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)
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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
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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
$0.01.
CADIZ INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1998 Page
I. FINANCIAL STATEMENTS
A. Consolidated Statement of Operations
For the Three Months Ended September 30,
1998 and 1997.................................2
B. Consolidated Statement of Operations
For the Nine Months Ended September 30, 1998
and 1997..................................... 3
C. Consolidated Balance Sheet
As of September 30, 1998 and December 31,
1997..........................................4
D. Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 1998
and 1997..................................... 5
E. Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1998..6
F. Condensed Notes to the Consolidated Financial
Statements.........................................7
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II. SUPPLEMENTARY INFORMATION
A. Management's Discussion and Analysis of
Financial Condition and Results of Operations......9
B. Other Information.................................23
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C. Signatures....................................25
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30,1998 1997
---- ----
($ 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
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Operating (loss) profit (192) 7,555
Interest expense, net 4,702 3,937
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Net (loss) income (4,894) 3,618
Less: Preferred stock dividends - (9)
------ -------
Net (loss) income applicable to
common stock (4,894) 3,609
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Basic net (loss) income per
common share $ (.15) $ .11
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Diluted net (loss) income per
common share $ - $ .11
======== ========
Basic weighted average
shares outstanding 33,280 32,400
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Diluted weighted average
shares outstanding - 33,491
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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
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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
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Total costs and expenses 75,688 79,116
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Operating (loss) income (1,989) 4,376
Interest expense, net 13,159 11,723
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Net loss (15,148) (7,347)
Less: Preferred stock dividends - (1,213)
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Net loss applicable to common stock (15,148) (8,560)
======= =======
Basic net loss per common share $ (.46) $ (.30)
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Basic weighted average shares
outstanding 33,069 28,400
====== ======
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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
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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
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$211,559 $203,049
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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
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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)
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Total stockholders' equity 41,270 50,381
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$211,559 $203,049
======== ========
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See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, 1998 1997
---- ----
($ 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
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Net cash (used for) provided by
operating activities (10,092) 2,984
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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
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Net cash used for investing
activities (8,041) (1,337)
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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)
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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
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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
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See accompanying condensed notes to the consolidated financial statements.
CADIZ INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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
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$17,805 $13,838
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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.
Effective September 1, 1998, Cadiz Land Company, Inc. changed its name to Cadiz Inc.
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.
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
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Divisional net income:
Farming $ 1,291 $ 5,618
Packing 4,067 5,411
Marketing 2,034 2,707
Proprietary product development 66 408
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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
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Net loss $(4,894) $ 3,618
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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,
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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)
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$ 4,702 $ 3,937
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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.
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
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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
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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
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Net loss $(15,148) $(7,347)
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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)
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$ 13,159 $ 11,723
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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.
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
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.
Not applicable.
None.
The name of the Company was changed to Cadiz Inc. effective September 1, 1998.
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
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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
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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
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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
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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
______________________________________________________________________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.
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
1.2 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.
2.1 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.
3.1 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.
4.1 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.
5.1.1 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.
5.2.1 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:
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:
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.
b) After adjustment of the Base Rate for the Water Price Index, Metropolitan to receive approximately a 5% discount.
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.
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".
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".
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.
7.1 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.
8.1 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.
9.1 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.
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.
11.1 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.
| ARTICLE 5 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 9 MOS |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD START | JUL 01 1998 |
| PERIOD END | SEP 30 1998 |
| CASH | 766 |
| SECURITIES | 0 |
| RECEIVABLES | 10,931 |
| ALLOWANCES | (437) |
| INVENTORY | 17,805 |
| CURRENT ASSETS | 29,891 |
| PP&E | 183,959 |
| DEPRECIATION | (18,964) |
| TOTAL ASSETS | 211,559 |
| CURRENT LIABILITIES | 23,818 |
| BONDS | 140,409 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 334 |
| OTHER SE | 40,936 |
| TOTAL LIABILITY AND EQUITY | 211,559 |
| SALES | 73,699 |
| TOTAL REVENUES | 73,699 |
| CGS | 59,555 |
| TOTAL COSTS | 59,555 |
| OTHER EXPENSES | 16,133 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 13,159 |
| INCOME PRETAX | (15,148) |
| INCOME TAX | 0 |
| INCOME CONTINUING | (15,148) |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (15,148) |
| EPS PRIMARY | (0.46) |
| EPS DILUTED | 0 |