Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended August 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-8814
PURE CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
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Colorado
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84-0705083 |
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(State of incorporation)
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(I.R.S. Employer Identification No.) |
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500 East 8th Ave, Suite 201, Denver, CO 80203
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(303) 292-3456 |
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(Address of principal executive office) (Zip Code)
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(Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock 1/3 of $.01 par value
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The NASDAQ Stock Market, LLC |
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(Title of each class)
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(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
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 has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K 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
the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrants most recently completed second
fiscal quarter: $32,766,000
Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of November 12, 2010 was: 22,055,497
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
registrants definitive proxy statement for the 2010 annual meeting of
stockholders, which will be filed with the SEC within 120 days of the close of
the fiscal year ended August 31, 2010.
SAFE HARBOR STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements that are not historical facts contained in this Annual Report on Form 10-K are
forward looking statements that involve risk and uncertainties that could cause actual results to
differ from projected results. The words anticipate, believe, estimate, expect, plan,
intend 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 new home
construction and other development in the areas where we may sell our water, which in turn may be
impacted by credit availability, population growth, and employment rates, the market price of
water, changes in customer consumption patterns, 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, including flood and droughts, 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.
PART I
Item 1 Business
Summary
Pure Cycle Corporation was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008.
We are a vertically integrated water and wastewater service provider that contracts with
landowners, land developers, home builders, cities and municipalities to design, construct, operate
and maintain water and wastewater systems. As a vertically integrated service provider, we own all
assets necessary to provide water and wastewater services to customers. This includes owning (i)
water rights to provide domestic and irrigation water to customers (we own surface water,
groundwater, reclaimed water rights and storage rights), (ii) infrastructure (such as wells,
diversion structures, pipelines, reservoirs and treatment facilities) required to withdraw, treat,
store and deliver domestic water to customers, (iii) infrastructure required to collect, treat,
store and reuse wastewater, and (iv) infrastructure required to treat and deliver reclaimed water
for irrigation use by customers.
We generate cash flows and revenues by (i) selling taps (connections) to our water and wastewater
systems and/or (ii) monthly service fees and consumption charges from metered deliveries.
We currently provide water services to approximately 258 Single Family Equivalent (SFE) (as
defined below) water connections and 157 SFE wastewater connections located in southeastern
metropolitan Denver.
We plan to utilize our significant water assets, which are described in the Our Water Assets
section below, to provide residential/commercial water and wastewater services to communities along
the eastern slope of the Rocky Mountains in Colorado, in the area extending essentially from Ft.
Collins on the north to Colorado Springs on the south which is generally referred to as the Front
Range. Principally we are targeting the I-70 corridor which is located east of downtown Denver
and south of the Denver International Airport. This area is predominately undeveloped and is
expected to experience substantial growth over the next 30 years.
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Glossary of terms
The following terms are commonly used in the water industry and are used throughout our annual
report:
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Acre-foot approximately 326,000 gallons of water, or enough water to cover an acre of
ground with one foot of water. For some instances herein, as context dictates, the term acre
feet is used to designate an annual decreed amount of water that might be available during a
typical year. |
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Consumptive Use the amount of water that is evaporated, transpired, incorporated into
products or crops, consumed by humans or livestock, or otherwise removed from the immediate
water environment. |
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Customer Facilities facilities that carry potable water and reclaimed water to customers
from the retail water distribution system (see Retail Facilities below) and collect
wastewater from customers and transfer it to the retail wastewater collection system. Water
and wastewater service lines, interior plumbing, meters and other components are typical
examples of Customer Facilities. In many cases, portions of the Customer Facilities are
constructed by the developer, but they are owned and maintained by the customer. |
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Non-tributary groundwater water that is physically separated from surface water by
impermeable layers in an aquifer or located outside the boundaries of any designated
groundwater basin. The withdrawal of such water will not, within one hundred years of
continuous withdrawal, deplete the flow of a natural stream at an annual rate greater than
one-tenth of one percent of the annual rate of withdrawal. |
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Not non-tributary groundwater water located within those portions of the Dawson, Denver,
Arapahoe, and Laramie-Fox Hills aquifers that are outside the boundaries of any designated
groundwater basin, the withdrawal of which will, within one hundred years, deplete the flow of
a natural stream at an annual rate of greater than one-tenth of one percent of the annual rate
of withdrawal. |
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Retail Facilities facilities that distribute water to and collect wastewater from an
individual subdivision or community. Developers are typically responsible for the funding and
construction of Retail Facilities. Once we certify that the Retail Facilities have been
constructed in accordance with our design criteria, the developer dedicates the Retail
Facilities to us or to a quasi-municipal political subdivision of the state and we operate and
maintain the facilities. |
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Section a parcel of land equal to one square mile and containing 640 acres. |
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Single Family Equivalent unit (SFE) One SFE is a customer; whether residential,
commercial or industrial; that imparts a demand on our water or wastewater systems similar to
the demand of a family of four persons living in a single family house on a standard sized
lot. One SFE is assumed to have a water demand of approximately 0.4 acre-feet per year and to
contribute wastewater flows of approximately 300 gallons per day |
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Special Facilities facilities that are required to extend services to an individual
development and are not otherwise classified as a typical Wholesale Facility or Retail
Facility. Temporary infrastructure required prior to construction of permanent water and
wastewater systems or transmission pipelines to transfer water from one location to another
are examples of Special Facilities. We typically design and construct the Special Facilities
using funds provided by the developer in addition to the normal rates, fees and charges that
we collect from our customers. We are typically responsible for the operation and maintenance
of the Special Facilities upon completion. |
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Tributary groundwater all water located in an aquifer that is hydrologically connected to
a natural stream and is not considered non-tributary or not non-tributary. |
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Wholesale Facilities facilities that serve an entire service area or major regions or
portions thereof. Wells, treatment plants, pump stations, tanks, reservoirs, transmission
pipelines, and major sewage lift stations are typical examples of Wholesale Facilities. We
own, design, construct, operate, maintain and repair Wholesale Facilities which are typically
funded using rates, fees and charges that we collect from our customers. |
Our Water Assets
This section should be read in conjunction with Item 1A Risk Factors, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operation Critical Accounting
Policies and Use of Estimates, and Note 4 to the accompanying financial statements.
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The approximately $102.9 million of capitalized water costs on our balance sheet represents the
costs of the water rights we own and the related infrastructure developed to provide water and
wastewater services. Each of these assets is explained in detail below.
Rangeview Water Supply and the Lowry Range
Our Rangeview Water
Collectively we refer to the water and storage rights described in this paragraph as our
Rangeview Water Supply. At the Lowry Range (described below) we own or control a total of
approximately 3,300 acre feet of tributary surface water, 25,050 acre feet of nontributary and
not-nontributary groundwater rights, and storage rights. Of the 25,050 acre feet of Lowry Range
groundwater, we own approximately 11,650 acre feet of non-tributary and not non-tributary
groundwater 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). We also have the right to convert up to 1,650 acre feet of the Export groundwater to a
similar amount of surface water for use off the Lowry Range. We hold the exclusive right to
develop and deliver through 2081 the remaining 13,400 acre feet of groundwater, along with the
balance of the surface water, for use on the Lowry Range.
We acquired our Rangeview Water Supply in April 1996 pursuant to the following agreements:
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The 1996 Amended and Restated Lease Agreement (the Lease) between the State Board of Land
Commissioners (the Land Board) and the Rangeview Metropolitan District (the District), a
quasi-municipal political subdivision of the State of Colorado; |
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The Agreement for Sale of Export Water between us and the District; and |
(iii) |
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The Water Service Agreement between us and the District for the provision of water service
to the Districts Service Area. |
Additionally, in 1997 we entered into a Wastewater Service Agreement (the Wastewater Agreement)
with the District to provide wastewater service to customers within the Districts service area.
All of the foregoing agreements are collectively referred to as the Rangeview Water Agreements.
Pursuant to the Rangeview Water Agreements, we design, construct, operate and maintain the
Districts water and wastewater systems to provide water and wastewater service to customers within
the Districts 24,000 acre service area at the Lowry Range. On the Lowry Range, we operate both
the water and the wastewater systems during our contract period on behalf of the District, who owns
the facilities for both systems. At the expiration of our contract term in 2081, ownership of the
water system facilities servicing customers on the Lowry Range will revert to the Land Board, with
the District retaining ownership of the wastewater facilities. Off the Lowry Range, we use our
Export Water as well as other supplies owned by us to provide water service and wastewater service
to our customers and we own these facilities.
The Lowry Range Property
The Lowry Range was acquired by the Land Board in the 1960s and according to the Land Board; it is
one of the most complex and visible properties held in trust by the Land Board. Located in
unincorporated Arapahoe County, about 20 miles southeast of downtown Denver, the Lowry Range is one
of the largest contiguous parcels under single ownership next to a major metropolitan area in the
United States. The Lowry Range is approximately 26,000 acres in size or about 40 square miles of
land. Of the 26,000 acres, we have the exclusive rights to provide water and wastewater services to
approximately 24,000 acres.
Future plans for the Lowry Range are based on a three-part vision as established by the Land Board.
The current vision centers around (i) large-scale open space and conservation lands with continued
agricultural use, (ii) development of water resources and potential reservoir sites, and (iii) a
sustainable mixed-use development on a portion of the Lowry Range. However, the Land Board has no
active development plans. Previous development plans ended when the developer withdrew from the
project.
Arkansas River Water and Land
On August 31, 2006, we acquired water and land in the Arkansas River Valley in southern Colorado
from High Plains A&M, LLC (HP A&M) pursuant to an asset purchase agreement (the Arkansas River
Agreement). We own approximately 60,000 acre-feet of surface water rights in the Arkansas River
together with approximately 17,500 acres of irrigated farm land in southeastern Colorado.
Currently we are leasing our land and water to area farmers who continue to irrigate the land for
agricultural purposes. The water rights we own are represented by over 21,600 shares of the Fort
Lyon Canal Company (the
FLCC), which is a non-profit mutual ditch company established in the late 1800s to operate and
maintain the 110-mile long Fort Lyon Canal between La Junta, Colorado and Lamar, Colorado.
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It is our intention to change the use of the Arkansas River water from being exclusively for
agricultural purposes to municipal and industrial purposes. We will utilize this water to help
meet the growing water demands of Colorados Front Range. We anticipate that approximately 40,000
acre feet of the 60,000 acre feet we own will be available for non-agricultural uses. Owning the
land and water interest allows us to work cooperatively with our agricultural lessees to maintain
productive agricultural operations and make improvements to the land and water which we anticipate
will produce efficiencies which will make water available for other than agricultural uses.
Timing of the development of the Arkansas River water will depend on the timing of new connections
to our water and wastewater systems. We plan to fund the development of the Arkansas River water,
much like the other water we own, by using proceeds generated from the sale of water taps
associated with new connections to our system. This will fund the construction of infrastructure
to treat and transport the Arkansas River water to our service areas. In addition to increasing
our service capacities, the Arkansas River water may present additional market opportunities for us
to assist other water providers in solving their long-term water supply needs for their existing
and new connections.
Arapahoe County Fairgrounds Agreement for Water Service
In 2005, we entered into an Agreement for Water Service (the County Agreement) with Arapahoe
County (the County) to design, construct, operate and maintain a water system for, and provide
water services to, the Arapahoe County Fairgrounds (the Fairgrounds), which is located west of
the Lowry Range. Pursuant to the County Agreement we purchased 321 acre-feet of water in 2008.
Further details of the funding arrangements with the County are described in Note 4 to the
accompanying financial statements.
Pursuant to the County Agreement we constructed and we own a new deep water well, a 500,000 gallon
water tank and pipelines to transport water to the Fairgrounds. The construction of these items was
completed in our fiscal 2006, and we began providing water service to the Fairgrounds on July 21,
2006.
Sky Ranch Water Supply and Water Service Agreements
In 2003 and 2004, we entered into two water service agreements and a groundwater purchase agreement
with the developer of approximately 940 acres of land known as Sky Ranch. Sky Ranch is located in
Arapahoe County, Colorado directly adjacent to I-70, approximately 16 miles east of downtown
Denver, 4 miles north of the Lowry Range, and 4 miles south of Denver International Airport. Sky
Ranch has been zoned for residential, commercial and retail uses and may include up to 4,850 SFEs.
In 2007 the developer of Sky Ranch, Neumann Homes, Inc., filed for bankruptcy protection. On
October 18, 2010, pursuant to a Loan Sale and Assignment Agreement (the Loan Sale Agreement) with
the Bank of America, N.A. (BofA) we acquired the promissory note payable by Sky Ranch, LLC (a
wholly owned subsidiary of Neumann Homes, Inc.) to BofA and the deed of trust granted by Sky Ranch,
LLC to secure the promissory note for cash payments totaling $7.0 million. We made a $700,000
escrow payment on July 30, 2010 and paid the remaining $6.3 million on October 18, 2010. On
October 26, 2010, the United States Bankruptcy Court, Northern District of Illinois, entered an
order granting our motion requesting that title to the Sky Ranch property be deeded to us free and
clear of all bankruptcy claims. Pursuant to the order, we own the Sky Ranch property effective as
of November 2, 2010.
Owning Sky Ranch provides new opportunities to us and our shareholders. First, purchasing the land
interest removes the uncertainties created by the bankruptcy as to when the property would be
available to the market for development and the enforceability of our water service agreements.
Second, in addition to our previous contractual right to provide water service to the property, we
now have the right to provide and control wastewater service to the property. This will enable us
to implement our environmentally sensitive water reuse system using highly treated effluent water
distributed through a dedicated reclaimed water distribution system for all outdoor irrigation
demands on the property. Third, we acquired approximately 739 acre feet of water rights associated
with the land to add to the approximately 89 acre feet we acquired prior to the bankruptcy.
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The Sky Ranch property is fully zoned and entitled. Based on records obtained from the bankruptcy
court, the previous developer invested nearly $7.0 million in the property for planning,
engineering, soil and geotechnical evaluations, transportation studies, roadway alignments,
infrastructure planning, etc. We currently envision that when development at Sky Ranch begins, the
development will be in the form of entry level housing (houses costing less than $300,000). We
will not construct infrastructure such as roads, curbs and gutters. Instead we will partner with
national home builders/developers for
these improvements as part of our plan to provide the market with competitively priced lots that
are ready for development together with affordable, sustainable, environmentally sound water and
wastewater services. We anticipate working with the builders/developers to bring a product to the
Denver market that is both affordable and desirable. Although we do not know exactly when this
property will be developed, land development experts believe the entry level housing market will be
the first product to rebound in the Denver metropolitan area. At full development, the water and
wastewater utilities at Sky Ranch are anticipated to generate in excess of $132 million in tap fee
revenue and $6 million annually in service fee revenue (based on current fees and charges).
In order to finance the Sky Ranch acquisition, we issued a $5.2 million Convertible Negotiable Note
Payable (the Convertible Note) and sold 1,848,931 shares of our common stock pursuant to an
effective shelf registration statement for $3.00 per share. These financing transactions are
described in further detail in Note 14 to the accompanying financial statements.
Paradise Water Supply
In 1987 we acquired the conditional rights 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 our Paradise Water Supply). Due to
the significant development costs of water assets along the western slope and agreements with
other western slope water interests, the use of our Paradise Water Supply is limited to
opportunities along the western slope. We anticipate the primary market for the Paradise Water
Supply to be the energy industry. Our storage and water rights are located along the energy rich
western slope in Colorado, and water availability is an important factor in the development and
production of these energy supplies.
See the discussion of impairment analysis in the Critical Accounting Policies section below for
more information. See also Note 4 to the accompanying financial statements for information
concerning the finding of reasonable diligence review by the State Engineer.
Well Enhancement and Recovery Systems
In January 2007, we, along with two other parties formed Well Enhancement and Recovery Systems, LLC
(Well Enhancement LLC), to develop a new deep water well enhancement tool and process which we
believe will increase the efficiency of wells into the Denver Basin groundwater formation. In our
fiscal 2008, the well enhancement tool and process was completed and tested on two deep water wells
developed by an area water provider with favorable results. According to results from studies
performed by an independent hydro-geologist, the well enhancement tool effectively increased the
production of the two test wells by approximately 80% and 83% when compared to that of nearby wells
developed in similar formations at similar depths. Based on the positive results of the test
wells, we continue to refine the process of enhancing deep water wells and anticipate marketing the
tool to area water providers. We did not utilize the well enhancement tool during 2010 due to a
lack of wells being drilled in the Denver metropolitan market. On April 27, 2010, we and the other
remaining owner of Well Enhancement LLC acquired the third partners 1/3rd interest in
Well Enhancement LLC. Following the acquisition, the remaining partners each hold a 50% interest
in Well Enhancement LLC.
Revenues
We generate revenues predominately from three sources: (i) one time water and wastewater tap fees,
(ii) construction fees, and (iii) monthly service fees. Our revenue sources and how we account for
them are described in greater detail below. We typically negotiate the payment terms for tap fees,
construction fees, and other water and wastewater service fees with each developer, builder or
municipality as a component of our service agreements prior to construction of the project.
Water and Wastewater Tap Fees
Tap fees are paid by the developer in advance of construction activities and are non-refundable.
Tap fees are typically used to fund construction of the Wholesale Facilities and defray the
acquisition costs of obtaining water rights.
Pursuant to our Rangeview Water Agreements, our water tap fees (as well as water usage charges
described further below) are market driven, in that our rates and charges may not exceed the
average of similar rates and charges of three nearby water providers. Despite increases in the
water tap fees at these three nearby water providers, our water tap fees and wastewater tap fees
remain unchanged at $22,500 per SFE and $4,883 per SFE, respectively. Due to increases in tap fees
at the surrounding
water providers, water tap fees were last increased on July 1, 2009, by $1,000 to $22,500 per SFE,
which was a 4.7% increase over the 2008 water tap fee. Wastewater tap fees have not changed since
2003.
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Table A provides a summary of our water tap fees since 2006:
Table A Water System Tap Fees
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2010 |
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2009 |
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2008 |
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2007 |
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2006 |
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Water tap fees per SFE |
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$ |
22,500 |
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$ |
22,500 |
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$ |
21,500 |
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$ |
20,000 |
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$ |
16,840 |
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Percentage Increase |
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0.0 |
% |
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4.7 |
% |
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7.5 |
% |
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18.8 |
% |
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14.2 |
% |
Percentage increase from 2006-2010 |
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34 |
% |
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Developers owning rights to either surface water or groundwater underlying their properties may
receive a credit against a portion of their water tap fees if they elect to sell their water to us.
Any credit is negotiated at the time a service agreement is entered into with respect to the
property.
Construction Fees
Construction fees are fees we receive, typically in advance, from developers for us to build
certain infrastructure such as Special Facilities which are normally the responsibility of the
developer.
Monthly Service Fees
Monthly water usage charges are assessed to customers based on actual metered deliveries each
month. Water usage pricing is capped at the average of the prices charged by the same three
surrounding water providers used as the basis for our water tap fees. As a result of increases in
usage fees for these local water providers, as of July 1, 2010, we increased our usage charges as
noted in Table B below.
Table B Tiered Water Usage Pricing Structure
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Price ($ per thousand gallons) |
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Amount of consumption |
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2010 |
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2009 |
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2008 |
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Base charge per SFE |
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$ |
27.62 |
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$ |
25.11 |
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$ |
25.11 |
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0 gallons to 10,000 gallons |
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$ |
2.81 |
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$ |
2.55 |
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$ |
2.55 |
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10,001 gallons to 20,000 gallons |
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$ |
3.69 |
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$ |
3.35 |
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$ |
3.35 |
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20,001 gallons and above |
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$ |
6.56 |
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$ |
5.96 |
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$ |
5.96 |
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The figures in Table B reflect the amounts charged to customers and do not reflect the royalties
and fees retained by the Land Board and the District as further described below:
Water revenues are tiered based on timing and volume of water use. The more water used by a
customer in a given month, the higher the cost of additional incremental water deliveries to the
customer.
Wastewater customers are charged a flat monthly fee of $37.62 per SFE, or approximately $451 per
year per SFE, which was increased on July 1, 2010 from $35.10 per SFE, an increase of approximately
7.0%.
We also collect other immaterial fees and charges from residential customers and other end users to
cover miscellaneous administrative and service expenses, such as application fees, review fees and
permit fees.
Land Board Royalties
Pursuant to the Rangeview Water Agreements, the Land Board is entitled to royalty payments based on
a percentage of revenues earned from water sales that utilize water from the Lowry Range or Export
Water. The calculation of royalties depends on whether the customer is located on the Lowry Range
or elsewhere and whether the customer is a public or private entity. The Land Board does not
receive a royalty from wastewater services.
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Lowry Range Customers
Water service related payments from customers located on the Lowry Range generate royalties to the
Land Board at a rate of 12% of gross revenues. When either (i) metered production of water used on
the Lowry Range in any calendar year exceeds 13,000 acre-feet or (ii) 10,000 surface acres on the
Lowry Range have been rezoned to non-agricultural use, finally platted and water tap agreements
have been entered into with respect to all improvements to be constructed on such acreage, the Land
Board may elect, at its option, to receive, in lieu of its royalty of 12% of gross revenues, 50% of
the net profits derived from the sale or other disposition of water on the Lowry Range. To date
neither of these conditions has been met and such conditions are not likely to be met any time
soon.
Export Water Customers
Export Water royalties vary depending on a number of factors. When we withdraw, treat and deliver
water to customers located off the Lowry Range, incurring the costs related to this process,
royalties to the Land Board are based on our Net Revenues. Net Revenues are defined as gross
revenues less costs incurred as a direct and indirect result of incremental activity associated
with the withdrawal, treatment and delivery of the water (costs include reasonable overhead
allocations). Royalties payable to the Land Board for Export Water sales escalate based on the
amount of Net Revenue we receive and are lower for sales to a water district or similar municipal
or public entity than for sales to a private entity as noted in Table C.
Table C Royalties for Export Water Sales
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Royalty Rate |
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Private |
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Public |
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Net Revenues |
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Entity Buyer |
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Entity Buyer |
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$0 - $45,000,000 |
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12 |
% |
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10 |
% |
$45,000,001 - $60,000,000 |
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24 |
% |
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20 |
% |
$60,000,001 - $75,000,000 |
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36 |
% |
|
|
30 |
% |
$75,000,001 - $90,000,000 |
|
|
48 |
% |
|
|
40 |
% |
Over $90,000,000 |
|
|
50 |
% |
|
|
50 |
% |
District Fees
In exchange for providing water service to the Districts customers (customers on the Lowry
Range), we receive 95% of all amounts received by the District relating to water services after
deducting the required royalty to the Land Board. In exchange for providing wastewater services,
we receive 100% of the Districts wastewater tap fees and 90% of the Districts monthly wastewater
service fees, as well as the right to use or sell the reclaimed water.
Tap Participation Fee
As further described in Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations: Critical Accounting Policies and Use of Estimates section below, and Note 7
to the accompanying financial statements, we agreed to pay HP A&M 10% (this may increase to 20%
under circumstances described in Note 7 to the accompanying financial statements) of the tap fees
we receive from the next 40,000 water taps we sell from and after the date of the Arkansas River
Agreement. This is referred to as the Tap Participation Fee. As of August 31, 2010, 38,937
water taps remain subject to the Tap Participation Fee. The Tap Participation Fee is payable when
we sell water taps and receive funds from such water tap sales or other dispositions of property
purchased in the HP A&M acquisition.
Significant Customer
We had one customer, the Ridgeview Youth Services Center, which accounted for 64% of our total
revenues for each of the three years ended August 31, 2010, 2009 and 2008.
- 9 -
Our Projected Operations
This section should be read in conjunction with Item 1A Risk Factors.
Along the Front Range of Colorado, there are over 70 separate water providers with varying needs
for replacement and new water supplies. We believe that we are well positioned to assist certain
of these water providers in meeting their current and future water needs.
We design, construct and operate our existing and future water and wastewater facilities using
advanced water purification and wastewater treatment technologies which allow us to use our water
supplies in an efficient and environmentally sustainable manner. We plan to develop our water and
wastewater systems in stages to efficiently meet demands in our service areas, thereby reducing the
amount of up-front capital costs required for construction of facilities. We use third party
contractors to construct our facilities as needed. We employ a licensed water and wastewater
operator to operate our water and wastewater systems. As our systems expand, we expect to hire
additional personnel to operate our systems, which includes water production, treatment, testing,
storage, distribution, metering, billing and operations management.
Our water and wastewater systems conjunctively use surface and groundwater supplies and storage of
raw water and highly treated effluent supplies to provide a balanced sustainable water supply for
our customers. Integrating conservation practices and incentives together with effective water
reuse demonstrates our commitment to providing environmentally responsible, sustainable water and
wastewater services. Water supplies and water storage reservoirs are competitively sought
throughout the west and along the Front Range of Colorado. We believe regional cooperation among
area water providers in developing new water supplies, water storage, and transmission and
distribution systems, provides the most cost effective way of expanding and enhancing service
capacities for area water providers. We continue to discuss developing water supplies and water
storage opportunities with area water providers.
Our Denver based supplies are a valuable, locally available, resource located near the point of
use. This enables us to incrementally develop infrastructure to produce, treat and deliver water
to customers based on their growing demands. Adding our locally available supplies to our
intermediate and longer term supplies from the Arkansas River balances both current and ongoing
supplies to meet the growing water demands in the Front Range market.
Our Arkansas River supplies are located in southeast Colorado and will require an approximately
130-mile pipeline and water treatment and pumping facilities with an estimated cost of over $500
million to deliver the water to Front Range customers. Since acquiring the Arkansas River supply,
we have investigated various pipeline alignments and potential partnerships for construction of
these facilities. In order to use this water for municipal purposes we must file a change of use
application with the Colorado water court. This will likely be a lengthy process and require a
substantial amount of capital for legal and engineering services. If we successfully change the
use of our water rights to include municipal uses, we would then need to construct the pipeline and
other infrastructure to transport the water to the municipal customers. We do not plan on starting
this process in the near term and anticipate that the tap fees and usage fees we generate from taps
sold utilizing our water rights located along the Front Range, along with funding from other
pipeline partners, will be sufficient to fund the water delivery facilities when the water is
needed along the Front Range. Although we have not yet filed a change of use application, we are
working with the FLCC and other interested parties in the Arkansas River Valley to mitigate any
adverse impacts to the local communities and to make investments and decisions on farming
operations which benefit continued agricultural operations as well as providing new municipal water
supplies for the Front Range. We are conducting a rotational crop study program and participating
in discussions with area interests including the Lower Arkansas Valley Super Ditch (Super Ditch),
which is a group of Arkansas Valley irrigators who have assembled to study alternatives to
traditional buy and dry agricultural-to-municipal water transfers.
Based on our initial development plans, we expect the development of our Rangeview Water Supply to
require a significant number of high capacity deep water wells. We anticipate drilling separate
wells into each of the three principal aquifers located beneath the Lowry Range. Each well is
intended to deliver water to central water treatment facilities for treatment prior to delivery to
customers. Development of our Lowry Range surface water supplies will require facilities to divert
surface water to storage reservoirs to be located on the Lowry Range and treatment facilities to
treat the water prior to introduction into our distribution systems. Surface water diversion
facilities will be designed with capacities to divert the surface water when available
(particularly during seasonal events such as spring run-off and summer storms) for storage in
reservoirs to be constructed on the Lowry Range. Based on preliminary engineering estimates, the
full build-out of water facilities (including diversion structures, transmission pipelines,
reservoirs, and water treatment facilities) on the Lowry Range will cost in excess of
$340 million and will accommodate water service to customers located on and outside the Lowry
Range. We expect this build out to occur over an extended period of time, and we expect that tap
fees will be sufficient to fund the infrastructure costs.
- 10 -
Rangeview Metropolitan District
The District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986
for the purpose of providing water and wastewater service to the Lowry Range. The District is
required to utilize the 13,400 acre-feet of water leased to it by the Land Board to serve customers
on the Lowry Range. The District is governed by an elected board of directors. Eligible voters and
persons eligible to serve as directors of the District must own an interest in property within the
boundaries of the District. We own certain rights and real property interests which encompasses the
current boundaries of the District. The current directors of the District are Mark W. Harding and
Scott E. Lehman (both employees of Pure Cycle), and an independent board member. Pursuant to
Colorado law, directors receive $100 for each board meeting they attend, up to a maximum of $1,600
per year.
Water and Growth in Colorado
The Colorado economy, much like that of the US as a whole, experienced a continued weak economy
through 2010. Although annualized housing starts have fallen approximately 79% since 2006, the
annualized June 30, 2010 housing starts increased 14% over the annualized June 30, 2009 housing
starts, the first increase since 2006. The unemployment rate in Colorado was 8.2% at August 31,
2010, which was lower than the national unemployment rate of 9.6%. The Denver Regional Council of
Governments (DRCOG), a voluntary association of over 50 county and municipal governments in the
Denver metropolitan area, continues to estimate that the Denver metropolitan area population will
increase by about 44% from todays 2.7 million people to 3.9 million people by the year 2030. A
Statewide Water Supply Initiative report by the Colorado Water Conservation Board estimates that
the South Platte River basin, which includes the Denver metropolitan region, will grow from a
current population of approximately 3.2 million to approximately 4.9 million by the year 2030;
while the States population will increase from 4.7 million to 7.2 million. Approximately 70% of
the States projected population increase is anticipated to occur within the South Platte River
basin. Significant increases in Colorados population, particularly in the Denver metro region and
other areas in the water short South Platte River basin, together with increasing agricultural,
recreational, and environmental water demands will intensify competition for water supplies. The
estimated population increases are expected to result in demands for water services in excess of
the current capabilities of municipal service providers, especially during drought conditions. The
Statewide Water Supply Initiative estimates that population growth in the Denver region and the
South Platte River basin will result in additional water supply demands of over 400,000 acre feet
by the year 2030, which must be met with new water sources. Many cities and municipalities require
property developers to demonstrate they have sufficient water supplies for their proposed projects
before considering rezoning or annexation applications. These factors indicate that water and
availability of water will continue to be critical to growth prospects for the region and the
state, and that competition for available sources of water will continue to intensify. We focus
the marketing of our water supplies and services to developers and homebuilders that are active
along the Colorado Front Range as well as other area water providers in need of additional
supplies.
Colorados future water supply needs will be met through conservation, reuse and the development of
new supplies. Our rules and regulations for water and wastewater service call for adherence to
strict conservation measures, including low flow water fixtures, high efficiency appliances, and
advanced irrigation control devices. Additionally, our systems are designed and constructed using
a dual-pipe water distribution system to segregate the delivery of high quality potable drinking
water to our customers through one system and a second system to supply raw or reclaimed water for
irrigation demands. About one-half of the water used by a typical Denver-area residential water
customer is used for outdoor landscape and lawn irrigation. We believe that raw or reclaimed water
supplies provide the lowest cost, most environmentally sustainable water for outdoor irrigation.
Our systems will include an extensive water reclamation system, in which essentially all effluent
water from wastewater treatment plants will be reused to meet non-potable water demands. Our
dual-distribution systems demonstrate our commitment to environmentally responsible water
management policies in our water short region.
Competition
We negotiate individual service agreements with developers and/or homebuilders, cities and
municipalities to design, construct and operate water and wastewater systems and to provide
services. These service agreements address all aspects of the development of the water and
wastewater systems including:
(i) |
|
The purchase of water and wastewater taps in exchange for our obligation to construct certain
Wholesale Facilities, |
|
(ii) |
|
The establishment of payment terms, timing, capacity and location of Special Facilities (if
any), and |
(iii) |
|
Specific terms related to our provision of ongoing water and wastewater services. |
- 11 -
Although we have exclusive long-term water and wastewater service contracts for 24,000 acres of the
26,000 acre Lowry Range, including exclusive rights to serve two of the six development sections
currently proposed at the Lowry Range, providing water service to areas other than Sky Ranch and
the majority of the Lowry Range is subject to competition. Moreover, competitors have attempted to
challenge our exclusive rights to service the Lowry Range. See Item 1A Risk Factors Lowry
Range below. Alternate sources of water are available, principally from other private parties,
such as farmers or others owning water rights that have historically been used for agriculture, and
from municipalities seeking to annex new development areas in order to increase their tax base.
Our principal competition in areas close to the Lowry Range is the City of Aurora. Principal
factors affecting competition for potential purchasers of our Arkansas River water and Export Water
include the availability of water for the particular purpose, the cost of delivering the water to
the desired location including the cost of required taps, and the reliability of the water supply
during drought periods. We believe the water assets we own and have the exclusive right to use,
which have a supply capacity of approximately 180,000 SFE units, provide us a significant
competitive advantage along the Front Range. Our legal rights to the Rangeview Water Supply have
been confirmed for municipal use and a significant portion of our water supply is close to Denver
area water users. Our pricing structure is competitive and our water portfolio is well balanced
with senior surface water rights, groundwater rights, storage capacity and reclaimed water
supplies.
Employees
We currently have four full-time employees and one part-time employee.
Available Information and Website Address
Our website address is www.purecyclewater.com. We make available free of charge through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to these reports as soon as reasonably practicable after filing with the
SEC. These reports and all other material we file with the SEC may be obtained directly from the
SECs website, www.sec.gov/edgar/searchedgar/companysearch.html, under CIK code 276720. The
contents of our website are not incorporated by reference into this report. You may also read and
copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Operating information for the Public Reference Room is available by calling
the SEC at 1-800-SEC-0330.
Item 1A Risk Factors
Our business, operations, and financial condition are subject to significant risks. These risks
include those listed below and may include additional risks of which we are not currently aware or
which we currently do not believe are material. If any of the events or circumstances described in
the following risk factors actually occurs, our business could be materially adversely affected.
These risks should be read in conjunction with the other information set forth in this report.
We are dependent on the housing market and development in our targeted service areas for future
revenues.
Providing water service using our Colorado Front Range water supplies is our principal source of
future revenue. The timing and amount of these revenues will depend significantly on housing
developments being built near our water assets. The development of these areas is not within our
control, and 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.
In the event water sales are not forthcoming or development on the Lowry Range, Sky Ranch or other
developments in our targeted service area are delayed indefinitely, we would need to incur
additional short or long-term debt obligations or seek to sell additional equity to generate
operating capital, and there are no assurances that we would be successful in obtaining additional
operating capital.
Since 2006, the Colorado housing market has seen significant declines in new home construction,
which was exacerbated by instability in the credit markets. If the downturn in the homebuilding
and credit markets continues, intensifies, or if the national economy weakens further and economic
concerns intensify, it could have a significant negative impact on our business and financial
condition.
- 12 -
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. In addition, the Land
Board may not develop large portions of the Lowry Range which would significantly limit our ability
to utilize the non-Export Water specifically reserved for use on the Lowry Range.
Our construction of water and wastewater projects may expose us to certain completion, performance
and financial risks.
We intend to rely on independent contractors to construct our water and wastewater facilities.
These construction activities may involve risks, including shortages of materials and labor, work
stoppages, labor relations disputes, weather interference, engineering, environmental, permitting
or geological problems and unanticipated cost increases. These issues could give rise to delays,
cost overruns or performance deficiencies, or otherwise adversely affect the construction or
operation of our water and wastewater delivery systems. In addition, we may experience quality
problems in the construction of our systems and facilities, including equipment failures. We cannot
assure you that we will not face claims from customers or others regarding product quality and
installation of equipment placed in service by contractors.
Certain of our contracts may be fixed-price contracts, in which we may bear all or a significant
portion of the risk for cost overruns. Under these fixed-price contracts, contract prices are
established in part based on fixed, firm subcontractor quotes on contracts and on cost and
scheduling estimates. These estimates may be based on a number of assumptions, including
assumptions about prices and availability of labor, equipment and materials, and other issues. If
these subcontractor quotations or cost estimates prove inaccurate, or if circumstances change, cost
overruns may occur, and our financial results would be negatively impacted. In many cases, the
incurrence of these additional costs would not be within our control.
We may have contracts in which we guarantee project completion by a scheduled date. At times, we
may guarantee that the project, when completed, will achieve certain performance standards. If we
fail to complete the project as scheduled, or if we fail to meet guaranteed performance standards,
we may be held responsible for cost impacts and/or penalties to the customer resulting from any
delay or for the costs to alter the project to achieve the performance standards. To the extent
that these events occur and are not due to circumstances for which the customer accepts
responsibility or cannot be mitigated by performance bonds or the provisions of our agreements with
contractors, the total costs of the project would exceed our original estimates and our financial
results would be negatively impacted.
Our customers may require us to secure performance and completion bonds for certain contracts and
projects. The market environment for surety companies has become more risk averse. We secure
performance and completion bonds for our contracts from these surety companies. To the extent we
are unable to obtain bonds, we may not be awarded new contracts. We cannot assure you that we can
secure performance and completion bonds when required.
Design, construction or system failures could result in injury to third parties or damage to
property. Any losses that exceed claims against our contractors, the performance bonds and our
insurance limits at such facilities could result in claims against us. In addition, if there is a
customer dispute regarding performance of our services, the customer may decide to delay or
withhold payment to us.
Certain of our water rights are conditional decrees and require findings of reasonable diligence.
Our surface water interests and reservoir sites at the Lowry Range and our Paradise Water Supply
are conditionally decreed and are subject to a finding of reasonable diligence from the Colorado
water court every six years. To arrive at a finding of reasonable diligence, the water court must
determine that we continue to diligently pursue the development of said water rights. If the water
court is unable to make such a finding, we could lose the water right under review.
The Lowry Range conditional decrees are currently under their first review by the water court to
determine if such decrees meet the diligence criteria. If the water court does not make a
determination of reasonable diligence, it would materially adversely impact the value of our
interests in the Rangeview Water Supply.
The fiscal 2005 review of our Paradise Water Supply was completed in 2008, but not without
objectors and not without us having to agree to certain stipulations to remove the objections. In
order to continue to maintain the Paradise Water Supply, over the next six years we must (i) select
an alternative reservoir site; (ii) file an application in water court to change the place of
storage; (iii) identify specific end users and place(s) of use of the water; and (iv) identify
specific source(s) of the water rights for use.
- 13 -
We are involved in on-going discussion 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 are subject to terms of the Lease between the Land Board and the
District. The Lease 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 are
involved in ongoing discussions with the Land Board to clarify the terms of the Lease. An
unfavorable outcome in such discussions could have a material adverse effect on our financial
results.
In order to utilize the Arkansas River water acquired in fiscal 2006, we must apply for a change of
use with the water court and this may take several years to complete.
The change of use of our Arkansas River water requires a favorable ruling by the water court, which
could take several years and be a costly and contentious effort since it is anticipated that many
parties will oppose the change of use and the transfer of the water. There are several conditions
which must be satisfied prior to our receiving a change of use decree for transfer of our Arkansas
River water. One condition that we must satisfy is a showing of anti-speculation in which we, as
the applicant, must demonstrate that we have contractual obligations to provide water service to
customers prior to the water court ruling on the transfer of a water right. The water court is also
expected to limit the transfer to the consumptive use portion of the water right and to address
changing the historic use of the water from agricultural uses to other uses such as municipal and
industrial use. We expect to face opposition to any consumptive use calculations of the historic
agricultural uses of this water. The water court may impose conditions on our transfer of the water
rights such as requiring us to mitigate the loss of the farming tax base, imposing re-vegetation
requirements to convert soils from irrigated to non-irrigated, and imposing water quality measures.
Any such conditions will likely increase the cost of transferring the water rights.
We may not be able to obtain sufficient capital to develop our water rights, in particular the
Arkansas River water.
Development of water rights requires a substantial capital investment. We anticipate financing
water and wastewater systems primarily through the sale of water taps and water delivery charges to
users. However, we cannot assure you that these sources of cash will be sufficient to cover our
capital costs. Moreover, the development of the Arkansas River water will require a pipeline and
other infrastructure to deliver the water to the Front Range, which is anticipated to cost over
$500 million. We likely would be required to partner with others to finance a project of this
magnitude and there is no assurance we would be able to obtain the financing necessary to develop
our Arkansas River water.
Our net losses may continue and we may not have sufficient liquidity to pursue our business
objectives.
We have experienced significant net losses, our cash flows from operations have not been sufficient
to fund our operations in the past and we have been required to raise debt and equity capital to
remain in operation. Since 2004, we have raised approximately $31.5 million to support our
operations through (i) the issuance of approximately $26.1 million of common stock (which includes
approximately $5.5 million of common stock sold in September 2010), and (ii) the issuance of $5.2
million of convertible debt in September 2010. Our ability to fund our operational needs and meet
our business objectives will depend on our ability to generate cash from future operations. We
currently have a limited number of customers. If our future cash flows from operations and other
capital resources are not sufficient to fund our operations and the significant capital expenditure
requirements to build our water delivery systems, we may be forced to reduce or delay our business
activities, or seek to obtain additional debt or equity capital, which may not be available on
acceptable terms, or at all.
The rates we are allowed to charge customers on the Lowry Range are limited by the Lease with the
Land Board and our contract with the District and may not be sufficient to cover our costs of
construction and operation.
The prices we may charge for our water and wastewater services on the Lowry Range are subject to
pricing regulations set forth in the Lease with the Land Board. Both the tap fees and our usage
rates and charges are capped at the average of the rates of three surrounding water providers.
Annually we survey the tap fees and rates of the surrounding providers and we typically adjust our
tap fees and rates and charges based on the average of those charged by this group. Our costs
associated with the construction of water delivery systems and the production, treatment and
delivery of our water are subject to market conditions and other factors, which may increase at a
significantly greater rate than the prices charged by the three surrounding providers. Factors
beyond our control and which cannot be predicted, such as government regulations, drought, water
contamination and severe weather conditions, like tornadoes and floods, may result in additional
labor and material costs that may not be
recoverable under our rate structure. Either increased customer demand or increased water
conservation may also impact the overall cost of our operations. If the costs for construction and
operation of our water services, including the cost of extracting our groundwater, exceed our
revenues, we would be providing service to the Lowry Range at a loss. We may petition the Land
Board for rate increases; however, there can be no assurance that the Land Board would approve a
rate increase request.
- 14 -
In the event of default by HP A&M on the promissory notes secured by deeds of trust on our
properties, we would be required to cure the defaults or lose some of our properties and the water
rights associated with such properties.
60 of the 80 properties we acquired from HP A&M (which relate to approximately 75% of our Arkansas
River water rights) are subject to promissory notes owed by HP A&M. Principal and interest on the
notes total approximately $11.0 million as of August 31, 2010. Each of the notes is secured by
deeds of trust on one of our properties, but the notes are solely the responsibility of HP A&M.
Because of HP A&Ms financial position and the substantial penalties imposed on HP A&M in the event
of a default, the likelihood of HP A&M defaulting on the notes is deemed remote. As a result the
promissory notes are not reflected on our balance sheet. If HP A&M was to default on any of the
notes, we have the right to cure said default and recover defined amounts of our stock and Tap
Participation Fee from HP A&M. If we did not cure the defaults, we would lose the land and water
rights securing the defaulted note.
We have a limited number of employees and may not be able to manage the increasing demands of our
expanding operations.
We have a limited number of employees to administer our existing assets, interface with applicable
governmental bodies, market our services and plan for the construction and development of our
future assets. We may not be able to maximize the value of our water assets because of our limited
manpower. We depend significantly on the services of Mark W. Harding, our President and Chief
Financial Officer. The loss of Mr. Harding would cause a significant interruption of our
operations. The success of our future business development and ability to capitalize on growth
opportunities depends on our ability to attract and retain additional experienced and qualified
persons to operate and manage our business. State regulations set the training, experience and
qualification standards required for our employees to operate specific water and wastewater
facilities. Failure to find state-certified and qualified employees to support the operation of our
facilities could put us at risk for, among other things, regulatory penalties (including fines and
suspension of operations), operational errors at the facilities, improper billing and collection
processes, and loss of contracts and revenues. We cannot assure you that we can successfully
manage our assets and our growth.
We may be adversely affected by any future decision by the Colorado Public Utilities Commission to
regulate us as a public utility.
The Colorado Public Utilities Commission (CPUC) regulates investor-owned water companies
operating for the purpose of supplying water to the public. The CPUC regulates many aspects of
public utilities operations, including establishing water rates and fees, initiating inspections,
enforcement and compliance activities and assisting consumers with complaints.
We do not believe we are a public utility under Colorado law. We currently provide services by
contract to the District, which supplies the public. Quasi-municipal metropolitan districts, such
as the District, are exempt by statute from regulation by the CPUC. However, the CPUC could attempt
to regulate us as a public utility. If this were to occur, we might incur significant expense
challenging the CPUCs assertion of jurisdiction, and we may be unsuccessful. In the future,
existing regulations may be revised or reinterpreted, and new laws and regulations may be adopted
or become applicable to us or our facilities. If we become regulated as a public utility, our
ability to generate profits could be limited and we might incur significant costs associated with
regulatory compliance.
There are many obstacles to our ability to sell our Paradise Water Supply.
We have never earned revenues from our Paradise Water Supply. Our ability to convert our Paradise
Water Supply into an income generating asset is limited. Due to the cost of developing western
slope water and agreements with other western slope water interests, our use of the Paradise Water
Supply is limited to opportunities along the western slope. As part of our water court decree for
the Paradise Water Supply, we are permitted to construct a storage facility on the Colorado River.
However, due to a stipulation entered into with various objectors to our Paradise Water rights and
the strict regulatory requirements for constructing a reservoir on the main stem of the Colorado
River, we do not anticipate completing the storage facility at its decreed location. We cannot
assure you that we will ever be able to make use of this asset or sell the water profitably.
- 15 -
Conflicts of interest may arise relating to the operation of the District.
Our officers and employees constitute a majority of the directors of the District. Pure Cycle,
along with our officers and employees and one unrelated individual, own, as tenants in common, the
40 acres that constitute the District. We have made loans to the District to fund its
operations. At August 31, 2010, total principal and interest owed to us by the District was
approximately $519,800. Pursuant to our Service Agreement with the District, the District receives
fees of 5% of the revenues from the sale of water on the Lowry Range. Proceeds from the fee
collections will initially be used to repay the Districts obligations to us, but after these loans
are repaid, the District is not required to use the funds to benefit Pure Cycle. We have received
benefits from our activities undertaken in conjunction with the District, but conflicts may arise
between our interests and those of the District, and with our officers who are acting in dual
capacities in negotiating contracts to which both we and the District are parties. We expect that
the District will expand when more properties are developed and become part of the District, and
our officers acting as directors of the District will have fiduciary obligations to those other
constituents. There can be no assurance that all conflicts will be resolved in the best interests
of Pure Cycle and its shareholders. In addition, other landowners coming into the District will be
eligible to vote and to serve as directors of the District. There can be no assurances that our
officers and employees will remain as directors of the District or that the actions of a
subsequently elected board would not have an adverse impact on our operations.
We are required to maintain stringent water quality standards and are subject to regulatory and
environmental risks.
We must provide water that meets all federal and state regulatory water quality standards and
operate our water and wastewater facilities in accordance with these standards. We face
contamination and pollution risks with respect to our water supplies. Improved detection
technology, increasingly stringent regulatory requirements, and heightened consumer awareness of
water quality issues contribute to an environment of increased focus on water quality. We cannot
assure you that in the future we will be able to reduce the amounts of contaminants in our water to
acceptable levels. In addition, the standards that we must meet are constantly changing and
becoming more stringent. Future changes in regulations governing the supply of drinking water and
treatment of wastewater may have a material adverse impact on our financial results.
In October 2009, the Water Quality Control Division of the Colorado Department of Public Health and
Environment advised us of proposed changes to the discharge permit for the Districts Coal Creek
wastewater reclamation facility. The revised permit requires compliance with effluent ammonia
limitations, use of E. coli rather than fecal coliform as an indicator of effluent disinfection
efficacy, and a more stringent (lower) effluent chlorine residual limitation. The revised permit
requires us to comply with the new criteria by October 2014. Although we do not anticipate having
significant difficulties complying with the revised permit, there are no assurances that we will be
able to comply with future requirements or that the cost of such compliance will be covered by the
rate structure required by the Rangeview Water Agreements.
Our water supplies are subject to contamination, including contamination from naturally
occurring compounds, pollution from man-made sources and intentional sabotage. In addition, we
handle certain hazardous materials at our water treatment facilities, primarily sodium
hypochlorite. Any failure of our operation of the facilities or any contamination of our supplies,
including sewage spills, noncompliance with water quality standards, hazardous materials leaks and
spills, and similar events could expose us to environmental liabilities, claims and litigation
costs. If any of these events occur, we may have to interrupt the use of that water supply until
we are able to substitute the supply from another source or treat the contaminated supply. We
cannot assure you that we will successfully manage these issues, and failure to do so could have a
material adverse effect on our future results of operations.
Our business is subject to seasonal fluctuations and weather conditions which could affect demand
for our water service and our revenues.
We depend on an adequate water supply to meet the present and future demands of our customers and
to continue our expansion efforts. Conditions beyond our control may interfere with our water
supply sources. Drought and overuse may limit the availability of water. These factors might
adversely affect our ability to supply water in sufficient quantities to our customers and our
revenues and earnings may be adversely affected. Additionally, cool and wet weather, as well as
drought restrictions and our customers conservation efforts, may reduce consumption demands, also
adversely affecting our revenue and earnings. Furthermore, freezing weather may also contribute to
water transmission interruptions caused by pipe and main breakage. If we experience an interruption
in our water supply, it could have a material adverse effect on our financial condition and results
of operations. Demand for our water during the warmer months is generally greater than during
cooler months due primarily to additional requirements for water in connection with cooling
systems, irrigation systems and other outside water use. Throughout the year, and particularly
during typically warmer months, demand will vary with temperature
and rainfall levels. If temperatures during the typically warmer months are cooler than expected or
there is more rainfall than expected, the demand for our water may decrease and adversely affect
our revenues.
- 16 -
Item 1B Unresolved Staff Comments
We have no unresolved Staff comments.
Item 2 Properties
Corporate office We occupy approximately 1,000 square feet at a cost of approximately $1,400, per
month, at the address shown on the cover of this Form 10-K. This is leased pursuant to a three
year operating lease agreement with a third party.
Water related assets In addition to the water rights we own in the Denver metropolitan area which
are described in Item 1 Our Water Assets, we also own a 500,000 gallon water tank, a deep water
well and pump station, and approximately four miles of water pipeline in Arapahoe County Colorado.
Additionally, although owned by the District, we operate and maintain another 500,000 gallon deep
water well, water tank and pump station, two alluvial wells, the Districts wastewater treatment
plant, and water distribution and wastewater collection pipelines that serve customers located at
the Lowry Range. These assets are used to provide service to our existing customers.
Other equipment In addition to the real property we own in the Arkansas River Valley as described
in Item 1 Our Water Assets Arkansas River Water, we also own various water delivery fixtures
located on our real properties. These items consist mainly of irrigation pumps, irrigation
ditches, and irrigation pipelines as well as various structures and agricultural related buildings.
Item 3 Legal Proceedings
We are not involved in any litigation or legal proceedings as of the date of the filing of this
Form 10-K.
PART II
Item 5 Market for Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Our common stock is traded on the NASDAQ Capital Market under the symbol PCYO. The high and low
sales prices of our common stock, by quarter, for the fiscal years ended August 31, 2010 and 2009
are presented with the Selected Quarterly Financial Information in Note 15 to the accompanying
financial statements.
(b) Holders
On October 29, 2010, there were approximately 1,800 holders of record of our common stock.
(c) Dividends
We have never paid any dividends on our common stock and expect for the foreseeable future to
retain all of our earnings from operations, if any, for use in expanding and developing our
business. Any future decision as to the payment of dividends will be at the discretion of our board
of directors and will depend upon our earnings, financial position, capital requirements, plans for
expansion and such other factors as our board of directors deems relevant. The terms of our Series
B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the
Series B Preferred Stock have been paid. The terms of the Convertible Note (as defined in Item 7 -
Managements Discussion and Analysis of Financial Condition and Results of Operations) prohibit the
payment of dividends without the consent of the Convertible Note holder.
- 17 -
(d) Securities authorized for issuance under equity compensation plans
Table D Securities Authorized for Issuance Under Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities remaining |
|
|
|
Number of securities to be |
|
|
Weighted-average |
|
|
available for future issuance under |
|
|
|
issued upon exercise of |
|
|
exercise price of |
|
|
equity compensation plans |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities reflected in |
|
Plan category |
|
warrants and rights |
|
|
warrants and rights |
|
|
column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
Approved by security holders |
|
|
262,500 |
|
|
$ |
6.26 |
|
|
|
1,303,311 |
|
Not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
262,500 |
|
|
$ |
6.26 |
|
|
|
1,303,311 |
|
|
|
|
|
|
|
|
|
|
|
(e) Performance Graph 1
This graph compares the cumulative total return of our common stock for the last five fiscal years
with the cumulative total return for the same period of the S&P 500 Index and a peer group
index2. The graph assumes the investment of $100 in common stock in each of the indices
as of the market close on August 31 and reinvestment of all dividends.
Cumulative Returns For the fiscal years ended August 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Pure Cycle Corporation |
|
$ |
100.00 |
|
|
$ |
112.52 |
|
|
$ |
103.95 |
|
|
$ |
82.18 |
|
|
$ |
44.22 |
|
|
$ |
40.95 |
|
S&P 500 |
|
$ |
100.00 |
|
|
$ |
108.88 |
|
|
$ |
125.36 |
|
|
$ |
111.40 |
|
|
$ |
91.06 |
|
|
$ |
95.53 |
|
Peer Group |
|
$ |
100.00 |
|
|
$ |
100.68 |
|
|
$ |
105.20 |
|
|
$ |
92.40 |
|
|
$ |
86.21 |
|
|
$ |
96.37 |
|
|
|
|
1. |
|
This performance graph is not soliciting material, is not deemed filed with the
Commission and is not to be incorporated by reference in any of our filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date hereof and irrespective of any general incorporation
language in any such filing. |
|
2. |
|
The Peer Group consists of the following companies that have been selected on the basis
of industry focus or industry leadership: American States Water Company, Aqua America,
Inc., Artesian Resources Corp., California Water Service Group, Connecticut Water Service,
Inc., Middlesex Water Company, Pennichuck Corp., SJW Corp., and The York Water Company. |
- 18 -
(f) Recent Sales of Unregistered Securities; use of proceeds from registered securities
There were no sales of unregistered securities during the three months ended August 31, 2010.
(g) Purchase of equity securities by the issuer and affiliated purchasers
We did not purchase any of our equity securities during the three months ended August 31,
2010.
- 19 -
Item 6 Selected Financial Data
Table E Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended August 31, |
|
In thousands (except per share data) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 * |
|
Summary Statement of Operations items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
264.1 |
|
|
$ |
260.2 |
|
|
$ |
282.4 |
|
|
$ |
265.7 |
|
|
$ |
271.7 |
|
Net loss |
|
$ |
(5,391.3 |
) |
|
$ |
(5,728.1 |
) |
|
$ |
(6,926.7 |
) |
|
$ |
(6,914.7 |
) |
|
$ |
(792.9 |
) |
Basic and diluted loss per share |
|
$ |
(0.27 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.05 |
) |
Weighted average shares outstanding |
|
|
20,207 |
|
|
|
20,207 |
|
|
|
20,189 |
|
|
|
18,590 |
|
|
|
14,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 * |
|
Summary Balance Sheet Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
1,819.6 |
|
|
$ |
3,990.4 |
|
|
$ |
5,502.2 |
|
|
$ |
7,288.4 |
|
|
$ |
3,121.4 |
|
Total assets |
|
$ |
106,377.8 |
|
|
$ |
108,091.1 |
|
|
$ |
109,899.4 |
|
|
$ |
111,891.9 |
|
|
$ |
108,833.9 |
|
Current liabilities |
|
$ |
171.3 |
|
|
$ |
138.1 |
|
|
$ |
163.9 |
|
|
$ |
183.3 |
|
|
$ |
380.1 |
|
Long term liabilities |
|
$ |
63,746.5 |
|
|
$ |
60,183.8 |
|
|
$ |
56,567.8 |
|
|
$ |
53,863.8 |
|
|
$ |
53,789.1 |
|
Total liabilities |
|
$ |
63,917.8 |
|
|
$ |
60,321.9 |
|
|
$ |
56,731.6 |
|
|
$ |
54,047.1 |
|
|
$ |
54,169.2 |
|
Equity |
|
$ |
42,460.0 |
|
|
$ |
47,769.2 |
|
|
$ |
53,167.8 |
|
|
$ |
57,844.8 |
|
|
$ |
54,664.7 |
|
We did not declare or pay any cash dividends in any of the five fiscal years presented.
The following items had a significant impact on our operations:
|
|
In fiscal 2010, 2009, 2008 and 2007, respectively, we imputed approximately $3.6 million,
$3.7 million, $4.4 million and $4.7 million of interest related to the Tap Participation Fee
payable to HP A&M. |
|
|
In fiscal 2009, we recognized gains on the sale of non-irrigated land totaling
approximately $59,700. |
|
|
In fiscal 2008 and 2007, respectively, we recognized approximately $273,700 of losses and
$1.04 million of gains related to the acquisition of certain CAA interests (explained further
in Note 5 to the accompanying financial statements). In the 2007 acquisitions, certain of the
parties were deemed related to the Company and therefore, approximately $765,100 of this gain
was recorded as a contribution of capital in fiscal 2007. The remaining $271,100 of gain is
included in the statement of operations. |
|
|
In fiscal 2006, we acquired water and real property interests in the Arkansas River Valley.
The consideration for these assets consisted of equity valued at approximately $36.2 million
and a Tap Participation Fee agreement valued at approximately $45.7 million (at August 31,
2006), which is payable when we sell water taps. The total consideration of approximately
$81.9 million was allocated to the acquired assets based on each assets relative fair value. |
|
|
In fiscal 2006, we recognized $390,900 of gain related to the extinguishment of debt and
the acquisition of certain CAA interests. |
Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The discussion and analysis below includes certain forward-looking statements that are subject to
risks, uncertainties and other factors, as described in Risk Factors and elsewhere in this Annual
Report on Form 10-K, that could cause our actual growth, results of operations, performance,
financial position and business prospects and opportunities for this fiscal year and the periods
that follow to differ materially from those expressed in, or implied by, those forward-looking
statements. Readers are cautioned that forward-looking statements contained in this Form 10-K
should be read in conjunction with our disclosure
under the heading: SAFE HARBOR STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 on page 4.
- 20 -
The following Managements Discussion and Analysis (MD&A) is intended to help the reader
understand the results of operations and our financial condition and should be read in conjunction
with the accompanying financial statements and the notes thereto included in Part II, Item 8 of
this Annual Report on Form 10-K. The following sections focus on the key indicators reviewed by
management in evaluating our financial condition and operating performance, including the
following:
|
|
Revenue generated from providing water and wastewater services; |
|
|
Expenses associated with developing our water assets; and |
|
|
Cash available to continue development of our water rights and service agreements. |
Our MD&A section includes the following items:
|
|
Our Business a general description of our business, our services and our business
strategy. |
|
|
Critical Accounting Policies and Estimates a discussion of our critical accounting
policies that require critical judgments, assumptions and estimates. |
|
|
Results of
Operations an analysis of our results of operations for the three fiscal
years presented in our financial statements. We present our discussion in the MD&A in
conjunction with the accompanying Financial Statements. |
|
|
Liquidity, Capital Resources and Financial Position an analysis of our cash position and
cash flows, as well as a discussion of our financing arrangements. |
Our Business
We are a water and wastewater service provider that contracts with land owners, land developers,
home builders, cities, and municipalities to design, construct, operate and maintain water and
wastewater systems using our balanced water portfolio consisting of surface water and groundwater
supplies, surface water storage, aquifer storage, and reclaimed water supplies. We generate cash
flows and revenues by (i) selling taps (connections) to our water and wastewater systems and/or
(ii) monthly service fees and consumption charges from metered deliveries.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (GAAP) requires management to make estimates and assumptions
about future events that affect the amounts reported in the financial statements and accompanying
notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results inevitably will differ
from those estimates, and such differences may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our financial statements
include estimates associated with the timing of revenue recognition, the impairment analysis of our
water rights, managements valuation of the Tap Participation Fee, and share-based compensation.
Below is a summary of these critical accounting policies.
Revenue Recognition
Our revenues consist mainly of tap fees and monthly service fees. As further described in Note 2
to the accompanying financial statements, proceeds from tap sales are deferred upon receipt and
recognized in income based on whether we own or do not own the facilities constructed with the
proceeds. We recognize tap fees derived from agreements for which we construct infrastructure
others own as revenue, along with the associated costs of construction, pursuant to the
percentage-of-completion method. The percentage-of-completion method requires management to
estimate the percent of work that is completed on a particular project, which could change
materially throughout the duration of the construction period and result in significant
fluctuations in revenue recognized during the reporting periods throughout the construction
process. We did not recognize any revenues pursuant to the percentage-of-completion method during
the fiscal years ended August 31, 2010, 2009 or 2008.
- 21 -
Tap fees derived from agreements for which we own the infrastructure are recognized as revenue
ratably over the estimated service life of the assets constructed with said fees. Although the cash
will be received up-front and most construction will be completed within one year of receipt of the
proceeds, revenue recognition may occur over 30 years or more. Management is required to estimate
the service life, and currently the service life is based on the estimated useful accounting life
of the assets constructed with the tap fees. The useful accounting life of the asset is based on
managements estimation of an accounting based useful life and may not have any correlation to the
actual life of the asset or the actual service life of the tap. This is deemed a reasonable
recognition life of the revenues because the depreciation of the assets constructed generating
those revenues will be matched with the revenues.
Monthly water usage fees and monthly wastewater service fees are recognized in income each month as
earned.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment at least annually or whenever management believes
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. We measure recoverability of assets to be held and used by a comparison of the
carrying amount of an asset to estimated future undiscounted net cash flows we expect to be
generated by the eventual use of the asset. If such assets are considered to be impaired and
therefore the costs of the assets deemed to be unrecoverable, the impairment to be recognized would
be the amount by which the carrying amount of the assets exceeds the estimated fair value of the
assets.
Our water assets will be utilized in the provision of water services which inevitably will
encompass many housing and economic cycles. Our service capacities are quantitatively estimated
based on an average single family home utilizing .4 acre-feet of water per year. Our water
supplies are legally decreed to us through the water court. The water court decree allocates a
specific amount of water (subject to continued beneficial use) which historically has not changed.
Thus, individual housing and economic cycles typically do not have an impact on the number of
connections we can serve with our supplies or the amount of water legally decreed to us relating
to these supplies.
We report assets to be disposed of at the lower of the carrying amount or fair value less costs to
sell.
Our Front Range and Arkansas River Water Rights
We determine the undiscounted cash flows for our Denver based assets and the Arkansas River Valley
assets by estimating tap sales to potential new developments in our service area and along the
Front Range, using estimated future tap fees less estimated costs to provide water services, over
an estimated development period. Actual new home development in our service area and the Front
Range, actual future tap fees, and actual future operating costs, inevitably will vary
significantly from our estimates, which could have a material impact on our financial statements
as well as our results of operations. We performed an impairment analysis as of August 31, 2010,
and determined that our Rangeview Water Supply and Arkansas River water assets were not impaired
and their costs were deemed recoverable. Our impairment analysis is based on development
occurring within areas in which we have service agreements (e.g. Sky Ranch and the Lowry Range) as
well as in surrounding areas, including the Front Range and the I-70 corridor. We estimate that
we have the ability to provide water service to approximately 180,000 SFEs using our combined
Rangeview Water Supply and Arkansas River water assets which have a carrying value of
approximately $97.2 million as of August 31, 2010. Based on the carrying value of our water
rights, the long term and uncertain nature of any development plans, current tap fees of $22,500
and estimated gross margins, we estimate that we would need to add approximately 8,000 new water
connections (requiring approximately 4.8% of our portfolio) to generate net revenues sufficient to
recover the costs of our Rangeview Water Supply and Arkansas River water assets. If tap fees
increase 5%, we would need to add approximately 7,600 new water taps (requiring approximately 4.5%
of our portfolio) to recover the costs of our Rangeview Water Supply and Arkansas River water
assets. If tap fees decrease 5%, we would need to add approximately 8,400 new water taps
(requiring approximately 5.0% of our portfolio) to recover the costs of our Rangeview Water Supply
and Arkansas River water assets.
Although changes in the housing market throughout the Front Range have delayed our estimated tap
sale projections, these changes do not alter our water ownership, nor our service obligations to
existing properties or the number of SFEs we can service.
- 22 -
Our Paradise Water Rights
Every six years the Paradise Water Supply is subject to a finding of reasonable diligence review by
the water court and the State Engineer. For a favorable finding we must demonstrate that we are
diligently pursuing the development of the water rights. If we do not receive a favorable finding
of reasonable diligence, our right to the Paradise Water Supply would be lost and we would be
required to impair the Paradise Water Supply asset. The most recent diligence review was started
in our fiscal 2005 and was completed in 2008, but not without objectors and not without us having
to agree to certain stipulations to remove the objections. In order to continue to maintain the
Paradise water right, over the next six years we must (i) select an alternative reservoir site;
(ii) file an application in water court to change the place of storage; (iii) identify specific end
users and place(s) of use of the water; and (iv) identify specific source(s) of the water rights
for use. We fully intend to meet the stipulations by the date of the next diligence review.
For our Paradise Water Supply, we determined the undiscounted cash flows by estimating the
proceeds we could derive from the leasing of the water rights to commercial, industrial, and
agricultural users along the western slope of Colorado, and based on the impairment analysis we
completed at August 31, 2010, we believe the Paradise Water Supply is not impaired and the costs
are deemed recoverable.
Tap Participation Fee
In 2006 we acquired approximately 17,500 acres of irrigated land together with approximately
60,000 acre-feet of Arkansas River water rights from HP A&M. Along with common stock issued to HP
A&M, we agreed to pay HP A&M 10% (this may increase to 20% under circumstances described in Note 7
to the accompanying financial statements) of tap fees we receive from the next 40,000 water taps
we sell from and after the date of the Arkansas River Agreement, of which 38,937 water taps remain
to be paid as of August 31, 2010. The Tap Participation Fee is payable when we sell water taps
and receive funds from such water tap sales or other dispositions of property purchased in the HP
A&M acquisition. The Tap Participation Fee liability is valued by estimating new home development
in our 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 metropolitan area
applied to an estimated development pattern supported by historical development patterns of
certain master planned communities in the Denver metropolitan area. This development pattern was
then applied to projected future water tap fees determined by using historical water tap fee
trends. Based on updated new home activity in the Denver metropolitan area, we updated the
estimated discounted cash flow analysis as of February 28, 2009. We completed an update to our
analysis of the fair value of the Tap Participation Fee as of August 31, 2010. We determined that
changes in the projected estimated discounted cash flows did not materially impact our February
28, 2009 fair value analysis. Actual new home development in our service area and actual future
tap fees inevitably will vary significantly from our estimates which could have a material impact
on our financial statements as well as our results of operations. An important component in our
estimate of the value of the Tap Participation Fee, which is based on historical trends, is that
we reasonably expect water tap fees to continue to increase in the coming years. Tap fees are a
market based pricing metric which in part demonstrates the increasing costs to acquire and develop
new water supplies. It is thus a market metric which in part demonstrates the increasing value of
our water assets. We continue to assess the value of the Tap Participation Fee liability and
update its valuation analysis whenever events or circumstances indicate the assumptions used to
estimate the value of the liability have changed materially. The difference between the net
present value and the estimated realizable value will be imputed as interest expense using the
effective interest method over the estimated development period utilized in the valuation of the
Tap Participation Fee.
Obligations Payable by HP A&M
60 of the 80 properties we acquired pursuant to the Arkansas River Agreement are subject to
outstanding promissory notes with principal and accrued interest totaling approximately $11.0
million at August 31, 2010. 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. However, 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 defaults.
If we do not cure the defaults, we will lose the properties securing the defaulted notes and the
water rights associated with said properties. If HP A&M defaults on any of 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, which is the primary reason
these notes are not reflected on our balance sheet, we 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 August 31, 2010.
- 23 -
Share-based compensation
We estimate the fair value of share-based payment awards made to key employees and directors on the
date of grant using the Black-Scholes option-pricing model. We then expense the fair value over
the vesting period of the grant using a straight-line expense model. The fair value of share-based
payments requires management to estimate/calculate various inputs such as the volatility of the
underlying stock, the expected dividend rate, the estimated forfeiture rate and an estimated life
of each option. These assumptions are based on historical trends and estimated future actions of
option holders and may not be indicative of actual events which may have a material impact on our
financial statements. See Note 8 to the accompanying financial statements for further details on
share-based compensation expense.
Results of operations
Executive Summary
The results of our operations for the fiscal years ended August 31, 2010, 2009 and 2008 were as
follows:
Table F Summary Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Fiscal Years Ended August 31, |
|
|
2010-2009 |
|
|
2009-2008 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Millions of gallons of water delivered |
|
|
33.1 |
|
|
|
33.9 |
|
|
|
42.8 |
|
|
|
(0.8 |
) |
|
|
-2 |
% |
|
|
(8.9 |
) |
|
|
-21 |
% |
Water revenues generated |
|
$ |
140,700 |
|
|
$ |
137,400 |
|
|
$ |
159,600 |
|
|
$ |
3,300 |
|
|
|
2 |
% |
|
$ |
(22,200 |
) |
|
|
-14 |
% |
Water delivery operating costs incurred
(excluding depreciation and depletion) |
|
$ |
52,400 |
|
|
$ |
54,700 |
|
|
$ |
58,600 |
|
|
$ |
(2,300 |
) |
|
|
-4 |
% |
|
$ |
(3,900 |
) |
|
|
-7 |
% |
Water delivery gross margin % |
|
|
63 |
% |
|
|
60 |
% |
|
|
63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wastewater treatment revenues |
|
$ |
67,600 |
|
|
$ |
67,000 |
|
|
$ |
67,000 |
|
|
$ |
600 |
|
|
|
1 |
% |
|
$ |
|
|
|
|
0 |
% |
Wastewater treatment operating costs
incurred |
|
$ |
20,800 |
|
|
$ |
20,200 |
|
|
$ |
18,900 |
|
|
$ |
600 |
|
|
|
3 |
% |
|
$ |
1,300 |
|
|
|
7 |
% |
Wastewater treatment gross margin % |
|
|
69 |
% |
|
|
70 |
% |
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$ |
1,808,200 |
|
|
$ |
1,942,200 |
|
|
$ |
2,316,800 |
|
|
$ |
(134,000 |
) |
|
|
-7 |
% |
|
$ |
(374,600 |
) |
|
|
-16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses |
|
$ |
5,391,300 |
|
|
$ |
5,728,100 |
|
|
$ |
6,926,700 |
|
|
$ |
(336,800 |
) |
|
|
-6 |
% |
|
$ |
(1,198,600 |
) |
|
|
-17 |
% |
Water and Wastewater Usage Revenues
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 water providers. Table B in Item 1 Business, outlines our tiered
pricing structure and changes during the fiscal years ended August 31, 2010, 2009 and 2008,
respectively.
Our wastewater customers are charged flat monthly fees based on their number of tap connections.
Fiscal 2010 compared to fiscal 2009
Water deliveries dropped approximately 2% in fiscal 2010 because our largest customer closed
certain student housing facilities which in turn reduced its water usage. Despite the drop in
water usage, water revenues increased 2% during fiscal 2010 primarily as a result of increased
usage fees. Water delivery gross margin increased 3% in fiscal 2010. This was due to our efforts
to manage costs. In addition, due to reductions in water usage, we were able to positively manage
the energy usage at our facilities. Finally, we increased water usage fees effective July, 2010.
Wastewater fees increased approximately 1% in fiscal 2010, which is a result of increased monthly
fees effectively July 1, 2010. Wastewater gross margin decreased approximately 1% in fiscal 2010,
which is not a material change.
- 24 -
Fiscal 2009 compared to fiscal 2008
Water deliveries dropped approximately 21% in fiscal 2009 due mainly to higher precipitation in
fiscal 2009, particularly in the late spring and early summer months, the main irrigation months.
Water usage fees decreased approximately 14% in fiscal 2009 mainly as a result of the decreased
water usage, partially offset by increased water usage fees. Gross margins for water services
decreased approximately 3% in fiscal 2009 due to the decreased water usage as noted above. The
decrease in the gross margin percentage was not as large as the decrease in water usage due to our
efforts to manage costs and increasing water usage rates.
Wastewater usage fees did not change during 2009. Gross margins for wastewater services decreased
2% in fiscal 2009 due to timing of various required wastewater quality testing procedures.
General and Administrative and Other Expenses
General and administrative (G&A) expenses for the fiscal years ended August 31, 2010, 2009 and
2008 were impacted by the share-based compensation expenses as follows (amounts are approximate):
Table G G&A Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Fiscal Years Ended August 31, |
|
|
2010-2009 |
|
|
2009-2008 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
G&A expenses as reported |
|
$ |
1,808,200 |
|
|
$ |
1,942,200 |
|
|
$ |
2,316,300 |
|
|
$ |
(134,000 |
) |
|
|
-7 |
% |
|
$ |
(374,100 |
) |
|
|
-16 |
% |
Share-based compensation expenses |
|
|
(87,600 |
) |
|
|
(325,500 |
) |
|
|
(351,500 |
) |
|
|
237,900 |
|
|
|
-73 |
% |
|
|
26,000 |
|
|
|
-7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses less share-based
compensation expenses |
|
$ |
1,720,600 |
|
|
$ |
1,616,700 |
|
|
$ |
1,964,800 |
|
|
$ |
103,900 |
|
|
|
6 |
% |
|
$ |
(348,100 |
) |
|
|
-18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in G&A expenses, with and without share-based compensation expenses, are mainly
attributable to the following:
Fiscal 2010 G&A expenses, including share-based compensation expenses, decreased approximately 7%,
while fiscal 2009 G&A expenses decreased approximately 16%. These decreases are mainly a result of
managements continued cost cutting efforts in light of the economy and lack of new home
development in our targeted service areas. The significant approximate amounts included in G&A for
the years ended August 31, 2010, 2009 and 2008, respectively were:
Table H Signficant Balances in G&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Fiscal Years Ended August 31, |
|
|
2010-2009 |
|
|
2009-2008 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Salary and salary related expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including share-based compensation |
|
$ |
606,600 |
|
|
$ |
814,800 |
|
|
$ |
791,300 |
|
|
$ |
(208,200 |
) |
|
|
-26 |
% |
|
$ |
23,500 |
|
|
|
3 |
% |
Excluding share-based compensation |
|
$ |
518,900 |
|
|
$ |
489,300 |
|
|
$ |
465,800 |
|
|
$ |
29,600 |
|
|
|
6 |
% |
|
$ |
23,500 |
|
|
|
5 |
% |
FLCC water assessment fees |
|
$ |
362,800 |
|
|
$ |
339,300 |
|
|
$ |
330,500 |
|
|
$ |
23,500 |
|
|
|
7 |
% |
|
$ |
8,800 |
|
|
|
3 |
% |
Professional fees |
|
$ |
244,500 |
|
|
$ |
292,100 |
|
|
$ |
386,000 |
|
|
$ |
(47,600 |
) |
|
|
-16 |
% |
|
$ |
(93,900 |
) |
|
|
-24 |
% |
Public entity related expenses |
|
$ |
74,300 |
|
|
$ |
61,100 |
|
|
$ |
66,700 |
|
|
$ |
13,200 |
|
|
|
22 |
% |
|
$ |
(5,600 |
) |
|
|
-8 |
% |
Consulting fees |
|
$ |
55,700 |
|
|
$ |
83,700 |
|
|
$ |
227,600 |
|
|
$ |
(28,000 |
) |
|
|
-33 |
% |
|
$ |
(143,900 |
) |
|
|
-63 |
% |
Salary and salary related expenses including share-based expenses decreased 26% from 2009 to 2010
as a result of the vesting of options prior to 2010 and decreases in our stock price. The
decreases in the stock price resulted in a lower fair value of options which in turn resulted in a
lower share-based expense. Salary and salary related expenses including share-based expenses
increased 3% from 2008 to 2009 as a result of the granting of options in fiscal 2009 which vested
20% at the grant date which resulted in additional share-based compensation expenses.
- 25 -
Salary and salary related expenses excluding share-based compensation increased 6% in 2010 due to
the addition of a farm manager on January 1, 2010. Salary and salary related expenses excluding
share-based compensation increased 5% from 2008-2009 due to pay increases.
FLCC water assessment fees are the fees we pay for our share of the maintenance of the Fort Lyon
Canal in the Arkansas River Valley. The fees are approved by the shareholders of the FLCC and
changes during the years presented are a result of approved fee changes by the FLCC shareholders.
As of August 31, 2010, we hold approximately 26% of the voting shares of the FLCC.
Professional fees (legal and accounting) decreased each of the years as a result of our reduced use
of legal counsel as a result of the withdrawal of the developer from the Lowry Range development
project and less activity in water court.
Costs associated with being a corporation and costs associated with being a publicly traded entity
decreased from 2008 2009 primarily due to the elimination of franchise fees paid to the State of
Delaware due to our reincorporation into Colorado. These expenses increased in fiscal 2010 as a
result of our complying with the electronic proxy rules for our 2010 annual meeting of
shareholders.
Consulting fees decreased entirely due to the decrease in use of consultants as a result of the
withdrawal of the developer from the Lowry Range development project.
Other income and Expense Items
Table I Other Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
For the Fiscal Years Ended August 31, |
|
|
2010-2009 |
|
|
2009-2008 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Other expense items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
depletion expense |
|
$ |
255,100 |
|
|
$ |
381,700 |
|
|
$ |
381,300 |
|
|
$ |
(126,600 |
) |
|
|
-33 |
% |
|
$ |
400 |
|
|
|
0 |
% |
Imputed interest expense |
|
$ |
3,620,000 |
|
|
$ |
3,700,000 |
|
|
$ |
4,400,000 |
|
|
$ |
(80,000 |
) |
|
|
-2 |
% |
|
$ |
(700,000 |
) |
|
|
-16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
67,400 |
|
|
$ |
84,600 |
|
|
$ |
283,600 |
|
|
$ |
(17,200 |
) |
|
|
-20 |
% |
|
$ |
(199,000 |
) |
|
|
-70 |
% |
Depreciation and depletion decreased in fiscal 2010 due entirely to the Arkansas River water
acquisition costs being fully depreciated as of August 31, 2009.
Imputed interest expense represents the expensed portion of the difference between the relative
fair value of the Tap Participation Fee liability payable to HP A&M and the net present value of
the liability recognized under the effective interest method. The decreases in the imputed
interest expense from fiscal 2008 through fiscal 2010 are a result of the updated valuations
performed in the first quarter of fiscal 2008 and the second quarter of fiscal 2009, which are
explained in greater detail in Note 7 to the accompanying financial statements.
Interest income represents interest earned on the temporary investment of capital in cash
equivalents or available-for-sale securities, interest accrued on the note payable by the District
and interest accrued on the Special Facilities construction proceeds receivable from the County.
The decrease from fiscal 2008 to fiscal 2010 is due to a significant decline in interest rates due
to the recessionary economy and decreasing levels of cash investments.
Liquidity, capital resources and financial position
At August 31, 2010, our working capital, defined as current assets less current liabilities, was
approximately $1.6 million, of which approximately $1.4 million was cash and cash equivalents and
marketable securities. Subsequent to our fiscal year end, we completed the sale of approximately
$5.5 million of common stock and we issued the Convertible Note in the principal amount of $5.2
million, raising a combined total of approximately $10.7 million. Of this, we utilized $6.3
million to complete the acquisition of the loan instruments from BofA on the Sky Ranch property.
The remaining $4.4 million (along with our $1.4
million of cash and marketable securities we had at August 31, 2010) will be utilized for working
capital and other general corporate purposes. As of the date of the filing of this annual report
on Form 10-K, we have an effective shelf registration statement pursuant to which we may elect to
sell up to another $4.45 million of stock at any time and from time to time. We believe that as of
the date of the filing of this annual report on Form 10-K and as of August 31, 2010, we have
sufficient working capital to fund our operations for the next fiscal year. See, however, the risk
factors in Item 1A above.
- 26 -
Pursuant to the Arkansas River Agreement, we agreed to pay HP A&M 10% of the tap fees we receive
from the next 40,000 water taps we sell from and after the date of the Arkansas River Agreement. As
of August 31, 2010, we have estimated the value of the Tap Participation Fee at approximately $61.1
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 and February 28, 2009. See Note 7 in the
accompanying financial statements for the impact of the revaluation. The actual amount to be paid
will inevitably differ from 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 during the fiscal year ended
August 31, 2010. As of August 31, 2010, there are 38,937 taps that remain subject to the Tap
Participation Fee.
We are obligated to pay the FLCC annual water assessment charges. These are the charges assessed
to the FLCC shareholders for the upkeep and maintenance of the Fort Lyon Canal. The payments are
payable to the FLCC each calendar year. In December 2009, the board and shareholders of the FLCC
approved an increase in the calendar 2010 assessments from $14.40 per share to $15.00 per share,
resulting in an increase in our water assessments from approximately $315,000 per year to
approximately $335,000 per year. Additionally, during the twelve months ended August 31, 2010, the
FLCC shareholders approved a water purchase, and our share of the purchase price was approximately
$7,000.
Pursuant to agreements we entered into with HP A&M, described in greater detail in Note 7 to the
accompanying financial statements, the management of our farm leases is being performed by HP A&M
through August 31, 2011. After that date, depending on certain factors described in the
accompanying financial statements, HP A&M may extend the management services agreement, or we may
assume management of the farms. Pursuant to the management services agreement, while HP A&M is
managing the farm leases, HP A&M is responsible for all expenses associated with maintaining the
leases with the exception of the water assessment fees paid to the FLCC, which fees are borne by
us. As compensation for their management responsibilities, HP A&M retains all lease and certain
other non-crop income associated with the farms and the water used thereon.
Upon completion of construction of the Fairgrounds facilities and the initiation of water service
to the Fairgrounds in July 2006, we began ratably recognizing deferred tap fee revenues from our
County Agreement 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. In addition, we started
recognizing deferred Special Facilities funding as revenues in fiscal 2006, which will also be
recognized over the useful life of the constructed assets. See also Note 4 to the accompanying
financial statements for information regarding the amendment to the County Agreement in regards to
the Special Facilities funding and the receipt of water rights in August 2008.
Summary Cash Flows Table
Table J Summary Cash Flows Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
Year Ended August 31, |
|
|
2010-2009 |
|
|
2009-2008 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Cash (used) provded by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating acitivites |
|
$ |
(1,584,600 |
) |
|
$ |
(1,482,500 |
) |
|
$ |
(1,443,200 |
) |
|
$ |
(102,100 |
) |
|
|
7 |
% |
|
$ |
(39,300 |
) |
|
|
3 |
% |
Investing activities |
|
$ |
806,900 |
|
|
$ |
(3,070,900 |
) |
|
$ |
466,100 |
|
|
$ |
3,877,800 |
|
|
|
-126 |
% |
|
$ |
(3,537,000 |
) |
|
|
-759 |
% |
Financing activities |
|
$ |
84,600 |
|
|
$ |
19,500 |
|
|
$ |
121,000 |
|
|
$ |
65,100 |
|
|
|
334 |
% |
|
$ |
(101,500 |
) |
|
|
-84 |
% |
Changes in 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, G&A expenses, and
depletion/depreciation expenses.
Changes in the cash used by operations of approximately 7% in fiscal 2010 and approximately 3% in
2009 are due mainly to timing of cash receipts and payments (i.e. receipt of cash against trade
receivables and payment of trade payables) and decreased interest income.
- 27 -
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.
Changes in Investing Activities
We continue to incur 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.
Investing activities in fiscal 2010 consisted primarily of approximately $1.5 million of marketable
securities maturing offset by the $735,000 escrow payment and expenses related to the Sky Ranch
acquisition which is described in greater detail in Note 14 in the accompanying financial
statements. Investing activities in fiscal 2009 consisted mainly of the purchase of marketable
securities of approximately $3.0 million and the capitalization of approximately $110,400 related
to investments in water systems. Investing activities in 2008 consisted mainly of $790,600
received from the maturity of available-for-sale securities, offset by $271,000 of investments in
water rights.
Changes in Financing Activities
Financing activities in fiscal 2010 consisted mainly of approximately $89,000 of payments received
from the County on the construction note described in Note 4 to the accompanying financial
statements. Financing activities in fiscal 2009 consisted mainly of approximately $82,200 of
payments received from the County on the construction note, offset by approximately $59,700 of Tap
Participation Fee payments made to HP A&M related to the sale of non-irrigated land. Financing
activities in fiscal 2008 consisted mainly of $150,500 of payments received from the County on the
construction note offset by approximately $26,500 of debt payments to a related party.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA, which is
more fully described in Note 5 to the accompanying financial statements.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 to the accompanying financial statements for a discussion of recently adopted and issued
accounting pronouncements.
Total Contractual Cash Obligations
Table K Contractual Cash Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
33,500 |
|
|
$ |
16,800 |
|
|
$ |
16,800 |
|
|
|
(a |
) |
|
|
(a |
) |
Participating Interests in Export Water |
|
|
1,214,800 |
|
|
|
(b |
) |
|
|
(b |
) |
|
|
(b |
) |
|
|
(b |
) |
Tap Participation Fee payable to HP A&M |
|
|
113,126,200 |
|
|
|
(c |
) |
|
|
(c |
) |
|
|
(c |
) |
|
|
(c |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (d) |
|
$ |
114,374,500 |
|
|
$ |
16,800 |
|
|
$ |
16,800 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Our only operating lease is related to our office space. We signed this lease on August
27, 2009. It is a three year lease with monthly lease payments of approximately $1,400 per
month. |
|
(b) |
|
The participating interests liability is payable to the CAA holders upon the sale of Export
Water, and therefore, the timing of the payments is uncertain and not reflected in the above
table by period. |
- 28 -
|
|
|
(c) |
|
The Tap Participation Fee payable to HP A&M is payable upon the sale of water taps. Because
the timing of these water tap sales is not fixed and determinable, the estimated payments are
not reflected in the above table by period. The amount listed above includes an unamortized
discount of approximately $52.0 million. 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 our rate-base districts, and other
market forces beyond our control. Because the estimates and assumptions used to value the Tap
Participation Fees payable to HP A&M are subjective, actual results could vary materially
from the estimates. |
|
(d) |
|
This table does not include the Convertible Note which was issued on September 28, 2010. As
further described in Notes 7 and 14 to the accompanying financial statements, if approval to
convert the Convertible Note to common stock is not obtained from our shareholders at our
2011 annual meeting, the Convertible Note requires interest only payments totaling $487,800
in the next twelve months and interest and principal payments totaling approximately $5.4
million becoming due on January 15, 2012, which would be in the 1-3 year period in the table
above. |
Item 7A Quantitative and Qualitative Disclosures About Market Risk
General
Pure Cycle has limited exposure to market risks from instruments that may impact our 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 August 31, 2010, the majority of our capital is
invested in certificates of deposit with stated maturities and locked interest rates and therefore
not subject to interest rate fluctuations. We have no investments denominated in foreign country
currencies and therefore our investments are not subject to foreign currency exchange risk.
- 29 -
Item 8 Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
|
|
|
|
|
Page |
|
|
F-1 |
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-28 |
- 30 -
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Pure Cycle Corporation
We have audited the accompanying balance sheets of Pure Cycle Corporation as of August 31, 2010 and
2009, and the related statements of operations, shareholders equity, and cash flows for each of
the years in the three-year period ended August 31, 2010. We also have audited Pure Cycle
Corporations internal control over financial reporting as of August 31, 2010, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Pure Cycle Corporations management is
responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these financial statements and an opinion
on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Pure Cycle Corporation as of August 31, 2010 and 2009, and the
results of its operations and its cash flows for each of the years in the three-year period then
ended in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, Pure Cycle Corporation maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2010, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
/s/ GHP HORWATH, P.C.
Denver, Colorado
November 12, 2010
F-1
PURE CYCLE CORPORATION
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 31, |
|
|
|
2010 |
|
2009 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,017 |
|
|
$ |
705,083 |
|
Marketable securities |
|
|
1,435,054 |
|
|
|
3,002,208 |
|
Trade accounts receivable |
|
|
71,155 |
|
|
|
63,394 |
|
Prepaid expenses |
|
|
236,627 |
|
|
|
154,928 |
|
Current portion of construction proceeds receivable |
|
|
64,783 |
|
|
|
64,783 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,819,636 |
|
|
|
3,990,396 |
|
|
|
|
|
|
|
|
|
|
Investments in water and water systems, net |
|
|
102,931,347 |
|
|
|
103,159,632 |
|
|
|
|
|
|
|
|
|
|
Construction proceeds receivable, less current portion |
|
|
351,791 |
|
|
|
414,494 |
|
Note receviable related party, Rangeview Metropolitan District,
including accrued interest |
|
|
519,834 |
|
|
|
507,795 |
|
Escrow and other items related to the Sky Ranch acquisition |
|
|
735,000 |
|
|
|
|
|
Property and equipment, net |
|
|
8,854 |
|
|
|
16,593 |
|
Other assets |
|
|
11,292 |
|
|
|
2,171 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
106,377,754 |
|
|
$ |
108,091,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
44,818 |
|
|
$ |
22,216 |
|
Accrued liabilities |
|
|
70,704 |
|
|
|
60,080 |
|
Deferred revenues |
|
|
55,800 |
|
|
|
55,800 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
171,322 |
|
|
|
138,096 |
|
|
|
|
|
|
|
|
|
|
Deferred revenues, less current portion |
|
|
1,390,305 |
|
|
|
1,446,108 |
|
Participating Interests in Export Water Supply |
|
|
1,214,799 |
|
|
|
1,216,360 |
|
Tap Participation Fee payable to HP A&M, net of $52.0 million and $55.6 million discount |
|
|
61,141,329 |
|
|
|
57,521,329 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
63,917,755 |
|
|
|
60,321,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock: |
|
|
|
|
|
|
|
|
Series B par value $.001 per share, 25 million shares authorized;
432,513 shares issued and outstanding
(liquidation preference of $432,513) |
|
|
433 |
|
|
|
433 |
|
Common stock: |
|
|
|
|
|
|
|
|
Par value 1/3 of $.01 per share, 40 million shares authorized;
20,206,566 shares outstanding |
|
|
67,360 |
|
|
|
67,360 |
|
Additional paid-in capital |
|
|
92,341,555 |
|
|
|
92,253,916 |
|
Accumulated comprehensive income (loss) |
|
|
(1,580 |
) |
|
|
3,986 |
|
Accumulated deficit |
|
|
(49,947,769 |
) |
|
|
(44,556,507 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
42,459,999 |
|
|
|
47,769,188 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
106,377,754 |
|
|
$ |
108,091,081 |
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements
F-2
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended August 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Metered water usage |
|
$ |
140,677 |
|
|
$ |
137,431 |
|
|
$ |
159,649 |
|
Wastewater treatment fees |
|
|
67,626 |
|
|
|
66,976 |
|
|
|
66,976 |
|
Special facility funding recognized |
|
|
41,508 |
|
|
|
41,508 |
|
|
|
41,508 |
|
Water tap fees recognized |
|
|
14,296 |
|
|
|
14,296 |
|
|
|
14,296 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
264,107 |
|
|
|
260,211 |
|
|
|
282,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Water service operations |
|
|
(52,439 |
) |
|
|
(54,668 |
) |
|
|
(58,576 |
) |
Wastewater service operations |
|
|
(20,805 |
) |
|
|
(20,162 |
) |
|
|
(18,925 |
) |
Depletion and depreciation |
|
|
(88,564 |
) |
|
|
(88,576 |
) |
|
|
(88,511 |
) |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(161,808 |
) |
|
|
(163,406 |
) |
|
|
(166,012 |
) |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
102,299 |
|
|
|
96,805 |
|
|
|
116,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(1,808,167 |
) |
|
|
(1,942,225 |
) |
|
|
(2,316,291 |
) |
Depreciation |
|
|
(166,513 |
) |
|
|
(293,113 |
) |
|
|
(292,778 |
) |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1,872,381 |
) |
|
|
(2,138,533 |
) |
|
|
(2,492,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
67,432 |
|
|
|
84,636 |
|
|
|
283,590 |
|
Other |
|
|
24,283 |
|
|
|
(844 |
) |
|
|
(48,672 |
) |
Gain (loss) on sale of assets |
|
|
9,404 |
|
|
|
59,671 |
|
|
|
(270 |
) |
Loss on extinguishment of contingent obligations and debt |
|
|
|
|
|
|
|
|
|
|
(273,723 |
) |
Loss on sales of marketable securities |
|
|
|
|
|
|
|
|
|
|
(1,973 |
) |
Interest imputed on the Tap Participation Fees payable to HP A&M |
|
|
(3,620,000 |
) |
|
|
(3,733,000 |
) |
|
|
(4,393,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,391,262 |
) |
|
$ |
(5,728,070 |
) |
|
$ |
(6,926,700 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted |
|
$ |
(0.27 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted |
|
|
20,206,566 |
|
|
|
20,206,566 |
|
|
|
20,188,675 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements
F-3
PURE CYCLE CORPORATION
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income (loss) |
|
|
Deficit |
|
|
Total |
|
August 31, 2007 balance: |
|
|
432,513 |
|
|
$ |
433 |
|
|
|
20,252,138 |
|
|
$ |
67,512 |
|
|
|
(256,800 |
) |
|
$ |
(1,979,447 |
) |
|
$ |
91,650,897 |
|
|
$ |
7,168 |
|
|
$ |
(31,901,737 |
) |
|
$ |
57,844,826 |
|
CAA acquisition |
|
|
|
|
|
|
|
|
|
|
211,228 |
|
|
|
704 |
|
|
|
|
|
|
|
|
|
|
|
1,904,573 |
|
|
|
|
|
|
|
|
|
|
|
1,905,277 |
|
Retirement of treasury stock |
|
|
|
|
|
|
|
|
|
|
(256,800 |
) |
|
|
(856 |
) |
|
|
256,800 |
|
|
|
1,979,447 |
|
|
|
(1,978,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,519 |
|
|
|
|
|
|
|
|
|
|
|
351,519 |
|
Unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,168 |
) |
|
|
|
|
|
|
(7,168 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,926,700 |
) |
|
|
(6,926,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,933,868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2008 balance: |
|
|
432,513 |
|
|
|
433 |
|
|
|
20,206,566 |
|
|
|
67,360 |
|
|
|
|
|
|
|
|
|
|
|
91,928,398 |
|
|
|
|
|
|
|
(38,828,437 |
) |
|
|
53,167,754 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325,518 |
|
|
|
|
|
|
|
|
|
|
|
325,518 |
|
Unrealized gain on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,986 |
|
|
|
|
|
|
|
3,986 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,728,070 |
) |
|
|
(5,728,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,724,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2009 balance: |
|
|
432,513 |
|
|
|
433 |
|
|
|
20,206,566 |
|
|
|
67,360 |
|
|
|
|
|
|
|
|
|
|
|
92,253,916 |
|
|
|
3,986 |
|
|
|
(44,556,507 |
) |
|
|
47,769,188 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,639 |
|
|
|
|
|
|
|
|
|
|
|
87,639 |
|
Unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,566 |
) |
|
|
|
|
|
|
(5,566 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,391,262 |
) |
|
|
(5,391,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,396,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010 balance: |
|
|
432,513 |
|
|
$ |
433 |
|
|
|
20,206,566 |
|
|
$ |
67,360 |
|
|
|
|
|
|
$ |
|
|
|
$ |
92,341,555 |
|
|
$ |
(1,580 |
) |
|
$ |
(49,947,769 |
) |
|
$ |
42,459,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements
F-4
PURE CYCLE CORPORATION
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended August 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,391,262 |
) |
|
$ |
(5,728,070 |
) |
|
$ |
(6,926,700 |
) |
Adjustments to reconcile net loss to net cash
used for operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Imputed interest on Tap Participation Fees payable to HP A&M |
|
|
3,620,000 |
|
|
|
3,733,000 |
|
|
|
4,393,000 |
|
Depreciation, depletion and other non-cash items |
|
|
258,872 |
|
|
|
390,794 |
|
|
|
431,320 |
|
Share-based compensation expense included with
general and administrative expenses |
|
|
87,639 |
|
|
|
325,518 |
|
|
|
351,519 |
|
Loss on extinguishment of contingent obligations and debt |
|
|
|
|
|
|
|
|
|
|
273,723 |
|
Loss on sales of marketable securities |
|
|
|
|
|
|
|
|
|
|
1,973 |
|
(Gain) loss on sale of fixed assets |
|
|
(9,404 |
) |
|
|
(59,671 |
) |
|
|
270 |
|
Interest added to note receivable related party |
|
|
|
|
|
|
|
|
|
|
|
|
Rangeview Metropolitan District |
|
|
(12,039 |
) |
|
|
(12,996 |
) |
|
|
(19,065 |
) |
Interest added to construction proceeds receivable |
|
|
(26,343 |
) |
|
|
(29,588 |
) |
|
|
(30,906 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(7,761 |
) |
|
|
8,007 |
|
|
|
(1,184 |
) |
Interest receivable and prepaid expenses |
|
|
(81,699 |
) |
|
|
(27,910 |
) |
|
|
131,535 |
|
Accounts payable and accrued liabilities |
|
|
33,226 |
|
|
|
(25,767 |
) |
|
|
7,088 |
|
Deferred revenues |
|
|
(55,803 |
) |
|
|
(55,802 |
) |
|
|
(55,801 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities |
|
|
(1,584,574 |
) |
|
|
(1,482,485 |
) |
|
|
(1,443,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and maturities of marketable securities |
|
|
1,561,588 |
|
|
|
|
|
|
|
790,661 |
|
Sale of property and equipment |
|
|
10,000 |
|
|
|
59,671 |
|
|
|
1,000 |
|
Other investing activities |
|
|
(10,000 |
) |
|
|
(7,000 |
) |
|
|
|
|
Investments in water and water systems |
|
|
(19,649 |
) |
|
|
(110,354 |
) |
|
|
(270,998 |
) |
Escrow payment for Sky Ranch acquisition |
|
|
(735,000 |
) |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
|
|
|
|
(14,992 |
) |
|
|
(7,547 |
) |
Purchase of marketable securities |
|
|
|
|
|
|
(2,998,222 |
) |
|
|
|
|
Investment in Well Enhancement and Recovery Systems LLC |
|
|
|
|
|
|
|
|
|
|
(47,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
806,939 |
|
|
|
(3,070,897 |
) |
|
|
466,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Arapahoe County construction proceeds |
|
|
89,046 |
|
|
|
82,196 |
|
|
|
150,518 |
|
Payments to contingent liability holders |
|
|
(4,477 |
) |
|
|
(3,033 |
) |
|
|
(2,966 |
) |
Tap Participation Fee payments to HP A&M |
|
|
|
|
|
|
(59,671 |
) |
|
|
|
|
Payments on long-term debt related parties |
|
|
|
|
|
|
|
|
|
|
(26,542 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
84,569 |
|
|
|
19,492 |
|
|
|
121,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(693,066 |
) |
|
|
(4,533,890 |
) |
|
|
(856,102 |
) |
Cash and cash equivalents beginning of year |
|
|
705,083 |
|
|
|
5,238,973 |
|
|
|
6,095,075 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
12,017 |
|
|
$ |
705,083 |
|
|
$ |
5,238,973 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements
F-5
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE 1: ORGANIZATION
Pure Cycle Corporation (the Company) was incorporated in Delaware in 1976 and
reincorporated in Colorado in 2008. The Company owns water assets in the Denver, Colorado
metropolitan area, in the Arkansas River Valley in southern Colorado, and on the western slope of
Colorado. The Company is currently using its water assets located in the Denver metropolitan area
to provide water and wastewater services to customers located in the Denver metropolitan area.
The Company provides a full line of water and wastewater services which includes designing and
constructing water and wastewater systems as well as operating and maintaining such systems. The
Companys business focus is to provide water and wastewater service to customers throughout the
Denver metropolitan area as well as along the Colorado Front Range.
The Company believes it has sufficient working capital and financing sources to fund its
operations for at least the next fiscal year, which is based on the following:
|
|
|
The Company has approximately $1.4 million of cash, cash equivalents
and marketable securities, and |
|
|
|
|
The Company has approximately $1.6 million of working capital. |
|
|
|
Subsequent to August 31, 2010: |
|
|
|
The Company sold approximately $5.5 million of its common stock
pursuant to an effective shelf registration and issued a $5.2 million Convertible
Negotiable Promissory Note Payable (the Convertible Note), as described in
detail in Note 14 below, |
|
|
|
|
Following this stock sale, the Company can sell up to approximately
$4.5 million of additional common stock pursuant to the shelf registration
statement, and |
|
|
|
|
Following the acquisition of Sky Ranch as described in Note 14 below,
the Company has approximately $5.8 million in cash, cash equivalents and
marketable securities. |
The Companys ability to generate working capital from its water and wastewater projects is
dependent on its ability to successfully market its water, or in the event it is unsuccessful, to
sell the underlying water assets. In the event increased sales are not achieved or the Company is
unable to sell its water assets at a sufficient level, the Company may have to issue additional
short or long-term debt or seek to sell additional shares of the Companys common or preferred
stock to generate sufficient working capital. There can be no assurance that the Company will be
successful in marketing its water on terms that are acceptable to the Company.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company generates revenues mainly from (i) one time water and wastewater tap fees, (ii)
construction fees, and (iii) monthly water usage fees and wastewater service fees. Because these
items are separately delivered, the Company accounts for each of the items separately, as described
below.
Tap and Construction Fees. Tap fees are system connection fees paid by the developer in
advance of construction activities and are non-refundable. Tap fees are typically used to fund
construction of certain facilities and defray the acquisition costs of obtaining water rights.
Construction fees may be received from developers for the Company to construct assets that are
required to be constructed by the developer.
Proceeds from tap fees and construction fees are deferred upon receipt and recognized in income
either upon completion of construction of infrastructure or ratably over time, depending on whether
the Company owns the infrastructure constructed with the proceeds or the customer owns the
infrastructure constructed with the proceeds.
F-6
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Tap and construction fees derived from agreements in which the Company will not own the assets
constructed with the fees (for example the assets constructed for use on the Lowry Range) are
recognized as revenue using the percentage-of-completion method. Costs of construction of the
assets when the Company will not own the assets are recorded as costs of revenue.
Tap and construction fees derived from agreements for which the Company will own the infrastructure
(for example the assets constructed for use at the Arapahoe County Fairgrounds (the Fairgrounds))
are recognized as revenues ratably over the estimated accounting service life of the facilities
constructed, starting at completion of construction, which could be in excess of thirty years.
Costs of construction of the assets when the Company will own the assets are capitalized and
depreciated over their estimated economic lives.
The Company recognized approximately $14,300 of water tap fee revenues in each of the three fiscal
years ended August 31, 2010, respectively. These tap fee revenues relate to the Water Service
Agreement (the County Agreement) with Arapahoe County (the County) entered into in August 2005.
The Company began recognizing the water tap fees as revenue ratably over the estimated service
period upon completion of the Wholesale Facilities in its fiscal 2006. The water tap fees being
recognized over this period are net of the royalty payments (described below) to the State of
Colorado Board of Land Commissioners (the Land Board) and amounts paid to third parties pursuant
to the Comprehensive Amendment Agreement No. 1 (the CAA) as further described in Note 5 below.
The Company recognized approximately $41,500 of Special Facilities funding as revenue in each of
the three fiscal years ended August 31, 2010, respectively. These construction revenues also relate
to the County Agreement as more fully described in Note 4 below.
As of August 31, 2010, the Company has deferred recognition of approximately $1.4 million of tap
and construction fee revenue from the County, which will be recognized as revenue ratably through
2036.
Monthly Usage and Service Fees. Monthly water usage charges are assessed to customers
based on actual metered usage each month plus a base monthly service fee assessed per single family
equivalent (SFE) unit served. One SFE is a customer, whether residential, commercial or
industrial, that imparts a demand on our water or wastewater systems similar to the demand of a
family of four persons living in a single family house on a standard sized lot. One SFE is assumed
to have a water demand of approximately 0.4 acre-feet per year and to contribute wastewater flows
of approximately 300 gallons per day. Water usage pricing uses a tiered pricing structure. The
Company recognizes water usage revenues upon delivering water to its customers. The water revenues
recognized by the Company are shown net of royalties to the Land Board and amounts retained by the
Rangeview Metropolitan District (the District).
The Company recognizes wastewater processing revenues monthly based on flat fees assessed per SFE.
The monthly wastewater service fees are shown net of amounts retained by the District.
The Company recognized approximately $140,700, $137,400 and $159,600 of water usage revenues during
the fiscal years ended August 31, 2010, 2009 and 2008, respectively. The Company recognized
approximately $67,600, $67,000 and $67,000 of wastewater revenues during the fiscal years ended
August 31, 2010, 2009 and 2008, respectively.
Costs of delivering water and providing wastewater service to customers are recognized as incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-7
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
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 a high quality financial institution.
Financial Instruments Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist
primarily of cash equivalents and marketable securities. The Company places its cash equivalents
and investments with a high quality financial institution. At various times throughout fiscal 2010,
cash deposits have exceeded federally insured limits. The Company invests its excess cash primarily
in certificates of deposit, money market instruments, commercial paper obligations, corporate bonds
and US government treasury obligations. To date, the Company has not experienced significant losses
on any of these investments.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value.
Current Assets and Liabilities
For those current assets and liabilities that are considered financial instruments (cash and cash
equivalents, accounts receivable/payable, accrued liabilities), the carrying amounts approximate
fair value because of the short maturity of those instruments.
The fair value of the marketable securities are based on the values reported by the financial
institution where the funds are held and are shown in the table below. These securities include
only federally insured certificates of deposit.
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010 |
|
|
August 31, 2009 |
|
Carrying Amount |
|
$ |
1,435,100 |
|
|
$ |
3,002,200 |
|
Estimated Fair Value |
|
|
1,433,500 |
|
|
|
3,006,200 |
|
|
|
|
|
|
|
|
Unrealized (loss) gain |
|
$ |
(1,600 |
) |
|
$ |
4,000 |
|
|
|
|
|
|
|
|
Notes Receivable and Construction Proceeds Receivable
The carrying amounts of the Companys notes receivable and construction proceeds receivable
approximate fair value as they bear interest at rates which are comparable to current market rates.
Long-term Financial Liabilities
As described in Note 5 below, the CAA is comprised of a recorded balance and an off-balance sheet
or contingent obligation. The amount payable is a fixed amount but is repayable only upon the
sale of Export Water (as defined in Note 4 below). Because of the uncertainty of the sale of
Export Water, the Company has determined that the contingent portion of the CAA does not have a
determinable fair value.
The fair value of the Tap Participation Fee (as defined in Note 7 below) is determined by
projecting new home development in the Companys targeted service area over an estimated
development period, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010 |
|
|
August 31, 2009 |
|
Carrying Amount |
|
$ |
61,141,300 |
|
|
$ |
57,521,300 |
|
Estimated Fair Value |
|
|
61,141,300 |
|
|
|
57,521,300 |
|
|
|
|
|
|
|
|
Unrealized gain or loss |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-8
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Cash Flows
The Company did not pay any interest or income taxes during the three fiscal years ended August
31, 2010.
Marketable Securities
At August 31, 2010, the Companys marketable securities are comprised entirely of certificates of
deposit maintained at various financial institutions, each of which have invested balances below
federally insured limits and pay interest at stated rates through maturity. One certificate of
deposit has an unrealized loss of approximately $1,600 as of August 31, 2010. The certificates
mature at various dates through June 2011; however, these securities represent temporary
investments and it is managements intent to hold these securities available for current operations
and not hold them until maturity, therefore they are classified as available-for-sale securities
and are recorded at fair value. The Company has no investments in equity instruments.
The Companys marketable securities are recorded as available-for-sale and therefore any
unrecognized changes in the fair value of these marketable securities is included as a component of
accumulated comprehensive income (loss).
For the fiscal years ended August 31, 2010, 2009 and 2008, gross realized gains totaled
approximately $0, $0, and $2,000, respectively.
Accounts receivable
The Company records accounts receivable net of allowances for uncollectible accounts. There were
no allowances for uncollectible accounts as of August 31, 2010 or 2009. Any allowance for
uncollectible accounts would be determined based on specific review of past due accounts.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the eventual use of the
asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs
to sell. The Company believes there are no impairments in the carrying amounts of its long-lived
assets at August 31, 2010.
Water and Wastewater Systems
If costs meet the Companys capitalization criteria, costs to construct water and wastewater
systems are capitalized as incurred, including interest, and depreciated over their estimated
useful lives. The Company capitalizes design and construction costs related to construction
activities and it capitalizes certain legal, engineering and permitting costs relating to the
adjudication and improvement of its water assets.
Depletion and Depreciation of Water Assets
The Company depletes its water assets that are being utilized on the basis of units produced
divided by the total volume of water adjudicated in the water decrees. Water systems are
depreciated on a straight line basis over their estimated useful lives of up to thirty years.
F-9
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Share-based Compensation
The Company maintains a stock option plan for the benefit of its employees and directors. The
Company records share-based compensation costs which are measured at the grant date based on the
fair value of the award and are recognized as expense over the applicable vesting period of the
stock award using the straight-line method. The Company has adopted the alternative transition
method for calculating the tax effects of share-based compensation which allows for a simplified
method of calculating the tax effects of employee share-based compensation. Because the Company
has a full valuation allowance on its deferred tax assets, the granting and exercise of stock
options during the fiscal years ended August 31, 2010 and 2009 had no impact on the income tax
provisions.
The Company recognized approximately $87,600, $325,500 and $351,500 of share-based compensation
expenses during the fiscal years ended August 31, 2010, 2009 and 2008, respectively.
Income Taxes
The Company uses a more-likely-than-not threshold for the recognition and de-recognition of tax
positions, including any potential interest and penalties relating to tax positions taken by the
Company. The Company does not have any significant unrecognized tax benefits as of August 31,
2010.
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 2007 through fiscal 2010. 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. At August 31, 2010, the Company did not have any
accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest
expense recognized during the fiscal years ended August 31, 2010, 2009 or 2008.
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 approximately
202,100, 250,100 and 155,100, common share equivalents as of August 31, 2010, 2009 and 2008,
respectively, have been excluded from the calculation of loss per common share as their effect is
anti-dilutive.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability
to the Company. Where it is determined that a new accounting pronouncement affects the Companys
financial reporting, the Company undertakes a study to determine the consequence of the change to
its financial statements and assures that there are proper controls in place to ascertain that the
Companys financials properly reflect the change. New pronouncements assessed by the Company
recently are discussed below:
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). This
update requires additional disclosure within the roll forward of activity for assets and
liabilities measured at fair value on a recurring basis, including transfers of assets and
liabilities between Level 1 and Level 2 of the fair value hierarchy and the separate presentation
of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair
value hierarchy. In addition, the update requires enhanced disclosures of the valuation techniques
and inputs used in the fair value measurements within Levels 2 and 3. The new disclosure
requirements are effective for interim and annual periods beginning after December 15, 2009, except
for the disclosure of purchases, sales, issuances and settlements of Level 3 measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010 (September 1, 2011 for
the Company). As ASU 2010-06 only requires enhanced disclosures, the Company does not expect that
the adoption of this update will have a material effect on its financial statements.
F-10
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
In October 2009, the FASB issued ASU No. 2009-13 Multiple-Deliverable Revenue Arrangements-a
Consensus of the FASB Emerging Issues Task Force (ASU 2009-13) which updates ASC Topic 605,
Revenue Recognition.
ASU 2009-13 provides another alternative for determining the selling price of deliverables and will
allow companies to allocate arrangement consideration in multiple deliverable arrangements in a
manner that better reflects the transactions economics and could result in earlier revenue
recognition. ASU 2009-13 is effective for the Company prospectively for revenue arrangements
entered into or materially modified on or after October 1, 2010; however, early adoption is
permitted. The Company is currently evaluating the impact of adopting ASU 2009-13 on its financial
statements.
In August 2009, the FASB issued authoritative guidance clarifying the measurement of the fair value
of liabilities. The amendments reduce potential ambiguity in financial reporting when measuring the
fair value of liabilities and help to improve consistency in the application of authoritative
guidance. This update is effective for the first reporting period, including interim periods,
beginning after issuance, which for the Company was September 1, 2009. The adoption of this
guidance did not have an impact on the Companys results of operations, financial position or cash
flows.
In June 2009, the FASB issued ASU 2009-17, Consolidations: Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities. ASU 2009-17, which amends ASC 810-10,
Consolidation, prescribes a qualitative model for identifying whether a company has a controlling
financial interest in a variable interest entity (VIE) and eliminates the quantitative model. The
new model identifies two primary characteristics of a controlling financial interest: (1) provides
a company with the power to direct significant activities of the VIE, and (2) obligates a company
to absorb losses of and/or provides rights to receive benefits from the VIE. ASU 2009-17 requires a
company to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE.
A company that holds a controlling financial interest is deemed to be the primary beneficiary of
the VIE and is required to consolidate the VIE. ASU 2009-17 is effective as of the beginning of
each reporting entitys first annual reporting period that begins after November 15, 2009
(September 1, 2010 for the Company). The Company is currently evaluating the effect the adoption
of ASU 2009-17 will have on its financial statements.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the
current year presentation.
NOTE 3: FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date in the
principal or most advantageous market. The Company uses a fair value hierarchy that has three
levels of inputs, both observable and unobservable, with use of the lowest possible level of input
to determine fair value.
Level 1 Valuations for assets and liabilities traded in active exchange markets. The Company
had none of these instruments at August 31, 2010.
Level 2 Valuations are obtained from readily available pricing sources via independent providers
for market transactions involving similar assets or liabilities. At August 31, 2010, the Company
had one Level 2 asset, namely its marketable securities. The Companys principal market for these
securities is the secondary institutional markets and valuations are based on observable market
data in those markets.
Level 3 Valuations for assets and liabilities that are derived from other valuation
methodologies, including discounted cash flow models and similar techniques, and not based on
market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain
assumptions and projections in determining the fair value assigned to such assets or liabilities.
The Company had one Level 3 liability at August 31, 2010, the Tap Participation Fee liability.
F-11
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Company maintains policies and procedures to value instruments using the best and most relevant
data available.
The following table presents information about the Companys assets and liabilities that are
measured at fair value on a recurring and non-recurring basis as of August 31, 2010, and indicates
the fair value hierarchy of the valuation techniques we utilized to determine such fair value.
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
Estimated Fair |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and |
|
Assets and liabilities |
|
Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
(Losses) |
|
Measured on a recurring basis: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
1,435,000 |
|
|
$ |
|
|
|
$ |
1,435,000 |
|
|
$ |
|
|
|
$ |
(1,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
Measured on a non-recurring basis: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tap Participation Fee liability |
|
$ |
61,141,329 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
61,141,329 |
|
|
$ |
|
|
Although not required, the Company deems the following table, which presents the changes in
the Tap Participation Fee for the fiscal year ended August 31, 2010, to be helpful to the users of
its financial statements.
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|
|
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Fair Value Measurement at August 31 using Significant |
|
|
|
Unobservable Inputs (Level 3) |
|
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|
|
|
|
|
|
|
|
Discount - to be |
|
|
|
|
|
|
|
|
|
|
|
imputed as |
|
|
|
Gross Estimated |
|
|
Tap Participation |
|
|
interest expense |
|
|
|
Tap Participation |
|
|
Fee Reported |
|
|
in future |
|
|
|
Fee Liability |
|
|
Liability |
|
|
periods |
|
Balance at August 31, 2009 |
|
$ |
113,147,688 |
|
|
$ |
57,521,329 |
|
|
$ |
55,626,359 |
|
Total gains and losses (realized and unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
Imputed interest recorded as Other Expense |
|
|
|
|
|
|
3,620,000 |
|
|
|
(3,620,000 |
) |
Increase in estimated value (to be realized in future periods) |
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|
|
|
|
|
|
|
|
|
Purchases, sales, issuances, payments, and settlements |
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|
|
Transfers in and/or out of Level 3 |
|
|
|
|
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|
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Balance at August 31, 2010 |
|
$ |
113,147,688 |
|
|
$ |
61,141,329 |
|
|
$ |
52,006,359 |
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|
F-12
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE 4: WATER ASSETS
The Companys water and water systems consist of the following approximate costs and accumulated
depreciation and depletion as of August 31:
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|
|
|
|
|
August 31, 2010 |
|
|
August 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Depreciation |
|
|
|
Costs |
|
|
and Depletion |
|
|
Costs |
|
|
and Depletion |
|
Arkansas River Valley assets |
|
$ |
81,318,700 |
|
|
$ |
(972,400 |
) |
|
$ |
81,319,300 |
|
|
$ |
(823,700 |
) |
Rangeview water supply |
|
|
14,285,700 |
|
|
|
(6,000 |
) |
|
|
14,271,800 |
|
|
|
(5,500 |
) |
Rangeview water system |
|
|
167,700 |
|
|
|
(57,200 |
) |
|
|
167,700 |
|
|
|
(52,000 |
) |
Paradise water supply |
|
|
5,536,500 |
|
|
|
|
|
|
|
5,532,600 |
|
|
|
|
|
Fairgrounds water and water system |
|
|
2,899,900 |
|
|
|
(358,400 |
) |
|
|
2,899,900 |
|
|
|
(270,300 |
) |
Sky Ranch water supply |
|
|
100,000 |
|
|
|
|
|
|
|
100,000 |
|
|
|
|
|
Water supply other |
|
|
25,700 |
|
|
|
(8,900 |
) |
|
|
23,800 |
|
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
104,334,200 |
|
|
|
(1,402,900 |
) |
|
|
104,315,100 |
|
|
|
(1,155,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in water and water systems |
|
$ |
102,931,300 |
|
|
|
|
|
|
$ |
103,159,600 |
|
|
|
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|
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|
|
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|
|
|
Depletion and Depreciation
The Company recorded approximately $500, $500 and $600 of depletion charges during the fiscal
years ended August 31, 2010, 2009 and 2008, respectively. This related entirely to the Rangeview
Water Supply (as defined below). No depletion is taken against the Arkansas River water, Paradise
Water Supply or Sky Ranch Water Supply (all of which are defined below) because these assets have
not been placed into service as of August 31, 2010.
The Company recorded approximately $254,600, $381,200 and $380,700 of depreciation expense in
fiscal 2010, 2009 and 2008, respectively.
Arkansas River Valley Assets
Arkansas River Water. The Company acquired its Arkansas River water rights to increase
its rights to senior surface water and to increase its inventory of water and capacity to serve
additional customers. The Company owns approximately 60,000 acre-feet of senior water rights in
the Arkansas River and its tributaries. The Company anticipates that of this, approximately
40,000 acre-feet will be available for non-agricultural uses along the front range of Colorado
sometime in the future. The Company acquired its Arkansas River Valley assets from High Plains
A&M LLC (HP A&M) pursuant to an Asset Purchase Agreement (the Arkansas River Agreement)
entered into on May 10, 2006.
In order to utilize the Arkansas River water in the Companys service areas, the Company will be
required to convert this water to municipal and industrial uses. Change of water use must be done
through the Colorado water court and several conditions must be present prior to the water court
granting an application for transfer of a water right. A transfer case would be expected to include
the following provisions: (i) a provision of anti-speculation in which the applicant must have
contractual obligations to provide water service to customers prior to the water court ruling on
the transfer of a water right, (ii) the applicant can only transfer the consumptive use portion
of its water rights (the Company expects to face opposition to any consumptive use calculation of
the historic agricultural uses of its water), (iii) applicants likely would be required to mitigate
the loss of tax base in the basin of origin, (iv) applicants would likely have re-vegetation
requirements to restore irrigated soils to non-irrigated, and (v) applicants would be required to
meet water quality measures which would be included in the cost of transferring the water rights.
The value of the assets was recorded based on the deemed fair value of the consideration paid at
the acquisition date, because the value of the consideration was deemed more reliable than the
value of the acquired assets. The consideration paid is comprised of equity (3.0 million shares
of the Companys common stock) and the Tap
Participation Fee. Because the estimated value of the consideration paid was less than the total
estimated fair value of the assets acquired by the Company, the relative values assigned to the
assets were ratably reduced.
F-13
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Land. Currently the approximately 17,500 acres (comprised of 80 separate properties) owned
by the Company is being used for agricultural purposes. Approximately 60 of the properties are
subject to promissory notes maintained by the seller as further described in Note 7. The land is
located in the counties of Bent, Otero and Prowers in Southern Colorado. Each of the properties is
subject to operating leases (which expire at various dates through 2011) which the Company assumed
effective as of the closing. Pursuant to a property management agreement (described below) between
HP A&M and the Company, HP A&M will manage the leases for a period of five years (through August
31, 2011) and will receive all lease payments from the lessees as a management fee. Because the
Company does not have the risk of loss associated with the leases (HP A&Ms management fee is equal
to the lease income for the next five years, and contractually HP A&M has the risk of loss on the
leases), the lease income and management fees are reflected on a net revenue basis throughout the
term of the management agreement. The Company also owns certain contract rights, tangible
personal property, mineral rights, and other water interests related to the Arkansas River water
and land.
The Company and HP A&M entered into a five year property management agreement, pursuant to which,
HP A&M holds the right to pursue leasing of the land and Arkansas River water to interested
parties. All lease income associated with leasing the land and Arkansas River water, together with
all costs associated with these activities including but not limited to, overhead obligations, real
property taxes, and personnel costs, are the sole opportunity and obligation of HP A&M. The
property management agreement can be extended an additional five years through 2016 under
circumstances defined in the agreement.
Land sales. On February 10, 2010, the Company sold approximately four acres of farm land for
$10,000 ($2,500 per acre) in cash. The land had an allocated carrying value of approximately $600,
which resulted in a gain of approximately $9,400 being recorded during 2010. The Company
maintained all water rights associated with the acreage that was sold. During the fiscal
year ended August 31, 2009, the Company sold certain non-irrigated parcels of land at net
sales prices of approximately $59,700 in cash. This is net of approximately $3,600 of fees.
Because the Company assigned no value to this non-irrigated land at the acquisition date (the land
was deemed to have a fair value of zero at the acquisition date because it was not being irrigated
and therefore was deemed non-essential to the Companys business), the proceeds to the Company are
recorded as a gain on sale of land in the accompanying statement of operations. Pursuant to the
Arkansas River Agreement, 100% of the proceeds from the sale of the non-irrigated land are required
to be paid to HP A&M, which resulted in credits to the Tap Participation Fee in an amount
equivalent to the proceeds of the sale of 28 water taps.
Fort Lyon Canal Company (FLCC) Shares. The water rights are represented by over 21,600
shares of the FLCC, which is a non-profit mutual ditch company established in the late 1800s that
operates and maintains the 110 mile Fort Lyon Canal between La Junta, Colorado and Lamar,
Colorado. The shares in the FLCC represent the amount of water the Company owns in the Fort Lyon
Canal.
Pursuant to the Arkansas River Agreement, the Company pledged to HP A&M: (i) one-half of the shares
of FLCC purchased by the Company, (ii) all shares of FLCC hereafter issued to the Company by means
of any dividend or distribution in respect of the shares pledged hereunder (together with the
shares identified in (i), the Companys Pledged Shares), (iii) the certificates representing the
Companys Pledged Shares, (iv) the land associated with the water represented by the Companys
Pledged Shares, and (v) all rights to money or property which the Company now has or hereafter
acquires in respect of the Companys Pledged Shares. This pledge agreement will terminate upon
payment of the Tap Participation Fee.
Rangeview Water Supply and Water System
The Rangeview Water Supply consists of 28,350 acre-feet and is a combination of tributary
surface water and groundwater rights along with certain storage rights associated with the Lowry
Range, a 26,000 acre property owned by the Land Board located approximately 15 miles southeast of
Denver. The $14.4 million of capitalized costs represent the costs of assets acquired or
facilities constructed to extend water service to customers located on and off the Lowry Range.
The recorded costs of the Rangeview Water Supply include payments to the sellers of the
Rangeview Water Supply, design and construction costs and certain direct costs related to
improvements to the asset including legal and engineering fees.
F-14
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Company acquired the Rangeview Water Supply beginning in 1996 when:
(i) |
|
The District entered into the Amended and Restated Lease Agreement with the Land Board,
which owns the Lowry Range; |
(ii) |
|
The Company entered into the Agreement for Sale of Export Water with the District, a
quasi-municipal political subdivision of the State of Colorado; |
(iii) |
|
The Company entered into the Service Agreement with the District for the provision of water
service to the Lowry Range; and |
(iv) |
|
In 1997, the Company entered into the Wastewater Service Agreement with the District for the
provision of wastewater service to the Districts service area (collectively these agreements
are referred to as the Rangeview Water Agreements). |
Pursuant to the Rangeview Water Agreements, the Company has the exclusive right, through 2081, to
use 13,400 acre feet of the Rangeview Water Supply specifically on the Lowry Range. The Rangeview
Water Agreements also provide for the Company to use surface reservoir storage capacity in
providing water service to customers both on and off the Lowry Range. The Company owns the rights
to use the remaining 11,650 acre-feet of groundwater, which can be exported off the Lowry Range to
serve area users (referred to as Export Water). The Company also has the option with the Land
Board to exchange an aggregate gross volume of 165,000 acre-feet of groundwater for 1,650 acre-feet
per year of adjudicated surface water and to use this surface water as Export Water.
Based on independent engineering estimates, the water designated for use on the Lowry Range is
capable of providing water service to approximately 46,500 SFE units, and the Export Water owned by
the Company can serve approximately 33,600 SFE units throughout the Denver metropolitan region.
Pursuant to the Rangeview Water Agreements, the Company will design, finance, construct, operate
and maintain the Districts water and wastewater systems to provide service to the Districts
customers on the Lowry Range. On the Lowry Range, the Company will operate both the water and the
wastewater systems during the contract period and the District will own both systems. After 2081,
ownership of the water system servicing customers on the Lowry Range will revert to the Land Board,
with the District retaining ownership of the wastewater system. The Company owns the Export Water
and will use it to provide water and wastewater services to customers off the Lowry Range. The
Company will also own all the facilities required to extend water and wastewater services off the
Lowry Range. The Company plans to contract with third parties for the construction of these
facilities.
Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and
usage or monthly fees, are governed by the terms of the Rangeview Water Agreements. The Companys
rates and charges are reviewed annually and are based on the average of similar rates and charges
of three surrounding municipal water and wastewater service providers. These represent gross fees
and to the extent that water service is provided using Export Water, the Company is required to pay
royalties to the Land Board ranging from 10% of gross revenues to 50% of net revenue after
deducting certain costs. In exchange for providing water service to customers on the Lowry Range,
the Company will receive 95% of all water service fees received by the District, after the District
pays the required royalties to the Land Board totaling 12% of gross revenues received from water
sales. In exchange for providing wastewater service for the Districts customers, the Company will
receive 100% of the Districts wastewater tap fees and 90% of the Districts wastewater usage fees.
The Company delivered approximately 33.1 million, 33.9 million and 42.8 million gallons of water to
customers during the fiscal years ended August 31, 2010, 2009 and 2008, respectively.
F-15
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Arapahoe County Fairgrounds Agreement for Water Service
The Company owns approximately 321 acre-feet of groundwater purchased pursuant to the County
Agreement. The Company plans to use this water in conjunction with its Rangeview Water Rights in
providing water to areas outside the Lowry Range. The $2.9 million of capitalized costs includes
the costs to construct various Wholesale and Special Facilities, including a new deep water well, a
500,000 gallon water tank and pipelines to transport water to the Fairgrounds.
Pursuant to the County Agreement, the County has or will pay the Company the following:
(i) |
|
In August 2005, the County purchased water taps for 38.5 SFEs for $567,490, or $14,740 per
tap, which was used to construct the Wholesale Facilities. This was received by the Company
in August 2005, as follows: |
|
a. |
|
A cash payment of approximately $514,600, and |
|
b. |
|
The transfer of rights to 27 acre-feet of dedicated groundwater valued at
approximately $52,900. |
(ii) |
|
The County agreed to provide funding of approximately $1,245,200 for the Special Facilities.
This is being paid by the County as follows: |
|
a. |
|
An initial cash payment of approximately $397,000, which was received in August
2005, |
|
b. |
|
The transfer of approximately 294 acre-feet of water, valued at approximately
$206,000, with a cash payment of approximately $34,100, received in August 2008 (this
was initially 336 acre-feet of water valued at approximately $240,100 with no
additional cash payment, see discussion of the amendment to the County Agreement
below), |
|
c. |
|
The balance of approximately $607,900 in monthly payments over 10 years
(including interest at 6% per annum). |
Since the Company is utilizing Export Water to provide water service to the Fairgrounds, the sale
of the water taps generated a royalty payment to the Land Board of $34,522. The agreement with the
Land Board requires royalty payments on Export Water sales based on net revenues, which are defined
as proceeds from the sale of Export Water less direct and indirect costs, including reasonable
overhead charges, associated with the withdrawal, treatment and delivery of Export Water. Based on
this, in September 2005, the Company made a $34,522 royalty payment to the Land Board, which is 10%
of the net tap fees received from the County.
In addition, tap fees under service agreements in which Export Water will be utilized are subject
to the CAA, which is described in more detail in Note 5 below. Net tap fees subject to the CAA
totaled $532,968, which were the tap fees received from the County less the $34,522 Land Board
royalty. The $532,968 was distributed by the escrow agent as required by the CAA in September 2005.
Based on the CAA positions held by the Company at the time, the Company received $373,078, or 70%,
of the distribution and external parties received $159,890, or 30%.
The tap fees retained by the Company were used to fund construction of the Wholesale Facilities
required to extend water service to the Fairgrounds. In July 2006 the Company completed
construction of the Wholesale Facilities and began ratably recognizing $428,000 of tap fees in
income over the estimated accounting life of the assets. The $428,000 is the net of the tap fees
received by the Company of $567,490, decreased by (i) royalties to the Land Board of $34,522; and
(ii) 65% of the total payments made to external CAA holders or $104,136. In each of the three
fiscal years ended August 31, 2009, 2008 and 2007, the Company recognized approximately
$14,300 of tap fee revenue. At August 31, 2009, approximately $384,800 of these tap fees are still
deferred.
The total construction funding of $1.25 million is deferred and will be recognized as revenue over
the expected service period, which is also the estimated useful life of the Special Facilities
constructed with the funds. In each of the fiscal years ended August 31, 2010, 2009 and
2008, the Company recognized approximately $41,500 of Special Facilities revenue. At August 31,
2010, approximately $1.08 million of the construction funding is still deferred.
F-16
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Amendment to the County Agreement. Because the County had not transferred the 336
acre-feet of groundwater to the Company as required in the County Agreement, the County was making
interest payments to the Company totaling $600 per month until such time as the required water
rights transfer was made. In August 2008, the
Company and the County entered into Amendment No. 1 to Agreement For Water Service (the County
Amendment), whereby the County transferred to the Company 294 acre-feet of water valued at
approximately $206,000, and made a cash payment of approximately $34,100. The County Amendment was
necessary because prior to the signing of the County Agreement, some of the water rights to be
transferred to the Company had previously been adjudicated to another party. As a result, the
acre-feet to be transferred from the County to the Company were reduced from 336 acre-feet to
approximately 294 acre-feet. As a result of the reduction in the acre-feet transferred to the
Company, the County made an additional cash payment of approximately $34,100 in August 2008. As a
result of the transfer of the water rights and the cash payment, the County ceased making the
required $600 monthly interest payments to the Company in August 2008. The value of the water
rights was included in the Construction proceeds receivable account on the accompanying balance
sheet until the transfer, and then $206,000 was capitalized as part of the investment in Arapahoe
County water.
Sky Ranch
At August 31, 2010, the Company owned approximately 89 acre-feet of water located beneath Sky
Ranch. Pursuant to a groundwater purchase agreement the Company had with the prior developer, the
Company paid $100,000 to the prior developer of Sky Ranch to acquire these water rights.
Effective July 30, 2010, the Company entered into a Loan Sale and Assignment Agreement (the Loan
Sale Agreement) with the Bank of America, N.A. (BofA), to acquire from BofA loan instruments
secured by approximately 940 acres of undeveloped land known as Sky Ranch. The Company is
acquiring the promissory note payable by Sky Ranch, LLC (a wholly owned subsidiary of Neumann
Homes, Inc.) and the deed of trust granted by Sky Ranch, LLC to secure the promissory note from the
Seller for cash payments totaling $7.0 million. Concurrent with the signing of the Loan Sale
Agreement the Company made an escrow payment totaling $700,000 to BofA. The balance of the
acquisition price, or $6.3 million, was paid to BofA in connection with the closing, which was on
October 18, 2010, subsequent to the Companys fiscal year end. The property includes approximately
820 acre feet of water, of which the Company already owned approximately 89 acre feet purchased
pursuant to the agreements entered into with the former developer. See Note 14 below for
information on the financing of the Sky Ranch acquisition. On October 26, 2010, the United States
Bankruptcy Court, Northern District of Illinois, entered an order granting the Companys motion
requesting that title to the Sky Ranch property be deeded to the Company free and clear of all
bankruptcy claims. Pursuant to the order, the Company owns the Sky Ranch property effective as of
November 2, 2010.
Paradise Water Supply
In 1987, the Company acquired water, water wells, and related assets from Paradise Oil, Water and
Land Development, Inc., which constitute the Paradise Water Supply. The $5.5 million of
capitalized costs includes costs to acquire the Paradise Water Supply, as well as certain direct
legal and engineering costs relating to improvements to the asset. The Paradise Water Supply
includes 70,000 acre-feet of conditionally decreed tributary Colorado River water, a right-of-way
permit from the United States Department of the Interior, Bureau of Land Management, for the
construction of a 70,000 acre-foot dam and reservoir across federal lands, and four unrelated water
wells.
Every six years the Paradise Water Supply is subject to a finding of reasonable diligence review by
the water court and the State Engineer to determine if the Company is diligently pursuing the
development of the water rights. During fiscal 2005, the water court began the latest review and
the Company received its official finding of reasonable diligence in August 2008. During the
diligence review, the Company received objections from two parties to its Paradise Water rights.
The Company and the objectors reached an agreement on the objections, which resulted in the Company
receiving its finding of reasonable diligence. The agreement with the objectors called for the
Company to, among others, perform the following during the next six years: (i) select an
alternative reservoir site; (ii) file an application in water court to change the place of storage;
(iii) identify specific end users and place(s) of use of the water; and (iv) identify specific
source(s) of the water rights for use. The Company is working on satisfying the above stipulations
by the next diligence review period.
F-17
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE 5: 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 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, which is
described in greater detail in Note 4 above. 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. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7
million contingent liability was 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.
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.
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. Because the original recorded
liability, which was $11.1 million, was approximately 35% of the original total liability of $31.8
million, 35% of each payment remitted to the CAA holders is allocated to the recorded liability
account. The remaining portion of each payment, or approximately 65%, is allocated to the
contingent obligation, which is recorded on a net revenue basis.
In recent years, in order to reduce the long term impact of the CAA, the Company has repurchased
various portions of the CAA obligations in priority. The Company did not make any CAA acquisitions
during the fiscal years ended August 31, 2010 or 2009.
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. The Company recorded a loss on the acquisition of the CAA interests in October 2007 of
approximately $273,700.
In July 2007, the Company acquired the rights to approximately $10.5 million of CAA interests in
exchange for cash payments of approximately $2.6 million, which was raised in the Companys equity
offering in July 2007. The Company recorded a gain on the acquisition of the CAA interests made in
July 2007 of approximately $1.0 million. Of this, approximately $765,000 was recorded as a capital
contribution because the CAA interests acquired by the Company for approximately $7.8 million were
held by parties that are deemed related to the Company.
F-18
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
As a result of the CAA acquisitions, and due to the sale of Export Water, as detailed in the table
below, the total remaining potential third party obligation as of August 31, 2010 is approximately
$3.5 million:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export Water |
|
|
Initial Export |
|
|
Total Potential |
|
|
Paticipating |
|
|
|
|
|
|
Proceeds |
|
|
Water Proceeds |
|
|
Third party |
|
|
Interests |
|
|
|
|
|
|
Received |
|
|
to Pure Cycle |
|
|
Obligation |
|
|
Liability |
|
|
Contingency |
|
Original balances |
|
$ |
|
|
|
$ |
218,500 |
|
|
$ |
31,807,732 |
|
|
$ |
11,090,630 |
|
|
$ |
20,717,102 |
|
Activity from inception until
August 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
|
|
|
|
28,077,500 |
|
|
|
(28,077,500 |
) |
|
|
(9,789,983 |
) |
|
|
(18,287,517 |
) |
Option payments Sky Ranch
and The Hills at Sky Ranch |
|
|
110,400 |
|
|
|
(42,280 |
) |
|
|
(68,120 |
) |
|
|
(23,754 |
) |
|
|
(44,366 |
) |
Arapahoe County tap fees * |
|
|
532,968 |
|
|
|
(373,078 |
) |
|
|
(159,890 |
) |
|
|
(55,754 |
) |
|
|
(104,136 |
) |
Export Water sale payments |
|
|
45,662 |
|
|
|
(31,963 |
) |
|
|
(13,699 |
) |
|
|
(4,779 |
) |
|
|
(8,920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2009 |
|
|
689,030 |
|
|
|
27,848,679 |
|
|
|
3,488,523 |
|
|
|
1,216,360 |
|
|
|
2,272,163 |
|
Fiscal 2010 activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export Water sale payments |
|
|
14,922 |
|
|
|
(10,445 |
) |
|
|
(4,477 |
) |
|
|
(1,561 |
) |
|
|
(2,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2010 |
|
$ |
703,952 |
|
|
$ |
27,838,234 |
|
|
$ |
3,484,046 |
|
|
$ |
1,214,799 |
|
|
$ |
2,269,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Arapahoe County tap fees are less $34,522 in royalties paid to the Land Board. |
The CAA includes contractually established priorities which call for payments to CAA holders
in order of their priority. This means the first three payees receive their full payment before
the next priority level receives any payment and so on until full repayment. The Company will
receive approximately $5.1 million of the first priority payout (the remaining entire first
priority payout totals approximately $7.3 million as of August 31, 2010).
NOTE 6: ACCRUED LIABILITIES
At August 31, 2010, the Company had accrued liabilities of approximately $70,700, of which $65,000
was for professional fees with the remainder relating to operating payables.
At August 31, 2009, the Company had accrued liabilities of approximately $60,100, of which $50,100
was for professional fees with the remainder relating to operating payables.
NOTE 7: LONG-TERM DEBT AND OPERATING LEASE
As of August 31, 2010, the Company has no debt with contractual maturity dates. However, see Note
14 below for information regarding the Convertible Note issued subsequent to August 31, 2010.
The Participating Interest in Export Water supply and the Tap Participation Fee payable to HP A&M
are obligations of the Company that have no scheduled maturity dates. Therefore, these liabilities
are not disclosed in tabular format. However, the Tap Participation Fee is described below.
Tap Participation Fee payable to HP A&M
Pursuant to the Arkansas River Agreement the Company granted HP A&M the right to receive ten
percent (10%) of the Companys gross proceeds, or the equivalent thereof, from the sale of the
next 40,000 water taps sold by the Company from and after the date of the Arkansas River Agreement
(the Tap Participation Fee). As a result of land sales in 2006 and 2009 and the sale of
unutilized water rights owned by the Company in the Arkansas River Valley in 2007, 38,937 water
taps remain subject to the Tap Participation Fee.
The Tap Participation Fee is due and payable once the Company has sold a water tap and received
the consideration due for such water tap. The Company did not sell any water taps during the
fiscal year ended August 31, 2010 or 2009. However, the Company did make Tap
Participation Fee payments to HP A&M during the fiscal year ended August 31, 2009, as a
result of non-irrigated land sales described above.
F-19
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Tap Participation Fee was initially valued at approximately $45.6 million at the acquisition
date using a discounted cash flow analysis of the projected future payments to HP A&M. The $61.1
million balance at August 31, 2010, includes approximately $16.4 million of imputed interest,
recorded using the effective interest method. The Company estimates the value of the Tap
Participation Fee by projecting new home development in the Companys targeted 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 estimated future water tap fees calculated using historical water tap fees. Based on
the weak new home construction market in the Denver metropolitan area, the Company updated its
estimated discounted cash flow analysis as of February 28, 2009. The February 2009 update
resulted in the following changes from the prior estimate:
(i) |
|
An increase in the overall future estimated Tap Participation Fee of approximately $4.7
million (from approximately $108.5 million to approximately $113.1 million); |
(ii) |
|
A decrease in the imputed effective interest rate from approximately 8.6% to approximately
6.3%; and |
(iii) |
|
A decrease in the imputed interest expense for the fiscal year ended August 31,
2010 and 2009 of approximately $1.6 million and $1.1 million, respectively, which equates to
approximately $.08 and $.05 per basic and diluted share, respectively. |
The Company completed an update to its analysis of the fair value of the Tap Participation Fee as
of August 31, 2010. The Company determined that changes in the projected estimated discounted
cash flows did not materially impact its February 28, 2009 fair value analysis.
Actual new home development in the Companys service area and actual future tap fees inevitably
will vary significantly from the Companys estimates which could have a material impact on the
Companys financial statements as well as its results of operations. An important component in the
Companys estimate of the value of the Tap Participation Fee, which is based on historical trends,
is that the Company reasonably expects water tap fees to continue to increase in the coming years.
Tap fees are a market based pricing metric which in part demonstrates the increasing costs to
acquire and develop new water supplies. It is thus a market metric which in part demonstrates the
increasing value of the Companys water assets. The Company continues to assess the value of the
Tap Participation Fee liability and updates its valuation analysis whenever events or
circumstances indicate the assumptions used to estimate the value of the liability have changed
materially. The difference between the net present value and the estimated realizable value will
be imputed as interest expense using the effective interest method over the estimated development
period utilized in the valuation of the Tap Participation Fee.
The Company imputes interest expense on the unpaid Tap Participation Fee using the effective
interest method over the estimated development period utilized in the valuation of the liability.
The Company imputed interest of approximately $3.6 million, $3.7 million and $4.4 million during
the fiscal years ended August 31, 2010, 2009 and 2008, respectively.
After five years, under circumstances defined in the Arkansas River Agreement, the Tap
Participation Fee can increase to 20% of the Companys water tap fees and the number of water taps
subject to the Tap Participation Fee would be correspondingly reduced by half. Payment of the Tap
Participation Fee may be accelerated in the event of a merger, reorganization, sale of
substantially all assets, or similar transactions and in the event of bankruptcy and insolvency
events.
F-20
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Promissory Notes Payable by HP A&M
Certain of the properties the Company acquired from HP A&M are subject to outstanding promissory
notes with principal and accrued interest totaling approximately $11.0 million and $12.0 million at
August 31, 2010 and 2009, respectively. These promissory notes are secured by deeds of trust on the Properties. The Company did not assume any of these promissory notes and is 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, at the Companys sole discretion, the Company may make
payments pursuant to any or all of the notes and cure any or all of the defaults. If the Company
does not cure the defaults, it will lose the properties securing the defaulted notes. If HP A&M
defaults on the promissory notes, the Company can foreclose on a defined amount of stock issued to
HP A&M and reduce the Tap Participation Fee by two times the amount of notes defaulted on by HP
A&M. Because HP A&M would lose such a substantial amount of equity and the Tap Participation Fee,
and based on the financial stability of HP A&M and its owners and affiliated companies, the
probability of HP A&M defaulting on the notes is deemed remote. As far as the Company is aware, as
of August 31, 2010, HP A&M has not defaulted on any of the promissory notes. If HP A&M were to
default on the notes, the Company would lose approximately 60 of the 80 (approximately 75%) real
property interests it acquired and a comparable percentage of the water rights the Company
acquired, which are associated with those properties, unless the Company cured the notes in
default.
Because the outstanding notes are collateralized by the Companys properties and Arkansas River
Water, HP A&M is deemed to be a Variable Interest Entity (VIE) per GAAP. However, because the
Company will not absorb any of HP A&Ms expected losses or receive any of HP A&Ms expected gains,
the Company is not deemed the Primary Beneficiary of HP A&M and therefore is not required to
consolidate HP A&M. HP A&M became a VIE to the Company on August 30, 2006 when the Company
acquired the Arkansas River Water Rights and Properties subject to the outstanding promissory
notes. HP A&M is a holding company that acquires water rights and related properties for
investment and sale purposes.
Operating Lease
Effective August 27, 2009, the Company entered into an operating lease for approximately 1,000
square feet of office space. The lease has a three year term with payments of approximately
$1,400 per month.
NOTE 8: SHAREHOLDERS EQUITY
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 exceed
$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 August 31, 2010, the Company has 1,303,311 shares that can be granted to eligible
participants pursuant to the Equity Plan.
The Company estimates the fair value of share-based payment awards on the date of grant using the
Black-Scholes option-pricing model (Black-Scholes model). Using the Black-Scholes model, the
value of the portion of the award that is ultimately expected to vest is recognized as a period
expense over the requisite service period in the statement of operations. Option forfeitures are
to be estimated at the time of grant and revised if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company does not expect any forfeiture of its option
grants and therefore the compensation expense has not been reduced for estimated forfeitures. No
options were forfeited by option holders during the three fiscal years ended August 31,
2010. The Company attributes the value of share-based compensation to expense using the
straight-line single option method for all options granted.
F-21
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Companys determination of the estimated fair value of share-based payment awards on the date
of grant is affected by the following variables and assumptions:
|
|
The grant date exercise price is the closing market price of the Companys common stock
on the date of grant; |
|
|
|
Estimated option lives based on historical experience with existing option holders; |
|
|
|
Estimated dividend rates based on historical and anticipated dividends over the life of
the option; |
|
|
|
Life of the option based on historical experience option grants have lives between 8 and
10 years; |
|
|
|
Risk-free interest rates with maturities that approximate the expected life of the
options granted; |
|
|
|
Calculated stock price volatility calculated over the expected life of the options
granted, which is calculated based on the weekly closing price of the Companys common stock
over a period equal to the expected life of the option; and |
|
|
|
Option exercise behaviors based on actual and projected employee stock option exercises
and forfeitures. |
In January 2010, the Company granted its non-employee directors options to purchase a combined
12,500 shares of the Companys common stock pursuant to the Equity 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 $31,200 (approximately $2.49 per option) using the
Black-Scholes model with the following variables: weighted average exercise price of $2.88 (which
was the closing sales price of the Companys common stock on the date of the grant); estimated
option lives of ten years; estimated dividend rate of 0%; weighted average risk-free interest rate
of 3.74%; weighted average stock price volatility of 88.4%; and an estimated forfeiture rate of 0%.
The $31,200 of stock-based compensation is being expensed monthly over the vesting period.
In August 2009, the Company granted two employees options to purchase a combined 80,000 shares of
the Companys common stock pursuant to the Equity Plan. The options vest one-fifth at the grant
date and one-fifth on each of the next four anniversary dates of the grant date. The options
expire ten years from the date of grant. The Company calculated the fair value of these options at
approximately $217,300 (approximately $2.72 per option) using the Black-Scholes model with the
following variables: weighted average exercise price of $3.13 (which was the closing sales price of
the Companys common stock on the date of the grant); estimated option lives of ten years;
estimated dividend rate of 0%; weighted average risk-free interest rate of 3.51%; weighted average
stock price volatility of 89.35%; and an estimated forfeiture rate of 0%. Approximately $43,500 of
the share-based compensation was expensed at the grant date and the remaining $173,800 is being
expensed monthly over the remaining vesting period.
In January 2009, the Company granted its non-employee directors options to purchase a combined
15,000 shares of the Companys common stock pursuant to the Equity 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 $36,300 (approximately $2.42 per option) using the
Black-Scholes model with the following variables: weighted average exercise price of $2.94 (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 2.33%; weighted average stock price volatility of 91.6%; and an estimated forfeiture rate
of 0%. The $36,300 of stock-based compensation was expensed monthly over the vesting period.
In August 2008, the Company granted one of its non-employee directors an option to purchase 2,500
shares of the Companys common stock pursuant to the Equity Plan. The option vests one year from
the date of grant and expires ten years from the date of grant. The Company calculated the fair
value of this option at approximately $16,100 (approximately $6.44 per option) using the
Black-Scholes model with the following variables: weighted average exercise price of $7.64 (which
was the closing sales price of the Companys common stock on the date of the grant); estimated
option life of eight years; estimated dividend rate of 0%; weighted average risk-free interest rate
of 4.75%; weighted average stock price volatility of 92.5%; and an estimated forfeiture rate of 0%.
The $16,100 of stock-based compensation was expensed monthly over the vesting period.
F-22
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
In January 2008, the Company granted its outside directors options to purchase a combined 15,000
shares of the Companys common stock pursuant to the Equity 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 (approximately $6.25 per option)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 was expensed monthly over the vesting period.
No options were exercised during the fiscal years ended August 31, 2010 or 2009.
The following table summarizes the stock option activity for the Equity Plan for the fiscal
year ended August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Approximate |
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Instrinsic |
|
|
|
Options |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Oustanding at beginning of period |
|
|
250,000 |
|
|
$ |
6.43 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
12,500 |
|
|
$ |
2.88 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2010 |
|
|
262,500 |
|
|
$ |
6.26 |
|
|
|
6.7 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at August 31, 2010 |
|
|
202,000 |
|
|
$ |
7.22 |
|
|
|
6.2 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Intrinsic value less than zero |
The following table summarizes the activity and value of non-vested options as of and for the
fiscal year ended August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Number of |
|
|
Date Fair |
|
|
|
Options |
|
|
Value |
|
Non-vested options oustanding at beginning of period |
|
|
79,000 |
|
|
$ |
2.66 |
|
Granted |
|
|
12,500 |
|
|
|
2.49 |
|
Vested |
|
|
(31,000 |
) |
|
|
2.57 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested options outstanding at August 31, 2010 |
|
|
60,500 |
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All non-vested options are expected to vest. The total fair value of options vested during the
fiscal years ended August 31, 2010, 2009 and 2008 was approximately $79,700, $230,700 and
$195,400, respectively. The weighted average grant date fair value of options granted during the
fiscal years ended August 31, 2010, 2009 and 2008 was $2.49, $2.67 and $6.25, respectively.
Share-based compensation expense for the fiscal years ended August 31, 2010, 2009 and
2008, was approximately $87,600, $325,500 and $351,500, respectively.
F-23
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
At August 31, 2010, the Company has unrecognized expenses relating to non-vested options that are
expected to vest totaling approximately $132,500. The weighted-average period over which these
options are expected to vest is approximately two years. The Company has not recorded any excess
tax benefits to additional paid in capital.
Warrants
As of August 31, 2010, the Company had outstanding warrants to purchase 92 shares of common stock
at an exercise price of $1.80 per share. These warrants expire six months from the earlier of:
(i) |
|
The date all of the Export Water is sold or otherwise disposed of, |
|
(ii) |
|
The date the CAA is terminated with respect to the original holder of the warrant, or |
|
(iii) |
|
The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA. |
No warrants were exercised during fiscal 2010, 2009 or 2008.
Pledged Common Stock Owned by HP A&M
Pursuant to the Arkansas River Agreement, HP A&M pledged, transferred, assigned and granted to the
Company a security interest in and to (a) 1,500,000 shares of Pure Cycle common stock, (b) all
shares of Pure Cycle Common Stock hereafter issued to HP A&M by means of any dividend or
distribution in respect of the shares pledged thereunder (together with the shares identified in
(a), the Pledged Shares), (c) the certificates representing the Pledged Shares, and (d) all
rights to money or property which HP A&M now has or hereafter acquires in respect of the Pledged
Shares. The Pledged Shares are being held by the Companys corporate legal counsel.
Registration Rights Agreement
Pursuant to the Arkansas River Agreement the Company granted HP A&M one demand right to request the
registration of 750,000 shares of Pure Cycle common stock and piggyback rights to register an
additional 750,000 shares of Pure Cycle common stock.
Pursuant to the demand right, upon the request of HP A&M, the Company is required to file a
registration statement for up to 750,000 shares of the Companys common stock owned by HP A&M and
to use its reasonable best, diligent efforts to cause the registration statement to become
effective. Provided the Company exercises the appropriate efforts, it has no liability to HP A&M
if the registration statement is not declared effective. Furthermore, HP A&M has no right to put
its Company common stock to the Company or to otherwise require the Company to purchase its shares.
As of August 31, 2010, HP A&M has not requested the Company to register these shares.
HP A&M exercised its piggyback rights in July 2007 and therefore the Company registered 750,000
shares of common stock held by HP A&M.
Voting Rights Agreement
Pursuant to the Arkansas River Agreement, Mr. Mark Harding, the Companys President, agrees to vote
shares of Pure Cycle common stock owned by him (which total 727,243 shares at August 31, 2010) for
HP A&Ms designated board member (currently HP A&M does not have a board member on the Companys
board).
Gain on Extinguishment of Related Party CAA Obligations and Debt
See Note 13 below regarding the gain on extinguishment of related party CAA obligations and debt
recorded as additional paid in capital.
F-24
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Shelf Registration Statement
On July 28, 2010, the Company filed a shelf registration with the SEC to register up to $10.0
million of common stock. As further described in Note 14 below, on September 29, 2010, the Company
sold 1,848,931 shares of its common stock for approximately $5,546,800, or $3.00 per share pursuant
to this shelf registration. Following this sale, the Company can issue approximately $4,453,200 of
additional common stock pursuant to the shelf registration.
NOTE 9: SIGNIFICANT CUSTOMERS
The Company had accounts receivable from one customer that accounted for approximately 82% of the
Companys trade receivables balances at both August 31, 2010 and 2009. The Company earned revenues
from the same customer that accounted for approximately 64% of the Companys total revenues for
each of the years ended August 31, 2010, 2009 and 2008.
NOTE 10: INCOME TAXES
There is no provision for income taxes because the Company has incurred operating losses. Deferred
income taxes reflect the tax effects of net operating loss carryforwards and temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Companys deferred tax assets
as of August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended August 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
5,022,300 |
|
|
$ |
4,575,900 |
|
Imputed interest on Tap Participation Fee |
|
|
6,123,100 |
|
|
|
4,772,800 |
|
Deferred revenue |
|
|
539,400 |
|
|
|
352,100 |
|
Depreciation and depletion |
|
|
175,600 |
|
|
|
143,500 |
|
Loss in Well Enhancment LLC |
|
|
34,600 |
|
|
|
34,200 |
|
Other |
|
|
6,400 |
|
|
|
5,800 |
|
Valuation allowance |
|
|
(11,901,400 |
) |
|
|
(9,884,300 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded a valuation allowance equal to the excess of the deferred tax assets over
the deferred tax liability as the Company is unable to reasonably determine if it is more likely
than not that deferred tax assets will ultimately be realized.
Income taxes computed using the federal statutory income tax rate differs from our effective tax
rate primarily due to the following for the fiscal years ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended August 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Expected benefit from federal taxes at statutory rate of 34% |
|
$ |
(1,833,000 |
) |
|
$ |
(1,947,500 |
) |
|
$ |
(2,355,100 |
) |
State taxes, net of federal benefit |
|
|
(177,900 |
) |
|
|
(189,000 |
) |
|
|
(228,600 |
) |
Expiration of net operating losses |
|
|
147,900 |
|
|
|
142,800 |
|
|
|
117,600 |
|
Permanent and other differences |
|
|
(154,100 |
) |
|
|
121,900 |
|
|
|
131,800 |
|
Change in valuation allowance |
|
|
2,017,100 |
|
|
|
1,871,800 |
|
|
|
2,334,300 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense / benefit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2010, the Company has approximately $13.5 million of net operating loss carryforwards
available for income tax purposes which expire between fiscal 2011 and 2030. Utilization of these
net operating loss carryforwards may be subject to substantial annual ownership change limitations
provided by the Internal Revenue Code. Such an annual limitation could result in the expiration of
the net operating loss carryforwards before utilization.
F-25
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Net operating loss carryforwards of approximately $396,500, $382,800 and $315,400 expired during
the fiscal years ended August 31, 2010, 2009 and 2008, respectively.
NOTE 11: 401(k) PLAN
Effective July 25, 2006, the Company adopted the Pure Cycle Corporation 401(k) Profit Sharing Plan
(the Plan), a defined contribution retirement plan for the benefit of its employees. The Plan is
currently a salary deferral only plan and at this time the Company does not match employee
contributions. The Company pays the annual administrative fees of the Plan, and the Plan
participants pay the investment fees. The Plan is open to all employees, age 21 or older, who have
been employees of the Company for at least six months. During the fiscal years ended
August 31, 2010, 2009 and 2008, the Company paid fees of approximately $2,400, $3,800 and $2,400,
respectively, for the administration of the Plan.
NOTE 12: SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended August 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Increase in estimated
Tap Participation Fee
liability and related
discount |
|
$ |
|
|
|
$ |
4,758,038 |
|
|
$ |
3,867,321 |
|
|
|
|
|
|
|
|
|
|
|
Water rights received
from Arapahoe County
which reduced the
Construction proceeds
receivable balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
206,005 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 13: RELATED PARTY TRANSACTIONS
Until August 31, 2009, the Company leased office space from the estate of the son of its former
CEO. The Company leased the office space on a month-to-month basis for $1,000 per month.
On December 16, 2009, the Company entered into a Participation Agreement with the District whereby
the Company agreed to provide funding to the District in connection with the District joining the
South Metro Water Supply Authority (SMWSA). During the year ended August 31, 2010, the Company
provided funding of approximately $110,300. The Company anticipates providing additional funding
of approximately $20,000 per year to maintain the Districts membership in SMWSA. The $110,300
funding was expensed in the general and administrative line in the accompanying statement of
operations.
The Company paid HP A&M approximately $16,700, $41,700 and $49,700 during the fiscal
years ended August 31, 2010, 2009 and 2008, respectively. This is predominately due to the
Company paying 50% of the salary and expenses for work performed by an HP A&M employee on behalf
of the Company related to operations of the agricultural property owned by the Company in the
Arkansas River Valley. The amount paid to HP A&M in fiscal 2010 decreased approximately $25,000
from fiscal 2009 because on January 1, 2010, this employee became an employee of the Company and
on that date HP A&M began reimbursing the Company for half of said employees salary and expenses.
In fiscal 2010, HP A&M paid the Company approximately $28,100 for this employees salary and
expenses.
In 2009, the Company paid HP A&M approximately $59,700 pursuant to the Tap Participation Fee as a
result of the sale of non-irrigated land.
In 1995, the Company extended a loan to the District, a related party. The loan provided for
borrowings of up to $250,000, is unsecured, bears interest based on the prevailing prime rate plus
2% (5.25% at August 31, 2010) and matures on December 31, 2010. The approximately $519,800 balance
of the note receivable at August 31, 2010 includes borrowings of approximately $229,300 and
accrued interest of approximately $290,500. The approximately $507,800 balance of the note
receivable at August 31, 2009 includes borrowings of approximately $229,300 and accrued interest
of approximately $278,500. The Company extended the due date to December 31, 2010 and accordingly
the note has been classified as non-current.
F-26
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
See also Note 14 below regarding the sale of common stock and the issuance of the Convertible Note
to a related party subsequent to August 31, 2010.
NOTE 14: SUBSEQUENT EVENTS
As noted in Note 4 above, effective July 30, 2010, the Company entered into the Loan Sale
Agreement with BofA. The Company completed this acquisition on October 18, 2010. The
total consideration paid to BofA pursuant to the Loan Sale Agreement was $7.0 million in cash
($700,000 was remitted prior to August 31, 2010 with the remaining $6.3 million being remitted to
BofA subsequent to August 31, 2010). The funding for this was completed in September 2010, when
the Company entered into the $5.2 million Convertible Note with PAR Investment Partners, L.P.
(PAR), a 5% or greater shareholder of the Company, and sold approximately 1.8 million shares of
its common stock for approximately $5.5 million. Both financing transactions are described below.
Of the combined $10.7 million raised by the Company, $6.3 million was used to complete the Loan
Sale Agreement with BofA and the remaining funds, approximately $4.4 million (when added to the
Companys current cash, cash equivalent and marketable security balances of approximately $1.4
million provides the Company with approximately $5.8 million) will be used for working capital and
other general corporate purposes.
Issuance of the Convertible Note
The Company issued the $5.2 million Convertible Note to PAR on September 28, 2010. The Convertible
Note (i) bears interest at 10% per annum, (ii) does not require payments until April 1, 2011, at
which time interest only payments are due monthly (interest accruing from September 28, 2010
March 31, 2011 is due on April 1, 2011) on the first day of each subsequent month until the
Convertible Note matures on January 15, 2012, (iii) is unsecured, and (iv) upon approval by the
Companys shareholders, can be converted to unregistered common stock at a conversion price of
$2.70 per share. The Company intends to seek shareholder approval to convert the Convertible Note
to common stock at its 2011 annual shareholders meeting. In conjunction with the Convertible
Note, the Company granted PAR one demand right and piggyback rights to register the shares of
common stock issuable upon conversion of the Convertible Note.
If the Companys shareholders do not approve the conversion of the Convertible Note to common
stock, the Convertible Note would require the following payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending: |
|
Principal Payments |
|
|
Interest Payments |
|
|
Total Payments |
|
August 31, 2011 |
|
$ |
|
|
|
$ |
486,800 |
|
|
$ |
486,800 |
|
August 31, 2012 |
|
|
5,200,000 |
|
|
|
197,900 |
|
|
|
5,397,900 |
|
|
|
|
|
|
|
|
|
|
|
Total payments |
|
$ |
5,200,000 |
|
|
$ |
684,700 |
|
|
$ |
5,884,700 |
|
|
|
|
|
|
|
|
|
|
|
If the Companys shareholders approve the conversion of the Convertible Note to common stock, the
number of common shares issued will be determined based on the principal and accrued interest at
the date of approval.
Sale of common stock pursuant to the shelf registrations
On September 29, 2010, the Company sold 1,848,931 shares of its common stock for approximately $5.5
million or $3.00 per share. These shares were sold pursuant to a $10.0 million effective shelf
registration statement (registration number 333-168160) filed with the SEC on July 28, 2010.
Following this issuance, the Company can issue up to an additional $4.5 million of its common stock
pursuant to the shelf registration statement. Approximately 930,600 shares of common stock sold in
this offering were sold to PAR for approximately $2.8 million or $3.00 per share.
F-27
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE
15: SUPPLEMENTAL DATA: SELECTED QUARTERLY FINANCIAL INFORMATION
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 quarters ended: |
|
August 31 |
|
|
May 31 |
|
|
February 28 |
|
|
November 30 |
|
Total revenues |
|
$ |
95.3 |
|
|
$ |
58.0 |
|
|
$ |
51.2 |
|
|
$ |
59.6 |
|
Gross margin |
|
$ |
49.2 |
|
|
$ |
22.3 |
|
|
$ |
13.7 |
|
|
$ |
17.1 |
|
Net loss |
|
$ |
(1,264.9 |
) |
|
$ |
(1,333.4 |
) |
|
$ |
(1,514.3 |
) |
|
$ |
(1,278.7 |
) |
Earnings per share basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
3.15 |
|
|
$ |
3.27 |
|
|
$ |
3.24 |
|
|
$ |
3.68 |
|
Low |
|
$ |
2.22 |
|
|
$ |
2.30 |
|
|
$ |
2.00 |
|
|
$ |
2.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 quarters ended: |
|
August 31 |
|
|
May 31 |
|
|
February 28 |
|
|
November 30 |
|
Total revenues |
|
$ |
79.8 |
|
|
$ |
62.5 |
|
|
$ |
54.1 |
|
|
$ |
63.8 |
|
Gross margin |
|
$ |
36.8 |
|
|
$ |
25.7 |
|
|
$ |
17.0 |
|
|
$ |
17.3 |
|
Net loss |
|
$ |
(1,289.5 |
) |
|
$ |
(1,325.2 |
) |
|
$ |
(1,401.3 |
) |
|
$ |
(1,712.1 |
) |
Earnings per share basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.08 |
) |
Market price of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
3.70 |
|
|
$ |
3.25 |
|
|
$ |
3.96 |
|
|
$ |
6.09 |
|
Low |
|
$ |
2.41 |
|
|
$ |
2.16 |
|
|
$ |
1.75 |
|
|
$ |
2.09 |
|
*****
F-28
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
There were no changes in or disagreement with accountants on accounting and financial disclosures.
Item 9A Controls and Procedures
(a) |
|
Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that
information required to be disclosed in our reports filed or submitted to the SEC under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified by
the Commissions rules and forms, and that information is accumulated and communicated to
management, including the principal executive and financial officer as appropriate, to allow timely
decisions regarding required disclosures. The President and Chief Financial Officer evaluated the
effectiveness of disclosure controls and procedures as of August 31, 2010, pursuant to Rule
13a-15(b) under the Exchange Act. Based on that evaluation, the President and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the Companys
disclosure controls and procedures were effective. 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.
(b) |
|
Managements Report on Internal Control Over Financial Reporting |
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. The
Exchange Act defines internal control over financial reporting as a process designed by, or under
the supervision of, the Companys principal executive and principal financial officers and effected
by the Companys board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America and includes those policies and procedures that:
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company; |
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and |
|
|
|
|
Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of the Companys internal control over financial reporting as
of August 31, 2010. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated
Framework. Based on our assessment, we determined that, as of August 31, 2010, the Companys
internal control over financial reporting was effective based on those criteria.
GHP Horwath P.C. (GHP) our independent registered public accounting firm has performed an audit
of the effectiveness of the Companys internal control over financial reporting as of August 31,
2010. This audit is required to be performed in accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Our independent auditors were given unrestricted access to all financial records and
related data. The report of the Companys independent registered public accounting firm, including
the attestation report on our internal control over financial reporting is included in Item 8.
Financial Statements and Supplementary Data.
31
(c) |
|
Changes in Internal Controls |
No changes were made to our internal control over financial reporting during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B Other Information
None
PART III
Information concerning Items 10 through Items 14 will be contained in our definitive Proxy
Statement pursuant to Regulation 14A promulgated under the Exchange Act for the 2010 Annual Meeting
of Shareholders and is incorporated herein by reference, which is expected to be filed on or about
December 2, 2010.
PART IV
Item 15 Exhibits and Financial Statement Schedules
(a) |
|
Financial Statements |
|
1. |
|
See Index to Financial Statements and Supplementary Data in Part
II, Item 8 of this Form 10-K. |
|
2. |
|
Financial Statement Schedules: None |
|
3. |
|
Exhibits: The exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as part of this
Form 10-K |
Index to Exhibits
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Articles of Incorporation of Pure Cycle Corporation. Incorporated
by reference to Appendix B to the Proxy Statement on Schedule 14A
filed December 14, 2007. |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of Pure Cycle Corporation. Incorporated by reference to
Appendix C to the Proxy Statement on Schedule 14A filed December
14, 2007. |
|
|
|
|
|
|
4.1 |
|
|
Specimen Stock Certificate. Incorporated by reference to Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 2010. |
|
|
|
|
|
|
10.1 |
|
|
Right of First Refusal Agreement dated August 12, 1992 between INCO
Securities Corporation and Richard F. Myers, Mark W. Harding,
Thomas P. Clark, Thomas Lamm and Rowena Rogers. Incorporated by
Reference from Registration Statement on Form SB-2, filed April 19,
2004, Registration No. 333-114568. |
|
|
|
|
|
|
10.2 |
|
|
2004 Equity Incentive Plan, Incorporated by reference from Proxy
Statement for Annual Meeting held April 12, 2004. ** |
|
|
|
|
|
|
10.3 |
|
|
Service Agreement, dated April 11, 1996, by and between Pure Cycle
Corporation and the Rangeview Metropolitan District. Incorporated
by reference from Quarterly Report on Form 10-QSB for the period
ended May 31, 1996. |
32
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
10.4 |
|
|
Wastewater Service Agreement, dated January 22, 1997, by and
between Pure Cycle Corporation and the Rangeview Metropolitan
District. Incorporated by reference from the Annual Report on Form
10-KSB for the fiscal year ended August 31, 1998. |
|
|
|
|
|
|
10.5 |
|
|
Comprehensive Amendment Agreement No. 1, dated April 11, 1996, by
and among ISC, the Company, the Bondholders, Gregory M. Morey,
Newell Augur, Jr., Bill Peterson, Stuart Sundlun, Alan C. Stormo,
Beverlee A. Beardslee, Bradley Kent Beardslee, Robert Douglas
Beardslee, Asra Corporation, International Properties, Inc., and
the Land Board. Incorporated by reference from Quarterly Report on
Form 10-QSB for the period ended May 31, 1996. |
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10.6 |
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Agreement for Sale of Export Water dated April 11, 1996 by and
among the Company and the District. Incorporated by reference from
Quarterly Report on Form 10-QSB for the fiscal quarter ended May
31, 1996). |
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10.7 |
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Water Service Agreement for the Sky Ranch PUD dated October 31,
2003 by and between Airpark Metropolitan District, Icon Investors
I, LLC, the Company and the District. Incorporated by reference
from Registration Statement on Form SB-2, filed April 19, 2004,
Registration No. 333-114568. |
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10.8 |
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Amendment to Water Service Agreement for the Sky Ranch PUD dated
January 6, 2004. Incorporated by Reference from Amendment No. 1 to
Registration Statement on Form SB-2, filed June 7, 2004,
Registration No. 333-114568. |
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10.9 |
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Agreement to Amend Water Service Agreement for the Sky Ranch PUD
dated January 30, 2004. Incorporated by Reference from Amendment
No. 1 to Registration Statement on Form SB-2, filed June 7, 2004,
Registration No. 333-114568. |
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10.10 |
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Agreement to Amend Option Agreement for Export Water Service for
the Sky Ranch PUD dated January 30, 2004. Incorporated by Reference
from Amendment No. 1 to Registration Statement on Form SB-2, filed
June 7, 2004, Registration No. 333-114568. |
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10.11 |
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Second Amendment to Water Service Agreement for the Sky Ranch PUD
dated March 5, 2004. Incorporated by Reference from original Annual
Report on Form 10-K for the fiscal year ended August 31, 2007,
filed November 21, 2006. |
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10.12 |
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Amended and Restated Lease Agreement between the Land Board and the
District dated April 4, 1996. Incorporated by Reference from
Amendment No. 1 to Registration Statement on Form SB-2, filed June
7, 2004, Registration No. 333-114568. |
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10.13 |
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Bargain and Sale Deed among the Land Board, the District and the
Company dated April 11, 1996. Incorporated by Reference from
Amendment No. 1 to Registration Statement on Form SB-2, filed June
7, 2004, Registration No. 333-114568. |
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10.14 |
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Mortgage Deed, Security Agreement, and Financing Statement between
the Land Board and the Company dated April 11, 1996. Incorporated
by Reference from Amendment No. 1 to Registration Statement on Form
SB-2, filed June 7, 2004, Registration No. 333-114568. |
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10.15 |
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Water Service Agreement for the Hills at Sky Ranch Water dated May
14, 2004 among Icon Land II, LLC, a Colorado limited liability
company, the Company, and the District. Incorporated by reference
from the Current Report on Form 8-K filed with the SEC on May 21,
2004. |
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10.16 |
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Agreement for Water Service dated August 3, 2005 among Pure Cycle
Corporation, Rangeview Metropolitan District and Arapahoe County
incorporated by reference from Form 8-K filed on August 4, 2005. |
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10.17 |
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Arkansas River Agreement dated May 10, 2006, between Pure Cycle
Corporation and High Plains A&M, LLC, and the Seller Pledge
Agreement, Pure Cycle Corporation Pledge Agreement, Property
Management Agreement, and Registration Rights Agreement, attached
as exhibits thereto, entered into between Pure Cycle Corporation
and High Plains A&M, LLC dated August 31, 2009. Incorporated by
reference from Form 8-K filed on May 16, 2006. |
33
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Exhibit No. |
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Description |
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10.18 |
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Amendment No. 1 to Agreement for Water Service dated August 25,
2008, between Pure Cycle Corporation and Arapahoe County.
Incorporated by reference from Form 10-K for the fiscal
year ended August 31, 2008. |
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10.19 |
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Loan Sale and Assignment Agreement dated July 30, 2010, between
Pure Cycle Corporation and Bank of America, N.A. Incorporated by
reference from Form 8-K filed on August 4, 2010. |
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10.20 |
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License Agreement between Pure Cycle Corporation and Sky Ranch LLC,
a Colorado limited liability company, Debtor-in-Possession.
Incorporated by reference from Form 8-K filed on August 4, 2010. |
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10.21 |
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Convertible Negotiable Note Payable dated September 28, 2010,
between Pure Cycle Corporation and PAR Investment Partners, L.P.
Incorporated by reference from Form 8-K filed on September 29,
2010. |
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10.22 |
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Registration Rights Agreement dated September 28, 2010, between
Pure Cycle Corporation and PAR Investment Partners, L.P.
Incorporated by reference from Form 8-K filed on September 29,
2010. |
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14 |
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Code of Ethics as amended August 2, 2007. Incorporated by
reference from Form 10-K for the fiscal year ended August
31, 2008. |
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23.1 |
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Consent of GHP Horwath, P.C. * |
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31.1 |
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Certification under Section 302 of the Sarbanes-Oxley Act of 2002. * |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted
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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** |
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Indicates management contract or compensatory plan or arrangement
in which directors or executive officers are eligible to
participate. |
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PURE CYCLE CORPORATION |
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By:
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/s/ Mark W. Harding
Mark W. Harding, President and Chief Financial Officer
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November 12, 2010 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacity and on the dates
indicated.
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Signature |
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Title |
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Date |
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/s/ Mark W. Harding
Mark W. Harding
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President,
Chief Financial Officer and
Director (Principal
Executive Officer,
Principal Financial and Accounting
Officer)
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November 12, 2010 |
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/s/ Harrison H. Augur
Harrison H. Augur
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Chairman,
Director
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November 12, 2010 |
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/s/ Arthur G. Epker III
Arthur G. Epker III
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Director
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November 12, 2010 |
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/s/ Richard L. Guido
Richard L. Guido
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Director
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November 12, 2010 |
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/s/ Peter C. Howell
Peter C. Howell
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Director
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November 12, 2010 |
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/s/ George M. Middlemas
George M. Middlemas
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Director
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November 12, 2010 |
35