UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
OR
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the transition period from..to...
Commission File Number 0-12114
---------------------
CADIZ INC.
(Exact name of registrant specified in its charter)
DELAWARE 77-0313235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Wilshire Boulevard, Suite 1600
Santa Monica, CA 90401-1111
(Address of principal executive offices) (Zip Code)
(310) 899-4700
(Registrant's telephone number, including area code)
--------------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Title of Each Class Name of Each Exchange on Which Registered
------------------- ---------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (220.405 of this chapter)
is not contained herein, and will not be contained to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment of this Form 10-K. /__/
As of March 26, 2002, the registrant had 36,230,241 shares of
common stock outstanding. The aggregate market value of the
Common Stock held by nonaffiliates as of March 26, 2002 was
approximately $303,167,898 based on the closing price on that
date.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's proxy statement for the annual
meeting to be held on May 6, 2002, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the close of the Registrant's fiscal
year, are incorporated by reference under Part III of this Form
10-K.
TABLE OF CONTENTS
PART I
Item 1, Business. . . . . . . . . . . . . . . . . . . . . . 1
Item 2, Properties. . . . . . . . . . . . . . . . . . . . . 12
Item 3, Legal Proceedings. . . . . . . . . . . . . . . . . .14
Item 4, Submission of Matters to a
Vote of Security Holders. . . . . . . . . . . . . . . . . 14
PART II
Item 5, Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . 15
Item 6, Selected Financial Data . . . . . . . . . . . . . . 17
Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . .17
Item 7A, Quantitative and Qualitative
Disclosures about Market Risk. . . . . . . . . . . . . . .32
Item 8, Financial Statements and Supplementary Data. . . . .32
Item 9, Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure. . . . .32
PART III
Item 10, Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . . . . . .32
Item 11, Executive Compensation. . . . . . . . . . . . . . .33
Item 12, Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . . . . . . 33
Item 13, Certain Relationships and Related Transactions. . .33
PART IV
Item 14, Exhibits, Financial Statements and
Reports of Form 8-K. . . . . . . . . . . . . . . . . . . .33
Page i
PART I
ITEM 1. BUSINESS
Information presented in this Form 10-K that discusses
financial projections, proposed transactions such as those with
the Metropolitan Water District of Southern California and
Kingdom Agricultural Development Company, information or
expectations about our business strategies, results of
operations, products or markets, or otherwise makes statements
about future events, are forward-looking statements. Forward-
looking statements can be identified by the use of words such as
"intends", "anticipates", "believes", "estimates", "projects",
"forecasts", "expects", "plans" and "proposes". Although we
believe that the expectations reflected in these forward-looking
statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results
to differ materially from these forward-looking statements.
These include, among others, the cautionary statements under the
caption "Certain Trends and Uncertainties", as well as other
cautionary language contained in this Form 10-K. These
cautionary statements identify important factors that could cause
actual results to differ materially from those described in the
forward-looking statements. When considering forward-looking
statements in this Form 10-K, you should keep in mind the
cautionary statements described above.
OVERVIEW
The combination of considerable population increases and
limited supplies are placing great demands on water resources
both in California and worldwide. Compounding the issue, many
population centers are not located where significant
precipitation occurs. We therefore believe that a competitive
advantage exists for those companies that possess or can provide
high quality, reliable and affordable water supply in locations
worldwide including California and its multi-billion dollar
agricultural industry, one of the largest users of water in the
state. Accordingly, Cadiz Inc., which is sometimes referred to as
"Cadiz", "we" or "us", has created an integrated and
complementary portfolio of assets encompassing landholdings with
high-quality groundwater resources and/or storage potential, as
well as agricultural properties located throughout central and
southern California with valuable water rights, and other
contractual water rights. We believe that our access to water
will provide us with a competitive edge both as a major
agricultural concern and as a supplier of water, leading to
continued appreciation in the value of our portfolio.
Additionally, product innovation from our fruit breeding
programs, international licensing programs, global marketing
reach, and highly regarded Sun World brand name, provides our
agricultural operations a strong position in the ongoing
consolidation in the global retail grocery industry. Our
agricultural operations are provided through our wholly-owned
subsidiary, Sun World International, Inc. and its subsidiaries,
all of which together we sometimes refer to as "Sun World". Sun
World is one of the largest developers, growers, producers and
marketers of proprietary fruits and vegetables in California,
specializing in high-value permanent crops. Currently, Sun World
owns more than 19,000 acres of land primarily located in two
major growing areas of California: the San Joaquin Valley and
the Coachella Valley.
In addition to our Sun World properties, we hold
approximately 45,300 acres of land in eastern San Bernardino
County that are substantially underlain by high-quality
groundwater resources with demonstrated potential for various
applications, including water storage and
Page 1
supply programs, and agricultural, municipal, recreational
and industrial development. Substantially all of our properties
are located in close proximity to California's major aqueduct
systems. We expect to use our resources to participate in a broad
variety of water storage and supply, transfer, exchange and
conservation programs with public agencies and other parties.
In December 1997, we commenced discussions with the
Metropolitan Water District of Southern California in order to
develop principles and terms for a long-term agreement related to
our Cadiz, California property. In July 1998, Cadiz and
Metropolitan approved the Principles and Terms for Agreement for
the Cadiz Groundwater Storage and Dry-Year Supply Program, which
we sometimes refer to as the "Cadiz Program", authorized
preparation of a final agreement based on these principles and
initiated the environmental review process for the Cadiz Program.
Following extensive negotiations with Cadiz to further refine and
finalize these basic principles, Metropolitan's Board of
Directors approved definitive economic terms and responsibilities
at their April 2001 board meeting. The Cadiz Program definitive
terms will serve as the basis for a final agreement to be
executed between Metropolitan and Cadiz. Execution of this final
agreement will be subject to completion of the ongoing
environmental review process.
Based upon our expertise in water and agricultural
resources, in June 1999, Sun World was appointed by Kingdom
Agricultural Development Company (KADCO), a company currently
100% controlled by His Royal Highness Prince Alwaleed Bin Talal
Bin Abdulaziz Alsaud, to develop and manage up to 100,000 acres
of agricultural land in southern Egypt, called the Tushka
Project.
On January 16, 2002, we announced an agreement in principle
with KADCO to combine the businesses of Sun World and KADCO.
Following the proposed combination, KADCO's shareholders will
have a 49.75% interest in the combined business, and Cadiz will
retain an ownership interest of 50.25%. Prior to the proposed
combination, KADCO expects to have cash resources in excess of
$80 million.
On March 11, 2002, we announced our intent to create a new
subsidiary company that will provide an array of innovative
business solutions to the significant water problems facing the
Middle East. Through the new subsidiary, we intend to build a
diversified water business with both direct investment and the
provision of economic, technical and management services. Mr.
Bruce Babbitt, former U.S. Secretary of the Interior and Governor
of Arizona, has joined us to lead this new subsidiary as its
chairman and chief executive officer.
We continually seek to develop and manage our water and
agricultural resources for their highest and best uses. We also
continue to evaluate acquisition opportunities, which are
complementary to our current portfolio of water and agricultural
resources.
(a) General Development of Business
--------------------------------
As part of our current business strategy, we conduct our
land acquisition, water development activities, agricultural
operations and search for international water and agricultural
opportunities for the purpose of enhancing the long-term
appreciation of our properties and future prospects. See
"Narrative Description of Business" below.
As the most populous state in the nation, California's
population is projected to swell to nearly 50 million people by
the year 2020. This increasing population is placing great
demands on California's infrastructure, particularly its limited
water resources. According to the California Department of Water
Resources, shortfalls of approximately seven million acre-feet
are forecasted in a dry year by the year 2020. We therefore
believe that, with both the increasing scarcity of water supplies
in California and the increasing demand for water, our access to
water will provide us with a competitive advantage both as a
major agricultural concern and as a
Page 2
supplier of water which will lead to continued appreciation in
the value of our portfolio.
The increasing scarcity of water supplies, coupled with
increased demand from population growth, is not just a California
issue but a worldwide issue. Our California experience in water
resource management and development provides a strong foundation
for pursuing water resource opportunities internationally,
including opportunities in the Middle East.
Sun World, which we acquired in September 1996, owns
approximately 19,000 acres of agricultural land primarily in the
San Joaquin and Coachella Valleys, giving us total landholdings
of approximately 64,400 acres. See Item 2, "Properties".
(b) Financial Information about Industry Segments
---------------------------------------------
During the year ended December 31, 2001, we operated our
agricultural resources segment and continued to develop our water
resource segment of the business. See Consolidated Financial
Statements. Also, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
(c) Narrative Description of Business
---------------------------------
Pursuant to our business strategy, we continually seek to
develop and manage our portfolio of water and agricultural
resources for their highest and best uses. Our development and
management activities are currently focused on agricultural
operations (primarily through Sun World) and water resource
development. We also continue to evaluate acquisition
opportunities, which are complementary to our current portfolio
of water and agricultural resources.
WATER RESOURCE DEVELOPMENT
Our portfolio of water resources, located in close proximity
to the Colorado River or the major aqueduct systems of central
and southern California, such as the State Water Project and the
Colorado River Aqueduct, provides us with the opportunity to
participate in a variety of water storage and supply programs,
exchanges and transfers.
(a) Cadiz Groundwater Storage and Dry-Year Supply Program
-----------------------------------------------------
27,300 acres of our property located in the Cadiz and Fenner
Valleys of eastern California are underlain by a high-quality
groundwater basin. Precipitation falls within a catchment area
of nearly 1,300 square miles and provides annual recharge to the
basin. The catchment area is the area contributing surface and
groundwater recharge to the groundwater basin. See Item 2,
"Properties - The Cadiz/Fenner Property".
In July 1998, Cadiz and Metropolitan entered into Principles
and Terms for Agreement for the Cadiz Program. The principles
provide that Metropolitan will, during wet years or periods of
excess supply, store surplus water from its Colorado River
Aqueduct in the groundwater basin underlying our property located
in Cadiz, California. During dry years or times of reduced
allocations from the Colorado River, the stored water will be
withdrawn and returned via conveyance facilities to the aqueduct
to meet Metropolitan's water supply needs. In addition,
indigenous groundwater would also be transferred utilizing the
same facilities. The Cadiz Program will have the capacity to
convey, either for storage or transfer, up to 150,000 acre-feet
in any given year during its 50-year term.
Page 3
Metropolitan's Board of Directors, following extensive
negotiations with us to further refine and finalize these basic
principles and terms, approved definitive economic terms and
responsibilities for the Cadiz Program in April 2001.
Pursuant to the approved definitive terms, during storage
operations, Metropolitan will pay a $50 fee per acre-foot for put
of Colorado River water into storage, and a $40 fee per acre-foot
for return of Colorado River water from storage, or a total of
$90 per acre-foot to cycle water into and out of the basin. On
the transfer of indigenous water, Metropolitan will pay a base
rate of $230 per acre-foot, which will be adjusted according to a
fair market value adjustment procedure. Metropolitan has
committed to minimum levels of utilization of the Cadiz Program
for both storage of Colorado River Aqueduct water (900,000 acre-
feet) and transfer of indigenous groundwater (up to 1,500,000
acre-feet). In addition, the definitive terms for the Cadiz
Program provide Cadiz the option to sell a portion of the
indigenous groundwater (30,000 acre-feet per year for 25 years or
a total of 750,000 acre-feet) to outside third parties within
Metropolitan's service area at fair market value.
The Cadiz Program facilities will include, among other
things:
* spreading basins, which are shallow ponds that
percolate water from the ground surface to the water
table;
* high yield extraction wells designed to extract stored
Colorado River water and indigenous groundwater from
beneath the Cadiz Program area;
* a 35-mile conveyance pipeline that will connect the
spreading basins and wellfield to the Colorado River
Aqueduct at Metropolitan's Iron Mountain pumping plant;
and
* a pumping plant that will pump water through the
conveyance pipeline from Metropolitan's Iron Mountain
pumping plant to the spreading basins.
The facilities are estimated to cost approximately $150
million, and both parties will jointly share these costs. A
pilot spreading basin project was constructed to model and
analyze the storage and extraction of water. All operational
costs of the Cadiz Program, including annual operations,
maintenance and energy costs, will be an obligation of
Metropolitan. However, Cadiz will assume pro rata operational
costs associated with the sale of indigenous groundwater to third
parties.
The definitive terms for the Cadiz Program call for the
establishment of a comprehensive groundwater monitoring and
management plan to ensure long-term protection of the groundwater
basin. The final agreement may reflect adjustments to the
definitive terms in order to reflect information identified
during the environmental review process and will be subject to
approval by the respective boards of both parties.
In October 2001, the environmental report was issued by
Metropolitan and the U.S. Bureau of Land Management, in
collaboration with the U.S. Geological Survey and the National
Park Service, and the related protest period has ended. Before
construction and operation of the Cadiz Program can commence, the
environmental review process must be completed
including the issuance of final regulatory approvals by the
U.S. Bureau of Land Management and Metropolitan. The process
for obtaining these approvals is often difficult and time
consuming as the process includes significant public review and
comment and often draws opposition from third parties including
litigation of the final regulatory approvals. We anticipate
final actions related to the environmental review process to
be completed by the end of the
Page 4
second quarter of 2002 after which construction of the Cadiz
Program facilities may commence. Once construction is commenced,
the Cadiz Program is anticipated to be operational within 18 to
24 months.
(b) Other Eastern Mojave Properties
-------------------------------
Our water development activities at our 6,000 acre Piute
property are located in eastern San Bernardino County
approximately 15 miles from the resort community of Laughlin,
Nevada and about 12 miles from the Colorado River town of
Needles, California. Hydrological studies and testing of a full-
scale production well have demonstrated that this landholding is
underlain by recharging groundwater of high quality and
additional investigations are ongoing regarding the development
of the property for a variety of uses.
Additionally, we own or control additional acreage located
throughout other areas of the eastern Mojave Desert, such as the
property we own near Danby Lake. This area is located
approximately 30 miles southeast of our Cadiz/Fenner Valley
property and is 10 miles north of the Colorado River Aqueduct.
Our initial hydrological studies confirm that this property has
excellent storage and supply capabilities.
(c) Sun World Water Resources
-------------------------
Sun World has valuable water rights in various parts of
central and southern California. We believe that with increasing
water shortages in California, land with water rights will
increase in value.
Sun World's landholdings and associated water resources are
located adjacent to the major aqueduct systems of central and
southern California, or are in close proximity to the Colorado
River. These holdings complement our other groundwater resources
and will enhance our opportunities to participate in a broad
variety of water storage, supply, exchange or banking programs.
By way of example, we have identified more than 10,000 acre-feet
of excess water that we plan to either transfer to our other
properties or exchange or transfer to other water users without
affecting current agricultural production on an annual basis.
(d) Proposed New Subsidiary
-----------------------
On March 11, 2002, we announced our intent to create a new
subsidiary company that will provide an array of innovative
business solutions to the significant water problems facing the
Middle East. Through the new subsidiary, we intend to build a
diversified water business with both direct investment and the
provision of economic, technical and management services. Mr.
Bruce Babbitt, former U.S. Secretary of the Interior and Governor
of Arizona, has joined us to lead this new subsidiary as its
chairman and chief executive officer.
The new subsidiary will target opportunities in the Middle
East because of the region's growing need for managed water
resources, sound environmental planning, effective conservation
of water resources and the growing need for renewable water
resources proportionate to the growing population and the
burgeoning agricultural system. We believe that the Middle East
has an arid environment similar to parts of California where our
operations are conducted. Further, we believe that this project
complements the work we are conducting at the Tushka Project site
and our relationship with KADCO.
Page 5
AGRICULTURAL OPERATIONS
Through Sun World, we are one of California's largest
vertically integrated agricultural companies due to our extensive
research and development program, our year-round sourcing of
fresh fruits and vegetables, our farming and packing activities
and our strong marketing capabilities. For the 12 months ended
December 31, 2001, Sun World recorded revenues of $92.4 million.
(a) Product Line
------------
Sun World ships over 80 different varieties of fresh fruits
and vegetables throughout the United States and to more than 30
foreign countries. Sun World is a leading grower and marketer of
table grapes, seedless watermelons, colored sweet peppers, citrus
(oranges and lemons) and stonefruit (plums, peaches, nectarines
and apricots). It is also one of California's largest
independent marketers of grapefruit, tangerines, mandarins, navel
oranges and lemons.
The breadth and diversity of the product line helps to
minimize the impact of individual crop earnings fluctuations.
Further, the breadth and diversity of its product offering
provides Sun World with greater presence and influence with its
grocery and food service customers.
Although many fruits and vegetables are fungible
commodities, Sun World has adopted a strategy of developing and
acquiring specialty produce varieties with unique characteristics
which differentiate them from commodity produce varieties. Most
of these varieties are harvested during favorable marketing
windows when available supply from competitors is limited. These
specialty varieties typically command a price premium and are
less subject to the same price volatility than the commodity
varieties. They also provide Sun World with a dominant position
in a number of product categories. Examples of the branded
produce grown and marketed by Sun World include Superior
Seedless(R) table grapes, Midnight Beauty(R) table grapes, Black
Diamond(R) plums, Honeycot(R) apricots and Amber Crest(R)
peaches. These products evolved through a combination of
internal development and acquisition. Sun World's research and
development center is dedicated to developing additional high
value proprietary varieties. See "Proprietary Product
Development" below.
(b) Farming Operations
------------------
Sun World's farming operations produced approximately seven
million units of fruits and vegetables during the year ended
December 31, 2001 from its approximately 13,400 planted acres of
which approximately 12,200 acres are owned by Sun World and 1,200
acres are leased. Permanent crops are grown on approximately
11,000 of the owned acres of which 42% are proprietary varieties.
Sun World's principal agricultural lands are located in the San
Joaquin and Coachella Valleys of California. See Item 2,
"Properties".
Sun World properties are primarily dedicated to producing
permanent commercial crops and, to a lesser extent, annual (or
row) crops. Over 1,500 acres are currently utilized for
developing crops (e.g., new vines and trees that have not yet
reached commercial maturity). Sun World has implemented a crop
development plan with the intent of redeploying marginally
productive acreage to produce varieties of crops that possess
superior proprietary characteristics and/or are available for
delivery at peak pricing windows throughout the year.
Additionally, during 2001, Sun World completed the three-year
transition of approximately 400 acres of table grapes that are
certified organic for the 2001 growing season.
Page 6
(c) Packing and Marketing Operations
--------------------------------
In addition to merchandising its own products, Sun World
provides marketing and packing services to third party growers.
For third party growers, Sun World provides three key benefits:
* Sun World's brand name, proprietary products and
reputation with wholesalers;
* a full complement of handling services that include
harvest, cooling, packing and shipping; and
* an internal sales and marketing force servicing
approximately 500 customers throughout the world.
Sun World's packing facilities handled over eight million
units of produce during the year ended December 31, 2001. These
facilities provide harvesting, packing, cooling and shipping
services for Sun World production, as well as for other
commercial clients. Currently, Sun World owns three facilities,
two of which are located in the Coachella Valley and one of which
is located in the San Joaquin Valley. See Item 2, "Properties".
Sun World's vertically integrated operations enable it to
offer the market a continuous stream of new specialty products,
which receive a market premium. As a large grower, Sun World is
able to manage the quality of its own product line, and as a
significant packer and marketer, Sun World works with other
growers to ensure product quality through packing and
distribution. During fiscal 2001, we sold over 10 million units
with wholesale value of approximately $94.5 million. This amount
includes the wholesale value for units sold on behalf of third
party growers for which only the sales commission and packing
revenues received by Sun World are included in Sun World's
reported revenues.
Sun World's sourcing, both external and internal, is
diversified geographically throughout California. Sun World's
owned and leased farming operations are located throughout the
major growing regions in California from the Coachella Valley in
the south to central California's San Joaquin Valley, as well as
operations near the coast. Sun World sources externally produced
product from throughout California, from other areas of the
United States, and from international sources. This geographic
diversification not only reduces the impact that unfavorable
weather conditions and infestations could have on Sun World's
operations, but also provides Sun World with longer selling
seasons for many crops since harvests occur at different times.
In addition, geographic diversification also allows Sun World the
ability to provide the quality and breadth of product throughout
the year demanded by retailers.
Sun World's customer base consists of approximately 500
accounts including supermarket retailers, food service entities,
warehouse clubs, and international trading companies located in
approximately 30 countries. Domestic customers include national
retailers such as Safeway Stores and Albertson's; club stores,
including Costco and Sam's; and food service distributors,
including Sysco and Alliant. During 2001, approximately 12% of
Sun World's products were marketed internationally including in
Canada, Europe, Australia, Japan, Hong Kong, Singapore, Malaysia,
Taiwan, the Middle East and South Africa. Only one national
retailer, Safeway Stores, (representing approximately 11%)
accounted for more than 10% of Sun World's revenues in 2001. As
is consistent with industry practice, Sun World does not maintain
written agreements with Safeway Stores or its other significant
customers.
Page 7
(d) Proprietary Product Development
-------------------------------
Sun World has a long history of product innovation, and its
research and development center maintains a fruit breeding
program that has introduced dozens of proprietary fruit varieties
in the last six years. Recent product successes include the
Midnight Beauty(R) seedless black table grape, the Black
Diamond(R) plum, the Amber Crest(R) peach and the Honeycot(R)
apricot. During 2001, Sun World filed for 12 new plant patents
in the United States, including six new varieties of table
grapes, three new varieties of plums and three new varieties of
peaches. We believe that these products and several other
promising grape and stonefruit varieties will be planted
commercially in the near future, both domestically and
internationally. Sun World also continually assesses the
strategic value of filing patents on its proprietary fruit
varieties internationally and files for patents in countries
where it deems strategic value will be obtained. During 2001,
Sun World filed for 12 new plant patents internationally in
Argentina, Australia, Brazil, Chile, Egypt, European Union,
Mexico, Peru and South Africa. The European Union countries
include Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden and the United Kingdom.
Sun World devotes approximately 200 acres to its research
and development center and crop experimentation. The research
and development center facility houses tissue culture rooms,
growth rooms, four greenhouses and experimental growing crops.
The amounts expended by Sun World on its research and development
activities totaled $2,023,000 for the year ended December 31,
2001, $1,636,000 for the year ended December 31, 2000, and
$1,450,000 for the year ended December 31, 1999.
As a result of over 20 years of research and development,
Sun World holds rights to 320 patents and trademarks around the
world and has 86 pending applications for additional patents and
trademarks domestically and internationally. The patent
registrations exist in most major fruit producing countries and
the trademarks are held in both fruit producing and consuming
regions. Sun World's patents have varying expiration dates
occurring within the next several years through 2024; however,
the expiration of any individual patent will not have a material
effect upon Sun World's operations.
Enhancing the value of the proprietary product portfolio
through licensing is an integral part of Sun World's growth
strategy. Sun World continues to seek licensing opportunities
with key strategic partners to introduce, trial and produce Sun
World's proprietary products in major production areas that have
appropriate plant protection rights and do not compete with Sun
World's own domestic production. These licensing agreements will
provide Sun World with a long-term annual revenue stream based
upon a royalty fee for each box of proprietary fruit sold over
the lives of the licensed trees or vines approximating 25 to 40
years. Currently, Sun World has licensing agreements in place in
Australia, Chile, Israel, Italy, Morocco, Namibia, New Zealand,
South Africa, Spain and the United States and expects to continue
to expand its licensing portfolio. An example of Sun World's
licensing success is the definitive agreement entered into with
the South African fruit industry granting long-term license
agreements to South African fruit companies seeking to produce
and export Sun World's proprietary Sugraone grape variety (more
commonly known as Sun World's Superior Seedless(R) grape). This
agreement also provided Sun World compensation for past Sugraone
grapevine plantings and fruit sales and granted Sun World
exclusive North American marketing rights for the Sugraone grape
variety. We believe these licensing agreements have established
a precedent that will change the way new and improved varieties
of produce will be brought to market in the future.
Page 8
TUSHKA PROJECT WITH KADCO
The combination of our innovative proprietary products and
expertise in desert farming and water resources management led to
Sun World's appointment by KADCO, a company currently 100%
controlled by His Royal Highness Prince Alwaleed Bin Talal Bin
Abdulaziz Alsaud, to develop and manage up to 100,000 acres of
agricultural land in southern Egypt, called the Tushka Project.
The Tushka Project is the cornerstone in the Egyptian
government's multi-billion dollar South Valley Project, an
immense infrastructure plan designed to irrigate more than
500,000 acres of desert land to foster urban and agricultural
development. The South Valley Project involves the construction
of one of the world's largest pumping stations and a 43-mile
canal that diverts water from Egypt's Lake Nasser, the reservoir
formed on the Nile River by the Aswan High Dam, to four separate
parcels of land - the first being the Tushka Project site.
Construction is well underway, with the main canal, pumping
station and branch canals slated to be complete and operational
by the end of 2002. The initial commercial plantings of
permanent crops for the Tushka Project will follow in early 2003.
Concurrent to the development of necessary infrastructure, a
research site and nursery, including 300 acres of test plots
irrigated with local groundwater, have been established.
As compensation for project development and management of
the Tushka Project, Sun World earns a quarterly equity interest
in KADCO based upon meeting certain developmental milestones and
has been granted an option to purchase additional shares. The
combined equity interest is expected to equate to approximately
10% ownership of KADCO upon completion of the development. In
addition, Sun World will receive annual marketing and licensing
fees equal to the greater of 1.5% of gross revenues or 5% of
earnings before interest, taxes, depreciation and amortization
(EBITDA) from the project. No capital investment is required by
Sun World, and KADCO reimburses Sun World for all expenses
incurred. The management agreement, signed in October 1999, has
a four-year term with an option to extend for multiple further
terms.
PROPOSED BUSINESS COMBINATION OF SUN WORLD WITH KADCO
On January 16, 2002, we announced an agreement in principle
with KADCO, to combine the businesses of Sun World and KADCO.
Following the proposed combination, KADCO's shareholders will
have a 49.75% interest in the combined business, and Cadiz will
retain an ownership interest of 50.25%. Prior to the proposed
combination, KADCO expects to have cash resources in excess of
$80 million.
We intend to utilize the cash resources of the combined
business both to recapitalize Sun World and to provide for future
business expansion. The agreement in principle contemplates
that, in the future, KADCO shareholders will have an opportunity
to make an additional equity investment in the combined business.
Should KADCO shareholders make this additional investment, we may
choose to maintain a majority percentage ownership in the
combined business through a proportionate matching investment.
The management of Sun World will continue to manage the
combined business with Keith Brackpool as chairman and Timothy
Shaheen as chief executive officer. The board of the combined
business will consist of seven board members. As Cadiz will
initially hold a majority ownership in the combined business,
Cadiz will initially nominate four board members and
KADCO shareholders will initially nominate the remaining three
board members. Should KADCO ever obtain a majority percentage
ownership of the combined business, the shareholders of KADCO
will then have the right to nominate a majority of board members.
Page 9
The proposed combination is subject to the negotiation and
execution of definitive agreements and a number of other
important conditions, including, among others, procurement of
governmental, third-party and lender approvals or consents as
necessary, completion of confirmatory due diligence by both
parties and KADCO's completion of additional equity financing.
We anticipate that the combination will be consummated
during the second quarter of 2002. However, management cannot
assure that a definitive agreement with KADCO will be reached or
that the combination will be consummated. See the discussion
under the caption "Certain Trends and Uncertainties" and Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
SEASONALITY
In connection with our water resource development
activities, we do not expect revenues to be seasonal in nature.
Sun World's agricultural operations, however, are impacted
by the general seasonal trends that are characteristic of the
agricultural industry. Sun World has historically received the
majority of its operating profit during the months of June to
October following the harvest and sale of its table grape and
stonefruit crops. Due to this concentrated activity, we have,
therefore, historically incurred an operating loss with respect
to our agricultural operations in the other months during the
year.
COMPETITION
We face competition for the acquisition, development and
sale of our properties from a number of competitors, some of
which have greater resources than us. We may also face
competition in the development of water resources associated with
our properties. Since California has scarce water resources and
an increasing demand for available water, we believe that
location, price and reliability of delivery are the principal
competitive factors affecting transfers of water in California.
The agricultural business is highly competitive. Sun
World's competitors include a limited number of large
international food companies, as well as a large number of
smaller independent growers and grower cooperatives. No single
competitor has a dominant market share in this industry due to
the regionalized nature of these businesses. In addition to
drawing from its proprietary base of products, Sun World utilizes
brand recognition, product quality, harvesting in favorable
production windows, effective customer service and consumer
marketing programs to enhance its position within the highly
competitive fresh food industry. Consumer and institutional
recognition of the Sun World trademark and related brands and the
association of these brands with high quality food products
contribute to Sun World's ability to compete in the market for
fresh fruit and vegetables.
EMPLOYEES
As of December 31, 2001, we employed approximately 550 full-
time employees (including all those individuals who work more
that 1,000 hours per year). Sun World, throughout the year,
engages various part-time and seasonal employees, with a seasonal
high of approximately 1,200 part-time employees. Additionally,
Sun World contracts with outside labor contractors for personnel
used in the farming operations with a seasonal high of
approximately 4,800 people. Approximately 190 of our employees
are represented by a labor
Page 10
union pursuant to contracts renewed in 1999 that expire in 2002.
Generally, we believe that our employee relations are good.
REGULATION
Certain areas of our operations are subject to varying
degrees of federal, state and local laws and regulations. Our
agricultural operations are subject to a broad range of evolving
environmental laws and regulations. These laws and regulations
include the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Federal Insecticide, Fungicide
and Rodenticide Act and the Comprehensive Environmental Response,
Compensation and Liability Act. Compliance with these and other
foreign and domestic laws and related regulations is an ongoing
process, which is not currently expected to have a material
effect on our capital expenditures, earnings or competitive
position. Environmental concerns are, however, inherent in most
major agricultural operations, including those conducted by us,
and there can be no assurance that the cost of compliance with
environmental laws and regulations in the future will not be
material.
Our food operations are also subject to regulations enforced
by, among others, the U.S. Food and Drug Administration and
state, local and foreign equivalents and to inspection by the
U.S. Department of Agriculture and other federal, state, local
and foreign environmental and health authorities. Among other
things, the U.S. Food and Drug Administration enforces statutory
standards regarding the safety of food products, establishes
ingredients and manufacturing procedures for certain foods,
establishes standards of identity for foods and determines the
safety of food substances in the United States. Similar
functions are performed by state, local and foreign governmental
entities with respect to food products produced or distributed in
their respective jurisdictions. Existing environmental
regulations have not, in the past, had a materially adverse
effect upon our operations, and we believe that existing
environmental regulations will not, in the future, have a
materially adverse effect upon our operations. There can be no
assurances, however, as to the effect of any environmental
regulations, which may be adopted in the future.
As we proceed with the development of our properties,
including the Cadiz Program, we will be required to satisfy
various regulatory authorities that we are in compliance with the
laws, regulations and policies enforced by such authorities.
Groundwater development, and the export of surplus groundwater
for sale to single entities such as public water agencies, is not
subject to regulation by existing statutes other than general
environmental statutes applicable to all development projects.
Additionally, we must obtain a variety of approvals and permits
from state and federal governments with respect to issues that
may include environmental issues, issues related to special
status species, issues related to the public trust, and others.
Because of the discretionary nature of these approvals and
concerns which may be raised by various governmental officials,
public interest groups and other interested parties during both
the approval and development process, our ability to develop
properties and realize income from our projects, including the
Cadiz Program, could be delayed, reduced or eliminated.
ITEM 2. PROPERTIES
We currently lease our executive offices in Santa Monica,
California which consist of approximately 10,400 square feet,
pursuant to a lease that expires in July 2004. Current base rent
under the lease is approximately $38,000 per month. We have one
five-year option to renew at fair market rate. We also maintain
a development office in San Bernardino, California. Sun World
owns its main packing facility (including sales and
administrative offices) in Bakersfield, California and owns two
packing facilities (including sales offices) in Coachella,
Page 11
California. We believe that our property and equipment is
generally well maintained, in good operating condition and
adequate for their present needs.
The following is a description of our significant
properties.
THE CADIZ/FENNER PROPERTY
In 1984, we conducted an investigation of the feasibility of
the agricultural development of land located in the Mojave Desert
near Cadiz, California, and confirmed the availability of high-
quality water in commercial quantities appropriate for
agricultural development. Since 1985, we have acquired
approximately 34,500 acres in the Cadiz and Fenner Valleys of
eastern San Bernardino County approximately 30 miles north of the
Colorado River Aqueduct, including approximately 7,000 acres
obtained as part of a litigation settlement with Waste Management
in April 2001.
Additional numerous independent geotechnical and engineering
studies conducted since 1985 have confirmed that the Cadiz/Fenner
property overlies a natural groundwater basin which is ideally
suited for underground water storage and dry year transfers as
contemplated in the Cadiz Program. See Item 1, "Business -
Narrative Description of Business - Water Resource Development".
In November 1993, the San Bernardino County Board of
Supervisors unanimously approved a General Plan Amendment
establishing an agricultural land use designation for 9,600 acres
at Cadiz for which 1,600 acres have been developed and are leased
to Sun World. This action also approved permits to construct
infrastructure and facilities to house as many as 1,150 seasonal
workers and 170 permanent residents (employees and their
families) and allows for the withdrawal of more than 1,000,000
acre-feet of groundwater from the groundwater basin underlying
our property.
We hold substantially all Cadiz/Fenner acreage in fee
directly.
THE SUN WORLD PROPERTIES
(a) Farm Properties
---------------
Sun World owns approximately 19,000 acres and leases
approximately 2,800 acres of improved land in central and
southern California. Concurrently with our acquisition of Sun
World in 1996, Sun World entered into a lease for approximately
1,600 acres of Cadiz/Fenner agricultural real property from
Cadiz. The lease, as amended, has a 10-year term expiring in
September 2006 with annual rental of $250 per acre. Sun World is
responsible for all costs associated with growing crops on the
leased property. The majority of this land is used for the
cultivation of permanent and annual crops and support activities,
including packing facilities.
Sun World-owned farming property is divided between six
distinct geographic regions: Madera, Bakersfield, Tulare and
Arvin (located within the San Joaquin Valley), Coachella (located
in the state's southeastern corner near Palm Springs) and Blythe
(located approximately 100 miles east of the Coachella Valley
adjoining the Colorado River).
Page 12
(b) Packing and Handling Facilities
-------------------------------
Sun World owns three packing and handling facilities: one
facility located in the San Joaquin Valley at Kimberlina near
Bakersfield, a facility in the Coachella Valley and a third
facility also in the Coachella Valley that is leased to a third
party.
The Kimberlina facility, located on an 83 acre parcel owned
by Sun World, consists of two highly automated production lines
for packing stonefruit and citrus, cold storage areas, and office
space.
Sun World's Coachella Valley facilities consists of three
independent buildings located on 26 acres of land in Coachella,
California. One building is used primarily for packing citrus,
receiving table grapes, cold storage and office space. A second
building is used primarily for receiving, cooling and storing
table grapes and row crops. The third building was used
primarily for packing lemons and for storage.
OTHER EASTERN MOJAVE PROPERTIES
We also own approximately 10,900 additional acres in the
eastern Mojave Desert, including the Piute and Danby Lake
properties.
The Piute property consists of approximately 6,000 acres and
is located approximately 60 miles northeast of Cadiz and
approximately 15 miles west of the Colorado River and Laughlin,
Nevada, a small, fast growing town with hotels, casinos and water
recreation facilities. We identified the Piute property for
acquisition by a combination of satellite imaging and geological
techniques which we used to identify water at Cadiz.
The Piute acreage adjoins Highway 95, approximately 60 miles
south of Las Vegas. The Santa Fe Railroad passes through the
land and Interstate 40 is approximately 12 miles to the south.
DEBT SECURED BY PROPERTIES
Of our outstanding debt at December 31, 2001, $117.5 million
represents loans secured by Sun World's properties and $25.1
million represents loans secured by the majority of our non-Sun
World properties. Information regarding interest rates and
principal maturities is provided in Note 9 to the consolidated
financial statements.
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal and administrative proceedings and
claims and we actively pursue the protection of our intellectual
and proprietary property in the ordinary course of business. In
the opinion of management, the ultimate outcome of each
proceeding or all such proceedings combined will not have a
material adverse impact on our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders
during the fourth quarter of 2001. The results of our Annual
Meeting of Stockholders held May 14, 2001 were reported in our
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2001.
Page 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Stock
Market under the symbol "CLCI". The following table reflects
actual sales transactions. The high and low range of the sales
price of the common stock for the dates indicated have been
provided by Nasdaq.
High Low
Sales Sales
Quarter Ended Price Price
------------- ----- -----
2000:
March 31 $ 12.500 $ 7.313
June 30 $ 8.875 $ 5.563
September 30 $ 10.125 $ 7.750
December 31 $ 10.750 $ 6.938
2001:
March 31 $ 10.500 $ 8.031
June 30 $ 10.180 $ 8.250
September 30 $ 10.000 $ 7.150
December 31 $ 8.980 $ 7.250
On March 26, 2002, the high, low and last sales prices for
the shares, as reported by Nasdaq, were $8.840, $8.570 and
$8.780, respectively.
Options in our stock trade under the symbol "QAZ".
We also have an authorized class of 100,000 shares of
preferred stock. To date, there are four series of preferred
stock designated for issuance including:
* 40,259 shares of Series A Junior Participating
Preferred Stock pursuant to a Stockholders' Rights
Plan, of which none are issued and outstanding;
* 5,000 shares of Series D Convertible Preferred Stock of
which 5,000 shares are issued and outstanding;
* 3,750 shares of Series E-1 Convertible Preferred Stock
of which 3,750 shares are issued and outstanding; and
* 3,750 shares of Series E-2 Convertible Preferred Stock
of which 3,750 shares are issued and outstanding.
The Board of Directors has no present plans or arrangements for
the issuance of additional shares of preferred stock.
On May 10, 1999 we adopted a Stockholders' Rights Plan. In
connection with the Rights Plan, and as further described in the
Rights Plan, we declared a dividend of one preferred share
purchase right for each outstanding share of our common stock
outstanding at the close of business on June 1, 1999.
As of March 26, 2002, the number of stockholders of record
of our common stock was 161 and the estimated number of
beneficial owners was approximately 2,604.
Page 14
To date, we have not paid a cash dividend on our common
stock and we do not anticipate paying any cash dividends in the
foreseeable future. Our ability to pay such dividends is subject
to covenants pursuant to agreements with our lenders that do not
allow for the payment of dividends other than out of our
cumulative net income.
During the quarter ended December 31, 2001, we issued 40,000
shares of common stock and warrants to purchase 215,000 shares
of our common stock at an exercise price of $7.50 per share.
These shares and warrants were issued in connection with our
issuance of an aggregate of $7.5 million of Series E-1 and E-2
preferred stock. The issuance of the warrants, common stock, and
the Series E-1 and E-2 preferred stock were not registered under
the Securities Act of 1933, as amended. We believe that the
transactions described are exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) of
the Securities Act as the transactions did not involve public
offerings. All other securities sold by us during the year ended
December 31, 2001 which were not registered under the Securities
Act have previously been reported in our Quarterly Reports on
Form 10-Q. In February 2002, we registered for resale the
warrants and shares issued in connection with the above
transactions by filing a Registration Statement on Form S-3.
Page 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data insofar as it relates
to the years ended December 31, 2001, 2000, 1999, 1998 and 1997
has been derived from financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. The
information that follows should be read in conjunction with the
audited consolidated financial statements and notes thereto for
each of the three years in the period ended December 31, 2001
included in Part IV of this Form 10-K. See also Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
($ in thousands, except for per share data)
Year Ended December 31,
----------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of
Operations Data:
Total revenues $ 92,402 $ 107,745 $ 115,229 $ 106,544 $ 100,157
Net loss (25,722) (22,458) (8,594) (7,470) (8,538)
Less:
Preferred stock
dividends 591 - - - (1,213)
Imputed dividend
on preferred
stock 441 - - - -
------- ------- ------- -------- -------
Net loss
applicable to
common stock $ (26,754) $ (22,458) $ (8,594) $ (7,470) $ (9,751)
========= ========= ======== ======== =========
Per share:
Net loss
(basic and
diluted) $ (.75) $ (.64) $ (.25) $ (.23) $ (.33)
========= ========= ======== ======= =========
Weighted-average
common shares
outstanding 35,854 35,344 34,678 33,173 29,485
========= ========= ======== ======= ========
December 31,
---------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Total assets $ 198,275 $ 203,617 $ 214,102 $ 214,359 $ 203,049
Long-term debt $ 141,429 $ 145,610 $ 142,089 $ 142,317 $ 131,689
Redeemable
preferred
stock $ 9,958 $ 3,950 $ - $ - $ -
Common stock and
additional
paid-in capital $ 152,765 $ 143,063 $ 136,552 $ 127,998 $ 121,199
Accumulated
deficit $ (135,062) $(109,340) $ (86,882) $ (78,288)$ (70,818)
Stockholders'
equity $ 17,703 $ 33,723 $ 49,670 $ 49,710 $ 50,381
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The consolidated financial statements set forth herein for
each of the three years in the period ended December 31, 2001,
reflect the results of our operations and the operations of our
wholly-owned subsidiaries including Sun World.
Page 16
A summary of the Sun World elements which our management
believes is essential to an analysis of the results of operations
for such periods is presented below. For purposes of this
summary, the term Sun World will be used, when the context so
requires, with respect to the operations and activities of our
Sun World subsidiary, and the term Cadiz will be used, when the
context so requires, with respect to our operations and
activities that do not involve Sun World.
Our net income or loss in future fiscal periods will be
largely reflective of (a) the operations of our water development
activities including the Cadiz Groundwater Storage and Dry-Year
Supply Program and (b) the operations of Sun World including its
international expansion. Sun World conducts its operations
through four operating divisions: farming, packing, marketing and
proprietary product development. Net income from farming
operations varies from year to year primarily due to yield and
pricing fluctuations which can be significantly influenced by
weather conditions, and are, therefore, generally subject to
greater annual variation than Sun World's other divisions.
However, the geographic distribution of Sun World's farming
operations within California and the diversity of its crop mix
makes it unlikely that adverse weather conditions would affect
all of Sun World's properties or all of its crops in any single
year. Nevertheless, net profit from Sun World's packing,
marketing and proprietary product development operations tends to
be more consistent from year to year than net profit from Sun
World's farming operations. Packing and marketing revenues from
third party growers currently represent less than 10% of our
total revenues. Sun World has entered into agreements
domestically and internationally to license selected proprietary
fruit varieties and continues to pursue additional domestic and
international licensing opportunities. License revenues
currently represent less than 10% of our total revenues.
(a) YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2000
-------------------------------------------------------
Our agricultural operations are impacted by the general
seasonal trends that are characteristic of the agricultural
industry. Sun World has historically received the majority of
its net income during the months of June to October following the
harvest and sale of its table grape and stonefruit crops. Due to
this concentrated activity, Sun World has, therefore,
historically incurred a loss with respect to its agricultural
operations in the other months during the year.
Page 17
The table below sets forth, for the periods indicated, the
results of operations for Sun World's four main divisions (before
elimination of any interdivisional charges), as well as the
categories of costs and expenses we incurred which are not
included within the divisional results (in thousands):
Year Ended
December 31,
2001 2000
---- ----
Divisional net income (loss) :
Farming $ (3,243) $ 2,791
Packing 8,320 7,193
Marketing 3,303 3,868
Proprietary product development 2,891 4,331
-------- -------
11,271 18,183
General and administrative 10,890 10,939
Special litigation (7,929) 424
Removal of underperforming crops 736 1,549
Non-recurring compensation expense 5,537 -
Depreciation and amortization 8,151 8,381
Interest expense, net 19,551 19,188
Income tax expense 57 160
------- --------
Net loss $(25,722) $(22,458)
======== ========
FARMING OPERATIONS. Net loss from farming operations
totaled $3.2 million for 2001 compared to a net profit of $2.8
million in 2000. Farming revenues were $71.7 million and farming
expenses were $74.9 million for 2001. For 2000, Sun World had
farming revenues of $86.4 million and farming expenses of $83.6
million. Farming results were negatively impacted by a two-week
weather related delay in the table grape harvest in Coachella and
Mexico, which created an overlap with the early table grape
harvests in the San Joaquin Valley. This overlap created
downward pressure on F.O.B. prices for table grapes that
continued through the entire San Joaquin Valley harvest. Year-to-
date F.O.B. prices for table grapes were 3% below 2000 farming
results. Additionally, Sun World experienced lower table grape
yields as it sold 3.5 million boxes during 2001 compared to 3.9
million boxes during 2000.
Results were also negatively impacted in 2001 compared to
2000 due to decreased prices for wine grapes, peppers and plums.
Average F.O.B. prices for wine grapes and peppers were down due
to oversupply in the industry by 45% and 29%, respectively,
compared to 2000. Profits for plums were down due to lower
yields coupled with smaller sized fruit resulting from adverse
weather. Sun World sold 0.8 million boxes of plums in 2001
compared to 1.0 million boxes in 2000. F.O.B. prices for plums
were 25% below 2000 prices. 2001 citrus results were $1.1
million higher than 2000 due to an 18% increase in production
yields coupled with a 9% increase in F.O.B. prices. The decrease
in farming expenses is primarily due to the removal of certain
underperforming stonefruit and wine grape acreage at the
conclusion of the 2000 growing season and the reduction and
elimination of certain row crop acreage in 2001 for crops that
had become unprofitable. Sun World's proprietary table grape and
stonefruit products have allowed Sun World to continue to command
price premiums to the overall market.
PACKING OPERATIONS. Sun World's packing and handling
facilities contributed $8.3 million in profit during 2001
compared to $7.2 million in 2000. The aggregate packing and
handling revenue for these operations of $21.4 million was offset
by $13.1 million of expenses for 2001. Revenues totaled $21.9
million offset by expenses of $14.7 million for 2000. Sun
Page 18
World packed 2.9 million units during 2001 and moved an additional
5.3 million units through the cold storage facilities for a total
of 8.2 million units processed through the packing operations in
2001 compared to 8.6 million units in 2000. This decrease in
units is due primarily to lower Sun World-grown table grape and
plum yields as well as fewer units of third party citrus
partially offset by increased units of third party table grapes.
The increase in profits is due to increased profits per unit
resulting from a price increase in storage and handling revenues
for table grapes, stonefruit and peppers that was implemented in
2001 to offset increased energy and labor costs. Units packed
and handled during 2001 consisted primarily of Sun World-grown
table grapes, peppers and seedless watermelons in the Coachella
Valley; table grapes and citrus products packed for third party
growers; and Sun World-grown table grapes, stonefruit, citrus,
and peppers from the San Joaquin Valley.
MARKETING OPERATIONS. During 2001, a total of 10.1 million
units were sold consisting primarily of Sun World-grown table
grapes, peppers and watermelons from the Coachella Valley; table
grapes and citrus from domestic third party growers; and Sun
World-grown table grapes, stonefruit, citrus, and peppers from
the San Joaquin Valley. These unit sales resulted in marketing
revenue of $7.5 million. Marketing expenses totaled $4.2 million
for 2001 resulting in net income from marketing operations of
$3.3 million. During 2000, 11.5 million units were sold
resulting in revenues of $8.6 million offset by expenses of $4.7
million for net income of $3.9 million. The decrease in
revenues, marketing profits and units sold is primarily due to
lower F.O.B. prices for table grapes, plums and peppers,
decreased units of Sun World-grown table grapes and plums, and
the elimination of certain underperforming stonefruit and row
crops from production in 2001.
PROPRIETARY PRODUCT DEVELOPMENT. Sun World has a long
history of product innovation, and its research and development
center maintains a fruit breeding program that has introduced
dozens of proprietary fruit varieties. Additionally, Sun World
continues to expand its licensing program with key strategic
partners worldwide to introduce, trial and produce Sun World's
proprietary varieties, which provides Sun World with a long-term
annual revenue stream based upon a royalty fee for each box of
proprietary fruit sold during the life of the tree or vine.
During 2001, net income from proprietary product development was
$2.9 million consisting of revenues of $4.9 million offset by
expenses of $2.0 million. For 2000, net income was $4.3 million
consisting of revenues of $6.0 million offset by expenses of $1.7
million. The decrease in proprietary product development net
income is primarily due to decreased intercompany royalties due
to lighter yields, additional costs associated with the expansion
of Sun World's licensing distribution structure, and a timing
difference for international royalties due to harvest delays in
South Africa. Revenues include $1.3 million related to project
development and management fees payable in equity of KADCO for
both 2001 and 2000. During 2001, Sun World expanded its acreage
under license with its strategic partners by 15% to over 7,000
acres.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses totaled $10.9 million for 2001 and 2000.
SPECIAL LITIGATION. We were engaged in lawsuits against
Waste Management seeking monetary damages arising from activities
adverse to us in connection with a landfill, which until its
defeat by the voters of San Bernardino County in 1996, was
proposed to be located adjacent to our Cadiz/Fenner Valley
properties. In March 2001, we executed a settlement agreement
with Waste Management related to these lawsuits. Pursuant to
the settlement agreement, Waste Management paid Cadiz $6 million
in cash and granted to Cadiz an exclusive option to
receive, at no cost to Cadiz, up to approximately 7,000 acres of
real property in eastern San Bernardino County primarily adjacent
to the Cadiz Program property. In April 2001, we
Page 19
exercised the option and as a consequence acquired the subject
property. The settlement resulted in net proceeds of $7.9 million
for 2001. During 2000, expenses including litigation costs and professional
fees related to this matter totaled $0.4 million.
NON-RECURRING COMPENSATION. In March 2001, we issued
564,163 deferred stock units to certain senior managers of Cadiz
and Sun World. These deferred stock units were issued in
exchange for the cancellation of 1,055,000 fully vested options
to purchase our common stock held by the senior managers. The
number of the deferred stock units issued was calculated based on
the average closing price for the 10 business days following the
filing of our Annual Report on Form 10-K for the year ended
December 31, 2000 on March 29, 2001. We recorded a one-time
charge of $5,537,000 and no cash was expended in connection with
the issuance of the deferred stock units.
REMOVAL OF UNDERPERFORMING CROPS. During 2001, management
decided to remove approximately 40 acres of citrus at the Cadiz
ranch and Sun World removed approximately 700 acres of wine
grapes, citrus, and stonefruit. We recorded a charge of $0.7
million in connection with the removal of these crops. In
December 2000, we recorded a $1.5 million charge to remove
certain underperforming crops, primarily 600 acres of wine grapes
and stonefruit.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses for the year ended December 31, 2001
totaled $8.2 million compared to $8.4 million for the year ended
December 31, 2000. The decrease is primarily attributable to
certain assets being sold or removed in 2001 and other assets
becoming fully depreciated.
INTEREST EXPENSE. Net interest expense totaled $19.6 million
during the year ended December 31, 2001 compared to $19.2 million
during the year ended December 31, 2000. The following table
summarizes the components of net interest expense for the two
periods (in thousands):
Year Ended
December 31,
2001 2000
---- ----
Interest on outstanding debt - Sun World $ 14,574 $ 14,546
Interest on outstanding debt - Cadiz 1,347 2,319
Amortization of financing costs 3,748 2,546
Interest income (118) (223)
-------- --------
$ 19,551 $ 19,188
======== ========
The increase in interest on outstanding debt during 2001 is
primarily due to (a) increased average borrowings under Sun
World's revolving credit facility; (b) increased interest and
financing costs related to the debt added by Sun World in
December 2000, and (c) amortization of warrants issued for the
extension of Cadiz' revolving credit facility and term loan
facility, which total increase is partially offset by the savings
from lower prime and LIBOR interest rates on our variable rate
debt. Financing costs, which include legal fees, loan fees and
warrants, are amortized over the life of the debt agreement.
Page 20
(b) YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999
-------------------------------------------------------
The table below sets forth, for the periods indicated, the
results of operations for Sun World's four main divisions (before
elimination of any interdivisional charges), as well as the
categories of costs and expenses incurred which are not included
within the divisional results (in thousands):
Year Ended
December 31,
2000 1999
---- ----
Divisional net income
Farming $ 2,791 $ 14,542
Packing 7,193 7,656
Marketing 3,868 4,573
Proprietary product development 4,331 3,187
-------- ---------
18,183 29,958
General and administrative 10,939 10,913
Special litigation 424 937
Removal of underperforming crops 1,549 -
Depreciation and amortization 8,381 8,891
Interest expense, net 19,188 17,811
Income tax expense 160 -
-------- ---------
Net loss $(22,458) $ (8,594)
======== ==========
FARMING OPERATIONS. Net income from farming operations
totaled $2.8 million for 2000 compared to $14.5 million in 1999.
Farming revenues were $86.4 million and farming expenses were
$83.6 million for 2000. For 1999, we had farming revenues of
$94.9 million and farming expenses of $80.4 million. The decrease
in farming results in 2000 compared to 1999 were primarily due to
decreased prices on table grapes, wine grapes, stonefruit and
citrus due to an oversupply of products in the industry. Average
F.O.B. prices for 2000 were down 13%. The increase in farming
expenses is primarily due to costs to grow and harvest citrus in
the San Joaquin Valley in 2000 that were not incurred in 1999 due
to the December 1998 freeze. Sun World's proprietary table grape
and stonefruit products have allowed Sun World to continue to
command a price premium to the overall market that helped offset
some of the losses incurred from its commodity products.
PACKING OPERATIONS. Sun World's packing and handling
facilities contributed $7.2 million in profit during 2000
compared to $7.7 million in 1999. We packed 3.6 million units
and moved an additional 5.0 million units through the cold
storage facilities for a total of 8.6 million units processed
through the packing operations in 2000 compared to the same total
of 8.6 million units in 1999. Packing results were negatively
impacted by a significant increase in corrugated box costs and
temporary use of third party storage facilities during July 2000
due to capacity constraints. Units packed and handled during
2000 primarily consisted of Sun World-grown table grapes,
stonefruit, citrus, peppers and seedless watermelons as well as
table grapes, citrus and stonefruit products packed for third
party growers. Packing and handling revenue for these operations
of $21.9 million was offset by $14.7 million of expenses for
2000. Revenues totaled $20.5 million offset by expenses of $12.8
million for 1999.
MARKETING OPERATIONS. Sun World's marketing operations
include selling, merchandising and promoting Sun World-grown
products, as well as providing these services for third party
growers. During 2000, a total of 11.5 million units were sold
consisting primarily of Sun World-grown table grapes, stonefruit,
citrus, peppers and watermelons as well as table
Page 21
grapes, watermelons, citrus and stonefruit from domestic
third party growers. These unit sales resulted in marketing
revenue of $8.6 million. Marketing expenses totaled $4.7 million
for 2000 resulting in net income from marketing operations of $3.9
million. During 1999, 11.1 million units were sold resulting in
revenues of $9.4 million offset by expenses of $4.8 million for
net income of $4.6 million. The increase in units sold is
primarily due to increased units of Sun World-grown plums and
stonefruit marketed for third parties. Average commissions for
2000 were down 12% from average commissions in 1999 due to the
lower F.O.B. prices noted above.
PROPRIETARY PRODUCT DEVELOPMENT. Sun World has a long
history of product innovation, and its research and development
center maintains a fruit breeding program that has introduced
dozens of proprietary fruit varieties including twelve new
varieties for which plant patents were applied for in 2000.
During 2000, net income from proprietary product development
totaled $4.3 million consisting of revenues of $6.0 million
offset by expenses of $1.7 million. For 1999, net income from
proprietary product development was $3.2 million consisting of
revenues of $4.6 million offset by expenses of $1.4 million. The
increase in revenues resulted from international royalties
primarily related to our licensing agreements for Sugraone table
grapes and consulting income from KADCO.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses totaled $10.9 million for both 2000 and
1999.
SPECIAL LITIGATION. We were engaged in lawsuits seeking
monetary damages in connection with the prevention of a landfill
which was proposed to be located adjacent to our Cadiz/Fenner
Valley properties. In March 2001, we entered into a settlement
agreement with Waste Management related to these lawsuits.
During the year ended December 31, 2000, expenses including
litigation costs and professional fees totaled $0.4 million as
compared to $0.9 million during the year ended December 31, 1999.
REMOVAL OF UNDERPERFORMING CROPS. In December 2000, we
accrued costs to remove certain underperforming crops, primarily
600 acres of wine grapes and stonefruit. We recorded a charge of
$1.5 million in connection with these removals.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses for the year ended December 31, 2000
totaled $8.4 million compared to $8.9 million for the year ended
December 31, 1999. The decrease is primarily attributable to
certain assets being sold or removed and other assets becoming
fully depreciated.
INTEREST EXPENSE. Net interest expense totaled $19.2 million
during the year ended December 31, 2000 compared to $17.8 million
during the year ended December 31, 1999. The following table
summarizes the components of net interest expense for the two
periods (in thousands):
Year Ended
December 31,
2000 1999
---- ----
Interest on outstanding debt - Sun World $14,546 $14,204
Interest on outstanding debt - Cadiz 2,319 1,785
Amortization of financing costs 2,546 2,176
Interest income (223) (354)
-------- --------
$19,188 $17,811
======= =======
Page 22
The increase in interest on outstanding debt during 2000 is
primarily due to (a) increased borrowings on Sun World's
revolving credit facility to meet seasonal working capital needs
and (b) amortization of warrants issued for the extension of
Cadiz' revolving credit facility and term loan facility.
Financing costs, which include legal fees, loan fees and
warrants, are amortized over the life of the debt agreement.
LIQUIDITY AND CAPITAL RESOURCES
(a) Current Financing Arrangements
------------------------------
CADIZ OBLIGATIONS. As Cadiz has not received significant
revenues from our water resource activity to date, Cadiz has been
required to obtain financing to bridge the gap between the time
water resource development expenses are incurred and the time
that revenue will commence. Historically, Cadiz has addressed
these needs primarily through secured debt financing arrangements
with our lenders, private equity placements and the exercise of
outstanding stock options.
As of December 31, 2001, we were obligated for approximately
$10.1 million under a senior term loan facility and $15 million
under a $15 million revolving credit facility with the same
lender. In the first quarter of 2002, we completed an extension
of both facilities to a maturity date of January 31, 2003 and
increased Cadiz' revolving credit facility to $25 million. $10
million of Cadiz' revolving credit facility is convertible into
1,250,000 shares of our stock any time prior to January 2003 at
the election of the lender. Currently, the lender holds a senior
deed of trust on substantially all of our non-Sun World assets
under the term loan facility and a second lien on our non-Sun
World assets under Cadiz' revolving credit facility. We have
historically structured our financing arrangement with the lender
with a view toward effective implementation of the Cadiz Program.
While we currently anticipate repayment of these facilities with
monies to be received under the Cadiz Program, we may, if we deem
appropriate, replace or renegotiate the terms of these facilities
to accommodate other developments such as delays in the timetable
for regulatory approvals or litigation related to regulatory
approvals of the Cadiz Program. We retain the right to maintain
$25.5 million of senior debt secured by the Cadiz Program area
lands pursuant to the definitive economic terms for the Cadiz
Program agreed with Metropolitan, as described under "Outlook"
below.
In December 2000, we issued $5 million of Series D
Convertible Preferred Stock. The stock is convertible into
625,000 shares of our common stock any time prior to July 2004 at
the election of the holder. We also have the right to convert the
preferred stock, but only when the closing price of our common
stock has exceeded $12 per share for 30 consecutive trading days.
The preferred stock will be redeemed in July 2004 if it is still
outstanding.
In October and November 2001, we issued an aggregate of $7.5
million of Series E-1 and E-2 Convertible Preferred Stock in
$3.75 million issuances respectively. The Series E-1 and E-2
preferred stock is convertible into an aggregate of 1,000,000
shares of our common stock at any time prior to July 2004 at the
election of the holder. We also have the right to convert the
Series E-1 and E-2 preferred stock, but only when the closing
price of our common stock has exceeded $10.50 per share for 30
consecutive trading days. The preferred stock will be redeemed
in July 2004 if still outstanding.
As we continue to actively pursue our business strategy,
additional financing specifically in connection with our water
programs will be required. Responsibility for funding the
design, construction and program implementation costs of the
capital facilities for the Cadiz Program will, under currently
developed principles and terms, be shared equally by Cadiz and
Page 23
Metropolitan. We plan to use monies to be received from Metropolitan
for its initial payment for 600,000 acre-feet of groundwater
storage as well as long-term financing arrangements currently
under negotiation, to fund Cadiz' share of the estimated $150
million cost of the program capital facilities.
SUN WORLD OBLIGATIONS. Under Sun World's historical working
capital cycle, working capital is required primarily to finance
the costs of growing and harvesting crops, which generally occur
from January through September with a peak need in June. Sun
World harvests and sells the majority of its crops during the
period from June through October, when it receives the majority
of its revenues. In order to bridge the gap between incurrence
of expenditures and receipt of revenues, large cash outlays are
required each year which are financed through a $30 million
revolving credit agreement guaranteed by Cadiz.
In November 2001, Sun World renewed its revolving credit
facility through the 2002 growing season with a maturity date of
November 2002. Amounts eligible to be borrowed under the
revolving credit facility are based upon a borrowing base of
eligible accounts receivable and inventory balances. Maximum
availability under the revolving credit facility varies
throughout the year with a maximum of $30 million available
during the peak borrowing periods of April to July. The
revolving credit facility is secured by accounts receivable,
inventory, and the proceeds thereof, requires Sun World to meet
certain financial covenants, and is guaranteed by Cadiz. Amounts
borrowed under the facility will accrue interest at either prime
plus 1.0% or LIBOR plus 2.50% at our election. No amounts were
outstanding under the revolving credit facility at December 31,
2001.
In addition, Sun World has outstanding $115 million of First
Mortgage Notes which will mature on April 15, 2004 and are
publicly traded and registered under the Securities Act of 1933.
The Sun World notes became redeemable at the option of Sun World,
in whole or in part, at any time on or after April 15, 2001.
Interest accrues at the rate of 11-1/4%per annum and is payable
semi-annually on April 15th and October 15th of each year. The
Sun World notes are secured by a first lien (subject to certain
permitted liens) on substantially all of the assets of Sun World
and its subsidiaries, other than growing crops, crop inventories
and accounts receivable and proceeds thereof, which secure Sun
World's revolving credit facility, and certain real property
pledged to third parties. The Sun World notes are also secured
by the guarantee of Cadiz and the pledge by Cadiz of all of the
stock of Sun World. The Sun World notes include covenants that
do not allow for the payment of dividends by us or by Sun World
other than out of cumulative net income.
CASH USED FOR OPERATING ACTIVITIES. Cash used for operating
activities totaled $4.3 million for the year ended December 31,
2001, as compared to cash used for operating activities of $9.1
million for the year ended December 31, 2000. The decrease in
cash used for operating activities is primarily due to the $6
million of cash received as part of the special litigation
recovery in 2001 coupled with higher accounts payable balances at
December 31, 2001.
CASH USED FOR INVESTING ACTIVITIES. Cash used for investing
activities totaled $5.5 million for the year ended December 31,
2001, as compared to $2.7 million for the same period in 2000.
The increase is cash used was primarily due to reduced sales of
property, plant and equipment, and the non reoccurrence of a $1.6
million final partnership distribution in 2000, partially offset
by decreased expenditures for developing crops.
Page 24
CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by
financing activities totaled $7.9 million for the year ended
December 31, 2001 as compared to $10.6 million for the same
period in 2000. Cadiz issued $7.5 million of preferred stock in
2001 compared to $5.0 million in 2000. Net proceeds from stock
options exercised totaled $1.6 million in 2001 compared to $1.0
million in 2000 and principal payments on long-term debt totaled
$1.6 million in 2001 compared to $0.7 million in 2000. In
addition, Sun World issued $5.2 million of long-term debt in
2000.
(b) Outlook
-------
We are actively pursuing the development of our water
resources. Specifically, in April 2001, Cadiz and Metropolitan
approved definitive economic terms and responsibilities for a 50-
year agreement for the Cadiz Program. Under the Cadiz Program,
Metropolitan will, during wet years or periods of excess supply,
store surplus water from the Colorado River Aqueduct in the
groundwater basin underlying our property. During dry years or
times of reduced allocations from the Colorado River, the
previously imported water, together with additional existing
groundwater, will be extracted and delivered, via a conveyance
pipeline, back to the aqueduct. The definitive terms will serve
as the basis for a final agreement to be executed between
Metropolitan and Cadiz. Execution of this final agreement will
be subject to completion of the ongoing environmental review
process for the Cadiz Program.
Key provisions of the approved definitive terms for the
Cadiz Program are as follows:
* Over the 50-year term of the agreement, Metropolitan will
store a minimum of 900,000 acre-feet of Colorado River
Aqueduct water in our groundwater basin and purchase up
to a minimum of 1,500,000 acre-feet of existing
groundwater for transfer during dry years. The Cadiz
Program will have the capacity to convey, either for
storage or transfer, up to approximately 150,000 acre-
feet in any given year.
* During storage operations, Metropolitan will pay $50 per
acre-foot for put of Colorado River water into storage
and $40 per acre-foot for return of Colorado River water
from storage, or a total of $90 per acre-foot to cycle
water into and out of the basin. These fees will be
adjusted by the Consumer Price Index (CPI).
* As outlined above, Metropolitan's total minimum
commitment for storage is 900,000 acre-feet.
Metropolitan will pay for the initial 600,000 acre-feet
of put and take activity upon final contract execution
and completion of the environmental review process ($54
million before CPI adjustment). Metropolitan will pay
for an additional 300,000 acre-feet of put and take
activity at the earlier of actual usage or 30,000 acre-
foot annual increments during years 5-14 of Cadiz Program
operations ($2,700,000 per year before CPI adjustment).
* For transfer operations, Metropolitan shall purchase
30,000 acre-feet per year of indigenous groundwater for
25 years at a $230 per acre-foot transfer fee, subject to
a fair market value adjustment as described below. In
addition, Cadiz may elect to either sell up to an
additional 30,000 acre-feet per year of indigenous
groundwater to third parties in Metropolitan's service
area at fair market value, or require Metropolitan to
purchase that amount of water at a fixed transfer fee of
$230 per acre-foot. Accordingly, Metropolitan's total
potential minimum commitment for the life of the Cadiz
Program will be 1,500,000 acre-feet of indigenous
groundwater. All transfers of indigenous groundwater,
whether to Metropolitan or third parties, will be made in
accordance with the terms and conditions of a Groundwater
Monitoring and Management Plan.
Page 25
* The transfer fee will reflect a "fair market value"
adjustment, which shall be determined up to once a year.
The transfer fee will be adjusted by one-half of any
increase or decrease in the fair market value, above or
below the transfer fee currently in place ($230 per acre-
foot initially). Each increase or decrease in the
transfer fee paid by Metropolitan may not exceed 15%.
For example, if the fair market value at the first
redetermination is $350 per acre-foot, then the adjusted
transfer fee shall be $264 [the lesser of (a) $230 + 50%
* ($350-$230) = $290 per acre-foot or (b) $230 * 15% =
$264.50 per acre-foot].
* Our right to sell to third parties within Metropolitan's
service area includes scheduled access to Metropolitan's
system at the rate charged by Metropolitan for conveying
water through its aqueduct and pipeline system (the
wheeling rate) charged for "as available capacity", plus
power costs and any standard water stewardship fee that
is uniformly charged to Metropolitan member agencies or
third parties. Depending on availability of system
capacity, Metropolitan may elect to exchange other water
for delivery to our customers and "bank" the water we
have sold.
* If indigenous water supplies are determined to exceed
1,700,000 acre-feet, Metropolitan shall have the first
right of refusal to purchase one-half of that excess
yield.
* Cadiz groundwater meets all existing federal and state
water quality standards. Metropolitan's Colorado River
Aqueduct water meets all existing federal and state water
quality standards. Metropolitan shall be responsible to
ensure, at its expense, that Colorado River Aqueduct
water introduced into our groundwater basin shall, at a
minimum, meet all existing and potential future federal
and state water quality standards applicable to the
Colorado River Aqueduct. We shall be responsible to
ensure, at our expense, that indigenous groundwater
introduced into the Metropolitan delivery system shall at
a minimum, meet all existing and potential future federal
and state water quality standards. If both indigenous
groundwater and stored Colorado River water exceed any
future federal or state water quality standard, then the
parties will share compliance with the new standard based
pro rata on the contribution to exceeding the standard.
* The Cadiz Program facilities, including spreading basins,
extraction wells, conveyance pipeline and a pumping plant
are estimated to cost approximately $150 million, and
both parties will equally share these costs. Each party
will be responsible for financing its portion of the
capital costs.
* Metropolitan will be responsible for operational costs of
the Cadiz Program. However, we will assume pro rata
operational costs associated with the sale of indigenous
groundwater to third parties.
* We and Metropolitan shall share equally the capital costs
required for mitigation at the outset of the Cadiz
Program. We shall assume the ongoing annual costs of
operating the Groundwater Monitoring and Management Plan
and of maintaining the right to withdraw water from the
basin underlying the Cadiz Program area.
Metropolitan and the U.S. Bureau of Land Management, in
cooperation with the U.S. Geological Survey and the National Park
Service, issued the Final Environmental Impact
Report/Environmental Impact Statement for the Cadiz Program in
October 2001. Issuance of
Page 26
the environmental report is a significant milestone in the
environmental review process as it represents the last step prior
to final actions from the U.S. Bureau of Land Management and
Metropolitan. We anticipate final actions related to the
environmental review process to be completed by the end of the
second quarter of 2002 after which construction of the Cadiz
Program facilities may commence.
In addition to the development of our water resources, we
are actively involved in further agricultural development and
reinvestment in our landholdings. Such development will be
systematic and in furtherance of our business strategy to provide
for maximization of the value of our assets. We also continually
evaluate acquisition opportunities that are complimentary to our
current portfolio of water and agricultural resources.
In January 2002, we announced an agreement in principle with
KADCO to combine the businesses of Sun World and KADCO.
Following the proposed combination, KADCO's shareholders will
have a 49.75% interest in the combined business, and Cadiz will
retain an ownership interest of 50.25%. Prior to the proposed
combination, KADCO expects to have cash resources in excess of
$80 million.
We intend to use the cash resources of the combined business
both to recapitalize Sun World and to provide for future business
expansion. The agreement in principle contemplates that, in the
future, KADCO shareholders will have an opportunity to make an
additional equity investment in the combined business. Should
KADCO shareholders make this additional investment, we may choose
to maintain a majority percentage ownership in the combined
business through a proportionate matching investment. We believe
that additional investment will help position the combined
business for its planned future transformation into a publicly-
traded company. The proposed combination is subject to the
negotiations of definitive agreements and a number of other
important conditions. See "Certain Trends and Uncertainties -
Proposed Combination of Sun World with KADCO" below.
Historically, Sun World has serviced its indebtedness and
met its seasonal working capital needs using available internal
cash, its revolving credit facility and through an intercompany
revolver with Cadiz. Cadiz has met its ordinary working capital
needs through a combination of available internal cash, quarterly
management fee payments from Sun World, payments from Sun World
under an agricultural lease whereby Sun World now operates Cadiz'
1,600 acres of developed agricultural property at Cadiz,
California, Cadiz' revolving credit facility, the exercise of
outstanding stock options, and equity placements. Except for the
foregoing, additional intercompany cash payments between Sun
World and Cadiz are subject to certain restrictions under their
current lending arrangements.
We may require additional cash beyond the amounts described
in this section although we are not looking to raise additional
working capital at this time. We may meet any such future
requirements through a variety of means to be determined at the
appropriate time. Such means may include equity or debt
placements, or the sale or other disposition of assets. Equity
placements would be undertaken only to the extent necessary so as
to minimize the dilutive effect of any such placements upon our
existing stockholders.
(c) Certain Trends and Uncertainties
--------------------------------
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we are filing
cautionary statements identifying important risk factors that
could cause our actual results to differ materially from those
projected in our forward-looking statements made by or on our
behalf.
Page 27
We wish to caution readers that these factors, among others,
could cause our actual results to differ materially from those
expressed in any projected, estimated or forward-looking
statements relating to us. The following factors should be
considered in conjunction with any discussion of operations or
results by us or our representatives, including any forward-
looking discussion, as well as comments contained in press
releases, presentations to securities analysts or investors, or
other communications by us.
In making these statements, we are not undertaking to
address or update each factor in future filings or communications
regarding our business or results, and are not undertaking to
address how any of these factors may have caused changes to
discussions or information contained in previous filings or
communications. In addition, certain of these matters may have
affected our past results and may affect future results.
RISKS INHERENT IN AGRICULTURAL OPERATIONS. We are subject
to risks associated with our agricultural operations. Numerous
factors can affect the price, yield and marketability of the
crops grown on our properties. Crop prices may vary greatly from
year to year as a result of the relationship between production
and market demand. For example, the production of a particular
crop in excess of demand in any particular year will depress
market prices, and inflationary factors and other unforeseeable
economic changes may also, at the same time, increase operating
costs with respect to such crops. In addition, the agricultural
industry in the United States is highly competitive, and domestic
growers and produce marketers are facing increased competition
from abroad, particularly from Mexico. There are also a number
of factors outside of our control that could, alone or in
combination, materially adversely affect our agricultural
operations, such as adverse weather conditions, insects, blight
or other diseases, labor problems such as boycotts or strikes and
shortages of competent laborers. Our operations may also be
adversely affected by changes in governmental policies including
food safety and environmental regulations, social and economic
conditions, and industry production levels.
PROPOSED COMBINATION OF SUN WORLD WITH KADCO. The proposed
combination of Sun World with KADCO may not occur in the second
quarter of 2002, or at all, if various conditions are not met.
These conditions include final negotiation and execution of
definitive agreements and a number of other conditions such as
obtaining consents of governmental authorities and third parties
with whom we have contracts, including lenders, completing a "due
diligence" review of the other's operations, and KADCO obtaining
additional equity financing in order to complete the transaction.
RISKS OF WATER DEVELOPMENT PROJECTS. We anticipate that we
will continue to incur operating losses from our non-Sun World
operations until such time as we are able to receive significant
revenues from the development of our water development projects,
including the Cadiz Program. In addition to the risks associated
with receiving all necessary regulatory approvals and permits
with respect to our water development projects, including
litigation by environmental or other groups which may delay or
even prevent implementation of the Cadiz Program, we may also
encounter unforeseen technical difficulties, which could result in
construction delays, and cost increases or determination that
a project is not feasible. We are continuing to negotiate the
terms and conditions of water storage and supply programs with
various California water agencies (including Metropolitan with
respect to preparing the final agreement for the Cadiz Program).
However, the outcome of these negotiations cannot be predicted
with any degree of certainty. The circumstances under which
transfers or storage of water can be made and the profitability
of any transfers or storage are subject to significant
uncertainties, including hydrologic risks of variable water
supplies, risks presented by allocations of water under existing
and prospective priorities, and risks of adverse changes to or
Page 28
interpretations of U.S. federal, state and local laws,
regulations and policies.
RISKS OF NOT BEING ABLE TO PAY DIVIDENDS. We are restricted
by contract from paying dividends and we do not intend to pay
dividends in the foreseeable future. As a result, any return on
investment on our common stock will depend primarily upon
appreciation in the price of the common stock. To date, we have
never paid a cash dividend on our common stock. The ability to
receive distributions from Sun World's cash flow and to pay
dividends in turn to stockholders is restricted by a series of
covenants in the indenture governing the Sun World notes. These
covenants do not allow for the payment of dividends by us or by
Sun World other than out of cumulative net income. Similar
restrictions are contained in the loan documents governing Sun
World's secured $30 million revolving credit facility, Sun
World's $5 million unsecured term loan and Cadiz' $25 million
revolving credit facility. As we have a history of operating
losses, we have been unable to date to pay dividends.
Other important risk factors that could cause our actual
results to differ materially from those expressed or implied by
or on our behalf are discussed elsewhere within this Form 10-K in
the sections entitled: "Outlook", "Seasonality", "Regulation",
"Competition" and "Liquidity and Capital Resources".
(d) Critical Accounting Policies
----------------------------
As discussed in Note 2 to the Consolidated Financial
Statements of Cadiz, the preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and related
footnotes. In preparing these financial statements, management
has made its best estimates and judgments of certain amounts
included in the financial statements based on all relevant
information available at the time and giving due consideration to
materiality. We do not believe there is a great likelihood that
materially different amounts would be reported related to the
accounting policies described below. However, application of
these policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual
results could differ from these estimates. Management has
concluded that the following critical accounting policies
described below affect the most significant judgments and
estimates used in the preparation of the consolidated financial
statements.
REVENUE RECOGNITION. To date we have not had significant
revenue earned from our water development programs. As such,
virtually all of our revenue has come from Sun World's
agricultural operations. The Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition" provides guidance on the application of generally
accepted accounting principles to selected revenue recognition
issues. Sun World's revenues consist primarily of sales of fresh
fruits and vegetables to large domestic national and regional
supermarket chain stores and produce brokers, sales of juice to
wineries and juice cooperatives, sales of raisins to processors,
packing and marketing for third party growers,
international licensing, project development and management
services, and other miscellaneous receivables. Revenue is
recognized when product has been shipped and risk of loss has
been transferred to the customer and collection of the resulting
receivable is reasonably assured. Packing revenues and marketing
commissions from third party growers are recognized when the
related services are provided. For licensing, revenue is recognized
when the licensee's product has been sold. Project development and
management fees are recorded when earned under the terms of the
related agreement. At the time revenue is recognized, we provide
for costs associated with any estimated returns or allowances
which occur in the produce industry given the perishable nature
of Sun World's products. We have
Page 29
concluded that our revenue recognition policy is appropriate
and in accordance with generally accepted accounting principles
and SAB No. 101.
INVENTORIES AND RELATED ALLOWANCE FOR OBSOLETE AND EXCESS
INVENTORY. Inventories are valued at the lower of cost or
market. Management estimates what market conditions will be for
produce based on the age, size, quality and overall market for
fresh product held in inventory at the end of each reporting
period. When future market conditions indicate that the cost of
the inventory plus any additional selling expenses exceed the
expected net revenues to be received, we provide a reserve for
the amount of estimated costs in excess of estimated net
revenues. Management also regularly conducts a review of non-
product inventory that consists primarily of corrugated boxes,
chemicals and seed. Appropriate allowances are made based on
management's review for all excess and obsolete inventory
compared to estimated future usage and sales.
GOODWILL, INTANGIBLE AND OTHER LONG-LIVED ASSETS. Property,
plant and equipment, goodwill, intangible and certain other long-
lived assets are amortized over their useful lives. Useful lives
are based on management's estimates of the period that the assets
will generate revenue. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. At
Sun World, management regularly reviews crop portfolios in an
attempt to identify crops that are underperforming generally at
the conclusion of each growing season. As a result of these
reviews, management determines which crops will be removed
immediately or at the conclusion of the next growing season. As
such, appropriate writedowns and accruals for estimated removal
costs are made and where appropriate, remaining useful lives are
shortened to correspond to the estimated period that the assets
will are expected to generate future revenues.
DEFERRED TAX ASSETS AND VALUATION ALLOWANCES. To date, we
have had a history of net operating losses as we have not
generated significant revenue from our water development programs
and Sun World has experienced losses from its agricultural
operations. As such, we have generated significant deferred tax
assets, including large net operating loss carry forwards for
federal and state income taxes for which we have a full valuation
allowance. Management is currently working on initiatives at
Cadiz and Sun World that are designed to generate future taxable
income, although there can be no guarantee that this will occur.
As taxable income is generated, some portion or all of the
valuation allowance will be reversed and an increase in net
income would consequently be reported in future years.
(e) New Accounting Pronouncements
-----------------------------
See Footnote 2, Summary of Significant Accounting Policies,
to Cadiz Inc. Financial Statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market
Risk
We are exposed to market risk from changes in interest rates
on long-term debt obligations that impact the fair value of these
obligations. Our policy is to manage interest rates through the
use of a combination of fixed and variable rate debt. Our
interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. Other instruments, such as interest
rate swaps, options, floors, caps or collars may also be used
depending upon market conditions. No such instruments were used
in 2001.
Page 30
The table below presents the principal amounts, weighted-
average interests rates, and fair values by year of scheduled
maturities to evaluate the expected cash flows and sensitivity to
interest rate changes (in thousands of dollars). Circumstances
could arise which may cause interest rates and the timing and
amount of actual cash flows to differ materially from the
schedule below:
Long-Term Debt
-------------------------------------------------
Variable Average
Expected Fixed Rate Average Rate Interest
Maturity Maturities Interest Rate Maturities Rate
- ------------ ---------- ------------- ---------- -----
2002 $ 476 7.7% $ 5,286 4.9%
2003 394 7.8% 25,951 4.0%
2004 115,419 11.2% - -
2005 23 8.8% - -
2006 5 10.2% - -
Total $ 116,317 11.2% $ 31,237 4.1%
========== ====== ========= =====
Fair
Value
at
12/31/01 $ 107,417 $ 31,237
========== =========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted in
response to Part IV below. See the Index to Consolidated
Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated
herein by reference to the definitive proxy statement involving
the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act
of 1934 not later than 120 days after December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated
herein by reference to the definitive proxy statement involving
the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act
of 1934 not later than 120 days after December 31, 2001.
Page 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this item is incorporated
herein by reference to the definitive proxy statement involving
the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act
of 1934 not later than 120 days after December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated
herein by reference to the definitive proxy statement involving
the election of directors which we intend to file with the
Commission pursuant to Regulation 14A under the Securities and
Exchange Act of 1934 not later than 120 days after December 31,
2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements. See Index to Consolidated
Financial Statements.
2. Financial Statement Schedules. See Index to
Consolidated Financial Statements.
3. Exhibits.
The following exhibits are filed or incorporated by
reference as part of this Form 10-K.
3.1 Cadiz Certificate of Incorporation, as amended(1)
3.2 Amendment to Cadiz Certificate of Incorporation dated
November 12, 1996(2)
3.3 Amendment to Cadiz Certificate of Incorporation
dated September 1, 1998(3)
3.4 Cadiz Bylaws, as amended(4)
3.5 Cadiz Certificate of Designations of Series A Junior
Participating Preferred Stock(5)
3.6 Cadiz Certificate of Designations of Series D Convertible
Preferred Stock dated December 28, 2000(6)
3.7 Cadiz Certificate of Correction Filed to Correct the
Certificate of Designations of Series D Preferred
Stock of Cadiz Inc. dated December 28, 2000(6)
3.8 Cadiz Certificate of Designations of Series E-1
Convertible Preferred Stock dated October 22, 2001(7)
3.9 Cadiz Certificate of Designations of Series E-2 Convertible
Preferred Stock dated November 28, 2001(8)
Page 32
4.1 Specimen Form of Stock Certificate for Cadiz registered stock(3)
4.2 Indenture, dated as of April 16, 1997 among Sun World as
issuer, Sun World and certain subsidiaries of Sun World
as guarantors, and IBJ Whitehall Bank & Trust Company as
trustee, for the benefit of holders of 11-1/4%First
Mortgage Notes due 2004 (including as Exhibit A to the
Indenture, the form of the Global Note and the form of
each Guarantee)(9)
4.3 Amendment to Indenture dated as of October 9, 1997(10)
4.4 Amendment to Indenture dated as of January 23, 1998(11)
10.1 Cadiz' 1996 Stock Option Plan(4)
10.2 Amendment to Cadiz' 1996 Stock Option Plan
10.3 Cadiz' Amended and Restated 1998 Non-Qualified Stock
Option Plan
10.4 Cadiz 2000 Stock Award Plan(12)
10.5 Employment Agreement between Cadiz and Keith Brackpool
dated February 1, 1998(11)
10.6 Employment Agreement dated September 13, 1996
between Sun World, Cadiz and Timothy J. Shaheen(13)
10.7 Employment Agreement dated September 13, 1996
between Sun World, Cadiz and Stanley E. Speer(13)
10.8 Form of Sun World Executive Officer Employment
Agreement(14)
10.9 Fifth Amended and Restated Credit Agreement,
dated as of March 7, 2002, by and between Cadiz and
ING Baring (U.S.) Capital LLC
10.10 Revolving Credit Note, dated as of November 25, 1997,
by and between Cadiz and ING Baring (U.S.) Capital
Corporation (11)
10.11 The Cadiz Groundwater Storage and Dry-Year Supply Program
Definitive Economic Terms and Responsibilities between
Metropolitan Water District of Southern California and
Cadiz dated March 6, 2001
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
- ----------------------
(1) Previously filed as an Exhibit to our Registration
Statement of Form S-1 (Registration No. 33-75642)
declared effective May 16, 1994 filed on February
23, 1994
(2) Previously filed as an Exhibit to our Report on
Form 10-Q for the quarter ended September 30, 1996
filed on November 13, 1996
Page 33
(3) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1998 filed on November 13, 1998
(4) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999 filed on August 13, 1999
(5) Previously filed as an Exhibit to our Report on
Form 8-K dated May 10, 1999 filed on May 18, 1999
(6) Previously filed as an Exhibit to our Report on
Form 8-K dated December 29, 2000 filed on January
3, 2001
(7) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2001 filed on November 14, 2001
(8) Previously filed as an Exhibit to our Registration
Statement on Form S-3 (Registration Statement No.
333-75006 filed on December 13, 2001
(9) Previously filed as an Exhibit to Amendment No. 1
to our Form S-1 Registration Statement No. 333-
19109 filed on April 29, 1997
(10) Previously filed as an Exhibit to Amendment No. 2
to Sun World's Form S-4 Registration Statement No.
333-31103 filed on October 10, 1997
(11) Previously filed as an Exhibit to our Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997 filed on March 26, 1998
(12) Previously filed as Appendix A to our Proxy
Statement dated April 5, 2000, filed on March 29,
2000
(13) Previously filed as an Exhibit to our Transition
Report on Form 10-K for the nine months ended
December 31, 1996 filed on April 14, 1997
(14) Previously filed as an Exhibit to our
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 filed on May 14, 1997
(b) Reports on Form 8-K
1. Report on Form 8-K filed October 26, 2001
describing our issuance of an aggregate of
$7,500,000 in newly authorized Series E-1 and E-2
Convertible Preferred Stock.
2. Report on Form 8-K filed January 18, 2002
reporting that Cadiz had reached an agreement in
principle with Kingdom Agricultural Development
Company (KADCO), to combine the businesses of Sun
World International, Inc. and KADCO.
3. Report on Form 8-K filed March 13, 2002 reporting
that Cadiz and ING Baring (U.S.) Capital LLC had
amended the terms of their revolving credit and
senior term facilities to extend the maturity
dates to January 31, 2003 and to increase the
revolving credit facility from $15 million to $25
million.
Page 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereto duly authorized.
CADIZ INC.
By: /s/ Keith Brackpool By: /s/ Stanley E. Speer
------------------------------- -----------------------
Keith Brackpool, Stanley E. Speer,
Chairman and Chief Executive Officer Chief Financial Officer
Date: March 27, 2002 Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
Name and Position Date
- ------------------------------- -------------------
/s/ Keith Brackpool March 27, 2002
- --------------------------------
Keith Brackpool, Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/ Anthony L. Coelho March 27, 2002
- ----------------------------------
Anthony L. Coelho, Director
/s/ Murray H. Hutchison March 27, 2002
- -----------------------------------
Murray H. Hutchison, Director
/s/ Dwight W. Makins March 27, 2002
- ------------------------------------
Dwight Makins, Director
/s/ Timothy J. Shaheen March 27, 2002
- -------------------------------------
Timothy J. Shaheen, Director
/s/ Stanley E. Speer March 27, 2002
- -----------------------------------------
Stanley E. Speer, Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 35
INDEX TO FINANCIAL STATEMENTS
Page
CADIZ INC. FINANCIAL STATEMENTS
- -------------------------------
Report of Independent Accountants. . . . . . . . . . . . .40
Consolidated Statement of Operations for the
three years ended December 31, 2001. . . . . . . . . . .41
Consolidated Balance Sheet as of
December 31, 2001 and 2000. . . . . . . . . . . . . . . .42
Consolidated Statement of Cash Flows for the
three years ended December 31, 2001. . . . . . . . . . .43
Consolidated Statement of Stockholders' Equity for
the three years ended December 31, 2001. . . . . . . . .44
Notes to the Consolidated Financial Statements. . . . . . 45
CADIZ INC. FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------
Schedule I - Condensed Financial Information of
Registrant for the three years ended December 31, 2001..69
Schedule II - Valuation and Qualifying Accounts for the
three years ended December 31, 2001. . . . . . . . . . .72
SUN WORLD INTERNATIONAL, INC. FINANCIAL STATEMENTS
- --------------------------------------------------
Report of Independent Accountants. . . . . . . . . . . . .73
Consolidated Statement of Operations
for the three years ended December 31, 2001. . . . . . .74
Consolidated Balance Sheet as of
December 31, 2001 and 2000. . . . . . . . . . . . . . . 75
Consolidated Statement of Cash Flows for the
three years ended December 31, 2001. . . . . . . . . . 76
Consolidated Statement of Stockholder's Equity
for the three years ended December 31, 2001. . . . 77
Notes to the Consolidated Financial Statements. . . . . . 78
(Schedules other than those listed above have been omitted since
they are either not required, inapplicable, or the required
information is included on the financial statements or notes
thereto.)
Page 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cadiz Inc.
In our opinion, the accompanying consolidated balance sheet
and the related consolidated statements of operations, cash flows
and stockholders' equity present fairly, in all material
respects, the financial position of Cadiz Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are
the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
February 21, 2002, except as to
Note 9, which is as of March 8, 2002
Page 37
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
(In thousands, except per share data)
Revenues $ 92,402 $ 107,745 $ 115,229
Special litigation recovery 7,929 - -
--------- --------- --------
Total revenues and special
litigation recovery 100,331 107,745 115,229
--------- --------- --------
Costs and expenses:
Cost of sales 79,108 87,925 83,821
General and administrative 12,913 12,576 12,363
Non-recurring compensation expense 5,537 - -
Special litigation - 424 937
Removal of underperforming crops 736 1,549 -
Depreciation and amortization 8,151 8,381 8,891
--------- --------- --------
Total costs and expenses 106,445 110,855 106,012
--------- --------- --------
Operating profit (loss) (6,114) (3,110) 9,217
Interest expense, net 19,551 19,188 17,811
--------- --------- --------
Net loss before income taxes (25,665) (22,298) (8,594)
Income tax expense 57 160 -
--------- --------- --------
Net loss (25,722) (22,458) (8,594)
Less: Preferred stock dividends 591 - -
Imputed dividend on
preferred stock 441 - -
--------- --------- --------
Net loss applicable
to common stock $ (26,754) $ (22,458) $ (8,594)
========== ========= =========
Basic and diluted net
loss per share $ (.75) $ (.64) $ (.25)
========== ========= =========
Weighted-average
shares outstanding 35,854 35,344 34,678
========== ========= =========
See accompanying notes to the consolidated financial statements.
Page 38
CADIZ INC.
CONSOLIDATED BALANCE SHEET
December 31,
($ in thousands) 2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,458 $ 3,291
Accounts receivable, net 6,327 7,884
Inventories 13,027 15,203
Prepaid expenses and other 788 631
------- -------
Total current assets 21,600 27,009
Property, plant, equipment
and water programs, net 165,297 164,824
Other assets 11,378 11,784
------- -------
$ 198,275 $ 203,617
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,758 $ 7,900
Accrued liabilities 5,680 5,815
Bank overdraft 410 -
Long-term debt, current portion 4,960 859
------- -------
Total current liabilities 22,808 14,574
Long-term debt 141,429 145,610
Deferred income taxes 5,447 5,447
Other liabilities 930 313
Contingencies
Series D redeemable convertible
preferred stock - $0.01 par value:
5,000 shares authorized;
shares issued and outstanding -
5,000 at December 31, 2001 and
December 31, 2000 4,243 3,950
Series E-1 and E-2 redeemable
convertible preferred stock -
$0.01 par value:
7,500 shares authorized; shares
issued and outstanding -
7,500 at December 31, 2001 and
none at December 31, 2000 5,715 -
Stockholders' equity:
Common stock - $0.01 par value;
70,000,000 shares
authorized; shares issued
and outstanding 36,070,834
at December 31, 2001 and
35,674,674 at
December 31, 2000 361 357
Additional paid-in capital 152,404 142,706
Accumulated deficit (135,062) (109,340)
------- -------
Total stockholders' equity 17,703 33,723
------- -------
$ 198,275 $ 203,617
========= ========
See accompanying notes to the consolidated financial statements.
Page 39
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-------------------------
($ in thousands) 2001 2000 1999
---- ---- ----
Cash flows from
operating activities:
Net loss $ (25,722) $ (22,458) $ (8,594)
Adjustments to reconcile
net loss to net cash
used for operating activities:
Depreciation and amortization 11,664 10,926 11,060
Issuance of stock for services - - 28
Gain on disposal of assets (421) (96) (104)
Removal of underperforming crops 736 1,549 -
Land received in
litigation recovery (2,000) - -
Shares of KADCO stock earned
for services (1,250) (1,250) (313)
Share of partnership operations - (71) (328)
Compensation charge for deferred
stock units 566 237 -
Non-recurring compensation expense 5,537 - -
Changes in operating assets
and liabilities:
Decrease (increase) in
accounts receivable 1,557 552 (2,141)
Decrease (increase) in
inventories 1,830 2,740 (3,318)
(Increase) decrease in prepaid
expenses and other (157) 286 75
Increase (decrease) in
accounts payable 3,858 (133) (720)
(Decrease) increase in
accrued liabilities (551) (1,039) 1,668
Increase (decrease) increase
in other liabilities 51 (297) (298)
------- ------- ------
Net cash used for
operating activities (4,302) (9,054) (2,985)
------- ------- ------
Cash flows from investing activities:
Additions to property,
plant and equipment (1,583) (1,252) (4,835)
Additions to water programs (1,359) (1,595) (3,177)
Additions to developing crops (3,124) (3,844) (3,531)
Proceeds from disposal of property,
plant and equipment 452 2,956 233
Partnership distributions - 1,568 -
Decrease (increase) in other assets 154 (525) (998)
------- ------- ------
Net cash used for
investing activities (5,460) (2,692) (12,308)
------- ------- ------
Cash flows from financing activities:
Net proceeds from issuance of stock 1,583 1,032 6,803
Proceeds from issuance of
preferred stock 7,500 5,000 -
Proceeds from issuance of
long-term debt - 5,231 -
Principal payments on
long-term debt (1,564) (686) (685)
Bank overdraft 410 - -
------- ------- ------
Net cash provided by
financing activities 7,929 10,577 6,118
------- ------- ------
Net decrease in cash and
cash equivalents (1,833) (1,169) (9,175)
Cash and cash equivalents,
beginning of period 3,291 4,460 13,635
------- ------- -------
Cash and cash equivalents,
end of period $ 1,458 $ 3,291 $ 4,460
========= ======== ========
See accompanying notes to the consolidated financial statements.
Page 40
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
($ in thousands)
Total
Additional Stock-
Common Stock Paid-in Accumulated holders'
Shares Amount Capital Deficit Equity
------ ----- -------- ------- ------
Balance as of
December 31, 1998 33,592,261 $ 336 $ 127,662 $ (78,288) $ 49,710
Exercise of
stock options 1,513,150 15 6,788 - 6,803
Issuance of
warrants to a lender - - 1,335 - 1,335
Stock issued
for services 61,250 1 415 - 416
Net loss - - - (8,594) (8,594)
--------- ----- --------- -------- --------
Balance as of
December 31, 1999 35,166,661 352 136,200 (86,882) 49,670
Exercise of stock
options and warrants 246,149 2 1,030 - 1,032
Issuance of
warrants to lenders - - 2,126 - 2,126
Interest paid
with stock 111,864 1 831 - 832
Stock issued
for services 150,000 2 1,469 - 1,471
Issuance of
warrants and
beneficial conversion
feature for Series D
convertible preferred
stock - - 1,050 - 1,050
Net loss - - - (22,458) (22,458)
--------- ----- ------- -------- --------
Balance as of
December 31, 2000 35,674,674 357 142,706 (109,340) 33,723
Exercise of
stock options
and stock
awards 331,176 3 1,580 - 1,583
Issuance of
warrants to lenders - - 1,435 - 1,435
Payment of
preferred stock
dividends with
common stock 24,984 - 245 - 245
Preferred stock
dividend - - (591) - (591)
Non-recurring
compensation - - 5,537 - 5,537
Stock issued
in connection
with Series E-1
and E-2 convertible
preferred stock 40,000 1 319 - 320
Issuance of warrants
and beneficial
conversion feature
for Series E-1 and E-2
convertible
preferred stock - - 1,614 - 1,614
Imputed dividend
from warrants
and deferred
beneficial conversion
feature - - (441) - (441)
Net loss - - - (25,722) (25,722)
--------- ----- --------- -------- --------
Balance as of
December 31, 2001 36,070,834 $ 361 $ 152,404 $ (135,062) $ 17,703
========== ====== ========= ========== ========
See accompanying notes to the consolidated financial statements
Page 41
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
- --------------------------------
The Company currently has agricultural operations through its
wholly-owned subsidiary, Sun World International, Inc. and its
subsidiaries, collectively referred to as "Sun World," and is
developing the water resource segment of its business, which is not
yet significant to the operations or the balance sheet of the
Company. The primary business of the Company is to acquire and
develop water and agricultural resources. The Company has created a
complementary portfolio of assets encompassing undeveloped land with
high-quality groundwater resources and/or storage potential,
agricultural properties located throughout central and southern
California with valuable water rights, and other contractual water
rights. Management believes that, with both the increasing scarcity
of water supplies in California and an increasing population, the
Company's access to water will provide it with a competitive
advantage both as a major agricultural concern and as a supplier of
water.
Sun World is a large vertically integrated agricultural company
that owns more than 19,000 acres of land, primarily located in two
major growing areas of California: the San Joaquin Valley and the
Coachella Valley. Fresh produce, including table grapes, stonefruit,
citrus, peppers and watermelons, is marketed and shipped to food
wholesalers and retailers throughout the United States and to more
than 30 foreign countries. Sun World owns three cold storage and/or
packing facilities in California, of which two are operated and one
is leased to a third party.
Sun World provides the Company with additional water rights
throughout central and southern California. The Company's
landholdings, which total approximately 64,400 acres, are located
adjacent to the Colorado River and the major aqueduct systems of
central and southern California. The Company expects to utilize its
resources to participate in a broad variety of water storage and
supply, transfer, exchange, and conservation programs with public
agencies and other parties.
In 2001, the Company and the Metropolitan Water District of
Southern California ("Metropolitan") approved definitive economic
terms and responsibilities for a water storage and supply program at
its Cadiz, California property. The Cadiz Groundwater Storage and
Dry-Year Supply Program (the "Cadiz Program") will enhance southern
California water supply reliability in two ways, providing a new dry-
year water supply and much-needed storage. During wet years or
periods of excess supply, Metropolitan will store surplus Colorado
River water in the aquifer system underlying the Company's Cadiz
property. During dry years, the previously imported water, together
with additional existing groundwater, will be extracted and
delivered, via a 35-mile conveyance pipeline, to Metropolitan's
service area. Implementation of the Cadiz Program is subject to
completion and approval of a final agreement and an environmental
review process which currently is in its final stages and is expected
to be completed during 2002.
In January 2002, the Company announced an agreement in principle
with KADCO to combine the businesses of Sun World and KADCO.
Following the proposed combination, KADCO's shareholders will have a
49.75% interest in the combined business, and Cadiz will retain an
ownership interest of 50.25%. Prior to the proposed combination,
KADCO expects to have cash resources in excess of $80 million which
will be used to recapitalize Sun World and
Page 42
provide for future business expansion.
Although the development and management activities of the
Company are currently focused on agricultural operations (primarily
through its wholly-owned subsidiary, Sun World) and water resource
development, the Company will continue to develop and manage its
land, water and agricultural resources for their highest and best
uses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and Sun World. All material intercompany balances and
activity have been eliminated from the consolidated financial
statements.
RECLASSIFICATIONS
These financial statements reflect certain reclassifications
made to the prior period balances to conform to the current year
presentation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. In preparing
these financial statements, management has made estimates with regard
to revenue recognition and the valuation of inventory, goodwill and
other long-lived assets, and deferred tax assets. Actual results
could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes crop sale revenue upon shipment and
transfer of title to customers. Packing revenues and marketing
commissions from third party growers are recognized when the related
services are provided. Proprietary product development revenues are
recognized based upon product sales by licensees. Project
development and management fees are recorded when earned under the
terms of the related agreement.
Revenues attributable to one national retailer totaled $10.5
million in 2001, $12.8 million in 2000 and $14.4 million in 1999.
Export sales accounted for approximately 8.4%, 9.9% and 10.3% of the
Company's revenues for the years ended December 31, 2001, 2000 and
1999, respectively.
Page 43
RESEARCH AND DEVELOPMENT
Sun World incurs costs to research and develop new varieties of
proprietary products. Research and development costs are expensed as
incurred. Such costs were approximately $2,023,000 for the year
ended December 31, 2001, $1,636,000 for the year ended December 31,
2000, and $1,450,000 for the year ended December 31, 1999.
NET LOSS PER COMMON SHARE
Basic Earnings Per Share (EPS) is computed by dividing the net
loss, after deduction for preferred dividends either accrued or
imputed, if any, by the weighted-average common shares outstanding.
Options, deferred stock units, warrants and preferred stock
convertible into or exercisable for certain shares of the Company's
common stock, were not considered in the computation of diluted EPS
because their inclusion would have been antidilutive. Had these
instruments been included, the fully diluted weighted average shares
outstanding would have increased by approximately 2.3 million shares,
1.5 million shares, and 1.2 million shares for the years ended
December 31, 2001, 2000 and 1999, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits with an original
maturity of three months or less to be cash equivalents. The Company
invests its excess cash in deposits with major international banks
and short-term commercial paper and, therefore, bears minimal risk.
Such investments are stated at cost, which approximates fair value,
and are considered cash equivalents for purposes of reporting cash
flows. At December 31, 2001, the Company had a bank overdraft
totaling $410,000 which is disclosed separately within current
liabilities.
INVENTORIES
Growing crops, pepper seed, and materials and supplies are
stated at the lower of cost or market, on a first-in, first-out
(FIFO) basis. Growing crop inventory includes direct costs and an
allocation of indirect costs.
INVESTMENT IN PARTNERSHIP
Sun World, through a wholly-owned subsidiary, owned a 50%
interest in ASC/SWB Partnership, formerly named American SunMelon
(the "Partnership"). In October 1998, the Partnership sold
substantially all of its assets. In November 2000, Sun World
received a final distribution of $1.6 million in connection with the
liquidation of the Partnership. Sun World had accounted for its
investment in the Partnership using the equity method.
PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
Property, plant, equipment and water programs are stated at
cost.
Page 44
The Company capitalizes direct and certain indirect costs of
planting and developing orchards and vineyards during the development
period, which varies by crop and generally ranges from three to
seven years. Depreciation commences in the year commercial
production is achieved.
Permanent land development costs, such as acquisition costs,
clearing, initial leveling and other costs required to bring the land
into a suitable condition for general agricultural use, are
capitalized and not depreciated since these costs have an indefinite
useful life.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally ten to forty-five
years for land improvements and buildings, three to twenty-five years
for machinery and equipment, and five to thirty years for permanent
crops.
Water rights and water storage and supply programs are stated at
cost. All costs directly attributable to the development of such
programs are being capitalized by the Company. These costs, which
are expected to be recovered through future revenues, consist of
direct labor, drilling costs, consulting fees for various
engineering, hydrological, environmental and feasibility studies, and
other professional and legal fees.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company annually evaluates its long-lived assets, including
intangibles, for potential impairment. When circumstances indicate
that the carrying amount of the asset may not be recoverable, as
demonstrated by estimated future cash flows, an impairment loss would
be recorded based on estimated fair value.
During the year ended December 31, 2001 and 2000, the Company
incurred costs to remove certain underperforming crops, primarily
stonefruit, citrus, and wine grapes. The Company recorded a charge of
$736,000 and $1,549,000 in 2001 and 2000, respectively, in connection
with the removal of these crops which is shown under the heading
"Removal of underperforming crops" on the Consolidated Statement of
Operations.
OTHER ASSETS
As a result of a merger in May 1988 between two companies, which
eventually became known as Cadiz Inc., goodwill in the amount of
$7,006,000 was recorded. This amount is being amortized on a
straight-line basis over thirty years. Accumulated amortization was
$3,193,000 and $2,960,000 at December 31, 2001 and December 31, 2000,
respectively.
Capitalized loan fees represent costs incurred to obtain debt
financing. Such costs are amortized over the life of the related
loan. At December 31, 2001, the majority of capitalized loan fees
relate to the issuance of the First Mortgage Notes described in Note
9.
Trademark development costs represent legal costs incurred to
obtain and defend patents and trademarks related to the Company's
proprietary products throughout the world. Such costs are
capitalized and amortized over their estimated useful life, which
range from 10 to 20 years.
Page 45
INCOME TAXES
Income taxes are provided for using an asset and liability
approach which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial statement and tax bases of assets
and liabilities at the applicable enacted tax rates. A valuation
allowance is provided when it is uncertain that some portion or all
of the deferred tax assets will be realized.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the years ended December 31, 2001,
2000 and 1999 was $16,020,000, $16,328,000, and $15,988,000,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS 141 and 142
- ----------------
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Accounting for Business Combinations" and No. 142 ("SFAS
142"), "Goodwill and Other Intangibles", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will
continue to be amortized over their estimated useful lives.
The Company will apply the new rules on accounting for goodwill
and other intangible assets beginning January 1, 2002. Application
of the non-amortization provisions of SFAS 142 is expected to result
in a decrease in amortization expense of approximately $233,000 due
to goodwill no longer being amortized. The Company's current policy
for measuring goodwill impairment is based upon an analysis of future
undiscounted cash flows, which does not result in an indicated
impairment as of December 31, 2001. Under SFAS 142, goodwill must be
assigned to reporting units and measured for impairment based upon
fair value of the reporting units. The goodwill carried on the
Company's books at December 31, 2001 relates to the Cadiz water
resource development segment of the business and the Cadiz Program.
Management does not anticipate that the adoption of these standards
will have a material adverse effect on the Company's financial
position or results of operations.
SFAS 144
- --------
In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of". SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. The
adoption of SFAS 144 is not anticipated to have a material adverse
effect on the Company's financial position or results of operations.
Page 46
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable consist of the following (dollars in
thousands):
December 31,
2001 2000
---- ----
Trade receivables $4,294 $ 4,190
Due from unaffiliated growers 448 541
Other 2,091 3,675
------ -------
6,833 8,406
Less allowance for doubtful accounts (506) (522)
------ -------
$6,327 $ 7,884
======= =======
Substantially all trade receivables are from large domestic
national and regional supermarket chain stores and produce brokers
and are unsecured. Amounts due from unaffiliated growers represent
receivables for harvest advances and for services (harvest, haul and
pack) provided on behalf of growers under agreement with Sun World
and are recovered from proceeds of product sales. Other receivables
primarily include wine grape and raisin sales, proceeds due from
third party marketers, receivables for international licensing, and
other miscellaneous receivables.
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following (dollars in thousands):
December 31,
2001 2000
---- ----
Growing crops $10,174 $11,538
Materials and supplies 2,621 2,880
Harvested product 218 528
Pepper seed 14 257
------- -------
$13,027 $15,203
======= =======
Page 47
NOTE 5 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
- ------------------------------------------------------
Property, plant, equipment and water programs consist of the
following (dollars in thousands):
December 31,
2001 2000
---- ----
Land $69,068 $67,034
Permanent crops 66,300 67,278
Developing crops 12,997 9,779
Water programs 16,181 14,433
Buildings 22,544 22,113
Machinery and equipment 20,588 20,042
------- -------
207,678 200,679
Less accumulated depreciation (42,381) (35,855)
------- -------
$165,297 $164,824
======== ========
Depreciation expense during the years ended December 31, 2001,
2000 and 1999 was $7,699,000, $7,971,000, and $8,460,000,
respectively.
NOTE 6 - OTHER ASSETS
- ---------------------
Other assets consist of the following (dollars in thousands):
December 31,
2001 2000
---- ----
Goodwill, net $3,813 $ 4,046
Deferred loan costs, net 2,400 2,662
Long-term receivables 342 1,799
Capitalized trademark
development, net 2,000 1,713
Receivable from KADCO to be
paid in common shares 2,813 1,563
Other 10 1
------- -------
$11,378 $11,784
======= =======
NOTE 7 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following (dollars in
thousands):
December 31,
2001 2000
---- ----
Interest $2,736 $ 2,835
Payroll and benefits 1,907 1,754
Preferred stock dividends 345 -
Other 692 1,226
------ -------
$5,680 $ 5,815
====== =======
Page 48
NOTE 8 - REVOLVING CREDIT FACILITY
- ----------------------------------
In November 2001, Sun World renewed its Revolving Credit
Facility through the 2002 growing season with a maturity date of
November 2002. Amounts eligible to be borrowed under the Revolving
Credit Facility are based upon a borrowing base of eligible accounts
receivable and inventory balances. Maximum availability under the
Revolving Credit Facility varies throughout the year with a maximum
of $30 million available during the peak borrowing periods of April
to July. The Revolving Credit Facility is secured by accounts
receivable, inventory, and the proceeds thereof, requires Sun World
to meet certain financial covenants, and is guaranteed by the
Company. Amounts borrowed under the facility will accrue interest at
either prime plus 1.0% or LIBOR plus 2.50% at the Company's election.
No amounts were outstanding under the Revolving Credit Facility at
December 31, 2001 and 2000.
Page 49
NOTE 9 - LONG-TERM DEBT
- ------------------------
Management estimates that the fair value of the Company's long-
term debt approximates the carrying value for all debt instruments
except for the Series B First Mortgage Notes ("First Mortgage
Notes"). The fair value of the First Mortgage Notes is estimated to
be approximately $106.1 million based on quoted market prices as of
December 31, 2001. At December 31, 2001 and December 31, 2000, the
carrying amount of the Company's outstanding debt is summarized as
follows (dollars in thousands):
December 31,
2001 2000
---- ----
Cadiz obligations:
Senior term bank loan,
interest payable
quarterly, variable
interest rate based
upon LIBOR plus 2%
(4.6% at December 31, 2001
and 8.5% at December 31, 2000),
due January 31, 2003 $ 10,095 $ 10,345
$15 million revolving line
of credit, interest
payable quarterly,
variable interest rate
based upon LIBOR plus 2%
(4.6% at December 31, 2001
and 8.5% at December 31, 2000),
due January 31, 2003 15,000 15,000
Debt discount (363) (1,433)
------- -------
24,732 23,912
------ -------
Sun World obligations:
Series B First
Mortgage Notes, interest
payable semi-annually
with principal due in
April 2004, interest at 11.25% 115,000 115,000
Senior unsecured term loan,
interest payable
quarterly, due December 31, 2002,
interest at LIBOR plus 3%
(5.60% at December 31, 2001
and 9.40% at December 31, 2000) 5,000 5,000
Note payable to bank, quarterly
principal installments of $72 plus
interest payable monthly, due
December 31, 2003, interest at
prime (4.75% at December 31, 2001
and 9.50% at December 31, 2000) 1,142 1,500
Note payable to insurance company,
quarterly installments of $120
(including interest), due
January 1, 2005, interest at 7.75% 945 1,639
Note payable to finance company,
monthly installments of $18
(including interest), due
July 1, 2002, interest at 7.50% 103 305
Other 269 255
Debt discount (802) (1,142)
------ -------
121,657 122,557
------- -------
146,389 146,469
Less current portion (4,960) (859)
-------- -------
$141,429 $145,610
======== ========
Page 50
Annual maturities of long-term debt outstanding (in thousands),
excluding $1,165 representing the unamortized portion of warrants, on
December 31, 2001 are as follows: 2002 - $5,762; 2003 - $26,345; 2004
- - $115,419; 2005 - $23; and 2006 - $5.
CADIZ OBLIGATIONS
The senior term bank loan is secured by substantially all of the
Company's non-Sun World related property. During 2001, pursuant to
the loan agreement, the Company repriced certain warrants previously
issued. In February 2002, the Company completed an amendment to the
loan that extended the maturity date of the obligation to January 31,
2003. The interest rate is LIBOR plus 300 basis points, payable
quarterly.
The $15 million revolving credit facility was fully drawn at
December 31, 2001 and 2000, and is secured by a second lien on
substantially all of the non-Sun World assets of the Company. During
2001, pursuant to the loan agreement, the Company repriced certain
warrants previously issued. In February 2002, the Company completed
an amendment to the facility that extended the maturity date of the
obligation to January 31, 2003. The interest rate can either be
LIBOR plus 300 basis points if paid in cash or LIBOR plus 700 basis
points if paid in common stock. In March 2002, the revolving credit
facility was increased to $25 million, with $10 million of the $25
million revolver convertible into 1,250,000 of the Company's common
stock any time prior to January 2003 at the election of the lender.
In connection with obtaining the extension of the term loan and
revolver and the increase in the revolver, the Company repriced
certain warrants previously issued and issued certain additional
warrants to purchase shares of the Company's common stock. The
estimated fair value of the warrants issued and repriced was
calculated using the Black Scholes option pricing model and was
recorded as a debt discount and is being amortized over the remaining
term of the loan.
SUN WORLD OBLIGATIONS
In April 1997, Sun World issued $115 million of Series A First
Mortgage Notes through a private placement. The notes have
subsequently been exchanged for Series B First Mortgage Notes, which
are registered under the Securities Act of 1933 and are publicly
traded. The First Mortgage Notes are secured by a first lien
(subject to certain permitted liens) on substantially all of the
assets of Sun World and its subsidiaries other than growing crops,
crop inventories and accounts receivable and proceeds thereof, which
secure the Revolving Credit Facility. The First Mortgage Notes
mature April 15, 2004, but became redeemable at the option of Sun
World, in whole or in part, at any time on or after April 15, 2001.
The First Mortgage Notes include covenants that do not allow for the
payment of dividends by the Company or by Sun World other than out of
cumulative net income.
The First Mortgage Notes are also secured by the guarantees of
Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and Sun
World International de Mexico S.A. de C.V. (collectively, the "Sun
World Subsidiary Guarantors") and by the Company. The Company also
pledged all of the stock of Sun World as collateral for its
guarantee. Sun World and the Sun World Subsidiary Guarantors are all
direct and indirect wholly-owned subsidiaries of the Company. The
guarantees by the Sun World Subsidiary Guarantors are full,
unconditional, and joint and several. Sun World and the Sun World
Subsidiary Guarantors comprise all of the
Page 51
direct and indirect subsidiaries of the Company other than inconsequential
subsidiaries. Additionally, management believes that the direct and
indirect non-guarantor subsidiaries of Cadiz are inconsequential, both
individually and in the aggregate, to the financial statements of the
Company for all periods presented.
In December 2000, Sun World entered into a two-year $5 million
senior unsecured term loan. In connection with obtaining the loan,
the Company issued 50,000 shares of the Company's common stock as
well as certain warrants to purchase shares of the Company's common
stock. The fair values of the stock and the warrants were recorded as
a debt discount and are being amortized over the life of the loan.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Condensed consolidating financial information as of December 31,
2001 and 2000 and for the three years ended December 31, 2001 for the
Company is as follows (in thousands):
Consolidating
Statement
of Operations
Information
Year Ended
December 31, 2001 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
Revenues $ 1,903 $ 92,399 $ (1,900) $ 92,402
Special litigation
recovery 7,929 - - 7,929
------- -------- ------- --------
Total revenues and
special litigation
recovery 9,832 92,399 (1,900) 100,331
------- ------- ------- --------
Costs and expenses:
Cost of sales 118 79,390 (400) 79,108
General and
administrative 5,433 8,980 (1,500) 12,913
Non-recurring
compensation 2,584 2,953 - 5,537
Removal of
underperforming crops 222 514 - 736
Depreciation and
amortization 1,137 7,014 - 8,151
------- ------- ------- --------
Total costs and expenses 9,494 98,851 (1,900) 106,445
------- ------- ------- --------
Operating profit (loss) 338 (6,452) - (6,114)
Interest expense, net 3,718 15,598 235 19,551
------- ------- ------- --------
Loss before income taxes (3,380) (22,050) (235) (25,665)
Income tax expense - 57 - 57
------- ------- ------- --------
Net loss (3,380) (22,107) (235) (25,722)
Less:
Preferred stock
dividends 591 - - 591
Imputed dividend
on preferred stock 441 - - 441
------- ------- ------- --------
Net loss applicable
to common stock $ (4,412) $ (22,107) $ (235) $ (26,754)
======== ======== ======= =========
Page 52
Consolidating
Balance Sheet Information
December 31, 2001 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents $ 400 $ 1,058 $ - $ 1,458
Accounts
receivable, net 1 6,326 - 6,327
Due from affiliate 11,254 - (11,254) -
Inventories - 13,229 (202) 13,027
Prepaid expenses
and other 210 578 - 788
------ ------- ------- --------
Total current
assets 11,865 21,191 (11,456) 21,600
Property, plant,
equipment and
water programs, net 41,266 124,031 - 165,297
Other assets 4,432 6,946 - 11,378
------- ------- ------- --------
$ 57,563 $152,168 $(11,456) $198,275
======== ======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,330 $ 10,428 $ - $ 11,758
Accrued liabilities 791 4,889 - 5,680
Due to affiliate - 11,254 (11,254) -
Bank overdraft 410 - - 410
Long-term debt,
current portion - 4,960 - 4,960
------- ------- ------- --------
Total current
liabilities 2,531 31,531 (11,254) 22,808
Long-term debt 24,732 116,697 - 141,429
Deferred income taxes - 5,447 - 5,447
Other liabilities 371 559 - 930
Losses in excess of
investment in affiliate 2,066 - (2,066) -
Series D redeemable
preferred stock 4,243 - - 4,243
Series E-1 and E-2
redeemable
preferred stock 5,715 - - 5,715
Stockholders' equity:
Common stock 361 - - 361
Additional
paid-in capital 152,404 38,273 (38,273) 152,404
Accumulated deficit (134,860) (40,339) 40,137 (135,062)
-------- ------- -------- --------
Total stockholders'
equity 17,905 (2,066) 1,864 17,703
------- ------- ------- --------
$ 57,563 $152,168 $ (11,456) $198,275
======== ======== ========= ========
Page 53
Consolidating
Statement of
Cash Flow Information
Year Ended
December 31, 2001 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
Net cash provided by
(used for) operating
activities $ 1,442 $ (5,509) $ (235) $ (4,302)
------- ------- -------- ---------
Cash flows from
investing activities:
Additions to property,
plant and equipment (88) (1,495) - (1,583)
Additions to
water programs (1,359) - - (1,359)
Additions to
developing crops (109) (3,015) - (3,124)
Proceeds from disposal
of property,
plant and equipment 2 450 - 452
(Increase) decrease
in other assets (575) 494 235 154
------- ------- ------- ---------
Net cash (used for)
provided by investing
activities (2,129) (3,566) 235 (5,460)
------- ------- ------- ---------
Cash flows from
financing activities:
Net proceeds from
issuance of stock 1,583 - - 1,583
Proceeds from issuance
of preferred stock 7,500 - - 7,500
Borrowings from
intercompany revolver (11,254) 11,254 - -
Principal payments
on long-term debt (251) (1,313) - (1,564)
Bank overdraft 410 - - 410
------- ------- -------- ---------
Net cash (used for)
provided by
financing activities (2,012) 9,941 - 7,929
------- ------- -------- ---------
Net (decrease) increase
in cash and
cash equivalents (2,699) 866 - (1,833)
Cash and cash
equivalents,
beginning of period 3,099 192 - 3,291
------- ------- -------- ---------
Cash and cash
equivalents,
end of period $ 400 $1,058 $ - $ 1,458
====== ====== ======== =========
Page 54
Consolidating
Statement
of Operations
Information
Year Ended
December 31, 2000 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
Revenues $ 1,920 $ 107,727 $ (1,902) $ 107,745
-------- --------- -------- ----------
Costs and expenses:
Cost of sales 124 88,203 (402) 87,925
General and
administrative 4,355 9,721 (1,500) 12,576
Special litigation 424 - - 424
Removal of
underperforming crops - 1,549 - 1,549
Depreciation and
amortization 1,174 7,207 - 8,381
------- ------- ------- --------
Total costs and
expenses 6,077 106,680 (1,902) 110,855
------- ------- ------- --------
Operating profit (loss) (4,157) 1,047 - (3,110)
Interest expense, net 4,085 15,103 - 19,188
------- ------- ------- --------
Loss before income taxes (8,242) (14,056) - (22,298)
Income tax expense - 160 - 160
------- ------- ------- --------
Net loss $ (8,242) $(14,216) $ - $ (22,458)
======== ======== ======= ==========
Page 55
Consolidating
Balance Sheet Information
December 31, 2000 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents $ 3,099 $ 192 $ - $ 3,291
Accounts
receivable, net 7 7,879 (2) 7,884
Inventories - 15,405 (202) 15,203
Prepaid expenses
and other 212 419 - 631
------- ------- ------- --------
Total current
assets 3,318 23,895 (204) 27,009
Investment in
subsidiary 17,093 - (17,093) -
Property, plant,
equipment and
water programs, net 38,842 125,982 - 164,824
Other assets 4,199 7,585 - 11,784
------- ------- ------- --------
$ 63,452 $157,462 $(17,297) $ 203,617
======== ======== ======== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,209 $ 6,693 $ (2) $ 7,900
Accrued liabilities 349 5,466 - 5,815
Due to affiliate 202 - (202) -
Long-term debt,
current portion - 859 - 859
------- ------- ------- ----------
Total current
liabilities 1,760 13,018 (204) 14,574
Long-term debt 23,912 121,698 - 145,610
Deferred income taxes - 5,447 - 5,447
Other liabilities 107 206 - 313
Series D redeemable
preferred stock 3,950 - - 3,950
Stockholders' equity:
Common stock 357 - - 357
Additional paid-in
capital 142,706 35,325 (35,325) 142,706
Accumulated deficit (109,340) (18,232) 18,232 (109,340)
-------- ------- ------- ---------
Total
stockholders'
equity 33,723 17,093 (17,093) 33,723
------- ------- ------- ---------
$ 63,452 $157,462 $(17,297) $ 203,617
======== ======== ======== ===========
Page 56
Consolidating
Statement of
Cash Flow
Information
Year Ended
December 31, 2000 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
Net cash used for
operating activities $ (4,849) $ (4,205) $ - $ (9,054)
------- ------- ------- ----------
Cash flows from
investing activities:
Additions to property,
plant and equipment (293) (959) - (1,252)
Additions to
water programs (1,595) - - (1,595)
Additions to
developing crops (159) (3,685) - (3,844)
Proceeds from disposal
of property,
plant and equipment 1 2,955 - 2,956
Partnership
distributions - 1,568 - 1,568
Increase in
other assets (162) (363) - (525)
------- ------- ------- --------
Net cash used for
investing activities (2,208) (484) - (2,692)
------- ------- ------- --------
Cash flows from
financing activities:
Net proceeds from
issuance of stock 1,032 - - 1,032
Proceeds from issuance
of preferred stock 5,000 - - 5,000
Proceeds from issuance
of long-term debt - 5,231 - 5,231
Principal payments on
long-term debt (21) (665) - (686)
------- ------- ------- --------
Net cash provided by
financing activities 6,011 4,566 - 10,577
------- ------- ------- --------
Net decrease in cash
and cash equivalents (1,046) (123) - (1,169)
Cash and cash equivalents,
beginning of period 4,145 315 - 4,460
------- ------- ------- --------
Cash and cash equivalents,
end of period $ 3,099 $ 192 $ - $ 3,291
======= ====== ======= =========
Consolidating
Statement
of Operations
Information
Year Ended
December 31, 1999 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
Revenues $ 1,829 $ 115,218 $ (1,818) $ 115,229
------- -------- -------- ----------
Costs and expenses:
Cost of sales 132 84,140 (451) 83,821
General and
administrative 4,672 9,058 (1,367) 12,363
Special litigation 937 - - 937
Depreciation and
amortization 1,179 7,712 - 8,891
------- -------- -------- ---------
Total costs
and expenses 6,920 100,910 (1,818) 106,012
------- -------- -------- ---------
Operating profit (loss) (5,091) 14,308 - 9,217
Interest expense, net 2,932 14,879 - 17,811
------- -------- -------- ---------
Net loss $(8,023) $ (571) $ - $ (8,594)
======= ======== ======== ==========
Page 57
Consolidating
Statement of
Cash Flow
Information
Year Ended
December 31, 1999 Cadiz Sun World Eliminations Consolidated
----- --------- ------------ ------------
Net cash (used for)
provided by
operating activities $ (4,746) $ 1,761 $ - $ (2,985)
-------- -------- ------- -----------
Cash flows from
investing activities:
Additions to property,
plant and equipment (3,645) (2,680) 1,490 (4,835)
Additions to
water programs (3,177) - - (3,177)
Additions to
developing crops - (3,531) - (3,531)
Proceeds from
disposal of
property, plant and
equipment 1,490 233 (1,490) 233
Increase in other
assets (64) (934) - (998)
-------- -------- ------- ---------
Net cash used for
investing activities (5,396) (6,912) - (12,308)
-------- -------- ------- ---------
Cash flows from
financing activities:
Net proceeds from
issuance of stock 6,803 - - 6,803
Principal payments on
long-term debt (9) (676) - (685)
-------- -------- ------- ---------
Net cash provided
by (used for)
financing activities 6,794 (676) - 6,118
-------- -------- ------- ---------
Net decrease in cash
and cash equivalents (3,348) (5,827) - (9,175)
Cash and cash equivalents,
beginning of period 7,493 6,142 - 13,635
-------- -------- ------- ---------
Cash and cash equivalents,
end of period $ 4,145 $ 315 $ - $ 4,460
======= ======= ======= ==========
Page 58
NOTE 10 - INCOME TAXES
- ----------------------
Deferred taxes are recorded based upon differences between the
financial statement and tax bases of assets and liabilities and
available carryforwards. Temporary differences and carryforwards
which gave rise to a significant portion of deferred tax assets and
liabilities as of December 31, 2001 and 2000 are as follows (in
thousands):
December 31,
2001 2000
---- ----
Deferred tax liabilities:
Fixed asset basis difference $7,987 $ 7,550
Other 48 48
------ -------
Total deferred tax liabilities 8,035 7,598
------ -------
Deferred tax assets:
Net operating losses 49,437 38,560
Reserve for notes receivable - 1,178
Fixed asset basis difference 6,300 6,300
State taxes 1,855 1,855
Reserves and accruals 3,466 1,372
Other 935 535
------ -------
Total deferred tax assets 61,993 49,800
Valuation allowance for
deferred tax assets (59,405) (47,649)
------- --------
Net deferred tax liability $ 5,447 $ 5,447
======= =======
As of December 31, 2001, the Company had net operating loss
(NOL) carryforwards of approximately $136.3 million for federal
income tax purposes. Such carryforwards expire in varying amounts
through the year 2021. At December 31, 2001, the Company has state
NOL carryforwards of $35.1 million. These NOL carryforwards expire
in varying amounts through the year 2011.
A reconciliation of the income tax benefit to the statutory
federal income tax rate is as follows (dollars in thousands):
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Expected federal income
tax benefit at 34% $ (8,726) $ (7,581) $ (2,922)
Loss with no tax
benefit provided 8,541 7,380 2,718
State income tax 6 147 -
Foreign withholding taxes 51 79 -
Amortization 79 79 79
Other non-deductible expenses 106 56 125
-------- -------- --------
Income tax expense $ 57 $ 160 $ -
======== ======== ========
Page 59
NOTE 11 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company has a 401(k) Plan for its salaried employees.
Employees must work 1,000 hours and have completed one year of
service to be eligible to participate in this plan. The Company
matches 75% of the first four percent deferred by an employee up to
$1,600 per year. In addition, Sun World maintains a defined
contribution pension plan covering its employees who (i) are not
covered by a collective bargaining agreement, (ii) have at least one
year of service and (iii) have worked at least 1,000 hours per year.
Contributions are 2% of each covered employee's salary. For those
hourly employees covered under a collective bargaining agreement,
contributions are made to a multi-employer pension plan in accordance
with negotiated labor contracts and are generally based on the number
of hours worked.
NOTE 12 - PREFERRED AND COMMON STOCK
- -------------------------------------
SERIES D CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 100,000 shares of
preferred stock. On December 29, 2000, the Company issued 5,000
shares of Series D Convertible Preferred Stock ("Series D Preferred
Stock") for $5,000,000. The holders of the Preferred Stock are
entitled to receive dividends, payable semi-annually, at a rate of 7%
if paid in cash or 9% if paid in the Company's common stock. The
Series D Preferred Stock is convertible into 625,000 shares of the
Company's common stock any time prior to July 2004 at the election of
the holder. The Company also has the right to convert the Series D
Preferred Stock, but only when the closing price of the Company's
common stock has exceeded $12 per share for 30 consecutive trading
days. Holders are entitled to a liquidation preference equal to the
initial purchase of $1,000 per share plus any accrued and unpaid
dividends. The Series D Preferred Stock will be redeemable in July
2004 if still outstanding.
The Company issued certain warrants to purchase shares of the
Company's common stock in connection with the issuance of the Series
D Preferred Stock. The fair market value of the Company's common
stock at the time of issuance was above the accounting conversion
price resulting in an imputed dividend (beneficial conversion
feature). The estimated fair value of the warrants issued
(calculated using the Black Scholes option pricing model) and the
imputed dividend totaled $1,050,000 which was recorded as a discount
to the Series D Preferred Stock. The discount is being amortized
through the redemption date of the stock and treated as a reduction
to earnings for earnings per share calculations although no assets of
the Company will ever be expended.
SERIES E-1 AND E-2 CONVERTIBLE PREFERRED STOCK
During the fourth quarter of 2001, the Company issued 7,500
shares of Series E-1 and E-2 Convertible Preferred Stock (the "Series
E Preferred Stock") for an aggregate of $7,500,000. The holders of
the Preferred Stock are entitled to receive dividends, payable semi-
annually, at a rate of 7% if paid in cash or 9% if paid in the
Company's common stock. The Series E Preferred Stock is convertible
into 1,000,000 shares of the Company's common stock any time prior to
July 2004 at the election of the holder. The Company also has the
right to
Page 60
convert the Series E Preferred Stock, but only when the
closing price of the Company's common stock has exceeded $10.50 per
share for 30 consecutive trading days. Holders are entitled to a
liquidation preference equal to the initial purchase of $1,000 per
share plus any accrued and unpaid dividends. The Series E Preferred
Stock will be redeemable in July 2004 if still outstanding.
The Company issued 40,000 shares of the Company's common stock
and certain warrants to purchase shares of the Company's common stock
in connection with the issuance of the Series E Preferred Stock. The
fair market value of the Company's common stock at the time of
issuance was above the accounting conversion price resulting in an
imputed dividend (beneficial conversion feature). The estimated fair
value of the warrants issued (calculated using the Black Scholes
option pricing model) and the imputed dividend totaled $1,614,000
which was recorded as a discount to the Series E Preferred Stock.
The discount is being amortized through the redemption date of the
stock and treated as a reduction to earnings for earnings per share
calculations although no assets of the Company will ever be expended.
COMMON STOCK
In March 2000, the Company issued 100,000 shares of common stock
to a hydrological research company upon the deemed satisfaction of
certain contingencies with respect to the issuance of such shares
established in connection with the Company's 1998 acquisition of all
of such company's assets.
NOTE 13 - STOCK-BASED COMPENSATION PLANS AND WARRANTS
- -----------------------------------------------------
STOCK OPTIONS AND WARRANTS
The Company issues options pursuant to its 1996 Stock Option
Plan (the "1996 Plan") and the 1998 Non-Qualified Stock Option Plan
(the "1998 Plan") approved by the Board of Directors in February
1998. The Company also grants stock awards pursuant to its 2000
Stock Award Plan described below. Collectively, the plans provide
for the granting of up to 4,000,000 shares. At December 31, 2001,
the Company has approximately 524,000 shares remaining that can be
granted under the plans. All options are granted at a price
approximating fair market value at the date of grant, have vesting
periods ranging from issuance date to five years, have maximum terms
ranging from five to seven years and are issued to directors,
officers, consultants and employees of the Company.
Compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the
stock. Had compensation cost for these plans been determined using
fair value, as explained below, the Company's net loss and net loss
per common share would have increased to the following pro forma
amounts (dollars in thousands):
Page 61
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net loss applicable
to common stock: As reported $(26,754) $(22,458) $ (8,594)
Pro forma $(27,670) $(23,450) $(12,134)
Net loss per common share:
As reported $ (.75) $ (.64) $ (.25)
Pro forma $ (.77) $ (.66) $ (.35)
The fair value of each option granted during the periods
reported was estimated on the date of grant using the Black Scholes
option pricing model based on the weighted-average assumptions of:
risk-free interest rate of 4.54% for 2001, 4.94% for 2000, and 6.67%
for 1999; expected volatility of 40.0% for 2001, 66.7% for 2000, and
46.9% for 1999; expected life of three years for 2001 and 2000 and
five years for 1999; and an expected dividend yield of zero for all
three years.
The following table summarizes stock option activity for the
periods noted. All options listed below were issued to officers,
directors, employees and consultants.
Weighted-
Average
Exercise
Amount Price
---------- -------
Outstanding at December 31, 1998 3,891,900 $ 5.26
Granted 800,000 $ 7.58
Expired or canceled (66,000) $ 7.20
Exercised (1,513,150) $ 4.50
----------
Outstanding at December 31, 1999 3,112,750 $ 6.21
Granted 132,500 $ 9.76
Expired or canceled (19,500) $ 8.56
Exercised (215,152) $ 4.80
----------
Outstanding at December 31, 2000 3,010,598 $ 6.45
Granted 266,250 $ 9.62
Expired or canceled (1,096,000) $ 4.76
Exercised (330,098) $ 4.78
----------
Outstanding at December 31, 2001 1,850,750(a) $ 8.05
==========
Options exercisable at
December 31, 1999 2,306,500 $ 5.64
==========
Options exercisable at
December 31, 2000 2,549,098 $ 5.98
==========
Options exercisable at
December 31, 2001 1,446,750 $ 7.86
==========
Weighted-average years of remaining
contractual life of options
outstanding at December 31, 2001 2.85
=====
(a) Exercise prices vary from $4.75 to $11.75 and expiration
dates vary from March 2002 to October 2008.
Page 62
The weighted-average fair value of options granted during the
years 2001, 2000 and 1999 were $3.44, 5.37, and $3.71, respectively.
The Company accounts for equity securities issued to non-
employees in accordance with the provisions of SFAS 123 and Emerging
Issues Task Force 96-18. During the years ended December 31, 2001,
2000 and 1999, the Company issued 215,000, 350,000, and 250,000
warrants with weighted-average exercise prices of $7.59, $6.46, and
$6.50, respectively. During the year ended December 31, 2000, 75,000
warrants with a weighted-average exercise price of $5.03 were
exercised in a cashless transaction resulting in the issuance of
30,997 shares of common stock. No warrants expired or were canceled
during any of the three periods discussed. During 2001, in
connection with the loan amendments for the Cadiz obligations
described in Note 9, the Company repriced certain warrants previously
issued resulting in a reduction in the weighted-average exercise
price. At December 31, 2001, there were 1,240,000 warrants
outstanding with a weighted-average exercise price of $4.40 per
share, which expire through 2005.
2000 STOCK AWARD PLAN
The Cadiz Inc. 2000 Stock Award Plan ("Stock Award Plan") was
approved by the Company's shareholders in May 2000. Under the Stock
Award Plan, the Company may issue various forms of stock awards
including restricted stock and deferred stock units to attract,
retain and motivate key employees or other eligible persons. As of
December 31, 2001, the Company had outstanding 817,325 deferred stock
units granted under the Stock Award Plan of which 253,162 deferred
stock units entitle the holder to receive one share of the Company's
common stock for each deferred stock unit three years from the date
of grant and 564,163 deferred stock units were granted pursuant to
the exchange noted under Non-Recurring Compensation Expense below.
During the year ended December 31, 2001, 1,078 stock units were
exchanged for shares of the Company's common stock. The Company
charged $566,000 and $237,000 to expense during the years ended
December 31, 2001 and 2000, respectively, in connection with the
Stock Award Plan.
NON-RECURRING COMPENSATION EXPENSE
In 2001, the Company issued 564,163 deferred stock units to
certain senior managers of Cadiz and Sun World. These deferred stock
units were issued in exchange for the cancellation of 1,055,000 fully
vested options to purchase the Company's common stock held by senior
managers. In accordance with the terms of Stock Option Exchange
Agreements, the number of the deferred stock units issued was
calculated based on the average closing price for the 10 business
days following the filing of the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 on March 29, 2001. Each
deferred stock unit is exchangeable for one share of the Company's
common stock at the end of the deferral period elected by the holder.
The Company recorded a one-time charge of $5,537,000 in 2001 and no
cash was expended in connection with the issuance of the deferred
stock units.
Page 63
RESTRICTED STOCK AWARD
Following the acquisition of Sun World in 1996, the Company's
Chief Executive Officer was awarded a stock bonus of 125,000 shares
of restricted common stock at no cost. The Company issued the final
25,000 of these shares during the year ended December 31, 1999.
Compensation expense was recognized as earned over the period of
service.
NOTE 14 - CONTINGENCIES
- -----------------------
In December 1995, the Company filed an action relative to the
proposed construction and operation of a landfill (the "Rail-Cycle
Project") which was to be located adjacent to the Company's Cadiz
property with the Superior Court in San Bernardino County,
California. The action challenged the various decisions by the
County of San Bernardino relative to the proposed Rail-Cycle Project
and sought compensatory damages. In September 1998, the Court
granted defendants' motion for summary judgment. The Company
appealed this decision and in August 2000, the California Court of
Appeals granted, in part, the Company's appeal. The Court's decision
revoked all environmental and land-use approvals, and thus
effectively terminated the Rail-Cycle Project, as proposed.
The Company filed other civil actions against Waste Management,
Inc., which asserted claims arising from alleged criminal and
fraudulent conduct against the Company engaged in by Waste Management
in connection with the Rail-Cycle Project.
In March 2001, the Company and Waste Management executed a
settlement agreement intended to fully and finally compromise and
settle the claims asserted by the Company against Waste Management in
all of the outstanding civil actions. Pursuant to the Settlement
Agreement, Waste Management paid the Company $6 million in cash and
granted to the Company an exclusive option to receive, at no cost to
the Company, up to approximately 7,000 acres of real property in
eastern San Bernardino County primarily adjacent to the Cadiz Program
property. In April 2001, the Company exercised the option and has
acquired the subject property. Net proceeds from the settlement are
included in the Company's statement of operations under the caption
"Special Litigation Recovery".
In the normal course of its agricultural operations, the Company
handles, stores, transports and dispenses products identified as
hazardous materials. Regulatory agencies periodically conduct
inspections and, currently, there are no pending claims with respect
to hazardous materials.
The Company is involved in other legal and administrative
proceedings and claims. In the opinion of management, the ultimate
outcome of each proceeding or all such proceedings combined will not
have a material adverse impact on the Company's financial statements.
Page 64
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------
(In thousands except per share data)
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---- ---- ---- ----
Revenues $ 7,371 $ 20,371 $ 48,683 $ 15,977
Gross profit (loss) (570) 4,927 7,611 1,326
Net loss applicable
to common stock (7,165) (5,030) (5,267) (9,292)
Net loss
per common share $ (.20) $ (.14) $ (.15) $ (.26)
Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
---- ---- ---- ----
Revenues $ 7,936 $ 26,928 $ 55,376 $ 17,505
Gross profit (loss) (530) 3,698 12,009 4,643
Net loss (8,842) (6,282) (342) (6,992)
Net loss per
common share $ (.25) $ (.18) $ (.01) $ (.20)
Page 65
CADIZ INC.
SCHEDULE I - CONDENSEND FINANCIAL INFORMATION OF REGISTRANT
December 31,
BALANCE SHEET ($ in thousands): 2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 400 $ 3,099
Accounts receivable, net 1 7
Due from subsidiary 11,254 -
Prepaid expenses and other 210 212
------- -------
Total current assets 11,865 3,318
Investment in subsidiary - 17,093
Property, plant, equipment
and water programs, net 41,266 38,842
Other assets 4,432 4,199
------- -------
$ 57,563 $ 63,452
======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,330 $ 1,209
Accrued liabilities 791 349
Due to subsidiary - 202
Bank overdraft 410 -
------- -------
Total current liabilities 2,531 1,760
Long-term debt 24,732 23,912
Other liabilities 371 107
Losses in excess of
investment in subsidiary 2,066 -
Contingencies
Series D redeemable convertible
preferred stock - $0.01 par value:
5,000 shares authorized; shares
issued and outstanding -
5,000 at December 31, 2001
and December 31, 2000 4,243 3,950
Series E-1 and E-2
redeemable convertible
preferred stock - $0.01 par value:
7,500 shares authorized; shares
issued and outstanding -
7,500 at December 31, 2001 and
none at December 31, 2000 5,715 -
Stockholders' equity:
Common stock - $0.01 par value;
70,000,000 shares
authorized; shares issued and
outstanding 36,070,834
at December 31, 2001 and 35,674,674 at
December 31, 2000 361 357
Additional paid-in capital 152,404 142,706
Accumulated deficit (134,860) (109,340)
------- -------
Total stockholders' equity 17,905 33,723
------- -------
$ 57,563 $ 63,452
======= =======
Page 66
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATON OF REGISTRANT
STATEMENT OF OPERATIONS Year Ended December 31,
($ in thousands) 2001 2000 1999
---- ---- ----
Revenues $ 1,903 $ 1,920 $ 1,829
Special litigation recovery 7,929 - -
-------- ------- -------
Total revenues and special
litigation recovery 9,832 1,920 1,829
-------- ------- -------
Costs and expenses:
Cost of sales 118 124 132
General and administrative 5,433 4,355 4,672
Special litigation - 424 937
Non-recurring compensation expense 2,584 - -
Removal of underperforming crops 222 - -
Depreciation and amortization 1,137 1,174 1,179
-------- ------- -------
Total costs and expenses 9,494 6,077 6,920
-------- ------- -------
Operating profit (loss) 338 (4,157) (5,091)
Loss from subsidiaries (22,107) (14,216) (571)
Interest expense, net 3,718 4,085 2,932
-------- ------- -------
Net loss (25,487) (22,458) (8,594)
Less: Preferred stock dividends 591 - -
Imputed dividend on
preferred stock 441 - -
-------- ------- -------
Net loss applicable to
common stock $ (26,519) $(22,458) $ (8,594)
========== ======= ==========
Page 67
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Year Ended December 31,
STATEMENT OF CASH FLOWS 2001 2000 1999
---- ---- ----
($ in thousands)
Cash flows from operating activities:
Net loss $ (25,487) $ (22,458) $ (8,594)
Adjustments to reconcile net
loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 3,521 2,956 2,498
Issuance of stock for services - - 28
Loss from subsidiaries 22,107 14,216 571
(Gain) loss on disposal of assets 5 (1) 6
Removal of underperforming crops 222 - -
Land received from litigation
settlement (2,000) - -
Compensation charge for
deferred stock units 271 100 -
Non-recurring compensation expense 2,584 - -
Changes in operating assets
and liabilities:
Decrease in accounts receivable 6 9 61
Increase in due to subsidiary - - 274
Decrease (increase) in prepaid
expenses and other 2 174 (133)
Increase in accounts payable 121 504 4
Increase (decrease) in
accrued liabilities 97 (356) 539
(Decrease) increase in
other liabilities (7) 7 -
------- -------- -------
Net cash provided by
(used for) operating activities 1,442 (4,849) (4,746)
------- -------- -------
Cash flows from investing activities:
Additions to property,
plant and equipment (88) (293) (3,645)
Additions to developing crops (109) (159) -
Additions to water programs (1,359) (1,595) (3,177)
Proceeds from disposal of
property, plant and equipment 2 1 1,490
Increase in other assets (575) (162) (64)
------- -------- -------
Net cash used for
investing activities (2,129) (2,208) (5,396)
------- -------- -------
Cash flows from financing activities:
Net proceeds from issuance of stock 1,583 1,032 6,803
Proceeds from issuance of
preferred stock 7,500 5,000 -
Intercompany revolver
with subsidiary (11,254) - -
Principal payments on
long-term debt (251) (21) (9)
Bank overdraft 410 - -
------- -------- -------
Net cash (used for) provided
by financing activities (2,012) 6,011 6,794
------- -------- -------
Net decrease in cash and
cash equivalents (2,699) (1,046) (3,348)
Cash and cash equivalents,
beginning of period 3,099 4,145 7,493
------- -------- -------
Cash and cash equivalents,
end of period $ 400 $ 3,099 $ 4,145
======= ======== =======
Page 68
CADIZ INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2001, 2000 and 1999
($ in thousands)
Balance Additions Balance
at Charged to at End
Year ended Beginning Costs and Other of
December 31, 2001 of Period Expenses Accounts Deductions Period
- ----------------- --------- -------- -------- ---------- ------
Allowance for
doubtful accounts $ 522 $ - $ - $ 16 $ 506
======== ======= ======== ====== ========
Tax valuation
allowance $ 47,649 $ - $ 11,756 $ - $ 59,405
======== ======= ======== ====== ========
Year ended
December 31, 2000
- ------------------
Allowance for
doubtful accounts $ 224 $ 308 $ - $ 10 $ 522
======== ======= ======== ====== ========
Tax valuation
allowance $ 39,665 $ - $ 7,984 $ - $ 47,649
======== ======= ======== ====== ========
Year ended
December 31, 1999
- ------------------
Allowance for
doubtful accounts $ 285 $ - $ - $ 61 $ 224
======== ======= ======== ====== ========
Tax valuation
allowance $ 35,319 $ - $ 4,346 $ - $ 39,665
======== ======= ======== ====== ========
Page 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Sun World International, Inc.
In our opinion, the accompanying consolidated balance sheet
and the related consolidated statements of operations, cash flows
and stockholder's equity present fairly, in all material
respects, the financial position of Sun World International,
Inc., a wholly-owned subsidiary of Cadiz Inc., and its
subsidiaries at December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
February 21, 2002
Page 70
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
($ in thousands) 2001 2000 1999
---- ---- ----
Revenues $ 92,399 $ 107,727 $ 115,218
-------- -------- ---------
Costs and expenses:
Cost of sales 79,390 88,203 84,140
General and administrative 8,980 9,721 9,058
Non-recurring compensation expense 2,953 - -
Removal of underperforming crops 514 1,549 -
Depreciation and amortization 7,014 7,207 7,712
-------- -------- --------
98,851 106,680 100,910
-------- -------- --------
Operating income (loss) (6,452) 1,047 14,308
Interest expense, net 15,598 15,103 14,879
Net loss before income taxes (22,050) (14,056) (571)
Income tax expense 57 160 -
-------- -------- --------
Net loss $ (22,107) $ (14,216) $ (571)
========= ========= ========
See accompanying notes to the consolidated financial statements.
Page 71
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED BALANCE SHEET
December 31,
($ in thousands) 2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,058 $ 192
Accounts receivable, net 6,326 7,879
Inventories 13,229 15,405
Prepaid expenses and other 578 419
-------- --------
Total current assets 21,191 23,895
Property, plant, equipment, and
water programs, net 124,031 125,982
Other assets 6,946 7,585
-------- --------
Total assets $ 152,168 $157,462
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 10,428 $ 6,693
Accrued liabilities 4,889 5,466
Due to parent company 11,254 -
Long-term debt, current portion 4,960 859
-------- --------
Total current liabilities 31,531 13,018
Long-term debt 116,697 121,698
Deferred income taxes 5,447 5,447
Other liabilities 559 206
Contingencies
Stockholder's equity:
Common stock, $0.01 par value,
300,000 shares authorized;
42,000 shares issued and outstanding - -
Additional paid-in capital 38,273 35,325
Accumulated deficit (40,339) (18,232)
-------- --------
Total stockholder's equity (2,066) 17,093
-------- --------
Total liabilities and stockholder's equity $ 152,168 $ 157,462
======== ========
Page 72
See accompanying notes to the consolidated financial statements.
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
($ in thousands) 2001 2000 1999
---- ---- ----
Cash flows from
operating activities:
Net loss $ (22,107) $ (14,216) $ (571)
Adjustments to reconcile
net loss to net
cash (used for) provided
by operating activities:
Depreciation and
amortization 8,143 7,970 8,570
Gain on disposal of assets (426) (95) (110)
Removal of underperforming crops 514 1,549 -
Shares of KADCO stock
earned for services (1,250) (1,250) (313)
Share of partnership operations - (71) (328)
Compensation charge for
deferred stock units 296 137 -
Non-recurring compensation
expense 2,953 - -
Changes in operating assets
and liabilities:
Decrease (increase) in
accounts receivable 1,553 552 (2,213)
Decrease (increase)in
inventories 1,830 2,740 (3,405)
(Increase) decrease
in prepaid
expenses and other (160) 112 207
Increase (decrease)in
accounts payable 3,734 (645) (714)
(Decrease) increase in
accrued liabilities (647) (683) 1,129
Decrease in due to parent - - (193)
Increase (decrease) in
other liabilities 58 (305) (298)
------- -------- --------
Net cash (used for) provided
by operating activities (5,509) (4,205) 1,761
------- -------- --------
Cash flows from investing activities:
Additions to property, plant,
equipment, and water programs (1,495) (959) (2,680)
Additions to developing crops (3,015) (3,685) (3,531)
Proceeds from disposal of property,
plant and equipment 450 2,955 233
Partnership distributions - 1,568 -
Decrease (increase) in other assets 494 (363) (934)
------- -------- --------
Net cash used for
investing activities (3,566) (484) (6,912)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt - 5,231 -
Principal payments on
long-term debt (1,313) (665) (676)
Intercompany revolver with parent 11,254 - -
------- -------- --------
Net cash provided by (used for)
financing activities 9,941 4,566 (676)
------- -------- --------
Net increase (decrease) in cash
and cash equivalents 866 (123) (5,827)
Cash and cash equivalents at
beginning of period 192 315 6,142
------- -------- --------
Cash and cash equivalents at
end of period $ 1,058 $ 192 $ 315
========= ======== ======
See accompanying notes to the consolidated financial statements.
Page 73
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($ in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance as of
December 31, 1998 42,000 $ - $ 34,183 $ (3,445) $ 30,738
Net loss - - - (571) (571)
------ ----- -------- --------- ---------
Balance as of
December 31, 1999 42,000 - 34,183 (4,016) 30,167
Capital contribution
from parent for the
value of shares and
warrants issued
in connection with
obtaining the senior
unsecured term loan
financing - - 1,142 - 1,142
Net loss - - - (14,216) (14,216)
------ ----- -------- -------- --------
Balance as of
December 31, 2000 42,000 - 35,325 (18,232) 17,093
Capital contribution
from parent for the
value of the
non-recurring
compensation - - 2,953 - 2,953
Revaluation of
derivative for warrants
issued by parent - - (235) - (235)
Capital contribution
from parent for
warrants issued relating
to senior unsecured
term loan - - 230 - 230
Net loss - - - (22,107) (22,107)
------ ----- -------- -------- --------
Balance as of
December 31, 2001 42,000 $ - $ 38,273 $ (40,339) $ (2,066)
====== ====== ========== ========= =========
See accompanying notes to the consolidated financial statements.
Page 74
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
NOTES TO THE CONSOLDIATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Founded in 1975, Sun World International, Inc. ("SWII") and
its subsidiaries (collectively, the "Company") operate as the
agricultural segment of Cadiz Inc. ("Cadiz"). The Company is an
integrated agricultural operation that owns more than 19,000
acres of land, primarily located in two major growing areas of
California: the San Joaquin Valley and the Coachella Valley.
Fresh produce, including table grapes, stonefruit, citrus,
peppers and watermelons is marketed, packed and shipped to food
wholesalers and retailers located throughout the United States
and to more than 30 foreign countries. The Company owns and
operates three cold storage and/or packing facilities located in
California, of which two are operated and one is leased to a
third party.
In January 2002, Cadiz announced an agreement in principle
with KADCO to combine the businesses of Sun World and KADCO.
Following the proposed combination, KADCO's shareholders will
have a 49.75% interest in the combined business, and Cadiz will
retain an ownership interest of 50.25%. Prior to the proposed
combination, KADCO expects to have cash resources in excess of
$80 million which will be used to recapitalize Sun World and
provide for future business expansion.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
SWII and its subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated.
RECLASSIFICATIONS
These financial statements reflect certain reclassifications
made to the prior period balances to conform to the current year
presentation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. In preparing these financial statements, management has
made estimates with regard to revenue recognition and valuation
of inventory, long-lived assets, and deferred tax assets. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes crop sale revenue upon shipment and
transfer of title to customers. Packing revenues and marketing
commissions from third party growers are recognized when the
related services are provided. Proprietary product development
revenues are recognized based upon product sales by licensees.
Project development and management
Page 75
fees are recorded when earned under the terms of the related
agreement.
Revenues attributable to one national retailer totaled $10.5
million in 2001, $12.8 million in 2000 and $14.4 million in 1999.
Export sales accounted for approximately 8.4%, 9.9% and 10.3%, of
the Company's revenues for the years ended December 31, 2001,
2000 and 1999, respectively.
RESEARCH AND DEVELOPMENT
The Company incurs costs to research and develop new
varieties of proprietary products. Research and development
costs are expensed as incurred. Such costs were approximately
$2,023,000 for the year ended December 31, 2001, $1,636,000 for
the year ended December 31, 2000 and $1,450,000 for the year
ended December 31, 1999.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits with an
original maturity of three months or less to be cash equivalents.
The Company invests its excess cash in deposits with major
international banks and short-term commercial paper and,
therefore, bears minimal risk. Such investments are stated at
cost, which approximates fair value, and are considered cash
equivalents for purposes of reporting cash flows.
INVENTORIES
Growing crops, pepper seed, and materials and supplies are
stated at the lower of cost or market, on a first-in, first-out
(FIFO) basis. Growing crops inventory includes direct costs and
an allocation of indirect costs.
INVESTMENT IN PARTNERSHIPS
The Company, through a wholly-owned subsidiary, owned a 50%
interest in ASC/SWB Partnership, formerly named American SunMelon
(the "Partnership"). In October 1998, the Partnership sold
substantially all of its assets. In November 2000, the Company
received a final distribution of $1.6 million in connection with
the liquidation of the Partnership. The Company had accounted
for its investment in the Partnership using the equity method.
PROPERTY, PLANT, EQUIPMENT, AND WATER PROGRAMS
Property, plant, equipment, and water programs are stated
at cost.
The Company capitalizes direct and certain indirect costs
of planting and developing orchards and vineyards during the
development period, which varies by crop and usually ranges from
three to seven years. Depreciation commences in the year
commercial production is achieved.
Page 76
Permanent land development costs, such as acquisition costs,
clearing, initial leveling and other costs required to bring the
land into a suitable condition for general agricultural use, are
capitalized and not depreciated since these costs have an
indefinite useful life.
Depreciation is provided using the straight-line method over
the estimated useful lives of the assets, generally ten to forty-
five years for land improvements and buildings, three to twenty-
five years for machinery and equipment, and five to thirty years
for permanent crops.
Water programs are stated at cost. All costs directly
attributable to the development of such programs are being
capitalized by the Company.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company annually evaluates its long-lived assets,
including intangibles, for potential impairment. When
circumstances indicate that the carrying amount of the asset may
not be recoverable, as demonstrated by estimated future cash
flows, an impairment loss would be recorded based on fair value.
During the year ended December 2001 and 2000, the Company
incurred costs to remove certain underperforming crops, primarily
stonefruit, citrus, and wine grapes. The Company recorded charges
of $514,000 and $1,549,000 in 2001 and 2000, respectively, in
connection with the removal of these crops which is shown under
the heading "Removal of underperforming crops" on the
Consolidated Statement of Operations.
OTHER ASSETS
Capitalized loan fees represent costs incurred to obtain debt
financing. Such costs are amortized over the life of the related
loan. At December 31, 2001, the majority of capitalized loan
fees relate to the issuance of the First Mortgage Notes described
in Note 9.
Trademark development costs represent legal costs incurred to
obtain and defend patents and trademarks related to the Company's
proprietary products throughout the world. Such costs are
capitalized and amortized over their estimated useful life, which
range from 10 to 20 years.
INCOME TAXES
The Company is included in the consolidated federal and
combined state tax returns of Cadiz. The Company and Cadiz have a
tax sharing agreement which provides that the Company's current
tax liability is determined as though the Company filed its own
returns. Income taxes are provided for using an asset and
liability approach which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement and tax
bases of assets and liabilities at the applicable enacted tax
rates. A valuation allowance is provided when it is uncertain
that some portion or all of the deferred tax assets will be
realized.
Page 77
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest for the years ended December
31, 2001, 2000 and 1999 were $14,660,000, $14,497,000 and
$14,204,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS 141 and 142
- ----------------
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Accounting for Business Combinations" and No.
142 ("SFAS 142"), "Goodwill and Other Intangibles", effective for
fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their
estimated useful lives. The Company will apply the new rules on
accounting for other intangible assets beginning January 1, 2002.
Management does not anticipate that the adoption of these
standards will have a material adverse effect on the Company's
financial position or results of operations.
SFAS 144
- --------
In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of". SFAS 144 retains the
fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and
used and (b) measurement of long-lived assets to be disposed of
by sale. The adoption of SFAS 144 is not anticipated to have a
material adverse effect on the Company's financial position or
results of operations.
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable consist of the following (dollars in
thousands):
December 31,
2001 2000
---- ----
Trade receivables $ 4,294 $ 4,190
Due from unaffiliated growers 448 541
Other 2,090 3,670
------- -------
6,832 8,401
Less allowance for
doubtful accounts (506) (522)
------- -------
$ 6,326 $ 7,879
======= =======
Page 78
Substantially all trade receivables are from large domestic
national and regional supermarket chain stores and produce
brokers and are unsecured. Amounts due from unaffiliated growers
represent receivables for harvest advances and for services
(harvest, haul and pack) provided on behalf of growers under
agreement with the Company and are recovered from proceeds of
product sales. Other receivables primarily include wine grape
and raisin sales, proceeds due from third party marketers,
receivables for international licensing, and other miscellaneous
receivables.
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following (dollars in thousands):
December 31,
2001 2000
---- ----
Growing crops $ 10,376 $ 11,740
Materials and supplies 2,621 2,880
Harvested product 218 528
Pepper seed 14 257
-------- -------
$ 13,229 $ 15,405
======== ========
NOTE 5 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
- ------------------------------------------------------
Property, plant, equipment and water programs consist of the
following (dollars in thousands):
December 31,
2001 2000
---- ----
Land $ 49,178 $ 49,196
Permanent crops 58,489 58,860
Developing crops 12,486 9,546
Buildings 21,182 20,496
Machinery and equipment 14,760 14,025
Water programs 2,525 2,135
-------- --------
158,620 154,258
Less accumulated depreciation (34,589) (28,276)
-------- --------
$124,031 $125,982
======== ========
Page 79
NOTE 6 - OTHER ASSETS
- ---------------------
Other assets consist of the following (dollars in
thousands):
December 31,
2001 2000
---- ----
Deferred loan costs, net $ 1,781 $ 2,510
Long-term receivables 342 1,799
Capitalized trademark development, net 2,000 1,713
Receivable from KADCO to be
paid in common shares 2,813 1,563
Other 10 -
------- -------
$ 6,946 $ 7,585
======= =======
NOTE 7 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following (dollars in
thousands):
December 31,
2001 2000
---- ----
Interest $ 2,695 $ 2,780
Payroll and benefits 1,743 1,609
Other 451 1,077
------- -------
$ 4,889 $ 5,466
======= =======
NOTE 8 - REVOLVING CREDIT FACILITIES
- ------------------------------------
In November 2001, Sun World renewed its Revolving Credit
Facility through the 2002 growing season with a maturity date of
November 2002. Amounts eligible to be borrowed under the
Revolving Credit Facility are based upon a borrowing base of
eligible accounts receivable and inventory balances. Maximum
availability under the Revolving Credit Facility varies
throughout the year with a maximum of $30 million available
during the peak borrowing periods of April to July. The
Revolving Credit Facility is secured by accounts receivable,
inventory, and the proceeds thereof, requires Sun World to meet
certain financial covenants, and is guaranteed by the Company.
Amounts borrowed under the facility accrue interest at either
prime plus 1.0% or LIBOR plus 2.50% at the Company's election.
No amounts were outstanding under the Revolving Credit Facility
at December 31, 2001 and 2000.
Page 80
NOTE 9 - LONG-TERM DEBT
- -----------------------
Management estimates that the fair value of the Company's
long-term debt approximates the carrying value for all debt
instruments except the Series B First Mortgage Notes ("First
Mortgage Notes"). The fair value of the First Mortgage Notes is
estimated to be approximately $106.1 million based on quoted
market prices as of December 31, 2001. At December 31, 2001 and
December 31, 2000, the carrying amount of the Company's
outstanding debt is summarized as follows (dollars in thousands):
December 31,
2001 2000
---- ----
Series B First Mortgage Notes,
interest payable
semi-annually, with principal
due in April 2004,
interest at 11.25% $ 115,000 $ 115,000
Senior unsecured term loan,
interest payable
quarterly, due
December 31, 2002, interest
at LIBOR plus 3% (5.60% at
December 31, 2001 and
9.40% at December 31, 2000) 5,000 5,000
Note payable to bank,
quarterly principal installments
of $72 plus interest
payable monthly, due
December 31, 2003, interest at prime
(4.75% at December 31, 2001 and
9.50% at December 31, 2000) 1,142 1,500
Note payable to insurance company,
Quarterly installments of $120
(including interest), due
January 1, 2005, interest at 7.75% 945 1,639
Note payable to finance company,
monthly installments
of $18 (including interest),
due July 1, 2002,
interest at 7.50% 103 305
Other 269 255
Debt discount (802) (1,142)
-------- --------
121,657 122,557
Less: current portion (4,960) (859)
-------- --------
$ 116,697 $ 121,698
========= =========
Annual maturities of long-term debt outstanding (in
thousands), excluding $802 representing the unamortized portion
of warrants on December 31, 2001 are as follows: 2002 - $5,762;
2003 - $1,250; 2004 - $115,419, 2005 - $23, and 2006 - $5.
Page 81
In April 1997, the Company issued $115 million of Series A
First Mortgage Notes through a private placement. The notes have
subsequently been exchanged for Series B First Mortgage Notes,
which are registered under the Securities Act of 1933 and are
publicly traded. The First Mortgage Notes are secured by a first
lien (subject to certain permitted liens) on substantially all of
the assets of the Company and its subsidiaries other than growing
crops, crop inventories and accounts receivable and proceeds
thereof, which secure the Revolving Credit Facility. The First
Mortgage Notes mature April 15, 2004, but are redeemable at the
option of the Company, in whole or in part, at any time on or
after April 15, 2001. The First Mortgage Notes include covenants
that do not allow for the payment of dividends by the Company
other than out of cumulative net income.
The First Mortgage Notes are also secured by the guarantees
of Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and
Sun World International de Mexico S.A. de C.V. (collectively, the
"Sun World Subsidiary Guarantors") and by the Company. Cadiz
also pledged all of the stock of Sun World as collateral for its
guarantee.
In December 2000, Sun World entered into a two-year $5
million senior unsecured term loan. In connection with obtaining
the loan, the Company issued 50,000 shares of Cadiz' common stock
as well as certain warrants to purchase shares of Cadiz' common
stock. The fair value of the stock and the warrants were recorded
as a debt discount and are being amortized over the life of the
loan.
Pursuant to Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities", the warrants meet the definition of a derivative for
the Company as the value of the warrants is tied to the market
value of Cadiz stock. As such, the value of the warrants will be
adjusted to fair value at each reporting date with the
corresponding gain or loss being included in the Statement of
Operations.
Page 82
NOTE 10 - INCOME TAXES
- ----------------------
Significant components of the Company's deferred income tax
assets and liabilities as of December 31, 2001 and 2000 are as
follows (dollars in thousands):
December 31,
2001 2000
---- ----
Deferred tax liabilities:
Net fixed assets basis difference $ 8,490 $ 8,077
Other 48 48
-------- --------
Total deferred tax liabilities 8,538 8,125
-------- --------
Deferred tax assets:
Net operating losses 19,280 9,811
Reserve for notes receivable - 1,178
State taxes 1,854 1,854
Reserves and accruals 2,098 1,215
Other 894 513
Total deferred tax assets 24,126 14,571
Valuation allowance for
deferred tax assets (21,035) (11,893)
-------- --------
Net deferred tax liability $ 5,447 $ 5,447
======== ========
As of December 31, 2001, the Company has net operating loss
(NOL) carryforwards of approximately $48.5 million for federal
income tax purposes. Such carryforwards expire in varying
amounts through the year 2021. As of December 31, 2001, the
Company has state NOL carryforwards of approximately $31.7
million. These NOL carryforwards expire in varying amounts
through the year 2011.
A reconciliation of the income tax expense to the statutory
federal income tax rate is as follows (dollars in thousands):
Year Ended
December 31,
2001 2000 1999
---- ---- ----
Expected federal income
tax benefit at 34% $ (7,497) $ (4,779) $ (194)
Loss with no tax benefit provided 7,531 4,663 131
State income tax 6 147 8
Foreign withholding taxes 51 79 -
Other non-deductible expenses (34) 50 55
-------- -------- --------
Income tax expense $ 57 $ 160 $ -
========= ======= =======
Page 83
NOTE 11 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company participates in the Cadiz Inc. 401(k) Plan for its
salaried employees. Employees must work 1,000 hours annually and
have completed one year of service to be eligible to participate
in this plan. The Company matches 75% of the first four percent
deferred by an employee up to $1,600 per year. In addition, the
Company maintains a defined contribution pension plan covering
its employees who (i) are not covered by a collective bargaining
agreement, (ii) have at least one year of service and (iii) have
worked at least 1,000 hours annually. Contributions are 2% of
each covered employee's salary. For those hourly employees
covered under a collective bargaining agreement, contributions
are made to a multi-employer pension plan in accordance with
negotiated labor contracts and are generally based on the number
of hours worked.
NOTE 12 - RELATED PARTY TRANSACTIONS
- -------------------------------------
Cadiz owns approximately 1,600 acres of irrigated farmland in
San Bernardino County consisting primarily of citrus and grapes.
Pursuant to a 10-year lease entered into as of the acquisition
date, the Company is responsible for the production, packing,
handling, and marketing of the products on the Cadiz property.
Pursuant to the lease as amended in April 1997, Cadiz is to
receive annual land rent of $250 per acre, or $400,000. In
addition, the Company entered into a service agreement with Cadiz
in which Cadiz provides management and financial services to the
Company. The term of the agreement is 10 years with an annual
fee of $1.5 million. The agreement provides for certain other
reimbursement of expenses incurred on behalf of the Company. The
Company made payments to Cadiz of $2.4 million for 2001, $2.3
million for 2000, and $2.4 million for 1999 pursuant to the
services agreement and the lease agreement mentioned above. In
addition, the Company purchased a citrus ranch from Cadiz at book
value of $1.5 million in January 1999.
The Company has intercompany revolving credit agreements
whereby the Company can loan or borrow from Cadiz as needed.
Under the intercompany revolving credit agreement, $11.3 million
was outstanding as of December 31, 2001 and no amount was
outstanding as of December 31, 2000.
NOTE 13 - NON-RECURRING COMPENSATION EXPENSE
- --------------------------------------------
In 2001, Cadiz issued 300,860 deferred stock units to
certain senior managers of Sun World. These deferred stock units
were issued in exchange for the cancellation of 565,000 fully
vested options to purchase the Cadiz common stock held by senior
managers. In accordance with the terms of the Stock Option
Exchange Agreements, the number of the deferred stock units
issued was calculated based on the average closing price for the
10 business days following the filing of the Cadiz Annual Report
on Form 10-K for the year ended December 31, 2000 on March 29,
2001. Each deferred stock unit is exchangeable for one share of
Cadiz common stock at the end of the deferral period elected by
the holder. The Company recorded a one-time charge of $2,953,000
in 2001 and no cash was expended in connection with the issuance
of the deferred stock units.
Page 84
NOTE 14 - CONTINGENCIES
- -----------------------
In the normal course of its agricultural operations, the
Company handles, stores, transports and dispenses products
identified as hazardous materials. Regulatory agencies
periodically conduct inspections and, currently, there are no
pending claims with respect to hazardous materials.
The Company is involved in other legal and administrative
proceedings and claims. In the opinion of management, the
ultimate outcome of each proceeding or all such proceedings
combined will not have a material adverse impact on the Company's
financial statements.
Page 85