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1980 THE FORT LYON CANAL COMPANY NOTES TO FINANCIAL STATEMENTS OCTOBER 31,1993 , Note 1. Brief History ~ Description of the Company The Fort Lyon Canal Company is a mutual ditch company organized under a special Colorado statute (C.R.S. 7-42-101). Mutual ditch companies have the power to make contractH and incur binding liabilities and they provide water to stockholders based on proportions of stock ownership. Operations are financed through stockholder approved assessments. The Company is governed by a five-man board of stockholder directors. who are elected yearly. The stockholders hold pro rata decrees of 933 cubic feet of direct flow rights and 115,000 acre feet of storag-e rights from the Arkansas River. The productivity of the water rights varies greatly in accordance with yearly climatic conditions. Irrigation area served is about 93,000 acres of mostly wheat, corn, sorghum and alfalfa. The canal system began during the year 1860, when a government engineer constructed a small ditch for the use of the Cheyenne and Arapahoe Indians, about three miles northwest of La Junta, Colorado. The "Arkansas River Land, Town and Canal Company" was fonned in 1883, and from that date to 1892 a series of successor companies expanded the main canal to its present 113 miles. The Fort Lyon Canal Company became the mutual ditch company owner of the system in July, 1897. A 50-mile storage canal and reservoir system was completed by the company in 1915. The Company has primarily been concerned with maintenance, water delivery and protection of water rights since that time. Note 2. Significant Accounting Policies The financial statements have been prepared on the accrual basis of accounting, which recognizes revenues when earned and expenses when liability for them is incurred. The statements are prepared in accordance with fund accounting concepts for non- profit organizations. Water inventory is recognized only if purchased water is on hand at year-end, and is presented at cost, a~ are inventories of supplies. For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company also includes restricted cash as part of cash equivalents. Canal rights-of-way: The Company hotds title to rights-of-way for the system through prescription" earned by the original construction and continual occupancy of the main canal, by purchase of a given strip of land 23