Agreement and Plan of Reorganization between Potomac Energy Corporation and Gayland Coal, Inc.

Summary

Potomac Energy Corporation and Gayland Coal, Inc., along with Gayland's shareholders, have agreed that Potomac will acquire all outstanding shares of Gayland in exchange for shares of Potomac. The transaction is intended to qualify as a tax-free reorganization. At closing, Gayland shareholders will transfer their shares to Potomac and receive Potomac shares in return. The agreement outlines the required financial disclosures, property lists, and other representations by Potomac, and sets the closing date as July 28, 2000.

EX-1.1 2 0002.txt AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization ("the Agreement"), dated as of the July 28th, 2000 by and between Potomac Energy corporation, a Oklahoma Corporation ("Potomac") and Gayland Coal, Inc a Utah Corporation ("Gayland") and the shareholders of Gayland ("Shareholders"), who execute this Agreement and the Investment Letter as set forth in Exhibit A of this Agreement, with reference to the following: A. Potomac is an Oklahoma Corporation. Potomac has authorized class A common stock of 50 million shares, $0.001 par value, of which 18,727,243 shares are outstanding, and 0- shares of preferred stock, $0.00 par value, of which 0- shares are outstanding. B. Gayland is a Utah Corporation, Gayland has authorized class A common stock of 100,000 shares, $0. par value, of which 100,000 shares are outstanding. C. The respective Boards of Directors of Potomac and Gayland have deemed it advisable and in the best interests of Potomac and Gayland that Gayland be acquired by Potomac pursuant to the terms and conditions set forth in this Agreement. D. Potomac and Gayland propose to enter into this Agreement which provides among other things that 100% of the outstanding shares of Gayland be acquired by Potomac, in exchange for shares of Potomac and such additional items all as more fully described in the Agreement. E. The parties desire the transaction to qualify as a tax-free reorganization under Section 368 (a)(1)(B) of the Internal Revenue Code of 1986, as amended. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 THE ACQUISITION 1.01 At the Closing, a total of 100,000 common shares, which represents 100% of the outstanding shares of Gayland, shall be acquired by Potomac in exchange for 14,499,000 investment shares of Potomac which shall be issued to Gayland shareholders as set forth on the signature page of this Agreement. 1.02 At the Closing, the Gayland shareholders will deliver certificates for the outstanding shares of Gayland, duly endorsed so as to make Potomac the sole holder thereof, free and clear of all claims and encumbrances and Potomac shall deliver a transmittal letter directed to the transfer agent of Potomac directing the issuance of shares to the shareholders of Gayland as set forth on the signature page of this Agreement. 1.03 Following the reorganization, there will be a total of 33,226,243 shares, $0.001 par value, issued and outstanding in Potomac. ARTICLE 2 THE CLOSING 1.01 The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place in the offices of Potomac Energy Corporation 3168 Bel Air Dr., Las Vegas, Nevada at 11:00 a.m., on July 28, 2000 or at such other place or date and time as may be agreed to in writing by the parties hereto. ARTICLE 3 REPRESENTATION AND WARRANTIES OF POTOMAC ENERGY CORPORATION Potomac and its officers and directors hereby represent and warrant to Gayland as follows: 3.01 Potomac shall deliver to Gayland, on or before Closing, each of the following: (a) Financial Statements. Audited financial statements of Potomac including, but not limited to, balance sheets and profit and loss statements as of March 31, 2000. (b) Property. An accurate list and description of all property, real or personal, owned by Potomac of a value equal to or greater than $10,000.00. (Schedule B). (c) Liens and Liabilities. A complete and accurate list of all material liens, encumbrances, easements, security interests or similar interests in or on any of the assets listed on Schedule A. (Schedule C). A complete and accurate list of all debts, liabilities and obligations of Potomac incurred or owing as of the date of this Agreement. (Schedule C.1). (d) Leases and Contracts. A complete and accurate list describing all material terms of each lease (whether of real or personal property) and each contract, promissory note, mortgage, license, franchise, or other written agreement to which Potomac is a party which involves or can reasonably be expected to involve aggregate future payments or receipts by Potomac (whether by the terms of such lease, contract, promissory note, license, franchise or other written agreement or as a result of a guarantee of the payment of or indemnity against the failure to pay same) of $1,000.00 or more annually during the twelve-month period ended December 31,1999, or any consecutive twelve-month period thereafter, except any of said instruments which terminate or are cancelable without penalty during such twelve-month period. (Schedule D). (e) Loan Agreements. Complete and accurate copies of all loan agreements and other documents with respect to obligations of Potomac for the repayment of borrowed money. (Schedule E). (f) Consents Required. A complete list of all agreements wherein consent to the transaction herein contemplated is required to avoid a default hereunder; or where notice of such transaction is required at or subsequent to closing, or where consent to an acquisition, consolidation, or sale of all or substantially all of the assets is required to avoid a default thereunder. (Schedule F). (g) Articles and Bylaws. Complete and accurate copies of the Certificate and Articles of Incorporation and Bylaws of Potomac together with all amendments thereto to the date hereof. (Schedule G). (h) Shareholders. A complete list of all persons or entities holding capital stock of Potomac or any rights to subscribe for, acquire, or receive shares of the capital stock of Potomac (whether warrants, calls, options, or conversion rights), including copies of all stock option plans whether qualified or non qualified, and other similar agreements. (Schedule H). (i) Officers and Directors. A complete and current list of all officers and Directors of Potomac. (Schedule I). (j) Salary Schedule. A complete and accurate list (in all material respects) of the names and the current salary rate for each present employee of Potomac who received $10,000 or more in aggregate compensation from Potomac whether in salary, bonus or otherwise, during the year 1999, or who is presently scheduled to receive from Potomac a salary in excess of $10,000 during the year December 1999, including in each case the amount of compensation received or scheduled to be received, and a schedule of the hourly rates of all other employees listed according to departments. (Schedule J). (k) Litigation. A complete and accurate list (in all material respects) of all material civil, criminal, administrative, arbitration or other such proceedings or investigations (including without limitations unfair labor practice matters, labor organization activities, environmental matters and civil rights violations) pending or, to the knowledge of Potomac threatened, which may materially and adversely affect Potomac. (Schedule K). (l) Tax Returns. Accurate copies of all Federal and State tax returns for Potomac for the last fiscal year. (Schedule L). (m) Agency Reports. Copies of all material reports or filings (and a list of the categories of reports or filings made on a regular basis) made by Potomac under ERISA, EEOC, FDA and all other governmental agencies (federal, state or local) during the last fiscal year. (Schedule M). (n) Banks. A true and complete list (in all material respects), as of the date of this Agreement, showing (1) the name of each bank in which Potomac has an account or safe deposit box, and (2) the names and addresses of all signatories. (Schedule N). (o) Jurisdictions Where Qualified. A list of all jurisdictions wherein Potomac is qualified to do business and is in good standing. (Schedule O). (p) Subsidiaries. A complete list of all subsidiaries of Potomac. (Schedule P). The term "Subsidiary" or "Subsidiaries" shall include corporations, unincorporated associations, partnerships, joint ventures, or similar entities in which Potomac has an interest, direct or indirect. (q) Union Matters. An accurate list and description (in all material respects) of all union contracts and collective bargaining agreements of Potomac, if any. (Schedule Q). (r) Employee and Consultant Contracts. A complete and accurate list of all employee and consultant contracts which Potomac may have, other than those listed in the schedule on Union Matters. (Schedule R). (s) Employee Benefit Plans. Complete and accurate copies of all salary, stock option, bonus, incentive compensation, deferred compensation, profit sharing, retirement, pension, group insurance, disability, death benefit or other benefit plans, trust agreements or arrangements of Potomac in effect on the date hereof or to become effective after the date thereof, together with copies of any determination letters issued by the Internal Revenue Service with respect thereto. (Schedule S). 3.02 Organization, Standing and Power. Potomac is a corporation duly organized, validly existing and in good standing under the laws of the State of Oklahoma with all requisite corporate power to own or lease its properties and carry on its businesses as are now being conducted. 3.03 Qualification. Potomac is qualified and is licensed as a foreign corporation. 3.04 Capitalization of Potomac. The authorized capital stock of Potomac consists of 50,000,000 class A shares of Common Stock, $0.001 par value, of which the only shares issued and outstanding are 18,727,243 issued to shareholders listed on Schedule H, which shares were duly authorized, validly issued and fully paid and non assessable. There are 0- preferred shares currently outstanding. There are 0- preemptive rights with respect to the Potomac stock. 3.05 Authority. The execution and delivery of this Agreement and consummation of the transactions contemplated herein have been duly authorized by all necessary corporate action, including but not limited to duly and validly authorized action and approval by the Board of Directors, on the part of Potomac. This Agreement constitutes the valid and binding obligation of Potomac enforceable against it in accordance with its terms, subject to the principles of equity applicable to the availability of the remedy of specific performance. This Agreement has been duly executed by Potomac and the execution and transactions contemplated by this Agreement shall not result in any breach of any terms or provisions of Potomac's Certificate and Articles of Incorporation or Bylaws or of any other agreement, court order or instrument to which Potomac is a party or bound by. 3.06 Absence of Undisclosed Liabilities. Potomac has no material liabilities of any nature, whether fixed, absolute, contingent or accrued, which were not reflected on the financial statements set forth in Schedule A nor otherwise disclosed in this Agreement or any of the Schedules or Exhibits attached hereto. 3.07 Absence of Changes. Since March 31,1999, there has not been any material adverse change in the condition (financial or other wise), assets, liabilities, earnings or business of Potomac, except for changes resulting from completion of those transactions described in Section 5.01. 3.08 Tax Matters. All taxes and other assessments and levies which Potomac is required by law to withhold or to collect have been duly withheld and collected, and have been paid over to the proper government authorities or are held by Potomac in separate bank accounts for such payment or are represented by depository receipts, and all such withholdings and collections and all other payments due in connection therewith (including, without limitation, employment taxes, both the employees' and employer's share) have been paid over to the government or placed in a separate and segregated bank account for such purpose. There are no known deficiencies in income taxes for any periods and further, the representations and warranties as to the absence of undisclosed liabilities contained in Section 3.06 includes any and all tax liabilities of whatsoever kind or nature (including, without limitation, all federal, state, local and foreign income, profit, franchise, sales, use and property taxes) due or to become due, incurred in respect of or measured by Potomac income or business prior to the Closing Date. 3.09 Options, Warrants, etc. Except as otherwise described in Schedule H, there are no outstanding options, warrants, calls, commitments or agreements of any character to which Potomac or its shareholders are a party or by which Potomac or its shareholders are bound, or are a party, calling for the issuance of shares of capital stock of Potomac or any securities representing the right to purchase or otherwise receive any such capital stock of Potomac. 3.10 Title to Assets. Except for liens set forth in Schedule C, Potomac is the sole and unconditional owner of, with good and marketable title to, all the assets listed in the schedules as owned by them and all other property and assets are free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever. 3.11 Agreements in Force and Effect. Except as set forth in Schedules D and E, all material contracts, agreements, plans, promissory notes, mortgages, leases, policies, licenses, valid and in full force and effect on the date hereof, and Potomac has not breached any material provision of, and is not in default in any material respect under the terms of, any such contract, agreement, plan, promissory note, mortgage, lease, policy, license, franchise or similar instrument which breach or default would have a material adverse effect upon the business, operations or financial condition of Potomac. 3.12 Legal Proceedings, Etc. Except as set forth in Schedule K, there are no civil, criminal, administrative, arbitration or other such proceedings or investigations pending or, to the knowledge of either Potomac or the shareholders thereof, threatened, in which, individually or in the aggregate, an adverse determination would materially and adversely affect the assets, properties, business or income of Potomac. Potomac has substantially complied with, and is not in default in any material respect under, any laws, ordinances, requirements, regulations or orders applicable to its businesses. 3.13 Governmental Regulation. To the knowledge of Potomac and except as set forth in Schedule K, Potomac is not in violation of or in default with respect to any applicable law or any applicable rule, regulation, order, writ or decree of any court or any governmental commission, board, bureau, agency or instrumentality, or delinquent with respect to any report required to be filed with any governmental commission, board, bureau, agency or instrumentality which violation or default could have a material adverse effect upon the business, operations or financial condition of Potomac. 3.14 Brokers and Finders. Potomac shall be solely responsible for payment to any broker or finder retained by Potomac for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated herein. 3.15 Accuracy of Information. No representation or warranty by Potomac contained in this Agreement and no statement contained in any certificate or other instrument delivered or to be delivered to Gayland pursuant hereto or in connection with the transactions contemplated hereby (including without limitation all Schedules and exhibits hereto) contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary in order to make the statements contained herein or therein not misleading. 3.16 Subsidiaries. Potomac does have other subsidiaries or own capital stock representing ten percent (10%) or more of the issued and outstanding stock of any other corporation. 3.17 Consents. Except as listed in Schedule F, no consent or approval of, or registration, qualification or filing with, any governmental authority or other person is required to be obtained or accomplished by Potomac or any shareholder thereof in connection with the consummation of the transactions contemplated hereby. 3.18 Improper Payments. Neither Potomac, nor any person acting on behalf of Potomac has made any payment or otherwise transmitted anything of value, directly or indirectly, to (a) any official or any government or agency or political subdivision thereof for the purpose of influencing any decision affecting the business of Potomac (b) any customer, supplier of competitor of Potomac or employee of such customer, supplier or competitor, for the purpose of obtaining, retaining Potomac's existing business for Potomac or (c) any political party or any candidate for elective political office nor has any fund or other asset of Potomac been maintained that was not fully and accurately recorded on the books of account of Potomac. 3.19 Copies of Documents. Potomac has made available for inspection and copying by Gayland and its duly authorized representatives, and will continue to do so at all times, true and correct copies of all documents which it has filed with the Securities and Exchange Commission and all other governmental agencies which are material to the terms and conditions contained in this Agreement. Furthermore, all filings by Potomac with the Securities and Exchange Commission, and all other governmental agencies, including but not limited to the Internal Revenue Service, have contained information which is true and correct, to the best knowledge of the Board of Directors of Potomac, in all material respects and did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein not misleading or which could have any material adverse effect upon the financial condition or operations of Potomac or adversely effect the objectives of this Agreement with respect to Gayland including, but not limited to, the issuance and subsequent trading of the shares of common stock of Potomac to be received hereby, subject to compliance by the shareholders of Gayland with applicable law. Potomac has filed with the Securities and Exchange Commission and each state securities regulator, or a timely basis, all statements, applications, reports and filings required under the Securities Act of 1933 and the Exchange Act of 1934, as amended. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF GAYLAND COAL, INC. Gayland and its president hereby represent and warrant to Potomac as follows: 4.01 Gayland shall deliver to Potomac, on or before Closing, the following: (a) Financial Statements. Audited financial statements of Gayland as of March 31, 2000. (Schedule AA). (b) Property. An accurate list and description of all property, real or personal, owned by Gayland of a value equal to or greater than $1,000.00. (Schedule BB). (c) Liens and Liabilities. A complete and accurate list of all material liens, encumbrances, easements, security interests or similar interests in or on any of the assets listed on Schedule AA. (Schedule CC). A complete and accurate list of all debts, liabilities and obligations of Gayland incurred or owing as of the date of this Agreement. (Schedule CC.1). (d) Leases and Contracts. A complete and accurate list describing all material terms of each lease (whether of real or personal property) and each contract, promissory note, mortgage, license, franchise, or other written agreement to which Gayland is a party which involves or can reasonably be expected to involve aggregate future payments or receipts by Gayland (whether by the terms of such lease, contract, promissory note, license, franchise or other written agreement or as a result of a guarantee of the payment of or indemnity against the failure to pay same) of $1,000.00 or more annually during the twelve-month period ended December 31, 1999, or any consecutive twelve-month period thereafter, except any of said instruments which terminate or are cancelable without penalty during such twelve-month period. (Schedule DD). (e) Loan Agreements. Complete and accurate copies of all loan agreements and other documents with respect to obligations of Gayland for the repayment of borrowed money. (Schedule EE). (f) Consents Required. A complete list of all agreements wherein consent to the transaction herein contemplated is required to avoid a default hereunder; or where notice of such transaction is required at or subsequent to closing, or where consent to an acquisition, consolidation, or sale of all or substantially all of the assets is required to avoid a default thereunder. (Schedule FF). (g) Articles and Bylaws. Complete and accurate copies of the Certificate and Articles of Incorporation and Bylaws of Gayland together with all amendments thereto to the date hereof. (Schedule GG). (h) Shareholders. A complete list of all persons or entities holding capital stock of Gayland or any rights to subscribe for, acquire, or receive shares of the capital stock of Gayland (whether warrants, calls, options, or conversion rights), including copies of all stock option plans whether qualified or non qualified, and other similar agreements. (Schedule HH). (i). Officers and Directors. A complete and current list of all officers and Directors of Gayland. (Schedule II). (j) Salary Schedule. A complete and accurate list (in all material respects) of the names and the current salary rate for each present employee of Gayland who received $10,000 or more in aggregate compensation from Gayland whether in salary, bonus or otherwise, during the year 1999, or who is presently scheduled to receive from Gayland a salary in excess of $10,000 during the year ending December 31, 1999, including in each case the amount of compensation received or scheduled to be received, and a schedule of the hourly rates of all other employees listed according to departments. (Schedule JJ). (k) Litigation. A complete and accurate list (in all material respects) of all material civil, criminal, administrative, arbitration or other such proceedings or investigations (including without limitations unfair labor practice matters, labor organization activities, environmental matters and civil rights violations) pending or, to the knowledge of Gayland threatened, which may materially and adversely affect Gayland. (Schedule KK). (l) Tax Returns. Accurate copies of all Federal and State tax returns for Gayland, if any. (Schedule LL). (m) Agency Reports. Copies of all material reports or filings (and a list of the categories of reports or filings made on a regular basis) made by Gayland under ERISA, EEOC, FDA and all other governmental agencies (federal, state or local). (Schedule MM). (n) Banks. A true and complete list (in all material respects), as of the date of this Agreement, showing (1) the name of each bank in which Gayland has an account or safe deposit box, and (2) the names and addresses of all signatories. (Schedule NN). (o) Jurisdictions Where Qualified. A list of all jurisdictions wherein Gayland is qualified to do business and is in good standing. (Schedule OO). (p) Subsidiaries. A complete list of all subsidiaries of Gayland. (Schedule PP). The term "Subsidiary" or "Subsidiaries" shall include corporations, unincorporated associations, partnerships, joint ventures, or similar entities in which Gayland has an interest, direct or indirect. (q) Union Matters. An accurate list and description (in all material respects) of all union contracts and collective bargaining agreements of Gayland, if any. (Schedule QQ). (r) Employee and Consultant Contracts. A complete and accurate list of all employee and consultant contracts which Gayland may have, other than those listed in the schedule on Union Matters. (Schedule RR). (s) Employee Benefit Plans. Complete and accurate copies of all salary, stock option, bonus, incentive compensation, deferred compensation, profit sharing, retirement, pension, group insurance, disability, death benefit or other benefit plans, trust agreements or arrangements of Gayland in effect on the date hereof or to become effective after the date thereof, together with copies of any determination letters issued by the Internal Revenue Service with respect thereto. (Schedule SS). (t) Insurance Policies. A complete and accurate list (in all material respects) and description of all material insurance policies naming Gayland as an insured or beneficiary or as a loss payable payee or for which Gayland has paid all or part of the premium in force on the date hereof, specifying any notice or other information possessed by Gayland regarding possible claims thereunder, cancellation thereof or premium increases thereon, including any policies now in effect naming Gayland as beneficiary covering the business activities of Gayland. (Schedule TT). (u) Licenses and Permits. A complete list of all licenses, permits and other authorizations of Gayland. (Schedule VV). 4.02 Organization, Standing and Power. Gayland is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah with all requisite corporate power to own or lease its properties and carry on its businesses as is now being conducted. 4.03 Qualification. Gayland is not qualified and is not licensed as a foreign corporation. 4.04 Capitalization of Gayland. The authorized capital stock of Gayland consists of 100,000 class A shares of Common Stock, no par value, which shares are issued to shareholders listed on Schedule HH, which shares were duly authorized, validly issued and fully paid and non assessable. There are no preemptive rights with respect to the Gayland stock. 4.05 Authority. The execution and delivery of this Agreement and consummation of the transactions contemplated herein have been duly authorized by all necessary corporate action, including but not limited to duly and validly authorized action and approval by the Board of Directors, on the part of Gayland. This Agreement constitutes the valid and binding obligation of Gayland enforceable against it in availability of the remedy of specific performance. This Agreement has been duly executed by Gayland and the execution and transactions contemplated by this Agreement shall not result in any breach of any terms or provisions of Gayland's Certificate and Articles of Incorporation or Bylaws or of any other agreement, court order or instrument to which Gayland is a party or bound by. 4.06 Absence of Undisclosed Liabilities. Gayland has no material liabilities of any nature, whether fixed, absolute, contingent or accrued, which were not reflected on the financial statements set forth in Schedule AA nor otherwise disclosed in this Agreement or any of the Schedules or Exhibits attached hereto. 4.07 Absence of Changes. Since March 31, 2000, there has not been any material adverse change in the condition (financial or other wise), assets, liabilities, earnings or business of Gayland, except for changes resulting from completion of those transactions described in Section 5.01. 4.08 Tax Matters. All taxes and other assessments and levies which Gayland is required by law to withhold or to collect have been duly withheld and collected, and have been paid over to the proper government authorities or are held by Gayland in separate bank accounts for such payment or are represented by depository receipts, and all such withholdings and collections and all other payments due in connection therewith (including, without limitation, employment taxes, both the employees' and employer's share) have been paid over to the government or placed in a separate and segregated bank account for such purpose. There are no known deficiencies in income taxes for any periods and further, the representations and warranties as to the absence of undisclosed liabilities contained in Section 4.06 includes any and all tax liabilities of whatsoever kind or nature (including, without limitation, all federal, state, local and foreign income, profit, franchise, sales, use and property taxes) due or to become due, incurred in respect of or measured by Gayland income or business prior to the Closing Date. 4.09 Options, Warrants, etc. Except as otherwise described in Schedule HH, there are no outstanding options, warrants, calls, commitments or agreements of any character to which Gayland or its shareholders are a party or by which Gayland or its shareholders are bound, or are a party, calling for the issuance of shares of capital stock of Gayland or any securities representing the right to purchase or otherwise receive any such capital stock of Gayland. 4.10 Title to Assets. Except for liens set forth in Schedule CC, Gayland is the sole and unconditional owner of, with good and marketable title to, all the assets listed in the schedules as owned by them and all other property and assets are free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever. 4.11 Agreements in Force and Effect. Except as set forth in Schedules DD and EE, all material contracts, agreements, plans, promissory notes, mortgages, leases, policies, licenses, franchises or similar instruments to which Gayland is a party are valid and in full force and effect on the date hereof, and Gayland has not breached any material provision of, and is not in default in any material respect under the terms of, any such contract, agreement, plan, promissory note, mortgage, lease, policy, license, franchise or similar instrument which breach or default would have a material adverse effect upon the business, operations or financial condition of Gayland. 4.12 Legal Proceedings, Etc. Except as set forth in Schedule KK, there are no civil, criminal, administrative, arbitration or other such proceedings or investigations pending or, to the knowledge of either Gayland or the shareholders thereof, threatened, in which, individually or in the aggregate, an adverse determination would materially and adversely affect the Gayland, properties, business or income of Gayland. Gayland has substantially complied with, and is not in default in any material respect under, any laws, ordinances, requirements, regulations or orders applicable to its businesses. 4.13 Governmental Regulation. To the knowledge of Gayland and except as set forth in Schedule KK, Gayland is not in violation of or in default with respect to any applicable law or any applicable rule, regulation, order, writ or decree of any court or any governmental commission, board, bureau, agency or instrumentality, or delinquent with respect to any report required to be filed with any governmental commission, board, bureau, agency or instrumentality which violation or default could have a material adverse effect upon the business, operations or financial condition of Gayland. 4.14 Brokers and Finders. Gayland shall be solely responsible for payment to any broker or finder retained by Gayland for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated herein. 4.15 Accuracy of Information. No representation or warranty by Gayland contained in this Agreement and no statement contained in any certificate or other instrument delivered or to be delivered to Potomac pursuant hereto or in connection with the transactions contemplated hereby (including without limitation all Schedules and exhibits hereto) contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary in order to make the statements contained herein or therein not misleading. Gayland and its officers and directors make no representation or warranty as to the value of the Steam Power Plant contained in the Appraisal provided by Gayland and is relying exclusively on the Appraisal Reports of Mr. Michel Medock and others, which have been furnished to Potomac. 4.16 Subsidiaries. Except as listed in Schedule PP, Gayland does not have any other subsidiaries or own capital stock representing ten percent (10%) or more of the issued and outstanding stock of any other corporation. 4.17 Consents. Except as listed in Schedule FF, no consent or approval of, or registration, qualification or filing with, any governmental authority or other person is required to be obtained or accomplished by Gayland or any shareholder thereof in connection with the consummation of the transactions contemplated hereby. 4.18 Improper Payments. No person acting on behalf of Gayland has made any payment or otherwise transmitted anything of value, directly or indirectly, to (a) any official or any government or agency or political subdivision thereof for the purpose of influencing any decision affecting the business of Gayland (b) any customer, supplier of competitor of Gayland, or employee of such customer, supplier or competitor, for the purposes of obtaining, retaining or Potomac's business for Gayland, or (c) any political party or any candidate for elective political office nor has any fund or other asset of Gayland been maintained that was not fully and accurately recorded on the books of account of Gayland. 4.19 Copies of Documents. Gayland has made available for inspection and copying by Potomac and its duly authorized representatives, and will continue to do so at all times, true and correct copies of all documents which it has filed with governmental agencies which are material to the terms and conditions contained in this Agreement. Furthermore, all filings by Gayland with governmental agencies, including but not limited to the Internal Revenue Service, have contained information which is true and correct in all material respects and did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein not misleading or which could have any material adverse effect upon the financial condition or operations of Gayland or adversely effect the objectives of this Agreement. 4.20 Investment Intent of Shareholders. Each shareholder of Gayland represents and warrants to Potomac that the shares of Gayland being acquired pursuant to this Agreement are being acquired for his or her own account and for investment and not with a view to the public resale or distribution of such shares and further acknowledges that the shares being issued have not been registered under the Securities Act and are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act and must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. ARTICLE 5 CONDUCT AND TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE ACQUISITION 5.01 Conduct and Transactions of Potomac. During the period from the date hereof to the date of Closing, Potomac shall: (a) Conduct its operations in the ordinary course of business, including but not limited to, paying all obligations as they mature, complying with all applicable tax laws, filing all tax returns required to be filed and paying all taxes due; (b) Maintain its records and books of account in a manner that fairly and correctly reflect its income, expenses, assets and liabilities. Potomac shall not during such period, except in the ordinary course of business, without the prior written consent of Gayland: (a) Sell, dispose of or encumber any of its properties or assets except for payment of brokers or finders fees; (b) Declare or pay any dividends on shares of its capital stock or make any other distribution of assets to the holders thereof; (c) Issue, reissue or sell, or issue options or rights to subscribe to, or enter into any contract or commitment to issue, reissue or sell, any shares of its capital stock or acquire or agree to acquire any shares of its capital stock; (d) Except as otherwise contemplated and required by this Agreement, amend its Articles of Incorporation or merge or consolidate with or into any other corporation or sell all or substantially all of its assets or change in any manner the rights of its capital stock or other securities; (e) Pay or incur any obligation or liability, Potomac or contingent more than $10,000; (f) Incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise become responsible for obligations of any other party, or make loans or advances to any other party; (g) Make any material change in its insurance coverage: (h) Increase in any manner the compensation, direct or indirect, of any of its officers or executive employees; except in accordance with existing employment contracts; (i) Enter into any agreement or make any commitment to any labor union or organization; (j) Make any capital expenditures. 5.02 Conduct and Transactions of Gayland. During the period from the date hereof to the date of Closing, Gayland shall: (a) Obtain an investment letter from each shareholder of Gayland in a form substantially like that attached hereto as Exhibit A. (b) Conduct the operations of Gayland in the ordinary course of business. Gayland shall not during such period, except in the ordinary course of business, without the prior written consent of Potomac: (a) Sell, dispose of or encumber any of the properties or assets of Gayland; (b) Declare or pay any dividends on shares of its capital stock or make any other distribution of assets to the holders thereof; (c) Issue, reissue or sell, or issue options or rights to subscribe to, or enter into any contract or commitment to issue, reissue or sell, any shares of its capital stock or acquire or agree to acquire any shares of its capital stock; (d) Except as otherwise contemplated and required by this Agreement, amend its Articles of Incorporation or merge or consolidate with or into any other corporation or sell all or substantially all of its assets or change in any manner the rights of its capital stock or other securities; (e) Pay or incur any obligation or liability, direct or contingent; (f) Incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise become responsible for obligations of any other party, or make loans or advances to any other party; (g) Make any material change in its insurance coverage: (h) Increase in any manner the compensation, direct or indirect, of any of its officers or executive employees; except in accordance with existing employment contracts; (i) Enter into any agreement or make any commitment to any labor union or organization; (j) Make any material capital expenditures. (k) Allow any of the foregoing actions to be taken by any subsidiary of Gayland. ARTICLE 6 RIGHTS OF INSPECTION 6.01 During the period from the date of this Agreement to the date of Closing of the acquisition, Potomac and Gayland agree to use their best efforts to give the other party, including its representatives and agents, full access to the premises, books and records of each of the entities, and to furnish the other with such financial and operating data and other information including, but not limited to, copies of all legal documents and instruments referred to on any schedule or exhibit hereto, with respect to the business and properties of Potomac or Gayland, as the case may be, as the other shall from time to time request; provided, however, if there are any such investigations: (1) they shall be conducted in such manner as not to unreasonably interfere with the operation of the business of the other parties and (2) such right of inspection shall not affect in any way whatsoever any of the representations or warranties given by the respective parties hereunder. In the event of termination of this Agreement, Potomac and Gayland will each return to the other all documents, work papers and other materials obtained from the other party in connection with the transactions contemplated hereby, and will take such other steps necessary to protect the confidentiality of such material. ARTICLE 7 CONDITIONS TO CLOSING 7.01 Conditions to Obligations of Gayland. The obligation of Gayland to perform this Agreement is subject to Closing unless waived in writing by Gayland. (a) Representations and Warranties. There shall be no information disclosed in the schedules delivered by Potomac which in the opinion of Gayland would materially adversely affect the proposed transaction and intent of the parties as set forth in this Agreement. The representations and warranties of Potomac set forth in Article 3 hereof shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made on and as of the Closing, except as otherwise permitted by this Agreement. (b) Performance of Obligations. Potomac shall have in all material respects performed all agreements required to be performed by it under this Agreement and shall have performed in all material respects any actions contemplated by this Agreement prior to or on the Closing and Potomac shall have complied in all material respects with the course of conduct required by this Agreement. (c) Corporate Action. Minutes, certified copies of corporate resolutions and/or other documentary evidence satisfactory to counsel for Gayland that Potomac has submitted this Agreement and any other documents required hereby to such parties for approval as provided by applicable law. (d) Consents. Execution of this Agreement by the shareholders of Gayland and any consents necessary for or approval of any party listed on any Schedule delivered by Potomac whose consent or approval is required pursuant thereto shall have been obtained. (e) Financial Statements. Gayland shall have been furnished with financial statements of Potomac including, but not limited to, balance sheets and profit and loss statements as of March 31, 2000. Such financial statements shall have been prepared in conformity with generally accepted accounting principles on a basis consistent with those of prior periods and fairly present the financial position of Potomac as of March 31, 2000. (f) Statutory Requirements. All statutory requirements for the valid consummation by Potomac of the transactions contemplated by this Agreement shall have been fulfilled. (g) Governmental Approval. All authorizations, consents, approvals, permits and orders of all federal and state governmental agencies required to be obtained by Potomac for consummation of the transactions contemplated by this Agreement shall have been obtained. (h) Employment Agreements. Existing Potomac employment agreements will have been delivered to Counsel for Gayland. (i) Changes in Financial Condition of Potomac. There shall not have occurred any material adverse change in the financial condition or in the operations of the business of Potomac, except expenditures in furtherance of this Agreement. (j) Absence of Pending Litigation. Potomac is not engaged in or threatened with any suit, action, or legal, administrative or other proceedings or governmental investigations pertaining to this Agreement or the consummation of the transactions contemplated hereunder. (k) Authorization for Issuance of Stock. Gayland shall have received in form and substance satisfactory to Counsel for Gayland a letter instructing and authorizing the Registrar and Transfer Agent for the shares of common stock of Potomac to issue stock certificates representing ownership of Potomac common stock to Gayland in accordance with the terms of this Agreement and a letter from said Registrar and Transfer Agent acknowledging receipt of the letter of instruction and stating to the effect that the Registrar and Transfer Agent holds adequate supplies of stock certificates necessary to comply with the letter of instruction and the terms and conditions of this Agreement. 7.02 Conditions to Obligations of Potomac. The obligation of Potomac to perform this Agreement is subject to the satisfaction of the following conditions on or before the Closing unless waived in writing by Potomac. (a) Representations and Warranties. There shall be no information disclosed in the schedules delivered by Gayland, which in the opinion of Potomac would materially adversely affect the proposed transaction and intent of the parties as set forth in this Agreement. The representations and warranties of Gayland set forth in Article 4 hereof shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made on and as of the Closing, except as otherwise permitted by this Agreement. (b) Performance of Obligations. Gayland shall have in all material respects performed all agreements required to be performed by it under this Agreement and shall have performed in all material respects any actions contemplated by this Agreement prior to or on the Closing and Gayland shall have complied in all respects with the course of conduct required by this Agreement. (c) Corporate Action. Minutes, certified copies of corporate resolutions and/or other documentary evidence satisfactory to Counsel for Potomac that Gayland has submitted this Agreement and any other documents required hereby to such parties for approval as provided by applicable law. (d) Consents. Any consents necessary for or approval of any party listed on any Schedule delivered by Gayland, whose consent or approval is required pursuant thereto, shall have been obtained. (e) Financial Statements. Potomac shall have been furnished with an internal unaudited financial statement of Gayland for the period ended March 31,2000. Such financial statements shall fairly present the financial position of Gayland as of March 31, 2000. (f) Statutory Requirements. All statutory requirements for the valid consummation by Gayland of the transactions contemplated by this Agreement shall have been fulfilled. (g) Governmental Approval. All authorizations, consents, approvals, permits and orders of all federal and state governmental agencies required to be obtained by Gayland for consummation of the transactions contemplated by this Agreement shall have been obtained. (h) Employment Agreements. Existing Gayland employment agreements will have been delivered to Counsel for Potomac. (i) Changes in Financial Condition of Potomac. There shall not have occurred any material adverse change in the financial condition or in the operations of the business of Potomac, except expenditures in furtherance of this Agreement. (j) Absence of Pending Litigation. Potomac is not engaged in or threatened with any suit, action, or legal, administrative or other proceedings or governmental investigations pertaining to this Agreement or the consummation of the transactions contemplated hereunder. ARTICLE 8 MATTERS SUBSEQUENT TO CLOSING 8.01 Covenant of Further Assurance. The parties covenant and agree that they shall, from time to time, execute and deliver or cause to be executed and delivered all such further instruments of conveyance, transfer, assignments, receipts and other instruments, and shall take or cause to be taken such further or other actions as the other party or parties to this Agreement may reasonably deem necessary in order to carry out the purposes and intent of this Agreement. ARTICLE 9 NATURE AND SURVIVAL OF REPRESENTATIONS 9.01 All statements contained in any written certificate, schedule, exhibit or other written instrument delivered by Potomac or Gayland pursuant hereto, or otherwise adopted by Potomac, by its written approval, or by Gayland by its written approval, or in connection with the transactions contemplated hereby, shall be deemed representations and warranties by Potomac or Gayland as the case may be. All representations, warranties and agreements made by either party shall survive for the period of the applicable statute of limitations and until the discovery of any claim, loss, liability or other matter based on fraud, if longer. ARTICLE 10 TERMINATION OF AGREEMENT AND ABANDONMENT OF REORGANIZATION 10.1 Termination. Anything herein to the contrary notwithstanding, this Agreement and any agreement executed as required hereunder and the acquisition contemplated hereby may be terminated at any time before the closing date as follows: (a) By mutual written consent of the Boards of Directors of Potomac and Gayland. (b) By the Board of Directors of Potomac if any of the conditions set forth in Section 7.02 shall not have been satisfied. (c) By the Board of Directors of Gayland if any of the conditions set forth in Section 7.01 shall not have been satisfied. 10.02 Terminations of Obligations and Waiver of Conditions; Payment of Expenses. In the event this Agreement and the acquisition are terminated and abandoned pursuant to this Article 10 hereof, this Agreement shall become void and of no force and effect and there shall be no liability on the part of any of the parties hereto, or their respective directors, officers, shareholders or controlling persons to each other. Each party hereto will pay all costs and expenses incident to its negotiation and preparation of this Agreement and any of the documents evidencing the transactions contemplated hereby, including fees, expenses and disbursements of counsel. ARTICLE 11 EXCHANGE OF SHARES: FRACTIONAL SHARES 11.01 Exchange of Shares. At the Closing, Potomac shall issue a letter to the transfer agent of Potomac with a copy of the resolution of the Board of Directors of Potomac authorizing the issuance of Potomac shares as set forth on the signature page of this Agreement. 11.02 Restrictions on Shares Issued to Gayland. Due to the fact that Gayland will receive shares of Potomac common stock in connection with the acquisition which have not been registered under the 1933 Act by virtue of the exemption provided in Section 4(2) of such Act, those shares of Potomac will contain the following legend: The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold or offered for sale in the absence of an effective Registration Statement for the shares under the Securities Act of 1933 or an opinion of counsel to the Corporation that such registration is required. ARTICLE 12 MISCELLANEOUS 12.01 Construction. This Agreement shall be construed and enforced in accordance with the laws of the State of Utah excluding the conflicts of laws. 12.02 Notices. All notices necessary or appropriate under this Agreement shall be effective when personally delivered or deposited in the United States mail, postage prepaid, certified or registered, return receipt requested, and addressed to the parties last known address which addresses are currently as follows: If to "Potomac" Potomac Energy Corporation 3168 Bel Air Dr. Las Vegas, Nevada 89109 If to "Gayland" Gayland Coal, Inc. 3168 Bel Air Dr. Las Vegas, Nevada 89109 12.03 Amendments and Waiver. The parties hereby may, by mutual agreement in writing signed by each party, amend this Agreement in any respect. Any term or provision of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof, such waiver right shall include, but not be limited to, the right of either party to: (a) Extent the time for the performance of any of the obligations of the other; (b) Waive any inaccuracies of representations by the other contained in this Agreement or in any document delivered pursuant hereto: (c) Waive compliance by the other with any of the covenants contained in this Agreement, and performance of any obligations by the other; and (d) Waive the fulfillment of any condition that is precedent to the performance by the party so waiving of any of its obligations under this Agreement. Any writing on the part of a party relating to such amendment, extension or waiver as provided in this Section 12.03 shall be valid if authorized or ratified by the Board of Directors of such Party. 12.04 Remedies not Exclusive. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. The election of any one or more remedies by Potomac or Gayland shall not constitute a waiver of the right to pursue other available remedies. 12.05 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.06 Benefit. This Agreement shall be binding upon, and inure to the benefit of, the respective successors and assigns of Potomac and Gayland. 12.07 Entire Agreement. This Agreement and the Schedules and Exhibits attached hereto, represent the entire agreement of the undersigned regarding the subject matter hereof, and supersede all prior written or oral understandings or agreements between the parties. 12.08 Each Party to Bear its Own Expense. Potomac and Gayland shall each bear their own respective expenses incurred in connection with the negotiation, execution, closing, and performance of this Agreement, including counsel fees and accountant fees. 12.09 Captions and Section Headings. Captions and section headings used herein are for convenience only and shall not control or affect the meaning or construction of any provisions of this Agreement. Executed as of the date first written above. Potomac Energy Corporation Gayland Coal, Inc. /s/ F. W. Young /s/ Winfield Moon By: _________________________ By: __________________________ F. W. Young, President Winfield Moon, Jr. President 7/28/00 7/28/00 Dated: _______________________ Dated: ________________________