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 September 30, 1998
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 LAND COMPANY, INC.
(Exact name of registrant specified in its charter)
DELAWARE 77-0313235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Wilshire Boulevard, Suite 1600
Santa Monica, CA 90401-1111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 899-4700
CADIZ LAND COMPANY, INC.
(Former Name of Registrant)
Securities Registered Pursuant to Section 12(b) of the Act: None
Name of Each Exchange
Title of Each Class on Which Registered
-------------------- -----------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No
The number of shares outstanding of each of the Registrant's classes of Common
Stock at September 12, 1998 was 33,448,261 shares of Common Stock, par value
$0.01.
CADIZ INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998 Page
I. FINANCIAL STATEMENTS
A. Consolidated Statement of Operations
For the Three Months Ended September 30,
1998 and 1997.................................2
B. Consolidated Statement of Operations
For the Nine Months Ended September 30, 1998
and 1997..................................... 3
C. Consolidated Balance Sheet
As of September 30, 1998 and December 31,
1997..........................................4
D. Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 1998
and 1997..................................... 5
E. Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1998..6
F. Condensed Notes to the Consolidated Financial
Statements.........................................7
II. SUPPLEMENTARY INFORMATION
A. Management's Discussion and Analysis of
Financial Condition and Results of Operations......9
B. Other Information.................................23
C. Signatures....................................25
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30,1998 1997
---- ----
($ in thousands except per share data)
Revenues $45,596 $52,949
------- -------
Costs and expenses:
Cost of sales 37,588 38,316
Special litigation 447 183
General and administrative 3,207 2,949
Depreciation and amortization 4,546 3,946
------- -------
Total costs and expenses 45,788 45,394
------- -------
Operating (loss) profit (192) 7,555
Interest expense, net 4,702 3,937
------- -------
Net (loss) income (4,894) 3,618
Less: Preferred stock dividends - (9)
------ -------
Net (loss) income applicable to
common stock (4,894) 3,609
======== =======
Basic net (loss) income per
common share $ (.15) $ .11
======== =======
Diluted net (loss) income per
common share $ - $ .11
======== ========
Basic weighted average
shares outstanding 33,280 32,400
======== ========
Diluted weighted average
shares outstanding - 33,491
======== =======
See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF OEPRATIONS
(UNAUDITED)
For the Nine Months Ended September 30,1998 1997
---- ----
($ in thousands except per share data)
Revenues $73,699 $83,492
------- -------
Costs and expenses:
Cost of sales 59,555 63,487
Special litigation 1,093 563
General and administrative 8,481 8,775
Depreciation and amortization 6,559 6,291
------- -------
Total costs and expenses 75,688 79,116
------- -------
Operating (loss) income (1,989) 4,376
Interest expense, net 13,159 11,723
------- --------
Net loss (15,148) (7,347)
Less: Preferred stock dividends - (1,213)
------- -------
Net loss applicable to common stock (15,148) (8,560)
======= =======
Basic net loss per common share $ (.46) $ (.30)
======= =======
Basic weighted average shares
outstanding 33,069 28,400
====== ======
See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1998 1997
---- ----
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 766 $5,298
Accounts receivable, net 10,494 5,881
Inventories 17,805 13,838
Prepaid expenses and other 826 1,161
------- -------
Total current assets 29,891 26,178
Investment in partnership 6,552 6,327
Property, plant, equipment and
water programs, net 164,995 160,193
Other assets 10,121 10,351
------ -------
$211,559 $203,049
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,922 $8,517
Accrued liabilities 10,873 6,114
Revolving credit facility 2,700 -
Long-term debt, current portion 323 519
------- -------
Total current liabilities 23,818 15,150
Long-term debt 140,409 131,689
Deferred income taxes 5,447 5,447
Other liabilities 615 382
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value;
45,000,000 shares
authorized; shares issued and
outstanding - 33,432,161 at
September 30, 1998 and 32,646,661
at December 31, 1997 334 326
Additional paid-in capital 126,902 120,873
Accumulated deficit (85,966) (70,818)
------- -------
Total stockholders' equity 41,270 50,381
------- -------
$211,559 $203,049
======== ========
See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, 1998 1997
---- ----
($ in thousands)
Cash flows from operating activities:
Net loss $(15,148) $(7,347)
Adjustments to reconcile net loss
from operations to cash (used for)
provided by operating activities:
Depreciation and amortization 7,911 7,254
Issuance of shares for services 374 471
Interest capitalized to debt - 315
(Gain) loss on disposal of assets (70) 141
Share of partnership operations (899) (638)
Changes in operating assets and
liabilities:
Increase in accounts receivable (4,613) (4,235)
Increase in inventories (4,428) (389)
Decrease (increase) in prepaid
expenses and other 675 (26)
Increase in accounts payable 1,405 1,750
Increase in accrued liabilities 4,468 5,005
Increase in other liabilities 233 683
------- -------
Net cash (used for) provided by
operating activities (10,092) 2,984
------- -------
Cash flows from investing activities:
Additions to property, plant and
equipment (4,505) (1,385)
Proceeds from disposal of property,
plant and equipment 232 2,735
Additions to water programs (1,152) (498)
Additions to developing crops (2,578) (3,739)
Partnership distributions 674 1,164
(Increase) decrease in other assets (712) 386
------- -------
Net cash used for investing
activities (8,041) (1,337)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of stock 1,392 1,690
Proceeds from issuance of long-
term debt 10,000 115,080
Principal payments on long-term debt (491) (140,843)
Net proceeds from short-term debt 2,700 -
Costs for debt issuance - (5,744)
------- -------
Net cash provided by (used for)
financing activities 13,601 (29,817)
------- -------
Net decrease in cash and cash
equivalents (4,532) (28,170)
Cash and cash equivalents, beginning
of period 5,298 33,307
------- -------
Cash and cash equivalents, end
of period $ 766 $ 5,137
======= =======
See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Nine Months Ended September 30, 1998
($ in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------- ------ ------- ------- ------
Balance as of
December 31, 1997 32,646,661 $ 326 $ 120,873 $ (70,818) $ 50,381
Exercise of
stock options 355,500 4 1,388 - 1,392
Issuance of warrants
to a lender - - 1,643 - 1,643
Stock issued
for services 55,000 - 374 - 374
Acquisition of
hydrological
research company 375,000 4 2,624 - 2,628
Net loss - - - (15,148) (15,148)
------- ------ ------- ------- -------
Balance as of
September 30, 1998 33,432,161 $ 334 $ 126,902 $ (85,966) $ 41,270
========== ====== ========= ========= ========
See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- -------------------------------
The Consolidated Financial Statements have been prepared by
the Company without audit and should be read in conjunction with
the Consolidated Financial Statements and notes thereto included
in the Company's latest Form 10-K for the year ended December 31,
1997. The foregoing Consolidated Financial Statements include
all adjustments, consisting only of normal recurring adjustments
which the Company considers necessary for a fair presentation.
The results of operations for the nine months ended September 30,
1998 are not necessarily indicative of the results to be expected
for the full fiscal year.
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):
September 30, December 31,
1998 1997
---- ----
Growing Crops $ 9,605 $10,124
Pepper seed 1,472 1,648
Harvested product 4,323 169
Materials and supplies 2,405 1,897
------- -------
$17,805 $13,838
======= =======
NOTE 3 - EARNINGS PER SHARE
- ----------------------------
During December 1997, the Company adopted Financial Accounting
Standards Board No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 replaced the presentation of earnings per share reflected on
the statement of operations with dual presentation of Basic Earnings
per Share (Basic EPS) and Diluted Earnings per Share (Diluted
EPS). Basic EPS excludes dilution and is computed by dividing
net income by the weighted average number of shares outstanding
during the reported periods. Diluted EPS reflects the potential
dilution that could occur under the treasury stock method if
stock options and other commitments to issue common stock were
exercised. Earnings per share has been restated for the three
months ended September 30, 1997 to reflect the adoption of SFAS
128. Diluted EPS was not presented for all other periods as it
would be antidilutive. For the three months ended September 30,
1997, the effect on weighted average shares outstanding for
dilutive stock options, warrants, and preferred stock was an
additional 1,091,000 shares.
NOTE 4 - CORPORATE NAME CHANGE
- ------------------------------
Effective September 1, 1998, Cadiz Land Company, Inc. changed its
name to Cadiz Inc.
NOTE 5 - SUBSEQUENT EVENT
- -------------------------
Sun World, through a wholly-owned subsidiary, owns a 50%
interest in ASC/SWB Partnership, formerly named American SunMelon
(the "Partnership"). Sun World accounts for its interest in the
Partnership using the equity method. On October 27, 1998, the
Partnership sold substantially all of its assets to a third party
for $35 million in cash. In conjunction with the sale, Sun World
received an initial distribution of $15.2 million from the
Partnership.
CADIZ INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The financial statements set forth herein as of and for the
nine months ended September 30, 1998 and 1997 reflect the results
of operations for Cadiz Inc., Sun World International, Inc. and
its wholly-owned subsidiaries ("Sun World"), and Southwest Fruit
Growers ("SWFG") in which the Company was the general partner and
held an approximate 66.3 percent partnership interest as of
September 30, 1998. For purposes of this discussion, the term
Sun World will be used, when the context so requires, with
respect to the operations and activities of the Company's Sun
World subsidiary, and the term Cadiz will be used, when the
context so requires, with respect to those operations and
activities of the Company not involving Sun World.
The Company's net income or loss in future fiscal periods
will be largely reflective of (a) the operations of the
Cadiz/Fenner Water Storage and Supply Program and (b) the
operations of Sun World. Sun World conducts its operations
through four operating divisions: farming, packing, marketing and
proprietary product development. Net income from farming
operations varies from year to year primarily due to yield and
pricing fluctuations which can be significantly influenced by
weather conditions, and are, therefore, generally subject to
greater annual variation than Sun World's other divisions.
However, the geographic distribution of Sun World's farming
operations and the diversity of its crop mix makes it unlikely
that adverse weather conditions would affect all of Sun World's
properties or all of its crops in any single year. Nevertheless,
net profit from Sun World's packing, marketing and proprietary
product development operations tends to be more consistent from
year to year than net profit from Sun World's farming operations.
As such, Sun World continues to strategically add volume in the
packing and marketing areas that will complement Sun World's in-
house production or fill in contra-seasonal marketing windows.
Sun World is also actively exploring various domestic and
international opportunities to license selected proprietary fruit
varieties.
The following discussion contains trend analysis and other
forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the
Securities and Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-
looking statements throughout this document. Specific factors
that might cause such a difference include, but are not limited
to, the timing and terms of the various approvals required in
order to complete the Cadiz/Fenner Water Storage and Supply
Program.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
- ---------------------------------------------------------------
ENDED SEPTEMBER 30, 1997
- ------------------------
The Company's agricultural operations are impacted by the
general seasonal trends that are characteristic of the
agricultural industry. Sun World has historically received the
majority of its net income during the months of June to October
following the harvest and sale of its table grape and 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 cooler weather patterns in California during the first
half of 1998 delayed the harvest of all California grape and
stonefruit production by as much as four weeks from the 1997
harvest schedule which has caused a delay in recognition of
certain revenues and related profits from the third to the fourth
quarter of 1998.
The table below sets forth, for the periods indicated, the
results of operations for the Company's four main operating
divisions (before elimination of any interdivisional charges) as
well as the categories of costs and expenses incurred by the
Company which are not included within the divisional results (in
thousands):
Three Months Ended
September 30,
-------------
1998 1997
----- -----
Divisional net income:
Farming $ 1,291 $ 5,618
Packing 4,067 5,411
Marketing 2,034 2,707
Proprietary product development 66 408
------- -------
7,458 14,144
Special litigation 447 183
General and administrative 2,657 2,460
Depreciation and amortization 4,546 3,946
Interest expense 4,702 3,937
------- --------
Net loss $(4,894) $ 3,618
======= =======
FARMING OPERATIONS. The Company farms over 19,000 acres of
agricultural properties located primarily in two major growing
areas of California, the San Joaquin Valley and the Coachella
Valley. The Company's agricultural properties are primarily
dedicated to producing permanent commercial crops and to a lesser
extent, row crops. Net income from farming operations decreased
$4.3 million to $1.3 million for the three months ended September
30, 1998 from $5.6 million for the three months ended September
30, 1997.
The reduced farming profits for the three months ended
September 30, 1998 compared to 1997 were primarily due to the
harvests for 1998 crops running approximately four weeks later
than 1997 resulting in sales and related profits for certain
table and wine grapes, plums, citrus, and sweet peppers being
shifted into the fourth quarter. During the quarter ended
September 30, 1998, sales of Company-farmed product decreased 27%
from 4.4 million units in 1997 to 3.2 million in 1998. Overall,
net income from table grapes for the third quarter decreased $2.5
million from $3.5 million in 1997 to $1.0 million in 1998 due to
the harvest timing as well as reduced yields and higher harvest
costs for early season southern San Joaquin Valley table grapes.
No wine grape profits were recognized in 1998 as the harvest was
delayed into the fourth quarter. In the 1997 quarter, $1.7 million
of wine grape profits were recognized. Stonefruit profits for the
third quarter of 1998 exceeded 1997 profits by $0.7 million due to
strong F.O.B. pricing for plums and removal of certain underperforming
peach and nectarine crops for 1998. Third quarter profits from row
crops (primarily watermelons and sweet peppers) decreased by approximately
$1.0 million compared to 1997 primarily due to delays in harvest
and decreased F.O.B. prices.
Revenues from farming operations totaled $40.2 million for
the 1998 quarter compared to $44.4 million in the 1997 quarter.
Expenses totaled $38.9 million in the 1998 quarter compared to
$38.8 million in the 1997 quarter.
PACKING OPERATIONS. For the quarter ended September 30,
1998, Sun World's four packing and handling facilities
contributed revenues of $8.0 million offset by $3.9 million of
expenses resulting in $4.1 million of net income from packing
operations. Revenues of $10.3 million were offset by expenses of
$4.9 million resulting in net income from packing operations of
$5.4 million during the third quarter of 1997. The $1.3 million
decrease in net income resulted primarily from reduced handling
income on table grapes due to the harvest for late season table
grapes extending into the fourth quarter in 1998 and the reduced
yields experienced on early season San Joaquin Valley table
grapes. Sun World packed and/or handled 3.8 million units during
the third quarter of 1998 compared to 4.5 million units during
the third quarter of 1997.
MARKETING OPERATIONS. Sun World's marketing operations
include the sale and promotion of Sun World grown products, as
well as providing these services for third party growers. During
the three months ended September 30, 1998, a total of
approximately 4.5 million units were sold compared to 6.0 million
units sold during the three months ended September 30, 1997.
Units sold consisted primarily of Company-grown table grapes,
sweet peppers, watermelons and stonefruit. The reduction in units
sold is primarily due to the harvests and sale of late season
table grapes and plums being delayed into the fourth quarter as
well as the reduced yields experienced on early season table
grapes in the San Joaquin Valley. The 1998 unit sales resulted
in marketing revenue of $3.2 million while marketing expenses
totaled $1.2 million for net income of $2.0 million for the
quarter. For the third quarter of 1997, marketing revenues were
$4.1 million while marketing expenses were $1.4 million for net
income of $2.7 million.
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
many proprietary fruit varieties during the past five years. In
addition, Sun World has a 50% interest in ASC/SWB Partnership,
formerly American SunMelon (the "Partnership"), a partnership
engaged in proprietary development, production and marketing of
seedless watermelon seed. The majority of the Partnership assets
were sold in October 1998. The decrease in net income from
proprietary product development to $0.1 million for the 1998
quarter from $0.4 million for the 1997 quarter resulted primarily
from higher legal and other intellectual property costs.
SPECIAL LITIGATION. The Company is engaged in various
lawsuits seeking monetary damages in connection with the prevention
of a proposed landfill that would have been located adjacent to
its Cadiz/Fenner Valley properties. See "Item 1 - Legal Proceedings."
During the three months ended September 30, 1998, expenses
incurred totaled $0.4 million compared to $0.2 million of costs
incurred during the same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses during the three months ended September
30, 1998 totaled $2.7 million compared to $2.5 million for the
three months ended September 30, 1997. This increase resulted
primarily from increased administrative costs associated with
developing the Cadiz/Fenner Water Storage and Supply Program.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expense for the three months ended September 30,
1998 totaled $4.5 million compared to $3.9 million for the same
period in 1997. The increase is primarily attributable to the
timing of relief of depreciation costs from inventory due to the
timing of the harvests.
INTEREST EXPENSE, NET. Net interest expense totaled $4.7
million during the three months ended September 30, 1998,
compared to $3.9 million during the same period in 1997. The
following table summarizes the components of net interest expense
for the two periods (in thousands):
Three Months Ended
September 30,
--------
1998 1997
---- ----
Interest on outstanding debt
- Sun World $ 3,710 $ 3,388
Interest on outstanding debt
- Cadiz 435 213
Amortization of financing costs 566 408
Interest income (9) (72)
------- -------
$ 4,702 $ 3,937
======= =======
The increase in interest expense is primarily due to (a)
increased borrowings for seasonal working capital needs primarily
resulting from the delay in harvests and (b) amortization of
warrants issued for the Cadiz Revolver (as defined below) that
was entered into during the fourth quarter of 1997. Financing
costs, which include legal fees and warrants, are amortized over
the life of the debt agreements.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
- -----------------------------------------------------------------
SEPTEMBER 30, 1997
- ------------------
The table below sets forth, for the periods indicated, the
results of operations for the Company's four main operating
divisions (before elimination of any interdivisional charges) as
well as the categories of costs and expenses incurred by the
Company which are not included within the divisional results (in
thousands):
Nine Months Ended
September 30
----------
1998 1997
---- ----
Divisional net income:
Farming $ 3,835 $ 6,953
Packing 5,835 7,175
Marketing 2,742 4,106
Proprietary product development 672 948
------- -------
13,084 19,182
Special litigation 1,093 563
General and administrative expense 7,421 7,952
Depreciation and amortization expense 6,559 6,291
Interest expense, net 13,159 11,723
------- -------
Net loss $(15,148) $(7,347)
======= =======
FARMING OPERATIONS. Net income from farming operations
totaled $3.8 million for the nine months ended September 30, 1998
primarily resulting from the harvest of table grapes, sweet
peppers and watermelons from the Coachella Valley operations and
table grapes and stonefruit from the San Joaquin Valley
operations. Farming revenues were $60.3 million and farming
expenses were $56.5 million for the nine months ended September
30, 1998. For the nine months ended September 30, 1997, the
Company had farming revenues of $66.7 million, farming expenses
of $59.7 million and net income from farming operations of $7.0
million. Farming profits from the Coachella Valley operations
increased $1.8 million from 1997 due to strong F.O.B. prices for
peppers and watermelons and record table grape yields partially
offset by lower table grape F.O.B. prices due to downward
pressure from the record yields coupled with increased production
from Mexico. Farming profits from San Joaquin Valley operations
decreased $4.5 million primarily due to (a) the harvest for
certain table and wine grapes running approximately four weeks
later than 1997 resulting in corresponding revenues and profits
being deferred into the fourth quarter; and (b) reduced yields
and higher harvest costs on the early season table grapes in the
San Joaquin Valley. These unfavorable results were partially
offset by improved F.O.B. pricing on plums and the removal of
certain underperforming peach and nectarine crops at the
conclusion of the 1997 season. Farming profits for coastal sweet
peppers were off $0.7 million from 1997 due to delays in
harvest and decreased F.O.B. prices.
PACKING OPERATIONS. Sun World's four packing and handling
facilities contributed $5.8 million in profit during the nine
months ended September 30, 1998 compared to $7.2 million for the
nine months ended September 30, 1997. During the nine months
ended September 30, 1998, the Company packed and/or handled 6.6
million units compared to 8.0 million units in 1997. Units
packed primarily consisted of Company-grown table grapes, sweet
peppers and seedless watermelons in the Coachella Valley; table
grapes and citrus products packed for third party growers; and
table grapes and stonefruit in the San Joaquin Valley. Packing
and handling revenue for these operations of $15.8 million was
offset by $10.0 million of expenses for the nine months ended
September 30, 1998. Revenues totaled $18.5 million offset by
expenses of $11.3 million for the nine months ended September 30,
1997. The decrease in packing income for the nine months ended
September 30, 1998 compared to 1997 is primarily attributable to
the late harvests resulting in certain packing and handling
revenues shifting into the fourth quarter as well as the impact
of reduced yields experienced on early season table grapes in the
San Joaquin Valley.
MARKETING OPERATIONS. During the nine months ended
September 30, 1998, a total of 7.8 million units were sold
consisting primarily of Company-grown table grapes, sweet peppers
and watermelons from the Coachella Valley; table grapes,
watermelons and citrus from domestic third party growers;
watermelons and sweet peppers from Mexico; Company-grown table
grapes, stonefruit, watermelons and sweet peppers from the San
Joaquin Valley; and sweet peppers from the coastal operations.
These unit sales resulted in marketing revenue of $6.0 million.
Marketing expenses totaled $3.3 million for the nine months ended
September 30, 1998 resulting in net income from marketing
operations of $2.7 million. During the nine months ended
September 30, 1997, 10.3 million units were marketed resulting in
revenues of $7.5 million offset by expenses of $3.4 million for
net profit of $4.1 million. The decrease in units sold, revenues
and net income from marketing operations from 1997 to 1998 is
primarily attributable to the delay in the harvest and sale of
certain late season plums and table grapes into the fourth
quarter as well as the reduced yields experienced on early season
table grapes in the San Joaquin Valley.
PROPRIETARY PRODUCT DEVELOPMENT. During the nine months
ended September 30, 1998, net income from proprietary product
development was $0.7 million consisting of the Company's share of
partnership income in American SunMelon totaling $0.9 million
offset by $0.2 million in net research and development expenses.
During the nine months ended September 30, 1997, net income from
proprietary product development totaled $0.9 million resulting
primarily from the Company's share of partnership income in
American SunMelon.
SPECIAL LITIGATION. During the nine months ended
September 30, 1998 and 1997, expenses incurred for various
lawsuits seeking monetary damages in connection with prevention
of the proposed landfill that would have been located adjacent to
its Cadiz/Fenner Valley properties, totaled $1.1 million and $0.6
million, respectively. See "Item 1 - Legal Proceedings."
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses for the nine months ended September 30,
1998 totaled $7.4 million compared to $8.0 million for the nine
months ended September 30, 1997. The $0.6 million reduction in
general and administrative costs resulted primarily from the
reduction in administrative staff since the beginning of 1997 as
well as reduced professional fees.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and
amortization expense for the nine months ended September 30, 1998
totaled $6.6 million compared to $6.3 million for the same period
in 1997. The increase is primarily attributable to depreciation
related to capital expenditures over the past twelve months
including the new computer system and various developing crops
which reached commercial production in 1998.
INTEREST EXPENSE, NET. Net interest expense totaled $13.2
million during the nine months ended September 30, 1998, compared
to $11.7 million during the same period in 1997. The following
table summarizes the components of net interest expense for the
two periods (in thousands):
Nine Months Ended
September 30
----------
1998 1997
----- ----
Interest on outstanding debt -
Sun World $ 10,884 $ 10,191
Interest on outstanding debt - Cadiz 1,058 692
Amortization of financing costs 1,351 1,373
Interest income (134) (533)
------- -------
$ 13,159 $ 11,723
======== ========
The increase in interest on outstanding debt during the 1998
period is primarily attributable to the Company's debt
refinancing in April 1997, whereby Sun World issued $115 million
of 11-1/4% First Mortgage Notes and used the proceeds and
existing cash balance to pay off approximately $130 million of
long-term debt. Interest expense is also higher due to (a)
increased borrowings for seasonal working capital needs primarily
resulting from the delay in harvest and sale of crops due to
cooler weather conditions during the growing season and (b)
amortization of warrants issued on the $15.0 million Cadiz
Revolver entered into during the fourth quarter of 1997 and (c)
reduced average cash balances in 1998 compared to 1997 prior to
the debt refinancing resulting in lower interest income.
Financing costs, which include legal fees, loan fees and
warrants, are amortized over the life of the debt agreements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES. With
the revolving credit facilities in place for both Cadiz and Sun
World, as further discussed below, as well as the partnership
distribution described below and in Note 5 to the Consolidated
Financial Statements, the Company believes it will be able to
meet its working capital needs without looking to additional
outside funding sources, although no assurances can be made. See
"Current Financing Arrangements" below.
Under Sun World's historical working capital cycle, working
capital is required primarily to finance the costs of growing and
harvesting crops, which generally occur from January through
September with a peak need in June. Sun World harvests and sells
the majority of its crops during the period from June through
October, when it receives the majority of its revenues. In order
to bridge the gap between incurrence of expenditures and receipt
of revenues, large cash outlays are required each year. Prior to
its debt refinancing in April 1997, Sun World's cash balance was
sufficient to provide for these seasonal working capital
requirements without the need for additional outside funding.
However, management determined that utilizing a substantial
portion of Sun World's cash on hand to pay down long-term debt
and concurrently entering into a revolving line of credit to meet
its seasonal working capital needs was a more effective use of
its financial resources. In April 1998, Sun World entered into a
$25 million one year facility (the "Sun World Revolver"). As of
September 30, 1998, $2.7 million was outstanding under the Sun
World Revolver with additional borrowing availability of approximately
$13 million. See "Current Financing Arrangements - Sun World" below.
In order to provide additional availability of working
capital and to provide a readily available funding mechanism for
add-on acquisition opportunities, Cadiz entered into a three year
$15 million revolving credit facility (the "Cadiz Revolver") in
November 1997. As of September 30, 1998, $15.0 million was
outstanding under the Cadiz Revolver of which $7.5 million was
loaned to Sun World for seasonal working capital needs through an
intercompany revolving credit arrangement. This intercompany
balance is expected to be repaid during the remainder of 1998,
utilizing proceeds from the sale of Sun World's crops.
As described in Note 5 to the financial statements, ASC/SWB
Partnership (formerly American SunMelon), a watermelon seed
company in which Sun World owns a 50% interest through a wholly-
owned subsidiary, sold substantially all of its assets to a third
party on October 27, 1998 for $35 million in cash. The
transaction resulted in an initial cash distribution to Sun World
of approximately $15.2 million. Sun World's interest in ASC/SWB
Partnership is part of the collateral securing Sun World's $115
million Exchange Notes described below. Pursuant to the
provisions of the bond indenture, Sun World is offering to
utilize $11.5 million of proceeds from this distribution to
purchase Exchange Notes at par. This offer will expire on
December 7, 1998. If less than $11.5 million of Exchange Notes
are tendered, any remaining amounts will be available to Sun
World for general corporate purposes. The remaining $3.7 million
of the initial distribution will be utilized primarily for Sun
World's crop development program.
CURRENT FINANCING ARRANGEMENTS
- ------------------------------
CADIZ OBLIGATIONS
As Cadiz has not received significant revenues from its
water resource activity to date, Cadiz has been required to
obtain financing to bridge the gap between the time water
resource development expenses are incurred and the time that
revenue will commence. Historically, Cadiz has addressed these
needs primarily through secured debt financing arrangements with
its lenders, private equity placements and the exercise of
outstanding stock options.
As of September 30, 1998, Cadiz was obligated for
approximately $9.8 million under a senior term loan facility.
With Cadiz' election to extend the facility in 1998, the maturity
date of the term loan is April 30, 1999. The Company issued
certain additional warrants in conjunction with the extension.
Cadiz also has the right to obtain an additional one-year
extension. If that extension is exercised, Cadiz would be
required to issue certain warrants and the interest rate would be
further adjusted. Currently, the term lender holds a senior deed
of trust on substantially all of Cadiz' non-Sun World related
property.
In November 1997, the Company entered into the $15 million
Cadiz Revolver. The Cadiz Revolver is secured by a second lien
on substantially all of the non-Sun World assets of the Company.
Principal is due on December 31, 2000. The Company had $15.0
million outstanding under the Cadiz Revolver at September 30,
1998. During 1998, the Company issued additional warrants in
connection with borrowings under the Cadiz Revolver.
As the Company continues to actively pursue its business
strategy, additional financing specifically in connection with
the Company's water programs may be required. Responsibility for
funding the design, construction and program implementation costs
of the capital facilities for the Cadiz/Fenner Water Storage and
Supply Program will, under currently developed principles and
terms, be shared equally by the Company and the Metropolitan
Water District of Southern California ("Metropolitan"). The
Company is analyzing various alternatives for funding its fifty
percent share of the estimated $125 million to $150 million cost
of the program capital facilities. These funding alternatives
include (a) long-term financing arrangements or (b) utilization
of monies to be received from Metropolitan for its initial
purchase of 500,000 acre-feet of indigenous groundwater. The
principles of agreement call for payment to Cadiz of at least
$115 million for this initial groundwater. Based upon the results
of analyses performed by an investment banking firm retained by
the Company, management believes that several alternative long-term
financing arrangements are available to the Company.
SUN WORLD OBLIGATIONS
The Sun World Notes were issued in the principal amount of
$115 million on April 16, 1997 and will mature on April 15, 2004.
The Sun World Notes will be redeemable at the option of Sun
World, in whole or in part, at any time on or after April 15,
2001. Interest accrues at the rate of 11-1/4% per annum and is
payable semi-annually on April 15 and October 15 of each year.
The Sun World Notes are secured by a first lien (subject to
certain permitted liens) on substantially all of the assets of
Sun World and its subsidiaries, other than growing crops, crop
inventories and accounts receivable and proceeds thereof, which
secure the Sun World Revolver, and certain real property pledged
to third parties. The Sun World Notes are also secured by the
guarantee of Cadiz and the pledge by Cadiz of all of the stock of
Sun World.
Commencing October 14, 1997, Sun World offered to exchange
(the "Exchange Offer") up to $115.0 million aggregate principal
amount of its 11-1/4% Series B First Mortgage Notes (the "Exchange
Notes") for $115.0 million aggregate principal amount of the Sun
World Notes. The Exchange Notes are registered under the
Securities Act of 1933 and have the same terms as the Sun World
Notes. The exchange of all of the Sun World Notes was completed
on November 12, 1997.
In April 1998, Sun World entered into the Sun World Revolver
which is guaranteed by Cadiz. As of September 30, 1998, $2.7
million was outstanding under the Sun World Revolver.
CASH USED FOR OPERATING ACTIVITIES. Cash used for operating
activities totaled $10.1 million for the nine months ended
September 30, 1998, as compared to cash provided by operating
activities of $3.0 million for the nine months ended September
30, 1997. The increase in cash used from operating activities is
primarily due to the delay in the harvest and sale of late season
table and wine grapes, plums and peppers, which also resulted in
a larger increase in inventories, as well as the reduced yields
experienced for early season table grapes in the San Joaquin
Valley.
CASH USED FOR INVESTING ACTIVITIES. Cash used for investing
activities totaled $8.0 million for the nine months ended
September 30, 1998, as compared to cash used for investing
activities of $1.3 million for the same period in 1997. The
Company invested $2.6 million in developing crops, $1.2 million
in water programs, and $4.5 million in the purchase of property,
plant and equipment including a 1,200 acre citrus ranch ("Vista
Verde") in the San Joaquin Valley which was purchased by Cadiz in
August 1998, and a new computer system implementation. In 1997,
the Company received $2.7 million from the disposal of certain
non-core properties compared to $0.2 million in 1998.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES. Cash
provided by financing activities totaled $13.6 million for the
nine months ended September 30, 1998, consisting primarily of
$2.7 million in borrowings under the Sun World Revolver and $10.0
million in borrowings under the Cadiz Revolver, as compared to
cash used for financing activities of $29.8 million for the nine
months ended September 30, 1997 resulting from the Sun World debt
refinancing in April 1997. Principal payments on long-term debt
totaled $0.5 million for the nine months ended September 30,
1998. Net proceeds from the exercise of stock options totaled
$1.4 million during the nine months ended September 30, 1998 and
$1.7 million for the nine months ended September 30, 1997.
OUTLOOK
The Company is actively pursuing the development of its
water resources. Specifically, the Company and Metropolitan have
verified the feasibility of and developed principles and terms
for a water storage and supply program at its Cadiz, California
property (the "Cadiz/Fenner Water Storage and Supply Program" or
the "Program"). The Program will involve the conveyance of water
from Metropolitan's Colorado River Aqueduct, during periods of
excess supply, for storage in the aquifers underlying the
Company's properties. The water will be delivered through a 35-
mile transmission pipeline, which will have a capacity of 100,000
acre-feet per year. Total storage capacity will be approximately
500,000 acre-feet. During periods of shortage, the stored water
will be extracted by wells and returned to the Colorado River
Aqueduct. The Program will also have the ability to transfer
high-quality indigenous groundwater for distribution throughout
Metropolitan's service area.
Metropolitan, assisted by an accredited panel of independent
industry experts, has completed a review of numerous
environmental, engineering, hydrological and other studies which
confirm the Program's feasibility. Principles and terms for the
agreement have been developed and approved by the Boards of both
parties. The parties have commenced facility optimization
studies, the environmental review process and documentation of
the Program contract. The Program could be operational by the
year 2000. The principles of agreement call for minimum
commitments totaling 2,000,000 acre-feet of Program utilization
by Metropolitan. Based upon the fees associated with these
minimum commitments, the Company believes the revenue stream
generated by the Program will be sufficient to meet the then
existing operating requirements of the Company. A detailed
summary of the principles and terms for the Program is included
in the Principles for an Agreement Between the Metropolitan Water
District of Southern California and Cadiz Land Company, Inc.
included as an Exhibit to this Form 10-Q.
In addition to the development of its water resources, the
Company is actively involved in further agricultural development
and reinvestment in its landholdings. Such development will be
systematic and in furtherance of the Company's business strategy
to provide for maximization of the value of its assets. The
Company also continually evaluates acquisition opportunities
which are complementary to its current portfolio of landholdings,
water resources and agricultural operations. With the
acquisition of the Vista Verde ranch by Cadiz as described above,
the Company will grow, pack and market approximately 300,000
boxes of citrus from December through March which is contra-
seasonal to the Company's primary farming operations. This
acquisition helps to further diversify the Company's portfolio
and enables the Company to utilize its Bakersfield packing facility
during a previous period of limited utilization.
The Company believes that, based upon current levels of
operations and anticipated growth, Sun World can adequately
service its indebtedness and meet its seasonal working capital
needs utilizing available internal cash, the Sun World Revolver,
through an intercompany revolver with Cadiz and utilizing
available proceeds from the American SunMelon asset sale. Cadiz
expects to be able to meet its ordinary working capital needs, in
the short-term, through a combination of quarterly management fee
payments from Sun World, payments from Sun World under an
agricultural lease whereby Sun World now operates the Company's
1,600 acres of developed agricultural property at Cadiz,
California, draws from the Cadiz Revolver, and the exercise of
outstanding stock options. Except for the foregoing, additional
intercompany cash payments between Sun World and Cadiz are
subject to certain restrictions under its current lending
arrangements.
YEAR 2000
The year 2000 ("Y2K") issue is the result of computer
programs using two digits rather than four to define the
applicable year. Such software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company or its
significant suppliers or customers fail to make necessary
modifications, conversions, and contingency plans on a timely
basis, the Y2K issue could have a material adverse effect on the
Company's business, operations, cash flows, and financial
condition. The impact of the Y2K issue cannot be quantified at
this time because Cadiz cannot accurately estimate the magnitude,
duration, or ultimate impact of noncompliance by suppliers,
customers, and third parties that have no direct relationship to
the Company.
The Company has established a corporate-wide project team to
identify and mitigate all Y2K issues. The team has identified
three categories of software and systems that require attention:
(1) Information technology ("IT") systems, such as
mini mainframes, PCs, and networks;
(2) Non-IT systems, such as equipment, machinery,
climate control, and security systems, which may
contain microcontrollers with embedded technology;
and
(3) Partner (supplier and customer) IT and non-IT
systems.
For each category, the project team is utilizing the
following steps to identify and resolve Y2K issues: (1) inventory
the systems, (2) assess risks and impact of each system, (3)
prioritize projects, (4) fix, replace, or develop contingency
plans for non-compliant systems, and (5) test Y2K compliance.
The status of each of the major categories as of September 30,
1998 is as follows:
INFORMATION TECHNOLOGY
Currently, various IT remediation projects are at different
phases of completion. The Company's assessments have identified
three major internal IT remediation projects (1) AS400
Applications, (2) PC Based Accounting and Payroll Systems, and
(3) PC Based Network Servers and Desktop Computers.
The Company has performed approximately 30 percent of the
work believed to be required on the IT projects. The Company's
plan is to resolve compliance issues in critical business
information systems by August 31, 1999.
YEAR 2000 COMPLIANCE FOR AS/400 APPLICATIONS
The IBM AS/400 hardware and operating systems are year 2000
compliant. The Company utilizes AS400 applications for its
sales/order entry, accounts receivable, produce inventory, and
grower accounting systems. The primary year 2000 issue as it
relates to the IBM AS/400 is that the core business applications
software currently does not process nor store properly dates
after December 31, 1999. Currently, date storage fields are
being expanded from six digits to eight digits for all affected
display screens and reports where appropriate. The Company plans
to have all programming and testing with regard to core business
AS400 applications completed by August 31, 1999.
YEAR 2000 COMPLIANCE FOR PC BASED ACCOUNTING AND PAYROLL SYSTEMS
The Company utilizes commercial PC based accounting systems
for its general ledger, accounts payable, project costing,
purchasing, non-produce inventory, payroll and human resource
systems. The Company's key software vendors are currently
finalizing Y2K service packs which are expected to be fully
implemented and tested during the first quarter of 1999.
YEAR 2000 COMPLIANCE ON PC BASED NETWORK SERVERS AND DESKTOP
COMPUTERS
The Company is currently contacting all significant PC based
desktop and server system manufacturers to ascertain Year 2000
compliance. In addition, the Company is looking at purchasing
certain software applications to assist in determining Y2K
compliance with various PC applications.
The Company does not expect to have any hardware Year 2000
compliance issues as most of the Company's PC hardware is less
than one year old and is already Y2K compliant.
NON-IT SYSTEMS
The Company is still assessing Y2K issues relating to Non-IT
Systems. The project team will complete its assessment of this
area during the fourth quarter of 1998. The assessment includes
reviewing all farming equipment, packing equipment, climate
control systems, wells and irrigation systems, security systems,
electrical systems and telephone systems on all of the Company's
properties. Management believes that given the agricultural
nature of the Company's business, the project team will not
encounter any major Y2K issues which cannot be corrected or would
have a material adverse affect on the Company, although no
absolute assurances can be given.
SUPPLIERS AND CUSTOMERS IT AND NON-IT SYSTEMS
The Company will commence in the fourth quarter of 1998
sending surveys and conducting formal communications with its
significant suppliers and customers to determine the extent to
which it may be affected by those third parties' Y2K preparedness
plans. In the absence of adequate responses and disclosures from
major suppliers and customers, the Company will attempt to make
independent assessments. However, a compliance failure by a
major supplier or customer, or one of their suppliers or
customers, could have a material adverse effect on the Company's
business or financial condition. As a result, in some cases, the
Company will develop contingency plans for suppliers and
customers determined to be at risk of noncompliance or business
disruption. Such plans could include finding alternative
suppliers or manual intervention where necessary.
Costs related to the Y2K issue are funded through operating
cash flows. The Company presently believes that the total costs
to obtain Y2K compliant systems will not exceed $250,000 which
consists mostly of internal labor for programming and testing.
CADIZ INC.
OTHER
ITEM 1. LEGAL PROCEEDINGS
----------------
See "Item 3. Legal Proceedings" included in the
Company's latest Form 10-K and "Item 1. Legal Proceedings"
included in the Company's Form 10-Q for the quarter ended
March 31, 1998.
CADIZ LAND COMPANY, INC. V. COUNTY OF SAN BERNARDINO, ET.
AL., CASE NO. BCV 02341. On or about September 30, 1998,
the court granted defendants' motions for summary
judgement on the ground of ripeness. Specifically, the
court found that Cadiz' procedural due process claim is
not ripe due to the fact that, at this point in time,
there is no actual concrete injury. Cadiz plans to appeal
this decision.
CADIZ LAND COMPANY, INC. V. WASTE MANAGEMENT, INC., ET. AL.,
CASE NO. CV 97-7827 (the "federal action") and CADIZ LAND
COMPANY, INC. V. WASTE MANAGEMENT, INC., CASE NO. SC 05743
(the "state court action"). On or about October 5, 1998,
a Special Criminal Grand Jury for the County of San Bernardino
empaneled to investigate Waste Management's activities in
connection with its development of the Rail-Cycle project,
returned indictments charging Waste Management, Inc., Waste
Management of North America, Waste Management Technologies, Inc.
and numerous officers and employees of Waste Management with
23 felonies, all of which arise in connection with Waste
Management's scheme to sabotage the Company in retaliation for
the Company's opposition to the Rail-Cycle project. More
specifically, the felonies charged include nine counts of stock
fraud under California Corporations Code Section 25541;
conspiracy; telephone fraud; wiretapping; receiving stolen
property; fraudulent computer access; theft of trade secrets;
forgery; and falsification of evidence. On or about October 9,
1998, a former Waste Management consultant named in the criminal
indictment was convicted of, inter alia, stock fraud and
conspiracy to commit stock fraud, after pleading no contest to
these charges. Based on these developments and other evidence
only recently made available to the Company on account of the
pending criminal investigation, the Company has moved in the
federal action for reconsideration of the Court's prior order
dismissing, with prejudice, the Company's claim for securities
fraud against Waste Management and other defendants. Further,
pending the outcome of the motion for reconsideration, the
Company plans to vigorously prosecute its claims asserted against
Waste Management in the state court action and to dismiss,
without prejudice, its remaining claims asserted in the federal
action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
------------------------------------------
During the quarter ended September 30, 1998, the Company
issued 30,000 shares upon exercise of outstanding options
to a single option holder at an exercise price of $5.50
per share. The issuance of the shares was not registered
under the Securities Act of 1933, as amended (the
"Securities Act"). The Company believes that the
transactions described are exempt from the registration
requirements of the Securities Act by virtue of Section
4(2) thereof as transactions not involving any public
offerings. The shares were issued in accordance with the
terms of previously executed stock option agreements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
The name of the Company was changed to Cadiz Inc.
effective September 1, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------
A. EXHIBITS
1. EXHIBIT 3 - AMENDMENT TO CERTIFICATE OF INCORPORATION DATED
SEPTEMBER 1, 1998.
2. EXHIBIT 4 - SPECIMEN FORM OF STOCK CERTIFICATE FOR THE
COMPANY'S REGISTERED STOCK.
3. EXHIBIT 10 - PRINCIPLES FOR AN AGREEMENT BETWEEN THE
METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA AND THE
COMPANY DATED AUGUST 14, 1998.
4. EXHIBIT 27 - FINANCIAL DATA SCHEDULE
CADIZ INC.
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 November 13, 1998
------------------------------------ -----------------
Keith Brackpool, President and Date
Chief Executive Officer and Director
By: /s/ Stanley E. Speer November 13, 1998
------------------------------------ -----------------
Stanley E. Speer Date
Chief Financial Officer
EXHIBIT 3.1
----------
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
CADIZ LAND COMPANY, INC.
a Delaware Corporation
CADIZ LAND COMPANY, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of Cadiz Land Company, Inc.
adopted a resolution setting forth a proposed amendment to the
Certificate of Incorporation of said corporation and declaring said
amendment to be advisable. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, That the Certificate of Incorporation of this
corporation be amended by changing Article One thereof so that,
as amended said Article shall be and read as follows:
"First. The name of the Corporation is Cadiz Inc., hereinafter
sometimes referred to as the Corporation."
SECOND: That said amendment was duly adopted by the
Corporation's Board of Directors and by each outstanding class of
stockholders in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Cadiz Land Company, Inc. has caused this
certificate to be signed by Keith Brackpool, its Chief Executive
officer and Stanley E. Speer, its Secretary, this 1st day of
September, 1998.
By: /s/ Keith Brackpool
------------------------------
Keith Brackpool
Chief Executive Officer
ATTEST:
By: /s/ Stanley E. Speer
-------------------------------
Stanley E. Speer,
Secretary
EXHIBIT 4.1
------------
[Front of Certificate]
COMMON STOCK COMMON STOCK
Number Shares
CI________ [logo] __________
CADIZ
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 127537 10 8
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
Cadiz Inc.
transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this certificate properly endorsed. This
Certificate shall not be valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[SEAL]
CADIZ INC.
CORPORATE
SEAL
1992
DELAWARE
/s/ Stanley E. Speer /s/ Keith Brackpool
----------------- ----------------
SECRETARY PRESIDENT
[Vertical along right margin:]
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED OFFICER
[Reverse of Certificate]
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof
and the qualifications, limitations or restrictions of such preferences
and/or rights. Such requests shall be made to the Corporation's Secretary
at the principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT-- ____Custodian_____
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right under Uniform Gifts to Minors
of survivorship and not Act____________
as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________ HEREBY SELL, ASSIGN
AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
_____________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
____________________________________________________________________________
____________________________________________________________________________
______________________________________________________________________Shares
of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
____________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
DATED ______________________________
X_________________________________________
X_________________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(s) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EXHIBIT 10.1
------------
PRINCIPLES FOR AN AGREEMENT BETWEEN
THE METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA
AND CADIZ LAND COMPANY, INC. ("PRINCIPLES")
The Metropolitan Water District of Southern California
("Metropolitan") and Cadiz Land Company, Inc. ("Cadiz") have
jointly evaluated the feasibility of a water storage and supply
program, referred to as the Cadiz/Fenner Water Storage and Supply
Program ("Program"), and have determined that the Program is
feasible and beneficial to both Metropolitan and Cadiz (referred
to collectively as the "Parties"). As proposed, Metropolitan
would store a minimum of 500,000 acre-feet ("AF") of its Colorado
River water in the groundwater basin underlying Cadiz land
holdings in the Cadiz and Fenner valleys in San Bernardino
County, California. This water would be conveyed to the
Cadiz/Fenner storage area via a pipeline from the Colorado River
Aqueduct ("CRA"). Upon request of Metropolitan, Cadiz would
extract the stored water and convey it back to the CRA.
Metropolitan would also purchase for transfer to the CRA a
minimum of 1,100,000 AF of indigenous groundwater from the
Cadiz/Fenner groundwater basin during the 50-year term of the
Program. The stored and transferred water would be delivered to
Metropolitan on demand as a supplemental, dry year supply.
In addition to these minimum amounts of storage and supply,
Metropolitan could store additional Colorado River water and
purchase for transfer additional indigenous groundwater as
technically and environmentally feasible. All Program capital
facilities would be dedicated to Metropolitan's use. The Parties
propose to prepare a comprehensive agreement (the "Agreement")
consistent with these Principles, final implementation of which
will become effective only when all appropriate institutional and
environmental requirements are met, and all necessary conditions
precedent have been satisfied.
RECITALS
A. WHEREAS, Cadiz is a publicly-held agricultural company
that owns and manages substantial land and water resources
throughout central and southern California, including more than
27,000 acres (43 square miles) of land located in the Cadiz and
Fenner valleys of San Bernardino County, California (the
"Property");
B. WHEREAS, Cadiz, as one of the largest United States
growers and marketers of table grapes, stone fruit and specialty
row crops, has developed farming operations at the Property using
water-conserving irrigation techniques and has completed an
Environmental Impact Report, certified by the County of San
Bernardino, which approved the development of up to 9,600 acres
of irrigated agriculture and affirmed the withdrawal and use of
indigenous groundwater;
C. WHEREAS, Metropolitan was created in 1928 under the
Metropolitan Water District Act for the purpose of providing
supplemental water supplies to the cities and communities of
southern California within its 5,155 square-mile service area,
which includes portions of Los Angeles, Orange, San Diego,
Riverside, San Bernardino, and Ventura Counties;
D. WHEREAS, Metropolitan has entitlements to Colorado
River water pursuant to the 1928 Boulder Canyon Project Act, the
United States Supreme Court 1963 opinion in ARIZONA V. CALIFORNIA
and subsequent decrees and contracts with the United States and
others;
E. WHEREAS, Metropolitan owns and operates the CRA which
imports water from the Colorado River for use in southern
California;
F. WHEREAS, California law and water policy all recognize
the importance of groundwater storage and conjunctive use
programs in meeting the water supply needs of the state;
G. WHEREAS, the proposed Program would provide storage and
dry year supply opportunities which are necessary components of
the California 4.4 Plan;
H. WHEREAS, storage programs for Colorado River water
supplies will provide for more efficient use of this water
resource, which is a critical component of the water supply for
over 16,000,000 people in Southern California and which will ease
demands and impacts on the sensitive Bay/Delta ecosystem
providing a significant benefit to the environment and to all the
people of California;
I. WHEREAS, various studies and reports prepared by public
agencies and accredited consultants confirm that the Property
overlies a large groundwater basin that has significant water
recharge and storage capabilities and which can yield substantial
amounts of high-quality water in excess of the present and
projected agricultural requirements of Cadiz;
J. WHEREAS, various hydrological, environmental, and
engineering studies and reports, together with empirical data
acquired by Cadiz from more than fourteen years of groundwater
pumping for irrigation, confirm that the Property is well suited
technically, environmentally, and economically for a storage and
supply program, involving both storage of Colorado River water
and transfer of indigenous groundwater;
K. WHEREAS, the Parties have jointly reviewed the
feasibility of the Program and have concluded that the Program is
technically feasible; and the Parties therefore desire to
finalize an appropriate water management strategy that achieves
reasonable and beneficial conjunctive use of Colorado River water
and Cadiz indigenous groundwater by the operation of a
conjunctive use program that entails the delivery of high
quality, reliable, supplemental water supplies to Metropolitan on
a long-term basis for use within its service area;
L. WHEREAS, the Parties recognize that environmental
documentation of this Program is required for compliance with the
California Environmental Quality Act ("CEQA") and the National
Environmental Policy Act ("NEPA"), and that this Program is
subject to compliance with CEQA and NEPA; and
M. WHEREAS, the Principles reflect the basic parameters of
the Program and provide a scope for environmental review. In
compliance with CEQA and NEPA, the Principles are not a legally
binding document, information regarding the Program which is
discovered during the environmental review phase will be taken
fully into account in analyzing the Program.
NOW THEREFORE, the Parties desire to document their
demonstrated commitment to pursuing such a Program by agreeing to
these Principles as the basis for preparing the Agreement which
will be brought to the respective Boards of both Parties for
final action.
PRINCIPLES
1. STORAGE PROGRAM COMPONENT
-------------------------
1.1 Metropolitan shall Put (as defined in Section 4.1)
a minimum of 500,000 AF of its CRA water for storage in the
Cadiz/Fenner groundwater basin within five (5) years from
commencement of Program operations or will pay equivalent fees,
on an annual basis, to Cadiz pursuant to Section 5 of these
Principles. Put water shall be returned to Metropolitan upon
request at the rate of 100,000 AF per year. Metropolitan shall
Take (as defined in Section 4.1) the minimum stored Put water
within 20 years of commencement of Program operations, or will
pay equivalent fees to Cadiz pursuant to Section 5 of these
Principles. In the event Metropolitan pays equivalent Put and/or
Take fees, Metropolitan shall receive a credit to be applied to
future Put and Take of CRA water.
1.2 In order to maximize the benefits of the Agreement
to both Parties, after Metropolitan has Put 500,000 AF of CRA
water to storage pursuant to Section 1.1, Metropolitan may
continue to Put, Store, and Take (as defined in Section 4.1)
water through the Program capital facilities during the term of
the Agreement.
1.3 Transportation and evaporation losses of stored
CRA water shall be set at 10% and may be changed after further
study at the mutual consent of both Parties. Such losses shall
be deducted after payment of the Put Fee but prior to payment of
the Take Fee and the Storage Fee as described in Section 5.1.
All water placed in storage as part of the Agreement, minus the
losses, shall be returned to Metropolitan upon request.
2. DRY YEAR SUPPLY (TRANSFER) PROGRAM COMPONENT
--------------------------------------------
2.1 Metropolitan shall purchase from Cadiz a minimum
of 1,100,000 AF of indigenous groundwater for transfer to
Metropolitan during the 50-year term of the Agreement pursuant to
the agreed upon purchase schedule in Section 5.2. Metropolitan
may purchase available additional indigenous groundwater for
transfer to Metropolitan under the same terms and conditions,
consistent with the safe operation of the groundwater basin and
requirements of the groundwater management plan as described in
Section 2.2.
2.2 To ensure long-term management of the groundwater
resource, the Parties shall implement a comprehensive groundwater
monitoring and management plan. The plan shall include all
specific technical criteria, operating procedures, monitoring,
and reporting procedures necessary to ensure that any potential
adverse impacts to the groundwater resource will be avoided or
mitigated.
3. CONSTRUCTION OF FACILITIES FOR STORAGE AND DRY YEAR
--------------------------------------------------
SUPPLY (TRANSFER) PROGRAM
--------------------------
3.1 The Parties shall jointly fund construction of and
jointly own the facilities needed to operate the Program
("Program Capital Facilities"). The Agreement shall specify the
Parties' respective responsibilities for all Program Capital
Facilities. In this regard, it is contemplated that the Program
would involve the following new Program Capital Facilities:
3.1.1 Spreading and Recovery Facilities -- The
Parties will construct, own, and operate facilities consisting
of: (1) approximately 640 acres of spreading facilities; and (2)
approximately 33 extraction wells.
3.1.2 Conveyance Pipeline -- The Parties will
construct, own, and operate a bi-directional pipeline from the
Property to the CRA, as well as the related pumping facilities
and appurtenances capable of base loaded operation of
approximately 100,000 AF per year (approximately 135 cfs) to and
from the CRA.
3.2 Responsibility for funding design, construction,
and program implementation costs of the Program Capital
Facilities shall be shared equally by the Parties. The Parties
estimate that design, construction, and program implementation
costs of the Program Capital Facilities described above in
sections 3.1.1 and 3.1.2 shall be approximately $125 million to
$150 million. Cadiz shall fund its 50% portion through its
corporate resources. Metropolitan, with the joint cooperation of
Cadiz, shall arrange for its 50% portion of the funding.
3.3 Design, construction, and Program implementation
costs are estimated to be within the range of $125 million - $150
million. The costs within that range are to be shared equally by
the Parties. If such costs should be below $125 million for any
reason, the savings shall be shared equally by the Parties. If
such costs should be above $150 million due to a request from one
Party for a change in design, construction, implementation, or
base load operation, the Party requesting the change shall bear
the responsibility for funding that cost overage. If such costs
should be above $150 million due to reasons not known at this
time, the Parties shall renegotiate the Agreement. The Parties
shall remain free to mutually share the cost of changes in
design, construction, and implementation.
4. PROGRAM OPERATIONAL REQUIREMENTS
-------------------------------
4.1 The Program Capital Facilities shall have the
capacity to convey water from the CRA to the Cadiz/Fenner area
and recharge the water into the groundwater basin underlying the
Cadiz/Fenner area ("Put"); to store water in the Cadiz/Fenner
basin ("Store"); and to extract stored water and convey it back
to the CRA ("Take"). In addition, the Program shall be capable
of extraction and conveyance of indigenous groundwater from the
Cadiz/Fenner basin to the CRA ("Transfer").
4.2 Upon commencement of operations, the Program shall
have the capacity to Put 100,000 AF (approximately 135 cfs) into
storage per year. The Program shall have the capacity to Take
100,000 AF of water per year from storage and convey it back to
the CRA, or to Transfer 100,000 AF of indigenous groundwater to
the CRA in the course of one year. During the environmental
review phase, the parties will analyze the operational
requirements of the program to optimize the layout and sizing of
the facilities, subject to the provisions of Section 3.3 above.
4.3 Throughout the term of the Agreement, the Program
shall have the capacity to Store a minimum of 500,000 AF of CRA
water in the Cadiz/Fenner groundwater basin.
4.4 The Parties shall be jointly responsible for
taking all steps needed to implement Put, Store, Take, and
Transfer operations and convey the stored and transferred water
to Metropolitan. Metropolitan shall have responsibility for the
physical operation of the Program, and the Agreement shall
specify the respective responsibilities of the Parties for all
other Program operations.
5. PROGRAM COMPONENT FEES
----------------------
5.1 STORAGE COMPONENT FEES
----------------------
5.1.1 Metropolitan shall pay Cadiz $90 per AF
of CRA water Metropolitan cycles through the Program Capital
Facilities. The $90 per AF rate shall be based on a rate of $50
to Put such water ("Put Fee") and $40 to Take such water ("Take
Fee").
5.1.2 Metropolitan shall pay a "Storage Fee"
of $5 per AF every year that Metropolitan's CRA water is stored
in the Cadiz/Fenner groundwater basin.
5.1.3 Commencing concurrently with the initial
operation of the Program, the Put Fee, Take Fee, and Storage Fee
shall be adjusted annually to account for inflation.
5.1.4 After the minimum 500,000 AF are Put
into storage, as referenced in Section 1.1, additional CRA water
may be cycled through the Program in accordance with the fees
described in Section 5.1.
5.2 DRY YEAR SUPPLY (TRANSFER) COMPONENT FEES
-----------------------------------------
5.2.1 Metropolitan shall pay Cadiz a "Transfer
Fee" for the purchase of transferred indigenous groundwater. The
Transfer Fee shall be based on an initial rate of $230 per AF
("Base Rate"). The payments shall be structured as follows for
the first 500,000 AF:
1st 500,000 AF
------------------
a) $110 per AF to be paid upon
completion of permits and approvals necessary
for program implementation including, but not
limited to, certification of the EIR/EIS for
the Program;
b) $120 per AF to be paid upon
completion of the conveyance and spreading
facilities. This payment is to be adjusted
for the Water Price Index described in
Section 5.3 below.
5.2.2 Metropolitan shall purchase from Cadiz
an additional 600,000 AF of indigenous groundwater (beyond that
described in Section 5.2.1) for Transfer to Metropolitan during
the 50-year term of the Agreement pursuant to the following
schedule:
1st 200,000 AF
------------------
a) Base Rate adjusted for the Water Price Index
to be paid upon delivery to the CRA or 10
years after commencement of operations,
whichever is earlier;
b) After adjustment of the Base Rate for the
Water Price Index, Metropolitan to receive
approximately a 5% discount.
2nd 200,000 AF
------------------
a) Base Rate adjusted for the Water Price Index
to be paid upon delivery to the CRA or 20
years after commencement of operations,
whichever is earlier;
b) After adjustment of the Base Rate for the
Water Price Index, Metropolitan to receive
approximately a 5% discount.
3rd 200,000 AF
------------------
a) Base Rate adjusted for the Water Price Index
to be paid upon delivery to the CRA or 30
years after commencement of operations,
whichever is earlier;
b) After adjustment of the Base Rate for the
Water Price Index, Metropolitan to receive
approximately a 5% discount.
5.3. WATER PRICE INDEX
-----------------
Fees under the transfer program described in
Section 5.2 will be adjusted periodically based upon an index
(the "Water Price Index") which will be derived from the concepts
contained in Exhibit "A".
5.4 WATER QUALITY FEE
-----------------
The Parties recognize that the delivery of low TDS
indigenous groundwater from the Cadiz/Fenner groundwater basin
into the CRA provides a water quality benefit to Metropolitan.
The Parties further recognize that this benefit will vary
depending on numerous factors, such as the flow in the CRA at the
time of Transfer, the actual quality of the water delivered under
the Program, the availability of blending water supplies, and/or
the eventual addition of treatment facilities. Accordingly,
Metropolitan will pay a fee for the water quality benefit of the
water delivered from the Program to the CRA at the end of the
year of actual delivery. This fee will be additive to both the
Take Fee and the Transfer Fee. The Water Quality Fee shall be
calculated annually based on the concepts contained in the "Water
Quality Fee Formula", attached as Exhibit "B".
6. ADDITIONAL PROGRAM USAGE COMMITMENTS
-------------------------------------
Metropolitan agrees to Put a minimum of 500,000 AF of
CRA water into groundwater storage under this Program and
purchase a minimum of 1,100,000 AF of indigenous groundwater
under this Program as previously discussed in these Principles.
In accordance with the fees described in Section 5 and subject to
the availability for Transfer of 400,000 AF of indigenous
groundwater, or a pro rata portion thereof, Metropolitan agrees
to (a) Put an additional 400,000 AF of CRA water through the
Program in addition to the initial Put of 500,000 AF; or (b)
purchase an additional 400,000 AF of indigenous groundwater
beyond the initial 1,100,000 AF; or (c) any combination of "(a)"
and "(b)" totaling the additional amount of indigenous
groundwater available for transfer up to 400,000 AF. Nothing
contained in these Principles shall be construed to mean the
Parties would limit the Program's beneficial use of CRA water
supplies or Cadiz indigenous groundwater supplies, consistent
with the safe operation of the groundwater basin.
7. SECURITY ASSURANCES
-------------------
7.1 Metropolitan's interests in the storage portion of
the Program will be secured by placing stored water in a trust
along with easements for use of the spreading basins, extraction
wells, and conveyance pipeline.
7.2 Metropolitan's interests in the transfer portion
of the Program will be secured by the trust provisions described
in Section 7.1 and an appropriate security interest in the
Property and/or appropriate financial securities.
7.3 Cadiz agrees that it will not deed ownership of
the Property without the written permission of Metropolitan
during the term of the Agreement. Metropolitan agrees that such
permission will not be unreasonably withheld or delayed. Any
transfer of property must ensure that the Program is secured
against non-performance.
7.4 To the extent there is a partial non-performance
of the Program, Metropolitan's interests shall be secured by an
appropriate security interest in the Property and/or appropriate
financial securities.
8. CONDITIONS PRECEDENT
--------------------
8.1 The Parties recognize that environmental
documentation is required for compliance with CEQA and NEPA and
that this Program is subject to compliance with CEQA and NEPA.
Until completion of compliance with CEQA and NEPA, the Parties
are unable to determine the full range and scope of potential
impacts associated with the Program. Accordingly, both Parties
retain the right to reevaluate the Program and, if necessary, not
proceed with the Program if the environmental review determines
that the benefits of the Program do not outweigh any unavoidable
adverse environmental impacts associated with the Program.
8.2 Based on Metropolitan's minimum commitments to the
Program, the melded cost of the storage and transfer components
is currently $205 per AF (1998 dollars), not accounting for
adjustments for the price index, water quality benefit, O&M and
power. By the end of the environmental review phase, should such
melded cost be exceeded, the Parties agree that the Program may
not proceed as specified under these Principles, and the Parties
will reevaluate whether or not to proceed with the Program or
renegotiate the Agreement. In addition, should such melded cost
be exceeded or as otherwise mutually acceptable, the Parties may
separate the Program components and proceed with just the
separate transfer or storage component of the Program.
8.3 The Parties have concluded this Program is
technically feasible. The Parties shall reevaluate the Program
or renegotiate the Agreement if detailed environmental review
reveals clear and objective technical or legal reasons why the
Program cannot be completed as planned in the Principles and the
Agreement.
8.4 Metropolitan will contract with a nationally
recognized financial consultant to review the scope and structure
of the final agreement to advise Metropolitan that the Program is
financially sound and fair to the Parties in the context of a dry
year water supply program.
9. MISCELLANEOUS PROVISIONS
------------------------
9.1 Cadiz has no existing water storage or supply
programs with other parties regarding the Property. Metropolitan
shall have exclusive use of the Program Capital Facilities
described in Section 3 above for the term of the Agreement, and
Cadiz shall not enter into any water storage or supply programs
with other parties regarding the Property during the term of the
Agreement without the written permission of Metropolitan.
9.2 If Cadiz does not convey water to Metropolitan
when required under the terms of the Agreement, Metropolitan may
require specific performance from Cadiz and/or exercise its right
under a security interest in the Property. Metropolitan agrees
that Cadiz may propose to meet its conveyance commitments by
providing water to Metropolitan via alternate sources, and
Metropolitan agrees that it will consider such a proposal.
9.3 Metropolitan or another appropriate public agency
shall be the lead agency on the environmental documentation. The
Parties shall share responsibility on obtaining any institutional
approvals required under the Program, and shall be responsible
for preparing such documentation and obtaining any necessary
permits. Metropolitan and Cadiz shall share equally the costs
for such documentation and approvals.
10. TERM OF THE AGREEMENT
---------------------
The basic term of the Agreement shall be for 50 years,
and may be extended under terms and conditions mutually agreed
upon by the Parties. At the end of the term of the Agreement,
the Parties shall each own half of the Program Capital Facilities
constructed for operation of the Program. If the Parties fail to
reach agreement on an extension or renegotiation, Cadiz may
negotiate with third parties. Metropolitan shall have a right of
first refusal on any agreement with a third party. Any new
agreement with a third party must provide reasonable compensation
for use of the Metropolitan funded portion of Program Capital
Facilities.
11. EARLY TERMINATION OF AGREEMENT
------------------------------
11.1 Should the conditions precedent described in
Section 8.1 or 8.3 not be met before completion of the
environmental review phase, either Party may initiate
renegotiation of the Agreement at that time. At such point, all
work shall cease and the Parties shall each be responsible for
one half of the costs incurred on the studies and environmental
documentation process from the date of execution of these
Principles to that point.
11.2 Should the water management and supply benefits of
the Program be materially reduced prior to the completion of the
environmental review phase due to materially changed conditions,
Metropolitan shall immediately notify Cadiz. As used herein,
"materially changed conditions" shall be defined as (a)
significant reductions in Metropolitan's projected water demands,
or (b) significant changes in Colorado River water availability
as determined by the Secretary of the Interior or by the United
States Bureau of Reclamation that would result in a critical lack
of water available for storage or a critical lack of capacity in
the CRA for Program water due to long-term surplus conditions on
the Colorado River. The Parties agree that under no
circumstances shall the meaning of materially changed conditions
be interpreted to include changed conditions that are the result
of actions undertaken by Metropolitan or Cadiz. In circumstances
of materially changed conditions, the Parties shall enter into
renegotiations to address the materially changed conditions. If
renegotiations cannot resolve the issues caused by the materially
changed conditions, either Party may terminate the Agreement. In
the case of Agreement termination, the Parties shall continue to
share the cost of and shall take the actions necessary to
complete the environmental review phase. Metropolitan shall be
reimbursed for its costs in preparation of the environmental
documentation if a third party should enter into an agreement
with Cadiz for a water storage and/or supply program on the
Property.
IN WITNESS WHEREOF, The Parties hereto have executed these
Principles on this 14th day of August, 1998.
The Metropolitan Water District
of Southern California
By: /s/ John R. Wodraska
---------------------
John R. Wodraska
General Manager
Approved as to form:
By: /s/ Gregory Taylor
---------------------
N. Gregory Taylor
General Counsel
Cadiz Land Company, Inc.
By: /s/ Keith Brackpool
-------------------------
Keith Brackpool
Chief Executive Officer
Attachments (Exhs. A&B)
EXHIBIT A
WATER PRICE INDEX
The Cadiz Land Company, Inc. ("Cadiz") and The Metropolitan Water
District of Southern California ("Metropolitan") are developing an
agreement that will provide for the implementation of the Cadiz/Fenner
Water Storage and Supply Program. One feature of this program is the
transfer of indigenous groundwater to Metropolitan over the fifty-year
term of the agreement. To ensure that future payments made for this
new dry-year supply represent the future value of water, a price index
together with a price discount, are proposed.
Parties commonly use indexing in long-term agreements to adjust
prices (upward or downward) to reflect changes in value over time.
Several indices to adjust the price of these new supplies have been
evaluated and one index, an "Incremental Supply Cost Index" appears
most appropriate to this program.
In general terms, this index would measure on an annual basis
Metropolitan's change in cost of water supplied by new or expanded
water storage and water supply programs. On a periodic basis (for
example once every three years) the price of the new water supply
being provided by Cadiz would be adjusted to reflect the change (if
any) in Metropolitan's cost of comparable water storage and supply
programs as measured by the index. More specifically, the index would
measure the change in the weighted-average costs of new water supplies
available to Metropolitan and possibly other Southern California water
providers.
A pricing discount provision is proposed to be a part of this index
formula and program agreement to ensure Metropolitan would at all
times pay a lesser cost for Cadiz indigenous water than the cost of
comparable water supplies. In summary, the features and benefits of
the proposed price index are summarized as follows:
- - Fair - index would be the most relevant and objective measure of
change in value of the water to be supplied by the Program.
- - Affordable - index would ensure the cost of water supplied under
the program would not exceed the average cost supplied by the
region's other incremental water storage and/or supply programs.
- - Responsible - index would ensure future rate-payers are not put
at risk as the result of speculation, or obligated to pay fixed
rates for water that may in the future overstate Metropolitan's
cost to purchase comparable water supplies.
- - Manageable - index would preclude erratic pricing fluctuations
(spikes) due to temporary hydrological conditions or other
anomalies.
- - Flexible - index could be modified at a future date if it were
determined the index was no longer the most appropriate method
to assess the change in the value of indigenous Cadiz
groundwater.
EXHIBIT B
WATER QUALITY BENEFIT INDEX
One important water quality objective of Metropolitan is to reduce the
total dissolved solids (TDS") of its supplies to approximately 500
mg/l. Historically, Metropolitan has achieved this objective by
blending high TDS Colorado River water with other available sources of
supplies with lower TDS levels. The introduction of alternative
supply sources with lower TDS levels than the Colorado River TDS
levels therefore has the potential to provide water quality benefits
to Metropolitan.
A significant part of the Cadiz Program is the introduction of water
containing lower TDS, organic carbon and bromides than other sources
currently available. In accomplishing this, Metropolitan could
realize water quality benefits (avoided costs), when the program
delivers water to the CRA, either through direct transfer or exchange
of CRA water for Cadiz' indigenous groundwater.
To measure the possible water quality benefits (based on
Metropolitan's actual cost savings), a Water Quality Index is
proposed. This Water Quality Index would adjust the price
Metropolitan pays for alternative water supplies. The index would be
based on the many factors that impact the cost of Metropolitan's
overall system water quality. These factors include, but are not
limited to, the following:
- TDS of Cadiz's supplies
- TDS of CRA supplies
- TDS of SWP supplies
- Metropolitan water demands
- Potential Desalination facilities
- Ozone Treatment facilities
Because these factors vary from year to year, the Index will be
performance-based and will measure only Metropolitan's actual cost
savings resulting from the use of the program. If and when
Metropolitan realizes actual cost savings, the price to be paid for
water supplied by the Program would be adjusted accordingly.
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