C150313 Feasibility Study - Laserfiche WebLink

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NOTE 2 – CONTINGENCIES AND COMMITMENTS – DAM REPAIRS Previous expenses for dam repairs including professional fees, such as engineering, were written off in prior years because, in Management’s opinion, prior engineering costs and repairs through August, 2009 held no value to future dam construction. The State of Colorado has identified certain problems with the dam and requested the Company to evaluate its condition and determine steps to be taken. The Company anticipates it will incur substantial repair and improvement costs in the next several years to comply with Colorado’s requirements. Further, if the new dam is not substantially completed by October 2010, Colorado could revoke any permitting for the reconstruction of the dam. Colorado has in the past extended its deadline, and it is management’s opinion that the extension will be granted, but there can be no assurance of the extension. A contingency exists with respect to this matter, the ultimate resolution of which cannot presently be determined. The Company believes that it will incur significant costs to reconstruct the dam. (See also the unaudited supplemental schedule of dam reconstruction costs.) Subsequent to December 31, 2009, the Company, through its related party, Two Rivers Water Company, has engaged a consultant at $4,000 per month through January 31, 2012. NOTE 3 – INCOME TAXES The Company is a Colorado nonprofit organization and is exempt from income taxes under Section 501(c)(12) of the Internal Revenue Code. For an organization to qualify under IRC 501(c)(12), it must satisfy the following requirements: Any excess of operating revenues over operating expenses must be returned to HCIC’s members. If any excess capital is put into a reserve or savings account, this account belongs to its members and not to HCIC. HCIC must also limit its return on capital to ensure savings or monetary benefit go to its members rather than shareholders. In the past, HCIC was classified as a 501(c)(12), non-profit corporation and was exempt from Federal income tax if 85% or more of its income is received from its members, and therefore does not pay income taxes. If more than 15% of the Company’s income is received from other sources other than its members then the Company would be subject to income taxes. During management’s review of the Company’s tax status as a non-profit, management believes that its non-profit tax status could be challenged by the Internal Revenue Service (“IRS”) due to potential violations by the Company in the Internal Revenue Code. If the Company is determined by the IRS to be a taxable entity, then the Company would be subject to federal and state income taxes. Management has determined that the potential past due taxes are immaterial. A contingency exists with respect to the non-profit taxation matter, the ultimate resolution of which cannot presently be determined. NOTE 4 – RELATED PARTY TRANSACTIONS Two Rivers Water Company, a Company’s shareholder, at December 31, 2009 has advanced $295,762 in costs for the benefit of the Company. As of February 28, 2010, the total advanced by Two Rivers was $464,726. The advances are uncollaterized, bear no interest and are due on demand. During 2008 and 2009, certain Company shareholders performed services in exchange for partial payment of their assessments. Services include work on the ditch and attending board meetings. For the years ended December 31, 2009 and 2008 these services were valued at $4,377 and $2,090, respectively and were included in operating expenses. Management believes that the value of the exchange of services for assessments represents fair value for services performed. - It must be organized and operated as a cooperative. - It must conduct activities described in IRC 501(c)(12) and the regulations. - It must derive 85 percent or more of its income from members. Page 10