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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2002
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.)
777 S. FIGUEROA STREET, SUITE 4250
LOS ANGELES, CA 90017
(Address of principal executive offices) (Zip Code)
(213) 271-1600
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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 NO X
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 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.
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
YES NO X
--- ---
As of September 30, 2004, the Registrant had 6,612,674 shares of
common stock outstanding. The aggregate market value of the
common stock held by nonaffiliates as of June 30, 2004 was
approximately $41,050,122 based on 4,773,270 shares of common
stock outstanding held by nonaffilliates and the closing price on
that date. Shares of common stock held by each executive officer
and director and by each entity that owns more than 5% of the
outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant is not incorporating by reference any other
documents within this Annual Report on Form 10-K except those
footnoted in Part IV under the heading "Item 15. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".
Page i
TABLE OF CONTENTS
Part I
- ------
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders. .13
Part II
- -------
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities .14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . .16
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 8. Financial Statements and Supplementary Data . . . . . 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . .37
Item 9A. Controls and Procedures . . . . . . . . . . . . . . .37
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . . 47
Item 13. Certain Relationships and Related Transactions . . . 52
Item 14. Principal Accountant Fees and Services . . . . . . . 53
Part IV
- -------
Item 15. Exhibits, Financial Statements and Reports of Form 8-K.
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Page ii
PART I
ITEM 1. BUSINESS
Information presented in this Form 10-K that discusses
financial projections, proposed transactions such as those
concerning the further development of our land and water assets,
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
Our primary asset consists of three blocks of largely
contiguous land in eastern San Bernardino County, California.
This land position totals approximately 45,000 acres. Virtually
all of this land is underlain by high-quality groundwater
resources with demonstrated potential for various applications,
including water storage and supply programs and agricultural,
municipal, recreational, and industrial development. Two of the
three blocks of land are located in proximity to the Colorado
River Aqueduct, the major source of imported water for southern
California. The third block of land is located near the Colorado
River.
The value of these assets derives from a combination of
population increases and limited water supplies throughout
southern California. In addition, most of the major population
centers in southern California are not located where significant
precipitation occurs, requiring the importation of water from
other parts of the state. We therefore believe that a
competitive advantage exists for those companies that possess or
can provide high quality, reliable, and affordable water to major
population centers.
Notwithstanding certain actions taken in 2002 by the
Metropolitan Water District of Southern Californian
("Metropolitan"), as described below, we expect to be able to use
our land assets and related water resources to participate in a
broad variety of water storage and supply, transfer, exchange,
and conservation programs with public agencies and other parties.
In 1997 we commenced discussions with Metropolitan in order
to develop principles and terms for a long-term agreement for a
joint venture groundwater storage and supply program on our land
in the Cadiz and Fenner valleys ("Cadiz Program"). Following
extensive negotiations with us, in April 2001 Metropolitan's
Board of Directors approved definitive economic terms,
conditions, and responsibilities ("Principles of Agreement"),
which were to serve as the basis for a final agreement to be
executed between us, subject to the then-ongoing environmental
review process.
The Cadiz Program would have provided Metropolitan with a
valuable increase in water supply during periods of drought or
other emergencies, as well as greater reliability and flexibility
in operation of its Colorado River Aqueduct. During wet years,
surplus water from the
Page 1
Colorado River would be stored in the aquifer system underlying
Cadiz' land. When needed, the stored water, together with
indigenous groundwater, would be returned to the Colorado River
Aqueduct for distribution to Metropolitan's member agencies throughout
six southern California counties.
On August 29, 2002, the U.S. Department of the Interior
approved the Final Environmental Impact Statement for the Cadiz
Program and issued its Record of Decision, the final step in the
federal environmental review process for the Cadiz Program. The
Record of Decision amends the California Desert Conservation Area
Plan for an exception to the utility corridor element and offered
to Metropolitan a right-of-way grant necessary for the
construction and operation of the Cadiz Program.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Irrespective of Metropolitan's actions, Southern
California's need for water storage and supply programs has not
abated. We believe there are several different scenarios to
maximize the value of this water resource, all of which are under
current evaluation. See "Water Resource Development" below.
Because we expected that these alternatives may have
different anticipated capital requirements and implementation
periods than those previously established for the Cadiz Program,
we promptly entered into an agreement with our senior secured
lender, ING Capital LLC ("ING"), for a three year extension of
approximately $35 million of senior secured loans with a maturity
date of January 31, 2003. We also entered into agreements with
the holders of our preferred stock for an extension until July
2006 of the mandatory redemption date of this preferred stock.
Our extension with ING was subject to certain conditions,
including annual renewals of the revolving credit facility of our
wholly-owned subsidiary, Sun World International, Inc. (which,
together with its subsidiaries, we refer to as "Sun World").
Sun World was, however, unable to obtain such a renewal for
its 2003-2004 growing season. Historically, we, as the parent
company of Sun World, had supplemented Sun World's annual working
capital requirements. We were not able to do this for the 2003-
2004 growing season, thereby compelling Sun World to obtain a
larger facility than in prior years. Sun World was able to obtain
this larger facility but only conditioned on obtaining the
consent of holders of Sun World's outstanding First Mortgage
Notes, which Sun World was ultimately unable to procure. Because
of this, the only way Sun World could obtain the new financing
needed to provide working capital for its 2003-2004 growing
seasons was to seek court approval, pursuant to Chapter 11, to a
new Debtor in Possession ("DIP") facility. Therefore, in January
2003 Sun World filed a voluntary petition for Chapter 11
bankruptcy protection in order to access its needed seasonal
financing.
Sun World's financial situation and bankruptcy filing, in
turn, negated the agreement we had previously reached with ING
for the three-year extension of our senior secured loans. We were
unable to make payment of this debt upon the original January 31,
2003 maturity date, and in February 2003 ING declared these loans
to be in default, although we remained in negotiations with ING
for an overall restructuring of this debt.
Page 2
Given the negative effect of these various developments on
the trading price for our common stock, we were unable to
maintain the minimum price needed for continued listing on the
Nasdaq National Market. Effective March 27, 2003, our common
stock was delisted from trading on the Nasdaq National Market.
In light of these events, we have implemented the following
restructuring steps:
* In June 2003 we completed an equity offering of $2.0
million in newly issued common stock (including $320
thousand in shares issued for services);
* In October 2003 we completed an exchange of all of our
then outstanding preferred stock for newly issued common
stock;
* In November 2003 Sun World submitted its plan of
reorganization to the Bankruptcy Court;
* In December 2003 we completed a comprehensive
restructuring which resulted in:
* A new extension of up to three years of our $35
million debt facility with ING;
* An additional equity infusion of $8.6 million
through the issuance of common stock;
* A one for twenty-five reverse split of our
outstanding common stock;
* The transfer of our properties to Cadiz Real Estate
LLC, a Delaware limited liability company wholly owned
by us and created at the behest of ING; and
* The completion of a binding agreement with the
holders of a majority of Sun World's First Mortgage
Notes, otherwise referred to as the "Bondholders",
which provides for the transfer of an unsecured claim
due to us from Sun World of $13.5 million to a trust
controlled by the Bondholders, as well as the pledge of
our equity in Sun World to this trust as security for
our obligation to support a plan of reorganization for
Sun World that provides no recovery to us on account of
our equity interests in Sun World. In return, the
Bondholders agreed to release us from any obligations
pursuant to our guarantee of Sun World's First Mortgage
Notes.
With the implementation of these restructuring steps, we
have been able to retain ownership of all of our assets relating
to our water programs and obtain working capital needed to
continue our efforts to develop our water programs, albeit with
our commitment to support a Sun World plan of reorganization that
provides for the divestiture of our equity interests in Sun
World. Because many of our pre-existing common stockholders have
participated in the equity issuances which were part of the
restructuring, our base of common stockholders remains largely
the same as before the restructuring.
We remain committed to our water programs and we continue to
explore all opportunities. We cannot predict with certainty which
of these various opportunities will ultimately be utilized.
Page 3
(A) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
We are a Delaware corporation formed in 1992 to act as the
surviving corporation in a Delaware reincorporation merger
between us and our predecessor, Pacific Agricultural Holdings,
Inc., a California corporation formed in 1983.
As part of our historical business strategy, we have
conducted 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.
The focus of our water development activities has been the
Cadiz Program. The actions of Metropolitan in late 2002 have, at
a minimum, delayed the Cadiz Program, which in turn has caused us
to undergo a corporate restructuring. In 2003, our business
development activities consisted largely of implementing this
restructuring, which has included the Chapter 11 filing of and
formulation of a plan of reorganization for our Sun World
subsidiary and a completion of an amendment and extension of our
credit facilities with our senior secured lender. Our primary
goal in this process has been to maintain ownership of our San
Bernardino properties and to create a capital structure which
would allow us to continue our development of the Cadiz Program.
With the completion of an overall capital restructuring in
December 2003, we believe that we have succeeded in achieving
this goal. This overall capital restructuring provided for up to
a three year extension of our $35 million debt facility with ING
and an additional equity infusion of $8.6 million through the
issuance of common stock, and is described in more detail in Item
7, "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
We acquired all of the outstanding capital stock of Sun
World in 1996. Since that time, until late 2002, we provided to
Sun World various management and administrative services and
facilities, and supplemented Sun World's annual working capital
requirements. In late 2002, it became apparent that we would not
be able to continue to provide such ongoing financial support to
Sun World. In order to obtain the new financing needed to provide
working capital for its 2003-2004 growing seasons, on January 30,
2003 (the "Petition Date"), Sun World and three of its wholly
owned subsidiaries filed voluntary petitions under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court,
Central District of California, Riverside Division (Case Nos: RS
03-11370 DN, RS 03-11369 DN, RS 03-11371 DN, RS 03-11374 DN).
Shortly following the filing of the petitions, Sun World sought
and obtained authority to enter into a Debtor in Possession
("DIP") facility which provided Sun World with sufficient loan
availability to continue its operations. As of the petition
date, due to the Company's loss of control over the operations of
Sun World, the financial statements of Sun World will no longer
be consolidated with those of Cadiz, but instead Cadiz will
account for its investment in Sun World on the cost basis of
accounting.
In November 2003 Sun World filed a plan of reorganization
(Debtors' Joint Plan of Reorganization dated November 24, 2003)
with the Bankruptcy Court (the "Plan") and accompanying
disclosure statement. Under the Plan as proposed, the reorganized
Sun World will continue to operate as a going concern following
effectiveness of the Plan; however, all of our ownership
interests in the reorganized Sun World will be canceled. The
reorganized Sun World's equity interests will be held instead by
Sun World's creditors. Also, under the proposed Plan, all service
agreements between Sun World and us will be terminated, and
approximately $13.5 million in debt owed to us by Sun World
(including approximately $12.3 million in loans) will be canceled.
Page 4
We supported the filing of the Plan in the belief that the
manner in which the Plan provides for the resolution of claims
asserted by and against us in the Sun World bankruptcy
proceedings would be in our best interests. In furtherance of
this belief, and in order to ensure that our interests in Sun
World are treated in a manner consistent with that under the
proposed Plan irrespective of whether or not the Plan is approved
in its proposed form, in December 2003 we entered into a global
settlement agreement with Sun World and with the holders of a
majority of Sun World's First Mortgage Notes, otherwise referred
to as the Bondholders. This global settlement agreement provides
for:
* The grant by Sun World to us of a general unsecured claim
against Sun World of $13.5 million in full and final
settlement of all claims and causes of action between us, and
the termination and/or rejection of all contracts and
agreements between us and Sun World, with the exception of an
agricultural lease by us to Sun World of our Cadiz, California
farm properties (the "Sun World Settlement");
* The transfer of this unsecured claim to a trust controlled
by the Bondholders;
* Our agreement not to seek a recovery in the Sun World
bankruptcy proceedings on account of our equity interest in
Sun World, and a pledge of all of our equity interests in Sun
World to the Bondholder trust as security for our obligations
under the global settlement; and
* The waiver by the Bondholders (and by any other holders of
First Mortgage Notes who elect to opt into the settlement) to
seek recovery against us on account of our guarantee of Sun
World's obligations under the First Mortgage Notes.
The Sun World Settlement was subject to the approval of the
Bankruptcy Court, which was obtained by Sun World. Bankruptcy
Court approval was not required for the other aspects of the
global settlement. The Bankruptcy Court's approval order for the
Sun World Settlement is currently the subject of an appeal by a
creditor of Sun World. Sun World is defending against this
appeal. We have an agreement with the Bondholders providing that
the other aspects of the global settlement, as described above,
shall remain fully effective even if the pending appeal of the
Sun World Settlement is successful.
A hearing to consider the adequacy of the disclosure
statement accompanying the Plan, most recently scheduled for June
11, 2004, has been subject to several postponements and no
hearing date is currently scheduled. In Sun World's filings with
the Bankruptcy Court, Sun World has reported that it believes
that the Plan likely cannot be confirmed absent the acceptance of
the holders of the First Mortgage Notes, in their capacity as
secured creditors. Sun World has further reported to the
Bankruptcy Court that the holders of the First Mortgage Notes
have not yet reached a consensus with respect to certain
corporate governance issues relating to the reorganized company,
and that they have been unable to finalize a shareholder
agreement term sheet. In the meantime, Sun World has, with Bankruptcy
Court approval, expanded the scope of its engagement with Ernst &
Young Corporate Finance LLC to include services related to (i) a
sale of substantially all of its assets pursuant to a motion or a
plan of reorganization, and (ii) obtaining an equity investor and
financing under a plan of reorganization and is actively pursuing the
sales/investment process. Sun World has chosen to delay the
preparation of an amended Plan and disclosure statement and
the scheduling of a disclosure statement hearing date pending
the outcome of these most recent developments. Sun World's
exclusivity period (i.e. the period during which only Sun
World may file a plan of reorganization) currently expires on
October 8, 2004. We cannot predict at this time what changes,
if any, will be made to the Plan as a result of the foregoing or
whether or not the Plan, as amended, will be approved.
Page 5
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
During the year ended December 31, 2002, 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
---------------------------------
With the completion of our financial restructuring in
December 2003, we are able to continue with our strategy of
development of our holdings for their highest and best uses. At
present, our development activities are focused on water resource
development at our San Bernardino County properties.
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) THE CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY PROGRAM
---------------------------------------------------------
The Company owns approximately 35,000 acres of land and
related high-quality groundwater resources in the Cadiz and
Fenner valleys of eastern San Bernardino County. The aquifer
system underlying this property is naturally recharged by
precipitation (both rain and snow) within a watershed of
approximately 1,300 square miles. See Item 2, "Properties - The
Cadiz/Fenner Property".
In 1997 we commended discussions with Metropolitan in order
to develop principles and terms for a long-term agreement for a
joint venture groundwater storage and supply program on this
land. The Cadiz Program would provide Metropolitan with a
valuable increase in water supply during periods of drought or
other emergencies, as well as greater reliability and flexibility
in operation of its Colorado River Aqueduct. During wet years,
surplus water from the Colorado River would be stored in the
aquifer system that underlies the Cadiz property. When needed,
the stored water and indigenous groundwater would be returned to
the Colorado River Aqueduct for distribution to Metropolitan's
member agencies throughout six southern California counties.
Metropolitan provides supplemental water to approximately 17
million people.
In addition, temporary withdrawals of indigenous groundwater
would also be available from the Cadiz Program during
emergencies, in full compliance with the GROUNDWATER MONITORING &
MANAGEMENT PLAN approved by the U.S. Department of the Interior
in its RECORD OF DECISION. With this provision of the MANAGEMENT
PLAN the effective long-term storage capacity of the Cadiz
Program may exceed two million acre-feet.
Following extensive negotiations with us, in April 2001
Metropolitan's Board of Directors approved definitive economic
terms and responsibilities, which were to serve as the basis for
a final agreement to be executed between us, subject to the then-
ongoing environmental review process. Pursuant to these
definitive terms, during storage operations, Metropolitan would
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
Page 6
and out of the basin. On the transfer of indigenous water,
Metropolitan would pay a base rate of $230 per acre-foot, which
will be adjusted according to a fair market value adjustment
procedure. Metropolitan would commit 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 provided for the grant to Cadiz of 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.
Cadiz Program facilities would 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 to connect the spreading
basins and wellfield to the Colorado River Aqueduct at
Metropolitan's Iron Mountain pumping plant; and
* A pumping plant to pump water through the conveyance
pipeline from Metropolitan's Iron Mountain pumping plant
to the spreading basins.
The expected cost of these facilities is approximately $150
million, which was to be jointly shared.
The definitive terms for the Cadiz Program also call for the
establishment of a comprehensive groundwater monitoring and
management plan to ensure long-term protection of the groundwater
basin.
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. On August 29, 2002, the U.S. Department of Interior
approved the Final Environmental Impact Statement for the Cadiz
Program and issued its Record of Decision, the final step in the
federal environmental review process for the Cadiz Program. The
Record of Decision amends the California Desert Conservation Area
Plan for an exception to the utility corridor element and offered
to Metropolitan a right-of-way grant necessary for the
construction and operation of the Cadiz Program.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Subsequent to Metropolitan's actions, negotiations towards a
final agreement for the Cadiz Program on the basis of the
previously approved definitive terms have ceased.
With Metropolitan's actions, we have not been able to
complete the environmental review phase of the Cadiz Program. It
is our position that Metropolitan's actions of October 2002
breached various contractual and fiduciary obligations of
Metropolitan to us, and interfered with the economic advantage we
would obtain from the Cadiz Program. Therefore, in April 2003 we
Page 7
filed a claim against Metropolitan seeking compensatory and
punitive damages. See Item 3 - "Legal Proceedings".
Irrespective of Metropolitan's actions, the need for new
water storage and supply programs has not diminished in the
southwestern United States. The Colorado River watershed is
currently in the grip of a prolonged drought that presents major
challenges to the economies of California, Nevada, and Arizona.
As population continues to grow at record rates, these states are
faced with the very real possibility that current and future
supplies will not be able to meet demand.
Implementation of the Cadiz Program would provide a valuable
increase in water supply during periods of drought or other
emergencies, as well as greater reliability and flexibility in
operation of the Colorado River Aqueduct. During wet years,
excess water from the Colorado River would be stored in the
aquifer system that underlies approximately 35,000 acres of land
owned by Cadiz. When needed, the stored water would be returned
to the Colorado River Aqueduct for distribution.
In addition, temporary withdrawals of indigenous groundwater
would also be available during emergencies, in full compliance
with the GROUNDWATER MONITORING & MANAGEMENT PLAN approved by the
U.S. Department of the Interior in its RECORD OF DECISION. With
this provision of the MANAGEMENT PLAN the effective long-term
storage capacity of the Cadiz Program may exceed two million acre-
feet.
The Company believes there are a variety of scenarios under
which the value of the Cadiz Program may be realized. Indeed,
exploratory discussions have been initiated with representatives
of governmental organizations, water agencies, and private water
users with regard to their expressed interest in implementation
of the Cadiz Program. Several such discussions have been held
with water agencies that are independently seeking reliability of
supply. Other discussions have focused on the possibility of
exchanging water stored at the Cadiz Program with water
contractors in other regions in California. In addition, the
current drought within the Colorado River watershed has served as
an impetus to cooperative discussions between states, with the
goal that interstate exchanges and transfers may also become
feasible in the future.
Because of the Company's long-term relationship with
Metropolitan, the Company also intends to pursue discussions with
the agency in an effort to determine whether there are terms
acceptable to both parties under which the Cadiz Program could be
implemented. With the recent finalization of the Quantification
Settlement Agreement (QSA), an agreement between the Secretary of
the Interior, the State of California, Metropolitan and three
other southern California water agencies quantifying the amount
of water California's Colorado River users could expect on an
annual basis, Metropolitan's Colorado River supplies are now
specified and limited only by the variable volume of flow on the
river. To meet the growing needs of its service area,
Metropolitan must take advantage of all opportunities to store
available Colorado River water during periods of surplus. With
virtually all environmental permits and approvals in place for
the Cadiz Program, except for those dependent upon Metropolitan's
certification of the Environmental Impact Report (EIR), the
Company believes a partnership with Metropolitan could be renewed
in a timely manner if terms acceptable to both parties were to be
negotiated.
In the absence of a negotiated resolution, the Company would
continue to seek an administrative resolution of its claim
against Metropolitan. In April 2003 the Company filed an
administrative notice of claim with Metropolitan asserting the
breach by Metropolitan of various obligations specified in the
PRINCIPLES OF AGREEMENT. The Company believes that by failing to
Page 8
complete the environmental review process, as specified in the
PRINCIPLES OF AGREEMENT, Metropolitan violated this contract,
breached its fiduciary duties to the Company and interfered with
the Company's prospective economic advantages. In discussions
following presentation of this claim, Cadiz and MWD agreed to
evaluate alternative approaches to implementation of the Cadiz
Program. MWD has not to date responded to the claim and Cadiz
has until October 2005 to file a lawsuit against the agency.
(B) OTHER EASTERN MOJAVE PROPERTIES
-------------------------------
Our second largest block of land is approximately 9,000
acres in the Piute Valley of eastern San Bernardino County. This
landholding is located approximately 15 miles from the resort
community of Laughlin, Nevada, and about 12 miles from the
Colorado River town of Needles, California. Extensive
hydrological studies, including the drilling and testing of a
full-scale production well, have demonstrated that this
landholding is underlain by high-quality groundwater. The aquifer
system underlying this property is naturally recharged by
precipitation (both rain and snow) within a watershed of
approximately 975 square miles.
Additional hydrological investigations and discussions with
potential partners have commenced with the objective of
developing our Piute Valley assets.
Additionally, we own or control additional acreage located
near Danby Dry Lake, approximately 30 miles southeast of our
landholdings in Cadiz and Fenner valleys. Our Danby Lake
property is located approximately 10 miles north of the Colorado
River Aqueduct, and initial hydrological studies indicate that it
has excellent potential for a groundwater storage and supply
project.
AGRICULTURAL OPERATIONS
Sun World is a leading producer of high value crops and one
of California's largest vertically integrated agricultural
concerns. Farming approximately 10,000 acres of agricultural
crops throughout southern and central California, Sun World grows
dozens of varieties of fresh fruit and vegetables, and is one of
the top three domestic producers of table grapes (5% of United
States production) plums (6%), colored peppers (4%), and
watermelon (3%). Sun World's operations include divisions
specializing in farming, packing, marketing, and proprietary
product development.
On January 30, 2003, Sun World filed voluntary petitions
under Chapter 11 of the Bankruptcy Code. See "General Development
of Business", above. Since the filing date, Sun World has
operated its business and managed its affairs as debtor and
debtor in possession. As of that date due to the Company's loss
of control over the operations of Sun World, the financial
statements of Sun World will no longer be consolidated with those
of Cadiz, but instead, Cadiz will account for its investment in
Sun World on the cost basis of accounting. As a result of
changing to the cost basis of accounting on January 31, 2003, we
had a net investment in Sun World of approximately $195 thousand
consisting of loans and other amounts due from Sun World of
$13,500,000 less losses in excess of investment in Sun World of
$13,305,000. We wrote off the net investment in Sun World of $195
thousand at the Chapter 11 filing date because we do not anticipate
being able to recover our investment.
As part of the Sun World bankruptcy process, we are no
longer engaged in agricultural operations. We lease for operation
by others approximately 1,600 acres of Cadiz/Fenner agricultural
real property. See Item 2. "Properties - Leased Farm Property".
Page 9
SEASONALITY
Our water resource development activities are not seasonal
in nature.
With our divestiture of Sun World as contemplated by the
agreement with a majority of Sun World's bondholders, our
operations will no longer be subject to the general seasonal
trends that are characteristic of the agricultural industry.
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.
EMPLOYEES
As of December 31, 2002, we employed approximately 465 full-
time employees (i.e. those individuals working more than 1,000
hours per year), most of whom were employed by Sun World. Sun
World, throughout the year, engages various part-time and
seasonal employees, with a seasonal high of approximately 2,000
part-time employees. Additionally, Sun World contracts with
outside labor contractors for personnel used in the farming
operations with a seasonal high of approximately 5,000 people.
Approximately 155 of our employees are represented by a labor
union pursuant to contracts renewed in 2002 that expire in 2006.
Generally, we believe that our employee relations are good.
REGULATION
Our operations are subject to varying degrees of federal,
state and local laws and regulations. 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 development and approval
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 Los Angeles,
California, which consist of approximately 4,770 square feet,
pursuant to a sublease that expires on June 14, 2006. Current
base rent under the lease is approximately $7,550.00 per month.
Page 10
As part of our December 2003 overall capital restructuring,
we transferred all of our assets (with the exception of any Sun
World related assets) to Cadiz Real Estate LLC, a Delaware
limited liability company, which we sometimes refer to as Cadiz
Real Estate. We hold 100% of the equity interests of Cadiz Real
Estate, and therefore we continue to hold 100% beneficial
ownership of the properties which we transferred to Cadiz Real
Estate. Cadiz Real Estate was created at the behest of our senior
secured lender, ING. The Board of Managers of Cadiz Real Estate
consists of two managers appointed by us and one independent
manager named by ING. As long as our obligations to ING are
outstanding, Cadiz Real Estate may not institute bankruptcy
proceedings without the unanimous consent of this Board of
Managers (including the independent manager).
Cadiz Real Estate is a co-obligor under our credit
facilities with ING, for which the assets of Cadiz Real Estate
have been pledged as security.
Because the transfer of our properties to Cadiz Real Estate
has no effect on our ultimate beneficial ownership of these
properties, we refer throughout this Report to properties owned
of record either by Cadiz Real Estate or by us as "our"
properties.
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.
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 the 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 and an unaffiliated third party. 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.
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 9,000 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.
Page 11
LEASED FARM PROPERTY
Concurrently with our acquisition of Sun World in 1996, we
leased to Sun World approximately 1,600 acres of our Cadiz/Fenner
property which has been developed for agricultural use. This
lease, as amended pursuant to Sun World's bankruptcy proceedings,
now provides for the lease by Sun World of 1,100 acres of this
property through the 3004 season. The remainder of the property is
leased to an unaffiliated third party. These leases provide for
the lessee to be 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.
DEBT SECURED BY PROPERTIES
Of our outstanding debt at December 31, 2002, $116.7 million
represents loans secured by Sun World's properties and $35.1
million represents loans secured by the majority of our non-Sun
World properties. Information regarding interest rates and
principal maturities is provided in Note 10 to the consolidated
financial statements.
ITEM 3. LEGAL PROCEEDINGS
CLAIM AGAINST METROPOLITAN
On April 7, 2003 we filed an administrative claim against
The Metropolitan Water District of California ("Metropolitan"),
asserting the breach by Metropolitan of various obligations
specified in our Principles of Agreement with Metropolitan. We
believe that by failing to complete the environmental review
process for the Cadiz Program, as specified in the Principles of
Agreement, Metropolitan violated this contract, breached its
fiduciary duties to us and interfered with our prospective
economic advantages. See Item 1, "Business - Narrative
Description of Business - Water Resource Development". The
filing was made with the Executive Secretary of Metropolitan. We
are seeking recovery of compensatory and punitive damages.
In discussions following presentation of this claim, we and
Metropolitan have agreed to evaluate alternative approaches to
implementation of the Cadiz Program. Metropolitan has not to
date responded to the claim and we have until October 2005 to
file a lawsuit against the agency.
SUN WORLD BANKRUPTCY FILING
January 30, 2003 (the "Petition Date") Sun World and three
of its wholly owned subsidiaries (Sun Desert, Inc., Coachella
Growers and Sun World/Rayo) filed voluntary petitions under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court, Central District of California, Riverside Division (Case
Nos: RS 03-11370 DN, RS 03-11369 DN, RS 03-11371 DN, RS 03-11374
DN). See Item 1, "Business - General Development of Business".
OTHER PROCEEDINGS
There are no other material pending legal proceedings to which
we are a party or of which any of our property is the subject.
Page 12
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 2002. The results of our Annual
Meeting of Stockholders held on May 6, 2002 were reported in our
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002.
Page 13
PART II
ITEM 5. MARKET FOR REGISTRANT'SCOMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is currently traded over the counter on the
OTC U.S. Market, often referred to as the "Pink Sheets" under the
symbol "CDZI-OTC". Prior to March 27, 2003, the Company's common
stock was listed on the Nasdaq National Market (Nasdaq). On March
27, 2003, the Company's common stock was delisted from Nasdaq,
and thereafter traded on the OTC Bulletin Board until May 23,
2003, at which time our common stock was removed from the
Bulletin Board and began trading on the Pink Sheets. The
following table reflects actual sales transactions for the dates
that the Company was trading on Nasdaq, and high and low bid
information for dates subsequent. The OTC Bulletin Board and Pink
Sheet market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The high and low ranges of the
common stock for the dates indicated have been provided by
Bloomberg LP. Please note that all stock prices listed throughout
this annual report on Form 10K have been adjusted for the one for
25 reverse stock split that took place in December 2003.
HIGH LOW
QUARTER ENDED SALES PRICE SALES PRICE
------------- ----------- -----------
2001:
March 31 $ 262.50 $ 200.775
June 30 $ 254.50 $ 206.25
September 30 $ 250.00 $ 178.75
December 31 $ 224.50 $ 181.25
2002:
March 31 $ 225.00 $ 191.75
June 30 $ 275.00 $ 205.75
September 30 $ 155.50 $ 75.00
December 31 $ 68.75 $ 5.25
On July 31, 2004, the high, low and last sales prices for
the shares, as reported by Bloomberg, were $15.00, $15.00, and
$15.00, respectively.
We also have an authorized class of 100,000 shares of
preferred stock. As of December 31, 2002, there were 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 were issued and outstanding
* 5,000 shares of Series D Convertible Preferred Stock
of which 5,000 shares were issued and outstanding;
* 3,750 shares of Series E-1 Convertible Preferred Stock
of which 3,750 shares were issued and outstanding;
* 3,750 shares of Series E-2 Convertible Preferred Stock
of which 3,750 shares were issued and outstanding;
The Company subsequently entered into an agreement with the
holders of the Series D, Series E-1 and Series E-2 on October 21,
2003 in which the preferred stockholders exchanged
Page 14
all of their shares of preferred stock for 400,000 shares of common
stock. On December 15, 2003, Cadiz filed a certificate of
elimination which eliminated the Series D, Series E-1 and Series
E-2 Convertible 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, and filed a
Certificate of Designations designating for issuance 40,259
shares of Series A Junior Participating Preferred Stock. No
shares of Series A Participating Preferred Stock were ever
issued. The Rights Plan was amended and terminated by our Board
of Directors on March 25, 2004. On March 26, 2004, Cadiz filed a
certificate of elimination which eliminated this series of
preferred stock.
As of July 31, 2004, the number of stockholders of record of
our common stock was 240 and the estimated number of beneficial
owners was approximately 2,263.
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 primary lender that
prohibits the payment of dividends.
During the quarter ended December 31, 2002, we did not issue
any shares. All securities sold by us during the three years
ended December 31, 2002 which were not registered under the
Securities Act have previously been reported in our Annual and
Quarterly Reports on Forms 10K and 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data insofar as it relates
to the years ended December 31, 2002, 2001, 2000, 1999 and 1998
has been derived from our audited financial statements. 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, 2002
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,
-----------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of
Operations Data:
Total revenues $ 114,250 $ 92,402 $ 107,745 $ 115,229 $ 106,544
Net loss (22,225) (25,722) (22,458) (8,594) (7,470)
Less: Preferred stock
dividends 1,125 591 - - -
Imputed dividend
on preferred
stock 984 441 - - -
--------- -------- --------- --------- ---------
Net loss applicable
to common stock $ (24,334) $(26,754) $ (22,458) $ (8,594) $ (7,470)
========= ======== ========= ========= =========
Per share:
Net loss (basic and
diluted) $ (16.76) $ (18.66) $ (15.88) $ (6.20) $ (5.63)
========= ======== ========= ========= =========
Weighted-average common
shares outstanding 1,452 1,434 1,414 1,387 1,327
========= ======== ========= ========= =========
Page 15
DECEMBER 31,
-------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Total assets $ 191,883 $ 198,275 $ 203,617 $ 214,102 $ 214,359
Long-term debt $ 115,447 $ 141,429 $ 145,610 $ 142,089 $ 142,317
Redeemable preferred
stock $ 10,942 $ 9,958 $ 3,950 $ - $ -
Common stock and
additional paid-in
capital $ 156,166 $ 152,765 $ 143,063 $ 136,552 $ 127,998
Accumulated deficit $(157,287) $(135,062) $(109,340) $ (86,882) $ (78,288)
Stockholders' equity
(deficit) $ (1,121) $ 17,703 $ 33,723 $ 49,670 $ 49,710
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the following
discussion contains trend analysis and other 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, our
ability to maximize value from our Cadiz, California land and
water resources; the uncertainty of the outcome of Sun World's
bankruptcy proceedings; our outstanding guarantee of Sun World's
First Mortgage Notes; and our ability to obtain new financings as
needed to meet our ongoing working capital needs. See additional
discussion under the heading "Certain Trends and Uncertainties"
below.
OVERVIEW
CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY PROGRAM. In
1997, we commenced discussions with the Metropolitan Water
District of Southern California (Metropolitan) in order to
develop principles and terms for a long-term agreement for a
joint venture water storage and supply program on and under 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 (the Cadiz
Program). At the same time, Cadiz and Metropolitan 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
economic terms were to serve as the basis for a final agreement
to be executed between Metropolitan and Cadiz, subject to the
then-ongoing environmental review process.
Under the Cadiz Program, during wet years or periods of
excess supply, surplus water from the Colorado River Aqueduct
would be stored 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, would be extracted and
delivered, via a conveyance pipeline, back to the aqueduct.
On August 29, 2002, the U.S. Department of Interior
approved the Final Environmental Impact Statement for the Cadiz
Program and issued its Record of Decision, the final step in the
Page 16
federal environmental review process for the Cadiz Program. The
Record of Decision amends the California Desert Conservation Area
Plan for an exception to the utility corridor element and offered
to Metropolitan a right-of-way grant necessary for the
construction and operation of the Cadiz Program.
On September 17, 2002, the Metropolitan Subcommittee on
Rules and Ethics scheduled a series of meetings in October and
November 2002 to consider (a) acceptance of the Record of
Decision and the terms and conditions of the right-of-way grant,
(b) certification of the environmental documentation for the
Cadiz Program under state law, and (c) the final agreement
between Cadiz and Metropolitan.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Irrespective of Metropolitan's actions, Southern
California's need for water storage and supply programs has not
abated. We believe there are several different scenarios to
maximize the value of this water resource, all of which are under
current evaluation.
Until October 2002 we had expected that the Cadiz Program
would be implemented upon the previously negotiated terms, and we
had structured our financing arrangements with a view to such
implementation. Following Metropolitan's vote in October 2002 to
not proceed with the Cadiz Program, these financing arrangements
were no longer workable on their then existing terms.
In January 2003 our wholly-owned subsidiary, Sun World
International, Inc. (which, together with its subsidiaries, we
refer to as "Sun World") filed a voluntary petition for Chapter
11 bankruptcy protection in order to access seasonal financing.
Historically, we, as the parent company of Sun World, had
supplemented Sun World's annual working capital requirements.
However, at the time of Sun World's filing we did not have the
ability to do this. The only way Sun World could obtain the new
financing needed to provide working capital for its 2003-2004
growing seasons was to seek court approval, pursuant to Chapter
11, to a new Debtor in Possession ("DIP") facility.
Sun World's financial situation and bankruptcy filing, in
turn, negated an agreement we had previously reached with our
primary lender, ING Capital LLC ("ING") for a three year
extension of approximately $35 million of senior secured loans
with a maturity date of January 31, 2003. As we were unable to
make payment of this debt when due, in February 2003 ING declared
these loans to be in default, although we remained in
negotiations with ING for an overall restructuring of this debt.
Our financing activities during 2003 were directed primarily
towards completion of an overall restructuring of our capital
structure which would preserve our ability to continue with our
water resource development programs. This overall capital
restructuring was successfully completed in December 2003, and
featured the following components, in chronological order:
* In June 2003 we completed a private equity offering of
800,000 shares of our common stock (after giving effect
to our one for twenty-five reverse stock split
Page 17
effective December 15, 2003 (the "Reverse Split")). 672,000
shares were issued in consideration of $1.68 million in cash,
112,000 were issued in consideration for $280 thousand in
services rendered to us, and 16,000 were issued as
consideration for fees related to the equity offering.
The proceeds raised in this offering provided sufficient
working capital for us to continue operations pending
completion of the larger $8.6 million private placement
in December 2003 described below.
* In August 2003 our stockholders approved
implementation of a reverse split of our outstanding
common stock, with the exact ratio for the split to be
determined by our Board of Directors at the time of the
split. The reverse split was intended to increase the
likelihood of our being able to meet the minimum trading
price required for listing our stock on The Nasdaq
SmallCap Market or other national securities exchange, as
well as to provide us with additional authorized but
unissued shares of common stock to be used for capital
raising and other purposes.
* In October 2003 we entered into an agreement with the
holder of all of our outstanding Series D, Series E-1 and
Series E-2 preferred stock whereby we issued 400,000
shares of our common stock (after giving effect to the
Reverse Split) in exchange of all of our then outstanding
Series D, Series E-1 and Series E-2 preferred stock. In
connection with this conversion, we recorded a charge
against paid-in capital as an inducement to convert.
* In December 2003 we simultaneously completed:
* An extension of up to three years of our $35
million debt facility with ING (see "Liquidity and
Capital Resources - Current Financing Arrangements -
Cadiz Obligations" below);
* A one for twenty-five reverse split of our
outstanding common stock;
* An additional equity infusion of $8.6 million
through the issuance of 3,440,000 shares of common
stock;
* The transfer of our properties to Cadiz Real Estate
LLC, a Delaware limited liability company wholly owned
by us and created at the behest of ING; and
* The completion of our global settlement agreement
with the holders of a majority of Sun World's First
Mortgage Notes (the "Bondholders") which provides
for the pledge of our equity in Sun World together
with an unsecured claim due to us from Sun World of
$13.5 million to a trust controlled by the
Bondholders (see "Liquidity and Capital Resources -
Current Financing Arrangements - Sun World
Obligations" below).
As a consequence of all of these transactions, the number
of outstanding shares of our common stock (after giving effect to
our December 2003 one for twenty-five reverse stock split) has
increased from 1,858,659 shares as of December 31, 2002
(including 400,000 common shares issuable upon the conversion of
outstanding Series D and E preferred stock) to
Page 18
8,200,340 shares as of December 31, 2003 (including 1,728,955
common shares issuable upon the conversion of outstanding Series
F preferred stock).
With the completion of these transactions, we have provided
for our short-term working capital needs and are able to refocus
our efforts on obtaining and utilizing the capital necessary to
proceed with our water resource development programs.
RESULTS OF OPERATIONS
The consolidated financial statements set forth herein for
each of the three years in the period ended December 31, 2002
reflect the results of our operations and the operations of our
wholly-owned subsidiaries including Sun World.
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.
In January 2003, Sun World filed a voluntary petition for
Chapter 11 bankruptcy protection. As of that date due to the
Company's loss of control over the operations of Sun World, the
financial statements of Sun World will no longer be consolidated
with those of Cadiz, but instead, Cadiz will account for its
investment in Sun World on the cost basis of accounting. As a
result of changing to the cost basis of accounting on January 31,
2003, the Company had a net investment in Sun World of approximately
$195 thousand consisting of loans and other amounts due from Sun World
of $13,500,000 less losses in excess of investment in Sun World of
$13,305,000. Cadiz wrote off the net investment in Sun World of
$195 thousand at the Chapter 11 filing date because it does not
anticipate being able to recover its investment. For this reason,
our net income or loss in future fiscal periods will be largely
reflective of the operations of our water development activities.
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 make 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 income from Sun
World's packing, marketing and proprietary product development
operations tends to be more consistent from year to year than net
income from Sun World's farming operations. Packing and marketing
revenues from third party growers represent less than 10% of Sun
World's 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 represent
less than 10% of our total revenues, but provide a higher
operating margin than the other Sun World divisions.
(A) YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------
Sun World's 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
Page 19
grape and stonefruit crops. Due to this concentrated activity,
Sun World has historically incurred losses with respect to its
agricultural operations during the other months of the year.
The table below sets forth, for the periods indicated, the
results of operations for Sun World's four main operating
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
2002 2001
---- ----
Divisional income (loss):
Farming $ 6,701 $ (3,243)
Packing 9,761 8,320
Marketing 4,551 3,303
Proprietary product development 4,457 2,891
--------- ---------
25,470 11,271
General and administrative 12,819 10,890
Unusual items included in G&A 1,710 -
Special litigation - (7,929)
Non-recurring compensation expense - 5,537
Removal of underperforming crops 4,514 736
Depreciation and amortization 7,480 8,151
Interest expense, net 21,172 19,551
Income tax (benefit) expense - 57
--------- ---------
Net loss $ (22,225) $ (25,722)
========= =========
FARMING OPERATIONS. Income from farming operations totaled
$6.7 million for the year ended December 31, 2002 compared to a
net loss of $3.2 million for the year ended December 31, 2001.
Farming revenues were $87.4 million and farming expenses were
$80.7 million for the year ended December 31, 2002 compared to
farming revenues of $71.7 million and farming expenses of $74.9
million for 2001. Farming results were favorably impacted by the
timing of the table grape harvest in Coachella and Mexico
returning to normal as opposed to the harvest starting two weeks
late in 2001, which created an overlap with the early table grape
harvests in the San Joaquin valley. Year-to-date average F.O.B.
prices for table grapes were 3.5% higher than the prior year.
Additionally, Sun World experienced increased table grape
production due to increased yields and due to leasing some
additional organic table grape acreage for the 2002 season. Sun
World sold 4.4 million boxes of table grapes for the year ended
December 31, 2002 compared to 3.5 million boxes during the same
period in 2001. Results were also favorably affected by increased
plum yields as plum units sold were 32% higher in 2002 than in
2001. Sun World also experienced a 58% increase in F.O.B. prices
for peppers. Results were favorably impacted by the continued
strong performance of Sun World's proprietary SUPERIOR
SEEDLESS(R) and MIDNIGHT BEAUTY(R) table grapes and BLACK
DIAMOND(R) plums as production increased and F.O.B. prices
remained strong coupled with the removal of certain
underperforming crops at the conclusion of the 2001 season. Sun
World continues to achieve a price premium for its proprietary
table grape and stonefruit products compared to competing
commercially available varieties.
Page 20
PACKING OPERATIONS. Sun World's packing and handling
facilities contributed $9.8 million in income during the year
ended December 31, 2002 and $8.3 million during the year ended
December 31, 2001. Packing and handling revenue for these
operations of $23.3 million was offset by $13.5 million of
expenses for the year ended December 31, 2002. Revenues
totaled $21.4 million offset by expenses of $13.1 million for
the year ended December 31, 2001. Sun World packed 3.0 million
units during the year ended December 31, 2002 compared to 2.9
million units for the year ended December 31, 2001. For the year
ended December 31, 2002, Sun World handled 8.9 million units
compared to 8.2 million units in 2001. The increase in units packed
and handled was due primarily to increased production of table
grapes and plums. Units packed and handled during the year ended
December 31, 2002 consisted 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
table grapes, stonefruit, citrus, and peppers from the San
Joaquin Valley.
MARKETING OPERATIONS. During the year ended December 31,
2002, 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 $12.2
million. Marketing expenses totaled $7.6 million for the year
ended December 31, 2002 resulting in income from marketing
operations of $4.6 million. During the year ended December 31,
2001, 10.1 million units were marketed resulting in revenues of
$7.5 million offset by expenses of $4.2 million for income of
$3.3 million. The increase in marketing profits was primarily
due to increased F.O.B. prices for table grapes, plums and
peppers. Additionally, revenues and expenses increased due to
fruit purchased from third party suppliers and sold primarily to
a customer's distribution center related to Sun World's role as
a primary supplier of certain fruit categories in 2002.
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 the year ended December 31, 2002, income from proprietary
product development was $4.5 million consisting of revenues of
$6.9 million offset by expenses of $2.4 million. For the year
ended December 31, 2001, income was $2.9 million consisting of
revenues of $4.9 million offset by expenses of $2.0 million. The
increase in proprietary product development net income was
primarily due to a $0.5 million increase in intercompany
royalties due to increased yields and higher F.O.B. prices and a
$1.4 million increase in international royalties due primarily to
improved table grape yields for acreage under license coupled
with a delay in the South Africa harvest season, which
effectively shifted a portion of South African revenues from the
fourth quarter of 2001 to the first quarter of 2002. Revenues
include $1.3 million related to project development and
management fees payable in equity of KADCO for both 2002 and
2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses for the year ended December 31, 2002
totaled $12.8 million compared to $10.9 million for the 2001
period before the inclusion in 2002 of $1.1 million for the write-
off of capitalized legal costs incurred by Sun World in
litigation relating to the unsuccessful defense of intellectual
property rights and $0.6 million in professional fees relating to
unsuccessful attempts by Sun World to restructure debt during the
year. The increase was primarily due to higher employee related
costs coupled with $0.8 million of professional fees related to
the KADCO combination that was not completed and costs related to
exploring water development opportunities in the Middle East.
UNUSUAL ITEMS INCLUDED IN GENERAL AND ADMINISTRATIVE
EXPENSES. Unusual items for the year ended December 31, 2002
totaled $1.7 million compared to none in 2001. The
Page 21
unusual items consisted of $1.1 million for the write-off of
capitalized legal costs incurred by Sun World in litigation relating
to the unsuccessful defense of intellectual property rights and $0.6
million in professional fees relating to unsuccessful attempts by
Sun World to restructure debt during the year.
SPECIAL LITIGATION. Cadiz was 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, Cadiz 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 approximately 7,000 acres of real
property in eastern San Bernardino County primarily adjacent to
the Cadiz Program property. The settlement resulted in net
proceeds recognized of $7.9 million (consisting of $6.0 million in
cash and land valued at $1.9 million) for the year ended December
31, 2001.
NON-RECURRING COMPENSATION. In March 2001, Cadiz agreed to
issue 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. 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 2002, we removed
approximately 1,900 acres of underperforming crops consisting of
200 acres from the Cadiz ranch and 1,700 acres from Sun World's
ranches. The crops removed include approximately 100 acres of
juice grapes and 100 acres of citrus at the Cadiz ranch and 500
acres of wine grapes, 300 acres of raisin grapes, 400 acres of
stonefruit, 400 acres of citrus, and 100 acres of table grapes
from Sun World's operations. The Company recorded a non- cash
charge of $4.5 million in connection with the removal of these
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.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and
amortization expense for the year ended December 31, 2002 totaled
$7.5 million compared to $8.2 million during the same period in
2001. The decrease in depreciation was primarily attributable to
certain assets being removed in 2001 and 2002 and certain assets
becoming fully depreciated during the past year.
INTEREST EXPENSE, NET. Net interest expense totaled $21.5
million compared to $19.6 million for the years ended December
31, 2002 and 2001. The following table summarizes the components
of net interest expense for the two periods (in thousands):
YEAR ENDED
DECEMBER 31
2002 2001
---- ----
Interest on outstanding debt - Sun World $ 14,484 $ 14,574
Interest on outstanding debt - Cadiz 976 1,347
Amortization of financing costs 5,761 3,748
Interest income (49) (118)
--------- ---------
Page 22
$ 21,172 $ 19,551
========= =========
The decrease in interest on outstanding debt for the year
ended December 31, 2002 is primarily due to the impact of lower rates
on Cadiz variable rate debt. Amortization of financing costs increases
because of the addition of amortization of warrants issued for the
extension and increase in the Cadiz credit facilities in the first
quarter of 2002. Financing costs, which include legal fees and warrants,
are amortized over the life of the debt agreement.
(B) YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------
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 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. Income 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.
Page 23
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 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 income 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 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 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
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, 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, 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
Page 24
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 exercised the option and as a
consequence acquired the subject property. The settlement
resulted in net proceeds of $7.9 million (consisting of $6.0 million
in cash and land valued at $1.9 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. 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
Page 25
Interest income (118) (223)
--------- ---------
$ 19,551 $ 19,188
========= =========
The increase in interest on outstanding debt during 2001
was 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.
LIQUIDITY AND CAPITAL RESOURCES
(A) CURRENT FINANCING ARRANGEMENTS
------------------------------
CADIZ OBLIGATIONS. As we have not received significant
revenues from our water resource activity to date, we have 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, we have 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, 2002, we were obligated for approximately
$10,095,068 under a senior term loan facility and $25 million
under a revolving credit facility with our primary secured
lender, ING Capital LLC. Each facility had a maturity date of
January 31, 2003. Sun World's bankruptcy filing negated an
agreement we had previously reached with ING for a three year
extension of these loans, and in February 2003 ING declared these
loans to be in default.
During 2003 we remained in continuing discussions with ING
concerning an overall restructuring of this debt and in December
2003, as part of an overall restructuring of our capital
structure, we entered into agreements with ING which provided
for:
* Establishing the outstanding principal amount owed under
the senior term loan facility at $10 million and under the
revolving credit facility at $25 million, for an aggregate
outstanding principal balance owed to ING of $35 million;
* The immediate payment to ING of approximately $2.4 million,
representing payment of approximately $2 million in accrued
and unpaid interest on the credit facilities through September
30, 2003 and payment of approximately $400,000 in expenses
incurred by ING;
* An extension of the maturity date of the credit facilities
until March 31, 2005, with three additional automatic 6 month
extensions conditioned on our maintaining, as of the
commencement date of each extension, cash in an amount equal
to at least 4% of the outstanding principal balance of the
credit facilities in a cash collateral account held by ING;
* Interest commencing as of October 1, 2003 at the rate of
either (i) 8%, payable in cash, or (ii) 4% payable in cash
plus 8% payable in kind. Interest is payable every six months
commencing March 31, 2004. We have the right to choose the
form of payment with respect to each date upon which an
interest payment is due. At the closing of our restructuring,
we deposited into ING's cash collateral account the sum of
$2,142,280,
Page 26
representing interest accruing at the rate of 4% per annum
from October 1, 2003 until March 31, 2005;
* The issuance to ING of 100,000 shares of Series F preferred
stock, convertible as of the date of issuance into 1,728,955
shares of our common stock. As the holder of this preferred
stock, in addition to conversion rights ING has:
* The right to appoint two members of our Board of Directors
* The right to approve the authorization or issuance of
any other class or shares of our preferred stock;
* Anti-dilution protection;
* Pre-emptive rights;
* Registration rights; and
* Dividend, liquidation and voting rights shared on an
as-converted basis with common stock.
* The transfer of all of our assets (with the exception of
any Sun World related assets) to Cadiz Real Estate LLC, a
Delaware limited liability company ("Cadiz Real Estate"), a
newly created Delaware limited liability company in which we
hold 100% of the economic interests. Cadiz Real Estate is a co-
obligor with us on our credit facilities with ING, and the
properties now held of record by Cadiz Real Estate secure our
obligations under these facilities. We have entered into a
management agreement with Cadiz Real Estate pursuant to which
we will manage the assets now held by Cadiz Real Estate,
subject to the requirements of the Operating Agreement of
Cadiz Real Estate. The Operating Agreement of Cadiz Real
Estate provides for a Board of Managers consisting of two
managers appointed by us and one independent manager named by
ING. As long as our obligations to ING are outstanding, Cadiz
Real Estate may not institute bankruptcy proceedings without
the unanimous consent of this Board of Managers (including the
independent manager).
The debt covenants associated with these credit facilities
were negotiated by the parties with a view towards our operating
and financial condition as it existed at the time of the
restructuring. Given current circumstances, we do not consider it
likely that we will be in material breach of such covenants.
As we continue to actively pursue our business strategy,
additional financing specifically in connection with our water
programs will be required. See "Outlook", below. As the parties
anticipated this need at the time of our credit restructuring,
the covenants in the credit facility which would otherwise
prohibit our incurrence of additional debt (or our use of our
assets as security for such debt) contain an exception for debt
and liens incurred in order to finance the acquisition,
construction or improvement of any assets (up to a maximum of
$135 million at any one time outstanding). The covenants in the
credit facilities do not prohibit our use of equity financing,
but do provide that 35% of the proceeds of such issuance be
applied as a prepayment against such facilities (which prepayment
may take the form of a deposit in ING's cash collateral account).
We do not expect these covenants to materially limit our ability
to undertake debt or equity financing in order to finance our
water development activities.
Subsequent to the conversion of Series D and E preferred
stock discussed in Item 5, at December 31, 2003, we have no
outstanding credit facilities or preferred stock other than that
held by ING as described above.
Page 27
SUN WORLD OBLIGATIONS. Sun World has outstanding $115
million of First Mortgage Notes. The First Mortgage Notes were
originally to mature on April 15, 2004. The First Mortgage Notes
are currently in default as a consequence of the Sun World
bankruptcy filing. Sun World's proposed plan of reorganization
currently provides for settlement of claims held by the holders of
these notes through the issuance of equity interests in Sun World
to such holders.
The Sun World notes are also secured by the guarantee of
Cadiz. As we are not a party to the Sun World bankruptcy filing,
the effectiveness of a plan of reorganization which discharges
Sun World's obligation to holders of these notes will not, in and
of itself, release us of any obligations which we may still have
under this guarantee. The Plan, as currently proposed, includes a
release in our favor with respect to any of our remaining
obligations under this guarantee; however, we do not know whether
this provision of the Plan will be approved by the Bankruptcy
Court.
We have limited any potential obligation we may have
otherwise had under the guarantee by entering into release
agreements with the majority of holders of the Sun World notes.
For example, in December 2003 we entered into a global settlement
agreement with Sun World and with the holders of a majority of
Sun World's First Mortgage Notes (the "Bondholders") (see Item 1,
"Business - General Development of Business"). Pursuant to this
global settlement agreement, the Bondholders waived their rights
to seek recovery against us on account of our guarantee of Sun
World's obligations under the First Mortgage Notes. This right
will similarly be waived by any other note holder which elects to
opt into this settlement. The identity and ownership interests of
Sun World's bondholders is not a matter of public record,
however, based on the results of investigations performed on
behalf of Sun World, we believe that we have obtained waivers
and/or releases to date from Bondholders which hold, together
with their affiliates, approximately 88% in interest of
outstanding Sun World notes. All of the remaining Sun World
notes (other than a nominal interest of less than 1%) are held by
persons who are also shareholders of ours.
No non-releasing bondholder has sought to enforce our
guarantee of Sun World's obligations against us, nor has any such
bondholder given any indication to us that it plans to do so. As
part of our December 2003 global settlement agreement, the
Bondholders gave written direction to the indenture trustee
irrevocably instructing the trustee to take no action against us
on behalf of bondholders or on account of the guarantee.
Further, we believe that if a bondholder's claim against Sun
World is ultimately satisfied in whole or in part through a Sun
World plan of reorganization, then such bondholder will not be
entitled to enforce the guarantee against us as to the amount of
the claim so satisfied.
In view of all of these factors, we do not anticipate that
significant claims will be made against us under the guarantee
and we are not setting aside existing working capital or seeking
to raise additional working capital in order to pay claims under
the guarantee.
We have no other obligations or working capital needs with
respect to Sun World. As part of our December 2003 global
settlement, we have settled all of our claims and obligations
with Sun World. Although we continue to be the record owner of
Sun World's stock, Sun World will not be receiving working
capital contributions from us while it is in bankruptcy
proceedings. Sun World's currently proposed plan of
reorganization provides for our ownership interests in Sun World
to be canceled. Whether or not this plan is approved, we do not
expect to provide working capital support for a reorganized Sun
World.
CASH USED FOR OPERATING ACTIVITIES. Cash used for
operating activities totaled $10.1 million for the year ended
December 31, 2002, as compared to cash used for operating
Page 28
activities of $4.3 million for the year ended December 31, 2001.
The increase in cash used for operating activities was primarily
due to $4.4 million lower accounts payable balances and $1.0
million higher inventories at December 31, 2002.
CASH USED FOR INVESTING ACTIVITIES. Cash used for
investing activities totaled $2.1 million for the year ended
December 31, 2002, as compared to $5.5 million for the same
period in 2001. The decrease was primarily due to reduced capital
expenditures coupled with increased sales of property, plant and
equipment.
CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by
financing activities totaled $14.0 million for the year ended
December 31, 2002 consisting primarily of $10 million of
borrowings under the Cadiz revolving credit facility coupled with
net short-term borrowing of $4.4 million by Sun World. Borrowings
increased from the prior year in which monies were received from
the Rail-Cycle and Rayo water litigation settlements. For the
same period in 2001, cash provided by financing activities
totaled $7.9 million consisting primarily of $7.5 million in
proceeds from the issuance of Series E preferred stock.
Principal payments on long-term debt totaled $0.8 million for the
year ended December 31, 2002 compared to $1.6 million for the
year ended December 31, 2001. Net proceeds from the exercise of
stock options totaled $0.8 million during the year ended December
31, 2002 and $1.6 million for the year ended December 31, 2001.
(B) OUTLOOK
-------
SHORT TERM OUTLOOK. The proceeds of our 2003 private
placements have provided us with sufficient cash to meet our
expected working capital needs through approximately May 2005.
$2.0 million of the proceeds of our December 2003 private
placement were used to bring current our outstanding interest
payments owed to ING under our ING credit facilities. $2.1
million of the proceeds of our December 2003 private placement
were placed in a cash collateral account with ING in order to
extend the maturity date of the credit facility through March 31,
2005. These funds can be applied, if necessary, to the payment of
accrued interest due under our credit facilities with ING. The
remainder of the proceeds will be used to meet our ongoing
working capital needs.
LONG TERM OUTLOOK. In the longer term, our working capital
needs will be determined based upon the specific measures we
pursue in the development of our water resources. Whichever
measure or measures are chosen, we expect that we will need to
raise additional cash from time to time until we are able to
generate cash through our development activities. We will
evaluate the amount of cash needed, and the manner in which such
cash will be raised, on an ongoing basis. We may meet any such
future cash 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 29
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 to 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.
OUR REVENUES ARE DEPENDENT UPON THE SUCCESS OF OUR WATER
DEVELOPMENT PROJECTS. We may never generate revenues or become
profitable unless we are able to successfully implement our water
development programs. At present, we do not know the terms, if
any, upon which we may be able to proceed with the Cadiz Program,
or any alternative means which we may be able to use in order to
implement our water development programs. Regardless of the form
of our water development programs, 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
interpretations of U.S. federal, state and local laws,
regulations and policies. Additional risks attendant to such
programs include our ability to obtain all necessary regulatory
approvals and permits, possible litigation by environmental or
other groups, unforeseen technical difficulties, and general
market conditions for water supplies.
WE ARE UNCERTAIN OF THE OUTCOME OF SUN WORLD'S BANKRUPTCY
PROCEEDINGS. Sun World's plan of reorganization, as filed with
the U.S. Bankruptcy Court, has not been approved. We do not know
when or if this plan will ever be approved. In addition, we do
not know whether changes will need to be made to the plan in
order to obtain approval of the plan and, if so, what such
changes would be. Notwithstanding our separate and binding global
settlement agreements with Sun World and with the holders of a
majority in interest of Sun World's First Mortgage Notes, we will
not know the exact nature of the post-bankruptcy ownership
structure of Sun World or the final disposition of our claims and
the claims of Sun World's creditors in the bankruptcy proceedings
until such proceedings are formally concluded.
A PENDING APPEAL OF THE BANKRUPTCY COURT'S APPROVAL OF OUR
SETTLEMENT WITH SUN WORLD MAY BE SUCCESSFUL. A single unsecured
creditor of Sun World has appealed the order of the Bankruptcy
Court which authorized Sun World to enter into a global
settlement agreement with us. We may be exposed to significant
monetary damages (and, as a result, potential default under our
agreements with our senior secured lender) if (i) this appeal is
successful in reversing the Bankruptcy Court's order, (ii) our
settlement with Sun World is thereafter disapproved and
abandoned, (iii) litigation is commenced on behalf of Sun World's
estate against us, and (iv) a judgment is obtained against us and
enforced.
OUR GUARANTEE OF SUN WORLD'S FIRST MORTGAGE NOTES REMAINS
OUTSTANDING. Sun World's First Mortgage Notes are secured by our
guarantee. If, notwithstanding our efforts to limit potential
obligations under this guarantee, a claim is successfully
asserted against us under this guarantee, we may not have the
ability to pay such a claim. Our inability to pay a claim under
the guarantee may materially and adversely affect our ability to
conduct our business and thereby cause a default under our
agreements with our senior secured lender.
Page 30
OUR FAILURE TO MAKE TIMELY PAYMENTS OF PRINCIPAL AND
INTEREST ON OUR INDEBTEDNESS MAY RESULT IN A FORECLOSURE ON OUR
ASSETS. As of December 31, 2003, we had indebtedness outstanding
to our senior secured lender of approximately $35 million. Our
assets have been put up as collateral to secure the payment of
this debt. If we cannot generate sufficient cash flow to make
timely payments of principal and interest on this indebtedness,
or if we otherwise fail to comply with the terms of agreements
governing our indebtedness, we may default on our obligations. If
we default on our obligations, our lenders may sell off the
assets that we have put up as collateral. This, in turn, may
result in a cessation or sale of our operations.
OUR STOCK IS NOT TRADED ON A NATIONAL SECURITIES EXCHANGE.
Effective March 27, 2003, our common stock was delisted from
trading on the Nasdaq National Market. While we intend to reapply
for a Nasdaq listing as soon as we are eligible to do so, certain
requirements for such a listing, such as minimum trading price,
are not within our control, and therefore we cannot be certain
when or if we will be able to meet the initial listing
requirements of Nasdaq or another national securities exchange.
FURTHER EQUITY FINANCINGS WILL RESULT IN THE DILUTION OF
OWNERSHIP INTERESTS OF CURRENT STOCKHOLDERS. We may require
additional capital to finance our operations until such time as
our water development operations produce revenues. We cannot
assure you that our current lenders, or any other lenders, will
give us additional credit should we seek it. Consequently, we
will likely seek to raise additional working capital in the near
term through further equity financings, which will result in
dilution to the equity interests of current common stockholders.
THE REGISTRATION FOR RESALE OF COMMON STOCK PURSUANT TO
EXISTING REGISTRATION RIGHTS AGREEMENTS WILL INCREASE THE NUMBER
OF OUTSTANDING SHARES OF OUR COMMON STOCK ELIGIBLE FOR RESALE.
The sale, or availability for sale, of these shares could cause
decreases in the market price of our common stock, particularly
in the event that a large number of shares were sold in the
public market over a short period of time. Similarly, the
perception that additional shares of our common stock could be
sold in the public market in the future, could cause a reduction
in the trading price of our stock.
WE ARE RESTRICTED BY CONTRACT FROM PAYING DIVIDENDS AND WE
DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. Any
return on investment on our common stock will depend primarily
upon the appreciation in the price of our common stock. To date,
we have never paid a cash dividend on our common stock. The loan
documents governing our credit facilities with ING prohibit the
payment of dividends while such facilities are outstanding. As we
have a history of operating losses, we have been unable to date
to pay dividends. Even if we post a profit in future years, we
currently intend to retain all future earnings for the operation
of our business. As a result, we do not anticipate that we will
declare any dividends in the foreseeable future.
(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 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
Page 31
information available at the time and giving due to 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.
(1) 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.
(2) INTANGIBLE AND OTHER LONG-LIVED ASSETS. Property,
plant and equipment, 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. As a result of
the actions taken by Metropolitan in the fourth quarter of 2002
as described in Note 1, the Company, with the assistance of an
independent valuation firm, evaluated the carrying value of its
water program and determined that the asset was not impaired and
that the costs will be recovered through sale or operation of the
project.
(3) GOODWILL. 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
was being amortized on a straight-line basis over thirty years.
Accumulated amortization was $3,193,000 at December 31, 2001. In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, ("SFAS No.
142") "Goodwill and Other Intangible Assets". Under SFAS No. 142
goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but will be subject to annual impairment
tests in accordance with the Statement. Upon adoption of SFAS
No. 142, effective at the beginning of fiscal 2002, the Company
performed a transitional fair value based impairment test and
determined that its goodwill was not impaired. In addition,
cessation of amortization of goodwill upon adoption of SFAS No.
142 did not have a material impact upon the Company's financial
position or results of operations. Goodwill is tested for
impairment annually in the first quarter, or earlier if events
occur which require an impairment analysis be performed. As a
result of the actions taken by Metropolitan in the fourth quarter
of 2002 as described in Note 1 to the financial statements, the
Company, with the assistance of an independent appraisal firm,
performed an impairment test of its goodwill and determined that
its goodwill was not impaired.
Page 32
(4) 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 had 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 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
-----------------------------
Adoption of Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, SFAS No. 141, Accounting for Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets did not
have a material impact on the Company's financial position,
results of operations or cash flows for the year ended December
31, 2002.
In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 145, which rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers, and FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements as well as amends FASB No. 13, to make various
technical various corrections. The Statement is effective for
financial statements issued after May 15, 2002. The adoption of
this standard did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit
or disposal activities and supersedes Emerging Issues Task Force
("EITF") Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
Under EITF Issue 94-3, a liability for an exit cost as defined in
EITF Issue 94-3 was recognized at the date of an entity s
commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair
value. The Company adopted the provisions of SFAS 146 effective
January 1, 2003 and such adoption did not have a material impact
on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45,
Guarantor s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of
Others ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it
has issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company
adopted the disclosure provisions of FIN 45 during the fourth
quarter of 2002 and the recognition provisions of FIN 45
effective January 1, 2003. Such adoption did not have a material
impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS No. 123. This Statement
Page 33
amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends
the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The amendments to
Statement 123 in paragraphs 2(a)-2(e) of this Statement shall be
effective for financial statements for fiscal years ending after
December 15, 2002. Earlier application of the transition
provisions in paragraphs 2(a)-2(d) is permitted for entities with
a fiscal year ending prior to December 15, 2002, provided that
financial statements for the 2002 fiscal year have not been
issued as of the date this Statement is issued. Early application
of the disclosure provisions in paragraph 2(e) is encouraged. The
amendment to Statement 123 in paragraph 2(f) of this Statement
and the amendment to Opinion 28 in paragraph 3 shall be effective
for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on its
financial position or results of its operations.
In January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). In
general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
Company adopted the provisions of FIN 46 effective February 1,
2003 and such adoption did not have an impact on its consolidated
financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect
to variable interest entities created before January 31, 2003,
which among other things, revised the implementation date to the
first year or interim period ending after March 15, 2004, with
the exception of Special Purpose Entities ( SPE). The
consolidation requirements apply to all SPE s in the first year
or interim period ending after December 15, 2003. The Company's
adoption of the provisions of FIN 46R is not expected to have a
material impact on its consolidated financial statements.
In April 2003, FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS 133. SFAS 149 is effective for
contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS
149 effective June 30, 2003 and such adoption did not have an
impact on its consolidated financial statements since the Company
has not entered into any derivative or hedging transactions.
In May 2003, FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:
Page 34
* a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional
obligation that requires the issuer to redeem it by
transferring its assets at a specified or determinable date or
upon an event that is certain to occur;
* a financial instrument, other than an outstanding share,
that embodies an obligation to repurchase the issuer s equity
shares, or is indexed to such an obligation, and requires the
issuer to settle the obligation by transferring assets; and
* a financial instrument that embodies an unconditional
obligation that the issuer must settle by issuing a variable
number of its equity shares if the monetary value of the
obligation is based solely or predominantly on (1) a fixed
monetary amount, (2) variations in something other than the
fair value of the issuer's equity shares, or (3) variations
inversely related to changes in the fair value of the issuer s
equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3
which deferred the effective dates for applying certain
provisions of SFAS 150 related to mandatorily redeemable
financial instruments of certain non-public entities and certain
mandatorily redeemable non-controlling interests for public and
non-public companies. For public entities, SFAS 150 is effective
for mandatorily redeemable financial instruments entered into or
modified after May 31, 2003 and is effective for all other
financial instruments as of the first interim period beginning
after June 15, 2003. For mandatorily redeemable non-controlling
interests that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS 150, but
would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 150 are
deferred indefinitely. The measurement provisions of SFAS 150 are
also deferred indefinitely for other mandatorily redeemable non-
controlling interests that were issued before November 4, 2003.
For those instruments, the measurement guidance for redeemable
shares and non-controlling interests in other literature shall
apply during the deferral period. The Company adopted the
provisions of SFAS 150 effective June 30, 2003, and such adoption
did not have an impact on our consolidated financial statements.
(F) OFF BALANCE SHEET ARRANGEMENTS
-------------------------------
Cadiz does not have any off balance sheet arrangements at
this time.
(G) CERTAIN KNOWN CONTRACTUAL OBLIGATIONS
-------------------------------------
PAYMENTS DUE BY PERIOD
CONTRACTUAL LESS THAN AFTER
OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- ------------- ----- --------- --------- --------- -------
Cadiz Inc.
- ----------
Long term debt
obligations (A) $ 35,000 $ - $ 35,000 $ - $ -
Operating leases 262 112 150 - -
Sun World International, Inc.
- -----------------------------
Long term debt
obligations (B) 121,697 6,250 115,442 5 -
Operating leases 714 375 339 - -
--------- --------- --------- --------- ---------
Total contractual cash
obligations $ 157,673 $ 6,737 $ 150,931 $ 5 $ -
========= ========= ========= ========= =========
Page 35
(A) Cadiz long-term debt included in the table above reflects
the debt restructuring which occurred in December 2003 as
described above in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operation; Liquidity and
Capital Resources; Cadiz Obligations.
(B) As a result of the Chapter 11 filing on January 30, 2003
all required principal payments on this long-term debt are
suspended. Therefore the commitments shown above will not reflect
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
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
--------------------------------------------------------
FIXED RATE AVERAGE VARIABLE RATE AVERAGE
EXPECTED MATURITY MATURITIES INTEREST RATE MATURITIES INTEREST RATE
- ----------------- ---------- ------------- ------------- -------------
Sun World International, Inc. (A)
2003 $ 394 7.8% $ 5,856 6.0%
2004 115,419 11.2% - -
2005 23 8.8% - -
2006 5 10.2% - -
--------- ----- --------- ----
Subtotal 115,841 11.2% 5,856 6.0%
Cadiz, Inc. (B)
2005 35,000 12.0% - -
--------- ----- --------- ----
Total $ 150,841 11.4% $ 5,856 6.0%
========= ===== ========= ====
(A) As a result of the Chapter 11 filing on January 30,
2003 all required principal payments on this long-term debt are
suspended. Therefore the commitments shown above will not reflect
cash outlays in future periods.
(B) Cadiz long-term debt included in the table above reflects
the debt restructuring which occurred in December 2003 as
described above in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operation; Liquidity and
Capital Resources; Cadiz Obligations.
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.
Page 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with
the participation of our management, including our Chairman,
Chief Executive Officer and Chief Financial Officer (Principal
Executive and Financial Officer), of the effectiveness of the
design and operation of our disclosure controls and procedures as
of December 31, 2002. As of the date of that evaluation, our Chairman,
Chief Executive Officer and Chief Financial Officer concluded that
these disclosure controls and procedures are effective in timely
alerting him to material information relating to Cadiz (including
our consolidated subsidiaries) required to be included in our periodic
Securities and Exchange Commission filings. There was no significant
change in our internal control over financial reporting that occurred
during the most recent fiscal quarter that materially affected,
or is reasonably likely to affect, our internal control over
financial reporting, and no corrective actions with regard to
significant deficiencies or weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position with Cadiz
---- --- -------------------
Keith Brackpool 47 Chairman of the Board,
President, Chief Executive and
Financial Officer
Murray H. Hutchison 66 Director
Timothy J. Shaheen 44 Director and President
and Chief Executive Officer of
Sun World International, Inc.
Geoffrey Arens 40 Director
Gregory Ritchie 40 Director
Richard E. Stoddard 53 CEO and Chairman of the Board of
Managers of Cadiz Real Estate LLC
Keith Brackpool is a founder of Cadiz, has served as a
member of Cadiz' Board of Directors since September 1986, and has
served as President and Chief Executive Officer of Cadiz since
December 1991. Mr. Brackpool assumed the role of Chairman of the
Board of Cadiz on May 14, 2001, and the role of Chief Financial
Officer on May 19, 2003. Mr. Brackpool has also been a principal
of 1334 Partners L.P., a partnership that owns commercial real
estate from 1989 to present.
Page 37
Murray H. Hutchison was appointed a director of Cadiz in
June 1997. He is also a member of the Board of Managers (an LLC's
functional equivalent of a Board of Directors) of Cadiz'
subsidiary, Cadiz Real Estate LLC. In his capacity as a manager
of the LLC he performs essentially the same duties on behalf of
the LLC as he would as an outside director for a corporation.
Since his retirement in 1996 from International Technology
Corporation, a publicly traded diversified environmental
management company, Mr. Hutchison has been self-employed with his
business activities involving primarily the management of an
investment portfolio. From 1976 to 1994, Mr. Hutchison served as
Chief Executive Officer and Chairman of International Technology.
Mr. Hutchison currently serves as a director of Jack in the Box,
Inc., a publicly traded fast food restaurant chain. Additionally,
Mr. Hutchison serves as Chairman of the Huntington Hotel
Corporation, a privately owned hotel and office building, and as
a director of several other non-publicly traded U.S. companies.
Timothy J. Shaheen was appointed a director of Cadiz in
March 1999. Mr. Shaheen has also served as the President, Chief
Executive Officer and a director of Cadiz' wholly-owned
subsidiary, Sun World International, Inc., since September 1996.
Mr. Shaheen has 18 years of experience in the produce industry
and is active on several industry advisory committees. Prior to
joining Sun World, he served as a senior executive with Albert
Fisher North America, a publicly traded domestic and
international produce company from 1989 to 1996. While with
Albert Fisher, Mr. Shaheen also served as director of its
Canadian produce operations and as a director of Fresh Western
Marketing, one of the largest growers and shippers of fresh
vegetables in the Salinas Valley of California. Prior to his
employment with Albert Fisher, Mr. Shaheen has seven years of
experience with the accounting firm of Ernst & Young LLP. Mr.
Shaheen is a certified public accountant. As described more
fully in "Item 1 Description of Business - General Development of
Business" above, Sun World and its domestic subsidiaries filed
for bankruptcy on January 30, 2003.
Geoffrey Arens was appointed a director of Cadiz on January
30, 2004 as a nominee of ING pursuant to the rights of ING as
holder of Cadiz' Series F preferred stock. Mr. Arens has been
with ING since 1995 and is the co-Head of ING's Strategic Trading
Platform Americas group and as such is responsible for that
group's global proprietary investing business. He is also CEO of
ING Capital Advisors, LLC, a registered investment advisor
specializing in the management of leveraged loan assets for large
institutional clients. In addition to his Board duties at Cadiz,
Mr. Arens also serves on the Board of Directors of ING Capital
Management, Ltd., and California Coastal Communities, Inc.
Gregory Ritchie was appointed a director of Cadiz on March
25, 2004 as a nominee of ING pursuant to the rights of ING as
holder of Cadiz' Series F preferred stock. Mr. Ritchie has been
with ING since 1995 and is a Managing Director and the co-head of
ING's Strategic Trading Platform and as such is responsible for
the group's global proprietary investing business. He is also
head of the Strategic Trading Platform's Equities team.
Richard E. Stoddard serves as CEO and Chairman of the Board of
Managers of Cadiz Real Estate LLC, the subsidiary of Cadiz,
directing the development of the Cadiz Groundwater Storage
Program and the other Cadiz real estate assets. In addition,
since 1988, Mr. Stoddard has served as the Chairman and CEO of
Kaiser Ventures LLC, an unrelated public entity involved in
water development, real estate development and waste management
projects in southern California. Mr. Stoddard also serves as a
general business consultant to Cadiz.
Page 38
The certificate of designation for our Series F preferred
stock provides that the holder(s) of the Series F preferred stock
(currently ING) have the right to elect two members of the Board
of Directors.
Directors of Cadiz hold office until the next annual meeting
of stockholders or until their successors are elected and
qualified. There are no family relationships between any
directors or current officers of Cadiz. Officers serve at the
discretion of the Board of Directors.
The Board of Directors has determined that Mr. Hutchison, a
member of the Company's Audit Committee, is an "audit committee
financial expert" as that term is defined in Item 401(h) of
Regulation S-K under the Securities Act. The other members of the
Audit Committee are Messrs. Arens and Ritchie. The Board has
determined that Messrs. Hutchison, Arens and Ritchie are
independent in accordance with the criteria and guidelines
established by Nasdaq.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and
executive officers, and persons who beneficially own more than
10% of a registered class of our equity securities ("reporting
persons"), to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock and other equity
securities of Cadiz. Reporting persons are required by the SEC
regulations to furnish Cadiz with copies of all Section 16(a)
forms they file. We have filed these forms on behalf of some of
our directors and officers in the past and have a power of
attorney to assist certain of them in the future. To Cadiz'
knowledge, based solely on a review of the copies of reports and
amendments thereto on Forms 3, 4 and 5 furnished to us by
reporting persons and forms that we filed on behalf of certain
directors and officers, during, and with respect to, Cadiz'
fiscal year ended December 31, 2002, and on a review of written
representations from reporting persons to Cadiz that no other
reports were required to be filed for such fiscal year, the Forms
4 filed in the third quarter for Mr. Hutchison, Mr. Anthony
Coehlo (who was then a director of Cadiz but resigned effective
December 15, 2003) and Mr. Dwight Makins (who was then a director
of Cadiz but resigned effective December 15, 2003) which reported
each of their grants of 580 stock options for services as
directors, were inadvertently filed late, and all other Section
16(a) filing requirements applicable to Cadiz' directors,
executive officers and greater than 10% beneficial owners during
such period were satisfied in a timely manner.
CODE OF ETHICS
Cadiz has adopted a code of ethics that applies to all of
its employees, including its principal executive and financial
officer. A copy of the code of ethics may be found on Cadiz'
website at www.cadizinc.com. Other information on this website
is not incorporated as part of this filing.
Page 39
ITEM 11. EXECUTIVE COMPENSATION
The tables and discussion below set forth information about
the compensation awarded to, earned by, or paid to Cadiz'
executive officers during the years ended December 31, 2002, 2001
and 2000.
SUMMARY COMPENSATION TABLE
ANNUAL OTHER LONG-TERM
NAME AND FISCAL COMPENSATION(2) COMPENSATION AWARDS
PRINCIPAL YEAR(1) SALARY BONUS(3) RESTRICTED STOCK
POSITION AWARDS(4)(5)
Keith Brackpool 12/31/02 $500,000 $ 233,124 $ -0-
President and 12/31/01 500,000 -0- -0-
Chief Executive
Officer(6) 12/31/00 500,000 150,000 150,000
Timothy J.
Shaheen 12/31/02 300,000 -0- -0-
President and 12/31/01 300,000 -0- -0-
Chief Executive
Officer 12/31/00 300,000 75,000 75,000
of Sun World
Stanley E.
Speer 12/31/02 260,000 -0- -0-
Chief Financial
Officer(6) 12/31/01 260,000 -0- -0-
12/31/00 260,000 65,000 65,000
- --------------------------------
(1) The information presented in this table is for the years
ended December 31, 2002, 2001 and 2000. The executive
officers for whose compensation has been disclosed for the
year ended December 31, 2002 constituted all of Cadiz'
executive officers as of December 31, 2002 and during the
year ended December 31, 2002.
(2) No column for "Other Annual Compensation" has been included
to show compensation not properly categorized as salary or
bonus, which consisted entirely during each fiscal year of
perquisites and other personal benefits, because the
aggregate amounts did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus
reported for each of the above named executive officers for
each fiscal year. See "Employment Arrangements" below.
(3) Bonuses were paid in February for the preceding calendar
year.
(4) Deferred stock units were granted to Messrs. Brackpool,
Shaheen and Speer in February 2001 and May 2000, as part of
their respective bonuses for the preceding calendar year.
These deferred stock units vest three years from the date of
issuance. The total number and value of deferred stock units
outstanding at December 31, 2002 (based upon the Nasdaq
National Stock Market closing sales price per share of
$13.75 on that date) for Messrs. Brackpool, Shaheen and
Speer was as follows:
UNITS
NAME FISCAL YEAR OUTSTANDING VALUE
---- ----------- ----------- -----
Brackpool 12/31/99 1,616 $ 22,220
12/31/00 615 8,456
Shaheen 12/31/99 873 12,003
12/31/00 308 4,235
Speer 12/31/99 776 10,670
12/31/00 267 3,671
All of the deferred stock units listed above vested prior to
the date of this filing and the officers were issued shares
of common stock accordingly, with the exception that the
Cadiz' Board of Directors authorized the buyout of the tax
withholding portion of the officers' deferred stock units
for the February 2001 grant and therefore the number of
shares of common stock issued to each for such grant was
reduced by the tax withholding amount.
(5) Deferred stock units, which were fully vested but
cannot be exchanged for shares of common stock without
restrictions until March 31, 2003, were issued to Messrs.
Brackpool, Shaheen and Speer in March 2001 in exchange for
fully vested and expiring options in amounts equaling the
value of the expiring options in excess of their exercise
price. The total number and value of these deferred stock
units outstanding at December 31, 2002 (based upon the
Nasdaq National Stock Market closing sales price per share
of $13.75 on that date) for Messrs. Brackpool, Shaheen and
Speer was as follows:
# of Options Units
Name Exchanged Awarded Value
---- ------------ ------- -----
Brackpool 12,000 5,415 $ 74,456
Shaheen 16,000 8,664 119,130
Speer 8,000 4,332 59,565
Page 40
All of the deferred stock units listed above vested without
restriction in 2003 and the officers were issued shares of
common stock accordingly.
(6) Mr. Brackpool assumed the position of Chief Financial
Officer of Cadiz on May 19, 2003 when Mr. Speer resigned from
that position. Mr. Speer remains as the Chief Financial Officer
of Sun World.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-
END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- --------------- ----------- ------------- ----------------
Keith Brackpool -0- -$0- 80,000(2)/-0- -$0-/-$0-
Timothy J. Shaheen -0- -0- 3,000(3)/-0- -$0-/-$0-
Stanley E. Speer -0- -0- 5,000(4)/-0- -$0-/-$0-
- ---------------------------------------
(1) Based upon the Nasdaq National Market closing sales
price per share of Cadiz common stock at December 31,
2002 which was $13.75.
(2) These options expired without exercise on
January 15, 2004.
(3) These options expired without exercise on
February 12, 2004.
(4) 2,000 of these options expired without exercise on
February 13, 2003, and the remaining 3,000 options
expired without exercise on February 12, 2004.
COMPENSATION OF DIRECTORS
In the fiscal year 2002, Messrs. Anthony Coelho, Murray H.
Hutchison and Dwight W. Makins each received cash compensation
for their services as directors of Cadiz in the amount of $25,000
per year, payable quarterly in advance in accordance with their
agreements with Cadiz. Messrs. Coelho and Makins served as
directors for the fiscal year 2002, and subsequently resigned
December 15, 2003.
Messrs. Brackpool and Shaheen do not receive any
compensation for serving as directors of Cadiz or Sun World since
they are otherwise paid as employees of Cadiz or Sun World.
EMPLOYMENT ARRANGEMENTS
Until February 1, 2003, Mr. Brackpool was employed pursuant
to an Employment Agreement which provided for base compensation
of $500,000 annually plus an annual incentive based bonus not to
exceed 120% of his base compensation. This agreement provided
that in the event of a material change or reduction in Mr.
Brackpool's responsibilities, he would be entitled to terminate
the agreement and continue to receive base compensation for the
remainder of the term of the agreement, and also provided that
Mr. Brackpool would be entitled to continue to receive base
salary and a deemed bonus equal to 60% of base salary in the
event of any other termination of the agreement by Cadiz company
other than for cause.
Subsequent to February 1, 2003, Cadiz failed to make
payments of base compensation to Mr. Brackpool as and when
required under this agreement, thereby giving Mr. Brackpool the
right to terminate the agreement, which was effectively
terminated as of February 1, 2003. In accordance with the
termination provisions of the agreement governing termination
without cause, Mr. Brackpool became entitled to receive payment
of $800,000.
Page 41
This $800,000 payment was made to Mr. Brackpool as part of
an overall settlement of obligations arising under a $1 million
loan entered into by Mr. Brackpool with Cadiz on July 5, 2002.
See "Item 13. Certain Relationships and Related Transactions",
below. This overall settlement with Mr. Brackpool was made
effective July 5, 2003, by way of a corresponding reduction in
Mr. Brackpool's obligations to Cadiz under the loan. This
reduction, along with cash payments by Mr. Brackpool in the
amount of $181,013 and an application of $50,000 of accrued but
unpaid compensation owed by Cadiz to Mr. Brackpool under his post
February 1, 2003 employment arrangements with Cadiz, resulted in
the settlement in full by Mr. Brackpool of his obligations under
this loan.
Notwithstanding the agreed termination of Mr. Brackpool's
existing employment agreement as of February 1, 2003, and
notwithstanding Mr. Brackpool's right to collect termination
payments pursuant to that agreement without continuing to provide
services to Cadiz following that date, Cadiz had and continues to
have a need for Mr. Brackpool's services subsequent to February
1, 2003. However, given our then existing circumstances and
limited financial resources, we agreed that it was necessary to
change certain of Mr. Brackpool's duties and responsibilities and
to materially reduce his compensation.
To this end, effective as of the first pay period after
February 1, 2003 Mr. Brackpool has been compensated pursuant to
an Agreement Regarding Employment pursuant to which Mr. Brackpool
receives base compensation of $20,000 per month, plus the same
fringe benefits that Mr. Brackpool had been receiving under his
prior employment agreement, including the use of a leased
automobile and life and disability insurance benefits funded by
us. While this Agreement requires Mr. Brackpool to perform his
services in a satisfactory manner, it does not require that his
services be provided on a full-time basis. Although the initial
term of the Agreement Regarding Employment ended September 30,
2003, Mr. Brackpool continues to provide services to us upon the
terms and conditions set forth in this Agreement.
Mr. Shaheen was engaged by Cadiz to act as the President and
Chief Executive Officer of Sun World. In this capacity, Mr.
Shaheen received an annual base salary from Sun World of
$300,000. Mr. Shaheen was entitled to receive additional
compensation in the form of bonuses at the sole discretion of the
Board of Directors, based primarily on the performance of Sun
World. Mr. Shaheen also received the use of a leased automobile
funded by Sun World.
Mr. Speer was engaged by Cadiz to act as the Chief Financial
Officer of both Cadiz and Sun World in 2002. In this capacity,
Mr. Speer received an annual base salary of $260,000. A portion
of Mr. Speer's compensation was allowed to be paid by Sun World
or other subsidiaries of Cadiz as determined periodically by
Cadiz. Mr. Speer was entitled to receive additional compensation
in the form of bonuses at the sole discretion of the Board of
Directors, based primarily on the performance of Cadiz. Mr. Speer
also received the use of a leased automobile funded by Cadiz. On
May 19, 2003, Mr. Speer resigned as the Chief Financial Officer
of Cadiz though he retained his position as the Chief Financial
Officer of Sun World.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 2002, all decisions
concerning executive officer compensation were made by the
Compensation Committee of the Board of Directors. The members
of the Compensation Committee were Messrs. Hutchison
(Chairman), Makins and Coehlo, all of whom were non-employee
directors. Mr. Coehlo replaced Mr. Mitt Parker as a member of
the committee upon the resignation of Mr. Parker in March 2002.
Page 42
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors has formed a Compensation Committee
which is responsible for reviewing and establishing the
compensation payable to Cadiz' executive officers, including
the President and Chief Executive Officer. For executive
officers other than the President and Chief Executive Officer,
the Committee establishes compensation levels based, in part,
upon the recommendations of the President and Chief Executive
Officer.
The Compensation Committee has furnished the following
report on executive compensation:(1)
Cadiz' executive compensation programs
are designed to enhance operating performance
and to maximize the long-term value of Cadiz'
assets and stockholder value, by aligning the
financial interest of the executive officers
with those of the stockholders. Such a
compensation program helps to achieve Cadiz'
business and financial objectives and provide
incentives needed to attract and retain well-
qualified executives in a highly competitive
marketplace. To this end, Cadiz has developed
a compensation program with three primary
components: base salary, performance-based
cash awards and long-term incentives through
stock awards.
BASE SALARY. An effort is made to
establish base salary levels for all
executive officers so as to be competitive
with the salaries of executives of other
companies with similarly sized asset
portfolios and to ensure the continued
services of key individuals. No specific or
set formula has been used to tie base salary
levels to precise measurable factors.
Adjustments to an executive officer's base
salary, once established, can be made at the
discretion of the Compensation Committee,
based upon such factors as position and
responsibility, salary history and cost of
living increases.
Where applicable, the Compensation
Committee may also consider the past
performance of the officer, both in adjusting
base salary levels and in determining
additional incentive compensation, such as
the cash awards and long term incentives
discussed below.
PERFORMANCE-BASED CASH AWARDS. The
Compensation Committee believes that
incentives should be offered to executives
which are related to improvements in
performance that yield increased value for
stockholders. Although the Compensation
Committee relies primarily upon the grant of
incentive stock options or other stock awards
to reward executive performance (see "Long-
Term Incentives" below), under certain
circumstances, the Compensation Committee
will utilize performance-based cash awards
from time to time to provide additional
incentives.
Page 43
As Chairman and Chief Executive Officer
of Cadiz, Mr. Brackpool is charged with the
overall responsibility for the performance of
Cadiz, as well as Sun World. Mr. Brackpool is
compensated pursuant to a written agreement
effective as of February 1, 1998 which
includes, in addition to base salary, an
incentive bonus compensation component.
Historically, the Compensation Committee has
established bonus compensation for Mr.
Brackpool pursuant to criteria established in
his employment agreement. Due to the
exceptional performance of Mr. Brackpool in
furtherance of the Cadiz Program and his
efforts with exploring water and agricultural
projects in the Middle East, the Compensation
Committee granted Mr. Brackpool a performance-
based bonus of $233,124 in the first half of
2002.
LONG-TERM INCENTIVES. The primary form
of incentive compensation offered by Cadiz to
executives consists of long-term incentives
in the form of stock options or other stock
awards. This form of compensation is intended
to help retain executives and motivate them
to improve Cadiz' long-term performance and
hence long-term stock market performance.
Stock options and other stock awards are
granted at the prevailing market value and
will only have added value if Cadiz' stock
price increases.
The Compensation Committee views the
grant of stock awards as both a reward for
past performance and an incentive for future
performance. Stock options or other stock
awards granted by Cadiz may vest immediately
upon grant, with the passage of time, at the
discretion of the Board, and/or upon the
achievement of certain specific performance
goals. Where performance is not readily
measurable, the vesting of performance based
options or other stock awards may be
dependent upon the satisfaction of subjective
performance criteria.
Options previously granted by Cadiz,
whether vesting immediately or contingently,
are exercisable for a period of five to seven
years from grant. The Compensation Committee
anticipates that options or stock awards will
continue to be granted in the future in order
to provide executives with additional long-
term incentives. Such options and stock
awards may be granted to executives pursuant
to the Cadiz 1996 Stock Option Plan or 2000
Stock Award Plan.
DEDUCTIBILITY OF CERTAIN EXECUTIVE
COMPENSATION EXPENSES UNDER FEDERAL TAX LAWS
The Compensation Committee has
considered the impact of provisions of the
Internal Revenue Code of 1986, specifically
Code Section 162(m). Section 162(m) limits to
$1 million Cadiz' deduction for compensation
paid to each executive officer of Cadiz,
which does not qualify as "performance
based".
While Cadiz expects that this provision
will not limit its tax deductions for
executive compensation in the near term, the
Cadiz 1996 Stock Option Plan ?enables Cadiz
to comply, to the extent deemed advisable,
with the requirements of Section 162(m) for
Page 44
performance based compensation to insure
that Cadiz will be able to avail itself of all
deductions otherwise available with respect
to awards made under the 1996 Stock Option
Plan. However, any shares of stock issued to
executives under the Cadiz 2000 Stock Award
Plan will not qualify as performance-based
compensation and, therefore, will be counted
in determining whether the $1 million limit
has been reached.
CONCLUSION
Through the programs described above, a
very significant portion of Cadiz' executive
compensation is contemplated to be linked
directly to corporate performance. The
Compensation Committee intends to implement
this policy of linking executive compensation
to corporate performance in order to continue
to align the interest of executives with
those of Cadiz' stockholders.
THE COMPENSATION COMMITTEE
Murray H. Hutchison, Chairman
- ------------------------------------
(1) This report shall not be deemed incorporated by reference by
any general statement incorporating by reference this annual
report on Form 10-K into any filing under the Securities Act of
1933, except to the extent that Cadiz specifically incorporates
this report by reference, and shall not otherwise be deemed filed
under such acts.
Page 45
STOCK PRICE PERFORMANCE
The stock price performance graph below compares the
cumulative total return of Cadiz common stock against the
cumulative total return of the Standard & Poor's Small Cap 600
and the Russell 2000r index for the past five fiscal years. The
graph indicates a measurement point of December 31, 1997 and
assumes a $100 investment on such date in Cadiz common stock, the
Standard & Poor's Small Cap 600 and the Russell 2000r indices.
With respect to the payment of dividends, Cadiz has not paid any
dividends on its common stock, but the Standard & Poor's Small
Cap 600 and the Russell 2000r indices assume that all dividends
were reinvested. The stock price performance graph shall not be
deemed incorporated by reference by any general statement
incorporating by reference this annual report on Form 10-K into
any filing under the Securities Act of 1933, as amended, except
to the extent that Cadiz specifically incorporates this graph by
reference, and shall not otherwise be deemed filed under such
acts.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Assumes initial investment of $100.00
and re-investment of dividends
- ------------------------------------------------------------------------------
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
Cadiz 100 89.0458951 110.942427 104.373467 93.6587645 6.4229826
Share
Value
Russell 100 96.5539335 115.498147 110.642534 111.779781 87.6596037
2000
Index
Value
S&P Small 100 64.7825127 109.179731 121.213292 128.16295 108.533893
Cap Index
Value
Page 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information as of December 31, 2003
with respect to shares of our common stock that may be issued
under our existing compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
Plan Number of Weighted-average Number of
Category securities to be exercise price securities remaining
issued upon of outstanding available for
exercise of options, warrants future issuance
outstanding and rights under equity
options, warrants compensation plans
and rights (excluding securities
reflected in
column (a))
(A) (B) (C)
Equity compensation 40,202 $ 184.66 35,756
plans approved by
stockholders(1)
Equity compensation 16,500(2) $ 228.30(2) 1,487,611(3)
plans not approved
by stockholders
TOTAL 56,702 $ 197.36 1,507,807(4)
(1) Represents 37,450 share for the Cadiz Inc. 1996 Stock Option Plan,
and 2,752 shares for the Cadiz Inc. 2000 Stock Award Plan.
(2) Represents the Cadiz Inc. 1998 Stock Option Plan
(3) Represents 15,560 shares for the 1998 Stock Option Plan and
1,472,051 shares for the Management Equity Incentive Plan
(4) There is a cumulative cap on the 1996 Stock Option Plan, the
1998 Stock Option Plan and the 2000 Stock Award Plan of
160,000 shares.
STOCK OPTION AND AWARD PLANS IN GENERAL
The purpose of Cadiz' stock option and award plans is to
provide incentives to attract, retain and motivate eligible
persons whose present and potential contributions are important
to the success of Cadiz and its subsidiaries and affiliates, by
offering them an opportunity to participate in Cadiz future
performance through awards of options, restricted stock grants
and other similar stock awards.
1996 STOCK OPTION PLAN
In 1996, our board of directors and stockholders approved
the adoption of the Cadiz Inc. 1996 Stock Option Plan (the "1996
Plan") to provide incentives to key employees of Cadiz and its
subsidiaries. Under the 1996 Plan, stock options may be granted
to directors, officers, employees, consultants, independent
contractors and advisors of Cadiz or its subsidiaries or
affiliates.
The 1996 Plan is administered by a committee of the Board or
the Board acting as the committee. Grants under the Plan may
consist of: (i) options intended to qualify as incentive
Page 47
stock options ("ISOs") within the meaning of the Internal Revenue
Code of 1986, as amended (the "Code"), (ii) so-called "non-qualified
stock options" ("NQSOs") that are not intended to so qualify, or
(iii) a combination thereof. Directors who are not employees of
the Company will be entitled to receive only NQSOs under the
Plan.
The 1996 Plan permits the governing committee to grant
options either as ISOs or as NQSOs, and allows the committee to
establish, as to any participant, the number of options, exercise
price, exercise term (subject to a maximum of ten years), and
other terms and conditions. Subject to the foregoing, the option
exercise price may not be less than 85% of the fair market value
of a share of Cadiz common stock on the date of grant of such
option; however, in the case of an ISO, the price shall be no
less than 100% of the fair market value of a share of Common
Stock at the time such option is granted; and in the case of an
ISO granted to a 10% stockholder, the exercise price will be no
less than 110% of the fair market value of the common stock on
the date of grant. Upon a "change in control" (as defined in the
1996 Plan), the Board has the right to accelerate vesting of all
options so that they become exercisable within the 30-day period
preceding the change in control.
The Board may amend or terminate the Plan at any time;
provided, however, that the Board may not, without the approval
of stockholders, amend the Plan in any manner that requires such
stockholder approval pursuant to the Code or pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
or Rule 16b-3 thereunder. According to its terms, the 1996 Plan
will terminate 10 years from its effective date.
Originally, 120,000 shares of common stock were reserved and
authorized for issuance under the 1996 Plan. An additional 40,000
shares (for an aggregate of 160,000 shares) were subsequently
authorized for issuance, however, the reservation and
authorization of 160,000 shares is cumulative of all three of
Cadiz' stock option and award plans. Shares subject to a grant or
award under the 1996 Plan which are not issued or delivered by
reason of the failure to vest or the expiration, termination,
cancellation or forfeiture are again available for future grants
and awards. As of December 31, 2003, 35,756 shares remained
available for grant under the 1996 Plan (subject to the
cumulative cap for issuance under all three stock option and
award plans).
1998 STOCK OPTION PLAN
In 1998, the Board approved a Non-Qualified Stock Option
Plan (the "1998 Plan") to provide grants of stock options to
certain employees, consultants, independent contractors and
advisors of Cadiz or its subsidiaries and affiliates, but
excluding any directors or officers including those who would be
required to file reports of beneficial ownership pursuant to the
Exchange Act.
The 1998 Plan is administered by a committee of the Board or
the Board acting as the committee. It permits the governing
committee to establish, as to any participant, the number of
options, exercise price, exercise term (subject to a maximum of
ten years), and other terms and conditions, however, the Board's
general intent with the plan is to grant options at an exercise
price equal to the fair market value of Cadiz common stock at the
time of grant, which options vest ratably over a five-year period
subject to vesting acceleration for a change in control of the
Company or the Board's determination of satisfaction of certain
specified performance criteria.
The Board may amend or terminate the Plan at any time;
provided, however, that the Board may not, with respect to any
particular option grant, without the consent of the holder of
that outstanding option, amend or terminate such option or
materially adversely affect the rights
Page 48
of the holder under such option. According to its terms, the 1998
Plan will terminate 10 years from its effective date.
31,700 shares are reserved and authorized for issuance under
the 1998 Plan, which amount may be decreased by the cumulative
cap of 160,000 for issuance under all three stock option and
award plans. Shares subject to a grant or award under the 1998
Plan which are not issued or delivered by reason of the failure
to vest or the expiration, termination, cancellation or
forfeiture are again available for future grants and awards. As
of December 31, 2003, 15,560 shares remained available for grant
under the 1998 Plan (subject to the cumulative cap for issuance
under all three stock option and award plans).
2000 STOCK AWARD PLAN
In 2000, our board of directors and stockholders approved
the adoption of the Cadiz Inc. 2000 Stock Award Plan (the "2000
Plan") to add additional forms of stock awards (i.e., restricted
stock, deferred stock units, stock bonus and stock awards in lieu
of cash) to the currently available stock option grants to
provide incentives to key employees of Cadiz and its subsidiaries
without as significant a dilutive effect on the stockholders.
Under the 2000 Plan, stock options may be granted to certain
directors, officers, employees, consultants, independent
contractors and advisors of Cadiz or its subsidiaries and
affiliates.
The 2000 Plan is administered by a committee of the Board or
the Board acting as the committee. It permits the governing
committee to establish, as to any participant, the number and
type of options, stock awards, deferred stock units, stock
bonuses or the like, exercise price, exercise term (subject to a
maximum of ten years), and other terms and conditions. A change
in control of the Company shall accelerate the vesting of
outstanding, but unvested, stock awards under the 2000 Plan.
The Board may amend or terminate the Plan at any time;
provided, however, that the Board may not, without the approval
of stockholders, amend the Plan in any manner that requires such
stockholder approval pursuant to the Code or pursuant to the
Exchange Act or Rule 16b-3 thereunder. Further, the Board may
not, with respect to any particular stock grant, without the
consent of the holder of that outstanding grant, amend or
terminate such grant or materially adversely affect the rights of
the holder under such grant. According to its terms, the 2000
Plan will terminate 10 years from its effective date.
40,000 shares are reserved and authorized for issuance
under the 2000 Plan, which amount may be decreased by the
cumulative cap of 160,000 for issuance under all three stock
option and award plans. Shares subject to a grant or award under
the 2000 Plan which are not issued or delivered by reason of the
failure to vest or the expiration, termination, cancellation or
forfeiture are again available for future grants and awards. As
of December 31, 2003, 10,596 shares remained available for grant
under the 2000 Plan (subject to the cumulative cap for issuance
under all three stock option and award plans).
MANAGEMENT EQUITY INCENTIVE PLAN
In December 2003, concurrently with the completion of the
restructuring of our financing arrangements with ING, our board
of directors authorized the adoption of a Management Equity
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan,
a total of 1,472,051 shares of our common stock may be granted to
our key personnel. Our Board has formed an initial allocation
committee to direct the initial allocation of 717,373 of these
shares. This initial allocation committee consists of Mr.
Hutchison (as Chairman of the Compensation Committee), Mr.
Brackpool and Mr. Richard Stoddard (a consultant to Cadiz). The
Board has authorized the
Page 49
initial allocation committee to award all or part of the initial
allocation shares to key personnel (including members of such
committee) without further approval of the Board. Any initial
allocation shares so granted will be subject to vesting conditions.
One-third of the shares granted will vest on the dated of the grant.
The remaining two-thirds will vest in two equal installments on
December 11, 2004 and December 11, 2005 (subject to continued
status of the recipient as an employee or consultant to Cadiz
as of the respective vesting date, but also subject to immediate
vesting in full of any theretofore unvested shares upon any
termination without cause).
The 754,678 shares covered by the Incentive Plan which are
not part of the initial allocation are issuable pursuant to the
direction of, and upon such vesting and other conditions as may
be established by, the Compensation Committee.
As of September 30, 2004, no shares have been granted or
issued under the Incentive Plan.
Page 50
BENEFICIAL OWNERSHIP
The following table sets forth, as of September 15, 2004, the
ownership of common stock of Cadiz by each stockholder who is
known by Cadiz to own beneficially more than five percent of the
outstanding common stock, by each director, by each executive
officer listed in the summary compensation table above, and by
all directors and executive officers as a group excluding, in
each case, rights under options or warrants not exercisable
within 60 days. All persons named have sole voting power and
investment power over their shares except as otherwise noted.
CLASS OF COMMON STOCK
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OWNERSHIP OF CLASS
----------------- ----------------- --------
ING Groep N.V. 1,828,429 (1) 21.9%
ING Capital LLC
Amstelveenseweg 500
1081 KL Amsterdam
SACC Partners LP 634,699(2) 9.6%
Riley Investment Management
LLC
B. Riley & Co. Inc.
B. Riley & Co. Retirement
Trust
11100 Santa Monica Blvd.,
Suite 800
Los Angeles, CA 90025
FMR Corp. 602,806(8) 9.1%
82 Devonshire Street
Boston, MA 02109
Bedford Oak Partners, L.P. 601,500(4) 9.1%
Bedford Oak Capital, L.P.
Bedford Oak Offshore
100 South Bedford Road
Mt. Kisco, NY 10549
Lloyd Miller MILGRAT I 501,400(3) 7.6%
Lloyd I. Miller Fund C
Lloyd Miller A4 Trust
Lloyd Miller MILFAM II
4550 Gordon Drive
Naples, Florida 34102-7914
Morgan Stanley & Co. 339,603(5) 5.1%
International Limited
1585 Broadway
New York, NY 10036
Keith Brackpool 127,223(6) 1.9%
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Timothy J. Shaheen 10,109 *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Murray Hutchison 6,490(7) *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Geoffrey Arens 0 *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Gregory Ritchie 1,000 *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
All directors and officers 144,822(6)(7)
as a group
(five individuals)
--------------------------------------------------------------
* Represents less than one percent of the 6,612,665
outstanding shares of common stock of Cadiz as of June 30,
2004.
Page 51
CLASS OF SERIES F PREFERRED STOCK
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OWNERSHIP OF CLASS
----------------- ----------------- --------
ING Groep N.V. 100,000(1) 100%
ING Capital LLC
Amstelveenseweg 500
1081 KL Amsterdam
(1) Based upon a Schedule 13D filed on February 2, 2004 with the
SEC by ING Groep N.V. on behalf of its wholly-owned
subsidiary ING Capital LLC, and based on Cadiz corporate
records, the ING entities beneficially own 100,000 shares of
Cadiz Series F Preferred Stock and have sole voting and
dispositive power as to all of the shares. The preferred
stock held by ING is initially convertible into 1,728,955
shares of Cadiz common stock. In addition to the preferred
stock, ING holds 94,000 shares of Cadiz common stock, which
were issued at the end of 2003 upon ING's exercise of
warrants, and ING has sole voting and dispositive power as
to the common stock. The principal office of ING Capital LLC
is located at 1325 Avenue of the Americas, New York, NY
10019.
(2) Based upon a Schedule 13G filed on May 12, 2004 with the SEC
by SACC Partners LP and its affiliated entities, Cadiz
corporate records of stock issuances and correspondence with
Mr. Riley, the listed affiliated entities beneficially own
an aggregate of 634,699 shares of Cadiz common stock, and
have sole voting and dispositive power of the stock.
(3) Based upon a Schedule 13G filed on May 17, 2004 with the SEC
by Lloyd I. Miller, III, Cadiz corporate records of stock
issuances and correspondence with Mr. Miller, the listed
affiliated entities beneficially own an aggregate of 501,400
shares of Cadiz common stock. Mr. Miller has sole voting
power of 300,000 of the shares, and sole dispositive power
of 100,000 of the shares. The remaining shares beneficially
owned by Mr. Miller are subject to shared voting and
dispositive power.
(4) Based upon a Schedule 13G filed on September 8, 2004 with
the SEC, Cadiz corporate records of stock issuances and
correspondence with Bedford Oak, the listed related funds
beneficially own an aggregate of 339,603 shares of Cadiz
common stock.
(5) Based upon a Schedule 13G filed on February 18, 2004 with
the SEC by Morgan Stanley & Co. International Limited and
its affiliated entities, Cadiz corporate records of stock
issuances and correspondence with Morgan Stanley, Morgan
Stanley has shared voting rights and shared dispositive
power over an aggregate of 339,603 shares of Cadiz common
stock.
(6) Includes 2,000 shares owned by a foundation of which Mr.
Brackpool is a trustee, but in which Mr. Brackpool has no
economic interest and 2,000 shares owned by his separated
spouse. Mr. Brackpool disclaims any beneficial ownership of
the 4,000 shares owned by the foundation and his spouse.
(7) Includes 1,490 shares underlying presently exercisable
options.
(8) Based upon a Schedule 13G filed on October 14, 2004 with the
SEC by FMR Corp. and its affiliated entities, Cadiz corporate
records of stock issuances and correspondence with FMR Corp.,
the listed affiliated entities beneficially own an aggregate
of 602,806 shares of Cadiz common stock, and have sole voting
and dispositive power of the stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 5, 2002, we entered into an agreement with Keith
Brackpool, our Chief Executive Officer, whereby we agreed to loan
him up to $1 million. The loan had a term of one year and bore an
interest rate of 6% per annum. As of December 31, 2002, the
maximum $1 million amount of the loan was outstanding. The loan
was repaid in full by Mr. Brackpool in 2003 at the expiration of
the loan term.
Our loan with Mr. Brackpool was intended to be structured
with terms no more favorable than those which Mr. Brackpool would
have been able to obtain from unrelated third parties, and the
loan agreement therefore provided for the loan to be secured by
collateral with a value of at
Page 52
least 133% of the outstanding loan amount. Initially, the loan
was secured by a portion of Mr. Brackpool's otherwise unencumbered
equity holdings in our stock. In November 2002 Mr. Brackpool
provided additional security for the loan in the form of a pledge
of a portion of Mr. Brackpool's interests in a real estate
limited partnership.
This loan was authorized by our Board in May 2002. We were
then nearing final votes on the various approvals needed for the
Cadiz Program, and both the company and our executives were the
subject of intense media interest. At the same time, Mr.
Brackpool required a source of funds to satisfy personal
obligations incurred by him in 1999 in order to finance his
purchase that year, for $5.25 million, of 750,000 of our shares
upon the exercise of previously issued stock options. Our Board
was concerned that the publicity accompanying a public sale of
Cadiz stock by Mr. Brackpool, regardless of the reasons for the
sale, at a time when the outcome of voting on the Cadiz Program
was not certain would significantly impair our ability to obtain
the approvals we needed. Given the importance to us of the Cadiz
Program, the Board approved the loan so as to provide Mr.
Brackpool with funds without selling any of his Cadiz
shareholdings in the public markets.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal years ended December 31, 2002 and 2001,
professional services were performed by PricewaterhouseCoopers
LLC (PwC). Cadiz' audit committee annually approves the
engagement of outside auditors for audit services in advance. The
audit committee has also established complementary procedures to
require pre-approval of all audit-related, tax and permitted non-
audit services provided by PwC, and to consider whether the
outside auditors' provision of non-audit services to Cadiz is
compatible with maintaining the independence of the outside
auditors. The audit committee may delegate pre-approval authority
to one or more of its members. Any such fees pre-approved in this
manner shall be reported to the audit committee at its next
scheduled meeting. All services described below were pre-approved
by the audit committee.
All fees for services rendered by PwC aggregated $307,726
and $280,630 for the fiscal years ended December 31, 2002 and
2001, respectively, and were composed of the following:
Audit Fees. The aggregate fees billed for the audit of the
annual financial statements for the fiscal years ended December
31, 2002 and 2001, for reviews of the financial statements
included in the Company's Quarterly Reports on Form 10Q, and for
assistance with and review of documents filed with the SEC were
$246,500 for 2002 and $249,930 for 2001.
Audit Related Fees. The aggregate fees billed for audit-
related services for the fiscal years ended December 31, 2002 and
2001 were $48,976 and $18,000, respectively. These fees
relate to assurance and related services performed by PwC that
are reasonably related to the performance of the audit or review
of the Company's financial statements. These services include
attest services that are not required by statute or regulation,
internal control reviews and consultations concerning financial
accounting and reporting matters.
Tax Fees. Fees billed for tax services for the fiscal years
ended December 31, 2002 and 2001 were $12,250 and $12,700,
respectively.
All Other Fees. No other fees were billed by PwC to Cadiz
for services other than as discussed above for the fiscal years
ended December 31, 2002 and 2001.
Page 53
PART IV
ITEM 15. 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 8, 1996(2)
3.3 Amendment to Cadiz Certificate of
Incorporation dated September 1, 1998(3)
3.4 Cadiz Certificate of Designations of Series A
Junior Participating Preferred Stock(4)
3.5 Cadiz Certificate of Designations of Series D
Convertible Preferred Stock dated December 28, 2000(5)
3.6 Cadiz Certificate of Correction filed to
Correct the Certificate of Designations of Series
D Preferred Stock dated December 28, 2000(5)
3.7 Certificate of Amendment of Certificate of
Designations of Series D Preferred Stock of Cadiz
Inc. dated December 31, 2002
3.8 Cadiz Certificate of Designations of Series E-1
Convertible Preferred Stock dated October 22, 2001(6)
3.9 Certificate of Amendment of Certificate of
Designations of Series E-1 Preferred Stock of
Cadiz Inc. dated December 31, 2002
3.10 Cadiz Certificate of Designations of Series E-2
Convertible Preferred Stock dated November 28, 2001(7)
3.11 Certificate of Amendment of Certificate of
Designations of Series E-2 Preferred Stock of
Cadiz Inc. dated December 31, 2002
3.12 Cadiz Bylaws, as amended (8)
4.1 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 11.25% 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)
Page 54
4.2 Amendment to Indenture dated as of October 9, 1997(10)
4.3 Amendment to Indenture dated as of January 23, 1998(11)
10.1 Cadiz Inc. 1996 Stock Option Plan(8)
10.2 Amendment to the Cadiz Inc. 1996 Stock Option Plan(12)
10.3 Amended and Restated Cadiz Inc. 1998 Non-
Qualified Stock Option Plan(12)
10.4 Cadiz Inc. 2000 Stock Award Plan(13)
10.5 Employment Agreement dated February 1, 1998
between Cadiz Inc. and Keith Brackpool (11)
10.6 Security Agreement between Cadiz Inc.
and Keith Brackpool dated July 5, 2002(14)
10.7 Pledge Agreement between Keith Brackpool
and Cadiz Inc. dated November 2002
10.8 Employment Agreement dated September 13, 1996
between Sun World International, Inc., Cadiz Inc.
and Timothy J. Shaheen(15)
10.9 Employment Agreement dated September 13, 1996
between Sun World International, Inc., Cadiz Inc.
and Stanley E. Speer(15)
10.10 Form of Sun World Executive Officer
Employment Agreement (16)
10.11 Fifth Amended and Restated Credit
Agreement, dated as of March 7, 2002, by and
between Cadiz Inc. and ING Baring (U.S.) Capital
LLC, as Administrative Agent, and the lenders
party thereto (12)
10.12 Revolving Credit Note, dated as of
November 25, 1997, by and between Cadiz Inc. and
ING Baring (U.S.) Capital Corporation (11)
10.13 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(12)
21.1 Subsidiaries of the Registrant
31.1 Certification of Keith Brackpool, Chairman,
Chief Executive Officer and Chief Financial
Officer of Cadiz Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Keith Brackpool, Chairman,
Chief Executive Officer and Chief Financial
Officer of Cadiz Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- ----------------------
Page 55
(1) Previously filed as an Exhibit to our Registration
Statement on 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 14, 1996
(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 Report on
Form 8-K dated May 10, 1999 filed on May 18, 1999
(5) Previously filed as an Exhibit to our Report on
Form 8-K dated December 29, 2000 filed on January
3, 2001
(6) 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
(7) Previously filed as an Exhibit to our Registration
Statement on Form S-3 (Registration No. 333-75006)
filed on December 13, 2001
(8) 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
(9) Previously filed as an Exhibit to Amendment No. 1
to our Registration Statement on Form S-3
(Registration No. 333-19109) filed on April 29,
1997
(10) Previously filed as an Exhibit to Amendment No. 2
to Sun World's Registration Statement on Form S-4
(Registration No. 333-31103) filed on October 14,
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 an Exhibit to our Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001 filed on March 28, 2002
(13) Previously filed as Appendix A to our Proxy
Statement dated April 5, 2000, filed on March 29,
2000
(14) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2002 filed on November 14, 2002
(15) 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
(16) 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
(17) Previously filed as an Exhibit to our Annual
Report on Form 10-K for the year ended December
31, 2001 filed on March 28, 2002.
(B) REPORTS ON FORM 8-K
We did not file any reports on Form 8-K in 2002 that were
not already previously reported on our Quarterly Reports on Form
10-Q.
Page 56
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
------------------------------
Keith Brackpool,
Chairman and Chief Executive
and Financial Officer
Date: November 1, 2004
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 November 1, 2004
- -----------------------------------------
Keith Brackpool, Chairman and Chief
Executive and Financial Officer
(Principal Executive, Financial and Accounting Officer)
/s/ Murray H. Hutchison November 1, 2004
- ------------------------------------------
Murray H. Hutchison, Director
/s/ Timothy J. Shaheen November 1, 2004
- ------------------------------------------
Timothy J. Shaheen, Director
/s/ Geoffrey Arens November 1, 2004
- ------------------------------------------
Geoffrey Arens, Director
/s/ Gregory Ritchie November 1, 2004
- ------------------------------------------
Gregory Ritchie, Director
Page 57
CADIZ INC. FINANCIAL STATEMENTS
- -------------------------------
Page
Report of Independent Registered Public Accounting Firm . . . . 59
Consolidated Statement of Operations for the three years ended
December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . 60
Consolidated Balance Sheet as of December 31, 2002 and 2001 . . 61
Consolidated Statement of Cash Flows for the three years ended
December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . .62
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2002 , 2001, and 2000 . . . . . . . . .64
Notes to the Consolidated Financial Statements . . . . . . . . .66
CADIZ INC. FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------
Schedule I - Condensed Financial Information of Registrant for
the three years ended December 31, 2002 . . . . . . . . . . . .102
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2002 . . . . . . . . . . . . . . . . .105
SUN WORLD INTERNATIONAL, INC. FINANCIAL STATEMENTS
- --------------------------------------------------
Report of Independent Registered Public Accounting Firm . . . .106
Consolidated Statement of Operations for the three years ended
December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . .107
Consolidated Balance Sheet as of December 31, 2002 and 2001 . .108
Consolidated Statement of Cash Flows for the three years ended
December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . .109
Consolidated Statement of Stockholder's Equity for the three
years ended December 31, 2002 . . . . . . . . . . . . . . . . .110
Notes to the Consolidated Financial Statements . . . . . . . . 111
(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 58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2002 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 index appearing under Item 15(a)(2)
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 the standards of the Public Company Accounting
Oversight Board (United States). These standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, 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.
As discussed in Note 2 to the accompanying financial
statements, the Company incurred losses of approximately $22.2
million and $25.7 million in 2002 and 2001, respectively, had a
working capital deficit of $34.0 million at December 31, 2002, and
used cash for operating activities of $10.1 million and $4.3 million
in 2002 and 2001, respectively. In addition, the Company's
wholly-owned subsidiary, Sun World International, Inc., and
certain of its subsidiaries ("Sun World") filed voluntary
petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code on January 30, 2003. Management of Sun
World continues to operate as debtor-in-possession until a Plan
of Reorganization is approved by its creditors and confirmed by
the Bankruptcy Court. The Company's and Sun World's objectives
in regard to this matter are also discussed in Note 2. The
accompanying consolidated financial statements have been prepared
using accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The matters described above and
the uncertainties inherent in the bankruptcy process raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
September 18, 2004
Page 59
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
- --------------------------------------------------------------------
Revenues $ 114,250 $ 92,402 $ 107,745
Special litigation recovery - 7,929 -
--------- --------- ---------
Total revenues and special
litigation recovery 114,250 100,331 107,745
--------- --------- ---------
Costs and expenses:
Cost of sales 86,356 79,108 87,925
General and administrative 16,953 12,913 12,576
Non-recurring compensation expense - 5,537 -
Special litigation - - 424
Removal of underperforming crops 4,514 736 1,549
Depreciation and amortization 7,480 8,151 8,381
--------- --------- ---------
Total costs and expenses 115,303 106,445 110,855
--------- --------- ---------
Operating loss (1,053) (6,114) (3,110)
Interest expense, net 21,172 19,551 19,188
--------- --------- ---------
Net loss before income taxes (22,225) (25,665) (22,298)
Income tax expense - 57 160
--------- --------- ---------
Net loss (22,225) (25,722) (22,458)
Less: Preferred stock dividends 1,125 591 -
Imputed dividend on
preferred stock 984 441 -
--------- --------- ---------
Net loss applicable to common stock $ (24,334) $ (26,754) $ (22,458)
========= ========= =========
Basic and diluted net loss per share $ (16.76) $ (18.66) $ (15.88)
========= ========= =========
Weighted-average shares outstanding 1,452 1,434 1,414
========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 60
CADIZ INC.
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------
DECEMBER 31,
($ IN THOUSANDS) 2002 2001
- -----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,229 $ 1,458
Accounts receivable, net 6,732 6,326
Note receivable from officer 1,022 -
Inventories 13,513 13,027
Prepaid expenses and other 1,166 789
--------- ---------
Total current assets 25,662 21,600
Property, plant, equipment and water programs, net 154,928 165,297
Goodwill 3,813 3,813
Other assets 7,480 7,565
--------- ---------
$ 191,883 $ 198,275
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,394 $ 11,758
Accrued liabilities 6,816 5,680
Bank overdraft - 410
Revolving credit facility 4,400 -
Long-term debt, current portion 41,019 4,960
--------- ---------
Total current liabilities 59,629 22,808
Long-term debt 115,447 141,429
Deferred income taxes 5,447 5,447
Other liabilities 1,539 930
Contingencies (Note 16)
Series D redeemable convertible preferred stock -
$0.01 par value: 5,000 shares authorized; shares
issued and outstanding - 5,000 at December 31,
2002 and December 31, 2001 4,536 4,243
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, 2002 and December 31, 2001 6,406 5,715
Stockholders' equity:
Common stock - $0.01 par value; 70,000,000 shares
authorized; shares issued and outstanding
1,458,659 at December 31, 2002 and 1,442,833 at
December 31, 2001 15 14
Additional paid-in capital 156,151 152,751
Accumulated deficit (157,287) (135,062)
--------- ---------
Total stockholders' equity (1,121) 17,703
--------- ---------
$ 191,883 $ 198,275
========= =========
See accompanying notes to the consolidated financial statements.
Page 61
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2002 2001 2000
- --------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (22,225) $ (25,722) $ (22,458)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization 13,241 11,664 10,926
Loss (gain) on disposal of assets 346 (421) (96)
Removal of underperforming crops 4,514 736 1,549
Land received in litigation
recovery - (2,000) -
Shares of KADCO stock earned for
services (1,250) (1,250) (1,250)
Compensation charge for deferred
stock units 579 566 237
Non-recurring compensation expense - 5,537 -
Accrued interest on note
receivable from officer (22) - -
Other - - (71)
Changes in operating assets
and liabilities:
Decrease (increase) in accounts
receivable (405) 1,557 552
Decrease (increase) in
inventories (1,116) 1,830 2,740
(Increase) decrease in prepaid
expenses and other (378) (157) 286
Increase (decrease) in accounts
payable (4,365) 3,858 (133)
(Decrease) increase in accrued
liabilities 633 (551) (1,039)
Increase (decrease) increase in
other liabilities 315 51 (297)
--------- --------- ---------
Net cash used for operating
activities (10,133) (4,302) (9,054)
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and
equipment (638) (1,583) (1,252)
Additions to water programs (643) (1,359) (1,595)
Additions to developing crops (2,176) (3,124) (3,844)
Proceeds from disposal of property,
plant and equipment 2,463 452 2,956
Loan to officer (1,000) - -
Decrease (increase) in other assets (95) 154 1,043
--------- --------- ---------
Net cash used for investing
activities (2,089) (5,460) (2,692)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 764 1,583 1,032
Proceeds from issuance of
preferred stock - 7,500 5,000
Net proceeds from short-term
borrowings 14,400 - -
Proceeds from issuance of
long-term debt - - 5,231
Principal payments on long-term debt (761) (1,564) (686)
Bank overdraft (410) 410 -
--------- --------- ---------
Net cash provided by financing
activities 13,993 7,929 10,577
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 1,771 (1,833) (1,169)
Cash and cash equivalents, beginning
of period 1,458 3,291 4,460
--------- --------- ---------
Cash and cash equivalents, end of
period $ 3,229 $ 1,458 $ 3,291
========= ========= =========
Non-cash financing and investing
activities:
Page 62
Exchange of deferred stock units for
common stock $ 43 $ - $ -
Payment of preferred stock dividends
with common stock 908 245 -
See accompanying notes to the consolidated financial statements.
Page 63
CADIZ INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ IN THOUSANDS)
- --------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ----------- -------------
Balance as of
December 31, 1999 1,406,666 $ 14 $ 136,538 $ (86,882) $ 49,670
Exercise of stock
options and warrants 9,846 - 1,032 - 1,032
Issuance of warrants
to lenders - - 2,126 - 2,126
Interest paid with stock 4,475 - 832 - 832
Stock issued for services 6,000 - 1,471 - 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 1,426,987 14 143,049 (109,340) 33,723
Exercise of stock options
and stock awards 13,247 - 1,583 - 1,583
Issuance of warrants
to lenders - - 1,435 - 1,435
Payment of preferred
stock dividends with
common stock 999 - 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 1,600 - 320 - 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 1,442,833 14 152,751 (135,062) 17,703
Page 64
Exercise of stock options 5,741 1 763 - 764
Issuances of common
stock to lender 1,000 - 208 - 208
Beneficial conversion
feature for convertible
notes payable - - 884 - 884
Exchange of deferred
stock units for common
stock 3,482 - 43 - 43
Issuance of warrants
to lenders - - 2,703 - 2,703
Payment of preferred
stock dividends with
common stock 5,603 - 908 - 908
Preferred stock dividend - - (1,125) - (1,125)
Imputed dividend from
warrants and deferred
beneficial conversion
feature - - (984) - (984)
Net loss - - - (22,225) (22,225)
--------- ------ --------- ---------- ----------
Balance as of
December 31, 2002 1,458,659 $ 15 $ 156,151 $ (157,287) $ (1,121)
========= ====== ========= ========== ==========
See accompanying notes to the consolidated financial statements.
Page 65
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
==============================================
NOTE 1 - DESCRIPTION OF BUSINESS
- --------------------------------
The Company had 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. With Sun
World's filing of voluntary petitions for relief under Chapter 11
of the Bankruptcy code as further described below, the primary
business of the Company is to acquire and develop water
resources. The Company has created a complementary portfolio of
assets encompassing undeveloped land with high-quality
groundwater resources and/or storage potential, 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 could provide it with a competitive advantage as a supplier
of water.
The Company's primary asset consists of three blocks of
largely contiguous land in eastern San Bernardino County,
California. This land position totals approximately 45,000
acres. Virtually all of this land is underlain by high-quality
groundwater resources with demonstrated potential for various
applications, including water storage and supply programs, and
agricultural, municipal, recreational and industrial development.
Two of the three blocks of land are located in proximity to the
Colorado River Aqueduct, the major source of imported water for
southern California. The third block of land is located near the
Colorado River.
The value of this asset arises from a combination of
considerable population increases and limited water supplies
throughout southern California. In addition, most of the
population centers in southern California are not located where
significant precipitation occurs requiring the importation of
water from other parts of the state. The Company therefore
believes that a competitive advantage exists for those companies
that possess or can provide high quality, reliable and affordable
water to major population centers.
Therefore, notwithstanding certain actions taken in 2002 by
the Metropolitan Water District of Southern California
("Metropolitan"), as described below, the Company continues to
expect to be able to use its water resources to participate in a
broad variety of water storage and supply, transfer, exchange and
conservation programs with public agencies and other parties.
In 1997, the Company commenced discussions with Metropolitan
in order to develop principles and terms for a long-term
agreement for a joint venture water storage and supply program on
and under its desert properties, sometimes referred to as the
"Cadiz Program". Following extensive negotiations with the
Company, in April 2001 Metropolitan's Board of Directors approved
definitive economic terms and responsibilities, which were to
serve as the basis for a final agreement to be executed between
the Company and Metropolitan, subject to the then-ongoing
environmental review process.
The Cadiz Program would have provided Metropolitan with a
valuable increase in water supply during periods of drought or
other emergencies, as well as greater reliability and flexibility
in operation of its Colorado River Aqueduct. During wet years,
surplus water from the Colorado River would be stored in the
aquifer system underlying Cadiz' land. When needed,
Page 66
the stored water, together with indigenous groundwater, would be
returned to the Colorado River Aqueduct for distribution to
Metropolitan's member agencies throughout six southern California
counties.
On August 29, 2002, the U.S. Department of Interior approved
the Final Environmental Impact Statement for the Cadiz Program
and issued its Record of Decision, the final step in the federal
environmental review process for the Cadiz Program. The Record of
Decision amends the California Desert Conservation Area Plan for
an exception to the utility corridor element and offered to
Metropolitan a right-of-way grant necessary for the construction
and operation of the Cadiz Program.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Irrespective of Metropolitan's actions, Southern
California's need for water storage and supply programs has not
abated. The Company believes there are several different
scenarios to maximize the value of this water resource, all of
which are under current evaluation.
The Company believes there are a variety of scenarios under
which the value of the Cadiz Program may be realized.
Exploratory discussions have been initiated with representatives
of governmental organizations, water agencies, and private water
users with regard to their expressed interest in implementation
of the Cadiz Program. Several such discussions have been held
with water agencies that are independently seeking reliability of
supply. Other discussions have focused on the possibility of
exchanging water stored at the Cadiz Program with water
contractors in other regions in California. In addition, the
current drought within the Colorado River watershed has served as
an impetus to cooperative discussions between states, with the
goal that interstate exchanges and transfers may also become
feasible in the future.
Because of the Company's long-term relationship with
Metropolitan, the Company also intends to pursue discussions with
the agency in an effort to determine whether there are terms
acceptable to both parties under which the Cadiz Program could be
implemented. With the recent finalization of the Quantification
Settlement Agreement (QSA), an agreement between the Secretary of
the Interior, the State of California, Metropolitan and three
other southern California water agencies quantifying the amount
of water California's Colorado River users could expect on an
annual basis, Metropolitan's Colorado River supplies are now
specified and limited only by the variable volume of flow on the
river. To meet the growing needs of its service area,
Metropolitan must take advantage of all opportunities to store
available Colorado River water during periods of surplus. With
virtually all environmental permits and approvals in place for
the Cadiz Program, except for those dependent upon Metropolitan's
certification of the Environmental Impact Report (EIR), the
Company believes a partnership with Metropolitan could be renewed
in a timely manner if terms acceptable to both parties were to be
negotiated.
Page 67
Sun World is a large vertically integrated agricultural
company that owns more than 18,000 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.
On January 30, 2003, Sun World and certain of its
subsidiaries (Sun Desert Inc., Coachella Growers, and Sun
World/Rayo) filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. The filing was made in the United States
Bankruptcy Court, Central District of California, Riverside
Division. Sun World sought bankruptcy protection in order to
access a seasonal financing package of up to $40 million to
provide working capital through the 2003-2004 growing seasons.
Under the protection of Chapter 11, the Company is managing its
affairs and operating its business as a debtor-in-possession
while it develops its Plan of Reorganization. Estimated
liabilities subject to compromise at January 30, 2003 (date of
filing the Chapter 11) are summarized as follows (dollars in
thousands):
Pre-petition liabilities $ 7,502
Due to parent company 13,549
Unsecured notes payable 5,000
Secured notes payable 115,000
---------
Total $ 141,051
=========
As a debtor-in-possession, Sun World is authorized to
continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the
approval of the Bankruptcy Court. Under the Bankruptcy Code,
actions to collect pre-petition indebtedness, as well as most
other pending litigation, are stayed and other contractual
obligations against Sun World may not be enforced. In addition,
under the Bankruptcy Code, Sun World may assume or reject
executory contracts, including lease obligations. Parties
affected by these rejections may file claims with the Court in
accordance with the reorganization process. Absent an order of
the Court, substantially all pre-petition liabilities are subject
to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy
Court.
The four Sun World entities are the joint proponents of the
Debtors' Joint Plan of Reorganization Dated November 24, 2003
(the "Plan"). Under the Plan, which is subject to amendment and
modification, the reorganized Sun World will continue to operate
as a going concern on and after the Plan's effective date. The
Plan provides for the restructuring of Sun World's balance sheet
by providing for Sun World to issue equity interests in the
reorganized company to the holders of its First Mortgage Notes in
partial satisfaction of their mortgage note claims; for the
payment in full of convenience claims and trade claims; and for
Sun World to issue equity interests in the reorganized company to
entities holding certain other unsecured claims in full
satisfaction of those claims. Exit financing to be provided by
an exit lender under the Plan should meet the reorganized
company's need for seasonal financing following the
Page 68
effective date. The hearing to consider the adequacy of the
disclosure statement accompanying the Plan, most recently scheduled
for June 11, 2004, has been subject to several postponements and no
hearing date is currently scheduled.
In Sun World's filings with the Bankruptcy Court, Sun World has
reported that it believes that the Plan likely cannot be confirmed
absent the acceptance of the holders of the First Mortgage Notes, in
their capacity as secured creditors. Sun World has further reported
to the Bankruptcy Court that the holders of the First Mortgage Notes
have not reached a consensus with respect to certain corporate governance
issues relating to the reorganized company, and that they have been
unable to finalize a shareholder agreement term sheet. In the meantime,
Sun World has, with Bankruptcy Court approval, expanded the scope of its
engagement with Ernst & Young Corporate Finance LLC to include services
related to (i) a sale of substantially all of its assets pursuant to a
motion or a plan or reorganization, and (ii) obtaining an equity investor
and financing under a plan of reorganization and is actively pursuing the
sales/investment process. Sun World has chosen to delay the preparation
of an amended Plan and disclosure statement and the scheduling of a
disclosure statement hearing date pending the outcome of these most recent
developments. Sun World's exclusivity period (i.e. the period during which
only Sun World may file a plan of reorganization) currently expires on
December 31, 2004. The Company cannot predict at this time what changes,
if any, will be made to the Plan as a result of the foregoing or whether
or not the Plan, as amended, will be approved.
At January 30, 2003, due to the Company's loss of control
over the operations of Sun World, the financial statements are no
longer consolidated with those of Cadiz. Instead, Cadiz accounts
for its investment in Sun World on the cost basis of accounting. As a
result, the Company wrote off its net investments in Sun World of $195
thousand at the Chapter 11 filing date because it does not anticipate being
able to recover its investment.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
BASIS OF PRESENTATION
The financial statements of the Company have been prepared
using accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The Company incurred losses of
$22.2 million and $25.7 million in 2002 and 2001, respectively,
had a working capital deficit of $34.0 million at December 31,
2002, and used cash in operations of $10.1 million and $4.3
million in 2002 and 2001, respectively. In addition, Sun World
filed for reorganization under Chapter 11 of the Bankruptcy Code.
The financial statements of the Company do not purport to reflect
or to provide for all of the consequences of an ongoing Chapter
11 reorganization. Specifically, but not all-inclusive, the
financial statements of the Company do not present: (a) the
realizable value of assets on a liquidation basis or the
availability of such assets to satisfy liabilities, (b) the
amount which will ultimately be paid to settle liabilities and
contingencies which may be allowed in the Chapter 11
reorganization, or (c) the effect of changes which may be made
resulting from a Plan of Reorganization. The appropriateness of
using the going-concern basis is dependent upon, among other
things, confirmation of a Plan of Reorganization, future
profitable operations,
Page 69
the ability to comply with provisions of financing agreements and
the ability to generate sufficient cash from operations to meet
obligations.
Inherent in a successful Plan of Reorganization is a capital
structure that permits the Company to generate cash flows after
reorganization to meet its restructured obligations and fund the
current operations of the Company. There can be no assurance
that the Company will be able to attain these objectives or
reorganize successfully. Because of the ongoing nature of the
reorganization case, the financial statements contained herein
are subject to material uncertainties.
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.
ONE-FOR-25 REVERSE STOCK SPLIT
In December 2003, the Company effected a one-for-25 reverse
stock split. All share and per share information in the
accompanying financial statements have been retroactively
restated to reflect the effect of this stock split.
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
Sun World 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 $9.6
million (8.4%) in 2002, $7.9 million (8.5%) in 2001 and $12.8
million (11.9%) in 2000. Export sales accounted for
Page 70
approximately 12.1%, 8.4% and 9.9% of the Company's revenues for
the years ended December 31, 2002, 2001 and 2000, respectively.
Services and license revenues were less than 10% of total
revenues for each of the years in the three-year period ended
December 31, 2002.
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 $2,424,000
for the year ended December 31, 2002, $2,023,000 for the year
ended December 31, 2001, and $1,636,000 for the year ended
December 31, 2000.
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 333,000 shares, 92,000 shares, and
60,000 shares for the years ended December 31, 2002, 2001 and
2000, respectively.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock options and other stock-
based employee awards. Pro forma information regarding net loss
and loss per share, as calculated under the provisions of SFAS
123, are disclosed in the table below. The Company accounts for
equity securities issued to non-employees in accordance with
the provision of SFAS 123 and Emerging Issues Task Force 96-18.
Had compensation cost for these plans been determined using
fair value the Company's net loss and net loss per common share
would have increased to the following pro forma amounts (dollars
in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Net loss applicable to common stock:
As reported $ (24,334) $ (26,754) $ (22,458)
Expense under
SFAS 123 (648) (949) (992)
--------- --------- ---------
Pro forma $ (24,982) $ (27,703) $ (23,450)
========= ========= =========
Net loss per common share:
As reported $ (16.76) $ (18.66) $ (15.88)
Expense under
SFAS 123 (0.45) (0.66) (0.70)
--------- --------- ---------
Pro forma $ (17.21) $ (19.32) $ (16.58)
========= ========= =========
Page 71
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, from time to time, in 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, harvested crops, and materials and supplies
are stated at the lower of cost or market, on a first-in, first-
out (FIFO) basis. Growing and harvested crop inventory includes
direct costs and an allocation of indirect costs.
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 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. As a result of the actions taken by Metropolitan in
the fourth quarter of 2002 as described in Note 1, the Company,
with the assistance of an independent valuation firm, evaluated
the carrying value of its water program and determined that the
asset was not impaired and that the costs will be recovered
through implementation of the Cadiz Program either with other
government organizations, water agencies and private
Page 72
water users, or through implementation of the Cadiz Program on
terms acceptable to both Cadiz and Metropolitan.
During the year ended December 31, 2002, 2001 and 2000, the
Company incurred costs to remove certain underperforming crops,
primarily stonefruit, citrus, and wine grapes. The Company
recorded a charge of $4,514,000, $736,000 and $1,549,000 in 2002,
2001 and 2000, respectively, in connection with the removal costs
and write off of capitalized costs related to these crops which
is shown under the heading "Removal of underperforming crops" on
the Consolidated Statement of Operations.
GOODWILL AND 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 was being
amortized on a straight-line basis over thirty years.
Accumulated amortization was $3,193,000 at December 31, 2001. In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, ("SFAS No.
142") "Goodwill and Other Intangible Assets". Under SFAS No. 142
goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but will be subject to annual impairment
tests in accordance with the Statement. Upon adoption of SFAS
No. 142, effective at the beginning of fiscal 2002, the Company
performed a transitional fair value based impairment test and
determined that its goodwill was not impaired. In addition,
cessation of amortization of goodwill upon adoption of SFAS No.
142 did not have a material impact upon the Company's financial
position or results of operations. Goodwill is tested for
impairment annually in the first quarter, or earlier if events
occur which require an impairment analysis be performed. As a
result of the actions taken by Metropolitan in the fourth quarter
of 2002 as described in Note 1, the Company, with the assistance
of an independent valuation firm, performed an impairment test of
its goodwill and determined that its goodwill was not impaired.
Amortization expense on goodwill was $234,000 for each of
the years ended December 31, 2001 and 2000. As required by SFAS
No. 142, the results for the prior years have not been restated.
Had the Company applied the non-amortization provisions related
to goodwill under SFAS No. 142 for all periods presented, the
Company's net loss and net loss per share would have been as
follows (in thousands, except per share amounts):
2002 2001 2000
---- ---- ----
Reported net loss applicable to
common stock $ (24,334) $ (26,754) $ (22,458)
Goodwill amortization, net of tax - 234 234
--------- --------- ---------
Adjusted net loss $ (24,334) $ (26,520) $ (22,224)
========= ========= =========
Basic and diluted net loss per share:
As reported $ (16.76) $ (18.66) $ (15.88)
Goodwill amortization - 0.16 0.17
--------- --------- ---------
Adjusted basic and diluted net
loss per share $ (16.76) $ (18.50) $ (15.71)
========= ========= =========
Page 73
Capitalized loan fees represent costs incurred to obtain
debt financing. Such costs are amortized over the life of the
related loan. At December 31, 2002, the majority of capitalized
loan fees relate to the issuance of the First Mortgage Notes
described in Note 10.
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.
In October 1999, Sun World entered into a management
agreement with Kingdom Agricultural Development Company (KADCO)
to develop and manage up to 100,000 acres of agricultural land in
southern Egypt called the Tushka project. KADCO is controlled by
His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz
Alsuad. As compensation for project development and management,
Sun World earns a quarterly fee of $312,500 based upon meeting
developmental milestones to be paid through an equity interest in
KADCO. The management agreement expired on September 30, 2003.
Sun World will receive licensing revenues from KADCO in the
future based upon planting of proprietary varieties at the Tushka
project. KADCO is currently engaged in a private placement to
raise the required funds to develop the project. Sun World
anticipates receiving shares in KADCO for payment of its project
development and management fee in connection with the completion
of the private placement. The amount of shares to be received
will be the current per share price used for the private
placement divided into the total amount of management fee earned
which is shown under the heading, "Receivable from KADCO to be
paid in common shares" in Note 7.
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 more likely
than not that some portion or all of the deferred tax assets will
not be realized.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the years ended December 31,
2002, 2001 and 2000 was $15,262,000, $16,020,000 and $16,328,000,
respectively. Cash paid for income taxes during the years ended
December 31, 2002, 2001 and 2000 was $71,000, $57,000 and $226,000,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
Adoption of Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, SFAS No. 141, Accounting for Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets did not
have a material impact on the Company's financial position,
results of operations or cash flows for the year ended December
31, 2002.
Page 74
In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 145, which rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers, and FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements as well as amends FASB No. 13, to make various
technical various corrections. The Statement is effective for
financial statements issued after May 15, 2002. The adoption of
this standard did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit
or disposal activities and supersedes Emerging Issues Task Force
("EITF") Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
Under EITF Issue 94-3, a liability for an exit cost as defined in
EITF Issue 94-3 was recognized at the date of an entity s
commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair
value. The Company adopted the provisions of SFAS 146 effective
January 1, 2003 and such adoption did not have a material impact
on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45,
Guarantor s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of
Others ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it
has issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company
adopted the disclosure provisions of FIN 45 during the fourth
quarter of 2002 and the recognition provisions of FIN 45
effective January 1, 2003. Such adoption did not have a material
impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The amendments to
Statement 123 in paragraphs 2(a)-2(e) of this Statement shall be
effective for financial statements for fiscal years ending after
December 15, 2002. Earlier application of the transition
provisions in paragraphs 2(a)-2(d) is permitted for entities with
a fiscal year ending prior to December 15, 2002, provided that
financial statements for the 2002 fiscal year have not been
issued as of the date this Statement is issued. Early application
of the disclosure provisions in paragraph 2(e) is encouraged. The
amendment to Statement 123 in paragraph 2(f) of this Statement
and the amendment to Opinion 28 in paragraph 3 shall be effective
for financial reports containing condensed financial statements
for interim periods beginning after December
Page 75
15, 2002. The adoption of SFAS No. 148 did not have a material
impact on the Company's financial position or results of its
operations.
In January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). In
general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
Company adopted the provisions of FIN 46 effective February 1,
2003 and such adoption did not have an impact on its consolidated
financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect
to variable interest entities created before January 31, 2003,
which among other things, revised the implementation date to the
first year or interim period ending after March 15, 2004, with
the exception of Special Purpose Entities (SPE). The
consolidation requirements apply to all SPE's in the first year
or interim period ending after December 15, 2003. The Company's
adoption of the provisions of FIN 46R is not expected to have a
material impact on its consolidated financial statements since it
currently has no SPE's.
In April 2003, FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS 133. SFAS 149 is effective for
contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS
149 effective June 30, 2003 and such adoption did not have an
impact on its consolidated financial statements since the Company
has not entered into any derivative or hedging transactions.
In May 2003, FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:
* a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional
obligation that requires the issuer to redeem it by
transferring its assets at a specified or determinable date or
upon an event that is certain to occur;
* a financial instrument, other than an outstanding share,
that embodies an obligation to repurchase the issuer s equity
shares, or is indexed to such an obligation, and requires the
issuer to settle the obligation by transferring assets; and
* a financial instrument that embodies an unconditional
obligation that the issuer must settle by issuing a variable
number of its equity shares if the monetary value of the
Page 76
obligation is based solely or predominantly on (1) a fixed
monetary amount, (2) variations in something other than the
fair value of the issuer s equity shares, or (3) variations
inversely related to changes in the fair value of the issuer s
equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3
which deferred the effective dates for applying certain
provisions of SFAS 150 related to mandatorily redeemable
financial instruments of certain non-public entities and certain
mandatorily redeemable non-controlling interests for public and
non-public companies. For public entities, SFAS 150 is effective
for mandatorily redeemable financial instruments entered into or
modified after May 31, 2003 and is effective for all other
financial instruments as of the first interim period beginning
after June 15, 2003. For mandatorily redeemable non-controlling
interests that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS 150, but
would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 150 are
deferred indefinitely. The measurement provisions of SFAS 150 are
also deferred indefinitely for other mandatorily redeemable non-
controlling interests that were issued before November 4, 2003.
For those instruments, the measurement guidance for redeemable
shares and non-controlling interests in other literature shall
apply during the deferral period. The Company adopted the
provisions of SFAS 150 effective June 30, 2003, and such adoption
did not have an impact on its consolidated financial statements.
NOTE 3 - NOTE RECEIVABLE FROM OFFICER
- -------------------------------------
On July 5, 2002, the chief executive officer ("CEO") of the
Company issued a promissory note to the Company for a loan of up
to $1,000,000 to be made by the Company to the CEO. Under the
terms of the promissory note, the principal and unpaid interest,
at 6% per annum, was due and payable on July 5, 2003. The note
was collateralized by a pledge of shares of common stock,
restricted stock and deferred stock units so that the aggregate
fair market value of the pledged collateral was equal to or
greater than 133% of the outstanding principal and accrued
interest due on the note.
On July 5, 2003, the Company and CEO entered into an
"Agreement Regarding Satisfaction of Note Obligation" (the
"Agreement"). Under the terms of the Agreement, the Company
determined that it was obligated to pay the CEO effective
February 1, 2003, $800,000 as a termination payment under a
previously existing employment agreement. This overall
settlement with Mr. Brackpool was made effective July 5, 2003, by
way of a corresponding reduction in Mr. Brackpool's obligations
to Cadiz under the loan. This reduction, along with cash
payments by Mr. Brackpool in the amount of $181,013 and an
application of $50,000 of accrued but unpaid compensation owed by
Cadiz to Mr. Brackpool under his post February 1, 2003 employment
arrangements with Cadiz, resulted in the settlement in full by
Mr. Brackpool of his obligations under this loan.
The Agreement of Employment dated July 5, 2003, has an
initial term of February 1, 2003, through September 30, 2003;
provides for a fixed amount of monthly compensation; and allows
for a new employment agreement to be negotiated, if mutually
agreeable, upon expiration of the term of the agreement. Although
the initial term of the agreement has expired the CEO continues
to provide services to the Company under the terms of the
agreement.
Page 77
NOTE 4 - ACCOUNTS RECEIVABLE
- -----------------------------
Accounts receivable consist of the following (dollars in
thousands):
DECEMBER 31,
2002 2001
---- ----
Trade receivables $ 4,303 $ 4,294
Due from unaffiliated growers 24 448
Other 2,952 2,090
--------- ---------
7,279 6,832
Less allowance for doubtful accounts (547) (506)
--------- ---------
$ 6,732 $ 6,326
========= =========
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 5 - INVENTORIES
- --------------------
Inventories consist of the following (dollars in thousands):
DECEMBER 31,
2002 2001
---- ----
Growing crops $ 10,702 $ 10,174
Materials and supplies 2,525 2,621
Harvested product 286 232
--------- ---------
$ 13,513 $ 13,027
========= =========
NOTE 6 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
- ------------------------------------------------------
Property, plant, equipment and water programs consist of the
following (dollars in thousands):
DECEMBER 31,
2002 2001
---- ----
Land $ 66,372 $ 69,068
Permanent crops 61,994 66,300
Developing crops 11,624 12,997
Water programs 16,859 16,181
Buildings 22,620 22,544
Page 78
Machinery and equipment 20,818 20,588
--------- ---------
200,287 207,678
Less accumulated depreciation (45,359) (42,381)
--------- ---------
$ 154,928 $ 165,297
========= =========
Depreciation expense during the years ended December 31,
2002, 2001 and 2000 was $7,178,000, $7,699,000, and $7,971,000,
respectively.
NOTE 7 - OTHER ASSETS
- ---------------------
Other assets consist of the following (dollars in
thousands):
DECEMBER 31,
2002 2001
---- ----
Deferred loan costs, net $ 1,156 $ 2,400
Long-term receivables 327 342
Capitalized trademark development, net 1,934 2,000
Receivable from KADCO to be paid in
common shares 4,063 2,813
Other - 10
--------- ---------
$ 7,480 $ 7,565
========= =========
Amortization expense of deferred loan costs was $5,761,000,
$3,748,000 and $2,546,000 in 2002, 2001, and 2000, respectively, and
is included in interest expense in the statement of operations.
Amortization expense for capitalized trademark development was
$302,000, $219,000 and $176,000 in 2002, 2001, and 2000, respectively.
Future amortization of capitalized trademark development is as
follows; $352,000 - 2003; $285,000 - 2004; $285,000 - 2005;
$286,000 - 2006; $278,000 - 2007; $448,000 - 2008 and thereafter.
NOTE 8 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following (dollars in
thousands):
DECEMBER 31,
2002 2001
---- ----
Interest $ 2,934 $ 2,736
Payroll and benefits 2,731 1,907
Preferred stock dividends 561 345
Other 590 692
--------- ---------
$ 6,816 $ 5,680
========= =========
Page 79
NOTE 9 - REVOLVING CREDIT FACILITY
- ----------------------------------
In November 2002, Sun World was notified by its seasonal
revolving lender that it would not renew Sun World's revolving
Credit Facility for the 2003 growing season. The seasonal
revolver expired on November 30, 2002. Sun World sought and
obtained extensions from its lender through January 31, 2003.
During the extension period, Sun World sought to obtain seasonal
financing from several different lenders. Each of these lenders
wanted to have a first position on all of Sun World's assets in
order to lend outside of a Chapter 11 proceeding. This required
the holders of the First Mortgage Notes to modify their agreement
with Sun World. As outlined in Note 1, Sun World was unable to
procure the financing with the consent of all parties. On
January 30, 2003, Sun World and certain of its subsidiaries filed
a voluntary petition for Chapter 11. On January 31, 2003, the
Bankruptcy Court approved an interim $15 million dollar debtor-in-
possession ("DIP") financing facility. On March 3, 2003, the
Bankruptcy Court approved an additional $25 million with the same
lender for a final approved DIP financing facility of $40
million. The DIP financing expires on November 30, 2004, bears
interest at the greater of Prime plus 4% or 8.25% , and is secured
by substantially all of Sun World's assets. Borrowing
availability is determined based on the lesser of (1) eligible
percentages of inventory and accounts receivable plus a specified
amount starting at $15 million and reduced by $150,000 per month;
(2) certain multiples of trailing 12 months EBITDA as defined in
the credit agreement; or (3) eligible percentage of the current
value of all real property. Sun World is required to meet certain
financial covenants.
At December 31, 2002, $4.4 million was outstanding under Sun
World's Revolving Credit Facility that was subsequently paid off
with proceeds from the DIP financing on January 30, 2003. No
amount was outstanding under the Revolving Credit Facility at
December 31, 2001.
Page 80
NOTE 10 - LONG-TERM DEBT
- ------------------------
At December 31, 2002 and December 31, 2001, the carrying
amount of the Company's outstanding debt is summarized as follows
(dollars in thousands):
DECEMBER 31,
2002 2001
----- ----
Cadiz obligations:
Senior term bank loan, interest payable
quarterly, variable interest rate based
upon LIBOR plus 3% (4.35% at December 31,
2002 and 5.6% at December 31, 2001), due
January 31, 2003 $ 10,095 $ 10,095
$25 million revolving line of credit,
interest payable quarterly, variable
interest rate based upon LIBOR plus 3%
(4.35% at December 31, 2002 and 5.6% at
December 31, 2001), due January 31, 2003
(see Cadiz obligations below) 25,000 15,000
Debt discount (326) (363)
--------- ---------
34,769 24,732
--------- ---------
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 5% - 6.35% at December 31,
2002 and LIBOR plus 3% - 5.60% at
December 31, 2001) 5,000 5,000
Note payable to bank, quarterly principal
installments of $72 plus interest payable
monthly, due December 31, 2003, interest at
prime (4.25% at December 31, 2002 and 4.75%
at December 31, 2001) 856 1,142
Note payable to insurance company, quarterly
installments of $120 (including interest),
due January 1, 2005, interest at 7.75% 654 945
Note payable to finance company, monthly
installments of $18 (including interest),
due July 1, 2002, interest at 7.50% - 103
Other 187 269
Debt discount - (802)
--------- ---------
121,697 121,657
--------- ---------
156,466 146,389
Less current portion (41,019) (4,960)
--------- ---------
$ 115,447 $ 141,429
========= =========
Page 81
Pursuant to the Company's various loan agreements, annual
maturities of long-term debt outstanding, excluding $326,000
representing the unamortized portion of warrants issued with debt,
on December 31, 2002 are as follows: 2003 - $41,345,000; 2004 -
$115,419,000; 2005 - $23,000; and 2006 - $5,000. As a result
of Sun World's Chapter 11 filing on January 30, 2003, all
required principal payments on Sun World's long term debt are
suspended.
CADIZ OBLIGATIONS
The senior term bank loan of $10,095,000 is secured by
substantially all of the Company's non-Sun World related
property. In February 2002, the Company completed an extension
of the maturity date of the obligation to January 31, 2003. The
interest rate is LIBOR plus 300 basis points, payable quarterly.
The revolving credit facility was fully drawn at December
31, 2002 and 2001, 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 extension of 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
Company's revolving credit facility was increased from $15
million to $25 million, with $10 million of the $25 million
revolver initially convertible into 50,000 shares 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.
On February 13, 2003, the lender of both the Company's
senior term loan and $25 million revolving credit facility
delivered to the Company a Notice of Default and Demand for
Payment.
On December 15, 2003, the Company entered into an amendment
of its senior term loan and revolving credit facility to extend
the maturity date of each through March 31, 2005 and can obtain
further extensions through September 30, 2006, by maintaining
sufficient balances, among other conditions, in a cash collateral
account with the lender. The maximum aggregate amount to be
outstanding under the amended credit facilities is $35 million.
The amendment of these credit facilities did not constitute a
troubled debt restructuring and was accounted for as a debt
modification under EITF 96-19. In connection with this
amendment, the Company;
* paid the lender $2,425,034 representing; (i) accrued
interest through September 30, 2003 of $1,412,457 at the non
default interest rate; (ii) accrued interest through September
30, 2003 of $612,577 at the default rate of interest; and
(iii) $400,000 in fees;
* issued to the lender 100,000 shares of series F Preferred
stock initially convertible into 1,728,955 shares of common
stock; and
Page 82
* deposited $2,142,280 in a cash collateral account with the
lender representing prepaid interest through March 31, 2005.
Interest under the amended credit facilities is payable
semiannually at the Company's option in either cash at 8% per
annum, or in cash and paid in kind ("PIK"), at 4% per annum for
the cash portion and 8% per annum for the PIK portion. The PIK
portion will be added to the outstanding principal balance.
The terms of the amended loan facilities also require
certain mandatory prepayments from the cash proceeds of future
equity issuances by the Company.
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 Sun World's revolving credit facility.
With the entering into the DIP Facility as described in Note 9,
the note holders now have a second position on substantially all
of Sun World's assets for so long as the DIP Facility is
outstanding. The First Mortgage Notes mature April 15, 2004, but
are redeemable at the option of Sun World, in whole or in part,
at any time prior to the maturity date. 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. As a result
of Sun World's Chapter 11 filing discussed in Note 2, principal
payment on the First Mortgage Notes was suspended until a final
plan of reorganization is approved.
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 Cadiz. Cadiz also
pledged all of the stock of Sun World as collateral for its
guarantee. 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 direct
and indirect subsidiaries of the Company other than
inconsequential subsidiaries. Additionally, management believes
that the direct and indirect non-guarantor subsidiaries of Cadiz
and Sun World Subsidiary Guarantors 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 2,000 shares of Cadiz' common stock
as well as certain warrants to purchase shares of Cadiz common
stock were issued. The fair value of the stock and the warrants
were recorded as a debt discount and were fully amortized over
the life of the loan through December 31, 2002. At December 31,
2002, Sun World did not repay the loan and thus, Sun World was in
default. With the default, pursuant to the terms of the
agreement, the interest rate was increased by 2%. In connection
with Sun World's Chapter 11 filing, all principal and interest on
this obligation have been suspended.
Page 83
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Condensed consolidating financial information as of December
31, 2002 and 2001 and for the three years ended December 31, 2002
for the Company is as follows (in thousands):
CONSOLIDATING STATEMENT
OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 2002
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Revenues $ 2,067 $ 114,234 $ (2,051) $ 114,250
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 103 86,880 (627) 86,356
General and administrative 7,500 10,953 (1,500) 16,953
Removal of underperforming
crops 1,017 3,497 - 4,514
Depreciation and
amortization 1,022 6,458 - 7,480
--------- --------- --------- ---------
Total costs and expenses 9,642 107,788 (2,127) 115,303
--------- --------- --------- ---------
Operating profit (loss) (7,575) 6,446 76 (1,053)
Loss from subsidiary (9,540) - 9,540 -
Interest expense, net 5,108 16,299 (235) 21,172
--------- --------- --------- ---------
Loss before income taxes (22,223) (9,853) 9,851 (22,225)
Income tax expense 2 (2) - -
--------- --------- --------- ---------
Net loss (22,225) (9,851) 9,851 (22,225)
Less: Preferred stock
dividends (1,125) - - (1,125)
Imputed dividend on
preferred stock (984) - - (984)
--------- --------- --------- ---------
Net loss applicable to
common stock $ (24,334) $ (9,851) $ 9,851 $ (24,334)
========= ========= ========= =========
Page 84
CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 2002
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 189 $ 3,040 $ - $ 3,229
Accounts receivable, net - 6,732 - 6,732
Net investment in and
advances and loans to
affiliate 1,739 - (1,739) -
Note receivable from
officer 1,022 - - 1,022
Inventories - 13,638 (125) 13,513
Prepaid expenses and other 323 843 - 1,166
--------- --------- --------- ---------
Total current assets 3,273 24,253 (1,864) 25,662
Property, plant, equipment
and water programs, net 40,076 114,852 - 154,928
Other assets 3,981 7,312 - 11,293
--------- --------- --------- ---------
$ 47,330 $ 146,417 $ (1,864) $ 191,883
========= ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,142 $ 6,252 $ - $ 7,394
Accrued liabilities 987 5,829 - 6,816
Due to parent company - 13,546 (13,546) -
Revolving credit facility - 4,400 - 4,400
Long-term debt, current
portion 34,769 6,250 - 41,019
--------- --------- --------- ---------
Total current liabilities 36,898 36,277 (13,546) 59,629
Long-term debt - 115,447 - 115,447
Deferred income taxes - 5,447 - 5,447
Other liabilities 611 928 - 1,539
Series D redeemable preferred
stock 4,536 - - 4,536
Series E-1 and E-2 redeemable
preferred stock 6,406 - - 6,406
Stockholders' equity:
Common stock 15 - - 15
Additional paid-in capital 156,151 38,508 (38,508) 156,151
Accumulated deficit (157,287) (50,190) 50,190 (157,287)
--------- --------- --------- ---------
Total stockholders' equity (1,121) (11,682) 11,682 (1,121)
--------- --------- --------- ---------
$ 47,330 $ 146,417 $ (1,864) $ 191,883
========= ========= ========= =========
Page 85
CONSOLIDATING STATEMENT OF
CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, 2002
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Net cash provided by (used
for) operating activities $ (7,910) $ (4,205) $ 1,982 $ (10,133)
--------- --------- --------- ---------
Cash flows from investing activities:
Additions to property,
plant and equipment (138) (500) - (638)
Additions to water programs (643) - - (643)
Additions to developing
crops (24) (2,152) - (2,176)
Proceeds from disposal of
property, plant and
equipment 3 2,460 - 2,463
Loan to officer (1,000) - - (1,000)
(Increase) decrease in other
assets 124 (219) - (95)
--------- --------- --------- ---------
Net cash (used for) provided
by investing activities (1,678) (411) - (2,089)
--------- --------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance
of stock 764 - - 764
Net proceeds from
short-term borrowings 10,000 4,400 - 14,400
Borrowings from
intercompany revolver (977) 2,959 (1,982) -
Principal payments on
long-term debt - (761) - (761)
Bank overdraft (410) - - (410)
--------- --------- --------- ---------
Net cash (used for) provided
by financing activities 9,377 6,598 (1,982) 13,993
--------- --------- --------- ---------
Net (decrease) increase in
cash and cash equivalents (211) 1,982 - 1,771
Cash and cash equivalents,
beginning of period 400 1,058 - 1,458
--------- --------- --------- ---------
Cash and cash equivalents,
end of period $ 189 $ 3,040 $ - $ 3,229
========= ========= ========= =========
Page 86
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)
Loss from subsidiary (22,342) - 22,342 -
Interest expense, net 3,718 15,598 235 19,551
--------- --------- --------- ---------
Loss before income taxes (25,722) (22,050) 22,107 (25,665)
Income tax expense - 57 - 57
--------- --------- --------- ---------
Net loss (25,722) (22,107) 22,107 (25,722)
Less: Preferred stock
dividends 591 - - 591
Imputed dividend on
preferred stock 441 - - 441
--------- --------- --------- ---------
Net loss applicable to
common stock $ (26,754) $ (22,107) $ 22,107 $ (26,754)
========= ========= ========= =========
Page 87
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 - 6,326 - 6,326
Net investment in and
advances and loans to
affiliate 8,986 - (8,986) -
Inventories - 13,229 (202) 13,027
Prepaid expenses and other 211 578 - 789
--------- --------- --------- ---------
Total current assets 9,597 21,191 (9,188) 21,600
Property, plant, equipment
and water programs, net 41,266 124,031 - 165,297
Other assets 4,432 6,946 - 11,378
--------- --------- --------- ---------
$ 55,295 $ 152,168 $ (9,188) $ 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 parent company - 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
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 14 - - 14
Additional paid-in capital 152,751 38,273 (38,273) 152,751
Accumulated deficit (135,062) (40,339) 40,339 (135,062)
--------- --------- --------- ---------
Total stockholders' equity 17,703 (2,066) 2,066 17,703
--------- --------- --------- ---------
$ 55,295 $ 152,168 $ (9,188) $ 198,275
========= ========= ========= =========
Page 88
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 89
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)
Loss from subsidiary (14,216) - 14,216 -
Interest expense, net 4,085 15,103 - 19,188
--------- --------- --------- ---------
Loss before income taxes (22,458) (14,056) 14,216 (22,298)
Income tax expense - 160 - 160
--------- --------- --------- ---------
Net loss $ (22,458) $ (14,216) $ 14,216 $ (22,458)
========= ========= ========= =========
Page 90
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
Increase in other assets (162) 1,205 - 1,043
--------- --------- --------- ---------
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
========= ========= ========= =========
Page 91
NOTE 11 - INCOME TAXES
- -----------------------
The tax provision in 2001 and 2000 consists primarily of
foreign tax withholdings and state taxes in 2000.
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, 2002 and
2001 are as follows (in thousands):
DECEMBER 31,
2002 2001
---- ----
Deferred tax liabilities:
Fixed asset basis difference $ 8,792 $ 7,987
Other 48 48
--------- ---------
Total deferred tax liabilities 8,840 8,035
--------- ---------
Deferred tax assets:
Net operating losses 56,840 49,437
Fixed asset basis difference 6,849 6,300
State taxes 1,855 1,855
Reserves and accruals 1,508 3,466
Other 1,359 935
--------- ---------
Total deferred tax assets 68,411 61,993
Valuation allowance for deferred
tax assets (65,018) (59,405)
--------- ---------
Net deferred tax liability $ 5,447 $ 5,447
========= =========
The valuation allowance increased by $5,613,000, $11,756,000
and $7,894,000 in 2002, 2001 and 2000, respectively.
As of December 31, 2002, the Company had net operating loss
(NOL) carryforwards of approximately $157.3 million for federal
income tax purposes. Such carryforwards expire in varying
amounts through the year 2022. At December 31, 2002, the Company
has state NOL carryforwards of $37.9 million. These NOL
carryforwards expire in varying amounts through the year 2013.
Due to the fact that it is more likely than not that the
Company will not realize its net deferred tax assets, it has
recorded a full valuation allowance against these assets.
Accordingly, no deferred tax asset has been recorded in the
accompanying balance sheet.
Section 382 of the Internal Revenue Code imposes an annual
limitation on the utilization of net operating loss carryforwards
based on a statutory rate of return (usually the "applicable
federal funds rate", as defined in the Internal Revenue Code) and
the value of the corporation at the time of a "change of
ownership" as defined by Section 382. Due to past equity
issuances and equity issuances in 2003, and due to the Chapter 11
filing by Sun World, the Company's
Page 92
ability to utilize net operating loss carryforwards may be limited.
A reconciliation of the income tax benefit to the statutory
federal income tax rate is as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Expected federal income tax
benefit at 34% $ (7,557) $ (8,726) $ (7,581)
Loss with no tax benefit provided 7,440 8,541 7,380
Federal AMT refund (73) - -
State income tax 5 6 147
Foreign withholding taxes 68 51 79
Amortization - 79 79
Other non-deductible expenses 117 106 56
--------- --------- ---------
Income tax expense $ - $ 57 $ 160
========= ========= =========
NOTE 12 - 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. The Company
contributed $322,000, $300,000 and $199,000 to the plans for fiscal
years 2002, 2001 and 2000, respectively.
NOTE 13 - 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 were 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 was initially
convertible into 25,000 shares of the Company's common stock any
time prior to July 2004 at the election of the holder. The
Company also had the right to convert the Series D Preferred
Stock, but only when the closing price of the Company's common
stock had exceeded $300 per share for 30 consecutive trading
days. Holders were 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 would be
redeemable in July 2004 if still outstanding.
Page 93
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.
SERIES E-1 AND E-2 CONVERTIBLE PREFERRED STOCK
During the fourth quarter of 2001, the Company issued 3,750
shares of Series E-1 Convertible Preferred Stock and 3,750 shares
of Series E-2 Convertible Preferred Stock (the "Series E
Preferred Stock") for an aggregate of $7,500,000. The holders of
the Series E 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
was convertible into 40,000 shares of the Company's common stock
any time prior to July 2004 at the election of the holder. The
Company also had the right to convert the Series E Preferred
Stock, but only when the closing price of the Company's common
stock had exceeded $262 per share for 30 consecutive trading
days. Holders were 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 would be
redeemable in July 2004 if still outstanding.
The Company issued 1,600 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-1 and Series E-2 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.
On October 15, 2002, the Company and preferred stockholders
agreed to amend the Certificates of Designations of Series D,
Series E-1 and Series E-2 Preferred Stock to (i) reduce the
conversion price from $200 per share for the Series D Preferred
Stock and from $187.50 per share for Series E Preferred Stock to
$131.25 per share for both Series D and Series E Preferred Stock;
and (ii) extend the redemption date to July 16, 2006. With the
assistance of an independent valuation firm, the Company
determined that the additional value associated with the
reduction in the conversion price was offset by the extension of
the redemption date and that there was no loss or gain
attributable to the amendment to the Certificates of
Designations.
On October 20, 2003, the Company and the referred
stockholders entered into an agreement to (i) exchange all
outstanding shares of Series D Preferred Stock, plus accrued and
unpaid dividends, for an aggregate of 320,000 shares of common
stock; and (ii) exchange all outstanding shares of series E
Preferred Stock, plus accrued and unpaid dividends, for an
Page 94
aggregate of 80,000 shares of common stock. In connection with
this conversion, the Company recorded a charge of $42,000 against
paid in capital as an inducement to convert. At this time the
Company also recorded the unamortized beneficial conversion
feature of the Series D and Series E Preferred Stock as a charge
against paid in capital.
COMMON STOCK
Subsequent to December 31, 2002, the Company issued common
stock as follows:
* In March 2003, 8,000 shares of common stock were issued in
connection with the issuance of $200,000 of convertible notes
payable;
* In June 2003, the Company sold 672,000 shares of common
stock at $2.50 per share;
* In June, July, and October 2003, the Company issued 128,000
shares of common stock for services at $2.50 per share;
* In October 2003, the Company issued 400,000 shares of
common stock for all outstanding shares of Series D and E
Preferred Stock;
* In December 2003, the Company sold 3,440,000 shares of
common stock for $2.50 per share;
* In December 2003, the Company issued 94,000 shares of
common stock upon exercise of outstanding warrants;
* In December 2003, the Company issued 84,699 shares of
common stock on conversion of $212,000 in convertible notes
payable and accrued interest;
* In December 2003, the Company issued 160,000 shares of
common stock as part of a settlement agreement with a
potential claimant; and
* In December 2003, the Company implemented a one for twenty-
five reverse split of our common stock, and
* In February 2004, the Company issued 140,000 shares of
common stock for settlement of a $200,000 executive bonus and
a $150,000 consulting fee.
NOTE 14 - 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
Page 95
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 160,000 shares. At
December 31, 2002, the Company has approximately 27,858 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.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, ("SFAS 123"),
"Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock-based
compensation other than for non-employees.
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 4.08% for 2002, 4.54%
for 2001, and 4.94% for 2000; expected volatility of 57.2% for
2002, 40.0% for 2001, and 66.7% for 2000; expected life of three
years for 2002, 2001 and 2000; 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
AMOUNT EXERCISE PRICE
------ --------------
Outstanding at December 31, 1999 124,510 $ 155.25
Granted 5,300 $ 244.00
Expired or canceled (780) $ 214.00
Exercised (8,606) $ 120.00
--------- --------
Outstanding at December 31, 2000 120,424 $ 161.25
Granted 10,650 $ 240.50
Expired or canceled (43,840) $ 119.00
Exercised (13,204) $ 119.50
--------- --------
Outstanding at December 31, 2001 74,030 $ 201.25
Granted 3,700 $ 183.75
Expired or canceled (10,280) $ 189.25
Exercised (5,740) $ 132.75
--------- --------
Outstanding at December 31, 2002 61,710(a) $ 207.43
========= ========
Options exercisable at December 31, 2000 101,964 $ 149.50
========= ========
Page 96
Options exercisable at December 31, 2001 57,870 $ 196.50
========= ========
Options exercisable at December 31, 2002 54,690 $ 238.25
========= ========
Weighted-average years of remaining
contractual life of options outstanding
at December 31, 2002 1.89
=========
(a) Exercise prices vary from $102.50 to $293.75 and
expiration dates vary from March 2003 to October 2008.
The weighted-average fair value of options granted during
the years 2002, 2001 and 2000 were $83.22, $86.00, and $134.25,
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, 2002, 2001 and 2000, the Company issued warrants to
purchase 64,000, 8,600, and 14,000 shares with weighted-average
exercise prices of $50.75, $189.75, and $161.50, respectively.
During the year ended December 31, 2000, warrants with a weighted-
average exercise price of $125.75 were exercised in a cashless
transaction resulting in the issuance of 1,240 shares of common
stock. No warrants expired or were canceled during any of the
three periods discussed. During 2002, in connection with the
loan amendments for the Cadiz obligations described in Note 10,
the Company repriced certain warrants previously issued resulting
in a reduction in the weighted-average exercise price. At
December 31, 2002, there were 113,600 warrants outstanding with a
weighted-average exercise price of $58.50 per share, which expire
through 2006.
In connection with the Company's default in February 2003 on
its senior term loan and $25 million revolving credit facility,
as described in Note 10; (i) warrants held by the lender to
purchase 40,000 shares of the Company's common stock vested at an
exercise price of $0.25 per share; and (ii) the exercise price on
warrants held by the lender to purchase 57,000 shares of the
Company's common stock were automatically reset to $0.25 per share.
As a result, the weighted average exercise price of the
113,600 warrants outstanding at December 31, 2002 decreased to
$28.25 per share.
In December 2003, warrants to purchase 94,000 shares of
common stock were exercised for $23,500 in total cash proceeds.
At June 30, 2004, warrants to purchase 8,600 shares of common
stock of the Company at a weighted average exercise price of $190
per share remained outstanding.
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, 2002, the Company had outstanding
28,917 deferred stock units granted under the Stock Award Plan of
Page 97
which 9,680 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 19,237 deferred stock
units were granted pursuant to the exchange noted under Non-
Recurring Compensation Expense below. During the year ended
December 31, 2002, 3,482 stock units were exchanged for shares of
the Company's common stock. The Company charged $579,000,
$566,000 and $237,000 to expense during the years ended December
31, 2002, 2001 and 2000, respectively, in connection with the
Stock Award Plan.
NON-RECURRING COMPENSATION EXPENSE
In 2001, the Company issued 22,567 deferred stock units to
certain senior managers of Cadiz and Sun World. These deferred
stock units were issued in exchange for the cancellation of
42,200 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 charge of $5,537,000 in 2001 and no cash was expended
in connection with the issuance of the deferred stock units.
NOTE 15 - SEGMENT INFORMATION
- -----------------------------
The Company has agricultural operations through
its wholly-owned subsidiary, Sun World, and is developing the
water resource segment of its business, which is not yet
significant to the operations of the Company. With Sun World's
filing of voluntary petitions for relief under Chapter 11 of the
Bankruptcy code as further described in Note 1, the primary
business of the Company is to acquire and develop water
resources.
The Company's has two reportable segments; water
resources (Cadiz) and agriculture (Sun World). The accounting
policies of the segments are the same as those described in the
summary of significant accounting polices. The Company's
operations are reported in the following businesses segments:
Financial information by reportable business segment is
reported in the following tables:
2002 2001 2000
---- ---- ----
($ in thousands)
External sales:
Water Resources $ 16 $ 3 $ 18
Agricultural 114,234 92,399 107,727
--------- --------- ---------
Consolidated $ 114,250 $ 92,402 $ 107,745
========= ========= =========
Inter-segment sales:
Water Resources $ 2,051 $ 1,900 $ 1,902
Page 98
Agricultural (2,051) (1,900) (1,902)
--------- --------- ---------
Consolidated $ - $ - $ -
========= ========= =========
Total sales:
Water Resources $ 2,067 $ 1,903 $ 1,920
Agricultural 114,234 92,399 107,727
Other (2,051) (1,900) (1,902)
--------- --------- ---------
Consolidated $ 114,250 $ 92,402 $ 107,745
========= ========= =========
Profit (loss) before income taxes:
Water Resources $ (7,575) $ 338 $ (4,157)
Agricultural 6,446 (6,452) 1,047
Other 76 - -
Interest expense (21,172) (19,551) (19,188)
--------- --------- ---------
Consolidated $ (22,225) $ (25,665) $ (22,298)
========= ========= =========
Assets:
Water Resources $ 45,591 $ 46,309
Agricultural 146,417 152,168
Other (125) (202)
--------- ---------
Consolidated $ 191,883 $ 198,275
========= =========
Capital expenditures:
Water Resources $ 805 $ 1,556 $ 2,047
Agricultural 2,652 4,510 4,644
--------- --------- ---------
Consolidated $ 3,457 $ 6,066 $ 6,691
========= ========= =========
Depreciation and amortization:
Water Resources $ 1,022 $ 1,137 $ 1,174
Agricultural 6,458 7,014 7,207
--------- --------- ---------
Consolidated $ 7,480 $ 8,151 $ 8,381
========= ========= =========
Interest expense, net:
Water Resources $ 5,108 $ 3,718 $ 4,085
Agricultural 16,299 15,598 15,103
Other (235) 235 -
--------- --------- ---------
Consolidated $ 21,172 $ 19,551 $ 19,188
========= ========= =========
Page 99
NOTE 16 - 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 100
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------
(In thousands except per share data)
QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
---- ---- ---- ----
Revenues $ 7,750 $ 23,063 $ 64,280 $ 19,157
Gross profit (loss) 1,497 6,215 16,820 3,362
Net loss applicable to
common stock (7,800) (5,962) (950) (9,622)
Net loss per common
share $ (5.40) $ (4.11) $ (.65) $ (6.60)
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 $ (5.02) $ (3.51) $ (3.67) $ (6.50)
Page 101
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------
DECEMBER 31,
BALANCE SHEET ($ IN THOUSANDS): 2002 2001
- --------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 189 $ 400
Net investment in and advances to subsidiary 1,739 8,986
Note receivable from officer 1,022 -
Prepaid expenses and other 323 211
--------- ---------
Total current assets 3,273 9,597
Property, plant, equipment and water
programs, net 40,076 41,266
Goodwill 3,813 3,813
Other assets 168 619
--------- ---------
$ 47,330 $ 55,295
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,142 $ 1,330
Accrued liabilities 987 791
Bank overdraft - 410
Long-term debt, current portion 34,769 -
--------- ---------
Total current liabilities 36,898 2,531
Long-term debt - 24,732
Other liabilities 611 371
Contingencies
Series D redeemable convertible preferred
stock - $0.01 par value:
5,000 shares authorized; shares issued and
outstanding - 5,000 at December 31, 2002
and December 31, 2001 4,536 4,243
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, 2002
and none at December 31, 2001 6,406 5,715
Stockholders' equity:
Common stock - $0.01 par value; 70,000,000
shares authorized; shares issued and
outstanding 1,458,659 at December 31, 2002
and 1,442,833 at December 31, 2001 15 14
Additional paid-in capital 156,151 152,751
Accumulated deficit (157,287) (135,062)
--------- ---------
Total stockholders' equity (1,121) 17,703
--------- ---------
$ 47,330 $ 55,295
========= =========
Page 102
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- -----------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2002 2001 2000
- -----------------------------------------------------------------------
Revenues $ 2,067 $ 1,903 $ 1,920
Special litigation recovery - 7,929 -
--------- --------- ---------
Total revenues and special
litigation recovery 2,067 9,832 1,920
--------- --------- ---------
Costs and expenses:
Cost of sales 103 118 124
General and administrative 7,500 5,433 4,355
Special litigation - - 424
Non-recurring compensation expense - 2,584 -
Removal of underperforming crops 1,017 222 -
Depreciation and amortization 1,022 1,137 1,174
--------- --------- ---------
Total costs and expenses 9,642 9,494 6,077
--------- --------- ---------
Operating profit (loss) (7,575) 338 (4,157)
Loss from subsidiaries (9,540) (22,342) (14,216)
Interest expense, net 5,108 3,718 4,085
--------- --------- ---------
Net loss before income taxes (22,223) (25,722) (22,458)
Income taxes 2 - -
--------- --------- ---------
Net loss (22,225) (25,722) (22,458)
Less: Preferred stock dividends 1,125 591 -
Imputed dividend on
preferred stock 984 441 -
--------- --------- ---------
Net loss applicable to common stock $ (24,334) $ (26,754) $ (22,458)
========= ========= =========
Page 103
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- -----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------
STATEMENT OF CASH FLOWS ($ IN THOUSANDS) 2002 2001 2000
- -----------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (22,225) $ (25,722) $ (22,458)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Depreciation and amortization 5,181 3,521 2,956
Loss from subsidiary 9,540 22,342 14,216
(Gain) loss on disposal of assets (3) 5 (1)
Removal of underperforming crops 1,017 222 -
Land received from litigation
settlement - (2,000) -
Compensation charge for deferred
stock units 272 271 100
Non-recurring compensation expense - 2,584 -
Accrued interest on note receivable
from officer (22) - -
Changes in operating assets and
liabilities:
Increase in due to subsidiary (1,360) - -
Decrease (increase) in prepaid
expenses and other (112) 8 183
Increase in accounts payable (189) 121 504
Increase (decrease) in accrued
liabilities (9) 97 (356)
(Decrease) increase in other
liabilities - (7) 7
--------- --------- ---------
Net cash provided by (used for)
operating activities (7,910) 1,442 (4,849)
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and
equipment (138) (88) (293)
Additions to developing crops (24) (109) (159)
Additions to water programs (643) (1,359) (1,595)
Proceeds from disposal of property,
plant and equipment 3 2 1
Loan to officer (1,000) - -
Increase in other assets 124 (575) (162)
--------- --------- ---------
Net cash used for investing activities (1,678) (2,129) (2,208)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 764 1,583 1,032
Net proceeds from short-term borrowings 10,000 - -
Proceeds from issuance of preferred
stock - 7,500 5,000
Intercompany revolver with subsidiary (977) (11,254) -
Principal payments on long-term debt - (251) (21)
Bank overdraft (410) 410 -
--------- --------- ---------
Net cash (used for) provided by
financing activities 9,377 (2,012) 6,011
--------- --------- ---------
Net decrease in cash and cash
equivalents (211) (2,699) (1,046)
Cash and cash equivalents,
beginning of period 400 3,099 4,145
--------- --------- ---------
Cash and cash equivalents,
end of period $ 189 $ 400 $ 3,099
========= ========= =========
Page 104
CADIZ INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ IN THOUSANDS)
- --------------------------------------------------------------------------
BALANCE AT ADDITIONS CHARGED TO BALANCE
YEAR ENDED BEGINNING COSTS AND INCOME TAX AT END
DECEMBER 31, 2002 OF PERIOD EXPENSES PROVISION DEDUCTIONS OF PERIOD
- ----------------- --------- -------- --------- ---------- ---------
Allowance for
doubtful accounts $ 506 $ 200 $ - $ 159 $ 547
========= ========= ========= ========= =========
Tax valuation
allowance $ 59,405 $ - $ 5,613 $ - $ 65,018
========= ========= ========= ========= =========
YEAR ENDED
DECEMBER 31, 2001
- -----------------
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
========= ========= ========= ========= =========
Page 105
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2002 and 2001 and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2002 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 the
standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
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.
As discussed in Note 1 to the accompanying financial
statements, Sun World International, Inc. and certain of its
subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code on January 30,
2003. Management continues to operate the Company as a debtor-in-
possession until a Plan of Reorganization is approved by its
creditors and confirmed by the Bankruptcy Court. The Company's
objectives in regard to this matter are also discussed in Note 1.
The accompanying financial statements have been prepared using
accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The uncertainties inherent in the
bankruptcy process raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
March 14, 2003
Page 106
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
- ------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2002 2001 2000
- ------------------------------------------------------------------------
Revenues $ 114,583 $ 91,973 $ 107,632
--------- --------- ---------
Costs and expenses:
Cost of sales 86,880 79,390 88,203
General and administrative 10,953 8,980 9,721
Non-recurring compensation expense - 2,953 -
Removal of underperforming crops 3,497 514 1,549
Depreciation and amortization 6,458 7,014 7,207
--------- --------- ---------
107,788 98,851 106,680
--------- --------- ---------
Operating income (loss) 6,795 (6,878) 952
(Gain) loss on sale of property 349 (426) (95)
Interest expense, net 16,299 15,598 15,103
--------- --------- ---------
Net loss before income taxes (9,853) (22,050) (14,056)
Income tax (benefit) expense (2) 57 160
--------- --------- ---------
Net loss $ (9,851) $ (22,107) $ (14,216)
========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 107
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
- ---------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------
DECEMBER 31,
($ IN THOUSANDS) 2002 2001
- ---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,040 $ 1,058
Accounts receivable, net 6,732 6,326
Inventories 13,638 13,229
Prepaid expenses and other 843 578
--------- ---------
Total current assets 24,253 21,191
Property, plant, equipment, net 112,293 121,506
Intangible assets 1,934 2,000
Other assets 7,937 7,471
--------- ---------
Total assets $ 146,417 $ 152,168
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 6,252 $ 10,428
Accrued liabilities 5,829 4,889
Due to parent company 13,546 11,254
Revolving credit facility 4,400 -
Long-term debt, current portion 6,250 4,960
--------- ---------
Total current liabilities 36,277 31,531
Long-term debt 115,447 116,697
Deferred income taxes 5,447 5,447
Other liabilities 928 559
--------- ---------
Total liabilities 158,099 154,234
--------- ---------
Contingencies
Stockholder's equity:
Common stock, $0.01 par value, 300,000 shares authorized;
42,000 shares issued and outstanding - -
Additional paid-in capital 38,508 38,273
Accumulated deficit (50,190) (40,339)
--------- ---------
Total stockholder's equity (11,682) (2,066)
--------- ---------
Total liabilities and stockholder's equity $ 146,417 $ 152,168
========= =========
See accompanying notes to the consolidated financial statements.
Page 108
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
- ----------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
($ IN THOUSANDS) 2002 2001 2000
- ----------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (9,851) $ (22,107) $ (14,216)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 8,295 8,143 7,970
Loss (gain) on disposal of assets 349 (426) (95)
Removal of underperforming crops 3,497 514 1,549
Shares of KADCO stock earned
for services (1,250) (1,250) (1,250)
Share of partnership operations - - (71)
Compensation charge for deferred
stock units 307 296 137
Non-recurring compensation expense - 2,953 -
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (406) 1,553 552
(Increase) decrease in inventories (1,039) 1,830 2,740
(Increase) decrease in prepaid
expenses and other (265) (160) 112
(Decrease) increase in accounts
payable (4,176) 3,734 (645)
Increase (decrease) in accrued
liabilities 687 (647) (683)
(Decrease) increase in due
to parent (668) 1,983 -
Increase (decrease) in other
liabilities 315 58 (305)
--------- --------- ---------
Net cash used for operating
activities (4,205) (3,526) (4,205)
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant,
equipment and water programs (500) (1,495) (959)
Additions to developing crops (2,152) (3,015) (3,685)
Proceeds from disposal of property,
plant and equipment 2,460 450 2,955
Partnership distributions - - 1,568
(Increase) decrease in other assets (219) 494 (363)
--------- --------- ---------
Net cash used for investing
activities (411) (3,566) (484)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt - - 5,231
Principal payments on long-term debt (762) (1,313) (665)
Net proceeds from short-term borrowings 4,400 - -
Intercompany revolver with parent 2,960 9,271 -
--------- --------- ---------
Net cash provided by financing
activities 6,598 7,958 4,566
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 1,982 866 (123)
Cash and cash equivalents
at beginning of period 1,058 192 315
--------- --------- ---------
Cash and cash equivalents at
end of period $ 3,040 $ 1,058 $ 192
========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 109
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
($ IN THOUSANDS)
- -----------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
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)
Revaluation of
derivative for
warrants issued
by parent - - 235 - 235
Net loss - - - (9,851) (9,851)
--------- ----- --------- --------- ---------
Balance as of
December 31, 2002 42,000 $ - $ 38,508 $ (50,190) $ (11,682)
========= ===== ========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 110
SUN WORLD INTERNATIONAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - NATURE OF OPERATIONS AND REORGANIZATION UNDER CHAPTER 11
- -----------------------------------------------------------------
Founded in 1975, Sun World International, Inc. ("SWII" or
"Sun World") and its subsidiaries (collectively, the "Company")
operate as the agricultural segment of Cadiz Inc. ("Cadiz"). The
Company is an integrated agricultural operation that owns
approximately 18,400 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.
On January 30, 2003, SWII and certain of its subsidiaries
(Sun Desert Inc., Coachella Growers, and Sun World/Rayo) filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy
Code. The filing was made in the United States Bankruptcy Court,
Central District of California, Riverside Division. SWII sought
bankruptcy protection in order to access a seasonal financing
package of up to $40 million to provide working capital through
the 2003-2004 growing seasons. Under the protection of Chapter
11, the Company is managing its affairs and operating its
business as a debtor-in-possession while it develops its Plan of
Reorganization. Liabilities subject to compromise at January 30,
2003 (date of filing the Chapter 11) are summarized as follows
(dollars in thousands):
Pre-petition liabilities $ 7,502
Due to parent company 13,549
Unsecured notes payable 5,000
Secured notes payable 115,000
---------
Total $ 141,051
=========
Historically, Cadiz has supplemented the annual working
capital requirements of Sun World. Cadiz determined it would not
be in a position to supplement the revolving credit facility for
this forthcoming season, thereby requiring Sun World to access a
larger facility than in the past. Sun World was able to obtain
this larger facility, however the new loan was conditioned on
reaching an arrangement with the holders ("Noteholders") of Sun
World Series B First Mortgage Notes ("First Mortgage Notes").
Sun World ultimately was unable to procure the financing with the
consent of all parties. Therefore, the only way to complete this
new financing on a timely basis was to seek Court approval,
pursuant to Chapter 11, under a Debtor in Possession ("DIP")
facility. Effective March 3, 2003, the Bankruptcy Court issued
approval on a DIP financing facility of up to $40 million. See
Note 8 for more detail on the Company's DIP financing facility.
The financial statements of the Company have been prepared
using accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The financial statements of the
Company do not purport to reflect or to provide for all of the
consequences of an ongoing Chapter 11 reorganization.
Specifically, but not all-inclusive, the financial statements of
the Company do not present: (a) the realizable value of assets on
a liquidation basis or the availability of such assets to satisfy
liabilities, (b) the amount which will ultimately be paid to
settle liabilities and contingencies which
Page 111
may be allowed in the Chapter 11 reorganization, or (c) the effect
of changes which may be made resulting from a Plan of Reorganization.
The appropriateness of using the going-concern basis is dependent
upon, among other things, confirmation of a Plan of
Reorganization, future profitable operations, the ability to
comply with debtor-in-possession financing agreements and the
ability to generate sufficient cash from operations to meet
obligations.
Inherent in a successful Plan of Reorganization is a capital
structure that permits the Company to generate cash flows after
reorganization to meet its restructured obligations and fund the
current operations of the Company. The Company's objective in
the Chapter 11 proceeding is to achieve the highest possible
recovery for all creditors and shareholders consistent with the
Company's ability to pay and the continuation of its business.
There can be no assurance that the Company will be able to attain
these objectives or reorganize successfully. Because of the
ongoing nature of the reorganization case, the financial
statements contained herein are subject to material
uncertainties.
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 fees are recorded when earned
under the terms of the related agreement.
Revenues attributable to one national retailer totaled $9.6
million in 2002, $7.9 million in 2001 and $12.8 million in 2000.
Export sales accounted for approximately 12.1%, 8.4% and 9.9%, of
the Company's revenues for the years ended December 31, 2002,
2001 and 2000,
Page 112
respectively. Service revenues and license revenues were less than
10% of total revenues for each of the years in the three-year
period ended December 31, 2002.
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
$2,424,000 for the year ended December 31, 2002, $2,023,000 for
the year ended December 31, 2001 and $1,636,000 for the year
ended December 31, 2000.
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. At times these deposits exceed
federally insured limits. Such investments are stated at cost,
which approximates fair value, and are considered cash
equivalents for purposes of reporting cash flows.
INVENTORIES
Growing crops, harvested crops, and materials and supplies
are stated at the lower of cost or market, on a first-in, first-
out (FIFO) basis. Growing and harvested crops inventory includes
direct costs and an allocation of indirect costs.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment 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.
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.
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.
Page 113
During the year ended December 2002, 2001 and 2000, the
Company incurred costs to remove certain underperforming crops,
primarily stonefruit, citrus, and wine grapes. The Company
recorded charges of $3,497,000, $514,000 and $1,549,000 in 2002,
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.
INTANGIBLE AND OTHER ASSETS
Water programs are stated at cost. All costs directly
attributable to the development of such programs are being
capitalized by the Company.
Capitalized loan fees represent costs incurred to obtain debt
financing. Such costs are amortized over the life of the related
loan. At December 31, 2002, 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
ranges from 10 to 20 years.
In October 1999, the Company entered into a management
agreement with Kingdom Agricultural Development Company (KADCO)
to develop and manage up to 100,000 acres of agricultural land in
southern Egypt called the Tushka project. KADCO is controlled by
His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz
Alsaud. As compensation for project development and management,
the Company earns a quarterly fee of $312,500 based upon meeting
developmental milestones to be paid through an equity interest in
KADCO. KADCO is currently engaged in a private placement to raise
the required funds to develop the project. The Company
anticipates receiving shares in connection with the completion of
the private placement. The amount of shares to be received will
be the current per share price used for the private placement
divided into the total amount of management fee earned which is
shown under the heading, "Receivable from KADCO to be paid in
common shares" in Note 6.
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 114
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest for the years ended December
31, 2002, 2001 and 2000 were $14,484,000, $14,660,000 and
$14,497,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, SFAS No. 141, Accounting for Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets did not
have a material impact on the Company's financial position,
results of operations or cash flows for the year ended December
31, 2002.
In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 145, which rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers, and FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements as well as amends FASB No. 13, to make various
technical various corrections. The Statement is effective for
financial statements issued after May 15, 2002. The adoption of
this standard did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial reporting for
costs associated with exits or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs in a
Restructuring). The provisions of this Statement are effective
for exit or disposal activities initiated after December 31,
2002. The Company does not believe the adoption of this Standard
will have a material impact on its financial position or results
of operations.
In December 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure - an amendment of SFAS No. 123. This
Statement amends FASB Statement No. 123, Accounting for Stock-
Based Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on
reported results. The Statement is effective for fiscal years
ending after December 15, 2002. The adoption of this Standard
will not have a material impact on the Company's financial
position or results of operations.
In November 2002, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation Number 45, or FIN 45,
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (an interpretation of SFAS No. 5, 57, and 107 and
recission of FIN 34). FIN 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating to a guarantor's
accounting for, and disclosure of, the
Page 115
issuance of certain types of guarantees. FIN 45 is effective
January 1, 2003 and its adoption is not expected to have a
significant effect on the Company's financial position or results
of operations.
In January 2003, the FASB issued FIN 46, Consolidation
of Variable Interest Entities, and Interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the
identification of variable interest entities ("VIE's") for which
control is achieved through means other than through voting
rights and to determine when and which business enterprise should
consolidate the VIE (the "primary beneficiary'"). FIN 46 is
effective January 1, 2003 and the Company does not believe the
adoption of FIN 46 will have a significant effect on its
financial position or results of operations.
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable consist of the following (dollars in
thousands):
DECEMBER 31,
2002 2001
---- ----
Trade receivables $ 4,303 $ 4,294
Due from unaffiliated growers 24 448
Other 2,952 2,090
--------- ---------
7,279 6,832
Less allowance for doubtful accounts (547) (506)
--------- ---------
$ 6,732 $ 6,326
========= =========
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,
2002 2001
---- ----
Growing crops $ 10,702 $ 10,376
Materials and supplies 2,525 2,635
Harvested product 411 218
--------- ---------
$ 13,638 $ 13,229
========= =========
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Depreciation related to permanent crops and related farming
equipment included in growing crop inventory totaled $2,131,
$1,848 and $1,992 at December 31, 2002, 2001 and 2000,
respectively.
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
- ---------------------------------------
Property, plant, equipment and water programs consist of the
following (dollars in thousands):
DECEMBER 31,
2002 2001
---- ----
Land $ 46,482 $ 49,178
Permanent crops 55,500 58,489
Developing crops 11,466 12,486
Buildings 21,212 21,182
Machinery and equipment 14,927 14,760
--------- ---------
149,587 156,095
Less accumulated depreciation (37,294) (34,589)
--------- ---------
$ 112,293 $ 121,506
========= =========
Depreciation expense for 2002, 2001 and 2000 was $6,156,
$6,795 and $7031, respectively.
NOTE 6 - INTANGIBLE AND OTHER ASSETS
- ------------------------------------
Intangible and other assets consist of the following
(dollars in thousands):
DECEMBER 31,
2002 2001
---- ----
Water programs $ 2,559 $ 2,525
Deferred loan costs, net 988 1,781
Long-term receivables 327 342
Capitalized trademark development, net 1,934 2,000
Receivable from KADCO to be paid in
common shares 4,063 2,813
Other - 10
--------- ---------
$ 9,871 $ 9,471
========= =========
Amortization expense of deferred loan costs was $802, $793
and $763 in 2002, 2001 and 2000, respectively, and is included in
interest expense in the statement of operations. Amortization
expense for capitalized trademark development was $302, $219 and
$176 in 2002, 2001, and 2000, respectively.
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NOTE 7 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following (dollars in
thousands):
DECEMBER 31,
2002 2001
---- ----
Interest $ 2,695 $ 2,695
Payroll and benefits 2,587 1,743
Other 547 451
--------- ---------
$ 5,829 $ 4,889
========= =========
NOTE 8 - REVOLVING CREDIT FACILITIES
- ------------------------------------
In November 2002, Sun World was notified by its seasonal
revolving lender that it would not renew the Revolving Credit
Facility for the 2003 growing season. The seasonal revolver
expired on November 30, 2002. The Company sought and obtained
extensions from its lender through January 31, 2003. During the
extension period, the Company sought to obtain seasonal financing
from several different lenders. Each of these lenders wanted to
have a first position on all of the Company's assets in order to
lend outside of a Chapter 11 proceeding. This required the
holders of the First Mortgage Notes to modify their agreement
with the Company. As outlined in Note 1, the Company was unable
to procure the financing with the consent of all parties. On
January 30, 2003, Sun World and certain of its subsidiaries filed
a voluntary petition for Chapter 11. On January 31, 2003, the
Bankruptcy Court approved an interim $15 million dollar DIP
financing facility. On March 3, 2003, the Bankruptcy Court
approved a final $40 million DIP financing facility agreement
with the same lender. The DIP financing expires on July 30, 2004,
bears interest at the greater of Prime plus 4% or 8.25%, and is
secured by substantially all of the Company's assets. Borrowing
availability is determined based on the lesser of (1) eligible
percentages of inventory and accounts receivable plus a specified
amount starting at $15 million and reduced by $150,000 per month;
(2) certain multiples of trailing 12 months EBITDA as defined in
the credit agreement; or (3) eligible percentage of the current
value of all real property. The Company is required to meet
certain financial covenants.
At December 31, 2002, $4.4 million was outstanding under the
Revolving Credit Facility that was subsequently paid off with
proceeds from the DIP financing on January 30, 2003. No amount
was outstanding under the Revolving Credit Facility at December
31, 2001.
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NOTE 9 - LONG-TERM DEBT
- -----------------------
At December 31, 2002 and December 31, 2001, the carrying
amount of the Company's outstanding debt is summarized as follows
(dollars in thousands):
DECEMBER 31,
2002 2001
---- ----
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 5% - 6.35% at
December 31, 2002 and LIBOR plus 3% -
5.60% at December 31, 2001) 5,000 5,000
Note payable to bank, quarterly principal
installments of $72 plus interest payable
monthly, due December 31, 2003, interest
at prime (4.25% at December 31, 2002 and
4.75% at December 31, 2001) 856 1,142
Note payable to insurance company,
quarterly installments of $120 (including
interest), due January 1, 2005, interest
at 7.75% 654 945
Note payable to finance company, monthly
installments of $18 (including interest),
due July 1, 2002, interest at 7.50% - 103
Other 187 269
Debt discount - (802)
--------- ---------
121,697 121,657
Less: current portion (6,250) (4,960)
--------- ---------
$ 115,447 $ 116,697
========= =========
Pursuant to the Company's various loan agreements, annual
maturities of long-term debt outstanding (in thousands) at
December 31, 2002 are as follows: 2003 - $6,250; 2004 - $115,419,
2005 - $23, and 2006 - $5. As a result of the Chapter 11 filing
on January 30, 2003, all required principal payments on this long-
term debt are suspended.
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. With the
entering into the DIP Facility as described in Note 8, the note
holders now have a second position on substantially all of the
Company's assets for so long as the DIP
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Facility is outstanding. 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 prior to the maturity date. 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 Cadiz. 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, 2,000 shares of Cadiz' common stock as well as certain
warrants to purchase shares of Cadiz' common stock were issued.
The fair value of the stock and the warrants were recorded as a
debt discount and were fully amortized over the life of the loan
through December 31, 2002. At December 31, 2002, the Company did
not repay the loan and thus, the Company was in default. With
the default, pursuant to the terms of the agreement, the interest
rate was increased by 2%. In connection with the Company's
Chapter 11 filing, all principal and interest payments on this
obligation have been suspended.
NOTE 10 - INCOME TAXES
- ----------------------
Significant components of the Company's deferred income tax
assets and liabilities as of December 31, 2002 and 2001 are as
follows (dollars in thousands):
DECEMBER 31,
2002 2001
---- ----
Deferred tax liabilities:
Net fixed assets basis difference $ 8,792 $ 8,490
Other 48 48
--------- ---------
Total deferred tax liabilities 8,840 8,538
--------- ---------
Deferred tax assets:
Net operating losses 23,551 19,280
State taxes 1,854 1,854
Reserves and accruals 1,473 2,098
Other 943 894
--------- ---------
Total deferred tax assets 27,821 24,126
Valuation allowance for deferred
tax assets (24,428) (21,035)
--------- ---------
Net deferred tax liability $ 5,447 $ 5,447
========= =========
As of December 31, 2002, the Company has net operating loss
(NOL) carryforwards of approximately $60.4 million for federal
income tax purposes. Such carryforwards expire in varying
amounts through the year 2022. As of December 31, 2002, the
Company has state NOL carryforwards of approximately $34.1
million. These NOL carryforwards expire in varying
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amounts through the year 2013.
A reconciliation of the income tax (benefit) expense to the
statutory federal income tax rate is as follows (dollars in
thousands):
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Expected federal income tax benefit
at 34% $ (3,350) $ (7,497) $ (4,779)
Loss with no tax benefit provided 3,322 7,531 4,663
Federal AMT refund (73) - -
State income tax 3 6 147
Foreign withholding taxes 68 51 79
Other non-deductible expenses 28 (34) 50
--------- --------- ---------
Income tax (benefit) expense $ (2) $ 57 $ 160
========= ========= =========
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. The Company contributed $266, $243 and $244 for
fiscal years 2002, 2001 and 2000, respectively.
Effective January 1, 2003, the Company eliminated the defined
contribution plan and allowed those employees that were eligible
for the plan to begin participating in the Cadiz Inc. 401(k)
Plan. With this change, in order to meet the statutory
requirements, the plan was amended to eliminate the $1,600
matching cap per year for each covered employee and the Company
match was increased to 100% for the first three percent deferred
and 50% of the next two percent deferred.
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.
Through December 31, 2001, pursuant to the lease as amended in
April 1997, Cadiz received annual land rent of $250 per acre, or
$400,000. In 2002, the annual land rent was reduced to $250,000
as certain underperforming crops at the Cadiz ranch were removed.
In addition, the Company entered into a service agreement
with Cadiz in which Cadiz
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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 also provides for certain other reimbursement
of expenses incurred on behalf of the Company. The Company made
payments to Cadiz of $1.8 million for 2002, $2.4 million for 2001,
and $2.3 million for 2000 pursuant to the services agreement and
the lease agreement mentioned above. The Company is precluded
from paying any further amounts under the services agreement
pursuant to the Company's DIP Financing agreement more fully
described in Note 8.
The Company has intercompany revolving credit agreements
whereby the Company can borrow from Cadiz as needed. Under the
intercompany revolving credit agreement, $12.2 million was
outstanding as of December 31, 2002 and $9.3 million was
outstanding as of December 31, 2001. Additional amounts payable
to Cadiz representing amounts owed pursuant to the services and
lease agreement as well as the reimbursement of certain other net
expenses were $1.3 million and $2.0 million at December 31, 2002
and 2001, respectively.
NOTE 13 - NON-RECURRING COMPENSATION EXPENSE
- ---------------------------------------------
In 2001, Cadiz issued 12,034 deferred stock units to certain
senior managers of Sun World. These deferred stock units were
issued in exchange for the cancellation of 22,600 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.
NOTE 14 - UNUSUAL ITEMS
- -------------------------
The Company is involved with various litigation proceedings
both domestically and internationally to protect its proprietary
fruit varieties from unauthorized use. The Company is currently
involved in proceedings with domestic growers to enjoin their
unauthorized production of one of the Company's proprietary
grapevines. During 2002, a California state court issued a
ruling adverse to Sun World in one of these proceedings. In
March 2003, the appeals court upheld the decision reached by the
California state court. The Company is appealing this ruling and
will continue to vigorously pursue its claims. The Company wrote
off capitalized legal costs related to defending its intellectual
property rights to this variety as of December 31, 2002 resulting
in a charge of $1,097,000. An ultimate unfavorable outcome in
this matter could have a material adverse impact on the Company's
future financial performance.
As described in Note 1, the Company tried unsuccessfully to
restructure its debt and ultimately filed for Chapter 11 on
January 30, 2003. In connection with these efforts, the Company
incurred $614,000 of professional fees. As a result of the
unsuccessful debt restructuring, these costs have been written
off as of December 31, 2002.
Page 122
NOTE 15 - 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 various 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.
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