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THE NORTH POUDRE IRRIGATION COMPANY

1997

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DIRECTORS

Manuel Pineda .. .. .. ... Windsor, Colorado Gary Simpson ... Ault, Colorado Duane Aranci ... Fort Collins, Colorado Dorothy Schild ... .. ... Fort Collins, Colorado Dennis Bode ... ... ... Fort Collins, Colorado

OFFICERS

Manuel Pineda . ... President Duane Aranci ... Vice President Dale Henry ... Operations Manager Sharon Seaworth ... ... Secretary

ORDER OF BUSINESS

According to the By-Laws, the order of business of the stockholders meeting shall be as follows:

1. Meeting called to order by the chairman at 10:00 a.m.

2. Appointment of three stockholders of the Company as a credentials committee.

3. Registration of proxies with credentials committee 4. Report of credentials committee

5. Annual report

6. Nomination of directors

7. Opening of polls for election of directors 8. Old business

9. New business

(A) Vote on assessment for the year

The 1997 summer and early fall weather certainly affected the operations of not only the North Poudre Irrigation Co., but also the lives of people, their homes, property, land, crops and livestock. Again, it was an entirely different season when we look back at the water supply, the cool, wet weather in June, the flood in Fort Collins, the excessive rains and floods in the high plains of eastern Colorado and the 3-day snowstorm in October.

The year started out as a very mild winter with a normal amount of snowpack reported. We had a fairly typical warm sunny spring with scattered timely rains, which did not greatly affect farming operations, but we had rain off and on for almost all the month of June, which greatly affected the quality of the alfalfa crop.

The Board appropriated two and one-half acre feet of early water and four and one-half acre feet of seasonal water. There was a light demand for water during the month of June. The high demand was during the month of July until the rains hit again at the end of the month.

A tropical rainstorm hit the western part of the city of Fort Collins and Laporte starting on the 27th of July and continuing through July 28th.

Over 11 inches of rain were recorded in a 30 hour period. The ensuing rains caused a flood of water that claimed five lives and completely flooded out a mobile home park. Over $24,000,000 of damage was reported by residents and businesses from the Spring Creek area to the foothills in the western part of the city. Over 400 homes and businesses were damaged or totally destroyed. Colorado State University reported estimated damages to buildings, equipment and books of over

$140,000,000. Recovery continues at this writing.

The North Poudre system incurred some damages to roads, fences and ditches in the Boxelder drainage area.

An early fall snowstorm hit state-wide in Colorado on October 24-26, effectively halting all harvesting operations. Highways were closed and most air traffic into Denver International Airport was canceled. Ten persons across the state died during the three day storm and over 30,000 head of livestock perished. Livestock losses of over $20,000,000 have been reported with another $7,000,000 in crop losses reported by one eastern Colorado county.

Despite all the unusual weather, harvesting continued later, with some minor losses to corn fields. Sugar content in beets was expected to drop due to all the moisture from the wet snow. Livestock prices are at $67.50 to $70.50 @ cwt for choice steers holding steady to lower from last year.

Corn is at $4.80 to $4.95 @ cwt, wheat at $3.20 @ bushel and pinto beans at $17 to $18 @ cwt, all lower from last year. Sugar beet growers are expecting a 1997 crop payment to total an average price of $44.50 @

ton area wide. Dairy producers reported an average price of $12 @ cwt for their raw milk production . Corn silage in the pit was quoted at $28 ^@

2

ton. Alfalfa prices per ton range from $75 to $140 for premium grade baled hay. No report on brewing barley production or prices at this time.

The prices listed here are an average reflection of livestock and commodity prices for the month of November, 1997, in northern Colorado.

Various issues were addressed by the NPIC Board during the year. In January, the NPIC Board interviewed several applicants for the vacant position of Manager for the Company. In February, Dale Henry was employed as the Operations Manager for the NPIC.

A personnel litigation issue with former employee Mike Wich was settled out of court in March.

A change of use for the Fossil Creek Preferred Rights by the Poudre Prairie Mutual Reservoir and Irrigation Company is in the water court.

North Poudre filed an objection so it can look closely at the request.

A general Information and Operational Policy for the irrigation water users has been furnished with a season-end summary of the water you used during the 1997 irrigation season. We hope this information helps you in your plans for next year. We will be prepared to answer any questions on this subject.

Growth, land use, water demands and residential and commercial building and construction continues to be the subject of much discussion and planning in Larimer County and the city of Fort Collins. The NPIC reports that 62 stock transfers were made in 1997, representing a total of 602 shares. Approximately 13% went to M&l use.

The NPIC Board has been discussing the issue of planning and developing a water delivery policy regarding the use of North Poudre shares and the CBT units by the stockholders.

The city of Fort Collins boasts a population of over 106,000 people and is reported to be the 25th fastest growing city in the United States. The town of Wellington claims over 1800 people, consuming an estimated 93,000,000 gallons of water supplied by North Poudre's Reservoir #3.

Several new service oriented businesses are under construction, or completed on the east end of town adjacent to 1-25.

NPIC has applied to the Colorado Water Conservation Board for funds in the amount of $1 ,245,000 to finance the construction and rehabilitation of the following projects: 1 ). Installation of 1500 feet of outlet pipe south of #6 Reservoir; 2). Rehabilitation of #4 Reservoir; 3). Expanding the spillway at #5 Reservoir; 4). Installation of 1000 feet of pipe on the Buckeye Lateral; 5). Rehabilitation of the spillway at Indian Creek Reservoir.

The NPIC Board and the Buckeye Lateral Directors are currently working on plans for the NPIC to take over the operations and maintenance of the lateral. The Buckeye Lateral would pay the NPIC

$81 ,000 to take over the ditch and would also convey to the NPIC all the necessary ditch easements, accesses, rights-of-way and all property

3

rights wherever appropriate.

Employee and ditchrider, Bob Rees, has completed his new water computer program, which makes tracking and getting information to the stockholders much easier and accurate. The Board is very satisfied with the success of his program.

On the 17th of September, the NPIC was the successful bidder of 3 parcels of BLM land that were adjoining NPIC reservoir properties or were inundated by water. The parcels totaling 436.95 acres were purchased for $89,550. The lands were under or adjacent to #5, #6 and

#15 Reservoirs.

One year after the release of water and sediment from Halligan Reservoir (Sept. '96}, the North Fork of the Poudre is slowly but surely recovering from the impact to the fish population. Positive reports received from the Colorado Division of Wildlife and Geologist Ellen Wohl from CSU state that the fish are making a comeback and the sediment removal from the pools and stream bed are anywhere from 50% to 85%

scoured out. Detailed reports are in the NPIC files. Halligan spilled off and on during the water season helping to move the sediment downstream.

NPIC and the city of Fort Collins continue to discuss the Halligan expansion project. A further report will be made at the Annual meeting.

The employees, the Operations Manager and Vice President, Duane Aranci, acting as advisor, have accomplished a tremendous amount of work and maintenance throughout the NPIC system. Duane Aranci has been familiarizing Dale Henry to all the NPIC properties, structures and reservoirs, and the main objective of the company - to deliver the irrigation water.

Again, we wish to advise the stockholders that use water for irrigation.

Due to the continuing transfer of NPIC water to municipal-industrial use, the possibility exists that there may not be as much water available to rent as there has been in the past. Arrange and plan for your water needs for the season. Rental water could get more expensive, if you can find it. The M&l users at this time own 4,993 shares.

It has been our pleasure working with our office manager this past year. Sharon Seaworth's familiarity with the community, the stockholders, the operations and administration of the NPIC are invaluable. We have been pleasantly surprised by her handling of the computers, the books, the record keeping, the programming and her knowledge of the day to day operations of the Company. Sharon, thank you for your optimistic attitude and your accomplishments this past year.

We had over thirty stockholders attend our Forum this year. We are improving in that category. Lots of questions and discussion were brought forth. We wish to thank all those who took the time to join us the evening of November 20.

Vice President Duane Aranci's position on the NPIC Board will be up for election.

4

Please join us for the 96th Annual Stockholders meeting of the NPIC on Monday, February 2nd, 1998 at the Holiday Inn on Highway 14 and 1- 25. Lunch will be served. Come early to register, visit and ask questions.

We hope to see you all there.

Respectfully submitted, Manuel Pineda, President Board of Directors

The North Poudre Irrigation Company

For those stockholders that I have not had the pleasure of meeting yet, please allow me to introduce myself and give a brief personal history. My name is Dale Henry. I am a Fort Collins native. My

background includes construction estimations, utility pipeline, and heavy equipment experience. I am a college graduate with a degree in

computer technologies.

I began the position of Operations Manager last February. Since then, I have become familiar with the procedures and problems with operating an irrigation company. My first impression was one of just water delivery. But, as first impressions go, it was naturally somewhat short. However, as I become more accustomed to the issues and aspects surrounding water, I will strive to be professional, fair, and equitable to all concerned parties involved with The North Poudre Irrigation Company.

One area that I would like to touch on briefly is the fact that this was the first year that North Poudre Irrigation had a complete computerized water delivery program for tracking usage, deliveries, and orders. I cannot compliment Mr. Bob Rees, who designed and programmed it, enough. It has meant less confusion, less paper work, more control, and fewer mistakes. Bob is in the process of updating and modifying the water program and hopefully, next year we will have another qualified operator to run the program.

1997 proved to be an exceptional year for northern Colorado and the water community. We saw a fairly normal spring and the start of a hot summer. But just as with most anything, it all changed at the end of July with enormous rain storms. The North Poudre Irrigation system

sustained little damage associated with the flooding. We had a near washout of the Livermore ditch upstream from Park Creek Reservoir and several minor problems caused by over flows.

The most damage caused by the flooding was to access roads.

Namely, the roads leading to the Boxelder flood retention dams. B-5 and B-6 were almost entirely inaccessible due to washed out roads.

North Poudre Irrigation's maintenance personnel rebuilt the access roads. The maintenance personnel will have some major cleanup on the B-2 flood dam retention area as the debris damaged the fence and requires some special attention.

So much for the past season, I would like to give the shareholders some insight on what they may expect in the future. North Poudre Irrigation has been operated in the past with a reactionary philosophy. In other words, wait until it breaks, then fix it. This can be very costly and time consuming. Preventative and anticipatory procedures are going to be pursued in all maintenance, operations, and water delivery areas.

Major structures to begin with will be inspected, assessed, and listed according to their condition and requirements. Eventually, all structures,

6

no matter how small, will be done. This will enable us to project repair or replacements.

Shareholders can look for an integrated weed control program to be implemented. I plan on utilizing every resource available to combat and hopefully gain some control over the noxious and pest weeds on our system. Mechanical and chemical treatments will be used, and not just on an infrequent basis . Special attention will be given to the Sago Pond weed and moss that is inundating the system and causing problems .

A safety program will be implemented for the employees. This is not only for the safety of the personnel, but by having a documented program in place we may be able to lower our insurance costs. Which means saving the shareholders some operating costs.

Please feel free to contact me and discuss whatever issue you feel may be important. I am not a title holder and wish to be available to all shareholders if and when the situation arises.

Dale Henry,

Operations Manager

7

Year Assmt. A c. Ft/Share delivered

1985 100.00

1986 75.00

1987 75.00

1988 70.00

1989 75.00

1990 75.00

1991 75.00

1992 75.00

1993 75.00

1994 75.00

1995 75.00

1996 75.00

1997 85.00

$ 8.00 for Water Assessement 27.00 for ewes loan retirement

2.00 for Weed control

4.31 5.65 4.03 4.80 4.25 4.48 4.12 4.11 4.97 5.16 3.90 5.20 3.40

2.00 for Right of way acquisition 46.00 for Operation and maintenance

$ 85.00

Cost per Ac.Ft.

23.20 13.27 18.61 14.58 17.65 16.74 18.20 18.20 15.09 14.53 19.23 14.42 25.00

$ 51.00 per share due and payable April 1, 1998, interest at 1-1/2%

per month charged after May 1, 1998.

$ 34.00 per share due and payable October 1, 1998, interest at 1- 1/2% per month charged after November 1, 1998.

No water will be delivered on delinquent accounts.

Total assessments of $85.00 per share are due April 1, 1998 on two

shares or less.

Source

Storage - November 1, 1996 CST - November 1, 1996 North Fork

Munroe Canal South Side CST Quota

Distribution

Storage - November 1, 1997

Ag Stockholders (Seasonal & Early- 7310 shares) CST Direct (2690 shares)

Rental #6

CST Account- NP carryover November 1, 1997

Evaporation & distribution loss - 14.4%

34,227 available for ag delivery

Fossil Creek Reservoir

Preferred Rights Exchanged for CST North Poudre deliveries Rental

CST Quota 60%-24,000 Acre Feet

Acre Feet

40,845 6,900 25,496 30,010 3,414 12,600 119,265

53,924 34,227 12,010 2,000 12,100 114,261 5,004 119,265

3,420 3,000 -0- 2,000

8,420

Dividends Acre Feet Per Share

April 9, 1997 May 7, 1997 August 6, 1997

9

Seasonal Early 4.0

.5

1.0 1.5

4.5 2.5

HILL & HILL, P.C.

Attorneys at Law A Professional Corporation Fort Collins, Colorado 85022

December 2, 1997

Manuel Pineda, the President, in his annual report, has summarized many of the challenges faced by the North Poudre Board, the management, and the stockholders in 1997.

The issues facing North Poudre often require administrative management and legal assistance. As attorney for North Poudre, my task has been to help the Company deal with the laws, rules, and regulations that continue to grow and change like our population. Unfortunately, the legal system is increasingly expensive.

The substantial transfers in stock ownership over the last 30 years are a part of major changes in our area. As President Pineda has suggested, North Poudre water will not continue to be available for rental as the municipal and industrial needs increase. Thus, the Board and the stockholders will have to work on solutions to make water available to those farms and acreages which use irrigation water. The operation and maintenance of the North Poudre ditch system will be affected when water is transferred away to meet municipal and industrial use. North Poudre's allocation of 40,000 units in the Northern Colorado Water Conservancy District gives it flexibility, but this flexibility will soon be lost to a great extent. Many of these units will no longer be available for irrigation exchanges because of the increased need for domestic supplies. Also, irrigation costs will probably increase. It seems inevitable the Northern Colorado Water conservancy District will be charging more for its units by either an additional assessment, or seeking a change in fixed rate agreements which delivers the units at a $1.50 a unit, or both.

The total charge has been a $60,000.00 a year charge for North Poudre's 40,000 units. Any additional assessment or change may increase assessments for the stockholders in North Poudre.

With more and more emphasis on the need for domestic water, we wonder how long the Northern Colorado Water Conservancy District Board will continue to be appointed by Judges as opposed to being elected. If there is a change to an elected Board, then what impact will that have on the users in the District? Will agriculture be assisted or protected in any way?

In the fall of 1967 and in 1968, as attorney for North Poudre, I began to learn firsthand about the operations of North Poudre as I walked with Board members on portions of the Roberts' ranch as part of North Poudre's efforts to acquire the land to build Park Creek Reservoir. I have had the opportunity for 30 years to work with a wide variety of dedicated

10

conscientious people. Certainly, I have benefited from the knowledge they brought to North Poudre and shared with me. These opportunities have made representing North Poudre both interesting and challenging.

We're accelerating into a new era. We hope most changes made at North Poudre result in tradeoffs that create solutions which are equally satisfactory for the competing interests of the North Poudre stockholders.

Internal strife can be avoided with creative and cooperative efforts.

Among such efforts, we hope that an expanded Halligan Reservoir will someday benefit the stockholders and the area. Also, of course, we all hope that some agriculture will survive n Larimer County.

My views are based on working and living in Fort Collins for over 60 years, and my thoughts do not necessarily reflect those of the North Poudre Board's. Everyone will have to adjust to what actually develops.

Respectfully submitted, HILL and HILL, P.C.

Alden T. Hill Alden V. Hill Attorneys at Law

160 West Mountain Avenue P.O. Box 421

Fort Collins, Colorado 80522 Telephone: (970) 482 -3683 Facsimile: (970) 482-7648

11

Board of Directors

North Poudre Irrigation Company Wellington, Colorado

November 19, 1997

I have audited the accompanying balance sheets of the North Poudre Irrigation Company (a nonprofit organization) as of October 31, 1997 and 1996, and the related statements of income and retained earnings, and

cash flows for the years then ended. These financial statements are the

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responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on the audits.

I conducted the audits in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that the audits provide a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the North Poudre Irrigation Company at October 31, 1997 and 1996, and the results of its operations and its cash. flows for the years then ended in conformity with generally accepted accounting principles.

Respectfully submitted,

James A. Brock

Certified Public Accountant

12

North Poudre Irrigation Company Wellington, Colorado

Balance Sheets October 31, 1997 and 1996

ASSETS

1997 1996

Current Assets

Cash and Cash Equivalents (Note 1) 19,094 69,204

11

Assessments Receivable 21,019 21,086

Note Receivable 15,404

Accounts Receivable - Other 20,476

Prepaid Expense 21,115' 18,263

Total Current Assets 81,704 123,957

Property Assets (Notes 1)

Land 571,415 481,865

Priorities, Water Rights, and Easements 716,471 716,471 Ditches and Reservoirs (Note 2) 12,815,063 12,815,063

Buildings and Improvements 195,710 195,710

Radio and Office Equipment 66,742 66,742

Machinery and Equipment 306,569 279,369

Transportation Equipment 109,577 109,577

Total 14,781,547 14,664,797

Less: Accumulated Depreciation (3,373,480) (3,202, 17 4)

Total Property Assets 11,408,067 11,462,623

Other Assets

Certificate of Deposit - Restricted (Note 4) 110,000 80,000 Stock of Other Companies (Note 1) 17,941 17,941

Total Other Assets 127,941 97,941

Total Assets 11,617,712 11,684,521

The accompanying notes are an integral part of these financial statements.

Exhibit 1

13

LIABILITIES

1997 1996

Current Liabilities

Notes Payable (Note 2) 238,165 290,531

Accounts Payable -Trade 7,747 24,327

Accounts Payable - Water Purchase (Note 3) 60,000 60,000 Payroll Withholding Payable 289

1

Accrued Interest Payable 89,595 95,054

Accrued Compensated Absences 9,751 18,777

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Accrued Salary and Wages 9,960

Total Current Liabilities 405,547 498,649

Long-Term Liabilities

Notes Payable (Note 3) 4,491,480 4,585,645 Deferred Revenue (Note 5) 110,000 80,000 Total Long-Term Liabilities 4,601,480 4,665,645

Total Liabilities 5,007,027 5,164,294

STOCKHOLDERS' EQUITY Paid in Capital

Common Stock (1 0,000 Shares Authorized,

$50 Par Value, 10,000 Shares Issued,

9,998 Shares Outstanding) 500,000 500,000 Additional Paid in Capital 430,197 430,197

Total Paid in Capital 930,197 930,197

Retained Earnings 5,682,657 5,592,199

Total Paid in Capital

and Retained Earnings 6,612,854 6,522,396

Less: Treasury Shares (2 Shares at Cost) (2, 169) (2, 169) 1

Total Stockholders' Equity 6,610,685 6,520,227 J

Total Liabilities

and Stockholders' Equity 11,617,712 11,684,521

Exhibit 1

14

North Poudre Irrigation Company Wellington, Colorado

Statements of Income and Retained Earnings For the Years Ended October 31, 1997 and 1996

1997 1996

, Operating Revenues

Assessments 850,426 750,446

! I

Recreational Leases 211,300 207,785

Other Operating Income 85,768 60,572

Reimbursements 6,623 2,544

Stock Transfer Fees 5,290 5,640

Total Operating Revenues 1,159,407 1,026,987

Operating Expenses

Salaries and Wages 264,383 327,115

Depreciation 171,306 171,036

Repairs and Maintenance 137,575 126,486 Water Purchased and Assessments 75,387 75,939

Legal Fees 55,284 66,858

Insurance 30,027 35,149

Office and Other Expense 24,572 17,606

Employee Benefits 23,019 33,397

Payroll Taxes 21 ,415 27,008

Ditch Riders' Expense 20,976 20,436

Utilities and Telephone 17,259 16,241

Engineering and Other Fees 17,049 73,442 Directors' Fees and Expense 16,115 19,491

Gas and Oil 11,919 14,702

Weed Control 9,526 29,350

Vehicle and Other Taxes 4,596 3,585

Accounting Fees 2,800 . 2,700

Total Operating Expenses 903,208 1,060,541

1 Income (Loss) From Operations 256,199 (33,554)

J

Exhibit 2 (Continued)

15

North Poudre Irrigation Company Wellington, Colorado

Statements of Income and Retained Earnings For the Years Ended October 31, 1997 and 1996

1997 1996

Other Income (Expense)

Gain on Sale of Assets 3,500 3,703

Interest and Finance Charges 9,019 7,969

Oil and Gas Royalties 12,817 11,619

Interest Expense (191 ,077) (197, 148)

Total Other Income (Expense) (165,741) (173,857)

Net Income (Loss) 90,458 {207,411)

Retained Earnings - Beginning of Year 5,592,199 5,799,610

Retained Earnings - End of Year 5,682,657 5,592,199

16

North Poudre Irrigation Company Wellington, Colorado Statements of Cash Flows

For the Years Ended October 31, 1997 and 1996

Cash Flows From Operating Activities Net Income (Loss)

Adjustments to Reconcile Net Income (Loss) 1997

90,458 to Net Cash Provided by Operating Activities:

Depreciation 171 ,306

Gain on Sale of Assets (3,500) Decrease (Increase) in Assets:

Assessments Receivable Other Account Receivable Prepaid Expenses

Increase (Decrease) in Liabilities:

Accounts Payable Accrued Expenses Deferred Revenue

Net Cash Used by Operating Activities Cash Flows From Investing Activities

Net Proceeds From Sale of Assets Collection of Loans Receivable Purchase of Equipment and

Property Assets

Increase in Restricted Investments Net Cash Used by Investing Activities Cash Flows From Financing Activities

67 (20,476)

(2,852) (16,580) (24, 156) 30,000 224,267

3,500 15,404 (116,750)

(30,000) (127,846)

Proceeds From Short-Term Debt 144,000 Repayment of Short-Term Debt (200,000) Repayment of Long-Term Debt (90,531) Net Cash Provided by (Used by) Financing Activities (146,531) Net Change in Cash and Cash Equivalents (50, 11 0) Cash and Cash Equivalents -

Beginning of Year

Cash and Cash Equivalents - End of Year

69,204

19,094

The accompanying notes are an integral part of these financial statements.

Exhibit 3

17

1996

(207,411)

171,036 (3,703)

7,567 (4, 115)

(513) 2,083 25,000 (10,059)

8,895 1,604 (80, 130) (25,000) (94,631)

330,000 (248,000)

(87,054) (5,054) (109,744) 178,948

69,204

North Poudre Irrigation Company Wellington, Colorado Statements of Cash Flows

For the Years Ended October 31, 1997 and 1996 Supplemental Cash Flow Information

Amounts paid in cash for interest expense during the periods were

$196,536 for 1997 and $196,738 for 1998.

The accompanying notes are an integral part of these financial statements.

Exhibit 3

18

North Poudre Irrigation Company Wellington, Colorado Notes to Financial Statements

October 31, 1997

Note 1 - Summary of Significant Accounting Policies

Operations- The Company provides irrigation water for agriculture uses to approximately 600 shareholders in the Northern Colorado front range. The Company business office and maintenance shop facilities are located in Wellington, Colorado.

Property Assets - Property assets are recorded at cost for assets purchased and fair market value for donated assets. Depreciation is being taken by the straight-line method over the following useful lives.

Item Life

Ditches and Reservoirs 100 years Buildings and Improvements 10-40 years Radio and Office Equipment 1 0 years Machinery and Equipment 1 0 years Transportation Equipment 5-10 years Cash and Cash Equivalents - All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times, such cash balances and temporary investments may be in excess of the FDIC insurance limits.

Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Income Taxes - The Company is exempt from income taxes under IRC Section 501 (C) (12). The company retains this exemption during years that 85% of the companies gross income is received from shareholders. During the year ended October 31, 1997 the 85% test was not met and the company had a taxable net income of $90,458.

The company also had a net operating loss carry forward of $360,632 that was used to offset the current years taxable income. The remaining balance of the net operating loss will be available for carry forward through the year ended October 31, 2010.

Stock of Other Companies - Investments in the stock of other irrigation companies is stated at cost.

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North Poudre Irrigation Company Wellington, Colorado Notes to Financial Statements

October 31, 1997

Note 2 - Notes Payable

Source Current Long-Term

First National Bank, 8.25%

interest, due January 30, 1998, amount due represents advances on $500,000 line of credit.

The loan is unsecured. 144,000 Colorado Department of Natural

Resources (Colorado Water Conservation Board), 5% interest, payable in 11 annual installments of $19,782 beginning June 15, 1989. Collateralized by the Park Creek Reservoir and water

rights. 17,943 18,841

Colorado Department of Natural Resources (Colorado Water Conservation Board), 5% interest, payable in 40 annual installments of $19,847 beginning June 15, 1992. Collateralized by an undivided one half interest in

the No. 2 dam structure. 3,778 317,597 Colorado Department of Natural

Resources (Colorado Water Conservation Board), 5% interest, payable in 40 annual installments of $77,612 beginning May 1, 1985.

Collateralized by an undivided one half interest in the Fossil

Creek dam structure. 20,792 1,115,600

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Total

144,000

36,784

321,375

1 '136,392

Note 2 - Notes Payable (continued)

Source Current Long-Term Total

Colorado Department of Natural Resources (Colorado Water Conservation Board), 5% interest, payable in 40 annual installments of $67,192 beginning May 1, 1987.

Collateralized by an undivided one half interest in the No. 15

Reservoir dam structure. 16,323 1,001,003 1,017,326 Colorado Department of Natural

Resources (Colorado Water Conservation Board), 5% interest, payable in 40 annual installments of $23,57 4 beginning May 1, 1990.

Collateralized by an undivided one half interest in the Clark

Lake dam structure. 4,995 366,573 371 ,568 Colorado Department of Natural

Resources (Colorado Water Conservation Board), 2% interest, payable in 40 annual installments of $64,378 beginning May 1, 1996, collateralized by the #5 and #6

dam structure. 30,334 1,671,866 1,702,200

Total 238,165 4,491,480 4,729,645

2 1

North Poudre Irrigation Company Wellington, Colorado Notes to Financial Statements

October 31, 1997

The following is a summary of the annual debt service requirements:

Year Principal Interest Total

1998 238,165 178,218 416,383

1999 97,964 174,420 272,384

2000 82,151 170,451 252,602

2001 85,312 167,290 252,602

2002 88,612 163,990 252,602

2003 92,058 160,544 252,602

2004 95,656 156,946 252,602

2005-2035 3,949,727 2,134,716 6,084,443

Totals 4,729,6456 3,306,575 8,036,220

Note 3 - Water Allotment Agreement

The Company entered into an agreement December 5, 1945, with the Northern Colorado Water Conservancy District for the annual purchase of 40,000 acre feet of water, or any such portion that may be delivered, at $1.50 per unit. Payment is due May 1 of every year and is secured by an irrevocable levy of assessment on the capital stock of the Company. Payments shall continue until the delivery system is paid for and thereafter for operating and maintenance charges.

Note 4 - Option Agreement - Halligan Reservoir

The Company has entered into an agreement with the City of Fort Collins (the City) that may result in the sale of the Halligan Reservoir site to the City for $5,363,675. Based on the agreement, the Company retains the current storage capacity of the reservoir. During the next 7 years, the City will make option payments to the Company totaling

$460,000, as the City considers and works toward possible completion of the sale. If the sale is not completed, one-half of the option payments or all of the option payments under limited circumstances could be refundable to the City. The Company has purchased a certificate of deposit representing one-half of the option payments and deferred the potential income resulting from the payments. Should the sale be completed , the full amount of the option payments will be applied toward the purchase price.

22

North Poudre Irrigation Company Wellington, Colorado Notes to Financial Statements

October 31 , 1997

Note 5 - Pension Plan

The Company sponsors a deferred compensation plan for all full time employees. The Company matches employee deferrals up to a maximum of 3% of compensation. The Company's contribution to the plan was $4,497 for the year ended October 31, 1997.

23

North Poudre Irrigation's maintenance personnel installing a plastic liner on ditch #2 last spring.

A bridge was built on the Munroe Canal to replace a pipe last spring.

24

Photograph taken on July 29, 1997 of accumulated debris and water in 8-2 flood dam.

Photograph taken two days after showing changes in water level and debris.

25