Unassociated Document
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-QSB
(Mark
One)
| x |
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the
quarterly period ended February
28, 2005
| o |
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the
transition period from __________ to __________
Commission
file number 0-8814
PURE
CYCLE CORPORATION
(Exact
name of small business issuer as specified in its charter)
|
Delaware |
84-0705083 |
|
(State of incorporation) |
(I.R.S.
Employer Identification
Number) |
| |
|
| |
|
|
8451 Delaware St., Thornton,
CO |
80260 |
|
(Address of principal executive
offices) |
(Zip
Code) |
| |
|
| |
|
|
(303) 292 -
3456 |
|
|
Registrant’s telephone number |
|
| |
|
| |
|
|
N/A |
|
(Former
name, former address and former fiscal year, if changed since last
report.) |
Check
whether the registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x; NO o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in rule
12b-2 of the Exchange Act). Yes o No x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of April 7,
2005:
|
Common stock, 1/3 of $.01 par
value |
13,703,635 |
|
(Class) |
(Number
of Shares) |
Transitional
Small business Disclosure Format (Check one): Yes o; No x
PURE
CYCLE CORPORATION
INDEX TO
FEBRUARY 28, 2005 FORM 10-QSB
| |
|
Page |
|
Part
I - Financial Information |
|
|
|
Item
1 - Financial Statements (unaudited) |
|
3 |
| |
|
|
|
Balance
Sheets - February 28, 2005 and August 31, 2004 |
|
3 |
| |
|
|
|
Statements
of Operations - For the three months ended February 28, 2005 and February
29, 2004 |
|
4 |
| |
|
|
|
Statements
of Operations - For the six months ended February 28, 2005 and February
29, 2004 |
|
5 |
| |
|
|
|
Statements
of Cash Flows - For the six months ended February 28, 2005 and February
29, 2004 |
|
6 |
| |
|
|
|
Notes
to Financial Statements |
|
7 |
| |
|
|
|
Item
2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition |
|
11 |
| |
|
|
|
Item
3 - Controls and Procedures |
|
17 |
| |
|
|
|
Part
II - Other Information |
|
|
|
Item
1 - Legal Proceedings |
|
17 |
| |
|
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds |
|
17 |
| |
|
|
|
Item
3 - Defaults Upon Senior Securities |
|
17 |
| |
|
|
|
Item
4 - Submission of Matters to a Vote of Security Holders |
|
17 |
| |
|
|
|
Item
5 - Other information |
|
17 |
| |
|
|
|
Item
6 - Exhibits |
|
17 |
| |
|
|
|
Signature
Page |
|
18 |
| |
|
|
“SAFE
HARBOR” STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES
LITIGATION REFORM ACT OF 1995
Statements
that are not historical facts contained in this Quarterly Report on Form 10-QSB
are forward looking statements that involve risk and uncertainties that could
cause actual results to differ from projected results. The words “anticipate,”
“believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions, as
they relate to us, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions. We cannot assure you
that any of our expectations will be realized. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, without limitation, the timing of development of the areas
where we may sell our water, the market price of water, changes in applicable
statutory and regulatory requirements, uncertainties in the estimation of water
available under decrees, costs of delivery of water, 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 conditions, labor relations, availability and cost of material and
equipment, delays in anticipated permit and construction dates, environmental
risks, the results of financing efforts and the ability to meet capital
requirements, and general economic conditions.
PURE
CYCLE CORPORATION
BALANCE
SHEETS
| |
|
February
28, 2005 |
|
August
31, 2004 |
|
|
ASSETS |
|
(unaudited) |
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
1,339,661 |
|
$ |
1,574,201 |
|
|
Marketable
securities |
|
|
3,730,043 |
|
|
4,055,643 |
|
|
Trade
accounts receivable |
|
|
33,695 |
|
|
50,238 |
|
|
Interest
receivable |
|
|
18,840 |
|
|
24,516 |
|
|
Prepaid
expenses |
|
|
31,667 |
|
|
34,077 |
|
|
Total
current assets |
|
|
5,153,906 |
|
|
5,738,675 |
|
| |
|
|
|
|
|
|
|
|
Investments
in water and water systems: |
|
|
|
|
|
|
|
|
Rangeview
water supply |
|
|
13,829,433 |
|
|
13,786,125 |
|
|
Paradise
water supply |
|
|
5,514,289 |
|
|
5,498,124 |
|
|
Rangeview
water system |
|
|
155,789 |
|
|
151,798 |
|
|
Sky
Ranch water supply |
|
|
50,000 |
|
|
50,000 |
|
|
Water
supply - other |
|
|
3,360 |
|
|
3,360 |
|
|
Total
investments in water and water systems |
|
|
19,552,871 |
|
|
19,489,407 |
|
|
Accumulated
depreciation and depletion |
|
|
(19,144 |
) |
|
(16,286 |
) |
|
Investments
in water and water systems, net |
|
|
19,533,727 |
|
|
19,473,121 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
5,031 |
|
|
-- |
|
|
Note
receivable - Rangeview Metropolitan District, including
accrued interest |
|
|
421,668 |
|
|
413,805
|
|
|
Total
assets |
|
$ |
25,114,332 |
|
$ |
25,625,601 |
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
31,137 |
|
$ |
2,946 |
|
|
Accrued
liabilities |
|
|
43,219 |
|
|
180,927
|
|
|
Total
current liabilities |
|
|
74,356 |
|
|
183,873 |
|
| |
|
|
|
|
|
|
|
|
Amounts
reimbursable to former officer |
|
|
--
|
|
|
2,465,555
|
|
|
Deferred
revenue |
|
|
25,803
|
|
|
17,435
|
|
|
Long-term
debt - related parties, including accrued interest |
|
|
1,437,004 |
|
|
1,420,964
|
|
|
Participating
Interests in Export Water supply |
|
|
8,213,187 |
|
|
8,214,275
|
|
|
Total
liabilities |
|
|
9,750,350
|
|
|
12,302,102 |
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity: |
|
|
|
|
|
|
|
|
Preferred
stock: |
|
|
|
|
|
|
|
|
Par
value $.001 per share, 25 million shares authorized:
Series
B - 432,513 shares issued and outstanding (liquidation preference
of $432,513) |
|
|
433 |
|
|
433 |
|
|
Common
stock: |
|
|
|
|
|
|
|
|
Par
value 1/3 of $.01 per share, 40 million shares authorized:
13,703,635
and 13,316,135 shares issued and outstanding |
|
|
45,681 |
|
|
44,387 |
|
|
Additional
paid-in capital |
|
|
38,978,310 |
|
|
36,407,105
|
|
|
Unrealized
(loss) gain on marketable securities |
|
|
(13,458 |
) |
|
14,834
|
|
|
Accumulated
deficit |
|
|
(23,646,984 |
) |
|
(23,143,260 |
) |
|
Total
stockholders' equity |
|
|
15,363,982 |
|
|
13,323,499
|
|
|
Total
liabilities and stockholders’ equity |
|
$ |
25,114,332 |
|
$ |
25,625,601 |
|
See
Accompanying Notes to Financial Statements
PURE
CYCLE CORPORATION
STATEMENTS
OF OPERATIONS
(unaudited)
| |
|
Three
Months Ended |
|
| |
|
February
28, |
|
February
29, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Water
usage revenue |
|
$ |
23,178 |
|
$ |
18,446 |
|
|
Wastewater
treatment revenue |
|
|
14,285 |
|
|
13,501 |
|
|
Other
revenue |
|
|
3,335 |
|
|
2,463 |
|
| |
|
|
40,798 |
|
|
34,410 |
|
| |
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Water
service operating expense |
|
|
1,920 |
|
|
2,761 |
|
|
Wastewater
service operating expense |
|
|
2,148 |
|
|
1,636 |
|
|
Other
water revenue operating expense |
|
|
2,248 |
|
|
1,331 |
|
|
Depletion
expense |
|
|
94 |
|
|
100 |
|
| |
|
|
6,410 |
|
|
5,828 |
|
|
Gross
margin |
|
|
34,388 |
|
|
28,582 |
|
| |
|
|
|
|
|
|
|
|
General
and administrative expenses |
|
|
(359,414 |
) |
|
(131,667 |
) |
|
Depreciation
expense |
|
|
(1,770 |
) |
|
(1,237 |
) |
|
Operating
loss |
|
|
(326,796
|
) |
|
(104,322 |
) |
| |
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
Interest
income |
|
|
37,300 |
|
|
3,961 |
|
|
Interest
expense - related parties |
|
|
(8,234 |
) |
|
(43,483 |
) |
|
Amortization
of warrants |
|
|
-- |
|
|
(6,300 |
) |
|
Total
other income (expense) |
|
|
29,066 |
|
|
(45,822 |
) |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(297,730 |
) |
$ |
(150,144 |
) |
| |
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted |
|
$ |
(.02 |
) |
$ |
(.02 |
) |
| |
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted |
|
|
13,525,496 |
|
|
7,895,141 |
|
See
Accompanying Notes to Financial Statements
PURE
CYCLE CORPORATION
STATEMENTS
OF OPERATIONS
(unaudited)
| |
|
Six
Months Ended |
|
| |
|
February
28, |
|
February
29, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Water
usage revenue |
|
$ |
62,872 |
|
$ |
55,314 |
|
|
Wastewater
treatment revenue |
|
|
28,571 |
|
|
27,002 |
|
|
Other
revenue |
|
|
3,335 |
|
|
3,415 |
|
|
|
|
94,778 |
|
|
85,731 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Water
service operating expense |
|
|
9,219 |
|
|
5,190 |
|
|
Wastewater
service operating expense |
|
|
4,433 |
|
|
3,819 |
|
|
Other
water revenue operating expense |
|
|
2,858 |
|
|
2,329 |
|
|
Depletion
expense |
|
|
295 |
|
|
308 |
|
| |
|
|
16,805 |
|
|
11,646 |
|
|
Gross
margin |
|
|
77,973 |
|
|
74,085 |
|
| |
|
|
|
|
|
|
|
|
General
and administrative expenses |
|
|
(628,492 |
) |
|
(219,302 |
) |
|
Depreciation
expense |
|
|
(3,192 |
) |
|
(2,474 |
) |
|
Operating
loss |
|
|
(553,711
|
) |
|
(147,691 |
) |
| |
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
Interest
income |
|
|
66,026 |
|
|
8,307 |
|
|
Interest
expense - related parties |
|
|
(16,039 |
) |
|
(86,966 |
) |
|
Amortization
of warrants |
|
|
-- |
|
|
(12,600 |
) |
|
Total
other income (expense) |
|
|
49,987 |
|
|
(91,259 |
) |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(503,724
|
) |
$ |
(238,950 |
) |
| |
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted |
|
$ |
(.04 |
) |
$ |
(.03 |
) |
| |
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted |
|
|
13,427,420 |
|
|
8,131,754 |
|
See
Accompanying Notes to Financial Statements
PURE
CYCLE CORPORATION
STATEMENTS
OF CASH FLOWS
(unaudited)
| |
|
Six
Months Ended |
|
| |
|
February
28, |
|
February
29, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net
loss |
|
$ |
(503,724 |
) |
$ |
(238,950 |
) |
|
Adjustments
to reconcile net loss to net cash used
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,192 |
|
|
2,474 |
|
|
Depletion |
|
|
295 |
|
|
308 |
|
|
Amortization
of warrants |
|
|
-- |
|
|
12,600 |
|
|
Interest
accrued on long-term debt - related parties |
|
|
16,039 |
|
|
86,966 |
|
|
Interest
added to note receivable - Rangeview Metropolitan
District |
|
|
(7,863 |
) |
|
(6,880 |
) |
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade
accounts receivable |
|
|
16,543 |
|
|
33,846 |
|
|
Interest
receivable and prepaid expenses |
|
|
8,087 |
|
|
-- |
|
|
Trade
accounts payable and accrued liabilities |
|
|
(109,517 |
) |
|
(7,122 |
) |
|
Deferred
revenues |
|
|
8,368 |
|
|
-- |
|
|
Net
cash used by operating activities |
|
|
(568,580 |
) |
|
(116,758 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Investments
in water supply and water systems |
|
|
(63,464 |
) |
|
(70,423 |
) |
|
Purchase
of marketable securities |
|
|
(2,090,458 |
) |
|
-- |
|
|
Maturities
of marketable securities |
|
|
2,387,765 |
|
|
-- |
|
|
Purchase
of property and equipment |
|
|
(5,660 |
) |
|
-- |
|
|
Net
cash provided (used) by investing activities |
|
|
228,183 |
|
|
(70,423 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds
from stock option exercises |
|
|
157,500 |
|
|
-- |
|
|
Reimbursement
to former CEO |
|
|
(50,555 |
) |
|
-- |
|
|
Payments
applied to Participating Interests in Export Water
supply |
|
|
(1,088 |
) |
|
-- |
|
|
Net
cash provided by financing activities |
|
|
105,857 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents |
|
|
(234,540 |
) |
|
(187,181 |
) |
|
Cash
and cash equivalents - beginning of period |
|
|
1,574,201 |
|
|
525,780 |
|
|
Cash
and cash equivalents - end of period |
|
$ |
1,339,661 |
|
$ |
338,599 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash financing activities: |
|
|
|
|
|
|
|
|
Restricted
common stock issued to former CEO in satisfaction of reimbursement
obligation |
|
$ |
2,415,000 |
|
$ |
-- |
|
| |
|
|
|
|
|
|
|
See
Accompanying Notes to Financial Statements
PURE
CYCLE CORPORATION
NOTES TO
FINANCIAL STATEMENTS
NOTE 1
- ACCOUNTING PRINCIPLES
The
balance sheet as of February 28, 2005, the statements of operations for the
three and six months ended February 28, 2005 and February 29, 2004,
respectively, and the statements of cash flows for the six months ended February
28, 2005 and February 29, 2004 have been prepared by the Company and have not
been audited. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows at February 28, 2005 and for all
periods presented have been appropriately made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's fiscal year 2004 Annual Report on
Form 10-KSB. The results of operations for interim periods presented are not
necessarily indicative of the operating results for the full year.
Stock-based
compensation
The
Company accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) No. 25, Accounting
for Stock Issued to Employees. The
Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation as
specified in SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No.
123. The pro
forma disclosure of net loss and loss per share required by SFAS No. 123 is
shown below.
| |
|
Three
Months Ended |
|
Six
Months Ended |
|
| |
|
February
28, |
|
February
29, |
|
February
28, |
|
February
29, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
Net
loss, as reported |
|
$ |
(297,730 |
) |
$ |
(150,144 |
) |
$ |
(503,724 |
) |
$ |
(238,950 |
) |
|
Add-back:
Stock-based employee compensation expense included in reported net
loss |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all options and warrants |
|
|
(35,159 |
) |
|
-- |
|
|
(70,318 |
) |
|
-- |
|
|
Pro
forma net loss |
|
$ |
(332,889 |
) |
$ |
(150,144 |
) |
$ |
(574,042 |
) |
$ |
(238,950 |
) |
|
Weighted
average common shares outstanding - basic and diluted |
|
|
13,525,496 |
|
|
7,895,141 |
|
|
13,427,420 |
|
|
8,131,754 |
|
|
Pro
forma net loss per share |
|
$ |
(.02 |
) |
$ |
(.02 |
) |
$ |
(.04 |
) |
$ |
(.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 0% dividend yield, 112.89% volatility, risk free rates between 1.0%
and 1.5%, and an expected life of six years. No options have been granted during
fiscal 2005.
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the use of highly
subjective assumptions, including the expected stock price volatility. Because
the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimates, in management’s
opinion, the existing models do not necessarily provide a reliable measure of
fair value of its employee stock-based compensation.
PURE
CYCLE CORPORATION
NOTES TO
FINANCIAL STATEMENTS
NOTE 1
- ACCOUNTING PRINCIPLES (Continued)
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
NOTE 2
- OPTION PAYMENT
The Sky
Ranch Water Service Agreement (the “SR Agreement”) and the Hills at Sky Ranch
Water Service Agreement (the “Hills Agreement”), provide the developer the right
to exercise options to use a combined 1,450 acre feet of Export Water per year
at Sky Ranch after a defined number of taps have been purchased for use at Sky
Ranch. The SR Agreement option calls for annual installments of $50,000 over
five years, and the Hills Agreement option calls for annual installments of
$10,400 over five years, unless the developer allows the options to expire.
Option fees received before the options are exercised or allowed to expire will
not be refunded. In February 2005, the developer remitted the first $10,400
installment payment under the Hills Agreement, which was distributed in
order of priority to the parties to the Comprehensive Amendment Agreement No. 1
(the “CAA”). In March 2005 of this distribution, the Company received $7,280 and
outside parties received $3,120. The Company received a distribution based on
the repurchase of certain CAA interests in fiscal 2004. The payment
received by the Company was deferred and will be recognized ratably into income
until the next option payment is due. Of the amounts paid to the outside
parties, $1,088 was allocated to the Participating Interest in Export Water
supply liability and $2,032 reduced the contingency under the CAA. The CAA is
more fully described in the Company’s Annual Report on Form 10-KSB for the year
ended August 31, 2004 and in the accompanying Accounting
for Participating Interests and Contingencies in
Management’s Discussion and Analysis of Results of Operations and Financial
Condition.
NOTE 3
- MARKETABLE SECURITIES
Management
determines the appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such determinations each
fiscal quarter. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
The Company had no investments classified as held-to-maturity at February 28,
2005 or August 31, 2004.
Debt
securities for which the Company does not have the positive intent or ability to
hold to maturity are classified as available-for-sale, along with any
investments in equity securities (the Company had no investments in equity
securities at February 28, 2005 or August 31, 2004). Securities classified as
available-for-sale are marked to market at each fiscal quarter. Changes in value
on such securities are recorded as a component of equity in the
Unrealized (loss) gain on marketable securities account. The cost
of securities sold is based on the specific identification method. All the
available-for-sale securities were purchased for temporary investment
purposes using the proceeds of the Company’s equity offering in June of 2004,
pending permanent use of such proceeds in accordance with the terms of the
offering. The following is a summary of such securities at February 28,
2005:
| |
|
Cost
Basis |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Estimated
Fair Value |
|
|
Commercial
paper |
|
$ |
1,203,490 |
|
$ |
-- |
|
$ |
-- |
|
$ |
1,203,490 |
|
|
U.S.
government debt securities |
|
|
1,095,481 |
|
|
2,505 |
|
|
(3,880 |
) |
|
1,094,106 |
|
|
U.S.
corporate debt securities |
|
|
2,648,020 |
|
|
8,530 |
|
|
(20,613 |
) |
|
2,635,937 |
|
|
Total
investments |
|
|
4,946,991 |
|
|
11,035 |
|
|
(24,493 |
) |
|
4,933,533 |
|
|
Less
amounts included with cash
equivalents |
|
|
1,203,490 |
|
|
-- |
|
|
-- |
|
|
1,203,490 |
|
|
Total
marketable securities |
|
$ |
3,743,501 |
|
$ |
11,035 |
|
$ |
(24,493 |
) |
$ |
3,730,043 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no sales of marketable securities during the six months ended February 28,
2005. The aggregate fair value of investments with unrealized gains and
unrealized losses as of February 28, 2005 was $2,846,087 and $2,087,446,
respectively. All investments with unrealized losses at February 28, 2005 have
been in a loss position for less than a year.
PURE
CYCLE CORPORATION
NOTES TO
FINANCIAL STATEMENTS
NOTE 3
- MARKETABLE SECURITIES (Continued)
Comprehensive
Income
In
addition to net loss, comprehensive income includes the unrecognized changes in
the fair value of marketable securities that are classified as
available-for-sale as noted in the following:
| |
|
Three
Months Ended |
|
Six
Months Ended |
|
| |
|
February
28, |
|
February
29, |
|
February
28, |
|
February
29, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
Net
loss |
|
$ |
(297,730 |
) |
$ |
(150,144 |
) |
$ |
(503,724 |
) |
$ |
(238,950 |
) |
|
Unrealized
loss on marketable securities |
|
|
(12,050 |
) |
|
-- |
|
|
(28,292 |
) |
|
-- |
|
|
Comprehensive
loss |
|
$ |
(309,780 |
) |
$ |
(150,144 |
) |
$ |
(532,016 |
) |
$ |
(238,950 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4
- PROPERTY AND EQUIPMENT
Property
and equipment, which consists entirely of computer and related equipment, is
stated at cost. Depreciation is computed using the straight-line method over
estimated useful lives of three years. Maintenance and repairs are charged to
expense as incurred.
NOTE 5
- NOTES PAYABLE - RELATED PARTIES
In the
aggregate, during the year ended August 31, 2004, the Company repaid $1.6
million of principal and approximately $2.0 million of accrued interest under
loan agreements with eleven related parties. Approximately $1.6 million of the
accrued interest was repaid with common stock surrendered by our former CEO for
which he was reimbursed on January 13, 2005 (see Note 8 and the Company’s Annual
Report on Form 10-KSB for the year ended August 31, 2004 for more information).
The remaining $0.4 million of accrued interest and $1.6 million of principal
were paid in cash by the Company.
NOTE 6
- STOCKHOLDERS’ EQUITY
Effective
April 26, 2004, stockholders approved a one-for-ten reverse stock split. In the
reverse stock split, every ten shares of the Company’s pre-split common stock
became one share of the Company’s post-split common stock. Accordingly, all
share and per share amounts for all periods affected have been restated to
reflect the reverse split.
On
December 8, 2004, the Company amended its Certificate of Incorporation to reduce
the total number of shares authorized for issuance from 225 million shares to 65
million shares, with 40 million shares designated as common stock and 25 million
shares designated as preferred stock.
During
the six months ended February 28, 2005, the Company issued 87,500 shares of
common stock upon the exercise of stock options. The options were exercised at a
price of $1.80 per share.
NOTE 7
- RELATED PARTY TRANSACTIONS
The
Company leases office space from its former CEO and shareholder. Prior to
September 1, 2004, the Company was not required to pay rent. Effective September
1, 2004, the Company executed a lease agreement whereby the Company leases the
office space on a month-to-month basis for $1,000 per month.
PURE
CYCLE CORPORATION
NOTES TO
FINANCIAL STATEMENTS
NOTE 8
- LCH, INC. SETTLEMENT AGREEMENT
Effective
August 31, 2004, the Company entered into the Settlement Agreement with LCH,
Inc. (an entity related to the Company’s former CEO). Under the Settlement
Agreement, LCH released the Company from its obligations under the LCH
Agreement (which is more fully described in the Company’s Annual Report on Form
10-KSB for the year ended August 31, 2004) in consideration of the Company’s
former CEO surrendering 306,279 shares of common stock (which had been pledged
as collateral to secure payment of notes issued by the Company to LCH in 1988
and 1989), and the Company repaying the $950,000 principal amount of the notes.
The 306,279 shares were designated to repay $1,557,110 of accrued interest
payable to LCH under the notes and to retire $4.0 million of contingent
obligations payable to LCH under the LCH Agreement. To reimburse Mr. Clark, on
January 13, 2005, the Company paid Mr. Clark $50,555 in cash and issued to him
300,000 shares of restricted common stock (totaling $2,465,555).
*****
Item
2. Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
Description
of Business
Pure
Cycle Corporation was incorporated in 1976 in Delaware. We own or have rights to
use significant water assets which we are using to provide water and wastewater
services to customers located in the Denver, Colorado metropolitan area near our
principal water assets. Our primary business activities include the design,
construction, operation and maintenance of water and wastewater systems which
provide water and wastewater services to our customers.
Rangeview
Water Assets
In 1996
we entered into an agreement with the State of Colorado Board of Land
Commissioners (the “State Land Board”) for the exclusive right to provide water
and wastewater services to approximately 24,000 acres of primarily undeveloped
land known as the “Lowry Range Property”. The Lowry Range Property is located in
Arapahoe County, Colorado approximately 15 miles southeast of Denver and 12
miles south of the Denver International Airport. At the same time we entered
into the agreement with the State Land Board we also entered into two 85-year
agreements with the Rangeview Metropolitan District (the “District”), a
quasi-municipal political subdivision of the State of Colorado. Under these
agreements we have exclusive access to approximately 29,270 acre feet per year
of water, of which 17,620 acre feet per year are available to us for use
specifically on the Lowry Range Property. We own the remaining 11,650 acre feet
of water per year (referred to as the “Export Water”) and can "export" it off
the Lowry Range Property to provide water and wastewater services to nearby
communities and developers in need of additional water supplies. The Export
Water and the water available for use on the Lowry Range Property are referred
to as our “Rangeview Water Assets”.
Based on
independent engineering estimates, the 17,620 acre feet of water, which is
designated for use on the Lowry Range Property, is capable of providing water
service to approximately 47,500 Single Family Equivalent (SFE) units. An SFE is
defined as the amount of water required each year by a family of four persons
living in a single family house on a standard lot. Based on independent
engineering estimates, the 11,650 acre feet of Export Water we own, which is
comprised of surface and groundwater on and beneath the Lowry Range Property,
can serve approximately 32,500 SFE units throughout the Denver metropolitan
region. Additionally, we have the option, with the State Land Board, to
substitute 1,650 acre feet of Export surface water in exchange for a total gross
volume of 165,000 acre feet of groundwater.
Our
business includes the design, construction and operation of facilities to
provide water and wastewater services. On the Lowry Range Property, we will
operate both the water and the wastewater systems during our contract period and
the District will own both systems. However, after 2081, ownership of the water
system servicing customers on the Lowry Range Property will revert to the State
Land Board. Off the Lowry Range property, we will use our Export Water to
provide water and wastewater services, and we will own these assets. We will
contract with third parties for construction of these facilities.
Water
and/or wastewater services are subject to individual water and wastewater
service agreements. We negotiate individual agreements with developers and/or
homebuilders to provide water and wastewater services. Our service contracts
outline our obligations to construct certain facilities necessary to develop and
treat water and/or wastewater, and include the timing of installation of the
facilities, capacities of the systems, and where the services will be provided.
Under these agreements, developers and/or homebuilders purchase water and/or
wastewater taps from us in exchange for our obligation to construct the water
and/or wastewater facilities and for us to provide water and wastewater
services.
In
agreements marketing our Export Water, we plan to negotiate the purchase of
groundwater from the developers seeking water service from us. Such purchased
water would not be subject to obligations under the commercialization agreement
which is more fully described in the Company’s Annual Report on Form 10-KSB for
the year ended August 31, 2004. Similarly, water tap fees received from the sale
of taps to customers located on the Lowry Range Property are not subject to
obligations under these financing agreements.
The State
Land Board is in the initial stages of developing a plan to solicit requests for
proposals to engage a development partner to assist in the future development of
the Lowry Range Property. We are not able to determine the timing of development
of the Lowry Range Property, although residential, commercial and industrial
development is under way outside of the Lowry Range Property along its southern,
western and northern borders. Additional water sales will only occur after
development has commenced. In the event development of the Lowry Range Property
and the surrounding areas is delayed, we may be required to incur additional
short-term or long-term debt obligations or seek to sell additional equity to
generate operating capital until demand arises for our water assets.
Due to
the continuing growth of the Denver metropolitan region and the limited
availability of new water supplies, many metropolitan planning agencies are
requiring property developers to demonstrate adequate water availability prior
to any consideration for zoning requests for property development. As a result,
we believe we are well positioned to market and sell our water and wastewater
services to developers and homebuilders seeking to develop new communities both
within the Lowry Range Property as well as in other areas in the growing Denver
metropolitan region.
Sky
Ranch
In 2003
and 2004 we entered into two Water Service Agreements with the developer of Sky
Ranch, a proposed new development located along Interstate 70, approximately
seven miles south of the Denver International Airport in Arapahoe County,
Colorado. Under the Water Service Agreements, we will provide water service to
the 4,850 SFE units that are anticipated to be built at Sky Ranch. Under the
Water Service Agreements, the developer must purchase at least 400 water taps
before occupancy of the first home. The Water Service Agreements permit the
developer to add additional taps annually, with at least 310 taps to be
purchased each year until at least 4,120 total taps have been purchased. This
schedule is designed to provide us with adequate funds with which to construct
the facilities needed to provide water service to the Sky Ranch
development.
We
initially anticipated the developer purchasing the first 20 taps in our second
quarter of fiscal 2005. However, due to customary due diligence and market
analysis being performed by the developer, the initial 20 taps were not
purchased during the second quarter. Based on information received from the
developer, the developer is actively marketing residential lots to several
national home builders with operations in the Denver area. As the developer
finalizes agreements for the sale of lots, the developer has indicated
that it will proceed with construction of the project and the purchase of
taps to initially provide water service for construction activities and as homes
are completed for residential use. We have begun the design and engineering of
the water facilities and will initiate construction at such time as we receive
notice from the developer to proceed and payment for the inital tap purchases.
Rangeview
Metropolitan District
The
District is a quasi-municipal corporation and political subdivision of the State
of Colorado formed in 1986 for the purpose of providing water and wastewater
services to the Lowry Range Property. The District is required to utilize the
17,620 acre feet of water leased to it by the State Land Board located on the
Lowry Range Property exclusively for service to customers on the Lowry Range
Property.
The
District is run by an elected board of directors. The only eligible voters and
the only persons eligible to serve as directors are the owners of property in
the 40 acre boundary of the District. The current directors of the District are
Thomas P. Clark, Mark W. Harding, Scott E. Lehman (all of which are employees of
Pure Cycle) and Thomas Lamm.
Pure
Cycle and the board of directors of the District have attempted to transact
business between the District and Pure Cycle on an arms-length basis. The
conflicts of interest of the directors in transactions between Pure Cycle and
the District are disclosed in filings with the Colorado Secretary of State. The
District and Pure Cycle have each been represented by separate legal counsel in
negotiating the water service agreement and wastewater service agreement between
the parties. The agreements were also approved by the members of the District's
board who were not Pure Cycle employees and by the State Land
Board.
Under the
service agreements between Pure Cycle and the District, Pure Cycle is obligated
to provide funding to the District as the District’s cash reserves fall below
the level specified in the District’s contract with the State Land Board. The
District is permitted to request funding from Pure Cycle to replenish its
reserves for certain defined operating expenses related to the Lowry Range
Property. We anticipate funding substantially all of the District’s operating
expenditures for the foreseeable future until the District generates additional
on-site water revenues. During the six months ended February 28, 2005, we
provided the District with approximately $92,000 of funding. Of this, we
recorded $48,000 as general and administrative expenses and $44,000 was
capitalized as part of the Rangeview Water Assets.
Paradise
Water Supply
We own
conditional water rights in western Colorado that entitle us to build a 70,000
acre-foot reservoir to store tributary water on the Colorado River; a
right-of-way permit from the U.S. Bureau of Land Management for property at the
dam and reservoir site; and four tributary water wells with a theoretical
capacity to produce approximately 56,000 acre feet of water annually
(collectively known as the “Paradise Water Supply”). We will seek to utilize our
Paradise Water Supply asset to deliver water to customers located in the Denver
metropolitan area or to customers in the downstream states of Nevada, Arizona
and California. However, due to the strict regulatory requirements for
constructing an on-channel reservoir, completing this conditional storage right
at its decreed location could be difficult. As a result, there can be no
assurance that we will ever be able to make use of this asset or sell the water
profitably. In accordance with Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standard No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets (“SFAS
144”), at least annually we review our long-term assets, including our Paradise
Water Supply, for indicators of impairment. Consistent with SFAS 144, we compare
the carrying amount of our Paradise Water Supply asset to the sum of the
expected undiscounted cash flows from the expected eventual use of the asset.
Our assessment of the recoverability of the carrying value of the Paradise Water
Supply assumes revenue being developed through water tap sales and monthly
metered water usage fees offset by wholesale development costs, which are based
on engineering estimates, over a 35 year development horizon. Based on the
latest annual assessment (last test performed as of August 31, 2004) the
expected undiscounted cash flows exceed the carrying value of the Paradise Water
Supply and therefore no impairment was found to exist.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those
estimates.
We have
identified certain key accounting policies on which our financial condition and
results of operations are dependent. These key accounting policies most often
involve complex matters or are based on subjective judgments or decisions. In
the opinion of management, our most critical accounting policies are those
related to revenue recognition, impairment of water assets and other long-lived
assets, depletion and depreciation, accounting for participating interests in
Export Water sales, royalty and other obligations, and income taxes. We base our
estimates and judgments on historical experience of the operations and on
various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Management periodically reviews its estimates, including those related
to the recoverability and useful lives of assets. Actual results may differ from
these estimates under different assumptions or conditions.
Accounting
for Participating Interests and Contingent Liabilities
As more
fully described in our Annual Report on Form 10-KSB for the year ended August
31, 2004, the balance sheet liability captioned "Participating Interests in
Export Water supply" (the “Participating Interests”) represents an obligation
which arose under the Comprehensive Amendment Agreement No. 1 (the “CAA”) which,
along with certain other agreements, was used to acquire our Export Water
supply. We recorded an initial liability of approximately $11.1 million which
represents the cash we received and used to purchase the Export Water supply. In
return, we agreed to remit a total of $31.8 million of proceeds received from
our future sales of Export Water to the Participating Interest holders,
excluding Pure Cycle. In accordance with Emerging Issues Task Force (EITF) Issue
No 88-18 Sales
of Future Revenues, the
obligation for the $11.1 million has been recorded as debt for which the payment
obligation arises upon receipt of proceeds from Export Water sales. The
remaining $20.7 million (before the transactions that occurred in fiscal 2004 as
described below) will be paid from future proceeds received from the sale of
Export Water. The $20.7 million contingency is not reflected on our balance
sheet as the obligation to pay is contingent on our ability to sell Export
Water, for which the amounts and the timing are not reasonably
determinable.
During
2004, we acquired the rights to approximately $8.2 million of obligations under
the CAA for cash of $2.75 million and 40,512 restricted shares of our common
stock. In connection with these transactions, we reduced the Participating
Interests by approximately $2.9 million. For more information refer to our
Annual Report on Form 10-KSB for the year ended August 31, 2004.
As
proceeds from the sale of Export Water are generated and payments are made under
the CAA, we will allocate a ratable percentage of said payments to the principal
portion of the Participating Interests liability (i.e. 35% of the total proceeds
payable to parties other than Pure Cycle) and the balance to the contingent
liability (i.e. 65% of the total proceeds payable to parties other than Pure
Cycle). As proceeds from the sale of Export Water are collected and applied to
the $20.7 million contingency they are recorded on a net revenue
basis.
The
following table reflects the activity in the CAA obligations:
|
Participating
Interests in Export Water supply |
|
|
|
Liability |
|
Contingency |
|
Total
Obligation |
|
|
Original
balances |
|
$ |
11,090,630 |
|
$ |
20,717,102 |
|
$ |
31,807,732 |
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2004 acquisitions |
|
|
2,858,920 |
|
|
5,340,413 |
|
|
8,199,333 |
|
|
Sky
Ranch option payment paid to external parties
(fiscal 2004) |
|
|
17,435 |
|
|
32,565 |
|
|
50,000 |
|
|
Hills
at Sky Ranch option payment paid to external
parties (fiscal 2005) |
|
|
1,088 |
|
|
2,032 |
|
|
3,120 |
|
|
Balance
at February 28, 2005 |
|
$ |
8,213,187 |
|
$ |
15,342,092 |
|
$ |
23,555,279 |
|
| |
|
|
|
|
|
|
|
|
|
|
Financial
Condition
Results
of Operations
We
delivered 6.6 million gallons and 7.2 million gallons of water during the three
months ended February 28, 2005 and February 29, 2004, respectively, which
generated approximately $23,200 and $18,400 of water fees, respectively. We
delivered 20.2 million gallons and 22.0 million gallons of water during the six
months ended February 28, 2005 and February 29, 2004, respectively, which
generated approximately $62,900 and $55,300 of water fees, respectively.
The
increase in water usage fees for both the three and six months ended February
28, 2005, respectively, is mainly attributable to rate increases effective May
2004. Our water service charges are based on a tiered pricing structure that is
sensitive to the date and volume of water use. Our tiered pricing structure is
controlled through a market-driven pricing mechanism under which our rates and
charges may not exceed similar rates and charges of three nearby communities.
We
generated approximately $14,300 and $13,500 of wastewater revenues during the
three months ended February 28, 2005 and February 29, 2004, respectively, and we
generated approximately $28,600 and $27,000 of wastewater revenues during the
six months ended February 28, 2005 and February 29, 2004, respectively. Our
wastewater treatment customers are currently charged a flat monthly amount,
which was increased in May 2004. Wastewater treatment fees are also controlled
through the market-driven pricing mechanism.
Operating
costs relating to the delivery of water, the treatment of wastewater, and
general and administrative expenses for the three and six months ended February
28, 2005 and February 29, 2004, respectively, were as follows:
| |
|
Three
Months Ended |
|
% |
|
| |
|
February
28, |
|
February
29, |
|
Increase |
|
| |
|
2005 |
|
2004 |
|
(Decrease) |
|
|
Operating
costs of delivering water |
|
$ |
1,900 |
|
$ |
2,800 |
|
|
(32 |
%) |
|
Operating
costs of treating wastewater |
|
$ |
2,100 |
|
$ |
1,600 |
|
|
31 |
% |
|
General
and administrative expenses |
|
$ |
359,400 |
|
$ |
131,700 |
|
|
173 |
% |
| |
|
|
|
|
|
| |
|
Six
Months Ended |
|
% |
|
| |
|
February
28, |
|
February
29, |
|
Increase |
|
| |
|
2005 |
|
2004 |
|
(Decrease) |
|
|
Operating
costs of delivering water |
|
$ |
9,200 |
|
$ |
5,200 |
|
|
77 |
% |
|
Operating
costs of treating wastewater |
|
$ |
4,400 |
|
$ |
3,800 |
|
|
16 |
% |
|
General
and administrative expenses |
|
$ |
628,500 |
|
$ |
219,300 |
|
|
187 |
% |
| |
|
|
|
|
|
|
|
|
|
|
The
increase in general and administrative expenses for the three and six months
ended February 28, 2005 was due to the following:
| · |
Employee
related expenses (including salaries, taxes and healthcare) increased
approximately $73,400 and $159,900, respectively, due to the addition of
one employee in the first quarter of fiscal 2005, annual salary increases
for existing employees and significant increases in healthcare premiums.
|
| · |
Franchise
taxes increased approximately $72,700 for both the three and six month
periods ended February 28, 2005, respectively, due mainly to changes in
the number of shares of common stock authorized and outstanding following
our Annual Stockholders’ Meeting in April of
2004. |
| · |
Professional
service fees increased approximately $26,200 and $56,200,
respectively. |
| · |
The
portion of the payments to the District recorded as expense to fund its
operations accounted for approximately $23,300 and $48,300,
respectively. |
| · |
Payments
to directors for their participation in board meetings as well as
Directors & Officers insurance accounted for approximately $22,400 and
$36,400, respectively, of the increases. |
The Sky
Ranch Water Service Agreement (the “SR Agreement”) and the Hills at Sky Ranch
Water Service Agreement (the “Hills Agreement”), provide the developer the right
to exercise options to use a combined 1,450 acre feet of Export Water per year
at Sky Ranch after a defined number of taps have been purchased for use at Sky
Ranch. The SR Agreement option calls for annual installments of $50,000 over
five years, and the Hills Agreement option calls for annual installments of
$10,400 over five years, unless the developer allows the options to expire.
Option fees received before the options are exercised or allowed to expire will
not be refunded. In February 2005, the developer remitted the first $10,400
installment payment under the Hills Agreement and it was distributed to the CAA
parties in order of priority. In March 2005, we received our CAA distribution of
$7,280 and outside parties received $3,120. The payment we received was deferred
and will be recognized ratably into income until the next option payment is due.
Of the amounts paid to the outside parties, $1,088 was allocated to the
Participating Interest in Export Water supply liability and $2,032 reduced the
contingency under the CAA. The CAA is more fully described in our Annual Report
on Form 10-KSB for the year ended August 31, 2004 and in the accompanying
Accounting
for Participating Interests and Contingencies.
Interest
income increased to $37,300 from $4,000 for the three months ended February 28,
2005, and increased to $66,000 from $8,300 for the six months ended February 28,
2005. The increase is due to the temporary investment of funds raised in the
equity offering in June of 2004.
Interest
expense decreased to $8,200 from $43,500 for the three months ended February 28,
2005, and decreased to $16,000 from $87,000 for the six months ended February
28, 2005. The decrease is due to the repayment of $1.6 million of debt in August
of 2004.
Primarily
due to the factors described above, the net loss for the three and six months
ended February 28, 2005 increased approximately $147,600 (from $150,100 to
$297,700) and $264,700 (from $239,000 to $503,700), respectively.
Liquidity
and Capital Resources
At
February 28, 2005, current assets exceed current liabilities by approximately
$5.08 million and we had cash and cash equivalents and marketable securities of
approximately $5.07 million. We believe that at February 28, 2005, we have
sufficient working capital to fund our operations for the next year. However,
there can be no assurances that we will be successful in marketing the water
from our primary water projects in the near term. In the event increased
revenues and cash flows from providing water services are not achieved, we may
incur additional short or long-term debt or seek to sell additional equity
securities to generate working capital to support our operations.
Development
of the facilities necessary for us to provide water and wastewater services to
customers, including the water rights that we currently hold or additional water
rights that we may seek to acquire, will require substantial capital investment.
We anticipate that these efforts will be financed through our collection of
water and wastewater system tap fees and service charges. A tap fee is a
one-time charge collected from a builder or property owner which, when paid,
allows the customer to access our system and obtain water (or wastewater)
service. Service charges are recurring monthly fees collected from a customer
for ongoing water (or wastewater) service and are comprised of a base monthly
service charge (for water service) plus, a consumption charge for each 1,000
gallons of water used. Although we anticipate that tap fee revenues will be
sufficient to fund the design and construction of necessary water and wastewater
facilities, once we receive tap fees from a developer we are contractually
obligated to construct the facilities needed to provide service to those
customers for whom the taps fees were paid. We anticipate that the service
charge revenues will be sufficient to fund our obligations to provide ongoing
water and wastewater services to our customers. We cannot however assure you
that the revenues we collect will be sufficient to cover our capital costs and
other obligations.
The Water
Service Agreements with Sky Ranch provide for 4,850 SFE connections which, at
current rates and charges, would generate approximately $60.2 million in total
water tap fee revenues and approximately $2.8 million annually in water service
fees based on average water usage fees in our rate-based districts. These
represent gross fees and, to the extent that water service is provided using
Export Water, we are required to pay a royalty to the State Land Board equal to
12% of the net revenue after deducting our costs. If the developer exercises its
option to purchase Export Water, we expect to dedicate approximately 1,450 acre
feet, or approximately 12%, of our Export Water supply (which is about 5.0% of
our overall Rangeview Water Assets) for this project. We estimate that we will
spend approximately $25 million to construct the infrastructure needed to
provide water service to the Sky Ranch development.
At
February 28, 2005, we had outstanding debt to three related parties totaling
approximately $1.4 million (which includes approximately $745,100 of accrued
interest). Of the $1.4 million of debt, approximately $189,100 bears simple
interest at 9.01%; $51,700 bears simple interest at 8.36%; $424,500 bears simple
interest at the Applicable Federal Rate for short-term obligations (2.92% at
February 28, 2005); and $26,600 bears no interest. The notes are payable at
various dates between August 2007 and October 2007, subject to earlier payment
if Export Water sales occur. Interest is not payable on a current basis, but
does accrue and is added to the principal monthly.
Effect
of Newly Issued Accounting Pronouncements
In
December 2004, the FASB issued Statement of Financial Accounting Standard No.
123 (revised 2004) Share-Based
Payment (“SFAS
123R”) which is a revision of SFAS 123 and addresses the accounting for employee
stock options. SFAS 123R is effective for public companies, that file as small
business issuers, for interim or annual periods beginning after December 15,
2005 (SFAS 123R is effective for us beginning March 1, 2006), supersedes APB
Opinion No. 25, Accounting
for Stock Issued to Employees, and
amends SFAS No. 95, Statement
of Cash Flows.
Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. We have not yet completed our evaluation of the impact of SFAS
123R, but we expect the adoption to have a material effect on our financial
statements. See NOTE 1 - ACCOUNTING PRINCIPLES for pro-forma disclosures
required under SFAS 123.
Item
3. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
President and Chief Financial Officer has concluded that our disclosure controls
(as defined in Securities Exchange Act Rule 13a-15) at the end of the period are
effective to ensure that the information required to be disclosed by us in the
reports we file under the Securities Exchange Act of 1934 are gathered, analyzed
and disclosed with adequate timeliness, accuracy and completeness, based on an
evaluation of such controls and procedures.
Changes
in Internal Controls
There
have been no significant changes in our internal controls over financial
reporting identified in connection with our evaluation during the fiscal quarter
to which this report relates that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
Part
II
Item
1. Legal
Proceedings
None
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
On
January 13, 2005, we issued 300,000 shares of restricted common stock pursuant
to Section 4(2) of the Securities Act of 1933 and paid $50,555 to our former
CEO, Mr. Thomas Clark, as consideration for Mr. Clark surrendering 306,279
shares of common stock which had been pledged as collateral to secure payment of
certain promissory notes issued by us to a related party. This occurred as part
of the LCH Settlement Agreement, effective as of August 31, 2004, which is more
fully described in our Annual Report on Form 10-KSB for the year ended August
31, 2004 and in NOTE 8 - LCH, INC. SETTLEMENT AGREEMENT above.
Item
3. Defaults
Upon Senior Securities
None
Item
4. Submission
of Matters to a Vote of Security Holders
None
Item
5. Other
Information
None
Item
6. Exhibits
Exhibits
31 -
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 - Filed
herewith.
32 -
Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 - Filed
herewith.
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PURE
CYCLE CORPORATION
Mark W.
Harding
President
and Chief Financial Officer
April 8,
2005