Annual report pursuant to Section 13 and 15(d)

PARTICIPATING INTERESTS IN EXPORT WATER

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PARTICIPATING INTERESTS IN EXPORT WATER
 12 Months Ended
Aug. 31, 2013
Participating Interests In Export Water  
PARTICIPATING INTERESTS IN EXPORT WATER
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 represented the cash the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water Assets to the 2013 Annual Report). 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 in return for their initial $11.1 million investments. 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 the sale of Export Water, the amounts and timing of which are not reasonably determinable.

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.

From time to time 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, 2013 and 2012. 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 at August 31, 2013, is $3.4 million:
 
   
Export Water
    
Initial Export
    
Total Potential
    
Paticipating
        
   
Proceeds
    
Water Proceeds
    
Third party
    
Interests
        
   
Received
    
to Pure Cycle
    
Obligation
    
Liability
    
Contingency
  
Original balances
   $ —     $ 218,500     $ 31,807,700     $ 11,090,600     $ 20,717,100  
Activity from inception until August 31, 2012:
                                  
Acquisitions
     —       28,077,500       (28,077,500 )     (9,790,000 )     (18,287,500 )
Option payments - Sky Ranch and The Hills at Sky Ranch
     110,400       (42,300 )     (68,100 )     (23,800 )     (44,300 )
Arapahoe County tap fees *
     533,000       (373,100 )     (159,900 )     (55,800 )     (104,100 )
Export Water sale payments
     111,300       (77,900 )     (33,400 )     (12,100 )     (21,300 )
Balance at August 31, 2012
     754,700       27,802,700       3,468,800       1,208,900       2,259,900  
Fiscal 2013 activity:
                                        
Export Water sale payments
     158,000       (110,600 )     (47,400 )     (16,000 )     (31,400 )
Balance at August 31, 2013
   $ 912,700     $ 27,692,100     $ 3,421,400     $ 1,192,900     $ 2,228,500  
 
 * 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, 2013).