UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from .. to ...
Commission File Number 0-12114
-----------------------------
Cadiz Inc.
(Exact name of registrant specified in its charter)
DELAWARE 77-0313235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 S. FIGUEROA STREET, SUITE 4250
LOS ANGELES, CA 90017
(Address of principal executive offices) (Zip Code)
(213) 271-1600
(Registrant's telephone number, including area code)
---------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 220.405 of this
chapter) is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10-K. X
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
YES NO X
--- ---
As of September 30, 2004, the Registrant had 6,612,674 shares of
common stock outstanding. The aggregate market value of the
common stock held by nonaffiliates as of June 30, 2004 was
approximately $41,050,122 based on 4,773,270 shares of common
stock outstanding held by nonaffiliates and the closing price on
that date. Shares of common stock held by each executive officer
and director and by each entity that owns more than 5% of the
outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant is not incorporating by reference any other
documents within this Annual Report on Form 10-K except those
footnoted in Part IV under the heading "Item 15. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".
TABLE OF CONTENTS
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . .12
Item 4. Submission of Matters to a Vote of Security Holders. . 13
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . .15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 16
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 8. Financial Statements and Supplementary Data. . . . .. .35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . 35
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . 36
PART III
Item 10. Directors and Executive Officers of the Registrants. .36
Item 11. Executive Compensation . . . . . . . . . . . . . . . .40
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . . .45
Item 13. Certain Relationships and Related Transactions . . . .50
Item 14. Principal Accountant Fees and Services . . . . . . . .51
PART IV
Item 15. Exhibits, Financial Statements and Reports of Form
8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Page i
PART I
ITEM 1. BUSINESS
Information presented in this Form 10-K that discusses
financial projections, proposed transactions such as those
concerning the further development of our land and water assets,
information or expectations about our business strategies,
results of operations, products or markets, or otherwise makes
statements about future events, are forward-looking statements.
Forward-looking statements can be identified by the use of words
such as "intends", "anticipates", "believes", "estimates",
"projects", "forecasts", "expects", "plans" and "proposes".
Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions,
there are a number of risks and uncertainties that could cause
actual results to differ materially from these forward-looking
statements. These include, among others, the cautionary
statements under the caption "Certain Trends and Uncertainties",
as well as other cautionary language contained in this Form 10-K.
These cautionary statements identify important factors that could
cause actual results to differ materially from those described in
the forward-looking statements. When considering forward-looking
statements in this Form 10-K, you should keep in mind the
cautionary statements described above.
OVERVIEW
Our primary asset consists of three blocks of largely
contiguous land in eastern San Bernardino County, California.
This land position totals approximately 45,000 acres. Virtually
all of this land is underlain by high-quality groundwater
resources with demonstrated potential for various applications,
including water storage and supply programs and agricultural,
municipal, recreational, and industrial development. Two of the
three blocks of land are located in proximity to the Colorado
River Aqueduct, the major source of imported water for southern
California. The third block of land is located near the Colorado
River.
The value of these assets derives from a combination of
population increases and limited water supplies throughout
southern California. In addition, most of the major population
centers in southern California are not located where significant
precipitation occurs, requiring the importation of water from
other parts of the state. We therefore believe that a
competitive advantage exists for those companies that possess or
can provide high quality, reliable, and affordable water to major
population centers.
Notwithstanding certain actions taken in 2002 by the
Metropolitan Water District of Southern California
("Metropolitan"), as described below, we expect to be able to use
our land assets and related water resources to participate in a
broad variety of water storage and supply, transfer, exchange,
and conservation programs with public agencies and other parties.
In 1997 we commenced discussions with Metropolitan in order
to develop principles and terms for a long-term agreement for a
joint venture groundwater storage and supply program on our land
in the Cadiz and Fenner valleys ("Cadiz Program"). Following
extensive negotiations with us, in April 2001 Metropolitan's
Board of Directors approved definitive economic terms,
conditions, and responsibilities ("Principles of Agreement"),
which were to serve as the basis for a final agreement to be
executed between us, subject to the then-ongoing environmental
review process.
The Cadiz Program would have provided Metropolitan with a
valuable increase in water supply during periods of drought or
other emergencies, as well as greater reliability and flexibility
in operation of its Colorado River Aqueduct. During wet years,
surplus water from the
Page 1
Colorado River would be stored in the aquifer system underlying
Cadiz' land. When needed, the stored water, together with
indigenous groundwater, would be returned to the Colorado River
Aqueduct for distribution to Metropolitan's member agencies throughout
six southern California counties.
On August 29, 2002, the U.S. Department of Interior approved
the Final Environmental Impact Statement for the Cadiz Program
and issued its Record of Decision, the final step in the federal
environmental review process for the Cadiz Program. The Record
of Decision amends the California Desert Conservation Area Plan
for an exception to the utility corridor element and offered to
Metropolitan a right-of-way grant necessary for the construction
and operation of the Cadiz Program.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Irrespective of Metropolitan's actions, Southern
California's need for water storage and supply programs has not
abated. We believe there are several different scenarios to
maximize the value of this water resource, all of which are under
current evaluation. See "Water Resource Development", below.
Because we expected that these alternatives may have
different anticipated capital requirements and implementation
periods than those previously established for the Cadiz Program,
we promptly entered into an agreement with our senior secured
lender, ING Capital LLC ("ING") for a three year extension of
approximately $35 million of senior secured loans with a maturity
date of January 31, 2003. We also entered into agreements with
the holders of our preferred stock for an extension until July
2006 of the mandatory redemption date of this preferred stock.
Our extension with ING was subject to certain conditions,
including annual renewals of the revolving credit facility of our
wholly-owned subsidiary, Sun World International, Inc. (which,
together with its subsidiaries, we refer to as "Sun World").
Sun World was, however, unable to obtain such a renewal for
its 2003-2004 growing season. Historically, we, as the parent
company of Sun World, had supplemented Sun World's annual working
capital requirements. We were not able to do this for the 2003-
2004 growing season, thereby compelling Sun World to obtain a
larger facility than in prior years. Sun World was able to
obtain this larger facility but only conditioned on obtaining the
consent of holders of Sun World's outstanding First Mortgage
Notes, which Sun World was ultimately unable to procure. Because
of this, the only way Sun World could obtain the new financing
needed to provide working capital for its 2003-2004 growing
seasons was to seek court approval, pursuant to Chapter 11, to a
new Debtor in Possession ("DIP") facility. Therefore, in January
2003 Sun World filed a voluntary petition for Chapter 11
bankruptcy protection in order to access its needed seasonal
financing.
Sun World's financial situation and bankruptcy filing, in
turn, negated the agreement we had previously reached with ING
for the three year extension of our senior secured loans. We
were unable to make payment of this debt upon the original
January 31, 2003 maturity date, and in February 2003 ING declared
these loans to be in default, although we remained in
negotiations with ING for an overall restructuring of this debt.
Page 2
Given the negative effect of these various developments on
the trading price for our common stock, we were unable to
maintain the minimum price needed for continued listing on the
Nasdaq National Market. Effective March 27, 2003, our common
stock was delisted from trading on the Nasdaq National Market.
In light of these events, we have implemented the following
restructuring steps:
* In June 2003 we completed an equity offering of $2.0
million in newly issued common stock (including $320 thousand
in shares issued for services);
* In October 2003 we completed an exchange of all of our
then outstanding preferred stock for newly issued common
stock;
* In November 2003 Sun World submitted its plan of
reorganization to the Bankruptcy Court;
* In December 2003 we completed a comprehensive
restructuring which resulted in:
* A new three year extension of our $35 million debt
facility with ING;
* An additional equity infusion of $8.6 million through the
issuance of common stock;
* A one for twenty-five reverse split of our outstanding
common stock;
* The transfer of our properties to Cadiz Real Estate LLC,
a Delaware limited liability company wholly owned by us and
created at the behest of ING; and
* The completion of a binding agreement with the holders of
a majority of Sun World's First Mortgage Notes, otherwise
referred to as the "Bondholders", which provides for the
transfer of an unsecured claim due to us from Sun World of
$13.5 million to a trust controlled by the Bondholders, as
well as the pledge of our equity in Sun World to this trust
as security for our obligation to support a plan of
reorganization for Sun World that provides no recovery to us
on account of our equity interests in Sun World. In return,
the Bondholders agreed to release us from any obligations
pursuant to our guarantee of Sun World's First Mortgage
Notes.
With the implementation of these restructuring steps, we
have been able to retain ownership of all of our assets relating
to our water programs and obtain working capital needed to
continue our efforts to develop our water programs, albeit with
our commitment to support a Sun World plan of reorganization that
provides for the divestiture of our equity interests in Sun
World. Because many of our pre-existing common stockholders have
participated in the equity issuances which were part of the
restructuring, our base of common stockholders remains largely
the same as before the restructuring.
We remain committed to our water programs and we continue to
explore all opportunities. We cannot predict with certainty which
of these various opportunities will ultimately be utilized.
Page 3
(A) GENERAL DEVELOPMENT OF BUSINESS
We are a Delaware corporation formed in 1992 to act as the
surviving corporation in a Delaware reincorporation merger
between us and our predecessor, Pacific Agricultural Holdings,
Inc., a California corporation formed in 1983.
As part of our historical business strategy, we have
conducted our land acquisition, water development activities,
agricultural operations and search for international water and
agricultural opportunities for the purpose of enhancing the long-
term appreciation of our properties and future prospects. See
"Narrative Description of Business" below.
The focus of our water development activities has been the
Cadiz Program. The actions of Metropolitan in late 2002 have, at
a minimum, delayed the Cadiz Program, which in turn has caused us
to undergo a corporate restructuring. In 2003, our business
development activities consisted largely of implementing this
restructuring, which has included the Chapter 11 filing of and
the substantive disposition of our equity interests in our Sun
World subsidiary and a completion of an amendment and extension
of our credit facilities with our senior secured lender. Our
primary goal in this process has been to maintain ownership of
our San Bernardino properties and to create a capital structure
which would allow us to continue our development of the Cadiz
Program. With the completion of an overall capital restructuring
in December 2003, we believe that we have succeeding in achieving
this goal. This overall capital restructuring provided for a
three year extension of our $35 million debt facility with ING
and an additional equity infusion of $8.6 million through the
issuance of common stock, and is described in more detail in Item
7, "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
We acquired all of the outstanding capital stock of Sun
World in 1996. Since that time, until late 2002, we provided to
Sun World various management and administrative services and
facilities, and supplemented Sun World's annual working capital
requirements. In late 2002, it became apparent that we would not
be able to continue to provide such ongoing financial support to
Sun World. In order to obtain the new financing needed to
provide working capital for its 2003-2004 growing seasons, on
January 30, 2003 (the "Petition Date") Sun World and three of its
wholly owned subsidiaries filed voluntary petitions under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court,
Central District of California, Riverside Division (Case Nos: RS
03-11370 DN, RS 03-11369 DN, RS 03-11371 DN, RS 03-11374 DN).
Shortly following the Petition Date, Sun World sought and
obtained authority to enter into a Debtor in Possession ("DIP")
facility which provided Sun World with sufficient loan
availability to continue its operations. As of the petition
date, due to the Company's loss of control over the operations of
Sun World, the financial statements of Sun World will no longer
be consolidated with those of Cadiz, but instead Cadiz will
account for its investment in Sun World on the cost basis of
accounting.
In November 2003 Sun World filed a plan of reorganization
(Debtors' Joint Plan of Reorganization dated November 24, 2003)
with the Bankruptcy Court (the "Plan") and accompanying
disclosure statement. Under the Plan as proposed, the
reorganized Sun World will continue to operate as a going concern
following effectiveness of the Plan; however, all of our
ownership interests in the reorganized Sun World will be
canceled. The reorganized Sun World's equity interests will be
held instead by Sun World's creditors. Also, under the proposed
Plan, all service agreements between Sun World and us will be
terminated, and approximately $13.5 million in debt owed to us by
Sun World (including approximately $12.3 million in loans) will be
canceled.
Page 4
We supported the filing of the Plan in the belief that the
manner in which the Plan provides for the resolution of claims
asserted by and against us in the Sun World bankruptcy
proceedings would be in our best interests. In furtherance of
this belief, and in order to ensure that our interests in Sun
World are treated in a manner consistent with that under the
proposed Plan irrespective of whether or not the Plan is approved
in its proposed form, in December 2003 we entered into a global
settlement agreement with Sun World and with the holders of a
majority of Sun World's First Mortgage Notes, otherwise referred
to as the Bondholders. This global settlement agreement provides
for:
* The grant by Sun World to us of a general unsecured claim
against Sun World of $13.5 million in full and final
settlement of all claims and causes of action between us, and
the termination and/or rejection of all contracts and
agreements between us and Sun World, with the exception of an
agricultural lease by us to Sun World of our Cadiz, California
farm properties (the "Sun World Settlement");
* The transfer of this unsecured claim to a trust controlled
by the Bondholders;
* Our agreement not to seek a recovery in the Sun World
bankruptcy proceedings on account of our equity interest in
Sun World, and a pledge of all of our equity interests in Sun
World to the Bondholder trust as security for our obligations
under the global settlement; and
* The waiver by the Bondholders (and by any other holders of
First Mortgage Notes who elect to opt into the settlement) to
seek recovery against us on account of our guarantee of Sun
World's obligations under the First Mortgage Notes.
The Sun World Settlement was subject to the approval of the
Bankruptcy Court, which was obtained by Sun World. Bankruptcy
Court approval was not required for the other aspects of the
global settlement. The Bankruptcy Court's approval order for the
Sun World Settlement is currently the subject of an appeal by a
creditor of Sun World. Sun World is defending against this
appeal. We have an agreement with the Bondholders providing that
the other aspects of the global settlement, as described above,
shall remain fully effective even if the pending appeal of the
Sun World Settlement is successful.
A hearing to consider the adequacy of the disclosure
statement accompanying the Plan, most recently scheduled for June
11, 2004, has been subject to several postponements and no
hearing date is currently scheduled. In Sun World's filings with
the Bankruptcy Court, Sun World has reported that it believes
that the Plan likely cannot be confirmed absent the acceptance of
the holders of the First Mortgage Notes, in their capacity as
secured creditors. Sun World has further reported to the
Bankruptcy Court that the holders of the First Mortgage Notes
have not reached a consensus with respect to certain
corporate governance issues relating to the reorganized company,
and that they have been unable to finalize a shareholder
agreement term sheet. In the meantime, Sun World has, with Bankruptcy
Court approval, expanded the scope of its engagement with Ernst &
Young Corporate Finance LLC to include services related to (i) a
sale of substantially all of its assets pursuant to a motion or a
plan of reorganization, and (ii) obtaining an equity investor and
financing under a plan of reorganization and is actively pursuing
the sales/investment process. Sun World has chosen to delay the
preparation of an amended Plan and disclosure statement and the
scheduling of a disclosure statement hearing date pending the
outcome of these most recent developments. Sun World's exclusivity
period (i.e. the period during which only Sun World may file a
plan of reorganization) currently expires on December 31, 2004.
We cannot predict at this time what changes, if any,
Page 5
will be made to the Plan as a result of the foregoing or whether or
not the Plan, as amended, will be approved.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
During the year ended December 31, 2003 we continued to
develop the water resource segment of our business and, until Sun
World's January 30 bankruptcy filing, operated our agricultural
resources segment. See Consolidated Financial Statements. See
also Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(C) NARRATIVE DESCRIPTION OF BUSINESS
With the completion of our financial restructuring in
December 2003, we are able to continue with our strategy of
development of our holdings for their highest and best uses. At
present, our development activities are focused on water resource
development at our San Bernardino County properties.
WATER RESOURCE DEVELOPMENT
Our portfolio of water resources, located in close proximity
to the Colorado River or the major aqueduct systems of central
and southern California, such as the State Water Project and the
Colorado River Aqueduct, provides us with the opportunity to
participate in a variety of water storage and supply programs,
exchanges and transfers.
(A) CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY PROGRAM.
The Company owns approximately 35,000 acres of land and
related high-quality groundwater resources in the Cadiz and
Fenner valleys of eastern San Bernardino County. The aquifer
system underlying this property is naturally recharged by
precipitation (both rain and snow) within a watershed of
approximately 1,300 square miles. See Item 2, "Properties - The
Cadiz/Fenner Property".
In 1997 we commended discussions with Metropolitan in
order to develop principles and terms for a long-term agreement
for a joint venture groundwater storage and supply program on
this land. The Cadiz Program would provide Metropolitan with a
valuable increase in water supply during periods of drought or
other emergencies, as well as greater reliability and flexibility
in operation of its Colorado River Aqueduct. During wet years,
surplus water from the Colorado River would be stored in the
aquifer system that underlies the Cadiz property. When needed,
the stored water and indigenous groundwater would be returned to
the Colorado River Aqueduct for distribution to Metropolitan's
member agencies throughout six southern California counties.
Metropolitan provides supplemental water to approximately 17
million people.
In addition, temporary withdrawals of indigenous groundwater
would also be available from the Cadiz Program during
emergencies, in full compliance with the GROUNDWATER MONITORING &
MANAGEMENT PLAN approved by the U.S. Department of the Interior
in its RECORD OF DECISION. With this provision of the MANAGEMENT
PLAN the effective long-term storage capacity of the Cadiz
Program may exceed two million acre-feet.
Following extensive negotiations with us, in April 2001
Metropolitan's Board of Directors approved definitive economic
terms and responsibilities, which were to serve as the basis for
a final agreement to be executed between us, subject to the then-
ongoing environmental review process. Pursuant to these
definitive terms, during storage operations, Metropolitan would
pay a
Page 6
$50 fee per acre-foot for put of Colorado River water into
storage, and a $40 fee per acre-foot for return of Colorado River
water from storage, or a total of $90 per acre-foot to cycle
water into and out of the basin. On the transfer of indigenous
water, Metropolitan would pay a base rate of $230 per acre-foot,
which will be adjusted according to a fair market value
adjustment procedure. Metropolitan would commit to minimum levels
of utilization of the Cadiz Program for both storage of Colorado
River Aqueduct water (900,000 acre-feet) and transfer of
indigenous groundwater (up to 1,500,000 acre-feet). In addition,
the definitive terms provided for the grant to Cadiz of the
option to sell a portion of the indigenous groundwater (30,000
acre-feet per year for 25 years or a total of 750,000 acre-feet)
to outside third parties within Metropolitan's service area at
fair market value.
Cadiz Program facilities would include, among other things:
* Spreading basins, which are shallow ponds that
percolate water from the ground surface to the water
table;
* High yield extraction wells designed to extract stored
Colorado River water and indigenous groundwater from
beneath the Cadiz Program area;
* A 35-mile conveyance pipeline to connect the spreading
basins and wellfield to the Colorado River Aqueduct at
Metropolitan's Iron Mountain pumping plant; and
* A pumping plant to pump water through the conveyance
pipeline from Metropolitan's Iron Mountain pumping plant
to the spreading basins.
The expected costs of these facilities is approximately $150
million, which was to be jointly shared.
The definitive terms for the Cadiz Program also call for the
establishment of a comprehensive groundwater monitoring and
management plan to ensure long-term protection of the groundwater
basin.
In October 2001, the environmental report was issued by
Metropolitan and the U.S. Bureau of Land Management, in
collaboration with the U.S. Geological Survey and the National
Park Service. On August 29, 2002, the U.S. Department of
Interior approved the Final Environmental Impact Statement for
the Cadiz Program and issued its Record of Decision, the final
step in the federal environmental review process for the Cadiz
Program. The Record of Decision amends the California Desert
Conservation Area Plan for an exception to the utility corridor
element and offered to Metropolitan a right-of-way grant
necessary for the construction and operation of the Cadiz
Program.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Subsequent to Metropolitan's actions, negotiations towards a
final agreement for the Cadiz Program on the basis of the
previously approved definitive terms have ceased.
Page 7
With Metropolitan's actions, we have not been able to
complete the environmental review phase of the Cadiz Program. It
is our position that Metropolitan's actions of October 2002
breached various contractual and fiduciary obligations of
Metropolitan to us, and interfered with the economic advantage we
would obtain from the Cadiz Program. Therefore, in April 2003 we
filed a claim against Metropolitan seeking compensatory and
punitive damages. See Item 3 - "Legal Proceedings".
Irrespective of Metropolitan's actions, the need for new
water storage and supply programs has not diminished in the
southwestern United States. The Colorado River watershed is
currently in the grip of a prolonged drought that presents major
challenges to the economies of California, Nevada, and Arizona.
As population continues to grow at record rates, these states are
faced with the very real possibility that current and future
supplies will not be able to meet demand.
Implementation of the Cadiz Program would provide a valuable
increase in water supply during periods of drought or other
emergencies, as well as greater reliability and flexibility in
operation of the Colorado River Aqueduct. During wet years,
excess water from the Colorado River would be stored in the
aquifer system that underlies approximately 35,000 acres of land
owned by Cadiz. When needed, the stored water would be returned
to the Colorado River Aqueduct for distribution.
In addition, temporary withdrawals of indigenous groundwater
would also be available during emergencies, in full compliance
with the GROUNDWATER MONITORING & MANAGEMENT PLAN approved by the
U.S. Department of the Interior in its RECORD OF DECISION. With
this provision of the MANAGEMENT PLAN the effective long-term
storage capacity of the Cadiz Program may exceed two million acre-
feet.
The Company believes there are a variety of scenarios under
which the value of the Cadiz Program may be realized. Indeed,
exploratory discussions have been initiated with representatives
of governmental organizations, water agencies, and private water
users with regard to their expressed interest in implementation
of the Cadiz Program. Several such discussions have been held
with water agencies that are independently seeking reliability of
supply. Other discussions have focused on the possibility of
exchanging water stored at the Cadiz Program with water
contractors in other regions in California. In addition, the
current drought within the Colorado River watershed has served as
an impetus to cooperative discussions between states, with the
goal that interstate exchanges and transfers may also become
feasible in the future.
Because of the Company's long-term relationship with
Metropolitan, the Company also intends to pursue discussions with
the agency in an effort to determine whether there are terms
acceptable to both parties under which the Cadiz Program could be
implemented. With the recent finalization of the Quantification
Settlement Agreement (QSA), an agreement between the Secretary of
the Interior, the State of California, Metropolitan and three
other southern California water agencies quantifying the amount
of water California's Colorado River users could expect on an
annual basis, Metropolitan's Colorado River supplies are now
specified and limited only by the variable volume of flow on the
river. To meet the growing needs of its service area,
Metropolitan must take advantage of all opportunities to store
available Colorado River water during periods of surplus. With
virtually all environmental permits and approvals in place for
the Cadiz Program, except for those dependent upon Metropolitan's
certification of the Environmental Impact Report (EIR), the
Company believes a partnership with Metropolitan could be renewed
in a timely manner if terms acceptable to both parties were to be
negotiated.
Page 8
In the absence of a negotiated resolution, the Company would
continue to seek an administrative resolution of its claim
against Metropolitan. In April 2003 the Company filed an
administrative notice of claim with Metropolitan asserting the
breach by Metropolitan of various obligations specified in the
PRINCIPLES OF AGREEMENT. The Company believes that by failing to
complete the environmental review process, as specified in the
PRINCIPLES OF AGREEMENT, Metropolitan violated this contract,
breached its fiduciary duties to the Company and interfered with
the Company's prospective economic advantages. In discussions
following presentation of this claim, Cadiz and Metropolitan
agreed to evaluate alternative approaches to implementation of
the Cadiz Program. Metropolitan has not to date responded to the
claim and Cadiz has until October 2005 to file a lawsuit against
the agency.
(B) OTHER EASTERN MOJAVE PROPERTIES
Our second largest block of land is approximately 9,000
acres in the Piute Valley of eastern San Bernardino County. This
landholding is located approximately 15 miles from the resort
community of Laughlin, Nevada, and about 12 miles from the
Colorado River town of Needles, California. Extensive
hydrological studies, including the drilling and testing of a
full-scale production well, have demonstrated that this
landholding is underlain by high-quality groundwater. The aquifer
system underlying this property is naturally recharged by
precipitation (both rain and snow) within a watershed of
approximately 975 square miles.
Additional hydrological investigations and discussions with
potential partners have commenced with the objective of
developing our Piute Valley assets.
Additionally, we own or control additional acreage located
near Danby Dry Lake, approximately 30 miles southeast of our
landholdings in Cadiz and Fenner valleys. Our Danby Lake
property is located approximately 10 miles north of the Colorado
River Aqueduct, and initial hydrological studies indicate that it
has excellent potential for a groundwater storage and supply
project.
AGRICULTURAL OPERATIONS
Sun World is a leading producer of high value crops and one
of California's largest vertically integrated agricultural
concerns. Farming approximately 10,000 acres of agricultural
crops throughout southern and central California, Sun World grows
dozens of varieties of fresh fruit and vegetables, and is one of
the top three domestic producers of table grapes (5% of United
States production) plums (6%), colored peppers (4%), and
watermelon (3%). Sun World's operations include divisions
specializing in farming, packing, marketing, and proprietary
product development.
On January 30, 2003, Sun World filed voluntary petitions
under Chapter 11 of the Bankruptcy Code. See "General Development
of Business", above. Since the filing date, Sun World has
operated its business and managed its affairs as debtor and
debtor in possession. As of that date due to the Company's loss
of control over the operations of Sun World, the financial
statements of Sun World will no longer be consolidated with those
of Cadiz, but instead, Cadiz will account for its investment in
Sun World on the cost basis of accounting. As a result of
changing to the cost basis of accounting on January 31, 2003, we
had a net investment in Sun World of approximately $195 thousand
consisting of loans and amounts due from Sun World of
$13,500,000 less losses in excess of investment in Sun World of
$13,305,000. We wrote off the net investment in Sun World of $195
thousand at the Chapter 11 filing date because we do not anticipate
being able to recover our investment.
Page 9
As part of the Sun World bankruptcy process, we are no
longer engaged in agricultural operations. We lease for operation
by others approximately 1,600 acres of Cadiz/Fenner agricultural
real property. See Item 2. "Properties - Leased Farm Property".
SEASONALITY
Our water resource development activities are not seasonal
in nature.
With our divestiture of Sun World as contemplated by the
agreement with a majority of Sun World's bondholders, our
operations will no longer be subject to the general seasonal
trends that are characteristic of the agricultural industry.
COMPETITION
We face competition for the acquisition, development and
sale of our properties from a number of competitors, some of
which have greater resources than us. We may also face
competition in the development of water resources associated with
our properties. Since California has scarce water resources and
an increasing demand for available water, we believe that
location, price and reliability of delivery are the principal
competitive factors affecting transfers of water in California.
EMPLOYEES
As of December 31, 2003, we employed 7 full-time employees
(i.e. those individuals working more than 1,000 hours per year).
We believe that our employee relations are good.
REGULATION
Our operations are subject to varying degrees of federal,
state and local laws and regulations. As we proceed with the
development of our properties, including the Cadiz Program, we
will be required to satisfy various regulatory authorities that
we are in compliance with the laws, regulations and policies
enforced by such authorities. Groundwater development, and the
export of surplus groundwater for sale to single entities such as
public water agencies, is not subject to regulation by existing
statutes other than general environmental statutes applicable to
all development projects. Additionally, we must obtain a variety
of approvals and permits from state and federal governments with
respect to issues that may include environmental issues, issues
related to special status species, issues related to the public
trust, and others. Because of the discretionary nature of these
approvals and concerns which may be raised by various
governmental officials, public interest groups and other
interested parties during both the development and approval
process, our ability to develop properties and realize income
from our projects, including the Cadiz Program, could be delayed,
reduced or eliminated.
ITEM 2. PROPERTIES
We currently lease our executive offices in Los Angeles,
California, which consist of approximately 4,770 square feet,
pursuant to a sublease that expires on June 14, 2006. Current
base rent under the lease is approximately $7,550.00 per month.
As part of our December 2003 overall capital restructuring,
we transferred all of our assets (with the exception of our
office sublease, certain office furniture and equipment and any
Page 10
Sun World related assets) to Cadiz Real Estate LLC, a Delaware
limited liability company ("Cadiz Real Estate"). We hold 100% of
the equity interests of Cadiz Real Estate, and therefore we
continue to hold 100% beneficial ownership of the properties
which we transferred to Cadiz Real Estate. Cadiz Real Estate was
created at the behest of our senior secured lender, ING. The
Board of Managers of Cadiz Real Estate consists of two managers
appointed by us and one independent manager named by ING. As long
as our obligations to ING are outstanding, Cadiz Real Estate may
not institute bankruptcy proceedings without the unanimous
consent of this Board of Managers (including the independent
manager).
Cadiz Real Estate is a co-obligor under our credit
facilities with ING, for which assets of Cadiz Real Estate have
been pledged as security.
Because the transfer of our properties to Cadiz Real Estate
has no effect on our ultimate beneficial ownership of these
properties, we refer throughout this Report to properties owned
of record either by Cadiz Real Estate or by us as "our"
properties.
The following is a description of our significant
properties.
THE CADIZ/FENNER PROPERTY
In 1984, we conducted an investigation of the feasibility of
the agricultural development of land located in the Mojave Desert
near Cadiz, California, and confirmed the availability of high-
quality water in commercial quantities appropriate for
agricultural development. Since 1985, we have acquired
approximately 34,500 acres in the Cadiz and Fenner Valleys of
eastern San Bernardino County approximately 30 miles north of the
Colorado River Aqueduct.
Additional numerous independent geotechnical and engineering
studies conducted since 1985 have confirmed that the Cadiz/Fenner
property overlies a natural groundwater basin which is ideally
suited fro the underground water storage and dry year transfers
as contemplated in the Cadiz Program. See Item 1, "Business -
Narrative Description of Business - Water Resource Development".
In November 1993, the San Bernardino County Board of
Supervisors unanimously approved a General Plan Amendment
establishing an agricultural land use designation for 9,600 acres
at Cadiz for which 1,600 acres have been developed and are leased
to Sun World and an unaffiliated third party. This action also
approved permits to construct infrastructure and facilities to
house as many as 1,150 seasonal workers and 170 permanent
residents (employees and their families) and allows for the
withdrawal of more than 1,000,000 acre-feet of groundwater from
the groundwater basin underlying our property.
OTHER EASTERN MOJAVE PROPERTIES
We also own approximately 10,900 additional acres in the
eastern Mojave Desert, including the Piute and Danby Lake
properties.
The Piute property consists of approximately 9,000 acres and
is located approximately 60 miles northeast of Cadiz and
approximately 15 miles west of the Colorado River and Laughlin,
Nevada, a small, fast growing town with hotels, casinos and water
recreation facilities. We identified the Piute property for
acquisition by a combination of satellite imaging and geological
techniques which we used to identify water at Cadiz.
Page 11
LEASED FARM PROPERTY
Concurrently with our acquisition of Sun World in 1996, we
leased to Sun World approximately 1,600 acres of our Cadiz/Fenner
property which has been developed for agricultural use. This
lease, as amended pursuant to Sun World's bankruptcy proceedings,
now provides for the lease by Sun World of 1,100 acres of this
property through the 2004 harvest season. The remainder of the property
is leased to an unaffiliated third party. These leases provide for
the lessee to be responsible for all costs associated with growing
crops on the leased property. The majority of this land is used for the
cultivation of permanent and annual crops and support activities,
including packing facilities.
DEBT SECURED BY PROPERTIES
Our outstanding debt at December 31, 2003 of $35 million
represents loans secured by our properties (including properties
held of record by Cadiz Real Estate). Information regarding
interest rates and principal maturities is provided in Note 10 to
the consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
CLAIM AGAINST METROPOLITAN
On April 7, 2003 we filed an administrative claim against
The Metropolitan Water District of California ("Metropolitan"),
asserting the breach by Metropolitan of various obligations
specified in our Principles of Agreement with Metropolitan. We
believe that by failing to complete the environmental review
process for the Cadiz Program, as specified in the Principles of
Agreement, Metropolitan violated this contract, breached its
fiduciary duties to us and interfered with our prospective
economic advantages. See Item 1, "Business - Narrative
Description of Business - Water Resource Development". The
filing was made with the Executive Secretary of Metropolitan. We
are seeking recovery of compensatory and punitive damages.
In discussions following presentation of this claim, we and
Metropolitan have agreed to evaluate alternative approaches to
implementation of the Cadiz Program. Metropolitan has not to
date responded to the claim and we have until October 2005 to
file a lawsuit against the agency.
SUN WORLD BANKRUPTCY FILING
On January 30, 2003, (the "Petition Date") Sun World and
three of its wholly owned subsidiaries (Sun Desert, Inc.,
Coachella Growers and Sun World/Rayo) filed voluntary petitions
under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court, Central District of California, Riverside
Division (Case Nos: RS 03-11370 DN, RS 03-11369 DN, RS 03-11371
DN, RS 03-11374 DN). See Item 1, "Business - General Development
of Business".
ING NOTICES OF DEFAULT/NOTICES OF RESCISSION
On July 7 and 8, 2003, ING recorded a series of Notices of
Default and Election to Sell under Deed of Trust in the office of
the San Bernardino County Recorder evidencing a foreclosure
action by ING against the property which was securing our senior
secured loans
Page 12
with ING. ING had declared these senior secured loans, which then
had a maturity date of January 31, 2003, to be in default in
February 2003.
In December 2003, subsequent to the completion of our
comprehensive financial restructuring which included a three year
extension of our loans with ING (See Item 1. Business -
Overview), ING recorded Notices of Rescission in San Bernardino
County whereby ING rescinded, canceled and withdrew each such
Notice of Default and Election to Sell.
OTHER PROCEEDINGS
There are no other material pending legal proceedings to
which we are a party or of which any of our property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders
during the fourth quarter of 2003. The results of a Special
Meeting of Stockholders held August 21, 2003 were reported in our
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2003.
Page 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is currently traded over the counter on the
OTC U.S. Market, often referred to as the "Pink Sheets" under the
symbol "CDZI-OTC". Prior to March 27, 2003, the Company's common
stock was listed on the Nasdaq National Market (Nasdaq). On March
27, 2003, the Company's common stock was delisted from Nasdaq,
and thereafter traded on the OTC Bulletin Board until May 23,
2003, at which time our common stock was removed from the
Bulletin Board and began trading on the Pink Sheets. The
following table reflects actual sales transactions for the dates
that the Company was trading on Nasdaq, and high and low bid
information for dates subsequent. The OTC Bulletin Board and Pink
Sheet market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The high and low ranges of the
common stock for the dates indicated have been provided by
Bloomberg LP. Please note that all stock prices listed throughout
this annual report on Form 10K have been adjusted for the one for
25 reverse stock split that took place in December 2003.
HIGH LOW
QUARTER ENDED SALES PRICE SALES PRICE
------------- ----------- -----------
2002:
March 31 $ 225.00 $ 191.75
June 30 $ 275.00 $ 205.75
September 30 $ 155.50 $ 75.00
December 31 $ 68.75 $ 5.25
2003:
March 31 $ 20.25 $ 2.625
June 30 $ 4.75 $ 2.425
September 30 $ 4.00 $ 1.425
December 31 $ 5.90 $ 3.375
On July 31, 2004, the high, low and last sales prices for
the shares, as reported by Bloomberg, were $15.00, $15.00, and
$15.00, respectively.
We also have an authorized class of 100,000 shares of
preferred stock. There is one series of preferred stock (Series
F) authorized for issuance. All 100,000 authorized shares of
Series F Preferred Stock are issued and outstanding.
On May 10, 1999 we adopted a Stockholders' Rights Plan. In
connection with the Rights Plan, and as further described in the
Rights Plan, we declared a dividend of one preferred share
purchase right for each outstanding share of our common stock
outstanding at the close of business on June 1, 1999, and filed a
Certificate of Designations designating for issuance 40,259
shares of Series A Junior Participating Preferred Stock. No
shares of Series A Participating Preferred Stock were ever
issued. The Rights Plan was amended and terminated by our Board
of Directors on March 25, 2004. On March 26, 2004, Cadiz filed a
certificate of elimination which eliminated this series of
preferred stock.
As of July 31, 2004, the number of stockholders of record of
our common stock was 240 and the estimated number of beneficial
owners was approximately 2,263.
To date, we have not paid a cash dividend on our common
stock and we do not
Page 14
anticipate paying any cash dividends in the foreseeable future.
Our ability to pay such dividends is subject to covenants pursuant
to agreements with our primary lender that prohibits the payment
of dividends.
During the quarter ended December 31, 2003, we issued
4,190,699 shares of common stock and 100,000 shares of Series F
Preferred Stock. 3,440,000 shares of common stock were issued at
$2.50 per share in connection with a private sale of our common
stock for an aggregate amount of $8.6 million. 400,000 shares
were issued in exchange for the cancellation of all of our
outstanding Series D, Series E-1 and Series E-2 preferred stock.
160,000 shares were issued as part of a settlement agreement with
a potential claimant and were valued by us for purposes of this
settlement at $2.50 per share. ING exercised all of their
outstanding warrants and received 94,000 shares of common stock
at an exercise price of $0.25 per share. The remaining 84,699
shares were issued upon conversion of all of our 8% unsecured
convertible promissory notes in the aggregate principal amount of
$200,000 plus accrued interest, which was previously reported in our
quarterly report on Form 10-Q for the quarter ended March 31, 2003.
The Series F preferred stock, which is initially convertible into
1,728,955 shares of common stock (subject to anti-dilution
adjustments), was issued in connection with the restructuring of our
senior secured debt with ING. The issuances of common stock and
Series F preferred stock were not registered under the Securities
Act. We believe that the transactions described are exempt from the
registration requirements of the Securities Act by virtue of
Section 4(2) of the Securities Act as the transactions did not
involve public offerings, the number of investors was limited,
the investors were provided with information about us, and we
placed restrictions on resale of the securities. All other
securities sold by us during the three years ended December 31,
2003 which were not registered under the Securities Act have
previously been reported in our Annual and Quarterly Reports on
Forms 10K and 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data insofar as it relates
to the years ended December 31, 2003, 2002, 2001, 2000 and 1999
has been derived from our audited financial statements. The
information that follows should be read in conjunction with the
audited consolidated financial statements and notes thereto for
each of the three years in the period ended December 31, 2003
included in Part IV of this Form 10-K. See also Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
($ in thousands, except for per share data)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Total revenues $ 3,162 $ 114,250 $ 92,402 $107,745 $ 115,229
Net loss (11,536) (22,225) (25,722) (22,458) (8,594)
Less: Preferred
stock
dividends 918 1,125 591 - -
Imputed
dividend on
preferred
stock 1,600 984 441 - -
--------- --------- --------- --------- ---------
Net loss applicable to
common stock $ (14,054) $ (24,334) $ (26,754) $ (22,458) $ (8,594)
========= ========= ========= ========= =========
Per share:
Net loss (basic and
diluted) $ (6.39) $ (16.76) $ (18.66) $ (15.89) $ (6.20)
========= ========= ========= ========= =========
Weighted-average common
shares outstanding 2,200 1,452 1,434 1,414 1,387
========= ========= ========= ========= =========
Page 15
DECEMBER 31,
---------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Total assets $ 49,526 $ 191,883 $ 198,275 $ 203,617 $ 214,102
Long-term debt $ 30,253 $ 115,447 $ 141,429 $ 145,610 $ 142,089
Redeemable preferred
stock $ - $ 10,942 $ 9,958 $ 3,950 $ -
Preferred stock, common
stock and additional
paid-in capital $ 185,040 $ 156,166 $ 152,765 $ 143,063 $ 136,552
Accumulated deficit $(168,823) $(157,287) $(135,062) $(109,340) $ (86,882)
Stockholders' equity $ 16,217 $ (1,121) $ 17,703 $ 33,723 $ 49,670
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the following
discussion contains trend analysis and other forward-looking
statements. Forward-looking statements can be identified by the
use of words such as "intends", "anticipates", "believes",
"estimates", "projects", "forecasts", "expects", "plans" and
"proposes". Although we believe that the expectations reflected
in these forward-looking statements are based on reasonable
assumptions, there are a number of risks and uncertainties that
could cause actual results to differ materially from these
forward-looking statements. These include, among others, our
ability to maximize value from our Cadiz, California land and
water resources; the uncertainty of the outcome of Sun World's
bankruptcy proceedings; our outstanding guarantee of Sun World's
First Mortgage Notes; and our ability to obtain new financings as
needed to meet our ongoing working capital needs. See additional
discussion under the heading "Certain Trends and Uncertainties"
below.
OVERVIEW
As discussed in further detail below, as of January
30, 2003 the financial statements of our Sun World subsidiary are
no longer being consolidated with ours. Presently, our
operations (and, accordingly, our working capital requirements)
relate primarily to our water development activities and, more
specifically, to the Cadiz Groundwater Storage and Dry-Year
Supply Program. Our results of operations for periods subsequent
to January 2003 have been, and in future fiscal periods will be,
largely reflective of the operations of our water development
activities.
CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY PROGRAM. In
1997, we commenced discussions with the Metropolitan Water
District of Southern California (Metropolitan) in order to
develop principles and terms for a long-term agreement for a
joint venture water storage and supply program on and under our
Cadiz, California property. In July 1998, Cadiz and Metropolitan
approved the Principles and Terms for Agreement for the Cadiz
Groundwater Storage and Dry-Year Supply Program (the Cadiz
Program). At the same time, Cadiz and Metropolitan authorized
preparation of a final agreement based on these principles and
initiated the environmental review process for the Cadiz Program.
Following extensive negotiations with Cadiz to further refine and
finalize these basic principles, Metropolitan's Board of
Directors approved definitive economic terms and responsibilities
at their April 2001 board meeting. The Cadiz Program definitive
economic terms were to serve as the basis for a final agreement
to be executed between Metropolitan and Cadiz, subject to the
then-ongoing environmental review process.
Page 16
Under the Cadiz Program, during wet years or periods of
excess supply, surplus water from the Colorado River Aqueduct
would be stored in the groundwater basin underlying our property.
During dry years or times of reduced allocations from the
Colorado River, the previously imported water, together with
additional existing groundwater, would be extracted and
delivered, via a conveyance pipeline, back to the aqueduct.
On August 29, 2002, the U.S. Department of Interior
approved the Final Environmental Impact Statement for the Cadiz
Program and issued its Record of Decision, the final step in the
federal environmental review process for the Cadiz Program. The
Record of Decision amends the California Desert Conservation Area
Plan for an exception to the utility corridor element and offered
to Metropolitan a right-of-way grant necessary for the
construction and operation of the Cadiz Program.
On September 17, 2002, the Metropolitan Subcommittee on
Rules and Ethics scheduled a series of meetings in October and
November 2002 to consider (a) acceptance of the Record of
Decision and the terms and conditions of the right-of-way grant,
(b) certification of the environmental documentation for the
Cadiz Program under state law, and (c) the final agreement
between Cadiz and Metropolitan.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Irrespective of Metropolitan's actions, Southern
California's need for water storage and supply programs has not
abated. We believe there are several different scenarios to
maximize the value of this water resource, all of which are under
current evaluation.
Until October 2002 we had expected that the Cadiz Program
would be implemented upon the previously negotiated terms, and we
had structured our financing arrangements with a view to such
implementation. Following Metropolitan's vote in October 2002 to
not proceed with the Cadiz Program, these financing arrangements
were no longer workable on their then existing terms.
In January 2003 our wholly-owned subsidiary, Sun World
International, Inc. (which, together with its subsidiaries, we
refer to as "Sun World") filed a voluntary petition for Chapter
11 bankruptcy protection in order to access seasonal financing.
Historically, we, as the parent company of Sun World, had
supplemented Sun World's annual working capital requirements.
However, at the time of Sun World's filing we did not have the
ability to do this. The only way Sun World could obtain the new
financing needed to provide working capital for its 2003-2004
growing seasons was to seek court approval, pursuant to Chapter
11, to a new Debtor in Possession ("DIP") facility.
Sun World's financial situation and bankruptcy filing, in
turn, negated an agreement we had previously reached with our
primary lender, ING Capital LLC ("ING") for a three year
extension of approximately $35 million of senior secured loans
with a maturity date of January 31, 2003. As we were unable to
make payment of this debt when due, in February 2003 ING declared
these loans to be in default, although we remained in
negotiations with ING for an overall restructuring of this debt.
Page 17
Our financing activities during 2003 were directed primarily
towards completion of an overall restructuring of our capital
structure which would preserve our ability to continue with our
water resource development programs. This overall capital
restructuring was successfully completed in December 2003, and
featured the following components, in chronological order:
* In June 2003 we completed a private equity offering of
800,000 shares of our common stock (after giving effect
to our one for twenty-five reverse stock split effective
December 15, 2003 (the "Reverse Split")). 672,000 shares
were issued in consideration of $1.68 million in cash,
112,000 were issued in consideration for $280 thousand in
services rendered to us, and 16,000 were issued as
consideration for fees related to the equity offering.
The proceeds raised in this offering provided sufficient
working capital for us to continue operations pending
completion of the larger $8.6 million private placement
in December 2003 described below.
* In August 2003 our stockholders approved implementation of
a reverse split of our outstanding common stock, with the
exact ratio for the split to be determined by our Board of
Directors at the time of the split. The reverse split was
intended to increase the likelihood of our being able to meet
the minimum trading price required for listing our stock on
The Nasdaq SmallCap Market or other national securities exchange,
as well as to provide us with additional authorized but
unissued shares of common stock to be used for capital
raising and other purposes.
* In October 2003 we entered into an agreement with the
holder of all of our outstanding Series D, Series E-1 and
Series E-2 preferred stock whereby we issued 400,000
shares of our common stock (after giving effect to the
Reverse Split) in exchange of all of our then outstanding
Series D, Series E-1 and Series E-2 preferred stock. In
connection with this conversion, we recorded a charge
against paid-in capital as an inducement to convert.
* In December 2003 we simultaneously completed:
* An extension of up to three years of our $35
million debt facility with ING (see "Liquidity and
Capital Resources - Current Financing Arrangements -
Cadiz Obligations" below);
* A one for twenty-five reverse split of our
outstanding common stock;
* An additional equity infusion of $8.6 million
through the issuance of 3,440,000 shares of common
stock;
* The transfer of our properties to Cadiz Real
Estate LLC, a Delaware limited liability company wholly
owned by us and created at the behest of ING; and
* The completion of our global settlement agreement
with the holders of a majority of Sun World's First
Mortgage Notes (the "Bondholders") which provides
for the pledge of our equity in Sun World together
with an unsecured claim due to us from Sun World of
$13.5 million to a
Page 18
trust controlled by the Bondholders (see "Liquidity
and Capital Resources - Current Financing Arrangements
- Sun World Obligations" below).
As a consequence of all of these transactions, the number
of outstanding shares of our common stock (after giving effect to
our December 2003 one for twenty-five reverse stock split) has
increased from 1,858,659 shares as of December 31, 2002
(including 400,000 common shares issuable upon the conversion of
outstanding Series D and E preferred stock) to 8,200,340 shares
as of December 31, 2003 (including 1,728,955 common shares issuable upon
the conversion of outstanding Series F preferred stock).
With the completion of these transactions, we have provided
for our short-term working capital needs and are able to refocus
our efforts on obtaining and utilizing the capital necessary to
proceed with our water resource development programs.
RESULTS OF OPERATIONS
On January 30, 2003, Sun World filed a voluntary petition
for Chapter 11 bankruptcy protection. As of that date due to the
Company's loss of control over the operations of Sun World, the
financial statements of Sun World are no longer consolidated with
ours, but instead, we are accounting for our investment in Sun
World on the cost basis of accounting. As a result of changing
to the cost basis of accounting on January 31, 2003, we had a net
investment in Sun World of approximately $195 thousand consisting
of loans and amound due from Sun World of $13,500,000 less losses
in excess of investment in Sun World of $13,305,000. As a result,
the Company wrote off its net investment in Sun World of $195
thousand at the Chapter 11 filing date because it does not anticipate
being able to recover its investment.
Our consolidated financial statements for the year ended
December 31, 2003 include the results of operations for Sun World
only for the period January 1, 2003 through January 30, 2003.
The results of operations of Sun World subsequent to January 30,
2003 are not included in these consolidated financial statements.
As a result of the foregoing, direct comparisons of our
consolidated results of operations for year ended December 31,
2003 with results for the year ended December 31, 2002 will not,
in our view, prove meaningful.
For this reason, we believe that material trends and
developments with respect to our results of operations from
period to period are more readily identifiable by comparing the
unconsolidated results of Cadiz Inc., which do not include the
January 2003 operations of Sun World, rather than our
consolidated results of operations, which include the January
2003 operations of Sun World. Therefore, in the following
discussion of results of operations for 2003 as compared to 2002,
we are using only the unconsolidated results of Cadiz Inc.
Tables which disclose the results of Cadiz Inc. separate
from its consolidated subsidiary Sun World for the years ended
December 31, 2003 and 2002, and from which the numbers used in
the following discussion are derived, can be found in Note 10 to
the Consolidated Financial Statements.
(A) YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED
DECEMBER 31, 2002
We have not received significant revenues from our water
resource activity to date. As a result, we have historically
incurred a net loss from operations. Cadiz had revenues of $0.3
million for the year ended December 31, 2003 and $2.1 million for
the year ended December 31,
Page 19
2002. Our net loss, excluding our loss from Sun World, totaled
$9.2 million for the year ended December 31, 2003 compared to
$12.7 million for the year ended December 31, 2002, with
the decrease for the 2003 period resulting from decreases in
general and administrative and interest expense offset by a reduction
in revenue and no cost incurred for the removal of underperforming
crops in 2003.
Our primary expenses are our ongoing overhead costs (i.e.
general and administrative expense) and our interest expense.
REVENUES. Cadiz standalone revenue during the year totaled
$0.3 million during the year ended December 31, 2003 compared to
$2.1 million the preceding year. The decrease is primarily due to
discontinuation of the management fee payable by Sun World as of
January 30, 2003 due to Sun World's Chapter 11 filing.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses during the year ended December 31, 2003
totaled $4.7 million compared to $7.5 million for the year ended
December 31, 2002. The decrease in general and administrative
expenses is primarily due to reductions in salaries and other
costs associated with a reduction in staffing, elimination of
foreign water programs, and reduced facility and insurance costs,
partly offset by increased professional fees related to the
restructuring.
WRITE OFF OF INVESTMENT IN SUBSIDIARY. On January 30, 2003, Sun
World and certain of its subsidiaries filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code. As of that date,
due to the Company's loss of control over the operations of Sun
World, the financial statements are no longer consolidated with those
of Cadiz, but instead Cadiz accounts for its investment in Sun World
on the cost basis of accounting. As a result of changing to the
cost basis of accounting and because the Company does not believe it
will be able to recover its investment, the Company wrote off its
investment in Sun World of $195,000.
REMOVAL OF UNDERPERFORMING CROPS. During 2002, 200 acres of
underperforming table grapes and citrus were removed at the Cadiz
Ranch resulting in a charge of $1.0 million in connection with the
removal of these crops. No such removals occurred during 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
for Cadiz totaled $0.6 million for the year ended December 31, 2003
compared to $1.0 million for the 2002 year. The reduction in
depreciation and amortization is primarily due to the removal of
underperforming crops in 2002 and certain assets becoming fully
depreciated during the past year.
INTEREST EXPENSE, NET. Net interest expense totaled $3.6
million during the year ended December 31, 2003, compared to $5.1
million during the same period in 2002. The following table
summarizes the components of net interest expense for the two
periods (in thousands):
YEAR ENDED DECEMBER 31,
2003 2002
---- ----
Interest on outstanding debt $ 3,053 $ 3,101
Amortization of financing costs 641 2,712
Interest income (58) (705)
--------- ---------
$ 3,636 $ 5,108
========= =========
Page 20
Financing costs, which include legal fees and warrant costs,
are amortized over the life of the debt agreement, most of which
related to the ING obligation which became due near the beginning
of 2003 resulting in lower costs during 2003. The lower interest
income was the result of no interest accruing on the intercompany
loans to Sun World following the Chapter 11 petition.
(B) YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED
DECEMBER 31, 2001
Sun World's agricultural operations are impacted by the
general seasonal trends that are characteristic of the
agricultural industry. Sun World has historically received the
majority of its net income during the months of June to October
following the harvest and sale of its table grape and stonefruit
crops. Due to this concentrated activity, Sun World has
historically incurred losses with respect to its agricultural
operations during the other months of the year.
The table below sets forth, for the periods indicated, the
results of operations for Sun World's four main operating
divisions (before elimination of any interdivisional charges) as
well as the categories of costs and expenses we incurred which
are not included within the divisional results (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001
---- ----
Divisional income (loss):
Farming $ 6,701 $ (3,243)
Packing 9,761 8,320
Marketing 4,551 3,303
Proprietary product development 4,457 2,891
--------- ---------
25,470 11,271
General and administrative 12,819 10,890
Unusual items included in G&A 1,710 -
Special litigation - (7,929)
Non-recurring compensation expense - 5,537
Removal of underperforming crops 4,514 736
Depreciation and amortization 7,480 8,151
Interest expense, net 21,172 19,551
Income tax (benefit) expense - 57
--------- ---------
Net loss $ (22,225) $ (25,722)
========= =========
FARMING OPERATIONS. Income from farming operations totaled
$6.7 million for the year ended December 31, 2002 compared to a
loss of $3.2 million for the year ended December 31, 2001.
Farming revenues were $87.4 million and farming expenses were
$80.7 million for the year ended December 31, 2002 compared to
farming revenues of $71.7 million and farming expenses of $74.9
million for 2001. Farming results were favorably impacted by the
timing of the table grape harvest in Coachella and Mexico
returning to normal as opposed to the harvest starting two weeks
late in 2001, which created an overlap with the early table grape
harvests in the San Joaquin valley. Year-to-date average F.O.B.
prices for table grapes were 3.5% higher than the prior year.
Additionally, Sun World experienced increased table grape
production due to increased yields and due to leasing some
additional organic table grape acreage for the 2002 season. Sun
World sold 4.4 million boxes of table grapes for the year ended
December 31,
Page 21
2002 compared to 3.5 million boxes during the same period in 2001.
Results were also favorably affected by increased plum yields
as plum units sold were 32% higher in 2002 than in 2001. Sun
World also experienced a 58% increase in F.O.B. prices for
peppers. Results were favorably impacted by the continued strong
performance of Sun World's proprietary SUPERIOR SEEDLESS(R) and
MIDNIGHT BEAUTY(R) table grapes and BLACK DIAMOND(R) plums as
production increased and F.O.B. prices remained strong coupled
with the removal of certain underperforming crops at the conclusion
of the 2001 season. Sun World continues to achieve a price
premium for its proprietary table grape and stonefruit products
compared to competing commercially available varieties.
PACKING OPERATIONS. Sun World's packing and handling
facilities contributed $9.8 million in income during the year
ended December 31, 2002 and $8.3 million during the year ended
December 31, 2001. Packing and handling revenue for these
operations of $23.3 million was offset by $13.5 million of
expenses for the year ended December 31, 2002. Revenues totaled
$21.4 million offset by expenses of $13.1 million for the year
ended December 31, 2001. Sun World packed 3.0 million units
during the year ended December 31, 2002 compared to 2.9 million
units for the year ended December 31, 2001. For the year ended
December 31, 2002, Sun World handled 8.9 million units compared
to 8.2 million units in 2001. The increase in units packed and
handled was due primarily to increased production of table grapes
and plums. Units packed and handled during the year ended
December 31, 2002 consisted of Sun World-grown table grapes,
peppers and seedless watermelons in the Coachella Valley; table
grapes and citrus products packed for third party growers; and
table grapes, stonefruit, citrus, and peppers from the San
Joaquin Valley.
MARKETING OPERATIONS. During the year ended December 31,
2002, a total of 10.1 million units were sold consisting
primarily of Sun World-grown table grapes, peppers and
watermelons from the Coachella Valley; table grapes and citrus
from domestic third party growers; and Sun World-grown table
grapes, stonefruit, citrus, and peppers from the San Joaquin
Valley. These unit sales resulted in marketing revenue of $12.2
million. Marketing expenses totaled $7.6 million for the year
ended December 31, 2002 resulting in income from marketing
operations of $4.6 million. During the year ended December 31,
2001, 10.1 million units were marketed resulting in revenues of
$7.5 million offset by expenses of $4.2 million for income of
$3.3 million. The increase in marketing profits was primarily
due to increased F.O.B. prices for table grapes, plums and
peppers. Additionally, revenues and expenses increased due to
fruit purchased from third party suppliers and sold primarily to
a customer's distribution center related to Sun World's role as a
primary supplier of certain fruit categories in 2002.
PROPRIETARY PRODUCT DEVELOPMENT. Sun World has a long
history of product innovation, and its research and development
center maintains a fruit breeding program that has introduced
dozens of proprietary fruit varieties. Additionally, Sun World
continues to expand its licensing program with key strategic
partners worldwide to introduce, trial and produce Sun World's
proprietary varieties, which provides Sun World with a long-term
annual revenue stream based upon a royalty fee for each box of
proprietary fruit sold during the life of the tree or vine.
During the year ended December 31, 2002, income from proprietary
product development was $4.5 million consisting of revenues of
$6.9 million offset by expenses of $2.4 million. For the year
ended December 31, 2001, income was $2.9 million consisting of
revenues of $4.9 million offset by expenses of $2.0 million. The
increase in proprietary product development net income was
primarily due to a $0.5 million increase in intercompany
royalties due to increased yields and higher F.O.B. prices and a
$1.4 million increase in international royalties due primarily to
improved table grape yields for acreage under license coupled
with a delay in the South Africa harvest season, which
effectively shifted a portion of South African revenues from the
fourth
Page 22
quarter of 2001 to the first quarter of 2002. Revenues
include $1.3 million related to project development and
management fees payable in equity of KADCO for both 2002 and
2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses for the year ended December 31, 2002
totaled $12.8 million compared to $10.9 million for the 2001
period before inclusion in 2002 of $1.1 million for the write-off
of capitalized legal costs incurred by Sun World in litigation
relating to the unsuccessful defense of intellectual property rights
and $0.6 million in professional fees relating to unsuccessful
attempts by Sun World to restructure debt during the year. The
increase was primarily due to higher employee related costs coupled
with $0.8 million of professional fees related to the KADCO
combination that was not completed and costs related to exploring
water development opportunities in the Middle East.
UNUSUAL ITEMS INCLUDED IN GENERAL AND ADMINISTRATIVE
EXPENSES. Unusual items for the year ended December 31, 2002
totaled $1.7 million compared to none in 2001. The unusual items
consisted of $1.1 million for the write-off of capitalized legal
costs incurred by Sun World relating to an adverse ruling in
litigation involving the unauthorized domestic production of one
of Sun World's proprietary grapevines and $0.6 million in
professional fees relating to unsuccessful attempts by Sun World
to restructure debt during the year.
SPECIAL LITIGATION. Cadiz was engaged in lawsuits against
Waste Management seeking monetary damages arising from activities
adverse to us in connection with a landfill, which until its
defeat by the voters of San Bernardino County in 1996, was
proposed to be located adjacent to our Cadiz/Fenner Valley
properties. In March 2001, Cadiz executed a settlement agreement
with Waste Management related to these lawsuits. Pursuant to the
settlement agreement, Waste Management paid Cadiz $6 million in
cash and granted to Cadiz approximately 7,000 acres of real
property in eastern San Bernardino County primarily adjacent to
the Cadiz Program property. The settlement resulted in net
proceeds recognized of $7.9 million (consisting of $6 million in
cash and land valued at $1.9 million) for the year ended December
31, 2001.
NON-RECURRING COMPENSATION. In March 2001, Cadiz agreed to
issue 564,163 deferred stock units to certain senior managers of
Cadiz and Sun World. These deferred stock units were issued in
exchange for the cancellation of 1,055,000 fully vested options
to purchase our common stock held by the senior managers. We
recorded a one-time charge of $5,537,000 and no cash was expended
in connection with the issuance of the deferred stock units.
REMOVAL OF UNDERPERFORMING CROPS. During 2002, we removed
approximately 1,900 acres of underperforming crops consisting of
200 acres from the Cadiz ranch and 1,700 acres from Sun World's
ranches. The crops removed include approximately 100 acres of
juice grapes and 100 acres of citrus at the Cadiz ranch and 500
acres of wine grapes, 300 acres of raisin grapes, 400 acres of
stonefruit, 400 acres of citrus, and 100 acres of table grapes
from Sun World's operations. The Company recorded a non- cash
charge of $4.5 million in connection with the removal of these
crops.
During 2001, management decided to remove approximately 40
acres of citrus at the Cadiz ranch and Sun World removed
approximately 700 acres of wine grapes, citrus, and stonefruit.
We recorded a charge of $0.7 million in connection with the
removal of these crops.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and
amortization expense for the year ended December 31, 2002 totaled
$7.5 million compared to $8.2 million during the same period in
2001. The decrease in depreciation was primarily attributable to
certain assets being removed in 2001 and 2002 and certain assets
Page 23
becoming fully depreciated during the past year.
INTEREST EXPENSE, NET. Net interest expense totaled $21.5
million compared to $19.6 million for the years ended December
31, 2002 and 2001. The following table summarizes the components
of net interest expense for the two periods (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001
---- ----
Interest on outstanding debt - Sun World $ 14,484 $ 14,574
Interest on outstanding debt - Cadiz 976 1,347
Amortization of financing costs 5,761 3,748
Interest income (49) (118)
--------- ---------
$ 21,172 $ 19,551
========= =========
The decrease in interest on outstanding debt for the year
ended December 31, 2002 is primarily due to the impact of lower
rates on the Company's variable rate debt. Increased amortization
of financing costs during 2002 is due to the amortization of
warrants issued for the extension and increase in the Cadiz
credit facilities in the first quarter of 2002. Financing costs,
which include legal fees and warrants, are amortized over the life
of the debt agreement.
LIQUIDITY AND CAPITAL RESOURCES
(A) CURRENT FINANCING ARRANGEMENTS
CADIZ OBLIGATIONS. As we have not received significant
revenues from our water resource activity to date, we have been
required to obtain financing to bridge the gap between the time
water resource development expenses are incurred and the time
that revenue will commence. Historically, we have addressed these
needs primarily through secured debt financing arrangements with
our lenders, private equity placements and the exercise of
outstanding stock options.
As of December 31, 2002, we were obligated for approximately
$10,095,068 under a senior term loan facility and $25 million
under a revolving credit facility with our primary secured
lender, ING Capital LLC. Each facility had a maturity date of
January 31, 2003. Sun World's bankruptcy filing negated an
agreement we had previously reached with ING for a three year
extension of these loans, and in February 2003 ING declared these
loans to be in default.
During 2003 we remained in continuing discussions with ING
concerning an overall restructuring of this debt and in December
2003, as part of an overall restructuring of our capital
structure, we entered into agreements with ING which provided
for:
* Establishing the outstanding principal amount owed under
the senior term loan facility at $10 million and under the
revolving credit facility at $25 million, for an aggregate
outstanding principal balance owed to ING of $35 million;
Page 24
* The immediate payment to ING of approximately $2.4
million, representing payment of approximately $2 million in
accrued and unpaid interest on the credit facilities through
September 30, 2003 and payment of approximately $400,000 in
expenses incurred by ING;
* An extension of the maturity date of the credit
facilities until March 31, 2005, with three additional
automatic 6 month extensions conditioned on our maintaining,
as of the commencement date of each extension, cash in an
amount equal to at least 4% of the outstanding principal
balance of the credit facilities in a cash collateral
account held by ING;
* Interest commencing as of October 1, 2003 at the rate of
either (i) 8%, payable in cash, or (ii) 4% payable in cash
plus 8% payable in kind. Interest is payable every six
months commencing March 31, 2004. We have the right to
choose the form of payment with respect to each date upon
which an interest payment is due. At the closing of our
restructuring, we deposited into ING's cash collateral
account the sum of $2,142,280, representing interest
accruing at the rate of 4% per annum from October 1, 2003
until March 31, 2005;
* The issuance to ING of 100,000 shares of Series F
preferred stock, convertible as of the date of issuance into
1,728,955 shares of our common stock. As the holder of this
preferred stock, in addition to conversion rights ING has:
* The right to appoint two members of our Board of
Directors
* The right to approve the authorization or issuance of
any other class or shares of our preferred stock;
* Anti-dilution protection;
* Pre-emptive rights;
* Registration rights; and
* Dividend, liquidation and voting rights shared on an
as-converted basis with common stock.
* The transfer of all of our assets (with the exception of
any Sun World related assets) to Cadiz Real Estate LLC, a
Delaware limited liability company ("Cadiz Real Estate"), a
newly created Delaware limited liability company in which we
hold 100% of the economic interests. Cadiz Real Estate is a
co-obligor with us on our credit facilities with ING, and the
properties now held of record by Cadiz Real Estate secure our
obligations under these facilities. We have entered into a
management agreement with Cadiz Real Estate pursuant to which
we will manage the assets now held by Cadiz Real Estate,
subject to the requirements of the Operating Agreement of
Cadiz Real Estate. The Operating Agreement of Cadiz Real
Estate provides for a Board of Managers consisting of two
managers appointed by us and one independent manager named by
ING. As long as our obligations to ING are outstanding, Cadiz
Real Estate may not institute bankruptcy proceedings without
the unanimous consent of this Board of Managers (including the
independent manager).
The debt covenants associated with these credit facilities
were negotiated by the parties with a view towards our operating
and financial condition as it existed at the time of the
restructuring. Given current circumstances, we do not consider
it likely that we will be in material breach of such covenants.
Page 25
As we continue to actively pursue our business strategy,
additional financing specifically in connection with our water
programs will be required. See "Outlook", below. As the parties
anticipated this need at the time of our credit restructuring,
the covenants in the credit facility which would otherwise
prohibit our incurrence of additional debt (or our use of our
assets as security for such debt) contain an exception for debt
and liens incurred in order to finance the acquisition,
construction or improvement of any assets (up to a maximum of
$135 million at any one time outstanding). The covenants in the
credit facilities do not prohibit our use of equity financing,
but do provide that 35% of the proceeds of such issuance be
applied as a prepayment against such facilities (which prepayment
may take the form of a deposit in ING's cash collateral account).
We do not expect these covenants to materially limit our ability
to undertake debt or equity financing in order to finance our
water development activities.
At December 31, 2003, we have no outstanding credit
facilities or preferred stock other than that held by ING as
described above.
SUN WORLD OBLIGATIONS
- ---------------------
Sun World has outstanding $115 million of First Mortgage
Notes. The First Mortgage Notes were originally to mature on
April 15, 2004. The First Mortgage Notes are currently in default
as a consequence of the Sun World bankruptcy filing. Sun World's
proposed plan of reorganization currently provides for settlement
of claims held by the holders of these notes through the issuance
of equity interests in Sun World to such holders.
The Sun World notes are also secured by the guarantee of
Cadiz. As we are not a party to the Sun World bankruptcy filing,
the effectiveness of a plan of reorganization which discharges
Sun World's obligation to holders of these notes will not, in and
of itself, release us of any obligations which we may still have
under this guarantee. The Plan, as currently proposed, includes a
release in our favor with respect to any of our remaining
obligations under this guarantee; however, we do not know whether
this provision of the Plan will be approved by the Bankruptcy
Court.
We have limited any potential obligation we may have
otherwise had under the guarantee by entering into release
agreements with the majority of holders of the Sun World notes.
For example, in December 2003 we entered into a global settlement
agreement with Sun World and with the holders of a majority of
Sun World's First Mortgage Notes (the "Bondholders") (see Item 1,
"Business - General Development of Business"). Pursuant to this
global settlement agreement, the Bondholders waived their rights
to seek recovery against us on account of our guarantee of Sun
World's obligations under the First Mortgage Notes. This right
will similarly be waived by any other note holder which elects to
opt into this settlement. The identity and ownership interests of
Sun World's bondholders is not a matter of public record,
however, based on the results of investigations performed on
behalf of Sun World, we believe that we have obtained waivers
and/or releases to date from Bondholders which hold, together
with their affiliates, approximately 88% in interest of
outstanding Sun World notes. All of the remaining Sun World
notes (other than a nominal interest of less than 1%) are held by
persons who are also shareholders of ours.
No non-releasing bondholder has sought to enforce our
guarantee of Sun World's obligations against us, nor has any such
bondholder given any indication to us that it plans to do so. As
part of our December 2003 global settlement agreement, the
Bondholders gave written direction to the indenture trustee
irrevocably instructing the trustee to take no action against us
on behalf of bondholders or on account of the guarantee.
Further, we believe that if a bondholder's claim against Sun
World is ultimately satisfied in whole or in part through a Sun
Page 26
World plan of reorganization, then such bondholder will not be
entitled to enforce the guarantee against us as to the amount of
the claim so satisfied.
In view of all of these factors, we do not anticipate that
significant claims will be made against us under the guarantee
and we are not setting aside existing working capital or seeking
to raise additional working capital in order to pay claims under
the guarantee.
We have no other obligations or working capital needs with
respect to Sun World. As part of our December 2003 global
settlement, we have settled all of our claims and obligations
with Sun World. Although we continue to be the record owner of
Sun World's stock, Sun World will not be receiving working
capital contributions from us while it is in bankruptcy
proceedings. Sun World's currently proposed plan of
reorganization provides for our ownership interests in Sun World
to be canceled. Whether or not this plan is approved, we do not
expect to provide working capital support for a reorganized Sun
World.
CASH USED FOR OPERATING ACTIVITIES. Cash used for
operating activities totaled $6.6 million for the year ended
December 31, 2003, as compared to cash used for operating
activities of $10.1 million for the year ended December 31, 2002.
The above amounts are not comparable because of the deconsolidation
of Sun World in January 2003.
Cash used by Cadiz for operating activities for the year
ended December 31, 2003 totaled $4.9 million compared to $7.9 million
for the previous year. The decrease in cash used for operating
activities was primarily due to a reduced loss in 2003. Cadiz loss
in 2003, excluding its loss from Sun World, was $9.1 million as
compared to $12.7 million in 2002.
CASH USED FOR INVESTING ACTIVITIES. Cash used for investing
activities totaled $3.5 million for the year ended December 31, 2003,
as compared to $2.1 million for the same period in 2002. $1.0
million of the cash used in 2003 was the result of
the deconsolidation of Sun World in 2003.
Cash used by Cadiz for investing activities for the year
ended December 31, 2003 totaled $2.0 million, primarily for cash
placed in a restricted bank account to pay for interest on the
$35 million term loan through March 2005, compared to $1.7 million
for the previous year. The 2002 expenditures were primarily due to
capital expenditures for water programs and a $1.0 million loan to
an officer.
CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by
financing activities totaled $10.2 million for the year ended
December 31, 2003 consisting primarily of $10.3 million from the
issuance of capital stock by Cadiz. For the same period
in 2002, cash provided by financing activities totaled $14.0
million primarily from short-term borrowings of $10.0 million by
Cadiz and $4.4 million by Sun World.
(B) OUTLOOK
SHORT TERM OUTLOOK. The proceeds of our 2003 private
placements have provided us with sufficient cash to meet our
expected working capital needs through approximately May 2005.
$2.0 million of the proceeds of our December 2003 private
placement were used to bring current our outstanding interest
payments owed to ING under our ING credit facilities. $2.1
million of the proceeds of our December 2003 private placement
were placed in a cash collateral account with ING in order to
extend the maturity date of the credit facility through March 31,
2005. These funds can be applied, if necessary, to the payment of
accrued interest
Page 27
due under our credit facilities with ING. The remainder of the
proceeds will be used to meet our ongoing working capital needs.
LONG TERM OUTLOOK. In the longer term, our working capital
needs will be determined based upon the specific measures we
pursue in the development of our water resources. Whichever
measure or measures are chosen, we expect that we will need to
raise additional cash from time to time until we are able to
generate cash through our development activities. We will
evaluate the amount of cash needed, and the manner in which such
cash will be raised, on an ongoing basis. We may meet any such
future cash requirements through a variety of means to be
determined at the appropriate time. Such means may include equity
or debt placements, or the sale or other disposition of assets.
Equity placements would be undertaken only to the extent
necessary so as to minimize the dilutive effect of any such
placements upon our existing stockholders.
(C) CERTAIN TRENDS AND UNCERTAINTIES
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we are filing
cautionary statements identifying important risk factors that
could cause our actual results to differ materially from those
projected in our forward-looking statements made by or on our
behalf.
We wish to caution readers that these factors, among
others, could cause our actual results to differ materially from
those expressed in any projected, estimated or forward-looking
statements relating to us. The following factors should be
considered in conjunction with any discussion of operations or
results by us or our representatives, including any forward-
looking discussion, as well as comments contained in press
releases, presentations to securities analysts or investors, or
other communications to us.
In making these statements, we are not undertaking to
address or update each factor in future filings or communications
regarding our business or results, and are not undertaking to
address how any of these factors may have caused changes to
discussions or information contained in previous filings or
communications. In addition, certain of these matters may have
affected our past results and may affect future results.
OUR REVENUES ARE DEPENDENT UPON THE SUCCESS OF OUR WATER
DEVELOPMENT PROJECTS. We may never generate revenues or become
profitable unless we are able to successfully implement our water
development programs. At present, we do not know the terms, if
any, upon which we may be able to proceed with the Cadiz Program,
or of any alternative means which we may be able to use in order
to implement our water development programs. Regardless of the
form of our water development programs, the circumstances under
which transfers or storage of water can be made and the
profitability of any transfers or storage are subject to
significant uncertainties, including hydrologic risks of variable
water supplies, risks presented by allocations of water under
existing and prospective priorities, and risks of adverse changes
to or interpretations of U.S. federal, state and local laws,
regulations and policies. Additional risks attendant to such
programs include our ability to obtain all necessary regulatory
approvals and permits, possible litigation by environmental or
other groups, unforeseen technical difficulties, and general
market conditions for water supplies.
WE ARE UNCERTAIN OF THE OUTCOME OF SUN WORLD'S BANKRUPTCY
PROCEEDINGS. Sun World's plan of reorganization, as filed with
the U.S. Bankruptcy Court, has not been approved. We do not know
when or if this plan will ever be approved. In addition, we do
not know whether changes will need to be made to the plan in
order to obtain approval of the plan and, if so, what
Page 28
such changes would be. Notwithstanding our separate and binding global
settlement agreements with Sun World and with the holders of a
majority in interest of Sun World's First Mortgage Notes, we will
not know the exact nature of the post-bankruptcy ownership
structure of Sun World or the final disposition of our claims and
the claims of Sun World's creditors in the bankruptcy proceedings
until such proceedings are formally concluded.
A PENDING APPEAL OF THE BANKRUPTCY COURT'S APPROVAL OF OUR
SETTLEMENT WITH SUN WORLD MAY BE SUCCESSFUL. A single unsecured
creditor of Sun World has appealed the order of the Bankruptcy
Court which authorized Sun World to enter into a global
settlement agreement with us. We may be exposed to significant
monetary damages (and, as a result, potential default under our
agreements with our senior secured lender) if (i) this appeal is
successful in reversing the Bankruptcy Court's order, (ii) our
settlement with Sun World is thereafter disapproved and
abandoned, (iii) litigation is commenced on behalf of Sun World's
estate against us, and (iv) a judgment is obtained against us and
enforced.
OUR GUARANTEE OF SUN WORLD'S FIRST MORTGAGE NOTES REMAINS
OUTSTANDING. Sun World's First Mortgage Notes are secured by our
guarantee. If, notwithstanding our efforts to limit potential
obligations under this guarantee, a claim is successfully
asserted against us under this guarantee, we may not have the
ability to pay such a claim. Our inability to pay a claim under
the guarantee may materially and adversely affect our ability to
conduct our business and thereby cause a default under our
agreements with our senior secured lender.
OUR FAILURE TO MAKE TIMELY PAYMENTS OF PRINCIPAL AND
INTEREST ON OUR INDEBTEDNESS MAY RESULT IN A FORECLOSURE ON OUR
ASSETS. As of December 31, 2003, we had indebtedness outstanding
to our senior secured lender of approximately $35 million. Our
assets have been put up as collateral to secure the payment of
this debt. If we cannot generate sufficient cash flow to make
timely payments of principal and interest on this indebtedness,
or if we otherwise fail to comply with the terms of agreements
governing our indebtedness, we may default on our obligations.
If we default on our obligations, our lenders may sell off the
assets that we have put up as collateral. This, in turn, may
result in a cessation or sale of our operations.
OUR STOCK IS NOT TRADED ON A NATIONAL SECURITIES
EXCHANGE. Effective March 27, 2003, our common stock was
delisted from trading on the Nasdaq National Market. While we
intend to reapply for a Nasdaq listing as soon as we are eligible
to do so, certain requirements for such a listing, such as
minimum trading price, are not within our control, and therefore
we cannot be certain when or if we will be able to meet the
initial listing requirements of Nasdaq or another national
securities exchange.
FURTHER EQUITY FINANCINGS WILL RESULT IN THE DILUTION
OF OWNERSHIP INTERESTS OF CURRENT STOCKHOLDERS. We may require
additional capital to finance our operations until such time as
our water development operations produce revenues. We cannot
assure you that our current lenders, or any other lenders, will
give us additional credit should we seek it. Consequently, we
will likely seek to raise additional working capital in the near
term through further equity financings, which will result in
dilution to the equity interests of current common stockholders.
THE REGISTRATION FOR RESALE OF COMMON STOCK PURSUANT TO
EXISTING REGISTRATION RIGHTS AGREEMENTS WILL INCREASE THE NUMBER
OF OUTSTANDING SHARES OF OUR COMMON STOCK ELIGIBLE FOR RESALE.
The sale, or availability for sale, of these shares could cause
decreases in the market price of our common stock, particularly
in the event that a large number of shares were sold in the
public market over a short period of time. Similarly, the
perception that
Page 29
additional shares of our common stock could be sold in the public
market in the future, could cause a reduction in the trading price
of our stock.
WE ARE RESTRICTED BY CONTRACT FROM PAYING DIVIDENDS AND
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. Any
return on investment on our common stock will depend primarily
upon the appreciation in the price of our common stock. To date,
we have never paid a cash dividend on our common stock. The loan
documents governing our credit facilities with ING prohibit the
payment of dividends while such facilities are outstanding. As
we have a history of operating losses, we have been unable to
date to pay dividends. Even if we post a profit in future years,
we currently intend to retain all future earnings for the
operation of our business. As a result, we do not anticipate
that we will declare any dividends in the foreseeable future.
(D) CRITICAL ACCOUNTING POLICIES
As discussed in Note 2 to the Consolidated Financial
Statements of Cadiz, the preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect amounts reported in the accompanying
consolidated financial statements and related footnotes. In
preparing these financial statements, management has made its
best estimates and judgments of certain amounts included in the
financial statements based on all relevant information available
at the time and giving due to consideration to materiality. We do
not believe there is a great likelihood that materially different
amounts would be reported related to the accounting policies
described below. However, application of these policies involves
the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from
these estimates. Management has concluded that the following
critical accounting policies described below affect the most
significant judgments and estimates used in the preparation of
the consolidated financial statements.
(1) PRINCIPLES ON CONSOLIDATION. The Consolidated
Financial Statements have been prepared by Cadiz Inc.,
sometimes referred to as "Cadiz" or "the Company". On January
30, 2003, Sun World filed voluntary petitions under Chapter 11
of the Bankruptcy Code. Since the filing date, Sun World has
operated its business and managed its affairs as debtor and
debtor in possession. As of that date due to the Company's
loss of control over the operations of Sun World, the financial
statements of Sun World are no longer consolidated with those
of Cadiz, but instead, Cadiz is accounting for its investment
in Sun World on the cost basis of accounting. The foregoing
Consolidated Financial Statements include the accounts of the Company
and, until January 30, 2003, those of its then wholly-owned
subsidiary, Sun World International, Inc. and its subsidiaries
collectively referred to as "Sun World", and contain all adjustments,
consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation. Certain reclassifications
have been made to the prior period to conform to the current
presentation.
(2) INVENTORIES AND RELATED ALLOWANCE FOR OBSOLETE AND
EXCESS INVENTORY. Inventories are valued at the lower of cost or
market. Management estimates what market conditions will be for
produce based on the age, size, quality and overall market for
fresh product held in inventory at the end of each reporting
period. When future market conditions indicate that the cost of
the inventory plus any additional selling expenses exceed the
expected net revenues to be received, we provide a reserve for
the amount of estimated costs in excess of estimated net
revenues. Management also regularly conducts a review of non-
product inventory that consists primarily of corrugated boxes,
chemicals and seed. Appropriate
Page 30
allowances are made based on management's review for all excess
and obsolete inventory compared to estimated future usage and sales.
(3) INTANGIBLE AND OTHER LONG-LIVED ASSETS. Property,
plant and equipment, intangible and certain other long-lived
assets are amortized over their useful lives. Useful lives are
based on management's estimates of the period that the assets
will generate revenue. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. At
Sun World, management regularly reviews crop portfolios in an
attempt to identify crops that are underperforming generally at
the conclusion of each growing season. As a result of these
reviews, management determines which crops will be removed
immediately or at the conclusion of the next growing season. As
such, appropriate writedowns and accruals for estimated removal
costs are made and where appropriate, remaining useful lives are
shortened to correspond to the estimated period that the assets
are expected to generate future revenues. As a result of the
actions taken by Metropolitan in the fourth quarter of 2002 as
described in Note 1, the Company, with the assistance of an
independent valuation firm, evaluated the carrying value of its
water program and determined that the asset was not impaired and
that the costs will be recovered through sale or operation of the
project.
(4) GOODWILL. As a result of a merger in May 1988 between
two companies, which eventually became known as Cadiz Inc.,
goodwill in the amount of $7,006,000 was recorded. This amount
was being amortized on a straight-line basis over thirty years.
Accumulated amortization was $3,193,000 at December 31, 2001. In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, ("SFAS No.
142") "Goodwill and Other Intangible Assets". Under SFAS No. 142
goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but will be subject to annual impairment
tests in accordance with the Statement. Upon adoption of SFAS
No. 142, effective at the beginning of fiscal 2002, the Company
performed a transitional fair value based impairment test and
determined that its goodwill was not impaired. In addition,
cessation of amortization of goodwill upon adoption of SFAS No.
142 did not have a material impact upon the Company's financial
position or results of operations. Goodwill is tested for
impairment annually in the fourth quarter, or earlier if events
occur which require an impairment analysis be performed. As a
result of the actions taken by Metropolitan in the fourth quarter
of 2002 as described in Note 1 to the financial statements, the
Company, with the assistance of an independent appraisal firm,
performed an impairment test of its goodwill and determined that
its goodwill was not impaired. In addition, in the first quarter
of 2003, the Company, with the assistance of an independent
appraisal firm, performed its annual impairment test of goodwill
and determined its goodwill was not impaired.
(5) DEFERRED TAX ASSETS AND VALUATION ALLOWANCES. To date,
we have had a history of net operating losses as we have not
generated significant revenue from our water development programs
and Sun World had experienced losses from its agricultural
operations. As such, we have generated significant deferred tax
assets, including large net operating loss carry forwards for
federal and state income taxes for which we have a full valuation
allowance. Management is currently working on initiatives at
Cadiz that are designed to generate future taxable income,
although there can be no guarantee that this will occur. As
taxable income is generated, some portion or all of the valuation
allowance will be reversed and an increase in net income would
consequently be reported in future years.
(E) NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement of
Page 31
Financial Accounting Standard (SFAS) No. 145, which rescinds
FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, FASB Statement No. 44, Accounting
for Intangible Assets of Motor Carriers, and FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements as well as amends FASB No. 13, to make various
technical various corrections. The Statement is effective for
financial statements issued after May 15, 2002. The adoption of
this standard did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit
or disposal activities and supersedes Emerging Issues Task Force
("EITF") Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
Under EITF Issue 94-3, a liability for an exit cost as defined in
EITF Issue 94-3 was recognized at the date of an entity s
commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair
value. The Company adopted the provisions of SFAS 146 effective
January 1, 2003 and such adoption did not have a material impact
on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45,
Guarantor s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of
Others ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it
has issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company
adopted the disclosure provisions of FIN 45 during the fourth
quarter of 2002 and the recognition provisions of FIN 45
effective January 1, 2003. Such adoption did not have a material
impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The amendments to
Statement 123 in paragraphs 2(a)-2(e) of this Statement shall be
effective for financial statements for fiscal years ending after
December 15, 2002. Earlier application of the transition
provisions in paragraphs 2(a)-2(d) is permitted for entities with
a fiscal year ending prior to December 15, 2002, provided that
financial statements for the 2002 fiscal year have not been
issued as of the date this Statement is issued. Early application
of the disclosure provisions in paragraph 2(e) is encouraged. The
amendment to Statement 123 in paragraph 2(f) of this Statement
and the amendment to Opinion 28 in paragraph 3 shall be effective
for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on its
financial position or results of its operations.
In January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). In
general, a variable interest entity is a corporation,
partnership, trust or any
Page 32
other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources
for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
Company adopted the provisions of FIN 46 effective February 1,
2003 and such adoption did not have an impact on its consolidated
financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect
to variable interest entities created before January 31, 2003,
which among other things, revised the implementation date to the
first year or interim period ending after March 15, 2004, with
the exception of Special Purpose Entities ( SPE). The
consolidation requirements apply to all SPE s in the first year
or interim period ending after December 15, 2003. The Company's
adoption of the provisions of FIN 46R is not expected to have a
material impact on its consolidated financial statements.
In April 2003, FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS 133. SFAS 149 is effective for
contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS
149 effective June 30, 2003 and such adoption did not have an
impact on its consolidated financial statements since the Company
has not entered into any derivative or hedging transactions.
In May 2003, FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:
* a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional
obligation that requires the issuer to redeem it by
transferring its assets at a specified or determinable date or
upon an event that is certain to occur;
* a financial instrument, other than an outstanding share,
that embodies an obligation to repurchase the issuer s equity
shares, or is indexed to such an obligation, and requires the
issuer to settle the obligation by transferring assets; and
* a financial instrument that embodies an unconditional
obligation that the issuer must settle by issuing a variable
number of its equity shares if the monetary value of the
obligation is based solely or predominantly on (1) a fixed
monetary amount, (2) variations in something other than the
fair value of the issuer s equity shares, or (3) variations
inversely related to changes in the fair value of the issuer s
equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3
which deferred the effective dates for applying certain
provisions of SFAS 150 related to mandatorily redeemable
financial instruments of certain non-public entities and certain
mandatorily redeemable non-controlling interests for public and
non-public companies. For public entities, SFAS 150 is effective
for mandatorily redeemable financial instruments entered into or
modified after May 31, 2003 and is effective for all other
financial instruments as of the first interim period beginning
Page 33
after June 15, 2003. For mandatorily redeemable non-controlling
interests that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS 150, but
would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 150 are
deferred indefinitely. The measurement provisions of SFAS 150 are
also deferred indefinitely for other mandatorily redeemable non-
controlling interests that were issued before November 4, 2003.
For those instruments, the measurement guidance for redeemable
shares and non-controlling interests in other literature shall
apply during the deferral period. The Company adopted the
provisions of SFAS 150 effective June 30, 2003, and such adoption
did not have an impact on our consolidated financial statements.
In March 2004, the consensus of Emerging Issues Task Force (EITF)
Issue No. 03-06, Participating Securities and the Two-Class Method
under FASB Statement 128, was published. EITF Issue No. 03-06
addresses the computations of earnings per share by companies that
have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the
company. Further guidance on the application and allocations of the
two-class method of calculating earnings per share is also included.
The provisions of EITF Issue No. 03-06 will be effective for reporting
periods beginning after March 31, 2004. The adoption of this guidance
is not expected to have significant impact on the Company's financial
results of operations and financial position.
(F) OFF BALANCE SHEET ARRANGEMENTS
Cadiz does not have any off balance sheet arrangements at
this time other than the guarantee of Sun World's first mortgage
notes (as discussed in "(g)" below).
(G) CERTAIN KNOWN CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
CONTRACTUAL LESS THAN
OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------- ----- ------ --------- --------- -------------
Cadiz Inc.
- ----------
Long term debt
obligations (A) $ 35,000 $ - $ 35,000 $ - $ -
Operating leases 262 112 150 - -
--------- ------ --------- ------- ---------
$ 35,262 $ 112 $ 35,150 $ - $ -
========= ====== ========= ======= =========
(A) Cadiz long-term debt included in the table above reflects
the debt restructuring which occurred in December 2003 as
described above in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operation; Liquidity and
Capital Resources; Cadiz Obligations.
In April 1997, Sun World issued $115 million of Series A First
Mortgage Notes through a private placement. The notes have
subsequently been exchanged for Series B First Mortgage Notes,
which are registered under the Securities Act of 1933 and are
publicly traded. The First Mortgage Notes are secured by a first
lien (subject to certain permitted liens) on substantially all of
the assets of Sun World and its subsidiaries other than growing
crops, crop inventories and accounts receivable and proceeds
thereof, which secure the Revolving Credit Facility. With the
entering into the DIP Facility as described in Note 9, the note
holders now have a second position on substantially all of the
Company's assets for so long as the DIP Facility is outstanding.
The First Mortgage Notes
Page 34
mature April 15, 2004, but are redeemable at the option of Sun World,
in whole or in part, at any time prior to the maturity date. The
First Mortgage Notes include covenants that do not allow for the
payment of dividends by the Company other than out of cumulative
net income.
The First Mortgage Notes are also secured by the guarantees
of Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and
Sun World International de Mexico S.A. de C.V. (collectively, the
"Sun World Subsidiary Guarantors") and by Cadiz. Cadiz also
pledged all of the stock of Sun World as collateral for its
guarantee. The guarantees by the Sun World Subsidiary Guarantors
are full, unconditional, and joint and several. Sun World and
the Sun World Subsidiary Guarantors comprise all of the direct
and indirect subsidiaries of the Company other than
inconsequential subsidiaries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates
on long-term debt obligations that impact the fair value of these
obligations. Our policy is to manage interest rates
fair values by year of scheduled maturities to evaluate the
expected cash flows and sensitivity to interest rate changes (in
thousands of dollars). Circumstances could arise which may cause
interest rates and the timing and amount of actual cash flows to
differ materially from the schedule below:
LONG-TERM DEBT
-------------------------------------------------------
EXPECTED FIXED RATE AVERAGE VARIABLE RATE AVERAGE
MATURITY MATURITIES INTEREST RATE MATURITIES INTEREST RATE
- -------- ---------- ------------- ---------- -------------
Cadiz Inc.
2005 $ 35,000 12.0% $ - $ -
========= ===== ========= ====
Cadiz long-term debt included in the table above reflects
the debt restructuring which occurred in December 2003 as
described above in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operation; Liquidity and
Capital Resources; Cadiz Obligations.
Cadiz has guaranteed the First Mortgage Notes issued by Sun
World as described in Item 7(g) above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted in
response to Part IV below. See the Index to Consolidated
Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISLCOSURE
Not applicable.
Page 35
ITEM 9A. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with
the participation of our management, including our Chairman,
Chief Executive Officer and Chief Financial Officer (Principal
Executive and Financial Officer), of the effectiveness of the
design and operation of our disclosure controls and procedures as
of December 31, 2003. As of the date of that evaluation, our Chairman,
Chief Executive Officer and Chief Financial Officer concluded that
these disclosure controls and procedures are effective in timely
alerting him to material information relating to Cadiz (including
our consolidated subsidiaries) required to be included in our periodic
Securities and Exchange Commission filings. There was no significant
change in our internal control over financial reporting that occurred
during the most recent fiscal quarter that materially affected,
or is reasonably likely to affect, our internal control over
financial reporting, and no corrective actions with regard to
significant deficiencies or weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position with Cadiz
---- --- -------------------
Keith Brackpool 47 Chairman of the Board,
President, Chief Executive and
Financial Officer
Murray H. Hutchison 66 Director
Timothy J. Shaheen 44 Director and President
and Chief Executive Officer of
Sun World International, Inc.
Geoffrey Arens 40 Director
Gregory Ritchie 40 Director
Richard E. Stoddard 53 CEO and Chairman of the
Board of Managers of Cadiz
Real Estate LLC
Keith Brackpool is a founder of Cadiz, has served as a
member of Cadiz' Board of Directors since September 1986, and has
served as President and Chief Executive Officer of Cadiz since
December 1991. Mr. Brackpool assumed the role of Chairman of the
Board of Cadiz on May 14, 2001, and the role of Chief Financial
Officer on May 19, 2003. Mr. Brackpool has also been a principal
of 1334 Partners L.P., a partnership that owns commercial real
estate from 1989 to present.
Murray H. Hutchison was appointed a director of Cadiz in
June 1997. He is also a member of the Board of Managers (an LLC's
functional equivalent of a Board of Directors) of Cadiz'
subsidiary, Cadiz Real Estate LLC. In his capacity as a manager
of the LLC he performs essentially the same duties on behalf of
the LLC as he would as an outside director for a corporation.
Since his retirement in 1996 from International Technology
Corporation, a publicly traded diversified environmental
management company, Mr. Hutchison has been self-employed
Page 36
with his business activities involving primarily the management of
an investment portfolio. From 1976 to 1994, Mr. Hutchison served as
Chief Executive Officer and Chairman of International Technology.
Mr. Hutchison currently serves as a director of Jack in the Box,
Inc., a publicly traded fast food restaurant chain. Additionally,
Mr. Hutchison serves as Chairman of the Huntington Hotel
Corporation, a privately owned hotel and office building, and as
a director of several other non-publicly traded U.S. companies.
Timothy J. Shaheen was appointed a director of Cadiz in
March 1999. Mr. Shaheen has also served as the President, Chief
Executive Officer and a director of Cadiz' wholly-owned
subsidiary, Sun World International, Inc., since September 1996.
Mr. Shaheen has 18 years of experience in the produce industry
and is active on several industry advisory committees. Prior to
joining Sun World, he served as a senior executive with Albert
Fisher North America, a publicly traded domestic and
international produce company from 1989 to 1996. While with
Albert Fisher, Mr. Shaheen also served as director of its
Canadian produce operations and as a director of Fresh Western
Marketing, one of the largest growers and shippers of fresh
vegetables in the Salinas Valley of California. Prior to his
employment with Albert Fisher, Mr. Shaheen has seven years of
experience with the accounting firm of Ernst & Young LLP. Mr.
Shaheen is a certified public accountant. As described more
fully in "Item 1 Description of Business - General Development of
Business" above, Sun World and its domestic subsidiaries filed
for bankruptcy on January 30, 2003.
Geoffrey Arens was appointed a director of Cadiz on January
30, 2004 as a nominee of ING pursuant to the rights of ING as
holder of Cadiz' Series F preferred stock. Mr. Arens has been
with ING since 1995 and is the co-Head of ING's Strategic Trading
Platform Americas group and as such is responsible for that
group's global proprietary investing business. He is also CEO of
ING Capital Advisors, LLC, a registered investment advisor
specializing in the management of leveraged loan assets for large
institutional clients. In addition to his Board duties at Cadiz,
Mr. Arens also serves on the Board of Directors of ING Capital
Management, Ltd., and California Coastal Communities, Inc.
Gregory Ritchie was appointed a director of Cadiz on March
25, 2004 as a nominee of ING pursuant to the rights of ING as
holder of Cadiz' Series F preferred stock. Mr. Ritchie has been
with ING since 1995 and is a Managing Director and the co-head of
ING's Strategic Trading Platform and as such is responsible for
the group's global proprietary investing business. He is also
head of the Strategic Trading Platform's Equities team.
Richard E. Stoddard serves as CEO and Chairman of the Board
of Managers of Cadiz Real Estate LLC, the subsidiary of Cadiz,
directing the development of the Cadiz Groundwater Storage
Program and the other Cadiz real estate assets. In addition,
since 1988, Mr. Stoddard has served as the Chairman and CEO of
Kaiser Ventures LLC, an unrelated public entity involved in
water development, real estate development and waste management
projects in southern California. Mr. Stoddard also serves as a
general business consultant to Cadiz.
The certificate of designation for our Series F preferred
stock provides that the holder(s) of the Series F preferred stock
(currently ING) have the right to elect two members of the Board
of Directors.
Directors of Cadiz hold office until the next annual meeting
of stockholders or until their successors are elected and
qualified. There are no family relationships between any
directors or current officers of Cadiz. Officers serve at the
discretion of the Board of Directors.
Page 37
The Board of Directors has determined that Mr. Hutchison, a
member of the Company's Audit Committee, is an "audit committee
financial expert" as that term is defined in Item 401(h) of
Regulation S-K under the Securities Act. The other members of the
Audit Committee are Messrs. Arens and Ritchie. The Board has
determined that Messrs. Hutchison, Arens and Ritchie are
independent in accordance with the criteria and guidelines
established by Nasdaq.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and
executive officers, and persons who beneficially own more than
10% of a registered class of our equity securities ("reporting
persons"), to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock and other equity
securities of Cadiz. Reporting persons are required by the SEC
regulations to furnish Cadiz with copies of all Section 16(a)
forms they file. We have filed these forms on behalf of some of
our directors and officers in the past and have a power of
attorney to assist certain of them in the future. To Cadiz'
knowledge, based solely on a review of the copies of reports and
amendments thereto on Forms 3, 4 and 5 furnished to us by
reporting persons and forms that we filed on behalf of certain
directors and officers, during, and with respect to, Cadiz'
fiscal year ended December 31, 2003, and on a review of written
representations from reporting persons to Cadiz that no other
reports were required to be filed for such fiscal year, and all
Section 16(a) filing requirements applicable to Cadiz' directors,
executive officers and greater than 10% beneficial owners during
such period were satisfied in a timely manner.
CODE OF ETHICS
Cadiz has adopted a code of ethics that applies to all of
its employees, including its principal executive and financial
officer. A copy of the code of ethics may be found on Cadiz'
website at www.cadizinc.com. Other information on this website
is not incorporated as part of this filing.
Page 38
ITEM 11. EXECUTIVE COMPENSATION
The tables and discussion below set forth information about
the compensation awarded to, earned by, or paid to Cadiz' chief
executive and financial officer during the years ended December
31, 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
OTHER LONG-TERM
ANNUAL COMPENSATION(2) COMPENSATION AWARDS
---------------------- -------------------
NAME AND FISCAL RESTRICTED STOCK ALL OTHER
PRINCIPAL POSITION YEAR(1) SALARY BONUS AWARDS(3)(4) COMPENSATION
Keith Brackpool 12/31/03 $ 288,461 $ 200,000(5) $ -0- $ 850,000(6)
President and
Chief Executive 12/31/02 500,000 233,124 -0- -0-
and Financial
Officer 12/31/01 500,000 -0- -0- -0-
- -------------------------------
(1) The information presented in this table is for the years
ended December 31, 2003, 2002 and 2001. The executive
officer for whom compensation has been disclosed for the
year ended December 31, 2003, is the only executive officer
of Cadiz as of December 31, 2003. No other executive officer
received total salary or bonus exceeding $100,000 during the
year ended December 31, 2003.
(2) No column for "Other Annual Compensation" has been included
to show compensation not properly categorized as salary or
bonus, which consisted entirely during each fiscal year of
perquisites and other personal benefits, because the
aggregate amounts did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus
reported for Mr. Brackpool for each fiscal year. See
"Employment Arrangements" below.
(3) 1,616 and 615 deferred stock units were granted to Mr.
Brackpool in May 2000 and February 2001, respectively, as
part of his bonus for the preceding calendar year. These
deferred stock units vested three years from the date of
issuance and therefore 1,616 and 615 shares of common stock
were issued to him in 2003 and 2004 accordingly. The 1,616
deferred stock unit grant was exchanged in March 2003 for
1,616 shares of common stock valued at $4,040 (based upon a
$2.50 sale price per share on the expiration date). Mr.
Brackpool's 615 deferred stock units outstanding at December
31, 2003 (based upon the Pink Sheets closing sales price per
share of $5.10 on that date) were valued at $3,136. Upon
their vesting in February 2004, the Company's Board of
Directors authorized the buyout of the tax withholding
portion of Mr. Brackpool's deferred stock units and he was
issued 370 shares valued at $4,637 including the tax
withholding amount (based upon a $7.54 closing sale price
per share on the expiration date).
(4) Deferred stock units, which were fully vested but could not
be exchanged for shares of common stock without restrictions
until March 31, 2003, were issued to Mr. Brackpool in March
2001 in exchange for fully vested and expiring options in
amounts equaling the value of the expiring options in excess
of their exercise price. Mr. Brackpool exchanged 12,000
expiring stock options in March 2001 for 5,415 deferred
stock units and was issued shares of common stock upon the
exercise of the deferred stock units on March 31, 2003 for a
net value of $13,538 (based upon a $2.50 sale price per
share on that date).
(5) This bonus was paid to Mr. Brackpool in February 2004 for
services completed in the preceding calendar year. Mr.
Brackpool was provided the opportunity to receive the bonus
in cash or shares of common stock valued at $2.50 per share
and elected to receive his compensation in stock.
(6) Mr. Brackpool received an aggregate $850,000 due to the
termination of his previous employment agreement without
cause and foregone salary, as described more fully in
"Employment Arrangements" below.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-
END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- -------------- ----------- ------------- ----------------
Keith Brackpool -0- -$0- 80,000(2)/-0- -$0-/-$0-
- --------------------------------------
(1) Based upon the Pink Sheets closing sales price per
share of Cadiz common stock at December 31, 2003 which
was $5.10.
Page 39
(2) These options expired without exercise on
January 15, 2004.
COMPENSATION OF DIRECTORS
In the fiscal year 2003, Messrs. Anthony Coelho, Murray H.
Hutchison and Dwight W. Makins each received cash compensation
for their services as directors of Cadiz in the amount of $6,250
for each of the first and fourth quarter. For the second and
third quarters, each director received an aggregate of 4,000
shares of Cadiz common stock valued at $2.50 per share for their
services as directors during those periods. Messrs. Coelho and
Makins served as directors in 2003 until their resignations which
were effective December 15, 2003. Mr. Philip R. Burnaman II
joined the Cadiz Board of Directors for a brief period in January
2003 at the nomination of ING, however, he resigned within a
month and did not receive any compensation from Cadiz for his
services.
Messrs. Brackpool, Shaheen, Arens and Ritchie do not receive
any compensation from Cadiz for serving as directors of Cadiz or
Sun World. Mr. Hutchison will receive $25,000 per year in
accordance with his agreement with Cadiz for services as a
director.
EMPLOYMENT ARRANGEMENTS
Until February 1, 2003, Mr. Brackpool was employed pursuant
to an Employment Agreement which provided for base compensation
of $500,000 annually plus an annual incentive based bonus not to
exceed 120% of his base compensation. This agreement provided
that in the event of a material change or reduction in Mr.
Brackpool's responsibilities, he would be entitled to terminate
the agreement and continue to receive base compensation for the
remainder of the term of the agreement, and also provided that
Mr. Brackpool would be entitled to continue to receive base
salary and a deemed bonus equal to 60% of base salary in the
event of any other termination of the agreement by Cadiz company
other than for cause.
Subsequent to February 1, 2003, Cadiz failed to make
payments of base compensation to Mr. Brackpool as and when
required under this agreement, thereby giving Mr. Brackpool the
right to terminate the agreement, which was effectively
terminated as of February 1, 2003. In accordance with the
termination provisions of the agreement governing termination
without cause, Mr. Brackpool became entitled to receive payment
of $800,000.
This $800,000 payment was made to Mr. Brackpool as part of
an overall settlement of obligations arising under a $1 million
loan entered into by Mr. Brackpool with Cadiz on July 5, 2002.
See "Item 13. Certain Relationships and Related Transactions",
below. This overall settlement with Mr. Brackpool was made
effective July 5, 2003, by way of a corresponding reduction in
Mr. Brackpool's obligations to Cadiz under the loan. This
reduction, along with cash payments by Mr. Brackpool in the
amount of $181,013 and an application of $50,000 of accrued but
unpaid compensation owed by Cadiz to Mr. Brackpool under his post
February 1, 2003 employment arrangements with Cadiz, resulted in
the settlement in full by Mr. Brackpool of his obligations under
this loan.
Notwithstanding the agreed termination of Mr. Brackpool's
existing employment agreement as of February 1, 2003, and
notwithstanding Mr. Brackpool's right to collect termination
payments pursuant to that agreement without continuing to provide
services to Cadiz following that date, Cadiz had and continues to
have a need for Mr. Brackpool's services subsequent to February
1, 2003. However, given our then existing circumstances and
limited financial resources, we agreed that it was necessary to
change certain of Mr. Brackpool's duties and responsibilities and
to materially reduce his compensation.
Page 40
To this end, effective as of the first pay period after
February 1, 2003 Mr. Brackpool has been compensated pursuant to
an Agreement Regarding Employment pursuant to which Mr. Brackpool
receives base compensation of $20,000 per month, plus the same
fringe benefits that Mr. Brackpool had been receiving under his
prior employment agreement, including the use of a leased
automobile and life and disability insurance benefits funded by
us. While this Agreement requires Mr. Brackpool to perform his
services in a satisfactory manner, it does not require that his
services be provided on a full-time basis. Although the initial
term of the Agreement Regarding Employment ended September 30,
2003, Mr. Brackpool continues to provide services to us upon the
terms and conditions set forth in this Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 2003, all decisions
concerning executive officer compensation were made by the
Compensation Committee of the Board of Directors. The members
of the Compensation Committee were Messrs. Hutchison
(Chairman), Makins and Coehlo until the resignation of Messrs.
Makins and Coehlo effective December 15, 2003, all of whom were
non-employee directors. No meetings of the Compensation
Committee were held after December 15, 2003 through the end of
the fiscal year 2003.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors has formed a Compensation Committee
which is responsible for reviewing and establishing the
compensation payable to Cadiz' executive officers, including
the President and Chief Executive Officer. For executive
officers other than the President and Chief Executive Officer,
the Committee establishes compensation levels based, in part,
upon the recommendations of the President and Chief Executive
Officer.
The Compensation Committee has furnished the following
report on executive compensation:(1)
Cadiz' executive compensation programs are designed to
enhance operating performance and to maximize the long-
term value of Cadiz' assets and stockholder value, by
aligning the financial interest of the executive
officers with those of the stockholders. Such a
compensation program helps to achieve Cadiz' business
and financial objectives and provide incentives needed
to attract and retain well-qualified executives in a
highly competitive marketplace. To this end, Cadiz has
developed a compensation program with three primary
components: base salary, performance-based cash awards
and long-term incentives through stock awards.
BASE SALARY. An effort is made to establish base
salary levels for all executive officers so as to be
competitive with the salaries of executives of other
companies with similarly sized asset portfolios and to
ensure the continued services of key individuals. No
specific or set formula has been used to tie base
salary levels to precise measurable factors.
Adjustments to an executive officer's base salary, once
established, can be made at the discretion of the
Compensation Committee, based upon such factors as
position and responsibility, salary history and cost of
living increases.
Where applicable, the Compensation Committee may also
consider the past
Page 41
performance of the officer, both in adjusting base salary
levels and in determining additional incentive compensation,
such as the cash awards and long term incentives discussed
below.
PERFORMANCE-BASED CASH AWARDS. The Compensation
Committee believes that incentives should be offered to
executives which are related to improvements in
performance that yield increased value for
stockholders. Although the Compensation Committee
relies primarily upon the grant of incentive stock
options or other stock awards to reward executive
performance (see "Long-Term Incentives" below), under
certain circumstances, the Compensation Committee will
utilize performance-based cash awards from time to time
to provide additional incentives.
As Chairman and Chief Executive Officer of Cadiz, Mr.
Brackpool is charged with the overall responsibility
for the performance of Cadiz. Mr. Brackpool is
compensated pursuant to a written agreement effective
as of February 1, 2003 which reduced his base salary to
50% of its previous amount. It is intended within the
terms of the agreement that Mr. Brackpool and Cadiz
mutually attempt to negotiate a new employment
agreement setting forth the terms and conditions of his
employment. Historically, the Compensation Committee
has established bonus compensation for Mr. Brackpool
pursuant to criteria established in his employment
agreement. Since a new agreement is not yet in place at
this time, the Compensation Committee separately
granted Mr. Brackpool a performance-based bonus of
$200,000 (which Mr. Brackpool could elect to receive in
stock or cash) upon the successful completion of the
refinancing of Cadiz in December 2003. This bonus was
paid to Mr. Brackpool in February 2004.
LONG-TERM INCENTIVES. The primary form of incentive
compensation offered by Cadiz to executives consists of
long-term incentives in the form of stock options or
other stock awards. This form of compensation is
intended to help retain executives and motivate them to
improve Cadiz' long-term performance and hence long-
term stock market performance. Stock options and other
stock awards are granted at the prevailing market value
and will only have added value if Cadiz' stock price
increases.
The Compensation Committee views the grant of stock
awards as both a reward for past performance and an
incentive for future performance. Stock options or
other stock awards granted by Cadiz may vest
immediately upon grant, with the passage of time, at
the discretion of the Board, and/or upon the
achievement of certain specific performance goals.
Where performance is not readily measurable, the
vesting of performance based options or other stock
awards may be dependent upon the satisfaction of
subjective performance criteria.
Options previously granted by Cadiz, whether vesting
immediately or contingently, are exercisable for a
period of five to seven years from grant. The
Compensation Committee anticipates that options or
stock awards will continue to be granted in the future
in order to provide executives with additional long-
term incentives. Such options and stock awards may be
granted to executives pursuant to the Cadiz 1996 Stock
Option Plan or 2000 Stock Award Plan.
Due to the difficult circumstances which Cadiz and its
subsidiaries have faced in the past year, however, all
stock options granted under the three existing plans
have become virtually worthless and a majority of them
have expired within the last year without exercise.
Therefore, the Compensation Committee, Board of
Page 42
Directors, management and our senior secured lender
have agreed upon the implementation of a proposed
Management Equity Incentive Plan with a total of
1,472,051 shares authorized which would provide
incentive to senior management in a going-forward
manner. The Board formed an initial allocation
committee made up of Messrs. Brackpool, Hutchison, and
Stoddard (a consultant to Cadiz), to direct the initial
allocation of 717,373 of these shares, 1/3 of which
will vest on the date of the grant. The remaining two-
thirds will vest in two equal installments on December 11,
2004 and December 11, 2005 (subject to continued employment
or immediate vesting upon termination without cause). It
is intended that the remaining 754,678 shares covered by
the incentive plan are issuance pursuant to the direction
of, and upon such vesting and other conditions as may
be established by, the Compensation Committee.
DEDUCTIBILITY OF CERTAIN EXECUTIVE COMPENSATION
EXPENSES UNDER FEDERAL TAX LAWS
The Compensation Committee has considered the impact of
provisions of the Internal Revenue Code of 1986,
specifically Code Section 162(m). Section 162(m) limits
to $1 million Cadiz' deduction for compensation paid to
each executive officer of Cadiz, which does not qualify
as "performance based".
While Cadiz expects that this provision will not limit
its tax deductions for executive compensation in the
near term, the Cadiz 1996 Stock Option Plan ?enables
Cadiz to comply, to the extent deemed advisable, with
the requirements of Section 162(m) for performance
based compensation to insure that Cadiz will be able to
avail itself of all deductions otherwise available with
respect to awards made under the 1996 Stock Option
Plan. However, any shares of stock issued to executives
under the Cadiz 2000 Stock Award Plan and Management
Equity Incentive Plan will not qualify as performance-
based compensation and, therefore, will be counted in
determining whether the $1 million limit has been
reached.
CONCLUSION
Through the programs described above, a very
significant portion of Cadiz' executive compensation is
contemplated to be linked directly to corporate
performance. The Compensation Committee intends to
implement this policy of linking executive compensation
to corporate performance in order to continue to align
the interest of executives with those of Cadiz'
stockholders.
THE COMPENSATION COMMITTEE
Murray H. Hutchison, Chairman
_______________________________
(1) This report shall not be deemed incorporated by reference by
any general statement incorporating by reference this annual
report on Form 10-K into any filing under the Securities Act of
1933, except to the extent that Cadiz specifically incorporates
this report by reference, and shall not otherwise be deemed filed
under such acts.
Page 43
STOCK PRICE PERFORMANCE
The stock price performance graph below compares the
cumulative total return of Cadiz common stock against the
cumulative total return of the Standard & Poor's Small Cap 600
Nasdaq U.S. index and the Russell 2000r index for the past five
fiscal years. The graph indicates a measurement point of December
31, 1998 and assumes a $100 investment on such date in Cadiz
common stock, the Standard & Poor's Small Cap 600 and the Russell
2000r indices. With respect to the payment of dividends, Cadiz
has not paid any dividends on its common stock, but the Standard
& Poor's Small Cap 600 and the Russell 2000r indices assume that
all dividends were reinvested. The stock price performance graph
shall not be deemed incorporated by reference by any general
statement incorporating by reference this annual report on Form
10-K into any filing under the Securities Act of 1933, as
amended, except to the extent that Cadiz specifically
incorporates this graph by reference, and shall not otherwise be
deemed filed under such acts.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Assumes initial investment of $100.00
and re-investment of dividends
- ------------------------------------------------------------------------------
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
Cadiz 100 124.59016 117.21311 105.18033 7.2131148 2.6754098
Share
Value
Russell 100 119.62034 114.59143 115.76927 90.788226 131.9817
2000
Index
Value
S&P Small 100 168.53272 187.10804 197.83572 167.53579 230.41922
Cap Index
Value
Page 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information as of December 31, 2003
with respect to shares of our common stock that may be issued
under our existing compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted-securities Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding for future issuance
outstanding options, options, warrants under equity
warrants and rights and rights compensation plans
(excluding securities
reflected in
column (a))
Plan Category (A) (B) (C)
- -----------------------------------------------------------------------------
Equity 40,202 $ 184.66 35,756
compensation
plans
approved by
stockholders(1)
Equity 16,500(2) $ 228.30(2) 1,487,611(3)
compensation
plans not
approved by
stockholders
TOTAL 56,702 $ 197.36 1,507,807(4)
(1) Represents 37,450 shares for the Cadiz Inc. 1996 Stock Option Plan
and 2,752 shares for the Cadiz Inc. 2000 Stock Award Plan.
(2) Represents the Cadiz Inc. 1998 Stock Option Plan
(3) Represents 15,560 shares for the 1998 Stock Option Plan and
1,472,051 shares for the Management Equity Incentive Plan
(4) There is a cumulative cap on the 1996 Stock Option Plan, the
1998 Stock Option Plan and the 2000 Stock Award Plan of
160,000 shares.
STOCK OPTION AND AWARD PLANS IN GENERAL
The purpose of Cadiz' stock option and award plans is to
provide incentives to attract, retain and motivate eligible
persons whose present and potential contributions are important
to the success of Cadiz and its subsidiaries and affiliates, by
offering them an opportunity to participate in Cadiz future
performance through awards of options, restricted stock grants
and other similar stock awards.
1996 Stock Option Plan
In 1996, our board of directors and stockholders approved
the adoption of the Cadiz Inc. 1996 Stock Option Plan (the "1996
Plan") to provide incentives to key employees of Cadiz and its
subsidiaries. Under the 1996 Plan, stock options may be granted
to directors, officers, employees, consultants, independent
contractors and advisors of Cadiz or its subsidiaries or
affiliates.
The 1996 Plan is administered by a committee of the Board or
the Board acting as the committee. Grants under the Plan may
consist of: (i) options intended to qualify as incentive
Page 45
stock options ("ISOs") within the meaning of the Internal Revenue Code
of 1986, as amended (the "Code"), (ii) so-called "non-qualified
stock options" ("NQSOs") that are not intended to so qualify, or
(iii) a combination thereof. Directors who are not employees of
the Company will be entitled to receive only NQSOs under the
Plan.
The 1996 Plan permits the governing committee to grant
options either as ISOs or as NQSOs, and allows the committee to
establish, as to any participant, the number of options, exercise
price, exercise term (subject to a maximum of ten years), and
other terms and conditions. Subject to the foregoing, the option
exercise price may not be less than 85% of the fair market value
of a share of Cadiz common stock on the date of grant of such
option; however, in the case of an ISO, the price shall be no
less than 100% of the fair market value of a share of Common
Stock at the time such option is granted; and in the case of an
ISO granted to a 10% stockholder, the exercise price will be no
less than 110% of the fair market value of the common stock on
the date of grant. Upon a "change in control" (as defined in the
1996 Plan), the Board has the right to accelerate vesting of all
options so that they become exercisable within the 30-day period
preceding the change in control.
The Board may amend or terminate the Plan at any time;
provided, however, that the Board may not, without the approval
of stockholders, amend the Plan in any manner that requires such
stockholder approval pursuant to the Code or pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
or Rule 16b-3 thereunder. According to its terms, the 1996 Plan
will terminate 10 years from its effective date.
Originally, 120,000 shares of common stock were reserved and
authorized for issuance under the 1996 Plan. An additional 40,000
shares (for an aggregate of 160,000 shares) were subsequently
authorized for issuance, however, the reservation and
authorization of 160,000 shares is cumulative of all three of
Cadiz' stock option and award plans. Shares subject to a grant or
award under the 1996 Plan which are not issued or delivered by
reason of the failure to vest or the expiration, termination,
cancellation or forfeiture are again available for future grants
and awards. As of December 31, 2003, 35,756 shares remained
available for grant under the 1996 Plan (subject to the
cumulative cap for issuance under all three stock option and
award plans).
1998 STOCK OPTION PLAN
In 1998, the Board approved a Non-Qualified Stock Option
Plan (the "1998 Plan") to provide grants of stock options to
certain employees, consultants, independent contractors and
advisors of Cadiz or its subsidiaries and affiliates, but
excluding any directors or officers including those who would be
required to file reports of beneficial ownership pursuant to the
Exchange Act.
The 1998 Plan is administered by a committee of the Board
or the Board acting as the committee. It permits the governing
committee to establish, as to any participant, the number of
options, exercise price, exercise term (subject to a maximum of
ten years), and other terms and conditions, however, the Board's
general intent with the plan is to grant options at an exercise
price equal to the fair market value of Cadiz common stock at the
time of grant, which options vest ratably over a five-year period
subject to vesting acceleration for a change in control of the
Company or the Board's determination of satisfaction of certain
specified performance criteria.
Page 46
The Board may amend or terminate the Plan at any time;
provided, however, that the Board may not, with respect to any
particular option grant, without the consent of the holder of
that outstanding option, amend or terminate such option or
materially adversely affect the rights of the holder under such
option. According to its terms, the 1998 Plan will terminate 10
years from its effective date.
31,700 shares are reserved and authorized for issuance under
the 1998 Plan, which amount may be decreased by the cumulative
cap of 160,000 for issuance under all three stock option and
award plans. Shares subject to a grant or award under the 1998
Plan which are not issued or delivered by reason of the failure
to vest or the expiration, termination, cancellation or
forfeiture are again available for future grants and awards. As
of December 31, 2003, 15,560 shares remained available for grant
under the 1998 Plan (subject to the cumulative cap for issuance
under all three stock option and award plans).
2000 STOCK AWARD PLAN
In 2000, our board of directors and stockholders approved
the adoption of the Cadiz Inc. 2000 Stock Award Plan (the "2000
Plan") to add additional forms of stock awards (i.e., restricted
stock, deferred stock units, stock bonus and stock awards in lieu
of cash) to the currently available stock option grants to
provide incentives to key employees of Cadiz and its subsidiaries
without as significant a dilutive effect on the stockholders.
Under the 2000 Plan, stock options may be granted to certain
directors, officers, employees, consultants, independent
contractors and advisors of Cadiz or its subsidiaries and
affiliates.
The 2000 Plan is administered by a committee of the Board
or the Board acting as the committee. It permits the governing
committee to establish, as to any participant, the number and
type of options, stock awards, deferred stock units, stock
bonuses or the like, exercise price, exercise term (subject to a
maximum of ten years), and other terms and conditions. A change
in control of the Company shall accelerate the vesting of
outstanding, but unvested, stock awards under the 2000 Plan.
The Board may amend or terminate the Plan at any time;
provided, however, that the Board may not, without the approval
of stockholders, amend the Plan in any manner that requires such
stockholder approval pursuant to the Code or pursuant to the
Exchange Act or Rule 16b-3 thereunder. Further, the Board may
not, with respect to any particular stock grant, without the
consent of the holder of that outstanding grant, amend or
terminate such grant or materially adversely affect the rights of
the holder under such grant. According to its terms, the 2000
Plan will terminate 10 years from its effective date.
40,000 shares are reserved and authorized for issuance under
the 2000 Plan, which amount may be decreased by the cumulative
cap of 160,000 for issuance under all three stock option and
award plans. Shares subject to a grant or award under the 2000
Plan which are not issued or delivered by reason of the failure
to vest or the expiration, termination, cancellation or
forfeiture are again available for future grants and awards. As
of December 31, 2003, 10,596 shares remained available for grant
under the 2000 Plan (subject to the cumulative cap for issuance
under all three stock option and award plans).
Page 47
MANAGEMENT EQUITY INCENTIVE PLAN
In December 2003, concurrently with the completion of the
restructuring of our financing arrangements with ING, our board
of directors authorized the adoption of a Management Equity
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan,
a total of 1,472,051 shares of our common stock may be granted to
our key personnel. Our Board has formed an initial allocation
committee to direct the initial allocation of 717,373 of these
shares. This initial allocation committee consists of Mr.
Hutchison (as Chairman of the Compensation Committee), Mr.
Brackpool and Mr. Richard Stoddard (a consultant to Cadiz). The
Board has authorized the initial allocation committee to award
all or part of the initial allocation shares to key personnel
(including members of such committee) without further approval of
the Board. Any initial allocation shares so granted will be
subject to vesting conditions. One-third of the shares granted
will vest immediately on the date of the grant. The remaining
two-thirds will vest in two equal installments on December 11, 2004
and December 11, 2005 (subject to continued status of the recipient
as an employee or consultant to Cadiz as of the respective vesting
date, but also subject to immediate vesting in full of any
theretofore unvested shares upon any termination without cause).
The 754,678 shares covered by the Incentive Plan which are
not part of the initial allocation are issuable pursuant to the
direction of, and upon such vesting and other conditions as may
be established by, the Compensation Committee.
As of September 30, 2004, no shares have been issued under the
Incentive Plan.
Page 48
BENEFICIAL OWNERSHIP
The following table sets forth, as of September 15, 2004, the
ownership of common stock of Cadiz by each stockholder who is
known by Cadiz to own beneficially more than five percent of the
outstanding common stock, by each director, by each executive
officer listed in the summary compensation table above, and by
all directors and executive officers as a group excluding, in
each case, rights under options or warrants not exercisable
within 60 days. All persons named have sole voting power and
investment power over their shares except as otherwise noted.
CLASS OF COMMON STOCK
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
ING Groep N.V. 1,828,429(1) 21.9%
ING Capital LLC
Amstelveenseweg 500
1081 KL Amsterdam
SACC Partners LP 634,699(2) 9.6%
Riley Investment Management
LLC
B. Riley & Co. Inc.
B. Riley & Co. Retirement
Trust
11100 Santa Monica Blvd.,
Suite 800
Los Angeles, CA 90025
FMR Corp. 602,806(8) 9.1%
82 Devonshire Street
Boston, MA 02109
Bedford Oak Partners, L.P. 601,500(4) 9.1%
Bedford Oak Capital, L.P.
Bedford Oak Offshore
100 South Bedford Road
Mt. Kisco, NY 10549
Lloyd Miller MILGRAT I 501,400(3) 7.6%
Lloyd I. Miller Fund C
Lloyd Miller A4 Trust
Lloyd Miller MILFAM II
4550 Gordon Drive
Naples, FL 34102-7914
Morgan Stanley & Co. International 339,603(5) 5.1%
Limited
1585 Broadway
New York, NY 10036
Keith Brackpool 127,223(6) 1.9%
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Timothy J. Shaheen 10,109 *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Murray Hutchison 6,490(7) *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Geoffrey Arens 0 *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
Gregory Ritchie 1,000 *
c/o 777 S. Figueroa St.,
Suite 4250
Los Angeles, CA 90017
All directors and officers 144,822(6)(7)
as a group
(seven individuals)
- -----------------------------------------------------------------
* Represents less than one percent of the 6,612,665
outstanding shares of common stock of Cadiz as of March 31, 2004
Page 49
CLASS OF SERIES F PREFERRED STOCK
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS
- ---------------- -------------------- --------
ING Groep N.V. 100,000(1) 100%
ING Capital LLC
Amstelveenseweg 500
1081 KL Amsterdam
(1) Based upon a Schedule 13D filed on February 2, 2004 with the
SEC by ING Groep N.V. on behalf of its wholly-owned subsidiary
ING Capital LLC, and based on Cadiz corporate records, the ING
entities beneficially own 100,000 shares of Cadiz Series F
Preferred Stock and have sole voting and dispositive power as to
all of the shares. The preferred stock held by ING is initially
convertible into 1,728,955 shares of Cadiz common stock. In
addition to the preferred stock, ING holds 99,474 shares of Cadiz
common stock, 94,000 of which were issued at the end of 2003 upon
ING's exercise of warrants, and ING has sole voting and
dispositive power as to the common stock. The principal office of
ING Capital LLC is located at 1325 Avenue of the Americas, New
York, NY 10019.
(2) Based upon a Schedule 13G filed on May 12, 2004 with the SEC
by SACC Partners LP and its affiliated entities, Cadiz
corporate records of stock issuances and correspondence with
Mr. Riley, the listed affiliated entities beneficially own
an aggregate of 634,699 shares of Cadiz common stock, and
have sole voting and dispositive power of the stock.
(3) Based upon a Schedule 13G filed on May 17, 2004 with the SEC
by Lloyd I. Miller, III, Cadiz corporate records of stock
issuances and correspondence with Mr. Miller, the listed
affiliated entities beneficially own an aggregate of 501,400
shares of Cadiz common stock. Mr. Miller has sole voting
power of 300,000 of the shares, and sole dispositive power
of 100,000 of the shares. The remaining shares beneficially
owned by Mr. Miller are subject to shared voting and
dispositive power.
(4) Based upon a Schedule 13G filed on September 8, 2004 with the SEC,
Cadiz corporate records of stock issuances and correspondence with
Bedford Oak, the listed related funds beneficially own an aggregate
of 339,603 shares of Cadiz common stock.
(5) Based upon a Schedule 13G filed on February 18, 2004 with the SEC
by Morgan Stanley & Co. International Limited and its affiliated
entities, Cadiz corporate records of stock issuances and correspondence
with Morgan Stanley, Morgan Stanley has shared voting rights and shared
dispositive power over an aggregate of 339,603 shares of Cadiz
common stock.
(6) Includes 2,000 shares owned by a foundation of which Mr.
Brackpool is a trustee, but in which Mr. Brackpool has no
economic interest and 2,000 shares owned by his separated
spouse. Mr. Brackpool disclaims any beneficial ownership of
the 4,000 shares owned by the foundation and his spouse.
(7) Includes 1,490 shares underlying presently exercisable
options.
(8) Based upon a Schedule 13G files on October 14, 2004 with the SEC
by FMR Corp. and its affiliated entities, Cadiz corporate records
of stock issuances and correspondence with FMR Corp., the listed
affiliated entities beneficially own an aggregate of 602,806 shares
of Cadiz common stock, and have sole voting and dispositive power of
the stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 5, 2002, we entered into an agreement with Keith
Brackpool, our Chief Executive Officer, whereby we agreed to loan
him up to $1 million. The loan had a term of one year and bore an
interest rate of 6% per annum. As of December 31, 2002, the
maximum $1 million amount of the loan was outstanding. The loan
was repaid in full by Mr. Brackpool in 2003 at the expiration of
the loan term.
Page 50
Our loan with Mr. Brackpool was intended to be structured
with terms no more favorable than those which Mr. Brackpool would
have been able to obtain from unrelated third parties, and the
loan agreement therefore provided for the loan to be secured by
collateral with a value of at least 133% of the outstanding loan
amount. Initially, the loan was secured by a portion of Mr.
Brackpool's otherwise unencumbered equity holdings in our stock.
In November 2002 Mr. Brackpool provided additional security for
the loan in the form of a pledge of a portion of Mr. Brackpool's
interests in a real estate limited partnership.
This loan was authorized by our Board in May 2002. We were
then nearing final votes on the various approvals needed for the
Cadiz Program, and both the company and our executives were the
subject of intense media interest. At the same time, Mr.
Brackpool required a source of funds to satisfy personal
obligations incurred by him in 1999 in order to finance his
purchase that year, for $5.25 million, of 750,000 of our shares
upon the exercise of previously issued stock options. Our Board
was concerned that the publicity accompanying a public sale of
Cadiz stock by Mr. Brackpool, regardless of the reasons for the
sale, at a time when the outcome of voting on the Cadiz Program
was not certain would significantly impair our ability to obtain
the approvals we needed. Given the importance to us of the Cadiz
Program, the Board approved the loan so as to provide Mr.
Brackpool with funds without selling any of his Cadiz
shareholdings in the public markets.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal years ended December 31, 2003 and 2002,
professional services were performed by PricewaterhouseCoopers
LLC (PwC). Cadiz' audit committee annually approves the
engagement of outside auditors for audit services in advance. The
audit committee has also established complementary procedures to
require pre-approval of all audit-related, tax and permitted non-
audit services provided by PwC, and to consider whether the
outside auditors' provision of non-audit services to Cadiz is
compatible with maintaining the independence of the outside
auditors. The audit committee may delegate pre-approval authority
to one or more of its members. Any such fees pre-approved in this
manner shall be reported to the audit committee at its next
scheduled meeting. All services described below were pre-approved
by the audit committee.
All fees for services rendered by PwC aggregated $296,050
and $307,726 for the fiscal years ended December 31, 2003 and
2002, respectively, and were composed of the following:
Audit Fees. The aggregate fees billed for the audit of the
annual financial statements for the fiscal years ended December
31, 2003 and 2002, for reviews of the financial statements
included in the Company's Quarterly Reports on Form 10Q, and for
assistance with and review of documents filed with the SEC were
$296,050 for 2003 and $246,500 for 2002.
Audit Related Fees. The aggregate fees billed for audit-
related services for the fiscal years ended December 31, 2003 and
2002 were $0 and $48,976, respectively. These fees
relate to assurance and related services performed by PwC that
are reasonably related to the performance of the audit or review
of the Company's financial statements. These services include
attest services that are not required by statute or regulation,
internal control reviews and consultations concerning financial
accounting and reporting matters.
Tax Fees. Fees billed for tax services for the fiscal years
ended December 31, 2003 and 2002 were $0 and $12,250, respectively.
Page 51
All Other Fees. No other fees were billed The aggregate fees
billed by PwC to Cadiz for services other than as discussed above
for the fiscal years ended December 31, 2003 and 2002.
Page 52
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(A) 1. Financial Statements. See Index to Consolidated
Financial Statements.
2. Financial Statement Schedules. See
Index to Consolidated Financial Statements.
3. Exhibits.
The following exhibits are filed or incorporated by
reference as part of this Form 10-K.
3.1 Cadiz Certificate of Incorporation, as
amended(1)
3.2 Amendment to Cadiz Certificate of
Incorporation dated November 8, 1996(2)
3.3 Amendment to Cadiz Certificate of
Incorporation dated September 1, 1998(3)
3.4 Amendment to Cadiz Certificate of
Incorporation dated December 15, 2003
3.5 Certificate of Elimination of Series D
Preferred Stock, Series E-1 Preferred Stock and
Series E-2 Preferred Stock of Cadiz Inc. dated
December 15, 2003
3.6 Certificate of Elimination of Series A Junior
Participating Preferred Stock of Cadiz Inc., dated
March 25, 2004
3.7 Certificate of Designations of Series F
Preferred Stock of Cadiz Inc. dated December 15,
2003
3.8 Cadiz Bylaws, as amended (4)
4.1 Indenture, dated as of April 16, 1997 among
Sun World as issuer, Sun World and certain
subsidiaries of Sun World as guarantors, and IBJ
Whitehall Bank & Trust Company as trustee, for the
benefit of holders of 11.25% First Mortgage Notes
due 2004 (including as Exhibit A to the Indenture,
the form of the Global Note and the form of each
Guarantee)(5)
4.2 Amendment to Indenture dated as of October 9,
1997(6)
4.3 Amendment to Indenture dated as of January 23,
1998(7)
4.4 Preferred Stock Exchange Agreement, dated
October 20, 2003, by and among Cadiz Inc., OZ
Master Fund, Ltd. and OZF Credit Opportunities
Master Fund, Ltd.
10.1 Cadiz Inc. 1996 Stock Option Plan(4)
10.2 Amendment to the Cadiz Inc. 1996 Stock Option
Plan(10)
Page 53
10.3 Amended and Restated Cadiz Inc. 1998 Non-
Qualified Stock Option Plan(15)
10.4 Cadiz Inc. 2000 Stock Award Plan(8)
10.5 Security Agreement between Cadiz Inc. and
Keith Brackpool dated July 5, 2002(9)
10.6 Pledge Agreement between Keith Brackpool
and Cadiz Inc. dated November 2002(10)
10.7 Agreement Regarding Employment Between Cadiz
Inc. and Keith Brackpool dated July 5, 2003(11)
10.8 Agreement Regarding Satisfaction of Note
Obligations Between Cadiz Inc. and Keith Brackpool
dated July 5, 2003(11)
10.9 Employment Agreement dated September 13, 1996
between Sun World International, Inc., Cadiz Inc.
and Timothy J. Shaheen(12)
10.10 Sixth Amended and Restated Credit
Agreement, dated as of December 15, 2003, among
Cadiz Inc., Cadiz Real Estate LLC, and ING Capital
LLC, as Administrative Agent, and the lenders party
thereto
10.11 Sixth Global Amendment Agreement, dated
as of December 15, 2003, between Cadiz Inc., Cadiz
Real Estate LLC, and ING Capital LLC
10.12 ING Capital LLC Amended and Restated Tranche A Note in
principal amount of $25 million
10.13 ING Capital LLC Amended and Restated Tranche B Note in
principal amount of $10 million
10.14 Limited Liability Company Agreement of Cadiz Real
Estate LLC dated December 11, 2003
10.15 The Cadiz Groundwater Storage and Dry-
Year Supply Program Definitive Economic Terms and
Responsibilities between Metropolitan Water
District of Southern California and Cadiz dated
March 6, 2001(13)
10.16 Sun World-Bondholder-Cadiz Term Sheet and
Agreement in Principle, dated as of October 13,
2003, by and among Cadiz, Sun World International,
Inc. and its debtor affiliates, and Black Diamond
Capital Management, L.L.C. and CFSC Wayland
Advisers, Inc. and their respective affiliates
10.17 Sun World Noteholder Trust Agreement,
dated December 15, 2003, by and among Cadiz Inc.,
Logan & Company, as Trustee, Black Diamond Capital
Management, L.L.C. on behalf of its affiliates, and
CFSC Wayland Advisers, Inc.
10.18 Assignment of Claims, dated December 15,
2003, by Cadiz Inc. and the Sun World Noteholder
Trust
Page 54
10.19 Pledge Agreement, dated as of December
12, 2003, by and between Cadiz Inc., as Pledgor,
and Sun World Noteholder Trust, as Secured Party
10.20 Agreement re Closing of "Sun World-
Bondholder-Cadiz Term Sheet and Agreement in
Principle", dated as of November 24, 2003, by and
between Cadiz Inc. and Black Diamond Capital
Management, L.L.C. and CFSC Wayland Advisers, Inc.
and their respective affiliates
10.21 Mutual General Release, dated December
15, 2003 by and between Cadiz Inc., and Sun World
International, Inc., Sun Desert Inc., Coachella
Growers and Sun World/Rayo
10.22 Resolution of the Directors of Cadiz Inc.,
authorizing the Management Equity Incentive Plan.
21.1 Subsidiaries of the Registrant
31.1 Certification of Keith Brackpool, Chairman,
Chief Executive Officer and Chief Financial Officer
of Cadiz Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Keith Brackpool, Chairman,
Chief Executive Officer and Chief Financial Officer
of Cadiz Inc. pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
- ---------------------------
(1) Previously filed as an Exhibit to our Registration
Statement of Form S-1 (Registration No. 33-75642)
declared effective May 16, 1994 filed on February
23, 1994
(2) Previously filed as an Exhibit to our Report on
Form 10-Q for the quarter ended September 30, 1996
filed on November 14, 1996
(3) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1998 filed on November 13, 1998
(4) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999 filed on August 13, 1999
(5) Previously filed as an Exhibit to Amendment No. 1
to our Form S-1 Registration Statement No. 333-
19109 filed on April 29, 1997
(6) Previously filed as an Exhibit to Amendment No. 2
to Sun World's Form S-4 Registration Statement No.
333-31103 filed on October 14, 1997
(7) Previously filed as an Exhibit to our Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997 filed on March 26, 1998
(8) Previously filed as Appendix A to our Proxy
Statement dated April 5, 2000, filed on March 29,
2000
(9) Previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2002 filed on November 14, 2002
(10) Previously filed as an Exhibit to our Annual
Report on Form 10-K for the year ended December
31, 2002 filed concurrently with this Annual
Report on Form 10-K
(11) Previously filed as an Exhibit to our Report on
Form 10-Q for the quarter ended September 30, 2003
filed concurrently with this Annual Report on Form
10-K
(12) Previously filed as an Exhibit to our Transition
Report on Form 10-K for
Page 55
the nine months ended December 31, 1996 filed on
April 14, 1997
(13) Previously filed as an Exhibit to our Annual
Report on Form 10-K for the year ended December
31, 2001 filed on March 28, 2002.
(B) REPORTS ON FORM 8-K
We filed a report on Form 8-K dated December 17, 2003
reporting numerous transactions involved with the comprehensive
refinancing of the Company, extension of the Company's senior
debt, exchange of its pre-existing preferred stock into shares of
common stock, divestiture of its agricultural subsidiary and the
implementation of a one for 25 reverse stock split.
Page 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereto duly authorized.
CADIZ INC.
By: /s/ Keith Brackpool
--------------------
Keith Brackpool,
Chairman and Chief Executive
and Financial Officer
Date: November 1, 2004
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
NAME AND POSITION DATE
------------------- ----
/s/ Keith Brackpool November 1, 2004
- -------------------------------------------- ---
Keith Brackpool, Chairman and Chief Executive
and Financial Officer
(Principal Executive, Financial and Accounting Officer)
/s/ Murray H. Hutchison November 1, 2004
- -------------------------------------------- ---
Murray H. Hutchison, Director
/s/ Timothy J. Shaheen November 1, 2004
- -------------------------------------------- ---
Timothy J. Shaheen, Director
/s/ Geoffrey Arens November 1, 2004
- -------------------------------------------- ---
Geoffrey Arens, Director
/s/ Gregory Ritchie November 1, 2004
- -------------------------------------------- ---
Gregory Ritchie, Director
Page 57
CADIZ INC. FINANCIAL STATEMENTS
- -------------------------------
Page
Report of Independent Registered Public Accounting Firm. . . . 59
Consolidated Statement of Operations for the three years ended
December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . 60
Consolidated Balance Sheet as of December 31, 2003 and 2002. . 61
Consolidated Statement of Cash Flows for the three years ended
December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . 63
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2003 . . . . . . . . . . . . . . . . .65
Notes to the Consolidated Financial Statements. . . . . . . . .67
CADIZ INC. FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------
Schedule I - Condensed Financial Information of Registrant for
the three years ended December 31, 2003. . . . . . . . . . . .104
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 2003. . . . . . . . . . . . . . . . .108
SUN WORLD INTERNATIONAL, INC. FINANCIAL STATEMENTS
- --------------------------------------------------
Report of Independent Registered Public Accounting Firm. . . .109
Consolidated Statement of Operations for the three years
ended December 31, 2003. . . . . . . . . . . . . . . . . . . .110
Consolidated Balance Sheet as of December 31, 2003 and 2002. .111
Consolidated Statement of Cash Flows for the three years ended
December 31, 2003. . . . . . . . . . . . . . . . . . . . . . .112
Consolidated Statement of Stockholder's Equity for the three
years ended December 31, 2003. . . . . . . . . . . . . . . . .113
Notes to the Consolidated Financial Statements. . . . . . . . 114
(Schedules other than those listed above have been omitted since
they are either not required, inapplicable, or the required
information is included on the financial statements or notes
thereto.)
Page 58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Cadiz Inc.
In our opinion, the accompanying consolidated balance sheet
and the related consolidated statements of operations, cash flows
and stockholders' equity present fairly, in all material
respects, the financial position of Cadiz Inc. and its
subsidiaries at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 15(a)(2)
present fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion
on these financial statements and financial statement schedules
based on our audits. We conducted our audits of these statements
in accordance with the standards of the Public Company Accounting
Oversight Board (United States). These standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the accompanying financial
statements, the Company incurred losses of approximately $11.5
million and $22.2 million in 2003 and 2002, respectively, and
used cash for operating activities of $6.6 million and $10.1
million in 2003 and 2002, respectively. In addition, the
Company's wholly-owned subsidiary, Sun World International, Inc.,
and certain of its subsidiaries ("Sun World") filed voluntary
petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code on January 30, 2003. Management of Sun
World continues to operate as debtor-in-possession until a Plan
of Reorganization is approved by its creditors and confirmed by
the Bankruptcy Court. The Company's and Sun World's objectives
in regard to this matter are also discussed in Note 2. The
accompanying consolidated financial statements have been prepared
using accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The matters described above and
the uncertainties inherent in the bankruptcy process raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
September 18, 2004
Page 59
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------
Three Year Ended December 31,
(In thousands, except per share data) 2003 2002 2001
- ------------------------------------------------------------------------
Revenues $ 3,162 $ 114,250 $ 92,402
Special litigation recovery - - 7,929
--------- --------- ---------
Total revenues and special
litigation recovery 3,162 114,250 100,331
--------- --------- ---------
Costs and expenses:
Cost of sales 2,965 86,356 79,108
General and administrative 5,235 16,953 12,913
Write off of investment in subsidiary 195 - -
Reorganization costs 655 - -
Non-recurring compensation expense - - 5,537
Removal of underperforming crops - 4,514 736
Depreciation and amortization 743 7,480 8,151
--------- --------- ---------
Total costs and expenses 9,793 115,303 106,445
--------- --------- ---------
Operating loss (6,631) (1,053) (6,114)
Interest expense, net 4,905 21,172 19,551
--------- --------- ---------
Net loss before income taxes (11,536) (22,225) (25,665)
Income tax expense - - 57
--------- --------- ---------
Net loss (11,536) (22,225) (25,722)
Less: Preferred stock dividends 918 1,125 591
Imputed dividend on
preferred stock 1,600 984 441
--------- --------- ---------
Net loss applicable to common stock $ (14,054) $ (24,334) $ (26,754)
========= ========= =========
Basic and diluted net loss per share $ (6.39) $ (16.76) $ (18.66)
========= ========= =========
Weighted-average shares outstanding 2,200 1,452 1,434
========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 60
CADIZ INC.
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------
December 31,
($ in thousands) 2003 2002
- ------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,422 $ 3,229
Accounts receivable, net - 6,732
Note receivable from officer - 1,022
Inventories - 13,513
Prepaid expenses and other 248 1,166
--------- ---------
Total current assets 3,670 25,662
Property, plant, equipment and water
programs, net 39,514 154,928
Goodwill 3,813 3,813
Restricted cash 2,142 -
Other assets 387 7,480
--------- ---------
$ 49,526 $ 191,883
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 857 $ 7,394
Accrued liabilities 1,545 6,816
Revolving credit facility - 4,400
Long-term debt, current portion - 41,019
--------- ---------
Total current liabilities 2,402 59,629
Long-term debt 30,253 115,447
Deferred income taxes - 5,447
Other liabilities 654 1,539
Contingencies (Note 16)
Series D redeemable convertible preferred stock
- $0.01 par value:
5,000 shares authorized; shares issued and
outstanding - none at December 31, 2003 and
5,000 at December 31, 2002 - 4,536
Series E-1 and E-2 redeemable convertible
preferred stock - $0.01 par value:
7,500 shares authorized; shares issued and
outstanding - none at December 31, 2003 and
7,500 at December 31, 2002 - 6,406
Stockholders' equity:
Series F convertible preferred stock - $.01
par value:
100,000 shares authorized; shares issued and
outstanding - 100,000 at December 31, 2003 1 -
Common stock - $0.01 par value:
70,000,000 shares authorized; shares issued
and outstanding 6,471,385 at December 31, 2003
and 1,458,659 at December 31, 2002 65 15
Page 61
Additional paid-in capital 184,974 156,151
Accumulated deficit (168,823) (157,287)
--------- ---------
Total stockholders' equity 16,217 (1,121)
--------- ---------
$ 49,526 $ 191,883
========= =========
See accompanying notes to the consolidated financial statements.
Page 62
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------
Year Ended December 31,
($ in thousands) 2003 2002 2001
- ------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (11,536) $ (22,225) $ (25,722)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 1,602 13,241 11,664
Write off of investment in subsidiary 195 - -
Stock issued for services 550 - -
Compensation paid through settlement
of note receivable from officer 841 - -
Interest paid in common stock 12 - -
Loss (gain) on disposal of assets 43 346 (421)
Removal of underperforming crops - 4,514 736
Land received in litigation recovery - - (2,000)
Shares of KADCO stock earned for
services - (1,250) (1,250)
Compensation charge for deferred
stock units 152 579 566
Non-recurring compensation expense - - 5,537
Accrued interest on note receivable
from officer - (22) -
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable 1,488 (405) 1,557
Decrease (increase) in
inventories (3,043) (1,116) 1,830
Increase in prepaid expenses
and other (112) (378) (157)
Increase (decrease) in accounts
payable 1,393 (4,365) 3,858
(Decrease) increase in accrued
liabilities 1,831 633 (551)
Increase in other liabilities - 315 51
--------- --------- ---------
Net cash used for operating
activities (6,584) (10,133) (4,302)
--------- --------- ---------
Cash flows from investing activities:
Deconsolidation of subsidiary (1,019) - -
Additions to property, plant
and equipment (140) (638) (1,583)
Additions to water programs - (643) (1,359)
Additions to developing crops (231) (2,176) (3,124)
Proceeds from disposal of property,
plant and equipment - 2,463 452
Loan to officer 181 (1,000) -
Increase in restricted cash (2,142) - -
Decrease (increase) in other assets (104) (95) 154
--------- --------- ---------
Net cash used for investing
activities (3,455) (2,089) (5,460)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 10,304 764 1,583
Proceeds from issuance of
long-term debt 135 - 7,500
Financing costs (400) - -
Proceeds from convertible
note payable 200 - -
Net proceeds from short-term
borrowings - 14,400 -
Principal payments on long-term debt (7) (761) (1,564)
Bank overdraft - (410) 410
--------- --------- ---------
Net cash provided by financing
activities 10,232 13,993 7,929
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 193 1,771 (1,833)
Cash and cash equivalents, beginning
of period 3,229 1,458 3,291
--------- --------- ---------
Page 63
Cash and cash equivalents, end of
period $ 3,422 $ 3,229 $ 1,458
========= ========= =========
Non-cash financing and investing activities:
Settlement of note receivable from
officer $ 841 $ - $ -
Common stock issued upon conversion of
preferred stock 14,020 - -
Issuance of preferred stock with loan
extension 5,000 - -
Issuance of common stock upon conversion
of note payable 212 - -
Exchange of deferred stock units for
common stock 1,054 43 -
Payment of preferred stock dividends
with common stock - 908 245
See accompanying notes to the consolidated financial statements.
Page 64
CADIZ INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Years Ended December 31, 2003, 2002 and 2001
($ in thousands)
- --------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- ------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ------
Balance as of
December 31,
2000 - - 1,426,987 $ 14 $ 143,049 $(109,340) $ 33,723
Exercise of
stock options
and stock
awards - - 13,247 - 1,583 - 1,583
Issuance of
warrants to
lenders - - - - 1,435 - 1,435
Payment of
preferred stock
dividends
with common
stock - - 999 - 245 - 245
Preferred stock
dividend - - - - (591) - (591)
Non-recurring
compensation - - - - 5,537 - 5,537
Stock issued
in connection
with Series E-1
and E-2
convertible
preferred
stock - - 1,600 - 320 - 320
Issuance of
warrants and
beneficial
conversion
feature for
Series E-1 and
E-2 convertible
preferred stock - - - - 1,614 - 1,614
Imputed dividend
from warrants
and deferred
beneficial
conversion
feature - - - - (441) - (441)
Net loss - - - - - (25,722) (25,722)
------- ---- --------- ---- --------- --------- ---------
Balance as of
December 31,
2001 - - 1,442,833 14 152,751 (135,062) 17,703
Exercise of
stock options - - 5,741 1 763 - 764
Issuances of
common stock
to lender - - 1,000 - 208 - 208
Beneficial
conversion
feature for
convertible
notes payable - - - - 884 - 884
Exchange of
deferred stock
units for
common stock - - 3,482 - 43 - 43
Issuance of
warrants to
lenders - - - - 2,703 - 2,703
Payment of
preferred stock
dividends with
common stock - - 5,603 - 908 - 908
Preferred stock
dividend - - - - (1,125) - (1,125)
Imputed dividend
from warrants
and deferred
beneficial
conversion
feature - - - - (984) - (984)
Net loss - - - - - (22,225) (22,225)
------- ---- --------- ---- --------- --------- ---------
Balance as of
December 31,
2002 - - 1,458,659 15 156,151 (157,287) (1,121)
Page 65
Exchange of
deferred stock
units for
common stock - - 26,027 - 1,054 - 1,054
Issuance of
common stock
for cash - - 4,112,000 41 10,239 - 10,280
Issuance of
stock to
lenders - - 168,000 2 430 - 432
Issuance of
common stock
for services - - 128,000 1 279 - 280
Exercise of
warrants - - 94,000 1 23 - 24
Conversion of
Series D and
E convertible
preferred
stock - - 400,000 4 14,016 - 14,020
Conversion of
convertible
note payable - - 84,699 1 211 - 212
Beneficial
conversion
feature of
note payable - - - - 90 - 90
Preferred stock
dividend - - - - (918) - (918)
Imputed dividend
from warrants
and deferred
beneficial
conversion
feature - - - - (1,600) - (1,600)
Issuance of
Series F
convertible
preferred
stock 100,000 1 - - 4,999 - 5,000
Net loss - - - - - (11,536) (11,536)
------- ---- --------- ---- --------- --------- ---------
Balance as
of December
31, 2003 100,000 $ 1 6,471,385 $ 65 $ 184,974 $(168,823) $ 16,217
======= ==== ========= ==== ========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 66
CADIZ INC.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
=============================================
NOTE 1 - DESCRIPTION OF BUSINESS
- --------------------------------
The Company had agricultural operations through its wholly-
owned subsidiary, Sun World International, Inc. and its
subsidiaries, collectively referred to as "Sun World," and is
developing the water resource segment of its business. With Sun
World's filing of voluntary petitions for relief under Chapter 11
of the Bankruptcy code as further described below, the primary
business of the Company is to acquire and develop water
resources. The Company has created a complementary portfolio of
assets encompassing undeveloped land with high-quality
groundwater resources and/or storage potential, located
throughout central and southern California with valuable water
rights, and other contractual water rights. Management believes
that, with both the increasing scarcity of water supplies in
California and an increasing population, the Company's access to
water could provide it with a competitive advantage as a supplier
of water.
The Company's primary asset consists of three blocks of largely
contiguous land in eastern San Bernardino County, California.
This land position totals approximately 45,000 acres. Virtually
all of this land is underlain by high-quality groundwater
resources with demonstrated potential for various applications,
including water storage and supply programs, and agricultural,
municipal, recreational and industrial development. Two of the
three blocks of land are located in proximity to the Colorado
River Aqueduct, the major source of imported water for southern
California. The third block of land is located near the Colorado
River.
The value of this asset arises from a combination of
considerable population increases and limited water supplies
throughout southern California. In addition, most of the
population centers in southern California are not located where
significant precipitation occurs requiring the importation of
water from other parts of the state. The Company therefore
believes that a competitive advantage exists for those companies
that possess or can provide high quality, reliable and affordable
water to major population centers.
Therefore, notwithstanding certain actions taken in 2002 by
the Metropolitan Water District of Southern California
("Metropolitan"), as described below, the Company continues to
expect to be able to use its water resources to participate in a
broad variety of water storage and supply, transfer, exchange and
conservation programs with public agencies and other parties.
In 1997, the Company commenced discussions with Metropolitan
in order to develop principles and terms for a long-term
agreement for a joint venture water storage and supply program on
and under its desert properties, sometimes referred to as the
"Cadiz Program". Following extensive negotiations with the
Company, in April 2001 Metropolitan's Board of Directors approved
definitive economic terms and responsibilities, which were to
serve as the basis for a final agreement to be executed between
the Company and Metropolitan, subject to the then-ongoing
environmental review process.
The Cadiz Program would have provided Metropolitan with a
valuable increase in water supply during periods of drought or
other emergencies, as well as greater reliability and flexibility
in operation of its Colorado River Aqueduct. During wet years,
surplus water from the Colorado River would be stored in the
aquifer system underlying Cadiz' land. When needed,
Page 67
the stored water, together with indigenous groundwater, would be
returned to the Colorado River Aqueduct for distribution to
Metropolitan's member agencies throughout six southern California
counties.
On August 29, 2002, the U.S. Department of Interior approved
the Final Environmental Impact Statement for the Cadiz Program
and issued its Record of Decision, the final step in the federal
environmental review process for the Cadiz Program. The Record of
Decision amends the California Desert Conservation Area Plan for
an exception to the utility corridor element and offered to
Metropolitan a right-of-way grant necessary for the construction
and operation of the Cadiz Program.
On October 8, 2002, Metropolitan's Board considered
acceptance of the Record of Decision and the terms and conditions
of the right-of-way grant. The Board voted not to adopt
Metropolitan staff's recommendation to approve the terms and
conditions of the right-of-way grant issued by the Department of
the Interior for the Cadiz Program by a vote of 47.11% in favor
and 47.36% against the recommendation. Instead, the Board voted
for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Program
by a vote of 50.25% in favor and 44.22% against.
Irrespective of Metropolitan's actions, Southern
California's need for water storage and supply programs has not
abated. The Company believes there are several different
scenarios to maximize the value of this water resource, all of
which are under current evaluation.
The Company believes there are a variety of scenarios under
which the value of the Cadiz Program may be realized.
Exploratory discussions have been initiated with representatives
of governmental organizations, water agencies, and private water
users with regard to their expressed interest in implementation
of the Cadiz Program. Several such discussions have been held
with water agencies that are independently seeking reliability of
supply. Other discussions have focused on the possibility of
exchanging water stored at the Cadiz Program with water
contractors in other regions in California. In addition, the
current drought within the Colorado River watershed has served as
an impetus to cooperative discussions between states, with the
goal that interstate exchanges and transfers may also become
feasible in the future.
Because of the Company's long-term relationship with
Metropolitan, the Company also intends to pursue discussions with
the agency in an effort to determine whether there are terms
acceptable to both parties under which the Cadiz Program could be
implemented. With the recent finalization of the Quantification
Settlement Agreement (QSA), an agreement between the Secretary of
the Interior, the State of California, Metropolitan and three
other southern California water agencies quantifying the amount
of water California's Colorado River users could expect on an
annual basis, Metropolitan's Colorado River supplies are now
specified and limited only by the variable volume of flow on the
river. To meet the growing needs of its service area,
Metropolitan must take advantage of all opportunities to store
available Colorado River water during periods of surplus. With
virtually all environmental permits and approvals in place for
the Cadiz Program, except for those dependent upon Metropolitan's
certification of the Environmental Impact Report (EIR), the
Company believes a partnership with Metropolitan could be renewed
in a timely manner if terms acceptable to both parties were to be
negotiated.
Page 68
Sun World is a large vertically integrated agricultural
company that owns more than 18,000 acres of land, primarily
located in two major growing areas of California: the San Joaquin
Valley and the Coachella Valley. Fresh produce, including table
grapes, stonefruit, citrus, peppers and watermelons, is marketed
and shipped to food wholesalers and retailers throughout the
United States and to more than 30 foreign countries. Sun World
owns three cold storage and/or packing facilities in California,
of which two are operated and one is leased to a third party.
On January 30, 2003, Sun World and certain of its
subsidiaries (Sun Desert Inc., Coachella Growers, and Sun
World/Rayo) filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. The filing was made in the United States
Bankruptcy Court, Central District of California, Riverside
Division. Sun World sought bankruptcy protection in order to
access a seasonal financing package of up to $40 million to
provide working capital through the 2003-2004 growing seasons.
Under the protection of Chapter 11, the Company is managing its
affairs and operating its business as a debtor-in-possession
while it develops its Plan of Reorganization. Liabilities
subject to compromise at December 31, 2003 are summarized as
follows (dollars in thousands):
Accounts payable $ 4,311
Interest payable 3,795
Due to parent company 13,500
Unsecured notes payable 5,000
Secured notes payable 115,000
---------
Total $ 141,606
=========
As a debtor-in-possession, Sun World is authorized to
continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the
approval of the Bankruptcy Court. Under the Bankruptcy Code,
actions to collect pre-petition indebtedness, as well as most
other pending litigation, are stayed and other contractual
obligations against Sun World may not be enforced. In addition,
under the Bankruptcy Code, Sun World may assume or reject
executory contracts, including lease obligations. Parties
affected by these rejections may file claims with the Court in
accordance with the reorganization process. Absent an order of
the Court, substantially all pre-petition liabilities are subject
to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy
Court.
The four Sun World entities are the joint proponents of the
Debtors' Joint Plan of Reorganization Dated November 24, 2003
(the "Plan"). Under the Plan, which is subject to amendment and
modification, the Reorganized Sun World will continue to operate
as a going concern on and after the Plan's effective date. The
Plan provides for the restructuring of Sun World's balance sheet
by providing for Sun World to issue equity interests in the
Reorganized Company to the holders of its First Mortgage Notes in
full satisfaction of their mortgage note claims; for the payment
in full of convenience claims and trade claims; and for Sun World
to issue equity interests in the reorganized company to entities
holding certain other unsecured claims in full satisfaction of
those claims. Exit financing to be provided by an exit lender
under
Page 69
the Plan should meet the Company's need for seasonal
financing following the effective date. The hearing to consider
the adequacy of the disclosure statement accompanying the Plan,
most recently scheduled for June 11, 2004, has been subject to
several postponements and no hearing date is currently scheduled.
In Sun World's filings with the Bankruptcy Court, Sun World has
reported that it believes that the Plan likely cannot be confirmed
absent the acceptance of the holders of the First Mortgage Notes, in
their capacity as secured creditors. Sun World has further reported
to the Bankruptcy Court that the holders of the First Mortgage Notes
have not reached a consensus with respect to certain corporate governance
issues relating to the reorganized company, and that they have been
unable to finalize a shareholder agreement term sheet. In the meantime,
Sun World has, with Bankruptcy Court approval, expanded the scope of its
engagement with Ernst & Young Corporate Finance LLC to include services
related to (i) a sale of substantially all of its assets pursuant to a
motion or a plan or reorganization, and (ii) obtaining an equity investor
and financing under a plan of reorganization and is actively pursuing the
sales/investment process. Sun World has chosen to delay the preparation
of an amended Plan and disclosure statement and the scheduling of a
disclosure statement hearing date pending the outcome of these most recent
developments. Sun World's exclusivity period (i.e. the period during which
only Sun World may file a plan of reorganization) currently expires on
December 31, 2004. The Company cannot predict at this time what changes,
if any, will be made to the Plan as a result of the foregoing or whether
or not the Plan, as amended, will be approved.
At January 30, 2003, due to the Company's loss of control
over the operations of Sun World, the financial statements are no
longer consolidated with those of Cadiz. Instead, Cadiz accounts
for its investment in Sun World on the cost basis of accounting. As
a result, the Company wrote off its net investment in Sun World of
$195 thousand at the Chapter 11 filing date because it does not
anticipate being able to recover its investment.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
BASIS OF PRESENTATION
The financial statements of the Company have been prepared
using accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The Company incurred losses of
$11.5 million and $22.2 million in 2003 and 2002, respectively,
had working capital of $1.3 million at December 31, 2003, and
used cash in operations of $6.6 million and $10.1 million in 2003
and 2002, respectively. In addition, Sun World filed for
reorganization under Chapter 11 of the Bankruptcy Code. The
financial statements of the Company do not purport to reflect or
to provide for all of the consequences of an ongoing Chapter 11
reorganization. Specifically, but not all-inclusive, the
financial statements of the Company do not present: (a) the
realizable value of assets on a liquidation basis or the
availability of such assets to satisfy liabilities, (b) the
amount which will ultimately be paid to settle liabilities and
contingencies which may be allowed in the Chapter 11
reorganization, or (c) the effect of changes which may be made
resulting from a Plan of Reorganization. The appropriateness of
using the going-concern basis is dependent upon,
Page 70
among other things, confirmation of a Plan of Reorganization, future
profitable operations, the ability to comply with provisions of
financing agreements and the ability to generate sufficient cash
from operations to meet obligations.
During the quarter ended June 30, 2003, the Company raised
$1.7 million cash and during the quarter ended December 31, 2003,
$8.6 million in cash through private sales of common stock. Based
on current forecasts, the Company believes it has sufficient
resources to fund normal operations until May 2005. There is
no assurance that additional financing (public or private) will
be available on acceptable terms or at all. If the Company issues
additional equity securities to raise funds, the ownership
percentage of the Company's existing stockholders would be reduced.
New investors may demand rights, preferences or privileges senior to
those of existing holders of common stock. If the Company cannot
raise needed funds, it might be forced to make further
substantial reductions in its operating expenses, which could
adversely affect its ability to implement its current business
plan and ultimately its viability as a company. These financial
statements do not include any adjustments that might result from
these uncertainties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of the Company and those of Sun World until January 30, 2003, at
which date Sun World and certain of its subsidiaries (Sun Desert
Inc., Coachella Growers, and Sun World/Rayo) filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. As
of that date, due to the Company's loss of control over the
operations of Sun World, the financial statements of Sun World
are no longer consolidated with those of Cadiz, but instead,
Cadiz accounts for its investment in Sun World on the cost basis
of accounting. As a result of changing to the cost basis of
accounting on January 31, 2003, the Company had a net investment
in Sun World of $195,000 consisting of loans and other amounts
due from Sun World of $13,500,000 less losses in excess of
investment in Sun World of $13,305,000. The Company wrote off
its net investment in Sun World during the quarter ended March 31,
2003 because it does not anticipate being able to recover
its investment.
ONE-FOR-25 REVERSE STOCK SPLIT
In December 2003, the Company effected a one-for-25 reverse
stock split. All share and per share information in the
accompanying financial statements have been retroactively
restated to reflect the effect of this stock split.
RECLASSIFICATIONS
These financial statements reflect certain reclassifications
made to the prior period balances to conform to the current year
presentation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported
Page 71
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. In preparing these financial statements, management has
made estimates with regard to revenue recognition and the
valuation of inventory, goodwill and other long-lived assets, and
deferred tax assets. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Sun World recognizes crop sale revenue upon shipment and
transfer of title to customers. Packing revenues and marketing
commissions from third party growers are recognized when the
related services are provided. Proprietary product development
revenues are recognized based upon product sales by licensees.
Project development and management fees are recorded when earned
under the terms of the related agreement.
Revenues attributable to one national retailer totaled $0.1
million (2.2%) in 2003, $9.6 million (8.4%) in 2002 and $7.9
million (8.5%) in 2001. Revenues attributable to another national
retailer totaled $.05 million (16.6%) in 2003. Export sales accounted
for approximately 6.1%, 12.1% and 8.4% of the Company's revenues for
the years ended December 31, 2003, 2002 and 2001, respectively.
Services and license revenues were less than 10% of total revenues for
each of the years in the three-year period ended December 31,
2003.
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 $183,000
for the month ended January 31, 2003, $2,424,000 for the year
ended December 31, 2002, and $2,023,000 for the year ended
December 31, 2001.
NET LOSS PER COMMON SHARE
Basic Earnings Per Share (EPS) is computed by dividing the
net loss, after deduction for preferred dividends either accrued
or imputed, if any, by the weighted-average common shares
outstanding. Options, deferred stock units, warrants, and
participating and redeemable preferred stock convertible into or
exercisable for certain shares of the Company's common stock,
were not considered in the computation of diluted EPS because
their inclusion would have been antidilutive. Had these
instruments been included, the fully diluted weighted average
shares outstanding would have increased by approximately 125,000
shares (including the effect of the convertible Series F preferred
stock issued December 15, 2003), 333,000 shares, and 92,000 shares
for the years ended December 31, 2003, 2002 and 2001, respectively.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock options and other stock-
based employee awards. Pro forma information regarding net loss
and loss per share, as calculated under the provisions of SFAS
123, are disclosed in the
Page 72
table below. The Company accounts for equity securities issued to
non-employees in accordance with the provision of SFAS 123 and Emerging
Issues Task Force 96-18.
Had compensation cost for these plans been determined using
fair value the Company's net loss and net loss per common share
would have increased to the following pro forma amounts (dollars
in thousands except per share amounts):
YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Net loss applicable to
common stock: As reported $ (14,054) $ (24,334) $ (26,754)
Expense under
SFAS 123 (150) (648) (949)
--------- --------- ---------
Pro forma $ (14,204) $ (24,982) $ (27,703)
========= ========= =========
Net loss per common
share: As reported $ (6.39) $ (16.76) $ (18.66)
Expense under
SFAS 123 (0.07) (0.45) (0.66)
--------- --------- ---------
Pro forma $ (6.46) $ (17.21) $ (19.32)
========= ========= =========
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.
RESTRICTED CASH
At the closing of the secured term lending, the Company
deposited into the lender's cash collateral account the sum of
$2,142,000. The deposit represented collateral for future
interest payments on the Company's credit facility accruing at
the rate of 4% per annum from October 1, 2003 until March 31,
2005. This amount is shown on the balance sheet as Restricted
Cash.
INVENTORIES
Growing crops, harvested crops, and materials and supplies
are stated at the lower of cost or market, on a first-in, first-
out (FIFO) basis. Growing and harvested crop inventory includes
direct costs and an allocation of indirect costs.
PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
Property, plant, equipment and water programs are stated at
cost.
The Company capitalizes direct and certain indirect costs of
planting and developing orchards and vineyards during the
development period, which varies by crop and generally
Page 73
ranges from three to seven years. Depreciation commences in the year
commercial production is achieved.
Permanent land development costs, such as acquisition costs,
clearing, initial leveling and other costs required to bring the
land into a suitable condition for general agricultural use, are
capitalized and not depreciated since these costs have an
indefinite useful life.
Depreciation is provided using the straight-line method over
the estimated useful lives of the assets, generally ten to forty-
five years for land improvements and buildings, three to twenty-
five years for machinery and equipment, and five to thirty years
for permanent crops.
Water rights and water storage and supply programs are
stated at cost. All costs directly attributable to the
development of such programs are being capitalized by the
Company. These costs, which are expected to be recovered through
future revenues, consist of direct labor, drilling costs,
consulting fees for various engineering, hydrological,
environmental and feasibility studies, and other professional and
legal fees.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company annually evaluates its long-lived assets,
including intangibles, for potential impairment. When
circumstances indicate that the carrying amount of the asset may
not be recoverable, as demonstrated by estimated future cash
flows, an impairment loss would be recorded based on estimated
fair value. As a result of the actions taken by Metropolitan in
the fourth quarter of 2002 as described in Note 1, the Company,
with the assistance of an independent valuation firm, evaluated
the carrying value of its water program and determined that the
asset was not impaired and that the costs will be recovered
through implementation of the Cadiz Program either with other
government organizations, water agencies and private water users,
or through implementation of the Cadiz Program on terms
acceptable to both Cadiz and Metropolitan.
During the years ended December 31, 2002 and 2001, the
Company incurred costs to remove certain underperforming crops,
primarily stonefruit, citrus, and wine grapes. The Company
recorded a charge of $4,514,000 and $736,000 in 2002 and 2001,
respectively, in connection with the removal costs and write off
of capitalized costs related to these crops which is shown under
the heading "Removal of underperforming crops" on the
Consolidated Statement of Operations.
GOODWILL AND OTHER ASSETS
As a result of a merger in May 1988 between two companies,
which eventually became known as Cadiz Inc., goodwill in the
amount of $7,006,000 was recorded. This amount was being
amortized on a straight-line basis over thirty years.
Accumulated amortization was $3,193,000 at December 31, 2001. In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, ("SFAS No.
142") "Goodwill and Other Intangible Assets". Under SFAS No. 142
goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but will be subject to annual impairment
tests in accordance with the Statement. Upon adoption of SFAS
No. 142, effective at the
Page 74
beginning of fiscal 2002, the Company performed a transitional
fair value based impairment test and determined that its goodwill
was not impaired. In addition, cessation of amortization of goodwill
upon adoption of SFAS No. 142 did not have a material impact upon
the Company's financial position or results of operations.
Goodwill is tested for impairment annually in the first quarter, or
earlier if events occur which require an impairment analysis be performed.
As a result of the actions taken by Metropolitan in the fourth quarter
of 2002 as described in Note 1, the Company, with the assistance
of an independent valuation firm, performed an impairment test of
its goodwill and determined that its goodwill was not impaired.
In addition, in the first quarter of 2003, the Company, with the
assistance of an independent appraisal firm, performed its annual
impairment test of goodwill and determined its goodwill was not
impaired.
Amortization expense on goodwill was $234,000 for the year
ended December 31, 2001. As required by SFAS No. 142, the
results for the prior years have not been restated. Had the
Company applied the non-amortization provisions related to
goodwill under SFAS No. 142 for all periods presented, the
Company's net loss and net loss per share would have been as
follows (in thousands, except per share amounts):
2003 2002 2001
---- ---- ----
Reported net loss applicable to
common stock $ (14,054) $ (24,334) $ (26,754)
Goodwill amortization, net of tax - - 234
--------- --------- ---------
Adjusted net loss $ (14,054) $ (24,334) $ (26,520)
========= ========= =========
Basic and diluted net loss per share:
As reported $ (6.39) $ (16.76) $ (18.66)
Goodwill amortization - - 0.16
--------- --------- ---------
Adjusted basic and diluted net
loss per share (6.39) $ (16.76) $ (18.50)
========= ========= =========
Capitalized loan fees represent costs incurred to obtain
debt financing. Such costs are amortized over the life of the
related loan. At December 31, 2003, the majority of capitalized
loan fees relate to costs incurred in connection with the
extension of the debt with ING described in Note 10. At December
31, 2002, the majority of capitalized loan fees relate to the
issuance of the First Mortgage Notes described in Note 10.
Trademark development costs represent legal costs incurred
to obtain and defend patents and trademarks related to the
Company's proprietary products throughout the world. Such costs
are capitalized and amortized over their estimated useful life,
which range from 10 to 20 years.
In October 1999, Sun World entered into a management
agreement with Kingdom Agricultural Development Company (KADCO)
to develop and manage up to 100,000 acres of agricultural land in
southern Egypt called the Tushka project. KADCO is controlled by
His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz
Alsuad. As compensation for project development and management,
Sun World earns a quarterly fee of $312,500 based upon meeting
developmental milestones to be paid through an equity interest in
KADCO. The
Page 75
management agreement expired on September 30, 2003.
Sun World will receive licensing revenues from KADCO in the
future based upon planting of proprietary varieties at the Tushka
project. KADCO is currently engaged in a private placement to
raise the required funds to develop the project. Sun World
anticipated receiving shares in KADCO for payment of its project
development and management fee in connection with the completion
of the private placement. The amount of shares to be received
will be the current per share price used for the private
placement divided into the total amount of management fee earned
which is shown under the heading, "Receivable from KADCO to be
paid in common shares" in Note 7.
INCOME TAXES
Income taxes are provided for using an asset and liability
approach which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the financial statement and tax
bases of assets and liabilities at the applicable enacted tax
rates. A valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will
not be realized.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the years ended December 31,
2003, 2002 and 2001 was $3,913,000, $15,262,000, and $16,020,000,
respectively. Cash paid for income taxes during the years ended
December 31, 2003, 2002 and 2001 was $0, $71,000 and $57,000,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 145, which rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers, and FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements as well as amends FASB No. 13, to make various
technical various corrections. The Statement is effective for
financial statements issued after May 15, 2002. The adoption of
this standard did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit
or disposal activities and supersedes Emerging Issues Task Force
("EITF") Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
Under EITF Issue 94-3, a liability for an exit cost as defined in
EITF Issue 94-3 was recognized at the date of an entity s
commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair
value. The Company adopted the provisions of SFAS 146 effective
January 1, 2003 and such adoption did not have a material impact
on the consolidated financial statements.
Page 76
In November 2002, the FASB issued Interpretation No. 45,
Guarantor s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of
Others ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it
has issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company
adopted the disclosure provisions of FIN 45 during the fourth
quarter of 2002 and the recognition provisions of FIN 45
effective January 1, 2003. Such adoption did not have a material
impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The amendments to
Statement 123 in paragraphs 2(a)-2(e) of this Statement shall be
effective for financial statements for fiscal years ending after
December 15, 2002. Earlier application of the transition
provisions in paragraphs 2(a)-2(d) is permitted for entities with
a fiscal year ending prior to December 15, 2002, provided that
financial statements for the 2002 fiscal year have not been
issued as of the date this Statement is issued. Early application
of the disclosure provisions in paragraph 2(e) is encouraged. The
amendment to Statement 123 in paragraph 2(f) of this Statement
and the amendment to Opinion 28 in paragraph 3 shall be effective
for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on its
financial position or results of its operations.
In January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). In
general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
Company adopted the provisions of FIN 46 effective February 1,
2003 and such adoption did not have an impact on its consolidated
financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect
to variable interest entities created before January 31, 2003,
which among other things, revised the implementation date to the
first year or interim period ending after March 15, 2004, with
the exception of Special Purpose Entities ( SPE). The
consolidation requirements apply to all SPE s in the first year
or interim period ending after December 15, 2003. The Company's
adoption of the provisions of FIN 46R is not expected to have a
material impact on its consolidated financial statements.
Page 77
In April 2003, FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS 133. SFAS 149 is effective for
contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS
149 effective June 30, 2003 and such adoption did not have an
impact on its consolidated financial statements since the Company
has not entered into any derivative or hedging transactions.
In May 2003, FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:
* a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional
obligation that requires the issuer to redeem it by
transferring its assets at a specified or determinable date or
upon an event that is certain to occur;
* a financial instrument, other than an outstanding share,
that embodies an obligation to repurchase the issuer s equity
shares, or is indexed to such an obligation, and requires the
issuer to settle the obligation by transferring assets; and
* a financial instrument that embodies an unconditional
obligation that the issuer must settle by issuing a variable
number of its equity shares if the monetary value of the
obligation is based solely or predominantly on (1) a fixed
monetary amount, (2) variations in something other than the
fair value of the issuer s equity shares, or (3) variations
inversely related to changes in the fair value of the issuer's
equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3
which deferred the effective dates for applying certain
provisions of SFAS 150 related to mandatorily redeemable
financial instruments of certain non-public entities and certain
mandatorily redeemable non-controlling interests for public and
non-public companies. For public entities, SFAS 150 is effective
for mandatorily redeemable financial instruments entered into or
modified after May 31, 2003 and is effective for all other
financial instruments as of the first interim period beginning
after June 15, 2003. For mandatorily redeemable non-controlling
interests that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS 150, but
would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 150 are
deferred indefinitely. The measurement provisions of SFAS 150 are
also deferred indefinitely for other mandatorily redeemable non-
controlling interests that were issued before November 4, 2003.
For those instruments, the measurement guidance for redeemable
shares and non-controlling interests in other literature shall
apply during the deferral period. The Company adopted the
provisions of SFAS 150 effective June 30, 2003, and such adoption
did not have an impact on our consolidated financial statements.
Page 78
In March 2004, the consensus of Emerging Issues Task Force (EITF)
Issue No. 03-06, Participating Securities and the Two-Class Method
under FASB Statement 128, was published. EITF Issue No. 03-06
addresses the computations of earnings per share by companies that
have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the
company. Further guidance on the application and allocations of the
two-class method of calculating earnings per share is also included.
The provisions of EITF Issue No. 03-06 will be effective for reporting
periods beginning after March 31, 2004. The adoption of this guidance
is not expected to have significant impact on the Company's financial
results of operations and financial position.
NOTE 3 - NOTE RECEIVABLE FROM OFFICER
- -------------------------------------
On July 5, 2002, the chief executive officer ("CEO") of the
Company issued a promissory note to the Company for a loan of up
to $1,000,000 to be made by the Company to the CEO. Under the
terms of the promissory note, the principal and unpaid interest,
at 6% per annum, was due and payable on July 5, 2003. The note
was collateralized by a pledge of shares of common stock,
restricted stock and deferred stock units so that the aggregate
fair market value of the pledged collateral was equal to or
greater than 133% of the outstanding principal and accrued
interest due on the note.
On July 5, 2003, the Company and CEO entered into an
"Agreement Regarding Satisfaction of Note Obligation" (the
"Agreement"). Under the terms of the Agreement, the Company
determined that it was obligated to pay the CEO effective
February 1, 2003, $800,000 as a termination payment under a
previously existing employment agreement. This overall
settlement with Mr. Brackpool was made effective July 5, 2003, by
way of a corresponding reduction in Mr. Brackpool's obligations
to Cadiz under the loan. This reduction, along with cash
payments by Mr. Brackpool in the amount of $181,013 and an
application of $50,000 of accrued but unpaid compensation owed by
Cadiz to Mr. Brackpool under his post February 1, 2003 employment
arrangements with Cadiz, resulted in the settlement in full by
Mr. Brackpool of his obligations under this loan.
The Agreement of Employment dated July 5, 2003, has an
initial term of February 1, 2003, through September 30, 2003;
provides for a fixed amount of monthly compensation; and allows
for a new employment agreement to be negotiated, if mutually
agreeable, upon expiration of the term of the agreement.
Although the initial term of the agreement has expired, the CEO
continues to provide services to the Company under the terms of
the agreement.
Page 79
NOTE 4 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable at December 31, 2002, consisted of the
following (dollars in thousands):
DECEMBER 31,
2002
----
Trade receivables $ 4,303
Due from unaffiliated growers 24
Other 2,952
---------
7,279
Less allowance for doubtful accounts (547)
---------
$ 6,732
=========
Substantially all trade receivables in 2002 are from large
domestic national and regional supermarket chain stores and
produce brokers and are unsecured. Amounts due from unaffiliated
growers represent receivables for harvest advances and for
services (harvest, haul and pack) provided on behalf of growers
under agreement with Sun World and are recovered from proceeds of
product sales. Other receivables primarily include wine grape
and raisin sales, proceeds due from third party marketers,
receivables for international licensing, and other miscellaneous
receivables.
NOTE 5 - INVENTORIES
- --------------------
Inventories at December 31, 2002, consisted of the following
(dollars in thousands):
DECEMBER 31,
2002
----
Growing crops $ 10,702
Materials and supplies 2,525
Harvested product 286
---------
$ 13,513
=========
Page 80
NOTE 6 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
- ------------------------------------------------------
Property, plant, equipment and water programs consist of the
following (dollars in thousands):
DECEMBER 31,
2003 2002
---- ----
Land and land improvements $ 22,010 $ 66,372
Permanent crops 6,494 61,994
Developing crops 192 11,624
Water programs 14,274 16,859
Buildings 1,408 22,620
Machinery and equipment 3,590 20,818
--------- ---------
47,968 200,287
Less accumulated depreciation (8,454) (45,359)
--------- ---------
$ 39,514 $ 154,928
========= =========
Depreciation expense during the years ended December 31,
2003, 2002 and 2001 was $683,000, $7,178,000 and $7,699,000
respectively.
Permanent crops and developing crops shown as Cadiz assets
are leased to Sun World and an unaffiliated third party as Cadiz does
not conduct agricultural operations.
NOTE 7 - OTHER ASSETS
- ---------------------
Other assets consist of the following (dollars in
thousands):
DECEMBER 31,
2003 2002
---- ----
Deferred loan costs, net $ 387 $ 1,156
Long-term receivables - 327
Capitalized trademark development,
net - 1,934
Receivable from KADCO to be paid in
common shares - 4,063
--------- ---------
$ 387 $ 7,480
========= =========
Amortization expense of deferred loan costs was $641,000,
$5,761,000 and $3,748,000 in 2003, 2002, and 2001, respectively,
and is included in interest expense in the statement of
operations. Amortization expense for capitalized trademark
development was $60,000, $302,000, and $219,000 in 2003, 2002,
and 2001, respectively.
Page 81
NOTE 8 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following (dollars in
thousands):
DECEMBER 31,
2003 2002
---- ----
Interest $ 1,073 $ 2,934
Payroll, bonus, and benefits 248 2,731
Consulting fee 150 -
Preferred stock dividends - 561
Other 74 590
--------- ---------
$ 1,545 $ 6,816
========= =========
NOTE 9 - REVOLVING CREDIT FACILITY
- ----------------------------------
In November 2002, Sun World was notified by its seasonal
revolving lender that it would not renew Sun World's revolving
Credit Facility for the 2003 growing season. The seasonal
revolver expired on November 30, 2002. Sun World sought and
obtained extensions from its lender through January 31, 2003.
During the extension period, Sun World sought to obtain seasonal
financing from several different lenders. Each of these lenders
wanted to have a first position on all of Sun World's assets in
order to lend outside of a Chapter 11 proceeding. This required
the holders of the First Mortgage Notes to modify their agreement
with Sun World. As outlined in Note 1, Sun World was unable to
procure the financing with the consent of all parties. On
January 30, 2003, Sun World and certain of its subsidiaries filed
a voluntary petition for Chapter 11. On January 31, 2003, the
Bankruptcy Court approved an interim $15 million dollar debtor-in-
possession ("DIP") financing facility. On March 3, 2003, the
Bankruptcy Court approved an additional $25 million with the same
lender for a final approved DIP financing facility of $40
million. The DIP financing expires on November 30, 2004, bears
interest at the greater of Prime plus 4% or 8.25% , and is
secured by substantially all of Sun World's assets. Borrowing
availability is determined based on the lesser of (1) eligible
percentages of inventory and accounts receivable plus a specified
amount starting at $15 million and reduced by $150,000 per month;
(2) certain multiples of trailing 12 months EBITDA as defined in
the credit agreement; or (3) eligible percentage of the current
value of all real property. Sun World is required to meet certain
financial covenants.
At December 31, 2002, $4.4 million was outstanding under Sun
World's Revolving Credit Facility that was subsequently paid off
with proceeds from the DIP financing on January 30, 2003.
Page 82
NOTE 10 - LONG-TERM DEBT
- ------------------------
At December 31, 2003 and December 31, 2002, the carrying
amount of the Company's outstanding debt is summarized as follows
(dollars in thousands):
DECEMBER 31,
2003 2002
---- ----
Cadiz obligations:
Senior term bank loan, interest payable
semi-annually, interest per annum at 4%
in cash and 8% paid in kind, due March
31, 2005. $ 35,000 $ -
Senior term bank loan, interest payable
quarterly, variable interest rate based
upon LIBOR plus 3% (4.35% at December 31,
2002), due January 31, 2003 - 10,095
$25 million revolving line of credit,
interest payable quarterly, variable
interest rate based upon LIBOR plus 3%
(4.35% at December 31, 2002), due
January 31, 2003 - 25,000
Debt discount (4,747) (326)
--------- ---------
30,253 34,769
--------- ---------
Sun World obligations:
Series B First Mortgage Notes, interest
payable semi-annually with principal
due in April 2004, interest at 11.25% - 115,000
Senior unsecured term loan, interest
payable quarterly, due December 31,
2002, interest at (LIBOR plus 5% -
6.35% at December 31, 2002 and LIBOR
plus 3% - 5.60% at December 31, 2001) - 5,000
Note payable to bank, quarterly principal
installments of $72 plus interest
payable monthly, due December 31, 2003,
interest at prime(4.25% at December 31,
2002 and 4.75% at December 31, 2001) - 856
Note payable to insurance company,
quarterly installments of $120
(including interest), due January 1,
2005, interest at 7.75% - 654
Other - 187
--------- ---------
- 121,697
--------- ---------
30,253 156,466
Less current portion - (41,019)
--------- ---------
$ 30,253 $ 115,447
========= =========
Pursuant to the Company's loan agreement, annual maturity of
long-term debt outstanding (in thousands), excluding $4,747,000
representing the unamortized portion of debt
Page 83
discount, on December 31, 2003 is as follows: 2005 - $35,000.
CADIZ OBLIGATIONS
The senior term bank loan is secured by substantially all of
the Company's non-Sun World related property. During 2001,
pursuant to the loan agreement, the Company repriced certain
warrants previously issued. In February 2002, the Company
completed an amendment to the loan that extended the maturity
date of the obligation to January 31, 2003. The interest rate is
LIBOR plus 300 basis points, payable quarterly.
The revolving credit facility was fully drawn at December
31, 2002 and 2001, and was secured by a second lien on
substantially all of the non-Sun World assets of the Company.
During 2001, pursuant to the loan agreement, the Company repriced
certain warrants previously issued. In February 2002, the
Company completed an amendment to the facility that extended the
maturity date of the obligation to January 31, 2003. The
interest rate can either be LIBOR plus 300 basis points if paid
in cash or LIBOR plus 700 basis points if paid in common stock.
In March 2002, the revolving credit facility was increased from
$15 million to $25 million, with $10 million of the $25 million
revolver convertible into 1,250,000 of the Company's common stock
any time prior to January 2003 at the election of the lender. In
connection with obtaining the extension of the term loan and
revolver and the increase in the revolver, the Company repriced
certain warrants previously issued and issued certain additional
warrants to purchase shares of the Company's common stock. The
estimated fair value of the warrants issued and repriced was
calculated using the Black Scholes option pricing model and was
recorded as a debt discount and is being amortized over the
remaining term of the loan.
On February 13, 2003, the lender of both the Company's
senior term loan and $25 million revolving credit facility
delivered to the Company a Notice of Default and Demand for
Payment.
On December 15, 2003, the Company entered into an amendment
of its senior term loan and revolving credit facility to extend
the maturity date through March 31, 2005 and can obtain further
extensions through September 30, 2006, by maintaining sufficient
balances, among other conditions, in a cash collateral account
with the lender. The maximum aggregate amount to be outstanding
under the amended credit facilities is $35 million. The
amendment of these credit facilities did not constitute a
troubled debt restructuring and was accounted for as a debt
modification under EITF 96-19. In connection with this
amendment, the Company;
* paid the lender $2,425,034 representing; (i) accrued
interest through September 30, 2003 of $1,412,457 at the non
default interest rate; (ii) accrued interest through September
30, 2003 of $612,577 at the default rate of interest; and
(iii) $400,000 in fees;
* issued to the lender 100,000 shares of series F Preferred
stock initially convertible into 1,728,955 shares of common
stock; and
* deposited $2,142,280 in the cash collateral account with
the lender representing prepaid interest through March 31,
2005.
Page 84
The estimated value of the Series F preferred stock of $5
million was recorded as a debt discount and is being amortized
over the initial term of the note through March 31, 2005.
Interest under the amended credit facilities is payable
semiannually at the Company's option in either cash at 8% per
annum, or in cash and paid in kind ("PIK"), at 4% per annum for
the cash portion and 8% per annum for the PIK portion. The PIK
portion will be added to the outstanding principal balance.
The terms of the amended loan facilities also require
certain mandatory prepayments from the cash proceeds of future
equity issuances by the Company.
SUN WORLD OBLIGATIONS
In April 1997, Sun World issued $115 million of Series A
First Mortgage Notes through a private placement. The notes have
subsequently been exchanged for Series B First Mortgage Notes,
which are registered under the Securities Act of 1933 and are
publicly traded. The First Mortgage Notes are secured by a first
lien (subject to certain permitted liens) on substantially all of
the assets of Sun World and its subsidiaries other than growing
crops, crop inventories and accounts receivable and proceeds
thereof, which secure the Revolving Credit Facility. With the
entering into the DIP Facility as described in Note 9, the note
holders now have a second position on substantially all of the
Company's assets for so long as the DIP Facility is outstanding.
The First Mortgage Notes mature April 15, 2004, but are
redeemable at the option of Sun World, in whole or in part, at
any time prior to the maturity date. The First Mortgage Notes
include covenants that do not allow for the payment of dividends
by the Company other than out of cumulative net income. As a
result of Sun World's Chapter 11 filing discussed in Note 2,
principal payment on the First Mortgage Notes was suspended until
a final plan of reorganization is approved.
The First Mortgage Notes are also secured by the guarantees
of Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and
Sun World International de Mexico S.A. de C.V. (collectively, the
"Sun World Subsidiary Guarantors") and by Cadiz. Cadiz also
pledged all of the stock of Sun World as collateral for its
guarantee. The guarantees by the Sun World Subsidiary Guarantors
are full, unconditional, and joint and several. Sun World and
the Sun World Subsidiary Guarantors comprise all of the direct
and indirect subsidiaries of the Company other than
inconsequential subsidiaries. Additionally, management believes
that the direct and indirect non-guarantor subsidiaries of Cadiz
and Sun World Subsidiary Guarantors are inconsequential, both
individually and in the aggregate, to the financial statements of
the Company for all periods presented.
In December 2000, Sun World entered into a two-year $5
million senior unsecured term loan. In connection with obtaining
the loan, the Company issued 2,000 shares of the Cadiz' common
stock as well as certain warrants to purchase shares of the Cadiz
common stock were issued. The fair value of the stock and the
warrants were recorded as a debt discount and were fully
amortized over the life of the loan through December 31, 2002.
At December 31, 2002, Sun World did not repay the loan and thus,
Sun World was in default. With the default, pursuant to the
terms of the agreement, the interest rate was increased by 2%.
In connection with Sun
Page 85
World's Chapter 11 filing, all principal and interest on this
obligation have been suspended.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Condensed consolidating financial information as of December
31, 2003 and 2002 and for the three years ended December 31, 2003
for the Company is as follows (in thousands):
CONSOLIDATING STATEMENT
OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 2003
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Revenues $ 303 $ 3,005 $ (146) $ 3,162
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 333 2,653 (21) 2,965
General and
administrative 4,653 707 (125) 5,235
Write off of
investment in
subsidiary 195 - - 195
Reorganization
costs - 655 - 655
Depreciation and
amortization 553 190 - 743
--------- --------- --------- ---------
Total costs and
expenses 5,734 4,205 (146) 9,793
--------- --------- --------- ---------
Operating loss (5,431) (1,200) - (6,631)
Loss from
subsidiary (2,469) - 2,469 -
Interest expense,
net 3,636 1,269 - 4,905
--------- --------- --------- ---------
Loss before income
taxes (11,536) (2,469) 2,469 (11,536)
Income tax expense - - - -
--------- --------- --------- ---------
Net loss (11,536) (2,469) 2,469 (11,536)
Less: Preferred
stock
dividends (918) - - (918)
Imputed
dividend on
preferred
stock (1,600) - - (1,600)
--------- --------- --------- ---------
Net loss applicable
to common stock $ (14,054) $ (2,469) $ 2,469 $ (14,054)
========= ========= ========= =========
Page 86
CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 2003
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents $ 3,422 $ - $ - $ 3,422
Accounts
receivable, net - - - -
Prepaid expenses
and other 248 - - 248
--------- --------- --------- ---------
Total current
assets 3,670 - - 3,670
Property, plant,
equipment and
water programs,
net 39,514 - - 39,514
Goodwill 3,813 - - 3,813
Restricted cash 2,142 - - 2,142
Other assets 387 - - 387
--------- --------- --------- ---------
$ 49,526 $ - $ - $ 49,526
========= ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 857 $ - $ - $ 857
Accrued
liabilities 1,545 - - 1,545
--------- --------- --------- ---------
Total current
liabilities 2,402 - - 2,402
Long-term debt 30,253 - - 30,253
Other liabilities 654 - - 654
Stockholders'
equity:
Series F
convertible
preferred stock 1 - - 1
Common stock 65 - - 65
Additional paid-in
capital 184,974 - - 184,974
Accumulated
deficit (168,823) - - (168,823)
--------- --------- --------- ---------
Total
stockholders'
equity 16,217 - - 16,217
--------- --------- --------- ---------
$ 49,526 $ - $ - $ 49,526
========= ========= ========= =========
Page 87
CONSOLIDATING STATEMENT OF
CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, 2003
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Net cash used for
operating
activities $ (4,881) $ (1,703) $ - $ (6,584)
--------- --------- --------- ---------
Cash flows from
investing
activities:
Disposal of
subsidiary - (1,019) - (1,019)
Additions to
property, plant
and equipment - (140) - (140)
Additions to
developing crops (34) (197) - (231)
Payment of loan
to officer 181 - - 181
Increase in
restricted cash (2,142) - - (2,142)
(Increase)
decrease in
other assets 5 (109) - (104)
--------- --------- --------- ---------
Net cash (used for)
provided by
investing
activities (1,990) (1,465) - (3,455)
--------- --------- --------- ---------
Cash flows from
financing
activities:
Proceeds from
issuance of long-
term debt - 135 - 135
Net proceeds from
issuance of
stock 10,304 - - 10,304
Financing costs (400) - - (400)
Proceeds from
convertible note
payable 200 - - 200
Principal payments
on long-term debt - (7) - (7)
--------- --------- --------- ---------
Net cash provided
by financing
activities 10,104 128 - 10,232
--------- --------- --------- ---------
Net increase
(decrease) in
cash and cash
equivalents 3,233 (3,040) - 193
Cash and cash
equivalents,
beginning of
period 189 3,040 - 3,229
--------- --------- --------- ---------
Cash and cash
equivalents, end
of period $ 3,422 $ - $ - $ 3,422
========= ========= ========= =========
Page 88
CONSOLIDATING STATEMENT
OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 2002
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Revenues $ 2,067 $ 114,234 $ (2,051) $ 114,250
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 103 86,880 (627) 86,356
General and
administrative 7,500 10,953 (1,500) 16,953
Removal of
underperforming
crops 1,017 3,497 - 4,514
Depreciation and
amortization 1,022 6,458 - 7,480
--------- --------- --------- ---------
Total costs and
expenses 9,642 107,788 (2,127) 115,303
--------- --------- --------- ---------
Operating profit
(loss) (7,575) 6,446 76 (1,053)
Loss from
subsidiary (9,540) - 9,540 -
Interest expense,
net 5,108 16,299 (235) 21,172
--------- --------- --------- ---------
Loss before income
taxes (22,223) (9,853) 9,851 (22,225)
Income tax expense 2 (2) - -
--------- --------- --------- ---------
Net loss (22,225) (9,851) 9,851 (22,225)
Less: Preferred
stock
dividends (1,125) - - (1,125)
Imputed
dividend on
preferred
stock (984) - - (984)
--------- --------- --------- ---------
Net loss applicable
to common stock $ (24,334) $ (9,851) $ 9,851 $ (24,334)
========= ========= ========= =========
Page 89
CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 2002
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents $ 189 $ 3,040 $ - $ 3,229
Accounts
receivable, net - 6,732 - 6,732
Net investment in
and advances and
loans to
subsidiary 1,739 - (1,739) -
Note receivable
from officer 1,022 - - 1,022
Inventories - 13,638 (125) 13,513
Prepaid expenses
and other 323 843 - 1,166
--------- --------- --------- ---------
Total current
assets 3,273 24,253 (1,864) 25,662
Property, plant,
equipment and
water programs,
net 40,076 114,852 - 154,928
Other assets 3,981 7,312 - 11,293
--------- --------- --------- ---------
$ 47,330 $ 146,417 $ (1,864) $ 191,883
========= ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,142 $ 6,252 $ - $ 7,394
Accrued
liabilities 987 5,829 - 6,816
Due to parent
company - 13,546 (13,546) -
Revolving credit
facility - 4,400 - 4,400
Long-term debt,
current portion 34,769 6,250 - 41,019
--------- --------- --------- ---------
Total current
liabilities 36,898 36,277 (13,546) 59,629
Long-term debt - 115,447 - 115,447
Deferred income
taxes - 5,447 - 5,447
Other liabilities 611 928 - 1,539
Series D redeemable
preferred stock 4,536 - - 4,536
Series E-1 and E-2
redeemable
preferred stock 6,406 - - 6,406
Stockholders'
equity:
Common stock 15 - - 15
Additional paid-in
capital 156,151 38,508 (38,508) 156,151
Accumulated deficit (157,287) (50,190) 50,190 (157,287)
--------- --------- --------- ---------
Total
stockholders'
equity (1,121) (11,682) 11,682 (1,121)
--------- --------- --------- ---------
$ 47,330 $ 146,417 $ (1,864) $ 191,883
========= ========= ========= =========
Page 90
CONSOLIDATING STATEMENT OF
CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, 2002
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Net cash provided
by (used for)
operating
activities $ (7,910) $ (4,205) $ 1,982 $ (10,133)
--------- --------- --------- ---------
Cash flows from
investing
activities:
Additions to
property, plant
and equipment (138) (500) - (638)
Additions to
water programs (643) - - (643)
Additions to
developing crops (24) (2,152) - (2,176)
Proceeds from
disposal of
property, plant
and equipment 3 2,460 - 2,463
Loan to officer (1,000) - - (1,000)
(Increase)
decrease in
other assets 124 (219) - (95)
--------- --------- --------- ---------
Net cash (used for)
provided by
investing
activities (1,678) (411) - (2,089)
--------- --------- --------- ---------
Cash flows from
financing
activities:
Net proceeds from
issuance of stock 764 - - 764
Net proceeds from
short-term
borrowings 10,000 4,400 - 14,400
Borrowings from
intercompany
revolver (977) 2,959 (1,982) -
Principal payments
on long-term debt - (761) - (761)
Bank overdraft (410) - - (410)
--------- --------- --------- ---------
Net cash (used for)
provided by
financing
activities 9,377 6,598 (1,982) 13,993
--------- --------- --------- ---------
Net (decrease)
increase in cash
and cash
equivalents (211) 1,982 - 1,771
Cash and cash
equivalents,
beginning of
period 400 1,058 - 1,458
--------- --------- --------- ---------
Cash and cash
equivalents, end
of period $ 189 $ 3,040 $ - $ 3,229
========= ========= ========= =========
Page 91
CONSOLIDATING STATEMENT
OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 2001
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Revenues $ 1,903 $ 92,399 $ (1,900) $ 92,402
Special litigation
recovery 7,929 - - 7,929
--------- --------- --------- ---------
Total revenues
and special
litigation
recovery 9,832 92,399 (1,900) 100,331
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 118 79,390 (400) 79,108
General and
administrative 5,433 8,980 (1,500) 12,913
Non-recurring
compensation 2,584 2,953 - 5,537
Removal of
underperforming
crops 222 514 - 736
Depreciation and
amortization 1,137 7,014 - 8,151
--------- --------- --------- ---------
Total costs and
expenses 9,494 98,851 (1,900) 106,445
--------- --------- --------- ---------
Operating profit
(loss) 338 (6,452) - (6,114)
Loss from
subsidiary (22,342) - 22,342 -
Interest expense,
net 3,718 15,598 235 19,551
--------- --------- --------- ---------
Loss before income
taxes (25,722) (22,050) 22,107 (25,665)
Income tax expense - 57 - 57
--------- --------- --------- ---------
Net loss (25,722) (22,107) 22,107 (25,722)
Less: Preferred
stock
dividends 591 - - 591
Imputed
dividend on
preferred
stock 441 - - 441
--------- --------- --------- ---------
Net loss applicable
to common stock $ (26,754) $ (22,107) $ 22,107 $ (26,754)
========= ========= ========= =========
Page 92
CONSOLIDATING STATEMENT OF
CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, 2001
CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED
----- --------- ------------ ------------
Net cash provided
by (used for)
operating
activities $ 1,442 $ (5,509) $ (235) $ (4,302)
--------- --------- --------- ---------
Cash flows from
investing
activities:
Additions to
property, plant
and equipment (88) (1,495) - (1,583)
Additions to
water programs (1,359) - - (1,359)
Additions to
developing crops (109) (3,015) - (3,124)
Proceeds from
disposal of
property,
plant and
equipment 2 450 - 452
(Increase)
decrease in other
assets (575) 494 235 154
--------- --------- --------- ---------
Net cash (used for)
provided by
investing
activities (2,129) (3,566) 235 (5,460)
--------- --------- --------- ---------
Cash flows from
financing
activities:
Net proceeds
from issuance
of stock 1,583 - - 1,583
Proceeds from
issuance of
preferred stock 7,500 - - 7,500
Borrowings from
intercompany
revolver (11,254) 11,254 - -
Principal
payments on
long-term debt (251) (1,313) - (1,564)
Bank overdraft 410 - - 410
--------- --------- --------- ---------
Net cash (used for)
provided by
financing
activities (2,012) 9,941 - 7,929
--------- --------- --------- ---------
Net (decrease)
increase in cash
and cash
equivalents (2,699) 866 - (1,833)
Cash and cash
equivalents,
beginning of
period 3,099 192 - 3,291
--------- --------- --------- ---------
Cash and cash
equivalents, end
of period $ 400 $ 1,058 $ - $ 1,458
========= ========= ========= =========
Page 93
NOTE 11 - INCOME TAXES
- ----------------------
Deferred taxes are recorded based upon differences between
the financial statement and tax bases of assets and liabilities
and available carryforwards. Temporary differences and
carryforwards which gave rise to a significant portion of
deferred tax assets and liabilities as of December 31, 2003 and
2002 are as follows (in thousands):
DECEMBER 31,
2003 2002
---- ----
Deferred tax liabilities:
Fixed asset basis difference $ - $ 8,792
Other - 48
--------- ---------
Total deferred tax liabilities - 8,840
--------- ---------
Deferred tax assets:
Net operating losses 36,663 56,840
Fixed asset basis difference 6,759 6,849
State taxes - 1,855
Reserves and accruals 35 1,508
Other 303 1,359
--------- ---------
Total deferred tax assets 43,760 (68,411)
Valuation allowance for deferred
tax assets (43,760) (65,018)
--------- ---------
Net deferred tax liability $ - $ 5,447
========= =========
The valuation allowance increased (decreased) by
$(21,258,000) in 2003 primarily due to the deconsolidation of Sun
World, and $5,613,000, and $11,756,000 in 2002 and 2001, respectively.
As of December 31, 2003, the Company had net operating loss
(NOL) carryforwards of approximately $109.0 million for federal
income tax purposes. Such carryforwards expire in varying
amounts through the year 2023. At December 31, 2003, the Company
has state NOL carryforwards of $5.0 million. These NOL
carryforwards expire in varying amounts through the year 2013.
Due to the fact that it is more likely than not that the
Company will not realize its net deferred tax assets, it has
recorded a full valuation allowance against these assets.
Accordingly, no deferred tax asset has been recorded in the
accompanying balance sheet.
Section 382 of the Internal Revenue Code imposes an annual
limitation on the utilization of net operating loss carryforwards
based on a statutory rate of return (usually the "applicable
federal funds rate", as defined in the Internal Revenue Code) and
the value of the corporation at the time of a "change of
ownership" as defined by Section 382. Due to past equity
issuances and equity issuances in 2003, and due to the Chapter 11
filing by Sun World, the Company's ability to utilize net operating
loss carryforwards may be limited.
Page 94
A reconciliation of the income tax benefit to the statutory
federal income tax rate is as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Expected federal income tax
benefit at 34% $ (3,922) $ (7,557) $ (8,726)
Loss with no tax benefit provided 3,900 7,440 8,541
Feberal AMT refund - (73) -
State income tax 2 5 6
Foreign withholding taxes - 68 51
Amortization - - 79
Other non-deductible expenses 20 117 106
--------- --------- ---------
Income tax expense (benefit) $ - $ - $ 57
========= ========= =========
NOTE 12 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company has a 401(k) Plan for its salaried employees.
Employees must work 1,000 hours and have completed one year of
service to be eligible to participate in this plan. The Company
matches 75% of the first four percent deferred by an employee up
to $1,600 per year. In addition, Sun World maintains a defined
contribution pension plan covering its employees who (i) are not
covered by a collective bargaining agreement, (ii) have at least
one year of service and (iii) have worked at least 1,000 hours
per year. Contributions are 2% of each covered employee's
salary. For those hourly employees covered under a collective
bargaining agreement, contributions are made to a multi-employer
pension plan in accordance with negotiated labor contracts and
are generally based on the number of hours worked. The Company
contributed $12,000, $322,000 and $300,000 to the plans for
fiscal years 2003, 2002 and 2001, respectively.
NOTE 13 - PREFERRED AND COMMON STOCK
- ------------------------------------
SERIES F CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 100,000 shares of
$0.01 par value Series F Convertible Preferred Stock ("Series F
Preferred Stock"). On December 15, 2003, the Company issued
100,000 shares of Series F Preferred Stock in conjunction with
the extension of the Company's senior term loan's maturity date.
The 100,000 preferred shares are initially convertible into
1,728,955 shares of Common Stock of the Company. The number of
common shares received upon conversion may adjust if additional
common shares are used by the Company. The holders of the
Preferred Stock are entitled to receive dividends as if the
shares had been converted to Common Stock if dividends are paid
on the Company's common stock. The Series F Preferred Stock may
not be redeemed by the Company. The estimated value of the Series
F Preferred Stock was recorded as a debt discount and is being
amortized over the initial term of the senior term loans through
March 31, 2005.
Page 95
SERIES D CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 100,000 shares of
preferred stock. On December 29, 2000, the Company issued 5,000
shares of Series D Convertible Preferred Stock ("Series D
Preferred Stock") for $5,000,000. The holders of the Preferred
Stock were entitled to receive dividends, payable semi-annually,
at a rate of 7% if paid in cash or 9% if paid in the Company's
common stock. The Series D Preferred Stock was initially
convertible into 25,000 shares of the Company's common stock any
time prior to July 2004 at the election of the holder. The
Company also had the right to convert the Series D Preferred
Stock, but only when the closing price of the Company's common
stock had exceeded $300 per share for 30 consecutive trading
days. Holders were entitled to a liquidation preference equal to
the initial purchase of $1,000 per share plus any accrued and
unpaid dividends. The Series D Preferred Stock would be
redeemable in July 2004 if still outstanding. In 2003, all
outstanding shares of Series D preferred stock were exchanged for
common stock as further described below.
The Company issued certain warrants to purchase shares of
the Company's common stock in connection with the issuance of the
Series D Preferred Stock. The fair market value of the Company's
common stock at the time of issuance was above the accounting
conversion price resulting in an imputed dividend (beneficial
conversion feature). The estimated fair value of the warrants
issued (calculated using the Black Scholes option pricing model)
and the imputed dividend totaled $1,050,000 which was recorded as
a discount to the Series D Preferred Stock. The discount is
being amortized through the redemption date of the stock and
treated as a reduction to earnings for earnings per share
calculations. Upon exchange of the Series D Preferred Stock for
common stock in October 2003, the unamortized beneficial
conversion feature was charged against paid in capital.
SERIES E-1 AND E-2 CONVERTIBLE PREFERRED STOCK
During the fourth quarter of 2001, the Company issued 3,750
shares of Series E-1 Convertible Preferred Stock and 3,750 shares
of Series E-2 Convertible Preferred Stock (the "Series E
Preferred Stock") for an aggregate of $7,500,000. The holders of
the Series E Preferred Stock are entitled to receive dividends,
payable semi-annually, at a rate of 7% if paid in cash or 9% if
paid in the Company's common stock. The Series E Preferred Stock
was convertible into 40,000 shares of the Company's common stock
any time prior to July 2004 at the election of the holder. The
Company also had the right to convert the Series E Preferred
Stock, but only when the closing price of the Company's common
stock had exceeded $262 per share for 30 consecutive trading
days. Holders were entitled to a liquidation preference equal to
the initial purchase of $1,000 per share plus any accrued and
unpaid dividends. The Series E Preferred Stock would be
redeemable in July 2004 if still outstanding. In 2003, all
outstanding shares of Series E preferred stock were exchanged for
common stock as further described below.
The Company issued 1,600 shares of the Company's common
stock and certain warrants to purchase shares of the Company's
common stock in connection with the issuance of the Series E
Preferred Stock. The fair market value of the Company's common
stock at the
Page 96
time of issuance was above the accounting conversion
price resulting in an imputed dividend (beneficial conversion
feature). The estimated fair value of the warrants issued
(calculated using the Black Scholes option pricing model) and the
imputed dividend totaled $1,614,000 which was recorded as a
discount to the Series E-1 and Series E-2 Preferred Stock. The
discount is being amortized through the redemption date of the
stock and treated as a reduction to earnings for earnings per
share calculations. Upon exchange of the Series E Preferred Stock
for common stock in October 2003, the unamortized beneficial
conversion feature was charged against paid in capital.
On October 15, 2002, the Company and preferred stockholders
agreed to amend the Certificates of Designations of Series D,
Series E-1 and Series E-2 Preferred Stock to (i) reduce the
conversion price from $200 per share for the Series D Preferred
Stock and from $187.50 per share for Series E Preferred Stock to
$131.25 per share for both Series D and Series E Preferred Stock;
and (ii) extend the redemption date to July 16, 2006. With the
assistance of an independent valuation firm, the Company
determined that the additional value associated with the
reduction in the conversion price was offset by the extension of
the redemption date and that there was no loss or gain
attributable to the amendment to the Certificates of
Designations.
On October 20, 2003, the Company and the preferred
stockholders entered into an agreement to (i) exchange all
outstanding shares of Series D Preferred Stock, plus accrued and
unpaid dividends, for an aggregate of 320,000 shares of common
stock; and (ii) exchange all outstanding shares of series E
Preferred Stock, plus accrued and unpaid dividends, for an
aggregate of 80,000 shares of common stock. In connection with
this conversion, the Company recorded a charge of $42,000 against
paid in capital as an inducement to convert. At this time the
Company also recorded the unamortized beneficial conversion
feature of the Series D and Series E Preferred Stock as a charge
against paid in capital.
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 Company also grants stock awards pursuant to
its 2000 Stock Award Plan described below. Collectively, the
plans provide for the granting of up to 160,000 shares. At
December 31, 2003, the Company has approximately 35,756 shares
remaining that can be granted under the plans. All options are
granted at a price approximating fair market value at the date of
grant, have vesting periods ranging from issuance date to five
years, have maximum terms ranging from five to seven years and
are issued to directors, officers, consultants and employees of
the Company.
Compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock
at the date of the grant over the amount an employee must pay to
acquire the stock.
The Company has adopted the disclosure-only provisions of
Statement of Financial
Page 97
Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock-based compensation other than
for non-employees.
The fair value of each option granted during the periods
reported was estimated on the date of grant using the Black
Scholes option pricing model based on the weighted-average
assumptions of: risk-free interest rate of 4.08% for 2002, and
4.54% for 2001; expected volatility of 57.2% for 2002, and 40.0%
for 2001; expected life of three years for 2002 and 2001; and an
expected dividend yield of zero for both years. No options were
granted in 2003.
The following table summarizes stock option activity for the
periods noted. All options listed below were issued to officers,
directors, employees and consultants.
WEIGHTED-
AVERAGE
AMOUNT EXERCISE PRICE
------ --------------
Outstanding at December 31, 2000 120,424 $ 161.25
Granted 10,650 $ 240.50
Expired or canceled (43,840) $ 119.00
Exercised (13,204) $ 119.50
-------
Outstanding at December 31, 2001 74,030 $ 201.25
Granted 3,700 $ 183.75
Expired or canceled (10,280) $ 189.25
Exercised (5,740) $ 132.75
-------
Outstanding at December 31, 2002 61,710 $ 207.43
Granted - -
Expired or canceled (7,760) $ 207.43
Exercised - -
-------
Outstanding at December 31, 2003 53,950(a) $ 207.43
=======
Options exercisable at December 31, 2001 57,870 $ 198.50
=======
Options exercisable at December 31, 2002 54,690 $ 196.50
=======
Options exercisable at December 31, 2003 53,150 $ 115.80
=======
Weighted-average years of remaining
contractual life of options outstanding
at December 31, 2003 0.95
=======
(a) Exercise prices vary from $165.75 to $292.50 and
expiration dates vary from January 2004 to February 2007.
The weighted-average fair value of options granted during
the years 2002 and 2001
Page 98
were $83.22, and $86.00, respectively.
The Company accounts for equity securities issued to non-
employees in accordance with the provisions of SFAS 123 and
Emerging Issues Task Force 96-18. During the years ended
December 31, 2002 and 2001, the Company issued 64,000, and 8,600
warrants with weighted-average exercise prices of $50.75, and
$189.75, respectively. No warrants expired or were canceled
during any of the three periods discussed. During 2002, in
connection with the loan amendments for the Cadiz obligations
described in Note 10, the Company repriced certain warrants
previously issued resulting in a reduction in the weighted-
average exercise price. At December 31, 2002, there were 113,600
warrants outstanding with a weighted-average exercise price of
$58.50 per share, which expire through 2006.
In connection with the Company's default in February 2003 on
its senior term loan and $25 million revolving credit facility,
as described in Note 10; (i) warrants held by the lender to
purchase 40,000 shares of the Company's common stock vested at an
exercise price of $0.25 per share; and (ii) the exercise price on
warrants held by the lender to purchase 57,000 shares of the
Company's common stock was automatically reset to $0.25 per
share.
In December 2003, warrants to purchase 94,000 shares of
common stock were exercised for $23,500 in total cash proceeds.
At December 31, 2003, warrants to purchase 8,600 shares of common
stock of the Company at a weighted average exercise price of
$190.00 per share remained outstanding.
2000 STOCK AWARD PLAN
The Cadiz Inc. 2000 Stock Award Plan ("Stock Award Plan")
was approved by the Company's shareholders in May 2000. Under
the Stock Award Plan, the Company may issue various forms of
stock awards including restricted stock and deferred stock units
to attract, retain and motivate key employees or other eligible
persons. As of December 31, 2003, the Company had outstanding
2,752 deferred stock units granted under the Stock Award Plan.
Each of the units entitle the holder to receive one share of the
Company's common stock for each deferred stock unit three years
from the date of grant. During the year ended December 31, 2003,
26,027 stock units were exchanged for shares of the Company's
common stock. The Company charged $152,000, $579,000 and
$566,000 to expense during the years ended December 31, 2003,
2002 and 2001, respectively, in connection with the Stock Award
Plan.
MANAGEMENT EQUITY INCENTIVE PLAN
In December 2003, concurrently with the completion of the
restructuring of our financing arrangements with ING, the
Company's board of directors authorized the adoption of a
Management Equity Incentive Plan (the "Incentive Plan"). Under
the Incentive Plan, a total of 1,472,051 shares of common stock
may be granted to key personnel. The Board has formed an initial
allocation committee to direct the initial allocation of 717,373
of these shares. The Board has authorized the initial allocation
committee to award all or part of the initial allocation shares
to key personnel (including members of such committee) without
further approval of the Board. Any initial allocation of shares
so granted will be subject to vesting conditions. One-third of
the shares granted will vest
Page 99
on the date of the grant. The remaining two-thirds will vest in
two equal installments on December 11, 2004 and December 11, 2005
(subject to continued status of the recipient as an employee or
consultant to Cadiz as of the respective vesting date, but also
subject to immediate vesting in full of any theretofore unvested
shares upon any termination without cause).
The 754,678 shares covered by the Incentive Plan which are
not part of the initial allocation are issuable pursuant to the
direction of, and upon such vesting and other conditions as may
be established by, the Compensation Committee.
No shares have been granted or issued under the Incentive Plan.
NON-RECURRING COMPENSATION EXPENSE
In 2001, the Company issued 22,567 deferred stock units to
certain senior managers of Cadiz and Sun World. These deferred
stock units were issued in exchange for the cancellation of
42,200 fully vested options to purchase the Company's common
stock held by senior managers. In accordance with the terms of
Stock Option Exchange Agreements, the number of the deferred
stock units issued was calculated based on the average closing
price for the 10 business days following the filing of the
Company's Annual Report on Form 10-K for the year ended December
31, 2000 on March 29, 2001. Each deferred stock unit is
exchangeable for one share of the Company's common stock at the
end of the deferral period elected by the holder. The Company
recorded a one-time charge of $5,537,000 in 2001 and no cash was
expended in connection with the issuance of the deferred stock
units.
NOTE 15 - SEGMENT INFORMATION
- -------------------------------
With Sun World's filing of voluntary petitions for relief
under Chapter 11 of the Bankruptcy code as further described in
Note 1, the primary business of the Company is to acquire and
develop water resources.
The Company had two reportable segments; water resources
(Cadiz) and agriculture (Sun World). The accounting policies of
the segments are the same as those described in the summary of
significant accounting polices. The Company's operations are
reported in the following business segments:
Financial information by reportable business segment is
reported in the following tables:
2003 2002 2001
---- ---- ----
($ in thousands)
External sales:
Water Resources $ 157 $ 16 $ 3
Agricultural 3,005 114,234 92,399
--------- --------- ---------
Consolidated $ 3,162 $ 114,250 $ 92,402
========= ========= =========
Page 100
Inter-segment sales:
Water Resources $ 146 $ 2,051 $ 1,900
Agricultural (146) (2,051) (1,900)
--------- --------- ---------
Consolidated $ - $ - $ -
========= ========= =========
Total sales:
Water Resources $ 303 $ 2,067 $ 1,903
Agricultural 3,005 114,234 92,399
Other (146) (2,051) (1,900)
--------- --------- ---------
Consolidated $ 3,162 $ 114,250 $ 92,402
========= ========= =========
Profit (loss) before income taxes:
Water Resources $ (5,236) $ (7,575) $ 338
Agricultural (1,200) 6,446 (6,452)
Other (195) 76 -
Interest expense (4,905) (21,172) (19,551)
--------- --------- ---------
Consolidated $ (11,536) $ (22,225) $ (25,665)
========= ========= =========
Assets:
Water Resources $ 49,526 $ 45,591 $ 46,309
Agricultural - 146,417 152,168
Other - (125) (202)
--------- --------- ---------
Consolidated $ 49,526 $ 191,883 $ 198,275
========= ========= =========
Capital expenditures:
Water Resources $ 34 $ 805 $ 1,556
Agricultural 337 2,652 4,510
--------- --------- ---------
Consolidated $ 371 $ 3,457 $ 6,066
========= ========= =========
Depreciation and amortization:
Water Resources $ 553 $ 1,022 $ 1,137
Agricultural 190 6,458 7,014
--------- --------- ---------
Consolidated $ 743 $ 7,480 $ 8,151
========= ========= =========
Interest expense, net:
Water Resources $ 3,636 $ 5,108 $ 3,718
Agricultural 1,269 16,299 15,598
Other - (235) 235
--------- --------- ---------
Consolidated $ 4,905 $ 21,172 $ 19,551
========= ========= =========
Page 101
NOTE 16 - CONTINGENCIES
- -----------------------
In December 1995, the Company filed an action relative to
the proposed construction and operation of a landfill (the "Rail-
Cycle Project") which was to be located adjacent to the Company's
Cadiz property with the Superior Court in San Bernardino County,
California. The action challenged the various decisions by the
County of San Bernardino relative to the proposed Rail-Cycle
Project and sought compensatory damages. In September 1998, the
Court granted defendants' motion for summary judgment. The
Company appealed this decision and in August 2000, the California
Court of Appeals granted, in part, the Company's appeal. The
Court's decision revoked all environmental and land-use
approvals, and thus effectively terminated the Rail-Cycle
Project, as proposed.
The Company filed other civil actions against Waste
Management, Inc., which asserted claims arising from alleged
criminal and fraudulent conduct against the Company engaged in by
Waste Management in connection with the Rail-Cycle Project.
In March 2001, the Company and Waste Management executed a
settlement agreement intended to fully and finally compromise and
settle the claims asserted by the Company against Waste
Management in all of the outstanding civil actions. Pursuant to
the Settlement Agreement, Waste Management paid the Company $6
million in cash and granted to the Company an exclusive option to
receive, at no cost to the Company, up to approximately 7,000
acres of real property in eastern San Bernardino County primarily
adjacent to the Cadiz Program property. In April 2001, the
Company exercised the option and has acquired the subject
property. Net proceeds from the settlement are included in the
Company's statement of operations under the caption "Special
Litigation Recovery".
In the normal course of its agricultural operations, the
Company handles, stores, transports and dispenses products
identified as hazardous materials. Regulatory agencies
periodically conduct inspections and, currently, there are no
pending claims with respect to hazardous materials.
The Company is involved in other legal and administrative
proceedings and claims. In the opinion of management, the
ultimate outcome of each proceeding or all such proceedings
combined will not have a material adverse impact on the Company's
financial statements.
Page 102
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ---------------------------------------------------
(In thousands except per share data)
Quarter Ended
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
---- ---- ---- ----
Revenues $ 3,046 $ 97 $ 19 $ -
Gross profit (loss) 367 47 (154) (63)
Net loss applicable to
common stock (5,171) (1,951) (3,013) (3,919)
Net loss per common
share $ (3.53) $ (0.92) $ (1.32) $ (1.17)
Quarter Ended
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
---- ---- ---- ----
Revenues $ 7,750 $ 23,063 $ 64,280 $ 19,157
Gross profit (loss) 1,497 6,215 16,820 3,362
Net loss applicable to
common stock (7,800) (5,962) (950) (9,622)
Net loss per common
share $ (5.40) $ (4.11) $ (0.65) $ (6.60)
Page 103
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------
December 31,
BALANCE SHEET ($ in thousands): 2003 2002
- --------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,422 $ 189
Net investment in and advances to subsidiary - 1,739
Note receivable from officer - 1,022
Prepaid expenses and other 248 323
--------- ---------
Total current assets 3,670 3,273
Property, plant, equipment and water
programs, net 39,514 40,076
Goodwill 3,813 3,813
Restricted cash 2,142 -
Other assets 387 168
--------- ---------
$ 49,526 $ 47,330
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 857 $ 1,142
Accrued liabilities 1,545 987
Long-term debt, current portion - 34,769
--------- ---------
Total current liabilities 2,402 36,898
Long-term debt 30,253 -
Other liabilities 654 611
Contingencies
Series D redeemable convertible preferred
stock - $0.01 par value:
5,000 shares authorized; shares issued and
outstanding - none at December 31, 2003
and 5,000 at December 31, 2002 - 4,536
Series E-1 and E-2 redeemable convertible
preferred stock - $0.01 par value:
7,500 shares authorized; shares issued and
outstanding - none at December 31, 2003 and
7,500 at December 31, 2002 - 6,406
Stockholders' equity:
Series F convertible preferred stock - $.01
par value:
100,000 shares authorized, shares issued
and outstanding - 100,000 at December
31, 2003 1 -
Common stock - $0.01 par value; 70,000,000
shares authorized; shares issued and
outstanding 6,471,384 at December 31, 2003
and 1,458,659 at December 31, 2002 65 15
Additional paid-in capital 184,974 156,151
Accumulated deficit (168,823) (157,287)
--------- ---------
Total stockholders' equity 16,217 (1,121)
--------- ---------
$ 49,526 $ 47,330
========= =========
Page 104
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------
STATEMENT OF OPERATIONS Year Ended December 31,
($ in thousands) 2003 2002 2001
- --------------------------------------------------------------------
Revenues $ 303 $ 2,067 $ 1,903
Special litigation recovery - - 7,929
--------- --------- ---------
Total revenues and special
litigation recovery 303 2,067 9,832
--------- --------- ---------
Costs and expenses:
Cost of sales 333 103 118
General and administrative 4,653 7,500 5,433
Non-recurring compensation expense - - 2,584
Removal of underperforming crops - 1,017 222
Write off of investment in
subsidiary 195 - -
Depreciation and amortization 553 1,022 1,137
--------- --------- ---------
Total costs and expenses 5,734 9,642 9,494
--------- --------- ---------
Operating profit (loss) (5,431) (7,575) 338
Loss from subsidiary (2,469) (9,540) (22,342)
Interest expense, net 3,636 5,108 3,718
--------- --------- ---------
Net loss before income taxes (11,536) (22,223) (25,722)
Income taxes - 2 -
--------- --------- ---------
Net loss (11,536) (22,225) (25,722)
Less: Preferred stock dividends 918 1,125 591
Imputed dividend on preferred
stock 1,600 984 441
--------- --------- ---------
Net loss applicable to common stock $ (14,054) $ (24,334) $ (26,754)
========= ========= =========
Page 105
CADIZ INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------
Year Ended December 31,
STATEMENT OF CASH FLOWS ($ in thousands) 2003 2002 2001
- --------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (11,536) $ (22,225) $ (25,722)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Depreciation and amortization 1,336 5,181 3,521
Write off of investment in subsidiary 195 - -
Stock issued for services 550 - -
Compensation paid through settlement of
note receivable from officer 841 - -
Interest paid in common stock 12 - -
Loss from subsidiary 2,470 9,540 22,342
(Gain) loss on disposal of assets 43 (3) 5
Removal of underperforming crops - 1,017 222
Land received from litigation settlement - - (2,000)
Compensation charge for deferred
stock units 126 272 271
Non-recurring compensation expense - - 2,584
Accrued interest on note receivable
from officer - (22) -
Changes in operating assets and
liabilities:
Increase in due to subsidiary - (1,360) -
Decrease (increase) in prepaid expenses
and other 75 (112) 8
Increase in accounts payable (155) (189) 121
Increase (decrease) in accrued
liabilities 1,117 (9) 97
Increase (decrease) in due to affiliate 45 - -
Decrease in other liabilities - - (7)
--------- --------- ---------
Net cash provided by (used for)
operating activities (4,881) (7,910) 1,442
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and
equipment - (138) (88)
Additions to developing crops - (24) (109)
Additions to water programs (34) (643) (1,359)
Proceeds from disposal of property,
plant and equipment - 3 2
Loan to officer 181 (1,000) -
Increase in restricted cash (2,142) - -
Increase in other assets 5 124 (575)
--------- --------- ---------
Net cash used for investing activities (1,990) (1,678) (2,129)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 10,304 764 1,583
Financing costs (400) - -
Proceeds from convertible
note payable 200 - -
Net proceeds from short-term borrowings - 10,000 -
Proceeds from issuance of preferred stock - - 7,500
Intercompany revolver with subsidiary - (977) (11,254)
Principal payments on long-term debt - - (251)
Bank overdraft - (410) 410
--------- --------- ---------
Page 106
Net cash (used for) provided by
financing activities 10,104 9,377 (2,012)
--------- --------- ---------
Net decrease in cash and cash equivalents 3,233 (211) (2,699)
Cash and cash equivalents, beginning
of period 189 400 3,099
--------- --------- ---------
Cash and cash equivalents, end of period $ 3,422 $ 189 $ 400
========= ========= =========
Page 107
CADIZ INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------
For the years ended December 31, 2003, 2002 and 2001 ($ in thousands)
- -------------------------------------------------------------------------------
BALANCE AT ADDITIONS CHARGED TO BALANCE
YEAR ENEDED BEGINNING COSTS AND OTHER AT END
DECEMBER 31, 2003 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------- --------- -------- -------- ---------- ---------
Allowance for
doubtful accounts $ 547 $ - $ 547 $ - $ -
========= ========= ========= ========= =========
Tax valuation
allowance $ 65,018 $ - $ (21,258) $ - $ (43,760)
========= ========= ========= ========= =========
YEAR ENDED
DECEMBER 31, 2002
- -----------------
Allowance for
doubtful accounts $ 506 $ 200 $ - $ 159 $ 547
========= ========= ========= ========= =========
Tax valuation
allowance $ 59,405 $ - $ 5,613 $ - $ 65,018
========= ========= ========= ========= =========
YEAR ENDED
DECEMBER 31, 2001
- -----------------
Allowance for
doubtful accounts $ 522 $ - $ - $ 16 $ 506
========= ========= ========= ========= =========
Tax valuation
allowance $ 47,649 $ - $ 11,756 $ - $ 59,405
========= ========= ========= ========= =========
Page 108
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Sun World International, Inc.
In our opinion, the accompanying consolidated balance sheet
and the related consolidated statements of operations, cash flows
and stockholder's deficit present fairly, in all material
respects, the financial position of Sun World International,
Inc., a wholly-owned subsidiary of Cadiz Inc., and its
subsidiaries at December 31, 2003 and 2002 and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 1 to the accompanying financial
statements, Sun World International, Inc. and certain of its
subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code on January 30,
2003. Management continues to operate the Company as a debtor-in-
possession until a Plan of Reorganization is approved by its
creditors and confirmed by the Bankruptcy Court. The Company's
objectives in regard to this matter are also discussed in Note 1.
The accompanying financial statements have been prepared using
accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business. The uncertainties inherent in the
bankruptcy process raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Los Angeles, California
March 5, 2004, except for Note 17 for which the date is September 17, 2004
Page 109
SUN WORLD INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------
Year Ended December 31,
($ in thousands) 2003 2002 2001
- -----------------------------------------------------------------------
Revenues $ 100,938 $ 114,583 $ 91,973
--------- --------- ---------
Costs and expenses:
Cost of sales 86,989 86,880 79,390
General and administrative 8,889 9,243 8,980
Non-recurring compensation expense - - 2,953
Unusual items (Note 15) - 1,710 -
Removal of underperforming crops 926 3,497 514
Depreciation and amortization 6,873 6,458 7,014
--------- --------- ---------
103,677 107,788 98,851
--------- --------- ---------
Operating income (loss) (2,739) 6,795 (6,878)
(Gain) loss on sale of property (387) 349 (426)
Interest expense, net (contractual
interest for fiscal year 2003
was $17,041) 2,932 16,299 15,598
--------- --------- ---------
Loss before reorganization items and
income taxes (5,284) (9,853) (22,050)
Reorganization items:
Debt issuance costs 912 - -
Professional fees 3,770 - -
--------- --------- ---------
Total reorganization items 4,682 - -
--------- --------- ---------
Net loss before income taxes (9,966) (9,853) (22,050)
Income tax (benefit) expense 102 (2) 57
--------- --------- ---------
Net loss $ (10,068) $ (9,851) $ (22,107)
========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 110
SUN WORLD INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------
December 31,
($ in thousands) 2003 2002
- ---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,548 $ 3,040
Accounts receivable, net 7,031 6,732
Inventories 12,851 13,638
Prepaid expenses and other 1,817 843
--------- ---------
Total current assets 23,247 24,253
Property, plant, and equipment, net 107,812 112,293
Intangible assets 1,903 1,934
Other assets 6,568 7,937
--------- ---------
Total assets $ 139,530 $ 146,417
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 5,689 $ 6,252
Accrued liabilities 2,280 5,829
Due to parent company - 13,546
Revolving credit facility 4,423 4,400
Long-term debt, current portion 125 6,250
--------- ---------
Total current liabilities 12,517 36,277
Long-term debt 730 115,447
Deferred income taxes 5,447 5,447
Other liabilities 365 928
--------- ---------
Total liabilities not subject to compromise 19,059 158,099
--------- ---------
Liabilities subject to compromise under
reorganization proceedings 141,606 -
--------- ---------
Contingencies (Note 16)
Stockholder's deficit:
Common stock, $0.01 par value, 300,000
shares authorized; 42,000 shares issued
and outstanding - -
Additional paid-in capital 39,123 38,508
Accumulated deficit (60,258) (50,190)
--------- ---------
Total stockholder's deficit (21,135) (11,682)
--------- ---------
Total liabilities and stockholder's deficit $ 139,530 $ 146,417
========= =========
See accompanying notes to the consolidated financial statements.
Page 111
SUN WORLD INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------
Year Ended December 31,
($ in thousands) 2003 2002 2001
- ------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (10,068) $ (9,851) $ (22,107)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 6,987 8,295 8,143
Write off of debt issuance costs 912 - -
Valuation allowance 1,500 - -
Loss (gain) on disposal of assets (387) 349 (426)
Removal of underperforming crops 926 3,497 514
Shares of KADCO stock earned
for services (938) (1,250) (1,250)
Compensation charge for deferred
stock units 211 307 296
Non-recurring compensation expense - - 2,953
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable (299) (406) 1,553
Decrease (increase) in inventories 246 (1,039) 1,830
Increase in prepaid expenses
and other (974) (265) (160)
Increase (decrease) in accounts
payable 3,143 (4,176) 3,734
Increase (decrease) in accrued
liabilities 247 687 (647)
(Decrease) increase in due to parent - (668) 1,983
(Decrease) increase in other
liabilities (159) 315 58
--------- --------- ---------
Net cash provided by (used for)
operating activities before
reorganization items 1,347 (4,205) (3,526)
Increase in liabilities subject to
compromise under reorganization
proceedings 559 - -
--------- --------- ---------
Net cash provided by (used for)
operating activities 1,906 (4,205) (3,526)
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant,
and equipment (2,831) (500) (1,495)
Additions to developing crops (1,963) (2,152) (3,015)
Proceeds from disposal of property,
plant and equipment 2,754 2,460 450
(Increase) decrease in other assets (539) (219) 494
--------- --------- ---------
Net cash used for investing activities (2,579) (411) (3,566)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt 136 - -
Principal payments on long-term debt (978) (762) (1,313)
Net proceeds from short-term borrowings 23 4,400 -
Intercompany revolver with parent - 2,960 9,271
--------- --------- ---------
Net cash (used for) provided by
financing activities (819) 6,598 7,958
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (1,492) 1,982 866
Cash and cash equivalents at beginning
of period 3,040 1,058 192
--------- --------- ---------
Cash and cash equivalents at end
of period $ 1,548 $ 3,040 $ 1,058
========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 112
SUN WORLD INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
($ in thousands)
- --------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
------ ------ ------- ------- ---------------
Balance as of
December 31, 2000 42,000 $ - $ 35,325 $ (18,232) $ 17,093
Capital contribution
from parent for
the value of the
non-recurring
compensation - - 2,953 - 2,953
Revaluation of
derivative for
warrants issued
by parent - - (235) - (235)
Capital
contribution from
parent for
warrants issued
relating to senior
unsecured term loan - - 230 - 230
Net loss - - - (22,107) (22,107)
------- ------ -------- --------- ---------
Balance as of
December 31, 2001 42,000 - 38,273 (40,339) (2,066)
Revaluation of
derivative for
warrants issued
by parent - - 235 - 235
Net loss - - - (9,851) (9,851)
------- ------ -------- --------- ---------
Balance as of
December 31, 2002 42,000 - 38,508 (50,190) (11,682)
Exchange of deferred
stock units for
parent's common
stock - - 615 - 615
Net loss - - - (10,068) (10,068)
------- ------ -------- --------- ---------
Balance as of
December 31, 2003 42,000 - $ 39,123 $ (60,258) $ (21,135)
======= ====== ======== ========= =========
See accompanying notes to the consolidated financial statements.
Page 113
SUN WORLD INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
(A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.)
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - NATURE OF OPERATIONS AND REORGANIZATION UNDER CHAPTER 11
- -----------------------------------------------------------------
Founded in 1975, Sun World International, Inc. ("SWII" or
"Sun World") and its subsidiaries (collectively, the "Company")
operate as the agricultural segment of Cadiz Inc. ("Cadiz"). The
Company is an integrated agricultural operation that owns
approximately 17,100 acres of land, primarily located in two
major growing areas of California: the San Joaquin Valley and the
Coachella Valley. Fresh produce, including table grapes,
stonefruit, citrus, peppers and watermelons is marketed, packed
and shipped to food wholesalers and retailers located throughout
the United States and to more than 30 foreign countries. The
Company owns and operates three cold storage and/or packing
facilities located in California, of which two are operated and
one is leased to a third party.
On January 30, 2003 (the "Petition Date"), SWII and certain
of its subsidiaries (Sun Desert Inc., Coachella Growers, and Sun
World/Rayo) filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code. The filing was made in the United States
Bankruptcy Court, Central District of California, Riverside
Division ("Bankruptcy Court"). Included in the Consolidated
Financial Statements are subsidiaries operated outside the United
States, which have not commenced Chapter 11 cases or other
similar proceedings elsewhere, and are not debtors. The assets
and liabilities of such non-filing subsidiaries are not
considered material to the Consolidated Financial Statements.
SWII sought bankruptcy protection in order to access a seasonal
financing package of up to $40 million to provide working capital
through the 2003-2004 growing seasons.
As a debtor-in-possession, Sun World is authorized to
continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the
approval of the Bankruptcy Court. Under the Bankruptcy Code,
actions to collect pre-petition indebtedness, as well as most
other pending litigation, are stayed and other contractual
obligations against Sun World may not be enforced. In addition,
under the Bankruptcy Code, Sun World may assume or reject
executory contracts, including lease obligations. Parties
affected by these rejections may file claims with the Court in
accordance with the reorganization process. Absent an order of
the Court, substantially all pre-petition liabilities are subject
to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy
Court.
The four Sun World entities are the joint proponents of the
Debtors' Joint Plan of Reorganization Dated November 24, 2003
(the "Plan"). Under the Plan, which is subject to amendment and
modification, the Reorganized Sun World will continue to operate
as a going concern on and after the Plan's effective date. The
Plan provides for the restructuring of Sun World's balance sheet
by providing for Sun World to issue equity interests in the
Reorganized Company to the holders of its First Mortgage Notes in
full satisfaction of their mortgage note claims; for the payment
in full of convenience claims and trade claims; and for Sun World
to issue equity interests in the Reorganized Company to entities
holding certain other unsecured claims in full satisfaction of
those claims. Exit financing to be provided by an exit lender
under the Plan should meet the Company's need for seasonal
financing following the effective date. The hearing to consider
the adequacy of the disclosure statement accompanying the Plan
and to approve solicitation procedures for the voting by
creditors on the Plan is scheduled for May 7,
Page 114
2004, but may be continued. See Note 16, Subsequent Events.
The financial statements of the Company have been prepared
using accounting principles applicable to a going concern, which
assumes realization of assets and settlement of liabilities in
the normal course of business and in accordance with Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code". Accordingly, all pre-petition
liabilities subject to compromise have been segregated in the
Consolidated Balance Sheet and classified as "Liabilities subject
to compromise under reorganization proceedings", at the estimated
amount of allowable claims. The financial statements of the
Company do not purport to reflect or to provide for all of the
consequences of an ongoing Chapter 11 reorganization.
Specifically, but not all-inclusive, the financial statements of
the Company do not present: (a) the realizable value of assets on
a liquidation basis or the availability of such assets to satisfy
liabilities, (b) the amount which will ultimately be paid to
settle liabilities and contingencies which may be allowed in the
Chapter 11 reorganization, or (c) the effect of changes which may
be made resulting from a Plan of Reorganization. The
appropriateness of using the going-concern basis is dependent
upon, among other things, confirmation of a Plan of
Reorganization, future profitable operations, the ability to
comply with debtor-in-possession financing agreements and the
ability to generate sufficient cash from operations to meet
obligations.
Inherent in a successful Plan of Reorganization is a capital
structure that permits the Company to generate cash flows after
reorganization to meet its restructured obligations and fund the
current operations of the Company. The Company's objective in
the Chapter 11 proceeding is to achieve the highest possible
recovery for all creditors and shareholders consistent with the
Company's ability to pay and the continuation of its business.
There can be no assurance that the Company will be able to attain
these objectives or reorganize successfully. Because of the
ongoing nature of the reorganization case, the financial
statements contained herein are subject to material
uncertainties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
SWII and its subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated.
BANKRUPTCY ACCOUNTING
Since the Chapter 11 bankruptcy filing, the Company has
applied the provisions of SOP 90-7, which does not significantly
change the application of accounting principles generally
accepted in the United States of America; however, it does
require that the financial statements for periods including and
subsequent to filing the Chapter 11 petition distinguish
transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. As
disclosed in the Consolidated Statement of Operations,
reorganization items consist of the write off of unamortized debt
issuance costs as of the Petition Date of
Page 115
$912,000 and professional fees directly associated with the
reorganization of $3,770,000. Of the professional fees incurred,
approximately $3,139,000 had been paid as of December 31, 2003.
RECLASSIFICATIONS
These financial statements reflect certain reclassifications
made to the prior period balances to conform to the current year
presentation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. In preparing these financial statements, management has
made estimates with regard to revenue recognition and valuation
of inventory, long-lived assets, and deferred tax assets. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes crop sale revenue upon shipment and
transfer of title and risk of loss to customers. Packing
revenues and marketing commissions from third party growers are
recognized when the related services are provided. Proprietary
product development revenues are recognized based upon product
sales by licensees. Project development and management fees are
recorded when earned under the terms of the related agreement.
Revenues attributable to one national retailer totaled $11.1
million in 2003, $9.6 million in 2002 and $7.9 million in 2001.
Revenue for another national retailer totaled $11.6 million in
2003. Export sales accounted for approximately 12.4%, 12.1% and
8.4%, of the Company's revenues for the years ended December 31,
2003, 2002 and 2001, respectively. Service revenues and license
revenues were less than 10% of total revenues for each of the
years in the three-year period ended December 31, 2003.
RESEARCH AND DEVELOPMENT
The Company incurs costs to research and develop new
varieties of proprietary products. Research and development
costs are expensed as incurred. Such costs were approximately
$2,791,000 for the year ended December 31, 2003, $2,424,000 for
the year ended December 31, 2002 and $2,023,000 for the year
ended December 31, 2001 and are included in general and
administrative expenses in the Consolidated Statement of
Operations.
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.
Page 116
At times these deposits exceed federally insured limits. Such
investments are stated at cost, which approximates fair value,
and are considered cash equivalents for purposes of reporting
cash flows.
INVENTORIES
Growing crops, harvested crops, and materials and supplies
are stated at the lower of cost or market, on a first-in, first-
out (FIFO) basis. Growing and harvested crops inventory includes
direct costs and an allocation of indirect costs.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
The Company capitalizes direct and certain indirect costs
of planting and developing orchards and vineyards during the
development period, which varies by crop and usually ranges from
three to seven years. Depreciation commences in the year
commercial production is achieved.
Permanent land development costs, such as acquisition costs,
clearing, initial leveling and other costs required to bring the
land into a suitable condition for general agricultural use, are
capitalized and not depreciated since these costs have an
indefinite useful life.
Depreciation is provided using the straight-line method over
the estimated useful lives of the assets, generally ten to forty-
five years for land improvements and buildings, three to twenty-
five years for machinery and equipment, and five to thirty years
for permanent crops.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company annually evaluates its long-lived assets,
including intangibles, for potential impairment. When
circumstances indicate that the carrying amount of the asset may
not be recoverable, as demonstrated by estimated future cash
flows, an impairment loss would be recorded based on fair value.
During the year ended December 2003, 2002 and 2001, the
Company incurred costs to remove certain underperforming crops,
primarily stonefruit, citrus, and wine grapes. The Company
recorded charges of $926,000, $3,497,000 and $514,000 in 2003,
2002 and 2001, respectively, in connection with the removal of
these crops which is shown under the heading "Removal of
underperforming crops" on the Consolidated Statement of
Operations.
INTANGIBLE AND OTHER ASSETS
Water programs are stated at cost. All costs directly
attributable to the development of such programs are being
capitalized by the Company.
Capitalized loan fees represent costs incurred to obtain debt
financing. Such costs
Page 117
are amortized over the life of the related loan.
Trademark development costs represent legal costs incurred to
obtain and defend patents and trademarks related to the Company's
proprietary products throughout the world. Such costs are
capitalized and amortized over their estimated useful life, which
ranges from 10 to 20 years.
In October 1999, the Company entered into a management
agreement with Kingdom Agricultural Development Company (KADCO)
to develop and manage up to 100,000 acres of agricultural land in
southern Egypt called the Tushka project. KADCO is controlled by
His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz
Alsaud. As compensation for project development and management,
the Company earns a quarterly fee of $312,500 based upon meeting
developmental milestones to be paid through an equity interest in
KADCO. The management agreement expired on September 30, 2003.
The Company will receive licensing revenues from KADCO in the
future based upon plantings of proprietary varieties at the
Tushka project. KADCO is currently engaged in a private
placement to raise the required funds to develop the project.
The Company anticipates receiving shares in KADCO for payment of
its project development and management fee in connection with the
completion of the private placement. The amount of shares to be
received will be the current per share price used for the private
placement divided into the total amount of management fee earned
which is shown under the heading, "Receivable from KADCO to be
paid in common shares" in Note 6.
INCOME TAXES
The Company is included in the consolidated federal and
combined state tax returns of Cadiz. The Company's current tax
liability is determined as though the Company filed its own
returns. Income taxes are provided for using an asset and
liability approach which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement and tax
bases of assets and liabilities at the applicable enacted tax
rates. A valuation allowance is provided when it is considered
more likely than not that some portion or all of the deferred tax
assets will not be realized.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest for the years ended December
31, 2003, 2002 and 2001 were $1,748,000, $14,484,000 and
$14,660,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial reporting for
costs associated with exits or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs in a
Restructuring). The provisions of this Statement are effective
for exit or disposal activities initiated after December 31,
2002. The adoption of this standard did not have a material
impact on the Company's financial position or results of
operations.
Page 118
In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure
- - an amendment of SFAS No. 123. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about
the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The
Statement is effective for fiscal years ending after December 15,
2002. The adoption of this standard did not have a material
impact on the Company's financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation
Number 45, or FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (an interpretation of SFAS No. 5, 57, and
107 and recission of FIN 34). FIN 45 clarifies the requirements
of SFAS No. 5, Accounting for Contingencies, relating to a
guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. FIN 45 is effective January 1, 2003
and its adoption did not have a material impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued FIN 46, Consolidation
of Variable Interest Entities, and Interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the
identification of variable interest entities (VIE) for which
control is achieved through means other than through voting
rights and to determine when and which business enterprise should
consolidate the VIE. The consolidated requirements of FIN 46
apply immediately to variable interest entities created after
January 31, 2003. The Company adopted the provisions of FIN 46
effective February 1, 2003 and such adoption did not have a
material impact on the Company's financial position or results of
operations. In December 2003, the FASB issued FIN 46R with
respect to VIE's created before January 31, 2003, which among
other things, revised the implementation date to the first fiscal
year or interim period ending after March 15, 2004, with the
exception of Special Purpose Entities (SPE). The consolidation
requirements apply to all SPE's in the first fiscal year or
interim period beginning after December 15, 2003. The adoption
of the provisions of FIN 46R is not expected to have a material
impact on the Company's financial position or results of
operations since it currently has no SPE's.
In April 2003, the FASB issued SFAS 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.
SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS
149 is effective for contracts and hedging relationships entered
into or modified after June 30, 2003. The adoption of this
standard did not have a material impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both debt and equity and requires an
issuer to classify certain instruments as liabilities in its
balance sheet. For public entities, SFAS 150 is effective for
mandatorily redeemable financial instruments entered into or
modified after May 31, 2003 and is effective for all other
financial instruments as of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have
a material impact on the Company's financial position or results
of operations.
Page 119
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable consist of the following (dollars in
thousands):
December 31,
2003 2002
---- ----
Trade receivables $ 4,054 $ 4,303
Other 3,447 2,976
--------- ---------
7,501 7,279
Less allowance for doubtful
accounts (470) (547)
--------- ---------
$ 7,031 $ 6,732
========= =========
Substantially all trade receivables are from large domestic
national and regional supermarket chain stores and produce
brokers and are unsecured. Other receivables primarily include
juice grape and raisin sales, proceeds due from third party
marketers, receivables for international licensing, and other
miscellaneous receivables.
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following (dollars in thousands):
December 31,
2003 2002
---- ----
Growing crops $ 10,427 $ 10,702
Materials and supplies 2,235 2,525
Harvested product 189 411
--------- ---------
$ 12,851 $ 13,638
========= =========
Depreciation related to permanent crops and related farming
equipment included in growing crop inventory totaled $1,833,
$2,131 and $1,848 at December 31, 2003, 2002 and 2001,
respectively.
Page 120
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
- ---------------------------------------
Property, plant, and equipment consist of the following
(dollars in thousands):
December 31,
2003 2002
---- ----
Land $ 44,325 $ 46,482
Permanent crops 56,218 55,500
Developing crops 9,413 11,466
Buildings 21,780 21,212
Machinery and equipment 16,531 14,927
--------- ---------
148,267 149,587
Less accumulated depreciation (40,455) (37,294)
--------- ---------
$ 107,812 $ 112,293
========= =========
Depreciation expense for 2003, 2002 and 2001 was $6,521,
$6,156 and $6,795, respectively.
NOTE 6 - INTANGIBLE AND OTHER ASSETS
- ------------------------------------
Intangible and other assets consist of the following
(dollars in thousands):
December 31,
2003 2002
---- ----
Water programs $ 2,559 $ 2,559
Deferred loan costs, net 7 988
Long-term receivables 502 327
Capitalized trademark development,
net 1,903 1,934
Receivable from KADCO to be paid
in common shares 5,000 4,063
--------- ---------
9,971 9,871
Valuation allowance (1,500) -
--------- ---------
$ 8,471 $ 9,871
========= =========
Amortization expense of deferred loan costs was $113, $802
and $793 in 2003, 2002 and 2001, respectively, and is included in
interest expense in the statement of operations. Amortization
expense for capitalized trademark development was $352, $302 and
$219 in 2003, 2002, and 2001, respectively. Future amortization
of capitalized trademark development is as follows (in
thousands): $285 - 2004; $285 - 2005; $286 - 2006; $278 - 2007;
$769 - 2008 and thereafter.
Page 121
NOTE 7 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following (dollars in
thousands):
December 31,
2003 2002
---- ----
Interest $ 35 $ 2,695
Payroll and benefits 1,931 2,587
Other 314 547
--------- ---------
$ 2,280 $ 5,829
========= =========
NOTE 8 - REVOLVING CREDIT FACILITIES
- ------------------------------------
Pre-petition financing:
In November 2002, Sun World was notified by its seasonal
revolving lender that it would not renew the Revolving Credit
Facility for the 2003 growing season. The seasonal revolver
expired on November 30, 2002. The Company sought and obtained
extensions from its lender through January 31, 2003. During the
extension period, the Company sought to obtain seasonal financing
from several different lenders. Each of these lenders wanted to
have a first position on all of the Company's assets in order to
lend outside of a Chapter 11 proceeding. This required the
holders of the First Mortgage Notes to modify their agreement
with the Company. As outlined in Note 1, the Company was unable
to procure the financing with the consent of all parties. On
January 30, 2003, Sun World and certain of its subsidiaries filed
a voluntary petition for Chapter 11.
At December 31, 2002, $4.4 million was outstanding under the
Revolving Credit Facility that was subsequently paid off with
proceeds from the DIP financing on January 31, 2003.
Debtor-In-Possession (DIP) financing:
On January 31, 2003, the Bankruptcy Court approved an interim
$15 million dollar DIP financing facility. On March 3, 2003, the
Bankruptcy Court approved a final DIP financing facility
agreement with the same lender. The DIP financing, as amended,
provides for varying commitment levels based upon the Company's
seasonal borrowing requirements with a peak commitment level of
$35 million during the June through August time frame. The DIP
financing expires on November 30, 2004, bears interest at the
greater of Prime plus 4% or 8.25%, and is secured by
substantially all of the Company's assets. Borrowing
availability is determined based on the lesser of: (1) eligible
percentages of inventory and accounts receivable plus a specified
amount starting at $15 million in March 2003 and reduced by
$150,000 per month thereafter; (2) certain multiples of trailing
12 months EBITDA as defined in the credit agreement; or (3)
eligible percentage of the current value of all real property.
The Company is required to meet certain financial and other
customary covenants.
Page 122
Approximately $4.4 million was outstanding under the DIP financing
facility at December 31, 2003.
NOTE 9 - LONG-TERM DEBT
- -----------------------
At December 31, 2003 and December 31, 2002, the carrying
amount of the Company's outstanding debt is summarized as follows
based upon the original contractual maturities (dollars in
thousands):
December 31,
2003 2002
---- ----
Amounts classified under Long-term debt:
Series B First Mortgage Notes, interest
payable semi-annually, with principal
due in April 2004, interest at 11.25%
(default interest at 12.25%) $ 115,000 $ 115,000
Unsecured term loan, interest payable
quarterly, due December 31, 2002,
default interest at LIBOR plus 5% 5,000 5,000
Note payable to bank, quarterly
principal installments of $72 plus
interest payable monthly, due December
31, 2003, interest at prime - 856
Note payable to insurance company,
quarterly installments of $120
(including interest), due January 1,
2005, interest at 7.75% 654 654
Other 201 187
--------- ---------
120,855 121,697
Less: Current portion (125) (6,250)
Amounts subject to compromise
under reorganization proceedings (120,000) -
--------- ---------
$ 730 $ 115,447
========= =========
Pursuant to the Company's various loan agreements, the
contractual maturities of long-term debt outstanding (in
thousands) at December 31, 2003 are as follows: 2004 - $120,778,
2005 - $73, and 2006 - $4. Included in these amounts are
significant pre-petition obligations for which payments have been
suspended as a result of the Chapter 11. Therefore, the
commitments shown above will not reflect actual cash outlays in
the future period.
Page 123
As a result of the Chapter 11, all required principal
payments on pre-petition debt were suspended other than for
obligations classified as "Other" above. For the period
subsequent to the Petition Date, interest on the debt classified
under "Liabilities subject to compromise under reorganization
proceedings" was not paid or accrued in accordance with SOP 90-7.
Contractual interest on these debt instruments at the default
rate for the year ending December 31, 2003 was $13.2 million in
excess of recorded interest of $1.1 million included in the
Consolidated Income Statement for these debt instruments.
In April 1997, the Company issued $115 million of Series A
First Mortgage Notes through a private placement. The notes have
subsequently been exchanged for Series B First Mortgage Notes,
which are registered under the Securities Act of 1933 and are
publicly traded. Prior to the Chapter 11, the First Mortgage
Notes were secured by a first lien (subject to certain permitted
liens) on substantially all of the assets of the Company and its
subsidiaries other than growing crops, crop inventories and
accounts receivable and proceeds thereof, which secured the
Revolving Credit Facility. With the entering into the DIP
Facility as described in Note 8, the note holders now have a
second position on substantially all of the Company's assets for
so long as the DIP Facility is outstanding.
The First Mortgage Notes are also secured by the guarantees
of Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and
Sun World International de Mexico S.A. de C.V. (collectively, the
"Sun World Subsidiary Guarantors") and by Cadiz. Cadiz also
pledged all of the stock of Sun World as collateral for its
guarantee. See Note 13 for additional discussion of Cadiz
guarantee.
In December 2000, Sun World entered into a two-year $5
million senior unsecured term loan. In connection with obtaining
the loan, 50,000 shares of Cadiz' common stock as well as certain
warrants to purchase shares of Cadiz' common stock were issued.
The fair value of the stock and the warrants were recorded as a
debt discount and were fully amortized over the life of the loan
through December 31, 2002. At December 31, 2002, the Company did
not repay the loan and thus, the Company was in default. With
the default, pursuant to the terms of the agreement, the interest
rate was increased by 2%. In connection with the Company's
Chapter 11 filing, all principal and interest payments on this
obligation have been suspended.
NOTE 10 - LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION
PROCEEDINGS
- ----------------------------------------------------------------
Under bankruptcy law, actions by creditors to collect
indebtedness Sun World owed prior to the Petition Date are stayed
and certain other pre-petition contractual obligations may not be
enforced against the Company. The Company has received approval from
the Bankruptcy Court to pay certain pre-petition liabilities
including employee salaries and wages, benefits, other employee
obligations, and certain grower liabilities entitled to trust
protection under the Perishable Agricultural Commodities Act
(PACA). Except for certain secured debt obligations, all pre-
petition liabilities have been classified as "Liabilities subject
to compromise under reorganization proceedings" in the
Consolidated Balance Sheet. Adjustments to the claims may result
from negotiations, payments authorized by Bankruptcy Court order,
rejection of executory
Page 124
contracts including leases, or other events.
Pursuant to an order of the Bankruptcy Court, Sun World
mailed notices to all known creditors that the deadline for
filing proofs of claim with the Court was August 29, 2003. An
estimated 340 claims were filed as of August 29, 2003. Amounts
that Sun World has recorded are in many instances different from
amounts filed by our creditors. Differences between amounts
scheduled by Sun World and claims by creditors are being
investigated and resolved in connection with our claims
resolution process. Until the process is complete, the ultimate
number and amount of allowable claims cannot be ascertained. The
ultimate resolution of these claims will be based upon the final
plan of reorganization.
Liabilities subject to compromise under reorganization
proceedings are summarized as follows (dollars in thousands):
December 31,
2003
----
Accounts payable $ 4,311
Interest payable 3,795
Due to parent company (see note 13) 13,500
Long-term debt (see note 9) 120,000
---------
Total $ 141,606
=========
NOTE 11 - INCOME TAXES
- ----------------------
Significant components of the Company's deferred income tax
assets and liabilities as of December 31, 2003 and 2002 are as
follows (dollars in thousands):
December 31,
2003 2002
---- ----
Deferred tax liabilities:
Net fixed assets basis difference $ 9,111 $ 8,792
Other 48 48
--------- ---------
Total deferred tax liabilities 9,159 8,840
--------- ---------
Deferred tax assets:
Net operating losses 28,079 23,551
State taxes 1,853 1,854
Reserves and accruals 748 1,473
Other 989 943
--------- ---------
Total deferred tax assets 31,669 27,821
Valuation allowance for deferred
tax assets (27,957) (24,428)
--------- ---------
Net deferred tax liability $ 5,447 $ 5,447
========= =========
Page 125
As of December 31, 2003, the Company has net operating loss
(NOL) carryforwards of approximately $71.2 million for federal
income tax purposes. Such carryforwards expire in varying
amounts through the year 2023. As of December 31, 2003, the
Company has state NOL carryforwards of approximately $43.9
million. These NOL carryforwards expire in varying amounts
through the year 2014.
A reconciliation of the income tax (benefit) expense to the
statutory federal income tax rate is as follows (dollars in
thousands):
Year Ended December 31,
2003 2002 2001
---- ---- ----
Expected federal income tax benefit
at 34% $ (3,388) $ (3,350) $ (7,497)
Loss with no tax benefit provided 2,696 3,322 7,531
Federal AMT refund - (73) -
State income tax 2 3 6
Foreign withholding taxes 100 68 51
Restructuring costs 661 - -
Other non-deductible expenses 31 28 (34)
--------- ---------- ---------
Income tax (benefit) expense $ 102 $ (2) $ 57
========= ========== =========
NOTE 12 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company participates in the Cadiz Inc. 401(k) Plan for its
employees. Employees must work 1,000 hours annually and have
completed one year of service to be eligible to participate in
this plan. The Company matches 100% of the first three percent
deferred by an employee and 50% of the next two percent deferred.
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. Total Company
contributions to these plans (in thousands) totaled $296,000 in 2003,
$266,000 in 2002 and $243,000 in 2001.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
In September 1996, the Company and Cadiz entered into a 10-
year services agreement which had three separate components: (1)
the services agreement itself under which Cadiz provided
management and financial services to the Company in exchange for
an annual management fee of $1.5 million and reimbursement of
certain other expenses incurred on behalf of the Company; (2) an
agricultural lease of Cadiz-owned irrigated farmland in San
Bernardino County consisting primarily of citrus and grapes for
which the Company paid annual land rent of $250,000; and (3) a
tax sharing agreement which provided for Cadiz and Sun World to
file a consolidated tax return with Sun World paying to Cadiz an
amount equal to its current tax liability as though Sun World
filed its own returns. Additionally, the Company had an
intercompany revolving credit agreement whereby the Company could
borrow from Cadiz as
Page 126
needed. As of December 31, 2002, $12.2 million was owed to Cadiz
under the intercompany revolving credit agreement and $1.3 million
was payable to Cadiz under the services agreement.
Effective July 1, 2003, the Company and Cadiz agreed to an
amended agricultural lease approved by the Bankruptcy Court
whereby the Company would lease approximately 370 acres of lemons
and table grapes for the 2004 harvest season with rent equal to
50% of the net farming profit from the sale of the crops.
In November 2003, the Company, Cadiz and holders of the
majority of the First Mortgage Notes entered into a settlement
agreement with respect to the various claims between the parties
which was approved by the Bankruptcy Court. The settlement
agreement provided for the following: (1) Cadiz would be allowed
a general unsecured claim of $13.5 million in full and final
settlement of all of its claims against the Company; (2) the
Company and Cadiz consented to the termination of all contracts
and agreement to which Cadiz and the Company are parties
including the services agreement described above but excluding
the agricultural lease; (3) Cadiz waived any contention that it
was entitled to a recovery on account of its equity interest in
Sun World.
In addition, pursuant to the settlement agreement, Cadiz
agreed to assign its $13.5 million claim to a trust for the
benefit of those holders of First Mortgage Notes who elect to
receive their prorata share of this trust. Further, Cadiz agreed
to pledge its equity ownership in the Company to the trust. The
$13.5 million claim is classified under the caption "Liabilities
subject to compromise under reorganization proceedings" on the
Consolidated Balance Sheet at December 31, 2003.
The Company made payments to Cadiz of $0.3 million for 2003,
$1.9 million for 2002, and $0 for 2001, pursuant to the services
agreement (including the agricultural lease) described above.
NOTE 14 - NON-RECURRING COMPENSATION EXPENSE
- --------------------------------------------
In 2001, Cadiz issued 12,034 deferred stock units to certain
senior managers of Sun World. These deferred stock units were
issued in exchange for the cancellation of 22,600 fully vested
options to purchase the Cadiz common stock held by senior
managers. In accordance with the terms of the Stock Option
Exchange Agreements, the number of the deferred stock units
issued was calculated based on the average closing price for the
10 business days following the filing of the Cadiz Annual Report
on Form 10-K for the year ended December 31, 2000 on March 29,
2001. Each deferred stock unit is exchangeable for one share of
Cadiz common stock at the end of the deferral period elected by
the holder. The Company recorded a one-time charge of $2,953,000
in 2001 and no cash was expended in connection with the issuance
of the deferred stock units.
Page 127
NOTE 15 - UNUSUAL ITEMS
- -----------------------
The Company is involved with various litigation proceedings
both domestically and internationally to protect its proprietary
fruit varieties from unauthorized use. The Company is currently
involved in proceedings with domestic growers to enjoin their
unauthorized production of one of the Company's proprietary
grapevines, the Sugraone table grape. During 2002, a California
state court issued a ruling adverse to Sun World in one of these
proceedings. In March 2003, the appeals court upheld the
decision reached by the California state court. The Company wrote
off capitalized legal costs related to defending its intellectual
property rights to this variety as of December 31, 2002 resulting
in a charge of $1,097,000. The unfavorable outcome in this matter
could have an adverse impact on the Company's future financial
performance.
As described in Note 1, the Company tried unsuccessfully to
restructure its debt and ultimately filed for Chapter 11 on
January 30, 2003. In connection with these efforts, the Company
incurred $614,000 of professional fees. As a result of the
unsuccessful debt restructuring, these costs have been written
off as of December 31, 2002.
NOTE 16 - CONTINGENCIES
- -----------------------
In the normal course of its agricultural operations, the
Company handles, stores, transports and dispenses products
identified as hazardous materials. Regulatory agencies
periodically conduct inspections and, currently, there are no
pending claims with respect to hazardous materials.
The Company is involved in various other legal and
administrative proceedings and claims. In the opinion of
management, the ultimate outcome of each proceeding or all such
proceedings combined will not have a material adverse impact on
the Company's financial statements.
NOTE 17 - SUBSEQUENT EVENTS
- ---------------------------
A hearing to consider the adequacy of the disclosure statement
accompanying the Plan, most recently scheduled for June 11, 2004, has
been subject to several postponements and no hearing date is
currently scheduled. In Sun World's filings with the Bankruptcy
Court, Sun World has reported that it believes that the Plan likely
cannot be confirmed absent the acceptance of the holders of the First
Mortgage Notes, in their capacity as secured creditors. Sun World
has further reported to the Bankruptcy Court that the holders of the
First Mortgage Notes have not reached a consensus with respect to
certain corporate governance issues relating to the reorganized
company, and that they have been unable to finalize a shareholder
agreement term sheet. In the meantime, Sun World has, with Bankruptcy
Court approval, expanded the scope of its engagement with Ernst &
Young Corporate Finance LLC to include services related to (i) a sale
of substantially all of its assets pursuant to a motion or a plan of
reorganization, and (ii) obtaining an equity investor and financing
under a plan of reorganization
Page 128
and is actively pursuing the sales/investment process. Sun World has
chosen to delay the preparation of an amended Plan and disclosure
statement and the scheduling of a disclosure statement hearing date
pending the outcome of these most recent developments. Sun World's
exclusivity period (i.e. the period during which only Sun World may
file a plan of reorganization) currently expires on December 31, 2004.
Sun World cannot predict at this time what changes, if any, will be
made to the Plan as a result of the foregoing or whether or not the
Plan, as amended, will be approved.
Page 129