-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I9e2Ocvs13pSou5DuG4RYab+vG6D819e5c3QNaG+selms50RFooPxR0oL26Qvkp7 ZcM+/Ul0R4ssQlJpvfzF2w== 0001015402-03-000454.txt : 20030214 0001015402-03-000454.hdr.sgml : 20030214 20030214181310 ACCESSION NUMBER: 0001015402-03-000454 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKY MOUNTAIN ENERGY CORP CENTRAL INDEX KEY: 0001114977 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 900031918 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30689 FILM NUMBER: 03569389 BUSINESS ADDRESS: STREET 1: 333 N SAM HOUSTON PKWY E STREET 2: SUITE 910 CITY: HOUSTON STATE: TX ZIP: 77060 BUSINESS PHONE: 281-448-6500 MAIL ADDRESS: STREET 1: 333 N SAM HOUSTON PKWY E STREET 2: SUITE 910 CITY: HOUSTON STATE: TX ZIP: 77060 FORMER COMPANY: FORMER CONFORMED NAME: HOLOGRAPHIC SYSTEMS INC DATE OF NAME CHANGE: 20000522 FORMER COMPANY: FORMER CONFORMED NAME: EMISSION CONTROL DEVICES INC DATE OF NAME CHANGE: 20010813 10QSB 1 doc1.txt ROCKY MOUNTIAN ENERGY 10QSB 12-31-2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________________ FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 __________________ FOR QUARTER ENDED DECEMBER 31, 2002 COMMISSION FILE NO. 0-30689 ------- ROCKY MOUNTAIN ENERGY CORPORATION (Exact name of registrant as specified in charter) NEVADA 90-0031918 - -------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation) 333 NORTH SAM HOUSTON PARKWAY E., SUITE 910 HOUSTON, TEXAS 77060 - -------------------------------------------------------------------------------- (Address of principal (Postal Code) executive offices) Registrant's telephone number, including area code: (281) 448-6500 -------------- EMISSION CONTROL DEVICES, INC. ------------------------------ (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) As of January 31, 2002 there were 61,690,604 shares of the common stock, $0.001 ---------------- ---------- par value, of the registrant issued and outstanding. Transitional Small Business Disclosure Format (check one) YES NO X --- --- ROCKY MOUNTAIN ENERGY CORPORATION (FORMERLY KNOWN AS EMISSIONS CONTROL DEVICES, INC.) (A DEVELOPMENT STAGE COMPANY) FEBRUARY 14, 2003 INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements............................................. 2 ------ Item 2. Management's Discussion and Analysis and Plan of Operation....... 13 ------ PART II. OTHER INFORMATION SIGNATURES................................................................... 23 i ROCKY MOUNTAIN ENERGY CORPORATION FORM 10-QSB DECEMBER 31, 2002 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) __________ UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) TABLE OF CONTENTS __________ PAGE ---- Unaudited Consolidated Condensed Financial Statements: Consolidated Condensed Balance Sheet as of September 30, 2002 and December 31, 2002 (Unaudited) 4 Unaudited Consolidated Condensed Statement of Operations for the three months ended December 31, 2002 and for the period from inception, May 10, 2002, to December 31, 2002 5 Unaudited Consolidated Condensed Statement of Stockholders' Deficit for the three months ended December 31, 2002 6 Unaudited Consolidated Condensed Statement of Cash Flows for the three months ended December 31, 2002 and for the period from inception, May 10, 2002, to December 31, 2002 7 Notes to Unaudited Consolidated Condensed Financial Statements. 8 Page 3 of 27
ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) CONSOLIDATED CONDENSED BALANCE SHEETS DECEMBER 31, 2002 AND SEPTEMBER 30, 2002 __________ DECEMBER 31, SEPTEMBER 30, 2002 2002 ASSETS (UNAUDITED) (NOTE) ------ -------------- --------------- Current assets $ - $ - -------------- --------------- Property and equipment Oil and gas properties 175,000 - Office furniture and fixtures 3,749 3,749 Office equipment under capital leases 52,114 52,114 -------------- --------------- 230,863 55,863 Less accumulated depreciation and amortization (7,138) (3,677) -------------- --------------- Net property and equipment 223,725 52,186 Deferred loan costs 19,000 - Lease deposits 4,225 4,225 -------------- --------------- Total assets $ 246,950 $ 56,411 ============== =============== LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities: Note payable $ 100,000 $ 100,000 Book overdraft 4,481 445 Notes payable to stockholders 173,231 35,131 Capital lease obligation 52,114 52,114 Accounts payable and accrued liabilities 486,772 315,509 -------------- --------------- Total current liabilities 816,598 503,199 -------------- --------------- Commitments and contingencies Stockholders' deficit: Common stock: $.001 par value; 200,000,000 shares authorized, 54,989,735 and 57,983,061 issued and 26,546,323 and 24,747,373 outstanding at December 31, 2002 and September 30, 2002, respectively 26,546 24,747 Additional paid-in capital 948,496 725,384 Unissued common stock 100,000 100,000 Deferred compensation (159,667) (222,167) Losses accumulated in the development stage (1,485,023) (1,074,752) -------------- --------------- Total stockholders' deficit (569,648) (446,788) -------------- --------------- Total liabilities and stockholders' deficit $ 246,950 $ 56,411 ============== =============== Note: The balance sheet at September 30, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements. Page 4 of 27
ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND FOR THE PERIOD FROM INCEPTION, MAY 10, 2002, TO DECEMBER 31, 2002 __________ THREE MONTHS ENDED INCEPTION TO DECEMBER 31, DECEMBER 31, 2002 2002 -------------- -------------- Costs and expenses: General and administrative $ 401,027 $ 920,611 Depreciation and amortization 3,461 7,138 Loss from unsuccessful acquisitions - 82,875 Loss from unfunded loan agreement - 310,000 Recapitalization costs - 153,897 Interest expense 5,783 10,502 -------------- -------------- Net loss $ (410,271) $ (1,485,023) ============== ============== Basic and diluted net loss per common share $ (0.02) ============== Weighted average common shares 25,646,873 ==============
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements. Page 5 of 27
ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 __________ Additional Unissued COMMON STOCK PAID-IN COMMON DEFERRED ACCUMULATED SHARES AMOUNT CAPITAL STOCK COMPENSATION DEFICIT TOTAL ----------- -------- --------- -------- -------------- ------------ ---------- Balance at September 30, 2002 24,747,373 $24,747 $725,384 $100,000 $ (222,167) $(1,074,752) $(446,788) Stock issued for services 1,350,000 1,350 46,500 - - - 47,850 Acquisition of interest in Stratus Energy, LLC 1,000,000 1,000 174,000 - - - 175,000 Ten percent stock dividend to Stockholders of record on November 27, 2002 2,322,398 2,322 (2,322) - - - - Shares cancelled (2,873,398) (2,873) 2,873 - - - - Interest on loans from stockholders - - 2,061 - - - 2,061 Amortization of deferred compensation - - - - 62,500 - 62,500 Net loss - - - - - (410,271) (410,271) ----------- -------- --------- -------- -------------- ------------ ---------- Balance at December 31, 2002 26,546,373 $26,546 $948,496 $100,000 $ (159,667) $(1,485,023) $(569,648) =========== ======== ========= ======== ============== ============ ==========
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements. Page 6 of 27
ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND FOR THE PERIOD FROM INCEPTION, MAY 10, 2002, TO DECEMBER 31, 2002 __________ THREE MONTHS ENDED INCEPTION TO DECEMBER 31, DECEMBER 31, 2002 2002 -------------- -------------- Cash flows from operating activities: Net loss $ (410,271) $ (1,485,023) Adjustments to reconcile net loss to net cash used in operating activities 291,171 1,267,415 -------------- -------------- Net cash required by operating activities (119,100) (217,608) -------------- -------------- Cash flows from investing activities: Purchase of office furniture and fixtures - (3,749) Acquisition costs - (82,874) -------------- -------------- Net cash required by investing activities - (86,623) -------------- -------------- Cash flows from financing activities: Proceeds from notes payable - 100,000 Payment of loan costs (19,000) (119,000) Proceeds from notes payable to stockholders 138,100 173,231 Proceeds from sale of common stock - 150,000 -------------- -------------- Net cash provided by financing activities 119,100 304,231 -------------- -------------- Net increase (decrease) in cash and cash equivalents - - Cash and cash equivalents at beginning of year - - -------------- -------------- Cash and cash equivalents at end of year $ - $ - ============== ============== Non-Cash Investing and Financing Activities Acquired interest in Stratus Energy, LLC in exchange for 1,000,000 shares of the Company's common stock $ 175,000 $ 175,000 Acquired office equipment under capital lease obligations - 52,114
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements. Page 7 of 27 ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND CRITICAL ACCOUNTING POLICIES ---------------------------------------------- ORGANIZATION ------------ Rocky Mountain Energy Corporation (the 'Company") is a corporation in the development stage that was formed to acquire and develop oil and gas properties. The Company was originally incorporated in Texas on May 10, 2002, as Cavallo Energy Corporation but was merged with a non-operating public shell company, Emission Control Devices, Inc., on May 29, 2002. The merger transaction (the "Transaction") was treated as a recepitalization because just prior to the Transaction , Emission Control Devices, Inc. had no significant assets or liabilities. Emission Control Devices, Inc. adopted a name change to Rocky Mountain Energy Corporation and remains the legal reporting entity. Cavallo Energy Corporation is considered the acquiror in the Transaction for financial reporting purposes and the accompanying financial statements include the historical operations of Cavallo Energy Corporation since its inception. The legal reporting entity, Rocky Mountain Energy Corporation was originally incorporated in the state of Colorado on May 16, 1985 as Mountain Ashe, Inc. On September 23, 1987 the Company adopted a name change to Holographic Systems, Inc. and re-incorporated in the state of Nevada. On January 22, 2001, the Company's name was again changed to Emission Control Devices, Inc. as part of a recapitalization involving a North Carolina corporation of the same name. Finally, on May 30, 2002, in connection with the Transaction, the Company adopted the name Rocky Mountain Energy Corporation. GENERAL ------- The unaudited consolidated condensed financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to such rules and regulations. These unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Rocky Mountain Energy Corporation(the "Company") included in the Company's Annual Report on Form 10-KSB for the year ended September 30, 2002. In the opinion of management, the unaudited consolidated condensed financial information included herein reflect all adjustments, consisting only of normal, recurring adjustments, which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim period presented herein is not necessarily indicative of the results to be expected for a full year or any other interim period. DEVELOPMENT STAGE ENTERPRISE ---------------------------- The Company reports as a development stage enterprise because, since its inception, substantially all efforts by management have been directed in the areas of financial planning, capital raising and identification of oil and gas properties for acquisition. Page 8 of 27 ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND CRITICAL ACCOUNTING POLICIES, CONTINUED -------------------------------------------------------- ACCOUNTING ESTIMATES --------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Currently, these estimates mainly involve the useful lives of property and equipment and the valuation of common stock issued for compensation or other reasons. OIL AND GAS PRODUCING ACTIVITIES ------------------------------------ The Company uses the full cost method of accounting for its investment in oil and gas properties. Under this method, the Company capitalizes all acquisition, exploration and development costs incurred for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. Costs, however, associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also capitalized to oil and gas properties. Unless a significant portion of the Company's proved reserve quantities are sold (greater than 25 percent), proceeds from the sale of oil and gas properties are accounted for as a reduction to capitalized costs, and gains and losses are not recognized. The Company will compute the depreciation, depletion and amortization ("DD&A") of oil and gas properties on a quarterly basis using the unit-of-production method based upon production and estimates of proved reserve quantities. Unproved properties will be excluded from the amortizable base until evaluated. Future development costs and dismantlement, restoration and abandonment costs, net of estimated salvage values, will be added to the amortizable base. These future costs, when incurred, will be estimated by engineers employed by the Company. The Company will limit the capitalized costs of proved oil and gas properties, net of accumulated DD&A and deferred income taxes, to the estimated future net cash flows from proved oil and gas reserves discounted at 10 percent, net of related tax effects, plus the lower of cost or fair value of unproved properties included in the costs being amortized. If capitalized costs exceed this limit, the excess will be charged to additional DD&A expense. Given the volatility of oil and gas prices, it is reasonably possible that estimates of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline significantly, even if only for a short period of time, it is possible that a write-down of oil and gas properties would result. Significant unproved properties will be periodically assessed for possible impairments or reductions in value. If a reduction in value occurs, the impairment will be transferred to proved properties. Unproved properties that are individually insignificant will be amortized over an average holding period. Page 9 of 27 ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND CRITICAL ACCOUNTING POLICIES, CONTINUED -------------------------------------------------------- OIL AND GAS REVENUES ----------------------- Oil and gas revenues will be recorded under the sales method. Under this method the Company will recognize oil and gas revenues when production occurs and will accrue revenue relating to production for which the Company has not received payment. As of December 31, 2002, the Company had not completed the acquisition of any producing oil and gas properties. Accordingly, no revenue related to oil and gas production has been reported. 2. GOING CONCERN CONSIDERATIONS ------------------------------ Since it began operations on May 10, 2002, the Company suffered a significant loss from operations and has been dependent on stockholders and new investors to provide the cash resources to sustain its operations. The capital required during the start-up phase of operations has caused the Company to become delinquent in the payment of payroll and in the remittance of payroll taxes. The Company's liquidity problems were heightened when a loan agreement with a subsidiary of Marathon Holding Corporation (the "Marathon Agreement"), that required a $100,000 up front fee, turned out to be an effort by Marathon and certain officers and associates of Marathon to defraud the Company. The effects of the Marathon Agreement extended beyond the up front fees and origination costs to the unraveling of certain planned acquisitions. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's strategic plan for dealing with its liquidity problems is based on direct sales of its common stock or use of its common stock to collateralize working capital loans and to complete certain planned acquisitions that management believes will produce cash flows from operations. The Company is also seeking a NASD or American Stock Exchange listed company with which to merge. Management believes that merging with a NASD or American Stock Exchange listed company may improve its ability to obtain sources of financing. There can be no assurance that any of the plans developed by the Company will produce cash flows sufficient to overcome current liquidity problems. The Company's long-term viability as a going concern is dependent on certain key factors, as follows: - The Company's ability to obtain adequate sources of outside financing to fund near-term development stage operations, satisfy past due payroll liabilities and pay delinquent federal withholding liabilities. - The Company's ability to acquire and produce from economically viable oil and gas reserves. - The Company's ability to ultimately achieve adequate profitability and cash flows to sustain continuing operations. Page 10 of 27 ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS __________ 3. ACQUISITION OF INTEREST IN STRATUS ENERGY, LLC ---------------------------------------------------- On December 1, 2002, the Company acquired H & N LLC's interest in Stratus Energy, LLC, a limited liability corporation organized pursuant to the laws of the state of Arkansas. The properties acquired in this transaction consist of 16,438 acres in Las Animas County, Colorado and Colifax County, New Mexico in the Raton Basin. The properties comprise the Trinidad Coal Bed Methane project. The purchase price was 1,000,000 shares of the Company's common stock which was valued at $175,000. 4. INCOME TAXES ------------- The Company has incurred losses since its inception and, therefore, has not been subject to federal income taxes. As of September 30, 2002, the Company had net operating loss ("NOL") carryforwards for income tax purposes of approximately $932,000 which expire in the tax year ending September 30, 2022. Because United States tax laws limit the time during which NOL carryforwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOL for federal income tax purposes should the Company generate taxable income. The difference between the income tax benefit in the accompanying statement of operations and the amount that would result if the United States Federal statutory rate of 34% were applied to pre-tax loss for the period ended September 30, 2002 is as follows: Benefit for income tax at federal statutory rate $(139,492) (34.0%) Non-deductible expenses related primarily to recapitalization and loan costs 37,519 9.1 Increase in valuation allowance 101,973 24.9 ---------- -------- $ - -% ========== ======== 5. LEGAL PROCEEDINGS ----------------- The Company may also be periodically subject to legal proceedings and claims that arise in the ordinary course of its business. To date, no legal proceedings have been initiated against the Company as a defendant. 6. SUBSEQUENT EVENTS ------------------ ACQUISITION OF UNITED STATES OIL COMPANY PROPERTIES --------------------------------------------------------- On November 1, 2002, the Company took steps to acquire the 8,000 acre Ten Mile and Desert Spring Fields in Sweetwater County, Wyoming from United States Oil Company ("U.S. Oil") for a total purchase price of $2,900,000. This acquisition, when completed, will provide the Company with the controlling interest in the coal bed methane gas project in Sweetwater County, Wyoming. The terms of the transaction are $200,000 in cash on or before November 15, 2002 and a convertible note bearing interest at 2% per year for the remaining $2,700,000. Interest is payable quarterly on the conventional note and the note cannot be converted during the first twelve months. During the remaining term, the note can be converted to Company common stock at the prevailing stock price. The Company, at Page 11 of 27 ROCKY MOUNTAIN ENERGY CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS __________ 6. SUBSEQUENT EVENTS, CONTINUED ------------------------------ its option, may force conversion when the share price averages $1.50 per share for 60 days or longer. The Company was unable to make the required cash down payment by November 15, 2002, but has subsequently made $120,000 in cash payments and received extensions for payment of the remaining balance from U.S. Oil until March 13, 2003. The transaction to acquire U.S. Oil is a related party transaction because Steve Lieberman, the President of U.S. Oil is also a director of the Company. RESIDENTIAL RESOURCES FINANCIAL SERVICES ------------------------------------------- On November 12, 2002, the Company executed a financing arrangement with Residential Resources Financial Services ("Residential"), an investment banking firm, to provide up to $100 million of acquisition and development financing for proved oil and gas projects. The funding will be secured by, among other things, any proved oil and gas reserves the Company purchases using proceeds received under the agreement. In January 2003, a commitment fee of $50,000 was paid to Residential Resources in connection with the execution of the financing arrangement. Any projects funded under this financing arrangement will be subject to due diligence by Residential. Debt financing obtained will be at market rates at the time bonds are issued. Management believes that any transactions funded by Residential will take approximately four months to close. However, no assurances can be made as to when or if any project will close. Page 12 of 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL As of the September 30, 2002, the end of the Company's prior fiscal year, the Company had closed no property acquisitions. Accordingly, the Company did not generate any revenues from operations during the period from inception, May 10, 2002, to September 30, 2002. During December 2002, the Company completed the acquisition of an interest in Stratus Energy, LLC and since September 30 2002, the Company has taken steps to close three other acquisitions of properties/companies in the Rocky Mountain region of the United States. The Company must complete funding of a $200,000 short-term note to complete one of these acquisitions. The remaining two potential acquisitions will require that the Company raise and fund $5,500,000. A letter of intent for another acquisition with a purchase price of $8,000,000, for currently producing/cash flowing properties has been signed. The Company believes that it current acquisition prospects will meet the criteria for funding under the Residential Resources Credit Facility, discussed below. The Company is continually searching for properties within the Rocky Mountain region that fit within the operating, technical, and cash flow parameters that we believe will allow us to be successful. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. DEVELOPMENT STAGE ENTERPRISE The Company reports as a development stage enterprise because, since its inception, substantially all efforts by management have been directed in the areas of financial planning, capital raising and identification of oil and gas properties for acquisition. OIL AND GAS PRODUCING ACTIVITIES The Company uses the full cost method of accounting for its investment in oil and gas properties. Under this method, the Company capitalizes all acquisition, exploration and development costs incurred for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. Costs, however, associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also capitalized to oil and gas properties. Unless a significant portion of the Company's proved reserve quantities are sold (greater than 25 percent), proceeds from the sale of oil and gas properties are accounted for as a reduction to capitalized costs, and gains and losses are not recognized. The Company will compute the depreciation, depletion and amortization ("DD&A") of oil and gas properties on a quarterly basis using the unit-of-production method based upon production and estimates of proved reserve quantities. Unproved properties will be excluded from the amortizable base until evaluated. Future development costs and dismantlement, restoration and abandonment costs, net of estimated salvage values, will be added to the amortizable base. These future costs, when incurred, will be estimated by engineers employed by the Company. The Company will limit the capitalized costs of proved oil and gas properties, net of accumulated DD&A and deferred income taxes, to the estimated future net cash flows from proved oil and gas reserves discounted at 10 percent, net of related tax effects, plus the lower of cost or fair value of unproved properties included in the costs being amortized. If capitalized costs exceed this limit, the excess will be charged to additional DD&A expense. Page 13 of 27 Given the volatility of oil and gas prices, it is reasonably possible that estimates of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline significantly, even if only for a short period of time, it is possible that a write-down of oil and gas properties would result. Significant unproved properties will be periodically assessed for possible impairments or reductions in value. If a reduction in value occurs, the impairment will be transferred to proved properties. Unproved properties that are individually insignificant will be amortized over an average holding period. OIL AND GAS REVENUES Oil and gas revenues will be recorded under the sales method. Under this method the Company will recognize oil and gas revenues when production occurs and will accrues revenue relating to production for which the Company has not received payment. BUSINESS STRATEGY Our business strategy is to acquire proved oil and natural gas reserves, including proved undeveloped reserves, and to expand reserves, production and cash flow through development and exploitation of such reserves. The key elements of our strategy are: Regional Focus. We seek to acquire proved reserves in the geographic core areas - --------------- in which we maintain operational expertise in the San Juan Basin, New Mexico and Rocky Mountain region. Based on the results of recent activities in the San Juan Basin of New Mexico and in Rocky Mountain region by other participants in the oil and natural gas industry, we believe that sizable unexploited reserves remain in these areas Property Mix. We seek to acquire properties that are a combination of producing - ------------- and non-producing assets. We believe that producing properties will provide immediate revenue and cash flow, while non-producing assets will provide future development opportunities and, ultimately, reserves at a reduced cost, because based on the experience of our management, proved undeveloped properties are typically sold at a reduced price compared to producing properties. Additionally, we seek properties that have additional development potential for non-proved reserves, such as probable and possible reserves. Aggressive Management And Exploitation Of Assets. Our goal is, when possible, - --------------------------------------------------- to act as the "operator" of the properties that we acquire. As operator, we believe that we can most economically direct critical functions in the exploration and production process. These functions include: - determining the area to develop and explore; - managing production; - managing the permitting and optioning process; - determining seismic survey design; - overseeing data acquisition and processing; and - identifying each prospect and drill site. Technological Expertise. We have operational expertise in each geographic core - ------------------------- area in which our recent property acquisitions are located. We will use these skills, together with 3-D seismic data visualization and interpretation techniques, to develop our oil and gas reserves. We expect to add experienced technical personnel to our current team; however, we can give no assurance that such additional personnel will be hired or that it will be on terms satisfactory to us. Business Strategy. Our business strategy is to acquire oil and natural gas - ------------------ properties with existing proved reserves of oil and natural gas and to develop proved undeveloped reserves of oil and natural gas. Key elements of our strategy are: Page 14 of 27 - - Focus on acquiring additional producing oil and gas properties in areas that we have identified in our geographic core areas the San Juan Basin of New Mexico and the Rocky Mountains; - - Acquire properties containing both developed and undeveloped reserves; - - Aggressively manage and exploit all properties acquired; and - - Use technological expertise to develop reserves. - - We have operational expertise in each geographic core area in which our properties are located. We will use these skills, together with 3-D seismic data visualization and interpretation techniques, to develop our oil and gas reserves. We expect to add experienced technical personnel to our current team; however, we can give no assurance that such additional personnel will be hired or that it will be on terms satisfactory to us. ACQUISITIONS AND PROPOSED ACQUISITIONS UNITED STATES OIL CO. On November 1, 2002, Rocky Mountain Energy Corporation took steps to acquire the 8,000 acre Ten Mile and Desert Spring Fields in Sweetwater County, Wyoming from United States Oil Co. (U.S. Oil). This acquisition, if completed according to its terms will result in the Company's ownership of a controlling interest in a coal bed methane gas project in Sweetwater County, Wyoming. Net proved reserves to the interest purchased (at a price of $2,900,000) is estimated to be 56.4 billion cubic feet (Bcf) gas. The proved reserves represented by this acquisition are proved undeveloped and development activities must take place in order to generate cash flow to the company. Development funding of $3 million is needed to drill shallow wells at approximately 2,300' to 4,200' in depth. Development will begin with the drilling of a proved undeveloped Almond location (4,200') well in which the Company will also encounter the prolific Lewis sand at 3,500' and coal bed methane formations at shallower depths, around 2,300'. Expected initial flow rate is 1,000 Mcfpd. Reserves are long-term gas reserves with moderate decline curves. There are two wells already drilled which encountered the gas sands mentioned above awaiting completion which will begin immediately. PROVED RESERVES (000S OMITTED) Net BCF Undiscounted. Net PV10% ------------ ------------ ------------ Proved Undeveloped 56.4 $ 100,333 $ 51,300 The purchase price for U.S. Oil is $2,900,000 to be satisfied with a $200,000 short term note due on November 15, 2002, and a convertible note bearing 2% interest per annum for two years for the remaining $2.7 million. Interest is payable quarterly on the convertible note. The convertible note cannot be converted during the first twelve months, but can be converted to Company common stock thereafter through maturity at the then prevailing stock price. The Company, at its option, may force conversion should the share price averages $1.50 per share for 60 days or longer. In January, partial payments totaling $80,000 have been made on the $200,000 note. Because of the partial payments, the term of the note has been extended by U. S. Oil Co. to April 30, 2003. The Company is currently raising cash to pay the remaining $120,000 balance of the $200,000 short term-note. The lender is withholding the revenues which are due to the Company from November and December 2002 production until the $200,000 note has been paid. The transaction to acquire U.S. Oil is a related party transaction since Mr. Steve Lieberman, the President of U.S. Oil is also a director of the Company. Mr. Lieberman owns 275,000 shares of the Company's common stock as of December 31, 2002. Page 15 of 27 H & N LLC On December 1, 2002, the Company acquired H&N LLC's interest in Stratus Energy, LLC a Limited Liability Corporation organized pursuant to the laws of the state of Arkansas. The properties acquired in this transaction consist of 16,438 acres in Las Animas County, Colorado and Colifax County, New Mexico in the Raton Basin producing area. The properties comprise the Trinidad Coal bed Methane project. The purchase price was 1,000,000 shares of the Company's common stock which was valued at $175,000. The Trinidad project is an ideal acquisition for the Company since it is geographically favorable to the Company's existing properties and within the areas of its expertise. We anticipate that this acquisition will produce significant production income for the year 2003. Additionally, the property itself will be used for development financing. Upon development, this property could produce in excess of $3,000,000 in revenues per month to the Company's interest. Estimated ultimate recoverable reserves for the Trinidad Coal bed Methane Project are 200 Bcf, being 2 Bcf per well for 100 wells drilled on 160 acre spacing. Under the terms of the purchase and sales agreement, the seller has also agreed to provide development capital to produce and maximize cash flow on the properties. The Company expects to begin development of the property in March 2003. Drilling will be done in a "five spot" pattern, being four gas wells drilled around a saltwater disposal well. Coal gas wells produce significant amounts of water along with the gas. Coal gas wells are very low-risk drilling. The gas is found in layers of coal which blanket an area measured in the thousands of acres. The gas will be marketed through the El Paso gas line, which runs near the field. The Company's field is located between the Trinidad Gas Field, which has produced over 150 Billion cubic feet of gas to date, and the Garcia Field. The coal bed sections average 12 feet to 14 feet in thickness and wells are estimated to produce up to 2 Bcf per well from a relatively shallow 3,300'. The discovery well, the Phillips Petroleum #6-17, was completed from 3,055' to 3,240' in 23 feet of coal beds. Reservoir shut-in pressure was 1,504 pounds per square inch (psi). After twenty-four years of production, shut-in pressure was still 1,472 psi, denoting very little decline and indicating the possibility of large volumes of remaining reserves. HORSESHOE GALLUP/NORTHEAST HOGBACK On January 10, 2003, the Company announced that it had executed a purchase and sale agreement for the purchase of the Horseshoe Gallup and Northeast Hogback Unit, (HGU/NEHU) from Regent Energy Corporation. The acquisition includes approximately 24,000 acres of oil producing property in the San Juan Basin, near Farmington, New Mexico. Current production is approximately 250 barrels of oil per day. These properties have an estimated 10 million barrels of proven reserves of oil, 8.4 million of which is proved undeveloped, at depths from 1,300 feet to 2,300 feet. Some 100 development wells are planned over the next three years which are designed to raise production to 3,000 barrels of oil per day. A reserve report by Ryder Scott & Co., values the reserves at $60 million discounted at the net present value of 10%. The non-discounted value of these reserves is $120 million. These values were derived using a price of $23.50 per barrel, while the current price is over $30 per barrel. The purchase price for this property is $5.5 million, which is expected to be financed thru the Company's Residential Resources credit line. No share dilution is expected. Closing is scheduled for March 31, 2003. The acquisition price for these reserves is $0.55 per barrel. Development cost are estimated to be $0.75 per barrel provided that the Company can use its own equipment, which it plans to acquire, in lieu of using outside contractors. Therefore, the total acquisition and development cost of $1.30 per barrel make this an attractively priced acquisition for the Company. In connection with the acquisition of the HGU/NEHU property, the Company has signed a $3.0 million note with Earl Hollingshead, (sole owner of Parawon Operating LLC), in order to purchase the mortgage he has on the HGU/NEHU properties. The term of this note is $300,000 payable on January 15, 2003 and the remainder of $2.7 million due on March 31, 2003, (the closing date for HGU/NEHU). This an interest free note. As of January 30, 2003, the Company has paid $40,000 on this note. The balance of the purchase price will be paid to Regent or to various lien holders on the property. Regent is a related party in that the Chairman of the Board of the Company is also a Board member of Regent, and the President/CEO of the Company is the former President/CEO of Regent. The Chairman of the company owns 154,328 shares of Regent stock which represents 0.43% of the common stock of Regent, while the President of the Company is one beneficiary of a trust which owns 4,813,112 shares of Regent representing 13.61% of Regent's common shares. Page 16 of 27 ACQUISITION OF COLORADO PRODUCING OIL AND GAS PROPERTY On January 30, 2003, the Company announced that it has executed a letter of intent to purchase a producing property located in central Colorado. The field is currently producing and generating approximately $150,000 of revenues per month. This acquisition contains proved reserves net to the Company of an estimated 8.3 billion cubic feet of gas and 455,426 barrels of oil. Production is anticipated to increase almost three fold by performance of behind pipe mechanical operations. The price of this property is $8 million with an effective date of January 1, 2003, thereby crediting the Company with sales proceeds from that day forward. The price equates to $4.35 per barrel of oil equivalent. Current oil prices are over $30 per barrel. Closing is set for March 31, 2003. The Company expects to utilize the Residential Resources line of credit to fund this acquisition. MERGER The Company has decided to pursue a possible merger with a NASDAQ or American Stock Exchange listed company as part of its strategy to maximize shareholder value. The Company has executed an agreement with Stifel to seek a candidate for such a merger. There are no assurances that a suitable candidate will be found or that such a merger would ever take place. CAPITAL RESOURCES CURRENT SITUATION Since it began operations on May 10, 2002 the Company has generated no cash flows from operations. The cash needs are being met by advances from the CEO of the Company and from certain investors. Management anticipates that the cash flow from the properties we are purchasing from United States Oil Company will provide the Company with sufficient cash flows to meet our normal general and administrative expenses and field operating expenses, provided that our development program produces the quantities of gas management anticipates. The Company does not have an ongoing line of credit at this time, and without such can not guarantee that there will be sufficient cash to meet daily ongoing needs. We are counting on cash flow from operations and/or a future credit line to satisfy our cash flow needs. Due to the liquidity problems the Company is currently experiencing, the Company's auditors have included an emphasis paragraph in their report on the Company's September 30, 2002 consolidated financial statement that indicates that there is substantial doubt about the Company's ability to continue as a going concern. RESIDENTIAL RESOURCES FINANCIAL SERVICES On November 12, 2002, the Company executed an agreement with Residential Resources Financial Services ("Residential"), an investment banking firm, to provide up to $100 million of acquisition and development financing for proved oil and gas projects. The funding will be secured, with, among other things, each of the proved oil and gas reserves the Company purchases. A commitment fee of $50,000 was paid to Residential Resources who has funded $2.9 billion in secured loans to date. Each project assigned for funding will need to pass due diligence by Residential. Terms are likely to be at market rates at the time bonds are issued. Interest rates are at their lowest in forty years and market conditions for securitization are very favorable. The financing is asset based geared to current cash flowing properties, so there is no dilution to our stock. The process with Residential to close a transaction is expected to take approximately 120 days from start to finish, and no assurances can be made when or if every project will close, however. INTERNATIONAL MERCANTILE HOLDING GROUP, INC. $3 MILLION CREDIT FACILITY In the most recent Form 10-KSB, the Company reported that on January 7, 2003, the Company signed a Loan Agreement with International Mercantile Holding Group, Inc., a New York Corporation wherein the Company would borrow approximately $90,000 from IMHG. The first $90,000 is a first tranch draw-down which can be Page 17 of 27 drawn up to $3 million. Terms of the note are that interest is charged at prime rate, currently 4.25%, with interest paid semi-annually beginning July 1, 2003. The principal is due on December 30, 2005. The note is secured with 2 million shares of RMEC section 144 Restricted stock, which will be returned to the Company upon payment of the note. However, on January 23, 2003, the Company filed a Form 8-K stating that this agreement has been cancelled and all shares of stock associated with this agreement have been cancelled. AGREEMENTS WITH STIFEL, NICOLAUS & COMPANY On January 8, 2003, the Company announced that it has hired Stifel, Nicolaus & CO. Inc., investment bankers of Denver Colorado to locate and negotiate suitable cash flowing acquisitions of proved oil and gas properties in the Rocky Mountain region. Stifel, Nicolas was founded in 1890 and managed numerous significant financings, including Chicago's O'Hare airport in 1961. In 1983 the firm went public on the NYSE (ticker "SF"). Today, Stifel, Nicolaus is a full service regional brokerage and investment-banking firm providing securities brokerage, investment banking, trading, advisory and related financial services. The firm has 77 offices in 30 states employing 1,200 employees. The energy unit has completed $800 million in capital raising and advised on 19 M&A, valuation and fairness opinions. The Company anticipates contracting in the near future with several of the acquisition candidates that Stifel, Nicolaus has presented to this point, as combining current high cash flow properties with our proved undeveloped reserve base is the core of our business plan. On February 13, 2003, the Company executed an agreement with Stifel Nicolaus to locate and advise the Company on merger candidates wherein the Company would merge into a NASDAQ or American Stock Exchange listed company. The Company is actively seeking a candidate for this merger. COMPANY DECISION TO UTILIZE ASSET BASED FINANCING On January 22, 2003, the Company announced that the recently announced acquisitions and those in negotiation will be financed by asset-based financing only. The Company is concentrating on acquiring properties with substantial amounts of proved reserves and current production, thus lending itself to asset based financing. Therefore, the Company will not consider either equity offerings or convertible debt offerings at this time. The Company will continue to move forward on acquisition opportunities which have current production with associated high cash flow and we intend to utilize our financing vehicle with Residential Resources to complete these acquisitions. This strategy will result in non-dilution of the stock and provides the investor with the highest return on investment that we can accomplish with our acquisition and development program. COMPANY BORROWINGS SHORT TERM NOTE WITH MATHERS ASSOCIATES On July 2, 2002, the Company entered into a 90-day note at 12% interest for the sum of $100,000. The note is due and payable on October 2, 2002. Default interest on this note is at a rate of 18%. The note is guaranteed by the Company and personally by the President of the Company. The note has been extended until April 30, 2003 by mutual consent of the parties. The lender has agreed to take Company stock for the interest due on this note. Approximately 230,000 shares will be issued in this regard. LONG TERM AND SHORT TERM NOTES WITH STEVE LIEBERMAN (UNITED STATES OIL COMPANY) In conjunction with the purchase of the U. S. Oil properties, the company signed two notes with Mr. Steve Lieberman, the President of U. S. Oil. Page 18 of 27 The first note is a $200,000 note due by the Company as a down payment for the properties. The note was due on January 15, 2003, but has been extended to April 30, 2003. As of January 30, 2003, the Company had paid $80,000 of the amount owed leaving a balance of $120,000 owed to Lieberman. Interest accrues at 18% per annum on this note. A second note was signed with Mr. Lieberman for the $2.7 million. This represents the balance of the purchase price for the U. S. Oil properties of $2.9 million less the down payment of $200,000 mentioned above. The $2.7 million note has a term of two years beginning November 1, 2003 and provides for interest of 2% per annum payable quarterly. SHORT TERM NOTE WITH PARAWON LLC (EARL HOLLINGSHEAD) In connection with the acquisition of the HGU/NEHU property, the Company has signed a $3.0 million note with Earl Hollingshead, (sole owner of Parawon Operating LLC), in order to purchase the mortgage he has on the HGU/NEHU properties. The terms of this note are $300,000 payable on January 15, 2003 and the remainder of $2.7 million due on March 31, 2003, (the closing date for HGU/NEHU). The $300,000 payment date has been extended to March 31, 2003 to coincide with the closing of the property and the financing anticipated to be made by the Residential Resources line of credit of $100 million. This an interest-free note. As of February 13, 2003, the Company has paid $56,000 on this note. The President and CEO has personally guaranteed this note. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. The Company is not a defendant in any legal proceeding. 2. ROCKY MOUNTAIN ENERGY CORPORATION VS. SALVATORE RUSSO ET AL On October 23, 2002, in the District Court of Harris County, Texas 113 Judicial District, Rocky Mountain Energy, as plaintiff, filed a suit against Salvatore Russo; SOS Resource Services, Inc. a New York corporation; Consolidated American Finance Services Group LLC; Consolidated American Energy Resources, Inc.; George Melina; Regent Consulting and EuroPacific Asset Management Corporation; Horst Danning; Ron Brooks dba Marathon Corporation jointly as defendants. Page 19 of 27 Rocky Mountain represented to Defendants Russo, Melina, Danning and Brooks that Rocky was looking to make acquisitions of oil and gas properties and companies and was in the need of financing in order to accomplish said acquisitions. Each of the four Defendants represented to Rocky that Defendant Brooks ostensibly controlled, (Marathon Corporation had $1.5 billion in assets), a credit line of over $600 million, and that it would agree to give Rocky a line of credit in the amount of $40 million in exchange for 20,000,000 shares of Rocky common stock to Marathon Corporation with rights of registration. Brooks also stated that in order to obtain the financing, Rocky would have to put up $100,000 for various fees up front.In response to Rocky's request for credit references and documentation, Defendant Brooks, on or about May 23, 2002, delivered to Rocky documents ostensibly from Ernst and Young and from Union Bank of Switzerland which appeared to be authentic, but which were determined to be fake and fraudulent several months later, as well as a Credit Agreement, ostensibly for the granting of credit of $40,000,000 to Rocky by Marathon Corporation. After reviewing the documentation, the Credit Agreement was signed on behalf of Rocky who then wired $100,000 at Defendant Brooks direction. Of this $100,000, it was later discovered that Defendant Russo received at least $12,500; Defendant Melina received at least $12,500 and Defendant Danning received at least $25,000. As a result of the representations made and the Credit Agreement, Rocky attempted to proceed with acquisitions of B,C&D properties from the credit line. Along this line, a check was issued by Marathon Corporation and signed by Defendant Brooks for $3,000,000 to fund this acquisition. On approximately August 7, 2002, the check was returned for non-sufficient funds. Prior to the return of the $3,000,000 check, Defendants Russo, Melina, and Brooks acquired a total of 8,000,000 shares of Rocky common stock from existing shareholders, which shared were escrowed with and through an attorney, Jim K. Choate, who was introduced to Rocky by Defendant Russo. In late August, Rocky determined that the $3,000,000 as well as the $40,000,000 were a fraud and demanded that any stock in the hands of Defendants Russo, Melina and/or Brooks be returned. The claims of Credit Agreements, and other funding have proved to be fraudulent, Rocky is demanding return of the $100,000 initial amount paid to Ron Brooks for the Marathon Corporation line of credit and the 9,000,000 shares of stock issued by Rocky. CURRENT UPDATE On November 22, 2002, Rocky reached agreement on recovery of 5.9 million disputed shares with Defendants Sal Russo, SOS Resources, George Melina, Consolidated American Energy Resources Inc., Regent Consulting and Consolidated American Finance Services Group LLC. These parties mutually released each other from any future liability. Rocky will continue its suit against Brooks, Marathon Corporation (no relation to Marathon Oil Company or subsidiary of USX) and Danning for the balance of the relief sought. Russo, on behalf of SOS Resources and Regent Consulting, as well as Melina for Consolidated American Companies are joining Rocky in the suit remaining against Defendant Brooks, Marathon Corporation and Danning, and give their support to the decision to continue the action against them. 3. ROCKY MOUNTAIN ENERGY CORPORATION AND JOHN N. EHRMAN VS. CLYDE VANDERBROUK AND DANIEL SILVERMAN On September 16, 2002, in the District Court of Harris County, Texas 190 Judicial District. Rocky Mountain Energy (Rocky) filed suit as plaintiff against Clyde Vanderbrouk and Daniel Silverman, defendants. Plaintiff Rocky Mountain Energy Corporation and John N. Ehrman charge as follows: Defendants Vanderbrouk and Silverman both were officers of Regent Energy Corporation when Plaintiff Ehrman was the President and CEO of the same. Defendant Vanderbrouk sent out anonymous letters to creditors of Regent stating that they would never see their money owed them by Regent, thus violating fiduciary duty as an officer of Regent. Silverman was befriended by Vanderbrouk who joined him in activities designed to damage Regent. Silverman continued to feed confidential information to Vanderbrouk who would then post it on the internet in a drive to push the company out of business. Page 20 of 27 In May of 2002, Plaintiff left Regent and began as President/CEO of Rocky Mountain Energy. As the business of Rocky developed and press releases were being made concerning signing a line of Credit with Marathon Corporation, followed by the acquisition of the B,C&D property, Defendants Silverman and Vanderbrouk made statements on the Internet that the above mentioned transactions did not occur and urged investors to short Rocky's common stock, thus doing much harm to the company. The Defendants also alleged that Ehrman was involved in a "pump and dump" scheme. This allegation is meritless since Ehrman is subject to SEC Rule 144 for his ability to sell his restricted shares. However, resulting from the assertions of Silverman and Vanderbrouk, a massive short play was mounted, damaging the value of the stock of Rocky Mountain Energy Corporation. Rocky is seeking relief as follows: (1)where judgments against both Defendants jointly and severally for Rocky's damages in an amount in jurisdictional limits of this Court; (2) exemplary damages as determined by the trier of the fact, together with interest at the legal rate from date of judgment until paid; (3) Costs of Court and interest on such judgment until paid; (4) Such other and further relief to which Plaintiff may be justly entitled; (5) Permanent injunctive relief to stop the offensive behavior. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Rocky Mountain Energy Corporation was formed when a company named Cavallo Energy Corporation (a privately held corporation) merged into Emission Control Devices, Inc. (a publicly traded company), on May 29, 2002. The name of the new corporation was changed to Rocky Mountain Energy Corporation and is listed on the OTCBB with the symbol RMEC. Cavallo Energy was formed on May 10, 2002 as a special purpose corporation to merge with Emission Control Devices ("EMCD" OTCBB), a public company. On May 29, 2002, Cavallo reverse merged with "EMCD" and formed Rocky Mountain Energy Corporation, a public company. Cavallo is now a wholly owned subsidiary of Rocky Mountain Energy Corporation. On October 31, 2002, the Board of Directors authorized the repurchase of up to 8,000,000 of its shares of common stock representing approximately 30% of the outstanding trading shares. The purchases may be conducted from time to time on the open market or in private transactions. The shares of common stock are being purchased to return the shares to treasury for corporate purposes and improve the Company's financial position. On November 20, 2002, the Company announced that a ten percent stock dividend will be payable to shareholders of record as of Wednesday, November 27, 2002. All shareholders of record on November 27, 2002 as of the close of trading will receive a 10% dividend payable in common shares on their holdings of Company common stock. The ability of the Company to pay any future cash dividends is directly dependant on the available cash flow from operations. Currently, there is no excess cash flow from operations. On January 2, 2003, the Company executed an agreement for public relations, comprehensive business consulting and investor awareness programs with Boardwell Financial. The sum of ten million shares of RMEC stock was granted as compensation under the agreement. The Company likewise executed agreements with Larry Vindman and William Brantley for web site design, implementation and upkeep and other services which involved the payment of 1.5 million shares of RMEC stock. The Company sold 500,000 freely trading shares to H&N LLC, an accredited investor at $0.12/share. Additionally, the Company sold two separate lots of 400,000 and 500,000 shares respectively to Bordwell Financial at $0.1144/share. On February 5, 2003, the Company filed a Form S-8 whereby 7.6 million shares of Company stock are to be given to employees and directors as compensation for back wages and to consultants for fees. On January 17 and January 21, the Company announced that it has cancelled 6,000,000 and 2,450,000 shares respectively, thereby reducing the outstanding share count by 8,540,000 shares of its common stock. Page 21 of 27 At December 31, 2002, the Company had approximately 2,100 shareholders of record and 54,989,735 shares of its common stock issued and outstanding. Approximately 25 million shares are in the public float. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None of the Company's notes are in default. All notes that have been extended beyond the original term as shown in Part I, Item 2. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no items submitted to a vote of Security Holders since the inception of the Company. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page 22 of 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKY MOUNTAIN ENERGY CORPORATION By /S/ JOHN N. EHRMAN ------------------------------ John N. Ehrman President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated. SIGNATURE TITLE DATE --------- ----- ---- /S/ PAUL BORNSTEIN Chairman of the Board, Director February 14, 2003 - ------------------- Paul Bornstein /S/ JOHN N. EHRMAN President, Chief Executive February 14, 2003 - ------------------- Officer and Director John N. Ehrman /S/ STEVE LIEBERMAN Director February 14, 2003 - ------------------- Steve Lieberman /S/ MICHAEL PUGH Chief Financial Officer February 14, 2003 - ------------------- Michael Pugh Page 23 of 27 CERTIFICATIONS CEO CERTIFICATION I, John N. Ehrman, certify that: 1. I have reviewed this annual report on Form 10-QSB of Rocky Mountain Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 By /S/ JOHN N. EHRMAN ------------------------------ John N. Ehrman President and Chief Executive Officer Page 24 of 27 CFO CERTIFICATION I, Michael Pugh, certify that: 1. I have reviewed this annual report on Form 10-QSB of Rocky Mountain Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 /S/ MICHAEL PUGH ------------------------------ Michael Pugh Chief Financial Officer Page 25 of 27 EX-2.5 3 doc2.txt 6 EXHIBIT "D" ASSIGNMENT AND BILL OF SALE --------------------------- STATE OF NEW MEXICO Sec. Sec. COUNTY OF SAN JUAN Sec. This Assignment and Bill of Sale (the "Assignment'), dated effective as of 7:00 a.m., mountain standard time, on January 1, 2003 (the "Effective Time"), is from REGENT ENERGY CORPORATION (fka Vulcan Minerals & Energy, Inc.), (fka Playa Minerals & Energy Inc.), whose address is 10777 Westheimer, Suite 1100, Houston, Texas 77042 (the "Assignor"), to ROCKY MOUNTAIN ENERGY CORPORATION, whose address is 333 North Sam Houston Pkwy. E., Suite 910, Houston, Texas 77060 (the "Assignee"). PART 1 GRANTING AND HABENDUM CLAUSES For Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which Assignor hereby acknowledges, Assignor has transferred, bargained, conveyed, and assigned, and does hereby transfer, bargain, convey and assign to Assignee, effective for all purposes as of the Effective Time, (the "Acquired Interest") all of the right, title and interest of Assignor in and to the following properties and assets (such properties and assets being hereinafter called the "Assets"): A. Any and all working interest owned by Assignor and set for on Exhibit "A", or which Assignor is entitled to receive by reason of any participation, joint venture, farm-in, farm-out, joint operating agreement or other agreement, in and to the oil, gas and/or mineral leases, permits, licenses, concessions, leasehold estates, working interests, reversionary interests, fee and term mineral interests, and any other interests of Assignor in oil, gas, and associated hydrocarbons ("Hydrocarbons"), it being the intent hereof that the legal descriptions and depth limitations set forth on Exhibit "A" are for information only and the term "Leases" includes all of Assignor's right, title and interest in the interests described on Exhibit "A" even though such interest may be incorrectly described (collectively, the "Leases"); B. All right, title and interest of Assignor in and to or derived from the following and are assignable and are attributable to, appurtenant to, incidental to, or used for the operation of the Leases (the "Personal Property and Incidental Rights"): 1. All easements, rights-of-way, permits, licenses, servitudes or other interests; 2. All of the personal property, inventory, and equipment without exception or exclusion, located on the lease as of the effective date; and 3. All contracts, agreements, and title instruments to the extent attributable to and affecting the Assets in existence as of the date of execution of this Assignment, including all hydrocarbon sales, purchase, gathering transportation, treating, marketing, exchange, processing, and fractionating contracts, and joint operating agreements. C. All merchantable oil and condensate produced from or attributable to the Leases prior to the Effective Time which have not been sold by Assignor and are in storage at the Effective Time (the "Inventory Hydrocarbons"); specifically excluding the following (the "Excluded Assets"): i. any and all rights of the Assignor in royalty interests, overriding royalty interests, production payment interests, or any other non-participating burdens on the Leases in effect as of the Effective Time; ii. all trade credits, accounts receivable, notes receivable and other receivables attributable to Assignor's interest in the Assets with respect to any period of time prior to the Effective Time; all deposits, cash, checks in process of collection, cash equivalents and funds attributable to Assignor's interest in the assets with respect to any period of time prior to the Effective Time; and all proceeds, benefits, income or revenues accruing (and any security or other deposits made) with respect to the Assets prior to the Effective Time; iii. all corporate, financial, and tax records of Assignor; however, Assignee shall be entitled to receive copies of any tax records which directly relate to any assumed obligations, or which are necessary for assignee's ownership, administration, or operation of the Assets; iv. all claims and causes of action of Assignor arising from acts, omissions or events, or damage to or destruction of the Assets, occurring prior to the Effective Time; v. all rights, title, claims and interests of Assignor relating to the Assets prior to the Effective Time under any policy or agreement of insurance or indemnity; under any bond; or to any insurance or condemnation proceeds or awards; vi. all Hydrocarbons produced from or attributable to the Assets with respect to all periods prior to the Effective Time, together with all proceeds from or of such Hydrocarbons, except the Inventory Hydrocarbons; vii. claims of Assignor or refund of or loss carry forwards with respect to production, windfall profit, severance, ad valorem or any other taxes attributable to any period prior to the Effective Time, or income for franchise taxes; 2 viii. all amounts due or payable to Assignor or adjustments or refunds under any contract or agreements (including take-or-pay claims) affecting the Assets, respecting periods prior to the Effective Time; ix. all amounts due or payable to Assignor or adjustments to insurance premiums related to the Assets with respect to any period prior to the Effective Time; x. all proceeds, benefits, income or revenues accruing (and any security or other deposits made ) with respect to the Assets, and all accounts receivable attributable to the Assets, prior to the Effective Time; xi. All of Assignor's intellectual property, including but not limited to, proprietary computer software, patents, trade secrets, copyrights, names, marks and logos; and TO HAVE AND TO HOLD, subject to the terms, exceptions and other provisions herein stated, the Acquired Interest in the Assets unto Assignee, its respective heirs, personal representatives, successors and assigns, forever. PART II MISCELLANEOUS A. Disclaimer of Warranties; Subrogation. Assignor represents and ---------------------------------------- warrants (i) that Assignor has good right and authority to sell and assign the Acquired Interest in the Assets; and (ii) that the Assets are free and clear of any mortgages, deeds of trust, financing statements, liens and encumbrances (other than those created pursuant to joint operating agreements and those to be released simultaneously with the execution of this Assignment) created by, through, or under Assignor, but not otherwise. Except for the warranty set forth in the preceding sentence, the assignments and conveyances made by this Assignment are made without warranty of title, express, implied, or statutory, and without recourse, even as to the return of the purchase price or other consideration, but with full substitution and subrogation of Assignee, and all persons claiming by, through and under Assignee, to the extent assignable, in and to all covenants and warranties of Assignor's predecessors in title and with full subrogation of all rights accruing under the applicable statutes of limitation or prescription under the laws of the state where the Assets are located and all rights of actions of warranty against all former owners of the Assets. Any covenants or warranties implied by statute or law by the use of the words "transfer', "convey", "bargain" or "assign" or other similar words used in this Assignment are hereby expressly disclaimed, waived and negated. 3 B. Further Disclaimers. Assignor and Assignee agree that to the extent -------------------- required by applicable law to be operative, the disclaimers of certain warranties contained in this paragraph are "conspicuous" disclaimers for the purposes of any applicable law, rule or order. The Personal Property and Incidental Rights are assigned to Assignee without recourse (even as to the return of the purchase price or other consideration), covenant or warranty of any kind, express, implied or statutory. WITHOUT LIMITING THE EXPRESS PROVISIONS HEREOF, ASSIGNEE SPECIFICALLY AGREES THAT ASSIGNOR IS CONVEYING THE PERSONAL PROPERTY AND INCIDENTAL RIGHTS ON AN "AS IS, WHERE IS, WITH ALL FAULTS" BASIS AND WITHOUT REPRESENTATION OR WARRANTY, EITHER EXPRESS, IMPLIED AT COMMON LAW, BY STATUTE OR OTHERWISE, OR STATUTORY, ALL OF WHICH ASSIGNOR HEREBY DISCLAIMS), RELATING TO TITLE TRANSFERABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, MERCHANTABILITY, DESIGN OR QUALITY, COMPLIANCE WITH SPECIFICATIONS OR CONDITIONS REGARDING OPERATION, FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, ABSENCE OR LATENT DEFECTS, OR ANY OTHER MATTER WHATSOEVER. THE PROVISIONS OF THIS SECTION HAVE BEEN NEGOTIATED BY ASSIGNEE AND ASSIGNOR AFTER DUE CONSIDERATION AND ARE INTENDED TO BE COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES OF ASSIGNOR, EITHER EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE EQUIPMENT THAT MAY ARISE PURSUANT TO ANY LAW NOW OR HEREAFTER IN EFFECT OR OTHERWISE, EXCEPT AS EXPRESSLY SET FORTH HEREIN. C. Subject to Purchase and Sale Agreement. This Assignment is delivered -------------------------------------- pursuant to that certain Purchase and Sale Agreement effective as of January 1, 2003, by and between Assignor, as Seller, and Assignee, as Buyer (the "Purchase and Sale Agreement"). In the event of any conflict, inconsistencies, or ambiguities between the terms and conditions of this Assignment and the Purchase and Sale Agreement, the terms and conditions of the Purchase and Sale Agreement shall govern and control. The Purchase and Sale Agreement contains a provision for certain contingent payments to be earned by Assignor, as Seller. Exhibit "C" titled Contingent Payment Schedule is attached hereto and made a part hereof in order to ratify and affirm Assignee's obligation to Assignor regarding the contingent payments. D. Further Assurances. The parties agree to take all such further ------------------- actions and execute, acknowledge and deliver all such further documents that are necessary or useful in carrying out the purposes of this Assignment. So long as authorized by applicable law so to do, Assignor agrees to execute, acknowledge and deliver to Assignee all such other additional instruments, notices, division orders, transfer orders and other documents and to do all such other and further acts and things as may be necessary to more fully and effectively convey and assign to Assignee the Acquired Interest in the Assets conveyed hereby or intended so to be conveyed. 4 E. Successors and Assigns. This Assignment shall bind and inure to the ----------------------- benefit of Assignor and Assignee and their respective heirs, personal representatives, successors and assigns. F. Governing Law. This Assignment shall be governed by and interpreted -------------- in accordance with the laws of the State of New Mexico, without regard to any conflicts of law rule that would direct application of the laws of another jurisdiction, except to the extent that it is mandatory that the law of some other jurisdiction, wherein the Assets are located, shall apply. G. Exhibits. All exhibits attached hereto are hereby made a part hereof -------- and incorporated herein by this reference. References in such exhibits to instruments on file in the public records are made for all purposes. Unless provided otherwise, all recording references in such exhibits are to the appropriate records of the counties in which the Assets are located. H. Captions. The captions in this Assignment are for convenience only -------- and shall not be considered a part of or affect the construction or interpretation of any provision of this Assignment. I. Counterparts. This Assignment 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. EXECUTED as of the dates of the acknowledgments below, to be effective for all purposes as of the Effective Time. ASSIGNOR: REGENT ENERGY CORPORATION (FKA VULCAN MINERALS & ENERGY, INC.) (FKA PLAYA MINERALS & ENERGY, INC.) By:______________________________ Andrew Levy, Director ASSIGNEE: ROCKY MOUNTAIN ENERGY CORPORATION By:______________________________ John N. Ehrman, President 5 STATE OF NEW YORK Sec. Sec. COUNTY OF NEW YORK Sec. This instrument was acknowledged before me on this day of 2003, by Andrew Levy, Director of Regent Energy Corporation, a Nevada corporation, on behalf of said corporation. ______________________________________________ Notary Public in and for the State of New York My Commission Expires: STATE OF TEXAS Sec. Sec. COUNTY HARRIS Sec. This instrument was acknowledged before me on this ________ day of , 2003, by John N. Ehrman, President of Rocky Mountain Energy Corporation, a Nevada corporation, on behalf of said corporation. ______________________________________________ Notary Public in and for the State of Texas My Commission Expires: 6 EX-2.6 4 doc3.txt PURCHASE AND SALES AGREEMENT THIS AGREEMENT, dated as of January 1, 2003, is between Regent Energy Corporation ("Seller"), with offices at 10777 Westheimer, Suite 1100, Houston, Texas 77042 and Rocky Mountain Energy Corporation ("Buyer") with offices at 333 North Sam Houston Parkway East, Suite 910, Houston, Texas 77060. Subject to the terms and conditions of this Purchase and Sales Agreement, Seller desires to sell, assign, transfer and convey to Buyer and Buyer desires to purchase from Seller all of Seller's right, title and interest in, to and under or derived from the oil and gas leases, oil, gas and mineral leases and other interests therein referred to in Exhibit "A", attached hereto and made a part hereof for all purposes, insofar and only insofar as said Leases apply to the lands, depths, formations, wellbore rights and/or other rights specified on Exhibit "A" together with identical interests in and to all property and rights incident thereto, including without limitation, all materials, equipment, personal property and fixtures located thereon or used in connection therewith (the "Equipment") on the lease and all of Seller's rights in, to and under all agreements, leases, permits, rights-of-way, easements, licenses, options and orders in any way relating thereto as of 7:00 A.M. local time, January 1, 2003 (the "Effective Time"), all of the foregoing properties, rights and interests being hereinafter sometimes called the "Interests". THEREFORE, In consideration of the above recitals and of the covenants and agreements herein contained, Seller and Buyer agree as follows: 1. SALE AND PURCHASE: Subject to and upon all of the terms and ------------------- conditions hereinafter set forth, Seller shall sell, transfer, assign, convey and deliver unto Buyer all of Seller's right, title and interest in and to the Interests, and Buyer shall purchase, receive, pay for and accept the Interests from Seller, as of the Effective Time. 2. SALE PRICE: The sale price for the Interests shall be the ----------- approximate amount of Five Million Five Hundred Thousand and No/100 Dollars ($5,500,000), subject only to any applicable price adjustment as provided for herein below. At Closing Buyer shall pay and deliver to Seller the total sale price after any applicable price adjustment as provided for herein below as follow, to wit: (a) The Buyer shall deliver the sum of $5,500,000 paid over at closing per the directions of current mortgage holders of record, less any deposits paid by Buyer to mortgage holders. (b) The Purchase Price shall be adjusted as follows (to the extent such items are known or can be reasonably estimated at Closing), and the resulting amount (the "Closing Amount") shall be paid to Seller. --------------- (i) The Purchase Price shall be decreased by the following --------- amounts: x. The amount of revenues actually received by Seller for oil, gas, condensate, natural gas liquids and other petroleum product sales attributable to production from the Subject Properties from and after the Effective Date (it being agreed that all oil which was produced from the Subject Properties prior to the Effective Date and which was, on the Effective Date, stored in tanks located on the Subject Lease, or located elsewhere but used by Seller to store oil produced from the Subject Properties prior to delivery to oil Buyer, and above pipeline connections shall be deemed to have been produced before the Effective Date); y. Notwithstanding the above, any sums expended by Buyer in order to extinguish a debt of Seller in order to facilitate the closing shall be taken as a credit at closing by Buyer. z. Special Consideration. At closing, seller shall settle the invoices of Jenkens & Gilchrist, attorneys at law, out of sales proceeds. (ii) The Purchase Price shall be increased by the following --------- amounts: x. The amount of all reasonable costs and expenses incurred and paid by Seller in connection with the ownership or operation of the Assets and attributable to the period from and after the Effective Date, including without limitation any lease operating expenses and customary and reasonable overhead charges; y. An amount equal to all prepaid expenses attributable to the Assets paid by Seller and attributable to the period from and after the Effective Date, including without limitation prepaid ad valorem, property, production and other taxes and payments for insurance coverage accruing to the benefit of Buyer subsequent to the Effective Date. 3. INFORMATION AND ACCESS: Seller shall make a good-faith effort to ------------------------ give Buyer and Buyer's authorized representatives, at any reasonable time(s) before Closing, (i) physical access to the wells and other Equipment included in the Interests, at Buyer's sole risk, cost and expense, for the purpose of inspecting the same, conducting witnessed tests of production from the wells, and (ii) access to all production, engineering and other technical data and records, and to all contract, land and lease records, to the extent such data and records are in Seller's possession and relate to the Interests; provided, however, Seller shall have no obligation to provide Buyer such access to any data or information which Seller considers proprietary or confidential to it or which access Seller cannot legally provide Buyer because of third-party restrictions on Seller. 4. TITLE DEFECTS: For the purpose of this Agreement, a "Title Defect" -------------- shall mean a material deficiency in one (or more) of the following respects, to-wit: 3 (a) Seller's title at the Effective Time, as to one or more properties, is subject to an outstanding mortgage, deed of trust, lien or encumbrance or other adverse claim which would induce a pipeline Buyer to suspend payment of proceeds as to Seller's interest or require the furnishing of security or indemnity. Evidence that Seller is currently receiving its full share of proceeds from a pipeline Buyer or third-party operator (not under a 100% or other division order requiring Seller to further distribute proceeds to third parties) for the Interests shall be considered a presumption that no defect exists with respect to this interest; (b) Seller owns less than the net revenue interest described on Exhibit "A" or more than the working interest described on Exhibit "A" without a corresponding increase in net revenue interest; (c) Seller's rights and interests are subject to being reduced by virtue of the exercise by a third party of reversionary, back-in or other similar right not reflected on Exhibit "A"; and, (d) Seller Is In default under some material provision of a lease, farmout agreement or agreement affecting the Interests. 5. SALE PRICE ADJUSTMENTS: Buyer may, by delivery of written notice to ----------------------- Seller of the existence of a Title Defect, request reduction of the sale price for the property affected. Seller may request an increase in the sale price of a property by delivery to Buyer of written notice that the net revenue interest actually owned by Seller therein is greater than that shown on Exhibit "A". 4 Any such notice by Buyer or Seller shall include appropriate evidence to substantiate its position and shall be delivered to the other party on or before twenty (20) days after closing. In the event any such notice is not timely delivered, the claimant shall thereafter have no right to claim a Title Defect or different revenue interest. Upon timely delivery of a notice either by Buyer of a Title Defect or by Seller of an increase or decrease in net revenue interest, Buyer and Seller shall meet and use their best efforts to agree on the validity of the claim and the amount of any required price adjustment based on the following formula: (i) If both the Working Interest and the Net Revenue Interest for any property are incorrectly stated on Exhibit "A", but the ratio of Net Revenue Interest to Working Interest is correctly stated, then the adjustment to the Purchase Price shall be the product of the value listed on Exhibit "A" multiplied by a fraction, the numerator of which is the Net Revenue Interest increase or decrease and the denominator of which is the Net Revenue Interest listed on Exhibit "A". (ii) If either the Working Interest or the Net Revenue Interest for any property is incorrectly stated on Exhibit "A" and the ratio of Net Revenue Interest to Working Interest is incorrectly stated, then the Purchase Price shall be adjusted as follows: Buyer shall recalculate the value of the property affected using precisely the same economic model, formula and assumptions used by it in calculating its values shown on Exhibit "A" but inserting the correct Working Interest and Net Revenue Interest percentage for the incorrect percentages. The difference between the recalculated value and the value shown on Exhibit "A" shall be the dollar value of the adjustment to the Purchase Price. 6. SELLER REPRESENTATIONS AND WARRANTIES: Seller represents and ---------------------------------------- warrants to that as of the Effective Date and the date Seller executes this Agreement that to the best of Seller's knowledge: 5 (a) Is duly qualified to carry on its business in the state where the Interests are located, and has all the requisite power and authority to enter into and perform this Agreement. (b) It has taken all necessary actions pursuant to Its Articles of Incorporation, By-laws and other governing documents to fully authorize it to consummate the transaction contemplated by this Agreement. (c) This Agreement and the consummation of the transactions contemplated by this Agreement will not violate, constitute a default under, or be in conflict with (i) any provision of Seller's Articles of Incorporation or Bylaws, (ii) any material contract, agreement or instrument to which Seller is a party or by which Seller is bound or, (iii) any judgment, decree, order, statute, rule, permit or regulation applicable to Seller or the Assets. (d) The execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action on the part of Seller. This Agreement has been duly executed and delivered on behalf of Seller and at Closing all documents and instruments required hereunder to be executed and delivered by Seller shall have been duly executed and delivered. This Agreement and such documents and instruments will constitute legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, subject, however, to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors, and to general principles of equity. (e) SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTY OF MERCHANTABILITY AND THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, REGARDING THE SUBJECT PROPERTIES, FIXTURES, FACILITIES, EQUIPMENT, IMPROVEMENTS, MATERIALS AND OTHER PERSONAL PROPERTY LOCATED ON OR INCLUDED IN 6 THE ASSETS, AND THE SAME ARE TO BE SOLD ON AN "AS IS, WHERE IS" BASIS AND CONDITION. IT IS UNDERSTOOD BETWEEN THE PARTIES THAT SELLER HAS RECORD TITLE SUBJECT TO CLAIMS OF VARIOUS PARTICIPANTS THAT WILL BE SATISFIED OUT OF SELLER'S POSITION IN THE SALE. (f) To the best of Seller's knowledge, all ad valorem, property and similar taxes and assessments based on or measured by the ownership of the Assets or the production of hydrocarbons or the receipt of proceeds there from on account of the Assets for all years prior to 2001 have been properly paid. (g) To the best of Seller's knowledge, there are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or to the best of Seller's knowledge threatened against Seller. (h) Except as expressly set forth in attached Schedule "B", no suit, M&M lien, action or other proceeding (including, without limitation, tax, environmental or development demands proceedings) is pending, or to the best of Seller's knowledge threatened, which might result in impairment or loss of title to any of the Assets or the value thereof. Seller shall promptly notify Buyer of any such proceeding which may arise or be threatened prior to Closing hereunder. (i) To the best of Seller's knowledge, there exists no adverse claim or claimed default (or any event which, with the giving of notice or the passage of time, or both, would constitute a default) under (i) any of the Subject Agreements or (ii) any order, writ, injunction or decree of any court, commission or administrative agency affecting any of the Assets. Seller shall promptly notify Buyer of any notice hereafter received by Seller of any such claim or default and the occurrence of any such event of which Seller becomes aware prior to Closing. 7 (j) To the best of Seller's knowledge, there are no unpaid bills or past due charges for any labor or materials incurred by or on behalf of Seller incident to the exploration, development or operation of the Assets which could be the basis for the existence or the filing of any claims against the Assets or any part thereof, other than as set forth in Exhibit B and Exhibit B-1. (k) To the best of Seller's knowledge, the Assets have been operated in compliance in all material respects with all valid laws, rules, regulations, ordinances and orders of governmental authorities having jurisdiction (including environmental laws) and in compliance in all material respects with all permits, approvals, contracts and agreements relating to the Assets. (l) None of the Assets are subject to any preferential rights to purchase or restrictions on assignment that would be applicable to the transactions contemplated hereby, or which have not already expired. (m) To the best of Seller's knowledge, there are no approvals, consents or filings required to be made or obtained to an assignment or transfer of any of the Assets. (n) To the best of Seller's knowledge, there are no operations involving any of the Assets to which Seller has become a non-consenting party. (o) To the best of Seller's knowledge, except as expressly set forth on Schedule "F", there are no prepayments, advance payments, take-or-pay payments or similar payments requiring the delivery of gas from the Assets without then or thereafter receiving payment at current prices. 8 (p) To the best of Seller's knowledge, all of the Subject Properties have been drilled and completed within the boundaries of the Subject Lease or within the limits otherwise permitted by contract, pooling or unit agreement, and by law; and all drilling and completion of the Subject Properties and all development and operations on the Subject Lease have been conducted in all material respects in compliance with all applicable laws, ordinances, rules, regulations and permits, and judgments, orders and decrees of any court or governmental body or agency, except failures which individually and in the aggregate would not have a material adverse effect on the use, value or operation of the Assets. (q) To the best of Seller's knowledge, except as expressly set forth in Schedule "G", all proceeds from the sale of hydrocarbons produced from the Subject Properties are currently being paid to Seller or such proceeds are currently being held in suspense by any Buyer thereof or any other party by whom proceeds are paid except for immaterial amounts. (r) On the Closing Date, no mortgage lien, security interest or similar lien created by Seller will exist with respect to the Assets. (s) To the best of Seller's knowledge, the Subject Lease is burdened by no royalty, overriding royalty interests, production payments or other burdens on production in excess of those shown on Exhibit A. Otherwise, the Assignment shall be made without warranty of title, either express or implied, except for acts by, through and under Seller, and shall be subject to all validly existing burdens on production which pertain to the Subject Lease. (t) SELLER DOES NOT WARRANT, EITHER EXPRESSLY OR IMPLIEDLY, THE RESERVOIR PERFORMANCE OR THE MERCHANTABILITY, SUITABILITY, CONDITION OR FITNESS FOR ANY PARTICULAR PURPOSE OR USE OF ANY OF THE AFORESAID LEASEHOLD EQUIPMENT, MATERIAL OR PERSONAL PROPERTY, ANY SUCH WARRANTY BEING EXPRESSLY DENIED. BUYER, BY ACCEPTANCE OF THIS AGREEMENT, HEREBY AGREES TO ACCEPT THE SAME "WHERE IS, AS IS" AND WITH ALL FAULTS OR DEFECTS, IF ANY, IN THEIR PRESENT CONDITION AND STATE 9 OF REPAIR. BUYER EXPRESSLY WAIVES ALL OF THE EXPRESS AND IMPLIED WARRANTIES PROVIDED BY NEW MEXICO LAW, INCLUDING PARTICULARLY (BUT NOT LIMITED TO) (1) THE WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE; (2) THE WARRANTY AGAINST REDHIBITORY VICES AND (3) ANY RIGHT TO CLAIM RESCISSION OR REDUCTION IN THE PURCHASE PRICE ON ACCOUNT OF ANY DEFECT OR CONDITION OF THE AFORESAID LEASEHOLD EQUIPMENT, MATERIAL OR PERSONAL PROPERTY WHICH MAY NOW OR HEREAFTER EXIST, WHETHER KNOWN OR UNKNOWN ON THIS DATE. 7. BUYER'S REPRESENTATIONS AND WARRANTIES -------------------------------------- Buyer represents and warrants to and with Seller that: (a) Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Nevada and Buyer is duly qualified to carry on its business in the state in which the Assets lie. (b) Buyer has all requisite power and authority to carry on its business as presently conducted; to enter into this Agreement; to purchase the Assets on the terms described in this Agreement and to perform its obligations hereunder. (c) This Agreement and the consummation of the transactions contemplated by this Agreement will not violate, constitute a default under, or be in conflict with, (i) any provision of Buyer's Articles of Incorporation or Bylaws, (ii) any material contract, agreement or instrument to which Buyer is a party or by which Buyer is bound, or (iii) any judgment, decree, order, statute, rule or regulation applicable to Buyer. 10 (d) The execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered on behalf of Buyer and at Closing all documents and instruments required hereunder to be executed and delivered by Buyer shall have been duly executed and delivered. This Agreement and such documents and instruments will constitute legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their terms, subject, however, to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors, and to general principles of equity. (e) Buyer is now, and hereafter shall continue to be, qualified to own State and/or Federal oil, gas and mineral leases in the State of New Mexico and with all other applicable regulatory bodies. (f) Buyer is acquiring the Assets for Buyer's own account or investment, and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act of 1933, and shall not resell any or all of the Assets except in compliance with all applicable securities laws. 11 8. OBLIGATIONS OF SELLER AND BUYER ------------------------------- (a) For purposes of determining adjustments to the Purchase Price under Article 1(d) hereof, Buyer agrees to accept the gas sales and oil and condensate sales meter readings taken in good faith by Seller as of 7:00 o'clock A.M. on the Effective Date hereof. (b) At the Closing, Buyer shall expressly assume and agree to be bound by the Contracts insofar as they relate to periods of time from and after the Effective Date and will protect, indemnify and hold Seller harmless from and against any claims or demands arising out of the failure of Buyer to do so. (c) Except as provided for in Articles 8(d), and 9, Seller shall retain all risk and liability of whatsoever nature connected with operations conducted on the Assets prior to the Closing Date and agrees to protect, indemnify, defend and hold Buyer free and harmless from all liabilities, penalties, claims, causes of action, demands, lawsuits and expenses associated with the operations prior to the Closing Date. Buyer shall assume all risk and liability of whatsoever nature connected with operations conducted on the Assets from and after the Closing Date, and agrees to protect, indemnify, defend and hold Seller free and harmless from all liabilities, penalties, claims, causes of action, demands, lawsuits and expenses associated with the Contracts and the operations from and after the Closing Date. (d) Except as provided for in Article 6, 9(b) and (f) hereof, Buyer assumes full responsibility for, and agrees to protect, indemnify, defend and hold Seller, its agents, directors, officers, shareholders and employees, free and harmless from and against all loss, liability, claims, fines, expenses, costs (including attorney's fees and expenses) and causes of action caused by or 12 arising out of any federal, state or local laws, rules, orders and regulations applicable to any waste material or hazardous substances on or included with the Assets or the presence, disposal, release or threatened release of all waste material or hazardous substance from the Assets into the atmosphere or into or upon land or any water course or body of water, including ground water (collectively, "Environmental Liabilities"), whether or not attributable to -------------------------- Seller's activities or the activities of Seller's agents, directors, officers, shareholders and employees, or to the activities of third parties (regardless of whether or not Seller was or is aware of such activities) prior to, during or after the period of Seller's ownership of the Assets. This indemnification and assumption shall apply to liability for voluntary environmental response actions undertaken pursuant either to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C.A. Sec. 9601, et seq.), as from time to time amended or revised, or to any other federal, state or local law. (e) Buyer agrees to comply with all laws and governmental regulations with respect to abandonment of wells and/or abandonment of the leasehold property including, where applicable, the plugging of wells, the compliance with law or rules regarding inactive or unplugged wells, including bonding requirements and restoration as specified in the Subject Lease. Buyer agrees to protect, defend, indemnify and hold Seller, its agents, directors, officers, shareholders and employees, free and harmless from and against any and all costs, expenses, claims, demands and causes of action of every kind and character arising out of, incident to, or in connection with the abandonment of wells and/or abandonment of and proper disposition of any leasehold property, including, without limitation, the leases, any structures, materials, land, wells, casing, leasehold equipment and other personal property, plugging requirements or exceptions thereto, including bonding requirements, regardless of whether the liability therefore is based upon some alleged act or omission of Seller, or of the Buyer, or of some other party. 13 (f) All accounts payable and other costs and expenses with respect to the Seller's interest in the Assets which relate to the period prior to the Effective Date shall be the obligation of and be paid by Seller and those which relate to the period commencing with the Effective Date shall be the obligation of and be paid by Buyer. (g) All prepaid utility charges applicable to periods following the Effective Date relating to the Assets shall be prorated as of the Effective Date. (h) If monies are received by either party hereto which, under the terms of this Article, belong to the other party, the same shall immediately be paid over to the proper party. If an invoice or other evidence of an obligation is received which is applicable to periods both prior to and after the Effective Date and is, thus, under the terms of the preceding paragraphs, partially the obligation of Seller and partially the obligation of Buyer, then the parties shall consult with each other and each shall promptly pay its portion of such obligation to the obligee. (i) Seller will pay all ad valorem, property taxes and other taxes assessed on, based on, or attributable to production and other equipment that occurred prior to the Effective Date. Buyer will pay all taxes assessed on, based on, or attributable to production that occurred after the Effective Date. It is agreed that whichever party receives said tax statements shall pay such taxes prior to delinquency and the other party hereto agrees to reimburse the paying party its pro rata share thereof promptly upon receipt of an invoice accompanied by evidence of such payment. It is further agreed that, should Seller pay the taxes, then Buyer also shall reimburse Seller for any portion of the aforementioned taxes that are assessable against other working interest and non-working interest owners and Buyer shall recoup from them accordingly. Buyer shall pay all applicable state, parish, municipality or government sales or use taxes on the leasehold, equipment, material or personal property located thereon for periods subsequent to the Effective Date. 14 (j) Seller and Buyer shall each bear their own costs and expenses, including, but not limited to, attorney's fees incurred in connection with the transactions contemplated in this Agreement. (k) The sale of the Assets shall be subject to, and Buyer shall assume, pay for and perform, the duties, liabilities and obligations relating to the Assets, including, but not limited to, all applicable and validly recorded and unrecorded agreements, contracts and instruments (including, but not limited to, royalties, overriding royalty interests, production payments, net profits interest, carried working interest or similar burdens), from and after the Effective Date. 9. ENVIRONMENTAL CONDITIONS ------------------------ (a) The Assets which have been identified herein and are the subject of this Agreement have been utilized by Seller and its predecessors-in-title for the purpose of exploration, development and production of oil and gas. Information, to the best of Seller's knowledge, regarding any substantial quantity of crude oil and produced water which may have been spilled or disposed of onsite and the locations thereof, including pit closures, burial, land farming, land spreading and underground injection, will be made available to Buyer as soon as practicable after the execution of this Agreement, but in no event less than thirty (30) days after the Closing Date. Buyer acknowledges that there may have been spills of these materials in the past onto the Assets described herein. In addition, some oil field production equipment may contain asbestos and/or Naturally Occurring Radioactive Material ("NORM"). In this ---- regard, Buyer expressly understands that NORM may affix or attach itself to the inside of wells, materials and equipment as scale, or in other forms, and that 15 said wells, material and equipment located on the property described herein may contain NORM and that NORM-containing material may be buried or otherwise disposed of on the Assets. Buyer also expressly understands that special procedures may be required for the removal and disposal of asbestos and NORM from the equipment and Assets where it may be found and Buyer agrees to assume all liability for such asbestos and NORM and for use of appropriate procedures and activities required to handle and dispose of same. (b) Promptly after execution of this Agreement by both parties, Buyer shall have the right, at its own cost, risk and expense, to conduct or have conducted an environmental assessment of the Assets. Seller will provide Buyer (or its contractor) as may be requested with reasonable access to the Assets operated by Seller in order to conduct the environmental assessment. Buyer shall release, protect, indemnify, defend and hold Seller, its agents, directors, officers, shareholders and employees, free and harmless against any liability or damage to persons or property arising out of such environmental assessment. Such indemnity shall also apply regardless of whether the liability or damage arises in whole or in part from the negligence of Seller. Buyer shall advise Seller of any material adverse environmental conditions of the Assets which it finds unacceptable ("Unacceptable Environmental Conditions") and --------------------------------------- provide evidence thereof on or before Closing. For the purpose of this paragraph, such conditions shall be "material" only if they will cost in excess of $250,000 to cure or remedy, and were not specifically disclosed on or before the execution of this Agreement. Within thirty (30) days after receipt of such notice, Seller may either (1) remedy or agree to remedy such Unacceptable Environmental Conditions within a period of time not to exceed 90 days following the receipt of Unacceptable Environmental Conditions Notice; (2) negotiate with Buyer in a good faith effort to agree upon an adjustment to the Purchase Price which adjustment shall reflect Buyer's cost to remedy such conditions ("Buyer's ------- Remediation Costs") or (3) remove the asset or assets from the Assets being - ------------------ conveyed and assigned and adjust the Purchase Price by the amount of Buyer's Remediation Costs. 16 SUBJECT TO THE FOREGOING AND EXCEPT AS EXPRESSLY PROVIDED FOR IN THIS AGREEMENT, BUYER UNDERSTANDS AND AGREES THAT THIS SALE IS MADE ON AN "WHERE IS, AS IS" BASIS AND BUYER RELEASES SELLER FROM ANY LIABILITY WITH RESPECT THERETO WHETHER OR NOT CAUSED BY OR ATTRIBUTABLE TO SELLER'S NEGLIGENCE EXCEPT AS OTHERWISE EXPRESSLY AGREED UPON IN WRITING BY SELLER AS PROVIDED HEREIN. (c) From and after the Closing Date, Buyer shall dispose of or discharge any waste from the Assets (including, but not limited to, produced water, drilling fluids and other associated wastes) in accordance with applicable federal, state or local regulations. When and if any lease, an interest in which has been conveyed and assigned hereunder, is terminated, Buyer shall take at its sole expense whatever remedial action on the Assets is necessary to meet any federal, state or local requirements directed at protecting human health and the environment in effect at that time. (d) Except as provided for in Article 9(b) hereof, Buyer, its successors and assigns, hereby agree to protect, indemnify, defend and hold Seller, its agents, directors, officers, shareholders and employees, free and harmless from and against all claims, demands and causes of action, including any civil fines, penalties, costs of clean-up or plugging liabilities for any and all wells, brought by any and all persons, including (without limitation) Buyer's agents, directors, officers, shareholders and employees and also including (without limitation) any private citizens, persons, organizations and any agency, branch or representative of federal, state or local government, on account of any personal injury or death or damage, destruction or loss of 17 property, contamination of natural resources (including soil, surface water or ground water) resulting from or arising out of any liability caused by or connected with the presence, disposal or release of any material of any kind, including, without limitation, asbestos and/or NORM, in, under or on the Assets at the time the Assets are conveyed and assigned to Buyer, or thereafter caused by acts of Buyer, its agents, directors, officers, shareholders and employees, with regard to its use of the described Assets subsequent to the conveyance and assignment of the described Assets pursuant to this Agreement without regard to whether such liability, injury, death, damage, destruction, loss or contamination is caused in whole or in part by any claimed negligence, active or passive, on the part of Seller or other indemnified party. This indemnification shall be in addition to any other indemnity provisions contained in this Agreement. 10. CONDITIONS OF CLOSING BY BUYER: The obligation of Buyer to close is ------------------------------ subject to the satisfaction of the following conditions: (a) Buyer shall have had reasonable access during normal business hours to all data and records obligated to be provided Buyer in Section 3 hereof. (b) That all representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at and as of Closing as if such representations and warranties were made at and as of Closing; (c) Buyer shall have received Seller's assurance that (i) the consummation of the transaction contemplated hereby will not violate the provisions of Seller's corporate charter and by-laws or any agreement, instrument, order, judgment or law by which it is bound, and (ii) all title documents delivered hereunder are validly executed on behalf of Seller. 18 (d) Seller shall have obtained and delivered to Buyer (i) all prerequisite waivers of preferential rights of purchase, and (ii) all necessary consents for transfer of the Interests, except those which by their nature cannot be requested or obtained until after Closing, or Buyer and Seller shall have adjusted the sale price in accordance with the provisions of Section 2 and 5. (e) That all representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at and as of Closing as if such representations and warranties were made at and as of Closing; (f) Seller shall have performed and satisfied in all material respects all covenants and agreements required by this Agreement to be performed or satisfied by Buyer at or prior to Closing; and (g) at the Closing Date, no suit, action or other proceeding shall be pending or threatened in which it is sought to restrain or prohibit the performance of or to obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. (h) Since the date of this Agreement, there shall have been no material adverse change in the condition of the Assets, except depreciation of personal property through ordinary wear and tear, depletion resulting from production and economic, political or legal changes affecting the oil and gas industry in general; provided, however, that no change in the conditions of the -------- ------- Assets shall be deemed material unless the aggregate value thereof exceeds five (5%) of the Purchase Price 11. CONDITIONS OF CLOSING BY SELLER: The obligation of Seller to close -------------------------------- is subject to: (a) Seller receiving evidence satisfactory to Seller that Buyer has all requisite corporate, partnership or other power and authority to purchase the Interests on the terms described in this Agreement and to perform its other obligations hereunder and that all corporate, partnership and/or other prerequisites of whatsoever nature have been fulfilled. 19 (b) That Seller shall have performed and satisfied in all material respects all covenants and agreements required by this Agreement to be performed or satisfied by Seller at or prior to Closing; (c) At the Closing Date, no suit, action or other proceeding shall be pending or threatened in which it is sought to restrain or prohibit the performance of or to obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. 12. CLOSING: The Closing shall be held on or before March 31, 2003, at ------- 2:00 P.M., at the offices of Buyer or at such other place as Seller and Buyer may mutually agree in writing. At Closing the following will occur: (a) Seller and Buyer shall execute, acknowledge and deliver an Assignment and Bill of Sale substantially in the form of Exhibit "D" attached hereto. (b) Buyer shall deliver to Seller by either wire transfer or certified funds the remaining balance of the total sale price as adjusted hereunder, subject to further adjustment after Closing as provided for herein, and shall cause to be delivered to Seller a certificate representing the shares of Buyer required to be transferred to Seller pursuant to Article 2(b) above. (c) Seller and Buyer shall execute any necessary forms required by governmental agencies for the transfer of the Interests and Buyer shall file same immediately following Closing. (d) Seller shall (subject to the terms of any applicable agreements and to the other provisions hereof) deliver to Buyer exclusive possession of the Interests, effective as of the Effective Time. 20 (e) All books, records and files in the possession of Seller pertaining to the Interests, including, without limitation, all well files, correspondence, geological and engineering information, shall be made available for delivery to Buyer at Seller's offices where currently maintained, within five (5) days after the Closing. Seller shall have the right to retain copies of any or all of such books, records and files and to retain canceled checks and general ledger, purchasing and other general accounting records of Seller. Seller reserves the right to later examine the records and information delivered to Buyer pursuant to this paragraph (e) to the extent such examination is necessary for any relevant business purpose. All information and data shall be furnished as a matter of convenience only to Buyer and Buyer's reliance on same shall be at Buyer's sole risk. 13. RESERVATIONS AND EXCEPTIONS: Sale and purchase of the Interests is ---------------------------- made subject to all reservations, exceptions, limitations, contracts and other burdens or instruments which are of record or of which Buyer has actual or constructive notice, including any matter included or referenced in the materials made available by Seller to Buyer. 14. CLOSING ADJUSTMENTS: All ad valorem taxes, real property taxes and -------------------- similar obligations ("Property Taxes") for the year 2002 shall be prorated and paid by Seller. All proceeds (including proceeds held in suspense or escrow) from the sale of production actually sold and delivered by Seller prior to the Effective Time and attributable to the Interests shall belong to Seller and all proceeds from the sale of production actually sold and delivered after the Effective Time attributable to the Interests shall belong to Buyer. In addition, all oil, condensate or liquid hydrocarbons (hereinafter in this paragraph called "oil") in storage above the pipeline connection shall be gauged and all gas meter charts shall be replaced at the Effective Time. Buyer shall pay Seller for such oil at the highest posted field price prevailing at the Effective Time for oil of like grade and gravity for the particular field. 21 Except as otherwise specifically provided in this Agreement, all costs, expenses and obligations relating to the Interests which accrue prior to the Effective Time shall be paid and discharged by Seller; and all costs, expenses and obligations relating to the Interests which accrue after the Effective Time shall be paid and discharged by Buyer. Within 5 days prior to closing, Seller will prepare and deliver to Buyer a closing settlement statement that details the adjustments in Articles 2(d), 5, 6, 9 and 14. 15. POST CLOSING ACCOUNTING: ------------------------- (a) As soon as practicable after the Closing, Seller shall prepare and deliver to Buyer, in accordance with this Agreement and generally accepted accounting principles, a statement (the "Intermediate Settlement Statement") setting forth each adjustment or payment that was not finally determined as of the Closing and showing the calculation of such adjustments to the sale price including adjustments related to title defects of Article 5, Buyer Remediation costs of Articles 9(b), and any adjustments related to Article 15(c). As soon as practicable after receipt of the Intermediate Settlement Statement, Buyer shall deliver to Seller a written report containing any changes that Buyer proposes be made to the Intermediate Settlement Statement. The parties undertake to agree with respect to the Intermediate Settlement Statement no later than 180 days after closing, such agreement constituting and to be embodied in the "Final Settlement Statement" and to establish the "Final Sale Price", and the date upon which the Final Sale Price is established to be the "Final Settlement Date'. However, the "Final Sale Price" shall not include any additional consideration which may be earned upon performance level of the assets reaching stated targets per Exhibit "C", until such time as they are achieved or agreement is reached 22 that they shall not be achieved. Such additional payments are considered additional consideration for the purchase of these assets. In the event Buyer and Seller are unable to mutually agree upon the amount of the Final Settlement Statement, an audit shall be conducted by a mutually agreed upon accounting firm. Buyer and Seller agree to be bound by the findings of such audit, insofar as the Final Settlement Statement amount is concerned, and each shall bear one half of all expenses associated with such audit. In the event that (i) the Final Sale Price is more than the amount paid at Closing, Buyer shall pay to Seller the amount of such difference, or (ii) the Final Sale Price is less than the amount paid at Closing, Seller shall pay Buyer in immediately available funds the amount of such difference within 10 days of noticification. Seller shall be responsible for the settlement of all joint billing audits which relate to accounting periods prior to the Effective Time. Buyer shall be responsible for the settlement of all joint billing audits which relate to accounting periods after the Effective Time. Any credits received by Buyer after the Effective Time Attributable to expenses paid prior to the Effective Time shall be promptly reimbursed to Seller by Buyer. (b) Any additional consideration earned pursuant to 2(c) connected with production levels achieved shall be considered an upward post closing adjustment regardless of when earned. 16. TAXES: The sale price provided for hereunder excludes any sales ----- taxes or other taxes in connection with the sale of property pursuant to this Agreement because the parties believe that this sale is exempt from sales tax. If a determination is ever made that a sales tax or other transfer tax applies, Buyer shall be liable for such tax as well as any applicable conveyance, transfer and recording fees, and real estate transfer stamps or taxes imposed on any transfer of property pursuant to this Agreement. Buyer shall defend and hold Seller harmless with respect to the payment of all such taxes, if any, including any interest or penalties assessed thereon. 23 All taxes (other than ad valorem and income taxes) which are imposed on or with respect to the production of oil, natural gas or other hydrocarbons or minerals or equipment or the receipt of proceeds therefrom (including but not limited to severance, production, excise and windfall profit taxes) shall be apportioned between the parties based upon the respective shares of production taken by the parties. Payment or withholding of all such taxes which have accrued prior to the Effective Time and filing of all statements, returns and documents pertinent thereto shall be the responsibility of Seller. Payment or withholding of all such taxes which have accrued from and after the Effective Time and the filing of all statements, returns and documents incident thereto shall be the responsibility of Buyer. 17. FURTHER OPERATION OF SELLER-OPERATED INTERESTS: Seller shall, as to ---------------------------------------------- the Interests it now operates, continue to operate the same until the Effective Time, when such operation shall be turned over to, and become the responsibility of Buyer. In the event Closing occurs after the Effective Time, however, Seller shall, unless Buyer and Seller otherwise agree, continue the physical operation of such Interests until Closing: such operation from and after the Effective Time shall be conducted by Seller for and on behalf of Buyer; and for any such services performed by Seller from and after the Effective Time, Buyer shall pay Seller for all reasonable and necessary expenses incurred by Seller in such operation, protection or maintenance of the Interests. Such expenses may be recovered by Seller as part of the closing or post-closing adjustments, as appropriate. In all of its operations after full execution of this Agreement, Seller shall exercise the same standard of care as an ordinary prudent operator under the same or similar circumstances and shall notify Buyer of any material adverse change in the productive capability of any well Included in the Interests. Effective with closing, the revised Operating Agreement with attached Accounting Procedure, Exhibit "G", shall be in effect for the properties. 24 18. BROKER'S FEE: Seller represents and warrants to Buyer that Seller ------------- has incurred no liability, contingent or otherwise, for broker's or finder's fees in respect of this Agreement or the transactions contemplated hereby for which Buyer shall have any responsibility whatsoever; and Buyer represents and warrants to Seller that Buyer has incurred no fees in respect of this Agreement or the transactions contemplated hereby for which Seller shall have any responsibility whatsoever. 19. NOTICES: All communications required or permitted under this ------- Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been fully made if actually delivered, or if mailed by registered or certified mail, postage prepaid, to the address as set forth below: SELLER ------ Regent Energy Corporation 10777 Westheimer, Suite 1100 Houston, TX 77042 Attn: Andrew Levy BUYER ----- Rocky Mountain Energy Corporation 333 N. Sam Houston Parkway East, Suite 910 Houston, Texas 77060 Attn: John N. Ehrman 20. FURTHER ASSURANCE: After Closing each of the parties shall execute, ----------------- acknowledge and deliver to the other such further instruments, and take such other actions as may be reasonably necessary to carry out the provisions of this Agreement. Certain forms of the Bureau of Land Management will have to be prepared, executed and filed at a later date. Seller acknowledges that Buyer is making this concession to speed closing. However, Buyer shall assume all 25 responsibility for notifying the Buyer of oil and gas production from the Interests, and such other designated persons who may be responsible for disbursing payments for the purchase of such production, of the change of ownership of the Interests. Buyer shall take all actions necessary to effectuate the transfer of such payments to Buyer as of the Effective Time. Seller shall have no responsibility or liability for the proper distribution of proceeds from and after the Effective Time. 21. PRESS RELEASE: There shall be no press release or public -------------- communication concerning this purchase and sale by either party except with the written consent of the party not originating said release or communication, with the exception being those reports reasonably required by applicable state or federal law or regulations. 22. ENTIRE AGREEMENT: This Instrument states the entire agreement ----------------- between the parties and may be supplemented, altered, amended, modified or revoked by writing only, signed by both parties. 23. SURVIVAL: The representations, warranties and agreements contained -------- in this Purchase and Sales Agreement and in any certificate or other instrument delivered by or on behalf of either party pursuant to this Purchase and Sales Agreement shall survive the Closing and shall be unaffected by any investigation made by the other party. 24. HEADINGS: The headings are for guidance only and shall have no -------- significance in the interpretations of this Agreement. 26 25. GOVERNING LAW: THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE ------------- PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW MEXICO THE PARTIES AGREE THAT ANY LITIGATION RELATING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT MUST BE BROUGHT BEFORE AND DETERMINED BY A COURT OF COMPETENT JURISDICTION WITHIN THE STATE OF NEW MEXICO. SELLER: REGENT ENERGY CORPORATION By:________________________________________ Andrew Levy, Director for Regent Energy Corporation BUYER: ROCKY MOUNTAIN ENERGY CORPORATION By:________________________________________ John N. Ehrman, President and CEO 27 STATE OF NEW YORK Sec. Sec. COUNTY OF NEW YORK Sec. BEFORE ME, the undersigned authority, on this day personally appeared Andrew Levy, known to me to be the person whose name is subscribed to in the foregoing instrument, and known to me to be a Director of Regent Energy Corporation, a New Mexico corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein express, and as the act of said corporation. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this _______ day of _________ 2003. _______________________________________ Notary Public, State of New York STATE OF TEXAS Sec. Sec. COUNTY OF HARRIS Sec. BEFORE ME, the undersigned authority, on this day personally appeared John N. Ehrman, known to me to be the person whose name is subscribed to in the foregoing instrument, and known to me to the President of Rocky Mountain Energy Corporation, a Nevada corporation, and acknowledged to me that he executed said instrument for the purposes and consideration therein express, and as the act of said corporation. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this _______ day of _________ 2003. _______________________________________ Notary Public, State of Texas 28 EXHIBIT "A" The Participating Area of the Horseshoe-Gallup Unit, covering 90% working interest and full net revenue interest as attached: Township 30 North, Range 16 West, N.M.P.M. ------------------------------------------ Section 2: N 1/2 SW 1/4 Sections 3 & 4: All Section 5: N 1/2, N 1/2 SW 1/4, SE 1/4 SW 1/4, SE 1/4 Section 6: N 1/2 NE 1/4, SE 1/4 NE 1/4 Section 8: N 1/2 NE 1/4, SE 1/4 NE 1/4 Section 9: N 1/2, N 1/2 SW 1/4, SE 1/4 SW 1/4, W 1/2 SE 1/4 Section 10: NW 1/4 Township 31 North, Range 16 West, N.M.P.M. ------------------------------------------ Section 19: S 1/2 NE 1/4, NW 1/4, S 1/2 Section 20: S 1/2 Section 21: S 1/2 Section 22: S 1/2 SW 1/4 Section 26: S 1/2 Section 27: W 1/2 NE 1/4, SE 1/4 NE 1/4, NW 1/4, S 1/2 Sections 28-30: All Section 31: N 1/2, N 1/2 SW 1/4, SE 1/4 SW 1/4, SE 1/4 Sections 32-35: All Section 36: W 1/2 SW 1/4 Township 31 North, Range 17 West, N.M.P.M. ------------------------------------------ Section 13: SW 1/4 NW 1/4, SW 1/4, W 1/2 SE 1/4, SE 1/4 SE 1/4 Section 14: All Section 15: NE 1/4, N 1/2 NW 1/4, SE 1/4 NW 1/4, N 1/2 SE 1/4, SE 1/4 SE 1/4 Section 23: NE 1/4, N 1/2 NW 1/4, SE 1/4 NW 1/4, N 1/2 SE 1/4, SE 1/4 SE 1/4 Section 24: All Section 25 N 1/2, NE 1/4 SW 1/4, SE 1/4 Section 36: NE 1/4 NE 1/4 containing 13,527.80 acres, more or less, San Juan County, New Mexico. OIL AND GAS LEASES: - ------------------ LEASE A: - ------- Serial No.: I-149-IND-7652 Date: October 29, 1947, effective December 15, 1947 Recorded: Book 321, Page 2 Lessor: J. M. Stewart, General Superintendent of the Navajo Service, on behalf of the Navajo Tribe Indians Original Lessee: Byrd-Frost, Inc. 29 Tracts: 1, 1-A, 1-B and 1-C Royalty: 1/8 1. Unit Tract 1: Township 31 North, Range 17 West, N.M.P.M. ------------ ------------------------------------------ Sec. 15: E 1/2 NW 1/4, NW 1/4 NW 1/4, E 1/2 SE 1/4, NW 1/4 SE 1/4 Navajo Tribal Contract I-149-IND-7652 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 83.398437% 4.101563% 2. Unit Tract 1-A: Township 31 North, Range 17 West, N.M.P.M. -------------- ------------------------------------------ Sec. 23: E 1/2 NW 1/4, NW 1/4 NW 1/4 Navajo Tribal Contract I-149-IND-7652 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 83.398437% 4.101563% 3. Unit Tract 1-B: Township 31 North, Range 17 West, N.M.P.M. -------------- ------------------------------------------ Sec.15: NE 1/4 Navajo Tribal Contract I-149-IND-7652 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 83.398437% 4.101563%* Overriding Royalties: --------------------- *i. All Depths ---------- ii. Surface to 1900 feet subsurface ------------------------------- 100% interest in sliding scale overriding royalty of (1) 1/16 x 7/8 when monthly production averages 40 BOPD or less, (2) 3/32 x 7/8 when monthly production averages 41-100 BOPD, and (3) 1/8 x 7/8 when monthly production averages more than 100 BOPD 4. Unit Tract 1-C: Township 31 North, Range 17 West, N.M.P.M. -------------- ------------------------------------------ Sec. 23: E 1/2 SE 1/4, NW 1/4 SE 1/4 Navajo Tribal Contract I-149-IND-7652 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 83.398437% 4.101563%* Overriding Royalties: --------------------- *i. All Depths ---------- ii. Surface to 1900 feet subsurface ------------------------------- 100% interest in sliding scale overriding royalty of (1) 1/16 x 7/8 when monthly production averages 40 BOPD or less, (2) 3/32 x 7/8 when monthly production averages 41-100 BOPD, and (3) 1/8 x 7/8 when monthly production averages more than 100 BOPD 30 LEASE B: - ------- Serial No.: 14-20-603-733 Date: October 11, 1954, effective December 22, 1954 Recorded: Book 325, Page 147 Lessor: Sam Ahkech, Chairman of the Navajo Tribal Council, on behalf of the Navajo Tribe of Indians Original Lessee: Bolack Oil & Gas Co. Tracts: 4, 5, 6, 6-A, 7, 8, 9, 10 and 11 Royalty: 1/8 1. Unit Tract 4: Township 30 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec.6: E 1/2 NE 1/4, NW 1/4 NE 1/4 Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 2. Unit Tract 5: Township 30 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec. 5: NW 1/4, SE 1/4 Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.03125% 5.46875% 3. Unit Tract 6: Township 30 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec. 5: NE 1/4, E 1/2 SW 1/4, NW 1/4 SW 1/4 Sec. 8: NE 1/4 NE 1/4 Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 4. Unit Tract 6-A: Township 30 North, Range 16 West, N.M.P.M. -------------- ------------------------------------------ Sec.8: SE 1/4 NE 1/4, NW 1/4 NE 1/4 Sec.9: That part of the SW 1/4 NW 1/4 and NW 1/4 SW 1/4 lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 5. Unit Tract 7: Township 30 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec.4: That part of the NW 1/4 NW 1/4 lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.03125% 5.46875% 31 6. Unit Tract 8: Township 30 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec.4: That part of the SW 1/4 NW 1/4 lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.03125% 5.46875% 7. Unit Tract 9: Township 30 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec.4: That part of the NW 1/4 SW 1/4 lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.03125% 5.46875% 8. Unit Tract 10: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec.4: That part of the SW 1/4 SW 1/4 lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.03125% 5.46875% 9. Unit Tract 11: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec.9: That part of the NW 1/4 NW 1/4 lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-733 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE C: - ------- Serial No. 14-20-603-734 Date: October 5, 1954, effective December 22, 1954 Recorded: Book 270, Page 10 Lessor: Sam Ahkech, Chairman of the Navajo Tribal Council, on behalf of the Navajo Tribe of Indians Original Lessee: The Atlantic Refining Company Tract: 12 Royalty: 1/8 1. Unit Tract 12: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 28: That portion lying within the Navajo Indian Reservation Sec. 29: All Sec. 30: All Sec. 31: E 1/2, NW 1/4, E 1/2 SW 1/4, NW 1/4 SW 1/4 Sec. 32: All Sec. 33: That portion lying within the Navajo Indian Reservation Navajo Tribal Contract No. 14-20-603-734 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 32 LEASE D: - ------- Serial No.: 14-20-603-2022 Date: December 4, 1956, effective February 1, 1957 Recorded: Book 321, Page 210 Lessor: Acting Chairman of Navajo Tribal Council, on behalf of the Navajo Tribe of Indians Original Lessee: Magnolia Petroleum Company Tract: 13 Royalty: 1/8 1. Unit Tract 13: Township 31 North, Range 17 West, N.M.P.M. ------------- ------------------------------------------ Sec. 13: SW 1/4, SE 1/4 SE 1/4, W 1/2 SE 1/4, SW 1/4 NW 1/4 Sec. 14: All Sec. 23: NE 1/4 Sec. 24: N 1/2 Navajo Tribal Contract No. 14-20-603-2022 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE E: - ------- Serial No. 14-20-600-3531 Date: September 19, 1957, effective October 31, 1957 Recorded: Book 355, Page 130 Lessor: Paul Jones, Chairman of the Navajo Tribal Council, on behalf of the Navajo Tribe of Indians; and Albert Wing, Chairman of the Ute Mountain Tribal Council and the Ute Mountain Tribe of the Ute Mountain Reservation Original Lessee: The Atlantic Refining Company Tract: 3 Royalty: 1/8 1. Unit Tract 3: Township 31 North, Range 16 West, N.M.P.M. ------------ ------------------------------------------ Sec.19: W 1/2, SE 1/4, S 1/2 NE 1/4 Sec. 20: S 1/2 Navajo Tribal Contract No. 14-20-600-3531 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 33 LEASE F: - ------- Serial No. 14-20-603-4908 Date: December 5, 1958, effective December 22, 1958 Recorded: Book 401, Page 71 Lessor: Ah kay na pah or heirs, as the case may be, as Allottee No. 048277 of the Navajo Tribe of Indians Original Lessee: Ralph Lowe Tract: 24 Royalty: 1/8 1. Unit Tract 24: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 2: Lots 1, 2, 5, 6 Navajo Allotted Contract No. 14-20-603-4908 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 75% 12.5% LEASE G: - ------- Serial No. 14-20-603-4909 Date: December 10, 1958, effective January 22, 1959 Recorded: Book 457, Page 2 Lessor: Ushkee nah yah, or Louie Jim, Allottee No. 048280 of the Navajo Tribe of Indians Original Lessee: J. Felix Hickman; and Helbing and Podpechan, a partnership Tract: 25 Royalty: 1/8 1. Unit Tract 25: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 2: SW 1/4 Navajo Allotted Contract No. 14-20-603-4909 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE H: - ------- Serial No.: SF 079439 (and SF 079439-A, segregated from SF 079439) Date: September 1, 1948 Recorded: Book 355, Page 125 Lessor: United States of America Original Lessee: A. L. Duff, Jr. Tracts: 26, 27, 28, 29, 30, 31 and 32 Royalty: 1/8 1. Unit Tract 26: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 3: Lots 3 and 4 Sec. 4: Lot 3 United States Lease SF 079439 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 80.8125% 6.6875% 34 2. Unit Tract 27: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 3: Lots 1 and 2 United States Lease SF 079439 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 85.5% 2% 3. Unit Tract 28: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 4: Lot 4 United States Lease SF 079439 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 80.8125% 6.6875% 4. Unit Tract 29: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 4: Lot 5 United States Lease SF 079439 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 80.8125% 6.6875% 5. Unit Tract 30: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 4: Lot 6 United States Lease SF 079439 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 85% 2.5% 6. Unit Tract 31: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 4: Lot 7 United States Lease SF 079439 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 85.5% 2% 7. Unit Tract 32: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 4: Lots 1 and 2 United States Lease SF 079439-A Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 85.5% 2% LEASE I: - ------- Serial No.: SF 081226 (and SF 081226-A, SF 081226-B, and SF 081226-C, segregated from SF 081226) Date: October 1, 1951 Recorded: Book 355, Page 126 Lessor: United States of America Original Lessee: Hazel Bolack Tracts: 33, 34, 34-A, 35, 36, 37, 38 and 39 Royalty: 1/8 35 1. Unit Tract 33: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 3: Lots 5, 6, 9, 11, 14 and 16 Sec. 4: E 1/2 SW 1/4, SE 1/4 NE 1/4, E 1/2 SE 1/4 Sec. 10: Lots 1 and 2 United States Lease SF 081226 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.8125% 4.6875% 2. Unit Tract 34: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 9: NW 1/4 SE 1/4 United States Lease SF 081226 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 93.75% 75.515625% 5.734375% 3. Unit Tract 34-A: Township 30 North, Range 16 West, N.M.P.M. --------------- ------------------------------------------ Sec. 9: SW 1/4 SE 1/4 United States Lease SF 081226 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 93.75% 75.515625% 5.734375% 4. Unit Tract 35: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 9: Lot 1 United States Lease SF 081226-A Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 84.765625% 2.734375% 5. Unit Tract 36: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 9: Lots 2, 3 and E 1/2 SW 1/4 United States Lease SF 081226-A Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 82.03125% 5.46875% 6. Unit Tract 37: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 9: E 1/2 NW 1/4 United States Lease SF 081226-A Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 7. Unit Tract 38: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 4: W 1/2 SE 1/4, SW 1/4 NE 1/4, SE 1/4 NW 1/4 Sec. 3: Lots 7, 8, 10, 12, 13 and 15 Sec. 9: W 1/2 NE 1/4 36 Sec. 10: E 1/2 NW 1/4 United States Lease SF 081226-B Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% *(unitized (Gallup) interval only) 8. Unit Tract 39: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 9: E 1/2 NE 1/4 United States Lease SF 081226-C Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE J: - ------- Serial No.: 14-20-604-1950 Date: November 21, 1956, effective February 25, 1957 Recorded: Book 328, Page 86 Lessor: Scott Jacket, Chairman of the Ute Mountain Tribal Council, on behalf of the Ute Mountain Tribe of the Ute Mountain Reservation Original Lessee: The Atlantic Refining Company Tracts: 17 and 18 Royalty: 1/8 1. Unit Tract 17: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 26: S 1/2 Sec. 35: W 1/2, NE 1/4, N 1/2 SE 1/4 Sec. 36: W 1/2 SW 1/4 Ute Mountain Ute Tribal Contract No. 14-20-604-1950 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 2. Unit Tract 18: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 35: S 1/2 SE 1/4 Ute Mountain Ute Tribal Contract No. 14-20-604- 1950 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE K: - ------- Serial No.: 14-20-604-1951 Date: June 28, 1957, effective September 23, 1957 Recorded: Book 359, Page 77 Lessor: Paul Jones, Chairman of the Navajo Tribal Council, on behalf of the Navajo Tribe of Indians; and Albert Wing, Chairman of the Ute Mountain Tribal Council and Ute Mountain Tribe of the Ute Mountain Reservation Original Lessee: El Paso Natural Gas Company Tracts: 19, 20 and 21 Royalty: 1/8 37 1. Unit Tract 19: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 27: SE 1/4, NW 1/4, E 1/2 SW 1/4, W 1/2 NE 1/4, SE 1/4 NE 1/4 Sec. 28: E 1/2 SE 1/4, W 1/2 E 1/2, and that part of W 1/2 lying within the Ute Mountain Indian Reservation Sec. 33: W 1/2 NE 1/4, E 1/2 SE 1/4, and that part of W 1/2 lying within the Ute Mountain Indian Reservation Sec. 34: NE 1/4, W 1/2 SE 1/4, NE 1/4 SE 1/4, W 1/2 NW 1/4, E 1/2 SW 1/4 Ute Mountain Ute Tribal Contract No. 14-20-604-1951 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% 2. Unit Tract 20: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 28: E 1/2 NE 1/4 Sec. 33: E 1/2 NE 1/4 Sec. 34: E 1/2 NW 1/4, W 1/2 SW 1/4 Ute Mountain Ute Tribal Contract No. 14-20-604-1951 i. Surface to base of Gallup formation (except unitized interval): ------------------------------------------------------------- Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 90.9340% 72.2925% 8% ii. Unitized (Gallup) interval: -------------------------- Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 99.7674% 79.3151% 8% 3. Unit Tract 21: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 27: W 1/2 SW 1/4 Sec. 33: W 1/2 SE 1/4 Sec. 34: SE 1/4 SE 1/4 Ute Mountain Ute Tribal Contract No. 14-20-604-1951 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE L: - ------- Serial No. NOO-C-14-20-1948 (Formerly 14-20-604-1948A(N)) Date: May 21, 1981, effective May 26, 1981 Recorded: Book 1147, Page 929 Lessor: Chairman of the Navajo Tribal Council, on behalf of the Navajo Tribe of Indians Original Lessee: Texaco Inc. Tract: 16-A Royalty: 1/8 1. Unit Tract 16-A: Township 31 North, Range 16 West, N.M.P.M. --------------- ------------------------------------------ Sec. 21: That portion of the SW 1/4 that lies West of the Burt Survey; being 486.10 feet wide and within the Navajo Indian Reservation Navajo Tribal Contract No. NOO-C-14-20-1948A 38 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE M: - ------- Serial No.: 14-20-604-1948A(U) Date: August 7, 1981, effective August 7, 1981 Recorded: Book 1144, Page 793 Lessor: Judy M. Knight, Chairperson of the Ute Mountain Tribal Council, on behalf of the Ute Mountain Indian Tribe Original Lessee: Texaco Inc. Tract: 16 Royalty: 1/8 1. Unit Tract 16: Township 31 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 21: SE 1/4, and that portion of the SW 1/4 that lies East of the Burt Survey, and within the Ute Mountain Indian Reservation Sec. 22: S 1/2 SW 1/4 Ute Mountain Ute Tribal Contract No. 14-20-604-1948A(U) Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE N: - ------- Serial No.: E-3150-12 Date: December 10, 1949 Recorded: Unrecorded, but there is no need to do so Lessor: State of New Mexico Original Lessee: John Burroughs Tract: 41 Royalty: 1/8 1. Unit Tract 41: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 2: Lots 3 and 4 State of New Mexico Lease E-3150-12 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE O: - ------- Serial No.: E-9896-7 Date: March 20, 1956 Recorded: Book 1148, Page 245 Lessor: State of New Mexico Original Lessee: Monsanto Chemical Company Tract: 42 Royalty 1/8 1. Unit Tract 42: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 2: S 1/2 NW 1/4 State of New Mexico Lease E-9896-7 39 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 76.5625% 10.9375% LEASE P: - ------- Serial No.: 14-20-603-2037 Date: Unknown Recorded: Apparently unrecorded Lessor: Navajo Tribe of Indians Original Lessee: Unknown Tract: 15 Royalty: 1/8 1. Unit Tract 15: Township 31 North, Range 17 West, N.M.P.M. ------------- ------------------------------------------ Sec. 24: S 1/2 Sec. 25: E 1/2, NW 1/4, NE 1/4 SW 1/4 Sec. 36: NE 1/4 NE 1/4 Navajo Tribal Contract No. 14-20-603-2037 Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 100% 87.5% 0% LEASE Q: - ------- Serial No.: NM 0444-A Date: May 1, 1952 Recorded: Unknown Lessor: United States of America Original Lessee: J. R. Abraham Tract: 40 Royalty: 1/8 1. Unit Tract 40: Township 30 North, Range 16 West, N.M.P.M. ------------- ------------------------------------------ Sec. 9: E 1/2 SE 1/4 United States Lease NM 04444-A Operating Rights Net Revenue Interest Overriding Royalty Interest ---------------- -------------------- --------------------------- 0% 0% 5% Assignment of all accounts receivable (if any) whether collectable or uncollectable, associated with the leases since inception to date. 40 EXHIBIT "B" LAWSUITS -------- Hart Oil & Gas vs. Regent Energy Corporation et al. No. CV 2002-345-3, in the - -------------------------------------------------- Eleventh Judicial District Court, San Juan County, New Mexico. Steve Szumlinski vs. Regent Energy Corporation No. CV 2002-373-4, in the - ---------------------------------------------- Eleventh Judicial District Court, San Juan County, New Mexico. JP Machine Services, Inc. vs. Regent Energy Corporation No. CV 2002-331-3, in - ------------------------------------------------------- the Eleventh Judicial District Court of San Juan County, New Mexico. Parawon et al vs. Regent Energy Corporation, foreclosure action. - ------------------------------------------- 41 EXHIBIT "B-1" HGU/NEHU LIEN CLAIMS AS OF JUNE 4, 2002 --------------------------------------- SAN JUAN COUNTY RECORDS ----------------------- APPROX $ VENDOR BOOK/PAGE DATE - ----------- ---------------------------------- --------- -------- $ 39,800.00 American Energy Services 1333/405 12/05/01 -0- American Energy Services (amended) 1334/845 01/03/02 62,739.29 Baker Petrolite Corp. 1337/714 02/26/02 33,596.18 Steven R. Szumlinski 1338/247 03/07/02 1,723.56 J.C. Well Service 1338/507 03/12/02 14,302.53 Hart Oil & Gas 1338/699 03/14/02 9,283.11 Rig Equipment and Supply 1341/273 04/29/02 44,086.12 Key Four Corners 1330/988 10/23/01 - ----------- $205,530.79 Total TO BE CLEARED BY REGENT AT CLOSING. 42 EXHIBIT "F" PRE-PAYMENTS ------------ None. 43 -----END PRIVACY-ENHANCED MESSAGE-----