10-Q 1 mar10q2002.txt MARCH 31, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from..to... Commission File Number 0-12114 CADIZ INC. (Exact name of registrant specified in its charter) DELAWARE 77-0313235 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Wilshire Boulevard, Suite 1600 Santa Monica, California 90401-1111 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 899-4700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each of the Registrant's classes of common stock at May 10, 2002 was 36,237,982 shares of common stock, par value $0.01. CADIZ INC. INDEX For the Three Months Ended March 31, 2002 Page ---- PART I - FINANCIAL INFORMATION 1. CADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS Statement of Operations for the three months ended March 31, 2002 and 2001. . . . . . . . . . . . . . . . . . . 1 Balance Sheet as of March 31, 2002 and December 31, 2001. . . . . . . . . . . . . . . . . . . . . . 2 Statement of Cash Flows for the three months ended March 31, 2002 and 2001. . . . . . . . . . . . . . . . . . . 3 Statement of Stockholders' Equity for the three months ended March 31, 2002. . . . . . . . . . . . . . . . . 4 Notes to the Consolidated Financial Statements. . . . . . . . .5 SUN WORLD INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS Statement of Operations for the three months ended March 31, 2002 and 2001. . . . . . . . . . . . . . . .14 Balance Sheet as of March 31, 2002 and December 31, 2001. . . . . . . . . . . . . . . . . . . . . .15 Statement of Cash Flows for the three months ended March 31, 2002 and 2001. . . . . . . . . . . . . . . .16 Statement of Stockholder's Equity for the three months ended March 31, 2002. . . . . . . . . . . . . .17 Notes to the Consolidated Financial Statements . . . . . . . .18 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . .19 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . .28 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 28 Page i CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS For the Three Months Ended March 31, --------------- (In thousands except per share data) 2002 2001 ---- ---- Revenues $ 7,750 $ 7,371 Special litigation recovery - 7,929 -------- --------- Total revenues and special litigation recovery 7,750 15,300 -------- --------- Costs and expenses: Cost of sales 6,253 7,941 General and administrative 3,238 3,249 Non-recurring compensation expense - 5,537 Depreciation and amortization 726 834 -------- --------- Total costs and expenses 10,217 17,561 -------- --------- Operating loss (2,467) (2,261) Interest expense, net 4,783 4,688 -------- --------- Net loss before income taxes (7,250) (6,949) Income tax expense 23 30 -------- --------- Net loss (7,273) (6,979) Less: Preferred stock dividends 281 113 Imputed dividend on preferred stock 246 73 -------- --------- Net loss applicable to common stock $ (7,800) $ (7,165) ========= ========= Basic and diluted net loss per common share $ (0.22) $ (0.20) ========= ========= Basic and diluted weighted average shares outstanding 36,140 35,691 ========= ========= See accompanying notes to the consolidated financial statements. Page 1 CADIZ INC. CONSOLIDATED BALANCE SHEET (Unaudited) March 31, December 31, ($ in thousands) 2002 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 404 $ 1,458 Accounts receivable, net 4,203 6,327 Inventories 20,838 13,027 Prepaid expenses and other 739 788 -------- -------- Total current assets 26,184 21,600 Property, plant, equipment and water programs, net 164,598 165,297 Other assets 12,137 11,378 -------- -------- $202,919 $198,275 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,671 $ 11,758 Accrued liabilities 8,670 5,680 Bank overdraft - 410 Revolving credit facility 2,900 - Long-term debt, current portion 38,767 4,960 -------- -------- Total current liabilities 57,008 22,808 Long-term debt 116,527 141,429 Deferred income taxes 5,447 5,447 Other liabilities 1,074 930 Contingencies Series D redeemable convertible preferred stock - $0.01 par value: 5,000 shares authorized; shares issued and outstanding - 5,000 at March 31, 2002 and December 31, 2001 4,317 4,243 Series E-1 and E-2 redeemable convertible preferred stock - $0.01 par value: 7,500 shares authorized; shares issued and outstanding - 7,500 at March 31, 2002 and December 31, 2001 5,888 5,715 Stockholders' equity: Common stock - $0.01 par value; 70,000,000 shares authorized; shares issued and outstanding - 36,230,241 at March 31, 2002 and 36,070,834 at December 31, 2001 362 361 Additional paid-in capital 154,631 152,404 Accumulated deficit (142,335) (135,062) -------- -------- Total stockholders' equity 12,658 17,703 -------- -------- $ 202,919 $ 198,275 ========= ========= See accompanying notes to the consolidated financial statements. Page 2 CADIZ INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Months Ended March 31, -------------- ($ in thousands) 2002 2001 ---- ---- Cash flows from operating activities: Net loss $ (7,273) $ (6,979) Adjustments to reconcile net loss from operations to cash used for operating activities: Depreciation and amortization 1,773 1,529 Gain on sale of assets (45) (6) Land received in litigation recovery - (2,000) Shares of KADCO stock earned for services (313) (313) Compensation charge for deferred stock units 154 117 Non-recurring compensation expense - 5,537 Changes in operating assets and liabilities: Decrease in accounts receivable 2,124 2,022 Increase in inventories (6,359) (5,783) Decrease (increase) in prepaid expenses and other 48 (92) Decrease in accounts payable (5,086) (1,787) Increase in accrued liabilities 3,060 1,853 (Decrease) increase in other liabilities (8) 28 -------- -------- Net cash used for operating activities (11,925) (5,874) Cash flows from investing activities: Additions to property, plant and equipment (190) (479) Additions to water programs (221) (439) Additions to developing crops (1,002) (805) Proceeds from disposal of property, plant and equipment 45 7 Increase in other assets (746) (172) -------- -------- Net cash used for investing activities (2,114) (1,888) -------- -------- Cash flows from financing activities: Net proceeds from issuance of stock 638 170 Principal payments on long-term debt (143) (466) Net proceeds from short-term debt 12,900 3,625 Decrease in bank overdraft (410) - -------- -------- Net cash provided by financing activities 12,985 3,329 -------- -------- Net decrease in cash and cash equivalents (1,054) (4,433) Cash and cash equivalents, beginning of period 1,458 4,768 -------- -------- Cash and cash equivalents, end of period $ 404 $ 335 ========= ======== See accompanying notes to the consolidated financial statements. Page 3 CADIZ INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) For the Three Months Ended March 31, 2002 ($ in thousands) Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity ------ ------ ------- ---------- ------------ Balance as of December 31, 2001 36,070,834 $ 361 $ 152,404 $ (135,062) $ 17,703 Exercise of stock options 118,500 1 637 - 638 Issuance and repricing of warrants to lender - - 1,766 - 1,766 Preferred stock dividend - - (281) - (281) Payment of preferred stock dividends with common stock 40,907 - 351 - 351 Imputed dividend from warrants and deferred beneficial conversion feature - - (246) - (246) Net loss - - - (7,273) (7,273) -------- ----- --------- --------- ------- Balance as of March 31, 2002 36,230,241 $ 362 $ 154,631 $(142,335) $ 12,658 ========== ===== ========= ========== ========= See accompanying notes to the consolidated financial statements. Page 4 NOTE 1 - BASIS OF PRESENTATION ------------------------------ The Consolidated Financial Statements have been prepared by Cadiz Inc., sometimes referred to as "Cadiz" or "the Company", without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2001. The foregoing Consolidated Financial Statements include the accounts of the Company and its 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 period presentation. The results of operations for the three months ended March 31, 2002 are not indicative of the results to be expected for the full fiscal year as Sun World's harvest seasons and revenues are seasonal in nature. See Note 2 to the Consolidated Financial Statements included in the Company's latest Form 10-K for a discussion of the Company's accounting policies. NOTE 2 - INVENTORIES -------------------- Inventories consist of the following (dollars in thousands): March 31, December 31, 2002 2001 ---- ---- Growing crops $ 17,608 $ 10,174 Harvested product 95 218 Materials and supplies 3,135 2,635 -------- ------- $ 20,838 $ 13,027 ======== ======== NOTE 3 - LONG-TERM DEBT ----------------------- CADIZ OBLIGATIONS As of March 31, 2002, Cadiz was obligated for approximately $10.1 million under a senior term loan facility and $25 million under a $25 million revolving credit facility with the same lender. In the first quarter of 2002, the Company completed a one-year extension of both facilities extending the maturity dates to January 31, 2003 and increasing the revolving credit facility to $25 million. $10 million of the Cadiz' revolving credit facility is convertible into 1,250,000 shares of stock any time prior to January 2003 at the election of the lender. In connection with obtaining the extension of the term loan and revolving credit facility and the increase in the revolving credit facility, the Company repriced certain warrants previously issued and issued certain additional warrants to purchase shares of the Company's Page 5 common stock. The estimated fair value of the warrants issued and repriced was calculated using the Black Scholes option pricing model and was recorded as a debt discount and is being amortized over the remaining term of the loan. SUN WORLD OBLIGATIONS In April 1997, Sun World issued $115 million of Series A First Mortgage Notes through a private placement. The notes have subsequently been exchanged for Series B First Mortgage Notes, which are registered under the Securities Act of 1933 and are publicly traded. The First Mortgage Notes are secured by a first lien (subject to certain permitted liens) on substantially all of the assets of Sun World and its subsidiaries other than growing crops, crop inventories and accounts receivable and proceeds thereof, which secure the Revolving Credit Facility. The First Mortgage Notes mature April 15, 2004, but are redeemable at the option of Sun World, in whole or in part, at any time on or after April 15, 2001. The First Mortgage Notes include covenants that do not allow for the payment of dividends by the Company or by Sun World other than out of cumulative net income. The First Mortgage Notes are also secured by the guarantees of Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and Sun World International de Mexico S.A. de C.V. (collectively, the "Sun World Subsidiary Guarantors") and by the Company. The Company also pledged all of the stock of Sun World as collateral for its guarantee. Sun World and the Sun World Subsidiary Guarantors are all direct and indirect wholly-owned subsidiaries of the Company. The guarantees by the Sun World Subsidiary Guarantors are full, unconditional, and joint and several. Sun World and the Sun World Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company other than inconsequential subsidiaries. Additionally, management believes that the direct and indirect non-guarantor subsidiaries of Cadiz are inconsequential, both individually and in the aggregate, to the financial statements of the Company for all periods presented. Page 6 CONDENSED CONSOLIDATING FINANCIAL INFORMATION Condensed consolidating financial information as of and for the three months ended March 31, 2002 and 2001 and consolidating balance sheet information as of December 31, 2001 for the Company is as follows (in thousands): Consolidating Statement of Operations Information Quarter Ended March 31, 2002 Cadiz Sun World Eliminations Consolidated -------- --------- ------------ ------------ Revenues $ 482 $ 7,743 $ (475) $ 7,750 Costs and expenses: Cost of sales 31 6,322 (100) 6,253 General and administrative 1,406 2,207 (375) 3,238 Depreciation and amortization 227 499 - 726 ------- ------- ------ -------- Total costs and expenses 1,664 9,028 (475) 10,217 ------- ------- ------ -------- Operating loss (1,182) (1,285) - (2,467) Interest expense, net 794 4,032 (43) 4,783 ------- ------- ------ -------- Net loss before income taxes (1,976) (5,317) 43 (7,250) Income tax expense 2 21 - 23 ------- ------- ------ -------- Net loss (1,978) (5,338) 43 (7,273) Less: Preferred stock dividends 281 - - 281 Imputed dividend on preferred stock 246 - - 246 ------- ------- ------ -------- Net loss applicable to common stock $ (2,505) $ (5,338) $ 43 $ (7,800) ======== ======== ======= ======== Page 7 Consolidating Balance Sheet Information March 31, 2002 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 404 $ - $ 404 Accounts receivable, net - 4,203 - 4,203 Due from affiliate 20,432 - (20,432) - Inventories - 21,040 (202) 20,838 Prepaid expenses and other 175 564 - 739 ------- -------- -------- ------- Total current assets 20,607 26,211 (20,634) 26,184 Property, plant, equipment and water programs, net 41,324 123,274 - 164,598 Other assets 4,814 7,323 - 12,137 ------- -------- -------- ------- $ 66,745 $ 156,808 $ (20,634) $202,919 ======== ======== ========= ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,432 $ 5,239 $ - $ 6,671 Accrued liabilities 864 7,806 - 8,670 Due to affiliate - 20,432 (20,432) - Revolving credit facility - 2,900 - 2,900 Long-term debt, current portion 33,580 5,187 - 38,767 ------- -------- -------- ------- Total current liabilities 35,876 41,564 (20,432) 57,008 Long-term debt - 116,527 - 116,527 Deferred income taxes - 5,447 - 5,447 Other liabilities 443 631 - 1,074 Losses in excess of investment in subsidiary 7,169 - (7,169) - Series D redeemable preferred stock 4,317 - - 4,317 Series E-1 and E-2 redeemable preferred stock 5,888 - - 5,888 Stockholders' equity: Common stock 362 - - 362 Additional paid-in capital 154,631 38,316 (38,316) 154,631 Accumulated deficit (141,941) (45,677) 45,283 (142,335) ------- -------- -------- ------- Total stockholders' equity 13,052 (7,361) 6,967 12,658 ------- -------- -------- ------- $ 66,745 $ 156,808 $ (20,634) $202,919 ========= ========= ========= ======== Page 8 Consolidating Statement of Cash Flow Information Quarter Ended March 31, 2002 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ Net cash used for operating activities $ (853) $ (11,072) $ - $(11,925) ------- -------- -------- ------- Cash flows from investing activities: Additions to property, plant and equipment (28) (162) - (190) Additions to water programs (221) - - (221) Additions to developing crops (36) (966) - (1,002) Proceeds from disposal of property, plant and equipment - 45 - 45 Increase in other assets (416) (330) - (746) ------- -------- -------- ------- Net cash used for investing activities (701) (1,413) - (2,114) ------- -------- -------- ------- Cash flows from financing activities: Net proceeds from issuance of stock 638 - - 638 Principal payments on long-term debt - (143) - (143) Borrowings from intercompany revolver, net (9,074) 9,074 - - Net proceeds from short-term borrowings 10,000 2,900 - 12,900 Decrease in bank overdraft (410) - - (410) ------- -------- -------- ------- Net cash provided by financing activities 1,154 11,831 - 12,985 ------- -------- -------- ------- Net decrease in cash and cash equivalents (400) (654) - (1,054) Cash and cash equivalents, beginning of period 400 1,058 - 1,458 ------- -------- -------- ------- Cash and cash equivalents, end of period $ - $ 404 $ - $ 404 ======= ========= ======== ======= Page 9 Consolidating Balance Sheet Information December 31, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 400 $ 1,058 $ - $ 1,458 Accounts receivable, net 1 6,326 - 6,327 Due from affiliate 11,254 - (11,254) - Inventories - 13,229 (202) 13,027 Prepaid expenses and other 210 578 - 788 ------- -------- -------- ------- Total current assets 11,865 21,191 (11,456) 21,600 Property, plant, equipment and water programs, net 41,266 124,031 - 165,297 Other assets 4,432 6,946 - 11,378 ------- -------- -------- ------- $ 57,563 $ 152,168 $ (11,456) $198,275 ======== ========= ========= ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,330 $ 10,428 $ - $ 11,758 Accrued liabilities 791 4,889 - 5,680 Due to affiliate - 11,254 (11,254) - Bank overdraft 410 - - 410 Long-term debt, current portion - 4,960 - 4,960 ------- -------- -------- ------- Total current liabilities 2,531 31,531 (11,254) 22,808 Long-term debt 24,732 116,697 - 141,429 Deferred income taxes - 5,447 - 5,447 Other liabilities 371 559 - 930 Losses in excess of investment in affiliate 2,066 - (2,066) - Series D redeemable preferred stock 4,243 - - 4,243 Series E-1 and E-2 redeemable preferred stock 5,715 - - 5,715 Stockholders' equity: Common stock 361 - - 361 Additional paid-in capital 152,404 38,273 (38,273) 152,404 Accumulated deficit (134,860) (40,339) 40,137 (135,062) ------- -------- -------- ------- Total stockholders' equity 17,905 (2,066) 1,864 17,703 ------- -------- -------- ------- $ 57,563 $ 152,168 $ (11,456) $198,275 ========= ========= ========= ======== Page 10 Consolidating Statement of Operations Information Quarter Ended March 31, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ Revenues $ 478 $ 7,368 $ (475) $ 7,371 Special litigation recovery 7,929 - - 7,929 ------- -------- -------- ------- Total revenues and special litigation recovery 8,407 7,368 (475) 15,300 ------- -------- -------- ------- Costs and expenses: Cost of sales 30 8,051 (140) 7,941 General and administrative 1,514 2,110 (375) 3,249 Non-recurring compensation expense 2,584 2,953 - 5,537 Depreciation and amortization 288 546 - 834 ------- -------- -------- ------- Total costs and expenses 4,416 13,660 (515) 17,561 ------- -------- -------- ------- Operating profit (loss) 3,991 (6,292) 40 (2,261) Interest expense, net 812 3,914 (38) 4,688 ------- -------- -------- ------- Net income (loss) before income taxes 3,179 (10,206) 78 (6,949) Income tax expense - 30 - 30 ------- -------- -------- ------- Net income (loss) 3,179 (10,236) 78 (6,979) Less: Preferred stock dividends 113 - - 113 Imputed dividend on preferred stock 73 - - 73 ------- -------- -------- ------- Net loss applicable to common stock $ 2,993 $ (10,236) $ 78 $ (7,165) ========= ========= ======== ======== Page 11 Consolidating Statement of Cash Flow Information Quarter Ended March 31, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ Net cash provided by (used for) operating activities $ 4,411 $ (10,285) $ - $ (5,874) ------- -------- -------- ------- Cash flows from investing activities: Additions to property, plant and equipment (16) (463) - (479) Proceeds from disposal of property, plant and equipment - 7 - 7 Additions to water programs (439) - - (439) Additions to developing crops (44) (761) - (805) Increase in other assets (43) (129) - (172) ------- -------- -------- ------- Net cash used for investing activities (542) (1,346) - (1,888) ------- -------- -------- ------- Cash flows from financing activities: Net proceeds from issuance of stock 170 - - 170 Principal payments on long-term debt (250) (216) - (466) Borrowings from intercompany revolver, net (6,888) 6,888 - - Net proceeds from short-term borrowings - 3,625 - 3,625 ------- -------- -------- ------- Net cash (used for) provided by financing activities (6,968) 10,297 - 3,329 ------- -------- -------- ------- Net decrease in cash and cash equivalents (3,099) (1,334) - (4,433) Cash and cash equivalents, beginning of period 3,099 1,669 - 4,768 ------- -------- -------- ------- Cash and cash equivalents, end of period $ - $ 335 $ - $ 335 ======= ======== ======== ======= Page 12 NOTE 4 - NON-RECURRING COMPENSATION EXPENSE ------------------------------------------- In March 2001, the Company issued 564,163 deferred stock units to certain senior managers of Cadiz and Sun World. These deferred stock units were issued in exchange for the cancellation of 1,055,000 fully vested options to purchase the Company's common stock held by the senior managers. 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 and no cash was expended in connection with the issuance of the deferred stock units. NOTE 5 - SPECIAL LITIGATION RECOVERY ------------------------------------ In March 2001, the Company and Waste Management executed a settlement agreement to fully 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 approximately 7,000 acres of real property valued at approximately $2 million in eastern San Bernardino County primarily adjacent to the Cadiz Program property. Net proceeds from the settlement are included in the Company's statement of operations under the caption "Special Litigation Recovery". NOTE 6 - NET LOSS PER COMMON SHARE ---------------------------------- Basic Earnings Per Share (EPS) is computed by dividing the net loss, after deduction for preferred dividends either accrued or imputed, if any by the weighted-average common shares outstanding. Options, deferred stock units, warrants, convertible debt, and preferred stock that are convertible into shares of the Company's common stock were not considered in the computation of diluted EPS because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 4.4 million shares and 2.3 million shares for the three months ended March 31, 2002 and 2001, respectively. NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS ----------------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, ("SFAS No. 142") "Goodwill and Other Intangible Assets". Under SFAS No. 142 goodwill and intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement. The adoption of SFAS No. 142, effective at the beginning of fiscal 2002, did not have a material impact upon the Company's financial position or results of operations. Page 13 SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended March 31, ($ in thousands) 2002 2001 ---- ---- Revenues $ 7,743 $ 7,368 -------- -------- Costs and expenses: Cost of sales 6,322 8,051 General and administrative 2,207 2,112 Non-recurring compensation expense - 2,953 Depreciation and amortization 499 546 -------- -------- Total costs and expenses 9,028 13,662 Operating loss (1,285) (6,294) Interest expense, net 4,032 3,914 -------- -------- Net loss before income taxes (5,317) (10,208) Income tax expense 21 28 -------- -------- Net loss $ (5,338) $(10,236) ======== ======== See accompanying notes to the consolidated financial statements. Page 14 SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED BALANCE SHEET (Unaudited) March 31, December 31, ($ in thousands) 2002 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 404 $ 1,058 Accounts receivable, net 4,203 6,326 Inventories 21,040 13,229 Prepaid expenses and other 564 578 -------- -------- Total current assets 26,211 21,191 Property, plant, equipment, and water programs, net 123,274 124,031 Other assets 7,323 6,946 -------- -------- Total assets $ 156,808 $ 152,168 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 5,239 $ 10,428 Accrued liabilities 7,806 4,889 Due to parent 20,432 11,254 Revolving credit facility 2,900 - Long-term debt, current portion 5,187 4,960 -------- -------- Total current liabilities 41,564 31,531 Long-term debt 116,527 116,697 Deferred income taxes 5,447 5,447 Other liabilities 631 559 Contingencies Stockholder's equity: Common stock, $0.01 par value, 300,000 shares authorized; 42,000 shares issued and outstanding - - Additional paid-in capital 38,316 38,273 Accumulated deficit (45,677) (40,339) -------- -------- Total stockholder's equity (7,361) (2,066) -------- -------- Total liabilities and stockholder's equity $ 156,808 $ 152,168 ========= ========= See accompanying notes to the consolidated financial statements. Page 15 SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, ($ in thousands) 2002 2001 ---- ---- Cash flows from operating activities: Net loss $ (5,338) $ (10,236) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 942 919 Gain on disposal of assets (45) (6) Shares of KADCO stock earned for services (313) (313) Compensation charge for deferred stock units 80 66 Non-recurring compensation expense - 2,953 Changes in operating assets and liabilities: Decrease in accounts receivable 2,123 2,020 Increase in inventories (6,359) (5,741) Decrease (increase) in prepaid expenses and other 14 (93) Decrease in accounts payable (5,189) (1,877) Increase in accrued liabilities 2,917 1,908 Increase in due to parent 104 88 (Decrease) increase in other liabilities (8) 27 ---------- ---------- Net cash used for operating activities (11,072) (10,285) ---------- ---------- Cash flows from investing activities: Additions to property, plant, equipment, and water programs (162) (463) Additions to developing crops (966) (761) Proceeds from disposal of property, plant and equipment 45 7 Increase in other assets (330) (129) ---------- ---------- Net cash used for investing activities (1,413) (1,346) ---------- ---------- Cash flows from financing activities: Principal payments on long-term debt (143) (216) Borrowings from intercompany revolver, net 9,074 6,888 Proceeds from short-term borrowings 2,900 3,625 ---------- ---------- Net cash provided by financing activities 11,831 10,297 ---------- ---------- Net decrease in cash and cash equivalents (654) (1,334) Cash and cash equivalents at beginning of period 1,058 1,669 ---------- ---------- Cash and cash equivalents at end of period $ 404 $ 335 ========== ========= See accompanying notes to the consolidated financial statements. Page 16 SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (UNAUDITED) For the Three Months Ended March 31, 2002 ($ in thousands) Additional Total Common Stock Paid-in Accumulated Stockholder's Shares Amount Capital Deficit Equity ------ ------ ------- ---------- ------------- Balance as of December 31, 2001 42,000 $ - $ 38,273 $ (40,339) $ (2,066) Revaluation of derivative for warrants issued by parent - - 43 - 43 Net loss - - - (5,338) (5,338) ------- ----- -------- ---------- --------- Balance as of March 31, 2002 42,000 $ - $ 38,316 $ (45,677) $ (7,361) ======= ===== ======== ========== ========= See accompanying notes to the consolidated financial statements. Page 17 SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION ------------------------------ The Consolidated Financial Statements have been prepared by Sun World International, Inc. and its subsidiaries, collectively referred to as "Sun World" without audit and should be read in conjunction with the Sun World Consolidated Financial Statements and notes thereto included in the Cadiz Inc. Form 10-K for the year ended December 31, 2001. The foregoing Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, which Sun World considers necessary for a fair presentation. The results of operations for the three months ended March 31, 2002 are not indicative of the results to be expected for the full fiscal year as Sun World's harvest seasons and revenues are seasonal in nature. See Note 2 to the Sun World Consolidated Financial Statements included in the Cadiz Inc. latest Form 10-K for a discussion of Sun World's accounting policies. NOTE 2 - INVENTORIES -------------------- Inventories consist of the following (dollars in thousands): March 31, December 31, 2002 2001 ---- ---- Growing crops $ 17,810 $ 10,376 Harvested product 95 218 Materials and supplies 3,135 2,635 --------- --------- $ 21,040 $ 13,229 ========= ========= NOTE 3 - NON-RECURRING COMPENSATION EXPENSE ------------------------------------------ In March 2001, Cadiz issued 300,860 deferred stock units to certain senior managers of Sun World. These deferred stock units were issued in exchange for the cancellation of 565,000 fully vested options to purchase Cadiz common stock held by the senior managers. Each deferred stock unit is exchangeable for one share of Cadiz common stock at the end of the deferral period elected by the holder. Sun World recorded a one-time charge and a contribution to capital by Cadiz of $2,953,000 in connection with the issuance of the deferred stock units. No cash was expended in connection with the issuance of the deferred stock units. Page 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) RESULTS OF OPERATIONS The financial statements set forth herein as of and for the three months ended March 31, 2002 and 2001 reflect the results of our operations and the operations of our wholly-owned subsidiaries including Sun World. A summary of the Sun World elements which our management believes is essential to an analysis of the results of operations for such periods is presented below. For purposes of this summary, the term Sun World will be used, when the context so requires, with respect to the operations and activities of our Sun World subsidiary, and the term Cadiz will be used, when the context so requires, with respect to our operations and activities that do not involve Sun World. Our net income or loss in future fiscal periods will be largely reflective of (a) the operations of our water development activities including the Cadiz Groundwater Storage and Dry-Year Supply Program and (b) the operations of Sun World including its international expansion. Sun World conducts its operations through four operating divisions: farming, packing, marketing and proprietary product development. Net income from farming operations varies from year to year primarily due to yield and pricing fluctuations which can be significantly influenced by weather conditions, and are, therefore, generally subject to greater annual variation than Sun World's other divisions. However, the geographic distribution of Sun World's farming operations within California and the diversity of its crop mix make it unlikely that adverse weather conditions would affect all of Sun World's properties or all of its crops in any single year. Nevertheless, net profit from Sun World's packing, marketing and proprietary product development operations tends to be more consistent from year to year than net profit from Sun World's farming operations. Packing and marketing revenues from third party growers currently represent less than 10% of our total revenues. Sun World has entered into agreements domestically and internationally to license selected proprietary fruit varieties and continues to pursue additional domestic and international licensing opportunities. License revenues currently represent less than 10% of our total revenues. 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 complete and implement proposed transactions with the Metropolitan Water District of Southern California and Kingdom Agricultural Development Company, price and yield fluctuations in our agricultural operations and seasonality. See additional discussion under the heading "Certain Trends and Uncertainties" in Item 7 of the Company's Form 10-K for the year ended December 31, 2001. Page 19 THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 Our agricultural operations are impacted by the general seasonal trends that are characteristic of the agricultural industry. Sun World has historically received the majority of its net income during the months of June to October following the harvest and sale of its table grape and stonefruit crops. Due to this concentrated activity, Sun World has 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 the Company's four main divisions (before elimination of any interdivisional charges) as well as the categories of costs and expenses incurred which are not included within the divisional results (in thousands): Three Months Ended March 31, 2002 2001 ---- ---- Divisional net income (loss): Farming $ 856 $ (740) Packing (125) (56) Marketing (309) (316) Proprietary product development 558 148 -------- --------- 980 (964) General and administrative 2,721 2,857 Special litigation - (7,929) Non-recurring compensation expense - 5,537 Depreciation and amortization 726 834 Interest expense, net 4,783 4,688 Income tax expense 23 28 -------- --------- Net loss $ (7,273) $ (6,979) ======== ========= FARMING OPERATIONS. Net income from farming operations totaled $0.9 million for the three months ended March 31, 2002, compared to a net loss of $0.7 million for the three months ended March 31, 2001. Farming revenues were $5.5 million and farming expenses were $4.6 million for the first quarter of 2002. For the first quarter of 2001, farming revenues were $5.8 million and farming expenses were $6.5 million. Farming revenues and expenses generated in the first quarters of 2002 and 2001 were primarily due to harvesting and selling navel oranges and lemons. During the quarter ended March 31, 2002, the increase in farming results compared to 2001 primarily resulted from a 28% increase in F.O.B. prices for navel oranges coupled with a 21% decrease in cost per unit due to higher yields per acre. The increase in yield per acre was partially due to the removal of approximately 200 lower producing acres of navels at the conclusion of the 2001 harvest. Page 20 PACKING OPERATIONS. For the quarter ended March 31, 2002, Sun World's packing and handling facilities contributed revenues of $2.4 million offset by $2.5 million of expenses for a net loss of $0.1 million equal to the net loss of $0.1 million for the quarter ended March 31, 2001. For the first quarter of 2001, Sun World generated revenues of $2.6 million and expenses of $2.7 million. Packing operations generally reflect a loss in the first quarter of the year as less than 10% of the annual volume is packed or handled during the first quarter. This limited volume level does not provide adequate revenues to cover fixed infrastructure costs associated with operating the packing and handling facilities. Units packed during the quarter totaled 0.6 million in 2002 compared to 0.7 million in 2001. MARKETING OPERATIONS. Sun World's marketing operations include the selling, merchandising and promoting of Sun World grown products, as well as providing these services for third party growers. Marketing revenues of $0.5 million were offset by marketing expenses of $0.8 million resulting in a net loss of $0.3 million for both the first quarter of 2002 and the first quarter of 2001. Similar to the packing operations, marketing operations ordinarily reflect a loss during the first quarter of the year as less than 10% of the annual volume of units marketed are sold during the quarter. During the three months ended March 31, 2002, a total of approximately 0.6 million units was sold, consisting primarily of Sun World-grown lemons and navel oranges, and citrus from domestic third party growers in Coachella compared to 0.8 million units in 2001. The decrease in units marketed was primarily due to reduced yields for Sun World-farmed lemons. PROPRIETARY PRODUCT DEVELOPMENT. Sun World has a long history of product innovation, and its research and development center maintains a fruit breeding program that has introduced dozens of proprietary fruit varieties. During the three months ended March 31, 2002, net income from proprietary product development totaled $0.6 million consisting of revenues of $1.1 million offset by expenses of $0.5 million. For the three months ended March 31, 2001, net income from proprietary product development was $0.1 million consisting of revenues of $0.5 million offset by expenses of $0.4 million. Revenues increased in 2002 compared to 2001 primarily due to increased international royalties from improved table grape yields for acreage under license and a delay in the South Africa harvest season, which effectively shifted a portion of South African revenues from the fourth quarter of 2001 to the first quarter of 2002. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the three months ended March 31, 2002 totaled $2.7 million compared to $2.9 million for the three months ended March 31, 2001. The decrease is due primarily to incentive bonuses for senior executives awarded in February 2001. 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 an exclusive option to receive, at no cost to Cadiz, up to approximately 7,000 acres of real property valued at approximately $2 million in eastern San Bernardino County primarily adjacent to the Cadiz Program property. In April 2001, Cadiz exercised the option and as a consequence acquired Page 21 the subject property. The settlement resulted in net proceeds of $7.9 million for 2001. NON-RECURRING COMPENSATION. In March 2001, we issued 564,163 deferred stock units to certain senior managers of Cadiz and Sun World. These deferred stock units were issued in exchange for the cancellation of 1,055,000 fully vested options to purchase our common stock held by the senior managers. 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. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the three months ended March 31, 2002 and 2001 totaled $0.7 million compared to $0.8 million. The $0.1 million decrease is due primarily to the timing of crop harvests coupled with lower depreciation costs due to the removal of certain underperforming crops during the fourth quarter of 2001. INTEREST EXPENSE, NET. Net interest expense totaled $4.8 million during the three months ended March 31, 2002, compared to $4.7 million during the same period in 2001. The following table summarizes the components of net interest expense for the two periods (in thousands): Three Months Ended March 31, -------- 2002 2001 ---- ---- Interest on outstanding debt - Sun World $ 3,597 $ 3,559 Interest on outstanding debt - Cadiz 146 463 Amortization of financing costs 1,048 696 Interest income (8) (30) -------- -------- $ 4,783 $ 4,688 ======== ======== The increase in interest on outstanding debt during the first quarter of 2002 is primarily due to (a) increased intercompany revolver borrowings at Sun World partially offset by lower interest rates on its variable rate debt, (b) amortization of warrants issued for the extension and increase in the Cadiz credit facilities, partially offset by (c) lower interest expenses at Cadiz due to an increased intercompany loan balance with Sun World coupled with lower rates on variable rate debt. Financing costs, which include legal fees and warrants, are amortized over the life of the debt agreement. LIQUIDITY AND CAPITAL RESOURCES 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. Page 22 As of March 31, 2002, we were obligated for approximately $10.1 million under a senior term loan facility and $25 million under a $25 million revolving credit facility with the same lender. In the first quarter of 2002, we completed an extension of both facilities to a maturity date of January 31, 2003 and increased our revolving credit facility to $25 million. $10 million of our revolving credit facility is convertible into 1,250,000 shares of our stock any time prior to January 2003 at the election of the lender. Currently, the lender holds a senior deed of trust on substantially all of our non-Sun World assets under the term loan facility and a second lien on our non-Sun World assets under our revolving credit facility. We have historically structured our financing arrangement with the lender with a view toward effective implementation of the Cadiz Program. While we currently anticipate repayment of these facilities with monies to be received under the Cadiz Program, we may, if we deem appropriate, replace or renegotiate the terms of these facilities to accommodate other developments such as delays in the timetable for regulatory approvals or litigation related to regulatory approvals of the Cadiz Program. We retain the right to maintain $25.5 million of senior debt secured by the Cadiz Program area lands pursuant to the definitive economic terms for the Cadiz Program agreed with Metropolitan, as described under "Outlook" below. In December 2000, we issued $5 million of Series D Convertible Preferred Stock. The stock is convertible into 625,000 shares of our common stock any time prior to July 2004 at the election of the holder. We also have the right to convert the preferred stock, but only when the closing price of our common stock has exceeded $12 per share for 30 consecutive trading days. The preferred stock will be redeemed in July 2004 if it is still outstanding. In October and November 2001, we issued an aggregate of $7.5 million of Series E-1 and E-2 Convertible Preferred Stock in $3.75 million issuances respectively. The Series E-1 and E-2 preferred stock is convertible into an aggregate of 1,000,000 shares of our common stock at any time prior to July 2004 at the election of the holder. We also have the right to convert the Series E-1 and E-2 preferred stock, but only when the closing price of our common stock has exceeded $10.50 per share for 30 consecutive trading days. The preferred stock will be redeemed in July 2004 if still outstanding. As we continue to actively pursue our business strategy, additional financing specifically in connection with our water programs will be required. Responsibility for funding the design, construction and program implementation costs of the capital facilities for the Cadiz Program will, under currently developed principles and terms, be shared by Cadiz and Metropolitan as described below. We plan to use monies to be received from Metropolitan for its initial payment for 600,000 acre-feet of groundwater storage as well as other financing arrangements to fund Cadiz' share of the cost of the program capital facilities. SUN WORLD OBLIGATIONS. Under Sun World's historical working capital cycle, working capital is required primarily to finance the costs of growing and harvesting crops, which generally occur from January through September with a peak need in June. Sun World harvests and sells the majority of its crops during the period from June through October, when it receives the majority of its revenues. In order to bridge the gap between incurrence of expenditures and receipt of revenues, large cash outlays are required each year which are financed through a $30 million revolving credit agreement guaranteed by Cadiz. Page 23 In November 2001, Sun World renewed its revolving credit facility through the 2002 growing season with a maturity date of November 2002. Amounts eligible to be borrowed under the revolving credit facility are based upon a borrowing base of eligible accounts receivable and inventory balances. Maximum availability under the revolving credit facility varies throughout the year with a maximum of $30 million available during the peak borrowing periods of April to July. The revolving credit facility is secured by accounts receivable, inventory, and the proceeds thereof, requires Sun World to meet certain financial covenants, and is guaranteed by Cadiz. Amounts borrowed under the facility will accrue interest at either prime plus 1.0% or LIBOR plus 2.50% at our election. As of March 31, 2002, $2.9 million was outstanding under the revolving credit agreement. Additionally, Sun World has an intercompany revolving credit agreement with Cadiz for seasonal working capital needs, as needed. $18.3 million was outstanding under the intercompany revolver as of March 31, 2002. In addition, Sun World has outstanding $115 million of First Mortgage Notes which will mature on April 15, 2004 and are publicly traded and registered under the Securities Act of 1933. The Sun World notes became redeemable at the option of Sun World, in whole or in part, at any time on or after April 15, 2001. Interest accrues at the rate of 11-1/4% per annum and is payable semi-annually on April 15th and October 15th of each year. The Sun World notes are secured by a first lien (subject to certain permitted liens) on substantially all of the assets of Sun World and its subsidiaries, other than growing crops, crop inventories and accounts receivable and proceeds thereof, which secure Sun World's revolving credit facility, and certain real property pledged to third parties. The Sun World notes are also secured by the guarantee of Cadiz and the pledge by Cadiz of all of the stock of Sun World. The Sun World notes include covenants that do not allow for the payment of dividends by us or by Sun World other than out of cumulative net income. CASH USED FOR OPERATING ACTIVITIES. Cash used for operating activities totaled $11.9 million for the three months ended March 31, 2002, as compared to $5.9 million for the three months ended March 31, 2001. The increase in cash used for operating activities is primarily due to (a) the $6 million received in connection with the Rail-Cycle litigation during the first quarter of 2001, and (b) a larger reduction in accounts payable as the accounts payable balance at December 31, 2001 was higher than at December 31, 2000, partially offset by (c) lower inventory balances due to the removal of approximately 700 acres of underperforming crops during the fourth quarter of 2001. CASH USED FOR INVESTING ACTIVITIES. Cash used for investing activities totaled $2.1 million for the three months ended March 31, 2002, as compared to $1.9 million for the same period in 2001. The increase was primarily due to increased capital expenditures for developing crops and increased capitalized costs for Sun World's patents and trademarks, partially offset by decreased expenditures for property, plant and equipment and water programs. CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing activities totaled $13.0 million for the three months ended March 31, 2002, consisting primarily of $2.9 million of borrowings under Sun World's revolving credit facility and $10 million of additional borrowings under the Cadiz' revolving credit facility, compared to $3.6 million in 2001. Principal payments on long-term debt totaled $0.1 million for the three months ended March 31, 2002 compared to $0.5 million for the three months ended March 31, 2001. Net proceeds from the exercise of Page 24 stock options totaled $0.6 million during the three months ended March 31, 2002 compared to $0.2 million for the three months ended March 31, 2001. OUTLOOK We are actively pursuing the development of our water resources. Specifically, in April 2001, Cadiz and Metropolitan approved definitive economic terms and responsibilities for a 50- year agreement for the Cadiz Program. Under the Cadiz Program, Metropolitan will, during wet years or periods of excess supply, store surplus water from the Colorado River Aqueduct in the groundwater basin underlying our property. During dry years or times of reduced allocations from the Colorado River, the previously imported water, together with additional existing groundwater, will be extracted and delivered, via a conveyance pipeline, back to the aqueduct. The definitive terms will serve as the basis for a final agreement to be executed between Metropolitan and Cadiz. Execution of this final agreement will be subject to completion of the ongoing environmental review process for the Cadiz Program. Key provisions of the approved definitive terms for the Cadiz Program are as follows: * Over the 50-year term of the agreement, Metropolitan will store a minimum of 900,000 acre-feet of Colorado River Aqueduct water in our groundwater basin and purchase up to a minimum of 1,500,000 acre-feet of existing groundwater for transfer during dry years. The Cadiz Program will have the capacity to convey, either for storage or transfer, up to approximately 150,000 acre- feet in any given year. * During storage operations, Metropolitan will pay $50 per acre-foot for put of Colorado River water into storage and $40 per acre-foot for return of Colorado River water from storage, or a total of $90 per acre-foot to cycle water into and out of the basin. These fees will be adjusted by the Consumer Price Index (CPI). * As outlined above, Metropolitan's total minimum commitment for storage is 900,000 acre-feet. Metropolitan will pay for the initial 600,000 acre-feet of put and take activity upon final contract execution and completion of the environmental review process ($54 million before CPI adjustment). Metropolitan will pay for an additional 300,000 acre-feet of put and take activity at the earlier of actual usage or 30,000 acre- foot annual increments during years 5-14 of Cadiz Program operations ($2,700,000 per year before CPI adjustment). * For transfer operations, Metropolitan shall purchase 30,000 acre-feet per year of indigenous groundwater for 25 years at a $230 per acre-foot transfer fee, subject to a fair market value adjustment as described below. In addition, Cadiz may elect to either sell up to an additional 30,000 acre-feet per year of indigenous groundwater to third parties in Metropolitan's service area at fair market value, or require Metropolitan to purchase that amount of water at a fixed transfer fee of $230 per acre-foot. Accordingly, Metropolitan's total potential minimum commitment for the life of the Cadiz Program will be 1,500,000 acre-feet of indigenous groundwater. All transfers of indigenous groundwater, whether to Metropolitan or third parties, will be made in accordance with the terms and conditions of a Groundwater Monitoring and Page 25 Management Plan. * The transfer fee will reflect a "fair market value" adjustment, which shall be determined up to once a year. The transfer fee will be adjusted by one-half of any increase or decrease in the fair market value, above or below the transfer fee currently in place ($230 per acre- foot initially). Each increase or decrease in the transfer fee paid by Metropolitan may not exceed 15%. For example, if the fair market value at the first redetermination is $350 per acre-foot, then the adjusted transfer fee shall be $264 [the lesser of (a) $230 + 50% * ($350-$230) = $290 per acre-foot or (b) $230 * 15% = $264.50 per acre-foot]. * Our right to sell to third parties within Metropolitan's service area includes scheduled access to Metropolitan's system at the rate charged by Metropolitan for conveying water through its aqueduct and pipeline system (the wheeling rate) charged for "as available capacity", plus power costs and any standard water stewardship fee that is uniformly charged to Metropolitan member agencies or third parties. Depending on availability of system capacity, Metropolitan may elect to exchange other water for delivery to our customers and "bank" the water we have sold. * If indigenous water supplies are determined to exceed 1,700,000 acre-feet, Metropolitan shall have the first right of refusal to purchase one-half of that excess yield. * Cadiz groundwater meets all existing federal and state water quality standards. Metropolitan's Colorado River Aqueduct water meets all existing federal and state water quality standards. Metropolitan shall be responsible to ensure, at its expense, that Colorado River Aqueduct water introduced into our groundwater basin shall, at a minimum, meet all existing and potential future federal and state water quality standards applicable to the Colorado River Aqueduct. We shall be responsible to ensure, at our expense, that indigenous groundwater introduced into the Metropolitan delivery system shall at a minimum, meet all existing and potential future federal and state water quality standards. If both indigenous groundwater and stored Colorado River water exceed any future federal or state water quality standard, then the parties will share compliance with the new standard based pro rata on the contribution to exceeding the standard. * We have estimated the costs of the Cadiz Program facilities, including spreading basins, extraction wells, conveyance pipeline and a pumping plant, to be approximately $150 million. The parties will equally share these costs. Each party will be responsible for financing its portion of the capital costs. * Metropolitan will be responsible for operational costs of the Cadiz Program. However, we will assume pro rata operational costs associated with the sale of indigenous groundwater to third parties. Page 26 * Cadiz and Metropolitan shall share equally the capital costs required for mitigation at the outset of the Cadiz Program. Cadiz shall assume the ongoing annual costs of operating the Groundwater Monitoring and Management Plan and of maintaining the right to withdraw water from the basin underlying the Cadiz Program area. Metropolitan and the U.S. Bureau of Land Management, in cooperation with the U.S. Geological Survey and the National Park Service, issued the Final Environmental Impact Report/Environmental Impact Statement for the Cadiz Program in October 2001. In addition, the U.S. Fish and Wildlife Service issued a biological opinion in March 2002 which concluded that the Cadiz Program fully complies with the Endangered Species Act and will not adversely impact the desert tortoise. The next step in the environmental review process is completion of final actions by the U.S. Bureau of Land Management through the issuance of Records of Decision, which will be shortly followed by final actions by Metropolitan. We anticipate final actions related to the environmental review process to be completed by the end of the summer of 2002 after which construction of the Cadiz Program facilities may commence. In addition to the development of our water resources, we are actively involved in further agricultural development and reinvestment in our landholdings. Such development will be systematic and in furtherance of our business strategy to provide for maximization of the value of our assets. We also continually evaluate acquisition opportunities that are complimentary to our current portfolio of water and agricultural resources. In January 2002, we announced an agreement in principle with KADCO to combine the businesses of Sun World and KADCO. Following the proposed combination, KADCO's shareholders will have a 49.75% interest in the combined business, and Cadiz will retain an ownership interest of 50.25%. We intend to use the cash resources of the combined business both to recapitalize Sun World and to provide for future business expansion. The agreement in principle contemplates that, in the future, KADCO shareholders will have an opportunity to make an additional equity investment in the combined business. Should KADCO shareholders make this additional investment, we may choose to maintain a majority percentage ownership in the combined business through a proportionate matching investment. We believe that additional investment will help position the combined business for its planned future transformation into a publicly- traded company. The proposed combination is subject to the negotiation of definitive agreements and a number of important conditions. These conditions include obtaining consents of governmental authorities and third parties with whom we have contracts, including lenders, completing a "due diligence" review of the other's operations, and KADCO obtaining additional equity financing in order to complete the transaction. Historically, Sun World has serviced its indebtedness and met its seasonal working capital needs using available internal cash, its revolving credit facility and an intercompany revolver with Cadiz. Cadiz has met its ordinary working capital needs through a combination of available internal cash, quarterly management fee payments from Sun World, payments from Sun World under an agricultural lease where Sun World operates Cadiz' 1,600 acres of developed agricultural property at Cadiz, California, Cadiz' revolving credit facility, the exercise of outstanding stock options, and equity placements. Except for the foregoing, additional Page 27 intercompany cash payments between Sun World and Cadiz are subject to certain restrictions under their current lending arrangements. We may require additional cash beyond the amounts described in this section although we are not looking to raise additional working capital at this time. We may meet any such future requirements through a variety of means to be determined at the appropriate time. Such means may include equity or debt placements, or the sale or other disposition of assets. Equity placements would be undertaken only to the extent necessary so as to minimize the dilutive effect of any such placements upon our existing stockholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risks for the three months ended March 31, 2002 does not differ materially from that discussed under Item 7A of the Cadiz' Annual Report on Form 10-K for the year ended December 31, 2001. PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS See "Item 3. Legal Proceedings" included in Cadiz' Annual Report on Form 10-K for a complete discussion. ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended March 31, 2002, we amended the terms of our revolving credit and senior term facilities in order to extend the maturity dates of both facilities to January 31, 2003 and to increase the revolving credit facility from $15 million to $25 million. At its option, the lender at any time may convert up to $10 million outstanding under the revolving credit facility to our common stock at a rate equal to $8.00 per share, subject to standard anti-dilution adjustments. In connection with the amendment of the loan facilities, we amended 825,000 previously issued warrants to reduce the exercise price per share of such warrants to $1.75 and issued 250,000 new three-year warrants, all of which are currently exercisable. 125,000 of the 250,000 new warrants are exercisable at an initial exercise price of $8.80 per share and the remaining 125,000 warrants are exercisable at an initial exercise price of $8.73 per share. The exercise prices of the new and amended warrants are subject to standard anti- dilution adjustments. Also, the exercise prices of all the warrants will be reduced if we do not pay off all or part of our outstanding term and revolving loans by certain target dates. Specifically, if all loans are not repaid by July 31, 2002, then the exercise price of the warrants will be reduced by $0.25 if certain regulatory approvals for the Cadiz Program are obtained by June 30, 2002, or by $0.75 if the approvals are not so obtained. Further, if all loans are not repaid by Page 28 October 31, 2002, then the exercise prices of the warrants will be reduced by $0.25 if the approvals are obtained by June 30, 2002, or by $0.75 if the approvals are not so obtained. And finally, if the loans are not repaid in full by January 31, 2003, the exercise prices of the warrants will be reduced to $0.01. We believe that the issuance of the new warrants is 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. In May 2002, we supplemented the currently existing resale registration statement on Form S-3 for the amended warrants and filed a separate resale registration statement on Form S-3 for the new warrants. ITEM 3. - DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS The annual meeting of the stockholders of Cadiz was held on May 6, 2002. The stockholders took the following action at the meeting: 1. Elected Messrs. Keith Brackpool, Anthony Coelho, Murray H. Hutchison, Dwight W. Makins and Timothy J. Shaheen to Cadiz' Board of Directors. Messrs. Brackpool, Makins and Shaheen were elected by the vote of 28,688,214 in favor and 8,866 withheld and no broker non-votes. Mr. Coelho was elected by the vote of 28,684,214 in favor and 11,066 withheld and no broker non-votes. Mr. Hutchison was elected by the vote of 28,686,214 in favor and 10,866 withheld and no broker non-votes. 2. Ratified the selection by our Board of Directors of PricewaterhouseCoopers LLP to continue as our independent certified public accountants for fiscal 2002 by a vote of 28,624,414 in favor and 68,126 against, with 4,540 abstaining and no broker non-votes. ITEM 5. - OTHER INFORMATION Not applicable. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" included on Form 10-K for the year ended December 31, 2001. Page 29 B. REPORTS ON FORM 8-K * Report on Form 8-K dated January 18, 2002, describing the proposed combination of Sun World International, Inc. and Kingdom Agricultural Development Company. * Report on Form 8-K dated March 13, 2002, describing the extension and increase of Cadiz Inc.'s revolving credit agreement and term loan (extension only) with ING Baring (U.S.) Capital LLC. Page 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CADIZ INC. By: /s/ Keith Brackpool May 15, 2002 ------------------------------------------ ------------ Keith Brackpool, Chairman of the Board and Date Chief Executive Officer By: /s/ Stanley E. Speer May 15, 2002 --------------------------------------- ------------ Stanley E. Speer Date Chief Financial Officer Page 31