UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): June 14, 2002
MID-POWER SERVICE CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 2-85602-D 87-0398403
------------------- --------------- --------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
3800 Howard Hughes Parkway
Suite 860A
Las Vegas, Nevada 89109
----------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(702) 214-3615
----------------------------------------------------
(Registrant's telephone number, including area code)
Note: This amendment two is filed to include pro forma financial statements,
(F-17 - F-19) that were inadvertently omitted from amendment number one
filed August 28, 2002.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
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(a) Financial Statements of Business Acquired. Audited financial
statements for the business acquired, including the
accountant's reports, are included beginning at page F-1
immediately following the signature page of this document.
(b) Pro Forma Financial Information. Pro forma financial
information relative to the acquired business is included
beginning at page F-16 immediately following the audited
financial statements for the business acquired.
(c) Exhibits. The following exhibits are filed with this report on
Form 8-K:
SEC
Exhibit Reference
Number Number Title of Document Location
- --------------------- ---------------------------------------- -----------------
Plan of Acquisition, Reorganization,
Item 2 Arrangement, Liquidation, or Succession
- --------------------- ---------------------------------------- -----------------
2.01 2 Acquisition Agreement and Plan of Merger Previous filing
among Mid-Power Service Corporation,
Red Star, Inc., and Mid-Power Resource
Corporation, dated June 13, 2002
Item 3 Articles of Incorporation and Bylaws
- --------------------- ---------------------------------------- -----------------
3.01 3 Amended and Restated Articles of Previous filing
Incorporation dated June 4, 2002
3.02 3 Bylaws dated June 4, 2002 Previous filing
Item 10 Material Contracts
- --------------------- ---------------------------------------- -----------------
10.01 10 Promissory Note in the amount of Previous filing
$10,000,000 dated June 13, 2002
10.02 10 Registration Rights Agreement between Previous filing
Mid-Power Service Corporation and
Edward Mike Davis dated June 13, 2002
10.03 10 Loan Agreement by and among Mid-Power Previous filing
Service Corporation and Mid-Power
Resource Corporation, borrowers, and
SCRS Investors, LLC, lender, dated as
of May 9, 2002
10.04 10 Promissory Note among Mid-Power Service Previous filing
Corporation and Mid-Power Resource
Corporation, as makers, and SCRS
Investors, LLC, as holder, as of
May 9, 2002
10.05 10 Security Agreement between Mid-Power Previous filing
Resource Corporation and
SCRS Investors, LLC as of May 9, 2002
10.06 10 Deed of Trust and Security Agreement as Previous filing
of May 9, 2002, between Mid-Power
Resource Corporation, trustor,
Bruce Lemons, trustee, and SCRS
Investors, LLC, beneficiary
10.07 10 2002 Stock Option and Purchase Rights Previous filing
Plan adopted June 25, 2002
10.08 10 Notice of Grant (with related Stock Previous filing
Option Agreement and Notice of Exercise)
and Stock and Option Grant Schedule
2
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned hereunto duly authorized.
MID-POWER SERVICE CORPORATION
Dated: August 29, 2002 By: /s/ Kenneth M. Emter
-------------------------------------
Kenneth M. Emter, Secretary/Treasurer
3
RED STAR, INC.
Financial Statements
December 31, 2001
Index to Financial Statements
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Page
----
Independent Auditor's report F-2
Balance sheet F-3
Statement of operations F-4
Statement of stockholders' equity F-5
Statement of cash flows F-6
Notes to financial statements F-7
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F-1
INDEPENDENT AUDITOR'S REPORT
To the Stockholder of Red Star, Inc.
We have audited the accompanying balance sheet of Red Star, Inc. as of December
31, 2001 and the statements of operations, stockholders' equity, and cash flows
for the years ended December 31, 2001 and 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Red Star, Inc. as of December
31, 2001 and the results of its operations, and its cash flows for the years
ended December 31, 2001 and 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Tanner + Co.
Salt Lake City, Utah
July 17, 2002
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F-2
RED STAR, INC.
Balance Sheet
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March 31,
2002 December 31,
(Unaudited) 2001
----------- -----------
Assets
Current assets:
Cash $ 190 $ 1,154
Accounts receivable 425 26,572
Prepaid expenses 3,476 4,636
----------- -----------
Total current assets 4,091 32,362
Drilling equipment and vehicles, net of
accumulated depreciation of $43,355 and $28,900 245,756 260,211
Oil and gas properties, successful efforts method 87,500 87,500
Other assets - 1,115
----------- -----------
$ 337,347 $ 381,188
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 49,919 $ 49,319
Related party payable 8,863 -
Accrued abandonment costs 87,500 87,500
Current portion of long-term debt 16,542 16,542
----------- -----------
Total current liabilities 162,824 153,361
Long-term debt 62,267 66,500
Commitments - -
Stockholders' equity:
Common stock, $.01 par value, authorized 1,000
shares; 1,000 shares issued and outstanding 10 10
Additional paid-in-capital 298,355 322,355
Accumulated deficit (186,109) (161,038)
----------- -----------
Total stockholders' equity 15,576 161,327
----------- -----------
$ 337,347 $ 381,188
=========== ===========
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See accompanying notes to financial statements. F-3
RED STAR, INC.
Statement of Operations
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Three Months Years Ended
Ended March 31, December 31,
------------------------ ----------------------
2002 2001
(unaudited) (unaudited) 2001 2000
------- ------- --------- --------
Revenues
Drilling equipment rental $ - $ - $ 172,382 $ -
Consulting revenue - - 73,054 -
Oil and gas sales 141 443 1,343 -
------- ------- --------- --------
Total revenues 141 443 246,779 -
------- ------- --------- --------
Costs and expenses:
Operating Costs 7,578 9,788 129,322 -
General Administrative 2,587 1,187 116,966 478
Depreciation, depletion, and amortization 14,455 - 32,243 3,344
------- ------- --------- --------
24,620 10,975 278,531 3,822
------- ------- --------- --------
Loss from operations (24,479) (10,532) (31,752) (3,822)
Interest expense (592) (285) (1,202) (1,938)
------- ------- --------- --------
Net loss $(25,071) $(10,817) $ (32,954) $ (5,760)
======== ======== ========= ========
Loss per common share - basic and diluted $ (25.07) $ (10.82) $ (0.33) $ (5.76)
======== ======== ========= ========
Weighted average number of common
shares - basic and diluted 1,000 1,000 1,000 1,000
======== ======== ========= ========
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See accompanying notes to financial statements. F-4
RED STAR, INC.
Statement of Stockholders' Equity
Period January 1, 2000 to March 31, 2002
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Common Stock Additional
----------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------- ------- --------- ---------
Balance at January 1, 2000 1,000 $ 10 $ 99,990 $(122,324)
Net loss - - - (5,760)
------- ------- --------- ---------
Balance at December 31, 2000 1,000 10 99,990 (128,084)
Contributed Capital - - 487,126 -
Distributions - - (264,761) -
Net loss - - - (32,954)
------- ------- --------- ---------
Balance at December 31, 2001 1,000 10 322,355 (161,038)
Distributions (unaudited) - - (24,000) -
Net loss (unaudited) - - - (25,071)
------- ------- --------- ---------
Balance at March 31, 2002
(unaudited) 1,000 $ 10 $ 298,355 $(186,109)
======= ======= ========= =========
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See accompanying notes to financial statements. F-5
RED STAR, INC.
Statement of Cash Flows
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Three Months Years Ended
Ended March 31, December 31,
------------------------- ----------------------
2002 2001
(unaudited) (unaudited) 2001 2000
--------- -------- --------- --------
Cash flows from operating activities:
Net loss $ (25,071) $(10,817) $ (32,954) $ (5,760)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 14,455 - 32,243 -
(Increase) decrease in:
Accounts receivable 26,147 (127) (26,572) -
Prepaid expenses 1,160 - (4,636) -
Other assets 1,115 875 15 3,329
Increase (decrease) in:
Accounts payable (12,449) - 49,319 -
Accrued abandonment costs - - (15) 87,515
--------- -------- --------- --------
Net cash provided by (used in)
operating activities 5,357 (10,069) 17,400 85,084
--------- -------- --------- --------
Cash flows used in investing activities -
purchase of property and equipment - - (202,001) (87,500)
--------- -------- --------- --------
Cash flow from financing activities:
Proceeds from related party note payable 8,863 10,078 - 2,408
Payments on line of credit - - (9,852) -
Payments on long-term debt (4,233) - (4,068) -
Capital contributions - - 414,646 -
Capital distributions (10,951) - (215,005) -
--------- -------- --------- --------
Net cash (used in) provided by
financing activities (6,321) 10,078 185,721 2,406
--------- -------- --------- --------
Net increase (decrease) in cash (964) 9 1,120 (8)
Cash, beginning of year 1,154 34 34 42
--------- -------- --------- --------
Cash, end of year $ 190 $ 43 $ 1,154 $ 34
========= ======== ========= ========
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See accompanying notes to financial statements. F-6
RED STAR, INC.
Notes to Financial Statements
December 31, 2001
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1. Organization Organization and Business
and Red Star, Inc. (the Company), an S-corporation, is
Summary of incorporated under the laws of the state of Nevada. The
Significant Company's primary business intent was to acquire oil and gas
Accounting properties for exploration, development and future production.
Policies However, for the years ended December 31, 2001 and 2000, the
Company did not have any significant oil and gas production
and all revenues were a result of rental of equipment or
consulting services. All of the company's operations are
conducted in the continental United States.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade
receivables. In the normal course of business, the Company
provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when
realized, have been within the range of management's
expectations.
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such account. The Company
believes it is not exposed to any significant credit risk on
cash and cash equivalents.
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F-7
RED STAR, INC.
Notes to Financial Statements
Continued
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1. Organization Oil and Gas Producing Activities
and The Company utilizes the successful efforts method of
Summary of accounting for its oil and gas producing activities. Under
Significant this method, all costs associated with productive exploratory
Accounting wells and productive or nonproductive development wells are
Policies capitalized while the costs of nonproductive exploratory wells
Continued are expensed. If an exploratory well finds oil and gas
reserves, but a determination that such reserves can be
classified as proved is not made after one year following
completion of drilling, the costs of drilling are charged to
operations. Indirect exploratory expenditures, including
geophysical costs and annual lease rentals, are expensed as
incurred. Unproved oil and gas properties that are
individually significant are periodically assessed for
impairment of value, and a loss is recognized at the time of
impairment by providing an impairment allowance. Capitalized
costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated
salvage values, are depreciated and depleted by the unit-
of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved
property, the cost and related accumulated depreciation,
depletion, and amortization are eliminated from the property
accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the
cost is charged to accumulated depreciation, depletion, and
amortization with a resulting gain or loss recognized in
income.
On the sale of an entire interest in an unproved property for
cash or cash equivalent, gain or loss on the sale is
recognized, taking into consideration the amount of any
recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is
sold, the amount received is treated as a reduction of the
cost of the interest retained.
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F-8
RED STAR, INC.
Notes to Financial Statements
Continued
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1. Organization Property and Equipment
and Property and equipment are stated at cost less accumulated
Summary of depreciation. Depreciation is provided using the straight-line
Significant method over the estimated useful life of these assets.
Accounting Expenditures for maintenance and repairs are expensed when
Policies incurred and betterments are capitalized. When assets are
Continued sold, retired or otherwise disposed of, the applicable costs
and accumulated depreciation, depletion, and amortization are
removed from the accounts, and the resulting gain or loss is
reflected in operations.
Income Taxes
The Company, with the consent of its stockholder, has elected
under the Internal Revenue Code to be taxed as an S
corporation. In lieu of corporation income taxes the
stockholders of an S corporation are taxed on the Company's
taxable income. Therefore, no provision or liability for
federal income taxes has been included in the financial
statements.
Because the effect of income taxes would be immaterial had the
company been presented as a public corporation for the years
ended December 31, 2001 and 2000 and for the unaudited three
months ended March 31, 2002 and 2001, no pro-forma tax effects
have been disclosed as a result of Mid-Power Service
Corporation's acquisition of the Company. (See note 12).
Revenue Recognition
Revenue is recognized from gas sales when the gas passes
through the pipeline at the well head, persuasive evidence of
a sale exists, the sales price is fixed, and collection is
reasonably assured. Revenues from services provided to other
well operators are recognized when the services have been
performed, a persuasive evidence of a sale exists, the sales
price is fixed, and collection is reasonably assured.
The Company does not have any gas balancing arrangements.
Revenue from the rental of drilling equipment is recognized in
accordance with the terms of the rental agreement.
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F-9
RED STAR, INC.
Notes to Financial Statements
Continued
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1. Organization Revenue Recognition - Continued
and Consulting revenue derived from services provided in
Summary of connection with drilling operations are recorded when an
Significant agreement for such services exist, the services have been
Accounting performed, and payment for such services is reasonably
Policies assured.
Continued
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Earnings Per Share
The computation of basic earnings per common share is based on
the weighted average number of shares outstanding during the
period. The company had no common stock equivalents in 2001
and 2000. Diluted loss per common share is not calculated when
the affect is anti-dilutive.
Unaudited Information
In the opinion of management, the accompanying unaudited
financial statements for the three months ended March 31, 2002
and 2001 contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the results of
operations and cash flows for the three month periods ended
March 31, 2002 and 2001. Results for the interim periods do
not necessarily indicate results which may be expected for any
other interim or annual period.
2. Oil and Gas In December 2000 the Company acquired oil and gas leasehold
Properties interests in the Clear Creek Unit in Carbon and Emery Counties
in Utah, which is comprised of approximately 17,096 acres of
land from Anschutz Exploration Corporation and Cordillera
Corporation. The company acquired these leaseholds by assuming
certain legal liability for abandonment costs associated with
the wells on the land, limited by certain terms of the
assignment agreement and by providing Anschutz and Cordillera
with certain revenue interest rights (See note 6).
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F-10
RED STAR, INC.
Notes to Financial Statements
Continued
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2. Oil and Gas The Company maintains a 100% working interest in the Leasehold
Properties of the Clear Creek Unit, equivalent to a 72.1% net revenue
Continued interest. The leases are subject to approximately 20.75%
revenue interest landowners' and overriding royalties and
approximately 7.14% due to the sole shareholder of the
Company. In addition, the sole owner has a 14.3% working
interest, equivalent to a 10% net revenue interest, in the
Oman #2-20 and the Utah fuel #8 Wells.
As consideration for the acquisition of title to the Clear
Creek unit gas and oil leasehold interests, the Company is
obligated to pay Anschutz $200,000 solely out of 5% from the
net revenue interest received by the Company from oil and gas
production from certain wells on the Clear Creek unit.
3. Accrued In December 2000 the Company became obligated for estimated
Abandonment costs of $87,500 to plug and abandon certain wells in
Costs connection with the acquisition of the Clear Creek leasehold
interests. Any abandonment costs of such wells in excess of
$87,500 was guaranteed by the previous leasehold interest
owners.
4. Line-of- The Company has a revolving line-of-credit with a bank to
Credit borrow up to $10,000. The line-of-credit bears interest at the
Banks "reference rate" plus 7.55 percent and is secured by
checking accounts of the Company. No amounts were outstanding
on the line of credit at December 31, 2001.
5. Long-Term Long-term debt consists of the following at December 31, 2001:
Debt
Notes payable, due in monthly installments of
$1,561, including interest at 2.9%, secured by
vehicles, and maturing in October 2006. $ 83,042
------------
less current portion (16,542)
------------
$ 66,500
============
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F-11
RED STAR, INC.
Notes to Financial Statements
Continued
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5. Long-Term Future maturities of long-term debt are as follows:
Debt
Continued Year Ending December 31: Amounts
------------------------ -------------
2002 $ 16,542
2003 17,028
2004 17,528
2005 18,044
2006 13,900
------------
$ 83,042
============
6. Commitments Revenue Interest Obligation
and As consideration for the acquisition of title to the Clear
Contingencies Creek unit gas and oil leasehold interests, the Company is
obligated to pay Anschutz $200,000 solely out of 5% from the
net revenue interest received by the Company from oil and gas
production from certain wells on the Clear Creek unit.
In connection with the acquisition of the Clear Creek unit gas
and oil leasehold interests, the Company acquired
approximately 72.1% net revenue interest. Of the remaining net
revenue interest, approximately 20.75% is due to landowners
and overriding royalties and 7.14% is due to the sole
shareholder of the Company.
The Company also assumed the obligation for any abandonment,
or environmental cleanup costs, however, per the purchase
agreement the sellers agreed to pay for obligation amounts in
excess of $87,000. Subsequent to year-end the former sole
owner of the Company entered into a settlement agreement with
the former leasehold interest owner in which amounts were paid
from the former leasehold interest owners to the former sole
owner of the Company in exchange for the Company's assumption
of all potential liabilities (See note 3).
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F-12
RED STAR, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Sales to The Company's had revenues to entities which represent more
Major than 10% of the total revenue as follows:
Customer
2001 2000
--------- ---------
Company A $ 172,000 $ -
Company B $ 73,000 $ -
8. Supplemental Operations reflect actual amounts paid for interest and income
Disclosures taxes as follows:
of Cash Flow
Information
2001 2000
--------- ---------
Interest $ 1,202 $ 1,938
========= =========
Income taxes $ - $ -
========= =========
During the year ended December 31, 2001:
o The Company acquired vehicles of $87,110 in exchange
for long-term debt.
o The sole shareholder of the company exchanged a note
payable due from the company of $72,480 for
contributed capital.
o The Company distributed a note receivable of $49,756
to the sole shareholder of the Company.
9. Fair Value of The Company's financial instruments consist of cash,
Financial receivables, payables, and notes payable. The carrying amount
Instruments of cash, receivables and payables approximates fair value
because of the short-term nature of these items. The aggregate
carrying amount of the notes payable approximates fair value
as the individual borrowings bear interest at market interest
rates.
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F-13
RED STAR, INC.
Notes to Financial Statements
Continued
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10. Environmental Various federal, state and local laws and regulations covering
Regulation discharge of materials into the environment, or otherwise
relating to the protection of the environment, may affect the
Company's operations and the costs of its oil and natural gas
exploitation, development and production operations. The
Company does anticipate that it will be required in the near
future to expend amounts material in relation to the financial
statements taken as a whole by reason of environmental laws
and regulations (see note 3). Because these laws and
regulations are constantly being changed, the Company is
unable to predict the conditions and other factors, over which
it does not exercise control, that may give rise to
environment liabilities affecting the Company.
11. Recent In August 2001, the Financial Accounting Standards Board
Accounting issued Statement of Financial Accounting Standards No. 144
Pronounce- "Accounting for the Impairment of Long-Lived Assets". This
ments Statement addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to
be disposed of. This Statement supercedes FASB Statement 121
and APB Opinion No. 30. However, this Statement retains
certain fundamental provisions of Statement 121, namely;
recognition and measurement of the impairment of long- lived
assets to be held and used, and measurement of long-lived
assets to be disposed of by sale. The Statement also retains
the requirement of Opinion 30 to report discontinued
operations separately from continuing operations. This
Statement also Amends ARB No. 51 to eliminate the exception of
consolidation for a temporarily controlled subsidiary. The
provisions of this statement are effective for financial
statements issued for fiscal years beginning after December
15, 2001. The Company is currently assessing the impact of
this statement.
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F-14
RED STAR, INC.
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Recent In June 2001, the Financial Accounting Standards Board issued
Accounting Statement of Financial Accounting Standards No. 143,
Pronounce- "Accounting for Asset Retirement Obligations". This Statement
ments addresses financial accounting and reporting for obligations
Continued associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. This Statement is
effective for financial statement issued for fiscal years
beginning after June 15, 2002. the Disposal of Long-Lived
Assets. This Statement addresses financial accounting and
reporting for the disposal of long-lived assets. Management
does not expect the adoption of SFAS No. 143 to have a
significant impact on the financial position or results of
operations of the Company. The Company is currently assessing
the impact of these statements.
12. Subsequent On June 14, 2002 the Company completed under an Acquisition
Event Agreement and Plan of Merger Agreement with Mid-Power Service
Corporation, a Nevada corporation, wherein a wholly-owned
subsidiary of Mid-Power merged with and into Red Star, Inc.,
and all of the issued and outstanding common stock of Red Star
was converted into the right to receive an aggregate of
17,125,365 shares of Mid-Power common stock, $5,500,000 in
cash and a promissory note for $10,000,000 payable, together
with interest at the greater of 6% or one percentage point
over Bank of America reference rate, on January 5, 2003.
In May 2002 the previous Clear Creek Unit leasehold owners
entered into a settlement agreement with the sole owner of the
Company which released those prior owners from future
abandonment cost liability in exchange for a payment of
$575,000. The Company distributed this amount to the sole
owner of the Company but remains obligated for any future
abandonment cost liability.
In June 2002 the Company entered into a settlement agreement
with an effective date of May 31, 2002 with the State of Utah
regarding certain wells in the Clear Creek Unit which were in
violation of certain regulatory laws. In accordance with the
agreement the Company is required to pay $184,180 for a bond
deposit, which will allow the Company 5 years to either plug
and abandon the wells or return the wells to active
production. Mid-Power Service Corporation assumed this cost as
it was negotiated after the Merger Agreement with Mid- Power
Service Corporation.
- --------------------------------------------------------------------------------
F-15
Mid-Power Service Corporation
Pro Forma Combined Condensed Financial Statements
(Unaudited)
The following unaudited pro forma condensed combined balance sheet aggregates
the consolidated balance sheets of Mid-Power Service Corporation (a Nevada
corporation) ("Mid-Power") and Red Star, Inc. (a Nevada S-corporation) ("Red
Star") as of March 31, 2002, accounting for the transaction as a purchase of all
of the outstanding stock of Red Star by Mid-Power in exchange for $5,500,0000,
the issuance of 17,125,365 share of Mid-Power common stock, and a promissory
note of $10,000,000, and using the assumptions described in the following notes,
giving effect to the transaction, as if the transaction had occurred on March
31, 2002. The transaction was not completed as of March 31, 2002.
The following unaudited pro forma condensed combined statement of operations
combines the results of operations of Mid-Power and Red Star for the nine months
ended March 31, 2002 and the year ended June 30, 2001 as if the transaction had
occurred as of the beginning of each respective period.
The unaudited pro forma combined condensed financial statements should be read
in conjunction with the financial statements and the related notes thereto of
Mid-Power as of March 31, 2002 and for the nine months then ended as filed on
Form 10-QSB on May 15, 2002 and as of June 20, 2001 and for the year then ended
as filed on Form 10-KSB on October 5, 2001 and the financial statements of Red
Star included elsewhere in this filing. The unaudited pro forma combined
condensed financial information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have actually occurred had the transaction occurred on the dates
indicated, nor is it necessarily indicative of future operating results or
financial position of the merged companies. The pro forma adjustments are based
on the information and assumptions available as of the date of this filing. The
unaudited pro forma combined condensed financial statements do not give effect
to any cost savings or synergies, if any, that may result from the integration
of Mid-Power and Red Star's operations.
- --------------------------------------------------------------------------------
F-16
Mid-Power Service Corporation
Unaudited Pro Forma Balance Sheet
March 31, 2002
Mid-Power Red Star Adjustments Pro Forma
----------- --------- ------------ ------------
Assets
Current assets
Cash and cash equivalents $ 1,386,298 $ 190 $ 1,386,488
Inventory 2,415 - 2,415
Note receivable - current portion 100,000 - 100,000
Prepaid expenses - 3,476 3,476
Other receivables 87,333 425 87,758
----------- --------- ------------ ------------
Total current assets 1,576,046 4,091 1,580,137
Oil and gas properties
Unproved gas properties 640,311 87,500 1,2 40,219,523 40,947,334
Equipment, net of accumulated depreciation 253,173 245,756 498,929
----------- --------- ------------ ------------
Net Oil and Gas Properties 893,484 333,256 41,446,263
Property and equipment, net of accumulated depreciation 139,551 - 139,551
Long-term note receivable - current portion 200,000 - 200,000
Investments 1,001,225 - 1,001,225
----------- --------- ------------ ------------
Total assets $ 3,810,306 $ 337,347 $ 40,219,523 $ 44,367,176
=========== ========= ============ ============
Liabilities and stockholders' equity
Current liabilities
Notes payable - current portion 28,798 16,542 45,340
Accounts payable 219,200 49,919 269,119
Accrued payroll and other 1,980 - 1,980
Accrued plug and abandon costs - 87,500 87,500
Note payable 1 15,500,000 15,500,000
Related party note payable - 8,863 8,863
----------- --------- ------------ ------------
Total current liabilities 249,978 162,824 15,912,802
Long-term debt - 62,267 62,267
----------- --------- ------------ ------------
Total Liabilities 249,978 225,091 15,500,000 15,975,069
----------- --------- ------------ ------------
Stockholders' equity
Common Stock 6,800 10 1 17,115 23,925
Additional paid-in capital 7,005,268 298,355 1 24,516,299 31,819,922
Deficit accumulated during the development stage
beginning July 1, 2001 (1,952,025) - (1,952,025)
Accumulated deficit (1,499,715) (186,109) 1 186,109 (1,499,715)
----------- --------- ------------ ------------
Total stockholders' equity 3,560,328 112,256 24,719,523 28,392,107
----------- --------- ------------ ------------
Total liabilities and stockholders' equity $ 3,810,306 $ 337,347 $ 40,219,523 $ 44,367,176
=========== ========= ============ ============
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
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F-17
Mid-Power Service Corporation
Unaudited Pro Forma Combined Statement of Operations
For the 12 Months Ended June 30, 2001
Mid-Power Red Star Adjustments Pro Forma
--------- --------- ----------- ------------
Oil and gas sales $ - $ 672 $ 672
--------- --------- ------------
Cost
Operating Costs - 13,858 13,858
Professional fees 28,135 14,335 42,470
General and administrative 10,139 13,828 23,967
Depreciation expense - 1,672 1,672
--------- --------- ------------
Total costs and expenses 38,274 43,693 81,967
--------- --------- ------------
Loss from operations (38,274) (43,021) (81,295)
--------- --------- ------------
Other income (expense):
Interest income 8,815 - 8,815
Interest expense (7,397) (1,095) 3 (956,000) (964,492)
--------- --------- -------- ------------
Total other income 1,418 (1,095) (955,677)
--------- --------- ------------
Net loss $ (36,856) $ (44,116) $ (1,036,972)
========= ========= ============
Per Share $ (0.29) $ (44.12) $ (0.05)
========= ========= ============
Weighted average shares
Outstanding (basic) 2,392,177 1,000 19,517,542
========= ========= ============
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
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F-18
Mid-Power Service Corporation
Unaudited Pro Forma Combined Statement of Operations
For the 9 Months Ended March 31, 2002
Mid-Power Red Star Adjustments Pro Forma
------------ -------- ------------- ------------
Oil and gas sales $ 57,821 $ 672 $ 58,493
Drilling equipment rental and consulting - 245,436 245,436
------------ -------- ------------
Total revenues 57,821 246,108 - 303,929
------------ -------- ------------
Cost
Product development 404,518 125,252 529,770
Exploration expense 917,649 - 917,649
Professional fees 472,549 65,775 538,324
General and administrative 318,097 24,454 342,551
Depreciation expense 25,636 32,243 57,879
------------ -------- ------------
Total costs and expenses 2,138,449 247,724 2,386,173
------------ -------- ------------
Loss from operations (2,080,628) (1,616) (2,082,244)
------------ -------- ------------
Other income (expense):
Minority interest in net loss of
subsidiary 68,404 - 68,404
Interest income 69,246 - 69,246
Interest expense (9,047) (1,076) 3 (712,000) (722,123)
------------ -------- --------- ------------
Total other income 128,603 (1,076) (584,473)
------------ -------- ------------
Net loss $ (1,952,025) $ (2,692) $ (2,666,717)
============ ======== ============
Loss per share basic and diluted $ (0.29) $ (2.69) $ (0.11)
============ ======== ============
Weighted average shares
Basic and diluted 6,800,244 1,000 23,925,609
============ ======== ============
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
- --------------------------------------------------------------------------------------------------------------------------------
F-19
Notes to the Unaudited Pro Forma Combined Condensed Financial Statements
NOTE 1 - Mid-Power Service Corporation
Mid-Power Service Corporation ["Mid-Power"], a Delaware corporation,
was incorporated in July 1983. Mid-Power is primarily engaged in the
business of oil and natural gas exploration, development and production
and participating in other energy and power generation projects.
NOTE 2 - Red Star, Inc.
Red Star, Inc. ["Red Star"], was incorporated as an S-corporation under
the laws of Nevada in February 1997 and was primarily engaged in the
business of producing and selling natural gas.
NOTE 3 - Pro Forma Adjustments
Mid-Power Service Corporation completed an Acquisition Agreement and
Plan of Merger with Red Star, on June 14, 2002, wherein a wholly-owned
subsidiary of Mid-Power merged with and into Red Star, Inc., and all of
the issued and outstanding common stock of Red Star was converted into
the right to receive an aggregate of 17,125,365 shares of Mid-Power
common stock, $5,500,000 in cash and a promissory note for $10,000,000
payable, together with interest at the greater of 6% or one percentage
point over Bank of American reference rate, on January 5, 2003. The
total purchase price and the allocation of such purchase price is
preliminarily based on management's estimates.
Pro forma adjustments on the attached financial statements include the
following:
[1] To record the acquisition of Red Star by Mid-Power through the
issuance of 17,125,365 shares of common stock and promissory
notes of $15,500,000 ($10,000,000 to the sole owner of Red
Star and $5,500,000 to an affiliate of an officer/director of
Mid-Power to secure the cash portion of the purchase price).
The value of the shares issued ($24,831,779) was based on the
closing price of Mid-Power's common stock on the date of the
transaction ($1.45 per share). Therefore the total purchase
price was $40,331,779.
[2] The excess of purchase price over net assets acquired of
$40,219,523 has been allocated to unproved gas properties.
This allocation is preliminary and is subject to change upon
final determination of the fair value of all assets acquired.
[3] To record interest expense based on promissory notes of
$15,500,000 at an interest rate of 6%.
NOTE 4 - PRO FORMA (LOSS) PER SHARE
The pro forma (loss) per share is computed based on the number of
shares outstanding, after adjustment for shares issued in the
acquisition, as though such shares had been outstanding from the
beginning of the periods presented.
Dilutive earnings per share was not presented, as its effect was
anti-dilutive for the periods presented.
NOTE 5 - SUCCESSFUL EFFORTS METHOD
Mid-Power accounts for its oil and gas properties under the successful
efforts method. The properties acquired from Red Star, Inc., are
undeveloped and unproved and are subject to impairment if proved
reserves can not be substantiated through development efforts or the
fair market value of the properties are deemed below the net book value
of the properties. The pro forma statements have not reflected any
potential impairment of such assets.
- --------------------------------------------------------------------------------
F-20