UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON,United StatesSecurities and Exchange CommissionWashington, D. C. 20549FORM 10-KFOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934(Mark(Mark One)[X][√] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31,20052006OR[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from..…… to...…….Commission File Number 0-12114CADIZ INC. (ExactCadiz Inc.(Exact name of registrant specified in its charter)DELAWARE77-0313235(State(State or other jurisdiction of(I.R.S.(I.R.S. Employerincorporation or organization)Identification No.)777 S. Figueroa Street, Suite 4250Los Angeles, CA90017(Address(Address of principal executive offices) (Zip Code)(213) 271-1600(Registrant's(Registrant’s telephone number, including area code)Securities Registered Pursuant to Section 12(b) of the Act:Title of Each ClassName of Each Exchange on Which RegisteredNone NoneCommon Stock, par value $0.01 per share The NASDAQ Stock Market LLC(Title of Class) (Exchange)Securities Registered Pursuant to Section 12(g) of the Act:COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class)Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 under the Securities Act of 1933.YES NO X --- ---Yes __ No _√_Indicate by a check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.YES NO X --- ---Yes __ No _√_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 --- ---Yes _√_ No ___Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(220.405(§220.405 of this chapter) is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10- K10-K or any amendment of this Form 10-K.[ ]□Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).LARGE ACCELERATED FILER ACCELERATED FILER X --- --- NON-ACCELERATED FILER --- Page iLarge accelerated filer ___ Accelerated filer _√_ Non-accelerated filer ___Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).YES NO X --- ---Yes___ No _√_As ofFeb 28, 2006,March 2, 2007, the Registrant had11,330,40211,887,762 shares of common stock outstanding. The aggregate market value of the common stock held by nonaffiliates as of June 30,20052006 was approximately$86,942,138$95,432,717 based on4,575,9025,610,389 shares of common stock outstanding held by nonaffiliates and the closing price on that date. Shares of common stock held by each executive officer and director and by each entity that owns more than 5% of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.DOCUMENTS INCORPORATED BY REFERENCEDocuments Incorporated by ReferencePortions of the Registrant's definitive Proxy Statement to be filed for its20062007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. The Registrant is not incorporating by reference any other documents within this Annual Report on Form 10-K except those footnoted in Part IV under the heading"Item“Item 15. Exhibits, Financial Statement Schedules, and Reports on Form8-K"8-K”.Page iiiTABLE OF CONTENTSPart I
Item 1. Business 1 Item 1A. Risk Factors 8 Item 1B. Unresolved Staff Comments 10 Item 2. Properties 10 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Part IIPart IIIPart IViiPART IItem 1. Business . . . . . . . . . . . . . . . . . . . . . . .1 Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . 8 Item 1B. Unresolved Staff Comments. . . . . . . . . . . . . . .9 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .9 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . .11 Item 4. Submission of Matters to a Vote of Security Holders. 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . .13 Item 6. Selected Financial Data. . . . . . . . . . . . . . . 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . .15 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . .27 Item 8. Financial Statements and Supplementary Data. . . . . 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . 27 Item 9A. Controls and Procedures. . . . . . . . . . . . . . . 28 Item 9B. Other Information. . . . . . . . . . . . . . . . . . 28 PART III Item 10. Directors and Executive Officers of the Registrant . .29 Item 11. Executive Compensation. . . . . . . . . . . . . . . . 29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . 29 Item 13. Certain Relationships and Related Transactions. . . . 29 Item 14. Principal Accountant Fees and Services. . . . . . . . 29 PART IV Item 15. Exhibits and Financial Statement Schedules . . . . . .30 Page iii PART IThis Form 10-K presents forward-looking statements with regard to financial projections, proposed transactions such as those concerning the further development of our land and water assets, information or expectations about our business strategies, results of operations, products or markets, or otherwise makes statements about future events. Suchforward- lookingforward-looking statements can be identified by the use of words such as"intends"“intends”,"anticipates"“anticipates”,"believes"“believes”,"estimates"“estimates”,"projects"“projects”,"forecasts"“forecasts”,"expects"“expects”,"plans"“plans” and"proposes"“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, the cautionary statements under the caption"Risk Factors"“Risk Factors”, as well as other cautionary language contained in this Form 10-K. These cautionary statements identify important factors that could cause actual results to differ materially from those described in the forward-looking statements. When considering forward-looking statements in this Form 10-K, you should keep in mind the cautionary statements described above.OVERVIEWOverviewOur primaryasset consists of three blocksassets are 45,000 acres of land in three areas of eastern San Bernardino County,California totaling approximately 46,000 acres.California. Virtually all of this land is underlain byhigh- qualityhigh-quality groundwater resources with demonstrated potential forvarious applications, including water storage and supply programs andrecreational, residential, and agricultural development.Two of the threeThe properties are also located in proximity to the Colorado River and the Colorado River Aqueduct, the major source of imported water for southern California. Thethird property is located nearaquifer systems underlying theColorado River.properties contain large amounts of water and are suitable for water storage and supply programs.The value of these assets derives from a combination of projected population increases and limited water supplies throughout southern California. In addition, most of the major population centers in southern California are not located where significant precipitation occurs, requiring the importation of water from other parts of the state. We therefore believe that a competitive advantage exists for companies that can provide high quality, reliable, and affordable water to major population centers.To this end,Our objective is to realize the highest and best use for these assets. In 1993 we secured permits for up to 9,600 acres of agricultural development in1997the Cadiz Valley and the withdrawal of more than 1 million acre-feet of groundwater from the aquifer system underlying the property.Given the location of the property, wecommenced discussions withthen focused on theMetropolitan Water Districtdevelopment ofSouthern California ("Metropolitan") in order to develop a long-term agreement for a joint venture groundwateran aquifer storage and supply program on our land in the Cadiz and FennervalleysValleys. We believe that the location and geology ofeastern San Bernardino Countythese properties are uniquely suited for such a development. To this end, in 1997 we entered into the first of a series of agreements with the Metropolitan Water District of Southern California (“Metropolitan”) to jointly design, permit and build such a project (the"Cadiz Project"“Cadiz Project” or the “Project”).Under the Cadiz Project, surplus water from the Colorado River would be stored in the aquifer system underlying our land during wet years. When needed, the stored water, together with indigenous groundwater, could be returned to the Colorado River Aqueduct for distribution to Metropolitan's member agencies throughout six southern California counties.1Between 1997 and 2002, Metropolitan and the Company received substantially all of the various state and federal approvals required for permitsrequiredto construct and operate the projectincludingand received a federal Record of Decision (“ROD”)from the U.S. Department of the Interior, which endorsed the Cadiz Project andgrantedoffered aright-of-wayright of way for construction of project facilities. The federal government also approved a FinalPage 1Environmental Impact Statement("FEIS"(“FEIS”) in compliance with the National Environmental Policy Act("NEPA"(“NEPA”).DespiteWith thesignificant progress made incompletion of the federalenvironmentalreview and permitting process, Cadiz expected Metropolitan to hold a CEQA hearing, take a vote to approve the Final Environmental Impact Report (“FEIR”) and accept the right of way offered to the Project by the U.S. Department of the Interior. Metropolitan’s staff brought the matter before the Metropolitan Board of Directors in October 2002Metropolitan'sand, in a very close vote, the Metropolitan Board voted not to accept the right of way grant and refused to consider whether or not to certify theFinal Environmental Impact Report ("FEIR"),FEIR, which was a necessary action to authorize implementation of the Cadiz Project in accordance with the California Environmental Quality Act("CEQA"(“CEQA”).It is our position that these actions breached various contractual and fiduciary obligations to us and interfered with the economic advantage we would have obtained from the Cadiz Project. In April 2003 we filed a claim against Metropolitan seeking compensatory damages. When settlement negotiations failed to produce a resolution, we filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17, 2005. Our claims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance have been allowed and will all go forward to trial later this year. See Item 3 - “Legal Proceedings”.Regardless of the MetropolitanBoard'sBoard’s actions in October 2002, SouthernCalifornia'sCalifornia’s population continues to grow, and the need for water storage and supply programs has not abated. Moreover, the advantages of underground water storage facilities are increasingly evident. These include minimal surface environmental impacts, low capital investment, protection from airborne contaminants and minimal evaporative water loss. Therefore we continue to pursue the completion of the environmental review process for the Cadiz Project.To that end,we are now in advanced discussions with a third party public agency that would assumetheroleCounty of San Bernardino has agreed to serve as the CEQA lead agencyand completefor thestatecompletion ofCaliforniathe environmental reviewprocess.of the Cadiz Project and issue any permits required under California law once the review is completed. We are also workingdirectlywith the U.S. Department of the Interior to have the permits that were approved during the federal environmental review process, including theright-of-wayright of way granted in theRecord of Decision,ROD, issued directly to theCompany.Company for the benefit of any participating public agency. Additionally, we are in discussions with several other public agencies regarding their interest in participating in the Cadiz Project.All of theseThese agencies have access toindependentsources ofsupplywater that can be storedbyin the Cadiz Project. See"Water“Water ResourceDevelopment"Development”, below.DueIn addition tosignificant populationagriculture and water development, the rapid growth of nearby desert communities inSouthernsouthern California,where our properties are located, we have also begun to explore additional usesNevada and Arizona indicates that the Company’s land holdings may be suitable for other types ofour land assets.development. To this end, we haveretained outside services to conductconducted a detailed analysis of our land assetsandto assess the opportunities for these properties. Based on this analysis, we believe that our properties have significant long-term potential for residential and commercial development. Weexpect that these objectives will have different capital requirements and implementation periods than those previously established. Therefore, in 2002, we entered into a series of agreements with our senior secured lender, ING Capital LLC ("ING") pursuantare continuing towhich we reduced our debtexplore alternative land uses toING to $25 million and extendedmaximize thematurity date of the ING debt until March 31, 2010, conditioned upon a further principal reduction of $10 million on or before March 31, 2008. In addition, we raised approximately $35 million in equity through private placements completed in 2003 and 2004. Further, in February 2005, our wholly owned subsidiary Sun World International, Inc. ("Sun World") completed the sale of substantially all of its assets, and Sun World's consensual plan of reorganization was confirmed by the U.S. Bankruptcy Court in August 2005. Sun World had entered bankruptcy proceedings on January 30, 2003, following which the financial statements of Sun World are no longer consolidated with ours. With the implementation of these steps, we have been able to retain ownership of allvalue of ourland assets and assets relating to our water programs and also to obtain working capital needed to continue our efforts to develop our water programs. Because many of our pre-existing common stockholders have participated in the 2003 and 2004 private placements, our base of common stockholders remains largely the same as before these placements.properties.2We remain committed to our land and water assets andwewill continue to explore all opportunities for development of these assets. We cannot predict with certainty which of these various opportunities will ultimately be utilized.Page 2 (A) GENERAL DEVELOPMENT OF BUSINESS -------------------------------(a)General Development of BusinessWe are a Delaware corporation formed in 1992 to act as the surviving corporation in a Delaware reincorporation merger between us and our predecessor, Pacific Agricultural Holdings, Inc., a California corporation formed in 1983.As part of our historical business strategy, we have conducted our land acquisition, water development activities, agricultural operations,andsearch for international water and agricultural opportunitiesforand real estate development initiatives to maximize thepurpose of enhancing the long- term appreciationlong-term value of our properties and future prospects. See"Narrative“Narrative Description ofBusiness"Business” below.Our initial focus was on the acquisition of land, the assembly of contiguous land holdings through property exchanges and to prove the quantity and quality of water resources through well drilling programs. We subsequently established agricultural operations on the properties in the Cadiz and Fenner Valleys and sought to develop the water resources underlying that site.The focus of our water development activities has been the Cadiz Project. The MetropolitanBoard'sBoard’s decision in late 2002 delayed implementation of the Cadiz Project as we sought a settlement with Metropolitan before proceeding with another state agency.In 2005, our business development activities consisted largely of continued adjustmentsWhen it became clear that we would not be able toour capital structure by way of amendmentsreach settlement and continue the Project with Metropolitan, we began toour lending agreementstake steps to complete the environmental review process andequity issuances. See "Overview", above. Our primary goalimplement the Project independently. To that end, inthis process has been to maintain ownership of our2006 we began work with San Bernardino Countypropertiesto complete the CEQA environmental review for the Project. In the Fall of 2006, the County agreed to serve as the CEQA lead agency in the review of the Project’s existing and updated environmental documents.At the same time we have pursued a claim against Metropolitan, seeking compensatory damages for what we believe is a breach of contractual and fiduciary obligations tocreate a capital structure thatus and interference with the economic advantage we wouldallow us to continue the development ofhave obtained from the Cadiz Project. Webelievefiled a claim against Metropolitan in April 2003 and, when settlement negotiations failed to produce a resolution, filed a lawsuit in Los Angeles Superior Court in November 2005. Our claims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance will all go forward to trial, which is currently scheduled for later this year.In 2006, we refinanced our long term debt with a new $36.4 million zero coupon senior secured convertible term loan that matures on June 29, 2011 and received $1.1 million when certain holders of warrants issued in 2004 exercised their right to purchase 70,000 common shares at $15.00 per share. In 2007, wehave succeeded in achieving this goal. We have obtainedexercised our right to terminate the remaining warrants on March 2, 2007, subject to a 30 day notice period. In response, the remaining warrant holders exercised their right to purchase 335,440 shares of our common stock during the notice period, and we received an additionalequity infusion$5.0 million from the sale ofapproximately $35 million through the issuancethese shares. Following this exercise, no warrants remain outstanding. These transactions are described in more detail in3Item 7, “Management’s Discussion and Analysis ofcommon stock. We have paid down our debt facility with ING to $26 million,Financial Condition andhave obtained a maturity date extension and interest rate reduction with respect to such debt. We have also divested allResults ofthe assets and operations of Sun World. Sun World'sOperation.”The Chapter 11 Reorganization Plan("Plan") isof our Sun World International Inc. subsidiary became effective in 2005, and the Company has no further liabilities related to the business or operations of Sun World.These transactions are described in more detail in Item 7, "Management's Discussion(b)Financial Information about Industry SegmentsThe primary business of the Company is to acquire andAnalysis of Financial Conditiondevelop land andResults of Operation." (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS --------------------------------------------- During the year ended December 31, 2005 we continued to develop thewaterresource segment of our business. With the deconsolidation of Sun World upon Sun World's January 30, 2003 bankruptcy filing ourresources. Our agricultural operations are confined to limited farming activities at the Cadiz Valley property.We no longer actively operateAs aseparate agricultural resourcesresult, the Company’s financial results are reported in a single segment. See Consolidated Financial Statements. See also Item 7,"Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations”.(C) NARRATIVE DESCRIPTION OF BUSINESS ---------------------------------(c)Narrative Description of BusinessOur business strategy is the development of our land holdings for their highest and best uses. At present, our development activities are focused on water resource and real estate development at our San Bernardino County properties.WATER RESOURCE DEVELOPMENTWater Resource DevelopmentOur portfolio of water resources, located in proximity to the Colorado River and the Colorado River Aqueduct, the principal source of imported water for Southern California,Page 3provides us with the opportunity to participate in a variety of water storage and supply programs, exchanges and conservation programs with public agencies and other partners.CADIZ GROUNDWATER STORAGE AND DRY-YEAR SUPPLY PROGRAM ----------------------------------------------------- We ownThe Cadiz Valley Aquifer Storage ProjectThe Company owns approximately 35,000 acres of land and relatedhigh- qualityhigh-quality groundwater resources in the Cadiz and Fenner valleys of eastern San Bernardino County. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed of approximately 1,300 square miles. See Item 2,"Properties“Properties - The Cadiz/FennerProperty"Property”.In 1997 we commenced discussions with Metropolitan in order to develop principles and terms for a long-term agreement for a joint venture groundwater storage and supply program on this land (the"Cadiz Project"“Cadiz Project”). The Cadiz Project would have provided SouthernCaliforniansCalifornia with a valuable increase in water supply during periods of drought or other emergencies. During wet years, surplus water from the Colorado River would be stored in the aquifer system that underlies the Cadiz property. When needed, the stored water and indigenous groundwater wouldbehave been returned to the Colorado River Aqueduct for distribution to water agencies throughout six southern California counties. The Colorado River Aqueduct provides supplemental water to approximately 18 million people. Additionally, exchange agreements could be used to transfer this supplemental water supply to California communities in the Central and Northern portions of the state.4Temporary withdrawals of indigenous groundwater would alsobehave been available from the Cadiz Project during emergencies. Any temporary withdrawals wouldbehave been strictly monitored according to the provisions of the Groundwater Monitoring & Management Plan("(“ManagementPlan"Plan”)approved by the U.S. Department of the Interior in its 2002Record of Decision.ROD. The comprehensive Management Plan was created during the CadizProject'sProject’s extensive environmental review process to ensure long-term protection of the aquifer system and related environmental resources in and surrounding the area in which the Cadiz Project is located.Cadiz Project facilities would include, among other things:* Spreading basins, which are shallow ponds that percolate water from the ground surface to the water table; * High yield extraction wells designed to extract stored Colorado River water and indigenous groundwater from beneath the Cadiz Project area; * A 35-mile conveyance pipeline to connect the spreading basins and wellfield to the Colorado River Aqueduct near the Iron Mountain pumping plant; and * A pumping plant to pump water through the conveyance pipeline from the Colorado River Aqueduct near the Iron Mountain pumping plant to the Cadiz Project spreading basins.
· Spreading basins, which are shallow ponds that percolate water from the ground surface to the water table;
· High yield extraction wells designed to extract stored Colorado River water and indigenous groundwater from beneath the Cadiz Project area;
· A 35-mile conveyance pipeline to connect the spreading basins and wellfield to the Colorado River Aqueduct near the Iron Mountain pumping plant; and
· A pumping plant to pump water through the conveyance pipeline from the Colorado River Aqueduct near the Iron Mountain pumping plant to the Cadiz Project spreading basins. The cost of these facilities was estimated to be approximately $150 million in 2002 and is expected to be higher today due to steel price increases and higher well drilling costs.Page 4In October 2001, the Final Environmental Impact Statement("FEIS"(“FEIS”) and Final Environmental Impact Report("FEIR"(“FEIR”) were issued by Metropolitan and the U.S. Bureau of Land Management, in collaboration with the U.S. Geological Survey and the National Park Service. On August 29, 2002, the U.S. Department of Interior approved the FEIS for the Cadiz Project and issued itsRecord of Decision,ROD, the final step in the federal environmental review process for the Cadiz Project. TheRecord of DecisionROD amended the California Desert Conservation Area Plan for an exception to the utility corridor element and offered to Metropolitan aright-of-wayright of way grantnecessaryfor theconstruction and operation ofpipeline from the Colorado River Aqueduct to the Cadiz Project.With all federal approvalsand permitsin place, on October 8, 2002,Metropolitan'sMetropolitan’s Board considered acceptance of the terms and conditions of theright-of-wayright of way grant pursuant to the publishedRecord of Decision.ROD. The Board voted not to adopt Metropolitanstaff'sstaff’s recommendation to approve the terms and conditions of theright-of-wayright of way grant issued by the Department of the Interiorfor the Cadiz Projectby a very narrow margin. Instead, the Board voted for an alternative motion to reject the terms and conditions of theright-of-wayright of way grant and to not proceed with the Cadiz Project. Subsequent to the MetropolitanBoards' actions,Board’s action, negotiations toward a final agreement for the Cadiz Project on the basis of the previously approved definitive economic terms ceased.WhenMetropolitan'sMetropolitan’s Board declined to proceed with the Cadiz Project, the FEIR was complete and awaiting certification at a hearing scheduled for late October 2002. It is our position thatMetropolitan'sMetropolitan’s actions on October 8, 2002, breached various contractual and fiduciary obligations of Metropolitan to us, and interfered with the economic advantage we would have obtained from the Cadiz Project. Therefore, in April 2003 we filed a claim against5Metropolitan seeking compensatoryand punitivedamages. When settlement negotiations failed to produce a resolution, we filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17, 2005. See Item 3 -"Legal Proceedings"“Legal Proceedings”.Meanwhile,In 2006, theneed forCounty of San Bernardino agreed to serve as the newwater storage and supply programs in the southwestern United States has not diminished. Over the five years preceding the 2004 - 2005 winter season, the Colorado River watershed experienced a prolonged drought that presented major challenges to the economies of California, Nevada, and Arizona. The drought was followed by a wet year in 2005 during which surplus water was available to Metropolitan that exceeded its storage capacity by approximately 200,000 acre- feet. Had the Cadiz Project been built, it could have accommodated most of this available surplus. As population continues to grow at record rates, the Southwest is facing the very real possibility that current and future supplies of water will not be able to meet demand without more investment in water infrastructure, including groundwater storage projects. To meet this need, we are committed to completing the Cadiz Project and finalizing the state of California environmental review. To that end we are now in advanced discussions with a third party public agency that would assume the role ofCEQA lead agency for the Project and evaluate the changes to the Project as well as the Project’s existing and updated environmental documentation. Once the CEQA review is complete, the County has the authority to issue any permits required under Californiaenvironmentallaw for construction and implementation of the Project. In late 2006 and early 2007, we submitted a technical memorandum and numerous permit applications to the County, which officially began the CEQA review process. We expect this process to be completed by the end of 2007.We are also working directly with the U.S. Department of the Interior to have the permits that weregrantedauthorized during the federal environmental review process, including theright-of-way grantedright of way grant included in theRecord of Decision,ROD, issued directly to the Company. Additionally, we are in discussions with several other public agencies regarding their interest in participating in the Cadiz Project. All of these agencies have access toindependentsources ofsupplywater that can be stored by the Cadiz Project.Page 5 OTHER EASTERN MOJAVE PROPERTIES -------------------------------6Other Eastern Mojave PropertiesOur second largest landholding is approximately 9,000 acres in the Piute Valley of eastern San Bernardino County. This landholding is located approximately 15 miles from the resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of Needles, California. Extensive hydrological studies, including the drilling and testing of a full-scale production well, have demonstrated that this landholding is underlain by high-quality groundwater. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed of approximately 975 square miles. Discussions with potential partners have commenced with the objective of developing our Piute Valley assets.Additionally, we own additional acreage located near Danby Dry Lake, approximately 30 miles southeast of our landholdings in Cadiz and Fenner valleys. Our Danby Lake property is located approximately 10 miles north of the Colorado River Aqueduct. Initial hydrological studies indicate that it has excellent potential for a groundwater storage and supply project.AGRICULTURAL OPERATIONS With the bankruptcy of Sun World, ourAgricultural OperationsOur agricultural operations are very limited. Historically, wehaveleased our Cadiz Valley farming property to Sun World and other third parties.In the fourth quarter of 2004, theCurrently, we leasewith Sun World expired. We continue to lease to a third partyapproximately 160 acres of organic table grape vineyards at our Cadiz Valleyproperty.property to a third party. The lease is renewable on a year to year basis with annual revenues of approximately$50,000.$12,000. In20052006, wealsofarmed 500 acres of table grape vineyards, 240 acres of Lisbon lemons and 20 acres of Eureka lemons. We subcontracted the irrigation labor, harvesting and marketing of the crop to third parties.AnnualIn 2006, revenues from agricultural operations wereapproximately $1.1 million. On January 30, 2003, Sun World filed voluntary petitions under Chapter 11 of the Bankruptcy Code. In February 2005, with Bankruptcy Court approval, Sun World sold substantially all of its assets and in September 2005 the Chapter 11 Reorganization Plan became effective. See "General Development of Business", above. Following the filing date and until the sale of its assets, Sun World operated its business and managed its affairs as debtor and debtor in possession. As of the filing date the financial statements of Sun World are no longer consolidated with those of ours, but instead, we 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 $195,000 consisting of loans and other amounts due from Sun World of $13,500,000 less losses in excess of investment in Sun World of $13,305,000. We wrote off the net investment in Sun World of $195,000 at the Chapter 11 filing date because we do not anticipate being able to recover our investment. On August 26, 2005, the U.S. Bankruptcy Court confirmed Sun World's amended plan of reorganization, which included a settlement agreement between Sun World and Cadiz regarding the retention of certain Sun World net operating loss carryforwards by Cadiz and released Cadiz from all liabilities under the guarantees of First Mortgage Notes issued by Sun World. The amended Plan became effective on September 6, 2005, and Cadiz has no further interest in the business and operations of Sun World. Page 6 SEASONALITY$602,000.SeasonalityOur water resource development activities are not seasonal in nature.With the 2003 bankruptcy and 2005 sale of the assets of ourdivestiture ofSun World International, Inc. subsidiary (“Sun World”), ourremainingfarming operations are limited. These operations will be subject to the general seasonal trends that are characteristic of the agricultural industry.COMPETITIONCompetitionWe face competition for the acquisition, development and sale of our properties from a number of competitors. We may also face competition in the development of water resources associated with our properties. Since California has scarce water resources and an increasing demand for available water, we believe that location, price and reliability of delivery are the principal competitive factors affecting transfers of water in California.EMPLOYEESEmployeesAs of December 31,2005,2006, we employed89 full-time employees (i.e. those individuals working more than 1,000 hours per year). We believe that our employee relations are good.REGULATION7RegulationOur operations are subject to varying degrees of federal, state and local laws and regulations. As we proceed with the development of our properties, including the Cadiz Project, we will be required to satisfy various regulatory authorities that we are in compliance with the laws, regulations and policies enforced by such authorities. Groundwater development, and the export of surplus groundwater for sale to single entities such as public water agencies, is not subject to regulation by existing statutes other than general environmental statutes applicable to all development projects. Additionally, we must obtain a variety of approvals and permits from state and federal governments with respect to issues that may include environmental issues, issues related to special status species, issues related to the public trust, and others. Because of the discretionary nature of these approvals and concerns which may be raised by various governmental officials, public interest groups and other interested parties during both the development and approval process, our ability to develop properties and realize income from our projects, including the Cadiz Project, could be delayed, reduced or eliminated.ACCESS TO OUR INFORMATIONAccess To Our InformationWe are subject to the information and reporting requirements of the Securities Exchange Act and file annual, quarterly and current reports, proxy statements and other information with the SEC. You can request copies of these documents, for a copying fee, by writing to the SEC. We furnish our stockholders with annual reports containing financial statements audited by our independent auditors.We also make available on our website www.cadizinc.com copies of our annual, quarterly and special reports, proxy and information statements and other information.Page 7Our business is subject to a number of risks, including those described below.OUR DEVELOPMENT ACTIVITIES HAVE NOT GENERATED SIGNIFICANT REVENUESOur Development Activities Have Not Generated Significant RevenuesAt present, our development activities are focused on water resource and real estate development at our San Bernardino County properties. We have not received significant revenues from our development activities to date and we do not know when, if ever, we will receive operating revenues from our development activities. As a result, we continue to incur a net loss from operations.WE MAY NEVER GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLE UNLESS WE ARE ABLE TO SUCCESSFULLY IMPLEMENT PROGRAMS TO DEVELOP OUR LAND ASSETS AND RELATED WATER RESOURCESWe May Never Generate Significant Revenues Or Become Profitable Unless We Are Able To Successfully Implement Programs To Develop Our Land Assets And Related Water ResourcesWe do not know the terms, if any, upon which we may be able to proceed with our water and real estate development programs. Regardless of the form of our water development programs, the circumstances under which transfers or storage of water can be made and the profitability of any transfers or storage are subject to significant uncertainties, including hydrologic risks of variable water supplies, risks presented by allocations of water under existing8and prospectivepriorities,priorities. Both water andrisksreal estate development programs are subject to the risk of adverse changes to or interpretations of U.S. federal, state and local laws, regulations and policies. Additional risks attendant to such programs include our ability to obtain all necessary regulatory approvals and permits, possible litigation by environmental or other groups, unforeseen technical difficulties, general market conditions for real estate and water supplies, and the timegapneeded to generate significant operating revenues from such programs after operations commence.OUR FAILURE TO MAKE TIMELY PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS MAY RESULT INOur Failure To Make Timely Payments Of Principal And Interest On Our Indebtedness May Result In AFORECLOSURE ON OUR ASSETSForeclosure On Our AssetsAs of December 31,2005,2006, we had indebtedness outstanding to our senior securedlenderlenders of approximately$25.9$37.3 million. Our assets have been put up as collateral to secure the payment of this debt. If we cannot generate sufficient cash flow to maketimely payments ofprincipal and interest on this indebtedness when due, or if we otherwise fail to comply with the terms of agreements governing our indebtedness, we may default on our obligations. If we default on our obligations, our lenders may sell off the assets that we have put up as collateral. This, in turn, would result in a cessation or sale of our operations.THE ISSUANCE OF SHARES UNDER OUR MANAGEMENT EQUITY INCENTIVE PLAN WILL IMPACT EARNINGSThe Conversion Of Our Outstanding Senior Indebtedness Into Common Stock Would Dilute The Percentage Of Our Common Stock Held By Current StockholdersOur senior indebtedness is convertible into common stock at the election of our lenders. As of December 31, 2006, our senior indebtedness was convertible into 1,736,518 shares of our common stock, an amount equal to approximately 15.1% of the number of shares of our common stock outstanding as of that date. An election by our lenders to convert all or a portion of our senior secured indebtedness into common stock will dilute the percentage of our common stock held by current stockholders.The Issuance Of Equity Securities Underapplicable accounting rules,Management Equity Incentive Plans Will Impact EarningsOur compensation programs for management emphasize long-term incentives, primarily through the issuance of equity securities and options to purchase equity securities. It is expected that plans involving the issuance of shares, options, or both will be submitted from time to time to our stockholders for approval. In the event that any such plans are approved and implemented, the issuance of shares and options underour Management Incentive Equity Plansuch plans may result in the dilution of the ownership interest of other stockholders and will, under currently applicable accounting rules, result in a charge to earnings based on the value of our common stock at the time of issue and thevaluationfair value of options at the time of theiraward and willaward. The expense would be recorded over the vesting periodin proportion toof each stock and option grant.We May Not Be Able To Obtain thequantities vested.Financing We Need To Implement OurManagement Equity Incentive Plan provides for the issuance of up to 1,472,051 shares of common stock. Subsequent to January 1, 2005 we have issued stock or options to purchase stock representing 1,459,712 of the shares authorized for issuance under this Management Equity Incentive Plan. Page 8 Based on the trading price of our common stock at the time of such issuances, such issuances resulted in a charge to our earnings of $16.7 million for our fiscal year ended December 31, 2005 and will result in a further significant charge to our earnings for our fiscal year ended December 31, 2006. The cost of approximately 93% of the shares and options issued in our fiscal year ended December 31, 2005 was an expense during 2005. WE MAY NOT BE ABLE TO OBTAIN THE FINANCING WE NEED TO IMPLEMENT OUR ASSET DEVELOPMENT PROGRAMSAsset Development ProgramsWe will require additional capital to finance our operations until such time as our asset developmentoperationsprograms produce revenues. We cannot assure you that our current lenders, or any other lenders, will give us additional credit should we seek it. If we are unable to obtain additional credit, we may engage in further equity financings. Our ability to obtain equity9financing will depend, among other things, on the status of our asset development programs and general conditions in the capital markets at the time funding is sought. Any further equity financings would result in the dilution of ownership interests of our current stockholders.WE ARE RESTRICTED BY CONTRACT FROM PAYING DIVIDENDS AND WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTUREWe Are Restricted By Contract from Paying Dividends and We Do Not Intend To Pay Dividends In The Foreseeable FutureAny return on investment on our common stock will depend primarily upontheappreciation in the price of our common stock. To date, we have never paid a cash dividend on our common stock. The loan documents governing our credit facilities with our senior securedlenderlenders prohibit the payment of dividends while such facilities are outstanding. As we have a history of operating losses, we have been unable todatepay dividends topay dividends.date. Even if we post a profit in future years, we currently intend to retain all future earnings for the operation of our business. As a result, we do not anticipate that we will declare any dividends in the foreseeable future.Not applicable at this time.Following is a description of our significant properties.THE CADIZ/FENNER PROPERTYThe Cadiz/Fenner Valley PropertyIn 1984, we conducted investigations of the feasibility of agricultural development of land located in the Cadiz and Fenner valleys of eastern San Bernardino County, California. These investigations confirmed the availability of high-qualitywatergroundwater in commercial quantities appropriate for agricultural development. Since 1985, we have acquired approximately 35,000 acres of largely contiguous land in this area, which is located approximately 30 miles north of the Colorado River Aqueduct.Page 9Additional independent geotechnical and engineering studies conducted since 1985 have confirmed that the Cadiz/Fenner property overlies a natural groundwater aquifer system that is ideally suited for the underground water storage and dry yeartransfers astemporary withdrawals contemplated in the Cadiz Project. See Item 1,"Business“Business - Narrative Description of Business - Water ResourceDevelopment"Development”.In November 1993, the San Bernardino County Board of Supervisors unanimously approved a General Plan Amendment establishing an agricultural land use designation for 9,600 acres in the Cadiz Valley,forof which approximately 1,600 acres have been developed for agriculture. This action alsoapproved permits to construct infrastructure and facilities to house as many as 1,150 seasonal workers and 170 permanent residents (employees and their families) andallows for the withdrawal of more than 1,000,000 acre-feet of groundwater from the aquifer system underlying our property.OTHER EASTERN MOJAVE PROPERTIES10Other Eastern Mojave PropertiesWe also own approximately 10,900 additional acres in the eastern Mojave Desert, including the Piute and Danby Lake properties.Our second largest property consists of approximately 9,000 acres in the Piute Valley of eastern San Bernardino County. This landholding is located approximately 15 miles from the resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of Needles, California. Extensive hydrological studies, including the drilling and testing of a full-scale production well, have demonstrated that this landholding is underlain by high-quality groundwater. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed of approximately 975 square miles. Discussions with potential partners have commenced with the objective of developing our Piute Valley assets.Additionally, we own or control additional acreage located near Danby Dry Lake, approximately 30 miles southeast of our landholdings in the Cadiz and Fenner valleys. Our Danby Lake property is located approximately 10 miles north of the Colorado River Aqueduct. Initial hydrological studies indicate that it has excellent potential for a groundwater storage and supply project.FARM PROPERTYFarmPropertyApproximately 1,600 acres of our Cadiz Valley property has been developed for agricultural use. We are currently leasing to a third party approximately 160 acres of this property, consisting of organic table grapevineyards, and until the fourth quarter of 2004 were leasing approximately 750vineyards. During 2005, we leased an additional 500 acresof this property, consistingof juice grape vineyardsand citrus orchards,toSun World.the same party. Theleases provide forlease provides that thelessees tolessee be responsible for all costs associated with growing crops on the leased property. The leasewith the third partyis renewable on a year to year basis withannual2006 revenues of approximately$50,000.$12,000. In20052006, the Company farmed the 500 acres of juice grape vineyards and 260 acres of citrusorchardorchards using subcontractors to farm, harvest andsubcontracted the labor and marketing ofmarket the crop. Annual revenues from these agricultural activities wereapproximately $1.1 million. Page 10 EXECUTIVE OFFICES$602,000.Executive OfficesWe currently lease our executive offices in Los Angeles, California, which consist of approximately 4,770 square feet, pursuant to a sublease that expires on June 14,2006.2007. Current base rent under the lease is approximately$8,350$8,745 per month.CADIZ REAL ESTATECadiz Real EstateIn December 2003, we transferred substantially all of our assets (with the exception of our office sublease, certain office furniture and equipment and any Sun World related assets) to Cadiz Real Estate LLC, a Delaware limited liability company("(“Cadiz RealEstate"Estate”). We hold 100% of the equity interests of Cadiz Real Estate, and therefore we continue to hold 100% beneficial ownership of the properties that we transferred to Cadiz Real Estate. Cadiz Real Estate was created at the behest of our then existing senior secured lender, ING. The Board of Managers of Cadiz Real Estate currently consists of two managers appointed byus andus. Our senior secured lender, Peloton, has the right to appoint one independentmanager named by ING.manager.11Cadiz Real Estate is a co-obligor under ourcredit facilities with ING,senior secured convertible term loan, for which assets of Cadiz Real Estate have been pledged as security.Because the transfer of our properties to Cadiz Real Estate has no effect on our ultimate beneficial ownership of these properties, we refer throughout this Report to properties owned of record either by Cadiz Real Estate or by us as"our"“our” properties.DEBT SECURED BY PROPERTIESDebt Secured by PropertiesOur outstanding debt at December 31,20052006 of$25.9$37.3 million represents loans secured by ourpropertiesassets (including properties held of record by Cadiz Real Estate). Information regarding interest rates and principal maturities is provided in Note 6 to the consolidated financial statements.Claim Against MetropolitanOn April 7, 2003, we filed an administrative claim against The Metropolitan Water District of Southern California("Metropolitan"(“Metropolitan”), asserting the breach by Metropolitan of various obligations specified in our 1998 Principles of Agreement withMetropolitan.Metropolitan and other related contracts. We believe that by failing to complete the environmental review process for the Cadiz Project,as specified infailing to accept thePrinciplesright ofAgreement,way grant offered by the U.S. Department of the Interior and for taking other actions inconsistent with their obligations, Metropolitan violatedthis contract,the contracts between the parties, breached its fiduciary duties to us and interfered with our prospective economic advantages. See Item 1,"Business“Business - Narrative Description of Business - Water ResourceDevelopment"Development”. The filing was made with the Executive Secretary of Metropolitan.When settlement negotiations failed to produce a resolution, we filed a lawsuit against Metropolitan intheLos Angeles Superior Court on November 17,2005. We are2005 seeking recovery ofcompensatory and punitivedamages. Metropolitanhas notcounsel responded with a demurrer, seeking todate respondedhave certain claims disallowed. On October 18, 2006 the Court ruled in favor of Cadiz and overruled the demurrer to thelitigation. Page 11 SUN WORLD BANKRUPTCY FILING On January 30, 2003, (the "Petition Date") Sun Worldclaims for breach of fiduciary duty, promissory estoppel, breach of implied contract andthreespecific performance. As a result, these claims will all go forward to trial, along with the breach ofits wholly owned subsidiaries (Sun Desert, Inc., Coachella Growers and Sun World/Rayo) filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, Central District of California, Riverside Division (Case Nos: RS 03-11370 DN, RS 03-11369 DN, RS 03-11371 DN, RS 03-11374 DN). Sun World's consensual plan of reorganizationexpress contract claim, which wasconfirmednot addressed by theCourt in August 2005 and became effective in September, 2005. See Item 1, "Business - General Development of Business". OTHER PROCEEDINGSdemurrer. The trial is scheduled for October 2007.Other ProceedingsThere are no other material pending legal proceedings to which we are a party or of which any of our property is the subject.Our 2006 annual meeting was held on November 10, 2006. The stockholders took the following actions at the meeting:121.Elected Messrs. Keith Brackpool, Murray H. Hutchison, Timothy J. Shaheen, Stephen J. Duffy and Winston H. Hickox to the Company's Board of Directors. Mr. Brackpool was elected by the vote of 7,066,396 shares in favor and 2,518 withheld and no broker non-votes. Mr. Hutchison was elected by the vote of 7,021,133 shares in favor and 47,781 withheld and no broker non-votes. Mr. Shaheen was elected by the vote of 7,066,358 shares in favor and 2,556 withheld and no broker non-votes. Mr. Duffy was elected by the vote of 7,021,253 shares in favor and 47,661 withheld and no broker non-votes. Mr. Hickox was elected by the vote of 7,021,223 shares in favor and 47,691 withheld and no broker non-votes.Mr. Raymond J. Pacini serves as a director of the Company by designation under our credit agreement with our senior secured lenders, and thus was not subject to election at the annual meeting.2.Ratified the selection by our Board of Directors of PricewaterhouseCoopers LLP to continue as our independent certified public accountants for fiscal year 2006 by a vote ofour stockholders during7,066,101 in favor and 1,868 against, with 945 abstaining and no broker non-votes.3.Approved thefourth quarterCadiz Outside Director Compensation Plan by a vote of2005.2,040,426 in favor and 57,477 against, with 1,886 abstaining and 4,969,125 broker non-votes.4.Approved the issuance of Cadiz common stock upon the conversion of the Company's loan with Peloton Multi-Strategy Master Fund in an amount in excess of the 19.99% "Exchange Cap" provided for in the credit agreement for this loan transaction by a vote of 2,078,734 in favor and 18,333 against, with 2,722 abstaining and 4,969,125 broker non-votes.13PART IIPage 12The Company's common stock is currently traded on The NASDAQNationalGlobal Market ("NASDAQ") under the symbol "CDZI." Prior to June 20, 2005, theCompanyCompany’s common stock was tradedover the counter on the OTC Bulletin Board. Prior to March 27, 2003, the Company's common stock was listed on NASDAQ. On March 27, 2003, the Company's common stock was de-listed from NASDAQ and thereafter traded on the OTC Bulletin Board until May 23, 2003, at which time our common stock was removed from the Bulletin Board and began trading on the OTC U.S. Market, often referred to as the "Pink Sheets". On November 11, 2004 our stock resumed tradingon the OTC Bulletin Board. The following table reflects actual sales transactions for the dates that the Company was trading on NASDAQ, and high and low bid information otherwise. The OTC Bulletin Boardand Pink Sheetmarket quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The high and low ranges of the common stock for the dates indicated have been provided by Bloomberg LP.HIGH LOW QUARTER ENDED SALES PRICE SALES PRICE ------------- ----------- ----------- 2004:
High Low Quarter Ended Sales Price Sales Price 2005: March 31 $ 15.40 $ 11.50 June 30 $ 19.00 $ 14.25 September 30 $ 19.50 $ 16.00 December 31 $ 22.00 $ 18.00 2006: March 31 $ 21.00 $ 16.00 June 30 $ 18.01 $ 15.75 September 30 $ 21.37 $ 17.00 December 31 $ 22.95 $ 18.30 On March31 $ 7.60 $ 4.80 June 30 $ 8.75 $ 7.10 September 30 $ 15.50 $ 8.50 December 31 $ 17.00 $ 11.70 2005: March 31 $ 15.40 $ 11.50 June 30 $ 19.00 $ 14.25 September 30 $ 19.50 $ 16.00 December 31 $ 22.00 $ 18.00 On February 28, 2006,2, 2007, the high, low and last sales prices for the shares, as reported by Bloomberg, were$18.48, $16.55,$26.66, $26.30, and$18.37,$26.59, respectively.We also have an authorized class of 100,000 shares of preferred stock. There is one series of preferred stock (Series F) authorized for issuance. All 100,000 authorized shares of Series F Preferred Stock were issued in December 2003. Effective November 30, 2004, 99,000 shares of Series F Preferred Stock were converted to 1,711,665 shares of our common stock leaving 1,000 shares of Series F Preferred Stock issued and outstanding.As ofFebruary 28, 2006,March 2, 2007, the number of stockholders of record of our common stock was214 and the195. The estimated number of beneficial ownerswasis approximately1,480.1,401.To date, we have not paid a cash dividend on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Ourability to pay such dividends is subject tosenior secured convertible term loan has covenantspursuant to agreements with our primary lenderthatprohibitsprohibit the payment of dividends.Page 13All securities sold by us during the three years ended December 31,20052006 which were not registered under the Securities Act have previously been reported in our Annual, Quarterly, and Current Reports on Forms 10K, 10-Q and 8K.14The following selected financial data insofar as it relates to the years ended December 31, 2006, 2005, 2004, 20032002and20012002 has been derived from our audited financial statements. The information that follows should be read in conjunction with the audited consolidated financial statements and notes thereto foreach of the three years inthe period ended December 31,20052006 included in Part IV of this Form 10-K. See also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".($ in thousands, except
($ in thousands, except for per share data) Year Ended December 31, 2006 2005 2004 2003 2002Statement of Operations Data: Total revenues $ 614 $ 1,197 $ 47 $ 3,162 $ 114,250 Net loss(13,825 ) (23,025 ) (16,037 ) (11,536 ) (25,225 ) Less: Preferred stock dividends- - - 918 1,125 Imputed dividend on preferred stock - - -1,600 984 Net loss applicable to common stock $ (13,825 ) $ (23,025 ) $ (16,037 ) $ (14,054 ) $ (24,334 )Per share: Net loss (basic and diluted) $ (1.21 ) $ (2.14 ) $ (2.32 ) $ (6.39 ) $ (16.76 )Weighted-average common shares outstanding11,381 10,756 6,911 2,200 1,452 December 31, 2006 2005 2004 2003 2002Balance Sheet Data: Total assets $ 50,326 $ 46,046 $ 51,071 $ 49,526 $ 191,883 Long-term debt $ 25,881 $ 25,883 $ 25,000 $ 30,253 $ 115,447 Redeemable preferred stock $ - $ - $ - $ - $ 10,942 Preferred stock, common stock and additional paid-in capital $ 245,322 $ 226,852 $ 209,718 $ 185,040 $ 156,166 Accumulated deficit $ (221,710 ) $ (207,885 ) $ (184,860 ) $ (168,823 ) $ (157,287 ) Stockholders' equity (deficit) $ 23,612 $ 18,967 $ 24,858 $ 16,217 $ (1,121 )On January 30, 2003, Sun World filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Since that date, the financial statements of Sun World are no longer consolidated with those of Cadiz due to the Company’s loss of control over the operations of Sun World. As a result, revenues, long term debt and total assets were significantly lower subsequent to 2002.On October 20, 2003, the Company and holders of Series D and Series E Preferred Stock entered into an agreement to exchange all outstanding shares of Series D and Series E Preferred Stock, plus accrued and unpaid dividends, forper share data) YEAR ENDED DECEMBER 31, -------------------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- Statementan aggregate ofOperations Data: Total revenues $ 1,197 $ 47 $ 3,162 $114,250 $ 92,402 Net loss (23,025) (16,037) (11,536) (22,225) (25,722) Less:400,000 shares of common stock. Holders of the remaining Series F Preferred Stock, which is convertible into our common stock, are only entitled to dividends if common stock dividends- - 918 1,125 591 Imputed dividend on preferred stock - - 1,600 984 441 -------- -------- -------- -------- -------- Net loss applicable to common stock $(23,025) $(16,037) $(14,054) $(24,334) $(26,754) ======== ======== ======== ======== ======== Per share: Net loss (basic and diluted) $ (2.14) $ (2.32) $ (6.39) $ (16.76) $ (18.66) ======== ======== ======== ======== ======== Weighted-averageare paid.15Weighted average common shares outstanding10,756 6,911 2,200 1,452 1,434 ======== ======== ======== ======== ======== DECEMBER 31, ------------------------------------------------ 2005 2004 2003have increased from 1,452,000 in 20022001 ---- ---- ---- ---- ---- Balance Sheet Data: Total assets $ 46,046 $ 51,071 $ 49,526 $ 191,883 $ 198,275 Long-term debt $ 25,883 $ 25,000 $ 30,253 $ 115,447 $ 141,429 Redeemableto 11,381,000 in 2006. The increase is primarily due to the issuance of 6,273,000 shares to investors in private placements, 2,281,000 shares to investors upon the conversion of preferred stock$ - $ - $ - $ 10,942 $ 9,958 Preferred stock, common stockandadditional paid-in capital $ 226,738 $ 209,718 $ 185,040 $ 156,166 $ 152,765 Accumulated deficit $(207,885) $(184,860) $(168,823) $(157,287) $(135,062) Stockholders' equity (deficit) $ 18,967 $ 24,858 $ 16,217 $ (1,121) $ 17,703 Page 14warrant exercises, and 1,539,000 shares to employees, vendors and lenders.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 ourCadiz, Californialand and water resources and our ability to obtain new financings as needed to meet our ongoing working capital needs. See additional discussion under the heading "RiskFactors"Factors” above.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, ourOverviewOur operations (and, accordingly, our working capital requirements) relate primarily to our water and real estate development activities andmore specifically,primarily to the CadizGroundwater Storage and Dry-Year Supply Program ("Cadiz Project"). 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.Project.In 1997 wecommenced discussionsentered into the first of a series of agreements with the Metropolitan Water District of Southern California("Metropolitan"(“Metropolitan”)in ordertodevelopjointly design, permit and build along-term agreement for a joint venturegroundwater storage and supply program on our land in the Cadiz and Fenner valleys of eastern San Bernardino County (the"Cadiz Project"“Cadiz Project”). Under the Cadiz Project, surplus water from the Colorado River would be stored in the aquifer system underlying our land during wet years. When needed, the stored watertogether withand temporary withdrawals of indigenous groundwater, could bereturned todistributed through the Colorado River Aqueductfor distributionto Metropolitan's member agencies throughout six southern California counties.Between 1997 and 2002, Metropolitanstaffand the Company received substantially all of the various state and federal approvals required for permitsrequiredto construct and operate the projectincludingand received a federal Record of Decision (“ROD”)from the U.S. Department of the Interior, which endorsed the Cadiz Project andgrantedoffered aright-of-wayright of way grant for construction of project facilities. The federal government also approved a Final Environmental Impact Statement("FEIS"(“FEIS”) in compliance with the National Environmental Policy Act("NEPA"(“NEPA”).Despite the significant progress made in the federal environmental review process, in October 2002Metropolitan'sMetropolitan’s Board voted not to accept the right of way grant offered by the U.S. Department of the Interior and refused to consider whether or not to certify the Final Environmental Impact Report("FEIR"(“FEIR”), which was a necessary action to authorize implementation of the Cadiz Project in accordance with the California Environmental Quality Act("CEQA"(“CEQA”).16When Metropolitan’s Board declined to proceed with the Cadiz Project, the FEIR was complete and awaiting certification at a hearing scheduled for late October 2002. It is our position that these actions breached various contractual and fiduciary obligations to us, and interfered with the economic advantage we would have obtained from the Cadiz Project. In April 2003 we filed a claim against Metropolitan seeking compensatory damages. When settlement negotiations failed to produce a resolution, we filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17, 2005. Our claims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance have been allowed by the Court and will all go forward to trial later this year. See Item 3 - “Legal Proceedings”.Regardless of the MetropolitanBoard'sBoard’s actions in October 2002, SouthernCalifornia'sCalifornia’s population continues to grow, and the need for water storage and supply programs has not abated. Moreover, the advantages of underground water storage facilities are increasingly evident. These include minimal surface environmental impacts, low capital investment, protection from airborne contaminants and minimal evaporative water loss. Therefore we continue to pursue the completion of the environmental review process for the Cadiz Project.To that end,we are Page 15 now in advanced discussions with a third party public agency that would assumetheroleCounty of San Bernardino has agreed to serve as the CEQA lead agencyand completefor thestatecompletion ofCaliforniathe environmental reviewprocess.of the Cadiz Project and issue any permits required under California law once the review is completed. We are also workingdirectlywith the U.S. Department of the Interior to have the permits that were approved during the federal environmental review process, including theright-of-wayright of way granted in theRecord of Decision to Metropolitan,ROD, issued directly to theCompany.Company for the benefit of any participating public agency. Additionally, we are in discussions with several other public agencies regarding their interest in participating in the Cadiz Project.All of theseThese agencies have access toindependentsources ofsupplywater that can be storedbyin the Cadiz Project. See"Water“Water ResourceDevelopment"Development”,below. Dueabove.In addition tosignificant populationagriculture and water development, the rapid growth of nearby desert communities inSouthernsouthern California,where our properties are located, we have also begun to explore additional usesNevada and Arizona indicates that the Company’s land holdings may be suitable for other types ofour land assets.development. To this end, we haveretained outside services to conductconducted a detailed analysis of our land assetsandto assess the opportunities for these properties. Based on this analysis, we believe that our properties have significant long-term potential for residential and commercial development. Weexpectare continuing to explore alternative land uses to maximize the value of our properties.In 2006, we refinanced our long-term debt with the proceeds of a new $36.4 million zero coupon senior secured convertible term loan thatthese alternative scenarios will have different capital requirements and implementation periods than those previously establishedmatures on June 29, 2011. Interest accrues on the principal balance of the loan at 5 percent per annum for theCadiz Project. Therefore, following Metropolitan's actions in 2002, we have entered into a series of agreements with our senior secured lender, ING Capital LLC ("ING") pursuantfirst 3 years and 6 percent thereafter. No interest and principal payments are due prior towhich we reduced our debt to ING to $25 million and extendedthe final maturitydatedate. Each of theING debt until March 31, 2010, conditioned upontwo loan tranches is convertible into the Company’s $0.01 par value common stock at afurther principal reduction of $10 million on or before March 31, 2008.fixed conversion price per share, subject to downward adjustment in the event a change in control. See “Liquidity and Capital Resources” below.Inaddition,2003 and 2004, wehaveraised approximately $35 millioninof equity through private placements, including a $24 million private placement completedin 2003 and 2004. Most recently,on November 30, 2004. The November 30, 2004we completed aprivate placement included the issuance of400,000 Units at the price of $60.00 per Unit. Each Unit consisted of five (5)warrants to purchase 405,440 shares ofthe Company's common stock and one (1) common stock purchase warrant. Each Warrant entitled the holder to purchase one (1) share ofour common stock at an exercise price of $15.00 per share.Each Warrant has a termDuring 2006, holders ofthree (3) years, but is callable70,000 of the warrants exercised their warrants, resulting in the issuance by usifof 70,000 shares17of common stock. On January 31, 2007, we exercised a cancellation option and notified holders that theclosing market pricewarrants would expire on March 2, 2007 unless exercised by the warrant holder prior to that date. All of the remaining warrant holders exercised their warrants following receipt of this notice, resulting in the issuance by us of 335,440 shares of common stock and receipt by us of $5,031,600 of net cash proceeds. Under the terms of ourcommon stock exceeds $18.75 for 10 consecutive trading days.current loan agreement, we have retained all proceeds associated with the exercise of these Warrants. As of March 2, 2007, no warrants remain outstanding.Weused approximately half of the proceeds of the placementremain committed toreduceoursenior debt to ING. The balance of the proceeds are being used by the Company for working capital. Further, in February 2005, our wholly owned subsidiary Sun World International, Inc. ("Sun World") completed the sale of substantially all of itsland and water assets andSun World's consensual plan of reorganization was confirmed by the U.S. Bankruptcy Court in August 2005. See "Item 1. General Development of Business", above. Sun World entered bankruptcy proceedings on January 30, 2003, following which the financial statements of Sun World are no longer consolidated with ours. With the implementationwe continue to explore all opportunities for development of thesesteps, we have been ableassets. We cannot predict with certainty which of these various opportunities will ultimately be utilized.Results of Operations(a)Year Ended December 31, 2006 Compared toretain ownership of all of our land assets and assets relating to our water programs and also to obtain working capital needed to continue our efforts to develop our water programs. Because many of our pre-existing common stockholders have participated in the 2003 and 2004 private placements, our base of common stockholders remains largely the same as before these placements. Page 16 RESULTS OF OPERATIONS (A) YEAR ENDED DECEMBERYear Ended December 31, 2005COMPARED TO YEAR ENDED DECEMBER 31, 2004 ---------------------------------------------------We have not received significant revenues from our water resource and real estate development activity to date. As a result, we continue to incur a net loss from operations. We had revenues of $0.6 million for the year ended December 31, 2006 and $1.2 million for the year ended December 31, 2005. The lower revenues were due to a below average lemon harvest. Our net loss totaled $13.8 million for the year ended December 31, 2006, compared with a net loss of $23.0 million for the year ended December 31, 2005. The lower loss in 2006 period resulted primarily from $14.4 million lower non-cash compensation expenses from stock and option awards under our Management Equity Incentive Plan, partially offset by $1.4 million higher other general and administrative expenses relating to the Cadiz Project and the Company’s lawsuit against the Metropolitan Water District of Southern California. Other expenses were higher, primarily due to $0.5 million of additional interest expense and a $2.9 million expense related to a change in the value of certain bifurcated derivative instruments imbedded in our senior secured convertible term loan.Our primary expenses are our ongoing overhead costs (i.e. general and administrative expense) and our interest expense. We expect to incur additional non-cash expenses in connection with future management and director equity incentive compensation plans.Revenues. Revenue totaled $0.6 million during the year ended December 31, 2006 compared to $1.2 million during the year ended December 31, 2005. 2006 revenues included $0.6 million of revenues related to citrus crop sales, which were down $0.6 million from the prior year. The lemon grove was pruned extensively in early 2006, which limited the growth of fruit during the early spring. The crop was also affected by unusually hot summer weather and a winter freeze. Crop rental income also declined to $12 thousand in 2006 from $35 thousand in 2005. We no longer consider agriculture to be our core business. When possible, we prefer to lease our vineyards and citrus groves to third parties so that we can focus our resources on our water and real estate development programs.Cost of Sales. Cost of Sales totaled $721,000 during the year ended December 31, 2006, compared with $994,000 during the year ended December 31, 2005. The lower cost of sales in 2006 reflected lower lemon harvesting, processing and marketing costs, due to a smaller lemon crop. This was partially offset by additional irrigation and cultivation expenses18associated with the juice grape crop. Cadiz leased the juice grape crop to Sun View Vineyards of California in 2005.General and Administrative Expenses.General and administrative expenses during the year ended December 31, 2006 totaled $7.7 million compared with $20.7 million for the year ended December 31, 2005. Non-cash compensation costs related to stock and option awards is included in General and Administrative Expenses.Compensation costs from stock and option awards for the year ended December 31, 2006 totaled $2.3 million compared with $16.7 million for the year ended December 31, 2005. The expenses primarily relate to stock and options issued under the Cadiz 2003 Management Equity Incentive Plan and the Outside Director Compensation Plan. 12,339 options and 14,701 shares were granted under the Management Equity Incentive Plan and the Outside Directors Compensation Plan, respectively, in 2006, compared with 1,094,712 shares and 365,000 options granted under the Management Equity Incentive Plan in 2005. Shares and options issued under the Plans vest over varying periods from the date of issue to December 2008. $877,000 of the 2006 expense is a result of the adoption and application of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payments” effective January 1, 2006.Other General and Administrative Expenses, exclusive of stock based compensation costs, totaled $5.5 million in the year ended December 31, 2006, compared with $4.1 million for the year ended December 31, 2005. Higher 2006 expenses were primarily due to additional legal and consulting fees related to water development efforts, including the Company’s lawsuit against the Metropolitan Water District of Southern California, and accounting expenses related to Sarbanes Oxley compliance.Depreciation and Amortization. Depreciation and amortization totaled $0.2 million for the year ended December 31, 2006 compared to $0.2 million for 2005.Interest Expense, net. Net interest expense totaled $2.4 million during the year ended December 31, 2006, compared to $1.9 million during 2005. Higher interest expense was primarily due to the amortization of the debt discount related to certain derivatives imbedded in the new senior secured convertible term loan. 2006 interest income increased to $376 thousand from $159 thousand in the prior year due to higher cash balances and higher short-term interest rates. The following table summarizes the components of net interest expense for the two periods (in thousands):
Year Ended December 31, 2006 2005 Interest on outstanding debt $ 1,987 $ 2,062 Amortization of debt discount783 - Amortization of financing costs40 28 Interest income(376 ) (159 ) $ 2,434 $ 1,931 19Loss on Extinguishment of Debt and Debt Refinancing. Financing costs, which are primarily legal fees, are amortized over the life of each loan agreement. In June, 2006 we entered into a new loan agreement with Peloton Partners LLP (“Peloton”), as administrative agent for the loan, and with an affiliate of Peloton and another investor, as lenders. As a result, $408 thousand of legal fees were capitalized and will be amortized over the 5 year life of the loan agreement. At the same time, $868 thousand of deferred financing costs and prepaid interest associated with the prior loan agreement with ING Capital LLC (“ING”) were fully expensed.Change in Fair Value of Derivative Liability. The Company prepaid its existing indebtedness with ING in June, 2006 with the proceeds of a new senior secured convertible term loan. The new loan contained certain “embedded derivatives” which were bifurcated from the host debt instrument and were recorded at fair values on the Company’s consolidated balance sheet under GAAP. These embedded derivatives were subject to periodic revaluation based on changes in the fair market value of our common stock. On September 29, 2006, certain terms and conditions of the credit agreement and embedded derivatives were amended. The fair value of the equity conversion options were recalculated, and a $2.9 million expense was recognized due to an increase in fair value. The primary reason for the increase in fair value was the increase in the trading price of our common stock from June 30, 2006 to September 29, 2006. Following the September 29, 2006 amendment, bifurcation of the embedded equity conversion option is no longer required. As a result, the fair value of the embedded derivatives has been transferred from the liability accounts to stockholder’s equity, and no further fair value adjustments were required after September 30, 2006. There was no comparable expense in the prior year ending December 31, 2005.Other Income. Other Income during the year ended December 31, 2006 totaled $373 thousand, primarily related to payments from a stockholder related to a short swing profit liability. In March, 2006, one of our stockholders determined that it had, at a time when it was the beneficial holder of more than 10% of our outstanding equity securities, inadvertently engaged in trades which resulted in automatic short swing profit liability to the Company pursuant to Section 16(b) of the Securities Exchange Act of 1934. After becoming aware of the situation, the stockholder promptly made payments totaling $350,000 to the Company to settle the entire short swing profit liability owed as a consequence of these trades.(b)Year Ended December 31, 2005 Compared to Year Ended December 31, 2004We had revenues of $1.2 million for the year ended December 31, 2005 and $47 thousand for the year ended December 31, 2004. Our net loss totaled $23.0 million for the year ended December 31, 2005 compared with a net loss of $16.0 million for the year ended December 31, 2004. The higher loss for the 2005 period resulted primarily from non-cash compensation expenses of $16.7 million from stock and option awards under our Management Equity Incentive Plan. No such expense was incurred in 2004. The 2004 period included the write-off of $3.4 million of permanent and developing crops,$2.8$3.7 million higher amortization of deferred borrowing costs and a $1.4 million write-off of deferred borrowing costs. General and administrative costs increased$1.0$17.7 million in 2005.Our primary expenses are our ongoing overhead costs (i.e. general and administrative expense) and our interest expense.During the upcoming year ending December 31, 2006 we expect to incur additional non-cash expenses in connection with our Management Equity Incentive Plan. The issuance of these shares, or options to purchase these shares, results in a charge to our earnings based on the value of our common stock at the time of issue and the valuation of options at the time of their award and is recorded over the vesting period in proportion to the quantities vested. The value of our common stock at the time of issue and the valuation of options at the time of their award will be added to additional paid-in capital with the result that there will not be a net reduction to shareholders' equity as a result of the issuances. REVENUES. Revenue20Revenues. Revenues totaled $1.2 million during the year ended December 31, 2005 compared to $47 thousand during the year ended December 31, 2004. 2005 revenues include $1.1 million of citrus crop sales, $35 thousand of crop rental income and $39 thousand of other rental income. The 2005 revenue increase is primarily due to citrus crops that Cadiz farmed in 2005. In 2004 Cadiz leased these crops to Sun World and did not include SunWorld'sWorld’s revenues from citrus crop sales in the consolidated financial statements because Sun World was in bankruptcy.We no longer consider agriculture to be our core business. When possible, we prefer to lease our vineyards and citrus groves to third parties so that we can focus our resources on our water and real estate development programs. COST OF SALES.Cost of Sales. Cost of Sales totaled $994,000 during the year ended December 31, 2005, reflecting the production and sale of citrus crops at the Cadiz Ranch property. Cadiz leased these crops to Sun World in 2004 and did not include SunWorld'sWorld’s cost of sales in the consolidated financial statements because Sun World was in bankruptcy.GENERAL AND ADMINISTRATIVE EXPENSES.General and Administrative Expenses.General and administrative expenses during the year ended December 31, 2005 totaled$4.1$20.7 million compared with $3.1 million for the year ended December 31, 2004.HigherGeneral and administrative expenseswere primarilyinclude non-cash compensation costs related tolegalstock andconsulting fees incurred related to water development efforts, accounting expenses related to Sarbanes Oxley compliance and initial listing costs for our listing on The NASDAQ National Market. Page 17 COMPENSATION COSTS FROM STOCK AND OPTION AWARDS.option awards.Compensation costs from stock and option awards for the year ended December 31, 2005 totaled $16.7 million. The costs consist of non-cash compensation expenses relating to stock and option grants issued under the Management Equity Incentive Plan. The grants and related accounting are discussed further in the Notes to the Consolidated Financial Statements. There were no comparable stock and option grants during the year ended December 31, 2004.DEPRECIATION AND AMORTIZATION.Other general and administrative expenses, exclusive of stock based compensation costs, totaled $4.1 million during the year ended December 31, 2005, compared with $3.1 million for the year ended December 31, 2004. Higher expenses were primarily related to legal and consulting fees incurred related to water development efforts, accounting expenses related to Sarbanes Oxley compliance and initial listing costs for our listing on The NASDAQ National Market (now the NASDAQ Global Market).Depreciation and Amortization. Depreciation and amortization totaled $0.2 million for the year ended December 31, 2005 compared to $0.5 million for 2004. The reduction in depreciation and amortization is due to certain assets becoming fully depreciated during 2005 and the write down of certain assets no longer used or useful in the restructured Cadiz business.INTEREST EXPENSE, NET.Interest Expense, net. Net interest expense totaled $1.9 million during the year ended December 31, 2005, compared to$9.1$7.7 million during 2004. Lower interest expense was primarily due to the November 30, 2004 debt restructuring and the repayment of $10 million of debt from the proceeds of the private placement of common stock and warrants completed on that date. The restructuring transaction resulted in the amortizationand write- off during 2004ofthe higherlower financing coststhat had been associated withthan the prior debt structure. The following table summarizes the components of net interest expense for the two periods (in thousands):YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 ---- ---- Cadiz Interest21
Year Ended December 31, 2005 2004 Interest on outstanding debt $ 2,062 $ 3,970 Amortization of financing costs28 3,767 Interest income(159 ) (42 ) $ 1,931 $ 7,695 Loss onoutstanding debt $ 2,062 $ 3,970 AmortizationExtinguishment offinancing costs 28 3,767 Write off of unamortized financing costs - 1,369 Interest income (159) (42) ------- ------- $ 1,931 $ 9,064 ======= =======Debt and Debt Refinancing. Financing costs, which include legal fees and warrant costs, are amortized over the expected life ofthe ING debteach loan agreement. In November, 2004 we entered into an agreement with ING which restructured our loan and extended the maturity date from March 31, 2005 to March 31, 2010. As a result,all$1,369,000 of unamortized deferred financing costs associated with the prior loan agreement werefullyexpensed on the November 30, 2004 amendment date.(B) YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 ---------------------------------------------------Ourconsolidated financial statements forrestructured loan with ING was repaid in full in June 2006 using theyear ended December 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 included in these consolidated financial statements. As a result of the foregoing, direct comparisonsproceeds of ourconsolidated results of operations for year ended December 31, 2004new senior secured convertible term loan withresults for the year ended December 31, 2003 do not, in our view, prove meaningful. Page 18 Tables which disclose the results of Cadiz Inc. separate from its consolidated subsidiary Sun World for the year ended December 31, 2003,Peloton.Liquidity andfrom which the numbers used in the following discussion are derived, can be found in Note 7 to the Consolidated Financial Statements. We had revenues of $47 thousand for the year ended December 31, 2004 and $3.2 million for the year ended December 31, 2003, including $3.0 million from Sun World for the month ended January 30, 2003. Our net loss totaled $16.0 million for the year ended December 31, 2004 compared to $11.5 million for the year ended December 31, 2003 which included a $2.5 million loss from Sun World for the period ended January 30, 2003. The increase for the 2004 period resulted from the write off of permanent and developing crops in the amount of $3.4 million, a $2.8 million increase in interest cost resulting from amortization of deferred borrowing costs, and write offs of unamortized deferred borrowing costs of $1.4 million. General and administrative costs declined by $2.2 million in 2004. REVENUES. Revenue totaled $47 thousand during the year ended December 31, 2004 compared to $3.2 million the preceding year. The $3.2 million in 2003 includes $0.3 million attributable to Cadiz with the remainder attributable to Sun World for the period ended January 30, 2003. The Cadiz decrease from $0.3 million to $47 thousand is primarily due to discontinuation of the management fee and other fees payable to Cadiz by Sun World as of January 30, 2003 due to Sun World's Chapter 11 filing. The revenue during the year ended December 31, 2004 was derived primarily from the lease of farming property to a third party. No revenue was derived from the lease to Sun World during the year ended December 31, 2004 as such revenue was contingent on profitability of the harvest, which profitability was not achieved under the terms of the lease. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the year ended December 31, 2004 totaled $3.1 million compared to $5.2 million for the year ended December 31, 2003. Excluding Sun World, Cadiz general and administrative expenses during the year ended December 31, 2003 were $4.7 million. The decrease in Cadiz' general and administrative expenses in 2004 is primarily due to reductions in salaries which included a contract termination payment to the Company's CEO of $0.8 million in 2003 and increased professional fees in 2003 related to transactions with our secured lender, our equity raising activities, and the Sun World bankruptcy. 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 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. As a result of changing to the cost basis of accounting and because the Company did not believe it will be able to recover its investment, the Company wrote off its investment in Sun World of $195,000 in 2003. There was no similar expense in 2004. REORGANIZATION COSTS. Reorganization costs totaled $0.7 million during 2003. These costs were incurred by Sun World during January 2003 related to the Chapter 11 bankruptcy filing. No such costs occurred during 2004. Page 19 WRITE OFF OF PERMANENT CROPS AND DEVELOPING CROPS. In the last quarter of the year ended December 31, 2004, the long- standing lease for a portion of our Cadiz Valley farming property to Sun World expired and the crops have not been leased to another party. The remaining property, which is leased to an independent third party on a year to year basis, does not generate a significant amount of revenue. Based on the uncertainty as to possible recovery of the carrying value of the permanent crops and developing crops on this property, during the last quarter of 2004 we wrote off our investment in permanent and developing crops at this property in the amount of $3.4 million, net of depreciation. See Note 2 to our Consolidated Financial Statements. No such write offs occurred during 2003. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for Cadiz totaled $0.5 million for the year ended December 31, 2004 compared to $0.7 million for the 2003 year. The reduction in depreciation and amortization is due to certain assets becoming fully depreciated during 2004 and $0.2 million attributable to Sun World included in the period ended January 30, 2003 which did not exist in 2004. INTEREST EXPENSE, NET. Net interest expense totaled $9.1 million during the year ended December 31, 2004, compared to $4.9 million during 2003, of which $3.6 million was attributable to Cadiz excluding Sun World. The following table summarizes the components of Cadiz net interest expense and that of Sun World for the two periods (in thousands): YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 ---- ---- Cadiz Interest on outstanding debt $ 3,970 $ 3,053 Amortization of financing costs 3,767 641 Write off of unamortized financing costs 1,369 - Interest income (42) (58) Sun World interest expense - 1,269 ------- ------- $ 9,064 $ 4,905 ======= =======Capital Resources(a)Current Financingcosts, which include legal fees, warrant costs and preferred stock, are amortized over the life of the ING debt agreement. In December 2003 we entered into an agreement with ING which extended the maturity date of our loan, which had a prior maturity date of January 31, 2003. As a result there was little amortization during 2003 as the deferred financing costs were fully amortized at the January 2003 maturity date. Following several months of discussion with ING, our loan was amended in December 2003 and the financing costs associated with the debt amendment of $5.3 million (consisting of fees of $0.3 million and preferred stock valued at $5.0 million) were being amortized through the maturity date of March 31, 2005. On November 30, 2004 we entered into another amendment of the loan agreement, under which the term of the loan was extended, the interest rate was reduced, and a portion of the principal balance was repaid necessitating the write off of the remaining $1.4 million in unamortized financing costs associated with the loan under the terms applicable as of December 2003. Page 20 LIQUIDITY AND CAPITAL RESOURCES (A) CURRENT FINANCING ARRANGEMENTS ------------------------------ CADIZ OBLIGATIONS.ArrangementsAs we have not received significant revenues from our water resource and real estate activity to date, we have been required to obtain financing to bridge the gap between the time water resource and real estate 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 stockoptions.options and warrants.Subsequent to the vote ofMetropolitan'sMetropolitan’s Board in October 2002 to not proceed with the Cadiz Project and SunWorld'sWorld’s January 2003 bankruptcy filing, we have worked with our primary securedlender, ING Capital LLC,lenders to structure our debt in a way whichwould allowallows us to continue our development of the CadizProject.Project and minimize the dilution of the ownership interests of common stockholders. Webelieve that we have accomplished this goal withentered into a series of agreements with ING Capital LLC and then refinanced the ING loan with a new $36.4 million five year zero coupon senior secured convertible term loan with Peloton Partners LLP (through an affiliate) and another lender (the “Peloton Loan”) in June 2006. The Peloton loan provided for:
· the repayment in full of our senior secured term loan with ING;
· a final maturity date of June 29, 2011;
· a zero coupon structure, which requires no cash interest payments prior to the final maturity date; and
· a 5% interest rate for the first 3 years, with a 6% interest rate thereafter. At each lender’s option, principal plus accrued interest on each of the two loan tranches is convertible into the Company’s $0.01 par value common stock at a fixed conversion price per22share. The conversion prices are subject to downward adjustment in themost recentevent ofwhich concludeda change inNovember 2004. In November 2004 we entered into our most recent seriescontrol.On or after June 29, 2007, principal and interest accrued on each ofagreements with ING which provided for: *therepaymenttwo loan tranches can be prepaid on 30 days notice either if the Company’s stock price exceeds the tranche’s conversion price by 40% for 20 consecutive trading days infulla 30 trading day period or if the Company completes the Cadiz Water Program entitlement process, secures a right-of-way for the project pipeline and arranges sufficient financing to repay the loan and build the Cadiz Project. The conversion prices ofour senior termthe two loanfacility with INGtranches are $18.15 and $23.10, respectively, so the $10 million Tranche A prepayment option would become available at a share price above $25.41 per share and thereduction to $25$26.4 millionof the outstanding principal balance under our existing revolving credit facility; and * amendments to the terms and conditions of our revolving credit facility with ING in order to: (i) extend the maturity date of the debt until March 31, 2010, conditioned uponTranche B prepayment option would become available at afurther principal reduction of $10 million on or before March 31, 2008, and (ii) reduce the interest rate through March 31, 2008 on the new outstanding balance to 4% cash plus 4% PIK (increasing to 4% cash plus 6% PIK for interest periods commencing on and after April 1, 2008). Also in November 2004 ING agreed to convert 99,000 shares of the Company's Series F Preferred Stock (representing 99% of the outstanding shares of Series F Preferred Stock) into 1,711,665 shares of the Company's common stock. We had issued 100,000 shares of Series F preferred stock to ING as part of our agreements in December 2003. Concurrently with this conversion, the terms and conditions of the remaining outstanding Series F Preferred Stock were amended to fix the conversion ratio at its original conversion ratio of 17.28955 shares of common stock for eachshareof Series F Preferred Stock converted. In addition to its conversation rights, as the holder of this preferred stock ING holds: - The right to appoint two members of our Board of Directors as long as both (a) the outstanding principal balance of ING's loan is at least $15 million, and (b) the Series F Preferred Stock holdings of ING (including Page 21 both the common stock into which outstanding Series F Preferred Stock is then convertible and any common stock received by ING upon previous conversions of Series F Preferred Stock which remains held by, and has not been disposed of, by ING) represent at least 5% of our common stock; - The right to approve the authorization or issuance of any other class or shares of our preferred stock; - Anti-dilution protection; - Pre-emptive rights; - Registration rights; and - Dividend, liquidation and voting rights shared on an as-converted basis with common stock. Pursuant to our loan arrangements with ING, ING also has the right to appoint an independent manager to the Board of Managers of Cadiz Real Estate LLC, a Delaware limited liability company ("Cadiz Real Estate"), in which we hold 100% of the economic interests. In December 2003 we transferred substantially all of our assets (with the exception of our office sublease, certain office furniture and any Sun World related assets) to Cadiz Real Estate. Cadiz Real Estate is a co-obligor with us on our credit facilities with ING, and the properties now held of record by Cadiz Real Estate secure our obligations under these facilities. We have entered into a management agreement with Cadiz Real Estate pursuant to which we manage the assets now held by Cadiz Real Estate, subject to the requirements of the Operating Agreement of Cadiz Real Estate. The Operating Agreement of Cadiz Real Estate provides for a Board of Managers consisting of two managers appointed by us and one independent manager named by ING. As long as our obligations to ING are outstanding, Cadiz Real Estate may not institute bankruptcy proceedings without the unanimous consent of this Board of Managers (including the independent manager).price above $32.34 per share.The debt covenants associated withour ING credit facilitythe loan were negotiated by the parties with a view towards our operating and financial condition as it existed at the time therevisedagreements were executed.Given current circumstances, we do not consider it likely that we will be in material breach of such covenants.At December 31,2005,2006, the Company was in compliance with its debt covenants.In addition to allowing us to repay our former credit facility with ING, the Peloton Loan provided us with $9.3 million of additional working capital and deferred all interest payments until the June 29, 2011 final maturity date. Furthermore, the Peloton Loan, unlike the ING facility, permits us to retain any proceeds received from the exercise of warrants issued by us in 2004 as part of a $24 million private equity placement.A private placement completed by the Company in November 30, 2004 included the issuance of warrants to purchase 405,440 shares of our common stock at an exercise price of $15.00 per share. During 2006, holders of 70,000 of the warrants exercised their warrants, resulting in the issuance by us of 70,000 shares of common stock with net proceeds of $1,050,000.In February 2007, we exercised our right to terminate the remaining warrants upon 30 days notice, and holders of all the remaining 335,440 warrants exercised their warrants. As a result, we issued 335,440 shares of our common stock and received net proceeds of $5,031,600 during February 2007. Following these exercises, no Warrants remain outstanding.As we continue to actively pursue our business strategy, additional financingspecificallyin connection with our water programs will be required. See"Outlook"“Outlook”, below.As the parties have anticipated this need, the covenants in the credit facility which would otherwise prohibit our incurrence of additional debt (or our use of our assets as security for such debt) contain an exception for debt and liens incurred in order to finance the acquisition, construction or improvement of any assets (up to a maximum of $135 million at any one time outstanding).The covenants in the credit facility do not prohibit our use of additional equity financingbut do provide that 35%and allow us to retain 100% of the proceeds ofsuch issuance be applied as a prepayment against such facility.any equity financing. We do not expectthesethe loan covenants to materially limit our ability toundertake debt or equity financing in order tofinance our water development activities.We issued 100,000 shares of Series F preferred stock to ING as part of our agreements in December 2003 (the “ING Preferred Stock”), of which 1,000 shares remain outstanding. The preferred shares are convertible into 17.28955 shares of common stock for each share of Series F Preferred Stock converted.At December 31,2005,2006, we have no outstanding credit facilities or preferred stock other thanthat held bythe Peloton Loan and INGasPreferred Stock described above.Page 22 SUN WORLD OBLIGATIONS - --------------------- We have obtained waivers and/or releases with respect to our previously issued guarantees of the First Mortgage Notes from all the holders of outstanding First Mortgage Notes. Further, as part of a December 2003 global settlement, we have settled all of our claims and obligations with Sun World. With the confirmation of Sun World's consensual plan of reorganization by the U.S. Bankruptcy Court in August, 2005 and the effectiveness of the Plan in September, 2005, Cadiz is released from all liabilities under the guarantees of Sun World's previously outstanding First Mortgage Notes. Further, although we continue to be the record owner of Sun World's stock, with the sale by Sun World of all of its assets Sun World does not conduct any business operations and therefore has no working capital needs at present. CASH USED FOR OPERATING ACTIVITIES.23Cash Used for Operating Activities. Cash used for operating activities totaled$3.7$5.3 million for the year ended December 31,2005,2006, as compared to cash used for operating activities of$7.6$3.7 million for the year ended December 31,2004.2005. The$3.9$1.6 milliondecreaseincrease was primarily due toa reduction in cash interest paid, as all interest expense incurred under the restructured ING loan during 2005 was either credited against a prepaid interest account or addedlower crop sale revenues and higher general and administrative expenses related to theprincipal balance outstanding. The prepaid interest account will not be sufficient to coverCompany’s water development efforts, including legal and regulatory costs associated with theentire amountCadiz Program CEQA application and the Company’s lawsuit against the Metropolitan Water District oftheSouthern California.Cash Provided By (Used for) Investing Activities. No cashinterest payment due on September 30, 2006, and a $55,000 cash interest payment will be due at that time. CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES. Cashwas usedinby investing activities in the year ended December 31, 2006, compared with $68 thousand used for investing activities during the same period in 2005. 2006 capital expenditures were financed with proceeds realized from the sale of a motor vehicle.Cash Provided by Financing Activities. Cash provided by financing activities totaled$68$10.4 million for the year ended December 31, 2006, compared with $40 thousand for the year ended December 31,2005, as compared to $2.12005. The 2006 results reflect $9.3 millionprovided by investing activities duringof net proceeds from thesame period in 2003. The $2.1placement of a new $36.4 millioncash provided by investing activities for the year ended December 31, 2004 was almost entirely due to the reduction of restricted cash that had been placed in a restricted bank account to pay for interest on the $35 millionsenior secured convertible term loanfacility with ING. The useand $1.1 million ofa restricted bank account for this purpose had been a requirement under our pre-November 2004 arrangements with ING. On November 30, 2004proceeds from therestricted cash account mechanism was replaced with a prepaid interest credit account. Reductions in the prepaid interest credit account are reflected in Cash Used for Operating Activities, as described above. CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing activities totaled $40,000 for the year ended December 31, 2005, compared with $11.1 million for the year ended December 31, 2004. Thereissuance of 70,000 shares of $0.01 par value common stock at $15.00 per share when certain warrant holders chose to exercise their warrants. In contrast, there was no material financing activity in 2005.In contrast a $25 million private placement of common stock and warrants was completed on November 30, 2004, and $10 million of the $21.3 million in net proceeds realized in the placement were applied to the repayment of term loan borrowings. (B) OUTLOOK ------- SHORT TERM OUTLOOK.(b)OutlookShort Term Outlook. The proceeds of our2003new $36.4 million senior secured convertible term loan and the sale of common shares pursuant to the decision by holders to exercise certain warrants issued in November 2004private placements have providedprovide us with sufficientcashfunds to meet our expected working capital needs forcurrent operations untilthe next 12 months. The Company expects to continue its historical practice of structuring its financing arrangements to match the anticipated needs of its development activities. See "Long Term Outlook", below. No assurances can be given, however, as to the availability or terms of any new financing.Long Term Outlook. In the longer term, we will need to raise additional capitalin ordertofund the $10 million mandatory repayment of its borrowing from ING due on or before March 2008. See "Long Term Outlook", below. Approximately $12.7 million of the proceeds of our November 2004 private placement were used to reduce the principal balance, which included approximately $2.7 million of interest payable in kind ("PIK"), owed to ING under our ING credit facilities to $25 million. 40 Page 23 Units in the 2004 private placement were issued to ING to prepay $2.4 million of future cash interestfinance working capital needs and any payments due underthe Company's $25 million borrowing from the lender. The remainder of the proceeds from the placementsour senior secured convertible term loan at maturity. See “Current Financing Arrangements” above. Payments will beuseddue under the term loan only tomeet our ongoing working capital needs. LONG TERM OUTLOOK. The currentthe extent that lenders elect not to exercise equity conversion rights prior to the loan’s final maturitydate of our loan with ING is March 2010, and we will need to fund a $10 million mandatory principal repayment on or before March 31, 2008. In the meantime, ourdate. Our future working capital needs willbe determined baseddepend upon the specific measures we pursue in the entitlement and development of ourwater resources andreal estateassets.and water resources. We will evaluate the amount of cash needed,to fund our development activities and our repayment obligations,and the manner in which such cash will be raised, on an ongoing basis. We may meet anysuchfuture cash requirements through a variety of means,to be determined at the appropriate time. Such means may includeincluding equity or debt placements, or through 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.(C) CRITICAL ACCOUNTING POLICIES ----------------------------(c)Critical Accounting PoliciesAs discussed in Note 2 to the Consolidated Financial Statements of Cadiz, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements and related footnotes.24In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements based on all relevant information available at the time and giving duetoconsideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Management has concluded that the following critical accounting policies described below affect the most significant judgments and estimates used in the preparation of the consolidated financial statements.(1)PRINCIPLES OF CONSOLIDATIONPrinciples of ConsolidationThe Consolidated Financial Statements have been prepared by Cadiz Inc., sometimes referred to as"Cadiz"“Cadiz” or"the Company"“the Company”. On January 30, 2003, Sun World filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Sincethe filing date, Sun World has operated its business and managed its affairs as debtor and debtor in possession. As ofthat 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 Cadizbut instead,due to the Company’s loss of control over the operations of Sun World. Instead, Cadiz is accounting for its investment in Sun World on the cost basis ofaccounting. As a result, the Companyaccounting and wrote off its net investment in Sun World of $195,000at the Chapter 11 filing datebecause 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 its then wholly-owned subsidiary, Sun World International, Inc. and its subsidiaries collectively referred to as "Sun World", and contain 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. Page 24(2) Intangible and Other Long-LivedAssets.Assets. Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based onmanagement'smanagement’s estimates of the periodthatover which 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 2002 as described in Note 1, the Company, with the assistance of a valuation firm, evaluated the carrying value of its water program and determined that the asset was not impaired and that the costs expect to be recovered through sale or operation of the project.The Company reevaluates the carrying value of its water program annually during the first quarter of each year and has confirmed that the carrying value of the water program is not impaired as of December 31,2005. During the fourth quarter of the year ended December 31, 2004, the long-standing lease to Sun World for a portion of the permanent and developing crops at the Cadiz Valley property terminated and the crops have not been leased to any other party. The lease to an independent third party for the remainder of the crops is on a year to year basis and does not generate a significant amount of revenue. Based on the uncertainty as to possible recovery of the carrying value of the permanent crops and developing crops the Company recorded a charge of $3.4 million to write off the capitalized costs related to these crops which is shown under the heading "Write-off of permanent and developing crops" on the Consolidated Statement of Operations.2006.(3)GOODWILL.Goodwill. As a result of a merger in May 1988 between two companies, which eventually became known as Cadiz Inc., goodwill in the amount of $7,006,000 was recorded. Approximately $3,193,000 of this amount was amortized until the adoption of Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142,("(“SFAS No.142"142”)"Goodwill“Goodwill and Other IntangibleAssets"Assets” on January 1, 2002. Goodwill is tested for impairment annually in the first quarter, or if events occur which require an impairment analysis be performed.As a resultThe Company has confirmed that the carrying value of theactions taken by Metropolitan in the fourth quartergoodwill is not impaired as of2002 as described in Note 1, the Company, with the assistance of a valuation firm, performed an impairment test of its goodwill and determined that its goodwill was not impaired. In addition, in the first quarter of 2005, 2004 and 2003, the Company, performed its annual impairment test of goodwill and determined that its goodwill was not impaired.December 31, 2006.(4) Deferred Tax Assets and Valuation Allowances. To datewe have had a history of net operating losses aswe have not generated significant revenue from our water development programs, andSun Worldwe have hadexperienced losses from its agricultural operations.a history of net operating losses. As such, we have generated significant deferred tax assets, including large net operating loss carry forwards for federal and state income taxes for which we have recorded a full valuation allowance. Management is currently working oninitiatives atwater and real estate development projects, including the Cadiz Program, that are designed to generate future taxable income, although there can be no guarantee that this will occur.AsIf taxable income is generated in future years, some portion or all of the valuation allowance will be reversed, and an increase in net income would consequently bereported in future years. (D) NEW ACCOUNTING PRONOUNCEMENTS -----------------------------reported.25(d)New Accounting PronouncementsInDecember 2004,June 2006, the FASBrevisedissued FSP FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No.123 (FAS 123R), "Share-Based Payment", which requires companies109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected toexpensebe taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that a tax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets theestimated fair valuemore likely than not recognition threshold to determine the amount ofemployee stock options and similar awards.benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this Statement.OnApril 14, 2005,September 13, 2006, theU.S.Securities and Exchange Commissionadoptedissued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of anew rule amending the compliance dates for FAS 123R. In accordance with the new Page 25 rule, the accounting provisions of FAS 123R will bemateriality assessment. SAB No. 108 is effective for fiscal years ending after November 14, 2006, or fiscal year 2006 for theCompany beginning in the first quarterCompany. The adoption offiscal 2006. The Company tentatively expects to adopt the provisions of FAS123R using a modified prospective application. FAS 123R, which provides certain changes to the method of valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. The Company will incur additional expense during fiscal 2006 related to new awards granted during 2006 that cannot yet be quantified. The Company is in the process of determining how the guidance regarding value share- based compensation as prescribed in FAS 123R will be applied to value share-based awards granted after the effective date and the impact that the recognition of compensation expense related to such awards will have on its financial statements. In December 2004, the FASB issued SFASSAB No.153, "Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, "Accounting for Nonmonetary Transactions," provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. The Company has concluded that SFAS No. 153. will108 did not have a material impact onits consolidated financial statements. In March 2005,theFASB issued FIN 47, " Accounting for Conditional Asset Retirement Obligations," an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and is effective for the Company's fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on the Company's consolidated financial statements. (E) OFF BALANCE SHEET ARRANGEMENTS ------------------------------Company’s beginning retained earnings.(e)Off Balance Sheet ArrangementsCadiz does not have any off balance sheet arrangements at this time.(F) CERTAIN KNOWN CONTRACTUAL OBLIGATIONS ------------------------------------- PAYMENTS DUE BY PERIOD CONTRACTUAL LESS THAN OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS - ----------- ----- --------- --------- --------- ------------- Long term debt obligations $ 25,891 $ 8 $ 10,027 $ 15,856 $ - Interest payable 2,875 55 2,684 136 - Operating leases 57 55 2 - - -------- -------- -------- -------- -------- $ 28,823 $ 118 $ 12,713 $ 15,992 $ - ======== ======== ======== ======== ======== Page 26(f)Certain Known Contractual Obligations
Payments Due by Period Contractual Obligations Total Less than 1 year 1-3 years 3-5 years After 5 yearsLong term debt obligations $ 37,347 $ 9 $ 19 $ 37,319 $ -Interest payable 10,433 1 1 10,431 - Operating leases 102 74 28 - - $ 47,882 $ 84 $ 48 $ 47,750 $ -
Cadiz long-term debt included in the table above reflects themost recent arrangements with INGPeloton Loan, whichwere concludedwas executed inNovember 2004June 2006, and subsequently amended in September 2006, as described above in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation; Liquidity and CapitalResources; Cadiz Obligations.Resources.26We are exposed to market risk from changes in interest rates on long-term debt obligations thatimpactaffect the fair value of these obligations. Our policy is to manage interestrates fair valuesrate exposure by year of scheduled maturities and to evaluatetheexpected cash flows and sensitivity to interest rate changes (in thousands of dollars). A 1% change in interest rate on the Company long term debt obligation would have resulted in interest expense fluctuating by approximately$252,000$316,000 during the year ended December 31,2005.2006. Circumstances could arise which may cause interest rates and the timing and amount of actual cash flows to differ materially from the schedule below:LONG-TERM DEBT ------------------------------------------------------- FIXED RATE AVERAGE VARIABLE RATE AVERAGE EXPECTED MATURITY MATURITIES INTEREST RATE MATURITIES INTEREST RATE - ----------------- ---------- ------------- ------------- ------------- 2008 $ 10,000 8.0% $ - $ - ======== ==== ======== ======== 2010 $ 15,000 8.8% $ - $ - ======== ==== ======== ========
Long-Term Debt Fixed Rate Average Interest Variable Rate Average Interest Expected Maturity Maturities Rate Maturities Rate 2011 $ 37,3475.4 % $ - $ - Cadiz long-term debt included in the table above reflects the debt restructuring which occurred inDecember 2004June 2006, as described above in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources; Cadiz Obligations.With the confirmation of SunWorld'sWorld’s consensual plan of reorganization by the U.S. Bankruptcy Court in August, 2005 and the effectiveness of the Plan in September, 2005, Cadiz is released from all liabilities under the guarantees of First Mortgage Notes issued by Sun World.The information required by this item is submitted in response to Part IV below. See the Index to Consolidated Financial Statements.Not applicable.Page 27Disclosure Controls and ProceduresWe have established disclosure controls and procedures to ensure that material information related to the Company, including its consolidated entities, is accumulated and communicated to senior management, including the Chairman and Chief Executive Officer (the"Principal27“Principal ExecutiveOfficer"Officer”) and Chief Financial Officer (the"Principal“Principal FinancialOfficer"Officer”) and to our Board of Directors. Based on their evaluation as of December 31,2005,2006, our Principal Executive Officer and Principal Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and15d- 15(e)15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and such information is accumulated and communicated to management, including the principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosures.MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGManagement’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31,2005.2006. Ourmanagement'smanagement’s assessment of the effectiveness of our internal control over financial reporting as of December 31,20052006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTINGChanges in Internal Control Over Financial ReportingIn connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in the Company's internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.On March 14, 2007 we filed with the Delaware Secretary of State a certificate of correction to our Second Amended and Restated Certificate of Designations of Series F Preferred Stock ("Second Amended Series F Certificate"). The certificate of correction was filed in order to correct an error whereby references remained in the Second Amended Series F Certificate to Series F Preferred Directors, although with the filing of the Second Amended Series F Certificate the position of Series F Preferred Director was abolished. In order to correct thistime. Pageerror, references in the Second Amended Series F Certificate to "at least one of the Series F Preferred Directors" have been changed to "a majority of the Corporation's independent directors", as originally intended.28PART IIIThe information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directors which we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2005.2006.The information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directors which we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2005.2006.The information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directors which we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2005.2006.The information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directors which we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2005.2006.The information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directors which we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2005. Page2006.29PART IV
1. Financial Statements. See Index Consolidated Financial Statements.
2. Financial Statement Schedule. See Index to Consolidated Financial Statements.
3. Exhibits. The following exhibits are filed or incorporated by reference as part of this Form 10-K.3.1Cadiz Certificate of Incorporation, asamended(1)amended(1)3.2Amendment to Cadiz Certificate of Incorporation dated November 8,1996(2)1996(2)3.3 Amendment to Cadiz Certificate of Incorporation dated September 1,1998(3)1998(3)3.4 Amendment to Cadiz Certificate of Incorporation dated December 15,2003(7)2003(4)3.5Certificate of Elimination of Series D Preferred Stock, Series E-1 Preferred Stock and Series E-2 Preferred Stock of Cadiz Inc. dated December 15,2003(7)2003(4)3.6 Certificate of Elimination of Series A Junior Participating Preferred Stock of Cadiz Inc., dated March 25,2004(7)2004(4)3.7Amended and Restated Certificate of Designations of Series F Preferred Stock of Cadiz Inc.(8)(5)3.8Cadiz Bylaws, as amended(4)(6)3.9 Second Amended and Restated Certificate of Designations of Series F Preferred Stock of Cadiz Inc. date June 30, 2006, as corrected by Certificate of Correctiondated March 14, 200710.1 Agreement Regarding Employment Between Cadiz Inc. and Keith Brackpool dated July 5,2003(6)2003(7)10.2Sixth Amended and Restated Credit Agreement, dated as of December 15, 2003, among Cadiz Inc., Cadiz Real Estate LLC, and ING Capital LLC, as Administrative Agent, and the lenders party thereto(7) 10.3 First Amendment to 2003 Restated Credit Agreement and Consent to Offering, dated as of November 30, 2004, among Cadiz Inc., Cadiz Real Estate LLC, and ING Capital LLC, as Administrative Agent, and the lenders party thereto.(9) 10.4 ING Capital LLC Second Amended and Restated Tranche A Note, dated as of November 30, 2004, in principal amount of $15 million.(9) Page 30 10.5 ING Capital LLC Second Amended and Restated Tranche B Note, dated as of November 30, 2004, in principal amount of $10 million.(9) 10.6Limited Liability Company Agreement of Cadiz Real Estate LLC dated December 11,2003(7) 10.72003(4)10.3 Amendment No. 1, dated October 29, 2004, to Limited Liability Company Agreement of Cadiz Real Estate LLC.(9) 10.8(8)3010.4 The Cadiz Groundwater Storage and Dry-Year Supply Program Definitive Economic Terms and Responsibilities between Metropolitan Water District of Southern California and Cadiz dated March 6,2001(5) 10.92001(9)10.5 Resolution of the Directors of Cadiz Inc., authorizing the Management Equity Incentive Plan.(7) 10.10(4)10.6 Supplemental Resolutions of the Compensation Committee of the Board of Directors of Cadiz Inc., regarding the Management Equity Incentive Plan.(9) 10.11(8)10.7 Form of Incentive Plan Stock OptionAgreement(10) 10.12Agreement(10)10.8 2004 Management Bonus Plan.(9) 10.13(8)10.9 Consulting Agreement dated August 1, 2002 by and between Richard Stoddard and Cadiz Inc., and Extension of Consulting Agreement dated January 1, 2004 by and between Richard Stoddard and Cadiz Inc.(9) 10.14(8)10.10 Employment Agreement dated September 12, 2005 between O'Donnell Iselin II and Cadiz Inc.(11)10.1510.11 Settlement Agreement dated as of August 11, 2005 by and between Cadiz Inc., on the one hand, and Sun World International, Inc., Sun Desert, Inc., Coachella Growers and Sun World/Rayo, on the otherhand(12)hand(12)10.12 $36,375,000 Credit Agreement among Cadiz Inc. and Cadiz Real Estate LLC, as Borrowers, the Several Lenders from time to time parties thereto, and Peloton Partners LLP, as Administrative Agent, dated as of June 26, 2006(13)10.13 Amendment No. 1 dated September 29, 2006 to the $36,375,000 Credit Agreement among Cadiz Inc. and Cadiz Real Estate LLC, as Borrowers, the Several Lenders from time to time parties thereto and Peloton Partners LLP, as Administrative Agent, dated as of June 26, 2006 (14)10.14 Outside Director Compensation Plan(15)10.15 Resolutions adopted by the Cadiz Inc. Board of Directors on March 13, 2007, increasing the annual salary paid to Keith Brackpool and the monthly consulting fees paid to Richard E. Stoddard.21.1 Subsidiaries of the Registrant23.1 Consent of Independent Registered Public Accounting Firm31.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 20023131.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Page 3132.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002- ------------------------ (1) Previously filed as an Exhibit to our Registration Statement of Form S-1 (Registration No. 33-75642) declared effective May 16, 1994 filed on February 23, 1994 (2) Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 1996 filed on November 14, 1996 (3) Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 filed on November 13, 1998 (4) Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 filed on August 13, 1999 (5) Previously filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28, 2002 (6) Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 2, 2004 (7) Previously filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003 filed on November 2, 2004. (8) Previously filed as an Exhibit to our Current Report on Form 8-K dated November 30, 2004 filed on December 2, 2004. (9) Previously filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed on March 31, 2005 (10) Previously filed as an Exhibit to our Form S-8 Registration Statement No. 333-124626 filed on May 4, 2005 (11) Previously filed as an Exhibit to our Current Report on Form 8-K dated October 3, 2005 filed on October 3, 2005 (12) Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 14, 2005 Page
(1)Previously filed as an Exhibit to our Registration Statement of Form S-1 (Registration No. 33-75642) declared effective May 16, 1994 filed on February 23, 1994
(2)Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 1996 filed on November 14, 1996
(3)Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 filed on November 13, 1998
(4)Previously filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003 filed on November 2, 2004.
(5)Previously filed as an Exhibit to our Current Report on Form 8-K dated November 30, 2004 filed on December 2, 2004.
(6)Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 filed on August 13, 1999
(7)Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 2, 2004
(8)Previously filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed on March 31, 2005
(9)Previously filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28, 2002
(10)Previously filed as an Exhibit to our Form S-8 Registration Statement No. 333-124626 filed on May 4, 2005
(11)Previously filed as an Exhibit to our Current Report on Form 8-K dated October 3, 2005 filed on October 3, 2005
(12)Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 14, 2005
(13) Previously filed as an exhibit to our registration statement on Form S-3 (Registration No. 333-126117) filed on July 28, 2006
(14) Previously filed as an exhibit to our current report on Form 8-K dated October 4, 2006 and filed October 4, 2006
(15) Previously filed as appendix B to our definitive proxy dated October 10, 2006 and filed October 10, 2006 32INDEX TO FINANCIAL STATEMENTSCADIZ INC. CONSOLIDATED FINANCIAL STATEMENTSPage Report of Independent Registered Public Accounting Firm. . . .34 Consolidated Statements of Operations for the three years ended December 31, 2005. . . . . . . . . . . . . . . . . . . . . . 36 Consolidated Balance Sheets as of December 31, 2005 and 2004. 37 Consolidated Statements of Cash Flows for the three years ended December 31, 2005. . . . . . . . . . . . . . . . . . . . . . 38 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2005. . . . . . . . . . . . . . . . 39 Notes to the Consolidated Financial Statements. . . . . . . . 40 Financial Statement Schedule. . . . . . . . . . . . . . . . . 64 (Schedules(Schedules other than those listed above have been omitted since they are either not required, inapplicable, or the required information is included on the financial statements or notes thereto.)Page33REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Cadiz Inc.:We have completedanintegratedauditaudits of Cadiz Inc.'s’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of December 31,20052006 andauditsan audit of its 2004and 2003consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.Consolidatedfinancialfinancial statements and financial statement schedule- ------------------------------------------------------------------In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cadiz Inc. and its subsidiaries at December 31,20052006 and2004,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31,20052006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.As discussed in Note 2 to the accompanying consolidated financial statements, the Companyhas suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's planschanged the manner inregard to these matters are also describedwhich it accounts for share-based compensation inNote 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.2006.Internal control over financial reporting- -----------------------------------------Also, in our opinion,management'smanagement’s assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31,20052006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2005,2006, based onPage 34criteria established in Internal Control - Integrated Framework issued by the COSO. TheCompany'sCompany’s management is responsible for maintaining effective internal control over financial34reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions onmanagement'smanagement’s assessment and on the effectiveness of theCompany'sCompany’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluatingmanagement'smanagement’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinions.opinion.Acompany'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany'scompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.PricewaterhouseCoopers LLPLos Angeles, CaliforniaMarch 16,2006 Page200735CONSOLIDATED STATEMENTS OF OPERATIONS- ------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2003 - ------------------------------------------------------------------------------ Total revenues $ 1,197 $ 47 $ 3,162 -------- -------- -------- Costs and expenses: Cost of sales 994 - 2,965 General and administrative 4,045 3,050 5,235 Compensation costs from stock and option awards 16,687 - - Write off of investment in subsidiary - - 195 Reorganization costs - - 655 Write-off of permanent and developing crops - 3,443 - Depreciation and amortization 229 527 743 -------- -------- -------- Total costs and expenses 21,955 7,020 9,793 -------- -------- -------- Operating loss (20,758) (6,973) (6,631) Interest expense, net 1,931 9,064 4,905 -------- -------- -------- Net loss before income taxes (22,689) (16,037) (11,536) Income tax expense 336 - - -------- -------- -------- Net loss (23,025) (16,037) (11,536) Less: Preferred stock dividends - - 918 Imputed dividend on preferred stock - - 1,600 -------- -------- -------- Net loss applicable to common stock $(23,025) $(16,037) $(14,054) ======== ======== ======== Basic and diluted net loss per share $ (2.14) $ (2.32) $ (6.39) ======== ======== ======== Weighted-average shares outstanding 10,756 6,911 2,200 ======== ======== ========
Year Ended December 31, (In thousands, except per share data) 2006 2005 2004Total revenues $ 614 $ 1,197 $ 47Costs and expenses: Cost of sales (exclusive of depreciation shown below)721 994 - General and administrative7,710 20,732 3,050 Write-off of permanent and developing crops (Note 2)- - 3,443 Depreciation and amortization154 229 527 Total costs and expenses8,585 21,955 7,020 Operating loss (7,971 ) (20,758 ) (6,973 ) Interest expense, net (2,434 ) (1,931 ) (7,695 ) Loss on extinguishment of debt and debt refinancing (868 ) - (1,369 ) Change in fair value of derivative liability (2,919 ) - - Other income 373 - - Other income (expense), net(5,848 ) (1,931 ) (9,064 ) Net loss before income taxes (13,819 ) (22,689 ) (16,037 ) Income tax expense 6 336 - Net loss (13,825 ) (23,025 ) (16,037 ) Net loss applicable to common stock $ (13,825 ) $ (23,025 ) $ (16,037 )Basic and diluted net loss per share $ (1.21 ) $ (2.14 ) $ (2.32 )Weighted-average shares outstanding 11,381 10,756 6,911 See accompanying notes to the consolidated financial statements.Page36CONSOLIDATED BALANCE SHEET- ------------------------------------------------------------------------ DECEMBER 31, ------------ ($ IN THOUSANDS) 2005 2004 - ------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 5,302 $ 9,031 Accounts Receivable 170 - Prepaid interest expense 740 1,106 Prepaid expenses and other 34 116 -------- -------- Total current assets 6,246 10,253 Property, plant, equipment and water programs, net 35,323 35,552 Goodwill 3,813 3,813 Other assets 664 1,453 -------- -------- Total assets $ 46,046 $ 51,071 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 369 $ 470 Accrued liabilities 819 743 Current portion of long term debt 8 - -------- -------- Total current liabilities 1,196 1,213 Long-term debt 25,883 25,000 -------- -------- Total liabilities 27,079 26,213 Contingencies (Note 13) Stockholders' equity: Series F convertible preferred stock - $.01 par value: 100,000 shares authorized, shares issued and outstanding - 1,000 at December 31, 2005 and 1,000 at December 31, 2004 - - Common stock - $0.01 par value; 70,000,000 shares authorized; shares issued and outstanding: 11,330,463 at December 31, 2005 and 10,324,339 at December 31, 2004 114 103 Additional paid-in capital 226,738 209,615 Accumulated deficit (207,885) (184,860) -------- -------- Total stockholders' equity 18,967 24,858 -------- -------- Total liabilities and stockholders' equity $ 46,046 $ 51,071 ======== ========
December 31, ($ in thousands) 2006 2005 ASSETS Current assets:Cash and cash equivalents $ 10,397 $ 5,302Accounts Receivable 301 170 Prepaid interest expense - 740 Prepaid expenses and other 243 34 Total current assets10,941 6,246 Property, plant, equipment and water programs, net 35,190 35,323 Goodwill 3,813 3,813 Other assets 382 664 Total assets $ 50,326 $ 46,046 LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable $ 444 $ 369 Accrued liabilities380 819 Current portion of long term debt9 8 Total current liabilities833 1,196 Long-term debt 25,881 25,883 Total liabilities 26,714 27,079 Contingencies (Note 12) Stockholders' equity: Series F convertible preferred stock - $.01 par value: 100,000 shares authorized, shares issued and outstanding - 1,000 at December 31, 2006 and 1,000 at December 31, 2005 - - Common stock - $0.01 par value; 70,000,000 shares authorized; shares issued and outstanding: 11,536,597 at December 31, 2006 and 11,330,463 at December 31, 2005 116 114 Additional paid-in capital 245,206 226,738 Accumulated deficit (221,710 ) (207,885 ) Total stockholders' equity23,612 18,967 Total liabilities and stockholders' equity $ 50,326 $ 46,046 See accompanying notes to the consolidated financial statements.Page37CONSOLIDATEDSTATEMENTSSTATEMENT OF CASH FLOWS- ------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------- ($IN THOUSANDS) 2005 2004 2003 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net loss $(23,025) $(16,037) $(11,536) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 257 4,294 1,602 Write off of unamortized deferred debt discount and loan fees - 1,369 - Write off of investment in subsidiary - - 195 Stock issued for services - - 550 Compensation costs from stock and option awards 16,687 - - Compensation paid through settlement of note receivable from officer - - 841 Interest paid in common stock - - 12 Interest added to loan principal 851 - - Net (gain)/loss on disposal of assets 42 - 43 Write-off of permanent and developing crops - 3,443 - Compensation charge for deferred stock units - - 152 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (170) - 1,488 Decrease (increase) in inventories - - (3,043) Decrease (increase) in prepaid expenses and other 1,236 122 (216) (Decrease) increase in accounts payable (101) (386) 1,393 (Decrease) increase in accrued liabilities 522 (454) 1,831 -------- -------- -------- Net cash used for operating activities (3,701) (7,649) (6,688) -------- -------- -------- Cash flows from investing activities: Deconsolidation of subsidiary - - (1,019) Additions to property, plant and equipment (68) (8) (140) Additions to developing crops - - (231) Loan to officer - - 181 Decrease (increase) in restricted cash - 2,142 (2,142) -------- -------- -------- Net cash provided by (used for) investing activities (68) 2,124 (3,455) -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of stock - 21,274 10,304 Proceeds from issuance of long-term debt 44 - 135 Financing costs - (150) (400) Proceeds from convertible note payable - - 200 Net proceeds from short-term borrowings - - - Principal payments on long-term debt (4) (10,000) (7) -------- -------- -------- Net cash provided by financing activities 40 11,124 10,232 -------- -------- -------- Net increase in cash and cash equivalents (3,729) 5,609 193 Cash and cash equivalents, beginning of period 9,031 3,422 3,229 -------- -------- -------- Cash and cash equivalents, end of period $ 5,302 $ 9,031 $ 3,422 ======== ======== ======== Non-cash financing and investing activities Settlement of note receivable from officer $ - $ 1 $ 841 Common stock issued upon conversion of preferred stock - - 14,020 Issuance of preferred stock with loan extension - - 5,000 Issuance of common stock upon conversion of note payable - - 212 Issuance of common stock to prepay interest on term loan obligations - 2,400 - Issuance of common stock for services accrued in prior year 447 350 - Exchange of deferred stock units for common stock - 654 1,054 Interest added to loan principle 851 - -
Year Ended December 31, ($ in thousands) 2006 2005 2004Cash flows from operating activities: Net loss $ (13,825 ) $ (23,025 ) $ (16,037 ) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization154 229 527 Amortization of debt issuance costs40 28 286 Amortization of debt discount783 - 3,481 Loss on extinguishment of debt and debt refinancing868 - 1,369 Interest added to loan principalNet (gain)/loss on disposal of assets 1,463(21) 85142 -- Write-off of permanent and developing crops- - 3,443 Change in value of derivative liability2,919 - - Compensation charge for stock awards and share options2,260 16,687 - Changes in operating assets and liabilities: Decrease (increase) in accounts receivable(131 ) (170 ) - Decrease (increase) in prepaid borrowing expense523 - - Decrease (increase) in prepaid expenses and other(209 ) 1,236 122 (Decrease) increase in accounts payable75 (101 ) (386 ) (Decrease) increase in accrued liabilities(175 ) 522 (454 ) Net cash used for operating activities(5,276 ) (3,701 ) (7,649 ) Cash flows from investing activities: Deconsolidation of subsidiary- - - Additions to property, plant and equipment(22 ) (68 ) (8 ) Proceeds from asset disposition22 - - Decrease (increase) in restricted cash- - 2,142 Net cash provided by (used for) investing activities- (68 ) 2,134 Cash flows from financing activities: Net proceeds from issuance of common stock1,050 - 21,274 Proceeds from issuance of long-term debt36,375 44 - Debt issuance costs(408 ) - (150 ) Principal payments on long-term debt(26,646 ) (4 ) (10,000 ) Net cash provided by financing activities10,371 40 11,124 Net increase in cash and cash equivalents 5,095 (3,729 ) 5,609 Cash and cash equivalents, beginning of period 5,302 9,031 3,422 Cash and cash equivalents, end of period $ 10,397 $ 5,302 $ 9,031Non-cash financing and investing activities Settlement of note receivable from officer $ - $ - $ 1Issuance of common stock to prepay interest on term loan obligations Issuance of common stock for services accrued in prior year - 447 350 Exchange of deferred stock units for common stock - - 654 See accompanying notes to the consolidated financial statements.Page38CONSOLIDATEDSTATEMENTSSTATEMENT OF STOCKHOLDERS' EQUITY- -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 ($ IN THOUSANDS) - -------------------------------------------------------------------------------- PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------- ------------ PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY ------ ------ ------ ------ ------- ------- ------ Balance as of December 31, 2002 - $ - 1,458,659 $ 15 $156,151 $(157,287) $ (1,121) Exchange of deferred stock units for common stock - - 26,027 - 1,054 - 1,054 Issuance of common stock for cash - - 4,112,000 41 10,239 - 10,280 Issuance of stock to lenders - - 168,000 2 430 - 432 Issuance of common stock for services - - 128,000 1 279 - 280 Exercise of warrants - - 94,000 1 23 - 24 Conversion of Series D and E convertible preferred stock - - 400,000 4 14,016 - 14,020 Conversion of convertible note payable - - 84,699 1 211 - 212 Beneficial conversion feature of note payable - - - - 90 - 90 Preferred stock dividend - - - - (918) - (918) Imputed dividend from warrants and deferred beneficial conversion feature - - - - (1,600) - (1,600) Issuance of Series F convertible preferred stock 100,000 1 - - 4,999 - 5,000 Net loss - - - - - (11,536) (11,536) ------- ---- --------- ---- -------- --------- -------- 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 cash - - 2,000,000 20 23,654 - 23,674 Issuance of common stock for services - - 140,000 1 349 - 350 Conversion of Series F convertible preferred stock (99,000) (1) 1,711,665 17 (16) - - Net loss - - - - - (16,037) (16,037) ------- ---- --------- ---- -------- --------- -------- Balance as of December 31, 2004 1,000 - 10,324,339 103 209,615 (184,860) 24,858 Issuance of common stock for services - - 37,200 1 446 - 447 Issuance of management incentive shares and options - - 968,933 10 16,677 - 16,687 Fractional shares retired - - (9) - - - - Net loss - - - - - (23,025) (23,025) ------- ---- --------- ---- -------- --------- -------- Balance as of December 31, 2005 1,000 $ - 11,330,463 $114 $226,738 $(207,885) $ 18,967 ======= ==== ========== ==== ======== ========= ========
For the Years Ended December 31, 2006, 2005 and 2004 ($ in thousands) Additional Total Preferred Stock Common Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit EquityBalance as of December 31, 2003 100,000 $ 16,471,385 $ 65 $ 184,974(168,823 ) $ 16,217Exchange of deferred stock units for common stock - - 1,289 - 654 - 654 Issuance of common stock for cash - - 2,000,000 20 23,654 - 23,674 Issuance of common stock for services - - 140,000 1 349 - 350 Conversion of Series F convertible preferred stock (99,000 ) (1 ) 1,711,665 17 (16 ) - - Net loss - - - - - (16,037 ) (16,037 ) Balance as of December 31, 2004 1,000 - 10,324,339 103 209,615 (184,860 ) 24,858 Issuance of common stock for services - - 37,200 1 446 - 447 Issuance of management incentive shares and options - - 968,933 10 16,677 - 16,687 Fractional shares retired - - (9 ) - - - - Net loss - - - - - (23,025 ) (23,025 ) Balance as of December 31, 2005 1,000 $ -11,330,463 $ 114 $ 226,738 $ (207,885 ) $ 18,967Convertible term loan conversion option - - - - 15,160 - 15,160 Stock compensation expense and issuance of managementincentive and outside director shares - - 136,195 1 2,259 - 2,260Common stock issued due to warrant exercise - - 70,000 1 1,049 - 1,050 Fractional shares retired - - (61 ) - - - - Net Loss - - - - - (13,825 ) (13,825 ) Balance as of December 31, 2006 1,000 $ -11,536,597 $ 116 $ 245,206 $ (221,710 ) $ 23,612
See accompanying notes to the consolidated financialstatements Pagestatements.39NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 - DESCRIPTION OF BUSINESS- --------------------------------TheCompany'sCompany’s primaryasset consists of three blocksassets are 45,000 acres of land in three areas of eastern San Bernardino County,California totaling approximately 46,000 acres.California. Virtually all of this land is underlain by high-quality groundwater resources with demonstrated potential forvarious applications, including water storage and supply programs andrecreational, residential, and agricultural development.Two of the threeThe properties are also located in proximity to the Colorado River and the Colorado River Aqueduct, the major source of imported water for southern California. Thethird property is located nearaquifer systems underlying theColorado River.properties contain large amounts of water and are suitable for water storage and supply programs.The value of these assets derives from a combination of projected population increases and limited water supplies throughout southern California. In addition, most of the major population centers in southern California are not located where significant precipitation occurs, requiring the importation of water from other parts of the state.WeThe Company thereforebelievebelieves that a competitive advantage exists for companies that can provide high quality, reliable, and affordable water to major population centers.To this end,In 1993 the Company secured permits for up to 9,600 acres of agricultural development in the Cadiz Valley and the withdrawal of more than 1 million acre-feet of ground water from the aquifer system underlying the property. In 1997,we commenced discussionsthe Company entered into the first of a series of agreements with the Metropolitan Water District of Southern California("Metropolitan"(“Metropolitan”)in ordertodevelop a long-term agreement for a joint venture groundwaterjointly design, permit and build an aquifer storage and supply program onourthe Company’s land in the Cadiz and Fennervalleys of eastern San Bernardino CountyValleys (the"Cadiz Project"“Cadiz Project” or the “Project”).Under the Cadiz Project, surplus water from the Colorado River would be stored in the aquifer system underlying our land during wet years. When needed, the stored water, together with indigenous groundwater, could be returned to the Colorado River Aqueduct for distribution to Metropolitan's member agencies throughout six southern California counties.Between 1997 and 2002, Metropolitan and the Company received substantially all of the various state and federal approvals required for permitsrequiredto construct and operate the projectincludingand received a federal Record of Decision (“ROD”)from the U.S. Department of the Interior, which endorsed the Cadiz Project andgrantedoffered aright-of-wayright of way grant for the construction of project facilities. The federal government also approved a Final Environmental Impact Statement("FEIS"(“FEIS”) in compliance with the National Environmental Policy Act("NEPA"(“NEPA”).Despite the significant progress made in the federal environmental review process, in October 2002Metropolitan'sMetropolitan’s Board voted not to accept the right of way grant offered by the U.S. Department of the Interior and refused to consider whether or not to certify the Final Environmental Impact Report("FEIR"(“FEIR”), which was a necessary action to authorize implementation of the Cadiz Project in accordance with the California Environmental Quality Act("CEQA"(“CEQA”).WhenMetropolitan'sMetropolitan’s Board declined to proceed with the Cadiz Project, the FEIR was complete and awaiting certification at a hearing scheduled for late October 2002. It is theCompany'sCompany’s position thatMetropolitan'sthese actionson October 8, 2002by Metropolitan breached various contractual and fiduciary obligationsof Metropolitantous,the Company, and interfered with the economic advantagethe Companyit would have obtained from the Cadiz Project.Therefore, inIn April 2003 the Company filed a claim against Metropolitan seeking compensatoryand punitivedamages. When settlement negotiations failed to produce a resolution, the Company filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17, 2005.PageThe claims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance have all been allowed by the Court and are scheduled for trial in late 2007.40Meanwhile, the need fornewwater storage and supply programsin the southwestern United Stateshas notdiminished. Overabated. Moreover, thefive years precedingadvantages of underground water storage facilities are increasingly evident. These include minimal surface environmental impacts, lower capital investment, protection from airborne contaminants and minimal evaporative water loss. Therefore the2004 - 2005 winter season,Company continues to pursue theColorado River watershed experienced a prolonged drought that presented major challenges tocompletion of theeconomies of California, Nevada, and Arizona. The drought was followed by a wet year in 2005 during which surplus water was available to Metropolitan that exceeded its storage capacity by approximately 200,000 acre- feet. Hadenvironmental review process for the CadizProject been built, it could have accommodated mostProject.To that end, the County ofthis available surplus. As population continuesSan Bernardino has agreed togrow at record rates,serve as theSouthwest is facingCEQA lead agency for thevery real possibility that current and future suppliescompletion ofwater will not be able to meet demand without more investment in water infrastructure, including groundwater storage projects. To meet this need,theCompany is committed to completingenvironmental review of the Cadiz Project andfinalizingissue any permits required under California law once thestate of California environmental review. To that end the Companyreview isnow in advanced discussions with a third party public agency that would assume the role of CEQA lead agency and complete the California environmental review process.completed. The Company is also workingdirectlywith the U.S. Department of the Interior to have the permits that weregrantedapproved during the federal environmental review process, including theright-of-wayright of way granted in theRecord of Decision,ROD, issued directly to theCompany.Company for the benefit of any participating public agency. Additionally, the Company is in discussions with several other public agencies regarding their interest in participating in the Cadiz Project.All of theseThese agencies have access toindependentsources ofsupplywater that can be storedbyin the Cadiz Project.DueIn addition tosignificant populationagriculture and water development, the rapid growth of nearby desert communities inSouthernsouthern California,whereNevada and Arizona indicates that theCompany's properties are located, the Company has also begun to explore additional usesCompany’s land holdings may be suitable for other types ofour land assets.development. To this end, the Company hasretained outside services to conductconducted a detailed analysis ofourthe Company’s land assetsandto assess the opportunities for these properties.These objectivesBased on this analysis, the Company believes that its properties havedifferent capital requirementssignificant long-term potential for residential andimplementation periods than those previously established. Therefore, in 2002, we entered intocommercial development. The Company is continuing to explore alternative land uses to maximize the value of its properties.In 2006, the Company refinanced its long term debt with aseries of agreements with ournew $36.4 million zero coupon senior securedlender, ING Capital LLC ("ING") pursuantconvertible term loan that matures on June 29, 2011 and received $1.1 million when certain holders of warrants issued in 2004 exercised their right towhich we reduced our debtpurchase 70,000 common shares at $15.00 per share. In 2007, the Company exercised its right toINGterminate the remaining warrants on March 2, 2007, subject to$25 million and extendeda 30 day notice period. In response, thematurity dateremaining warrant holders exercised their right to purchase 335,440 shares of theING debt until March 31, 2010, conditioned upon a further principal reductionCompany’s common stock during the notice period, and the Company received an additional $5.0 million from the sale of$10 million on or before March 31, 2008. In addition, we raised approximately $35 million in equity through private placements completed in 2003 and 2004. On January 30, 2003,these shares. Following this exercise, no Warrants remain outstanding.The Chapter 11 Reorganization Plan of theCompany's wholly-owned subsidiary,Company’s Sun World International Inc.("Sun World")subsidiary became effective in 2005, andcertain of its subsidiaries (Sun Desert Inc., Coachella Growers, and Sun World/Rayo) filed voluntary petitions for relief under Chapter 11 oftheBankruptcy Code. The filing was made in the United States Bankruptcy Court, Central District of California, Riverside Division. Sun World 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. The financial statements of Sun World areCompany has nolonger consolidated with those of Cadiz duefurther liabilities related to theCompany's loss of control over thebusiness or operations of SunWorld on the Chapter 11 filing date. Cadiz also wrote off its net investment in Sun World of $195 thousand on that date because it did not anticipate being able to recover its investment.World.Thefour Sun World entities were the joint proponents of the Debtors' Joint Plan of Reorganization Dated November 24, 2003 (the "Plan"). The Plan provided for the restructuring of Sun World's balance sheet by providing for Sun World to issue equity interests in the Page 41 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. The holders of Sun World's secured First Mortgage Notes were unable to reach agreement on various Plan issues, and the Plan as presented was not confirmable. Thereafter, following an extensive marketing process, Sun World entered into, subject to Court approval, an asset purchase agreement ("APA") in December 2004 with BDCM Opportunity Fund, L.P. ("BDCM""), " a major holder of the First Mortgage Notes, under which BDCM would acquire substantially all of Sun World's assets subject to overbids at a Court authorized auction. Following the auction on January 13, 2005, BDCM was declared the winning bidder and the Court approved on January 14, 2005, an amended APA under which BDCM agreed to acquire substantially all of Sun World's assets in exchange for cash and credit consideration of $127,750,000, plus assumption of certain liabilities totaling an estimated $14 million, including the trade claims which approximate net book value as of December 31, 2004 of the assets sold. Thereafter, BDCM assigned its rights under the APA to Sun World International LLC ("SWLLC"), a subsidiary of BDCM. The agreement with SWLLC closed on February 28, 2005. Following closing of the transaction, Sun World filed an amended Plan to distribute the remaining consideration left in Sun World (estimated at approximately $50 million after interim distributions/credits to the holders of First Mortgage Notes of approximately $78 million upon closing as authorized by the Court). On August 26, 2005, a Settlement Agreement between Cadiz, on the one hand, and Sun World and three of Sun World's subsidiaries, on the other hand, was approved by the U.S. Bankruptcy Court, concurrently with the Court's confirmation of the amended Plan. The Settlement Agreement provides that following the September 6, 2005 effective date of Sun World's plan of reorganization, Cadiz will retain the right to utilize the Sun World net operating loss carryovers (NOLs). Sun World Federal NOLs are estimated to be approximately $52 million. If, in any year from calendar year 2005 through calendar year 2011, the utilization of such NOLs results in a reduction of Cadiz' tax liability for such year, then Cadiz will pay to the Sun World bankruptcy estate 25% of the amount of such reduction, and shall retain the remaining 75% for its own benefit. There is no requirement that Cadiz utilize these NOLs during this reimbursement period, or provide any reimbursement to the Sun World bankruptcy estate for any NOLs used by Cadiz after this reimbursement period expires. The amended Plan became effective on September 6, 2005, and Cadiz has no further interest in the business and operations of Sun World. With the bankruptcy of Sun World, our agricultural operations are very limited. Historically, we have leased our Cadiz Valley farming property to Sun World and other third parties. In the fourth quarter of 2004, the lease with Sun World expired. We continue to lease to a third party approximately 160 acres of vineyards at our Cadiz Valley property. The lease is renewable on a year to year basis with annual revenues of approximately $50,000. In 2005 we also farmed 260 acres of citrus crops. We subcontracted the labor, harvesting and marketing of the crop to third parties. Annual revenues were approximately $1.1 million. We remainCompany remains committed toourits land and water assets and we continue to explore all opportunities for development of these assets.WeThe Company cannot predict with certainty which of these various opportunities will ultimately be utilized.Page 4241NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- --------------------------------------------------- BASIS OF PRESENTATION The financial statementsBasis ofthe 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 $23.0 million and $16.0 million in 2005 and 2004, respectively, had working capital of $5.1 million at December 31, 2005, and used cash in operations of $3.7 million and $7.6 million in 2005 and 2004, respectively.PresentationAs discussed in Note 1, on October 8, 2002,Metropolitan'sMetropolitan’s Board voted not to proceed with the Cadiz Project and thereby did not consider acceptance of the terms and conditions of theright- of-wayfederal right-of-way grant. The Company believes that, by failing to complete the environmental review process for the Cadiz Project,as specified inMetropolitan breached various contractual and fiduciary obligations to thePrinciples of Agreement, Metropolitan violated this contract. OnCompany and interfered with the economic advantage it would have obtained from the Cadiz Project. In April7,2003 the Company filedan administrativea claim against Metropolitanassertingseeking compensatory and damages. When settlement negotiations failed to produce a resolution, thebreach of various obligations specified in the Company's Principles of Agreement with Metropolitan, and subsequentlyCompany filed a lawsuit against Metropolitanwith thein Los Angeles Superior Court on November 17, 2005.The Company remains committed to its water programs and it continues to explore all opportunities for development of these assets. As further discussed in Note 1,exploratorythe County of San Bernardino has agreed to serve as the CEQA lead agency for the completion of the environmental review of the Cadiz Project and issue any permits required under California law once the review is completed. The Company is also in discussionshave been initiatedwithrepresentatives of governmental organizations, waterseveral other public agenciesand private water users with regard toregarding theirexpressedinterest inimplementation ofparticipating in the Cadiz Project. However, at the present time, the Company does not have a commitment from any of these parties for the implementation of the Cadiz Project.InNovember 2004,June 2006, the Company raised$21.3$36.4 millionin cashthrough the private placement of aprivate salefive year zero coupon convertible term loan with Peloton Partners LLP (“Peloton”), as administrative agent, and an affiliate of Peloton and another investor, as lenders. The proceeds of the new term loan were partially used to repay the Company’s prior term loan facility with ING Capital LLC (“ING”). In September 2006, and additional $1.1 million was raised when certain holders of warrants to purchase the Company’s common stock at $15.00 per share chose to exercise the warrants and purchase 70,000 shares of commonstock, of which $10.0 million was used to pay down long term debt.stock. Based on current forecasts, the Company believes that ithassufficient resources to fund operations beyond December2006.2007.TheCompany'sCompany’s current resources do not provide the capital necessary to fundthea water or real estate development project should the Company be required to do so. There is no assurance that additional financing (public or private) will be available on acceptable terms or at all. If the Company issues additional equity or equity linked securities to raise funds, the ownership percentage of theCompany'sCompany’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. As discussed in Note 1, subsequentSubsequent to the effective date of thePlan ofChapter 11 reorganization plan of Sun World, theCompany'sCompany’s primary activities are limited to the development of its waterresource programsresources and related assets. From the effective date of thePlan of reorganizationplan through December 31,2005,2006, the Company has incurred losses of approximately$5.2$19.1 million and used cash in operations ofapproximately $1.3$6.5 million.Page 4342ReclassificationsThe Company reclassified stock based compensation in the 2005 financial statements to conform to the current presentation. This reclassification had no effect on the Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholder’s Equity.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and those of Sun World untilOn January 30, 2003at which datethe Company’s wholly-owned subsidiary, Sun World International, Inc. 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 were no longer consolidated with those of Cadizbut instead,due to the Company’s loss of control over the operations of Sun World. Cadizaccountedaccounts for its investment in Sun Worldon the cost basis of accounting. As a result of changing tousing the cost basis of accountingon January 31, 2003, the Company had a netand ascribes no value to its investment in SunWorld of $195,000 consisting of loans and other amounts due from Sun World of $13,500,000 less losses in excess of investment in Sun World of $13,305,000. The Company wrote off its net investment in Sun World during the quarter ended March 31, 2003.World.In December 2003, the Company transferred substantially all of its assets (with the exception ofouran office sublease, certain office furniture and equipment and any Sun World related assets) to Cadiz Real Estate LLC, a Delaware limited liability company("(“Cadiz RealEstate"Estate”). The Company holds 100% of the equity interests of Cadiz Real Estate, and therefore continues to hold 100% beneficial ownership of the properties that it transferred to Cadiz Real Estate. Because the transfer of theCompany'sCompany’s properties to Cadiz Real Estate has no effect on its ultimate beneficial ownership of these properties, the properties owned of record either by Cadiz Real Estate or by the Company are treated as belonging to the Company.ONE-FOR-25 REVERSE STOCK SPLIT In December 2003, the Company effected a one-for-25 reverse stock split. All share and per share informationUse of Estimates inthe accompanying financial statements have been retroactively restated to reflect the effectPreparation ofthis stock split. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTSFinancial StatementsThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has made estimates with regard to revenue recognition, goodwill and other long-lived assets, and deferred tax assets. Actual results could differ from those estimates.REVENUE RECOGNITIONRevenue RecognitionThe Company recognizes crop sale revenue upon shipment and transfer of title to customers.Stock-Based CompensationGeneral and administrative expenses include $2,260,000 and $16,687,000 of stock based compensation expenses in the fiscal years ending December 31, 2006 and 2005, respectively.43Prior to thedeconsolidationJanuary 2006 adoption ofSun World, packing revenuesSFAS 123R, the Company accounted for grants of options to employees to purchase its common stock using the intrinsic value method in accordance with APB Opinion No. 25 andmarketing commissions from third party growers were recognized whenFIN No. 44, “Accounting for Certain Transactions Involving Stock Compensation”. As permitted by SFAS 123 and as amended by SFAS No. 148, therelated services were provided. Proprietary product development revenues were recognized based upon product salesCompany chose to continue to account for such option grants under APB Opinion No. 25 and provide the expanded disclosures specified in SFAS 123, as amended bylicensees. Project development and management fees were recorded when earned under the terms of the related agreement. Page 44 Sun World revenues attributable to one national retailer totaled $0.1 million (2.2%)SFAS No. 148.Had compensation cost for themonth ended January 31, 2003. Revenues attributable to another national retailer totaled $0.5 million (16.6%)Company’s option grants been determined based on their fair value at the grant date for awards consistent with the provisions of SFAS 123R, the Company’s net loss per share for themonth ended January 31, 2003. Sun World export sales accounted for approximately 6.1% of revenues for the month ended January 31, 2003. Services and license revenues were less than 10% of total revenues for the yeartwelve months ended December 31,2003. RESEARCH AND DEVELOPMENT Prior2005 and 2004 would have been the adjusted pro forma amounts indicated below (dollars in thousands):
Year Ended December 31, 2005 2004Net loss applicable to common stock: As reported $ (23,025 ) $ (16,037 ) Additional expense under SFAS 123 $ (3,096 )- Pro forma $ (26,121 ) $ (16,037 )Net loss per common share: As reported $ (2.14 ) $ (2.32 ) Additional expense under SFAS123$ (0.29 ) $ -Pro forma $ (2.43 ) $ (2.32 ) For purposes of computing the pro forma disclosures required by SFAS 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option pricing model.In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which requires all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their grant date fair values. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-based Compensation,” (“SFAS 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company adopted the new requirements using the modified prospective transition method during the first quarter of 2006, and as a result, will not retroactively adjust results from prior periods. Under this transition method, compensation expense associated with stock options recognized in fiscal 2006 included: 1) expenses related to thedeconsolidationremaining unvested portion ofSun World,all stock option awards granted prior to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) expenses related to all stock option awards granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company will apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis over the requisite service period. 365,000 options were granted under the Company’s 2003 Management Equity Incentive Plan in 2005, and 12,339 options were granted in 2006. The Options have a 10 year term with vesting periods ranging from the issuance date to three years. The 2006 options had a strike price equal to the fair market value of the Company’s common stock on the grant date.44As a result of the adoption of SFAS 123R, the Companyincurred costs to research and develop new varieties of proprietary products. Research and development costs were expensed as incurred. Such costs incurred by Sun World were approximately $183,000 for the month ended January 31, 2003, and are included in general administrative expensesrecorded expense in thestatementamount ofoperations. NET LOSS PER COMMON SHARE$877,000 in 2006 related to the fair value of options. $831,000 of this amount was related to options granted in 2005. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. The remaining vesting periods are relatively short, and the potential impact of forfeitures is not material. The Company is in a tax loss carryforward position and is not expected to realize a benefit from any additional compensation expense recognized under SFAS 123R. See Note 4 - Income Taxes.Net Loss Per Common ShareBasic 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,andparticipating and redeemable preferred stock and the zero coupon term loan convertible into or exercisable for certain shares of theCompany'sCompany’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 1,583,000 shares, 725,000 shares68,000 shares,and125,00068,000 shares for the years ended December 31, 2006, 2005 and 2004, respectively.Cash and2003, respectively. STOCK-BASED COMPENSATION As permitted under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", 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 provisions 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 except per share amounts): Page 45 YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 2003 ---- ---- ---- Net loss applicable to common stock: As reported $(23,025) $(16,037) $(14,054) Additional expense under SFAS 123 $ (3,096) - (150) -------- -------- -------- Pro forma $(26,121) $(16,037) $(14,204) ======== ======== ======== Net loss per common share: As reported $ (2.14) $ (2.32) $ (6.39) Additional expense under SFAS 123 $ (0.29) $ - $ (0.07) -------- -------- -------- Pro forma $ (2.43) $ (2.32) $ (6.46) ======== ======== ======== CASH AND CASH EQUIVALENTSCash EquivalentsThe Company considers all short-term deposits with an original maturity of three months or less to be cash equivalents. The Company invests its excess cash in deposits with major international banks, government agency notes and short-term commercial paper and, therefore, bears minimal risk. Such investments are stated at cost, which approximates fair value, and are considered cash equivalents for purposes of reporting cash flows.PREPAID INTEREST EXPENSEPrepaid Interest ExpenseAs part of the private sale of common shares on November 30, 2004, the Company issued to its lender, ING, $2.4 million of units as prepaid interest under theCompany'sCompany’s $25 millionborrowingsecured term loan from ING.TheOn December 31, 2005, the current portion of this interestiswas included in Prepaid Interest Expense and the non-current portioniswas included in Other Assets in the Consolidated Balance Sheet. The total amount of prepaid interest was $1,284,000and $2,400,000on December 31,20052005. The ING loan was repaid in full on June 29, 2006, and2004, respectively. PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMSthere was no Prepaid Interest Expense balance on December 31, 2006.Property, Plant, Equipment and Water ProgramsProperty, plant, equipment and water programs are stated at cost.The Company capitalized direct and certain indirect costs of planting and developing orchards and vineyards during the development period, which varied by crop and generally ranged from three to seven years. Depreciation commenced in the year commercial production was achieved.45Permanent land development costs, such as acquisition costs, clearing, initial leveling and other costs required to bring the land into a suitable condition for general agricultural use, were capitalized and not depreciated, since these costs were determined to have an indefinite useful life.Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally ten toforty- fiveforty-five years for land improvements and buildings, three totwenty- fivetwenty-five years for machinery and equipment, and five to thirty years for permanent crops.Page 46Water rights and water storage and supply programs are stated at cost.AllCertain costs directly attributable to the development of such programsare beinghave been capitalized by the Company. These costs, which are expected to be recovered through future revenues, consist of direct labor, drilling costs, consulting fees for various engineering, hydrological, environmental and feasibility studies, and other professional and legal fees.IMPAIRMENT OF LONG-LIVED ASSETSImpairment of Long-Lived AssetsThe Company evaluates its long-lived assets, including intangibles, for potential impairment when circumstances indicate that the carrying amount of the asset may not be recoverable. This evaluation is based upon estimated future cash flows. In the event that the undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written down to their estimated fair value. As a result of the actions taken by Metropolitan in the fourth quarter of 2002 as described in Note 1, the Company, with the assistance of a valuation firm, evaluated the carrying value of its water program and determined that the asset was not impaired and that the costs were estimated to be recovered through implementation of the Cadiz Project with other government organizations, water agencies and private water users. In 2006, 20052004and20032004 the Company reviewed the valuation of theitswater program and concluded that the carrying amount of the program was not impaired. TheCompany'sCompany’s estimate could be impacted by changes in plans related to the Cadiz Project.Permanent crops and developing crops shown as Cadiz assets consist of lemon groves and grape vineyards located on the Cadiz Valley property. These crops have previously been leased to Sun World and an unaffiliated third party. During the fourth quarter of the year ended December 31, 2004, the long-standing lease to Sun World was terminated.In 2005, an independent third party leased the vineyards, and the company farmed the 2005 citrus crop. The vineyard leases do not generate a significant amount of revenue, and the future profitability of lemon farming operations is uncertain.Due to the uncertainty of recovering the carrying value of the permanent and developing crops, the Company recorded a charge of $3.4 million in 2004 to write off the capitalized cost of these crops, which is shown under the heading"Write-off“Write-off of permanent and developingcrops"crops” on the Consolidated Statement of Operations.GOODWILL AND OTHER ASSETSGoodwill and Other AssetsAs a result of a merger in May 1988 between two companies which eventually became known as Cadiz Inc., goodwill in the amount of $7,006,000 was recorded. Approximately $3,193,000 of this amount was amortized prior to the adoption of Statement of Financial Accounting Standards No. 142,("(“SFAS No.142"142”)"Goodwill“Goodwill and Other IntangibleAssets"Assets” on January 1, 2002. Goodwill is tested for impairment annually in the first quarter of each year, or if events occur which require an impairment analysis be performed. As a result of the actions taken by Metropolitan in the fourth quarter of 2002 as described in Note 1, the Company, with46the assistance of a valuation firm, performed an impairment test of its goodwill and determined that its goodwill was not impaired. In addition, the Company performeditsan annual impairment test of goodwill in the first quarter of 2006, 20052004and20032004 and determined that the goodwill was not impaired.Page 47Capitalized loan fees represent costs incurred to obtain debt financing. Such costs are amortized over the life of the related loan.At December 31, 2005 and 2004, theThe capitalized loan fees relate tocosts incurred in connectionthe zero coupon secured convertible term loan with Peloton Partners LLP and the prior term loan with INGloanCapital LLC, as described in Note 6.INCOME TAXESIncome TaxesIncome taxes are provided for using an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.FAIR VALUE OF FINANCIAL INSTRUMENTSFair Value of Financial InstrumentsFinancial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and accrued liabilities due to their short-term nature. The carrying value of the Company's debt, before discount, approximates fair value, based on interest rates currently available to the Company for debt with similar terms.SUPPLEMENTAL CASH FLOW INFORMATIONSupplemental Cashpaid for interest during the years ended December 31, 2004 and 2003 was $3,970,000 and $3,913,000, respectively.Flow InformationAs described in Note 2, cash interest payments due on the ING loanin the year ended December 31, 2005were credited against a $2.4 million prepaid interest account that had been established for this purpose. No cash payments are due on the new Peloton Loan prior to the June 29, 2011 final maturity date.Cash payments for income taxes were $128,200 in the year ended December 31, 2006. No cash was paid for income taxes during the years ended December 31, 2005 and 2004,and 2003,respectively.RECENT ACCOUNTING PRONOUNCEMENTSRecent Accounting PronouncementsInDecember 2004,June 2006, the FASBrevisedissued FSP FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No.123 (FAS 123R), "Share-Based Payment", which requires companies109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected toexpensebe taken on a tax return. This Interpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that a tax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets theestimated fair valuemore likely than not recognition threshold to47determine the amount ofemployee stock options and similar awards.benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this Statement.OnApril 14, 2005,September 13, 2006, theU.S.Securities and Exchange Commissionadoptedissued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of anew rule amending the compliance dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R will bemateriality assessment. SAB No. 108 is effective for fiscal years ending after November 14, 2006, or fiscal year 2006 for theCompany beginning in the first quarterCompany. The adoption offiscal 2006. The Company tentatively expects to adopt the provisions of FAS123R using a modified prospective application. FAS 123R, which provides certain changes to the method of valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. The Company will incur additional expense during fiscal 2006 related to new awards granted during 2006 that cannot yet be quantified. The Company is in the process of determining how the guidance regarding value share- based compensation as prescribed in FAS 123R will be applied to value share-based awards granted after the effective date and the impact that the recognition of compensation expense related to such awards will have on its financial statements. Page 48 In December 2004, the FASB issued SFASSAB No.153, "Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, "Accounting for Nonmonetary Transactions," provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. The Company has concluded that SFAS No. 153. will108 did not have a material impact onits consolidated financial statements. In March 2005,theFASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations," an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and is effective for the Company's fourth quarter ending December 31, 2005. Adoption of FIN 47 did not have an impact on the Company's consolidated financial statements.Company’s beginning retained earnings.NOTE 3 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS- ------------------------------------------------------Property, plant, equipment and water programs consist of the following (dollars in thousands):DECEMBER 31, 2005 2004 ---- ---- Land and land improvements $ 21,986 $ 22,010 Water programs 14,274 14,274 Buildings 1,191 1,408 Machinery and equipment 2,103 3,599 -------- -------- 39,554 41,291 Less accumulated depreciation (4,231) (5,739) -------- -------- $ 35,323 $ 35,552 ======== ========
December 31, 2006 2005 Land and land improvements $ 21,986 $ 21,986 Water programs14,274 14,274 Buildings1,191 1,191 Machinery and equipment726 2,103 38,177 39,554 Less accumulated depreciation(2,987 ) (4,231 ) $ 35,190 $ 35,323 Depreciation expense during the years ended December 31, 2006, 2005 and 2004 was $154,000, $229,000 and2003 was $229,000,$527,000and $683,000respectively.Prior to 2005, all permanent crops and developing crops shown as Cadiz assets were leased to Sun World and to an unaffiliated third party. In the fourth quarter of the year ended December 31, 2004, the lease of the Cadiz Valley farming property to Sun World terminated. Based on the uncertainty as to possible recovery of the carrying value of the permanent crops and developing crops on this property, during the last quarter of 2004 the Company wrote off $3.4 million, net of depreciation, of permanent and developing crops at this property. Page 49NOTE 4 - OTHER ASSETS- ---------------------Other assets consist of the following (dollars in thousands):DECEMBER 31, 2005 2004 ---- ---- Deferred loan costs, net $ 120 $ 148 Prepaid interest 544 1,294 Property tax refund receivable - 11 -------- -------- $ 664 $ 1,453 ======== ========
December 31, 2006 2005 Deferred loan costs, net $ 382 $ 120 Prepaid interest- 544 $ 382 $ 664 Amortizationexpenseof deferred loan costs was $40,000, $28,000$3,767,000and$641,000$286,000 in 2006, 2005,2004,and2003,2004, respectively, and is included in interest expense in the statement of operations.Amortization expense included in the consolidated financial statements for Sun World's capitalized trademark development was $60,000 in 2003.48NOTE 5 - ACCRUED LIABILITIES- ---------------------------- Accrued liabilities consist of the following (dollars in thousands): DECEMBER 31, 2005 2004 ---- ---- Interest $ 264 $ 172 Payroll, bonus, and benefits 4 142 Consulting and Legal expenses 65 326 Income & other taxes 336 - Other expenses 150 103 -------- -------- $ 819 $ 743 ======== ========
December 31, 2006 2005 Interest $ - $ 264 Payroll, bonus, and benefits10 4 Consulting and Legal expenses72 65 Income & other taxes238 336 Other expenses60 150 $ 380 $ 819 NOTE 6 - LONG-TERM DEBT- -----------------------At December 31,20052006 and2004,2005, the carrying amount of theCompany'sCompany’s outstanding debt is summarized as follows (dollars in thousands):DECEMBER 31, 2005 2004 ---- ---- Senior term bank loan, interest payable semi-annually, interest per annum at 4% in cash plus 4% paid in kind until March 31, 2008 and 4% in cash plus 6% paid in kind March 31, 2010 $ 25,851 $ 25,000 Other unsecured loans 40 - -------- -------- 25,891 25,000 Less current portion 8 - -------- -------- $ 25,883 $ 25,000 ======== ======== Page 50
December 31, 2006 2005 Zero coupon secured convertible term loan due June 29, 2011.Interest accruing at 5% per annum until June 29, 2009 and at 6%thereafter $ 37,316 $ - Senior term loan due March 31, 2010, interest payable semi-annually,at 4% in cash plus 4% paid in kind until March 31, 2008 and 4%in cash plus 6% paid in kind thereafter - 25,851Other loans 31 40 Debt Discount (11,457 ) - 25,890 25,891 Less current portion9 8 $ 25,881 $ 25,883 Pursuant to theCompany'sCompany’s loan agreements, annual maturities of long-term debt outstanding on December 31,20052006 are as follows:YEAR $000'S ---- ------ 2006 $ 8 2007 9 2008 10,009 2009 9 2010 15,856 -------- $ 25,891 ======== The senior
Year $000’s2007 $ 92008 9 2009 9 2010 42011 37,316 $ 37,347 49In June, the Company entered into a $36.4 million five year zero coupon convertible termbankloan with Peloton Partners LLP, as administrative agent for the loan, and with an affiliate of Peloton and another investor, as lenders (the “Peloton Loan”). Certain terms of the loan were subsequently amended pursuant to Amendment #1 to the Credit Agreement, whichpreviously consistedwas effective September 29, 2006. Under the terms of the loan, interest accrues at a 5% annual rate for the first 3 years and 6% thereafter, calculated on the basis of arevolving credit facility360 day year anda termactual days elapsed. The entire amount of accrued interest is due at the final maturity of the loanhad an outstanding balancein June, 2011. Substantially all the assets of$25,851,000 and $25,000,000 at December 31, 2005 and 2004, respectively. The senior term bank loan was due on January 31, 2003 and, through various amendment and extensions, is now due on March 31, 2010, with a $10 million mandatory principal repayment due on or before March 31, 2008. In February 2002,the Companycompleted an amendment to the senior term bank facility that extended the maturity date of the obligation to January 31, 2003. The interest rate could either be LIBOR plus 300 basis points if paid in cash or LIBOR plus 700 basis points if paid in common stock. In March 2002, the revolving credit facility was increased from $15 million to $25 million, with $10 million of the $25 million revolver convertible into 1,250,000 of the Company's common stock any time prior to January 2003 at the election of the lender. In connection with obtaining the extension ofhave been pledged as collateral for the term loan, which contains representations, warranties andrevolvercovenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens, pay dividends or make restricted payments, dispose of assets, make investments and merge or consolidate with another person. However, there are no financial maintenance covenants and no restrictions on theincrease inCompany’s ability to issue additional common stock to fund future working capital needs.At therevolver,lender’s option, principal plus accrued interest is convertible into theCompany repriced certain warrants previously issued and issued certain additional warrants to purchase shares of the Company'sCompany’s $0.01 par value common stock. Theestimatedloan is divided into two tranches: the $10 million Tranche A is convertible at $18.15 per share, and the $26.4 million Tranche B is convertible at $23.10 per share. A maximum of 2,221,909 shares are issuable pursuant to these conversion rights, with this maximum number applicable if the loan is converted on the final maturity date. The Company has more than sufficient authorized common shares available for this purpose.In the event of a change in control, the conversion prices are adjusted downward by a discount that declines over time such that, under a change in control scenario, both the Tranche A and Tranche B conversion prices are initially $16.50 per share and increase in a linear manner over time to the full $18.15 Tranche A conversion price and $23.10 Tranche B conversion price on the final maturity date. In no event does the maximum number of shares issuable to lenders pursuant to these revised conversion formulas exceed the 2,221,909 shares that would be issued to lenders pursuant to a conversion in full on the final maturity date in the absence of a change in control.Each of the loan tranches can be prepaid if the price of the Company’s stock on the NASDAQ Global Market exceeds the conversion price of the tranche by 40% or if the Company obtains a certified environmental impact report for the Cadiz groundwater storage and dry year supply program, a pipeline right-of-way and permits for pipeline construction and financing commitments sufficient to construct the project. The Company has filed a registration statement on Form S-3 covering the resale of all the securities issuable upon conversion of the loan.The Company has analyzed all of the above provisions of the convertible loan and related agreements for embedded derivatives under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities and related Emerging Issues Task Force (EITF) interpretations and SEC rules. The Company concluded that certain provisions of the convertible loan agreement, which were in effect prior to the first amendment date, may be deemed to be derivatives for purposes of the application of FASB Statement No. 133 and EITF 00-19: Accounting for Derivative Financial Instruments to, and Potentially Settled in, a Company’s Own Stock. Therefore, in accordance with FASB Statement No. 133, these embedded instruments were bifurcated from the host debt instrument and classified as a liability in the Company’s financial statements. The Company prepared valuations for each of the50deemed derivatives using a Black-Scholes option pricing model and recorded a liability of approximately $12.2 million on the June 30 loan funding date, with an offsetting discount to the convertible term loan.On June 30, 2006, the derivative liability was classified and recorded as part of long term debt in the balance sheet. The debt discount will be amortized to interest expense over the life of the loan using the effective interest amortization method. The principal valuation assumptions are as follows:
Loan balance available for conversion: $36.4 million Expected term: 5 years Cadiz common share price: $17.01 Volatility: 46% Risk-free Interest Rate: 5.18% Change in control probability: 10%
On September 29, 2006 the terms of the loan were amended, and it was determined that bifurcation of the embedded equity conversion option is no longer required. The derivative liability was adjusted to fair value on the amendment date, and the $2,919,000 increase in fair value was recorded as an “Other Expense” item in the Consolidated Statement of Operations. The $15.2 million fair value of thewarrants issuedderivative liability was then transferred to the Additional Paid-in Capital component of Stockholder’s Equity in accordance with the tentative conclusion reached by the Emerging Issues Task Force at the task force’s September 7, 2006 meeting.The Company incurred $408,000 of outside legal expenses related to the negotiation andrepriced was calculated usingdocumentation of theBlack Scholes option pricing model and was recorded as a debt discount and was beingloan, which will be amortized over theremaining termlife of theloan.loan using the interest amortization methodTheCompany failedproceeds of the Peloton Loan were applied topay offrepay in full theseniorCompany’s termbankloanon its maturity datefacility with ING described below. As a result, ING retained the $762,000 remaining balance ofJanuary 31, 2003the prepaid interest credit account described below, andon February 13, 2003,thelender deliveredwrite-off of this asset was reflected in the “Other Expense” caption of the Statement of Operations. The write-off of $106,000 of unamortized debt issuance costs related to theCompany a Notice of Default and Demand for Payment.ING loan was also reflected under “Other Expense”.OnDecember 15, 2003,November 30, 2004 the Company entered into an amendment of its senior term loanand revolving credit facility to extend the maturity date through March 31, 2005 and was entitled to obtain further extensions through September 30, 2006, by maintaining sufficient balances, among other conditions, in a cash collateral account with the lender. The maximum aggregate amount to be outstanding under the amended credit facility was $35 million plus accrued interest. The amendment of the credit facility did not constitute a troubled debt restructuring and was accounted for as a debt modification under EITF 96-19. In connection with this amendment, the Company; * paid the lender $2,425,034 representing; (i) accrued interest through September 30, 2003 of $1,412,457 at the non default interest rate; (ii) accrued interest through September 30, 2003 of $612,577 at the default rate of interest; and (iii) $400,000 in fees; Page 51 * issued to the lender 100,000 shares of series F Preferred stock initially convertible into 1,728,955 shares of common stock; and * deposited $2,142,280 in the cash collateral account with the lender representing prepaid interest through March 31, 2005. The estimated value of the Series F preferred stock of $5 million was recorded as a debt discount and was being amortized over the initial term of the note through March 31, 2005. Interest under the amended credit facilities was payable semiannually 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 was to be added to the outstanding principal balance. On November 30, 2004 the Company entered into another amendment of its senior term loanagreement withING.ING Capital LLC (the “ING Loan”). The amendment of the credit facility did not constitute a troubled debt restructuring and was accounted for as a debt extinguishment under EITF 96-19. Pursuant to this amendment, the Company;*
(i) | extend the maturity date of the debt until March 31, 2010, conditioned upon a further principal reduction of $10 million on or before March 31, 2008, and |
(ii) | reduce the interest rate through March 31, 2008 on the new outstanding balance to 4% cash plus 4% PIK (increasing to 4% cash plus 6% PIK for interest periods commencing on and after April 1, 2008). |
December 31, | |||||||
2006 | 2005 | ||||||
Deferred tax assets: | |||||||
Net operating losses | $ | 25,501 | $ | 22,763 | |||
Fixed asset basis difference | 7,645 | 8,037 | |||||
Contributions carryover | 6 | - | |||||
Accrued liabilities and other | 1,049 | 814 | |||||
Total deferred tax assets | 34,201 | 31,614 | |||||
Valuation allowance for deferred tax assets | (34,201 | ) | (31,614 | ) | |||
Net deferred tax asset | $ | - | $ | - |
Year Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
Expected federal income tax benefit at 34% | $ | (4,700 | ) | $ | (7,714 | ) | $ | (5,453 | ) | |
Loss with no tax benefit provided | 3,426 | 1,672 | 1,993 | |||||||
State income tax | 6 | 336 | 2 | |||||||
Stock Options | (21 | ) | 4,020 | - | ||||||
Losses utilized against unconsolidated | ||||||||||
subsidiary taxable income | - | 2,012 | 1,837 | |||||||
Non-deductible expenses and other | 1,295 | 10 | 1,621 | |||||||
Income tax expense (benefit) | $ | 6 | $ | 336 | $ | - |
Risk free interest rate | 4.21% | |
Expected life | 9.5 years | |
Expected volatility | 46% | |
Expected dividend yield | 0.0% | |
Weighted average vesting period | 0.8 years |
Weighted | Average | Aggregate | |||||||||||
Average | Remaining | Intrinsic | |||||||||||
Exercise | Contractual | Value | |||||||||||
Options | Shares | Price | Term | ($000’s) | |||||||||
Outstanding January 1, 2006 | 365,000 | $ | 12.71 | 9.4 | |||||||||
Granted | 12,339 | $ | 20.00 | 10.0 | |||||||||
Exercised | - | - | - | ||||||||||
Forfeited or expired | - | - | - | ||||||||||
Outstanding at December 31, 2006 | 377,339 | $ | 12.95 | 8.4 | $ | 3,966 | |||||||
Exercisable at December 31, 2006 | 351,667 | $ | 12.62 | 8.4 | $ | 3,667 |
Weighted- | |||||||
Average | |||||||
Amount | Exercise Price | ||||||
Outstanding at December 31, 2003 | 53,950 | $ | 207.43 | ||||
Granted | - | - | |||||
Expired or canceled | (39,270 | ) | $ | 198.54 | |||
Exercised | - | - | |||||
Outstanding at December 31, 2004 | 14,680 | $ | 231.22 | ||||
Granted | 365,000 | $ | 12.71 | ||||
Expired or canceled | (14,680 | ) | $ | 231.22 | |||
Exercised | - | - | |||||
Outstanding at December 31, 2005 | 365,000 | $ | 12.71 | ||||
Granted | 12,339 | $ | 20.00 | ||||
Expired or canceled | - | - | |||||
Exercised | - | - | |||||
Outstanding at December 31, 2006 | 377,339 | (a) | $ | 12.95 | |||
Options exercisable at December 31, 2006 | 355,780 | $ | 12.62 | ||||
Weighted-average years of remaining contractual life of options outstanding at December 31, 2006 | 8.4 |
(a) | Exercise prices vary from $12.00 to $20.00, and expiration dates vary from May 2015 to December 2016. |
Weighted- | |||||||
Average | |||||||
Grant-date | |||||||
Shares | Fair Value | ||||||
($000's) | |||||||
Nonvested at December 31, 2005 | 125,779 | $ | 1,950 | ||||
Granted | 14,701 | 282 | |||||
Forfeited or canceled | - | - | |||||
Vested | (136,195 | ) | (2,150 | ) | |||
Nonvested at December 31, 2006 | 4,285 | $ | 82 |
(In thousands except per share data) | |||||||||||||
Quarter Ended | |||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||
2006 | 2006 | 2006 | 2006 | ||||||||||
Revenues | $ | 252 | $ | 157 | $ | 37 | $ | 168 | |||||
Operating loss | (2,095 | ) | (1,786 | ) | (2,086 | ) | (2,004 | ) | |||||
Net loss applicable to common stock | (2,226 | ) | (3,150 | ) | (5,684 | ) | (2,765 | ) | |||||
Net loss per common share | $ | (0.19 | ) | $ | (0.28 | ) | $ | (0.50 | ) | $ | (0.24 | ) | |
Quarter Ended | |||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||
2005 | 2005 | 2005 | 2005 | ||||||||||
Revenues | $ | 15 | $ | 15 | $ | 15 | $ | 1,152 | |||||
Operating loss | (1,006 | ) | (12,178 | ) | (3,411 | ) | (4,163 | ) | |||||
Net loss applicable to common stock | (1,569 | ) | (12,625 | ) | (3,863 | ) | (4,968 | ) | |||||
Net loss per common share | $ | (0.15 | ) | $ | (1.18 | ) | $ | (0.35 | ) | $ | (0.46 | ) |
For the years ended December 31, 2006, 2005 and 2004 ($ in thousands) | |||||||||||||||||||
Balance at | Additions Charged to | Balance | |||||||||||||||||
Year ended | Beginning | Costs and | Other | at End | |||||||||||||||
December 31, 2006 | of Period | Expenses | Accounts | Deductions | of Period | ||||||||||||||
Tax valuation allowance | $ | 31,614 | $ | 2,587 | $ | - | $ | - | $ | 34,201 | |||||||||
Year ended | |||||||||||||||||||
December 31, 2005 | |||||||||||||||||||
Tax valuation allowance | $ | 44,383 | $ | - | $ | - | $ | 12,769 | $ | 31,614 | |||||||||
Year ended | |||||||||||||||||||
December 31, 2004 | |||||||||||||||||||
Tax valuation allowance | $ | 43,760 | $ | - | $ | 623 | $ | - | $ | 44,383 |
Name and Position | Date |
/s/ Keith Brackpool | March 16, 2007 |
Keith Brackpool, Chairman and | |
Chief Executive Officer | |
(Principal Executive Officer) | |
/s/ O'Donnell Iselin II | March 16, 2007 |
O'Donnell Iselin II, Chief Financial Officer | |
(Principal Financial and Accounting Officer) | |
/s/ Stephen J. Duffy | March 16, 2007 |
Stephen J. Duffy, Director | |
/s/ Geoffrey Grant | March 16, 2007 |
Geoffrey Grant, Director | |
/s/ Winston H. Hickox | March 16, 2007 |
Winston H. Hickox, Director | |
/s/ Murray H. Hutchison | March 16, 2007 |
Murray H. Hutchison, Director | |
/s/ Raymond J. Pacini | March 16, 2007 |
Raymond J. Pacini, Director | |
/s/ Timothy J. Shaheen | March 16, 2007 |
Timothy J. Shaheen, Director |