Annual report pursuant to Section 13 and 15(d)

Note 5 - Participating Interests in Export Water

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Note 5 - Participating Interests in Export Water
 12 Months Ended
Aug. 31, 2012
Business Combination Disclosure [Text Block]
NOTE 5:               PARTICIPATING INTERESTS IN EXPORT WATER

The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990’s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represents the cash the Company received and used to purchase its Export Water.  In return, the Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders.  The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.  See further discussion regarding the Export Water in Note 4 – Water Assets.

The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company.  If the Company does not sell the Export Water, the holders of the Series B Preferred Stock are also not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supply liability account) with the balance of the payment being charged to the contingent obligation portion.  Because the original recorded liability, which was $11.1 million, was 35% of the original total liability of $31.8 million, 35% of each payment remitted to the CAA holders is allocated to the recorded liability account.  The remaining portion of each payment, or 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.

In fiscal years 2007 and 2008, in order to reduce the long term impact of the CAA, the Company repurchased various portions of the CAA obligations in priority.  The Company did not make any CAA acquisitions during the fiscal years ended August 31, 2012, 2011 and 2010.  As a result of the acquisitions, and due to the sale of Export Water, as detailed in the table below, the remaining potential third party obligation as of August 31, 2012 is $3.5 million.

   
Export Water Proceeds Received
   
Initial Export Water Proceeds to Pure Cycle
   
Total Potential Third party Obligation
   
Paticipating Interests Liability
   
Contingency
 
Original balances
  $ -     $ 218,500     $ 31,807,732     $ 11,090,630     $ 20,717,102  
Activity from inception until August 31, 2011:                                        
Acquisitions
    –       28,077,500       (28,077,500 )     (9,789,983 )     (18,287,517 )
Option payments - Sky Ranch and The Hills at Sky Ranch
    110,400       (42,280 )     (68,120 )     (23,754 )     (44,366 )
Arapahoe County tap fees *
    532,968       (373,078 )     (159,890 )     (55,754 )     (104,136 )
Export Water sale payments
    85,123       (59,585 )     (25,538 )     (8,907 )     (16,631 )
Balance at August 31, 2011
    728,491       27,821,057       3,476,684       1,212,232       2,264,452  
Fiscal 2012 activity:
                                       
Export Water sale payments
    26,163       (18,314 )     (7,849 )     (3,304 )     (4,545 )
Balance at August 31, 2012
  $ 754,654     $ 27,802,743     $ 3,468,835     $ 1,208,928     $ 2,259,907  

  *  The Arapahoe County tap fees are less $34,522 in royalties paid to the Land Board.

The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority.  This means the first three payees receive their full payment before the next priority level receives any payment and so on until full repayment.  The Company will receive $5.1 million of the first priority payout.  The remaining entire first priority payout totals $7.3 million as of August 31, 2012.