Municipal Water & Wastewater Services
Agricultural Leasing
Drilling and Hydraulic Fracturing Water
O&G Leases
Fiscal 2013 Annual Report
Letter to Shareholders
Form 10-K
Proxy Statement
2014 Equity Incentive Plan
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Dear Shareholders:
Fiscal year ending August 31, 2013 has been a terrific year for our company. The Company’s investments
in our land and water assets have begun to generate significant revenues to our shareholders and our future
prospects are encouraging. The Company’s land and water asset have long increased in value year over
year; however these assets had not begun to generate substantial revenues until this past year. Each of our
segment business enterprises, (1) wholesale water and wastewater service, include the sale of industrial
water for Oil & Gas operations; and (2) our agricultural operations managing our approximately 17,000
acres of irrigated farm land in southeast Colorado are producing significant revenues with outstanding
future prospects.
Industrial Water Sales;
There are several highly publicized shale oil developments in the United States, one of which is located in
our home state of Colorado known as the Niobrara Formation. Through the advent and use of horizontal
drilling and hydraulic fracturing, Colorado’s once quite oil & gas industry has exploded attracting billions
of dollars of investment from a number of national and international oil companies.
from
Production
formations was
these
historically considered unattractive until the
recent use of directionally-drilled wells, which
may extend horizontally through the oil-bearing
formations for up to 10,000 feet, and hydraulic
fracturing, which has unlocked significant
quantities of oil and gas from these formations.
in excess of
Significant water demands,
7,000,000 gallons, are required to drill and frack
each well; making water availability and
delivery one of the more important components
of developing Niobrara wells. In the early
development of this play, water was delivered
by truck to each well pad site resulting in
thousands of truck trips for each well. As E&P
companies seek to develop multiple wells at
each pad site (as many as 10 horizontal wells on
a single pad), water availability and delivery
have become key logistics.
O&G Permitted Well
Sites
Conoco
Others
O&G Lease Area
130,000 acres in
Adams, Arapahoe
in conjunction with
We,
industry service
providers, have developed a water system which
delivers water to an acreage area of more than
100,000 acres
fixed and mobile
transmission lines nearly eliminating the need to
transport water via trucks. In addition to the
financial, logistical and operational advantages
to transferring water through pipelines, reduced traffic and reduced wear and tear on local roads has been a
significant benefit to operators as well as local communities. The operational advantages for us and our
customers, allows us to deliver water on a continuous 24/7 basis.
through
As of the writing of this letter, oil & gas operators have drilled approximately 17 wells in and around our
water facilities, where we have delivered water for each of these wells. Operators are still assessing the
development potential of this area, and may drill an additional 20 – 40 wells for 2014. If some or all of this
more than 200 square mile area of interest moves from an assessment phase to a development phase, we
may see as many as 8 – 16 wells per square mile in the development area. The Company has boosted its
water delivery capabilities during 2013 to meet the increased water demands from our customers and can
incrementally expand our capacities to meet future demands.
Another significant event occurring during our most recent fiscal year was the purchase of a large lease
position in our area by ConocoPhillips from Anadarko, including the Company’s’ two leases (our 42 acre
mineral interest along the east side of the Lowry Range as well as our 640 acre lease at Sky Ranch).
Each of these leases carries a 20% gross (less certain taxes) production royalty interest to the Company.
Our 42 acre lease’s initial 3 year term matured in June of this year and Conoco paid an additional bonus to
extend that Lease for its contract extension period of one additional year until June 2014. Our initial 3 year
term for Sky Ranch will mature in March of 2014 and can be extended for an additional two years with the
payment of an additional approximately $1.25 million bonus. Conoco is working on well permits for each
of our leases and we look forward to working with them on a drilling schedule.
Agricultural Operations
Last year we reported that High Plains A&M (“HP A&M”), the company from which we purchased our
farm and water interests in southeastern Colorado, defaulted on certain promissory notes (“Notes”) held by
HP A&M. The Notes (at that time aggregated approximately $9.6 million) are secured by deeds of trust for
the land and water rights owned by the Company. Approximately 70% of the farms and water rights
owned by the Company are secured by these Notes and deeds of trust. During the past year, the Company
purchased or is in the final stages of purchasing each of the HP A&M notes from the farmers, in most cases
through issuing Pure Cycle notes with a 5 year term at an interest rate of 5%. The Company has initiated
(or is in the process of initiating) foreclosure proceeding against each of the Notes and intends to exercise
its rights under its Asset Purchase Agreement (“Agreement”) with HP A&M to seek remedies against HP
A&M as outlined in the Agreement.
Our farm operations segment generated over $1
million in revenues from our farm leases.
During 2013, our farm leases were primarily
cash leases with our tenant farmers, with a small
percentage of farm leases being a crop share
lease. The 2013 agricultural years in southeast
Colorado was a challenging year, while not as
challenging as the severe drought of 2012, still
very dry. We look to upgrade our farm
operations through investing in center pivot
sprinkler systems, which will significantly
enhance our crop yields and convert many of
our cash leases to crop share leases. We believe
this will
the
Company’s as well as our tenant farmer’s
returns on this asset and continue to believe our
farm operations will generate stable and
profitable returns to our shareholders.
significantly enhance both
Domestic Water and Wastewater
We continue to deliver high quality water and wastewater service to our wholesale domestic water and
wastewater customers. In addition to operating facilities we own, we also operate systems owned by others
under separate contract operations agreements. In 2013, we expanded our operating capabilities adding
additional staff and operating contracts such as the Town of Bennett to operate and maintain both their
domestic water and wastewater systems. One of the key areas of emphasis for 2014 will be to update our
water and wastewater system designs for service to Sky Ranch. Our Sky Ranch property is competitively
positioned and offers attractive zoning which will allow developers and home builders to offer a wide
range of housing products. The Denver real estate market continues to be among the nation’s best
performing metropolitan housing markets. Since we own the land and are able to provide water and
wastewater service on a cost effective and incremental basis, and Sky Ranch’s proximity to primary
transportation corridors (e.g., Interstate 70 and E-470), we believe that Sky Ranch is competitively
positioned in the Denver housing market. We look forward to working with area developers and home
builders at Sky Ranch.
SMWSA
The most recent fiscal year also reached significant milestones in the Water Infrastructure Supply
Efficiency Project know as “WISE”. In June of this year members organized the South Metropolitan Wise
Authority to implement the WISE project. Under the WISE Partnership, Denver and Aurora will provide
wholesale treated South Platte River water to participating WISE members. Water will be made available
from Aurora’s Water Treatment Plant located adjacent to the Lowry Range and be distributed to each of the
10 member water providers of WISE. The Company, together with the Rangeview Metropolitan District,
seeks to participate in this regional water infrastructure and supply project which will interconnect the
water systems of the 10 WISE members together with Denver and Aurora’s water systems, making water
deliveries, transfers, and exchanges readily available. Should the Company, together with the Rangeview
Metropolitan District participate, our participation may costs approximately $7 million over a 7 year
period. In addition to interconnecting our systems, the project’s benefits include additional surface water
supplies from the South Platte River the Company can use at Sky Ranch and other areas we serve.
Stock Developments
Pure Cycle has had some significant growth and development in trading during fiscal 2013. The
Company’s stock increased trading from between $1.65 to $3.25 during fiscal 2012 to $1.87 to $7.32
during fiscal 2013. The volume has also increased dramatically between the two years. This increase was in
part due to the Company being added to the Russell 2000® and Russell Global® Indexes. The trend is a
positive improvement that we hope will be built upon as the Company’s financial performance increases
and liquidity returns to the float.
LOOKING FORWARD
Our focus for fiscal 2014 will be to continue to meet the increasing demands of our oil and gas customers
in and around our service area and along the I-70 corridor. We expect to see additional oil rigs working the
area and we will continue to provide reliable and cost effective water to meet the needs of this industry.
We look to pursue new opportunities to enhance revenues from our farm management operations and
finalize our remedies against HP A&M throughout the year. We continue to see increased interest in
developing Sky Ranch and look to partner with a developer to define a development timeline for the
project. We look forward to advancing the WISE Partnership and our discussions regarding the regional
use of the water storage reservoirs at the Lowry Range.
Along with the Company’s other employees and directors, we remain committed to building shareholder
value with our land and water assets, and we are all grateful for your continued support.
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, 2013
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, 2013
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 or other jurisdiction of incorporation
or organization)
84-0705083
(I.R.S. Employer Identification No.)
1490 Lafayette St, Suite 203, Denver, CO 80218
(Address of principal executive offices) (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 [X] 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 [X]
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
- 1 -
company” in Rule 12b-2 of the Exchange Act:
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 business day of the registrant’s most recently completed second fiscal quarter: $69,447,594
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable
date: November 20, 2013: 24,037,598
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement for the
2014 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days of the close of the fiscal year
ended August 31, 2013.
- 2 -
Table of Contents
s
- 3 -
ItemPagePart I1Business61A.Risk Factors221B.Unresolved Staff Comments292Properties293Legal Proceedings294Mine Safety Discolosures30Part II306Selected Financial Data337Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations347A.Quantitative and Qualitative Disclosures About Market Risk488Financial Statements and Supplementary Data499Changes in and Disagreements with Accountants on Accounting and Financial 509A.Controls and Procedures509B.Other Information51Part III10Directors, Executive Officers and Corporate Governance5111Executive Compensation515113Certain Relationships and Related Transactions, and Director Independence5114Principal Accounting Fees and Services51Part IV15Exhibits and Financial Statement Schedules51Signatures545MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchases of Equity Securities12SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholder Matters
“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, or incorporated by reference
into this Form 10-K, are forward-looking statements that involve risk and uncertainties that could cause actual
results to differ materially 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. Our actual results could differ
materially from those discussed in or implied by these forward-looking statements. Forward-looking statements
include statements relating to, among other things:
factors that may impact labor and material costs;
loss of key employees and hiring additional personnel for our operations;
our competitive advantage;
negotiation of payment terms for fees;
the sufficiency of our working capital and financing sources to fund our operations;
intent not to hold marketable securities until maturity;
our ability to comply with permit requirements and environmental regulations and the cost of such
compliance;
the adequacy of the provisions in the “Lease” for the Lowry Range to cover present and future
circumstances;
estimated population increases in the Denver metropolitan area and the South Platte River basin;
plans for the use and development of our water assets;
anticipated timing and amount of, and sources of funding for (i) capital expenditures to construct
infrastructure and increase production capacities, (ii) compliance with water, environmental and other
regulations, and (iii) operations including delivery and treatment of water and wastewater;
the ability of our deep water well enhancement tool and process to increase efficiency of wells and our
plans to market that product to area water providers;
our ability to assist Colorado “Front Range” water providers in meeting current and future water needs;
our ability to reduce the amount of up-front construction costs;
participation in regional water projects, including “WISE”;
timing of satisfaction of conditions to change Land Board royalties;
regional cooperation among area water providers in the development of new water supplies and water
storage, transmission and distribution systems as the most cost-effective way to expand and enhance
service capacities;
future water supply needs in Colorado;
anticipated increases in residential and commercial demand for water services and competition for these
services;
use of raw and reclaimed water for outdoor irrigation;
costs to treat contaminated water;
the decreases of individual housing and economic cycles on the number of connections we can serve with
our water;
the number of new water connections needed to recover the costs of our Rangeview Water Supply and
Arkansas River water assets;
increases in future water tap fees;
the impact of water quality, solid waste disposal and environmental regulations on our financial condition
and results of operations;
the impact of the downturn in the homebuilding and credit markets on our business and financial condition;
environmental clean-up at the Lowry Range by the U.S. Army Corps of Engineers;
our plans to provide water for drilling and hydraulic fracturing of oil and gas wells;
increases in oil and gas drilling activity on our property and on the Lowry Range;
the recoverability of construction and acquisition costs from rates;
our belief that we are not a public utility under Colorado law;
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plans for development of our Sky Ranch property;
anticipated revenues from full development of our Sky Ranch property;
management of farms and the generation of revenues from such management including plans to increase
crop yields;
our ability to meet customer demands in a sustainable and environmentally friendly way;
potential opposition to, and anticipated requirements of, the water court in connection with a change of use
application for our Arkansas River water;
our ability to mitigate adverse impacts to local communities from our change of use process;
claims of “HP A&M” against the Company;
the amount of the “Tap Participation Fee” liability;
our ability to reduce the Tap Participation Fee and recover damages from HP A&M;
changes in unrecognized tax positions;
forfeitures of option grants and vesting of non-vested options;
the impact of new accounting pronouncements;
impairments in carrying amounts of long-lived assets;
the effectiveness of our disclosure controls and procedures and our internal controls over financial
reporting;
loss of properties and water rights due to the failure to cure defaults by HP A&M;
litigation and arbitration with the Land Board;
litigation with HP A&M; and
future fluctuations in the price and trading volume of our common stock.
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;
employment rates;
general economic conditions;
the market price of water;
changes in customer consumption patterns;
changes in applicable statutory and regulatory requirements;
changes in governmental policies and procedures;
uncertainties in the estimation of water available under decrees;
uncertainties in the estimation of costs of delivery of water and treatment of wastewater;
uncertainties in the estimation of the service life of our systems;
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 floods, droughts and freezing conditions;
labor relations;
turnover of elected and appointed officials and delays caused by political concerns and government
procedures;
availability and cost of labor, material and equipment;
delays in anticipated permit and construction dates;
engineering and geological problems;
environmental risks and regulations;
our ability to raise capital;
our ability to negotiate contracts with new customers;
outcome of litigation and arbitration proceedings; and
uncertainties in water court rulings.
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These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us, including
the factors described under “Risk Factors” in this Annual Report on Form 10-K. “Risk Factors” contains additional
information concerning factors that could cause actual results to differ materially from those in the forward-looking
statements. Except for our ongoing obligation to disclose certain information under the federal securities laws, we
undertake no obligation, and disclaim any obligation, to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. All forward-looking statements are expressly
qualified by this cautionary statement.
PART I
Item 1 – Business Summary
Pure Cycle Corporation (“Pure Cycle”) is an investor-owned Colorado corporation that provides wholesale water
and wastewater services and leases farm land. The wholesale water and wastewater services include water
production, storage, treatment, bulk transmission to retail distribution systems, wastewater collection and treatment,
irrigation water treatment and transmission, construction management, billing and collection and emergency
response. We provide these services to our wholesale customers, which are typically local governmental entities that
provide water and wastewater services to their end-use customers located in the greater Denver, Colorado
metropolitan area.
We are vertically integrated, which means we own all assets necessary to provide wholesale water and wastewater
services to our customers. This includes owning (i) water rights which we use to provide domestic and irrigation
water to our wholesale 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 water, (iii) infrastructure required to collect, treat, store and reuse wastewater, and
(iv) infrastructure required to treat and deliver reclaimed water for irrigation use.
We currently provide wholesale water service predominately to two local governmental entity customers. Our
largest customer is the Rangeview Metropolitan District (the “District”), a quasi-municipal political subdivision of
the State of Colorado which is described further below. We provide service to the District and its end-use customers
pursuant to “The Rangeview Water Agreements” (defined below) between us and the District for the provision of
wholesale water service to the District for use in the District’s service area. Through the District, we provide
wholesale service to 258 Single Family Equivalent (“SFE”) (as defined below) water connections and 157 SFE
wastewater connections located in southeastern metropolitan Denver. We also provide water to the oil and gas
industry for the purpose of hydraulic fracturing.
We plan to utilize our significant water assets along with our adjudicated reservoir sites, which are described in the
Our Water Assets section below, to provide wholesale water and wastewater services to local governmental entities.
These local governmental entities will in turn provide residential and commercial water and wastewater services to
communities along the eastern slope of Colorado in the area extending essentially from Fort 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.
Our farm land consists of approximately 16,700 acres of irrigated land currently being leased to local farmers in
southeastern Colorado and we own 931 acres of land in the I-70 corridor east of Denver, Colorado that is being held
for development. These land interests are described in the Our Water and Land Assets section below.
Pure Cycle Corporation was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008.
Glossary of terms
The following terms are commonly used in the water industry and are used throughout our annual report:
Acre Foot (“aft”) – 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 available during a typical year.
- 6 -
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 – underground water in an aquifer which is situated so it neither draws from
nor contributes to a natural surface stream in any measurable degree.
Not Non-Tributary Groundwater – statutorily defined as a groundwater located within those portions of the
Dawson, Denver, Arapahoe, and Laramie-Fox hills aquifers that are outside of any designated groundwater
basin in existence on January 1, 1985.
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.
Tributary Surface Water – water on the surface of the ground flowing in a stream or river system.
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 and Land 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 Operations – Critical Accounting Policies and Use of Estimates, and
Note 4 – Water Assets to the accompanying financial statements.
The $88.5 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 wholesale water and wastewater services. Each of these assets is
explained in detail below.
- 7 -
The illustration below indicates the approximate location of each of our
assets.
•
•
Denver Based Assets
25,050 aft of groundwater
3,300 aft of South Platte River
average annual amount
• Over 26,000 aft of surface storage
•
931 Acres of Development Property
Arkansas River Assets
of
senior
aft
60,000
Arkansas River water
16,700 acres of irrigated
farm land
•
•
- 8 -
The map below indicates the location of our Denver area assets.
Rangeview Water Supply and the Lowry Range
Our Rangeview Water – We own or control a total of approximately 3,300 acre feet of tributary surface water,
25,050 acre feet of non-tributary and not non-tributary groundwater rights, and approximately 26,000 acre feet of
- 9 -
adjudicated reservoir sites that we refer to as our “Rangeview Water Supply.” This water is located at the “Lowry
Range,” which is owned by the State Board of Land Commissioners (the “Land Board”) and is described below.
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
(this portion of the Rangeview Water Supply 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 the year 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 Land Board and the District;
(ii) The Agreement for Sale of Export Water between us and the District; and
(iii) The Service Agreement between us and the District for the provision of water service to the District’s
customers.
Additionally, in 1997 we entered into a Wastewater Service Agreement (the “Wastewater Agreement”) with the
District to provide wastewater service to the District’s customers. 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 allow the District to provide water and wastewater service to its customers located 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.
Through facilities we own, we use our Export Water, and we intend to use other supplies owned by us, to provide
wholesale water service and wastewater service to customers located outside of the Lowry Range, including
customers of the District and other governmental entities and industrial and commercial customers.
Based on independent engineering estimates, the water designated for use on the Lowry Range is capable of
providing water service to 46,500 SFE units, and the Export Water owned by the Company can serve 33,600 SFE
units throughout the Denver metropolitan region.
The Lowry Range Property – The Lowry Range is located in unincorporated Arapahoe County (the “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 27,000
acres in size or about 40 square miles of land. Of the 27,000 acres, pursuant to our agreements with the District, we
have the exclusive rights to provide water and wastewater services to approximately 24,000 acres of the Lowry
Range. However, as more fully described in Item 3 – Legal Proceedings, we filed a lawsuit against the Land Board
for failing to protect our exclusive rights under the Lease in December 2011.
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 encompass 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 may receive $100 for each board meeting they attend, up to a
maximum of $1,600 per year. Mr. Harding and Mr. Lehman have both elected to forego these payments.
South Metropolitan Water Supply Authority – The South Metropolitan Water Supply Authority (“SMWSA”) is a
municipal water authority in the State of Colorado organized to pursue the acquisition and development of new
water supplies on behalf of its members. SMWSA members include 14 Denver area water providers in Arapahoe
- 10 -
and Douglas Counties. The District became a member of SMWSA in 2009 in an effort to participate with other area
water providers in developing regional water supplies along the Front Range. For over 2 years, the SMWSA
members have been working with Denver Water and Aurora Water on a cooperative water project known as the
Water Infrastructure Supply Efficiency partnership (“WISE”), which seeks to develop regional infrastructure which
would interconnect member’s water transmission systems to be able to develop additional water supplies from the
South Platte River in conjunction with Denver Water and Aurora Water. In July of 2013, the District together with 9
other SMWSA members formed the South Metropolitan Wise Authority (“SMWA”) to continue to develop the
WISE project. Through an agreement with the District, we support SMWA and its joint water development efforts
and may seek to participate in one or more regional water projects if such projects are in our best interest.
Preliminary estimates for the District’s capital expenditure related to the WISE project are approximately $6.7
million, which will be completed over a 7 year period.
East Cherry Creek Valley System – Pursuant to a 1982 contractual right, the District may purchase water produced
from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system. ECCV’s Land Board
system is comprised of eight wells and over ten miles of buried water pipeline located on the Lowry Range. In order
to increase the delivery capacity and reliability of these wells, in May 2012, in our capacity as Rangeview’s service
provider and the Export Water Contractor (as defined in the Lease), we entered into an agreement to operate and
maintain the ECCV facilities and we can utilize the system to provide water to commercial and industrial customers,
including customers providing water for drilling and hydraulic fracturing of oil and gas wells.
Hydraulic fracturing – We generated revenues of $325,700 during our fiscal year ended August 31, 2013 from sales
of drilling and frack water to third party service providers who were providing water for wells drilled into the
Niobrara Formation. With a large percentage of the acreage surrounding the Lowry Range in Arapahoe, Adams,
Elbert, and portions of Douglas Counties already leased by major oil companies, we anticipate providing additional
water for drilling oil and gas wells in the coming fiscal year. Through Select Energy Services, LLC (“Select”), we
are currently selling frack water to ConocoPhillips, the largest oil and gas lease holder operating in the area. In order
to service this new demand, we have rehabilitated or are in the process of rehabilitating five of our ECCV wells to
service the industry and we have added approximately 2,500 ft of 8” buried line so that we can deliver water directly
to the industry both on and off of the Lowry Range. We have increased our capacity to approximately 500,000
gallons per day to meet this demand and anticipate during fiscal 2014 that we will increase our delivery capacity to 1
million gallons per day. At present ConocoPhillips has one rig working the area and is fracking 1 well
approximately every 3 weeks. Each frack uses approximately 7 million gallons. We anticipate another rig will be
added in early calendar 2014. During fiscal 2013 we sold approximately 106.5 aft to the industry. During September
and October 2013 we sold an additional approximately 61.3 aft to the industry. Sales of water to the industry by aft
are detailed in the following chart.
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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 Rangeview Water
Supply. The calculation of royalties depends on the water source, 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.
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
collective net profits (ours and the District’s) 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 are owed to the Land Board when our Rangeview Water
Supply is sold or disposed of to customers located off the Lowry Range. If we incur costs to withdraw, treat
and deliver water to such customers, 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 A.
The Land Board is currently claiming that Export Royalties are owed on gross rather than Net Revenues and that it
is entitled to a royalty on wastewater service revenues. See Item 1A – Risk Factors – We, the District and the Land
Board entered into an Arbitration Agreement pursuant to which the parties have agreed to submit claims under the
Lease to binding arbitration and Item 3 – Legal Proceedings.
Arkansas River Water and Land
We own approximately 60,000 acre feet of surface water rights in the Arkansas River together with approximately
16,700 acres of irrigated farm land in southeastern Colorado. We acquired our Arkansas River water and land from
High Plains A&M, LLC (“HP A&M”) pursuant to an asset purchase agreement dated May 10, 2006 (the “Arkansas
River Agreement”). The water rights we own are represented by 21,782 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 and Lamar, Colorado. We have agreements to sell approximately
1,600 acres of farmland and 3,400 FLCC shares for approximately $5.7 million, which are expected to close during
fiscal year 2014.
In order to preserve our Arkansas River water rights until we are ready to seek a change of use, we currently lease
our land and water to area farmers who continue to irrigate the land for agricultural purposes. In conjunction with
the Arkansas River Agreement we entered into a property management agreement pursuant to which HP A&M
agreed to manage our farm properties and take care of our obligations under the farm leases, including property
taxes in exchange for the rental income from the Leases (the “Property Management Agreement”). In August 2012,
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Net RevenuesPrivate Entity BuyerPublic Entity Buyer$0 - $45,000,00012%10%$45,000,001 - $60,000,00024%20%$60,000,001 – $75,000,00036%30%$75,000,001 - $90,000,00048%40%Over $90,000,00050%50%Table A - Royalties for Export Water SalesRoyalty Rate
we terminated the Property Management Agreement due to certain defaults by HP A&M under the terms of the
Arkansas River Agreement and related agreements. As a result of the termination, we now control all leasing
activities and are entitled to all future income from such leasing activities. We are also responsible for property taxes
and other expenses associate with the properties. We intend to continue managing our farms together with our tenant
farmers. For additional information concerning our rights and obligations under the Arkansas River Agreement and
a discussion of the effect of the defaults by HP A&M, see Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates – Fair Value
Estimates – Obligations Payable by HP A&M, Now in Default and – Farm Accounts Receivable and Future Farm
Income.
Agricultural Operations and Leasing – Beginning on
August 3, 2012, we assumed management of our farm
operations and all associated income and expenses.
Beginning September 1, 2012, we began tracking and
reporting our farm operations as a separate business
segment to reflect management’s analysis, investment
decision, and operating performance for this business
segment. Currently, approximately 90% of our farm
operations are managed through cash lease arrangements
with local area farmers whereby we charge a fixed fee,
billed semi-annually in March and November, to lease
our land and the water for agricultural purposes to tenant
farmers. We have a small number of crop share leases,
pursuant to which we and the tenant farmer jointly share
in the gross revenues generated from the crops grown
under a 75% farmer, 25% landlord participation. The
table to the right details a sampling of the crops grown
on our farms. We will continue to review and evaluate ways to enhance the performance of our
approximately16,700 acres of farm land through relationships with area farmers. The following is a map of our
farming properties.
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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 below and Note 7 – Long-
Term Debt and Operating Lease and Note 15 – Subsequent Events to the accompanying financial statements, 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
original date of the Arkansas River Agreement. This is referred to as the “Tap Participation Fee”, or “TPF.” The
TPF 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.
Effective as of September 1, 2011, (i) HP A&M elected to increase the TPF percentage from 10% to 20% and take a
corresponding 50% reduction in the number of taps subject to the TPF and (ii) pursuant to the Property Management
Agreement, we began allocating 26.9% of the Net Revenues (defined as all lease and related income received from
the farms less employee expenses, direct expenses for managing the leases and a reasonable overhead allocation)
paid to HP A&M against the TPF. Beginning in June of 2012, HP A&M began defaulting on certain promissory
notes owed to third parties resulting in a default under the Arkansas River Agreements. As a result of HP A&M’s
default, on August 3, 2012, we terminated the Property Management Agreement and stopped allocating 26.9% of
the Net Revenues to the TPF. We began implementing our remedies under the Arkansas River Agreements,
including commencing foreclosure procedures on certain farms and FLCC shares, and as of August 31, 2013, there
remained 17,194 water taps subject to the Tap Participation Fee. Subsequent to fiscal year end, additional farms and
corresponding FLCC shares have been foreclosed upon reducing the remaining water taps subject to the Tap
Participation Fee to 13,830.
Additional information on the elections made by HP A&M, the terms of the Arkansas River Agreement, the
estimation of the fair value of the Tap Participation Fee liability, the calculation of the percentage of Net Revenues
and the reduction of water taps subject to the Tap Participation Fee is included in Item 7 – Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates below
and in Note 7 – Long-term Debt and Operating Lease and Note 14 – Related Party Transactions to the
accompanying financial statements.
Approximately 60 of the 80 farms acquired from HP A&M were subject to deeds of trust to secure payment of
promissory notes owed by HP A&M to third parties. As of the date of this filing, HP A&M has defaulted on all of
these promissory notes and deeds of trust. The farms subject to the deeds of trust consist of approximately 14,000
acres of farm land and 16,882 FLCC shares of water rights. Mineral rights on these farms, if any, are owned
approximately 75% by HP A&M and 25% by us. As of September 1, 2012 HP A&M owed approximately $9.6
million of principal and accrued interest on the defaulted notes. We have commenced exercising our remedies under
the Arkansas River Agreement and related agreements, which remedies include, but are not limited to, the right to (i)
foreclose on 1,500,000 shares of Pure Cycle common stock issued to HP A&M and the proceeds therefrom (the
“Pledged Shares”) which were pledged by HP A&M pursuant to a pledge agreement (the “Seller Pledge
Agreement”) to secure the payment and performance by HP A&M of the promissory notes described above (these
shares were sold in a foreclosure sale in September 2012); (ii) reduce the Tap Participation Fee; (iii) terminate the
Property Management Agreement; and (iv) recover damages caused by the defaults, including certain costs and
attorney’s fees. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of
Operation – Critical Accounting Policies and Use of Estimates - Fair Value Estimates – Obligations Payable by HP
A&M, Now in Default below for further discussion of the defaults by HP A&M and the remedies under the Arkansas
River Agreement, as well as Note 7 – Long-Term Debt and Operating Lease and Note 15 – Subsequent Events to the
accompanying financial statements.
During fiscal year 2013 four of our farms and one FLLC certificate representing water rights only went through
foreclosure proceedings due to the defaults by HP A&M. Our agreement with HP A&M provides for a reduction of
the number of water taps subject to the TPF payable to HP A&M in the event of the farms or water rights are sold in
a foreclosure sale. We reduced the number of taps by 2,233 taps and the discounted present value of the TPF
payable by a total of approximately $11.7 million as a result of the foreclosures. As of August 31, 2013 there were
17,194 taps subject to the Tap Participation Fee. Subsequent to our fiscal year end, an additional three farms and one
FLCC certificate representing water rights only, collectively including 1,832 FLCC shares, were foreclosed resulting
in a reduction of the number of taps subject to the TPF by an additional 3,364 taps (approximately $11.9 million of
the TPF), leaving 13,830 taps subject to the Tap Participation Fee as of November 27, 2013.
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Sky Ranch
In 2010 we purchased 931 acres of undeveloped land located in unincorporated Arapahoe County known as Sky
Ranch. Sky Ranch is located directly adjacent to I-70, 16 miles east of downtown Denver, 4 miles north of the
Lowry Range, and 4 miles south of Denver International Airport. The financing of the Sky Ranch acquisition is
described in greater detail in Note 4 – Water Assets to the accompanying financial statements.
The property includes rights to 820 acre feet of water, has
been zoned for residential, commercial and retail uses and
may include up to 4,850 SFE’s. There is currently no
development at Sky Ranch. We currently lease the land to
an area farmer. We envision that when development at Sky
Ranch begins, the development will be in the form of entry
level housing (houses costing less than $300,000). We plan
to partner with national home builders/developers to
develop the Sky Ranch property. We are anticipating that
the home builder/developer will construct infrastructure
such as roads, curbs and gutters, and we will construct the
necessary water and wastewater systems. Our plan is 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 timing for development of this property
is unknown, some land development experts believe the entry level housing market is among the most active
housing products 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 approximately $7 million
annually in wholesale service fee revenue (based on current fees and charges).
Oil and Gas Lease – On March 10, 2011, we entered into a Paid-Up Oil and Gas Lease (the “O&G Lease”) and
Surface Use and Damage Agreement (the “Surface Use Agreement”) with Anadarko E&P Company, L.P.
(“Anadarko”), a wholly owned subsidiary of Anadarko Petroleum Company. The O&G Lease seeks to capitalize on
the growing interest in the region’s Niobrara Oil Formation. Pursuant to the O&G Lease, we received an up-front
payment of $1,900 per net mineral leased acre, or $1,243,400, and 20% of gross proceeds royalty (less certain taxes)
from the sale of any oil and gas produced from our property. In December of 2012 the O&G Lease was purchased
by a wholly owned subsidiary of ConocoPhillips Company (“ConocoPhillips”). The O&G Lease has a term of three
(3) years commencing on March 10, 2011. If ConocoPhillips commences drilling and has a producing well on Sky
Ranch or lands pooled or unitized with Sky Ranch, the O&G Lease will continue in effect for as long as oil or gas is
being produced. If there is no production by the end of the initial term, ConocoPhillips may extend the O&G Lease
for an additional two (2) years by paying us an up-front payment equal to the initial up-front payment noted above.
Pursuant to the Surface Use Agreement, ConocoPhillips may drill on up to three well pad sites on the Sky Ranch
property covered under the O&G Lease. Additionally, we will receive $3,000 per acre for land that is permanently
disturbed for use in the oil and gas exploration and production. During October 2013 three well permit applications
were filed. One permit is for a well to be drilled on the Sky Ranch property. The remaining two permits are for wells
to be drilled off of Sky Ranch, but will be drilled into the formation under the Sky Ranch property.
We have experienced increased water demands for hydraulic fracturing of oil and gas wells being developed in the
Niobrara Formation around our Sky Ranch property and the Land Board’s Lowry Range property. Based on similar
horizontal wells developed in the Niobrara Formation each horizontal well will require between 3 million and 7
million gallons of water to drill and “frack”, which equates to selling water to between approximately 23 and 54
SFE’s.
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Arapahoe County Fairgrounds Agreement for Water Service
In 2005, we entered into an Agreement for Water Service (the “County
Agreement”) with the County to design, construct, operate and maintain a water
system for, and provide water services to, the County for use at the County’s
fairgrounds (the “Fairgrounds”), which are 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 – Water Assets to the accompanying financial statements.
Pursuant to the County Agreement we constructed and own a 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 County in 2006.
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 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 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 are marketing the tool to area water providers. 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. During fiscal 2013 our tool was used in 3 wells.
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. The conditional water rights diligence application was
completed in October 2008 and we were able to negotiate a finding of diligence and continuation of the conditional
water rights through October 2014. In order to obtain a finding of reasonable diligence at the next diligence
proceeding for the Paradise conditional water rights in October 2014, we are required to (i) select an alternate
reservoir site; (ii) file an application with the Water Court for Water Division 5 to change the place of storage; (iii)
identify specific end users and places of use for the Paradise conditional water rights within the Colorado River
basin in Colorado, excluding the Gunnison River basin; and (iv) identify specific source(s) of the water rights for
use. We do not intend to spend the resources needed to find an alternative reservoir site without a specific use for the
water. We have been unable to find potential customers for this water and cannot be certain that any customer will
commit to use the water within the next year. Since we do not have a customer that will commit to use the water and
will not commit the resources necessary to move the reservoir site without a customer, we are expecting to lose the
conditional water rights. Accordingly, we deemed the Paradise Water Supply to be fully impaired and an
impairment of $5.5 million was recorded in the fiscal 2012 financial statements. We are currently working on
options to dispose of our Paradise Water Supply asset.
Revenues
We generate revenues through two separate lines of businesses including our Wholesale Water and Wastewater
business and our Farming Operations, which are described below.
- 16 -
Wholesale Water and Wastewater business – We generate revenues through our wholesale water and wastewater
segment predominately from three sources: (i) monthly service and contract delivery fees, (ii) one time water and
wastewater tap fees and construction fees, and (iii) consulting 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 our wholesale customers as a component of our service agreements
prior to construction of the project.
i) Monthly Service Fees – Monthly wholesale water usage fees are assessed to our customers based on actual
metered deliveries to their end-use customers each month. Water usage fees are based on a tiered pricing
structure that provides for higher prices as customers use greater amounts of water. Water usage pricing is
capped at the average of the prices charged by the same three surrounding water providers used as the basis
for water tap fees. The District has not changed its water usage fees since July 1, 2010. The water usage
fees are noted below in table B:
The figures in Table B reflect the amounts charged to the District’s end-use customers. In exchange for
providing water service to the District’s Lowry Range customers, we receive 95% of the usage charges
received by the District relating to water services after deducting the required royalty to the Land Board
(described above at Rangeview Water Supply and Lowry Range – Land Board Royalties). In exchange for
providing wastewater services, we receive 90% of the District’s monthly wastewater service fees, as well as
the right to use or sell the reclaimed water.
Currently the District charges its wastewater customers based on a monthly fee of $7.83 per SFE plus a
$6.68 per thousand gallons treated usage fee. There have not been any changes to the pricing structure since
July 1, 2011.
In addition to the tiered water usage pricing structure we currently charge a hydrant rate of $9 per thousand
gallons. During fiscal 2013 our sales to the fracking industry were charged at the hydrant rate. Beginning
October 2013 we began charging a water rate to the fracking industry of $10.50 per thousand gallons for
export water sales. We also collect other immaterial fees and charges from customers and other users to
cover miscellaneous administrative and service expenses, such as application fees, review fees and permit
fees.
ii) Water and Wastewater Tap Fees and Construction Fees – Tap fees are paid by developers 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 the Rangeview Water Agreements the District’s rates and charges to end use customers may
not exceed the average of similar rates and charges of three nearby water providers. Despite modest
increases in the water tap fees at these three nearby water providers, the District’s water tap fees and
wastewater tap fees have remained unchanged at $22,500 per SFE and $4,883 per SFE, respectively, since
2009. The District last increased water tap fees on July 1, 2009, by $1,000 to $22,500 per SFE, which was a
4.7% increase over the 2008 water tap fee.
In exchange for providing water service to the District’s customers (customers on the Lowry Range), we
receive 95% of the District’s tap fees after deducting the required royalty to the Land Board described
above. In exchange for providing wastewater services, we receive 100% of the District’s wastewater tap
fees.
- 17 -
Amount of consumption201320122011Base charge per SFE27.62$ 27.62$ 27.62$ 0 gallons to 10,000 gallons2.81$ 2.81$ 2.81$ 10,001 gallons to 20,000 gallons3.69$ 3.69$ 3.69$ 20,001 gallons to 40,000 gallons6.56$ 6.56$ 6.56$ 40,001 gallons and above8.93$ 8.93$ 8.93$ Table B - Tiered Water Usage Pricing StructurePrice ($ per thousand gallons)
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.
iii) Consulting Fees – Consulting fees are fees we receive, typically on a monthly basis, from municipalities
and area water providers along the I-70 corridor, for system management and maintenance.
Farming Operations – We lease our farms to local area farmers on both cash and crop share lease basis. Our cash
lease farmers are charged a fixed fee, billed semi-annually in March and November. During the November billing
cycle our cash lease billings include either a discount or a premium adjustment based on actual water deliveries by
the FLCC. Our crop share lease fees are based on actual crop yields and are received upon the sale of the crops. All
fees are estimated and recognized ratably on a monthly basis.
Significant Customers
Our wholesale water and wastewater sales to the District pursuant to the Rangeview Water Agreements accounted
for 34%, 86%, and 91% of our total water revenues for the years ended August 31, 2013, 2012 and 2011,
respectively. The District has one significant customer, the Ridgeview Youth Services Center (“Ridgeview”).
Pursuant to our Rangeview Water Agreements with the District, we are providing water to Ridgeview on behalf of
the District. Ridgeview accounted for 28%, 53% and 60% of our total water revenues for the years ended August 31,
2013, 2012 and 2011, respectively.
Our wholesale water sales indirectly to ConocoPhillips accounted for 59% of our total water revenues for the fiscal
year ended August 31, 2013.
Our Projected Operations
This section should be read in conjunction with Item 1A – Risk Factors.
Along the Colorado Front Range, there are over 70 water providers with varying needs for replacement and new
water supplies. We believe we are well positioned to assist certain of these 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 licensed water and
wastewater operators to operate our water and wastewater systems. As our systems expand, we expect to hire
additional personnel to operate our systems, which include 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 wholesale customers and their
end-use 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.
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
- 18 -
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, based on current costs, and will accommodate water service to
customers located on and outside the Lowry Range. We expect this build out to occur over an extended period of
time, and we expect that tap fees will be sufficient to fund the infrastructure costs.
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.
In order to use our Arkansas River 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 a 130-mile pipeline, and water treatment and pumping facilities, from southeastern Colorado to the
Denver metropolitan area at an estimated cost of over $500 million, based on current costs. Since acquiring the
Arkansas River supply, we have investigated various pipeline alignments and potential partnerships for construction
of these facilities. 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.
During fiscal 2013 we, along with the District, began developing and integrating the ECCV system of wells through
the rehabilitation of a number of existing wells and the addition of piping to service fracking operations both on and
off of the Lowry Range. In order to fully meet the anticipated demand by these operations during fiscal 2014 we
may continue to invest in this system to maximize our production and to divert our water to the locations we need to
reach. We anticipate expanding capacity in our system from approximately 500,000 gallons per day to
approximately 1 million gallons per day during fiscal 2014.
The District is currently in the process of negotiating terms for the development of the WISE project. This project is
being established for the purpose of extending renewable water sources held by the Denver and Aurora water
districts to the South Metro water providers, including the District. This system will add an additional vital source of
water to our system, which in the long-term will be an essential component of the District’s system and will enable
us to continue to meet the demands or our customers on a sustainable and environmentally friendly manner.
Through our funding agreement with the District we may participate in this project during fiscal 2014.
We are exploring development of our Sky Ranch property including evaluating possible joint venture opportunities
whereby we will contribute the property, a portion of the development funds, and build the water and wastewater
infrastructure for housing and commercial development of the property. The timing for us to begin developing the
property is largely dependent on the Denver real estate market and interest we receive from home builders and
developers. While the Denver area’s housing market has strengthened in recent years we are not able to determine
when we expect to begin development of the property.
We continue to develop our farming operations seeking to increase crop yields and to balance our cash and crop
share leases in order to maximize profits while leveraging our risks. We plan on adding sprinkler irrigation to a few
of our farms during fiscal 2014 in order to better utilize our water supplies and increase crop yields. We are also
negotiating with area farmers to optimize our lease structure.
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Water and Growth in Colorado
After experiencing a weak economy through 2012, much like that of the U.S. as a whole, Colorado began recovering
during 2013. The key drivers in our business model are:
Housing Starts – From September 2011 to September 2012 the annual housing starts increased by 41%.
From September 2012 to September 2013 the annual housing starts increased by 34%.
Unemployment – The unemployment rate in Colorado was 7% at August 31, 2013 compared to a national
unemployment rate of 7.3%. Colorado added an estimated 56,800 jobs from August 2012 to August 2013.
Population – 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 3.2 million to 4.9 million by the year 2030; while the State’s
population will increase from 4.7 million to 7.2 million.
Demand – 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.
Supply – 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.
Development – Colorado law requires property developers to demonstrate they have sufficient water
supplies for their proposed projects before rezoning or annexation applications will be considered. 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.
The District’s 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 local governmental entities and their end-use 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. We expect our systems to 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 our governmental customers and with their developers and/or
homebuilders, to design, construct and operate water and wastewater systems and to provide services to end-use
customers of governmental entities and to commercial and industrial customers. 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,
(ii) the establishment of payment terms, timing, capacity and location of Special Facilities (if any); and
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(iii) specific terms related to our provision of ongoing water and wastewater services to our local governmental
customers as well as the governmental entity’s end-use customers.
Although we have exclusive long-term water and wastewater service contracts for 24,000 acres of the 27,000-acre
Lowry Range pursuant to our service agreement with the District, providing water and wastewater services to areas
other than Sky Ranch and the majority of the Lowry Range, is subject to competition. Moreover, others, including
the Land Board, have attempted to challenge, thus far without success, our exclusive rights to service the Lowry
Range. See Item 1A – Risk Factors and Item 3 – Legal Proceedings 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. The water assets we own and have the exclusive right
to use have a supply capacity of 180,000 SFE units, and we believe they provide us with 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.
Environmental, Health and Safety Regulation
Provision of water and wastewater services is subject to regulation under the federal Safe Drinking Water Act, the
Clean Water Act, related state laws, and federal and state regulations issued under these laws. These laws and
regulations establish criteria and standards for drinking water and for wastewater discharges. In addition, we are
subject to federal and state laws and other regulations relating to solid waste disposal and certain other aspects of our
operations.
Environmental compliance issues may arise in the normal course of operations or as a result of regulatory changes.
We attempt to align capital budgeting and expenditures to address these issues in a timely manner.
Safe Drinking Water Act – The Safe Drinking Water Act establishes criteria and procedures for the U.S.
Environmental Protection Agency (the “EPA”) to develop national quality standards for drinking water. Regulations
issued pursuant to the Safe Drinking Water Act and its amendments set standards on the amount of certain microbial
and chemical contaminants and radionuclides allowable in drinking water. The State of Colorado has assumed
primary responsibility for enforcing the standards established by the Safe Drinking Water Act and has adopted the
Colorado Primary Drinking Water Standards (5 CCR 1003-1). Current requirements for drinking water are not
expected to have a material impact on our financial condition or results of operations as we have made and are
making investments to meet existing water quality standards. In the future, we might be required to change our
method of treating drinking water and make additional capital investments if additional regulations become
effective.
The federal Groundwater Rule became effective December 1, 2009. This rule requires additional testing of water
from well sources and under certain circumstances requires demonstration and maintenance of effective disinfection.
In 2009, Colorado adopted Article 13 to the Colorado Primary Drinking Water Standards to establish monitoring
and compliance criteria for the Groundwater Rule. We have implemented measures to comply with the Groundwater
Rule.
Clean Water Act – The Clean Water Act regulates wastewater discharges from drinking water and wastewater
treatment facilities and storm water discharges into lakes, rivers, streams, and groundwater. The State of Colorado
has assumed primary responsibility for enforcing the standards established by the federal Clean Water Act for
wastewater discharges from domestic water and wastewater treatment facilities and has adopted the Colorado Water
Quality Control Act and related regulations. It is our policy to obtain and maintain all required permits and
approvals for discharges from our water and wastewater facilities and to comply with all conditions of those permits
and other regulatory requirements. A program is in place to monitor facilities for compliance with permitting,
monitoring and reporting for wastewater discharges. From time to time, discharge violations might occur which
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might result in fines and penalties; but we have no reason to believe that any such fines or penalties are pending or
will be assessed.
In the future, we anticipate changing our method of treating wastewater, which will require future additional capital
investments, as additional regulations become effective. We anticipate spending between $400,000 and $500,000
during calendar year 2014 for improvements at our wastewater treatment facilities necessary to maintain compliant
operations in light of more stringent discharge criteria for ammonia-nitrogen and chlorine residual.
Solid Waste Disposal – The handling and disposal of residuals and solid waste generated from water and wastewater
treatment facilities is governed by federal and state laws and regulations. We have a program in place to monitor our
facilities for compliance with regulatory requirements, and we do not anticipate that costs associated with our
handling and disposal of waste material from our water and wastewater operations will have a material impact on
our business or financial condition.
Employees
We currently have five full-time employees.
Available Information and Website Address
Our website address is www.purecyclewater.com. We make available free of charge through our website our annual
reports 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 Securities and Exchange Commission (“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, including the accompanying financial statements and notes thereto.
We are dependent on the housing market and development in our targeted service areas for future revenues.
Providing wholesale 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 wholesale water sales are not forthcoming or development on the
Lowry Range, Sky Ranch or other developments in our targeted service area is 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. After several years
of significant declines in new home construction, there have been positive market gains in the Colorado housing
market in 2013. However, if the downturn in the homebuilding and credit markets return or if the national economy
weakens and economic concerns intensify, it could have a significant negative impact on our business and financial
condition.
Development on the Lowry Range is not within our control and is subject to obstacles. Development on the Lowry
Range is controlled by the Land Board, which consists of a five person citizen group representing education,
agriculture, local government and natural resources, plus one at-large commissioner, each appointed for a four-year
term by the Colorado governor and approved by the Colorado Senate. The Land Board’s focus with respect to issues
such as development and conservation on the Lowry Range tends to change as membership on the Land Board
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changes. In addition, there are often significant delays on the adoption and implementation of plans with respect to
property administered by the Land Board because the process involves many constituencies with diverse interests. In
the event water sales are not forthcoming or development of the Lowry Range is delayed, we may incur additional
short or long-term debt obligations or seek to sell additional equity to generate operating capital. Further, 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.
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. The U.S. Army Corps of Engineers have been
conducting unexploded ordnance removal activities at the Lowry Range for the past 20 years. Continued activities
are dependent on federal appropriations, and the Army Corps of Engineers has no assurance from year to year of
such appropriations for its activities at the Lowry Range.
We and the District have been involved in ongoing disputes with the Land Board regarding our rights and
obligations with respect to our Rangeview Water Supply, and such disputes may continue to arise and may not be
resolved in our favor. 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 currently involved in both an arbitration proceeding and a
lawsuit with the Land Board to resolve disputes under the Lease. See the next two risk factors. Moreover, since the
Lease extends until 2081, additional disputes may arise. An unfavorable resolution of these disputes could have a
material adverse effect on our business, operating results and financial condition.
We filed a lawsuit against the Land Board claiming the Land Board breached and will breach agreements
entered into by the Land Board and us in connection with a 1996 settlement, and we may not be successful. On
December 19, 2011, we and the District filed a lawsuit against the Land Board, claiming that the Land Board
breached, and will breach, agreements entered into by the Land Board with us and the District in connection with a
1996 settlement agreement with respect to our Rangeview Water Supply. Those agreements include the Lease
between the Land Board and the District and the Service Agreement between us and the District. The Land Board
issued a Request for Proposal that included a draft lease agreement related to oil and gas rights at the Land Board’s
Lowry Range and subsequently entered into an oil and gas lease which we believe does not adequately address or
protect the District’s exclusive right to provide water service to the Lowry Range or our rights as the District’s
exclusive Service Provider. There can be no assurance that we will be successful in the lawsuit or that disputes
under the Lease will not reoccur. An unfavorable decision in this lawsuit could have a material adverse effect on the
value of our Rangeview Water Supply, our business, operating results and financial condition.
We, The District and the Land Board entered into an Arbitration Agreement pursuant to which the parties have
agreed to submit certain counterclaims under the Lease to binding arbitration. In connection with the lawsuit we
and the District filed against the Land Board, as described above, the Land Board raised certain counterclaims
related to operational disputes under the Lease, which the parties have agreed to submit to binding arbitration. An
unfavorable outcome in the arbitration could increase our costs of operations and have a material adverse effect on
our business, operating results, and financial condition.
HP A&M filed a law suit against us alleging breaches of representations made in connection with the Arkansas
River Agreement. HP A&M initiated a lawsuit against us in District Court, City and County of Denver, State of
Colorado on February 27, 2012 alleging breaches of representations made in connection with the Arkansas River
Agreement. HP A&M’s claims relate to the issues currently being litigated between us and the Land Board
regarding our exclusive right to provide water service to the Land Board’s Lowry Range property. An unfavorable
decision in our lawsuit against the Land Board discussed above could adversely affect the decision in this lawsuit.
An adverse decision in the HP A&M lawsuit could have a material adverse effect on our business, operating, results
and financial condition.
The District’s rights under the Lease have been challenged by third parties. The District’s rights under the Lease
have been challenged by third parties in the past, most recently in 2008 when the City of Aurora (the “City”) applied
for the right to store water in certain reservoir sites on the Lowry Range that had already been adjudicated by the
District and the Land Board, which adjudications allow us to use the reservoir sites for our Rangeview Water
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Supply. In that proceeding, a developer sought to support the City by filing an amicus brief in which the developer
asserted, contrary to the terms of the Lease, that the developer might not be required to obtain water and wastewater
service exclusively from the District for planned development on the Lowry Range. The City’s application was
denied. However, there can be no assurance that the District’s rights under the Lease will not be challenged again,
which could require us to commence potentially expensive litigation to enforce our rights as the District’s service
provider to the adjudicated reservoir sites and to provide wholesale water and wastewater service to the Lowry
Range. See also risk factor: “We filed a lawsuit against the Land Board claiming the Land Board breached and will
breach agreements entered into by the Land Board and us in connection with a 1996 settlement, and we may not be
successful.”
Our operations are affected by local politics and governmental procedures which are beyond our control. We
operate in a highly political environment. We market our water rights to municipalities and other governmental
entities run by elected or politically appointed officials. Our principal competitors are municipalities seeking to
expand their sales tax base and other water districts. Various constituencies, including our competitors, developers,
environmental groups, conservation groups, and agricultural interests, have competing agendas with respect to the
development of water rights in Colorado, which means that decisions affecting our business are based on many
factors other than economic and business considerations. Additional risks associated with dealing with governmental
entities include turnover of elected and appointed officials, changes in policies from election to election, and a lack
of institutional history in these entities concerning their prior courses of dealing with the Company. We spend
significant time and resources educating elected officials, local authorities and others regarding our water rights and
the benefits of contracting with us. Political concerns and governmental procedures and policies may hinder or delay
our ability to enter into service agreements or develop our water rights. While we have worked to reduce the
political risks in our business through our participation as the service provider for the District in regional cooperative
resource programs, such as the SMWA and its WISE partnership with Denver Water and Aurora Water, as well as
education and communication efforts and community involvement, there can be no assurance that our efforts will be
successful.
Our Lowry Range Surface water rights are “conditional decrees” and require findings of reasonable diligence.
Our surface water interests and reservoir sites at the Lowry Range 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. During fiscal 2012,
the Lowry Range conditional decrees were granted their first review by the water court which determined that we
and the District met the diligence criteria. The water court entered a finding of reasonable diligence on the Lowry
Range surface water decrees on February 11, 2012. Our next diligence period will be in February 2018. If the water
court does not make a determination of reasonable diligence in 2018, it would materially adversely impact the value
of our interests in the Rangeview Surface Water Supply.
In order to utilize our Arkansas River water, 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 our customers. 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 or other infrastructure to deliver the water to the
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Front Range, which is anticipated to cost over $500 million, based on current costs. 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.
HP A&M has defaulted on promissory notes secured by deeds of trust on our Arkansas River properties and
water rights and if we are unsuccessful in curing the defaults, we will lose some of our properties and the water
rights associated with such properties. Approximately 60 of the 80 properties we acquired from HP A&M are
subject to promissory notes owed by HP A&M to third parties with principal and accrued interest totaling
$9.6 million at August 31, 2012. These promissory notes are secured by deeds of trust on our Arkansas River
properties and water rights. HP A&M has defaulted on all of the notes. Although we are not legally responsible for
paying these notes, if we do not cure the defaults, we would lose 75% of the Arkansas River properties and a
comparable percentage of the water rights. We foreclosed on the Pledged Shares, consisting of 1.5 million shares of
our common stock owned by HP A&M which were pledged to us to secure the promissory notes. The foreclosure
sale yielded $3.5 million which is not enough to cure all of the promissory notes. We have been acquiring the
promissory notes to protect our Arkansas River properties. As of the filing date, we have successfully acquired
approximately $7 million of the notes payable by HP A&M in exchange for a combination of cash and secured
notes. The notes we have issued are secured by the same Arkansas River properties and water rights and generally
have a five-year term, bear interest at an annual rate of 5% and require semi-annual payments with a straight line
amortization schedule. We may not be successful in negotiating acquisitions of all of the notes. If we are unable to
acquire all of the notes or to pay our notes as they become due, we could lose the property and water rights securing
the unacquired HP A&M notes and securing our notes in foreclosure proceedings. The loss of the Arkansas River
properties and water rights could have a material adverse effect on our business, operating results and financial
condition.
HP A&M attempted to acquire four of the Arkansas River properties, which were subject to promissory notes and
deeds of trust defaulted on by HP A&M, without paying us for the properties. We have purchased most of the HP
A&M notes and deeds of trust defaulted on by HP A&M and started foreclosure proceedings to clear title to the
properties and obtain title to any mineral rights owned by HP A&M as additional collateral to recover the amounts
we have had to pay to cure HP A&M’s defaults. HP A&M attempted to redeem four of the properties after the
foreclosure sales were completed and sought a court order preventing the Public Trustee from issuing us the deeds to
the properties as the successful bidder in the foreclosure sales. The court ruled against HP A&M on November 20,
2013. However, HP A&M has 49 days to appeal the judgment. See “Item 3 – Legal Proceedings” for details
regarding this lawsuit. If HP A&M appeals the judgment and is successful, we could lose these four properties,
which have a market value of approximately $3,060,000. HP A&M would be liable to us for this loss pursuant to the
terms of the Arkansas River Agreement, but there can be no assurance that we would recover such damages.
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 $30.4 million to support our operations through (i) the issuance of $25.2 million of common stock (includes
the issuance of stock pursuant to the exercise of options, net of expenses) and (ii) the issuance of $5.2 million of
Convertible Debt, which was converted to common stock on January 11, 2011. 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. Recent economic conditions and disruptions have caused substantial volatility in capital markets,
including credit markets and the banking industry, and have increased the cost and significantly reduced the
availability of financing, which may continue or worsen in the future. There can be no assurance that financing will
be available on acceptable terms or at all.
The rates the District is 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 charged by the District for water service on the Lowry Range are subject to pricing regulations
set forth in the Lease with the Land Board. Both the tap fees and usage rates and charges are capped at the average
of the rates of three nearby water providers. Annually the District surveys the tap fees and rates of the three nearby
providers and the District may adjust tap fees and rates and charges based on the average of those charged by this
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group, and we receive 95% of whatever the District charges its customers. Our costs associated with the construction
of water delivery systems and the production, treatment and delivery of water are subject to market conditions and
other factors, which may increase at a significantly greater rate than the fees we receive from the District. Factors
beyond our control and which cannot be predicted, such as government regulations, insurance and labor markets,
drought, water contamination and severe weather conditions, like tornadoes and floods, may result in additional
labor and material costs that may not be recoverable under the current 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 wholesale water services, including the cost of extracting our groundwater, exceed
our revenues, we would be providing service to the District for use at the Lowry Range at a loss. The District may
petition the Land Board for rate increases; however, there can be no assurance that the Land Board would approve a
rate increase request. Further, even if a rate increase were approved, it might not be granted in a timely manner or in
an amount sufficient to cover the expenses for which the rate increase was sought.
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.
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
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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 mainly 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.
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 the 40 acres that constitute the District. We have made loans to the District to fund its operations. At
August 31, 2013, total principal and interest owed to us by the District was $556,000. Pursuant to our Service
Agreement with the District for the provision of water services, the District retains 5% of the revenues from the sale
of water to its end-use customers 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.
Water quality standards are subject to regulatory change. 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. Future changes in regulations governing the supply of drinking water and treatment of wastewater may
have a material adverse impact on our financial results. With respect to service of customers on the Lowry Range,
the District’s rates might not be sufficient to cover the cost of compliance with additional or more stringent
requirements. If the cost of compliance were to increase, we anticipate that the rates of the nearby water providers
that the District uses to establish its rates and charges would increase to reflect these cost increases, thereby allowing
the District to increase its rates and charges. However, there can be no assurance that these water providers would
raise their rates in an amount that would be sufficient to enable the District (and us) to cover any increased
compliance costs.
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 2015. Although we anticipate being able
to comply with the revised permit, there can be 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.
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Contamination to our water supply may result in disruption in our services and litigation, which could adversely
affect our business, operating results and financial condition. Our water supplies are subject to contamination,
including contamination from naturally occurring compounds, pollution from man-made sources and intentional
sabotage. Our land at Sky Ranch and a portion of the Lowry Range have been leased for oil and gas exploration and
development. Such exploration and development could expose us to additional contamination risks. 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.
We may incur significant costs in order to treat the contaminated source through expansion of our current treatment
facilities or development of new treatment methods. If we are unable to substitute water supply from an
uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there
may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to
decontaminate a water source or an underground water system could be significant and could adversely affect our
business, operating results and financial condition and may not be recoverable in rates.
We could also be held liable for consequences arising out of human exposure to hazardous substances in our water
supplies or other environmental damage. For example, private plaintiffs could assert personal injury or other toxic
tort claims arising from the presence of hazardous substances in our drinking water supplies. Although we have not
been a party to any environmental or pollution-related lawsuits, such lawsuits have increased in frequency in recent
years. If we are subject to an environmental or pollution-related lawsuit, we might incur significant legal costs, and
it is uncertain whether we would be able to recover the legal costs from ratepayers or other third parties. Our
insurance policies may not cover or provide sufficient coverage for the costs of these claims.
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
local governmental customers and their end-use 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 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 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.
Sales to the fracking industry could be curtailed or eliminated in the future. Our water sales are highly
concentrated with one company providing frack services to the oil and gas industry on and around the Lowry range
and our Sky Ranch property. Regulations, fracking technologies, and the success of the wells are conditions that
could limit or eliminate our sales to this customer base as well as renewals of our oil and gas leases, if any, in the
future. We have no contractual commitment that will ensure these sales will continue in the future.
A failure of the water wells or distribution networks that we own or control could result in losses and damages
that may affect our financial condition and reputation. We distribute water through a network of pipelines and
store water in storage tanks. A failure of these pipelines or tanks could result in injuries and damage to property for
which we may be responsible, in whole or in part. The failure of these pipelines or tanks may also result in the need
to shut down some facilities or parts of our water distribution network in order to conduct repairs. Such failures and
shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water
delivery requirements prescribed by our contracts, which could adversely affect our financial condition, results of
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operations, cash flow, liquidity and reputation. Any business interruption or other losses might not be covered by
insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the
future at acceptable rates.
Our stock price has been volatile in the past and may decline in the future. Our common stock has experienced
significant price and volume fluctuations in the past and may experience significant fluctuations in the future
depending upon a number of factors, some of which are beyond our control. Factors that could affect our stock price
and trading volume include, among others, the perceived prospects of our business; differences between anticipated
and actual operating results; changes in analysts’ recommendations or projections; the commencement and/or results
of litigation and other legal proceedings; and future sales of our common stock by significant shareholders, officers
and directors. In addition, stock markets in general have experienced extreme price and volume volatility from time
to time, which may adversely affect the market price of our common stock for reasons unrelated to our performance.
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
Corporate Office – We occupy 1,200 square feet at a cost of $1,530, per month, at the address shown on the cover
of this Form 10-K. We lease these premises pursuant to a two year operating lease agreement with a third party.
Water Related Assets – In addition to the water rights and adjudicated reservoir sites 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 four miles of
water pipeline in Arapahoe County Colorado. Additionally, although owned by the District, we operate and maintain
another 500,000 gallon water tank, a deep water well, 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.
Land – We own 931 acres of land known as Sky Ranch which is described further in Item 1 – Our Water Assets –
Sky Ranch. In addition, we own approximately 16,700 acres of irrigated farm land in the Arkansas River Valley as
described in Item 1 – Our Water Assets – Arkansas River Water. A portion of our farm land totaling 1,603 acres of
land is currently held for sale.
Other Equipment – We also own various water delivery fixtures located on our farm properties. These items consist
mainly of irrigation pumps, irrigation ditches, and irrigation pipelines.
Item 3 – Legal Proceedings
As discussed in a Form 8-K filed on December 19, 2011, on that date we and the District filed a lawsuit against the
State of Colorado by and through the Land Board. The complaint was filed with the District Court, City and County
of Denver, State of Colorado. We and the District are claiming that the Land Board breached, and will breach,
agreements entered into by the Land Board with us and the District in connection with a 1996 settlement agreement.
Those agreements include (i) the Amended and Restated Water Lease, dated as of April 4, 1996, between the Land
Board and the District (the “Lease”) and (ii) the Service Agreement of the same date between us and the District.
The Land Board asserted certain counterclaims in the lawsuit that relate to operational disputes under the Lease. On
June 14, 2013, we, the District and the Land Board entered into an Arbitration Agreement pursuant to which the
parties have agreed to submit three counterclaims under the Lease to binding arbitration: (i) whether revenues from
wastewater services are subject to royalties under the Lease and the appropriate payment for a right-of-way for a
wastewater reclamation facility, (ii) whether Export Water royalties are owed on a net or gross proceeds basis, and
(iii) if, and/or how water from the four aquifers under the Lowry Range should be blended for sale, as well as any
related claims of us and the District for offset, credit or overpayment of previous royalties paid and defenses to the
three claims. The counterclaims have been dismissed from the lawsuit without prejudice. An arbitrator has not yet
been selected, so the timing of resolution of these claims is unknown. We and the District believe that we have been
conducting our operations in accordance with the Lease and are prepared to defend our decisions in the arbitration.
- 29 -
As disclosed in two Form 8-K’s, one filed on February 16, 2012 and one filed on February 29, 2012, HP A&M
initiated a lawsuit against us in District Court, City and County of Denver, State of Colorado on February 27, 2012
alleging breaches of representations made in connection with the Arkansas River Agreement. HP A&M claims
relate to the issues currently being litigated between us and the Land Board regarding our exclusive right to provide
water service to the Land Board’s Lowry Range property. Because the claims alleged by HP A&M relate to the
issues being litigated in our lawsuit against the Land Board, the HP A&M suit has been stayed pending resolution of
the Land Board suit. We believe the allegations are without merit and intend to defend the lawsuit vigorously.
During the fiscal year ended August 31, 2013, foreclosure proceedings were commenced against 38 of the properties
we acquired from HP A&M which are subject to promissory notes defaulted upon by HP A&M and secured by
deeds of trust on our land and water rights. As of August 31, 2013, 34 of our properties acquired from HP A&M
remain subject to foreclosure proceedings. These properties represent over 40% of our FLCC shares and over 45%
of our farm land. The proceedings were filed on various dates from January 9, 2013 through July 3, 2013, with the
Public Trustees of Bent, Otero and Prowers Counties in Colorado and involve claims against HP A&M for its failure
to pay the notes. Foreclosure proceedings in Colorado take at least nine months to conclude. Foreclosure sales were
conducted on three of our properties on August 28, 2013, and on a fourth property on September 4, 2013. PCY
Holdings, LLC (“PCY Holdings”), our wholly owned subsidiary, was the successful bidder in the foreclosure sales.
Due to statutory protections afforded us as the owner of the properties and our liquidity, we had anticipated
concluding these foreclosure proceedings on terms which would not have a material adverse effect on our financial
position, results of operations or cash flows. However, on September 16, 2013, HP A&M filed a complaint against
PCY Holdings and the Public Trustee for the County of Bent, Colorado. The lawsuit was filed in the District Court,
County of Bent, Colorado. HP A&M is seeking (i) a declaratory judgment that it is entitled to redeem the four
properties from the foreclosure sales by paying the amount of the outstanding debt, plus fees, which is the amount
we bid in the sales, and (ii) preliminary and permanent injunctions against the Public Trustee preventing the Public
Trustee from issuing confirmation deeds for the foreclosure sales to PCY Holdings or anyone other than HP A&M.
On November 20, 2013, the complaint was dismissed with prejudice, and judgment was entered in favor of the
Public Trustee and PCY Holdings. The District Court ruled that “High Plains’ Complaint and Motion are baseless,
without statutory authority, and are an attempt to obstruct the proper function of the office of the Public Trustee of
Bent County, and PCY Holdings relative to the foreclosures of the four Subject Farms”. Further the District Court
ruled “that High Plains’ Motion and its claims in its Verified Complaint are frivolous and groundless, and awards
the Public Trustee of Bent County and PCY Holdings their attorneys’ fees and costs incurred in connection with this
matter.”
HP A&M has 49 days from the date of the judgment in which to file an appeal. If HP A&M appeals this judgment
and wins on appeal, we could lose these four properties, subject to our remedies under the Arkansas River
Agreement. We intend to vigorously defend any appeal of this ruling. The Arkansas River agreement requires HP
A&M to acquire any properties subject to foreclosure on our behalf. Therefore, our remedies against HP A&M for
the note defaults include the right to damages for any loss of these four properties.
Item 4 – Mine Safety Disclosures
None.
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, 2013 and 2012 are presented below:
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(b)
Holders
On November 20, 2013, there were 1,097 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 and require dividends to be paid on the Series B Preferred
Stock if proceeds from the sale of Export Water Rights exceed $36,026,232. For further discussion see Note 8 –
Shareholder’s Equity to the accompanying financial statements.
(d)
Securities Authorized For Issuance Under Equity Compensation Plans
(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 index 2. The graph assumes the
investment of $100 in common stock in each of the indices as of the market close on August 31 and reinvestment of
all dividends.
- 31 -
Fiscal 2013 quarters ended:August 31May 31February 28November 30 Market price of common stock High6.72$ 7.32$ 4.10$ 2.78$ Low5.00$ 3.87$ 2.31$ 1.87$ Fiscal 2012 quarters ended:August 31May 31February 28November 30 Market price of common stock High2.51$ 2.90$ 3.25$ 3.00$ Low1.90$ 2.03$ 1.65$ 1.70$ Plan categoryNumber of securities to be issued upon exercise of outstanding options, warrants and rightsWeighted-average exercise price of outstanding options, warrants and rightsNumber of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(a)(b)(c)Equity compensation plans: Approved by security holders 347,500 $ 5.63 1,218,311 Not approved by security holders – ––Total347,500 $ 5.63 1,218,311Table D - Securities Authorized for Issuance Under Equity Compensation Plans20132012201120102009Pure Cycle Corporation86.09$ 33.11$ 49.01$ 49.83$ 53.81$ S&P 500142.35$ 119.92$ 101.63$ 85.76$ 81.75$ Peer Group160.97$ 134.27$ 117.94$ 104.42$ 93.18$ Cumulative Returns For the fiscal years ended August 31,
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.
(f)
Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities
None.
(g)
Purchase of Equity Securities By the Issuer and Affiliated Purchasers
None.
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Item 6 – Selected Financial Data
The following items had a significant impact on our operations:
In fiscal 2013 in order to protect our farm assets we acquired approximately $7 million of the $9.6 million
in HP A&M notes.
In fiscal 2013 we sold 1,500,000 unregistered shares of Pure Cycle common stock owned by HP A&M for
$2.35 per share, yielding approximately $3.5 million.
In fiscal 2012 the Paradise Water Supply asset was deemed fully impaired and the entire asset value of $5.5
million was written off and recorded in the accompanying financial statements. Additionally, we recorded
an impairment of $6.5 million on land and water rights held for sale. See further discussion in Note 4 –
Water Assets in the accompanying financial statements.
In fiscal 2013, 2012, 2011, 2010 and 2009, respectively, we imputed $3.3 million, $3.5 million, $3.8
million, $3.6 million and $3.7 million of interest related to the Tap Participation Fee payable to HP A&M.
As described below, this represents the difference between the net present value and the estimated
realizable value of the Tap Participation Fee, which is being charged to expense using the effective interest
method over the estimated development period utilized in the valuation of 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 from HP A&M.
In fiscal 2011, we acquired 931 acres of land known as Sky Ranch for $7.0 million.
In fiscal 2010, we sold a total of 3.8 million shares of common stock for a total of $10.7 million, which was
used to acquire the Sky Ranch property and is being used for working capital.
In fiscal 2009, we recognized gains on the sale of non-irrigated land totaling $59,700.
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In thousands (except per share data)20132012201120102009Summary Statement of Operations items: Total revenues1,857.5$ 284.4$ 282.1$ 264.1$ 260.2$ Net loss(4,150.4)$ (17,418.7)$ (6,016.2)$ (5,391.3)$ (5,728.1)$ Basic and diluted loss per share (0.17)$ (0.72)$ (0.26)$ (0.27)$ (0.28)$ Weighted average shares outstanding 24,038 24,038 23,169 20,207 20,207 Summary Balance Sheet Information:20132012201120102009 Current assets9,900.0$ 7,661.8$ 5,065.6$ 1,819.6$ 3,990.4$ Total assets108,618.3$ 111,582.0$ 116,122.7$ 106,377.8$ 108,091.1$ Current liabilities5,402.3$ 6,254.8$ 658.3$ 171.3$ 138.1$ Long term liabilities65,443.5$ 75,209.5$ 68,174.0$ 63,746.5$ 60,183.8$ Total liabilities70,845.8$ 81,464.3$ 68,832.3$ 63,917.8$ 60,321.9$ Equity37,772.5$ 30,117.8$ 47,290.3$ 42,460.0$ 47,769.2$ Table E - Selected Financial DataFor the Fiscal Years Ended August 31,As of August 31,
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 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 and our farming operations;
Expenses associated with developing our water and land 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
Pure Cycle Corporation (“we”, “us” or “our”) is an investor-owned Colorado corporation that (i) provides wholesale
water and wastewater services to end-use customers of governmental entities and to commercial and industrial
customers and (ii) manages land and water assets for farming.
Wholesale Water and Wastewater - These services include water production, storage, treatment, bulk transmission
to retail distribution systems, wastewater collection and treatment, irrigation water treatment and transmission,
construction management, billing and collection and emergency response.
We are a vertically integrated wholesale water and wastewater provider, which means we own or control
substantially all assets necessary to provide wholesale water and wastewater services to our customers. This includes
owning (i) water rights which we use to provide domestic, irrigation, and industrial water to our wholesale
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 water, (iii) infrastructure required to collect, treat, store and reuse wastewater, and (iv) infrastructure required
to treat and deliver reclaimed water for irrigation use.
- 34 -
We currently provide wholesale water service predominately to two local governmental entity customers. Our
largest customer is the Rangeview Metropolitan District (the “District”), a quasi-municipal political subdivision of
the State of Colorado, which is described further below. We provide service to the District and its end-use customers
pursuant to “The Rangeview Water Agreements” (defined below) between us and the District for the provision of
wholesale water service to the District for use in the District’s service area. Through our governmental entity
wholesale customers, we serve 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 along with our adjudicated reservoir sites to provide wholesale water
and wastewater services to local governmental entities which in turn will provide residential/commercial water and
wastewater services to communities along the eastern slope of Colorado in the area extending essentially from Fort
Collins on the north to Colorado Springs on the south, which is generally referred to as the “Front Range.”
Principally we target 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.
Agricultural Operations and Leasing- Beginning August 3, 2012, we assumed management of our farm operations
and all associated income and expenses. Beginning September 1, 2012, we began tracking and reporting our farm
operations as a separate business segment to reflect management’s analysis, investment decision, and operating
performance for this business segment. Currently, approximately 90% of our farm operations are managed through
cash lease arrangements with local area farmers whereby we charge a fixed fee, billed semi-annually in March and
November, to lease our land and the water for agricultural purposes to tenant farmers. We have a small number of
crop share leases, pursuant to which we and the tenant farmer jointly share in the gross revenues generated from the
crops grown under a 75% farmer, 25% landlord participation. The majority of crops grown on our farms are alfalfa,
with a number of acres also planted in corn, sorghum, and wheat. We will continue to review and evaluate ways to
enhance the performance of our approximately 16,700 acres of farm land through relationships with area farmers.
We also own 931 acres of land along the I-70 corridor east of Denver, Colorado. We are currently leasing this land
to an area farmer until such time as the property can be developed.
These land interests are described in the Arkansas River Water and Land and Sky Ranch sections of Note 4 - Water
Assets to the 2013 Annual Report.
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 of water assets and other long-lived assets, valuation of
the Tap Participation Fee, fair value estimates and share-based compensation. Below is a summary of these critical
accounting policies.
Revenue Recognition
Our revenues consist mainly of tap fees, construction fees, monthly service fees, and beginning in fiscal 2013, farm
operations. As further described in Note 2 – Summary of Significant Accounting Policies to the accompanying
financial statements, proceeds from tap sales and construction fees 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 owned by others 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
- 35 -
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, 2013, 2012 or 2011.
Tap and construction 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 therefore be
matched with the revenues.
Monthly water usage fees and monthly wastewater service fees are recognized in income each month as earned.
Pursuant to the O&G Lease, we received up-front payments which are recognized as other income on a straight-line
basis over three years (the initial term of the O&G Lease).
Historically, we have leased our Arkansas River land and water to tenant farmers under a cash lease model. Pursuant
to the Property Management Agreement, HP A&M was to receive the income from the farm leases until 2014. As a
result of HP A&M’s default of certain obligations, we terminated the Property Management Agreement. Effective as
of August 3, 2012 we are managing the farm operations and we are entitled to receive all income from such
operations. Currently we lease our farms to local area farmers on both cash and crop share lease basis. Our cash
lease farmers are charged a fixed fee, billed semi-annually in March and November. During the November billing
cycle our cash lease billings include either a discount or a premium adjustment based on actual water deliveries by
the FLCC. Our crop share lease fees are based on actual crop yields and are received upon the sale of the crops. All
fees are estimated and recognized ratably on a monthly basis.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment 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 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, 2011, which we reviewed as of August 31, 2013, and determined there were no material
changes and that our Denver based assets and our Arkansas River assets are not impaired and their costs are 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 180,000 SFE’s using our
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combined Rangeview Water Supply, Sky Ranch water and Arkansas River water assets which have a carrying value
of $88.5 million as of August 31, 2013. 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 8,300 new water connections (requiring 5.7% 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 7,900 new water taps (requiring 5.4% 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 8,700 new water taps
(requiring 5.9% 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.
We have contracts to sell farms totaling 1,603 acres along with 3,397 FLCC shares associated with the land.
Our Paradise Water Supply – 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, by 2014 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 do not intend to spend the resources needed
to find an alternative reservoir site without a specific use for the water. We have been unable to find potential
customers for this water and cannot be certain a customer will commit to use the water within the next two years.
Since we do not have a customer that will commit to use the water and we will not commit the resources necessary
to move the reservoir site without a customer, we expect to lose the conditional water rights. Accordingly, we have
deemed the Paradise Water Supply to be fully impaired and an impairment of $5.5 million was recorded in the
accompanying fiscal 2012 financial statements. We are currently working on options to dispose of our Paradise
Water Supply asset.
Tap Participation Fee
The $59.8 million Tap Participation Fee liability at August 31, 2013, represents the estimated discounted fair value
of the Company’s obligation to pay HP A&M 20% of the Company’s gross proceeds, or the equivalent thereof, from
the future sale of 17,194 water taps by the Company.
As partial consideration for the purchase of our farms and related water, 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.
The TPF is payable only when we sell water taps and receive funds from such water tap sales from any of our
properties as well as any sale of water rights we had purchased from HP A&M. Payment of the TPF 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. The TPF 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. 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. 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 TPF. See further discussion in the “Obligations Payable by HP A&M, Now in Default” section
below.
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An important component in our estimate of the value of the TPF is that water tap fees will continue to increase in the
coming years. Tap fees are market based and increases in tap fees reflect, among other things, the increasing costs to
acquire and develop new water supplies. Tap fees thus are partially indicative of the increasing value of our water
assets. We continue to assess the value of the TPF liability and update our valuation analysis whenever events or
circumstances indicate the assumptions used to estimate the value of the liability have changed materially. We
updated the estimated discounted cash flow analysis as of August 31, 2013, as described in more detail below.
Pursuant to the Arkansas River Agreement, effective as of September 1, 2011, HP A&M elected to increase the TPF
percentage from 10% to 20% and take a corresponding 50% reduction in the number of taps subject to the TPF. In
addition, the initial term of the Property Management Agreement with HP A&M expired on August 31, 2011.
During the extended term of the Property Management Agreement, we were permitted to allocate 26.9% of the Net
Revenues (defined as all lease and related income received from the farms less employee expenses, direct expenses
for managing the leases and a reasonable overhead allocation) paid to HP A&M against the TPF. As a result of HP
A&M’s default, on August 3, 2012 we terminated the Property Management Agreement and stopped allocating
26.9% of the Net Revenues to the TPF.
During the 2012 fiscal year, we allocated $189,700 to the TPF liability and to additional paid in capital (due to HP
A&M being deemed a related party as of fiscal 2012 year-end). This is the equivalent of 41 water taps.
During the 2013 fiscal year we foreclosed on three farms and one FLCC certificate representing water rights only.
Additionally we cured one farm in foreclosure. As a result of these foreclosures, in accordance with our remedies
pursuant to our agreement with HP A&M, we exercised our right to reduce the TPF. We reduced the number of taps
subject to the TPF by 2,233 taps, and the discounted present value of the TPF by a total of approximately $11.7
million.
As a result of the events described above, we revalued the TPF liability as of August 31, 2013. The updated
valuation and the events described above resulted in the following:
Our obligation to pay HP A&M 20% of the gross proceeds, or the equivalent thereof, from the sale of the
next 19,468 water taps as of September 1, 2011, became an obligation to pay 20% of the gross proceeds, or
the equivalent thereof, from the sale of the next 17,194 water taps.
The total undiscounted estimated payments to HP A&M for the TPF decreased $17.9 million from the
previous valuation completed in fiscal 2012. The total estimated payments were then discounted to the
current valuation date and the difference between the amount reflected on the Company’s balance sheet and
the total estimated payments is imputed as interest expense over the estimated development life using the
effective interest method. The imputed effective interest rate remained 5.3% and the amount of interest
imputed was $3.3 million for fiscal 2013.
As of August 31, 2013 there were 17,194 taps subject to the TPF and we revalued the TPF liability resulting in a
remaining discounted present value liability of $59.8 million. $26.1 million of interest has been imputed since the
acquisition date recorded using the effective interest method. Subsequent to our fiscal year end an additional three
farms and 1,832 FLCC shares have been obtained through the foreclosure proceedings resulting in a further
reduction of the number of taps subject to the TPF by 3,364 taps and a corresponding reduction to the TPF payable
of $11.9 million, leaving 13,830 taps subject to the TPF.
Fair Value Estimates
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. We
generally use 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. See Note 3 – Fair Value Measurements to the accompanying
financial statements. As discussed below, we used other methodologies to determine the fair value of the related
party receivable from HP A&M, certain notes payable issued by us in exchange for HP A&M notes, and the
receivable for unpaid balances owed to HP A&M for farm lease payments that are now payable to us.
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Obligations Payable by HP A&M, Now in Default – Approximately 60 of the 80 properties we acquired from HP
A&M were subject to outstanding promissory notes payable to third parties. These promissory notes are secured by
deeds of trust on our properties and water rights, as well as mineral interests, up to 25% of which are owned by us
and up to 75% of which are currently owned by HP A&M. As of fiscal year end 2012 and since that date, HP A&M
has defaulted on all of the notes. At the time of default, HP A&M owed approximately $9.6 million of principal and
accrued interest secured by approximately 14,000 acres of farm land and 16,882 FLCC shares representing water
rights owned by us.
On July 2, 2012, we formally notified HP A&M that its failure to pay the promissory notes constituted an Event of
Default under the Seller Pledge Agreement and a default of a material covenant under the Arkansas River
Agreement and that unless such defaults were cured within thirty (30) days, the Property Management Agreement
would be terminated and we would proceed to exercise certain rights and remedies under the Arkansas River
Agreement, the Seller Pledge Agreement, and the Property Management Agreement to protect our assets. Our
remedies at law and under the Arkansas River Agreement and related agreements include, but are not limited to, the
right to (i) terminate the Property Management Agreement; (ii) foreclose on the Pledged Shares; (iii) reduce the Tap
Participation Fee; and (iv) recover damages caused by the defaults, including certain costs and attorneys’ fees.
Pursuant to these remedies we have taken the following actions:
(i) On August 3, 2012, we formally terminated the Property Management Agreement. See further discussion in
Farm Accounts Receivable and Future Farm Income below.
(ii) During September 2012 we sold the Pledged Shares in accordance with the Seller Pledge Agreement
yielding approximately $3.4 million to us.
(iii) As described in Note 7 – Long Term Debt and Operating Lease, to the accompanying consolidated
financial statements, to protect our land and water interests, upon a default by HP A&M, at our sole
discretion, we may take any measure we deem appropriate to remedy all of the defaults. If we do not
protect our interest relating to the defaults, we may lose the properties and water rights securing the
defaulted notes. As of August 31, 2013, we have acquired approximately $7 million of the $9.6 million of
promissory notes that are payable by HP A&M to third parties. These promissory notes were acquired with
cash payments of approximately $1.5 million and the issuance of notes by us. The majority of the notes we
issued have a five-year term, bear interest at an annual rate of 5% and require semi-annual payments with a
straight-line amortization schedule. The carrying value of the notes payable approximate the fair value as
the rates are comparable to market rates. We did not assume any of these promissory notes and are not
legally responsible for making any of the required payments under these notes. This responsibility remains
solely with HP A&M.
During the 2013 fiscal year four farms and one FLCC certificate representing water only went through
foreclosure proceedings. In accordance with our remedies pursuant to our agreement with HP A&M, we
exercised our right to reduce the TPF as a result of these foreclosures. We reduced the number of taps by
2,233 or a total of approximately $10.3 million. Subsequent to our fiscal year end an additional three farms
and 1,832 FLCC shares have been through the foreclosure proceedings resulting in a further reduction of
3,364 taps.
(iv) We have the right to collect from HP A&M any amounts we spend to protect our interest against the
defaulted notes, including the new notes we issue to the holders in exchange for the HP A&M notes.
Among other remedies we have the right to collect from HP A&M all costs and expenses, including
reasonable attorneys’ fees, we incur to protect our interest against the defaults and in protecting our rights
and title to the farm property and water rights securing the notes. The following table details the balance in
HP default receivable as of August 31, 2013 and August 31, 2012.
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1)
2)
Includes default interest paid at the time we acquired the notes. In addition to the
interest included above interest continues to accrue at a default interest rate of 10%
per annum. As of August 31, 2013 the balance of default interest not accrued above
was approximately $751,300. Payment of the default interest remains the sole
responsibility of HP A&M.
In addition to the above we have expensed $72,557 in attorney’s fees related to the
defaults during 2012 that have not been accrued.
Farm Accounts Receivable and Farm Operations – The Property Management Agreement was terminated prior to
the end of fiscal 2012 and all future farm income will be paid directly to us instead of HP A&M. Most of the farm
leases are “cash only” leases and a few are “crop share” leases. A “crop share” lease entitles us to a share of the
sales from the crop sales of the farmer. Most of the farm leases expire on December 31, 2014, while the remaining
leases have a variety of expiration dates. The farm “cash only” lease payments are generally billed twice a year in
March and November. The unpaid balances from the March billing (performed by HP A&M) were recorded on our
books as accounts receivable (less an allowance for uncollectible accounts) of $56,500. We may terminate the leases
by written notice on or before July 15th of the year prior to the termination. As of July 15, 2013, none of the leases
were terminated. Under the “cash only” lease agreements, the annual lease payment can be reduced if the number of
annual runs of irrigation water delivered to the farm as reported by the Fort Lyon Canal Company fall below 20
runs. If the annual runs of irrigation are less than 20, the annual lease rate will be reduced by $2 per acre per run less
than the 20 runs with a maximum annual discount of $10 per acre. During calendar year 2013, the lessee farmers
only received 11 runs. Accordingly, the maximum discount of $10 per acre will be applied to the second billing in
November 2013. This discount which will be deducted with the November 2013 billing is reflected in the schedule
below. All future expected cash billings are reflected at their full value. The “crop share” agreements are generally 1
year agreements and the payment cannot be calculated until after the farmers sell their crops. Accordingly any future
payments from “crop share” leases are not included in the future farm lease billings schedule below.
The future scheduled billing for the farm income is presented in Table F below:
Expenses associated with the farm operations are expected to include management salaries, maintenance, property
taxes and FLCC assessments.
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August 31, 2013August 31, 2012HP A&M receivableMortgage default (1)9,643,550$ 9,550,222$ Attorneys' fees, filing fees, & other costs (2)426,606 10,070,156 9,550,222 Pledged share sale(3,415,000) HP A&M receivable6,655,156$ 9,550,222$ TotalLess than 1 year1-3 yearsContractual lease income receivableFarm leases receivable1,350,400$ 895,800$ 454,600$ Total1,350,400$ 895,800$ 454,600$ Payments due to Pure Cycle by periodTable F - Contractual Farm lease income receivable
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. We do not expect any forfeiture of option grants;
therefore the compensation expense has not been reduced for estimated forfeitures. 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. For further details on share based compensation expense, see
Note 8 – Shareholders’ Equity to the accompanying financial statements.
Results of operations
Executive Summary
The results of our operations for the fiscal years ended August 31, 2013, 2012 and 2011 were as follows:
Changes in Revenues
We generate water revenues from (i) one time water and wastewater tap fees, (ii) construction fees, (iii) monthly
wholesale water usage fees and wastewater service fees and (iv) farm operations.
Fiscal 2013 compared to Fiscal 2012 – Our water deliveries increased 102% in fiscal 2013 compared to fiscal 2012.
Revenues increased 175% in fiscal 2013 compared to fiscal 2012. Both deliveries and sales increased primarily as a
result of the addition of water sales used for oil and gas activities, which was used to frack wells drilled into the
Niabrara formation. Our revenue increased by a greater margin then our deliveries due to our ability to charge a
higher meter rate on fracking water then we typically receive from customers that have acquired taps. The following
table details the sources of our sales, the number of kgal (1,000 gallons) sold, and the average price per kgal for
fiscal 2013 and fiscal 2012.
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201320122011$%$%Millions of gallons of water delivered69.234.234.535.0 102%(0.3) -1%Water revenues generated502,700$ 182,800$ 157,500$ 319,900$ 175%25,300$ 16%Water delivery operating costs incurred (excluding depreciation and depletion)188,300$ 78,100$ 51,900$ 110,200$ 141%26,200$ 50% Water delivery gross margin %63%57%67%Wastewater treatment revenues41,700$ 45,800$ 68,800$ (4,100)$ -9%(23,000)$ -33%Wastewater treatment operating costs incurred17,000$ 19,300$ 19,200$ (2,300)$ -12%100$ 1% Wastewater treatment gross margin %59%58%72%Farm operations1,241,900$ -$ -$ 1,241,900$ 100%-$ 0%Farm operations operating costs incurred96,300$ -$ -$ 96,300$ 100%-$ 0% Farm operations gross margin %92%General and administrative expenses2,333,100$ 2,374,100$ 2,212,000$ (41,000)$ -2%162,100$ 7%Net losses4,150,400$ 17,418,700$ 6,016,200$ (13,268,300)$ -76%11,402,500$ 190%Table G - Summary Results of OperationsFiscal Years Ended August 31,Change2012-20112013-2012
Our gross margin on delivering water (not including depletion charges) increased from 57% in fiscal 2012 to 67% in
fiscal 2013 due to increased sales and our ability to offset the ECCV system costs with increased water deliveries.
Our wastewater fees decreased 9% in fiscal 2013 compared to fiscal 2012 due to decreased demand from our only
customer.
We began our farm operations during fiscal 2013. Prior to fiscal 2012 we did not generate any revenues from our
farming operations. The following chart details our farm revenue by lease type, acres, and the average revenue per
acre for fiscal 2013.
Fiscal 2012 compared to Fiscal 2011 – Our water deliveries decreased 1% in fiscal 2012 compared to fiscal 2011
due mainly to slightly more precipitation during the irrigation season resulting in less usage for outdoor irrigation.
Our gross margin on delivering water (not including depletion charges) decreased from 67% in fiscal 2011 to 57%
in fiscal 2012, mainly as a result of the ECCV lease expense of $23,300 in fiscal 2012 and $0 in fiscal 2011, See
further discussion below in “ECCV Capacity Operating System” section below.
Our wastewater fees decreased 33% in fiscal 2012 compared to fiscal 2011, because we changed how our customer
is charged. Our only wastewater customer was previously charged a flat monthly fee based on the number of tap
connections; however, beginning July 1, 2011, we began to charge our wastewater customer based on the amount of
wastewater treated due to a reduction in their wastewater flows..
General and Administrative Expenses
Table H details significant items, and changes, included in our General and Administrative Expenses (“G&A
Expenses”) as well as the impact that share-based compensation has on our G&A Expenses for the fiscal years
ended August 31, 2013, 2012 and 2011, respectively.
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Customer TypeSaleskgalAverage per kgalSaleskgalAverage per kgalOn Site138,300$ 33,831.2 4.09$ 142,300$ 30,759.9 4.63$ Export-Commercial42,000 4,156.8 10.10 23,700 2,587.6 9.16Fracking322,400 34,025.1 9.48 10,200 852.8 11.96Consulting6,600 502,700$ 72,013.1 6.98$ 182,800$ 34,200.3 5.34$ 20132012Water Revenue SummaryLease TypeSalesAcresAverage per AcreArkansas Cash1,062,120$ 10,732 98.97$ Arkansas Pasture5,500 1,084 5.07 Arkansas Watershares56,000 - N/AArkansas Crop Share102,400 1,202 85.19 Arkansas Held for Sale- 1,331 - Arkansas Not Farmed- 2,361 - Sky Ranch15,880 931 17.06 1,241,900$ 17,641 70.40$ 2013Farm Summary
Fiscal 2013 compared to Fiscal 2012 – Salary and related expenses increased by 4% during fiscal 2013 as
compared to fiscal 2012 mainly as a result of bonuses paid to management in fiscal 2013 following the successful
conversion of our farming operations to our control as well as the addition of capacity to our system. As noted on
the bottom line of Table H, salary and related expenses excluding share-based compensation expenses increased 3%
during fiscal 2013 compared to fiscal 2012, mainly as a result of the employee bonuses noted above. Share-based
compensation expenses increased 22% during fiscal 2013 compared to fiscal 2012 due to the issuance of additional
options to our independent directors and to our management.
FLCC water assessment fees are the fees we pay for our share of the maintenance of the Fort Lyon Canal in
Southeast Colorado. The fees are approved by the shareholders of the FLCC. The FLCC fees decreased 11% during
fiscal 2013 compared to fiscal 2012 as a result of the assessment fees being decreased from $17.00 per share for
calendar year 2012 to $15.00 per share for calendar year 2013. As of August 31, 2013, we hold approximately 23%
of the voting shares of the FLCC.
Professional fees (mainly legal and accounting fees) decreased 43% during fiscal 2013 compared to fiscal 2012. The
decrease was due to a reduction in state litigation legal fees of approximately $188,900, a reduction of legal fees
associated with the HP default of $73,600, and a reduction of general legal fees of $27,700. The decrease was
partially offset by an increase in accounting fees of $4,900.
Fees paid to our board of directors in fiscal 2013 include $45,800 for premiums related to our directors and officers
insurance policy (this amount increased by $800 from fiscal 2012). The remaining fees of $74,800 represent
amounts paid to our board members for annual and meeting attendance fees and travel expenses which decreased
$4,900 from fiscal 2012, primarily as a result of a reduction in the number of committee meetings.
Costs associated with Sky Ranch decreased 38% during fiscal 2013 as compared to fiscal 2012 due to a decrease in
consulting fees associated with the establishment of water districts that occurred in fiscal 2012. The consulting fees
were decreased in fiscal 2013 by $23,700. Our property taxes also decreased by $26,500.
Costs associated with being a corporation and costs associated with being a publicly traded entity decreased 8%
during fiscal 2013 compared to fiscal 2012 primarily due to a change in our Edgar and XBRL processing providers.
Consulting fees for fiscal 2013 consisted of $27,500 to recruit new staff members, $2,700 for fees associated with
the disposal of our Paradise asset, $2,000 related to our involvement in WISE, and $15,200 related to the
development of the Sky Ranch water districts. All of these fees are non-recurring.
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201320122011$%$%Significant G&A Expense items: Salary and salary related expenses 723,500$ 693,500$ 807,400$ 30,000$ 4%(113,900)$ -14% FLCC water assessment fees321,200 361,600 472,400 (40,400) -11%(110,800) -23% Professional fees370,600 655,800 330,400 (285,200) -43%325,400 98% Fees paid to directors including insurance120,600 124,700 144,100 (4,100) -3%(19,400) -13% Costs associated with Sky Ranch83,600 133,800 136,500 (50,200) -38%(2,700) -2% Public entity related expenses90,500 98,100 92,500 (7,600) -8%5,600 6% Consulting fees47,400 2,600 11,600 44,800 1723%(9,000) -78% Farm property taxes237,400 - All other compenents of G&A combined338,300 304,000 217,100 34,300 11%86,900 40%G&A Expenses as reported2,333,100$ 2,374,100$ 2,212,000$ (41,000)$ -2%162,100$ 7%Share-based compensation (66,800) (54,600) (94,500) (12,200) 22%39,900 -42%G&A Expenses less share-based compensation2,266,300$ 2,319,500$ 2,117,500$ (53,200)$ -2%202,000$ 10%Note - salary and salary related expenses excluding share-based compensation: Salary and salary related expenses656,700$ 638,900$ 712,800$ 17,800$ 3%(73,900)$ -10%2012-20112013-2012ChangeFiscal Years Ended August 31,Table H- G&A Expenses
We incurred $237,400 in property taxes during fiscal 2013 as a result of taking over the management of our farms in
August 2012. This obligation was previously the responsibility of HP A&M and as such we did not have this
expense in previous years.
All other G&A Expenses are comprised of typical operating expenses and increased 11% during fiscal 2013
compared to fiscal 2012 as a result of additional funding to Rangeview Metropolitan District as well as an increase
in our bad debt allowance.
Fiscal 2012 compared to Fiscal 2011 – Salary and related expenses decreased by 14% during fiscal 2012 as
compared to fiscal 2011 mainly as a result of bonuses paid to management in fiscal 2011 following the successful
completion of the financing and acquisition of the Sky Ranch property which were not paid in 2012. As noted on the
bottom line of Table H, salary and related expenses excluding share-based compensation expenses decreased 10%
during fiscal 2012 compared to fiscal 2011, mainly as a result of the employee bonuses noted above. Share-based
compensation expenses decreased 42% during fiscal 2012 compared to fiscal 2011 due to the forfeiture of 29,500
stock options by two former board members and one former employee.
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. The FLCC fees decreased 23%
during fiscal 2012 compared to fiscal 2011 as a result of the purchase of project water by the FLCC during our fiscal
2011, which did not recur in 2012. As of August 31, 2012, we hold approximately 23% of the voting shares of the
FLCC.
Professional fees (mainly legal and accounting fees) increased 98% during fiscal 2012 compared to fiscal 2011
mainly as a result of additional legal fees related to the lawsuit we filed against the State of Colorado by and through
the Land Board in December 2011 and the lawsuit filed against us by HP A&M, as well as legal fees associated with
the HP A&M default on the promissory notes secured by deeds of trust on our Arkansas River assets.
Fees paid to our board of directors in fiscal 2012 include $45,000 for premiums related to our directors and officers
insurance policy (this amount is unchanged from fiscal 2011). The remaining fees of $79,700 represent amounts
paid to our board members for annual and meeting attendance fees and travel expenses which decreased 13% from
fiscal 2011, mainly as a result of an additional board member in fiscal 2011 as well as additional meetings held to
discuss the financing and acquisition of Sky Ranch in fiscal 2011.
Costs associated with Sky Ranch decreased 2% during fiscal 2012 as compared to fiscal 2011 due to a decrease in
consulting fees associated with the beginning phases of marketing the property to home builders/developers that
occurred in 2011. The consulting fees were decreased in 2012 by $30,000, but were offset by an increase in property
taxes of $27,000.
Costs associated with being a corporation and costs associated with being a publicly traded entity increased 6%
during fiscal 2012 compared to fiscal 2011 primarily due to increased fees charged by NASDAQ and our transfer
agent.
Overall consulting fees decreased due to a decrease in the use of consultants as a result of management’s continued
effort to reduce costs.
All other G&A Expenses are comprised of typical operating expenses and increased 40% during fiscal 2012
compared to fiscal 2011 as a result of additional funding to Rangeview Metropolitan District as well as bad debt
expense for the newly acquired farm lease receivables.
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Other Income and Expense Items
Depreciation and depletion increased 1% during fiscal 2013 compared to fiscal 2012 due to the addition of
equipment beginning to depreciate in fiscal 2013. Depreciation and depletion increased 3% during fiscal 2012
compared to fiscal 2011 due mainly to Sky Ranch improvements beginning to depreciate in fiscal 2012.
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 changes in the imputed interest expense in each of the years presented are a result of
the updated valuations performed in first quarter of fiscal 2012, which are explained in greater detail in Note 7-
Long-Term Debt and Operating Lease to the accompanying financial statements. These imputed interest charges
account for 79%, 20% and 64% of our total reported net losses for the fiscal years ended August 31, 2013, 2012 and
2011, respectively.
The $416,000, $423,000, and $199,300 of oil and gas lease payments recognized in fiscal 2013, fiscal 2012, and
fiscal 2011 respectively, represent a portion of the up-front payment received on March 10, 2011, upon the signing
of the O&G Lease and the Surface Use Agreement with Anadarko. On March 10, 2011 we received an up-front
payment of $1,243,400 from Anadarko for the purpose of exploring for, developing, producing and marketing oil
and gas on 634 acres of mineral estate we own at our Sky Ranch property. The oil and gas rights under the
remaining 304 acres at Sky Ranch were already owned by Anadarko. We deferred immediate recognition of the up-
front payment, but began recognizing the up-front payment in income over the initial three year term of the O&G
Lease beginning March 10, 2011. We also received $9,300 from Anadarko pursuant to the Surface Use Agreement.
As of August 31, 2013, we have deferred recognition of $235,500 of income related to the O&G Lease.
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 2012 to fiscal 2013 is due to reduced
investments partially offset by increased farm late fees. The increase from fiscal 2011 to fiscal 2012 is due to a slight
recovery of the investment market interest rates.
Liquidity, capital resources and financial position
At August 31, 2013, our working capital, defined as current assets less current liabilities, was $4.5 million, which
included $2.45 million in cash, cash equivalents and marketable securities. 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 $15 million of stock at any time and from time to time. During 2012 we sold the 1.5 million Pledged Shares
for $3.5 million or $2.35 per share. We believe that as of the date of the filing of this annual report on Form 10-K
and as of August 31, 2013, we have sufficient working capital to fund our operations for the next fiscal year.
Arkansas River Valley Water Assets – The FLCC water assessments are the charges assessed to the FLCC
shareholders for the upkeep and maintenance of the Fort Lyon Canal. The water assessment payments are payable to
the FLCC each calendar year. Our calendar year assessments for 2013 will be approximately $290,000 and are being
expensed ratably during the year. Our calendar year 2012 property taxes (paid in April 2013) were approximately
$142,000. We anticipate the property taxes for calendar year 2013 to be similar, so we accrue monthly property
taxes of approximately $11,800.
- 45 -
201320122011$%$%Other expense items: Depreciation and depletion expense311,200$ 309,200$ 300,800$ 2,000$ 1%8,400$ 3% Imputed interest expense3,275,400$ 3,470,500$ 3,847,000$ (195,100)$ -6%(376,500)$ -10%Other income items: Oil and gas payments recognized416,000$ 423,000$ 199,300$ (7,000)$ -2%223,700$ 100% Interest income34,600$ 53,400$ 53,100$ (18,800)$ -35%300$ 1%ChangeFor the Fiscal Years Ended August 31,2013-20122012-2011
Sky Ranch Property – Our calendar year 2012 Sky Ranch property taxes (paid in April 2013) were approximately
$90,600. We anticipate the property taxes for calendar year 2013 to be similar, so we accrue monthly property taxes
of approximately $7,600.
ECCV Capacity Operating System – Pursuant to a 1982 contractual right, the District may purchase water produced
from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system. ECCV’s Land Board
system is comprised of eight wells and more than ten miles of buried water pipeline located on the “Lowry Range”
as described in Note 4 – Water Assets to the 2012 Annual Report. In May 2012, in order to increase the delivery
capacity and reliability of these wells, in our capacity as the District’s service provider and the Export Water
Contractor (as defined in the Amended and Restated Water Lease between the District and the Colorado State Board
of Land Commissioners), we entered into an agreement to operate and maintain the ECCV facilities allowing us to
utilize the system to provide water to commercial and industrial customers, including customers providing water for
drilling and hydraulic fracturing of oil and gas wells. Our costs associated with the use of the ECCV system were a
flat monthly fee of $4,667 per month from May 1, 2012 through December 31, 2012, which increased to $8,000 per
month from January 1, 2013 through December 31, 2020, and will decrease to $3,000 per month from January 1,
2020 through April 2032. Additionally, we pay a fee per 1,000 gallons of water produced from ECCV’s system,
which is included in the water usage fees charged to customers.
The Tap Participation Fee - The $59.8 million Tap Participation Fee liability at August 31, 2013, represents the
estimated fair value of our obligation to pay HP A&M 20% of our gross proceeds, or the equivalent thereof, from
the sale of the next 17,194 water taps we sell and includes $26.1 million of interest, which has been imputed since
we acquired our farm assets, recorded using the effective interest method. During the extended term of the Property
Management Agreement, we were permitted to allocate 26.9% of the Net Revenues (defined as all lease and related
income received from the farms less employee expenses, direct expenses for managing the leases and a reasonable
overhead allocation) paid to HP A&M against the Tap Participation Fee. During the fiscal year ended August 31,
2012, we allocated $189,700 to the Tap Participation Fee liability, which was the equivalent of 41 taps. As a result
of HP A&M’s default, on August 3, 2012, we terminated the Property Management Agreement and stopped
allocating 26.9% of the Net Revenues to the TPF. Therefore, no Net Revenue was allocated against the TPF
liability during the fiscal year ended August 31, 2013, and no Net Revenue will be allocated to the liability in any
future period. We did not sell any taps during the fiscal years ended August 31, 2013 or 2012.
Payment of the TPF 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. During the 2013 fiscal year we foreclosed
on three of our farms and one FLCC certificate representing water rights only, and cured one farm in foreclosure.
Our agreement with HP A&M allows us to reduce the TPF in the event any of our farms or water rights are
foreclosed upon. As of August 31, 2013, there were 17,194 (a reduction of 2,233 compare to 2012) taps subject to
the Tap Participation Fee. As a result of the foreclosures and the reduction in taps remaining subject to the TPF, the
Tap Participation Fee was revalued as of August 31, 2013.
South Metropolitan Water Supply Authority – The South Metropolitan Water Supply Authority (“SMWSA”) is a
municipal water authority in the State of Colorado organized to pursue the acquisition and development of new
water supplies on behalf of its members. SMWSA members include 14 Denver area water providers in Arapahoe
and Douglas Counties. The District became a member of SMWSA in 2009 in an effort to participate with other area
water providers in developing regional water supplies along the Front Range. For over 2 years, the SMWSA
members have been working with Denver Water and Aurora Water on a cooperative water project known as the
Water Infrastructure Supply Efficiency partnership (“WISE”), which seeks to develop regional infrastructure which
would interconnect member’s water transmission systems to be able to develop additional water supplies from the
South Platte River in conjunction with Denver Water and Aurora Water. In July of 2013, the District together with 9
other SMWSA members formed the South Metropolitan Wise Authority (SWMA) to continue to develop the WISE
project. Through an agreement with the District, we continue to support SMWA and its joint water development
efforts and may seek to participate in one or more regional water projects if such projects are in our best interest.
- 46 -
Summary Cash Flows Table
Changes in Operating Activities – Operating activities include revenues we receive from the sale of wholesale
water and wastewater services, costs incurred in the delivery of those services, G&A expenses, and
depletion/depreciation expenses.
Cash used by operations in fiscal 2013 decreased by $130,000 compared to fiscal 2012, which was due mainly to
increased revenues and reduced legal fees related to the Land Board. These were partially offset by an increase in
accounts receivable and HP default receivable. Cash used by operations in fiscal 2012 increased by $1.3 million
compared to fiscal 2011, which was due mainly to increased legal fees related to the Land Board and HP A&M law
suits and the HP A&M default on the farm notes and deeds of trust. These were offset by an increase in accounts
payable and accrued expenses and a decrease in deferred income from the Anadarko lease.
We will continue to provide wholesale domestic water and wastewater services 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 – Investing activities in fiscal 2013 consisted of the investment in our water system
and purchase of assets of $418,000, the sale of marketable securities of $1.1 million, the sale of collateral stock of
$3.4 million. Investing activities in fiscal 2012 consisted of the purchase of marketable securities of $1.2 million and
the sale of marketable securities of $4.7 million. Investing activities in fiscal 2011 consisted of our acquisition of
Sky Ranch, which required $6.8 million during the year ended August 31, 2011, and the purchase of $6.4 million of
marketable securities, which was offset by the sale/maturity of $3.2 million of marketable securities..
Changes in Financing Activities – Financing activities in fiscal 2013 consisted primarily of payments on the
promissory notes of $1.8 million and the receipt of $292,00 from the County pursuant to the County Agreement and
the early payoff of the debt. Financing activities in fiscal 2012 consisted of the receipt of $85,000 from the County
pursuant to the County Agreement. Financing activities in fiscal 2011 consisted mainly of the sale of $5.4 million of
common stock pursuant to our effective shelf registration and the issuance of the $5.2 million Convertible Note –
Related Party. See Note 4 – Water Assets to the accompanying financial statements. Proceeds from both financings
were used to finance the acquisition of Sky Ranch and provide additional working capital. The Convertible Note –
Related Party was converted into common stock in January 2011. Additionally, we received $82,200 from the
County pursuant to the County Agreement. See Note 4 – Water Assets to the accompanying financial statements.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA which is $2.2 million, as
described in Note 5 – Participating Interest in Export Water to the accompanying financial statements. The
contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales
of Export Water, the amounts and timing of which are not reasonably determinable.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies to the accompanying financial statements for recently
adopted and issued accounting pronouncements.
- 47 -
201320122011$%$%Cash (used) provided by: Operating acitivites(1,756,700)$ (1,887,100)$ (623,200)$ 130,400$ -7%(1,263,900)$ 203% Investing activities4,098,100$ 3,354,000$ (9,996,100)$ 744,100$ 22%13,350,100$ -134% Financing activities(1,516,500)$ 85,000$ 10,679,100$ (1,601,500)$ -1884%(10,594,100)$ -99%2013-2012For the Fiscal Years Ended August 31,2012-2011Change
Total Contractual Cash Obligations
(a) Our contractual obligations are related to our Arkansas Valley farms. We have refinanced most farms on 5
year terms at a rate of 5% payable 2 times per year. The remaining farms are in various stages of
negotiation, but due to their default status by HP A&M they are reflected as a current liability maturing in
less than 1 year.
(b) Our only operating lease is related to our office space. We occupy 1,200 square feet at a cost of $1,530, per
month, at the address shown on the cover of this Form 10-K. We lease these premises pursuant to a two
year operating lease agreement with a third party.
(c) 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.
(d) 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 $41.4 million. The Tap
Participation Fee is described in greater detail in Note 7 – Long-Term Debt and Operating Lease to the
accompanying financial statements.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
General
We have limited exposure to market risks from instruments that may impact our balance sheets, statements of
operations, and statements of cash flows. Such exposure is due primarily to changing interest rates.
Interest Rates
The primary objective for our investment activities is to preserve principal while maximizing yields without
significantly increasing risk. This is accomplished by investing in diversified short-term interest bearing
investments. As of August 31, 2013, the Company is not holding any marketable securities in an effort to create
liquidity while the Company is in the process of curing the defaults by High Plains A&M, LLC (“HP A&M”). We
have no investments denominated in foreign country currencies, and therefore our investments are not subject to
foreign currency exchange risk.
- 48 -
TotalLess than 1 year1-3 years3-5 yearsMore than 5 yearsContractual obligations7,758,000$ 4,546,900$ 2,664,000$ 547,100$ (a)Operating lease obligations24,480 18,360 6,120 (b)(b)Participating Interests in Export Water1,192,900 (c)(c)(c)(c)Tap Participation Fee payable to HP A&M105,065,800 (d)(d)(d)(d) Total114,041,180$ 4,565,260$ 2,670,120$ 547,100$ $ -Payments due by periodTable K - Contractual Cash Obligations
Item 8 – Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
- 49 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Pure Cycle Corporation
We have audited the accompanying consolidated balance sheets of Pure Cycle Corporation as of August 31, 2013
and 2012, and the related consolidated statements of operations, shareholders' equity and comprehensive income
(loss) and cash flows for each of the three years in the period ended August 31, 2013. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements.
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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Pure Cycle Corporation as of August 31, 2013 and 2012, and the results of their operations and
their cash flows for each of the three years in the period ended August 31, 2013, in conformity with accounting
principles generally accepted in the United States of America.
/s/ GHP HORWATH, P.C
Denver, Colorado
November 27, 2013
F-1
ASSETS:August 31, 2013August 31, 2012Current assets:Cash and cash equilvalents2,448,363$ 1,623,517$ Marketable securities–1,101,367 Trade accounts receivable584,802 135,458 Sky Ranch receivable57,303 –Current portion of HP A&M receivable6,655,156 4,456,857 Prepaid expenses154,345 279,782 Current portion of construction proceeds receivable–64,783 Total current assets9,899,969 7,661,764 Investments in water and water systems, net88,512,249 88,510,359 Land - Sky Ranch3,768,029 3,778,464 Land and water held for sale5,748,630 5,748,630 Construction proceeds receivable, less current portion–226,879 Note receivable - related party:Rangeview Metropolitan District, including accrued interest555,983 543,945 HP A&M receivable, less current portion–5,093,365 Other assets133,471 18,671 Total assets108,618,331$ 111,582,077$ LIABILITIES:Current liabilities:Accounts payable167,775 261,383 Current portion mortgages payable, including interest payable of $122,0284,668,943 5,340,890 Accrued liabilities264,740 172,630 Deferred revenues65,384 65,384 Deferred oil and gas lease payment235,483 414,480 Total current liabilities5,402,325 6,254,767 Deferred revenues, less current portion1,232,220 1,297,605 Deferred oil and gas lease payment, less current portion–224,510 Mortgages payable, less current portion3,211,112 4,209,329 Participating interests in Export Water Supply1,192,910 1,208,928 Tap Participation Fee payable to HP A&Mnet of $42.9 million and $44.8 million discount respectively59,807,289 68,269,176 Total liabilities70,845,856 81,464,315 Commitments and ContingenciesSHAREHOLDERS' EQUITY:Preferred stock:Series B - par value $.001 per share, 25 milllion shares authorized433 433 432,513 shares issued and outstanding(liquidation perference of $432,513)Common stock:Par value 1/3 of $.01 per share, 40 million shares authorized;24,037,598 shares issued and outstanding80,130 80,130 Additional paid in capital115,224,946 103,420,869 Accumulated comprehensive loss–(1,081) Accumulated deficit(77,533,034) (73,382,589) Total shareholders' equity37,772,475 30,117,762 Total liabilities and shareholders' equity108,618,331$ 111,582,077$ PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying Notes to Financial Statements
F-3
201320122011Revenues: Metered water usage $ 502,668 $ 182,802 $ 157,497 Wastewater treatment fees 41,697 45,778 68,833 Special facility funding recognized 41,508 41,508 41,508 Water tap fees recognized 14,294 14,296 14,296 Farm operations 1,241,882 Other income 15,413 Total revenues 1,857,462 284,384 282,134 Expenses: Water service operations (188,309) (78,144) (51,882) Wastewater service operations (16,958) (19,269) (19,224) Farm operations (96,337)–– Other (1,199) (1,995) Depletion and depreciation (90,468) (88,576) (88,587) Total cost of revenues (393,271) (187,984) (159,693)Gross margin 1,464,191 96,400 122,441 General and administrative expenses (2,333,126) (2,374,106) (2,212,026)Impairment of land and water rights held for sale– (6,457,760)–Impairment of water assets– (5,544,022)–Depreciation (220,834) (220,657) (212,184) Operating loss (1,089,769) (14,500,145) (2,301,769)Other income (expense): Oil and gas lease income, net 416,048 422,999 199,257 Farm income, net - 71,101 – Interest income 34,583 53,339 53,133 Interest expense (245,503) Other 9,574 3,552 31,887 Gain on sale of assets– 1,016 – Interest expensed on Convertible Note - Related ––– (151,667) Interest imputed on the Tap Participation Fees payable to HP A&M (3,275,378) (3,470,523) (3,847,000) Net loss $ (4,150,445) $ (17,418,661) $ (6,016,159) Net loss per common share – basic and diluted $ (0.17) $ (0.72) $ (0.26) Weighted average common shares outstanding – basic and diluted 24,037,596 24,037,596 23,168,450 For the Fiscal Years Ended August 31,
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
See accompanying Notes to Financial Statements
F-4
AdditionalAccumulatedPaid-inComprehensiveAccumulatedSharesAmountSharesAmountCapitalIncome (loss)DeficitTotalAugust 31, 2010 balance:432,513 433$ 20,206,566 67,360$ 92,341,555$ (1,580)$ (49,947,769.0)$ 42,459,999$ Sale of common stock, less fees and - expenses of approximately $145,200 ––1,848,931 6,163 5,395,442 ––5,401,605 Issuance of restricted common stock upon - conversion of Convertible Debt––1,982,099 6,607 5,345,060 ––5,351,667 Share-based compensation––––94,550 ––94,550 Unrealized loss on investments–––––(1,323) –(1,323) Net loss––––––(6,016,159) (6,016,159) Comprehensive loss(6,017,482) August 31, 2011 balance:432,513 433 24,037,596 80,130 103,176,607 (2,903) (55,963,928) 47,290,339 Share-based compensation––54,588 54,588 Allocation of net revenues to TPF189,674 189,674 Unrealized loss on investments––1,822 1,822 Net loss––(17,418,661) (17,418,661) Comprehensive loss(17,416,839) August 31, 2012 balance:432,513 433 24,037,596 80,130 103,420,869 (1,081) (73,382,589) 30,117,762 Share-based compensation––––66,812 ––66,812 Reduction in TPF due to remedies under the Arkansas River Agreement––––11,737,265 ––11,737,265 Realized gain on investments–––––1,081 –1,081 Net loss––––––(4,150,445) (4,150,445) Comprehensive loss(4,149,364) Preferred StockCommon Stock
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Financial Statements
F-5
201320122011Cash flows from operating activitiesNet loss(4,150,445)$ (17,418,661)$ (6,016,159)$ Adjustments to reconcile net loss to net cashused for operating activities:Share-based compensation expense66,812 54,588 94,550 Depreciation, depletion and other non-cash items313,137 307,507 297,212 Imputed interest on Tap Participation Fees payable to HP A&M3,275,378 3,470,523 3,847,000 Impairment of water assets- 5,544,022 - Impairment of land and water rights held for sale- 6,457,760 - Interest expensed on Convertible Note-Related Party- - 151,667 Interest added to note receivable - related partyRangeview Metropolitan District(12,038) (12,072) (12,039) Interest added to construction proceeds receivable- (19,241) (22,899) Gain on sale of fixed assets- (1,016) - Changes in operating assets and liabilities:Trade accounts receivable(449,344) (36,974) (27,329) Prepaid expenses125,437 (37,782) (5,373) HP A&M Receivable(519,934) - - Sky Ranch Receivable(57,303) - - Accounts payable and accrued liabilities120,527 246,034 72,457 Deferred revenue(65,385) (27,314) (55,802) Deferred income - oil and gas lease(403,507) (414,480) 1,053,470 Net cash used for operating activities(1,756,665) (1,887,106) (623,245) Cash flows from investing activities:Investments in water, water systems and land(378,008) (132,221) (6,841,255) Purchases of marketable securities- (1,235,857) (6,357,177) Sales and maturities of marketable securities1,101,367 4,724,847 3,202,373 Proceeds from sale of land- 1,099 - Proceeds from sale of collateral stock3,415,000 - - Purchase of property and equipment(40,300) (3,894) - Net cash provided (used) by investing activities4,098,059 3,353,974 (9,996,059) Cash flows from financing activitiesNet proceeds from equity offering- - 5,401,606 Issuance of Convertible Note - Related Party- - 5,200,000 Arapahoe County construction proceeds291,662 84,854 82,196 Payment to contingent liability holders(16,018) - (4,720) Payments made on promissory notes payable(1,792,192) Net cash (used for) provided by financing activities(1,516,548) 84,854 10,679,082 Net change in cash and cash equivalents824,846 1,551,722 59,778 Cash and cash equivalents - beginning of year1,623,517 71,795 12,017 Cash and cash equivalents - end of year2,448,363$ 1,623,517$ 71,795$ For the fiscal Years Ended August 31,
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
NOTE 1 – ORGANIZATION
Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976 and reincorporated in Colorado in
2008. The Company owns assets in the Denver, Colorado metropolitan area and in Southeast Colorado. The
Company is currently using its water assets located in the Denver metropolitan area to provide wholesale water and
wastewater services to customers located in the Denver metropolitan area. The Company is leasing its farm land in
the Arkansas River Valley to area farmers.
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 wholesale water and wastewater services, predominately to local governmental entities, which provide
services to their end-use 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. As of August 31, 2013, the Company had $2.4 million of cash and cash equivalents and $4.5
million of working capital. During fiscal year end 2013, the Company sold the 1.5 million shares of Pure Cycle
common stock issued to High Plains A&M, LLC (“HP A&M”), which were pledged as security for certain debt
obligations, in a foreclosure sale for $3.5 million or $2.35 per share.
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
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its
majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.
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.
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 in an account which as of August 31, 2013 exceed federally insured limits. At various times
during the year ended August 31, 2013, the Company’s main operating account exceeded federally insured limits.
Marketable Securities
At August 31, 2012, the Company’s marketable securities are comprised entirely of certificates of deposits
maintained at various financial institutions, each of which have invested below federally insured limits and pay
interest at stated rates through maturity. The certificates matured at various dates through May 2013.
F-6
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
The amounts reported on the balance sheets for marketable securities as of August 31, 2012 represent the fair values
of the underlying instruments as reported by the financial institutions where the funds are held. As of August 31,
2013, the Company is not holding any marketable securities in an effort to create liquidity while the Company is in
the process of resolving the defaults by HP A&M.
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 high quality
financial institutions. At various times throughout the year ended August 31, 2013, cash deposits have exceeded
federally insured limits. The Company invests its idle 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.
Mortgages Payable and HP A&M Receivable
In conjunction with HP A&M defaulting on certain promissory notes in fiscal year 2012, the Company has the right
to collect from HP A&M any amounts the Company spends to protect its interest from the defaulted notes.
Accordingly the Company has recorded the entire amount of the HP A&M notes at default as well as expenses
incurred to cure the defaults as a receivable from HP A&M less proceeds received from the sale of shares held in
escrow pursuant to the asset purchase agreement (“The Arkansas River Agreement”). The receivable represents the
amount of the defaulted promissory notes payable by HP A&M which were purchased by the Company and with
respect to which the Company will pursue remedies under the Arkansas River agreement (as described in more
detail in Note 4) over the next 12 months, plus expenses as noted above.
In the fiscal year 2013 the Company began acquiring the defaulted promissory notes that are payable by HP A&M.
The majority of the notes issued by the Company have a five-year term, bear interest at an annual rate of five
percent (5%) and require semi-annual payments with a straight-line amortization schedule, (see Note 7 – Long term
debt and operating lease).
Cash Flows
The Company paid $123,500 in interest during the fiscal year ended August 31, 2013. The Company did not pay any
interest during the fiscal years ended August 31, 2012 and 2011, respectively.
The Company did not pay any income taxes during the fiscal years ended August 31, 2013, 2012 and 2011,
respectively.
Trade Accounts Receivable
The Company records accounts receivable net of allowances for uncollectible accounts. Included in trade accounts
receivable are balances due from farm operations. The Company recorded an allowance for uncollectible accounts in
the amounts of $41,100 and $20,400 as of August 31, 2013 and 2012, respectively. The allowance for uncollectible
accounts was determined based on specific review of all 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. Based
F-7
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
on the Company’s procedures, the Company determined that its “Paradise Water Supply” asset (defined in Note 4
below) and land and water rights held for sale related to the Arkansas River Assets were impaired as of August 31,
2012. The Company determined that no impairment of such assets existed at August 31, 2013. There was no
impairment in the carrying amounts of the remaining long-lived assets at August 31, 2013 and 2012. See further
discussion in Note 4 below under sections “Paradise Water Supply” and “Arkansas River Assets”.
Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges
Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as
incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to thirty
years. 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.
The Company depletes its water assets that are being utilized on the basis of units produced (i.e. thousands of
gallons sold) divided by the total volume of water adjudicated in the water decrees.
Tap Participation Fee Liability and Imputed Interest Expense
The Tap Participation Fee liability (“TPF”), as described in Note 7 – Long Term Debt and Operating Lease,
represents the discounted fair value of the amounts the Company estimates it will pay HP A&M pursuant to the
Arkansas River Agreement. The Company imputes interest expense on the unpaid TPF using the effective imputed
interest of $3.3 million, $3.5 million and $3.8 million during the years ended August 31, 2013, 2012 and 2011,
respectively.
The TPF 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 years ended August 31, 2013, 2012 or 2011. As of
August 31, 2013, 17,194 water taps remain subject to the TPF.
Revenue Recognition
The Company generates revenues through two separate lines of businesses. Its revenues are derived through its
Wholesale Water and Wastewater business and its Farming Operations, which are described below.
Wholesale Water and Wastewater business – The Company generates revenues through its wholesale water and
wastewater segment predominately from three sources: (i) monthly wholesale water usage fees and wastewater
service fees, (ii) one time water and wastewater tap fees, and construction fees, and (iii) consulting fees. Because
these items are separately delivered, the Company accounts for each of the items separately, as described below.
i) Monthly wholesale water and wastewater service fees – Monthly wholesale water usage charges are
assessed to the Company’s 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 the Company’s 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 wholesale water usage revenues upon delivering water to its customers or its
governmental customers’ end-use customers, as applicable. The water revenues recognized by the
Company are shown net of royalties to the Land Board and, when applicable, amounts retained by the
Rangeview Metropolitan District (the “District”).
The Company recognizes wastewater processing revenues monthly based on usage. The monthly
wastewater service fees are shown net of amounts retained by the District. Amounts recognized for water
and wastewater services during the fiscal years ended August 31, 2013, 2012 and 2011, are presented in the
statements of operations. Costs of delivering water and providing wastewater service to customers are
recognized as incurred.
F-8
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
The Company delivered 69.2 million, 34.2 million and 34.5 million gallons of water to customers during
the fiscal years ended August 31, 2013, 2012 and 2011, respectively.
ii) Water and wastewater tap fees and construction fees – Tap fees, also called system development fees, are
received in advance, are non-refundable and are typically used to fund construction of certain facilities and
defray the acquisition costs of obtaining water rights. Construction fees are fees used by the Company to
construct assets that are typically required to be constructed by developers or home builders.
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 a customer owns the infrastructure constructed
with the proceeds.
Tap and construction fees derived from agreements in which the Company will not own the assets
constructed with the fees 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 construction costs.
Tap and construction fees derived from agreements for which the Company will own the infrastructure 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.
In August 2005, the Company entered into the Water Service Agreement (the “County Agreement”) with
Arapahoe County (the “County”) to provide water service to the County’s fairgrounds (the “Fairgrounds”).
Pursuant to the County Agreement, the Company owns the facilities which store, treat, and deliver the
water and amortizes the cost of these facilities over their useful lives. In each of the three fiscal years ended
August 31, 2013, 2012 and 2011, the Company recognized $14,300 of tap fee revenue. At August 31, 2013,
$327,600 of these tap fees are still deferred. The Company recognized $41,500 of “Special Facilities”
funding as revenue in each of the three fiscal years ended August 31, 2013, 2012, and 2011 respectively.
These construction revenues also relate to the County Agreement entered into in August 2005. As of
August 31, 2013, the Company has deferred recognition of $1.3 million of tap and construction fee revenue
from the County, which will be recognized as revenue ratably through 2036.
In addition to the tap fee revenues and the construction revenues, the Company also records interest income
from the County using the effective interest method. Pursuant to the County Agreement, the County is
making payments to the Company totaling $82,200 per year for the construction of the Special Facilities at
the Fairgrounds. These payments include interest at 6% per annum. In April 2013 the County paid the
balance on the note. The Company recognized $5,500, $19,200 and $22,900 of interest income from the
County during the fiscal years ended August 31, 2013, 2012 and 2011, respectively.
In August 2012, the Company entered into an agreement with Front Range Pipeline which grants Front
Range Pipeline easement rights for a period of three years to construct a pipeline for total consideration of
$28,700. As of August 31, 2013, the Company had $18,900 in deferred revenue from Front Range Pipeline.
iii) Consulting Fees – Consulting fees are fees we receive, typically on a monthly basis, from municipalities
and area water providers along the I-70 corridor, for system management and maintenance
Agricultural Farming Operations – The Company leases its Arkansas River water and land to area farmers who
actively farm the properties. Prior to August 3, 2012, pursuant to a property management agreement between HP
A&M and the Company (the “Property Management Agreement”), HP A&M received a management fee equal to
100% of the income from the land and water leases. As a result, the Company presented its land and water lease
income net of the management fees paid to HP A&M. Effective August 3, 2012, the Company terminated the
F-9
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
Property Management Agreement due to a default by HP A&M on certain promissory notes secured by deeds of
trust on the land and water purchased by the Company from HP A&M in 2006. Effective August 3, 2012, the
Company manages the land and water leases and the income from the land and water leases became payable to the
Company. Pursuant to the farm lease agreements, the Company bills the lessees semi-annually in March and
November. The lease billings include minimum billings and adjustments based on actual water deliveries by the Fort
Lyon Canal Company (“FLCC”) or are based on crop yields. Subsequent to August 3, 2012, the Company records
farm lease income ratably each month based on estimated annual lease income the Company anticipates collecting
from its land and water leases. The Company recorded these amounts as receivables, less an estimated allowance for
uncollectible accounts. The allowance as of August 31, 2013, was determined by the Company’s specific review of
all past due accounts. The Company has recorded allowances for doubtful accounts totaling $41,100 and $20,400 as
of August 31, 2013 and 2012, respectively. As of August 31, 2013 the company has accrued $397,300 of farm
income related to billings for future periods. The Company manages the farm lease business as a separate line of
business from the wholesale water and wastewater business.
Royalty and other obligations
Revenues from the sale of Export Water are shown net of royalties payable to the Land Board. Revenues from the
sale of water on the “Lowry Range” are shown net of the royalties to the Land Board and the amounts retained by
the District. See further description of the “Lowry Range” in Note 4 – Water Assets under section “Rangeview
Water Supply and Water System”.
Oil and Gas Lease Payments
As further described in Note 4 below, on March 10, 2011, the Company entered into a Paid-Up Oil and Gas Lease
(the “O&G Lease”) and a Surface Use and Damage Agreement (the “Surface Use Agreement”) with Anadarko E&P
Company, L.P. (“Anadarko”) a wholly owned subsidiary of Anadarko Petroleum Company. Pursuant to the O&G
Lease on March 10, 2011, the Company received an up-front payment of $1,243,400 from Anadarko for the purpose
of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of mineral estate
owned by the Company at its Sky Ranch property. In December 2012 the O&G Lease was purchased by a wholly
owned subsidiary of ConocoPhillips Company. The Company began recognizing the up-front payment from
Anadarko as income on a straight-line basis over three years (the initial term of the O&G Lease) on March 10, 2011.
During the years ended August 31, 2013, 2012 and 2011, the Company recognized $416,000, $423,000 and
$199,000 respectively, of income related to the up-front payments received pursuant to the O&G Lease.
As of August 31, 2013, the Company has deferred recognition of $235,500 of income related to the O&G Lease,
which will be recognized into income ratably through February 2014.
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, 2013 and 2012 had no impact on the income tax provisions.
The Company recognized $66,800, $54,600 and $94,600 of share-based compensation expenses during the fiscal
years ended August 31, 2013, 2012 and 2011, respectively.
F-10
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
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, 2013.
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 2009 through fiscal 2012. 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, 2013, 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, 2013, 2012 or 2011.
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 347,600, 215,100 and 280,100 common share
equivalents as of August 31, 2013, 2012 and 2011, 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. 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. A variety of proposed
or otherwise potential accounting standards are currently under study by standard-setting organizations and various
regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, the Company has
not determined whether implementation of such proposed standards would be material to the Company’s financial
statements. New pronouncements assessed by the Company recently are discussed below:
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02). ASU 2013-02 finalizes Proposed
ASU No. 2012-240, and seeks to improve the transparency of reporting reclassifications out of accumulated other
comprehensive income. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15,
2012 (September 1, 2013 for the Company). The adoption of ASU 2013-02 will not have a material impact on its
results of operations, financial condition or cash flows.
In 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11). ASU 2013-02
provides that an unrecognized tax benefit, or a portion, should be presented in the financial statements as a reduction
to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward for
reporting fiscal years beginning after December 15, 2013 (September 1, 2014 for the Company). The adoption of
ASUJ 2013-11 will not have a material impact on its results of operations, financial condition or cash flows.
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.
F-11
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock
Exchange. The Company had none of these instruments at August 31, 2013 or 2012.
Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent
providers for market transactions involving similar assets or liabilities. The Company had no Level 2 assets at
August 31, 2013 and one Level 2 asset at August 31, 2012, its marketable securities. The Company’s principal
markets for these securities are 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, 2013 and 2012, the Tap
Participation Fee liability, which is described in greater detail in Note 2 – Summary of Significant Accounting
Policies and Note 7 – Long-Term Debt And Operating Lease.
The Company maintains policies and procedures to value instruments using the best and most relevant data
available.
The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its
investments in water and water systems and other long-lived assets. See Note 4 for impairment of water rights and
land with the associated water rights held for sale.
Level 2 Asset – Marketable Securities Measured on a Recurring Basis. The Company’s marketable securities were
the Company’s only financial assets measured on a recurring basis. The fair values of the marketable securities are
based on the values reported by the financial institutions where the funds are held. These securities included only
federally insured certificates of deposit.
Level 3 Liability – Tap Participation Fee. The Company’s Tap Participation Fee liability is the Company’s only
financial liability measured on a non-recurring basis. The Tap Participation Fee liability is valued by projecting new
home development in the Company’s targeted service area over an estimated development period. Due to the long-
term nature of the Tap Participation Fee, the valuation of the Tap Participation Fee is not sensitive to minor changes.
See further description of the Tap Participation Fee in Note 7 – Long-Term Debt and Operating Lease.
The following table provides information on the assets and liabilities measured at fair value as of August 31, 2013:
Although not required, the Company deems the following table, which presents the changes in the Tap Participation
Fee for the year ended August 31, 2013, to be helpful to the users of its financial statements:
F-12
Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Unrealized Gains andFair ValueCost / Other Value(Level 1)(Level 2)(Level 3)(Losses)Tap Participation Fee59,807,289$ 59,807,289$ -$ -$ 59,807,289$ -$ Fair Value Measurement Using:
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value are
discussed above. The methodologies for other financial assets and liabilities are discussed below.
Cash and Cash Equivalents: The Company’s cash and cash equivalents are reported using the values as reported by
the financial institution where the funds are held. These securities primarily include balances in the Company’s
operating and savings accounts. The carrying amount of cash and cash equivalents approximate fair value.
Accounts Receivable and Accounts Payable: The carrying amounts of accounts receivable and accounts payable
approximate fair value due to the relatively short period to maturity for these instruments.
Long-term Financial Liabilities: The Comprehensive Amendment Agreement No. 1 the “CAA” is comprised of a
recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of
its “Rangeview Water Supply” (defined in Note 4 below). The amount payable is a fixed amount but is repayable
only upon the sale of “Export Water” (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 CAA is described further in Note 5 – Participating Interests in Export Water.
The recorded balance of the “Tap Participation Fee” liability (as described below) is its estimated fair value
determined by projecting new home development in the Company’s targeted service area over an estimated
development period.
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.
HP A&M Receivable: In conjunction with HP A&M defaulting on certain promissory notes, the Company has the
right to collect from HP A&M any amounts the Company spends to cure the defaulted notes. Accordingly the
Company has recorded the entire amount of the HP A&M notes as a receivable from HP A&M. Due to the fact that
HP A&M is a related party the fair value of the accounts receivable is not practical to determine.
Mortgages Payable: During fiscal 2013, the Company began acquiring the defaulted and non-defaulted promissory
notes that are payable by HP A&M. The majority of the notes issued by the Company have a five-year term, bear
interest at an annual rate of five percent (5%) and require semi-annual payments with a straight-line amortization
schedule. The carrying value of the notes payable approximate the fair value as the rates are comparable to market
rates.
Off-Balance Sheet Instruments: The Company’s off-balance sheet instruments consist entirely of the contingent
portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which
F-13
Gross Estimated Tap Participation Fee LiabilityTap Participation Fee Reported LiabilityDiscount - to be imputed as interest expense in future periodsBalance at August 31, 2012112,958,000$ 68,269,100$ 44,688,900$ Total gains and losses (realized and unrealized): Imputed interest recorded as "Other Expense"- 3,275,400 (3,275,400) Purchases, sales, issuances, payments, and settlements(10,276,100) (11,737,200) 1,461,100 Transfers in and/or out of Level 3- - - Balance at August 31, 2013102,681,900$ 59,807,300$ 42,874,600$ Fair Value Measurement using Significant Unobservable Inputs (Level 3)
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a
determinable fair value. See further discussion in Note 5 – Participating Interests In Export Water.
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:
Depletion and Depreciation
The Company recorded $500 of depletion charges during each of the three fiscal years ended August 31, 2013, 2012
and 2011, respectively. This related entirely to the Rangeview Water Supply (defined below). No depletion is taken
against the Arkansas River water or Sky Ranch Water Supply (all are defined below) because the water located at
these locations is not yet being utilized for their intended purpose as of August 31, 2013.
The Company recorded $311,300, $309,200 and $300,800 of depreciation expense in each of the fiscal years ended
August 31, 2013, 2012 and 2011, respectively. These figures include depreciation for other equipment not included
in the table above.
Arkansas River Assets
Arkansas River Water – The Company owns 60,000 acre feet of senior water rights in the Arkansas River and its
tributaries in Southeastern Colorado. The Company anticipates that of this, 40,000 acre feet may be available for
non-agricultural uses along the front range of Colorado sometime in the future. The Company acquired its Arkansas
River assets from HP A&M pursuant to 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.
F-14
CostsAccumulated Depreciation and DepletionCostsAccumulated Depreciation and DepletionArkansas River assets $ 69,112,300 $ (1,487,700) $ 69,112,300 $ (1,315,900)Rangeview water supply 14,667,000 (7,700) 14,376,100 (7,100)Sky Ranch water rights and other costs 3,915,100 (79,800) 3,924,100 (50,800) Fairgrounds water and water system 2,899,900 (622,600) 2,899,900 (534,500)Rangeview water system 167,700 (72,800) 167,700 (67,600)Water supply – other 43,200 (22,400) 25,600 (19,400)Totals 90,805,200 (2,293,000) 90,505,700 (1,995,300)Net investments in water and water systems $ 88,512,200 $ 88,510,400 August 31, 2013August 31, 2012
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
The value of the assets was recorded based on the determined fair value of the consideration paid at the acquisition
date, because the value of the consideration was deemed a more reliable criterion of value than the value of the
acquired assets. The consideration paid was comprised of equity (3.0 million shares of the Company’s common
stock) and the Tap 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. For a discussion of promissory notes owed by HP A&M to third parties which are secured by the
Company’s Arkansas River water rights, see “Arkansas River Land” section below, Note 7 – Long Term Debt and
Operating Lease, and Note 15 – Subsequent Events.
Fort Lyon Canal Company (“FLCC”) Shares – The Arkansas River water rights are represented by 21,782 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 FLCC shares
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.
Arkansas River Land – The Company owns approximately 16,700 acres of real property which is being used for
agricultural purposes and was acquired from HP A&M in 2006 in connection with the water acquisition described
above. The land is located in the counties of Bent, Otero and Prowers in southern Colorado. 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 land owned by the Company is divided into 80 separate properties, each of which is being leased to area
farmers. Most of the operating leases expire on December 31, 2014, while the remaining leases have a variety of
expiration dates. Pursuant to a property management agreement between HP A&M and the Company (the “Property
Management Agreement”), HP A&M had the right to pursue leasing of the land and Arkansas River water to
interested parties with all lease income associated with leasing the land and Arkansas River water, together with all
costs associated with these activities, being the sole opportunity and obligation of HP A&M. The Property
Management Agreement’s initial term expired on August 31, 2011 and beginning September 1, 2011, the Property
Management Agreement entered into the “Extended Term” which could extend the Property Management
Agreement until September 2014 at the latest. During the Extended Term, HP A&M was to continue to manage the
leases and receive all lease payments from the lessees as a management fee. Beginning September 1, 2011, until the
Property Management Agreement was terminated the Company allocated 26.9% (calculated pursuant to the Property
Management Agreement based on consideration paid to HP A&M since the signing of the Arkansas River
Agreement) of the net revenues paid to HP A&M (which is the lease payments HP A&M retains less expenses for
employees, reasonable overhead and actual expenses paid to manage the farm leases) against the Tap Participation
Fee liability. Because the Company did not have the risk of loss associated with the leases (HP A&M’s management
fee was equal to all lease income and contractually HP A&M had the risk of loss on the leases), the lease income
and management fees are reflected on a net basis throughout the initial and Extended Terms of the Property
Management Agreement until termination on August 3, 2012.
The Property Management Agreement was terminated on August 3, 2012 due to defaults by HP A&M on certain
promissory notes secured by deeds of trust on the Company’s land and water. On July 23, 2012, the Company
notified all the farm lessees that HP A&M had notified the Company that HP A&M intended to default on its
obligations under the promissory notes issued by HP A&M to purchase farms and water rights in the Fort Lyon
Canal system. The lessees were informed that all lease payments would be billed directly by and paid directly to the
Company from the date of the notice forward. All other terms of the leases remained unchanged. Under the farm
lease agreements, the farmers are billed twice a year in November and March. The Company received lease income
F-15
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
from farm leases of approximately $1,241,900 and $71,100 (recorded as revenue for fiscal 2013 and other income
for fiscal 2012) for the fiscal years ended August 31, 2013 and 2012, respectively. The allocation of 26.9% of the
net revenues against the Tap Participation Fee, the termination of the Property Management and the defaults by HP
A&M are described in greater detail in Note 7 – Long-Term Debt and Operating Lease.
Land and Water Shares Held for Sale
During fiscal year end 2012, management decided to sell certain farms in order to have the cash flow sufficient to
acquire the notes defaulted upon by HP A&M and to meet the future obligations on the promissory notes the
Company intends to issue as consideration to purchase the notes owed by HP A&M. Management is anticipating
selling approximately 1,603 acres of land along with 3,397 FLCC shares associated with this land. The net book
value of the assets held for sale prior to being impaired at August 31, 2012 was $12.2 million. The negotiated sale
price for these assets is $5.7 million which resulted in a loss of $6.5 million, which was expensed in fiscal 2012.
Rangeview Water Supply and Water System
The “Rangeview Water Supply” consists of 25,050 acre feet and is a combination of tributary surface water and
groundwater rights along with certain storage rights associated with the Lowry Range, a 27,000-acre property owned
by the Land Board located 16 miles southeast of Denver, Colorado. The $14.7 million on the Company’s balance
sheet as of August 31, 2013, represents the costs of assets acquired or facilities constructed to extend water service
to customers located on 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 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.
Services on the Lowry Range – Pursuant to the Rangeview Water Agreements, the Company designs, finances,
constructs, operates and maintains the District’s water and wastewater systems to provide service to the District’s
customers on the Lowry Range. The Company will operate both the water and the wastewater systems during the
contract period and the District owns both systems. After 2081, ownership of the water system will revert to the
Land Board, with the District retaining ownership of the wastewater system.
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. Rates and charges are required to be
F-16
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
less than the average of similar rates and charges of three surrounding municipal water and wastewater service
providers, which are reassessed annually. Pursuant to the Rangeview Water Agreements the Land Board receives a
12% royalty on all gross revenues received from water sales to customers on the Lowry Range. The District retains
5% of the remaining gross revenues and the Company receives 95% of the remaining gross revenues after the Land
Board Royalty. The Land Board does not receive a royalty on wastewater fees. The Company receives 100% of the
District’s wastewater tap fees and 90% of the District’s wastewater usage fees (the District retains the other 10%).
Export Water – The Company owns the Export Water and uses and intends to use it to provide water and
wastewater services to customers off the Lowry Range. The Company will own all facilities required to extend
water and wastewater services using its Export Water. The Company anticipates contracting with third parties for
the construction of these facilities. If the Company sells 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.
The County Fairgrounds Water and Water System
The Company owns 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.
Sky Ranch
In 2010 the Company purchased approximately 931 acres of undeveloped land known as Sky Ranch. The property
includes the rights to 820 acre feet of water.
Total consideration for the land and water included the $7.0 million purchase price, plus direct costs and fees of
$554,100. The Company allocated the total acquisition cost to the land and water rights based on estimates of each
asset’s respective fair value.
At August 31, 2013 Sky Ranch Metropolitan District #5 owed the Company approximately $57,300 for various
costs associated with establishing and operating the district. The Company anticipates these costs will be recovered
through property tax assessments.
O&G Lease – On March 10, 2011, the Company entered into the O&G Lease and the Surface Use Agreement with
Anadarko. Pursuant to the O&G Lease, the Company received an up-front payment of $1,243,400 from Anadarko
for the purpose of exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate
owned by the Company at its Sky Ranch property. The Company also received $9,000 in surface use and damage
payments.
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.” 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, the Company must demonstrate that it is diligently pursuing the development of the water rights. If the
Company does not receive a favorable finding of reasonable diligence, it will lose its right to the Paradise Water
Supply. The most recent diligence review was started in our fiscal 2005 and was completed in 2008, but not without
objectors and not without the Company having to agree to certain stipulations to remove the objections. In order to
continue to maintain the Paradise water right, by 2014 the Company 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 places of use for
the water; and (iv) identify specific source(s) of the water rights for use. Management does not intend to spend the
resources needed to find an alternative reservoir site without a specific use for the water. The Company has been
unable to find potential customers for this water and cannot be certain that a customer will commit to use the water
within the next two years. Since the Company does not have a customer that will commit to use the water and the
Company will not commit the resources necessary to move the reservoir site in the absence of a customer, the
F-17
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
Company expects to lose these conditional water rights. Accordingly during the fourth quarter of fiscal 2012, the
Company determined the Paradise Water Supply was fully impaired and an impairment charge of $5.5 million was
recorded. The Company is currently in the process of disposing of the Paradise Water Supply.
NOTE 5 – PARTICIPATING INTERESTS IN EXPORT WATER
The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early
1990’s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the
Company recorded an initial liability of $11.1 million, which represented the cash the Company received from the
participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in
Note 4 – Water Assets to the 2013 Annual Report). The Company agreed to remit a total of $31.8 million of
proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1
million investments. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million
contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is
contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.
The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no
recourse against the Company. If the Company does not sell the Export Water, the holders of the Series B Preferred
Stock are also not entitled to payment of any dividend and have no contractual recourse against the Company.
As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA
holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating
Interests in Export Water Supply liability account) with the balance of the payment being charged to the contingent
obligation portion. Because the original recorded liability, which was $11.1 million, was 35% of the original total
liability of $31.8 million, 35% of each payment remitted to the CAA holders is allocated to the recorded liability
account. The remaining portion of each payment, or 65%, is allocated to the contingent obligation, which is recorded
on a net revenue basis.
From time to time the Company repurchased various portions of the CAA obligations in priority. The Company did
not make any CAA acquisitions during the fiscal years ended August 31, 2013 and 2012. As a result of the
acquisitions, and due to the sale of Export Water, as detailed in the table below, the remaining potential third party
obligation at August 31, 2013, is $3.4 million:
* The Arapahoe County tap fees are less $34,522 in royalties paid to the Land Board.
The CAA includes contractually established priorities which call for payments to CAA holders in order of their
priority. This means the first three payees receive their full payment before the next priority level receives any
F-18
Export Water Proceeds ReceivedInitial Export Water Proceeds to Pure CycleTotal Potential Third party ObligationPaticipating Interests LiabilityContingencyOriginal balances$ –218,500$ 31,807,700$ 11,090,600$ 20,717,100$ Activity from inception until August 31, 2012: Acquisitions –28,077,500 (28,077,500) (9,790,000) (18,287,500) Option payments - Sky Ranch and The Hills at Sky Ranch 110,400 (42,300) (68,100) (23,800) (44,300) Arapahoe County tap fees *533,000 (373,100) (159,900) (55,800) (104,100) Export Water sale payments111,300 (77,900) (33,400) (12,100) (21,300) Balance at August 31, 2012754,700 27,802,700 3,468,800 1,208,900 2,259,900 Fiscal 2013 activity: Export Water sale payments158,000 (110,600) (47,400) (16,000) (31,400) Balance at August 31, 2013912,700$ 27,692,100$ 3,421,400$ 1,192,900$ 2,228,500$
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
payment and so on until full repayment. The Company will receive $5.1 million of the first priority payout (the
remaining entire first priority payout totals $7.3 million as of August 31, 2013).
NOTE 6 – ACCRUED LIABILITIES
At August 31, 2013, the Company had accrued liabilities of $264,700, of which $156,200 was for estimated
property taxes on the Sky Ranch property, $56,700 was for professional fees, $30,300 for prepaid farm lease
payments and the remaining $21,600 was related to operating payables.
At August 31, 2012, the Company had accrued liabilities of $172,600, of which $60,500 was for estimated property
taxes on the Sky Ranch property, $56,800 was for professional fees, $33,500 for prepaid farm lease payments and
the remaining $21,500 was related to operating payables.
NOTE 7 – LONG-TERM DEBT AND OPERATING LEASE
As of August 31, 2013, the Company is subject to mortgages with contractual maturity dates as described below.
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 Participating Interest in Export Water supply is described in Note 5 – Participating Interest in
Export Water and the Tap Participation Fee is described below in section “Tap Participation Fee Payable to HP
A&M”.
Tap Participation Fee Payable to HP A&M
The $59.8 million Tap Participation Fee liability at August 31, 2013, represents the estimated discounted fair value
of the Company’s obligation to pay HP A&M 20% of the Company’s gross proceeds, or the equivalent thereof, from
the sale of the next 17,194 water taps sold by the Company.
Initially the obligation was to pay 10% of the Company’s gross proceeds, or the equivalent thereof, from the sale of
40,000 water taps sold after the date of the Arkansas River Agreement. The 40,000 water taps were reduced to
17,194 water taps as a result of (i) sales of Arkansas River Valley land in 2006 and 2009, (ii) the sale of unutilized
water rights owned by the Company in the Arkansas River Valley in 2007, (iii) the election made by HP A&M,
effective September 1, 2011, pursuant to the Arkansas River Agreement, to increase the Tap Participation Fee
percentage from 10% to 20%, and to take a corresponding 50% reduction in the number of taps subject to the Tap
Participation Fee, (iv) the allocation of 26.9% of the Net Revenues (defined as all lease and related income received
from the farms less employee expenses, direct expenses for managing the leases and a reasonable overhead
allocation) received by HP A&M from management of the farm leasing operations from September 1, 2011 to
August 3, 3012 prior to termination of the Property Management Agreement, and (v) the reduction of 2,233 taps as
the result of foreclosures on certain farms pursuant to the remedies outlined in the Arkansas River Agreement.
The fair value of the TPF liability is an estimate prepared by management of the Company. The fair value of the
liability is based on discounted estimated cash flows subject to the TPF calculated by projecting future annual
water tap sales for the number of taps subject to the TPF at the date of valuation. Future cash flows from water tap
sales are estimated by utilizing the following historical information, where available:
New homes constructed in the area known as the 11-county “Front Range” of Colorado from the 1980’s
through the valuation date. The Company utilized data for this length of time to provide development
information over many economic cycles because the Company anticipates development in its targeted
service area to encompass many economic cycles over the development period.
New home construction patterns for large master planned housing developments along the Front Range.
The Company utilized this information because these developments are deemed comparable to projects
anticipated to be constructed in the Company’s targeted service area (i.e. these master planned
communities were located in predominately undeveloped areas on the outskirts of the Front Range).
F-19
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
Population growth rates for Colorado and the Front Range. Population growth rates were utilized to
predict anticipated growth along the Front Range, which was used to predict an estimated number of new
homes necessary to house the increased population.
The Consumer Price Index since the 1980’s, which was utilized to project estimated future water tap fees.
Utilizing this historical information, the Company projected an estimated new home development pattern in its
targeted service area sufficient to cover the sale of the water taps subject to the Tap Participation Fee at the date of
the revaluation, August 31, 2013. The Company revalued the TPF payable as of August 31, 2013 due to the
reduction of taps subject to the TPF related to remedies under the Arkansas River Agreement. The estimated
proceeds generated from the sale of those water taps resulted in estimated payments to HP A&M over the life of
the projected development period of $102.7 million, which is a decrease of $17.9 million from the previous
valuation completed in fiscal 2012 ($120.6 million). The estimated payments to HP A&M are then discounted to
the current valuation date and the difference between the amount reflected on the Company’s balance sheet at the
valuation date and the total estimated payments is imputed as interest expense over the estimated development time
using the effective interest method. The implied interest rate for the most recent valuation was 5.0%.
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 consolidated
financial statements. An important component in the Company’s estimate of the value of the TPF, 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 market based and the continued increase in tap fees reflects, among other things, the increasing
costs to acquire and develop new water supplies. Tap fees thus are partially indicative of the increasing value of the
Company’s water assets. The Company continues to assess the value of the TPF 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 TPF.
Payment of the TPF 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. Pursuant to the default provisions of the
Company’s agreement with HP A&M, the Company reduced the discounted present value of the TPF by $11.7
million during the fiscal year-end August 31, 2013. The Company recorded the decrease in the TPF payable as an
equity transaction due to the related party nature of the original transaction. Through August 31, 2013 $26.1
million of interest has been imputed since the acquisition date, recorded using the effective interest method.
Promissory Notes Payable by HP A&M in default
Approximately 60 of the 80 properties the Company originally acquired from HP A&M are subject to outstanding
promissory notes payable to third parties that are secured by deeds of trust on the Company’s properties and water
rights, as well as mineral interests. HP A&M has now defaulted on all of the promissory notes and informed the
Company that it does not intend to pay any of the amounts owed. HP A&M owed approximately $9.6 million of
principal and accrued interest as of September 1, 2012. These promissory notes are secured by approximately 14,000
acres of land and 16,882 FLCC shares representing water rights owned by the Company.
On July 2, 2012, the Company formally notified HP A&M that its failure to pay the promissory notes constituted an
Event of Default under the Seller Pledge Agreement (as defined below) and a default of a material covenant under
the Arkansas River Agreement. The Company informed HP A&M that unless such defaults were cured within thirty
days, the Property Management Agreement would be terminated and the Company would proceed to exercise
certain rights and remedies under the Arkansas River Agreement, the Seller Pledge Agreement, and the Property
Management Agreement to protect its assets. The Company’s remedies at law and under the Arkansas River
Agreement and related agreements include, but are not limited to, the right to (i) foreclose on 1,500,000 shares of
Pure Cycle common stock issued to HP A&M and the proceeds therefrom (the “Pledged Shares”) which were
pledged by HP A&M pursuant to a pledge agreement (the “Seller Pledge Agreement”) to secure the payment and
performance by HP A&M of the promissory notes described above; (ii) reduce the Tap Participation Fee; (iii)
F-20
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
terminate the Property Management Agreement; and (iv) recover damages caused by the defaults, including certain
costs and expenses, including attorneys’ fees.
On August 3, 2012, the Company formally terminated the Property Management Agreement. On September 27,
2012, the Pledged Shares were sold at auction in a foreclosure sale for $2.35 per share, yielding approximately $3.42
million of proceeds to the Company (net of fees of $110,000). Pursuant to the Arkansas River Agreement, the
Company is reducing the Tap Participation Fee and is entitled to recover damages caused by the defaults, including
certain costs and expenses, including attorney fees. The Company is currently pursuing its remedies and will
continue to pursue such remedies over the next 12 months.
To protect its land and water interests, during the fiscal ended August 31, 2013, the Company purchased
approximately $7.0 million of the $9.6 million notes payable by HP A&M and is negotiating the purchase of the
remaining $2.6 million with the holders. HP A&M continues to be liable for making the required payments on the
notes, and the Company is pursuing remedies to recover the costs and expenses, including attorneys’ fees, incurred
by the Company in protecting the rights and title to the land and water rights securing the notes payable by HP
A&M, including the costs incurred in purchasing the notes defaulted on by HP A&M. The amount owed on the
outstanding notes was approximately $7.9 million, including accrued interest of $122,000, and $9.6 million at
August 31, 2013 and August 31, 2012, respectively.
During fiscal year 2013 four of the farms and one FLLC certificate representing water rights only went through
foreclosure proceedings due to the defaults by HP A&M. The Company’s agreement with HP A&M provides for a
reduction of the number of water taps subject to the TPF payable to HP A&M. The Company reduced the number of
taps by 2,233 taps and the discounted present value of the Tap Participation Fee by a total of approximately $11.7
million as a result of the foreclosures. As of August 31, 2013 there were 17,194 taps subject to the Tap Participation
Fee. Subsequent to the Company’s fiscal year end, an additional three farms and one FLCC certificate representing
water rights only, collectively including 1,832 FLCC shares, were foreclosed resulting in a reduction of the number
of taps subject to the TPF by an additional 3,364 taps (approximately $11.9 million of the TPF), leaving 13,830 taps
subject to the Tap Participation Fee.
Future Maturities
F-21
Mortgage notes held and defaulted on by HP A&M2,526,900$ Mortgage notes, interest at 5%, due various dates in 20175,231,100 Total7,758,000 Less: current portion(4,546,900) Total long-term mortgage payable3,211,100$ Future Maturities2014 (including $2,526,900 of HP A&M defaulted notes to third parties)4,546,900$ 2015844,500 2016887,300 2017932,200 2018534,500 201912,600 Total7,758,000$
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
Operating Lease
Effective January 2013, the Company entered into an operating lease for 1,200 square feet of office space. The lease
has a two year term with payments of approximately $1,530 per month.
NOTE 8 – SHAREHOLDERS’ EQUITY
Sale of common stock and issuance of common stock upon conversion of Convertible Note – Related Party
The Company issued a $5.2 million convertible not on September 28, 2010. The Company’s shareholders authorized
conversion of the convertible note at the January 11, 2011 annual shareholders’ meeting. Following the meeting the
note was converted into 1,982,099 unregistered shares of its common stock. From issuance until conversion, the
convertible note – Related Party accrued interest at a rate of 10% per annum. During the fiscal year ended August
31, 2011, the Company accrued $151,700 of interest on the Convertible Note – Related Party.
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 shareholders 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. At
August 31, 2013, the Company had 1,218,311 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. During
fiscal year 2012, 29,500 options were forfeited by option holders and an additional 48,000 options expired. No
options were forfeited during the fiscal years ended August 31, 2013 and 2011. The Company attributes the value of
share-based compensation to expense using the straight-line single option method for all options granted.
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;
F-22
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
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 August 2013, the Company granted management options to purchase 100,000 shares of the Company’s common
stock pursuant to the Equity Plan. The options vest one-third one year from the date of grant, one-third two years
from the date of grant, and one-third three years from date of grant. The options expire ten years from the date of
grant. The Company calculated the fair value of these options at $427,100 using the Black-Scholes model with the
following variables: weighted average exercise price of $5.88 (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 2.71%; weighted average stock price volatility 63.6%; and an estimated forfeiture
rate of 0%. The $427,100 of stock-based compensation is being expensed monthly over the vesting periods.
In January 2013, the Company granted its non-employee directors options to purchase a combined 32,500 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 $76,800 using the
Black-Scholes model with the following variables: weighted average exercise price of $3.15 (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 1.84%; weighted average stock price volatility
69.2%; and an estimated forfeiture rate of 0%. The $76,800 of stock-based compensation is being expensed monthly
over the vesting periods.
In January 2012, 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 $15,400 using the
Black-Scholes model with the following variables: weighted average exercise price of $1.85 (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 1.87%; weighted average stock price volatility
73.29%; and an estimated forfeiture rate of 0%. The $15,400 of stock-based compensation is being expensed
monthly over the vesting periods.
In January 2011, the Company granted its non-employee directors options to purchase a combined 17,500 shares of
the Company’s common stock pursuant to the Equity Plan. 12,500 of the options vest one year from the date of
grant and expire ten years from the date of grant. 5,000 of the options vest one-half at the first anniversary of the
grant date and one-half at the second anniversary of the grant date. The Company calculated the fair value of these
options at $54,500 using the Black-Scholes model with the following variables: weighted average exercise price of
$3.67 (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 3.37%; weighted
average stock price volatility of 84.7%; and an estimated forfeiture rate of 0%. The $54,500 of stock-based
compensation is being expensed monthly over the vesting periods.
No options were exercised during the fiscal years ended August 31, 2013, 2012, or 2011.
The following table summarizes the stock option activity for the Equity Plan for the fiscal year ended August 31,
2013:
F-23
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended
August 31, 2013:
All non-vested options are expected to vest. The total fair value of options vested during the fiscal years ended
August 31, 2013, 2012 and 2011 was $48,700, $66,000 and $74,700, respectively. The weighted average grant date
fair value of options granted during the fiscal years ended August 31, 2013, 2012 and 2011 was $3.80, $1.23 and
$3.11, respectively.
Share-based compensation expense for the fiscal years ended August 31, 2013, 2012 and 2011, was $66,800,
$54,600 and $94,600, respectively.
At August 31, 2013, the Company had unrecognized expenses relating to non-vested options that are expected to
vest totaling $453,700. The weighted-average period over which these options are expected to vest is less than three
years. The Company has not recorded any excess tax benefits to additional paid in capital.
Warrants
As of August 31, 2013, the Company had outstanding warrants to purchase 92 shares of common stock at an
exercise price of $1.80 per share. These warrants expire six months from the earlier of:
(i) The date all of the Export Water is sold or otherwise disposed of,
(ii) The date the CAA is terminated with respect to the original holder of the warrant, or
(iii) The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA.
No warrants were exercised during fiscal 2013, 2012 or 2011.
F-24
Number of OptionsWeighted-Average Exercise PriceWeighted-Average Remaining Contractual TermApproximate Aggregate Instrinsic ValueOustanding at beginning of period215,000 5.88$ Granted132,500 5.21$ Exercised - $ – Forfeited or expired - $ - Outstanding at August 31, 2013347,500 5.62$ 6.98$ 145,559$ Options exercisable at August 31, 2013215,000 5.90$ 4.89$ 121,265$ Number of OptionsWeighted-Average Grant Date Fair ValueNon-vested options oustanding at beginning of period22,500 1.72$ Granted132,500 3.80 Vested(22,500) 1.72 Forfeited - - Non-vested options outstanding at August 31, 2013132,500 3.80$
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
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 the Pledged Shares, consisting of 1,500,000 shares of Pure Cycle common stock and the
proceeds there from. Due to the HP A&M default the Pledged Shares were sold pursuant to a foreclosure sale for
$3.5 million or $2.35 per share.
NOTE 9 – SIGNIFICANT CUSTOMER
The Company sells wholesale water and wastewater services to the District pursuant to the Rangeview Water
Agreements. Sales to the District accounted for 34%, 86%, and 91% of the Company’s total revenues for the years
ended August 31, 2013, 2012 and 2011, respectively. The District had one significant customer, the Ridgeview
Youth Services Center. Pursuant to the Rangeview Water Agreements the Company is providing water and
wastewater services to this customer on behalf of the District. The District’s significant customer accounted for
28%, 53% and 60% of the Company’s total revenues for the years ended August 31, 2013, 2012 and 2011,
respectively.
Revenues from another customer represented approximately 59% of the Company’s water and wastewater revenues
for the fiscal year ended August 31, 2013. The Company had no revenues from the other customer for the fiscal
years ended August 31, 2012 or 2011.
The Company had accounts receivable from the District which accounted for 20% and 16% of the Company’s trade
receivables balances at August 31, 2013 and 2012, respectively. Accounts receivable from the District’s largest
customer accounted for 17% and 13% of the Company’s trade receivables as of August 31, 2013, and 2012,
respectively.
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:
The Company has recorded a valuation allowance against the deferred tax assets 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:
F-25
20132012Deferred tax assets: Net operating loss carryforwards $ 6,080,000 $ 5,948,300 Imputed interest on Tap Participation Fee 10,074,200 8,852,500 Deferred revenue 494,600 560,700 Impairment charges - 2,408,800 Depreciation and depletion 4,899,800 2,425,700 Other 43,600 45,000 Valuation allowance (21,592,200) (20,241,000) Net deferred tax asset $ - $ - For the Fiscal Years Ended August 31,
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
At August 31, 2013, the Company has $16.3 million of net operating loss carryforwards available for income tax
purposes, which expire between fiscal 2014 and 2028. Utilization of these net operating loss carryforwards may be
subject to substantial annual ownership change limitations provided by the Internal Revenue Code. Such an annual
limitation could result in the expiration of the net operating loss carryforwards before utilization.
Net operating loss carryforwards of $395,200, $241,200 and $324,500 expired during the fiscal years ended August
31, 2013, 2012 and 2011, 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, 2013, 2012 and 2011, the Company paid fees of $3,300, $3,400 and $2,600, respectively, for the
administration of the Plan.
NOTE 12 – LITIGATION LOSS CONTINGENCIES
The Company is involved in various claims, litigation and other legal proceedings that arise in the ordinary course of
its business. The Company records an accrual for a loss contingency when its occurrence is probable and damages
can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of
possible outcomes. The Company makes such estimates based on information known about the claims and
experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible
losses that could have a material effect on the Company's financial position, results of operations or cash flows.
Because each of the lawsuits below involves complex legal issues and uncertainties and are in the early stages of
litigation, the Company has determined that no accruals for losses related to the lawsuits are reasonably estimable or
deemed reasonably likely at this time.
On December 19, 2011, the Company and the District filed a lawsuit against the State of Colorado by and through
the Land Board. The complaint was filed with the District Court, City and County of Denver, State of Colorado. The
Company and the District are claiming that the Land Board breached, and will breach, agreements entered into by
the Land Board with the Company and the District in connection with a 1996 settlement agreement. Those
agreements include (i) the Amended and Restated Water Lease, dated as of April 4, 1996, between the Land Board
and the District (the “Lease”) and (ii) the Service Agreement of the same date between the Company and the
District. As initially reported in a Current Report on Form 8-K filed on November 29, 2011, the Land Board issued a
Request for Proposal that included a draft lease agreement related to oil and gas rights at the Land Board’s Lowry
Range. The Company believes the draft lease agreement did not adequately address or protect the Company’s
exclusive right to provide water to the Lowry Range. The Land Board subsequently entered into an oil and gas lease
for the Lowry Range, which, like the draft lease, does not protect the Company’s exclusive rights. As a result of this
breach, the Company and the District are claiming damages to be proven at trial.
F-26
201320122011Expected benefit from federal taxes at statutory rate of 34%(1,411,200)$ (5,922,300)$ (2,045,500)$ State taxes, net of federal benefit(137,000) (574,800) (198,500) Expiration of net operating losses147,400 90,000 121,000 Permanent and other differences27,400 25,800 37,800 Change in valuation allowance1,373,400 6,381,300 2,085,200 Total income tax expense / benefit-$ -$ -$ For the Fiscal Years Ended August 31,
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
HP A&M initiated a lawsuit against the Company in District Court, City and County of Denver, State of Colorado
on February 27, 2012, alleging breaches of representations made in connection with the Arkansas River Agreement.
The HP A&M claims relate to the issues currently being litigated between the Company and the Land Board
regarding the Company’s exclusive right to provide water service to the Land Board’s Lowry Range property. The
Company believes the allegations are without merit and intends to vigorously defend against them.
The Land Board asserted certain counterclaims in the lawsuit described above that relate to operational disputes
under the Lease. On June 14, 2013, the Company, the District and the Land Board entered into an Arbitration
Agreement pursuant to which the parties have agreed to submit three counterclaims under the Lease to binding
arbitration: (i) whether revenue from wastewater services are subject to royalties under the Lease and the appropriate
payment for a right-of-way for a wastewater reclamation facility, (ii) whether Export Water royalties are owed on a
net or gross proceeds basis, and (iii) if, and/or how water from the four aquifers under the Lowry Range should be
blended for sale, as well as any related claims of the Company and the District for offset, credit or overpayment of
previous royalties paid and defenses to the three claims. The counterclaims have been dismissed from the lawsuit
without prejudice. An arbitrator has not yet been selected, so the timing of resolution of these claims is unknown.
Because the arbitration has not proceeded past the agreement stage and the outcome is uncertain, the Company has
determined that accruals for losses related to the arbitration are not reasonably estimable or deemed reasonably
likely at this time. The Company and the District believe that they have been conducting their operations in
accordance with the Lease and are prepared to defend their decisions in the arbitration.
During the fiscal year ended August 31, 2013, foreclosure proceedings were commenced against 38 of the properties
acquired by the Company from HP A&M which are subject to promissory notes defaulted upon by HP A&M and
secured by deeds of trust on the Company’s land and water rights. These properties represent approximately 40% of
the Company’s FLLC shares and over 45% of the Company’s Arkansas River land. The proceedings were filed on
various dates from January 9, 2013 through July 3, 2013, with the Public Trustees of Bent, Otero and Prowers
Counties in Colorado and involve claims against HP A&M for its failure to pay the notes. Foreclosure proceedings
in Colorado take at least nine months to conclude. Foreclosure sales were conducted on three of the Company’s farm
properties on August 28, 2013, and on a fourth property on September 4, 2013, subsequent to fiscal year end. The
Company’s wholly owned subsidiary, PCY Holding, LLC (“PCY Holdings”), was the successful bidder in the
foreclosure sales. Due to statutory protections afforded to the Company as the owner of the properties and the
Company’s liquidity, the Company had anticipated concluding these foreclosure proceedings on terms which would
not have a material adverse effect on its financial position, results of operations or cash flows. On September 16,
2013, HP A&M filed a complaint against PCY Holdings and the Public Trustee for the County of Bent, Colorado.
The lawsuit was filed in the District Court, County of Bent, Colorado. HP A&M was seeking (i) a declaratory
judgment that it is entitled to redeem the four properties from the foreclosure sales by paying the amount of the
outstanding debt, plus fees, which is the amount PCY Holdings bid in the sales, and (ii) preliminary and permanent
injunctions against the Public Trustee preventing the Public Trustee from issuing confirmation deeds for the
foreclosure sales to PCY Holdings or anyone other than HP A&M. On November 20, 2013 the Complaint was
dismissed with prejudice, and judgment was entered in favor of the Public Trustee and PCY Holdings. The District
Court ruled that “High Plains’ Complaint and Motion are baseless, without statutory authority, and are an attempt to
obstruct the proper function of the office of the Public Trustee of Bent County, and PCY Holdings relative to the
foreclosures of the four Subject Farms”. Further the District Court ruled “that High Plains’ Motion and its claims in
its Verified Complaint are frivolous and groundless, and awards the Public Trustee of Bent County and PCY
Holdings their attorneys’ fees and costs incurred in connection with this matter.”
HP A&M has 49 days from the date of the judgment in which to file an appeal. If HP A&M appeals this judgment
and wins on appeal, the Company could lose these properties, subject to its remedies under the Arkansas River
Agreement. The Company intends to vigorously defend any appeal of this ruling.
NOTE 13 – SEGMENT REPORTING
The Company operates primarily in two lines of business: (i) the wholesale water and wastewater business; and (ii)
the agricultural farming business. The Company provides wholesale water and wastewater services to customers
using water rights owned by the Company and develops infrastructure to divert, treat and distribute that water and
collect, treat and reuse wastewater. The Company’s agricultural business consists of the Company leasing its
F-27
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
Arkansas River Valley land and water to area farmers under cash leases or in certain cases crop share leases. The
following tables show information by operating segment for the fiscal year ended August 31, 2013:
As of August 31, 2012, the Company had only one operating segment.
NOTE 14 – SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
NOTE 15 – RELATED PARTY TRANSACTIONS
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”). The Company provided funding of $139,500, $115,500, and $25,000 for the fiscal
years ended August 31, 2013, 2012, and 2011, respectively. The funding was expensed in the general and
administrative expenses line in the accompanying statements of operations for the years ended August 31, 2013,
2012, and 2011, respectively.
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, 2013) and
matures on December 31, 2013. The $556,000 balance of the note receivable at August 31, 2013 includes
borrowings of $229,300 and accrued interest of $326,700. The $543,900 balance of the note receivable at August
31, 2012 includes borrowings of $229,300 and accrued interest of $314,600. The Company extended the due date to
December 31, 2014, and accordingly the note has been classified as non-current.
F-28
Wholesalewater andwastewaterAgriculturalAll OtherTotalRevenues544,400$ 1,241,900$ 71,200$ 1,857,500$ Gross profit248,600 1,145,600 70,000 1,464,200 Depletion and depreciation311,300 - - 311,300 Other significant noncash items: Stock-based compensation- - 66,800 66,800 TPF interest expense3,275,400 - - 3,275,400 Segment assets93,522,800 6,697,500 8,398,000 108,618,300 Expenditures for segment assets- - - - Business segmentsFiscal Year Ended August 31, 2013201320122011Reduction in Tap Participation Fee Liability resulting from remedies under the Arkansas River Agrement $ 11,737,300 $ - $ - Mortgage payable and related party receivable recorded upon HP A&M default - 9,550,200 - Farm revenue allocated against the Tap Participation Fee liability and additional paid in capital thru August 3, 2012 - 189,700 - Issuance of shares of restricted common stock upon conversion of the Convertible Note - Related Party - - 5,351,700 11,737,300$ 9,739,900$ 5,351,700$ For the Fiscal Years Ended August 31,
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013, 2012 and 2011
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to our fiscal year end an additional three farms and 1,832 FLCC shares have been obtained through the
foreclosure proceedings resulting in a reduction of the number of taps subject to the TPF by 3,364 taps and a
corresponding reduction to the TPF payable of $11.9 million.
F-29
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.
Item 9A – Controls and Procedures
(a)
Evaluation of Disclosure 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, 2013, 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
Management 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, our executive and principal financial officers and
effected by our 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
GAAP 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 our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and our directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our 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 our internal control over financial reporting as of August 31, 2013. 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, 2013, our internal control over financial reporting was effective based on those
criteria.
- 50 -
(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.
Item 9B – Other Information
None
PART III
Information concerning Items 10 through Items 14 will be contained in, and is incorporated herein by reference to,
our definitive Proxy Statement pursuant to Regulation 14A promulgated under the Exchange Act for the 2013
Annual Meeting of Shareholders, which is expected to be filed on or about December 6, 2013.
PART IV
Item 15 – Exhibits and Financial Statement Schedules
(a)
1.
2.
3.
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
Exhibit
No.
Description
3.1
3.2
4.1
10.1
10.2
10.3
10.4
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 Exhibit 4.1 to Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 2010.
2004 Equity Incentive Plan, Incorporated by reference to Exhibit F to the Proxy Statement for the
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 to Exhibit 10.2 to the 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 to Exhibit 10.3 to the Annual
Report on Form 10-KSB for the fiscal year ended August 31, 1998.
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 to Exhibit
10.7 to the Quarterly Report on Form 10-QSB for the period ended May 31, 1996.
- 51 -
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Agreement for Sale of Export Water dated April 11, 1996 by and among the Company and the
District. Incorporated by reference to Exhibit 10.3 to the 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 to Exhibit 10.9 to the 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 to Exhibit 10.13 to 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 to Exhibit 10.14 to Amendment No. 1 to Registration Statement on Form
SB-2, filed June 7, 2004, Registration No. 333-114568.
Second Amendment to Water Service Agreement for the Sky Ranch PUD dated March 5, 2004.
Incorporated by reference to Exhibit 10.15 to the original Annual Report on Form 10-K for the
fiscal year ended August 31, 2007.
Amended and Restated Lease Agreement between the Land Board and the District dated April 4,
1996. Incorporated by reference to Exhibit 10.17 to Amendment No. 1 to Registration Statement on
Form SB-2, filed June 7, 2004, Registration No. 333-114568.
Bargain and Sale Deed among the Land Board, the District and the Company dated April 11, 1996.
Incorporated by reference to Exhibit 10.18 to Amendment No. 1 to Registration Statement on Form
SB-2, filed June 7, 2004, Registration No. 333-114568.
Mortgage Deed, Security Agreement, and Financing Statement between the Land Board and the
Company dated April 11, 1996. Incorporated by reference to Exhibit 10.19 to 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 to Exhibit 10.1 to the Current Report on Form 8-K filed 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 to Exhibit 10.24 to the
Current Report on 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 and
Property Management Agreement, attached as exhibits thereto, entered into between Pure Cycle
Corporation and High Plains A&M, LLC dated August 31, 2010. Incorporated by reference to
Exhibit 10.25 to the Current Report on Form 8-K filed on May 16, 2006.
Amendment No. 1 to Agreement for Water Service dated August 25, 2008, between Pure Cycle
Corporation and Arapahoe County. Incorporated by reference to Exhibit 10.36 to the Annual Report
on Form 10-K for the fiscal year ended August 31, 2009.
Registration Rights Agreement dated September 28, 2010, between Pure Cycle Corporation and
PAR Investment Partners, L.P. Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed on September 29, 2010.
Paid-Up Oil and Gas Lease dated March 14, 2011, between Pure Cycle Corporation and Anadarko
E&P Company, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed on March 15, 2011.
- 52 -
10.19
Surface Use and Damage Agreement dated March 14, 2011, between Pure Cycle Corporation and
Anadarko E&P Company, L.P. Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed on March 15, 2011.
21.1
23.1
31.1
32.1
*
**
Subsidiaries
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.
- 53 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
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 27, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/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 27, 2013
Chairman, Director
November 27, 2013
Director
November 27, 2013
Director
November 27, 2013
Director
November 27, 2013
/s/ George M. Middlemas
George M. Middlemas
Director
November 27, 2013
- 54 -
EXHIBIT 21.1
SUBSIDIARIES
PCY Holdings, LLC, a Colorado limited liability company
PCY-DT, LLC, a Colorado limited liability company
- 55 -
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-
189166) and Form S-8 (No. 333-115240) of Pure Cycle Corporation of our report dated November 29,
2013 (which expresses an unqualified opinion), which appears on page F-1 of this annual report on Form
10-K for the year ended August 31, 2013.
/s/ GHP HORWATH, P.C.
Denver, Colorado
November 27, 2013
- 56 -
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark W. Harding, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Pure Cycle Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under my supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under my supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report my conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Dated: November 27, 2013
/s/ Mark W. Harding
Mark W. Harding
Principal Executive Officer and Principal Financial Officer
- 57 -
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark W. Harding, the Chief Executive Officer and Chief Financial Officer of Pure Cycle Corporation (the
“Company”), hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Form 10-K of the Company for the fiscal year ended August 31, 2013, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result
of operations of the Company.
/s/ Mark W. Harding
Mark W. Harding
Principal Executive Officer and Principal Financial Officer
November 27, 2013
- 58 -
Proxy Statement
for the January 15, 2014
Annual Meeting of Shareholders
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 pursuant to 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:
2955427.3
PURE CYCLE CORPORATION
1490 Lafayette Street, Suite 203
Denver, CO 80218
(303) 292-3456
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on January 15, 2014
TO PURE CYCLE’S SHAREHOLDERS:
You are cordially invited to attend the annual meeting of 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 15, 2014 at 2:00 p.m. Mountain Time. The purposes of the meeting are to:
1. Elect a board of six directors to serve until the next annual meeting of shareholders, or until their successors
have been duly elected and qualified;
2. Ratify the appointment of GHP Horwath, P.C. as the Company’s independent registered public accounting
firm for the 2014 fiscal year;
3. Approve, on an advisory basis, the compensation of the Company’s named executive officer;
4. Vote, on an advisory basis, on the frequency of an advisory vote on executive compensation;
5. Approve the Pure Cycle Corporation 2014 Equity Incentive Plan; and
6. 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 20, 2013 will be entitled to notice of or to
vote at this meeting or any adjournment(s) or postponement(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 6, 2013
/s/ Scott E. Lehman
Scott E. Lehman, Secretary
PURE CYCLE CORPORATION
1490 Lafayette Street, Suite 203
Denver, CO 80218
(303) 292-3456
PROXY STATEMENT FOR THE
ANNUAL MEETING OF SHAREHOLDERS
To be held on January 15, 2014
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 15, 2014 at 2:00 p.m. Mountain Time or at any
adjournment or postponement thereof. This proxy statement will be made available to shareholders on or about
December 6, 2013. 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.
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 latest Annual
Report on Form 10-K, on-line may be found in the Important Notice Regarding the Availability of Proxy Materials
(the “Notice”), 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, Broadridge Corporate Issuer Solutions, by calling 1-800-579-
1639, by writing the Company’s Secretary at the Company’s address set forth above, or by visiting
www.proxyvote.com and entering the control number from the Notice.
If you would like to receive the Notice 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 registered public accounting firm for the fiscal
year ending August 31, 2014, (iii) the approval, on an advisory basis, of the compensation of the Company’s named
executive officer, (iv) the recommendation, by advisory vote, on the frequency of advisory voting on executive
compensation, (v) the approval of the Pure Cycle Corporation 2014 Equity Incentive Plan (the “2014 Plan”), and
(vi) such other matters as may properly come before the Meeting. Management will be available to respond to
appropriate questions.
Who is entitled to vote and how many votes do I have?
If you were a shareholder of record as of 5:00 p.m. Mountain Time on November 20, 2013 (the “Record Date”), you
will be entitled to vote at the Meeting or any adjournments or postponements thereof. On the Record Date, there
were 24,037,598 shares of the Company’s 1/3 of $.01 par value common stock (“common stock”) issued and
outstanding. 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 your shares are held in an account at a bank, brokerage firm, or other nominee in “street name,” you need to
submit voting instructions to your bank, brokerage firm, or other nominee in order to cast your vote. If you wish to
vote in person at the Meeting, you must obtain a valid proxy from the nominee that holds your shares. If you are the
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shareholder of record, you may vote your shares by following the instructions in the Notice mailed on or about
December 6, 2013, 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 or by attending the Meeting in person.
Can I change or revoke my vote?
A proxy may be revoked by a shareholder any time before it is voted at the Meeting by submission of another proxy
bearing a later date, by attending the Meeting and voting in person, or if you are a shareholder of record, by written
notice of revocation to the Secretary of the Company.
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. Proposals 1, 3, 4 and 5 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 these
proposals. In this case your shares will be treated as “broker non-votes” and will not be counted for purposes of
determining the vote on these proposals.
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
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, advisory vote on executive compensation, approval of the 2014 Plan 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, 3, 5 and other matters. For proposals 2, 3, 5 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. Because your vote on executive compensation is advisory, it will not be binding on the board
of directors or the Company. However, the board of directors will review the voting results and take them into
consideration when making future decisions regarding executive compensation.
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Frequency of advisory vote on executive compensation – With respect to the advisory vote regarding the
frequency of future executive compensation advisory votes, shareholders may vote for a frequency of every
one, two, or three years, or may abstain. The board of directors will consider the option that receives the most
votes to be the option selected by our shareholders. Although the vote is advisory and not binding, the board of
directors will review and consider the voting results when determining the frequency of shareholder voting on
executive compensation. Abstentions and “broker non-votes” will be excluded from the vote and will have no
effect on the outcome of the vote.
If no specification is made, then the shares will be voted “FOR” the election as directors of the persons nominated
by the board of directors, “FOR” proposal 2, “FOR” proposal 3, as an abstention on proposal 4, “FOR” proposal 5
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 statement, 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 20, 2013, 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 Securities and Exchange Commission (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 20, 2013,
there were 24,037,598 common 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 20, 2013, 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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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 31,500 shares purchasable by Mr. Augur under options exercisable within 60 days. Includes 10,000
shares of common stock held by Patience Partners, LLC, a limited liability company in which a foundation
controlled by Mr. Augur is a 60% member and Mr. Augur is a 20% managing member. 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 24,000 shares purchasable by Mr. Epker under options exercisable within 60 days. Excludes all 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. Mr. Epker is an officer of PCM and
has been a director of the Company since 2007. In his capacity as an officer of PCM, Mr. Epker has sole voting
and dispositive power with respect to the shares of common stock held by PIP; however, Mr. Epker disclaims
beneficial ownership of the shares held by PIP.
4.
Includes 31,500 shares purchasable by Mr. Guido under options exercisable within 60 days.
5.
Includes 29,000 shares purchasable by Mr. Howell under options exercisable within 60 days.
6.
Includes 31,500 shares purchasable by Mr. Middlemas under options exercisable within 60 days.
7.
Includes the following shares:
a. 210,000 shares held by SMA Investments, LLLP as described in number 1 above,
b. 147,500 shares purchasable by directors and officers under options exercisable within 60 days, and
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Name and address of beneficial ownerAmount and nature of beneficial ownershipPercent of classMark W. Harding **727,24313.03%Harrison H. Augur **139,7812*Arthur G. Epker III - One International Place, Suite 2401, Boston, MA 0211024,0003*Richard L. Guido **31,5004*Peter C. Howell **29,5005*George M. Middlemas - 225 W. Washington, #1500, Chicago, IL 6060631,5006*All officers and directors as a group (6 persons)983,52474.07%PAR Capital Management, Inc. / PAR Investment Partners, L.P. / PAR Group, L.P. One International Place, Suite 2401, Boston, MA 021105,982,970 824.89%High Plains A&M, LLC - 301 St. Charles Ave., 3rd Floor, New Orleans, LA 701301,500,000 96.24%Trigran Investments, Inc. / Trigran Investments, L.P. 630 Dundee Road, Suite 230, Northbrook, IL 600622,269,977 109.44%Riley McCormack Revocable Trust - 2555 Lake Avenue, Miami Beach, FL 331401,650,000 116.86%RMB Capital Management, LLC - 115 S. LaSalle Street, 34th Floor, Chicago, IL 606031,663,529 126.92%Tealwood Asset Management, Inc. - 80 South 8th Street, Suite 1225, Minneapolis, MN 554021,248,156 135.19%* Less than 1%** Address is the Company's address: 1490 Lafayette Street, Suite 203, Denver, CO 80218
c. 10,000 shares of common stock held by Patience Partners, LLC, and 46,111 shares of common stock
held by Auginco, as described in number 2 above.
8. PIP owns directly 5,892,970 shares. PGL, through its control of PIP as general partner, has sole voting and
dispositive power with respect to all 5,892,970 shares owned beneficially by PIP. PCM, through its control of
PGL as general partner, has sole voting and dispositive power with respect to all 5,892,970 shares owned
beneficially by PIP.
9. This disclosure is based on a Schedule 13G filed by High Plains A&M, LLC (“HP A&M”) on September 11,
2006, and the Company’s knowledge that 1,500,000 shares previously held by HP A&M were sold by the
Company in a foreclosure sale on September 27, 2012. 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.
10. 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 14, 2013. It includes
2,269,977 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.
11. This disclosure is based on a Schedule 13G/A filed by Riley McCormack on January 18, 2013.
12. This disclosure is based on a Schedule 13G filed by RMB Capital Management, LLC on February 9, 2011.
13. This disclosure is based on a Schedule 13G filed by Tealwood Asset Management, Inc. (“Tealwood”) on
January 17, 2012. Tealwood has sole dispositive power over 1,248,156 and sole voting power over 983,605
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.
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 17.
CORPORATE GOVERNANCE AND BOARD MATTERS
Board Leadership Structure
The Company’s board of directors has chosen to separate the positions of Chief Executive Officer (“CEO”) and
Chairman of the board. Keeping these positions separate allows the Company’s CEO 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
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NameAgePositionMark W. Harding 50Director, President, CEO and CFO *Harrison H. Augur 71Chairman of the Board *Arthur G. Epker, III51Director *Richard L. Guido 69Director *Peter C. Howell64Director *George M. Middlemas67Director ** Director nominee
CEO 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 CEO 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 and Corporate Governance Committee (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 five of the six current members, Messrs. Augur, Epker,
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 fiscal year on a set schedule. They also hold special meetings and act by written consent from time to
time as appropriate. The Company’s independent directors meet regularly in executive sessions without
management present. The executive sessions of independent directors are held in conjunction with each regularly
scheduled board meeting.
During the fiscal year ended August 31, 2013, the board of directors held two (2) 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. All of the Company’s board members
are expected to attend the annual meeting. All of the Company’s board members attended the 2013 Annual Meeting
except Mr. Guido.
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Committees
The Board has three standing committees: Audit Committee, Compensation Committee and 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 2013 is set forth below:
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 five (5) meetings during the fiscal year ended August 31,
2013. In addition, the Audit Committee Chair met twice with the auditors during the fiscal year ended August 31,
2013.
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 CEO 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, 2013.
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
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
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DirectorAudit CommitteeCompensation CommitteeNominating CommitteeM. Harding–––H. AugurXXXA. Epker–XXR. GuidoX–ChairP. HowellChair––G. Middlemas–Chair–Fiscal 2013 Committee Membership
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 75 on the date of the
annual meeting, unless the Nominating Committee waives such requirements. 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, 2013.
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 2014 annual meeting, a shareholder must provide notice, along
with supporting information (discussed below) regarding such nominee, to the Company's Secretary by August 7,
2013, 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.
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
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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 separately 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 2013 for services to the Company:
(1)
In addition to cash compensation, pursuant to the Pure Cycle Corporation 2004 Incentive Plan, as amended
(the “2004 Plan”), 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 6,500 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 aggregate grant date fair value of options granted during the Company’s fiscal year ended
August 31, 2013, as computed in accordance with FASB ASC Topic 718. For more information about how the
Company values and accounts for share-based compensation see Note 8 – Shareholders’ Equity to the
Company’s audited consolidated financial statements for the year ended August 31, 2013, which are included
in the Company’s 2013 Annual Report on Form 10-K.
(2) The $15,500 earned by Mr. Augur is comprised of: $10,000 for serving on the board, $1,000 for being
chairman of the board, $3,000 for serving on three committees, and $1,500 for attendance at board and
committee meetings ($500 per meeting). Mr. Augur had 31,500 options outstanding as of August 31, 2013, all
of which are exercisable within 60 days of the filing of this proxy statement.
(3) The $13,000 earned by Mr. Epker is comprised of: $10,000 for serving on the board, $2,000 for serving on
two committees, and $1,000 for attendance at board and committee meetings ($500 per meeting). Mr. Epker
had 24,000 options outstanding as of August 31, 2013, all of which are exercisable within 60 days of the filing
of this proxy statement.
(4) The $14,000 earned by Mr. Guido is comprised of: $10,000 for serving on the board, $2,000 for serving on
two committees, and $2,000 for attendance at board and committee meetings ($500 per meeting). Mr. Guido
had 31,500 options outstanding as of August 31, 2013, all of which are exercisable within 60 days of the filing
of this proxy statement.
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Fees Earned or Paid in CashOption Awards (1)TotalName($)($)($)H. Augur (2)15,500 15,400 30,900 A. Epker (3)13,000 15,400 28,400 R. Guido (4)14,000 15,400 29,400 P. Howell (5)14,500 15,400 29,900 G. Middlemas (6)12,000 15,400 27,400 Director Compensation
(5) The $14,500 earned by Mr. Howell is comprised of: $10,000 for serving on the board, $1,000 for serving on
one committee, and $3,000 for attendance at board and committee meetings ($500 per meeting). Mr. Howell
had 29,000 options outstanding as of August 31, 2013, all of which are exercisable within 60 days of the filing
of this proxy statement.
(6) The $12,000 earned by Mr. Middlemas is comprised of: $10,000 for serving on the board, $1,000 for serving
on one committee, and $1,000 for attendance at board and committee meetings ($500 per meeting). Mr.
Middlemas had 31,500 options outstanding as of August 31, 2013, all of which are exercisable within 60 days
of the filing of this proxy statement.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Persons Covered
This compensation discussion and analysis addresses compensation for fiscal 2013 for Mark W. Harding, the
Company’s President, CEO and Chief Financial Officer (“CFO”) and its only executive officer.
Summary
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 structured 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.
Due to modest achievements in fiscal 2012, in August 2012 the Compensation Committee recommended and the
board of directors approved maintaining Mr. Harding’s salary for fiscal 2013 at the same level as it had been for
fiscal 2012. In August 2013, in recognition of the many positive achievements in fiscal 2013, the Compensation
Committee recommended and the board approved a cash bonus award and a stock option award for Mr. Harding and
a salary increase for fiscal 2014 from $262,500 to $275,000.
2013 Achievements
The Company’s 2013 financial results improved compared to 2012, although it continues to operate at a loss in part
due to the significant decline in new home construction in Colorado which started in 2006 and only recently has
begun to improve. Due in large part to the efforts and leadership of Mr. Harding, the Company achieved a number of
financial and strategic objectives during fiscal 2013, including:
A 175% increase in water revenues due to an increase in water sold for hydraulic fracturing (“fracking”);
The acquisition of approximately $7 million of defaulted promissory notes payable by HP A&M and initiation
of foreclosure proceedings on 38 properties to clear title to the properties and obtain any mineral rights owned
by HP A&M to recover amounts paid by the Company to resolve the HP A&M defaults;
The addition of farm income of approximately $1,241,900 due to the termination of the property management
agreement with HP A&M;
Entry into a strategic service agreement with the Town of Bennett;
The Company has rehabilitated or is in the process of rehabilitating five of the East Cherry Creek Valley Water
and Sanitation District System (“ECCV”) wells and has added approximately 2,500 ft of 8” buried line so that
the Company can deliver water directly to the fracking industry both on and off of the Lowry range;
Expansion of water delivery capacity to approximately 500,000 gallons per day to meet customer demand for
frack water;
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Negotiation of agreements to sell approximately 1,603 acres of land along with 3,397 Fort Lyon Canal
Company shares associated with this land for approximately $5.7 million;
Through an agreement with the Rangeview Metropolitan District, the Company has worked with regional water
suppliers, including Denver Water and Aurora Water, to participate in a cooperative water project known as the
Water Infrastructure Supply Efficiency partnership (“WISE”) which seeks to develop regional infrastructure
which would interconnect water transmission systems of members to develop additional water supplies for the
Denver region; and
Completion of a multi-truck load out facility to provide frack water.
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 independent,
non-employee directors. The Compensation Committee reviews the performance and compensation level for the
CEO and makes recommendations to the board of directors for final approval. The Compensation Committee also
determines equity grants under the 2004 Incentive Plan, if any. The CEO may provide information to the
Compensation Committee regarding his compensation; however, the Compensation Committee makes the final
determination on the executive compensation recommendation to the board. Final compensation determinations 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.
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. 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.
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 the Company’s operational performance goals, and aligns the interests of the executive
officer and employees with those of the shareholders of the Company. Additionally, the Compensation Committee’s
goal is to design a compensation package that falls within the mid-range of the packages provided to executives of
similarly sized corporations in like industries.
Generally, the executive officer receives a base cash salary and an opportunity to earn a cash bonus based on
attainment of predetermined objectives at the discretion of the Compensation Committee. Long-term equity
incentives are also considered. The mixture of 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 Company’s executive officer does not receive
any perquisites or personal benefits. 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.
Compensation of the Company’s CEO
The current compensation program for the Company’s CEO consists of the following:
Base Salary – In August 2012, the Compensation Committee reviewed and recommended a salary for the CEO for
the fiscal year ended August 31, 2013. Mr. Harding’s base salary was established by the Compensation Committee
based upon publicly available compensation data for executive officers in comparable companies in the water
development industry, job responsibilities, level of experience, individual performance and contributions to the
business throughout his career with the Company, and Mr. Harding’s achievements in fiscal 2012.
In making the base salary decision, the Compensation 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
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any other company. In August 2012, the Compensation Committee recommended that Mr. Harding’s salary remain
at $262,500 for fiscal 2013. The board approved the Compensation Committee’s recommendation. In August 2013
the Compensation Committee recommended and the board of directors approved a salary increase to $275,000 to be
effective for fiscal 2014.
Incentive Bonus – The Compensation Committee’s goal in granting incentive bonuses is to tie a portion of the
CEO’s compensation to the operating performance of the Company and to the CEO’s individual contribution to the
Company. The Compensation Committee did not benchmark the CEO’s bonus to that of executive officers at other
companies. In formulating recommendations for bonus compensation for Mr. Harding, the Compensation
Committee considered a number of factors, including, among other things: (i) the extraordinary efforts put forth by
Mr. Harding in handling the defaults by HP A&M on $9.6 million of promissory notes secured by deeds of trust on
the Company’s Arkansas River land and water rights and the foreclosures and lawsuits associated with these
defaults; (ii) the progress made by Mr. Harding and the Company in achieving the objectives established by the
Compensation Committee for fiscal 2013 (as discussed below); (iii) Mr. Harding’s experience, talents and skills, and
the importance thereof to the Company; and (iv) the potential availability of better paying positions for officers with
Mr. Harding’s experience and skills.
Development and operation of water and wastewater systems requires long-term planning to meet anticipated future
needs of customers, balancing concerns of constructing expensive infrastructure in advance of customer demand
with concerns of not being prepared for increased customer demands. The strategy and objectives of the Company
must of necessity address the needs of customers over a lifetime. Additionally, development of the areas to be
served by the Company’s water systems is a process that is anticipated to take many years and involves many factors
which are not within the Company’s control, including, but not limited to the decisions of the State Land Board of
Colorado (the “Land Board”) with respect to development of the Lowry Range; housing markets; and competing
agendas of governmental entities, developers, environmental groups, conservation groups and agricultural interests.
Therefore, performance plan objectives established by the Compensation Committee for the CEO and other key
personnel tend to be long range objectives which cannot reasonably be expected to be completed in the course of a
single year. Additionally, the Compensation Committee designs the plan to award performance without encouraging
inappropriate risk taking.
In August 2012, the Compensation Committee recommended and the board of directors approved establishing a
performance plan for fiscal 2013. The Compensation Committee structured the performance plan to provide for a
maximum bonus payout for Mr. Harding based on a potential award equal to 100% of his salary with the following
targets:
Less than
Substantial Progress
Substantial
Progress on Plan
Discretionary
75% – 99%
Meet Plan
100%
Exceed Plan
Up to 150%
The 2013 performance plan was comprised of a number of corporate, nonfinancial objectives, long-term and
strategic in nature, including the following objectives: (i) entering into agreements to sell fracking water; (ii)
expansion of water delivery capabilities; (iii) negotiations with the Land Board to obtain certain corporate objectives
and protect the Company’s rights on the Lowry Range; (iv) evaluating transactions regarding Sky Ranch;
(v) executing an agreement with a municipality on favorable terms to the Company; (vi) repurchasing debt defaulted
on by HP A&M; (vii) selling certain farms and FLCC shares; (viii) initiating foreclosure remedies against the
properties subject to the HP A&M notes and deeds of trust; and (ix) entering into the WISE agreement. The plan
also included corporate strategic objectives the disclosure of which the Company believes would cause competitive
harm. The Compensation Committee believed that the achievement of each performance objective, including the
undisclosed goals, would be extraordinarily difficult and that it was unlikely that the CEO and key employees would
be able to fully achieve them.
In August 2013, the Compensation Committee reviewed the Company’s operating results for fiscal 2013 and
evaluated the Company’s success in achieving the performance plan objectives. The Compensation Committee
determined that a bonus was warranted in recognition of Mr. Harding’s success in achieving or making significant
progress toward achieving 85% of the objectives established in the 2013 performance plan. The Compensation
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Committee recommended awarding, and the board authorized awarding, Mr. Harding a discretionary bonus of
$80,000 in fiscal 2013, as well as a stock option to purchase 100,000 shares of common stock, as described below.
Long-Term Equity Incentives – The goal of long-term equity incentive compensation is to align the interests of the
CEO with those of the Company’s shareholders and to provide the CEO 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 other equity based awards directly motivate an executive to maximize long-term
shareholder value. The philosophy of the Compensation Committee in administering the Company’s 2004 Plan is to
tie the number of stock options and shares of stock awarded to each employee in the plan to the performance of the
Company and to the individual contribution of each employee to the Company. The Compensation Committee
recommended awarding, and the board authorized awarding, Mr. Harding a non-statutory stock option to purchase
100,000 shares of the Company’s common stock in recognition of his performance during the fiscal year ended
August 31, 2013, noting that Mr. Harding had not received any equity incentive awards since 2007 and determining
that it would be preferable to recognize his achievements with a mix of cash and long-term incentives.
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 CEO and its other
four most highly compensated executive officers. The Company has not established a policy with regard to
Section 162(m) of the Internal Revenue 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.
Stock Ownership Requirements for Executive Officers
While the Company has not established stock ownership guidelines for its executive officer, at August 31, 2013, the
Company’s CEO owned stock with a market value of approximately of fourteen times his base salary, which is in
excess of the five times base salary multiple that is the median multiple for the Top 100 of S&P 500 companies and
excess of the six times base salary that the Institutional Shareholder Services (“ISS”) defines as “robust” ownership,
earning such companies the highest score on the item form ISS.
Executive Compensation Tables
The Company’s CEO, Mr. Harding, is the Principal Executive Officer and the Principal Financial Officer of the
Company and its only executive officer. Therefore, all tables contained in this section relate solely to Mr. Harding.
Summary Compensation Table
(1) The amount in this column represents the aggregate grant date fair value of stock options awarded in fiscal 2013
as computed in accordance with FASB ASC Top 718. See Note 8 – Shareholders’ Equity to the Company’s
audited consolidated financial statements for the year ended August 31, 2013, which are included in our 2013
Annual Report on Form 10 K for a description of the assumptions used to value option awards and the manner
in which the Company recognizes the related expense pursuant to FASB ASC Topic 718.
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Name and Principal PositionFiscal YearBase SalaryBonusOption Awards (1)Total($)($)($)($)Mark W. Harding2013262,500 80,000 427,099 769,599 President, 2012262,500 25,000 - 287,500 CEO and CFO2011250,000 135,000 - 385,000 Summary Compensation Table
Grants of Plan Based Awards – The following table sets forth certain information regarding option awards granted
to the named executive officer pursuant to the 2004 Plan during the year ended August 31, 2013:
(1) The option award was granted and approved on the same date with an exercise price equal to the closing market
price of the Company’s common stock on the date of grant. The option award vests in three equal installments
on each of the first, second and third anniversary dates of the grant and will expire ten years from date of grant.
(2) Reflects the grant date fair value estimated using the Black-Scholes option pricing model as computed in
accordance with FASB ASC 718.
Outstanding Equity Awards at Fiscal Year-End – The following table summarizes certain information regarding
outstanding option awards held by the named executive officer at August 31, 2013. There are no other types of
equity awards outstanding.
(1) One-third of the total number of s hares of common stock subject to the option will vest on each of the first,
second and third anniversary of the grant date, August 14, 2013.
Option Exercises and Stock Vested – Mr. Harding did not exercise any options or have any stock vest during the
year ended August 31, 2013. 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.
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All OtherOption Awards:Exercise orGrant DateNumber ofBase PriceFair Value ofSecuritiesof OptionStock andGrantUnderlyingAwardsOptionNameDateOptions (1)($/Sh)Awards (2)Mark W. Harding 8/31/20138/14/2013100,000 5.88$ 427,099$ Grants of Plan-Based AwardsNumber ofNumber ofSecuritiesSecuritiesUnderlyingUnderlyingUnexercisedUnexercisedOptionOptionOptionsOptionsExerciseExpirationName(#) Exerciseable(#) Unexerciseable (1)Price DateMark W. Harding- 100,0005.88$ 8/14/2023Outstanding Equity Awards at Fiscal Year-End
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, 2013 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 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, 2013.
/s/ Peter C. Howell (Chairman)
/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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Related Parties
Arkansas River Transaction with HP A&M – The Company owns approximately 60,000 acre feet of water rights in
the Arkansas River together with approximately 16,700 acres of irrigated farm land in southeastern Colorado. The
Company acquired this water and land from HP A&M pursuant to an asset purchase agreement dated May 10, 2006
(the “Arkansas River Agreement”). As consideration for these assets, the Company issued HP A&M 3,000,000
shares of its common stock. As a result of this acquisition HP A&M owned more than 5% of the outstanding shares
of common stock of the Company and became a related party. 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” or “TPF”), 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. In conjunction with the Arkansas River Agreement the Company also entered into a property
management agreement pursuant to which HP A&M agreed to manage the farm properties (the “Property
Management Agreement”). Effective as of September 1, 2011, (i) HP A&M elected to increase the Tap Participation
Fee percentage from 10% to 20% and take a corresponding 50% reduction in the number of taps subject to the Tap
Participation Fee and (ii) pursuant to the Property Management Agreement, the Company began allocating 26.9% of
the Net Revenues (defined as all lease and related income received from the farms less employee expenses, direct
expenses for managing the leases and a reasonable overhead allocation) paid to HP A&M against the Tap
Participation Fee. Although the Company did not sell any water taps during the years ended August 31, 2013 or
2012, the Company allocated Net Revenues in the amount of $189,700 in fiscal 2012 to the Tap Participation Fee
liability and additional paid-in capital (due to HP A&M being a related party).
60 of the 80 properties the Company acquired from HP A&M are subject to outstanding promissory notes payable to
third parties with principal and accrued interest totaling $7.9 million and $9.6 million at August 31, 2013 and 2012,
respectively. These promissory notes are secured by deeds of trust on the Company’s Arkansas River properties and
water rights. Commencing in the third quarter of fiscal year 2012 and since that date, HP A&M has defaulted on all
of the notes and deeds of trust. Although the Company is not legally responsible for paying these notes, if the
Company does not cure the defaults, it would lose over 75% of the Arkansas River properties and a comparable
percentage of water rights. The Company has a right to collect from HP A&M any amounts the Company spends to
cure the defaulted notes. As a consequence of these defaults, the Company terminated the Property Management
Agreement in August 2012 and, in September 2013, sold 1.5 million shares of Company common stock owned by
HP A&M which were pledged by HP A&M to secure the payment and performance of the promissory notes.
In fiscal 2013, the Company acquired from third parties approximately $7 million of the promissory notes that are
payable by HP A&M in exchange for a combination of cash and secured notes payable by the Company. The
majority of the notes issued by the Company have a five-year term, bear interest at an annual rate of 5% and require
semi-annual payments with a straight-line amortization schedule. The notes purchased by the Company continue to
be due and payable by HP A&M to the Company as the new holder. Accordingly, the Company has recorded the
entire amount of the HP A&M notes as a receivable from HP A&M.
During the 2013 fiscal year four farms and one FLCC certificate representing water only went through foreclosure
proceedings. In accordance with the Company’s remedies pursuant the Arkansas River Agreement, the Company
exercised its right to reduce the TPF as a result of these foreclosures. The Company reduced the number of taps
subject to the TPF by 2,233 and the discounted present value of the TPF by approximately $10.3 million.
Subsequent to fiscal 2013, an additional three farms and 1,832 FLCC shares went through foreclosure proceedings
resulting in a further reduction of taps subject to the TPF by 3,364 taps and the discounted present value of the TPF
by approximately $11.9 million, leaving 13,830 taps subject to the TPF.
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
- 16 -
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.
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 six. 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, and George M. Middlemas.
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 and
public company directorships held by 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, CEO 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 be 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 managing member 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., an investment adviser. In that capacity, Mr. Epker manages
a portion of the assets of PAR Investment Partners, L.P., a private investment fund. Mr. Epker is also a director of
Champions Oncology, Inc. and The Steppingstone Foundation. 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 Associate General Counsel of DeltaCom, Inc., a
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telecommunications company, from March 2006 to March 2007. From 1980 through 2004, Mr. Guido was an
employee of Inco Limited, a Canadian mining company (now known as Vale). While at Inco Mr. Guido served as
Associate General Counsel of Inco Limited and served as President, Chief Legal Officer and Secretary of Inco
United States, Inc., now known as Vale 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 officer, director or 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 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 Great Lakes Cheese, Inc., a privately held 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 director of Advanced Equities Financial Corporation and
Combinenet and previously served 15 years as a director 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, as
well as his Certified Public Accountant (“CPA”) Certificate.
The proxy cannot be voted for more than the six 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.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE
ELECTION AS DIRECTORS OF THE PERSONS NOMINATED.
____________________________
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
(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
registered public accounting firm of the Company for the fiscal year ending August 31, 2014. 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
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confirm that the provision of such services does not impair the auditors’ 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 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, 2013 and 2012, the Company was billed the following audit, audit-
related, tax and other fees by its independent registered public accountant. The audit related fees are comprised
entirely of fees for additional procedures performed on subsequent events. The tax fees are comprised entirely of
fees for the preparation of the federal and state corporate tax returns. The Audit Committee approved 100% of these
fees in accordance with the Audit Committee Charter.
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.
____________________________
ADVISORY VOTE ON EXECUTIVE COMPENSATION
(Proposal No. 3)
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in July 2010,
requires that we provide our shareholders with the opportunity to vote to approve, on a non-binding, advisory basis,
the compensation of our named executive officer as disclosed in the Proxy Statement in accordance with the
compensation disclosure rules of the SEC.
We urge shareholders to read the “Executive Compensation” section beginning on page 10 of this Proxy Statement,
as well as the Summary Compensation Table and other related compensation tables and narrative, beginning on page
13 of the Proxy Statement, which provide detailed information on the compensation of our named executive officer.
The Company’s compensation programs are designed to support its business goals and promote short- and long-term
profitable growth of the Company. Our 2004 Plan and our proposed 2014 Plan are intended to align compensation
with the long-term interests of our shareholders.
We are asking shareholders to approve the following advisory resolution at the Meeting:
RESOLVED, that the shareholders of the Company approve, on an advisory basis, the
compensation of the Company’s named executive officer, as disclosed pursuant to Item 402 of
Regulation S-K, including the disclosure under the heading “Executive Compensation” and in
the compensation tables and accompanying narrative discussion in the Company’s Definitive
Proxy Statement.
- 19 -
August 31, 2013August 31, 2012Audit Fees $ 62,000 $ 44,600 Audit Related Fees $ – $ 1,750 Tax $ 8,500 $ 9,000 All Other Fees $ 3,640 $ – For the Fiscal Years Ended:
This advisory resolution, commonly referred to as a “say-on-pay” resolution, is not binding on the Company or the
board of directors. The say-on-pay proposal is not intended to address any specific item of compensation, but rather
the overall compensation of our named executive officer and the executive compensation policies, practices, and
plans described in this Proxy Statement. Although non-binding, the board of directors will carefully review and
consider the voting results when making future decisions regarding the Company’s executive compensation
program.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL, ON AN ADVISORY
BASIS, OF THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICER.
____________________________
FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION
(Proposal No. 4)
The Dodd-Frank Act also provides that shareholders must be given the opportunity to vote, on a non-binding,
advisory basis, for their preference as to how frequently we should seek advisory votes on the compensation of our
named executive officer as disclosed in accordance with the compensation disclosure rules of the SEC. By voting
with respect to this Proposal 4, shareholders may indicate whether they would prefer that we conduct advisory votes
on executive compensation every one, two, or three years. Shareholders also may, if they desire, abstain from
casting a vote on this proposal.
After consideration of the various arguments supporting each frequency level, the board of directors has determined
that it will not make a recommendation regarding the frequency of the shareholders’ advisory vote on the
compensation of the company’s named executive officer. The board of directors will determine the frequency of
future votes on executive compensation after taking into consideration the preferences of the shareholders as
reflected by the results of the advisory vote at the Meeting. The proxy card provides shareholders with the
opportunity to choose among four options (holding the vote every one, two, or three years, or abstaining).
We are asking shareholders to approve the following advisory resolution at the Meeting:
RESOLVED, that the option of every one year, two years, or three years that receives the most votes
cast by shareholders present in person or by proxy and entitled to vote at the Annual Meeting will be
determined to be the preferred frequency of the shareholders for holding an advisory shareholder vote
to approve the compensation paid to the Company’s named executive officers, as disclosed pursuant to
Item 402 of Regulation S-K, including the disclosure under the heading “Executive Compensation” and
in the compensation tables and accompanying narrative discussion in the Company’s Definitive Proxy
Statement.
This vote is advisory and not binding on the Company or the board of directors. Although non-binding, the board of
directors will take into account the outcome of the vote when considering the frequency of future advisory votes on
executive compensation. Notwithstanding the outcome of the shareholder vote, the board of directors may decide to
conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as
discussions with shareholders and the adoption of material changes to compensation programs.
THE BOARD OF DIRECTORS IS NOT MAKING A RECOMMENDATION ON PROPOSAL NO. 4
REGARDING THE FREQUENCY OF THE SHAREHOLDER ADVISORY VOTE ON APPROVAL OF
COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS.
____________________________
APPROVAL OF PURE CYCLE CORPORATION 2014 EQUITY INCENTIVE PLAN
(Proposal No. 5)
Background
In 2004 the shareholders approved the 2004 Plan that provided for option and stock grants to officers, employees,
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consultants and directors of the Company. The 2004 Plan expires on April 12, 2014. In order to enable the Company
to continue its historic practice of providing long-term incentives to officers, employees, consultants and directors,
the board of directors is submitting the Pure Cycle Corporation 2014 Equity Incentive Plan to the shareholders for
approval. The board of directors believes that it is in the best interest of the Company and the shareholders to
approve the 2014 Plan. The board of directors approved the 2014 Plan on October 21, 2013, subject to approval by
the shareholders at the Meeting. The 2014 Plan will become effective on April 12, 2014, or on the date it is
approved by the shareholders, whichever is later. The 2014 Plan will replace the 2004 Plan, which expires on April
12, 2014. If the shareholders do not approve the 2014 Plan, the Company will be limited in its ability to offer equity
incentive awards to officers, employees, consultants and directors after April 12, 2014, the expiration date of the
2004 Plan.
Summary Description of the 2014 Plan
The material provision of the 2014 Plan are summarized below: The following description of the 2014 Plan is a
summary and is qualified in its entirety by reference to the 2014 Plan, a copy of which is attached as Appendix A to
this Proxy Statement. Shareholders are urged to review the 2014 Plan before determining how to vote on this
proposal.
Purpose – The purpose of the 2014 Plan is to attract, motivate and retain officers, employees, consultants, and
directors by issuing common stock based incentives to directors, officers, employees and consultants who are
selected for participation. By relating incentive compensation to increases in shareholder value, it is hoped that these
individuals will both continue in the long-term service of the Company and be motivated to experience a heightened
interest and participate in the future success of Company operations. The 2014 Plan is designed so that the interests
of individuals selected to receive the award will be more closely aligned with that of the Company’s shareholders.
Participation – Participants in the 2014 Plan shall be those officers, full and part-time employees, consultants and
non-employee directors who, in the judgment of the Committee are performing, or during the term of their incentive
arrangement, will perform important services in the management, operation and development of the Company, and
are expected to significantly contribute to long term corporate economic objectives. The 2014 Plan is administered
by the board of directors or the Compensation Committee of the board of directors (the “Administrator”). Subject to
the terms of the 2014 Plan, the Administrator determines the persons to whom awards are granted, the types of
awards granted, the number of shares subject to the awards, the vesting schedules, the type of consideration to be
paid to the Company upon exercise of awards and the term of any award (which cannot exceed ten years). No single
participant may be granted an award in excess of 300,000 shares in a twelve-month period. The Administrator may
delegate to officers the power to make these determinations, except with respect to grants to executive officers and
directors. There are currently one officer, four employees, six non-employee directors and no consultants eligible to
participate in the 2014 Plan.
Form of Awards – Awards under the 2014 Plan may be granted in any one or all of the following forms: (i) incentive
stock options (“ISOs”) intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”); (ii) non-qualified stock options (“NSOs”); (iii) stock appreciation rights, which may be granted in tandem
with options or on a stand-alone basis; (iv) shares of restricted stock; (v) shares of unrestricted stock; (vi)
performance shares, and (vii) performance units.
Maximum Shares Available – The maximum aggregate number of shares of common stock available for award
under the 2014 Plan is 1,600,000, subject to adjustment as provided in the 2014 Plan. Shares that are subject to an
award which are not used because the terms of the award are not met, including shares which expire, terminate or
are forfeited, shares used for full or partial payment of the purchase price of an award, and shares retained by the
Company for withholding tax purposes will be available for subsequent awards under the 2014 Plan.
Options – Under the 2014 Plan, the Administrator may grant both ISOs and NSOs. Options may not be granted
under the 2014 Plan at an exercise price of less than the fair market value of the common stock on the date of grant
and the term of options cannot exceed ten years. ISOs may only be granted to persons who are employees of the
Company. The exercise price of an ISO granted to a holder of more than 10% of the common stock must be at least
110% of the fair market value of the common stock on the date of grant, and the term of these options cannot exceed
five years. No more than 1,600,000 shares are available for grant as ISOs. The aggregate market price (determined
- 21 -
at the date of grant) of common stock with respect to which ISO’s are exercisable for the first time by any option
holder during any year under all Company plans may not exceed $100,000. ISOs granted pursuant to the 2014 Plan
may not be exercised more than three months after the option holder ceases to be an employee of the Company,
except that in the event of the death, disability, or retirement of the option holder, the option may be exercised by the
holder (or such holder’s estate, as the case may be), for a period of up to one year after the date of death, disability
or retirement.
Stock Appreciation Rights – The Administrator may grant free standing stock appreciation rights or stock
appreciation rights in tandem with option awards. Stock appreciation rights represent the right to receive upon
exercise an amount payable in cash or common stock equal to (A) the number of shares with respect to which the
stock appreciation right is being exercised multiplied by (B) the excess of (i) the fair market value of a share of
common stock on the date the award is exercised over (ii) the exercise price specified in the award agreement.
Tandem stock appreciation rights may be exercisable only to the extent that the related option is exercisable and will
be exercisable only for such period as the Administrator determines, which may expire prior to the expiration of the
related option. If a stock appreciation right is issued in tandem with an option, the exercise of the stock appreciation
right or the related option will result in an equal reduction in the number of corresponding shares subject to the
option or stock appreciation right, as applicable, that were granted in tandem with such stock appreciation right or
option. Nontandem stock appreciation rights will be exercisable during such period as the Administrator determines.
At the discretion of the Administrator, payment upon exercise may be in cash, shares of common stock (with or
without restrictions), or any combination thereof, as determined by the Administrator in its sole discretion.
Performance Awards – Under the performance award component of the 2014 Plan, participants may be granted an
award denominated in shares of common stock (“performance shares”) or in dollars (“performance units”).
Achievement of the performance targets, or multiple performance targets established by the Administrator relating
to corporate, group, unit or individual performance based upon standards set by the Administrator shall entitle the
participant to payment at the full amount or a portion of the amount specified with respect to the award, at the
discretion of the Administrator based on its evaluation of the performance of the target goals applicable to such
award. Payment may be made in cash, common stock or any combination thereof, as determined by the
Administrator, and shall be adjusted in the event the participant ceases to be an employee of the Company before the
end of a performance cycle by reason of death, disability or retirement.
Stock Awards – Under the stock component of the 2014 Plan, the Administrator may, in selected cases, grant to a
plan participant a given number of shares of restricted stock or unrestricted stock. Restricted stock under the 2014
Plan is common stock restricted as to sale pending fulfillment of such vesting schedule and employment
requirements as the Administrator shall determine. Prior to the lifting of the restrictions, the participant will
nevertheless be entitled to receive distributions in liquidation and dividends on, and to vote the shares of, the
restricted stock. The 2014 Plan provides for forfeiture of restricted stock for breach of conditions of grant.
Non-Employee Director Awards – The 2014 Plan also permits the board of directors (and not the Compensation
Committee) to grant awards of NSOs, restricted stock or unrestricted stock to non-employee directors. The board
may authorize individual grants or adopt one or more formulas for grants of awards to the non-employee directors.
All options granted to non-employee directors must have an exercise price equal to the fair market value at the date
of grant.
Exercise Price – The exercise price of awards may be paid in cash, in shares of common stock (valued at fair market
value at the date of exercise), by delivery of a notice of exercise together with irrevocable instructions to a broker to
deliver to the Company the proceeds of the sale of common stock or of a loan from the broker sufficient to pay the
exercise price, by having the Company withhold from shares being exercised the number of shares having a fair
market value equal to the exercise price for all shares being exercised, or by a combination of the foregoing means
of payment, as may be determined by the Administrator. The Company may guarantee a third-party loan or make a
loan to a participant that is not an officer or director if all or part of the exercise price of such loan is secured by the
stock underlying the award and the loan bears a market interest rate.
162(m) Awards – Generally the Company cannot deduct compensation paid to the named executive officers in
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excess of $1,000,000. An exemption is available for “qualified performance based” compensation that satisfies the
requirements of Section 162(m) of the Code. The 2014 Plan permits the Administrator to establish awards which
qualify for the exemption. In order to qualify, an award must be based on the achievement of one or more objective
performance goals selected by the Administrator which shall be based on one or any combination of the following:
specified levels of earnings per share, operating income (before or after taxes), production or production growth,
resource replacement or resource growth, revenues, gross margin, return on operating assets, return on equity,
economic value added, stock price appreciation, total shareholder return (measured in terms of stock price
appreciation and dividend growth), successful completion of financing, cash flows, or cost control, of the Company,
an affiliate, or a division for or within which the participant is primarily employed. Such performance goals may
also be based upon the attaining of specified levels of Company performance under one or more of the measures
described above relative to the performance of other companies. The Administrator may not adjust such an award
upwards, nor may it waive the achievement of goals except in the case of death or disability of the participant.
Adjustments – The 2014 Plan provides that the total number of shares covered by such 2014 Plan, the number of
shares covered by each award and the exercise price per share may be proportionately adjusted by the Administrator
in the event of a stock split, reverse stock split, stock dividend or similar capital adjustment effected without receipt
of consideration by the Company. Upon a merger or sale of substantially all assets of the Company, the
Administrator will have the power and discretion to prescribe the terms for exercise or modification of outstanding
awards under the 2014 Plan. In addition, upon a change of control, the Administrator is authorized to make
adjustments in outstanding awards, including acceleration of exercise dates and vesting schedules, granting cash
bonuses to award holders equal to the exercise price, making cash payments to holders equal to the difference
between the fair market value and the exercise price of awards in exchange for cancellation of the awards, and
elimination of restrictions on vesting of restricted stock or performance shares.
Amendments – The board of directors may amend or discontinue the 2014 Plan at any time, provided that no such
amendment may become effective without approval of the shareholders if shareholder approval is necessary to
satisfy statutory or regulatory requirements or if the board of directors, on advice of counsel, determines that
shareholder approval is otherwise necessary or desirable. No amendment or discontinuance shall adversely affect the
rights and obligations with respect to outstanding awards under the 2014 Plan without the consent of award holders.
Registration of Underlying Common Stock – If the 2014 Plan is approved by the shareholders, the Company expects
to file a registration statement on Form S-8 to register up to the 1,600,000 shares of common stock that will be
reserved for issuance under the 2014 Plan.
Comparison of 2014 Plan to 2004 Plan
The provisions of the 2014 Plan are substantially similar to the provisions of the expiring 2004 Plan. The 2014 Plan
varies in substance from the expiring 2004 Plan as follows:
The repricing provisions were revised to eliminate the ability of the Administrator to reprice outstanding
awards unless shareholder approval is obtained;
Stock appreciation rights were added as a type of award available for grant under the 2014 Plan; and
The section governing awards to non-employee directors was revised to eliminate the specific formula
grants awarded to non-employee directors upon initial election to the board and upon reelection to the
board. Instead, subject to certain limitations, the board of directors has discretion to determine the nature of
awards, the number of shares subject to awards, and the other terns of awards granted to non-employee
directors, including the discretion to adopt one or more formulas for the determination of non-employee
director awards.
Current Plan Benefits
The following table sets forth information as of August 31, 2013, with respect to the Company’s 2004 Plan. The
Company does not have any other equity compensation plans.
- 23 -
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
(a)
(b)
(c)
347,500
$5.62
1,218,311
–
347,500
–
$5.62
–
1,218,311(1)
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
____________________
(1) The securities available for issuance under the 2004 Plan will cease to be available on April 12, 2014, the expiration date of
the 2004 Plan.
New Plan Benefits
No awards have been proposed or are determinable at this time for the 2014 Plan. However, if the 2014 Plan had
been in effect during the last fiscal year, the non-employee directors would have received 6,500 shares each at the
annual meeting upon reelection to the board. Such grants are reflected below.
2014 Equity Incentive Plan
Position
Executive Group (1 person) ...................
Non-Executive Director Group
(5 persons) .............................................
Non-Executive Officers (none) ..............
Employee Group (5 persons) .................
____________________
Dollar Value
($)(1)
(2)
76,800
(2)
(2)
Number of Units
(2)
32,500(3)
(2)
(2)
(1) Dollar value based on the fair market value on January 16, 2013, the date of the 2013 annual meeting.
(2) If the proposed 2014 Plan is approved, the shares authorized for the 2014 Plan will be used only for future grants. No awards
have been proposed or are determinable at this time for these groups.
(3) The board of directors anticipates continuing the practice under the 2004 Plan of awarding an NSO to purchase 6,500 shares
of common stock to each non-employee director on the date of the annual meeting for service on the board of directors.
Such options are expected to vest on the first anniversary of the date of grant.
Federal Income Tax Consequences of the Equity Incentive Plan
The following is a general summary of the federal income tax consequences that may apply to recipients of options,
stock appreciation rights, stock, performance shares and performance units under the 2014 Plan. Because the
application of the tax laws may vary according to individual circumstances, each participant is urged to seek
professional tax advice concerning the tax consequences to him or her of participation in the 2014 Plan including the
potential application and effect of state, local and foreign tax laws and estate and gift tax considerations.
Incentive Stock Options – A participant who is granted an ISO recognizes no taxable income when the ISO is
- 24 -
granted and generally recognizes no taxable income upon exercise of the ISO unless the alternative minimum tax
applies (see below). A participant who exercises an ISO recognizes taxable gain or loss when the participant sells
the shares purchased pursuant to the ISO. Any gain or loss recognized on the sale of shares acquired upon exercise
of an ISO is taxed as capital gain or loss if the shares have been held for more than one year from the date the option
was exercised and for more than two years after the option was granted. In this event, the Company receives no
deduction with respect to the ISO shares. If the participant disposes of the shares before the required holding periods
have elapsed (a “disqualifying disposition”), the participant recognizes ordinary income on disposition of the shares,
to the extent of the difference between the fair market value on the date of exercise (or potentially up to six months
thereafter if the option holder is subject to Section 16(b) of the Securities Exchange Act of 1934 (the “Act”) as a
director, officer or greater than 10% shareholder) and the exercise price, but, in the case of a disposition in which a
loss (if sustained) would be recognized, not exceeding the net gain upon such disposition. The Company generally
receives a corresponding deduction in the year of the disqualifying disposition equal to the amount of ordinary
income recognized by the option holder. Long-term capital gain is currently taxed at a more favorable rate than
ordinary income, but the deduction of capital losses is subject to limitation.
Certain taxpayers who have significant tax preferences (and other items allowed favorable treatment for regular tax
purposes) may be subject to the alternative minimum tax (“AMT”). The AMT is payable only if and to the extent
that it exceeds the taxpayer’s regular tax liability, and AMT paid generally may be credited against subsequent
regular tax liability. For purposes of the AMT, an incentive stock option is treated as if it were a non-statutory
option (see below). Thus, the difference between fair market value on the date of exercise (or potentially up to six
months thereafter if the option holder is subject to Section 16(b) of the Act) and the option price is included in
income for AMT purposes, and the taxpayer receives a basis equal to such fair market value for subsequent AMT
purposes. However, regular tax treatment (see above) will apply for AMT purposes if a disqualifying disposition
occurs in the same taxable year as the options are exercised.
Non-Statutory Stock Options – The tax treatment of NSOs differs significantly from the tax treatment of ISOs.
Similar to an ISO, no taxable income is recognized when an NSO is granted. However, upon the exercise of an
NSO, the difference between the fair market value of the shares on the date of exercise and the exercise price of the
option is taxable as ordinary compensation income to the recipient. In addition, the Company is entitled to a
compensation deduction for the amount of ordinary income recognized by the option holder. If the option holder is
subject to Section 16(b) of the Act, the date for measuring taxable income potentially may be deferred for up to six
months (unless the employee makes an election under Section 83(b) of the Code within 30 days after the exercise
date).
Stock Appreciation Rights – No income will be recognized by a participant in connection with the grant of a tandem
stock appreciation right or a nontandem stock appreciation right. When the stock appreciation right is exercised, the
participant normally will be required to include as taxable ordinary income in the year of exercise an amount equal
to the amount of cash received and the fair market value of any unrestricted shares of common stock received on the
exercise of the stock appreciation right. The Company is entitled to a compensation deduction for the amount of
ordinary income recognized by the participant.
Unrestricted Stock – Grantees of unrestricted stock awards generally will recognize taxable income in an amount
equal to the fair market value of the stock at the time of the grant (or potentially up to six months thereafter if the
grantee is subject to Section 16(b) of the Act) less the amount, if any, paid for the stock.
Restricted Stock – Grantees of restricted stock awards generally do not recognize income at the time of the grant of
such awards. However, when shares of restricted stock are no longer subject to a substantial risk of forfeiture (or
potentially up to six months thereafter if the grantee is subject to Section 16(b) of the Act), grantees recognize
ordinary income in an amount equal to the fair market value of the stock less the amount, if any, paid for the stock.
Alternatively, the grantee of restricted stock may elect, under Section 83(b) of the Code to recognize income upon
the grant of the stock and not at the time the restriction lapses, provided this election is properly made within 30
days after the grant. The Company is entitled to deduct an amount equal to the fair market value of the stock at the
time the grantee recognizes income related to the grant.
Performance Awards – Generally no income will be recognized by a participant upon the grant of a performance
award. When payment is made with respect of the earn-out of a performance award (or, with respect to performance
- 25 -
shares, potentially up to six months thereafter if the grantee is subject to section 16(b) of the Act), the recipient
generally will be required to recognize ordinary income in an amount equal to the cash received and the fair market
value of any unrestricted shares of common stock received. The Company is entitled to a compensation deduction
for the amount of ordinary income recognized by the participant.
Withholding – The Company may withhold any taxes required by any law or regulation of any governmental
authority, whether federal, state or local, in connection with any award under the 2014 Plan, including, but not
limited to withholding of any portion of any payment or withholding from other compensation payable to the
participant, unless such person reimburses the Company for such amount.
Compliance with Section 409A of the Code – To the extent applicable, it is intended that the 2014 Plan and any
grants made thereunder comply with the provisions of Section 409A of the Code, so that the income inclusion
provisions of Section 409A(a)(1) of the Code do not apply to the participants. The 2014 Plan and any grants made
under the 2014 Plan will be administered in a manner consistent with this intent.
Limitations on the Company’s compensation deduction – The Company’s ability to take a compensation deduction
based on the amount of ordinary income recognized by a participant is subject to certain limitations attributable to
payments of excess compensation such as Sections 162(m) and 280G of the Code.
Effective Date
If the proposed 2014 Incentive Plan is approved by the shareholders, it will become effective on April 12, 2014, or
the date of approval by the shareholders, whichever is later.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF PURE CYCLE
CORPORATION 2014 EQUITY INCENTIVE PLAN
____________________________
ACTION TO BE TAKEN UNDER THE PROXY
The proxy will be voted “FOR” the individuals nominated by the board and “FOR” approval of proposals 2, 3, and
5, and as an abstention on proposal 4, 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 adjournments or postponements 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, 2013, all the directors, executive officers and 10% beneficial owners complied with the
applicable Section 16(a) filing requirements. The Company files the Form 4s on behalf of directors with respect to
stock option grants awarded by the Company.
Shareholder Proposals
Shareholder proposals for inclusion in the Proxy Statement for the 2015 annual meeting of shareholders must be
received at the principal executive offices of the Company by August 7, 2014 but not before June 9, 2014. For more
information refer to the Company’s Bylaws which were filed as Appendix C to the Proxy Statement on Schedule
14A filed with the SEC on December 14, 2007. The Company is not required to include proposals received outside
- 26 -
of these dates in the proxy materials for the 2015 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, the Notice, or 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 1-855-418-5058, 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, 1490 Lafayette Street, Suite
203, Denver, CO 80218, or by sending an email to info@purecyclewater.com. The information on the Company’s
website is not part of this proxy statement.
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Appendix A
2014 Equity Incentive Plan
Appendix A
Proposed Plan
PURE CYCLE CORPORATION
2014 EQUITY INCENTIVE PLAN
To be effective as of April 12, 2014
SECTION 1
INTRODUCTION
1.1
Establishment. Pure Cycle Corporation hereby establishes the Pure Cycle
Corporation 2014 Equity Incentive Plan (the “Plan”) for certain officers, employees, consultants,
and directors of the Company.
1.2
Purposes. The purposes of the Plan are to provide the officers, employees,
consultants, and directors of the Company selected for participation in the Plan with added
incentives to continue in the long-term service of the Company and to create in such persons a
more direct interest in the future success of the operations of the Company by relating incentive
compensation to increases in shareholder value, so that the income of such persons is more
closely aligned with the income of the Company’s shareholders. The Plan is also designed to
enhance the ability of the Company to attract, retain and motivate officers, employees,
consultants, and directors by providing an opportunity for investment in the Company.
SECTION 2
DEFINITIONS
2.1
Definitions. The following terms shall have the meanings set forth below:
(a)
“Administrator” means (i) the Board, or (ii) one or more committees of
the Board or another committee (within its delegated authority) to whom the Board or such
committee has delegated all or part of its authority under this Plan. Any committee under clause
(ii) hereof which makes grants to “officers” of the Company (as that term is defined in Rule 16a-
1(f) promulgated under the Exchange Act) shall be composed of not less than the minimum
number of persons from time to time required by Rule 16b-3, each of whom, to the extent
necessary to comply with Rule 16b-3 only, shall be a Non-Employee Director. Further, if the
Administrator consists of less than the entire Board, then to the extent necessary for any Award
to qualify as “performance-based compensation” within the meaning of Section 162(m) of the
Internal Revenue Code, each member of the Administrator will be an Outside Director. To the
extent required by any applicable stock exchange, this Plan shall be administered by a committee
composed entirely of independent directors (within the meaning of the applicable stock
exchange). For purposes of the preceding provisions, if one or more members of the
Administrator is not a Non-Employee or not an Outside Director, but recuses himself or herself
or abstains from voting with respect to a particular action taken by the Administrator, then the
Administrator, with respect to the action, will be deemed to consist only of the members of the
Administrator who have not recused themselves or abstained from voting.
(b)
“Affiliated Entity” means (i) any corporation or other entity (including but
not limited to a partnership) that directly, or through one or more intermediaries controls, is
controlled by, or is under common control with, Pure Cycle Corporation, or (ii) any entity in
which the Company has a significant equity interest, as determined by the Administrator.
2720921.2
(c)
“Award” means a grant made under this Plan in the form of Options,
Stock Appreciation Rights, unrestricted Stock, Restricted Stock, Performance Shares, or
Performance Units.
(d)
“Award Holder” has the meaning set forth in Section 3.4.
(e)
“Award Agreement” means a written document delivered by the Company
to the recipient of an Award specifying the terms of such Award. Such document must specify,
at a minimum, the number of Shares subject to the Award, and to the extent applicable, the
exercise price, vesting schedule, restrictions, performance targets, and with respect to Options
and Stock Appreciation Rights, any terms which vary from the default provisions provided in the
Plan. Such document need not be signed by the Award recipient.
(f)
(g)
“Board” means the board of directors of the Company.
“Company” means Pure Cycle Corporation, a Colorado corporation,
together with its Affiliated Entities except where the context otherwise requires.
(h)
“Consultant” means any person, including an advisor, engaged by the
Company to render consulting or advisory services and who is compensated for such services
and such person is eligible to receive shares registered on Form S-8 under the Securities Act.
Mere service as a Director or payment of a director’s fee by the Company or an Affiliated Entity
shall not be sufficient to constitute “consulting or advisory services” rendered to the Company or
an Affiliated Entity.
(i)
“Covered Employee” has the meaning set forth in Section 162(m)(3) of
the Internal Revenue Code.
(j)
(k)
“Director” means a member of the Board.
“Effective Date” means April 12, 2014, or the date on which the Plan is
initially approved by a vote of the shareholders of the Company, whichever is later.
(l)
“Employee” means any person who is a full or part-time employee
(including, without limitation, an officer or director who is also an employee) of the Company or
any Affiliated Entity or any division thereof. The term also includes future employees who have
received a formal offer of employment.
(m)
“Exchange Act” shall mean the Securities Exchange Act of 1934, as
amended.
(n)
“Executive Officer” shall mean an officer as defined in Exchange Act
Rule 16a-1(f) and any person deemed to be an “executive officer” within the scope of
Section 13(k) of the Exchange Act.
(o)
“Exercise Period” means the period of time within which an Option or
Stock Appreciation Right must be exercised.
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(p)
may be purchased.
“Exercise Price” means the price at which Shares subject to an Award
(q)
“Fair Market Value” means, as of any date, the value of the Stock
determined as follows:
(i)
If the Stock is listed on any established stock exchange, its Fair
Market Value shall be the closing sales price for such Stock as quoted on such exchange for the
last market trading day prior to the time of determination (or, if there are no actual sales of such
Stock on such date, the latest sales price of such Stock preceding such date);
(ii)
If the Stock is regularly quoted by a recognized securities dealer
but selling prices are not reported, the Fair Market Value of a Share shall be the mean between
the high bid and low asked prices for the Stock on the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(iii)
In the absence of an established market for the Stock, the Fair
Market Value shall be determined in good faith by the Administrator by the reasonable
application of a reasonable valuation method in accordance with Section 409A of the Internal
Revenue Code and the regulations thereunder.
(r)
“Incentive Stock Option” means any Option designated as such and
granted in accordance with the requirements of Section 422 of the Internal Revenue Code.
(s)
“Internal Revenue Code” means the Internal Revenue Code of 1986, as it
may be amended from time to time, and the rules and regulations promulgated thereunder.
(t)
“Non-Employee Director” means a Director who is a “non-employee
director” within the meaning of Rule 16b-3 promulgated under the Exchange Act.
(u)
“Non-Statutory Option” means any Option other than an Incentive Stock
Option.
(v)
“Option” means a right to purchase Stock at a stated price for a specified
period of time.
(w)
“Outside Director” means a Director who is an “outside director” within
the meaning of Internal Revenue Code Section 162(m).
(x)
“Participant” means an Employee or Director of, or Consultant to, the
Company designated by the Administrator from time to time during the term of the Plan to
receive one or more Awards under the Plan.
(y)
“Performance Cycle” means the period of time as specified by the
Administrator over which Performance Share or Performance Units are to be earned.
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(z)
“Performance Shares” means an Award made pursuant to Section 9
which entitles a Participant to receive Shares, their cash equivalent or a combination thereof
based on the achievement of performance targets during a Performance Cycle.
(aa)
“Performance Units” means an Award made pursuant to Section 9 which
entitles a Participant to receive cash, Stock or a combination thereof based on the achievement of
performance targets during a Performance Cycle.
(bb) “Plan Year” means each 12-month period beginning September 1 and
ending the following August 31, except that for the first year of the Plan it shall begin on the
Effective Date and extend to August 31 of that year.
(cc)
“Qualifying Awards” means Options and Stock Appreciation Rights
granted with an Exercise Price of not less than the Fair Market Value of a share of Stock on the
date of grant.
(dd) “Restricted Stock” means Stock granted under Section 8 that is subject to
restrictions imposed pursuant to such Section.
(ee)
“Service Provider” means an Employee or Director of, or Consultant to,
the Company or an Affiliated Entity.
(ff)
“Share” means a share of Stock.
(gg) “Stock” means the common stock, $.01 par value, of the Company.
(hh) “Stock Appreciation Right” means the right pursuant to an Award granted
under Section 7 to receive, upon exercise, an amount payable in cash or Shares equal to the
number of Shares with respect to which the Stock Appreciation Right is being exercised
multiplied by the excess of (i) the Fair Market Value of a Share on the date the Award is
exercised, over (ii) the Exercise Price specified in the Award Agreement.
2.2
Gender and Number. Except when otherwise indicated by the context, the
masculine gender shall also include the feminine gender, and the definition of any term herein in
the singular shall also include the plural
SECTION 3
PLAN ADMINISTRATION
3.1
Authority of Administrator. The Plan shall be administered by the Administrator.
Subject to the terms of the Plan and applicable law, and in addition to other express powers and
authorizations conferred on the Administrator by the Plan, the Administrator shall have full
power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to
be granted to eligible Participants; (iii) determine the number of Shares to be covered by, or with
respect to which payments, rights, or other matters are to be calculated in connection with,
Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what
extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other
securities, other Awards or other property, or canceled, forfeited, or suspended and the method or
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methods by which Awards may be settled, exercised, canceled, forfeited, or suspended;
(vi) determine whether, to what extent, and under what circumstances cash, Shares, other
securities, other Awards, other property, and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the holder thereof or of the
Administrator; (vii) subject to the limitations in Sections 6 and 15, to make any adjustment in the
Exercise Price, the number of Shares subject to, or the terms of, an outstanding Award by
amendment, substitution, or regrant, provided that if the amendment, substitution, or regrant
effects a repricing (which shall not include adjustments contemplated by Sections 4 and 11),
shareholder approval shall be required before repricing is effective; (viii) determine whether, to
what extent, and under what circumstances to accelerate the exercisability of any Award or the
end of a Performance Cycle or the termination of the restriction period for any Restricted Stock
Award; (ix) correct any defect, supply any omission, reconcile any inconsistency and otherwise
interpret and administer the Plan and any instrument or agreement relating to the Plan or any
Award hereunder; (x) establish, amend, suspend, or waive such rules and regulations and appoint
such agents as it shall deem appropriate for the proper administration of the Plan; and (xi) make
any other determination and take any other action that the Administrator deems necessary or
desirable for the administration of the Plan. To the extent necessary or appropriate, the
Administrator may adopt sub-plans consistent with the Plan to conform to applicable state or
foreign securities or tax laws.
3.2
Determinations Under the Plan. Unless otherwise expressly provided in the Plan
all designations, determinations, interpretations, and other decisions under or with respect to the
Plan or any Award shall be within the sole discretion of the Administrator, may be made at any
time and shall be final, conclusive, and binding upon all persons, including the Company, any
Affiliated Entity, any Participant, any holder or beneficiary of any Award, and any shareholder.
No member of the Administrator shall be liable, in the absence of bad faith, for any act or
omission with respect to his or her services as an Administrator. Service on a committee acting
as the Administrator shall constitute service as a director of the Company entitling members to
any indemnification of liability benefits applicable to directors with respect to their services as
Administrator.
3.3
Delegation of Certain Responsibilities. The Administrator may, in its sole
discretion, delegate to appropriate officers of the Company the administration of the Plan under
this Section 3; provided, however, that no such delegation by the Administrator shall be made (i)
if such delegation would not be permitted under applicable law or (ii) with respect to the
administration of the Plan as it affects Executive Officers, Covered Employees, or Directors of
the Company, and provided further that the Administrator may not delegate its authority to
correct errors, omissions or inconsistencies in the Plan. Subject to the above limitations, the
Administrator may delegate to the Chief Executive Officer of the Company its authority under
this Section 3 to grant Awards to employees who are not Executive Officers, Covered
Employees, or Directors of the Company. All authority delegated by the Administrator under
this Section 3.3 shall be exercised in accordance with the provisions of the Plan and any
guidelines for, conditions on, or limitations to the exercise of such authority that may from time
to time be established by the Administrator.
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3.4
Award Agreement. Each Award granted under the Plan shall be evidenced by an
Award Agreement which shall be delivered to the Participant to whom the Award is granted (the
“Award Holder”).
3.5
Date of Grant. An Award shall be considered as having been granted on the date
specified in the grant resolution of the Administrator.
SECTION 4
STOCK SUBJECT TO THE PLAN
4.1
Number of Shares. Subject to adjustment as provided in Section 4.3, one million
six hundred thousand (1,600,000) Shares are initially authorized for issuance under the Plan in
accordance with the provisions of the Plan and subject to such restrictions or other provisions as
the Administrator may from time to time deem necessary. Subject to adjustment as provided in
Section 4.3, no Participant may be granted Awards in any twelve-month period with respect to
more than three hundred thousand (300,000) Shares. If an Award is to be settled in cash, the
number of Shares on which the Award is based shall not count toward the individual share limit
set forth in this Section 4.1. The Shares may be divided among the various Plan components as
the Administrator shall determine, except that no more than one million six hundred thousand
(1,600,000) Shares as calculated pursuant to Section 4.2 shall be cumulatively available for the
grant of Incentive Stock Options under the Plan. Shares which may be issued upon the vesting
or exercise of Awards shall be applied to reduce the maximum number of Shares remaining
available for use under the Plan. The Company shall at all times during the term of the Plan and
while any Awards are outstanding retain as authorized and unissued Stock, or as treasury Stock,
at least the number of Shares from time to time required under the provisions of the Plan, or
otherwise assure itself of its ability to perform its obligations hereunder.
4.2
Unused and Forfeited Stock. Any Shares that are subject to an Award under this
Plan which are not used because the terms and conditions of the Award are not met, including
any Shares that are subject to an Award which expires or is terminated for any reason, any
Shares which are used for full or partial payment of the purchase price of Shares with respect to
which an Award is exercised and any Shares retained by the Company pursuant to Section 16.2
shall automatically become available for use under the Plan. Notwithstanding the foregoing, any
Shares used for full or partial payment of the purchase price of the Shares with respect to which
an Award is exercised and any Shares retained by the Company pursuant to Section 16.2 that
were originally Incentive Stock Option Shares shall still be considered as having been granted
for purposes of determining whether the Share limitation provided for in Section 4.1 has been
reached for purposes of Incentive Stock Option grants.
4.3
Adjustments for Stock Split, Stock Dividend, etc. If the Company shall at any time
increase or decrease the number of its outstanding Shares of Stock or change in any way the
rights and privileges of such Shares by means of the payment of a stock dividend or any other
distribution upon such Shares payable in Stock, or through a stock split, subdivision,
consolidation, combination, reclassification or recapitalization involving the Stock, then in
relation to the Stock that is affected by one or more of the above events, the numbers, rights and
privileges of (i) the Shares of Stock as to which Awards may be granted under the Plan, and
(ii) the Shares of Stock then included in each outstanding Award granted hereunder, shall be
-6-
increased, decreased or changed in like manner as if they had been issued and outstanding, fully
paid and nonassessable at the time of such occurrence.
4.4
Dividend Payable in Stock of Another Corporation, etc. Except as set forth in
Section 4.5 below, if the Company shall at any time pay or make any dividend or other
distribution upon the Stock payable in securities of another corporation or other property (except
money or Stock), a proportionate part of such securities or other property shall be set aside and
delivered to any Participant then holding an Award for the particular type of Stock for which the
dividend or other distribution was made, upon exercise thereof or vesting thereof, as applicable.
Prior to the time that any such securities or other property are delivered to a Participant in
accordance with the foregoing, the Company shall be the owner of such securities or other
property and shall have the right to vote the securities, receive any dividends payable on such
securities, and in all other respects shall be treated as the owner. If securities or other property
which have been set aside by the Company in accordance with this Section are not delivered to a
Participant because an Award is not exercised or otherwise vested, then such securities or other
property shall remain the property of the Company and shall be dealt with by the Company as it
shall determine in its sole discretion.
4.5
Spin-offs. If the Company shall at any time pay or make any dividend or other
distribution upon the Stock in the nature of a spin-off, for example a dividend payable in
securities of an Affiliated Entity, the Administrator shall in its discretion determine what changes
are equitably required to outstanding Awards to effect the spin-off, including but not limited to
treating Awards of Employees remaining with the Company differently from Awards to
Employees of the newly spun-off entity, substituting Awards for Company Stock for Awards of
stock in the spun-off entity, and allowing either the Company, the spun-off entity or both to hold
the securities or property set aside for Award participants.
4.6
Other Changes in Stock. In the event there shall be any change, other than as
specified in Sections 4.3, 4.4 and 4.5, in the number or kind of outstanding shares of Stock or of
any stock or other securities into which the Stock shall be changed or for which it shall have
been exchanged, and if the Administrator shall in its discretion determine that such change
equitably requires an adjustment in the number or kind of Shares subject to outstanding Awards
or which have been reserved for issuance pursuant to the Plan but are not then subject to an
Award, then such adjustments shall be made by the Administrator and shall be effective for all
purposes of the Plan and on each outstanding Award that involves the particular type of stock for
which a change was effected.
4.7
General Adjustment Rules. If any adjustment or substitution provided for in this
Section 4 shall result in the creation of a fractional Share under any Award, the Company shall,
in lieu of selling or otherwise issuing such fractional Share, pay to the Participant a cash sum in
an amount equal to the product of such fraction multiplied by the Fair Market Value of a Share
on the date the fractional Share would otherwise have been issued. In the case of any such
substitution or adjustment affecting an Award with an Exercise Price, the total Exercise Price for
the shares of Stock then subject to the Award shall remain unchanged but the Exercise Price per
share under each such Award shall be equitably adjusted by the Administrator to reflect the
greater or lesser number of shares of Stock or other securities into which the Stock subject to the
Award may have been changed.
-7-
4.8
Determination by Administrator. Adjustments under this Section 4 shall be made
by the Administrator, whose determinations with regard thereto shall be final and binding upon
all persons.
SECTION 5
PARTICIPATION
Participants in the Plan shall be those Employees, Directors, or Consultants who, in the
judgment of the Administrator, are performing, or during the term of their incentive arrangement
will perform, important services in the management, operation and development of the
Company, and significantly contribute, or are expected to significantly contribute, to the
achievement of long-term corporate economic objectives. Participants may be granted from time
to time one or more Awards; provided, however, that the grant of each such Award shall be
separately approved by the Administrator, receipt of one such Award shall not result in
automatic receipt of any other Award, and written notice shall be given to such person,
specifying the terms, conditions, rights and duties related thereto; and further provided that
Incentive Stock Options shall not be granted to (i) Consultants, (ii) part-time employees,
(iii) Non-Employee Directors, or (iv) Employees of any partnership or other entity which is
included within the definition of an Affiliated Entity but whose employees are not permitted to
receive Incentive Stock Options under the Internal Revenue Code. Each Participant shall enter
into an agreement with the Company, in such form as the Administrator shall determine and
which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and
duties. Awards shall be deemed to be granted as of the date specified in the grant resolution of
the Administrator, which date shall be the date of any related agreement with the Participant. In
the event of any inconsistency between the provisions of the Plan and any such agreement
entered into hereunder, the provisions of the Plan shall govern.
SECTION 6
STOCK OPTIONS TO EMPLOYEES AND CONSULTANTS
6.1
Grant of Options to Employees and Consultants. Coincident with or following
designation for participation in the Plan, a Participant (other than a Non-Employee Director) may
be granted one or more Options. The Administrator in its sole discretion shall designate whether
an Option is to be considered an Incentive Stock Option or a Non-Statutory Option. The
Administrator may grant both an Incentive Stock Option and a Non-Statutory Option to the same
Participant at the same time or at different times. Incentive Stock Options and Non-Statutory
Options, whether granted at the same or different times, shall be deemed to have been awarded in
separate grants, shall be clearly identified, and in no event shall the exercise of one Option affect
the right to exercise any other Option or affect the number of Shares for which any other Option
may be exercised.
6.2
Option Agreements. Except as otherwise set forth in an Award Agreement
delivered to the Participant, each Option shall be governed by the following terms and
conditions, as well as such other terms and conditions not inconsistent therewith as the
Administrator may consider appropriate in each case.
Number of Shares. Each Award Agreement shall state that it covers a
specified number of Shares, as determined by the Administrator. To the extent that the aggregate
(a)
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Fair Market Value of Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Participant during any year (under all plans of
the Company and any Affiliated Entity) exceeds $100,000, such Options shall be treated as not
being Incentive Stock Options. The foregoing shall be applied by taking Options into account in
the order in which they were granted. For the purposes of the foregoing, the Fair Market Value
of any Share shall be determined as of the time the Option with respect to such Share is granted.
In the event the foregoing results in a portion of an Option designated as an Incentive Stock
Option exceeding the $100,000 limitation, only such excess shall be treated as not being an
Incentive Stock Option.
(b)
Price. Except for the limitations on Incentive Stock Options set forth
below, the price at which each Share covered by an Option may be purchased shall be
determined in each case by the Administrator and set forth in the Award Agreement. In no event
shall the Exercise Price for each Share covered by an Option be less than the Fair Market Value
of the Stock on the date the Option is granted. Further, the Exercise Price for each Share covered
by an Incentive Stock Option granted to an Employee who then owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company or any parent or
subsidiary corporation of the Company must be at least 110% of the Fair Market Value of the
Stock subject to the Incentive Stock Option on the date the Option is granted.
(c)
Duration of Options. The Administrator shall determine the period of
time within which the Option may be exercised by the Award Holder. The Exercise Period must
expire, in all cases, not more than ten years from the date an Option is granted; provided,
however, that the Exercise Period of an Incentive Stock Option granted to an Employee who then
owns stock possessing more than 10% of the total combined voting power of all classes of stock
of the Company or any parent or subsidiary corporation of the Company must expire not more
than five years from the date such Option is granted. Any Exercise Period determined by the
Administrator to be shorter than the ten or five-year term set forth above, must be set forth in an
Award Agreement. Each Award Agreement shall also state the periods of time, if any, as
determined by the Administrator, when incremental portions of each Option shall vest. If any
Option is not exercised during its Exercise Period, it shall be deemed to have been forfeited and
of no further force or effect.
(d)
Termination of Service, Retirement, Death or Disability. Except as
otherwise determined by the Administrator, each Option shall be governed by the following
terms with respect to the exercise of the Option if an Award Holder ceases to be a Service
Provider:
(i)
If the Award Holder ceases to be a Service Provider within the
Exercise Period for cause, as determined by the Company, the Option shall thereafter be void for
all purposes. As used in this Section 6.2(d), “cause” shall mean (A) if applicable, “cause” as
defined on a written contract between the Award Holder and the Company, or (B) in any other
case, a gross violation, as determined by the Company, of the Company’s established policies
and procedures. The effect of this Section 6.2(d)(i) shall be limited to determining the
consequences of a termination, and nothing in this Section 6.2(d)(i) shall restrict or otherwise
interfere with the Company’s discretion with respect to the termination of any Service Provider.
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(ii)
If the Award Holder ceases to be a Service Provider with the
Company in a manner determined by the Board, in its sole discretion, to constitute retirement
(which determination shall be communicated to the Award Holder within 10 days of such
termination), the Option may be exercised by the Award Holder, or in the case of death, by the
persons specified in clause (iii) of this Section 6.2(d), within three months following his or her
retirement if the Option is an Incentive Stock Option or within twelve months following his or
her retirement if the Option is a Non-Statutory Stock Option (provided in each case that such
exercise must occur within the Exercise Period), but not thereafter. In any such case, the Option
may be exercised only as to the Shares as to which the Option had become exercisable on or
before the date the Award Holder ceased to be a Service Provider.
(iii)
If the Award Holder dies (A) while he or she is a Service Provider,
(B) within the three-month period referred to in clause (v) below, or (C) within the three or
twelve-month period referred to in clause (ii) above, the Option may be exercised by those
entitled to do so under the Award Holder’s will or by the laws of descent and distribution within
twelve months following the Award Holder’s death (provided that such exercise must occur
within the Exercise Period), but not thereafter. In any such case, the Option may be exercised
only as to the Shares as to which the Option had become exercisable on or before the date the
Award Holder ceased to be a Service Provider.
(iv)
If the Award Holder becomes disabled (within the meaning of
Section 22(e) of the Internal Revenue Code) while a Service Provider, Incentive Stock Options
held by the Award Holder may be exercised by the Award Holder within twelve months
following the date the Award Holder ceased to be a Service Provider (provided that such
exercise must occur within the Exercise Period), but not thereafter. If the Award Holder
becomes disabled (within the meaning of Section 22(e) of the Internal Revenue Code) while a
Service Provider or within three-month period referred to in clause (v) below or within the
twelve-month period following his or her retirement as provided in clause (ii) above, Non-
Statutory Options held by the Award Holder may be exercised by the Award Holder within
twelve months following the date of the Award Holder’s disability (provided that such exercise
must occur within the Exercise Period), but not thereafter. In any such case, the Option may be
exercised only as to the Shares as to which the Option had become exercisable on or before the
date the Award Holder ceased to be a Service Provider.
(v)
If the Award Holder ceases to be a Service Provider within the
Exercise Period for any reason other than cause, retirement as provided in clause (ii) above,
disability as provided in clause (iv) above or the Award Holder’s death, the Option may be
exercised by the Award Holder within three months following the date of such cessation
(provided that such exercise must occur within the Exercise Period), but not thereafter. In any
such case, the Option may be exercised only as to the Shares as to which the Option had become
exercisable on or before the date that the Award Holder ceased to be a Service Provider.
(e)
Exercise, Payments, etc. The method for exercising and paying the
Exercise Price of each Option granted under the Plan shall be as set forth in Section 16.
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SECTION 7
STOCK APPRECIATION RIGHTS
7.1
Awards Granted by Administrator. Coincident with or following designation for
participation in the Plan, a Participant may be granted one or more Stock Appreciation Rights.
The Administrator may grant free standing Stock Appreciation Rights, Stock Appreciation
Rights in tandem with an Option, or any combination thereof.
7.2
Award Agreement. Except as otherwise set forth in an Award Agreement
delivered to the Participant, each Stock Appreciation Right shall be governed by the following
terms and conditions, as well as such other terms and conditions not inconsistent therewith as the
Administrator may consider appropriate in each case.
(a)
Number of Shares. Each Award Agreement shall state that it covers a
specified number of Shares, as determined by the Administrator.
(b)
Price. The Exercise Price of a Stock Appreciation Right shall be
determined in each case by the Administrator and set forth in the Award Agreement. In no event
shall the Exercise Price for a Stock Appreciation Right be less than the Fair Market Value of the
Stock on the date the Award is granted.
(c)
Term. The Administrator shall determine the period of time within which
the Stock Appreciation Right may be exercised by the Award Holder. The Exercise Period must
expire, in all cases, not more than ten years from the date an Award is granted. If any Stock
Appreciation Right is not exercised during its Exercise Period, it shall be deemed to have been
forfeited and of no further force or effect.
(d)
Vesting. Each Stock Appreciation shall become exercisable and vest over
such period of time or upon such events as determined by the Administrator (including based on
achievement of performance goals or future service requirements), which vesting or other terms
shall be set forth in an Award Agreement.
(e)
Termination of Service, Retirement, Death or Disability. Except as
otherwise determined by the Administrator, each Stock Appreciation Award shall be governed
by the terms set forth in Section 6.2(d) with respect to the exercise of the Stock Appreciation
Right if an Award Holder ceases to be a Service Provider.
7.3
Exercise of Stock Appreciation Right. An Award Holder desiring to exercise a
Stock Appreciation Right shall deliver notice to the Company in the manner set forth in
Section 16.1(a) except that such notice need not be accompanied by payment. Upon the exercise
of a Stock Appreciation Right, the Award Holder shall be entitled to receive from the Company
an amount determined by multiplying:
(a)
The excess of the Fair Market Value of a Share on the date the Award is
exercised over the Exercise Price specified in the Award Agreement; by
(b)
The number of Shares with respect to which the Stock Appreciation Right
is exercised.
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At the discretion of the Administrator, payment upon exercise may be in cash, shares of
Stock (with or without restrictions), or any combination thereof, as determined by the
Administrator in its sole discretion.
7.4
Effect of Exercise of Tandem Right. If a Stock Appreciation Right is issued in
tandem with an Option, the exercise of the Stock Appreciation Right or the related Option will
result in an equal reduction in the number of corresponding Shares subject to the Option or Stock
Appreciation Right, as applicable, that were granted in tandem with such Stock Appreciation
Right or Option.
SECTION 8
STOCK AWARDS
8.1
Awards Granted by Administrator. Coincident with or following designation for
participation in the Plan, a Participant may be granted one or more unrestricted Stock Awards or
Restricted Stock Awards consisting of Shares. A Stock Award may be paid by delivery of Stock,
in cash or in a combination of Stock and cash, as determined by the Administrator.
8.2
Restrictions. A Participant’s right to retain a Restricted Stock Award granted to
such Participant under Section 8.1 shall be subject to such restrictions, including but not limited
to the Participant’s continuing to perform as a Service Provider for a restriction period specified
by the Administrator, or the attainment of specified performance goals and objectives, as may be
established by the Administrator with respect to such Award. The Administrator may, in its sole
discretion, require different periods of service or different performance goals and objectives with
respect to (i) different Participants, (ii) different Restricted Stock Awards, or (iii) separate,
designated portions of the Shares constituting a Restricted Stock Award.
8.3
Transferability. The Participant’s right to sell, encumber or otherwise transfer
Restricted Stock shall be subject to the limitations of Section 12.2 hereof.
8.4
Privileges of a Shareholder. Unless otherwise determined by the Administrator
and set forth in the Award Agreement, a Participant holding Shares of Restricted Stock shall
become the holder of record of the Restricted Stock on the date the Award is granted.
8.5
Enforcement of Restrictions. The Administrator may in its sole discretion require
one or more of the following methods of enforcing the restrictions referred to in Section 8.2 and
8.3:
(a)
placing a legend on the stock certificates referring to the restrictions as
follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO FORFEITURE AND TRANSFERABILITY RESTRICTIONS AS SET
FROTH IN THE RESTRICTED STOCK AGREEMENT BETWEEN THE
SHAREHOLDER AND PURE CYCLE CORPORATION DATED
_____________. A COPY OF THE RESTRICTED STOCK AGREEMENT
IS ON FILE AT THE EXECUTIVE OFFICE OF PURE CYCLE
CORPORATION.
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(b)
requiring the Participant to keep the stock certificates, duly endorsed, in
the custody of the Company while the restrictions remain in effect; or
(c)
requiring that the stock certificates, duly endorsed, be held in the custody
of a third party while the restrictions remain in effect.
8.6
Termination of Service, Death or Disability. In the event of the death or disability
(within the meaning of Section 22(e) of the Internal Revenue Code) of a Participant, or the
retirement of a Participant as provided in Section 6.2(d)(ii), all service period and other
restrictions applicable to Restricted Stock Awards then held by him shall lapse, and such Awards
shall become fully nonforfeitable. Subject to Section 11, in the event a Participant ceases to be a
Service Provider for any other reason, any Restricted Stock Awards as to which the service
period or other restrictions have not been satisfied shall be forfeited.
SECTION 9
PERFORMANCE SHARES AND PERFORMANCE UNITS
9.1
Awards Granted by Administrator. Coincident with or following designation for
participation in the Plan, a Participant (other than a Non-Employee Director) may be granted
Performance Shares or Performance Units.
9.2
Amount of Award. The Administrator shall establish a maximum amount of a
Participant’s Award, which amount shall be denominated in Shares in the case of Performance
Shares or in dollars in the case of Performance Units.
9.3
Communication of Award. Written notice of the maximum amount of a
Participant’s Award and the Performance Cycle determined by the Administrator shall be given
to a Participant as soon as practicable after approval of the Award by the Administrator.
9.4
Amount of Award Payable. The Administrator shall establish maximum and
minimum performance targets to be achieved during the applicable Performance Cycle.
Performance targets established by the Administrator shall relate to corporate, group, unit or
individual performance and may be established in terms of earnings, growth in earnings, ratios of
earnings to equity or assets, or such other measures or standards determined by the
Administrator. Multiple performance targets may be used and the components of multiple
performance targets may be given the same or different weighting in determining the amount of
an Award earned, and may relate to absolute performance or relative performance measured
against other groups, units, individuals or entities. Achievement of the maximum performance
target shall entitle the Participant to payment (subject to Section 9.6) at the full or maximum
amount specified with respect to the Award; provided, however, that notwithstanding any other
provisions of this Plan, in the case of an Award of Performance Shares the Administrator in its
discretion may establish an upper limit on the amount payable (whether in cash or Stock) as a
result of the achievement of the maximum performance target. The Administrator may also
establish that a portion of a full or maximum amount of a Participant’s Award will be paid
(subject to Section 9.6) for performance which exceeds the minimum performance target but
falls below the maximum performance target applicable to such Award.
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9.5
Adjustments. At any time prior to payment of a Performance Share or
Performance Unit Award, the Administrator may adjust previously established performance
targets or other terms and conditions to reflect events such as changes in laws, regulations, or
accounting practice, or mergers, acquisitions or divestitures.
9.6
Payments of Awards. Following the conclusion of each Performance Cycle, the
Administrator shall determine the extent to which performance targets have been attained, and
the satisfaction of any other terms and conditions with respect to an Award relating to such
Performance Cycle. The Administrator shall determine what, if any, Exercise Price is due with
respect to an Award and whether such Exercise Price shall be made in cash, Stock or some
combination. Payment shall be made in a lump sum or installments, as determined by the
Administrator, commencing as promptly as practicable following the end of the applicable
Performance Cycle, subject to Section 16 or such other terms and conditions as may be
prescribed by the Administrator; provided, however, that, subject to Section 20.4, all payments
shall be made no later than (i) March 15 of the year following the end of the Performance Cycle
if such Performance Cycle ends on or before August 31 of a year, or (ii) November 15 of the
year following the end of the Performance Cycle if such Performance Cycle ends on or after
September 1 of a year.
9.7
Termination of Employment. If a Participant ceases to be a Service Provider
before the end of a Performance Cycle by reason of his or her death, disability as provided in
Section 6.2(d)(iv), or retirement as provided in Section 6.2(d)(ii), the Performance Cycle for
such Participant for the purpose of determining the amount of the Award payable shall end at the
end of the calendar quarter immediately preceding the date on which such Participant ceased to
be a Service Provider. Subject to Section 20.4, the amount of an Award payable to a Participant
to whom the preceding sentence is applicable shall be paid at the end of the Performance Cycle
and shall be that fraction of the Award computed pursuant to the preceding sentence the
numerator of which is the number of calendar quarters during the Performance Cycle during all
of which said Participant was a Service Provider and the denominator of which is the number of
full calendar quarters in the Performance Cycle. Upon any other termination of Participant’s
services as a Service Provider during a Performance Cycle, participation in the Plan shall cease
and all outstanding Awards of Performance Shares or Performance Units to such Participant
shall be canceled.
SECTION 10
AWARDS TO NON-EMPLOYEE DIRECTORS
10.1 Board Grants. The Board (and not a committee of the Board), in its sole
discretion, may grant Awards to Non-Employee Directors in the form of Non-Statutory Options,
unrestricted Stock or Restricted Stock. The Board (and not a committee of the Board), in its sole
discretion, may also adopt one or more formulas that provide for granting a specified Award to
each Non-Employee Director for attendance at each meeting of designated committees of the
Board. The Board may adopt different formulas for the various committees of the Board, and it
may choose to adopt formulas for some committees and not others. Further, any formula may
provide for a different grant to members of the committee charged with additional
responsibilities on the committee, such as the chairman.
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10.2 Administrator. The Administrator shall have no authority, discretion or power to
select the Non-Employee Directors who will receive any Award, determine the number of Shares
to be issued or the time at which such Awards are to be granted, establish the duration of the
Awards or alter any other terms or conditions specified in the Plan or by the Board, except in the
sense of administering the Plan pursuant to the provisions of the Plan and the grant resolution of
the Board.
10.3 Price of Option Shares. The exercise price per Share for any Option granted
pursuant to this Section 10 shall be 100% of the Fair Market Value of the Stock on the date on
which the Non-Employee Director is granted the Option.
10.4 Termination. If the Non-Employee Director ceases to be a Director for any
reason, an Award which is exercisable may be exercised by the Non-Employee Director at any
time following the date of such cessation provided that such exercise must occur prior to the
Award expiration date. In any such case, the Award may be exercised only as to the Shares as to
which the Award had become exercisable on or before the date that the Non-Employee Director
ceased to be a Director.
10.5 Other Terms. Except for the limitations set forth in Sections 5, 10.3, 10.4, and 11,
the terms and provisions of Awards shall be as determined from time to time by the
Administrator, and Awards issued may contain terms and provisions different from other Awards
granted to the same or other Award recipients. Awards shall be evidenced by an Award
Agreement containing such terms and provisions as the Administrator may determine, subject to
the provisions of the Plan.
SECTION 11
CHANGE IN CONTROL, REORGANIZATION OR LIQUIDATION
11.1 Change In Control. In the event of a change in control of the Company as
defined in Section 11.3, then the Administrator may, in its sole discretion, without obtaining
shareholder approval, to the extent permitted in Section 15, take any or all of the following
actions: (a) accelerate the exercise dates of any outstanding Awards or make all such Awards
fully vested and exercisable; (b) grant a cash bonus award to any Award Holder in an amount
necessary to pay the Exercise Price of all or any portion of the Award then held by such Award
Holder; (c) pay cash to any or all Award Holders in exchange for the cancellation of their
outstanding Awards in an amount equal to the difference between the Exercise Price of such
Awards and the greater of the tender offer price for the underlying Stock or the Fair Market
Value of the Stock on the date of the cancellation of the Awards; (d) make any other adjustments
or amendments to the outstanding Awards; and (e) eliminate all restrictions with respect to
Awards of Restricted Stock and deliver Shares free of restrictive legends to any Participant;
provided, however, that the Administrator shall not make any adjustment or amendment that
would constitute a “modification” of an Award, as such term is used in Internal Revenue Code
regulation § 1.409A-1(b)(5)(v), that would result in such Award being subject to additional tax
pursuant to Section 409A of the Internal Revenue Code.
11.2 Performance Shares and Performance Units. Under the circumstances described
in Section 11.1, the Administrator may, in its sole discretion, and without obtaining shareholder
approval, to the extent permitted in Section 15, provide for payment of outstanding Performance
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Shares and Performance Units at the maximum award level or any percentage thereof; provided,
however, that to the extent permitted by Section 20.4 herein, all payments shall be made no later
than (i) March 15 of the year following the end of the Performance Cycle to which the
Performance Shares or Performance Units relate if such Performance Cycle ends on or before
August 31 of a year, or (ii) November 15 of the year following the end of the Performance Cycle
to which the Performance Shares or Performance Units relate if such Performance Cycle ends on
or after September 1 of a year.
11.3 Definition. For purposes of the Plan, a “change in control” shall be deemed to
have occurred if: (a) any “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2)
of the Exchange Act), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company, is or becomes the “beneficial owner” (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 33-1/3% of the then
outstanding voting stock of the Company; or (b) at any time during any period of three
consecutive years (not including any period prior to the Effective Date), individuals who at the
beginning of such period constitute the Board (and any new director whose election by the Board
or whose nomination for election by the Company’s shareholders was approved by a vote of at
least two-thirds of the directors then still in office who either were directors at the beginning of
such period or whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority thereof; or (c) the shareholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 80% of the combined voting
power of the voting securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation, or the shareholders approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all or substantially
all of the Company’s assets.
11.4 Reorganization or Liquidation. In the event that the Company is merged or
consolidated with another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any reclassification or
change of outstanding Shares), or if all or substantially all of the assets or more than 50% of the
outstanding voting stock of the Company is acquired by any other corporation, business entity or
person (other than a sale or conveyance in which the Company continues as a holding company
of an entity or entities that conduct the business or businesses formerly conducted by the
Company), or in case of a reorganization (other than a reorganization under the United States
Bankruptcy Code) or liquidation of the Company, and if the provisions of Section 11.1 do not
apply, the Administrator, or the board of directors of any corporation assuming the obligations of
the Company, shall, have the power and discretion to prescribe the terms and conditions for the
exercise, or modification, of any outstanding Awards granted hereunder. By way of illustration,
and not by way of limitation, the Administrator may provide for the complete or partial
acceleration of the dates of exercise of the Options, or may provide that such Options will be
exchanged or converted into options to acquire securities of the surviving or acquiring
corporation, or may provide for a payment or distribution in respect of outstanding Options (or
the portion thereof that is currently exercisable) in cancellation thereof. The Administrator may
remove restrictions on Restricted Stock and may modify the performance requirements for any
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other Awards. The Administrator may provide that Stock or other Awards granted hereunder
must be exercised in connection with the closing of such transaction, and that if not so exercised
such Awards will expire. Any such determinations by the Administrator may be made generally
with respect to all Participants, or may be made on a case-by-case basis with respect to particular
Participants. The provisions of this Section 11.4 shall not apply to any transaction undertaken
for the purpose of reincorporating the Company under the laws of another jurisdiction, if such
transaction does not materially affect the beneficial ownership of the Company’s capital stock.
SECTION 12
CONTINUATION OF SERVICES; TRANSFERABILITY
12.1 Continuation of Services. Nothing contained in the Plan or in any Award granted
under the Plan shall confer upon any Participant any right with respect to the continuation of his
or her services as a Service Provider, or interfere in any way with the right of the Company,
subject to the terms of any separate employment or consulting agreement to the contrary, at any
time to terminate such services or to increase or decrease the compensation of the Participant
from the rate in existence at the time of the grant of an Award. Whether an authorized leave of
absence, or absence in military or government service, shall constitute a termination of
Participant’s services as a Service Provider shall be determined by the Administrator at the time
of such leave in accordance with then current laws and regulations.
12.2 Nontransferability. Except as provided in Section 12.3, no right or interest of any
Participant in an Award granted pursuant to the Plan shall be assignable or transferable during
the lifetime of the Participant, except (if otherwise permitted under Section 12.4) pursuant to a
domestic relations order, either voluntarily or involuntarily, or be subjected to any lien, directly
or indirectly, by operation of law, or otherwise, including execution, levy, garnishment,
attachment, pledge or bankruptcy. In the event of a Participant’s death, a Participant’s rights and
interests in Options and Stock Appreciation Rights shall, if otherwise permitted under Section
12.4, be transferable by testamentary will or the laws of descent and distribution, and payment of
any amounts due under the Plan shall be made to, and exercise of any Options and Stock
Appreciation Rights may be made by, the Participant’s legal representatives, heirs or legatees.
If, in the opinion of the Administrator, a person entitled to payments or to exercise rights with
respect to the Plan is disabled from caring for his or her affairs because of mental condition,
physical condition or age, payment due such person may be made to, and such rights shall be
exercised by, such person’s guardian, conservator or other legal personal representative upon
furnishing the Administrator with evidence satisfactory to the Administrator of such status.
Transfers shall not be deemed to include transfers to the Company or “cashless exercise”
procedures with third parties who provide financing for the purpose of (or who otherwise
facilitate) the exercise of Awards consistent with applicable laws and the authorization of the
Administrator.
12.3 Permitted Transfers. Pursuant to conditions and procedures established by the
Administrator from time to time, the Administrator may permit Awards (other than Incentive
Stock Options) to be transferred to, exercised by and paid to certain persons or entities related to
a Participant, including but not limited to members of the Participant’s immediate family,
charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are
members of the Participant’s immediate family and/or charitable institutions. In the case of
initial Awards, at the request of the Participant, the Administrator may permit the naming of the
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related person or entity as the Award recipient. Any permitted transfer shall be subject to the
condition that the Administrator receive evidence satisfactory to it that the transfer is being made
for estate and/or tax planning purposes on a gratuitous or donative basis and without
consideration (other than nominal consideration).
12.4 Limitations on Incentive Stock Options. Notwithstanding anything in this
Agreement (or in any Award Agreement evidencing the grant of an Option hereunder) to the
contrary, Incentive Stock Options shall be transferable only to the extent permitted by Section
422 of the Internal Revenue Code and the treasury regulations thereunder without affecting the
Option’s qualification under Section 422 as an Incentive Stock Option.
SECTION 13
GENERAL RESTRICTIONS
13.1
Investment Representations. The Company may require any person to whom an
Award is granted, as a condition of exercising such Award or receiving Stock under the Award,
to give written assurances in substance and form satisfactory to the Company and its counsel to
the effect that such person is acquiring the Stock subject to the Award for such person’s own
account for investment and not with any present intention of selling or otherwise distributing the
same, and to such other effects as the Company deems necessary or appropriate in order to
comply with federal and applicable state securities laws. Legends evidencing such restrictions
may be placed on the certificates evidencing the Stock.
13.2 Compliance with Securities Laws. Each Award shall be subject to the
requirement that, if at any time counsel to the Company shall determine that the listing,
registration or qualification of the Shares subject to such Award upon any securities exchange or
under any state or federal law, or the consent or approval of any governmental or regulatory
body, is necessary as a condition of, or in connection with, the issuance or purchase of Shares
thereunder, such Award may not be accepted or exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or obtained on conditions
acceptable to the Administrator. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification.
13.3 Stock Restriction Agreement. The Administrator may provide that shares of Stock
issuable pursuant to an Award shall, under certain conditions, be subject to restrictions whereby
the Company has a right of first refusal with respect to such shares or a right or obligation to
repurchase all or a portion of such shares, which restrictions may survive a Participant’s
cessation or termination as a Service Provider.
13.4 Shareholder Privileges. No Award Holder shall have any rights as a shareholder
with respect to any Shares covered by an Award until the Award Holder becomes the holder of
record of such Stock, and no adjustments shall be made for dividends or other distributions or
other rights as to which there is a record date preceding the date such Award Holder becomes the
holder of record of such Stock, except as provided in Section 4.
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SECTION 14
OTHER EMPLOYEE BENEFITS
The amount of any compensation deemed to be received by a Participant as a result of the
exercise of an Option or the grant or vesting of any other Award shall not constitute “earnings”
with respect to which any other benefits of such Participant are determined, including without
limitation benefits under any pension, profit sharing, life insurance or salary continuation plan.
SECTION 15
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time-to-time may amend or modify, the
Plan; provided, however, that no amendment or modification may become effective without
approval of the amendment or modification by the shareholders if shareholder approval is
required to enable the Plan to satisfy any applicable statutory or regulatory requirements, or if the
Company, on the advice of counsel, determines that shareholder approval is otherwise necessary
or desirable.
No amendment, modification or termination of the Plan shall in any manner adversely
affect any Awards theretofore granted under the Plan, without the consent of the Participant
holding such Awards.
SECTION 16
EXERCISE AND WITHHOLDING
16.1 Exercise, Payments, etc.
(a)
The method for exercising each Award granted under the Plan shall be by
delivery to the Corporate Secretary of the Company or an agent designated pursuant to
Section 18 of a notice specifying the number of Shares with respect to which such Award is
exercised and payment of the Exercise Price. Such notice shall be in a form satisfactory to the
Administrator and shall specify the particular Award (or portion thereof) which is being
exercised and the number of Shares with respect to which the Award is being exercised. The
exercise of the Award shall be deemed effective upon receipt of such notice by the Corporate
Secretary or a designated agent and payment to the Company. The purchase of such Stock shall
be deemed to take place at the principal office of the Company upon delivery of such notice, at
which time the purchase price of the Stock shall be paid in full by any of the methods or any
combination of the methods set forth in (b) below. A properly executed certificate or certificates
representing the Stock shall be issued by the Company and delivered to the Award Holder. If
certificates representing Stock are used to pay all or part of the Exercise Price, separate
certificates for the same number of shares of Stock shall be issued by the Company and delivered
to the Award Holder representing each certificate used to pay the Exercise Price, and an
additional certificate shall be issued by the Company and delivered to the Award Holder
representing the additional Shares, in excess of the Exercise Price, to which the Award Holder is
entitled as a result of the exercise of the Award.
(b)
The exercise price shall be paid by any of the following methods or any
combination of the following methods:
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(i)
in cash;
Company;
(ii)
by certified or cashier’s check payable to the order of the
(iii)
if authorized by the Administrator, in its sole discretion, by
delivery to the Company of certificates representing the number of Shares then owned by the
Award Holder, the Fair Market Value of which equals the purchase price of the Stock purchased
pursuant to the Award, properly endorsed for transfer to the Company; provided however, that
Shares used for this purpose must have been held by the Award Holder for more than six
months; and provided further that the Fair Market Value of any Shares delivered in payment of
the purchase price upon exercise of the Award shall be the Fair Market Value as of the exercise
date, which shall be the date of delivery of the certificates for the Stock used as payment of the
Exercise Price;
(iv)
if authorized by the Administrator, in its sole discretion, by
requesting to receive the number of Shares being exercised less the number of Shares having a
Fair Market Value as of the exercise date equal to the aggregate Exercise Price for all Shares
being exercised at the time;
(v)
if authorized by the Administrator, in its sole discretion, and
subject to applicable law, including Section 402 of the Sarbanes-Oxley Act, by delivery by a
Participant (other than an Executive Officer or Director) to the Company of a properly executed
notice of exercise together with irrevocable instructions to a broker to deliver to the Company
promptly the amount of the proceeds of the sale of all or a portion of the Stock or of a loan from
the broker to the Award Holder necessary to pay the exercise price; or
combination of these methods.
(vi)
if authorized by the Administrator, in its sole discretion, any
(c)
In the sole discretion of the Administrator, the Company may, subject to
applicable law, including Section 402 of the Sarbanes-Oxley Act, guaranty a third-party loan
obtained by a Participant (other than an Executive Officer or Director) to pay part or all of the
Exercise Price of the Shares provided that such loan or the Company’s guaranty is secured by the
Shares and the loan bears interest at a market rate. The Company may not make or guaranty
loans to Executive Officers or Directors.
16.2 Withholding Requirement. The Company’s obligations to deliver Shares upon the
exercise of an Option or Stock Appreciation Right, or upon the vesting of any other Award, shall
be subject to the Participant’s satisfaction of all applicable federal, state and local income and
other tax withholding requirements. The Company may defer exercise of an Award unless
indemnified by the Participants to the Administrator’s satisfaction against the payment of any
such amount. Further, the Company shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind due to the Participant by the Company.
16.3 Withholding with Stock. At the time the Administrator grants an Award, it may,
in its sole discretion, grant the Participant an election to pay all such amounts of tax withholding,
or any part thereof, by electing to transfer to the Company, or to have the Company withhold
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from Shares otherwise issuable to the Participant, Shares having a value equal to the amount
required to be withheld or such lesser amount as may be elected by the Participant. All elections
shall be subject to the approval or disapproval of the Administrator. The value of Shares to be
withheld shall be based on the Fair Market Value of the Stock on the date that the amount of tax
to be withheld is to be determined (the “Tax Date”). Any such elections by Participants to have
Shares withheld for this purpose will be subject to the following restrictions:
(a)
(b)
All elections must be made prior to the Tax Date;
All elections shall be irrevocable; and
(c)
If the Participant is an “officer” or “director” of the Company within the
meaning of Section 16 of the Exchange Act, the Participant must satisfy the requirements of such
Section 16 of the Exchange Act and any applicable rules thereunder with respect to the use of
Stock to satisfy such tax withholding obligation.
16.4
Incentive Options. In the event that an Award Holder makes a disposition (as
defined in Section 424(c) of the Internal Revenue Code) of any Stock acquired pursuant to the
exercise of an Incentive Stock Option prior to the later of (i) the expiration of two years from the
date on which the Incentive Stock Option was granted or (ii) the expiration of one year from the
date on which the Option was exercised, the Award Holder shall send written notice to the
Company at its principal office (Attention: Corporate Secretary) of the date of such disposition,
the number of Shares disposed of, the amount of proceeds received from such disposition, and
any other information relating to such disposition as the Company may reasonably request. The
Award Holder shall, in the event of such a disposition, make appropriate arrangements with the
Company to provide for the amount of additional withholding, if any, required by applicable
federal and state income tax laws.
SECTION 17
SECTION 162(M) PROVISIONS
17.1 Limitations.
Notwithstanding any other provision of
the
Administrator determines at the time any Award of Stock, Performance Shares, or Performance
Units is granted to a Participant that such Participant is, or is likely to be at the time he or she
recognizes income for federal income tax purposes in connection with such Award, a Covered
Employee, then the Administrator may provide that this Section 17 is applicable to such Award.
this Plan,
if
17.2 Performance Goals. If an Award is subject to this Section 17, then the lapsing of
restrictions thereon and the distribution of cash, Shares or other property pursuant thereto, as
applicable, shall be subject to the achievement of one or more objective performance goals
established by the Administrator, which shall be based on the attainment of one or any
combination of the following: specified levels of earnings per share, operating income (before or
after taxes), production or production growth, resource replacement or resource growth,
revenues, gross margin, return on operating assets, return on equity, economic value added, stock
price appreciation, total shareholder return (measured in terms of stock price appreciation and
dividend growth), successful completion of financing, cash flow, or cost control, of the Company
or Affiliated Entity (or any division thereof) for or within which the Participant is primarily
employed. Such performance goals also may be based upon the attaining of specified levels of
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Company performance under one or more of the measures described above relative to the
performance of other companies. Such performance goals shall be set by the Administrator
within the time period prescribed by, and shall otherwise comply with the requirements of,
Section 162(m) of the Internal Revenue Code and the regulations thereunder.
17.3 Adjustments. Notwithstanding any provision of the Plan other than Sections 5 and
11, with respect to any Award that is subject to this Section 17, the Administrator may not adjust
upwards the amount payable pursuant to such Award, nor may it waive the achievement of the
applicable performance goals except in the case of the death or disability of the Participant.
17.4 Expiration of Grant Authority. The Administrator’s authority to grant new
awards that are intended to qualify as performance-based compensation within the meaning of
162(m) of the Internal Revenue Code (other than Qualifying Awards) shall terminate upon the
first meeting of the Company’s shareholders that occurs in the fifth year following the year in
which the Company’s shareholders first approve this Plan.
17.5 Other Restrictions. The Administrator shall have the power to impose such other
restrictions on Awards subject to this Section 17 as it may deem necessary or appropriate to
ensure that such Awards satisfy all requirements for “performance-based compensation” within
the meaning of Section 162(m)(4)(B) of the Internal Revenue Code or any successor thereto.
SECTION 18
BROKERAGE ARRANGEMENTS
The Administrator, in its discretion, may enter into arrangements with one or more banks,
brokers or other financial institutions to facilitate the exercise of Options or the disposition of
Shares acquired upon exercise of Stock Options, including, without limitation, arrangements for
the simultaneous exercise of Stock Options and sale of the Shares acquired upon such exercise.
SECTION 19
NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the Plan to
shareholders of the Company for approval shall be construed as creating any limitations on the
power or authority of the Board to adopt such other or additional incentive or other
compensation arrangements of whatever nature as the Board may deem necessary or desirable or
preclude or limit the continuation of any other plan, practice or arrangement for the payment of
compensation or fringe benefits to Employees or Consultants generally, or to any class or group
of Employees or Consultants, which the Company or any Affiliated Entity now has lawfully put
into effect, including, without limitation, any retirement, pension, savings and stock purchase
plan, insurance, death and disability benefits and executive short-term incentive plans.
SECTION 20
REQUIREMENTS OF LAW
20.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant to
the Plan shall be subject to all applicable laws, rules and regulations.
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20.2 Rule 16b-3. Transactions under the Plan and within the scope of Rule 16b-3 of
the Exchange Act are intended to comply with all applicable conditions of Rule 16b-3. To the
extent any provision of the Plan or any action by the Administrator under the Plan fails to so
comply, such provision or action shall, without further action by any person, be deemed to be
automatically amended to the extent necessary to effect compliance with Rule 16b-3; provided,
however, that if such provision or action cannot be amended to effect such compliance, such
provision or action shall be deemed null and void to the extent permitted by law and deemed
advisable by the Administrator.
20.3 Governing Law. The Plan and all agreements hereunder shall be construed in
accordance with and governed by the laws of the State of Delaware.
20.4 Specified Employees Under Regulation 409A. For purposes of this Plan, the term
“termination of employment” shall mean, with respect to any Award that constitutes a deferral of
compensation within the meaning of Section 409A of the Internal Revenue Code, “separation
from service” within the meaning of Section 409A of the Internal Revenue Code. Payment of
any amount due a Participant after a termination of employment with the Company shall
generally be made as soon as practical after such termination. However, if a Participant is a
“specified employee” on the date of his or her termination of employment, as that term is defined
under Sections 409A(a)(2)(A)(i) and 409A(a)(2)(B)(i) of the Internal Revenue Code, then, to the
extent necessary to avoid imposition of additional taxes and interest under Section 409A of the
Internal Revenue Code, any such payment shall be made on the date that is the earliest of: (i) six
(6) months after the Participant’s termination of employment, (ii) the Participant’s date of death,
if applicable, or (iii) such other earliest date for which such payment will not be subject to the
constructive receipt, interest, and additional tax provisions of Section 409A of the Internal
Revenue Code.
20.5 Regulation 409A. The payments and benefits payable under the Plan are intended
to not be subject to the additional tax imposed pursuant to Section 409A of the Internal Revenue
Code, and the Plan shall be construed in accordance with such intent.
SECTION 21
DURATION OF THE PLAN
No Award shall be granted under the Plan after ten years from the Effective Date;
provided, however, that any Award theretofore granted may, and the authority of the Board or
the Administrator to amend, alter, adjust, suspend, discontinue, or terminate any such Award or
to waive any conditions or rights under any such Award shall, extend beyond such date.
Dated: April 12, 2014
PURE CYCLE CORPORATION
By:
Mark W. Harding
President
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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 1934 1934, as amended. The words “will”, “expect”, “should”, “scheduled”, “plan”, “believe”, “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.
Executive Officer and Directors
Mark W. Harding President, Chief Executive / Financial Officer, Director
Harrison H. Augur Chairman of the Board
Arthur G. Epker, III Director
Richard L. Guido Nominating and Governance Committee Chairman
Peter C. Howell Audit Committee Chairman
George M. Middlemas Compensation Committee Chairman
Corporate Legal Counsel
Davis, Graham & Stubbs LLP
1550 17th Street, Suite 500
Denver, CO 80202
303.892.9400
Independent Registered Public Accountants
GHP Horwath, P.C.
1670 Broadway, Suite 3000
Denver, CO 80202
303.831.5000
Stock Transfer Agent & Register
Broadridge Corporate Issuer Services, Inc.
1717 Arch Street, Suite 1300,
Philadelphia, PA 19103
855.418.5058
Our stock is traded on the NASDAQ Capital Market under the symbol “PCYO”.
For more information please visit our website at www.purecyclewater.com