______________________________________________________________ Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB (Mark One) X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1996 ___ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 0-8814 PURE CYCLE CORPORATION (Exact name of small business issuer as specified in its charter) Delaware 84-0705083 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5650 York Street, Commerce City, CO 80022 (Address of principal executive offices) (Zip Code) Registrant's telephone number(303) 292 - 3456 _________________________________________________________________ N/A (Former name, former address and former fiscal year, if changed since last report.) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 [ ] State the number of shares outstanding of each of the issuer's classes of common equity , as of May 31, 1996: Common Stock, 1/3 of $.01 Par Value 78,439,763 (Class) (Number of Shares) Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [x] _________________________________________________________________ PAGE 1 OF 12 PURE CYCLE CORPORATION AND SUBSIDIARY INDEX TO MAY 31, 1996 FORM 10-QSB Page Part I - Financial Information (unaudited) Balance Sheets - May 31, 1996 and 3 August 31, 1995 Statements of Operations - For the three months 4 ended May 31, 1996 and May 31, 1995 Statements of Operations - For the Nine months 5 ended May 31, 1996 and May 31, 1995 Statements of Cash Flows - For the Nine months 6-7 ended May 31, 1996 and May 31, 1995 Notes to Financial Statements 8 Management's Discussion and Analysis of 9 Results of Operations and Financial Condition Part II - Other Information Item 1 - Legal Proceedings 10 Item 2 - Exhibits and reports on Form 8-K 11 Signature Page 12 PAGE 2 OF 12 PURE CYCLE CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS (unaudited)
May 31 August 31 Assets 1996 1995 ------ --------- Current Assets: Cash and cash equivalents $ 242,148 $ 865,803 Marketable securities 3,429 3,429 Note receivable (Note 2) 245,406 119,327 Prepaid expenses and other current assets 10,710 16,037 Total current assets 501,693 1,004,596 Investments in water projects: Paradise water rights 5,463,984 5,462,457 Rangeview water commercialization agreement (Rangeview WCA) 5,989,895 5,856,194 Sellers Gulch water rights -- 31,997 Equipment, at cost, net of accumulated depreciation of $11,527 and $9,514 5,711 5,359 Patents, net of accumulated amortization of $35,460 and $34,776 in 1996 and 1995, respectively -- 684 Other assets 22,596 22,596 ---------- ---------- $ 11,983,879 $ 12,383,883 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt (Note 3) $ -- $ 185,460 Accounts payable 51,568 60,450 --------- ---------- Total current liabilities 51,568 245,910 Long-term debt payable to related parties, less current maturities 3,010,203 2,888,296 Other non-current liabilities 125,583 120,228 Minority interest in Rangeview WCA 4,020,630 4,020,630 Stockholders' equity: Preferred stock, par value $.001 per share; authorized - 25,000,000 shares: Series A - 1,600,000 shares issued and outstanding 1,600 1,600 Series B - 432,513 shares issued and outstanding 433 433 Common stock, par value 1/3 of $.01 per share; authorized - 135,000,000 shares; issued and outstanding 78,439,763 shares 261,584 261,584 Additional paid-in capital 23,615,561 23,615,561 Deficit accumulated during development stage ( 6,376,911) ( 6,043,987) Deficit accumulated prior to September 1, 1986 (12,726,372) (12,726,372) ---------- ---------- Total stockholders' equity 4,775,895 5,108,819 Contingency (Note 4) ---------- ---------- $ 11,983,879 $ 12,383,883 ========== ==========
[FN] See Accompanying Notes to the Consolidated Financial Statements PAGE 3 OF 12 PURE CYCLE CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended May 31 May 31 1996 1995 ------ ------ Expenses: General, administrative and marketing $( 79,155) $( 90,114) Interest ( 50,731) ( 51,531) ------- ------- Total Expenses (129,886) (141,645) Interest income 9,000 9,064 ------- ------- Net loss $(120,886) $(132,581) ======= ======= Net Loss per common share $ --* $ --* ======= ======= * less than $.01 per share
[FN] See Accompanying Notes to the Consolidated Financial Statements PAGE 4 OF 12 PURE CYCLE CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Nine Months Ended Cumulative May 31 May 31 Sept. 1, 1986 to 1996 1995 May 31,1996 ------ ------ ----------- General and administrative expenses $(249,403) $(254,959) $(3,749,123) Other income (expense): Interest expense (132,530) (145,524) (1,841,723) Loss on abandonment of option on water rights -- -- ( 850,000) Financing expense on purchase of water rights option -- -- ( 200,000) Financing cost for issuance of stock below market price -- -- ( 187,500) Loss on abandonment of power plant equipment -- -- ( 242,500) Gain from waived put options -- -- 40,950 Expiration of option to purchase water rights ( 31,997) -- ( 31,997) Gain on sale of marketable securities -- ( 3,611) 24,809 Interest income 32,778 -- 71,019 Other, net -- -- 29,503 ------- ------- --------- Net loss before extraordinary item (381,152) (404,094) (6,936,562) Extraordinary gain on extinguishment of debt (Note 3) 48,228 -- 559,651 ------- ------- --------- Net loss $(332,924) $(404,094) $(6,376,911) ======= ======= ========= Net Loss per common share $ --* $ --* ======= ======= * less than $.01 per share
[FN] See Accompanying Notes to the Consolidated Financial Statements PAGE 5 OF 12 PURE CYCLE CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended Cumulative May 31 May 31 Sept. 1, 1986 to 1996 1995 May 31, 1996 ------ ------ ---------------- Cash flows from operating activities: Net loss $(332,924) $(404,094) $(6,376,911) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,697 3,669 30,982 Amortization of debt issuance costs -- 4,600 23,000 (Loss)/gain on sale of marketable securities -- 3,611 ( 24,809) Accretion of discount on long-term debt -- 11,750 69,630 Common shares issued as additional interest expense -- -- 25,000 Extraordinary gain on extinguishment of debt ( 48,228) -- ( 559,651) Loss on abandonment of option on water rights -- -- 750,000 Financing expense on purchase of water option -- -- 200,000 Financing costs for issuance of stock options below market price -- -- 187,500 Gain on put options waived -- -- ( 40,950) Loss on abandonment of power plant equipment -- -- 62,500 Payment for services and expenses with common stock donated by President -- -- 298,250 Other unrealized loss on marketable securities -- -- 1,143 Increase in accrued interest on note receivable (12,769) ( 784) ( 16,096) Other -- -- ( 1,065) Changes in operating assets and liabilities: Prepaid expenses and other current assets 5,327 ( 6,667) ( 5,760) Accounts payable and other non-current liabilities ( 3,527) 13,397 432,418 Accrued interest 127,175 139,800 1,545,294 ------- ------- --------- Net cash used in operating activities $(262,249) $(234,718) $(3,399,525) ------- ------- --------- (continued) PAGE 6 OF 12
PURE CYCLE CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended Cumulative May 31 May 31 Sept. 1, 1986 to 1996 1995 May 31, 1996 ------ ------ ---------------- Cash flows from investing activities: Investments in water rights $(103,231) $( 84,800) $(2,288,859) Purchase of marketable securities -- ( 300,000) (2,000,000) Proceeds from sale of marketable securities -- 1,278,289 2,024,809 Increase in note receivable (113,310) 679 ( 229,310) Purchase of equipment ( 2,365) ( 71,000) ( 17,237) Increase in other assets -- -- ( 106,595) ------- --------- --------- Net cash provided by (used in) investing activities (218,906) 821,810 (2,617,192) ------- --------- --------- Cash flows from financing activities: Proceeds from issuance of debt -- -- 2,677,629 Repayments of debt (142,500) -- (1,167,190) Proceeds from sale of common stock -- -- 2,900,000 Proceeds from sale of Series A convertible Preferred stock -- -- 1,600,000 Proceeds from issuance of redeemable common stock -- -- 245,000 Proceeds from issuance of stock options -- -- 100,000 Repurchase of stock options -- -- ( 100,000) ------- ------- --------- Net cash provided by (used in) financing activities (142,500) -- 6,255,439 ------- ------- --------- Net increase (decrease) in cash and cash equivalents (623,655) 587,092 238,722 Cash and cash equivalents beginning of period 365,803 122,441 3,426 ------- ------- --------- Cash and cash equivalents end of period $ 242,148 $ 709,533 $ 242,148 ======= ======= =========
[FN] See Accompanying Notes to the Consolidated Financial Statements PAGE 7 OF 12 PURE CYCLE CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING PRINCIPLES The consolidated balance sheet as of May 31, 1996 and August 31, 1995, the consolidated statements of operations for the three and nine months ended May 31, 1996 and May 31, 1995 and the consolidated statements of cash flows for the nine months ended May 31, 1996 and May 31, 1995, have been prepared by the Company, without an audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at May 31, 1996 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1995 Annual Report on Form 10- KSB. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full year. NOTE 2 - NOTE RECEIVABLE In April 1995, the Company extended short-term credit to the Rangeview Metropolitan District. The loan permits borrowings up to $250,000, is unsecured, bears interest based on the prevailing prime rate plus 2% and, matures on December 31, 1996. NOTE 3 - CURRENT MATURITIES OF LONG-TERM DEBT During January 1996, the Company reached an agreement with a creditor to retire a note payable, totaling $190,728 with accrued interest, for payment of $142,500. The difference in the face value of the note and the cash paid to retire the debt of $48,228 has been reflected as an extraordinary gain on the consolidated statement of operations for the nine months ended May 31, 1996. NOTE 4 - CONTINGENCY In 1988, the Company initiated efforts to acquire approximately 10,000 acre feet of non-tributary ground water rights from the Rangeview Metropolitan District (the "District"). Since that time, the Company, together with other investors, has purchased certain real property, municipal notes and bonds, and options to purchase water related to this project. In October of 1994, the Company joined in a lawsuit initiated by others including the District, against the Colorado State Board of Land Commissioners (the "Board") seeking a Declaratory Judgment affirming that the lease between the Board and the District was valid and binding. In May of 1996, the parties to the lawsuit agreed to a settlement (the "Settlement"). The Settlement was subject to obtaining a final non-appealable order of the trial court approving the Settlement. The trial court order was signed subsequent to the end of the quarter on June 14, 1996 and will be non-appealable on July 29, 1996. PAGE 8 OF 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations General and administrative expenses for the nine months ended May 31, 1996 were approximately $5,555 lower than for the period ended May 31, 1995, primarily because of a decrease in facility costs and administrative salaries. Interest expense decreased for the nine months ended May 31, 1996 by approximately $28,630 compared to the period ended May 31, 1995 due to a lower average outstanding balance of notes payable in the first nine months of fiscal 1996 compared to the same period in fiscal 1995. Net loss for the nine months ended May 31, 1996 decreased approximately $71,170 compared to the nine months ended May 31, 1995 primarily because of the combined effects of the recognition of an extraordinary gain on the extinguishment of debt, higher interest income and lower interest expense offset by the expiration of an option to purchase certain water rights. Liquidity and Capital Resources At May 31, 1996, current assets exceed current liabilities by approximately $450,125 and, the Company had cash and cash equivalents of $242,148. The Company is aggressively pursuing the sale and development of its water rights. The Company cannot provide any assurances that it will be able to sell its water rights. In the event a sale of the Company's water rights is not forthcoming and the Company is not able to generate revenues from the sale or development of its technology, the Company may sell additional portions of the Company's profit interest pursuant to the WCA, incur 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. Development of any of the water rights 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 rights is anticipated to be financed through the sale of water taps and water delivery charges to a city or municipality. A water tap charge refers to a charge imposed by a municipality to permit a water user to access 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 based on a per 1,000 gallons of water consumed. PAGE 9 OF 12 PART II - OTHER INFORMATION Item 1 - Legal Proceedings In 1988, the Company initiated efforts to acquire approximately 10,000 acre feet of non-tributary ground water rights located in the four principal aquifers known as the Denver Basin Aquifers from the Rangeview Metropolitan District (the "District"). Since that time, the Company, together with other investors, has purchased certain real property, municipal notes and bonds, and options to purchase water related to this project. In October of 1994, the Company joined in a lawsuit initiated by others including the District, against the Colorado State Board of Land Commissioners (the "Board") seeking a Declaratory Judgment affirming that the lease between the Board and the District was valid and binding. Under the lease, the Board granted development rights to the ground water located on and beneath certain land owned by the Board. In May of 1996, the parties to the lawsuit agreed to a settlement (the "Settlement"). The Settlement, among other things, provides for the retirement of all of the District's outstanding Water Revenue Notes and Bonds, and clarifies the Board's royalty participation in a new lease of the ground water. The Company negotiated agreements to acquire the remainder of the District's outstanding Water Revenue Notes and Bonds not already owned by the Company with a principal value of $24,914,058 in exchange for participation interests in the Company's Water Rights Commercialization Agreement ("WCA"). Commitments with respect to the WCA will increased from approximately $31,00,000 to approximately $32,026,000 as a result of the Settlement. The Settlement was subject to obtaining a final non-appealable order of the trial court approving the Settlement. The trial court order was signed subsequent to the end of the quarter on June 14, 1996 and will be non-appealable on July 29, 1996. Pursuant to the Settlement, the Company will deliver all of the outstanding Notes and Bonds to the District in exchange for ownership of 11,650 acre feet of tributary and non-tributary ground water, 12,000 acre feet of surface storage rights, and an 85 year Service Agreement between the District and the Company. The Service Agreement provides for the Company to design, develop, operate, and maintain the District's water system which will deliver water to customers within the District's 24,000 acre service area. The District has reserved approximately 14,000 acre feet of water to provide water service to future customers within its service area. The Company will receive approximately 85% of the District's tap fees, user fees, and system development fees in exchange for the Company's commitments under the Service Agreement. The Company is currently negotiating with several Denver area water providers to sell portions of the 11,650 acre feet of water and with certain property owners within the District's Service Area for development of the District's water system PAGE 10 OF 12 Item 2 - Exhibits and Reports on Form 8-K (a) Exhibits - The following exhibits are included herewith. 10.1 Settlement Agreement and Mutual Release, dated April 11, 1996, by and among the Colorado State Board of Land Commissioners (the "Land Board"), Rangeview Metropolitan District ("Rangeview"), the Company, INCO Securities Corporation ("Inco"), and Apex Investment Fund II, L.P., Landmark Water Partners, L.P., Landmark Water Partners II, L.P., Environmental Venture Fund, L.P., Environmental Private Equity Fund II, L.P., The Productivity Fund II, L.P., Proactive Partners, L.P., Warwick Partners, L.P., Auginco, Anders C. Brag, Amy Leeds, and D.W Pettyjohn (collectively the "Bondholders"), and ("OAR"), Willard G. Owens and H. F. Riebesell, Jr. (collectively the "Owens Group Bondholders"). 10.2 Service Agreement, dated April 11, 1996, by and between the Company and Rangeview. 10.3 Agreement for Sale of Export Water, dated April 11, 1996, by and between the Company and Rangeview. 10.4 Amended and Restated Option and Purchase Agreement, dated April 11, 1996, by and among OAR, the Company and INCO. 10.5 Amended and Restated Option and Purchase Agreement, dated April 11, 1996, by and among the Land Board, Riebesell, the Company and Inco. 10.6 Second Amended and Restated Closing Escrow Instructions Willard Owens Transaction, dated April 11, 1996, by and among OAR, the Company, the Land Board, H. F. Riebesell, Jr., and Colorado National Bank. 10.7 Comprehensive Amendment Agreement No. 1, dated April 11, 1996, by and among Inco, the Company, the Bondholders, Gregory M. Morey, Newell Augur, Jr., Bill Peterson, Stuart Sundlun, Alan C. Stormo, Beverly A. Beardslee, Bradley Kent Beardslee, Robert Douglas Beardslee, Asra Corporation, International Properties, Inc., and the Land Board. (b) The Company has not filed any reports on Form 8-K during the quarter. PAGE 11 OF 12 PURE CYCLE CORPORATION SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PURE CYCLE CORPORATION Date: July 12, 1996 /S/ Thomas P. Clark - ---------------------- -------------------------- Thomas P. Clark, President Date: July 12, 1996 /S/ Mark W. Harding - --------------------- -------------------------- Mark W. Harding, Chief Financial Officer PAGE 12 OF 12