Exhibit 10.3

 

ACQUISITION AGREEMENT

 

 

THIS ACQUISITION AGREEMENT, dated as of January 20, 2004 (the “Agreement”), is
by and among Particle Drilling, Inc., a Texas corporation (“Newco”), ProDril
Partners L.L.C., a Texas limited liability company (“Parent”), ProDril Services
Incorporated, a Texas corporation (“PSI”), Mr. Harry B. Curlett (“Stockholder”),
an individual, CCORE Technology and Licensing, Ltd, a Texas limited partnership
(“CCORE”) and Curlett Family Limited Partnership, Ltd., a Wyoming limited
partnership (“CFLP”).

 

W I T N E S S E T H:

 

WHEREAS, the parties hereto have previously entered into that certain
Acquisition Agreement dated September 10, 2003 (the “Original Acquisition
Agreement”);

 

WHEREAS, pursuant to the Original Acquisition Agreement, it was contemplated
that Newco would acquire substantially all of the assets of PSI for the
consideration set forth therein;

 

WHEREAS, the Original Acquisition Agreement was terminated pursuant to its
terms;

 

WHEREAS, the parties hereto desire to enter into this Agreement in order to
consummate the transactions contemplated pursuant to the Original Acquisition
Agreement;

 

WHEREAS, CFLP has licensed certain technology (the “CFLP Technology”) to CCORE
pursuant to that certain Patent and Technology License Agreement dated March 1,
2000;

 

WHEREAS, CCORE has licensed to PSI certain of its technology, and has
sublicensed to PSI the CFLP Technology, pursuant to that certain Patent and
Technology License Agreement dated September 21, 1993 (as amended, the “CCORE
License”);

 

WHEREAS, it has been proposed that the CCORE License be terminated and that a
new license be entered into with Newco;

 

WHEREAS, Parent owns 100% of the stock of Newco;

 

WHEREAS, the Stockholder owns shares of the stock of PSI, and thus would derive
a substantial benefit from the consummation of the transactions contemplated
herein;

 

WHEREAS, it has been proposed that Parent and other investors capitalize Newco
as set forth herein;

 

WHEREAS, Newco has loaned to PSI certain amounts pursuant to that certain
Revolving Line of Credit Promissory Note in the original maximum principal
amount of $350,000, and may (but is not obligated to) make additional advances
pursuant thereto (the “Loan”);

 

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WHEREAS, in order to induce Newco to make the Loan, CFLP assigned certain
patents and patent rights to Newco pursuant to that certain Assignment and
Assumption Agreement dated June 1, 2003 (the “Loan Technology Assignment”);

 

NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, agree as follows:

 

ARTICLE I

THE TRANSACTIONS

 

Section 1.1.  Sale by PSI.  Upon the terms and subject to the conditions set
forth herein, at the Closing (as hereinafter defined) PSI will sell, transfer,
assign, and convey to Newco good title in and to (a) the assets listed on
Exhibit A (the “Assets”), free and clear of any lien, lease, or encumbrance, and
(b) the tradename “ProDril Services” and any derivatives thereof, free and clear
of any lien, lease, or encumbrance, pursuant to an assignment and assumption
agreement in the form reasonably required by Newco.

 

Section 1.2.  The Licenses.  At or prior to the Closing, PSI and CCORE shall
terminate the CCORE License pursuant to a termination agreement in the form
reasonably required by Newco (the “Termination Agreement”) and CCORE, CFLP, PSI,
ProDril Services International Limited, and the Stockholder shall enter into (i)
a license agreement with Newco in the form of Exhibit B (the “New License
Agreement”), and (ii) an Assignment and Assumption Agreement in the form of
Exhibit C (the “Assignment”).

 

Section 1.3.  The Sales Price.  At the Closing, as consideration for the sale
and transfer of the Assets and the execution of the Termination Agreement, Newco
will (a) execute and deliver to PSI the royalty agreement set forth as Exhibit D
(the “Royalty Agreement”), and (b) assume the payables and other liabilities of
PSI specifically listed on Exhibit E (the “Assumed Liabilities”), pursuant to an
assignment and assumption agreement in the form reasonably required by Newco. 
Except for the assumption of the Assumed Liabilities at the Closing as provided
pursuant to this Section, neither Newco nor Parent shall assume or be deemed to
have assumed any debts or obligations of PSI.  PSI and Newco hereby agree that
the present fair saleable value of the rights of PSI pursuant the Royalty
Agreement is not less than $750,000; provided, however, that the foregoing
stipulation set forth in this sentence shall not be considered a guaranty or
warranty by Newco.

 

Section 1.4.  Agreement Not To Compete.  At the Closing, the Stockholder and PSI
shall execute and deliver to Newco an Agreement Not To Compete in the form of
Exhibit F.

 

Section 1.5.  Closing.  The closing (the “Closing”) of the transactions
contemplated by this Agreement shall take place at the offices of Newco in
Houston, Texas as promptly as practicable (but in any event within two business
days) following the date on which the last of the conditions set forth in
Article VII is fulfilled or waived, or at such other time and place as

 

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Newco and PSI shall agree. The date on which the Closing occurs is referred to
in this Agreement as the “Closing Date.”  At the Closing, each of the parties
hereto shall take such actions required to be taken by it pursuant to the terms
hereof at or before Closing.  The Transactions will be effective as of 12:01 am
on the Closing Date (the “Effective Time”).

 

Section 1.6.  Taking of Necessary Action; Further Action.  Each of Parent, PSI
and the Stockholder will take all such reasonable and lawful action as may be
necessary or appropriate either before, at, or after the Closing in order to
effectuate the transactions described in this Article (the “Transactions”) in
accordance with this Agreement and as necessary or desirable to carry out the
purposes of this Agreement and to vest Newco with full right, title and
possession to the Assets and all rights intended to be conveyed by the New
License Agreement or the Assignment.  Specifically, but not by way of
limitation, PSI shall deliver to Newco all files, data, records and other
information set forth in tangible form (whether written or electronic) which
relates to the technology subject to the New License Agreement or the
Assignment.

 

Section 1.7.  The Original Acquisition Agreement.  The parties acknowledge and
ratify the termination of the Original Acquisition Agreement, and hereby release
each other from any liability or obligation pursuant to or relating to the
Original Acquisition Agreement, including but not limited to the circumstances
surrounding the termination thereof.

 

ARTICLE II

REPRESENTATIONS AND

WARRANTIES OF PARENT AND NEWCO

 

Parent and Newco each represent and warrant to PSI as follows:

 

Section 2.1.  Organization and Qualification.  Parent is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Texas and Newco is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas and each of them has
the requisite power and authority to own, lease and operate its respective
assets and properties and to carry on its respective businesses as they are now
being conducted.

 

Section 2.2.  Authority; Non-Contravention; Approvals.

 

(a)                                  Parent and Newco each have full limited
liability company and corporate (as the case may be) power and authority to
execute and deliver this Agreement, to consummate the transactions contemplated
hereby. This Agreement has been approved by the Managers of Parent and the Board
of Director of Newco, and no other limited liability company or corporate
proceedings on the part of Parent or Newco are necessary to authorize the
execution and delivery of this Agreement or the consummation by Parent and Newco
of the transactions contemplated hereby. This Agreement has been duly executed
and delivered by each of Parent and Newco, and, assuming the due authorization,
execution and delivery hereof by

 

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Stockholder, PSI, CCORE, and CFLP, constitutes a valid and legally binding
agreement of each of Parent and Newco enforceable against each of them in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors’ rights generally and (ii)
general equitable principles.

 

(b)                                 The execution and delivery of this Agreement
by each of Parent and Newco and the consummation by each of Parent and Newco of
the transactions contemplated hereby do not and will not violate or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Parent or the Newco under any of the terms, conditions or provisions
of (i) the respective charters or bylaws of Parent or the Newco, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to
Parent or the Newco or any of their respective properties or assets, or (iii)
any note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which Parent or Newco is now a party or by which Parent or Newco or any
of their respective properties or assets may be bound or affected.

 

(c)                                  No declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any governmental
or regulatory body or authority is necessary for the execution and delivery of
this Agreement by Parent or Newco or the consummation by Parent or Newco of the
transactions contemplated hereby.

 

Section 2.3.  Brokers and Finders.  Parent or Newco have not entered into any
contract, arrangement or understanding with any person or firm which may result
in the obligation of Parent or Newco to pay any finder’s fees, brokerage or
agent commissions or other like payments in connection with the transactions
contemplated hereby. There is no claim for payment by Parent or Newco of any
investment banking fees, finder’s fees, brokerage or agent commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby.

 

Section 2.4.  Financials of Newco.  The pro forma balance sheet as of June 30,
2003 of Newco has been prepared in accordance with generally accepted accounting
principles, consistently applied (except for the absence of footnote disclosures
and for the absence of normal year-end audit adjustments which are not material
in the aggregate) and fairly present the financial condition and result of
operations of Newco.

 

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ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF PSI AND THE SHAREHOLDER

 

PSI and the Stockholder jointly and severally represent and warrant to Parent
and Newco that:

 

Section 3.1.  Organization and Qualification.  PSI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted.  PSI is duly qualified to do business as a foreign entity and
is in good standing in each jurisdiction in which the properties owned, leased,
or operated by it or the nature of the business conducted by it makes such
qualification necessary. True, accurate and complete copies of PSI’s Articles of
Incorporation, as amended, and Bylaws, as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to Newco.

 

Section 3.2.  Subsidiaries.  PSI does not own, any stock or other ownership
interests in any other entity.

 

Section 3.3.  Authority; Non-Contravention; Approvals.

 

(a)                                  PSI has full corporate power and authority
to execute and deliver this Agreement and, to consummate the transactions
contemplated hereby.  This Agreement has been approved by all of the members of
the Board of Directors of PSI, and other than the approval of the stockholders
of PSI no other corporate proceedings on the part of PSI are necessary to
authorize the execution and delivery of this Agreement or the consummation by
PSI of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by PSI and Stockholder, and, assuming the due
authorization, execution and delivery hereof by Parent and Newco, constitutes a
valid and legally binding agreement of PSI and Stockholder, enforceable against
PSI and Stockholder in accordance with its terms, except that such enforcement
may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors’ rights
generally and (b) general equitable principles.  PSI stipulates that is has not
been subject to undue pressure or coercion in connection with negotiation or
execution of this Agreement.

 

(b)                                 Except as set forth in the Disclosure
Schedule, the execution and delivery of this Agreement by PSI and the
Stockholder and the consummation by PSI and the Stockholder of the transactions
contemplated hereby do not and will not violate or result in a breach of any
provision of, or constitute a

 

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default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of PSI under any of the terms,
conditions or provisions of (i) the charter or bylaws of PSI, (ii) to the
Knowledge of PSI, any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any court or governmental
authority applicable to any of PSI or any of its properties or assets, or (iii)
any note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, or any Operating Agreement (as defined in Section 5.23) to which PSI
is now a party or by which PSI or its properties or assets may be bound or
affected.

 

(c)                                  No declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any governmental
or regulatory body or authority is necessary for the execution and delivery of
this Agreement by PSI or the consummation by PSI of the transactions
contemplated hereby.

 

Section 3.4.  Financial Statements.  PSI has furnished Parent and Newco with a
balance sheet, income statement and statement of cash flow of PSI as of August
31, 2003, (collectively, the “Financial Statements”).  The Financial Statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, and are accurate and complete (except for the absence of
footnote disclosures and for the absence of normal year-end audit adjustments
which are not material in the aggregate) and fairly present the financial
condition and result of operations of PSI.  The fiscal 2003 budget and capital
budget with respect to PSI previously furnished by PSI to Parent (a) are true
and complete copies of PSI’s most recent internal budgets for fiscal 2003 and
(b) were prepared by management of PSI in good faith and on a reasonable basis. 
The Disclosure Schedule lists all intercompany transactions between or among
PSI, CFLP, CCORE and/or the Stockholder since January 1, 2003.

 

Section 3.5.  Absence of Undisclosed Liabilities.  Except as disclosed in the
disclosure schedule delivered by PSI to Newco (the “Disclosure Schedule”), PSI
has not incurred any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except liabilities or obligations (a)
which are provided for in the Financial Statements or reflected in the notes
thereto, or (b) liabilities or obligations under this Agreement.

 

Section 3.6.  Absence of Certain Changes or Events.  Except as disclosed in the
Disclosure Schedule, since December 31, 2002, to the Knowledge of PSI, the
business of PSI has been conducted in the ordinary course of business consistent
with past practices, and there has not been any event, occurrence, development
or state of circumstances or facts which has had, or could reasonably be
anticipated to have, individually or in the aggregate, a Material Adverse
Effect.  Specifically, but not by way of limitation, since December 31, 2002 PSI
has not engaged in any of the actions described in Section 5.1.  “Material
Adverse Effect” means any event, occurrence, fact, condition, change,
development or effect that is or could reasonably be

 

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anticipated to be materially adverse to the business, assets (including
intangible assets), liabilities, financial condition, results of operations,
properties (including intangible properties) or business prospects of PSI, as
applicable, taken as a whole, which is not reflected in the August 31, 2003
Financial Statements of PSI.  “Knowledge” means the actual knowledge of PSI
after reasonable inquiry of officers of PSI.

 

Section 3.7.  Tangible Assets.  PSI does not own any real property.  PSI leases
the real property described in the Disclosure Schedule.  The Disclosure Schedule
sets forth a list describing all trucks, automobiles, trailers, other titled
vehicles, machinery, equipment, furniture, supplies, tools, and other tangible
personal property (“Personal Property”) owned by PSI (the “Owned Assets”).  The
Disclosure Schedule also sets forth a description of all real property or
personal property leased by PSI or which is otherwise used by PSI but which is
not owned by PSI (the “Leased Assets”).  Except as indicated in the Disclosure
Schedule, the Owned Assets and the Leased Assets constitute all of the tangible
property necessary for the conduct by PSI of its business as now conducted.  PSI
has good and indefeasible title to all of the Owned Assets free and clear of all
mortgages, liens, pledges, charges, or encumbrance of any nature whatsoever,
except as indicated on the Disclosure Schedule.  All of the Owned Assets and the
Leased Assets are in good, serviceable condition and fit for the particular
purposes for which they are used in the business of PSI, subject only to normal
maintenance requirements and wear and tear reasonably expected in the ordinary
course of business.

 

Section 3.8.  Intellectual Property.  Subject to the terms of the CCORE License:

 

(a)                                  The Disclosure Schedule sets forth all of
the following that are owned, licensed, or used by PSI (collectively, the
“Intellectual Property Rights”): (i) patents, patent applications, and
inventions and discoveries that may be patentable (collectively, “Patents”),
(ii) all know-how, trade secrets, confidential and proprietary information,
technical information, data, process technology, plans, drawings, and blue
prints (collectively, “Trade Secrets”), and (iii) trademarks, service marks, and
trade names, and copyrights.

 

(b)                                 PSI has the right to freely use the
Intellectual Property Rights and, except as indicated on the Disclosure
Schedule, owns the Intellectual Property Rights, free of any lien or
encumbrance.  The Disclosure Schedule describes any obligation of PSI to pay
royalties or other compensation to third parties in exchange for the right to
use any of the Intellectual Property Rights.  Other than as provided in the Loan
Technology Assignment, PSI has not assigned, hypothecated or otherwise
encumbered any of the Intellectual Property Rights.

 

(c)                                  PSI may freely assign or transfer all
licenses that it has with third parties with respect to the Intellectual
Property Rights.

 

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(d)                                 Except as indicated in the Disclosure
Schedule, PSI has no knowledge of any infringement by any other person of any of
the Intellectual Property Rights, and PSI has not entered into any agreement to
indemnify any other party against any charge of infringement of any of the
Intellectual Property Rights.  To the Knowledge of PSI, PSI has not and does not
violate or infringe any intellectual property right of any other person, and PSI
has not received any communication alleging that it violates or infringes the
intellectual property rights of any other person.  PSI has not been sued for
infringing any intellectual property right of another person.

 

(e)                                  All of the issued Patents relating to the
dualjet technology are currently in compliance with formal legal requirements
(including payment of filing, examination, and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety days after the
Closing Date.  No such Patent has been or is now involved in any interference,
reissue, reexamination, or opposition Proceeding.  To the Knowledge of PSI,
there is no patent or patent application of any Third Party which potentially
interferes with any such Patent.  To the Knowledge of PSI, no such Patent is
infringed or has been challenged or threatened in any way.

 

(f)            With respect to each Trade Secret, the documentation, if any,
relating to such Trade Secret is current and accurate.  PSI has taken all
reasonable precautions to protect the secrecy, confidentiality, and value of all
Trade Secret (including the enforcement by PSI of a policy requiring each
employee or contractor to execute proprietary information and confidentiality
agreements substantially in the standard form of PSI and all current and former
employees and contractors of PSI have executed such an agreement).  To PSI’s
Knowledge, PSI has good title and an absolute right to use the Trade Secrets.
The Trade Secrets are not part of the public knowledge or literature, and, to
the Knowledge of PSI, have not been used, divulged, or appropriated either for
the benefit of any person (other than PSI) or to the detriment of PSI.  To the
Knowledge of PSI, no Trade Secret is subject to any adverse claim or has been
challenged or threatened in any way or infringes any intellectual property right
of any other person.

 

Section 3.9.  Employee Benefits.  The Disclosure Schedule contains a complete
list of “employee welfare plans” (as that term is defined in Section 3(1) of the
Employee Retirement Income Security Act of 1974 (“ERISA”)) currently maintained
by PSI or any person or trade or business under common control with PSI, or in
which active or former employees of PSI (collectively, the “Affected Employees”)
currently participate (which plans are hereinafter referred to as “Welfare
Plans”).  The Disclosure Schedule also contains a complete list of “employee
pension benefit plans” as that term is defined in Section 3(2) of ERISA
maintained by PSI or any person or trade or business under common control with
PSI, or in which any such entity currently contributes or is required to
contribute or in which Affected Employees currently

 

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participate (which plans are hereinafter referred to as “Pension Plans”). 
Neither PSI nor any of the Affected Employees participate or have ever
participated in any “multiemployer plan” (as that term is defined in Section
3(37) of ERISA).  The Welfare Plans and Pension Plans, and any other plans of
the type described in the first two sentences of this Section previously
applicable at any time to PSI, are collectively referred to as “Company Plans”. 
PSI Plan is or was in compliance with the provisions of all applicable laws,
rules and regulations, including, without limitation, ERISA and the Code.  None
of the Pension Plans has incurred any “accumulated funding deficiency” (as
defined in Section 412(a) of the Code).  PSI has not incurred any liability to
the Pension Benefit Guaranty Corporation under Section 4062, 4063 or 4064 of
ERISA, or any withdrawal liability under Title IV of ERISA with respect to any
multiemployer plan.  The Disclosure Schedule describes all bonuses and other
compensation which will be payable to any of the employees of PSI as a result of
the consummation of the Transactions, and any obligation to pay severance
payments.

 

Section 3.10.  Litigation.  Except as described in the Disclosure Schedule,
there are no claims, suits, actions, or proceedings (a “Proceeding”) pending or,
to the Knowledge of PSI, threatened against or relating to PSI, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator, including but not limited to any Proceeding
relating to a claim or allegation that there has been any violation of
applicable federal or state securities laws (“Securities Law”). Except as
described in the Disclosure Schedule, PSI is not subject to any judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator.  The
Disclosure Schedule sets forth a complete description of any prior Proceeding
relating to PSI that has been settled, dismissed, or otherwise terminated.

 

Section 3.11.  No Violation of Law.  Except as indicated in the Disclosure
Schedule, PSI is not in violation of and has not been given notice or been
charged with any violation of, any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable Securities
Law or Environmental Law) of any governmental or regulatory body or authority. 
Except as disclosed in the Disclosure Schedule, as of the date of this
Agreement, no investigation or review by any governmental or regulatory body or
authority with respect to PSI is pending or to the Knowledge of PSI contemplated
or threatened, nor has any governmental or regulatory body or authority
indicated an intention to conduct the same. PSI has all permits (including
without limitation Environmental Permits (as defined in Section 3.15)),
licenses, franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct their businesses as
presently conducted (collectively, the “Company Permits”). PSI is not in
violation of the terms of any Company Permit.

 

Section 3.12.  Insurance Policies.  The Disclosure Schedule sets forth a true
and accurate list and summary of current insurance coverage or information
concerning any self insurance program with respect to PSI.  Except as indicated
in the Disclosure Schedule, insurance policies providing such coverage will be
outstanding and in full force and effect through the Closing Date.  Except as
indicated in the Disclosure Schedule, PSI has not received notice from any
current insurance carrier of the intention of such carrier (a) to discontinue
any material insurance coverage afforded to PSI; or (b) to materially increase
the premium costs of

 

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such insurance.  The types of insurance policies maintained by PSI and the
coverage afforded by such policies with respect to the operations of PSI are, in
the opinion of PSI, reasonable in light of the nature of the businesses
conducted and the risks associated with such businesses.  No application by PSI
for insurance or any bond has been denied for any reason.

 

Section 3.13.  Taxes.  All returns and reports, including, without limitation,
information and withholding returns and reports (“Tax Returns”), of or relating
to any foreign, federal, state or local tax, assessment or other governmental
charge (“Taxes”) that are required to be filed on or before the Closing by or
with respect to PSI has been or will be duly and timely filed.  All such tax
returns were correct and complete in all respects and all Taxes, including
interest and penalties, owed by PSI (as shown on such Tax Returns) have been
paid.  PSI has not agreed to extend the statute of limitations for the
collection of any Taxes.  There is no unpaid pending claim against PSI with
respect to any Taxes, and no assessment, deficiency or adjustment has been
asserted or proposed with respect to any Tax Return of or with respect to PSI. 
The total amounts set up as liabilities for current and deferred Taxes in the
Financial Statements have been prepared in accordance with generally accepted
accounting principles and are sufficient to cover the payment of all Taxes,
including any penalties or interest thereon and whether or not assessed or
disputed, that are, or are hereafter found to be, or to have been, due with
respect to the operations of PSI through the periods covered thereby or the
current life or use of their respective assets.  PSI has (and as of the Closing
Date will have) made all deposits (including estimated tax payments for taxable
years for which the consolidated federal income tax return is not yet due)
required with respect to Taxes.  No waiver or extension of any statute of
limitation as to any federal, local or foreign Tax matter has been given by or
requested from PSI.  PSI has not filed consolidated income tax returns with any
corporation for any taxable period which is not now closed by the applicable
statute of limitations.

 

Section 3.14.  Labor Matters.  The Disclosure Schedule sets forth a list of the
employees of PSI, or the employees of affiliated entities whose services are
utilized by PSI, and indicates the compensation paid or payable to such
employees with respect to the calendar year of 2003.  Except as set forth in the
Disclosure Schedule, (a) there are no material controversies pending or, to the
Knowledge of PSI, threatened between PSI or any of its affiliates on the one
hand and any of its employees on the other, and (b) neither PSI nor any of its
affiliates is a party to a collective bargaining agreement of other labor union
contract applicable to any such employees, nor does PSI have any Knowledge of
any activities or proceedings of any labor union to organize any such employees.

 

Section 3.15.  Environmental Matters.  Except as set forth in the Disclosure
Schedule:

 

(a)                                  no notice, demand, request for information,
citation, summons or order has been received, no complaint has been served, no
penalty has been assessed, and no investigation, action, claim, suit, proceeding
or review is pending or, to the Knowledge of PSI, is threatened by any
governmental entity or other person with respect to PSI relating to or arising
out of any Environmental Law (as defined below);

 

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(b)                                 To the Knowledge of PSI, PSI is and has been
in compliance with all Environmental Laws and Environmental Permits (as defined
below); and

 

(c)                                  there are no liabilities of or relating to
PSI of any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, arising under or relating to any Environmental Law
and there are no facts, conditions, situations or set of circumstances which
could reasonably be expected to result in or be the basis for any such
liability.

 

For purposes of this Section, “PSI” shall include any entity which is, in whole
or in part, a predecessor of PSI.  For purposes of this Agreement, (i)
“Environmental Laws” means any and all laws, statutes, ordinances, rules,
regulations, orders or determinations of any Governmental Authority (as defined
below) pertaining to health or the environment currently in effect in any and
all jurisdictions in which PSI owns property or conducts business, including
without limitation, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980, as amended,
the Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances
Control Act, as amended, the Superfund Amendments and Reauthorization Act of
1986, as amended, the Hazardous Materials Transportation Act, as amended, and
all other environmental conservation or protection laws, (ii) the term
“Governmental Authority” includes the United States of America, as well as any
other foreign jurisdiction or state, county, city and political subdivisions in
which PSI owns property or conducts business, and any agency, department,
commission, board, bureau or instrumentality of any of them that exercises
jurisdiction over PSI, and (iii) “Environmental Permits” means all permits,
licenses, certificates, registrations, identification numbers, applications,
consents, approvals, variances, notices of intent, and exemptions necessary for
the ownership, use and/or operation of any facility or operation of PSI to
comply with requirements of Environmental Laws.

 

Section 3.16.  Material Contracts. The Disclosure Schedule lists all agreements,
leases, commitments, contracts, undertakings or understandings to which PSI is a
party, including but not limited to service agreements, manufacturing
agreements, purchase or sale agreements, supply agreements, distribution or
distributor agreements, real estate leases, purchase orders, customer orders and
equipment rental agreements (the “Operating Agreements”).  Each Operating
Agreement is a valid, binding and enforceable agreement of PSI and, to the
Knowledge of PSI, the other parties thereto.  Except as indicated in the
Disclosure Schedule, there has not occurred any breach or default under any
Operating Agreement on the part of PSI or, to the Knowledge of PSI, any other
parties thereto.  Except as indicated in the Disclosure Schedule, no event has
occurred which with the giving of notice or the lapse of time, or both, would
constitute a default under any Operating Agreement on the part of PSI, or, to
the Knowledge of PSI, any of the other parties thereto.  There is no dispute
between the parties to any Operating Agreement as to the interpretation thereof
or as to whether any party is in breach or default thereunder, and no party to
any Operating Agreement has indicated its intention to, or suggested it may
evaluate whether to, terminate any Operating Agreement.

 

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Section 3.17.  Brokers and Finders.  PSI has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of Parent, Newco, PSI or the Stockholder to pay any finder’s fees,
brokerage or agent commissions or other like payments in connection with the
transactions contemplated hereby.  There is no claim for payment by PSI of any
investment banking fees, finder’s fees, brokerage or agent commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby.

 

Section 3.18.  Purchase for Own Account.  The rights under the Royalty Agreement
to be acquired by PSI pursuant to the terms hereof (the “Rights”) are being or
will be acquired by PSI for its own account and with no intention of
distributing or reselling the Rights or any part thereof in any transaction that
would be in violation of the securities laws of the United States of America, or
any state, without prejudice, however, to the rights of PSI at all times to sell
or otherwise dispose of all or any part of the Rights under an effective
registration statement under the Securities Act, or under an exemption from such
registration available under the Securities Act.  PSI represents that it is
experienced in evaluating companies such as Newco and has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment and has the ability to suffer the total loss
of his investment.  PSI further represent that they have had the opportunity to
ask questions of and receive answers from executive officers of Newco concerning
the terms and conditions of the offering of Rights and to obtain additional
information to the satisfaction of PSI.  PSI understands that the Rights will
not be registered at the time of their issuance under the Securities Act for the
reason that the sale provided for in this Agreement is exempt pursuant to
Section 4(2) of the Securities Act and that the reliance of Newco on such
exemption is predicated in part on the representations of PSI set forth herein.

 

Section 3.19.  Solvency.

 

(a)                                  PSI will not be insolvent immediately after
the Closing.  As used in this Section, “insolvent” means that the sum the debts
and other probable liabilities of PSI exceed the present fair saleable value of
the assets of PSI.  For purposes of this Section 3.19(a), it is assumed that the
present fair saleable value of the rights to which PSI is entitled under the
Royalty Agreement exceeds $750,000.

 

(b)                                 Immediately after giving effect to the
consummation of the Transactions, PSI’s only significant asset will be its
rights under the Royalty Agreement and PSI will have no Known liabilities, other
than liabilities to persons or entities that have agreed in writing to defer
payment until funds are available under the Royalty Agreement or otherwise. 
Accordingly, immediately after giving effect to the consummation of the
Transactions,  (i) PSI will be able to pay its Known liabilities as they become
due in the usual course of its business, (ii) PSI will not have unreasonably
small capital with which to conduct its present or proposed business (as it does
not propose to engage in active business operations after Closing), and (iii)

 

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taking into account all pending and threatened litigation Known to PSI, final
judgments against PSI in actions for money damages are not reasonably
anticipated to be rendered at a time when, or in amounts such that, PSI will be
unable to satisfy any such judgments promptly in accordance with their terms
(taking into account the maximum probable amount of such judgments in any such
actions and the earliest reasonable time at which such judgments might be
rendered) as well as all Known liabilities of PSI.  The cash available to PSI,
after taking into account all other anticipated uses of the cash, will be
sufficient to pay promptly in accordance with their terms all Known
liabilities.  For purposes of this Section 3.19, the term “Known liabilities”
shall mean debts and judgments of PSI which (i) are now due and payable, (ii)
will become due and payable after Closing with respect to which PSI has incurred
a contractual obligation as of Closing, or (iii) PSI anticipates it will incur
in the near term after Closing, including but not limited to amounts arising
from pending and threatened litigation of PSI.

 

Section 3.20.  Disclosure.  No representation or warranty of PSI or the
Stockholder set forth hereunder or in the schedules attached hereto or in any
certificate delivered pursuant to Section 7.3(a) contains any untrue statement
of the material fact or omits to state a material fact necessary in order to
make the statements contained herein or therein not misleading.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

OF CFLP AND CCORE

 

CCORE and CFLP, jointly and severally, represent and warrant to Newco and Parent
as follows:

 

Section 4.1.  Organization and Qualification.  CCORE is a limited partnership
duly organized, validly existing and in good standing under the laws of the
State of Texas and has the requisite power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted.  CFLP is a limited partnership duly organized, validly existing
and in good standing under the laws of Wyoming and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted.

 

Section 4.2.  Authority; Non-Contravention; Approvals.

 

(a)                                  CCORE and CFLP each has full partnership
power and authority as the case may be to execute and deliver this Agreement
and, to consummate the transactions.  This Agreement has been approved by the
sole general partner of each of CCORE and CFLP and no other partnership
proceedings on the part of CCORE and CFLP are necessary to authorize the
execution and delivery of this Agreement or the consummation by CCORE and

 

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CFLP of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by CCORE and CFLP, and, assuming the due authorization,
execution and delivery hereof by Parent, Newco, PSI, and the Stockholder,
constitutes a valid and legally binding agreement of CCORE and CFLP, enforceable
against CCORE and CFLP in accordance with its terms, except that such
enforcement may be subject to (a) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors’ rights generally and (b) general equitable principles.

 

(b)                                 Subject to the terms of the CCORE License,
the execution and delivery of this Agreement by CCORE and CFLP and the
consummation by CCORE and CFLP of the transactions contemplated hereby do not
and will not violate or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of CCORE and CFLP under any of
the terms, conditions or provisions of (i) the limited partnership agreements of
CCORE and CFLP, (ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any court or governmental
authority applicable to CCORE and CFLP or any of their respective properties or
assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit or concession to which either CCORE and CFLP is now a party or
by which CCORE or CFLP or any of their respective properties or assets may be
bound or affected.

 

(c)                                  No declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any governmental
or regulatory body or authority is necessary for the execution and delivery of
this Agreement by CCORE or CFLP or the consummation by CCORE or CFLP of the
transactions contemplated hereby.

 

Section 4.3.  Litigation.  There are no Proceedings pending or, to the Knowledge
of CCORE or CFLP, threatened against or relating to either of CCORE and CFLP
before any court, governmental department, commission, agency, instrumentality
or authority, or any arbitrator, including but not limited to any Proceeding
relating to a claim or allegation that there has been any violation of
Securities Law.  Neither of CCORE and CFLP is subject to any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or authority, or any arbitrator.  The Disclosure
Schedule sets forth a complete description of any prior Proceeding relating to
CCORE and CFLP that has been settled, dismissed, or otherwise terminated.

 

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Section 4.4.  No Violation of Law.  Neither CCORE nor CFLP is in violation of or
has been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance or judgment (including, without limitation,
any applicable Securities Law or Environmental Law) of any governmental or
regulatory body or authority.  No investigation or review by any governmental or
regulatory body or authority with respect to CCORE or CFLP is pending or
threatened, nor has any governmental or regulatory body or authority indicated
an intention to conduct the same. CCORE and CFLP have all permits (including
without limitation Environmental Permits, licenses, franchises, variances,
exemptions, orders and other governmental authorizations, consents and approvals
necessary to conduct their businesses as presently conducted. CCORE and CFLP are
not in violation of the terms of any such permits.

 

ARTICLE V

CONDUCT OF BUSINESS PENDING THE TRANSACTIONS

 

Section 5.1.  Conduct of Business of PSI.  Prior to the Effective Time, PSI
shall operate its business in, and only in, the usual, regular and ordinary
course of business in substantially the same manner as operated on the date of
this Agreement.  Without limiting the generality of the foregoing, during the
period from the date of this Agreement to the Effective Time, PSI will not:

 

(a)                                  Amend its charter or bylaws;

 

(b)                                 Merge or consolidate with or agree to merge
or consolidate with, or purchase or agree to purchase all or substantially all
of the assets of, or otherwise acquire any corporation, partnership, association
or other business organization or division thereof;

 

(c)                                  Sell, lease or otherwise dispose of, or
agree to sell, lease or otherwise dispose of, any of its assets;

 

(d)                                 Make or declare a dividend or other
distribution to any of its stockholders, or redeem any of their stock;

 

(e)                                  Issue any capital stock or any rights to
acquire any of its capital stock;

 

(f)                                    Enter into any contract relating to the
Intellectual Property Rights;

 

(g)                                 Adopt, amend or terminate any Company Plan;

 

(h)                                 Amend or terminate any Operating Agreement;

 

(i)                                     Enter into any transaction or agreement
with the Stockholder, CCORE, or CFLP, other than as contemplated pursuant to the
Transactions;

 

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(j)            Enter into or modify any employment or severance agreement with
any director, officer, or employee, or agree to increase the compensation of any
officer, director or employee;

 

(k)           Make any capital expenditure; or

 

(l)            Incur any indebtedness other than the Loan.  As used in the
preceding sentence, the term “indebtedness” does not include liability to
vendors incurred in the ordinary course of PSI’s business.

 

Section 5.2.  Agreement of the Stockholder.  The Stockholder will not, prior to
the Effective Time, (a) take any action which would cause PSI to violate the
terms of Section 5.1, or (b) transfer any shares of the stock of PSI.

 

Section 5.3.  Business Organization.  Prior to the Effective Time, PSI and
Stockholder shall use their commercially reasonable best efforts to (a) preserve
intact the business organization of PSI, (b) keep available the services of the
officers and employees of PSI, (c) preserve the good will of PSI, (d) maintain
and keep the properties and assets of PSI in as good a repair and condition as
presently exists, (e) maintain the rights of PSI with respect to the
Intellectual Property Rights, and (f) maintain in full force and effect the
insurance coverage of PSI.  If PSI does not have the financial resources to take
any specific action required pursuant to this Section, PSI shall notify Newco in
writing of such fact and shall request in writing an advance pursuant to the
Loan in order to fund the taking of such action.  Newco, may, in its absolute
discretion, make or decline to make the requested advance.

 

Section 5.4.  Appraisal Rights.  If PSI receives any notice from any of its
shareholders electing to exercise their right (“Appraisal Rights”) to dissent
from the Transactions pursuant to Article 5.11 of the Texas Business Corporation
Act (the “TBCA”), it shall promptly notify Newco of such receipt, and shall
thereafter comply with the instructions of Newco regarding the manner in which
the proceedings relating to the exercise of the Appraisal Rights are conducted. 
Newco may, but shall not be required to, loan to PSI the amounts required to
fund the payment of any amounts payable by PSI in connection with the Appraisal
Rights.

 

Section 5.5.  Acquisition Transactions.

 

(a)                                  After the date hereof and prior to the
Closing or earlier termination of this Agreement, neither PSI nor the
Stockholder will initiate, solicit, negotiate, encourage or provide confidential
information to facilitate, and PSI or the Stockholder shall, and shall cause any
officer, director or employee of any of PSI, or any attorney, accountant,
investment banker, financial advisor or other agent retained by any of them to,
not initiate, solicit, negotiate, encourage or provide non-public or
confidential information to facilitate, any proposal or offer to acquire all or
any substantial part of the business or properties of PSI, any capital stock of
PSI, or any portion of the Intellectual Property Rights, whether by merger,
purchase of assets,

 

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license, tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof (an “Acquisition Transaction”).

 

(b)                                 Notwithstanding the provisions of paragraph
(a) above, PSI may, in response to an unsolicited written proposal with respect
to an Acquisition Transaction (“Acquisition Proposal”), furnish (subject to the
execution of a confidentiality agreement substantially similar to the
confidentiality provisions of the Confidentiality Agreement executed by Parent
in connection herewith for the benefit of PSI (the “Company Confidentiality
Agreement”)) confidential or non-public information concerning its business,
properties or assets to any corporation, partnership, person or other entity or
group (a “Potential Acquiror”) and negotiate with such Potential Acquiror if
based upon advice of its outside legal counsel and financial advisors, the Board
of Directors of PSI, determines in good faith that such action to provide such
confidential or non-public information to such Potential Acquiror is necessary
for the Board of Directors of PSI, to act in a manner which is consistent with
its fiduciary duties to its stockholders; provided, however, that PSI is
prohibited from providing to a Potential Acquiror any confidential or non-public
information not previously furnished to Parent.  It is understood and agreed
that negotiations conducted in accordance with this paragraph (b) shall not
constitute a violation of Section 5.5 (a).

 

(c)                                  PSI shall immediately notify Parent after
receipt of any Acquisition Proposal or any request for non-public information
relating to PSI in connection with an Acquisition Proposal or for access to the
properties, books or records of PSI by any person or entity that informs the
Board of Directors of PSI that it is considering making, or has made, an
Acquisition Proposal.  Such notice to Parent shall be made orally and in writing
and shall indicate in reasonable detail the identity of the Potential Acquiror
and the terms and conditions of such proposal, inquiry or contact.

 

ARTICLE VI

ADDITIONAL AGREEMENTS

 

Section 6.1.  Stockholders’ Approvals.  Subject to the fiduciary duties of the
Board of Directors of PSI under applicable law, PSI shall, as promptly as
practicable, submit this Agreement and the Transactions for the approval and
adoption by the holders of its common stock (the “PSI Stockholders’”) as
required pursuant to the TBCA, at a meeting of stockholders (the “PSI
Stockholders’ Approval”).  Such meeting of stockholders shall be held as soon as
practicable, and shall be referred to herein as the “Stockholders’ Meeting.” 
PSI shall provide written notice of the Stockholders’ Meeting to the PSI
Stockholders, and conduct the Stockholders’ Meeting, in compliance with all
applicable corporate law and Securities Law.  All notices to be provided to the
PSI Stockholders with respect to the Stockholders’ Meeting or

 

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related to the Transactions shall be provided to Parent and Newco for their
review at least two (2) business days before their transmittal.

 

Section 6.2.  Cooperation.  PSI shall afford to the Parent and Newco and their
respective accountants, counsel, financial advisors and other representatives
reasonable access during normal business hours throughout the period prior to
the Effective Time to all of its properties, books, contracts, personnel,
representatives of or contacts with governmental or regulatory authorities,
agencies or bodies, commitments, and records (including, but not limited to, Tax
Returns and any and all records or documents which are within the possession of
governmental or regulatory authorities, agencies or bodies, and the disclosure
of which PSI can facilitate or control) and, such parties as its representatives
may reasonably request. Any investigation pursuant to this Section shall be
conducted in such manner as not to interfere unreasonably with the conduct of
the business of PSI or with the performance of any of the employees of PSI.  No
investigation pursuant to this Section shall affect any representation or
warranty made by any party.

 

Section 6.3.  License Agreements.  At the Closing, the Stockholder, CCORE and
CFLP shall execute and deliver to Newco the New License Agreement.

 

Section 6.4.  Expenses and Fees.

 

(a)                                  All costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expenses, unless otherwise agreed.

 

(b)                                 Notwithstanding (a) above, PSI agrees to pay
to Parent (i) a fee equal to $100,000 plus (ii) all documentable out-of-pocket
costs and expenses reasonably incurred by Parent and Newco in connection with
this Agreement and the transactions contemplated hereby, including without
limitation, all attorney’s fees, accountant’s fee and broker’s and investment
banker’s fees incurred in connection with this Agreement and the transactions
contemplated hereby, if (A) PSI terminates this Agreement pursuant to clause (v)
of Section 9.1(a); (B) Parent terminates this Agreement pursuant to clause (iv)
of Section 9.1(b); or (C) (1) Parent terminates this Agreement pursuant to
clause (v) of Section 9.1(b) or PSI terminates this Agreement pursuant to clause
(vi) of Section 9.1(a), and (2) on January 21, 2004 (if a vote has not earlier
been held at the Stockholders’ Meeting), or at the time of such failure to so
approve the Transactions or this Agreement, there shall exist or have been
proposed an Acquisition Proposal.

 

                Section 6.5.  Agreement to Cooperate.

 

(a)                                  Subject to the terms and conditions herein
provided, each of the parties hereto shall use all reasonable efforts to take,
or cause to be taken, all

 

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action and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including using its reasonable
efforts to obtain all necessary, proper or advisable waivers, consents and
approvals under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, including using its reasonable
efforts to obtain all necessary or appropriate waivers, consents or approvals of
third parties required in order to preserve material contractual relationships
of PSI and to lift any injunction or other legal bar to the Transactions (and,
in such case, to proceed with the Transactions as expeditiously as possible).

 

(b)                                 In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, whether before or after the Effective Time, the parties
hereto agree to cooperate and use their reasonable efforts to defend against and
respond thereto; provided, however, that in the event any such claim, action,
suit, investigation or other proceeding is commenced against PSI or any other
party hereto by any governmental body or other person or other legal or
administrative proceeding is commenced against PSI or Stockholder, Parent shall
have the right, at its own expense, to participate therein, and PSI or
Stockholder will not settle any such litigation without the consent of Parent,
which consent will not be unreasonably withheld.

 

Section 6.6.  Public Statements.  The parties shall consult with each other
prior to issuing any press release or any written public statement with respect
to this Agreement or the transactions contemplated hereby and shall not issue
any such press release or written public statement without the consent of the
other party, which consent shall not be unreasonably withheld.

 

Section 6.7.  Notification of Certain Matters.  Each of the Stockholder, PSI,
Parent and Newco agrees to give prompt notice to each other of, and to use their
respective reasonable best efforts to prevent or promptly remedy, (a) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect (or in all respects in the case of
any representation or warranty containing any materiality qualification) at any
time from the date hereof to the Effective Time and (b) any material failure (or
any failure in the case of any covenant, condition or agreement containing any
materiality qualification) on its part to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section 6.7
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.

 

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Section 6.8.  Additional Financing.  Within a reasonable period of time
following the Closing, Newco will use its reasonable best efforts to obtain the
financing required to promptly and reasonably develop, complete, test, and
commercially exploit the Intellectual Property Rights.  It is the present
intention of Newco to obtain financing of between $10 million and $20 million in
the form of equity, debt or lease financing as soon as practicable following the
Closing.  Notwithstanding the foregoing, Newco will not be considered in breach
of this provision if after Closing it implements an alternative financing plan,
or is unsuccessful in the implementation of its financing plan.

 

Section 6.9.  Dissolution.  PSI will not dissolve or liquidate at any time after
Closing without the consent of Newco, which consent may be given or withheld in
its absolute and sole discretion; provided, however, that the consent of Newco
to the dissolution and liquidation of PSI shall be granted if such dissolution
and liquidation is necessary to prevent PSI from violating, or to enable PSI to
cease violating, federal or state securities laws, provided further, however,
that, notwithstanding the foregoing, no dissolution or liquidation of PSI shall
be permitted if in the reasonable judgment of counsel to Newco it will thereby
be considered to have issued securities to the PSI Stockholders.  After Closing,
PSI will not, in connection with the issuance of any of its securities, refer to
Newco or any financial or other information regarding Newco, without the written
consent of Newco, which will not be unreasonably withheld.

 

Section 6.10.  Name Change.  At or prior to Closing, PSI will change its name to
a name that does not include the word “ProDril.”

 

ARTICLE VII

CONDITIONS TO CLOSING

 

Section 7.1.  Conditions to Each Party’s Obligation to Effect the Transactions.
 The respective obligations of each party to effect the Transactions shall be
subject to the fulfillment or waiver, if permissible, at or prior to the
Effective Time of the following conditions:

 

(a)                                  no preliminary or permanent injunction or
other order or decree by any federal or state court which prevents the
consummation of the Transactions shall have been issued and remain in effect
(each party agreeing to use its reasonable efforts to have any such injunction,
order or decree lifted);

 

(b)                                 no action shall have been taken, and no
statute, rule or regulation shall have been enacted, by any state or federal
government or governmental agency in the United States which would prevent the
consummation of the Transactions or make the consummation of the Transactions
illegal;

 

(c)                                  all amounts payable as the result of the
exercise of any Appraisal Rights shall have been paid with advances from Newco
pursuant to Section 5.4;

 

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(d)                                 the partners of CCORE shall have approved
its participation in the Transactions as required pursuant to the partnership
agreement of CCORE and in accordance with applicable partnership law; and

 

(e)                                  The PSI Stockholders’ Approval shall have
been obtained.

 

Section 7.2.  Conditions to Obligation of PSI to Effect the Transactions. 
Unless waived by PSI, the obligation of PSI to effect the Transactions shall be
subject to the fulfillment at or prior to the Effective Time of the following
additional conditions:

 

(a)                                  Parent and Newco shall have performed in
all material respects (or in all respects in the case of any agreement
containing any materiality qualification) their agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Parent and Newco contained in this Agreement
shall be true and correct in all material respects (or in all respects in the
case of any representation or warranty containing any materiality qualification)
on and as of the date made and on and as of the Closing Date as if made at and
as of such date, and PSI shall have received a certificate executed on behalf of
Parent by the President or a Vice President of Parent and on behalf of Newco by
the President and Chief Executive Officer or a Vice President of Newco to that
effect.

 

(b)                                 Newco shall have issued securities in
exchange for a consideration to Newco of at least $1,000,000, less the balance
of any amounts loaned by Parent to PSI prior to the Effective Time.

 

(c)                                  Newco shall have paid the Patent Counsel
Fees (as defined in Section 7.2).

 

Section 7.3.  Conditions to Obligations of Parent and Newco to Effect the
Transactions.  Unless waived by Parent and Newco, the obligations of Parent and
Newco to effect the Transactions shall be subject to the fulfillment at or prior
to the Effective Time of the following additional conditions:

 

(a)                                  PSI, Stockholder, CFLP, and CCORE shall
have performed in all material respects (or in all respects in the case of any
agreement containing any materiality qualification) their agreements contained
in this Agreement required to be performed on or prior to the Closing Date and
the representations and warranties of PSI, CFLP, CCORE and Stockholder contained
in this Agreement shall be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made and on and as of the
Closing Date as if made at and as of such date, and Newco shall have received a
certificate executed on behalf of PSI, CFLP, and

 

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CCORE by the chief executive officer of the respective entity, or its general
partner, and also by the Stockholder individually, to that effect;

 

(b)           Since August 31, 2003, there shall have been no changes that
constitute, and no event or events shall have occurred which have resulted in or
constitute, a Material Adverse Effect (other than changes or events due to the
lack of funds to meet PSI’s ongoing obligations which are promptly disclosed
with advance written notice to Newco);

 

(c)           Parent shall have received a legal opinion, in form reasonably
satisfactory to Parent concerning the enforceability of the agreements executed
by PSI, CFLP, and CCORE at Closing and that this Agreement, and that manner of
its adoption and approval by the directors of PSI and the PSI Stockholders
comply with the requirements of the applicable corporate law;

 

(d)           The Stockholder shall have entered into an employment agreement
with Newco in form reasonably satisfactory to Newco;

 

(e)           All third party consents required to the consummation of the
Transactions described in the Disclosure Schedule relating to any permit,
license or agreement shall have been obtained;

 

(f)            Newco shall have acquired substantially all of the assets of
ProDril Services International Ltd pursuant to terms and conditions acceptable
to Newco;

 

(g)           The holders of any of the indebtedness of PSI other than the
Remaining Indebtedness which is not to be assumed by Newco pursuant to Section
1.3 shall have restructured or subordinated as required by Newco, in its sole
and absolute discretion, to assure that such holders will not be able to
successfully challenge the validity or effectiveness of the Transactions;

 

(h)           No Appraisal Rights shall have been exercised;

 

(i)            The holders of the equity securities of PSI that, on a fully
diluted basis, are the equivalent of at least 65% of the common stock of PSI
(after taking into account the conversion rights of preferred stock) shall have
been voted in favor of the Transactions; and

 

(j)            The legal files relating to the Patents which were the subject of
the Loan Technology Assignment shall have been released to Newco upon the
payment of fees as provided pursuant to the Loan Technology Assignment (the
“Patent Counsel Fees”).

 

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ARTICLE VIII

INDEMNIFICATION

 

Section 8.1.  Indemnification of Newco.  PSI, CCORE, CFLP, and the Stockholder
each agree to jointly and severally indemnify Parent and Newco (including their
respective officers, directors, employees and agents) against, and hold each of
them harmless from and against, any and all claims, actions, causes of action,
arbitrations, proceedings, losses, damages, liabilities, judgments and expenses
(including, without limitation, reasonable attorneys’ fees) (“Indemnified
Amounts”) incurred by the indemnified party as a result of (a) any error,
inaccuracy, breach or misrepresentation in any of the representations and
warranties made by or on behalf of CFLP, CCORE, the Stockholder, or PSI in this
Agreement, (b) any violation or breach by the Stockholder, CFLP, CCORE, or PSI
or default by the Stockholder, CFLP, CCORE or PSI under the terms of this
Agreement or (c) any liabilities or obligations of PSI other than the Assumed
Liabilities.  The indemnified party shall be entitled to recover its reasonable
and necessary attorneys’ fees and litigation expenses incurred in connection
with successful enforcement of its rights under this Section.

 

Section 8.2.  Indemnification of Companies.  Parent and Newco will indemnify PSI
against, and hold it harmless from and against, any and all Indemnified Amounts
incurred by PSI (and its officers, directors, employees, and agents) as a result
of (a) any error, inaccuracy, breach or misrepresentation in any of the
representations and warranties made by or on behalf of Parent or Newco in this
Agreement, (b) any violation or breach by Parent or Newco of or default by
Parent or Newco under the terms of this Agreement, and (c) the Assumed
Liabilities.  PSI shall be entitled to recover their reasonable and necessary
attorney’s fees and litigation expenses incurred in connection with successful
enforcement of their rights under this Section.

 

Section 8.3.  Procedure.  The defense of any claim, action, suit, proceeding or
investigation subject to indemnification under this Article shall be conducted
by the indemnifying party.  If the indemnifying party fails to conduct such
defense, the indemnified parties may retain counsel satisfactory to them and the
indemnifying party shall pay all reasonable fees and expenses of such counsel
for the indemnified parties promptly as statements therefor are received.  The
party not conducting the defense will use reasonable efforts to assist in the
vigorous defense of any such matter, provided that such party shall not be
liable for any settlement of any claim effected without its written consent,
which consent, however, shall not be unreasonably withheld.  Any indemnified
party wishing to claim indemnification under this Article VIII, upon learning of
any such claim, action, suit, proceeding or investigation, shall notify the
indemnifying party (but the failure so to notify a party shall not relieve such
party from any liability which it may have under this Article VIII except to the
extent such failure materially prejudices such party).  If the indemnifying
party is responsible for the attorneys’ fees of the indemnified parties, then
the indemnified parties as a group may retain only one law firm to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more indemnified parties.

 

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Section 8.4.  Survival.  Except as set forth in the following sentence, the
representations, warranties and indemnities set forth in this Agreement and in
any certificate or instrument delivered in connection herewith shall be
continuing and shall survive (subject to any applicable statute of limitations
with respect to any claim by a third party) the Closing until the third
anniversary of the Closing Date.  The period during which the representations
and warranties survive pursuant to this section is referred to herein with
respect to such representations and warranties as the “Survival Period”.  After
the expiration of the applicable Survival Period, the representations and
warranties shall thereafter terminate and be of no further force and effect
unless a written notice asserting a claim shall have been made pursuant to this
Article VIII within the Survival Period with respect to such matter.  Any claim
for indemnification made during the Survival Period shall remain in effect for
purposes of such indemnification notwithstanding such claim may not be resolved
within the Survival Period.  The indemnification obligations under this Article
VIII shall apply regardless of whether any suit or action results solely or in
part from the active, passive or concurrent negligence of the indemnified
party.  The rights of the parties to indemnification under this Article VIII
shall not be limited due to any investigations heretofore or hereafter made by
such parties or their representatives, regardless of negligence in the conduct
of any such investigations.  The representations, warranties and covenants and
agreements made by the parties shall not be deemed merged into any instruments
or agreements delivered in connection with the Closing or otherwise in
connection with the transactions contemplated hereby.  The sole remedy of a
party hereto for any claims, actions, causes of action, arbitrations,
proceedings, losses, damages, liabilities, judgments and expenses relating to
the Transactions shall be indemnification under this Article VIII.

 

ARTICLE IX

MISCELLANEOUS

 

Section 9.1.  Termination.  This Agreement may be terminated at any time prior
to the Closing, as follows:

 

(a)           PSI shall have the right to terminate this Agreement:

 

(i)                                     if the representations and warranties of
Parent and Newco shall fail to be true and correct in all material respects (or
in all respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date, on and as
of any subsequent date as if made at and as of the subsequent date and such
failure shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any materiality
qualification) within 30 days after written notice of such failure is given to
Parent by PSI;

 

(ii)                                  if the Transactions are not completed by
January 21, 2004 (provided that the right to terminate this Agreement under this

 

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Section 9.1(a)(ii) shall not be available to PSI if the failure of PSI to
fulfill any obligation to Parent or Newco under or in connection with this
Agreement has been the cause of or resulted in the failure of the Transaction to
occur on or before such date);

 

(iii)                               if the Transactions are enjoined by a final,
unappealable court order;

 

(iv)                              if Parent or Newco (a) fail to perform in any
material respects any of their covenants (or in all respects in the case of any
covenant containing any materiality qualification) in this Agreement, and (b) do
not cure such default in all material respects (or in all respects in the case
of any covenant containing any materiality qualification) within 30 days after
written notice of such default is given to Parent and Newco by PSI;

 

(v)                                 if (a) PSI receives an offer from any third
party (excluding any affiliate of PSI or any group of which any affiliate of PSI
is a member) with respect to a merger, sale of substantial assets or other
business combination involving PSI, (B) PSI’s Board of Directors determines in
good faith that such offer constitutes an Acquisition Proposal which, if
consummated pursuant to its terms, would result in a transaction more favorable
to the PSI Stockholders than the Transactions (a “Superior Proposal”) and
resolves to accept such Superior Proposal, and (C) PSI shall have given Parent
two (2) days’ prior written notice of its intention to terminate this Agreement
pursuant to this provision, provided that termination shall not be effective
until such time as the payment required by Section 6.4(b) shall have been
received by Parent; or

 

(vi)                              if the PSI Stockholders’ Approval shall not
have been obtained by January 21, 2004.

 

(b)           Parent or Newco shall have the right to terminate this Agreement:

 

(i)                                     if the representations and warranties of
PSI shall fail to be true and correct in all material respects (or in all
respects in the case of any representation or warranty containing any
materiality qualification) on and as of the date made or, except in the case of
any such representations and warranties made as of a specified date, on and as
of any subsequent date as if made at and as of such subsequent date and such
failure shall not have been cured in all material respects (or in all respects
in the case of any representation or warranty containing any materiality
qualification) within 30 days after written notice of such failure is given to
PSI by Newco;

 

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(ii)                                  if the Transactions are not completed by
January 21, 2004 (provided that the right to terminate this Agreement under this
Section 9.1(b)(ii) shall not be available to Newco if the failure of Parent or
Newco to fulfill any obligation to PSI under or in connection with this
Agreement has been the cause of or resulted in the failure of the Transactions
to occur on or before such date);

 

(iii)                               if PSI (a) fails to perform in any material
respect (or in all respects in the case of any covenant containing any
materiality qualification) any of its covenants in this Agreement, and (b) does
not cure such default in all material respects (or in all respects in the case
of any covenant containing any materiality qualification) within 30 days after
notice of such default is given to PSI by Newco;

 

(iv)                              If the Board of Directors of PSI shall have
(A) recommended to the PSI Stockholders to accept a Superior Proposal, or
resolved to do so; or (B) withdrawn, modified or changed the recommendation of
this Agreement or the Transactions in a manner adverse to Parent or Newco shall
have resolved to do so, other than in connection with the exercise of the rights
of PSI to terminate this Agreement under Section 9.1(a)(i) or 9.1(a)(iv) as a
result of a material breach of a representation, warranty or covenant;

 

(v)                                 If the PSI Stockholders’ Approval shall not
have been obtained by January 21, 2004;

 

(vi)                              If the holders of the equity securities of PSI
that, on a fully diluted basis, are the equivalent of at least two-thirds of the
common stock of PSI (after taking into account the conversion rights of
preferred stock) shall not have been voted in favor of the Transactions on or
before January 21, 2004; or

 

(c)                                  The Board of Directors of PSI, Newco, and
Parent, mutually agree.

 

Section 9.2.  Effect of Termination.  In the event of termination of this
Agreement by pursuant to the provisions of Section 9.1, this Agreement shall
forthwith become void and there shall be no further obligations on the part of
PSI, Parent, Newco, CCORE, CFLP or their respective officers or directors, or
the Stockholder (except as set forth in this Section 9.2 and in Sections 6.4 and
9.9, all of which shall survive the termination).  Nothing in this Section 9.2
shall relieve any party from liability for any breach of this Agreement.

 

Section 9.3.  Remedies.  If any legal action or other proceeding is brought for
the enforcement of this Agreement, or because of an alleged dispute, breach,
default or

 

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misrepresentation in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys’ fees and other costs incurred in that action or proceeding
in addition to any other relief to which it or he may be entitled at law or
equity.

 

Section 9.4.  Notices.  All notices, consents, demands or other communications
required or permitted to be given pursuant to this Agreement shall be deemed
sufficiently given: (i) when delivered personally during a business day to the
appropriate location described below or telefaxed to the telefax number
indicated below, or (ii) five (5) business days after the posting thereof by
United States first class, registered or certified mail, return receipt
requested, with postage fee prepaid and addressed:

 

If to Parent or Newco:

808 Travis Street

 

Suite 850

 

Houston, Texas 77002

 

Telefax No. (713) 224-6361

 

 

With a copy to:

Casey W. Doherty

 

Doherty, Doherty & Adams, L.L.P.

 

1717 St. James Place, Suite 520

 

Houston, Texas 77056

 

Telefax No. (713) 572-1001

 

 

If to PSI, CFLP, CCORE

 

or the Stockholder:

4239 Pat O’Hara Mountain Drive

 

Cody, Wyoming 82414-9205

 

Telefax No. (307) 587-2595

 

 

With a copy to:

Bill Stone

 

Scheef & Stone, L.L.P.

 

5956 Sherry Lane, Suite 1400

 

Dallas, Texas 75225

 

TELEFAX NO. (214) 706-4242

 

Section 9.5.  Successors.  This Agreement shall be binding upon each of the
parties upon their execution, and inure to the benefit of the parties hereto and
their successors and assigns.

 

Section 9.6.  Severability.  In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision of this Agreement or any such other instrument.

 

Section 9.7.  Section Headings.  The section headings used herein are
descriptive only and shall have no legal force or effect whatsoever.  Except to
the extent the context specifically indicates otherwise, all references to
articles and sections refer to articles and sections of this

 

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Agreement, and all references to the exhibits and schedules refer to exhibits
and schedules attached hereto, each of which is made a part hereof for all
purposes.

 

Section 9.8.  Gender.  Whenever the context so requires, the masculine shall
include the feminine and neuter, and the singular shall include the plural and
conversely.

 

Section 9.9.  Governing Law.  This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas, U.S.A., applicable to
agreements and contracts executed and to be wholly performed there, without
giving effect to the conflicts of law principles thereof.  Exclusive venue for
any action brought hereunder shall lie in Harris County, Texas.

 

Section 9.10.  Multiple Counterparts.  This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original.

 

Section 9.11.  Waiver.  Any waiver by either party to be enforceable must be in
writing and no waiver by either party shall constitute a continuing waiver.

 

Section 9.12.  Entire Agreement.  This Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof.

 

Section 9.13.  No Assumption Against Draftsman.  Each party hereto has been
represented by counsel with respect to the negotiation and drafting of this
Agreement and all related documents.  Accordingly, each party agrees that
ambiguities with respect to any language contained herein or therein shall not
be resolved against the drafting party.

 

                IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date and year first set forth above.

 

 

PARTICLE DRILLING, INC.

 

 

 

 

 

By:

/s/ Prentis Tomlinson

 

 

 

Prentis Tomlinson, Chief Executive Officer

 

 

 

 

 

 

 

PRODRIL PARTNERS LLC

 

 

 

 

 

 

 

By:

/s/ Prentis Tomlinson

 

 

 

Prentis Tomlinson, Chief Executive Officer

 

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PRODRIL SERVICES INCORPORATED

 

 

 

 

 

 

 

By:

/s/ Jack Bobo

 

 

 

Jack Bobo, Director

 

 

 

 

 

 

 

 

 

 

/s/ Harry B. Curlett

 

 

Harry B. Curlett

 

 

 

 

 

 

 

CCORE TECHNOLOGY AND LICENSING, LTD.,

 

a Texas Limited Partnership

 

 

 

 

By:

/s/ Harry B. Curlett

 

 

 

Harry B. Curlett, General Partner

 

 

 

 

 

 

 

CURLETT FAMILY LIMITED PARTNERSHIP, LTD.,

 

a Wyoming Limited Partnership

 

 

 

 

By:

Patriarch, LLC, a Wyoming Limited Liability

 

 

Company (its General Partner)

 

 

 

 

 

 

 

 

By:

/s/ Harry B. Curlett

 

 

 

 

Harry B. Curlett, Manager

 

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