Filed by Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended: May 31, 2008
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-8814
PURE CYCLE CORPORATION
(Exact name of small business issuer as specified in its charter)
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Delaware
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84-0705083 |
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(State of incorporation)
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(I.R.S. Employer
Identification Number) |
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8451 Delaware St., Thornton, CO
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80260 |
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(Address of principal executive offices)
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(Zip Code) |
(303) 292
3456
Registrants telephone number
N/A
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller Reporting Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company filer (as defined in rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
July 8, 2008:
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Common stock, 1/3 of $.01 par value
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20,206,566 |
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(Class)
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(Number of Shares) |
PURE CYCLE CORPORATION
INDEX TO MAY 31, 2008 FORM 10-Q
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Page |
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PART I FINANCIAL INFORMATION |
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Item 1
Financial Statements (unaudited) |
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3 |
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May 31, 2008 and August 31, 2007 |
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3 |
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For the three months ended May 31, 2008 and 2007 |
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4 |
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5 |
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For the nine months ended May 31, 2008 and 2007 |
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6 |
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Notes to Financial Statements |
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7 |
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15 |
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22 |
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22 |
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23 |
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24 |
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24 |
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25 |
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Exhibit 31 |
Exhibit 32 |
PURE CYCLE CORPORATION
BALANCE SHEETS
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May 31, |
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August 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS: |
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Current assets: |
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Cash and cash equivalents |
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$ |
5,706,490 |
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$ |
6,095,075 |
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Trade accounts receivable |
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51,233 |
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70,217 |
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Prepaid expenses |
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59,293 |
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246,968 |
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Current portion of construction proceeds receivable |
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64,783 |
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64,783 |
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Marketable securities |
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799,802 |
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Interest receivable |
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11,585 |
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Total current assets |
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5,881,799 |
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7,288,430 |
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Investments in water and water systems, net |
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103,199,931 |
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103,248,427 |
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Construction proceeds receivable, less current portion, including $240,075
expected to be paid with water rights |
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719,845 |
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792,719 |
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Note receivable Rangeview Metropolitan District, including accrued interest |
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490,753 |
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475,734 |
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Assets held for sale |
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77,940 |
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77,940 |
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Investment in Well Enhancement and Recovery Systems, LLC |
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13,486 |
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4,431 |
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Property and equipment, net |
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8,865 |
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4,210 |
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Total assets |
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$ |
110,392,619 |
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$ |
111,891,891 |
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LIABILITIES: |
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Current liabilities: |
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Accounts payable |
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$ |
96,633 |
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$ |
15,056 |
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Accrued liabilities |
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62,220 |
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85,919 |
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Deferred revenues |
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55,800 |
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55,800 |
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Current debt related party |
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26,542 |
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Total current liabilities |
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214,653 |
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183,317 |
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Deferred revenues, less current portion |
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1,515,861 |
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1,557,711 |
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Participating Interests in Export Water Supply |
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1,218,449 |
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2,851,037 |
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Tap Participation Fee payable to HP A&M,
net of discount of $55.8 million and $55.1 million |
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52,710,000 |
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49,455,000 |
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Total liabilities |
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55,658,963 |
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54,047,065 |
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Commitments and Contingencies |
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STOCKHOLDERS EQUITY: |
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Preferred stock: |
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Par value $.001 per share, 25 million shares authorized;
Series B 432,513 shares issued and outstanding
(liquidation preference of $432,513) |
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433 |
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433 |
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Common stock: |
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Par value 1/3 of $.01 per share, 40 million shares authorized;
20,206,566 and 19,995,338 shares outstanding |
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67,360 |
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67,512 |
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Additional paid-in capital |
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91,840,640 |
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91,650,897 |
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Accumulated deficit |
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(37,174,777 |
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(31,901,737 |
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Treasury stock, at cost, 0 and 256,800 shares of common stock |
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(1,979,447 |
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Accumulated comprehensive income |
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7,168 |
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Total stockholders equity |
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54,733,656 |
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57,844,826 |
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Total liabilities and stockholders equity |
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$ |
110,392,619 |
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$ |
111,891,891 |
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See Accompanying Notes to Financial Statements
3
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended May 31, |
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2008 |
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2007 |
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Revenues: |
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Metered water usage |
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$ |
36,869 |
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$ |
33,731 |
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Wastewater treatment fees |
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16,744 |
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14,752 |
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Special facility funding |
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10,377 |
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10,377 |
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Water tap fees |
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3,574 |
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3,574 |
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Total revenues |
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67,564 |
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62,434 |
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Expenses: |
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Cost of revenues: |
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Water delivery costs |
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(9,233 |
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(12,855 |
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Wastewater treatment costs |
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(4,921 |
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(5,688 |
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Depletion and depreciation |
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(22,121 |
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(21,955 |
) |
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Total cost of revenues |
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(36,275 |
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(40,498 |
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Gross margin |
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31,289 |
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21,936 |
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General and administrative expenses |
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(588,024 |
) |
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(521,742 |
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Depreciation |
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(73,251 |
) |
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(69,939 |
) |
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Operating loss |
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(629,986 |
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(569,745 |
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Other income (expense): |
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Interest income |
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52,748 |
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34,841 |
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Loss on sale of marketable securities |
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(1,211 |
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Share of losses of Well Enhancement and
Recovery Systems, LLC |
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(37,128 |
) |
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(30,000 |
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Imputed interest expense related to the Tap
Participation Fees payable to HP A&M |
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(1,114,000 |
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(1,176,800 |
) |
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Net loss |
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$ |
(1,728,366 |
) |
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$ |
(1,742,915 |
) |
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Net loss per common share basic and diluted |
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$ |
(.09 |
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$ |
(.09 |
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Weighted average common shares outstanding
basic and diluted |
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20,206,566 |
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18,476,230 |
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See Accompanying Notes to Financial Statements
4
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
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Nine Months Ended May 31, |
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2008 |
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2007 |
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Revenues: |
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Metered water usage |
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$ |
101,986 |
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$ |
91,995 |
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Wastewater treatment fees |
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50,232 |
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44,256 |
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Special facility funding |
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31,131 |
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31,131 |
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Water tap fees |
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10,722 |
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10,722 |
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Total revenues |
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194,071 |
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178,104 |
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Expenses: |
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Cost of revenues: |
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Water delivery costs |
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(38,673 |
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(38,381 |
) |
Wastewater treatment costs |
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(13,532 |
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(17,067 |
) |
Depletion and depreciation |
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(66,240 |
) |
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(65,662 |
) |
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Total cost of revenues |
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(118,445 |
) |
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(121,110 |
) |
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Gross margin |
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75,626 |
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56,994 |
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General and administrative expenses |
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(1,810,442 |
) |
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(1,650,395 |
) |
Depreciation |
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(219,985 |
) |
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(208,384 |
) |
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Operating loss |
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(1,954,801 |
) |
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(1,801,785 |
) |
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Other income (expense): |
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Interest income |
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250,402 |
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120,051 |
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Gain on sale of land |
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17,927 |
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Loss on sale of marketable securities |
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(1,973 |
) |
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(71 |
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Share of losses of Well Enhancement and
Recovery Systems, LLC |
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(37,945 |
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(30,000 |
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Extinguishment of contingent obligations |
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(273,723 |
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Imputed interest expense related to the Tap
Participation Fees payable to HP A&M |
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(3,255,000 |
) |
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(3,463,542 |
) |
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Net loss |
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$ |
(5,273,040 |
) |
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$ |
(5,157,420 |
) |
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Net loss per common share basic and diluted |
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$ |
(.26 |
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$ |
(.28 |
) |
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Weighted average common shares outstanding
basic and diluted |
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20,182,668 |
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18,399,887 |
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See Accompanying Notes to Financial Statements
5
PURE CYCLE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
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Nine Months Ended May 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,273,040 |
) |
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$ |
(5,157,420 |
) |
Adjustments to reconcile net loss to net cash
used by operating activities: |
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Imputed interest on Tap Participation Fees payable to HP A&M |
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3,255,000 |
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3,463,542 |
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Extinguishment of contingent obligations |
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273,723 |
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Stock-based compensation expense included with general and
administrative expenses |
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263,761 |
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223,927 |
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Depreciation, depletion and other non-cash items |
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|
287,584 |
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|
275,681 |
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Share of losses of Well Enhancement and Recovery Systems, LLC |
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37,945 |
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30,000 |
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Loss on sale of marketable securities |
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1,973 |
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|
71 |
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Interest added to construction proceeds receivable |
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(23,024 |
) |
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(37,773 |
) |
Interest added to note receivable Rangeview Metropolitan District |
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(15,019 |
) |
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(17,580 |
) |
Gain on sale of land |
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(17,927 |
) |
Changes in operating assets and liabilities: |
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Trade accounts receivable |
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18,984 |
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|
20,098 |
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Construction proceeds receivable |
|
|
95,898 |
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|
57,330 |
|
Interest receivable and prepaid expenses |
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|
199,260 |
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(164,417 |
) |
Accounts payable and accrued liabilities |
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57,878 |
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(223,384 |
) |
Deferred revenues |
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|
(41,850 |
) |
|
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(41,854 |
) |
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Net cash used by operating activities |
|
|
(860,927 |
) |
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(1,589,706 |
) |
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Cash flows from investing activities: |
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Sale of LAWMA Shares |
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|
849,742 |
|
Sales and maturities of marketable securities |
|
|
790,661 |
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1,547,255 |
|
Sale of property and equipment |
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|
19,250 |
|
Purchase of property and equipment |
|
|
(7,547 |
) |
|
|
(1,596 |
) |
Investment in Well Enhancement and Recovery Systems, LLC |
|
|
(47,000 |
) |
|
|
(40,000 |
) |
Capitalized acquisition costs |
|
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|
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|
|
(37,600 |
) |
Investments in water and water systems |
|
|
(234,837 |
) |
|
|
(37,945 |
) |
Purchase of marketable securities |
|
|
|
|
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|
(199,402 |
) |
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Net cash provided by investing activities |
|
|
501,277 |
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|
|
2,099,704 |
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Cash flows from financing activities: |
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|
|
|
|
|
|
|
Tap Participation Fee payments made to HP A&M |
|
|
|
|
|
|
(849,742 |
) |
Payments to Participating Interests in Export Water Supply holders |
|
|
(2,393 |
) |
|
|
(2,632 |
) |
Payments on related party debt |
|
|
(26,542 |
) |
|
|
|
|
|
|
|
|
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|
Net cash used by financing activities |
|
|
(28,935 |
) |
|
|
(852,374 |
) |
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|
|
|
|
Net change in cash and cash equivalents |
|
|
(388,585 |
) |
|
|
(342,376 |
) |
Cash and cash equivalents beginning of period |
|
|
6,095,075 |
|
|
|
374,069 |
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
5,706,490 |
|
|
$ |
31,693 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Financial Statements
6
NOTE 1 PRESENTATION OF INTERIM INFORMATION
The balance sheet as of May 31, 2008, and the statements of operations and cash flows for the three
and nine months ended May 31, 2008 and 2007, respectively, have been prepared by Pure Cycle
Corporation (the Company) and have not been audited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at May 31, 2008 and for all periods
presented have been appropriately made.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been condensed or omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the Companys 2007 Annual
Report on Form 10-K. The results of operations for interim periods presented are not necessarily
indicative of the operating results for the full year.
The August 31, 2007 balance sheet was taken directly from the Companys audited financial
statements.
Cash and Cash Equivalents. Cash and cash equivalents include all highly liquid debt instruments
with original maturities of three months or less. The Companys cash equivalents are comprised
entirely of money market funds maintained at high quality financial institutions. The Company has
no investments in equity instruments.
Tap Participation Fee payable to HP A&M. The Tap Participation Fee payable to High Plains A&M (HP
A&M), arose as a result of the Companys acquisition of its Arkansas River Water rights and is
described in greater detail in the Companys 2007 Annual Report on Form 10-K. The $52.7 million
estimated fair value of the Tap Participation Fee payable at May 31, 2008 (which includes imputed
interest of approximately $7.9 million) was determined using a discounted cash flow analysis of
the projected future payments to HP A&M. The Company determined this value by estimating new home
development in the Companys service area over an estimated development period. This was done by
utilizing third party historical and projected housing and population growth data for the Denver,
Colorado metropolitan area applied to an estimated development pattern supported by historical
development patterns of certain master planned communities in the Denver, Colorado metropolitan
area. This development pattern was then applied to future water tap fees that were calculated
using historical water tap fees. Based on the housing market in the Denver metropolitan area, the
Company updated its estimated tap sales schedule as it relates to the Tap Participation Fee
estimate at November 30, 2007, with no further updates necessary as of May 31, 2008. This update
resulted in the following changes from the prior valuation model: (i) an increase in the overall
future estimated Tap Participation Fee of approximately $3.9 million (from approximately $104.6
million to approximately $108.5 million), (ii) a decrease in the imputed effective interest rate
from 10% to approximately 8.6% and (iii) a decrease in the imputed interest expense for the three
and nine months ended May 31, 2008 of approximately $172,700 and $526,400, respectively
(approximately $702,000 for the fiscal year). Actual development may differ substantially from the
estimated new home development in the Companys service area, which may have a material effect on
the estimated fair value of the Tap Participation Fee payable to HP A&M and such differences may
have a material impact on the financial statements. The valuation of the Tap Participation Fee
payable to HP A&M is a significant estimate based on available historic market information and
estimated future market information. Many factors are necessary to estimate future market
conditions, including but not limited to, supply and demand for new homes, population growth along
the Front Range, cash flows, tap fee increases at the Companys rate-based districts, and other
market forces beyond the Companys control.
The Company imputes interest expense on the unpaid Tap Participation Fee using an effective
interest method over the estimated development period utilized in the valuation of the liability.
The Company imputed interest of approximately $1.1 million and $3.3 million related to the Tap
Participation Fee during the three and nine months ended May 31, 2008, respectively. The Company
imputed interest of approximately $1.2 million and $3.5 million related to the Tap Participation
Fee during the three and nine months ended May 31, 2007, respectively.
Royalty and other obligations. Revenues from the sale of Export Water are shown net of royalties
payable to the Colorado State Board of Land Commissioners (the Land Board). Revenues from the
sale of water on the Lowry Range Property are shown net of the royalties to the Land Board and the
fees retained by the Rangeview Metropolitan District.
Depletion and depreciation of water assets. Water supplies that are being utilized are depleted on
the basis of units produced divided by the total volume of water adjudicated in the Companys water
decrees. Water systems are depreciated on a straight line basis over their estimated useful lives.
7
Income taxes. On September 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48). FIN 48 prescribes a more-likely-than-not threshold for the
recognition and de-recognition of tax positions, providing guidance on the accounting for interest
and penalties relating to tax positions and requires that the cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance sheet of retained
earnings or other appropriate components of equity or net assets in the statement of financial
position. The Company did not have any significant unrecognized tax benefits and there was no
material effect on its financial condition or results of operations as a result of implementing FIN
48.
The Company files income tax returns with the Internal Revenue Service and the State of Colorado.
The tax years that remain subject to examination are fiscal 2005 through fiscal 2007. The Company
does not believe there will be any material changes in its unrecognized tax positions over the next
twelve months.
The Companys policy is to recognize interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company
did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor
was any interest expense recognized during the quarter.
Recently Issued Accounting Pronouncements. In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 (SFAS No. 159). SFAS No. 159 allows companies the choice to measure many
financial instruments and certain other items at fair value. This gives a company the opportunity
to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007 (September 1, 2008 for the Company). The Company
is currently evaluating the impact of this standard on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, (FAS 157), which
establishes a framework for measuring fair value in accordance with GAAP and expands disclosures
about fair value measurements. FAS 157 is effective for fiscal years, and the interim periods
within those fiscal years, beginning after November 15, 2007 (September 1, 2008 for the Company).
The Company is currently evaluating the impact of this standard on its financial statements.
NOTE 2 MARKETABLE SECURITIES
All marketable securities held by the Company matured or were sold during the nine months ended May
31, 2008. The funds were transferred to other temporary investments with original maturities of
three months or less and are included in cash and cash equivalents on the balance sheet.
NOTE 3 INVESTMENTS IN WATER AND WATER SYSTEMS
The Companys investments in water and water systems consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2008 |
|
|
August 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
and |
|
|
|
Costs |
|
|
Depletion |
|
|
Costs |
|
|
Depletion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arkansas River Valley assets |
|
$ |
81,234,547 |
|
|
$ |
(474,842 |
) |
|
$ |
81,234,547 |
|
|
$ |
(265,466 |
) |
Rangeview water supply |
|
|
14,156,138 |
|
|
|
(4,779 |
) |
|
|
13,949,036 |
|
|
|
(4,408 |
) |
Rangeview water system |
|
|
167,720 |
|
|
|
(44,909 |
) |
|
|
167,720 |
|
|
|
(38,032 |
) |
Paradise water supply |
|
|
5,528,818 |
|
|
|
|
|
|
|
5,525,017 |
|
|
|
|
|
Fairgrounds water and water system |
|
|
2,693,858 |
|
|
|
(160,236 |
) |
|
|
2,669,924 |
|
|
|
(94,325 |
) |
Sky Ranch water supply |
|
|
100,000 |
|
|
|
|
|
|
|
100,000 |
|
|
|
|
|
Water supply other |
|
|
5,307 |
|
|
|
(1,691 |
) |
|
|
5,307 |
|
|
|
(893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
103,886,388 |
|
|
$ |
(686,457 |
) |
|
$ |
103,651,551 |
|
|
$ |
(403,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in water and
water systems |
|
$ |
103,199,931 |
|
|
|
|
|
|
$ |
103,248,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The Companys water rights and current water and wastewater service agreements are more fully
described in Note 3 to the Companys 2007 Annual Report on Form 10-K. There have been no
significant changes to the Companys water rights or water and wastewater service agreements
during the three or nine months ended May 31, 2008.
NOTE 4 HP A&M PROMISSORY NOTES
Certain of the properties the Company acquired from HP A&M are subject to outstanding promissory
notes with principal and accrued interest totaling approximately $13.5 million at May 31, 2008 and
$13.9 million at August 31, 2007. Additional information regarding these promissory notes, the
circumstances under which the Company would be required to make payments pursuant to these notes
and the accounting treatment of these notes is more fully described in Note 3 to the Companys 2007
Annual Report on Form 10-K.
NOTE 5 CONSTRUCTION PROCEEDS RECEIVABLE
Pursuant to the Water Service Agreement (the County Agreement) with Arapahoe County (the
County), as more fully described in Note 3 to the 2007 Annual Report on Form 10-K, the County is
required to make monthly payments to the Company for the construction of the Special Facilities
constructed at the County Fairgrounds. The monthly payments payable by the County were originally
$6,850. This was calculated based on an original payable balance of approximately $607,900, which
is the total capital expended by the Company for the Special Facilities of approximately $1.245
million less approximately $397,000 paid by the County up front and less approximately $240,000 for
the value of the water rights to be transferred to the Company. However, pursuant to the County
Agreement, because the County had not transferred the 336 acre-feet of water to the Company upon
the completion of construction, the balance owed the Company was not reduced by the value of the
water rights and is therefore still included in the construction proceeds receivable account. As a
result, the monthly payment being charged to the County was increased to $9,555 upon completion of
the facilities. The County made six payments of $9,555 each through December 2006, but then ceased
making payments because the County disagreed with the increase. As a result, in October 2007, the
Company and the County reached an agreement, whereby the County would (i) make the principal and
interest payments on the original $607,900 balance owed to the Company (or approximately $6,850 per
month for ten years), (ii) pay half of the interest (at 6% per annum) calculated on the value of
the water rights that have not been transferred to the Company as of yet, and (iii) transfer the
water rights valued at approximately $240,000 as soon as practical. The transfer of the water
rights to the Company is currently being processed in the Colorado Water Court and the Company
expects to receive the rights during its fiscal 2008. In addition, in October 2007 the County made
a one-time payment of approximately $54,800, which represents the amounts past due under the
amendment to the County Agreement.
NOTE 6 INVESTMENT IN WELL ENHANCEMENT AND RECOVERY SYSTEMS, LLC
Effective January 30, 2007, the Company entered into an Operating Agreement with Mr. R. Clark (who
is deemed the indirect beneficial owner of 6.1% of the Companys common stock by means of his role
as manager of TPC Ventures, LLC) and Hydro Resources, Inc. (collectively the Company, Mr. Clark and
Hydro Resources, Inc. are referred to as the LLC Owners) to form Well Enhancement and Recovery
Systems, LLC (Well Enhancement LLC). Well Enhancement LLC was established to develop a new deep
water well enhancement tool and process which the LLC Owners believe will increase the efficiency
of deep water wells in the Denver metropolitan area. Each of the LLC Owners holds a 1/3 interest in
Well Enhancement LLC. The president of the Company acts as the manager of Well Enhancement LLC.
The Company accounts for its investment in Well Enhancement LLC under the equity method pursuant to
Accounting Principles Board Opinion No. 18 The Equity Method of Accounting for Investments in
Common Stock (as amended) and Emerging Issues Task Force Issue No. 03-16 Accounting for Investments
in Limited Liability Companies. As of May 31, 2008, the Companys Investment in Well Enhancement
and Recovery Systems, LLC account on its balance sheet includes $87,000 of capital contributions
made to date by the Company and its 1/3rd share of the approximately $220,600 of net
losses of Well Enhancement LLC from its inception through May 31, 2008. As of May 31, 2008, Well
Enhancement LLCs balance sheet consisted of approximately $34,100 of cash and approximately $600
of accrued professional fees. For the three and nine months ended May 31, 2008, Well Enhancement
LLC posted net losses of approximately $111,400 and $111,900, respectively. Since its inception,
Well Enhancement LLC has posted net losses of approximately $220,600. The net losses are primarily
a result of research and development costs associated with the design of the well enhancement tool.
9
NOTE 7 PARTICIPATING INTERESTS IN EXPORT WATER
The Company acquired its Rangeview Water Supply through various amended agreements entered into in
the early 1990s. The acquisition was consummated with the signing of the Comprehensive Amendment
Agreement No. 1 (the CAA) in 1996. Upon entering into the CAA, the Company recorded an initial
liability of approximately $11.1 million, which represents the cash the Company received and used
to purchase its Export Water Supply. In return, the Company agreed to remit a total of $31.8
million of proceeds received from the sale of Export Water to the Participating Interest holders.
In accordance with EITF Issue No 88-18 Sales of Future Revenues, the obligation for the $11.1
million (which has been reduced to approximately $1.2 million at May 31, 2008, as detailed below)
was recorded as debt, and the remaining $20.7 million (which has been reduced to approximately $2.3
million at May 31, 2008, as detailed below) contingent liability is not reflected on the Companys
balance sheet because the obligation to pay this is contingent on sales of Export Water, the
amounts and timing of which are not reasonably determinable.
As the proceeds from the sale of Export Water are received, and the amounts are remitted to the
external CAA holders, the Company allocates a ratable percentage of this payment to the principal
portion (the Participating Interests in Export Water supply liability account) with the balance of
the payment being charged to the contingent obligation portion. The amount allocated to the
liability is approximately 35%, which is the percentage the $11.1 million represented of the
original total $31.8 million obligation. The remaining portion, or approximately 65%, is allocated
to the contingent obligation. The portion allocated to principal will be recorded as a reduction in
the Participating Interests in Export Water liability account while the amounts applied to the
contingency are recorded on a net revenue basis when funds are received.
In recent years the Company has repurchased various portions of the CAA obligations in priority.
The table below summarizes the transactions impacting the CAA obligations since its signing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water |
|
|
Export Water |
|
|
Total |
|
|
Participating |
|
|
|
|
|
|
Proceeds |
|
|
Proceeds to |
|
|
Potential |
|
|
Interests |
|
|
|
|
|
|
Received |
|
|
Pure Cycle |
|
|
Obligation |
|
|
Liability |
|
|
Contingency |
|
Original balances |
|
$ |
|
|
|
$ |
218,500 |
|
|
$ |
31,807,732 |
|
|
$ |
11,090,630 |
|
|
$ |
20,717,102 |
|
Activity from inception
through August 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sky Ranch option payments |
|
|
110,400 |
|
|
|
(42,280 |
) |
|
|
(68,120 |
) |
|
|
(23,754 |
) |
|
|
(44,366 |
) |
Acquisitions |
|
|
|
|
|
|
23,398,234 |
|
|
|
(23,398,234 |
) |
|
|
(8,158,430 |
) |
|
|
(15,239,804 |
) |
Arapahoe County tap fees * |
|
|
532,968 |
|
|
|
(373,078 |
) |
|
|
(159,890 |
) |
|
|
(55,754 |
) |
|
|
(104,136 |
) |
Export Water Sale payments |
|
|
15,810 |
|
|
|
(11,067 |
) |
|
|
(4,743 |
) |
|
|
(1,655 |
) |
|
|
(3,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2007 |
|
|
659,178 |
|
|
|
23,190,309 |
|
|
|
8,176,745 |
|
|
|
2,851,037 |
|
|
|
5,325,708 |
|
Activity during the nine months
ended May 31,
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export Water Sale payments |
|
|
9,883 |
|
|
|
(6,918 |
) |
|
|
(2,965 |
) |
|
|
(1,035 |
) |
|
|
(1,930 |
) |
Acquisitions |
|
|
|
|
|
|
4,679,266 |
|
|
|
(4,679,266 |
) |
|
|
(1,631,553 |
) |
|
|
(3,047,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2008 |
|
$ |
669,061 |
|
|
$ |
27,862,657 |
|
|
$ |
3,494,514 |
|
|
$ |
1,218,449 |
|
|
$ |
2,276,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Arapahoe County tap fees are less a $34,522 royalty payment to the Land Board. |
In October 2007, the Company acquired the rights to approximately $4.7 million of CAA interests in
exchange for 211,228 shares of the Companys restricted common stock valued at approximately $1.9
million. As a result, the Company now has the right to retain an additional $4.7 million (combined
with prior CAA acquisitions the Company has made, the Company now retains a total of $27.9 million
of the CAA) of the initial $31.8 million of proceeds from the sale of Export Water. When combined
with the CAA acquisitions and the payments made as a result of the sale of Export Water through
August 31, 2007, as described in the Companys 2007 Annual Report on Form 10-K, the total remaining
potential third party obligation as of May 31, 2008 is approximately $3.5 million. The Company
recorded a loss on the acquisition of the CAA interests in October 2007 of approximately $273,700.
10
The CAA includes contractually established priorities. Following the CAA acquisition made by the
Company, the Companys priority levels include $5.1 million of remaining amounts payable at the
highest priority level, $2.5 million in the third priority level, and the remaining $20.3 million
at various other priority levels.
The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the
CAA have no recourse against the Company. If the Company does not sell the Export Water, the
holders of the Series B Preferred Stock are also not entitled to payment of any dividend and have
no contractual recourse against the Company.
NOTE 8 STOCKHOLDERS EQUITY
The table below summarizes the significant changes in the Companys equity accounts during the nine
months ended May 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2007 |
|
|
20,252,138 |
|
|
$ |
67,512 |
|
|
|
(256,800 |
) |
|
$ |
(1,979,447 |
) |
|
$ |
91,650,897 |
|
|
$ |
7,168 |
|
|
$ |
(31,901,737 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of CAA
interest (described in Note 7) |
|
|
211,228 |
|
|
|
704 |
|
|
|
|
|
|
|
|
|
|
|
1,904,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock |
|
|
(256,800 |
) |
|
|
(856 |
) |
|
|
256,800 |
|
|
|
1,979,447 |
|
|
|
(1,978,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale/maturity of
marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,273,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2008 |
|
|
20,206,566 |
|
|
$ |
67,360 |
|
|
|
|
|
|
$ |
|
|
|
$ |
91,840,640 |
|
|
$ |
|
|
|
$ |
(37,174,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock. The Companys non-voting Series B Preferred Stock has a preference in liquidation
of $1.00 per share less any dividends previously paid. Additionally, the Series B Preferred Stock
is redeemable at the discretion of the Company for $1.00 per share less any dividends previously
paid. In the event that the Companys proceeds from sale or disposition of Export Water rights
exceeds $36,026,232, the Series B Preferred Stock holders will receive the next $432,513 of
proceeds in the form of a dividend.
Equity Compensation Plan. The Company maintains the 2004 Incentive Plan (the Equity Plan) which
was approved by stockholders in April 2004. Executives, eligible employees and non-employee
directors are eligible to receive options and restricted stock grants pursuant to the Equity Plan.
Under the Equity Plan, options to purchase shares of stock, and restricted stock awards, can be
granted with exercise prices and vesting periods determined by the Compensation Committee of the
Board. The Company initially reserved 1.6 million shares of common stock for issuance under the
Equity Plan. As of May 31, 2008, the Company has 1,445,000 shares that can be granted to eligible
participants pursuant to the Equity Plan.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model and to expense the fair value over the vesting period
of the grant. Tabular disclosures required pursuant to SFAS 123(R) for the Companys Equity Plan
is presented below. For additional information on the Equity Plan including a summary of the
significant assumptions refer to the Companys Form 10-K for the year ended August 31, 2007.
11
The following table summarizes the stock option activity for the Equity Plan for the nine months
ended May 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Approximate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Instrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outsanding at beginning of period |
|
|
140,000 |
|
|
$ |
8.60 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
15,000 |
|
|
|
7.50 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2008 |
|
|
155,000 |
|
|
$ |
8.50 |
|
|
|
7.4 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at May 31, 2008 |
|
|
110,000 |
|
|
$ |
8.60 |
|
|
|
6.9 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Intrinsic value less than zero |
The following table summarizes the activity and value of non-vested options as of and for the nine
months ended May 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Options |
|
|
Fair Value |
|
Non-vested
options outsanding at beginning of period |
|
|
40,000 |
|
|
$ |
7.22 |
|
Granted |
|
|
15,000 |
|
|
|
6.24 |
|
Vested |
|
|
(10,000 |
) |
|
|
6.77 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested options outstanding at May 31, 2008 |
|
|
45,000 |
|
|
$ |
7.00 |
|
|
|
|
|
|
|
|
The total fair value of options vested during the three and nine months ended May 31, 2008 was
approximately $0 and $67,700, respectively.
Stock-based compensation expense for the three months ended May 31, 2008 and 2007, was
approximately $93,400 and $67,500, respectively. Stock-based compensation expense for the nine
months ended May 31, 2008 and 2007 was approximately $263,800 and $224,000, respectively.
At May 31, 2008, the Company has unrecognized expenses relating to non-vested options that are
expected to vest totaling approximately $186,500. The weighted-average period over which these
options are expected to vest is less than 1 year. The Company has not recorded any excess tax
benefits to additional paid in capital.
There were no options exercised during the three or nine months ended May 31, 2008.
During the three and nine months ended May 31, 2007, the Company issued 370,002 and 394,675 shares
of common stock upon the exercise of stock options, respectively. The options were exercised at a
price of $1.80 per share. The exercise price for the options exercised during the three months
ended May 31, 2007 was paid for by the option holder utilizing 87,632 shares of Company common
stock held by the option holder for more than six months with a market value at the date of
exercise totaling approximately $666,000, which is included on the line Treasury Stock on the
accompanying balance sheet. The exercise price for all the options exercised during the nine months
ended May 31, 2007 was paid for by the option holder utilizing 92,332 shares of Company common
stock held by the option holder for more than six months with a market value at the dates of
exercise totaling approximately $710,400.
In January 2008, the Company granted its directors options to purchase a combined 15,000 shares of
the Companys common stock pursuant to the 2004 Incentive Plan. The options vest one year from the
date of grant and expire ten years from the date of grant. The Company calculated the fair value of
these options at approximately $93,600 using
the Black-Scholes model with the following variables: weighted average exercise price of $7.50
(which was the closing sales price of the Companys common stock on the date of the grant);
estimated option lives of eight years; estimated dividend rate of 0%; weighted average risk-free
interest rate of 4.25%; weighted average stock price volatility of 90.6%; and an estimated
forfeiture rate of 0%. The $93,600 of stock-based compensation will be expensed monthly over the
vesting period.
12
Restricted Stock. On August 27, 2007, the Company granted 34,189 shares of restricted common stock
to the President of the Company pursuant to the Equity Plan. The Company is recognizing
compensation expense on this grant based on the grant date fair value of the stock. The grant date
fair value of the restricted stock was based upon the closing sales price of the Companys common
stock on the date of the grant and is being amortized to compensation expense over the vesting term
of two years. Because there has been no change in the status of the restricted stock, the Company
omitted the status table, which is disclosed in Note 8 to the Companys 2007 Annual Report on Form
10-K.
As of May 31, 2008, there was approximately $162,200 of unrecognized compensation expense related
to restricted stock awarded under the Equity Plan, which is expected to be recognized over a
remaining period of less than 2 years.
Treasury Stock. Effective January 15, 2008, the Company changed its state of incorporation from
Delaware to Colorado. This was approved by the Companys stockholders at the annual stockholders
meeting. Additional information regarding this change can be found in the Companys Definitive
Proxy Statement for its 2008 annual stockholders meeting filed with the Securities and Exchange
Commission on December 14, 2007. Colorado corporate laws do not permit a corporation to hold
treasury stock. Therefore, effective with the reincorporation, the Company effectively retired the
treasury stock reflected on its balance sheet. All the treasury stock held by the Company was
acquired through mature share exchanges related to stock option exercises. The result of the
treasury stock retirement was a reduction of the Companys par value and additional paid in capital
of approximately $2.0 million.
Warrants. As of May 31, 2008, the Company had outstanding warrants to purchase 92 shares of common
stock at an exercise price of $1.80 per share, which are more fully described in Note 8 to the
Companys 2007 Annual Report on Form 10-K.
Loss per common share. Loss per common share is computed by dividing net loss by the weighted
average number of shares outstanding during each period. Common stock options and warrants
aggregating 155,092 and 276,753 common share equivalents as of May 31, 2008 and May 31, 2007,
respectively, have been excluded from the calculation of loss per common share as their effect is
anti-dilutive.
Comprehensive Loss. In addition to net loss, comprehensive loss includes the unrecognized changes
in the fair value of marketable securities that are classified as available-for-sale as noted in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(1,728,366 |
) |
|
$ |
(1,742,915 |
) |
|
$ |
(5,273,040 |
) |
|
$ |
(5,157,420 |
) |
Unrealized gain (loss) on
marketable securities |
|
|
|
|
|
|
4,880 |
|
|
|
(7,168 |
) |
|
|
16,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(1,728,366 |
) |
|
$ |
(1,738,035 |
) |
|
$ |
(5,280,208 |
) |
|
$ |
(5,141,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to May 31, 2008, the Company had marketable securities that were recorded as
available-for-sale and therefore any unrecognized changes in the fair value of these marketable
securities was included as a component of other comprehensive income. As described in Note 2, all
of the Companys marketable securities either matured or were sold during the nine months ended May
31, 2008. The Company invested these funds in cash equivalent accounts and therefore after the sale
/ maturity date of the available-for-sale securities the only items included in comprehensive
income is the Companys net loss.
13
NOTE 9 RELATED PARTY TRANSACTIONS
In October 2007, the Company repaid approximately $26,500 to a party related to Mr. Clark. This
represented the only remaining note payable with a scheduled maturity.
The Company leases office space from Mr. Clark, who is also the sole manager of TPC Ventures, LLC
which is a greater than 5% holder of the Companys common stock. The Company leases the office
space on a month-to-month basis for $1,000 per month.
NOTE 10 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Nine months ended: |
|
|
|
May 31, 2008 |
|
|
May 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock |
|
$ |
1,979,447 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to acquire contingent obligations |
|
$ |
1,905,277 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to purchase price relating to LAWMA shares
acquired from HP A&M |
|
$ |
|
|
|
$ |
927,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock accepted upon exercise of stock options
with mature shares used as consideration |
|
$ |
|
|
|
$ |
710,418 |
|
|
|
|
|
|
|
|
*****
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the accompanying unaudited financial
statements and related notes thereto and the financial statements and the notes thereto contained
in our 2007 Annual Report on Form 10-K.
Disclosure Regarding Forward-Looking Statements
Certain statements in this Quarterly Report, other than purely historical information, including
estimates, projections, forecasts, and assumptions are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. The words anticipate, believe,
estimate, expect, plan, intend, would and similar expressions, as they relate to us, are
intended to identify forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot
assure you that any of our expectations will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward-looking statements include, without
limitation, the timing of development of the areas where we may sell our water, including
uncertainties related to the development of projects the Company currently has under contract, the
market price of water, changes in applicable statutory and regulatory requirements, uncertainties
in the estimation of water available under decrees, costs of delivery of water and treatment of
wastewater, uncertainties in the estimation of costs of construction projects, the strength and
financial resources of our competitors, our ability to find and retain skilled personnel, climatic
and weather conditions, labor relations, availability and cost of material and equipment, delays in
anticipated permit and construction dates, environmental risks, the results of financing efforts
and the ability to meet capital requirements, and general economic conditions. We undertake no
obligation to update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
General
Pure Cycle Corporation is an investor-owned water and wastewater service provider engaged in the
design, construction, operation and maintenance of water and wastewater systems. Our premise is
that water is a precious commodity that is often undervalued and therefore used inefficiently. We
primarily operate in the Denver, Colorado metropolitan area, however, we have assets located in the
Denver area, in southeastern Colorado in the Arkansas River, and on the western slope of Colorado.
Our business practices are centered on the efficient and environmentally responsible use of our
water to ensure we have water to meet the long-term needs of our customers.
Utilizing our water assets, we withdraw, treat, store and deliver water to our customers. We then
collect wastewater from our customers which is treated and will be reused through dual distribution
systems. A dual distribution system is one in which domestic water demands and irrigation water
demands are provided through separate independent infrastructure. Our dual distribution systems
promote efficient water resource management and reduce the amount of water that is wasted by
traditional water systems which enable us to maximize the use of our valuable water supplies and
allow us the ability to provide long-term water solutions on a regional basis.
Our water assets are comprised of the following annual entitlements which are described in greater
detail in our 2007 Annual Report on Form 10-K:
|
|
Approximately 60,000 acre-feet of senior 1883 water rights in the Arkansas River and its
tributaries represented by over 21,600 shares of the Fort Lyon Canal Company (FLCC); |
|
|
|
Approximately 11,650 acre-feet of water located in Arapahoe County, Colorado at property
known as the Lowry Range (an approximately 27,000 acre property located in Arapahoe County,
Colorado, owned by the State Board of Land Commissioners), which we can export from the
Lowry Range to supply water to nearby communities and developers in need of additional water
supplies (this water asset is referred to as our Export Water) see Risk Factors below for
additional information on the Lowry Range water; |
|
|
|
Approximately 363 acre-feet of groundwater pursuant to an Agreement for Water Service (the
County Agreement) with Arapahoe County (the County), which will be added to our overall
Denver metropolitan water supply portfolio (we are awaiting the delivery of a water rights
deed for approximately 336 acre-feet of this water valued at approximately $240,000, the value
of which is included in the construction proceeds receivable account on our balance sheet as
of May 31, 2008, until the water rights deed is received, which we expect to receive in our
fiscal 2008); and |
15
|
|
Approximately 89 acre-feet of water located beneath Sky Ranch together with the right to
purchase an additional 671 acre-feet of water (for a total of 760 acre-feet) pursuant to the
Sky Ranch Agreements (however, see update on Sky Ranch bankruptcy in the Risk Factors below). |
In addition to the water we own, we also control the following water assets in Colorado, which are
described in greater detail below and in our 2007 Annual Report on Form 10-K:
|
|
We have the exclusive rights to provide water and wastewater through 2081 using
approximately 15,050 acre-feet of water to the Lowry Range. This water is required to be used
specifically on the Lowry Range (collectively we refer to the 15,050 acre-feet of water
designated for use on the Lowry Range and the 11,650 acre-feet of Export Water as our
Rangeview Water Supply) see Risk Factors below for additional information on the Lowry
Range water; |
|
|
|
We own conditional water rights in western Colorado that entitle us to build a 70,000
acre-foot reservoir to store Colorado River tributary water and a right-of-way permit from the
U.S. Bureau of Land Management for property at the dam and reservoir site (collectively known
as the Paradise Water Supply). |
Our water marketing activities target our water and wastewater services to developers and
homebuilders developing new communities along the Front Range, including the greater Denver and
Colorado Springs metropolitan areas. Our groundwater supplies are largely undeveloped and are
located in the southeastern portion of the greater Denver area in Arapahoe County. The majority of
our surface water is located in the Arkansas River Valley, and we are proposing to use it in our
target service market and throughout the Front Range of Colorado. We work with area developers to
investigate water supply constraints, water and wastewater utility issues, market demand, treatment
and transportation concerns, employment centers and other issues in order to identify suitable
areas for development. Construction of water and wastewater systems and the providing of water and
wastewater services are subject to individual water and wastewater service agreements. We negotiate
individual agreements with developers and/or homebuilders to design, construct and operate water
and wastewater systems. Our service contracts outline our obligations to design, construct and
operate certain facilities necessary to develop and treat water and treat and reuse wastewater.
These service agreements include the timing of installation of the facilities, required capacities
of the systems, and locations for the services to be provided. Service agreements address all
aspects of the development of the water and wastewater systems. For details on our current service
agreements please refer to our 2007 Annual Report on Form 10-K.
Results of Operations
Executive Summary
The approximate results of our operations for the three and nine months ended May 31, 2008 and May
31, 2007 are as follows:
Summary Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
Nine Months Ended May 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Millions of gallons of water delivered |
|
|
10.0 |
|
|
|
10.2 |
|
|
|
25.5 |
|
|
|
25.8 |
|
Water revenues generated |
|
$ |
36,900 |
|
|
$ |
33,700 |
|
|
$ |
102,000 |
|
|
$ |
92,000 |
|
Water delivery operating costs incurred
(excluding depreciation and depletion) |
|
$ |
9,200 |
|
|
$ |
12,900 |
|
|
$ |
38,700 |
|
|
$ |
38,400 |
|
Water delivery gross margin % |
|
|
75 |
% |
|
|
62 |
% |
|
|
62 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wastewater treatment revenues |
|
$ |
16,700 |
|
|
$ |
14,800 |
|
|
$ |
50,200 |
|
|
$ |
44,300 |
|
Wastewater treatment operating costs incurred |
|
$ |
4,900 |
|
|
$ |
5,700 |
|
|
$ |
13,500 |
|
|
$ |
17,100 |
|
Wastewater treatment gross margin % |
|
|
71 |
% |
|
|
62 |
% |
|
|
73 |
% |
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$ |
588,000 |
|
|
$ |
521,700 |
|
|
$ |
1,810,400 |
|
|
$ |
1,650,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses |
|
$ |
1,728,400 |
|
|
$ |
1,742,915 |
|
|
$ |
5,273,000 |
|
|
$ |
5,157,420 |
|
16
Water Usage Revenues and Margins
Water deliveries for the three and nine months ended May 31, 2008 remained consistent with the
comparable periods in fiscal 2007. Water usage revenues for the three and nine month periods ended
May 31, 2008 increased 9% and 11%, respectively, over the comparable periods in fiscal 2007. These
increases are due to our July 2007 increase in water rates and timing of customer use.
Our water service charges are based on a tiered pricing structure that provides for higher prices
as customers use greater amounts of water. Our rates and charges are established based on the
average of three surrounding communities, referred to as our rate-based districts. Our rate-based
districts have continued to raise their rates over the past several years.
Gross margins for water operations for the three and nine month periods ended May 31, 2008
increased over the comparable periods in fiscal 2007 by 13% and 4%, respectively, which is a result
of maintenance and on-going operational expenses incurred in the prior year which were not incurred
in 2008.
Wastewater Treatment Revenues and Margins
Our wastewater customers are charged flat monthly fees based on the number of tap connections they
have, which increased in July 2007 and accounts for the entire 13% increase in the periods
presented.
Gross margins for wastewater operations for the three and nine month periods ended May 31, 2008
were approximately 9% and 11% higher than the comparable periods in fiscal 2007, respectively, due
to certain maintenance expenses incurred in fiscal 2007 which were not incurred in 2008.
General and Administrative and Other Expenses
General and administrative (G&A) expenses for the three and six month periods ended May 31, 2008
and May 31, 2007 were impacted by SFAS No. 123 (revised 2004) Share Based Payment (SFAS 123(R))
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
% |
|
|
Nine Months Ended May 31, |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
Change |
|
G&A expenses as reported |
|
$ |
(588,000 |
) |
|
$ |
(521,700 |
) |
|
$ |
(66,300 |
) |
|
|
13 |
% |
|
$ |
(1,810,400 |
) |
|
$ |
(1,650,400 |
) |
|
$ |
(160,000 |
) |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
93,400 |
|
|
|
67,500 |
|
|
|
25,900 |
|
|
|
38 |
% |
|
|
263,800 |
|
|
|
224,000 |
|
|
|
39,800 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses less
stock-based
compensation |
|
$ |
(494,600 |
) |
|
$ |
(454,200 |
) |
|
$ |
(40,400 |
) |
|
|
9 |
% |
|
$ |
(1,546,600 |
) |
|
$ |
(1,426,400 |
) |
|
$ |
(120,200 |
) |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without the effects of stock-based compensation expenses, G&A expenses increased during the nine
months ended May 31, 2008 by approximately $120,200 or 8%. The main reasons for this increase were:
|
|
|
Approximately $166,000 and $54,500, respectively, of the increases were caused by
additional consulting and legal fees related to our negotiations with Lend Lease and the
Land Board on providing water to the six sections of the Lowry Range to be developed, which
were not incurred in fiscal 2007 (discussed further below in the Item 1A Risk Factors),
and |
|
|
|
|
The FLCC water assessments increased by approximately $61,100 for the nine months ended
May 31, 2008 as a result of increased operating costs of the Fort Lyon Canal, and |
|
|
|
|
These increases were offset by reductions in other professional fees of approximately
$136,800 (in 2007 professional fees were high due to the consultations with the Securities
and Exchange Commission (SEC) which is explained in greater detail in our 2007 Form
10-K), and |
|
|
|
|
Reductions of approximately $61,800 in public entity costs as a result of our
reincorporation into the State of Colorado which eliminated franchise taxes to the State of
Delaware. |
17
G&A expenses increased during the three months ended May 31, 2008 compared to the three months
ended May 31, 2007 by approximately $40,400 or 9%. The main reasons for this increase was due to
additional legal and consulting fees of approximately $96,500 and $18,300, respectively, related to
our negotiations with Lend Lease and the Land
Board on providing water to the six sections of the Lowry Range to be developed initially, which
were not incurred in fiscal 2007. These increases were offset by decreases in other professional
fees of approximately $54,100 (for the same reasons as the decrease in the professional fees
detailed above) and a $32,300 decrease in public entity costs as a result of the reincorporation
into Colorado.
Depreciation and depletion charges for the three and nine month periods ended May 31, 2008 were
approximately $95,400 and $286,200, which is consistent to the approximately $91,900 and $274,000
of expense recorded for the comparable periods in fiscal 2007.
Interest income totaled approximately $52,700 and $250,400 for the three and nine month periods
ended May 31, 2008, respectively. Interest income totaled approximately $34,800 and $120,100 for
the three and nine month periods ended May 31, 2007, respectively. This represents interest earned
on the temporary investment of capital, interest accrued on the note receivable from the District
and interest accrued on the construction proceeds receivable from Arapahoe County. The increases in
both comparable periods are due mainly to the temporary investment of over $5.0 million raised in
the equity offering in July 2007, offset by decreases in the interest on the note receivable from
the District due to reductions in the prime rate over the past several months.
Imputed interest expense related to the Tap Participation Fee payable to HP A&M totaled
approximately $1.1 million and $3.3 million for the three and nine month periods ended May 31,
2008, respectively. Imputed interest on the Tap Participation Fee totaled approximately $1.2
million and $3.5 million for the three and nine months ended May 31, 2007, respectively. This
represents the expensed portion of the difference between the relative fair value of the liability
and the net present value of the liability recognized under the effective interest method. See also
Note 1 to the accompanying financial statements for discussion on the revaluation of the Tap
Participation Fee and the impact to the May 31, 2008 financial statements.
Our net losses, as reported in our statements of operations for the three and nine months ended May
31, 2008 and May 31, 2007, were approximately $1.7 million, $5.3 million, $1.7 million and $5.2
million, respectively. Our reported net losses have been materially impacted by the imputed
interest on the Tap Participation Fee and stock-based compensation expense recognized pursuant to
SFAS 123(R). In the table below, we have presented a non-GAAP financial disclosure to provide a
quantitative analysis of the impact of the imputed interest and stock-based compensation expenses
on our reported net losses and loss per share. Because these items do not require the use of
current assets, management does not include these items in its analysis of our financial results or
how we allocate our resources. Because of this, we deemed it meaningful to provide this non-GAAP
disclosure of the impact of these significant items on our financial results.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
Nine Months Ended May 31, |
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Net loss as reported |
|
$ |
1,728,400 |
|
|
$ |
1,742,900 |
|
|
$ |
(14,500 |
) |
|
$ |
5,273,000 |
|
|
$ |
5,157,400 |
|
|
$ |
115,600 |
|
Interest imputed on Tap
Participation Fees
payable to HP A&M |
|
|
(1,114,000 |
) |
|
|
(1,176,800 |
) |
|
|
62,800 |
|
|
|
(3,255,000 |
) |
|
|
(3,463,500 |
) |
|
|
208,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
(93,400 |
) |
|
|
(67,500 |
) |
|
|
(25,900 |
) |
|
|
(263,800 |
) |
|
|
(224,000 |
) |
|
|
(39,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss less imputed
interest and
stock-based
compensation |
|
$ |
521,000 |
|
|
$ |
498,600 |
|
|
$ |
22,400 |
|
|
$ |
1,754,200 |
|
|
$ |
1,469,900 |
|
|
$ |
284,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share as reported |
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
0.00 |
|
|
$ |
0.26 |
|
|
$ |
0.28 |
|
|
$ |
(0.02 |
) |
Interest imputed on Tap
Participation Fees
payable to HP A&M |
|
|
(0.06 |
) |
|
|
(0.06 |
) |
|
|
(0.00 |
) |
|
|
(0.16 |
) |
|
|
(0.19 |
) |
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
|
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share less imputed
interest and
stock-based
compensation |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.00 |
) |
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares
outstanding |
|
|
20,206,566 |
|
|
|
18,476,230 |
|
|
|
|
|
|
|
20,182,668 |
|
|
|
18,399,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our working capital, defined as current assets less current liabilities, at May 31, 2008 was
approximately $5.7 million, and we had cash and cash equivalents on hand totaling approximately
$5.7 million at May 31, 2008. We believe that at May 31, 2008, we have sufficient working capital
to fund our operations for the next year. However, there can be no assurance that we will be
successful in marketing the water from our primary water projects in the near term. In order to
generate working capital to support our operations, we may incur additional short or long-term debt
or seek to sell additional equity securities. We have an effective shelf registration statement
pursuant to which we may elect to sell up to another $5.7 million of stock at any time and from
time to time.
Development of the water that we own, have rights to use, or may seek to acquire, will require
substantial capital investments. We anticipate that capital required for the development of the
water and wastewater systems will be financed through the sale of water taps to developers and
water delivery charges to users. A water tap fee refers to a charge we impose to fund construction
of Wholesale Facilities (Wholesale Facilities are further defined in our 2007 Annual Report on
Form 10-K) and permit access to our water delivery system (e.g., a single-family homes tap into
our water system). A water service charge refers to a water customers monthly water bill,
generally charged per 1,000 gallons of water delivered to the customer. We anticipate tap fees will
be sufficient to generate funds with which we can design and construct the necessary Wholesale
Facilities. However, once we receive tap fees from a developer, we are contractually obligated to
construct the Wholesale Facilities for the taps paid for, even if our costs are not covered by the
fees we receive. We cannot assure you that these sources of cash will be sufficient to cover all
our capital costs.
As further described in our 2007 Annual Report on Form 10-K, pursuant to the Arkansas River
Agreement we agreed to pay HP A&M 10% of our water tap fees received on the sale of the next 40,000
water taps. As of May 31, 2008, we have estimated the value of the Tap Participation Fee payable to
HP A&M at approximately $52.7 million based on a discounted cash flow valuation analysis, which was
originally prepared at August 31, 2006, and was updated as of November 30, 2007. See Note 1 in the
accompanying financial statements for the impact of the revaluation. The actual amount to be paid
could exceed our estimates. Tap participation payments are not payable to HP A&M until we receive
water tap fee payments. We did not sell any taps or make any Tap Participation Fee
payments during the nine months ended May 31, 2008. As of May 31, 2008, 38,965 taps remain subject
to the Tap Participation Fee.
19
We are obligated to pay the FLCC annual water assessment charges which are the charges assessed to
the FLCC shareholders for the upkeep and maintenance of the Fort Lyon Canal. The payments are due
to the FLCC each calendar year. In December 2007, the board of the FLCC approved an increase in the
calendar 2008 assessments from $12.50 per share to $15.00 per share, which equates to an increase
in our water assessments from approximately $265,000 per year to approximately $325,000 per year.
On August 3, 2005, we entered into the County Agreement to provide water service to the Arapahoe
County Fairgrounds. In accordance with accounting principles generally accepted in the United
States of America (GAAP), upon completion of construction of the Arapahoe County Fairgrounds
facilities and the initiation of water service to the Arapahoe County Fairgrounds in July 2006, we
began ratably recognizing deferred tap fee revenues as income. The tap fees received from the
County are being recognized in income over the estimated useful life of the constructed assets, or
30 years. For the three and nine months ended May 31, 2008 and May 31, 2007, we recognized water
tap revenues of approximately $3,600 and $10,700, respectively. In addition, we started recognizing
deferred Special Facilities funding (the Special Facilities funding is more fully described in
Note 3 to the 2007 Annual Report on Form 10-K) as revenues per SAB 104 in fiscal 2006, which will
also be recognized over the useful life of the constructed assets. For the three and nine months
ended May 31, 2008 and May 31, 2007, we recognized Special Facility funding revenues of
approximately $10,400 and $31,100, respectively. See also Note 5 to the accompanying financial
statements for information regarding the amendment to the County Agreement in regards to the
Special Facilities funding.
Repayment of all related party and non-related debt
In October 2007, we repaid our sole outstanding note to a related party. Therefore, at May 31,
2008, we had no outstanding related party or non-related party debt.
Operating Activities
Operating activities include revenues we receive from the sale of water and wastewater services to
our customers, costs incurred in the delivery of those services, general and administrative
expenses, and depletion/depreciation expenses.
Cash used by operating activities was approximately $860,900 and $1.6 million for the nine months
ended May 31, 2008 and May 31, 2007, respectively. The change is mainly due to changes in operating
assets and liabilities. $100,000 of this change was due to us cancelling the checks issued to Sky
Ranch (see Investing Activities and Risk Factors below for more information) for water purchases
for which we have not received the water rights deeds. These were cancelled due to Sky Ranch
entering bankruptcy.
As a result of the Arkansas River Agreement signed on August 31, 2006, we imputed approximately
$3.3 million and $3.5 million of interest on the Tap Participation Fee payable to HP A&M for nine
month periods ended May 31, 2008 and May 31, 2007, respectively.
During the nine months ended May 31, 2008 and May 31, 2007, we accrued interest on the note
receivable from the District of approximately $15,000 and $17,600, respectively, which is
comparable period over period. We also accrued approximately $23,000 and $37,800 of interest on the
construction proceeds receivable from the County during the nine months ended May 31, 2008 and May
31, 2007, respectively. The decrease in the construction proceeds interest income is a result of
payments made by the County since the prior year, which reduces the interest income recognized
under the effective interest method, and due to the agreement reached with the County Agreement as
described in Note 5 to the accompanying financial statements.
We incurred approximately $287,600 and $275,700 of depreciation, depletion and other non-cash
charges during the nine months ended May 31, 2008 and May 31, 2007, respectively, which is a change
of less than 5%.
We will continue to provide domestic water and wastewater service to customers in our service
area and we will continue to operate and maintain our water and wastewater systems with our own
employees.
20
Investing Activities
On October 31, 2003 we entered into the Denver Groundwater Purchase Agreement (the DGPA) with the
developer of Sky Ranch. The DGPA provides us the right to purchase a total of 223 acre-feet of
adjudicated decreed water rights owned by the developer. Under the DGPA, we can acquire 44.6
acre-feet of water per year (or 20% of the total 223 acre-feet) for a payment of $50,000 (acquiring
the entire 223 acre-feet requires payments totaling $250,000). On March 26, 2004 and May 26, 2005,
we exercised our rights and purchased a total of 89.2 acre-feet of Denver aquifer groundwater for
payments totaling $100,000. During our fiscal 2007 and fiscal 2006 we made the two required $50,000
payments pursuant to the DGPA, for which we have not received the water rights deeds from the
developer, nor has the developer cashed either of the payments. In November, 2007, the developer of
Sky Ranch filed for Chapter 11 bankruptcy protection. Because of the bankruptcy and since we have
not received our water rights deeds from Sky Ranch, we have cancelled the two uncashed checks
issued to Sky Ranch and have reversed the $100,000 that was included in the Prepaid Expenses
account on our Balance Sheet. We will continue to follow the bankruptcy proceedings of Sky Ranch
and vigorously enforce our rights under the DGPA and other Sky Ranch agreements.
We continue to invest in legal and engineering fees associated with our water rights, and we
continue to invest in the right-of-way permit fees to the Department of Interior Bureau of Land
Management and legal and engineering costs for our Paradise Water Supply.
Cash provided by investing activities for the nine months ended May 31, 2008 and May 31, 2007, was
approximately $501,300 and $2.1 million, respectively. The fiscal 2007 cash provided by investing
activities was positively impacted by the sale of LAWMA shares, as more fully described in our
2007 Annual Report on Form 10-K and the sale of approximately $1.5 million of available-for-sale
securities.
Financing Activities
Cash used by financing activities during the nine months ended May 31, 2008 and May 31, 2007, was
approximately $28,900 and $852,400, respectively. The difference is mainly due to the approximately
$849,700 Tap Participation Fee payment made as a result of the above mentioned sale of LAWMA
shares.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the CAA, which is more fully described in
our 2007 Annual Report on Form 10-K, and in Note 7 to the accompanying financial statements.
Recently Adopted and Issued Accounting Pronouncements
See Note 1 to the accompanying financial statements regarding recently adopted and issued
accounting pronouncements.
Critical Accounting Policies
Our financial statements are prepared in accordance GAAP, which requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements, and reported amounts of revenues
and expenses during the reporting period. Actual results could differ significantly from those
estimates. With the exception of the items described below, since August 31, 2007, there have been
no significant changes to our critical accounting policies; therefore, for further discussion of
our significant accounting policies, refer to Note 2 and Item 7 Critical Accounting Policies in
our 2007 Annual Report on Form 10-K.
Tap Participation Fee
As described in Note 1 to the accompanying financial statements, we assess the value of the Tap
Participation Fee payable to HP A&M whenever events or circumstances indicate the assumptions used
to estimate the value of the liability have changed materially. Based on changes in the housing
market in Colorado and other similar factors, we
revalued the Tap Participation Fee at November 30, 2007. See Note 1 to the accompanying financial
statements for impact of this revaluation.
21
Obligations Payable by HP A&M
Certain of the properties we acquired pursuant to the Arkansas River Agreement are subject to
outstanding promissory notes, as further described in the notes to our financial statements in our
2007 Annual Report on Form 10-K. These notes are secured by deeds of trust on the properties. We
did not assume any of these promissory notes and are not responsible for making any of the required
payments under these notes. This responsibility remains solely with HP A&M. In the event of default
by HP A&M, we may make payments on any or all of the notes and cure any or all of the defaults. If
we do not cure the defaults, we will lose the properties securing the defaulted notes. If HP A&M
defaults on the promissory notes, we can foreclose on a defined amount of Pure Cycle stock issued
to HP A&M being held in escrow and reduce the Tap Participation Fee by two times the amount of
notes defaulted on by HP A&M. Although the likelihood of HP A&M defaulting on the notes is deemed
remote, we will continue to monitor the status of the notes for any indications of default. We are
not aware of any defaults by HP A&M as of May 31, 2008.
Income taxes
There is no provision for income taxes because we continue to incur operating losses. See Note 1 to
the accompanying financial statements for information regarding our adoption of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. Pure Cycle has limited exposure to market risks from instruments that may impact the
Balance Sheets, Statements of Operations, and Statements of Cash Flows, such exposure is due
primarily to changing interest rates.
Interest Rates. The primary objective for our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. This is accomplished by investing in
diversified short-term interest bearing investments. As of May 31, 2008, we no longer have any
investments which are subject to market risks as the majority of our capital is invested
predominately in overnight money market funds related to US Treasury Obligations which earn
interest at stated rates. We have no investments denominated in foreign country currencies and
therefore our investments are not subject to foreign currency exchange risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedure
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in the Exchange Act Rule 13a 15(f). Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.
The President and Chief Financial Officer assessed the effectiveness of internal control over
financial reporting as of May 31, 2008 based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon this evaluation, the President and Chief Financial Officer concluded that
our disclosure controls and procedures have been designed and are being operated in a manner that
provides reasonable assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. A system of controls, no
matter how well designed and operated, cannot provide absolute assurance that the objectives of the
system of controls are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting and Managements Remediation Initiatives
None
22
Part II
Item 1A. Risk Factors
We are dependent on the development of Sky Ranch, the Lowry Range and other areas near our
Rangeview Water Supply that are potential markets for our Export Water.
Providing water service using our Rangeview Water Supply is one of our principal sources of future
revenue. The timing and amount of these revenues will depend significantly on the development of
the Lowry Range, Sky Ranch and other potential developments around our Rangeview Water Supply and
along the Colorado Front Range. The development of these areas is not within our control.
Sky Ranch
In November 2007, the developer of Sky Ranch filed for Chapter 11 bankruptcy protection. As of the
date of this filing, there has been no resolution of the claims against the developer of Sky Ranch
and we do not know what the ultimate impact to our agreements with Sky Ranch will be as a result of
the bankruptcy. As described in the Investing Activities section above we have not received the
water rights deeds for the last two water purchases made under the DGPA agreement, nor has Sky
Ranch cashed our checks related to these purchases. Because of the bankruptcy filing, we have
cancelled the last two checks and we are unsure if we will be able to complete the acquisition of
the remaining water located at Sky Ranch pursuant to the DGPA. In addition to our claims against
the developer, a bank holds a security interest in the entire Sky Ranch development, including our
agreements. We are not aware of the banks intentions with respect to its rights in the
development. Until these issues are resolved, there will be no development and consequently no
sales of water taps or water at Sky Ranch. We cannot reasonably predict how long this process will
take or whether any of our rights related to Sky Ranch will have any value following the
bankruptcy.
Lowry Range, Lend Lease and the City of Aurora
Through the District, we are a party to the Amended and Restated Lease Agreement (the Lease) with
the Colorado State Board of Land Commissioners (the Land Board). Pursuant to the Lease, the
District and Pure Cycle have the exclusive right to provide water and wastewater service to
approximately 24,000 acres of the approximately 27,000 acre Lowry Range, which is owned by the Land
Board. In June 2007, the Land Board entered into an agreement with Lend Lease Lowry Range LLC
(Lend Lease) for the sole development rights of approximately 3,900 acres (or six-square miles)
of the Lowry Range. Of this, approximately 1,300 acres (or two square miles) are subject to the
Lease. Lend Lease has claimed, in contradiction to the Lease, that they may not be required to
obtain water and wastewater service exclusively from us for any portion of the development, see
Item 5 below. Lend Lease has further stated they may annex the development into the City of Aurora
(Aurora). While we believe Lend Leases claims regarding the Lease are without merit and have
continued to vigorously defend our rights under the Lease, we are negotiating with Lend Lease,
Aurora and the Land Board to reach a mutually satisfactory service plan for the Lowry Range
development. Any such service plan would require amending the Lease and would need to be agreed to
by both the District and the Land Board. Due to the number of parties and issues involved, it may
take a considerable amount of time to negotiate an agreement which is satisfactory to all parties.
Further, such negotiations may not be successful. We remain prepared to take additional legal
action if necessary to enforce our rights to the adjudicated reservoirs under the Lease and to
provide water and wastewater service to the Lowry Range. If additional legal proceedings become
necessary and our rights under the Lease are adversely ruled upon in such legal proceedings, it
could materially adversely impact the value of our interests, including the value of our Rangeview
Water Supply.
Even if we are able to reach satisfactory agreements with Lend Lease, Aurora, the District and the
Land Board to provide service to the Lend Lease development, there can be no assurance that
development will occur or that water sales will occur on acceptable terms or in the amounts or time
required for us to support our costs of operation. Because of the prior use of the Lowry Range as a
military facility, environmental clean-up may be required prior to development, including the
removal of unexploded ordnance. There is often significant delay in adoption of development plans,
as the political process involves many constituencies with differing interests. In the event water
sales are not forthcoming or development of the Lowry Range is delayed, we may incur additional
short or long-term debt obligations or seek to sell additional equity to generate operating
capital. In addition, the Land Board is considering conservation options for portions of the Lowry
Range. If the Land Board determines to limit the use of significant portions of the Lowry Range for
conservation, it may limit our ability to fully develop our Rangeview Water Supply.
23
Colorado housing market
Our operations are affected by general economic conditions and the pace and location of real estate
development activities in the greater Denver metropolitan area, most particularly areas which are
close to our Rangeview Water Supply. From 2006 and continuing through May 31, 2008, the Colorado
housing market has continued to see a slowing in new construction, which could continue for some
time. Increases in the number of our water and wastewater connections, our connection fees and our
billings and collections depends on real estate development in this area. We have no ability to
control the pace and location of real estate development activities which affect our business.
We expect to be involved in on-going negotiations with the Land Board to clarify our rights and
obligations with respect to our Rangeview Water Supply and such negotiations may not be successful.
Our Rangeview Water Supply rights derive principally from the Lease between the Land Board and the
District which was entered into in 1996 prior to any development of the Lowry Range or of areas
outside the Lowry Range that utilize our Export Water. The terms of the Lease did not fully
anticipate the specific circumstances of development that have arisen and may not clearly delineate
rights and responsibilities for the forms of transactions that may
arise in the future. We anticipate engaging in negotiations with the
Land Board from time to time to clarify the terms of the Lease. An
unfavorable outcome in such negotiations could have a material adverse effect on our financial
results. We cannot assure you that such negotiations will be successful.
Item 5. Other Information
In 2003, Aurora filed an application for conditional water rights with the District Court, Water
Division I, State of Colorado (Water Court). In the filing, Aurora listed numerous potential
sites for reservoirs for storage of its water rights. Three of the potential reservoir sites were
located on the Lowry Range on reservoir sites which had been adjudicated by the District and the
Land Board and for which the Land Board has previously granted the right to obtain rights-of-way to
the District and us to construct reservoirs. On November 6, 2007, as a result of an objection by
the District and us, the Water Court granted a motion requiring Aurora to remove the three
reservoir sites from its filing. On February 22, 2008, Aurora filed a motion with the Water Court
for reconsideration of this judgment.
On March 14, 2008, Lend Lease filed a motion with the Water Court to file an amicus brief
supporting Auroras reconsideration motion to allow a third party to build and operate a reservoir
on sites which have been adjudicated and identified in the Lease. In this motion, Lend Lease
stated that we may not have the exclusive right to provide water service to the two sections of the
Lowry Range subject to the Lease. In April 2008, the Water Court denied Lend Leases motion to
file an amicus brief and upheld its November 2007 motion requiring Aurora to remove the three
reservoir sites from its filing.
Item 6. Exhibits
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Exhibits |
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31 |
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Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.* |
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32 |
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Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.* |
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* |
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Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
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PURE CYCLE CORPORATION |
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/s/ Mark W. Harding |
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President and Chief Financial Officer |
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July 10, 2008 |
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EXHIBIT INDEX
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Exhibits |
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31 |
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Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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32 |
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Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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