Note 6 - Long-Term Debt

12 Months Ended

Dec. 31, 2011

Debt Disclosure [Text Block]

NOTE 6 – LONG-TERM DEBT

At December 31, 2011 and 2010, the carrying amount of the Company’s outstanding debt is summarized as follows (dollars in thousands):

	December 31,
	2011			2010
Zero coupon secured convertible term loan due June 29, 2013.  Interest accruing at 5% per annum until June 29, 2009 and at 6% thereafter	$	56,673		$	51,412
Other loans		4			20
Debt discount		(4,641	)		(7,013	)
		52,036			44,419
Less current portion		4			16
	$	52,032		$	44,403

The Company estimates fair value of debt to be $52.357 million.

Pursuant to the Company’s loan agreements, annual maturities of long-term debt outstanding on December 31, 2011, are as follows:

Year	$	000’s
2012		4
2013		56,673
2014		-
	$	56,677

In June 2006, the Company entered into a $36.4 million five year zero coupon senior secured convertible term loan with Peloton Partners LLP (through an affiliate) and another lender (the “Term Loan”).  On April 16, 2008, the Company was advised that Peloton had assigned its interest in the Term Loan to an affiliate of Lampe Conway & Company LLC (“Lampe Conway”), and Lampe Conway subsequently replaced Peloton as administrative agent of the loan.  On June 4, 2009, the Company completed arrangements to amend the Term Loan with Lampe Conway which modified certain of the conversion features and extended the maturity date to June 29, 2013 with interest continuing to accrue at 6% per annum through maturity.  Further, the conversion feature was modified to allow up to $4.55 million of principal to be converted into 650,000 shares of the Company's Common Stock (“Common Stock”) at a conversion price of $7 per share, and the remaining principal and interest to be converted into shares of Common Stock at a conversion price of $35 per share.

On October 19, 2010, the Company closed a new $10 million working capital facility with Lampe Conway and other participating lenders (“the Lenders”). Under the terms of the new $10 million facility, the Company drew the first $5 million at closing (“First Tranche”).  Also upon closing, the Company was granted the option to draw up to an additional $5 million over the subsequent 12 months (“Second Tranche”).  The Company drew a total of $2 million on the Second Tranche prior to its expiration.  All interest on outstanding balances accrues at 6%, with no principal or interest payments required before the new facility’s June 29, 2013, maturity date, consistent with our existing term debt facility.

The First Tranche (including accrued interest) is convertible at any time into the Company’s common stock at a price of $13.50 per share and the Second Tranche (including accrued interest) is convertible into the Company’s common stock at $12.50 per share.

Also on October 19, 2010, the Company’s existing debt facility with the Lenders was modified as to certain of its conversion features.  $20.62 million of the existing convertible debt was changed to allow for up to $2.5 million of this amount to be converted at any time into our common stock at the price of $13.50 per share, with the remaining amount becoming non-convertible.  On June 30, 2011, $2 million of the $5 million available Second Tranche was drawn.  As a result of the Second Tranche draw, $4 million of the outstanding loan became convertible into 320,000 shares of the Company's common stock.  Further, approximately $10 million of the loan that was previously convertible into approximately 290,000 shares of the Company's common stock is no longer convertible.

The Term Loan is collateralized by substantially all of the assets of the Company, and contains representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens, pay dividends or make restricted payments, dispose of assets, make investments and merge or consolidate with another person.  However, while there are affirmative covenants, there are no financial maintenance covenants and no restrictions on the Company’s ability to issue additional common stock to fund future working capital needs.  The debt covenants associated with the loan were negotiated by the parties with a view towards the Company’s operating and financial condition as it existed at the time the agreements were executed.  At December 31, 2011, the Company was in compliance with its debt covenants.

As a result of the modifications of the convertible debt arrangements in June 2009 and October 2010, the change in conversion value between the original and modified instrument totaling approximately $3.2 million was recorded as additional debt discount with an offsetting amount recorded as additional paid-in capital.  Such debt discount is accreted to the redemption value of the instrument over the remaining term of the loan as additional interest expense.  In connection with the modification transaction in October 2010, the Company recorded a derivative liability related to the conversion option.  The fair value of the derivative liability was marked-to-market at the end of each reporting period and recorded as other income (expense).  On July 25, 2011, the Company entered into an amendment to the facility eliminating the availability to the Company of the unused $3 million portion of the facility.  As a result, the conversion option related to the unused portion of the facility no longer exists and a derivative liability is no longer being recorded.

The Company has analyzed all of the above provisions of the convertible loan and related agreements for embedded derivatives under generally accepted accounting principles and SEC rules.  The Company concluded that certain provisions of the convertible loan agreement, which were in effect prior to the first amendment date, are deemed to be derivatives.  Therefore, these embedded instruments were bifurcated from the host debt instrument and classified as a liability in the Company’s financial statements.  The Company prepared valuations for each of the deemed derivatives using a Black-Scholes option pricing model and recorded a liability of approximately $12.2 million on the June 30, 2006, loan funding date, with an offsetting discount to the convertible term loan.  This derivative liability was classified and recorded as part of long-term debt in the balance sheet.  The debt discount will be amortized to interest expense over the life of the loan using the effective interest amortization method.  The principal valuation assumptions are as follows:

Loan balance available for conversion:	$36.4 million
Expected term:	5 years
Cadiz Inc. common share price:	$	17.01
Volatility:		46	%
Risk-free Interest Rate:		5.18	%
Change in control probability:		10	%

The Company incurred $408,000 and $105,000 in 2006 and 2010, respectively, of outside legal expenses and lenders fees related to the negotiation and documentation of the loan, which is amortized over the life of the loan.