<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12 (b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Keystone Silver Mines, Inc.
-----------------------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Idaho 82 6008705
------- ------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR
ORGANIZATION) IDENTIFICATION NO.)
808 S. College, Suite 300, McKinney, TX 75069
------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(509) 326-1029
---------------------------
(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
--------------------------- ------------------------------
--------------------------- ------------------------------
SECURITIES TO BE REGISTERED UNDER SECTION 12 (g) OF THE ACT:
Common Stock
------------------------------
(TITLE OF CLASS)
1
<PAGE>
FORWARD LOOKING STATEMENTS
Keystone Silver Mines, Inc., ("KYMI" 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.
2
<PAGE>
INFORMATION REQUIRED IN REGISTRATION STATEMENT
TABLE OF CONTENTS
Part I 4
Item 1. Description of Business 4
Item 2. Management's Discussion and Analysis
or Plan of Operation 5
Item 3. Description of Property 9
Item 4. Security Ownership of Management and
Others and Certain Security Holders 9
Item 5. Directors, Executives, Officers and
Significant Employees 10
Item 6. Remuneration of Directors and
Executive Officers 12
Item 7. Interest of Management and Others in
Certain Transactions 12
Item 8. Legal Proceedings 12
Part II 13
Item 1. Market Price of and Dividends of the
Registrant's Common Equity and Other
Stockholder Matters 13
Item 2. Recent Sales of Unregistered Securities 13
Item 3. Description of Securities 14
Item 4. Indemnification of Directors and Officers 14
Part F/S 15
Item 1. Financial Statements 15
Item 2. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 15
Part III 16
Item 1. Index to Exhibits 16
Item 2. Description of Exhibits 16
Signatures 17
3
<PAGE>
PART I
Item 1. Description of Business.
General
The Company was organized July 1, 1957 (Date of Inception) under the laws
of the State of Idaho, as Uranium Discovery & Development Company. 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.
As part of the reorganization which occurred on August 9, 1999, the Company
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 and issued an
additional 1,000,000 shares for services in connection with the acquisition.
As of April 30, 2000, the Company had 1,974,070 shares of common stock
outstanding. 149,070 of those common shares are freetrading. 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 shares may be registered after August 9, 2000 by the filing of a Form 144
pursuant to Regulation 230.144 of the Securities & Exchange Act of 1933, as
amended.
Also, on August 9, 1999, the Company authorized certain stock options 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.
The Company 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.
Item 2 Management's Discussion and Analysis
or Plan of Operation
On August 9, 1999, the Company purchased a 25% undivided interest in the oil
and gas lease which the Company acquired was formerly owned by Scope Operating
Company and Scope will remain as the operator of the lease. Scope Operating
Company is the holder of the other 75% of the lease and will continue to
own that portion of the leasehold.
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. Over 200,000 wells have
been drilled in the province and 431 fields larger than 1 MMBOE have been
discovered. 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.
4
<PAGE>
The Felts Lease is comprised of approximately 90 acres near Coffeyville, Kansas,
approximately 110 miles North North East 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.
From 1983 to 1984 29 wells were drilled East of the river. The original operator
was Black Star Petroleum, now defunct. Most of the wells were fully equipped and
were oil wells or injection wells. Black Star produced approximately 17,000
barrels of oil over a two year period before declaring bankruptcy. The wells
then sat idle for many years until the landowner began pumping 3 to 5 wells on
an intermittent basis. From mid 1993 through 1995, the landowner 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 millidracys. 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.
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, 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% to the landowner and 87% 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.
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.
5
<PAGE>
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.
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 at $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 of a new business and 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.
6
<PAGE>
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. Management
decisions, therefore, will likely 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.
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.
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.
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 Articles of
Incorporation 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.
12. Director's Liability Limited. The Company's Articles of Incorporation
exclude personal liability of its directors to the Company and its stockholders
for monetary damages for breach of fiduciary duty except in certain specified
circumstances. Accordingly, the Company will have a much more limited right of
action against its directors than otherwise would be the case. This provision
does not affect the liability of any director under federal or applicable state
securities laws.
7
<PAGE>
13. 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.
14. 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.
15. 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.
16. No Foreseeable Dividends. The Company has not paid dividends on its Common
Stock and does not anticipate paying such dividends in the foreseeable future.
17. 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.
18. 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.
19. 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.
8
<PAGE>
Item 3. Description of Property.
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 April 11, 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.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The Company presently has the following capitalization:
Free Trading Common Shares 149,070
Restricted Shares Issued for
Services Rendered August 9, 1999 1,200,000
Restricted Shares Issued for
Oil & Gas Property August 9, 1999 625,000
---------
Total Shares Outstanding: 1,974,070
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.
Number of
Shares Owned Percentage
Name and Address Beneficially Ownership
---------------- ------------ ----------
Scope Operating Company
808 S. College, Suite 300
McKinney, TX 75069 625,000 .3166
Sole Owner:
Jeff Johnson
808 S. College, Suite 300
McKinney, TX 75069
Jeff Johnson 1,000,000 .5065
808 S. College, Suite 300
McKinney, TX 75069
Neil Liebman, Esq. 220,000 .1114
24 Greenway Plaza, Suite 1826
Houston, TX 77046
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.
9
<PAGE>
Additionally, 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.
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 Age Positions Held and Tenure
------ ----- -------------------------
S. Jeff Johnson 34 Chairman of the Board, Chief Executive
Officer
Dwight Brehm 43 Vice President, Secretary, Director
Ronald McDonald 53 Director
The directors named above will serve until the first annual meeting of the
Company's stockholders. Thereafter, directors will be elected for one-year terms
at the annual stockholders' meeting. 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.
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.
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. 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.
10
<PAGE>
Dwight Brehm, Vice President, Operations, 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. 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 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 is a director of Mark
Twain Bank of St. Louis, Missouri, and is 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 has also been a principal and
investor in Strength Energy Corporation of Dallas, Texas, is the principal owner
of Glencoe Oil & Gas, Inc., also of Dallas, Texas, has owned the rights to
Gladder Oil Field Equipment Company of Chicago, Illinois, an oil equipment
manufacturer, Glencoe Trading International, a machinery and equipment dealer.
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. (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. Mr. McDonald is also a member of the board of directors of
American Kiosk Corporation, a publicly traded company, 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.
11
<PAGE>
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 Nevada 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.
Item 6. Remuneration of Directors and Executive Officers
Annual
Name: Comp.
----- -------
Jeff Johnson Being Negotiated
Dwight Brehm Being Negotiated
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.
Item 7. Interest of Management and Others in Certain Transactions
Office services are provided without charge by a director. Such costs are
immaterial to the financial statements and, accordingly, have not been reflected
therein. 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.
Item 8. Legal Proceedings
None
12
<PAGE>
PART II
Item 1. Market Price and Dividends on the Registrant's Common Equity and Other
Shareholder Matters
The securities of the Company have been trading under the trading symbol KYMI
since August of 1999. Recent prices for the stock prior to the reverse split has
been at approximately $2.00 bid per share. There has been no share volume in
trading since August of 1999.
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. 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 or for services rendered in connection with the purchase of assets by the
Company:
Number of
Shares Owned Percentage
Name and Address Beneficially Ownership
---------------- ------------ ----------
Scope Operating Company
808 S. College, Suite 300
McKinney, TX 75069 625,000 .3166
Sole Owner:
Jeff Johnson
808 S. College, Suite 300
McKinney, TX 75069
Jeff Johnson 1,000,000 .5065
808 S. College, Suite 300
McKinney, TX 75069
Neil Liebman, Esq. 220,000 .1114
24 Greenway Plaza, Suite 1826
Houston, TX 77046
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.
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.
All of the above shares may be registered in accordance with Regulation 230.144
after August 9, 2000 by the filing of a Form 144 pursuant to Regulation 230.144
of the Securities & Exchange Act of 1933, as amended.
Additionally, 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.
13
<PAGE>
Item 3. 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 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. The Board of Directors may issue such shares of Common and/or
Preferred Stock in one or more series, with such voting powers, designations,
preferences and rights or qualifications, limitations or restrictions thereof as
shall be stated in the resolution of resolutions.
The Company presently has the following securities issued and outstanding:
Free Trading Common Shares 149,070
Restricted Shares Issued for
Services Rendered August 9, 1999 1,200,000
Restricted Shares Issued for
Oil & Gas Property August 9, 1999 625,000
---------
Total Shares Outstanding: 1,974,070
Item 4. Indemnification of Directors and Officers
The Articles of Incorporation and the Bylaws of the Company, filed as Exhibits
and incorporated herein by reference, respectively, provide 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.
14
<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, and
December 31, 1999 and 1998
<PAGE>
--------------------------------------------------------------------------------
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 13
--------------------------------------------------------------------------------
<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.
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
A Professional Corporation
Certified Public Accountants
By: s/ Dorothea Krempein
-------------------------
Dorothea Krempein, C.P.A.
June 5, 2000
Dallas, Texas
1
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Balance Sheets
April 30, 2000, and December 31, 1999 and 1998
---------------------------------------------------------------------------------------------------
ASSETS
<CAPTION>
APRIL 30, December 31, December 31,
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
CURRENT ASSETS
Account receivable, related party $ 1,471 $ - $ -
--------- --------- --------
PROPERTY AND EQUIPMENT
Oil and gas properties (successful efforts) 62,500 - -
Less accumulated depreciation, depletion, and amortization 256 - -
--------- --------- --------
NET PROPERTY AND EQUIPMENT 62,244 - -
--------- --------- --------
OTHER ASSETS
Organization costs, net of accumulated amortization of
$1,333 and $0, respectively 18,667 20,000 -
Deferred tax asset, net of allowance of $22,296 - - -
--------- --------- --------
TOTAL OTHER ASSETS 18,667 20,000 -
--------- --------- --------
$ 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
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
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 $ -
============= ============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
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
---------------------------------------------------------------------------------------
<CAPTION>
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) $ - $ -
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
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
---------------------------------------------------------------------------------------------------------------------------------
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 220,000 11,000 9,000 - - 20,000
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
============ ============ ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
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 $ - $ - $ -
========== ========== ==========
</TABLE>
(CONTINUED)
6
<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
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Shares issued for services related to organization costs $ - $ 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 $ -
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
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 1, 1957, as Uranium
Discovery and Development Company, 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)
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 $256 for the four months ended
April 30, 2000. There was no depreciation, depletion, or
amortization for the years ended December 31, 1999 and 1998.
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.
(Continued)
9
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (Continued)
--------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
-------------------------------
The Company accounts for its long-lived assets under the provisions
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. If the carrying amount is not recoverable,
an impairment loss is recognized.
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.
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>
(Continued)
10
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (Continued)
--------------------------------------------------------------------------------
NOTE B - RELATED PARTY TRANSACTIONS (Continued)
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
at a value of $62,500, which is the discounted value of the
Company's unregistered common stock. The property value recorded
is significantly less than the value presented in the current
reserve study.
The Company had an account receivable balance from Scope Operating
Company in the amount of $1,471 at April 30, 2000.
NOTE C - ORGANIZATION COSTS
Costs incurred to accomplish the changes in the capital structure
have been capitalized as organization costs. These costs will be
amortized over sixty months beginning in January 2000. During the
four months ended April 30, 2000, the Company incurred
amortization expense in the amount of $1,333.
NOTE D - 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 E - 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.
(Continued)
11
<PAGE>
KEYSTONE SILVER MINES, INC.
Notes to Financial Statements (Continued)
--------------------------------------------------------------------------------
NOTE E - COMMITMENTS AND CONTINGENCIES (Continued)
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.
NOTE F - CONCENTRATIONS
One customer accounted for all of the Company's oil and gas sales
for the four months ended April 30, 2000.
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
A Professional Corporation
Certified Public Accountants
By: s/ Dorothea Krempein
-------------------------
Dorothea Krempein, C.P.A.
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)
16
<PAGE>
<TABLE>
KEYSTONE SILVER MINES, INC.
Supplemental Information (UNAUDITED)
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>
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
ACTIVITIES AT:
Unproved oil and gas properties $ - $ - $ -
Proved oil and gas properties 62,500 - -
Support equipment and facilities - - -
----------- ----------- -----------
62,500 - -
Less accumulated depletion 256 - -
----------- ----------- -----------
Net capitalized costs $ 62,244 $ - $ -
=========== =========== ===========
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES FOR THE FOUR MONTHS
ENDED APRIL 30, 2000, AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998:
Property acquisition costs
Proved $ 62,500 $ - $ -
Unproved $ - $ - $ -
Exploration costs $ - $ - $ -
Development costs $ - $ - $ -
Amortization rate per equivalent barrel of production .0041 - -
(CONTINUED)
</TABLE>
17
<PAGE>
<TABLE>
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
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES FOR THE FOUR MONTHS
ENDED APRIL 30, 2000, AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998:
<S> <C> <C> <C>
Oil and gas sales $ 2,460 $ - $ -
Production costs (989) - -
Depletion and amortization (256) - -
----------- ----------- -----------
Results of operations for oil and gas producing activities
(excluding corporate overhead and financing costs) $ 1,215 $ - $ -
=========== =========== ===========
</TABLE>
18
<PAGE>
<TABLE>
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
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 30, 2000 December 31, 1999 December 31, 1998
---------------------- ---------------------- ----------------------
OIL GAS Oil Gas Oil Gas
(BBLS) (MCF) (Bbls) (Mcf) (Bbls) (Mcf)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proved Developed and Undeveloped Reserves
Beginning of year - - - - - -
Revisions of previous estimates - - - - - -
Improved recovery - - - - - -
Purchases of minerals in place 36,034 - - - - -
Extensions and discoveries - - - - - -
Production (147) - - - - -
Sales of minerals in place - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
April 30, 2000, and December 31, 1999 and 1998 35,887 - - - - -
========== ========== ========== ========== ========== ==========
Proved Developed Reserves
Beginning of year - - - - - -
========== ========== ========== ========== ========== ==========
End of year 35,887 - - - - -
========== ========== ========== ========== ========== ==========
</TABLE>
(CONTINUED)
19
<PAGE>
<TABLE>
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
-------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 30, December 31, December 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AT:
Future cash inflows $ 897,190 $ - $ -
Future production costs (188,497) - -
Future development costs - - -
Future income tax expense (226,257) - -
---------- ---------- ----------
482,436 - -
Future net cash flows
10% annual discount for estimated timing of cash flows (169,091) - -
---------- ---------- ----------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves $ 313,345 $ - $ -
========== ========== ==========
</TABLE>
(CONTINUED)
20
<PAGE>
<TABLE>
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
------------------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 30, December 31, December 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
The following reconciles the change in the standardized measure of discounted
future net cash flows during the four months ended April 30, 2000, and for the
years ended December 31, 1999 and 1998:
Beginning of year $ - $ - $ -
Sales of oil and gas produced, net of production costs (1,471) - -
Development costs incurred during the year which were previously estimated - - -
Net change in estimated future development costs - - -
Revisions of previous quantity estimates - - -
Net change from purchases and sales of minerals in place 710,164 - -
Accretion of discount (169,091) - -
Net change in income taxes (226,257) - -
Other - - -
---------- ---------- ----------
End of year $ 313,345 $ - $ -
========== ========== ==========
</TABLE>
SEE INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL INFORMATION.
21
<PAGE>
Item 2. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
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 By Laws*
3.4 Purchase & Sale Agreement and Corporate Resolutions
in connection therewith*
10.1 Assignment of Oil & Gas Lease*
10.2 Appraisal of Ronald L. Cook, P.E. dated May 25, 2000*
------------------
* Previously filed
22
<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.
Keystone Silver Mines, Inc.
(Registrant)
Date: August 1, 2000 By: /s/ S. Jeff Johnson
-----------------------
S. Jeff Johnson
President
23
