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 May 31, 2004
___ 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)
Registrant's telephone number (303) 292 - 3456
_________________________________________________________________
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 [ ]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of July 14, 2004:
Common Stock, 1/3 of $.01 par Value 11,074,954
(Class) (Number of Shares)
Transitional Small business Disclosure Format (Check one):
Yes [ ]; No [x]
PURE CYCLE CORPORATION
INDEX TO MAY 31, 2004 FORM 10-QSB
Page
Part I - Financial Information (unaudited)
Balance Sheets - May 31, 2004 and 3
August 31, 2003
Statements of Operations - For the three months 4
ended May 31, 2004 and May 31, 2003
Statements of Operations - For the nine months 5
ended May 31, 2004 and May 31, 2003
Statements of Cash Flows - For the nine months 6
ended May 31, 2004 and May 31, 2003
Notes to Financial Statements 7
Management's Discussion and Analysis of 9
Results of Operations and Financial Condition
Signature Page 13
Controls and Procedures
Part II -
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 13
Item 4 - Submission of Matters to a Vote of
Security Holders 13
Item 6. - Exhibits and Reports on Form 8-K 14
"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 are
selling 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 revenues
and 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
(unaudited)
May 31, August 31,
ASSETS 2004 2003
(unaudited)
Current assets:
Cash and cash equivalents $ 96,252 $ 525,780
Trade accounts receivable 47,417 67,687
Deferred offering costs 274,756 --
Total current assets 418,425 593,467
Investment in water and systems:
Rangeview water supply 13,796,995 13,710,773
Paradise water supply 5,498,124 5,494,323
Rangeview water system 148,441 148,441
Sky Ranch water supply 50,000 --
Accumulated depreciation & depletion (14,748) (10,543)
Total investment in water and systems 19,478,812 19,342,994
Note receivable, including accrued interest 410,222 399,902
Other assets 58,141 77,041
$ 20,365,600 $ 20,413,404
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,510 8,244
Accrued liabilities 214,279 43,528
Deferred revenue 17,435 --
Total current liabilities 261,224 51,772
Long-term debt - related parties,
including accrued interest 5,019,994 4,889,545
Participating interests in Rangeview
water rights 11,073,195 11,090,630
Stockholders' equity:
Preferred stock, par value $.001 per
share; authorized - 25,000,000 shares:
Series A1 - 1,058,000 and 1,600,000 shares
issued and outstanding, respectively 1,058 1,600
Series B - 432,513 shares issued and
outstanding 433 433
Series D - 6,455,000 shares issued and
outstanding 6,455 6,455
Series D1- 2,000,000 shares issued and
outstanding 2,000 2,000
Common stock, par value 1/3 of $.01 per
share; authorized - 135,000,000 shares;
8,145,087 and 7,843,976 shares issued and
outstanding, respectively 27,150 26,146
Additional paid-in capital 25,511,965 25,512,427
Accumulated deficit (21,537,874) (21,167,604)
Total stockholders' equity 4,011,187 4,381,457
$ 20,365,600 $ 20,413,404
See Accompanying Notes to the Financial Statements
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Three months Ended
May 31, May 31,
2004 2003
Water service revenue
Water usage fees $ 32,457 $ 27,729
Wastewater usage fees 13,763 18,672
Revenue - other 1,002 --
47,222 46,401
Water service operating expense ( 3,321) ( 5,769)
Wastewater service operating expense ( 1,896) ( 1,722)
Consulting services expense ( 560) --
Gross margin 41,445 38,910
General and administrative expense ( 125,169) (98,247)
Depreciation expense ( 1,360) ( 1,241)
Depletion expense ( 63) ( 126)
Other income (expense):
Interest income 3,610 3,941
Interest expense related parties ( 43,483) (44,264)
Interest expense other ( 6,300) ( 6,300)
Net loss $( 131,320) (107,327)
Basic and diluted net loss per common share $ ( 0.02) $( 0.01)
Weighted average common shares outstanding 8,145,087 7,843,976
See Accompanying Notes to the Financial Statements
PURE CYCLE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Nine months Ended
May 31, May 31,
2004 2003
Water service revenue
Water usage revenues $ 87,772 $ 104,953
Wastewater usage fees 40,765 45,260
Revenues - other 4,416 --
132,953 150,213
Water service operating expense ( 8,511) ( 11,488)
Wastewater service operating expense ( 5,715) ( 6,735)
Consulting services expense ( 2,889) --
Gross margin 115,838 131,990
General and administrative expense ( 344,471) ( 222,804)
Depreciation expense ( 3,711) ( 3,723)
Depletion expense ( 494) ( 952)
Other income (expense):
Interest income 11,917 12,497
Interest expense related parties ( 130,449) ( 132,792)
Interest expense other ( 18,900) ( 18,900)
Net loss $( 370,270) $( 234,684)
Basic and diluted net loss per common share $ ( 0.05) $ ( 0.03)
Weighted average common shares outstanding 8,078,677 7,843,976
See Accompanying Notes to the Financial Statements
PURE CYCLE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Nine months Ended
May 31, May 31,
2004 2003
Cash flows from operating activities:
Net loss $(370,270) $(234,684)
Adjustment to reconcile
net loss to net cash provided by
operating activities:
Depreciation on water systems 3,711 4,675
Depletion expense 494 --
Increase in accrued interest
on note receivable (10,320) ( 10,749)
Increase in accrued interest on long
term debt and other non-current
liabilities 130,449 132,792
Changes in operating assets and liabilities:
Trade accounts receivable 20,270 10,191
Other assets 18,900 18,900
Deferred revenue 17,435 --
Accounts payable and accrued liabilities 192,017 1,323
Net cash from/ used in
operating activities 2,686 (77,552)
Cash flows from investing activities:
Investments in water supply (140,023) --
Investment in Rangeview water system -- (99,164)
Net cash used in investing activities (140,023) (99,164)
Cash flows from financing activities:
Deferred offering costs (274,756) --
Participating interests in Rangeview water rights ( 17,435) --
Net cash used in financing activities (292,191) --
Net decrease in cash and cash equivalents (429,528) (176,716)
Cash and cash equivalents at beginning of period 525,780 287,720
Cash and cash equivalents at end of period $ 96,252 $ 111,004
See Accompanying Notes to the Financial Statements
PURE CYCLE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING PRINCIPLES
The balance sheet as of May 31, 2004, the statements of
operations for the three and nine months periods ended May 31,
2004 and May 31, 2003, and the statements of cash flows for the
nine-month period ended May 31, 2003 and 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 May 31, 2004 and for all
periods presented have been made.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Company's fiscal year 2003 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.
Certain prior period amounts have been reclassified to conform
to the current period presentation.
NOTE 2 - STOCKHOLDERS' EQUITY
In August 2003, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the
Company issued 2,000,000 shares of Series D-1 Preferred Stock
to the Company's CEO, Mr. Thomas Clark, in exchange for 200,000
shares of Common Stock owned by Mr. Clark. The Company sold
200,000 shares of the Company's Common Stock at $2.50 per share
to eleven accredited investors, four of whom had previously
invested with the Company. Proceeds to the Company were
$500,000. The Series D-1 Preferred Stock does not earn
dividends and is convertible into 200,000 shares of Common Stock
at such time that the Company has sufficient shares of
authorized Common Stock. The shares were issued under Section
4(2) of the Securities Act of 1933.
During the nine months ended May 31, 2004, the Company issued
301,111 shares of Common Stock in exchange for 542,000 shares of
Series A-1 Preferred Stock, pursuant to the certificate of
designation of the Series A-1 Preferred Stock. The holders of
the 542,000 shares of Series A-1 Preferred Stock were retired.
NOTE 3 - Reverse Split
On April 26, 2004, the Company effected a 1-for-10 reverse
split of common stock. All data included in the
financial statements reflect the reverse stock split.
NOTE 4 - Water Contract
On October 31, 2003, the Company entered into a long-term
Water Service Agreement whereby the Company will provide
domestic water service to a new master planned community ("Sky
Ranch") located in the Denver metropolitan area in Arapahoe
County. The new community will be developed over several years
and will have up to 4,000 single family residences. The Company
expects to generate one-time revenues from the sale of water taps
(currently $12,420 per tap) and annual revenues through the
delivery of water. On May 14, 2004, the Company entered into a
second long-term Water Service Agreement whereby the Company
will provide domestic water service to a second related master
planned community ("The Hills" at Sky Ranch) located in the
Denver metropolitan area in Arapahoe County. The new community
will be located adjacent to and be developed in conjunction with
the Sky Ranch development. Both developments will occur over
the next several years. The Hills at Sky Ranch will have up to
850 single family residences. The Company is responsible for
developing the associated infrastructure, construction of which
is expected to commence in 2004, to provide water
service to the development. The Company expects that the tap
fee revenues will provide sufficient revenues to fund
construction of facilities necessary to deliver water to the
developments.
Pursuant to the Sky Ranch Agreement, the Company has the option
to purchase 223 acre feet of water rights owned by the developer
of Sky Ranch for $250,000. On March 26, 2004, the Company
exercised a portion of its option and purchased 44.6 acre feet
of Denver aquifer groundwater for $50,000.
Additionally, pursuant to the Sky Ranch Agreement, the Company
received a $50,000 option payment from the developer for the
option to purchase 2,500 single family equivalent water
connections as part of the Sky Ranch development. The Company
accounted for the transaction as deferred revenue and paid the
$50,000 to reduce obligations to investors under the
Comprehensive Amendment Agreement ($17,435) and deferred
revenue ($32,565).
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. FIN No. 46 requires an entity to consolidate a
variable interest entity if it is designated as the primary
beneficiary of that entity even if the entity does not have a
majority of voting interests. A variable interest entity is
generally defined as an entity whose equity is insufficient to
finance its activities or whose owners lack the risk and rewards
of ownership. The provisions of this statement apply at inception
for any entity created after January 31, 2003. For small business
entities, the provisions of this Interpretation must be applied
at the end of the first reporting period that ends after December
15, 2004. The Company has determined it will not be subject to
this pronouncement.
In June 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of a nonpublic entity. The
adoption of SFAS No. 150 did not have an impact on the Company's
financial statements.
NOTE 6 - SUBSEQUENT EVENT
On June 24, 2004, the Company completed the sale of
700,000 shares of its common stock in an public offering underwritten
by Flagstone Securities at a price of $9.00 per share generating
approximately $5,668,000 in net proceeds, after the underwriting
discount and estimated expenses. Selling stockholders sold an
additional 2,505,367 shares of common stock. In addition, the
Company received $2,491,860 shares of common stock, bringing the
total number of shares of common stock sold pursuant to the offering
to 3,205,367. In addition, the Company received $2,491,860 from the
exercise of 1,405,30 options and warrants to purchase common shares
that were sold by selling stockholders in the offering. On July 9,
2004, the Company sold an additional 326,263 shares of common stock
at a price of $9.00 per share in connection with the exercise of the
over-allotment granted to the underwriter. The sale of the over-allotment
shares provided gross proceeds to the Company of $2,936,367 and net
proceeds of approximately $2,741,832.
DESCRIPTION OF BUSINESS
Pure Cycle Corporation (the "Company") was incorporated in
Delaware in 1976. The Company is engaged in providing water and
wastewater services to customers located in Denver Colorado where
its principal assets are located. The Company operates water and
wastewater systems which include designing, constructing,
operating and maintaining systems to service customers in the
Denver metropolitan area. In 1996, the Company entered into an
85-year agreement (the "Land Board Lease") to provide water and
wastewater services to 24,000 acres of primarily undeveloped land
in the greater Denver metropolitan area owned by the State of
Colorado known as the Lowry Range ("Service Area"). This
agreement with the State of Colorado Board of Land Commissioners
("State Land Board") and the Rangeview Metropolitan District
("District"), a quasi-municipal political subdivision of the
State provides for the use of water supplies from the Lowry Range
("Rangeview Water Supply") to provide water services to the
Service Area.
The Land Board Lease gives us exclusive access to
approximately 29,000 acre feet per year of water from, and the
exclusive right to provide water and wastewater services to, the
Lowry Range. The Lowry Range is located in Arapahoe County
approximately 15 miles southeast of Denver and 12 miles south of
the Denver International Airport. Of the approximately 29,000
acre feet of water to which we have access, 17,500 acre feet are
available to us for use on the Lowry Range. We own the remaining
11,650 acre feet and can "export" it from the Lowry Range to
supply water to communities and developers in need of additional
water supplies. There are no legal limitations on the locations
outside of the Lowry Range in which we can sell Export Water,
except that, if we sell Export Water for use outside of Arapahoe
County, we are required to offer to Arapahoe County the right to
buy such water at the same rates.
Water and/or wastewater service, whether to customers
located in the Lowry Range service area or off the Lowry Range
service area, is subject to individual water and wastewater
service agreements. We will negotiate individual service
agreements with developers and/or homebuilders to provide water
and wastewater service. Our service contracts will outline our
obligations to construct certain facilities necessary to develop
and treat water and/or wastewater, including the timing of
installation of the facilities, capacities of the systems, and
where the services will be provided. Developers and/or
homebuilders are required to purchase water and/or wastewater
taps from us in exchange for our obligation to construct the
water and/or wastewater facilities.
We also own conditional water rights in western Colorado
that entitles 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).
Although we will seek to utilize the Paradise Water Supply to
deliver water to customers located in the Denver metropolitan
area or to customers in the downstream states of Nevada, Arizona
and California, legal issues relating to interstate water
transfers and inter-basin water transfers make the short-term
realization on these assets unlikely.
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 planning for future development of the
Lowry Range. We are not able to determine the timing of
development of property in and around the Lowry Range service
area, although residential, commercial and industrial development
is under way outside of the Lowry Range service area along its
southern, western and northern borders, and we anticipate that
initial development of Sky Ranch will begin shortly. Water sales
will only occur after development has commenced. We cannot
assure you regarding the pace of development or that water sales
can be made on terms acceptable to us. In the event development
of the property within the Lowry Range service area or of Sky
Ranch and surrounding areas is delayed, we may be required to
incur additional short or long-term debt obligations or seek to
sell equity services to generate operating capital.
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, royalty and other
obligations, and income taxes, which are more fully described in
the Company's Prospectus dated June 21, 2004. Management
periodically reviews its estimates, including those related to the
recoverability and useful lives of assets. Changes in facts and
circumstances may result in revised estimates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
During the quarter ended May 31, 2004, the Company delivered
approximately 13.3 million gallons of water to customers in the
Service Area generating revenues from water sales of $32,457
compared to the delivery of 9.3 million gallons generating
revenues of $27,729 during the three months ended May 31, 2003.
Water deliveries during the three months ended May 31, 2004 were
up approximately 43%, while water revenues were up approximately
17%. Price variances for water revenues are primarily
attributable to a tiered pricing structure whereby in peak summer
months, customers may pay increased prices for water deliveries
while overall water deliveries may decline [on a comparable basis
with year earlier periods?] causing a higher weighted average
price per 1,000 gallons of water delivered. The Company incurred
water service operating costs of $3,321 during the quarter as
compared to $5,769 during the quarter ended May 31, 2003. During
the quarter ended May 31, 2004, the Company processed
approximately 2.9 million gallons of wastewater from customers in
the Service Area generating revenues from wastewater fees of
$13,763, as compared to processing 1.9 million gallons of
wastewater generating revenues of $18,672 during the three months
ended May 31, 2003. The Company incurred wastewater operating
costs of $1,896 during the quarter as compared to $1,722 for the
three months ending May 31, 2003. While the Company processed
approximately 1.0 million gallons more of wastewater during the
three months ended May 31, 2004, revenues decreased approximately
26%, due to the adoption in May 2003 of a fixed price rate
structure for wastewater service.
During the nine months ended May 31, 2004, the Company
delivered approximately 36.8 million gallons of water generating
water service revenues of $87,772 compared to approximately 28.4
million gallons of water generating $104,953, for the nine months
ended May 31, 2003. The higher revenues in the nine month period
ended May 31, 2003 were the result of an approximately $20,000
reversal of water service revenue recorded in 2003. The Company
incurred water service operating costs of $8,511 during the nine
month period ended May 31, 2004 as compared to $11,488 during the
nine months ended May 31, 2003. During the nine months ended May
31, 2004, the Company processed approximately 7.5 million gallons
of wastewater from customers in the Service Area generating
revenues from wastewater fees of $40,765, as compared to
processing 5.85 million gallons of wastewater generating revenues
of $45,260 during the three months ended February 28, 2003. The
Company incurred wastewater operating costs of $5,715 during the
nine month period ending May 31, 2004 as compared to $6,735 for
the nine month period ending May 31, 2003.
General and administrative expenses for the three months ended
May 31, 2004 were $26,922 higher than for the three months ended
May 31, 2003, primarily due to an increase in legal costs
incurred in connection with the Company's annual meeting on April
12, 2004 and the reverse stock split effect at such meeting. Net
loss for the three months ended May 31, 2004 was $131,320
compared to a net loss of $107,327 for the three months ended May
31, 2003. The increase in net loss of $23,993 is due to
additional costs incurred with the Company's annual meeting and
the reverse stock split.
General and administrative expenses for the nine months ended
May 31, 2004 were $121,667 higher than for the nine months ended
May 31, 2003, primarily due to an increase in legal costs
incurred in connection with the Company's annual meeting on April
12, 2004 and the reverse stock split. Net loss for the nine
months ended May 31, 2004 was $370,270 compared to a net loss of
$234,684 for the nine months ended May 31, 2003. The increase in
net loss of $135,586 is due to additional overhead costs from an
additional employee as well as costs incurred with the Company's
annual meeting.
Liquidity and Capital Resources
At May 31, 2004, current assets exceed current liabilities by
$157,201; and the Company had cash and cash equivalents of
$96,252. Included in current assets and current liabilities are
costs relating to the Company's common stock offering.
On June 24, 2004, the Company sold 700,000 shares of common
stock at a price of $9.00 per share generating approximately
$5,668,000 in net proceeds for Pure Cycle, after the underwriting
discount and estimated expenses. In addition, in connection with
the offering, the Company received $2,491,860 from the exercise
of 1,405,370 options and warrants. On July 9, 2004, the Company
sold an additional 326,263 shares of common stock at a price of
$9.00 per share as part of an exercise of the over-allotment
granted to the underwriter. The sale of the over-allotment
shares provided gross proceeds to the Company of $2,936,367 and
net proceeds of approximately $2,741,832. The offering was
underwritten by Flagstone Securities.
The Company believes it has sufficient working capital to fund
its operations for the next year or longer. The Company
believes that it has adequate funding for the construction of
facilities needed, pursuant to its commitments under the water
service agreement, from required tap purchases as part of the
water service agreement. There can be no assurances, however,
that the Company will be successful in marketing the water from
its two primary water projects in the near term. In the event
sales are not achieved, the Company may sell additional
participating interests in its water projects, incur additional
short or long-term debt or seek to sell additional shares of
common or preferred stock or stock purchase warrants, as deemed
necessary by the Company, to generate working capital.
Development of any of the water rights that the Company has,
or is seeking to acquire, will require substantial capital
investment by the Company. Any such additional capital for the
development of the water rights is anticipated to be financed
through the sale of water taps and water delivery charges to a
city or municipality. A water tap charge refers to a charge
imposed by a municipality to permit a water user to access a
water delivery system (i.e. a single-family home's tap into the
municipal water system), and a water delivery charge refers to a
water user's monthly water bill generally based on a per 1,000
gallons of water consumed. Annually, the developer must purchase
not less than a minimum number of taps, the proceeds from which
are used to expand the capacity of our water system to deliver
water to additional customers in the development. We anticipate
that the system development portion of tap fees will be
sufficient to generate funds with which we can design and
construct the necessary water facilities. However, once we
receive tap fees from a developer, we are contractually obligated
to construct the water delivery system for the taps paid for,
even if our costs are not covered by the fees we receive. We can
not assure you that our revenues will be sufficient to cover our
capital costs.
In October 2003, we entered into a water service agreement
with a developer to provide water to approximately 4,000 SFE
units that are being built on approximately 800 acres known as
"Sky Ranch" located 4 miles north of the Lowry Range along
Interstate 70. In May 2004, we entered into a second agreement
with the developer of Sky Ranch to provide water services to an
additional 850 SFEs at Hills at Sky Ranch, a development adjacent
to, and to be developed concurrently with, Sky Ranch. We expect
that the construction of the Sky Ranch project will begin in
October 2004, with the first homes available in February 2005.
Based on housing market demands of similar projects in the area
and projections provided by the developer, we expect that the
project will be fully built out within 10 years. Under the Sky
Ranch Agreements, the developer must purchase at least 400 water
taps before occupancy of the first home. The agreement permits
the developer to add additional taps annually, with at least
310 taps to be purchased each year. This schedule is designed to
provide us with adequate funds with which to construct the
facilities needed to provide water service to the areas being
built.
The water service agreements for Sky Ranch incorporate 4,850
SFE connections, which at current rates and charges would
generate approximately $60 million in total water tap fee
revenues and approximately $2.8 million annually in water service
revenues. 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. This royalty rate will
increase after net revenues exceed $45.0 million. 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 supply) for this project. We estimate we will
spend approximately $27 million for infrastructure related to the
development and delivery of water to the 4,850 single family
equivalent units. We have never undertaken a project of this
size, and no contracts have been entered into to perform this
work. Accordingly, we cannot assure you that our costs will not
exceed this estimate.
For the initial developments at Sky Ranch, we anticipate
receiving tap fees of approximately $1.9 million, representing
approximately 156 taps, in the current fiscal year ending
August 31, 2004, and approximately $3.0 million, representing an
additional 244 taps, prior to January 2005. We estimate that it
will cost approximately $2.5 million to construct the
infrastructure to service the initial 400 taps. We will expand
the infrastructure to meet demand as houses are built at the Sky
Ranch developments. We will initially develop the water beneath
the Sky Ranch property, which is being dedicated to us by the
developer in exchange for credit of a portion of the water
resource tap fee. The dedicated water is sufficient to provide
water service to approximately 1,400 customers. Because the
dedicated water is not Export Water, no payments will be required
to be made under the Financing Agreements and no royalty payments
will be required to be made to the State Land Board with respect
to tap fee revenues from the first 1,400 taps at Sky Ranch
serviced with the dedicated water. Because the project has not
yet commenced, we cannot assure you that these revenue and
expense estimates will be the actual revenues and expenses that
we will experience.
At February 29, 2004, we had outstanding debt to seven related
parties totaling $1,109,061, $512,439 of which bears interest at
prime plus 2% (6% at May 27, 2004) and $596,622 of which bears
interest at 10.25%. All notes mature in August 2007. Interest
is not payable on a current basis, but accrues and is added to
principal monthly.
In addition, we are obligated under notes totaling $848,023 at
February 29, 2004 which bear interest at rates at 7.18% and 8.04%
and notes totaling $2,473,263 at February 29, 2004 which bear
interest at prime plus 3% (7% at May 27, 2004). These notes
mature in August 2007. The holders of these notes are parties to
the Commercialization Agreement and have agreed that if the
amount of principal and accrued interest on these notes is paid
under the Commercialization Agreement prior to the maturity date
of the notes, the notes will be canceled.
Item 3. - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial
officer have concluded that the Company's disclosure controls
(as defined in Exchange Act Rule 13a-15 are sufficiently
effective to ensure that the information required to be
disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate
timeliness, accuracy and completeness, based on an evaluation of
such controls and procedures conducted at the end of the period.
Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls during the fiscal quarter to which this report
relates or subsequent to the date of the evaluation referred to
above.
Part II
Item 2. - Unregistered Sales of Equity Securities and Use of
Proceeds
On June 21, 2004, the Company sold 400,000 shares of common
stock on exercise of stock options and 1,005,370 shares of common
stock on exercise of warrants, and received $2,491,861 upon such
exercise. The shares purchased on exercise were resold by the
holders thereof pursuant to a registered public offering which
was completed on June 24, 2004. The issuances of common stock
were made pursuant to exemptions from registration in accordance
with Section 4(2) of the Securities Act of 1933 available for
investors with sophisticated investors with knowledge about the
Company's operations that were able to evaluate the merits and
risks of the investment.
Item 4. - Submission of Matters to a Vote of Security Holders
At the Company's annual meeting held on April 12, 2004, the
following matters were voted upon and adopted by stockholders, as
follows:
Voted
For Against Abstain
1. Election of Directors
Harrison H. Augur 5,736,783 0 720
Thomas P. Clark 5,719,110 17,672 720
Mark W. Harding 5,717,143 17,640 720
George M. Middlemas 5,736,783 0 720
Margaret Hansson 5,719,143 17,640 720
Richard L. Guido 5,736,763 20 720
2. Amendment to Certificate
of Incorporation to
Increase Authorized
Capital from 135 million
to 225 million. 5,723,096 13,120 872
3. Amendment to Certificate
of Incorporation
authorizing the board of
directors to effect a one-
for-ten or one-for-five
reverse stock split. 5,719,638 15,947 1,502
4. Amendment to Certificate
of Incorporation
authorizing the board of
directors to decrease the
authorized shares of
common stock upon or after
the reverse split. 5,718,175 16,595 2,317
5. Approval of the 2004
Incentive Plan. 5,716,238 18,617 2,232
6. Ratification of the
appointment of KPMG LLP as
independent auditors for
the 2004 fiscal year. 5,715,668 18,305 3,115
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
31(a). Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32. Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K
None
PURE CYCLE CORPORATION
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
Date:
July 14, 2004 /S/ Thomas P. Clark
Thomas P. Clark
Chief Executive Officer
Date:
July 14, 2004 /S/ Mark W. Harding
Mark W. Harding
President
Exhibit 31(a)
CERTIFICATIONS
I, Thomas P. Clark, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
PureCycle 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. The small business issuer's other certifying officer and
I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15(d)-15(e)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the small business issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the small business
issuer's disclosure controls and procedures and presented in this
report our conclusions 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
(c) Disclosed in this report any change in the small
business issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and
I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the small business issuer's
auditors and the audit committee of the small business issuer's
board of directors (or persons performing the equivalent
function):
(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
small business issuer'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
small business issuer's internal controls over financial
reporting.
Date July 14, 2004
/s/ Thomas P. Clark
A signed original of this written statement
required by Section 302 of the Sarbanes-Oxley Act of 2002 has
been provided to PureCycle Corporation and will be retained by
PureCycle Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 31(b)
CERTIFICATION
I, Mark Harding, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
PureCycle 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. The small business issuer's other certifying officer and
I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15(d)-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15f and 15d-15f
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the small business issuer's, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the small business
issuer's disclosure controls and procedures and presented in this
report our conclusions 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
(c) Disclosed in this report any change in the small
business issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and
I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the small business issuer's
auditors and the audit committee of the small business issuer's
board of directors (or persons performing the equivalent
function):
(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
small business issuer'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
small business issuer's internal controls over financial
reporting.
Date July 14, 2004
/s/ Mark Harding
A signed original of this written statement
required by Section 302 of the Sarbanes-Oxley Act of 2002 has
been provided to PureCycle Corporation and will be retained by
PureCycle Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PureCycle Corporation
(the "Company"), on Form 10-QSB for the period ending May 31,
2004 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Thomas P. Clark, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) 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/ Thomas P. Clark
Chief Executive Officer
July 14, 2004
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PureCycle Corporation
(the "Company"), on Form 10-QSB for the period ending May 31,
2004 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Mark Harding, President, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C.
1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of
2002, that:
(1) 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
Chief Financial Officer
July 14, 2004