SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1998
Commission File Number 0-8814
PURE CYCLE CORPORATION
(Name of small business issuer as specified in its charter)
Delaware 84-0705083
(State of incorporation) (I.R.S. Employer
Identification No.)
5650 York Street, Commerce City, CO 80022
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (303) 292-3456
Name of each
Title exchange on which
Securities registered under Section of class registered
12(b)of the Exchange Act: -------- -----------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock,
1/3 of $.01 par value
(Title of class)
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 [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]
Revenues for fiscal year ended August 31, 1998: $25,366
Aggregate market value of voting stock held by non-affiliates: $
9,804,970 (based upon the average bid and asked price on the OTC
Bulletin Board on November 13, 1998)
Number of shares of Common Stock outstanding, as of November 13,
1998: 78,439,763
Transitional Small Business Disclosure Format(Check One): Yes [ ]
No [x]
Documents incorporated by reference: None
Table of Contents
<PAGE>
Item Part I Page
1. Description of Business . . . . . . . . . . . 3
2. Description of Property . . . . . . . . . . . 6
3. Legal Proceedings. . . . . . . . . . . . . . . 6
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . 6
Part II
5. Market for the Common Equity and
Related Stockholder Matters . . . . . . . . . 7
6. Management's Discussion and Analysis . . . . 8
7. Financial Statements . . . . . . . . . . . . 12
8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . 25
Part III
9. Directors, Executive Officers, Promoters and
Control Persons; Section 16 (a) Beneficial
Ownership Reporting Compliance . . . . . . . 25
10. Executive Compensation . . . . . . . . . . . 26
11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 27
12. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . 29
13. Exhibits and Reports on Form 8-K . . . . . . .30
Signatures . . . . . . . . . . . . . . . . .32
"SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements that are not historical facts contained in this Annual
Report on Form 10-KSB are forward looking statements that involve
risk and uncertainties that could cause actual results to differ
from projected results. Factors that could cause actual results to
differ materially include, among others: the market price of water,
changes in applicable statutory and regulatory requirements,
changes in technology, uncertainties in the estimation of water
available under decrees and timing of development, the strength and
financial resources of the Company's competitors, the Company's
ability to find and retain skilled personnel, climatic conditions,
labor relations, availability and cost of material and equipment,
delays in anticipated permit and start-up dates, environmental
risks, the results of financing efforts, amd general economic
conditions.
<PAGE>
PART I
Item 1. Description of Business
General
Pure Cycle Corporation (the "Company") was incorporated in
Delaware in 1976. The Company is engaged in the water management
business providing water and wastewater services to customers
located in the Denver area. The Company operates water and
wastewater systems including designing, constructing, operating and
maintaining systems serving customers in the Denver metropolitan
area. The Company also owns patented water recycling technologies
which are capable of processing wastewater into pure potable
drinking water. There have been no significant changes in the way
the Company does business during the year. The Company's focus
continues to be to provide water and wastewater service to
customers within its service area and to expand its service to
other areas throughout the Denver metropolitan area and the
southwestern United States.
In 1996, the Company entered into a landmark water privatization
agreement with the State of Colorado and the Rangeview Metropolitan
District (the "District") for the development of over 26,000 acre
feet of water in the Denver metropolitan area. The water
privatization agreement enabled the Company to acquire ownership to
a total gross volume of 1,165,000 acre feet of groundwater (with an
annual usage right of 11,650 acre feet per year), and an option to
substitute 1,650 acre feet of surface water in exchange for a total
gross volume of 165,000 acre feet of groundwater, and the use of
surface reservoir storage capacity (collectively referred to as the
"Export Water Supply").
In addition to ownership of the Export Water Supply, the Company
entered into water and wastewater privatization agreements
("Service Agreements") with an eighty-five year term with the
District to design, construct, operate, and maintain the District's
water and wastewater systems to service customers within the
District's 24,000 acre service area which is located 2 miles from
the greater Denver metropolitan area in Arapahoe County ("Service
Area"). The District has reserved approximately 14,350 acre feet
per year of water and surface reservoir storage capacity
(collectively referred to as the "Service Area Water Supply") for
use within the District's Service Area.
The Company's water assets together with its Service Agreements
enable the Company to develop and market water and wastewater
service to cities, municipalities and special districts in need of
additional water supplies and to serve the water and wastewater
needs of customers within the District's Service Area. The Company
will seek to utilize its patented water recycling technologies to
process the wastewater into pure potable water for reuse
applications.
Description of Company Assets
Rangeview Water Supply
In 1988, the Company initiated efforts to acquire approximately
10,000 acre feet of non-tributary groundwater from the District.
Since that time, the Company acquired various options to purchase
water together with a portion of the water revenue notes and bonds
(the "District Bonds") issued by the District, options to purchase
the remaining District Bonds, and certain real property interests
within the boundaries of the District. Beginning in 1990 the
Company entered into a Water Commercialization Agreement (the
"WCA") where the Company sold rights to investors to participate in
the proceeds from the sale of the Export Water Supply in order to
finance the acquisition of the above described assets.
In April 1996, as part of a comprehensive settlement agreement
with the State of Colorado ("Settlement Agreement"), the Company
purchased all of the District's outstanding District Bonds from the
holders of the securities and entered into a water privatization
agreement between the District and the Company. As part of the
Settlement Agreement, the Company entered into the Service
Agreements and purchased a fee interest to the Export Water Supply,
which consists of a total gross volume of 1,165,000 acre feet
(approximately 11,650 acre feet per year) of non-tributary
groundwater, and the option to substitute 1,650 acre feet of
tributary surface water for a total gross volume of 165,000 acre
feet of non-tributary groundwater, and surface reservoir storage
rights from the District in exchange for all the outstanding
District Bonds. The Company continues to develop and market its
Export Water Supply to Denver area water providers that are in need
of additional water supplies.
<PAGE>
Comprehensive Amendment Agreement
In order to acquire all the remaining outstanding District Bonds
not already held by the Company to enable the Company to enter into
the Settlement Agreement and to acquire the Export Water Supply,
the Company negotiated agreements with all the remaining bond
holders and amended the WCA and its agreements with all prior
investors in the WCA. Pursuant to the Comprehensive Amendment
Agreement (the "CAA") entered into in conjunction with the
Settlement Agreement, such bond holders and investors have a right
to receive $31,807,232 from the proceeds of a sale or other
disposition of the Export Water Supply.
Service Agreements
The Company entered into an eighty five year water privatization
agreement with the District to design, construct, operate, and
maintain the District's water system to provide water service to
customers within the District's 24,000 acre Service Area. The
District has reserved approximately 14,350 acre feet of water per
year, together with surface reservoir storage capacity for the
Company's use in providing water service to customers within the
District's Service Area. In exchange for providing water service
to customers within the District's Service Area, the Company will
receive 95% of the District's water revenues remaining after
payment of royalties to the State of Colorado Land Board.
In January of 1997, the Company entered into an eighty five year
Wastewater Service Agreement with the District which provides for
the Company to design, finance, construct, operate and maintain the
District's wastewater system to provide wastewater service to
customers within the District's 24,000 acre Service Area. In
exchange for providing wastewater service to customers within the
District's Service Area, the Company will receive 100% of the
District's wastewater tap fees, and 90% of the District's
wastewater usage fees.
The Company will supply water and wastewater services to
customers within the 24,000 acres of property which constitute the
boundaries of the District's Service Area. The District's Service
Area is located in southeastern Arapahoe County, Colorado a
growing county bordering Denver, Colorado. Currently the majority
of the property is undeveloped land owned by the State of Colorado,
however portions of the property have been sold to private
interests. Development of the property is dependent on overall
growth in the Denver metropolitan area.
The development of the Rangeview Project is divided into two
segments: one segment is the development and distribution of the
Export Water Supply to Denver area water providers in need of
additional water supplies; and the second, is the development of
water and wastewater service to customers within the District's
24,000 acre Service Area. During fiscal year 1998, the Company's
revenues were generated by providing approximately 17 million
gallons of water to customers within the District's Service Area.
Paradise Water Supply
In 1987, the Company acquired certain water, water wells, and
related assets from Paradise Oil, Water and Land Development,
Inc., which constitute the "Paradise Water Supply". The Paradise
Water Supply includes 70,000 acre feet of tributary Colorado River
decreed water, a right-of-way permit from the United States
Department of the Interior, Bureau of Land Management for the
construction of a 70,000 acre foot dam and reservoir across federal
lands, and four water wells ranging in depth from 900 feet to 1,800
feet. The water wells produce approximately 7,500 - 9,400 gallons
per minute (which produce approximately 14,000 acre feet per well
per year) with an artesian pressure of approximately 100 pounds per
square inch.
Recycling Technology
The Company developed and patented water recycling technology
which converts single-family home wastewater/sewage into pure
potable drinking water. The Company manufactured, installed and
operated the single-family water recycling units in the late 1970's
and early 1980's until halting production of the units in 1982.
The Company has shifted its strategic market for its water
recycling technology from the its original single-family units to
large municipal wastewater treatment applications. The Company has
not operated a large wastewater treatment plant using its
technologies and their can be no assurance that the technology will
be technically or economically feasable on a large scale. The
Company, through its Wastewater Service Agreement, will seek to
apply its water recycling technology to treat municipal wastewater
into pure potable water for reuse.
<PAGE>
The Business
Beginning in fiscal 1987, and continuing through fiscal 1998, the
Company has acquired a portfolio of water assets (which are
described above in the Description of Company Assets) which it can
use to provide water service to customers located throughout the
Denver metropolitan area and it has acquired the exclusive right to
provide water and wastewater service to customers located within
its 24,000 acre services. The Company seeks to utilize its water
assets and wastewater treatment technologies to privatize other
government owned water and wastewater systems in Colorado and
throughout the western United States.
The Rangeview Metropolitan District is a quasi-municipal,
political subdivision of the State of Colorado and is empowered to
provide water and wastewater services to approximately 24,000 acres
of property located approximately 2 miles south and east of Denver
metropolitan area, most of which is owned by the State of Colorado
(the "Service Area").
The development of the District's Service Area is dependent on
growth in the Denver metropolitan area, and on the State of
Colorado selling portions of its property to parties interested in
the development of the land. The District has reserved
approximately 14,350 acre feet of water annually, together with
surface reservoir storage capacity, to provide water service to the
property. The District completed a study to analyze the future
development opportunities for the property and defined three
categories of land uses: residential, commercial / light
industrial, and open space. Approximately 10,000 acres is suitable
for residential development accommodating up to 70,000 single-
family homes; approximately 2,200 acres is suitable for commercial
and light industrial development along the primary access
corridors; and the remaining 12,800 acres is suitable for open
space (i.e. parks, playing fields, and golf courses).
Pursuant to the Company's water and wastewater Service
Agreements, the Company will develop, operate and maintain the
District's water and wastewater systems. In exchange for
developing, operating and maintaining the District's water system,
the Company receives 95% of the water tap fee and usage fee
revenues after payment of a twelve percent (12%) royalty to the
State Land Board. In exchange for developing, operating and
maintaining the District's wastewater system the Company receives
100% of the District's wastewater tap fees and 90% of the
District's wastewater usage fees. The District is empowered to set
rates and charges for water and wastewater services. Pursuant to
the Settlement Agreement, the District's water rates and charges
must be the average of similar rates and charges of the three
surrounding municipal water providers. Portions of the Company's
participation in the water and wastewater tap fees and user fees
are required to be used to finance the development of facilities
needed to furnish water and wastewater service.
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility ("Model Facility"). The
Model Facility will purchase the equivalent of 201 residential
water taps at $8,165 per tap (or $1,641,165), and the equivalent of
156 residential wastewater taps at $4,000 per tap (or $624,000,
collectively $2,265,165). Pursuant to its Service Agreements, the
Company will receive $1,372,014 from the water tap revenue, and
$624,000 from the sewer tap revenues for a combined total of
$1,996,014. The Company will design, construct, operate and
maintain the water and wastewater system to deliver water and sewer
service to the Model Facility. Construction on the facilities are
scheduled to begin in first quarter fiscal year 1999 with the
opening of the Model Facility in late 1999.
The 40 largest municipal water providers in the Denver
metropolitan area deliver approximately 98% of the water consumed
by residents and businesses in the Denver metropolitan area. The
Company actively marketed the Export Water Supply to each of the 40
largest providers during fiscal year 1998. The Export Water Supply
could be sold for a lump sum amount or pursuant to service contract
whereby the Company will deisgn, construct, operate and maintian
the water system to deliver the water to customers. The timing,
terms, and conditions of sales are dependent on the purchaser.
The Company is also pursuing the sale of the Paradise Water
Supply to water users in the Denver metropolitan area and to
cities, municipalities, and special districts in the downstream
states of Arizona, Nevada and California. However, there are
certain restrictions under the Colorado River Compact which relate
to a reallocation of water from one state to another, including a
requirement that a court decree authorizing the use of the water
out of state be obtained and compliance with other interstate
compacts or agreements, which would need to be resolved or complied
with before the Paradise Water Supply can be sold to users outside
of Colorado. If the Company is successful in selling its Paradise
Water Supply, the Company would anticipate developing the
facilities to deliver the water in a manner similar to the Export
Water Supply. Other potential development opportunities for the
Paradise Water Supply include, but are not limited to, the
utilization of the artesian pressure for hydroelectric power
generation, water leasing to agricultural interests, mineral
interests, and recreational interests.
<PAGE>
The Company's business of water management is subject to
competitive factors since alternative sources of water are
available. The Company is aware of other private water companies
who are attempting to market competing water to municipal water
providers in the Denver area. In addition, municipal water
providers seeking to acquire water evaluate independent water owned
by individuals, farmers, ranchers, and others. The principal
factors affecting competition in this regard include, but may not
be limited to, the availability of water for the particular
purpose, the cost of delivering the water to the desired location,
the availability of water during dry year periods, the quality of
the water source, and the reliability of the water supply. The
Company believes that its water provide the Company with an
advantage over its competition because the water the Company owns
has been designated for municipal use by decrees issued by Colorado
water courts, and because of the quantity of water available, the
quality of water, its location relative to the Denver metropolitan
area, (and Paradise's location to deliver water to either
downstream users or Denver area water users through exchanges or
other transfers), and price. The quantity of water the Company has
available for sale has been determined by court decrees of the
Colorado water courts. The Company has had the quality and
quantity of the Rangeview and Paradise Water Supply evaluated by
independent appraisers and water engineers. The Rangeview water
quality, without treatment, meets or exceeds all current federal
and state drinking water standards.
The business segment of water processing and municipal water
recycling are also subject to competition from municipal water
providers who also provide wastewater/sewage processing, and from
regional wastewater/sewage processors. The majority of
wastewater/sewage treatment is processed by approximately 10 major
wastewater/sewage treatment providers. The majority of Denver area
water providers participate in the Metropolitan Wastewater
Authority which process approximately 95% of the areas
wastewater/sewage. The Company is not aware of any private
companies providing wastewater/sewage treatment services in the
Denver metropolitan area. The Company believes that it could have
a competitive advantage because its wastewater treatment technology
uses no toxic chemicals and the water after processing exceeds
stringent water quality standards currently in effect.
Additionally, residual material created in the wastewater treatment
process can be composted into a high grade fertilizer for
agricultural use.
If the Company is successful in selling water, the construction
of wells, dams, pipelines and storage facilities may require
compliance with environmental regulations; however, the Company
believes that regulatory compliance would not materially impact
such a sale. It is anticipated that a purchaser of the Company's
water would undertake to construct the required facilities to
deliver the water to its users, however the Company would consider
providing such infrastructure as part of a water sale agreement. If
the Company were to ultimately agree to provide such facilities,
the Company could incur substantial capital expenditures to comply
with governmental regulations. However, the Company cannot assess
such costs until the purchaser of the water and the nature of the
water delivery system required has been determined. Similarly if
the Company were to obtain a contract for treatment of wastewater
and sewage, governmental regulations concerning drinking water
quality and wastewater discharge quality may be applicable.
However, until the Company has a contract proposal specifying the
quantity and type of wastewater to be treated and the proposed use
of such treated water, the cost of regulatory compliance cannot be
determined.
The Company holds several patents in the United States and abroad
related to its water recycling system and its components. The
value to the Company of these patents is dependent upon the
Company's ability to adapt its water recycling system to larger
scale applications, or to develop other uses for the technology.
The Company currently has three full time employees and one part
time employee.
Item 2. Description of Property
The Company currently leases office facilities at the address
shown on the cover page.
In 1996, the Company purchased a total gross volume of 1,165,000
acre feet (approximately 11,650 acre feet per year) of non-
tributary groundwater, together with an option to substitute 1,650
acre feet of tributary surface water in exchange for a total gross
volume of 165,000 acre feet of non-tributary groundwater, and
surface storage rights from the District. See "Item 1. Description
of Business - Description of Company's Assets - Rangeview Water
Supply."
The Company owns approximately 70,000 acre feet of conditional
water rights, water wells and related assets in the State of
Colorado by assignment and quit claim deed. See "Item 1.
Description of Business - Description of Company's Assets -
Paradise Water Supply."
<PAGE>
Item 3. Legal Proceedings
In March 1998, the Company joined a lawsuit initiated by others
including the Rangeview Metropolitan District and the State of
Colorado, Board of Land Commissioners ("State"), brought in the
District Court of Arapahoe County, Colorado, against US Home
Corporation seeking declaratory judgment affiriming US Home
Corporation's responsibilities under Lease S-37280 as amended and
the Agreement to Exchange Real Property requiring US Home
Corporation to obtain water service from the District and the State
for development activities on property governed under Lease S-
37280. Management does not believe the outcome of the lawsuit will
have a material adverse effect to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the
fourth quarter ended August 31, 1998.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Markets
The table below shows for the quarters indicated the high and low
bid prices of the Common stock on the OTC Bulletin Board. The
Company's Common stock is traded on the OTC Bulletin Board under
the trade symbol PCYL. As of November 13, 1998, there were 3,984
holders of record of the Company's Common stock.
Calendar Quarter Low High
---------------- ---- ----
1998 First $.15 $.22
Second $.11 $.19
Third $.12 $.187
Fourth $.11 $.15
1997 First $.22 $.375
Second $.20 $.50
Third $.15 $.37
Fourth $.18 $.26
Quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.
Dividends
The Company has never paid any dividends on its Common Stock and
does not anticipate paying any dividends in the foreseeable future.
Dividends cannot be paid on the Common Stock at any time when there
are unpaid accrued dividends owning on the Company's outstanding
Preferred Stock.
Recent Sales of Unregistered Securities
In August 1998, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the Company
issued 3,200,000 shares of Series C Preferred Stock to Mr. Thomas
Clark in exchange for 3,200,000 shares of common stock owned by Mr.
Clark. The Company sold 3,200,000 shares of the Company's Common
Stock at $.125 per share to four accredited investors who have
previously invested in the Company. Proceeds to the Company were
$400,000. The shares were issued under Section 4 (2) of the
Securities Act of 1933.
In December of 1997, the Company agreed to adjust the exercise
price of its outstanding options and warrants to purchase
approximately 48,672,000 shares held by certain directors,
officers, and investors of the Company from $.25 per share to $.18
per share. The options and warrant repricing was based on the
market closing price on December 2, 1997 of $.18 per share. The
Company has recognized a non-cash compensation expense of
approximately $51,000 which reflects the change in value of the
options and warrants based on the price of the Company's
outstanding shares at the date of repricing. The options and
warrants expire during 2002.
<PAGE>
Item 6. Management's Discussion and Analysis
General
Pure Cycle is engaged in the privatization of municipal water and
wastewater systems in Colorado and other areas. The Company seeks
to use its water and water technologies to enhance the availability
and quality of domestic drinking water. The Company purchased
approximately 11,650 acre feet of water and entered into two eighty
five year water and wastewater Service Agreements with the
Rangeview Metropolitan District which will enable the Company to
provide water and wastewater service to over 36 square miles of
property located in the Denver area. The Company continues to
develop its water recycling technologies and, will seek to
integrate these technologies for processing wastewater into pure
potable water for reuse into its wastewater service commitment to
the District's Service Area.
The Company is aggressively pursuing the marketing and sale of
its water to municipal water providers in the Denver metropolitan
region as well as users in Arizona, Nevada and California to
generate current and long term revenue sources. During fiscal year
1998, the Company delivered approximately 17 million gallons of
water to customers within the District's Service Area. The Company
continues to meet with developers and other parties interested in
developing portions of the District's Service Area. The District's
Service Area is primarily undeveloped land owned by the State of
Colroado situated in the growing Arapahoe County. A small portion
of the property have been sold to private interests who may develop
the property. The timing of the development of water and
wastewater facilities will depend upon when the property is
developed.
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility ("Model Facility"). The
Model Facility will purchase 201 equivalent residential water taps
at $8,165 per tap (or $1,641,165), and 156 equivalent residential
wastewater taps at $4,000 per tap (or $624,000, collectively
$2,265,165). Pursuant to its Service Agreements, the Company will
receive $1,372,014 from the water tap fees, and $624,000 from the
sewer tap fees for a combined total of $1,996,014. The Company
will design, construct, operate and maintain the water and
wastewater system to deliver water and sewer service to the Model
Facility. Projected costs for construction of the water system are
approximately $1,100,000, and projected cost for construction of
the wastewater system are $625,000 or combined costs of $1,725,000.
The costs are expected to be paid from prepaid water and wastewater
tap fees.
In addition to the Company's Service Area activities, the Company
continues to meet with Denver area water providers to develop and
sell the Company's Export Water Supply. Denver area water providers
continue to experience strong regional growth rates which continue
to pressure their developed water supplies. The Company is
marketing its Export Water Supply to water providers in need of
supplemental water supplies. Additionally, during fiscal 1998, the
Company has presented water supply proposals to private and
municipal water providers in Nevada, Arizona and California for the
sale of the Company's 70,000 acre feet of Paradise Water Supply,
understanding that certain legal issues relating to interstate
water transfers may exist. The Company continues to discuss water
supply arrangements with private companies and municipal water
providers to whom it has made proposals. The Company continues to
identify and market its water to other private companies and
municipal water providers.
At this time the Company is not able to determine the timing of
water sales or the timing of development of the property within the
District's Service Area. There can be no assurance that these
sales can be made on terms acceptable to the Company or that
development will occur. In the event water sales are not
forthcoming or development of the property within the District's
Service Area is delayed, the Company may sell additional portions
of the Company's profits interest pursuant to the CAA, incur
additional short or long-term debt obligations or seek to sell
additional shares of common stock, preferred stock or stock
purchase warrants as deemed necessary by the Company to generate
operating capital. The Company's ability to ultimately realize its
investment in its two primary water projects is dependent on its
ability to successfully market the water, or in the event it is
unsuccessful, to sell the underlying water. Under the provisions
of the CAA, the other investors in the Rangeview project are to
receive the first approximately $31,807,000 from the sale or other
disposition of the Export Water Supply. The Company has agreed to
pay the next $4,000,000 in proceeds to LCH, Inc., a company
affiliated with the Company's president. The next $432,513 in
proceeds are payable to the holders of the Company's Series B
Preferred Stock. The Company retains 100% of the proceeds in
excess of $35,807,232 from the sale or other disposition of the
Export Water Supply.
<PAGE>
Results of Operations
During fiscal year 1998, the Company's water service revenues
decreased approximately $1,550 or 6% to $25,366 as compared to
$26,915 for fiscal 1997, due primarily to above average rainfall in
the spring of 1998. The Company incurred approximately $4,800 in
operating costs associated with the water service revenues. Prior
to fiscal 1997, the Company did not report any revenues. The
Company continues to operate at a loss with its operating capital
requirements funded primarily through debt and equity financings
and the sale of rights to participate in the proceeds from the sale
of the Company's Export Water Supply.
The Company's general and administrative expenses for fiscal 1998
increased approximately $44,000 or 15% to $335,000 as compared to
$295,000 for fiscal 1997, due primarily to a increase in payroll
expenditures. The Company's general and administrative expenses
for fiscal 1997 decreased approximately $47,000 or 14% to $295,000
as compared to $338,000 for fiscal 1996, due primarily to a
decrease in payroll expenditures.
The Company's net loss for fiscal 1998 increased approximately
$172,000 or 49% as compared to $353,000 for fiscal 1997. The
increase in net loss for fiscal 1998 was due primarily to one-time
tap fee revenues received during 1997 and the recognition of an
extraordinary gain from the extinguishment of debt of approximately
$21,000 in 1997. The Company's net loss for fiscal 1997 decreased
approximately $103,000 or 22% as compared to $456,000 for fiscal
1996. The decrease in net loss for fiscal 1997 was due primarily
to the revenues generated during 1997 and the gain on
extinguishment of debt in 1997.
Liquidity and Capital Resources
Prior to fiscal 1992, the Company funded operations primarily
through long term debt financing from certain related parties
including the Company's President and major stockholder. Since
fiscal 1992, the Company has funded operations with debt and equity
financing and by marketing the right to share in proceeds from the
sale of its Export Water Supply to private individuals, companies
and institutions with an interest in the water supply market.
The Company's working capital at August 31, 1998 was $386,000.
The Company expects to incur additional costs in fiscal 1999 to
expand water service to customers within the District's Service
Area. Based on budgets prepared by management, the Company
believes that its working capital at August 31, 1998 is adequate to
fund its activities through at least fiscal 1999.
Development of any of the water 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 is anticipated to be financed by the municipality
purchasing such water or through the sale of water taps and water
delivery charges. A water tap charge refers to a charge imposed by
a municipality to permit a water user access to 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.
Operating Activities
During fiscal 1998, the Company used cash of approximately
$256,000 in its operations compared to approximately $173,000 in
fiscal 1997. One-time tap fee revenue received in fiscal 1997 and
an increase in general and administrative expenses accounted for
the increase in cash used for operations in fiscal 1998. Based on
budgeted operating costs, it is anticipated that a similar level of
cash will be used in the Company's general and administration
operations during fiscal 1999.
Construction Activities
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility. The Company will design,
construct, operate and maintain the water and wastewater system to
provide service to the Model Facility. Projected costs for
construction of the water system are approximately $1,100,000, and
projected cost for construction of the wastewater system are
$625,000 or combined costs of $1,725,000 to be paid from prepaid
water and wastewater tap fee revenues.
<PAGE>
Investing Activities
Cash used in investing activities for fiscal 1998 was
approximately $92,000. Costs of approximately $78,000 were
incurred relating to the Rangeview and Paradise Water Supply
projects and costs of approximately $14,000 were incurred relating
to the development of a water system serving customers within the
District's Service Area. Cash used in investing activities for
fiscal 1997 was approximately $233,000. Costs of approximately
$133,000 were incurred relating to the Rangeview and Paradise Water
Supply projects and costs of approximately $100,000 were incurred
relating to the development of a water system serving customers
within the District's Service Area.
Financing Activities
In August of 1998, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the Company
issued 3,200,000 shares of Series C Preferred Stock to Thomas P.
Clark in exchange for 3,200,000 shares of common stock owned by Mr.
Clark. The Company sold 3,200,000 shares of common stock to four
acredited investors who have previously invested with the Company
for $.125 per share. Proceeds to the Company were $400,000. In
August 1996, the Company entered into a loan agreement with six
related party investors to borrow $300,000. The proceeds from the
loan agreement were received in fiscal 1997. The Company also
entered into a loan agreement in August of 1997 and received
$350,000 from five related party investors. A portion of the
proceeds under the agreements were attributed to the value of the
warrants issued in connection with the loans.
Year 2000
The Company has completed its assessment of year 2000 issues on
its computer systems and applications and developed a remediation
plan. Conversion activities are in process and the Company expects
conversion and testing to be completed by the end of the fiscal
year ended August 31, 1999. The Company expects completion of the
project to cost less than $16,000. The Company believes its non-
information technology systems either will not have year 2000
issues or are not material to the Company's operations. While the
company does not believe it has any material year 2000 problem, the
failure to correct a material problem or the impact of a year 2000
problem on customers and third-party suppliers could result in an
interruption in, or failure of normal business activities or
operations. Such failures could could materially and adversely
affect the Company's results of operations, liquidity and financial
condition.
Readers are cautioned that forward-looking statements constained
in this Year 2000 update should be read in conjunction with the
Company's disclosure under the heading: "SAFE HARBOR STATEMENT
UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995" on page 2.
New Accounting Standards
In June of 1997, the FASB issued Statements of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), and No 131, Disclosure About Segment of an Enterprise and
Related Information ("SFAS 131"), effective for years beginning
after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. The Company
has not yet adopted SFAS 130. The Company will comply with the
reporting and display requirements of this statement when required.
SFAS 131 establishes standards for reporting information about
operating segments and the methods by which such segments were
determined. The Company has not yet adopted SFAS 131. As the
Company currently operates within one industry segment, the
reporting of such information is not expected to be significant.
<PAGE>
Item 7. Financial Statements
Page
Independent Auditors' Reports 12
Consolidated Balance Sheets 13
Consolidated Statements of Operations 14
Consolidated Statements of Stockholders' Equity 15
Consolidated Statements of Cash Flows 16
Notes to Consolidated Financial Statements 17-23
<PAGE>
Independent Auditors' Report
The Board of Directors
Pure Cycle Corporation:
We have audited the accompanying consolidated balance sheets of Pure
Cycle Corporation and Subsidary ("the Company") as of August 31, 1998
and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pure
Cycle Corporation and subsidiary as of August 31, 1998 and 1997 and the
results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
November 6 , 1998
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
August 31
--------------------------
ASSETS 1998 1997
--------- ----------
Current assets:
Cash and cash equivalents $ 423,027 $ 370,426
Marketable securities 3,429 3,429
Prepaid expenses and other current assets 7,830 7,830
------- -------
Total current assets 434,286 381,685
Investment in water and systems:
Rangeview water supply (Note 2) 12,995,881 12,920,490
Paradise water supply 5,470,606 5,468,041
Rangeview water system (Note 3) 114,088 100,212
---------- ----------
Total investment in water and systems 18,580,575 18,488,743
Note receivable, including accrued
interest (Note 4) 298,269 274,765
Equipment, at cost, net of accumulated
depreciation of $16,095 in 1998 and
$14,149 in 1997 1,143 3,089
Other assets 22,596 22,596
---------- ----------
$ 19,336,869 $ 19,170,878
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,049 $ 6,856
Accrued liabilities 45,809 45,809
--------- ---------
Total current liabilities 49,858 52,665
Long-term debt - related parties,
including accrued interest (Note 5) 3,786,981 3,550,925
Other non-current liabilities (Note 6) 120,983 113,843
Participating interests in Rangeview
water supply (Note 2) 11,090,630 11,090,630
Stockholders' equity (Note 7):
Preferred stock, par value $.001 per
share; authorized - 25,000,000 shares:
Series A - 1,600,000 shares issued
and outstanding 1,600 1,600
Series B - 432,514 shares issued
and outstanding 433 433
Series C - 3,200,000 shares issued
and outstanding 3,200 --
Common stock, par value 1/3 of $.01 per
share; 135,000,000 shares authorized;
78,439,763 shares issued and outstanding 261,584 261,584
Additional paid-in capital 24,126,744 23,678,561
Accumulated deficit (20,105,144) (19,579,363)
---------- ----------
Total stockholders' equity 4,288,417 4,362,815
---------- ----------
$ 19,336,869 $ 19,170,878
========== ==========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 31
-----------------------
1998 1997
-------- --------
Water service revenue:
Tap fees $ -- $ 69,610
Water usage fees 25,366 26,915
------- -------
25,366 96,525
Water service operating expense ( 4,800) ( 4,000)
General and administrative
expense (335,297) (291,133)
Other income (expense):
Interest income 32,146 27,288
Interest expense:
Related parties (236,056) (195,614)
Other ( 7,140) ( 7,140)
------- -------
Loss before
extraordinary item (525,781) (374,074)
Extraordinary gain on
extinguishment of debt (Note 6) -- 20,765
------- -------
Net loss $(525,781) $(353,309)
======= =======
Basic and diluted
loss per common share:
Loss before extraordinary
item $ * $ *
Extraordinary item -- *
------- -------
Net loss per common share $ * $ *
======= =======
Weighted average common
shares outstanding 78,439,763 78,439,763
* Less than $.01 per share
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended August 31, 1998 and 1997
<TABLE>
<CAPTION> Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------------ --------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 2,032,513 $2,033 78,439,763 $261,584 $23,633,561 $(19,226,054)
Warrants issued (Note 5 and 7) -- -- -- -- 45,000 --
Net loss -- -- -- -- -- ( 353,309)
--------- ----- ---------- ------- ---------- ----------
Balance at August 31, 1997 2,032,513 2,033 78,439,763 261,584 23,678,561 (19,579,363)
Preferred Stock issued in
exchange (Note 7) 3,200,000 3,200 (3,200,000) (3,200) -- --
Common Stock issued (Note 7) -- -- 3,200,000 3,200 396,800 --
Warrants issued (Note 5 and 7) -- -- -- -- 51,383 --
Net loss -- -- -- -- -- (525,781)
--------- ----- ---------- ------- ---------- ----------
Balance at August 31, 1998 5,232,513 $5,233 78,439,763 $261,584 $24,126,744 $(20,105,144)
========= ===== ========== ======= ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August, 31
----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss $(525,781) $( 353,309)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 1,946 2,066
Amortization of deferred
financing costs -- 18,000
Noncash compensation expense for the
repricing of options and warrants 51,383 --
Extraordinary gain on
extinguishment of debt -- ( 20,765)
Increase in accrued interest
on note receivable ( 23,504) ( 23,483)
Increase in accrued interest
on long term debt and other
non-current liabilities 243,196 202,754
Changes in operating assets
and liabilities:
Prepaid expenses and
other current assets -- 3,034
Accounts payable and
other accrued liabilities ( 2,807) ( 1,131)
------- -------
Net cash used in
operating activities (255,567) (172,834)
Cash flows from investing activities:
Investments in water supply ( 77,956) (133,284)
Investment in Rangeview water system ( 13,876) (100,212)
------- -------
Net cash provided by
(used in) investing activities ( 91,832) (233,496)
Cash flows from financing activities:
Proceeds from issuance
of debt and warrants -- 650,000
Proceeds from sale of common stock 400,000 --
------- -------
Net cash provided by
(used in) financing activities 400,000 650,000
------- -------
Net increase (decrease)
in cash and cash equivalents 52,601 243,670
Cash and cash equivalents
beginning of year 370,426 126,756
------- -------
Cash and cash equivalents
end of year $423,027 $370,426
======= =======
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998 and 1997
NOTE 1 - ORGANIZATION AND BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Business
Pure Cycle Corporation is engaged in the water management
business providing water and wastewater services to customers
located in the Denver area. The Company operates water and
wastewater systems and its operations include designing,
constructing, operating and maintaining systems serving customers
in the Denver metropolitan area and other areas. The Company also
owns patented water recycling technologies which are capable of
processing wastewater into pure potable drinking water. There have
been no significant changes in the way the Company does business
during the current year. The Company's focus continues to be to
provide water and wastewater service to customers within its
service area and expects to expand its service to other area
throughtout the Denver metropolitan area and the southwest.
Subsequent to fiscal year ended August 31, 1998, the Company
entered into an agreement to provide water and wastewater service
to a 400 acre development which will include the construction of a
500-bed Academic Model Juvenile Facility ("Model Facility"). The
Model Facility will purchase 201 equivalent residential water taps
at $8,165 per tap (or $1,641,165), and 156 equivalent residential
wastewater taps at $4,000 per tap (or $624,000, collectively
$2,265,165). Pursuant to its Service Agreements, the Company will
receive $1,372,014 from the water tap revenue, and $624,000 from
the sewer tap revenues for a combined total of $1,996,014. The
Company will design, construct, operate and maintian the water and
wastewater system to deliver water and sewer service to the Model
Facility. Construction on the facilities are scheduled to begin in
first quarter fiscal year 1999 with the opening of the Model
Facility in late 1999.
Although the Company believes it will be successful in marketing
the water from one or both of its water projects, there can be no
assurance that sales can be made on terms acceptable to the
Company. The Company's ability to ultimately realize its
investment in its two primary water projects is dependent on its
ability to successfully market the water, or in the event it is
unsuccessful, to sell the underlying water assets.
During its development stage, the Company funded the acquisition
of certain water and its operating activities primarily through
equity and other financing agreements with investors with an
interest in the water management business. These investors are
entitled to participate in the future revenues derived from the
sale of the Company's water. The Company believes that at August
31, 1998 the Company has sufficient working capital and available
credit to fund its operations for the next year or longer. 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.
Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements included the accounts of
the Company and its wholly-owned subsidiary, Rangeview Development
Corporation prior to its dissolution in August 1997. All inter-
company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash equivalents
For purposes of the statement of cash flows, cash and cash
equivalents include all highly liquid debt instruments with an
original maturity of three months or less.
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
Marketable Securities
The Company classifies its investment in marketable securities as
available-for-sale securities. Unrealized holding gains and losses
are recorded as a separate component of stockholders' equity.
Realized gains and losses are recorded in the statement of
operations.
Investments in Water Projects
The Paradise Water Supply represents Colorado River water, water
wells, and a federal right-of-way permit for a dam site located
near Debeque, Colorado. The Paradise Water Asset is recorded at
cost.
The Company's investment in the Rangeview Water Supply is
recorded at cost at August 31, 1998. Pursuant to the terms of the
Comprehensive Amendment Agreement ("CAA") entered into in 1996,
certain investors in the Rangeview project have the right to
receive the first approximately $31,807,000 from the proceeds of a
sale or other disposition of the Rangeview Water Supply. The
consideration received from those investors for this right to
participate in the proceeds has been reflected in the accompanying
consolidated balance sheet as a participating interest in the
Rangeview Water Supply.
In fiscal 1996 the Company adopted the provisions of Statement of
Financial Accounting Standard No. 121 ("SFAS 121"), "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets To Be
Disposed Of". SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company periodically assesses the feasibility,
marketability and anticipated future cash flows from the sale of it
Water Supply. Based on this assessment, the Company believes that
there is no impairment in the carrying value of the its investment
in water at August 31, 1998 and 1997 and therefore the adoption of
SFAS 121 has had no effect on the Company's financial statements.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), effective for fiscal years
beginning after December 15, 1995. This statement defines a fair
value method of accounting for employee stock options and
encourages entities to adopt that value method of accounting for
its stock compensation plans. SFAS 123 allows an entity to
continue to measure compensation costs for these plans using the
intrinsic value method of accounting as prescribed in Accounting
Pronouncement Bulletin Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25). The Company has elected to continue to
account for its employee stock compensation plans as prescribed
under APB 25. The pro forma disclosure of net loss and loss per
share required by SFAS 123 are included in Note 7.
Income taxes
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109") requires the use of the asset and
liability method of accounting for income taxes. Under the asset
and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
<PAGE>
Loss per common share
Loss per common share is computed by dividing net loss by the
weighted average number of shares outstanding during each period.
Convertible preferred stock and common stock options and warrants
have been excluded from the calculation of loss per share as their
effect is anti-dilutive.
Reclassifications
Certain amounts have been reclassified for comparability with the
1998 presentation.
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - RANGEVIEW WATER SUPPLY
In April of 1996, the Company entered into a water privatization
agreement with the State of Colorado and the Rangeview Metropolitan
District which enabled the Company to acquire ownership to a total
gross volume of 1,165,000 acre feet of groundwater (approximately
11,650 acre feet per year), and an option to substitute 1,650 acre
feet of surface water in exchange for a total gross volume of
165,000 acre feet of groundwater, and the use of surface reservoir
storage capacity (collectively referred to as the "Export Water
Supply").
In addition to the Export Water Supply, the Company entered into
a water and wastewater service agreement ("Service Agreements")
with the District which grants the Company an eighty-five year
exclusive right to design, construct, operate and maintain the
District's water and wastewater systems. In exchange for
designing, constructing, operating and maintaining the District's
water and wastewater system, the Company will receive 95% of the
District's water revenues remaining after payment of royalties
(totaling 12% of gross revenues) to the State Land Board, and 100%
of the District's wastewater system development charges and 90% of
the District's wastewater usage charges.
From November 1990 through August 1995, the Company made payments
to the District totaling $1,075,000 for various purchase options.
In addition, the Company purchased a right of first refusal to 40
acres of real property for $201,000. The Company also made
payments to certain District bond holders totaling approximately
$3,700,000, purchasing approximately $9,730,000 of District Bonds.
All of the amounts paid were capitalized as the cost of the
Company's investment in the Rangeview Water Supply. From November
1990 through August 1995, the Company sold rights to investors to
participate in the Company's share of the proceeds from the
Rangeview WCA ("Profit's Interests") in order to finance the
Company's investment in the Rangeview Water Supply. In, connection
with these transactions the Company transferred approximately
$5,778,000 of District Bonds to certain of the investors.
In addition to the payments described above, the Company
capitalized certain legal and other costs relating to the
acquisition of the Rangeview Water Supply totaling $91,832 in 1998,
$133,284 in 1997, and $1,046,576 in years prior.
In connection with the water privatization agreement, the Company
negotiated agreements with the District's bond holders, not
previously investors with the Company, to acquire all of the
remaining District Bonds totaling $15,184,000 by granting the bond
holders a senior, secured interest in the proceeds from the sale of
the Export Water Supply (referred to as a "Participating Interest")
aggregating $9,110,000, as provided for in the CAA.
Additionally, the Company negotiated agreements with all of the
investors in the Rangeview WCA to acquire their WCA Profits
Interests as well as all of the Bonds held by certain of those
investors totaling $5,778,000 in exchange for Participating
Interests in the CAA. The Bonds acquired from holders not
previously investors with the Company, totaling $15,184,000,
together with Bonds held by investors in the Rangeview WCA totaling
$5,778,000, together with bonds held by the Company totaling
$3,952,000 represented all of the District's outstanding Bonds
(totaling $24,914,000). The Company conveyed all of the
outstanding District Bonds to the District in exchange for title to
the Export Water Supply and the Service Agreements.
The estimated fair value of the $15,184,000 of Bonds purchased
($6,770,000) has been recorded as an increase in the cost of the
Rangeview Water Supply and an increase in the Participating
Interests in the Rangeview Water Supply.
The Participating Interests in the CAA, in the aggregate, have
the right to receive the first approximately $31,800,000 from the
proceeds of a sale or other disposition of the Export Water Supply.
After the distributions pursuant to the CAA, the Company has agreed
to pay the next $4,000,000 in proceeds to LCH Inc., a company
affiliated with the Company's president. The next $432,513 in
proceeds is payable to the holders of the Company's Series B
Preferred Stock. The Company retains 100% of the proceeds in
excess of $36,240,000 from the sale or other disposition of the
Export Water Supply.
<PAGE>
NOTE 3 - RANGEVIEW WATER SYSTEM
In conjunction with the privatization agreement, the Company also
entered into an 85 year Service Agreement with the District to
design, finance, construct, operate, and maintain the District's
water system to provide water service to customers within the
District's 24,000 acre Service Area. The District has reserved
approximately 14,350acre feet of water per year, together with
surface reservoir storage capacity, for the Company's use in
providing water service to customers within the District's Service
Area. In exchange for providing water service to customers within
the District's Service Area, the Company receives 95% of the
District's water revenues remaining after payment
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RANGEVIEW WATER SYSTEM (continued)
of royalties to the State Land Board. During fiscal year 1998, the
Company incurred costs of $4,800 to operate and maintain the water
system to deliver water to customers within the District's Service
Area. During fiscal year 1998, the Company delivered approximately
17 million gallons of water to customers in its Service Area.
Currently there are no wastewater customers within the District's
Service Area.
NOTE 4 - NOTE RECEIVABLE
In 1995, the Company extended a line of credit to the District.
The loan provides for borrowings of up to $250,000, is unsecured,
bears interest based on the prevailing prime rate plus 2% and,
matures on December 31, 1998. The balance of the note receivable
at August 31, 1998 was $298,765, including accrued interest.
Because of the revenue sources available to it, and its operating
expense history, the Company believes the District will be able to
repay the note within a period of one to two years after its due
date. Accordingly, the note has been classified as non-current.
NOTE 5 - LONG-TERM DEBT
Long-term debt, including accrued interest at August 31, 1998 and
1997 is comprised of the following:
1998 1997
--------- ---------
Notes payable, including accrued interest to
six parties, due August 2002 interest at prime
rate plus 2%, unsecured $ 354,308 $ 330,750
Notes payable, including accrued interest to
five parties, due July and August 2002
interest at 10 1/4%, unsecured net of
unamortized discount of $36,000 361,500 309,434
Note payable, to related party, due
October 2000, non-interest bearing, unsecured 26,542 26,542
Notes payable, including accrued interest, to
President and majority stockholder due October
2000, interest at 8.36% to 9.01%, unsecured 402,141 380,781
Notes payable, including accrued interest, to
related party, due October, 2000, interest at
the prime rate plus 3%, secured by shares of
the Company's common stock owned by the
President and majority stockholder 1,971,545 1,864,670
Notes payable, including accrued interest, to
a related party corporation, due October 2000,
interest ranging from 7.18% to 8.04%, unsecured 670,945 638,749
--------- ---------
Total long-term debt $3,786,981 $3,550,925
========= =========
Aggregate maturities of long-term debt are as follows:
Year Ending August 31, Amount
---------------------- ------
2000 $ 3,071,173
2002 715,808
---------
Total $ 3,786,981
In August 1997, the Company entered into a loan agreement with
five related party investors. The loan is for $350,000, is
unsecured, bears interest at the rate of 10 1/4% and is due August
30, 2002. In connection with the loan agreement, the Company
issued warrants to purchase 2,100,000 shares of the Company's
common stock at $.25 per share (see Note 7). A portion of the
proceeds received under the agreement ($45,000) has been attributed
to the estimated fair value of the warrants issued. The resulting
discount is being amortized over the term of the loan.
As of August 31, 1998, the President and majority stockholder of
the Company has pledged a total of 20,000,000 shares of common
stock from his personal holdings as collateral on certain of the
above notes payable.
<PAGE>
NOTE 6 - OTHER NON-CURRENT LIABILITIES
As a result of the expiration of the Colorado statute of
limitations, certain accounts payable to creditors incurred prior
to the Company's suspension of operations in 1985 totaling $20,765
are considered extinguished and have been reflected as an
extraordinary item in the accompanying consolidated statements of
operations in fiscal year 1997. At August 31, 1998, the Company
owes approximately $121,000 to creditors incurred prior to the
Company's suspension of operations in 1985 which amounts are
reflected as other non-current liabilities in the accompanying
balance sheet.
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred and Common Stock
In August 1998, the Company entered into a Plan of
Recapitalization and a Stock Purchase Agreement whereby the Company
issued 3,200,000 shares of Series C Convertible Preferred Stock to
the Company's President, Mr. Thomas Clark, in exchange for
3,200,000 shares of common stock owned by Mr. Clark. The Series C
Convertible Preferred Stock converts into an equivalent number of
shares of Common stock at the election of Mr. Clark provided the
Company has authorized and unissued shares of Common Stock
available. The Company sold 3,200,000 shares of the Company's
Common Stock at $.125 per share to four accredited investors who
have previously invested in the Company. Proceeds to the Company
were $400,000.
On May 25, 1994, the Company sold 1,600,000 shares of Series A
Convertible Preferred Stock, $.001 par value, for $1.00 per share
for total proceeds of $1,600,000. The holders of the Series A
Convertible Preferred Stock are entitled to be paid a dividend
amount equal to $2.00 per share represented by a Participating
Interest in the CAA. The Series A Preferred Stock is convertible
into 4 shares of Common Stock at the election of the Company or the
holders of the Preferred Stock.
During years prior to 1994, the Company was charged for the
reimbursement of costs, administrative services and rent expense by
a company related through common ownership. On August 31, 1994,
the Company issued 432,513 shares of Series B Preferred Stock,
$.001 par value, to a related party corporation, in satisfaction of
the payable for these charges of $432,513. The holder of the Series
B Preferred Stock is entitled to be paid a dividend amount equal to
$1.00 per share to be paid from the proceeds from a disposition of
the Rangeview Water Supply after the Participating Interests in the
CAA and the dividend obligation on the Series A Convertible
Preferred Stock have been satisfied.
Stock Options
On June 15, 1992, the Company adopted an Equity Incentive Plan.
In addition, on such date, the Company granted Mr. Fletcher Byrom
and Ms. Margaret Hansson options to purchase 7,000,000 and
8,000,000 shares of common stock, respectively, at an exercise
price of $.20 per share, through June 15, 1997. These options were
issued in exchange for options previously issued to Mr. Byrom and
Ms. Hansson in June of 1989. Also on June 15, 1992, the Company
granted Mr. Mark Harding and Mr. George Middlemas an option to
purchase 4,000,000 and 1,000,000 shares of common stock,
respectively, under such Plan at an exercise price of $.25 per
share. On March 12, 1996 the Company extended the terms of all
such options until 2002. Also, on March 12, 1996, the Company
granted Mr. Mark Harding options to purchase 3,000,000 shares of
common stock at an exercise price of $.25 per share, 2,000,000 of
which were immediately exercisable, with the remaining 1,000,000
vesting in annual increments of 250,000 shares beginning March 12,
1997.
In December of 1997, the Company agreed to adjust the exercise
price of its outstanding options and warrants to purchase
approximately 47,403,000 shares held by certain directors,
officers, and investors of the Company from $.25 per share to $.18
per share. The options and warrant repricing was based on the
market closing price on December 2, 1997 of $.18 per share. The
Company has recognized a non-cash compensation expense of
approximately $51,000 which reflects the change in value of the
options and warrants based on the price of the Company's
outstanding shares at the date of repricing. The options and
warrants expire during 2002.
<PAGE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has
been recognized for stock options granted to key employees and
Equity Incentive Plan. Had compensation costs for the Company's
two stock-based compensation plans been determined based on the
fair market value at the grant dates for awards under those plans
consistent with the method prescribed in FASB Statement 123, the
Company's net loss and loss per share would have been increased to
the pro forma amounts indicated below for the years ended August
31, 1998 and 1997:
Net loss: 1998 1997
---- ----
As Reported $(525,781) (353,309)
Pro forma (529,354) (356,882)
Loss per share:
As Reported * *
Pro forma * *
* Less than $.01 per share
<PAGE>
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCKHOLDERS' EQUITY -(continued)
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in fiscal
year 1996: no dividend yield; no expected volatility; and the
weighted average risk-free interest rate of 6.75% for the options.
A summary of the status of the Company's Equity Incentive Plan as
of August 31, 1998 and 1997, and changes during the years then
ended is presented below:
1998 1997
-------------------------- --------------------------
Weighted average Weighted average
Fixed options Shares exercise price Shares exercise price
- ------------------ ------ ---------------- ------ ----------------
Outstanding at
beginning of year 23,000,000 $.18 23,000,000 $.22
Granted -- -- -- --
Exercised -- -- -- --
---------- ----------
Outstanding at end
of year 23,000,000 $.18 23,000,000 $.22
========== ==========
Options exercisable
at year end 22,500,000 22,250,000
Weighted average
of fair value
of options granted
during the year -- --
The following table summarizes information about Equity Incentive
Plan options outstanding at August 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------------
Weighted average
remaining Weighted Weighted
Range of Exc. Number contractual average Number average
Price outstanding life exercise price exercisable exercise price
- ------------ ----------- ------ -------------- ----------- --------------
.18 23,000,000 3.75 .18 22,500,000 .18
.18 23,000,000 3.75 .18 22,500,000 .18
During the years ended August 31, 1998 and 1997, no options were
exercised.
Warrants
On December 2, 1997, the Company adopted a resolution to reprice
all the Company's outstanding warrants to $.18 per share.
In connection the 1997 loan agreement described in note 5, the
Company issued warrants to purchase 2,100,000 shares of the
Company's common stock at $.25 per share. The warrants expire
August 30, 2002. The estimated fair value of the warrants issued
of $45,000 has been credited to additional paid in capital.
The Company has also issued warrants, which remain outstanding,
between 1990 and 1997 to purchase 24,403,000 shares of the
Company's stock at $.25 per share (subsequently repriced to $.18
per share) in connection with the sale of profits interests in the
Rangeview WCA, which were subsequently converted into participating
interests in the CAA. The warrants expire 6 months after the
payment of the participating interests in the CAA.
During the years ended August 31, 1998 and 1997, no warrants were
exercised.
<PAGE>
NOTE 8 - INCOME TAXES
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
August 31, 1998 and 1997 are presented below.
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 2,635,000 $ 3,397,000
Less valuation allowance (2,635,000) (3,397,000)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
PURE CYCLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (continued)
The valuation allowance for deferred tax assets as of August 31,
1998 was $2,635,000. The net change in the valuation allowance for
the year ended August 31, 1998 was a net decrease of $762,000,
representing a decrease of $880,000 attributable to the expiration
of net operating loss carryforwards during the year and an increase
of $118,000 attributable to the net operating loss incurred
during the year. Since this is the only temporary difference, the
accompanying statements of operations reflect no income tax
benefit.
At August 31, 1998, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$6,773,000 which are available to offset future federal taxable
income, if any, through 2017.
<PAGE>
PART III
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; with Section 16(a) Beneficial Ownership Reporting
Compliance
The following are the officers and directors of the Company as of
August 31, 1998:
Name Age Position(s) with the Company
- ------------------------- --- -----------------------------------
Margaret S. Hansson. . . 74 Director, Chairman, Vice President
Fletcher L. Byrom . . . . 80 Director
Thomas P. Clark . . . . 62 Director, President,Treasurer
George M. Middlemas . . . 52 Director
Richard L. Guido . . . . 54 Director
Mark W. Harding . . . . 35 Chief Financial Officer, Secretary
MARGARET S. HANSSON
Ms. Hansson has been a Director of the Company since April 1977
and Chairman since September 23, 1983, and was the Chief Executive
Officer of the Company from September 23, 1983 to January 31, 1984.
Since May 1981, Ms. Hansson has been President of M. S. Hansson,
Inc., a Boulder, Colorado firm which consults to and invests in
small businesses. Ms. Hansson is Chief Executive Officer of
AquaLogic, Inc., a Boulder, Colorado company she founded in 1992.
From 1976 to May 1981, she was President of GENAC, Inc., a Boulder,
Colorado firm, which she founded. From 1960 to 1975, Ms. Hansson
was President and Chairman of the Board of Gerico, Inc., now Gerry
Baby Products, a Boulder, Colorado manufacturing firm which she
also founded. She is a Director of Norwest Banks, Stayodynamics,
Inc., the Midwest Group of Trust Funds and Gateway Technologies,
Inc. Ms. Hansson received her Bachelor of Arts degree from Antioch
College.
THOMAS P. CLARK
Thomas P. Clark has been a Director of the Company and President
since June 29, 1987, and Treasurer since September 6, 1988. Mr.
Clark is primarily involved in the management of the Company. His
business activities include: President, LC Holdings, Inc.
(business development), 1983 to present and, Partner, through a
wholly owned corporation, of Resource Technology Associates
(development of mineral and energy technologies), 1982 to present.
Mr. Clark received his Bachelor of Science degree in Geology and
Physics from Brigham Young University, Provo, Utah.
MARK W. HARDING
Mark W. Harding joined the Company in February 1990 as Corporate
Secretary and Chief Financial Officer. He brings a background in
public finance and management consulting experience. From 1988 to
1990, Mr. Harding worked for Price Waterhouse in Management
Consulting Services where he assisted clients in Public Finance
services and other investment banking related services. Mr.
Harding has a B.S. Degree in Computer Science, and a Masters in
Business Administration in Finance from the University of Denver.
FLETCHER L. BYROM
Fletcher L. Byrom has been a Director of the Company since April
22, 1988. He is a retired Chairman (1970-1982) and Chief Executive
Officer (1967-1982) of Koppers Company, Inc. Mr. Byrom presently
serves in the following positions: President and Director of MICASU
Corporation.
GEORGE M. MIDDLEMAS
George M. Middlemas has been a Director of the Company since
April 1993. Mr. Middlemas is a general partner with the Apex
Investment Partners, a diversified venture capital management
group. From 1985 to 1991, Mr. Middlemas was Senior Vice President
of Inco Venture Capital Management, primarily involved in venture
capital investments for Inco. From 1979 to 1985, Mr. Middlemas was
a Vice President and a member of the Investment Committee of
Citicorp Venture Capital Ltd., where he sourced, evaluated and
completed investments for Citicorp. Mr. Middlemas is a director of
Security Dynamics Technologies, Inc., American Communications
Services, Inc., and Pennsylvania State University - Library
Development Board. Mr. Middlemas received Bachelor degrees in
History and Political Science from Pennsylvania State University, a
Masters degree in Political Science from the University of
Pittsburgh and a Master of Business Administration from Harvard
Business School.
<PAGE>
RICHARD L. GUIDO
Mr. Guido has been a Director of the Company since July 1996. Mr.
Guido is Associate General Counsel of Inco Limited and President,
Chief Legal Officer and Secretary of Inco United States, Inc. Mr.
Guido is on the Board of Governors, Foreign Policy Association and
is a Director on the American-Indonesia Chamber of Commerce, and
the Canada-United States Law Institute. Mr. Guido received a
Bachelor of Science degree from the United States Air Force
Academy, a Master of Arts degree from Georgetown University, and a
Juris Doctor degree from the Catholic University of America.
None of the above persons is related to any other officer or
director of the Company. All directors are elected for one-year
terms which expire at the annual meeting of stockholders or until
their successors are elected and qualified. The Company's officers
are elected annually by the board of directors and hold office
until their successors are elected and qualified.
Mr. Middlemas was elected to the Company's board of directors
pursuant to the EPFund Voting Agreement. See "Security Ownership
of Certain Beneficial Owners and Management."
Mr. Guido was elected to the Company's board of directors
pursuant to the Inco Voting Agreement. See "Security Ownership of
Certain Beneficial Owners and Management."
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's directors and executive officers and persons who
are beneficial owners of more than 10% of the Company's Common
Stock are required to file reports of their holdings and
transactions in Common Stock with the Securities and Exchange
Commission and furnish the Company with such reports. Based solely
upon its review of the copies the Company has received or upon
written representations from these persons, the Company believes
that, as of November 24, 1997 all of the Company's directors,
executive officers, and 10% beneficial owners had complied with the
applicable Section 16 (a) filing requirements.
Item 10. Executive Compensation
Annual Compensation
--------------------------------------------
Name
and Other Annual
Principal Fiscal Salary Bonus Compensation
Position Year ($) ($) ($)
- ---------------------------------------------------------------
Thomas P. Clark
Pres./CEO 1998 60,000 0 0
1997 60,000 0 0
1996 60,000 0 0
For all other executive officers, consisting of two persons,
total annual salary and bonuses were less than $100,000.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of November , 1998, the
beneficial ownership of the Company's issued and outstanding Common
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, and
Series C Preferred Stock by each person who owns of record (or is
known by the Company to own beneficially) 5% or more of each such
class of stock, by each director of the Company, each executive
officer and by all directors and executive officers as a group.
Except as otherwise indicated, the Company believes that each of
the beneficial owners of the stock listed has sole investment and
voting power with respect to such shares, based on information
provided by such holders.
<TABLE>
<CAPTION>
Number Number of Number of Number of
of Common Percent of Series A Series B Series C Percent of
of Beneficial Stock Outstanding Preferred Preferred Preferred Outstanding
Owner Shares Shares Shares Shares Shares Shares
---------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Clark 24,064,854 30.7% (9) 346,000 40.0% (14)
5650 York Street,
Commerce (10) 3,200,000 100.0% (18)
City, Colorado 8002 2 (18)
George Middlemas 1,000,000 1.3% (1)
2440 N. Lakeview Ave (10)
Chicago, IL 60614 (11)
Richard L. Guido 0 0% (9)
145 King Street West
Toronto, Ontario, Canada
Margaret S. Hansson 8,246,000 9.5% (2)
2220 Norwood Avenue (9)
Boulder, Colorado 80304 (10)
Fletcher L. Byrom 7,100,000 8.3% (3)
P.O. Box 1055 (9)
Carefree, AZ 85377 (10)
Mark W. Harding 6,710,000 7.9% (4)
5650 York Street, Commerce
City, Colorado 80022
INCO Securities
Corporation 4,700,000 5.7% (5)
One New York Plaza (9)
New York, New York 10004
Apex Investment Fund II
L.P. 16,198,945 18.0% (6) 408,000 25.5%
233 S. Wacker Drive, (10)
Suite 9600 (11)
Chicago, Illinois 60606 (13)
Environmental Venture 6,278,181 7.7% (7)
Fund, L.P. (10)
233 S. Wacker Drive,
Suite 9600 (11)
Chicago, Illinois 60606
Environmental Private
Equity 7,142,320 8.6% (13) 600,000 37.5%
Fund II, L.P. (16)
233 S. Wacker Drive,
Suite 9600
Chicago, Illinois 60606
The Productivity 4,781,846 5.9% (8)
Fund II, L.P. (10)
233 S. Wacker Drive,
Suite 9600 (11)
Chicago, Illinois 60606
Proactive Partners L.P. 3,579,052 4.4% (13) 500,000 31.5%
50 Osgood Place,
Penthouse (17)
San Francisco,
California 94133
LC Holdings, Inc. 432,513 50.0%
5650 York Street,
Commerce City, Colorado
LCH, Inc. 86,503 10.0% (15)
5650 York Street,
Commerce City, Colorado
All Officers and ---------- ---------
Directors 47,120,854 46.9% (12)
as a group (6 persons)
</TABLE>
<PAGE>
(1) Includes 1,000,000 shares purchasable by Mr. Middlemas under
currently exercisable options.
(2) Includes 8,000,000 shares purchasable by Ms. Hansson under
currently exercisable options.
(3) Includes 3,000,000 shares purchasable under a currently
exercisable option by MICASU Aluminum, LLC which Mr. Byrom controls
as a manager and member and 1,000,000 shares purchasable under a
currently exercisable option by MICASU Corporation which Mr. Byrom
controls as President, Chief Executive Officer, and controlling
shareholder and 3,000,000 shares purchasable by Mr. Byrom under
currently exercisable options..
(4) Includes 6,500,000 shares purchasable by Mr. Harding under a
currently exercisable option.
(5) Includes 4,700,000 shares purchasable by Inco Securities
Corporation ("Inco") under currently exercisable warrants.
(6) Includes 8,506,198 shares purchasable by Apex Investment Fund
II, L.P. ("Apex") under a currently exercisable warrants.
(7) Includes 2,596,620 shares purchasable by Environmental Venture
Fund, L.P. ("EVFund") under a currently exercisable warrants.
(8) Includes 1,776,166 shares purchasable by Productivity Fund II,
L.P. ("PFund") under currently exercisable warrants.
(9) Pursuant to a voting agreement (the "Inco Voting Agreement")
dated December 11, 1990, Mr. Clark, Ms. Hansson and Mr. Byrom have
agreed to vote their shares of Common Stock in favor of electing a
representative designated by Inco to the Company's board of
directors. The Inco Voting Agreement remains in effect until
December 11, 2000. Mr. Guido is currently serving in the director
position elected pursuant to this Agreement.
(10) Pursuant to an Amended and Restated Voting Agreement (the
"EPFund Voting Agreement") dated August 12, 1992, Mr. Clark, Ms.
Hansson, Mr. Byrom, Apex, EVFund, and PFund have agreed to vote
their shares of Common Stock in favor of electing a representative
designated by Environmental Private Equity Fund II, L.P. ("EPFund")
to the Company's board of directors. The EPFund Voting Agreement
remains in effect until EPFund no longer owns or has rights to
acquire at least 1,301,000 shares of Common Stock, whichever is
earlier. Mr. Middlemas is currently serving in the director
position elected pursuant to this Agreement.
(11) Each of the Apex, EVFund, PFund, and EPFund (the "Apex
Partnerships") is controlled through one or more partnerships. The
persons who have or share control of such stockholders after
looking through one or more intermediate partnerships are referred
to herein as "ultimate general partners." The ultimate general
partners of Apex are: First Analysis Corporation, a Delaware
corporation ("FAC"), Stellar Investment Co. ("Stellar"), a
corporation controlled by James A. Johnson ("Johnson"); George
Middlemas ("Middlemas"); and Paul J. Renze ("Renze"). The ultimate
general partners of EVFund are: FAC; F&G Associates ("F&G");
William D. Ruckleshaus Associates, a Limited Partnership ("WDRA");
and Robertson, Stephens & Co. ("RS"). The ultimate general
partners of PFund are FAC and Bret R. Maxwell ("Maxwell"). The
ultimate general partners of EPFund are FAC, Maxwell, RS, Argentum
Environmental Corporation ("AEC") and Schneur A. Genack, Inc.
("SZG").
The business address of FAC, Stellar, Johnson, Middlemas, Renze
and Maxwell is 233 S. Wacker Drive, Suite 9600. Chicago Illinois
60606. Each of AEC and SZG maintains its business address c/o The
Argentum Group ("TAG"), 405 Lexington Avenue, New York, New York
10174. The business address of F&G is 123 Grove Avenue, Suite 118,
Cedarhurst, New York 11516. WDRA maintains its business address at
1201 Third Avenue, 39th Floor, Seattle, Washington 98101. RS
maintains its business address at One Embarcadero Center, San
Francisco, California 94111.
By reason of its status as a general partner or ultimate general
partner of each of Apex Partnerships, FAC may be deemed to be the
indirect beneficial owner of 34,401,292 shares of Common Stock, or
37.7% of such shares. By reason of his status as the majority
stockholder of FAC, F. Oliver Nicklin may also be deemed to be the
indirect beneficial owner of such shares. By reason of their
status as ultimate general partners of Apex, Stellar (and through
Stellar, Johnson), Middlemas and Renze may be deemed to be the
indirect beneficial owners of 16,198,945 shares of Common Stock, or
18.0% of such shares. When these shares are combined with his
currently exercisable option to purchase 936,869 shares of Common
Stock, Middlemas may be deemed to be the beneficial owner (directly
with respect to the option shares and indirectly as to the balance)
of 17,135,814 shares of Common Stock, or 19.21% of such shares.
<PAGE>
By reason of his status as an ultimate general partner of PFund
and EPFund, Maxwell may be deemed to be the indirect beneficial
owner of 11,924,166 shares of Common Stock, or 14.4% of such
shares.
By reason of F&G's and WDRA's status as an ultimate general
partners of EVFund, F&G, WDRA and their respective controlling
persons may be deemed to be the indirect beneficial owners of
6,278,181 shares of Common Stock, or 7.7% of such shares. By
reason of AEC's and SZG's status as ultimate general partners of
EPFund, AEC, SZG and their and their controlling persons may be
deemed to be the indirect beneficial owners of 7,142,320 shares of
Common Stock, or 8.8% of such shares. By reason of Genack's
interest in F&G, AEC and SZG, he may be deemed to be the indirect
beneficial owner of 13,420,501 shares of Common Stock, or 16.2% of
such shares.
By reason of RS's status as a general partner of EVFund and an
ultimate general partner of EPFund, RS and its controlling persons
may be deemed to be the indirect beneficial owners of 13,420,501
shares of Common Stock, or 16.2% of such shares.
Each of the Apex Partnerships disclaims beneficial ownership of
all shares of Common Stock described herein except those shares
that are owned by that entity directly. The Company understands
that each of the other persons named as an officer, director,
partner or other affiliate of any Apex Partnership herein disclaims
beneficial ownership of all the shares of Common Stock described
herein, except for Middlemas with respect to the option to purchase
1,000,000 shares held by him.
Each of the Apex Partnerships disclaims the existence of a
"group" among any or all of them and further disclaims the
existence of a "group" among any or all of them and any or all of
the other persons named as an officer, director, partner or those
affiliate of any of them, in each case within the meaning of
Section 13(d) (3) of the 1934 Act.
(12) Includes 22,500,000, shares purchasable by directors and
officers under currently exercisable options.
(13) Includes the conversion of 1,600,000 shares of Series A-1
Preferred Stock to Common Stock. Apex Investment Fund II, L.P.,
owning 408,000 shares of Series A Convertible Preferred Stock which
are currently convertible into 2,266,685 shares of Common Stock,
The Environmental Private Equity Fund II, L.P., owning 600,000
shares of Series A Convertible Preferred Stock which are currently
convertible into 3,333,360 shares of Common Stock, and Proactive
Partners, L.P., owning 500,000 shares of Series A-1 Convertible
Preferred Stock which are currently convertible to 2,777,800 shares
of Common Stock.
(14) Includes 346,010 shares of Series B Preferred Stock which Mr.
Clark. the Company's president, may be deemed to hold beneficially
by reason of his ownership of 80% of the common stock of LC
Holdings, Inc., the owner of 100% of the Series B Preferred Stock.
(15) Includes 86,503 shares of Series B Preferred Stock which LCH,
Inc. may be deemed to hold beneficially by reason of its ownership
of 20% of the common stock of LC Holdings, Inc., the owner of 100%
of the Series B Preferred Stock.
(16) Includes 322,264 shares purchasable by the Environmental
Private Equity Fund under a currently exercisable warrant.
(17) Includes 801,252 shares purchasable by Proactive Partners,
L.P. under a currently exercisable warrant.
(18) Includes 3,200,000 shares of Series C Preferred Stock which
Mr. Clark, the Company's president owns which are convertible to
3,200,000 shares of common stock if the Company has sufficent
authorized but unissued shares of common stock.
<PAGE>
Item 12. Certain Relationships and Related Transactions
From time to time since December 6, 1987, Thomas P. Clark, a
Director and President of the Company, loaned funds to the Company
to cover operating expenses. These funds have been treated by the
Company as unsecured debt, and the promissory notes with interest
at 8.36% to 9.01% per annum, issued to Mr. Clark on various dates
are payable October 15, 2000. To date, Mr. Clark has loaned the
Company $284,178 of which $43,350 has been repaid, leaving a
balance of $240,828. As of August 31, 1998, accrued interest on
the Notes totaled $161,312. All loans were made on terms
determined by the board members, other than Mr. Clark, to be at
market rates.
Additionally, LCH, Inc., a Delaware corporation which owns 20% of
LC Holdings, Inc. and is thereby affiliated with Mr. Clark, who
owns 80% of LC Holdings, Inc., loaned the Company a total of
$950,000 between November, 1988 and February, 1989. These funds
were represented by two Demand Promissory Notes (the "Notes") with
interest at a rate equal to the rate announced from time to time by
Mellon Bank, Pittsburgh, Pennsylvania as its "prime rate" plus 300
basis points from the date of the first advance thereunder until
maturity, payable quarterly beginning on the first day of April,
1989 and continuing thereafter on the first day of each subsequent
calendar quarter. No payments were made on the Notes. An April
25, 1989 Assumption of Obligations Agreement assigned the entire
debt of $950,000 to Rangeview Development Corp., which is a wholly-
owned subsidiary of the Company, and further assigned $750,000 of
that $950,000 to Rangeview Company, L.P a limited partnership in
which LCH held a 45% interest and Rangeview Development Corporation
held a 55% interest. In February of 1991, LCH transferred its
interest in Rangeview Company, L.P. to the Company in exchange for
a $4,000,000 profits interest in the Rangeview Project paid
subsequent to the first $31,000,000 profits interest allocated to
other investors. In connection with the Settlement Agreement, LCH
consented to be paid its $4,000,000 profits interest from the sale
or other disposition of the Export Water subsequent to payment of
$31,808,732 owed under the CAA. During fiscal year ended August
31, 1997, the Company reached an agreement with LCH, Inc. to defer
payment of the principal amount of the Notes, plus interest until
October 1, 2000. No additional consideration is due to LCH, Inc.
for the deferral. The board members, other than Mr. Clark,
determined the transactions are at fair market value taking into
consideration the risk to LCH, Inc.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3(a) Certificate of Incorporation of Registrant -
Incorporated by reference from Exhibit 4-A to Registration
Statement No. 2-65226.
3(a).1 Certificate of Amendment to Certificate of
Incorporation, filed August 31, 1987 - Incorporated by
reference from Annual Report on Form 10-K for the fiscal
year ended August 31, 1987.
3(a).2 Certificate of Amendment to Certificate of
Incorporation, filed May 27, 1988. Incorporated by
reference from Proxy Statement for the Annual Meeting held
April 22, 1988.
3(a).4 Certificates of Amendment to Certificate of
Incorporation filed April 13, 1993. Incorporated by
reference from Proxy Statement for Annual Meeting held
April 2, 1993.
3(a).6 Certificates of Amendment to Certificate of
Incorporation filed May 25, 1994 (Series A). Incorporated
by reference from Annual Report on Form 10-K for the fiscal
year ended August 31, 1994.
3(a).7 Certificates of Amendment to Certificate of
Incorporation filed August 31, 1994 (Series B).
Incorporated by reference from Annual Report on Form 10-K
for the fiscal year ended August 31, 1994
3(a).8 Certificates of Designation for the Series A-1
Preferred Stock Filed July 21, 1998, filed herewith.
3(a).9 Certificates of Amendment to Certificate of
Incorporation filed September 2, 1998 (Series C), filed
herewith.
3(b) Bylaws of Registrant - Incorporated by reference
from Exhibit 4.c to Registration Statement No. 2-62483.
3(b).1 Amendment to Bylaws effective April 22, 1988.
Incorporated by reference from Annual Report on Form 10-K
for the fiscal year ended August 31, 1989.
4.1 Specimen Stock Certificate - Incorporated by
reference to Registration Statement No. 2-62483.
9.1 Voting Agreement dated December 11, 1991, by and among Inco
Securities Corporation, Thomas P. Clark, Margaret S.
Hansson, Fletcher L. Byrom and the Company.*
10.1 Agreement to defer payment of notes, dated June 6, 1997, by
and between LCH inc. and the Company.**
<PAGE>
10.2 Equity Incentive Plan. Incorporated by references from
Proxy State for Annual Meeting held April 2, 1993.
10(h).2Service Agreement, dated April 19, 1996, by and
between the Company, and the District. ***
10(h).3Wastewater Service Agreement, dated January 22,
1997, by and between the Company, and the District, filed
herewith.
10(h).4Comprehensive Amendment Agreement No. 1, dated April
11, 1996, by and among ISC, the Company, the Bondholders,
Gregory M. Morey, Newell Augur, Jr., Bill Peterson, Stuart
Sundlun, Alan C. Stormo, Beverlee A. Beardslee, Bradley
Kent Beardslee, Robert Douglas Beardslee, Asra Corporation,
International Properties, Inc., and the Land Board. ***
27 Financial Data Schedule - filed herewith.
* Incorporated by reference from Annual Report on
Form 10-K for fiscal year ended August 31, 1991
** Incorporated by reference from Annual Report on Form
10-KSB for fiscal year ended August 31, 1997.
*** Incorporated by reference from Quarterly Report on
Form 10-QSB for the quarterly period ended May 31, 1996.
(b) The Company has not filed any reports on form 8-K during
the last quarter of fiscal 1998.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PURE CYCLE CORPORATION
By: /s/ Thomas P. Clark
--------------------------
Thomas P. Clark, President
Date: November 25, 1998
--------------------------
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Margaret S. Hansson Chairman, Vice November 25, 1998
Margaret S. Hansson President, Director
/s/ Thomas P. Clark President, Treasurer, November 25, 1998
Thomas P. Clark Director
/s/ Mark W. Harding Principal Financial November 25, 1998
Mark W. Harding Officer, Secretary
/s/ Fletcher L. Byrom Director November 25, 1998
Fletcher L. Byrom
/s/ George M. Middlemas Director November 25, 1998
George M. Middlemas
/s/ Richard L. Guido Director November 25, 1998
Richard L. Guido
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS DOCUMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THECOMPANY'S 10-QSB DATED August 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BYREFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 423,027
<SECURITIES> 3,429
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 434,286
<PP&E> 17,238
<DEPRECIATION> 16,095
<TOTAL-ASSETS> 19,336,869
<CURRENT-LIABILITIES> 49,858
<BONDS> 0
<COMMON> 261,584
0
2,033
<OTHER-SE> 4,024,800
<TOTAL-LIABILITY-AND-EQUITY> 19,336,869
<SALES> 0
<TOTAL-REVENUES> 25,366
<CGS> 0
<TOTAL-COSTS> 335,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,196
<INCOME-PRETAX> (525,781)
<INCOME-TAX> 0
<INCOME-CONTINUING> (525,781)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (525,781)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> 0
</TABLE>
WASTEWATER SERVICE AGREEMENT
between
PURE CYCLE CORPORATION
and
RANGEVIEW METROPOLITAN DISTRICT,
ACTING BY AND THROUGH ITS WATER ACTIVITY ENTERPRISE
WASTEWATER SERVICE AGREEMENT
THIS WASTEWATER SERVICE AGREEMENT (the "Agreement") is entered
into as of the 22 day of January, 1997, by and between PURE CYCLE
CORPORATION, a Delaware corporation ("Pure Cycle"), and RANGEVIEW
METROPOLITAN DISTRICT, a quasi-municipal corporation and political
subdivision of the State of Colorado, acting by and through its
water activity enterprise.
RECITALS
A. Rangeview is a special district organized pursuant to
Title 32 of the Colorado Revised Statutes with the power, among
others, to supply water for domestic and other public and private
purposes and to provide a complete sanitary sewage collection,
transmission, treatment and disposal system to its Service Area (as
defined in Section 1.1). Rangeview's water activity enterprise was
established by resolution of Rangeview adopted at a public meeting
of its board of directors on September 11, 1995, and is effective
as of the date of its adoption.
B. Pure Cycle is a corporation involved in the acquisition
and development of water and wastewater facilities and systems.
C. Rangeview's provision of water and wastewater services
with respect to the Service Area is governed in part by the terms
of the Amended and Restated Lease between Rangeview and the State
of Colorado, acting through the State Board of Land Commissioners
(the "Land Board") denominated Lease Number S-37280 dated April 11,
1996 (the "Lease").
D. Properties within Rangeview's Service Area are ready to
begin development and Rangeview desires to arrange for wastewater
service to be provided to such properties and the other properties
within its Service Area.
E. Rangeview has determined that it is in its best interests
to engage Pure Cycle to finance and manage the construction of
wastewater facilities to serve its Service Area for a number of
reasons, including the following:
(1) As part of the settlement of major litigation in
which bonds and notes in the principal amount of $24,914,058
previously issued by Rangeview have been acquired by Pure Cycle and
surrendered to Rangeview for cancellation, Pure Cycle in exchange
for the Rangeview bonds and notes received a right to divert and
sell the use of up to a total gross volume of 1,165,000 acre feet
of Export Water (as defined in Section 1.1) together with a
contract to provide water service (the "Water Service Agreement")
for and on behalf of Rangeview within the Lowry Range (as defined
in Section 1.1).
(2) Pure Cycle has expertise in the area of wastewater
treatment, and has the capability to finance the development of a
wastewater system.
(3) Pure Cycle has a long-term relationship with
Rangeview and is familiar with the development needs and
opportunities in the Service Area.
(4) There are substantial economies of scale inherent in
having one entity provide both water and wastewater services to the
Service Area.
<PAGE>
F. Rangeview has authority, pursuant to Section 32-1-1001,
C.R.S., to enter into contracts and agreements affecting the
affairs of the district and to appoint, hire, and retain agents.
G. At an election duly called by the Board and held November
5, 1996, the electors of the district approved the district
entering a Finance/Construction Management Agreement and an
Operation, Maintenance and Administration Agreement as a multiple-
fiscal year obligation.
H. The provisions of the two agreements described in G.
above, which were being negotiated at the time the District was
required to certify the ballot content for said election, have been
merged into this Agreement, with amendments.
COVENANTS AND AGREEMENTS
In consideration of the foregoing, the covenants and
agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
Definitions
1.1 Definitions. As used herein unless the context clearly
indicates otherwise, the words defined below and capitalized
throughout the text of this Agreement shall have the respective
meanings set forth below:
Applicant. "Applicant" shall mean a potential Wastewater User
who is submitting a request for wastewater service to Rangeview.
Board. "Board" shall mean the Board of Directors of
Rangeview.
Construction Security. "Construction Security" shall
have the meaning set forth in Section 3.2(e) herein.
Export Water. "Export Water" shall have the meaning set
forth in the Lease.
Lease. "Lease" shall have the meaning set forth in
Recital C.
Lowry Range. "Lowry Range" shall have the meaning set
forth in the Lease.
Master Plan. "Master Plan" shall mean a written master
plan for the construction of the Wastewater System
prepared by Rangeview and Pure Cycle pursuant to Section
3.1 herein.
NARUC. "NARUC" shall mean the National Association of
Regulatory Utilities Commissioners.
Non-Export Water. "Non-Export Water" shall have the
meaning set forth in the Lease.
<PAGE>
Performance Standards. "Performance Standards" shall
have the meaning set forth in Section 5.1 herein as more
specifically defined on Exhibit A attached hereto and
incorporated herein by this reference.
Plan Review Budget. "Plan Review Budget" shall mean a
budget prepared by Rangeview which includes its
anticipated costs to undertake the review anticipated by
Subsection 3.2(d).
Project Costs. "Project Costs" shall mean the
anticipated construction costs of the Project
Improvements pursuant to Section 3.2(b)(iii) herein.
Project Financial Plan. "Project Financial Plan" shall
mean a financial plan prepared by Pure Cycle and
submitted to Rangeview for the Rangeview Facilities
pursuant to Section 3.2 herein.
Project Improvements. "Project Improvements" shall mean
the wastewater improvements necessary to serve an
Applicant based upon the information provided by such
Applicant pursuant to Section 3.2(b)(i) herein.
Project Plan. "Project Plan" shall mean a plan
established jointly by Rangeview and Pure Cycle for the
provision of wastewater service to the properties
identified in the service request of an Applicant
pursuant to Section 3.2(b) herein.
Project Schedule. "Project Schedule" shall mean the
construction schedule required by 3.2(e) below.
Project Timeline. "Project Timeline" shall mean the
anticipated timing for design and construction of the
Project Improvements pursuant to Section 3.2(b)(ii)
herein.
Rangeview Facilities. "Rangeview Facilities" shall mean
those improvements identified on the Master Plan as
Rangeview's responsibility pursuant to Section 3.2(b)(iv)
herein.
Rate Consultant. "Rate Consultant" shall mean the
qualified consultant in the area of wastewater rate
structures engaged and utilized as provided in Section
2.2 and elsewhere herein.
Rate Structure. "Rate Structure" shall mean the rate
structure for wastewater service (which shall include but
not be limited to tap fees, usage charges and service
charges) established by Rangeview with the concurrence of
Pure Cycle pursuant to Section 2.2 herein.
Rules and Regulations. "Rules and Regulations" shall
mean the Rules and Regulations of Rangeview adopted by
the Board pursuant to Colorado law.
Service Agreement. "Service Agreement" shall mean the
written agreement or agreements for water and sewer
service between Rangeview and the Wastewater Users which,
inter alia, describe the public improvements to be
acquired and constructed by Rangeview to provide water
and wastewater service in the Service Area.
<PAGE>
Service Area. "Service Area" shall mean the
approximately 24,567.21 acres, more or less, according to
U.S. Government survey, in Arapahoe County, Colorado more
particularly described as follows:
Township 5 South, Range 64 West, Sections 7 through 10: all;
Sections 15 through 22: all; Sections 27 through 34: all.
Township 4 South, Range 65 West, Sections 33: all; and 34:
all.
Township 5 South, Range 65 West, Section 3: all; Sections 10
through 15: all, less certain surface rights granted for (but
including the water under) the Aurora Reservoir) in
Section 15; Sections 22 through 27: all, less certain surface
rights granted for (but including the water under) the Aurora
Reservoir in Section 22; Sections 35 and 36: all; Section 34:
north 2,183.19 feet.
Township 5 South, Range 66 West, Section 36: all.
All other property included within Rangeview's
Service Area with Pure Cycle's prior written consent
and agreement to provide such properties with
wastewater service.
Wastewater System. "Wastewater System" shall mean the
wastewater transmission, treatment and disposal
facilities, including re-use and land application
facilities, and all easements, rights of way and other
property interests necessary to accommodate such
facilities, which Rangeview or Wastewater Users are or
may become obligated to acquire and construct pursuant to
written Service Agreements with the Wastewater Users.
Wastewater Users. "Wastewater Users" shall mean the
persons and entities who own the real property in the
Service Area.
Water Service Agreement. "Water Service Agreement" shall
have the meaning set forth in Recital E.
1.2 Intent of This Agreement. This Agreement is intended to
provide the terms and conditions under which Pure Cycle will act as
Rangeview's agent to provide wastewater service to Wastewater
Users.
ARTICLE II
APPOINTMENT OF AGENT AND ESTABLISHMENT OF RATE STRUCTURE
2.1 Appointment of Agent. During the term of this Agreement,
Rangeview hereby grants to Pure Cycle the sole and exclusive right
to provide wastewater service to the Wastewater Users as its agent.
<PAGE>
2.2. Establishment of Rate Structure. A rate structure for
wastewater service (which shall include but not be limited to tap
fees, usage charges and service charges) shall be established by
Rangeview with the concurrence of Pure Cycle ("Rate Structure").
The Rate Structure shall be based upon cost of service principles
with the advice of a qualified consultant in the area of wastewater
rate structures ("Rate Consultant"). On or before November 15,
2001, and every five (5) years thereafter, or upon the request of
either party if new laws, regulations, or other circumstances arise
which affect the cost of service hereunder, Rangeview and Pure
Cycle shall contract with a Rate Consultant for a review of the
then existing Rate Structure. Based upon the recommendation of the
Rate Consultant, the parties shall negotiate in good faith to reach
agreement on an amended Rate Structure. The costs of the Rate
Consultant will be treated as an annual operating cost of the
Wastewater System.
If the parties are unable to reach an agreement on an
amended Rate Structure, the issue shall be determined by
arbitration pursuant to Section 11.17 of this Agreement.
ARTICLE III
Construction of Facilities
3.1 Master Plan. Within One Hundred Twenty (120) days of
execution of this Agreement, the parties shall cooperate in
establishing a written master plan for the construction of the
Wastewater System ("Master Plan"). The Master Plan shall identify
the anticipated improvements to be constructed, the projected
timing of construction of such improvements, the projected cost of
such improvements, the anticipated location of the improvements and
the allocation of responsibility for construction between Rangeview
and the Wastewater User(s). The Master Plan shall be jointly
revised by the parties not less frequently than every three (3)
years after its establishment.
3.2 Project Implementation.
(a) Scoping. Rangeview shall establish a policy
governing requests for wastewater service which shall require that
a potential Wastewater User ("Applicant") submit a service request
which shall include sufficient information to enable Rangeview and
Pure Cycle to determine the facilities necessary to serve such
property. Rangeview's policy shall require the Applicant to deposit
funds sufficient to cover all of Rangeview's costs in reviewing the
application and preparing a Service Agreement, which costs shall
include, but not be limited to, legal fees, management fees and
engineering fees incurred by Rangeview in implementing the
requirements of Subsection 3.2(a)-(c).
(b) Project Plan and Financial Plan. Upon receipt of a
complete service request from an Applicant, Rangeview shall submit
written notice to Pure Cycle. Within thirty (30) days of receipt
of such notice, Rangeview and Pure Cycle shall jointly establish a
plan for providing wastewater service to the properties identified
in the service request ("Project Plan") consistent with the Master
Plan, which identifies the following:
<PAGE>
(i) the improvements necessary to serve the
Applicant based upon the information provided ("Project
Improvements"); and
(ii) the anticipated timing for design and
construction of the Project Improvements ("Project Timeline"); and
(iii) the anticipated construction costs of the
Project Improvements ("Project Costs"); and
(iv) the appropriate allocation of responsibility
for construction between Rangeview and the Applicant, consistent
with Rangeview's Rules and Regulations and the Master Plan (the
improvements defined as Rangeview's responsibility shall be defined
as the "Rangeview Facilities") ; and
(v) the anticipated revenues to be received by
providing the service to the Applicant, consistent with the Rate
Structure.
Within thirty (30) days of completion of the Project Plan, Pure
Cycle shall submit to Rangeview a financial plan for the Rangeview
Facilities ("Project Financial Plan") which illustrates that the
projected revenues to be received from the provision of service to
the Applicant justify construction of the Rangeview Facilities to
provide wastewater service to the Applicant.
(c) Service Agreement. Upon completion of the Project
Plan and Project Financial Plan, Rangeview shall negotiate Service
Agreements with the Applicant which comply with the Master Plan,
Project Plan, the Project Financial Plan and the Rate Structure and
which are consistent with Pure Cycle's obligations hereunder.
Rangeview shall consult with Pure Cycle in the negotiation process
to ensure that Pure Cycle agrees that the Service Agreements
satisfy the conditions set forth above.
(d) Design. Once the Service Agreement for a Project is
executed by all parties, Pure Cycle shall be responsible for
preparing the preliminary design documents for the Rangeview
Facilities and for providing an engineer's estimate of all costs
associated therewith. Prior to the submittal of the Preliminary
Design documents to Rangeview, Pure Cycle shall request an
estimated Project review budget from Rangeview which budget shall
include Rangeview's anticipated costs to undertake the review
anticipated by this Subsection (d) and Subsection (e) below ("Plan
Review Budget"). Pure Cycle shall submit the preliminary design
documents for the Rangeview Facilities and a deposit of the costs
identified in the Plan Review Budget to Rangeview. On or before
December 31st of each year, Rangeview shall conduct an accounting
of all costs and expenses incurred in undertaking its review
pursuant to this Subsection and Subsection (e). In the event the
funds deposited hereunder exceed such costs and expenses, Rangeview
shall refund such amounts to Pure Cycle unless the parties agree
that such remaining amounts should be retained by Rangeview and
utilized for the next Rangeview Facilities' expenses. If
Rangeview's costs exceed the amounts deposited, Pure Cycle shall
deposit the additional amounts following receipt of a written
request for additional funding with documentation evidencing how
the previously deposited funds were utilized. Pure Cycle's
obligation to pay additional amounts under this Section shall not
exceed twenty five percent (25%) of the amounts previously
deposited unless the additional costs above 25% are necessitated by
changes, or by deficiencies or omissions in the Plan submitted by
Pure Cycle. Within ninety (90) days of submittal of the preliminary
design and deposit, Rangeview shall provide to Pure
<PAGE>
Cycle its approval, disapproval or conditional approval of the
preliminary design documents. Approvals will not be unreasonably
withheld. Disputes, if any, as to matters under this Section will
be submitted to arbitration pursuant to Section 11.17 hereunder.
(e) Construction and final design documentation. Once
the preliminary design documents have been approved by Rangeview,
Pure Cycle shall submit the following to Rangeview: (1) the final
design documents for the Rangeview Facilities substantially
consistent with the approved Preliminary Design; (2) an engineer's
estimate of the construction costs for the Rangeview Facilities;
(3) an irrevocable Letter of Credit, cash, or other security
acceptable to Rangeview in an amount equal to the estimated cost of
the Rangeview Facilities, including construction contractor
payments, and other costs payable by Rangeview reasonably likely to
be incurred during construction ("Construction Security") pursuant
to the terms set forth in Subsection (h) below; (4) draft bid and
contract documents for the Rangeview Facilities which: (i) name
Rangeview as the Owner, (ii) name Pure Cycle as the Construction
Manager and indicate that Pure Cycle will have the authority to
award the contract, monitor the construction and make payments to
the Contractor, and (iii) comply with the requirements of Colorado
law governing the public bidding of construction contracts for
special districts; and (5) a construction schedule for the
Rangeview Facilities ("Project Schedule"). Within thirty (30) days
of submittal of the aforementioned documents, Rangeview shall
provide to Pure Cycle its approval, disapproval or conditional
approval of the bidding of the Rangeview Facilities. Approvals
will not be unreasonably withheld or delayed. Once approval has
been obtained from Rangeview, Pure Cycle shall proceed with bidding
the Rangeview Facilities. When bids have been received and
tabulated, all information received during the bidding process
shall be submitted to Pure Cycle with a recommendation from
Rangeview as to which bidder should be awarded the contract for the
Rangeview Facilities. Pure Cycle shall be authorized to proceed
with the award of the contract without the prior written consent of
Rangeview provided the bid selected is not for an amount in excess
of the Construction Security. A copy of the executed contract
shall be provided to Rangeview within ten (10) days of execution.
If the contract is a financing or construction contract related to
effluent, sewage or sewerage which derives from Non Export Water or
water used to recharge Non Export Water under the Lease and which
is to be disposed of outside the boundaries of the Lowry Range,
then Pure Cycle shall provide the Land Board with a courtesy copy
of such contract (a draft being acceptable if a final is not yet
available) ten (10) days prior to execution. Pure Cycle shall be
solely responsible for all payments due under the construction
contract and any and all other costs related to the construction of
the Rangeview Facilities, including, but not limited to engineering
fees, legal fees, inspection fees and management fees. Pure Cycle
shall provide Rangeview with copies of all pay requests received
and shall provide Rangeview with a written Project status report on
a monthly basis. Pure Cycle shall be authorized to approve change
orders to construction contracts for Rangeview Facilities provided
that any change orders requiring a change in the design of the
Rangeview Facilities shall be approved in advance by Rangeview.
(f) Timing and Standards of Construction. Pure Cycle
shall cause construction of the Rangeview Facilities to be
completed in accordance with the design documents and the time
frame set forth in the Project Schedule approved by Rangeview.
Rangeview shall have a continuing right to inspect the construction
of the Wastewater System. Once construction is completed, Pure
Cycle will provide Rangeview with the plans for the improvements as
built.
(g) Dispute Resolution. Disputes between Rangeview and
Pure Cycle, if any, as to matters under this Section 3.2 will be
submitted to arbitration pursuant to Section 11.17, and a hearing
shall be held as expeditiously as reasonably possible.
<PAGE>
(h) Construction Security. Upon deposit of the
Construction Security, Pure Cycle shall deposit an itemization of
the improvements being constructed and their estimated costs. The
District agrees that upon receipt of an engineer's certification
that a portion of the Project is complete, it shall release the
associated dollar amount as shown on the itemization. Upon receipt
of an engineer's certification that the Project is complete and
operational, the District shall release the entire Construction
Security or any remaining portion thereof to Pure Cycle.
Notwithstanding any of the foregoing, however, the remaining
balance of the Construction Security shall be maintained by Pure
Cycle at a level sufficient to secure all estimated costs of
completing the Rangeview Facilities under construction. The
District shall allow Pure Cycle to pledge the revenues from the
Service Agreement for Rangeview Facilities and any security related
thereto to enable Pure Cycle to obtain the Construction Security.
3.3 Rules and Regulations of Rangeview. All construction,
operation, and maintenance of the Wastewater System shall be
performed in accordance with the Rangeview Metropolitan District
Rules and Regulations, as adopted from time to time (the "Rules and
Regulations").
3.4 Rangeview Ownership of Work. All contracts for the
construction of, and purchase of equipment for the Rangeview
Facilities shall be in the name of Rangeview, and all facilities
constructed and equipment purchased pursuant to such contracts will
be the sole and exclusive property of Rangeview.
ARTICLE IV
Ownership, Operation, and Maintenance of Facilities
4.1 Ownership Prior to Termination. Rangeview shall own the
Wastewater System. Pursuant to the terms of this Agreement, Pure
Cycle shall manage the construction, operate, maintain, repair,
replace and administer the Wastewater System.
4.2 Effluent attributable to water derived from Non-Export
Water or water used to recharge Non-Export Water under the Lease
("Lease Effluent") shall be used, disposed of and accounted for as
required by the Lease. Pure Cycle shall ensure that it does not
cause Rangeview to breach such terms. Pure Cycle shall prepare and
maintain adequate documentation to enable Rangeview (i) to
determine the appropriate amounts to be paid by it to the Land
Board pursuant to 6.3 and 7.3 of the Lease, and (ii) clearly to
distinguish between Lease Effluent and other effluent from the
Wastewater System. Pure Cycle may dispose effluent other than
Lease Effluent in any lawful manner it deems reasonable.
ARTICLE V
Wastewater Service
5.1 Wastewater Service. At its cost, Pure Cycle shall
provide wastewater service to the Wastewater Users in a
commercially reasonable manner consistent with generally accepted
standards of performance for public wastewater systems in the
metropolitan Denver area. Such services include without limitation
the following:
<PAGE>
(a) Operate, maintain, repair, replace, test, certify,
remove, and change the size of all facilities and other assets and
resources comprising the Wastewater System, expressly including
wastewater treatment facilities and facilities for re-use or land
application effluent, if any; and
(b) Develop and continuously monitor and recommend to
the Board modifications and additions to effective emergency
preparedness measures to respond to emergencies, including, but not
limited to main line breaks, obstructions, and backups, mechanical
failures, violation of effluent standards, and the interruption of
service from other causes; and
(c) Coordinate and cooperate with Rangeview in the
administration of plan review and approval, construction
observation, and conveyance and acceptance procedures for developer
Main Extensions; and
(d) Develop and continuously monitor and recommend to
the Board modifications and additions to the Rules and Regulations,
design standards and the Master Plan and coordinate and cooperate
with Rangeview in the administration and enforcement thereof and of
easements, service and main extension agreements; and
(e) Prepare, maintain and deliver to Rangeview
sufficient, appropriate and accurate records of all operations
undertaken by Pure Cycle on behalf of Rangeview pursuant to this
Agreement. This function shall include preparing and maintaining
accurate files of all contracts concerning the Wastewater System
and all other records necessary to the orderly administration and
operation thereof, and which are required to be kept by local,
state and federal statutes, ordinances and regulations, and by good
business practice, including records and accounts of sales and
dispositions of effluent subject to Section 6.3 of the Lease and
Gross Revenues (as defined in the Lease) derived therefrom; and
(f) Consult with and advise the Board on all matters
relating to the operations of the Wastewater System and to the
performance of Pure Cycle's obligations under this Agreement.
5.2 Qualified Competent Personnel. Pure Cycle shall employ
or contract with engineers, operators, and administrative and other
personnel who are fully qualified to perform the duties of
operating and administrating the Wastewater System. All plant
operators must possess an A or B certification and meet minimum
Colorado Department of Health and Environmental Services standards
for licensing applicable to the plant which they operate.
5.3 Permits and Licenses. Pure Cycle shall, at its own
expense, apply for and obtain all necessary permits and licenses
which may be required by any governmental entity which has
jurisdiction over the operations to be performed by Pure Cycle
pursuant to this Agreement.
5.4 Financing. Pure Cycle shall be responsible for financing
its obligations hereunder with the funds it receives pursuant to
this Agreement or from such other sources as it deems desirable.
Pure Cycle shall not claim or demand any payments or things of
value from Rangeview or the Wastewater Users except as provided by
this Agreement.
<PAGE>
5.5 Rangeview Administrative Functions. Rangeview shall be
responsible for performing at its sole expense all functions and
reporting obligations imposed upon it as a local government entity
and political subdivision of the State of Colorado. Such functions
include without limitation, compliance with budget, audit,
election, open meetings, public records, conflict of interest
disclosure and management laws, and Article X, Section 20 of the
Colorado Constitution. Rangeview shall further be solely
responsible for performing customer relations functions, billing
and collecting rates, fees, tolls and charges imposed by it upon
Wastewater Users, and administering and supervising tap sales.
Rangeview shall have primary responsibility for the administration
and enforcement of Rangeview Rules and Regulations, design
standards, easements and Service and Main Extension Agreements but
shall coordinate with Pure Cycle in the performance of these
functions.
5.6 Cost Accounting. Pure Cycle shall prepare and maintain
records reflecting or recording costs of service, both for capital
development and for operations and administration expenses, in
accordance with the National Association of Regulatory Utilities
Commissioners ("NARUC") System of Accounts for Wastewater Utilities-
- -Class A, as now or hereafter constituted, or, if the NARUC System
of Accounts is no longer available or appropriate in the judgement
of the Rate Consultant, in accordance with other generally accepted
wastewater utility cost accounting standards designated by the Rate
Consultant. Such records shall at all times be available during
normal business hours for inspection and copying by Rangeview or
the Rate Consultant. Pure Cycle shall ensure that any contract or
other arrangement it makes with a third person to perform capital
development or operations and administration functions assumed by
Pure Cycle hereunder expressly imposes this same requirement upon
such person for the benefit of Rangeview and the Rate Consultant.
5.7 Rangeview Cooperation. Rangeview shall cooperate with
Pure Cycle and provide Pure Cycle with such assistance as Pure
Cycle may reasonably request in performing Pure Cycle's duties
hereunder.
ARTICLE VI
Billing and Distribution of Revenues
6.1 Rates. Subject to limitations imposed by the laws of the
State of Colorado, Rangeview will continuously implement and
enforce the Rate Structure, including amendments thereto,
determined pursuant to section 2.2 above.
6.2 System Development Fees Distribution. The Parties
acknowledge that revenue derived from the imposition of System
Development Fees pursuant to the Rules and Regulations and Service
Agreements shall be utilized for costs related to the construction
of the Wastewater System. Pursuant to the terms of this Agreement,
Pure Cycle is solely responsible for the costs to finance the
construction of the Rangeview Facilities. Based upon this
allocation of responsibility and the fact that Rangeview's
anticipated costs to comply with the terms of Article III herein
are paid by Pure Cycle, the Parties agree that 100% of the System
Development Fee revenue shall be allocated to Pure Cycle.
Rangeview will remit Pure Cycle's 100% of System Development Fee
revenue monthly, as it receives the same, without interest. Along
with each such remittance, Rangeview will send a written report
stating the service address or other description of the licensed
premises for which such fees were paid, the number of equivalent
taps licensed for each premises, and the amount of the System
Development Fees collected for each license.
<PAGE>
6.3 Operating Revenue Distribution. Pursuant to Section 5.5
above, the Parties have acknowledged the administrative functions
to be undertaken by Rangeview. Based upon the allocation of
responsibilities between the parties, they have determined to
allocate the revenues derived from sewer rates imposed pursuant to
Article 17 of the Rules and Regulations, as follows: 90% to Pure
Cycle and 10% to Rangeview. Rangeview will remit Pure Cycle's
proportionate share of said rates monthly, as it receives the same,
without interest. The parties acknowledge that due to the fact that
the parties have limited financial history, the administrative
costs of Rangeview and Pure Cycle with respect to the wastewater
service to be provided hereunder are unknown. Therefore,
notwithstanding the provisions of this Section, if the applicable
percentage of said rates applicable to each party pursuant to this
Section are insufficient to cover the respective parties
administrative costs relating to the provision of wastewater
service as described herein, Pure Cycle and Rangeview shall
negotiate in good faith within ninety (90) days, after the
insufficiency is reasonably claimed by either party, an amendment
to this Section which provides each party with sufficient revenues
from this Agreement to cover its administrative costs or amend the
Rate Structure so that additional rate revenues are generated.
During any period of renegotiation, each party shall continue to
perform its obligations under this Agreement. Disputes as to an
appropriate amendment to provide either party with sufficient rate
revenues under this Section or to amend the Rate Structure will be
settled by arbitration pursuant to Section 11.17 of this Agreement.
6.4 Revenue Obligation Only. Rangeview's obligation to remit
funds to Pure Cycle hereunder shall be payable solely and
exclusively from its collections of System Development Charges and
sewer rates or other charges similar in purpose or function
thereto, and shall not be a general obligation of Rangeview.
Rangeview will establish and maintain policies and procedures
encouraging prompt and vigorous collection of delinquent accounts.
6.5 Reports and Audits.
(a) Rangeview may, upon no less than fourteen (14) days
prior written notice to Pure Cycle, cause a partial or complete
audit to be made at Rangeview's expense, by an auditor selected by
Rangeview, of the entire records and operations of Pure Cycle for a
five (5) year period preceding the date of the audit relating to
the provision of wastewater service pursuant to this Agreement.
Within fourteen (14) days following receipt of such a notice, Pure
Cycle shall make available to the auditor the books and records the
auditor reasonably deems necessary or desirable for the purpose of
making the audit. If the results of the audit reveal a deficiency
in any amounts paid by Pure Cycle to the Land Board or to Rangeview
for payment to the Land Board under Section 6.3 of the Lease, then
Pure Cycle shall pay such deficiency to the Land Board or
Rangeview, as applicable, together with interest thereon at the
rate of two percent (2%) per month from the date or dates such
amounts should have been paid to the Land Board. If such
inaccuracies resulted in a deficiency to the Land Board in excess
of two percent (2%) of the royalties previously paid by Rangeview
or on Rangeview's behalf for the period covered by the audit, then
Pure Cycle shall also pay the cost of the audit.
<PAGE>
(b) Rangeview shall prepare and keep full, complete, and
proper books, records and accounts of all collections with respect
to wastewater service. Said books, records, and accounts of
Rangeview shall be open at all reasonable times to the inspection
of Pure Cycle and its representatives who may also, at Pure Cycle's
expense, audit, copy or extract all or a portion of said books,
records, and accounts for a period of five (5) years after the date
such books, records and accounts are made. Pure Cycle may, upon
fourteen (14) days prior written notice to Rangeview, cause a
partial or complete audit to be made at Pure Cycle's expense, by an
auditor selected by Pure Cycle, of the entire records and
operations of Rangeview relating to the Wastewater System pursuant
to this Agreement. Within fourteen (14) days following receipt of
such a notice, Rangeview shall make available to the auditor the
books and records the auditor deems necessary or desirable for the
purpose of making the audit. Any deficiency in the payment of
amounts due Pure Cycle pursuant to Section 6.2 determined by such
audit shall be immediately due and payable by Rangeview together
with interest thereon at the rate of twelve percent (12%) per annum
from the date or dates such amounts should have been paid. If such
deficiency is in excess of two percent (2%) of the amounts
previously computed by Rangeview for the period covered by the
audit, then Rangeview shall pay the actual cost of the audit, at
the time the deficiency is paid.
6.6 Appropriation. The amounts necessary to make payments to
Pure Cycle for amounts due under this Article VI are hereby
appropriated for said purpose; and such amounts as appropriated for
each year shall be included in the annual budget and appropriation
resolution to be adopted and passed by the Board in each year,
until this contract is terminated.
6.7 Right of Set-Off. Notwithstanding the provisions of 6.2
and 6.3 above, Rangeview is entitled to deduct from the amounts due
to Pure Cycle hereunder any amounts expended by Rangeview and not
advanced by Pure Cycle to cure any deficiency in the performance of
Pure Cycle hereunder, or to perform or to aid or assist in the
performance of any of Pure Cycle's duties or obligations hereunder.
ARTICLE VII
Rights-of-Way
7.1 Rights-of-Way. Pure Cycle shall at its expense acquire
in the name of Rangeview all easements and rights-of-way necessary
to accommodate Rangeview Facilities. Notwithstanding the foregoing,
Rangeview shall assist Pure Cycle in obtaining such rights-of- way
in the manners provided in this Article and in such other manners
as Pure Cycle may reasonably request. Pure Cycle shall have a
license to use all Rangeview easements and rights- of-way for the
purpose of constructing, installing, replacing, operating and
maintaining the Wastewater System.
7.2 Lowry Range Rights-of-Way. As set forth in Exhibit D to
the Lease, a master plan of rights-of-way has been agreed upon with
respect to the Lowry Range, subject to certain rights of the Land
Board to amend such master plan. When a right-of-way on or under
the Lowry Range is reasonably necessary to enable Pure Cycle to
perform the services contemplated by this Agreement, Pure Cycle
shall notify Rangeview. Rangeview shall file a request for the
right-of-way with the Land Board in accordance with the Lease.
Upon grant of a right-of-way by the Land Board, Rangeview shall
promptly notify Pure Cycle.
7.3 Condemnation of Land. Upon Pure Cycle's request,
Rangeview agrees to use its governmental powers of condemnation if
condemnation is reasonably necessary to enable Pure Cycle to
perform the services contemplated by this Agreement. Pure Cycle
shall be responsible for the costs associated with Rangeview's
condemnation of such land.
<PAGE>
ARTICLE VIII
Indemnification
8.1 Mutual Indemnity. Pure Cycle and Rangeview shall each
indemnify and hold harmless the other, to the extent permitted by
law, against and from all claims, demands, and expenses of any and
all kinds (including attorney fees) for death, personal injury or
property damage arising out of, of caused by, any act or omission
of such indemnifying party, its contractors, agents or employees.
Nothing in this Section shall be construed as a waiver of or an
intent by Rangeview to waive any rights, privileges, immunities,
monetary limits or other protections or requirements set forth in
the Colorado Governmental Immunity Act, Section 24- 10-101, et
seq., C.R.S.
8.2 Service Indemnity. Additionally, Pure Cycle shall at its
sole cost and expense defend, indemnify and hold Rangeview harmless
against and from all claims and demands asserted against Rangeview
by any Wastewater User, by any party to or beneficiary of a Service
Agreement, or by any regulatory government or agency, based upon,
arising out of, or relating to the performance or non-performance
of Pure Cycle's obligations hereunder.
ARTICLE IX
Insurance and Bonds
9.1 Insurance. Pure Cycle shall and shall cause its
contractors to maintain with carriers acceptable to Rangeview
liability insurance,workers' compensation coverage fully covering
all persons engaged in the performance of this Agreement, in
accordance with Colorado law, and for public liability insurance
covering death and bodily injury with limits no less than required
by the Colorado Governmental Immunity Act, Section 24-10-101, et
seq., C.R.S. , which insurance shall name Rangeview as additional
insured.
9.2 Bonds. No operations are to be commenced on any portion
of the Service Area which is within the Lowry Range and owned by
the Land Board until Pure Cycle has filed good and sufficient
bonds, consistent with the requirements of C.R.S. 38-26-106, with
the Land Board to secure the payment for damages, losses or
expenses caused by Pure Cycle as a result of operations on or under
the Lowry Range. Pure Cycle acknowledges that, pursuant to the
Lease, the Land Board may require that the bonds be held in full
force and effect for one year after cessation of the operations for
which the bonds were intended. In addition, Pure Cycle shall
comply with the Rules and Regulations with respect to bonds
required by Rangeview.
9.3 Bond of Contractors. If activities are to be conducted
on land owned by the Land Board within the Lowry Range bonds
provided by contractors for construction activities shall list the
Land Board as a coinsured and shall otherwise comply with Section
9.2.
<PAGE>
ARTICLE X
Term, Default and Termination
10.1 Term. This Agreement shall commence on the date of
execution and, unless sooner terminated pursuant to this Article,
shall expire at 12:00 noon on May 1, 2081.
10.2 Default and Termination.
(a) The following events shall constitute Events of
Default under this Agreement:
(i) The filing by a party of a petition in bankruptcy,
insolvency or for reorganization under the bankruptcy laws of he
United States or under any insolvency act of any state, the
dissolution of a party, or a party making an assignment for the
benefit of creditors;
(ii) The institution against a party of involuntary
proceedings under any such bankruptcy law or insolvency act or for
dissolution, or the appointment of a receiver or trustee for all or
substantially all of the property of a party, which proceeding is
not dismissed or receivership or trusteeship is not vacated within
sixty (60) days after such institution or appointment; or
(iii) The material default in the performance of any
material term, covenant or condition in this Agreement which
default shall continue and not be cured for a period of thirty
(30) days after written notice specifically setting forth the
nature of the default has been given by the non-defaulting party to
the defaulting party, or if more than thirty (30) days is
reasonably required to cure such matter complained of, if the
defaulting party shall fail to commence to correct the same within
said thirty (30) day period or shall thereafter fail to prosecute
the same to completion with reasonable diligence.
(iv) For the purposes of this subsection
10.2(a), it shall be a material default in a material
term or condition of this Agreement if Pure Cycle's
performance of any of its obligations hereunder fails
consistently, after written notice specifically
identifying the performance deficiency and a reasonable
opportunity to cure, to meet generally accepted standards
of performance for public wastewater systems in the
metropolitan Denver area. Such failure may consist, by
way of illustration and not by way of limitation, of
consistent and repeated instances of the following: lack
of or unreasonably delayed response to requests for
service; inaccurate, incomplete or late reporting or
record keeping; failure to furnish competent,
professional, trained personnel; failure to remove
violent or insubordinate personnel; negligent or
intentional damage to or loss or destruction of Rangeview
property or other impairment of Rangeview assets;
substandard operation of the Wastewater System as
demonstrated by backups, accumulation of grease or other
obstructions in Mains, lack of routine facility
inspections, observations, repairs and maintenance, main
breaks, spills, unusual regulatory agency involvement
with or attention to system, unusual level of customer
complaints and the like. It is the intent of this
provision to enable Rangeview to terminate for default if
the cumulative effect of deficiencies such as those
listed above is such that, taken as a whole and measured
over a reasonable period of time not to exceed 24 months,
Pure Cycle's performance does not meet generally accepted
standards for the operations of a public wastewater
system in the metropolitan Denver area.
<PAGE>
(b) If an Event of Default shall occur, then the non-
defaulting party may, at its option, without any prejudice to any
other remedies it may have, (i) terminate this Agreement upon
giving written notice of termination to the defaulting or breaching
party, and, if Rangeview is the non-defaulting party, at its
option, exercise its rights under Section 10.3, and/or
(ii) commence an action for specific performance of the obligations
of the defaulting party and/or damages proximately caused by the
default or breach and its costs and reasonable attorneys' fees
(including costs incurred to cure such default pursuant to
Section 10.2(c)).
(c) If either party shall act or fail to act in a manner
which would constitute an Event of Default under this Agreement or
an Event of Default (as that term is defined in the Lease) under
the Lease, immediately, with the passage of time, with notice, or
any of the foregoing, the non-defaulting party may, at its option,
without prejudice to any other remedies it may have, cure such
Event of Default and seek reimbursement from the defaulting party
for any costs and damages associated therewith or offset such costs
and damages from any amounts owed to the defaulting party under
this Agreement or otherwise without waiting for the thirty-day
period provided for in Section 10(a)(iii) to run.
10.3 Declaration of Forfeiture. If an Event of Default
occurs and Rangeview terminates this Agreement or in the event of a
termination pursuant to Section 10.4, Rangeview shall have the
right, in connection with such termination, to expel Pure Cycle
from the Service Area and those claiming through or under Pure
Cycle pursuant to this Agreement, and remove the effects of both or
either, without being deemed guilty of any manner of trespass and
without prejudice to any other remedies. In the event of such
termination, Pure Cycle shall surrender and peacefully deliver to
Rangeview all property of Rangeview of whatever kind, that was in
Pure Cycle's possession or control. Such property shall be
returned to Rangeview in good condition (subject to any existing
licenses related to the delivery of water), plus any interest of
Pure Cycle in the Wastewater System. Subject to the following
sentence, title to such assets will be conveyed to Rangeview free
and clear of all security interests, liens and encumbrances
existing at the time of delivery to Rangeview. Notwithstanding the
foregoing, Pure Cycle shall have the right to encumber the revenues
it receives pursuant to this Agreement in connection with the
construction and development of the Wastewater System but only to
the extent necessary for financings obtained for construction and
development of the Wastewater System prior to termination. Upon
such termination, if Pure Cycle shall remain in possession of any
part of property described above, Pure Cycle shall be guilty of an
unlawful detainer and shall be subject to eviction or removal,
forcibly or otherwise, to the extent provided by law.
10.4 Pure Cycle Right of Termination. Pure Cycle may
terminate this Agreement at any time without cause upon giving one
year's prior written notice to Rangeview. During the one-year
period, Pure Cycle shall continue to discharge all of its
obligations under this Agreement and shall be entitled to the
benefits of this Agreement, unless Rangeview, at its option,
requires Pure Cycle to discontinue providing services hereunder
prior to the expiration of the one-year notice period.
Notwithstanding the foregoing, however, Pure Cycle may not
terminate this Agreement without Rangeview's consent unless all
Rangeview Facilities required to be built in order for Rangeview to
meet its obligations under a Service Agreement which has been
signed are fully completed and finally accepted by Rangeview.
10.5 Rangeview Buy-out Right. The parties acknowledge that
at some point during the term of this Agreement Rangeview may
determine that it desires to take over the operation of the
Wastewater System or otherwise make a change with regard to the
service provider. The parties also acknowledge that Pure Cycle has
and will continue to make substantial investments consisting of
initial and early phase development, corollary investments in its
water and other interests in Rangeview's Service Area and carrying
costs of capital consisting of the depreciation of investments
<PAGE>
and any opportunity costs of its investment in the Wastewater
System. The parties agree that Rangeview may terminate this
Agreement upon one (1) year written notice without cause, provided
it makes payment at the end of the one (1) year period of a buy-out
amount based on the following methodology: 1) The value of Pure
Cycle's investment will be obtained from the annual audited reports
of Pure Cycle's wastewater books following NARUC standards. 2)
Corollary investments will be based upon the present value of the
foregone income stream and will be considered if such investments
have been approved in advance by Rangeview. 3) The carrying cost
of capital will consist of two components: a) the interest costs
of funds borrowed or invested by Pure Cycle for the Wastewater
System, which will be determined by the actual interest cost
incurred by Pure Cycle and all related prepayment penalties; and b)
the opportunity cost of investment capital to generate future
earnings, which will be calculated as the present value of the net
earnings over the remaining duration of the Agreement. Disputes as
to an appropriate buy out amount under this Section will be settled
by arbitration pursuant to Section 11.17 of this Agreement with a
requirement that the arbitrator(s) have an expertise in the area of
utility rate structures.
ARTICLE XI
General Provisions
11.1 Records. In addition to complying with section 5.6
above, Pure Cycle shall prepare and maintain complete and accurate
records necessary to the orderly development, administration,
operation and maintenance of the Wastewater System, and which are
required to be kept by local, state, or federal statutes,
ordinances, or regulations in connection with the functions
performed by Pure Cycle hereunder. Such records include all design
and construction contract documents for Rangeview Facilities,
including record or as-built drawings. All such records shall be
the sole and exclusive property of Rangeview, but Pure Cycle may at
its sole expense copy all of such records as it may desire. All
such records shall be kept and maintained at such location and in
the official custody of such person as Rangeview shall from time to
time direct in writing. Pure Cycle shall follow District
instructions and guidelines concerning any and all requests for
public records made pursuant to Article 72 of Title 24, C.R.S., as
to any records within its possession or control.
11.2 Compliance with Laws. Pure Cycle shall perform its
obligations under this Agreement in such a manner that the
Wastewater System and all actions taken by Pure Cycle pursuant to
this Agreement comply fully with all applicable federal, state and
local statutes, regulations, ordinances, permits and orders,
including without limitation the federal Clean Water Act, and the
Rules and Regulations and Design Standards of Rangeview.
11.3 Taxes, Fees and Assessments. Pure Cycle shall ensure
that all construction contractors avail themselves of Rangeview's
exemption from state and local sales and use taxes whenever
possible. If tax liabilities are incurred in connection with the
work or the materials to be utilized in accomplishing the functions
of Pure Cycle pursuant to this Agreement, Pure Cycle shall be
solely responsible for and shall pay all such liabilities. Pure
Cycle shall pay all fees, charges and assessments incurred in the
performance of its obligations hereunder.
11.4 Assignment. Pure Cycle may assign its interest in this
Agreement, but only upon terms expressly approved in writing by
Rangeview, in its sole discretion. Any attempted assignment in
contravention of this Section shall be null and void.
Notwithstanding the foregoing, Pure Cycle may contract with third
parties to perform portions of its obligations under this Agreement
and such action on Pure Cycle's part shall not be deemed an
assignment of its interest in this Agreement.
<PAGE>
11.5 Notice. All notices required by this Agreement shall be
in writing and shall be delivered to the person to whom the notice
is directed, in person, by courier service or by United States mail
as a certified item, return receipt requested, addressed to the
address stated below. Notices delivered in person or by courier
service shall be deemed given when delivered to the person to whom
the notice is directed. Notices delivered by mail shall be deemed
given on the date of delivery as indicated on the return receipt.
The parties may change the stated address by giving ten (10) days'
written notice of such change pursuant to this Section.
If to Rangeview:
Rangeview Metropolitan District
141 Union Boulevard, Suite 150
Lakewood, Colorado 80228
Attention: President
and
If to Pure Cycle:
Pure Cycle Corporation
5650 York Street
Commerce City, Colorado 80022
Attention: President
11.6 Construction. Where required for proper interpretation,
words in the singular shall include the plural, and the masculine
gender shall include the neuter and the feminine, and vice versa,
as is appropriate. The article and section headings are for
convenience and are not a substantive portion of the Agreement.
The Agreement shall be construed as if it were equally drafted in
all aspects by all parties.
11.7 Entire Agreement. This Agreement, including the items
referenced herein or to be attached in accordance with the
provisions of this Agreement, constitutes the entire agreement
among the parties pertaining to the subject matter of this
Agreement and supersedes all prior and contemporaneous agreements
and understandings of the parties as to the subject matter of this
Agreement. No representation, warranty, covenant, agreement or
condition not expressed in this Agreement shall be binding upon the
parties or shall change or restrict the provisions of this
Agreement.
11.8 Authority. Each of the parties represents and warrants
that it has all requisite power, corporate and otherwise, to
execute, deliver and perform its obligations pursuant to this
Agreement, that the execution, delivery and performance of this
Agreement and the documents to be executed and delivered pursuant
to this Agreement have been duly authorized by it, and that upon
execution and delivery, this Agreement and all documents to be
executed and delivered pursuant to this Agreement will constitute
its legal, valid and binding obligation, enforceable against it in
accordance with their terms.
<PAGE>
11.9 Counterparts. This Agreement may be executed in one or
more counterparts, all of which together shall constitute one and
the same instrument.
11.10 Amendment. This Agreement shall not be amended except
by a writing executed by both parties.
11.11 Binding Effect. The benefits and terms and obligations
of this Agreement shall extend to and be binding upon the
successors or permitted assigns of the respective parties hereto.
11.12 Severability. If any clause or provision of this
Agreement is illegal, invalid or unenforceable under present or
future laws effective during the term of this Agreement, then, and
in that event, it is the intention of the parties hereto that the
remainder of this Agreement shall not be affected thereby. It is
also agreed that in lieu of each clause or provision of this
Agreement that is illegal, invalid or unenforceable, there shall be
added as a part of this Agreement a clause or provision as similar
in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
11.13 Duty of Good Faith and Fair Dealing; Regular
Consultation. The parties acknowledge and agree that each party
has a duty of good faith and fair dealing in its performance of
this Agreement.
11.14 Further Assurance. Each of the parties hereto, at any
time and from time to time, will execute and deliver such further
instruments and take such further action as may reasonably be
requested by the other party hereto, in order to cure any defects
in the execution and delivery of, or to comply with or accomplish
the covenants and agreements contained in this Agreement and/or any
other agreements or documents related thereto.
11.15 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado and
applicable federal law.
11.16 Arbitration. Any controversy or claim arising out of
or relating to the computation of amounts due pursuant to
Section 6.1 under this Agreement and all other controversies or
claims which the parties have expressly agreed herein shall be
submitted to arbitration shall be settled by arbitration
administered by the American Arbitration Association in accordance
with its commercial rules, and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction
thereof.
11.17 Litigation and Attorneys' Fees. Except as provided in
Section 11.17 above, in the event of claims, disputes or other
disagreements between the parties which the parties are not able to
resolve amicably, either party may bring suit in a court of
competent jurisdiction seeking resolution of the matter. The
prevailing party in any arbitration or suit shall be entitled to
recover its reasonable attorneys' fees and costs from the other
party.
11.18 Force Majeure. Should either party be unable to
perform any obligation required of it under this Agreement, other
than the payment of money, because of any cause beyond its control
(including, but not limited to war, insurrection, riot, civil
commotion, shortages, strikes, lockout, fire, earthquake, calamity,
windstorm, flood, material shortages, failure of any suppliers,
freight handlers, transportation vendors or like activities, or any
other force majeure), then such party's performance of any such
obligation shall be suspended for such period as the party is
unable to perform such obligation.
<PAGE>
11.19 Conflicts of Interest. The parties hereto acknowledge
that certain members of the board of directors of Rangeview are
either officers, directors or employees of Pure Cycle and may have
conflicts of interest with regard to this transaction. Rangeview
represents and warrants that such board members have, pursuant to
24-18-110, C.R.S., filed all necessary disclosure statements with
Rangeview and the Colorado Secretary of State. Pure Cycle
represents and warrants that the members of Pure Cycle's board of
directors who also serve on the Rangeview board of directors have
fully disclosed such interests to the disinterested board members
of Pure Cycle prior to obtaining board approval of this Agreement
and that those members with potential conflicts have abstained from
voting on this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Service Agreement on the date first written above.
ATTEST: RANGEVIEW METROPOLITAN DISTRICT,
ACTING BY AND THROUGH ITS
WASTEWATER ACTIVITY ENTERPRISE
By: By:
Title: Title:
ATTEST: PURE CYCLE CORPORATION
By: By:
Title: Title:
CERTIFICATE OF THE DESIGNATIONS, POWERS, PREFERENCES
AND RIGHTS OF
SERIES A-1 CONVERTIBLE PREFERRED STOCK
($.001 Par Value)
of
PURE CYCLE CORPORATION
______________________
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
______________________
PURE CYCLE CORPORATION, a Delaware corporation (the
"Corporation"), does hereby certify that the following resolutions
were duly adopted by the board of directors of the Corporation
pursuant to authority conferred upon the board of directors by
Article IV of the Certificate of Incorporation of the Corporation,
which authorizes the issuance of up to 25,000,000 shares of
Preferred Stock, at a meeting of the board of directors duly held
on May 10, 1998:
RESOLVED, that one series of the class of authorized Preferred
Stock, $.001 par value, of the Corporation is hereby created and
that the designations, powers, preferences and relative,
participating, optional or other special rights of the shares of
such series, and qualifications, limitations or restrictions
thereof, are hereby fixed as follows:
. Number of Shares and Designation. 1,600,000 shares of
the Preferred Stock, $.001 par value, of the Corporation are hereby
constituted as a series of the Preferred Stock designated as Series
A-1 Convertible Preferred Stock (the "Series A-1 Preferred Stock").
. Liquidation.
. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of
the Series A-1 Preferred Stock will be entitled to be paid, before
any distribution or payment is made upon any other equity
securities of the Corporation, the amount of $2.00 per share less
an amount equal to all dividends paid thereon (the "Liquidation
Value"); provided, however, that such preference on liquidation
shall only be paid from the Export Water or the proceeds of a
disposition of such asset.
. In addition to the preference provided for in this
Section 2, upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary the holders of the
Series A-1 Preferred Stock will be entitled to share in any
distribution or payment made to the holders of Common Stock,
whether from the Export Water or otherwise, on a pro rata basis
with the holders of the Common Stock determined as if such holders
had converted their
<PAGE>
Series A-1 Preferred Stock to Common Stock pursuant to Section 4
hereof immediately prior to such liquidation, dissolution or
winding up.
. The Corporation will mail written notice of any
distribution in connection with such liquidation, dissolution or
winding up, not less than 60 days prior to the payment date
stated therein, to each record holder of Series A-1 Preferred
Stock. Neither the consolidation or merger of the Corporation
into or with any other corporation or corporations, nor the sale
or transfer by the Corporation of all or any part of its assets,
nor the reduction of the capital stock of the Corporation, will
be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this Section 2.
. Dividends.
. General Obligations. The holders of the Series A-
1 Preferred Stock shall be entitled to receive cash dividends, as
set forth in this Section 3 or when and as declared by the board
of directors out of funds legally available for such purpose in a
total amount of $2.00 per share, and no more. Each share of
Series A-1 Preferred Stock shall earn and accrue a dividend only
if and when Gross Proceeds, after payment of royalties pursuant
to the Amended and Restated Lease, are received from the
marketing, sale or other disposition of the Export Water by Inco
Securities Corporation, the Corporation or the Export Water
Contractor in the amounts set forth below (a "Qualifying
Rangeview Sale"):
Series Proceeds Required
Series A-1 $23,036,233 to $32,026,232
Such dividend shall be paid upon completion of any Qualifying
Rangeview Sale unless payment is prohibited by Delaware law. The
holders of the Series A-1 Preferred Stock shall be entitled to
35.6% of that portion of the proceeds between $23,036,233 and
$32,026,232 from a Qualifying Rangeview Sale up to the total
amount of $3,200,000 ($2.00 per share). No dividends shall be
paid on Common Stock unless all dividends accrued on the Series A-
1 Preferred Stock have been paid.
. Distribution of Partial Dividend Payment. If
at any time less than the total amount of dividends have accrued
with respect to the Series A-1 Preferred Stock, any such payment
will be distributed ratably among the holders of the Series A-1
Preferred Stock based upon the number of shares held by such
holders.
. Cessation of Dividend Earnings. Once the
Corporation sells, transfers or otherwise conveys all of its
remaining interest in the Export Water or its interest in such
asset expires and the Corporation has received all proceeds
available to it from such asset, the Series A-1 Preferred Stock
will cease to accrue dividends even if the earnings from the
Export Water total less than $32,026,232.
<PAGE>
. Conversion.
. Right to Convert. Each share of Series A-1
Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the Issuance Date of such share at the
office of the Corporation, into 5.5556 fully paid and non-
assessable shares of Common Stock (the "Conversion Rate").
. Fractional Shares. In the event the aggregate
number of shares of Series A-1 Preferred Stock being converted by a
holder thereof is convertible into a number of shares of Common
Stock which would require the issuance of a fractional interest in
a share of Common Stock, the Corporation shall deliver cash in the
amount of the fair market value of such fractional interest.
. Accrued Dividends. If, at the time the holder
of shares of Series A-1 Preferred Stock exercises its right of
conversion under Section 4.A., such holder's shares of Series A-1
Preferred Stock have accrued dividends which remain unpaid at the
time of such conversion, such holder's right to receive dividends
on the shares so converted, to the extent accrued but unpaid on the
date of conversion, shall continue.
. Mandatory Conversion. In the event that (i)
the full dividends earnable on the Series A-1 Preferred Stock have
been paid, or (ii) the Corporation has sold, transferred, or
otherwise conveyed all of its remaining interest in the Export
Water or its interest in such asset has expired, or (iii) a
majority of the board of directors and the holders of a majority of
the Series A-1 Preferred Stock then outstanding voting as a class
determine that it is no longer economically feasible to develop the
Export Water, all shares of Series A-1 Preferred Stock shall
thereupon be converted into shares of Common Stock of the
Corporation at the Conversion Rate then in effect. Any such
conversion shall be deemed to take place at 5:01 Mountain Time on
the day such dividends are paid, such interest is sold,
transferred, or otherwise conveyed or expires, or the vote of the
board of directors and the holders of the Series A-1 Preferred
Stock becomes effective, and at that time the holders of the Series
A-1 Preferred Stock shall be treated for all purposes as the record
holders of shares of Common Stock; provided, however, that the
right to receive dividends on the shares so converted, to the
extent accrued but unpaid (whether or not declared) on the date of
such conversion, shall continue.
. Mechanics of Conversion. Before any holder of the
Series A-1 Preferred Stock shall be entitled to voluntarily convert
the same into shares of Common Stock, and before the holder of
Series A-1 Preferred Stock that has been converted into Common
Stock pursuant to Section 4.D above shall be entitled to receive a
replacement certificate therefor, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office
of the Corporation, in the case of a conversion pursuant to Section
4.A. above, shall give written notice to the Corporation at such
office that he or she elects to convert the same and shall state
therein his or her name or the name or names of his or her nominees
in which he or she wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to
such holder of the Series A-1 Preferred Stock, or to his or her
nominee or nominees, a certificate or certificates for the number
of shares of Common Stock to which he or she shall be entitled as
aforesaid. Any optional conversion shall be deemed to have taken
place at 5:01 Mountain Time on the date of such surrender of the
shares to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on
<PAGE>
such date; provided, however, that the right to receive dividends
on the shares so converted, to the extent accrued but unpaid on the
date of such conversion (whether or not declared), shall continue.
. Adjustment for Combinations or Consolidations
of Common Stock. In the event the Corporation at any time or from
time to time after the Issuance Date effects a subdivision,
combination or reclassification of its outstanding shares of Common
Stock into a greater or lesser number of shares, then and in each
such event the Conversion Rate shall be increased or decreased
proportionately.
. Adjustments for Merger or Reorganization, etc.
In case of any consolidation or merger of the Corporation with or
into another corporation or the conveyance of all or substantially
all of the assets of the Corporation to another corporation or
other person, provision shall be made so that each share of the
Series A-1 Preferred Stock shall thereafter be convertible into the
number of shares of stock or other securities or property to which
a holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series A-1 Preferred Stock
would have been entitled upon such consolidation, merger or
conveyance; and, in any such case, appropriate adjustment (as
determined by the board of directors) shall be made in the
application of the provisions herein set forth with respect to the
rights and interest thereafter of the holders of the Series A-1
Preferred Stock, to the end that the provisions set forth herein
(including provisions with respect to changes in and other
adjustments of the Conversion Rate) shall thereafter be applicable,
as nearly as they reasonably may be, in relation to any shares of
stock or other securities or property thereafter deliverable upon
the conversion of the Series A-1 Preferred Stock.
. Voting.
. Except as set forth in Section 5B., holders of
the Series A-1 Preferred Stock shall have the right to vote
together with the Common Stock, and not separately as a class, for
the election of directors and upon all other matters to be voted on
by the holders of the Common Stock of the Corporation. Every
holder of shares of the Series A-1 Preferred Stock shall have the
number of votes equal to the number of shares of Common Stock that
his or her shares of Series A-1 Preferred Stock would be
convertible into pursuant to Section 4 on the record date of the
meeting at which such shares are being voted multiplied by 1.25.
. So long as any shares of the Series A-1
Preferred Stock remain outstanding, the consent of the holders of a
majority of the shares of the Series A-1 Preferred Stock
outstanding voting separately as a class (with each share being
entitled to one vote) in person or by proxy, either in writing or
at any special or annual meeting, shall be necessary to permit,
effect or validate any one or more of the following:
. The authorization, creation or issuance,
or any increase in the authorized or issued amount, of (a) Series A-
1 Preferred Stock or (b) any class or series of stock ranking prior
to or on a parity with the Series A-1 Preferred Stock as to
dividends from earnings from the Export Water or the distribution
of the Export Water or the proceeds therefrom;
. The amendment, alteration or repeal,
whether by merger, consolidation or otherwise, of any of the
provisions of the Certificate of Incorporation of the Corporation
which would adversely affect any right, preference or voting power
of the Series A-1 Preferred Stock or of the holders thereof.
<PAGE>
. Any transaction by the Corporation which would
have the effect of decreasing the Surplus (as defined in Section
154 of the Delaware General Corporation Law) of the Corporation by
more than $500,000 or which would cause its Surplus to be equal to
less than $1,000,000;
. Any expenditures by the Corporation in
excess of $50,000 in any one month at any time that the
Corporation's Surplus is equal to or less than $1,000,000; and
. The merger or consolidation of the
Corporation with or into one or more other corporations or business
entities where the Corporation is not the surviving entity;
provided, however, that no such consent shall be required if the
merger and governing documents of the surviving entity provide for
the issuance of securities to holders of the Series A-1 Preferred
Stock with economic and voting rights equivalent to the rights
accorded the Series A-1 Preferred Stock under this Certificate.
. At each meeting or at any adjournment thereof
at which the holders of the Series A-1 Preferred Stock have the
right to vote as a class, the presence, in person or by proxy, of
the holders of a majority of the Series A-1 Preferred Stock then
outstanding will be required to constitute a quorum. The vote of a
majority of such quorum will be required to take any action at such
meeting. Cumulative voting by holders of Series A-1 Preferred
Stock is prohibited. In the absence of a quorum, a majority of the
holders present in person or by proxy of the Series A-1 Preferred
Stock shall have the power to adjourn the portion of the meeting
related to that particular series for a period of up to 30 days
without notice other than announcement at the meeting until a
quorum shall be present.
. Corporation's Right to Purchase Series A-1 Preferred
Stock.
. The Corporation shall have the right to
purchase shares of Series A-1 Preferred Stock in the public market
at such prices as may then be available in the public market for
such shares and shall have the right at any time to acquire any
Series A-1 Preferred Stock from the owner of such shares on such
terms as may be agreeable to such owner. Shares of Series A-1
Preferred Stock may be acquired by the Corporation from any
stockholder pursuant to this Section 6.A. without offering any
other stockholder an equal opportunity to sell his stock to the
Corporation, and no purchase by the Corporation from any
stockholder pursuant to this Section 6.A. shall be deemed to create
any right on the part of any stockholder to sell any shares of
Series A-1 Preferred Stock (or any other stock) to the Corporation.
The purchase by the Corporation of shares of Series A-1 Preferred
Stock pursuant to this Section 6.A. shall not be deemed for any
purpose to be a redemption. Such shares shall not be entitled to
receive dividends while held by the Company.
. Notwithstanding the foregoing provisions of
this Section 6, if a dividend upon any shares of Series A-1
Preferred Stock is past due, the Corporation shall not purchase or
otherwise acquire any shares of Series A-1 Preferred Stock, except
(i) pursuant to a purchase or exchange offer made on the same terms
to all holders of the Series A-1 Preferred Stock, or (ii) by
conversion of shares of Series A-1 Preferred Stock into, or
exchange of such shares for, Common Stock or any other stock of the
Corporation ranking junior to the Series A-1 Preferred Stock as to
dividends and upon liquidation, dissolution or winding up of the
Corporation.
. No holder of Series A-1 Preferred Stock shall
have any right to require the Corporation to redeem any or all of
the shares of Series A-1 Preferred Stock.
. Preemptive Rights. The holders of shares of Series
A-1 Preferred Stock are not entitled to any preemptive or
subscription rights in respect of any securities of the
Corporation.
<PAGE>
. Notices. Any notice required hereby to be given to
the holders of shares of Series A-1 Preferred Stock shall be
sufficiently given if sent by telecopier, registered or certified
mail, postage prepaid, by express mail or by other express courier
addressed to each holder of record at his address appearing on the
books of the Corporation. All notices and other communications
shall be effective (i) if mailed, when received or three (3) days
after mailing, whichever is earlier; (ii) if sent by express mail
or courier, when delivered; and (iii) if telecopied, when received
by the telecopier to which transmitted (a machine-generated
transaction report produced by sender bearing recipient's
telecopier number being prima facie proof of receipt).
. Transfer Costs. The Corporation shall pay any and
all documentary stamp and other transaction taxes attributable to
the issuance or delivery of shares of Common Stock upon conversion
of any shares of Series A-1 Preferred Stock; provided, however,
that the Corporation shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issue or
delivery of shares of Common Stock in a name other than that of the
holder of the Series A-1 Preferred Stock to be converted and no
such issue or delivery shall be made unless and until the person
requesting such issue or delivery has paid to the Corporation the
amount of any such tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.
. Definitions.
"Issuance Date" shall mean the initial date of the
issuance of any shares of the Series A-1 Preferred
Stock.
"Amended and Restated Lease" shall mean the lease
between the Rangeview Metropolitan District, a
quasi-municipal corporation and political
subdivision of the State of Colorado, and the State
of Colorado acting through the State Board of Land
Commissioners (the "State") denominated State Lease
Number S-37280, dated April 26, 1982, as amended
and restated April 11, 1996.
"Comprehensive Amendment Agreement No. 1" shall
mean the agreement entered into as of April 11,
1996 among the Corporation, the State, OAR,
Incorporated, Willard G. Owens, H.F. Riebesell, and
various investors who had invested in the
Corporation through investment agreements and stock
purchase agreements entered into from 1990 through
1994, which agreement amends the Corporation's
obligations under the prior investment and stock
purchase agreements and defines the rights of the
parties to Gross Proceeds from the marketing, sale,
or other disposition of the Export Water.
"Export Water" shall mean the 1,165,000 acre-feet
of water deeded by Rangeview and the State to the
Corporation pursuant to the terms of the Amended
and Restated Lease and an agreement for the sale of
export water (the "Export Water Agreement"), which
is attached to the Amended and Restated Lease as
Exhibit C.
<PAGE>
"Export Water Contractor" shall have the meaning
set forth in Section 6.1 of the Amended and
Restated Lease.
"Gross Proceeds" shall have the meaning set forth in
Section 2.4 of the Comprehensive Amendment Agreement.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate of Designation this 10th day of May, 1998.
PURE CYCLE CORPORATION
By: /s/ Thomas P. Clark
Thomas P. Clark, President
ATTEST:
By: /s/ Mark W. Harding
Mark W. Harding, Secretary
. CERTIFICATE OF THE DESIGNATIONS, POWERS, PREFERENCES
AND RIGHTS OF
SERIES C CONVERTIBLE PREFERRED STOCK
($.001 Par Value)
of
PURE CYCLE CORPORATION
______________________
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
______________________
PURE CYCLE CORPORATION, a Delaware corporation (the
"Corporation"), does hereby certify that the following resolutions
were duly adopted by the board of directors of the Corporation
pursuant to authority conferred upon the board of directors by
Article IV of the Certificate of Incorporation of the Corporation,
which authorizes the issuance of up to 25,000,000 shares of
Preferred Stock, at a meeting of the board of directors duly held
on August 3, 1998
RESOLVED, that one series of the class of authorized Preferred
Stock, $.001 par value, of the Corporation is hereby created and
that the designations, powers, preferences and relative,
participating, optional or other special rights of the shares of
such series, and qualifications, limitations or restrictions
thereof, are hereby fixed as follows:
1. Number of Shares and Designation. 3,200,000 shares of the
Preferred Stock, $.001 par value, of the Corporation are hereby
constituted as a series of the Preferred Stock designated as Series
C Convertible Preferred Stock (the "Series C Preferred Stock").
2. Liquidation.
A. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of
the Series C Preferred Stock will be entitled to share in any
distribution or payment made to the holders of Common Stock on a
pro rata basis with the holders of the Common Stock determined as
if such holders had converted their Series C Preferred Stock to
Common Stock pursuant to Section 4 hereof immediately prior to such
liquidation, dissolution or winding up.
<PAGE>
B. The Corporation will mail written notice of any
distribution in connection with such liquidation, dissolution or
winding up, not less than 60 days prior to the payment date stated
therein, to each record holder of Series C Preferred Stock.
Neither the consolidation or merger of the Corporation into or with
any other corporation or corporations, nor the sale or transfer by
the Corporation of all or any part of its assets, nor the reduction
of the capital stock of the Corporation, will be deemed to be a
liquidation, dissolution or winding up of the Corporation within
the meaning of this Section 2.
3. Dividends. The holders of the Series C Preferred
Stock will be entitled to share in any dividend or distribution or
payment made to the holders of Common Stock on a pro rata basis
with the holders of the Common Stock determined as if such holders
had converted their Series C Preferred Stock to Common Stock
pursuant to Section 4 hereof immediately prior to such dividend or
distribution.
4. Conversion.
A. Right to Convert. Each share of Series C Preferred
Stock shall be convertible, at the option of the holder thereof, at
any time, into 1 fully paid and non-assessable share of Common
Stock (the "Conversion Rate"), provided that the Corporation has
authorized but unissued shares of Common Stock to deliver to the
holders of the Series C Preferred Stock at the time of such
conversion.
B. Fractional Shares. In the event the aggregate
number of shares of Series C Preferred Stock being converted by a
holder thereof is convertible into a number of shares of Common
Stock which would require the issuance of a fractional interest in
a share of Common Stock, the Corporation shall deliver cash in the
amount of the fair market value of such fractional interest.
C. Accrued Dividends. If, at the time the holder of
shares of Series C Preferred Stock exercises its right of
conversion under Section 4.A, such holder's shares of Series C
Preferred Stock have accrued dividends which remain unpaid at the
time of such conversion, such holder's right to receive dividends
on the shares so converted, to the extent accrued but unpaid on the
date of conversion, shall continue.
D. Mechanics of Conversion. Before any holder of the
Series C Preferred Stock shall be entitled to voluntarily convert
the same into shares of Common Stock, such holder shall surrender
the certificate or certificates therefor, duly endorsed, at the
office of the Corporation, in the case of a conversion pursuant to
Section 4.A above, shall give written notice to the Corporation at
such office that he or she elects to convert the same and shall
state therein his or her name or the name or names of his or her
nominees in which he or she wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to
such holder of the Series C Preferred Stock, or to his or her
nominee or nominees, a certificate or certificates for the number
of shares of Common Stock to which he or she shall be entitled as
aforesaid. Any conversion shall be deemed to have taken place at
5:01 Mountain Time on the date of such surrender of the shares to
be converted, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such
shares of Common Stock on such date; provided, however, that the
right to receive dividends on the shares so converted, to the
extent accrued but unpaid on the date of such conversion (whether
or not declared), shall continue.
<PAGE>
E. Adjustment for Combinations or Consolidations of
Common Stock. In the event the Corporation at any time or from
time to time after the date of issuance of any Series C Preferred
Stock effects a subdivision, combination or reclassification of its
outstanding shares of Common Stock into a greater or lesser number
of shares, then and in each such event the Conversion Rate shall be
increased or decreased proportionately.
F. Adjustments for Merger or Reorganization, etc. In
case of any consolidation or merger of the Corporation with or into
another corporation or the conveyance of all or substantially all
of the assets of the Corporation to another corporation or other
person, provision shall be made so that each share of the Series C
Preferred Stock shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder
of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series C Preferred Stock would
have been entitled upon such consolidation, merger or conveyance;
and, in any such case, appropriate adjustment (as determined by the
board of directors) shall be made in the application of the
provisions herein set forth with respect to the rights and interest
thereafter of the holders of the Series C Preferred Stock, to the
end that the provisions set forth herein (including provisions with
respect to changes in and other adjustments of the Conversion Rate)
shall thereafter be applicable, as nearly as they reasonably may
be, in relation to any shares of stock or other securities or
property thereafter deliverable upon the conversion of the Series C
Preferred Stock.
5. Voting.
A. Holders of the Series C Preferred Stock shall have
the right to vote together with the Common Stock, and not
separately as a class, for the election of directors and upon all
other matters to be voted on by the holders of the Common Stock of
the Corporation. Every holder of shares of the Series C Preferred
Stock shall have the number of votes equal to the number of shares
of Common Stock that his or her shares of Series C Preferred Stock
would be convertible into pursuant to Section 4 on the record date
of the meeting at which such shares are being voted.
B. At each meeting or at any adjournment thereof at
which the holders of the Series C Preferred Stock have the right to
vote as a class, the presence, in person or by proxy, of the
holders of a majority of the Series C Preferred Stock then
outstanding will be required to constitute a quorum. The vote of a
majority of such quorum will be required to take any action at such
meeting. Cumulative voting by holders of Series C Preferred Stock
is prohibited. In the absence of a quorum, a majority of the
holders present in person or by proxy of the Series C Preferred
Stock shall have the power to adjourn the portion of the meeting
related to that particular series for a period of up to 30 days
without notice other than announcement at the meeting until a
quorum shall be present.
6. Corporation's Right to Purchase Series C Preferred Stock.
A. The Corporation shall have the right at any time to
acquire any Series C Preferred Stock from the owner of such shares
on such terms as may be agreeable to such owner. Shares of Series
C Preferred Stock may be acquired by the Corporation from any
stockholder pursuant to this Section 6.A without offering any other
stockholder an equal opportunity to sell his stock to the
Corporation, and no purchase by the Corporation from any
stockholder pursuant to this Section 6.A shall be deemed to create
any right on the part of any stockholder to sell any shares of
Series C Preferred Stock (or any other stock) to the Corporation.
The purchase by the Corporation of shares of Series C Preferred
Stock pursuant to this Section 6.A shall not be deemed for any
purpose to be a redemption. Such shares shall not be entitled to
receive dividends while held by the Company.
<PAGE>
B. Notwithstanding the foregoing provisions of this
Section 6, if a dividend upon any shares of Series C Preferred
Stock is past due, the Corporation shall not purchase or otherwise
acquire any shares of Series C Preferred Stock, except (i) pursuant
to a purchase or exchange offer made on the same terms to all
holders of the Series C Preferred Stock, or (ii) by conversion of
shares of Series C Preferred Stock into, or exchange of such shares
for, Common Stock.
7. Preemptive Rights. The holders of shares of Series C
Preferred Stock are not entitled to any preemptive or subscription
rights in respect of any securities of the Corporation.
8. Notices. Any notice required hereby to be given to the
holders of shares of Series C Preferred Stock shall be sufficiently
given if sent by telecopier, registered or certified mail, postage
prepaid, by express mail or by other express courier addressed to
each holder of record at his address appearing on the books of the
Corporation. All notices and other communications shall be
effective (i) if mailed, when received or three (3) days after
mailing, whichever is earlier; (ii) if sent by express mail or
courier, when delivered; and (iii) if telecopied, when received by
the telecopier to which transmitted (a machine-generated
transaction report produced by sender bearing recipient's
telecopier number being prima facie proof of receipt).
9. Transfer Costs. The Corporation shall pay any and all
documentary stamp and other transaction taxes attributable to the
issuance or delivery of shares of Common Stock upon conversion of
any shares of Series C Preferred Stock; provided, however, that the
Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or
delivery of shares of Common Stock in a name other than that of the
holder of the Series C Preferred Stock to be converted and no such
issue or delivery shall be made unless and until the person
requesting such issue or delivery has paid to the Corporation the
amount of any such tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.
IN WITNESS WHEREOF, the undersigned have executed this
Certificate of Designation this 3 day of August, 1998.
PURE CYCLE CORPORATION
By:
Margaret Hansson, Vice President
ATTEST:
By:
Mark W. Harding, Secretary
