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CEO Received $1-Million Loan, Cadiz Discloses

November 16, 2002|Michael A. Hiltzik | Times Staff Writer

Cadiz Inc. disclosed Friday that it made a $1-million loan to Chairman and Chief Executive Keith Brackpool in July, only weeks before such loans to corporate officers became illegal.

The Santa Monica company reported the July 5 loan as part of a quarterly filing with federal regulators. Brackpool put up 226,515 of his Cadiz shares as collateral for the loan.

Cadiz had not previously disclosed the loan, even though Brackpool's shareholdings were the subject of a separate disclosure filing in August and were discussed during a conference call with investors fully a month after the loan was executed.

Such transactions have become controversial as a result of widely publicized abuses by executives at WorldCom Inc. and other failing companies. They were among the corporate practices targeted for reform by the Sarbanes-Oxley Act, which was making its way through Congress at the time the loan was executed. The act, which President Bush signed into law July 31, rendered most corporate loans to corporate officers illegal.

Blackpool is a close associate of Gov. Gray Davis and an advisor to him on water policy.

In arranging the one-year, 6% loan from his own company, Brackpool pledged as collateral Cadiz shares then valued at $1.33 million. The value of the shares conformed to a provision in the loan document requiring that Brackpool maintain collateral worth 133% of the outstanding loan balance as security.

Since the date of the loan, Cadiz shares have plummeted in value. At Friday's closing price of $1 on Nasdaq, Brackpool's original pledged shares were worth only $226,515. Cadiz declined Friday to say how much of the loan remains outstanding but said it is collateralized "by assets ... in excess of that required under the note."

Disclosure of the loan comes a month after the Metropolitan Water District canceled a $150-million water storage partnership with Cadiz that was expected to produce as much as $1 billion in revenue for the company over 50 years. Because the company had long promoted the project as the key to its future, the cancellation raises questions about Cadiz's long-term viability.

"They had their balance sheet structured to get them to the point where they'd have the project in place," said Michael Crawford, an analyst at B. Riley & Co. of Santa Monica and a holder of Cadiz shares. "That was quashed, and now they have to restructure the balance sheet." Crawford maintains a "buy" rating on the shares.

In its regular quarterly financial statement Friday, Cadiz revealed that its finances are more precarious than it had previously indicated.

In the report for the third quarter ended Sept. 30, the company said it must raise $15 million in new financing for its Sun World agricultural subsidiary in the next year, in part as a condition for renewal of a crucial $35-million credit line from ING Baring Bank. Of that $15 million, the company said, $5 million would be used to retire a two-year loan to Sun World that comes due Dec. 31.

Cadiz left unclear how it intends to raise the alternative financing for Sun World but did say the infusion is crucial to its survival.

"The company's ability to operate is dependent on our ability to successfully obtain the working capital" provided by the credit line, the filing said.

Meanwhile, the interest rate on the ING loan -- assuming it is renewed -- would rise dramatically, to as much as 12% annually from less than 4.8% currently.

The source of the cash Cadiz forwarded to Brackpool is unclear; as of June 30, five days before the loan, the company said it had only $1.3 million in cash on hand.

The purpose of the loan was not stated in the documentation disclosed Friday. But at the time, Brackpool apparently was facing margin calls on about 500,000 Cadiz shares he had pledged as personal collateral at an undisclosed bank.

Those shares had lost half their value during June, and the bank apparently was pressing him to cover the decline. Before he could make other arrangements, the bank sold the shares on its own, raising about $2.2 million, according to a previous public filing by Brackpool.

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