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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - SB
Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12 (b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Scope Industries, Inc.
formerly known as
Keystone Silver Mines, Inc.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Idaho 82 6008705
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR
ORGANIZATION) IDENTIFICATION NO.)
808 S. College, Suite 300, McKinney, TX 75069
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(972) 529-1155
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(ISSUER'S TELEPHONE NUMBER)
SECURITIES TO BE REGISTERED UNDER SECTION 12 (b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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SECURITIES TO BE REGISTERED UNDER SECTION 12 (g) OF THE ACT:
Common Stock
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(TITLE OF CLASS)
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FORWARD LOOKING STATEMENTS
Scope Industries, Inc., ("SPIN" or the "Company") cautions readers that certain
important factors may affect the Company's actual results and could cause such
results to differ materially from any forward-looking statements that may be
deemed to have been made in this Form 10-SB or that are otherwise made by or on
behalf of the Company. For this purpose, any statements contained in the Form
10-SB that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "expect," "believe," "anticipate," "intend," "could,"
"estimate," "plans," or "continue" or the negative or other variations thereof
or comparable terminology are intended to identify forward-looking statements.
Factors that may affect the Company's results include, but are not limited to,
the Company's limited operating history, its ability to produce additional
products and services, its dependence on a limited number of customers and key
personnel, its possible need for additional financing, its dependence on certain
industries, and competition from its competitors. With respect to any
forward-looking statements contained herein, the Company believes that it is
subject to a number of risk factors, including: the Company's ability to
implement its product strategies to develop its business in emerging markets;
competitive actions; and, general economic and business conditions. Any forward-
looking statements in this report should be evaluated in light of these
important risk factors. The Company is also subject to other risks detailed
herein or set forth from time to time in the Company's filings with the
Securities and Exchange Commission.
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
TABLE OF CONTENTS
Part I
Item 1. Description of Business 4
Item 2. Management's Discussion and Analysis
or Plan of Operation 9
Item 3. Description of Property 12
Item 4. Security Ownership of Management and
Others and Certain Security Holders 12
Item 5. Directors, Executives, Officers and
Significant Employees 13
Item 6. Remuneration of Directors and
Executive Officers 16
Item 7. Interest of Management and Others in
Certain Transactions 17
Item 8. Description of Securities 17
Part II
Item 1. Market Price of and Dividends of the
Registrant's Common Equity and Other
Stockholder Matters II-1
Item 2. Legal Proceedings II-1
Item 3. Changes in & Disagreements with Accountants
On Accounting & Financial Disclosures II-2
Item 4. Recent Sales of Unregistered Securities II-2
Item 5. Indemnification of Directors and Officers II-3
Part F/S
Auditor's Report F-1
Financial Statements F-2
Supplemental Information F-10
Part III
Item 1. Index to Exhibits III-1
Item 2. Description of Exhibits III-1
Signatures III-2
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PART I
Item 1. Description of Business.
General
The Company was organized July 19, 1954 (Date of Inception) under the laws of
the State of Idaho, as Uranium Exploration Company and changed its name to
Uranium Discovery & Development Company on October 18, 1954. The corporate
purpose was to explore and develop uranium properties in Utah and in the silver
and lead areas of Shoshone County, Idaho and Mineral County, Montana. The
Company authorized 10,000,000 shares of common stock at $.05 per share par
value.
On February 12, 1962, the Company changed its name to Keystone Silver Mines,
Inc. In 1993, mining law changed with the result that a fee was placed on
unpatented mining claims of $200.00 per claim for that year and $100.00 annual
renewal fees in following years. The Board of Directors at the time dropped all
but ten unpatented claims that it then held. Subsequently, the value of all
mining claims was reduced to zero.
As of August 9, 1999, there were 9,034,868 shares of common stock outstanding.
On that date, the Board of Directors authorized a 70 to 1 reverse split.
Following the split, the Company had 129,070 shares outstanding. It then issued
220,000 shares in exchange for services rendered with the result that as of
December 31, 1999, there were 349,070 shares of common stock outstanding. The
220,000 shares were issued to Neil Liebman, Esq., the attorney who assisted with
all of the transactions which resulted in the present status of the Company.
As of December 31, 1998, the Company had an outstanding payable due to a
majority shareholder totaling $100,000. As part of the August 9, 1999, an
agreement was entered into with Jeff Johnson, whereby Mr. Johnson paid $100,000
directly to the majority shareholder. Pursuant to the agreement, as part of the
Company's capital structure reorganization, Mr. Johnson received an option to
purchase 5,000,000 shares of common stock at $.05 per share. An additional
1,000,000 shares of post-split common stock were issued to Mr. Johnson for
services in connection with the reorganization.
As an additional part of the reorganization which occurred on August 9, 1999,
the Company on April 11, 2000 acquired a working interest in an oil and gas
property located in the State of Kansas in exchange for 625,000 post-split
shares of common stock
On or about December 1, 2000, the Company changed its name from Keystone Silver
Mines, Inc. to Scope Industries, Inc.
As of December 15, 2000, the Company had 3,307,070 shares of common stock
outstanding. 149,070 of those common shares are held by the general public at
large and can be freely traded on the open market. The balance of the common
shares outstanding are unregistered and restricted having been issued pursuant
to Section 4(2) of the Securities & Exchange Act of 1933, as amended. These
securities contain a legend condition which restricts their sale to the general
public for a period of one year from the date of issuance and which under
certain circumstances may, in the future, be sold in compliance with Rule 144
adopted under the Securities Act. In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least one year is entitled to sell, in certain brokerage transactions, within
any three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class, or if the Common
Stock is quoted on NASD or a stock exchange, the average weekly trading volume
during the four calendar weeks immediately preceding the sale. A person who
presently is not and who has not been an affiliate of the Company for at least
three months immediately preceding the sale and who has beneficially owned the
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the volume limitations described above.
The stock options which were granted as discussed above were distributed as
follows:
To S. Jeff Johnson, an option to purchase 5,000,000 shares at $.05 at any time
within 2 years of August 9, 1999; to Harry F. Magnuson, an option to purchase
11,500 shares at $.05 at any time within 2 years of August 9, 1999; to Terry
Dunne, an option to purchase 11,500 shares at $.05 at any time within 2 years of
August 9, 1999; to Mark Absec, an option to purchase 500 shares at $.05 at any
time within 2 years of August 9, 1999; to Dennis O'Brien, an option to purchase
500 shares at $.05 at any time within 2 years of August 9, 1999 to R. M.
MacPhee, an option to purchase 500 shares at $.05 at any time within 2 years of
August 9, 1999; and to Thomas R. Magnuson, an option to purchase 500 shares at
$.05 at any time within 2 years of August 9, 1999. None of these options had
been exercised as of April 20, 2000.
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After the reorganization which was completed on August 9, 1999, the Company no
longer will seek to continue in the mining business and will now engage in the
oil and gas business including production from currently owned operations and
the acquisition and development of additional mid-continent oil and gas
properties.
As noted above, on April 11, 2000, the Company purchased a 25% undivided
interest in the oil and gas lease which the Company acquired
from Scope Operating Company and Scope Operating Company will remain as the
operator of the lease. Scope Operating Company, and other working interest
participants, are the holder of the other 75% of the lease and will continue
to own that portion of the leasehold.
During 1999, Scope Operating Company implemented a Phase I program that included
ten producing wells. The ten wells were pulled, cleaned out, downhole pumps were
repaired or replaced. New electrical wiring was installed throughout and a
portion of a new storage facility was constructed. Initially, the ten wells were
produced over a thirty day period with the result of approximately 10 to 12
barrels of oil production per day and good gas production with a ratio of an
average water/oil of 50/50. All indications were that the property would flood
successfully.
Phase II was completed in early 2000 bringing in a total of 21 producing oil
wells, 7 injector wells and a single water supply well. The storage facility and
injection plant were completed under this program.
Presently the wells are producing and all oil is sold pursuant to a division
order dated April 1, 2000 to Cooperative Refining, LLC. Payment for the crude
oil is adjusted on a daily basis and is based upon the common benchmark SPC West
Texas Intermediate Sweet, plus $1.00 per barrel as a premium due to the fact
that the oil produced is of high quality being 32 degree API gravity and because
of the close proximity of the wells to the refinery.
The crude oil contract can be terminated at any time by either party. There are
other purchasers in the area who would buy the oil if Cooperative Refining no
longer wished to do so. Management of Scope Operating is confident that there
will always be a ready market for the sale of the crude oil produced from the
Felts Lease for as long as oil can be produced from it.
Revenues received are divided by the payment of 12 1/2 % to the landowner and 87
1/2 % to Scope Operating Company. Scope Operating then deducts the lease
operating expenses from the gross revenue and distributes the net proceeds to
the Company, Keystone, and other working interest participants in the leasehold.
It should be noted that the Company at this juncture only receives income from
one customer, Scope Operating Company and presently has no other source of
income. Should Scope Operating Company not pay Scope Industries or should the
price of oil decline substantially, the income of Scope Industries would be
substantially reduced or could be eliminated entirely.
Risk Factors
1. Conflicts of Interest. Certain conflicts of interest exist between the
Company and its officers and director. They have other business interests to
which they devotes attention, and they may be expected to continue to do so
although management time should be devoted to the business of the Company. As a
result, conflicts of interest may arise that can be resolved only through
exercise of such judgment as is consistent with their fiduciary duties to the
Company. For example, Jeff Johnson, president and majority shareholder of the
Company, is also the sole shareholder of Scope Operating Company. Scope
Operating Company is the operator for the Company's oil and gas property. Scope
Operating Company receives the oil and gas revenue and pays the direct operating
expenses of the property. Mr. Johnson completely controls the income flow to
Scope Industries by being the sole owner of Scope Operating. This could result
in a conflict of interest between Scope and the Registrant, Scope Industries.
Furthermore, Dwight Brehm, who is also an officer and director of the Company,
is involved directly in the operation of Scope Operating Company and is or maybe
employed by Mr. Johnson in that entity. This could result in a direct conflict
of interest between Scope Exploaration and Scope Industries.
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2. Need for Additional Financing. The Company has very limited funds, and such
funds may not be adequate to take advantage of any available business
opportunities. Even if the Company's funds prove to be sufficient to acquire an
interest in, or complete a transaction with, a business opportunity, the Company
may not have enough capital to exploit the opportunity. The ultimate success of
the Company may depend upon its ability to raise additional capital. The Company
has not investigated the availability, source, or terms that might govern the
acquisition of additional capital and will not do so until it determines a need
for additional financing. If additional capital is needed, there is no assurance
that funds will be available from any source or, if available, that they can be
obtained on terms acceptable to the Company. If not available, the Company's
operations will be limited to those that can be financed with its modest
capital. To date, other than the personal funds of Mr. Johnson, the Company has
no outside ability to raise money.
3. Regulation of Penny Stocks. The Company's securities are subject to a
Securities and Exchange Commission rule that imposes special sales practice
requirements upon broker-dealers who sell such securities to persons other than
established customers or accredited investors. The shares of the Company have
been selling between a low $.52 bid to a high $2.00 bid since August 19, 1999
when the Company filed its most recent Form 211 pursuant to Rule 15c2- 11. There
has been little or no activity in the stock. However, based upon the Company's
financial status, the stock may be considered a penny stock. For purposes of the
rule, the phrase "accredited investors" means, in general terms, institutions
with assets in excess of $5,000,000, or individuals having a net worth in excess
of $1,000,000 or having an annual income that exceeds $200,000 (or that, when
combined with a spouse's income, exceeds $300,000). For transactions covered by
the rule, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell the Company's securities and also may affect the ability
of purchasers in this offering to sell their securities in any market that might
develop therefore.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, and 15g-7 under the Securities Exchange Act of 1934,
as amended. Because the securities of the Company may constitute "penny stocks"
within the meaning of the rules, the rules would apply to the Company and to its
securities. The rules may further affect the ability of owners of Shares to sell
the securities of the Company in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differentials and markups by selling broker-dealers; and
(v) the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. The
Company's management is aware of the abuses that have occurred historically in
the penny stock market. Although the Company does not expect to be in a position
to dictate the behavior of the market or of broker- dealers who participate in
the market, management will strive within the confines of practical limitations
to prevent the described patterns from being established with respect to the
Company's securities.
4. No Operating History. The Company has completely altered its business since
its formation, going from mining to oil and gas exploration and operation. The
Company has no operating history in oil and gas operation, exploration and
development and only recently purchased those assets and decided to enter that
type of business. The Company faces all of the risks which the management
believes are endemic for any new business which include the special risks
inherent in the investigation, acquisition, or involvement in a new business
opportunity. The Company must be regarded as a new or "start-up" venture with
all of the unforeseen costs, expenses, problems, and difficulties to which such
ventures are subject.
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5. No Assurance of Success or Profitability. There is no assurance that the
Company will acquire a favorable business opportunity. Even if the Company
should become involved in a business opportunity, there is no assurance that it
will generate revenues or profits, or that the market price of the Company's
Common Stock will be increased thereby.
6. Impracticability of Exhaustive Investigation. The Company's limited funds and
the lack of full-time management will likely make it impracticable to conduct a
complete and exhaustive investigation and analysis of a business opportunity
before the Company commits its capital or other resources thereto. Even though
Management will use its best efforts to comply with its fiduciary responsibility
to the shareholders under all circumstances, in certain instances, Management
decisions could be made without detailed feasibility studies, independent
analysis, market surveys and the like which, if the Company had more funds
available to it, would be desirable. The Company will be particularly dependent
in making decisions upon information provided by the promoter, owner, sponsor,
or others associated with the business opportunity seeking the Company's
participation. A significant portion of the Company's available funds may be
expended for investigative expenses and other expenses related to preliminary
aspects of completing an acquisition transaction, whether or not any business
opportunity investigated is eventually acquired. As a result, the Company and
Management may be more susceptible to derivative litigation or other shareholder
action. Additionally, this approach may increase the likelihood of success of
any such litigation.
7. Lack of Diversification. Because of the limited financial resources that the
Company has, it is unlikely that the Company will be able to diversify its
acquisitions or operations. The Company's probable inability to diversify its
activities into more than one area will subject the Company to economic
fluctuations within its target industry and therefore increase the risks
associated with the Company's operations. The Company total dependence and
reliance upon oil and gas revenues could be extremely dangerous should the price
of oil or gas be reduced substantially thus resulting in the payment of revenues
to the producer from the oil and gas buyer.
8. Other Regulation. An acquisition made by the Company may be of a business
that is subject to regulation or licensing by federal, state, or local
authorities. Compliance with such regulations and licensing can be expected to
be a time-consuming, expensive process and may limit other investment
opportunities of the Company.
9. Dependence upon Management; Limited Participation of Management. The Company
currently has several key individuals who are serving as its officers and
directors. The Company will be heavily dependent upon their skills, talents, and
abilities to implement its business plan, and may, from time to time, find that
the inability of the officers and directors to devote full time attention to the
business of the Company results in a delay in progress toward implementing its
business plan. Because investors will not be able to evaluate the merits of
possible business opportunities by the Company, they should critically assess
the information concerning the Company's officers and directors. The Company
presently has no keyman insurance.
10. Lack of Continuity in Management. The Company does not have an employment
agreement with its officers and directors, and as a result, there is no
assurance that they will continue to manage the Company in the future.
11. Indemnification of Officers and Directors. The Company's By Laws provide for
the indemnification of its directors, officers, employees, and agents, under
certain circumstances, against attorney's fees and other expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on behalf of the Company. The Company will also
bear the expenses of such litigation for any of its directors, officers,
employees, or agents, upon such person's promise to repay the Company therefore
if it is ultimately determined that any such person shall not have been entitled
to indemnification. This indemnification policy could result in substantial
expenditures by the Company which it will be unable to recoup.
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12. Dependence upon Outside Advisors. To supplement the business experience of
its officers and directors, the Company may be required to employ accountants,
technical experts, appraisers, attorneys, or other consultants or advisors. The
selection of any such advisors will be made by the Company's President without
any input from stockholders. Furthermore, it is anticipated that such persons
may be engaged on an "as needed" basis without a continuing fiduciary or other
obligation to the Company. In the event the President of the Company considers
it necessary to hire outside advisors, they may elect to hire persons who are
affiliates, if they are able to provide the required services.
13. Leveraged Transactions. There is a possibility that any acquisition of a
business opportunity by the Company may be leveraged, i.e., the Company may
finance the acquisition of the business opportunity by borrowing against the
assets of the business opportunity to be acquired, or against the projected
future revenues or profits of the business opportunity. This could increase the
Company's exposure to larger losses. A business opportunity acquired through a
leveraged transaction is profitable only if it generates enough revenues to
cover the related debt and expenses. Failure to make payments on the debt
incurred to purchase the business opportunity could result in the loss of a
portion or all of the assets acquired. There is no assurance that any business
opportunity acquired through a leveraged transaction will generate sufficient
revenues to cover the related debt and expenses.
14. Competition. The search for potentially profitable business opportunities is
intensely competitive. The Company expects to be at a disadvantage when
competing with many firms that have substantially greater financial and
management resources and capabilities than the Company.
15. No Foreseeable Dividends. The Company has not paid dividends on its Common
Stock and does not anticipate paying such dividends in the foreseeable future.
16. Loss of Control by Present Management and Stockholders. The Company may
consider an acquisition in which the Company would issue as consideration for
the business opportunity to be acquired an amount of the Company's authorized
but un-issued Common Stock that would, upon issuance, represent the great
majority of the voting power and equity of the Company. The result of such an
acquisition would be that the acquired company's stockholders and management
would control the Company, and the Company's management could be replaced by
persons unknown at this time. Such a merger would result in a greatly reduced
percentage of ownership of the Company by its current shareholders. In addition,
the Company's President could sell his control block of stock at a premium price
to the acquired company's stockholders.
17. Limited Public Market Exists. There is a very limited public market for the
Company's common stock, and no assurance can be given that a market will develop
or that a shareholder ever will be able to liquidate his investment without
considerable delay, if at all. If a market should develop, the price may be
highly volatile. Factors such as those discussed in this "Risk Factors" section
may have a significant impact upon the market price of the securities offered
hereby. Owing to the low price of the securities, many brokerage firms may not
be willing to effect transactions in the securities. Even if a purchaser finds a
broker willing to effect a transaction in these securities, the combination of
brokerage commissions, state transfer taxes, if any, and any other selling costs
may exceed the selling price. Further, many lending institutions will not permit
the use of such securities as collateral for any loans.
18. Blue Sky Considerations. Because the securities registered hereunder have
not been registered for resale under the blue sky laws of any state, the holders
of such shares and persons who desire to purchase them in any trading market
that might develop in the future, should be aware that there may be significant
state blue-sky law restrictions upon the ability of investors to sell the
securities and of purchasers to purchase the securities. Accordingly, investors
should consider the secondary market for the Company's securities to be a
limited one.
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Item 2 Management's Discussion and Analysis or Plan of Operation
On April 11, 2000, the Company purchased a 25% undivided interest in the oil and
gas lease which the Company acquired from Scope Operating Company. Scope will
remain as the operator of the lease. Scope Operating Company, and other working
interest participants, are the holder of the other 75% of the lease and will
continue to own that portion of the leasehold.
Jeff Johnson, president and majority shareholder of the Company, is also the
sole shareholder of Scope Operating Company. As noted above, Scope Operating
Company is the operator for the Company's oil and gas property. Scope Operating
Company receives the oil and gas revenue and pays the direct operating expenses
of the property.
The lease is known as the Felts Lease which is located in the Cherokee Platform
Province which extends from South Eastern Kansas and into part of South Western
Missouri and North Eastern Oklahoma. The Cherokee Platform Province covers a
total of 37 counties, is 235 miles long and 210 miles wide in an area of
approximately 26,500 square miles. The Felts Lease consists of 90 acres within
that broader expanse. The development of the Cherokee Platform Province began in
the 1860's with drilling in Bourbon and Cherokee Counties in Kansas with the
first discovery of oil in Allen County, Kansas in 1873. Local maps and
production records for the area show that 200,000 wells have been drilled in the
province and 431 fields larger than 1 MMBOE have been discovered. Those same
records, when analyzed, demonstrate that by the end of 1990, over 5.3 billion
barrels of oil had been discovered and 4.3 trillion cubic feet of gas had been
discovered.
The Felts Lease is comprised of approximately 90 acres near Coffeyville, Kansas,
approximately 110 miles Northeast of Tulsa, Oklahoma. The acreage is
bound by a river on the West side and is adjacent to an improved roadway (State
Highway 169) on the East.
Information obtained from local land records, from the local land owner and from
other records available in the area demonstrate that from 1983 to 1984 29 wells
were drilled East of the river. The original operator was Black Star Petroleum,
now defunct, who operated those wells through 1984 and into 1985. Most of the
wells were fully equipped and were oil wells or injection wells. Black Star
produced approximately 17,000 barrels of oil over the two year period of 1984
and 1985 before declaring bankruptcy. The wells then sat idle for many years
until the landowner began pumping 3 to 5 wells on an intermittent basis. The
landowner has informed the Company that from mid 1993 through 1995, he recovered
and received approximately $100,000.00 from oil sales. In 1999, the lease was
sold to Scope Operating Company, the property was cleaned up and access to the
wells was again established.
Oil production is from the Red Fork Sandstone at approximately 600 feet. The
feature is a North East/South West trending sandbar with accumulations of over
thirty feet of sand under some areas of the lease. Cores from an adjacent lease
show the Red Fork to have an average porosity of 19% and an average permeability
of 100 millidarcys. Engineering calculations indicate 240,000 barrels of
recoverable oil under the Felts Lease with only 20,000 barrels having already
been recovered. All 20,000 barrels were recovered with primary production
methods. This leaves approximately 220,000 barrels recoverable by primary and
secondary production methods according to the engineering report which the
Company obtained from Ronald E. Cook, Professional Engineer.
Primary production methods generally refer to those methods whereby oil is
pumped to the surface without assistance other than by the use of a pump jack
which lifts the oil from the pool where it is found. Secondary production
generally refers to the requirement that more sophisticated methods must be used
to force the oil to the surface such as, for example, by pumping water into the
hole to force the oil to the top or by the steam injection method which forces
the oil to the top and up the pipe to the surface by pumping steam down the well
and forcing the oil to the top.
All wells were drilled through the Red Fork, cased, cemented to surface,
perforated and lightly fraced. This gives the operator logs of the formation as
well as control over the injection fluids which will be used for secondary
recovery. All of these factors should increase the amount of oil recovered and
increase the effect of secondary recovery.
During 1999, Scope Operating Company implemented a Phase I program that included
ten producing wells. The ten wells were pulled, cleaned out, downhole pumps were
repaired or replaced. New electrical wiring was installed throughout and a
portion of a new storage facility was constructed. Initially, Scope Operating's
records demonstrate that the ten wells were produced over a thirty day period
with the result of approximately 10 to 12 barrels of oil production per day and
good gas production with a ratio of an average water/oil of 50/50. The
engineer's report showed indications were that the property would flood
successfully.
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Phase II was completed in early 2000 bringing in a total of 21 producing oil
wells, 7 injector wells and a single water supply well. The storage facility and
injection plant were completed under this program.
Presently the wells are producing and all oil is sold pursuant to a division
order dated April 1, 2000 to Cooperative Refining, LLC. Payment for the crude
oil is adjusted on a daily basis and is based upon the common benchmark SPC West
Texas Intermediate Sweet, plus $1.00 per barrel as a premium due to the fact
that the oil produced is of high quality being 32 degree API gravity and because
of the close proximity of the wells to the refinery.
The crude oil contract can be terminated at any time by either party. There are
other purchasers in the area who would buy the oil if Cooperative Refining no
longer wished to do so. Management of Scope Operating is confident that there
will always be a ready market for the sale of the crude oil produced from the
Felts Lease for as long as oil can be produced from it.
Revenues received are divided by the payment of 12 1/2 % to the landowner and 87
1/2 % to Scope Operating Company. Scope Operating then deducts the lease
operating expenses from the gross revenue and distributes the net proceeds to
the Company, Scope Industries, and other working interest participants in the
leasehold. A list of the other working participants in the leasehold is attached
as Exhibit 99.2 to this Registration Statement.
Revenues
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Presently, the Company receives income; its share of the production from the
Felts Lease. For the nine months ended September 30, 2000 gross income totaled
$14,025.00 compared to no income from the period ended September 30, 1999 since
at that time, the Company was in development stage. As noted, total gross income
for the nine month period was $14,025.00 resulting in a net operating loss of
($119,416.00) which resulted in a net loss attributable to common shareholders
of $.05 per share, basic and diluted whereas for the nine month period ended
September 30, 1999, again, the Company had no income and no expenses thus
resulting in no loss attributable to common shareholders.
There were no revenues for the year ended December 31, 1999 and no revenue for
the year ended December 31, 1998 since the Company was in its development stage
until the beginning of the year 2000. Because the Company had not yet started
operations, it had no profit and no loss during either 1998 or 1999.
Operating Expenses
------------------
Sales, General and Administrative
Selling, general and administrative costs were $133,441.00 in the for
the nine month period ended September 30, 2000 as compared to no expenses for
the same nine month period ended September 30, 1999 representing an increase of
100%. This increase was primarily attributed to the fact that the Company had
not yet started operations as of September 30, 1999 and was still in its
development stage.
There were no selling, general and administrative expense for the year
ended December 31, 1999 and no expense during the year ended December 31, 1998.
Net Loss
--------
Our net loss for the nine month period ended September 30, 2000 was
($119,416.00) as compared to no loss for the nine month period ended September
30, 1999. The increase in net loss was primarily attributable to the fact that
the Company was in its development stage during 1999 and had no income and
little expense. Loss per common share for the nine month period ended September
30, 2000 was ($0.05) as compared to a ($0.00) loss per common share for the nine
months ended September 30, 1999. This increase in loss per common share was
attributable to the fact that the Company had not yet commenced operations
during the nine month period ended September 30, 1999.
There was no loss for the year ended December 31, 1999 or for the year
ended December 31, 1998 since the business had not yet commenced. Thus, there
was no loss per common share for the year ended December 31, 1999 or for the
year ended December 31, 1998.
10
<PAGE>
Liquidity and Capital Resources
-------------------------------
To date, we have funded our capital requirements for our current from
cash flows from our operations and from the infusion of cash from the sale of
restricted stock to qualified investors. Our cash position as of September 30,
2000 was $517,340.00 as compared to no cash as of September 30, 1999. During
the first nine months of the year 2000, the Company had a net decrease in net
cash from operating activities of ($20,000.00). The Company received net cash
of $560,000.00 from financing activities resulting in net cash on hand of
$517,340.00 at the end of this period after deducting other minor adjustments.
We had no cash on hand as of December 31, 1999 and no cash as of
December 31, 1998 because the Company did not start actual operations until the
year 2000.
Our Capital Requirements
------------------------
Our greatest cash requirements during the next two years will be the
need for cash to purchase additional oil and gas properties.
We are seeking to fund activities and other operating needs in the next
two years from funds to be obtained through private equity sources.
Subsequent to the next twenty-four months, we plan to finance our
long-term operations and capital requirements with the profits and funds
generated from the revenues from our oil and gas production. We may obtain
future funding through new private financing and public offerings of debt and
equity securities.
Item 3. Description of Property.
The executive offices of the Company are housed in the space which is currently
used by Scope Operating Company. Scope Operating Company pays all expenses in
connection with that office including rent and other normal charges. Scope
Industries does not pay any rent to Scope for the use of its space and does
not lease any space from Scope Operating Company which would require the
payment of rent.
On April 11, 2000, the Company purchased from Scope Operating Company an
undivided 25% working interest in the Felts Oil Lease which is located in
Section 30-T34S-R17E, Montgomery County, Kansas containing 90 acres, more or
less. The Company receives 18.75% of the net revenue from the sale of oil
production from this lease. On May 25, 2000, Ronald L. Cook, Professional
Engineer, Kansas License No. 5353, of Petroleum Consultants, Inc. estimated that
the present fair market value of the portion of the leasehold held by the
Company was $447,144.00. This valuation was based upon an average price of
$25.00 per barrel for oil produced over the economic life of the property which
was estimated to be 11 years. That appraisal was made on a non-escalated basis
where price and expenses are constant over the economic life of the property.
In his appraisal, Mr. Cook stated that the lease has already produced
approximately 20,000 barrels of oil and that combined primary and secondary
recovery should recover an additional estimated 191,000 barrels of oil. He
states that the initial phase of secondary recovery would be a waterflood
followed by a polymer augmented flood where it is anticipated that the polymer
flood would plug thief holes and improve areal and vertical sweep efficiency of
the reservoir resulting in increased oil recovery that would not otherwise be
possible.
11
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The Company presently has the following capitalization:
Free Trading Common Shares held
by a total of 1,673 shareholders 149,070
Restricted Shares Issued for
Services Rendered August 9, 1999 1,200,000
Restricted Shares Issued for
Oil & Gas Property April 11, 2000 625,000
Restricted Shares Issued for
$560,000 cash from 7 investors 560,000
Restricted Shares Issued to
Officers and Directors on
December 15, 2000 510,000
---------
Total Shares Outstanding: 3,307,070
As noted above, the shares issued for services and the shares issued for the oil
and gas property are restricted. These shares were issued pursuant to Section
4(2) of the Securities & Exchange Act of 1933, as amended. These securities
contain a legend condition which restricts their sale to the general public for
a period of one year from the date of issuance and which under certain
circumstances may, in the future, be sold in compliance with Rule 144 adopted
under the Securities Act. In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least one year is entitled to sell, in certain brokerage transactions, within
any three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class, or if the Common
Stock is quoted on NASD or a stock exchange, the average weekly trading volume
during the four calendar weeks immediately preceding the sale. A person who
presently is not and who has not been an affiliate of the Company for at least
three months immediately preceding the sale and who has beneficially owned the
shares of Common Stock for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the volume limitations described above.
The following table sets forth, as of the date of this Registration Statement,
the number of shares of Common Stock owned of record and beneficially by
executive officers, directors and persons who hold 5.0% or more of the
outstanding Common Stock of the Company. Also included are the shares held by
all executive officers and directors as a group.
12
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares Owned Percentage
Title of Class Name and Address Beneficially Ownership
-------------- ---------------- ------------ ----------
<S> <C> <C> <C>
Common, $.05 Par Scope Operating Company
808 S. College, Suite 300
McKinney, TX 75069 625,000 18.89%
Sole Owner:
Jeff Johnson
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Jeff Johnson 1,000,000 30.23%*
Chairman & Chief Executive Officer
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Neil Liebman, Esq. 220,000 6.65%
24 Greenway Plaza, Suite 1826
Houston, TX 77046
Common, $.05 Par Dwight Brehm 500,000 15.12%
Secretary
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Ronald McDonald 10,000 0.30%
Director
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Kevin Allodi 500,000 15.12%
11445 79th Street
Burr Ridge, IL 60525
</TABLE>
*Jeff Johnson has the right to exercise 5,000,000 options for 5,000,000 shares
of common stock at any time until August 9, 2001. If he were to exercise these
options, the percentage of ownership would change from the present 30.23% to a
maximum of 86.50% if all of the options were exercised.
Jeff Johnson is Chairman of the Board of Directors and Chief Executive Officer
of the Company. He is also President and the sole shareholder of Scope Operating
Company which is the operator of the oil and gas property owned by the Company
and is also a co-owner of that oil and gas property with the Company, Scope
Operating Company owning 75% of the oil and gas property and KYMI owning the
other 25% of that same oil and gas property.
As noted above, Mr. Johnson holds an option to purchase an additional 5,000,000
shares of common stock in the Company by the payment of $250,000.00 which may be
exercised at any time prior to August 9, 2001 after which time the option
expires. Should Mr. Johnson exercise these options, then his ownership
percentage in the Company would increase to 86.50% of the Company's outstanding
shares.
Neil Liebman, Esq. is counsel to the Company and received 220,000 shares of
stock in exchange for legal services which he rendered in connection with the
purchase of Company assets and the stock reorganization.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The directors and executive officers currently serving the Company are as
follows:
Name and Age Current Position Director Since Officer Since
------------ ---------------- -------------- -------------
S. Jeff Johnson 34 Chairman of the Board, Aug. 9, 1999 Aug. 9, 1999
Chief Executive
Officer, Director
Dwight Brehm 43 Secretary, Director Aug. 9, 1999 Aug. 9, 1999
Ronald McDonald 53 Director Aug. 9, 1999
13
<PAGE>
The directors were all originally named on August 9, 1999 to serve until the
next annual meeting of the Company's shareholders. Thereafter, directors will be
elected for one-year terms at the annual stockholders' meeting. The next annual
shareholders meeting will take place on December 1, 2001. Officers will hold
their positions at the pleasure of the board of directors, absent any employment
agreement, of which none currently exists or is contemplated. There is no
arrangement or understanding between the directors and officers of the Company
and any other person pursuant to which any director or officer was or is to be
selected as a director or officer. The directors and officers of the Company
will devote time to the Company's affairs on an "as needed" basis. As a result,
the actual amount of time which they will devote to the Company's affairs is
unknown and is likely to vary substantially from month to month.
Additionally, the officers were also appointed to their various positions on
August 9, 1999 and have continued to hold those positions since that date.
The Company intends to engage other officers and add to the number of directors
in the immediate future. Those changes will be reported on a Form 8-K at the
appropriate time which will then be filed with the Securities & Exchange
Commission.
Biographical Information
S. Jeff Johnson, Chairman of the Board, Chief Executive Officer.
Mr. Johnson has been involved in the oil and gas business since 1988, has
assisted a number of small companies with financing and has acted as the
operating partner in various oil and gas exploration programs. For the last 6
years, he has been President of Scope Operating Company. He is a Certified
International Financier, is listed in International Who's Who, is a member of
the Independent Petroleum Association of America, the Texas Independent
Producer's Association and the Illinois Oil and Gas Association. He is a life
time member of Cambridge Who's Who for Business Executives. He has served on the
Capital Markets and the Crude Oil and Tax Committees of the Independent
Petroleum Association of America and has served on two committees of the Texas
Independent Producer's Association.
Dwight Brehm, Secretary, Chief Geologist, Director
Mr. Brehm is a second generation oil producer and has been engaged in the oil
and gas exploration and production industry for more than 20 years. For the last
five years, he has been Vice President of Scope Operating Company. He is a
graduate of Kansas State University majoring in geology and is today on the
Academic Advisory Board for the Kansas State University Geology Department where
he has served since 1980. His past responsibilities have included direct
supervision of 150 employees, 4 rotary drilling rigs and more than 400 producing
wells at one time. Under Mr. Brehm's leadership, Brehm Oil once ranked as the
largest independent oil company operating in the Illinois Basin. Mr. Brehm was
employed by Brehm Oil Company as General Manager May 1979 - March 1981. He held
several other positions within the company from June 1974 - April 1979.
Petroleum Information, Inc. produces an industry publication that gathers data
from crude oil purchasers and refineries, concerning crude oil sales on a
monthly basis, as well as, annual reports. This data supports the fact that
Brehm Oil Co. had crude oil sales for the calender year 1980, and monthly sales
for January through April 1981 (the month Mr. Brehm left the company), that were
the highest of any independent oil producer in Illinois. Mr. Brehm has worked in
various capacities on oil and gas projects in Oklahoma, Illinois, Indiana,
Kentucky, Wyoming, North Dakota, Montana, Colorado and other states. His past
and present professional and civil affiliations included the American
Association of Petroleum Geologists, the American Association of Petroleum
Landmen, the Independent Petroleum Association of America, service on the board
of directors of the Illinois Oil & Gas Association. He was a director of Mark
Twain Bank of St. Louis, Missouri, and was also a director of the Bank of
Illinois in Mount Vernon, Illinois. He is also a past president and life member
of Optimist International and a life sponsor of Ducks Unlimited.
Ronald McDonald, Director
Mr. McDonald has owned and operated a number of successful restaurant chains in
the Carolinas including Villa Inn's Italian Restaurants, the Ale Haus
Restaurants, various Army and Navy Clubs and hotel properties. As a member of
the family who originally developed McDonald's Restaurants, he is the author of
"The Complete Hamburger" from Birch Lane Press and is a successful food writer
for magazines and food publications. Other titles to his credit are: "Ronald L.
McDonald's McBarbecue Book," "Ronald L. McDonald's Franchise Buyer's Guide" and
"Shrimply Delicious." He is a frequent guest on the food channel and talk show
quest on Sony Network's 1200 radio stations. He operated Villa Inn's Italian
Restaurants and Ale Haus Restaurants from 1970 to 1973. He was also a principal
and investor in Strength Energy Corporation, an oil and gas exploration company,
of Dallas, Texas, which was dissolved in 1986 and Glencoe Trading International,
a machinery and equipment dealer, which was dissolved in 1986. He has been the
owner and operator of Reserve General Escrow Company since 1987 and owns and
controls a number of domestic and international development companies including
Ronald L. McDonald Real Estate and Construction, McDonald Development Ltd.
14
<PAGE>
(U.K.), Prestige Homes N.W., Ltd. (U.K.), Pure Development (U.K.) and McDonald's
Amusement Corporation (U.K.). A new restaurant chain is presently being
developed under McDonald's Amusement Corporation to be known as Mad Mac's
Funporium, a new chain of adult restaurants. McDonald's Amusement Corporation
provides the games and other equipment for the restaurants. Pure Development was
created for a low income housing project in the U.K., it and the other U.K.
companies were never utilized and were dissolved. Mr. McDonald is also a member
of the board of directors of American Kiosk Corporation, a publicly traded
company that owns 72 "Zeros" Restaurants, the Inner City Fund, a tax exempt
adult literacy foundation and is a 3rd degree Knight of Columbus.
Director's and Officer's Liability
A director or officer of the Corporation shall not be personally liable to this
Corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer, but this Article shall not eliminate or limit the liability
of a director or officer for (i) acts or omissions which involve international
or intentional misconduct, fraud or a knowing violation of the law or (ii) the
unlawful payment of dividends. Any repeal or modification of the Article by
stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director or
officer of the Corporation for acts of omissions prior to such repeal of
modification. Intentional misconduct means conduct which the person intended or
intentionally set about to perform which was a knowing violation of law or fraud
perpetrated on the company or its shareholders.
Indemnity
Every person who was or is a party to, or is threatened to be made a party to,
or is involved in any such action, suit or proceeding, whether civil, criminal,
administrative or investigative, by the reason of the fact that he or she or a
person with whom he or she is a legal representative, is or was a director of
the Corporation, or who is serving at the request of the Corporation as a
director or officer of another corporation, or is a representative in a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless to the fullest extent legally permissible under the laws of the
State of Idaho from time to time against all expenses, liability and loss
(including attorney's fees, judgments, fines, and amounts paid or to be paid in
a settlement) reasonably incurred or suffered by him or her in connection
therewith. Such right of indemnification shall be a contract right and which may
be enforced in any manner desired by such person. The expenses of officers and
directors incurred in defending a civil suit or proceeding must be paid by the
Corporation as incurred and in advance of the final disposition of the action,
suit, or proceeding, under receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he or she is not entitled to be indemnified
by the Corporation. Such right of indemnification shall not be exclusive of any
other right of such directors, officers or representatives may have or hereafter
acquire, and without limiting the generality of such statement, they shall be
entitled to their respective rights of indemnification under any bylaw,
agreement, vote of stockholders, provision of law, or otherwise, as well as
their rights under this article.
15
<PAGE>
Item 6. Remuneration of Directors and Executive Officers
During the last three fiscal years, the Company has paid its officers and
Directors as stated on the following schedule:
<TABLE>
<CAPTION>
Name Annual Awards Payouts
& Position Comp.
--------------------------------------------------------------------------------------
Year Salary Bonus Other Restricted LTIP Other
Compensation Stock Options
<S> <C> <C> <C> <C> <C> <C>
Jeff Johnson
Chief Executive
Officer 1998* -0- -0- -0- None None
1999 -0- -0- -0- 1,000,000 None**
2000 -0- -0- -0- None None
Dwight Brehm
Secretary
1998* -0- -0- -0- None None
1999 -0- -0- -0- None None
2000 -0- -0- -0- 500,000 None
Ronald McDonald
1998* -0- -0- -0- None None
1999 -0- -0- -0- None None
2000 -0- -0- -0- 10,000 None
</TABLE>
* Neither Mr. Johnson nor Mr. Brehm were officers of the Company during 1998 and
became officers only in August of 1999. Mr. McDonald is not an officer but
is a director having become a director in August of 1999.
** Jeff Johnson received and holds an option to purchase an additional 5,000,000
shares of common stock in the Company by the payment of $250,000.00 which may be
exercised at any time prior to August 9, 2001 after which time the option
expires. These options were not compensation or in lieu of compensation. They
were granted because as of December 31, 1998, the Company had an outstanding
payable due to a majority shareholder totaling $100,000. As part of the August
9, 1999, an agreement was entered into with Jeff Johnson, whereby Mr. Johnson
paid $100,000 directly to the majority shareholder. Pursuant to the agreement,
as part of the Company's capital structure reorganization, Mr. Johnson received
an option to purchase 5,000,000 shares of common stock at $.05 per share.
16
<PAGE>
There is no plan to compensate directors for their services as a director of the
Company. Presently, directors are not compensated. Only officers receive any
compensation as noted above. However, Mr. McDonald did receive stock in lieu of
compensation for his work as an initial director after the reorganization.
The Company does eventually intend to place its officers on a salary. However,
no firm agreement has yet been reached as to a salary structure for either Mr.
Johnson or Mr. Brehm as officers of the Company.
Item 7. Interest of Management and Others in Certain Transactions
Office services are provided without charge by Mr. Johnson, the Chief Executive
Officer. The officers and directors of the Company are involved in other
business activities and may, in the future, become involved in other business
opportunities. If a specific business opportunity becomes available, such
persons may face a conflict in selecting between the Company and their other
business interests. The Company has not formulated a policy for the resolution
of such conflicts.
Additionally, Jeff Johnson is the sole shareholder of Scope Operating Company.
On April 11, 2000, the Company purchased a 25% undivided interest in the oil and
gas lease which the Company acquired from Scope Operating Company. Scope
Operating Company will remain as the operator of the lease. Scope Operating
Company, and other working interest participants, are the holder's of the other
75% of the lease and will continue to own that portion of the leasehold.
Jeff Johnson, president and majority shareholder of the Company, is also the
sole shareholder of Scope Operating Company. As noted above, Scope Operating
Company is the operator for the Company's oil and gas property. Scope Operating
Company receives the oil and gas revenue and pays the direct operating expenses
of the property.
At December 31, 1998, the Company had an outstanding payable due to a majority
shareholder totaling $100,000. During the year ended December 31, 1999, an
agreement was entered into with Jeff Johnson, whereby he would obtain
controlling interest in the Company. Mr. Johnson paid $100,000 directly to the
shareholder. Pursuant to the agreement, the Company's capital structure was
reorganized and Mr. Johnson received an option to purchase 5,000,000 shares of
common stock at $.05 per share. As of November 30, 2000, Mr. Johnson had not
exercised this option, however, Mr. Johnson holds an 30.23% interest in the
Company.
Jeff Johnson, president and shareholder of the Company, is the sole shareholder
of Scope Operating Company. Scope Operating Company is the operator for the
Company's oil and gas property. Scope Operating Company receives the oil and gas
revenue and pays the direct operating expenses of the property. The summary of
transactions between Scope Operating Company and the Company for the four months
and the year ended April 30, 2000, and the year ended December 31, 1999, are as
follows:
APRIL 30, December 31,
2000 1999
----------- -----------
Oil and gas revenue-working interest $ 2,469 $ -
Less: lease operating expenses 989 -
----------- -----------
Net income remitted to the Company $ 1,471 $ -
=========== ===========
Effective April 11, 2000, the Company entered into an agreement to purchase a
twenty-five percent working interest in an oil and gas property from Scope
Operating Company. During April 2000, this property began its initial
production. Pursuant to this agreement, the Company issued 625,000 of its
unregistered, restricted stock.
The Company had an account receivable balance from Scope Operating Company in
the amount of $1,471 at April 30, 2000.
Item 8. Description of Securities
The aggregate number of shares which the Corporation shall have authority to
issue shall consist of 10,000,000 shares of Common Stock having a $.05 par
value. The Company is not authorized to issue preferred stock.
The Common Stock of the Company may be issued from time to time without prior
approval by the stockholders. The Common Stock may be issued for such
consideration as may be fixed from time to time by the Board of Directors.
17
<PAGE>
Each share of Common Stock is entitled to one vote, either in person or
by proxy, on all matters that may be voted upon by the owners thereof at a
meeting of the shareholders, including the election of directors. The holders of
Common Stock (i) have equal, ratable rights to dividends from funds legally
available therefor, when, as and if declared by the Board of Directors of the
Company; (ii) are entitled to share ratably in all of our assets available for
distribution to holders of Common Stock upon liquidation, dissolution or winding
up of our affairs; (iii) do not have preemptive or redemption provisions
applicable thereto; and (iv) are entitled to one non-cumulative vote per share
on all matters on which shareholders may vote at all meetings of shareholders.
There are no provisions in the Articles or By Laws that would delay, defer or
prevent a change in control of the Company.
The Company has the following securities issued and outstanding:
Free Trading Common Shares 149,070
to 1,673 Shareholders
Restricted Shares Issued for
Services Rendered August 9, 1999 1,200,000
to two shareholders
Restricted Shares Issued for
Oil & Gas Property August 9, 1999 625,000
to one shareholder
Restricted Shares Issued to
7 investors(1) 560,000
Restricted Shares Issued to
Officers and Directors 510,000
---------
Total Shares Outstanding: 3,307,070
(1) During the third quarter of 2000, the Company entered into a stock purchase
agreement to sell common stock pursuant to Section 4(2) of the Securities &
Exchange Act of 1933. The stock was sold to the following investors at $1.00 per
share and a total of $560,000.00 was raised which was paid into the Company
treasury. The stock is restricted and contains a legend condition and is not to
be registered. A copy of the Stock Purchase Agreement is attached hereto as
Exhibit 10.. The names, addresses, number of shares purchased and the amount
paid by each investor is set forth below:
Kevin Allodi
11445 79th Street
Burr Ridge, IL 60525 500,000 shares with $500,000.00 cash paid
John Austin
763 Holly Oak Drive
Palo Alto, CA 94303 15,000 shares with $15,000.00 cash paid
Eugene Baron
24061 Majestic
Oak Park, MI 48237 10,000 shares with $10,000.00 cash paid
Lena Hoffman
42160 Woodward, Apt. 19
Bloomfield, MI 48304 10,000 shares with $10,000.00 cash paid
Jerome Katz
1701 Strathcona Drive
Detroit, MI 48203 5,000 shares with $5,000.00 cash paid
Arnold Miles
31150 E. Huntley Sq.
Beverly Hills, MI 40825 10,000 shares with $10,000.00 cash paid
Robert Netzei
2700 Colonial Way
Bloomfield Hills, MI 48304 10,000 shares with $10,000.00 cash paid
18
<PAGE>
PART II
Item 1. Market Price and Dividends on the Registrant's Common Equity and Other
Shareholder Matters
The Company presently trades on the over the counter bulletin board [OTC:BB]
under the ticker symbol SPIN. The following table shows the high and low bid
over the last two years:
Bid Price
High Low
-----------------------
1999
----
First Quarter $ -0- $ -0-
Second Quarter $ -0- $ -0-
Third Quarter $ 4.20 $ 4.00
Fourth Quarter $ 4.20 $ 4.00
2000
----
First Quarter $ 4.20 $ 1.10
Second Quarter $ 2.80 $ 1.10
Third Quarter $ 2.40 $ 1.10
Fourth Quarter $ 2.40 $ .52
Volume in the Company's stock has been extremely low and during certain extended
periods, no trading has occurred at all.
No dividends have been paid to date and the Company's Board of Directors does
not anticipate paying dividends in the foreseeable future.
Item 2. Legal Proceedings
None
Item 3. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 4. Recent Sales of Unregistered Securities
The Company authorized the following sales of securities pursuant to Section
4(2) of the Securities & Exchange Act of 1933, as amended, in exchange for
assets, for services rendered in connection with the purchase of assets by the
Company or were sold for cash paid into the treasury of the Company:
<TABLE>
<CAPTION>
Number of
Shares Owned Percentage
Title of Class Name and Address Beneficially Ownership
-------------- ---------------- ------------ ----------
<S> <C> <C> <C>
Common, $.05 Par Scope Operating Company
808 S. College, Suite 300
McKinney, TX 75069 625,000 18.89%
Sole Owner:
Jeff Johnson
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Jeff Johnson 1,000,000 30.23%*
Chairman & Chief Executive Officer
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Neil Liebman, Esq. 220,000 6.65%
24 Greenway Plaza, Suite 1826
Houston, TX 77046
Common, $.05 Par Dwight Brehm 500,000 15.12%
Secretary
808 S. College, Suite 300
McKinney, TX 75069
Common, $.05 Par Ronald McDonald 10,000 0.30%
Director
808 S. College, Suite 300
McKinney, TX 75069
II-1
<PAGE>
Number of
Shares Owned Percentage
Title of Class Name and Address Beneficially Ownership
-------------- ---------------- ------------ ----------
Common, $.05 Par Group of 7 Investors
Discussed Above on Page 16 560,000 16.93%
</TABLE>
*Jeff Johnson has the right to exercise 5,000,000 options for 5,000,000 shares
of common stock at any time until August 9, 2001. If he were to exercise these
options, the percentage of ownership would change from the present 30.23% to a
maximum of 86.50% if all of the options were exercised. Jeff Johnson is Chairman
of the Board of Directors and Chief Executive Officer of the Company. He is also
President and the sole shareholder of Scope Operating Company which is the
operator of the oil and gas property owned by the Company and is also a co-owner
of that oil and gas property with the Company, Scope Operating Company, and
other working interest participants, owning 75% of the oil and gas property and
Scope Industries owning the other 25% of that same oil and gas property.
As noted above, Mr. Johnson holds an option to purchase an
additional 5,000,000 shares of common stock in the Company by the payment of
$250,000.00 which may be exercised at any time prior to August 9, 2001 after
which time the option expires. Should Mr. Johnson exercise these options, then
his ownership percentage in the Company would increase to 86.50% of the
Company's outstanding shares.
Neil Liebman, Esq. is counsel to the Company and received 220,000 shares of
stock in exchange for legal services which he rendered in connection with the
purchase of Company assets and the stock reorganization
II-2
<PAGE>
On August 9, 1999, the Company has issued the following options:
To S. Jeff Johnson, an option to purchase 5,000,000 shares at $.05 at any time
within 2 years of August 9, 1999; to Harry F. Magnuson, an option to purchase
11,500 shares at $.05 at any time within 2 years of August 9, 1999; to Terry
Dunne, an option to purchase 11,500 shares at $.05 at any time within 2 years of
August 9, 1999; to Mark Absec, an option to purchase 500 shares at $.05 at any
time within 2 years of August 9, 1999; to Dennis O'Brien, an option to purchase
500 shares at $.05 at any time within 2 years of August 9, 1999 to R. M.
MacPhee, an option to purchase 500 shares at $.05 at any time within 2 years of
August 9, 1999; and to Thomas R. Magnuson, an option to purchase 500 shares at
$.05 at any time within 2 years of August 9, 1999. None of these options had
been exercised as of April 20, 2000.
The other persons to whom options were issued were former officers and directors
of the Company prior to its reorganization in August, 1999.
Item 5. Indemnification of Directors and Officers
The Bylaws of the Company, filed as an Exhibit provides that the Company will
indemnify its officers and directors for costs and expenses incurred in
connection with the defense of actions, suits, or proceedings where the officer
or director acted in good faith and in a manner he reasonably believed to be in
the Company's best interest and is a party by reason of his status as an officer
or director, absent a finding of negligence or misconduct in the performance of
duty.
Article V of the By Laws of the Company states as follows:
"ARTICLE V
INDEMNITY
The Corporation shall indemnify its directors, officers and employees as
follows:
Every director, officer, or employee of the Corporation shall be indemnified by
the Corporation against all expenses and liabilities, including legal fees,
reasonably incurred by or imposed upon him/her in connection with any proceeding
to which he/she may be made a party, or in which he/she may become involved, by
reason of being or having been a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of the Corporation, partnership, joint
venture, trust or enterprise, or any settlement thereof, whether or not he/she
is a director, officer, employee or agent at the time such expenses are
incurred, except in such cases wherein the director, officer, employee or agent
is adjudged guilty of willful misfeasance or malfeasance in the performance of
his/her duties; provided that in the event of a settlement the indemnification
herein shall apply only when the Board of Directors approves such settlement and
reimbursement as being for the best interests of the Corporation.
The Corporation shall provide to any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of the corporation,
partnership, joint venture, trust or enterprise, the indemnity against expenses
of a suit, litigation or other proceedings which is specifically permissible
under applicable law.
The Board of Directors may, in its discretion, direct the purchase of liability
insurance by way of implementing the provisions of this Article."
II-3
<PAGE>
Part F/S
Item 1. Financial Statements
The audited financial statements of the Company and related notes which are
included in this offering have been examined by Hutton, Patterson & Company,
CPAs, and have been so included in reliance upon the opinion of such accountants
given upon their authority as an expert in auditing and accounting.
The following documents are filed as part of this report:
a) Keystone Silver Mines, Inc.
<PAGE>
KEYSTONE SILVER MINES, INC.
INDEPENDENT AUDITORS' REPORT
AND FINANCIAL STATEMENTS
April 30, 2000
December 31, 1999 and 1998
<PAGE>
TABLE OF CONTENTS
-------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Loss 4
Statements of Changes in Shareholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 8
Supplemental Information 14
-------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
Keystone Silver Mines, Inc.
McKinney, Texas
We have audited the accompanying balance sheets of Keystone Silver Mines, Inc.,
(an Idaho corporation) as of April 30, 2000, December 31, 1999 and December 31,
1998, and the related statements of income, changes in shareholders' equity and
cash flows for the four months ended April 30, 2000, and for the years ended
December 31, 1999 and 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
As discussed in NOTE F, certain costs associated with the acquisition of oil and
gas properties were previously classified as organization costs. For the year
ended December 31, 1999, and the four months ended April 30, 2000, organization
costs and the related accumulated amortization have been reclassified to oil and
gas properties and the related accumulated depreciation, depletion, and
amortization. These reclassifications have no impact on total assets, equity, or
the net loss for any of the periods covered by this report.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Keystone Silver Mines, Inc. as
of April 30, 2000, and December 31, 1999 and 1998, and the results of its
operations and its cash flows for the four months ended April 30,2000, and for
the years ended December 31, 1999 and 1998, in conformity with generally
accepted accounting principles.
Hutton, Patterson & Company
June 5, 2000 (Except NOTE F, which is dated December 19, 2000)
Dallas, Texas
1
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Balance Sheets
April 30, 2000, and December 31, 1999 and 1998
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS
APRIL 30, December 31, December 31,
2000 1999 1998
------------------ ------------------ ------------------
RESTATED RESTATED
(NOTE F) (NOTE F)
------------------ ------------------ ------------------
<S> <C> <C> <C>
CURRENT ASSETS
Account receivable, related party $ 1,471 $ - $ -
------------------ ------------------ ------------------
PROPERTY AND EQUIPMENT
Oil and gas properties (successful efforts) 82,500 20,000 -
Less accumulated depreciation, depletion, and amortization 1,589 - -
------------------ ------------------ ------------------
NET PROPERTY AND EQUIPMENT 80,911 20,000 -
------------------ ------------------ ------------------
OTHER ASSETS
Deferred tax asset, net of allowance of $22,296 - - -
------------------ ------------------ ------------------
$ 82,382 $ 20,000 $ -
================== ================== ==================
</TABLE>
(CONTINUED)
2
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Balance Sheets (CONTINUED)
April 30, 2000, and December 31, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
APRIL 30, December 31, December 31,
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Account payable, shareholder $ - $ - $ 100,000
------------------ ------------------ ------------------
TOTAL LIABILITIES - - 100,000
------------------ ------------------ ------------------
SHAREHOLDERS' EQUITY
Common stock, $0.05 par, 10,000,000 shares authorized,
1,974,070 and 349,070 shares outstanding, respectively 98,703 17,453 451,743
Additional paid-in capital 521,959 440,709 (13,581)
Outstanding stock options 100,000 100,000 -
Retained deficit (638,280) (538,162) (538,162)
------------------ ------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 82,382 20,000 (100,000)
------------------ ------------------ ------------------
$ 82,382 $ 20,000 $ -
================== ================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Statements of Loss
For the Four Months Ended April 30, 2000, and
For the Years Ended December 31, 1999 and 1998
------------------------------------------------------------------------------------------------------------------
APRIL 30, December 31, December 31,
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUE
Oil and gas revenue $ 2,460 $ - $ -
------------------ ------------------ ------------------
EXPENSES
Lease operating expense 989 - -
Depreciation, depletion, and amortization 1,589 - -
Consulting expense 100,000 - -
General and administrative - - 3,501
------------------ ------------------ ------------------
TOTAL EXPENSES 102,578 - 3,501
------------------ ------------------ ------------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (100,118) - (3,501)
PROVISION FOR INCOME TAXES - - -
------------------ ------------------ ------------------
NET LOSS $ (100,118) $ - $ (3,501)
================== ================== ==================
LOSS PER SHARE:
Basic $ (0.05) $ - $ -
================== ================== ==================
Diluted $ (0.01) $ - $ -
================== ================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Statements of Changes in Shareholders' Equity
For the Four Months Ended April 30, 2000, and
For the Years Ended December 31, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Discount/
Common Additional Outstanding Retained
Shares Stock Paid-in Capital Stock Options Deficit Total
------------- ----------- --------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 9,034,868 $ 451,743 $ (13,581) $ - $ (534,661) $ (96,499)
Net loss - - - - (3,501) (3,501)
------------- ----------- --------------- -------------- ----------- -----------
Balance, December 31, 1998 9,034,868 451,743 (13,581) - (538,162) (100,000)
Reverse stock split (8,905,798) (445,290) 445,290 - - -
Stock options issued for reduction
of payable to shareholder - - - 100,000 - 100,000
Shares issued for services related to the 220,000 11,000 9,000 - - 20,000
acquisition of oil and gas properties
Net loss - - - - - -
------------- ----------- --------------- -------------- ----------- -----------
Balance, December 31, 1999 349,070 17,453 440,709 100,000 (538,162) 20,000
SHARES ISSUED FOR ACQUISITION
OF OIL AND GAS PROPERTIES 625,000 31,250 31,250 - - 62,500
SHARES ISSUED FOR SERVICES 1,000,000 50,000 50,000 - - 100,000
NET LOSS - - - - (100,118) (100,118)
------------- ----------- --------------- -------------- ----------- -----------
BALANCE, APRIL 30, 2000 $ 1,974,070 $ 98,703 $ 521,959 $ 100,000 $ (638,280) $ 82,382
============= =========== =============== ============== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Statements of Cash Flows
For the Four Months Ended April 30, 2000, and
For the Years Ended December 31, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 30, December 31, December 31,
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (100,118) $ - $ (3,501)
Adjustment to reconcile net loss to net cash
provided by operating activities
Depreciation, depletion, and amortization 1,589 - -
Services acquired with common stock 100,000 - -
Changes in assets and liabilities:
Increase in account receivable, related party (1,471) - -
Increase in account payable, shareholder - - 3,501
------------------ ------------------ ------------------
Net cash flows provided by operating activities - - -
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES - - -
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES - - -
------------------ ------------------ ------------------
NET INCREASE IN CASH - - -
CASH, beginning - - -
------------------ ------------------ ------------------
CASH, ending $ - $ - $ -
================== ================== ==================
(CONTINUED)
6
</TABLE>
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Statements of Cash Flows (CONTINUED)
For the Four Months Ended April 30, 2000, and
For the Years Ended December 31, 1999 and 1998
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 30, December 31, December 31,
2000 1999 1998
------------------ ------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
<S> <C> <C> <C>
Shares issued for services related to acquisition of assets $ - $ 20,000 $ -
================== ================== ==================
Shares issued for acquisition of oil and gas properties $ 62,500 $ - $ -
================== ================== ==================
Shares issued for services $ 100,000 $ - $ -
================== ================== ==================
Options issued for reduction in payable to shareholder $ - $ 100,000 $ -
================== ================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
</TABLE>
7
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Keystone Silver Mines, Inc. (the Company), was originally
incorporated in the State of Idaho on July 19, 1954, as Uranium
Exploration Company, and changed its name to Uranium Discovery &
Developmment Company on October 18, 1954, for the purpose of
exploring and developing uranium properties in Utah and acquiring
mining claims and exploring for silver and lead in Shoshone
County, Idaho and Mineral County, Montana. In 1962, the Company
changed its name to Keystone Silver Mines, Inc.
In 1993, the mining laws in the U.S. were changed with the result
that the Bureau of Land Management (BLM) placed a $200 fee per
unpatented mining claim for that year with an annual fee of $100
per mining claim thereafter. The Board of Directors decided in
1993 that the Company could not afford the annual fees to the BLM
and, therefore, dropped all but ten of the unpatented claims.
Subsequently, the remaining value of the claims was reduced to
zero.
Effective August 9, 1999, the Company affected a reverse stock
split. At that date 9,034,868 shares of common stock were
outstanding. These shares were canceled and converted at a ratio
of 1 share of Keystone Silver Mines, Inc. common stock for every
70 shares of Keystone Silver Mines, Inc. common stock
outstanding.
Business Activity
-----------------
The Company is principally engaged in the production of oil and
gas. The Company owns a working interest in an oil and gas
property located in Kansas. The Company is planning to acquire
and develop oil and gas properties within the mid-continent
region of the United States.
Estimates
---------
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.
(CONTINUED)
8
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (CONTINUED)
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
-------------------------
The Company considers certificate of deposits and other
investments with maturities of less than three months to be cash
equivalents. The Company currently holds no cash equivalents.
Earnings Per Share
------------------
Basic earnings per share is calculated based upon the weighted
average of outstanding common stock. Diluted earnings per share is
calculated based upon the weighted average of outstanding common
stock plus any outstanding stock options or stock warrants. At
April 30, 2000, the Company had 5,025,000 options outstanding
(NOTE E). At December 31, 1999 and 1998, there were no options
outstanding.
Oil and Gas Properties
----------------------
The Company follows the successful efforts method of accounting
for its oil and gas producing activities. Under the successful
efforts method, the Company capitalizes all oil and gas leasehold
acquisition costs. For unproved properties, leasehold impairment
is recognized based upon an individual property assessment and
exploration experience. Upon discovery of commercial reserves,
such leasehold costs are transferred to proved properties.
Geological and geophysical expenses, production costs, and
overhead are charged against income as incurred. Exploratory
drilling costs are capitalized when incurred. If exploratory wells
are determined to be unsuccessful (dry holes), applicable costs
are expensed. Costs incurred to drill and equip developmental
wells, including unsuccessful development wells, are capitalized.
Expenditures related to extensive well workover projects are
capitalized upon determining that the workover resulted in
significantly increased proved reserves. All other workover costs
are expensed as incurred. These costs include those for deepening
existing producing wells within the same producing formation when
such operations are conducted for the purpose of restoring
efficient operating conditions as well as other repairs,
reconditioning, or reworking costs of wells already drilled and
operating.
Depreciation, depletion, and amortization of the cost of proved
producing oil and gas properties, including wells and related
equipment and facilities, are determined by the
units-of-production method based on quantities produced as a
percent of estimated proved recoverable reserves. Depreciation,
depletion, and amortization was $1,589 for the four months ended
April 30, 2000. There was no depreciation, depletion, or
amortization for the years ended December 31, 1999 and 1998.
(CONTINUED)
9
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (CONTINUED)
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and Gas Properties (CONTINUED)
----------------------
When complete units of depreciable property are retired or sold,
the asset cost and related accumulated depreciation and depletion
are eliminated with any gain or loss reflected in income.
Impairment of Long-Lived Assets
-------------------------------
The Company accounts for its long-lived assets under the provision
of SFAS No. 121 which requires the Company to review its
long-lived assets to determine if the carrying amounts of its
long-lived assets are recoverable. The Company reviews its oil and
gas properties for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be
recoverable. The Company uses the future undiscounted cash flows
from each oil and gas property to evaluate the future
recoverability of the property's carrying amount. If the carrying
amount is not recoverable, an impairment loss is recognized. The
Company has recorded no impairment losses for the years ended
December 31, 1998 or 1999, or for the four months ended April 30,
2000.
Revenue Recognition
--------------------
The Company recognizes revenue associated with sales of crude oil
and natural gas. Such revenue is recorded when title pases to the
customer. The Company has entered into an agreement to sell all of
the production from the Company's sole oil and gas property, the
Felts lease, to Cooperative Refining, LLC. This agreement can be
terminated at any time by either party. However, management is
confident that there is a ready market for the sale of crude oil
produced from the Felts lease for the remainder of the lease's
life. Revenues are collected by Scope Operating Company, the
operator, as described at NOTE B. Direct operating expenses are
paid from the revenue proceeds by the operator and the net revenue
is remitted to the Company.
Federal Income Taxes
--------------------
The Company accounts for federal income taxes under the provisions
of SFAS No. 109 which requires the recognition of deferred tax
assets and liabilities for the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective
tax basis. In addition, the recognition of future tax benefits,
such as net operating loss carryforwards, are required to the
extent that realization of such benefits are more likely.
<PAGE>
10
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (CONTINUED)
--------------------------------------------------------------------------------
NOTE B - RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company had an outstanding payable due
to a majority shareholder totaling $100,000. During the year ended
December 31, 1999, an agreement was entered into with Jeff
Johnson, whereby he would obtain controlling interest in the
Company. Mr. Johnson paid $100,000 directly to the shareholder.
Pursuant to the agreement, the Company's capital structure was
reorganized as discussed at NOTE A and Mr. Johnson received an
option to purchase 5,000,000 shares of common stock at $.05 per
share. As of April 30, 2000, Mr. Johnson has not exercised this
option, however, Mr. Johnson holds an 82% interest in the Company
as of April 30, 2000. (NOTE E)
Jeff Johnson, president and shareholder of the Company, is the
sole shareholder of Scope Operating Company. Scope Operating
Company is the operator for the Company's oil and gas property.
Scope Operating Company receives the oil and gas revenue and pays
the direct operating expenses of the property. The summary of
transactions between Scope Operating Company and the Company for
the four months and the year ended April 30, 2000, and the years
ended December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
APRIL 30, December December
2000 31, 1999 31, 1998
-------- --------- ---------
<S> <C> <C> <C>
Oil and gas revenue-working interest $ 2,460 $ - $ -
Less: lease operating expenses 989 - -
-------- --------- ---------
Net income remitted to the Company $ 1,471 $ - $ -
======= ========= =========
</TABLE>
Effective April 11, 2000, the Company entered into an agreement to
purchase a twenty-five percent working interest in an oil and gas
property from Scope Operating Company. Pursuant to this agreement,
the Company issued 625,000 of its unregistered, restricted common
stock at the historical cost basis of the property as reported by
Scope Operating Company. This value of $62,500, also approximates
the discounted value of the Company's unregistered common stock.
This property had no production from 1995 through March 2000,
causing the lease to expire. During April 2000, this property
began production under a new lease.
The Company had an account receivable balance from Scope Operating
Company in the amount of $1,471 at April 30, 2000.
11
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (CONTINUED)
--------------------------------------------------------------------------------
NOTE C - FEDERAL INCOME TAX AND DEFERRED FEDERAL INCOME TAX
Due to a current net operating loss, the Company has no current
liability for state or federal income taxes. The Company has no
significant temporary differences between financial statement
carrying amounts and their respective tax basis resulting in
deferred taxes. The Company has an aggregate net operating loss
carryforward of $100,118, which will expire in 2020. A deferred
tax asset of $22,296 related to the net operating loss
carryforward has been recorded; however, a valuation allowance has
been provided for the entire balance of this deferred tax asset.
Therefore, the provision for income taxes for the four months
ended April 30, 2000, is zero.
As discussed in NOTE B, there was a significant change in
ownership during the year ended December 31, 1999. Pursuant to
Internal Revenue regulations, the benefit of any net operating
losses accumulated prior to the change in ownership will be lost.
NOTE D - COMMITMENTS AND CONTINGENCIES
The exploration, development, and production of oil and gas is
subject to various federal and state laws and regulations to
protect the environment. Various state and governmental agencies
are considering or have adopted laws and regulations regarding
environmental control which could adversely affect the business of
the Company. Compliance with such legislation and regulations,
together with penalties resulting from noncompliance therewith,
will increase the cost of oil and gas development and production.
Some of these costs may ultimately be borne by the Company.
As a part of the agreement with Jeff Johnson (NOTE B), options
were issued for the purchase of 5,025,000 shares of post-split
common stock at $0.05 per share. Jeff Johnson received 5,000,000
of the options and various other individuals received the
remaining 25,000 options. The options expire August 9, 2001. As of
April 30, 2000, none of the options have been exercised.
12
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (CONTINUED)
--------------------------------------------------------------------------------
NOTE E - CONCENTRATIONS
One customer accounted for all of the Company's oil and gas sales
for the four months ended April 30, 2000.
NOTE F - RESTATEMENT
Certain costs associated with the acquisition of oil and gas
properties were previously classified as organization costs. For
the year ended December 31, 1999 and for the four months ended
April 30, 2000, "organization costs" of $20,000 have been
reclassified to "oil and gas properties (successful efforts)." For
the four months ended April 30, 2000, "accumulated amortization,
organization costs" have been reclassified to "accumulated
depreciation, depletion, and amortization." These
reclassifications have no impact on total assets, equity, or the
net loss for any of the periods presented in these financial
statements.
13
<PAGE>
SUPPLEMENTAL INFORMATION
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL INFORMATION
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
Keystone Silver Mines, Inc.
The supplemental information related to oil and gas producing activities,
reserves, and the standardized measure of discounted future net cash flows on
pages 15 through 20 is not a required part of the basic financial statements of
Keystone Silver Mines, Inc., but is supplementary information required by the
Financial Accounting Standards Board. We have applied certain limited
procedures, which consisted principally of inquiries of management regarding the
methods of measurement and presentation of the supplemental information.
However, we did not audit the information and express no opinion on it.
Hutton, Patterson & Company
June 5, 2000
Dallas, Texas
15
<PAGE>
KEYSTONE SILVER MINES, INC.
Supplemental Information (UNAUDITED)(CONTINUED)
For the Four Months Ended April 30, 2000, and
For the Years Ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
Reserve Information
-------------------
The following estimates of proved and unproved developed reserve quantities and
related standardized measure of discounted net cash flows are estimates only,
and do not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available. All of the Company's reserves
are located in the United States.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves to be incurred on net cash flows, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10 percent a year to reflect the estimated timing of the future
cash flows.
(CONTINUED)
18
<PAGE>
Part III
Item 1. Index to Exhibits
Exhibit
Number Title
-------- ------
3.1 Articles of Incorporation*
3.2a Change of Name*
3.2b Change of Name*
3.3 Amended By Laws
10.1 Assignment of Oil & Gas Lease*
10.2 Revised Division Order
10.3 Purchase & Sales Agreement
10.4 Resolutions of Board of Directors
10.5 Stock Purchase Agreement
27 Financial Data Schedule
99.1 Appraisal of Ronald L. Cook, P.E. dated May 25, 2000
99.2 List of All Participants in Felts Lease
All items noted with a * were previously attached to the original filing of this
Registration Statement.
Item 2. Description of Exhibits
3.1 Articles of Incorporation - the Articles of Incorporation for Uranium
Exploration Company, the original name of Scope Industries, Inc.
3.2a Amendment to Articles of Incorporation Changing Name from Uranium
Exploration Company to Uranium Discovery & Development Company
3.2b Amendment to Articles of Incorporation Changing Name from Uranium
Discovery & Development Company to Keystone Silver Mines, Inc.
3.3 Amended By Laws - By Laws for Keystone Silver Mines, Inc.
3.4 Purchase & Sale Agreement regarding Keystone Silver Mines, Inc. and
corporate resolutions in connection therewith
10.1 Assignment of Oil & Gas Lease - Assignment of 25% undivided interest in
Oil & Gas Lease from Scope Operating Co., Inc. to Scope Industries,
Inc.
10.2 Revised Division Order is an Order providing for the payment of monies
to The Land Owner and to Scope Operating Company from oil revenues
received.
10.3 Purchase & Sale Agreement regarding Keystone Silver Mines, Inc.
10.4 Resolution of Board of Directors whereby certain officers and Directors
resigned, others were appointed, authorizing issuance of Various Stock
Options and the 70 to 1 Reverse Split
10.5 Stock Purchase Agreement whereby the Company sold stock
To qualified investors
27 Financial Data Schedule
99.1 Appraisal of Ronald L. Cook, Professional Engineer making a valuation
for the Oil & Gas Lease owned by Keystone Silver Mines, Inc. and
setting the value at $447,144.00.
99.2 List of All Participants in Felts Lease
III-1
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Scope Industries, Inc.
(Registrant)
Date: January 4, 2001 By: /s/ S. Jeff Johnson
-----------------------
S. Jeff Johnson
President
III-2
