SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X 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, 1998
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.)
5650 York Street, Commerce City, CO 80022
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (303) 292-3456
Name of each
Title exchange on which
Securities registered under Section of class registered
12(b)of the Exchange Act: -------- -----------------
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 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 [ ]
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, 1998: $25,366
Aggregate market value of voting stock held by non-affiliates: $
9,804,970 (based upon the average bid and asked price on the OTC
Bulletin Board on November 13, 1998)
Number of shares of Common Stock outstanding, as of November 13,
1998: 78,439,763
Transitional Small Business Disclosure Format(Check One): Yes [ ]
No [x]
Documents incorporated by reference: None
Table of Contents
Item Part I Page
1. Description of Business . . . . . . . . . . . 3
2. Description of Property . . . . . . . . . . . 6
3. Legal Proceedings. . . . . . . . . . . . . . . 6
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . 6
Part II
5. Market for the Common Equity and
Related Stockholder Matters . . . . . . . . . 7
6. Management's Discussion and Analysis . . . . 8
7. Financial Statements . . . . . . . . . . . . 12
8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . 25
Part III
9. Directors, Executive Officers, Promoters and
Control Persons; Section 16 (a) Beneficial
Ownership Reporting Compliance . . . . . . . 25
10. Executive Compensation . . . . . . . . . . . 26
11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 27
12. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . 29
13. Exhibits and Reports on Form 8-K . . . . . . .30
Signatures . . . . . . . . . . . . . . . . .32
"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 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: 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 anticipated permit and start-up dates, environmental
risks, the results of financing efforts, amd 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 the water management
business providing water and wastewater services to customers
located in the Denver area. The Company operates water and
wastewater systems including 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. 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.
In 1996, the Company entered into a landmark water privatization
agreement with the State of Colorado and the Rangeview Metropolitan
District (the "District") for the development of over 26,000 acre
feet of water in the Denver metropolitan area. The water
privatization agreement enabled the Company to acquire ownership to
a total gross volume of 1,165,000 acre feet of groundwater (with an
annual usage right of 11,650 acre feet per year), and 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 ownership of the Export Water Supply, the Company
entered into water and wastewater privatization agreements
("Service Agreements") with an eighty-five year term with the
District to design, construct, operate, and maintain the District's
water and wastewater systems to service customers within the
District's 24,000 acre service area which is located 2 miles from
the greater Denver metropolitan area in Arapahoe County ("Service
Area"). The District has reserved approximately 14,350 acre feet
per year of water and surface reservoir storage capacity
(collectively referred to as the "Service Area Water Supply") for
use within the District's Service Area.
The Company's water assets together with its Service Agreements
enable the Company to develop and market water and wastewater
service to cities, municipalities and special districts in need of
additional water supplies and to serve the water and wastewater
needs of customers within the District's Service Area. The Company
will seek to utilize its patented water recycling technologies to
process the wastewater into pure potable water for reuse
applications.
Description of Company Assets
Rangeview Water Supply
In 1988, the Company initiated efforts to acquire approximately
10,000 acre feet of non-tributary groundwater from the District.
Since that time, the Company acquired various options to purchase
water together with a portion of the water revenue notes and bonds
(the "District Bonds") issued by the District, options to purchase
the remaining District Bonds, and certain real property interests
within the boundaries of the District. Beginning in 1990 the
Company entered into a Water Commercialization Agreement (the
"WCA") where the Company sold rights to investors to participate in
the proceeds from the sale of the Export Water Supply in order to
finance the acquisition of the above described assets.
In April 1996, as part of a comprehensive settlement agreement
with the State of Colorado ("Settlement Agreement"), the Company
purchased all of the District's outstanding District Bonds from the
holders of the securities and entered into a water privatization
agreement between the District and the Company. As part of the
Settlement Agreement, the Company entered into the Service
Agreements and purchased a fee interest to the Export Water Supply,
which consists of a total gross volume of 1,165,000 acre feet
(approximately 11,650 acre feet per year) of non-tributary
groundwater, and the option to substitute 1,650 acre feet of
tributary surface water for a total gross volume of 165,000 acre
feet of non-tributary groundwater, and surface reservoir storage
rights from the District in exchange for all the outstanding
District Bonds. The Company continues to develop and market its
Export Water Supply to Denver area water providers that are in need
of additional water supplies.
Comprehensive Amendment Agreement
In order to acquire all the remaining outstanding District Bonds
not already held by the Company to enable the Company to enter into
the Settlement Agreement and to acquire the Export Water Supply,
the Company negotiated agreements with all the remaining bond
holders and amended the WCA and its agreements with all prior
investors in the WCA. Pursuant to the Comprehensive Amendment
Agreement (the "CAA") entered into in conjunction with the
Settlement Agreement, such bond holders and investors have a right
to receive $31,807,232 from the proceeds of a sale or other
disposition of the Export Water Supply.
Service Agreements
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
customers within the District's 24,000 acre 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 District's Service Area, the Company will
receive 95% of the District's water revenues remaining after
payment of royalties to the State of Colorado Land Board.
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 District's 24,000 acre Service Area. In
exchange for providing wastewater service to customers within the
District's 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 will supply water and wastewater services to
customers within the 24,000 acres of property which constitute the
boundaries of the District's Service Area. The District's 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 sold to private
interests. Development of the property is dependent on overall
growth in the Denver metropolitan area.
The development of the Rangeview Project is divided into two
segments: one segment is the development and distribution of the
Export Water Supply to Denver area water providers in need of
additional water supplies; and the second, is the development of
water and wastewater service to customers within the District's
24,000 acre Service Area. During fiscal year 1998, the Company's
revenues were generated by providing approximately 17 million
gallons of water to customers within the District's Service 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 produce approximately 7,500 - 9,400 gallons
per minute (which produce 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 the 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 their can be no assurance that the technology will
be technically or economically feasable on a large scale. The
Company, through its Wastewater Service Agreement, will seek to
apply its water recycling technology to treat municipal wastewater
into pure potable water for reuse.
The Business
Beginning in fiscal 1987, and continuing through fiscal 1998, the
Company has acquired a portfolio of water assets (which are
described above in the Description of Company Assets) which it can
use to provide water service to customers located throughout the
Denver metropolitan area and it has acquired the exclusive right to
provide water and wastewater service to customers located within
its 24,000 acre services. 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 western United States.
The Rangeview Metropolitan District is a quasi-municipal,
political subdivision of the State of Colorado and is empowered to
provide water and wastewater services to approximately 24,000 acres
of property located approximately 2 miles south and east of Denver
metropolitan area, most of which is owned by the State of Colorado
(the "Service Area").
The 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 to parties interested in
the development of the land. The District has reserved
approximately 14,350 acre feet of water annually, together with
surface reservoir storage capacity, to provide water service to the
property. The District completed a study to analyze the future
development opportunities for the property and defined three
categories of land uses: residential, commercial / light
industrial, and open space. Approximately 10,000 acres is suitable
for residential development accommodating up to 70,000 single-
family homes; approximately 2,200 acres is suitable for commercial
and light industrial development along the primary access
corridors; and the remaining 12,800 acres is suitable for open
space (i.e. parks, playing fields, and golf courses).
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. The District is empowered to set
rates and charges for water and wastewater services. Pursuant to
the Settlement Agreement, the District's water rates and charges
must be 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.
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility ("Model Facility"). The
Model Facility will purchase the equivalent of 201 residential
water taps at $8,165 per tap (or $1,641,165), and the equivalent of
156 residential wastewater taps at $4,000 per tap (or $624,000,
collectively $2,265,165). Pursuant to its Service Agreements, the
Company will receive $1,372,014 from the water tap revenue, and
$624,000 from the sewer tap revenues for a combined total of
$1,996,014. The Company will design, construct, operate and
maintain the water and wastewater system to deliver water and sewer
service to the Model Facility. Construction on the facilities are
scheduled to begin in first quarter fiscal year 1999 with the
opening of the Model Facility in late 1999.
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 actively marketed the Export Water Supply to each of the 40
largest providers during fiscal year 1998. The Export Water Supply
could be sold for a lump sum amount or pursuant to service contract
whereby the Company will deisgn, construct, operate and maintian
the water system to deliver the water to customers. The timing,
terms, and conditions of sales are dependent on the purchaser.
The Company is also pursuing the sale of the Paradise Water
Supply to water 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. If the Company is successful in selling its Paradise
Water Supply, the Company would anticipate developing the
facilities to deliver the water in a manner similar to the Export
Water Supply. Other potential development opportunities for the
Paradise Water Supply include, but are not limited to, the
utilization of the artesian pressure for hydroelectric power
generation, water leasing to agricultural interests, mineral
interests, and recreational interests.
The Company's business of water management is subject to
competitive factors since alternative sources of water are
available. The Company is aware of other private water companies
who are attempting to market competing water 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 of
the water source, and the reliability of the water supply. The
Company believes that its water provide 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.
The business segment of 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 is processed by approximately 10 major
wastewater/sewage treatment providers. The majority of Denver area
water providers participate in the Metropolitan Wastewater
Authority which process approximately 95% of the areas
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.
Additionally, residual material created in the wastewater treatment
process can be composted into a high grade fertilizer for
agricultural use.
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 a purchaser of the Company's
water would undertake to construct the required facilities to
deliver the water to its users, however the Company would consider
providing such infrastructure as part of a water sale agreement. If
the Company were to ultimately agree to provide such facilities,
the Company could incur substantial capital expenditures to comply
with governmental regulations. 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.
Item 2. Description of Property
The Company currently leases office facilities at the address
shown on the cover page.
In 1996, the Company purchased a total gross volume of 1,165,000
acre feet (approximately 11,650 acre feet per year) of non-
tributary groundwater, together with 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 owns approximately 70,000 acre feet of conditional
water rights, water wells and related assets in the State of
Colorado by assignment and quit claim deed. See "Item 1.
Description of Business - Description of Company's Assets -
Paradise Water Supply."
Item 3. Legal Proceedings
In March 1998, the Company joined a lawsuit initiated by others
including the Rangeview Metropolitan District and the State of
Colorado, Board of Land Commissioners ("State"), brought in the
District Court of Arapahoe County, Colorado, against US Home
Corporation seeking declaratory judgment affiriming US Home
Corporation's responsibilities under Lease S-37280 as amended and
the Agreement to Exchange Real Property requiring US Home
Corporation to obtain water service from the District and the State
for development activities on property governed under Lease S-
37280. Management does not believe the outcome of the lawsuit will
have a material adverse effect to the Company.
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, 1998.
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 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 13, 1998, there were 3,984
holders of record of the Company's Common stock.
Calendar Quarter Low High
---------------- ---- ----
1998 First $.15 $.22
Second $.11 $.19
Third $.12 $.187
Fourth $.11 $.15
1997 First $.22 $.375
Second $.20 $.50
Third $.15 $.37
Fourth $.18 $.26
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 owning on the Company's outstanding
Preferred Stock.
Recent Sales of Unregistered Securities
In August 1998, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the Company
issued 3,200,000 shares of Series C Preferred Stock to Mr. Thomas
Clark in exchange for 3,200,000 shares of common stock owned by Mr.
Clark. The Company sold 3,200,000 shares of the Company's Common
Stock at $.125 per share to four accredited investors who have
previously invested in the Company. Proceeds to the Company were
$400,000. The shares were issued under Section 4 (2) of the
Securities Act of 1933.
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
approximately $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.
Item 6. Management's Discussion and Analysis
General
Pure Cycle is engaged in the privatization of municipal water and
wastewater systems in Colorado and other areas. The Company seeks
to use its water and water technologies to enhance the availability
and quality of domestic drinking water. The Company purchased
approximately 11,650 acre feet of water and entered into two eighty
five year water and wastewater Service Agreements with the
Rangeview Metropolitan District which will enable the Company to
provide water and wastewater service to over 36 square miles of
property located in the Denver area. The Company continues to
develop its water recycling technologies and, will seek to
integrate these technologies for processing wastewater into pure
potable water for reuse into its wastewater service commitment to
the District's Service Area.
The Company is aggressively pursuing the marketing and sale of
its water to municipal water providers in the Denver metropolitan
region as well as users in Arizona, Nevada and California to
generate current and long term revenue sources. During fiscal year
1998, the Company delivered approximately 17 million gallons of
water to customers within the District's Service Area. The Company
continues to meet with developers and other parties interested in
developing portions of the District's Service Area. The District's
Service Area is primarily undeveloped land owned by the State of
Colroado situated in the growing Arapahoe County. A small portion
of the property have been sold to private interests who may develop
the property. The timing of the development of water and
wastewater facilities will depend upon when the property is
developed.
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility ("Model Facility"). The
Model Facility will purchase 201 equivalent residential water taps
at $8,165 per tap (or $1,641,165), and 156 equivalent residential
wastewater taps at $4,000 per tap (or $624,000, collectively
$2,265,165). Pursuant to its Service Agreements, the Company will
receive $1,372,014 from the water tap fees, and $624,000 from the
sewer tap fees for a combined total of $1,996,014. The Company
will design, construct, operate and maintain the water and
wastewater system to deliver water and sewer service to the Model
Facility. Projected costs for construction of the water system are
approximately $1,100,000, and projected cost for construction of
the wastewater system are $625,000 or combined costs of $1,725,000.
The costs are expected to be paid from prepaid water and wastewater
tap fees.
In addition to the Company's Service Area activities, the Company
continues to meet with Denver area water providers to develop and
sell the Company's Export Water Supply. Denver area water providers
continue to experience strong regional growth rates which continue
to pressure their developed water supplies. The Company is
marketing its Export Water Supply to water providers in need of
supplemental water supplies. Additionally, during fiscal 1998, the
Company has 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 companies and
municipal water providers.
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 the Company's profits interest pursuant to the CAA, 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 projects is dependent on its
ability to successfully market the water, or in the event it is
unsuccessful, to sell the underlying water. Under the provisions
of the CAA, the other investors in the Rangeview project are to
receive the first approximately $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 $432,513 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 $35,807,232 from the sale or other disposition of the
Export Water Supply.
Results of Operations
During fiscal year 1998, the Company's water service revenues
decreased approximately $1,550 or 6% to $25,366 as compared to
$26,915 for fiscal 1997, due primarily to above average rainfall in
the spring of 1998. The Company incurred approximately $4,800 in
operating costs associated with the water service revenues. Prior
to fiscal 1997, the Company did not report any revenues. The
Company continues to operate at a loss with its operating capital
requirements funded primarily through debt and equity financings
and the sale of rights to participate in the proceeds from the sale
of the Company's Export Water Supply.
The Company's general and administrative expenses for fiscal 1998
increased approximately $44,000 or 15% to $335,000 as compared to
$295,000 for fiscal 1997, due primarily to a increase in payroll
expenditures. The Company's general and administrative expenses
for fiscal 1997 decreased approximately $47,000 or 14% to $295,000
as compared to $338,000 for fiscal 1996, due primarily to a
decrease in payroll expenditures.
The Company's net loss for fiscal 1998 increased approximately
$172,000 or 49% as compared to $353,000 for fiscal 1997. The
increase in net loss for fiscal 1998 was due primarily to one-time
tap fee revenues received during 1997 and the recognition of an
extraordinary gain from the extinguishment of debt of approximately
$21,000 in 1997. The Company's net loss for fiscal 1997 decreased
approximately $103,000 or 22% as compared to $456,000 for fiscal
1996. The decrease in net loss for fiscal 1997 was due primarily
to the revenues generated during 1997 and the gain on
extinguishment of debt in 1997.
Liquidity and Capital Resources
Prior to fiscal 1992, the Company funded operations primarily
through long term debt financing from certain related parties
including the Company's President and major stockholder. Since
fiscal 1992, the Company has funded operations with debt and equity
financing and by marketing the right to share in proceeds from the
sale of its Export Water Supply to private individuals, companies
and institutions with an interest in the water supply market.
The Company's working capital at August 31, 1998 was $386,000.
The Company expects to incur additional costs in fiscal 1999 to
expand water service to customers within the District's Service
Area. Based on budgets prepared by management, the Company
believes that its working capital at August 31, 1998 is adequate to
fund its activities through at least fiscal 1999.
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 or through the sale of water taps and water
delivery charges. A water tap charge refers to a charge imposed by
a municipality 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 based on a per 1,000 gallons of water
consumed.
Operating Activities
During fiscal 1998, the Company used cash of approximately
$256,000 in its operations compared to approximately $173,000 in
fiscal 1997. One-time tap fee revenue received in fiscal 1997 and
an increase in general and administrative expenses accounted for
the increase in cash used for operations in fiscal 1998. Based on
budgeted operating costs, it is anticipated that a similar level of
cash will be used in the Company's general and administration
operations during fiscal 1999.
Construction Activities
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility. The Company will design,
construct, operate and maintain the water and wastewater system to
provide service to the Model Facility. Projected costs for
construction of the water system are approximately $1,100,000, and
projected cost for construction of the wastewater system are
$625,000 or combined costs of $1,725,000 to be paid from prepaid
water and wastewater tap fee revenues.
Investing Activities
Cash used in investing activities for fiscal 1998 was
approximately $92,000. Costs of approximately $78,000 were
incurred relating to the Rangeview and Paradise Water Supply
projects and costs of approximately $14,000 were incurred relating
to the development of a water system serving customers within the
District's Service Area. Cash used in investing activities for
fiscal 1997 was approximately $233,000. Costs of approximately
$133,000 were incurred relating to the Rangeview and Paradise Water
Supply projects and costs of approximately $100,000 were incurred
relating to the development of a water system serving customers
within the District's Service Area.
Financing Activities
In August of 1998, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the Company
issued 3,200,000 shares of Series C Preferred Stock to Thomas P.
Clark in exchange for 3,200,000 shares of common stock owned by Mr.
Clark. The Company sold 3,200,000 shares of common stock to four
acredited investors who have previously invested with the Company
for $.125 per share. Proceeds to the Company were $400,000. In
August 1996, the Company entered into a loan agreement with six
related party investors to borrow $300,000. The proceeds from the
loan agreement were received in fiscal 1997. The Company also
entered into a loan agreement in August of 1997 and received
$350,000 from five related party investors. A portion of the
proceeds under the agreements were attributed to the value of the
warrants issued in connection with the loans.
Year 2000
The Company has completed its assessment of year 2000 issues on
its computer systems and applications and developed a remediation
plan. Conversion activities are in process and the Company expects
conversion and testing to be completed by the end of the fiscal
year ended August 31, 1999. The Company expects completion of the
project to cost less than $16,000. The Company believes its non-
information technology systems either will not have year 2000
issues or are not material to the Company's operations. While the
company does not believe it has any material year 2000 problem, the
failure to correct a material problem or the impact of a year 2000
problem on customers and third-party suppliers could result in an
interruption in, or failure of normal business activities or
operations. Such failures could could materially and adversely
affect the Company's results of operations, liquidity and financial
condition.
Readers are cautioned that forward-looking statements constained
in this Year 2000 update 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.
New Accounting Standards
In June of 1997, the FASB issued Statements of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), and No 131, Disclosure About Segment of an Enterprise and
Related Information ("SFAS 131"), effective for years beginning
after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. The Company
has not yet adopted SFAS 130. The Company will comply with the
reporting and display requirements of this statement when required.
SFAS 131 establishes standards for reporting information about
operating segments and the methods by which such segments were
determined. The Company has not yet adopted SFAS 131. As the
Company currently operates within one industry segment, the
reporting of such information is not expected to be significant.
Item 7. Financial Statements
Page
Independent Auditors' Reports 12
Consolidated Balance Sheets 13
Consolidated Statements of Operations 14
Consolidated Statements of Stockholders' Equity 15
Consolidated Statements of Cash Flows 16
Notes to Consolidated Financial Statements 17-23
Independent Auditors' Report
The Board of Directors
Pure Cycle Corporation:
We have audited the accompanying consolidated balance sheets of Pure
Cycle Corporation and Subsidary ("the Company") as of August 31, 1998
and 1997, and the related consolidated 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 consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pure
Cycle Corporation and subsidiary as of August 31, 1998 and 1997 and the
results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
November 6 , 1998
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
August 31
--------------------------
ASSETS 1998 1997
--------- ----------
Current assets:
Cash and cash equivalents $ 423,027 $ 370,426
Marketable securities 3,429 3,429
Prepaid expenses and other current assets 7,830 7,830
------- -------
Total current assets 434,286 381,685
Investment in water and systems:
Rangeview water supply (Note 2) 12,995,881 12,920,490
Paradise water supply 5,470,606 5,468,041
Rangeview water system (Note 3) 114,088 100,212
---------- ----------
Total investment in water and systems 18,580,575 18,488,743
Note receivable, including accrued
interest (Note 4) 298,269 274,765
Equipment, at cost, net of accumulated
depreciation of $16,095 in 1998 and
$14,149 in 1997 1,143 3,089
Other assets 22,596 22,596
---------- ----------
$ 19,336,869 $ 19,170,878
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,049 $ 6,856
Accrued liabilities 45,809 45,809
--------- ---------
Total current liabilities 49,858 52,665
Long-term debt - related parties,
including accrued interest (Note 5) 3,786,981 3,550,925
Other non-current liabilities (Note 6) 120,983 113,843
Participating interests in Rangeview
water supply (Note 2) 11,090,630 11,090,630
Stockholders' equity (Note 7):
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 - 432,514 shares issued
and outstanding 433 433
Series C - 3,200,000 shares issued
and outstanding 3,200 --
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 24,126,744 23,678,561
Accumulated deficit (20,105,144) (19,579,363)
---------- ----------
Total stockholders' equity 4,288,417 4,362,815
---------- ----------
$ 19,336,869 $ 19,170,878
========== ==========
See Accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 31
-----------------------
1998 1997
-------- --------
Water service revenue:
Tap fees $ -- $ 69,610
Water usage fees 25,366 26,915
------- -------
25,366 96,525
Water service operating expense ( 4,800) ( 4,000)
General and administrative
expense (335,297) (291,133)
Other income (expense):
Interest income 32,146 27,288
Interest expense:
Related parties (236,056) (195,614)
Other ( 7,140) ( 7,140)
------- -------
Loss before
extraordinary item (525,781) (374,074)
Extraordinary gain on
extinguishment of debt (Note 6) -- 20,765
------- -------
Net loss $(525,781) $(353,309)
======= =======
Basic and diluted
loss per common share:
Loss before extraordinary
item $ * $ *
Extraordinary item -- *
------- -------
Net loss per common share $ * $ *
======= =======
Weighted average common
shares outstanding 78,439,763 78,439,763
* Less than $.01 per share
See Accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended August 31, 1998 and 1997
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------------ --------------------- ----------- -------------
Balance at August 31, 1996 2,032,513 $2,033 78,439,763 $261,584 $23,633,561 $(19,226,054)
Warrants issued (Note 5 and 7) -- -- -- -- 45,000 --
Net loss -- -- -- -- -- ( 353,309)
--------- ----- ---------- ------- ---------- ----------
Balance at August 31, 1997 2,032,513 2,033 78,439,763 261,584 23,678,561 (19,579,363)
Preferred Stock issued in
exchange (Note 7) 3,200,000 3,200 (3,200,000) (3,200) -- --
Common Stock issued (Note 7) -- -- 3,200,000 3,200 396,800 --
Warrants issued (Note 5 and 7) -- -- -- -- 51,383 --
Net loss -- -- -- -- -- (525,781)
--------- ----- ---------- ------- ---------- ----------
Balance at August 31, 1998 5,232,513 $5,233 78,439,763 $261,584 $24,126,744 $(20,105,144)
========= ===== ========== ======= ========== ==========
See Accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August, 31
----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss $(525,781) $( 353,309)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 1,946 2,066
Amortization of deferred
financing costs -- 18,000
Noncash compensation expense for the
repricing of options and warrants 51,383 --
Extraordinary gain on
extinguishment of debt -- ( 20,765)
Increase in accrued interest
on note receivable ( 23,504) ( 23,483)
Increase in accrued interest
on long term debt and other
non-current liabilities 243,196 202,754
Changes in operating assets
and liabilities:
Prepaid expenses and
other current assets -- 3,034
Accounts payable and
other accrued liabilities ( 2,807) ( 1,131)
------- -------
Net cash used in
operating activities (255,567) (172,834)
Cash flows from investing activities:
Investments in water supply ( 77,956) (133,284)
Investment in Rangeview water system ( 13,876) (100,212)
------- -------
Net cash provided by
(used in) investing activities ( 91,832) (233,496)
Cash flows from financing activities:
Proceeds from issuance
of debt and warrants -- 650,000
Proceeds from sale of common stock 400,000 --
------- -------
Net cash provided by
(used in) financing activities 400,000 650,000
------- -------
Net increase (decrease)
in cash and cash equivalents 52,601 243,670
Cash and cash equivalents
beginning of year 370,426 126,756
------- -------
Cash and cash equivalents
end of year $423,027 $370,426
======= =======
See Accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998 and 1997
NOTE 1 - ORGANIZATION AND BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Business
Pure Cycle Corporation is engaged in the water management
business providing water and wastewater services to customers
located in the Denver area. The Company operates water and
wastewater systems and its operations include designing,
constructing, operating and maintaining systems serving customers
in the Denver metropolitan area and other areas. The Company also
owns patented water recycling technologies which are capable of
processing wastewater into pure potable drinking water. There have
been no significant changes in the way the Company does business
during the current year. The Company's focus continues to be to
provide water and wastewater service to customers within its
service area and expects to expand its service to other area
throughtout the Denver metropolitan area and the southwest.
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility ("Model Facility"). The
Model Facility will purchase 201 equivalent residential water taps
at $8,165 per tap (or $1,641,165), and 156 equivalent residential
wastewater taps at $4,000 per tap (or $624,000, collectively
$2,265,165). Pursuant to its Service Agreements, the Company will
receive $1,372,014 from the water tap revenue, and $624,000 from
the sewer tap revenues for a combined total of $1,996,014. The
Company will design, construct, operate and maintian the water and
wastewater system to deliver water and sewer service to the Model
Facility. Construction on the facilities are scheduled to begin in
first quarter fiscal year 1999 with the opening of the Model
Facility in late 1999.
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.
During its development stage, the Company funded the acquisition
of certain water and its operating activities primarily through
equity and other financing agreements with investors with an
interest in the water management business. These investors are
entitled to participate in the future revenues derived from the
sale of the Company's water. The Company believes that at August
31, 1998 the Company has sufficient working capital and available
credit 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.
Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements included the accounts of
the Company and its wholly-owned subsidiary, Rangeview Development
Corporation prior to its dissolution in August 1997. All inter-
company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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
For purposes of the statement of cash flows, cash and cash
equivalents include all highly liquid debt instruments with an
original maturity of three months or less.
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
Marketable Securities
The Company classifies its investment in marketable securities as
available-for-sale securities. Unrealized holding gains and losses
are recorded as a separate component of stockholders' equity.
Realized gains and losses are recorded in the statement of
operations.
Investments in Water Projects
The Paradise Water Supply represents Colorado River water, water
wells, and a federal right-of-way permit for a dam site located
near Debeque, Colorado. The Paradise Water Asset is recorded at
cost.
The Company's investment in the Rangeview Water Supply is
recorded at cost at August 31, 1998. Pursuant to the terms of the
Comprehensive Amendment Agreement ("CAA") entered into in 1996,
certain investors in the Rangeview project have the right to
receive the first approximately $31,807,000 from the proceeds of a
sale or other disposition of the Rangeview Water Supply. The
consideration received from those investors for this right to
participate in the proceeds has been reflected in the accompanying
consolidated balance sheet as a participating interest in the
Rangeview Water Supply.
In fiscal 1996 the Company adopted the provisions of Statement of
Financial Accounting Standard No. 121 ("SFAS 121"), "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets To Be
Disposed Of". SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company periodically assesses the feasibility,
marketability and anticipated future cash flows from the sale of it
Water Supply. Based on this assessment, the Company believes that
there is no impairment in the carrying value of the its investment
in water at August 31, 1998 and 1997 and therefore the adoption of
SFAS 121 has had no effect on the Company's financial statements.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), effective for fiscal years
beginning after December 15, 1995. This statement defines a fair
value method of accounting for employee stock options and
encourages entities to adopt that value method of accounting for
its stock compensation plans. SFAS 123 allows an entity to
continue to measure compensation costs for these plans using the
intrinsic value method of accounting as prescribed in Accounting
Pronouncement Bulletin Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25). The Company has elected to continue to
account for its employee stock compensation plans as prescribed
under APB 25. The pro forma disclosure of net loss and loss per
share required by SFAS 123 are included in Note 7.
Income taxes
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109") requires the use of the asset and
liability method of accounting for income taxes. Under the asset
and liability method of SFAS 109, 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 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. Under Statement 109, 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
have been excluded from the calculation of loss per share as their
effect is anti-dilutive.
Reclassifications
Certain amounts have been reclassified for comparability with the
1998 presentation.
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - RANGEVIEW WATER SUPPLY
In April of 1996, the Company entered into a water privatization
agreement with the State of Colorado and the Rangeview Metropolitan
District which enabled the Company to acquire ownership to a total
gross volume of 1,165,000 acre feet of groundwater (approximately
11,650 acre feet per year), and 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 ("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, and 100%
of the District's wastewater system development charges and 90% of
the District's wastewater usage charges.
From November 1990 through August 1995, the Company made payments
to the District totaling $1,075,000 for various purchase options.
In addition, the Company purchased a right of first refusal to 40
acres of real property for $201,000. The Company also made
payments to certain District bond holders totaling approximately
$3,700,000, purchasing approximately $9,730,000 of District Bonds.
All of the amounts paid were capitalized as the cost of the
Company's investment in the Rangeview Water Supply. From November
1990 through August 1995, the Company sold rights to investors to
participate in the Company's share of the proceeds from the
Rangeview WCA ("Profit's Interests") in order to finance the
Company's investment in the Rangeview Water Supply. In, connection
with these transactions the Company transferred approximately
$5,778,000 of District Bonds to certain of the investors.
In addition to the payments described above, the Company
capitalized certain legal and other costs relating to the
acquisition of the Rangeview Water Supply totaling $91,832 in 1998,
$133,284 in 1997, and $1,046,576 in years prior.
In connection with the water privatization agreement, the Company
negotiated agreements with the District's bond holders, not
previously investors with the Company, to acquire all of the
remaining District Bonds totaling $15,184,000 by granting the bond
holders a senior, secured interest in the proceeds from the sale of
the Export Water Supply (referred to as a "Participating Interest")
aggregating $9,110,000, as provided for in the CAA.
Additionally, the Company negotiated agreements with all of the
investors in the Rangeview WCA to acquire their WCA Profits
Interests as well as all of the Bonds held by certain of those
investors totaling $5,778,000 in exchange for Participating
Interests in the CAA. The Bonds acquired from holders not
previously investors with the Company, totaling $15,184,000,
together with Bonds held by investors in the Rangeview WCA totaling
$5,778,000, together with bonds held by the Company totaling
$3,952,000 represented all of the District's outstanding Bonds
(totaling $24,914,000). The Company conveyed all of the
outstanding District Bonds to the District in exchange for title to
the Export Water Supply and the Service Agreements.
The estimated fair value of the $15,184,000 of Bonds purchased
($6,770,000) has been recorded as an increase in the cost of the
Rangeview Water Supply and an increase in the Participating
Interests in the Rangeview Water Supply.
The Participating Interests in the CAA, in the aggregate, have
the right to receive the first approximately $31,800,000 from the
proceeds of a sale or other disposition of the Export Water Supply.
After the distributions pursuant to the CAA, 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 $432,513 in
proceeds is 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.
NOTE 3 - RANGEVIEW WATER SYSTEM
In conjunction with the privatization agreement, the Company also
entered into an 85 year Service Agreement with the District to
design, finance, construct, operate, and maintain the District's
water system to provide water service to customers within the
District's 24,000 acre Service Area. The District has reserved
approximately 14,350acre 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 District's Service Area, the Company receives 95% of the
District's water revenues remaining after payment
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RANGEVIEW WATER SYSTEM (continued)
of royalties to the State Land Board. During fiscal year 1998, the
Company incurred costs of $4,800 to operate and maintain the water
system to deliver water to customers within the District's Service
Area. During fiscal year 1998, the Company delivered approximately
17 million gallons of water to customers in its Service Area.
Currently there are no wastewater customers within the District's
Service Area.
NOTE 4 - NOTE RECEIVABLE
In 1995, the Company extended a line of credit to the District.
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, 1998. The balance of the note receivable
at August 31, 1998 was $298,765, including accrued interest.
Because of the revenue sources available to it, and its operating
expense history, the Company believes the District will be able to
repay the note within a period of one to two years after its due
date. Accordingly, the note has been classified as non-current.
NOTE 5 - LONG-TERM DEBT
Long-term debt, including accrued interest at August 31, 1998 and
1997 is comprised of the following:
1998 1997
--------- ---------
Notes payable, including accrued interest to
six parties, due August 2002 interest at prime
rate plus 2%, unsecured $ 354,308 $ 330,750
Notes payable, including accrued interest to
five parties, due July and August 2002
interest at 10 1/4%, unsecured net of
unamortized discount of $36,000 361,500 309,434
Note payable, to related party, due
October 2000, non-interest bearing, unsecured 26,542 26,542
Notes payable, including accrued interest, to
President and majority stockholder due October
2000, interest at 8.36% to 9.01%, unsecured 402,141 380,781
Notes payable, including accrued interest, to
related party, due October, 2000, interest at
the prime rate plus 3%, secured by shares of
the Company's common stock owned by the
President and majority stockholder 1,971,545 1,864,670
Notes payable, including accrued interest, to
a related party corporation, due October 2000,
interest ranging from 7.18% to 8.04%, unsecured 670,945 638,749
--------- ---------
Total long-term debt $3,786,981 $3,550,925
========= =========
Aggregate maturities of long-term debt are as follows:
Year Ending August 31, Amount
---------------------- ------
2000 $ 3,071,173
2002 715,808
---------
Total $ 3,786,981
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 loan agreement, the Company
issued warrants to purchase 2,100,000 shares of the Company's
common stock at $.25 per share (see Note 7). 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.
As of August 31, 1998, the President and majority stockholder of
the Company has pledged a total of 20,000,000 shares of common
stock from his personal holdings as collateral on certain of the
above notes payable.
NOTE 6 - OTHER NON-CURRENT LIABILITIES
As a result of the expiration of the Colorado statute of
limitations, certain accounts payable to creditors incurred prior
to the Company's suspension of operations in 1985 totaling $20,765
are considered extinguished and have been reflected as an
extraordinary item in the accompanying consolidated statements of
operations in fiscal year 1997. At August 31, 1998, the Company
owes approximately $121,000 to creditors incurred prior to the
Company's suspension of operations in 1985 which amounts are
reflected as other non-current liabilities in the accompanying
balance sheet.
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred and Common Stock
In August 1998, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the Company
issued 3,200,000 shares of Series C Convertible Preferred Stock to
the Company's President, Mr. Thomas Clark, in exchange for
3,200,000 shares of common stock owned by Mr. Clark. The Series C
Convertible Preferred Stock converts into an equivalent number of
shares of Common stock at the election of Mr. Clark provided the
Company has authorized and unissued shares of Common Stock
available. The Company sold 3,200,000 shares of the Company's
Common Stock at $.125 per share to four accredited investors who
have previously invested in the Company. Proceeds to the Company
were $400,000.
On May 25, 1994, the Company sold 1,600,000 shares of Series A
Convertible Preferred Stock, $.001 par value, for $1.00 per share
for total proceeds of $1,600,000. The holders of the Series A
Convertible Preferred Stock are entitled to be paid a dividend
amount equal to $2.00 per share represented by a Participating
Interest in the CAA. The Series A Preferred Stock is convertible
into 4 shares of Common Stock at the election of the Company or the
holders of the Preferred Stock.
During years prior to 1994, the Company was charged for the
reimbursement of costs, administrative services and rent expense by
a company related through common ownership. On August 31, 1994,
the Company issued 432,513 shares of Series B Preferred Stock,
$.001 par value, to a related party corporation, in satisfaction of
the payable for these charges of $432,513. The holder of the Series
B Preferred Stock is entitled to be paid a dividend amount equal to
$1.00 per share to be paid from the proceeds from a disposition of
the Rangeview Water Supply after the Participating Interests in the
CAA and the dividend obligation on the Series A Convertible
Preferred Stock have been satisfied.
Stock Options
On June 15, 1992, the Company adopted an Equity Incentive Plan.
In addition, on such date, the Company granted Mr. Fletcher Byrom
and Ms. Margaret Hansson options to purchase 7,000,000 and
8,000,000 shares of common stock, respectively, at an exercise
price of $.20 per share, through June 15, 1997. These options were
issued in exchange for options previously issued to Mr. Byrom and
Ms. Hansson in June of 1989. Also on June 15, 1992, the Company
granted Mr. Mark Harding and Mr. George Middlemas an option to
purchase 4,000,000 and 1,000,000 shares of common stock,
respectively, under such Plan at an exercise price of $.25 per
share. On March 12, 1996 the Company extended the terms of all
such options until 2002. Also, on March 12, 1996, the Company
granted Mr. Mark Harding options to purchase 3,000,000 shares of
common stock at an exercise price of $.25 per share, 2,000,000 of
which were immediately exercisable, with the remaining 1,000,000
vesting in annual increments of 250,000 shares beginning March 12,
1997.
In December of 1997, the Company agreed to adjust the exercise
price of its outstanding options and warrants to purchase
approximately 47,403,000 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
approximately $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.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has
been recognized for stock options granted to key employees and
Equity Incentive Plan. Had compensation costs for the Company's
two stock-based compensation plans been determined based on the
fair market value at the grant dates for awards under those plans
consistent with the method prescribed in FASB Statement 123, the
Company's net loss and loss per share would have been increased to
the pro forma amounts indicated below for the years ended August
31, 1998 and 1997:
Net loss: 1998 1997
---- ----
As Reported $(525,781) (353,309)
Pro forma (529,354) (356,882)
Loss per share:
As Reported * *
Pro forma * *
* Less than $.01 per share
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS' EQUITY -(continued)
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in fiscal
year 1996: no dividend yield; no expected volatility; and the
weighted average risk-free interest rate of 6.75% for the options.
A summary of the status of the Company's Equity Incentive Plan as
of August 31, 1998 and 1997, and changes during the years then
ended is presented below:
1998 1997
-------------------------- --------------------------
Weighted average Weighted average
Fixed options Shares exercise price Shares exercise price
- ------------------ ------ ---------------- ------ ----------------
Outstanding at
beginning of year 23,000,000 $.18 23,000,000 $.22
Granted -- -- -- --
Exercised -- -- -- --
---------- ----------
Outstanding at end
of year 23,000,000 $.18 23,000,000 $.22
========== ==========
Options exercisable
at year end 22,500,000 22,250,000
Weighted average
of fair value
of options granted
during the year -- --
The following table summarizes information about Equity Incentive
Plan options outstanding at August 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------------
Weighted average
remaining Weighted Weighted
Range of Exc. Number contractual average Number average
Price outstanding life exercise price exercisable exercise price
- ------------ ----------- ------ -------------- ----------- --------------
.18 23,000,000 3.75 .18 22,500,000 .18
.18 23,000,000 3.75 .18 22,500,000 .18
During the years ended August 31, 1998 and 1997, no options were
exercised.
Warrants
On December 2, 1997, the Company adopted a resolution to reprice
all the Company's outstanding warrants to $.18 per share.
In connection the 1997 loan agreement described in note 5, the
Company issued warrants to purchase 2,100,000 shares of the
Company's common stock at $.25 per share. The warrants expire
August 30, 2002. The estimated fair value of the warrants issued
of $45,000 has been credited to additional paid in capital.
The Company has also issued warrants, which remain outstanding,
between 1990 and 1997 to purchase 24,403,000 shares of the
Company's stock at $.25 per share (subsequently repriced to $.18
per share) in connection with the sale of profits interests in the
Rangeview WCA, which were subsequently converted into participating
interests in the CAA. The warrants expire 6 months after the
payment of the participating interests in the CAA.
During the years ended August 31, 1998 and 1997, no warrants were
exercised.
NOTE 8 - 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, 1998 and 1997 are presented below.
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 2,635,000 $ 3,397,000
Less valuation allowance (2,635,000) (3,397,000)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (continued)
The valuation allowance for deferred tax assets as of August 31,
1998 was $2,635,000. The net change in the valuation allowance for
the year ended August 31, 1998 was a net decrease of $762,000,
representing a decrease of $880,000 attributable to the expiration
of net operating loss carryforwards during the year and an increase
of $118,000 attributable to the net operating loss incurred
during the year. Since this is the only temporary difference, the
accompanying statements of operations reflect no income tax
benefit.
At August 31, 1998, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$6,773,000 which are available to offset future federal taxable
income, if any, through 2017.
PART III
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; with Section 16(a) Beneficial Ownership Reporting
Compliance
The following are the officers and directors of the Company as of
August 31, 1998:
Name Age Position(s) with the Company
- ------------------------- --- -----------------------------------
Margaret S. Hansson. . . 74 Director, Chairman, Vice President
Fletcher L. Byrom . . . . 80 Director
Thomas P. Clark . . . . 62 Director, President,Treasurer
George M. Middlemas . . . 52 Director
Richard L. Guido . . . . 54 Director
Mark W. Harding . . . . 35 Chief Financial Officer, Secretary
MARGARET S. HANSSON
Ms. Hansson has been a Director of the Company since April 1977
and Chairman since September 23, 1983, and was the Chief Executive
Officer of the Company from September 23, 1983 to January 31, 1984.
Since May 1981, Ms. Hansson has been President of M. S. Hansson,
Inc., a Boulder, Colorado firm which consults to and invests in
small businesses. Ms. Hansson is Chief Executive Officer of
AquaLogic, Inc., a Boulder, Colorado company she founded in 1992.
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 President and Chairman of the Board of Gerico, Inc., now Gerry
Baby Products, a Boulder, Colorado manufacturing firm which she
also founded. She is a Director of Norwest Banks, Stayodynamics,
Inc., the Midwest Group of Trust Funds and Gateway Technologies,
Inc. Ms. Hansson received her Bachelor of Arts degree from Antioch
College.
THOMAS P. CLARK
Thomas P. Clark has been a Director of the Company and President
since June 29, 1987, and Treasurer since September 6, 1988. 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 brings a background in
public finance and management consulting experience. 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: President and Director of MICASU
Corporation.
GEORGE M. MIDDLEMAS
George M. Middlemas has been a Director of the Company since
April 1993. Mr. Middlemas is a general partner with the Apex
Investment Partners, 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
Security Dynamics Technologies, Inc., American Communications
Services, Inc., 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. Mr.
Guido is Associate General Counsel of Inco Limited and President,
Chief Legal Officer and Secretary of Inco United States, Inc. Mr.
Guido is on the Board of Governors, Foreign Policy Association and
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.
Mr. Middlemas was elected to the Company's board of directors
pursuant to the EPFund Voting Agreement. See "Security Ownership
of Certain Beneficial Owners and Management."
Mr. Guido was elected to the Company's board of directors
pursuant to the Inco Voting Agreement. See "Security Ownership of
Certain Beneficial Owners and Management."
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 24, 1997 all of the Company's directors,
executive officers, and 10% beneficial owners had complied with the
applicable Section 16 (a) filing requirements.
Item 10. Executive Compensation
Annual Compensation
--------------------------------------------
Name
and Other Annual
Principal Fiscal Salary Bonus Compensation
Position Year ($) ($) ($)
- ---------------------------------------------------------------
Thomas P. Clark
Pres./CEO 1998 60,000 0 0
1997 60,000 0 0
1996 60,000 0 0
For all other executive officers, consisting of two persons,
total annual salary and bonuses were less than $100,000.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of November , 1998, the
beneficial ownership of the Company's issued and outstanding Common
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, and
Series C 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.
Number Number of Number of Number of
of Common Percent of Series A Series B Series C Percent of
of Beneficial Stock Outstanding Preferred Preferred Preferred Outstanding
Owner Shares Shares Shares Shares Shares Shares
---------- ----------- --------- --------- --------- -----------
Thomas P. Clark 24,064,854 30.7% (9) 346,000 40.0% (14)
5650 York Street,
Commerce (10) 3,200,000 100.0% (18)
City, Colorado 8002 2 (18)
George Middlemas 1,000,000 1.3% (1)
2440 N. Lakeview Ave (10)
Chicago, IL 60614 (11)
Richard L. Guido 0 0% (9)
145 King Street West
Toronto, Ontario, Canada
Margaret S. Hansson 8,246,000 9.5% (2)
2220 Norwood Avenue (9)
Boulder, Colorado 80304 (10)
Fletcher L. Byrom 7,100,000 8.3% (3)
P.O. Box 1055 (9)
Carefree, AZ 85377 (10)
Mark W. Harding 6,710,000 7.9% (4)
5650 York Street, Commerce
City, Colorado 80022
INCO Securities
Corporation 4,700,000 5.7% (5)
One New York Plaza (9)
New York, New York 10004
Apex Investment Fund II
L.P. 16,198,945 18.0% (6) 408,000 25.5%
233 S. Wacker Drive, (10)
Suite 9600 (11)
Chicago, Illinois 60606 (13)
Environmental Venture 6,278,181 7.7% (7)
Fund, L.P. (10)
233 S. Wacker Drive,
Suite 9600 (11)
Chicago, Illinois 60606
Environmental Private
Equity 7,142,320 8.6% (13) 600,000 37.5%
Fund II, L.P. (16)
233 S. Wacker Drive,
Suite 9600
Chicago, Illinois 60606
The Productivity 4,781,846 5.9% (8)
Fund II, L.P. (10)
233 S. Wacker Drive,
Suite 9600 (11)
Chicago, Illinois 60606
Proactive Partners L.P. 3,579,052 4.4% (13) 500,000 31.5%
50 Osgood Place,
Penthouse (17)
San Francisco,
California 94133
LC Holdings, Inc. 432,513 50.0%
5650 York Street,
Commerce City, Colorado
LCH, Inc. 86,503 10.0% (15)
5650 York Street,
Commerce City, Colorado
All Officers and ---------- ---------
Directors 47,120,854 46.9% (12)
as a group (6 persons)
(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 3,000,000 shares purchasable under a currently
exercisable option by MICASU Aluminum, LLC which Mr. Byrom controls
as a manager and member and 1,000,000 shares purchasable under a
currently exercisable option by MICASU Corporation which Mr. Byrom
controls as President, Chief Executive Officer, and controlling
shareholder and 3,000,000 shares purchasable by Mr. Byrom under
currently exercisable options..
(4) Includes 6,500,000 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) Pursuant to a voting agreement (the "Inco Voting Agreement")
dated December 11, 1990, Mr. Clark, Ms. Hansson and Mr. Byrom have
agreed to vote their shares of Common Stock in favor of electing a
representative designated by Inco to the Company's board of
directors. The Inco Voting Agreement remains in effect until
December 11, 2000. Mr. Guido is currently serving in the director
position elected pursuant to this Agreement.
(10) Pursuant to an Amended and Restated Voting Agreement (the
"EPFund Voting Agreement") dated August 12, 1992, Mr. Clark, Ms.
Hansson, Mr. Byrom, Apex, EVFund, and PFund have agreed to vote
their shares of Common Stock in favor of electing a representative
designated by Environmental Private Equity Fund II, L.P. ("EPFund")
to the Company's board of directors. The EPFund Voting Agreement
remains in effect until EPFund no longer owns or has rights to
acquire at least 1,301,000 shares of Common Stock, whichever is
earlier. Mr. Middlemas is currently serving in the director
position elected pursuant to this Agreement.
(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 Paul J. Renze ("Renze"). The ultimate
general partners of EVFund are: FAC; F&G Associates ("F&G");
William D. Ruckleshaus Associates, a Limited Partnership ("WDRA");
and Robertson, Stephens & Co. ("RS"). The ultimate general
partners of PFund are FAC and Bret R. Maxwell ("Maxwell"). The
ultimate general partners of EPFund are FAC, Maxwell, RS, Argentum
Environmental Corporation ("AEC") and Schneur A. Genack, Inc.
("SZG").
The business address of FAC, Stellar, Johnson, Middlemas, Renze
and Maxwell is 233 S. Wacker Drive, Suite 9600. Chicago Illinois
60606. Each of AEC and SZG maintains its business address c/o The
Argentum Group ("TAG"), 405 Lexington Avenue, New York, New York
10174. The business address of F&G is 123 Grove Avenue, Suite 118,
Cedarhurst, New York 11516. WDRA maintains its business address at
1201 Third Avenue, 39th Floor, Seattle, Washington 98101. RS
maintains its business address at One Embarcadero Center, San
Francisco, California 94111.
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 34,401,292 shares of Common Stock, or
37.7% 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 and Renze may be deemed to be the
indirect beneficial owners of 16,198,945 shares of Common Stock, or
18.0% of such shares. When these shares are combined with his
currently exercisable option to purchase 936,869 shares of Common
Stock, Middlemas may be deemed to be the beneficial owner (directly
with respect to the option shares and indirectly as to the balance)
of 17,135,814 shares of Common Stock, or 19.21% 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 14.4% 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 8.8% 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 16.2% of
such shares.
By reason of RS's status as a general partner of EVFund and an
ultimate general partner of EPFund, RS and its controlling persons
may be deemed to be the indirect beneficial owners of 13,420,501
shares of Common Stock, or 16.2% 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 22,500,000, shares purchasable by directors and
officers under currently exercisable options.
(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 under a currently exercisable warrant.
(17) Includes 801,252 shares purchasable by Proactive Partners,
L.P. under a currently exercisable warrant.
(18) Includes 3,200,000 shares of Series C Preferred Stock which
Mr. Clark, the Company's president owns which are convertible to
3,200,000 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 15, 2000. To date, Mr. Clark has loaned the
Company $284,178 of which $43,350 has been repaid, leaving a
balance of $240,828. As of August 31, 1998, accrued interest on
the Notes totaled $161,312. 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 is a wholly-
owned subsidiary of the Company, 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 $31,000,000 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
$31,808,732 owed under the CAA. During fiscal year ended August
31, 1997, the Company reached an agreement with LCH, Inc. to defer
payment of the principal amount of the Notes, plus interest until
October 1, 2000. 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.
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 Certificates 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 Certificates 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 Certificates 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 Certificates of Designation for the Series A-1
Preferred Stock Filed July 21, 1998, filed herewith.
3(a).9 Certificates of Amendment to Certificate of
Incorporation filed September 2, 1998 (Series C), filed
herewith.
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.
9.1 Voting Agreement dated December 11, 1991, by and among Inco
Securities Corporation, Thomas P. Clark, Margaret S.
Hansson, Fletcher L. Byrom and the Company.*
10.1 Agreement to defer payment of notes, dated June 6, 1997, by
and between LCH inc. and the Company.**
10.2 Equity Incentive Plan. Incorporated by references from
Proxy State for Annual Meeting held April 2, 1993.
10(h).2Service Agreement, dated April 19, 1996, by and
between the Company, and the District. ***
10(h).3Wastewater Service Agreement, dated January 22,
1997, by and between the Company, and the District, filed
herewith.
10(h).4Comprehensive 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. ***
27 Financial Data Schedule - filed herewith.
* Incorporated by reference from Annual Report on
Form 10-K for fiscal year ended August 31, 1991
** Incorporated by reference from Annual Report on Form
10-KSB for fiscal year ended August 31, 1997.
*** Incorporated by reference from Quarterly Report on
Form 10-QSB for the quarterly period ended May 31, 1996.
(b) The Company has not filed any reports on form 8-K during
the last quarter of fiscal 1998.
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
--------------------------
Thomas P. Clark, President
Date: November 25, 1998
--------------------------
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/ Margaret S. Hansson Chairman, Vice November 25, 1998
Margaret S. Hansson President, Director
/s/ Thomas P. Clark President, Treasurer, November 25, 1998
Thomas P. Clark Director
/s/ Mark W. Harding Principal Financial November 25, 1998
Mark W. Harding Officer, Secretary
/s/ Fletcher L. Byrom Director November 25, 1998
Fletcher L. Byrom
/s/ George M. Middlemas Director November 25, 1998
George M. Middlemas
/s/ Richard L. Guido Director November 25, 1998
Richard L. Guido