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”);


 





















 


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


 


2





















 


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


 


3





















 


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


 


5





















 


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


 


6





















 


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.


 


7





















 


(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


 


8





















 


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


 


9





















 


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.


 


11





















 


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)


 


12





















 


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


 


13





















 


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.


 


14





















 


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;


 


15





















 


(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,


 


16





















 


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


 


17





















 


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


 


18





















 


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.


 


19





















 


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;


 


20





















 


(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


 


21





















 


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”).


 


22





















 


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.


 


23





















 


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


 


24





















 


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;


 


25





















 


(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


 


26





















 


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


 


27





















 


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

  



 


28





















 


	
   

  	
  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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