Cadiz Inc.
Annual Report 2005

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KCADIZ INC - CDZIFiled: March 16, 2006 (period: December 31, 2005)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2005 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from .. to ... Commission File Number 0-12114 CADIZ INC. (Exact name of registrant specified in its charter) DELAWARE 77-0313235 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 S. Figueroa Street, Suite 4250,Los Angeles, CA 90017 (Address of principal executive offices) (Zip Code) (213) 271-1600 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which Registered None None 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 seasonedissuer, as defined in rule 405 under the Securities Act of 1933. YES NO X --- --- Indicate by a check mark if the Registrant is not required tofile reports pursuant to Section 13 or Section 15(d) of theExchange Act. YES NO X --- --- Indicate by check mark whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES X NO Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. --- --- Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K (220.405 of this chapter)is not contained herein, and will not be contained to the best ofRegistrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] Indicate by check mark whether the Registrant is a largeaccelerated filer, an accelerated filer, or a non-acceleratedfiler (as defined in Exchange Act Rule 12b-2). LARGE ACCELERATED FILER ACCELERATED FILER X --- --- NON-ACCELERATED FILER --- Page iIndicate by check mark whether the Registrant is a shell company(as defined in Exchange Act Rule 12b-2). YES NO X --- ---As of Feb 28, 2006, the Registrant had 11,330,402 shares ofcommon stock outstanding. The aggregate market value of thecommon stock held by nonaffiliates as of June 30, 2005 wasapproximately $86,942,138 based on 4,575,902 shares of commonstock outstanding held by nonaffiliates and the closing price onthat date. Shares of common stock held by each executive officerand director and by each entity that owns more than 5% of theoutstanding common stock have been excluded in that such personsmay be deemed to be affiliates. This determination of affiliatestatus is not necessarily a conclusive determination for otherpurposes.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant's definitive Proxy Statement to befiled for its 2006 Annual Meeting of Stockholders areincorporated by reference into Part III of this Report. TheRegistrant is not incorporating by reference any other documentswithin this Annual Report on Form 10-K except those footnoted inPart IV under the heading "Item 15. Exhibits, Financial StatementSchedules, and Reports on Form 8-K". Page iiTABLE OF CONTENTSPART IItem 1. Business . . . . . . . . . . . . . . . . . . . . . . .1Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . 8Item 1B. Unresolved Staff Comments. . . . . . . . . . . . . . .9Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .9Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . .11Item 4. Submission of Matters to a Vote of Security Holders. 12Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.PART IIItem 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . .13Item 6. Selected Financial Data. . . . . . . . . . . . . . . 14Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . .15Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . .27Item 8. Financial Statements and Supplementary Data. . . . . 27Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . 27Item 9A. Controls and Procedures. . . . . . . . . . . . . . . 28Item 9B. Other Information. . . . . . . . . . . . . . . . . . 28PART IIIItem 10. Directors and Executive Officers of the Registrant . .29Item 11. Executive Compensation. . . . . . . . . . . . . . . . 29Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . 29Item 13. Certain Relationships and Related Transactions. . . . 29Item 14. Principal Accountant Fees and Services. . . . . . . . 29PART IVItem 15. Exhibits and Financial Statement Schedules . . . . . .30 Page iiiPART IITEM 1. BUSINESS This Form 10-K presents forward-looking statements withregard to financial projections, proposed transactions such asthose concerning the further development of our land and waterassets, information or expectations about our businessstrategies, results of operations, products or markets, orotherwise makes statements about future events. Such forward-looking statements can be identified by the use of words such as"intends", "anticipates", "believes", "estimates", "projects","forecasts", "expects", "plans" and "proposes". Although webelieve that the expectations reflected in these forward-lookingstatements are based on reasonable assumptions, there are anumber of risks and uncertainties that could cause actual resultsto differ materially from these forward-looking statements.These include, among others, the cautionary statements under thecaption "Risk Factors", as well as other cautionary languagecontained in this Form 10-K. These cautionary statementsidentify important factors that could cause actual results todiffer materially from those described in the forward-lookingSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.statements. When considering forward-looking statements in thisForm 10-K, you should keep in mind the cautionary statementsdescribed above.OVERVIEW Our primary asset consists of three blocks of land ineastern San Bernardino County, California totaling approximately46,000 acres. Virtually all of this land is underlain by high-quality groundwater resources with demonstrated potential forvarious applications, including water storage and supply programsand recreational, residential, and agricultural development. Twoof the three properties are located in proximity to the ColoradoRiver Aqueduct, the major source of imported water for southernCalifornia. The third property is located near the ColoradoRiver. The value of these assets derives from a combination ofprojected population increases and limited water suppliesthroughout southern California. In addition, most of the majorpopulation centers in southern California are not located wheresignificant precipitation occurs, requiring the importation ofwater from other parts of the state. We therefore believe that acompetitive advantage exists for companies that can provide highquality, reliable, and affordable water to major populationcenters. To this end, in 1997 we commenced discussions with theMetropolitan Water District of Southern California("Metropolitan") in order to develop a long-term agreement for ajoint venture groundwater storage and supply program on our landin the Cadiz and Fenner valleys of eastern San Bernardino County(the "Cadiz Project"). Under the Cadiz Project, surplus waterfrom the Colorado River would be stored in the aquifer systemunderlying our land during wet years. When needed, the storedwater, together with indigenous groundwater, could be returned tothe Colorado River Aqueduct for distribution to Metropolitan'smember agencies throughout six southern California counties. Between 1997 and 2002, Metropolitan and the Company receivedsubstantially all of the various permits required to constructand operate the project, including a federal Record of Decisionfrom the U.S. Department of Interior, which endorsed the CadizProject and granted a right-of-way for construction of projectfacilities. The federal government also approved a Final Page 1Environmental Impact Statement ("FEIS") in compliance with theNational Environmental Policy Act ("NEPA"). Despite the significant progress made in the federalenvironmental review process, in October 2002 Metropolitan'sBoard refused to consider whether or not to certify the FinalEnvironmental Impact Report ("FEIR"), which was a necessaryaction to authorize implementation of the Cadiz Project inaccordance with the California Environmental Quality Act("CEQA"). Regardless of the Metropolitan Board's actions in October2002, Southern California's need for water storage and supplyprograms has not abated. Therefore we continue to pursue thecompletion of the environmental review process for the CadizProject. To that end we are now in advanced discussions with athird party public agency that would assume the role of CEQA leadagency and complete the state of California environmental reviewprocess. We are also working directly with the U.S. Departmentof Interior to have the permits that were approved during theSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.federal environmental review process, including the right-of-waygranted in the Record of Decision, issued directly to theCompany. Additionally, we are in discussions with several otherpublic agencies regarding their interest in participating in theCadiz Project. All of these agencies have access to independentsources of supply that can be stored by the Cadiz Project. See"Water Resource Development", below. Due to significant population growth in Southern California,where our properties are located, we have also begun to exploreadditional uses of our land assets. To this end, we have retainedoutside services to conduct a detailed analysis of our landassets and assess the opportunities for these properties. We expect that these objectives will have different capitalrequirements and implementation periods than those previouslyestablished. Therefore, in 2002, we entered into a series ofagreements with our senior secured lender, ING Capital LLC("ING") pursuant to which we reduced our debt to ING to $25million and extended the maturity date of the ING debt untilMarch 31, 2010, conditioned upon a further principal reduction of$10 million on or before March 31, 2008. In addition, we raisedapproximately $35 million in equity through private placementscompleted in 2003 and 2004. Further, in February 2005, our wholly owned subsidiary SunWorld International, Inc. ("Sun World") completed the sale ofsubstantially all of its assets, and Sun World's consensual planof reorganization was confirmed by the U.S. Bankruptcy Court inAugust 2005. Sun World had entered bankruptcy proceedings onJanuary 30, 2003, following which the financial statements of SunWorld are no longer consolidated with ours. With the implementation of these steps, we have been able toretain ownership of all of our land assets and assets relating toour water programs and also to obtain working capital needed tocontinue our efforts to develop our water programs. Because manyof our pre-existing common stockholders have participated in the2003 and 2004 private placements, our base of common stockholdersremains largely the same as before these placements. We remain committed to our land and water assets and we continueto explore all opportunities for development of these assets. Wecannot predict with certainty which of these variousopportunities will ultimately be utilized. Page 2(A) GENERAL DEVELOPMENT OF BUSINESS ------------------------------- We are a Delaware corporation formed in 1992 to act as thesurviving corporation in a Delaware reincorporation mergerbetween us and our predecessor, Pacific Agricultural Holdings,Inc., a California corporation formed in 1983. As part of our historical business strategy, we haveconducted our land acquisition, water development activities,agricultural operations and search for international water andagricultural opportunities for the purpose of enhancing the long-term appreciation of our properties and future prospects. See"Narrative Description of Business" below. The focus of our water development activities has been theCadiz Project. The Metropolitan Board's decision in late 2002delayed implementation of the Cadiz Project as we sought asettlement with Metropolitan before proceeding with another stateagency. In 2005, our business development activities consistedSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.largely of continued adjustments to our capital structure by wayof amendments to our lending agreements and equity issuances.See "Overview", above. Our primary goal in this process has beento maintain ownership of our San Bernardino County properties andto create a capital structure that would allow us to continue thedevelopment of the Cadiz Project. We believe that we havesucceeded in achieving this goal. We have obtained an additionalequity infusion of approximately $35 million through the issuanceof common stock. We have paid down our debt facility with ING to$26 million, and have obtained a maturity date extension andinterest rate reduction with respect to such debt. We have alsodivested all of the assets and operations of Sun World. SunWorld's Chapter 11 Reorganization Plan ("Plan") is effective, andthe Company has no further liabilities related to the business oroperations of Sun World. These transactions are described in moredetail in Item 7, "Management's Discussion and Analysis ofFinancial Condition and Results of Operation."(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS --------------------------------------------- During the year ended December 31, 2005 we continued todevelop the water resource segment of our business. With thedeconsolidation of Sun World upon Sun World's January 30, 2003bankruptcy filing our agricultural operations are confined tolimited farming activities at the Cadiz Valley property. We nolonger actively operate a separate agricultural resourcessegment. See Consolidated Financial Statements. See also Item7, "Management's Discussion and Analysis of Financial Conditionand Results of Operations".(C) NARRATIVE DESCRIPTION OF BUSINESS --------------------------------- Our business strategy is the development of our holdings fortheir highest and best uses. At present, our developmentactivities are focused on water resource and real estatedevelopment at our San Bernardino County properties. WATER RESOURCE DEVELOPMENT Our portfolio of water resources, located in proximity tothe Colorado River and the Colorado River Aqueduct, the principalsource 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 own approximately 35,000 acres of land and related high-quality groundwater resources in the Cadiz and Fenner valleys ofeastern San Bernardino County. The aquifer system underlyingthis property is naturally recharged by precipitation (both rainand snow) within a watershed of approximately 1,300 square miles.See Item 2, "Properties - The Cadiz/Fenner Property". In 1997 we commenced discussions with Metropolitan in orderto develop principles and terms for a long-term agreement for ajoint venture groundwater storage and supply program on this land(the "Cadiz Project"). The Cadiz Project would have providedSouthern Californians with a valuable increase in water supplyduring periods of drought or other emergencies. During wetyears, surplus water from the Colorado River would be stored inSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.the aquifer system that underlies the Cadiz property. Whenneeded, the stored water and indigenous groundwater would bereturned to the Colorado River Aqueduct for distribution to wateragencies throughout six southern California counties. TheColorado River Aqueduct provides supplemental water toapproximately 18 million people. Additionally, exchangeagreements could be used to transfer this supplemental watersupply to California communities in the Central and Northernportions of the state. Temporary withdrawals of indigenous groundwater would alsobe available from the Cadiz Project during emergencies. Anytemporary withdrawals would be strictly monitored according tothe provisions of the Groundwater Monitoring & Management Plan("Management Plan") approved by the U.S. Department of theInterior in its 2002 Record of Decision. The comprehensiveManagement Plan was created during the Cadiz Project's extensiveenvironmental review process to ensure long-term protection ofthe aquifer system and related environmental resources in andsurrounding 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. The cost of these facilities was estimated to beapproximately $150 million in 2002 and is expected to be highertoday due to steel price increases and higher well drillingcosts. Page 4 In October 2001, the Final Environmental Impact Statement("FEIS") and Final Environmental Impact Report ("FEIR") wereissued by Metropolitan and the U.S. Bureau of Land Management, incollaboration with the U.S. Geological Survey and the NationalPark Service. On August 29, 2002, the U.S. Department ofInterior approved the FEIS for the Cadiz Project and issued itsRecord of Decision, the final step in the federal environmentalreview process for the Cadiz Project. The Record of Decisionamended the California Desert Conservation Area Plan for anexception to the utility corridor element and offered toMetropolitan a right-of-way grant necessary for the constructionand operation of the Cadiz Project. With all federal approvals and permits in place, on October8, 2002, Metropolitan's Board considered acceptance of the termsand conditions of the right-of-way grant pursuant to thepublished Record of Decision. The Board voted not to adoptMetropolitan staff's recommendation to approve the terms andconditions of the right-of-way grant issued by the Department ofthe Interior for the Cadiz Project by a very narrow margin.Instead, the Board voted for an alternative motion to reject theSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.terms and conditions of the right-of-way grant and to not proceedwith the Cadiz Project. Subsequent to the Metropolitan Boards'actions, negotiations toward a final agreement for the CadizProject on the basis of the previously approved definitiveeconomic terms ceased. When Metropolitan's Board declined to proceed with the CadizProject, the FEIR was complete and awaiting certification at ahearing scheduled for late October 2002. It is our position thatMetropolitan's actions on October 8, 2002 breached variouscontractual and fiduciary obligations of Metropolitan to us, andinterfered with the economic advantage we would have obtainedfrom the Cadiz Project. Therefore, in April 2003 we filed aclaim against Metropolitan seeking compensatory and punitivedamages. When settlement negotiations failed to produce aresolution, we filed a lawsuit against Metropolitan in LosAngeles Superior Court on November 17, 2005. See Item 3 - "LegalProceedings". Meanwhile, the need for new water storage and supplyprograms in the southwestern United States has not diminished.Over the five years preceding the 2004 - 2005 winter season, theColorado River watershed experienced a prolonged drought thatpresented major challenges to the economies of California,Nevada, and Arizona. The drought was followed by a wet year in2005 during which surplus water was available to Metropolitanthat exceeded its storage capacity by approximately 200,000 acre-feet. Had the Cadiz Project been built, it could haveaccommodated most of this available surplus. As populationcontinues to grow at record rates, the Southwest is facing thevery real possibility that current and future supplies of waterwill not be able to meet demand without more investment in waterinfrastructure, including groundwater storage projects. To meet this need, we are committed to completing the CadizProject and finalizing the state of California environmentalreview. To that end we are now in advanced discussions with athird party public agency that would assume the role of CEQA leadagency and complete the California environmental review process.We are also working directly with the U.S. Department of Interiorto have the permits that were granted during the federalenvironmental review process, including the right-of-way grantedin the Record of Decision, issued directly to the Company.Additionally, we are in discussions with several other publicagencies regarding their interest in participating in the CadizProject. All of these agencies have access to independent sourcesof supply that can be stored by the Cadiz Project. Page 5 OTHER EASTERN MOJAVE PROPERTIES ------------------------------- Our second largest landholding is approximately 9,000 acresin the Piute Valley of eastern San Bernardino County. Thislandholding is located approximately 15 miles from the resortcommunity of Laughlin, Nevada, and about 12 miles from theColorado River town of Needles, California. Extensivehydrological studies, including the drilling and testing of afull-scale production well, have demonstrated that thislandholding is underlain by high-quality groundwater. The aquifersystem underlying this property is naturally recharged byprecipitation (both rain and snow) within a watershed ofapproximately 975 square miles. Discussions with potentialpartners have commenced with the objective of developing ourPiute Valley assets. Additionally, we own additional acreage located near DanbySource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Dry Lake, approximately 30 miles southeast of our landholdings inCadiz and Fenner valleys. Our Danby Lake property is locatedapproximately 10 miles north of the Colorado River Aqueduct.Initial hydrological studies indicate that it has excellentpotential for a groundwater storage and supply project.AGRICULTURAL OPERATIONS With the bankruptcy of Sun World, our agriculturaloperations are very limited. Historically, we have leased ourCadiz Valley farming property to Sun World and other thirdparties. In the fourth quarter of 2004, the lease with Sun Worldexpired. We continue to lease to a third party approximately 160acres of table grape vineyards at our Cadiz Valley property. Thelease is renewable on a year to year basis with annual revenuesof approximately $50,000. In 2005 we also farmed 240 acres ofLisbon lemons and 20 acres of Eureka lemons. We subcontractedthe labor and marketing of the crop to third parties. Annualrevenues were approximately $1.1 million. On January 30, 2003, Sun World filed voluntary petitionsunder Chapter 11 of the Bankruptcy Code. In February 2005, withBankruptcy Court approval, Sun World sold substantially all ofits assets and in September 2005 the Chapter 11 ReorganizationPlan became effective. See "General Development of Business",above. Following the filing date and until the sale of itsassets, Sun World operated its business and managed its affairsas debtor and debtor in possession. As of the filing date thefinancial statements of Sun World are no longer consolidated withthose of ours, but instead, we account for our investment in SunWorld on the cost basis of accounting. As a result of changingto the cost basis of accounting on January 31, 2003, we had a netinvestment in Sun World of approximately $195,000 consisting ofloans and other amounts due from Sun World of $13,500,000 lesslosses in excess of investment in Sun World of $13,305,000. Wewrote off the net investment in Sun World of $195,000 at theChapter 11 filing date because we do not anticipate being able torecover our investment. On August 26, 2005, the U.S. Bankruptcy Court confirmed SunWorld's amended plan of reorganization, which included asettlement agreement between Sun World and Cadiz regarding theretention of certain Sun World net operating loss carryforwardsby Cadiz and released Cadiz from all liabilities under theguarantees of First Mortgage Notes issued by Sun World. Theamended Plan became effective on September 6, 2005, and Cadiz hasno further interest in the business and operations of Sun World. Page 6SEASONALITY Our water resource development activities are not seasonalin nature. With our divestiture of Sun World our remaining farmingoperations are limited. These operations will be subject to thegeneral seasonal trends that are characteristic of theagricultural industry.COMPETITION We face competition for the acquisition, development andsale of our properties from a number of competitors. We may alsoface competition in the development of water resources associatedwith our properties. Since California has scarce water resourcesand an increasing demand for available water, we believe thatlocation, price and reliability of delivery are the principalSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.competitive factors affecting transfers of water in California.EMPLOYEES As of December 31, 2005, we employed 8 full-time employees(i.e. those individuals working more than 1,000 hours per year).We believe that our employee relations are good.REGULATION Our operations are subject to varying degrees of federal,state and local laws and regulations. As we proceed with thedevelopment of our properties, including the Cadiz Project, wewill be required to satisfy various regulatory authorities thatwe are in compliance with the laws, regulations and policiesenforced by such authorities. Groundwater development, and theexport of surplus groundwater for sale to single entities such aspublic water agencies, is not subject to regulation by existingstatutes other than general environmental statutes applicable toall development projects. Additionally, we must obtain a varietyof approvals and permits from state and federal governments withrespect to issues that may include environmental issues, issuesrelated to special status species, issues related to the publictrust, and others. Because of the discretionary nature of theseapprovals and concerns which may be raised by variousgovernmental officials, public interest groups and otherinterested parties during both the development and approvalprocess, our ability to develop properties and realize incomefrom our projects, including the Cadiz Project, could be delayed,reduced or eliminated.ACCESS TO OUR INFORMATION We are subject to the information and reporting requirementsof the Securities Exchange Act and file annual, quarterly andcurrent reports, proxy statements and other information with the SEC. You can request copies of these documents, for a copyingfee, by writing to the SEC. We furnish our stockholders withannual reports containing financial statements audited by ourindependent auditors. We also make available on our website www.cadizinc.comcopies of our annual, quarterly and special reports, proxy andinformation statements and other information. Page 7ITEM 1A. RISK FACTORS Our business is subject to a number of risks, includingthose described below.OUR DEVELOPMENT ACTIVITIES HAVE NOT GENERATED SIGNIFICANTREVENUES At present, our development activities are focused on waterresource development at our San Bernardino County properties. Wehave not received significant revenues from our developmentactivities to date and we do not know when, if ever, we willreceive operating revenues from our development activities. As aresult, we continue to incur a net loss from operations. WE MAY NEVER GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLEUNLESS WE ARE ABLE TO SUCCESSFULLY IMPLEMENT PROGRAMS TO DEVELOPOUR LAND ASSETS AND RELATED WATER RESOURCES We do not know the terms, if any, upon which we may be ableto proceed with our water development programs. Regardless ofSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.the form of our water development programs, the circumstancesunder which transfers or storage of water can be made and theprofitability of any transfers or storage are subject tosignificant uncertainties, including hydrologic risks of variablewater supplies, risks presented by allocations of water underexisting and prospective priorities, and risks of adverse changesto or interpretations of U.S. federal, state and local laws,regulations and policies. Additional risks attendant to suchprograms include our ability to obtain all necessary regulatoryapprovals and permits, possible litigation by environmental orother groups, unforeseen technical difficulties, general marketconditions for water supplies, and the time gap needed togenerate significant operating revenues from such programs afteroperations commence. OUR FAILURE TO MAKE TIMELY PAYMENTS OF PRINCIPAL AND INTEREST ONOUR INDEBTEDNESS MAY RESULT IN A FORECLOSURE ON OUR ASSETS As of December 31, 2005, we had indebtedness outstanding toour senior secured lender of approximately $25.9 million. Ourassets have been put up as collateral to secure the payment ofthis debt. If we cannot generate sufficient cash flow to maketimely payments of principal and interest on this indebtedness,or if we otherwise fail to comply with the terms of agreementsgoverning our indebtedness, we may default on our obligations.If we default on our obligations, our lenders may sell off theassets that we have put up as collateral. This, in turn, wouldresult in a cessation or sale of our operations. THE ISSUANCE OF SHARES UNDER OUR MANAGEMENT EQUITY INCENTIVE PLANWILL IMPACT EARNINGS Under applicable accounting rules, the issuance of sharesand options under our Management Incentive Equity Plan willresult in a charge to earnings based on the value of our commonstock at the time of issue and the valuation of options at thetime of their award and will be recorded over the vesting periodin proportion to the quantities vested. Our Management EquityIncentive Plan provides for the issuance of up to 1,472,051shares of common stock. Subsequent to January 1, 2005 we haveissued stock or options to purchase stock representing 1,459,712of the shares authorized for issuance under this ManagementEquity Incentive Plan. Page 8Based 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 IMPLEMENTOUR ASSET DEVELOPMENT PROGRAMS We will require additional capital to finance our operationsuntil such time as our asset development operations producerevenues. We cannot assure you that our current lenders, or anyother lenders, will give us additional credit should we seek it.If we are unable to obtain additional credit, we may engage infurther equity financings. Our ability to obtain equityfinancing will depend, among other things, on the status of ourasset development programs and general conditions in the capitalmarkets at the time funding is sought. Any further equityfinancings would result in the dilution of ownership interests ofour current stockholders.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. WE ARE RESTRICTED BY CONTRACT FROM PAYING DIVIDENDS AND WE DO NOTINTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE Any return on investment on our common stock will dependprimarily upon the appreciation 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 oursenior secured lender prohibit the payment of dividends whilesuch facilities are outstanding. As we have a history ofoperating losses, we have been unable to date to pay dividends.Even if we post a profit in future years, we currently intend toretain all future earnings for the operation of our business. Asa result, we do not anticipate that we will declare any dividendsin the foreseeable future.ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable at this time.ITEM 2. PROPERTIESThe following is a description of our significant properties.THE CADIZ/FENNER PROPERTY In 1984, we conducted investigations of the feasibility ofagricultural development of land located in the Cadiz and Fennervalleys of eastern San Bernardino County, California. Theseinvestigations confirmed the availability of high-quality waterin commercial quantities appropriate for agriculturaldevelopment. Since 1985, we have acquired approximately 35,000acres of largely contiguous land in this area, which is locatedapproximately 30 miles north of the Colorado River Aqueduct. Page 9 Additional independent geotechnical and engineering studiesconducted since 1985 have confirmed that the Cadiz/Fennerproperty overlies a natural groundwater aquifer system that isideally suited for the underground water storage and dry yeartransfers as contemplated in the Cadiz Project. See Item 1,"Business - Narrative Description of Business - Water ResourceDevelopment". In November 1993, the San Bernardino County Board ofSupervisors unanimously approved a General Plan Amendmentestablishing an agricultural land use designation for 9,600 acresin the Cadiz Valley for which approximately 1,600 acres have beendeveloped for agriculture. This action also approved permits toconstruct infrastructure and facilities to house as many as 1,150seasonal workers and 170 permanent residents (employees and theirfamilies) and allows for the withdrawal of more than 1,000,000acre-feet of groundwater from the aquifer system underlying ourproperty.OTHER EASTERN MOJAVE PROPERTIES We also own approximately 10,900 additional acres in theeastern Mojave Desert, including the Piute and Danby Lakeproperties. Our second largest property consists of approximately 9,000acres in the Piute Valley of eastern San Bernardino County. Thislandholding is located approximately 15 miles from the resortcommunity of Laughlin, Nevada, and about 12 miles from theSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Colorado River town of Needles, California. Extensivehydrological studies, including the drilling and testing of afull-scale production well, have demonstrated that thislandholding is underlain by high-quality groundwater. Theaquifer system underlying this property is naturally recharged byprecipitation (both rain and snow) within a watershed ofapproximately 975 square miles. Discussions with potentialpartners have commenced with the objective of developing ourPiute Valley assets. Additionally, we own or control additional acreage locatednear Danby Dry Lake, approximately 30 miles southeast of ourlandholdings in the Cadiz and Fenner valleys. Our Danby Lakeproperty is located approximately 10 miles north of the ColoradoRiver Aqueduct. Initial hydrological studies indicate that ithas excellent potential for a groundwater storage and supplyproject.FARM PROPERTY Approximately 1,600 acres of our Cadiz Valley property hasbeen developed for agricultural use. We are currently leasing toa third party approximately 160 acres of this property,consisting of table grape vineyards, and until the fourth quarterof 2004 were leasing approximately 750 acres of this property,consisting of juice grape vineyards and citrus orchards, to SunWorld. The leases provide for the lessees to be responsible forall costs associated with growing crops on the leased property.The lease with the third party is renewable on a year to yearbasis with annual revenues of approximately $50,000. In 2005 theCompany farmed the citrus orchard and subcontracted the labor andmarketing of the crop. Annual revenues from these activitieswere approximately $1.1 million. Page 10EXECUTIVE OFFICES We 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. Currentbase rent under the lease is approximately $8,350 per month.CADIZ REAL ESTATE In December 2003, we transferred substantially all of ourassets (with the exception of our office sublease, certain officefurniture and equipment and any Sun World related assets) toCadiz Real Estate LLC, a Delaware limited liability company("Cadiz Real Estate"). We hold 100% of the equity interests ofCadiz Real Estate, and therefore we continue to hold 100%beneficial ownership of the properties that we transferred toCadiz Real Estate. Cadiz Real Estate was created at the behestof our senior secured lender, ING. The Board of Managers ofCadiz Real Estate consists of two managers appointed by us andone independent manager named by ING. Cadiz Real Estate is a co-obligor under our creditfacilities with ING, for which assets of Cadiz Real Estate havebeen pledged as security. Because the transfer of our properties to Cadiz Real Estatehas no effect on our ultimate beneficial ownership of theseproperties, we refer throughout this Report to properties ownedof record either by Cadiz Real Estate or by us as "our"properties.DEBT SECURED BY PROPERTIESSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our outstanding debt at December 31, 2005 of $25.9 millionrepresents loans secured by our properties (including propertiesheld of record by Cadiz Real Estate). Information regardinginterest rates and principal maturities is provided in Note 6 tothe consolidated financial statements.ITEM 3. LEGAL PROCEEDINGSCLAIM AGAINST METROPOLITAN On April 7, 2003 we filed an administrative claim againstThe Metropolitan Water District of Southern California("Metropolitan"), asserting the breach by Metropolitan of variousobligations specified in our 1998 Principles of Agreement withMetropolitan. We believe that by failing to complete theenvironmental review process for the Cadiz Project, as specifiedin the Principles of Agreement, Metropolitan violated thiscontract, breached its fiduciary duties to us and interfered withour prospective economic advantages. See Item 1, "Business -Narrative Description of Business - Water Resource 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 in the Los AngelesSuperior Court on November 17, 2005. We are seeking recovery ofcompensatory and punitive damages. Metropolitan has not to dateresponded to the litigation. Page 11SUN WORLD BANKRUPTCY FILING On January 30, 2003, (the "Petition Date") Sun World andthree of its wholly owned subsidiaries (Sun Desert, Inc.,Coachella Growers and Sun World/Rayo) filed voluntary petitionsunder Chapter 11 of the Bankruptcy Code in the United StatesBankruptcy Court, Central District of California, RiversideDivision (Case Nos: RS 03-11370 DN, RS 03-11369 DN, RS 03-11371DN, RS 03-11374 DN). Sun World's consensual plan ofreorganization was confirmed by the Court in August 2005 andbecame effective in September, 2005. See Item 1, "Business -General Development of Business".OTHER PROCEEDINGS There are no other material pending legal proceedings towhich we are a party or of which any of our property is thesubject.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholdersduring the fourth quarter of 2005.PART II Page 12ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is currently traded on The NASDAQNational Market ("NASDAQ") under the symbol "CDZI." Prior toJune 20, 2005, the Company common stock was traded over thecounter on the OTC Bulletin Board. Prior to March 27, 2003, theSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Company's common stock was listed on NASDAQ. On March 27, 2003,the Company's common stock was de-listed from NASDAQ andthereafter traded on the OTC Bulletin Board until May 23, 2003,at which time our common stock was removed from the BulletinBoard and began trading on the OTC U.S. Market, often referred toas the "Pink Sheets". On November 11, 2004 our stock resumedtrading on the OTC Bulletin Board. The following table reflectsactual sales transactions for the dates that the Company wastrading on NASDAQ, and high and low bid information otherwise.The OTC Bulletin Board and Pink Sheet market quotations reflectinter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions.The high and low ranges of the common stock for the datesindicated have been provided by Bloomberg LP. HIGH LOW QUARTER ENDED SALES PRICE SALES PRICE ------------- ----------- ----------- 2004: March 31 $ 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, the high, low and last sales pricesfor the shares, as reported by Bloomberg, were $18.48, $16.55,and $18.37, respectively. We also have an authorized class of 100,000 shares ofpreferred stock. There is one series of preferred stock (SeriesF) authorized for issuance. All 100,000 authorized shares ofSeries F Preferred Stock were issued in December 2003. EffectiveNovember 30, 2004, 99,000 shares of Series F Preferred Stock wereconverted to 1,711,665 shares of our common stock leaving 1,000shares of Series F Preferred Stock issued and outstanding. As of February 28, 2006, the number of stockholders ofrecord of our common stock was 214 and the estimated number ofbeneficial owners was approximately 1,480. To date, we have not paid a cash dividend on our commonstock and we do not anticipate paying any cash dividends in theforeseeable future. Our ability to pay such dividends is subjectto covenants pursuant to agreements with our primary lender thatprohibits the payment of dividends. Page 13 All securities sold by us during the three years endedDecember 31, 2005 which were not registered under the SecuritiesAct have previously been reported in our Annual, Quarterly, andCurrent Reports on Forms 10K, 10-Q and 8K.ITEM 6. SELECTED FINANCIAL DATA The following selected financial data insofar as it relatesto the years ended December 31, 2005, 2004, 2003, 2002 and 2001has been derived from our audited financial statements. Theinformation that follows should be read in conjunction with theaudited consolidated financial statements and notes thereto forSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.each of the three years in the period ended December 31, 2005included in Part IV of this Form 10-K. See also Item 7,"Management's Discussion and Analysis of Financial Condition andResults of Operations".($ in thousands, except for per share data) YEAR ENDED DECEMBER 31, -------------------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ----Statement of Operations 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: Preferred 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-average common shares outstanding 10,756 6,911 2,200 1,452 1,434 ======== ======== ======== ======== ======== DECEMBER 31, ------------------------------------------------ 2005 2004 2003 2002 2001 ---- ---- ---- ---- ----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 Redeemable preferred stock $ - $ - $ - $ 10,942 $ 9,958 Preferred stock, common stock and additional 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 14ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In connection with the "safe harbor" provisions of thePrivate Securities Litigation Reform Act of 1995, the followingdiscussion contains trend analysis and other forward-lookingstatements. Forward-looking statements can be identified by theuse of words such as "intends", "anticipates", "believes","estimates", "projects", "forecasts", "expects", "plans" and"proposes". Although we believe that the expectations reflectedin these forward-looking statements are based on reasonableassumptions, there are a number of risks and uncertainties thatcould cause actual results to differ materially from theseforward-looking statements. These include, among others, ourability to maximize value from our Cadiz, California land andwater resources and our ability to obtain new financings asSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.needed to meet our ongoing working capital needs. See additionaldiscussion under the heading "Risk Factors" above.OVERVIEW As discussed in further detail below, as of January 30,2003 the financial statements of our Sun World subsidiary are nolonger being consolidated with ours. Presently, our operations(and, accordingly, our working capital requirements) relateprimarily to our water development activities and, morespecifically, to the Cadiz Groundwater Storage and Dry-YearSupply Program ("Cadiz Project"). Our results of operations forperiods subsequent to January 2003 have been, and in futurefiscal periods will be, largely reflective of the operations ofour water development activities. In 1997 we commenced discussions with the Metropolitan WaterDistrict of Southern California ("Metropolitan") in order todevelop a long-term agreement for a joint venture groundwaterstorage and supply program on our land in the Cadiz and Fennervalleys of eastern San Bernardino County (the "Cadiz Project").Under the Cadiz Project, surplus water from the Colorado Riverwould be stored in the aquifer system underlying our land duringwet years. When needed, the stored water, together withindigenous groundwater, could be returned to the Colorado RiverAqueduct for distribution to Metropolitan's member agenciesthroughout six southern California counties. Between 1997 and 2002, Metropolitan staff and the Companyreceived substantially all of the various permits required toconstruct and operate the project, including a federal Record ofDecision from the U.S. Department of Interior, which endorsed theCadiz Project and granted a right-of-way for construction ofproject facilities. The federal government also approved a FinalEnvironmental Impact Statement ("FEIS") in compliance with theNational Environmental Policy Act ("NEPA"). Despite the significant progress made in the federalenvironmental review process, in October 2002 Metropolitan'sBoard refused to consider whether or not to certify the FinalEnvironmental Impact Report ("FEIR"), which was a necessaryaction to authorize implementation of the Cadiz Project inaccordance with the California Environmental Quality Act("CEQA"). Regardless of the Metropolitan Board's actions in October2002, Southern California's need for water storage and supplyprograms has not abated. Therefore we continue to pursue thecompletion of the environmental review process for the CadizProject. To that end we are Page 15now in advanced discussions with a third party public agency that would assume the role of CEQA lead agency and complete the state of California environmental review process. We are also working directly with the U.S. Department of Interior to have the permits that were approved during the federal environmental review process, including the right-of-way granted in the Record of Decision to Metropolitan, 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 to independent sources of supply that can be stored by the Cadiz Project. See "Water Resource Development", below. Due to significant population growth in Southern California,where our properties are located, we have also begun to exploreadditional uses of our land assets. To this end, we have retainedSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.outside services to conduct a detailed analysis of our landassets and assess the opportunities for these properties. We expect that these alternative scenarios will havedifferent capital requirements and implementation periods thanthose previously established for the Cadiz Project. Therefore,following Metropolitan's actions in 2002, we have entered into aseries of agreements with our senior secured lender, ING CapitalLLC ("ING") pursuant to which we reduced our debt to ING to $25million and extended the maturity date of the ING debt untilMarch 31, 2010, conditioned upon a further principal reduction of$10 million on or before March 31, 2008. In addition, we haveraised approximately $35 million in equity through privateplacements completed in 2003 and 2004. Most recently, onNovember 30, 2004, we completed a private placement of 400,000Units at the price of $60.00 per Unit. Each Unit consisted offive (5) shares of the Company's common stock and one (1) commonstock purchase warrant. Each Warrant entitled the holder topurchase one (1) share of common stock at an exercise price of$15.00 per share. Each Warrant has a term of three (3) years,but is callable by us if the closing market price of our commonstock exceeds $18.75 for 10 consecutive trading days. We used approximately half of the proceeds of the placementto reduce our senior debt to ING. The balance of the proceedsare being used by the Company for working capital. Further, in February 2005, our wholly owned subsidiary SunWorld International, Inc. ("Sun World") completed the sale ofsubstantially all of its assets, and Sun World's consensual planof reorganization was confirmed by the U.S. Bankruptcy Court inAugust 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 areno longer consolidated with ours. With the implementation of these steps, we have been able toretain ownership of all of our land assets and assets relating toour water programs and also to obtain working capital needed tocontinue our efforts to develop our water programs. Because manyof our pre-existing common stockholders have participated in the2003 and 2004 private placements, our base of common stockholdersremains largely the same as before these placements. Page 16RESULTS OF OPERATIONS(A) YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 --------------------------------------------------- We have not received significant revenues from our waterresource and real estate development activity to date. As aresult, we continue to incur a net loss from operations. We hadrevenues of $1.2 million for the year ended December 31, 2005 and$47 thousand for the year ended December 31, 2004. Our net losstotaled $23.0 million for the year ended December 31, 2005compared with a net loss of $16.0 million for the year endedDecember 31, 2004. The higher loss for the 2005 period resultedprimarily from non-cash compensation expenses of $16.7 millionfrom stock and option awards under our Management EquityIncentive Plan. No such expense was incurred in 2004. The 2004period included the write-off of $3.4 million of permanent anddeveloping crops, $2.8 million higher amortization of deferredborrowing costs and a $1.4 million write-off of deferredborrowing costs. General and administrative costs increased $1.0million in 2005.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 toincur additional non-cash expenses in connection with ourManagement Equity Incentive Plan. The issuance of these shares,or options to purchase these shares, results in a charge to ourearnings based on the value of our common stock at the time ofissue and the valuation of options at the time of their award andis recorded over the vesting period in proportion to thequantities vested. The value of our common stock at the time ofissue and the valuation of options at the time of their awardwill be added to additional paid-in capital with the result thatthere will not be a net reduction to shareholders' equity as aresult of the issuances. REVENUES. Revenue totaled $1.2 million during the yearended December 31, 2005 compared to $47 thousand during the yearended December 31, 2004. 2005 revenues include $1.1 million ofcitrus crop sales, $35 thousand of crop rental income and $39thousand of other rental income. The 2005 revenue increase isprimarily due to citrus crops that Cadiz farmed in 2005. In 2004Cadiz leased these crops to Sun World and did not include SunWorld's revenues from citrus crop sales in the consolidatedfinancial statements because Sun World was in bankruptcy. We nolonger consider agriculture to be our core business. Whenpossible, we prefer to lease our vineyards and citrus groves tothird parties so that we can focus our resources on our water andreal estate development programs. COST OF SALES. Cost of Sales totaled $994,000 during theyear ended December 31, 2005, reflecting the production and saleof citrus crops at the Cadiz Ranch property. Cadiz leased thesecrops to Sun World in 2004 and did not include Sun World's costof sales in the consolidated financial statements because SunWorld was in bankruptcy. GENERAL AND ADMINISTRATIVE EXPENSES. General andadministrative expenses during the year ended December 31, 2005totaled $4.1 million compared with $3.1 million for the yearended December 31, 2004. Higher expenses were primarily relatedto legal and consulting fees incurred related to waterdevelopment efforts, accounting expenses related to SarbanesOxley compliance and initial listing costs for our listing on TheNASDAQ National Market. Page 17 COMPENSATION COSTS FROM STOCK AND OPTION AWARDS.Compensation costs from stock and option awards for the yearended December 31, 2005 totaled $16.7 million. The costs consistof non-cash compensation expenses relating to stock and optiongrants issued under the Management Equity Incentive Plan. Thegrants and related accounting are discussed further in the Notesto the Consolidated Financial Statements. There were nocomparable stock and option grants during the year ended December31, 2004. DEPRECIATION AND AMORTIZATION. Depreciation andamortization totaled $0.2 million for the year ended December 31,2005 compared to $0.5 million for 2004. The reduction indepreciation and amortization is due to certain assets becomingfully depreciated during 2005 and the write down of certainassets no longer used or useful in the restructured Cadizbusiness. INTEREST EXPENSE, NET. Net interest expense totaled $1.9million during the year ended December 31, 2005, compared to $9.1Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.million during 2004. Lower interest expense was primarily due tothe November 30, 2004 debt restructuring and the repayment of $10million of debt from the proceeds of the private placement ofcommon stock and warrants completed on that date. Therestructuring transaction resulted in the amortization and write-off during 2004 of the higher financing costs that had beenassociated with the prior debt structure. The following tablesummarizes the components of net interest expense for the twoperiods (in thousands): YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 ---- ---- Cadiz Interest on outstanding debt $ 2,062 $ 3,970 Amortization of financing costs 28 3,767 Write off of unamortized financing costs - 1,369 Interest income (159) (42) ------- ------- $ 1,931 $ 9,064 ======= ======= Financing costs, which include legal fees and warrant costs,are amortized over the life of the ING debt agreement. InNovember, 2004 we entered into an agreement with ING whichrestructured our loan and extended the maturity date from March31, 2005 to March 31, 2010. As a result, all deferred financingcosts associated with the prior loan were fully expensed on theNovember 30, 2004 amendment date.(B) YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 --------------------------------------------------- Our consolidated financial statements for the year endedDecember 31, 2003 include the results of operations for Sun Worldonly 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 comparisons of ourconsolidated results of operations for year ended December 31,2004 with results for the year ended December 31, 2003 do not, inour view, prove meaningful. Page 18 Tables which disclose the results of Cadiz Inc. separatefrom its consolidated subsidiary Sun World for the year endedDecember 31, 2003, and from which the numbers used in thefollowing discussion are derived, can be found in Note 7 to theConsolidated Financial Statements. We had revenues of $47 thousand for the year ended December31, 2004 and $3.2 million for the year ended December 31, 2003,including $3.0 million from Sun World for the month ended January30, 2003. Our net loss totaled $16.0 million for the year endedDecember 31, 2004 compared to $11.5 million for the year endedDecember 31, 2003 which included a $2.5 million loss from SunWorld for the period ended January 30, 2003. The increase for the2004 period resulted from the write off of permanent anddeveloping crops in the amount of $3.4 million, a $2.8 millionincrease in interest cost resulting from amortization of deferredborrowing costs, and write offs of unamortized deferred borrowingcosts of $1.4 million. General and administrative costs declinedby $2.2 million in 2004.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REVENUES. Revenue totaled $47 thousand during the yearended December 31, 2004 compared to $3.2 million the precedingyear. The $3.2 million in 2003 includes $0.3 million attributableto Cadiz with the remainder attributable to Sun World for theperiod ended January 30, 2003. The Cadiz decrease from $0.3million to $47 thousand is primarily due to discontinuation ofthe management fee and other fees payable to Cadiz by Sun Worldas of January 30, 2003 due to Sun World's Chapter 11 filing. Therevenue during the year ended December 31, 2004 was derivedprimarily from the lease of farming property to a third party.No revenue was derived from the lease to Sun World during theyear ended December 31, 2004 as such revenue was contingent onprofitability of the harvest, which profitability was notachieved under the terms of the lease. GENERAL AND ADMINISTRATIVE EXPENSES. General andadministrative expenses during the year ended December 31, 2004totaled $3.1 million compared to $5.2 million for the year endedDecember 31, 2003. Excluding Sun World, Cadiz general andadministrative expenses during the year ended December 31, 2003were $4.7 million. The decrease in Cadiz' general andadministrative expenses in 2004 is primarily due to reductions insalaries which included a contract termination payment to theCompany's CEO of $0.8 million in 2003 and increased professionalfees in 2003 related to transactions with our secured lender, ourequity 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 voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code. Asof that date, due to the Company's loss of control over theoperations of Sun World, the financial statements of Sun Worldare no longer consolidated with those of Cadiz, but instead Cadizaccounts for its investment in Sun World on the cost basis ofaccounting. As a result of changing to the cost basis ofaccounting and because the Company did not believe it will beable to recover its investment, the Company wrote off itsinvestment in Sun World of $195,000 in 2003. There was no similarexpense in 2004. REORGANIZATION COSTS. Reorganization costs totaled $0.7million during 2003. These costs were incurred by Sun Worldduring 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 thelast quarter of the year ended December 31, 2004, the long-standing lease for a portion of our Cadiz Valley farming propertyto Sun World expired and the crops have not been leased toanother party. The remaining property, which is leased to anindependent third party on a year to year basis, does notgenerate a significant amount of revenue. Based on theuncertainty as to possible recovery of the carrying value of thepermanent crops and developing crops on this property, during thelast quarter of 2004 we wrote off our investment in permanent anddeveloping crops at this property in the amount of $3.4 million,net of depreciation. See Note 2 to our Consolidated FinancialStatements. No such write offs occurred during 2003. DEPRECIATION AND AMORTIZATION. Depreciation andamortization for Cadiz totaled $0.5 million for the year endedDecember 31, 2004 compared to $0.7 million for the 2003 year. Thereduction in depreciation and amortization is due to certainassets becoming fully depreciated during 2004 and $0.2 millionattributable to Sun World included in the period ended JanuarySource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.30, 2003 which did not exist in 2004. INTEREST EXPENSE, NET. Net interest expense totaled $9.1million during the year ended December 31, 2004, compared to $4.9million during 2003, of which $3.6 million was attributable toCadiz excluding Sun World. The following table summarizes thecomponents of Cadiz net interest expense and that of Sun Worldfor 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 ======= ======= Financing costs, which include legal fees, warrant costs andpreferred stock, are amortized over the life of the ING debtagreement. In December 2003 we entered into an agreement with INGwhich extended the maturity date of our loan, which had a priormaturity date of January 31, 2003. As a result there was littleamortization during 2003 as the deferred financing costs werefully amortized at the January 2003 maturity date. Followingseveral months of discussion with ING, our loan was amended inDecember 2003 and the financing costs associated with the debtamendment of $5.3 million (consisting of fees of $0.3 million andpreferred stock valued at $5.0 million) were being amortizedthrough the maturity date of March 31, 2005. On November 30, 2004we entered into another amendment of the loan agreement, underwhich the term of the loan was extended, the interest rate wasreduced, and a portion of the principal balance was repaidnecessitating the write off of the remaining $1.4 million inunamortized financing costs associated with the loan under theterms applicable as of December 2003. Page 20LIQUIDITY AND CAPITAL RESOURCES(A) CURRENT FINANCING ARRANGEMENTS ------------------------------ CADIZ OBLIGATIONS. As we have not received significantrevenues from our water resource and real estate activity todate, we have been required to obtain financing to bridge the gapbetween the time water resource and real estate developmentexpenses are incurred and the time that revenue will commence.Historically, we have addressed these needs primarily throughsecured debt financing arrangements with our lenders, privateequity placements and the exercise of outstanding stock options. Subsequent to the vote of Metropolitan's Board in October2002 to not proceed with the Cadiz Project and Sun World'sJanuary 2003 bankruptcy filing, we have worked with our primarysecured lender, ING Capital LLC, to structure our debt in a waywhich would allow us to continue our development of the CadizProject. We believe that we have accomplished this goal with aseries of agreements with ING, in the most recent of whichSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.concluded in November 2004. In November 2004 we entered into our most recent series ofagreements with ING which provided for: * the repayment in full of our senior term loan facility with ING and the reduction to $25 million of the outstanding principal balance under our existing revolving credit facility; and * amendments to the terms and conditions of our revolving credit facility with ING in order to: (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). Also in November 2004 ING agreed to convert 99,000 shares ofthe Company's Series F Preferred Stock (representing 99% of theoutstanding shares of Series F Preferred Stock) into 1,711,665shares of the Company's common stock. We had issued 100,000shares of Series F preferred stock to ING as part of ouragreements in December 2003. Concurrently with this conversion, the terms and conditionsof the remaining outstanding Series F Preferred Stock wereamended to fix the conversion ratio at its original conversionratio of 17.28955 shares of common stock for each share of SeriesF Preferred Stock converted. In addition to its conversationrights, 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 theright to appoint an independent manager to the Board of Managersof Cadiz Real Estate LLC, a Delaware limited liability company("Cadiz Real Estate"), in which we hold 100% of the economicinterests. In December 2003 we transferred substantially all ofour assets (with the exception of our office sublease, certainoffice furniture and any Sun World related assets) to Cadiz RealEstate. Cadiz Real Estate is a co-obligor with us on our creditfacilities with ING, and the properties now held of record byCadiz Real Estate secure our obligations under these facilities.We have entered into a management agreement with Cadiz RealSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Estate pursuant to which we manage the assets now held by CadizReal Estate, subject to the requirements of the OperatingAgreement of Cadiz Real Estate. The Operating Agreement of CadizReal Estate provides for a Board of Managers consisting of twomanagers appointed by us and one independent manager named byING. As long as our obligations to ING are outstanding, CadizReal Estate may not institute bankruptcy proceedings without theunanimous consent of this Board of Managers (including theindependent manager). The debt covenants associated with our ING credit facilitywere negotiated by the parties with a view towards our operatingand financial condition as it existed at the time the revisedagreements executed. Given current circumstances, we do notconsider it likely that we will be in material breach of suchcovenants. At December 31, 2005, the Company was in compliancewith its debt covenants. As we continue to actively pursue our business strategy,additional financing specifically in connection with our waterprograms will be required. See "Outlook", below. As the partieshave anticipated this need, the covenants in the credit facilitywhich would otherwise prohibit our incurrence of additional debt(or our use of our assets as security for such debt) contain anexception for debt and liens incurred in order to finance theacquisition, construction or improvement of any assets (up to amaximum of $135 million at any one time outstanding). Thecovenants in the credit facility do not prohibit our use ofequity financing, but do provide that 35% of the proceeds of suchissuance be applied as a prepayment against such facility. We donot expect these covenants to materially limit our ability toundertake debt or equity financing in order to finance our waterdevelopment activities. At December 31, 2005, we have no outstanding creditfacilities or preferred stock other than that held by ING asdescribed above. Page 22SUN WORLD OBLIGATIONS--------------------- We have obtained waivers and/or releases with respect toour previously issued guarantees of the First Mortgage Notes fromall the holders of outstanding First Mortgage Notes. Further, aspart of a December 2003 global settlement, we have settled all ofour claims and obligations with Sun World. With the confirmationof Sun World's consensual plan of reorganization by the U.S.Bankruptcy Court in August, 2005 and the effectiveness of thePlan in September, 2005, Cadiz is released from all liabilitiesunder the guarantees of Sun World's previously outstanding FirstMortgage Notes. Further, although we continue to be the recordowner of Sun World's stock, with the sale by Sun World of all ofits assets Sun World does not conduct any business operations andtherefore has no working capital needs at present. CASH USED FOR OPERATING ACTIVITIES. Cash used foroperating activities totaled $3.7 million for the year endedDecember 31, 2005, as compared to cash used for operatingactivities of $7.6 million for the year ended December 31, 2004.The $3.9 million decrease was primarily due to a reduction incash interest paid, as all interest expense incurred under therestructured ING loan during 2005 was either credited against aprepaid interest account or added to the principal balanceoutstanding. The prepaid interest account will not be sufficientto cover the entire amount of the cash interest payment due onSeptember 30, 2006, and a $55,000 cash interest payment will beSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.due at that time. CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES. Cashused in investing activities totaled $68 thousand for the yearended December 31, 2005, as compared to $2.1 million provided byinvesting activities during the same period in 2003. The $2.1 million cash provided by investing activities for theyear ended December 31, 2004 was almost entirely due to thereduction of restricted cash that had been placed in a restrictedbank account to pay for interest on the $35 million term loanfacility with ING. The use of a restricted bank account for thispurpose had been a requirement under our pre-November 2004arrangements with ING. On November 30, 2004 the restricted cashaccount mechanism was replaced with a prepaid interest creditaccount. Reductions in the prepaid interest credit account arereflected in Cash Used for Operating Activities, as describedabove. CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided byfinancing activities totaled $40,000 for the year ended December31, 2005, compared with $11.1 million for the year ended December31, 2004. There was no material financing activity in 2005. Incontrast a $25 million private placement of common stock andwarrants was completed on November 30, 2004, and $10 million ofthe $21.3 million in net proceeds realized in the placement wereapplied to the repayment of term loan borrowings.(B) OUTLOOK ------- SHORT TERM OUTLOOK. The proceeds of our 2003 and 2004private placements have provided us with sufficient cash to meetour expected working capital needs for current operations untilthe Company will need to raise additional capital in order tofund the $10 million mandatory repayment of its borrowing fromING due on or before March 2008. See "Long Term Outlook", below.Approximately $12.7 million of the proceeds of our November 2004private placement were used to reduce the principal balance,which included approximately $2.7 million of interest payable inkind ("PIK"), owed to ING under our ING credit facilities to $25million. 40 Page 23Units in the 2004 private placement were issued to ING to prepay $2.4 million of future cash interest payments due under the Company's $25 million borrowing from the lender. The remainder of the proceeds from the placements will be used to meet our ongoing working capital needs. LONG TERM OUTLOOK. The current maturity date of our loanwith ING is March 2010, and we will need to fund a $10 millionmandatory principal repayment on or before March 31, 2008. Inthe meantime, our working capital needs will be determined basedupon the specific measures we pursue in the development of ourwater resources and real estate assets. We will evaluate theamount of cash needed to fund our development activities and ourrepayment obligations, and the manner in which such cash will beraised, on an ongoing basis. We may meet any such future cashrequirements through a variety of means to be determined at theappropriate time. Such means may include equity or debtplacements, or the sale or other disposition of assets. Equityplacements would be undertaken only to the extent necessary so asto minimize the dilutive effect of any such placements upon ourexisting stockholders.(C) CRITICAL ACCOUNTING POLICIESSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ---------------------------- As discussed in Note 2 to the Consolidated FinancialStatements of Cadiz, the preparation of financial statements inconformity with accounting principles generally accepted in theUnited States requires management to make estimates andassumptions that affect amounts reported in the accompanyingconsolidated financial statements and related footnotes. Inpreparing these financial statements, management has made itsbest estimates and judgments of certain amounts included in thefinancial statements based on all relevant information availableat the time and giving due to consideration to materiality. We donot believe there is a great likelihood that materially differentamounts would be reported related to the accounting policiesdescribed below. However, application of these policies involvesthe exercise of judgment and use of assumptions as to futureuncertainties and, as a result, actual results could differ fromthese estimates. Management has concluded that the followingcritical accounting policies described below affect the mostsignificant judgments and estimates used in the preparation ofthe consolidated financial statements. (1) PRINCIPLES OF CONSOLIDATION The ConsolidatedFinancial Statements have been prepared by Cadiz Inc., sometimesreferred to as "Cadiz" or "the Company". On January 30, 2003,Sun World filed voluntary petitions under Chapter 11 of theBankruptcy Code. Since the filing date, Sun World has operatedits business and managed its affairs as debtor and debtor inpossession. As of that date due to the Company's loss of controlover the operations of Sun World, the financial statements of SunWorld are no longer consolidated with those of Cadiz, butinstead, Cadiz is accounting for its investment in Sun World onthe cost basis of accounting. As a result, the Company wrote offits net investment in Sun World of $195,000 at the Chapter 11filing date because it did not anticipate being able to recoverits investment. The foregoing Consolidated Financial Statementsinclude the accounts of the Company and, until January 30, 2003,those of its then wholly-owned subsidiary, Sun WorldInternational, Inc. and its subsidiaries collectively referred toas "Sun World", and contain all adjustments, consisting only ofnormal recurring adjustments, which the Company considersnecessary for a fair presentation. Certain reclassificationshave been made to the prior period to conform to the currentperiod presentation. Page 24 (2) Intangible and Other Long-Lived Assets. Property,plant and equipment, intangible and certain other long-livedassets are amortized over their useful lives. Useful lives arebased on management's estimates of the period that the assetswill generate revenue. Long-lived assets are reviewed forimpairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Asa result of the actions taken by Metropolitan in the fourthquarter of 2002 as described in Note 1, the Company, with theassistance of a valuation firm, evaluated the carrying value ofits water program and determined that the asset was not impairedand that the costs expect to be recovered through sale oroperation of the project. The Company reevaluates the carryingvalue of its water program annually during the first quarter ofeach year and has confirmed that the carrying value of the waterprogram 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 thepermanent and developing crops at the Cadiz Valley propertyterminated and the crops have not been leased to any other party.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The lease to an independent third party for the remainder of thecrops is on a year to year basis and does not generate asignificant amount of revenue. Based on the uncertainty as topossible recovery of the carrying value of the permanent cropsand developing crops the Company recorded a charge of $3.4million to write off the capitalized costs related to these cropswhich is shown under the heading "Write-off of permanent anddeveloping crops" on the Consolidated Statement of Operations. (3) GOODWILL. As a result of a merger in May 1988 betweentwo 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 ofFinancial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards No. 142, ("SFAS No. 142")"Goodwill and Other Intangible Assets" on January 1, 2002.Goodwill is tested for impairment annually in the first quarter,or if events occur which require an impairment analysis beperformed. As a result of the actions taken by Metropolitan inthe fourth quarter of 2002 as described in Note 1, the Company,with the assistance of a valuation firm, performed an impairmenttest of its goodwill and determined that its goodwill was notimpaired. In addition, in the first quarter of 2005, 2004 and2003, the Company, performed its annual impairment test ofgoodwill and determined that its goodwill was not impaired. (4) Deferred Tax Assets and Valuation Allowances. To date,we have had a history of net operating losses as we have notgenerated significant revenue from our water development programsand Sun World had experienced losses from its agriculturaloperations. As such, we have generated significant deferred taxassets, including large net operating loss carry forwards forfederal and state income taxes for which we have a full valuationallowance. Management is currently working on initiatives atCadiz that are designed to generate future taxable income,although there can be no guarantee that this will occur. Astaxable income is generated, some portion or all of the valuationallowance will be reversed and an increase in net income wouldconsequently be reported in future years.(D) NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In December 2004, the FASB revised Statement No. 123 (FAS123R), "Share-Based Payment", which requires companies to expensethe estimated fair value of employee stock options and similarawards. On April 14, 2005, the U.S. Securities and ExchangeCommission adopted a new rule amending the compliance dates forFAS 123R. In accordance with the new Page 25rule, the accounting provisions of FAS 123R will be effective for the Company beginning in the first quarter of fiscal 2006. The Company tentatively expects to adopt the provisions of FAS123R using a modified prospective application. FAS 123R, which providescertain changes to the method of valuing share-based compensationamong other changes, will apply to new awards and to awards thatare outstanding on the effective date and are subsequentlymodified or cancelled. Compensation expense for outstandingawards for which the requisite service had not been rendered asof the effective date will be recognized over the remainingservice period using the compensation cost calculated for proforma 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 theprocess of determining how the guidance regarding value share-based compensation as prescribed in FAS 123R will be applied toSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.value share-based awards granted after the effective date and theimpact that the recognition of compensation expense related tosuch awards will have on its financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchange ofNonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No.153 is based on the principle that exchanges of nonmonetaryassets should be measured based on the fair value of the assetsexchanged. APB Opinion No. 29, "Accounting for NonmonetaryTransactions," provided an exception to its basic measurementprinciple (fair value) for exchanges of similar productiveassets. Under APB Opinion No. 29, an exchange of a productiveasset for a similar productive asset was based on the recordedamount of the asset relinquished. SFAS No. 153 eliminates thisexception and replaces it with an exception of exchanges ofnonmonetary assets that do not have commercial substance. TheCompany has concluded that SFAS No. 153. will not have a materialimpact on its consolidated financial statements. In March 2005, the FASB issued FIN 47, " Accounting forConditional Asset Retirement Obligations," an interpretation ofSFAS 143. This statement clarified the term conditional assetretirement obligation and is effective for the Company's fourthquarter ending December 31, 2005. Adoption of FIN 47 did nothave an impact on the Company's consolidated financialstatements.(E) OFF BALANCE SHEET ARRANGEMENTS ------------------------------ Cadiz does not have any off balance sheet arrangements atthis time.(F) CERTAIN KNOWN CONTRACTUAL OBLIGATIONS ------------------------------------- PAYMENTS DUE BY PERIODCONTRACTUAL LESS THANOBLIGATIONS 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 Cadiz long-term debt included in the table above reflectsthe most recent arrangements with ING which were concluded inNovember 2004 as described above in Item 7, ManagementsDiscussion and Analysis of Financial Condition and Results ofOperation; Liquidity and Capital Resources; Cadiz Obligations.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK We are exposed to market risk from changes in interest rateson long-term debt obligations that impact the fair value of theseobligations. Our policy is to manage interest ratesSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.fair values by year of scheduled maturities to evaluate theexpected cash flows and sensitivity to interest rate changes (inthousands of dollars). A 1% change in interest rate on theCompany long term debt obligation would have resulted in interestexpense fluctuating by approximately $252,000 during the yearended December 31, 2005. Circumstances could arise which maycause interest rates and the timing and amount of actual cashflows to differ materially from the schedule below: LONG-TERM DEBT ------------------------------------------------------- FIXED RATE AVERAGE VARIABLE RATE AVERAGEEXPECTED MATURITY MATURITIES INTEREST RATE MATURITIES INTEREST RATE----------------- ---------- ------------- ------------- ------------- 2008 $ 10,000 8.0% $ - $ - ======== ==== ======== ======== 2010 $ 15,000 8.8% $ - $ - ======== ==== ======== ======== Cadiz long-term debt included in the table above reflectsthe debt restructuring which occurred in December 2004 asdescribed above in Item 7. Managements Discussion and Analysis ofFinancial Condition and Results of Operations; Liquidity andCapital Resources; Cadiz Obligations. With the confirmation of Sun World's consensual plan ofreorganization by the U.S. Bankruptcy Court in August, 2005 andthe effectiveness of the Plan in September, 2005, Cadiz isreleased from all liabilities under the guarantees of FirstMortgage Notes issued by Sun World.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is submitted inresponse to Part IV below. See the Index to ConsolidatedFinancial Statements.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. Page 27ITEM 9A. CONTROLS AND PROCEDURESDISCLOSURE CONTROLS AND PROCEDURES We have established disclosure controls and procedures toensure that material information related to the Company,including its consolidated entities, is accumulated andcommunicated to senior management, including the Chairman andChief Executive Officer (the "Principal Executive Officer") andChief Financial Officer (the "Principal Financial Officer") andto our Board of Directors. Based on their evaluation as ofDecember 31, 2005, our Principal Executive Officer and PrincipalFinancial Officer have concluded that the Company's disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective toensure that the information required to be disclosed by theCompany in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and suchinformation is accumulated and communicated to management,Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.including the principal executive and principal financialofficers as appropriate, to allow timely decisions regardingrequired disclosures.MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing andmaintaining adequate internal control over financial reporting,as such term is defined in Exchange Act Rule 13a-15(f). Underthe supervision and with the participation of our management,including our Principal Executive Officer and Principal FinancialOfficer, we evaluated the effectiveness of our internal controlover financial reporting based on the criteria in the InternalControl-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based onour evaluation under that framework, our management concludedthat our internal control over financial reporting was effectiveas of December 31, 2005. Our management's assessment of theeffectiveness of our internal control over financial reporting asof December 31, 2005 has been audited by PricewaterhouseCoopersLLP, an independent registered public accounting firm, as statedin their report which is included herein.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING In connection with the evaluation required by paragraph (d)of Rule 13a-15 under the Exchange Act, there was no changeidentified in the Company's internal control over financialreporting that occurred during the last fiscal quarter that hasmaterially affected, or is reasonably likely to materiallyaffect, the Company's internal control over financial reporting.ITEM 9B. OTHER INFORMATION Not applicable at this time. Page 28PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item is incorporatedherein by reference to the definitive proxy statement involvingthe election of directors which we intend to file with the SECpursuant to Regulation 14A under the Securities and Exchange Actof 1934 not later than 120 days after December 31, 2005.ITEM 11. EXECUTIVE COMPENSATION The information called for by this item is incorporatedherein by reference to the definitive proxy statement involvingthe election of directors which we intend to file with the SECpursuant to Regulation 14A under the Securities and Exchange Actof 1934 not later than 120 days after December 31, 2005.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporatedherein by reference to the definitive proxy statement involvingthe election of directors which we intend to file with the SECpursuant to Regulation 14A under the Securities and Exchange Actof 1934 not later than 120 days after December 31, 2005.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporatedherein by reference to the definitive proxy statement involvingthe election of directors which we intend to file with the SECpursuant to Regulation 14A under the Securities and Exchange Actof 1934 not later than 120 days after December 31, 2005. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by this item is incorporatedherein by reference to the definitive proxy statement involvingthe election of directors which we intend to file with the SECpursuant to Regulation 14A under the Securities and Exchange Actof 1934 not later than 120 days after December 31, 2005. Page 29PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements. See Index to Consolidated Financial Statements. 2. Financial Statement Schedule. See Index to Consolidated Financial Statements. 3. Exhibits. The following exhibits are filed or incorporated byreference as part of this Form 10-K. 3.1 Cadiz Certificate of Incorporation, as amended(1) 3.2 Amendment to Cadiz Certificate of Incorporation dated November 8, 1996(2) 3.3 Amendment to Cadiz Certificate of Incorporation dated September 1, 1998(3) 3.4 Amendment to Cadiz Certificate of Incorporation dated December 15, 2003(7) 3.5 Certificate 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) 3.6 Certificate of Elimination of Series A Junior Participating Preferred Stock of Cadiz Inc., dated March 25, 2004(7) 3.7 Amended and Restated Certificate of Designations of Series F Preferred Stock of Cadiz Inc.(8) 3.8 Cadiz Bylaws, as amended (4) 10.1 Agreement Regarding Employment Between Cadiz Inc. and Keith Brackpool dated July 5, 2003(6) 10.2 Sixth 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)Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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) 10.6 Limited Liability Company Agreement of Cadiz Real Estate LLC dated December 11, 2003(7) 10.7 Amendment No. 1, dated October 29, 2004, to Limited Liability Company Agreement of Cadiz Real Estate LLC.(9) 10.8 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) 10.9 Resolution of the Directors of Cadiz Inc., authorizing the Management Equity Incentive Plan. (7) 10.10 Supplemental Resolutions of the Compensation Committee of the Board of Directors of Cadiz Inc., regarding the Management Equity Incentive Plan.(9) 10.11 Form of Incentive Plan Stock Option Agreement(10) 10.12 2004 Management Bonus Plan.(9) 10.13 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 Employment Agreement dated September 12, 2005 between O'Donnell Iselin II and Cadiz Inc.(11) 10.15 Settlement Agreement dated as of August 11, 2005 by and between Cadiz Inc., on the one hand, and Sun World International, Inc., Sun Desert, Inc., Coachella Growers and Sun World/Rayo, on the other hand(12) 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 31 32.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002------------------------ (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 32INDEX TO FINANCIAL STATEMENTSCADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm. . . .34Consolidated Statements of Operations for the three years ended December 31, 2005. . . . . . . . . . . . . . . . . . . . . . 36Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Consolidated Balance Sheets as of December 31, 2005 and 2004. 37Consolidated Statements of Cash Flows for the three years ended December 31, 2005. . . . . . . . . . . . . . . . . . . . . . 38Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2005. . . . . . . . . . . . . . . . 39Notes to the Consolidated Financial Statements. . . . . . . . 40Financial Statement Schedule. . . . . . . . . . . . . . . . . 64(Schedules other than those listed above have been omitted sincethey are either not required, inapplicable, or the requiredinformation is included on the financial statements or notesthereto.) Page 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Cadiz Inc.:We have completed an integrated audit of Cadiz Inc.'s 2005consolidated financial statements and of its internal controlover financial reporting as of December 31, 2005 and audits ofits 2004 and 2003 consolidated financial statements in accordancewith the standards of the Public Company Accounting OversightBoard (United States). Our opinions, based on our audits, arepresented below.Consolidated financial statements and financial statement schedule------------------------------------------------------------------In our opinion, the consolidated financial statements listed inthe accompanying index present fairly, in all material respects,the financial position of Cadiz Inc. and its subsidiaries atDecember 31, 2005 and 2004, and the results of their operationsand their cash flows for each of the three years in the periodended December 31, 2005 in conformity with accounting principlesgenerally accepted in the United States of America. In addition,in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with therelated consolidated financial statements. These financialstatements and financial statement schedule are theresponsibility of the Company's management. Our responsibilityis to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conductedour audits of these statements in accordance with the standardsof the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit offinancial statements includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used andsignificant estimates made by management, and evaluating theoverall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.The accompanying financial statements have been prepared assumingthat the Company will continue as a going concern. As discussedin Note 2 to the financial statements, the Company has sufferedrecurring losses from operations that raise substantial doubtSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.about its ability to continue as a going concern. Management'splans in regard to these matters are also described in Note 2.The financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.Internal control over financial reporting-----------------------------------------Also, in our opinion, management's assessment, included inManagement's Report on Internal Control Over Financial Reportingappearing under Item 9A, that the Company maintained effectiveinternal control over financial reporting as of December 31,2005 based on criteria established in Internal Control -Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairlystated, in all material respects, based on those criteria.Furthermore, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financialreporting as of December 31, 2005, based on Page 34criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of thePublic Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internalcontrol over financial reporting was maintained in all materialrespects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control overfinancial reporting, evaluating management's assessment, testingand evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as weconsider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.A company's internal control over financial reporting is aprocess designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation offinancial statements for external purposes in accordance withgenerally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that,in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company;(ii) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made onlyin accordance with authorizations of management and directors ofthe company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use,or disposition of the company's assets that could have a materialeffect on the financial statements.Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.PricewaterhouseCoopers LLPLos Angeles, CaliforniaMarch 16, 2006 Page 35CONSOLIDATED 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 ======== ======== ========See accompanying notes to the consolidated financial statements. Page 36CONSOLIDATED BALANCE SHEET------------------------------------------------------------------------ DECEMBER 31, ------------($ IN THOUSANDS) 2005 2004Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.------------------------------------------------------------------------ASSETS Current assets:Cash and cash equivalents $ 5,302 $ 9,031Accounts Receivable 170 -Prepaid interest expense 740 1,106Prepaid expenses and other 34 116 -------- -------- Total current assets 6,246 10,253Property, plant, equipment and water programs, net 35,323 35,552Goodwill 3,813 3,813Other assets 664 1,453 -------- -------- Total assets $ 46,046 $ 51,071 ======== ========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent 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 103Additional paid-in capital 226,738 209,615Accumulated deficit (207,885) (184,860) -------- -------- Total stockholders' equity 18,967 24,858 -------- -------- Total liabilities and stockholders' equity $ 46,046 $ 51,071 ======== ========See accompanying notes to the consolidated financial statements. Page 37CONSOLIDATED STATEMENTS OF CASH FLOWS------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31,Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. -------------------------($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 193Cash and cash equivalents, beginning of period 9,031 3,422 3,229Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. -------- -------- --------Cash and cash equivalents, end of period $ 5,302 $ 9,031 $ 3,422 ======== ======== ========Non-cash financing and investing activitiesSettlement of note receivable from officer $ - $ 1 $ 841Common stock issued upon conversion of preferred stock - - 14,020Issuance of preferred stock with loan extension - - 5,000Issuance of common stock upon conversion of note payable - - 212Issuance 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 1,054Interest added to loan principle 851 - -See accompanying notes to the consolidated financial statements. Page 38CONSOLIDATED STATEMENTS 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 - 1,054Issuance of common stock for cash - - 4,112,000 41 10,239 - 10,280Issuance of stock to lenders - - 168,000 2 430 - 432Issuance of common stock for services - - 128,000 1 279 - 280Exercise of warrants - - 94,000 1 23 - 24Conversion of Series D and E convertible preferred stock - - 400,000 4 14,016 - 14,020Conversion of convertible note payable - - 84,699 1 211 - 212Beneficial conversion feature of note payable - - - - 90 - 90Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.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 - 5,000Net loss - - - - - (11,536) (11,536) ------- ---- --------- ---- -------- --------- --------Balance as of December 31, 2003 100,000 1 6,471,385 65 184,974 (168,823) 16,217Exchange of deferred stock units for common stock - - 1,289 - 654 - 654Issuance of common stock for cash - - 2,000,000 20 23,654 - 23,674Issuance of common stock for services - - 140,000 1 349 - 350Conversion 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 - 447Issuance of management incentive shares and options - - 968,933 10 16,677 - 16,687Fractional 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 ======= ==== ========== ==== ======== ========= ========See accompanying notes to the consolidated financial statements Page 39Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 - DESCRIPTION OF BUSINESS-------------------------------- The Company's primary asset consists of three blocks ofland in eastern San Bernardino County, California totalingapproximately 46,000 acres. Virtually all of this land isunderlain by high-quality groundwater resources with demonstratedpotential for various applications, including water storage andsupply programs and recreational, residential, and agriculturaldevelopment. Two of the three properties are located inproximity to the Colorado River Aqueduct, the major source ofimported water for southern California. The third property islocated near the Colorado River. The value of these assets derives from a combination ofprojected population increases and limited water suppliesthroughout southern California. In addition, most of the majorpopulation centers in southern California are not located wheresignificant precipitation occurs, requiring the importation ofwater from other parts of the state. We therefore believe that acompetitive advantage exists for companies that can provide highquality, reliable, and affordable water to major populationcenters. To this end, in 1997 we commenced discussions with theMetropolitan Water District of Southern California("Metropolitan") in order to develop a long-term agreement for ajoint venture groundwater storage and supply program on our landin the Cadiz and Fenner valleys of eastern San Bernardino County(the "Cadiz Project"). Under the Cadiz Project, surplus waterfrom the Colorado River would be stored in the aquifer systemunderlying our land during wet years. When needed, the storedwater, together with indigenous groundwater, could be returned tothe Colorado River Aqueduct for distribution to Metropolitan'smember agencies throughout six southern California counties. Between 1997 and 2002, Metropolitan and the Company receivedsubstantially all of the various permits required to constructand operate the project, including a federal Record of Decisionfrom the U.S. Department of Interior, which endorsed the CadizProject and granted a right-of-way for construction of projectfacilities. The federal government also approved a FinalEnvironmental Impact Statement ("FEIS") in compliance with theNational Environmental Policy Act ("NEPA"). Despite the significant progress made in the federalenvironmental review process, in October 2002 Metropolitan'sBoard refused to consider whether or not to certify the FinalEnvironmental Impact Report ("FEIR"), which was a necessaryaction to authorize implementation of the Cadiz Project inaccordance with the California Environmental Quality Act("CEQA"). When Metropolitan's Board declined to proceed with the CadizProject, the FEIR was complete and awaiting certification at ahearing scheduled for late October 2002. It is the Company'sposition that Metropolitan's actions on October 8, 2002 breachedvarious contractual and fiduciary obligations of Metropolitan tous, and interfered with the economic advantage the Company wouldhave obtained from the Cadiz Project. Therefore, in April 2003the Company filed a claim against Metropolitan seekingcompensatory and punitive damages. When settlement negotiationsfailed to produce a resolution, the Company filed a lawsuitagainst Metropolitan in Los Angeles Superior Court on November17, 2005.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Page 40 Meanwhile, the need for new water storage and supplyprograms in the southwestern United States has not diminished.Over the five years preceding the 2004 - 2005 winter season, theColorado River watershed experienced a prolonged drought thatpresented major challenges to the economies of California,Nevada, and Arizona. The drought was followed by a wet year in2005 during which surplus water was available to Metropolitanthat exceeded its storage capacity by approximately 200,000 acre-feet. Had the Cadiz Project been built, it could haveaccommodated most of this available surplus. As populationcontinues to grow at record rates, the Southwest is facing thevery real possibility that current and future supplies of waterwill not be able to meet demand without more investment in waterinfrastructure, including groundwater storage projects. To meet this need, the Company is committed to completingthe Cadiz Project and finalizing the state of Californiaenvironmental review. To that end the Company is now in advanceddiscussions with a third party public agency that would assumethe role of CEQA lead agency and complete the Californiaenvironmental review process. The Company is also workingdirectly with the U.S. Department of Interior to have the permitsthat were granted during the federal environmental reviewprocess, including the right-of-way granted in the Record ofDecision, issued directly to the Company. Additionally, theCompany is in discussions with several other public agenciesregarding their interest in participating in the Cadiz Project.All of these agencies have access to independent sources ofsupply that can be stored by the Cadiz Project. Due to significant population growth in SouthernCalifornia, where the Company's properties are located, theCompany has also begun to explore additional uses of our landassets. To this end, the Company has retained outside services toconduct a detailed analysis of our land assets and assess theopportunities for these properties. These objectives have different capital requirements andimplementation periods than those previously established.Therefore, in 2002, we entered into a series of agreements withour senior secured lender, ING Capital LLC ("ING") pursuant towhich we reduced our debt to ING to $25 million and extended thematurity date of the ING debt until March 31, 2010, conditionedupon a further principal reduction of $10 million on or beforeMarch 31, 2008. In addition, we raised approximately $35 millionin equity through private placements completed in 2003 and 2004. On January 30, 2003, the Company's wholly-owned subsidiary,Sun World International, Inc. ("Sun World") and certain of itssubsidiaries (Sun Desert Inc., Coachella Growers, and SunWorld/Rayo) filed voluntary petitions for relief under Chapter 11of the Bankruptcy Code. The filing was made in the United StatesBankruptcy Court, Central District of California, RiversideDivision. Sun World sought bankruptcy protection in order toaccess a seasonal financing package of up to $40 million toprovide working capital through the 2003-2004 growing seasons.The financial statements of Sun World are no longer consolidatedwith those of Cadiz due to the Company's loss of control over theoperations of Sun World on the Chapter 11 filing date. Cadizalso wrote off its net investment in Sun World of $195 thousandon that date because it did not anticipate being able to recoverits investment. The four Sun World entities were the joint proponents of theDebtors' Joint Plan of Reorganization Dated November 24, 2003Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.(the "Plan"). The Plan provided for the restructuring of SunWorld's balance sheet by providing for Sun World to issue equityinterests in the Page 41reorganized 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 acquiresubstantially all of Sun World's assets in exchange for cash andcredit consideration of $127,750,000, plus assumption of certainliabilities totaling an estimated $14 million, including thetrade claims which approximate net book value as of December 31,2004 of the assets sold. Thereafter, BDCM assigned its rightsunder the APA to Sun World International LLC ("SWLLC"), asubsidiary of BDCM. The agreement with SWLLC closed on February28, 2005. Following closing of the transaction, Sun World filedan amended Plan to distribute the remaining consideration left inSun World (estimated at approximately $50 million after interimdistributions/credits to the holders of First Mortgage Notes ofapproximately $78 million upon closing as authorized by theCourt). On August 26, 2005, a Settlement Agreement between Cadiz, onthe one hand, and Sun World and three of Sun World'ssubsidiaries, on the other hand, was approved by the U.S.Bankruptcy Court, concurrently with the Court's confirmation ofthe amended Plan. The Settlement Agreement provides thatfollowing the September 6, 2005 effective date of Sun World'splan of reorganization, Cadiz will retain the right to utilizethe Sun World net operating loss carryovers (NOLs). Sun WorldFederal 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' taxliability for such year, then Cadiz will pay to the Sun Worldbankruptcy estate 25% of the amount of such reduction, and shallretain the remaining 75% for its own benefit. There is norequirement that Cadiz utilize these NOLs during thisreimbursement period, or provide any reimbursement to the SunWorld bankruptcy estate for any NOLs used by Cadiz after thisreimbursement period expires. The amended Plan became effective on September 6, 2005, andCadiz has no further interest in the business and operations ofSun World. With the bankruptcy of Sun World, our agriculturaloperations are very limited. Historically, we have leased ourCadiz Valley farming property to Sun World and other thirdparties. In the fourth quarter of 2004, the lease with Sun Worldexpired. We continue to lease to a third party approximately 160acres of vineyards at our Cadiz Valley property. The lease isrenewable on a year to year basis with annual revenues ofapproximately $50,000. In 2005 we also farmed 260 acres ofcitrus crops. We subcontracted the labor, harvesting andSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.marketing of the crop to third parties. Annual revenues wereapproximately $1.1 million. We remain committed to our land and water assets and wecontinue to explore all opportunities for development of theseassets. We cannot predict with certainty which of these variousopportunities will ultimately be utilized. Page 42 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---------------------------------------------------BASIS OF PRESENTATION The financial statements of the Company have been preparedusing accounting principles applicable to a going concern, whichassumes realization of assets and settlement of liabilities inthe 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, andused cash in operations of $3.7 million and $7.6 million in 2005and 2004, respectively. As discussed in Note 1, on October 8, 2002, Metropolitan'sBoard voted not to proceed with the Cadiz Project and thereby didnot consider acceptance of the terms and conditions of the right-of-way grant. The Company believes that by failing to completethe environmental review process for the Cadiz Project, asspecified in the Principles of Agreement, Metropolitan violatedthis contract. On April 7, 2003, the Company filed anadministrative claim against Metropolitan, asserting the breachof various obligations specified in the Company's Principles ofAgreement with Metropolitan, and subsequently filed a lawsuitagainst Metropolitan with the Los Angeles Superior Court onNovember 17, 2005. The Company remains committed to its water programs and itcontinues to explore all opportunities for development of theseassets. As further discussed in Note 1, exploratory discussionshave been initiated with representatives of governmentalorganizations, water agencies, and private water users withregard to their expressed interest in implementation of the CadizProject. However, at the present time, the Company does not havea commitment from any of these parties for the implementation ofthe Cadiz Project. In November 2004, the Company raised $21.3 million in cashthrough a private sale of common stock, of which $10.0 millionwas used to pay down long term debt. Based on current forecasts,the Company believes it has sufficient resources to fundoperations beyond December 2006. The Company's current resourcesdo not provide the capital necessary to fund the waterdevelopment project should the Company be required to do so.There is no assurance that additional financing (public orprivate) will be available on acceptable terms or at all. If theCompany issues additional equity securities to raise funds, theownership percentage of the Company's existing stockholders wouldbe reduced. New investors may demand rights, preferences orprivileges senior to those of existing holders of common stock.If the Company cannot raise needed funds, it might be forced tomake further substantial reductions in its operating expenses,which could adversely affect its ability to implement its currentbusiness plan and ultimately its viability as a company. Thesefinancial statements do not include any adjustments that mightresult from these uncertainties.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As discussed in Note 1, subsequent to the effective date ofthe Plan of reorganization of Sun World, the Company's primaryactivities are limited to the development of its water resourceprograms and related assets. From the effective date of the Planof reorganization through December 31, 2005, the Company hasincurred losses of approximately $5.2 million and used cash inoperations of approximately $1.3 million. Page 43Principles of Consolidation The consolidated financial statements include the accountsof the Company and those of Sun World until January 30, 2003, atwhich date Sun World and certain of its subsidiaries (Sun DesertInc., Coachella Growers, and Sun World/Rayo) filed voluntarypetitions for relief under Chapter 11 of the Bankruptcy Code. Asof that date, due to the Company's loss of control over theoperations of Sun World, the financial statements of Sun Worldwere no longer consolidated with those of Cadiz, but instead,Cadiz accounted for its investment in Sun World on the cost basisof accounting. As a result of changing to the cost basis ofaccounting on January 31, 2003, the Company had a net investmentin Sun World of $195,000 consisting of loans and other amountsdue from Sun World of $13,500,000 less losses in excess ofinvestment in Sun World of $13,305,000. The Company wrote off itsnet investment in Sun World during the quarter ended March 31,2003. In December 2003, the Company transferred substantially allof its assets (with the exception of our office sublease, certainoffice furniture and equipment and any Sun World related assets)to Cadiz Real Estate LLC, a Delaware limited liability company("Cadiz Real Estate"). The Company holds 100% of the equityinterests of Cadiz Real Estate, and therefore continues to hold100% beneficial ownership of the properties that it transferredto Cadiz Real Estate. Because the transfer of the Company'sproperties to Cadiz Real Estate has no effect on its ultimatebeneficial ownership of these properties, the properties owned ofrecord either by Cadiz Real Estate or by the Company are treatedas belonging to the Company. ONE-FOR-25 REVERSE STOCK SPLIT In December 2003, the Company effected a one-for-25 reversestock split. All share and per share information in theaccompanying financial statements have been retroactivelyrestated to reflect the effect of this stock split.USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity withgenerally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reportingperiod. In preparing these financial statements, management hasmade estimates with regard to revenue recognition, goodwill andother long-lived assets, and deferred tax assets. Actual resultscould differ from those estimates.REVENUE RECOGNITION The Company recognizes crop sale revenue upon shipment andtransfer of title to customers. Prior to the deconsolidation ofSun World, packing revenues and marketing commissions from thirdparty growers were recognized when the related services wereSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.provided. Proprietary product development revenues wererecognized based upon product sales by licensees. Projectdevelopment and management fees were recorded when earned underthe terms of the related agreement. Page 44 Sun World revenues attributable to one national retailertotaled $0.1 million (2.2%) for the month ended January 31, 2003.Revenues attributable to another national retailer totaled $0.5million (16.6%) for the month ended January 31, 2003. Sun Worldexport sales accounted for approximately 6.1% of revenues for themonth ended January 31, 2003. Services and license revenues wereless than 10% of total revenues for the year ended December 31,2003.RESEARCH AND DEVELOPMENT Prior to the deconsolidation of Sun World, the Companyincurred costs to research and develop new varieties ofproprietary products. Research and development costs wereexpensed as incurred. Such costs incurred by Sun World wereapproximately $183,000 for the month ended January 31, 2003, andare included in general administrative expenses in the statementof operations.NET LOSS PER COMMON SHARE Basic Earnings Per Share (EPS) is computed by dividing thenet loss, after deduction for preferred dividends either accruedor imputed, if any, by the weighted-average common sharesoutstanding. Options, deferred stock units, warrants, andparticipating and redeemable preferred stock convertible into orexercisable for certain shares of the Company's common stock,were not considered in the computation of diluted EPS becausetheir inclusion would have been antidilutive. Had theseinstruments been included, the fully diluted weighted averageshares outstanding would have increased by approximately 725,000shares, 68,000 shares, and 125,000 shares for the years endedDecember 31, 2005, 2004 and 2003, respectively.STOCK-BASED COMPENSATION As permitted under Statement of Financial AccountingStandards No. 123 ("SFAS 123"), "Accounting for Stock-BasedCompensation" as amended by SFAS 148, "Accounting for Stock-BasedCompensation-Transition and Disclosure", the Company has electedto follow Accounting Principles Board Opinion No. 25, "Accountingfor Stock Issued to Employees" in accounting for its stockoptions and other stock-based employee awards. Pro formainformation regarding net loss and loss per share, as calculatedunder the provisions of SFAS 123, are disclosed in the tablebelow. The Company accounts for equity securities issued to non-employees in accordance with the provisions of SFAS 123 andEmerging Issues Task Force 96-18. Had compensation cost for these plans been determined using fairvalue the Company's net loss and net loss per common share wouldhave increased to the following pro forma amounts (dollars inthousands except per share amounts): Page 45 YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 2003 ---- ---- ---- Net loss applicable to common stock:Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 EQUIVALENTS The Company considers all short-term deposits with anoriginal maturity of three months or less to be cash equivalents.The Company invests its excess cash in deposits with majorinternational banks, government agency notes and short-termcommercial paper and, therefore, bears minimal risk. Suchinvestments are stated at cost, which approximates fair value,and are considered cash equivalents for purposes of reportingcash flows.PREPAID INTEREST EXPENSE As part of the private sale of common shares on November 30,2004, the Company issued to its lender $2.4 million of units asprepaid interest under the Company's $25 million borrowing fromING. The current portion of this interest is included in PrepaidInterest Expense and the non-current portion is included in OtherAssets in the Consolidated Balance Sheet. The total amount ofprepaid interest was $1,284,000 and $2,400,000 on December 31,2005 and 2004, respectively.PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS Property, plant, equipment and water programs are stated atcost. The Company capitalized direct and certain indirect costs ofplanting and developing orchards and vineyards during thedevelopment period, which varied by crop and generally rangedfrom three to seven years. Depreciation commenced in the yearcommercial production was achieved. Permanent land development costs, such as acquisition costs,clearing, initial leveling and other costs required to bring theland into a suitable condition for general agricultural use, werecapitalized and not depreciated, since these costs weredetermined to have an indefinite useful life. Depreciation is provided using the straight-line method overthe estimated useful lives of the assets, generally ten to forty-five years for land improvements and buildings, three to twenty-five years for machinery and equipment, and five to thirty yearsfor permanent crops. Page 46 Water rights and water storage and supply programs arestated at cost. All costs directly attributable to thedevelopment of such programs are being capitalized by theCompany. These costs, which are expected to be recovered throughfuture revenues, consist of direct labor, drilling costs,consulting fees for various engineering, hydrological,environmental and feasibility studies, and other professional andSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.legal fees.IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates its long-lived assets, includingintangibles, for potential impairment when circumstances indicatethat the carrying amount of the asset may not be recoverable.This evaluation is based upon estimated future cash flows. In theevent that the undiscounted cash flows are less than the net bookvalue of the assets, the carrying value of the assets will bewritten down to their estimated fair value. As a result of theactions taken by Metropolitan in the fourth quarter of 2002 asdescribed in Note 1, the Company, with the assistance of avaluation firm, evaluated the carrying value of its water programand determined that the asset was not impaired and that the costswere estimated to be recovered through implementation of theCadiz Project with other government organizations, water agenciesand private water users. In 2005, 2004 and 2003 the Companyreviewed the valuation of the its water program and concludedthat the carrying amount of the program was not impaired. TheCompany's estimate could be impacted by changes in plans relatedto the Cadiz Project. Permanent crops and developing crops shown as Cadiz assetsconsist of lemon groves and grape vineyards located on the CadizValley property. These crops have previously been leased to SunWorld and an unaffiliated third party. During the fourth quarterof the year ended December 31, 2004, the long-standing lease toSun World was terminated. In 2005, an independent third partyleased the vineyards, and the company farmed the 2005 citruscrop. The vineyard leases do not generate a significant amountof revenue, and the future profitability of lemon farmingoperations is uncertain. Due to the uncertainty of recoveringthe carrying value of the permanent and developing crops, theCompany recorded a charge of $3.4 million in 2004 to write offthe capitalized cost of these crops, which is shown under theheading "Write-off of permanent and developing crops" on theConsolidated Statement of Operations.GOODWILL AND OTHER ASSETS As a result of a merger in May 1988 between two companies,which eventually became known as Cadiz Inc., goodwill in theamount of $7,006,000 was recorded. Approximately $3,193,000 ofthis amount was amortized prior to the adoption of Statement ofFinancial Accounting Standards No. 142, ("SFAS No. 142")"Goodwill and Other Intangible Assets" on January 1, 2002.Goodwill is tested for impairment annually in the first quarterof each year, or if events occur which require an impairmentanalysis be performed. As a result of the actions taken byMetropolitan in the fourth quarter of 2002 as described in Note1, the Company, with the assistance of a valuation firm,performed an impairment test of its goodwill and determined thatits goodwill was not impaired. In addition, the Company,performed its annual impairment test of goodwill in the firstquarter of 2005, 2004 and 2003 and determined that the goodwillwas not impaired. Page 47 Capitalized loan fees represent costs incurred to obtaindebt financing. Such costs are amortized over the life of therelated loan. At December 31, 2005 and 2004, the capitalizedloan fees relate to costs incurred in connection with the INGloan described in Note 6.INCOME TAXESSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Income taxes are provided for using an asset and liabilityapproach which requires the recognition of deferred tax assetsand liabilities for the expected future tax consequences oftemporary differences between the financial statement and taxbases of assets and liabilities at the applicable enacted taxrates. A valuation allowance is provided when it is more likelythan not that some portion or all of the deferred tax assets willnot be realized.FAIR VALUE OF FINANCIAL INSTRUMENTS Financial assets with carrying values approximating fairvalue include cash and cash equivalents and accounts receivable.Financial liabilities with carrying values approximating fairvalue include accounts payable and accrued liabilities due totheir short-term nature. The carrying value of the Company'sdebt approximates fair value, based on interest rates currentlyavailable to the Company for debt with similar terms.SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest during the years ended December 31,2004 and 2003 was $3,970,000 and $3,913,000, respectively. Asdescribed in Note 2, cash interest payments due on the ING loanin the year ended December 31, 2005 were credited against a $2.4million prepaid interest account that had been established forthis purpose. No cash was paid for income taxes during the yearsended December 31, 2005, 2004 and 2003, respectively.RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB revised Statement No. 123 (FAS123R), "Share-Based Payment", which requires companies to expensethe estimated fair value of employee stock options and similarawards. On April 14, 2005, the U.S. Securities and ExchangeCommission adopted a new rule amending the compliance dates forFAS 123R. In accordance with the new rule, the accountingprovisions of FAS 123R will be effective for the Companybeginning in the first quarter of fiscal 2006. The Companytentatively expects to adopt the provisions of FAS123R using amodified prospective application. FAS 123R, which providescertain changes to the method of valuing share-based compensationamong other changes, will apply to new awards and to awards thatare outstanding on the effective date and are subsequentlymodified or cancelled. Compensation expense for outstandingawards for which the requisite service had not been rendered asof the effective date will be recognized over the remainingservice period using the compensation cost calculated for proforma 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 theprocess of determining how the guidance regarding value share-based compensation as prescribed in FAS 123R will be applied tovalue share-based awards granted after the effective date and theimpact that the recognition of compensation expense related tosuch awards will have on its financial statements. Page 48 In December 2004, the FASB issued SFAS No. 153, "Exchange ofNonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No.153 is based on the principle that exchanges of nonmonetaryassets should be measured based on the fair value of the assetsexchanged. APB Opinion No. 29, "Accounting for NonmonetaryTransactions," provided an exception to its basic measurementprinciple (fair value) for exchanges of similar productiveassets. Under APB Opinion No. 29, an exchange of a productiveasset for a similar productive asset was based on the recordedSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.amount of the asset relinquished. SFAS No. 153 eliminates thisexception and replaces it with an exception of exchanges ofnonmonetary assets that do not have commercial substance. TheCompany has concluded that SFAS No. 153. will not have a materialimpact on its consolidated financial statements. In March 2005, the FASB issued FIN 47, "Accounting forConditional Asset Retirement Obligations," an interpretation ofSFAS 143. This statement clarified the term conditional assetretirement obligation and is effective for the Company's fourthquarter ending December 31, 2005. Adoption of FIN 47 did nothave an impact on the Company's consolidated financialstatements.NOTE 3 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS------------------------------------------------------ Property, plant, equipment and water programs consist of thefollowing (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 ======== ======== Depreciation expense during the years ended December 31,2005, 2004 and 2003 was $229,000, $527,000 and $683,000respectively. Prior to 2005, all permanent crops and developing cropsshown as Cadiz assets were leased to Sun World and to anunaffiliated third party. In the fourth quarter of the yearended December 31, 2004, the lease of the Cadiz Valley farmingproperty to Sun World terminated. Based on the uncertainty as topossible recovery of the carrying value of the permanent cropsand developing crops on this property, during the last quarter of2004 the Company wrote off $3.4 million, net of depreciation, ofpermanent and developing crops at this property. Page 49NOTE 4 - OTHER ASSETS--------------------- Other assets consist of the following (dollars inthousands): DECEMBER 31, 2005 2004 ---- ---- Deferred loan costs, net $ 120 $ 148 Prepaid interest 544 1,294 Property tax refund receivable - 11 -------- -------- $ 664 $ 1,453 ======== ========Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Amortization expense of deferred loan costs was $28,000,$3,767,000 and $641,000 in 2005, 2004, and 2003, respectively,and is included in interest expense in the statement ofoperations. Amortization expense included in the consolidatedfinancial statements for Sun World's capitalized trademarkdevelopment was $60,000 in 2003.NOTE 5 - ACCRUED LIABILITIES---------------------------- Accrued liabilities consist of the following (dollars inthousands): 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 ======== ========NOTE 6 - LONG-TERM DEBT----------------------- At December 31, 2005 and 2004, the carrying amount of theCompany's outstanding debt is summarized as follows (dollars inthousands): 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 Pursuant to the Company's loan agreements, annual maturitiesof long-term debt outstanding on December 31, 2005 are asfollows: YEAR $000'S ---- ------ 2006 $ 8 2007 9 2008 10,009 2009 9 2010 15,856Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. -------- $ 25,891 ======== The senior term bank loan, which previously consisted of arevolving credit facility and a term loan, had an outstandingbalance of $25,851,000 and $25,000,000 at December 31, 2005 and2004, respectively. The senior term bank loan was due on January31, 2003 and, through various amendment and extensions, is nowdue on March 31, 2010, with a $10 million mandatory principalrepayment due on or before March 31, 2008. In February 2002, the Company completed an amendment to thesenior term bank facility that extended the maturity date of theobligation to January 31, 2003. The interest rate could eitherbe LIBOR plus 300 basis points if paid in cash or LIBOR plus 700basis points if paid in common stock. In March 2002, therevolving credit facility was increased from $15 million to $25million, with $10 million of the $25 million revolver convertibleinto 1,250,000 of the Company's common stock any time prior toJanuary 2003 at the election of the lender. In connection withobtaining the extension of the term loan and revolver and theincrease in the revolver, the Company repriced certain warrantspreviously issued and issued certain additional warrants topurchase shares of the Company's common stock. The estimated fairvalue of the warrants issued and repriced was calculated usingthe Black Scholes option pricing model and was recorded as a debtdiscount and was being amortized over the remaining term of theloan. The Company failed to pay off the senior term bank loan onits maturity date of January 31, 2003 and on February 13, 2003,the lender delivered to the Company a Notice of Default andDemand for Payment. On December 15, 2003, the Company entered into an amendmentof its senior term loan and revolving credit facility to extendthe maturity date through March 31, 2005 and was entitled toobtain further extensions through September 30, 2006, bymaintaining sufficient balances, among other conditions, in acash collateral account with the lender. The maximum aggregateamount to be outstanding under the amended credit facility was$35 million plus accrued interest. The amendment of the creditfacility did not constitute a troubled debt restructuring and wasaccounted for as a debt modification under EITF 96-19. Inconnection 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 $5million was recorded as a debt discount and was being amortizedover the initial term of the note through March 31, 2005. Interest under the amended credit facilities was payableSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.semiannually at the Company's option in either cash at 8% perannum, or in cash and paid in kind ("PIK"), at 4% per annum forthe cash portion and 8% per annum for the PIK portion. The PIKportion was to be added to the outstanding principal balance. On November 30, 2004 the Company entered into anotheramendment of its senior term loan agreement with ING. Theamendment of the credit facility did not constitute a troubleddebt restructuring and was accounted for as a debt extinguishmentunder EITF 96-19. Pursuant to this amendment, the Company; * repaid in full the senior term loan portion of the facility with ING of $10 million and reduced to $25 million the outstanding principal balance under the existing revolving portion of the loan; * amended the terms and conditions of the loan facility with ING in order to: (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). * wrote off of the remaining $1.4 million in unamortized financing costs associated with the loan under the terms applicable as of the previous, December 2003, amendment. The terms of the amended loan facilities also requirecertain mandatory prepayments from the cash proceeds of futureequity issuances by the Company and prohibit the payment ofdividends. The senior term loan is collateralized by substantially allof the assets of the Company. At December 31, 2005 the Companywas in compliance with its debt covenants. Page 52NOTE 7 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION----------------------------------------------------- Condensed consolidating financial information for the yearended December 31, 2003 for the Company are presented below (inthousands). The condensed consolidating financial informationfor 2003 include the accounts of the Company and those of SunWorld until January 30, 2003, at which time Sun World was nolonger consolidated. No consolidating balance sheet informationfor 2003 and no consolidating financial information for 2004 and2005 are presented, as the consolidated financial statementsinclude only the results of Cadiz due to the deconsolidation ofSun World on January 30, 2003. Page 53CONSOLIDATING STATEMENTOF OPERATIONS INFORMATIONYEAR ENDED DECEMBER 31, 2003 CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED ----- --------- ------------ ------------Revenues $ 303 $ 3,005 $ (146) $ 3,162 -------- -------- -------- --------Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Costs and expenses: Cost of sales 333 2,653 (21) 2,965 General and administrative 4,653 707 (125) 5,235 Write off of investment in subsidiary 195 - - 195 Reorganization Costs - 655 - 655 Depreciation and amortization 553 190 - 743 -------- -------- -------- -------- Total costs and expenses 5,734 4,205 (146) 9,793 -------- -------- -------- --------Operating loss (5,431) (1,200) - (6,631)Loss from subsidiary (2,469) - 2,469 -Interest expense, net 3,636 1,269 - 4,905 -------- -------- -------- --------Loss before income taxes (11,536) (2,469) 2,469 (11,536)Income tax expense - - - - -------- -------- -------- -------- Net loss (11,536) (2,469) 2,469 (11,536)Less: Preferred stock dividends (918) - - (918) Imputed dividend on preferred stock (1,600) - - (1,600) -------- -------- -------- --------Net loss applicable to common stock $(14,054) $ (2,469) $ 2,469 $(14,054) ======== ======== ======== ========CONSOLIDATING STATEMENT OFCASH FLOW INFORMATIONYEAR ENDED DECEMBER 31, 2003 CADIZ SUN WORLD ELIMINATIONS CONSOLIDATED ----- --------- ------------ ------------Net cash used for operating activities $ (4,881) $ (1,703) $ - $ (6,584) -------- -------- -------- --------Cash flows from investing activities: Disposal of subsidiary - (1,019) - (1,019) Additions to property, plant and equipment - (140) - (140) Additions to developing crops (34) (197) - (231) Payment of loan to officer 181 - - 181 Increase in restricted cash (2,142) - - (2,142) (Increase) decrease in other assets 5 (109) - (104) -------- -------- -------- --------Net cash used for investing activities (1,990) (1,465) - (3,455) -------- -------- -------- --------Cash flows from Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. financing activities: Proceeds from issuance of long-term debt - 135 - 135 Net proceeds from issuance of stock 10,304 - - 10,304 Financing costs (400) - - (400) Proceeds from convertible note payable 200 - - 200 Principal payments on long-term debt - (7) - (7) -------- -------- -------- --------Net cash provided by financing activities 10,104 128 - 10,232 -------- -------- -------- --------Net increase (decrease) in cash and cash equivalents 3,233 (3,040) - 193Cash and cash equivalents, beginning of period 189 3,040 - 3,229 -------- -------- -------- --------Cash and cash equivalents, end of period $ 3,422 $ - $ - $ 3,422 ======== ======== ======== ======== Page 54NOTE 8 - INCOME TAXES--------------------- Deferred taxes are recorded based upon differences betweenthe financial statement and tax bases of assets and liabilitiesand available carryforwards. Temporary differences andcarryforwards which gave rise to a significant portion ofdeferred tax assets and liabilities as of December 31, 2005 and2004 are as follows (in thousands): DECEMBER 31, 2005 2004 ---- ---- Deferred tax assets: Net operating losses $ 22,763 $ 36,238 Fixed asset basis difference 8,037 8,049 Contributions carryover - 35 Accrued liabilities and other 814 61 -------- -------- Total deferred tax assets 31,614 44,383 Valuation allowance for deferred tax assets (31,614) (44,383) -------- -------- Net deferred tax asset $ - $ - ======== ======== The valuation allowance decreased $12,769,000 in 2005,primarily due to a decrease in the net operating loss category ofdeferred tax assets and increased $623,000 in 2004 due to anincrease in the deferred tax assets. As of December 31, 2005, the Company had net operating lossSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.(NOL) carryforwards of approximately $67 million for federalincome tax purposes. Such carryforwards expire in varyingamounts through the year 2025. This amount reflects theeffective reduction of the NOL carryforward as a result ofownership change annual limitation amounts. On August 26, 2005, a Settlement Agreement between Cadiz, onthe one hand, and Sun World and three of Sun World'ssubsidiaries, on the other hand, was approved by the U.S.Bankruptcy Court, concurrently with the Court's confirmation ofthe amended Plan. The Settlement Agreement provides thatfollowing the September 6, 2005 effective date of Sun World'splan of reorganization, Cadiz will retain the right to utilizethe Sun World net operating loss carryovers (NOLs). Sun WorldFederal 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' taxliability for such year, then Cadiz will pay to the Sun Worldbankruptcy estate 25% of the amount of such reduction, and shallretain the remaining 75% for its own benefit. There is norequirement that Cadiz utilize these NOLs during thisreimbursement period, or provide any reimbursement to the SunWorld bankruptcy estate for any NOLs used by Cadiz after thisreimbursement period expires. Because it is more likely than not that the Company will notrealize its net deferred tax assets, it has recorded a fullvaluation allowance against these assets. Accordingly, nodeferred tax asset has been recorded in the accompanying balancesheet. Section 382 of the Internal Revenue Code imposes an annuallimitation on the utilization of net operating loss carryforwardsbased on a statutory rate of return (usually the "applicable Page 55federal funds rate", as defined in the Internal Revenue Code) andthe value of the corporation at the time of a "change ofownership" as defined by Section 382. Due to past equityissuances and equity issuances in 2005, and due to the Chapter 11filing by Sun World, the Company's ability to utilize netoperating loss carryforwards is limited to approximately $7million annually, potentially adjusted by built-in gain terms. A reconciliation of the income tax benefit to the statutoryfederal income tax rate is as follows (dollars in thousands): YEAR ENDED DECEMBER 31, ---------------------- 2005 2004 2003 ---- ---- ---- Expected federal income tax benefit at 34% $ (7,714) $ (5,453) $ (3,922) Loss with no tax benefit provided 1,672 1,993 3,900 Federal AMT refund - - - State income tax 336 2 2 Amortization/write off of debt discount - 1,614 - Stock Options 4,020 - - Losses utilized against unconsolidated subsidiary taxable income 2,012 1,837 - Other non-deductible expenses 10 7 20 -------- -------- --------Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Income tax expense (benefit) $ 336 $ - $ - ======== ======== ========NOTE 9 - EMPLOYEE BENEFIT PLANS------------------------------ The Company has a 401(k) Plan for its salaried employees.Employees must work 1,000 hours and have completed one year ofservice to be eligible to participate in this plan. The Companymatches 75% of the first four percent deferred by an employee upto $1,600 per year. The Company contributed $22,000, $3,000 and$12,000 to the plans for fiscal years 2005, 2004 and 2003,respectively. Contributions include those made under Sun Worldplans for its employees for January 2003.NOTE 10 - PREFERRED AND COMMON STOCK-----------------------------------SERIES F CONVERTIBLE PREFERRED STOCK The Company has an authorized class of 100,000 shares of$0.01 par value Series F Convertible preferred stock ("Series FPreferred Stock"). On December 15, 2003, the Company issued100,000 shares of Series F Convertible Preferred Stock inconjunction with the extension of the Company's senior termloan's maturity date. The 100,000 preferred shares wereinitially convertible into 1,728,955 shares of Common Stock ofthe Company. The holders of the Preferred Stock are entitled toreceive dividends as if the shares had been converted to CommonStock if dividends are paid on the Company's common stock. TheSeries F Preferred Stock may not be redeemed by the Company. Theestimated value of the Series F Preferred Stock was recorded as adebt discount and was being amortized over the initial term ofthe senior term loans through March 31, 2005. However, when thesenior term loans were amended on November 30, 2004, theremaining debt discount of $1.4 million was written off. Page 56On November 30, 2004, 99,000 shares of the Series F Preferred Stock were converted into 1,711,665 shares of Common Stock of theCompany leaving 1,000 shares of the Series F Preferred Stockoutstanding.SERIES D CONVERTIBLE PREFERRED STOCK On December 29, 2000, the Company issued 5,000 shares ofSeries D Convertible Preferred Stock ("Series D Preferred Stock")for $5,000,000. The holders of the Preferred Stock were entitledto receive dividends, payable semi-annually, at a rate of 7% ifpaid in cash or 9% if paid in the Company's common stock. TheSeries D Preferred Stock was initially convertible into 25,000shares of the Company's common stock any time prior to July 2004at the election of the holder. The Company also had the right toconvert the Series D Preferred Stock, but only when the closingprice of the Company's common stock had exceeded $300 per sharefor 30 consecutive trading days. Holders were entitled to aliquidation preference equal to the initial purchase of $1,000per share plus any accrued and unpaid dividends. The Series DPreferred Stock would be redeemable in July 2004 if stilloutstanding. In 2003, all outstanding shares of Series Dpreferred stock were exchanged for common stock as furtherdescribed below. The Company issued certain warrants to purchase shares ofSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.the Company's common stock in connection with the issuance of theSeries D Preferred Stock. The fair market value of the Company'scommon stock at the time of issuance was above the accountingconversion price resulting in an imputed dividend (beneficialconversion feature). The estimated fair value of the warrantsissued (calculated using the Black Scholes option pricing model)and the imputed dividend totaled $1,050,000 which was recorded asa discount to the Series D Preferred Stock. The discount wasamortized through the redemption date of the stock and treated asa reduction to earnings for earnings per share calculations.Upon exchange of the Series D Preferred Stock for common stock inOctober 2003, the unamortized beneficial conversion feature wascharged against paid in capital.SERIES E-1 AND E-2 CONVERTIBLE PREFERRED STOCK During the fourth quarter of 2001, the Company issued 3,750shares of Series E-1 Convertible Preferred Stock and 3,750 sharesof Series E-2 Convertible Preferred Stock (the "Series EPreferred Stock") for an aggregate of $7,500,000. The holders ofthe Series E Preferred Stock are entitled to receive dividends,payable semi-annually, at a rate of 7% if paid in cash or 9% ifpaid in the Company's common stock. The Series E Preferred Stockwas convertible into 40,000 shares of the Company's common stockany time prior to July 2004 at the election of the holder. TheCompany also had the right to convert the Series E PreferredStock, but only when the closing price of the Company's commonstock had exceeded $262 per share for 30 consecutive tradingdays. Holders were entitled to a liquidation preference equal tothe initial purchase of $1,000 per share plus any accrued andunpaid dividends. The Series E Preferred Stock would beredeemable in July 2004 if still outstanding. In 2003, alloutstanding shares of Series E preferred stock were exchanged forcommon stock as further described below. The Company issued 1,600 shares of the Company's commonstock and certain warrants to purchase shares of the Company'scommon stock in connection with the issuance of the Series EPreferred Stock. The fair market value of the Company's commonstock at the Page 57time of issuance was above the accounting conversion price resulting in an imputed dividend (beneficial conversionfeature). The estimated fair value of the warrants issued(calculated using the Black Scholes option pricing model) and theimputed dividend totaled $1,614,000 which was recorded as adiscount to the Series E-1 and Series E-2 Preferred Stock. Thediscount is being amortized through the redemption date of thestock and treated as a reduction to earnings for earnings pershare calculations. Upon exchange of the Series E Preferred Stockfor common stock in October 2003, the unamortized beneficialconversion feature was charged against paid in capital. On October 15, 2002, the Company and preferred stockholdersagreed to amend the Certificates of Designations of Series D,Series E-1 and Series E-2 Preferred Stock to (i) reduce theconversion price from $200 per share for the Series D PreferredStock and from $187.50 per share for Series E Preferred Stock to$131.25 per share for both Series D and Series E Preferred Stock;and (ii) extend the redemption date to July 16, 2006. With theassistance of a valuation firm, the Company determined that theadditional value associated with the reduction in the conversionprice was offset by the extension of the redemption date and thatthere was no loss or gain attributable to the amendment to theCertificates of Designations. Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. On October 20, 2003, the Company and the preferredstockholders entered into an agreement to (i) exchange alloutstanding shares of Series D Preferred Stock, plus accrued andunpaid dividends, for an aggregate of 320,000 shares of commonstock; and (ii) exchange all outstanding shares of series EPreferred Stock, plus accrued and unpaid dividends, for anaggregate of 80,000 shares of common stock. In connection withthis conversion, the Company recorded a charge of $42,000 againstpaid in capital as an inducement to convert. At this time theCompany also recorded the unamortized beneficial conversionfeature of the Series D and Series E Preferred Stock as a chargeagainst paid in capital. COMMON STOCK AND WARRANTS On November 30, 2004, the Company completed a privateplacement of 400,000 Units at the price of $60.00 per Unit. EachUnit consisted of five (5) shares of the Company's common stockand one (1) common stock purchase warrant. Each Warrant willentitle the holder to purchase, commencing 180 days from the dateof issuance, one (1) share of common stock at an exercise priceof $15.00 per share. Each Warrant has a term of three (3) years,but will be callable at $15.00 per share by the Companycommencing twelve months following completion of the placement ifthe common shares have been registered and the closing marketprice of the Company's common stock exceeds $18.75 for 10consecutive trading days. An individual who assisted the company in identifyingparticipants in the November 30, 2004 private placement electedto receive a commission for the services in stock rather thancash. The commission amount was $326,400, and 27,200 commonshares were issued in payment of the obligation in February,2005. The 2004 Management Bonus Plan provided for the grantingof 10,000 shares of common stock valued at $12.00 per share. Thecost of the grant was recognized in December 2004, and 10,000shares were issued in May, 2005. Page 58NOTE 11 - STOCK-BASED COMPENSATION PLANS AND WARRANTS-----------------------------------------------------STOCK AND STOCK OPTIONS ISSUED TO DIRECTORS, OFFICER, CONSULTANTSAND EMPLOYEES The Company issued options pursuant to its 1996 Stock OptionPlan (the "1996 Plan"), the 1998 Non-Qualified Stock Option Plan(the "1998 Plan") and the Management Equity Incentive Plan. TheCompany also grants stock awards pursuant to its 2000 Stock AwardPlan (the "2000 Plan"), Management Equity Incentive Plan, and2004 Management Bonus Plan, described below. Collectively, the1996 Plan, the 1998 Plan, and the 2000 Plan provided for thegranting of up to 160,000 shares. All options under the 1996Plan, the 1998 Plan and the 2000 Plan were granted at a priceapproximating fair market value at the date of grant, had vestingperiods ranging from issuance date to five years, had maximumterms ranging from five to seven years and were issued todirectors, officers, consultants and employees of the Company.The Management Equity Incentive Plan provides for the granting of1,094,712 shares of common stock and 377,339 options for thepurchase of one share of common stock. The 2004 Management BonusPlan provides for the granting of 10,000 shares of common stockvalued at $12.00 per share. With one exception, all options issued under the 1996 Plan,the 1998 Plan and the 2000 plan expired in 2005. All the optionsSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.issued under these plans had strike prices significantly abovemarket prices. In 2005, an agreement was reached with the soleholder of unexpired options issued under these plans to cancelthose options. The 1996 Plan, the 1998 Plan and the 2000 Planwere then terminated. As a result, all options outstanding atDecember 31, 2005 were issued under the Management EquityIncentive Plan. Compensation cost for stock options granted to employees ismeasured as the excess, if any, of the quoted market price of theCompany's stock at the date of the grant over the amount anemployee must pay to acquire the stock. The Company has adopted the disclosure-only provisions ofStatement of Financial Accounting Standards No. 123, ("SFAS123"), "Accounting for Stock-Based Compensation." The fair valueof each option granted in 2005 was estimated on the date of grantusing the Black Scholes option pricing model based on weighted-average assumptions of: risk-free interest rate of 4.22%,expected volatility of 46.0%, expected life of ten years and anexpected dividend of zero. The following table summarizes stock option activity for theperiods noted. All options listed below were issued to officers,directors, employees and consultants. WEIGHTED- AVERAGE AMOUNT EXERCISE PRICE ------ -------------- Outstanding at December 31, 2002 61,710 $197.45 Granted - - Expired or canceled (7,760) $207.45 Exercised - - -------- Page 59 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(a) $ 12.71 ======== Options exercisable at December 31, 2005 238,335 $ 12.50 ========Weighted-average years of remaining contractual life of options outstanding at December 31, 2005 9.39 ======== (a) Exercise prices vary from $12.00 to $17.25, and expiration dates vary from May 2015 to October 2015. The weighted-average fair value of options granted during2005 was $10.80.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.STOCK PURCHASE WARRANTS ISSUED TO NON-EMPLOYEES The Company accounts for equity securities issued to non-employees in accordance with the provisions of SFAS 123 andEmerging Issues Task Force 96-18. During 2002, in connectionwith the loan amendments for the Cadiz obligations described inNote 6, the Company repriced certain warrants previously issuedresulting in a reduction in the weighted-average exercise price.At December 31, 2002, there were 113,600 warrants outstandingwith a weighted-average exercise price of $58.50 per share, whichexpired through 2006. In connection with the Company's default in February 2003 onits senior term loan and $25 million revolving credit facility,as described in Note 6; (i) warrants held by the lender topurchase 40,000 shares of the Company's common stock vested at anexercise price of $0.25 per share; and (ii) the exercise price onwarrants held by the lender to purchase 57,000 shares of theCompany's common stock was automatically reset to $0.25 pershare. In December 2003, warrants to purchase 94,000 shares ofcommon stock were exercised for $23,500 in total cash proceeds.The remaining warrants to purchase 8,600 shares of common stockof the Company at a weighted average exercise price of $190.00per share expired in 2004. On November 30, 2004 the Company completed a privateplacement of 400,000 units, each Unit consisting of five (5)shares of the Company's common stock and one (1) common stockpurchase warrant. Each of the 400,000 warrants entitle theholder to purchase one (1) Page 60share of common stock at an exercise price of $15.00 per share. Each Warrant has a term of three (3) years, and is callable by the Company commencing twelve months following completion of the placement if the closing market price of the Company's common stock exceeds $18.75 for 10 consecutive trading days. All 400,000 warrants remain outstanding. 2000 STOCK AWARD PLAN The Cadiz Inc. 2000 Stock Award Plan ("Stock Award Plan")was approved by the Company's shareholders in May 2000. Underthe Stock Award Plan, the Company may issue various forms ofstock awards including restricted stock and deferred stock unitsto attract, retain and motivate key employees or other eligiblepersons. Each of the units entitled the holder to receive oneshare of the Company's common stock for each deferred stock unitthree years from the date of grant. During the year endedDecember 31, 2004, 1,289 stock units were exchanged for shares ofthe Company's common stock and the remaining deferred stock unitswere cancelled in exchange for a payment to the holders ofapproximately $9,000. The Stock Award Plan was then terminated.The Company charged $152,000 to expense during the year endedDecember 31, 2003 in connection with the Stock Award Plan.MANAGEMENT EQUITY INCENTIVE PLAN In December 2003, concurrently with the completion of theCompany's then current financing arrangements with ING, theCompany's board of directors authorized the adoption of aManagement Equity Incentive Plan (the "Incentive Plan"). Underthe Incentive Plan, a total of 1,472,051 shares of common stockand common stock options may be granted to key personnel. TheBoard formed allocation committees to direct the initialSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.allocation of 717,373 of these shares and a subsequent allocationof 377,339 shares of common stock and 377,339 options to purchasecommon stock. In May 2005, 717,373 initial allocation shares, 377,339subsequent allocation shares and 325,000 options were awarded.An additional 40,000 options were awarded in October, 2005. All grants are subject to vesting conditions. The initialallocation shares vested 2/3 immediately on the date of the grantand the remaining 1/3 vested on December 11, 2005. Thesubsequent allocation shares of common stock and options topurchase common stock vest 1/3 upon grant, 1/3 on December 7,2005 and 1/3 on December 7, 2006, or such later vesting dates asmay be determined by the subsequent allocation committee. Allgrants are subject to continued employment and immediate vestingupon termination without cause.2004 MANAGEMENT BONUS PLAN In December 2004, the Company, with board approval, adoptedthe Cadiz Inc. 2004 Management Bonus Plan (the "Bonus Plan")pursuant to which a total of 10,000 shares of Cadiz common stock,valued at $12 per share, were authorized for issuance to Mr.Brackpool as a performance bonus. See Item 11 "ExecutiveCompensation". The liability and compensation expense related tothis award was reflected in the 2004 financial statements, andthe shares were issued under the Bonus Plan in May 2005. Page 61NOTE 12 - SEGMENT INFORMATION----------------------------- With Sun World's filing of voluntary petitions for reliefunder Chapter 11 of the Bankruptcy code as further described inNote 1, the primary business of the Company is to acquire anddevelop land and water resources. Prior to the filing ofvoluntary petitions the Company had two reportable segments:water resources (Cadiz) and agriculture (Sun World). After thebankruptcy, the Company's financial results are reported in asingle segment. The accounting policies of the segments are thesame as those described in the summary of significant accountingpolices. The Company's operations are reported in the followingbusiness segments: Financial information by reportable business segment isreported in the following tables: 2004 2003 2002 ---- ---- ---- ($ in thousands)External sales: Water Resources $ 1,197 $ 47 $ 157 Agricultural - - 3,005 -------- -------- --------Consolidated $ 1,197 $ 47 $ 3,162 ======== ======== ========Inter-segment sales: Water Resources $ - $ - $ 146 Agricultural - - (146) -------- -------- --------Consolidated $ - $ - $ - ======== ======== ========Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Total sales: Water Resources $ 1,197 $ 47 $ 303 Agricultural - - 3,005 Other - - (146) -------- -------- --------Consolidated $ 1,197 $ 47 $ 3,162 ======== ======== ========Profit (loss) before income taxes: Water Resources $(20,758) $ (3,530) $ (5,236) Agricultural - - (1,200) Other - (3,443) (195) Interest expense (1,931) (9,064) (4,905) -------- -------- --------Consolidated $(22,689) $(16,037) $(11,536) ======== ======== ========Capital expenditures: Water Resources $ 68 $ 8 $ 34 Agricultural - - 337 -------- -------- --------Consolidated $ 68 $ 8 $ 371 ======== ======== ========Depreciation and amortization: Water Resources $ 229 $ 527 $ 553 Agricultural - - 190 -------- -------- --------Consolidated $ 229 $ 527 $ 743 ======== ======== ========Interest expense, net: Water Resources $ 1,931 $ 9,064 $ 3,636 Agricultural - - 1,269 Other - - - -------- -------- --------Consolidated $ 1,931 $ 9,064 $ 4,905 ======== ======== ======== Page 62Assets: Water Resources $ 46,046 $ 51,071 $ 49,526 Agricultural - - - Other - - - -------- -------- --------Consolidated $ 46,046 $ 51,071 $ 49,526 ======== ======== ========NOTE 13 - CONTINGENCIES----------------------- In the normal course of its agricultural operations, theCompany handles, stores, transports and dispenses productsidentified as hazardous materials. Regulatory agenciesperiodically conduct inspections and, currently, there are nopending claims with respect to hazardous materials. The Company is involved in other legal and administrativeSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.proceedings and claims. In the opinion of management, theultimate outcome of each proceeding or all such proceedingscombined will not have a material adverse impact on the Company'sfinancial statements.NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)----------------------------------------------------(In thousands except per share data) QUARTER ENDED ------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2005 2005 2005 2005 ---- ---- ---- ----Revenues $ 15 $ 15 $ 15 $ 1,152Operating 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) QUARTER ENDED ------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2004 2004 2004 2004 ---- ---- ---- ----Revenues $ 11 $ 9 $ 12 $ 15Operating loss (658) (601) (756) (4,958)Net loss applicable to common stock (2,815) (2,724) (2,894) (7,604)Net loss per common share $ (0.43) $ (0.41) $ (0.44) $ (1.04) Page 63SCHEDULE 1 - VALUATION AND QUALIFYING ACCOUNTS--------------------------------------------------------------------------------FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 ($ IN THOUSANDS) BALANCE AT ADDITIONS CHARGED TO BALANCEYEAR ENDED BEGINNING COSTS AND OTHER AT ENDDECEMBER 31, 2005 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD----------------- ---------- --------- -------- ---------- --------- Tax valuation allowance $ 44,383 $ - $ - $ 12,769 $ 31,614 ========== ====== ========= ========== =========YEAR ENDEDDECEMBER 31, 2004----------------- Tax valuation allowance $ 43,760 $ - $ 623 $ - $ 44,383 ========== ====== ========= ========== =========YEAR ENDEDDECEMBER 31, 2003----------------- Allowance for doubtful accounts $ 547 $ 547 $ - $ - $ -Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ========== ====== ========= ========== ========= Tax valuation allowance $ 65,018 $ - $ (21,258) $ - $ 43,760 ========== ====== ========= ========== ========= Page 64SIGNATURESPursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned,thereto duly authorized. CADIZ INC. By: /s/ Keith Brackpool ---------------------------------- Keith Brackpool, Chairman and Chief Executive Officer Date: March 16, 2006 -----------------Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed by the following persons in thecapacities and on the dates indicated.NAME AND POSITION DATE----------------- ----/s/ Keith Brackpool March 16, 2006--------------------------------- -----------------Keith Brackpool, Chairman and Chief Executive Officer(Principal Executive Officer)/s/ O'Donnell Iselin II March 16, 2006--------------------------------- -----------------O'Donnell Iselin II,Chief Financial Officer (Principal Financial and Accounting Officer)/s/ Murray H. Hutchison March 16, 2006--------------------------------- -----------------Murray H. Hutchison, Director/s/ Timothy J. Shaheen March 16, 2006--------------------------------- -----------------Timothy J. Shaheen, Director/s/ Raymond J. Pacini March 16, 2006--------------------------------- -----------------Raymond J. Pacini, Director/s/ Gregory W. Preston March 16, 2006--------------------------------- -----------------Gregory W. Preston, Director Page 65Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 32.2STATEMENT PURSUANT TO SECTION 906 THE SARBANES-OXLEY ACT OF 2002BY PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER I, O'Donnell Iselin II, herby certify, to myknowledge, that: 1. the accompanying Annual Report on Form 10-K ofCadiz Inc. for the year ended December 31, 2005 (the"Report") fully complies with the requirements of Section13(a) or 15(d), as applicable, of the Securities andExchange Act of 1934, as amended; and 2. the information contained in the Report fairlypresents, in all material respects, the financial conditionand results of operations of Cadiz Inc. IN WITNESS WHEREOF, the undersigned has executed thisStatement as of the date first written above.Dated: March 16, 2006 /s/ O'Donnell Iselin II ------------------------------------- O'Donnell Iselin II Chief Financial Officer and Secretary Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 21.1 CADIZ INC. SUBSIDIARIES OF THE COMPANYRancho Cadiz Mutual Water CompanySun World International, Inc.Cadiz Real Estate LLCSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference inthe Registration Statements on Form S-3 (No.333-130338)and Form S-8 (No. 333-124626) of Cadiz, Inc. of ourreport dated March 16, 2006 relating to the financialstatements, financial statement schedule, management'sassessment of the effectiveness of internal control overfinancial reporting and the effectiveness of internalcontrol over financial reporting, which appears in thisForm 10-K./s/ PricewaterhouseCoopers LLP------------------------------PricewaterhouseCoopers LLPLos Angeles, CaliforniaMarch 16, 2006 Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I , Keith Brackpool, certify that: 1. I have reviewed this annual report on Form 10-K of Cadiz Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internalSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.Dated: March 16, 2006 /s/ Keith Brackpool ------------------------------------ Keith Brackpool Chairman and Chief Executive Officer Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I , O'Donnell Iselin II, certify that: 1. I have reviewed this annual report on Form 10-K of Cadiz Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internalSource: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.Dated: March 16, 2006 /s/ O'Donnell Iselin II ------------------------------------- O'Donnell Iselin II Chief Financial Officer and Secretary Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 32.1STATEMENT PURSUANT TO SECTION 906 THE SARBANES-OXLEY ACT OF 2002BY PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER I, Keith Brackpool, herby certify, to myknowledge, that: 1. the accompanying Annual Report on Form 10-K ofCadiz Inc. for the year ended December 31, 2005 (the"Report") fully complies with the requirements of Section13(a) or 15(d), as applicable, of the Securities andExchange Act of 1934, as amended; and 2. the information contained in the Report fairlypresents, in all material respects, the financial conditionand results of operations of Cadiz Inc. IN WITNESS WHEREOF, the undersigned has executed thisStatement as of the date first written above.Dated: March 16, 2006 /s/ Keith Brackpool ---------------------------------- Keith Brackpool Chairman, Chief Executive Officer Source: CADIZ INC, 10-K, March 16, 2006Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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