UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2005 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.) 777 S. Figueroa Street, Suite 4250 Los Angeles, California 90017 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 271-1600 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 --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES NO X --- --- As of November 7, 2005, the Registrant had 10,965,568 shares of common stock, par value $0.01 per share, outstanding. CADIZ INC. INDEX FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 PAGE ====================================================================== PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS Unaudited Statement of Operations for the three months ended September 30, 2005 and 2004. . . . . . . . . . . . . . . . . .1 Unaudited Statement of Operations for the nine months ended September 30, 2005 and 2004. . . . . . . . . . . . . . . . . .2 Unaudited Balance Sheet as of September 30, 2005 and December 31, 2004. . . . . . . . . . . . . . . . . . . . . . .3 Unaudited Statement of Cash Flows for the nine months ended September 30, 2005 and 2004. . . . . . . . . . . . . . . . . .4 Unaudited Statement of Stockholders' Equity for the nine months ended September 30, 2005. . . . . . . . . . . . . . . .5 Unaudited Notes to the Consolidated Financial Statements. . . 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . 21 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . .21 Page i CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) - ---------------------------------------------------------------------- FOR THE THREE MONTHS ENDED SEPTEMBER 30, ($ IN THOUSANDS EXCEPT PER SHARE DATA) 2005 2004 - ---------------------------------------------------------------------- Revenues $ 15 $ 12 -------- -------- Costs and expenses: General and administrative 1,054 636 Compensation costs from stock and option awards 2,305 - Depreciation and amortization 67 132 -------- -------- Total costs and expenses 3,426 768 -------- -------- Operating loss (3,411) (756) Interest expense, net 479 2,138 -------- -------- Loss before income taxes (3,890) (2,894) Income tax credit (27) - -------- -------- Net loss $ (3,863) $ (2,894) ======== ======== Net loss applicable to common stock $ (3,863) $ (2,894) ======== ======== Basic and diluted net loss per common share $ (0.35) $ (0.44) ======== ======== Basic and diluted weighted average shares outstanding 10,966 6,613 ======== ======== See accompanying notes to the consolidated financial statements. Page 1 CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) - ---------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, ($ IN THOUSANDS EXCEPT PER SHARE DATA) 2005 2004 - ---------------------------------------------------------------------- Revenues $ 45 $ 32 -------- -------- Costs and expenses: General and administrative 2,885 1,730 Compensation costs from stock and option awards 13,554 - Depreciation and amortization 201 394 -------- -------- Total costs and expenses 16,640 2,124 -------- -------- Operating loss (16,595) (2,092) Interest expense, net 1,433 6,341 -------- -------- Loss before income taxes (18,028) (8,433) Income tax expense 29 - -------- -------- Net loss $(18,057) $ (8,433) ======== ======== Net loss applicable to common stock $(18,057) $ (8,433) ======== ======== Basic and diluted net loss per common share $ (1.69) $ (1.28) ======== ======== Basic and diluted weighted average shares outstanding 10,679 6,591 ======== ======== See accompanying notes to the consolidated financial statements. Page 2 CADIZ INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) - ---------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, ($ IN THOUSANDS) 2005 2004 - ---------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,465 $ 9,031 Prepaid interest expense 1,059 1,106 Prepaid expenses and other 104 116 -------- -------- Total current assets 7,628 10,253 Property, plant, equipment and water programs, net 35,380 35,552 Goodwill 3,813 3,813 Other assets 617 1,453 -------- -------- $ 47,438 $ 51,071 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 374 $ 470 Accrued liabilities 355 743 -------- -------- Total current liabilities 729 1,213 Long-term debt 25,885 25,000 Commitments and contingencies Stockholders' equity: Series F convertible preferred stock - $.01 par value: 100,000 shares authorized; shares issued and outstanding - 1,000 at September 30, 2005 and December 31, 2004 - - Common stock - $.01 par value; 70,000,000 shares authorized; shares issued and outstanding - 10,965,568 at September 30, 2005 and 10,324,339 at December 31, 2004 110 103 Additional paid-in capital 223,631 209,615 Accumulated deficit (202,917) (184,860) -------- -------- Total stockholders' equity 20,824 24,858 -------- -------- $ 47,438 $ 51,071 ======== ======== See accompanying notes to the consolidated financial statements. Page 3 CADIZ INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - ---------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, ($ IN THOUSANDS) 2005 2004 - ---------------------------------------------------------------------- Cash flows from operating activities: Net loss $(18,057) $ (8,433) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 201 3,475 Interest expense added to loan principal 893 2,189 Stock issued for services 469 - Compensation charge for stock awards and share options 13,554 - Changes in operating assets and liabilities: Increase in accounts receivable (16) - Decrease in prepaid borrowing expense 851 - Decrease (increase) in prepaid expenses and other 28 (71) Decrease in other assets 32 - Decrease in accounts payable (96) (233) Increase (decrease) in accrued liabilities (396) (296) -------- -------- Net cash used for operating activities (2,537) (3,369) -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (53) (8) Proceeds from asset disposition 24 - Decrease in restricted cash - 1,445 -------- -------- Net cash provided by investing activities (29) 1,437 -------- -------- Net decrease in cash and cash equivalents (2,566) (1,932) Cash and cash equivalents, beginning of period 9,031 3,422 -------- -------- Cash and cash equivalents, end of period $ 6,465 $ 1,490 ======== ======== See accompanying notes to the consolidated financial statements. Page 4 CADIZ INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) - -------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 ($ IN THOUSANDS) - -------------------------------------------------------------------------------- PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------- ------------ PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY ------ ------ ------ ------ ------- ------- ------ Balance as of December 31, 2004 1,000 $ - 10,324,339 $ 103 $ 209,615 $(184,860) $ 24,858 Issuance of common stock for services - - 37,200 1 468 - 469 Issuance of incentive shares and options - - 604,029 6 13,548 - 13,554 Net loss - - - - - (18,057) (18,057) ------- ---- ---------- ------ --------- --------- --------- Balance as of September 30, 2005 1,000 $ - 10,965,568 $ 110 $ 223,361 $(202,917) $ 20,824 ======= ==== ========== ====== ========= ========= ========= See accompanying notes to the consolidated financial statements. Page 5 CADIZ INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION - ------------------------------ GENERAL The Consolidated Financial Statements have been prepared by Cadiz Inc., sometimes referred to as "Cadiz" or "the Company", without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2004. The foregoing Consolidated Financial Statements include the accounts of the Company and contain all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the Company's financial position, the results of its operations and its cash flows for the periods presented and have been prepared in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. This quarterly report on Form 10-Q should be read in conjunction with the Company's Form 10-K for the year ended December 31, 2004. The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of results for the entire fiscal year ending December 31, 2005. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Company have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business. The Company incurred losses of $18.1 million for the nine months ended September 30, 2005 and $16.0 million for the year ended December 31, 2004. The Company had working capital of $6.9 million at September 30, 2005 and used cash in operations of $2.5 million for the nine months ended September 30, 2005 and $7.6 million for the year ended December 31, 2004. Currently, the Company's sole focus is the development of its water resources program. During the year ended December 31, 2004, the Company raised $21.3 million in cash through a private sale of common stock. Based on current forecasts, the Company believes it has sufficient resources to fund operations beyond September 2006. The Company's current resources do not provide the capital necessary to fund the water development project should the Company be required to do so. There is no assurance that additional financing (public or private) will be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of the Company's existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If the Company cannot raise needed funds, it might be forced to make further substantial reductions in its operating expenses, which could adversely affect its ability to implement its current business plan and ultimately its viability as a company. These financial statements do not include any adjustments that might result from these uncertainties. Page 6 PRINCIPLES OF CONSOLIDATION In December 2003, the Company transferred substantially all of its assets with the exception of its office sublease, certain office furniture and equipment and the investment in Sun World International Inc.("Sun World") to Cadiz Real Estate LLC, a Delaware limited liability company ("Cadiz Real Estate"). The Company holds 100% of the equity interests of Cadiz Real Estate, and therefore continues to hold 100% beneficial ownership of the properties that it transferred to Cadiz Real Estate. Because the transfer of the Company's properties to Cadiz Real Estate has no effect on its ultimate beneficial ownership of these properties, the properties owned of record either by Cadiz Real Estate or by the Company are treated as belonging to the Company. On January 30, 2003, Sun World and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The financial statements of Sun World are no longer consolidated with those of Cadiz due to the Company's loss of control over the operations of Sun World on that date. Cadiz also wrote off its net investment in Sun World of $195 thousand at the Chapter 11 filing date because it did not anticipate being able to recover its investment. Further, in February 2005, Sun World completed the sale of substantially all of its assets. Sun World's consensual plan of reorganization was confirmed by the U.S. Bankruptcy Court in August, 2005 and became effective on September 6, 2005. Cadiz also reached a settlement with Sun World regarding certain tax matters that became effective on September 6, 2005. With the final bankruptcy plan confirmation and settlement, Cadiz has no further rights and obligations relating to Sun World assets or indebtedness, and supplemental disclosure of Sun World financial information will no longer be included in Cadiz filings. GOODWILL The Company has $3.8 million of goodwill which resulted from a merger in May 1988 between two companies, which eventually became known as Cadiz Inc. Goodwill is not amortized but is tested for impairment annually in the first quarter, or earlier if events occur which require an impairment analysis be performed. The Company performed an impairment test of its goodwill in the first quarter of 2005 and determined that its goodwill was not impaired as its market capitalization at March 31, 2005 of $159.4 million was in excess of the Company's net book value of $23.8 million at that date. INTANGIBLE AND OTHER LONG-LIVED ASSETS Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Page 7 RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board issued SFAS no. 123(R) (revised 2004), "Share-Based Payment" which amends SFAS Statement 123 and will be effective for the Company beginning January 1, 2006. The new standard will require the Company to recognize compensation costs in its financial statements in an amount equal to the fair value of share-based payments granted to employees and directors. The Company is currently evaluating how it will adopt the standard and evaluating the effect that the adoption of SFAS 123(R) will have on its financial position and results of operations. STOCK-BASED COMPENSATION As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock options and other stock- based employee awards. Pro forma information regarding net loss and loss per share, as calculated under the provisions of SFAS 123, as amended by SFAS 148, are disclosed in the table below. The Company accounts for equity securities issued to non-employees in accordance with the provision of SFAS 123 and Emerging Issues Task Force 96-18. Had compensation cost for these plans been determined using fair value the Company's net loss and net loss per common share would have increased to the following pro forma amounts (dollars in thousands): THREE AND NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 2005 2004 ---- ---- THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS ------------ ----------- ------------ ----------- Net loss applicable to common stock: as reported $ (3,863) $ (18,057) $ (2,894) $ (8,433) Stock based employee compensation cost, net of tax effects, included in the determination of net income as reported 2,305 13,554 - - Stock based employee compensation cost, net of tax effects, under the fair value method if the fair value method had been applied (2,482) (14,463) - - --------- --------- --------- --------- Proforma net loss if the fair value method had been applied $ (4,040) $ (18,966) $ (2,894) $ (8,433) ========= ========= ========= ========= Page 8 THREE AND NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 2005 2004 ---- ---- THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS ------------ ----------- ------------ ----------- Net loss applicable to common stock: as reported per basic and diluted common share $ (0.35) $ (1.69) $ (0.44) $ (1.28) Stock based employee compensation cost, net of tax effects, included in the determination of net income as reported 0.21 1.26 - - Stock based employee compensation cost, net of tax effects, under the fair value method if the fair value method had been applied (0.23) (1.35) - - --------- --------- --------- --------- Proforma net loss if the fair value method had been applied $ (0.37) $ (1.78) $ (0.44) $ (1.28) ========= ========= ========= ========= See Note 2 to the Consolidated Financial Statements included in the Company's Form 10-K for a discussion of the Company's accounting policies. NOTE 2 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS - ------------------------------------------------------ Property, plant, equipment and water programs consist of the following (in thousands): SEPTEMBER 30, DECEMBER 31, 2005 2004 Land and land improvements $ 21,986 $ 22,010 Water programs 14,274 14,274 Buildings 1,408 1,408 Machinery and equipment 3,651 3,599 -------- -------- 41,319 41,291 Less accumulated depreciation (5,939) (5,739) -------- -------- $ 35,380 $ 35,552 ======== ======== Depreciation expense totaled $67 thousand and $132 thousand during the three months ended September 30, 2005 and 2004, and $201 thousand and $394 thousand for the nine months ended September 30, 2005 and 2004. Page 9 NOTE 3 - DEBT - ------------- On November 30, 2004 the Company entered into an amendment of its senior term loan agreement with ING whereby it repaid in full the senior term loan portion of the facility with ING of $10 million and reduced to $25 million the outstanding principal balance under the existing revolving portion of the loan. The terms and conditions of the loan facility with ING were amended in order to extend the maturity date of the debt until March 31, 2010, conditioned upon a further principal reduction of $10 million on or before March 31, 2008, with an interest rate through March 31, 2008 of 4% cash plus 4% paid in kind ("PIK") increasing to 4% cash plus 6% PIK for interest periods commencing on and after April 1, 2008. Interest is payable semiannually on March 31 and September 30 each year. The PIK portion is added to the outstanding principal balance. On March 31, 2005 and September 30, 2005, the 4% cash interest in the aggregate amount of $0.9 million was paid by applying it to a $2.4 million credit against loan obligations created by ING as consideration for units purchased by ING as part of a $24 million private placement completed by the Company in November 2004, leaving a credit balance of $1.5 million. On the same dates, the accrued 4% PIK interest portion in amounts totaling $0.9 million was added to the principal balance of the loan. The terms of the loan facilities require certain mandatory prepayments from the cash proceeds of future equity issuances by the Company and prohibit the payment of dividends. The senior term loan is secured by substantially all of the assets of the Company. NOTE 4 - INCOME TAXES - --------------------- In February 2005, our wholly owned subsidiary Sun World completed the sale of substantially all of its assets. The sale will generate a total gain at Sun World of approximately $11.3 million and $45.2 million for federal and state income tax purposes, respectively. For regular income tax purposes this gain is not expected to generate a tax liability, in that Sun World and Cadiz file a consolidated tax return and the companies have sufficient net operating loss carryovers (NOLs) to offset the gain from Sun World. However, because of state apportionment factors and the Alternative Minimum Tax (AMT) rules, Cadiz is expected to have a tax liability of approximately $29 thousand, which amount has been accrued as of September 30, 2005. On August 26, 2005, a Settlement Agreement between Cadiz, on the one hand, and Sun World and three of Sun World's subsidiaries, on the other hand, was approved by the U.S. Bankruptcy Court, concurrently with the Court's confirmation of a consensual plan of reorganization for Sun World and its debtor affiliates. The Settlement Agreement provides that, following the September 6, 2005 effective date of Sun World's plan of reorganization, Cadiz will retain the right to utilize the Sun World NOLs. Sun World Federal NOLs are expected to total approximately $56 million. If, in any year from calendar year 2005 through calendar year 2011, the utilization of such NOLs results in a reduction of Cadiz' tax liability for such year, then Cadiz Page 10 will pay to the Sun World bankruptcy estate 25% of the amount of such reduction, and shall retain the remaining 75% for its own benefit. There is no requirement that Cadiz utilize these NOLs during this reimbursement period, or provide any reimbursement to the Sun World bankruptcy estate for any NOLs used by Cadiz after this reimbursement period expires. NOTE 5 - NET LOSS PER COMMON SHARE - ---------------------------------- Basic earnings per share (EPS) is computed by dividing the net loss, after deduction for preferred dividends either accrued or imputed, if any, by the weighted-average common shares outstanding. Options, deferred stock units, warrants, convertible debt, and preferred stock that are convertible into shares of the Company's common stock were not considered in the computation of diluted EPS because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 1,208,000 and 1,744,000 shares for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, weighted average shares outstanding would have increased by approximately 846,000 and 1,748,000 shares respectively. NOTE 6 - PREFERRED AND COMMON STOCK - ----------------------------------- During the nine months ended September 30, 2005, we issued 27,200 shares of common stock in consideration for services valued at $327,000 and 10,000 shares of common stock in consideration for a $142,000 accrued bonus. The shares were issued at $12 per share, the price of the November 2004 private placement at which time the issue of the shares was authorized, the services rendered, the bonus awarded, and the amounts accrued. NOTE 7 - STOCK BASED COMPENSATION - --------------------------------- Under the Cadiz 2003 Management Equity Incentive Plan a total of 1,472,051 shares of common stock was available to be granted to key personnel. Of the 1,472,051 shares, 1,094,712 were available to be granted with 717,373 shares vesting 2/3 immediately on the date of the grant and 1/3 on December 11, 2005, and 377,339 shares vesting 1/3 upon grant, 1/3 on December 7, 2005 and 1/3 on December 7, 2006. The remaining 377,339 shares of common stock were available to be granted in the form of options to purchase common stock at the price of $12.00 per share. Vesting of the 377,339 options is 1/3 upon grant, 1/3 on December 7, 2005 and 1/3 on December 7, 2006. All awards are subject to continued employment or immediate vesting upon termination without cause. During the nine months ended September 30, 2005 the Company granted 1,094,712 shares of common stock and 300,000 stock options to senior employees under the Cadiz 2003 Management Equity Incentive Plan. 604,029 of the shares vested immediately and were issued. The issuance of shares and options under these Plans results in a charge to the Company's earnings based on the value of the common stock at the time of the grant and the excess of the market price over the option exercise price at the time of their award. This charge will be recorded over the vesting period in proportion to the quantities vested. The value of Page 11 shares and options vested during the nine month period ended September 30, 2005 has been recorded as a cost during the period in the amount of $13.6 million. The value of shares and options vested during the three month period ended September 30, 2005 has been recorded as a cost during the period in the amount of $2.3 million. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for Stock-Based Compensation." The fair value of each option granted during 2005 was estimated on the date of grant using the Black Scholes option pricing model based on the weighted-average assumptions of: risk- free interest rate of 4.195%; expected volatility of 40.0%; expected life of three years; and an expected dividend yield of zero. No options were granted in 2004. The following table summarizes stock option activity for the periods noted. All options listed below were issued to officers, directors and employees. WEIGHTED- AVERAGE AMOUNT EXERCISE PRICE ------ -------------- Outstanding at December 31, 2004 - - Granted 300,000 $ 12.00 Expired or canceled - - Exercised - - -------- -------- Outstanding at September 30, 2005 300,000 $ 12.00 Page 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the following discussion contains trend analysis and other forward-looking statements. Forward-looking statements can be identified by the use of words such as "intends", "anticipates", "believes", "estimates", "projects", "forecasts", "expects", "plans" and "proposes". Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. These include, among others, our ability to maximize value from our Cadiz, California land and water resources; and our ability to obtain new financings as needed to meet our ongoing working capital needs. See additional discussion under the heading "Certain Trends and Uncertainties" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2004. OVERVIEW Our primary asset consists of three separate properties, each of which consists of largely contiguous land in eastern San Bernardino County, California. This land position totals approximately 45,000 acres. Virtually all of this land is underlain by high-quality groundwater resources with demonstrated potential for various applications, including water storage and supply programs and agricultural, municipal, recreational, and industrial development. Two of the three properties are located in proximity to the Colorado River Aqueduct, the major source of imported water for Southern California. The third property is located near the Colorado River. The value of these assets derives from a combination of population increases and limited water supplies throughout Southern California. In addition, most of the major population centers in Southern California are not located where significant precipitation occurs, requiring the importation of water from other parts of the state. We therefore believe that a competitive advantage exists for those companies that possess or can provide high quality, reliable, and affordable water to major population centers. To this end in 1997 we commenced discussions with the Metropolitan Water District of Southern California ("Metropolitan") in order to develop a long-term agreement for a joint venture groundwater storage and supply program on our land in the Cadiz and Fenner valleys of Eastern San Bernardino County (the "Cadiz Program"). Under the Cadiz Program, surplus water from the Colorado River would be stored in the aquifer system underlying our land during wet years. When needed, the stored water, together with indigenous groundwater, would be returned to the Colorado River Aqueduct for distribution to Metropolitan's member agencies throughout six Southern California counties. During the next several years, we engaged in extensive negotiations with Metropolitan concerning the Cadiz Program and actively pursued and received substantially all of the various permits required to construct and operate the project. However, in October 2002, Metropolitan's Board voted to not proceed with the Cadiz Program. Notwithstanding Metropolitan's actions in 2002, we expect to be able to use our land assets and related water resources to participate in a broad variety of water storage and supply, exchange, and conservation programs with public agencies and other parties. Southern Page 13 California's need for water storage and supply programs has not abated. We believe there are many different scenarios to maximize the value of this water resource, all of which are under current evaluation. We expect that these alternative scenarios will have different capital requirements and implementation periods than those previously established for the Cadiz Program. Therefore, following Metropolitan's actions in 2002, we have entered into a series of agreements with our senior secured lender, ING Capital LLC ("ING") pursuant to which we reduced our debt to ING to $25 million and extended the maturity date of the ING debt until March 31, 2010, conditioned upon a further principal reduction of $10 million on or before March 31, 2008. In addition, we have raised approximately $35 million in equity through private placements completed in 2003 and 2004. Further, in February 2005, our wholly owned subsidiary Sun World International, Inc. ("Sun World") completed the sale of substantially all of its assets, and Sun World's consensual plan of reorganization was confirmed by the U.S. Bankruptcy Court in August, 2005. Sun World had entered bankruptcy proceedings on January 30, 2003, following which the financial statements of Sun World are no longer consolidated with ours. With the implementation of these steps, we have been able to retain ownership of all of our assets relating to our water programs and to obtain working capital needed to continue our efforts to develop our water programs, albeit with the divestiture of our interests in Sun World's assets. Because many of our pre-existing common stockholders have participated in the 2003 and 2004 private placements, our base of common stockholders remains largely the same as before these placements. We remain committed to our water programs and we continue to explore all opportunities for development of these assets. We cannot predict with certainty which of these various opportunities will ultimately be utilized. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 - --------------------------------------------------------------- We have not received significant revenues from our water resource activity to date. As a result, we have historically incurred a net loss from operations. We had revenues of $15 thousand for the three months ended September 30, 2005 and $12 thousand for the three months ended September 30, 2004. Our net loss totaled $3.9 million (including a $2.3 million charge for shares and options granted) for the three months ended September 30, 2005 compared to $2.9 million for the three months ended September 30, 2004. Our primary expenses are our ongoing costs to develop our real estate and water assets and to secure the remaining entitlements needed to continue developing the Cadiz Program. These costs consist primarily of project management, legal, consulting, engineering and administrative expenses, which are characterized as general and administrative expenses for financial statement reporting purposes. Other costs include interest expense and compensation costs resulting from the grant of shares and options under the Cadiz 2003 Management Equity Incentive Plan and the 2004 Management Bonus Plan. Page 14 REVENUES Cadiz had revenues of $15 thousand for the three months ended September 30, 2005 and $12 thousand for the three months ended September 30, 2004. Higher revenues resulted from an increase in rental income attributable to the lease of additional Cadiz Ranch acreage to a third party. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the three months ended September 30, 2005 totaled $1.1 million compared to $636 thousand for the three months ended September 30, 2004. The increase in expenses is primarily due to higher legal and consulting costs related to the ongoing entitlement process and settlement negotiations related to the Sun World bankruptcy and the Cadiz Program in the three months ended September 30, 2005. COMPENSATION COSTS FROM STOCK AND OPTION AWARDS. During the three months ended September 30, 2005 the Company recognized a $2.3 million charge to the Company's earnings for stock and options previously issued under the Cadiz 2003 Management Equity Incentive Plan. Shares and options issued under the Plan vest over varying periods from the date of issue to December 2006. The issuance of shares and options under the Plan results in a charge to the Company's earnings based on the value of the common stock at the time of a stock grant and the excess of the market price over the option exercise price at the time of a stock option award. This charge will be recorded over the vesting period in proportion to the quantities vested. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the three months ended September 30, 2005 and 2004 totaled $67 thousand and $132 thousand, respectively. We incurred depreciation expense for permanent and developing crops in the 2004 period. These permanent and developing crops were written off in the last quarter of 2004 and were not subject to further depreciation in 2005, thereby resulting in a decrease in depreciation and amortization expense for the 2005 period. INTEREST EXPENSE, NET. Net interest expense totaled $0.5 million during the three months ended September 30, 2005, compared to $2.1 million during the same period in 2004. The following table summarizes the components of net interest expense for the two periods (in thousands): THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 ---- ---- Interest on outstanding debt $ 513 $ 1,117 Amortization of financing costs 7 1,026 Interest income (41) (5) -------- -------- $ 479 $ 2,138 ======== ======== The decrease in net interest expense is due to a combination of a reduction in the outstanding balance of the ING loan and lower interest rates on that loan. In addition, during 2005 there was reduced amortization of financing costs, that included both debt discount and borrowing fees, as the prior balance was written off at the time of the November 30, 2004 amendment to the terms and conditions of the ING loan. The financing costs of the November Page 15 30, 2004 amended terms and conditions of the ING loan are lower and are being amortized over a longer period. The financing costs for the November 30, 2004 amendment to the terms and conditions of the ING loan were $150 thousand. INCOME TAXES. In February 2005, our wholly owned subsidiary Sun World completed the sale of substantially all of its assets. The sale generated a total gain at Sun World of approximately $11.3 million and $45.2 million for federal and state income tax purposes, respectively. For regular income tax purposes this gain is not expected to generate a tax liability, in that Sun World and Cadiz file a consolidated tax return and the companies have sufficient net operating loss carryovers (NOLs) to offset the gain from Sun World. However, because of state apportionment factors and the Alternative Minimum Tax (AMT) rules, Cadiz is expected to have a tax liability of approximately $29 thousand that has been accrued as of September 30, 2005. This estimate represents a reduction from the previous estimate recorded by the Company at June 30, 2005 resulting in a $27 thousand reduction in the provision for income taxes in the three months ended September 30, 2005. The actual tax liability will vary from this estimate based upon taxable income generated during 2005. On August 26, 2005, a Settlement Agreement between Cadiz, on the one hand, and Sun World and three of Sun World's subsidiaries, on the other hand, was approved by the U.S. Bankruptcy Court, concurrently with the Court's confirmation of a consensual plan of reorganization for Sun World and its debtor affiliates. The Settlement Agreement provides that following the September 6, 2005 effective date of Sun World's plan of reorganization, Cadiz will retain the right to utilize the Sun World NOLs. Sun World Federal NOLs are expected to total approximately $56 million. If, in any year from calendar year 2005 through calendar year 2011, the utilization of such NOLs results in a reduction of Cadiz' tax liability for such year, then Cadiz will pay to the Sun World bankruptcy estate 25% of the amount of such reduction, and shall retain the remaining 75% for its own benefit. There is no requirement that Cadiz utilize these NOLs during this reimbursement period, or provide any reimbursement to the Sun World bankruptcy estate for any NOLs used by Cadiz after this reimbursement period expires. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 - ------------------------------------------------------------ We had revenues of $45 thousand for the nine months ended September 30, 2005 and $32 thousand for the nine months ended September 30, 2004. Our net loss totaled $18.1 million for the nine months ended September 30, 2005 compared to $8.4 million for the nine months ended September 30, 2004. Our primary expenses are our ongoing costs to develop our real estate and water assets and to secure the remaining entitlements needed to continue developing the Cadiz Program. These costs consist primarily of project management, legal, consulting, engineering and administrative expenses, which are characterized as general and administrative expenses for financial statement reporting purposes. Other costs include our interest expense and the Page 16 compensation costs resulting from the grant of shares and options under the Cadiz 2003 Management Equity Incentive Plan and the 2004 Management Bonus Plan. REVENUES. We had revenues of $45 thousand for the nine months ended September 30, 2005 and $32 thousand for the nine months ended September 30, 2004 resulting from increased rental income attributable to the lease of additional Cadiz Ranch acreage to a third party. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the nine months ended September 30, 2005 totaled $2.9 million compared to $1.7 million for the same 2004 period. The increase in general and administrative expenses is primarily due to higher legal and consulting costs related to the ongoing entitlement process and settlement negotiations related to the Sun World bankruptcy and the Cadiz Program, higher audit expenses and higher stock exchange listing fees in the nine months ended September 30, 2005. COMPENSATION COSTS FROM STOCK AND OPTION AWARDS. During the nine months ended September 30, 2005, the Company issued shares of common stock and stock options to senior employees under the Cadiz 2003 Management Equity Incentive Plan and the Cadiz 2004 Management Bonus Plan. Shares and options issued under the 2003 Management Equity Incentive Plan vest over varying periods from the date of issue to December 2006. Shares issued under the 2004 Management Bonus Plan vested immediately. The issuance of shares and options under these Plans results in a charge to the Company's earnings based on the value of the common stock at the time of the grant and the excess of the market price over the option exercise price at the time of the award. This charge will be recorded over the vesting period in proportion to the quantities vested. The value of shares and options vested during the nine month period ended September 30, 2005 has been recorded as a cost during the period in the amount of $13.6 million. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense for the nine months ended September 30, 2005 totaled $201 thousand compared to $394 thousand during the same period in 2004. We incurred depreciation expense for permanent and developing crops in the 2004 period. These permanent and developing crops were written off in the last quarter of 2004 and were not subject to further depreciation in 2005, thereby resulting in a decrease in depreciation and amortization expense for the 2005 period. INTEREST EXPENSE, NET. Net interest expense totaled $1.4 million during the nine months ended September 30, 2005 as compared to $6.3 million in 2004. The following table summarizes the components of net interest expense for the two periods (in thousands): NINE MONTHS ENDED SEPTEMBER 30 2005 2004 ---- ---- Interest on outstanding debt - Cadiz $ 1,531 $ 3,284 Amortization of financing costs 21 3,080 Interest income (119) (23) -------- -------- $ 1,433 $ 6,341 ======== ======== Page 17 The decrease in net interest expense is primarily due to a combination of a reduction in the outstanding balance of the ING loan and lower interest rates on that loan. In addition, during 2005 there was reduced amortization of financing costs that included both debt discount and borrowing fees, as the prior balance was written off at the time of the November 30, 2004 amendment to the terms and conditions of the ING loan. The financing costs of the November 30, 2004 amended terms and conditions of the ING loan are lower and are being amortized over a longer period. The financing costs for the November 30, 2004 amendment to the terms and conditions of the ING loan were $150 thousand. Interest income was also higher, primarily due to higher cash and cash equivalent balances. INCOME TAXES. In February 2005, our wholly owned subsidiary Sun World completed the sale of substantially all of its assets. The sale generated a total gain at Sun World of approximately $11.3 million and $45.2 million for federal and state income tax purposes, respectively. For regular income tax purposes this gain is not expected to generate a tax liability, in that Sun World and Cadiz file a consolidated tax return and the companies have sufficient tax attributes to offset the gain from Sun World. However, because of state apportionment factors and the Alternative Minimum Tax (AMT) rules, Cadiz is expected to have a tax liability of approximately $29 thousand that has been accrued as of September 30, 2005. The actual tax liability will vary from this estimate based upon taxable income generated during 2005. On August 26, 2005, a Settlement Agreement between Cadiz, on the one hand, and Sun World and three of Sun World's subsidiaries, on the other hand, was approved by the U.S. Bankruptcy Court, concurrently with the Court's confirmation of a consensual plan of reorganization for Sun World and its debtor affiliates. The Settlement Agreement provides that following the September 6, 2005 effective date of Sun World's plan of reorganization, Cadiz will retain the right to utilize the Sun World net operating loss carryovers (NOLs). Sun World Federal NOLs are expected to total approximately $56 million. If, in any year from calendar year 2005 through calendar year 2011, the utilization of such NOLs results in a reduction of Cadiz' tax liability for such year, then Cadiz will pay to the Sun World bankruptcy estate 25% of the amount of such reduction, and shall retain the remaining 75% for its own benefit. There is no requirement that Cadiz utilize these NOLs during this reimbursement period, or provide any reimbursement to the Sun World bankruptcy estate for any NOLs used by Cadiz after this reimbursement period expires. LIQUIDITY AND CAPITAL RESOURCES (A) CURRENT FINANCING ARRANGEMENTS ------------------------------ As we have not received significant revenues from our water resource activity to date, we have been required to obtain financing to bridge the gap between the time water resource development expenses are incurred and the time that revenue will commence. Historically, we Page 18 have addressed these needs primarily through secured debt financing arrangements with our lenders, private equity placements and the exercise of outstanding stock options. Subsequent to the vote of Metropolitan's Board in October 2002 to not proceed with the Cadiz Program and Sun World's January 2003 bankruptcy filing, we have worked with our primary secured lender, ING Capital LLC, to structure our debt in a way which would allow us to continue our development of the Cadiz Program. We believe that we have accomplished this goal with a series of agreements with ING, the most recent of which concluded in November 2004. In November 2004 we entered into our most recent series of agreements with ING which provided for the repayment in full of our senior term loan facility with ING, the reduction to $25 million of the outstanding principal balance under our existing revolving credit facility; and amendments to the terms and conditions of our revolving credit facility with ING in order to extend the maturity date of the debt until March 31, 2010, conditioned upon a further principal reduction of $10 million on or before March 31, 2008, and reduce the interest rate through March 31, 2008 on the new outstanding balance to 4% cash plus 4% PIK (increasing to 4% cash plus 6% PIK for interest periods commencing on and after April 1, 2008). With the addition of the accrued PIK interest portions on March 31, 2005 and September 30, 2005, the outstanding balance of our credit facility with ING as of September 30, 2005 was $25.9 million. Additional details concerning the terms of this November 2004 restructuring are included in our Form 10-K for the year ended December 31, 2004. As we continue to actively pursue our business strategy, additional financing specifically in connection with our water programs will be required. As the parties anticipated this need at the time of our credit restructuring, the restrictive covenants in our credit facility were crafted in a way that, in our view, should not materially limit our ability to undertake debt or equity financing in order to finance our water development activities. We have no outstanding credit facilities or preferred stock other than the Series F preferred stock held by ING as described in our 10-K for the year ended December 31, 2004. CASH USED FOR OPERATING ACTIVITIES. Cash used for operating activities was $2.5 million for the nine months ended September 30, 2005, as compared to $3.4 million for the nine months ended September 30, 2004. The decreased cash usage is primarily due to a $3.9 million smaller net loss before the non-cash compensation charge of $13.6 million in the 2005 period and the reduction in prepaid borrowing expense for the payment of interest in the 2005 period. This decrease was partly offset by a $3.3 million reduction in non-cash depreciation and amortization. CASH FLOW FROM INVESTING ACTIVITIES. During the nine months ended September 30, 2005, net cash flow used for investing activities was $29 thousand. A $53 thousand investment in property, plant & equipment was partially offset by $24 thousand of asset disposition proceeds. During the nine months ended September 30, 2004, $1.4 million was paid from the restricted cash account for the cash portion of interest due on the ING loan at March 31, 2004. Page 19 OUTLOOK SHORT TERM OUTLOOK. The proceeds of our 2003 and 2004 private placements in which we raised approximately $35 million have provided us with sufficient cash to meet our expected working capital needs for current operations until the Company will need to raise additional capital in order to fund the $10 million repayment of its borrowing from ING required to be made by March 2008 in order to obtain a further two year extension of the maturity date of the ING loan. See "Long Term Outlook", below. Approximately $12.7 million of the proceeds of our November 2004 private placement were used to reduce the principal balance, which included approximately $2.7 million in interest payable in kind ("PIK") owed to ING under our ING credit facilities, to $25 million. 40 Units in the 2004 private placement were issued to ING in consideration of a $2.4 million credit to be applied against obligations under the Company's $25 million borrowing from the lender. The remainder of the proceeds from the placements will be used to meet our ongoing working capital needs. LONG TERM OUTLOOK. In the longer term, the current maturity date of our loan with ING is March 2008, although we may obtain a further extension of this loan by making a $10 million repayment. Otherwise, our working capital needs will be determined based upon the specific measures we pursue in the development of our water resources. We will evaluate the amount of cash needed, and the manner in which such cash will be raised, on an ongoing basis. We may meet any such future cash requirements through a variety of means to be determined at the appropriate time. Such means may include equity or debt placements, or the sale or other disposition of assets. Equity placements would be undertaken only to the extent necessary so as to minimize the dilutive effect of any such placements upon our existing stockholders. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board issued SFAS no. 123(R) (revised 2004), "Share-Based Payment" which amends SFAS Statement 123 and will be effective for the Company beginning January 1, 2006. The new standard will require the Company to recognize compensation costs in its financial statements in an amount equal to the fair value of share-based payments granted to employees and directors. The Company is currently evaluating how it will adopt the standard and evaluating the effect that the adoption of SFAS 123(R) will have on its financial position and results of operations. CERTAIN KNOWN CONTRACTUAL OBLIGATIONS - ------------------------------------- PAYMENTS DUE BY PERIOD CONTRACTUAL 1 YEAR OBLIGATIONS TOTAL OR LESS 2-3 YEARS 4-5 YEARS AFTER 5 YEARS - ----------- ----- ------- --------- --------- ------------- Long term debt obligations $ 25,894 $ 8 $ 10,018 $ 15,868 $ - Operating leases 57 54 3 - - -------- -------- -------- -------- -------- $ 25,951 $ 62 $ 10,021 $ 15,868 $ - ======== ======== ======== ======== ======== Page 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risks for the nine months ended September 30, 2005 does not differ materially from that discussed under Item 7A of Cadiz' Annual Report on Form 10-K for the year ended December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer (Principal Executive and Principal Financial Officer, respectively), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2005. Based upon, and as of the date of that evaluation, our Chairman and Chief Executive Officer and our Chief Financial Officer concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to Cadiz (including our consolidated subsidiaries) required to be included in our periodic Securities and Exchange Commission filings. There was no significant change in our internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Legal Proceedings" included in the Company's latest Form 10-K for a complete discussion. As previously discussed in the Company's Form 10-K report for the period ended December 31, 2004, Cadiz filed an administrative claim against the Metropolitan Water District of California ("Metropolitan"), asserting the breach by Metropolitan of various obligations specified in our Principals of Agreement with Metropolitan. We believe that by failing to complete the environmental review process for the Cadiz Program, as specified in the Principals of Agreement, Metropolitan violated this contract, breached its fiduciary duties to us and interfered with our prospective economic advantages. The filing was made with the Executive Secretary of Metropolitan. We are seeking the recovery of compensatory and punitive damages and specific performance of certain Metropolitan obligations. In discussions following presentation of this claim, we have continued to evaluate alternative approaches to implementation of the Cadiz Program. The current deadline to file a lawsuit against Metropolitan has been extended to November 18, 2005, and we currently intend to file a lawsuit against the agency on or before that deadline. As previously reported in the Company's Form 8-K dated August 26, 2005, on August 26, 2005 the U.S. Bankruptcy Court confirmed a consensual plan of reorganization for Sun World and its debtor affiliates. See the Company's Form 8-K dated August 26, 2005 for a complete discussion. Page 21 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS The following exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q. 10.1 Settlement Agreement dated as of August 11, 2005 by and between Cadiz Inc., on the one hand, and Sun World International, Inc., Sun Desert, Inc., Coachella Growers and Sun World/Rayo, on the other hand 31.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Page 22 31.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 23 SIGNATURE 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 14, 2005 ------------------------------------ ---------------------- Keith Brackpool Date Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ O'Donnell Iselin II November 14, 2005 ------------------------------------ ---------------------- O'Donnell Iselin II, Date Chief Financial Officer and Secretary (Principal Financial Officer) Page 24