Document:

exv10w1

Exhibit 10.1

QUIDEL CORPORATION

SECOND AMENDMENT TO CREDIT AGREEMENT

     This SECOND AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is dated as of September 27, 2010
and entered into by and among QUIDEL CORPORATION, a Delaware corporation (“Borrower”), the
financial institutions listed on the signature pages hereof (“Lenders”), and BANK OF AMERICA, N.A.,
a national banking association, as agent for Lenders (in such capacity, “Agent”), and, for purposes
of Sections 4 and 6 hereof, each of the Guarantors listed on the signature pages hereof
(“Guarantors”), and is made with reference to that certain Credit Agreement dated as of October 8,
2008, as amended by that certain First Amendment to Credit Agreement and Security Agreement, dated
as of February 19, 2010 (as so amended, the “Credit Agreement”), by and among Borrower, Lenders,
U.S. Bank N.A., as Syndication Agent, and Bank of America, N.A., as Agent, Swing Line Lender and
L/C Issuer. Capitalized terms used herein without definition shall have the same meanings herein as
set forth in the Credit Agreement.

RECITALS

          WHEREAS, Borrower and Lenders desire to (i) waive compliance with the terms of Sections
6.12(a) and 6.12(b) of the Credit Agreement with respect to a specified date, (ii) amend the
definition of “Applicable Rate” as provided herein, and (iii) to make certain other amendments as
set forth below;

          NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants
herein contained, the parties hereto agree as follows:

Section 1. AMENDMENTS TO THE CREDIT AGREEMENT

     A. Section 1.1 of the Credit Agreement is hereby amended by adding thereto the following
definitions, which shall be inserted in proper alphabetical order:

          “Second Amendment” means the Second Amendment to Credit Agreement dated as of September 27,
2010 among Borrower, Lenders party thereto, Agent and Guarantors.

          “Second Amendment Effective Date” has the meaning specified in the Second Amendment.

     B. The definition of “Applicable Rate” in Section 1.1 of the Credit Agreement is hereby
amended by inserting the following text at the end thereof:

          “Notwithstanding anything herein to the contrary, the Applicable Rate in effect from the
Second Amendment Effective Date through the date a Compliance
Certificate is delivered pursuant to Section 6.2(b) for the reporting period ending on March
31, 2011 shall be based upon the following percentages per annum; provided, however, that (i) if no
Compliance Certificate is delivered when due in accordance with such Section for such reporting
period,

 

 

then, upon the request of the Required Lenders, Pricing Level 1 of the chart below shall apply
commencing on the 5th Business Day following the date such Compliance Certificate was
required to have been delivered to but excluding the date such Compliance Certificate is received
by Agent and, thereafter, the pricing level (in the chart below or chart above, as applicable)
indicated by such Compliance Certificate until such pricing level is required to be adjusted
pursuant to the terms of this definition and (ii) if an Event of Default has occurred and is
continuing at the time of delivery of such Compliance Certificate (whether under Section 6.12(a),
6.12(b) or otherwise), then the Applicable Rate shall be based on the percentages set forth below
until such time that no Event of Default shall be continuing (it being understood and agreed by the
parties that at any time that any such Event of Default has occurred and is continuing, the
applicable Default Rate shall also apply).”

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Applicable Rate
	 	 	 	 	 	 	 	 	Eurodollar Rate	 	 
	 	 	 	 	 	 	 	 	Margin	 	 
	Pricing	 	Funded Debt to EBITDA	 	Commitment	 	or Standby	 	Base Rate
	Level	 	Ratio	 	Fee	 	Letters of Credit	 	Margin
	1

	 	Greater than 2.50:1.00
	 	 	0.50	%	 	 	3.25	%	 	 	2.25	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	2

	 	Less than or equal to
2.50:1.00 but greater than or
equal to 2.00:1.00
	 	 	0.45	%	 	 	3.00	%	 	 	2.00	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	3

	 	Less than 2.00:1.00 but
greater than or equal to
1.50:1.00
	 	 	0.40	%	 	 	2.75	%	 	 	1.75	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	4

	 	Less than 1.50:1.00 but
greater than or equal to
1.00:1.00
	 	 	0.35	%	 	 	2.25	%	 	 	1.25	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5

	 	Less than 1.00:1.00
	 	 	0.30	%	 	 	2.00	%	 	 	1.00	%

Section 2. LIMITED WAIVER

     A. Subject to the terms and conditions set forth herein and in reliance on the representations
and warranties of Borrower herein contained, Lenders hereby waive Borrower’s compliance with
Section 6.12(a) and Section 6.12(b) of the Credit Agreement for the measurement date occurring on
(and only on) December 31, 2010 and agree that any failure by Borrower to comply with Section
6.12(a) and Section 6.12(b) for the measurement date

2

 

occurring on (and only on) December 31, 2010 shall not be treated as a Default or Event of Default
for purposes of the Credit Agreement and Loan Documents (it being understood and agreed by the
parties that Borrower shall still be required to deliver the Compliance Certificates required by
Section 6.2(b) of the Credit Agreement to be delivered with the financial statements being
delivered for the fiscal year and fiscal quarter ended December 31, 2010 in accordance with
Sections 6.1(a) and 6.1(b) of the Credit Agreement).

     B. Without limiting the generality of the provisions of Section 10.1 of the Credit Agreement,
the waiver and agreement set forth above shall be limited precisely as written and relates solely
to compliance with Section 6.12(a) and Section 6.12(b) of the Credit Agreement in the manner and to
the extent described above, and nothing in the waiver set forth above shall be deemed to: (A)
constitute a waiver of compliance by any Loan Party with respect to (1) Section 6.12(a) or Section
6.12(b) of the Credit Agreement in any other instance or (2) any other term, provision or condition
of the Credit Agreement or any other instrument or agreement referred to therein or (B) prejudice
any other right or remedy that Agent or any Lender may now have or may have in the future under or
in connection with the Credit Agreement or any other instrument or agreement referred to therein.

Section 3. CONDITIONS TO EFFECTIVENESS

          Sections 1 and 2 of this Amendment shall become effective only upon the satisfaction of all
of the following conditions precedent (the date of satisfaction of such conditions being referred
to herein as the “Second Amendment Effective Date”):

     A. On or before the Second Amendment Effective Date, Borrower shall deliver to Lenders (or to
Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender
and its counsel) the following, each, unless otherwise noted, dated the Second Amendment Effective
Date:

     (i) A certificate, dated as of the Second Amendment Effective Date, of its corporate
secretary or an assistant secretary of Borrower, certifying that there have been no changes
in its Certificate of Incorporation and its Bylaws from the form of Certificate of
Incorporation and Bylaws previously delivered to Lenders (or attaching copies of any such
amendments or other modifications);

     (ii) Resolutions of its Board of Directors approving and authorizing the execution,
delivery, and performance of this Amendment and the transactions contemplated hereby,
certified as of the Second Amendment Effective Date by its corporate secretary or an
assistant secretary as being in full force and effect without modification or amendment;

     (iii) Signature and incumbency certificates of its officers executing this Amendment;

     (iv) Executed copies of this Amendment executed by Borrower and each Guarantor;

3

 

     (v) A Certificate of a Responsible Officer of Borrower to the effect that each of the
conditions set forth in Section 3 of this Amendment have been satisfied;

     B. On or before the Second
Amendment Effective Date, Borrower shall pay to counsel to Agent all outstanding Attorney Costs
owing to counsel to Agent (including Attorney Costs incurred in connection with this Amendment) to
the extent invoiced prior to the date hereof; provided,
however, Borrower’s obligation under this
Section 3(B) shall not exceed $7,500.

     C. Borrower shall pay to each Lender executing this Amendment
on or before the Second Amendment Effective Date, by 5:00 PM, California time, on the Second
Amendment Effective Date, the amendment fee set forth in that certain letter agreement, dated as of
the date hereof, by and among Borrower and the lenders party thereto.

Section 4. REPRESENTATIONS AND WARRANTIES

         In order to induce Lenders to enter into this Amendment and to amend the Credit Agreement in
the manner provided herein, each Loan Party represents and warrants to each Lender that the
following statements are true, correct and complete:

     A. Corporate Power and Authority. Each Loan Party has all requisite corporate power and
authority to enter into this Amendment and to carry out the transactions contemplated by, and
perform its obligations under, the Credit Agreement as amended by this Amendment (the “Amended
Agreement”) and the other Loan Documents.

     B. Authorization of Agreements. The execution and
delivery of this Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of each Loan Party.

     C. No Conflict. The execution and delivery by each Loan Party of this Amendment and the
performance by such Loan Party of the Amended Agreement and the other Loan Documents do not and
will not (i) violate any provision of any law or any governmental rule or regulation applicable to
such Loan Party or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws
of such Loan Party or any of its Subsidiaries or any order, judgment or decree of any court or
other agency of government binding on such Loan Party or any of its Subsidiaries, (ii) conflict
with, result in a breach of or constitute (with due notice or lapse of time or both) a default
under any Contractual Obligation of such Loan Party or any of its Subsidiaries, (iii) result in or
require the creation or imposition of any Lien upon any of the properties or assets of such Loan
Party or any of its Subsidiaries (other than Liens created under any of the Loan Documents in favor
of Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or
consent of any Person under any Contractual Obligation of such Loan Party or any of its
Subsidiaries, except for such approvals or consents which have been obtained on or before the
Second Amendment Effective Date and disclosed in writing to Lenders.

     D. Governmental Consents. The execution and delivery by Borrower and Guarantors of this
Amendment and the performance by Borrower and Guarantors of the Amended Agreement and the other
Loan Documents do not and will not require any registration

4

 

with, consent or approval of, or notice to, or other action to, with or by, any federal, state or
other governmental authority or regulatory body.

     E. Binding Obligation. This Amendment has been duly executed and delivered by each Loan Party
and this Amendment and the Amended Agreement are the legally valid and binding obligations of such
Loan Party, enforceable against such Loan Party in accordance with their respective terms, except
as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors’ rights generally or by equitable principles relating to enforceability.

     F. Incorporation of Representations and Warranties From Loan Documents. The representations
and warranties contained in Article V of the Credit Agreement and in the other Loan Documents are
and will be true, correct and complete in all material respects on and as of the Second Amendment
Effective Date (both before and after giving effect to this Amendment) to the same extent as though
made on and as of that date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in all material
respects on and as of such earlier date.

     G. Absence of Default. Both before and after giving effect to this Amendment, no event has
occurred and is continuing or will result from the consummation of the transactions contemplated by
this Amendment that would constitute a Default or an Event of Default.

Section 5. MISCELLANEOUS

     A. Reference to and Effect on the Credit Agreement and the Other Loan Documents.

     (i) On and after the Second Amendment Effective Date, each reference in the Credit
Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import
referring to the Credit Agreement and each reference in the other Loan Documents to the
“Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.

     (ii) Except as specifically amended by this Amendment, the Credit Agreement and the
other Loan Documents shall remain in full force and effect and are hereby ratified and
confirmed.

     (iii) The execution, delivery and performance of this Amendment shall not, except as
expressly provided herein, constitute a waiver of any provision of, or operate as a waiver
of any right, power or remedy of Agent or any Lender under, the Credit Agreement or any of
the other Loan Documents.

     B. Fees and Expenses. Borrower acknowledges that all costs, fees and expenses as described in
Section 10.4(a) of the Credit Agreement incurred by Agent and its counsel with respect to this
Amendment and the documents and transactions contemplated hereby shall be for the account of
Borrower.

5

 

     C. Headings. Section and subsection headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment for any other
purpose or be given any substantive effect.

     D. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF CALIFORNIA (INCLUDING WITHOUT LIMITATION SECTION 1646.5 OF THE CIVIL CODE OF THE STATE
OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.

     E. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically attached to the same
document. This Amendment (other than the provisions of Sections 1 and 2 hereof, the effectiveness
of which is governed by Section 3 hereof) shall become effective upon the execution of a
counterpart hereof by Borrower, each Guarantor and Required Lenders and receipt by Borrower and
Agent of written or telephonic notification of such execution and authorization of delivery
thereof.

Section 6. ACKNOWLEDGEMENT AND CONSENT BY GUARANTORS

          Each Guarantor hereby acknowledges that it has read this Amendment and consents to the terms
thereof, and hereby confirms and agrees that, notwithstanding the effectiveness of this Amendment,
the obligations of each Guarantor under each Loan Document to which it is a party or otherwise
bound (i) shall continue in full force and effect, (ii) shall be valid and enforceable, (iii) shall
not be impaired or affected by the execution or effectiveness of this Amendment, and (iv) are
hereby confirmed and ratified in all respects. Each Guarantor acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment, such Guarantor is not
required by the terms of the Credit Agreement or any other Loan Document to consent to the
amendments to the Credit Agreement effected pursuant to this Amendment, and (ii) nothing in the
Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent
of such Guarantor to any future amendments to the Credit Agreement.

[signature pages follow]

6

 

          IN
WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and
delivered by their respective officers thereunto duly authorized as of the date first written
above.

	 	 	 	 	 
	 	BORROWER: 

QUIDEL CORPORATION

 	 
	 	By:  	/s/
John M. Radak
 	 
	 	 	Name:  	JOHN M. RADAK 	 
	 	 	Title:  	CHIEF FINANCIAL OFFICER 	 
	 
	 	GUARANTORS:

PACIFIC BIOTECH, INC.

 	 
	 	By:  	/s/
John M. Radak
 	 
	 	 	Name:  	JOHN M. RADAK 	 
	 	 	Title:  	SECRETARY AND TREASURER 	 
	 
	 	METRA BIOSYSTEMS, INC.

 	 
	 	By:  	/s/
John M. Radak
 	 
	 	 	Name:  	JOHN M. RADAK 	 
	 	 	Title:  	SECRETARY AND TREASURER 	 
	 
	 	OSTEO SCIENCES CORPORATION

 	 
	 	By:  	/s/
John M. Radak
 	 
	 	 	Name:  	JOHN M. RADAK 	 
	 	 	Title:  	SECRETARY AND TREASURER 	 
	 
	 	LITMUS CONCEPTS, INC.

 	 
	 	By:  	/s/ John M. Radak
 	 
	 	 	Name:  	JOHN M. RADAK 	 
	 	 	Title:  	SECRETARY AND TREASURER 	 
	 

[Signature Page to Second Amendment]

 

 

	 	 	 	 	 
	 	BANK OF AMERICA, N.A., as Agent

 	 
	 	By:  	/s/
Tiffany Shin
 	 
	 	 	Name:  	Tiffany Shin 	 
	 	 	Title:  	Assistant Vice President 	 
	 

[Signature Page to Second Amendment]

 

 

	 	 	 	 	 
	 	BANK OF AMERICA, N.A., as Lender

 	 
	 	By:  	/s/
John C. Plecque
 	 
	 	 	Name:  	John C. Plecque 	 
	 	 	Title:  	Senior Vice President 	 
	 

[Signature Page to Second Amendment]

 

 

	 	 	 	 	 
	 	U.S. BANK N.A., as Lender

 	 
	 	By:  	/s/
Maureen Sullivan
 	 
	 	 	Name:  	Maureen Sullivan 	 
	 	 	Title:  	Vice President 	 
	 

[Signature Page to Second Amendment]

 

 

	 	 	 	 	 
	 	UNION BANK, N.A., as Lender

 	 
	 	By:  	/s/
Glenn Fortin
 	 
	 	 	Name:  	Glenn Fortin 	 
	 	 	Title:  	Vice President 	 
	 

[Signature Page to Second Amendment]Exhibit 10.1

Exhibit 10.1

THIS PROMISSORY NOTE AND THE SECURITIES INTO WHICH THIS PROMISSORY NOTE IS CONVERTIBLE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, PLEDGED, TRANSFERRED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SHARES
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO
THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS.

CONVERTIBLE NEGOTIABLE PROMISSORY NOTE

Pure Cycle Corporation

			
	 	 	 
	$5,200,000
	 	Denver, Colorado
	 
	 	September 28, 2010

FOR VALUE RECEIVED, Pure Cycle Corporation, a Colorado corporation (“Pure Cycle”), hereby
promises to pay to the order of PAR Investment Partners, L.P., a Delaware limited partnership (the
“Holder”), at One International Place, Suite 2401, Boston, Massachusetts 02110, or at such other
place or places as Holder may designate from time to time, the principal sum of Five Million Two
Hundred Thousand Dollars ($5,200,000), together with interest on the unpaid principal balance
outstanding at the rate of ten percent (10%) per annum, such interest to accrue from the date
hereof until this Note is paid in full; provided, however, that in no event shall the rate of
interest exceed the maximum rate, if any, allowable under applicable law. All such payments of
principal and interest shall be made in lawful money of the United States of America.

	 	1.	 	Maturity. The entire principal balance, together with all accrued and unpaid
interest, shall be due and payable in full on January 15, 2012 (the “Maturity Date”).
All payments received hereunder shall be applied first to accrued interest and second
to principal.

	 	2.	 	Conversion. At the first annual meeting of shareholders of Pure Cycle held
after the date hereof, Pure Cycle shall seek shareholder approval authorizing the
Holder of this Note to convert all of the outstanding principal and, accrued and
unpaid, interest under this Note into common stock of the Company as provided below.
If shareholder approval is obtained, all outstanding principal and accrued and unpaid
interest under this Note shall automatically be converted into shares of Pure Cycle
common stock, one third (1/3) of $.01 par value, at the initial Conversion Price per
share (the “Conversion Price”) of the lower of: (i) $2.70 per share, and (ii) ninety
percent (90%) of the price per share paid by certain investors in a shelf offering by
Pure Cycle on or before October 31, 2011 of common stock from Pure Cycle’s outstanding
shelf registration filed on Form S-3, as amended (Registration No. 333-168160), but
subject to adjustment as provided below in the event of either (i) or (ii). The
conversion shall be deemed to have taken place at 5:01 p.m., Mountain Time, on
the date the inspector of elections certifies the shareholder vote for the shareholder
meeting at which approval for conversion is obtained.

 

 

If shareholder approval is not obtained, Pure Cycle may continue to seek shareholder
approval at any special or annual meeting of shareholders held prior to the Maturity
Date.

In the event of conversion, Holder shall surrender the original Note for cancellation at
the principal office of Pure Cycle accompanied by a notice of conversion specifying the
name or names in which the shares are of common stock are to be issued and such other
information reasonably requested by Pure Cycle, including, but not limited to, an
opinion of counsel satisfactory to Pure Cycle that registration is not required under
the Securities Act to issue shares in the name of persons other than the Holder. Holder
shall be treated as the record holder of shares of common stock effective as of the date
and time of conversion and shall have no remaining rights with respect to the Note so
converted, and the Note shall be cancelled.

As promptly as practicable (but no more than fifteen (15) business days) after the
surrender of the Note for conversion, Pure Cycle shall (subject to compliance with the
applicable provisions of federal and state securities laws) deliver to Holder
certificate(s) representing the number of shares of common stock into which the Note is
entitled to be converted or evidence of the issuance of such shares in book-entry form.

Pure Cycle shall not be required to issue fractions of shares of common stock upon
conversion of this Note. If any fraction of a share would, but for this paragraph, be
issuable upon any conversion of this Note, in lieu of such fractional share, Pure Cycle
shall deliver cash in the amount of the fair market value of such fractional interest.

Each certificate for shares of common stock issued upon conversion of this Note shall
bear the following legend:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER ANY STATE SECURITIES LAWS. NEITHER SUCH SHARES NOR
ANY PORTION THEREOF OR INTEREST THEREIN MAY BE SOLD, OFFERED
FOR SALE, ASSIGNED, PLEDGED, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SHARES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY
TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE
STATE SECURITIES LAWS.”

 

-2-

 

Pure Cycle shall reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall from time to time be sufficient to
effect the conversion of all outstanding principal and accrued and unpaid interest on
this Note.

All shares of common stock which may be issued upon conversion of this Note will upon
issuance, be validly issued, fully paid and nonassessable.

In the event Pure Cycle at any time or from time to time after the date of this Note
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 Price shall be adjusted (and any other appropriate actions shall be taken by
Pure Cycle) so that Holder shall be entitled to receive the number of shares of common
stock or other securities of Pure Cycle upon surrender of the Note that Holder would
have owned or would have been entitled to receive upon or by reason of any of the events
described above had the Note been converted immediately prior to the occurrence of such
event.

In case of any share exchange, reorganization, consolidation with or merger of Pure
Cycle with or into another corporation, or in case of any sale, lease, conveyance or
disposition to another corporation of the assets of Pure Cycle as an entirety or
substantially as an entirety, which is not treated as a liquidation, dissolution or
winding up of Pure Cycle, this Note shall after the date of such share exchange,
reorganization, consolidation, merger, sale, lease, conveyance or disposition be
convertible into the number of shares of stock or other securities or property
(including cash) to which the common stock issuable (at the time of such share exchange,
reorganization, consolidation, merger, sale, lease, conveyance or disposition) upon
conversion of this Note would have been entitled upon such share exchange,
reorganization, consolidation, merger, sale, lease, conveyance or disposition; and in
any such case, if necessary, the provisions set forth herein with respect to the rights
and interests thereafter of Holder shall be appropriately adjusted (as determined by the
board of directors) so as to be applicable, as nearly as may reasonably be, to any
 shares of stock or other securities or property thereafter deliverable on the conversion
of the Note.

	 	3.	 	Interest. The first six (6) months of interest accrued, and not yet paid, on
this Note shall become due and payable in cash on April 1, 2011. Additionally, all
further interest shall continue to accrue and become payable on the first of each
month, beginning May 1, 2011, until such time as this Note, is either: (i) paid in
full, or (ii) converted to common stock of Pure Cycle.

	 	4.	 	Registration Rights. On the date hereof, the Holder and Pure Cycle shall enter
into the Registration Rights Agreement attached hereto as Schedule 1.

 

-3-

 

	 	5.	 	Holder Approval. So long as this Note remains outstanding, the consent of
Holder shall be necessary for Pure Cycle to do any one or more of the following:

	 	a.	 	purchase, repurchase or redeem any shares of Pure Cycle’s
capital stock, except Pure Cycle may repurchase or redeem (i) the Series B
Preferred Stock and (ii) shares issued pursuant to Pure Cycle’s equity
incentive plans;

	 	b.	 	declare or pay dividends or any other distributions on the
common stock;

	 	c.	 	increase the authorized number of shares of common stock;

	 	d.	 	incur indebtedness in excess of $5,000,000 (except indebtedness
incurred to repay this Note in full); or

	 	e.	 	permit any subsidiary to issue stock except to Pure Cycle.

	 	6.	 	Miscellaneous. Pure Cycle shall not at any time after the date hereof issue
Additional Shares of Common Stock without consideration or for a net consideration per
share less than the Conversion Price in effect immediately prior to such issuance.

For purposes of the preceding paragraph, any obligation, agreement or undertaking to
issue warrants, options or other subscription or purchase rights with respect to shares
of common stock of Pure Cycle and the issuance of any securities convertible into or
exchangeable for shares of common stock (or the issuance of any warrants, options or any
rights with respect to such convertible or exchangeable securities) (collectively,
“Convertible Securities”) shall be deemed an issuance at the time such obligation,
agreement or undertaking is made or arises. For purposes of this Note, the “net
consideration per share” shall mean the amount equal to the total amount of
consideration, if any, received by Pure Cycle for the issuance of such Convertible
Securities plus the minimum amount of consideration, if any, payable to Pure Cycle upon
exercise or conversion thereof, divided by the aggregate number of shares of Common
Stock that would be issued if such Convertible Securities were exercised, exchanged or
converted.

For purposes of this Note, if a part or all of the consideration received by Pure Cycle
in connection with the issuance of the shares of common stock or the issuance of any
Convertible Securities consists of property other than cash, such consideration shall be
deemed to have the same value as shall be determined in good faith by the board of
directors of Pure Cycle.

“Additional Shares of Common Stock” shall mean all shares of common stock, Convertible
Securities, and rights or options to acquire common stock issued by Pure Cycle after the
date hereof, other than the foregoing (i) issued to officers, employees or directors of,
or consultants and advisors to, Pure Cycle or any affiliate pursuant to any stock
purchase or stock option plan or other arrangement that is approved by the board of
directors, including, but not limited to Pure Cycle’s 2004 Incentive Plan (including
 shares issued upon exercise of rights or options to acquire common stock or conversion
of Convertible Securities pursuant to such plans or arrangements);
(ii) issued upon exercise or conversion of outstanding rights or options to acquire
common stock or Convertible Securities; and (iii) up to ten million dollars
($10,000,000) worth of shares of common stock issued pursuant to Pure Cycle’s
outstanding shelf registration filed on Form S-3, as amended (Registration No.
333-168160) or any subsequent registration statement that Pure Cycle may file to replace
the above named registration statement.

 

-4-

 

	 	7.	 	Stamp and Applicable Taxes. Pure Cycle 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 this Note; provided, however, that Pure Cycle 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 Holder and
no such issue or delivery shall be made unless and until the person requesting such
issue or delivery has paid to Pure Cycle the amount of any such tax or has established,
to the satisfaction of Pure Cycle, that such tax has been paid.

	 	8.	 	Preemptive Rights. Holder is not entitled to any preemptive or subscription
rights in respect of any securities of Pure Cycle.

	 	9.	 	Notices. Any notices or other communications required or permitted hereunder
shall be in writing and if to Pure Cycle, addressed to its principal place of business
and if to Holder, addressed to the address designated in the first paragraph of this
Note. All notices and other communications shall be effective (i) if mailed, when
received or (ii) if sent by express mail or courier, when delivered.

	 	10.	 	Pre-Payment. Pure Cycle shall have the right of prepaying all or any part of
this Note without penalty. Pure Cycle waives demand, presentment for payment, notice
of nonpayment, protest, notice of protest, and all other notices, filing of suit and
diligence in collecting this Note.

	 	11.	 	Validity of Interest. The provisions of this Note and of all agreements now or
hereafter existing between Pure Cycle and Holder are hereby expressly limited so that
in no contingency or event whatever shall the amount paid or agreed to be paid to
Holder for the use, forbearance or detention of the sums evidenced by this Note exceed
the maximum amount permissible under applicable law. If from any circumstance whatever
the performance or fulfillment of any provision of this Note, or of any other agreement
between Pure Cycle and Holder, should involve or purport to require any payment in
excess of the limit prescribed by law, then the obligation to be performed or fulfilled
is hereby reduced to the limit of such validity, and if from any circumstance whatever
Holder should ever receive as interest an amount which would exceed the highest lawful
rate, then the amount which would be excessive interest shall be applied to the
reduction of principal (or, at Holder’s option, be paid over to Pure Cycle) and shall
not be counted as interest.

	 	12.	 	Severability. If any provision of this Note or of any other instrument
securing or executed in connection with this Note is, for any reason and to any extent,
invalid and unenforceable, then neither the remainder of the document in which such
provision is
contained, nor the application of the provision to other persons, entities or
circumstances, nor any other document referred to in this Note, shall be affected by
such invalidity or unenforceability, and there shall be deemed substituted for the
invalid or unenforceable provision the most similar provision which would be valid and
enforceable under applicable law.

 

-5-

 

	 	13.	 	Amendments and Waivers. This Note may not be amended, waived or discharged
except by an agreement in writing signed by the party against whom enforcement of any
such amendment, waiver, or discharge is sought.

	 	14.	 	Transfer. This Note may not be sold, assigned, pledged, transferred or
otherwise transferred by Holder without the prior written consent of Pure Cycle.

	 	15.	 	Holidays. If any payment of principal or interest upon this Note shall become
due and payable on Saturday, Sunday or a public holiday under federal law or the laws
of the State of Colorado, the due date of such payment shall be extended to the next
succeeding full business day and, in the case of principal, interest thereon at the
applicable rate shall be payable during such extension.

	 	16.	 	Governing Law. This Note is being made and delivered in the State of Colorado,
and its provisions shall be governed by, construed and enforced in accordance with, the
laws of the State of Colorado, without reference to any conflict or choice of law
principal.

	 	 	 	 	 	 	 	 	 	 	 
	ATTEST:	 	 	 	PURE CYCLE CORPORATION	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	BY:

	 	/s/ Scott E. Lehman
 

Scott E. Lehman, Secretary
	 	 	 	By:
	 	/s/ Mark W. Harding
 

Mark W. Harding, President
	 	 

 

-6-

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