Cadiz Inc.
Annual Report 2006

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KCADIZ INC - CDZIFiled: March 16, 2007 (period: December 31, 2006)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 StatesSecurities and Exchange CommissionWashington, D. C. 20549FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934(Mark One)[√] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2006OR[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from …… to …….Commission File Number 0-12114Cadiz Inc.(Exact name of registrant specified in its charter)DELAWARE 77-0313235(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)777 S. Figueroa Street, Suite 4250Los 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 Common Stock, par value $0.01 per share The NASDAQ Stock Market LLC (Title of Class) (Exchange)Securities Registered Pursuant to Section 12(g) of the Act:Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 under the Securities Act of 1933.Yes __ No _√_Indicate by a check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes __ No _√_Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes _√_ No ___Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§220.405 of this chapter) is not contained herein, and willnot be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment of this Form 10-K. □Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule12b-2).Large accelerated filer ___ Accelerated filer _√_ Non-accelerated filer ___Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes___ No _√_Source: CADIZ INC, 10-K, March 16, 2007Powered 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 of March 2, 2007, the Registrant had 11,887,762 shares of common stock outstanding. The aggregate market value of the common stock held bynonaffiliates as of June 30, 2006 was approximately $95,432,717 based on 5,610,389 shares of common stock outstanding held by nonaffiliates and theclosing price on that date. Shares of common stock held by each executive officer and director and by each entity that owns more than 5% of the outstandingcommon stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusivedetermination for other purposes.Documents Incorporated by ReferencePortions of the Registrant's definitive Proxy Statement to be filed for its 2007 Annual Meeting of Stockholders are incorporated by reference into Part III ofthis Report. The Registrant is not incorporating by reference any other documents within this Annual Report on Form 10-K except those footnoted in Part IVunder the heading “Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K”.iSource: CADIZ INC, 10-K, March 16, 2007Powered 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.TABLE OF CONTENTSPart I Item 1.Business 1 Item 1A. Risk Factors 8 Item 1B. Unresolved Staff Comments 10 Item 2. Properties 10 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Part II Item 5.Market for Registrant's Common Equity and Related Stockholder Matters14 Item 6. Selected Financial Data15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations16 Item 7A.Quantitative and Qualitative Disclosures about Market Risk27 Item 8. Financial Statements and Supplementary Data27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures27 Item 9A.Controls and Procedures27 Item 9B.Other Information28 Part III Item 10.Directors, Executive Officers and Corporate Governance29 Item 11. Executive Compensation29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters29 Item 13.Certain Relationships and Related Transactions, and Director Independence29 Item 14.Principal Accountant Fees and Services29 Part IVItem 15.Exhibits and Financial Statement Schedules30 iiSource: CADIZ INC, 10-K, March 16, 2007Powered 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 IITEM 1. BusinessThis Form 10-K presents forward-looking statements with regard to financial projections, proposed transactions such as those concerning the furtherdevelopment of our land and water assets, information or expectations about our business strategies, results of operations, products or markets, or otherwisemakes 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 we believe that the expectations reflected in these forward-lookingstatements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from theseforward-looking statements. These include, among others, the cautionary statements under the caption “Risk Factors”, as well as other cautionary languagecontained in this Form 10-K. These cautionary statements identify important factors that could cause actual results to differ materially from those described inthe forward-looking statements. When considering forward-looking statements in this Form 10-K, you should keep in mind the cautionary statementsdescribed above.OverviewOur primary assets are 45,000 acres of land in three areas of eastern San Bernardino County, California. Virtually all of this land is underlain byhigh-quality groundwater resources with demonstrated potential for recreational, residential, and agricultural development. The properties are also located inproximity to the Colorado River and the Colorado River Aqueduct, the major source of imported water for southern California. The aquifer systemsunderlying the properties contain large amounts of water and are suitable for water storage and supply programs.The value of these assets derives from a combination of projected population increases and limited water supplies throughout southern California. Inaddition, most of the major population centers in southern California are not located where significant precipitation occurs, requiring the importation ofwater from other parts of the state. We therefore believe that a competitive advantage exists for companies that can provide high quality, reliable, andaffordable water to major population centers.Our objective is to realize the highest and best use for these assets. In 1993 we secured permits for up to 9,600 acres of agricultural development inthe Cadiz Valley and the withdrawal of more than 1 million acre-feet of groundwater from the aquifer system underlying the property.Given the location of the property, we then focused on the development of an aquifer storage and supply program on our land in the Cadiz andFenner Valleys. We believe that the location and geology of these properties are uniquely suited for such a development. To this end, in 1997 we entered intothe first of a series of agreements with the Metropolitan Water District of Southern California (“Metropolitan”) to jointly design, permit and build such aproject (the “Cadiz Project” or the “Project”).1Source: CADIZ INC, 10-K, March 16, 2007Powered 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. Between 1997 and 2002, Metropolitan and the Company received substantially all of the various state and federal approvals required for permitsto construct and operate the project and received a federal Record of Decision (“ROD”) from the U.S. Department of the Interior, which endorsed the CadizProject and offered a right of way for construction of project facilities. The federal government also approved a Final Environmental Impact Statement(“FEIS”) in compliance with the National Environmental Policy Act (“NEPA”).With the completion of the federal review and permitting process, Cadiz expected Metropolitan to hold a CEQA hearing, take a vote to approve theFinal Environmental Impact Report (“FEIR”) and accept the right of way offered to the Project by the U.S. Department of the Interior. Metropolitan’s staffbrought the matter before the Metropolitan Board of Directors in October 2002 and, in a very close vote, the Metropolitan Board voted not to accept the rightof way grant and refused to consider whether or not to certify the FEIR, which was a necessary action to authorize implementation of the Cadiz Project inaccordance with the California Environmental Quality Act (“CEQA”).It is our position that these actions breached various contractual and fiduciary obligations to us and interfered with the economic advantage wewould have obtained from the Cadiz Project. In April 2003 we filed a claim against Metropolitan seeking compensatory damages. When settlementnegotiations failed to produce a resolution, we filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17, 2005. Our claims forbreach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance have been allowed and will allgo forward to trial later this year. See Item 3 - “Legal Proceedings”.Regardless of the Metropolitan Board’s actions in October 2002, Southern California’s population continues to grow, and the need for water storageand supply programs has not abated. Moreover, the advantages of underground water storage facilities are increasingly evident. These include minimalsurface environmental impacts, low capital investment, protection from airborne contaminants and minimal evaporative water loss. Therefore we continue topursue the completion of the environmental review process for the Cadiz Project.To that end, the County of San Bernardino has agreed to serve as the CEQA lead agency for the completion of the environmental review of the CadizProject and issue any permits required under California law once the review is completed. We are also working with the U.S. Department of the Interior tohave the permits that were approved during the federal environmental review process, including the right of way granted in the ROD, issued directly to theCompany for the benefit of any participating public agency. Additionally, we are in discussions with several other public agencies regarding their interest inparticipating in the Cadiz Project. These agencies have access to sources of water that can be stored in the Cadiz Project. See “Water Resource Development”,below.In addition to agriculture and water development, the rapid growth of nearby desert communities in southern California, Nevada and Arizonaindicates that the Company’s land holdings may be suitable for other types of development. To this end, we have conducted a detailed analysis of our landassets to assess the opportunities for these properties. Based on this analysis, we believe that our properties have significant long-term potential for residentialand commercial development. We are continuing to explore alternative land uses to maximize the value of our properties.2Source: CADIZ INC, 10-K, March 16, 2007Powered 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 remain committed to our land and water assets and will continue to explore all opportunities for development of these assets. We cannot predictwith certainty which of these various opportunities will ultimately be utilized.(a) General Development of BusinessWe are a Delaware corporation formed in 1992 to act as the surviving corporation in a Delaware reincorporation merger between us and ourpredecessor, Pacific Agricultural Holdings, Inc., a California corporation formed in 1983.As part of our historical business strategy, we have conducted our land acquisition, water development activities, agricultural operations, search forinternational water and agricultural opportunities and real estate development initiatives to maximize the long-term value of our properties and futureprospects. See “Narrative Description of Business” below.Our initial focus was on the acquisition of land, the assembly of contiguous land holdings through property exchanges and to prove the quantityand quality of water resources through well drilling programs. We subsequently established agricultural operations on the properties in the Cadiz and FennerValleys and sought to develop the water resources underlying that site.The focus of our water development activities has been the Cadiz Project. The Metropolitan Board’s decision in late 2002 delayed implementationof the Cadiz Project as we sought a settlement with Metropolitan before proceeding with another state agency. When it became clear that we would not beable to reach settlement and continue the Project with Metropolitan, we began to take steps to complete the environmental review process and implement theProject independently. To that end, in 2006 we began work with San Bernardino County to complete the CEQA environmental review for the Project. In theFall of 2006, the County agreed to serve as the CEQA lead agency in the review of the Project’s existing and updated environmental documents.At the same time we have pursued a claim against Metropolitan, seeking compensatory damages for what we believe is a breach of contractual andfiduciary obligations to us and interference with the economic advantage we would have obtained from the Cadiz Project. We filed a claim againstMetropolitan in April 2003 and, when settlement negotiations failed to produce a resolution, filed a lawsuit in Los Angeles Superior Court in November2005. Our claims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance will all goforward to trial, which is currently scheduled for later this year.In 2006, we refinanced our long term debt with a new $36.4 million zero coupon senior secured convertible term loan that matures on June 29, 2011and received $1.1 million when certain holders of warrants issued in 2004 exercised their right to purchase 70,000 common shares at $15.00 per share. In2007, we exercised our right to terminate the remaining warrants on March 2, 2007, subject to a 30 day notice period. In response, the remaining warrantholders exercised their right to purchase 335,440 shares of our common stock during the notice period, and we received an additional $5.0 million from thesale of these shares. Following this exercise, no warrants remain outstanding. These transactions are described in more detail in3Source: CADIZ INC, 10-K, March 16, 2007Powered 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 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” The Chapter 11 Reorganization Plan of our Sun World International Inc. subsidiary became effective in 2005, and the Company has no furtherliabilities related to the business or operations of Sun World.(b) Financial Information about Industry SegmentsThe primary business of the Company is to acquire and develop land and water resources. Our agricultural operations are confined to limited farmingactivities at the Cadiz Valley property. As a result, the Company’s financial results are reported in a single segment. See Consolidated Financial Statements.See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.(c) Narrative Description of BusinessOur business strategy is the development of our land holdings for their highest and best uses. At present, our development activities are focused onwater resource and real estate development at our San Bernardino County properties.Water Resource Development Our portfolio of water resources, located in proximity to the Colorado River and the Colorado River Aqueduct, the principal source of importedwater for Southern California, provides us with the opportunity to participate in a variety of water storage and supply programs, exchanges and conservationprograms with public agencies and other partners.The Cadiz Valley Aquifer Storage ProjectThe Company owns approximately 35,000 acres of land and related high-quality groundwater resources in the Cadiz and Fenner valleys of easternSan Bernardino County. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed ofapproximately 1,300 square miles. See Item 2, “Properties - The Cadiz/Fenner Property”.In 1997 we commenced discussions with Metropolitan in order to develop principles and terms for a long-term agreement for a joint venturegroundwater storage and supply program on this land (the “Cadiz Project”). The Cadiz Project would have provided Southern California with a valuableincrease in water supply during periods of drought or other emergencies. During wet years, surplus water from the Colorado River would be stored in theaquifer system that underlies the Cadiz property. When needed, the stored water and indigenous groundwater would have been returned to the ColoradoRiver Aqueduct for distribution to water agencies throughout six southern California counties. The Colorado River Aqueduct provides supplemental water toapproximately 18 million people. Additionally, exchange agreements could be used to transfer this supplemental water supply to California communities inthe Central and Northern portions of the state.4Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Temporary withdrawals of indigenous groundwater would also have been available from the Cadiz Project during emergencies. Any temporarywithdrawals would have been strictly monitored according to the provisions of the Groundwater Monitoring & Management Plan (“ManagementPlan”) approved by the U.S. Department of the Interior in its 2002 ROD. The comprehensive Management Plan was created during the Cadiz Project’sextensive environmental review process to ensure long-term protection of the aquifer system and related environmental resources in and surrounding the areain 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 Projectarea;· A 35-mile conveyance pipeline to connect the spreading basins and wellfield to the Colorado River Aqueduct near the Iron Mountainpumping plant; and· A pumping plant to pump water through the conveyance pipeline from the Colorado River Aqueduct near the Iron Mountain pumpingplant to the Cadiz Project spreading basins.The cost of these facilities was estimated to be approximately $150 million in 2002 and is expected to be higher today due to steel price increasesand higher well drilling costs.In October 2001, the Final Environmental Impact Statement (“FEIS”) and Final Environmental Impact Report (“FEIR”) were issued by Metropolitanand the U.S. Bureau of Land Management, in collaboration with the U.S. Geological Survey and the National Park Service. On August 29, 2002, the U.S.Department of Interior approved the FEIS for the Cadiz Project and issued its ROD, the final step in the federal environmental review process for the CadizProject. The ROD amended the California Desert Conservation Area Plan for an exception to the utility corridor element and offered to Metropolitan a rightof way grant for the pipeline from the Colorado River Aqueduct to the Cadiz Project.With all federal approvals in place, on October 8, 2002, Metropolitan’s Board considered acceptance of the terms and conditions of the right of waygrant pursuant to the published ROD. The Board voted not to adopt Metropolitan staff’s recommendation to approve the terms and conditions of the right ofway grant issued by the Department of the Interior by a very narrow margin. Instead, the Board voted for an alternative motion to reject the terms andconditions of the right of way grant and to not proceed with the Cadiz Project. Subsequent to the Metropolitan Board’s action, negotiations toward a finalagreement for the Cadiz Project on the basis of the previously approved definitive economic terms ceased.When Metropolitan’s Board declined to proceed with the Cadiz Project, the FEIR was complete and awaiting certification at a hearing scheduled forlate October 2002. It is our position that Metropolitan’s actions on October 8, 2002, breached various contractual and fiduciary obligations of Metropolitanto us, and interfered with the economic advantage we would have obtained from the Cadiz Project. Therefore, in April 2003 we filed a claim against5Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Metropolitan seeking compensatory damages. When settlement negotiations failed to produce a resolution, we filed a lawsuit against Metropolitan in LosAngeles Superior Court on November 17, 2005. See Item 3 - “Legal Proceedings”. In 2006, the County of San Bernardino agreed to serve as the new CEQA lead agency for the Project and evaluate the changes to the Project as wellas the Project’s existing and updated environmental documentation. Once the CEQA review is complete, the County has the authority to issue any permitsrequired under California law for construction and implementation of the Project. In late 2006 and early 2007, we submitted a technical memorandum andnumerous permit applications to the County, which officially began the CEQA review process. We expect this process to be completed by the end of 2007. We are also working directly with the U.S. Department of the Interior to have the permits that were authorized during the federal environmentalreview process, including the right of way grant included in the ROD, issued directly to the Company. Additionally, we are in discussions with several otherpublic agencies regarding their interest in participating in the Cadiz Project. All of these agencies have access to sources of water that can be stored by theCadiz Project.6Source: CADIZ INC, 10-K, March 16, 2007Powered 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. Other Eastern Mojave PropertiesOur second largest landholding is approximately 9,000 acres in the Piute Valley of eastern San Bernardino County. This landholding is locatedapproximately 15 miles from the resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of Needles, California. Extensivehydrological studies, including the drilling and testing of a full-scale production well, have demonstrated that this landholding is underlain by high-qualitygroundwater. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed of approximately975 square miles. Discussions with potential partners have commenced with the objective of developing our Piute Valley assets.Additionally, we own additional acreage located near Danby Dry Lake, approximately 30 miles southeast of our landholdings in Cadiz and Fennervalleys. Our Danby Lake property is located approximately 10 miles north of the Colorado River Aqueduct. Initial hydrological studies indicate that it hasexcellent potential for a groundwater storage and supply project.Agricultural OperationsOur agricultural operations are very limited. Historically, we leased our Cadiz Valley farming property to Sun World and other third parties.Currently, we lease approximately 160 acres of organic table grape vineyards at our Cadiz Valley property to a third party. The lease is renewable on a year toyear basis with annual revenues of approximately $12,000. In 2006, we farmed 500 acres of table grape vineyards, 240 acres of Lisbon lemons and 20 acres ofEureka lemons. We subcontracted the irrigation labor, harvesting and marketing of the crop to third parties. In 2006, revenues from agricultural operationswere $602,000.SeasonalityOur water resource development activities are not seasonal in nature.With the 2003 bankruptcy and 2005 sale of the assets of our Sun World International, Inc. subsidiary (“Sun World”), our farming operations arelimited. These operations will be subject to the general seasonal trends that are characteristic of the agricultural industry.Competition We face competition for the acquisition, development and sale of our properties from a number of competitors. We may also face competition in thedevelopment of water resources associated with our properties. Since California has scarce water resources and an increasing demand for available water, webelieve that location, price and reliability of delivery are the principal competitive factors affecting transfers of water in California.EmployeesAs of December 31, 2006, we employed 9 full-time employees (i.e. those individuals working more than 1,000 hours per year). We believe that ouremployee relations are good.7Source: CADIZ INC, 10-K, March 16, 2007Powered 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.RegulationOur operations are subject to varying degrees of federal, state and local laws and regulations. As we proceed with the development of our properties,including the Cadiz Project, we will be required to satisfy various regulatory authorities that we are in compliance with the laws, regulations and policiesenforced by such authorities. Groundwater development, and the export of surplus groundwater for sale to single entities such as public water agencies, is notsubject to regulation by existing statutes other than general environmental statutes applicable to all development projects. Additionally, we must obtain avariety of approvals and permits from state and federal governments with respect to issues that may include environmental issues, issues related to specialstatus species, issues related to the public trust, and others. Because of the discretionary nature of these approvals and concerns which may be raised byvarious governmental officials, public interest groups and other interested parties during both the development and approval process, our ability to developproperties and realize income from our projects, including the Cadiz Project, could be delayed, reduced or eliminated.Access To Our InformationWe are subject to the information and reporting requirements of the Securities Exchange Act and file annual, quarterly and current reports, proxystatements and other information with the SEC. You can request copies of these documents, for a copying fee, by writing to the SEC. We furnish ourstockholders with annual reports containing financial statements audited by our independent auditors.We also make available on our website www.cadizinc.com copies of our annual, quarterly and special reports, proxy and information statements andother information.ITEM 1A. Risk FactorsOur business is subject to a number of risks, including those described below.Our Development Activities Have Not Generated Significant RevenuesAt present, our development activities are focused on water resource and real estate development at our San Bernardino County properties. We havenot received significant revenues from our development activities to date and we do not know when, if ever, we will receive operating revenues from ourdevelopment activities. As a result, we continue to incur a net loss from operations.We May Never Generate Significant Revenues Or Become Profitable Unless We Are Able To Successfully Implement Programs To Develop Our LandAssets And Related Water ResourcesWe do not know the terms, if any, upon which we may be able to proceed with our water and real estate development programs. Regardless of theform of our water development programs, the circumstances under which transfers or storage of water can be made and the profitability of any transfers orstorage are subject to significant uncertainties, including hydrologic risks of variable water supplies, risks presented by allocations of water under existing8Source: CADIZ INC, 10-K, March 16, 2007Powered 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.and prospective priorities. Both water and real estate development programs are subject to the risk of adverse changes to or interpretations of U.S. federal,state and local laws, regulations and policies. Additional risks attendant to such programs include our ability to obtain all necessary regulatory approvals andpermits, possible litigation by environmental or other groups, unforeseen technical difficulties, general market conditions for real estate and water supplies,and the time needed to generate significant operating revenues from such programs after operations commence.Our Failure To Make Timely Payments Of Principal And Interest On Our Indebtedness May Result In A Foreclosure On Our AssetsAs of December 31, 2006, we had indebtedness outstanding to our senior secured lenders of approximately $37.3 million. Our assets have been putup as collateral to secure the payment of this debt. If we cannot generate sufficient cash flow to make principal and interest on this indebtedness when due, orif we otherwise fail to comply with the terms of agreements governing our indebtedness, we may default on our obligations. If we default on our obligations,our lenders may sell off the assets that we have put up as collateral. This, in turn, would result in a cessation or sale of our operations.The Conversion Of Our Outstanding Senior Indebtedness Into Common Stock Would Dilute The Percentage Of Our Common Stock Held By CurrentStockholdersOur senior indebtedness is convertible into common stock at the election of our lenders. As of December 31, 2006, our senior indebtedness wasconvertible into 1,736,518 shares of our common stock, an amount equal to approximately 15.1% of the number of shares of our common stock outstandingas of that date. An election by our lenders to convert all or a portion of our senior secured indebtedness into common stock will dilute the percentage of ourcommon stock held by current stockholders.The Issuance Of Equity Securities Under Management Equity Incentive Plans Will Impact EarningsOur compensation programs for management emphasize long-term incentives, primarily through the issuance of equity securities and options topurchase equity securities. It is expected that plans involving the issuance of shares, options, or both will be submitted from time to time to our stockholdersfor approval. In the event that any such plans are approved and implemented, the issuance of shares and options under such plans may result in the dilution ofthe ownership interest of other stockholders and will, under currently applicable accounting rules, result in a charge to earnings based on the value of ourcommon stock at the time of issue and the fair value of options at the time of their award. The expense would be recorded over the vesting period of eachstock and option grant.We May Not Be Able To Obtain the Financing We Need To Implement Our Asset Development ProgramsWe will require additional capital to finance our operations until such time as our asset development programs produce revenues. We cannot assureyou that our current lenders, or any other lenders, will give us additional credit should we seek it. If we are unable to obtain additional credit, we may engagein further equity financings. Our ability to obtain equity9Source: CADIZ INC, 10-K, March 16, 2007Powered 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 will depend, among other things, on the status of our asset development programs and general conditions in the capital markets at the time fundingis sought. Any further equity financings would result in the dilution of ownership interests of our current stockholders.We Are Restricted By Contract from Paying Dividends and We Do Not Intend To Pay Dividends In The Foreseeable Future Any return on investment on our common stock will depend primarily upon appreciation in the price of our common stock. To date, we have neverpaid a cash dividend on our common stock. The loan documents governing our credit facilities with our senior secured lenders prohibit the payment ofdividends while such facilities are outstanding. As we have a history of operating losses, we have been unable to pay dividends to date. Even if we post aprofit in future years, we currently intend to retain all future earnings for the operation of our business. As a result, we do not anticipate that we will declareany dividends in the foreseeable future.ITEM 1B. Unresolved Staff CommentsNot applicable at this time.ITEM 2. PropertiesFollowing is a description of our significant properties.The Cadiz/Fenner Valley PropertyIn 1984, we conducted investigations of the feasibility of agricultural development of land located in the Cadiz and Fenner valleys of eastern SanBernardino County, California. These investigations confirmed the availability of high-quality groundwater in commercial quantities appropriate foragricultural development. Since 1985, we have acquired approximately 35,000 acres of largely contiguous land in this area, which is located approximately30 miles north of the Colorado River Aqueduct.Additional independent geotechnical and engineering studies conducted since 1985 have confirmed that the Cadiz/Fenner property overlies anatural groundwater aquifer system that is ideally suited for the underground water storage and dry year temporary withdrawals contemplated in the CadizProject. See Item 1, “Business - Narrative Description of Business - Water Resource Development”.In November 1993, the San Bernardino County Board of Supervisors unanimously approved a General Plan Amendment establishing an agriculturalland use designation for 9,600 acres in the Cadiz Valley, of which approximately 1,600 acres have been developed for agriculture. This action also allows forthe withdrawal of more than 1,000,000 acre-feet of groundwater from the aquifer system underlying our property.10Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Other Eastern Mojave PropertiesWe also own approximately 10,900 additional acres in the eastern Mojave Desert, including the Piute and Danby Lake properties.Our second largest property consists of approximately 9,000 acres in the Piute Valley of eastern San Bernardino County. This landholding is locatedapproximately 15 miles from the resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of Needles, California. Extensivehydrological studies, including the drilling and testing of a full-scale production well, have demonstrated that this landholding is underlain by high-qualitygroundwater. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed of approximately975 square miles. Discussions with potential partners have commenced with the objective of developing our Piute Valley assets.Additionally, we own or control additional acreage located near Danby Dry Lake, approximately 30 miles southeast of our landholdings in theCadiz and Fenner valleys. Our Danby Lake property is located approximately 10 miles north of the Colorado River Aqueduct. Initial hydrological studiesindicate that it has excellent potential for a groundwater storage and supply project.Farm PropertyApproximately 1,600 acres of our Cadiz Valley property has been developed for agricultural use. We are currently leasing to a third partyapproximately 160 acres of this property, consisting of organic table grape vineyards. During 2005, we leased an additional 500 acres of juice grapevineyards to the same party. The lease provides that the lessee be responsible for all costs associated with growing crops on the leased property. The lease isrenewable on a year to year basis with 2006 revenues of approximately $12,000. In 2006, the Company farmed the 500 acres of juice grape vineyards and260 acres of citrus orchards using subcontractors to farm, harvest and market the crop. Annual revenues from these agricultural activities were $602,000.Executive Offices We currently lease our executive offices in Los Angeles, California, which consist of approximately 4,770 square feet, pursuant to a sublease thatexpires on June 14, 2007. Current base rent under the lease is approximately $8,745 per month.Cadiz Real EstateIn December 2003, we transferred substantially all of our assets (with the exception of our office sublease, certain office furniture and equipment andany Sun World related assets) to Cadiz 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 to Cadiz Real Estate. Cadiz Real Estatewas created at the behest of our then existing senior secured lender, ING. The Board of Managers of Cadiz Real Estate currently consists of two managersappointed by us. Our senior secured lender, Peloton, has the right to appoint one independent manager.11Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Cadiz Real Estate is a co-obligor under our senior secured convertible term loan, for which assets of Cadiz Real Estate have been pledged assecurity.Because the transfer of our properties to Cadiz Real Estate has no effect on our ultimate beneficial ownership of these properties, we refer throughoutthis Report to properties owned of record either by Cadiz Real Estate or by us as “our” properties.Debt Secured by PropertiesOur outstanding debt at December 31, 2006 of $37.3 million represents loans secured by our assets (including properties held of record by CadizReal Estate). Information regarding interest rates and principal maturities is provided in Note 6 to the consolidated financial statements.ITEM 3. Legal ProceedingsClaim Against MetropolitanOn April 7, 2003, we filed an administrative claim against The Metropolitan Water District of Southern California (“Metropolitan”), asserting thebreach by Metropolitan of various obligations specified in our 1998 Principles of Agreement with Metropolitan and other related contracts. We believe thatby failing to complete the environmental review process for the Cadiz Project, failing to accept the right of way grant offered by the U.S. Department of theInterior and for taking other actions inconsistent with their obligations, Metropolitan violated the contracts between the parties, breached its fiduciary dutiesto us and interfered with our 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 Los Angeles Superior Court on November17, 2005 seeking recovery of damages. Metropolitan counsel responded with a demurrer, seeking to have certain claims disallowed. On October 18, 2006 theCourt ruled in favor of Cadiz and overruled the demurrer to the claims for breach of fiduciary duty, promissory estoppel, breach of implied contract andspecific performance. As a result, these claims will all go forward to trial, along with the breach of express contract claim, which was not addressed by thedemurrer. The trial is scheduled for October 2007.Other ProceedingsThere are no other material pending legal proceedings to which we are a party or of which any of our property is the subject.ITEM 4. Submission of Matters to a Vote of Security HoldersOur 2006 annual meeting was held on November 10, 2006. The stockholders took the following actions at the meeting:12Source: CADIZ INC, 10-K, March 16, 2007Powered 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. 1. Elected Messrs. Keith Brackpool, Murray H. Hutchison, Timothy J. Shaheen, Stephen J. Duffy and Winston H. Hickox to the Company's Board ofDirectors. Mr. Brackpool was elected by the vote of 7,066,396 shares in favor and 2,518 withheld and no broker non-votes. Mr. Hutchison was elected by thevote of 7,021,133 shares in favor and 47,781 withheld and no broker non-votes. Mr. Shaheen was elected by the vote of 7,066,358 shares in favor and 2,556withheld and no broker non-votes. Mr. Duffy was elected by the vote of 7,021,253 shares in favor and 47,661 withheld and no broker non-votes. Mr. Hickoxwas elected by the vote of 7,021,223 shares in favor and 47,691 withheld and no broker non-votes.Mr. Raymond J. Pacini serves as a director of the Company by designation under our credit agreement with our senior secured lenders, and thus wasnot subject to election at the annual meeting.2. Ratified the selection by our Board of Directors of PricewaterhouseCoopers LLP to continue as our independent certified public accountants forfiscal year 2006 by a vote of 7,066,101 in favor and 1,868 against, with 945 abstaining and no broker non-votes.3. Approved the Cadiz Outside Director Compensation Plan by a vote of 2,040,426 in favor and 57,477 against, with 1,886 abstaining and4,969,125 broker non-votes.4. Approved the issuance of Cadiz common stock upon the conversion of the Company's loan with Peloton Multi-Strategy Master Fund in anamount in excess of the 19.99% "Exchange Cap" provided for in the credit agreement for this loan transaction by a vote of 2,078,734 in favor and 18,333against, with 2,722 abstaining and 4,969,125 broker non-votes.13Source: CADIZ INC, 10-K, March 16, 2007Powered 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 II ITEM 5. Market for Registrant's Common Equity and Related Stockholder MattersThe Company's common stock is currently traded on The NASDAQ Global Market ("NASDAQ") under the symbol "CDZI." Prior to June 20, 2005,the Company’s common stock was traded on the OTC Bulletin Board. The following table reflects actual sales transactions for the dates that the Companywas trading on NASDAQ, and high and low bid information otherwise. The OTC Bulletin Board market quotations reflect inter-dealer prices, without retailmark-up, mark-down or commission 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 2005: March 31 $15.40 $11.50 June 30 $19.00 $14.25 September 30 $19.50 $16.00 December 31 $22.00 $18.00 2006: March 31 $21.00 $16.00 June 30 $18.01 $15.75 September 30 $21.37 $17.00 December 31 $22.95 $18.30 On March 2, 2007, the high, low and last sales prices for the shares, as reported by Bloomberg, were $26.66, $26.30, and $26.59, respectively.We also have an authorized class of 100,000 shares of preferred stock. There is one series of preferred stock (Series F) authorized for issuance. All100,000 authorized shares of Series F Preferred Stock were issued in December 2003. Effective November 30, 2004, 99,000 shares of Series F Preferred Stockwere converted to 1,711,665 shares of our common stock leaving 1,000 shares of Series F Preferred Stock issued and outstanding.As of March 2, 2007, the number of stockholders of record of our common stock was 195. The estimated number of beneficial owners isapproximately 1,401.To date, we have not paid a cash dividend on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Oursenior secured convertible term loan has covenants that prohibit the payment of dividends.All securities sold by us during the three years ended December 31, 2006 which were not registered under the Securities Act have previously beenreported in our Annual, Quarterly, and Current Reports on Forms 10K, 10-Q and 8K.14Source: CADIZ INC, 10-K, March 16, 2007Powered 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 6. Selected Financial DataThe following selected financial data insofar as it relates to the years ended December 31, 2006, 2005, 2004, 2003 and 2002 has been derived fromour audited financial statements. The information that follows should be read in conjunction with the audited consolidated financial statements and notesthereto for the period ended December 31, 2006 included in Part IV of this Form 10-K. See also Item 7, "Management's Discussion and Analysis of FinancialCondition and Results of Operations". ($ in thousands, except for per share data) Year Ended December 31, 2006 2005 2004 2003 2002 Statement of Operations Data: Total revenues $614 $1,197 $47 $3,162 $114,250 Net loss (13,825) (23,025) (16,037) (11,536) (25,225)Less: Preferred stock dividends - - - 918 1,125 Imputed dividend on preferred stock - - - 1,600 984 Net loss applicable to common stock $(13,825)$(23,025)$(16,037)$(14,054)$(24,334) Per share: Net loss (basic and diluted) $(1.21)$(2.14)$(2.32)$(6.39)$(16.76) Weighted-average common shares outstanding 11,381 10,756 6,911 2,200 1,452 December 31, 2006 2005 2004 2003 2002 Balance Sheet Data: Total assets $50,326 $46,046 $51,071 $49,526 $191,883 Long-term debt $25,881 $25,883 $25,000 $30,253 $115,447 Redeemable preferred stock $- $- $- $- $10,942 Preferred stock, common stock and additional paid-in capital $245,322 $226,852 $209,718 $185,040 $156,166 Accumulated deficit $(221,710)$(207,885)$(184,860)$(168,823)$(157,287)Stockholders' equity (deficit) $23,612 $18,967 $24,858 $16,217 $(1,121) On January 30, 2003, Sun World filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Since that date, the financial statements of SunWorld are no longer consolidated with those of Cadiz due to the Company’s loss of control over the operations of Sun World. As a result, revenues, long termdebt and total assets were significantly lower subsequent to 2002.On October 20, 2003, the Company and holders of Series D and Series E Preferred Stock entered into an agreement to exchange all outstandingshares of Series D and Series E Preferred Stock, plus accrued and unpaid dividends, for an aggregate of 400,000 shares of common stock. Holders of theremaining Series F Preferred Stock, which is convertible into our common stock, are only entitled to dividends if common stock dividends are paid.15Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Weighted average common shares outstanding have increased from 1,452,000 in 2002 to 11,381,000 in 2006. The increase is primarily due to theissuance of 6,273,000 shares to investors in private placements, 2,281,000 shares to investors upon the conversion of preferred stock and warrant exercises,and 1,539,000 shares to employees, vendors and lenders. ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIn connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the following discussion contains trendanalysis and other forward-looking statements. Forward-looking statements can be identified by the use of words such as "intends", "anticipates","believes", "estimates", "projects", "forecasts", "expects", "plans" and "proposes". Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materiallyfrom these forward-looking statements. These include, among others, our ability to maximize value from our land and water resources and our ability toobtain new financings as needed to meet our ongoing working capital needs. See additional discussion under the heading "Risk Factors” above.OverviewOur operations (and, accordingly, our working capital requirements) relate primarily to our water and real estate development activities andprimarily to the Cadiz Project.In 1997 we entered into the first of a series of agreements with the Metropolitan Water District of Southern California (“Metropolitan”) to jointlydesign, permit and build a groundwater storage and supply program on our land in the Cadiz and Fenner valleys of eastern San Bernardino County (the“Cadiz Project”). Under the Cadiz Project, surplus water from the Colorado River would be stored in the aquifer system underlying our land during wet years.When needed, the stored water and temporary withdrawals of indigenous groundwater, could be distributed through the Colorado River Aqueduct toMetropolitan's member agencies throughout six southern California counties.Between 1997 and 2002, Metropolitan and the Company received substantially all of the various state and federal approvals required for permits toconstruct and operate the project and received a federal Record of Decision (“ROD”) from the U.S. Department of the Interior, which endorsed the CadizProject and offered a right of way grant for construction of project facilities. The federal government also approved a Final Environmental Impact Statement(“FEIS”) in compliance with the National Environmental Policy Act (“NEPA”).Despite the significant progress made in the federal environmental review process, in October 2002 Metropolitan’s Board voted not to accept theright of way grant offered by the U.S. Department of the Interior and refused to consider whether or not to certify the Final Environmental Impact Report(“FEIR”), which was a necessary action to authorize implementation of the Cadiz Project in accordance with the California Environmental Quality Act(“CEQA”).16Source: CADIZ INC, 10-K, March 16, 2007Powered 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.When Metropolitan’s Board declined to proceed with the Cadiz Project, the FEIR was complete and awaiting certification at a hearing scheduled forlate October 2002. It is our position that these actions breached various contractual and fiduciary obligations to us, and interfered with the economicadvantage we would have obtained from the Cadiz Project. In April 2003 we filed a claim against Metropolitan seeking compensatory damages. Whensettlement negotiations failed to produce a resolution, we filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17, 2005. Ourclaims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of implied contract and specific performance have been allowedby the Court and will all go forward to trial later this year. See Item 3 - “Legal Proceedings”.Regardless of the Metropolitan Board’s actions in October 2002, Southern California’s population continues to grow, and the need for water storageand supply programs has not abated. Moreover, the advantages of underground water storage facilities are increasingly evident. These include minimalsurface environmental impacts, low capital investment, protection from airborne contaminants and minimal evaporative water loss. Therefore we continue topursue the completion of the environmental review process for the Cadiz Project.To that end, the County of San Bernardino has agreed to serve as the CEQA lead agency for the completion of the environmental review of the CadizProject and issue any permits required under California law once the review is completed. We are also working with the U.S. Department of the Interior tohave the permits that were approved during the federal environmental review process, including the right of way granted in the ROD, issued directly to theCompany for the benefit of any participating public agency. Additionally, we are in discussions with several other public agencies regarding their interest inparticipating in the Cadiz Project. These agencies have access to sources of water that can be stored in the Cadiz Project. See “Water Resource Development”,above.In addition to agriculture and water development, the rapid growth of nearby desert communities in southern California, Nevada and Arizonaindicates that the Company’s land holdings may be suitable for other types of development. To this end, we have conducted a detailed analysis of our landassets to assess the opportunities for these properties. Based on this analysis, we believe that our properties have significant long-term potential for residentialand commercial development. We are continuing to explore alternative land uses to maximize the value of our properties.In 2006, we refinanced our long-term debt with the proceeds of a new $36.4 million zero coupon senior secured convertible term loan that matureson June 29, 2011. Interest accrues on the principal balance of the loan at 5 percent per annum for the first 3 years and 6 percent thereafter. No interest andprincipal payments are due prior to the final maturity date. Each of the two loan tranches is convertible into the Company’s $0.01 par value common stock ata fixed conversion price per share, subject to downward adjustment in the event a change in control. See “Liquidity and Capital Resources” below.In 2003 and 2004, we raised approximately $35 million of equity through private placements, including a $24 million private placement completedon November 30, 2004. The November 30, 2004 private placement included the issuance of warrants to purchase 405,440 shares of our common stock at anexercise price of $15.00 per share. During 2006, holders of 70,000 of the warrants exercised their warrants, resulting in the issuance by us of 70,000 shares17Source: CADIZ INC, 10-K, March 16, 2007Powered 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.of common stock. On January 31, 2007, we exercised a cancellation option and notified holders that the warrants would expire on March 2, 2007 unlessexercised by the warrant holder prior to that date. All of the remaining warrant holders exercised their warrants following receipt of this notice, resulting inthe issuance by us of 335,440 shares of common stock and receipt by us of $5,031,600 of net cash proceeds. Under the terms of our current loan agreement,we have retained all proceeds associated with the exercise of these Warrants. As of March 2, 2007, no warrants remain outstanding. We remain committed to our land and water assets and we continue to explore all opportunities for development of these assets. We cannot predictwith certainty which of these various opportunities will ultimately be utilized.Results of Operations(a) Year Ended December 31, 2006 Compared to Year Ended December 31, 2005We have not received significant revenues from our water resource and real estate development activity to date. As a result, we continue to incur anet loss from operations. We had revenues of $0.6 million for the year ended December 31, 2006 and $1.2 million for the year ended December 31, 2005. Thelower revenues were due to a below average lemon harvest. Our net loss totaled $13.8 million for the year ended December 31, 2006, compared with a net lossof $23.0 million for the year ended December 31, 2005. The lower loss in 2006 period resulted primarily from $14.4 million lower non-cash compensationexpenses from stock and option awards under our Management Equity Incentive Plan, partially offset by $1.4 million higher other general and administrativeexpenses relating to the Cadiz Project and the Company’s lawsuit against the Metropolitan Water District of Southern California. Other expenses were higher,primarily due to $0.5 million of additional interest expense and a $2.9 million expense related to a change in the value of certain bifurcated derivativeinstruments imbedded in our senior secured convertible term loan.Our primary expenses are our ongoing overhead costs (i.e. general and administrative expense) and our interest expense. We expect to incuradditional non-cash expenses in connection with future management and director equity incentive compensation plans.Revenues. Revenue totaled $0.6 million during the year ended December 31, 2006 compared to $1.2 million during the year ended December 31,2005. 2006 revenues included $0.6 million of revenues related to citrus crop sales, which were down $0.6 million from the prior year. The lemon grove waspruned extensively in early 2006, which limited the growth of fruit during the early spring. The crop was also affected by unusually hot summer weather anda winter freeze. Crop rental income also declined to $12 thousand in 2006 from $35 thousand in 2005. We no longer consider agriculture to be our corebusiness. When possible, we prefer to lease our vineyards and citrus groves to third parties so that we can focus our resources on our water and real estatedevelopment programs.Cost of Sales. Cost of Sales totaled $721,000 during the year ended December 31, 2006, compared with $994,000 during the year ended December31, 2005. The lower cost of sales in 2006 reflected lower lemon harvesting, processing and marketing costs, due to a smaller lemon crop. This was partiallyoffset by additional irrigation and cultivation expenses18Source: CADIZ INC, 10-K, March 16, 2007Powered 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.associated with the juice grape crop. Cadiz leased the juice grape crop to Sun View Vineyards of California in 2005.General and Administrative Expenses. General and administrative expenses during the year ended December 31, 2006 totaled $7.7 millioncompared with $20.7 million for the year ended December 31, 2005. Non-cash compensation costs related to stock and option awards is included in Generaland Administrative Expenses.Compensation costs from stock and option awards for the year ended December 31, 2006 totaled $2.3 million compared with $16.7 million for theyear ended December 31, 2005. The expenses primarily relate to stock and options issued under the Cadiz 2003 Management Equity Incentive Plan and theOutside Director Compensation Plan. 12,339 options and 14,701 shares were granted under the Management Equity Incentive Plan and the Outside DirectorsCompensation Plan, respectively, in 2006, compared with 1,094,712 shares and 365,000 options granted under the Management Equity Incentive Plan in2005. Shares and options issued under the Plans vest over varying periods from the date of issue to December 2008. $877,000 of the 2006 expense is a resultof the adoption and application of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payments” effective January 1, 2006.Other General and Administrative Expenses, exclusive of stock based compensation costs, totaled $5.5 million in the year ended December 31,2006, compared with $4.1 million for the year ended December 31, 2005. Higher 2006 expenses were primarily due to additional legal and consulting feesrelated to water development efforts, including the Company’s lawsuit against the Metropolitan Water District of Southern California, and accountingexpenses related to Sarbanes Oxley compliance.Depreciation and Amortization. Depreciation and amortization totaled $0.2 million for the year ended December 31, 2006 compared to $0.2 millionfor 2005.Interest Expense, net. Net interest expense totaled $2.4 million during the year ended December 31, 2006, compared to $1.9 million during 2005.Higher interest expense was primarily due to the amortization of the debt discount related to certain derivatives imbedded in the new senior securedconvertible term loan. 2006 interest income increased to $376 thousand from $159 thousand in the prior year due to higher cash balances and higher short-term interest rates. The following table summarizes the components of net interest expense for the two periods (in thousands): Year Ended December 31, 2006 2005 Interest on outstanding debt $1,987 $2,062 Amortization of debt discount 783 - Amortization of financing costs 40 28 Interest income (376) (159) $2,434 $1,931 19Source: CADIZ INC, 10-K, March 16, 2007Powered 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. Loss on Extinguishment of Debt and Debt Refinancing. Financing costs, which are primarily legal fees, are amortized over the life of each loanagreement. In June, 2006 we entered into a new loan agreement with Peloton Partners LLP (“Peloton”), as administrative agent for the loan, and with anaffiliate of Peloton and another investor, as lenders. As a result, $408 thousand of legal fees were capitalized and will be amortized over the 5 year life of theloan agreement. At the same time, $868 thousand of deferred financing costs and prepaid interest associated with the prior loan agreement with ING CapitalLLC (“ING”) were fully expensed.Change in Fair Value of Derivative Liability. The Company prepaid its existing indebtedness with ING in June, 2006 with the proceeds of a newsenior secured convertible term loan. The new loan contained certain “embedded derivatives” which were bifurcated from the host debt instrument and wererecorded at fair values on the Company’s consolidated balance sheet under GAAP. These embedded derivatives were subject to periodic revaluation based onchanges in the fair market value of our common stock. On September 29, 2006, certain terms and conditions of the credit agreement and embeddedderivatives were amended. The fair value of the equity conversion options were recalculated, and a $2.9 million expense was recognized due to an increase infair value. The primary reason for the increase in fair value was the increase in the trading price of our common stock from June 30, 2006 to September 29,2006. Following the September 29, 2006 amendment, bifurcation of the embedded equity conversion option is no longer required. As a result, the fair valueof the embedded derivatives has been transferred from the liability accounts to stockholder’s equity, and no further fair value adjustments were required afterSeptember 30, 2006. There was no comparable expense in the prior year ending December 31, 2005.Other Income. Other Income during the year ended December 31, 2006 totaled $373 thousand, primarily related to payments from a stockholderrelated to a short swing profit liability. In March, 2006, one of our stockholders determined that it had, at a time when it was the beneficial holder of morethan 10% of our outstanding equity securities, inadvertently engaged in trades which resulted in automatic short swing profit liability to the Companypursuant to Section 16(b) of the Securities Exchange Act of 1934. After becoming aware of the situation, the stockholder promptly made payments totaling$350,000 to the Company to settle the entire short swing profit liability owed as a consequence of these trades. (b) Year Ended December 31, 2005 Compared to Year Ended December 31, 2004We had revenues of $1.2 million for the year ended December 31, 2005 and $47 thousand for the year ended December 31, 2004. Our net losstotaled $23.0 million for the year ended December 31, 2005 compared with a net loss of $16.0 million for the year ended December 31, 2004. The higher lossfor the 2005 period resulted primarily from non-cash compensation expenses of $16.7 million from stock and option awards under our Management EquityIncentive Plan. No such expense was incurred in 2004. The 2004 period included the write-off of $3.4 million of permanent and developing crops, $3.7million higher amortization of deferred borrowing costs and a $1.4 million write-off of deferred borrowing costs. General and administrative costs increased$17.7 million in 2005. Our primary expenses are our ongoing overhead costs (i.e. general and administrative expense) and our interest expense.20Source: CADIZ INC, 10-K, March 16, 2007Powered 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. Revenues totaled $1.2 million during the year ended December 31, 2005 compared to $47 thousand during the year ended December 31,2004. 2005 revenues include $1.1 million of citrus crop sales, $35 thousand of crop rental income and $39 thousand of other rental income. The 2005revenue increase is primarily due to citrus crops that Cadiz farmed in 2005. In 2004 Cadiz leased these crops to Sun World and did not include Sun World’srevenues from citrus crop sales in the consolidated financial statements because Sun World was in bankruptcy.Cost of Sales. Cost of Sales totaled $994,000 during the year ended December 31, 2005, reflecting the production and sale of citrus crops at theCadiz Ranch property. Cadiz leased these crops to Sun World in 2004 and did not include Sun World’s cost of sales in the consolidated financial statementsbecause Sun World was in bankruptcy.General and Administrative Expenses. General and administrative expenses during the year ended December 31, 2005 totaled $20.7 million compared with $3.1 million for the year endedDecember 31, 2004. General and administrative expenses include non-cash compensation costs related to stock and option awards.Compensation costs from stock and option awards for the year ended December 31, 2005 totaled $16.7 million. The costs consist of non-cashcompensation expenses relating to stock and option grants issued under the Management Equity Incentive Plan. The grants and related accounting arediscussed further in the Notes to the Consolidated Financial Statements. There were no comparable stock and option grants during the year ended December31, 2004.Other general and administrative expenses, exclusive of stock based compensation costs, totaled $4.1 million during the year ended December 31,2005, compared with $3.1 million for the year ended December 31, 2004. Higher expenses were primarily related to legal and consulting fees incurred relatedto water development efforts, accounting expenses related to Sarbanes Oxley compliance and initial listing costs for our listing on The NASDAQ NationalMarket (now the NASDAQ Global Market).Depreciation and Amortization. Depreciation and amortization totaled $0.2 million for the year ended December 31, 2005 compared to $0.5 millionfor 2004. The reduction in depreciation and amortization is due to certain assets becoming fully depreciated during 2005 and the write down of certain assetsno longer used or useful in the restructured Cadiz business.Interest Expense, net. Net interest expense totaled $1.9 million during the year ended December 31, 2005, compared to $7.7 million during 2004.Lower interest expense was primarily due to the November 30, 2004 debt restructuring and the repayment of $10 million of debt from the proceeds of theprivate placement of common stock and warrants completed on that date. The restructuring transaction resulted in the amortization of lower financing coststhan the prior debt structure. The following table summarizes the components of net interest expense for the two periods (in thousands):21Source: CADIZ INC, 10-K, March 16, 2007Powered 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. Year Ended December 31, 2005 2004 Interest on outstanding debt $2,062 $3,970 Amortization of financing costs 28 3,767 Interest income (159) (42) $1,931 $7,695 Loss on Extinguishment of Debt and Debt Refinancing. Financing costs, which include legal fees and warrant costs, are amortized over the expectedlife of each loan agreement. In November, 2004 we entered into an agreement with ING which restructured our loan and extended the maturity date fromMarch 31, 2005 to March 31, 2010. As a result, $1,369,000 of unamortized deferred financing costs associated with the prior loan agreement were expensedon the November 30, 2004 amendment date. Our restructured loan with ING was repaid in full in June 2006 using the proceeds of our new senior securedconvertible term loan with Peloton. Liquidity and Capital Resources(a) Current Financing ArrangementsAs we have not received significant revenues from our water resource and real estate activity to date, we have been required to obtain financing tobridge the gap between the time water resource and real estate development expenses are incurred and the time that revenue will commence. Historically, wehave addressed these needs primarily through secured debt financing arrangements, private equity placements and the exercise of outstanding stock optionsand warrants.Subsequent to the vote of Metropolitan’s Board in October 2002 to not proceed with the Cadiz Project and Sun World’s January 2003 bankruptcyfiling, we have worked with our primary secured lenders to structure our debt in a way which allows us to continue our development of the Cadiz Project andminimize the dilution of the ownership interests of common stockholders. We entered into a series of agreements with ING Capital LLC and then refinancedthe ING loan with a new $36.4 million five year zero coupon senior secured convertible term loan with Peloton Partners LLP (through an affiliate) andanother lender (the “Peloton Loan”) in June 2006. The Peloton loan provided for:· the repayment in full of our senior secured term loan with ING;· a final maturity date of June 29, 2011;· a zero coupon structure, which requires no cash interest payments prior to the final maturity date; and· a 5% interest rate for the first 3 years, with a 6% interest rate thereafter.At each lender’s option, principal plus accrued interest on each of the two loan tranches is convertible into the Company’s $0.01 par value commonstock at a fixed conversion price per22Source: CADIZ INC, 10-K, March 16, 2007Powered 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.share. The conversion prices are subject to downward adjustment in the event of a change in control.On or after June 29, 2007, principal and interest accrued on each of the two loan tranches can be prepaid on 30 days notice either if the Company’sstock price exceeds the tranche’s conversion price by 40% for 20 consecutive trading days in a 30 trading day period or if the Company completes the CadizWater Program entitlement process, secures a right-of-way for the project pipeline and arranges sufficient financing to repay the loan and build the CadizProject. The conversion prices of the two loan tranches are $18.15 and $23.10, respectively, so the $10 million Tranche A prepayment option would becomeavailable at a share price above $25.41 per share and the $26.4 million Tranche B prepayment option would become available at a share price above $32.34per share.The debt covenants associated with the loan were negotiated by the parties with a view towards our operating and financial condition as it existed atthe time the agreements were executed. At December 31, 2006, the Company was in compliance with its debt covenants.In addition to allowing us to repay our former credit facility with ING, the Peloton Loan provided us with $9.3 million of additional working capitaland deferred all interest payments until the June 29, 2011 final maturity date. Furthermore, the Peloton Loan, unlike the ING facility, permits us to retain anyproceeds received from the exercise of warrants issued by us in 2004 as part of a $24 million private equity placement.A private placement completed by the Company in November 30, 2004 included the issuance of warrants to purchase 405,440 shares of our commonstock at an exercise price of $15.00 per share. During 2006, holders of 70,000 of the warrants exercised their warrants, resulting in the issuance by us of70,000 shares of common stock with net proceeds of $1,050,000.In February 2007, we exercised our right to terminate the remaining warrants upon 30 days notice, and holders of all the remaining 335,440 warrantsexercised their warrants. As a result, we issued 335,440 shares of our common stock and received net proceeds of $5,031,600 during February 2007.Following these exercises, no Warrants remain outstanding.As we continue to actively pursue our business strategy, additional financing in connection with our water programs will be required. See“Outlook”, below. The covenants in the credit facility do not prohibit our use of additional equity financing and allow us to retain 100% of the proceeds ofany equity financing. We do not expect the loan covenants to materially limit our ability to finance our water development activities.We issued 100,000 shares of Series F preferred stock to ING as part of our agreements in December 2003 (the “ING Preferred Stock”), of which 1,000shares remain outstanding. The preferred shares are convertible into 17.28955 shares of common stock for each share of Series F Preferred Stock converted.At December 31, 2006, we have no outstanding credit facilities or preferred stock other than the Peloton Loan and ING Preferred Stock describedabove.23Source: CADIZ INC, 10-K, March 16, 2007Powered 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 Used for Operating Activities. Cash used for operating activities totaled $5.3 million for the year ended December 31, 2006, as compared tocash used for operating activities of $3.7 million for the year ended December 31, 2005. The $1.6 million increase was primarily due to lower crop salerevenues and higher general and administrative expenses related to the Company’s water development efforts, including legal and regulatory costs associatedwith the Cadiz Program CEQA application and the Company’s lawsuit against the Metropolitan Water District of Southern California.Cash Provided By (Used for) Investing Activities. No cash was used by investing activities in the year ended December 31, 2006, compared with$68 thousand used for investing activities during the same period in 2005. 2006 capital expenditures were financed with proceeds realized from the sale of amotor vehicle.Cash Provided by Financing Activities. Cash provided by financing activities totaled $10.4 million for the year ended December 31, 2006,compared with $40 thousand for the year ended December 31, 2005. The 2006 results reflect $9.3 million of net proceeds from the placement of a new $36.4million senior secured convertible term loan and $1.1 million of proceeds from the issuance of 70,000 shares of $0.01 par value common stock at $15.00 pershare when certain warrant holders chose to exercise their warrants. In contrast, there was no material financing activity in 2005.(b) OutlookShort Term Outlook. The proceeds of our new $36.4 million senior secured convertible term loan and the sale of common shares pursuant to thedecision by holders to exercise certain warrants issued in November 2004 provide us with sufficient funds to meet our expected working capital needs for thenext 12 months. The Company expects to continue its historical practice of structuring its financing arrangements to match the anticipated needs of itsdevelopment activities. See "Long Term Outlook", below. No assurances can be given, however, as to the availability or terms of any new financing.Long Term Outlook. In the longer term, we will need to raise additional capital to finance working capital needs and any payments due under oursenior secured convertible term loan at maturity. See “Current Financing Arrangements” above. Payments will be due under the term loan only to the extentthat lenders elect not to exercise equity conversion rights prior to the loan’s final maturity date. Our future working capital needs will depend upon thespecific measures we pursue in the entitlement and development of our real estate and water resources. We will evaluate the amount of cash needed, and themanner in which such cash will be raised, on an ongoing basis. We may meet any future cash requirements through a variety of means, including equity ordebt placements, or through the sale or other disposition of assets. Equity placements would be undertaken only to the extent necessary, so as to minimize thedilutive effect of any such placements upon our existing stockholders.(c) Critical Accounting PoliciesAs discussed in Note 2 to the Consolidated Financial Statements of Cadiz, the preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the accompanyingconsolidated financial statements and related footnotes.24Source: CADIZ INC, 10-K, March 16, 2007Powered 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 preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements basedon all relevant information available at the time and giving due consideration to materiality. We do not believe there is a great likelihood that materiallydifferent amounts would be reported related to the accounting policies described below. However, application of these policies involves the exercise ofjudgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Management has concluded thatthe following critical accounting policies described below affect the most significant judgments and estimates used in the preparation of the consolidatedfinancial statements.(1) Principles of Consolidation The Consolidated Financial Statements have been prepared by Cadiz Inc., sometimes referred to as “Cadiz” or “theCompany”. On January 30, 2003, Sun World filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Since that date, the financial statements ofSun World are no longer consolidated with those of Cadiz due to the Company’s loss of control over the operations of Sun World. Instead, Cadiz isaccounting for its investment in Sun World on the cost basis of accounting and wrote off its net investment in Sun World of $195,000 because it did notanticipate being able to recover its investment. (2) Intangible and Other Long-Lived Assets. Property, plant and equipment, intangible and certain other long-lived assets are amortized over theiruseful lives. Useful lives are based on management’s estimates of the period over which the assets will generate revenue. Long-lived assets are reviewed forimpairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company reevaluates thecarrying value of its water program annually during the first quarter of each year and has confirmed that the carrying value of the water program is notimpaired as of December 31, 2006.(3) Goodwill. As a result of a merger in May 1988 between two companies, which eventually became known as Cadiz Inc., goodwill in the amount of$7,006,000 was recorded. Approximately $3,193,000 of this amount was amortized until the adoption of Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards No. 142, (“SFAS No. 142”) “Goodwill and Other Intangible Assets” on January 1, 2002. Goodwill istested for impairment annually in the first quarter, or if events occur which require an impairment analysis be performed. The Company has confirmed that thecarrying value of the goodwill is not impaired as of December 31, 2006.(4) Deferred Tax Assets and Valuation Allowances. To date we have not generated significant revenue from our water development programs, andwe have had a history of net operating losses. As such, we have generated significant deferred tax assets, including large net operating loss carry forwards forfederal and state income taxes for which we have recorded a full valuation allowance. Management is currently working on water and real estate developmentprojects, including the Cadiz Program, that are designed to generate future taxable income, although there can be no guarantee that this will occur. If taxableincome is generated in future years, some portion or all of the valuation allowance will be reversed, and an increase in net income would consequently bereported.25Source: CADIZ INC, 10-K, March 16, 2007Powered 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.(d) New Accounting PronouncementsIn June 2006, the FASB issued FSP FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ThisInterpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. Theevaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that atax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets the more likelythan not recognition threshold to determine the amount of benefit to recognize in the financial statements. This Interpretation is effective for fiscal yearsbeginning after December 15, 2006. The Company is currently evaluating the impact of this Statement.On September 13, 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on the considerationof the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective forfiscal years ending after November 14, 2006, or fiscal year 2006 for the Company. The adoption of SAB No. 108 did not have a material impact on theCompany’s beginning retained earnings.(e) Off Balance Sheet ArrangementsCadiz does not have any off balance sheet arrangements at this time.(f) Certain Known Contractual Obligations Payments Due by Period Contractual Obligations Total Less than 1year 1-3 years 3-5 years After 5 years Long term debt obligations $37,347 $9 $19 $37,319 $- Interest payable 10,433 1 1 10,431 - Operating leases 102 74 28 - - $47,882 $84 $48 $47,750 $- Cadiz long-term debt included in the table above reflects the Peloton Loan, which was executed in June 2006, and subsequently amended inSeptember 2006, as described above in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation; Liquidity andCapital Resources.26Source: CADIZ INC, 10-K, March 16, 2007Powered 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 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk from changes in interest rates on long-term debt obligations that affect the fair value of these obligations. Our policyis to manage interest rate exposure by year of scheduled maturities and to evaluate expected cash flows and sensitivity to interest rate changes (in thousandsof dollars). A 1% change in interest rate on the Company long term debt obligation would have resulted in interest expense fluctuating by approximately$316,000 during the year ended December 31, 2006. Circumstances could arise which may cause interest rates and the timing and amount of actual cashflows to differ materially from the schedule below: Long-Term Debt Fixed Rate AverageInterest Variable Rate AverageInterest Expected Maturity Maturities Rate Maturities Rate 2011 $37,347 5.4%$- $- Cadiz long-term debt included in the table above reflects the debt restructuring which occurred in June 2006, as described above in Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources; Cadiz Obligations. With the confirmation of 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 liabilities under the guarantees of First Mortgage Notes issued by Sun World. ITEM 8. Financial Statements and Supplementary Data The information required by this item is submitted in response to Part IV below. See the Index to Consolidated Financial Statements. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable. ITEM 9A. Controls And Procedures Disclosure Controls and Procedures We have established disclosure controls and procedures to ensure that material information related to the Company, including its consolidatedentities, is accumulated and communicated to senior management, including the Chairman and Chief Executive Officer (the27Source: CADIZ INC, 10-K, March 16, 2007Powered 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.“Principal Executive Officer”) and Chief Financial Officer (the “Principal Financial Officer”) and to our Board of Directors. Based on their evaluation as ofDecember 31, 2006, our Principal Executive Officer and Principal Financial Officer have concluded that the Company's disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosedby the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules and forms, and such information is accumulated and communicated to management,including the principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosures. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and PrincipalFinancial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the criteria in the Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, ourmanagement concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of theeffectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in 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 change identified in theCompany's internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company's internal control over financial reporting. ITEM 9B. Other Information On March 14, 2007 we filed with the Delaware Secretary of State a certificate of correction to our Second Amended and Restated Certificate ofDesignations of Series F Preferred Stock ("Second Amended Series F Certificate"). The certificate of correction was filed in order to correct an error wherebyreferences remained in the Second Amended Series F Certificate to Series F Preferred Directors, although with the filing of the Second Amended Series FCertificate the position of Series F Preferred Director was abolished. In order to correct this error, references in the Second Amended Series F Certificate to "atleast one of the Series F Preferred Directors" have been changed to "a majority of the Corporation's independent directors", as originally intended.28Source: CADIZ INC, 10-K, March 16, 2007Powered 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 III ITEM 10. Directors, Executive Officers and Corporate Governance The information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directorswhich we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2006. ITEM 11. Executive CompensationThe information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directorswhich we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2006. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directorswhich we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2006. ITEM 13. Certain Relationships and Related Transactions, and Director IndependenceThe information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directorswhich we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2006. ITEM 14. Principal Accountant Fees and ServicesThe information called for by this item is incorporated herein by reference to the definitive proxy statement involving the election of directorswhich we intend to file with the SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120 days after December 31,2006.29Source: CADIZ INC, 10-K, March 16, 2007Powered 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 IV ITEM 15. Exhibits and Financial Statement Schedules 1.Financial Statements. See Index Consolidated Financial Statements. 2.Financial Statement Schedule. See Index to Consolidated Financial Statements. 3.Exhibits.The following exhibits are filed or incorporated by reference as part of this Form 10-K.3.1 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(4)3.5 Certificate of Elimination of Series D Preferred Stock, Series E-1 Preferred Stock and Series E-2 Preferred Stock of Cadiz Inc. datedDecember 15, 2003(4)3.6 Certificate of Elimination of Series A Junior Participating Preferred Stock of Cadiz Inc., dated March 25, 2004(4)3.7 Amended and Restated Certificate of Designations of Series F Preferred Stock of Cadiz Inc.(5)3.8 Cadiz Bylaws, as amended (6) 3.9 Second Amended and Restated Certificate of Designations of Series F Preferred Stock of Cadiz Inc. date June 30, 2006, as corrected byCertificate of Correction dated March 14, 2007 10.1 Agreement Regarding Employment Between Cadiz Inc. and Keith Brackpool dated July 5, 2003(7)10.2 Limited Liability Company Agreement of Cadiz Real Estate LLC dated December 11, 2003(4)10.3 Amendment No. 1, dated October 29, 2004, to Limited Liability Company Agreement of Cadiz Real Estate LLC.(8)30Source: CADIZ INC, 10-K, March 16, 2007Powered 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.10.4 The Cadiz Groundwater Storage and Dry-Year Supply Program Definitive Economic Terms and Responsibilities between MetropolitanWater District of Southern California and Cadiz dated March 6, 2001(9)10.5 Resolution of the Directors of Cadiz Inc., authorizing the Management Equity Incentive Plan.(4)10.6 Supplemental Resolutions of the Compensation Committee of the Board of Directors of Cadiz Inc., regarding the Management EquityIncentive Plan.(8)10.7 Form of Incentive Plan Stock Option Agreement(10)10.8 2004 Management Bonus Plan.(8)10.9 Consulting Agreement dated August 1, 2002 by and between Richard Stoddard and Cadiz Inc., and Extension of Consulting Agreementdated January 1, 2004 by and between Richard Stoddard and Cadiz Inc.(8)10.10 Employment Agreement dated September 12, 2005 between O'Donnell Iselin II and Cadiz Inc.(11)10.11 Settlement Agreement dated as of August 11, 2005 by and between Cadiz Inc., on the one hand, and Sun World International, Inc., SunDesert, Inc., Coachella Growers and Sun World/Rayo, on the other hand(12)10.12 $36,375,000 Credit Agreement among Cadiz Inc. and Cadiz Real Estate LLC, as Borrowers, the Several Lenders from time to time partiesthereto, and Peloton Partners LLP, as Administrative Agent, dated as of June 26, 2006(13)10.13 Amendment No. 1 dated September 29, 2006 to the $36,375,000 Credit Agreement among Cadiz Inc. and Cadiz Real Estate LLC, asBorrowers, the Several Lenders from time to time parties thereto and Peloton Partners LLP, as Administrative Agent, dated as of June26, 2006 (14)10.14 Outside Director Compensation Plan(15)10.15 Resolutions adopted by the Cadiz Inc. Board of Directors on March 13, 2007, increasing the annual salary paid to Keith Brackpool andthe monthly consulting fees paid to Richard E. Stoddard.21.1 Subsidiaries of the Registrant23.1 Consent of Independent Registered Public Accounting Firm31.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Actof 200231Source: CADIZ INC, 10-K, March 16, 2007Powered 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.31.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Actof 200232.1 Certification of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 Certification of O'Donnell Iselin II, Chief Financial Officer and Secretary of Cadiz Inc. pursuant to 18 U.S.C. Section 1350, as adoptedpursuant 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 November13, 1998 (4)Previously filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003 filed on November 2,2004. (5)Previously filed as an Exhibit to our Current Report on Form 8-K dated November 30, 2004 filed on December 2, 2004. (6)Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 filed on August 13, 1999 (7)Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 2, 2004 (8)Previously filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed on March 31,2005 (9)Previously filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28,2002 (10)Previously filed as an Exhibit to our Form S-8 Registration Statement No. 333-124626 filed on May 4, 2005 (11)Previously filed as an Exhibit to our Current Report on Form 8-K dated October 3, 2005 filed on October 3, 2005 (12)Previously filed as an Exhibit to our Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 14, 2005 (13)Previously filed as an exhibit to our registration statement on Form S-3 (Registration No. 333-126117) filed on July 28, 2006 (14) Previously filed as an exhibit to our current report on Form 8-K dated October 4, 2006 and filed October 4, 2006 (15)Previously filed as appendix B to our definitive proxy dated October 10, 2006 and filed October 10, 200632Source: CADIZ INC, 10-K, March 16, 2007Powered 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.INDEX TO FINANCIAL STATEMENTS CADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 34 Consolidated Statements of Operations for the three years ended December 31, 2006 36 Consolidated Balance Sheets as of December 31, 2006 and 2005 37 Consolidated Statements of Cash Flows for the three years ended December 31, 2006 38 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2006 39 Notes to the Consolidated Financial Statements 40 Financial Statement Schedule 62 (Schedules other than those listed above have been omitted since they are either not required, inapplicable, or the required information is included on thefinancial statements or notes thereto.)33Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of Cadiz Inc.:We have completed integrated audits of Cadiz Inc.’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as ofDecember 31, 2006 and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting OversightBoard (United States). Our opinions, based on our audits, are presented below.Consolidated financial statements and financial statement scheduleIn our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of CadizInc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction withthe related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conductedour audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.As discussed in Note 2 to the accompanying consolidated financial statements, the Company changed the manner in which it accounts for share-basedcompensation in 2006.Internal control over financial reportingAlso, in our opinion, management’s assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A,that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects,based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting asof December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial34Source: CADIZ INC, 10-K, March 16, 2007Powered 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.reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’sassessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internalcontrol over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. PricewaterhouseCoopers LLPLos Angeles, CaliforniaMarch 16, 200735Source: CADIZ INC, 10-K, March 16, 2007Powered 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.CADIZ INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In thousands, except per share data) 2006 2005 2004 Total revenues $614 $1,197 $47 Costs and expenses: Cost of sales (exclusive of depreciation shown below) 721 994 - General and administrative 7,710 20,732 3,050 Write-off of permanent and developing crops (Note 2) - - 3,443 Depreciation and amortization 154 229 527 Total costs and expenses 8,585 21,955 7,020 Operating loss (7,971) (20,758) (6,973) Interest expense, net (2,434) (1,931) (7,695)Loss on extinguishment of debt and debt refinancing (868) - (1,369)Change in fair value of derivative liability (2,919) - - Other income 373 - - Other income (expense), net (5,848) (1,931) (9,064) Net loss before income taxes (13,819) (22,689) (16,037) Income tax expense 6 336 - Net loss (13,825) (23,025) (16,037) Net loss applicable to common stock $(13,825)$(23,025)$(16,037) Basic and diluted net loss per share $(1.21)$(2.14)$(2.32) Weighted-average shares outstanding 11,381 10,756 6,911 See accompanying notes to the consolidated financial statements.36Source: CADIZ INC, 10-K, March 16, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.CADIZ INC.CONSOLIDATED BALANCE SHEET December 31, ($ in thousands) 2006 2005 ASSETS Current assets: Cash and cash equivalents $10,397 $5,302 Accounts Receivable 301 170 Prepaid interest expense - 740 Prepaid expenses and other 243 34 Total current assets 10,941 6,246 Property, plant, equipment and water programs, net 35,190 35,323 Goodwill 3,813 3,813 Other assets 382 664 Total assets $50,326 $46,046 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $444 $369 Accrued liabilities 380 819 Current portion of long term debt 9 8 Total current liabilities 833 1,196 Long-term debt 25,881 25,883 Total liabilities 26,714 27,079 Contingencies (Note 12) Stockholders' equity: Series F convertible preferred stock - $.01 par value: 100,000 shares authorized, shares issued and outstanding - 1,000 at December 31, 2006 and 1,000 at December 31, 2005 - - Common stock - $0.01 par value; 70,000,000 shares authorized; shares issued and outstanding: 11,536,597 at December 31, 2006 and 11,330,463 at December 31, 2005 116 114 Additional paid-in capital 245,206 226,738 Accumulated deficit (221,710) (207,885)Total stockholders' equity 23,612 18,967 Total liabilities and stockholders' equity $50,326 $46,046 See accompanying notes to the consolidated financial statements.37Source: CADIZ INC, 10-K, March 16, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.CADIZ INC.CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, ($ in thousands) 2006 2005 2004 Cash flows from operating activities: Net loss $(13,825)$(23,025)$(16,037)Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 154 229 527 Amortization of debt issuance costs 40 28 286 Amortization of debt discount 783 - 3,481 Loss on extinguishment of debt and debt refinancing 868 - 1,369 Interest added to loan principalNet (gain)/loss on disposal of assets 1,463(21) 85142 -- Write-off of permanent and developing crops - - 3,443 Change in value of derivative liability 2,919 - - Compensation charge for stock awards and share options 2,260 16,687 - Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (131) (170) - Decrease (increase) in prepaid borrowing expense 523 - - Decrease (increase) in prepaid expenses and other (209) 1,236 122 (Decrease) increase in accounts payable 75 (101) (386)(Decrease) increase in accrued liabilities (175) 522 (454) Net cash used for operating activities (5,276) (3,701) (7,649) Cash flows from investing activities: Deconsolidation of subsidiary - - - Additions to property, plant and equipment (22) (68) (8)Proceeds from asset disposition 22 - - Decrease (increase) in restricted cash - - 2,142 Net cash provided by (used for) investing activities - (68) 2,134 Cash flows from financing activities: Net proceeds from issuance of common stock 1,050 - 21,274 Proceeds from issuance of long-term debt 36,375 44 - Debt issuance costs (408) - (150)Principal payments on long-term debt (26,646) (4) (10,000) Net cash provided by financing activities 10,371 40 11,124 Net increase in cash and cash equivalents 5,095 (3,729) 5,609 Cash and cash equivalents, beginning of period 5,302 9,031 3,422 Cash and cash equivalents, end of period $10,397 $5,302 $9,031 Non-cash financing and investing activities Settlement of note receivable from officer $- $- $1 Issuance of common stock to prepay interest on term loan obligations Issuance of common stock for services accrued in prior year - 447 350 Exchange of deferred stock units for common stock - - 654 See accompanying notes to the consolidated financial statements.38Source: CADIZ INC, 10-K, March 16, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.CADIZ INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2006, 2005 and 2004 ($ in thousands) Additional Total Preferred Stock Common Stock Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Capital Deficit Equity Balance as of December 31, 2003 100,000 $1 6,471,385 $65 $184,974 (168,823)$16,217 Exchange of deferred stock units for common stock - - 1,289 - 654 - 654 Issuance of common stock for cash - - 2,000,000 20 23,654 - 23,674 Issuance of common stock for services - - 140,000 1 349 - 350 Conversion of Series F convertible preferred stock (99,000) (1) 1,711,665 17 (16) - - Net loss - - - - - (16,037) (16,037) Balance as of December 31, 2004 1,000 - 10,324,339 103 209,615 (184,860) 24,858 Issuance of common stock for services - - 37,200 1 446 - 447 Issuance of management incentive shares and options - - 968,933 10 16,677 - 16,687 Fractional shares retired - - (9) - - - - Net loss - - - - - (23,025) (23,025) Balance as of December 31, 2005 1,000 $- 11,330,463 $114 $226,738 $(207,885)$18,967 Convertible term loan conversion option - - - - 15,160 - 15,160 Stock compensation expense and issuance ofmanagementincentive and outside director shares - - 136,195 1 2,259 - 2,260 Common stock issued due to warrant exercise - - 70,000 1 1,049 - 1,050 Fractional shares retired - - (61) - - - - Net Loss - - - - - (13,825) (13,825) Balance as of December 31, 2006 1,000 $- 11,536,597 $116 $245,206 $(221,710)$23,612 See accompanying notes to the consolidated financial statements.39Source: CADIZ INC, 10-K, March 16, 2007Powered 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.CADIZ INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESSThe Company’s primary assets are 45,000 acres of land in three areas of eastern San Bernardino County, California. Virtually all of this land isunderlain by high-quality groundwater resources with demonstrated potential for recreational, residential, and agricultural development. The properties arealso located in proximity to the Colorado River and the Colorado River Aqueduct, the major source of imported water for southern California. The aquifersystems underlying the properties contain large amounts of water and are suitable for water storage and supply programs.The value of these assets derives from a combination of projected population increases and limited water supplies throughout southern California. Inaddition, most of the major population centers in southern California are not located where significant precipitation occurs, requiring the importation ofwater from other parts of the state. The Company therefore believes that a competitive advantage exists for companies that can provide high quality, reliable,and affordable water to major population centers.In 1993 the Company secured permits for up to 9,600 acres of agricultural development in the Cadiz Valley and the withdrawal of more than 1million acre-feet of ground water from the aquifer system underlying the property. In 1997, the Company entered into the first of a series of agreements withthe Metropolitan Water District of Southern California (“Metropolitan”) to jointly design, permit and build an aquifer storage and supply program on theCompany’s land in the Cadiz and Fenner Valleys (the “Cadiz Project” or the “Project”).Between 1997 and 2002, Metropolitan and the Company received substantially all of the various state and federal approvals required for permits toconstruct and operate the project and received a federal Record of Decision (“ROD”) from the U.S. Department of the Interior, which endorsed the CadizProject and offered a right of way grant for the construction of project facilities. The federal government also approved a Final Environmental ImpactStatement (“FEIS”) in compliance with the National Environmental Policy Act (“NEPA”).Despite the significant progress made in the federal environmental review process, in October 2002 Metropolitan’s Board voted not to accept theright of way grant offered by the U.S. Department of the Interior and refused to consider whether or not to certify the Final Environmental Impact Report(“FEIR”), which was a necessary action to authorize implementation of the Cadiz Project in accordance with the California Environmental Quality Act(“CEQA”).When Metropolitan’s Board declined to proceed with the Cadiz Project, the FEIR was complete and awaiting certification at a hearing scheduled forlate October 2002. It is the Company’s position that these actions by Metropolitan breached various contractual and fiduciary obligations to the Company,and interfered with the economic advantage it would have obtained from the Cadiz Project. In April 2003 the Company filed a claim against Metropolitanseeking compensatory damages. When settlement negotiations failed to produce a resolution, the Company filed a lawsuit against Metropolitan in LosAngeles Superior Court on November 17, 2005. The claims for breach of fiduciary duty, breach of express contract, promissory estoppel, breach of impliedcontract and specific performance have all been allowed by the Court and are scheduled for trial in late 2007.40Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Meanwhile, the need for water storage and supply programs has not abated. Moreover, the advantages of underground water storage facilities areincreasingly evident. These include minimal surface environmental impacts, lower capital investment, protection from airborne contaminants and minimalevaporative water loss. Therefore the Company continues to pursue the completion of the environmental review process for the Cadiz Project.To that end, the County of San Bernardino has agreed to serve as the CEQA lead agency for the completion of the environmental review of the CadizProject and issue any permits required under California law once the review is completed. The Company is also working with the U.S. Department of theInterior to have the permits that were approved during the federal environmental review process, including the right of way granted in the ROD, issueddirectly to the Company for the benefit of any participating public agency. Additionally, the Company is in discussions with several other public agenciesregarding their interest in participating in the Cadiz Project. These agencies have access to sources of water that can be stored in the Cadiz Project.In addition to agriculture and water development, the rapid growth of nearby desert communities in southern California, Nevada and Arizonaindicates that the Company’s land holdings may be suitable for other types of development. To this end, the Company has conducted a detailed analysis ofthe Company’s land assets to assess the opportunities for these properties. Based on this analysis, the Company believes that its properties have significantlong-term potential for residential and commercial development. The Company is continuing to explore alternative land uses to maximize the value of itsproperties.In 2006, the Company refinanced its long term debt with a new $36.4 million zero coupon senior secured convertible term loan that matures on June29, 2011 and received $1.1 million when certain holders of warrants issued in 2004 exercised their right to purchase 70,000 common shares at $15.00 pershare. In 2007, the Company exercised its right to terminate the remaining warrants on March 2, 2007, subject to a 30 day notice period. In response, theremaining warrant holders exercised their right to purchase 335,440 shares of the Company’s common stock during the notice period, and the Companyreceived an additional $5.0 million from the sale of these shares. Following this exercise, no Warrants remain outstanding.The Chapter 11 Reorganization Plan of the Company’s Sun World International Inc. subsidiary became effective in 2005, and the Company has nofurther liabilities related to the business or operations of Sun World.The Company remains committed to its land and water assets and we continue to explore all opportunities for development of these assets. TheCompany cannot predict with certainty which of these various opportunities will ultimately be utilized.41Source: CADIZ INC, 10-K, March 16, 2007Powered 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.NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationAs discussed in Note 1, on October 8, 2002, Metropolitan’s Board voted not to proceed with the Cadiz Project and thereby did not consideracceptance of the terms and conditions of the federal right-of-way grant. The Company believes that, by failing to complete the environmental review processfor the Cadiz Project, Metropolitan breached various contractual and fiduciary obligations to the Company and interfered with the economic advantage itwould have obtained from the Cadiz Project. In April 2003 the Company filed a claim against Metropolitan seeking compensatory and damages. Whensettlement negotiations failed to produce a resolution, the Company filed a lawsuit against Metropolitan in Los Angeles Superior Court on November 17,2005.The Company remains committed to its water programs and it continues to explore all opportunities for development of these assets. As furtherdiscussed in Note 1, the County of San Bernardino has agreed to serve as the CEQA lead agency for the completion of the environmental review of the CadizProject and issue any permits required under California law once the review is completed. The Company is also in discussions with several other publicagencies regarding their interest in participating in the Cadiz Project. However, at the present time, the Company does not have a commitment from any ofthese parties for the implementation of the Cadiz Project.In June 2006, the Company raised $36.4 million through the private placement of a five year zero coupon convertible term loan with PelotonPartners LLP (“Peloton”), as administrative agent, and an affiliate of Peloton and another investor, as lenders. The proceeds of the new term loan werepartially used to repay the Company’s prior term loan facility with ING Capital LLC (“ING”). In September 2006, and additional $1.1 million was raisedwhen certain holders of warrants to purchase the Company’s common stock at $15.00 per share chose to exercise the warrants and purchase 70,000 shares ofcommon stock. Based on current forecasts, the Company believes that it sufficient resources to fund operations beyond December 2007.The Company’s current resources do not provide the capital necessary to fund a water or real estate development project should the Company berequired to do so. There is no assurance that additional financing (public or private) will be available on acceptable terms or at all. If the Company issuesadditional equity or equity linked securities to raise funds, the ownership percentage of the Company’s existing stockholders would be reduced. Newinvestors may demand rights, preferences or privileges senior to those of existing holders of common stock. If the Company cannot raise needed funds, itmight be forced to make further substantial reductions in its operating expenses, which could adversely affect its ability to implement its current businessplan and ultimately its viability as a company.Subsequent to the effective date of the Chapter 11 reorganization plan of Sun World, the Company’s primary activities are limited to thedevelopment of its water resources and related assets. From the effective date of the plan through December 31, 2006, the Company has incurred losses ofapproximately $19.1 million and used cash in operations of $6.5 million.42Source: CADIZ INC, 10-K, March 16, 2007Powered 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.ReclassificationsThe Company reclassified stock based compensation in the 2005 financial statements to conform to the current presentation. This reclassificationhad no effect on the Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholder’s Equity.Principles of ConsolidationOn January 30, 2003 the Company’s wholly-owned subsidiary, Sun World International, Inc. and certain of its subsidiaries (Sun Desert Inc.,Coachella Growers, and Sun World/Rayo) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As of that date, the financialstatements of Sun World were no longer consolidated with those of Cadiz due to the Company’s loss of control over the operations of Sun World. Cadizaccounts for its investment in Sun World using the cost basis of accounting and ascribes no value to its investment in Sun World.In December 2003, the Company transferred substantially all of its assets (with the exception of an office sublease, certain office furniture andequipment and any Sun World related assets) to Cadiz Real Estate LLC, a Delaware limited liability company (“Cadiz Real Estate”). The Company holds100% of the equity interests of Cadiz Real Estate, and therefore continues to hold 100% beneficial ownership of the properties that it transferred to CadizReal Estate. Because the transfer of the Company’s properties to Cadiz Real Estate has no effect on its ultimate beneficial ownership of these properties, theproperties owned of record either by Cadiz Real Estate or by the Company are treated as belonging to the Company.Use of Estimates in Preparation of Financial StatementsThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has made estimates withregard to revenue recognition, goodwill and other long-lived assets, and deferred tax assets. Actual results could differ from those estimates.Revenue RecognitionThe Company recognizes crop sale revenue upon shipment and transfer of title to customers.Stock-Based CompensationGeneral and administrative expenses include $2,260,000 and $16,687,000 of stock based compensation expenses in the fiscal years endingDecember 31, 2006 and 2005, respectively.43Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Prior to the January 2006 adoption of SFAS 123R, the Company accounted for grants of options to employees to purchase its common stock usingthe intrinsic value method in accordance with APB Opinion No. 25 and FIN No. 44, “Accounting for Certain Transactions Involving Stock Compensation”.As permitted by SFAS 123 and as amended by SFAS No. 148, the Company chose to continue to account for such option grants under APB Opinion No. 25and provide the expanded disclosures specified in SFAS 123, as amended by SFAS No. 148.Had compensation cost for the Company’s option grants been determined based on their fair value at the grant date for awards consistent with theprovisions of SFAS 123R, the Company’s net loss per share for the twelve months ended December 31, 2005 and 2004 would have been the adjusted proforma amounts indicated below (dollars in thousands): Year Ended December 31, 2005 2004 Net loss applicable to commonstock:As reported $(23,025)$(16,037) Additional expense under SFAS 123 $(3,096) - Pro forma $(26,121)$(16,037) Net loss per common share:As reported $(2.14)$(2.32) Additional expense under SFAS123 $(0.29)$- Pro forma $(2.43)$(2.32) For purposes of computing the pro forma disclosures required by SFAS 123, the fair value of each option granted to employees and directors isestimated using the Black-Scholes option pricing model.In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which requires all share-based payments to employees,including grants of employee stock options, be recognized in the financial statements based on their grant date fair values. SFAS No. 123R replaces SFAS No.123, “Accounting for Stock-based Compensation,” (“SFAS 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” TheCompany adopted the new requirements using the modified prospective transition method during the first quarter of 2006, and as a result, will notretroactively adjust results from prior periods. Under this transition method, compensation expense associated with stock options recognized in fiscal 2006included: 1) expenses related to the remaining unvested portion of all stock option awards granted prior to January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123; and 2) expenses related to all stock option awards granted or modified subsequent toJanuary 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company will apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis over therequisite service period. 365,000 options were granted under the Company’s 2003 Management Equity Incentive Plan in 2005, and 12,339 options weregranted in 2006. The Options have a 10 year term with vesting periods ranging from the issuance date to three years. The 2006 options had a strike priceequal to the fair market value of the Company’s common stock on the grant date.44Source: CADIZ INC, 10-K, March 16, 2007Powered 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 a result of the adoption of SFAS 123R, the Company recorded expense in the amount of $877,000 in 2006 related to the fair value of options.$831,000 of this amount was related to options granted in 2005. SFAS 123R also requires the Company to estimate forfeitures in calculating the expenserelated to stock-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. Theremaining vesting periods are relatively short, and the potential impact of forfeitures is not material. The Company is in a tax loss carryforward position andis not expected to realize a benefit from any additional compensation expense recognized under SFAS 123R. See Note 4 - Income Taxes.Net Loss Per Common ShareBasic Earnings Per Share (EPS) is computed by dividing the net loss, after deduction for preferred dividends either accrued or imputed, if any, by theweighted-average common shares outstanding. Options, deferred stock units, warrants, participating and redeemable preferred stock and the zero coupon termloan convertible into or exercisable for certain shares of the Company’s common stock were not considered in the computation of diluted EPS because theirinclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increasedby approximately 1,583,000 shares, 725,000 shares and 68,000 shares for the years ended December 31, 2006, 2005 and 2004, respectively.Cash and Cash EquivalentsThe Company considers all short-term deposits with an original maturity of three months or less to be cash equivalents. The Company invests itsexcess cash in deposits with major international banks, government agency notes and short-term commercial paper and, therefore, bears minimal risk. Suchinvestments are stated at cost, which approximates fair value, and are considered cash equivalents for purposes of reporting cash flows.Prepaid Interest ExpenseAs part of the private sale of common shares on November 30, 2004, the Company issued to its lender, ING, $2.4 million of units as prepaid interestunder the Company’s $25 million secured term loan from ING. On December 31, 2005, the current portion of this interest was included in Prepaid InterestExpense and the non-current portion was included in Other Assets in the Consolidated Balance Sheet. The total amount of prepaid interest was $1,284,000on December 31, 2005. The ING loan was repaid in full on June 29, 2006, and there was no Prepaid Interest Expense balance on December 31, 2006.Property, Plant, Equipment and Water ProgramsProperty, plant, equipment and water programs are stated at cost.The Company capitalized direct and certain indirect costs of planting and developing orchards and vineyards during the development period, whichvaried by crop and generally ranged from three to seven years. Depreciation commenced in the year commercial production was achieved.45Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Permanent land development costs, such as acquisition costs, clearing, initial leveling and other costs required to bring the land into a suitablecondition for general agricultural use, were capitalized and not depreciated, since these costs were determined to have an indefinite useful life.Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally ten to forty-five years for landimprovements and buildings, three to twenty-five years for machinery and equipment, and five to thirty years for permanent crops.Water rights and water storage and supply programs are stated at cost. Certain costs directly attributable to the development of such programs havebeen capitalized by the Company. These costs, which are expected to be recovered through future revenues, consist of direct labor, drilling costs, consultingfees for various engineering, hydrological, environmental and feasibility studies, and other professional and legal fees.Impairment of Long-Lived AssetsThe Company evaluates its long-lived assets, including intangibles, for potential impairment when circumstances indicate that the carrying amountof the asset may not be recoverable. This evaluation is based upon estimated future cash flows. In the event that the undiscounted cash flows are less than thenet book value of the assets, the carrying value of the assets will be written down to their estimated fair value. As a result of the actions taken by Metropolitanin the fourth quarter of 2002 as described in Note 1, the Company, with the assistance of a valuation firm, evaluated the carrying value of its water programand determined that the asset was not impaired and that the costs were estimated to be recovered through implementation of the Cadiz Project with othergovernment organizations, water agencies and private water users. In 2006, 2005 and 2004 the Company reviewed the valuation of the water program andconcluded that the carrying amount of the program was not impaired. The Company’s estimate could be impacted by changes in plans related to the CadizProject.Permanent crops and developing crops shown as Cadiz assets consist of lemon groves and grape vineyards located on the Cadiz Valley property.These crops have previously been leased to Sun World and an unaffiliated third party. During the fourth quarter of the year ended December 31, 2004, thelong-standing lease to Sun World was terminated. Due to the uncertainty of recovering the carrying value of the permanent and developing crops, theCompany recorded a charge of $3.4 million in 2004 to write off the capitalized cost of these crops, which is shown under the heading “Write-off of permanentand developing crops” on the Consolidated Statement of Operations.Goodwill and Other AssetsAs a result of a merger in May 1988 between two companies which eventually became known as Cadiz Inc., goodwill in the amount of $7,006,000was recorded. Approximately $3,193,000 of this amount was amortized prior to the adoption of Statement of Financial Accounting Standards No. 142,(“SFAS No. 142”) “Goodwill and Other Intangible Assets” on January 1, 2002. Goodwill is tested for impairment annually in the first quarter of each year, orif events occur which require an impairment analysis be performed. As a result of the actions taken by Metropolitan in the fourth quarter of 2002 as describedin Note 1, the Company, with46Source: CADIZ INC, 10-K, March 16, 2007Powered 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 assistance of a valuation firm, performed an impairment test of its goodwill and determined that its goodwill was not impaired. In addition, the Companyperformed an annual impairment test of goodwill in the first quarter of 2006, 2005 and 2004 and determined that the goodwill was not impaired.Capitalized loan fees represent costs incurred to obtain debt financing. Such costs are amortized over the life of the related loan. The capitalizedloan fees relate to the zero coupon secured convertible term loan with Peloton Partners LLP and the prior term loan with ING Capital LLC, as described inNote 6.Income TaxesIncome taxes are provided for using an asset and liability approach which requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted taxrates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.Fair Value of Financial InstrumentsFinancial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities withcarrying values approximating fair value include accounts payable and accrued liabilities due to their short-term nature. The carrying value of the Company'sdebt, before discount, approximates fair value, based on interest rates currently available to the Company for debt with similar terms.Supplemental Cash Flow InformationAs described in Note 2, cash interest payments due on the ING loan were credited against a $2.4 million prepaid interest account that had beenestablished for this purpose. No cash payments are due on the new Peloton Loan prior to the June 29, 2011 final maturity date.Cash payments for income taxes were $128,200 in the year ended December 31, 2006. No cash was paid for income taxes during the years endedDecember 31, 2005 and 2004, respectively.Recent Accounting PronouncementsIn June 2006, the FASB issued FSP FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ThisInterpretation also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. Theevaluation of a tax position in accordance with this Interpretation will be a two-step process. The first step will determine if it is more likely than not that atax position will be sustained upon examination and should therefore be recognized. The second step will measure a tax position that meets the more likelythan not recognition threshold to47Source: CADIZ INC, 10-K, March 16, 2007Powered 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.determine the amount of benefit to recognize in the financial statements. This Interpretation is effective for fiscal years beginning after December 15, 2006.The Company is currently evaluating the impact of this Statement.On September 13, 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on the considerationof the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective forfiscal years ending after November 14, 2006, or fiscal year 2006 for the Company. The adoption of SAB No. 108 did not have a material impact on theCompany’s beginning retained earnings.NOTE 3 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMSProperty, plant, equipment and water programs consist of the following (dollars in thousands): December 31, 2006 2005 Land and land improvements $21,986 $21,986 Water programs 14,274 14,274 Buildings 1,191 1,191 Machinery and equipment 726 2,103 38,177 39,554 Less accumulated depreciation (2,987) (4,231) $35,190 $35,323 Depreciation expense during the years ended December 31, 2006, 2005 and 2004 was $154,000, $229,000 and $527,000 respectively. NOTE 4 - OTHER ASSETSOther assets consist of the following (dollars in thousands): December 31, 2006 2005 Deferred loan costs, net $382 $120 Prepaid interest - 544 $382 $664 Amortization of deferred loan costs was $40,000, $28,000 and $286,000 in 2006, 2005, and 2004, respectively, and is included in interest expensein the statement of operations.48Source: CADIZ INC, 10-K, March 16, 2007Powered 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.NOTE 5 - ACCRUED LIABILITIES December 31, 2006 2005 Interest $- $264 Payroll, bonus, and benefits 10 4 Consulting and Legal expenses 72 65 Income & other taxes 238 336 Other expenses 60 150 $380 $819 NOTE 6 - LONG-TERM DEBTAt December 31, 2006 and 2005, the carrying amount of the Company’s outstanding debt is summarized as follows (dollars in thousands): December 31, 2006 2005 Zero coupon secured convertible term loan due June 29, 2011. Interest accruing at 5% per annum until June 29, 2009 and at 6% thereafter $37,316 $- Senior term loan due March 31, 2010, interest payable semi-annually, at 4% in cash plus 4% paid in kind until March 31, 2008 and 4% in cash plus 6% paid in kind thereafter - 25,851 Other loans 31 40 Debt Discount (11,457) - 25,890 25,891 Less current portion 9 8 $25,881 $25,883 Pursuant to the Company’s loan agreements, annual maturities of long-term debt outstanding on December 31, 2006 are as follows: Year $000’s 2007 $ 9 2008 9 2009 9 2010 4 2011 37,316 $ 37,347 49Source: CADIZ INC, 10-K, March 16, 2007Powered 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 June, the Company entered into a $36.4 million five year zero coupon convertible term loan with Peloton Partners LLP, as administrative agentfor the loan, and with an affiliate of Peloton and another investor, as lenders (the “Peloton Loan”). Certain terms of the loan were subsequently amendedpursuant to Amendment #1 to the Credit Agreement, which was effective September 29, 2006. Under the terms of the loan, interest accrues at a 5% annual ratefor the first 3 years and 6% thereafter, calculated on the basis of a 360 day year and actual days elapsed. The entire amount of accrued interest is due at thefinal maturity of the loan in June, 2011. Substantially all the assets of the Company have been pledged as collateral for the term loan, which containsrepresentations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incuradditional indebtedness, incur liens, pay dividends or make restricted payments, dispose of assets, make investments and merge or consolidate with anotherperson. However, there are no financial maintenance covenants and no restrictions on the Company’s ability to issue additional common stock to fund futureworking capital needs.At the lender’s option, principal plus accrued interest is convertible into the Company’s $0.01 par value common stock. The loan is divided into twotranches: the $10 million Tranche A is convertible at $18.15 per share, and the $26.4 million Tranche B is convertible at $23.10 per share. A maximum of2,221,909 shares are issuable pursuant to these conversion rights, with this maximum number applicable if the loan is converted on the final maturity date.The Company has more than sufficient authorized common shares available for this purpose.In the event of a change in control, the conversion prices are adjusted downward by a discount that declines over time such that, under a change incontrol scenario, both the Tranche A and Tranche B conversion prices are initially $16.50 per share and increase in a linear manner over time to the full$18.15 Tranche A conversion price and $23.10 Tranche B conversion price on the final maturity date. In no event does the maximum number of sharesissuable to lenders pursuant to these revised conversion formulas exceed the 2,221,909 shares that would be issued to lenders pursuant to a conversion in fullon the final maturity date in the absence of a change in control.Each of the loan tranches can be prepaid if the price of the Company’s stock on the NASDAQ Global Market exceeds the conversion price of thetranche by 40% or if the Company obtains a certified environmental impact report for the Cadiz groundwater storage and dry year supply program, a pipelineright-of-way and permits for pipeline construction and financing commitments sufficient to construct the project. The Company has filed a registrationstatement on Form S-3 covering the resale of all the securities issuable upon conversion of the loan.The Company has analyzed all of the above provisions of the convertible loan and related agreements for embedded derivatives under FASBStatement No. 133, Accounting for Derivative Instruments and Hedging Activities and related Emerging Issues Task Force (EITF) interpretations and SECrules. The Company concluded that certain provisions of the convertible loan agreement, which were in effect prior to the first amendment date, may bedeemed to be derivatives for purposes of the application of FASB Statement No. 133 and EITF 00-19: Accounting for Derivative Financial Instruments to,and Potentially Settled in, a Company’s Own Stock. Therefore, in accordance with FASB Statement No. 133, these embedded instruments were bifurcatedfrom the host debt instrument and classified as a liability in the Company’s financial statements. The Company prepared valuations for each of the50Source: CADIZ INC, 10-K, March 16, 2007Powered 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.deemed derivatives using a Black-Scholes option pricing model and recorded a liability of approximately $12.2 million on the June 30 loan funding date,with an offsetting discount to the convertible term loan.On June 30, 2006, the derivative liability was classified and recorded as part of long term debt in the balance sheet. The debt discount will beamortized to interest expense over the life of the loan using the effective interest amortization method. The principal valuation assumptions are as follows: Loan balance available for conversion:$36.4 million Expected term:5 years Cadiz common share price:$17.01 Volatility:46% Risk-free Interest Rate:5.18% Change in control probability:10% On September 29, 2006 the terms of the loan were amended, and it was determined that bifurcation of the embedded equity conversion option is nolonger required. The derivative liability was adjusted to fair value on the amendment date, and the $2,919,000 increase in fair value was recorded as an“Other Expense” item in the Consolidated Statement of Operations. The $15.2 million fair value of the derivative liability was then transferred to theAdditional Paid-in Capital component of Stockholder’s Equity in accordance with the tentative conclusion reached by the Emerging Issues Task Force at thetask force’s September 7, 2006 meeting.The Company incurred $408,000 of outside legal expenses related to the negotiation and documentation of the loan, which will be amortized overthe life of the loan using the interest amortization methodThe proceeds of the Peloton Loan were applied to repay in full the Company’s term loan facility with ING described below. As a result, ING retainedthe $762,000 remaining balance of the prepaid interest credit account described below, and the write-off of this asset was reflected in the “Other Expense”caption of the Statement of Operations. The write-off of $106,000 of unamortized debt issuance costs related to the ING loan was also reflected under “OtherExpense”.On November 30, 2004 the Company entered into an amendment of its senior term loan agreement with ING Capital LLC (the “ING Loan”). Theamendment of the credit facility did not constitute a troubled debt restructuring and was accounted for as a debt extinguishment under EITF 96-19. Pursuantto 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 oustanding principalbalance 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 orbefore March 31, 2008, and51Source: CADIZ INC, 10-K, March 16, 2007Powered 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. (ii)reduce the interest rate through March 31, 2008 on the new outstanding balance to 4% cash plus 4% PIK (increasing to 4% cashplus 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 theprevious, December 2003, amendment.The terms of the ING Loan also required certain mandatory prepayments from the cash proceeds of future equity issuances by the Company andprohibited the payment of dividends. The ING Loan was secured by substantially all of the assets of the Company. It was repaid in full on June 29, 2006.At December 31, 2006 the Company was in compliance with its debt covenants under the Peloton Loan. NOTE 7 - INCOME TAXESDeferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and availablecarryforwards. Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of December 31, 2006and 2005 are as follows (in thousands): December 31, 2006 2005 Deferred tax assets: Net operating losses $25,501 $22,763 Fixed asset basis difference 7,645 8,037 Contributions carryover 6 - Accrued liabilities and other 1,049 814 Total deferred tax assets 34,201 31,614 Valuation allowance for deferred tax assets (34,201) (31,614) Net deferred tax asset $- $- The valuation allowance increased $2,587,000 in 2006, primarily due to an increase in the net operating loss category of deferred tax.As of December 31, 2006, the Company had net operating loss (NOL) carryforwards of approximately $69.7 million for federal income tax purposesand $20.3 million for California state income tax purposes. Such carryforwards expire in varying amounts through the year 2026. These amounts reflect theeffective reduction of the NOL carryforwards as a result of ownership change annual limitation amounts.On August 26, 2005, a Settlement Agreement between Cadiz, on the one hand, and Sun World and three of Sun World’s subsidiaries, on the otherhand, was approved by the U.S.52Source: CADIZ INC, 10-K, March 16, 2007Powered 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.Bankruptcy Court, concurrently with the Court’s confirmation of the amended Plan. The Settlement Agreement provides that following the September 6,2005 effective date of Sun World’s plan of reorganization, Cadiz will retain the right to utilize the Sun World net operating loss carryovers (NOLs). SunWorld Federal NOLs are estimated to be approximately $57.8 million. If, in any year from calendar year 2005 through calendar year 2011, the utilization ofsuch NOLs results in a reduction of Cadiz’ tax liability for such year, then Cadiz will pay to the Sun World bankruptcy estate 25% of the amount of suchreduction, and shall retain the remaining 75% for its own benefit. There is no requirement that Cadiz utilize these NOLs during this reimbursement period, orprovide any reimbursement to the Sun World bankruptcy estate for any NOLs used by Cadiz after this reimbursement period expires.Because it is more likely than not that the Company will not realize its net deferred tax assets, it has recorded a full valuation allowance againstthese assets. Accordingly, no deferred tax asset has been recorded in the accompanying balance sheet.Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards based on a statutoryrate of return (usually the “applicable federal funds rate”, as defined in the Internal Revenue Code) and the value of the corporation at the time of a “changeof ownership” as defined by Section 382. Due to past equity issuances and equity issuances in 2005, and due to the Chapter 11 filing by Sun World, theCompany’s ability to utilize net operating loss carryforwards is limited to approximately $6.6 million annually, potentially adjusted by built-in gain items.A reconciliation of the income tax benefit to the statutory federal income tax rate is as follows (dollars in thousands): Year Ended December 31, 2006 2005 2004 Expected federal income tax benefit at 34% $(4,700)$(7,714)$(5,453)Loss with no tax benefit provided 3,426 1,672 1,993 State income tax 6 336 2 Stock Options (21) 4,020 - Losses utilized against unconsolidated subsidiary taxable income - 2,012 1,837 Non-deductible expenses and other 1,295 10 1,621 Income tax expense (benefit) $6 $336 $- NOTE 8 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) Plan for its salaried employees. The Company matches 100% of the first three percent of annual base salary and 50% ofthe next two percent of annual base salary contributed an employee to the plan. The Company contributed $20,000, $22,000 and $3,000 to the plans forfiscal years 2006, 2005 and 2004, respectively.53Source: CADIZ INC, 10-K, March 16, 2007Powered 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.NOTE 9 - PREFERRED AND COMMON STOCKSeries F Convertible Preferred StockThe Company has an authorized class of 100,000 shares of $0.01 par value Series F Convertible preferred stock (“Series F Preferred Stock”). OnDecember 15, 2003, the Company issued 100,000 shares of Series F Convertible Preferred Stock in conjunction with the extension of the Company’s seniorterm loan maturity date. The 100,000 preferred shares were initially convertible into 1,728,955 shares of common stock of the Company. If dividends are paidon the Company’s common stock, holders of Series F Preferred Stock are entitled to receive dividends as if the preferred shares had been converted tocommon stock. The Series F Preferred Stock may not be redeemed by the Company. The estimated value of the Series F Preferred Stock was recorded as a debtdiscount and was being amortized over the initial term of the senior term loans through March 31, 2005. On November 30, 2004, the senior term loans wereamended. 99,000 shares of the Series F Preferred Stock were converted into 1,711,665 shares of common stock of the Company, leaving 1,000 shares of theSeries F Preferred Stock outstanding, and the remaining debt discount of $1.4 million was written off.Common Stock and WarrantsOn November 30, 2004, the Company completed a private placement of 400,000 Units at the price of $60.00 per Unit. Each Unit consisted of five(5) shares of the Company’s common stock and one (1) common stock purchase warrant. Each Warrant will entitle the holder to purchase, commencing 180days from the date of issuance, 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 may beterminated early by the Company on 30 days notice during the period commencing twelve months after completion of the placement, if the common shareshave been registered and the closing market price of the Company’s common stock exceeds $18.75 for 10 consecutive trading days. The requirements of thiscall provision had been satisfied on December 31, 2006.An individual who assisted the company in identifying participants in the November 30, 2004 private placement elected to receive a commission forthe services in stock rather than cash. The commission amount was $326,400, and 27,200 common shares and 5,440 warrants were issued in payment of theobligation in February, 2005.The 2004 Management Bonus Plan provided for the granting of 10,000 shares of common stock valued at $12.00 per share. The cost of the grant wasrecognized in December 2004, and 10,000 shares were issued in May, 2005. As discussed in Note 6, principal and accrued interest on the Peloton Loan is convertible into common shares of the company at the Lender’s option.The terms of the loan include optional prepayment provisions that could result in an early conversion of the loan under certain circumstances, and a preferredconversion formula is provided upon a change in control of the Company.54Source: CADIZ INC, 10-K, March 16, 2007Powered 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.NOTE 10 - STOCK-BASED COMPENSATION PLANS AND WARRANTSThe Company has issued options pursuant to its 1996 Stock Option Plan (the "1996 Plan"), the 1998 Non-Qualified Stock Option Plan (the “1998Plan”) and the 2003 Management Equity Incentive Plan. The Company also has granted stock awards pursuant to its 2003 Management Equity IncentivePlan, 2004 Management Bonus Plan and Outside Director Compensation Plans described below.1996, 1998 and 2000 Stock Option PlansAll options under the 1996 Plan, the 1998 Plan and the 2000 Plan were granted at a price approximating fair market value at the date of grant, hadvesting periods ranging from issuance date to five years, had maximum terms ranging from five to seven years and were issued to directors, officers,consultants and employees of the Company.With one exception, all options issued under the 1996 Plan, the 1998 Plan and the 2000 plan expired in 2005. All the options issued under theseplans had strike prices significantly above market prices. In 2005, an agreement was reached with the sole holder of unexpired options issued under theseplans to cancel those options. The 1996 Plan, the 1998 Plan and the 2000 Plan were then terminated. As a result, all options outstanding at December 31,2005 and December 31, 2006 were issued under the 2003 Management Equity Incentive Plan.2003 Management Equity Incentive Plan In December 2003, concurrently with the completion of the Company’s then current financing arrangements with ING, the Company’s board ofdirectors authorized the adoption of a Management Equity Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, a total of 1,472,051 shares ofcommon stock and common stock options may be granted to key personnel. The Board formed allocation committees to direct the initial allocation of717,373 of these shares and a subsequent allocation of 377,339 shares of common stock and 377,339 options to purchase common stock.All grants are subject to vesting conditions. The initial allocation shares vested 2/3 immediately on the date of the grant and the remaining 1/3vested on December 11, 2005. The subsequent allocation shares of common stock and options to purchase common stock vest 1/3 upon grant, 1/3 onDecember 7, 2005 and 1/3 on December 7, 2006, or such later vesting dates as may be determined by the subsequent allocation committee. All grants aresubject to continued employment and immediate vesting upon termination without cause.2004 Management Bonus PlanIn December 2004, the Company, with board approval, adopted the Cadiz Inc. 2004 Management Bonus Plan (the "Bonus Plan") pursuant to whicha 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. The liabilityand compensation expense related to this award was reflected in the 2004 financial statements, and the shares were issued under the Bonus Plan in May 2005.55Source: CADIZ INC, 10-K, March 16, 2007Powered 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.2006 Outside Director Compensation PlanThe Cadiz Inc. Outside Director Compensation Plan was approved by Cadiz shareholders in November 2006. Under the plan, each outside directorreceives $30,000 of cash compensation and receives a deferred stock award consisting of shares of the Company’s common stock with a value equal to$20,000 on June 30th of each year. The award accrues on a quarterly basis, with $7,500 of cash compensation and $5,000 of stock earned for each fiscalquarter in which a director serves. The deferred stock award vests automatically on the January 31st which first follows the award date.Stock Options Issued under the 2003 Management Equity Incentive PlanThe 2003 Management Equity Incentive Plan provides for the granting of 377,339 options for the purchase of one share of common stock. Optionsissued under the Management Equity Incentive Plan were granted during 2005 and 2006. The options have a ten year term with vesting periods ranging fromissuance date to three years. Certain of these options had strike prices that were below the fair market value of the Company’s common stock on the date ofgrant. All options have been issued to officers, employees and consultants of the Company. 365,000 options were granted under the plan during 2005, andthe remaining 12,339 options were granted in 2006. All the options were unexercised and outstanding on December 31, 2006.In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”, which requires all share-based payments to employees,including grants of employee stock options, be recognized in the financial statements based on their grant date fair values. SFAS No. 123R replaces SFAS No.123, “Accounting for Stock-based Compensation,” (“SFAS 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”The Company adopted the new requirements using the modified prospective transition method during the first quarter of 2006, and as a result, willnot retroactively adjust results from prior periods. Under this transition method, compensation expense associated with stock options in fiscal 2006 included:1) expenses related to the remaining unvested portion of all stock option awards granted prior to January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS No. 123; and 2) expenses related to all stock option awards granted and/or modified subsequent toJanuary 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The fair value of each option granted in 2005 and 2006 was estimated on the date of grant using the Black Scholes option pricing model based onthe following weighted average assumptions: Risk free interest rate4.21% Expected life9.5 years Expected volatility 46% Expected dividend yield0.0% Weighted average vesting period0.8 yearsThe risk free interest rate was assumed to be equal to the yield of a U.S. Treasury bond of comparable maturity, as published in the Federal ReserveStatistical Release for the relevant56Source: CADIZ INC, 10-K, March 16, 2007Powered 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.date. The expected life estimate is based on an analysis of the employees receiving option grants and the expected behavior of each employee. The expectedvolatility was derived from an analysis of the historical volatility of the trading price per share of the Company’s common stock on the NASDAQ GlobalMarket. The Company does not anticipate that it will pay dividends to common shareholders in the future, and the weighted average vesting period is basedon the option vesting schedule, assuming no options are forfeit prior to the initial vesting date.The Company recognized stock option related compensation costs of $877,000 in fiscal 2006 relating to these options. $848,000 of stock optionrelated compensation costs were recognized in fiscal 2005 under APB-25. On December 31, 2006, the unamortized compensation expense related to theseoptions amounted to $143,000 and is expected to be recognized in 2007 and 2008. No stock options were exercised during fiscal 2005 and 2006.A summary of option activity under the plan as of December 31, 2006 and changes during the current fiscal year is presented below: Weighted Average Aggregate Average Remaining Intrinsic Exercise Contractual Value Options Shares Price Term ($000’s) Outstanding January1, 2006 365,000 $12.71 9.4 Granted 12,339 $20.00 10.0 Exercised - - - Forfeited or expired - - - Outstanding atDecember 31, 2006 377,339 $12.95 8.4 $3,966 Exercisable atDecember 31, 2006 351,667 $12.62 8.4 $3,667 57Source: CADIZ INC, 10-K, March 16, 2007Powered 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 weighted-average grant-date fair value of options granted during the years ending December 31, 2006 and December 31, 2005 were$10.08 and $10.80, respectively. The following table summarizes stock option activity for the periods noted. Weighted- Average Amount Exercise Price Outstanding at December 31, 2003 53,950 $207.43 Granted - - Expired or canceled (39,270)$198.54 Exercised - - Outstanding at December 31, 2004 14,680 $231.22 Granted 365,000 $12.71 Expired or canceled (14,680)$231.22 Exercised - - Outstanding at December 31, 2005 365,000 $12.71 Granted 12,339 $20.00 Expired or canceled - - Exercised - - Outstanding at December 31, 2006 377,339(a)$12.95 Options exercisable at December 31, 2006 355,780 $12.62 Weighted-average years of remaining contractual life of options outstanding at December 31, 2006 8.4 (a) Exercise prices vary from $12.00 to $20.00, and expiration dates vary from May 2015 to December 2016.Stock Awards to Directors, Officer, Consultants and EmployeesThe Company has also granted stock awards pursuant to its Management Equity Incentive Plan, 2004 Management Bonus Plan and Outside DirectorCompensation Plan.The Management Equity Incentive Plan provided for the granting of 1,094,712 shares of common stock in May 2005, the 2004 Management BonusPlan provided for the granting of 10,000 shares of common stock valued at $12.00 per share in December 2004, and the Outside Director Compensation Planprovides for the granting of up to 50,000 shares, 14,701 of which were granted in November 2006. Compensation cost for stock granted to employees anddirectors is measured at the quoted market price of the Company's stock at the date of the grant. All of the shares issuable under the 2003 Management Equity Incentive Plan were awarded in May 2005. At that time, 717,373 initial allocationshares, 377,339 subsequent allocation shares and 325,000 options were awarded. 604,026 shares were issued on the award date, 364,904 shares were issued inDecember 2005, and the remaining 125,779 shares were issued in December 2006. On December 31, 2006, there were no additional shares were issuableunder the 2003 Management Equity Incentive Plan.58Source: CADIZ INC, 10-K, March 16, 2007Powered 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 initial Outside Director Compensation Plan award was made on November 14, 2006 and included 10,416 shares for service rendered during the12 month service period ending June 30, 2004 and 2005 and 4,285 shares for services rendered during the 12 month service period ending June 30, 2006.The 10,416 shares for services rendered were issued immediately upon shareholder approval in November 2006. The remaining 4,285 shares vested inJanuary 2007.The accompanying consolidated statements include approximately $1,383,000 of stock based compensation expense related to these stock awardsin the fiscal year ended December 31, 2006. In the fiscal year ended December 31, 2005 $15,839,000 was recognized under APB-15. On December 31, 2006,the unamortized compensation expense relating to these stock awards was $27,000, which will be recognized in January 2007.A summary of stock awards activity under the plans during the fiscal year ended December 31, 2006 is presented below: Weighted- Average Grant-date Shares Fair Value ($000's) Nonvested at December 31, 2005 125,779 $1,950 Granted 14,701 282 Forfeited or canceled - - Vested (136,195) (2,150) Nonvested at December 31, 2006 4,285 $82 Issuance of Common Stock for ServicesAn individual who assisted the company in identifying participants in the November 2004 private placement elected to receive the commission forthese services in stock rather than cash. The commission amount was $326,400, and 27,200 common shares were issued in payment of the obligation inFebruary, 2005. The 2004 Management Bonus Plan provided for the granting of 10,000 shares of common stock valued at $12.00 per share. The cost of thegrant was recognized in December 2004, and 10,000 shares were issued in May, 2005. In 2003, certain vendors and employees agreed to receive 140,000shares with an aggregate value of $350,000 in lieu of cash for service rendered during the year.Stock Purchase Warrants Issued to Non-EmployeesThe Company accounts for equity securities issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues TaskForce 96-18. On November 30, 2004 the Company completed a private placement of 400,000 units, each Unit consisting of five (5) shares of the Company’scommon stock and one (1) common stock purchase warrant. Each of the 400,000 warrants entitle the holder to purchase one (1) share of common stock at anexercise price of $15.00 per share. An additional 5,440 warrants were issued to an individual59Source: CADIZ INC, 10-K, March 16, 2007Powered 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.who assisted the company in identifying participants in the November 30, 2004 private placement and elected to receive a commission for the services instock rather than cash. Each Warrant has a term of three (3) years and is callable at the Company’s option. During 2006, certain warrant holders exercised theirrights to purchase 70,000 shares, and the Company received $1,050,000 from the sale of that common stock. 335,440 warrants remain outstanding onDecember 31, 2006.In 2007, the Company exercised a right to terminate the remaining warrants on March 2, 2007, subject to a 30 day notice period. In response, theremaining warrant holders exercised their rights to purchase 335,440 shares of the Company’s common stock during the notice period, and the Companyreceived $5.0 million from the sale of these shares. Following this exercise, no Warrants remain outstanding.NOTE 11 - SEGMENT INFORMATIONWith Sun World’s 2003 filing of voluntary petitions for relief under Chapter 11 of the bankruptcy code in as further described in Note 1, the primarybusiness of the Company is to acquire and develop land and water resources. As a result, the Company’s financial results are reported in a single segment. NOTE 12 - CONTINGENCIESIn the normal course of its agricultural operations, the Company handles, stores, transports and dispenses products identified as hazardous materials.Regulatory agencies periodically conduct inspections and, currently, there are no pending claims with respect to hazardous materials.The Company is involved in other legal and administrative proceedings and claims. In the opinion of management, the ultimate outcome of eachproceeding or all such proceedings combined will not have a material adverse impact on the Company's financial statements.NOTE 13 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands except per share data) Quarter Ended March 31, June 30, September 30, December 31, 2006 2006 2006 2006 Revenues $252 $157 $37 $168 Operating loss (2,095) (1,786) (2,086) (2,004)Net loss applicable to common stock (2,226) (3,150) (5,684) (2,765)Net loss per common share $(0.19)$(0.28)$(0.50)$(0.24) Quarter Ended March 31, June 30, September 30, December 31, 2005 2005 2005 2005 Revenues $15 $15 $15 $1,152 Operating loss (1,006) (12,178) (3,411) (4,163)Net loss applicable to common stock (1,569) (12,625) (3,863) (4,968)Net loss per common share $(0.15)$(1.18)$(0.35)$(0.46) 60Source: CADIZ INC, 10-K, March 16, 2007Powered 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.NOTE 14 - SUBSEQUENT EVENTSAs previously reported, on November 30, 2004, the Company completed a private placement in which the Company issued 405,440 Units at theprice of $60.00 per Unit. Each Unit consisted of five (5) shares of common stock and one (1) common stock purchase warrant ("Warrant"). Each Warrantentitles the holder to purchase one (1) share of common stock at an exercise price of $15 per share. Each Warrant has a term of three years, subject tocancellation at the Company's option if the closing market price of the common stock exceeds $18.75 for 10 consecutive trading days.In June 2006, holders of 70,000 warrants chose to exercise their warrants, leaving 335,440 warrants outstanding on December 31, 2006. On January31, 2007, the Company exercised the cancellation option and notified warrant holders that the Warrants would expire on March 2, 2007 (the "TerminationDate"), unless exercised by the warrant holder prior to that date. In response, all the remaining warrant holders exercised their Warrants prior to theTermination Date, and the Company issued 335,440 shares of its common stock to these holders with proceeds of $5,031,600. As of March 2, 2007, therewere no warrants for the purchase of the Company’s common stock outstanding.61Source: CADIZ INC, 10-K, March 16, 2007Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.CADIZ INC.SCHEDULE 1 - VALUATION AND QUALIFYING ACCOUNT For the years ended December 31, 2006, 2005 and 2004 ($ in thousands) Balance at Additions Charged to Balance Year ended Beginning Costs and Other at End December 31, 2006 of Period Expenses Accounts Deductions of Period Tax valuation allowance $31,614 $2,587 $- $- $34,201 Year ended December 31, 2005 Tax valuation allowance $44,383 $- $- $12,769 $31,614 Year ended December 31, 2004 Tax valuation allowance $43,760 $- $623 $- $44,383 62Source: CADIZ INC, 10-K, March 16, 2007Powered 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.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereto duly authorized.CADIZ INC.By: /s/ Keith Brackpool Keith Brackpool, Chairman and Chief Executive Officer Date: March 16, 2007Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the datesindicated. Name and PositionDate /s/ Keith BrackpoolMarch 16, 2007 Keith Brackpool, Chairman and Chief Executive Officer (Principal Executive Officer) /s/ O'Donnell Iselin IIMarch 16, 2007 O'Donnell Iselin II, Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Stephen J. DuffyMarch 16, 2007 Stephen J. Duffy, Director /s/ Geoffrey GrantMarch 16, 2007 Geoffrey Grant, Director /s/ Winston H. HickoxMarch 16, 2007 Winston H. Hickox, Director /s/ Murray H. HutchisonMarch 16, 2007 Murray H. Hutchison, Director /s/ Raymond J. PaciniMarch 16, 2007 Raymond J. Pacini, Director /s/ Timothy J. ShaheenMarch 16, 2007 Timothy J. Shaheen, Director63Source: CADIZ INC, 10-K, March 16, 2007Powered 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, 2007Powered 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 3.9 CERTIFICATE OF CORRECTION FILED TO CORRECTA CERTAIN ERROR IN THESECOND AMENDED AND RESTATEDCERTIFICATE OF DESIGNATIONS OFSERIES F PREFERRED STOCKOFCADIZ INC.FILED IN THE OFFICE OF THE SECRETARY OF STATEOF DELAWARE ON JUNE 30, 2006CADIZ INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does herebycertify:1. That the name of the Corporation is Cadiz Inc.2. That a Second Amended and Restated Certificate of Designations of Series F Preferred Stock of Cadiz Inc. (the "Certificate") was filed by theSecretary of State of Delaware on June 30, 2006 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law ofthe State of Delaware.3. The inaccuracy or defect of the Certificate to be corrected is to change references to "at least one of the Series F Preferred Directors" in Sections4(d), 7(e)(v), 7(e)(vi) and 7(e)(vii) of the Certificate to refer to "a majority of the Corporation's independent directors" in each case.4. Section 4(d) of the Certificate is replaced in its entirety to read as follows: "(d) For so long as the Series F Preferred Stock is outstanding, the Corporation shall not, without the written consent or affirmative vote of amajority of the Corporation's independent directors, create, authorize or issue any class, series or shares of Preferred Stock or any other classof capital stock."5. Section 7(e)(v) of the Certificate is replaced in its entirety to read as follows: "(v) Corporation Equity Securities issued by the Corporation to any officer, director or employee of the Corporation as remuneration forservices rendered to the Corporation; provided, however, that at least a majority of the Corporation's independent directors voted toauthorize such issuance;"6. Section 7(e)(vi) of the Certificate is replaced in its entirety to read as follows: "(vi) Corporation Equity Securities issued by the Corporation to any consultant pursuant to compensation procedures approved by theBoard of Directors of the Corporation including the consent of at least a majority of the Corporation's independent directors;" 7. Section 7(e)(vii) of the Certificate is replaced in its entirety to read as follows: "(vii) Corporation Equity Securities issued in connection with the acquisition of all or part of another entity or in connection with a jointventure or such other strategic investment, which transaction is approved by at least a majority of the Corporation's independent directors;and" IN WITNESS WHEREOF, CADIZ INC., has caused this Certificate to be signed by O'Donnell Iselin II, its Chief Financial Officer and Secretary, this13th day of March, 2007.CADIZ INC. By: /s/ O'Donnell Iselin II O'Donnell Iselin II Chief Financial Officer and SecretarySource: CADIZ INC, 10-K, March 16, 2007Powered 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 10.15RESOLUTION OF THE BOARD OF DIRECTORS OF CADIZ INC.WHEREAS, the Compensation Committee of the Board is recommending that the annual base salaries of certain key personnel of the Company beincreased;NOW, THEREFORE, BE IT RESOLVED, that this Board hereby authorizes and approves an increase in the annual salary of Keith Brackpool underhis employment agreement from $250,000 to $400,000, effective retroactively to January 1, 2007 (with Keith Brackpool abstaining); andRESOLVED, FURTHER, that this Board hereby authorizes and approves an increase in the monthly salary of Richard E. Stoddard under hisconsulting agreement from $20,833 to $25,000, effective retroactively to January 1, 2007.Source: CADIZ INC, 10-K, March 16, 2007Powered 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 COMPANYCadiz Real Estate LLCRancho Cadiz Mutual Water CompanySW Estate, Inc.Source: CADIZ INC, 10-K, March 16, 2007Powered 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 in the Registration Statements on Form S-3 (No. 333-130338 and No. 333-136117) and Form S-8 (No.333-124626 and No. 333-138674) of Cadiz, Inc. of our report dated March 16, 2007 relating to the financial statements, financial statement schedule,management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting,which appears in this Form 10-K.PricewaterhouseCoopers LLPLos Angeles, CaliforniaMarch 16, 2007Source: CADIZ INC, 10-K, March 16, 2007Powered 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 31.1CERTIFICATION PURSUANT TO SECTION 302 OF THESARBANES-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 thestatements 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 thefinancial 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 inExchange 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 theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, theregistrant'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 internal control over financial reporting, to theregistrant'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 reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Dated: March 16, 2007 /s/ Keith BrackpoolKeith BrackpoolChairman and Chief Executive OfficerSource: CADIZ INC, 10-K, March 16, 2007Powered 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 31.2CERTIFICATION PURSUANT TO SECTION 302 OF THESARBANES-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 thestatements 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 thefinancial 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 inExchange 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 theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, theregistrant'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 internal control over financial reporting, to theregistrant'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 reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Dated: March 16, 2007 /s/ O'Donnell Iselin, IIO'Donnell Iselin, IIChief Financial Officer and SecretarySource: CADIZ INC, 10-K, March 16, 2007Powered 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 OFFICERI, Keith Brackpool, herby certify, to my knowledge, that:1. the accompanying Annual Report on Form 10-K of Cadiz Inc. for the year ended December 31, 2006 (the "Report") fully complies with the requirements ofSection 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cadiz Inc.IN WITNESS WHEREOF, the undersigned has executed this Statement as of the date first written above.Dated: March 16, 2007 /s/ Keith BrackpoolKeith BrackpoolChairman and Chief Executive OfficerSource: CADIZ INC, 10-K, March 16, 2007Powered 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 OFFICERI, O'Donnell Iselin II, herby certify, to my knowledge, that:1. the accompanying Annual Report on Form 10-K of Cadiz Inc. for the year ended December 31, 2006 (the "Report") fully complies with the requirements ofSection 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cadiz Inc.IN WITNESS WHEREOF, the undersigned has executed this Statement as of the date first written above.Dated: March 16, 2007 /s/ O'Donnell Iselin IIO'Donnell Iselin IIChief Financial Officer and SecretarySource: CADIZ INC, 10-K, March 16, 2007Powered 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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