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, 1998 ___ 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 of incorporation) (I.R.S. Employer 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, 1998: 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] PURE CYCLE CORPORATION INDEX TO May 31, 1998 FORM 10-QSB Page Part I - Financial Information (unaudited) Balance Sheets May 31, 1998 and 3 August 31, 1997 Statements of Operations - For the three months 4 ended May 31, 1998 and May 31, 1997 Statements of Operations - For the nine months 5 ended May 31, 1998 and May 31, 1997 Statements of Cash Flows - For the nine months 6 ended May 31, 1998 and May 31, 1997 Notes to Financial Statements 7 Management's Discussion and Analysis of 8 Results of Operations and Financial Condition Signature Page 9 "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements that are not historical facts contained in this Quarterly Report on Form 10-QSB are forward looking statements that involve 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: general economic conditions, 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 of development, 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 the anticipated permit and start-up dates, environmental risks, and the results of financing efforts. 2 PURE CYCLE CORPORATION CONSOLIDATED BALANCE SHEETS May 31 August 31 ASSETS 1998 1997 Current assets: Cash and cash equivalents $ 87,559 $ 370,426 Marketable securities 3,429 3,429 Prepaid expenses and other current assets 7,830 7,830 ---------- ---------- Total current assets 98,818 381,685 Investment in water projects: Rangeview water rights 12,992,383 12,920,490 Paradise water rights 5,470,606 5,468,041 Rangeview Water System 114,088 100,212 ---------- ---------- Total investment in water projects 18,577,077 18,488,743 Note receivable, including accrued interest 292,393 274,765 Equipment, at cost, net of accumulated depreciation of $15,790 and $14,149, respectively 1,448 3,089 Other assets 22,596 22,596 ---------- ---------- $ 18,992,332 $ 19,170,878 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 48,672 $ 6,856 Accrued liabilities -- 45,809 --------- --------- Total current liabilities 48,672 52,665 Long-term debt - related parties, including accrued interest (Note 2) 3,701,061 3,550,925 Other non-current liabilities 119,198 113,843 Participating interests in Rangeview water rights 11,090,630 11,090,630 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; 78,439,763 shares issued and outstanding 261,584 261,584 Additional paid-in capital 23,729,944 23,678,561 Accumulated deficit (19,960,790) (19,579,363) ---------- ---------- Total stockholders' equity 4,032,771 4,362,815 ---------- ---------- $ 18,992,332 $ 19,170,878 ========== ========== [FN] See Accompanying Notes to the Consolidated Financial Statements 3 PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended May 31 May 31 1998 1997 Water service revenue Tap fees $ -- $ 29,354 Water usage fees 5,419 -- ------- ------- 5,419 29,354 Expenses Water service operating expense ( 1,000) -- General, administrative and marketing ( 77,857) ( 75,164) Interest Related party ( 50,046) ( 49,580) Other ( 1,785) -- ------- ------- (130,688) (124,744) Interest income 7,365 7,007 ------- ------- Net Loss $(117,904) $( 88,383) Loss per common share $ --* $ --* * less than $.01 per share [FN] See Accompanying Notes to the Consolidated Financial Statements 4 PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Nine Months Ended May 31 May 31 1998 1997 Water service revenue Tap fees $ -- $ 75,724 Water usage fees 19,163 -- ------- ------- 19,163 75,724 Expenses Water service operating expense ( 2,000) -- General, administrative and marketing (267,658) (232,524) Interest Related party (150,136) (148,740) Other ( 5,355) -- ------- ------- (425,149) (381,264) Interest income 24,559 20,744 ------- ------- Net Loss $(381,427) $(284,796) ======= ======= Loss per common share $ --* $ --* * less than $.01 per share [FN] See Accompanying Notes to the Consolidated Financial Statements 5 PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended May 31 May 31 1998 1997 Cash flows from operating activities: Net loss $(381,427) $(284,796) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,641 1,544 Amortization of deferred financing costs -- 13,500 Noncash compensation expense for the repricing of options and warrants (Note 3) 51,383 -- Increase in accrued interest on note receivable ( 17,628) ( 17,607) Increase in accrued interest on long term debt and other non-current liabilities 155,491 148,740 Changes in operating assets and liabilities: Prepaid expenses and other current assets -- 3,034 Accounts payable ( 3,993) ( 25,124) ------- ------- Net cash used in operating activities (194,533) (160,709) Cash flows from investing activities: Investments in water rights ( 74,458) ( 91,784) Investment in rangeview water system ( 13,876) ( 41,535) ------- ------- Net cash used in investing activities ( 88,334) (133,319) Cash flows from financing activities: Proceeds from issuance of debt -- 300,000 ------- ------- Net cash provided by (used in) financing activities -- 300,000 ------- ------- Net increase (decrease) in cash and cash equivalents (282,867) 5,972 Cash and cash equivalents beginning of period 370,426 126,756 ------- ------- Cash and cash equivalents end of period $ 87,559 $ 132,728 ======= ======= [FN] See Accompanying Notes to the Consolidated Financial Statements 6 PURE CYCLE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING PRINCIPLES The consolidated balance sheet as of May 31, 1998 and August 31, 1997, the consolidated statements of operations for the three months and nine months ended May 31, 1998 and May 31, 1997 and the consolidated statements of cash flows for the nine months ended May 31, 1998 and May 31, 1997, 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, 1998 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 1997 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 - LONG-TERM DEBT In August 1996, the Company entered into a loan agreement with six related party investors. The loan is for $300,000, is unsecured, bears interest based on the prime rate plus 2% or 10 1/4% and is due August 30, 2002. In connection with the August 1996 loan agreement, the Company issued warrants to purchase shares of the Company's common stock. The agreement allowed the Company to extend the due date to August 30, 2002 by issuing additional warrants (see Note 3). In August 1997, the Company entered into a loan agreement with five related party investors. The loan is for $350,000, is unsecured, bears interest at the rate of 10 1/4% and is due August 30, 2002. In connection with the August 1997 loan agreement, the Company issued warrants to purchase shares of the Company's common stock (see Note 3). NOTE 3 - STOCKHOLDERS' EQUITY In connection with the August 1996 loan agreement described in note 2, the Company issued warrants to purchase 600,000 shares of the Company's common stock and additional warrants to purchase 1,323,000 shares to extend the due date of the note until August 30, 2002. The warrants are exercisable at $.25 per share and expire August 30, 2002. The estimated fair value of the warrants issued of $18,000 has been charged to expanse during the year ended August 31, 1997. In connection with the August 1997 loan agreement, the Company issued warrants to purchase 2,100,000 shares of the Company's common stock. The warrants are exercisable at $.25 per share and expire August 30, 2002. A portion of the proceeds received under the agreement ($45,000) has been attributed to the estimated fair value of the warrants issued. The resulting discount is being amortized over the term of the loan. In December of 1997, the Company agreed to adjust the exercise price of its outstanding options and warrants to purchase approximately 48,672,000 shares held by certain directors, officers, and investors of the Company from $.25 per share to $.18 per share. The options and warrant repricing was based on the market closing price on December 2, 1997 of $.18 per share. The Company has recognized a non-cash compensation expense of $51,000 which reflects the change in value of the options and warrants based on the price of the Company's outstanding shares at the date of repricing. The options and warrants expire during 2002. 7 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, 1998 were approximately $37,000 higher than for the period ended May 31, 1997, primarily because of a non- recurring, non-cash compensation expense related to the repricing of outstanding options and warrants. Interest expense increased for the nine months ended May 31, 1998 by approximately $7,000 compared to the period ended May 31, 1997 primarily because of a higher average outstanding balance of notes payable for the nine months of fiscal 1998 compared to the same period in fiscal 1997. Net loss for the nine months ended May 31, 1998 increased approximately $97,000 compared to the nine month ended May 31, 1997 primarily because of the receipt of one-time tap fee revenue during the nine months ended May 31, 1997 and the non- cash compensation expense. During the nine months ended May 31, 1998, the Company generated water service revenues of $19,163 and incurred approximately $2,000 in operating costs associated with the water service revenues The water service revenues were generated from the sale of water to customers within the Company's Service Area. Liquidity and Capital Resources At May 31, 1998, current assets exceed current liabilities by $50,146 and, the Company had cash and cash equivalents of $87,559. 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. 8 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 9, 1998 /S/ Thomas P. Clark -------------------- Thomas P. Clark, President Date: July 9, 1998 /S/ Mark W. Harding -------------------- Mark W. Harding, Chief Financial Officer