-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SQRl7sp/4bVJZUYXwsCv8CdorLxtphRh6z7b2iuoWKg2nGw2PV7imFKgDvpLfUfk zIdXNjAqsG/sq39FXxeMzg== 0000276720-98-000006.txt : 19981201 0000276720-98-000006.hdr.sgml : 19981201 ACCESSION NUMBER: 0000276720-98-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURE CYCLE CORP CENTRAL INDEX KEY: 0000276720 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 840705083 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-08814 FILM NUMBER: 98760934 BUSINESS ADDRESS: STREET 1: 5650 YORK STREET CITY: COMMERCE CITY STATE: CO ZIP: 80022 BUSINESS PHONE: 3032923456 MAIL ADDRESS: STREET 1: 5650 YORK ST CITY: COMMERCE CITY STATE: CO ZIP: 80022 FORMER COMPANY: FORMER CONFORMED NAME: PURECYCLE CORP DATE OF NAME CHANGE: 19920703 10KSB 1 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 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. 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. 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. 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. 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." 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. 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. 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. 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. 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. 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 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 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 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 PURE CYCLE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended August 31, 1998 and 1997
Additional Preferred Stock Common Stock Paid-in Accumulated Shares Amount Shares Amount Capital Deficit ------------------ --------------------- ----------- ------------- 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) ========= ===== ========== ======= ========== ==========
See Accompanying Notes to Consolidated Financial Statements 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 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. 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. 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. 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. 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 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. 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. 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. 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 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. 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. 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. 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. 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.
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 ---------- ----------- --------- --------- --------- ----------- 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)
(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. 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. 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.** 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. 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 EX-27 2 FDS 08/98 10-KSB
5 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. 12-MOS AUG-31-1998 AUG-31-1998 423,027 3,429 0 0 0 434,286 17,238 16,095 19,336,869 49,858 0 261,584 0 2,033 4,024,800 19,336,869 0 25,366 0 335,297 0 0 243,196 (525,781) 0 (525,781) 0 0 0 (525,781) (0.01) 0
EX-10 3 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. 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. 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. 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. 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: (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 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. (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: (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. 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. 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. (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. 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. 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. (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 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. 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. 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. 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: EX-10 4 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 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. . 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 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. . 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. . 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. "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 EX-10 5 . 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. 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. 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. 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 -----END PRIVACY-ENHANCED MESSAGE-----