PURE CYCLE CORPORATION
FISCAL YEAR ENDED AUGUST 31, 2010
ANNUAL REPORT
LETTER TO SHAREHOLDERS | FORM 10-K | PROXY STATEMENT
Dear Shareholders:
The past 15 months have been encouraging and have opened up new and exciting opportunities for Pure
Cycle. Some highlights include our acquisition and the related financing of Sky Ranch; joining the
South Metro Water Supply Authority (“SMWSA”); and increased housing development activity along
the Colorado Front Range. These items are briefly described below with greater detail being included in
the accompanying 2010 Annual Report on Form 10-K.
Sky Ranch
The biggest news of our fiscal 2010 was actually completed after our fiscal year was concluded. On
July 30, 2010, we entered into an agreement to acquire certain loan documents from the Bank of
America (“BofA”) which were secured by approximately 940 acres of land known as Sky Ranch. On
October 18, 2010, pursuant to this agreement, we acquired the promissory note payable by a wholly
owned subsidiary of the now defunct Neumann Homes, Inc. to BofA and the deed of trust securing the
promissory note for cash payments totaling $7.0 million (we made a $700,000 escrow payment in July
and paid the remaining $6.3 million in October). Effective November 2, 2010, as a result of filings we
made with the bankruptcy court in Illinois, we obtained title to the Sky Ranch property free and clear of
all unpublished claims; meaning we now own the property along with the associated rights to
groundwater underlying the property.
The acquisition was financed through a combination of the sale of approximately $5.5 million of
common stock in a public stock offering and the issuance of a $5.2 million convertible promissory note
to a greater-than-5% shareholder. As you will see in the attached proxy statement, in January 2011 we
are asking our shareholders to approve the issuance of additional shares of restricted common stock to
convert this note to restricted common stock. We raised a total of approximately $10.7 million, of
which $7.0 million was used for the Sky Ranch
acquisition and the remaining $3.7 million will be
used for working capital and other general
corporate purposes. Following the acquisition we
had approximately $5.8 million in cash and cash
equivalents.
Sky Ranch is an approximately 940-acre property
that has approximately 830 acre
feet of
groundwater. As you can see in the map to the
right, Sky Ranch is well situated along the “I-70
Corridor” directly north of the Lowry Range and
south of Denver International Airport.
The
property is zoned for up to 4,850 single family
equivalent units which will be comprised of
residential units, commercial/retail units and mixed
use facilities.
Using our current water and
wastewater fees, this equates to approximately
$109 million of water tap fees, approximately $24
million of wastewater tap fees and approximately
$6 million in annual service charges at build-out.
This acquisition was an opportunity to purchase
the property at depressed land prices and to release
lengthy
the property
bankruptcy. Most importantly, it in no way
from a complex and
changes our focus from providing water and wastewater services. We do not anticipate directly
constructing the infrastructure required to develop this property (other than the water and wastewater
systems). Rather, we endeavor to partner with home builders and developers, whereby they will
construct the necessary infrastructure and we will provide the land and water utilities. In addition to the
property already having zoning approvals, this property is more attractive than other undeveloped
property in the area since it can provide builders and developers with low cost lots under flexible terms
along with high quality water and wastewater services at prices lower than our nearest competitor. This
property is anticipated to cater to the starter home market, i.e., homes costing less than $300,000. To
read more about Sky Ranch, please visit our website at www.purecyclewater.com.
SMWSA
On December 16, 2009, the Rangeview Metropolitan District joined the SMWSA. SMWSA is
comprised of 14 individual water providers that work collaboratively to foster long-term reliable water
supplies by acquiring water rights and developing infrastructure. Our participation in the SMWSA
demonstrates our commitment as a regional water supplier to the Front Range of Colorado and we look
forward to working with our SMWSA partners to integrate water infrastructure and supplies for the
benefit of all SMWSA members.
The Housing Market and 2011 Outlook
Nationwide, the new housing market continues to recover. This market continues to be adversely
impacted by high unemployment rates and the stringent credit markets which constrain both builders and
potential buyers. However, the Colorado housing market is showing signs of improvement. For the 12
months ended September 30, 2010, the 11-county Colorado Front Range experienced an increase in new
home construction of approximately 33%. Although this only equates to approximately 6,400 new
homes being started, far short of the approximately 32,000 that were started in 2005, it is an indicator
that the market is recovering. Starter homes, which are those costing less than $300,000, comprised
approximately 53% of those starts; and this is positive news for us since that is the price point that Sky
Ranch will target.
As we look forward to 2011, we will focus on marketing the Sky Ranch property to national home
builders and developers and tailoring our proposals in order to get this property ready for development.
We continue to work with the State Land Board to address changes in our agreements that will enable
the Lowry Range to advance under the Land Board’s three- part vision of water resources, conservation
and development. We continue to work with (i) the City of Aurora on the possible sale of a reservoir
site, (ii) the SMWSA on regional cooperative water and infrastructure development, and (iii) Arapahoe
County on conservation and development parcel planning; and we hope to bring these discussions to
conclusion during the next year.
I would like to personally thank our shareholders for your continued support of Pure Cycle in
developing our significant water assets and real estate holdings.
Mark Harding
Mark W. Harding
President and Chief Executive Officer
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Annual Report on Form 10-K
For the Fiscal Year Ended August 31, 2010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission File Number 0-8814
PURE CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
Colorado
(State of incorporation)
84-0705083
(I.R.S. Employer Identification No.)
500 East 8th Ave, Suite 201, Denver, CO 80203
(Address of principal executive office) (Zip Code)
(303) 292-3456
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock 1/3 of $.01 par value
(Title of each class)
The NASDAQ Stock Market, LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Non-accelerated filer
[ ]
[ ]
(Do not check if a smaller reporting company)
Accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No
[X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the
last
$32,766,000
registrant’s most
completed
business
recently
second
fiscal
day
quarter:
the
of
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of November 12, 2010
was: 22,055,497
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement for the
2010 annual meeting of stockholders, which will be filed with the SEC within 120 days of the close of the fiscal year ended
August 31, 2010.
- 2 -
Table of Contents
Part I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item
1.
1A.
1B.
2.
3.
5.
6.
7.
7A.
Quantitative and Qualitative Disclosures About Market Risk
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
15.
Exhibits, Financial Statement Schedules
Signatures
Part IV
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4
13
18
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29
30
31
31
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32
32
32
32
35
“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-K are forward looking statements that
involve risk and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “believe,”
“estimate,” “expect,” “plan,” “intend” and similar expressions, as they relate to us, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties
and assumptions. We cannot assure you that any of our expectations will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward-looking statements include, without limitation, the timing of new
home construction and other development in the areas where we may sell our water, which in turn may be impacted by credit
availability, population growth, and employment rates, the market price of water, changes in customer consumption patterns,
changes in applicable statutory and regulatory requirements, uncertainties in the estimation of water available under decrees,
costs of delivery of water and treatment of wastewater, uncertainties in the estimation of costs of construction projects, the
strength and financial resources of our competitors, our ability to find and retain skilled personnel, climatic and weather
conditions, including flood and droughts, labor relations, availability and cost of material and equipment, delays in anticipated
permit and construction dates, environmental risks, the results of financing efforts and the ability to meet capital requirements,
and general economic conditions.
Summary
PART I
Item 1 - Business
Pure Cycle Corporation was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008.
We are a vertically integrated water and wastewater service provider that contracts with landowners, land developers, home
builders, cities and municipalities to design, construct, operate and maintain water and wastewater systems. As a vertically
integrated service provider, we own all assets necessary to provide water and wastewater services to customers. This includes
owning (i) water rights to provide domestic and irrigation water to customers (we own surface water, groundwater, reclaimed
water rights and storage rights), (ii) infrastructure (such as wells, diversion structures, pipelines, reservoirs and treatment
facilities) required to withdraw, treat, store and deliver domestic water to customers, (iii) infrastructure required to collect,
treat, store and reuse wastewater, and (iv) infrastructure required to treat and deliver reclaimed water for irrigation use by
customers.
We generate cash flows and revenues by (i) selling taps (connections) to our water and wastewater systems and/or (ii) monthly
service fees and consumption charges from metered deliveries.
We currently provide water services to approximately 258 Single Family Equivalent (“SFE”) (as defined below) water
connections and 157 SFE wastewater connections located in southeastern metropolitan Denver.
We plan to utilize our significant water assets, which are described in the Our Water Assets section below, to provide
residential/commercial water and wastewater services to communities along the eastern slope of the Rocky Mountains in
Colorado, in the area extending essentially from Ft. Collins on the north to Colorado Springs on the south which is generally
referred to as the “Front Range”. Principally we are targeting the “I-70 corridor” which is located east of downtown Denver
and south of the Denver International Airport. This area is predominately undeveloped and is expected to experience
substantial growth over the next 30 years.
Glossary of terms
The following terms are commonly used in the water industry and are used throughout our annual report:
• Acre-foot – approximately 326,000 gallons of water, or enough water to cover an acre of ground with one foot of water.
For some instances herein, as context dictates, the term acre feet is used to designate an annual decreed amount of water
that might be available during a typical year.
- 4 -
• Consumptive Use – the amount of water that is evaporated, transpired, incorporated into products or crops, consumed by
humans or livestock, or otherwise removed from the immediate water environment.
• Customer Facilities – facilities that carry potable water and reclaimed water to customers from the retail water distribution
system (see “Retail Facilities” below) and collect wastewater from customers and transfer it to the retail wastewater
collection system. Water and wastewater service lines, interior plumbing, meters and other components are typical
examples of Customer Facilities. In many cases, portions of the Customer Facilities are constructed by the developer, but
they are owned and maintained by the customer.
• Non-tributary groundwater – water that is physically separated from surface water by impermeable layers in an aquifer or
located outside the boundaries of any designated groundwater basin. The withdrawal of such water will not, within one
hundred years of continuous withdrawal, deplete the flow of a natural stream at an annual rate greater than one-tenth of one
percent of the annual rate of withdrawal.
• Not non-tributary groundwater - water located within those portions of the Dawson, Denver, Arapahoe, and Laramie-Fox
Hills aquifers that are outside the boundaries of any designated groundwater basin, the withdrawal of which will, within
one hundred years, deplete the flow of a natural stream at an annual rate of greater than one-tenth of one percent of the
annual rate of withdrawal.
• Retail Facilities – facilities that distribute water to and collect wastewater from an individual subdivision or community.
Developers are typically responsible for the funding and construction of Retail Facilities. Once we certify that the Retail
Facilities have been constructed in accordance with our design criteria, the developer dedicates the Retail Facilities to us or
to a quasi-municipal political subdivision of the state and we operate and maintain the facilities.
• Section - a parcel of land equal to one square mile and containing 640 acres.
• Single Family Equivalent unit (“SFE”) – One SFE is a customer; whether residential, commercial or industrial; that imparts
a demand on our water or wastewater systems similar to the demand of a family of four persons living in a single family
house on a standard sized lot. One SFE is assumed to have a water demand of approximately 0.4 acre-feet per year and to
contribute wastewater flows of approximately 300 gallons per day
• Special Facilities – facilities that are required to extend services to an individual development and are not otherwise
classified as a typical “Wholesale Facility” or “Retail Facility.” Temporary infrastructure required prior to construction of
permanent water and wastewater systems or transmission pipelines to transfer water from one location to another are
examples of Special Facilities. We typically design and construct the Special Facilities using funds provided by the
developer in addition to the normal rates, fees and charges that we collect from our customers. We are typically responsible
for the operation and maintenance of the Special Facilities upon completion.
• Tributary groundwater – all water located in an aquifer that is hydrologically connected to a natural stream and is not
considered non-tributary or not non-tributary.
• Wholesale Facilities – facilities that serve an entire service area or major regions or portions thereof. Wells, treatment
plants, pump stations, tanks, reservoirs, transmission pipelines, and major sewage lift stations are typical examples of
Wholesale Facilities. We own, design, construct, operate, maintain and repair Wholesale Facilities which are typically
funded using rates, fees and charges that we collect from our customers.
Our Water Assets
This section should be read in conjunction with Item 1A – Risk Factors, Item 7 – Management's Discussion and Analysis of
Financial Condition and Results of Operation – Critical Accounting Policies and Use of Estimates, and Note 4 to the
accompanying financial statements.
The approximately $102.9 million of capitalized water costs on our balance sheet represents the costs of the water rights we
own and the related infrastructure developed to provide water and wastewater services. Each of these assets is explained in
detail below.
- 5 -
Rangeview Water Supply and the Lowry Range
Our Rangeview Water
Collectively we refer to the water and storage rights described in this paragraph as our “Rangeview Water Supply.” At the
“Lowry Range” (described below) we own or control a total of approximately 3,300 acre feet of tributary surface water,
25,050 acre feet of nontributary and not-nontributary groundwater rights, and storage rights. Of the 25,050 acre feet of Lowry
Range groundwater, we own approximately 11,650 acre feet of non-tributary and not non-tributary groundwater which we can
“export” from the Lowry Range to supply water to nearby communities and developers in need of additional water supplies
(this water asset is referred to as our “Export Water”). We also have the right to convert up to 1,650 acre feet of the Export
groundwater to a similar amount of surface water for use off the Lowry Range. We hold the exclusive right to develop and
deliver through 2081 the remaining 13,400 acre feet of groundwater, along with the balance of the surface water, for use on
the Lowry Range.
We acquired our Rangeview Water Supply in April 1996 pursuant to the following agreements:
(i) The 1996 Amended and Restated Lease Agreement (the “Lease”) between the State Board of Land Commissioners (the
“Land Board”) and the Rangeview Metropolitan District (the “District”), a quasi-municipal political subdivision of the
State of Colorado;
(ii) The Agreement for Sale of Export Water between us and the District; and
(iii) The Water Service Agreement between us and the District for the provision of water service to the District’s Service
Area.
Additionally, in 1997 we entered into a Wastewater Service Agreement (the “Wastewater Agreement”) with the District to
provide wastewater service to customers within the District’s service area. All of the foregoing agreements are collectively
referred to as the “Rangeview Water Agreements.”
Pursuant to the Rangeview Water Agreements, we design, construct, operate and maintain the District's water and wastewater
systems to provide water and wastewater service to customers within the District’s 24,000 acre service area at the Lowry
Range. On the Lowry Range, we operate both the water and the wastewater systems during our contract period on behalf of
the District, who owns the facilities for both systems. At the expiration of our contract term in 2081, ownership of the water
system facilities servicing customers on the Lowry Range will revert to the Land Board, with the District retaining ownership
of the wastewater facilities. Off the Lowry Range, we use our Export Water as well as other supplies owned by us to provide
water service and wastewater service to our customers and we own these facilities.
The Lowry Range Property
The Lowry Range was acquired by the Land Board in the 1960’s and according to the Land Board; it is one of the most
complex and visible properties held in trust by the Land Board. Located in unincorporated Arapahoe County, about 20 miles
southeast of downtown Denver, the Lowry Range is one of the largest contiguous parcels under single ownership next to a
major metropolitan area in the United States. The Lowry Range is approximately 26,000 acres in size or about 40 square
miles of land. Of the 26,000 acres, we have the exclusive rights to provide water and wastewater services to approximately
24,000 acres.
Future plans for the Lowry Range are based on a three-part vision as established by the Land Board. The current vision centers
around (i) large-scale open space and conservation lands with continued agricultural use, (ii) development of water resources
and potential reservoir sites, and (iii) a sustainable mixed-use development on a portion of the Lowry Range. However, the
Land Board has no active development plans. Previous development plans ended when the developer withdrew from the
project.
Arkansas River Water and Land
On August 31, 2006, we acquired water and land in the Arkansas River Valley in southern Colorado from High Plains A&M,
LLC (“HP A&M”) pursuant to an asset purchase agreement (the “Arkansas River Agreement”). We own approximately
60,000 acre-feet of surface water rights in the Arkansas River together with approximately 17,500 acres of irrigated farm land
in southeastern Colorado. Currently we are leasing our land and water to area farmers who continue to irrigate the land for
- 6 -
agricultural purposes. The water rights we own are represented by over 21,600 shares of the Fort Lyon Canal Company (the
“FLCC”), which is a non-profit mutual ditch company established in the late 1800’s to operate and maintain the 110-mile long
Fort Lyon Canal between La Junta, Colorado and Lamar, Colorado.
It is our intention to change the use of the Arkansas River water from being exclusively for agricultural purposes to municipal
and industrial purposes. We will utilize this water to help meet the growing water demands of Colorado’s Front Range. We
anticipate that approximately 40,000 acre feet of the 60,000 acre feet we own will be available for non-agricultural uses.
Owning the land and water interest allows us to work cooperatively with our agricultural lessees to maintain productive
agricultural operations and make improvements to the land and water which we anticipate will produce efficiencies which will
make water available for other than agricultural uses.
Timing of the development of the Arkansas River water will depend on the timing of new connections to our water and
wastewater systems. We plan to fund the development of the Arkansas River water, much like the other water we own, by
using proceeds generated from the sale of water taps associated with new connections to our system. This will fund the
construction of infrastructure to treat and transport the Arkansas River water to our service areas. In addition to increasing our
service capacities, the Arkansas River water may present additional market opportunities for us to assist other water providers
in solving their long-term water supply needs for their existing and new connections.
Arapahoe County Fairgrounds Agreement for Water Service
In 2005, we entered into an Agreement for Water Service (the “County Agreement”) with Arapahoe County (the “County”) to
design, construct, operate and maintain a water system for, and provide water services to, the Arapahoe County Fairgrounds
(the “Fairgrounds”), which is located west of the Lowry Range. Pursuant to the County Agreement we purchased 321 acre-
feet of water in 2008. Further details of the funding arrangements with the County are described in Note 4 to the
accompanying financial statements.
Pursuant to the County Agreement we constructed and we own a new deep water well, a 500,000 gallon water tank and
pipelines to transport water to the Fairgrounds. The construction of these items was completed in our fiscal 2006, and we
began providing water service to the Fairgrounds on July 21, 2006.
Sky Ranch Water Supply and Water Service Agreements
In 2003 and 2004, we entered into two water service agreements and a groundwater purchase agreement with the developer of
approximately 940 acres of land known as Sky Ranch. Sky Ranch is located in Arapahoe County, Colorado directly adjacent
to I-70, approximately 16 miles east of downtown Denver, 4 miles north of the Lowry Range, and 4 miles south of Denver
International Airport. Sky Ranch has been zoned for residential, commercial and retail uses and may include up to 4,850
SFE’s. In 2007 the developer of Sky Ranch, Neumann Homes, Inc., filed for bankruptcy protection. On October 18, 2010,
pursuant to a Loan Sale and Assignment Agreement (the “Loan Sale Agreement”) with the Bank of America, N.A. (“BofA”)
we acquired the promissory note payable by Sky Ranch, LLC (a wholly owned subsidiary of Neumann Homes, Inc.) to BofA
and the deed of trust granted by Sky Ranch, LLC to secure the promissory note for cash payments totaling $7.0 million. We
made a $700,000 escrow payment on July 30, 2010 and paid the remaining $6.3 million on October 18, 2010. On October 26,
2010, the United States Bankruptcy Court, Northern District of Illinois, entered an order granting our motion requesting that
title to the Sky Ranch property be deeded to us free and clear of all bankruptcy claims. Pursuant to the order, we own the Sky
Ranch property effective as of November 2, 2010.
Owning Sky Ranch provides new opportunities to us and our shareholders. First, purchasing the land interest removes the
uncertainties created by the bankruptcy as to when the property would be available to the market for development and the
enforceability of our water service agreements. Second, in addition to our previous contractual right to provide water service
to the property, we now have the right to provide and control wastewater service to the property. This will enable us to
implement our environmentally sensitive water reuse system using highly treated effluent water distributed through a
dedicated reclaimed water distribution system for all outdoor irrigation demands on the property. Third, we acquired
approximately 739 acre feet of water rights associated with the land to add to the approximately 89 acre feet we acquired prior
to the bankruptcy.
The Sky Ranch property is fully zoned and entitled. Based on records obtained from the bankruptcy court, the previous
developer invested nearly $7.0 million in the property for planning, engineering, soil and geotechnical evaluations,
transportation studies, roadway alignments, infrastructure planning, etc. We currently envision that when development at Sky
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Ranch begins, the development will be in the form of entry level housing (houses costing less than $300,000). We will not
construct infrastructure such as roads, curbs and gutters. Instead we will partner with national home builders/developers for
these improvements as part of our plan to provide the market with competitively priced lots that are ready for development
together with affordable, sustainable, environmentally sound water and wastewater services. We anticipate working with the
builders/developers to bring a product to the Denver market that is both affordable and desirable. Although we do not know
exactly when this property will be developed, land development experts believe the entry level housing market will be the first
product to rebound in the Denver metropolitan area. At full development, the water and wastewater utilities at Sky Ranch are
anticipated to generate in excess of $132 million in tap fee revenue and $6 million annually in service fee revenue (based on
current fees and charges).
In order to finance the Sky Ranch acquisition, we issued a $5.2 million Convertible Negotiable Note Payable (the “Convertible
Note”) and sold 1,848,931 shares of our common stock pursuant to an effective shelf registration statement for $3.00 per
share. These financing transactions are described in further detail in Note 14 to the accompanying financial statements.
Paradise Water Supply
In 1987 we acquired the conditional rights to build a 70,000 acre-foot reservoir to store Colorado River tributary water and a
right-of-way permit from the U.S. Bureau of Land Management for property at the dam and reservoir site (collectively known
as our “Paradise Water Supply”). Due to the significant development costs of water assets along the western slope and
agreements with other western slope water interests, the use of our Paradise Water Supply is limited to opportunities along the
western slope. We anticipate the primary market for the Paradise Water Supply to be the energy industry. Our storage and
water rights are located along the energy rich western slope in Colorado, and water availability is an important factor in the
development and production of these energy supplies.
See the discussion of impairment analysis in the Critical Accounting Policies section below for more information. See also
Note 4 to the accompanying financial statements for information concerning the finding of reasonable diligence review by the
State Engineer.
Well Enhancement and Recovery Systems
In January 2007, we, along with two other parties formed Well Enhancement and Recovery Systems, LLC (“Well
Enhancement LLC”), to develop a new deep water well enhancement tool and process which we believe will increase the
efficiency of wells into the Denver Basin groundwater formation. In our fiscal 2008, the well enhancement tool and process
was completed and tested on two deep water wells developed by an area water provider with favorable results. According to
results from studies performed by an independent hydro-geologist, the well enhancement tool effectively increased the
production of the two test wells by approximately 80% and 83% when compared to that of nearby wells developed in similar
formations at similar depths. Based on the positive results of the test wells, we continue to refine the process of enhancing
deep water wells and anticipate marketing the tool to area water providers. We did not utilize the well enhancement tool
during 2010 due to a lack of wells being drilled in the Denver metropolitan market. On April 27, 2010, we and the other
remaining owner of Well Enhancement LLC acquired the third partner’s 1/3rd interest in Well Enhancement LLC. Following
the acquisition, the remaining partners each hold a 50% interest in Well Enhancement LLC.
Revenues
We generate revenues predominately from three sources: (i) one time water and wastewater tap fees, (ii) construction fees, and
(iii) monthly service fees. Our revenue sources and how we account for them are described in greater detail below. We
typically negotiate the payment terms for tap fees, construction fees, and other water and wastewater service fees with each
developer, builder or municipality as a component of our service agreements prior to construction of the project.
Water and Wastewater Tap Fees
Tap fees are paid by the developer in advance of construction activities and are non-refundable. Tap fees are typically used to
fund construction of the Wholesale Facilities and defray the acquisition costs of obtaining water rights.
Pursuant to our Rangeview Water Agreements, our water tap fees (as well as water usage charges described further below) are
market driven, in that our rates and charges may not exceed the average of similar rates and charges of three nearby water
providers. Despite increases in the water tap fees at these three nearby water providers, our water tap fees and wastewater tap
- 8 -
fees remain unchanged at $22,500 per SFE and $4,883 per SFE, respectively. Due to increases in tap fees at the surrounding
water providers, water tap fees were last increased on July 1, 2009, by $1,000 to $22,500 per SFE, which was a 4.7% increase
over the 2008 water tap fee. Wastewater tap fees have not changed since 2003.
Table A provides a summary of our water tap fees since 2006:
Table A - Water System Tap Fees
Water tap fees per SFE
Percentage Increase
Percentage increase from 2006-2010
$
2010
22,500
0.0%
34%
$
2009
22,500
4.7%
$
2008
21,500
7.5%
$
2007
20,000
18.8%
$
2006
16,840
14.2%
Developers owning rights to either surface water or groundwater underlying their properties may receive a credit against a
portion of their water tap fees if they elect to sell their water to us. Any credit is negotiated at the time a service agreement is
entered into with respect to the property.
Construction Fees
Construction fees are fees we receive, typically in advance, from developers for us to build certain infrastructure such as
Special Facilities which are normally the responsibility of the developer.
Monthly Service Fees
Monthly water usage charges are assessed to customers based on actual metered deliveries each month. Water usage pricing is
capped at the average of the prices charged by the same three surrounding water providers used as the basis for our water tap
fees. As a result of increases in usage fees for these local water providers, as of July 1, 2010, we increased our usage charges
as noted in Table B below.
Table B - Tiered Water Usage Pricing Structure
Amount of consumption
Base charge per SFE
0 gallons to 10,000 gallons
10,001 gallons to 20,000 gallons
20,001 gallons and above
Price ($ per thousand gallons)
2009
25.11
2.55
3.35
5.96
2010
$
27.62
$
2.81
$
3.69
$
6.56
2008
25.11
2.55
3.35
5.96
$
$
$
$
$
$
$
$
The figures in Table B reflect the amounts charged to customers and do not reflect the royalties and fees retained by the Land
Board and the District as further described below:
Water revenues are tiered based on timing and volume of water use. The more water used by a customer in a given month, the
higher the cost of additional incremental water deliveries to the customer.
Wastewater customers are charged a flat monthly fee of $37.62 per SFE, or approximately $451 per year per SFE, which was
increased on July 1, 2010 from $35.10 per SFE, an increase of approximately 7.0%.
We also collect other immaterial fees and charges from residential customers and other end users to cover miscellaneous
administrative and service expenses, such as application fees, review fees and permit fees.
Land Board Royalties
Pursuant to the Rangeview Water Agreements, the Land Board is entitled to royalty payments based on a percentage of
revenues earned from water sales that utilize water from the Lowry Range or Export Water. The calculation of royalties
depends on whether the customer is located on the Lowry Range or elsewhere and whether the customer is a public or private
entity. The Land Board does not receive a royalty from wastewater services.
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Lowry Range Customers
Water service related payments from customers located on the Lowry Range generate royalties to the Land Board at a rate of
12% of gross revenues. When either (i) metered production of water used on the Lowry Range in any calendar year exceeds
13,000 acre-feet or (ii) 10,000 surface acres on the Lowry Range have been rezoned to non-agricultural use, finally platted and
water tap agreements have been entered into with respect to all improvements to be constructed on such acreage, the Land
Board may elect, at its option, to receive, in lieu of its royalty of 12% of gross revenues, 50% of the net profits derived from
the sale or other disposition of water on the Lowry Range. To date neither of these conditions has been met and such
conditions are not likely to be met any time soon.
Export Water Customers
Export Water royalties vary depending on a number of factors. When we withdraw, treat and deliver water to customers
located off the Lowry Range, incurring the costs related to this process, royalties to the Land Board are based on our “Net
Revenues.” Net Revenues are defined as gross revenues less costs incurred as a direct and indirect result of incremental
activity associated with the withdrawal, treatment and delivery of the water (costs include reasonable overhead allocations).
Royalties payable to the Land Board for Export Water sales escalate based on the amount of Net Revenue we receive and are
lower for sales to a water district or similar municipal or public entity than for sales to a private entity as noted in Table C.
Table C - Royalties for Export Water Sales
Net Revenues
$0 - $45,000,000
$45,000,001 - $60,000,000
$60,000,001 – $75,000,000
$75,000,001 - $90,000,000
Over $90,000,000
Royalty Rate
Private
Entity
12%
24%
36%
48%
50%
Public
Entity
10%
20%
30%
40%
50%
District Fees
In exchange for providing water service to the District’s customers (customers on the Lowry Range), we receive 95% of all
amounts received by the District relating to water services after deducting the required royalty to the Land Board. In
exchange for providing wastewater services, we receive 100% of the District’s wastewater tap fees and 90% of the District’s
monthly wastewater service fees, as well as the right to use or sell the reclaimed water.
Tap Participation Fee
As further described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations:
Critical Accounting Policies and Use of Estimates section below, and Note 7 to the accompanying financial statements, we
agreed to pay HP A&M 10% (this may increase to 20% under circumstances described in Note 7 to the accompanying
financial statements) of the tap fees we receive from the next 40,000 water taps we sell from and after the date of the Arkansas
River Agreement. This is referred to as the “Tap Participation Fee.” As of August 31, 2010, 38,937 water taps remain subject
to the Tap Participation Fee. The Tap Participation Fee is payable when we sell water taps and receive funds from such water
tap sales or other dispositions of property purchased in the HP A&M acquisition.
Significant Customer
We had one customer, the Ridgeview Youth Services Center, which accounted for 64% of our total revenues for each of the
three years ended August 31, 2010, 2009 and 2008.
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Our Projected Operations
This section should be read in conjunction with Item 1A – Risk Factors.
Along the Front Range of Colorado, there are over 70 separate water providers with varying needs for replacement and new
water supplies. We believe that we are well positioned to assist certain of these water providers in meeting their current and
future water needs.
We design, construct and operate our existing and future water and wastewater facilities using advanced water purification and
wastewater treatment technologies which allow us to use our water supplies in an efficient and environmentally sustainable
manner. We plan to develop our water and wastewater systems in stages to efficiently meet demands in our service areas,
thereby reducing the amount of up-front capital costs required for construction of facilities. We use third party contractors to
construct our facilities as needed. We employ a licensed water and wastewater operator to operate our water and wastewater
systems. As our systems expand, we expect to hire additional personnel to operate our systems, which includes water
production, treatment, testing, storage, distribution, metering, billing and operations management.
Our water and wastewater systems conjunctively use surface and groundwater supplies and storage of raw water and highly
treated effluent supplies to provide a balanced sustainable water supply for our customers. Integrating conservation practices
and incentives together with effective water reuse demonstrates our commitment to providing environmentally responsible,
sustainable water and wastewater services. Water supplies and water storage reservoirs are competitively sought throughout
the west and along the Front Range of Colorado. We believe regional cooperation among area water providers in developing
new water supplies, water storage, and transmission and distribution systems, provides the most cost effective way of
expanding and enhancing service capacities for area water providers. We continue to discuss developing water supplies and
water storage opportunities with area water providers.
Our Denver based supplies are a valuable, locally available, resource located near the point of use. This enables us to
incrementally develop infrastructure to produce, treat and deliver water to customers based on their growing demands.
Adding our locally available supplies to our intermediate and longer term supplies from the Arkansas River balances both
current and ongoing supplies to meet the growing water demands in the Front Range market.
Our Arkansas River supplies are located in southeast Colorado and will require an approximately 130-mile pipeline and water
treatment and pumping facilities with an estimated cost of over $500 million to deliver the water to Front Range customers.
Since acquiring the Arkansas River supply, we have investigated various pipeline alignments and potential partnerships for
construction of these facilities. In order to use this water for municipal purposes we must file a change of use application with
the Colorado water court. This will likely be a lengthy process and require a substantial amount of capital for legal and
engineering services. If we successfully change the use of our water rights to include municipal uses, we would then need to
construct the pipeline and other infrastructure to transport the water to the municipal customers. We do not plan on starting
this process in the near term and anticipate that the tap fees and usage fees we generate from taps sold utilizing our water
rights located along the Front Range, along with funding from other pipeline partners, will be sufficient to fund the water
delivery facilities when the water is needed along the Front Range. Although we have not yet filed a change of use
application, we are working with the FLCC and other interested parties in the Arkansas River Valley to mitigate any adverse
impacts to the local communities and to make investments and decisions on farming operations which benefit continued
agricultural operations as well as providing new municipal water supplies for the Front Range. We are conducting a rotational
crop study program and participating in discussions with area interests including the Lower Arkansas Valley Super Ditch
(“Super Ditch”), which is a group of Arkansas Valley irrigators who have assembled to study alternatives to traditional “buy
and dry” agricultural-to-municipal water transfers.
Based on our initial development plans, we expect the development of our Rangeview Water Supply to require a significant
number of high capacity deep water wells. We anticipate drilling separate wells into each of the three principal aquifers
located beneath the Lowry Range. Each well is intended to deliver water to central water treatment facilities for treatment
prior to delivery to customers. Development of our Lowry Range surface water supplies will require facilities to divert surface
water to storage reservoirs to be located on the Lowry Range and treatment facilities to treat the water prior to introduction
into our distribution systems. Surface water diversion facilities will be designed with capacities to divert the surface water
when available (particularly during seasonal events such as spring run-off and summer storms) for storage in reservoirs to be
constructed on the Lowry Range. Based on preliminary engineering estimates, the full build-out of water facilities (including
diversion structures, transmission pipelines, reservoirs, and water treatment facilities) on the Lowry Range will cost in excess
of $340 million and will accommodate water service to customers located on and outside the Lowry Range. We expect this
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build out to occur over an extended period of time, and we expect that tap fees will be sufficient to fund the infrastructure
costs.
Rangeview Metropolitan District
The District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of
providing water and wastewater service to the Lowry Range. The District is required to utilize the 13,400 acre-feet of water
leased to it by the Land Board to serve customers on the Lowry Range. The District is governed by an elected board of
directors. Eligible voters and persons eligible to serve as directors of the District must own an interest in property within the
boundaries of the District. We own certain rights and real property interests which encompasses the current boundaries of the
District. The current directors of the District are Mark W. Harding and Scott E. Lehman (both employees of Pure Cycle), and
an independent board member. Pursuant to Colorado law, directors receive $100 for each board meeting they attend, up to a
maximum of $1,600 per year.
Water and Growth in Colorado
The Colorado economy, much like that of the US as a whole, experienced a continued weak economy through 2010.
Although annualized housing starts have fallen approximately 79% since 2006, the annualized June 30, 2010 housing starts
increased 14% over the annualized June 30, 2009 housing starts, the first increase since 2006. The unemployment rate in
Colorado was 8.2% at August 31, 2010, which was lower than the national unemployment rate of 9.6%. The Denver Regional
Council of Governments (“DRCOG”), a voluntary association of over 50 county and municipal governments in the Denver
metropolitan area, continues to estimate that the Denver metropolitan area population will increase by about 44% from today’s
2.7 million people to 3.9 million people by the year 2030. A Statewide Water Supply Initiative report by the Colorado Water
Conservation Board estimates that the South Platte River basin, which includes the Denver metropolitan region, will grow
from a current population of approximately 3.2 million to approximately 4.9 million by the year 2030; while the State’s
population will increase from 4.7 million to 7.2 million. Approximately 70% of the State’s projected population increase is
anticipated to occur within the South Platte River basin. Significant increases in Colorado’s population, particularly in the
Denver metro region and other areas in the water short South Platte River basin, together with increasing agricultural,
recreational, and environmental water demands will intensify competition for water supplies. The estimated population
increases are expected to result in demands for water services in excess of the current capabilities of municipal service
providers, especially during drought conditions. The Statewide Water Supply Initiative estimates that population growth in
the Denver region and the South Platte River basin will result in additional water supply demands of over 400,000 acre feet by
the year 2030, which must be met with new water sources. Many cities and municipalities require property developers to
demonstrate they have sufficient water supplies for their proposed projects before considering rezoning or annexation
applications. These factors indicate that water and availability of water will continue to be critical to growth prospects for the
region and the state, and that competition for available sources of water will continue to intensify. We focus the marketing of
our water supplies and services to developers and homebuilders that are active along the Colorado Front Range as well as
other area water providers in need of additional supplies.
Colorado’s future water supply needs will be met through conservation, reuse and the development of new supplies. Our rules
and regulations for water and wastewater service call for adherence to strict conservation measures, including low flow water
fixtures, high efficiency appliances, and advanced irrigation control devices. Additionally, our systems are designed and
constructed using a dual-pipe water distribution system to segregate the delivery of high quality potable drinking water to our
customers through one system and a second system to supply raw or reclaimed water for irrigation demands. About one-half
of the water used by a typical Denver-area residential water customer is used for outdoor landscape and lawn irrigation. We
believe that raw or reclaimed water supplies provide the lowest cost, most environmentally sustainable water for outdoor
irrigation. Our systems will include an extensive water reclamation system, in which essentially all effluent water from
wastewater treatment plants will be reused to meet non-potable water demands. Our dual-distribution systems demonstrate
our commitment to environmentally responsible water management policies in our water short region.
Competition
We negotiate individual service agreements with developers and/or homebuilders, cities and municipalities to design,
construct and operate water and wastewater systems and to provide services. These service agreements address all aspects of
the development of the water and wastewater systems including:
(i) The purchase of water and wastewater taps in exchange for our obligation to construct certain Wholesale Facilities,
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(ii) The establishment of payment terms, timing, capacity and location of Special Facilities (if any), and
(iii) Specific terms related to our provision of ongoing water and wastewater services.
Although we have exclusive long-term water and wastewater service contracts for 24,000 acres of the 26,000 acre Lowry
Range, including exclusive rights to serve two of the six development sections currently proposed at the Lowry Range,
providing water service to areas other than Sky Ranch and the majority of the Lowry Range is subject to competition.
Moreover, competitors have attempted to challenge our exclusive rights to service the Lowry Range. See Item 1A – Risk
Factors – Lowry Range below. Alternate sources of water are available, principally from other private parties, such as farmers
or others owning water rights that have historically been used for agriculture, and from municipalities seeking to annex new
development areas in order to increase their tax base. Our principal competition in areas close to the Lowry Range is the City
of Aurora. Principal factors affecting competition for potential purchasers of our Arkansas River water and Export Water
include the availability of water for the particular purpose, the cost of delivering the water to the desired location including the
cost of required taps, and the reliability of the water supply during drought periods. We believe the water assets we own and
have the exclusive right to use, which have a supply capacity of approximately 180,000 SFE units, provide us a significant
competitive advantage along the Front Range. Our legal rights to the Rangeview Water Supply have been confirmed for
municipal use and a significant portion of our water supply is close to Denver area water users. Our pricing structure is
competitive and our water portfolio is well balanced with senior surface water rights, groundwater rights, storage capacity and
reclaimed water supplies.
Employees
We currently have four full-time employees and one part-time employee.
Available Information and Website Address
Our website address is www.purecyclewater.com. We make available free of charge through our website our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as
reasonably practicable after filing with the SEC. These reports and all other material we file with the SEC may be obtained
directly from the SEC’s website, www.sec.gov/edgar/searchedgar/companysearch.html, under CIK code 276720. The contents
of our website are not incorporated by reference into this report. You may also read and copy any materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Operating information for the Public
Reference Room is available by calling the SEC at 1-800-SEC-0330.
Item 1A - Risk Factors
Our business, operations, and financial condition are subject to significant risks. These risks include those listed below and
may include additional risks of which we are not currently aware or which we currently do not believe are material. If any of
the events or circumstances described in the following risk factors actually occurs, our business could be materially adversely
affected. These risks should be read in conjunction with the other information set forth in this report.
We are dependent on the housing market and development in our targeted service areas for future revenues.
Providing water service using our Colorado Front Range water supplies is our principal source of future revenue. The timing
and amount of these revenues will depend significantly on housing developments being built near our water assets. The
development of these areas is not within our control, and there can be no assurance that development will occur or that water
sales will occur on acceptable terms or in the amounts or time required for us to support our costs of operation. In the event
water sales are not forthcoming or development on the Lowry Range, Sky Ranch or other developments in our targeted service
area are delayed indefinitely, we would need to incur additional short or long-term debt obligations or seek to sell additional
equity to generate operating capital, and there are no assurances that we would be successful in obtaining additional operating
capital.
Since 2006, the Colorado housing market has seen significant declines in new home construction, which was exacerbated by
instability in the credit markets. If the downturn in the homebuilding and credit markets continues, intensifies, or if the
national economy weakens further and economic concerns intensify, it could have a significant negative impact on our
business and financial condition.
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Because of the prior use of the Lowry Range as a military facility, environmental clean-up may be required prior to
development, including the removal of unexploded ordnance. In addition, the Land Board may not develop large portions of
the Lowry Range which would significantly limit our ability to utilize the non-Export Water specifically reserved for use on
the Lowry Range.
Our construction of water and wastewater projects may expose us to certain completion, performance and financial risks.
We intend to rely on independent contractors to construct our water and wastewater facilities. These construction activities
may involve risks, including shortages of materials and labor, work stoppages, labor relations disputes, weather interference,
engineering, environmental, permitting or geological problems and unanticipated cost increases. These issues could give rise
to delays, cost overruns or performance deficiencies, or otherwise adversely affect the construction or operation of our water
and wastewater delivery systems. In addition, we may experience quality problems in the construction of our systems and
facilities, including equipment failures. We cannot assure you that we will not face claims from customers or others regarding
product quality and installation of equipment placed in service by contractors.
Certain of our contracts may be fixed-price contracts, in which we may bear all or a significant portion of the risk for cost
overruns. Under these fixed-price contracts, contract prices are established in part based on fixed, firm subcontractor quotes on
contracts and on cost and scheduling estimates. These estimates may be based on a number of assumptions, including
assumptions about prices and availability of labor, equipment and materials, and other issues. If these subcontractor quotations
or cost estimates prove inaccurate, or if circumstances change, cost overruns may occur, and our financial results would be
negatively impacted. In many cases, the incurrence of these additional costs would not be within our control.
We may have contracts in which we guarantee project completion by a scheduled date. At times, we may guarantee that the
project, when completed, will achieve certain performance standards. If we fail to complete the project as scheduled, or if we
fail to meet guaranteed performance standards, we may be held responsible for cost impacts and/or penalties to the customer
resulting from any delay or for the costs to alter the project to achieve the performance standards. To the extent that these
events occur and are not due to circumstances for which the customer accepts responsibility or cannot be mitigated by
performance bonds or the provisions of our agreements with contractors, the total costs of the project would exceed our
original estimates and our financial results would be negatively impacted.
Our customers may require us to secure performance and completion bonds for certain contracts and projects. The market
environment for surety companies has become more risk averse. We secure performance and completion bonds for our
contracts from these surety companies. To the extent we are unable to obtain bonds, we may not be awarded new contracts.
We cannot assure you that we can secure performance and completion bonds when required.
Design, construction or system failures could result in injury to third parties or damage to property. Any losses that exceed
claims against our contractors, the performance bonds and our insurance limits at such facilities could result in claims against
us. In addition, if there is a customer dispute regarding performance of our services, the customer may decide to delay or
withhold payment to us.
Certain of our water rights are “conditional decrees” and require findings of reasonable diligence.
Our surface water interests and reservoir sites at the Lowry Range and our Paradise Water Supply are conditionally decreed
and are subject to a finding of reasonable diligence from the Colorado water court every six years. To arrive at a finding of
reasonable diligence, the water court must determine that we continue to diligently pursue the development of said water
rights. If the water court is unable to make such a finding, we could lose the water right under review.
The Lowry Range conditional decrees are currently under their first review by the water court to determine if such decrees
meet the diligence criteria. If the water court does not make a determination of reasonable diligence, it would materially
adversely impact the value of our interests in the Rangeview Water Supply.
The fiscal 2005 review of our Paradise Water Supply was completed in 2008, but not without objectors and not without us
having to agree to certain stipulations to remove the objections. In order to continue to maintain the Paradise Water Supply,
over the next six years we must (i) select an alternative reservoir site; (ii) file an application in water court to change the place
of storage; (iii) identify specific end users and place(s) of use of the water; and (iv) identify specific source(s) of the water
rights for use.
- 14 -
We are involved in on-going discussion with the Land Board to clarify our rights and obligations with respect to our
Rangeview Water Supply and such negotiations may not be successful.
Our Rangeview Water Supply rights are subject to terms of the Lease between the Land Board and the District. The Lease
was entered into in 1996 prior to any development of the Lowry Range or of areas outside the Lowry Range that utilize our
Export Water. The terms of the Lease did not fully anticipate the specific circumstances of development that have arisen and
may not clearly delineate rights and responsibilities for the forms of transactions that may arise in the future. We are involved
in ongoing discussions with the Land Board to clarify the terms of the Lease. An unfavorable outcome in such discussions
could have a material adverse effect on our financial results.
In order to utilize the Arkansas River water acquired in fiscal 2006, we must apply for a change of use with the water court
and this may take several years to complete.
The change of use of our Arkansas River water requires a favorable ruling by the water court, which could take several years
and be a costly and contentious effort since it is anticipated that many parties will oppose the change of use and the transfer of
the water. There are several conditions which must be satisfied prior to our receiving a change of use decree for transfer of our
Arkansas River water. One condition that we must satisfy is a showing of anti-speculation in which we, as the applicant, must
demonstrate that we have contractual obligations to provide water service to customers prior to the water court ruling on the
transfer of a water right. The water court is also expected to limit the transfer to the “consumptive use” portion of the water
right and to address changing the historic use of the water from agricultural uses to other uses such as municipal and industrial
use. We expect to face opposition to any consumptive use calculations of the historic agricultural uses of this water. The water
court may impose conditions on our transfer of the water rights such as requiring us to mitigate the loss of the farming tax
base, imposing re-vegetation requirements to convert soils from irrigated to non-irrigated, and imposing water quality
measures. Any such conditions will likely increase the cost of transferring the water rights.
We may not be able to obtain sufficient capital to develop our water rights, in particular the Arkansas River water.
Development of water rights requires a substantial capital investment. We anticipate financing water and wastewater systems
primarily through the sale of water taps and water delivery charges to users. However, we cannot assure you that these
sources of cash will be sufficient to cover our capital costs. Moreover, the development of the Arkansas River water will
require a pipeline and other infrastructure to deliver the water to the Front Range, which is anticipated to cost over $500
million. We likely would be required to partner with others to finance a project of this magnitude and there is no assurance we
would be able to obtain the financing necessary to develop our Arkansas River water.
Our net losses may continue and we may not have sufficient liquidity to pursue our business objectives.
We have experienced significant net losses, our cash flows from operations have not been sufficient to fund our operations in
the past and we have been required to raise debt and equity capital to remain in operation. Since 2004, we have raised
approximately $31.5 million to support our operations through (i) the issuance of approximately $26.1 million of common
stock (which includes approximately $5.5 million of common stock sold in September 2010), and (ii) the issuance of $5.2
million of convertible debt in September 2010. Our ability to fund our operational needs and meet our business objectives will
depend on our ability to generate cash from future operations. We currently have a limited number of customers. If our future
cash flows from operations and other capital resources are not sufficient to fund our operations and the significant capital
expenditure requirements to build our water delivery systems, we may be forced to reduce or delay our business activities, or
seek to obtain additional debt or equity capital, which may not be available on acceptable terms, or at all.
The rates we are allowed to charge customers on the Lowry Range are limited by the Lease with the Land Board and our
contract with the District and may not be sufficient to cover our costs of construction and operation.
The prices we may charge for our water and wastewater services on the Lowry Range are subject to pricing regulations set
forth in the Lease with the Land Board. Both the tap fees and our usage rates and charges are capped at the average of the
rates of three surrounding water providers. Annually we survey the tap fees and rates of the surrounding providers and we
typically adjust our tap fees and rates and charges based on the average of those charged by this group. Our costs associated
with the construction of water delivery systems and the production, treatment and delivery of our water are subject to market
conditions and other factors, which may increase at a significantly greater rate than the prices charged by the three surrounding
providers. Factors beyond our control and which cannot be predicted, such as government regulations, drought, water
contamination and severe weather conditions, like tornadoes and floods, may result in additional labor and material costs that
- 15 -
may not be recoverable under our rate structure. Either increased customer demand or increased water conservation may also
impact the overall cost of our operations. If the costs for construction and operation of our water services, including the cost of
extracting our groundwater, exceed our revenues, we would be providing service to the Lowry Range at a loss. We may
petition the Land Board for rate increases; however, there can be no assurance that the Land Board would approve a rate
increase request.
In the event of default by HP A&M on the promissory notes secured by deeds of trust on our properties, we would be required
to cure the defaults or lose some of our properties and the water rights associated with such properties.
60 of the 80 properties we acquired from HP A&M (which relate to approximately 75% of our Arkansas River water rights)
are subject to promissory notes owed by HP A&M. Principal and interest on the notes total approximately $11.0 million as of
August 31, 2010. Each of the notes is secured by deeds of trust on one of our properties, but the notes are solely the
responsibility of HP A&M. Because of HP A&M’s financial position and the substantial penalties imposed on HP A&M in
the event of a default, the likelihood of HP A&M defaulting on the notes is deemed remote. As a result the promissory notes
are not reflected on our balance sheet. If HP A&M was to default on any of the notes, we have the right to cure said default
and recover defined amounts of our stock and Tap Participation Fee from HP A&M. If we did not cure the defaults, we would
lose the land and water rights securing the defaulted note.
We have a limited number of employees and may not be able to manage the increasing demands of our expanding operations.
We have a limited number of employees to administer our existing assets, interface with applicable governmental bodies,
market our services and plan for the construction and development of our future assets. We may not be able to maximize the
value of our water assets because of our limited manpower. We depend significantly on the services of Mark W. Harding, our
President and Chief Financial Officer. The loss of Mr. Harding would cause a significant interruption of our operations. The
success of our future business development and ability to capitalize on growth opportunities depends on our ability to attract
and retain additional experienced and qualified persons to operate and manage our business. State regulations set the training,
experience and qualification standards required for our employees to operate specific water and wastewater facilities. Failure
to find state-certified and qualified employees to support the operation of our facilities could put us at risk for, among other
things, regulatory penalties (including fines and suspension of operations), operational errors at the facilities, improper billing
and collection processes, and loss of contracts and revenues. We cannot assure you that we can successfully manage our
assets and our growth.
We may be adversely affected by any future decision by the Colorado Public Utilities Commission to regulate us as a public
utility.
The Colorado Public Utilities Commission (“CPUC”) regulates investor-owned water companies operating for the purpose of
supplying water to the public. The CPUC regulates many aspects of public utilities' operations, including establishing water
rates and fees, initiating inspections, enforcement and compliance activities and assisting consumers with complaints.
We do not believe we are a public utility under Colorado law. We currently provide services by contract to the District, which
supplies the public. Quasi-municipal metropolitan districts, such as the District, are exempt by statute from regulation by the
CPUC. However, the CPUC could attempt to regulate us as a public utility. If this were to occur, we might incur significant
expense challenging the CPUC's assertion of jurisdiction, and we may be unsuccessful. In the future, existing regulations may
be revised or reinterpreted, and new laws and regulations may be adopted or become applicable to us or our facilities. If we
become regulated as a public utility, our ability to generate profits could be limited and we might incur significant costs
associated with regulatory compliance.
There are many obstacles to our ability to sell our Paradise Water Supply.
We have never earned revenues from our Paradise Water Supply. Our ability to convert our Paradise Water Supply into an
income generating asset is limited. Due to the cost of developing western slope water and agreements with other western slope
water interests, our use of the Paradise Water Supply is limited to opportunities along the western slope. As part of our water
court decree for the Paradise Water Supply, we are permitted to construct a storage facility on the Colorado River. However,
due to a stipulation entered into with various objectors to our Paradise Water rights and the strict regulatory requirements for
constructing a reservoir on the main stem of the Colorado River, we do not anticipate completing the storage facility at its
decreed location. We cannot assure you that we will ever be able to make use of this asset or sell the water profitably.
- 16 -
Conflicts of interest may arise relating to the operation of the District.
Our officers and employees constitute a majority of the directors of the District. Pure Cycle, along with our officers and
employees and one unrelated individual, own, as tenants in common, the 40 acres that constitute the District. We have made
loans to the District to fund its operations. At August 31, 2010, total principal and interest owed to us by the District was
approximately $519,800. Pursuant to our Service Agreement with the District, the District receives fees of 5% of the revenues
from the sale of water on the Lowry Range. Proceeds from the fee collections will initially be used to repay the District's
obligations to us, but after these loans are repaid, the District is not required to use the funds to benefit Pure Cycle. We have
received benefits from our activities undertaken in conjunction with the District, but conflicts may arise between our interests
and those of the District, and with our officers who are acting in dual capacities in negotiating contracts to which both we and
the District are parties. We expect that the District will expand when more properties are developed and become part of the
District, and our officers acting as directors of the District will have fiduciary obligations to those other constituents. There
can be no assurance that all conflicts will be resolved in the best interests of Pure Cycle and its shareholders. In addition, other
landowners coming into the District will be eligible to vote and to serve as directors of the District. There can be no assurances
that our officers and employees will remain as directors of the District or that the actions of a subsequently elected board
would not have an adverse impact on our operations.
We are required to maintain stringent water quality standards and are subject to regulatory and environmental risks.
We must provide water that meets all federal and state regulatory water quality standards and operate our water and
wastewater facilities in accordance with these standards. We face contamination and pollution risks with respect to our water
supplies. Improved detection technology, increasingly stringent regulatory requirements, and heightened consumer awareness
of water quality issues contribute to an environment of increased focus on water quality. We cannot assure you that in the
future we will be able to reduce the amounts of contaminants in our water to acceptable levels. In addition, the standards that
we must meet are constantly changing and becoming more stringent. Future changes in regulations governing the supply of
drinking water and treatment of wastewater may have a material adverse impact on our financial results.
In October 2009, the Water Quality Control Division of the Colorado Department of Public Health and Environment advised
us of proposed changes to the discharge permit for the District’s Coal Creek wastewater reclamation facility. The revised
permit requires compliance with effluent ammonia limitations, use of E. coli rather than fecal coliform as an indicator of
effluent disinfection efficacy, and a more stringent (lower) effluent chlorine residual limitation. The revised permit requires us
to comply with the new criteria by October 2014. Although we do not anticipate having significant difficulties complying
with the revised permit, there are no assurances that we will be able to comply with future requirements or that the cost of such
compliance will be covered by the rate structure required by the Rangeview Water Agreements.
Our water supplies are subject to contamination, including contamination from naturally occurring compounds, pollution from
man-made sources and intentional sabotage. In addition, we handle certain hazardous materials at our water treatment
facilities, primarily sodium hypochlorite. Any failure of our operation of the facilities or any contamination of our supplies,
including sewage spills, noncompliance with water quality standards, hazardous materials leaks and spills, and similar events
could expose us to environmental liabilities, claims and litigation costs. If any of these events occur, we may have to interrupt
the use of that water supply until we are able to substitute the supply from another source or treat the contaminated supply.
We cannot assure you that we will successfully manage these issues, and failure to do so could have a material adverse effect
on our future results of operations.
Our business is subject to seasonal fluctuations and weather conditions which could affect demand for our water service and
our revenues.
We depend on an adequate water supply to meet the present and future demands of our customers and to continue our
expansion efforts. Conditions beyond our control may interfere with our water supply sources. Drought and overuse may limit
the availability of water. These factors might adversely affect our ability to supply water in sufficient quantities to our
customers and our revenues and earnings may be adversely affected. Additionally, cool and wet weather, as well as drought
restrictions and our customers’ conservation efforts, may reduce consumption demands, also adversely affecting our revenue
and earnings. Furthermore, freezing weather may also contribute to water transmission interruptions caused by pipe and main
breakage. If we experience an interruption in our water supply, it could have a material adverse effect on our financial
condition and results of operations. Demand for our water during the warmer months is generally greater than during cooler
months due primarily to additional requirements for water in connection with cooling systems, irrigation systems and other
outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature
- 17 -
and rainfall levels. If temperatures during the typically warmer months are cooler than expected or there is more rainfall than
expected, the demand for our water may decrease and adversely affect our revenues.
We have no unresolved Staff comments.
Item 1B - Unresolved Staff Comments
Item 2 - Properties
Corporate office - We occupy approximately 1,000 square feet at a cost of approximately $1,400, per month, at the address
shown on the cover of this Form 10-K. This is leased pursuant to a three year operating lease agreement with a third party.
Water related assets - In addition to the water rights we own in the Denver metropolitan area which are described in Item 1 -
Our Water Assets, we also own a 500,000 gallon water tank, a deep water well and pump station, and approximately four
miles of water pipeline in Arapahoe County Colorado. Additionally, although owned by the District, we operate and maintain
another 500,000 gallon deep water well, water tank and pump station, two alluvial wells, the District’s wastewater treatment
plant, and water distribution and wastewater collection pipelines that serve customers located at the Lowry Range. These
assets are used to provide service to our existing customers.
Other equipment - In addition to the real property we own in the Arkansas River Valley as described in Item 1 - Our Water
Assets – Arkansas River Water, we also own various water delivery fixtures located on our real properties. These items
consist mainly of irrigation pumps, irrigation ditches, and irrigation pipelines as well as various structures and agricultural
related buildings.
We are not involved in any litigation or legal proceedings as of the date of the filing of this Form 10-K.
Item 3 - Legal Proceedings
PART II
Item 5 - Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Our common stock is traded on the NASDAQ Capital Market under the symbol “PCYO”. The high and low sales prices of
our common stock, by quarter, for the fiscal years ended August 31, 2010 and 2009 are presented with the Selected Quarterly
Financial Information in Note 15 to the accompanying financial statements.
(b)
Holders
On October 29, 2010, there were approximately 1,800 holders of record of our common stock.
(c)
Dividends
We have never paid any dividends on our common stock and expect for the foreseeable future to retain all of our earnings
from operations, if any, for use in expanding and developing our business. Any future decision as to the payment of dividends
will be at the discretion of our board of directors and will depend upon our earnings, financial position, capital requirements,
plans for expansion and such other factors as our board of directors deems relevant. The terms of our Series B Preferred Stock
prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid.
The terms of the Convertible Note (as defined in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations) prohibit the payment of dividends without the consent of the Convertible Note holder.
- 18 -
(d)
Securities authorized for issuance under equity compensation plans
Table D - Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
(c)
262,500
–
262,500
$ 6.26
–
$ 6.26
1,303,311
–
1,303,311
Plan category
Equity compensation plans:
Approved by security holders
Not approved by security holders
Total
(e)
Performance Graph 1
This graph compares the cumulative total return of our common stock for the last five fiscal years with the cumulative total
return for the same period of the S&P 500 Index and a peer group index2. The graph assumes the investment of $100 in
common stock in each of the indices as of the market close on August 31 and reinvestment of all dividends.
Cumulative Returns For the fiscal years ended August 31,
2005
2006
2007
2008
2009
2010
Pure Cycle Corporation
$
100.00
$
112.52
$
103.95
$
82.18
$
44.22
$
40.95
S&P 500
Peer Group
$
100.00
$
108.88
$
125.36
$
111.40
$
91.06
$
95.53
$
100.00
$
100.68
$
105.20
$
92.40
$
86.21
$
96.37
1. This performance graph is not “soliciting material,” is not deemed “filed” with the Commission and is not to be incorporated by reference in any of
our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date
hereof and irrespective of any general incorporation language in any such filing.
2. The Peer Group consists of the following companies that have been selected on the basis of industry focus or industry leadership: American States
Water Company, Aqua America, Inc., Artesian Resources Corp., California Water Service Group, Connecticut Water Service, Inc., Middlesex Water
Company, Pennichuck Corp., SJW Corp., and The York Water Company.
- 19 -
(f)
Recent Sales of Unregistered Securities; use of proceeds from registered securities
There were no sales of unregistered securities during the three months ended August 31, 2010.
(g)
Purchase of equity securities by the issuer and affiliated purchasers
We did not purchase any of our equity securities during the three months ended August 31, 2010.
- 20 -
Item 6 - Selected Financial Data
Table E - Selected Financial Data
In thousands (except per share data)
Summary Statement of Operations items:
2010
For the Fiscal Years Ended August 31,
2008
2007
2009
2006 *
Total revenues
Net loss
$
264.1
$
260.2
$
282.4
$
265.7
$
271.7
$
(5,391.3)
$
(5,728.1)
$
(6,926.7)
$
(6,914.7)
$
(792.9)
Basic and diluted loss per share
$
(0.27)
$
(0.28)
$
(0.34)
$
(0.37)
$
(0.05)
Weighted average shares outstanding
20,207
20,207
20,189
18,590
14,694
Summary Balance Sheet Information:
2010
2009
2008
2007
2006 *
As of August 31,
Current assets
Total assets
Current liabilities
Long term liabilities
Total liabilities
Equity
* As restated
$
1,819.6
$
3,990.4
$
5,502.2
$
7,288.4
$
3,121.4
$
106,377.8
$
108,091.1
$
109,899.4
$
111,891.9
$
108,833.9
$
171.3
$
138.1
$
163.9
$
183.3
$
380.1
$
63,746.5
$
60,183.8
$
56,567.8
$
53,863.8
$
53,789.1
$
63,917.8
$
60,321.9
$
56,731.6
$
54,047.1
$
54,169.2
$
42,460.0
$
47,769.2
$
53,167.8
$
57,844.8
$
54,664.7
We did not declare or pay any cash dividends in any of the five fiscal years presented.
The following items had a significant impact on our operations:
•
•
•
•
•
In fiscal 2010, 2009, 2008 and 2007, respectively, we imputed approximately $3.6 million, $3.7 million, $4.4 million and
$4.7 million of interest related to the Tap Participation Fee payable to HP A&M.
In fiscal 2009, we recognized gains on the sale of non-irrigated land totaling approximately $59,700.
In fiscal 2008 and 2007, respectively, we recognized approximately $273,700 of losses and $1.04 million of gains related
to the acquisition of certain CAA interests (explained further in Note 5 to the accompanying financial statements). In the
2007 acquisitions, certain of the parties were deemed related to the Company and therefore, approximately $765,100 of
this gain was recorded as a contribution of capital in fiscal 2007. The remaining $271,100 of gain is included in the
statement of operations.
In fiscal 2006, we acquired water and real property interests in the Arkansas River Valley. The consideration for these
assets consisted of equity valued at approximately $36.2 million and a Tap Participation Fee agreement valued at
approximately $45.7 million (at August 31, 2006), which is payable when we sell water taps. The total consideration of
approximately $81.9 million was allocated to the acquired assets based on each asset’s relative fair value.
In fiscal 2006, we recognized $390,900 of gain related to the extinguishment of debt and the acquisition of certain CAA
interests.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and
other factors, as described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K, that could cause our actual
growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year
and the periods that follow to differ materially from those expressed in, or implied by, those forward-looking statements.
Readers are cautioned that forward-looking statements contained in this Form 10-K should be read in conjunction with our
- 21 -
disclosure under the heading: “SAFE HARBOR STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995” on page 4.
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of
operations and our financial condition and should be read in conjunction with the accompanying financial statements and the
notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. The following sections focus on the key
indicators reviewed by management in evaluating our financial condition and operating performance, including the following:
• Revenue generated from providing water and wastewater services;
• Expenses associated with developing our water assets; and
• Cash available to continue development of our water rights and service agreements.
Our MD&A section includes the following items:
Our Business – a general description of our business, our services and our business strategy.
Critical Accounting Policies and Estimates – a discussion of our critical accounting policies that require critical judgments,
assumptions and estimates.
Results of Operations – an analysis of our results of operations for the three fiscal years presented in our financial
statements. We present our discussion in the MD&A in conjunction with the accompanying Financial Statements.
Liquidity, Capital Resources and Financial Position –an analysis of our cash position and cash flows, as well as a
discussion of our financing arrangements.
Our Business
We are a water and wastewater service provider that contracts with land owners, land developers, home builders, cities, and
municipalities to design, construct, operate and maintain water and wastewater systems using our balanced water portfolio
consisting of surface water and groundwater supplies, surface water storage, aquifer storage, and reclaimed water supplies.
We generate cash flows and revenues by (i) selling taps (connections) to our water and wastewater systems and/or (ii) monthly
service fees and consumption charges from metered deliveries.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such differences may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the
timing of revenue recognition, the impairment analysis of our water rights, management’s valuation of the Tap Participation Fee, and
share-based compensation. Below is a summary of these critical accounting policies.
Revenue Recognition
Our revenues consist mainly of tap fees and monthly service fees. As further described in Note 2 to the accompanying
financial statements, proceeds from tap sales are deferred upon receipt and recognized in income based on whether we own or
do not own the facilities constructed with the proceeds. We recognize tap fees derived from agreements for which we
construct infrastructure others own as revenue, along with the associated costs of construction, pursuant to the percentage-of-
completion method. The percentage-of-completion method requires management to estimate the percent of work that is
completed on a particular project, which could change materially throughout the duration of the construction period and result
in significant fluctuations in revenue recognized during the reporting periods throughout the construction process. We did not
recognize any revenues pursuant to the percentage-of-completion method during the fiscal years ended August 31, 2010, 2009
or 2008.
- 22 -
Tap fees derived from agreements for which we own the infrastructure are recognized as revenue ratably over the estimated
service life of the assets constructed with said fees. Although the cash will be received up-front and most construction will be
completed within one year of receipt of the proceeds, revenue recognition may occur over 30 years or more. Management is
required to estimate the service life, and currently the service life is based on the estimated useful accounting life of the assets
constructed with the tap fees. The useful accounting life of the asset is based on management’s estimation of an accounting
based useful life and may not have any correlation to the actual life of the asset or the actual service life of the tap. This is
deemed a reasonable recognition life of the revenues because the depreciation of the assets constructed generating those
revenues will be matched with the revenues.
Monthly water usage fees and monthly wastewater service fees are recognized in income each month as earned.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment at least annually or whenever management believes events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be
held and used by a comparison of the carrying amount of an asset to estimated future undiscounted net cash flows we expect to
be generated by the eventual use of the asset. If such assets are considered to be impaired and therefore the costs of the assets
deemed to be unrecoverable, the impairment to be recognized would be the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets.
Our water assets will be utilized in the provision of water services which inevitably will encompass many housing and
economic cycles. Our service capacities are quantitatively estimated based on an average single family home utilizing .4
acre-feet of water per year. Our water supplies are legally decreed to us through the water court. The water court decree
allocates a specific amount of water (subject to continued beneficial use) which historically has not changed. Thus,
individual housing and economic cycles typically do not have an impact on the number of connections we can serve with our
supplies or the amount of water legally decreed to us relating to these supplies.
We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell.
Our Front Range and Arkansas River Water Rights
We determine the undiscounted cash flows for our Denver based assets and the Arkansas River Valley assets by estimating
tap sales to potential new developments in our service area and along the Front Range, using estimated future tap fees less
estimated costs to provide water services, over an estimated development period. Actual new home development in our
service area and the Front Range, actual future tap fees, and actual future operating costs, inevitably will vary significantly
from our estimates, which could have a material impact on our financial statements as well as our results of operations. We
performed an impairment analysis as of August 31, 2010, and determined that our Rangeview Water Supply and Arkansas
River water assets were not impaired and their costs were deemed recoverable. Our impairment analysis is based on
development occurring within areas in which we have service agreements (e.g. Sky Ranch and the Lowry Range) as well as
in surrounding areas, including the Front Range and the I-70 corridor. We estimate that we have the ability to provide water
service to approximately 180,000 SFE’s using our combined Rangeview Water Supply and Arkansas River water assets
which have a carrying value of approximately $97.2 million as of August 31, 2010. Based on the carrying value of our water
rights, the long term and uncertain nature of any development plans, current tap fees of $22,500 and estimated gross margins,
we estimate that we would need to add approximately 8,000 new water connections (requiring approximately 4.8% of our
portfolio) to generate net revenues sufficient to recover the costs of our Rangeview Water Supply and Arkansas River water
assets. If tap fees increase 5%, we would need to add approximately 7,600 new water taps (requiring approximately 4.5% of
our portfolio) to recover the costs of our Rangeview Water Supply and Arkansas River water assets. If tap fees decrease 5%,
we would need to add approximately 8,400 new water taps (requiring approximately 5.0% of our portfolio) to recover the
costs of our Rangeview Water Supply and Arkansas River water assets.
Although changes in the housing market throughout the Front Range have delayed our estimated tap sale projections, these
changes do not alter our water ownership, nor our service obligations to existing properties or the number of SFE’s we can
service.
- 23 -
Our Paradise Water Rights
Every six years the Paradise Water Supply is subject to a finding of reasonable diligence review by the water court and the
State Engineer. For a favorable finding we must demonstrate that we are diligently pursuing the development of the water
rights. If we do not receive a favorable finding of reasonable diligence, our right to the Paradise Water Supply would be lost
and we would be required to impair the Paradise Water Supply asset. The most recent diligence review was started in our
fiscal 2005 and was completed in 2008, but not without objectors and not without us having to agree to certain stipulations to
remove the objections. In order to continue to maintain the Paradise water right, over the next six years we must (i) select an
alternative reservoir site; (ii) file an application in water court to change the place of storage; (iii) identify specific end users
and place(s) of use of the water; and (iv) identify specific source(s) of the water rights for use. We fully intend to meet the
stipulations by the date of the next diligence review.
For our Paradise Water Supply, we determined the undiscounted cash flows by estimating the proceeds we could derive from
the leasing of the water rights to commercial, industrial, and agricultural users along the western slope of Colorado, and
based on the impairment analysis we completed at August 31, 2010, we believe the Paradise Water Supply is not impaired
and the costs are deemed recoverable.
Tap Participation Fee
In 2006 we acquired approximately 17,500 acres of irrigated land together with approximately 60,000 acre-feet of Arkansas
River water rights from HP A&M. Along with common stock issued to HP A&M, we agreed to pay HP A&M 10% (this may
increase to 20% under circumstances described in Note 7 to the accompanying financial statements) of tap fees we receive
from the next 40,000 water taps we sell from and after the date of the Arkansas River Agreement, of which 38,937 water taps
remain to be paid as of August 31, 2010. The Tap Participation Fee is payable when we sell water taps and receive funds
from such water tap sales or other dispositions of property purchased in the HP A&M acquisition. The Tap Participation Fee
liability is valued by estimating new home development in our service area over an estimated development period. This was
done by utilizing third party historical and projected housing and population growth data for the Denver metropolitan area
applied to an estimated development pattern supported by historical development patterns of certain master planned
communities in the Denver metropolitan area. This development pattern was then applied to projected future water tap fees
determined by using historical water tap fee trends. Based on updated new home activity in the Denver metropolitan area, we
updated the estimated discounted cash flow analysis as of February 28, 2009. We completed an update to our analysis of the
fair value of the Tap Participation Fee as of August 31, 2010. We determined that changes in the projected estimated
discounted cash flows did not materially impact our February 28, 2009 fair value analysis. Actual new home development in
our service area and actual future tap fees inevitably will vary significantly from our estimates which could have a material
impact on our financial statements as well as our results of operations. An important component in our estimate of the value
of the Tap Participation Fee, which is based on historical trends, is that we reasonably expect water tap fees to continue to
increase in the coming years. Tap fees are a market based pricing metric which in part demonstrates the increasing costs to
acquire and develop new water supplies. It is thus a market metric which in part demonstrates the increasing value of our
water assets. We continue to assess the value of the Tap Participation Fee liability and update its valuation analysis whenever
events or circumstances indicate the assumptions used to estimate the value of the liability have changed materially. The
difference between the net present value and the estimated realizable value will be imputed as interest expense using the
effective interest method over the estimated development period utilized in the valuation of the Tap Participation Fee.
Obligations Payable by HP A&M
60 of the 80 properties we acquired pursuant to the Arkansas River Agreement are subject to outstanding promissory notes
with principal and accrued interest totaling approximately $11.0 million at August 31, 2010. These notes are secured by deeds
of trust on the properties. We did not assume any of these promissory notes and are not responsible for making any of the
required payments under these notes. This responsibility remains solely with HP A&M. However, in the event of default by
HP A&M, we may make payments on any or all of the notes and cure any or all defaults. If we do not cure the defaults, we
will lose the properties securing the defaulted notes and the water rights associated with said properties. If HP A&M defaults
on any of the promissory notes, we can foreclose on a defined amount of Pure Cycle stock issued to HP A&M being held in
escrow and reduce the Tap Participation Fee by two times the amount of notes defaulted on by HP A&M. Although the
likelihood of HP A&M defaulting on the notes is deemed remote, which is the primary reason these notes are not reflected on
our balance sheet, we continue to monitor the status of the notes for any indications of default. We are not aware of any
defaults by HP A&M as of August 31, 2010.
- 24 -
Share-based compensation
We estimate the fair value of share-based payment awards made to key employees and directors on the date of grant using the
Black-Scholes option-pricing model. We then expense the fair value over the vesting period of the grant using a straight-line
expense model. The fair value of share-based payments requires management to estimate/calculate various inputs such as the
volatility of the underlying stock, the expected dividend rate, the estimated forfeiture rate and an estimated life of each option.
These assumptions are based on historical trends and estimated future actions of option holders and may not be indicative of
actual events which may have a material impact on our financial statements. See Note 8 to the accompanying financial
statements for further details on share-based compensation expense.
Results of operations
Executive Summary
The results of our operations for the fiscal years ended August 31, 2010, 2009 and 2008 were as follows:
Table F - Summary Results of Operations
Millions of gallons of water delivered
Water revenues generated
Water delivery operating costs incurred
(excluding depreciation and depletion)
Water delivery gross margin %
Fiscal Years Ended August 31,
2009
2008
2010
2010-2009
$
33.1
140,700
$
33.9
137,400
$
42.8
159,600
$
(0.8)
3,300
$
Change
2009-2008
%
-2%
2%
$
(8.9)
(22,200)
$
%
-21%
-14%
$
52,400
63%
$
54,700
60%
$
58,600
63%
$
(2,300)
-4%
$
(3,900)
-7%
Wastewater treatment revenues
Wastewater treatment operating costs incurred
Wastewater treatment gross margin %
$
$
67,600
20,800
69%
$
$
67,000
20,200
70%
$
$
67,000
18,900
72%
$
$
600
600
1%
3%
$
-
$
1,300
0%
7%
General and administrative expenses
$
1,808,200
$
1,942,200
$
2,316,800
$
(134,000)
-7%
$
(374,600)
-16%
Net losses
$
5,391,300
$
5,728,100
$
6,926,700
$
(336,800)
-6%
$
(1,198,600)
-17%
Water and Wastewater Usage Revenues
Our water service charges are based on a tiered pricing structure that provides for higher prices as customers use greater
amounts of water. Our rates and charges are established based on the average of three surrounding water providers. Table B in
Item 1 – Business, outlines our tiered pricing structure and changes during the fiscal years ended August 31, 2010, 2009 and
2008, respectively.
Our wastewater customers are charged flat monthly fees based on their number of tap connections.
Fiscal 2010 compared to fiscal 2009
Water deliveries dropped approximately 2% in fiscal 2010 because our largest customer closed certain student housing
facilities which in turn reduced its water usage. Despite the drop in water usage, water revenues increased 2% during fiscal
2010 primarily as a result of increased usage fees. Water delivery gross margin increased 3% in fiscal 2010. This was due to
our efforts to manage costs. In addition, due to reductions in water usage, we were able to positively manage the energy usage
at our facilities. Finally, we increased water usage fees effective July, 2010.
Wastewater fees increased approximately 1% in fiscal 2010, which is a result of increased monthly fees effectively July 1,
2010. Wastewater gross margin decreased approximately 1% in fiscal 2010, which is not a material change.
- 25 -
Fiscal 2009 compared to fiscal 2008
Water deliveries dropped approximately 21% in fiscal 2009 due mainly to higher precipitation in fiscal 2009, particularly in
the late spring and early summer months, the main irrigation months. Water usage fees decreased approximately 14% in fiscal
2009 mainly as a result of the decreased water usage, partially offset by increased water usage fees. Gross margins for water
services decreased approximately 3% in fiscal 2009 due to the decreased water usage as noted above. The decrease in the
gross margin percentage was not as large as the decrease in water usage due to our efforts to manage costs and increasing
water usage rates.
Wastewater usage fees did not change during 2009. Gross margins for wastewater services decreased 2% in fiscal 2009 due to
timing of various required wastewater quality testing procedures.
General and Administrative and Other Expenses
General and administrative (“G&A”) expenses for the fiscal years ended August 31, 2010, 2009 and 2008 were impacted by
the share-based compensation expenses as follows (amounts are approximate):
Table G - G&A Expenses
Change
G&A expenses as reported
Share-based compensation expenses
G&A expenses less share-based
compensation expenses
Fiscal Years Ended August 31,
2009
1,942,200
(325,500)
2010
1,808,200
(87,600)
$
$
2008
2,316,300
(351,500)
$
2010-2009
$
$
(134,000)
237,900
%
-7%
-73%
2009-2008
$
$
(374,100)
26,000
%
-16%
-7%
$
1,720,600
$
1,616,700
$
1,964,800
$
103,900
6%
$
(348,100)
-18%
The changes in G&A expenses, with and without share-based compensation expenses, are mainly attributable to the following:
Fiscal 2010 G&A expenses, including share-based compensation expenses, decreased approximately 7%, while fiscal 2009
G&A expenses decreased approximately 16%. These decreases are mainly a result of management’s continued cost cutting
efforts in light of the economy and lack of new home development in our targeted service areas. The significant approximate
amounts included in G&A for the years ended August 31, 2010, 2009 and 2008, respectively were:
Table H - Signficant Balances in G&A
Fiscal Years Ended August 31,
2010
2008
2009
2010-2009
$
%
2009-2008
$
%
Change
Salary and salary related expenses:
Including share-based compensation
Excluding share-based compensation
FLCC water assessment fees
Professional fees
Public entity related expenses
Consulting fees
$
$
$
$
$
$
606,600
518,900
362,800
244,500
74,300
55,700
$
$
$
$
$
$
814,800
489,300
339,300
292,100
61,100
83,700
$
$
$
$
$
$
791,300
465,800
330,500
386,000
66,700
227,600
$
$
$
$
$
$
(208,200)
29,600
23,500
(47,600)
13,200
(28,000)
$
23,500
-26%
$
23,500
6%
$
8,800
7%
$
(93,900)
-16%
$
22%
(5,600)
$
-33% (143,900)
3%
5%
3%
-24%
-8%
-63%
Salary and salary related expenses including share-based expenses decreased 26% from 2009 to 2010 as a result of the vesting
of options prior to 2010 and decreases in our stock price. The decreases in the stock price resulted in a lower fair value of
options which in turn resulted in a lower share-based expense. Salary and salary related expenses including share-based
expenses increased 3% from 2008 to 2009 as a result of the granting of options in fiscal 2009 which vested 20% at the grant
date which resulted in additional share-based compensation expenses.
- 26 -
Salary and salary related expenses excluding share-based compensation increased 6% in 2010 due to the addition of a farm
manager on January 1, 2010. Salary and salary related expenses excluding share-based compensation increased 5% from
2008-2009 due to pay increases.
FLCC water assessment fees are the fees we pay for our share of the maintenance of the Fort Lyon Canal in the Arkansas
River Valley. The fees are approved by the shareholders of the FLCC and changes during the years presented are a result of
approved fee changes by the FLCC shareholders. As of August 31, 2010, we hold approximately 26% of the voting shares of
the FLCC.
Professional fees (legal and accounting) decreased each of the years as a result of our reduced use of legal counsel as a result
of the withdrawal of the developer from the Lowry Range development project and less activity in water court.
Costs associated with being a corporation and costs associated with being a publicly traded entity decreased from 2008 – 2009
primarily due to the elimination of franchise fees paid to the State of Delaware due to our reincorporation into Colorado.
These expenses increased in fiscal 2010 as a result of our complying with the electronic proxy rules for our 2010 annual
meeting of shareholders.
Consulting fees decreased entirely due to the decrease in use of consultants as a result of the withdrawal of the developer from
the Lowry Range development project.
Other income and Expense Items
Other expense items:
Depreciation and depletion expense
Imputed interest expense
Other income items:
Interest income
Table I - Other Items
For the Fiscal Years Ended August 31,
2010
2009
2008
2010-2009
$
%
2009-2008
$
%
Change
$
$
255,100
3,620,000
$
$
381,700
3,700,000
$
$
381,300
4,400,000
$
$
(126,600)
(80,000)
-33%
-2%
$
$
400
(700,000)
0%
-16%
$
67,400
$
84,600
$
283,600
$
(17,200)
-20%
$
(199,000)
-70%
Depreciation and depletion decreased in fiscal 2010 due entirely to the Arkansas River water acquisition costs being fully
depreciated as of August 31, 2009.
Imputed interest expense represents the expensed portion of the difference between the relative fair value of the Tap
Participation Fee liability payable to HP A&M and the net present value of the liability recognized under the effective interest
method. The decreases in the imputed interest expense from fiscal 2008 through fiscal 2010 are a result of the updated
valuations performed in the first quarter of fiscal 2008 and the second quarter of fiscal 2009, which are explained in greater
detail in Note 7 to the accompanying financial statements.
Interest income represents interest earned on the temporary investment of capital in cash equivalents or available-for-sale
securities, interest accrued on the note payable by the District and interest accrued on the Special Facilities construction
proceeds receivable from the County. The decrease from fiscal 2008 to fiscal 2010 is due to a significant decline in interest
rates due to the recessionary economy and decreasing levels of cash investments.
Liquidity, capital resources and financial position
At August 31, 2010, our working capital, defined as current assets less current liabilities, was approximately $1.6 million, of
which approximately $1.4 million was cash and cash equivalents and marketable securities. Subsequent to our fiscal year end,
we completed the sale of approximately $5.5 million of common stock and we issued the Convertible Note in the principal
amount of $5.2 million, raising a combined total of approximately $10.7 million. Of this, we utilized $6.3 million to complete
the acquisition of the loan instruments from BofA on the Sky Ranch property. The remaining $4.4 million (along with our
$1.4 million of cash and marketable securities we had at August 31, 2010) will be utilized for working capital and other
general corporate purposes. As of the date of the filing of this annual report on Form 10-K, we have an effective shelf
registration statement pursuant to which we may elect to sell up to another $4.45 million of stock at any time and from time to
- 27 -
time. We believe that as of the date of the filing of this annual report on Form 10-K and as of August 31, 2010, we have
sufficient working capital to fund our operations for the next fiscal year. See, however, the risk factors in Item 1A above.
Pursuant to the Arkansas River Agreement, we agreed to pay HP A&M 10% of the tap fees we receive from the next 40,000
water taps we sell from and after the date of the Arkansas River Agreement. As of August 31, 2010, we have estimated the
value of the Tap Participation Fee at approximately $61.1 million based on a discounted cash flow valuation analysis, which
was originally prepared at August 31, 2006, and was updated as of November 30, 2007 and February 28, 2009. See Note 7 in
the accompanying financial statements for the impact of the revaluation. The actual amount to be paid will inevitably differ
from our estimates. Tap participation payments are not payable to HP A&M until we receive water tap fee payments. We did
not sell any taps during the fiscal year ended August 31, 2010. As of August 31, 2010, there are 38,937 taps that remain
subject to the Tap Participation Fee.
We are obligated to pay the FLCC annual water assessment charges. These are the charges assessed to the FLCC shareholders
for the upkeep and maintenance of the Fort Lyon Canal. The payments are payable to the FLCC each calendar year. In
December 2009, the board and shareholders of the FLCC approved an increase in the calendar 2010 assessments from $14.40
per share to $15.00 per share, resulting in an increase in our water assessments from approximately $315,000 per year to
approximately $335,000 per year. Additionally, during the twelve months ended August 31, 2010, the FLCC shareholders
approved a water purchase, and our share of the purchase price was approximately $7,000.
Pursuant to agreements we entered into with HP A&M, described in greater detail in Note 7 to the accompanying financial
statements, the management of our farm leases is being performed by HP A&M through August 31, 2011. After that date,
depending on certain factors described in the accompanying financial statements, HP A&M may extend the management
services agreement, or we may assume management of the farms. Pursuant to the management services agreement, while HP
A&M is managing the farm leases, HP A&M is responsible for all expenses associated with maintaining the leases with the
exception of the water assessment fees paid to the FLCC, which fees are borne by us. As compensation for their management
responsibilities, HP A&M retains all lease and certain other non-crop income associated with the farms and the water used
thereon.
Upon completion of construction of the Fairgrounds facilities and the initiation of water service to the Fairgrounds in July
2006, we began ratably recognizing deferred tap fee revenues from our County Agreement as income. The tap fees received
from the County are being recognized in income over the estimated useful life of the constructed assets, or 30 years. In
addition, we started recognizing deferred Special Facilities funding as revenues in fiscal 2006, which will also be recognized
over the useful life of the constructed assets. See also Note 4 to the accompanying financial statements for information
regarding the amendment to the County Agreement in regards to the Special Facilities funding and the receipt of water rights
in August 2008.
Summary Cash Flows Table
Table J - Summary Cash Flows Table
Change
Year Ended August 31,
2009
2008
2010
2010-2009
$
%
2009-2008
$
%
Cash (used) provded by:
Operating acitivites
Investing activities
Financing activities
$
$
$
(1,584,600)
806,900
84,600
$
$
$
(1,482,500)
(3,070,900)
19,500
$
$
$
(1,443,200)
466,100
121,000
$
$
$
(102,100)
3,877,800
65,100
7%
-126%
334%
$
$
$
(39,300)
(3,537,000)
(101,500)
3%
-759%
-84%
Changes in Operating Activities
Operating activities include revenues we receive from the sale of water and wastewater services to our customers, costs
incurred in the delivery of those services, G&A expenses, and depletion/depreciation expenses.
Changes in the cash used by operations of approximately 7% in fiscal 2010 and approximately 3% in 2009 are due mainly to
timing of cash receipts and payments (i.e. receipt of cash against trade receivables and payment of trade payables) and
decreased interest income.
- 28 -
We will continue to provide domestic water and wastewater service to customers in our service area and we will continue to
operate and maintain our water and wastewater systems with our own employees.
Changes in Investing Activities
We continue to incur legal and engineering fees associated with our water rights, and we continue to invest in the right-of-way
permit fees to the Department of Interior Bureau of Land Management and legal and engineering costs for our Paradise Water
Supply.
Investing activities in fiscal 2010 consisted primarily of approximately $1.5 million of marketable securities maturing offset
by the $735,000 escrow payment and expenses related to the Sky Ranch acquisition which is described in greater detail in
Note 14 in the accompanying financial statements. Investing activities in fiscal 2009 consisted mainly of the purchase of
marketable securities of approximately $3.0 million and the capitalization of approximately $110,400 related to investments in
water systems. Investing activities in 2008 consisted mainly of $790,600 received from the maturity of available-for-sale
securities, offset by $271,000 of investments in water rights.
Changes in Financing Activities
Financing activities in fiscal 2010 consisted mainly of approximately $89,000 of payments received from the County on the
construction note described in Note 4 to the accompanying financial statements. Financing activities in fiscal 2009 consisted
mainly of approximately $82,200 of payments received from the County on the construction note, offset by approximately
$59,700 of Tap Participation Fee payments made to HP A&M related to the sale of non-irrigated land. Financing activities in
fiscal 2008 consisted mainly of $150,500 of payments received from the County on the construction note offset by
approximately $26,500 of debt payments to a related party.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA, which is more fully described in
Note 5 to the accompanying financial statements.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 to the accompanying financial statements for a discussion of recently adopted and issued accounting
pronouncements.
Total Contractual Cash Obligations
Table K - Contractual Cash Obligations
Payments due by period
Total
Less than 1
year
1-3 years
3-5
years
More than 5
years
Contractual obligations
Operating lease obligations
Participating Interests in Export Water
Tap Participation Fee payable to HP A&M
Total (d)
$
33,500
1,214,800
113,126,200
114,374,500
$
$
$
16,800
(b)
(c)
16,800
16,800
(b)
(c)
16,800
(a)
(b)
(c)
$ -
(a)
(b)
(c)
$ -
$
$
(a) Our only operating lease is related to our office space. We signed this lease on August 27, 2009. It is a three year lease
with monthly lease payments of approximately $1,400 per month.
(b) The participating interests liability is payable to the CAA holders upon the sale of Export Water, and therefore, the timing
of the payments is uncertain and not reflected in the above table by period.
(c) The Tap Participation Fee payable to HP A&M is payable upon the sale of water taps. Because the timing of these water
tap sales is not fixed and determinable, the estimated payments are not reflected in the above table by period. The amount
listed above includes an unamortized discount of approximately $52.0 million. The valuation of the Tap Participation Fee
- 29 -
payable to HP A&M is a significant estimate based on available historic market information and estimated future market
information. Many factors are necessary to estimate future market conditions, including but not limited to, supply and
demand for new homes, population growth along the Front Range, cash flows, tap fee increases at our rate-base districts,
and other market forces beyond our control. Because the estimates and assumptions used to value the Tap Participation
Fees payable to HP A&M are subjective, actual results could vary materially from the estimates.
(d) This table does not include the Convertible Note which was issued on September 28, 2010. As further described in Notes
7 and 14 to the accompanying financial statements, if approval to convert the Convertible Note to common stock is not
obtained from our shareholders at our 2011 annual meeting, the Convertible Note requires interest only payments totaling
$487,800 in the next twelve months and interest and principal payments totaling approximately $5.4 million becoming
due on January 15, 2012, which would be in the 1-3 year period in the table above.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
General
Pure Cycle has limited exposure to market risks from instruments that may impact our balance sheets, statements of
operations, and statements of cash flows. Such exposure is due primarily to changing interest rates.
Interest Rates
The primary objective for our investment activities is to preserve principal while maximizing yields without significantly
increasing risk. This is accomplished by investing in diversified short-term interest bearing investments. As of August 31,
2010, the majority of our capital is invested in certificates of deposit with stated maturities and locked interest rates and
therefore not subject to interest rate fluctuations. We have no investments denominated in foreign country currencies and
therefore our investments are not subject to foreign currency exchange risk.
- 30 -
Item 8 - Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Supplemental Data: Selected Quarterly Financial Information
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-28
- 31 -
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Pure Cycle Corporation
We have audited the accompanying balance sheets of Pure Cycle Corporation as of August 31, 2010 and 2009, and the related
statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended August 31,
2010. We also have audited Pure Cycle Corporation’s internal control over financial reporting as of August 31, 2010, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Pure Cycle Corporation's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pure
Cycle Corporation as of August 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in
the three-year period then ended in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, Pure Cycle Corporation maintained, in all material respects, effective internal control over financial
reporting as of August 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ GHP HORWATH, P.C.
Denver, Colorado
November 12, 2010
F-1
PURE CYCLE CORPORATION
BALANCE SHEETS
ASSETS:
Current assets:
Cash and cash equivalents
Marketable securities
Trade accounts receivable
Prepaid expenses
Current portion of construction proceeds receivable
Total current assets
August 31,
2010
2009
$
12,017
1,435,054
71,155
236,627
64,783
1,819,636
$
705,083
3,002,208
63,394
154,928
64,783
3,990,396
Investments in water and water systems, net
102,931,347
103,159,632
Construction proceeds receivable, less current portion
Note receviable - related party, Rangeview Metropolitan District, including
accrued interest
Escrow and other items related to the Sky Ranch acquisition
Property and equipment, net
Other assets
Total assets
351,791
414,494
519,834
735,000
8,854
11,292
106,377,754
$
507,795
–
16,593
2,171
108,091,081
$
LIABILITIES:
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenues
Total current liabilities
Deferred revenues, less current portion
Participating Interests in Export Water Supply
Tap Participation Fee payable to HP A&M,
net of $52.0 million and $55.6 million discount
Total liabilities
Commitments and Contingencies
SHAREHOLDERS’ EQUITY:
Preferred stock:
Series B - par value $.001 per share, 25 million shares authorized;
432,513 shares issued and outstanding
(liquidation preference of $432,513)
Common stock:
Par value 1/3 of $.01 per share, 40 million shares authorized;
20,206,566 shares outstanding
Additional paid-in capital
Accumulated comprehensive income (loss)
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders’ equity
See accompanying Notes to Financial Statements
F-2
$
44,818
70,704
55,800
171,322
$
22,216
60,080
55,800
138,096
1,390,305
1,214,799
61,141,329
63,917,755
1,446,108
1,216,360
57,521,329
60,321,893
433
433
67,360
92,341,555
(1,580)
(49,947,769)
42,459,999
106,377,754
67,360
92,253,916
3,986
(44,556,507)
47,769,188
108,091,081
$
$
Revenues:
Metered water usage
Wastewater treatment fees
Special facility funding recognized
Water tap fees recognized
Total revenues
Expenses:
Water service operations
Wastewater service operations
Depletion and depreciation
Total cost of revenues
Gross margin
General and administrative expenses
Depreciation
Operating loss
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
For the Fiscal Years Ended August 31,
2010
2008
2009
$ 140,677
67,626
41,508
14,296
264,107
$ 137,431
66,976
41,508
14,296
260,211
$ 159,649
66,976
41,508
14,296
282,429
(52,439) (54,668)
(20,805) (20,162)
(88,564) (88,576)
(161,808) (163,406)
96,805
102,299
(58,576)
(18,925)
(88,511)
(166,012)
116,417
(1,808,167) (1,942,225)
(166,513) (293,113)
(1,872,381) (2,138,533)
(2,316,291)
(292,778)
(2,492,652)
Other income (expense):
Interest income
Other
Gain (loss) on sale of assets
Loss on extinguishment of contingent obligations and debt
Loss on sales of marketable securities
Interest imputed on the Tap Participation Fees payable to HP A&M
Net loss
Net loss per common share – basic and diluted
67,432
84,636
24,283 (844)
59,671
9,404
–
–
(3,620,000) (3,733,000)
$ (5,391,262) $ (5,728,070)
$ (0.27) $ (0.28)
–
–
283,590
(48,672)
(270)
(273,723)
(1,973)
(4,393,000)
$ (6,926,700)
$ (0.34)
Weighted average common shares outstanding – basic and diluted
20,206,566
20,206,566
20,188,675
See accompanying Notes to Financial Statements
F-3
PURE CYCLE CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
$
Preferred Stock
Shares Amount
433
432,513
–
–
–
–
–
–
–
–
–
–
Common Stock
Treasury Stock
Shares
20,252,138
211,228
(256,800)
–
–
–
Amount
67,512
$
704
(856)
–
–
–
Shares
(256,800)
–
256,800
–
–
–
Amount
(1,979,447)
$
–
1,979,447
–
–
–
$
Additional
Paid-in
Capital
91,650,897
1,904,573
(1,978,591)
351,519
–
–
Accumulated
Comprehensive
Income (loss)
7,168
$
–
–
–
(7,168)
–
$
Accumulated
Deficit
(31,901,737)
–
–
–
–
(6,926,700)
432,513
–
–
–
432,513
–
–
–
433
–
–
–
433
–
–
–
20,206,566
–
–
–
20,206,566
–
–
–
67,360
–
–
–
67,360
–
–
–
432,513
$
433
20,206,566
$
67,360
–
–
–
–
–
– –
–
–
–
–
–
–
91,928,398
325,518
–
–
–
–
3,986
–
–
–
–
–
92,253,916
87,639
–
–
3,986
–
(5,566)
–
(38,828,437)
–
–
(5,728,070)
(44,556,507)
–
–
(5,391,262)
$ –
$
92,341,555
$
(1,580)
$
(49,947,769)
$
$
Total
57,844,826
1,905,277
–
351,519
(7,168)
(6,926,700)
(6,933,868)
53,167,754
325,518
3,986
(5,728,070)
(5,724,084)
47,769,188
87,639
(5,566)
(5,391,262)
(5,396,828)
42,459,999
August 31, 2007 balance:
CAA acquisition
Retirement of treasury stock
Share-based compensation
Unrealized loss on investments
Net loss
Comprehensive loss
August 31, 2008 balance:
Share-based compensation
Unrealized gain on investments
Net loss
Comprehensive loss
August 31, 2009 balance:
Share-based compensation
Unrealized loss on investments
Net loss
Comprehensive loss
August 31, 2010 balance:
See accompanying Notes to Financial Statements
F-4
PURE CYCLE CORPORATION
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash
used for operating activities:
Imputed interest on Tap Participation Fees payable to HP A&M
Depreciation, depletion and other non-cash items
Share-based compensation expense included with
general and administrative expenses
Loss on extinguishment of contingent obligations and debt
Loss on sales of marketable securities
(Gain) loss on sale of fixed assets
Interest added to note receivable – related party
Rangeview Metropolitan District
Interest added to construction proceeds receivable
Changes in operating assets and liabilities:
Trade accounts receivable
Interest receivable and prepaid expenses
Accounts payable and accrued liabilities
Deferred revenues
Net cash used for operating activities
Cash flows from investing activities:
Sales and maturities of marketable securities
Sale of property and equipment
Other investing activities
Investments in water and water systems
Escrow payment for Sky Ranch acquisition
Purchase of property and equipment
Purchase of marketable securities
Investment in Well Enhancement and Recovery Systems LLC
Net cash provided (used) by investing activities
Cash flows from financing activities:
Arapahoe County construction proceeds
Payments to contingent liability holders
Tap Participation Fee payments to HP A&M
Payments on long-term debt – related parties
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
For the Fiscal Years Ended August 31,
2010
2008
2009
$
(5,391,262)
$
(5,728,070)
$
(6,926,700)
3,620,000
258,872
3,733,000
390,794
4,393,000
431,320
87,639
–
–
(9,404)
(12,039)
(26,343)
(7,761)
(81,699)
33,226
(55,803)
(1,584,574)
1,561,588
10,000
(10,000)
(19,649)
(735,000)
–
–
–
806,939
325,518
–
–
(59,671)
(12,996)
(29,588)
8,007
(27,910)
(25,767)
(55,802)
(1,482,485)
–
59,671
(7,000)
(110,354)
–
(14,992)
(2,998,222)
–
(3,070,897)
351,519
273,723
1,973
270
(19,065)
(30,906)
(1,184)
131,535
7,088
(55,801)
(1,443,228)
790,661
1,000
–
(270,998)
–
(7,547)
–
(47,000)
466,116
89,046
(4,477)
–
–
84,569
(693,066)
705,083
12,017
$
82,196
(3,033)
(59,671)
–
19,492
(4,533,890)
5,238,973
705,083
$
150,518
(2,966)
–
(26,542)
121,010
(856,102)
6,095,075
5,238,973
$
See accompanying Notes to Financial Statements
F-5
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE 1:
ORGANIZATION
Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976 and reincorporated in Colorado in
2008. The Company owns water assets in the Denver, Colorado metropolitan area, in the Arkansas River Valley in
southern Colorado, and on the western slope of Colorado. The Company is currently using its water assets located
in the Denver metropolitan area to provide water and wastewater services to customers located in the Denver
metropolitan area.
The Company provides a full line of water and wastewater services which includes designing and constructing
water and wastewater systems as well as operating and maintaining such systems. The Company’s business focus is
to provide water and wastewater service to customers throughout the Denver metropolitan area as well as along the
Colorado Front Range.
The Company believes it has sufficient working capital and financing sources to fund its operations for at least the
next fiscal year, which is based on the following:
• At August 31, 2010:
o The Company has approximately $1.4 million of cash, cash equivalents and marketable securities,
and
o The Company has approximately $1.6 million of working capital.
• Subsequent to August 31, 2010:
o The Company sold approximately $5.5 million of its common stock pursuant to an effective shelf
registration and issued a $5.2 million Convertible Negotiable Promissory Note Payable (the
“Convertible Note”), as described in detail in Note 14 below,
o Following this stock sale, the Company can sell up to approximately $4.5 million of additional
common stock pursuant to the shelf registration statement, and
o Following the acquisition of Sky Ranch as described in Note 14 below, the Company has
approximately $5.8 million in cash, cash equivalents and marketable securities.
The Company's ability to generate working capital from its water and wastewater projects is dependent on its ability
to successfully market its water, or in the event it is unsuccessful, to sell the underlying water assets. In the event
increased sales are not achieved or the Company is unable to sell its water assets at a sufficient level, the Company
may have to issue additional short or long-term debt or seek to sell additional shares of the Company’s common or
preferred stock to generate sufficient working capital. There can be no assurance that the Company will be
successful in marketing its water on terms that are acceptable to the Company.
NOTE 2:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company generates revenues mainly from (i) one time water and wastewater tap fees, (ii) construction fees, and
(iii) monthly water usage fees and wastewater service fees. Because these items are separately delivered, the
Company accounts for each of the items separately, as described below.
Tap and Construction Fees. Tap fees are system connection fees paid by the developer in advance of construction
activities and are non-refundable. Tap fees are typically used to fund construction of certain facilities and defray the
acquisition costs of obtaining water rights. Construction fees may be received from developers for the Company to
construct assets that are required to be constructed by the developer.
Proceeds from tap fees and construction fees are deferred upon receipt and recognized in income either upon
completion of construction of infrastructure or ratably over time, depending on whether the Company owns the
infrastructure constructed with the proceeds or the customer owns the infrastructure constructed with the proceeds.
F-6
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Tap and construction fees derived from agreements in which the Company will not own the assets constructed with
the fees (for example the assets constructed for use on the Lowry Range) are recognized as revenue using the
percentage-of-completion method. Costs of construction of the assets when the Company will not own the assets
are recorded as costs of revenue.
Tap and construction fees derived from agreements for which the Company will own the infrastructure (for example
the assets constructed for use at the Arapahoe County Fairgrounds (the “Fairgrounds”)) are recognized as revenues
ratably over the estimated accounting service life of the facilities constructed, starting at completion of construction,
which could be in excess of thirty years. Costs of construction of the assets when the Company will own the assets
are capitalized and depreciated over their estimated economic lives.
The Company recognized approximately $14,300 of water tap fee revenues in each of the three fiscal years ended
August 31, 2010, respectively. These tap fee revenues relate to the Water Service Agreement (the “County
Agreement”) with Arapahoe County (the “County”) entered into in August 2005. The Company began recognizing
the water tap fees as revenue ratably over the estimated service period upon completion of the Wholesale Facilities
in its fiscal 2006. The water tap fees being recognized over this period are net of the royalty payments (described
below) to the State of Colorado Board of Land Commissioners (the “Land Board”) and amounts paid to third parties
pursuant to the Comprehensive Amendment Agreement No. 1 (the “CAA”) as further described in Note 5 below.
The Company recognized approximately $41,500 of “Special Facilities” funding as revenue in each of the three
fiscal years ended August 31, 2010, respectively. These construction revenues also relate to the County Agreement
as more fully described in Note 4 below.
As of August 31, 2010, the Company has deferred recognition of approximately $1.4 million of tap and construction
fee revenue from the County, which will be recognized as revenue ratably through 2036.
Monthly Usage and Service Fees. Monthly water usage charges are assessed to customers based on actual metered
usage each month plus a base monthly service fee assessed per single family equivalent (“SFE”) unit served. One
SFE is a customer, whether residential, commercial or industrial, that imparts a demand on our water or wastewater
systems similar to the demand of a family of four persons living in a single family house on a standard sized lot.
One SFE is assumed to have a water demand of approximately 0.4 acre-feet per year and to contribute wastewater
flows of approximately 300 gallons per day. Water usage pricing uses a tiered pricing structure. The Company
recognizes water usage revenues upon delivering water to its customers. The water revenues recognized by the
Company are shown net of royalties to the Land Board and amounts retained by the Rangeview Metropolitan
District (the “District”).
The Company recognizes wastewater processing revenues monthly based on flat fees assessed per SFE. The
monthly wastewater service fees are shown net of amounts retained by the District.
The Company recognized approximately $140,700, $137,400 and $159,600 of water usage revenues during the
fiscal years ended August 31, 2010, 2009 and 2008, respectively. The Company recognized approximately
$67,600, $67,000 and $67,000 of wastewater revenues during the fiscal years ended August 31, 2010, 2009 and
2008, respectively.
Costs of delivering water and providing wastewater service to customers are recognized as incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (“GAAP”) 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.
F-7
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less.
The Company’s cash equivalents are comprised entirely of money market funds maintained at a high quality
financial institution.
Financial Instruments – Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash
equivalents and marketable securities. The Company places its cash equivalents and investments with a high quality
financial institution. At various times throughout fiscal 2010, cash deposits have exceeded federally insured limits.
The Company invests its excess cash primarily in certificates of deposit, money market instruments, commercial
paper obligations, corporate bonds and US government treasury obligations. To date, the Company has not
experienced significant losses on any of these investments.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments
for which it is practicable to estimate that value.
Current Assets and Liabilities
For those current assets and liabilities that are considered financial instruments (cash and cash equivalents, accounts
receivable/payable, accrued liabilities), the carrying amounts approximate fair value because of the short maturity of
those instruments.
The fair value of the marketable securities are based on the values reported by the financial institution where the
funds are held and are shown in the table below. These securities include only federally insured certificates of
deposit.
Carrying Amount
Estimated Fair Value
Unrealized (loss) gain
August 31, 2010 August 31, 2009
3,002,200
$
3,006,200
4,000
1,435,100
1,433,500
(1,600)
$
$
$
Notes Receivable and Construction Proceeds Receivable
The carrying amounts of the Company’s notes receivable and construction proceeds receivable approximate fair
value as they bear interest at rates which are comparable to current market rates.
Long-term Financial Liabilities
As described in Note 5 below, the CAA is comprised of a recorded balance and an off-balance sheet or “contingent”
obligation. The amount payable is a fixed amount but is repayable only upon the sale of Export Water (as defined
in Note 4 below). Because of the uncertainty of the sale of Export Water, the Company has determined that the
contingent portion of the CAA does not have a determinable fair value.
The fair value of the “Tap Participation Fee” (as defined in Note 7 below) is determined by projecting new home
development in the Company’s targeted service area over an estimated development period, as summarized below:
Carrying Amount
Estimated Fair Value
Unrealized gain or loss
August 31, 2010 August 31, 2009
57,521,300
$
57,521,300
61,141,300
61,141,300
$
$
-
$
-
F-8
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Cash Flows
The Company did not pay any interest or income taxes during the three fiscal years ended August 31, 2010.
Marketable Securities
At August 31, 2010, the Company’s marketable securities are comprised entirely of certificates of deposit
maintained at various financial institutions, each of which have invested balances below federally insured limits and
pay interest at stated rates through maturity. One certificate of deposit has an unrealized loss of approximately
$1,600 as of August 31, 2010. The certificates mature at various dates through June 2011; however, these securities
represent temporary investments and it is management’s intent to hold these securities available for current
operations and not hold them until maturity, therefore they are classified as available-for-sale securities and are
recorded at fair value. The Company has no investments in equity instruments.
The Company’s marketable securities are recorded as available-for-sale and therefore any unrecognized changes in
the fair value of these marketable securities is included as a component of accumulated comprehensive income
(loss).
For the fiscal years ended August 31, 2010, 2009 and 2008, gross realized gains totaled approximately $0, $0, and
$2,000, respectively.
Accounts receivable
The Company records accounts receivable net of allowances for uncollectible accounts. There were no allowances
for uncollectible accounts as of August 31, 2010 or 2009. Any allowance for uncollectible accounts would be
determined based on specific review of past due accounts.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the eventual use of the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The
Company believes there are no impairments in the carrying amounts of its long-lived assets at August 31, 2010.
Water and Wastewater Systems
If costs meet the Company’s capitalization criteria, costs to construct water and wastewater systems are capitalized
as incurred, including interest, and depreciated over their estimated useful lives. The Company capitalizes design
and construction costs related to construction activities and it capitalizes certain legal, engineering and permitting
costs relating to the adjudication and improvement of its water assets.
Depletion and Depreciation of Water Assets
The Company depletes its water assets that are being utilized on the basis of units produced divided by the total
volume of water adjudicated in the water decrees. Water systems are depreciated on a straight line basis over their
estimated useful lives of up to thirty years.
F-9
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Share-based Compensation
The Company maintains a stock option plan for the benefit of its employees and directors. The Company records
share-based compensation costs which are measured at the grant date based on the fair value of the award and are
recognized as expense over the applicable vesting period of the stock award using the straight-line method. The
Company has adopted the alternative transition method for calculating the tax effects of share-based compensation
which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because
the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options
during the fiscal years ended August 31, 2010 and 2009 had no impact on the income tax provisions.
The Company recognized approximately $87,600, $325,500 and $351,500 of share-based compensation expenses
during the fiscal years ended August 31, 2010, 2009 and 2008, respectively.
Income Taxes
The Company uses a "more-likely-than-not" threshold for the recognition and de-recognition of tax positions,
including any potential interest and penalties relating to tax positions taken by the Company. The Company does
not have any significant unrecognized tax benefits as of August 31, 2010.
The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years
that remain subject to examination are fiscal 2007 through fiscal 2010. The Company does not believe there will be
any material changes in its unrecognized tax positions over the next twelve months.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. At August 31, 2010, the Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any interest expense recognized during the fiscal years
ended August 31, 2010, 2009 or 2008.
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. Common stock options and warrants aggregating approximately 202,100, 250,100 and 155,100,
common share equivalents as of August 31, 2010, 2009 and 2008, respectively, have been excluded from the
calculation of loss per common share as their effect is anti-dilutive.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability to the
Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting,
the Company undertakes a study to determine the consequence of the change to its financial statements and assures
that there are proper controls in place to ascertain that the Company’s financials properly reflect the change. New
pronouncements assessed by the Company recently are discussed below:
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-06). This update requires
additional disclosure within the roll forward of activity for assets and liabilities measured at fair value on a recurring
basis, including transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and the
separate presentation of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair
value hierarchy. In addition, the update requires enhanced disclosures of the valuation techniques and inputs used in
the fair value measurements within Levels 2 and 3. The new disclosure requirements are effective for interim and
annual periods beginning after December 15, 2009, except for the disclosure of purchases, sales, issuances and
settlements of Level 3 measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010 (September 1, 2011 for the Company). As ASU 2010-06 only requires enhanced disclosures, the Company
does not expect that the adoption of this update will have a material effect on its financial statements.
F-10
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
In October 2009, the FASB issued ASU No. 2009-13 "Multiple-Deliverable Revenue Arrangements-a Consensus of
the FASB Emerging Issues Task Force” (“ASU 2009-13”) which updates ASC Topic 605, “Revenue Recognition. "
ASU 2009-13 provides another alternative for determining the selling price of deliverables and will allow
companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better
reflects the transaction's economics and could result in earlier revenue recognition. ASU 2009-13 is effective for
the Company prospectively for revenue arrangements entered into or materially modified on or after October 1,
2010; however, early adoption is permitted. The Company is currently evaluating the impact of adopting ASU
2009-13 on its financial statements.
In August 2009, the FASB issued authoritative guidance clarifying the measurement of the fair value of liabilities.
The amendments reduce potential ambiguity in financial reporting when measuring the fair value of liabilities and
help to improve consistency in the application of authoritative guidance. This update is effective for the first
reporting period, including interim periods, beginning after issuance, which for the Company was September 1,
2009. The adoption of this guidance did not have an impact on the Company’s results of operations, financial
position or cash flows.
In June 2009, the FASB issued ASU 2009-17, “Consolidations: Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities.” ASU 2009-17, which amends ASC 810-10, “Consolidation”,
prescribes a qualitative model for identifying whether a company has a controlling financial interest in a variable
interest entity (“VIE”) and eliminates the quantitative model. The new model identifies two primary characteristics
of a controlling financial interest: (1) provides a company with the power to direct significant activities of the VIE,
and (2) obligates a company to absorb losses of and/or provides rights to receive benefits from the VIE. ASU 2009-
17 requires a company to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE. A
company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is
required to consolidate the VIE. ASU 2009-17 is effective as of the beginning of each reporting entity's first annual
reporting period that begins after November 15, 2009 (September 1, 2010 for the Company). The Company is
currently evaluating the effect the adoption of ASU 2009-17 will have on its financial statements.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year
presentation.
NOTE 3:
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date in the principal or most advantageous market. The
Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of
the lowest possible level of input to determine fair value.
Level 1 — Valuations for assets and liabilities traded in active exchange markets. The Company had none of these
instruments at August 31, 2010.
Level 2 — Valuations are obtained from readily available pricing sources via independent providers for market
transactions involving similar assets or liabilities. At August 31, 2010, the Company had one Level 2 asset, namely
its marketable securities. The Company’s principal market for these securities is the secondary institutional markets
and valuations are based on observable market data in those markets.
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including
discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value
assigned to such assets or liabilities. The Company had one Level 3 liability at August 31, 2010, the Tap
Participation Fee liability.
F-11
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Company maintains policies and procedures to value instruments using the best and most relevant data
available.
The following table presents information about the Company’s assets and liabilities that are measured at fair value
on a recurring and non-recurring basis as of August 31, 2010, and indicates the fair value hierarchy of the valuation
techniques we utilized to determine such fair value.
Assets and liabilities
Measured on a recurring basis:
Marketable securities
Measured on a non-recurring basis:
Tap Participation Fee liability
Estimated Fair
Value
Level 1
Level 2
Level 3
Unrealized
Gains and
(Losses)
$
1,435,000
-$
$
1,435,000
$
-
$
(1,600)
$
61,141,329
-$
$
-
$
61,141,329
$
-
Although not required, the Company deems the following table, which presents the changes in the Tap Participation
Fee for the fiscal year ended August 31, 2010, to be helpful to the users of its financial statements.
Balance at August 31, 2009
Total gains and losses (realized and unrealized):
Imputed interest recorded as "Other Expense"
Increase in estimated value (to be realized in future periods)
Purchases, sales, issuances, payments, and settlements
Transfers in and/or out of Level 3
Balance at August 31, 2010
Fair Value Measurement at August 31 using Significant
Unobservable Inputs (Level 3)
Gross Estimated
Tap Participation
Fee Liability
$
113,147,688
Tap Participation
Fee Reported
Liability
57,521,329
$
imputed as
interest expense
in future
periods
55,626,359
$
-
-
-
-
3,620,000
(3,620,000)
-
-
-
-
-
-
$
113,147,688
$
61,141,329
$
52,006,359
F-12
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE 4:
WATER ASSETS
The Company’s water and water systems consist of the following approximate costs and accumulated depreciation
and depletion as of August 31:
August 31, 2010
August 31, 2009
Accumulated
Depreciation
and Depletion
$ (972,400)
(6,000)
(57,200)
(358,400)
(8,900)
(1,402,900)
Costs
$ 81,318,700
14,285,700
167,700
5,536,500
2,899,900
100,000
25,700
104,334,200
$ 102,931,300
Accumulated
Depreciation
and Depletion
$ (823,700)
(5,500)
(52,000)
(270,300)
(4,000)
(1,155,500)
Costs
$ 81,319,300
14,271,800
167,700
5,532,600
2,899,900
100,000
23,800
104,315,100
$ 103,159,600
Arkansas River Valley assets
Rangeview water supply
Rangeview water system
Paradise water supply
Fairgrounds water and water system
Sky Ranch water supply
Water supply – other
Totals
Net investments in water and water systems
Depletion and Depreciation
The Company recorded approximately $500, $500 and $600 of depletion charges during the fiscal years ended
August 31, 2010, 2009 and 2008, respectively. This related entirely to the Rangeview Water Supply (as defined
below). No depletion is taken against the Arkansas River water, Paradise Water Supply or Sky Ranch Water Supply
(all of which are defined below) because these assets have not been placed into service as of August 31, 2010.
The Company recorded approximately $254,600, $381,200 and $380,700 of depreciation expense in fiscal 2010,
2009 and 2008, respectively.
Arkansas River Valley Assets
Arkansas River Water. The Company acquired its Arkansas River water rights to increase its rights to senior
surface water and to increase its inventory of water and capacity to serve additional customers. The Company
owns approximately 60,000 acre-feet of senior water rights in the Arkansas River and its tributaries. The
Company anticipates that of this, approximately 40,000 acre-feet will be available for non-agricultural uses along
the front range of Colorado sometime in the future. The Company acquired its Arkansas River Valley assets from
High Plains A&M LLC (“HP A&M”) pursuant to an Asset Purchase Agreement (the “Arkansas River
Agreement”) entered into on May 10, 2006.
In order to utilize the Arkansas River water in the Company’s service areas, the Company will be required to
convert this water to municipal and industrial uses. Change of water use must be done through the Colorado water
court and several conditions must be present prior to the water court granting an application for transfer of a water
right. A transfer case would be expected to include the following provisions: (i) a provision of anti-speculation in
which the applicant must have contractual obligations to provide water service to customers prior to the water court
ruling on the transfer of a water right, (ii) the applicant can only transfer the “consumptive use” portion of its water
rights (the Company expects to face opposition to any consumptive use calculation of the historic agricultural uses
of its water), (iii) applicants likely would be required to mitigate the loss of tax base in the basin of origin, (iv)
applicants would likely have re-vegetation requirements to restore irrigated soils to non-irrigated, and (v) applicants
would be required to meet water quality measures which would be included in the cost of transferring the water
rights.
The value of the assets was recorded based on the deemed fair value of the consideration paid at the acquisition
date, because the value of the consideration was deemed more reliable than the value of the acquired assets. The
consideration paid is comprised of equity (3.0 million shares of the Company’s common stock) and the Tap
F-13
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Participation Fee. Because the estimated value of the consideration paid was less than the total estimated fair value
of the assets acquired by the Company, the relative values assigned to the assets were ratably reduced.
Land. Currently the approximately 17,500 acres (comprised of 80 separate properties) owned by the Company is
being used for agricultural purposes. Approximately 60 of the properties are subject to promissory notes maintained
by the seller as further described in Note 7. The land is located in the counties of Bent, Otero and Prowers in
Southern Colorado. Each of the properties is subject to operating leases (which expire at various dates through
2011) which the Company assumed effective as of the closing. Pursuant to a property management agreement
(described below) between HP A&M and the Company, HP A&M will manage the leases for a period of five years
(through August 31, 2011) and will receive all lease payments from the lessees as a management fee. Because the
Company does not have the risk of loss associated with the leases (HP A&M’s management fee is equal to the lease
income for the next five years, and contractually HP A&M has the risk of loss on the leases), the lease income and
management fees are reflected on a net revenue basis throughout the term of the management agreement. The
Company also owns certain contract rights, tangible personal property, mineral rights, and other water interests
related to the Arkansas River water and land.
The Company and HP A&M entered into a five year property management agreement, pursuant to which, HP A&M
holds the right to pursue leasing of the land and Arkansas River water to interested parties. All lease income
associated with leasing the land and Arkansas River water, together with all costs associated with these activities
including but not limited to, overhead obligations, real property taxes, and personnel costs, are the sole opportunity
and obligation of HP A&M. The property management agreement can be extended an additional five years through
2016 under circumstances defined in the agreement.
Land sales. On February 10, 2010, the Company sold approximately four acres of farm land for $10,000 ($2,500
per acre) in cash. The land had an allocated carrying value of approximately $600, which resulted in a gain of
approximately $9,400 being recorded during 2010. The Company maintained all water rights associated with the
acreage that was sold. During the fiscal year ended August 31, 2009, the Company sold certain non-irrigated
parcels of land at net sales prices of approximately $59,700 in cash. This is net of approximately $3,600 of fees.
Because the Company assigned no value to this non-irrigated land at the acquisition date (the land was deemed to
have a fair value of zero at the acquisition date because it was not being irrigated and therefore was deemed non-
essential to the Company’s business), the proceeds to the Company are recorded as a gain on sale of land in the
accompanying statement of operations. Pursuant to the Arkansas River Agreement, 100% of the proceeds from the
sale of the non-irrigated land are required to be paid to HP A&M, which resulted in credits to the Tap Participation
Fee in an amount equivalent to the proceeds of the sale of 28 water taps.
Fort Lyon Canal Company (“FLCC”) Shares. The water rights are represented by over 21,600 shares of the FLCC,
which is a non-profit mutual ditch company established in the late 1800’s that operates and maintains the 110 mile
Fort Lyon Canal between La Junta, Colorado and Lamar, Colorado. The shares in the FLCC represent the amount
of water the Company owns in the Fort Lyon Canal.
Pursuant to the Arkansas River Agreement, the Company pledged to HP A&M: (i) one-half of the shares of FLCC
purchased by the Company, (ii) all shares of FLCC hereafter issued to the Company by means of any dividend or
distribution in respect of the shares pledged hereunder (together with the shares identified in (i), the “Company’s
Pledged Shares”), (iii) the certificates representing the Company’s Pledged Shares, (iv) the land associated with the
water represented by the Company’s Pledged Shares, and (v) all rights to money or property which the Company
now has or hereafter acquires in respect of the Company’s Pledged Shares. This pledge agreement will terminate
upon payment of the Tap Participation Fee.
Rangeview Water Supply and Water System
The “Rangeview Water Supply” consists of 28,350 acre-feet and is a combination of tributary surface water and
groundwater rights along with certain storage rights associated with the Lowry Range, a 26,000 acre property
owned by the Land Board located approximately 15 miles southeast of Denver. The $14.4 million of capitalized
costs represent the costs of assets acquired or facilities constructed to extend water service to customers located on
F-14
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
and off the Lowry Range. The recorded costs of the Rangeview Water Supply include payments to the sellers of the
Rangeview Water Supply, design and construction costs and certain direct costs related to improvements to the
asset including legal and engineering fees.
The Company acquired the Rangeview Water Supply beginning in 1996 when:
(i) The District entered into the Amended and Restated Lease Agreement with the Land Board, which owns the
Lowry Range;
(ii) The Company entered into the Agreement for Sale of Export Water with the District, a quasi-municipal
political subdivision of the State of Colorado;
(iii) The Company entered into the Service Agreement with the District for the provision of water service to the
Lowry Range; and
(iv)
In 1997, the Company entered into the Wastewater Service Agreement with the District for the provision of
wastewater service to the District’s service area (collectively these agreements are referred to as the
“Rangeview Water Agreements”).
Pursuant to the Rangeview Water Agreements, the Company has the exclusive right, through 2081, to use 13,400
acre feet of the Rangeview Water Supply specifically on the Lowry Range. The Rangeview Water Agreements also
provide for the Company to use surface reservoir storage capacity in providing water service to customers both on
and off the Lowry Range. The Company owns the rights to use the remaining 11,650 acre-feet of groundwater,
which can be exported off the Lowry Range to serve area users (referred to as “Export Water”). The Company also
has the option with the Land Board to exchange an aggregate gross volume of 165,000 acre-feet of groundwater for
1,650 acre-feet per year of adjudicated surface water and to use this surface water as Export Water.
Based on independent engineering estimates, the water designated for use on the Lowry Range is capable of
providing water service to approximately 46,500 SFE units, and the Export Water owned by the Company can serve
approximately 33,600 SFE units throughout the Denver metropolitan region.
Pursuant to the Rangeview Water Agreements, the Company will design, finance, construct, operate and maintain
the District's water and wastewater systems to provide service to the District’s customers on the Lowry Range. On
the Lowry Range, the Company will operate both the water and the wastewater systems during the contract period
and the District will own both systems. After 2081, ownership of the water system servicing customers on the
Lowry Range will revert to the Land Board, with the District retaining ownership of the wastewater system. The
Company owns the Export Water and will use it to provide water and wastewater services to customers off the
Lowry Range. The Company will also own all the facilities required to extend water and wastewater services off the
Lowry Range. The Company plans to contract with third parties for the construction of these facilities.
Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and usage or
monthly fees, are governed by the terms of the Rangeview Water Agreements. The Company’s rates and charges
are reviewed annually and are based on the average of similar rates and charges of three surrounding municipal
water and wastewater service providers. These represent gross fees and to the extent that water service is provided
using Export Water, the Company is required to pay royalties to the Land Board ranging from 10% of gross
revenues to 50% of net revenue after deducting certain costs. In exchange for providing water service to customers
on the Lowry Range, the Company will receive 95% of all water service fees received by the District, after the
District pays the required royalties to the Land Board totaling 12% of gross revenues received from water sales. In
exchange for providing wastewater service for the District’s customers, the Company will receive 100% of the
District’s wastewater tap fees and 90% of the District’s wastewater usage fees.
The Company delivered approximately 33.1 million, 33.9 million and 42.8 million gallons of water to customers
during the fiscal years ended August 31, 2010, 2009 and 2008, respectively.
F-15
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Arapahoe County Fairgrounds Agreement for Water Service
The Company owns approximately 321 acre-feet of groundwater purchased pursuant to the County Agreement.
The Company plans to use this water in conjunction with its Rangeview Water Rights in providing water to areas
outside the Lowry Range. The $2.9 million of capitalized costs includes the costs to construct various Wholesale
and Special Facilities, including a new deep water well, a 500,000 gallon water tank and pipelines to transport water
to the Fairgrounds.
Pursuant to the County Agreement, the County has or will pay the Company the following:
(i)
In August 2005, the County purchased water taps for 38.5 SFEs for $567,490, or $14,740 per tap, which was
used to construct the Wholesale Facilities. This was received by the Company in August 2005, as follows:
a. A cash payment of approximately $514,600, and
b. The transfer of rights to 27 acre-feet of dedicated groundwater valued at approximately $52,900.
(ii) The County agreed to provide funding of approximately $1,245,200 for the Special Facilities. This is being
paid by the County as follows:
a. An initial cash payment of approximately $397,000, which was received in August 2005,
b. The transfer of approximately 294 acre-feet of water, valued at approximately $206,000, with a cash
payment of approximately $34,100, received in August 2008 (this was initially 336 acre-feet of water
valued at approximately $240,100 with no additional cash payment, see discussion of the amendment
to the County Agreement below),
c. The balance of approximately $607,900 in monthly payments over 10 years (including interest at 6%
per annum).
Since the Company is utilizing Export Water to provide water service to the Fairgrounds, the sale of the water taps
generated a royalty payment to the Land Board of $34,522. The agreement with the Land Board requires royalty
payments on Export Water sales based on net revenues, which are defined as proceeds from the sale of Export
Water less direct and indirect costs, including reasonable overhead charges, associated with the withdrawal,
treatment and delivery of Export Water. Based on this, in September 2005, the Company made a $34,522 royalty
payment to the Land Board, which is 10% of the net tap fees received from the County.
In addition, tap fees under service agreements in which Export Water will be utilized are subject to the CAA, which
is described in more detail in Note 5 below. Net tap fees subject to the CAA totaled $532,968, which were the tap
fees received from the County less the $34,522 Land Board royalty. The $532,968 was distributed by the escrow
agent as required by the CAA in September 2005. Based on the CAA positions held by the Company at the time, the
Company received $373,078, or 70%, of the distribution and external parties received $159,890, or 30%.
The tap fees retained by the Company were used to fund construction of the Wholesale Facilities required to extend
water service to the Fairgrounds. In July 2006 the Company completed construction of the Wholesale Facilities and
began ratably recognizing $428,000 of tap fees in income over the estimated accounting life of the assets. The
$428,000 is the net of the tap fees received by the Company of $567,490, decreased by (i) royalties to the Land
Board of $34,522; and (ii) 65% of the total payments made to external CAA holders or $104,136. In each of the
three fiscal years ended August 31, 2009, 2008 and 2007, the Company recognized approximately $14,300 of tap
fee revenue. At August 31, 2009, approximately $384,800 of these tap fees are still deferred.
The total construction funding of $1.25 million is deferred and will be recognized as revenue over the expected
service period, which is also the estimated useful life of the Special Facilities constructed with the funds. In each of
the fiscal years ended August 31, 2010, 2009 and 2008, the Company recognized approximately $41,500 of Special
Facilities revenue. At August 31, 2010, approximately $1.08 million of the construction funding is still deferred.
F-16
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Amendment to the County Agreement. Because the County had not transferred the 336 acre-feet of groundwater to
the Company as required in the County Agreement, the County was making interest payments to the Company
totaling $600 per month until such time as the required water rights transfer was made. In August 2008, the
Company and the County entered into Amendment No. 1 to Agreement For Water Service (the “County
Amendment”), whereby the County transferred to the Company 294 acre-feet of water valued at approximately
$206,000, and made a cash payment of approximately $34,100. The County Amendment was necessary because
prior to the signing of the County Agreement, some of the water rights to be transferred to the Company had
previously been adjudicated to another party. As a result, the acre-feet to be transferred from the County to the
Company were reduced from 336 acre-feet to approximately 294 acre-feet. As a result of the reduction in the acre-
feet transferred to the Company, the County made an additional cash payment of approximately $34,100 in August
2008. As a result of the transfer of the water rights and the cash payment, the County ceased making the required
$600 monthly interest payments to the Company in August 2008. The value of the water rights was included in the
Construction proceeds receivable account on the accompanying balance sheet until the transfer, and then $206,000
was capitalized as part of the investment in Arapahoe County water.
Sky Ranch
At August 31, 2010, the Company owned approximately 89 acre-feet of water located beneath Sky Ranch. Pursuant
to a groundwater purchase agreement the Company had with the prior developer, the Company paid $100,000 to the
prior developer of Sky Ranch to acquire these water rights.
Effective July 30, 2010, the Company entered into a Loan Sale and Assignment Agreement (the “Loan Sale
Agreement”) with the Bank of America, N.A. (“BofA”), to acquire from BofA loan instruments secured by
approximately 940 acres of undeveloped land known as Sky Ranch. The Company is acquiring the promissory note
payable by Sky Ranch, LLC (a wholly owned subsidiary of Neumann Homes, Inc.) and the deed of trust granted by
Sky Ranch, LLC to secure the promissory note from the Seller for cash payments totaling $7.0 million. Concurrent
with the signing of the Loan Sale Agreement the Company made an escrow payment totaling $700,000 to BofA.
The balance of the acquisition price, or $6.3 million, was paid to BofA in connection with the closing, which was on
October 18, 2010, subsequent to the Company’s fiscal year end. The property includes approximately 820 acre feet
of water, of which the Company already owned approximately 89 acre feet purchased pursuant to the agreements
entered into with the former developer. See Note 14 below for information on the financing of the Sky Ranch
acquisition. On October 26, 2010, the United States Bankruptcy Court, Northern District of Illinois, entered an
order granting the Company’s motion requesting that title to the Sky Ranch property be deeded to the Company free
and clear of all bankruptcy claims. Pursuant to the order, the Company owns the Sky Ranch property effective as of
November 2, 2010.
Paradise Water Supply
In 1987, the Company acquired water, water wells, and related assets from Paradise Oil, Water and Land
Development, Inc., which constitute the “Paradise Water Supply.” The $5.5 million of capitalized costs includes
costs to acquire the Paradise Water Supply, as well as certain direct legal and engineering costs relating to
improvements to the asset. The Paradise Water Supply includes 70,000 acre-feet of conditionally decreed tributary
Colorado River 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 unrelated
water wells.
Every six years the Paradise Water Supply is subject to a finding of reasonable diligence review by the water court
and the State Engineer to determine if the Company is diligently pursuing the development of the water rights.
During fiscal 2005, the water court began the latest review and the Company received its official finding of
reasonable diligence in August 2008. During the diligence review, the Company received objections from two
parties to its Paradise Water rights. The Company and the objectors reached an agreement on the objections, which
resulted in the Company receiving its finding of reasonable diligence. The agreement with the objectors called for
the Company to, among others, perform the following during the next six years: (i) select an alternative reservoir
site; (ii) file an application in water court to change the place of storage; (iii) identify specific end users and place(s)
F-17
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
of use of the water; and (iv) identify specific source(s) of the water rights for use. The Company is working on
satisfying the above stipulations by the next diligence review period.
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 approximately $11.1 million, which represents the cash the Company
received and used to purchase its “Export Water,” which is described in greater detail in Note 4 above. 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.
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 approximately 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 approximately 65%, is allocated to the
contingent obligation, which is recorded on a net revenue basis.
In recent years, in order to reduce the long term impact of the CAA, the Company has repurchased various portions
of the CAA obligations in priority. The Company did not make any CAA acquisitions during the fiscal years ended
August 31, 2010 or 2009.
In October 2007, the Company acquired the rights to approximately $4.7 million of CAA interests in exchange for
211,228 shares of the Company’s restricted common stock valued at approximately $1.9 million. The Company
recorded a loss on the acquisition of the CAA interests in October 2007 of approximately $273,700.
In July 2007, the Company acquired the rights to approximately $10.5 million of CAA interests in exchange for
cash payments of approximately $2.6 million, which was raised in the Company’s equity offering in July 2007. The
Company recorded a gain on the acquisition of the CAA interests made in July 2007 of approximately $1.0 million.
Of this, approximately $765,000 was recorded as a capital contribution because the CAA interests acquired by the
Company for approximately $7.8 million were held by parties that are deemed related to the Company.
As a result of the CAA acquisitions, and due to the sale of Export Water, as detailed in the table below, the total
remaining potential third party obligation as of August 31, 2010 is approximately $3.5 million:
F-18
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Original balances
Export Water
Proceeds
Received
$ –
Initial Export
Water Proceeds
to Pure Cycle
$
218,500
Total Potential
Third party
Obligation
$
31,807,732
Paticipating
Interests
Liability
11,090,630
$
Contingency
$
20,717,102
Activity from inception until August 31, 2009:
Acquisitions
–
28,077,500
(28,077,500)
(9,789,983)
(18,287,517)
Option payments - Sky Ranch
and The Hills at Sky Ranch
Arapahoe County tap fees *
Export Water sale payments
Balance at August 31, 2009
Fiscal 2010 activity:
Export Water sale payments
Balance at August 31, 2010
110,400
532,968
45,662
689,030
(42,280)
(373,078)
(31,963)
(68,120)
(159,890)
(13,699)
(23,754)
(55,754)
(4,779)
(44,366)
(104,136)
(8,920)
27,848,679
3,488,523
1,216,360
2,272,163
14,922
703,952
$
(10,445)
27,838,234
$
(4,477)
3,484,046
$
(1,561)
1,214,799
$
(2,916)
2,269,247
$
* 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 approximately $5.1 million of the first priority
payout (the remaining entire first priority payout totals approximately $7.3 million as of August 31, 2010).
NOTE 6:
ACCRUED LIABILITIES
At August 31, 2010, the Company had accrued liabilities of approximately $70,700, of which $65,000 was for
professional fees with the remainder relating to operating payables.
At August 31, 2009, the Company had accrued liabilities of approximately $60,100, of which $50,100 was for
professional fees with the remainder relating to operating payables.
NOTE 7:
LONG-TERM DEBT AND OPERATING LEASE
As of August 31, 2010, the Company has no debt with contractual maturity dates. However, see Note 14 below for
information regarding the Convertible Note issued subsequent to August 31, 2010.
The Participating Interest in Export Water supply and the Tap Participation Fee payable to HP A&M are obligations
of the Company that have no scheduled maturity dates. Therefore, these liabilities are not disclosed in tabular
format. However, the Tap Participation Fee is described below.
Tap Participation Fee payable to HP A&M
Pursuant to the Arkansas River Agreement the Company granted HP A&M the right to receive ten percent (10%)
of the Company’s gross proceeds, or the equivalent thereof, from the sale of the next 40,000 water taps sold by the
Company from and after the date of the Arkansas River Agreement (the “Tap Participation Fee”). As a result of
land sales in 2006 and 2009 and the sale of unutilized water rights owned by the Company in the Arkansas River
Valley in 2007, 38,937 water taps remain subject to the Tap Participation Fee.
The Tap Participation Fee is due and payable once the Company has sold a water tap and received the
consideration due for such water tap. The Company did not sell any water taps during the fiscal year ended August
31, 2010 or 2009. However, the Company did make Tap Participation Fee payments to HP A&M during the fiscal
year ended August 31, 2009, as a result of non-irrigated land sales described above.
F-19
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Tap Participation Fee was initially valued at approximately $45.6 million at the acquisition date using a
discounted cash flow analysis of the projected future payments to HP A&M. The $61.1 million balance at August
31, 2010, includes approximately $16.4 million of imputed interest, recorded using the effective interest method.
The Company estimates the value of the Tap Participation Fee by projecting new home development in the
Company’s targeted service area over an estimated development period. This was done by utilizing third party
historical and projected housing and population growth data for the Denver, Colorado metropolitan area applied to
an estimated development pattern supported by historical development patterns of certain master planned
communities in the Denver, Colorado metropolitan area. This development pattern was then applied to estimated
future water tap fees calculated using historical water tap fees. Based on the weak new home construction market
in the Denver metropolitan area, the Company updated its estimated discounted cash flow analysis as of February
28, 2009. The February 2009 update resulted in the following changes from the prior estimate:
(i) An increase in the overall future estimated Tap Participation Fee of approximately $4.7 million (from
approximately $108.5 million to approximately $113.1 million);
(ii) A decrease in the imputed effective interest rate from approximately 8.6% to approximately 6.3%; and
(iii) A decrease in the imputed interest expense for the fiscal year ended August 31, 2010 and 2009 of
approximately $1.6 million and $1.1 million, respectively, which equates to approximately $.08 and $.05 per
basic and diluted share, respectively.
The Company completed an update to its analysis of the fair value of the Tap Participation Fee as of August 31,
2010. The Company determined that changes in the projected estimated discounted cash flows did not materially
impact its February 28, 2009 fair value analysis.
Actual new home development in the Company’s service area and actual future tap fees inevitably will vary
significantly from the Company’s estimates which could have a material impact on the Company’s financial
statements as well as its results of operations. An important component in the Company’s estimate of the value of
the Tap Participation Fee, which is based on historical trends, is that the Company reasonably expects water tap
fees to continue to increase in the coming years. Tap fees are a market based pricing metric which in part
demonstrates the increasing costs to acquire and develop new water supplies. It is thus a market metric which in
part demonstrates the increasing value of the Company’s water assets. The Company continues to assess the value
of the Tap Participation Fee liability and updates its valuation analysis whenever events or circumstances indicate
the assumptions used to estimate the value of the liability have changed materially. The difference between the net
present value and the estimated realizable value will be imputed as interest expense using the effective interest
method over the estimated development period utilized in the valuation of the Tap Participation Fee.
The Company imputes interest expense on the unpaid Tap Participation Fee using the effective interest method
over the estimated development period utilized in the valuation of the liability. The Company imputed interest of
approximately $3.6 million, $3.7 million and $4.4 million during the fiscal years ended August 31, 2010, 2009 and
2008, respectively.
After five years, under circumstances defined in the Arkansas River Agreement, the Tap Participation Fee can
increase to 20% of the Company’s water tap fees and the number of water taps subject to the Tap Participation Fee
would be correspondingly reduced by half. Payment of the Tap Participation Fee may be accelerated in the event
of a merger, reorganization, sale of substantially all assets, or similar transactions and in the event of bankruptcy
and insolvency events.
Promissory Notes Payable by HP A&M
Certain of the properties the Company acquired from HP A&M are subject to outstanding promissory notes with
principal and accrued interest totaling approximately $11.0 million and $12.0 million at August 31, 2010 and 2009,
respectively. These promissory notes are secured by deeds of trust on the Properties. The Company did not assume
F-20
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
any of these promissory notes and is not responsible for making any of the required payments under these notes.
This responsibility remains solely with HP A&M. In the event of default by HP A&M, at the Company’s sole
discretion, the Company may make payments pursuant to any or all of the notes and cure any or all of the defaults.
If the Company does not cure the defaults, it will lose the properties securing the defaulted notes. If HP A&M
defaults on the promissory notes, the Company can foreclose on a defined amount of stock issued to HP A&M and
reduce the Tap Participation Fee by two times the amount of notes defaulted on by HP A&M. Because HP A&M
would lose such a substantial amount of equity and the Tap Participation Fee, and based on the financial stability of
HP A&M and its owners and affiliated companies, the probability of HP A&M defaulting on the notes is deemed
remote. As far as the Company is aware, as of August 31, 2010, HP A&M has not defaulted on any of the
promissory notes. If HP A&M were to default on the notes, the Company would lose approximately 60 of the 80
(approximately 75%) real property interests it acquired and a comparable percentage of the water rights the
Company acquired, which are associated with those properties, unless the Company cured the notes in default.
Because the outstanding notes are collateralized by the Company’s properties and Arkansas River Water, HP A&M
is deemed to be a Variable Interest Entity (“VIE”) per GAAP. However, because the Company will not absorb any
of HP A&M’s expected losses or receive any of HP A&M’s expected gains, the Company is not deemed the
“Primary Beneficiary” of HP A&M and therefore is not required to consolidate HP A&M. HP A&M became a VIE
to the Company on August 30, 2006 when the Company acquired the Arkansas River Water Rights and Properties
subject to the outstanding promissory notes. HP A&M is a holding company that acquires water rights and related
properties for investment and sale purposes.
Operating Lease
Effective August 27, 2009, the Company entered into an operating lease for approximately 1,000 square feet of
office space. The lease has a three year term with payments of approximately $1,400 per month.
NOTE 8:
SHAREHOLDERS' EQUITY
Preferred Stock
The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $1.00 per share less any
dividends previously paid. Additionally, the Series B Preferred Stock is redeemable at the discretion of the
Company for $1.00 per share less any dividends previously paid. In the event that the Company’s proceeds from
sale or disposition of Export Water rights exceed $36,026,232, the Series B Preferred Stock holders will receive the
next $432,513 of proceeds in the form of a dividend.
Equity Compensation Plan
The Company maintains the 2004 Incentive Plan (the “Equity Plan”) which was approved by stockholders in April
2004. Executives, eligible employees and non-employee directors are eligible to receive options and restricted
stock grants pursuant to the Equity Plan. Under the Equity Plan, options to purchase shares of stock, and restricted
stock awards, can be granted with exercise prices and vesting periods determined by the Compensation Committee
of the Board. The Company initially reserved 1.6 million shares of common stock for issuance under the Equity
Plan. As of August 31, 2010, the Company has 1,303,311 shares that can be granted to eligible participants
pursuant to the Equity Plan.
The Company estimates the fair value of share-based payment awards on the date of grant using the Black-Scholes
option-pricing model (“Black-Scholes model”). Using the Black-Scholes model, the value of the portion of the
award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the
statement of operations. Option forfeitures are to be estimated at the time of grant and revised if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The Company does not expect any forfeiture of
its option grants and therefore the compensation expense has not been reduced for estimated forfeitures. No options
were forfeited by option holders during the three fiscal years ended August 31, 2010. The Company attributes the
value of share-based compensation to expense using the straight-line single option method for all options granted.
F-21
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is
affected by the following variables and assumptions:
• The grant date exercise price – is the closing market price of the Company’s common stock on the date of
grant;
• Estimated option lives – based on historical experience with existing option holders;
• Estimated dividend rates – based on historical and anticipated dividends over the life of the option;
• Life of the option –based on historical experience option grants have lives between 8 and 10 years;
• Risk-free interest rates – with maturities that approximate the expected life of the options granted;
• Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated
based on the weekly closing price of the Company’s common stock over a period equal to the expected life of
the option; and
• Option exercise behaviors – based on actual and projected employee stock option exercises and forfeitures.
In January 2010, the Company granted its non-employee directors options to purchase a combined 12,500 shares of
the Company’s common stock pursuant to the Equity Plan. The options vest one year from the date of grant and
expire ten years from the date of grant. The Company calculated the fair value of these options at approximately
$31,200 (approximately $2.49 per option) using the Black-Scholes model with the following variables: weighted
average exercise price of $2.88 (which was the closing sales price of the Company’s common stock on the date of
the grant); estimated option lives of ten years; estimated dividend rate of 0%; weighted average risk-free interest
rate of 3.74%; weighted average stock price volatility of 88.4%; and an estimated forfeiture rate of 0%. The $31,200
of stock-based compensation is being expensed monthly over the vesting period.
In August 2009, the Company granted two employees options to purchase a combined 80,000 shares of the
Company’s common stock pursuant to the Equity Plan. The options vest one-fifth at the grant date and one-fifth on
each of the next four anniversary dates of the grant date. The options expire ten years from the date of grant. The
Company calculated the fair value of these options at approximately $217,300 (approximately $2.72 per option)
using the Black-Scholes model with the following variables: weighted average exercise price of $3.13 (which was
the closing sales price of the Company’s common stock on the date of the grant); estimated option lives of ten years;
estimated dividend rate of 0%; weighted average risk-free interest rate of 3.51%; weighted average stock price
volatility of 89.35%; and an estimated forfeiture rate of 0%. Approximately $43,500 of the share-based
compensation was expensed at the grant date and the remaining $173,800 is being expensed monthly over the
remaining vesting period.
In January 2009, the Company granted its non-employee directors options to purchase a combined 15,000 shares of
the Company’s common stock pursuant to the Equity Plan. The options vest one year from the date of grant and
expire ten years from the date of grant. The Company calculated the fair value of these options at approximately
$36,300 (approximately $2.42 per option) using the Black-Scholes model with the following variables: weighted
average exercise price of $2.94 (which was the closing sales price of the Company’s common stock on the date of
the grant); estimated option lives of eight years; estimated dividend rate of 0%; weighted average risk-free interest
rate of 2.33%; weighted average stock price volatility of 91.6%; and an estimated forfeiture rate of 0%. The $36,300
of stock-based compensation was expensed monthly over the vesting period.
In August 2008, the Company granted one of its non-employee directors an option to purchase 2,500 shares of the
Company’s common stock pursuant to the Equity Plan. The option vests one year from the date of grant and expires
ten years from the date of grant. The Company calculated the fair value of this option at approximately $16,100
(approximately $6.44 per option) using the Black-Scholes model with the following variables: weighted average
exercise price of $7.64 (which was the closing sales price of the Company’s common stock on the date of the grant);
estimated option life of eight years; estimated dividend rate of 0%; weighted average risk-free interest rate of
F-22
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
4.75%; weighted average stock price volatility of 92.5%; and an estimated forfeiture rate of 0%. The $16,100 of
stock-based compensation was expensed monthly over the vesting period.
In January 2008, the Company granted its outside directors options to purchase a combined 15,000 shares of the
Company’s common stock pursuant to the Equity Plan. The options vest one year from the date of grant and expire
ten years from the date of grant. The Company calculated the fair value of these options at approximately $93,600
(approximately $6.25 per option)using the Black-Scholes model with the following variables: weighted average
exercise price of $7.50 (which was the closing sales price of the Company’s common stock on the date of the grant);
estimated option lives of eight years; estimated dividend rate of 0%; weighted average risk-free interest rate of
4.25%; weighted average stock price volatility of 90.6%; and an estimated forfeiture rate of 0%. The $93,600 of
stock-based compensation was expensed monthly over the vesting period.
No options were exercised during the fiscal years ended August 31, 2010 or 2009.
The following table summarizes the stock option activity for the Equity Plan for the fiscal year ended August 31,
2010:
Oustanding at beginning of period
Granted
Exercised
Forfeited or expired
Outstanding at August 31, 2010
Number of
Options
250,000
12,500
–
–
262,500
Weighted-
Average
Exercise Price
$
6.43
$
2.88
$ –
$ –
$
6.26
Options exercisable at August 31, 2010
202,000
$
7.22
* Intrinsic value less than zero
Weighted-
Average
Remaining
Contractual
Term
Approximate
Aggregate
Instrinsic
Value
6.7
6.2
*
*
The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended
August 31, 2010:
Non-vested options oustanding at beginning of period
Granted
Vested
Forfeited
Non-vested options outstanding at August 31, 2010
Weighted-
Average Grant
Date Fair
Value
$
2.66
2.49
2.57
–
$
2.67
Number of
Options
79,000
12,500
(31,000)
–
60,500
All non-vested options are expected to vest. The total fair value of options vested during the fiscal years ended
August 31, 2010, 2009 and 2008 was approximately $79,700, $230,700 and $195,400, respectively. The weighted
average grant date fair value of options granted during the fiscal years ended August 31, 2010, 2009 and 2008 was
$2.49, $2.67 and $6.25, respectively.
Share-based compensation expense for the fiscal years ended August 31, 2010, 2009 and 2008, was approximately
$87,600, $325,500 and $351,500, respectively.
F-23
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
At August 31, 2010, the Company has unrecognized expenses relating to non-vested options that are expected to
vest totaling approximately $132,500. The weighted-average period over which these options are expected to vest is
approximately two years. The Company has not recorded any excess tax benefits to additional paid in capital.
Warrants
As of August 31, 2010, the Company had outstanding warrants to purchase 92 shares of common stock at an
exercise price of $1.80 per share. These warrants expire six months from the earlier of:
(i) The date all of the Export Water is sold or otherwise disposed of,
(ii) The date the CAA is terminated with respect to the original holder of the warrant, or
(iii) The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA.
No warrants were exercised during fiscal 2010, 2009 or 2008.
Pledged Common Stock Owned by HP A&M
Pursuant to the Arkansas River Agreement, HP A&M pledged, transferred, assigned and granted to the Company a
security interest in and to (a) 1,500,000 shares of Pure Cycle common stock, (b) all shares of Pure Cycle Common
Stock hereafter issued to HP A&M by means of any dividend or distribution in respect of the shares pledged
thereunder (together with the shares identified in (a), the “Pledged Shares”), (c) the certificates representing the
Pledged Shares, and (d) all rights to money or property which HP A&M now has or hereafter acquires in respect of
the Pledged Shares. The Pledged Shares are being held by the Company’s corporate legal counsel.
Registration Rights Agreement
Pursuant to the Arkansas River Agreement the Company granted HP A&M one demand right to request the
registration of 750,000 shares of Pure Cycle common stock and piggyback rights to register an additional 750,000
shares of Pure Cycle common stock.
Pursuant to the demand right, upon the request of HP A&M, the Company is required to file a registration statement
for up to 750,000 shares of the Company's common stock owned by HP A&M and to use its reasonable best,
diligent efforts to cause the registration statement to become effective. Provided the Company exercises the
appropriate efforts, it has no liability to HP A&M if the registration statement is not declared effective.
Furthermore, HP A&M has no right to put its Company common stock to the Company or to otherwise require the
Company to purchase its shares. As of August 31, 2010, HP A&M has not requested the Company to register these
shares.
HP A&M exercised its piggyback rights in July 2007 and therefore the Company registered 750,000 shares of
common stock held by HP A&M.
Voting Rights Agreement
Pursuant to the Arkansas River Agreement, Mr. Mark Harding, the Company’s President, agrees to vote shares of
Pure Cycle common stock owned by him (which total 727,243 shares at August 31, 2010) for HP A&M’s
designated board member (currently HP A&M does not have a board member on the Company’s board).
Gain on Extinguishment of Related Party CAA Obligations and Debt
See Note 13 below regarding the gain on extinguishment of related party CAA obligations and debt recorded as
additional paid in capital.
F-24
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Shelf Registration Statement
On July 28, 2010, the Company filed a shelf registration with the SEC to register up to $10.0 million of common
stock. As further described in Note 14 below, on September 29, 2010, the Company sold 1,848,931 shares of its
common stock for approximately $5,546,800, or $3.00 per share pursuant to this shelf registration. Following this
sale, the Company can issue approximately $4,453,200 of additional common stock pursuant to the shelf
registration.
NOTE 9:
SIGNIFICANT CUSTOMERS
The Company had accounts receivable from one customer that accounted for approximately 82% of the Company’s
trade receivables balances at both August 31, 2010 and 2009. The Company earned revenues from the same
customer that accounted for approximately 64% of the Company’s total revenues for each of the years ended
August 31, 2010, 2009 and 2008.
NOTE 10:
INCOME TAXES
There is no provision for income taxes because the Company has incurred operating losses. Deferred income taxes
reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of the Company’s deferred tax assets as of August 31 are as follows:
Deferred tax assets:
Net operating loss carryforwards
Imputed interest on Tap Participation Fee
Deferred revenue
Depreciation and depletion
Loss in Well Enhancment LLC
Other
Valuation allowance
Net deferred tax asset
For the Fiscal Years Ended August 31,
2010
2009
$ 5,022,300
6,123,100
539,400
175,600
34,600
6,400
(11,901,400)
–
$ 4,575,900
4,772,800
352,100
143,500
34,200
5,800
(9,884,300)
–
The Company has recorded a valuation allowance equal to the excess of the deferred tax assets over the deferred tax
liability as the Company is unable to reasonably determine if it is more likely than not that deferred tax assets will
ultimately be realized.
Income taxes computed using the federal statutory income tax rate differs from our effective tax rate primarily due
to the following for the fiscal years ended August 31:
Expected benefit from federal taxes at statutory rate of 34%
State taxes, net of federal benefit
Expiration of net operating losses
Permanent and other differences
Change in valuation allowance
Total income tax expense / benefit
$
$
For the Fiscal Years Ended August 31,
2009
(1,947,500)
(189,000)
142,800
121,900
1,871,800
2010
(1,833,000)
(177,900)
147,900
(154,100)
2,017,100
$
(2,355,100)
(228,600)
117,600
131,800
2,334,300
2008
$
-
$
-
$
-
At August 31, 2010, the Company has approximately $13.5 million of net operating loss carryforwards available for
income tax purposes which expire between fiscal 2011 and 2030. Utilization of these net operating loss
carryforwards may be subject to substantial annual ownership change limitations provided by the Internal Revenue
F-25
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
Code. Such an annual limitation could result in the expiration of the net operating loss carryforwards before
utilization.
Net operating loss carryforwards of approximately $396,500, $382,800 and $315,400 expired during the fiscal
years ended August 31, 2010, 2009 and 2008, respectively.
NOTE 11:
401(k) PLAN
Effective July 25, 2006, the Company adopted the Pure Cycle Corporation 401(k) Profit Sharing Plan (the “Plan”),
a defined contribution retirement plan for the benefit of its employees. The Plan is currently a salary deferral only
plan and at this time the Company does not match employee contributions. The Company pays the annual
administrative fees of the Plan, and the Plan participants pay the investment fees. The Plan is open to all employees,
age 21 or older, who have been employees of the Company for at least six months. During the fiscal years ended
August 31, 2010, 2009 and 2008, the Company paid fees of approximately $2,400, $3,800 and $2,400, respectively,
for the administration of the Plan.
NOTE 12:
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
For the Fiscal Years Ended August 31,
2010
2009
2008
Increase in estimated Tap Participation Fee liability and
related discount
Water rights received from Arapahoe County which
reduced the Construction proceeds receivable balance
$ - $ 4,758,038 $ 3,867,321
$ - $ - $ 206,005
NOTE 13:
RELATED PARTY TRANSACTIONS
Until August 31, 2009, the Company leased office space from the estate of the son of its former CEO. The
Company leased the office space on a month-to-month basis for $1,000 per month.
On December 16, 2009, the Company entered into a Participation Agreement with the District whereby the
Company agreed to provide funding to the District in connection with the District joining the South Metro Water
Supply Authority (“SMWSA”). During the year ended August 31, 2010, the Company provided funding of
approximately $110,300. The Company anticipates providing additional funding of approximately $20,000 per
year to maintain the District’s membership in SMWSA. The $110,300 funding was expensed in the general and
administrative line in the accompanying statement of operations.
The Company paid HP A&M approximately $16,700, $41,700 and $49,700 during the fiscal years ended August
31, 2010, 2009 and 2008, respectively. This is predominately due to the Company paying 50% of the salary and
expenses for work performed by an HP A&M employee on behalf of the Company related to operations of the
agricultural property owned by the Company in the Arkansas River Valley. The amount paid to HP A&M in fiscal
2010 decreased approximately $25,000 from fiscal 2009 because on January 1, 2010, this employee became an
employee of the Company and on that date HP A&M began reimbursing the Company for half of said employee’s
salary and expenses. In fiscal 2010, HP A&M paid the Company approximately $28,100 for this employee’s salary
and expenses.
In 2009, the Company paid HP A&M approximately $59,700 pursuant to the Tap Participation Fee as a result of the
sale of non-irrigated land.
In 1995, the Company extended a loan to the District, a related party. The loan provided for borrowings of up to
$250,000, is unsecured, bears interest based on the prevailing prime rate plus 2% (5.25% at August 31, 2010) and
matures on December 31, 2010. The approximately $519,800 balance of the note receivable at August 31, 2010
includes borrowings of approximately $229,300 and accrued interest of approximately $290,500. The
F-26
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
approximately $507,800 balance of the note receivable at August 31, 2009 includes borrowings of approximately
$229,300 and accrued interest of approximately $278,500. The Company extended the due date to December 31,
2010 and accordingly the note has been classified as non-current.
See also Note 14 below regarding the sale of common stock and the issuance of the Convertible Note to a related
party subsequent to August 31, 2010.
NOTE 14:
SUBSEQUENT EVENTS
As noted in Note 4 above, effective July 30, 2010, the Company entered into the Loan Sale Agreement with BofA.
The Company completed this acquisition on October 18, 2010. The total consideration paid to BofA pursuant to the
Loan Sale Agreement was $7.0 million in cash ($700,000 was remitted prior to August 31, 2010 with the remaining
$6.3 million being remitted to BofA subsequent to August 31, 2010). The funding for this was completed in
September 2010, when the Company entered into the $5.2 million Convertible Note with PAR Investment Partners,
L.P. (“PAR”), a 5% or greater shareholder of the Company, and sold approximately 1.8 million shares of its
common stock for approximately $5.5 million. Both financing transactions are described below. Of the combined
$10.7 million raised by the Company, $6.3 million was used to complete the Loan Sale Agreement with BofA and
the remaining funds, approximately $4.4 million (when added to the Company’s current cash, cash equivalent and
marketable security balances of approximately $1.4 million provides the Company with approximately $5.8 million)
will be used for working capital and other general corporate purposes.
Issuance of the Convertible Note
The Company issued the $5.2 million Convertible Note to PAR on September 28, 2010. The Convertible Note (i)
bears interest at 10% per annum, (ii) does not require payments until April 1, 2011, at which time interest only
payments are due monthly (interest accruing from September 28, 2010 – March 31, 2011 is due on April 1, 2011)
on the first day of each subsequent month until the Convertible Note matures on January 15, 2012, (iii) is
unsecured, and (iv) upon approval by the Company’s shareholders, can be converted to unregistered common stock
at a conversion price of $2.70 per share. The Company intends to seek shareholder approval to convert the
Convertible Note to common stock at its 2011 annual shareholders’ meeting. In conjunction with the Convertible
Note, the Company granted PAR one demand right and piggyback rights to register the shares of common stock
issuable upon conversion of the Convertible Note.
If the Company’s shareholders do not approve the conversion of the Convertible Note to common stock, the
Convertible Note would require the following payments:
Fiscal Year Ending:
August 31, 2011
August 31, 2012
Total payments
Principal Payments
$
-
$
5,200,000
5,200,000
Interest Payments
486,800
$
197,900
684,700
$
Total Payments
$
486,800
5,397,900
5,884,700
$
If the Company’s shareholders approve the conversion of the Convertible Note to common stock, the number of
common shares issued will be determined based on the principal and accrued interest at the date of approval.
Sale of common stock pursuant to the shelf registrations
On September 29, 2010, the Company sold 1,848,931 shares of its common stock for approximately $5.5 million or
$3.00 per share. These shares were sold pursuant to a $10.0 million effective shelf registration statement
(registration number 333-168160) filed with the SEC on July 28, 2010. Following this issuance, the Company can
issue up to an additional $4.5 million of its common stock pursuant to the shelf registration statement.
Approximately 930,600 shares of common stock sold in this offering were sold to PAR for approximately $2.8
million or $3.00 per share.
F-27
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2010, 2009 AND 2008
NOTE 15:
SUPPLEMENTAL DATA: SELECTED QUARTERLY FINANCIAL INFORMATION
(unaudited)
In thousands, except per share amounts
Fiscal 2010 quarters ended:
Total revenues
Gross margin
Net loss
Earnings per share - basic and diluted
Market price of common stock
High
Low
Fiscal 2009 quarters ended:
Total revenues
Gross margin
Net loss
Earnings per share - basic and diluted
Market price of common stock
High
Low
August 31
$
$
$
$
95.3
49.2
(1,264.9)
(0.06)
May 31
$
$
$
$
58.0
22.3
(1,333.4)
(0.07)
February 28
$
51.2
$
13.7
$
(1,514.3)
$
(0.07)
November 30
$
59.6
$
17.1
$
(1,278.7)
$
(0.06)
$
$
3.15
2.22
$
$
3.27
2.30
$
$
3.24
2.00
$
$
3.68
2.13
August 31
$
$
$
$
79.8
36.8
(1,289.5)
(0.06)
May 31
$
$
$
$
62.5
25.7
(1,325.2)
(0.07)
February 28
$
54.1
$
17.0
$
(1,401.3)
$
(0.07)
November 30
$
63.8
$
17.3
$
(1,712.1)
$
(0.08)
$
$
3.70
2.41
$
$
3.25
2.16
$
$
3.96
1.75
$
$
6.09
2.09
*****
F-28
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreement with accountants on accounting and financial disclosures.
(a)
Evaluation of Disclosure Controls and Procedures
Item 9A - Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to
be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the Commission’s rules and forms, and that
information is accumulated and communicated to management, including the principal executive and financial
officer as appropriate, to allow timely decisions regarding required disclosures. The President and Chief Financial
Officer evaluated the effectiveness of disclosure controls and procedures as of August 31, 2010, pursuant to Rule
13a-15(b) under the Exchange Act. Based on that evaluation, the President and Chief Financial Officer concluded
that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were
effective. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that
the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been detected.
(b)
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) under the Exchange Act. The Exchange Act defines internal
control over financial reporting as a process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America,
and that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31,
2010. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we
determined that, as of August 31, 2010, the Company’s internal control over financial reporting was effective based
on those criteria.
GHP Horwath P.C. (“GHP”) our independent registered public accounting firm has performed an audit of the
effectiveness of the Company’s internal control over financial reporting as of August 31, 2010. This audit is
required to be performed in accordance with the standards of the Public Company Accounting Oversight Board
31
(United States). Our independent auditors were given unrestricted access to all financial records and related data.
The report of the Company’s independent registered public accounting firm, including the attestation report on our
internal control over financial reporting is included in Item 8. Financial Statements and Supplementary Data.
(c)
Changes in Internal Controls
No changes were made to our internal control over financial reporting during our most recently completed fiscal
quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
None
Item 9B - Other Information
PART III
Information concerning Items 10 through Items 14 will be contained in our definitive Proxy Statement pursuant to
Regulation 14A promulgated under the Exchange Act for the 2010 Annual Meeting of Shareholders and is
incorporated herein by reference, which is expected to be filed on or about December 2, 2010.
(a)
1.
2.
3.
Exhibit No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
PART IV
Item 15 – Exhibits and Financial Statement Schedules
Financial Statements
See “Index to Financial Statements and Supplementary Data” in Part II, Item 8 of this Form 10-K.
Financial Statement Schedules: None
Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by
reference as part of this Form 10-K
Index to Exhibits
Description
Articles of Incorporation of Pure Cycle Corporation. Incorporated by reference to Appendix B to
the Proxy Statement on Schedule 14A filed December 14, 2007.
Bylaws of Pure Cycle Corporation. Incorporated by reference to Appendix C to the Proxy
Statement on Schedule 14A filed December 14, 2007.
Specimen Stock Certificate. Incorporated by reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2010.
Right of First Refusal Agreement dated August 12, 1992 between INCO Securities Corporation and
Richard F. Myers, Mark W. Harding, Thomas P. Clark, Thomas Lamm and Rowena Rogers.
Incorporated by Reference from Registration Statement on Form SB-2, filed April 19, 2004,
Registration No. 333-114568.
2004 Equity Incentive Plan, Incorporated by reference from Proxy Statement for Annual Meeting
held April 12, 2004. **
Service Agreement, dated April 11, 1996, by and between Pure Cycle Corporation and the
Rangeview Metropolitan District. Incorporated by reference from Quarterly Report on Form 10-
QSB for the period ended May 31, 1996.
Wastewater Service Agreement, dated January 22, 1997, by and between Pure Cycle Corporation
and the Rangeview Metropolitan District. Incorporated by reference from the Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1998.
32
10.5
10.6
10.7
10.8
10.9
Comprehensive 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. Incorporated by reference from
Quarterly Report on Form 10-QSB for the period ended May 31, 1996.
Agreement for Sale of Export Water dated April 11, 1996 by and among the Company and the
District. Incorporated by reference from Quarterly Report on Form 10-QSB for the fiscal quarter
ended May 31, 1996).
Water Service Agreement for the Sky Ranch PUD dated October 31, 2003 by and between Airpark
Metropolitan District, Icon Investors I, LLC, the Company and the District. Incorporated by
reference from Registration Statement on Form SB-2, filed April 19, 2004, Registration No. 333-
114568.
Amendment to Water Service Agreement for the Sky Ranch PUD dated January 6, 2004.
Incorporated by Reference from Amendment No. 1 to Registration Statement on Form SB-2, filed
June 7, 2004, Registration No. 333-114568.
Agreement to Amend Water Service Agreement for the Sky Ranch PUD dated January 30, 2004.
Incorporated by Reference from Amendment No. 1 to Registration Statement on Form SB-2, filed
June 7, 2004, Registration No. 333-114568.
10.10
Agreement to Amend Option Agreement for Export Water Service for the Sky Ranch PUD dated
January 30, 2004. Incorporated by Reference from Amendment No. 1 to Registration Statement on
Form SB-2, filed June 7, 2004, Registration No. 333-114568.
10.11
10.12
Second Amendment to Water Service Agreement for the Sky Ranch PUD dated March 5, 2004.
Incorporated by Reference from original Annual Report on Form 10-K for the fiscal year ended
August 31, 2007, filed November 21, 2006.
Amended and Restated Lease Agreement between the Land Board and the District dated April 4,
1996. Incorporated by Reference from Amendment No. 1 to Registration Statement on Form SB-2,
filed June 7, 2004, Registration No. 333-114568.
10.13
Bargain and Sale Deed among the Land Board, the District and the Company dated April 11, 1996.
Incorporated by Reference from Amendment No. 1 to Registration Statement on Form SB-2, filed
June 7, 2004, Registration No. 333-114568.
10.14
10.15
10.16
10.17
Mortgage Deed, Security Agreement, and Financing Statement between the Land Board and the
Company dated April 11, 1996. Incorporated by Reference from Amendment No. 1 to Registration
Statement on Form SB-2, filed June 7, 2004, Registration No. 333-114568.
Water Service Agreement for the Hills at Sky Ranch Water dated May 14, 2004 among Icon Land
II, LLC, a Colorado limited liability company, the Company, and the District. Incorporated by
reference from the Current Report on Form 8-K filed with the SEC on May 21, 2004.
Agreement for Water Service dated August 3, 2005 among Pure Cycle Corporation, Rangeview
Metropolitan District and Arapahoe County incorporated by reference from Form 8-K filed on
August 4, 2005.
Arkansas River Agreement dated May 10, 2006, between Pure Cycle Corporation and High Plains
A&M, LLC, and the Seller Pledge Agreement, Pure Cycle Corporation Pledge Agreement, Property
Management Agreement, and Registration Rights Agreement, attached as exhibits thereto, entered
into between Pure Cycle Corporation and High Plains A&M, LLC dated August 31, 2009.
Incorporated by reference from Form 8-K filed on May 16, 2006.
33
10.18
10.19
10.20
10.21
10.22
14
23.1
31.1
32.1
*
**
Amendment No. 1 to Agreement for Water Service dated August 25, 2008, between Pure Cycle
Corporation and Arapahoe County. Incorporated by reference from Form 10-K for the fiscal year
ended August 31, 2008.
Loan Sale and Assignment Agreement dated July 30, 2010, between Pure Cycle Corporation and
Bank of America, N.A. Incorporated by reference from Form 8-K filed on August 4, 2010.
License Agreement between Pure Cycle Corporation and Sky Ranch LLC, a Colorado limited
liability company, Debtor-in-Possession. Incorporated by reference from Form 8-K filed on August
4, 2010.
Convertible Negotiable Note Payable dated September 28, 2010, between Pure Cycle Corporation
and PAR Investment Partners, L.P. Incorporated by reference from Form 8-K filed on September
29, 2010.
Registration Rights Agreement dated September 28, 2010, between Pure Cycle Corporation and
PAR Investment Partners, L.P. Incorporated by reference from Form 8-K filed on September 29,
2010.
Code of Ethics as amended August 2, 2007. Incorporated by reference from Form 10-K for the
fiscal year ended August 31, 2008.
Consent of GHP Horwath, P.C. *
Certification under Section 302 of the Sarbanes-Oxley Act of 2002. *
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
Filed herewith
Indicates management contract or compensatory plan or arrangement in which directors or
executive officers are eligible to participate.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PURE CYCLE CORPORATION
By: /s/ Mark W. Harding
Mark W. Harding, President and Chief Financial Officer
November 12, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacity and on the dates indicated.
Signature
/s/ Mark W. Harding
Mark W. Harding
/s/ Harrison H. Augur
Harrison H. Augur
/s/ Arthur G. Epker III
Arthur G. Epker III
/s/ Richard L. Guido
Richard L. Guido
/s/ Peter C. Howell
Peter C. Howell
Title
President,
Chief Financial Officer and Director
(Principal Executive Officer, Principal
Financial and Accounting Officer)
Date
November 12, 2010
Chairman, Director
November 12, 2010
Director
November 12, 2010
Director
November 12, 2010
Director
November 12, 2010
/s/ George M. Middlemas
George M. Middlemas
Director
November 12, 2010
35
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-142335), Form
S-3 (No. 333-168160) and Form S-8 (No. 333-115240) of Pure Cycle Corporation of our report dated November
12, 2010, related to the financial statements and the effectiveness of internal control over financial reporting (which
expresses an unqualified opinion), which appears on page F-1 of this annual report on Form 10-K for the fiscal year
ended August 31, 2010.
/s/ GHP HORWATH, P.C.
Denver, Colorado
November 12, 2010
36
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Proxy Statement
For the January 11, 2011
Annual Shareholders’ Meeting
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant
Filed by a party other than the Registrant
Check the appropriate box:
Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material under Section 240.14a-12
PURE CYCLE CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set
forth the amount on which the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials:
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
PURE CYCLE CORPORATION
500 E. 8th Ave, Suite 201
Denver, CO 80203
(303) 292-3456
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on January 11, 2011
TO PURE CYCLE’S SHAREHOLDERS:
You are cordially invited to attend the annual meeting of the shareholders of Pure Cycle Corporation (the
“Company”). The meeting will be held at 1550 Seventeenth Street, Suite 500, Denver, Colorado 80202, at the
offices of Davis Graham & Stubbs LLP, on January 11, 2011 at 2:00 p.m. Mountain Time for the following
purposes:
1. To elect a board of seven directors to serve until the next annual meeting of shareholders, or until their
successors have been duly elected and qualified;
2. To ratify the appointment of GHP Horwath, P.C. as the Company’s independent registered public
accounting firm for the 2011 fiscal year;
3. To approve the issuance of shares of common stock upon conversion of a $5.2 million Convertible
Negotiable Promissory Note payable by the Company to PAR Investment Partners, L.P., a 5% or greater
shareholder of the Company; and
4. To transact such other business as may properly come before the meeting or any adjournment(s) or
postponement(s) thereof.
Only shareholders of record as of 5:00 p.m. Mountain Time on November 22, 2010 will be entitled to notice of or to
vote at this meeting or any adjournment(s) thereof.
Whether or not you plan to attend, please vote promptly by following the instructions on the Important
Notice Regarding the Availability of Proxy Materials or, if you requested a printed set of proxy materials, by
completing, signing and dating the enclosed proxy and returning it in the accompanying postage-paid
envelope. Shareholders who attend the meeting may revoke their proxies and vote in person if they so desire.
BY ORDER OF THE BOARD OF DIRECTORS
December 2, 2010
/s/ Scott E. Lehman
Scott E. Lehman, Secretary
PURE CYCLE CORPORATION
500 E. 8th Ave, Suite 201
Denver, CO 80203
(303) 292-3456
PROXY STATEMENT FOR THE
ANNUAL MEETING OF SHAREHOLDERS
To be held on January 11, 2011
ABOUT THE MEETING
This proxy statement is being made available to shareholders in connection with the solicitation of proxies by the
board of directors of PURE CYCLE CORPORATION (the “Company”) for use at the annual meeting of
shareholders of the Company (the “Meeting”) to be held at 1550 Seventeenth Street, Suite 500, Denver, Colorado
80202, at the offices of Davis Graham & Stubbs LLP on January 11, 2011 at 2:00 p.m. Mountain Time or at any
adjournment thereof. The cost of soliciting proxies is being paid by the Company. The Company’s officers,
directors, and other regular employees may, without additional compensation, solicit proxies personally or by other
appropriate means.
Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a
full set of proxy materials?
Pursuant to the rules adopted by the Securities and Exchange Commission (“SEC”), the Company is required to
provide access to its proxy materials via the Internet. Accordingly, the Company furnished proxy materials to its
shareholders primarily via the Internet, rather than mailing these materials to each shareholder. On or about
December 2, 2010, the Company mailed to each shareholder of record and beneficial owners (other than those who
previously requested electronic delivery) an Important Notice Regarding the Availability of Proxy Materials.
How can I get access to the proxy materials?
Instructions on how to access the proxy materials, including this proxy statement and the Company’s Annual Report
on Form 10-K, on-line may be found in the Important Notice Regarding the Availability of Proxy Materials, as well
as instructions to request a printed set of such materials. You may also request the proxy materials by contacting the
Company’s transfer agent: Computershare Trust Company, Inc., 350 Indiana Street, Suite #800, Golden, Colorado
80401, telephone: (303) 262-0600 or 1-800-962-4284, or by writing the Company’s Secretary at the Company’s
address set forth above.
If you would like to receive the Important Notice Regarding the Availability of Proxy Materials via email rather
than regular mail in future years, please follow the instructions in the Notice. Choosing to receive future notices by
email will help the Company reduce the costs and environmental impact of the Company’s shareholder meetings.
What is the purpose of the Meeting?
At the Meeting, shareholders are asked to act upon the matters outlined above in the Notice of Annual Meeting of
Shareholders and as described in this proxy statement. The matters to be considered are (i) the election of directors,
(ii) the ratification of the appointment of the Company’s independent auditors for the fiscal year ending August 31,
2011, (iii) the approval of the issuance of shares of common stock upon conversion of a $5.2 million note payable,
and (iv) such other matters as may properly come before the Meeting. Management will be available to respond to
appropriate questions.
Who is entitled to vote?
Only shareholders of record as of 5:00 p.m. Mountain Time on November 22, 2010 (the “Record Date”), are entitled
to vote on matters presented at the Meeting. On the Record Date, there were 22,055,499 shares of the Company’s
1/3 of $.01 par value common stock (“common stock”) issued and outstanding.
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What are my voting rights?
If you were a shareholder of record on the Record Date you will be entitled to vote all of the shares you held on the
Record Date at the Meeting or any postponements or adjournments thereof. If your shares are held in an account at
a bank, brokerage firm, or other nominee, then you are the beneficial owner of shares held in “street name.” If you
wish to vote in person at the Meeting, you must obtain a valid proxy from the nominee that holds your shares.
Whether you hold shares directly as the shareholder of record or beneficially in street name, you may direct how
your shares are voted without attending the Meeting.
Each outstanding share of the Company’s common stock will be entitled to one vote on each matter acted upon.
There is no cumulative voting.
How do I vote?
If you are the shareholder of record, you may vote your shares by following the instructions in the Important Notice
Regarding the Availability of Proxy Materials mailed on or about December 2, 2010 or, if you have received a
printed set of the proxy materials, you may vote your shares by completing, signing and dating the enclosed proxy
card and then mailing it to the Company’s transfer agent in the pre-addressed envelope provided. You may also
vote your shares by calling the transfer agent at the number listed on the proxy card. If your shares are held
beneficially in street name, you may vote your shares by following the instructions provided by your broker.
Can I change or revoke my vote?
A proxy may be revoked by a shareholder any time prior to the exercise thereof by written notice to the Secretary of
the Company, by submission of another proxy bearing a later date or by attending the Meeting and voting in person.
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual shareholders are handled in a manner that
protects your voting privacy. Your vote will not be disclosed within the Company or to third parties, except: (1) as
necessary to meet applicable legal requirements, (2) to allow for the tabulation of votes and certification of the vote,
and (3) to facilitate a successful proxy solicitation. Occasionally shareholders provide written comments on their
proxy cards, which are forwarded to management of the Company.
Will my shares held in street name be voted if I do not provide my proxy?
If you hold your shares through a bank, broker, or other nominee, your shares must be voted by the nominee. If you
do not provide voting instructions, under the rules of the securities exchanges, the nominee’s discretionary authority
to vote your shares is limited to “routine” matters. Proposal 1 for the election of directors and proposal 3 for the
conversion of the promissory note are not considered routine matters for this purpose, so if you do not provide your
proxy, your shares will not be voted at the Meeting with respect to the election of directors or proposal 3. In this
case your shares will be treated as “broker non-votes” and will not be counted for purposes of determining the
election of directors or whether proposal 3 has been approved.
A “broker non-vote” occurs when a nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner.
What is a quorum?
The presence, in person or by proxy, of the holders of a majority of the outstanding shares of common stock
constitutes a quorum at the Meeting for the election of directors and for the other proposals. Abstentions and broker
non-votes are counted for the purposes of determining whether a quorum is present at the Meeting.
How many votes are required to approve the proposals?
• Election of Directors – The election of directors requires the affirmative vote of a plurality of the votes cast by
shares represented in person or by proxy and entitled to vote for the election of directors. This means that the
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nominees receiving the most votes from those eligible to vote will be elected. You may vote “FOR” all of the
nominees or your vote may be “WITHHELD” with respect to one or more of the nominees; however, a
“withheld” vote or a broker non-vote (defined above) will have no effect on the outcome of the election.
• Ratification of auditors, conversion of note payable to common stock and other matters – The number of votes
cast in favor of the proposal at the Meeting must exceed the number of votes cast against the proposal for the
approval of proposals 2 and 3 and other matters. For proposals 2 and 3 and any other business matters to be
voted on, you may vote “FOR,” “AGAINST,” or you may “ABSTAIN.” Abstentions and broker non-votes will
not be counted as votes for or against a proposal and, therefore, have no effect on the vote.
If no specification is made, then the shares will be voted “FOR” the directors nominated by the board of directors
and “FOR” proposals 2 and 3 and otherwise, in accordance with the recommendations of the board of directors.
Does the Company expect there to be any additional matters presented at the Meeting?
Other than the items of business described in this proxy, the Company is not aware of any other business to be acted
upon at the Meeting. If you grant a proxy, the persons named as proxy-holders, Mark W. Harding and Harrison H.
Augur, have the discretion to vote your shares on any additional matter properly presented for a vote at the Meeting.
If for any unforeseen reason any of the director nominees are not available for election at the date of the Meeting,
the named proxy-holders will vote your shares for such other candidates as may be nominated by the board.
When will the results of the voting being announced?
The Company will announce preliminary results at the Meeting and will publish final results in a current report on
Form 8-K to be filed within 4 days of the date of the Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of November 22, 2010, as to the beneficial ownership of shares of the
Company’s common stock by (i) each person (or group of affiliated persons) known to the Company to own
beneficially 5% or more of the common stock, (ii) each director of the Company and each nominee for director,
(iii) each executive officer and (iv) all directors and executive officers as a group. All information is based on
information filed by such persons with the SEC and other information provided by such persons to the Company.
Except as otherwise indicated, the Company believes that each of the beneficial owners listed has sole investment
and voting power with respect to such shares. On November 22, 2010, there were 22,055,499 shares outstanding.
Shares not outstanding but deemed beneficially owned by virtue of the right of a person to acquire shares within 60
days of November 22, 2010, are included as outstanding and beneficially owned for that person, but are not treated
as outstanding for the purpose of computing the percentage ownership of any other person.
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Name and address of beneficial owner
Mark W. Harding **
Harrison H. Augur **
Arthur G. Epker III - One International Place, Suite 2401, Boston, MA 02110
Richard L. Guido **
Peter C. Howell **
George M. Middlemas - 225 W. Washington, #1500, Chicago, IL 60606
H. Hunter White - 301 St. Charles Ave., 3rd Floor, New Orleans, LA 70130
All officers and directors as a group (7 persons)
PAR Capital Management, Inc. / PAR Investment Partners, L.P. / PAR Group, L.P.
One International Place, Suite 2401, Boston, MA 02110
High Plains A&M, LLC - 301 St. Charles Ave., 3rd Floor, New Orleans, LA 70130
Wellington Management Company, LLP - 75 State Street, Boston, MA 02109
Trigran Investments, Inc. / Trigran Investments, L.P.
630 Dundee Road, Suite 230, Northbrook, IL 60062
RMB Capital Management, LLC - 115 S. LaSalle Street, 34th Floor, Chicago, IL 60603
Tealwood Asset Management, Inc. - 80 South 8th Street, Suite 1225, Minneapolis, MN 55402
* Less than 1%
** Address is the Company's address: 500 E. 8th Ave, Suite 201, Denver, CO 80203
Amount and nature of
beneficial ownership
727,243 1
122,384 2
12,500 3
20,000 4
18,000 5
20,000 6
3,000,000 7
3,920,127 8
4,000,871
3,000,000
2,158,195
1,923,944
1,442,262
1,367,579
9
10
11
12
13
14
Percent of
class
3.3%
*
*
*
*
*
13.6%
17.7%
18.1%
13.6%
9.8%
8.7%
6.5%
6.2%
1.
2.
3.
Includes 210,000 shares of common stock held by SMA Investments, LLLP, a limited liability limited partnership
controlled by Mr. Harding.
Includes 20,000 shares purchasable by Mr. Augur under currently exercisable options. Includes 10,000 shares
of common stock held by Patience Partners, L.P., a limited partnership in which a foundation controlled by Mr.
Augur is a 60% limited partner and Patience Partners LLC is a 40% general partner. Patience Partners LLC is a
limited liability company in which Mr. Augur owns a 50% membership interest. Includes 46,111 shares of
common stock held by Auginco, a Colorado partnership, which is owned 50% by Mr. Augur and 50% by his
wife.
Includes 12,500 shares purchasable by Mr. Epker under currently exercisable options. Excludes 4,000,871
shares of common stock held directly by PAR Investment Partners, L.P. ("PIP"). PAR Capital Management,
Inc. ("PCM"), as the general partner of PAR Group, L.P. (“PGL”), which is the general partner of PIP, has
investment discretion and voting control over shares held by PIP. No shareholder, director, officer or employee
of PCM has beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934 (the “Exchange Act”)) of any shares held by PIP. The shares held by PIP are part of a
portfolio managed by Mr. Epker. As an officer of PCM, Mr. Epker has the authority to trade the securities held
by PIP, however, Mr. Epker disclaims beneficial ownership of the shares held by PIP.
4.
Includes 20,000 shares purchasable by Mr. Guido under currently exercisable options.
5.
Includes 17,500 shares purchasable by Mr. Howell under currently exercisable options.
6.
Includes 20,000 shares purchasable by Mr. Middlemas under currently exercisable options.
7. By reason of his status as a member and manager of High Plains A&M, LLC, (“HP A&M”), Mr. White has
voting authority and investment power over the 3,000,000 shares issued to HP A&M. Mr. White disclaims
beneficial ownership of the shares held by HP A&M except to the extent of his pecuniary interest therein, which
is approximately 66% or approximately 2,000,000 shares of common stock. HP A&M has pledged 2,250,000
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of its shares of common stock. Mr. White’s interest in the shares pledged would equate to a pledge of
approximately 1,500,000 of the shares in which he claims pecuniary interest.
8.
Includes the following shares:
a. 210,000 shares held by SMA Investments, LLLP as described in number 1 above,
b. 90,000 shares purchasable by directors and officers under exercisable options, and
c. 10,000 shares of common stock held by Patience Partners, L.P., and 46,111 shares of common stock
held by Auginco, as described in number 2 above.
9. This disclosure is based on the Schedule 13D/A filed by PIP, PGL and PCM on October 8, 2010. PIP owns
directly 4,000,871 shares. PGL, through its control of PIP as general partner, has sole voting and dispositive
power with respect to all 4,000,871 shares owned beneficially by PIP. PCM, through its control of PGL as
general partner, has sole voting and dispositive power with respect to all 4,000,871 shares owned beneficially
by PIP.
10. This disclosure is based on a Schedule 13G filed by HP A&M on September 11, 2006. By reason of the status
of each of H. Hunter White, Mark D. Campbell and M. Walker Baus as a member and manager of HP A&M,
each of them is deemed a beneficial owner of these shares. Each of them disclaims beneficial ownership of the
shares held by HP A&M except to the extent of his pecuniary interest in the limited liability company.
11. This disclosure is based on a Schedule 13G/A filed by Wellington Management Company, LLP (“Wellington”)
on February 12, 2010. Wellington, in its capacity as investment adviser, may be deemed to beneficially own
shares owned of record by clients of Wellington. Wellington shares dispositive power over 2,158,195 shares
and voting power over 1,499,695 shares.
12. This disclosure is based on a Schedule 13G/A filed by Trigran Investments, Inc. (“TII”), Trigran Investments,
L.P. (“TIL”), Douglas Granat, Lawrence A. Oberman and Steven G. Simon on February 12, 2010. It includes
1,198,640 shares of common stock owned by TIL. By reason of its role as the general partner of TIL, TII may
be considered the beneficial owner of the shares owned by TIL. By reason of their role as controlling
shareholders and sole directors of TII, each of Douglas Granat, Lawrence A. Oberman and Steven G. Simon
may be considered the beneficial owners of shares beneficially owned by TII.
13. This disclosure is based on a Schedule 13G filed by RMB Capital Management, LLC on February 5, 2010.
14. This disclosure is based on a Schedule 13G filed by Tealwood Asset Management, Inc. (“Tealwood”) on
November 3, 2010. Tealwood has sole dispositive power over 1,367,579 and voting power over 1,085,318
shares.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the Company’s directors, director nominees, and executive officer and their positions
currently held with the Company.
Name
Mark W. Harding
Harrison H. Augur
Arthur G. Epker III
Richard L. Guido
Peter C. Howell
George M. Middlemas
H. Hunter White
* Director nominee
Age
47
68
48
66
61
64
56
Position
Director, President, CEO and CFO *
Chairman of the Board *
Director *
Director *
Director *
Director *
*
The principal occupation and other information about each of the individuals listed above, including the period
during which each has served as director or officer can be found beginning on page 15.
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CORPORATE GOVERNANCE AND BOARD MATTERS
Board Leadership Structure
The Company’s board of directors has chosen to separate the positions of Chief Executive Officer and Chairman of
the board. Keeping these positions separate allows the Company’s Chief Executive Officer to focus on developing
and implementing the Company’s business plans and supervising the Company’s day-to-day operations and allows
the Company’s Chairman to lead the board of directors in its oversight and advisory roles. Because of the many
responsibilities of the board of directors and the significant time and effort required by each of the Chairman and the
Chief Executive Officer to perform their respective duties, the Company believes that having separate persons in
these roles enhances the ability of each to discharge those duties effectively and, as a corollary, enhances the
Company’s prospects for success. The board of directors also believes that having separate positions provides a
clear delineation of responsibilities for each position and fosters greater accountability of management.
Board Risk and Oversight
Our board of directors, as a whole and through its committees, has responsibility for the oversight of risk
management. With the oversight of the Company’s full board of directors, the Company’s executive officer is
responsible for the day-to-day management of the material risks the Company faces. In its oversight role, the board
of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by
management are adequate and functioning as designed. Annually, the board of directors holds strategic planning
sessions with management to discuss strategies, key challenges, risks and opportunities for the Company. This
involvement of the board of directors in setting the Company’s business strategy is a key part of its oversight of risk
management, its assessment of management’s appetite for risk, and its determination of what constitutes an
appropriate level of risk for the Company. Additionally, the board of directors regularly receives updates from
management regarding certain risks the Company faces, including various operating risks. Management attends
meetings of the board of directors and its committees on a regular basis, and as is otherwise needed, and are
available to address any questions or concerns raised by the board on risk management and any other matters.
The Audit Committee is responsible for overseeing risk management of financial matters, financial reporting, the
adequacy of the Company’s risk-related internal controls, internal investigations, and enterprise risks, generally.
The Nominating Committee oversees the Company’s corporate governance guidelines and governance-related risks,
such as board independence, as well as management and director succession planning. The Compensation
Committee oversees risks related to compensation policies and practices, and is responsible for establishing and
maintaining compensation policies and programs designed to create incentives consistent with the Company’s
business strategy that do not encourage excessive risk-taking.
Board Membership and Director Independence
Director Independence – At least a majority of the members of the board and all members of the board's Audit,
Compensation, and Nominating Committees must be independent in accordance with the listing standards of The
NASDAQ Stock Market. The board has determined that four of the six current members, Messrs. Augur, Guido,
Howell, and Middlemas, are independent pursuant to the standards of The NASDAQ Stock Market.
Terms of Directors and Officers – All directors are elected for one-year terms which expire at the annual meeting
of shareholders or when their successors are duly elected and qualified. The Company’s officers are elected annually
by the board of directors and hold office until their successors are duly elected and qualified.
Family Relationships of Directors and Officers – None of the current directors or officers, or nominees for director,
is related to any other officer or director of the Company or to any nominee for director.
Board meetings held – The board of directors and each of the standing committees described below meet
throughout the year on a set schedule. They also hold special meetings and act by written consent from time to time
as appropriate. The Company’s non-management directors meet regularly in executive sessions without
management present. The executive sessions of non-management directors are held in conjunction with each
regularly scheduled board meeting.
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During the fiscal year ended August 31, 2010, the board of directors held five (5) meetings. All board members
attended 75% or more of the aggregate of the total number of meetings of the board of directors and the total number
of meetings held by all committees of the board on which the director served except Mr. Middlemas. All of the
Company’s board members are expected to attend the annual meetings. All of the Company’s board members
attended the 2010 Annual Meeting.
Committees
The Board has three standing committees: Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee (the “Nominating Committee”). Each of the committees regularly reports on its
activities and actions to the full board of directors.
Membership in the standing committees for 2010 is set forth below:
Director
M. Harding
H. Augur
A. Epker
R. Guido
P. Howell
G. Middlemas
Fiscal 2010 Committee Membership
Audit
Committee
–
X
–
X
Chair
–
Compensation
Committee
–
X
X
–
–
Chair
Nominating
Committee
–
X
X
Chair
–
–
Audit Committee – The Audit Committee consists of Mr. Howell (Chair) and Messrs. Augur and Guido. The board
of directors has determined that all of the members of the Audit Committee are “independent” within the meaning of
the listing standards of The NASDAQ Stock Market and the SEC rules governing audit committees. In addition, the
board has determined that Mr. Howell meets the SEC criteria of an “audit committee financial expert” by reason of
his understanding of Accounting Principles Generally Accepted in the United States of America (“GAAP”) and the
application of GAAP, his education, his experiences as an auditor and chief financial officer, and his understanding
of financial statements. See Mr. Howell’s biography under Election of Directors (Proposal No. 1) for additional
information.
The functions to be performed by the Audit Committee include the appointment, retention, compensation and
oversight of the Company’s independent auditors, including pre-approval of all audit and non-audit services to be
performed by such auditors. The Audit Committee Charter is available on the Company’s website at
www.purecyclewater.com. The Audit Committee held six (6) meetings during the fiscal year ended August 31,
2010.
Compensation Committee – The Compensation Committee consists of Mr. Middlemas (Chairman) and Messrs.
Augur and Epker. The board of directors has determined that all members of the Compensation Committee are
“independent” with the meaning of the listing standards of The NASDAQ Stock Market. The functions to be
performed by the Compensation Committee include establishing the compensation of officers, evaluating the
performance of officers and key employees, and administering employee incentive compensation plans. The
Compensation Committee typically meets with the Chief Executive Officer to obtain information about employee
performance and compensation recommendations. It also has the authority to engage outside advisors to assist the
committee with its functions. The Compensation Committee has the power to delegate authority to the CEO or a
subcommittee to make certain determinations with respect to compensation for employees who are not executive
officers. The Company’s Compensation Committee Charter is available on the Company’s website at
www.purecyclewater.com. The Compensation Committee held two (2) meetings during the fiscal year ended
August 31, 2010.
Nominating and Corporate Governance Committee – The Nominating Committee consists of Messrs. Guido
(Chairman), Epker and Augur. The board of directors has determined that all the members of the Nominating
Committee are “independent” within the meaning of the listing standards of The NASDAQ Stock Market. The
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principal responsibilities of the Nominating Committee are to identify and nominate qualified individuals to serve as
members of the board and to make recommendations to the board with respect to director compensation. In
addition, the Nominating Committee is responsible for establishing the Company’s Corporate Governance
Guidelines and evaluating the board and its processes. In selecting nominees for the board, the Nominating
Committee is seeking a board with a variety of experience and expertise, and in selecting nominees it will consider
business experience in the industry in which the Company operates, financial expertise, independence from the
Company, experience with publicly traded companies, experience with relevant regulatory matters in which the
Company is involved, and a reputation for integrity and professionalism. The Company does not have a formal
policy with respect to the consideration of diversity in identifying director nominees, but it considers diversity as
part of its overall assessment of the board’s functions and needs. Nominees must be at least 21 years of age and less
than 70. Identification of prospective board members is done by a combination of methods, including word-of-
mouth in industry circles, inquiries of outside professionals and recommendations made to the Company. The
Nominating Committee Charter is available on the Company’s website at www.purecyclewater.com. The
Nominating Committee held two (2) meetings during the fiscal year ended August 31, 2010.
The Nominating Committee will consider nominations for director made by shareholders of record entitled to vote.
In order to make a nomination for election at the 2012 annual meeting, a shareholder must provide notice, along
with supporting information (discussed below) regarding such nominee, to the Company's Secretary by August 4,
2011, in accordance with the Company’s bylaws. The Nominating Committee evaluates nominees recommended by
shareholders utilizing the same criteria it uses for other nominees.
Each shareholder recommendation should be accompanied by the following:
• The full name, address, and telephone number of the person making the recommendation, and a statement that
the person making the recommendation is a shareholder of record (or, if the person is a beneficial owner of the
Company’s shares but not a record holder, a statement from the record holder of the shares verifying the
number of shares beneficially owned), and a statement as to whether the person making the recommendation
has a good faith intention to continue to hold those shares through the date of the Company’s next annual
meeting;
• The full name, address, and telephone number of the candidate being recommended, information regarding the
candidate’s beneficial ownership of the Company’s equity securities, any business or personal relationship
between the candidate and the person making the recommendation, and an explanation of the value or benefit
the person making the recommendation believes the candidate would provide as a director;
• A statement signed by the candidate that he or she is aware of and consents to being recommended to the
Nominating Committee and will provide such information as the Nominating Committee may request for its
evaluation of candidates;
• A description of the candidate’s current principal occupation, business or professional experience, previous
employment history, educational background, and any areas of particular expertise;
• Information about any business or personal relationships between the candidate and any of the Company’s
customers, suppliers, vendors, competitors, directors or officers, or other persons with any special interest
regarding any transactions between the candidate and the Company; and
• Any information in addition to the above about the candidate that would be required to be included in the
Company’s proxy statement (including without limitation information about legal proceedings in which the
candidate has been involved within the past ten years).
Compensation Committee Interlocks and Insider Participation – No interlocking relationship exists between any
member of the board of directors or the Compensation Committee and any other company’s board of directors or
compensation committee.
- 8 -
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics for its directors, officers and employees, which is
available on the Company’s website at www.purecyclewater.com.
Shareholder Communications with the Board
The board of directors has adopted a policy for shareholders to send communications to the board. The policy is
available on the Company’s website. Shareholders wishing to send communications to the board may contact the
Chairman of the board at the Company’s principal place of business or e-mail chairman@purecyclewater.com. All
such communications shall be shared with the members of the board, or if applicable, a specified committee or
director.
Director Compensation
Directors who are employees of the Company receive no fees for board service. Currently, Mr. Harding is the only
director who is also an employee. Each non-employee director receives a payment of $10,000 for each full year in
which he or she serves as a director, with an additional payment of $1,000 for each committee on which he or she
serves, and $1,000 for serving as chairman of the board. Directors receive $500 for attendance at each board
meeting and, if committee meetings are held separate from board meetings, each director receives $500 for
attendance at such committee meetings.
The following table sets forth summary information concerning the compensation paid to the Company’s non-
employee directors in fiscal 2010 for services to the Company:
Director Compensation
Fees
Earned or
Paid in
Cash
($)
(b)
17,500
14,500
15,500
15,500
12,500
Stock
Awards
($)
(c )
-
-
-
-
-
Option
Awards
(1)
($)
(d)
6,200
6,200
6,200
6,200
6,200
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)
(f)
Non-Equity
Incentive Plan
Compensation
($)
(e)
All Other
Compensation
($)
(g)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
($)
(h)
23,700
20,700
21,700
21,700
18,700
Name
(a)
H. Augur (2)
A. Epker (3)
R. Guido (4)
P. Howell (5)
G. Middlemas (6)
(1)
In addition to cash compensation, as part of the 2004 Incentive Plan approved by shareholders at the 2004
annual meeting of shareholders, each non-employee director receives an option to purchase 5,000 shares of
common stock upon initial election or appointment to the board (which vest one half at each of the first and
second anniversary dates of the grant), and an option to purchase 2,500 shares for each subsequent full year in
which he or she serves as a director, which options vest one year from the date of grant. The amounts in this
column represent the total dollar amount that will be recognized as expense for financial reporting purposes
with respect to the options granted during the Company’s fiscal year ended August 31, 2010. For more
information about how the Company values and accounts for share-based compensation see Note 8 –
Shareholders’ Equity in the Company’s August 31, 2010 Annual Report on Form 10-K.
(2) The $17,500 earned by Mr. Augur is comprised of: $10,000 for serving on the board, $1,000 for being the
chairman of the board, $3,000 for serving on three committees, $3,500 for attendance at board and committee
meetings ($500 per meeting). Mr. Augur had 20,000 options outstanding as of August 31, 2010, all of which
are exercisable within 60 days of the filing of this proxy statement.
- 9 -
(3) The $14,500 earned by Mr. Epker is comprised of: $10,000 for serving on the board, $2,000 for serving on
two committees and $2,500 for attendance at board and committee meetings ($500 per meeting). Mr. Epker
had 12,500 options outstanding as of August 31, 2010, all of which are exercisable within 60 days of the filing
of this proxy statement.
(4) The $15,500 earned by Mr. Guido is comprised of: $10,000 for serving on the board, $2,000 for serving on
two committees and $3,500 for attendance at board and committee meetings ($500 per meeting). Mr. Guido
had 20,000 options outstanding as of August 31, 2010, all of which are exercisable within 60 days of the filing
of this proxy statement.
(5) The $15,500 earned by Mr. Howell is comprised of: $10,000 for serving on the board, $1,000 for serving on
one committee and $4,500 for attendance at board and committee meetings ($500 per meeting). Mr. Howell
had 17,500 options outstanding as of August 31, 2010, all of which are exercisable within 60 days of the filing
of this proxy statement.
(6) The $12,500 earned by Mr. Middlemas is comprised of: $10,000 for serving on the board, $1,000 for serving
on one committee and $1,500 for attendance at board and committee meetings ($500 per meeting). Mr.
Middlemas had 20,000 options outstanding as of August 31, 2010, all of which are exercisable within 60 days
of the filing of this proxy statement.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation Philosophy
The Company’s executive compensation program is administered by the Compensation Committee of the board of
directors. The Compensation Committee is composed of Messrs. Middlemas, Augur and Epker, three non-employee
directors. The Compensation Committee reviews the performance and compensation level for the executive officer
and determines equity grants under the 2004 Incentive Plan. The executive officer may provide information to the
Compensation Committee regarding his compensation; however, the Compensation Committee makes the final
determination on executive compensation. Final compensation determinations, including equity awards, are
generally made in August at the end of the Company’s fiscal year. The following outlines the philosophy and
objectives of the Company’s compensation plan.
Q. What are the objectives of the Company’s compensation plan?
A. The objectives of the Company’s compensation plan are to correlate executive compensation with the
Company’s objectives and overall performance and to enable the Company to attract, retain and reward
executive officers who contribute to its long-term growth and success.
Q. What is the Company’s compensation plan designed to do?
A. The Company’s compensation plan is designed to attract, retain and motivate quality executive talent critical to
the Company’s growth and success. The compensation plan is designed to reward the executive officer of the
Company with competitive total pay opportunities through a compensation mix that emphasizes cash and non-
cash incentives and merit-based salary increases, while de-emphasizing entitlements and perquisites. The
compensation plan is designed to create a mutuality of interest between executive and shareholders through
equity ownership programs and to focus the executive’s attention on overall corporate objectives, in addition to
the executive’s personal objectives.
Q. What are the goals of the Compensation Committee?
A. The goal of the Compensation Committee is to provide a compensation package that is competitive with
compensation practices of companies with which the Company competes, provides variable compensation that
is linked to achievement of financial and individual performance goals, and aligns the interests of the executive
officer and employees with those of the shareholders of the Company by providing them with equity ownership
in the Company. Additionally, the Compensation Committee’s goal is to design compensation packages which
- 10 -
fall within the mid-range of the packages provided to executives of similarly sized corporations in like
industries.
Q. What are the basic elements of the executive officer’s pay and how do those fit into the Company’s
compensation plan?
A. Generally the executive officer receives a base cash salary, cash bonus (if the Compensation Committee elects
to award one), and long-term equity incentives. The mixture of these cash and non-cash compensation items is
designed to provide the executive with a competitive total compensation package while not using an excessive
amount of the Company’s cash or overly diluting the equity positions of its shareholders. The compensation
plan for the President is described below.
Q. Does the Company offer any benefit plans to its executive officer?
A. The executive officer is eligible for the same benefits available to all Company employees. Currently, this
includes participation in a tax-qualified 401(k) plan, health and dental plans.
Q. Does the Company offer any perquisites to its executive officer?
A. The Company’s executive officer does not receive any perquisites or personal benefits.
Compensation of the Company’s President
The current compensation program for the Company’s President consists of the following:
Base Salary—The Compensation Committee reviewed and approved a salary for the President during the year
ending August 31, 2010. His base salary was established by the Compensation Committee based upon competitive
compensation data for similarly sized public companies, job responsibilities, level of experience, individual
performance and contribution to the business throughout his career with the Company. In making the base salary
decision, the committee exercised its discretion and judgment based upon these factors. No specific formula was
applied to determine the weight of each factor. While the Compensation Committee reviewed competitive
compensation data, it did not benchmark Mr. Harding’s compensation to that of any other company. Mr. Harding’s
base salary remained unchanged from last year.
Incentive Bonus—The Compensation Committee’s goal in granting incentive bonuses is to tie a portion of the
President’s compensation to the performance of the Company and to the President’s individual contribution to the
Company. Due to the difficult market for real estate developments, the primary market for the Company’s water
rights, and the lack of completion of significant transactions in fiscal 2010, no incentive bonus was granted to the
President during the year ended August 31, 2010.
Long-Term Stock Incentives—The Compensation Committee has previously provided the Company’s President with
long-term equity incentive compensation through grants of stock options and restricted stock. The goal of the long-
term stock incentives has been to align the interests of the President with those of the Company’s shareholders and
to provide the President with a long-term incentive to manage the Company from the perspective of an owner with
an equity stake in the business. It is the belief of the Compensation Committee that stock options and restricted
stock grants directly motivate an executive to maximize long-term shareholder value. The philosophy of
administering the long-term stock incentive plan is to tie the number of stock options and restricted stock awarded to
each employee in the plan to the performance of the Company and to the individual contribution of each employee
in the plan.
No long-term stock incentives were granted during the fiscal year ended August 31, 2010. However, the
Compensation Committee tasked the Chairman of the Compensation Committee with investigating long-term
incentive awards for consideration by the Compensation Committee in fiscal 2011.
Discussion with Respect to Qualifying Compensation for Deductibility
Section 162(m) of the Internal Revenue Code imposes a limit on tax deductions for annual compensation (other than
performance-based compensation) in excess of one million dollars paid by a corporation to its chief executive
- 11 -
officer and its other four most highly compensated executive officers. The Company has not established a policy
with regard to Section 162(m) of the Code, because the Company does not currently anticipate paying cash
compensation in excess of one million dollars per annum to any employee. The Compensation Committee will
continue to assess the impact of Section 162(m) on its compensation practices and determine what further action, if
any, is appropriate.
Compensation Tables
The Company’s President, Mr. Harding, is the Principal Executive Officer and the Principal Financial Officer of the
Company. Therefore, all tables contained in this section relate solely to Mr. Harding.
Summary Compensation Table
Name and principal
position
Fiscal
year
(a)
Mark W. Harding
President,
CEO and CFO
(b)
2010
2009
2008
Base
Salary
($)
(c)
250,000
250,000
250,000
Bonus
($)
(d)
-
-
-
Stock
Awards
($)
(e)
-
-
-
Option
Awards
($)
(f)
-
-
-
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings
($)
(h)
Non-Equity
Incentive Plan
Compensation
($)
(g)
-
-
-
-
-
-
All Other
Compensation
($)
(i)
-
-
-
Total
($)
(j)
250,000
250,000
250,000
Grants of Plan Based Awards – The Company did not grant any plan based awards to Mr. Harding during the year
ended August 31, 2010. Therefore, the Company omitted the Grants of Plan Based Awards Table.
Outstanding Equity Awards at Fiscal Year-End – Mr. Harding did not have any outstanding equity awards at
August 31, 2010. Therefore, the Company omitted the Outstanding Equity Awards at Fiscal Year-End table.
Option Exercise and Stock Vested – Mr. Harding did not exercise any options or have any stock vest during the
year ended August 31, 2010. Therefore, the Company omitted the Option Exercise and Stock Vested table.
Pension Benefits – The Company does not offer pension benefits. Therefore, the Company omitted the Pension
Benefits Table.
Non-Qualified Deferred Compensation – The Company does not have any non-qualified deferred compensation
plans. Therefore, the Company has omitted the Non-Qualified Deferred Compensation Table.
Termination or Change-in-Control Payments – The Company does not have any plan or arrangement that provides
for payments to the executive officer in connection with a termination or change of control.
- 12 -
Compensation Committee Report1
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with
management, and based on the Committee’s review and discussion with management, has recommended to the full
board of directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement
for the Annual Meeting.
Respectfully submitted by the Compensation Committee of the Board of Directors
/s/ George M. Middlemas (Chairman)
/s/ Harry H. Augur
/s/ Arthur G. Epker III
REPORT OF THE AUDIT COMMITTEE1
The Audit Committee of the board of directors is comprised of independent directors and operates under a written
charter adopted by the board of directors. The Audit Committee charter is reassessed and updated as needed in
accordance with applicable rules of the SEC and The NASDAQ Stock Market.
The Audit Committee serves in an oversight capacity. Management is responsible for the Company’s internal
controls over financial reporting. The independent auditors are responsible for performing an independent audit of
the Company’s financial statements in accordance with the standards of the Public Company Accounting Oversight
Board (“PCAOB”) and issuing a report thereon. The Audit Committee’s primary responsibility is to monitor and
oversee these processes and to select and retain the Company’s independent auditors. In fulfilling its oversight
responsibilities, the Audit Committee reviewed with management the Company’s audited financial statements and
discussed not only the acceptability but also the quality of the accounting principles, the reasonableness of the
significant judgments and estimates, critical accounting policies and the clarity of disclosures in the audited financial
statements prior to issuance.
The Audit Committee reviewed and discussed the audited financial statements as of and for the year ended
August 31, 2010 with the Company’s independent auditors, GHP Horwath P.C. (“GHP”), and discussed not only the
acceptability but also the quality of the accounting principles, the reasonableness of the significant judgments and
estimates, critical accounting policies and the clarity of disclosures in the audited financial statements prior to
issuance. The Audit Committee meets with GHP, with and without management present, to discuss the results of
their examination and their evaluation of the Company’s internal controls, and the overall quality of the Company’s
financial reporting. The Audit Committee discussed and reviewed with GHP all communications required by
generally accepted auditing standards, including those described in Statement on Auditing Standards (SAS) No. 61,
as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the PCAOB in Rule 3200T.
GHP also provided the Audit Committee the written disclosures and the letter required by the applicable
requirements of the PCAOB for independent auditor communications with the Audit Committee concerning
independence. The Audit Committee also confirmed GHP’s independence with GHP.
Based on the foregoing, the Audit Committee recommended to the board of directors that the Company’s audited
financial statements be included in the Company’s Form 10-K for the fiscal year ended August 31, 2010.
/s/ Peter C. Howell
/s/ Harrison H. Augur
/s/ Richard L. Guido
1 These reports are not “soliciting material,” are not deemed “filed” with the Commission and are not to be
incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language in any such filing,
except to the extent the Company specifically references one of these reports.
- 13 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Related Parties
Tap Participation Fee Payments – On August 31, 2006, pursuant to an Asset Purchase Agreement (the “Arkansas
River Agreement”) with HP A&M, the Company purchased approximately 60,000 acre feet of water rights in the
Arkansas River and other related assets. As consideration for these assets, the Company issued HP A&M 3,000,000
shares of its common stock. The Company also granted HP A&M the right to receive ten percent (10%) of gross
proceeds, or the equivalent thereof, from the sale of the next 40,000 water taps (the “Tap Participation Fee”), which
was valued at approximately $45.6 million at the acquisition date. The Tap Participation Fee is due and payable
once the Company sells a water tap and receives the consideration due for such water tap. The Company did not sell
any water taps during the year ended August 31, 2010 or 2009. However, during fiscal 2009, the Company did
make Tap Participation Fee payments to HP A&M as a result of non-irrigated land sales which are discussed in
greater detail in Note 7 – Long-Term Debt and Operating Lease to the Company’s 2010 Annual Report on Form 10-
K. As a result of the acquisition, HP A&M owns 13.6% of the outstanding shares of common stock of the
Company.
Convertible Negotiable Promissory Note – Effective September 28, 2010, the Company issued a Convertible
Negotiable Promissory Note to PIP, an approximately 18% shareholder of the Company. See Proposal 3 for a
detailed description of this transaction.
Stock Purchase Pursuant to the Company’s Public Offering – In connection with the Company’s September 28,
2010, offering of 1,923,931 shares of the Company’s common stock, the Company’s Chairman of the board, Mr.
Augur, proposed to purchase 13,333 shares (or $40,000) in the offering and PIP proposed to purchase 930,633
shares (or $2,791,899) in the offering at the offering price of $3.00 per share. The Audit Committee discussed and
evaluated the proposed purchases in accordance with the Company’s Code of Business Conduct and Ethics and the
Audit Committee Charter, as described below. The Audit Committee approved the purchases after determining that
the terms and conditions of the purchases were fair to the Company and its shareholders and that the purchases were
in the Company’s best interest.
Review and Approval of Related Party Transactions
It is the Company’s policy as set forth in its Code of Business Conduct and Ethics that actual or apparent conflicts of
interest are to be avoided if possible and must be disclosed to the board of directors. Pursuant to the Code of
Business Conduct and Ethics, any transaction involving a related party must be reviewed and approved by the Audit
Committee. Additionally, the Audit Committee Charter requires the Audit Committee to review any transaction
involving the Company and a related party at least once a year or upon any significant change in the transaction or
relationship. The Code also provides non-exclusive examples of conduct which would involve a potential conflict
of interest and requires any material transaction involving a potential conflict of interest to be approved in advance
by the board. If a waiver from the Code is granted to an executive officer or director, the nature of the waiver will
be disclosed on the Company’s website, in a press release, or on a current report on Form 8-K.
The Company annually requires each of its directors and executive officers to complete a directors’ and officers’
questionnaire that solicits information about related party transactions. The Company’s board of directors and
outside legal counsel review all transactions and relationships disclosed in the directors’ and officers’ questionnaire,
and the board makes a formal determination regarding each director’s independence. If a director is determined to
no longer be independent, such director, if he or she serves on any of the Audit Committee, the Nominating
Committee, or the Compensation Committee, will be removed from such committee prior to (or otherwise will not
participate in) any future meeting of the committee. If the transaction presents a conflict of interest, the board of
directors will determine the appropriate response.
- 14 -
ELECTION OF DIRECTORS
(Proposal No. 1)
As of the date of the Meeting, the number of members of the board of directors will be fixed at seven. The board of
directors nominates the following persons currently serving on the board for reelection to the board: Mark W.
Harding, Harrison H. Augur, Arthur G. Epker III, Richard L. Guido, Peter C. Howell, George M. Middlemas and H.
Hunter White III.
Set forth below are the names of all nominees for director, all positions and offices with the Company held by each
such person, the period during which each has served as such, and the principal occupations and employment of
such persons during at least the last five years, as well as additional information regarding the skills, knowledge and
experience with respect to each nominee which has led the board of directors to conclude that each such nominee
should be elected or re-elected as a director of the Company.
Mark W. Harding. Mr. Harding joined the Company in April 1990 as Corporate Secretary and Chief Financial
Officer. He was appointed President of the Company in April 2001, Chief Executive Officer in April 2005, and a
member of the board of directors in February 2004. Mr. Harding brings a background in investment banking and
public finance, having worked from 1988 to 1990 for Price Waterhouse’s management consulting services where he
assisted clients in public finance and other investment banking related services. In determining Mr. Harding’s
qualifications to on the board of directors, the board of directors considered, among other things, that Mr. Harding is
the President and a board member of the Rangeview Metropolitan District and serves on a number of advisory
boards relating to water and wastewater issues in the Denver region, including a statewide roundtable created by the
Colorado legislature charged with identifying ways in which Colorado can address the water shortages facing Front
Range cities including Denver and Colorado Springs. Mr. Harding earned a B.S. Degree in Computer Science and a
Masters in Business Administration in Finance from the University of Denver.
Harrison H. Augur. Mr. Augur joined the board and was elected Chairman in April 2001. For more than 20 years,
Mr. Augur has been involved with investment management and venture capital investment groups. Mr. Augur has
been a general partner of CA Partners since 1987, and general partner of Patience Partners LLC since 1999. Mr.
Augur received a Bachelor of Arts degree from Yale University, an LLB degree from Columbia University School
of Law, and an LLM degree from New York University School of Law. In determining Mr. Augur’s qualifications
to serve on the board of directors, the board of directors has considered, among other things, his extensive
experience and expertise in finance and law.
Arthur G. Epker III. Mr. Epker was appointed to the board in August 2007. Since 1992, Mr. Epker has been a Vice
President and partner of PAR Capital Management, Inc., a private investment company located in Boston, MA. Mr.
Epker is also a portfolio manager over a portion of the assets of PAR Investment Partners, L.P., a private 3(c)7
investment company. Mr. Epker received his undergraduate degree in computer science and economics with highest
distinction from the University of Michigan and received a Master of Business Administration from Harvard
Business School. In determining Mr. Epker’s qualifications to serve on the board of directors, the board of directors
has considered, among other things, his extensive experience and expertise in finance and investment management.
Richard L. Guido. Mr. Guido served as a member of the Company’s board from July 1996 through August 31,
2003, and rejoined the board in 2004. Mr. Guido was an employee of Inco Limited, a Canadian mining company
(now known as Vale Inco), from 1980 through February 2004. He previously served on the Company’s board
pursuant to a voting agreement between Inco and the Company. That agreement is no longer in effect. Mr. Guido
was Associate General Counsel of DeltaCom, Inc., a telecommunications company, from March 2006 to March
2007, and prior to that Mr. Guido was Associate General Counsel of Inco Limited and President, Chief Legal
Officer and Secretary of Inco United States, Inc., now known as Vale Inco Americas, Inc. 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. In determining Mr. Guido’s
qualifications to serve on the board of directors, the board of directors has considered, among other things, his
extensive experience and expertise in finance, law and natural resource development.
Peter C. Howell. Mr. Howell was appointed to fill a vacancy on the board in February 2005. From 1997 to present,
Mr. Howell has served as an advisor to various business enterprises in the area of acquisitions, marketing and
financial reporting. From August 1994 to August 1997, Mr. Howell served as the Chairman and Chief Executive
- 15 -
Officer of Signature Brands USA, Inc. (formerly known as Health-O-Meter), and from 1989 to 1994 Mr. Howell
served as Chief Executive Officer and a director of Mr. Coffee, Inc. Mr. Howell is a member of the board of
directors of Libbey, Inc., Global Lite Array Inc. (a subsidiary of Global-Tech Advanced Innovations Inc.) and one
private company. Mr. Howell received a Master of Arts degree in Economics from Cambridge University. In
determining Mr. Howell’s qualifications to serve on the board of directors, the board of directors has considered,
among other things, his extensive experience and expertise in finance and financial reporting as well as his general
business expertise.
George M. Middlemas. Mr. Middlemas has been a director since April 1993. Mr. Middlemas has been a general
partner with Apex Venture Partners, a diversified venture capital management group, since 1991. From 1985 to
1991, Mr. Middlemas was Senior Vice President of Inco Venture Capital Management, primarily involved in
venture capital investments for Inco Securities Corporation. From 1979 to 1985, Mr. Middlemas was 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 member of the Pennsylvania State University-Library
Development Board and Athletic Committee and is a board member of the Joffrey Ballet of Chicago. Mr.
Middlemas received a Bachelor’s degree 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. In determining Mr. Middlemas’s qualifications to serve on the board of directors, the
board of directors has considered, among other things, his extensive experience and expertise in finance and
investment management.
H. Hunter White, III. Mr. White is a director nominee not currently serving on the board. Mr. White was a
founder of HP A&M, established in 2001, and since that date he has been the manager of HP A&M. HP A&M is a
developer of tributary and non-tributary water and water related assets in Colorado. Since 1978 Mr. White has been
an independent investor involved in a wide variety of business ventures. Mr. White is primarily a natural resources
developer, including real estate development, oil and gas exploration and production, and water resources. Mr.
White is also active with cellular telephone start ups, radio station ownership, hotel development, and buyouts and
business startups. Mr. White serves on the board of directors for one private company. Mr. White is involved in a
number of civic and cultural organizations and is a current board member and past Vice President of the New
Orleans Museum of Art. Mr. White received a bachelor’s degree from Louisiana State University. In determining
Mr. White’s qualifications to serve on the board of directors, the board of directors has considered, among other
things, his extensive experience and expertise in investment management, real estate development and water
resource development.
The proxy cannot be voted for more than the seven nominees named. Directors are elected for one-year terms or
until the next annual meeting of the shareholders and until their successors are elected and qualified. All of the
nominees have expressed their willingness to serve, but if because of circumstances not contemplated, one or more
nominees is not available for election, the proxy holders named in the enclosed proxy card intend to vote for such
other person or persons as the Nominating Committee may nominate.
HP A&M Director Nominee
The Arkansas River Agreement obligates the Company to nominate and solicit proxies for a director nominee
designated by HP A&M through the earlier of (i) the date on which the Company fully discharges its obligation to
pay the Tap Participation Fee or (ii) August 31, 2011. In addition, Mr. Harding agreed to vote his shares of common
stock in favor of the director nominee of HP A&M pursuant to a Voting Agreement for the same period that the
Company is obligated to solicit proxies for the HP A&M director nominee. HP A&M designated Mr. White as its
nominee to the board of directors for this election.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE
ELECTION AS DIRECTORS OF THE SEVEN PERSONS NOMINATED.
____________________________
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RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
(Proposal No. 2)
Action is to be taken by the shareholders at the Meeting with respect to the ratification and approval of the selection
by the Audit Committee of the Company’s board of directors of GHP Horwath, P.C. (“GHP”) to be the independent
auditors of the Company for the fiscal year ending August 31, 2011. In the event of a negative vote on such
ratification, the Audit Committee of the board of directors will reconsider its selection. A representative of GHP is
expected to be present at the Meeting. The GHP representative will have the opportunity to make a statement if he
or she desires to do so, and is expected to be available to respond to appropriate questions.
The Audit Committee reviews and approves in advance the audit scope, the types of non-audit services, if any, and
the estimated fees for each category for the coming year. For each category of proposed service, GHP is required to
confirm that the provision of such services does not impair their independence. Before selecting GHP, the Audit
Committee carefully considered that firm’s qualifications as an independent registered public accounting firm for
the Company. This included a review of its performance in prior years, as well as its reputation for integrity and
competence in the fields of accounting and auditing. The Audit Committee has expressed its satisfaction with GHP
in all of these respects. The Audit Committee’s review included inquiry concerning any litigation involving GHP
and any proceedings by the SEC against the firm.
GHP reported that the Company maintained, in all material respects, effective internal control over financial
reporting as of August 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
GHP has no direct or indirect financial interest in the Company and does not have any connection with the Company
in the capacity of promoter, underwriter, voting trustee, director, officer or employee. Neither the Company, nor
any officer, director nor associate of the Company has any interest in GHP.
Fees – For the fiscal years ended August 31, 2010 and 2009, the Company was billed the following audit, audit-
related, tax and other fees by its independent registered public accountant. The Audit Committee approved 100% of
these fees in accordance with the Audit Committee Charter. The audit related fees are comprised entirely of fees for
assistance with consultations with the Staff of the Office of the Chief Accountant of the SEC.
Audit Fees
Audit Related Fees
Tax
All Other Fees
Fiscal year ended August 31,
2010
$ 57,200
$ 5,800
-
$
-
$
2009
$ 62,900
$ 4,000
-
$
-
$
Pre-Approval Policy – The Audit Committee has established a pre-approval policy in its charter. In accordance
with the policy, the Audit Committee pre-approves all audit, non-audit and internal control related services provided
by the independent auditors prior to the engagement of the independent auditors with respect to such services.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE
APPOINTMENT OF THE INDEPENDENT AUDITORS.
____________________________
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ISSUANCE OF SHARES OF COMMON STOCK UPON CONVERSION OF CONVERTIBLE
NEGOTIABLE PROMISSORY NOTE
(Proposal No. 3)
Effective September 28, 2010, the Company issued a Convertible Negotiable Promissory Note (the “Note”) to PIP,
an approximately 18% shareholder of the Company. The Note: (i) has a face value of $5.2 million, (ii) accrues
simple interest at 10% per annum, (iii) interest from the issuance date of the Note through April 1, 2011 is due on
April 1, 2011 with monthly interest payments due the first day of each month following April 1, 2011 until the Note
matures on January 15, 2012, (iv) is unsecured, and (v) if approved by the Company’s shareholders, will be
converted to unregistered common stock of the Company at a conversion price of $2.70 per share. The conversion
price was set at 90% of the price per share at which the Company priced shares in its public offering which
commenced on the same date. The board of directors determined that a discount of 10% of the offering price was
appropriate because the shares which would be issued upon conversion are unregistered and therefore subject to
limitations on transferability. The last reported sales price of the common stock on The NASDAQ Stock Market on
September 27, 2010, the day before the Note was issued was $2.70 per share.
The Company received $5.2 million from PIP upon issuance of the Note. The $5.2 million, along with the
approximately $5.5 million raised in the public offering, were used to finance the Company’s acquisition of a note
payable and deed of trust granted by Sky Ranch, LLC, which ultimately enabled the Company to obtain title to
approximately 940 acres of land known as “Sky Ranch.” The Sky Ranch acquisition is described in more detail in
the Company’s 2010 Annual Report on Form 10-K. The proceeds remaining after the Sky Ranch acquisition will be
used for working capital and other corporate purposes. The issuance of the Note was approved by the Audit
Committee after it determined that the issuance was fair to the Company and its shareholders and in the Company’s
best interest, in accordance with the provisions of the Company’s Code of Business Conduct and Ethics and the
Audit Committee Charter applicable to related party transactions.
Shareholder approval of the issuance of the shares upon conversion of the Note is required pursuant to the rules of
The NASDAQ Stock Market. If the shareholders approve conversion of the Note at the Meeting on January 11,
2011, the $5.2 million Note, plus unpaid and accrued interest of $151,667 (total principal and interest of
$5,351,667), would convert into 1,982,099 shares of the Company’s common stock. Following this conversion, the
Company would have 24,037,596 shares outstanding, of which PAR would own 5,982,970 or 24.9% of the
Company’s outstanding shares.
If the Company’s shareholders do not approve the conversion of the Note to common stock, the Note would require
the following payments:
Fiscal Year Ending:
August 31, 2011
August 31, 2012
Total payments
Principal Payments
$
-
$
5,200,000
5,200,000
Interest Payments
$
486,800
197,900
684,700
$
Total Payments
486,800
5,397,900
5,884,700
$
$
If the conversion is not approved, the Company may be required to seek additional debt or equity financing to repay
the Note when it becomes due. In conjunction with the Note, the Company granted PAR one demand right and
certain piggyback rights to register the shares of common stock issuable upon conversion of the Note. There are no
preemptive rights associated with the Company common stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE CONVERSION OF THE NOTE
TO COMMON STOCK.
____________________________
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ACTION TO BE TAKEN UNDER THE PROXY
The proxy will be voted “FOR” approval of proposals 2 and 3, and “FOR” the directors nominated by the board,
unless the proxy is marked in such a manner as to withhold authority to so vote. The proxy will also be voted in
connection with the transaction of such other business as may properly come before the Meeting or any adjournment
or adjournments thereof. Management knows of no other matters, other than the matters set forth above, to be
considered at the Meeting. If, however, any other matters properly come before the Meeting or any adjournment
thereof, the persons named in the accompanying proxy will vote such proxy in accordance with their best judgment
on any such matter. The persons named in the accompanying proxy will also, if in their judgment it is deemed to be
advisable, vote to adjourn the Meeting from time to time.
Section 16 (a) Beneficial Ownership Reporting Compliance
OTHER INFORMATION
The Company’s directors and executive officers and persons who are beneficial owners of more than 10% of
common stock are required to file reports of their holdings and transactions in common stock with the SEC and
furnish the Company with such reports. Based solely upon the review of the copies of the Section 16(a) reports
received by the Company and written representations from these persons, the Company believes that during the
fiscal year ended August 31, 2010, all the directors, executive officers and 10% beneficial owners complied with the
applicable Section 16(a) filing requirements, except that the stock purchase made by Mr. Augur on September 28,
2010 in the Company’s registered stock offering was reported late on a Form 4 filed on October 6, 2010. The
Company files the Form 4 with respect to stock purchases made on behalf of the directors.
Shareholder Proposals
Shareholder proposals for inclusion in the Proxy Statement for the 2012 annual meeting of shareholders must be
received at the principal executive offices of the Company by August 4, 2011 but not before June 5, 2011. For more
information refer to the Company’s Bylaws which were filed as Appendix C to the Registration Statement on Form
SB-2/A filed with the SEC on June 10, 2004. The Company is not required to include proposals received outside of
these dates in the proxy materials for the 2012 annual meeting of shareholders, and any such proposals shall be
considered untimely. The persons named in the proxy will have discretionary authority to vote all proxies with
respect to any untimely proposals.
Delivery of Materials to Shareholders with Shared Addresses
The Company utilizes a procedure approved by the SEC called “householding”, which reduces printing and postage
costs. Shareholders who have the same address and last name will receive one copy of the Important Notice
Regarding the Availability of Proxy Materials or one set of printed proxy materials unless one or more of these
shareholders has provided contrary instructions.
If you wish to receive a separate copy of the proxy statement or the Notice of the Company’s Annual Report on
Form 10-K, or if you are receiving multiple copies and would like to receive a single copy, please contact the
Company’s transfer agent at Computershare Trust Company, Inc., 350 Indiana St., Suite #800, Golden, Colorado
80401, telephone (303) 262-0600 or 1-800-962-4284, or write to or call the Company’s Secretary at the Company’s
address or phone number set forth above, and the Company will undertake to deliver such documents promptly. If
your shares are owned through a bank, broker or other nominee, you may request householding by contacting the
nominee.
Form 10-K and Related Exhibits
The Company’s Annual Report on Form 10-K is available, free of charge, at the Company’s website,
www.purecyclewater.com, or at the SEC’s website, www.sec.gov. In addition, the Company will furnish a copy of
its Form 10-K to any shareholder free of charge and a copy of any exhibit to the Form 10-K upon payment of the
Company’s reasonable expenses incurred in furnishing such exhibit(s). You may request a copy of the Form 10-K
or any exhibit thereto by writing the Company’s Secretary at: Pure Cycle Corporation, 500 E. 8th Ave, Suite 201,
Denver, CO 80203, or by sending an email to info@purecyclewater.com. The information on the Company’s
website is not part of this proxy statement.
- 19 -
Documents Incorporated by Reference
Shareholders should review the following items included in the Company’s 2010 Annual Report on Form 10-K,
which is provided with this proxy statement, and such items are incorporated by reference herein:
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
- 20 -
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This Annual Report to Shareholders, including the letter to the shareholders from President Mark
W. Harding, contains forward‐looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
The words “will”, “expect”, “should”, “scheduled”, “plan”, “believe”,
1934, as amended.
”
Th
d d
1934
“promise”, “anticipate”, “could” and similar expressions are intended to identify forward‐looking
statements. Pure Cycle expectations regarding these matters are only its forecasts.
These
forecasts may be substantially different from actual results, which are affected by many factors.
The use of “Pure Cycle”, “our”, “we”, and similar terms are not intended to describe or imply
particular corporate organizations or relationships.
“ h d l d”
d “ ill”
“ h ld”
“b li
“ l
t”
”
“
Executive Officer and Directors
Mark W. Harding
Harrison H. Augur
Arthur G. Epker, III
Richard L. Guido
Peter C. Howell
George M. Middlemas
President, Chief Executive / Financial Officer, Director
Chairman of the Board
Director
Nominating and Governance Committee Chairman
Audit Committee Chairman
Compensation Committee Chairman
Legal Counsel
Legal Counsel
Stock Transfer Agent & Register
Stock Transfer Agent & Register
Computershare Trust Services
350 Indiana Street, Suite 800
Golden, Colorado 80201
303.262.0600
Davis, Graham & Stubbs LLP
1550 17th Street, Suite 500
Denver, CO 80202
303.892.9400
Corporate Auditor
GHP Horwath, P.C.
1670 Broadway, Suite 3000
Denver, CO 80202
303.831.5000
Our stock is traded on the NASDAQ Capital Market under the symbol “PCYO”.
For more information please visit our website at www.purecyclewater.com