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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from..to...
Commission File Number 0-12114
--------------------------------
Cadiz Inc
(Exact name of registrant specified in its charter)
DELAWARE 77-0313235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Wilshire Boulevard, Suite 1600
Santa Monica, CA 90401-1111
(Address of principal executive offices) (Zip Code)
(310) 899-4700
(Registrant's telephone number, including area code)
------------------------------------------------
Cadiz Land Company, Inc.
(Former Name of Registrant)
Securities Registered Pursuant to Section 12(b) of the Act: None
-------------------------------------------------
Title of Each Class Name of Each Exchange on Which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (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. /_/
As of March 16, 1999, the registrant had 34,366,572 shares of Common
Stock outstanding. The aggregate market value of the Common Stock held
by nonaffiliates as of March 16, 1999, was approximately $263,903,000
based on the average of the closing bid and asked prices on this date.
Documents Incorporated by Reference
Certain portions of Registrant's proxy statement for the annual meeting
to be held on May 10, 1999, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the
close of the Registrant's fiscal year, are incorporated by reference under
Part II of this Form 10-K.
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PART I
ITEM 1. BUSINESS
The long-term strategy of Cadiz Inc. (the
"Company") is to acquire and develop water and
agricultural resources, as well as selected water-
related technologies. The Company has created
an integrated and complementary portfolio of assets
encompassing undeveloped land with high-quality
groundwater resources and/or storage potential,
prime agricultural properties located throughout
central and southern California with secure and
reliable water rights, and other contractual water
rights. Management therefore believes that, with
both the increasing scarcity of water supplies in
California and an increasing population, the
Company's access to water will provide it with a
competitive advantage both as a major agricultural
concern and as a supplier of water, which will lead
to continued appreciation in the value of the
Company's portfolio.
In September 1996, the Company significantly
enhanced this portfolio through its acquisition of
Sun World International, Inc. ("Sun World"). The
Sun World acquisition made the Company one of the
largest fully integrated agricultural companies in
California by adding to the Company's portfolio
prime agricultural land, packing facilities,
marketing expertise, proprietary agricultural
products and the highly regarded Sun World brand
name. The acquisition of Sun World also added
valuable water rights to the Company's existing
water resource development operations. Currently,
Sun World owns more than 19,200 acres of land
primarily located in two major growing areas of
California: the San Joaquin Valley and the Coachella
Valley.
In addition to its Sun World properties, the
Company holds more than 39,000 acres of land in
eastern San Bernardino County which are underlain by
excellent groundwater resources with demonstrated
potential for various applications, including water
storage and supply programs, and agricultural,
municipal, recreational and industrial development.
All of the Company's properties are located in close
proximity to California's major aqueduct systems.
The Company expects to utilize its resources to
participate in a broad variety of water storage and
supply programs, including the storage and supply of
surplus water for public agencies, which require
supplemental sources of water, exchanges, or
transfers to third parties.
In December 1997, the Company entered into an
interim Agreement with the Metropolitan Water
District of Southern California ("Metropolitan") to
develop principles and terms for a long-term
agreement at its Cadiz, California property. In
July 1998, the Company and Metropolitan approved the
principles and terms for agreement for the Cadiz
Groundwater Storage and Dry-Year Supply Program (the
"Program"), authorized preparation of a final
agreement based on these principles and terms and
initiated the environmental review process for the
Program. The Program will enhance Southern
California water supply reliability in two ways,
providing a new dry-year water supply and much-
needed storage. During wet years or periods of
excess supply, Metropolitan will store surplus
Colorado River water in the aquifer system
underlying the Company's Cadiz property. During dry
years, the previously imported water, together with
indigenous groundwater, will be extracted and
delivered, via a conveyance pipeline, to
Metropolitan's service area. The principles and
terms for agreement call for Metropolitan to store a
minimum of 500,000 acre-feet of Colorado River water
and purchase a minimum of 1,100,000 acre-feet of
indigenous groundwater for transfer over the 50-year
term of the agreement.
The Company continually seeks to develop and
manage its water and agricultural resources
for their highest and best uses. The Company also
continues to evaluate acquisition opportunities,
which are complementary to its current portfolio of
water and agricultural resources.
(a) General Development of Business
----------------------------------
As part of its current business plan, the
Company's land acquisition, development activities
and agricultural operations are conducted for the
purpose of enhancing the long-term appreciation of
its properties. See "Narrative Description of
Business," below.
As the most populous state in the nation,
California's population is projected to swell to
nearly 50 million people by the year 2020. This
increasing population is placing great demands on
California's infrastructure, particularly its
limited water resources. According to the
California Department of Water Resources, shortfalls
of approximately 7 million acre-feet are forecasted
in a dry year by the year 2020. Management
therefore believes that, with both the increasing
scarcity of water supplies in California and the
increasing demand for water, the Company's access to
water will provide it with a competitive advantage
both as a major agricultural concern and as a
supplier of water which will lead to continued
appreciation in the value of the Company's
portfolio.
On September 13, 1996, the Company acquired all
of the stock of a reorganized Sun World pursuant to
a consensual plan of reorganization for a net
purchase price of approximately $179 million (the
"Sun World Acquisition"). Sun World and certain
subsidiaries of Sun World had filed voluntary
petitions for relief under Chapter 11 of the
Bankruptcy Code on October 3, 1994 after debt
restructuring negotiations with its existing lenders
failed.
The Company's Sun World Acquisition was an
integral part of the Company's business strategy.
Sun World adds to the Company's portfolio
approximately 19,200 acres of prime agricultural
land primarily in the San Joaquin and Coachella
Valleys, increasing the Company's total landholdings
to approximately 58,200 acres. See Item 2,
"Properties."
Effective September 1, 1998, the Company
changed its name from Cadiz Land Company, Inc. to
Cadiz Inc.
(b) Financial Information About Industry Segments
----------------------------------------------
During the year ended December 31, 1998, the
Company operated its agricultural resources segment
and continues to develop its water resource segment
of the business. See Consolidated Financial
Statements. Also, see Item 7, "Management's
Discussion and Analysis."
(c) Narrative Description of Business
-----------------------------------
Pursuant to its business strategy, the Company
continually seeks to develop and manage its
portfolio of water and agricultural resources for
their highest and best uses. The development and
management activities of the Company are currently
focused on agricultural operations (primarily
through its wholly-owned Sun World subsidiary) and
water resource development. The Company also
continues to evaluate acquisition opportunities,
which are complementary to its current portfolio
of water and agricultural resources.
WATER RESOURCE DEVELOPMENT
The Company's 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 the Company with
the opportunity to participate in a variety of water
storage and supply programs in partnership with
regional public water agencies.
CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY
PROGRAM. The Company's 27,400 acres in the Cadiz
and Fenner Valleys of eastern California (the
"Cadiz/Fenner Property") are underlain by a
substantial high-quality groundwater basin. This
groundwater is recharged by rain and snowfall within
a catchment area of nearly 1,300 square miles. See
Item 2, "Properties - The Cadiz/Fenner Property."
In July 1998, the Company and Metropolitan
approved principles and terms for agreement for the
Cadiz Groundwater Storage and Dry-Year Supply
Program. The principles and terms for agreement
provide that Metropolitan will, during wet years or
periods of excess supply, store surplus water from
its Colorado River Aqueduct in the Company's
groundwater basin. During dry-years or times of reduced
allocations from the Colorado River, the stored water
will be withdrawn and returned via conveyance facilities
to the aqueduct to meet Metropolitan's water supply
needs. In addition, indigenous groundwater would also
be transferred utilizing the same facilities.
During the 50-year term of the agreement,
Metropolitan will store a minimum of 500,000 acre-
feet of Colorado River Aqueduct water in the
Company's groundwater basin and purchase a minimum
of 1,100,000 acre-feet of existing groundwater for
transfer during dry-years. The Program will have
the capacity to convey, either for storage or
transfer, up to 150,000 acre-feet in any given year.
During storage operations, Metropolitan will
pay a fee per acre-foot for put of water into
storage and a fee per acre-foot for return of water
from storage, and a storage fee every year that water
is stored in the groundwater basin. On the transfer
of water, Metropolitan will pay a base rate of
approximately $230 per acre-foot, which will
be adjusted according to a water price formula.
Additionally, recognizing that delivery of the
Company's high-quality, indigenous groundwater to
the aqueduct provides a significant water quality
benefit, Metropolitan will pay the Company a water
quality fee for both transferred and returned water.
The Program facilities, including spreading
basins, extraction wells, conveyance pipeline and a
pumping plant, are estimated to cost between $125
and $150 million, and both parties will share these
costs. A pilot spreading basin project has been
constructed which will model and further analyze the
storage and extraction of water. Engineering and
optimization studies are currently ongoing to
finalize design criteria for the Program facilities.
All operational costs of the Program, including
annual operations, maintenance and energy costs,
will be an obligation of Metropolitan.
The principles and terms for agreement call for the
establishment of a comprehensive, independent groundwater
monitoring and management plan to ensure long-term
protection of the groundwater basin. The environmental
review process, which will include compliance with California
Environmental Quality Act and National Environmental
Protection Act requirements, has commenced. The final
agreement may reflect adjustments to these principles
and terms in order to reflect information identified
during this review. The final agreement will be
presented to the respective Boards of both parties
for approval. The Program is anticipated to be
operational by the year 2001.
PIUTE. The Company's water development
operations at its 7,300 acre Piute property are
located in eastern San Bernardino County
approximately 15 miles from the resort community of
Laughlin, Nevada and about 12 miles from the
Colorado River town of Needles, California.
Hydrological studies and testing of a full scale
production well have demonstrated that this
landholding is underlain by recharging groundwater
of excellent quality. See Item 2, "Properties - The
Piute Property." Additional technical and
environmental investigations are currently underway
for a water development program anticipated to
transfer approximately 10,000 to 15,000 acre feet
per year.
DANBY LAKE AND OTHER. The Company currently
owns or controls additional acreage located
throughout other areas of the Mojave Desert, such as
Danby Lake. This area is located approximately 30
miles southeast of the Company's Cadiz/Fenner Valley
property and 10 miles north of the Colorado River
Aqueduct.
SUN WORLD WATER RESOURCES. Sun World has
valuable water rights in various parts of central
and southern California. The Company believes with
increasing water shortages in California, land with
prime water rights will increase substantially in
value.
Sun World's landholdings and associated water
resources are located adjacent to the major aqueduct
systems of central and southern California, and in
close proximity to the Colorado River. These
holdings complement the Company's other groundwater
resources and will enhance the Company's
opportunities to participate in a broad variety of
water storage, supply, exchange or banking programs.
AGRICULTURAL OPERATIONS
The Company is one of California's largest
vertically integrated agricultural companies
combining an extensive research and development
program, year-round sourcing, farming and packing
activities and strong marketing capabilities. For
the twelve months ended December 31, 1998, Sun World
recorded revenues of $106.4 million.
PRODUCT LINE. Sun World ships approximately 75
different varieties of fresh fruits and vegetables
to all 50 states and to more than 30 foreign
countries. Sun World is a leading grower and
marketer of table grapes, seedless watermelons,
colored sweet peppers, plums, peaches, nectarines,
apricots and lemons. It is also one of California's
largest independent marketers of grapefruit,
tangerines, mandarins, navel oranges and dates.
The breadth and diversity of the product line
helps to minimize the impact of individual crop
earnings fluctuations. Further, the breadth and
diversity of its product offering provides Sun World
with greater presence and influence with its grocery
and food service customers.
Although many fruits and vegetables are
fungible commodities, Sun World has adopted a
strategy of developing and acquiring specialty
produce varieties with unique characteristics which
differentiate them from commodity produce varieties.
Most of these varieties are harvested during
favorable marketing windows when available supply
from competitors is limited. These specialty
varieties typically command a price premium and are
less subject to the same price volatility than the
commodity varieties. They also provide Sun World
with a dominant position in a number of product
categories. Examples of the branded produce grown
and marketed by Sun World include Superior Seedless
(TM) table grapes, Black Diamond(R) plums, Sun World
Seedless(R) watermelons, Honeycot(R) apricots, Amber
Crest(R) peaches, Super Star(TM) nectarines and Sun World
sweet colored peppers. These products evolved
through a combination of internal development and
acquisition. Sun World's research and development
center is dedicated to developing additional high
value proprietary varieties. See "Proprietary
Product Development," below.
FARMING OPERATIONS. Sun World's farming
operations produced approximately 7 million units of
fruits and vegetables during the year ended December
31, 1998. Its principal agricultural lands are
located in the San Joaquin and Coachella Valleys of
California. See Item 2, "Properties."
Sun World properties are primarily dedicated to
producing permanent commercial crops and, to a
lesser extent, annual (or row) crops. Additionally,
over 1,400 acres are currently utilized for
developing crops (e.g., vines and trees that have not
yet reached a commercial maturity). Following the
Sun World acquisition, the Company implemented a
crop development plan which has redeployed
marginally productive acreage to produce more
varieties of crops which possess superior
proprietary characteristics and/or are available for
delivery at peak pricing windows throughout the
year.
Additionally, during 1998, the Company acquired
two citrus ranches totaling approximately 2,000
acres in the San Joaquin Valley. These acquisitions
reflect the Company's strategy of expanding its
contra-seasonal operations to complement the summer
table grape and treefruit production.
PACKING AND MARKETING OPERATIONS. In addition
to merchandising its own products, Sun World
provides marketing and packing services to third
party growers. For third party growers, Sun World
provides three key benefits: (i) Sun World's brand
name, proprietary products and reputation with
wholesalers resulting in a significant pull through
effect; (ii) a full complement of handling services
that include harvest, cooling, packing and shipping;
and (iii) an internal sales and marketing force
servicing over 650 customers throughout the world.
Sun World's packing facilities handled
approximately 8 million units of produce during the
year ended December 31, 1998. These facilities
provide harvesting, packing, cooling and shipping
services for Sun World production, as well as for
other commercial clients. Currently, Sun World owns
four facilities, three of which are located in the
Coachella Valley and one of which is located in the
San Joaquin Valley. See Item 2, "Properties."
Sun World's vertically integrated operations
enable it to offer the market a continuous stream of
new specialty products, which receive a market
premium. As a large grower, Sun World is able to
manage the quality of its own product line, and as a
significant packer/marketer, Sun World works with
other growers to ensure product quality through
packing and distribution. During fiscal 1998, the
Company sold approximately 10 million units with
wholesale value of approximately $100 million. This
amount includes sale proceeds received for units
sold on behalf of third party growers for which only
the sales commission and packing revenues received
by Sun World are included in Sun World's reported
revenues.
Sun World's sourcing, both external and
internal, is diversified geographically. Sun
World's owned and leased farming operations are
located throughout California from the Coachella
Valley in the south to central California's San
Joaquin Valley, as well as operations near the coast.
Sun World sources externally produced product from
throughout California, from other areas of the
United States, and from international sources. This
geographic diversification not only reduces the
impact that unfavorable weather conditions and
infestations could have on Sun World's operations,
but also provides Sun World with a longer selling
season for many crops since the harvests occur at
different times. In addition, geographic
diversification also allows Sun World the ability to
provide the quality and breadth of product
throughout the year which is being demanded by
retailers.
Sun World's customer base consists of more than
650 accounts including supermarket retailers, food
service entities, warehouse clubs, and international
trading companies located in approximately 30
countries. Domestic customers include national
retailers such as Safeway Stores and Albertson's;
club stores, including PriceCostco and Sam's; and
food service distributors, including Sysco and
Alliant. Approximately 9% of Sun World's products
were marketed outside of the United States in
Canada, Europe, Australia, Japan, Hong Kong,
Singapore, Malaysia and Taiwan in 1998. Only one
national retailer, Safeway Stores, (representing
approximately 12%) accounted for more than 10% of
Sun World's revenues in 1998. As is consistent with
industry practice, Sun World does not maintain
written agreements with this or its other
significant customers.
PROPRIETARY PRODUCT DEVELOPMENT. Sun World has
a long history of product innovation, and its
research and development center maintains a fruit
breeding program that has introduced dozens of
proprietary fruit varieties in the last six years.
Recent product successes include the Midnight
Beauty(TM) seedless black table grape, Black Diamond(R)
plum, the Amber Crest(R) peach, Super Star(TM) nectarine
and the Honeycot(R) apricot. Management believes that
there are several other promising grape and
treefruit varieties, which are scheduled for
commercial planting and production in the near
future.
Sun World utilizes approximately 235 acres for
its research and development center and crop
experimentation. The research and development
center facility houses tissue culture rooms, growth
rooms, four greenhouses, and over 200 acres of
experimental growing crops. The amounts expended by
Sun World on its research and development activities
since the Sun World Acquisition amounted to $1,249,000
for the year ended December 31, 1998, $809,000 for the
year ended December 31, 1997 and $120,000 for the period
from September 14, 1996 to December 31, 1996.
As a result of over 20 years of research and
development, Sun World holds rights to more than 600
patents and trademarks around the world. The patent
registrations exist in most major fruit producing
countries and the trademarks are held in both fruit
producing and consuming regions. Sun World's
patents have varying expiration dates occurring
within the next several years through 2017; however,
the expiration of any individual patent will not
have a material effect upon Sun World's operations.
Enhancing the value of the proprietary product
portfolio through licensing is an integral part of
Sun World's growth strategy. Sun World continues to
seek key licensing opportunities (both domestically and
internationally) in production areas that do not compete
with Sun World's own domestic production. These
licensing agreements will provide Sun World with a
long-term annual revenue stream based upon a royalty
fee for each box of proprietary fruit sold from the
licensed production. In December 1998, the Company
entered into a definitive agreement with the South
African fruit industry granting long-term license
agreements to South African fruit companies seeking
to produce and export Sun World's proprietary Sugraone
grape variety (more commonly known as Sun World's
private Superior Seedless(R) grapes). These agreements
also provide Sun World compensation for past Sugraone
grapevine plantings and fruit sales and grant Sun World
exclusive North American marketing rights for these
Sugraone grapes. The Company believes these licensing
agreements have established a precedent that will change
the way new and improved varieties of produce will be
brought to market in the future.
SEASONALITY
In connection with the water resource
development activities of the Company, revenues are
not expected to be seasonal in nature.
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 grape
and treefruit crops. Due to this concentrated
activity, the Company has, therefore, historically
incurred a loss with respect to its agricultural
operations in the other months during the year.
The wet and cool weather conditions in
California during the first half of 1998 delayed the
harvest of all California grape and treefruit
production by as much as four weeks from the
previous year's harvest schedule. This caused a
shift in recognition of certain revenues and related
profits from the third to the fourth quarter of
1998.
COMPETITION
The Company faces competition for the
acquisition, development and sale of its properties
from a number of competitors, some of which have
greater resources than the Company. The Company may
also face competition in the development of water
resources associated with its properties. Since
California has scarce water resources and an
increasing demand for available water, the Company
believes that location, price and reliability of
delivery are the principal competitive factors
affecting transfers of water in California.
The agricultural business is highly
competitive. Sun World's competitors include a
limited number of large international food
companies, as well as a large number of smaller
independent growers and grower cooperatives. No
single competitor has a dominant market share in
this industry due to the regionalized nature of
these businesses. In addition to drawing from its
proprietary base of products, Sun World utilizes
brand recognition, product quality, harvesting in
favorable production windows, effective customer
service and consumer marketing programs to enhance
its position within the highly competitive fresh
food industry. Consumer and institutional
recognition of the Sun World trademark and related
brands and the association of these brands with high
quality food products contribute to Sun World's
ability to compete in the market for fresh fruit and
vegetables.
EMPLOYEES
As of December 31, 1998, the Company employed a
total of 843 full-time employees. Sun World,
throughout the year, engages various part-time and
seasonal employees, with a seasonal high of
approximately 2,500 part-time employees.
Approximately 150 of the Company's employees are
represented by a labor union pursuant to contracts
that expire in 1999. Generally, the Company
believes that its employee relations are good.
REGULATION
Certain areas of the Company's operations are
subject to varying degrees of federal, state and
local law and regulations. The Company's
agricultural operations are subject to a broad range
of evolving environmental laws and regulations.
These laws and regulations include the Clean Air
Act, the Clean Water Act, the Resource Conservation
and Recovery Act, the Federal Insecticide, Fungicide
and Rodenticide Act and the Comprehensive
Environmental Response, Compensation and Liability
Act. Compliance with these foreign and domestic
laws and related regulations is an ongoing process,
which is not currently expected to have a material
effect on the Company's capital expenditures,
earnings or competitive position. Environmental
concerns are, however, inherent in most major
agricultural operations, including those conducted
by the Company, and there can be no assurance that
the cost of compliance with environmental laws and
regulations in the future will not be material.
However, neither the Company nor Sun World expects
to incur any material capital expenditures for
environmental control facilities during 1999.
The Company's food operations are also subject
to regulations enforced by, among others, the U.S.
Food and Drug Administration and state, local and
foreign equivalents and to inspection by the U.S.
Department of Agriculture and other federal, state,
local and foreign environmental and health
authorities. Among other things, the U.S. Food and
Drug Administration enforces statutory standards
regarding the safety of food products, establishes
ingredients and manufacturing procedures for certain
foods, establishes standards of identity for foods
and determines the safety of food substances in the
United States. Similar functions are performed by
state, local and foreign governmental entities with
respect to food products produced or distributed in
their respective jurisdictions. Existing
environmental regulations have not, in the past, had
a materially adverse effect upon the operations of
the Company, and the Company believes that existing
environmental regulations will not, in the future,
have a materially adverse effect upon its
operations. There can be no assurances, however, as
to the effect of any environmental regulations
which may be adopted in the future.
As the Company proceeds with the development of
its properties, including the Program, the Company
will be required to satisfy various regulatory
authorities that it is 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, are not
subject to regulation by existing statutes other
than general environmental statutes applicable to
all development projects. Additionally, the Company
must obtain a variety of approvals and permits from
state and federal governments with respect to issues
that may include environmental issues, issues
related to special status species, issues related to
the public trust, and others. Because of the
discretionary nature of these approvals and concerns
which may be raised by various governmental
officials, public interest groups and other
interested parties during both the approval and
development process, the Company's ability to
develop properties and realize income from its
projects, including the Program, could be delayed,
reduced or eliminated.
ITEM 2. PROPERTIES
The Company currently leases its executive
offices in Santa Monica, California. The Company
also maintains a development office in San
Bernardino, California. Sun World owns its main
packing facility (including sales and administrative
offices) in Bakersfield, California and owns three
packing facilities (including sales offices) in
Coachella, California. The Company and each of its
subsidiaries believe that their property and
equipment are generally well maintained, in good
operating condition and adequate for their present
needs.
The following is a description of the Company's
significant properties.
THE CADIZ/FENNER PROPERTY
In 1984, the Company 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 prime
quality water in commercial quantities appropriate
for agricultural development. Since 1985, the
Company has acquired over 27,000 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 underground water storage and dry year transfers
as contemplated in the Program. See Item 1,
"Business - Narrative Description of Business -
Water Resource Development."
In November 1993, the San Bernardino County
Board of Supervisors unanimously approved a General
Plan Amendment establishing an agricultural land use
designation for 9,600 acres at Cadiz for which 1,600
acres have been developed and are leased to Sun
World. This Board action represented the largest
land use approval on behalf of a single property
holder in the County's known history. 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 Company's underground water basin.
Substantially all Cadiz/Fenner acreage is held
in fee directly by the Company.
THE SUN WORLD PROPERTIES
FARM PROPERTIES. Sun World owns approximately
19,200 acres and leases approximately 3,000 acres of
improved land in central and southern California.
The majority of this land is used for the
cultivation of permanent and annual crops and
support activities, including packing facilities.
Sun World owned farming property is divided
between five distinct geographic regions: Madera,
Bakersfield and Arvin (located within the San
Joaquin Valley), Coachella (located in the state's
southeastern corner near Palm Springs) and Blythe
(located approximately 100 miles east of the
Coachella Valley adjoining the Colorado River).
PACKING AND HANDLING FACILITIES. Sun World
owns four packing and handling facilities, three of
which are located on one campus in the Coachella Valley
and one of which is located in the San Joaquin Valley at
Kimberlina, near Bakersfield.
The Kimberlina facility, located on an 83 acre
parcel owned by Sun World, consists of two highly
automated production lines for packing treefruit and
citrus, cold storage areas, and office space.
Sun World's Coachella Valley facility consists of
three independent buildings located on 26 acres of industrial
commercial zoned land in Coachella, California. One building
is used primarily for packing citrus, receiving table grapes,
cold storage and office space. A second building is used
primarily for receiving, cooling and storing table grapes.
The third building is used primarily for packing watermelons
and lemons and for storage.
THE PIUTE PROPERTY
The Piute property consists of approximately
7,300 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. The Piute property was
identified for acquisition by the Company by a
combination of satellite imaging and geological
techniques, which were used by the Company to
identify water at Cadiz.
The Piute acreage adjoins Highway 95, which is
a direct route to Las Vegas, approximately 60 miles
north. The Santa Fe Railroad passes through the
land and Interstate 40 is approximately 12 miles to
the south. The property is held by the Company in
fee title as to approximately 3,600 acres, with the
remaining acreage under option.
The Company has commenced the development of
the water resources of this property. See Item 1,
"Business Narrative - Description of Business -
Water Resource Development."
OTHER PROPERTIES
In addition to the Cadiz and Piute properties,
the Company owns approximately 4,300 additional
acres in the Mojave Desert, including the Danby Lake
property, as to which development has not yet
commenced.
The Company will continue to seek to acquire
additional properties both in southern California
desert regions and elsewhere which are believed to
be suitable for development.
DEBT SECURED BY PROPERTIES
Of the Company's outstanding debt at December 31,
1998, $119.1 million represents loans secured by
substantially all of Sun World's properties and $24.8
million represents loans secured by the majority of the
Company's 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
In December 1995, an action styled CADIZ LAND
COMPANY, INC. VS. COUNTY OF SAN BERNARDINO, ET AL,
CASE NO. BCV 02341 was filed by the Company in
Superior Court in San Bernardino County. The action
challenges the various decisions by the County
relative to the proposed construction and operation
of a landfill (the "Rail-Cycle Project") near the
Company's Cadiz, California property, and seeks to
set aside such decisions and to obtain compensatory
damages arising therefrom. Named in this action, in
addition to the County, were the County's Board of
Supervisors, three individual members of the Board
of Supervisors, a County employee and Rail-Cycle,
L.P., whose general partner is controlled by Waste
Management, Inc. ("WMI"). On or about September 30,
1998, the Court granted defendants' motions for
summary judgement, finding that the Company's
procedural due process claim is not ripe due to the
fact that, as the Rail-Cycle Project cannot proceed
without voter approval of a business license tax,
there is no actual concrete injury to the Company at
this point in time. The Company has appealed this
decision.
On October 24, 1997, the Company filed suit in
the United States District Court, Central District
of California (CADIZ LAND COMPANY, INC. V. WASTE
MANAGEMENT, INC., ET. AL., CASE NO. CV 97-7827 WMB
(MANx) (the "Federal Court Action")) against WMI,
certain key executives and consultants of WMI, and
certain other parties in interest as to the Rail-
Cycle Project. The Complaint as originally filed
asserted claims under both federal and state law
from activities of defendants adverse to the Company
in connection with the Rail-Cycle Project. In
December 1997, the federal district judge, on its
own motion, severed the state law claims from the
complaint and dismissed them without prejudice.
Those claims were reasserted in a state proceeding
filed by the Company on January 8, 1998 in Los Angeles
Superior Court (West Division) (CADIZ LAND COMPANY, INC.
V. WASTE MANAGEMENT, INC., Civil Action No. SC 050743
(the "State Court Action")).
On or about April 27, 1998, in response to
motions to dismiss filed by various defendants in
the Federal Court Action, an order was entered
granting the Company leave to amend its complaint.
In addition, pursuant to that order, the Company's
claims for stock manipulation pursuant to Section
10(b) of the Exchange Act against the WMI defendants
and its RICO claims against San Bernardino County
officials Marsha Turoci and Michael Dombrowski were
dismissed without leave to amend. Judgements were
subsequently entered in favor of defendants with
respect to these claims. Based upon the criminal
indictments against certain defendants described
below and other evidence made available to the
Company on account of the pending criminal
investigation, the Company has filed appeals with
the Ninth Circuit Court of Appeals seeking the
reversal of the trial court's dismissal of these
claims, and these appeals are currently pending.
Upon the Company's motion, the remainder of the
Company's claims in the Federal Court Action, which
will be pursued in the State Court Action, have been
dismissed without prejudice.
In response to the State Court Action, the WMI
defendants on or about April 15, 1998 sought and
obtained a stay of the action, which expired by its
own terms in December 1998. The Company intends to
file a Second Amended Complaint and will continue to
vigorously prosecute its claims against the WMI defendants.
During 1998, felony complaints were filed by
the San Bernardino District Attorney charging a
Waste Management employee and a consultant with
multiple felony counts based upon their criminal
activities in connection with the Rail-Cycle
Project, and, also during 1998, an indictment was
handed down by a San Bernardino Special Criminal
Grand Jury which charges WMI, certain affiliates and
employees with 23 felony counts, all arising from
WMI's scheme to sabotage the Company in retaliation
for the Company's opposition to the Rail-Cycle Project.
In addition, indictments were handed down for certain
County employees for criminal activities in connection
with the Rail-Cycle Project. The WMI consultant pleaded
nolo contendere to four felony counts, including
stock fraud and conspiracy to commit stock fraud and
was sentenced to six years in prison.
Prior to the acquisition of Sun World, the
Internal Revenue Service (IRS) had filed claims
against Sun World and certain of its subsidiaries
(collectively "the Sun World Claimants") for taxes
refunded for workers that the IRS claims were
employees. The Sun World Claimants contend that the
workers are excluded from the definition of
employment under the Internal Revenue Code. On
January 21, 1998, the District Court ruled in favor
of one of the Sun World Claimants. The IRS has
appealed this decision. Management believes that
the likelihood of an unfavorable future outcome with
regard to this matter is remote. Accordingly, the
Company released $3,780,000 of reserves related to
this matter at December 31, 1997 which are reported
on the Consolidated Statement of Operations as
Litigation Benefit.
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 financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The results of the Company's Annual Meeting of
Stockholders held May 13, 1998 were reported in the
Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the
Nasdaq National Stock Market under the symbol
"CLCI." The following table reflects actual sales
transactions. The high and low range of the sales
price of the common stock for the dates indicated
have been provided by Nasdaq.
High Low
Quarter Ended Sales Sales
Price Price
------ -----
1996:
March 31 $ 6.375 $ 5.250
June 30 $ 6.500 $ 5.219
September 30 $ 6.000 $ 3.875
December 31 $ 5.625 $ 3.875
1997:
March 31 $ 6.063 $ 4.838
June 30 $ 6.250 $ 4.813
September 30 $ 8.063 $ 5.000
December 31 $ 9.375 $ 6.125
1998:
March 31 $ 11.938 $ 7.875
June 30 $ 14.188 $ 10.625
September 30 $ 13.438 $ 7.750
December 31 $ 9.500 $ 5.875
On March 16, 1999, the high, low and last sales prices
for the shares, as reported by Nasdaq, were $8.13, $7.94 and
$7.94, respectively.
In January 1998, options in the Company's stock began
trading on the American Stock Exchange, the Chicago Board
Options Exchange and the Pacific Stock Exchange under the
symbol "QAZ."
The Company also has an authorized class of 100,000
shares of preferred stock ("Preferred Stock"). To date,
the Board of Directors has designated three series of
Preferred Stock for issuance, including (i) up to 60,000
shares of Series A Preferred, of which 27,631 shares have
been issued and no shares remain outstanding; (ii) up to
1,000 shares of Series B Preferred, of which 1,000 shares
have been issued and no shares remain outstanding; and
(iii) up to 365 shares of Series C Preferred, of which
340 shares have been issued and no shares remain outstanding.
The Board of Directors has no present plans or arrangements
for the issuance of additional shares of Preferred Stock.
The estimated number of beneficial owners of the
Company's Common Stock is approximately 3,070, and the
number of stockholders of record on March 16, 1999 was 231.
To date, the Company has not paid a cash dividend
on Common Stock. The Company's ability to pay such
dividends is subject to certain covenants pursuant
to agreements with the Company's lenders.
During the quarter ended December 31, 1998, the
Company issued 18,100 shares upon exercise of
outstanding options to a single option holder at an
exercise price of $5.50 per share. The issuance of
the shares was not registered under the Securities
Act of 1933, as amended (the "Securities Act"). The
Company believes that the transactions described are
exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as
transactions not involving any public offerings.
The shares were issued in accordance with the terms
of previously executed stock option agreements. All
other securities sold by the Company during the year
ended December 31, 1998, which were not registered
under the Securities Act have previously been
reported in the Company's Quarterly Reports on Form
10-Q.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data insofar as
it relates to the years ended December 31, 1998, and
1997, the nine months ended December 31, 1996, and
to each of the years ended March 31, 1996 and 1995
has been derived from financial statements audited
by PricewaterhouseCoopers LLP, independent
accountants. The information that follows should be
read in conjunction with the audited consolidated
financial statements and notes thereto for the years
ended December 31, 1998, and 1997 and the nine
months ended December 31, 1996 included elsewhere
herein. See also Item 7, "Management's Discussion
and Analysis".
CADIZ INC.
Selected Financial Data
($ in thousands, except for per share data)
Nine
Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
--------------- ----------- -----------
1998 1997 1996(1) 1996 1995
Statement of ---- ---- ---- ---- ----
Operations Data:
Total revenues $ 106,544 $ 100,157 $ 23,780 $ 1,441 $ 543
Loss from continuing
operations before
extraordinary items (7,470) (8,538) (5,997) (8,487) (4,706)
Extraordinary items -0- -0- -0- -0- 115
Net loss (7,470) (8,538) (5,997) (8,487) (4,591)
Less:
Preferred stock
dividends -0- (1,213) (674) -0- -0-
Imputed dividend on
preferred stock -0- -0- (2,451) -0- -0-
------- ------- -------- -------- ------
Net loss applicable to
common stock $ (7,470) $ (9,751) $ (9,122) $ (8,487) $(4,591)
========= ========= ========= ======== =======
Per share:
Net loss from continuing
operations before
extraordinary items $ (.23) $ (.33) $ (.44) $ (.48) $ (.29)
Extraordinary items -0- -0- -0- -0- .01
--------- --------- -------- --------- -------
Net loss $ (.23) $ (.33) $ (.44) $ (.48) $ (.28)
========= ========= ========= ======= ========
Weighted average common
shares and equivalents 33,173 29,485 20,500 17,700 16,500
========= ========= ========= ======= ========
December 31, March 31,
------------------------- --------------
1998 1997 1996 1996 1995
Balance Sheet Data: ---- ---- ---- ---- -----
Total assets $ 214,359 $ 203,049 $ 230,790 $ 38,663 $ 34,888
Long-term debt $ 142,317 $ 131,689 $ 149,111 $ 68 $ 16,827
Redeemable preferred
stock $ -0- $ -0- $ 27,431 $ -0- $ -0-
Preferred stock,
common stock
and additional
paid-in capital $ 127,998 $ 121,199 $ 88,808 $ 73,149 $ 62,857
Accumulated deficit $ (78,288) $ (70,818) $ (61,067) $ (54,396) $(45,909)
Stockholders' equity $ 49,710 $ 50,381 $ 27,741 $ 18,753 $ 16,948
(1) Subsequent to the Company's September 13, 1996
acquisition of Sun World, the Company changed
its fiscal year end from March 31 to December 31
in order to align the Company's year end with
that of Sun World. Additionally, as a result of
the Sun World acquisition, the operations for
the nine months ended December 31, 1996 include
the results of operations of Sun World for the
period September 14, 1996 through December 31,
1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On September 13, 1996, the Company acquired all
of the outstanding capital stock of Sun World. The
Company's acquisition of Sun World was accounted for
using the purchase method of accounting. The
Consolidated Financial Statements include Sun World
from the date of acquisition. In addition, in 1996,
the Company changed its fiscal year end from March
31 to December 31 in order to align the Company's
year end with that of Sun World.
RESULTS OF OPERATIONS
The consolidated financial statements set forth
herein for the years ended December 31, 1998 and
1997 and the nine months ended December 31, 1996,
reflect the results of operations of the Company and
its wholly owned subsidiaries, Sun World (since
September 14, 1996), and Southwest Fruit Growers
("SWFG") in which the Company was the general
partner and had an approximate 66.3 percent
partnership interest. On November 5, 1998, the
Company purchased the assets of SWFG and the
partnership dissolved.
A summary of the Sun World elements which
management of the Company 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 the Company's Sun World
subsidiary, and the term Cadiz will be used, when
the context so requires, with respect to those
operations and activities of the Company not
involving Sun World.
The Company's net income or loss in future
fiscal periods will be largely reflective of (a) the
operations of the Company's water development
activities including the Cadiz Groundwater Storage
and Dry-Year Supply Program (the "Program") and
(b) the operations of Sun World. 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 and the diversity of its crop mix
makes it unlikely that adverse weather conditions
would affect all of Sun World's properties or all of
its crops in any single year. Nevertheless, net
profit from Sun World's packing, marketing and
proprietary product development operations tends to
be more consistent from year to year than net profit
from Sun World's farming operations. As such, Sun
World continues to strategically add volume in the
packing and marketing areas that will complement
Sun World's in-house production or fill in contra-
seasonal marketing windows. Sun World has entered
into agreements internationally to license selected
proprietary fruit varieties and continues to pursue
additional domestic and international licensing opportunities.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
- -------------------------------------------------------
DECEMBER 31, 1997
- -----------------
The Company'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 grape
and treefruit crops. Due to this concentrated
activity, Sun World has, therefore, historically
incurred a loss with respect to its agricultural
operations in the other months during the year.
The cooler wet weather patterns experienced in
California during the first half of 1998 delayed the
harvest of all California grape and treefruit
production by as much as four weeks from the 1997
harvest schedule and also reduced yields on certain
crops which prefer warmer weather conditions,
particularly early season table grapes in the San
Joaquin Valley.
The table below sets forth, for the periods
indicated, the results of operations for the
Company's four main divisions (before elimination of
any interdivisional charges), as well as the
categories of costs and expenses incurred by the
Company which are not included within the divisional
results (in thousands):
Year Ended
December 31,
1998 1997
---- ----
Divisional net income
Farming $ 8,522 $ 8,643
Packing 7,320 8,017
Marketing 3,245 4,126
Proprietary product development 11,466 1,568
------- -------
30,553 22,354
General and administrative 10,487 10,636
Special litigation 1,308 683
Litigation benefit - (3,780)
Depreciation and amortization 8,688 7,745
Interest expense, net 17,540 15,608
------- -------
Net loss $ (7,470) $ (8,538)
======== ========
FARMING OPERATIONS. Net income from farming
operations totaled $8.5 million for 1998 compared to
$8.6 million in 1997. Farming revenues were $78.1
million and farming expenses were $69.6 million for
1998. For 1997, the Company had farming revenues of
$77.9 million and farming expenses of $69.3 million.
Farming profits from the Coachella Valley operations
increased $1.7 million from 1997 due to strong
F.O.B. prices for peppers and watermelons and record
table grape yields partially offset by lower table
grape F.O.B. prices due to downward pressure from
the record yields coupled with increased production
from Mexico. Farming profits for the desert lemon
operations at Blythe and Cadiz increased $2.7
million from 1997 due to strong yields and strong
F.O.B. pricing experienced in 1998. Farming profits
from the San Joaquin Valley operations decreased $4.1
million primarily due to reduced yields and higher
harvest costs on the early season table grapes in
the San Joaquin Valley. These unfavorable results
were partially offset by improved F.O.B. pricing on
plums and the removal of certain underperforming
peach and nectarine crops at the conclusion of the
1997 season. Farming profits for coastal sweet
peppers were off $0.4 million from 1997 primarily
attributable to increased production costs.
PACKING OPERATIONS. During 1998, Sun World's
four packing and handling facilities contributed
$20.5 million in revenues offset by $13.2 million in
expenses resulting in $7.3 million in net income. In
1997, Sun World generated revenues of $23.1 million
and expenses of $15.1 million resulting in net
income of $8.0 million. The decrease in net income
from packing operations is primarily attributable to
the impact of reduced yields experienced in the
farming operations during the year, particularly for
the early season table grapes in the San Joaquin
Valley. During the year, Sun World packed 3.6
million units and moved an additional 4.0 million
units through the cold storage facilities for a
total of 7.6 million units processed through the
packing operations. In 1997, Sun World packed 4.1
million units and moved an additional 5.1 million
units through the cold storage facilities for a total
of 9.2 million units. Products packed or handled during
the year primarily consisted of Sun World-grown
table grapes, treefruit, sweet red and yellow
peppers, seedless watermelons and lemons, as well as
table grapes and citrus products packed for third
party growers.
MARKETING OPERATIONS. Sun World's marketing
operations include selling, merchandising and
promoting Sun World-grown products, as well as
providing these services for third party growers.
During 1998, approximately 9.9 million units were
sold primarily consisting of Sun World-grown table
grapes, treefruit, sweet red and yellow peppers,
seedless watermelons and lemons; and table grapes,
seedless watermelon, and citrus from domestic third
party growers. These unit sales resulted in
marketing revenue of $7.7 million while marketing
expenses totaled $4.5 million for 1998 resulting in
a net income from marketing operations of $3.2
million. During 1997, Sun World marketed 12.2
million units and generated revenues of $9.0 million
offset by expenses of $4.9 million resulting in net
income of $4.1 million. The decrease in units sold,
revenues and net income primarily resulted from the
decreased yields experienced in the farming
operations, particularly the early season table
grapes in the San Joaquin Valley.
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 during the past five
years. In addition, Sun World has a 50% interest in
ASC/SWB Partnership, formerly named American
SunMelon (the "Partnership"). During the year ended
December 31, 1998, net income from proprietary
product development was $11.5 million consisting of
revenues of $12.7 million ($10.7 million from the
Partnership) offset by expenses of $1.2 million.
The Partnership revenues relate to the operations of
American SunMelon for the period from January 1, 1998
to October 27, 1998 and the revenues related to the
distribution of proceeds from the Partnership from
the sale of substantially all of its assets to a third
party on October 27, 1998. In addition, the increase in
proprietary product development income is also
attributable to the licensing agreement for the
Company's Sugraone table grape variety entered into
with the South African table grape industry in
December 1998. Revenues of $1.1 million were
recognized in 1998 related to current and past
royalties for fruit sales and for past Sugraone
grapevine plantings. Net income of $1.6 million for
the year ended December 31, 1997 related primarily
to the operations of American SunMelon.
GENERAL AND ADMINISTRATIVE. General and
administrative expenses for 1998 totaled $10.5
million compared to $10.6 million in 1997.
SPECIAL LITIGATION. The Company is engaged in
lawsuits seeking monetary damages in connection with
the prevention of a landfill which was proposed to be
located adjacent to its Cadiz/Fenner Valley properties.
See "Item 3 - Legal Proceedings." During the year ended
December 31, 1998, expenses including litigation costs
and professional fees and expenses totaled $1.3 million
as compared to $0.7 million during the year ended
December 31, 1997.
LITIGATION BENEFIT. Prior to the acquisition
of Sun World by the Company, the Internal Revenue
Service (IRS) had filed claims against Sun World and
certain of its subsidiaries, (collectively "the Sun
World Claimants") for taxes refunded for workers
that the IRS claims were employees. Sun World
Claimants contend that the workers are excluded from
the definition of employment under the Internal
Revenue Code. On January 21, 1998, the District
Court ruled in favor of the Sun World Claimant who
had the largest outstanding claim. The IRS has
appealed this decision. Management believes that
the likelihood of an unfavorable future outcome with
regard to this matter is remote. Accordingly, Sun
World released $3.8 million of reserves related to
this matter at December 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation
and amortization expenses for the year ended
December 31, 1998 totaled $8.7 million compared to
$7.7 million for the year ended December 31, 1997.
The increase is attributable to depreciation related
to property, plant and equipment additions made
during the year and the timing of relief of
depreciation costs from inventory due to the timing
of the harvests.
INTEREST EXPENSE. As a result of the
acquisition of Sun World, net interest expense
totaled $17.5 million during the year ended December
31, 1998 compared to $15.6 million during the year
ended December 31, 1997. The following table
summarizes the components of net interest expense
for the two periods (in thousands):
Year Ended
December 31,
1998 1997
Interest on outstanding debt - Sun World $ 14,394 $ 13,446
Interest on outstanding debt - Cadiz 1,511 875
Amortization of financing costs 1,914 1,879
Interest income (279) (592)
------- -------
$ 17,540 $ 15,608
======== ========
The increase in interest on outstanding debt
during 1998 is primarily attributable to the
Company's debt refinancing in April 1997, whereby
Sun World issued $115 million of 11-1/4% First
Mortgage Notes and used the proceeds and existing
cash balance to pay off approximately $130 million
of long-term debt. Interest expense is also higher
due to (a) increased borrowings for seasonal working
capital needs primarily resulting from the delay in
harvest and sale of crops due to cooler weather
conditions during the growing season, (b)
amortization of warrants issued on the $15.0 million
Cadiz Revolver entered into during the fourth
quarter of 1997 and (c) reduced average cash
balances in 1998 compared to 1997 prior to the debt
refinancing resulting in lower interest income.
Financing costs, which include legal fees, loan fees
and warrants, are amortized over the life of the
debt agreements.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED
- ----------------------------------------------------------
DECEMBER 31, 1996
- -----------------
The table below sets forth, for the periods
indicated, the results of operations for the
Company's four main divisions (before elimination of
any interdivisional charges) as well as the
categories of costs and expenses incurred by the
Company which are not included within the divisional
results (in thousands):
Year Nine Months
Ended Ended
December 31, December 31,
1997 1996
---- ----
Divisional net income
Farming $ 8,643 $ 3,867
Packing 8,017 726
Marketing 4,126 666
Proprietary product development 1,568 718
------- --------
22,354 5,977
General and administrative 10,636 5,979
Special litigation 683 394
Litigation benefit (3,780) -
Depreciation and amortization 7,745 1,039
Interest expense, net 15,608 5,203
Income tax benefit - (641)
------- --------
Net loss $ (8,538) $ (5,997)
======== ========
FARMING OPERATIONS. The Company farmed over
19,000 acres of agricultural properties in 1997
primarily dedicated to producing permanent
commercial crops. Revenues during the year ended
December 31, 1997 resulted primarily from the
harvest of table grapes, treefruit, sweet red and
yellow peppers and seedless watermelons from the San
Joaquin Valley; table grapes, sweet red and yellow
peppers and seedless watermelons from the Coachella
Valley; lemons from the Cadiz and Blythe ranches; as
well as sweet red and yellow peppers from the
California coastal operations. Although yields for
these crops were higher than normal, similar high
crop yields throughout the industry resulted in
lower prices. As Sun World was able to command a
premium price for its proprietary products such as
Superior Seedless(TM) table grapes and Black Diamond(R)
plums, the impact of the industry-wide lower prices
were somewhat mitigated. Net income from farming
operations totaled $8.6 million for the year ended
December 31, 1997 based upon revenues of $77.9
million offset by farming expenses of $69.3 million.
Net income from farming operations for the nine
months ended December 31, 1996, which included the
operations of Sun World subsequent to the
acquisition from September 13, 1996, totaled $3.9
million on revenues of $16.5 million and expenses of
$12.6 million.
PACKING OPERATIONS. During 1997, Sun World's
four packing and handling facilities contributed
$23.1 million in revenues offset by $15.1 million in
expenses resulting in $8.0 million in net income.
During the year, Sun World packed 4.1 million units
and moved an additional 5.1 million units through
the cold storage facilities for a total of 9.2
million units processed through the packing
operations. Products packed or handled during the
year primarily consisted of Sun World-grown table
grapes, treefruit, sweet red and yellow peppers,
seedless watermelons and lemons, as well as table
grapes and citrus products packed for third party
growers. The 1996 net income of $0.7 million from
packing operations related to the results of Sun
World from September 14, 1996 to December 31, 1996
in which Sun World generated packing revenues of
$4.7 million and expenses of $4.0 million.
MARKETING OPERATIONS. During the year ended
December 31, 1997, approximately 12.2 million units
were sold primarily consisting of Sun World-grown
table grapes, treefruit, sweet red and yellow
peppers, seedless watermelons and lemons; and table
grapes, seedless watermelon, and citrus from
domestic third party growers. These unit sales
resulted in marketing revenue of $9.0 million while
marketing expenses totaled $4.9 million for the year
ended December 31, 1997 resulting in a net income
from marketing operations of $4.1 million. The 1996
net income from marketing operations related to the
results of Sun World from September 14, 1996 to
December 31, 1996 in which Sun World generated
marketing revenues of $2.5 million offset by
expenses of $1.8 million resulting in net profits of
$0.7 million.
PROPRIETARY PRODUCT DEVELOPMENT. During the
year ended December 31, 1997, net income from
proprietary product development was $1.6 million
consisting of revenues of $2.4 million ($1.3 million
from American SunMelon) offset by expenses of $0.8
million. The net income of $0.7 million for the
nine months ended December 31, 1996 related
primarily to the operations of American SunMelon
from September 14, 1996 to December 31, 1996.
GENERAL AND ADMINISTRATIVE. General and
administrative expenses during the year ended
December 31, 1997 and the nine months ended December
31, 1996 consisted primarily of corporate operating
expenses, professional fees and salaries. These
expenses increased by $4.7 million in 1997 as
compared to the nine months ended December 31, 1996
period primarily due to the inclusion of a full year
of operations for Sun World in 1997.
SPECIAL LITIGATION . The Company is engaged in
lawsuits seeking monetary damages in connection with
the prevention of a landfill which was proposed to be
located adjacent to its Cadiz/Fenner Valley properties.
See Item 3, "Legal Proceedings." During the year ended
December 31, 1997, expenses incurred in connection
with activities in opposition to the project, such
as litigation costs and professional fees and expenses
totaled $0.7 million as compared to $0.4 million
during the nine months ended December 31, 1996.
LITIGATION BENEFIT. Prior to the acquisition
of Sun World by the Company, the Internal Revenue
Service (IRS) had filed claims against Sun World and
certain of its subsidiaries, (collectively "the Sun
World Claimants") for taxes refunded for workers
that the IRS claims were employees. The Sun World
Claimants contend that the workers are excluded from
the definition of employment under the Internal
Revenue Code. On January 21, 1998, the District
Court ruled in favor of the Sun World Claimant who
had the largest outstanding claim. Management
believes that the likelihood of an unfavorable
future outcome with regard to this matter is remote.
Accordingly, Sun World released $3.8 million of
reserves related to this matter at December 31,
1997.
DEPRECIATION AND AMORTIZATION. Depreciation
and amortization expense for the year ended December
31, 1997 totaled $7.7 million compared to $1.0
million for the nine months ended December 31, 1996.
The increase is attributable to depreciation
relating to the acquired Sun World assets.
INTEREST EXPENSE. As a result of the
acquisition of Sun World, net interest expense
totaled $15.6 million during the year ended December
31, 1997 compared to $5.2 million during the nine
months ended December 31, 1996. The following table
summarizes the components of net interest expense
for the two periods (in thousands):
Year Nine Months
Ended Ended
December 31, December 31,
1997 1996
---- ----
Interest on outstanding debt - Sun World $ 13,446 $ 4,411
Interest on outstanding debt - Cadiz 875 782
Amortization of financing costs 1,879 746
Interest income (592) (736)
-------- -------
$ 15,608 $ 5,203
======= =======
The increase in interest expense on outstanding
debt during 1997 is attributable to the long-term
debt acquired as part of the Sun World acquisition.
Financing costs, which include legal fees and
extension fees, are amortized over the life of the
debt agreement.
LIQUIDITY AND CAPITAL RESOURCES
General Discussion of Liquidity and Capital Resources
- -----------------------------------------------------
Based on the $13.6 million of cash at December
31, 1998 and the revolving credit facilities in
place for both Cadiz and Sun World, as further
discussed below, the Company believes it will be
able to meet its working capital needs over the next
year without looking to additional outside funding
sources, although no assurances can be made. See
"Current Financing Arrangements" below.
Under Sun World's historical working capital
cycle, working capital is required primarily to
finance the costs of growing and harvesting crops,
which generally occur from January through September
with a peak need in June. Sun World harvests and
sells the majority of its crops during the period
from June through October, when it receives the
majority of its revenues. In order to bridge the
gap between incurrence of expenditures and receipt
of revenues, large cash outlays are required each
year which are financed through a revolving credit
agreement. In April 1998, Sun World entered into a
$25 million one year facility (the "Sun World
Revolver"). In February 1999, Sun World increased
the Sun World Revolver to a $30 million facility in
conjunction with a one year renewal of the facility.
See "Current Financing Arrangements - Sun World"
below.
In order to provide additional availability of
working capital and to provide a readily available
funding mechanism for add-on acquisition
opportunities, Cadiz entered into a three year $15
million revolving credit facility (the "Cadiz
Revolver") in November 1997.
Current Financing Arrangements
- --------------------------------
CADIZ OBLIGATIONS
As Cadiz has not received significant revenues
from its water resource activity to date, Cadiz has
been required to obtain financing to bridge the gap
between the time water resource development expenses
are incurred and the time that revenue will
commence. Historically, Cadiz has addressed these
needs primarily through secured debt financing
arrangements with its lenders, private equity
placements and the exercise of outstanding stock
options.
As of December 31, 1998, Cadiz was obligated
for approximately $9.8 million under a senior term
loan facility. With Cadiz' election to extend the
facility in 1998, the maturity date of the term loan
is April 30, 1999. The Company issued certain
additional warrants in conjunction with the
extension. Cadiz also has the right to obtain an
additional one-year extension. The Company is
currently evaluating opportunities to refinance this
term loan. If the extension is exercised, Cadiz
would be required to issue certain warrants and the
interest rate would be adjusted. Currently, the
term lender holds a senior deed of trust on
substantially all of Cadiz' non-Sun World related
property.
The Cadiz Revolver is secured by a second lien
on substantially all of the non-Sun World assets of
the Company. Principal is due on December 31, 2000.
The Company had $15.0 million outstanding under the
Cadiz Revolver at December 31, 1998. During 1998,
the Company issued additional warrants in connection
with borrowings under the Cadiz Revolver.
As the Company continues to actively pursue its
business strategy, additional financing specifically
in connection with the Company's water programs may
be required. Responsibility for funding the design,
construction and program implementation costs of the
capital facilities for the Cadiz Groundwater Storage
and Dry-Year Supply Program will, under currently
developed principles and terms, be shared equally by
the Company and the Metropolitan Water District of
Southern California ("Metropolitan"). The Company is
analyzing various alternatives for funding its share
of the estimated $125 million to $150 million cost of
the program capital facilities. These funding alternatives
include (a) long-term financing arrangements or
(b) utilization of monies to be received from Metropolitan
for its initial purchase of 500,000 acre-feet of indigenous
groundwater. The principles of agreement call for
payment to Cadiz of at least $115 million for this
initial groundwater. Based upon the results of
analyses performed by investment banking firms
retained by the Company, management believes that
several alternative long-term financing arrangements
are available to the Company.
SUN WORLD OBLIGATIONS
The First Mortgage Notes (the "Sun World
Notes") were issued in the principal amount of $115
million on April 16, 1997 and will mature on April
15, 2004. The Sun World Notes will be redeemable at
the option of Sun World, in whole or in part, at any
time on or after April 15, 2001. Interest accrues
at the rate of 11-1/4% per annum and is payable semi-
annually on April 15 and October 15 of each year.
The Sun World Notes are secured by a first lien
(subject to certain permitted liens) on
substantially all of the assets of Sun World and its
subsidiaries, other than growing crops, crop
inventories and accounts receivable and proceeds
thereof, which secure the Sun World Revolver, and
certain real property pledged to third parties. The
Sun World Notes are also secured by the guarantee of
Cadiz and the pledge by Cadiz of all of the stock of
Sun World.
Commencing October 14, 1997, Sun World offered
to exchange (the "Exchange Offer") up to $115.0
million aggregate principal amount of its 11-1/4 %
Series B First Mortgage Notes (the "Exchange Notes")
for $115.0 million aggregate principal amount of the
Sun World Notes. The Exchange Notes are registered
under the Securities Act of 1933 and have the same
terms as the Sun World Notes. The exchange of all
of the Sun World Notes was completed on November 12,
1997.
In April 1998, Sun World entered into the Sun
World Revolver which is guaranteed by Cadiz. As of
December 31, 1998, no amount was outstanding under
the Sun World Revolver. To meet its working capital
needs for 1999, Sun World has renewed the Sun World
Revolver for an additional year including an
increase in the facility to $30 million.
Additionally, Sun World has an intercompany
revolving credit agreement with Cadiz for seasonal
working capital needs as needed. No amount was
outstanding under the intercompany revolver as of
December 31, 1998.
CASH (USED FOR) PROVIDED BY OPERATING
ACTIVITIES. Cash used for operating activities
totaled $7.9 million for the year ended December 31,
1998, as compared to cash provided by operating
activities of $0.2 million for the year ended
December 31, 1997. The increase in cash used for
operating activities is primarily due to the
elimination of the Company's share of partnership
operations related to the sale by American SunMelon
of the majority of its assets in October 1998 as the
cash distribution to Sun World corresponding to the
sale is included in investing activities.
CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES. Cash provided by investing activities
totaled $2.7 million for the year ended December 31,
1998, as compared to cash used for investing
activities of $2.9 million for the same period in
1997. In October 1998, Sun World received an
initial distribution of $15.2 million from a 50%
owned partnership, American SunMelon. This
distribution resulted from the sale by the
partnership of substantially all of its assets to a
third party for $35 million in cash. During 1998,
the Company invested $3.4 million in developing crops,
$0.9 million in water programs, and $7.3 million for
the purchase of property, plant and equipment including
two citrus ranches in the San Joaquin Valley,
totaling approximately 2,000 acres, and a new
computer system implementation. In 1997, the
Company received $2.8 million from the disposal of
certain non-core properties compared to $0.4 million
in 1998.
CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES. Cash provided by financing activities
totaled $13.6 million for the year ended December
31, 1998, consisting primarily of $2.0 million in
borrowings by Sun World in conjunction with the
purchase of a citrus ranch and $10.0 million in
borrowings under the Cadiz Revolver. Cash used for
financing activities totaled $25.3 million for the
year ended December 31, 1997 resulting from the Sun
World debt refinancing in April 1997. Principal
payments on long-term debt totaled $0.6 million for
the year ended December 31, 1998. Net proceeds from
the exercise of stock options totaled $2.2 million
during 1998 compared to $1.7 million during 1997.
OUTLOOK
The Company is actively pursuing the
development of its water resources. Specifically,
in July 1998, the Company and Metropolitan approved
the principles and terms for agreement for a water
storage and supply program on the Company's land in
the Cadiz and Fenner Valleys of eastern San Bernardino
County (the "Cadiz Groundwater Storage and Dry-Year
Supply Program"). The principles and terms for
agreement provide that Metropolitan will, during
wet years or periods of excess supply, store surplus
water from its Colorado River Aqueduct in the
Company's groundwater basin. During dry years or times
of reduced allocations from the Colorado River, the
previously imported water, together with additional
existing groundwater, will be extracted and delivered,
via a conveyance pipeline, back to the aqueduct.
During the 50 year term of the agreement,
Metropolitan will store a minimum of 500,000 acre-
feet of Colorado River Aqueduct water in the
Company's groundwater basin and purchase a minimum
of 1,100,000 acre-feet of existing groundwater for
transfer during dry-years. The Program will have
the capacity to convey, either for storage or
transfer, up to 150,000 acre-feet in any given year.
During storage operations, Metropolitan will
pay a fee per acre-foot for put of water into
storage and a fee per acre-foot for return of water
from storage, and a storage fee per acre-foot every
year that water is stored in the groundwater basin.
On the transfer of water, Metropolitan will pay a
base rate of approximately $230 per acre-foot, which
will be adjusted according to a water price formula.
Additionally, recognizing that delivery of the
Company's high-quality, indigenous groundwater to
the aqueduct provides a significant water quality
benefit, Metropolitan will pay the Company a water
quality fee for both transferred and returned water.
The Program facilities, including spreading
basins, extraction wells, conveyance pipeline and a
pumping plant, are estimated to cost between $125
and $150 million, and both parties will share these
costs. All operational costs of the Program,
including annual operations, maintenance and energy
costs, will be an obligation of Metropolitan.
The principles and terms for agreement call for
the establishment of a comprehensive independent
groundwater monitoring and management plan to ensure
long-term protection of the groundwater basin. The
parties have commenced the environmental review
process, which will include compliance with
California Environmental Quality Act and National
Environmental Protection Act requirements. The
final agreement may reflect adjustments to these
principles and terms in order to reflect information
identified during this review. The final agreement
will be presented to the respective Boards of both
parties for approval. The Program is anticipated to
be operational by the year 2001.
In addition to the development of its water
resources, the Company is actively involved in
further agricultural development and reinvestment in
its landholdings. Such development will be
systematic and in furtherance of the Company's
business strategy to provide for maximization of the
value of its assets. The Company also continually
evaluates acquisition opportunities, which are
complimentary to its current portfolio of water and
agricultural resources. With the acquisition of two
citrus ranches in 1998, the Company will grow, pack
and market additional boxes of citrus from December
through March, which is contra-seasonal to the
Company's primary farming operations. This
acquisition helps to further diversify the Company's
portfolio and enables the Company to utilize its
Bakersfield packing facility during a previous
period of limited utilization.
The Company believes that, based upon current
levels of operations and anticipated growth, Sun
World can adequately service its indebtedness and
meet its seasonal working capital needs utilizing
available internal cash, the Sun World Revolver and,
if necessary, through an intercompany revolver with
Cadiz. Cadiz expects to be able to meet its
ordinary working capital needs, in the short-term,
through a combination of cash on hand, quarterly
management fee payments from Sun World, payments
from Sun World under an agricultural lease whereby
Sun World now operates the Company's 1,600 acres of
developed agricultural property at Cadiz,
California, and the possible exercise of outstanding
stock options. Except for the foregoing, additional
intercompany cash payments between Sun World and
Cadiz are subject to certain restrictions under its
current lending arrangements.
Since the Company's inception, inflation has
not had a material impact on the cost of materials
required in the development of property or on labor
costs. Similarly, the value of the Company's real
property has not been materially impacted by
inflation. In the event the rate of inflation
should accelerate in the future, the Company
believes the increase in value of its real property
will exceed any increases in costs attributable to
inflation.
YEAR 2000
The year 2000 ("Y2K") issue is the result of
computer programs using two digits rather than four
to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system
failures or miscalculations leading to disruptions
in the Company's activities and operations. If the
Company or its significant suppliers or customers
fail to make necessary modifications, conversions,
and contingency plans on a timely basis, the Y2K
issue could have a material adverse effect on the
Company's business, operations, cash flows, and
financial condition. The impact of the Y2K issue
cannot be quantified at this time because the
Company cannot accurately estimate the magnitude,
duration, or ultimate impact of noncompliance by
suppliers, customers, and third parties that have no
direct relationship to the Company.
The Company has established a corporate-wide
project team to identify and mitigate all Y2K
issues. The team has identified three categories of
software and systems that require attention:
(1) Information technology ("IT")
systems, such as mini mainframes,
PCs, and networks;
(2) Non-IT systems, such as equipment,
machinery, climate control, and
security systems, which may contain
microcontrollers with embedded
technology; and
(3) Partner (supplier and customer) IT
and non-IT systems.
For each category, the project team is
utilizing the following steps to identify and
resolve Y2K issues: (1) inventory the systems, (2)
assess risks and impact of each system, (3)
prioritize projects, (4) fix, replace, or develop
contingency plans for non-compliant systems, and (5)
test Y2K compliance.
The status of each of the major categories as of
February 1999 is as follows:
Information Technology
----------------------
Currently, various IT remediation projects are
at different phases of completion. The Company's
assessments have identified three major internal IT
remediation projects: (1) AS400 Applications, (2) PC
Based Accounting and Payroll Systems, and (3) PC
Based Network Servers and Desktop Computers.
The Company's plan is to resolve compliance
issues in critical business information systems by
August 31, 1999.
YEAR 2000 COMPLIANCE FOR AS/400 APPLICATIONS
The IBM AS/400 hardware and operating systems
are year 2000 compliant. The Company utilizes AS/400
applications for its sales/order entry, accounts
receivable, produce inventory, and grower accounting
systems. The primary year 2000 issue as it relates
to the IBM AS/400 is that the core business
applications software currently does not process nor
store properly dates after December 31, 1999.
Currently, date storage fields are being expanded
from six digits to eight digits for all affected
display screens and reports where appropriate. The
Company plans to have all programming and testing
with regard to core business AS/400 applications
completed by August 31, 1999. As of February 28,
1999, the Company is approximately 50% complete with
the AS/400 project and remains on schedule to have
the AS/400 applications Year 2000 compliant by
August 31, 1999.
YEAR 2000 COMPLIANCE FOR PC BASED ACCOUNTING
AND PAYROLL SYSTEMS
The Company utilizes commercial PC based
accounting systems for its general ledger, accounts
payable, project costing, purchasing, non-produce
inventory, payroll and human resource systems. As
of January 1999, all required service packs to make
these applications Year 2000 compliant have been
installed and tested.
YEAR 2000 COMPLIANCE ON PC BASED NETWORK
SERVERS AND DESKTOP COMPUTERS
The Company has contacted all significant PC
based desktop and server system manufacturers to
ascertain Year 2000 compliance. All significant PC
based systems are either Year 2000 compliant without
any changes or will be with the installation of ROM
upgrades. The Company plans to complete the
required ROM upgrades by March 31, 1999.
Non-IT Systems
---------------
Although no other areas of the business are
expected to create Year 2000 issues, the project
team is continuing to review all areas of the
business to determine Year 2000 compliance.
Management believes that given the agricultural
nature of the Company's business, the project team
will not encounter any major Y2K issues which cannot
be corrected or would have a material adverse affect
on the Company, although no absolute assurances can
be given.
Suppliers and Customers IT and Non-IT Systems
---------------------------------------------
The Company has identified all significant
suppliers and customers and has started the process
of sending surveys and conducting formal
communications to determine the extent to which it
may be affected by those third parties' Y2K
preparedness plans. In the absence of adequate
responses and disclosures from major suppliers and
customers, the Company will attempt to make
independent assessments. However, a compliance
failure by a major supplier or customer, or one of
their suppliers or customers, could have a material
adverse effect on the Company's business or
financial condition. As a result, in some cases the
Company will develop contingency plans for suppliers
and customers determined to be at risk of
noncompliance or business disruption. Such plans
could include finding alternative suppliers or
manual intervention where necessary.
Costs related to the Y2K issue are funded
through operating cash flows. The Company presently
believes that the total costs to obtain Y2K
compliant systems will not exceed $250,000, which
consists mostly of internal labor for programming
and testing.
CERTAIN TRENDS AND UNCERTAINTIES
In connection with the "safe harbor" provisions
of the Private Securities Litigation Reform Act of
1995, the Company is hereby filing cautionary
statements identifying important risk factors that
could cause the Company's actual results to differ
materially from those projected in forward-looking
statements of the Company made by or on behalf of
the Company.
The Company wishes to caution readers that
these factors, among others, could cause the
Company's actual results to differ materially from
those expressed in any projected, estimated or
forward-looking statements relating to the Company.
The following factors should be considered in
conjunction with any discussion of operations or
results by the Company or its representatives,
including any forward-looking discussion, as well as
comments contained in press releases, presentations
to securities analysts or investors, or other
communications by the Company.
In making these statements, the Company is not
undertaking to address or update each factor in
future filings or communications regarding the
Company's business or results, and is 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
the Company's past results and may affect future
results.
RISKS INHERENT IN AGRICULTURAL OPERATIONS. The
Company is subject to risks associated with its
agricultural operations. Numerous factors can
affect the price, yield and marketability of the
crops grown on the Company's properties. Crop
prices may vary greatly from year to year as a
result of the relationship between production and
market demand. For example, the production of a
particular crop in excess of demand in any
particular year will depress market prices, and
inflationary factors and other unforeseeable
economic changes may also, at the same time,
increase operating costs with respect to such crops.
In addition, the agricultural industry in the United
States is highly competitive, and domestic growers
and produce marketers are facing increased
competition from abroad, particularly from Mexico.
There are also a number of factors outside of the
Company's control that could, alone or in
combination, materially adversely affect the
Company's agricultural operations, such as adverse
weather conditions, insects, blight or other
diseases, labor problems such as boycotts or strikes
and shortages of competent laborers. The Company's
operations may also be adversely affected by changes
in governmental policies, social and economic
conditions, and industry production levels.
RISKS OF WATER DEVELOPMENT PROJECTS. The
Company anticipates that it will continue to incur
operating losses from its non-Sun World operations
until such time as it is able to receive significant
revenues from the development of its water
development projects, including the Cadiz
Groundwater Storage and Dry-Year Supply
Program. In addition to the risk of delays
associated with receiving all necessary regulatory
approvals and permits, the Company may also
encounter unforeseen technical difficulties, which
could result in construction delays, and cost
increases with respect to the Company's water
development projects. The Company is continuing to
negotiate the terms and conditions of water storage
and supply programs with various California water
agencies (including Metropolitan with respect to
preparing the final agreement for the Cadiz
Groundwater Storage and Dry-Year Supply Program).
However, the outcome of other negotiations cannot be
predicted with any degree of certainty. The
circumstances under which transfers or storage of
water can be made and the profitability of any
transfers or storage are subject to significant
uncertainties, including hydrologic risks of
variable water supplies, risks presented by
allocations of water under existing and prospective
priorities, and risks of adverse changes to or
interpretations of U.S. federal, state and local
laws, regulations and policies.
Other important risk factors that could cause
the Company's actual results to differ materially
from those expressed or implied by the Company or on
behalf of the Company are discussed elsewhere within
this Form 10-K in the sections entitled:
Seasonality, Regulation, Competition, Year 2000, and
Liquidity and Capital Resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk from
changes in interest rates on long-term debt
obligations that impact the fair value of these
obligations. The Company's policy is to
manage interest rates through the use of a
combination of fixed and variable rate debt. The
Company's interest rate risk management objective is
to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall
borrowing costs. Other instruments, such as
interest rate swaps, options, floors, caps or
collars may also be used depending upon market
conditions. No such instruments were used in 1998.
The table below presents the principal amounts,
weighted average interests rates, and fair values by
year of scheduled maturities to evaluate the
expected cash flows and sensitivity to interest rate
changes (in thousands of dollars). Circumstances
could arise which may cause interest rates and the
timing and amount of actual cash flows to differ
materially from the schedule below:
Long-Term Debt
----------------------------------------
Average Average
Fixed Interest Variable Interest
Expected Maturity Rate Rate Rate Rate
- ----------------- ---- ---- ---- ----
1999 $ 327 7.7% $ 286 7.8%
2000 15,432 9.9% 10,038 9.9%
2001 445 7.6% 286 7.8%
2002 385 7.7% 286 7.8%
2003 285 7.8% 856 7.8%
Thereafter 115,932 11.2% -0- -
-------- ----- -------- -----
Total $ 132,806 11.0% $ 11,752 9.6%
======== ===== ======== =====
Fair Value at
12/31/98 $ 139,206 $ 11,752
======== ========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is
submitted in response to Part IV hereof. See the
Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is
incorporated herein by reference to the definitive
proxy statement involving the election of directors
which the Company intends to file with the
Commission pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 not later than
120 days after December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is
incorporated herein by reference to the definitive
proxy statement involving the election of directors
which the Company intends to file with the
Commission pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 not later than
120 days after December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information called for by this item is
incorporated herein by reference to the definitive
proxy statement involving the election of directors
which the Company intends to file with the
Commission pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 not later than
120 days after December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is
incorporated herein by reference to the definitive
proxy statement involving the election of directors
which the Company intends to file with the
Commission pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 not later than
120 days after December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements. See Index to
Consolidated Financial Statements.
2. Financial Statement Schedules. See Index
to Consolidated Financial Statements.
3. Exhibits.
The following exhibits are filed or incorporated by
reference as part of this Annual Report.
3.1 Certificate of Incorporation of the Company,
as amended(2)
3.2 Amendment to Certificate of Incorporation dated
November 12, 1996(3)
3.3 Amendment to Certificate of Incorporation dated
September 1, 1998(13)
3.4 Bylaws of the Company, as amended to date(4)
3.5 Amended and Restated Certificate of Incorporation
of Sun World, Inc.(10)
3.6 Certificate of Merger of Sun World International,
Inc. into Sun World, Inc.(10)
3.7 Agreement and Plan of Merger of Sun World, Inc.
and Sun World International, Inc.(10)
3.8 Amended and Restated Bylaws of Sun World International,
Inc.(10)
4.1 Specimen Form of Stock Certificate for the Company's
registered stock(13)
4.2 Certificate of Designations of 6% Convertible Series
A Preferred Stock(1)
4.3 Certificate of Designations of 6% Convertible Series
B Preferred Stock(5)
4.4 Certificate of Designations of 6% Convertible Series
C Preferred Stock(1)
4.5 Indenture dated as of April 16, 1997 among Sun World
as issuer, Sun World and certain subsidiaries of Sun
World as guarantors, and IBJ Whitehall Bank & Trust
Company as trustee, for the benefit of holders of
11-1/4% First Mortgage Notes due 2004 (including as
Exhibit A to the Indenture, the form of the Global
Note and the form of each Guarantee)(8)
4.6 Form of Amendment to Indenture dated as of October 9,
1997(11)
4.7 Form of Amendment to Indenture dated as of January 23,
1998(12)
10.1 The Company's 1996 Stock Option Plan(6)
10.2 Form of Employment Agreement dated September 13, 1996
between Sun World, the Company and Timothy J. Shaheen(7)
10.3 Form of Employment Agreement dated September 13, 1996
between Sun World, the Company and Stanley E. Speer(7)
10.4 Form of Sun World Executive Officer Employment Agreement(9)
10.5 Credit Agreement between the Company and ING Baring (U.S.)
Capital Corporation dated November 25, 1997(12)
10.6 Revolving Credit Note between the Company and ING Baring
(U.S.) Capital Corporation dated November 25, 1997(12)
10.7 Employment Agreement between the Company and Keith Brackpool
dated February 1, 1998(12)
10.8 Principles for an Agreement between the Metropolitan Water
District of Southern California and the Company dated
August 14, 1998(13)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants (included in Part IV of
the Form 10-K)
27.1 Financial Data Schedule
(1) Previously filed as Exhibit to the Company's Report on
Form 8-K dated September 13, 1996
(2) Previously filed as Exhibit to the Company's Registration
Statement of Form S-1 (Registration No. 33-75642)
declared effective May 16, 1994
(3) Previously filed as Exhibit to the Company's Report on
Form 10-Q for the quarter ended September 30, 1996
(4) Previously filed as Exhibit to the Company's Report on
Form 8-K dated May 6, 1992
(5) Previously filed as Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1996
(6) Previously filed as Exhibit A to the Company's Proxy
Statement relating to the Annual Meeting of Stockholders
held on November 8, 1996
(7) Previously filed as Exhibit to the Company's Transition
Report on Form 10-K for the nine months ended December 31,
1996
(8) Previously filed as Exhibit to Amendment No. 1 to the
Company's Form S-1 Registration Statement No. 333-19109
(9) Previously filed as Exhibit to the Company's Report on
Form 10-Q for the quarter ended March 31, 1997
(10) Previously filed as Exhibit to Sun World's Form S-4
Registration Statement No. 333-31103
(11) Previously filed as Exhibit to Amendment No. 2 to Sun
World's Form S-4 Registration Statement No. 333-31103
(12) Previously filed as Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997
(13) Previously filed as Exhibit to the Company's Report
on Form 10-Q for the quarter ended September 30, 1998
(b) Reports on Form 8-K
1. Report on Form 8-K dated December 7, 1998, describing
the expiration of an offer made by the Company's Sun
World subsidiary to purchase Series B First Mortgage
Notes using proceeds received from the October 1998
sale of substantially all of the assets of ASC/SWB
Partnership (formerly American SunMelon), a watermelon
seed company in which Sun World holds a 50% interest.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly
authorized.
CADIZ INC.
By: /s/ Keith Brackpool By: /s/ Stanley E. Speer
----------------------- ----------------------
Keith Brackpool, Stanley E. Speer,
Chief Executive Officer Chief Financial Officer
and Director and Secretary
Date: March 19, 1999 Date: March 19, 1999
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/ Dwight W. Makins March 19, 1999
- ----------------------------
Dwight Makins, Chairman
of the Board and Director
/s/ Keith Brackpool March 19, 1999
- ----------------------------
Keith Brackpool,
Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Stanley E. Speer March 19, 1999
- ----------------------------
Stanley E. Speer,
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
/s/ Murray H. Hutchison March 19, 1999
- ----------------------------
Murray H. Hutchison, Director
/s/ Mitt Parker March 19, 1999
- ----------------------------
Mitt Parker, Director
/s/ Timothy J. Shaheen March 19, 1999
- ----------------------------
Timothy J. Shaheen, Director
/s/ Anthony L. Coelho March 19, 1999
- -----------------------------
Anthony L. Coelho, Director
CADIZ INC.
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS
- --------------------
Report of Independent Accountants................................34
Consolidated Statement of Operations for the years ended
December 31, 1998 and 1997, and the nine months ended
December 31, 1996..............................................35
Consolidated Balance Sheet as of December 31, 1998 and 1997......36
Consolidated Statement of Cash Flows for the years ended
December 31, 1998 and 1997, and the nine months ended
December 31, 1996..............................................37
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1998 and 1997, and the nine
months ended December 31, 1996.................................38
Notes to the Consolidated Financial Statements...................41
FINANCIAL STATEMENT SCHEDULES
- ------------------------------
Schedule I - Condensed Financial Information
of Registrant for the years ended December 31, 1998
and 1997, and the nine months ended December 31, 1996..........57
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1998 and 1997, and the nine months
ended December 31, 1996........................................60
(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.)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cadiz Inc.
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Cadiz Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years ended December 31, 1998 and
1997, and the nine months ended December 31, 1996, in conformity
with generally accepted accounting principles. 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 generally accepted auditing
standards, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers
- --------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
February 19, 1999
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months
Year Ended Ended
December 31, December 31,
(In thousands except per share data) 1998 1997 1996
- ------------------------------------------------------------------------
Revenues $95,845 $98,769 $22,942
Income from partnerships 10,699 1,388 838
------- ------- -------
Total revenues 106,544 100,157 23,780
------- ------- -------
Costs and expenses:
Cost of sales 74,742 76,566 17,725
General and administrative 11,736 11,873 6,057
Special litigation 1,308 683 394
Litigation benefit - (3,780) -
Depreciation and amortization 8,688 7,745 1,039
------- ------- -------
Total costs and expenses 96,474 93,087 25,215
------- ------- -------
Operating profit (loss) 10,070 7,070 (1,435)
Interest expense, net 17,540 15,608 5,203
-------- -------- -------
Loss before income taxes (7,470) (8,538) (6,638)
Income tax benefit - - (641)
------- ------- -------
Net loss (7,470) (8,538) (5,997)
Less: Preferred stock dividends - (1,213) (674)
Imputed dividend on
preferred stock - - (2,451)
------- ------- -------
Net loss applicable to common stock $(7,470) $(9,751) $(9,122)
======= ======== ========
Net loss per common share $ (.23) $ (.33) $ (.44)
======== ======== ========
Weighted average shares outstanding 33,173 29,485 20,500
======= ======= =======
See accompanying notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED BALANCE SHEET
December 31,
($ in thousands) 1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 13,635 $ 5,298
Accounts receivable, net 6,295 5,881
Inventories 15,019 13,838
Prepaid expenses and other 992 1,161
------- --------
Total current assets 35,941 26,178
Investment in partnerships 1,169 6,327
Property, plant, equipment and
water programs, net 166,022 160,042
Other assets 11,227 10,502
------- -------
$ 214,359 $ 203,049
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,753 $ 8,517
Accrued liabilities 6,846 6,114
Long-term debt, current portion 613 519
------- -------
Total current liabilities 16,212 15,150
Long-term debt 142,317 131,689
Deferred income taxes 5,447 5,447
Other liabilities 673 382
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value;
45,000,000 shares authorized;
shares issued and outstanding
33,592,261 at December 31, 1998
and 32,646,661 at December 31, 1997 336 326
Additional paid-in capital 127,662 120,873
Accumulated deficit (78,288) (70,818)
------- -------
Total stockholders' equity 49,710 50,381
------- -------
$ 214,359 $ 203,049
========= =========
See accompanying notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months
Year Ended Ended
December 31, December 31,
($ in thousands) 1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net loss $(7,470) $(8,538) $(5,997)
Adjustments to reconcile net loss
to net cash (used for) provided
by operating activities:
Depreciation and amortization 10,601 9,227 1,654
Litigation benefit - (3,780) -
Issuance of stock for services 374 470 -
Interest capitalized to debt - 315 481
(Gain) loss on disposal of assets (207) 99 -
Share of partnership operations (10,699) (1,388) (838)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (414) 1,652 11,367
(Increase) decrease
in inventories (1,559) 570 1,000
Decrease (increase) in
prepaid expenses and other 307 64 (428)
Increase (decrease) in
accounts payable 236 672 (6,798)
Increase in accrued liabilities 916 1,332 68
Decrease in other current
liabilities - (591) -
Increase (decrease) in other
liabilities 18 54 (674)
------ ------- -------
Net cash (used for) provided by
operating activities (7,897) 158 (165)
------ ------- -------
Cash flows from investing activities:
Additions to property, plant and
equipment (7,308) (2,114) (895)
Additions to water programs (856) (400) (343)
Additions to developing crops (3,396) (4,725) (187)
Proceeds from disposal of property,
plant and equipment 388 2,817 12,415
Partnership distributions 15,859 1,165 140
Acquisition of Sun World, net of
cash acquired - - (4,474)
(Increase) decrease in other assets (2,020) 358 -
------ ------- -------
Net cash provided by (used for)
investing activities 2,667 (2,899) 6,656
------ ------- -------
Cash flows from financing activities:
Net proceeds from issuance of stock 2,154 1,690 37,761
Proceeds from issuance of
long-term debt 12,000 120,089 -
Principal payments on
long-term debt (587) (141,248) (16,428)
Proceeds from short-term
borrowings, net - - 330
Debt issuance costs - (5,799) -
------ ------- -------
Net cash provided by (used for)
financing activities 13,567 (25,268) 21,663
------ ------- -------
Net increase (decrease) in cash and
cash equivalents 8,337 (28,009) 28,154
Cash and cash equivalents, beginning
of period 5,298 33,307 5,153
------ ------- -------
Cash and cash equivalents,
end of period $ 13,635 $ 5,298 $ 33,307
====== ======= ========
See accompanying notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997, and the Nine Months Ended
December 31, 1996
($ in thousands)
Total
Additional Accumu- Stock
Preferred Stock Common Stock Paid-in lated holders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
Balance as of
March 31, 1996 - $ - 19,247,611 $ 192 $ 72,957 $(54,396) $ 18,753
Exercise of stock
options and
warrants - - 335,000 3 939 - 942
Common stock
issued for
acquisition of
of Sun World - - 1,153,908 12 3,576 - 3,588
Net proceeds
from private
placements of
preferred
stock 1,300 - - - 10,688 - 10,688
Cash dividends
paid on
conversion of
preferred stock - - - - - (99) (99)
Dividends paid
on conversion
of preferred
stock - - 28,777 - 127 (127) -
Accrued dividends
on preferred stock - - - - - (448) (448)
Conversion of
redeemable
preferred
stock to
common stock - - 53,332 1 199 - 200
Conversion of
preferred stock
to common stock (960) - 2,627,240 26 (26) - -
Issuance of
stock warrants
for services - - - - 114 - 114
Net loss - - - - - (5,997) (5,997)
----- ------- ---------- ---- -------- --------- ---------
Balance as
of December 31,
1996 340 $ - 23,445,868 $234 $ 88,574 $(61,067) $ 27,741
----- ------- ---------- ---- -------- --------- ---------
Conversion of
redeemable
preferred
stock to
common stock - - 7,314,917 73 27,358 - 27,431
Exercise of
stock options
and warrants - - 588,500 7 1,358 - 1,365
Common stock
issued to
satisfy Sun
World purchase
liability - - 65,000 1 324 - 325
Preferred
dividends
paid with
common stock - - 361,251 3 1,714 - 1,717
Issuance of
warrants to
a lender - - - - 1,083 - 1,083
Stock issued
for services - - 75,000 1 329 - 330
Issuance of
stock for
refinancing - - 30,000 - 140 - 140
Conversion of
preferred stock
to common stock (340) - 766,125 7 (7) - -
Accrued
dividends on
preferred stock - - - - - (1,213) (1,213)
Net loss - - - - - (8,538) (8,538)
----- ------- ---------- ---- -------- --------- ---------
Balance as
of December
31, 1997 - $ - 32,646,661 $ 326 $120,873 $(70,818) $ 50,381
----- ------- ---------- ---- -------- --------- ---------
Exercise
of stock
options - - 515,600 6 2,148 - 2,154
Issuance of
warrants to
lender - - - - 1,643 - 1,643
Stock issued
for services - - 55,000 - 374 - 374
Acquisition
of hydrological
research
company - - 375,000 4 2,624 - 2,628
Net loss - - - - - (7,470) (7,470)
----- ------- ---------- ---- -------- --------- ---------
Balance as
of December
31, 1998 - $ - 33,592,261 $336 $127,662 $(78,288) $ 49,710
====== ======= ========== ==== ======== ======== ========
See accompanying notes to the consolidated financial statements.
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
- -----------------------------------
Effective September 1, 1998, Cadiz Land Company, Inc.
changed its name to Cadiz Inc. (the "Company"). The Company
currently has agricultural operations and is developing the
water resource segment of its business. The primary business
of the Company is to acquire and develop water and
agricultural resources. The Company has created an integrated
and complementary portfolio of assets encompassing undeveloped
land with high-quality groundwater resources and/or storage
potential, prime agricultural properties located throughout
central and southern California with secure and reliable water
rights, and other contractual water rights. Management believes
that, with both the increasing scarcity of water supplies in
California and an increasing population, the Company's access
to water will provide it with a competitive advantage both as a
major agricultural concern and as a supplier of water, which will
lead to continued appreciation in the value of the Company's
portfolio.
On September 13, 1996, the Company significantly
enhanced this portfolio through its acquisition of Sun World
International, Inc. and its wholly-owned subsidiaries,
collectively referred to as "Sun World," and became a
vertically integrated agricultural company. Today, Sun
World farms more than 21,000 acres, primarily located in two
major growing areas of California: the San Joaquin Valley
and the Coachella Valley. Fresh produce, including table
grapes, treefruit, peppers and watermelons, is marketed and
shipped to food wholesalers and retailers throughout the
United States and to more than 30 foreign countries. As of
December 31, 1998, Sun World owned four cold storage and/or
packing facilities in California, of which three are
operated and one is leased to a third party.
In addition, the acquisition of Sun World provided the
Company with valuable water rights throughout central and
southern California. The Company's landholdings, which now
total approximately 58,300 acres, are located adjacent to the
Colorado River and the major aqueduct systems of central and
southern California. The Company expects to utilize its resources
to participate in a broad variety of water storage and supply
projects, including the storage and supply of surplus water
for public agencies that require supplemental sources of
water for exchanges or transfers to third parties.
In 1998, the Company and the Metropolitan Water
District of Southern California ("Metropolitan") verified
the feasibility of and approved principles and terms for a
water storage and supply program at its Cadiz, California
property. The Cadiz Groundwater Storage and Dry-Year Supply
Program (the "Program") will enhance southern California
water supply reliability in two ways, providing a new dry-
year water supply and much-needed storage. During wet years
or periods of excess supply, Metropolitan will store surplus
Colorado River water in the aquifer system underlying the
Company's Cadiz property. During dry years, the previously
imported water, together with additional existing
groundwater, will be extracted and delivered, via a 35-mile
conveyance pipeline, to Metropolitan's service area. During
the 50-year term of the agreement, Metropolitan will store a
minimum of 500,000 acre-feet of Colorado River water and
purchase a minimum of 1,100,000 acre-feet of existing
groundwater for transfer. The Program will have the
capacity to convey up to 150,000 acre-feet of water per
year. The Company and Metropolitan have commenced the
environmental review process required by state and federal
environmental laws for the Program and construction of
pilot spreading basins, which will model and further analyze
the storage and extraction of water. Additionally,
engineering and optimization studies are currently being
finalized for the design of the Program's capital
facilities.
Although the development and management activities of
the Company are currently focused on agricultural operations
(primarily through its wholly-owned subsidiary, Sun World)
and water resource development, the Company will continue to
develop and manage its land, water and agricultural
resources for their highest and best uses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Sun World (since September 14, 1996), and Southwest Fruit
Growers Limited Partnership, a limited partnership ("SWFG")
in which the Company was the general partner and had an
approximate 66.3 percent partnership interest. Allocable
loses incurred through the year ended March 31, 1991 served
to eliminate the minority interest in SWFG for accounting
purposes. On November 5, 1998, the Company purchased the
assets of SWFG and the partnership dissolved. All material
intercompany balances and activity have been eliminated from
the consolidated financial statements.
CHANGE IN YEAR END AND RECLASSIFICATIONS
In 1996, the Company changed its fiscal year end from
March 31 to December 31 in order to align the Company's year
end with that of Sun World. These financial statements
reflect certain reclassifications made to the prior period
balances to conform with 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. Actual results
could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes crop sale revenue, packing
revenue and marketing commissions upon shipment to
customers.
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 $1,249,000 for the year ended December 31,
1998, $809,000 for the year ended December 31, 1997, and
$120,000 for the period from September 14, 1996 to December
31, 1996.
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. Because the Company had a net loss for
all periods presented, basic EPS equals diluted EPS. As
described in Note 13, the terms for conversion of the Series
B and C preferred stock issued during the nine months ended
December 31, 1996 afforded the holders a conversion price
lower than the market price of the common stock at the time
of issuance in order to recognize the sales and other market
restrictions of the unregistered common stock to be issued
upon conversion. The difference between the conversion
price and market price has been reported as an imputed
dividend for purposes of calculating basic EPS, although no
assets of the Company will ever be expended. The imputed
dividend of $2,451,000 had the effect of increasing the loss
per share for the nine months ended December 31, 1996 by
$0.11. It should be noted that the imputed dividend has
been given no other accounting recognition in the financial
statements of the Company for that period and any subsequent
period. All shares for all series of preferred stock had
been converted to common stock as of December 31, 1997.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits with an
original maturity of three months or less to be cash
equivalents. The Company invests its excess cash in
deposits with major international banks and short-term
commercial paper and, therefore, bears minimal risk. Such
investments are stated at cost, which approximates fair
value, and are considered cash equivalents for purposes of
reporting cash flows.
INVENTORIES
Growing crops, pepper seed, and materials and supplies
are stated at the lower of cost or market, on a first-in,
first-out (FIFO) basis. Growing crops inventory includes
direct costs and an allocation of indirect costs.
INVESTMENT IN PARTNERSHIPS
Sun World, through a wholly-owned subsidiary, owns a
50% interest in ASC/SWB Partnership, formerly named American
Sunmelon (the "Partnership"). In October 1998, the
Partnership sold substantially all of its assets to a third
party for $35 million in cash. In conjunction with the
sale, Sun World received an initial distribution of $15.2
million from the Partnership. The Partnership was engaged
in proprietary development, production, and marketing of
seedless watermelon seed. Sun World accounts for its
investment in the Partnership using the equity method.
During 1997, Sun World sold its 50% interest in the Sun Date
partnership.
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 indeterminate 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
fair value.
OTHER ASSETS
As a result of a merger in May 1988 between two
companies, which eventually became known as Cadiz Inc.,
an excess of purchase price over net assets acquired
in the amount of $7,006,000 was recorded. This amount
is being amortized on a straight-line basis over thirty
years. Accumulated amortization was $2,493,000 and
$2,259,000 at December 31, 1998 and December 31, 1997,
respectively.
Capitalized loan fees represent costs incurred to
obtain debt financing. Such costs are amortized over the
life of the related loan. At December 31, 1998, the majority
of capitalized loan fees relate to the issuance of the First
Mortgage Notes described in Note 10.
INCOME TAXES
Income taxes are provided for using an asset and
liability approach which requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities
at the applicable enacted tax rates. A valuation allowance
is provided when it is uncertain that some portion or all of
the deferred tax assets will be realized.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the years ended December
31, 1998 and 1997 and the nine months ended December 31,
1996 was $15,348,000, $12,452,000 and $3,892,000,
respectively.
NOTE 3 - ACQUISITIONS
- --------------------
On September 13, 1996, the Company acquired all of the
stock of a reorganized Sun World for approximately $179
million. Sun World and certain subsidiaries had filed
voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code on October 3, 1994. The acquisition of Sun
World was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Sun
World have been included in the consolidated financial
statements since the date of acquisition.
In January 1998, the Company issued 375,000 shares of
common stock to a hydrological research company in order to
acquire title to substantially all of its assets.
In 1998, the Company purchased two citrus ranches in
the San Joaquin Valley totaling approximately 2,000 acres
for $3.8 million.
NOTE 4 - ACCOUNTS RECEIVABLE
- -------------------------------
Accounts receivable consist of the following (dollars
in thousands):
December 31,
1998 1997
---- ----
Trade receivables $ 4,092 $ 4,131
Due from unaffiliated growers 231 535
Other 2,257 1,502
------- -------
6,580 6,168
Less allowance for doubtful accounts (285) (287)
------- -------
$ 6,295 $ 5,881
======= ========
Substantially all domestic receivables are from large
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 sales and other miscellaneous
receivables.
Revenues attributable to one national retailer totaled
$11.9 million in 1998, $13.6 million in 1997 and $3.8
million for the period September 14, 1996 to December 31,
1996. Export sales accounted for approximately 8.5%, 11.4%
and 20.6% of the Company's revenues for the years ended
December 31, 1998 and 1997, and for the period September 14,
1996 to December 31, 1996, respectively.
NOTE 5 - INVENTORIES
- ---------------------
Inventories consist of the following (dollars in
thousands):
December 31,
1998 1997
---- ----
Growing crops $11,208 $ 9,955
Pepper seed 1,344 1,648
Harvested product 360 169
Materials and supplies 2,107 2,066
------- --------
$ 15,019 $ 13,838
========= ========
NOTE 6 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
- ------------------------------------------------------
Property, plant, equipment and water programs consist
of the following (dollars in thousands):
December 31,
1998 1997
---- ----
Land $ 66,536 $ 64,005
Permanent crops 67,286 62,660
Developing crops 5,192 6,422
Water programs 8,482 5,284
Buildings 21,397 20,667
Machinery and equipment 18,186 14,262
------- -------
187,079 173,300
Less accumulated depreciation (21,057) (13,258)
------- -------
$ 166,022 $ 160,042
======= =======
NOTE 7 - OTHER ASSETS
- --------------------
Other assets consist of the following (dollars in thousands):
December 31,
1998 1997
---- ----
Capitalized loan fees, net $4,159 $ 4,785
Excess of purchase price over
asset acquired, net 4,514 4,747
Capitalized trademark development, net 989 732
Other 1,565 238
------- -------
$11,227 10,502
====== =======
NOTE 8 - ACCRUED LIABILITIES
- -----------------------------
Accrued liabilities consist of the following (dollars in thousands):
December 31,
1998 1997
----- ----
Interest $3,548 $ 2,989
Payroll and benefits 2,049 2,433
Other 1,249 692
------- --------
$6,846 $ 6,114
======= =======
NOTE 9 - REVOLVING CREDIT FACILITY
- -----------------------------------
In April 1998, Sun World entered into a one year $25
million Revolving Credit Facility. The Revolving Credit
Facility is secured by eligible accounts receivable and
inventory, and is guaranteed by the Company. Amounts
borrowed under the facility will accrue interest at either
prime plus 1.0% or LIBOR plus 2.50% at the Company's
election. No amounts were outstanding under the Revolving
Credit Facility at December 31, 1998. In February 1999, Sun
World increased the Revolving Credit Facility to $30 million
in conjunction with a one year renewal.
NOTE 10 - LONG-TERM DEBT
- ------------------------
Management estimates that the fair value of the
Company's long-term debt approximates the carrying value for
all debt instruments except for the Series B First Mortgage
Notes ("First Mortgage Notes"). The fair value of the First
Mortgage Notes is estimated to be approximately $121.4
million based on quoted market prices as of December 31,
1998. At December 31, 1998 and December 31, 1997, the
carrying amount of the Company's outstanding debt is
summarized as follows (dollars in thousands):
December 31,
1998 1997
------ ------
Cadiz obligations:
Senior term bank loan, interest
payable semi-annually, variable
interest rate based upon LIBOR plus
4% (9.97% at December 31, 1998 and
7.78% at December 31, 1997) $9,752 $ 9,752
$15 million revolving line of credit,
interest payable semi-annually
at 8% 15,000 5,000
Other 30 49
Debt discount (1,628) (935)
------- -------
23,154 13,866
------- -------
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
Note payable to bank, quarterly
principal installments of $72 plus
interest payable monthly, due
December 31, 2003, interest at prime
(7.75% at December 31, 1998) 2,000 -
Note payable to insurance company,
quarterly installments of
$93 (including interest), due
September 13, 2006, interest at 7.75% 2,110 2,306
Note payable to supplier, monthly
installments of $104 (including
interest) due March 1, 1998,
interest at 10.00% - 205
Note payable to finance company, monthly
installments of $18 (including interest)
due July 1, 2002, interest at 7.50% 666 831
------- ------
119,776 118,342
------- --------
142,930 132,208
Less current portion (613) (519)
------- -------
$ 142,317 $ 131,689
======== ========
Annual maturities of long-term debt outstanding,excluding
$1,628,000 representing the unamortized portion of warrants, on
December 31, 1998 are as follows: 1999 - $613,000; 2000 -
$25,470,000; 2001 - $731,000; 2002 - $671,000; 2003 - $1,141,000
and thereafter - $115,932,000.
CADIZ OBLIGATIONS
The senior term bank loan is secured by substantially
all of the Company's non-Sun World related property. With
Cadiz' election to extend the loan in April 1998, the
maturity date of the obligation is April 30, 1999, with
interest at a rate of LIBOR plus 400 basis points, payable
at LIBOR semi-annually, with the remaining accrued interest
deferred until maturity. In connection with obtaining the
one-year extension, the Company issued warrants to purchase
75,000 shares of the Company's common stock at $11.81, the
market price at issuance. The fair value of the warrants
totaled $394,000 and is being amortized over one year. The
Company has the right to obtain an additional one-year
extension. If the Company elects to exercise the option to
extend the note for an additional year, the interest rate
will be further adjusted and the Company will be required to
issue additional warrants to the lender.
In November 1997, the Company entered into a three-year
$15 million revolving credit facility. The facility is
secured by a second lien on substantially all of the non-Sun
World assets of the Company. Principal is due in 2000. The
Company had $15 million outstanding under the facility at
December 31, 1998. The Company issued 200,000 warrants in
connection with the initial borrowings at $7.00, the market
price at issuance. The total fair value of the warrants was
$920,000 and has been recorded as a debt discount and is
being amortized over the three-year term of the facility.
The Company issued warrants to purchase 150,000 shares of
the Company's common stock at $7.00 during 1998 in
connection with additional draws on the facility. The fair
value of the warrants of $1,249,000 has been recorded as a
debt discount and is being amortized over the remaining life
of the facility.
SUN WORLD OBLIGATIONS
In April 1997, Sun World restructured its long-term
debt by issuing $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 publicly traded. Sun World utilized the proceeds from
the debt offering and existing cash on hand to repay debt
totaling approximately $130 million.
The First Mortgage Notes are secured by a first lien
(subject to certain permitted liens) on substantially all of
the assets of Sun World and its subsidiaries other than
growing crops, crop inventories and accounts receivable and
proceeds thereof, which secure the Revolving Credit
Facility. The First Mortgage Notes are also guaranteed by
certain subsidiaries and the Company pledged all of the
stock of Sun World. 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 on or after April 15, 2001.
The First Mortgage Notes include covenants which restrict
the Company's ability to receive distributions from Sun
World.
NOTE 11 - INCOME TAXES
- ------------------------
Deferred taxes are recorded based upon differences
between the financial statement and tax basis 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, 1998 and 1997 are as follows (in
thousands):
December 31,
1998 1997
---- ----
Deferred tax liabilities:
Net fixed asset basis difference $ 5,618 $ 4,841
Net basis difference in partnership
investments - 3,886
Other - 1,268
------- --------
Total deferred tax liabilities 5,618 9,995
------- -------
Deferred tax assets:
Net operating losses 25,813 25,815
Reserve for notes receivable 1,178 1,178
State taxes 1,649 1,779
Other 550 1,097
------- --------
Total deferred tax assets 29,190 29,869
Valuation allowance for deferred
tax assets (29,019) (25,321)
------- --------
Net deferred tax assets 171 4,548
------ --------
Net deferred tax liability $ 5,447 $ 5,447
======= ========
As of December 31, 1998, the Company had net operating
loss (NOL) carryforwards of approximately $73.2 million for
federal income tax purposes. Such carryforwards expire in
varying amounts through the year 2012. In accordance with
the Tax Reform Act of 1986, NOL utilization may be subject
to an annual limitation. When there is a change of
ownership of more than 50% (as defined) of a corporation,
the use of any NOL is limited annually to an amount defined
by law. As of December 31, 1998, $21.7 million of NOL
carryforwards are limited to utilization of $4.5 million per
year. The remaining NOLS are not limited on an annual
basis.
As of December 31, 1998, the Company has state NOL
carryforwards of $10.6 million. These NOL carryforwards
expire in varying amounts through the year 2002.
A reconciliation of the income tax benefit to the statutory
federal income tax rate is as follows (dollars in
thousands):
Nine
Year Months
Ended Ended
December 31, December 31,
1998 1997 1996
----- ----- -----
Expected federal income tax
benefit at 34% $ (2,540) $ (2,903) $ (2,257)
Loss with no tax benefit 2,414 2,981 1,790
State income tax 451 - -
Amortization 79 79 60
Utilization of net
operating losses (601) - (696)
Other non-deductible expenses 197 (157) 462
------ ------- -------
Income tax benefit $ - - $ (641)
======= ======= =======
NOTE 12 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company has a 401(k) Plan for all employees of
Cadiz. This plan contains no eligibility requirements and
contributions by the Company are discretionary. To date, no
contributions to this plan have been made by the Company.
Sun World 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. Sun
World matches 75% of the first four percent deferred by an
employee up to $1,500 per year. In addition, Sun World
maintains a defined contribution pension plan covering
substantially all of 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.
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.
Effective January 1, 1999, the Cadiz 401(k) plan is being
merged into the Sun World 401(k) plan and renamed the Cadiz
Inc. 401(k) plan.
NOTE 13 - PREFERRED AND COMMON STOCK
- -------------------------------------
During the nine months ended December 31, 1996, the
Company issued (i) 27,431 shares totaling $27.6 million of
newly authorized Convertible Series A Redeemable Preferred
Stock; (ii) $10.0 million of newly authorized 6% Convertible
Series B Preferred Stock and (iii) $3.0 million of newly
authorized 6% Convertible Series C Preferred Stock. All
preferred stock was converted to common stock as of December
31, 1997. During 1997, the Company paid $1,717,000 of
preferred stock dividends with common stock.
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
Directors in February 1998. The plans provide for the
granting of up to 3,000,000 shares. At December 31, 1998,
the Company has 360,000 remaining options 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 three to seven years and are
issued to directors, officers, consultants and employees of
the Company. During the year ended December 31, 1998, the
Company granted options to purchase 525,000 shares of the
Company's common stock at a weighted average exercise price
of $9.12 per share.
Compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee
must pay to acquire the stock. Had compensation cost for
these plans been determined using fair value, as explained
below, rather than the quoted market price, the Company's
net loss and net loss per common share would have increased
to the following pro forma amounts (dollars in thousands):
Nine
Year Months
Ended Ended
December 31, December 31,
1998 1997 1996
---- ---- ----
Net loss: As reported $ (7,470) $ (8,538) $ (5,997)
Pro forma $ (8,833) $(10,203) $ (6,655)
Net loss per
common share
As reported $ (.23) $ (.33)(a) $ (.44)(a)
Pro forma $ (.27) $ (.35)(a) $ (.48)(a)
(a) After adjustment for preferred dividends during the
year ended December 31, 1997 and the nine months ended
December 31, 1996 of $1,213 and $3,125, respectively.
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.
The following table summarizes stock option activity
for the periods noted. All options listed below were issued
to officers, directors, employees and consultants.
Weighted-
Options Average
Outstanding Exercise
Number Price
----- ----------
Outstanding at March 31, 1996 2,791,000 $ 4.29
Granted 1,800,000 $ 4.62
Expired or canceled (400,000) $ 5.50
Exercised (325,000) $ 2.79
-------- -------
Outstanding at December 31, 1996 3,866,000 $ 4.44
Granted 527,500 $ 5.61
Expired or canceled (120,000) $ 4.80
Exercised (348,500) $ 4.17
-------- -------
Outstanding at December 31, 1997 3,925,000 $ 4.61
Granted 525,000 $ 9.12
Expired or canceled (42,500) $ 6.44
Exercised (515,600) $ 4.18
-------- -------
Outstanding at December 31, 1998 3,891,900(a) $ 5.26
========= =======
Options exercisable at December 31, 1996 1,966,000 $ 4.30
========= =======
Options exercisable at December 31, 1997 2,297,500 $ 4.40
========= =======
Options exercisable at December 31, 1998 2,472,900 $ 4.50
========= =======
Weighted-average fair value of
options granted during the year
ended December 31, 1998 $ 3.60
=========
Weighted-average remaining contractual
life of options outstanding at
December 31, 1998 2.11
=========
(a) Exercise prices vary from $4.25 to $9.375 and expiration
dates vary from May 1999 to November 2003.
During the years ended December 31, 1998 and 1997, and the
nine months ended December 31, 1996, the Company issued
225,000, 275,000 and 30,000 warrants with weighted-average
exercise prices of $8.60, $6.45 and $3.55, respectively.
During the year ended December 31, 1997 and the nine months
ended December 31, 1996, 240,000 warrants with a weighted-
average exercise price of $0.05 and 10,000 warrants with a
weighted-average exercise price of $3.55 were exercised,
respectively. No warrants expired or were canceled during
any of the three periods discussed. At December 31, 1998,
there were 500,000 warrants outstanding at a weighted-
average exercise price of $7.43 per share, which expire
through 2004. See Note 10 for further discussion of these
warrants.
RESTRICTED STOCK AWARD
Following the acquisition of Sun World in 1996, the
Company's Chief Executive Officer was awarded a stock bonus
of 125,000 shares of restricted common stock at no cost.
25,000 and 75,000 of these shares were issued during the
year ended December 31, 1998 and 1997, respectively. The
remaining 25,000 shares will be issuable in September 1999.
Compensation expense is being recognized as earned over the
period of service.
NOTE 15 - 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 challenges
the various decisions by the County of San Bernardino
relative to the proposed Rail-Cycle Project. Named in this
action in addition to the County of San Bernardino, were the
Board of Supervisors for the County of San Bernardino, three
individual members of the Board of Supervisors, an employee
of the County and Rail-Cycle, L.P. ("Rail-Cycle") whose
general partner is controlled by Waste Management, Inc.
("WMI").
The Company continues to believe the proposed Rail-
Cycle Project, if constructed and operated as currently
designed, poses environmental risks both to the Company's
agricultural operations at Cadiz and to the groundwater
basin underlying the Cadiz property. Accordingly, the
Company intends to pursue a claim for damages against the
County of San Bernardino and Rail-Cycle and the action seeks
compensatory damages. On or about September 30, 1998, the
court granted defendants' motions for summary judgement
finding that the Company's procedural due process claim
is not ripe due to the fact that, as the Rail-Cycle Project
cannot proceed without voter approval of a business license
tax, there is no actual concrete injury at this point in time.
The Company has appealed this decision.
On October 24, 1997, the Company filed suit in the
United States District Court, for the Central District of
California, against WMI and certain key executives and
consultants of WMI, and certain other parties in interest as
to the proposed Rail-Cycle Project (the "Federal Court Action").
The Complaint as originally filed asserted claims arising
under both federal and state law arising from activities of
defendants adverse to the Company in connection with the
Rail-Cycle Project. In December 1997, the federal district
judge, on his own motion, severed the state law claims from
the complaint and dismissed them without prejudice. Those
claims were reasserted in a state proceeding filed on
January 8, 1998 in Los Angeles Superior Court (West Division)
(the "State Court Action").
On or about April 27, 1998, in response to motions to
dismiss filed by various defendants in the Federal Court
Action, an order was entered granting the Company leave to
amend its complaint. In addition, pursuant to that order,
the Company's claims for stock manipulation pursuant to
Section 10(b) of the Exchange Act against the WMI defendants
and its RICO claims against San Bernardino County officials
Marsha Turoci and Michael Dombrowski were dismissed without
leave to amend. Judgements were subsequently entered in
favor of defendants with respect to these claims. Based
upon the criminal indictments against certain defendants
described below and other evidence made available to the
Company on account of the pending criminal investigation,
the Company has filed appeals with the Ninth Circuit Court
of Appeals seeking the reversal of the trial court's
dismissal of these claims, and these appeals are currently
pending. Upon the Company's motion, the remainder of the
Company's claims in the Federal Court Action, which will be
pursued in the State Court Action, have been dismissed
without prejudice.
In response to the State Court Action, the WMI
defendants on or about April 15, 1998 sought and obtained a
stay of the action, which expired by its own terms in
December 1998. The Company intends to file a Second Amended
Complaint and will continue to vigorously prosecute its
claims against the WMI defendants.
During 1998, felony complaints were filed by the San
Bernardino District Attorney charging a Waste Management
employee and a consultant with multiple felony counts based
upon their criminal activities in connection with the Rail-
Cycle Project, and, also during 1998, an indictment was
handed down by a San Bernardino Special Criminal Grand Jury
which charges WMI, certain affiliates and employees with 23
felony counts, all arising from WMI's scheme to sabotage the
Company in retaliation for the Company's opposition to the
Rail-Cycle Project. In addition, indictments were handed down
for certain County employees for criminal activities in
connection with the Rail-Cycle Project. The WMI consultant
pleaded nolo contendere to four felony counts, including stock
fraud and conspiracy to commit stock fraud, and was sentenced on
December 3, 1998 for felonies, which include perjury in the Federal
Court Action and the receipt of bribes.
Prior to the acquisition of Sun World, the Internal
Revenue Service (IRS) had filed claims against Sun World and
certain of its subsidiaries (collectively "the Sun World
Claimants"), for taxes refunded for workers that the IRS
claims were employees. The Sun World Claimants contend that
the workers are excluded from the definition of employment
under the Internal Revenue Code. On January 21, 1998, the
District Court ruled in favor of one of the Sun World
Claimants. The IRS has appealed this decision. Accordingly,
the Company released $3,780,000 of reserves related to this
matter at December 31, 1997 which are reported on the
Consolidated Statement of Operations as Litigation Benefit.
Management believes that the likelihood of an unfavorable
future outcome with regard to this matter is remote.
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.
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------------------
Quarter Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
Revenues $ 5,484 $ 22,619 $ 45,596 $ 32,845
Gross profit 471 5,664 8,008 17,659
Net (loss) income (7,190) (3,065) (4,894) 7,679
Net (loss) income per
common share (.22) (.09) (.15) .23
Quarter Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Revenues $ 4,805 $ 25,656 $ 52,949 $ 16,747
Gross (loss) profit (213) 5,503 14,633 3,668
Net (loss) income (7,396) (3,569) 3,618 (1,191)
Preferred stock dividends (438) (766) (9) -
Net (loss) income per
common share (.33) (.15) .11 (.04)
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
December 31,
BALANCE SHEET ($ in thousands): 1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $7,493 $ 3,590
Accounts receivable, net 77 18
Due from subsidiary 71 86
Prepaid expenses and other 253 130
-------- -------
Total current assets 7,894 3,824
Investment in subsidiary 30,738 30,543
Property, plant, equipment and
water programs, net 32,174 26,769
Other assets 4,585 4,740
------- --------
$75,391 $65,876
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 701 $ 710
Accrued liabilities 1,826 870
Long-term debt, current portion 9 20
------- -------
Total current liabilities 2,536 1,600
Long-term debt 23,145 13,846
Other liabilities - 49
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value;
45,000,000 shares authorized;
shares issued and outstanding
33,592,261 at December 31, 1998
and 32,646,661 at December 31, 1997 336 326
Additional paid-in capital 127,662 120,873
Accumulated deficit (78,288) (70,818)
-------- --------
Total stockholders' equity $49,710 $50,381
------- ------
$75,391 $65,876
======= =======
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Nine Months
Year Ended Ended
Statement of Operations December 31, December 31,
($ in thousands except
per share data) 1998 1997 1996
---- ---- ----
Revenues $ 2,003 $ 1,968 $ 1,278
------- ------- -------
Costs and expenses:
Cost of sales 49 270 1,329
General and administrative 4,726 4,042 3,206
Special litigation 1,308 683 394
Depreciation and amortization 1,182 994 773
------- ------- -------
Total costs and expenses 7,265 5,989 5,702
------- ------- -------
Operating loss (5,262) (4,021) (4,424)
Profit (loss) from subsidiaries 195 (2,817) (823)
Interest expense, net 2,403 1,700 1,391
------ ------- --------
Loss before income taxes (7,470) (8,538) (6,638)
Income tax benefit - - 641
------- ------- --------
Net loss (7,470) (8,538) (5,997)
Less: Preferred stock dividends - (1,213) (674)
Imputed dividend on preferred stock - - (2,451)
------- ------- -------
Net loss applicable to common stock $(7,470) $(9,751) $(9,122)
======= ======= ========
Net loss per common share $ (.23) $ (.33) $ (.44)
======= ======= ========
Weighted average shares outstanding 33,173 29,485 20,500
======= ======= =======
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Nine Months
Year Ended Ended
December 31, December 31,
Statement of Cash Flows ($ in thousands) 1998 1997 1996
---- ---- ----
Cash flows from operating
activities:
Net loss $ (7,470) $ (8,538) $ (5,997)
Adjustments to reconcile
net loss to net cash
used for operating activities:
Depreciation and amortization 2,230 1,462 1,388
Issuance of stock for services 374 470 -
(Gain) loss from subsidiaries (195) 2,817 823
Interest capitalized to debt - 315 481
(Gain) loss on disposal of assets (17) 138 -
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (59) 192 411
Decrease in inventories - 7 259
(Increase) decrease in due
from subsidiary (107) 131 (923)
Increase in prepaid expenses
and other (123) (56) (317)
Decrease in accounts payable (9) (667) (441)
Increase in accrued liabilities 1,007 506 219
Increase in deferred liabilities - - 375
Decrease in other liabilities (47) (1,006) -
-------- -------- -------
Net cash used for operating
activities (4,416) (4,229) (3,722)
------- ------- -------
Cash flows from investing activities:
Additions to property,
plant and equipment (2,910) (638) (27)
Additions to water programs (856) (466) (490)
Proceeds from disposal of property,
plant and equipment 27 33 (187)
Acquisition of Sun World - - (36,587)
Decrease (increase) in other assets (71) 153 -
------- ------- -------
Net cash used for investing
activities (3,810) (918) (37,291)
------- ------- --------
Cash flows from financing activities:
Net proceeds from issuance of stock 2,150 1,690 37,761
Proceeds from short-term debt, net - - 330
Proceeds from issuance of long-term debt 10,000 5,084 -
Principal payments on long-term debt (21) (9,231) -
Debt issuance costs - (38) -
Dividends paid on conversion of
preferred stock - - (99)
Return of capital from subsidiary - 9,100 -
------- ------- -------
Net cash provided by financing
activities 12,129 6,605 37,992
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 3,903 1,458 (3,021)
Cash and cash equivalents, beginning
of period 3,590 2,132 5,153
------- ------- ------
Cash and cash equivalents, end of period $ 7,493 $ 3,590 $ 2,132
======= ======= =======
CADIZ INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998 and 1997 and the nine months
ended December 31, 1996 ($ in thousands)
Additions Charged
to
Balance at ---------------
Beginning Costs Balance
Year ended of and Other at End
December 31, 1998 Period Expenses Accounts Deductions Period
- ----------------- ------- -------- -------- ---------- ------
Allowance for
doubtful accounts $ 287 $ 130 $ - $ 132 $ 285
===== ===== ===== ===== =====
Year ended
December 31, 1997
- -------------------
Allowance for
doubtful accounts $ 480 $ - $ - $ 193 $ 287
===== ===== ===== ===== =====
Nine months ended
December 31, 1996
- ------------------
Allowance for doubtful
accounts $ - $ 107 $ 373 $ - $ 480
===== ===== ===== ===== =====
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 33-83360, 33-63065,
333-35491 and 333-41367) and on Form S-3 (No. 333-53069) of
Cadiz Inc. of our report dated February 19, 1999, appearing
on page 36 of this Form 10-K.
/s/ PricewaterhouseCoopers
- --------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
March 19, 1999