SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 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 as 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the Registrant's classes of Common Stock at November 12, 2001 was 36,045,295 shares of Common Stock, par value $0.01. CADIZ INC. INDEX For the Nine Months Ended September 30, 2001 Page PART I - FINANCIAL INFORMATION 1. Cadiz Inc. Consolidated Financial Statements Statement of Operations for the three months ended September 30, 2001 and 2000. . . . . . . . . . . . . . . .3 Statement of Operations for the nine months ended September 30, 2001 and 2000. . . . . . . . . . . . . . . .4 Balance Sheet as of September 30, 2001 and December 31, 2000. . . . . . . . . . . . . . . . . . . . . .5 Statement of Cash Flows for the nine months ended September 30, 2001 and 2000. . . . . . . . . . . . . . . . . . .6 Statement of Stockholders' Equity for the nine months ended September 30, 2001. . . . . . . . . . . . . . 7 Notes to the Consolidated Financial Statements. . . . . . . . .. 8 Sun World International, Inc. Consolidated Financial Statements Statement of Operations for the three months ended September 30, 2001 and 2000. . . . . . . . . . . . . . . .17 Statement of Operations for the nine months ended September 30, 2001 and 2000. . . . . . . . . . . . . . . .18 Balance Sheet as of September 30, 2001 and December 31, 2000. . . . . . . . . . . . . . . . . . . . . .19 Statement of Cash Flows for the nine months ended September 30, 2001 and 2000. . . . . . . . . . . . . . . .20 Statement of Stockholder's Equity for the nine months ended September 30, 2001. . . . . . . . . . . . . . 21 Notes to the Consolidated Financial Statements. . . . . . . . . .22 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . 23 3. Quantitative and Qualitative Disclosures about Market Risk. . . .35 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . .35 CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For the Three Months Ended September 30, 2001 2000 ---- ---- ($ in thousands except per share data) Revenues $ 48,683 $ 55,376 ------- ------- Costs and expenses: Cost of sales 41,072 43,367 General and administrative 3,181 2,983 Special litigation - 84 Removal of underperforming crops 222 - Depreciation and amortization 4,379 4,349 ------- ------- Total costs and expenses 48,854 50,783 ------- ------- Operating profit (loss) (171) 4,593 Interest expense, net 4,909 4,935 ------- ------- Net loss (5,080) (342) Less:Preferred stock dividends 113 - Imputed dividend on preferred stock 74 - ------- ------- Net loss applicable to common stock $ (5,267) $ (342) ======== ======== Basic and diluted net loss per common share $ (0.15) $ (0.01) ======== ======== Basic and diluted weighted average shares outstanding 35,890 35,364 ======== ======= See accompanying notes to the consolidated financial statements. CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNADUITED) For the Nine Months Ended September 30, 2001 2000 ---- ---- ($ in thousands except per share data) Revenues $ 76,425 $ 90,240 Special litigation recovery 7,929 - --------- --------- Total revenues and special litigation recovery 84,354 90,240 --------- --------- Costs and expenses: Cost of sales 64,457 75,064 General and administrative 9,725 9,066 Special litigation - 360 Non-recurring compensation expense 5,537 - Removal of underperforming crops 222 - Depreciation and amortization 6,943 6,815 --------- --------- Total costs and expenses 86,884 91,305 --------- --------- Operating loss (2,530) (1,065) Interest expense, net 14,374 14,401 --------- --------- Net loss (16,904) (15,466) Less: Preferred stock dividends 338 - Imputed dividend on preferred stock 220 - --------- --------- Net loss applicable to common stock $(17,462) $ (15,466) ========= ========= Basic and diluted net loss per common share $ (0.49) $ (0.44) ========= ========= Basic and diluted weighted average shares outstanding 35,787 35,290 ======== ======== See accompanying notes to the consolidated financial statements. CADIZ INC. CONSOLIDATED BALANCE SHEET (Unaudited) September 30, December 31, 2001 2000 ---- ---- ($ in thousands) ASSETS Current assets: Cash and cash equivalents $ 313 $ 4,768 Accounts receivable, net 14,402 7,884 Inventories 15,971 15,203 Prepaid expenses and other 766 631 --------- --------- Total current assets 31,452 28,486 Property, plant, equipment and water programs, net 165,945 164,824 Other assets 11,130 11,784 --------- --------- $ 208,527 $ 205,094 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,416 $ 9,377 Accrued liabilities 8,687 5,815 Revolving credit facility 4,600 - Long-term debt, current portion 25,056 859 --------- -------- Total current liabilities 52,759 16,051 Long-term debt 121,212 145,610 Deferred income taxes 5,447 5,447 Other liabilities 741 313 Commitments and contingencies Series D redeemable convertible preferred stock - $.01 par value 5,000 shares authorized, issued and outstanding 4,170 3,950 Stockholders' equity: Common stock - $.01 par value; 70,000,000 shares authorized; shares issued and outstanding - 36,025,295 at September 30, 2001 and 35,674,674 at December 31, 2000 360 357 Additional paid-in capital 150,082 142,706 Accumulated deficit (126,244) (109,340) -------- -------- Total stockholders' equity 24,198 33,723 -------- -------- $ 208,527 $ 205,094 ========= ========= See accompanying notes to the consolidated financial statements. CADIZ INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 ---- ---- ($ in thousands) Cash flows from operating activities: Net loss $ (16,904) $ (15,466) Adjustments to reconcile net loss from operations to cash used for operating activities: Depreciation and amortization 9,230 8,768 Gain on sale of assets (371) (3) Removal of underperforming crops 222 - Land received in litigation recovery (2,000) - Share of partnership operations - (31) Stock earned for services (938) (938) Deferred stock compensation 418 141 Non-recurring compensation expense 5,537 - Changes in operating assets and liabilities: Increase in accounts receivable (6,518) (6,133) (Increase) decrease in inventories (1,460) 3,438 (Increase) decrease in prepaid expenses and other (135) 206 Increase in accounts payable 5,039 4,138 Increase in accrued liabilities 2,774 2,052 Increase in other liabilities 10 156 --------- --------- Net cash used for operating activities (5,096) (3,672) --------- --------- Cash flows from investing activities: Additions to property, plant and equipment (1,387) (900) Additions to developing crops (2,448) (3,066) Additions to water programs (1,020) (1,248) Proceeds from disposal of property, plant and equipment 398 436 Decrease (increase) in other assets 202 (371) -------- --------- Net cash used for investing activities (4,255) (5,149) -------- --------- Cash flows from financing activities: Net proceeds from issuance of stock 1,571 652 Principal payments on long-term debt (1,275) (420) Net proceeds from short-term debt 4,600 4,600 -------- --------- Net cash provided by financing activities 4,896 4,832 -------- --------- Net decrease in cash and cash equivalents (4,455) (3,989) Cash and cash equivalents, beginning of period 4,768 4,537 -------- --------- Cash and cash equivalents, end of period $ 313 $ 548 ========== ========== See accompanying notes to the consolidated financial statements. CADIZ INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) For the Nine Months Ended September 30, 2001 ($ in thousands) Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity ------ ------ ------- ------- ----------- Balance as of December 31, 2000 35,674,674 $ 357 $ 142,706 $(109,340) $ 33,723 Exercise of stock options 325,637 3 1,568 - 1,571 Repricing of warrants to a lender - - 584 - 584 Amortization of preferred stock warrants and imputed dividend - - (220) - (220) Payment of preferred stock dividends with common stock 24,984 - 245 - 245 Preferred stock dividend - - (338) - (338) Non-recurring compensation - - 5,537 - 5,537 Net loss - - - (16,904) (16,904) -------- ----- ------- --------- -------- Balance as of September 30, 2001 36,025,295 $ 360 $ 150,082 $(126,244) $ 24,198 ========== ====== ========== ========== ========= See accompanying notes to the consolidated financial statements. CADIZ INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION - ------------------------------ The Consolidated Financial Statements have been prepared by the Company without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's latest Form 10-K for the year ended December 31, 2000. The foregoing Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation. Certain reclassifications have been made to the prior period to conform to the current period presentation. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. See Note 2 to the Consolidated Financial Statements included in the Company's latest Form 10-K for a discussion of the Company's accounting policies. NOTE 2 - INVENTORIES - -------------------- Inventories consist of the following (dollars in thousands): September 30, December 31, 2001 2000 ---- ---- Growing crops $ 9,164 $ 11,538 Pepper seed 98 257 Harvested product 3,844 528 Materials and supplies 2,865 2,880 -------- -------- $ 15,971 $ 15,203 ======== ========= NOTE 3 - DEBT - ------------- SUN WORLD OBLIGATIONS In April 1997, Sun World issued $115 million of Series A First Mortgage Notes through a private placement. The notes have subsequently been exchanged for Series B First Mortgage Notes, which are registered under the Securities Act of 1933 and are publicly traded. The First Mortgage 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 Revolving Credit Facility. The First Mortgage Notes mature April 15, 2004, but are redeemable at the option of Sun World, in whole or in part, at any time on or after April 15, 2001. The First Mortgage Notes include covenants which restrict the Company's ability to receive distributions from Sun World. The First Mortgage Notes are also secured by the guarantees of Coachella Growers, Inc., Sun Desert, Inc., Sun World Brands, Sun World Management Corporation, Sun World/Rayo, and Sun World International de Mexico S.A. de C.V. (collectively, the "Sun World Subsidiary Guarantors") and by the Company. The Company also pledged all of the stock of Sun World as collateral for its guarantee. Sun World and the Sun World Subsidiary Guarantors are all direct and indirect wholly owned subsidiaries of the Company. The guarantees by the Sun World Subsidiary Guarantors are full, unconditional, and joint and several. Sun World and the Sun World Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company other than inconsequential subsidiaries. Additionally, management believes that the direct and indirect non-guarantor subsidiaries of Cadiz are inconsequential, both individually and in the aggregate, to the financial statements of the Company for all periods presented. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Condensed consolidating financial information as of and for the three months and nine months ended September 30, 2001 and 2000 for the Company is as follows (in thousands): Consolidating Statement of Operations Information Three Months Ended September 30, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ----------- ------------ Revenues $ 471 $ 48,687 $ (475) $ 48,683 ------ --------- -------- ---------- Costs and expenses: Cost of sales 29 41,143 (100) 41,072 General and administrative 1,292 2,264 (375) 3,181 Removal of underperforming crops 222 - - 222 Depreciation and amortization 284 4,095 - 4,379 ------ --------- -------- ---------- Total costs and expenses 1,827 47,502 (475) 48,854 ------ --------- -------- ---------- Operating profit (loss) (1,356) 1,185 - (171) Interest expense, net 859 3,889 161 4,909 ------ --------- -------- ---------- Net loss (2,215) (2,704) (161) (5,080) Less: Preferred stock dividends 113 - - 113 Imputed dividend on preferred stock 74 - - 74 ------ --------- -------- ---------- Net loss applicable to common stock $ (2,402) $ (2,704) $ (161) $ (5,267) ======= ======== ======= ======== Consolidating Statement of Operations Information Nine Months Ended September 30, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ----------- Revenues $ 1,425 $ 76,425 $ (1,425) $ 76,425 Special litigation recovery 7,929 - - 7,929 ------ ------- -------- --------- Total revenues and special litigation recovery 9,354 76,425 (1,425) 84,354 ------ --------- -------- --------- Costs and expenses: Cost of sales 90 64,667 (300) 64,457 General and administrative 4,075 6,775 (1,125) 9,725 Non-recurring compensation expense 2,584 2,953 - 5,537 Removal of underperforming crops 222 - - 222 Depreciation and amortization 857 6,086 - 6,943 ------ ------- -------- --------- Total costs and expenses 7,828 80,481 (1,425) 86,884 ------ ------- -------- --------- Operating profit (loss) 1,526 (4,056) - (2,530) Interest expense, net 2,360 11,805 209 14,374 ------ ------- -------- --------- Net loss (834) (15,861) (209) (16,904) Less: Preferred stock dividends 338 - - 338 Imputed dividend on preferred stock 220 - - 220 ------ ------- -------- --------- Net loss applicable to common stock $ (1,392) $ (15,861) $ (209) $ (17,462) ======== ========= ======== ========= Consolidating Balance Sheet Information September 30, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1 $ 312 $ - $ 313 Accounts receivable, net 97 14,305 - 14,402 Due from affiliate 5,338 - (5,338) - Inventories - 16,173 (202) 15,971 Prepaid expenses and other 112 654 - 766 ------- -------- ------- -------- Total current assets 5,548 31,444 (5,540) 31,452 Investment in subsidiary 4,184 - (4,184) - Property, plant, equipment and water programs, net 41,095 124,850 - 165,945 Other assets 4,253 7,086 (209) 11,130 ------- -------- ------- -------- $ 55,080 $ 163,380 $ (9,933) $ 208,527 ======== ========= ======== ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,294 $ 13,122 $ - $ 14,416 Accrued liabilities 446 8,241 - 8,687 Due to affiliate - 5,338 (5,338) - Revolving credit facility - 4,600 - 4,600 Long-term debt, current portion 24,265 791 - 25,056 ------- -------- ------- -------- Total current liabilities 26,005 32,092 (5,338) 52,759 Long-term debt - 121,212 - 121,212 Deferred income taxes - 5,447 - 5,447 Other liabilities 297 444 - 741 Redeemable preferred stock 4,170 - - 4,170 Stockholders' equity: Common stock 360 - - 360 Additional paid-in capital 150,082 38,278 (38,278) 150,082 Accumulated deficit (125,834) (34,093) 33,683 (126,244) ------- -------- ------- -------- Total stockholders' equity 24,608 4,185 (4,595) 24,198 ------- -------- ------- -------- $ 55,080 $ 163,380 $ (9,933) $ 208,527 ======== ========== ========= ========== Consolidating Statement of Cash Flow Information Nine Months Ended September 30, 2001 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ Net cash provided by (used for) operating activities $ 891 $ (5,987) $ - $ (5,096) ------- --------- ------- -------- Cash flows from investing activities: Additions to property, plant and equipment (58) (1,329) - (1,387) Additions to developing crops (85) (2,363) - (2,448) Additions to water programs (1,020) - - (1,020) Proceeds from disposal of property, plant and equipment 1 397 - 398 (Increase) decrease in other assets (307) 509 - 202 ------- --------- ------- -------- Net cash used for investing activities (1,469) (2,786) - (4,255) ------- --------- ------- -------- Cash flows from financing activities: Net proceeds from issuance of stock 1,571 - - 1,571 Principal payments on long-term debt (250) (1,025) - (1,275) Borrowings from intercompany revolver, net (3,841) 3,841 - - Net proceeds from short-term borrowings - 4,600 - 4,600 ------- --------- ------- -------- Net cash (used for) provided by financing activities (2,520) 7,416 - 4,896 ------- --------- ------- -------- Net decrease in cash and cash equivalents (3,098) (1,357) - (4,455) Cash and cash equivalents, beginning of period 3,099 1,669 - 4,768 ------- --------- ------- -------- Cash and cash equivalents, end of period $ 1 $ 312 $ - $ 313 ========= ======== ======= ========= Consolidating Balance Sheet Information December 31, 2000 Cadiz Sun World Eliminations Consolidated ----- --------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 3,099 $ 1,669 $ - $ 4,768 Accounts receivable, net 7 7,879 (2) 7,884 Inventories - 15,405 (202) 15,203 Prepaid expenses and other 212 419 - 631 --------- -------- ------- -------- Total current assets 3,318 25,372 (204) 28,486 Investment in subsidiary 17,093 - (17,093) - Property, plant, equipment and water programs, net 38,842 125,982 - 164,824 Other assets 4,199 7,585 - 11,784 --------- -------- ------- -------- $ 63,452 $ 158,939 $ (17,297) $ 205,094 ========== ========= ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,209 $ 8,170 $ (2) $ 9,377 Accrued liabilities 349 5,466 - 5,815 Due to affiliate 202 - (202) - Long-term debt, current portion - 859 - 859 --------- -------- ------- -------- Total current liabilities 1,760 14,495 (204) 16,051 Long-term debt 23,912 121,698 - 145,610 Deferred income taxes - 5,447 - 5,447 Other liabilities 107 206 - 313 Redeemable preferred stock 3,950 - - 3,950 Stockholders' equity: Common stock 357 - - 357 Additional paid-in capital 142,706 35,325 (35,325) 142,706 Accumulated deficit (109,340) (18,232) 18,232 (109,340) --------- -------- ------- -------- Total stockholders' equity 33,723 17,093 (17,093) 33,723 --------- -------- ------- -------- $ 63,452 $ 158,939 $(17,297) $ 205,094 ========== ========= ========= ========= Consolidating Statement of Operations Information Three Months Ended September 30, 2000 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ----------- Revenues $ 478 $ 55,373 $ (475) $ 55,376 --------- --------- --------- -------- Costs and expenses: Cost of sales - 43,423 (56) 43,367 General and administrative 1,197 2,161 (375) 2,983 Special litigation 84 - - 84 Depreciation and amortization 286 4,063 - 4,349 --------- --------- --------- -------- Total costs and expenses 1,567 49,647 (431) 50,783 --------- --------- --------- -------- Operating income (loss) (1,089) 5,726 (44) 4,593 Interest expense, net 1,077 3,858 - 4,935 --------- --------- --------- -------- Net income (loss) $ (2,166) $ 1,868 $ (44) $ (342) ========= ========== ======== ======== Consolidating Statement of Operations Information Nine months Ended September 30, 2000 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ Revenues $ 1,441 $ 90,224 $ (1,425) $ 90,240 --------- --------- --------- -------- Costs and expenses: Cost of sales - 75,261 (197) 75,064 General and administrative 3,323 6,868 (1,125) 9,066 Special litigation 360 - - 360 Depreciation and amortization 877 5,938 - 6,815 --------- --------- --------- -------- Total costs and expenses 4,560 88,067 (1,322) 91,305 --------- --------- --------- -------- Operating income (loss) (3,119) 2,157 (103) (1,065) Interest expense, net 2,923 11,478 - 14,401 --------- --------- --------- -------- Net loss $ (6,042) $ (9,321) $ (103) $ (15,466) ======== ========= ======== ========= Consolidating Statement of Cash Flow Information Nine Months Ended September 30, 2000 Cadiz Sun World Eliminations Consolidated ----- --------- ------------ ------------ Net cash used for operating activities $ (3,234) $ (438) $ - $ (3,672) --------- --------- --------- -------- Cash flows from investing activities: Additions to property, plant and equipment (283) (617) - (900) Additions to developing crops - (3,066) - (3,066) Additions to water programs (1,248) - - (1,248) Proceeds from disposal of property, plant and equipment 1 435 - 436 Increase in other assets (13) (358) - (371) --------- --------- --------- -------- Net cash used for investing activities (1,543) (3,606) - (5,149) --------- --------- --------- -------- Cash flows from financing activities: Net proceeds from issuance of stock 652 - - 652 Principal payments on long-term debt (20) (400) - (420) Net proceeds from short-term debt - 4,600 - 4,600 --------- --------- --------- -------- Net cash provided by financing activities 632 4,200 - 4,832 --------- --------- --------- -------- Net (decrease) increase in cash and cash equivalents (4,145) 156 - (3,989) Cash and cash equivalents, beginning of period 4,145 392 - 4,537 --------- --------- --------- -------- Cash and cash equivalents, end of period $ - $ 548 $ - $ 548 ========= ======== ======== ========= NOTE 4 - NON-RECURRING COMPENSATION EXPENSE - ------------------------------------------- In March 2001, the Company agreed to issue 564,163 deferred stock units to certain senior managers of Cadiz and Sun World. These deferred stock units were issued in exchange for the cancellation of 1,055,000 fully vested options to purchase the Company's common stock held by the senior managers. The number of the deferred stock units issued was calculated based on the average closing price for the 10 business days following the filing of the Company's Annual Report on Form 10-K on March 29, 2001. Each deferred stock unit is exchangeable for one share of the Company's common stock at the end of the deferral period elected by the holder. The Company recorded a one-time charge of $5,537,000 and no cash was expended in connection with the issuance of the deferred stock units. NOTE 5 - SPECIAL LITIGATION RECOVERY - ----------------------------------- The Company was engaged in lawsuits against Waste Management seeking monetary damages arising from activities adverse to the Company in connection with a landfill, which until its defeat by the voters of San Bernardino County in 1996 was proposed to be located adjacent to the Company's Cadiz/Fenner Valley properties. In March 2001, the Company and Waste Management executed a settlement agreement related to these lawsuits. Pursuant to the settlement agreement, Waste Management paid the Company $6.0 million in cash and granted to the Company an exclusive option to receive, at no cost to the Company, up to approximately 7,000 acres of real property in eastern San Bernardino County primarily adjacent to the Cadiz Program property. In April 2001, the Company exercised the option and, as a consequence, has acquired the subject property. The settlement resulted in net revenues recognized of $7.9 million. NOTE 6 - NET LOSS PER COMMON SHARE - ---------------------------------- Basic Earnings Per Share (EPS) is computed by dividing the net loss, after deduction for preferred dividends either accrued or imputed, if any by the weighted-average common shares outstanding. Options, deferred stock units, warrants and preferred stock that are convertible into shares of the Company's common stock were not considered in the computation of diluted EPS because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 2.2 million shares for the nine months ended September 30, 2001 SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended September 30, ($ in thousands) 2001 2000 ---- ---- Revenues $ 48,687 $ 55,373 ------- --------- Costs and expenses: Cost of sales 41,143 43,423 General and administrative 2,264 2,161 Depreciation and amortization 4,095 4,063 ------- --------- Total costs and expenses 47,502 49,647 ------- --------- Operating profit 1,185 5,726 Interest expense, net 3,889 3,858 ------- --------- Net income (loss) $ (2,704) $ 1,868 ========= ======== See accompanying notes to the consolidated financial statements. SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) Nine Months Ended September 30, ($ in thousands) 2001 2000 ---- ---- Revenues $ 76,425 $ 90,224 -------- -------- Costs and expenses: Cost of sales 64,667 75,261 General and administrative 6,775 6,868 Non-recurring compensation expense 2,953 - Depreciation and amortization 6,086 5,938 -------- -------- Total costs and expenses 80,481 88,067 -------- -------- Operating profit (4,056) 2,157 Interest expense, net 11,805 11,478 -------- -------- Net loss $ (15,861) $ (9,321) ======== ========= See accompanying notes to the consolidated financial statements. SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED BALANCE SHEET (Unaudited) September 30, December 31, ($ in thousands) 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 312 $ 1,669 Accounts receivable, net 14,305 7,879 Inventories 16,173 15,405 Prepaid expenses and other 654 419 -------- --------- Total current assets 31,444 25,372 Property, plant, equipment, and water programs, net 124,850 125,982 Other assets 7,086 7,585 -------- --------- Total assets $ 163,380 $ 158,939 ========= ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 13,122 $ 8,170 Accrued liabilities 8,241 5,466 Due to parent 5,338 - Revolving credit facility 4,600 - Long-term debt, current portion 791 859 --------- --------- Total current liabilities 32,092 14,495 Long-term debt 121,212 121,698 Deferred income taxes 5,447 5,447 Other liabilities 444 206 Commitments and contingencies Stockholder's equity: Common stock, $.01 par value, 300,000 shares authorized; 42,000 shares issued and outstanding - - Additional paid-in capital 38,278 35,325 Accumulated deficit (34,093) (18,232) --------- --------- Total stockholder's equity 4,185 17,093 --------- -------- Total liabilities and stockholder's equity $ 163,380 $ 158,939 ========= ========= See accompanying notes to the consolidated financial statements. SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, ($ in thousands) 2001 2000 ---- ---- Cash flows from operating activities: Net loss $ (15,861) $ (9,321) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 6,899 6,510 Gain on disposal of assets (376) (3) Share of partnership operations - (31) Stock earned for services (938) (938) Deferred stock compensation 222 81 Non-recurring compensation expense 2,953 - Changes in operating assets and liabilities: Increase in accounts receivable (6,426) (6,089) (Increase) decrease in inventories (1,460) 3,328 (Increase) decrease in prepaid expenses and other (235) 90 Increase in accounts payable 4,952 3,874 Increase in accrued liabilities 2,770 2,645 Increase (decrease)in due to parent 1,497 (742) Increase in other liabilities 16 158 -------- --------- Net cash used for operating activities (5,987) (438) -------- --------- Cash flows from investing activities: Additions to property, plant, equipment, and water programs (1,329) (617) Additions to developing crops (2,363) (3,066) Proceeds from disposal of property, plant and equipment 397 435 Decrease (increase) in other assets 509 (358) -------- --------- Net cash used for investing activities (2,786) (3,606) -------- --------- Cash flows from financing activities: Principal payments on long-term debt (1,025) (400) Borrowings from intercompany revolver, net 3,841 - Proceeds from short-term borrowings 4,600 4,600 -------- --------- Net cash provided by financing activities 7,416 4,200 -------- --------- Net (decrease) increase in cash and cash equivalents (1,357) 156 Cash and cash equivalents at beginning of period 1,669 392 -------- --------- Cash and cash equivalents at end of period $ 312 $ 548 ========= ======== See accompanying notes to the consolidated financial statements. SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (UNAUDITED) For the Nine Months Ended September 30, 2001 ($ in thousands) Additional Total Common Stock Paid-in Accumulated Stockholder's Shares Amount Capital Deficit Equity ------ ----- ------- -------- -------------- Balance as of December 31, 2000 42,000 $ - $ 35,325 $ (18,232) $ 17,093 Non-recurring compensation - - 2,953 - 2,953 Net loss - - - (15,861) (15,861) -------- ------ --------- -------- --------- Balance as of September 30, 2001 42,000 $ - $ 38,278 $ (34,093) $ 4,185 ======== ====== ======== ======== ======= See accompanying notes to the consolidated financial statements. SUN WORLD INTERNATIONAL, INC. (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION - ------------------------------ The Consolidated Financial Statements have been prepared by Sun World International, Inc. and its subsidiaries ("Sun World") without audit and should be read in conjunction with the Sun World Consolidated Financial Statements and notes thereto included in the Cadiz Inc. Form 10-K for the year ended December 31, 2000. The foregoing Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, which Sun World considers necessary for a fair presentation. Certain reclassifications have been made to the prior period to conform to the current period presentation. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. See Note 2 to the Sun World Consolidated Financial Statements included in the Cadiz Inc. latest Form 10-K for a discussion of Sun World's accounting policies. NOTE 2 - INVENTORIES - --------------------- Inventories consist of the following (dollars in thousands): September 30, December 31, 2001 2000 ---- ---- Growing crops $ 9,366 $ 11,740 Pepper seed 98 257 Harvested product 3,844 528 Materials and supplies 2,865 2,880 ------- -------- $ 16,173 $ 15,405 ========= ========= NOTE 3 - NON-RECURRING COMPENSATION EXPENSE - ------------------------------------------ In March 2001, Cadiz agreed to issue 300,860 deferred stock units to certain senior managers of Sun World. These deferred stock units were issued in exchange for the cancellation of 565,000 fully vested options to purchase Cadiz common stock held by the senior managers. The number of the deferred stock units issued was calculated based on the average closing price for the 10 business days following the filing of the Cadiz Inc. Annual Report on Form 10-K on March 29, 2001. Each deferred stock unit is exchangeable for one share of Cadiz common stock at the end of the deferral period elected by the holder. Sun World recorded a one-time charge and a contribution to capital by Cadiz of $2,953,000 in connection with the issuance of the deferred stock units. No cash was expended in connection with the issuance of the deferred stock units. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) RESULTS OF OPERATIONS The financial statements set forth herein as of and for the nine months ended September 30, 2001 and 2000 reflect the results of operations for the Company and its wholly-owned subsidiary, 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 "Cadiz 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. Packing and marketing revenues from third party growers currently represent less than 10% of total annual Company revenues. Nevertheless, net profit from Sun World's packing, marketing and proprietary product development operations tends to be more consistent from year to year than net profit from Sun World's farming operations. Sun World has entered into agreements internationally to license selected proprietary fruit varieties and continues to pursue additional domestic and international licensing opportunities. License revenues also currently represent less than 10% of total annual Company revenues. The following discussion contains trend analysis and other forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements throughout this document. Specific factors that may cause such a difference include, but are not limited to, price and yield fluctuations in the agricultural operations, seasonality, timing and terms of various approvals required to complete the Cadiz Program. See additional discussions under the heading "Certain Trends and Uncertainties" in Item 7 of the Company's latest Form 10-K. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,2000 The Company's agricultural operations are impacted by the general seasonal trends that are characteristic of the agricultural industry. Sun World has historically received the majority of its net income during the months of June to October following the harvest and sale of its table grape and stonefruit crops. Due to this concentrated activity, Sun World has historically incurred losses with respect to its agricultural operations during the other months of the year. The table below sets forth, for the periods indicated, the results of operations for the Company's four main operating divisions (before elimination of any interdivisional charges) as well as the categories of costs and expenses incurred by the Company which are not included within the divisional results ($ in thousands): Three Months Ended September 30, ---------- 2001 2000 ---- ---- Divisional net income (loss): Farming $ (2,378) $ 2,585 Packing 5,805 4,803 Marketing 2,374 2,315 Proprietary product development 1,246 1,921 -------- ------- 7,047 11,624 General and administrative 2,617 2,598 Special litigation - 84 Removal of underperforming crops 222 - Depreciation and amortization 4,379 4,349 Interest expense 4,909 4,935 ------- ------- Net loss $ (5,080) $ (342) ========= ======== FARMING OPERATIONS. Net loss from farming operations totaled ($2.4) million for the three months ended September 30, 2001 compared to a net income of $2.6 million for the three months ended September 30, 2000. Farming results during the third quarter of 2001 and 2000 were derived primarily from the harvest of table grapes and stonefruit from the San Joaquin Valley operations and table grapes from the Coachella Valley operations. During the quarter ended September 30, 2001, the increase in farming income resulted primarily from increased profits of $0.6 million for Coachella Valley table grapes due to an 11% increase in F.O.B. prices. Cooler spring temperatures caused the harvests to be delayed by approximately two weeks which reduced June production industry wide and resulted in improved pricing. Additionally, results from watermelons were $1.2 million favorable to prior year due to higher F.O.B. prices and the elimination of certain mid season acreage which historically has not been profitable. Farming results were negatively impacted by reduced pepper profits resulting from lower F.O.B. prices due to an over supply in the industry. Overall, farming results were negatively impacted primarily due to a two-week weather-related delay in the table grape harvests in Coachella and Mexico which caused an overlap with the early table grape harvests in the San Joaquin valley. This overlap created downward pressure on F.O.B. prices. Average F.O.B. prices for table grapes for the quarter were 4% lower than in the prior year. Additionally, the Company experienced lower table grape yields as the Company sold 2.6 million boxes during the 2001 quarter compared to 2.8 million boxes in 2000. Results were also negatively impacted by lower plum yields coupled with smaller sized fruit resulting from adverse weather. The Company sold 0.5 million boxes of plums during the third quarter compared to 0.7 million in 2000 with average F.O.B. prices decreasing by 13% compared to 2000. The Company also experienced a 9% reduction in F.O.B. prices for peppers and a 35% reduction in F.O.B. prices for wine grapes. Results were favorably impacted by the continued strong performance of Sun World's proprietary Midnight Beautyr table grape coupled with the removal of certain underperforming crops at the conclusion of the 2000 season. The Company continues to achieve a price premium for its proprietary table grape and stonefruit products compared to competing commercially available varieties. Revenues from farming operations totaled $39.3 million for the 2001 quarter compared to $46.7 million for the 2000 quarter. Farming expenses totaled $41.7 million in the 2001 quarter compared to $44.1 million in the 2000 quarter. PACKING OPERATIONS. Sun World's packing and handling facilities contributed revenues of $10.3 million offset by $4.5 million of expenses for net income of $5.8 million for the quarter ended September 30, 2001 compared to revenues of $9.9 million, expenses of $5.1 million, and net income of $4.8 million for the quarter ended September 30, 2000. The increase in profits was primarily due to a price increase in storage and handling revenues for table grapes, stonefruit and peppers that was implemented in 2001 to offset increased energy and labor costs. Units packed during the quarter totaled 0.9 million in 2001 compared to 1.2 million in 2000. The decrease in units packed during the quarter was primarily due to 100,000 fewer units of plumsSun World resulting from heat and hail damage resulting in lower packout of boxes per bin harvested and smaller sized fruit.at the end of last year and the Company's decision to field pack Coachella watermelons in 2001 to reduce costs Units handled for the third quarter totaled 4.3 million for 2001 compared to 4.4 million for 2000. Most of the shortfall in units packed described above was offset by additional organic table grape units obtained through a new handling and marketing agreement with a third party grower entered into for the 2001 growing season. The increase in storage and handling revenue partially, offset by the effect of a reduction in units packed and handled, resulted in an increase in third quarter revenues and profits compared to the prior year. MARKETING OPERATIONS. Marketing revenues of $3.6 million were offset by marketing expenses of $1.2 million resulting in net income of $2.4 million for the third quarter of 2001. Marketing revenues of $3.9 million were offset by marketing expenses of $1.6 million for net income of $2.3 million for the third quarter of 2000. The decrease in marketing revenues was due primarily to lower F.O.B. prices on table grapes, stonefruit, and peppers coupled with reduced table grape and plum units described above. This revenue decrease was offset by reduced advertising and promotional expenses for the 2001 quarter compared to the 2000 quarter. partially offset by a 10% increase in average marketing commissions per unit primarily resulting from higher F.O.B. prices for southern table grapes and watermelons. During the three months ended September 30, 2001, Sun World sold 5.0 million units, consisting primarily of Sun World-grown table grapes, peppers and stonefruit as well as table grapes, citrus and watermelons from domestic third party growers compared to 5.5 million units sold during the three months ended September 30, 2000. 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 dozens of proprietary fruit varieties. Additionally, Sun World continues to expand its licensing program with key strategic partners worldwide to introduce, trial and produce Sun World's proprietary varieties, which provides Sun World with a long-term annual revenue stream based upon a royalty fee for each box of proprietary fruit sold during the life of the tree or vine. During the three months ended September 30, 2001, net income from proprietary product development was $1.2 million consisting of revenues of $1.8 million offset by expenses of $0.6 million. For the three months ended September 30, 2000, net income was $1.9 million consisting of revenues of $2.3 million offset by expenses of $0.4 million. The decrease in proprietary product development net income is primarily due to a $0.2 million decrease in intercompany royalties due to lower yields and F.O.B. prices, a $0.2 million decrease in international royalties due to timing, and a $0.2 million increase in expenses due to additional costs associated with the expansion of Sun World's licensing distribution structure. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the three months ended September 30, 2001 and 2000 totaled $2.6 million. REMOVAL OF UNDERPERFORMING CROPS. In September 2001, management decided to remove approximately 40 acres of citrus at the Cadiz ranch that had historically incurred losses. The Company recorded a charge of $0.2 million in connection with the removal of these crops. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for each of the three months ended September 30, 2001 and 2000 totaled $4.4 million. INTEREST EXPENSE, NET. Net interest expense totaled $4.9 million during each of the three months ended September 30, 2001 and 2000. The following table summarizes the components of net interest expense for the two periods (in thousands): Three Months Ended September 30 2001 2000 ---- ---- Interest on outstanding debt - Sun World $ 3,714 $ 3,692 Interest on outstanding debt - Cadiz 309 580 Amortization of financing costs 902 688 Interest income (16) (25) ------- ------- $ 4,909 $ 4,935 ======== ======== Interest expense remained consistent with 2000 due to (a) increased average borrowings under Sun World's revolving credit agreement; and (b) increased interest and financing costs related to debt added in December 2000; offset by (c) the savings from lower Prime and LIBOR in interest rates on the Company's variable rate debt coupled with reduced borrowings by Sun World on the revolving line of credit. Financing costs, which include legal fees and warrants, are amortized over the life of the debt agreements. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 The table below sets forth, for the periods indicated, the results of operations for the Company's four main operating divisions (before elimination of any interdivisional charges) as well as the categories of costs and expenses incurred by the Company which are not included within the divisional results (in thousands): Nine Months Ended September 30 ------------ 2001 2000 ---- ---- Divisional net income (loss): Farming $ (1,832) $ 901 Packing 7,267 6,568 Marketing 2,760 3,561 Proprietary product development 2,199 2,904 --------- --------- 10,394 13,934 General and administrative 8,151 7,824 Special litigation (7,929) 360 Non-recurring compensation expense 5,537 - Removal of underperforming crops 222 - Depreciation and amortization 6,943 6,815 Interest expense, net 14,374 14,401 --------- --------- Net loss $ (16,904) $ (15,466) ========= ========= FARMING OPERATIONS. Net loss from farming operations totaled $1.8 million for the nine months ended September 30, 2001 compared to a net income of $0.9 million for the nine months ended September 30, 2000. Farming revenues were $60.6 million and farming expenses were $62.4 million for the nine months ended September 30, 2001 compared to farming revenues of $73.9 million and farming expenses of $73.0 million for 2000. Farming results were negatively impacted by the table grape harvest in Coachella and Mexico starting two weeks late, which created an overlap with the early table grape harvests in the San Joaquin valley. This overlap created downward pressure on F.O.B. prices. Year- to-date average F.O.B. prices for table grapes were 2% lower than the prior year. Additionally, the Company experienced lower table grape yields as it sold 3.3 million boxes for the nine months ended September 30, 2001 compared to 3.7 million boxes during the same period in 2000. Results were also negatively affected by lower plum yields coupled with lower F.O.B. prices. Adverse weather conditions resulted in lower yields and smaller sized fruit. Plum units sold were 29% lower in 2001 than in 2000 and average F.O.B. prices were 16% lower than 2000. The Company also experienced a 19% reduction in F.O.B. prices for peppers and a 35% reduction for wine grapes. Results were favorably impacted by the continued strong performance of Sun World's proprietary Midnight Beautyr table grape as production increased and F.O.B. prices remained strong coupled with the removal of certain underperforming crops at the conclusion of the 2000 season. The Company continues to achieve a price premium for its proprietary table grape and stonefruit products compared to competing commercially available varieties. PACKING OPERATIONS. Sun World's packing and handling facilities contributed $7.3 million in profit during the nine months ended September 30, 2001 and $6.6 million during the nine months ended September 30, 2000. Packing and handling revenue for these operations of $17.4 million was offset by $10.1 million of expenses for the nine months ended September 30, 2001. Revenues totaled $18.5 million offset by expenses of $11.9 million for the nine months ended September 30, 2000. Sun World packed 2.2 million units during the nine months ended September 30, 2001 compared to 2.9 million units during the same period in 2000. For the nine months ended September 30, 2001, Sun World handled 6.7 million units compared to 7.5 million units in 2000. The decrease in units packed and handled is due primarily to lower table grape and plum yields as well as fewer units of third party citrus partially offset by increased units of third party table grapes. The increase in profits is due to increased profits per unit resulting from a price increase in storage and handling revenues for table grapes, stonefruit and peppers that was implemented in 2001 to offset increased energy and labor costs. conditions and decreased Sun World-grown stonefruit and watermelon due to the elimination of certain unprofitable programs at the end of the 2000 season. Units packed and handled during the nine months ended September 30, 2001 consisted of Sun World-grown table grapes, peppers and seedless watermelons in the Coachella Valley; table grapes and citrus products packed for third party growers; and table grapes, stonefruit, citrus, and peppers from the San Joaquin Valley. MARKETING OPERATIONS. During the nine months ended September 30, 2001, a total of 8.0 million units were sold consisting primarily of Sun World-grown table grapes, peppers and watermelons from the Coachella Valley; table grapes and citrus from domestic third party growers; and Sun World-grown table grapes, stonefruit, citrus, and peppers from the San Joaquin Valley. These unit sales resulted in marketing revenue of $6.0 million. Marketing expenses totaled $3.2 million for the nine months ended September 30, 2001 resulting in net income from marketing operations of $2.8 million. During the nine months ended September 30, 2000, 9.9 million units were marketed resulting in revenues of $7.3 million offset by expenses of $3.7 million for net income of $3.6 million. The decrease in revenues, marketing profits and units sold is primarily due to lower F.O.B. prices for table grapes, plums and peppers, decreased units of Sun World-grown table grapes and plums, and the elimination of certain under performing stonefruit and row crops at the end of the 2000 seasonfrom production in 2001. and a decrease in third party citrus The decrease in commission revenue is partially offset by a 3% increase in average commission per unit resulting from higher F.O.B prices compared to 2000. 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 dozens of proprietary fruit varieties. Additionally, Sun World continues to expand its licensing program with key strategic partners worldwide to introduce, trial and produce Sun World's proprietary varieties, which provides Sun World with a long-term annual revenue stream based upon a royalty fee for each box of proprietary fruit sold during the life of the tree or vine. During the nine months ended September 30, 2001, net income from proprietary product development was $2.2 million consisting of revenues of $3.8 million offset by expenses of $1.6 million. For the nine months ended September 30, 2000, net income was $2.9 million consisting of revenues of $4.1 million offset by expenses of $1.2 million. The decrease in proprietary product development net income is primarily due to a $0.3 million decrease in intercompany royalties due to lighter yields and a $0.4 million increase due to additional costs associated with the expansion of Sun World's licensing distribution structure. During the nine months ended September 30, 2001, Sun World expanded its acreage under license with its strategic partners by 15% to over 7,000 acres. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the nine months ended September 30, 2001 totaled $8.2 million compared to $7.8 million for the 2000 period. The increase is primarily due to incentive bonuses for senior executives approved in February 2001. SPECIAL LITIGATION. The Company was engaged in lawsuits against Waste Management seeking monetary damages arising from activities adverse to the Company in connection with a landfill, which until its defeat by the voters of San Bernardino County in 1996, was proposed to be located adjacent to the Company's Cadiz/Fenner Valley properties. In March 2001, the Company and Waste Management executed a settlement agreement related to these lawsuits. Pursuant to the settlement agreement, Waste Management paid the Company $6 million in cash and granted to the Company an exclusive option to receive, at no cost to the Company, up to approximately 7,000 acres of real property in eastern San Bernardino County primarily adjacent to the Cadiz Program property. In April 2001, the Company exercised the option and as a consequence has acquired the subject property. The settlement resulted in net revenues recognized of $7.9 million for the nine months ended September 30, 2001. During the nine months ended September 30, 2000, expenses including litigation costs and professional fees totaled $0.4 million. NON-RECURRING COMPENSATION. In March 2001, the Company agreed to issue 564,163 deferred stock units to certain senior managers of Cadiz and Sun World. These deferred stock units were issued in exchange for the cancellation of 1,055,000 fully vested options to purchase the Company's common stock held by the senior managers. The number of the deferred stock units issued was calculated based on the average closing price for the 10 business days following the filing of the Company's Annual Report on Form 10-K on March 29, 2001. The Company recorded a one- time charge of $5,537,000 and no cash was expended in connection with the issuance of the deferred stock units. REMOVAL OF UNDERPERFORMING CROPS. In September 2001, management decided to remove approximately 40 acres of citrus at the Cadiz ranch that had historically incurred losses. The Company recorded a charge of $0.2 million in connection with the removal of these crops. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense for the nine months ended September 30, 2001 totaled $6.9 million compared to $6.8 million during the same period in 2000. INTEREST EXPENSE, NET. Net interest expense totaled $14.4 million during each of the nine months ended September 30, 2001 and 2000. The following table summarizes the components of net interest expense for the two periods (in thousands): Nine Months Ended September 30 ----------- 2001 2000 ---- ---- Interest on outstanding debt - Sun World $ 11,086 $ 11,075 Interest on outstanding debt - Cadiz 1,109 1,560 Amortization of financing costs 2,287 1,951 Interest income (108) (185) --------- ------- $ 14,374 $ 14,401 ========= ======== Interest expense remained consistent with 2000 due to (a) increased average borrowings under Sun World's revolving credit agreement; and (b) increased interest and financing costs related to debt added in December 2000; offset by (c) the savings from lower Prime and LIBOR interest rates on the Company's variable rate debt. Financing costs, which include legal fees and warrants, are amortized over the life of the debt agreements. LIQUIDITY AND CAPITAL RESOURCES CURRENT FINANCING ARRANGEMENTS - ------------------------------ CADIZ OBLIGATIONS As Cadiz has not received significant revenues from its water resource activity to date, Cadiz has been required to obtain financing to bridge the gap between the time water resource development expenses are incurred and the time that revenue will commence. Historically, Cadiz has addressed these needs primarily through secured debt financing arrangements with its lenders, private equity placements and the exercise of outstanding stock options. As of September 30, 2001, Cadiz was obligated for approximately $10.1 million under a senior term loan facility and $15 million under a $15 million revolving credit facility (the "Cadiz Revolver") with the same lender. In December 2000, the Company completed an extension of both facilities to a maturity date of January 31, 2002. Currently, the lender holds a senior deed of trust on substantially all of Cadiz' non- Sun World related property under the term loan facility and a second lien on substantially all of the non-Sun World assets of the Company under the Cadiz Revolver. The Company and the lender have historically structured their financing arrangement with a view toward effective implementation of the Cadiz Program. While the Company currently anticipates repayment of these facilities with monies to be received under the Cadiz Program, the Company may, if it deems appropriate, replace or renegotiate the terms of these facilities to accommodate other developments such as delays in the timetable for regulatory approvals of the Cadiz Program. The Company retains the right to maintain $25.5 million of senior debt secured by the Cadiz Program area lands pursuant to the definitive economic terms for the Cadiz Program agreed with Metropolitan Water District of Southern California ("Metropolitan"), as described under "Outlook" below. In October 2001, the Company issued $3.75 million of Series E-1 Convertible Preferred Stock ("Series E-1 Preferred"). The Series E-1 Preferred is convertible into 500,000 shares of the Company's common stock any time prior to July 2004 at the election of the holder. The Company also has the right to convert the Series E-1 Preferred, but only when the closing price of the Company's common stock has exceeded $10.50 per share for 30 consecutive trading days. The Series E-1 Stock will be redeemed in July 2004 if still outstanding. The Company has agreed to issue an additional $3.75 million Series E-2 Convertible Preferred Stock ("Series E-2 Preferred") by the end of November 2001, subject to standard closing conditions. The Series E-2 Preferred will have the same basic terms and conditions as the Series E-1 Preferred, although the number of shares of common stock issuable upon conversion will not be definitively established until the time of issuance. As the Company continues to actively pursue its business strategy, additional financing specifically in connection with the Company's water programs will be required. Responsibility for funding the design, construction and program implementation costs of the capital facilities for the Cadiz Program will, under currently developed principles and terms, be shared equally by the Company and 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 and (b) utilization of monies to be received from Metropolitan for its initial payment for 600,000 acre-feet of groundwater storage. 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 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 $30 million revolving credit agreement (the "Sun World Revolver") which is guaranteed by Cadiz. As of September 30, 2001, $4.6 million was outstanding under the Sun World Revolver. Sun World is currently negotiating a renewal of the Sun World Revolver for the 2002 growing season. Additionally, Sun World has an intercompany revolving credit agreement with the Company for seasonal working capital needs, as needed. $3.8 million was outstanding under the intercompany revolverowed by Sun World to Cadiz as of September 30, 2001. In addition, Sun World has outstanding $115 million of First Mortgage Notes (the "Sun World Notes") which will mature on April 15, 2004 and are publicly traded and registered under the Securities Act of 1933. The Sun World Notes are 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. CASH USED FOR OPERATING ACTIVITIES. Cash used for operating activities totaled $5.1 million for the nine months ended September 30, 2001, as compared to cash used for operating activities of $3.7 million for the nine months ended September 30, 2000. The increase in cash used for operating activities is primarily due to increased losses compared to the prior year. CASH USED FOR INVESTING ACTIVITIES. Cash used for investing activities totaled $4.3 million for the nine months ended September 30, 2001, as compared to $5.1 million for the same period in 2000. The decrease was primarily due to reduced capital expenditures for developing crops and the collection of a long-term receivablewithin other assets in connection with the settlement of the Rayo Water litigation, partially offset by increased expenditures for property, plant, and equipment primarily related to improvements to the Sun World packing facilities.. CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing activities totaled $4.9 million for the nine months ended September 30, 2001 as compared to $4.8 million for the same period in 2000, which consisted primarily of $4.6 million of borrowings under the Sun World Revolver in each year. Borrowings were down from prior year due to the monies received from the Rail-Cycle and Rayo water litigation settlements. Principal payments on long-term debt totaled $1.3 million for the nine months ended September 30, 2001 compared to $0.4 million for the nine months ended September 30, 2000. Net proceeds from the exercise of stock options totaled $1.6 million during the nine months ended September 30, 2001 and $0.7 million for the nine months ended September 30, 2000. OUTLOOK The Company is actively pursuing the development of its water resources. Specifically, in July 1998, the Company and Metropolitan approved the Principles for a 50-year agreement for the Cadiz Program. The Principles provide that Metropolitan will, during wet years or periods of excess supply, store surplus water from its Colorado River Aqueduct in the groundwater basin underlying the Company's property. 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. Subsequently, Metropolitan, following extensive negotiations with the Company to further refine and finalize the Principles, submitted definitive economic terms and responsibilities ("Definitive Terms") to its Board of Directors. Metropolitan's Board of Directors approved the Definitive Terms at their April 2001 board meeting. The Definitive Terms will serve as the basis for a final agreement to be executed between Metropolitan and the Company. Execution of this final agreement will be subject to completion of the ongoing environmental review process for the Cadiz Program. Metropolitan and the U.S. Bureau of Land Management ("BLM"), in cooperation with the U.S. Geological Survey and the National Park Service, issued the Final Environmental Impact Report/Environmental Impact Statement ("Final EIR/EIS") for the Cadiz Program in October 2001. The 30-day federal review and protest period for the Final EIR/EIS ended on November 5, 2001. Issuance of the Final EIR/EIS is a significant milestone in the environmental review process as it represents the last step prior to final actions from BLM and Metropolitan. The Company anticipates final actions to be completed by the first quarter of 2002 after which construction of the Cadiz Program facilities may commence. Key provisions of the approved Definitive Terms are as follows: * Over the 50-year term of the agreement, Metropolitan will store a minimum of 900,000 acre-feet of Colorado River Aqueduct ("CRA") water in the Company's groundwater basin and purchase up to a minimum of 1,500,000 acre-feet of existing groundwater for transfer during dry-years. The Cadiz Program will have the capacity to convey, either for storage or transfer, up to approximately 150,000 acre-feet in any given year. * During storage operations, Metropolitan will pay $50 per acre- foot for put of Colorado River water into storage and $40 per acre-foot for return of Colorado River water from storage, or a total of $90 per acre-foot to cycle water into and out of the basin. These fees will be adjusted by the Consumer Price Index ("CPI"). * As outlined above, Metropolitan's total minimum commitment for storage is 900,000 acre-feet. Metropolitan will pay for the initial 600,000 acre-feet of put and take activity upon final contract execution and completion of the environmental review ($54 million before CPI adjustment). Metropolitan will pay for an additional 300,000 acre-feet of put and take activity at the earlier of actual usage or 30,000 acre-foot annual increments during years 5-14 of Cadiz Program operations ($2,700,000 per year before CPI adjustment). * For transfer operations, Metropolitan shall purchase 30,000 acre- feet per year of indigenous groundwater for 25 years at a $230 per acre-foot transfer fee, subject to a fair market value adjustment as described below. In addition, Cadiz may elect to either sell up to an additional 30,000 acre-feet per year of indigenous groundwater to third parties in Metropolitan's service area at fair market value, or require Metropolitan to purchase that amount of water at a fixed transfer fee of $230 per acre- foot. Accordingly, Metropolitan's total potential minimum commitment for the life of the Cadiz Program will be 1,500,000 acre-feet of indigenous groundwater. All transfers of indigenous groundwater, whether to Metropolitan or third parties, will be made in accordance with the terms and conditions of a Groundwater Monitoring and Management Plan ("Management Plan"). * The transfer fee will reflect a "fair market value" adjustment, which shall be determined up to once a year. The transfer fee will be adjusted by one-half of any increase or decrease in the fair market value, above or below the base $230 rate. For example, if the fair market value is $350 per acre-foot, then the adjusted transfer fee shall be $230 + 50% * ($350-$230) = $290 per acre-foot. Each increase or decrease in the transfer fee paid by Metropolitan may not exceed 15%. * Cadiz' right to sell to third parties within Metropolitan's service area includes scheduled access to Metropolitan's system at the wheeling rate charged for "as available capacity," plus power costs and any standard water stewardship fee that is uniformly charged to Metropolitan member agencies or third parties. Depending on availability of system capacity, Metropolitan may elect to exchange other water for delivery to Cadiz customers and "bank" the water Cadiz has sold. * If indigenous water supplies are determined to exceed 1,700,000 acre-feet, Metropolitan shall have the first right of refusal to purchase one-half of that excess yield. * Cadiz groundwater meets all existing federal and state water quality standards. Metropolitan's CRA water meets all existing federal and state water quality standards. Metropolitan shall be responsible to ensure, at its expense, that CRA water introduced into the Cadiz groundwater basin shall, at a minimum, meet all existing and potential future federal and state water quality standards applicable to the CRA. Cadiz shall be responsible to ensure, at its expense, that indigenous groundwater introduced into the Metropolitan delivery system shall at a minimum, meet all existing and potential future federal and state water quality standards. If both indigenous groundwater and stored Colorado River water exceed any future federal or state water quality standard, then the parties will share compliance with the new standard based pro rata on the contribution to exceeding the standard. * The Cadiz Program facilities, including spreading basins, extraction wells, conveyance pipeline and a pumping plant are estimated to cost approximately $150 million, and both parties will equally share these costs. Each party will be responsible for financing its portion of the capital costs. * Metropolitan will be responsible for operational costs of the Cadiz Program. However, Cadiz will assume pro rata operational costs associated with the sale of indigenous groundwater to third parties. * Metropolitan and Cadiz shall share equally the capital costs required for mitigation at outset of the Cadiz Program. Cadiz shall assume the ongoing annual cost of operating the Management Plan. 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 that are complimentary to its current portfolio of water and agricultural resources. Historically, Sun World has serviced its indebtedness and met its seasonal working capital needs utilizing available internal cash, the Sun World Revolver and through an intercompany revolver with Cadiz. Cadiz has met its ordinary working capital needs through a combination of available internal cash, 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, the exercise of outstanding stock options, and equity placements. Except for the foregoing, additional intercompany cash payments between Sun World and Cadiz are subject to certain restrictions under its current lending arrangements. The Company may require additional cash beyond the foregoing to meet its working capital needs. Any such requirements would be met 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 the Company's existing stockholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risks for the nine months ended September 30, 2001 does not differ materially from that discussed under Item 7A of the registrant's Annual Report on Form 10-K for 2000. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Legal Proceedings" included in the Company's latest Form 10- K and March 31, 2001 Form 10-Q for a complete discussion. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In October, 2001 the Company issued 20,000 shares of common stock, 70,000 immediately vesting warrants and 37,500 conditional warrants to purchase shares of the Company's common stock at an exercise price of $7.50 per share in connection with the Company's issuance of $3.75 million of Series E-1 Preferred Stock. The issuance of the common stock, warrants and Series E-1 Preferred Stock were not registered under the Securities Act of 1933, as amended (the "Securities Act"). The Company believes that the transactions described are exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof as transactions not involving any public offerings. 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 4.1 Certificate of Designation of Series E-1 Preferred Stock of Cadiz Inc., dated October 22, 2001. B. REPORTS ON FORM 8-K Report on 8-K dated October 22, 2001, describing the Company's issuance of $3,750,000 in newly authorized Series E-1 Convertible Preferred Stock. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Cadiz Inc. By: /s/ Keith Brackpool November 14, 2001 ------------------------------- ----------------- Keith Brackpool, Chairman & Date Chief Executive Officer By: /s/ Stanley E. Speer November 14, 2001 ------------------------------- ----------------- Stanley E. Speer Date Chief Financial Officer