UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2003
Commission File Number 0-8814
PURE CYCLE CORPORATION
(Name of small business issuer as specified in its charter)
Delaware 84-0705083
(State of incorporation) (I.R.S. Employer Identification No.)
8451 Delaware Street, Thornton, CO 80260
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (303) 292-3456
Name of each
exchange
Securities registered on which
under Section 12(b)of registered
the Exchange Act: Title of Class
None None
Securities registered pursuant to Section 12(g) of the Exchange
Act:
Common Stock,
1/3 of $.01 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 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
[x] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]
Revenues for fiscal year ended August 31, 2003: $ 225,432
Aggregate market value of the voting stock held by non-
affiliates: $39,219,881 (based upon closing price on the OTC
Bulletin Board on November 7, 2003)
Number of shares of Common Stock outstanding, as of August 31,
2003: 78,439,763
Transitional Small Business Disclosure Format(Check One):
Yes [ ] No [x]
Documents incorporated by reference: None
Table of Contents
Part I
Item Page
1. Description of Business 3
2. Description of Property 6
3. Legal Proceedings 7
4. Submission of Matters to a
Vote of Security Holders 7
Part II
5. Market for Common Equity and
Related Stockholder Matters 7
6. Management's Discussion and Analysis 8
7. Financial Statements 13
8. Changes in and Disagreements with
Accountantson Accounting and
Financial Disclosure 27
Part III
9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance with Section 16(a)
of the Exchange Act 28
10. Executive Compensation 30
11. Security Ownership of Certain
BeneficialOwners and Management 31
12. Certain Relationships and Related
Transactions 35
13. Exhibits and Reports on Form 8-K 35
14. Controls and Procedures 37
Signatures 38
"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-KSB are forward looking statements
involving risk and uncertainties that could cause actual results
to differ from projected results. Factors that could cause
actual results to differ materially include, among others, the
market price of water, changes in applicable statutory and
regulatory requirements, changes in technology, uncertainties in
the estimation of water available under decrees and timing and
cost of development and delivery, uncertainties in the
estimation of revenues and costs of construction projects, the
strength and financial resources of the Company's competitors,
the Company's ability to find and retain skilled personnel,
climatic conditions, labor relations, availability and cost of
material and equipment, delays in anticipated permit and start-
up dates, environmental risks, the results of financing efforts,
and general economic conditions.
PART I
Item 1. Description of Business
General
Pure Cycle Corporation (the "Company") was incorporated in
Delaware in 1976. The Company is engaged in providing water and
wastewater services to customers located in Denver Colorado
where its principal assets are located. The Company operates
water and wastewater systems which include designing,
constructing, operating and maintaining systems to service
customers in the Denver metropolitan area. In 1996, the
Company entered into a long-term agreement to provide water and
wastewater services to 24,000 acres of primarily undeveloped
land in the greater Denver metropolitan area owned by the State
of Colorado known as the Lowry Range. This agreement with the
State of Colorado Board of Land Commissioners ("State Land
Board") and the Rangeview Metropolitan District ("District"), a
quasi-municipal political subdivision of the State provides for
the use of water supplies from the Lowry Range ("Rangeview Water
Supply") to provide water services to the Company's 24,000 acre
service area which is located in the greater Denver metropolitan
area in Arapahoe County ("Service Area"). As part of the
agreement, the Company also acquired the rights to additional
water that can be "exported" from the Lowry Range to supply
water to nearby communities and developers in need of additional
water supplies.
The Company owns additional water assets in western Colorado
known as the Paradise Water Supply, which the Company seeks to
develop and market either to the greater Denver metropolitan
area or in markets in the downstream states of Nevada, Arizona,
and southern California. The Company also owns patented water
recycling technologies which are capable of processing
wastewater into pure potable drinking water. The Company may
seek to utilize this technology in the future to enable it to
reuse its water supplies. There have been no significant
changes in the way the Company does business during the year.
The Company's focus continues to be to provide water and
wastewater service to customers within its Service Area and to
expand its service to other areas throughout the Denver
metropolitan area and the southwestern United States.
Description of Company Assets
Rangeview Water Supply
The Rangeview Water Supply is a combination of groundwater,
surface water, and surface water storage rights located within
the greater Denver metropolitan area in Arapahoe County, which
the Company utilizes to provide water and wastewater service to
customers located within the Company's Service Area as well as
other customers outside its Service Area in need of additional
water supplies. Certain of these water assets are owned by the
Company which include 1,165,000 acre feet of groundwater (with
an annual usage right of 11,650 acre feet per year), an option
to substitute 1,650 acre feet of surface water in exchange for a
total gross volume of 165,000 acre feet of groundwater, and the
use of surface reservoir storage capacity (collectively referred
to as the "Export Water Supply"). The Company seeks to develop
the Export Water Supply for customers outside the Service Area,
customers which would include neighboring communities in need of
additional water or developers seeking to develop new
communities needing water and wastewater services.
In addition to the water assets owned by the Company, pursuant
to two eighty-five year water and wastewater privatization
agreements, the Company manages the utility operations of the
Rangeview District, including design, construction, operation,
and maintenance of the District's water and wastewater systems
to service customers within the District's 24,000 acre Service
Area. The District has reserved an additional 14,350 acre feet
per year of groundwater, surface water, and surface reservoir
storage capacity (collectively referred to as the "Service Area
Water Supply") for the Company's exclusive use to provide water
and wastewater to customers within the Service Area. The
Service Area is located in Arapahoe County and is bordered by
the City of Aurora which is currently constructing a number of
residential housing developments directly adjacent to the
Service Area. Development of the Service Area has become a
priority for the State Land Board to generate income from their
real estate holding for the funding of the Colorado School Trust
which provides funding for public K-12 schools.
In addition to the water assets, the Company also owns a right
of first refusal to purchase 40 acres of real property which
constitute the boundaries of the District. The Company's
President, CEO, and Secretary serve as elected members of the
Board of Directors of the District.
Service Agreements
In 1996, the Company entered into an eighty-five year water
privatization agreement with the District to design, construct,
operate, and maintain the District's water system to provide
water service to the District's customers within the Service
Area. The District has reserved approximately 14,350 acre feet
of water per year, together with surface reservoir storage
capacity for the Company's use in providing water service to
customers within the District's Service Area. In exchange for
providing water service to customers within the Service Area,
the Company will receive 95% of all amounts received by the
District relating to water services remaining after payment of
royalties to the State Land Board totaling 12% of the gross
revenues received from water sales.
In January of 1997, the Company entered into an eighty-five
year Wastewater Service Agreement with the District which
provides for the Company to design, finance, construct, operate
and maintain the District's wastewater system to provide
wastewater service to customers within the Service Area. In
exchange for providing wastewater service to customers within
the Service Area, the Company will receive 100% of the
District's wastewater tap fees, and 90% of the District's
wastewater usage fees.
The Company supplies water and wastewater services to
customers within the 24,000 acres of property which constitute
the boundaries of the Service Area. The Service Area is located
in southeastern Arapahoe County, Colorado, a growing county
bordering Denver, Colorado. Currently the majority of the
property is undeveloped land owned by the State of Colorado;
however, portions of the property have been developed.
Development of the property is dependent on overall growth in
the Denver metropolitan area.
Paradise Water Supply
In 1987, the Company acquired certain water, water wells, and
related assets from Paradise Oil, Water and Land Development,
Inc., which constitute the "Paradise Water Supply." The
Paradise Water Supply includes 70,000 acre feet of tributary
Colorado River decreed 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 water wells ranging in
depth from 900 feet to 1,800 feet. The water wells are capable
of producing approximately 7,500 - 9,400 gallons per minute or
approximately 14,000 acre feet per well per year with an
artesian pressure of approximately 100 pounds per square inch.
Recycling Technology
The Company developed and patented water recycling technology
which converts single-family home wastewater/sewage into pure
potable drinking water. The Company manufactured, installed and
operated the single-family water recycling units in the late
1970's and early 1980's until halting production of the units in
1982. The Company has shifted its strategic market for its
water recycling technology from its original single-family units
to large municipal wastewater treatment applications. The
Company has not operated a large wastewater treatment plant
using its technologies and there can be no assurance that the
technology will be technically or economically feasible on a
large scale. The Company, through its Wastewater Service
Agreement, will seek to apply its water recycling technology as
more customers are added to the system to treat municipal
wastewater into pure potable water for reuse.
The Business
Pure Cycle Corporation (the "Company") is an investor owned
water and wastewater service provider, providing water and
wastewater service to customers within its Service Area as well
as customers outside its Service Area in the Denver metropolitan
area. The Company has acquired a portfolio of water assets and
Service Agreements which are described above in the Description
of Company Assets. The Company seeks to utilize its water
assets and wastewater treatment technologies to privatize other
government owned water and wastewater systems in Colorado and
throughout the southwestern United States.
Development of the District's Service Area is dependent on
growth in the Denver metropolitan area, and on the State of
Colorado selling portions of its property located within the
Service Area to parties interested in the development of the
land. During 2003, the District together with several other
governmental agencies have been working together with the State
Land Board to assist in determining what type of development may
be suitable for the State Land Board's Lowry Range property. As
part of this effort, two independent engineering evaluations
have determined the available water supplies are capable of
providing sustainable water service up to 100,000 single family
equivalent units. The Company's service area incorporates
24,000 acres of the total 27,000 acres of the Lowry Range
property. The water owned or controlled by the Company pursuant
to its Service Agreements, based on a review by independent
engineers, is capable of providing sustainable water service to
approximately 80,000 single family equivalent units.
A number of development models have been explored by the State
Land Board and the surrounding governmental agencies which range
from continued development of the type of the surrounding
development along the property's three borders, to a new planned
community, to a compact high density development model. The
State Land Board has received several reports and information
regarding the development options and will evaluate their
options over the next few months.
Pursuant to the Company's water and wastewater Service
Agreements, the Company will develop, operate and maintain the
District's water and wastewater systems. In exchange for
developing, operating and maintaining the District's water
system, the Company receives 95% of the water tap fee and usage
fee revenues after payment of a twelve percent (12%) royalty to
the State Land Board. In exchange for developing, operating and
maintaining the District's wastewater system the Company
receives 100% of the District's wastewater tap fees and 90% of
the District's wastewater usage fees. Pursuant to its
agreements, the Company's rates and charges are established by
the average of similar rates and charges of the three
surrounding municipal water providers. Portions of the
Company's participation in the water and wastewater tap fees and
user fees are required to be used to finance the development of
facilities needed to furnish water and wastewater service.
The 40 largest municipal water providers in the Denver
metropolitan area deliver approximately 98% of the water
consumed by residents and businesses in the Denver metropolitan
area. The Company is actively marketing the Export Water Supply
to each of the 40 largest providers. The Export Water Supply
could be sold for a lump sum amount or incrementally pursuant to
service contracts whereby the Company would design, construct,
operate and maintain the water system to deliver the water to
customers. As a result of the continuing growth of the Denver
metropolitan region as well as the limited availability of new
water supplies, many metropolitan planning agencies are
requiring property developers to first demonstrate adequate
water availability prior to any consideration for zoning
requests. This has resulted in the Company marketing its water
to area developers and home builders seeking to develop new
projects. The timing, terms, and conditions of sales, if any,
are dependent on the purchaser.
The Company is also pursuing the sale of water from the
Paradise Water Supply to users in the Denver metropolitan area
and to cities, municipalities, and special districts in the
downstream states of Arizona, Nevada and California. However,
there are certain restrictions under the Colorado River Compact
which relate to a reallocation of water from one state to
another, including a requirement that a court decree authorizing
the use of the water out of state be obtained, and compliance
with other interstate compacts or agreements, which would need
to be resolved or complied with before the Paradise Water Supply
can be sold to users outside of Colorado.
The Company's business of providing water and wastewater
services is subject to competitive factors since alternative
providers are available. The Company is aware of other private
water companies who are attempting to market competing service
to municipal water providers in the Denver area. In addition,
municipal water providers seeking to acquire water evaluate
independent water owned by individuals, farmers, ranchers, and
others. The principal factors affecting competition in this
regard include, but may not be limited to, the availability of
water for the particular purpose, the cost of delivering the
water to the desired location, the availability of water during
dry year periods, the quality and quantity of the water source,
and the reliability of the water supply. The Company believes
that its water provides the Company with an advantage over its
competition because the water the Company owns has been
designated for municipal use by decrees issued by Colorado water
courts, and because of the quantity of water available, the
quality of water, its location relative to the Denver
metropolitan area (and Paradise's location to deliver water to
either downstream users or Denver area water users through
exchanges or other transfers), and price. The quantity of water
the Company has available for sale has been determined by court
decrees of the Colorado water courts. The Company has had the
quality and quantity of the Rangeview and Paradise Water Supply
evaluated by independent appraisers and water engineers. The
Rangeview water quality, without treatment, meets or exceeds all
current federal and state drinking water standards.
Water processing and municipal water recycling are also
subject to competition from municipal water providers who also
provide wastewater/sewage processing, and from regional
wastewater/sewage processors. The majority of wastewater/sewage
treatment in the Denver metropolitan area is processed by
approximately 10 major wastewater/sewage treatment providers.
The majority of Denver area water providers participate in the
Metropolitan Wastewater Authority which processes approximately
95% of the area's wastewater/sewage. The Company is not aware
of any private companies providing wastewater/sewage treatment
services in the Denver metropolitan area. The Company believes
that it could have a competitive advantage because its
wastewater treatment technology uses no toxic chemicals and the
water after processing exceeds stringent water quality standards
currently in effect.
If the Company is successful in selling water, the
construction of wells, dams, pipelines and storage facilities
may require compliance with environmental regulations; however,
the Company believes that regulatory compliance would not
materially impact such a sale. It is anticipated that the
Company, as part of its commitment to provide water and
wastewater services, would design, construct and operate the
water and wastewater systems. The Company would incur
substantial capital expenditures to construct the facilities
necessary to provide its water and wastewater service. However,
the Company cannot assess such costs until the purchaser of the
water and the nature of the water delivery system required has
been determined. Similarly if the Company were to obtain a
contract for treatment of wastewater and sewage, governmental
regulations concerning drinking water quality and wastewater
discharge quality may be applicable. However, until the Company
has a contract proposal specifying the quantity and type of
wastewater to be treated and the proposed use of such treated
water, the cost of regulatory compliance cannot be determined.
The Company holds several patents in the United States and
abroad related to its water recycling system and its components.
The value to the Company of these patents is dependent upon the
Company's ability to adapt its water recycling system to larger
scale applications, or to develop other uses for the technology.
The Company currently has three full time employees and one
part time employee.
Comprehensive Amendment Agreement
In order to acquire the Rangeview Water Supply, the Company
negotiated an agreement with the State of Colorado and all of
the holders of the Rangeview bonds (the "Settlement Agreement")
and with all prior investors pursuant to investment agreements
relating to the development of the Rangeview water asset.
Pursuant to this amendment known as the Comprehensive Amendment
Agreement (the "CAA") such bond holders and investors have a
right to receive a total of $31,807,000 from the proceeds of a
sale or other disposition of the Export Water Supply (see Note 3
to the financial statements).
Item 2. Description of Property
The Company currently leases office facilities at no cost from
a related party at the address shown on the cover page.
The Company owns a total gross volume of 1,165,000 acre feet
(approximately 11,650 acre feet per year) of non-tributary
groundwater, an option to substitute 1,650 acre feet of
tributary surface water in exchange for a total gross volume of
165,000 acre feet of non-tributary groundwater, and surface
storage rights from the District. See "Item 1. Description of
Business - Description of Company's Assets - Rangeview Water
Supply." The Company is party to two eighty-five year water
privatization agreements with the Rangeview Metropolitan
District which entitles the Company to design, construct,
operate and maintain the water and wastewater systems which
serve customers within the District's Service Area. In
exchange, the Company receives 95% of all amounts received by
the District relating to water services remaining after payment
of royalties totaling 12% of gross revenues to the State of
Colorado Board of Land Commissioners, and 100% of the District's
wastewater tap fees and 90% of the District's wastewater usage
fees.
The Company owns approximately 70,000 acre feet of conditional
water rights, water wells and related assets in the State of
Colorado by assignment and quitclaim deed. See "Item 1.
Description of Business - Description of Company's Assets -
Paradise Water Supply."
Item 3. Legal Proceedings
The Company has no legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the
fourth quarter ended August 31, 2003.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters
Markets
The table below shows for the quarters indicated the high and
low bid prices of the 1/3 of $.01 par value per share of common
stock (the "Common Stock") on the OTC Bulletin Board. The
Company's Common Stock is traded on the OTC Bulletin Board under
the trade symbol PCYL. As of November 5, 2003, there were 3,875
holders of record of the Company's Common Stock.
Fiscal Quarter Low High
2003 First $.09 $.18
Second $.10 $.28
Third $.16 $.27
Fourth $.17 $.30
2002 First $.08 $.15
Second $.06 $.12
Third $.06 $.21
Fourth $.09 $.19
Quotations reflect inter-dealer prices, without retail mark-
up, mark-down or commission, and may not necessarily represent
actual transactions.
Dividends
The Company has never paid any dividends on its Common Stock
and does not anticipate paying any dividends in the foreseeable
future. Dividends cannot be paid on the Common Stock at any
time when there are unpaid accrued dividends owing on the
Company's outstanding preferred stock.
Recent Sales of Unregistered Securities
In August 2003, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the
Company issued 2,000,000 shares of Series D-1 Convertible
Preferred Stock to the Company's CEO, Mr. Thomas Clark in
exchange for 2,000,000 shares of Common Stock owned by Mr.
Clark. The Company sold 2,000,000 shares of the Company's
Common Stock at $.25 per share to eleven accredited investors,
four of whom had previously invested with the Company. Proceeds
to the Company were $500,000. The Preferred Stock was issued
under Section 4(2) of the Securities Act of 1933. The Common
Stock was sold pursuant to Regulation D, Rule 506.
Item 6. Management's Discussion and Analysis
General
Pure Cycle is an investor owned water and wastewater provider
engaged in the design, operation, maintenance of water and
wastewater systems primarily in the Denver metropolitan area
with assets available to serve areas in the southwestern United
States. The Company purchased approximately 1,165,000 acre feet
of water (11,650 acre feet annually) and entered into two
eighty-five year water and wastewater Service Agreements with
the Rangeview Metropolitan District which enables the Company to
provide water and wastewater service to its Service Area and
other customers located throughout the Denver area. The Company
intends to integrate its water recycling technologies for
processing wastewater into pure potable water for reuse at its
wastewater reclamation facilitity as wastewater flows increase
from development within the District's Service Area.
The Company is aggressively pursuing the marketing and sale of
its water rights to municipal water providers in the Denver
metropolitan region as well as users in Arizona, Nevada and
California to generate current and long term revenues to the
Company. As a result of the continuing growth of the Denver
metropolitan region and the limited availability of new water
supplies, many metropolitan planning agencies are requiring
property developers to first demonstrate adequate water
availability prior to any consideration for zoning requests on
property development. This has resulted in the Company
marketing its water to area developers and home builders seeking
to develop new projects as well as other municipal water
providers in need of additional water supplies.
The Company has also presented water supply proposals to
private and municipal water providers in Nevada, Arizona and
California for the sale of the Company's 70,000 acre feet of
Paradise Water Supply, understanding that certain legal issues
relating to interstate water transfers may exist. The Company
continues to discuss water supply arrangements with private
companies and municipal water providers to whom it has made
proposals. The Company continues to identify and market its
water to other private developers and municipal water providers.
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. The
Company's water assets are long-lived assets which are expected
to deliver water to customers for periods in excess of 100 years.
Management believes the Company's impairment analysis for its
Rangeview water supply incorporates a reasonable development
horizon for the District's 24,000 acre Service Area. During the
fiscal year ended August 31, 2003, the District's engineers
conducted an analysis of the available Rangeview water supply and
concluded the available supply is capable of providing a
sustainable water supply for the Service Area capable of serving
up to 100,000 single family equivalent homes. This analysis was
then reviewed by a second engineering firm which concurred with
the findings. The Company's Export Water Supply together with
the water available under the Service Contract is capable of
providing service to up to 80,000 of the 100,000 single family
equivalent units. Development of the Service Area may take
between 30 and 40 years to fully develop. The Service Area is
located at the edge of the Denver metropolitan area and a small
portion of the property has already been developed.
Key assumptions used in the impairment analysis are as
follows: The Company is to receive revenues from two income
sources: 1) a one time access fee charged to new water and
wastewater customers known as tap fees; and 2) an annual fee
based on the amount of water delivered to customers. The
Company's established fees are the average of the three
surrounding municipal water providers, which currently are
$11,100 per tap and $2.25 per 1,000 gallons of water delivered.
The Company's engineers have estimated the cost to construct the
infrastructure needed to deliver the Rangeview water supply to
customers within its Service Area and operating and maintenance
costs of the water system. Based upon these key assumptions the
Company's cash flow projections exceed the capitalized costs of
the asset as of August 31, 2003.
The Company's impairment analysis for its Paradise water
supply projects the development and sale of 70,000 acre feet of
its Colorado River water supply over a 30 year period. The
Company has two principal markets for the Paradise asset: one is
users within the Denver metropolitan area; and second is users in
the downstream states of Nevada, Arizona and California.
Infrastructure currently exists to transport Colorado River water
to the Denver metropolitan area. The Company would seek to
deliver its Paradise water to reservoirs which it owns as part of
the Rangeview water supply and deliver Paradise water through its
Rangeview water system. The key assumption used in the
impairment analysis is the sale of water to users in the Denver
market, based on the same terms as those used for the Rangeview
asset, receiving revenues from tap fees, and annual water usage
fees from delivered water.
The Company estimates that the cost to deliver the Paradise
water to the Denver metropolitan area through an exchange of
water for use of existing infrastructure owned by others may
consume up to 50% of the Paradise water supply, thus allowing for
the delivery of approximately 35,000 acre feet of Paradise water
to the Rangeview water system. Based upon these key assumptions
the Company's cash flow projections exceed the capitalized costs
of the asset as of August 31, 2003.
Alternatively, the delivery of the Paradise asset to the
downstream states (i.e. Nevada, Arizona and California) would be
accomplished by using the Colorado River as the delivery
mechanism. Use of the Colorado River as the delivery mechanism
to the farthest deliverable point in southern California could
result in water losses, primarily due to evaporation, of up to
50%. The key assumption used in the impairment analysis is the
sale of water to users in the downstream states based on
comparable wholesale water supply agreements generating
approximately $400 per acre foot per year. Based upon these
assumptions for delivery of water to users in the downstream
states, the Company's cash flow projections exceed the
capitalized costs of the asset as of August 31, 2003.
At this time the Company is not able to determine the timing
of water sales or the timing of development of the property
within the District's Service Area. There can be no assurance
that these sales can be made on terms acceptable to the Company
or that development will occur. In the event water sales are
not forthcoming or development of the property within the
District's Service Area is delayed, the Company may sell
additional portions of its profits interest, incur additional
short or long-term debt obligations or seek to sell additional
shares of common stock, preferred stock or stock purchase
warrants as deemed necessary by the Company to generate
operating capital. The Company's ability to ultimately realize
its investment in its two primary water assets is dependent on
its ability to successfully market the water. Under the
provisions of the CAA, the other investors in the Rangeview
project are to receive the first $31,807,000 from the sale or
other disposition of the Export Water Supply. The Company has
agreed to pay the next $4,000,000 in proceeds to LCH, Inc., a
company affiliated with the Company's president. The next
$433,000 in proceeds are payable to the holders of the Company's
Series B Preferred Stock. The Company retains 100% of the
proceeds in excess of $36,240,000 from the sale or other
disposition of the Export Water Supply.
Critical Accounting Policies
The Company's financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America ("GAAP") and our significant accounting
policies are summarized in Note 2 to the accompanying
consolidated financial statements. The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets,
liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
The Company has identified certain key accounting policies on
which its financial condition and results of operations are
dependent. These key accounting policies most often involve
complex matters or are based on subjective judgments or
decisions. In the opinion of management, the Company's most
critical accounting policies are those related to revenue
recognition, water assets and other long-lived assets, depletion
and depreciation and income taxes. Management periodically
reviews its estimates, including those related to the
recoverability and useful lives of assets. Changes in facts and
circumstances may result in revised estimates.
Revenue Recognition
The company recognizes construction project income using the
percentage-of-completion method, measured by the contract costs
incurred to date as a percentage of the estimated total contract
costs. Contract costs include all direct material, labor, and
equipment costs and those indirect costs related to contract
performance such as indirect labor and supplies costs. If the
construction project revenue is not fixed, the Company estimates
revenues that are most likely to occur. Provisions for estimated
losses on uncompleted contracts are made in the period in which
such losses are determined. Billings in excess of costs and
estimated earnings represent payments received on construction
projects under which the work has not been completed. These
amounts, if any, are recognized as construction progresses in
accordance with the percentage-of-completion method. The Company
did not recognize any construction revenues during the fiscal
year ended August 31, 2003.
The Company recognizes water usage revenues monthly based upon
metered water deliveries to customers. The Company recognizes
wastewater usage revenues monthly based upon a flat fee per
single family unit. Costs of delivering water and processing
wastewater are recognized as incurred. Revenues from the sale of
water and wastewater taps is recognized when taps are sold.
Depletion and Depreciation
The Company depletes its water assets 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 30 years.
Results of Operations
During fiscal year 2003, the Company delivered approximately
47.3 million gallons of water generating water usage revenues
from the sale of water to customers within the Company's Service
Area of $156,217, compared to the delivery of 54.5 million
gallons of water generating $156,026 for fiscal 2002. Water
deliveries decreased approximately 13% while revenues remained
the same due primarily to seasonal water deliveries with higher
water rates during peak times. The Company incurred
approximately $20,580 in operating costs compared to $13,896 for
fiscal 2002. Operating costs increased approximately $7,000
compared to fiscal year 2002 due primarily to a change in
operations from the Company contracting for operating service in
2002 to providing operating services in house in 2003. Also
during fiscal year 2003, the Company processed approximately
6.95 million gallons of wastewater generating wastewater usage
revenues of $56,780 and incurred $10,692 in wastewater operating
costs, compared to processing approximately 3.7 million gallons
of wastewater in fiscal year 2002 generating wastewater usage
revenues of $48,832 and incurring $13,896 in wastewater
operating costs.
General and administrative expenses for fiscal year 2003 were
$318,182, or approximately $96,310 higher than for fiscal year
2002 due primarily to an additional employee. Interest income
decreased to $16,263 in fiscal year 2003, compared to $21,181
for fiscal year 2002 due primarily to a decrease in interest
rates and a decrease in the average balance in the Company's
operating cash accounts. Interest expense decreased $18,376 to
$176,275 as compared to $194,651 in fiscal year 2002 due
primarily to a decrease in the prime lending rate. Net loss for
fiscal year 2003 of $321,043 was $75,896 higher than for fiscal
year 2002, primarily due to the addition of an employee.
Liquidity and Capital Resources
The Company's working capital defined as current assets less
current liabilities at August 31, 2003 was $541,695. The Company
believes that at August 31, 2003, it has sufficient working
capital to fund its operations for the next year or longer.
There can be no assurances, however, that the Company will be
successful in marketing the water from its two primary water
projects in the near term. In the event sales of these assets
are not achieved, the Company may sell additional participating
interests in its water projects, incur additional short or long-
term debt or seek to sell additional shares of common or
preferred stock or stock purchase warrants, as deemed necessary
by the Company, to generate working capital.
Development of any of the water that the Company has, or is
seeking to acquire, will require substantial capital investment
by the Company. Any such additional capital for the development
of the water is anticipated to be financed by the municipality
purchasing such water, through the sale of water taps and water
delivery charges. A water tap charge refers to a charge imposed
by a municipality or in this case, the Company, to permit a
water user access to a water delivery system (i.e. a single-
family home's tap into the municipal water system), and a water
delivery charge refers to a water user's monthly water bill,
generally charged per 1,000 gallons of water consumed.
Operating Activities
During fiscal 2003, cash used in operating activities was
approximately $115,000, compared to approximately $39,000 in
fiscal 2002. Operating costs increased due to additional costs
of operating the domestic water and wastewater systems and the
addition to the Company's staff. Accrued interest on note
receivable of $14,000 was offset by accrued interest on notes
payable of $176,000 for a change in accrued interest of
approximately $162,000. It is anticipated that a similar level
of cash will be used in the Company's operating functions during
fiscal 2004. The Company continues to provide domestic water and
wastewater service to customers in its Service Area and operates
and maintains its water and wastewater systems with Company
employees.
Investing Activities
Cash used in investing activities for fiscal 2003 was
approximately $147,000. Costs of approximately $147,000 were
capitalized to the Rangeview and Paradise Water Supply projects
during the fiscal year ended August 31, 2003. Cash used in
investing activities for fiscal 2002 was approximately $109,000.
The Company capitalizes certain legal, engineering and
permitting costs relating to the improvement of its water
assets.
Financing Activities
In August 2003, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the
Company issued 2,000,000 shares of Series D-1 Preferred Stock to
the Company's CEO, Mr. Thomas Clark in exchange for 2,000,000
shares of Common Stock owned by Mr. Clark. The Company sold
2,000,000 shares of the Company's Common Stock at $.25 per share
to eleven accredited investors, four of whom had previously
invested with the Company. Proceeds to the Company were
$500,000. The Preferred Stock was issued under Section 4(2) of
the Securities Act of 1933. The Common Stock was sold pursuant
to Regulation D, Rule 506.
Readers are cautioned that forward-looking statements
contained in this Form 10-KSB should be read in conjunction with
the Company's disclosure under the heading: "SAFE HARBOR
STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995" on page 2.
Impact of Recently Issued Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." This statement provides guidance
on the classification of gains and losses from the extinguishment
of debt and on the accounting for certain specified lease
transactions. SFAS No. 145 did not have a material impact on the
Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues
Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).
Generally, SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized as
incurred, whereas EITF Issue No. 94-3 required such a liability
to be recognized at the time that an entity committed to an exit
plan. SFAS No. 146, which is effective for exit or disposal
activities that are initiated after December 31, 2002, did not
have a material impact on the Company.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. FIN No. 46 requires an entity to consolidate a
variable interest entity if it is designated as the primary
beneficiary of that entity even if the entity does not have a
majority of voting interests. A variable interest entity is
generally defined as an entity where its equity is unable to
finance its activities or where the owners of the entity lack the
risk and rewards of ownership. The provisions of this statement
apply at inception for any entity created after January 31, 2003.
For an entity created before February 1, 2003, the provisions of
this Interpretation must be applied at the beginning of the first
interim or annual period beginning after June 15, 2003. The
Company is still assessing whether or not it is party to a
variable interest entity.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure." SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition,
Statement 148 amends the disclosure requirements of Statement 123
to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based
compensation, including requiring that this information be
included in interim as well as annual financial statements. The
Company has no plans to change to the fair value based method of
accounting for stock-based employee compensation, and is
therefore not affected by the transition provisions of SFAS
No. 148. The Company adopted the disclosure provisions of SFAS
No. 148 effective December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). It clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee,
including its ongoing obligation to stand ready to perform over
the term of the guarantee in the event that the specified
triggering events or conditions occur. The objective of the
initial measurement of the liability is the fair value of the
guarantee at its inception. The initial recognition and initial
measurement provisions of FIN 45 are effective on a prospective
basis to guarantees issued after December 31, 2002. However, the
disclosure requirements are effective for interim and annual
financial-statement periods ending after December 15, 2002. The
Company adoption of FIN 45 had no impact on the Company's results
of operations or financial position.
In June 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of a nonpublic entity. For
mandatorily redeemable financial instruments of a nonpublic
entity, this statement shall be effective for fiscal periods
beginning after December 15, 2003. It is not anticipated that the
adoption of this statement, however, will have a material effect
on our results of operations.
Total Contractual Cash Obligations
A summary of our total contractual cash obligations
(in millions ) as of August 31, 2003, is as follows:
Payments due
by period
Less More
Than Than
Contractual
Obligations Total 1 yr. 1-3yrs. 3-5yrs. 5yrs.
Long-term debt 4.9 -- 1.9 3.0 --
Item 7. Financial Statements
Page
Independent Auditors' Report 14
Balance Sheets 15
Statements of Operations 16
Statements of Stockholders' Equity 17
Statements of Cash Flows 18
Notes to Financial Statements 19-26
Independent Auditors' Report
The Board of Directors
Pure Cycle Corporation:
We have audited the accompanying balance sheets of Pure Cycle
Corporation ("the Company") as of August 31, 2003 and 2002, and
the related statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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, 2003 and 2002 and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Denver, Colorado
October 10, 2003
PURE CYCLE CORPORATION
BALANCE SHEETS
August 31,
ASSETS 2003 2002
Current assets:
Cash and cash equivalents $ 525,780 $ 287,720
Trade accounts receivable 67,687 50,919
Total current assets 593,467 338,639
Investment in water and systems:
Rangeview water supply (Note 3) 13,710,773 13,566,777
Paradise water supply 5,494,323 5,491,423
Rangeview water system (Note 3) 148,441 148,441
Investment in water and systems 19,353,537 19,206,641
Accumulated depreciation & depletion (10,543) (4,958)
Total water and water systems 19,342,994 19,201,683
Note receivable - related party,
including accrued interest (Note 4) 399,902 385,716
Other assets 77,041 102,241
$ 20,413,404 $ 20,028,279
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,244 $ 2,384
Accrued liabilities (Note 5 ) 43,528 19,495
Total current liabilities 51,772 21,879
Long-term debt - related parties,
including accrued interest (Note 6) 4,889,545 4,713,270
Participating interests in
Rangeview water supply (Note 3) 11,090,630 11,090,630
Stockholders' equity (Notes 7):
Preferred stock, par value $.001 per
share; authorized - 25,000,000 shares:
Series A1 - 1,600,000 shares issued
and outstanding 1,600 1,600
Series B - 432,513 shares issued
and outstanding 433 433
Series D - 6,455,000 shares
issued and outstanding 6,455 6,455
Series D1- 2,000,000 shares
issued and outstanding in 2003 2,000 --
Common stock, par value 1/3 of $.01 per
share; 135,000,000 shares authorized;
78,439,763 shares issued and
outstanding 261,584 261,584
Additional paid-in capital 25,276,989 24,778,989
Accumulated deficit ( 21,167,604) (20,846,561)
Total stockholders' equity 4,381,457 4,202,500
$ 20,413,404 $ 20,028,279
See Accompanying Notes to Financial Statements
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
Years ended August 31,
2003 2002
Water service revenues:
Water usage revenues 156,217 156,026
Wastewater processing revenues 56,780 48,832
Revenue - Other 12,435 --
225,432 204,858
Water service operating expense (20,580) (13,896)
Wastewater service operating
expense (10,692) (13,896)
Other expense (6,224) --
Gross margin 187,936 177,066
General and administrative
expense (318,182) (221,872)
Depreciation expense (4,948) (4,220)
Depletion expense ( 637) ( 738)
Operating income (loss) (135,841) (49,764)
Other income (expense):
Interest income 16,263 22,181
Interest expense -
related parties (176,275) (194,651)
Amortization of warrants (25,200) (25,200)
Other income -- 2,287
Total other income (expense) (185,212) (195,383)
Net loss $(321,043) $(245,147)
Basic and diluted net
loss per common share $ * $ *
Weighted average common
shares outstanding basic
and diluted 78,439,763 78,439,763
* Less than $.01 per share
See Accompanying Notes to Financial Statements
PURE CYCLE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended August 31, 2003 and 2002
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
Balance at
August 31, 2001 8,487,513 $8,488 78,439,763 $261,584 0 $ 0
Net loss -- -- -- -- -- --
Balance at
August 31, 2002 8,487,513 $8,488 78,439,763 $261,584 0 $ 0
Preferred Stock
issued in
exchanges, net
(Note 7) 2,000,000 2,000 -- --(2,000,000)(500,000)
Common Stock
issued from
treasury stock
(Note 7) -- -- -- -- 2,000,000 500,000
Net loss -- -- -- -- -- --
Balance at
August 31, 2003 10,487,513$ 10,488 78,439,763 $261,584 -- --
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
Balance at August 31, 2001 $24,778,989 $(20,601,414) $4,447,647
Net loss -- (245,147) (245,147)
Balance at August 31, 2002 $24,778,989 $(20,846,561) $4,202,500
Preferred Stock issued in
Exchanges, net (Note 7) 498,000 -- --
Common Stock
Issued from treasury stock
(Note 7) -- -- 500,000
Net loss -- (321,043) (321,043)
Balance at August 31, 2003 $25,276,989 ($21,167,604) $4,381,457
See Accompanying Notes to Financial Statements
PURE CYCLE CORPORATION
STATEMENTS OF CASH FLOWS
Years ended August 31,
2003 2002
Cash flows from operating
activities:
Net loss $(321,043) $( 245,147)
Adjustments to reconcile
net loss to net cash used in
operating activities:
Depreciation expense 4,948 4,220
Depletion expense 637 738
Change in accrued interest 162,089 178,741
Changes in operating assets
and liabilities:
Trade accounts receivable (16,768) (17,664)
Other assets 25,200 36,459
Accounts payable and
accrued liabilities 29,893 3,885
Net cash used in operating
activities (115,044) (38,768)
Cash used in investing activities-
Investments in water supply (146,896) (87,342)
Investments in water systems -- (21,830)
Net cash provided by
investing activities (146,896) (109,172)
Cash flows from financing activities-
Proceeds from sale of equity
instruments 500,000 --
Net increase (decease) in cash and
cash equivalents 238,060 (147,940)
Cash and cash equivalents
beginning of year 287,720 435,660
Cash and cash equivalents end of year $ 525,780 $287,720
See Accompanying Notes to Financial Statements
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
August 31, 2003 and 2002
NOTE 1 - ORGANIZATION AND BUSINESS
Pure Cycle Corporation (Company) owns certain water assets and
is providing water and wastewater services to customers located
in the Denver metropolitan area (Service Area). The Company
operates water and wastewater systems and its operating
activities include designing, constructing, operating and
maintaining systems serving customers in the Denver metropolitan
area. The Company also owns patented water recycling
technologies which are capable of processing wastewater into
pure potable drinking water. The Company's focus continues to be
to provide water and wastewater service to customers within its
Service Area and the Company expects to expand its service to
other areas throughout the Denver metropolitan area and the
southwestern United States.
Although the Company believes it will be successful in
marketing the water from one or both of its water projects,
there can be no assurance that sales can be made on terms
acceptable to the Company. The Company's ability to ultimately
realize its investment in its two primary water projects is
dependent on its ability to successfully market the water, or in
the event it is unsuccessful, to sell the underlying water
assets.
The Company believes that at August 31, 2003, it has
sufficient working capital and financing sources to fund its
operations for the next year or longer. There can be no
assurances, however, that the Company will be successful in
marketing the water from its two primary water projects in the
near term. In the event sales are not achieved, the Company may
sell additional participating interests in its water projects,
incur additional short or long-term debt or seek to sell
additional shares of common or preferred stock or stock purchase
warrants, as deemed necessary by the Company, to generate
working capital.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company recognizes construction project income using the
percentage-of-completion method, measured by the contract costs
incurred to date as a percentage of the estimated total contract
costs. Contract costs include all direct material, labor, and
equipment costs and those indirect costs related to contract
performance such as indirect labor and supplies costs. If the
construction project revenue is not fixed, the Company estimates
revenues that are most likely to occur. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Billings in excess of
costs and estimated earnings represent payments received on
construction projects under which the work has not been
completed. These amounts, if any, are recognized as
construction progresses in accordance with the percentage-of-
completion method.
The Company recognizes water usage revenues upon delivering
water to customers. The Company recognizes wastewater processing
revenues based on flat fees assessed per single family equivalent
unit served. Costs of delivering water and providing wastewater
service to customers are recognized as incurred. Revenues from
the sale of water and wastewater taps is recognized when taps are
sold.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United State of
America 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.
Cash equivalents
Cash and cash equivalents include all liquid debt instruments
with an original maturity of three months or less.
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash flows
No cash was paid for interest or taxes in 2003 or 2002. See
Note 6 for discussion regarding non cash exchange of common
stock for preferred stock.
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
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 exceed 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 investments in water and water systems at August
31, 2003.
Water and wastewater systems
The Company 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 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 30 years.
Stock-Based Compensation
The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principals Board
("APB No. 25"), Accounting for Stock Issued to Employees. The
Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" as specified in SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of SFAS No. 123". The pro forma
disclosure of net loss and loss per share required by SFAS No.
123 is shown below.
2003 2002
Net loss, as reported (321,043) (245,147)
Add: Stock-based employee
compensation expense included
in reported net income -- --
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all
options ans warrants -- --
Pro forma net loss ( --) ( --)
Actual and pro forma earnings per share for the year ended
August 31, 2003 were less than $.01 per share.
Income taxes
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
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. Convertible preferred stock and common stock options
and warrants aggregating 67,746,889 common share equivalents
outstanding as of August 31, 2003 have been excluded from the
calculation of loss per share as their effect is anti-dilutive.
NOTE 3 - RANGEVIEW WATER SUPPLY AND SYSTEM
Beginning in 1987, the Company initiated the purchase of the
Rangeview water assets. From 1987 through 2003, the Company made
payments to the sellers of the Rangeview water assets and
capitalized costs incurred relating to the acquisition of the
water assets totaling $12,038,161, and capitalized certain direct
costs relating to improvements to the asset which include legal
and engineering costs totaling $1,672,612.
In April 1996, the Company completed the purchase of the
Rangeview water assets and entered into a water privatization
agreement with the State of Colorado and the Rangeview
Metropolitan District (the "District"), a related party, which
enabled the Company to acquire ownership rights to a total gross
volume of 1,165,000 acre feet of groundwater (approximately
11,650 acre feet per year), an option to substitute 1,650 acre
feet of surface water in exchange for a total gross volume of
165,000 acre feet of groundwater, and the use of surface
reservoir storage capacity (collectively referred to as the
"Export Water Supply").
In addition to the Export Water Supply, the Company entered
into a water and wastewater service agreement ("The Service
Agreements") with the District which grants the Company an
eighty-five year exclusive right to design, construct, operate
and maintain the District's water and wastewater systems. In
exchange for designing, constructing, operating and maintaining
the District's water and wastewater system, the Company will
receive 95% of the District's water revenues remaining after
payment of royalties totaling 12% of gross revenues to the State
Land Board, 100% of the District's wastewater system development
charges and 90% of the District's wastewater usage charges. The
Company delivered approximately 47.3 and 54.5 million gallons of
water to customers in the Service Area in fiscal 2003 and 2002,
respectively. The Company processed approximately 6.95 and 3.7
million gallons of wastewater from customers within its Service
Area during fiscal 2003 and 2002, respectively.
The Company capitalizes certain legal, engineering and other
costs relating to the acquisition of the Rangeview Water Supply
due to improvements of the water assets through adjudication and
engineering services.
Participating interests in the Comprehensive Amendment
Agreement (the "CAA"), in the aggregate, have the right to
receive the first approximately $31,807,000 from the proceeds of
a sale or other disposition of the Export Water Supply. As
monies from the sale of the Export Water are received, they are
required to be paid to the holders of the CAA participation
interests, including holders of Series A-1 Preferred Stock, on a
pari pasu basis for the first $31,807,000. After payment of the
$31,807,000 in participating interest pursuant to the CAA, LCH
Inc., a company affiliated with the Company's CEO, has the right
to receive the next $4,000,000 in proceeds in exchange for
$950,000 in notes payable entered into between LCH and the
Company in 1987 and 1988. The next $433,000 in proceeds are
payable to the holders of the Company's Series B Preferred Stock.
In 1994, the Company issued the Series B Preferred Stock in
exchange for certain accounts payable totaling $433,000 to LC
Holdings Inc. The total obligation of $36,240,000 is non-
interest bearing, and if the Export Water is not sold, the
parties to the
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - RANGEVIEW WATER SUPPLY AND SYSTEM (continued)
agreement have no recourse against the Company. If the Company
does not sell the Export Water, the holders of the Series A-1,
and Series B Preferred Stock are not entitled to payment of any
dividend and have no contractual recourse against the Company.
The participating interests liability of $11.1 million
represents the obligation recorded by the Company relating to
actual cash financings received and costs incurred to acquire the
Rangeview water supply. The remainder of the participating
interests ($20.7 million) represent a contingent return to
financing investors andcertain preferred stock holders that
will only be payable from the sale of Export Water and will be
recognized if and when such sale occurs.
During fiscal 2003 and 2002, the Company had revenues from two
significant customers that accounted for 81% and 11%,
respectively of the Company's revenues during 2003 and 76% and
14%, respectively of revenues during 2002.
NOTE 4 - NOTE RECEIVABLE
In 1995, the Company extended a line of credit to the
District, a related party. The loan provides for borrowings of
up to $250,000, is unsecured, bears interest based on the
prevailing prime rate plus 2% and matures on December 31, 2003.
The balance of the note receivable at August 31, 2003 was
$399,902, including accrued interest. The Company intends to
extend the due date to December 31, 2004. Accordingly, the note
has been classified as non-current.
NOTE 5 - ACCRUED LIABILITIES
During fiscal year ended August 31, 2003, the Company had
accrued liabilities of $43,528, of which approximately $26,000
were for audit fees and the remainder was for operating trade
accounts payables. During fiscal year ended August 31, 2002,
the Company had accrued liabilities of $19,495, of which
approximately 18,000 were for audit fees.
NOTE 6 - LONG-TERM DEBT
Long-term debt, including accrued interest, at August 31, 2003
and 2002 is comprised of the following:
Notes payable, including accrued
interest to six related parties, 2003 2002
due August 2007, interest at
prime plus 2% (6.25% at August
31, 2003),unsecured $ 503,439 $ 484,876
Notes payable, including accrued
interest to five related parties,
due August 2007, interest at 10.25%,
unsecured, net of unamortized discount
of $0 and $9,000, respectively 578,685 542,809
Note payable, to CEO, due October
2007, non-interest bearing, unsecured 26,542 26,542
Notes payable, including accrued
interest, to CEO due October 2007,
interest at 8.36% to 9.01%, unsecured 508,941 487,581
Notes payable, including accrued interest,
to related party, due October, 2007,
interest at the prime rate plus 3%
(7.25% at August 31, 2003), secured by
shares of the Company's common stock
owned by the President 2,440,014 2,371,733
Notes payable, including accrued interest,
to a related party, due August 2007,
interest ranging from 7.18% to 8.04%,
unsecured 831,924 799,729
Total long-term debt $4,889,545 $4,713,270
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM DEBT (continued)
Aggregate maturities of long-term debt are as follows:
Year Ending August 31, Amount
2007 1,914,048
2008 and thereafter 2,975,497
Total $ 4,889,545
In 1996 and 1997, the Company entered into loan agreements
with eleven related party investors. The loan balances total
$1,082,124 at August 31, 2003, the loans are unsecured, and bear
interest at the rate of 10.25% and prime plus 2%. In connection
with the loan agreements, the Company issued warrants to
purchase 2,100,000 shares of the Company's common stock at $.18
per share. A portion of the proceeds received under the
agreement ($45,000) was attributed to the estimated fair value of the
warrants issued. The resulting discount is being amortized over
the term of the loan. In 2001, the term of the warrants and
debt was extended to 2007. The fair value of the warrants
extension are being amortized over the revised term of the debt.
See further discussion of the warrant in Note 7.
As of August 31, 2003, the CEO of the Company has pledged a
total of 20,000,000 shares of the Company's common stock from
his personal holdings as collateral on certain of the above
notes payable.
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred and Common Stock
In August 2003, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the
Company issued 2,000,000 shares of Series D-1 Preferred Stock
to the Company's CEO, Mr. Thomas Clark in exchange for 2,000,000
shares of Common Stock owned by Mr. Clark. The Company sold
2,000,000 shares of the Company's Common Stock at $.25 per share
to eleven accredited investors, four of whom had previously
invested with the Company. Proceeds to the Company were $500,000.
The Series D-1 Preferred Stock does not earn dividends and is
convertible into 2,000,000 shares of common stock at such time
that the Company has sufficient shares of authorized Common Stock.
The shares were issued under Section 4(2) of the Securities Act
of 1933.
Stock Options
Pursuant to the Company's Equity Incentive Plan approved by
stockholders in June of 1992, the Company granted Mr. Fletcher
Byrom, Ms. Margaret Hansson, Mr. George Middlemas, and Mr. Mark
Harding options to purchase 7,000,000, 8,000,000, 1,000,000, and
7,000,000 shares of common stock respectively at an exercise
price of $.18 per share. In April of 2001, the Board extended
the expiration date of options granted to Mr. Fletcher Byrom,
Ms. Margaret Hansson, Mr. George Middlemas and Mr. Mark Harding
from August 2002 to August 2007. In connection with their
extension of the expiration dates and whereas the related
options were fully vested in April 2001, and whereas these
options were not in the money at the time of their extension, no
compensation expense was recognized for the extensions. Also in
April 2001, the Board granted Mr. Harding options pursuant to
employment arrangements outside the Equity Incentive Plan to
purchase an additional 3,000,000 shares of common stock at an
exercise price of $.18 per share of which 2,250,000 vested
immediately and 250,000 shares vest on each anniversary date of
the grant over the following three years. Mr. Harding's new
options also expire in August 2007.
No options were granted in fiscal year 2003.
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS' EQUITY (continued)
A summary of the status of the Company's Equity Incentive Plan
and other compensatory options as of August 31, 2003 and 2002,
and changes during the years then ended is presented below:
2003 2002
Weighted Weighted
average average
Fixed options Shares exercise price Shares exercise price
Outstanding at beginning
of year 26,000,000 $.18 26,000,000 $.18
Granted -- -- -- --
Outstanding at end
of year 26,000,000 $.18 26,000,000 $.18
Options exercisable at
year end 25,750,000 $.18 25,500,000 $.18
Weighted average fair
value of options
granted during the year -- --
The weighted average remaining contractual life of the Options
Outstanding and Options Exercisable as of August 31, 2003 is 4
years.
No options were exercised during the years ended August 31,
2003 and 2002.
Warrants
In addition to the warrants discussed in Note 6, the Company
issued warrants from 1990 through 1996 to purchase 22,303,000
shares of the Company's stock at $.18 per share in connection
with the sale of profits interests
in the Rangeview project, which remain outstanding as of August
31, 2003. In 1996, all interests held in the Rangeview water
rights were converted into participating interests in the CAA.
The warrants expire 6 months after the payment of the
participating interests in the Comprehensive Amendment Agreement
("CAA").
Certain related parties, who hold notes payable from the
Company which aggregate a total of $1,082,124, as of August 31,
2003, extended the maturity date of the notes from August 2002 to
August 2007. In connection with the extension of the maturity
of the notes, the expiration date of the warrants was extended to
August 2007. The $126,000 recorded in connection with extension
of the warrants' expiration date is the fair value of the
warrants as of April 9, 2001, calculated using a Black-Scholes
option-pricing model with the following assumptions: no dividend
yield; annualized expected volatility of 101%; and a weighted
average risk-free interest rate of 4.65%. This amount is being
amortized straight-line over the period August 2002 to August
2007 as the imputed consideration relating to the extension of
the debt terms.
No warrants were exercised during the years ended August 31,
2003 and 2002.
NOTE 8 - SIGNIFICANT CUSTOMERS
The Company had accounts receivable from two significant
customers totaling approximately $56,546 and $7,187,
respectively, as of August 31, 2003 and $38,700 and $12,200,
respectively, as of August 31, 2002. The same customers
accounted for approximately 81% and 11%, respectively of the
Company's revenue during the year ended August 31, 2003 and
approximately 76% and 14%, respectively of the Company's revenue
during the year ended August 31, 2002.
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at August 31, 2003 and 2002 are presented below.
2003 2002
Deferred tax assets:
Net operating loss carry forwards $ 2,483,000 $ 2,423,000
Less valuation allowance (2,483,000) (2,423,000)
Net deferred tax asset $ -- $ --
The valuation allowance for deferred tax assets as of August
31, 2003 was $2,483,000. The net change in the valuation
allowance for the year ended August 31, 2003 was a net increase
of $60,000, primarily attributable to the net operating loss
incurred during the year, expiration of a portion of net
operating loss carry forwards, and difference in amortization.
The deferred tax asset at August 31, 2003, for which a valuation
allowance has been recorded, will be recognized, if ever, when
realization is more likely than not.
The expected statutory tax rate applied to the book loss is
equal to the increase in the net operating tax loss carry
forwards less the expiration of any tax loss carry forwards. At
August 31, 2003, the Company has estimated net operating loss
carry forwards for federal income tax purposes of approximately
$6,423,000, which are available to offset future federal taxable
income, if any, through fiscal 2023.
NOTE 10 - INFORMATION CONCERNING BUSINESS SEGMENTS
The Company has two lines of business: one is the design and
construction of water and wastewater systems pursuant to the
Service Agreements to provide water and wastewater service to
customers within the Service Area; and the second is the
operation and maintenance of the water and wastewater systems
which serve customers within the Service Area. The Company did
not recognize construction revenues during fiscal years 2003 or
2002.
The accounting policies of the segments are the same as those
of the Company, described in note 2. The Company evaluates the
performance of its segments based on gross margins of the
respective business units.
Segment information for the years ended August 31, 2003 and 2002
is as follows:
2003 2002
Service Total Service Total
Revenues $225,432 $225,432 $204,858 $204,858
Gross margin 187,936 187,936 177,066 177,066
Total assets 20,413,404 20,413,404 20,028,279 20,028,279
Capital e
expenditures 146,896 146,896 109,172 109,172
NOTE 11 - Related party transactions
During the years ended August 31, 2003 and 2002, the Company
has occupied office space from a related party at no cost to the
Company. Additionally, the Company has certain debt
instruments between related parties (see notes 3, 4 and 5).
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - Subsequent event transaction
Subsequent to fiscal year end August 31, 2003, subject to
final governmental approvals, the Company entered into a long-
term Water Service Agreement ("Agreement") whereby the Company
will provide domestic water service to a new master planned
community located in the Denver metropolitan area in Arapahoe
County. The new community will be developed over several years
and be composed of up to 4,000 single family residences. The
Company will generate one-time revenues from the sale of water
taps (currently $11,100 per tap) and annual revenues through the
delivery of water. The agreement is expected to generate gross
revenues of $44 million in tap fee revenues and approximately $2
million annually from water usage sales. The Company is
responsible for developing the associated infrastructure, which
is expected to commence in the summer of 2003 to provide water
service to the development and expects the tap fee revenues will
provide sufficient capital to the Company to construct
facilities necessary to deliver water to the development.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The following are the officers and directors of the Company as
of August 31, 2003:
Name Age Position(s) with the
Company
Harrison H. Augur 61 Chairman
Margaret S. Hansson . . . 79 Director, Vice President
Fletcher L. Byrom . . . . 85 Director
Thomas P. Clark . . . . . 67 Director, CEO
George M. Middlemas . . . 57 Director
Richard L. Guido . . . . 59 Director
Mark W. Harding . . . . . 40 President, CFO
HARRISON H. AUGUR
Mr. Augur was elected Chairman of the Board of Directors in
April 2001. For the past 20 years, Mr. Augur has been
involved with investment management and venture capital
investment groups. Mr. Augur has been a General Partner of CA
Partners since 1987, and General Partner of Patience Partners
LLC since 1999. Mr. Augur received a Bachelor of Arts degree
from Yale University in 1964, a LLB degree from Columbia
University School of Law, and his LLM degree from New York
University School of Law in 1987.
MARGARET S. HANSSON
Ms. Hansson has been a Director of the Company since April
1977, Vice President since 1992, and Chairman from 1983 to 2001,
and was the Chief Executive Officer of the Company from
September 23, 1983 to January 31, 1984. From 1976 to May 1981,
she was President of GENAC, Inc., a Boulder, Colorado firm,
which she founded. From 1960 to 1975, Ms. Hansson was CEO and
Chairman of Gerry Baby Products Company (formerly Gerico, Inc.),
now a division of Evenflo. She is a Director of Wells Fargo
Bank, Boulder Colorado, Wells Fargo Banks, PC, Colorado Capital
Alliance, Realty Quest, Inc. (now RQI, Inc.), and the Boulder
Technology Incubator. Ms. Hansson is currently President of two
companies, Adrop, LLC, and Erth, LLC. Ms. Hansson received her
Bachelor of Arts degree from Antioch College.
THOMAS P. CLARK
Thomas P. Clark was appointed Chief Executive Officer of the
Company in April 2001. Prior to his appointment as Chief
Executive Officer, Mr. Clark served as President and Treasurer
of the Company from 1987 to April 2001. Mr. Clark is primarily
involved in the management of the Company. His business
activities include: President, LC Holdings, Inc. (business
development), 1983 to present and, Partner, through a wholly
owned corporation, of Resource Technology Associates
(development of mineral and energy technologies), 1982 to
present. Mr. Clark received his Bachelor of Science degree in
Geology and Physics from Brigham Young University, Provo, Utah.
MARK W. HARDING
Mark W. Harding joined the Company in February 1990 as
Corporate Secretary and Chief Financial Officer. He was
appointed President of the Company in April 2001. He brings a
background in public finance and management consulting. From
1988 to 1990, Mr. Harding worked for Price Waterhouse in
management consulting services where he assisted clients in
public finance services and other investment banking related
services. Mr. Harding has a B.S. Degree in Computer Science and
a Masters in Business Administration in Finance from the
University of Denver.
FLETCHER L. BYROM
Fletcher L. Byrom has been a Director of the Company since
April 22, 1988. He is a retired Chairman (1970-1982) and Chief
Executive Officer (1967-1982) of Koppers Company, Inc. Mr.
Byrom presently serves in the following positions: Manager
Micasu Tungsten LLC, Micasu Farms LLC, and President of Micasu
Corporation and Micasu Charitable Foundation Inc.
GEORGE M. MIDDLEMAS
George M. Middlemas has been a Director of the Company since
April 1993. Mr. Middlemas has been a general partner with Apex
Investment Partners since 1991, a diversified venture capital
management group. From 1985 to 1991, Mr. Middlemas was Senior
Vice President of Inco Venture Capital Management, primarily
involved in venture capital investments for Inco. From 1979 to
1985, Mr. Middlemas was a Vice President and a member of the
Investment Committee of Citicorp Venture Capital Ltd., where he
sourced, evaluated and completed investments for Citicorp. Mr.
Middlemas is a director of Online Resources & Communications
Corporation, Tut Systems, Data Critical Corporation., and
Pennsylvania State University - Library Development Board. Mr.
Middlemas received Bachelor degrees in History and Political
Science from Pennsylvania State University, a Masters degree in
Political Science from the University of Pittsburgh and a Master
of Business Administration from Harvard Business School.
RICHARD L. GUIDO
Mr. Guido has been a Director of the Company since July 1996
and pursuant to his retirement, resigned from the Board
subsequent to fiscal year ended August 31, 2003. Mr. Guido had
been with Inco since 1980, and was Associate General Counsel of
Inco Limited and President, Chief Legal Officer and Secretary of
Inco United States, Inc. Mr. Guido is a Director on the
American-Indonesia Chamber of Commerce, and the Canada-United
States Law Institute. Mr. Guido received a Bachelor of Science
degree from the United States Air Force Academy, a Master of
Arts degree from Georgetown University, and a Juris Doctor
degree from the Catholic University of America.
None of the above persons is related to any other officer or
director of the Company. All directors are elected for one-year
terms which expire at the annual meeting of stockholders or
until their successors are elected and qualified. The Company's
officers are elected annually by the board of directors and hold
office until their successors are elected and qualified.
Section 16 (a) Beneficial Ownership Reporting Compliance
The Company's directors and executive officers and persons who
are beneficial owners of more than 10% of the Company's Common
Stock are required to file reports of their holdings and
transactions in Common Stock with the Securities and Exchange
Commission and furnish the Company with such reports. Based
solely upon its review of the copies the Company has received or
upon written representations from these persons, the Company
believes that, as of November 16, 2003 all of the Company's
directors, executive officers, and 10% beneficial owners had
complied with the applicable Section 16 (a) filing requirements.
Code of Ethics
Pursuant to a recent Securities and Exchange Commission
regulation, the Company must disclose whether or not is has
adopted a code of ethics for certain executive officers. The
Company currently dose not have a code of ethics for its
officers. However the Board of Directors believes that it is
appropriate to adopt such a code and intends to develop a code
of ethics during the next few months.
Securities Authorized for Issuance Under Equity Compensation
Plans
Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and under equity compen-
warrants and rights rights sation plans
(excluding securities
reflected in
column(a))
(a) (b) (c)
Equity compensation 24,000,000 $.18 1,000,000
plans approved by
securitiy holders
Equity compensation 3,000,000(1) $.18 --
plans not approved by
security holders
Total 27,000,000 -- 1,000,000
(1) In April 2001, the Board granted Mr. Harding the Company's
President and Chief Financial Officer, options pursuant to
employment arrangements outside the stockholder approved
Equity Incentive Plan to purchase 3,000,000 shares of
Common Stock at an exercise price of $.18 per share.
2,250,000 shares vested immediately, and 250,000 shares
vest on each anniversary date of the grant over the
following three years. These options expire in August
2007.
Item 10. Executive Compensation
Annual Compensation
Other
Name Annual
and Compen-
Principal Fiscal Salary Bonus sation
Position Year ($) ($) ($)
Thomas P. Clark
CEO 2003 60,000 0 0
2002 60,000 0 0
2001 60,000 0 0
Mark W. Harding
President, CFO 2003 80,000 0 0
2002 80,000 0 0
2001 80,000 0 0
Directors do not receive any compensation for serving on the
Board.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of November 16, 2003, the
beneficial ownership of the Company's issued and outstanding
Common Stock, Series A-1 Preferred Stock, Series B Preferred
Stock, and Series D Preferred Stock, and Series D-1 Preferred
Stock by each person who owns of record (or is known by the
Company to own beneficially) 5% or more of each such class of
stock, by each director of the Company, each executive officer
and by all directors and executive officers as a group. Except
as otherwise indicated, the Company believes that each of the
beneficial owners of the stock listed has sole investment and
voting power with respect to such shares, based on information
provided by such holders.
Common Stock
Name and Address of Number of Common Percent of
Beneficial Owner Stock Shares Outstanding
Common Shares
Thomas P. Clark 26,264,854 32.2% (18)(19)
8451 Delaware St
Thornton, CO 80260
George Middlemas 1,333,333 1.7% (1)
225 W. Washington, #1500 (11)
Chicago, IL 60606
Harrison H.Augur 506,667 0.6% (9)
P.O. Box 4389
Aspen, CO 81611
Richard L. Guido
Inco Securities Corporation 0 0%
145 King St. West, #1500
Toronto, Onterio Canada M5H4B7
Margaret S. Hansson 8,246,000 9.5% (2)
2220 Norwood Avenue
Boulder, Colorado 80304
Fletcher L. Byrom 7,100,000 8.3% (3)
305 Windmere Dr. #328
State College, PA 16801
Mark W. Harding 9,960,000 11.3% (4)
8451 Delaware St
Thornton, CO 80260
INCO Securities Corporation 4,700,000 5.7% (5)
145 King St. West, #1500
Toronto, Onterio Canada M5H4B7
Apex Investment Fund II L.P. 17,087,833 19.2% (6)
225 W. Washington, #1500 (11)
Chicago, IL 60606
Environmental Venture 6,278,181 7.7% (7)
Fund, L.P. (11)
233 S. Wacker Drive, Suite 9600
Chicago, Illinois 60606
Environmental Private Equity 7,142,320 8.6% (13)
Fund II, L.P. (16)
233 S. Wacker Drive, Suite 9600
Chicago, Illinois 60606
The Productivity 4,781,846 6.0% (8)
Fund II, L.P. (11)
233 S. Wacker Drive, Suite 9600
Chicago, Illinois 60606
Proactive Partners L.P. 3,579,052 4.4% (13)
50 Osgood Place, Penthouse (17)
San Francisco, California 94133
All Officers and Directors 52,410,854 47.3% (12)(13)(9)
as a group (7 persons) (18) (19)
Preferred Stock
Number of Number of
Series A Percentage Series B Percentage Number of Percent of
Name and Preferred Outstanding Preferred Outstanding Series D Outstanding
Address of Shares Shares Shares Shares Preferred Shares
Beneficial Shares
Owner
Thomas P. Clark 346,000 80.0% (14) 6,455,000 100.0%(18)
8451 Delaware St
Thornton, CO 80260
Apex Investment
Fund II L.P. 408,000 25.5%
225 W. Washington,
#1500
Chicago, IL
60606
Environmental
Private Equity 600,000 37.5%
Fund II, L.P.
233 S. Wacker
Drive, Suite 9600
Chicago, Illinois
60606
Proactive
Partners L.P. 500,000 31.5%
50 Osgood Place,
Penthouse
San Francisco,
California 94133
LC Holdings, Inc. 432,513 100.0%
8451 Delaware St
Thornton, CO 80260
LCH, Inc. 86,503 20.0% (15)
8451 Delaware St
Thornton, CO 80260
Preferred Stock (continued)
Number of Series Percent of
Name and Address of D-1 Preferred Outstanding
Beneficial Owner Shares Shares
Thomas P. Clark 2,000,000 100.0% (19)
8451 Delaware St
Thornton, CO 80260
(1) Includes 1,000,000 shares purchasable by Mr. Middlemas under
currently exercisable options.
(2) Includes 8,000,000 shares purchasable by Ms. Hansson under
currently exercisable options.
(3) Includes 2,333,334 shares purchasable under a currently
exercisable option by Mr. Fletcher L. Byrom Jr., 2,333,333
shares purchasable under a currently exercisable option by Susan
Byrom Evans, and 2,333,333 shares purchasable under a currently
exercisable option by Carol Byrom Conrad.
(4) Includes 9,750,000 shares purchasable by Mr. Harding under a
currently exercisable option.
(5) Includes 4,700,000 shares purchasable by Inco Securities
Corporation ("Inco") under currently exercisable warrants.
(6) Includes 8,506,198 shares purchasable by Apex Investment
Fund II, L.P. ("Apex") under a currently exercisable warrants.
(7) Includes 2,596,620 shares purchasable by Environmental
Venture Fund, L.P. ("EVFund") under a currently exercisable
warrants.
(8) Includes 1,776,166 shares purchasable by Productivity Fund
II, L.P. ("PFund") under currently exercisable warrants.
(9) Includes 300,000 shares purchasable by Mr. Augur under
currently exercisable warrants, and 111,111 of convertible
Series A-1 Preferred Stock.
(10) Intentionally omitted.
(11) Each of the Apex, EVFund, PFund, and EPFund (the "Apex
Partnerships") is controlled through one or more partnerships.
The persons who have or share control of such stockholders after
looking through one or more intermediate partnerships are
referred to herein as "ultimate general partners." The ultimate
general partners of Apex are: First Analysis Corporation, a
Delaware corporation ("FAC"), Stellar Investment Co.
("Stellar"), a corporation controlled by James A. Johnson
("Johnson"); George Middlemas ("Middlemas"); and Chartwell
Holdings Inc. ("Chartwell"), a corporation controlled by Paul J.
Renze ("Renze"). The ultimate general partners of EVFund are:
FAC; F&G Associates ("F&G"); William D. Ruckelshaus Associates,
a Limited Partnership ("WDRA"); and Banc America Robertson,
Stephens & Co. ("BARS"). The ultimate general partners of PFund
are FAC and Bret R. Maxwell ("Maxwell"). The ultimate general
partners of EPFund are FAC, Maxwell, BA, RS, Argentum
Environmental Corporation ("AEC") and Schneur Z. Genack, Inc.
("SZG").
The business address of FAC, Stellar, Johnson, Middlemas, and
Maxwell is 233 S. Wacker Drive, Suite 9600. Chicago Illinois
60606. The business address of Renze and Chartwell is 20 N
Wacker Dr., Suite 2200, Chicago IL 60606. Each of AEC and SZG
maintains its business address c/o The Argentum Group ("TAG"),
405 Lexington Avenue, 54th Floor New York, New York 10174. The
persons who take actions on behalf of AEC and SZG with respect
to their functioning as ultimate general partners of EPEF are
Schenur Z. Genack ("Genack"), Daniel Raynor ("Raynor") and
Walter H. Barandiaran ("Barandiaran"). Each of Raynor and
Barandiaran is principally employed as an executive of TAG and
maintains his business address at the TAG address. TAG's
principal business is merchant banking. SZG is principally
employed as a private investor and maintains his business
address at 18 East 48th Street, Suite 1800, New York, New York
10017. The business address of F&G and Harvey G. Felsen
("Felsen") who takes actions on behalf of F&G with respect to
its functioning as a ultimate general partner of EVFund, is 123
Grove Avenue, Suite 118, Cedarhurst, New York 11516. WDRA and
Paul B. Goodrich the person who takes action on behalf of WDRA
with respect to its functions on behalf of WDRA with respect to
its functioning as general partner of EVFund, maintains its
business address at 1201 Third Avenue, 39th Floor, Seattle,
Washington 98101. BARS maintains its business address at One
Embarcadero Center, San Francisco, California 94111. BARS
maintains its business address at 555 California St., San
Francisco, CA 94111. The person who takes actions on behalf of
BARS with respect to its functioning as an ultimate general
partner of EVF and EPEF is Charles R. Hamilton ("Hamilton").
Hamilton is principally employed as a partner is BARS and
maintains his principal business address at BARS.
By reason of its status as a general partner or ultimate
general partner of each of Apex Partnerships, FAC may be deemed
to be the indirect beneficial owner of 35,290,180 shares of
Common Stock, or 36.3% of such shares. By reason of his status
as the majority stockholder of FAC, F. Oliver Nicklin may also
be deemed to be the indirect beneficial owner of such shares. By
reason of their status as ultimate general partners of Apex,
Stellar (and through Stellar, Johnson, Middlemas, Chartwell and
through Chartwell and Renze) may be deemed to be the indirect
beneficial owners of 17,087,833 shares of Common Stock, or 19.2%
of such shares. When these shares are combined with his
personal holdings of 333,333 shares and his currently
exercisable option to purchase 1,000,000 shares of Common Stock,
Middlemas may be deemed to be the beneficial owner (directly
with respect to his shares and the option shares and indirectly
as to the balance) of 18,421,166 shares of Common Stock, or
20.4% of such shares.
By reason of his status as an ultimate general partner of
PFund and EPFund, Maxwell may be deemed to be the indirect
beneficial owner of 11,924,166 shares of Common Stock, or 14.2%
of such shares.
By reason of F&G's and WDRA's status as an ultimate general
partners of EVFund, F&G, WDRA and their respective controlling
persons may be deemed to be the indirect beneficial owners of
6,278,181 shares of Common Stock, or 7.7% of such shares. By
reason of AEC's and SZG's status as ultimate general partners of
EPFund, AEC, SZG and their and their controlling persons may be
deemed to be the indirect beneficial owners of 7,142,320 shares
of Common Stock, or 8.7% of such shares. By reason of Genack's
interest in F&G, AEC and SZG, he may be deemed to be the
indirect beneficial owner of 13,420,501 shares of Common Stock,
or 15.8% of such shares.
By reason of BARS's status as a general partner of EVFund and
an ultimate general partner of EPFund, BARS and its controlling
persons may be deemed to be the indirect beneficial owners of
13,420,501 shares of Common Stock, or 15.8% of such shares.
Each of the Apex Partnerships disclaims beneficial ownership
of all shares of Common Stock described herein except those
shares that are owned by that entity directly. The Company
understands that each of the other persons named as an officer,
director, partner or other affiliate of any Apex Partnership
herein disclaims beneficial ownership of all the shares of
Common Stock described herein, except for Middlemas with respect
to the option to purchase 1,000,000 shares held by him.
Each of the Apex Partnerships disclaims the existence of a
"group" among any or all of them and further disclaims the
existence of a "group" among any or all of them and any or all
of the other persons named as an officer, director, partner or
those affiliate of any of them, in each case within the meaning
of Section 13(d) (3) of the 1934 Act.
(12) Includes 25,750,000, shares purchasable by directors and
officers under currently exercisable options, and 17,578,989
shares purchasable under currently exercisable warrants.
(13) Includes the conversion of 1,600,000 shares of Series A-1
Preferred Stock to Common Stock. Apex Investment Fund II, L.P.,
owning 408,000 shares of Series A Convertible Preferred Stock
which are currently convertible into 2,266,685 shares of Common
Stock, The Environmental Private Equity Fund II, L.P., owning
600,000 shares of Series A Convertible Preferred Stock which are
currently convertible into 3,333,360 shares of Common Stock, and
Proactive Partners, L.P., owning 500,000 shares of Series A-1
Convertible Preferred Stock which are currently convertible to
2,777,800 shares of Common Stock.
(14) Includes 346,010 shares of Series B Preferred Stock which
Mr. Clark. the Company's president, may be deemed to hold
beneficially by reason of his ownership of 80% of the common
stock of LC Holdings, Inc., the owner of 100% of the Series B
Preferred Stock.
(15) Includes 86,503 shares of Series B Preferred Stock which
LCH, Inc. may be deemed to hold beneficially by reason of its
ownership of 20% of the common stock of LC Holdings, Inc., the
owner of 100% of the Series B Preferred Stock.
(16) Includes 322,264 shares purchasable by the Environmental
Private Equity Fund II L.P. under a currently exercisable
warrant.
(17) Includes 801,252 shares purchasable by Proactive Partners,
L.P. under a currently exercisable warrant.
(18) Includes 6,455,000 shares of Series D Preferred Stock,
which Mr. Clark, the Company's CEO owns which are convertible to
6,455,000 shares of common stock if the Company has sufficent
authorized but unissued shares of common stock.
(19) Includes 2,000,000 shares of Series D-1 Preferred Stock,
which Mr. Clark, the Company's CEO owns which are convertible
2,000,000 shares of common stock if the Company has sufficent
authorized but unissued shares of common stock.
Item 12. Certain Relationships and Related Transactions
From time to time since December 6, 1987, Thomas P. Clark, a
Director and President of the Company, loaned funds to the
Company to cover operating expenses. These funds have been
treated by the Company as unsecured debt, and the promissory
notes with interest at 8.36% to 9.01% per annum, issued to Mr.
Clark on various dates are payable October 1, 2007. To date,
Mr. Clark has loaned the Company $310,720 of which $43,350 has
been repaid, leaving a balance of $267,370. As of August 31,
2003, accrued interest on the Notes totaled $268,112. All loans
were made on terms determined by the board members, other than
Mr. Clark, to be at market rates.
Additionally, LCH, Inc., a Delaware corporation which owns 20%
of LC Holdings, Inc. and is thereby affiliated with Mr. Clark,
who owns 80% of LC Holdings, Inc., loaned the Company a total of
$950,000 between November, 1988 and February, 1989. These funds
were represented by two Demand Promissory Notes (the "Notes")
with interest at a rate equal to the rate announced from time to
time by Mellon Bank, Pittsburgh, Pennsylvania as its "prime
rate" plus 300 basis points from the date of the first advance
thereunder until maturity, payable quarterly beginning on the
first day of April, 1989 and continuing thereafter on the first
day of each subsequent calendar quarter. No payments were made
on the Notes. An April 25, 1989 Assumption of Obligations
Agreement assigned the entire debt of $950,000 to Rangeview
Development Corp., which was a wholly-owned subsidiary of the
Company until it was dissolved in fiscal 1997 and further
assigned $750,000 of that $950,000 to Rangeview Company, L.P a
limited partnership in which LCH held a 45% interest and
Rangeview Development Corporation held a 55% interest. In
February of 1991, LCH transferred its interest in Rangeview
Company, L.P. to the Company in exchange for a $4,000,000
profits interest in the Rangeview Project paid subsequent to the
first $31,807,000 profits interest allocated to other investors.
In connection with the Settlement Agreement, LCH consented to be
paid its $4,000,000 profits interest from the sale or other
disposition of the Export Water subsequent to payment of
$31,807,000 owed under the CAA. During fiscal year ended August
31, 1998, the Company reached an agreement with LCH, Inc. to
defer payment of the principal amount of the Notes, plus
interest until October 1, 2007. No additional consideration is
due to LCH, Inc. for the deferral. The board members, other
than Mr. Clark, determined the transactions are at fair market
value taking into consideration the risk to LCH, Inc.
The Company currently leases office facilities at no cost from
a related party at the address shown on the cover page.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3(a) Certificate of Incorporation of Registrant - Incorporated
by reference from Exhibit 4-A to Registration Statement
No. 2-65226.
3(a).1 Certificate of Amendment to Certificate of
Incorporation, filed August 31, 1987 - Incorporated by
reference from Annual Report on Form 10-K for the fiscal
year ended August 31, 1987.
3(a).2 Certificate of Amendment to Certificate of
Incorporation, filed May 27, 1988. Incorporated by
reference from Proxy Statement for the Annual Meeting
held April 22, 1988.
3(a).4 Certificate of Amendment to Certificate of
Incorporation filed April 13, 1993. Incorporated by
reference from Proxy Statement for Annual Meeting held
April 2, 1993.
3(a).6 Certificate of Amendment to Certificate of
Incorporation filed May 25, 1994 (Series A).
Incorporated by reference from Annual Report on Form 10-K
for the fiscal year ended August 31, 1994.
3(a).7 Certificate of Amendment to Certificate of
Incorporation filed August 31, 1994 (Series B).
Incorporated by reference from Annual Report on Form 10-K
for the fiscal year ended August 31, 1994
3(a).8 Certificate of Designation for the Series A-1
Preferred Stock Filed July 21, 1998.*
3(a).9 Certificate of Amendment to Certificate of
Incorporation filed September 2, 1999 (Series C).*
3(a).10 Certificate of Amendment to Certificate of
Incorporation filed November 5, 1999 (Series C1),
Incorporated by reference from Annual Report on Form 10-
KSB for the fiscal year ended August 31, 1999.
3(a).11 Certificate of Amendment to Certificate of
Incorporation filed November 5, 1999 (Series C2),
Incorporated by reference from Annual Report on Form 10-
KSB for the fiscal year ended August 31, 1999.
3(a).12 Certificate of Amendment to Certificate of
Incorporation filed August 29, 2000 (Series C3).
Incorporated by reference from Annual Report on Form 10-
KSB for the fiscal year ended August 31, 2000.
3(a).13 Certificate of Amendment to Certificate of
Incorporation file October 16, 2001 (Series D).
Incorporated by reference from Annual Report on Form 10-
KSB for the fiscal year ended August 31, 2001
3(a).14 Certificate of Amendment to Certificate of
Incorporation filed August 12, 2003 (Series D1)***.
3(b) Bylaws of Registrant - Incorporated by reference from
Exhibit 4.c to Registration Statement No. 2-62483.
3(b).1 Amendment to Bylaws effective April 22, 1988.
Incorporated by reference from Annual Report on Form 10-K
for the fiscal year ended August 31, 1989.
4.1 Specimen Stock Certificate - Incorporated by reference to
Registration Statement No. 2-62483.
10.2 Equity Incentive Plan. Incorporated by references from
Proxy Statement for Annual Meeting held April 2, 1993.
10(h).2 Service Agreement, dated April 19, 1996, by and
between the Company, and the District. **
10(h).3 Wastewater Service Agreement, dated January 22,
1998, by and between the Company, and the District.**
10(h).4 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. **
31.1 Certification under Section 302 of the Sarbanes-
Oxley Act of 2002. ***
31.2 Certification under Section 302 of the Sarbanes-
Oxley Act of 2002. ***
32.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. ***
32.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. ***
* Incorporated by reference from Annual Report on Form 10-
KSB for fiscal year ended August 31, 1998.
** Incorporated by reference from Quarterly Report on Form
10-QSB for the period ended May 31, 1996.
*** Filed herewith
(b) The Company has not filed any reports on form 8-K
during the last quarter of fiscal 2003.
Item 14. - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial
officer have concluded that the Company's disclosure controls
(as defined in Exchange Act Rule 13a-14(c)) are sufficiently
effective to ensure that the information required to be
disclosed by the Company in the reports it files under the
Securities Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an
evaluation of such controls and procedures conducted within 90
days prior to the date hereof.
Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referred
to above.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PURE CYCLE CORPORATION
By:/s/ Thomas P. Clark /s/ Mark W. Harding
Thomas P. Clark,
Chief Executive Officer Mark W. Harding, President,
Chief Financial Officer
Date: November 29, 2003 November 29, 2003
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Harrison H. Augur Chairman, Director November 29, 2003
Harrison H. Augur
/s/ Margaret S. Hansson Vice President, November 29, 2003
Margaret S. Hansson Director
/s/ Thomas P. Clark CEO, Director November 29, 2003
Thomas P. Clark
/s/ Mark W. Harding President, CFO November 29, 2003
Mark W. Harding
/s/ Fletcher L. Byrom Director November 29, 2003
Fletcher L. Byrom
/s/ George M. Middlemas Director November 29, 2003
George M. Middlemas
EXHIBIT 31.1
CERTIFICATIONS
I, Thomas P. Clark, certify that:
1. I have reviewed this quarterly report on Form 10KSB of
COMPANY.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e)) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date November 29, 2003
/s/ Thomas P. Clark
A signed original of this written statement
required by Section 302 of the Sarbanes-Oxley Act of 2002 has
been provided to COMPANY and will be retained by COMPANY and
furnished to the Securities and Exchange Commission or its staff
upon request.
EXHIBIT 31.2
CERTIFICATIONS
I, Mark W. Harding, certify that:
1. I have reviewed this quarterly report on Form 10KSB of
COMPANY.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e)) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date November 29, 2003
/s/ Mark W. Harding
A signed original of this written statement
required by Section 302 of the Sarbanes-Oxley Act of 2002 has
been provided to COMPANY and will be retained by COMPANY and
furnished to the Securities and Exchange Commission or its staff
upon request.
32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of PureCycle Corporation
(the "Company"), on Form 10-KSB for the year ending August 31,
2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Thomas P. Clark, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
result of operations of the Company.
/s/ Thomas P. Clark
Chief Executive Officer
November 29, 2003
32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of PureCycle Corporation
(the "Company"), on Form 10-KSB for the year ending August 31,
2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Mark Harding, President, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C.
1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
result of operations of the Company.
/s/ Mark W. Harding
Chief Financial Officer
November 29, 2003