UNITED STATES 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 the Quarterly Period Ended March 31, 2002
Commission File Number 2-85602-D
Mid-Power Service Corporation
-----------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0398403
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 Howard Hughes Parkway, Suite 860-A
Las Vegas, Nevada 89109
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
702-319-7153
----------------------------------------------
(Issuer's telephone number, including area code)
n/a
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 26, 2002, registrant had
6,800,244 shares of issued and outstanding common stock, par value $0.001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MID-POWER SERVICE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
-----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,386,298
Inventory 2,415
Note receivable - current portion 100,000
Other receivables 87,333
-----------------
Total current assets $ 1,576,046
-----------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation 139,551
LONG-TERM NOTE RECEIVABLE - current portion 200,000
INVESTMENTS 1,001,225
OIL AND GAS PROPERTIES:
Unevaluated properties 640,311
Equipment, net of accumulated depreciation 253,173
-----------------
Net Oil and Gas Properties 893,484
-----------------
TOTAL ASSETS $ 3,810,306
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion $ 28,798
Accounts payable 219,200
Accrued payroll and other 1,980
-----------------
Total current liabilities 249,978
-----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, --
none issued and outstanding
Common stock, $0.001 par value, 100,000,000 shares authorized
6,800,244 shares issued and outstanding at March 31, 2002 6,800
Additional paid-in capital 7,005,268
Deficit accumulated during the development stage beginning July 1, 2001 (1,952,025)
Accumulated deficit (1,499,715)
-----------------
Total stockholders' equity 3,560,328
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,810,306
=================
See accompanying notes to these condensed
consolidated financial statements.
2
MID-POWER SERVICE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FROM INCEPTION OF
DEVELOPMENT STAGE
(7/01/01) AND FOR FOR THE
FOR THE THREE MONTHS THE NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2002 2001
---------------- --------------- ------------------- -------------
OIL AND GAS SALES $ 37,609 $ -- $ 57,821 $ --
COST & EXPENSES:
Product development 167,027 -- 404,518 --
Exploration expense 399,578 -- 917,649 --
Professional fees 182,282 1,554 472,549 11,251
General and administrative 128,410 5,799 318,097 9,339
Depreciation expense 7,154 -- 25,636 --
---------------- --------------- ------------------- -------------
Total costs and expenses 884,451 7,353 2,138,449 20,590
---------------- --------------- ------------------- -------------
LOSS FROM OPERATIONS (846,842) (7,353) (2,080,628) (20,590)
---------------- --------------- ------------------- -------------
OTHER INCOME (EXPENSE):
Minority interest in net loss of
subsidiary -- -- 68,404 --
Interest income 13,850 -- 69,246 --
Interest expense 741 -- (9,047) --
---------------- --------------- ------------------- -------------
Total other income 14,591 -- 128,603 --
---------------- --------------- ------------------- -------------
NET LOSS $ (832,251) $ (7,353) $ (1,952,025) $ (20,590)
================ =============== =================== =============
BASIC & DILUTED NET LOSS
PER SHARE $ (0.12) $ (0.01) $ (0.29) $ (0.01)
================ =============== =================== =============
WEIGHTED AVERAGE SHARES
OUTSTANDING (BASIC & DILUTED) 6,800,244 3,600,793 6,800,244 3,600,793
================ =============== =================== =============
See accompanying notes to these condensed
consolidated financial statements.
3
MID-POWER SERVICE CORPORATION
(A DVELEOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
FROM INCEPTION OF
DEVELOPMENT STAGE
(7/01/01) AND FOR
THE NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------------- -------------------
2002 2001
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,952,025) $ (20,590)
Adjustments to Reconcile Net Loss to Net Cash Used In
Operating Activities:
Depreciation expense 25,636 --
Minority interest in net loss of subsidiary (68,404) --
Abandonment of investment 150,000 --
Changes in Operating Assets and Liabilities:
Inventory (2,415) --
Other receivables (37,333) --
Accounts payable 192,714 --
Accrued payroll and other 606 --
-------------------- -------------------
Net cash used in operating activities (1,691,221) (20,590)
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable (300,000) --
Investment in fluidized combustion (150,000) --
Cash received from acquisition of Sun Ray 46,878
Purchase of oil and gas properties (831,574) --
Purchase of property and equipment (157,970) --
-------------------- -------------------
Net cash used in investing activities (1,392,666) --
-------------------- -------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on notes payable (1,011,586) --
-------------------- -------------------
Net cash used in financing activities (1,011,586) --
-------------------- -------------------
DECREASE IN CASH AND CASH EQUIVALENTS (4,095,473) (20,590)
CASH AND CASH EQUIVALENTS, beginning of period 5,481,771 20,590
-------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,386,298 $ --
==================== ===================
See accompanying notes to these condensed
consolidated financial statements.
4
MID-POWER SERVICE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation:
The financial statements, management's discussion and these notes to
the consolidated financial statements are condensed and should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
June 30, 2001. Certain balances in the 2001 interim financial statements have
been reclassified to conform to the current quarter presentation. These changes
had no effect on total assets, total liabilities, stockholders' equity or net
loss.
The financial information contained herein is unaudited but, in the
opinion of the management of Mid-Power Service Corporation, includes all
adjustments (consisting of normal recurring accruals) that the Company considers
necessary for a fair presentation of the results of operations for the periods
indicated. The results for the nine-month period ended March 31, 2002 and 2001,
are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions for Form 10-QSB and, therefore, do
not include all footnotes and certain financial presentations necessary for a
fair presentation of financial position and results of operations in conformity
with generally accepted accounting principles.
Note 2: Development Stage Operations:
Mid-Power Service Corporation, formerly known as Caplan Corporation,
was incorporated under the laws of the state of Delaware on July 5, 1983, for
the purpose of participating in oil and gas activities in the United States.
Over the past several years, the Company has continued to phase-out its
operations and related investments. The exploration, development and production
of oil and gas reserves had been the Company's primary source of revenues,
however, it was discontinued in 1998. During 1997, the Company initiated its
investment in a second industry segment; mining of extractive minerals. The
Company obtained leasehold interests on acreage in West Texas for future
extraction of mineral substances, including bentonite, zeolite and other
associated minerals. The mineral extraction segment did not generate revenue
during its existence and the Company discontinued operations in this business
segment during the year ended June 30, 2000. During the year ended June 30,
2001, the Company was inactive as all investments and ongoing business
activities had been disposed of during the previous year.
On March 12, 2001, a new group of stockholders acquired a controlling
interest in the Company. Those stockholders and the management they have put in
place have changed the name of the Company to Mid-Power Service Corporation and
raised equity capital of more than $5.5 million. In July 2001, the Company
initiated a plan to generate and trade electrical power, to develop energy
related technologies, and to acquire oil and gas fuel sources for power
generation through exploration, development and acquisition. The Company holds a
Federal Energy Regulatory Commission (FERC) license to trade and generate
electric power throughout the United States.
5
Note 3: Acquisition of Oil and Gas Properties:
On August 30, 2001, the Company completed, through a subsidiary, an
acquisition of 70% of Sunray Petroleum, Inc. (known as MaxCo Oil Company, Inc.
until it changed to Sunray Petroleum, Inc. in March 2002) ("Sunray"), a
privately owned Bakersfield, California, oil company that had been engaged in
oil and gas exploration in Kern County, California, since June 2000. Pursuant to
the acquisition, the Company paid $400,000 in cash, agreed to pay an additional
$53,000 within 12 months, and agreed to issue 450,000 shares of the Company's
restricted common stock if Sunray reworked and returned to production an agreed
number of its wells.
Half of the shares were to be delivered upon satisfaction of the
condition, with the remaining half delivered one year thereafter. As a result of
the condition, the restricted common stock has not been allocated to the
purchase price. At the time of the acquisition, Sunray entered into one-year,
renewable employment agreements with each of its two minority stockholders.
On December 31, 2001, the Company agreed to acquire the remaining 30%
of the issued and outstanding shares of Sunray common stock held by the two
minority stockholders. In the transaction, Sunray entered into a service
agreement with one minority stockholder for onsite field services in
consideration of cancellation of his employment contract. Under the new service
agreement, the former minority stockholder was paid $25,000 in cash and was
transferred oil equipment with a book value of $167,254. This minority
stockholder also relinquished his right to 225,000 shares of Company restricted
common stock to be issued conditionally under the August 30, 2001, agreement.
Also, the Company issued the other Sunray minority stockholder a note
in the amount of $40,384 in consideration of the cancellation of his employment
contract. This minority stockholder also agreed to satisfy the payment of
$53,000 to be made to a third party pursuant to the terms and conditions of the
August 30, 2001, agreement and retained his right to receive the conditional
225,000 shares of Company restricted common stock, if the conditions for the
commercial productivity of a minimum of the acquired wells are met.
The acquisition of 70% of Sunray, completed on August 30, 2001, and the
remaining 30% of Sunray, completed on December 31, 2001, has been accounted for
as a purchase, and the acquisition cost of $632,638 (not including the
conditional issuance of 225,000 shares of restricted common stock) has been
allocated to assets acquired and liabilities assumed based on fair estimated
value. Unevaluated oil and gas properties of $640,311 reflect the fair value of
the assets acquired.
The Company's consolidated results of operations include Sunray's
activity from the effective date of the August 30, 2001, acquisition.
Eliminations have been made for intercompany transactions and the minority
interest portion of the loss for the period has been accounted for and allocated
accordingly.
On March 7, 2002, the Board of Directors of MaxCo adopted a resolution
authorizing the company name change to Sunray Petroleum, Inc. The name change
became effective on March 13, 2002.
Note 4: Notes Receivable:
On September 21, 2001, the Company entered into a Promissory Note
agreement with Pure Power Technologies, LLC (PPT) by which the Company will loan
PPT the sum of $300,000. The proceeds of the note are to be used by PPT for the
development and manufacture of generator units that the Company will utilize in
the production of wind energy and extraction of oil and gas reserves. The
Company has received personal guarantees for repayment from the principal owners
of PPT and holds a secured interest in the assets of PPT. The note receivable
bears an interest rate of 10% and requires principal payments annually beginning
September 30, 2002.
6
Note 5: Subsequent Event:
On May 10, 2002, a Company subsidiary entered into a farm-in agreement
with an unrelated third party to earn a 50% working interest (40% net revenue
interest) in up to 10 wells by funding the costs to drill and, if warranted,
complete each well, at a depth of approximately 6,800 feet, and construct gas
delivery pipeline during the next two and one-half years in acreage located in
Colusa County, California. The Company has deposited $600,000 into an escrow
account to be applied toward costs for the first well. Additional prospects may
be included in the venture. The Company is funding lease extension costs on up
to seven additional prospects. The Company will not be the operator.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Special Note Regarding Forward-Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. The Company intends that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe the Company's future
strategic plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding the Company or its management's current
beliefs, expectations, anticipations, estimations, projections, proposals, plans
or intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as:
o costs of and results from proposed reworking or recompletion
of wells in Kern County, California;
o the availability of opportunities to develop distributed power
projects;
o the availability of opportunities to develop energy-related
technologies;
o the ability of the Company to obtain any additional debt or
equity financing that may be required in order for the Company
to take advantage of available opportunities;
o prevailing prices for electrical power and energy sources that
may be used to generate electricity; and
o the Company's ability to identify and turn to financial
advantage energy-related opportunities.
Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
General
As of June 30, 2000, and through June 30, 2001, we were inactive, as
all investments and ongoing business activities had been disposed of prior to
June 30, 2000.
On March 12, 2001, eight individuals purchased an aggregate of
1,500,000 shares of restricted common stock (187,500 each) from six stockholders
of the Company, at a price of $0.22 per share. Additionally, for the sum of
$25,000 (which will be credited against the purchase price if the option is
exercised), one investor purchased an irrevocable proxy to vote 500,000 shares
of outstanding common stock and an option to purchase 100,000 outstanding shares
of restricted common stock. As a result of the foregoing transactions, the eight
purchasers have voting control over approximately 55% of the Company's common
stock.
Also on March 12, 2001, the stockholders of the Company, by majority
written consent, elected a new board of directors, which in turn elected new
officers. The Company then effected a two-to-one reverse split of the common
stock of the Company effective April 10, 2001, for all stockholders of record on
April 9, 2001, and voted to change the Company's name to "Mid-Power Service
Corporation." All share and per share amounts have been adjusted to give effect
to the reverse split.
8
On August 30, 2001, a Company subsidiary completed an acquisition of
70% of Sunray Petroleum, Inc. ("Sunray") (then known as MaxCo Oil Co., Inc.). On
December 31, 2001, the Company subsidiary acquired the remaining 30% of the
issued and outstanding shares of Sunray common stock held. Therefore, the
Company, through its subsidiary, now owns 100% of Sunray.
Sunray holds leases to the oil and gas rights on 1,010 gross acres,
which include over 50 unevaluated wells at depths of between 550 to 6,300 feet.
We believe that Sunray may be able to rework or recomplete some of the shut-in
wells and are currently implementing a program to recomplete, in another zone,
up to approximately four wells, depending on the results achieved from the
initial recompletions. As a by-product of recompletion and exploration
activities, the Company has recorded minimal revenues.
In June 2001, the Company purchased a 22.2% interest in First Step
Investors LLC (FSI) for $1,000,000. Additionally, other investor/partners
invested an additional $3.5 million in FSI. The total $4.5 million invested in
FSI will be used to acquire 70% of the interest Gordon Brothers Group Capital
LLC owns in First Step Capital LLC. First Step Capital LLC has a financial
interest in results of research and development of the specialized fuel known as
EcoSynfuel. First Step Capital LLC has also acquired delinquent loans at a
substantial discount in the attempt to recover loan amounts outstanding. During
the nine months ended March 31, 2002, the Company has not received cash flows
from this investment.
In addition, the Company holds a license to trade and generate electric
power throughout the United States. The license has an unlimited term and
enables the Company to engage in wholesale electric power and energy
transactions as a marketer. As of March 31, 2002, the Company has not earned
revenues under the license, but anticipates revenues under the license in the
near future.
The Company is continuing to review opportunities to participate in
distributed power-generation projects, which consist of placing relatively small
generating units at or near consumer sites to meet specific consumer power
needs. The Company believes that the Sunray acquisition may contribute to the
implementation of this strategic plan. The Company believes certain Sunray oil
wells may be reworked to produce natural gas in sufficient amounts to generate
electricity for sale in Bakersfield, California.
Results of Operations
Three Months Ended March 31, 2002, as Compared with Three Months Ended
March 31, 2001
For the three months ended March 31, 2002, income consisted of interest
income on Company funds with a minimal amount of revenue derived from the sale
of oil from properties acquired in 2001. As the Company is in the initial stage
of implementing its business plan, operations are limited to producing limited
quantities of oil as a by-product of reworking or recompleting individual wells
in an effort to increase production. As a result, most costs and expenses during
this period related to these oil field activities recorded as exploration
expense. During the three months ended March 31, 2002, the Company expended
approximately $167,000 on the research and development of new products. Such
expenditures have been in the development of an environmental air pollution
abatement system, a super compression design engine to be used in power
generation and a fluidized combustion power project located in Pennsylvania that
was recently abandoned by the Company, resulting in a write-off of $150,000 in
related costs. The remaining expenditures consisted of general and
administrative costs for rent, insurance, office expenses, salaries for
employees, consultant fees relating to the analysis of other possible energy
projects, as well as accounting, legal and other professional fees.
9
The Company had no operations for the three months ended March 31,
2001. Costs and expenses consisted of minimal expenses required to maintain the
corporate good standing of the Company and meet its periodic reporting
obligations pursuant to the securities laws. As a result, results of operations
for the three months ended March 31, 2001, are not indicative of results to be
compared to in the future.
Nine Months Ended March 31, 2002, as Compared with Nine Months Ended
March 31, 2001
For the nine months ended March 31, 2002, income consisted of interest
income on the Company funds with a minimal amount of revenue derived from the
sale of oil from properties acquired in 2001. As the Company is in the initial
stage of implementing its business plan, operations are limited to producing
limited quantities of oil as a by-product of reworking or recompleting
individual wells in an effort to increase production. As a result, most costs
and expenses during this period related to these oil field activities recorded
as exploration expense. The Company has expended approximately $400,000 on the
research and development of new products. Such expenditures have been in the
development of an environmental air pollution abatement system, a super
compression design engine to be used in power generation and a fluidized
combustion power project located in Pennsylvania that was recently abandoned by
the Company, resulting in a write-off of $150,000 in related costs, with the
remaining expenditures consisting of general and administrative costs for rent,
insurance, office expenses, salaries for employees, consultant fees relating to
the analysis of other possible energy projects, as well as accounting, legal and
other professional fees.
The Company had no operations for the nine months ended March 31, 2001.
Costs and expenses consisted of minimal expenses required to maintain the
corporate good standing of the Company and meet its periodic reporting
obligations pursuant to the securities laws. As a result, results of operations
for the nine months ended March 31, 2001, are not indicative of results to be
compared to in the future.
Liquidity and Capital Resources
The Company had working capital of approximately $1,326,000 at March
31, 2002, as compared to working capital of approximately $4,504,000 at June 30,
2001. The Company requires capital to fund its operating activities and costs
associated with reworking or recompleting wells in its Kern County, California,
properties. The Company estimates that it has sufficient capital resources to
meet these requirements for at least the next 12 months.
The Company has funds for the estimated costs required to earn a 50%
working interest (40% net revenue interest) in the initial well under its recent
farm-in arrangement on prospects in Colusa County, California, but will require
additional capital to earn an interest in additional wells under this venture.
Future Operations, Significant Accounting Policies and Estimates
The Company believes it has sufficient capital to identify and analyze
initially possible additional energy projects. However, the Company expects that
it will require substantial amounts of additional capital to implement its plans
to develop energy-related technologies, to generate and trade electrical power,
and to acquire oil and gas fuel for power generation through exploration,
development or acquisitions. Additional funds may be required to operate any
power generation or fuel projects in which it participates. The Company plans to
seek debt or other project financing for specific power generation projects and
fuel acquisitions. However, at this time, there are no such commitments for any
future financings.
In connection with the above, the Company has substantial investments
in energy-related projects as of March 31, 2002. The Company evaluates on a
quarterly basis its investments for potential impairment. Due to the nature of
its activities, it is reasonably possible our estimates for recovery of an
investment could materially change in the future.
10
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
SEC
Exhibit Reference
Number Number Title of Document Location
- -------------- ------------ --------------------------------------- ------------
Item 10 Material Contracts
- -------------- ------------ --------------------------------------- ------------
10.01 10 Venture Agreement of Mid-Power Service This filing
Corporation and Edward Mike Davis dated
May 10, 2002
(b) Reports on Form 8-K.
During the quarter ended March 31, 2002, the Company did not
file any reports on Form 8-K.
11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MID-POWER SERVICE CORPORATION
Date: May 17, 2002 By /s/ Kenneth M. Emter
--------------------------------------
Kenneth M. Emter
Secretary and Chief Financial Officer
12