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Exhibit 10.16    
    

ROYALTY AGREEMENT  

        This Royalty Agreement is entered into by and between Particle Drilling, Inc., a Texas corporation
("Newco"), and ProDril Services International Limited, a Texas limited partnership ("PSIL") as of
January 20, 2004. 

        WHEREAS,
Newco, PSIL, and certain other parties have entered into that certain Acquisition Agreement dated January 20, 2004 (the "Acquisition
Agreement") pursuant to which, among other things, Newco has acquired certain assets of PSIL in exchange for consideration from Newco, which consideration includes the
obligations of Newco set forth in this Agreement; 

        NOW
THEREFORE, for and in consideration the mutual premises and covenants contained herein and in the Acquisition Agreement, the parties hereto agree as follows: 

        1.    Royalty.    Newco shall pay PSIL on or before February 15, May 15, August 15, and
November 15 of each year an amount (the "Royalty") equal to 2% of the EBITDA with respect to the calendar quarter ending December 31,
March 31, June 30, and September 30, respectively. The obligation to pay the Royalties hereunder shall terminate when PSIL has received Royalties equaling US$7,500,000. 

        2.    Calculation of EBITDA.    The term "EBITDA" shall mean the
excess of the revenues of the Business over the expenses of the Business. The "Business" is the business operated by Newco which involves the generation of revenue from hydraulic jet drilling systems
utilized in oil and gas drilling operations or which involves technology which utilizes solid impactors which are introduced into oil and gas drilling fluid to impact the formation ahead of or in
conjunction with the drill bit, which in either case utilize any of the inventions subject to the Patents (as defined in the Acquisition Agreement). The revenues of the Business shall be determined on
the accrual basis in accordance with generally accepted accounting principles as consistently applied by Newco ("GAAP"). The expenses of the Business
shall consist of those expenses incurred by Newco which are allocable to the period in question on the accrual basis pursuant to GAAP, provided that expenses shall not include, however, any
(a) interest, (b) federal, state, and other income taxes, (c) amortization of Newco's goodwill or other intangible assets, or (d) depreciation of any of the tangible assets
of Newco. 

        3.    Reports.    Newco will on a quarterly basis provide PSIL (i) its quarterly and
year-to-date income statement and balance sheet, prepared in accordance with GAAP, and (ii) a written report that sets forth the computation of the EBITDA for that
quarter, certified by the chief financial officer of Newco. Such a report shall be provided with respect to any quarter in which the Business has any revenue on or before the date payment would be
required with respect to such quarter. PSIL shall keep such reports, and any information provided to it by Newco in connection with this Agreement, confidential. 

        4.    Inspections; Audits.    PSIL shall be permitted on an annual basis to inspect and audit the books and records of
Newco which relate to the determination of EBITDA. Such audit shall be at the expense of PSIL, unless it is determined that the Royalty has been underpaid by 10% or more, in which case the audit shall
be at the expense of Newco. 

        5.    Determinations by Newco.    All determinations by Newco with respect to the calculation of EBITDA shall be
assumed to be correct unless PSIL is able to establish an error by a preponderance of the evidence. Newco has complete and absolute discretion regarding the manner in which it conducts the Business or
incurs expenses with respect to the Business. 

        6.    Assignments.    PSIL may assign or transfer its rights hereunder only in connection with a dissolution expressly
permitted pursuant to the terms of the Acquisition Agreement. Newco may only assign the Patents (as defined in the Acquisition Agreement) if the assignee agrees to be bound by the terms of this
Agreement. 

        7.    Unaffiliated Shareholder.    Newco represents and warrants that it has at least five shareholders other than
ProDril Partners L.L.C. ("Parent") who are accredited investors not controlling, controlled by or under common control with the Parent (an "Independent
Shareholder") and who have acquired their stock in Newco in exchange for an investment of at least $50,000. During any period that (i) the Parent directly or indirectly,
through one or more affiliates, owns or controls more than 50% of the stock of Newco, and (ii) there are not at least five Independent Shareholders, Newco shall have a duty to PSIL not to pay
any of its officers compensation in an amount which breaches the fiduciary duty owed to unaffiliated shareholders under Texas corporate law. 

        8.    Disclaimer of Fiduciary Duty.    Neither Newco nor its management shall owe a fiduciary duty to PSIL or its
shareholders. 

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

	 	 	PARTICLE DRILLING, INC.
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	By:	 	/s/  PRENTIS TOMLINSON      
 Prentis Tomlinson, Chief Executive Officer
	 	 	 	 	 	 	 
	 	 	PRODRIL SERVICES INTERNATIONAL LIMITED
	 	 	 	 	 	 	 
	 	 	By:	 	LTL65429, L.P.,

a Texas limited partnership (its general partner)
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	By:	 	/s/  HARRY B. CURLETT      
 Harry B. Curlett, General Partner

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Exhibit 10.16QuickLinks
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Exhibit 10.25  

 
 

SECOND AMENDMENT
  TO
  SECURITYHOLDERS AGREEMENT
  AMONG
  K&F PARENT, INC.
  AND
  CERTAIN OF ITS
  STOCKHOLDERS, OPTIONHOLDERS AND WARRANTHOLDERS
  DATED AS OF NOVEMBER 18, 2004

    

        THIS SECOND AMENDMENT TO SECURITYHOLDERS AGREEMENT (the "Amendment"), dated as of April 27, 2005, is being entered into by and among K&F
Parent, Inc., a Delaware corporation (the "Company"), Aurora Equity Partners II L.P., a Delaware limited partnership, Aurora Overseas Equity Partners II, L.P., a Cayman Islands limited
partnership, Aurora Equity Partners III L.P., a Delaware limited partnership, Aurora Overseas Equity Partners III, L.P., a Cayman Islands limited partnership, the holders of 662/3% in
voting interests of the issued and outstanding shares of Common Stock, voting together as a single class, held by the Securityholders other than the Aurora Entities, and the holders of
662/3% in voting interests of the issued and outstanding shares of Preferred Stock, voting together as a single class, held by the Securityholders other than the Aurora Entities. All
capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to such terms in the Agreement (as defined below). 

 
 

R E C I T A L S    
    

        WHEREAS, the Company and the Securityholders are parties to that certain Securityholders Agreement dated as of November 18, 2004, as amended by that
certain First Amendment to Securityholders Agreement dated as of December 27, 2004 (the "Agreement"); 

        WHEREAS,
in connection with CGLSA (as defined below) executing, delivering, and agreeing to be bound by the terms of, the Agreement, as a Class B Securityholder, the parties
hereto desire to enter into this Amendment to amend the Agreement as set forth below; and 

        WHEREAS,
pursuant to Section 13.2 of the Agreement, the Agreement may be amended, modified or supplemented by written agreement of the parties hereto. 

 
 

A G R E E M E N T    
    

        NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 

 A.    Amendments to the Agreement

        1.     The
following defined terms shall be added to Section 1.1 of the Agreement: 

"CGLSA" means Connecticut General Life Insurance Company on behalf of Separate Account 4628 PB only and not its General Account. 

"ERC" means Employers Reinsurance Corporation. 

"GEIPT" means General Electric Insurance Plan Trust. 

        2.     Section 3.1
of the Agreement shall be amended and restated in its entirety to read as follows: 

        "3.1     Prohibition on Transfer Prior to Qualified IPO Date.    Each Securityholder agrees that prior to
the occurrence of the Qualified IPO Date such Securityholder will not Transfer any Securities now or hereafter owned by such Securityholder except to a Permitted Transferee or with the consent of the
Aurora Entities (which may be given or withheld in their respective sole and 

 

absolute
discretion with or without any reason or liability therefor except as hereinafter provided in this Section 3). The foregoing restriction shall be in addition to, and not in lieu of,
the terms of Sections 2, 4, 5, 6, 7 and 8 of this Agreement. Notwithstanding anything herein to contrary, any transaction which results in a change of Control of a Securityholder (other than any
Aurora Entities) shall be deemed to be a Transfer by such Securityholder to a Permitted Transferee and the provisions hereof which apply to Transfers to a Permitted Transferee shall also apply to such
Transfer, so long as the Securities owned by such Securityholder represent less than ten percent (10%) of the total consolidated assets of such Securityholder." 

        3.     The
last sentence of Section 4.2(a) of the Agreement shall be amended and restated in its entirety to read as follows: 

        "Notwithstanding
the foregoing, the Qualifying Class B Securityholders shall not be permitted to purchase any Securities pursuant to this Section 4 from any Securityholder
that is subject to ERISA if such purchase would constitute a non-exempt prohibited transaction under ERISA." 

        4.     The
last sentence of Section 4.2(c) of the Agreement shall be amended and restated in its entirety to read as follows: 

        "Notwithstanding
the foregoing, the Company shall not be permitted to purchase any Securities pursuant to this Section 4 from any Securityholder that is subject to ERISA if such
purchase would constitute a non-exempt prohibited transaction under ERISA." 

        5.     The
first sentence of Section 7.1 of the Agreement shall be amended and restated in its entirety to read as follows: 

        "Each
Securityholder (other than GEPT, CalPERS, CDP and CGLSA) hereby irrevocably appoints the Aurora Entities, and each of them acting alone (with full power of substitution), as such
Securityholder's proxy and attorney in fact (each, in such capacity, a "Proxy Holder") to vote and to give or withhold consent with respect to all
shares of Common Stock and Preferred Stock (if any such rights exists), held by such Securityholder from time to time in such manner as such Proxy Holder or Proxy Holders shall determine in their
respective sole and absolute discretion, at any meeting (whether annual or special and whether or not an adjourned meeting) of the Company or by written consent or otherwise, giving and granting to
the Proxy Holders all powers such Securityholder would possess if personally present and hereby ratifying and confirming all that said Proxy Holders or either shall lawfully do or cause to be done by
virtue hereof, provided, however, that the foregoing proxy shall not apply to any action to be taken or
consent to be given by any such Securityholder, in its capacity as
such, under the terms of Sections 12 and 13.2 of this Agreement or with respect to matters of the type described in Section 7.2(b), (c), (d), (e) and (f) and  provided, further, that the Aurora Entities shall be prohibited from using any of such proxies to amend
the terms and conditions set forth in Sections 12 and 13.2 hereof." 

        6.     Section 7.2
of the Agreement shall be amended and restated in its entirety to read as follows: 

        "7.2     Agreement of CalPERS, GEPT, CDP and CGLSA.    Each of CalPERS, GEPT, CDP and CGLSA hereby
irrevocably agrees, with respect to any matter, to vote and to give or withhold consent with respect to all shares of Common Stock and Preferred Stock held by CalPERS, GEPT, CDP or CGLSA, as the case
may be, as a Securityholder from time to time in such manner as the Aurora Entities shall vote or give or withhold consent with respect to such matter; provided
however, that CalPERS, GEPT, CDP or CGLSA, as the case may be, shall not be so obligated to so vote or give or withhold consent with respect to any matter to the extent that it
reasonably believes, based upon written advice of counsel, that: 

        (a)   solely
in the case of GEPT or CGLSA, to the extent that GEPT's or CGLSA's, as the case may be, fiduciary duties under ERISA shall require otherwise; 

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        (b)   such
matter relates to or would constitute a violation or breach of any covenant, agreement or representation or warranty by any Aurora Entity or any of its Affiliates
(other than the Company or any of its controlled Affiliates) contained in this Securityholders Agreement or the Management Services Agreement; 

        (c)   such
matter constitutes fraud by, gross negligence of, willful misconduct or malfeasance of, a felony or willful violation of law or admission or a violation of any
federal or state securities laws (including a consent or plea of no contest or consent to a permanent injunction prohibiting future violations) by any Aurora Entity or any of its Affiliates (other
than the Company or any of its controlled Affiliates); 

        (d)   the
taking of such action (i) is not within the scope of CalPERS', GEPT's, CDP's or CGLSA's, as the case may be, authority as a stockholder of the Company or
(ii) would constitute a breach or disregard of CalPERS', GEPT's, CDP's or CGLSA's, as the case may be, fiduciary duties to the other stockholders of the Company or (iii) would constitute
a violation by CalPERS, GEPT, CDP or CGLSA, as the case may be, of laws and regulations and rules having the force of law applicable to CalPERS, GEPT, CDP or CGLSA, as the case may be; 

        (e)   such
matter or action relates to the bankruptcy or insolvency of the Company or any of its subsidiaries; or 

        (f)    such
matter relates to the conduct of any Aurora Entity or any of its Affiliates (other than the Company or any of its controlled Affiliates) that would have the effect
of releasing any such Aurora Entity or any of its Affiliates, as the case may be, from liability if CalPERS, GEPT, CDP or CGLSA, as the case may be, reasonably believes, based upon written advice of
counsel, that such conduct was taken in bad faith or in a manner reasonably believed by such Aurora Entity or any of its Affiliates, as the case may be, to be not in, or opposed to, the best interest
of the Company. 

        Provided further, that the foregoing shall not apply to any action to be taken or consent to be given by CalPERS, GEPT, CDP or CGLSA, as
the case may be, in its capacity as a Securityholder, under the terms of Sections 12 and 13.2 of this Agreement. Each of CalPERS, GEPT, CDP and CGLSA represents that it has not heretofore given any
proxies or otherwise agreed to vote in respect of its Securities, and agrees that so long as such Securities are subject to this Section 7.2, it will not grant any proxy to any Person or
otherwise agree to vote in conflict with the provisions of this Section 7.2. Each of CalPERS, GEPT, CDP and CGLSA hereby affirms that its agreement to vote its Securities set forth in this
Section 7.2 is given in consideration for the mutual agreements contained in this Agreement and in connection with its subscription for its Securities and constitutes a material inducement to
the Company and the Aurora Entities to approve such subscription, and that this agreement to vote is coupled with an interest and may, under no circumstances, be revoked. The agreement set forth in
this Section 7.2 shall terminate with respect to each Security only at such time as such Security is no longer owned beneficially or of record by CalPERS, GEPT, CDP or CGLSA, as the case may
be, or any of their respective Permitted Transferees or any other Person designated a Securityholder and bound by the terms of this Agreement." 

        7.     Section 13.2
of the Agreement shall be amended and restated in its entirety to read as follows: 

        "13.2     Entire Agreement; Amendments.    This Agreement (including the exhibits hereto) constitutes the
entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except by a written agreement signed by (a) the Company, (b) the Aurora
Entities, (c) the holders of a majority in voting interest of the issued and outstanding shares of Common Stock, voting together as a single class and each such share being entitled to one vote
per share, held by all the Securityholders other than the Aurora Entities or their 

3

 

Affiliates
and (d) the holders of a majority in voting interest of the issued and outstanding shares of the Series A Preferred, voting together as a single class and each such share
being entitled to one vote per share, held by all the Securityholders other than the Aurora Entities or their Affiliates; provided that no amendment
shall be made to Section 7.2 hereof (e) with respect to GEPT, without the consent of GEPT, (f) with respect to CalPERS, without the consent of CalPERS, (g) with respect to
CDP, without the consent of CDP, and (h) with respect to CGLSA, without the consent of CGLSA; and provided,  further, that no amendment shall be made
to the last sentence of Section 4.2(a) and 4.2(c), the second to last sentence of Section 5.1,
the parenthetical in the first line of Section 7.1 with respect to GEPT and Section 13.15 hereof without the consent of GEPT; and  provided, further, that no amendment shall be made to the last sentence of Section 4.2(a) and
4.2(c), the second to last sentence of Section 5.1, the parenthetical in the first line of Section 7.1 with respect to CGLSA and Section 13.16 hereof without the consent of CGLSA;  provided, further, that no amendment shall be made to the parenthetical in the first line of
Section 7.1 with respect to CDP without the consent of CDP; and provided, further that no
amendment shall be made to Sections 4, 5, 6, 9, 10, 11, 12 or 13.2 hereof without the consent of (h) the holders of at least 662/3% in voting interest of the issued and
outstanding shares of Common Stock, voting together as a single class and each such share being entitled to one vote per share, held by all the Securityholders other than the Aurora Entities or their
Affiliates and (i) the holders of at least 662/3% in voting interest of the issued and outstanding shares of Preferred Stock, voting together as a single class and each such
share being entitled to one vote per share, held by all the Securityholders other than the Aurora Entities or their Affiliates; and provided further
that any amendment to Section 5 hereof shall not (i) increase the liability of any Securityholder in respect of representations or indemnification made pursuant to Section 5 or
(ii) require such Securityholder to provide any guarantee for the benefit of the Company without such Securityholder's consent; and provided
further that any amendment that would adversely affect the rights of any Securityholder or group of Securityholders (other than any amendment that would adversely affect the
rights of all Securityholders in the same manner) under this Agreement must be consented to by such Securityholder or group of Securityholders before such amendment may be deemed effective against
such Securityholder or group of Securityholders. Notwithstanding the foregoing, subject to the subscription rights set forth in Section 10 and subject to any limitations set forth in its
Amended and Restated Certificate of Incorporation or Bylaws, the Company shall have the right, from and after the date hereof, in the sole discretion of the Board, to issue shares of Common Stock or
Preferred Stock, or Options or Warrants to purchase or securities convertible into such shares, to any Person (whether or not such Person is already party to this Agreement) and to cause such
securities and such Persons (to the extent not already subject to this Agreement) to become subject to this Agreement (including, at the option of the Company, the designation of any of such
securities as Registrable Securities) and as a Securityholder of whatever class as the Company may determine, respectively." 

        8.     Section 13.15
of the Agreement shall be amended and restated in its entirety to read as follows: 

        "13.15     GEPT, ERC and GEIPT Liability.    Any monetary obligation or liability of GEPT, ERC or GEIPT,
as applicable, under this Agreement shall be enforced solely against the Securities then held by GEPT ERC or GEIPT, as applicable, and not against the other assets of GEPT, ERC or GEIPT, as
applicable, and not against the Trustees of GEPT or General Electric Company or any affiliate thereof or the assets thereof." 

        9.     Section 13.16
shall be added to the Agreement to read as follows: 

        "13.16     CGLSA Liability.    Any monetary liability of CGLSA under this Agreement shall be enforced
solely against the Securities then held by CGLSA and not against the other assets of 

4

 

CGLSA
and not against its officers or directors or Connecticut General Life Insurance Company or any affiliate thereof or the assets thereof." 

 B. Miscellaneous

        1.     Except
as amended as set forth above, the Agreement shall continue in full force and effect. 

        2.     This
Amendment may be signed in one or more counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed one and the same
document. 

        3.     This
Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to principles of conflicts of
law. 

        [Signature Pages follows]

5

 

        IN
WITNESS WHEREOF, the parties hereto have executed this Second Amendment to Securityholders Agreement as of the date first written above. 

	 	 	COMPANY:
	

 	
 	
K&F PARENT, INC.
	
 	
 	

By:	

/s/  RONALD H. KISNER      

	 	 	Name:	Ronald H. Kisner
	 	 	Title:	Executive Vice President and Secretary
	

 	
 	
SECURITYHOLDERS:
	
 	
 	
AURORA EQUITY PARTNERS II L.P.
	
 	
 	

By:	

Aurora Capital Partners II L.P.,

its general partner
	

 	
 	

By:	

Aurora Advisors II LLC,

its general partner
	

 	
 	

By:	

/s/  RICHARD K. ROEDER      

	 	 	Name:	Richard K. Roeder
	 	 	Title:	Vice President and Secretary
	

 	
 	
AURORA OVERSEAS EQUITY

PARTNERS II, L.P.
	

 	
 	
By:	

Aurora Overseas Capital Partners II, L.P.,

its general partner
	

 	
 	

By:	

Aurora Overseas Advisors II, LDC,

its general partner
	

 	
 	

By:	

/s/  RICHARD K. ROEDER      

	 	 	Name:	Richard K. Roeder
	 	 	Title:	Vice President and Secretary

S-1

 

	 	 	AURORA EQUITY PARTNERS III L.P.
	
 	
 	

By:	

Aurora Capital Partners III L.P.,

its general partner
	

 	
 	

By:	

Aurora Advisors III LLC,

its general partner
	

 	
 	

By:	

/s/  RICHARD K. ROEDER      

	 	 	Name:	Richard K. Roeder
	 	 	Title:	Secretary
	

 	
 	
AURORA OVERSEAS EQUITY

PARTNERS III, L.P.
	
 	
 	

By:	

Aurora Overseas Capital Partners III, L.P.,

its general partner
	

 	
 	

By:	

Aurora Overseas Advisors III, LDC,

its general partner
	

 	
 	

By:	

/s/  RICHARD K. ROEDER      

	 	 	Name:	Richard K. Roeder
	 	 	Title:	Secretary
	

 	
 	
K&F EQUITY PARTNERS L.P.
	
 	
 	

By:	

Aurora Advisors III LLC,

its general partner
	

 	
 	

By:	

/s/  RICHARD K. ROEDER      

	 	 	Name:	Richard K. Roeder
	 	 	Title:	Secretary

S-2

 

	 	 	GENERAL ELECTRIC PENSION TRUST
	
 	
 	

By:	

GE ASSET MANAGEMENT INCORPORATED,

its Investment Manager
	

 	
 	

By:	

/s/  MICHAEL M. PASTORE      

	 	 	Name:	Michael M. Pastore

	 	 	Title:	Vice President

	

 	
 	
CO-INVESTMENT PARTNERS, L.P.
	
 	
 	

By:	

CIP Partners, LLC, its general partner
	

 	
 	

By:	

/s/  DUNCAN CHAPMAN      

	 	 	Name:	Duncan Chapman

	 	 	Title:	                                

	

 	
 	
CALIFORNIA PUBLIC EMPLOYEES'

RETIREMENT SYSTEM
	

 	
 	
By:	

/s/  LEON SHAHINIAN      

	 	 	Name:	Leon Shahinian

	 	 	Title:	Senior Investment Officer

	

 	
 	
CAISSE DE DEPOT ET PLACEMENT DU QUEBEC
	

 	
 	
By:	

/s/  ALAIN TREMBLAY      
	

/s/  GHISLAIN GAUTHIER      

	 	 	Name:	Alain Tremblay
	Ghislain Gauthier

	 	 	Title:	Investment Manager
	Senior Vice-President

S-3

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SECOND AMENDMENT TO SECURITYHOLDERS AGREEMENT AMONG K&F PARENT, INC. AND CERTAIN OF ITS STOCKHOLDERS, OPTIONHOLDERS AND WARRANTHOLDERS DATED AS OF NOVEMBER 18, 2004

R E C I T A L S

A G R E E M E N T

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