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 March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from............to............ Commission File Number 0-12114 CADIZ INC. (Exact name of registrant specified in its charter) DELAWARE 77-0313235 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Wilshire Boulevard, Suite 1600 Santa Monica, CA 90401-1111 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 899-4700 Securities Registered Pursuant to Section 12(b) of the Act: None Name of Each Exchange Title of Each Class on Which Registered -------------------- ----------------------- None None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No The number of shares outstanding of each of the Registrant's classes of Common Stock at May ____, 1999 was __________ shares of Common Stock, par value $0.01. CADIZ INC. INDEX For the Three Months Ended March 31, 1999 Page PART I - FINANCIAL INFORMATION I. Consolidated Financial Statements A. Statement of Operations...............................2 B. Balance Sheet.........................................3 C. Statement of Cash Flows...............................4 D. Statement of Stockholders' Equity.....................5 E. Notes.................................................6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................7 3. Quantitative and Qualitative Disclosures about Market Risk...........................................16 PART II - OTHER INFORMATION................................16 CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For the Three Months Ended March 31, 1999 1998 ---- ---- ($ in thousands except per share data) Revenues $ 6,560 $ 5,053 Income from partnership - 431 ------- ------ Total revenues 6,560 5,484 ------- ------ Costs and expenses: Cost of sales 5,649 5,013 General and administrative 2,951 2,605 Special litigation 227 313 Depreciation and amortization 740 744 ------- ------ Total costs and expenses 9,567 8,675 -------- ------ Operating loss (3,007) (3,191) Interest expense, net 4,414 3,999 ------- ------ Net loss $(7,421) $(7,190) ======= ======= Net loss per common share $ (.22) $ (.22) ======== ======= Weighted average shares outstanding 33,953 32,791 ======= ====== See accompanying notes to the condensed consolidated financial statements. CADIZ INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) March 31, December 31, 1999 1998 ---- ---- ($ in thousands) ASSETS Current assets: Cash and cash equivalents $ 4,976 $ 13,635 Accounts receivable, net 5,778 6,295 Inventories 27,168 15,019 Prepaid expenses and other 766 992 ------- ------- Total current assets 38,688 35,941 Investment in partnerships 1,169 1,169 Property, plant, equipment and water programs, net 166,463 166,022 Other assets 11,434 11,227 ------- ------- $ 217,754 $ 214,359 -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,360 $ 8,753 Accrued liabilities 10,210 6,846 Revolving credit facility 4,100 - Long-term debt, current portion 681 613 ------- ------ Total current liabilities 23,351 16,212 Long-term debt 142,442 142,317 Deferred income taxes 5,392 5,447 Other liabilities 625 673 Commitments and contingencies Stockholders' equity: Common stock - $.01 par value; 45,000,000 shares authorized; shares issued and outstanding - 34,384,911 at March 31, 1999 and 33,592,261 at December 31, 1998 344 336 Additional paid-in capital 131,309 127,662 Accumulated deficit (85,709) (78,288) -------- ------- Total stockholders' equity 45,944 49,710 ------- ------- $ 217,754 $ 214,359 -------- --------- See accompanying notes to the condensed consolidated financial statements. CADIZ INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 1999 1998 ($ in thousands) ---- ---- Cash flows from operating activities: Net loss $ (7,421) $ (7,190) Adjustments to reconcile net loss from operations to cash used for operating activities: Depreciation and amortization 1,194 1,052 Issuance of shares for services - 264 Gain on sale of assets (40) - Share of partnership operations - (431) Changes in operating assets and liabilities: Decrease in accounts receivable 517 2,652 Increase in inventories (10,611) (7,456) Decrease in prepaid expenses and other 226 133 Decrease in accounts payable (393) (1,358) Increase in accrued liabilities 3,514 3,760 Decrease in other liabilities (104) (77) ------- ------- Net cash used for operating activities (13,118) (8,651) ------- ------- - - Cash flows from investing activities: Additions to property, plant and equipment (805) (1,732) Proceeds from disposal of property, plant and equipment 54 11 Additions to water programs (669) (385) Additions to developing crops (1,062) (1,101) Partnership distributions - 210 Increase in other assets (564) (379) ------- ------- Net cash used for investing activities (3,046) (3,376) ------- ------- Cash flows from financing activities: Net proceeds from issuance of stock 3,505 337 Principal payments on long-term debt (100) (301) Net proceeds from short-term debt 4,100 9,792 ------- ------- Net cash provided by financing activities 7,505 9,828 ------- ------- Net decrease in cash and cash equivalents (8,659) (2,199) Cash and cash equivalents, beginning of period 13,635 5,298 -------- ------- Cash and cash equivalents, end of period $ 4,976 $ 3,099 ======= ========= See accompanying notes to the condensed consolidated financial statements. CADIZ INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) For the Three Months Ended March 31, 1999 ($ in thousands) Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity Balance as of December 31, 1998 33,592,261 $ 336 $ 127,662 $ (78,288) $ 49,710 Exercise of stock options 773,900 8 3,497 - 3,505 Stock issued for services 18,750 - 150 - 150 Net loss - - - (7,421) (7,421) ---------- ----- ------- -------- ------ Balance as of March 31, 1999 34,384,911 $ 344 $ 131,309 $ (85,709) $ 45,944 ========== ====== ========= ======== ======= See accompanying notes to the consolidated financial statements. CADIZ INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION - ------------------------------- The Condensed Consolidated Financial Statements have been prepared by the Company without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's latest Form 10-K for the year ended December 31, 1998. The foregoing Condensed 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 three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the full fiscal year. See Note 2 to the Consolidated Financial Statements included in the Company's latest Form 10-K for a discussion of the Company's accounting policies. NOTE 2 - INVENTORIES Inventories consist of the following (dollars in thousands): March 31, December 31, 1999 1998 ----- ------ Growing crops $ 21,367 $ 11,208 Pepper seed 1,230 1,344 Harvested product 24 360 Materials and supplies 4,547 2,107 ------- ------- $ 27,168 $ 15,019 ====== ======== NOTE 3 - DEBT - ---------------------- In February 1999, Sun World renewed its seasonal revolving credit facility for an additional year and increased the facility to $30 million from $25 million. Amounts borrowed under the facility accrue interest at prime plus 1.0% or LIBOR plus 2.5% at the Company's election. Effective April 30, 1999, the Company obtained a one-year extension of its senior term bank loan totaling $10.3 million (including $0.5 million of accrued but unpaid interest). Pursuant to the extension agreement, the loan will accrue interest at LIBOR plus 2% and the Company will issue certain warrants. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (UNAUDITED) RESULTS OF OPERATIONS The financial statements set forth herein as of and for the three months ended March 31, 1999 and 1998 reflect the results of operations for the Company and its wholly-owned subsidiary, Sun World International, Inc. ("Sun World"). A summary of the Sun World elements which management of the Company believes is essential to an analysis of the results of operations for such periods is presented below. For purposes of this summary, the term Sun World will be used, when the context so requires, with respect to the operations and activities of the Company's Sun World subsidiary, and the term Cadiz will be used, when the context so requires, with respect to those operations and activities of the Company not involving Sun World. The Company's net income or loss in future fiscal periods will be largely reflective of (a) the operations of the Company's water development activities including the Cadiz Groundwater Storage and Dry-Year Supply Program (the "Program") and (b) the operations of Sun World. Sun World conducts its operations through four operating divisions: farming, packing, marketing and proprietary product development. Net income from farming operations varies from year to year primarily due to yield and pricing fluctuations which can be significantly influenced by weather conditions, and are, therefore, generally subject to greater annual variation than Sun World's other divisions. However, the geographic distribution of Sun World's farming operations and the diversity of its crop mix makes it unlikely that adverse weather conditions would affect all of Sun World's properties or all of its crops in any single year. Nevertheless, net profit from Sun World's packing, marketing and proprietary product development operations tends to be more consistent from year to year than net profit from Sun World's farming operations. 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 has entered into agreements internationally to license selected proprietary fruit varieties and continues to pursue additional domestic and international licensing opportunities. The following discussion contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements throughout this document. Specific factors that may cause such a difference include, but are limited to, price and yield fluctuations in the agricultural operations, seasonality, timing and terms of various approvals required to complete the Program. See additional discussions under the heading "Certain Trends and Uncertainties" in Item 7 of the Company's latest Form 10-K. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 The Company's agricultural operations are impacted by the general seasonal trends that are characteristic of the agricultural industry. Sun World has historically received the majority of its net income during the months of June to October following the harvest and sale of its table grape and treefruit crops. Due to this concentrated activity, Sun World has historically incurred losses with respect to its agricultural operations during the other months of the year. The table below sets forth, for the periods indicated, the results of operations for the Company's four main operating divisions (before elimination of any interdivisional charges) as well as the categories of costs and expenses incurred by the Company which are not included within the divisional results (in thousands): Three Months Ended March 31, 1999 1998 ----- ----- Divisional net income (loss): Farming $ 1,104 $ 770 Packing (199) (421) Marketing (433) (377) Proprietary product development 88 239 ------- ------ 560 211 General and administrative 2,600 2,345 Special litigation 227 313 Depreciation and amortization 740 744 Interest expense 4,414 3,999 ------ ------ Net loss $ (7,421) $ (7,190) ======== ======== FARMING OPERATIONS. Net income from farming operations totaled $1.1 million for the three months ended March 31, 1999, compared to $0.8 million for the three months ended March 31, 1998. Operating results during the first quarter of 1999 and 1998 were derived primarily from lemon sales into the fresh and juice markets as well as sweet red peppers from Mexico. During the quarter ended March 31, 1999, farming results were favorably impacted by increased yields coupled with strong pricing for southern lemons due to lower industry volumes resulting from the December freeze in the San Joaquin Valley. PACKING OPERATIONS. For the quarter ended March 31, 1999, Sun World's four packing and handling facilities contributed revenues of $1.8 million offset by $2.0 million of expenses largely due to the fixed infrastructure associated with these facilities for a net loss of $0.2 million compared to a net loss of $0.4 million for the quarter ended March 31, 1998. Packing operations generally reflect a loss in the first quarter of the year as less than 10% of the annual volume is packed or handled during the quarter. Units packed during the quarter totaled 399,000 in 1999 compared to 384,000 in 1998. The Company packed 396,000 units in the Coachella facility in the first quarter of 1999 compared to 257,000 units in the first quarter of 1998. Units packed were higher in 1999 for both third party citrus and Company-farmed lemons at the Coachella facility. The increase in volume in Coachella more than offset the 124,000 unit reduction of citrus packed in the Kimberlina facility resulting from the freeze. MARKETING OPERATIONS. Sun World's marketing operations include the selling, merchandising and promoting of Sun World grown products, as well as providing these services for third party growers. During the three months ended March 31, 1999, a total of approximately 721,000 units were sold, consisting primarily of Company-farmed lemons, citrus from domestic third party growers in Coachella, and sweet red peppers from Mexico, compared to 810,000 units sold during the three months ended March 31, 1998. This reduction in units was primarily due to a reduction in the marketing of San Joaquin citrus resulting from the freeze in December and reduced yields on sweet red peppers from Mexico. Marketing revenues of $0.6 million were offset by marketing expenses of $1.0 million resulting in a net loss of $0.4 million for the first quarter of 1998 and 1999. Similar to the packing operations, marketing operations ordinarily reflect a loss during the first quarter of the year as less than 10% of the annual volume of units marketed are sold during the quarter. PROPRIETARY PRODUCT DEVELOPMENT. Sun World has a long history of product innovation, and its research and development center maintains a fruit breeding program that has introduced many proprietary fruit varieties during the past five years. During the three months ended March 31, 1999 and 1998, net income from proprietary product development was $0.1 million consisting of $0.4 million of international royalties primarily related to the Company's licensing agreement of the Sugraone table grape in South Africa offset by research and development expenses of $0.3 million. During the three months ended March 31, 1998, net income from proprietary product development was $0.2 million consisting primarily of profits from the Company's 50% partnership interest in American SunMelon offset by $0.3 million of research and development expenses. American SunMelon sold substantially all of its assets and distributed the majority of the proceeds to the partners in the fourth quarter of 1998. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the three months ended March 31, 1999 totaled $2.6 million compared to $2.3 for the three months ended March 31, 1998. This increase primarily resulted from additional administrative costs incurred by Cadiz due to activity associated with the implementation of the Program. SPECIAL LITIGATION. The Company is engaged in lawsuits seeking monetary damages arising from activities adverse to the Company in conection with a landfill, which until its defeat by the voters of San Bernardino County in 1996, was proposed to be located adjacent to the Company's Cadiz/Fenner Valley properties. See "Item 1 - Legal Proceedings." During the three months ended March 31, 1999, expenses including litigation costs and professional fees totaled $0.2 million as compared to $0.3 million during the 1998 period. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the three months ended March 31, 1999 and 1998 totaled $0.7 million. INTEREST EXPENSE, NET. Net interest expense totaled $4.4 million during the three months ended March 31, 1999, compared to $4.0 million during the same period in 1998. The following table summarizes the components of net interest expense for the two periods (in thousands): Three Months Ended March 31, 1999 1998 ---- ----- Interest on outstanding debt - Sun World $ 3,439 $ 3,430 Interest on outstanding debt - Cadiz 491 329 Amortization of financing costs 562 307 Interest income (78) (67) ------- ------ $ 4,414 $ 3,999 ======= ======= The increase in interest expense to $4.4 million during the first quarter of 1999 from $4.0 million in 1998 is primarily due to (a) increased borrowings on the $15.0 million Cadiz Revolver (as defined below) compared to 1998 and (b) amortization of warrants issued for the Cadiz Revolver. Financing costs, which include legal fees and warrants, are amortized over the life of the debt agreements. LIQUIDITY AND CAPITAL RESOURCES General Discussion of Liquidity and Capital Resources - ------------------------------------------------------ Based on the cash on hand at March 31, 1999 and the revolving credit facilities in place for both Cadiz and Sun World, as further discussed below, the Company believes it will be able to meet its working capital needs over the next year without looking to additional outside funding sources, although no assurances can be made. See "Current Financing Arrangements" below. Under Sun World's historical working capital cycle, working capital is required primarily to finance the costs of growing and harvesting crops, which generally occur from January through September with a peak need in June. Sun World harvests and sells the majority of its crops during the period from June through October, when it receives the majority of its revenues. In order to bridge the gap between incurrence of expenditures and receipt of revenues, large cash outlays are required each year which are financed through a revolving credit agreement. In April 1998, Sun World entered into a $25 million one year facility (the "Sun World Revolver"). In February 1999, Sun World increased the Sun World Revolver to a $30 million facility in conjunction with a one year renewal of the facility. See "Current Financing Arrangements - Sun World" below. 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. Current Financing Arrangements - ------------------------------- CADIZ OBLIGATIONS As Cadiz has not received significant revenues from its water resource activity to date, Cadiz has been required to obtain financing to bridge the gap between the time water resource development expenses are incurred and the time that revenue will commence. Historically, Cadiz has addressed these needs primarily through secured debt financing arrangements with its lenders, private equity placements and the exercise of outstanding stock options. As of March 31, 1999, Cadiz was obligated for approximately $10.3 million under a senior term loan facility (including $0.5 million of accrued but unpaid interest). With the election to extend the facility in April 1999, the maturity date of the term loan is April 30, 2000. The Company issued certain warrants in conjunction with the extension. Currently, the term lender holds a senior deed of trust on substantially all of Cadiz' non-Sun World related property. 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 March 31, 1999. As the Company continues to actively pursue its business strategy, additional financing specifically in connection with the Company's water programs may be required. Responsibility for funding the design, construction and program implementation costs of the capital facilities for the Cadiz Groundwater Storage and Dry-Year Supply Program will, under currently developed principles and terms, be shared equally by the Company and the Metropolitan Water District of Southern California ("Metropolitan"). The Company is analyzing various alternatives for funding its 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 investment banking firms retained by the Company, management believes that several alternative long- term financing arrangements are available to the Company. SUN WORLD OBLIGATIONS The First Mortgage Notes (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 15th and October 15th of each year. The Sun World Notes are secured by a first lien (subject to certain permitted liens) on substantially all of the assets of Sun World and its subsidiaries, other than 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. To meet its working capital needs for 1999, Sun World has renewed the Sun World Revolver for an additional year including an increase in the facility to $30 million. As of March 31, 1999, $4.1 million was outstanding under the Sun World Revolver. Additionally, Sun World has an intercompany revolving credit agreement with Cadiz for seasonal working capital needs as needed. $5.2 million was outstanding under the intercompany revolver as of March 31, 1999 which is expected to be repaid during the last half of 1999 utilizing proceeds from the sale of Sun World's crops. CASH USED FOR OPERATING ACTIVITIES. Cash used for operating activities totaled $13.1 million for the three months ended March 31, 1999, as compared to cash used for operating activities of $8.7 million for the three months ended March 31, 1998. The increase in cash used for operating activities is primarily due to increased inventory balances in 1999 resulting from (a) an increase in acreage farmed in 1999 compared to 1998 due to the acquisition of two citrus ranches during the last half of 1998, and (b) Sun World purchasing additional packaging materials during the pre-season at favorable terms. CASH USED FOR INVESTING ACTIVITIES. Cash used for investing activities totaled $3.0 million for the three months ended March 31, 1999, as compared to cash used for investing activities of $3.4 million for the same period in 1998. The decrease was primarily due to reduced capital expenditures during the first quarter of 1999 compared to 1998 primarily due to computer system implementation costs incurred during the first quarter of 1998. During the first quarter of 1999, the Company invested $1.1 million in developing crops, $0.7 million in water programs, and $0.8 million for the purchase of property, plant and equipment. CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing activities totaled $7.5 million for the three months ended March 31, 1999, consisting primarily of $4.1 million in borrowings by Sun World for seasonal working capital compared to $9.8 million in 1998. Principal payments on long-term debt totaled $0.1 million for the three months ended March 31, 1999 compared to $0.3 million for the three months ended March 31, 1998. Net proceeds from the exercise of stock options totaled $3.5 million during the three months ended March 31, 1999 compared to $0.3 million during the three months ended March 31, 1998. OUTLOOK The Company is actively pursuing the development of its water resources. Specifically, in July 1998, the Company and Metropolitan approved the principles and terms for agreement for the Cadiz Groundwater Storage and Dry-Year Supply Program. The principles and terms for agreement provide that Metropolitan will, during wet years or periods of excess supply, store surplus water from its Colorado River Aqueduct in the Company's groundwater basin. During dry years or times of reduced allocations from the Colorado River, the previously imported water, together with additional existing groundwater, will be extracted and delivered, via a conveyance pipeline, back to the aqueduct. The principles and terms for agreement provide that over the 50 year term of the agreement, Metropolitan will store a minimum of 500,000 acre-feet of Colorado River Aqueduct water in the Company's groundwater basin and purchase a minimum of 1,100,000 acre-feet of existing groundwater for transfer during dry-years. The Program will have the capacity to convey, either for storage or transfer, up to 150,000 acre- feet in any given year. During storage operations, Metropolitan will pay a fee per acre-foot for put of water into storage and a fee per acre- foot for return of water from storage, and a storage fee per acre-foot every year that water is stored in the groundwater basin. On the transfer of water, Metropolitan will pay a base rate of approximately $230 per acre-foot, which will be adjusted according to a water price formula. Additionally, recognizing that delivery of the Company's high-quality, indigenous groundwater to the aqueduct provides a significant water quality benefit, Metropolitan will pay the Company a water quality fee for both transferred and returned water. The Program facilities, including spreading basins, extraction wells, conveyance pipeline and a pumping plant, are estimated to cost between $125 and $150 million, and both parties will share these costs. All operational costs of the Program, including annual operations, maintenance and energy costs, will be an obligation of Metropolitan. The principles and terms for agreement call for the establishment of a comprehensive independent groundwater monitoring and management plan to ensure long-term protection of the groundwater basin. The parties have commenced the environmental review process, which will include compliance with California Environmental Quality Act and National Environmental Protection Act requirements. The final agreement may reflect adjustments to these principles and terms in order to reflect information identified during this review. The final agreement will be presented to the respective Boards of both parties for approval. The Program is anticipated to be operational by the year 2001. In addition to the development of its water resources, the Company is actively involved in further agricultural development and reinvestment in its landholdings. Such development will be systematic and in furtherance of the Company's business strategy to provide for maximization of the value of its assets. The Company also continually evaluates acquisition opportunities, which are complimentary to its current portfolio of water and agricultural resources. With the acquisition of two citrus ranches in 1998, the Company will grow, pack and market additional boxes of citrus from December through March, which is contra-seasonal to the Company's primary farming operations. This acquisition helps to further diversify the Company's portfolio and enables the Company to utilize its Bakersfield packing facility during a previous period of limited utilization. The Company believes that, based upon current levels of operations and anticipated growth, Sun World can adequately service its indebtedness and meet its seasonal working capital needs utilizing available internal cash, the Sun World Revolver and, if necessary, through an intercompany revolver with Cadiz. Cadiz expects to be able to meet its ordinary working capital needs, in the short-term, through a combination of cash on hand, quarterly management fee payments from Sun World, payments from Sun World under an agricultural lease whereby Sun World now operates the Company's 1,600 acres of developed agricultural property at Cadiz, California, and the possible exercise of outstanding stock options. Except for the foregoing, additional intercompany cash payments between Sun World and Cadiz are subject to certain restrictions under its current lending arrangements. YEAR 2000 The year 2000 ("Y2K") issue is the result of computer programs using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations. If the Company or its significant suppliers or customers fail to make necessary modifications, conversions, and contingency plans on a timely basis, the Y2K issue could have a material adverse effect on the Company's business, operations, cash flows, and financial condition. The impact of the Y2K issue cannot be quantified at this time because the Company cannot accurately estimate the magnitude, duration, or ultimate impact of noncompliance by suppliers, customers, and third parties that have no direct relationship to the Company. The Company has established a corporate-wide project team to identify and mitigate all Y2K issues. The team has identified three categories of software and systems that require attention: (1) Information technology ("IT") systems, such as mini mainframes, PCs, and networks; (2) Non-IT systems, such as equipment, machinery, climate control, and security systems, which may contain microcontrollers with embedded technology; and (3) Partner (supplier and customer) IT and non-IT systems. For each category, the project team is utilizing the following steps to identify and resolve Y2K issues: (1) inventory the systems, (2) assess risks and impact of each system, (3) prioritize projects, (4) fix, replace, or develop contingency plans for non-compliant systems, and (5) test Y2K compliance. The status of each of the major categories as of April 1999 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'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 AS/400 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 AS/400 applications completed by August 31, 1999. As of April 22, 1999, the Company is approximately 60% complete with the AS/400 project and remains on schedule to have the AS/400 applications Year 2000 compliant 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. As of January 1999, all required service packs to make these applications Year 2000 compliant have been installed and tested. YEAR 2000 COMPLIANCE ON PC BASED NETWORK SERVERS AND DESKTOP COMPUTERS The Company has contacted all significant PC based desktop and server system manufacturers to ascertain Year 2000 compliance. All significant PC based systems are Year 2000 compliant with required ROM upgrades made in April 1999. Non-IT Systems -------------- Although no other areas of the business are expected to create Year 2000 issues, the project team is continuing to review all areas of the business to determine Year 2000 compliance. Management believes that given the agricultural nature of the Company's business, the project team will not encounter any major Y2K issues 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 has identified all significant suppliers and customers and has sent surveys and is conducting formal communications to determine the extent to which it may be affected by those third parties' Y2K preparedness plans. In the absence of adequate responses and disclosures from major suppliers and customers, the Company will attempt to make independent assessments. However, a compliance failure by a major supplier or customer, or one of their suppliers or customers, could have a material adverse effect on the Company's business or financial condition. As a result, in some cases the Company will develop contingency plans for suppliers and customers determined to be at risk of noncompliance or business disruption. Such plans could include finding alternative suppliers or manual intervention where necessary. Costs related to the Y2K issue are funded through operating cash flows. The Company presently believes that the total costs to obtain Y2K compliant systems will not exceed $250,000, which consists mostly of internal labor for programming and testing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --------------------------------------------------------- Information about market risks for the three months ended March 31, 1999 does not differ materially from that discussed under Item 7A of the registrant's Annual Report on Form 10-K for 1998. PART II - OTHER INFORMATION Item 1. - Legal Proceedings -------------------- See "Item 3. Legal Proceedings" included in the Company's latest Form 10-K for a complete discussion. CADIZ LAND COMPANY, INC. V. WASTE MANAGEMENT, INC., ET. AL., Case No. CV 97-7827 WMB (MANx) (the "federal action") and CADIZ LAND COMPANY, INC. V. WASTE MANAGEMENT, INC., Civil Action No. SC 05743 (the "State Court Action"). In the State Court Action, on March 10, 1999, the court sustained a demurrer to the Company's First Amended Complaint, with leave to amend. The Company's time in which to file its Second Amended Complaint has been extended until 60 days after certain discovery issues are resolved. The Company will continue to vigorously prosecute its claims against the WMI defendants. Item 2. - Changes in Securities and Use of Proceeds ------------------------------------------ During the quarter ended March 31, 1999, the Company issued 1,900 shares upon exercise of outstanding options to a single option holder at an exercise price of $5.50 per share. The issuance of the shares was not registered under the Securities Act of 1933, as amended (the "Securities Act"). The shares were issued in accordance with the terms of previously executed stock option agreements. The Company believes that this transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof as a transaction not involving a public offering. 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 and Reports on Form 8-K -------------------------------- A. Exhibits 1. Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Cadiz Inc. By: /s/ Keith Brackpool May , 1999 ------------------------------------ -------------------- Keith Brackpool, President and Date Chief Executive Officer and Director By: /s/ Stanley E. Speer May , 1999 ----------------------------------- --------------------- Stanley E. Speer Date Chief Financial Officer