UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2004 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from .. to ... Commission File Number 0-12114 CADIZ INC. (Exact name of registrant specified in its charter) DELAWARE 77-0313235 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 S. FIGUEROA STREET, SUITE 4250 LOS ANGELES, CALIFORNIA 90049 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 271-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X --- --- As of September 30, 2004, the Registrant had 6,612,674 shares of common stock, par value $0.01 per share, outstanding. CADIZ INC. FOR THE THREE MONTHS ENDED MARCH 31, 2004 PAGE - ---------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS Statement of Operations for the three months ended March 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . .1 Balance Sheet as of March 31, 2004 and December 31, 2003. . . 2 Statement of Cash Flows for the three months ended March 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . .3 Statement of Stockholders' Equity for the three months ended March 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . 4 Notes to the Consolidated Financial Statements. . . . . . . . 5 SUN WORLD INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS Statement of Operations for the three months ended March 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . 14 Balance Sheet as of March 31, 2004 and December 31, 2003. . .15 Statement of Cash Flows for the three months ended March 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . 16 Statement of Stockholder's Equity for the three months ended March 31, 2004. . . . . . . . . . . . . . . . . . . . . . . .17 Notes to the Consolidated Financial Statements. . . . . . . .18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . .22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . .30 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . .31 Page i CADIZ INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) - ----------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, (IN THOUSANDS EXCEPT PER SHARE DATA) 2004 2003 - ----------------------------------------------------------------------- Revenues $ 11 $ 3,046 --------- --------- Costs and expenses: Cost of sales - 2,679 General and administrative 538 1,637 Write off of investment in subsidiary - 195 Reorganization costs - 655 Depreciation and amortization 131 337 --------- --------- Total costs and expenses 669 5,503 --------- --------- Operating loss (658) (2,457) Interest expense, net 2,157 2,187 --------- --------- Net loss (2,815) (4,644) Less: Preferred stock dividends - 281 Imputed dividend on preferred stock - 246 --------- --------- Net loss applicable to common stock $ (2,815) $ (5,171) ========= ========= Basic and diluted net loss per common share $ (0.43) $ (3.53) ========= ========= Basic and diluted weighted average shares outstanding 6,548 1,465 ========= ========= See accompanying notes to the consolidated financial statements. Page 1 CADIZ INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) - ----------------------------------------------------------------------- MARCH 31, DECEMBER 31, ($ IN THOUSANDS) 2004 2003 - ----------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 2,567 $ 3,422 Prepaid expenses and other 394 248 --------- --------- Total current assets 2,961 3,670 Property, plant, equipment and water programs, net 39,383 39,514 Goodwill 3,813 3,813 Restricted cash 1,433 2,142 Other assets 310 387 --------- --------- $ 47,900 $ 49,526 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 784 $ 857 Accrued liabilities 84 1,545 Long-term debt, current portion 32,626 - --------- --------- Total current liabilities 33,494 2,402 Long-term debt - 30,253 Other liabilities - 654 Commitments and contingencies Stockholders' equity: Series F convertible preferred stock - $.01 par value: 100,000 shares authorized; shares issued and outstanding - 100,000 at March 31, 2004 and December 31, 2003 1 1 Common stock - $.01 par value; 70,000,000 shares authorized; shares issued and outstanding - 6,612,674 at March 31, 2004 and 6,471,385 at December 31, 2003 66 65 Additional paid-in capital 185,977 184,974 Accumulated deficit (171,638) (168,823) --------- --------- Total stockholders' equity 14,406 16,217 --------- --------- $ 47,900 $ 49,526 ========= ========= See accompanying notes to the consolidated financial statements. Page 2 CADIZ INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, ($ IN THOUSANDS) 2004 2003 - ----------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (2,815) $ (4,644) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 1,158 904 Loss on disposal of assets - 16 Write off of investment in subsidiary - 195 Interest expense added to loan principal 707 - Compensation charge for deferred stock units - 81 Accrued interest on loan to officer - (15) Changes in operating assets and liabilities: Decrease in accounts receivable - 1,488 Increase in inventories - (3,043) Increase in prepaid expenses and other (146) (10) Increase (decrease) in accounts payable (73) 1,693 Increase (decrease) in accrued liabilities (395) 1,271 --------- --------- Net cash used for operating activities (1,564) (2,064) --------- --------- Cash flows from investing activities: Disposal of subsidiary - (1,019) Additions to property, plant and equipment - (140) Additions to developing crops - (198) Payment of loan to officer - 30 Decrease in restricted cash for payment interest 709 - Increase decrease in other assets - (104) --------- --------- Net cash provided by (used for) investing activities 709 (1,431) --------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt - 135 Proceeds from convertible note payable - 200 Principal payments on long-term debt - (7) --------- --------- Net cash provided by financing activities - 328 --------- --------- Net decrease in cash and cash equivalents (855) (3,167) Cash and cash equivalents, beginning of period 3,422 3,229 --------- --------- Cash and cash equivalents, end of period $ 2,567 $ 62 ========= ========= See accompanying notes to the consolidated financial statements. Page 3 CADIZ INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) - -------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 2004 ($ IN THOUSANDS) - -------------------------------------------------------------------------------- PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------- ------------ PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT ------ ------ ------ ------ ------- ------- ------- Balance as of December 31, 2003 100,000 $ 1 6,471,385 $ 65 $ 184,974 $(168,823) $ 16,217 Exchange of deferred stock units for common stock - - 1,289 - 654 - 654 Issuance of common stock for services - - 140,000 1 349 - 350 Net loss - - - - - (2,815) (2,815) ------- ---- --------- ------ --------- --------- --------- Balance as of March 31, 2004 100,000 $ 1 6,612,674 $ 66 $ 185,977 $(171,638) $ 14,406 ======= ==== ========= ====== ========= ========= ========= See accompanying notes to the consolidated financial statements. Page 4 CADIZ INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ============================================== NOTE 1 - BASIS OF PRESENTATION - ------------------------------ GENERAL The Consolidated Financial Statements have been prepared by Cadiz Inc., sometimes referred to as "Cadiz" or "the Company", without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2003. On January 30, 2003, Sun World International, Inc. and its subsidiaries (collectively "Sun World") filed voluntary petitions under Chapter 11 of the Bankruptcy Code. See "General Development of Business", in the Company's Form 10-K for the year ended December 31, 2003. Since the filing date, Sun World has operated its business and managed its affairs as debtor and debtor in possession. As of that date due to the Company's loss of control over the operations of Sun World, the financial statements of Sun World are no longer consolidated with those of Cadiz, but instead, Cadiz is accounting for its investment in Sun World on the cost basis of accounting. At January 31, 2003, Cadiz had a net investment in Sun World of approximately $195 thousand. The Company wrote off the net investment in Sun World of $195 thousand at the Chapter 11 filing date because it did not anticipate being able to recover its investment. The foregoing Consolidated Financial Statements include the accounts of the Company and, until January 30, 2003, those of Sun World, and contain all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation. The unaudited consolidated financial information furnished herein has been prepared in accordance with generally accepted accounting principles and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company's financial position, the results of its operations and its cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. This quarterly report on Form 10-Q should be read in conjunction with the Company's Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of results for the entire fiscal year ending December 31, 2004. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Company have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business. The Company incurred losses of $2.8 million for the three months ended March 31, 2004 and $11.5 million for the year ended December 31, 2003. The Company had a working capital deficit of $30.5 million at March 31, 2004 and used cash in operations of $1.6 million for the three months ended March 31, 2004 and $6.6 million for the year ended December 31, 2003. In addition, Sun World filed for reorganization under Chapter 11 of the Bankruptcy Code. The financial statements of the Company do not purport to reflect or to provide for all of the consequences of an ongoing Chapter 11 reorganization. Specifically, but not all-inclusive, the financial statements of the Company do not present: (a) the realizable value of assets on a liquidation basis or the availability of such assets to satisfy liabilities, (b) the Page 5 amount which will ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 reorganization, or (c) the effect of changes which may be made resulting from a Plan of Reorganization. The appropriateness of using the going-concern basis is dependent upon, among other things, confirmation of a Plan of Reorganization, future profitable operations, the ability to comply with provisions of financing agreements and the ability to generate sufficient cash from operations to meet obligations. During the quarter ended June 30, 2003, the Company raised $1.7 million cash and during the quarter ended December 31, 2003, $8.6 million cash through private sales of common stock. Based on current forecasts, the Company believes it has sufficient resources to fund normal operations until May 2005. There is no assurance that additional financing (public or private) will be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of the Company's existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If the Company cannot raise needed funds, it might be forced to make further substantial reductions in its operating expenses, which could adversely affect its ability to implement its current business plan and ultimately its viability as a company. These financial statements do not include any adjustments that might result from these uncertainties. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and those of Sun World until January 30, 2003, at which date Sun World and certain of its subsidiaries (Sun Desert Inc., Coachella Growers, and Sun World/Rayo) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As of that date, due to the Company's loss of control over the operations of Sun World, the financial statements of Sun World are no longer consolidated with those of Cadiz, but instead, Cadiz accounts for its investment in Sun World on the cost basis of accounting. GOODWILL The Company has $3.8 million of goodwill which resulted from a merger in May 1988 between two companies, which eventually became known as Cadiz Inc. Goodwill is not amortized but is tested for impairment annually in the first quarter, or earlier if events occur which require an impairment analysis be performed. The Company performed an impairment test of its goodwill in the first quarter of 2004 and determined that its goodwill was not impaired as its market capitalization at March 31, 2004 of $46.9 million was in excess of the Company's net book value of $14.4 million at that date. INTANGIBLE AND OTHER LONG-LIVED ASSETS Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of the actions taken by Metropolitan in the fourth quarter of Page 6 2002 as described in Note 1 in Cadiz' Annual Report on Form 10- K for the year ended December 31, 2003, the Company, with the assistance of an independent valuation firm, evaluated the carrying value of its water program and determined that the asset was not impaired and that the costs will be recovered through the ultimate sale or operation of the project. STOCK-BASED COMPENSATION As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock options and other stock- based employee awards. Pro forma information regarding net loss and loss per share, as calculated under the provisions of SFAS 123, are disclosed in the table below. The Company accounts for equity securities issued to non-employees in accordance with the provision of SFAS 123 and Emerging Issues Task Force 96-18. Had compensation cost for these plans been determined using fair value the Company's net loss and net loss per common share would have increased to the following pro forma amounts (dollars in thousands): THREE MONTHS ENDED MARCH 31, 2004 2003 ---- ---- Net loss applicable to common stock: As reported $ (2,815) $ (5,171) Expense under SFAS 123 - (50) --------- --------- Pro forma $ (2,815) $ (5,221) ========= ========= Net loss per common share: As reported $ (0.43) $ (3.53) Expense under SFAS 123 - (0.03) --------- --------- Pro forma $ (0.43) $ (3.56) ========= ========= See Note 2 to the Consolidated Financial Statements included in the Company's Form 10-K for a discussion of the Company's accounting policies. NEW ACCOUNTING PRONOUNCEMENTS In March 2004, the consensus of Emerging Issues Task Force (EITF) Issue No. 03-06, Participating Securities and the Two-Class Method under FASB Statement 128, was published. EITF Issue No. 03-06 addresses the computations of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. Further guidance on the application and allocations of the two-class method of calculating earnings per share is also included. The provisions of EITF Issue No. 03-06 will be effective for reporting periods beginning after March 31, 2004. The adoption of this guidance is not expected to have significant impact on the Company's financial results of operations and financial position. Page 7 NOTE 2 - PROPERTY, PLANT EQUIPMENT AND WATER PROGRAMS - ----------------------------------------------------- Property, plant, equipment and water programs consist of the following (in thousands): MARCH 31, DECEMBER 31, 2004 2003 ---- ---- Land $ 22,010 $ 22,010 Permanent crops 6,494 6,494 Developing crops 192 192 Water programs 14,274 14,274 Buildings 1,408 1,408 Machinery and equipment 3,590 3,590 --------- --------- 47,968 47,968 Less accumulated depreciation (8,585) (8,454) --------- --------- $ 39,383 $ 39,514 ========= ========= NOTE 3 - DEBT - ------------- On December 15, 2003, the Company entered into an amendment of its senior term loan and revolving credit facility to extend the maturity date through March 31, 2005 and can obtain further extensions through September 30, 2006, by maintaining sufficient balances, among other conditions, in a cash collateral account with the lender. At the closing of the secured term lending, the Company deposited into the lender's cash collateral account the sum of $2,142,000. The deposit, which is shown on the balance sheet as Restricted Cash, represented collateral for future interest payments on the Company's credit facility accruing at the rate of 4% per annum from October 1, 2003 until March 31, 2005. Interest under the amended credit facilities is payable semiannually on March 31 and September 30 each year at the Company's option in either cash at 8% per annum, or in cash and paid in kind ("PIK"), at 4% per annum for the cash portion and 8% per annum for the PIK portion. The PIK portion will be added to the outstanding principal balance. On March 31, 2004, the Company elected the 4% cash and 8% PIK option. Accordingly, 4% interest from October 1, 2003 in the amount of $0.7 million was paid from the restricted cash account leaving a balance of $1.4 million. On the same date, the accrued 8% PIK portion in the amount of $1.4 million was added to the principal balance of the loan. At March 31, 2004, the $32.6 million principal balance of the loan represents the original borrowing of $35.0 million increased by the $1.4 million above less $3.8 million being the unamortized portion of the debt discount resulting from the issuance of the Series F preferred stock at the time of the loan extension. In April 1997, Sun World issued $115 million of Series A First Mortgage Notes through a Page 8 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. With the entering into the DIP Facility as described in Note 9 to the Company's filing on Form 10-K for the year ended December 31, 2002, the note holders now have a second position on substantially all of the Company's assets for so long as the DIP Facility is outstanding. 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 prior to the maturity date. The First Mortgage Notes include covenants that do not allow for the payment of dividends by the Company other than out of cumulative net income. The First Mortgage Notes are also secured by the guarantees of Coachella Growers, Inc., Sun Desert, Inc., Sun World/Rayo, and Sun World International de Mexico S.A. de C.V. (collectively, the "Sun World Subsidiary Guarantors") and by Cadiz. Cadiz also pledged all of the stock of Sun World as collateral for its guarantee. 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. Page 9 CONDENSED CONSOLIDATING FINANCIAL INFORMATION Condensed consolidating financial information as of and for the three months ended March 31, 2003 for the Company is presented below. Consolidating balance sheet information at December 31, 2003 and March 31, 2004 and consolidating financial information for the three months ended March 31, 2004 is not presented as Sun World was deconsolidated effective January 30, 2003 (in thousands): CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION THREE MONTHS ENDED MARCH 31, 2003 CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED ----- --------- ------------ ------------ Revenues $ 187 $ 3,005 $ (146) $ 3,046 --------- --------- --------- --------- Costs and expenses: Cost of sales 47 2,653 (21) 2,679 General and administrative 1,055 707 (125) 1,637 Write off investment in subsidiary 195 - - 195 Reorganization expense - 655 - 655 Depreciation and amortization 147 190 - 337 --------- --------- --------- --------- Total costs and expenses 1,444 4,205 (146) 5,503 --------- --------- --------- --------- Operating profit (loss) (1,257) (1,200) - (2,457) Income (loss) from subsidiary (2,469) - 2,469 - Interest expense, net 918 1,269 - 2,187 --------- --------- --------- --------- Net loss before income taxes (4,644) (2,469) 2,469 (4,644) Income tax expense - - - - --------- --------- --------- --------- Net loss (4,644) (2,469) 2,469 (4,644) Less: Preferred stock dividends 281 - - 281 Imputed dividend on preferred stock 246 - - 246 --------- --------- --------- --------- Net loss applicable to common stock $ (5,171) $ (2,469) $ 2,469 $ (5,171) ========= ========= ========= ========= Page 10 CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION THREE MONTHS ENDED MARCH 31, 2003 CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED ----- --------- ------------ ------------ Net cash used for operating activities $ (361) $ (1,703) $ - $ (2,064) --------- --------- --------- --------- Cash flows from investing activities: Disposal of subsidiary - (1,019) - (1,019) Additions to property, plant and equipment - (140) - (140) Additions to water programs - - - - Additions to developing crops (1) (197) - (198) Payment of loan to officer 30 - - 30 (Increase)decrease in other assets 5 (109) - (104) --------- --------- --------- --------- Net cash provided by (used for) investing activities 34 (1,465) - (1,431) --------- --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of long-term debt - 135 - 135 Net proceeds from convertible notes payable 200 - - 200 Principal payments on long-term debt - (7) - (7) --------- --------- --------- --------- Net cash provided by financing activities 200 128 - 328 --------- --------- --------- --------- Net decrease in cash and cash equivalents (127) (3,040) - (3,167) Cash and cash equivalents, beginning of period 189 3,040 - 3,229 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 62 $ - $ - $ 62 ========= ========= ========= ========= NOTE 4 - NET LOSS PER COMMON SHARE - ---------------------------------- Basic earnings per share (EPS) is computed by dividing the net loss, after deduction for preferred dividends either accrued or imputed, if any by the weighted-average common shares outstanding. Options, deferred stock units, warrants, convertible debt, and preferred stock that are convertible into shares of the Company's common stock were not considered in the computation of diluted EPS because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 1,751,000 shares (including Series F preferred stock convertible into 1,729,000 shares of common stock) and 323,000 at March 31, 2004 and 2003, respectively. NOTE 5 - PREFERRED AND COMMON STOCK - ----------------------------------- During the quarter ended March 31, 2004, we issued 60,000 shares of common stock in consideration for services valued at $150,000, and 80,000 shares of common stock in payment of $200,000 bonus for services rendered. The shares were issued at $2.50 per share, the price of the December 2003 private placement at which time the issue of the shares was authorized, the services rendered and the amounts accrued. We also issued 1,289 shares of Page 11 common stock to holders of deferred stock units who exchanged their deferred stock units for shares of common stock upon their vesting dates. NOTE 6 - SEGMENT INFORMATION - ---------------------------- Financial information by reportable business segment is reported in the tables below. The changes in the agricultural segment for the period ended March 31, 2004 are due to the deconsolidation of Sun World in January 2003. THREE MONTHS ENDED MARCH 31 2004 2003 External sales Water resources $ 11 $ 41 Agricultural - 3,005 --------- --------- Consolidated $ 11 $ 3,046 ========= ========= Inter-segment sales Water resources $ - $ 146 Agricultural - (146) --------- --------- Consolidated $ - $ - ========= ========= Total sales Water resources $ 11 $ 187 Agricultural - 3,005 Other - (146) --------- --------- Consolidated $ 11 $ 3,046 ========= ========= Income (loss) before income taxes Water resources $ (736) $ (1,062) Agricultural - (1,200) Interest expense (net) (2,079) (2,187) Other - (195) --------- --------- Consolidated $ (2,815) $ (4,644) ========= ========= MARCH 31, DECEMBER 31, 2004 2003 Assets Water resources $ 47,900 $ 49,526 Page 12 Agricultural - - --------- --------- Consolidated $ 47,900 $ 49,526 ========= ========= Page 13 SUN WORLD INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION) (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) - ------------------------------------------------------------------------ THREE MONTHS ENDED MARCH 31, ($ IN THOUSANDS) 2004 2003 - ------------------------------------------------------------------------ Revenues $ 12,277 $ 9,561 --------- --------- Costs and expenses: Cost of sales 11,255 9,071 General and administrative 2,403 2,146 Depreciation and amortization 474 526 --------- --------- Total costs and expenses 14,132 11,743 --------- --------- Operating loss (1,855) (2,182) Gain on sale of property 152 - Interest expense, net (contractual interest for 2004 and 2003, respectively was $3,915 and $4,029) 393 1,603 --------- --------- Loss before reorganization items and income taxes (2,096) (3,785) Reorganization items: Debt issuance costs - 912 Professional fees 418 1,365 --------- --------- Total reorganization items 418 2,277 --------- --------- Net loss before income taxes (2,514) (6,062) Income tax expense 62 20 --------- --------- Net loss $ (2,576) $ (6,082) ========= ========= See accompanying notes to the consolidated financial statements. Page 14 SUN WORLD INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION) (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED BALANCE SHEET (UNAUDITED) - ------------------------------------------------------------------------ MARCH 31, DECEMBER 31, ($ IN THOUSANDS) 2004 2003 - ------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 153 $ 1,548 Accounts receivable, net 6,329 7,031 Inventories 20,990 12,851 Prepaid expenses and other 1,716 1,817 --------- --------- Total current assets 29,188 23,247 Property, plant, equipment, and water programs, net 108,344 107,812 Intangible assets 1,896 1,903 Other assets 6,560 6,568 --------- --------- Total assets $ 145,988 $ 139,530 ========= ========= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable $ 6,583 $ 5,689 Accrued liabilities 1,756 2,280 Revolving credit facility 13,098 4,423 Long-term debt, current portion 120 125 --------- --------- Total current liabilities 21,557 12,517 Long-term debt 705 730 Deferred income taxes 5,447 5,447 Other liabilities 28 365 --------- --------- Total liabilities not subject to compromise 27,737 19,059 --------- --------- Liabilities subject to compromise under reorganization proceedings 141,606 141,606 Contingencies Stockholder's deficit: Common stock, $0.01 par value, 300,000 shares authorized; 42,000 shares issued and outstanding - - Additional paid-in capital 39,479 39,123 Accumulated deficit (62,834) (60,258) --------- --------- Total stockholder's deficit (23,355) (21,135) --------- --------- Total liabilities and stockholder's deficit $ 145,988 $ 139,530 ========= ========= See accompanying notes to the consolidated financial statements. Page 15 SUN WORLD INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION) (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - ------------------------------------------------------------------------ THREE MONTHS ENDED MARCH 31, ($ IN THOUSANDS) 2004 2003 - ------------------------------------------------------------------------ Cash flows from operating activities: Net loss $ (2,576) $ (6,082) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 481 602 Write-off of debt issuance costs - 912 Gain on disposal of assets (152) (9) Shares of KADCO stock earned for services - (313) Compensation charge for deferred stock units 20 79 Changes in operating assets and liabilities: Decrease in accounts receivable 702 1,520 Increase in inventories (7,159) (5,735) Decrease (increase) in prepaid expenses and other 101 (1,295) Increase in accounts payable 894 454 Increase (decrease) in accrued liabilities (524) 268 Increase in due to parent - (61) (Decrease) increase in other liabilities - (10) --------- --------- Net cash used before reorganization items (8,213) (9,670) --------- --------- Increase in liabilities subject to compromise under reorganization proceedings - 247 --------- --------- Net cash used for operating activities (8,213) (9,423) --------- --------- Cash flows from investing activities: Additions to property, plant, and equipment (663) (187) Additions to developing crops (1,257) (548) Proceeds from disposal of property, plant and equipment 157 21 Increase in other assets (64) (131) --------- --------- Net cash used for investing activities (1,827) (845) --------- --------- Cash flows from financing activities: Proceeds from issuance of long term debt - 136 Principal payments on long-term debt (30) (885) Borrowings from intercompany revolver, net - 51 Proceeds from short-term borrowings 8,675 9,662 --------- --------- Net cash provided by financing activities 8,645 8,964 --------- --------- Net decrease in cash and cash equivalents (1,395) (1,304) Cash and cash equivalents at beginning of period 1,548 3,040 --------- --------- Cash and cash equivalents at end of period $ 153 $ 1,736 ========= ========= See accompanying notes to the consolidated financial statements. Page 16 SUN WORLD INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION) (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT (UNAUDITED) - -------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 2004 ($ In Thousands) - -------------------------------------------------------------------------------- ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT DEFICIT ------ ------ ------- ------- ------- Balance as of December 31, 2003 42,000 $ - $ 39,123 $ (60,258) $ (21,135) Exchange of deferred stock units for parent's common stock - - 356 - 356 Net loss - - - (2,576) (2,576) --------- ------ -------- --------- --------- Balance as of March 31, 2004 42,000 $ - $ 39,479 $ (62,834) $ (23,355) ========= ====== ======== ========= ========= See accompanying notes to the consolidated financial statements. Page 17 SUN WORLD INTERNATIONAL, INC. (DEBTOR-IN-POSSESSION) (A WHOLLY-OWNED SUBSIDIARY OF CADIZ INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ============================================== NOTE 1 - NATURE OF OPERATIONS AND REORGANIZATION UNDER CHAPTER 11 - ----------------------------------------------------------------- Founded in 1975, Sun World International, Inc. ("SWII" or "Sun World") and its subsidiaries (collectively, the "Company") operate as the agricultural segment of Cadiz Inc. ("Cadiz"). The Company is an integrated agricultural operation that owns approximately 17,100 acres of land, primarily located in two major growing areas of California: the San Joaquin Valley and the Coachella Valley. Fresh produce, including table grapes, stonefruit, citrus, peppers and watermelons is marketed, packed and shipped to food wholesalers and retailers located throughout the United States and to more than 30 foreign countries. The Company owns and operates three cold storage and/or packing facilities located in California, of which two are operated and one is leased to a third party. On January 30, 2003 (the "Petition Date"), SWII and certain of its subsidiaries (Sun Desert Inc., Coachella Growers, and Sun World/Rayo) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The filing was made in the United States Bankruptcy Court, Central District of California, Riverside Division ("Bankruptcy Court"). Included in the Consolidated Financial Statements are subsidiaries operated outside the United States, which have not commenced Chapter 11 cases or other similar proceedings elsewhere, and are not debtors. The assets and liabilities of such no-filing subsidiaries are not considered material to the Consolidated Financial Statements. SWII sought bankruptcy protection in order to access a seasonal financing package of up to $40 million to provide working capital through the 2003-2004 growing seasons. As a debtor-in-possession, Sun World is authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well as most other pending litigation, are stayed and other contractual obligations against Sun World may not be enforced. In addition, under the Bankruptcy Code, Sun World may assume or reject executory contracts, including lease obligations. Parties affected by these rejections may file claims with the Court in accordance with the reorganization process. Absent an order of the Court, substantially all pre-petition liabilities are subject to settlement under a plan of reorganization to be voted upon by creditors and equity holders and approved by the Bankruptcy Court. The four Sun World entities are the joint proponents of the Debtors' Joint Plan of Reorganization Dated November 24, 2003 (the "Plan"). Under the Plan, which is subject to amendment and modification, the Reorganized Sun World will continue to operate as a going concern on and after the Plan's effective date. The Plan provides for the restructuring of Sun World's balance sheet by providing for Sun World to issue equity interests in the Reorganized Company to the holders of its First Mortgage Notes in full satisfaction of their mortgage note claims; for the payment in full of convenience claims and trade claims; and for Sun World to issue equity interests in the reorganized company to entities holding certain other unsecured claims in full satisfaction of those claims. Exit financing to be provided by an exit lender under the Plan should meet the Company's need for seasonal financing following the effective date. The hearing to consider the adequacy of the disclosure statement accompanying the Plan, most recently scheduled for June 11, 2004, has been subject to several postponements and no hearing date is currently scheduled. Page 18 In Sun World's filings with the Bankruptcy Court, Sun World has reported that it believes that the Plan likely cannot be confirmed absent the acceptance of the holders of the First Mortgage Notes, in their capacity as secured creditors. Sun World has further reported to the Bankruptcy Court that the holders of the First Mortgage Notes have not reached a consensus with respect to certain corporate governance issues relating to the reorganized company, and that they have been unable to finalize a shareholder agreement term sheet. In the meantime, Sun World has, with Bankruptcy Court approval, expanded the scope of its engagement with Ernst & Young Corporate Finance LLC to include services related to (i) a sale of substantially all of its assets pursuant to a motion or a plan or reorganization, and (ii) obtaining an equity investor and financing under a plan of reorganization and is actively pursuing the sales/investment process. Sun World has chosen to delay the preparation of an amended Plan and disclosure statement and the scheduling of a disclosure statement hearing date pending the outcome of these most recent developments. Sun World's exclusivity period (i.e. the period during which only Sun World may file a plan of reorganization) currently expires on December 31, 2004. The Company cannot predict at this time what changes, if any, will be made to the Plan as a result of the foregoing or whether or not the Plan, as amended, will be approved. The financial statements of the Company have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business and in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Accordingly, all pre-petition liabilities subject to compromise have been segregated in the Consolidated Balance Sheet and classified as "Liabilities subject to compromise under reorganization proceedings", at the estimated amount of allowable claims. The financial statements of the Company do not purport to reflect or to provide for all of the consequences of an ongoing Chapter 11 reorganization. Specifically, but not all-inclusive, the financial statements of the Company do not present: (a) the realizable value of assets on a liquidation basis or the availability of such assets to satisfy liabilities, (b) the amount which will ultimately be paid to settle liabilities and contingencies which may be allowed in the Chapter 11 reorganization, or (c) the effect of changes which may be made resulting from a Plan or Reorganization. The appropriateness of using the going-concern basis is dependent upon, among other things, confirmation of a Plan of Reorganization, future profitable operations, the ability to comply with debtor-in-possession financing agreements and the ability to generate sufficient cash from operations to meet obligations. Inherent in a successful Plan of Reorganization is a capital structure that permits the Company to generate cash flows after reorganization to meet its restructured obligations and fund the current operations of the Company. The Company's objective in the Chapter 11 proceeding is to achieve the highest possible recovery for all creditors and shareholders consistent with the Company's ability to pay and the continuation of its business. There can be no assurance that the Company will be able to attain these objectives or reorganize successfully. Because of the ongoing nature of the reorganization case, the financial statements contained herein are subject to material uncertainties. Page 19 NOTE 2 - BASIS OF PRESENTATION - ------------------------------ The Consolidated Financial Statements have been prepared by Sun World International, Inc. and its subsidiaries, collectively referred to as "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, 2003. The foregoing Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, which Sun World considers necessary for a fair presentation. The results of operations for the three months ended March 31, 2004 are not indicative of the results to be expected for the full fiscal year as Sun World's harvest seasons and revenues are seasonal in nature. Since the Chapter 11 bankruptcy filing, the Company has applied the provisions of SOP 90-7, which does not significantly change the application of accounting principles generally accepted in the United States of America; however, it does require that the financial statements for periods including and subsequent to filing the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. As disclosed in the Consolidated Statements of Operations, reorganization items at March 31, 2004, consist of professional fees directly associated with the reorganization of $418,000, and at March 31, 2003 consist professional fees directly associated with the reorganization of $1,365,000 and the write-off of unamortized debt issuance costs as of the Petition Date of $912,000. 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 3 - INVENTORIES - -------------------- Inventories consist of the following (dollars in thousands): MARCH 31, DECEMBER 31, 2004 2003 ---- ---- Growing crops $ 17,811 $ 10,427 Harvested product 322 189 Materials and supplies 2,857 2,235 --------- --------- $ 20,990 $ 12,851 ========= ========= NOTE 4 - LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS - --------------------------------------------------------------- Under bankruptcy law, actions by creditors to collect indebtedness Sun World owed prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be Page 20 enforced against the Company. We have received approval from the Bankruptcy Court to pay certain pre-petition liabilities including employee salaries and wages, benefits, other employee obligations, and certain grower liabilities entitled to trust protection under the Perishable Agricultural Commodities Act (PACA). Except for certain secured debt obligations, all pre- petition liabilities have been classified as "Liabilities subject to compromise under reorganization proceedings" in the Consolidated Balance Sheet. Adjustments to the claims may result from negotiations, payments authorized by Bankruptcy Court order, rejection of executory contracts including leases, or other events. Pursuant to an order of the Bankruptcy Court, Sun World mailed notices to all known creditors that the deadline for filing proofs of claim with the Court was August 29, 2003. An estimated 340 claims were filed as of August 29, 2003. Amounts that Sun World has recorded are in many instances different from amounts filed by our creditors. Differences between amounts scheduled by Sun World and claims by creditors are being investigated and resolved in connection with our claims resolution process. Until the process is complete, the ultimate number and amount of allowable claims cannot be ascertained. The ultimate resolution of these claims will be based upon the final plan of reorganization. Liabilities subject to compromise under reorganization proceedings are summarized as follows (dollars in thousands): MARCH 31, DECEMBER 31, 2004 2003 ---- ---- Accounts payable $ 4,311 $ 4,311 Interest payable 3,795 3,795 Due to parent company 13,500 13,500 Long-term debt 120,000 120,000 --------- --------- Total $ 141,606 $ 141,606 ========= ========= Page 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the following discussion contains trend analysis and other forward-looking statements. Forward-looking statements can be identified by the use of words such as "intends", "anticipates", "believes", "estimates", "projects", "forecasts", "expects", "plans" and "proposes". Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. These include, among others, our ability to maximize value from our Cadiz, California land and water resources; the uncertainty of the outcome of Sun World's bankruptcy proceedings; our outstanding guarantee of Sun World's First Mortgage Notes; and our ability to obtain new financings as needed to meet our ongoing working capital needs. See additional discussion under the heading "Certain Trends and Uncertainties" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2003. OVERVIEW As discussed in further detail below, as of January 30, 2003 the financial statements of our Sun World subsidiary are no longer being consolidated with ours. Presently, our operations (and, accordingly, our working capital requirements) relate primarily to our water development activities and, more specifically, to the Cadiz Groundwater Storage and Dry-Year Supply Program. Our results of operations for periods subsequent to January 2003 have been, and in future fiscal periods will be, largely reflective of the operations of our water development activities. CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY PROGRAM. In 1997, we commenced discussions with the Metropolitan Water District of Southern California (Metropolitan) in order to develop principles and terms for a long-term agreement for a joint venture water storage and supply program on and under our Cadiz, California property. In July 1998, Cadiz and Metropolitan approved the Principles and Terms for Agreement for the Cadiz Groundwater Storage and Dry-Year Supply Program (the Cadiz Program). At the same time, Cadiz and Metropolitan authorized preparation of a final agreement based on these principles and initiated the environmental review process for the Cadiz Program. Following extensive negotiations with Cadiz to further refine and finalize these basic principles, Metropolitan's Board of Directors approved definitive economic terms and responsibilities at their April 2001 board meeting. The Cadiz Program definitive economic terms were to serve as the basis for a final agreement to be executed between Metropolitan and Cadiz, subject to the then-ongoing environmental review process. Under the Cadiz Program, during wet years or periods of excess supply, surplus water from the Colorado River Aqueduct would be stored in the groundwater basin underlying our property. During dry years or times of reduced allocations from the Colorado River, the previously imported water, together with additional existing groundwater, would be extracted and delivered, via a conveyance pipeline, back to the aqueduct. Page 22 On August 29, 2002, the U.S. Department of Interior approved the Final Environmental Impact Statement for the Cadiz Program and issued its Record of Decision, the final step in the federal environmental review process for the Cadiz Program. The Record of Decision amends the California Desert Conservation Area Plan for an exception to the utility corridor element and offered to Metropolitan a right-of-way grant necessary for the construction and operation of the Cadiz Program. On September 17, 2002, the Metropolitan Subcommittee on Rules and Ethics scheduled a series of meetings in October and November 2002 to consider (a) acceptance of the Record of Decision and the terms and conditions of the right-of-way grant, (b) certification of the environmental documentation for the Cadiz Program under state law, and (c) the final agreement between Cadiz and Metropolitan. On October 8, 2002, Metropolitan's Board considered acceptance of the Record of Decision and the terms and conditions of the right-of-way grant. The Board voted not to adopt Metropolitan staff's recommendation to approve the terms and conditions of the right-of-way grant issued by the Department of the Interior for the Cadiz Program by a vote of 47.11% in favor and 47.36% against the recommendation. Instead, the Board voted for an alternative motion to reject the terms and conditions of the right-of-way grant and to not proceed with the Cadiz Program by a vote of 50.25% in favor and 44.22% against. Irrespective of Metropolitan's actions, Southern California's need for water storage and supply programs has not abated. We believe there are several different scenarios to maximize the value of this water resource, all of which are under current evaluation. Until October 2002 we had expected that the Cadiz Program would be implemented upon the previously negotiated terms, and we had structured our financing arrangements with a view to such implementation. Following Metropolitan's vote in October 2002 to not proceed with the Cadiz Program, these financing arrangements were no longer workable on their then existing terms. In January 2003, Sun World filed a voluntary petition for Chapter 11 bankruptcy protection in order to access seasonal financing. Historically, we, as the parent company of Sun World, had supplemented Sun World's annual working capital requirements. However, at the time of Sun World's filing we did not have the ability to do this. The only way Sun World could obtain the new financing needed to provide working capital for its 2003-2004 growing seasons was to seek court approval, pursuant to Chapter 11, to a new Debtor in Possession ("DIP") facility. Sun World's financial situation and bankruptcy filing, in turn, negated an agreement we had previously reached with our primary lender, ING Capital LLC ("ING") for a three year extension of approximately $35 million of senior secured loans with a maturity date of January 31, 2003. As we were unable to make payment of this debt when due, in February 2003 ING declared these loans to be in default, although we remained in negotiations with ING for an overall restructuring of this debt. Page 23 Our financing activities during 2003 were directed primarily towards completion of an overall restructuring of our capital structure which would preserve our ability to continue with our water resource development programs. This overall capital restructuring was successfully completed in December 2003, and featured the following components, in chronological order: * In June 2003 we completed a private equity offering of 800,000 shares of our common stock (after giving effect to our one for twenty-five reverse stock split effective December 15, 2003 (the "Reverse Split")). 672,000 shares were issued in consideration for $1.68 million in cash, 112,000 were issued in consideration for $280 thousand in services rendered to us, and 16,000 were issued as consideration for fees related to the equity offering. The proceeds raised in this offering provided sufficient working capital for us to continue operations pending completion of the larger $8.6 million private placement in December 2003 described below. * In August 2003 our stockholders approved implementation of a reverse split of our outstanding common stock, with the exact ratio for the split to be determined by our Board of Directors at the time of the split. The reverse split was intended to increase the likelihood of our being able to meet the minimum trading price required for listing our stock on The Nasdaq SmallCap Market or other national securities exchange, as well as to provide us with additional authorized but unissued shares of common stock to be used for capital raising and other purposes. * In October 2003 we entered into an agreement with the holder of all of our outstanding Series D, Series E-1 and Series E-2 preferred stock whereby we issued 400,000 shares of our common stock (after giving effect to the Reverse Split) in exchange of all of our then outstanding Series D, Series E-1 and Series E-2 preferred stock. In connection with this conversion, we recorded a change against paid-in capital as an inducement to convert. * In December 2003, as described in further detail in our most recent Form 10-K, we simultaneously completed: * An extension of up to three years of our $35 million debt facility with ING, * A one for twenty-five reverse split of our outstanding common stock; * An additional equity infusion of $8.6 million through the issuance of 3,440,000 shares of common stock; * The transfer of our properties to Cadiz Real Estate LLC, a Delaware limited liability company wholly owned by us and created at the behest of ING; and Page 24 * The completion of our global settlement agreement with the holders of a majority of Sun World's First Mortgage Notes (the "Bondholders") which provides for the pledge of our equity in Sun World together with an unsecured claim due to us from Sun World of $13.5 million to a trust controlled by the Bondholders. As a consequence of all of these transactions, the number of outstanding shares of our common stock (after giving effect to our December 2003 one for twenty-five reverse stock split) has increased from 1,858,659 shares as of December 31, 2002 (including 400,000 common shares issuable upon the conversion of outstanding Series D and E preferred stock) to 8,200,340 shares as of December 31, 2003 (including 1,728,955 common shares issuable upon the conversion of outstanding Series F preferred stock). With the completion of these transactions, we have provided for our short-term working capital needs and are able to refocus our efforts on obtaining and utilizing the capital necessary to proceed with our water resource development programs. RESULTS OF OPERATIONS On January 30, 2003, Sun World filed a voluntary petition for Chapter 11 bankruptcy protection. As of that date due to the Company's loss of control over the operations of Sun World, the financial statements of Sun World will no longer be consolidated with ours, but instead, we will account for our investment in Sun World on the cost basis of accounting. As a result of changing to the cost basis of accounting on January 31, 2003, we had a net investment in Sun World of approximately $195 thousand. We wrote off the net investment in Sun World of $195 thousand at the Chapter 11 filing date because we do not anticipate being able to recover our investment. Our consolidated financial statements for the three month period ended March 31, 2003 include the results of operations for Sun World only for the period January 1, 2003 through January 30, 2003. The results of operations of Sun World subsequent to January 30, 2003 are not consolidated in these consolidated financial statements. As a result of the foregoing, direct comparisons of our consolidated results of operations for the three months ended March 31, 2004 with results for the three months ended March 31, 2003 will not, in our view, prove meaningful. For this reason, we believe that material trends and developments with respect to our results of operations from period to period are more readily identifiable by comparing the unconsolidated results of Cadiz Inc., which do not include the January 2003 operations of Sun World, rather than our consolidated results of operations, which include the January 2003 operations of Sun World. Therefore, in the following discussion of results of operations, we are using only the unconsolidated results of Cadiz Inc. Tables which disclose the results of Cadiz Inc. separate from its consolidated subsidiary Sun World for the period ending March 31, 2003, and from which the numbers used Page 25 in the following discussion are derived, can be found in Note 3 to the Consolidated Financial Statements in Item 1 above. THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003 - ---------------------------------------------------------------- We have not received significant revenues from our water resource activity to date. As a result, we have historically incurred a net loss from operations. We had revenues of $11 thousand for the three months ended March 31, 2004 and $0.2 million for the three months ended March 31, 2003 with the reduction primarily attributable to the loss of management fees charged to Sun World in 2003 for the period to its Chapter 11 filing January 30, 2003. Our net loss totaled $2.8 million for the three months ended March 31, 2004 compared to $4.6 million for the three months ended March 31, 2003. During the three months ended March 31, 2003, Cadiz recorded $2.5 million loss from Sun World. Excluding the Sun World loss, Cadiz net loss for the three months ended March 31, 2003 was $2.2 million. Our primary expenses are our ongoing overhead costs (i.e. general and administrative expense) and our interest expense. REVENUES. We had revenues of $11 thousand for the three months ended March 31, 2004 and $0.2 million for the three months ended March 31, 2003 with the reduction attributable to the loss of management fees charged to Sun World in 2003 for the period to Sun World's Chapter 11 filing January 30, 2003, and the loss of fixed rental revenue from Cadiz Ranch. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the three months ended March 31, 2004 totaled $0.6 million compared to $1.1 million for the three months ended March 31, 2003. The decrease in general and administrative expenses is primarily due to reductions in professional fees, salaries and other costs associated with a reduction in staffing WRITE OFF OF INVESTMENT IN SUBSIDIARY. On January 30, 2003 Sun World and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As of that date due to the Company's loss of control over the operations of Sun World, the financial statements are no longer consolidated with those of Cadiz, but instead Cadiz accounts for its investment in Sun World on the cost basis of accounting. As a result of changing to the cost basis of accounting and because the Company does not believe it will be able to recover its investment, the Company wrote off its investment in Sun World of $195,000. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the three months ended March 31, 2004 and 2003 totaled $0.13 million compared to $0.15 million. INTEREST EXPENSE, NET. Net interest expense totaled $2.2 million during the three months ended March 31, 2004, compared to $0.9 million during the same period in 2003. The following table summarizes the components of net interest expense for the two periods (in thousands): Page 26 THREE MONTHS ENDED MARCH 31, 2004 2003 ---- ---- Interest on outstanding debt $ 1,139 $ 634 Amortization of financing costs 1,027 350 Interest income (9) (66) --------- --------- $ 2,157 $ 918 ========= ========= The increase in net interest expense is primarily due to a combination of higher interest rates on the ING loan and the amortization of both debt discount and borrowing fees. These financing costs, which include fees and preferred stock issued in conjunction with the ING loan extension, are amortized over the life of the debt agreement. For the 2004 period, the amortization of financing costs is non-cash as is $707 thousand of the interest on outstanding debt representing the PIK portion which is added to the loan principal. The result is that only approximately $400 thousand of the $2.2 million interest expense represents a current cash outlay. See Note 3 to Cadiz financial statements. LIQUIDITY AND CAPITAL RESOURCES (A) CURRENT FINANCING ARRANGEMENTS CADIZ OBLIGATIONS. As we have not received significant revenues from our water resource activity to date, we have been required to obtain financing to bridge the gap between the time water resource development expenses are incurred and the time that revenue will commence. Historically, we have addressed these needs primarily through secured debt financing arrangements with our lenders, private equity placements and the exercise of outstanding stock options. As of December 31, 2002, we were obligated for approximately $10,095,068 under a senior term loan facility and $25 million under a revolving credit facility with our primary secured lender, ING Capital LLC. Each facility had a maturity date of January 31, 2003. Sun World's bankruptcy filing negated an agreement we had previously reached with ING for a three year extension of these loans, and in February 2003 ING declared these loans to be in default. During 2003 we remained in continuing discussions with ING concerning an overall restructuring of this debt and in December 2003, as part of an overall restructuring of our capital structure, we entered into agreements with ING which provided for establishing the outstanding principal balance owed to ING at $35 million and extended the maturity date of the credit facilities until March 31, 2005, with three additional automatic six month extensions conditioned on our maintaining, as of the commencement date of each extension, cash in an amount equal to at least 4% of the outstanding principal balance of the credit facilities in a cash collateral Page 27 account held by ING. Additional details concerning the terms of this December 2003 restructuring are included in our Form 10-K for the year ended December 31, 2003. As we continue to actively pursue our business strategy, additional financing specifically in connection with our water programs will be required. See "Outlook", below. As the parties anticipated this need at the time of our credit restructuring, the restrictive covenants in our credit facility were crafted in a way that, in our view, should not materially limit our ability to undertake debt or equity financing in order to finance our water development activities. We have no outstanding credit facilities or preferred stock other than the Series F preferred stock held by ING as described in our 10-K for the year ended December 31, 2003. SUN WORLD OBLIGATIONS. Sun World has outstanding $115 million of First Mortgage Notes. The First Mortgage Notes were originally to mature on April 15, 2004. The First Mortgage Notes are currently in default as a consequence of the Sun World bankruptcy filing. Sun World's proposed plan of reorganization currently provides for settlement of claims held by the holders of these notes through the issuance of equity interests in Sun World to such holders. The Sun World notes are also secured by the guarantee of Cadiz. As we are not a party to the Sun World bankruptcy filing, the effectiveness of a plan of reorganization which discharges Sun World's obligation to holders of these notes will not, in and of itself, release us of any obligations which we may still have under this guarantee. The Plan, as currently proposed, includes a release in our favor with respect to any of our remaining obligations under this guarantee; however, we do not know whether this provision of the Plan will be approved by the Bankruptcy Court. We have limited any potential obligation we may have otherwise had under the guarantee by entering into release agreements with the majority of the holders of the Sun World notes. For example, in December 2003 we entered into a global settlement agreement with Sun World and with the holders of a majority of Sun World's First Mortgage Notes (the "Bondholders"). Pursuant to this global settlement agreement, the Bondholders waived their rights to seek recovery against us on account of our guarantee of Sun World's obligations under the First Mortgage Notes. This right will similarly be waived by any other note holder which elects to opt into this settlement. The identity and ownership interests of Sun World's bondholders is not a matter of public record, however, based on the results of investigations performed on behalf of Sun World, we believe that we have obtained waivers and/or releases to date from Bondholders which hold, together with their affiliates, approximately 88% in interest of outstanding Sun World notes. All of the remaining Sun World notes (other than a nominal interest of less than 1%) are held by persons who are also shareholders of ours. No non-releasing bondholder has sought to enforce our guarantee of Sun World's obligations against us, nor has any such bondholder given any indication to us that it plans to do so. As part of our December 2003 global settlement agreement, the Bondholders gave written direction to the indenture trustee irrevocably instructing the trustee to take no action against us on behalf of bondholders or on account of the guarantee. Further, we believe that if a bondholder's claim against Sun World is ultimately satisfied in whole or in part through a Sun Page 28 World plan of reorganization, then such bondholder will not be entitled to enforce the guarantee against us as to the amount of the claim so satisfied. In view of all of these factors, we do not anticipate that significant claims will be made against us under the guarantee and we are not setting aside existing working capital or seeking to raise additional working capital in order to pay claims under the guarantee. We have no other obligations or working capital needs with respect to Sun World. As part of our December 2003 global settlement, we have settled all of our claims and obligations with Sun World. Although we continue to be the record owner of Sun World's stock, Sun World will not be receiving working capital contributions from us while it is in bankruptcy proceedings. Sun World's currently proposed plan of reorganization provides for our ownership interests in Sun World to be canceled. CASH USED FOR OPERATING ACTIVITIES. Cash used for operating activities was $1.6 million for the three months ended March 31, 2004, as compared to $2.0 million for the three months ended March 31, 2003. These amounts are not comparable because of the deconsolidation of Sun world in January 2003. Cash used by Cadiz for operating activities totaled $1.6 million for the three months ended March 31, 2004 compared to $0.4 million for the same period in 2003. The increased cash usage is primarily due to a greater loss in the 2004 period. CASH USED FOR INVESTING ACTIVITIES. During the 2004 period $0.7 million was paid from the restricted cash account for the cash portion of interest due on the ING loan at March 31, 2004. During the three months ended March 31, 2003, $1.5 million was used for investing activities primarily due to $1.0 million as a result of deconsolidation of Sun World in January 2003, and $0.3 million for additions to fixed assets. CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing activities was $0 for the three months ended March 31, 2004, compared to $0.3 million in 2003. In 2003, Cadiz cash inflows resulted from the issuance of a $0.2 million convertible note and $0.1 million from Sun World's issuance of long-term debt. OUTLOOK SHORT TERM OUTLOOK. The proceeds of our 2003 private placements have provided us with sufficient cash to meet our expected working capital needs through approximately May 2005. $2.0 million of the proceeds of our December 2003 private placement were used to bring current our outstanding interest payments owed to ING under our ING credit facilities. $2.1 million of the proceeds of our December 2003 private placement were placed in a cash collateral account with ING in order to extend the maturity date of the credit facility through March 31, 2005. These funds can be applied, if necessary, to the payment of accrued interest due under our credit facilities with ING. The remainder of the proceeds will be used to meet our ongoing working capital needs. LONG TERM OUTLOOK. In the longer term, our working capital needs will be determined based upon the specific measures we pursue in the development of our water resources. Page 29 Whichever measure or measures are chosen, we expect that we will need to raise additional cash from time to time until we are able to generate cash through our development activities. We will evaluate the amount of cash needed, and the manner in which such cash will be raised, on an ongoing basis. We may meet any such future cash requirements through a variety of means to be determined at the appropriate time. Such means may include equity or debt placements, or the sale or other disposition of assets. Equity placements would be undertaken only to the extent necessary so as to minimize the dilutive effect of any such placements upon our existing stockholders. NEW ACCOUNTING PRONOUNCEMENTS In March 2004, the consensus of Emerging Issues Task Force (EITF) Issue No. 03-06, Participating Securities and the Two-Class Method under FASB Statement 128, was published. EITF Issue No. 03-06 addresses the computations of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. Further guidance on the application and allocations of the two-class method of calculating earnings per share is also included. The provisions of EITF Issue No. 03-06 will be effective for reporting periods beginning after March 31, 2004. The adoption of this guidance is not expected to have significant impact on the Company's financial results of operations and financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risks for the three months ended March 31, 2004 does not differ materially from that discussed under Item 7A of Cadiz' Annual Report on Form 10-K for the year ended December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, Chief Executive Officer and Chief Financial Officer (Principal Executive and Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2004. Based upon, and as of the date of that evaluation, our Chairman, Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective in timely alerting him to material information relating to Cadiz (including our consolidated subsidiaries) required to be included in our periodic Securities and Exchange Commission filings. There was no significant change in our internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to affect, our internal control over financial reporting, and no corrective actions with regard to significant deficiencies or weaknesses. Page 30 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Legal Proceedings" included in the Company's latest Form 10- K for a complete discussion. There are no other material pending legal proceedings to which we are a party or of which any of our property is the subject. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES During the quarter ended March 31, 2004, we issued 60,000 shares of common stock in consideration for services valued at $150,000, or $2.50 per share. We also issued 80,000 shares of common stock valued at $2.50 per share in payment of a $200,000 bonus for services rendered. We also issued 1,289 shares of common stock to holders of deferred stock units who exchanged their deferred stock units for shares of common stock upon their vesting dates. We believe that the transactions described are exempt from the registration requirements of the Securities Act by virtue of Section 4(2) of the Securities Act as the transactions did not involve public offerings, the number of investors was limited, the investors were provided with information about us, and we placed restrictions on resale of the securities (other than 734 shares issued upon exchange of deferred stock units which were eligible for resale pursuant to Rule 144(k)). 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 The following exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q. Page 31 3.1 Certificate of Elimination of Series A Junior Participating Preferred Stock of Cadiz Inc. 4.1 Amendment/Termination of Rights Agreement dated as of March __, 2004 by and between Cadiz Inc. and Continental Stock Transfer & Trust Company 31.1 Certification of Keith Brackpool, Chairman, Chief Executive Officer and Chief Financial Officer of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Keith Brackpool, Chairman, Chief Executive Officer and Chief Financial Officer of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 B. REPORTS ON FORM 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Page 32 CADIZ INC. By: /s/ Keith Brackpool November 1, 2004 ------------------------------------------ ---------------- Keith Brackpool, Chairman of the Board and Date Chief Executive Officer Page 33