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, 1999
or
[] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from..to...
Commission File Number 0-12114
------------------------------
CADIZ INC.
(Exact name of registrant specified in its charter)
DELAWARE 77-0313235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Wilshire Boulevard, Suite 1600
Santa Monica, CA 90401-1111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 899-4700
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 November 11, 1999 was 35,076,661
shares of Common Stock, par value $0.01.
INDEX
For the Nine Months Ended September 30, 1999 Page
PART I - FINANCIAL INFORMATION
1. Consolidated Financial Statements
A. Statement of Operations
For the Three Months Ended September 30, 1999
and 1998.............................................3
B. Statement of Operations
For the Nine Months Ended September 30, 1999 and
1998.................................................4
C. Balance Sheet
As of September 30, 1999 and December 31, 1998.......5
D. Statement of Cash Flows
For the Nine Months Ended September 30, 1999 and
1998.................................................6
E. Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1999.........7
F. Notes.................................................8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................9
3. Quantitative and Qualitative Disclosures about Market
Risk......................................................22
PART II - OTHER INFORMATION.....................................22
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 30, 1999 1998
---- ---
($ in thousands except
per share data)
Revenues $ 60,326 $ 45,483
Income from partnership 318 113
------- -------
Total revenues 60,644 45,596
------- -------
Costs and expenses:
Cost of sales 44,668 37,588
General and administrative 3,177 3,207
Special litigation 345 447
Depreciation and amortization 5,027 4,546
------- -------
Total costs and expenses 53,217 45,788
------- -------
Operating profit (loss) 7,427 (192)
Interest expense, net 4,434 4,702
------- -------
Net income (loss) $ 2,993 $ (4,894)
======== ========
Basic income (loss) per common share $ .09 $ (.15)
======== ========
Diluted income (loss) per common share $ .08 $ (.15)
======== ========
Basic weighted average shares outstanding 35,036 33,280
======= =======
Diluted weighted average shares outstanding 36,399 33,280
======= =======
See accompanying notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 30, 1999 1998
---- ----
($ in thousands except
per share data)
Revenues $ 93,079 $ 72,800
Income from partnership 318 899
------- -------
Total revenues 93,397 73,699
------- -------
Costs and expenses:
Cost of sales 68,882 59,555
General and administrative 9,348 8,481
Special litigation 817 1,093
Depreciation and amortization 7,229 6,559
-------- -------
Total costs and expenses 86,276 75,688
-------- -------
Operating income (loss) 7,121 (1,989)
Interest expense, net 13,457 13,159
------- --------
Net loss $ (6,336) $ (15,148)
======= ========
Basic loss per common share $ (.18) $ (.46)
======== ========
Basic weighted average shares outstanding 34,528 33,069
======= =======
See accompanying notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
1999 1998
---- ----
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 7,549 $ 13,635
Accounts receivable, net 14,223 6,295
Inventories 18,372 15,019
Prepaid expenses and other 598 992
------- -------
Total current assets 40,742 35,941
Investment in partnership 1,487 1,169
Property, plant, equipment and
water programs, net 168,970 166,022
Other assets 11,092 11,227
------- -------
$ 222,291 $ 214,359
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,820 $ 8,753
Accrued liabilities 10,339 6,846
Long-term debt, current portion 11,063 613
------- --------
Total current liabilities 33,222 16,212
Long-term debt 132,666 142,317
Deferred income taxes 5,323 5,447
Other liabilities 556 673
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value;
45,000,000 shares authorized;
shares issued and outstanding -
35,067,661 at September 30, 1999
and 33,592,261 at December 31, 1998 351 336
Additional paid-in capital 134,797 127,662
Accumulated deficit (84,624) (78,288)
------- --------
Total stockholders' equity 50,524 49,710
======== ========
$ 222,291 $ 214,359
======== =======
See accompanying notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 1999 1998
---- -----
($ in thousands)
Cash flows from operating activities:
Net loss $ (6,336) $ (15,148)
Adjustments to reconcile net
loss from operations to cash
(used for) provided by operating
activities:
Depreciation and amortization 8,824 7,911
Issuance of shares for compensation 28 374
Gain on disposal of assets (73) (70)
Share of partnership operations (318) (899)
Changes in operating assets and
liabilities:
Increase in accounts receivable (7,928) (4,613)
Increase in inventories (3,860) (4,428)
Decrease in prepaid expenses
and other 394 675
Increase in accounts payable 3,067 1,405
Increase in accrued liabilities 4,319 4,468
(Decrease) increase in other
liabilities (241) 233
-------- -------
Net cash used for operating
activities (2,124) (10,092)
-------- --------
Cash flows from investing activities:
Additions to property, plant
and equipment (4,629) (4,505)
Proceeds from disposal of property,
plant and equipment 185 232
Additions to water programs (2,023) (1,152)
Additions to developing crops (2,865) (2,578)
Partnership distributions - 674
Increase in other assets (819) (712)
-------- --------
Net cash used for investing
activities (10,151) (8,041)
--------- --------
Cash flows from financing activities:
Net proceeds from exercise of
stock options 6,438 1,392
Proceeds from issuance of long-term debt 32 10,000
Principal payments on long-term debt (281) (491)
Net proceeds from short-term debt - 2,700
------- -------
Net cash provided by financing
activities 6,189 13,601
------- --------
Net decrease in cash and cash
equivalents (6,086) (4,532)
Cash and cash equivalents, beginning
of period 13,635 5,298
-------- -------
Cash and cash equivalents, end
of period $ 7,549 $ 766
======= =======
See accompanying notes to the consolidated financial statements
CADIZ INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999
($ in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
--------------
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance as of
December 31, 1998 33,592,261 $ 336 $ 127,662 $(78,288) $ 49,710
Exercise of
stock options 1,431,650 14 6,424 - 6,438
Issuance of
warrants to a lender - - 449 - 449
Stock issued for
executive compensation 43,750 1 262 - 263
Net loss - - - (6,336) (6,336)
---------- ------- --------- -------- ---------
Balance as of
September 30, 1999 35,067,661 $ 351 $ 134,797 $(84,624) $ 50,524
========== ======= ========= ========= ========
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 1998. 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, 1999 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,
1999 1998
----- -----
Growing crops $ 10,772 $ 11,208
Pepper seed 1,067 1,344
Harvested product 3,316 360
Materials and supplies 3,217 2,107
------- -------
$ 18,372 $ 15,019
====== =======
NOTE 3 - DEBT
- -------------
In February 1999, Sun World renewed its seasonal revolving
credit facility for an additional year and increased the
facility to $30 million from $25 million. Amounts borrowed
under the facility accrue interest at prime plus 1.0% or LIBOR
plus 2.5% at the Company's election.
Effective April 30, 1999, the Company obtained a one-year
extension of its senior term bank loan totaling $10.3 million
(including $0.5 million of accrued but unpaid interest).
Pursuant to the extension agreement, the loan accrues interest
at LIBOR plus 2% and the Company issued certain warrants.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
RESULTS OF OPERATIONS
The financial statements set forth herein as of and for
the nine months ended September 30, 1999 and 1998 reflect the
results of operations for the Company and its wholly-owned
subsidiary, Sun World International, Inc.
A summary of the Sun World elements which management of
the Company believes is essential to an analysis of the results
of operations for such periods is presented below. For
purposes of this summary, the term Sun World will be used, when
the context so requires, with respect to the operations and
activities of the Company's Sun World subsidiary, and the term
Cadiz will be used, when the context so requires, with respect
to those operations and activities of the Company not involving
Sun World.
The Company's net income or loss in future fiscal periods
will be largely reflective of (a) the operations of the
Company's water development activities including the Cadiz
Groundwater Storage and Dry-Year Supply Program (the "Program")
and (b) the operations of Sun World. Sun World conducts its
operations through four operating divisions: farming, packing,
marketing and proprietary product development. Net income from
farming operations varies from year to year primarily due to
yield and pricing fluctuations, which can be significantly
influenced by weather conditions, and are, therefore, generally
subject to greater annual variation than Sun World's other
divisions. However, the geographic distribution of Sun World's
farming operations and the diversity of its crop mix makes it
unlikely that adverse weather conditions would affect all of
Sun World's properties or all of its crops in any single year.
Nevertheless, net profit from Sun World's packing, marketing
and proprietary product development operations tends to be more
consistent from year to year than net profit from Sun World's
farming operations. Sun World has entered into agreements to
license selected proprietary fruit varieties internationally
and continues to pursue additional domestic as well as
international licensing opportunities.
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 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 may cause such a difference include, but are not limited
to, price and yield fluctuations in the agricultural
operations, seasonality, timing and terms of various approvals
required to complete the Program. See additional discussions
under the heading "Certain Trends and Uncertainties" in Item 7
of the Company's latest Form 10-K.
Three Months Ended September 30, 1999 Compared to Three Months
- ---------------------------------------------------------------
Ended September 30, 1998
- ------------------------
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 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,
------------
1999 1998
---- -----
Divisional net income:
Farming $ 6,556 $ 1,291
Packing 5,368 4,067
Marketing 2,880 2,034
Proprietary product development 796 66
------- -------
15,600 7,458
General and administrative 2,801 2,657
Special litigation 345 447
Depreciation and amortization 5,027 4,546
Interest expense 4,434 4,702
-------- --------
Net income (loss) $ 2,993 $ (4,894)
======== =======
FARMING OPERATIONS. Net income from farming operations
totaled $6.6 million for the three months ended September 30,
1999 compared to $1.3 million for the three months ended
September 30, 1998. Operating results during the third quarter
of 1999 and 1998 were derived primarily from the harvest of
table grapes and peppers from the Coachella Valley operations
and table grapes and stonefruit from the San Joaquin Valley
operations. During the quarter ended September 30, 1999, the
improved farming results were primarily from increased yields
and higher F.O.B. prices for table grapes. Table grape units
sold during the quarter increased by approximately 50% as
yields for the San Joaquin Valley returned to normal levels
from the significant fall off in 1998. F.O.B. prices for table
grapes increased 4% over 1998 due to strong consumer demand.
Farming results were unfavorably impacted by soft market
conditions for watermelons due to excess supplies, and reduced
yields on certain plum varieties due to freezing temperatures
during bloom. Revenues from farming operations totaled $52.4
million for the 1999 quarter compared to $40.2 million for the
1998 quarter. Farming expenses totaled $45.8 million in the
1999 quarter compared to $38.9 million in the 1998 quarter.
PACKING OPERATIONS. For the quarter ended September 30,
1999, Sun World's packing and handling facilities contributed
revenues of $9.5 million offset by $4.1 million of expenses for
net income of $5.4 million compared to net income of $4.1
million for the quarter ended September 30, 1998. Packing
revenues were $8.0 million and expenses were $3.9 million in
the 1998 quarter. Units packed and handled during the quarter
totaled 4.6 million in 1999 compared to 3.8 million in 1998.
The increase in units packed and handled and revenues during
the quarter were primarily due to increased table grape yields
and third party citrus units offset by a reduction in
stonefruit units primarily due to the reduction in plum yields.
MARKETING OPERATIONS. Marketing revenues of $4.3 million
were offset by marketing expenses of $1.4 million resulting in
net income of $2.9 million for the third quarter of 1999.
Marketing revenues of $3.2 million were offset by marketing
expenses of $1.2 million for net income of $2.0 million for the
third quarter of 1998. The increase in marketing net income was
primarily due to a 7% increase in average marketing commissions
per unit and a 23% increase in units marketed during the
quarter compared to 1998, due primarily to higher F.O.B. prices
and yields experienced for table grapes and third party citrus.
During the three months ended September 30, 1999, the Company
sold 5.5 million units, consisting primarily of Company-farmed
table grapes, peppers and stonefruit as well as citrus from
domestic third party growers in Coachella compared to 4.5
million units sold during the three months ended September 30,
1998.
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.
During the three months ended September 30, 1999, net profit
from proprietary product development was $0.8 million
consisting of international royalties of $0.2 million, net
research and development income of $0.3 million and profits
from ASC/SWB partnership (formerly American SunMelon) of $0.3
million. For the three months ended September 30, 1998, net
income from proprietary product development was $0.1 million
consisting primarily of profits from the Company's 50%
partnership interest in American SunMelon. American SunMelon
sold substantially all of its assets and distributed the
majority of the proceeds to the partners in the fourth quarter
of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses during the three months ended September
30, 1999 totaled $2.8 million compared to $2.7 for the three
months ended September 30, 1998. This increase primarily
resulted from additional administrative costs incurred due to
activity associated with the implementation of the Program.
SPECIAL LITIGATION. The Company is engaged in lawsuits
seeking monetary damages arising from activities adverse to the
Company in connection with a landfill, which until its defeat
by the voters of San Bernardino County in 1996, was proposed to
be located adjacent to the Company's Cadiz/Fenner Valley
properties. See "Item 1 - Legal Proceedings" within Part II -
Other Information. During the three months ended September 30,
1999, expenses including litigation costs and professional fees
totaled $0.3 million as compared to $0.4 million during the
1998 period.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expense for the three months ended September 30,
1999 totaled $5.0 million compared to $4.5 million during the
same period in 1998. The increase is primarily attributable to
an increase in the relief of depreciation costs from inventory
due to the earlier timing of the 1999 harvests compared to
1998.
INTEREST EXPENSE, NET. Net interest expense totaled $4.4
million during the three months ended September 30, 1999,
compared to $4.7 million during the same period in 1998. The
following table summarizes the components of net interest
expense for the two periods (in thousands):
Three Months Ended
September 30,
---------
1999 1998
----- ----
Interest on outstanding debt - Sun World $ 3,607 $ 3,710
Interest on outstanding debt - Cadiz 375 435
Amortization of financing costs 507 566
Interest income (55) (9)
------- ------
$ 4,434 $ 4,702
======== =======
The decrease in interest is primarily due to reduced
borrowings on the revolving credit facility at Sun World
coupled with reduced interest costs at Cadiz due to the
extension of the Cadiz term loan facility at a lower interest
rate. Financing costs, which include legal fees and warrants,
are amortized over the life of the debt agreements.
Nine Months ended September 30, 1999 Compared to Nine Months
- ---------------------------------------------------------------
Ended September 30, 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):
Nine Months Ended
September 30
------------
1999 1998
------ ------
Divisional net income:
Farming $11,227 $ 3,835
Packing 7,197 5,835
Marketing 4,187 2,742
Proprietary product development 782 672
-------- --------
23,393 13,084
General and administrative expense 8,226 7,421
Special litigation 817 1,093
Depreciation and amortization expense 7,229 6,559
Interest expense, net 13,457 13,159
-------- --------
Net loss $(6,336) $(15,148)
======== ========
FARMING OPERATIONS. Net income from farming operations
totaled $11.2 million for the nine months ended September 30,
1999 compared to $3.8 million for the nine months ended
September 30, 1998. Farming revenues were $77.6 million and
farming expenses were $66.4 million for the nine months ended
September 30, 1999. For the nine months ended September 30,
1998, the Company had farming revenues of $60.3 million and
farming expenses of $56.5 million. The improved farming results
in 1999 compared to 1998 were primarily due to (a) increased
yields from certain developing table grape crops reaching
commercial production (b) significantly improved F.O.B. pricing
for table grapes and favorable yields for peppers from the
Coachella Valley operations and (c) increased table grape
yields in the San Joaquin Valley. Farming results were
unfavorably impacted by soft market conditions for watermelon
due to excess supplies and reduced yields on certain plum
varieties due to freezing temperatures during bloom. The
Company's proprietary table grape and stonefruit products have
allowed Sun World to continue to command a price premium to the
overall market which favorably impacts overall profitability.
PACKING OPERATIONS. Sun World's packing and handling
facilities contributed $7.2 million in profit during the nine
months ended September 30, 1999 compared to $5.8 million for
the nine months ended September 30, 1998. The Company packed
and handled 7.4 million units during the nine months ended
September 30, 1999 compared to 6.6 million during the same
period in 1998. The increase in units is due to a 40% increase
in Company-grown table grape production, a 30% increase in
citrus products packed for third party growers, offset by a 37%
reduction in stonefruit volumes primarily due to lighter plum
yields. Units packed and handled during the first nine months
of 1999 primarily consisted of Company-grown table grapes,
peppers and seedless watermelons in the Coachella Valley; table
grapes and citrus products packed for third party growers; and
table grape and stonefruit from the San Joaquin Valley.
Packing and handling revenue for these operations of $17.4
million was offset by $10.2 million of expenses for the nine
months ended September 30, 1999. Revenues totaled $15.8
million offset by expenses of $10.0 million for the nine months
ended September 30, 1998.
MARKETING OPERATIONS. During the nine months ended
September 30, 1999, a total of 9.2 million units were sold
consisting primarily of Company-grown table grapes, peppers and
watermelons from the Coachella Valley; table grapes,
watermelons and citrus from domestic third party growers;
peppers from Mexico; and Company-grown stonefruit and table
grapes from the San Joaquin Valley. These unit sales resulted
in marketing revenue of $7.8 million. Marketing expenses
totaled $3.6 million for the nine months ended September 30,
1999 resulting in net income from marketing operations of $4.2
million. During the nine months ended September 30, 1998, 7.8
million units were sold resulting in revenues of $6.0 million
offset by expenses of $3.3 million for net income of $2.7
million. The increase in units sold, revenues and net income
from marketing operations from 1998 to 1999 is primarily
attributable to higher F.O.B. prices, particularly for table
grapes, resulting in higher commissions coupled with increased
volumes of citrus marketed for third party growers. Average
per unit commissions were 4% higher for the nine months ended
September 30, 1999 compared to the same period in 1998 while
units marketed increased by 18%.
PROPRIETARY PRODUCT DEVELOPMENT. During the nine months
ended September 30, 1999, net income from proprietary product
development was $0.8 million consisting of $0.9 million of
international royalties primarily related to the Company's
licensing agreement of Sugraone table grapes in South Africa
offset by $0.4 million of net research and development
expenses. Net profit from ASC/SWB partnership (formerly
American SunMelon) was $0.3 million. Net profit in 1998 of $0.7
million consisted 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. American
SunMelon sold substantially all of its assets and distributed
the majority of the proceeds to the partners in the fourth
quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses for the nine months ended September 30,
1999 totaled $8.2 million compared to $7.4 million for the nine
months ended September 30, 1998. The $0.8 million increase in
general and administrative costs resulted primarily from
additional administrative costs incurred due to activity
associated with the implementation of the Program.
SPECIAL LITIGATION. The Company is engaged in lawsuits
seeking monetary damages arising from activities adverse to the
Company in connection with a landfill, which until its defeat
by the voters of San Bernardino County in 1996, was proposed to
be located adjacent to the Company's Cadiz/Fenner Valley
properties. See "Item 1 - Legal Proceedings" within Part II -
Other Information. During the nine months ended September 30,
1999, expenses including litigation costs and professional fees
totaled $0.8 million as compared to $1.1 million during the
1998 period.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and
amortization expense for the nine months ended September 30,
1999 totaled $7.2 million compared to $6.6 million for the same
period in 1998. The increase is primarily attributable to
relief of depreciation from inventory resulting from the
earlier timing of the harvests coupled with added depreciation
related to capital expenditures made during the past year.
INTEREST EXPENSE, NET. Net interest expense totaled $13.5
million during the nine months ended September 30, 1999,
compared to $13.2 million during the same period in 1998. The
following table summarizes the components of net interest
expense for the two periods (in thousands):
Nine Months Ended
September 30
----------
1999 1998
---- ----
Interest on outstanding debt - Sun World $ 10,827 $ 10,884
Interest on outstanding debt - Cadiz 1,291 1,058
Amortization of financing costs 1,594 1,351
Interest income (255) (134)
------- --------
$ 13,457 $ 13,159
======= ========
The increase in interest on outstanding debt during the
1999 period is primarily due to (a) increased borrowings on the
$15.0 million Cadiz Revolver (as defined below) compared to
1998 and (b) amortization of warrants issued for the Cadiz
Revolver and extension of the Cadiz term loan facility.
Financing costs, which include legal fees, loan fees and
warrants, are amortized over the life of the debt agreement.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES.
Based on the cash on hand at September 30, 1999 and the
revolving credit facilities in place for both Cadiz and Sun
World and anticipated payments under the Program, as further
discussed below, the Company believes it will be able to meet
its working capital needs over the next year without looking to
additional outside funding sources, although no assurances can
be made. See "Current Financing Arrangements" below.
Under Sun World's historical working capital cycle,
working capital is required primarily to finance the costs of
growing and harvesting crops, which generally occur from
January through September with a peak need in June. Sun World
harvests and sells the majority of its crops during the period
from June through October, when it receives the majority of its
revenues. In order to bridge the gap between incurrence of
expenditures and receipt of revenues, large cash outlays are
required each year, which are financed through a revolving
credit agreement. In April 1998, Sun World entered into a $25
million one year facility (the "Sun World Revolver"). In
February 1999, Sun World increased the Sun World Revolver to a
$30 million facility in conjunction with a one year renewal of
the facility. See "Current Financing Arrangements - Sun World"
below.
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, 1999, Cadiz was obligated for
approximately $10.3 million under a senior term loan facility.
Effective April 30, 1999, the Company extended the facility for
one year. The Company issued certain warrants in conjunction
with the extension. Currently, the term lender holds a senior
deed of trust on substantially all of Cadiz' non-Sun World
related property.
Additionally, Cadiz has a $15 million revolving credit
facility (the "Cadiz Revolver") which 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, 1999.
As the Company continues to actively pursue its business
strategy, additional financing specifically in connection with
the Company's water programs may be required. Responsibility
for funding the design, construction and program implementation
costs of the capital facilities for the Cadiz Groundwater
Storage and Dry-Year Supply Program will, under currently
developed principles and terms, be shared equally by the
Company and the Metropolitan Water District of Southern
California ("Metropolitan"). The Company is analyzing various
alternatives for funding its fifty percent share of the
estimated $125 million to $150 million cost of the program
capital facilities as well as satisfying the Cadiz term loan
facility and the Cadiz Revolver obligations described above.
These funding alternatives include (a) long-term financing
arrangements or (b) utilization of monies to be received from
Metropolitan for its initial purchase of indigenous groundwater
which are expected to be sufficient to fund the Company's share
of these capital costs. Based upon the results of analyses
performed by investment banking firms retained by the Company,
management believes that several alternative long-term
financing arrangements are available to the Company.
SUN WORLD OBLIGATIONS
Sun World has outstanding $115 million of First Mortgage
Notes (the "Sun World Notes") which 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 15th and October 15th of each
year. The Sun World Notes are secured by a first lien (subject
to certain permitted liens) on substantially all of the assets
of Sun World and its subsidiaries, other than 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.
In April 1998, Sun World entered into the Sun World
Revolver which is guaranteed by Cadiz. To meet its working
capital needs for 1999, Sun World renewed the Sun World
Revolver for an additional year including an increase in the
facility to $30 million. As of September 30, 1999, no amount
was outstanding under the Sun World Revolver. Additionally, Sun
World has an intercompany revolving credit agreement with Cadiz
for seasonal working capital needs as needed.
CASH USED FOR OPERATING ACTIVITIES. Cash used for
operating activities totaled $2.1 million for the nine months
ended September 30, 1999, as compared to cash used for
operating activities of $10.1 million for the nine months ended
September 30, 1998. The decrease in cash used for operating
activities is primarily due to (a) increased earnings resulting
from increased yields and better F.O.B. prices within the
Company's farming operations; (b) increased accounts payable
due to increased farming activity in 1999 resulting from
increased product volumes and acreage offset by (c) an increase
in accounts receivable due to increased sales.
CASH USED FOR INVESTING ACTIVITIES. Cash used for
investing activities totaled $10.2 million for the nine months
ended September 30, 1999 compared to cash used for investing
activities of $8.0 million for the same period in 1998. The
increase is primarily due to increased capital expenditures
during the nine months ended September 30, 1999 compared to
1998 resulting from costs associated with implementation of the
Program at Cadiz as well as a $0.7 million reduction in
distributions from the American SunMelon partnership, which
sold substantially all of its operating assets in the fourth
quarter of 1998. During the nine months ended September 30,
1999, the Company invested $2.9 million in developing crops,
$2.0 million in water programs, and $4.6 million for the
purchase of property, plant and equipment.
CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by
financing activities totaled $6.2 million for the nine months
ended September 30, 1999. Net proceeds from the exercise of
stock options totaled $6.4 million during the nine months ended
September 30, 1999 compared to $1.4 million during the nine
months ended September 30, 1998. Principal payments on long-
term debt totaled $0.3 million for the nine months ended
September 30, 1999 compared to $0.5 million for the nine months
ended September 30, 1998. There were no net proceeds from
short-term borrowings in 1999 compared to $2.7 million in 1998.
OUTLOOK
The Company is actively pursuing the development of its
water resources. Specifically, in July 1998, the Company and
Metropolitan approved the principles and terms for agreement
for the Cadiz Groundwater Storage and Dry-Year Supply Program.
The principles and terms for agreement provide that
Metropolitan will, during wet years or periods of excess
supply, store surplus water from its Colorado River Aqueduct in
the Company's groundwater basin. During dry years or times of
reduced allocations from the Colorado River, the previously
imported water, together with additional indigenous
groundwater, will be extracted and delivered, via a conveyance
pipeline, back to the aqueduct.
Metropolitan will store a minimum of 700,000 acre-feet of
Colorado River Aqueduct water in the Company's groundwater
basin and purchase a minimum of 1,500,000 acre-feet of existing
groundwater for transfer during dry-years. The Program will
have the capacity to convey, either for storage or transfer, up
to approximately 150,000 acre-feet in any given year over the
50 year term of the agreement.
During storage operations, Metropolitan will pay a fee per
acre-foot for put of water into storage and a fee per acre-foot
for return of water from storage, and a storage fee per acre-
foot every year that water is stored in the groundwater basin.
On the transfer of water, Metropolitan will pay a base rate of
approximately $230 per acre-foot, which will be adjusted
according to a water price formula. Additionally, recognizing
that delivery of the Company's high-quality, indigenous
groundwater to the aqueduct provides a significant water
quality benefit, Metropolitan will pay the Company a water
quality fee for both transferred and returned water.
In regard to the committed minimum transfer of 1,500,000
acre-feet of existing groundwater, Metropolitan will pay for
the first 400,000 acre-feet in two installments - $44 million
payable upon environmental certification and the balance of $48
million, subject to adjustment for the water price index,
payable upon completion of construction. Finally, Metropolitan
will commit to pay for the additional 1,100,000 acre-feet at
the earlier of delivery or in annual 40,000 acre-feet
increments commencing at the start of operations.
The Program facilities, including spreading basins,
extraction wells, conveyance pipeline and a pumping plant, are
estimated to cost between $125 and $150 million, and both
parties will share these costs. All operational costs of the
Program, including annual operations, maintenance and energy
costs, will be an obligation of Metropolitan.
The principles and terms for agreement call for the
establishment of a comprehensive independent groundwater
monitoring and management plan to ensure long-term protection
of the groundwater basin. The parties have commenced the
environmental review process, which will include compliance
with California Environmental Quality Act and National
Environmental Protection Act requirements. The final agreement
may reflect adjustments to these principles and terms in order
to reflect information identified during this review and will
be presented to the respective Boards of both parties for
approval. The Program is anticipated to be operational by the
year 2001.
In addition to the development of its water resources, the
Company is actively involved in further agricultural
development and reinvestment in its landholdings. Such
development will be systematic and in furtherance of the
Company's business strategy to provide for maximization of the
value of its assets. The Company also continually evaluates
acquisition opportunities, which are complimentary to its
current portfolio of water and agricultural resources. With
the acquisition of two citrus ranches in 1998, the Company will
grow, pack and market additional boxes of citrus from December
through March, which is contra-seasonal to the Company's
primary farming operations. This acquisition helps to further
diversify the Company's portfolio and enables the Company to
utilize its Bakersfield packing facility during a previous
period of limited utilization.
In June 1999, Sun World was appointed by Kingdom
Agricultural Development Company (KADCO), a company currently
100% controlled by His Royal Highness Prince Alwaleed Bin Talal
Bin Abdulaziz Alsaud, to develop and manage up to 100,000 acres
of agricultural land in southern Egypt, called the Tushka
Project. The Tushka Project is the cornerstone in the Egyptian
government's multi-billion dollar South Valley Project, an
immense infrastructure plan designed to irrigate more than
500,000 acres of desert land to foster urban and agricultural
development. The South Valley Project involves the construction
of a 43-mile (70 km) canal that diverts water from Egypt's Lake
Nasser, the reservoir formed on the Nile River by the Aswan
High Dam, to four separate parcels of land - the first being
the Tushka site. The initial plantings are expected to occur in
early 2002 upon completion of the canal construction. In
addition to Sun World's role in Tushka, Cadiz and KADCO also
agreed to form an entity to pursue the development and
management of water resources in the region.
As compensation for project development and management of
the Tushka Project, Sun World will earn annually an equity
interest in KADCO and has been granted an option to purchase
additional shares. The combined equity interest will equate to
approximately 10% ownership of KADCO. In addition, Sun World
will receive annual marketing and licensing fees equal to the
greater of 1.5% of gross revenues or 5% of EBITDA from the
project. No capital investment is required by Sun World, and
KADCO will reimburse Sun World for all expenses incurred. The
first term of the management agreement will be for four years
with an option to extend for multiple further terms. The
Company and KADCO executed the final contract in October 1999.
The Company believes that, based upon current levels of
operations and anticipated growth, Sun World can adequately
service its indebtedness and meet its seasonal working capital
needs utilizing available internal cash, the Sun World Revolver
and, if necessary, through an intercompany revolver with Cadiz.
Cadiz expects to be able to meet its ordinary working capital
needs, in the short-term, through a combination of cash on
hand, payments under the Program, quarterly management fee
payments from Sun World, payments from Sun World under an
agricultural lease whereby Sun World now operates the Company's
1,600 acres of developed agricultural property at Cadiz,
California, and the possible exercise of outstanding stock
options. Except for the foregoing, additional intercompany
cash payments between Sun World and Cadiz are subject to
certain restrictions under its current lending arrangements.
YEAR 2000
The year 2000 ("Y2K") issue is the result of computer
programs using two digits rather than four to define the
applicable year. Such software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations leading to disruptions in
the Company's activities and operations. If the Company or its
significant suppliers or customers fail to make necessary
modifications, conversions, and contingency plans on a timely
basis, the Y2K issue could have a material adverse effect on
the Company's business, operations, cash flows, and financial
condition. The impact of the Y2K issue cannot be quantified at
this time because the Company cannot accurately estimate the
magnitude, duration, or ultimate impact of noncompliance by
suppliers, customers, and third parties that have no direct
relationship to the Company.
The Company has established a corporate-wide project team
to identify and mitigate all Y2K issues. The team has
identified three categories of software and systems that
require attention:
(1) Information technology ("IT") systems, such as mini
mainframes, PCs, and networks;
(2) Non-IT systems, such as equipment, machinery, climate
control, and security systems, which may contain
microcontrollers with embedded technology; and
(3) Partner (supplier and customer) IT and non-IT systems.
For each category, the project team is utilizing the
following steps to identify and resolve Y2K issues: (1)
inventory the systems, (2) assess risks and impact of each
system, (3) prioritize projects, (4) fix, replace, or develop
contingency plans for non-compliant systems, and (5) test Y2K
compliance.
The status of each of the major categories as of October 1999
is as follows:
Information Technology
----------------------
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.
YEAR 2000 COMPLIANCE FOR AS/400 APPLICATIONS
The IBM AS/400 hardware, operating systems and core
business applications are year 2000 compliant. The Company
utilizes AS/400 applications for its sales/order entry,
accounts receivable, produce inventory, and grower accounting
systems.
YEAR 2000 COMPLIANCE FOR PC BASED ACCOUNTING AND PAYROLL SYSTEMS
The Company utilizes commercial PC based accounting
systems for its general ledger, accounts payable, project
costing, purchasing, non-produce inventory, payroll and human
resource systems. As of January 1999, all required service
packs to make these applications Year 2000 compliant have been
installed and tested.
YEAR 2000 COMPLIANCE ON PC BASED NETWORK SERVERS AND
DESKTOP COMPUTERS
The Company has contacted all significant PC based desktop
and server system manufacturers to ascertain Year 2000
compliance. All significant PC based systems are Year 2000
compliant with required ROM upgrades made in April 1999.
Non-IT Systems
---------------
Although no other areas of the business are expected to
create Year 2000 issues, the project team is continuing to
review all areas of the business to determine Year 2000
compliance. Management believes that given the agricultural
nature of the Company's business, the project team will not
encounter any major Y2K issues that cannot be corrected or
would have a material adverse affect on the Company, although
no absolute assurances can be given.
Suppliers and Customers IT and Non-IT Systems
---------------------------------------------
The Company has identified all significant suppliers and
customers and has sent surveys and is conducting formal
communications to determine the extent to which it may be
affected by those third parties' Y2K preparedness plans. The
Company has not received any responses that would indicate an
unawareness of Y2K issues. Every vendor or customer that has
responded to the request for information has responded that
they are actively working on the Y2K issues or have
successfully completed the Y2K project. The Company is
continuing to contact significant customers and vendors who
have not responded to the Company's requests to ensure, to the
extent possible, that they are going to be Y2K compliant.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
---------------------------------------------------------
Information about market risks for the nine months ended
September 30, 1999 does not differ materially from that
discussed under Item 7A of the registrant's Annual Report on
Form 10-K for 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-------------------
See "Item 3. Legal Proceedings" included in the Company's
latest Form 10-K for a complete discussion.
CADIZ LAND COMPANY, INC. V. WASTE MANAGEMENT, INC., ET.
AL., Case No. CV 97-7827 WMB (MANx) (the "federal action") and
CADIZ LAND COMPANY, INC. V. WASTE MANAGEMENT, inc., Civil
Action No. SC 05743 (the "State Court Action"). In the Federal
Action, briefing has been concluded in the Ninth Circuit Court
of Appeals on the Company's appeal from the dismissal of the
Company's claims for stock manipulation pursuant to Section
10(b) of the Exchange Act. The court has not yet set a date
for oral argument.
In the State Court Action, the Company received a
favorable ruling from the Los Angeles County Superior Court, on
July 13, 1999, on the discovery issues referenced in the
Company's Form 10-Q for the period ended March 31, 1999. WMI's
petition for writ of mandate, filed with the California Court
of Appeal, Second Appellate District, Division Seven,
requesting appellate review of this decision was denied on
October 6, 1999. It is anticipated that the Company will file
an amended complaint with the court within 90 days.
In the criminal case pending in San Bernardino County
against WMI, certain of its affiliates, and two of its past or
present employees, 12 felony counts remain pending. Nine
felony counts of stock fraud were dismissed on July 28, 1999,
after the Superior Court concluded that the evidence presented
to the grand jury was insufficient to support these charges.
The District Attorney has publicly announced his intention to
refile stock fraud charges based upon additional evidence not
previously presented to the grand jury. Trial in the criminal
case is set for January 10, 2000.
Item 2. Changes in Securities and Use of Proceeds
------------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matter to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
A. Exhibits
1. Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
None
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 12, 1998
----------------------- Date
Keith Brackpool, President and
Chief Executive Officer and Director
By: /s/ Stanley E. Speer November 12, 1998
--------------------- Date
Stanley E. Speer
Chief Financial Officer
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