8-K/A 1 form8kano2061402.txt FORM 8-K AMENDMENT NO. 2 DATED 6/14/02 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 -------------------------------------------------------------------------------- (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. -------------------------------------------------------------------------------- ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS -------------------------------------------------------------------------------- (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 ----------------------------------------------------------------------------- SIGNATURES -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- F-2
RED STAR, INC. Balance Sheet ----------------------------------------------------------------------------------------------- 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 =========== =========== ----------------------------------------------------------------------------------------------- See accompanying notes to financial statements. F-3
RED STAR, INC. Statement of Operations ----------------------------------------------------------------------------------------------- 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 ======== ======== ========= ======== ----------------------------------------------------------------------------------------------- See accompanying notes to financial statements. F-4
RED STAR, INC. Statement of Stockholders' Equity Period January 1, 2000 to March 31, 2002 ----------------------------------------------------------------------------------------------- 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) ======= ======= ========= ========= ----------------------------------------------------------------------------------------------- See accompanying notes to financial statements. F-5
RED STAR, INC. Statement of Cash Flows ----------------------------------------------------------------------------------------------- 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 ========= ======== ========= ======== ----------------------------------------------------------------------------------------------- See accompanying notes to financial statements. F-6
RED STAR, INC. Notes to Financial Statements December 31, 2001 -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- F-7 RED STAR, INC. Notes to Financial Statements Continued -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- F-8 RED STAR, INC. Notes to Financial Statements Continued -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- F-9 RED STAR, INC. Notes to Financial Statements Continued -------------------------------------------------------------------------------- 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). -------------------------------------------------------------------------------- F-10 RED STAR, INC. Notes to Financial Statements Continued -------------------------------------------------------------------------------- 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 ============ -------------------------------------------------------------------------------- F-11 RED STAR, INC. Notes to Financial Statements Continued -------------------------------------------------------------------------------- 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). -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- F-13 RED STAR, INC. Notes to Financial Statements Continued -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------ 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