SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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BMB MUNAI, INC.
------------------------------------------------
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BMB MUNAI, INC.
20A Kazibek Bi Street
Almaty, Kazakhstan 480100
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of BMB Munai, Inc., (the "Company")
will be held at Mineral Office, Daulet Neftebaza (Oil Base), Aktau, Kazakhstan
on October 8, 2004, at 10:00 a.m., local time, for the following purposes:
1. To amend and restate our Certificate of Incorporation;
2. To elect six directors to our Board of Directors and to
reserve the seventh directorship vacant, until such time as
the Board of Directors identifies and appoints a qualified
candidate to serve as a financial expert and independent
Director;
3. To approve the BMB Munai, Inc., 2004 Stock Incentive Plan as
adopted by the Board of Directors of the Company;
4. To authorize our Board of Directors to change the domicile of
the Company from the State of Delaware to any other State
within the United States, at such time as the Board of
Directors shall determine that a change of domicile is in the
best interest of the Company;
5. To ratify the actions of our directors for the last fiscal
year and for the period from the fiscal year end through the
date of the annual shareholder meeting; and
6. To transact any other business as may properly come before the
meeting or at any adjournment thereof.
Our Board of Directors has fixed the close of business on August 27,
2004, as the record date for determining stockholders entitled to notice of, and
to vote at, the meeting. A list of stockholders eligible to vote at the meeting
will be available for inspection at the meeting and for a period of 10 days
prior to the meeting during regular business hours at our corporate
headquarters, 20A Kazibek Bi Street, Almaty, Kazakhstan 480100.
All of our stockholders are cordially invited to attend the meeting in
person. Whether or not you expect to attend the annual meeting of stockholders,
your proxy vote is important. To assure your representation at the meeting,
please sign and date the enclosed proxy card and return it promptly in the
enclosed envelope, which requires no additional postage if mailed in the United
States. Should you receive more than one proxy because your shares are
registered in different names or addresses, each proxy should be signed and
returned to assure that all your shares will be voted. You may revoke your proxy
at any time prior to the meeting. If you attend the meeting and vote by ballot,
your proxy will be revoked automatically and only your vote at the meeting will
be counted.
YOUR VOTE IS IMPORTANT
IF YOU ARE UNABLE TO BE PRESENT PERSONALLY, PLEASE MARK, SIGN AND DATE THE
ENCLOSED PROXY, WHICH IS BEING SOLICITED BY THE BOARD OF DIRECTORS, AND RETURN
IT PROMPTLY IN THE ENCLOSED ENVELOPE.
By order of the Board of Directors,
September 17, 2004 /s/ Alexandre Agaian
--------------------------------------
Alexandre Agaian, President and co-CEO
BMB MUNAI, INC.
20A Kazibek Bi Street
Almaty, Kazakhstan 480100
PROXY STATEMENT
GENERAL
SOLICITATION OF PROXIES. This proxy statement is being furnished to the
stockholders of BMB Munai, Inc., a Delaware corporation, in connection with the
solicitation of proxies by our Board of Directors for use at our annual meeting
of stockholders to be held at the Mineral Office, Daulet Neftebaza (Oil Base),
Aktau, Kazakhstan at 10:00 a.m., local time, on October 8, 2004, or at any
adjournment thereof. A copy of the notice of meeting accompanies this proxy
statement. It is anticipated that the mailing of this proxy statement will
commence on or about September 21, 2004.
COST OF SOLICITATION. We will bear the costs of soliciting proxies. In
addition to the use of the mails, certain directors or officers of our Company
may solicit proxies by telephone, telegram, facsimile, cable or personal
contact. Upon request, we will reimburse brokers, dealers, banks and trustees,
or their nominees, for reasonable expenses incurred by them in forwarding proxy
material to beneficial owners of shares of our common stock.
OUTSTANDING VOTING SHARES. Only stockholders of record at the close of
business on August 27, 2004, the record date for the meeting, will be entitled
to notice of and to vote at the meeting. On the record date, we had 28,263,766
shares of common stock outstanding, which are our only securities entitled to
vote at the meeting, each share being entitled to one vote.
VOTE REQUIRED FOR APPROVAL. Shares of common stock will vote with
respect to each proposal. Under our Bylaws, Proposals 1, 3, 4, 5 and 6 each
require the affirmative vote of a majority of the votes eligible to be voted by
holders of shares represented at the annual meeting in person or by proxy. With
respect to Proposal 2 votes may be cast by a stockholder in favor of the nominee
or withheld. With respect to Proposals 1, 3, 4, 5 and 6, votes may be cast by a
stockholder in favor or against the Proposals or a stockholder may elect to
abstain. Since votes withheld and abstentions will be counted for quorum
purposes and are deemed to be present for purposes of the respective proposals,
they will have the same effect as a vote against each matter.
Under the NASD Rules of Fair Practice, brokers who hold shares in
street name have the authority, in limited circumstances, to vote on certain
items when they have not received instructions from beneficial owners. A broker
will only have such authority if (i) the broker holds the shares as executor,
administrator, guardian, trustee or in a similar representative or fiduciary
capacity with authority to vote or (ii) the broker is acting under the rules of
any national securities exchange of which the broker is also a member. Broker
abstentions or non-votes will be counted for purposes of determining the
presence or absence of a quorum at the meeting. Abstentions are counted in
tabulations of the votes cast on proposals presented to stockholders, but broker
non-votes are not counted for purposes of determining whether a proposal has
been approved
VOTING YOUR PROXY. Proxies in the accompanying form, properly executed
and received by us prior to the annual meeting and not revoked, will be voted as
directed. In the absence of direction from the stockholder, properly executed
proxies received prior to the Annual Meeting will be voted FOR the nominees of
Management to the Board of Directors and For Proposals 1, 3, 4, 5 and 6. You may
revoke your proxy by giving written notice of revocation to our Secretary at any
time before it is voted, by submitting a later-dated proxy or by attending the
annual meeting and voting your shares in person. Stockholders are urged to sign
and date the enclosed proxy and return it as promptly as possible in the
envelope enclosed for that purpose.
PROPOSAL ONE:
CONSIDER AND APPROVE ADOPTION OF THE AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF BMB MUNAI, INC.
We are proposing to amend and restate our Certificate of Incorporation,
as described below. A copy of the Amended and Restated Certificate of
Incorporation that you are being asked to approve, which we refer to in this
Proxy Statement as the Amendment, is attached to this Proxy Statement as
Appendix A. The Board of Directors has unanimously approved the Amended and
Restated Certificate of Incorporation and recommends approval and adoption by
the shareholders.
With the change in our business model and the desire to grow and expand
our business, we believe that increasing our authorized capital stock is in the
best interest of the Company to ensure we have sufficient shares to negotiate
potential acquisitions and reduce the likelihood that we would need to again
amend the Certificate of Incorporation for the purpose of increase our
authorized capital stock, thereby avoiding the costs associated with amendments.
We currently have 51,502,000 shares of authorized capital stock, including
50,000,000 common shares, 1,500,000 Class A preferred shares, 1,000 Class B
preferred shares and 1,000 Class C preferred shares. We currently have no shares
of any class of preferred stock issued or outstanding. By approving the
Amendment, you are voting to increase our authorized capital stock by an
additional 68,498,000 shares for total authorized capital stock of 120,000,000
consisting of 100,000,000 shares of common stock with a par value of $.001 and
20,000,000 shares of preferred stock with at par value of $.001 and to eliminate
the currently authorized preferred stock.
The remaining amendments are being offered to change provisions in the
Certificate of Incorporation that date back to our original incorporation. The
general purpose behind these changes is to update the Certificate of
Incorporation to be more consistent with and take greater advantage of the
provisions of the General Corporation Law of the State of Delaware and the
Bylaws of BMB Munai, Inc.
POSSIBLE DILUTION RESULTING FROM INCREASE IN AUTHORIZED COMMON SHARES
AND CREATION OF AUTHORIZED PREFERRED SHARES
We currently have 51,502,000 shares of authorized capital stock. By
voting in favor of Proposal One, you are voting to increase our authorized
capital stock by an additional 68,498,000 shares for total authorized capital
stock of 120,000,000 consisting of 100,000,000 shares of common stock with a par
value of $.001 and 20,000,000 shares of preferred stock with a par value of
$.001. We have no present obligation to issue additional common or preferred
stock, and have not yet designated any rights, preferences, privilege or classes
for the preferred stock. Moreover, we have no present plans to issue preferred
stock. If and/or when we issue additional common stock or any of the preferred
stock in the future you could suffer substantial dilution. You would suffer
dilution in the book value of your shares if the additional capital stock is
sold at prices lower than the price at which you purchased your common stock.
Moreover, if the Board of Directors in setting the rights, preferences and
privileges of the preferred stock determines to grant voting rights to the
holders of preferred stock, you could suffer dilution in the percentage of your
voting interest in Company matters. You could also suffer dilution if the Board
of Directors determines to make the preferred shares convertible into common
shares. Similarly, the Board of Directors could grant other rights to the future
holders of preferred stock that could be superior to your rights as a holder of
common stock.
POSSIBLE ANTI-TAKEOVER EFFECTS OF AUTHORIZING PREFERRED STOCK
Although we have no such present intent, preferred stock could be used
to discourage unsolicited acquisition proposals. For example, a business
combination could be impeded by the issuance of a series of preferred stock
containing class voting rights that would enable the holder or holders of such
series to block any such transaction. Alternatively, a business combination
could be facilitated by the issuance of a series of preferred stock having
sufficient voting rights to provide a required percentage vote to the holders
thereof. In addition, under some circumstances, the issuance of preferred stock
could adversely affect the voting power and other rights of the holders of the
common stock. Although our Board of Directors is required to make any
determination to issue any such stock based on its judgment as to the best
interests of our stockholders, it could act in a manner that would discourage an
acquisition attempt or other transaction that some, or a majority, of the
stockholder might believe to be in their best interest or in which stockholders
might receive a premium for their stock over prevailing market prices.
The following table provides a comparison of the material changes
between the current Certificate of Incorporation and the proposed Amended and
Restated Certificate of Incorporation. The tables are divided into two
categories:
(a) Provisions that were altered to effect a change in our capital
structure; and
(b) Provisions that were changed to be more consistent with and
take greater advantage of the General Corporation Law of
Delaware and our Bylaws.
In addition, the proposed Amended and Restated Certificate of
Incorporation contains a number of provisions in which there is no substantive
change from the current Certificate of Incorporation, as amended, although the
provisions have been reworded in a more concise manner, or related provisions
may have been consolidated or reordered in a more coherent fashion.
Changes to our capital structure
Existing Proposed
Subject Article(s) Existing Provision Article(s) Proposed Provision
- ------- ---------- ------------------ ---------- ------------------
Authorized common FOURTH The total authorized amount of IV The total authorized amount of
shares common stock is 50,000,000 shares, common stock is 100,000,000
$.001 par value per share. shares, $.001 par value per
share. Residual rights specifically
reserved to common stockholders.
Authorized FOURTH The corporation has three classes of IV The total authorized amount of
preferred shares preferred stock: preferred stock is 20,000,000
shares, $.001 par value per
CLASS A - Class A has 1,500,000 share, with no shares currently
shares authorized, $.01 par value. outstanding. The preferred
No Class A shares are currently shares have not yet been divided
outstanding. Each share of Class A into classes or series, nor have
has 100 votes. Class A entitled to any powers, preferences, rights
dividends as fixed by the Board, and or limitations been designated.
shall be paid in priority over The Board of Directors shall be
common, and Class B and Class C authorized to divide the
preferred Stockholders. Class A is preferred stock into classes
non-cumulative and and/or series and to designate
non-participating. In case of all powers, preferences, rights
liquidation or dissolution, Class A and limitations associated with
shall be entitled to be paid par each class and/or series. The
value before the holders of common, number of shares of preferred
Class B or Class C preferred stock. stock may be increased or
decreased by the affirmative vote
CLASS B - Class B has 1,000 shares of a majority of the common
authorized, $.01 par value. No stockholders without a vote of
Class B shares are currently the preferred stockholders,
outstanding. Class B is entitled to unless such is required by the
dividends as declared by the Board, Amended and Restated Certificate
and shall be paid in priority over of Incorporation.
common and Class C preferred
stockholders. Class B is
non-voting, non-cumulative and
non-participating. In case of
liquidation or dissolution, Class B
shall be entitled to be paid par
value before the holders of common
or Class C preferred stock.
CLASS C - Class C has 1,000 shares
authorized, $.01 par value. No Class C shares
are currently outstanding. Class C is
entitled to dividends as declared by the
Board, and shall be paid in priority over
common stockholders. Class C is non-voting,
non-cumulative and non-participating. Class C
is convertible to common stock of the
Company. In case of liquidation or
dissolution, Class C shall be entitled to be
paid par value before the holders of common
stock.
Changes to be more consistent with and take
greater advantage of Delaware Law and our Bylaws
Existing Proposed
Subject Article(s) Existing Provision Article(s) Proposed Provision
- ------- ---------- ------------------ ---------- ------------------
Classification of - No provision. III Directors shall be classified into
directors three substantially equally divided
classes with staggered terms. Class I
directors will initially be elected for
a term of one year and thereafter the
Class I directors shall serve for
three-year terms. Class II directors
will initially be elected for a two-year
terms and thereafter Class II directors
will serve three-year terms. Class III
directors will be elected to serve
three-year terms.
Removal of directors - No provision. III Directors shall be removed for
cause only.
No preemptive rights - No provision. V No holder of any class of stock of
the Corporation shall have any
preemptive, preferential or other
right to subscribe for or purchase
any class of the Corporation's
stock or other securities of the
Corporation, and any existing
preemptive rights are hereby
eliminated.
Vote required to take - No provision. V Except as otherwise provided by
action; Action by law, the Corporation may take any
written consent action upon the affirmative vote of
the majority of outstanding shares
entitled to vote, either at a
meeting or by written consent.
Compensation of - No provision. V The amount and type of compensation
Directors paid to Directors will be
determined by the Board of Directors.
The Board of Directors will also have
the power, in its sole discretion to pay
directors for services not ordinarily
rendered by directors.
Interested transactions - No provision. V In the absence of fraud, the
Corporation may engage in
transactions with officers and
directors of the Corporation. An
interested director may be counted
for quorum purposes at any meeting
of the Board of Directors which
shall authorize such transaction,
provided such interest of the
director shall be disclosed to the
Board or a majority of the Board.
Indemnification of - No provision. V Officers and directors of the
officers and directors Corporation shall be indemnified to
the fullest extent permitted by the
laws of the State of Delaware.
Existing Proposed
Subject Article(s) Existing Provision Article(s) Proposed Provision
- ------- ---------- ------------------ ---------- ------------------
Court ordered meetings - No provision. V Whenever a compromise or
of creditors arrangement is proposed between the
Corporation and its creditors or its
stockholders, the appropriate judicial
body may call a meeting of creditors or
stockholders. If a majority representing
3/4s in value of the creditors or
stockholders shall agree to a compromise
and reorganization of the Corporation,
such shall be binding on all creditors
or shareholders as the case may be.
PROCEDURE FOR AMENDING AND RESTATING OUR CERTIFICATE OF INCORPORATION
Provided that Proposal One of this proxy is approved, the form of
amendment set forth in the Amended and Restated Certificate of Incorporation
attached hereto as Annex A will become effective upon filing with the State of
Delaware.
NO DISSENTERS' RIGHTS
No dissenters' rights are available under the General Corporation Law
of the State of Delaware or under our current and the proposed Amended and
Restated Certificate of Incorporation or Bylaws to any stockholder who dissents
from this proposal.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of our common stock is required to adopt the proposed Amended and
Restated Certificate of Incorporation.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" PROPOSAL ONE TO ADOPT THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
PROPOSAL TWO:
ELECTION OF DIRECTORS
Our Bylaws provide that our Board of Directors will consist of not less
than three nor more than nine persons, the exact number to be fixed from
time-to-time by the Board of Directors. The Board of Directors has fixed the
current number of Directors at seven, divided into three classes with staggered
three-year terms. At a meeting of the Board of Directors held on July 28, 2004
the Board of Directors created a seventh directorship. This directorship
position is treated as a vacancy on the Board of Directors and can be filled by
the current directors or the shareholders. The intention of the Board of
Directors is to seek a candidate who will qualify as a "financial expert" and as
an independent Director for service on the audit committee of the Board of
Directors. The Board of Directors is continuing to search for a qualified
candidate to fill this position. Therefore, the proposed slate of directors
nominated by management is comprised of six persons and it is proposed that the
seventh directorship position be treated as a vacancy to be filled by the Board
of Directors when a qualified candidate is identified. The seventh directorship
has been designated as a Class I Director, who will stand for re-election at the
annual shareholders meeting in 2005.
The Board of Directors has nominated two persons for election as Class
I Directors who will serve a one-year term expiring on the date of the Annual
Meeting of Shareholders of the Company to be held in 2005, and until their
successors are duly elected and qualified. Messrs. Georges Benarroch and Valery
Tolkachev have been nominated by the Board of Directors to stand for election as
such Class I Directors.
The Board of Directors has nominated two persons for election as Class
II Directors to serve two-year terms expiring on the date of the Annual Meeting
of Shareholders of the Company to be held in 2006, and until their successors
are duly elected and qualified. Messrs. Alexandre Agaian and Mirgali Kunayev
have been nominated by the Board of Directors to stand for election as such
Class II Directors.
The Board of Directors has nominated two persons for election as Class
III Directors to serve three-year terms expiring on the date of the Annual
Meeting of Shareholders of the Company to be held in 2007, and until their
successors are duly elected and qualified. Messrs. Bakhytbek Baiseitov and Boris
Cherdabayev have been nominated by the Board of Directors to stand for election
as such Class III Directors.
NOMINEES
Set forth below is certain information as of August 27, 2004 concerning
the nominees for election at the 2004 Annual Meeting and our current officers,
including the business experience of each for at least the past five years:
Present Position Director
Name Age With the Company Since
- ---- --- ---------------- -----
Alexandre Agaian 52 Director November 2003
President and Co-CEO
Bakhytbek Baiseitov 46 Director November 2003
Georges Benarroch 56 Director November 2003
Boris Cherdabayev 50 Chairman of the Board of November 2003
Directors Co-CEO
Mirgali Kunayev 46 Director November 2003
Valery Tolkachev 36 Director December 2003
Anuar Kulmagambetov 51 Chief Financial Officer
Gary Lerner 40 Secretary
Dr. Alexandre Agaian. In July 1988, Dr. Agaian founded the first
commercial bank in the USSR, The Innovation Bank of Saint-Petersburg. He served
as the chairman of the Board of Directors and Chief Executive Officer of the
bank until 1993. In five years the bank grew to more than 600 employees and 100
times in assets. In 1989, Dr. Agaian was co-founder of the All-Union Association
of Commercial Banks, where he was Vice President until 1992. In July 1994, Dr.
Agaian founded ANBI Corporation, a New Jersey corporation with a goal of
building a bridge between the US financial and technological markets and banks
and companies in the former USSR countries. ANBI Corporation quickly grew to a
greater than $30 million company in 1999-2000. Since 2001, the interests of ANBI
Corporation have significantly expanded in Kazakhstan, where the company has a
long-term relationship and ownership interests with the Bank CenterCredit,
Kazakhstan International Bank, GeoCapital, Atameken, InvestTechnoPlus, and other
companies. From 1979 to 1987, Dr. Agaian served as a scientific secretary of The
All-Union (later All-Russian) Annual Conference on Computer Networking and held
a position of an official opponent and auditor for number of scientific papers
and magazines. Dr. Agaian has more than 50 publications, including few books,
presentations at many conferences, number of awards, patents, medals, honors and
diplomas. In 1993 at the annual meeting of the academy Dr. Agaian has been
elected as a Corresponding Member of the Engineering Academy of St. Petersburg
(Russia). Dr. Agaian graduated in 1973 from the State University of Tbilisi
(Georgia, former USSR), summa cum laude, with a degree in applied cybernetics.
In 1980 he obtained his Ph.D. in computer networking from The Academy of Science
in Moscow.
Bakhytbek Baiseitov. In 1998, Mr. Baiseitov formed the first
cooperative bank in the USSR, and continues to serve as the Chairman of the
Board of the bank. The bank is now known as Bank CenterCredit. Since 1995, Mr.
Baiseitov has also served as the Chairman of the Board of Kazakhstan
International Bank. In 1989, Mr. Baiseitov was co-founder of the All-Union
Association of Commercial Banks. Since 1996, Mr. Baiseitov has also served as a
founder and president of The Banks Association of the Republic of Kazakhstan. At
the present time Mr. Baiseitov is the chairman of the central audit committee of
"Otan" (Native land) party with the social-democratic policy. Since 1999, as
board chairman of "El-Daryn" Fund, Mr. Baiseitov has actively supported
scientific, technological and social innovations in all spheres of reformation
in Kazakhstan society. Mr. Baiseitov obtained his Masters degree from the Moscow
Institute for Finance in 1979 and for two more years continued education at
Almaty Institute of National Economy, at Credit and Finance department.
Georges Benarroch. Mr. Benarroch has been a member of the Investment
Dealer Association of Canada and has served as the president and chief executive
officer of Euro Canadian Securities Limited and its successor company,
Credifinance Securities Limited, an institutional investment bank, based in
Toronto, a member of the Toronto Stock Exchange and the Montreal Exchange since
1982. Credifinance Securities Limited has been one of the North American
pioneers in providing investment banking and equity research coverage of
companies in the FSU. Since 1994, Credifinance Securities Limited has acted as
agent and/or underwriter, stock exchange sponsor, and introducing broker for a
number of companies operating in the FSU and was instrumental in supporting
Hurricane Hydrocarbons (now PetroKazakhstan) and Transmeridian Exploration
through its early stage of development. Mr. Benarroch is also the president and
chief executive officer of Credifinance Capital Inc. based in Toronto, Canada
and Credifinance Capital Corp. based in Palm Beach, Florida, both companies
specialized in proprietary trading, private equity funding and venture capital.
Since 1994, he has also served as president and chief executive officer of
InterUnion Financial Corporation, a "business bank", which in 1996 created
InterUnion Asset Management, a Canadian money management firm with over $1.5
billion under management prior to being sold in 2001. Mr. Benarroch graduated
from the Faculte de Droit in Toulouse (France), with a B.Sc. degree from the
Universite de Montreal (Canada) in 1970. He received a M.Sc. International
Relations and Economic Development from both the Faculte de Droit de Nice
(France) and the Institut des Hautes Etudes Internationales, in 1972 and 1972
respectively. Mr. Benarroch completed a Doctorat de Droit (III cycle) at the
Universite de Paris (France) in 1974.
Boris Cherdabayev. Mr. Cherdabayev joined BMB Holding, Inc., and
assumed his current positions in May 2003. From May 2000 to May 2003, Mr.
Cherdabayev served as Director at LLP TengizChevroil, a multination oil and gas
company owned by Chevron, ExxonMobil, KazMunayGas and LukOil. From 1998 to May
2000, Mr. Cherdabayev served as a member of the Board of Directors,
Vice-President of Exploration and Production and Executive Director on Services
Projects Development for at NOC "Kazakhoil", an oil and gas exploration and
production company. From 1983 to 1988, he served as a people representative at
Novouzen City Council (Kazakhstan) and from 1994 to 1998; he served as a
people's representative at Mangistau Oblast Maslikhat (regional level
legislative structure) and a Chairman of the Committee on Law and Order. For his
achievements Mr. Cherdabayev has been awarded with a national "Kurmet" order.
Mr. Cherdabayev earned an engineering degree from the Ufa Oil & Gas Institute,
with a specialization in "machinery and equipment of oil and gas fields" in
1976. Mr. Cherdabayev also earned an engineering degree from Kazakh Polytechnic
Institute, with a specialization in "mining engineer on oil and gas fields'
development." During his career he also completed an English language program in
the US, NIAI-D Program (Chevron Advanced Management Program) at Chevron
Corporation offices in San-Francisco, CA, USA, and CSEP Program (Columbia Senior
Executive Program) at Columbia University, New York, NY USA.
Dr. Mirgali Kunayev. Dr. Kunayev has been a Vice President for Caspian
Services Group Limited since 2000. Dr. Kunayev's primary responsibilities
include marine oil operations support, construction of infrastructure within the
Caspian region and negotiation of service contracts. From 1998 to 2000, Dr.
Kunayev was the President of OJSC KazakhstanCaspiShelf. During that time he
worked collaboratively on the international project JNOC-Kazakhoil with
geophysical companies including, JGI, Schlumberger, Western Geophysical and PGS.
From 1995 to 1998, Dr. Kunayev served as President of International Geophysics,
Ltd. He was primarily responsible to oversee geological-geophysical operations
and exploratory drilling. In January 2002, Dr. Kunayev earned a Ph.D. under the
discipline of Geological and Mineralogical Science from the Moscow Geological
University in Moscow, Russia.
Valery Tolkachev. Since 1999, Mr. Tolkachev has served as a Deputy
Director of the Corporate Clients Department for Aton Investment Company in
Moscow, Russia. From 1991 to 1999, Mr. Tolkachev served in various positions
including, broker, analyst, manager and V.P. of Equities Department at MDM Bank,
IncomBank, IncomCapital, Tveruniversalbank and TIRAbrok Company. Mr. Tolkachev
graduated with Honors from the High Military School in Kiev, USSR in 1989. He is
currently attending the Academy of National Economy, Moscow Law faculty.
Dr. Anuar Kulmagambetov. Since 1998, Dr. Kulmagambetov has served as an
assistant to the chairman of the board at Bank CenterCredit, the fourth largest
bank in Kazakhstan. Dr. Kulmagambetov also currently holds the position of board
chairman of the Oil and Gas E&P Company "Bowels", which is licensed by
government of the Republic of Kazakhstan for oil and gas exploration and
production of up to 22,500 km2 of prospective territories. In 1998 Dr.
Kulmagambetov moved to Almaty, Kazakhstan as a lecturer at the International
Business Academy, where he continues to teach courses in different disciplines,
such as "Corporate Finance", "International Finances", "Mathematics for
Finances", "Anti-crisis management", etc. In 1969 after graduating with summa
cum laude from a special high school for physics and mathematics Dr.
Kulmagambetov continued his education at the Polytechnic Institute in Karaganda,
Kazakhstan (specialized in automated informational systems). For his success in
education he has been awarded a highest honorable grant (grant named after
Lenin) and graduated from the institute in 1974 with diploma with honor. From
1975 to 1978 Dr. Kulmagambetov continued his scientific research under his
doctorate program at the Institute for Mathematics and Mechanics of the Academy
of Science of the Republic of Kazakhstan. In 1978 he moved to Moscow to continue
his work at the Institute of Control Science. In 1981 his doctorate thesis
"Research and development of the parallel data base management methods" was
awarded a scientific degree of Ph.D. in automated information systems and
management. He has received a number of awards and diplomas for his research
work and published more than 50 scientific papers in Russia, Kazakhstan,
Holland, Japan and Bulgaria.
Gary Lerner. Mr. Lerner is a principal in the law firm of Lerner &
Kaplan, PLLC, a law firm he co-founded in 2001. From 1998 to 2000, Mr. Lerner
practiced law as a sole practitioner. Mr. Lerner received a B.S. degree from
Polytechnic University of New York in electrical engineering and computer
science in 1984. He earned a Masters degree in computer engineering from
Syracuse University in New York in 1987. Mr. Lerner earned a Jurist Doctorate
degree from New York Law School in 1998.
There are no family relationships among the nominees to our Board of
Directors.
Management does not expect that any nominee will become unavailable for
election as a director, but, if for any reason that should occur prior to the
Annual Meeting, the person named in the proxy will vote for such substitute
nominee, if any, as may be recommended by Management.
VOTE REQUIRED
Directors are elected by a plurality of votes cast at the Annual
Meeting. Unless contrary instructions are set forth in the proxies, the persons
with full power of attorney to act as proxies at the 2004 Annual Meeting will
vote all shares represented by such proxies for the election of the nominees
named therein as directors. Should any of the nominees become unable or
unwilling to accept nomination or election, it is intended that the persons
acting under the proxy will vote for the election, in the nominee's stead, of
such other persons as the Board of Directors of the Company may recommend. The
management has no reason to believe that any of the nominees will be unable or
unwilling to stand for election or to serve if elected.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" EACH OF THE NOMINEES LISTED ABOVE AND APPROVE THE
RESERVATION OF THE SEVENTH DIRECTORSHIP AS VACANT, UNTIL SUCH TIME AS
THE BOARD IDENTIFIES AND APPOINTS A QUALIFIED CANDIDATE TO SERVE AS A
FINANCIAL EXPERT AND INDEPENDENT DIRECTOR.
Security Ownership of Directors and Executive Officers
As of August 27, 2004, we had 28,263,766 shares of our common stock
issued and outstanding. The following table sets forth the beneficial ownership
of our Common Stock as of that date, for each director and nominee, the
President, the other executive officers, greater than 5% shareholders and for
all directors and executive officers as a group.
Shares of % of
Name Common Stock Class
- ---- ------------ -----
Alexandre Agaian 485,714 1.7%
Bakhytbek Baiseitov 1,714,286* 6.1%
Georges Benarroch -0- -0-%
Boris Cherdabayev 3,142,857* 11.1%
Anuar Kulmagambetov 285,714 1.0%
Mirgali Kunayev 1,428,571* 5.1%
Gary Lerner -0- -0-%
Valery Tolkachev -0- -0-%
All directors, nominees and executive
officers as a group (8 persons): 7,057,142 24.9%
*Messers. Baiseitov, Cherdabayev and Kunayev are the three members of
BMB Munai, LLC., a Kazakhstan limited company that owns 7,657,143 shares of our
common stock. Mr. Baiseitov holds a 33.34% interest and Messers. Cherdabayev and
Kunayev each hold 33.33% interests. Therefore, Messers. Baiseitov, Cherdabayev
and Kunayev may be deemed to be the beneficial owners of our shares that are
held by BMB Munai, LLC.
Security Ownership of Certain Beneficial Owners
As of August 27, 2004, the persons named below were, to our knowledge,
the only beneficial owners of more than 5% of the outstanding common stock,
other than directors, nominees and executive officers whose beneficial ownership
is described in the above table.
Shares of Percentage
Name Common Stock of Class
- ---- ------------ --------
BMB Munai LLC 7,657,143* 27.1%
Tolmakov Toleush Kalmukanovitch 3,500,000 12.4%
NAM Holdings Limited 2,196,040 7.7%
---------- ----
TOTAL 13,353,183 47.2%
========== ====
*BMB Munai, LLC., is a Kazakhstan limited company, in which Mr.
Baiseitov holds a 33.34% interest and Messers. Cherdabayev and Kunayev each hold
33.33% interests. Therefore, Messers. Baiseitov, Cherdabayev and Kunayev may be
deemed to be the beneficial owners of our shares that are held by BMB Munai,
LLC.
Executive Compensation
The following chart sets forth the compensation paid to each of our
Executive Officers and Directors during the last three fiscal years:
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------------------------
Annual Compensation Awards Payouts
------------------------------- -------------------------- -------------------------
Restricted
Name and Principal Other Annual Stock Options/ LTIP All Other
Position Year Salary Bonus Compensation Awards SARs Payout Compensation
- ------------------ ---- ------ ----- ------------ ---------- -------- ------ ------------
Alexandre Agaian 2004 $168,463 $ -0- $-0- $-0- $-0- $-0- $-0-
President, CEO, Director
Boris Cherdabayev 2004 10,000 105,000 -0- -0- -0- -0- -0-
Co-CEO, Chairman
of the Board
Anuar Kulmagambetov 2004 10,000 105,000 -0- -0- -0- -0- -0-
CFO
Georges Benarroch 2004 -0- -0- -0- -0- -0- -0- -0-
Former President,
Former CEO, Director*
- ---------------------
* Mr. Benarroch was the president and chief executive officer of
InterUnion during the period when InterUnion was conducting no active operations
prior to its merger with BMB Holding. Mr. Benarroch resigned as president and
chief executive officer of the Company at the time of the merger.
Compensation of Directors
On September 1, 2004, our Board adopted amendments to our Bylaws. Prior
to that time, our Bylaws provided that directors would not receive any stated
salary for their services as directors. However, by board resolution, a fixed
fee and expenses of attendance may be allowed for each meeting. These
limitations do not affect compensation for a person serving as an officer or
otherwise for the Company and receiving compensation therefore.
Consistent with the amendments to our Bylaws, Article V of our proposed
Amended and Restated Certificate of Incorporation provide that the Board of
Directors may determine from time to time the amount and type of compensation
which shall be paid to its members for service on the Board of Directors. The
Board of Directors shall also have the power, in its discretion, to provide for
and to pay to directors rendering services to the Corporation not ordinarily
rendered by directors, as such, special compensation appropriate to the value of
such services, as determined by the Board from time to time.
Meetings and Committees of the Board of Directors
During fiscal year ended March 31, 2004, there were five meetings of
the Board of Directors. All directors attended the meetings of the Board of
Directors. The Board of Directors currently has no standing committees.
Independent Registered Public Accounting Firm
The firm of BDO Kazakhstanaudit, served as our independent registered
public accounting firm for the fiscal year ended March 31, 2004. Our Board of
Directors is in the process of establishing an Audit Committee. The Committee
will be solely responsible for the appointment, compensation, retention, and
evaluation of the independent registered public accounting firm engaged to audit
or review our financial reports, audit our report on internal control, when
required and perform any allowable non-audit service.
Audit Fees
Principal accounting fees for professional services rendered for us by
BDO Kazakhstanaudit for the year ended March 31, 2004, is summarized as follows:
2004
----
Audit $126,314
Audit related -
Tax -
All other -
--------
Total $126,314
========
A representative of BDO Kazakhstanaudit is expected to be present at the Annual
Meeting and will have an opportunity to make a statement, if he or she desires
to do so, and to respond to appropriate questions that may be asked by
shareholders.
PROPOSAL THREE
APPROVE THE BMB MUNAI, INC., 2004 STOCK INCENTIVE PLAN AS
ADOPTED BY THE BOARD OF DIRECTORS
Description of BMB Munai, Inc., 2004 Stock Incentive Plan
On September 1, 2004, our Board of Directors adopted the BMB Munai,
Inc., 2004 Stock Incentive Plan, (the "Plan"), a copy of which is attached to
this proxy statement as Annex B. A copy of the plan will also be available for
inspection at the Company's principal executive offices for a period of ten days
preceding the date of the Annual Meeting. Under the Plan, our key employees,
advisors and consultants, (including directors and officers who are employees)
may be granted options to purchase shares of our Common Stock.
The Plan permits the granting of 5,000,000 shares of Common Stock at a
price equal to one hundred percent (100%) of the fair market value of the Common
Stock on the date that the option is granted provided, however, that the price
shall not be less than the par value of the Common Stock that is subject to the
option. Further, no Incentive Stock Option may be granted to an employee owning
Common Stock having more than 10% of the voting power of our company unless the
option price for such employee's option is at least 110% of the fair market
value of the Common Stock subject to the option at the time the option is
granted and the option is not exercisable after the expiration of five years
from the date of granting. The par value of our Common Stock is presently $.001
per share. No option may be granted under the Plan after the tenth anniversary
of the adoption of the Plan. Unless otherwise specified by our Board, options
granted under the Plan are Incentive Stock Options under the provisions and
subject to the limitations of Section 422 of the Internal Revenue Code.
Administration of the Plan
The Plan shall be administered by our Board until such time as a
Compensation Committee is appointed. Subject to the provisions of the Plan, our
Board determines the employees who will receive options under the Plan, the
number of shares subject to each option and the terms of those options, and
interprets the Plan and makes such rules of procedure as our Board may deem
proper.
Upon the granting of any option, the optionee must enter into a written
agreement with us setting forth the terms upon which the option may be
exercised. Such an agreement will set forth the length of the term of the option
and the timing of its exercise as determined by our Board. The Compensation
Committee, or if there is none, our Board, in its sole discretion will determine
the vesting schedule and exercise dates of any equity security granted under the
Plan at the time each grant is made. No equity security granted under the plan
shall be exercisable within six months of the date of grant without approval of
our Compensation Committee or our Board. In no event shall the length of an
option extend beyond ten years from the date of its grant. An optionee may
exercise an option by delivering payment to us in cash.
Under the Plan, if the employment of any person to whom an option has
been granted is terminated for any reason other than the death or disability of
the optionee, the option shall automatically terminate. If the termination is by
reason of retirement, the optionee may exercise such portion of the option as
has vested, within three months of termination or within the remaining term of
the option, whichever is shorter. If the optionee dies while employed by us or
our subsidiaries, or during a period after termination of employment in which
the optionee could exercise an option, the optionee's beneficiary may exercise
the option within one year of the date of the optionee's death but in no event
may the option be exercised later than the date on which the option would have
expired if the optionee had lived. If the termination is by reason of
disability, the optionee may exercise the option, in whole or in part, at any
time within one year following such termination of employment but in no event
may the option be exercised later than the date on which the option would have
expired had the optionee not become disabled.
Federal Income Tax Consequences
With respect to the tax effects of non-qualified stock options, since
the options granted under the Plan do not have a "readily ascertainable fair
market value" within the meaning of the Federal income tax laws, an optionee of
an option will realize no taxable income at the time the option is granted. When
a non-qualified stock option is exercised, the optionee will generally be deemed
to have received compensation, taxable at ordinary income tax rates, in an
amount equal to the excess of the fair market value of the shares of our Common
Stock on the date of exercise of the option over the option price. We will
withhold income and employment taxes in connection with the optionee's
recognition of ordinary income as a result of the exercise by an optionee of a
non-qualified stock option. We generally can claim an ordinary deduction in the
fiscal year that includes the last day of the taxable year of the optionee which
includes the exercise date or the date on which the optionee recognizes income.
The amount of such deduction will be equal to the ordinary income recognized by
the optionee. When stock acquired through the exercise of a non-qualified stock
option is sold, the difference between the optionee's basis in the shares and
the sale price will be taxed to the optionee as a capital gain (or loss).
With respect to the tax effects of Incentive Stock Options, the
optionee does not recognize any taxable income when the option is granted or
exercised. If no disposition of shares issued to an optionee pursuant to the
exercise of an Incentive Stock Option is made by the optionee within two years
after the date the option was granted or within one year after the shares were
transferred to the optionee, then (a) upon sale of such shares, any amount
realized in excess of the option price (the amount paid for the shares) will be
taxed to the optionee as long-term capital gain and any loss sustained will be a
long-term capital loss and (b) we will be allowed no deduction for Federal
income tax purposes. The exercise of an Incentive Stock Option will give rise to
an item of tax preference that may result in alternative minimum tax liability
for the optionee.
If shares of Common Stock acquired upon the exercise of an Incentive
Stock Option are disposed of prior to the expiration of the two year and one
year holding periods described above (a "Disqualifying Disposition") generally
(a) the optionee will realize ordinary income in the year of disposition in an
amount equal to the excess (if any) of the fair market value of the shares at
exercise (or, if less, the amount realized upon the sale of such shares) over
the option price thereof, and (b) we will be entitled to deduct such amount,
subject to applicable withholding requirements. Any further gain realized will
be taxed as short-term or long-term capital gain and will not result in any
deduction by our company. A Disqualifying Disposition will eliminate the item of
tax preference associated with the exercise of the Incentive Stock Option.
Changes in Plan
The Plan may be terminated, suspended, or modified at any time by our
Board, but no amendment increasing the maximum number of shares for which
options may be granted (except to reflect a stock split, stock dividend or other
distribution), reducing the option price of outstanding options, extending the
period during which options may be granted, otherwise materially increasing the
benefits accruing to optionees or changing the class of persons eligible to be
optionees shall be made without first obtaining approval by a majority of our
shareholders. No termination, suspension or modification of the Plan shall
adversely affect any right previously acquired by the optionee or other
beneficiary under the Plan.
Options granted under the Plan may not be transferred other than by
will or by the laws of descent and distribution and, during the optionee's
lifetime may be exercised only by the optionee. All of the Options previously
issued under the prior plan remain unchanged and outstanding.
OUR BOARD RECOMMENDS A VOTE "FOR" PROPOSAL THREE TO
APPROVE THE BMB MUNAI, INC., 2004 STOCK INCENTIVE PLAN
PROPOSAL FOUR
TO AUTHORIZE THE BOARD OF DIRECTORS
TO CHANGE OUR DOMICILE TO ANY OTHER STATE
WITHIN THE UNITED STATES
The Company was originally incorporated in the State of Utah and
subsequently changed its domicile to Delaware through a merger with a subsidiary
corporation formed in Delaware for the express purpose of changing the domicile
of the Company. While the State of Delaware imposes no State income tax on
corporations, it does impose a franchise tax that is based, in part, on the
capitalization and assets of the Company. For example, with the proposed
increases to our common and preferred stock, the franchise tax imposed on the
Company in the upcoming year is expected to increase from $17,000 to
approximately $37,000. As our business grows the franchise tax will continue to
increase. By redomiciling to another state for example, the State of Nevada,
which similarly does not impose State income tax and does not impose a franchise
tax, the Board of Directors believes the Company may realize significant cost
savings. We recommend our shareholders authorize the Board of Directors, in its
sole discretion, as it deems in the best interest of the Company and without
further shareholder action or approval, to change the domicile of the Company
from the State of Delaware to any other State within the United States. Such a
change of domicile may be accomplished by merger with a subsidiary corporation
or by any other method allowed or prescribed by law.
OUR BOARD RECOMMENDS A VOTE "FOR" PROPOSAL FOUR TO
AUTHORIZE THE BOARD OF DIRECTORS, IN ITS SOLE DISCRETION,
TO CHANGE TO DOMICILE OF THE COMPANY FROM DELAWARE TO ANY
OTHER STATE WITHIN THE UNITED STATES
PROPOSAL FIVE
TO RATIFY THE ACTIONS OF OUR DIRECTORS
We recommend that shareholders ratify the actions of our directors for
the last fiscal year and for the time period from the fiscal year end through
the date of the annual shareholder meeting.
OTHER MATTERS
We know of no other matters that are to be presented for action at the
annual meeting of stockholders other than those set forth above. If any other
matters properly come before the annual meeting of stockholders, the persons
named in the enclosed proxy form will vote the shares represented by proxies in
accordance with their best judgment on such matters.
2005 SHAREHOLDER PROPOSALS
If you wish to include a proposal in the Proxy Statement for the 2005
Annual Meeting of Stockholders, your written proposal must be received by the
Company no later than July 15, 2005. The proposal should be mailed by certified
mail, return receipt requested, and must comply in all respects with applicable
rules and regulations of the Securities and Exchange Commission, the laws of the
State of Delaware and our Bylaws. Stockholder proposals may be mailed to the
Corporate Secretary, BMB Munai, Inc., 500 Fifth Avenue, Suite 4810, New York,
New York, 10110.
For each matter that you wish to bring before the meeting, provide the
following information:
(a) a brief description of the business and the reason for bringing it
to the meeting;
(b) your name and record address;
(c) the number of shares of Company stock which you own; and
(d) any material interest (such as financial or personal interest) that
you have in the matter.
SELECTED INFORMATION FROM OUR ANNUAL REPORT ON FORM 10-KSB FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2004
Description of Business
We incorporated in Delaware on February 7, 1994. Prior to November 26,
2003, the Company existed under the name Inter Union Financial Corporation
("InterUnion"). The primary business strategy of InterUnion was to acquire
majority interests in financial services businesses.
On November 26, 2003, InterUnion executed an Agreement and Plan of
Merger (the "Agreement") with BMB Holding, Inc., a private Delaware corporation,
formed for the purpose of acquiring and developing of oil and gas fields in the
Republic of Kazakhstan. Pursuant to the Agreement, BMB Holding merged into
InterUnion, with InterUnion being the surviving corporation.
Pursuant to the terms of the Agreement, InterUnion issued an aggregate
of 14,857,143 shares of its common stock to the shareholders of BMB Holding in
exchange for the 1,000 issued and outstanding common shares of BMB Holding. As a
result of the merger, control of InterUnion passed to the shareholders of BMB
Holding. For accounting purposes, the transaction was treated as a reverse
merger under accounting principles generally accepted in the United States of
America, with BMB Holding treated as the acquiror for accounting purposes.
In connection with the Agreement, the Company name was changed to BMB
Munai, Inc., a new board of directors was elected and our outstanding common
stock was reverse split on a one share for ten basis. Accordingly, all per share
disclosures contained in the annual report were changed to give effect to this
split. Our authorized common stock was also reduced from 500,000,000 to
50,000,000.
At the time of the merger, the primary asset of BMB Holding was a 70%
interest in Emir Oil, LLP ("Emir Oil"). Subsequent to our fiscal year end, on
May 24, 2004, following several months of negotiation, we agreed to purchase the
30% interest of our minority partner in Emir Oil. The acquisition is being made
in exchange for 3,500,000 shares of our common stock. As a result of the
acquisition, Emir Oil will become a wholly owned subsidiary of BMB Munai.
Emir Oil is a limited liability comradeship formed under the laws of
the Republic of Kazakhstan ("ROK") for the sole purpose of acquiring the oil and
gas exploration license AI No. 1552 (the "License") and Contract No. 482 for
Exploration of Hydrocarbons in Aksaz-Dolinnoe-Emir oil fields, located in blocks
XXXVI-10-C (Partially), F (Partially) XXXVI-11-A (Partially), D (Partially) (the
"Contract"), in the ROK.
Our License was initially issued by the ROK to Zhanaozen Repair and
Mechanical Plant on April 30, 1999. On June 9, 2000, an Exploration Contract
("Contract") was entered into between the Agency of the Republic of Kazakhstan
and the Zhanaozen Repair and Mechanical Plant. On September 23, 2002, the
License and Contract were assigned to Emir Oil. The License and Contract grant
us the right to engage in exploration and development activities within the
Aksaz, Dolinnoe and Emir oil fields (hereinafter referred to as the "ADE Block,"
the "Fields" or the "License Area."
When initially entered, the Contract had a 5-year term and required
total capital expenditures for exploration and development during the term in
the amount of $21.5 million, with a minimum of $3.5 million of that expended in
2003. Subsequent to year-end, on May 18, 2004, at a meeting with the State
Expert Commission on Licensing and Contracts of subsoil users, the ROK agreed to
extend the terms of our Contract and License for two additional years, expiring
on June 9, 2007. We are currently negotiating the terms of that extension with
the ROK; however, under the extension the remaining capital expenditures for all
activities on the ADE Block, including exploration, development and improvements
will be made as follows:
Year Minimum Capital Expenditures
---- ----------------------------
2004 $7,000,000
2005 $9,300,000
2006 - 2007 $5,000,000
We do not anticipate that our remaining obligations under the Contract
will change materially as a result of the negotiation of an extension of the
Contract.
If we are successful in establishing commercial production within the
ADE Block, we will make application for an exploration and production contract.
Under our current Contract, we have the exclusive right to negotiate an
exploration and production contract for the ADE Block. The government is
required to conduct these negotiations in accordance with the Law of Petroleum.
We are not guaranteed the right to an exploration and production
contract. Such contracts are customarily awarded upon determination that a field
is capable of commercial rates of production and that the applicant has complied
with the other terms of its license and exploration contract. An exploration and
production contract typically requires a bonus payment upon execution, the
amount of which is subject to negotiation. If satisfactory terms cannot be
negotiated, we have the right to produce and sell oil under the Law of Petroleum
for the term of our existing Exploration Contract at a royalty rate of 2%. The
royalty rate under an exploration and production contracts is subject to
negotiation and varies in accordance with estimated reserve and production
volumes. Based on forecasted volumes, our average royalty rate over the term of
the production contract is expected to be about 8%.
There are two general forms of production contracts in Kazakhstan,
production-sharing contracts and tax and royalty based contracts. We favor a tax
and royalty based contract and expect to operate under this structure. Under
this financial arrangement, we pay 100% of the development and operating costs
and will be entitled to receive 100% of the revenues from production. The
government may also require that up to 20% of our production be sold into
domestic markets at local prices. We expect these prices to be lower than prices
we could receive in the export market by $7-$10 per barrel. Most of the smaller
producers in the region are not currently being required to sell into the
domestic market.
Description of Property
We are an independent oil and gas company engaged in the exploration,
development, exploitation and production of crude oil and natural gas in the
ROK. Our operations are currently focused onshore in the exploration and
development of the License and Exploration Contract of our wholly-owned
subsidiary, Emir Oil.
Kazakhstan
Until 1990, Kazakhstan was one of 15 independent republics that
comprised the former Soviet Union. It has chosen to align with Russia and 12 of
the former republics in the Commonwealth of Independent States ("CIS"), a union
of economic and political cooperation. Upon independence twelve years ago,
Kazakhstan embarked on a course of political and monetary reforms that have
resulted in the development of a market economy. Kazakhstan's economic prospects
are looking better than at almost any time since the collapse of the Soviet
Union, mainly due to higher world oil prices, major oil finds in the Caspian Sea
region and the development of oil production and export capabilities.
Kazakhstan belongs to the third largest world hydrocarbon basin in
terms of both known and potential hydrocarbon reserves after the Persian Gulf
and Western Siberia. This basin is estimated to contain approximately 20 Billion
proven barrels of oil in place and 200 Trillion proven cubic feet of gas in
place. Kazakhstan produces an average of 1,000,000 barrels of oil per day
("bopd"), which is expected to increase to 2,000,000 bopd by 2010.
The Pre-Caspian Basin recently hosted several large world-class
discoveries including LukOil and OKIOC/Agip KCO consortium. Four of the world's
giant oilfields are located in the Pre-Salt of the Pre-Caspian Basin (Tengiz,
Karachaganak, Orenburg and Astrakhan). Most major western oil & gas exploration
and production companies operate in Kazakhstan.
Petroleum Industry in Kazakhstan
Kazakhstan is an area of significant investment activity for the
international oil and gas industry. Kazakhstan's proved reserves rank among the
top 15 countries in the world with over 180 producing oil fields and 20 billion
barrels of proved oil reserves. Current production is approximately 1,000,000
bopd, of which approximately 2/3 is exported.
The entire former Soviet Union region has recently seen significant
foreign investment and strategic alliances for exploration, acquisition and
development of oil and gas reserves. U.S. investments in Kazakhstan exceeded $6
billion at the end of 2002. The majority of this investment was focused in the
petroleum industry and specifically in the development of the Tengiz field,
which has an estimated 6-9 billion barrels of oil reserves, and Karachaganak,
with an estimated 2.2 billion barrels of oil reserves. With Caspian Sea
discoveries now estimated to hold up to 30 billion barrels of oil reserves,
foreign investment of as much as $140 billion may be required to develop
infrastructure within Kazakhstan for production and distribution of these
resources.
The oil industry in Kazakhstan has been codified with the development
of the Law of Petroleum, which sets out the conduct of the oil and gas industry
and the roles of participants, both private and governmental. The industry is
regulated by the Ministry of Energy and Natural Resources, which administers all
contracts, licenses and investment programs. The Ministry of Energy and Natural
Resources has been through several stages of consolidation since the country's
independence in 1991. The government has been merging various regional
governmental agencies previously handling the extraction and transportation
sectors of the industry into one consolidated entity to eliminate the
bureaucracy and provide for more efficient management of the country's natural
resources. This entity maintains a direct ownership on behalf of the ROK in most
large oil field development projects as well as sole ownership and operation of
many of the interconnecting oil and gas pipeline systems. Governmental ownership
or participation in exploration and development projects, however, is not
required.
Overview of Regional Geology
The ADE Block is located in western Kazakhstan within the oil region of
Aktau. There are a number of producing oil fields surrounding the ADE Block,
including, Alatobe (the closest analogue field), North Akkar, NW Zhetybay,
Eastern Normaul, Tasbulat, Pionerskoe, Ashiagar and North Pridorozhnoe. The
carbonate fields found along the margins of the Pre-Caspian Basin account for
approximately 70% of Kazakhstan's oil reserves and production. The fields in the
trend are projected to contain over 15 billion barrels of recoverable oil
reserves, including the super-giant Tengiz field, which is estimated to hold 9
billion barrels of recoverable oil reserves.
The ADE Block is located on the edge of the Mangistau Usturt High of
the Mangyshlak Basin. The Mangyshlak Basin is located on the western part of the
Turan epi-Paleozoic platform. Tectonic activity in the Riphean-Vendian era led
to crustal tension and rifting, particularly the development of the Central
Mangyshlak and Tuarkyr-Karaaudan rift systems. The Central Mangyshlak rift
formed in early Paleozoic time. Deep drilling showed that Paleozoic sediments
consist of Lower Permian and Carboniferous carbonate rocks and Upper and Middle
Devonian and Lower Carboniferous clastics. The rift zone probably experienced
some compression during pre-Permian times and then tension during the Late
Permian and Early Triassic. The Mangyshlak and Usturt plates collided with the
eastern European continent during the Early Cimmerian tectonic event. Tangential
compression in the collision zone led to the formation of inversion highs with
upthrust-overthrust activity. The result was a series of linear mega-anticlines
and mega synclines. The rocks of the Permo-Triassic age were strongly deformed.
The Tuakyr-Karaaudan rift probably formed in the Early Paleozoic.
Middle Paleozoic deposits are strongly deformed and contain basic and ultra
basic rocks of Devonian and Early Carboniferous age. These ophiolites are
probably fragments of older oceanic crust. They are overlain by red
Permo-Triassic molasses composed of conglomerates and tuff and lava beds. The
total thickness of the molasses is 4-5 kilometers.
Exploration activity in the Mangyshlak Basin was aimed at Triassic and
Jurassic rocks, but Paleozoic rocks also may contain oil. A commercial discovery
was made in Paleozoic reservoir rocks in the Oymash area.
The Aksaz, Dolinnoe and Emir fields are located in the Karagalin slope
of the Beke-Bashkuducksky regional structural high in the present structure of
the Mangistau Usturt High.
There are a large number of thrust sheets in the Triassic interval in
the ADE Block. The general direction of the faults is east-west with the stress
from the south and south-west directions. The basement rocks were not penetrated
in the area. According to data from surrounding areas the basement is composed
of basic and ultra basic rocks of Lower Paleozoic. The Middle and Upper
Paleozoic clastics and carbonate sediments were deposited directly on the
basement and overlain by red-colored Permo-Triassic molasses. An anticlinal
structure in the sedimentary Paleozoic rocks was indicated in the Aksaz field
that could be a possible opportunity for future exploration drilling in the
license area.
The Middle Triassic rocks are penetrated by wells in the Aksaz,
Dolinnoe and Emir fields. This zone consists of shallow marine sediments:
limestones and dolomites inter bedded with layers of shale and volcanic ashes.
The carbonate rocks are replaced by clastic sediments in some areas. There is a
50-70 meters thick silty shale package in the upper part of the Middle Triassic.
The maximum total thickness of the Middle Triassic deposition in the area of 755
meters was penetrated by the Well #4 in the South Zhetybai field to the
southeast. All wells in the ADE Block were drilled to the middle of the Middle
Triassic interval.
Two oil and gas bearing zones, the T2B and T2V, were interpreted in the
upper part of the Middle Triassic carbonate interval. These zones are poorly
correlated between the fields. The seal for the pools are made up of volcanic
ash layers and tight carbonates. The trapping mechanism for the ADE fields is
formed by thrust faults to the north and structural closure to the south. The
Middle Triassic deposition is unconformably overlain by Upper Triassic marine
sediments. The Upper Triassic consists of shale inter bedded with sand and silt
layers. The total thickness of these depositions reaches 600 meters in the
license area. Some of Upper Triassic reservoirs are oil productive in the
surrounding fields.
The Jurassic sediments were deposited unconformably on the Triassic.
The Lower and Middle series of the Jurassic consists of marine and non-marine
sandstone, shales and siltstones with total thicknesses up to 950 meters. The
Jurassic reservoirs are oil and gas bearing in many of the surrounding fields
and contain the bulk of the oil and gas reserves in the Mangyshlak Basin. The
upper part of the Jurassic consists of limestone, dolomite and marls.
The Cretaceous deposition consists of more than 1,000 meters of marine
carbonate and clastic rocks. Some gas accumulations are encountered in clastic
Valanginian-Hauterivian, Albian and Senomanian reservoirs in Mangyshlak Basin.
The Tertiary rocks overly the Cretaceous and consist of 200 to 250 meters of
carbonates and shales.
ADE Block Infrastructure
The Aksaz, Dolinnoe and Emir fields are located in Mangystau Region of
Kazakhstan approximately 55 kilometers from the city of Aktau, a seaport on the
Caspian Sea. The ADE Block covers an area of approximately 203 square
kilometers. The surface topography is gentle and sparsely developed making
installation of roads, facilities and pipelines relatively easy.
The region has well-developed infrastructure. There is a railroad line,
the Aktau-Beyneu-Makat, and a number of gravel roads passing directly through
the license territory. Not far from the license territory (approximately 28
kilometers) there is a major oil and gas pipeline, the Uzen-Aktau-Atyrau
pipeline. We believe there are a number of options for transporting oil to both
domestic and export markets including by truck, rail car or pipeline.
The licensed territory is also well supplied with drinking water that
is sourced from the Kigach-Aktau water pipeline. There is also available water
for technical use from a well at the Kulussky water reserve, about 40 kilometers
distance from the fields. Within the licensed territory, lightly mineralized
underground water layers are found at depths of 600-650 meters. This water could
be utilized during the exploration, development and production work on the
fields.
We have completed construction of approximately 10 kilometers of high
voltage (6 Kilowatt) electric power line to the Emir field and 1 kilometer to
the Dolinnoe field.
We have undertaken a road network improvement program and have
completed construction of an 11 kilometer sand-gravel road at the Dolinnoe and
Emir fields.
Well Construction, Drilling and Oil Collection
When we acquired the License, there were three existing fields within
the ADE Block - Aksaz, Dolinnoe and Emir. Initial exploration of these fields
occurred in the 1960's, with wells being drilled between 1990 and 1996. Drilling
of several other wells was commenced after the initial discovery wells but all
were suspended prior to reaching the target horizons due to lack of funds. All
of the reserves in the three fields are encountered in Triassic aged carbonate
reservoirs. The depth of this formation ranges from approximately 3,000 meters
in Emir, to 3,600 meters in Dolinnoe to 4,200 meters in Aksaz.
In October 2003, we undertook steps to re-enter the wells that had been
previously completed and tested but shut down in the late 1990s. Preliminary
results indicated that major service work must be done to maintain a steady
productivity rate on the Dolinnoe-1 and Emir-1 wells. Both wells showed very
high pressure and good productivity, but in accordance with local regulations
test production has been interrupted until local government inspectors approved
a detailed work program with appropriate safety measures.
We commenced well workover on the Dolinnoe-1 and the Emir-1 wells in
December 2003. We contracted MAIKS, LLP to undertake a major repair and
re-conservation of the Dolinnoe-1 and Emir-1 wells.
Due to unstable oil flow at Emir-1 well, we have conducted geophysical
research at the well. This research indicates with high probability that the
producing horizon and borehole are blocked with impurities and sand. Underground
repair has been started for the well clean-up. In the course of well workover a
piece of the perforating tape abandoned by MangistauMunaiGas during geophysical
works in 1994-1996 was found at a depth of 2,953 meters. As a result, only 21
meters out of 54 meters of the first paying interval were opened with an average
oil flow rate of 105 bopd with a 6 millimeter choke used.
We have contracted MangystauGeology, LLP to carry out service work at
the Emir-1 well. At the present time MangystauGeology, LLP is attempting to
extract an alien object from the well.
A similar situation occurred at the Dolinnoe-1 well, where a piece of
perforating tape was found at the depth of 3,529 meters. After studying
different scenarios we decided to proceed with a well test at the depths of 3518
meters to 3529 meters (7 meters out of 71 meters of productive interval). With 6
and 8 millimeter chokes, testing being conducted since May 12, 2004, shows a
steady average oil flow rate of 500 bopd with the paying horizon pressure of
approximately 46MPa.
Samples of the crude oil and gas collected during test production have
been processed and full chemical content has been obtained.
The Company has begun preparations for new well drilling, including:
- New wells spots setting
- Platform construction for drilling rigs installation
- Additional road construction
- Camp settlement for workers and engineers
During the first calendar quarter 2004, we completed the preparation of
125 meter x 75 meter spot platform for the drilling rig at Dolinnoe-2 well and
300 meter x 300 meter ground settlement for the workers camp at Dolinnoe field.
We have contracted a drilling company, Saipem, to drill a new well in
the Dolinnoe field. We have retained the services of Halliburton Security DBS,
Halliburton Sperry-Sun, Baker Hughes, Schlumberger, Mud Logging, Cameron, GIS
Company, LLP and others to perform service work and geophysical studies during
the drilling process. All equipment, materials and supplies have been purchased
and delivered and drilling is planned to begin in early July 2004.
We have constructed a temporary oil collection system for processing of
oil produced during test production at the Emir-1 and Dolinnoe-1 wells. During
the first calendar quarter 2004, we finished construction of the ground
facilities for oil collection and pre-sale processing at the Emir-1 and
Dolinnoe-1 wells with capacity to connect up to seven additional wells at each
well, for combined collection and processing. The facilities allow for full
cycle processing, including oil separation from gas and water, oil heating, oil
flow measurements, oil storage reservoir, drain reservoir, operator system and
anti-flare system. The current scheme is based on the delivery of oil collected
in well oil tanks that can be transported by oil trucks to a nearby oil storage
facility owned by the prior minority interest holder in Emir Oil. The storage
facility is located approximately 25 kilometers from the ADE Block. Collected
oil can also be routed through an existing railroad terminal to buyers. We have
negotiated a contract with a refinery in Atyrau for the sale of oil produced
during the test production. We have installed the following equipment to
implement our oil collection scheme:
- Three crude oil tanks (two - of 100 m3 and one of 50 m3 volume)
- Gas separators
- Four oil pumps
- "Sputnik" equipment for measuring crude oil flow rate during
the test production, monitoring and managing the oil flow
process and further delivery of oil to the pre-sale processing
part of ground facilities. The scheme is ready for total of 8
wells to be connected by pipes to the Sputnik equipment for
combined processing
- Three fountain frames
- 40 tons of pipes for oil pumping, collection and compression
(73 mm diameter)
- Power converters
- Steam generators
We received a prepayment at the end of March 2004 and sold our first
100 tons of oil produced during the test production in Emir-1 and Dolinnoe-1
wells in April 2004. All oil produced has been sold to a refinery in Atyrau at
the domestic price level. Delivery has been made by rail cars filled at the
pouring station terminal, located at an oil storage facility owned by the prior
minority interest holder of Emir Oil. This facility has ground and underground
oil and fuel tanks with a total capacity of approximately 20,000 tons. At the
present time, reconstruction of the ground oil storage tanks at the storage
facility is under way to facilitate the collection of 3,000 to 4,000 tons of
oil.
Reserves
We have been collecting and analyzing available geological information
and reports associated with the ADE Block since June 2003. Much information
about the fields was obtained during the exploration work performed by Soviet
state owned exploration companies in the 1990's. Their research, however, was
performed with old technical equipment providing limited accuracy. Most of the
data obtained and analysis made at that time was based on incomplete 2D seismic
surveys and some test drilling and production from the Emir-1, Dolinnoe-1 and
Aksaz-1 wells. We acquired geophysical information and reports on the ADE Fields
from the Center for Information and Analysis of the National Committee of
Geology and Mineral Resources. This information has been processed and analyzed
for inclusion into the engineering reports of PGS Reservoir Consultants from
Oslo (Norway) and McDaniel and Associates Consultants from Calgary (Canada).
On behalf of Emir Oil we acquired a complete engineering report from
PGS Reservoir Consultants in August 2003. In September 2003 we also retained
McDaniel and Associates Consultants for the audit and re-interpretation of the
PGS report and other information available for ADE Block. The report from
McDaniel was received in November 2003. Both engineering reports were based on
incomplete information, contained a number of uncertainties and relied on
different standards and approaches for data interpretation. Based on our
concerns over the accuracy of these reports, we commissioned a 3D seismic
survey. We believe with the completion of a 3D seismic survey and its data
processing and interpretation we will have sufficient information to re-evaluate
the ADE Block oil and gas reserves, and prepare an efficient work program for
further exploration and development of the License territory.
3D Seismic
The Company commenced 3D seismic fieldwork in September 2003. TatArka,
LLP was commissioned for the 3D seismic field works and PGS-GIS, an affiliate of
PGS Reservoir Consultants in Almaty has been retained for the data processing
and interpretation. The actual seismic exploration of the license territory was
completed in December 2003. A total of 200 square kilometers was covered in the
3D seismic survey. All seismic data has been submitted for data processing,
which began in December 2003. In addition to the 3D seismic study, "ANCHAR,"
special acoustic low frequency geophysical equipment, has been used for the
purpose of determining whether the ADE Block geological structures contain oil
and gas.
The data obtained during 3D seismic is of a very high quality and
resolution. The full detailed report will augment the information previously
obtained from incomplete 2D seismic and geological data obtained from former
Soviet geologists that the Company used as the basis for engineering reports for
ADE Block previously prepared by PGS, Gubkin Institute of Russia and McDaniel
and Associates of Canada.
Subsequent to year-end, in May 2004, a preliminary report of the
results of 3D seismic data processing was released to us by PGS-GIS. The full
report is due to be released in October 2004. The complete report will cover
geological, technical and financial issues and will contain an evaluation of ADE
Block oil and gas reserves. The report is expected to improve the Company's
understanding of ADE Block geology for both Jurassic and Triassic formations and
to more precisely define pay zones and reservoir sizes and structures. The
results of the data processing are expected to significantly improve location of
drilling sites and reduce drilling risks.
Market Price of and Dividends on Our Common Equity and Other Shareholder
Matters.
Our shares are currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol BMBM. Effective December 12, 2003, we implemented a
one-for-ten reverse stock split and, on that date, every ten shares of common
stock outstanding were converted into one share of common stock.
As of June 3, 2004, we had approximately 350 shareholders holding
20,429,426 common shares. Of the issued and outstanding common stock,
approximately 539,175 are free trading, the balance are "restricted securities"
as that term is defined in Rule 144 promulgated by the Securities and Exchange
Commission.
The published high and low bid quotations from April 1, 2002 through
March 31, 2004, were furnished to us by Pink Sheets, LLC, are included in the
chart below. These quotations represent prices between dealers and do not
include retail markup, markdown or commissions and may not represent actual
transactions.
High Low
---- ---
Fiscal year ending March 31, 2004
First Quarter $ .31 $ .15
Second Quarter 1.20 .31
Third Quarter (Oct 1 thru Dec 11) 1.90 .60
Third Quarter (Dec. 12 thru Dec. 31, 7.00 1.05
after 1 share for 10 reverse split)
Fourth Quarter 8.00 1.75
Fiscal year ending March 31, 2003
First Quarter $ .95 $ .75
Second Quarter 1.30 .25
Third Quarter .63 .17
Fourth Quarter .45 .15
Cash Dividends
During the quarter ended December 31, 2003, we issued a stock dividend
to our shareholders of 50,000 shares. The shares were issued pro-rata to all of
our common stockholders on a one share for each 9.8 pre-split shares
outstanding.
There are no restrictions on our ability to pay cash dividends, other
than state law that may be applicable; those limit the ability to pay out all
earnings as dividends. The Board of Directors does not, however, anticipate
paying any dividends in the foreseeable future; it intends to retain the
earnings that could be distributed, if any, for the operations, expansion and
development of its business.
Management's Discussion and Analysis of Results of Operations
The following discussion is intended to assist you in understanding our
results of operations and our present financial condition. Our Consolidated
Financial Statements and the accompanying notes included elsewhere in the Form
10-KSB contain additional information that should be referred to when reviewing
this material.
Statements in this discussion may be forward-looking. These
forward-looking statements involve risks and uncertainties, including those
discussed below, which could cause actual results to differ from those
expressed. The statements regarding future financial and operating performance
and results, market prices, future hedging activities, and other statements that
are not historical facts contained herein are forward-looking statements. The
words "expect," "project," "estimate," "believe," "anticipate," "intend,"
"budget," "plan," "forecast," "predict," "may," "should," "could," "will" and
similar expressions are also intended to identify forward-looking statements.
Such statements involve risks and uncertainties, including, but not limited to,
market factors, market prices (including regional basis differentials) of
natural gas and oil, results for future drilling and marketing activity, future
production and costs and other factors detailed herein and in our other
Securities and Exchange Commission filings. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
We operate in one segment, natural gas and oil exploration and
development.
Overview
Prior to November 26, 2003, the Company existed under the name Inter
Union Financial Corporation ("InterUnion"). The primary business strategy of
InterUnion was to acquire majority interests in financial services businesses.
On November 26, 2003, InterUnion executed an Agreement and Plan of Merger with
BMB Holding, Inc., a private Delaware corporation, formed for the purpose of
acquiring and developing of oil and gas fields in the Republic of Kazakhstan.
Pursuant to the Agreement, BMB Holding merged into InterUnion, with InterUnion
being the surviving corporation. For accounting purposes, the transaction was
treated as a reverse merger under accounting principles generally accepted in
the United States, with BMB Holding and its then 70% owned subsidiary, Emir Oil,
treated as the surviving entity. BMB Holding was incorporated on May 6, 2003.
Following the merger, we changed our name to BMB Munai, Inc.
Since incorporation on May 6, 2003, our primary focus has been the
acquisition, exploration, development, exploitation and production of natural
gas and crude oil in Kazakhstan. With the acquisition of the exploration and
development license and contract of Emir Oil, we are focusing our efforts on the
development of the Aksaz, Dolinnoe and Emir Oil and Gas Fields in Kazakhstan.
We anticipate spending between $10 million and $20 million in the
continued exploration and development of the ADE Block in the next twelve
months. As we have limited resources, we anticipate the need to soon seek
additional capital to fund all or a significant portion of this capital budget.
We expect a portion of the funds needed to continue exploration and development
will come from the sell of oil produced during testing of the wells.
New Wells
Assuming we can raise sufficient funding, during the next twelve months
we intend to spend between $4 million and $11 million to drill new exploratory
wells. Initially we will focus our drilling efforts in the Dolinnoe Oil Field,
were we hope to drill at least three new exploratory wells. As of the date of
the annual report, we have undertaken activities in preparation of drilling the
proposed Dolinnoe-2 well. We expect drilling of this well to commence in July
2004. We plan to drill this well to 4,000 meters and to carry out geological,
geophysical and technical study of the field. We also plan to commence drilling
in the Emir Field by the end of 2004 and intend to complete two new wells in the
Emir Field by April 2005.
Acquisition of Additional Reserves
Depending on available funds, during the next twelve months, we also
expect to spend between $5 million and $6 million dollars toward increasing our
oil and gas reserves through the identification, investigation and acquisition
of additional oil and gas concessions in Kazakhstan.
Work Over of Existing Wells
In the next twelve months we will continue work over on existing wells
in the ADE Block. We recently completed work over to the Emir-1 well and will
begin work over of the Aksaz-1 well shortly. Thereafter, we will complete work
over of the Dolinnoe-1 well. We also intend to investigate other wells in the
ADE Block that were previously spudded to determine the commercial viability of
additional drilling at these sites. We anticipate these activities will cost
between $600,000 and $800,000 over the next twelve months.
Infrastructure Improvements
If we are able to raise sufficient capital we plan to spend between
$700,000 and $1 million on building and improving existing infrastructure in the
ADE Block. In August 2004, we plan to begin construction of a 14 kilometer long
pipeline from the Aksaz-1 well to the temporary collection and processing
facility at the Emir-1 well. Our plans also include the reconstruction of ground
fuel tanks at the oil and fuel storage facility we are currently using. We
intend to increase above ground storage capacity from 300 cubic meters to 2300
cubic meters. This should allow us to collect volumes sufficient for exporting.
This work should begin in July or August 2004. We also plan to acquire a
railroad line and terminal located within the Aksaz Field territory, with plans
to build a storage facility and pouring station at the terminal to allow for oil
transportation via railroad. This should help us create our own transportation
route for export and domestic oil sales. We expect to finalize acquisition of
the rail line and terminal early in 2005. Additionally, in the next twelve
months we plan to improve power supply to the ADE Block through the acquisition
of a 20 kilometer, 6 Kilowatt power line running through the ADE Block. We will
also continue expanding the road network within the ADE Block.
Oil Production and Sale
Subsequent to year-end, in April 2004, we made our first sale of 1,000
barrels of crude oil from test production at the Dolinnoe-1 well. Since May 12,
2004, a steady flow rate of 500 barrels of crude oil per day has been produced
from the well and sold to the domestic market.
Our revenue, profitability and future growth rate will depend
substantially on factors beyond our control, such as economic, political and
regulatory developments and competition from other sources of energy. Oil and
natural gas prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for oil or natural gas could
materially and adversely affect our financial position, our results of
operations, the quantities of oil and natural gas reserves that we can
economically produce and our access to capital.
Results of Operations
As discussed above, we incorporated on May 6, 2003, therefore, we have
no prior fiscal year results against which to compare.
Revenues. We realized no revenues in the period from inception on May
6, 2003, to March 31, 2004. This is primarily the result of our beginning
operations and seeking to acquire rights to oil and gas properties. We expect to
realize revenues in the upcoming fiscal year.
Expenses. During the period from May 6, 2003, to March 31, 2004, we
incurred expenses of $786,757. These expenses were primary attributable to
general and administrative expenses of $781,757. Our general and administrative
expenses were largely related to the hiring of personnel to operate our
business, as well as travel and professional expenses including accounting and
legal fees. We also incurred amortization and depreciation expenses of $4,758.
We anticipate that as we execute our planned business activities over the next
twelve months our expenses will continue to increase.
Loss from Operations. Since May 6, 2003, we have incurred losses from
operations totaling $786,515. These losses are the result of our incurring
numerous expenses in connection with the development of our oil fields before
they produce any oil or gas. If we are unable to develop our oil and gas fields
to a level where oil and gas production and sales offset the costs of
exploration, development and production, we will continue to generate operating
losses. At this time, it is unclear when we will generate sufficient oil and gas
to offset expenses, if at all.
Other Income. During the period from May 6, 2003, to March 31, 2004, we
recognized total other income $254,717. This included realized gains on
marketable securities of $19,368, unrealized gain on marketable securities of
$248,407 and exchange gain of $70,949, offset by net interest expense of
$84,007. During the year we raised approximately $12 million through the sale of
our securities in private placement transactions. Therefore, at times during the
year, we had funds that were not being used in operations that we invested in
marketable securities. We anticipate the funds held in marketable securities
will be used to fund our operations and therefore expect gains from marketable
securities, both realized and unrealized, to decrease in the next twelve months.
Net Loss. Since May 2003, we have realized a net loss of $613,782. As
discussed above this net loss is largely the result of our incurring expenses in
connection with the development of our oil and gas fields before they produce
any oil or gas. We will continue to realize a net loss from operations until
such time as revenues generated from oil and gas production and sales and other
income offset our expenses. At this time, it is unclear when or if that may
occur.
Liquidity and Capital Resources
Since May 6, 2003, our capital resources have consisted of funds raised
through the sale of our common stock and debt convertible to our common stock.
We anticipate our capital resources in the upcoming twelve months will likewise
consist primarily of funds raised in financing activities.
Note B of the Notes to the Financial Statements discloses that we will
need significant additional funding to develop the geographical area covered by
our exploration and development license. Moreover, prior to commencing
commercial oil production, we must obtain a commercial production contract from
the ROK. While we are legally entitled to receive this commercial production
contract and have the exclusive right to negotiate such with the ROK, and the
ROK is required to conduct the negotiations under the Law of Petroleum in
Kazakhstan, there is no guarantee that we will be awarded a production contract.
If we cannot obtain a production contract, we will only be able to produce and
sell oil under the Law of Petroleum for the term of the existing contract, which
expires June 9, 2007. These factors, among others raise substantial doubt about
our ability to continue as a going concern.
Cash Flows
During the year, cash was primarily used to fund exploration and
development expenditures. We had a net increase in cash of approximate $2
million during 2003. See below for additional discussion and analysis of cash
flow.
Period from
inception
(May 6, 2003)
through
March 31, 2004
--------------
Net cash used in operating activities $(3,486,661)
-----------
Net cash used in investing activities (6,523,008)
-----------
Net cash provided by financing activities 12,136,024
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 2,126,355
-----------
Our primary source of cash has been cash flows from equity and debt
offerings. During the period ended March 31, 2004, we generated $12,136,024 from
the sale of stock and issuance of debt. We primarily used this cash to fund our
capital expenditures. At March 31, 2004, we had cash on hand of $2,126,355.
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the upcoming 12 months
are $10 million to $20 million for exploration, development, production and
acquisitions. We expect to fund these expenditures primarily from additional
capital we will seek and cash on hand. In the event we are not successful in
raising the anticipated funds from the sale of our securities, we nevertheless
believe capital expenditures of approximately $5,000,000 could be financed
through cash on hand, the sale of marketable securities and revenues from
anticipated oil production. The minimum level of capital expenditures on the ADE
Block is dictated by the exploration contract. The amount of funds we devote to
any particular activity in excess of the minimum required capital expenditures
may increase or decrease significantly depending on available opportunities,
cash flows and development results, among others.
If we are not successful in obtaining funding, we anticipate that we
will instead seek to develop existing wells and infrastructure in hopes of
generating sufficient revenue to finance our operations. This development would
be funded by cash and cash equivalents and the sale of marketable securities we
currently hold. If the funding is limited to these sources, our anticipated
development activities would be significantly more limited than anticipated
under our present business plan.
As discussed in Note B to the consolidated financial statements and the
Report of our Independent Registered Public Accounting Firm we will require
substantial additional funding, and must obtain a commercial production contract
with the Government of Kazakhstan to fully develop their business. These
conditions raise substantial doubt about our ability to continue as a going
concern.
Contractual Obligations and Contingencies
The following table lists our significant commitments at March 31,
2004, excluding current liabilities as listed on our consolidated balance sheet:
Payments Due By Period
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
----------------------- ----- ------ --------- --------- -------
Capital Expenditure Commitment(1) $21,300,000 $7,000,000 $14,300,000 $ -- $ --
Due to the Government of Kazakhstan(2) 5,994,745 -- -- 5,994,745 --
Due to Reservoir Consultants 500,000 278,000 222,000 -- --
Liquidation Fund 20,000 -- 20,000 -- --
----------- ---------- ----------- ---------- ----
Total $27,814,745 $7,278,000 $14,542,000 $5,994,745 $ --
=========== ========== =========== ========== ====
(1) Under the terms of our Contract with the ROK, we are required to
spend a total of at least $21.5 million dollars in exploration, development and
improvements within the ADE Block during the term of the license, including $7
million during the 2004 calendar year and $9.3 million in the 2005 calendar
year. If we fail to do so, we may be subject to the loss of our Contract.
(2) In connection with our acquisition of the License and Contract, we
will be required to repay the ROK for exploration and development expenditures
incurred by it prior to the time we acquired the License and Contract. The
repayment terms of this obligation will not be determined until such time as we
are granted a commercial production contract. Prior to commencing commercial oil
production, we must obtain a commercial production contract from the ROK. While
we are legally entitled to receive this commercial production contract and have
the exclusive right to negotiate such with the ROK, and the ROK is required to
conduct the negotiations under the Law of Petroleum in Kazakhstan, there is no
guarantee that we will be awarded a production contract. Moreover, at this time
it is unclear when might apply for a production contract or when it might be
issued, if at all. Therefore, we have made our best estimate as to when we
anticipate becoming subject to this repayment obligation.
Off-Balance Sheet Financing Arrangements
As of March 31, 2004, we had no off-balance sheet financing
arrangements.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our financial statements. The impact of
these policies and associated risks are discussed throughout Management's
Discussion and Analysis and Plan of Operations where such policies affect our
reported and expected financial results. A complete discussion of our accounting
policies in included in Note A of the Notes to Consolidated Financial
Statements.
Development Stage and Going Concern
We are a development stage company and have not yet commenced our
primary revenue-generating activities, which is the production and sale of oil
and gas. Our ability to realize the carrying value of our assets is dependent on
being able to produce and sell oil from the ADE Fields. Our financial statements
have been presented on the basis that we are a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. We have accumulated losses totaling $613,782 and have incurred some
amount of debt in the development phase of our operations. To fully develop the
Fields and achieve positive cash flow, we will require substantial additional
funding. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities which might be necessary should the
Company be unable to continue in existence.
Principles of Consolidation
Our consolidated financial statements include all of our consolidated
subsidiaries. Our consolidated financial statements include the accounts of Emir
Oil, LLP, our 70% owned subsidiary. All significant inter-company transactions
have been eliminated.
Foreign exchange transactions
Our functional currency is the U.S. Dollar, thus the financial
statements of our foreign subsidiary are measured using the U.S. Dollar.
Accordingly, transaction gains and losses for foreign subsidiaries shall be
recognized in U.S. dollars in consolidated operations in the year of occurrence.
There are no current regulatory issues in Kazakhstan dealing with currency
conversions between the local currency in Kazakhstan and the U.S. Dollar that
are expected to negatively impact our business, however, the risk of actual
currency fluctuations as it relates to the U.S. dollar is present.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS 143 did not have an
effect on the Company's consolidated financial statements because the liability
for plugging and abandoning wells is borne by the Republic of Kazakhstan (see
Note F to the Consolidated Financial Statements).
In January 2003, the FASB issued Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities (VIEs), in an effort to expand upon
and strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In general, a VIE is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires a VIE to be consolidated by a company if that company is subject
to a majority of the risk of loss from the VIE's activities, is entitled to
receive a majority of the VIE's residual returns, or both. FIN 46 also requires
disclosures about VIEs that the Company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to VIEs created after January 31, 2003, and to other
entities no later than the three months ended September 30, 2003. Certain
disclosure requirements are required in all financial statements issued after
January 31, 2003, regardless of when the VIE was established. The Company has
not identified any VIEs that must be consolidated.
On April 30, 2003 -- The FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. The amendments set forth in SFAS No. 149 require that
contracts with comparable characteristics be accounted for similarly. SFAS No.
149 is generally effective for contracts entered into or modified after June 30,
2003 (with a few exceptions) and for hedging relationships designated after June
30, 2003. The guidance is to be applied prospectively only. The adoption of this
pronouncement had no effect on the Consolidated Financial Statements of the
Company.
On May 15, 2003 -- The Financial Accounting Standards Board (FASB)
issued Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. The Statement improves the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. It also establishes standards for how an
issuer classifies and measures on its balance sheet certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and was otherwise
effective for us as of July 1, 2003. The adoption of the applicable provisions
of this statement as of the indicated dates has had no effect on the Company's
financial statements.
Effects of Inflation and Pricing
The oil and natural gas industry is very cyclical and the demand for
goods and services of oil field companies, suppliers and others associated with
the industry puts extreme pressure on the economic stability and pricing
structure within the industry. Typically, as prices for oil and natural gas
increase, so do all associated costs. Material changes in prices impact the
current revenue stream, estimates of future reserves, borrowing base
calculations of bank loans and value of properties in purchase and sale
transactions. Material changes in prices can impact the value of oil and natural
gas companies and their ability to raise capital, borrow money and retain
personnel. While we do not currently expect business costs to materially
increase, continued high prices for oil and natural gas could result in
increases in the cost of material, services and personnel.
Financial Statements
See Consolidated Financial Statement listed in the accompanying index
to the Consolidated Financial Statements on Page F-1 herein.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On February 11, 2004, the Company dismissed Mintz & Partners LLP,
Chartered Accountants, from its position as the Company's independent
accountants. The Company's board of directors participated in and approved the
decision to change independent accountants.
The audit report of Mintz & Partners LLP, on June 19, 2003, for the
years ended March 31, 2003 and 2002, contained no adverse opinion, disclaimer of
opinion or qualification or modification as to uncertainty, audit scope or
accounting principles.
In connection with its audits for the past two fiscal years and review
of unaudited financial statements through September 30, 2003, and through the
date of dismissal on February 11, 2004, there have been no disagreements with
Mintz & Partners LLP, on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which if not
resolved to the satisfaction of Mintz & Partners LLP, would have caused them to
make reference thereto on the financial statements.
During the two most recent fiscal years and through February 11, 2004,
there have been no reportable events (as defined in Regulation S-B, Item
304(a)(1)(iv)).
On February 11, 2004, the Company engaged BDO Kazakhstanaudit to serve
as the Company's independent auditors. During the two most recent fiscal years
and through February 11, 2004, the Company has not consulted with BDO
Kazakhstanaudit regarding (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, and no
written report or oral advice was provided to the Company by BDO Kazakhstanaudit
that was an important factor considered by the Company in reaching a decision as
to an accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions thereto, or a
reportable event, as that term is defined in Item 304(a)(1)(iv) of Regulation
S-B.
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION
We file annual and quarterly reports with the Securities and Exchange
Commission. Stockholders may obtain, without charge, a copy of the most recent
Form 10-KSB (without exhibits) by requesting a copy in writing from us at the
following address:
BMB Munai, Inc.
500 Fifth Avenue, Suite 4810
New York, New York, 10110
The exhibits to the Form 10-KSB are available upon payment of charges
that approximate reproduction costs. If you would like to request documents,
please do so by September 27, 2004, to receive them before the annual meeting of
stockholders.
By order of the Board of Directors,
/s/ Alexandre Agaian
----------------------------------
Alexandre Agaian
President
September 17, 2004
STOCKHOLDERS ARE REQUESTED TO MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN
IT IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. YOUR PROMPT RESPONSE WILL
BE HELPFUL, AND YOUR COOPERATION WILL BE APPRECIATED.
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED FINANCIAL STATEMENTS
For the period since inception on May 6, 2003 till March 31, 2004
Table of Contents...........................................................F-1
Report of Independent Registered Public Accounting Firm.....................F-2
Consolidated Financial Statements
Consolidated Balance Sheet .................................................F-3
Consolidated Statement of Loss..............................................F-4
Consolidated Statement of Shareholders' Equity..............................F-5
Consolidated Statement of Cash Flows........................................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
BMB Munai, Inc.
We have audited the accompanying consolidated balance sheet of BMB Munai, Inc.
(a company in the development stage) as of March 31, 2004, and the related
consolidated statement of loss, shareholders' equity, and cash flows for the
period from inception (May 6, 2003) through March 31, 2004. These financial
statements are responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BMB Munai, Inc. at
March 31, 2004, and the consolidated results of its operations and its cash
flows for the period from inception (May 6, 2003) through March 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
consolidated financial statements, BMB Munai, Inc. will require substantial
additional funding, and must obtain a commercial production contract with the
Government of Kazakhstan to fully develop their business. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO Kazakhstanaudit, LLP
June 18, 2004
Almaty, Kazakhstan
F-2
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEET
ASSETS March 31, 2004
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 2,126,355
MARKETABLE SECURITIES 2,879,136
INVENTORIES 183,884
PREPAID ASSETS 522,148
-----------------
TOTAL CURRENT ASSETS 5,711,523
-----------------
LONG TERM ASSETS
FIXED ASSETS LESS ACCUM DEPRECIATION 259,653
OIL AND GAS PROPERTIES, FULL COST METHOD, LESS ACCUM DEPRECIATION 12,489,931
INTANGIBLE ASSETS 5,411
RESTRICTED CASH 20,000
DEPOSITS 21,172
-----------------
TOTAL LONG TERM ASSETS 12,796,167
-----------------
TOTAL ASSETS $ 18,507,690
=================
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 332,487
DUE TO RESERVOIR CONSULTANTS 278,000
OTHER S/T LIABILITIES 56,232
-----------------
TOTAL CURRENT LIABILITIES 666,719
-----------------
LONG-TERM LIABILITIES
DUE TO RESERVOIR CONSULTANTS 222,000
DUE TO THE GOVERNMENT OF KAZAKHSTAN 5,994,745
LIQUIDATION FUND 20,000
-----------------
TOTAL LONG TERM LIABILITIES 6,236,745
-----------------
TOTAL LIABILITIES 6,903,464
MINORITY INTEREST 81,984
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL
Class A Preferred Stock, $0.10 par value
Authorized - 1,500,000 shares
Issued and outstanding - None -
Class B Preferred Stock, $0.10 par value
Authorized - 1,000 shares
Issued and outstanding - None -
Class C Preferred Stock, $0.10 par value
Authorized - 1,000 shares
Issued and outstanding - None -
Common Stock, $0.001 par value
Authorized - 50,000,000 shares
Issued and outstanding - 20429422 20,429
ADDITIONAL PAID IN CAPITAL 12,115,595
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (613,782)
-----------------
SHAREHOLDER'S EQUITY 11,522,242
-----------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 18,507,690
=================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-3
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF LOSS
Period from inception (May 6, 2003)
through March 31, 2004
REVENUES $ -
-----------------
EXPENSES
OPERATING COSTS
GENERAL AND ADMINISTRATIVE (781,757)
AMORTIZATION AND DEPRECIATION (4,758)
-----------------
TOTAL EXPENSES (786,515)
LOSS FROM OPERATIONS (786,515)
OTHER INCOME
REALIZED GAINS ON MARKETABLE SECURITIES 19,368
UNREALIZED GAIN ON MARKETABLE SECURITIES 248,407
INTEREST INCOME/EXPENSE (NET) (84,007)
EXCHANGE GAIN 70,949
-----------------
TOTAL OTHER INCOME, NET 254,717
-----------------
NET LOSS BEFORE MINORITY INTEREST (531,798)
-----------------
MINORITY INTEREST (81,984)
-----------------
NET LOSS (613,782)
=================
WEIGHED AVERAGE COMMON SHARES OUTSTANDING $ 15,596,214
LOSS PER COMMON SHARE BASIC AND DILUTED $ (0.039)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-4
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Period from inception (May 6, 2003) through March 31, 2004
Common stock Additional
-------------------------- Paid-in Accumulated
shares amount Capital Deficit Total
================================================================================
Balance at May 6, 2003 491,655 $ 492 $ (492) $ - $ -
Stock dividend 50,000 50 (50) - -
-
Common stock issued during the merger 14,285,844 14,286 (14,286) - -
Conversion of Debt to common stock 571,428 571 1,999,429 - 2,000,000
Common stock issued in private placement 4,830,494 4,830 9,931,194 - 9,936,024
Options execised 200,000 200 199,800 - 200,000
Net loss - - - (613,782) (613,782)
--------------------------------------------------------------------------------
Balance at March 31, 2004 20,429,421 $ 20,429 $ 12,115,595 $ (613,782) $ 11,522,242
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-5
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF CASH FLOWS
Period from inception (May 6,
2003) through March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (613,782)
Adjustments to reconcile net loss to net cash used in operating activities
Non cash operating expenses (income)
Depreciation expenses 4,758
Minority Interest in Operations of Subsidiary 81,984
Change in operating assets and liabilities
Increase Marketable Securities (2,879,136)
Increase Inventories (183,884)
Increase Prepaid Assets (522,148)
Increase Account Payable and accrued liabilities 666,719
Restricted cash (20,000)
Rent Deposit (21,172)
--------------
Net cash used in operating activities (3,486,661)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (264,411)
Acquisition of intangible assets (5,411)
Purchase of Oil and Gas Properties (6,253,186)
--------------
Net cash used in investing activities (6,523,008)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale of Common Stock 9,936,024
Proceeds from Short-term Financing 500,000
Repayment of Short-term Financing (500,000)
Proceeds from Issuance of Convertible Debt 2,000,000
Proceeds from Execise of Common Stock Options 200,000
--------------
Net cash provided by financing activities 12,136,024
--------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,126,355
Cash and cash equivalents at Beginning of Year -
--------------
Cash and cash equivalents at End of Year $ 2,126,355
==============
NON CASH TRANSACIONS
Obligations to the Government of Kazakhstan for Contributed Oil and Gas Properties $ 5,994,745
Conversion of Debt into Common Stock $ 2,000,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-6
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
DESCRIPTION OF BUSINESS
During the period ending March 31, 2004, InterUnion Financial Corporation, now
named BMB Munai, Inc. (the "Company"), completed a reverse merger with BMB
Holding, Inc ("BMB"), a Delaware corporation. As a result of the merger, the
shareholders of BMB have obtained control of the Company. BMB was treated as the
acquiror for accounting purposes. A new board of directors was elected that is
comprised primarily of the former directors of BMB Holding, Inc. The primary
asset that was held by BMB Holding, Inc. and as a result of the merger is now
owned by the Company is a seventy percent (70%) interest in Emir Oil LLP ("Emir
Oil" or "Emir"). The primary assets of Emir Oil are a License and Contract. Emir
Oil is a Limited Liability Partnership formed under the laws of the Republic of
Kazakhstan for the sole purpose of acquiring the oil and gas exploration license
AI No. 1552 (the "License") and Contract No. 482 for Exploration of Hydrocarbons
in Aksaz-Dolinnoe-Emir oil fields, located in blocks XXXVI-10-C (Partially), F
(Partially) XXXVI-11-A (Partially), D n (Partially) (the "Contract"), in the
Republic of Kazakhstan.
In connection with the merger, the shareholders of BMB Holding, Inc. transferred
all of their 1,000 shares (being all of the issued and outstanding shares) of
BMB Holding, Inc. to the Company. As result, the former shareholders of BMB
Holding, Inc. collectively control the Company. Immediately following the
merger, the Company had an aggregate of 15,398,798 common shares issued and
outstanding, including the 14,857,143 common shares issued pursuant to the
merger.
Pursuant to the merger, the Company has changed its name from InterUnion
Financial Corporation to BMB Munai, Inc. The Company has also conducted a
reverse-split of its common shares on the basis of one new share for ten old
shares (1:10). Accordingly, all per share numbers contained in these financial
statements have been changed to give effect for this split.
Further, the Company has effected a reduction in its authorized capital from
500,000,000 common shares to 50,000,000 common shares. The Company is authorized
to issue preferred shares designated as Class "A," Class "B," and Class "C"
preferred shares, of which no such shares have been issued by the Company.
Two of the shareholders of BMB Holding, Inc. were also creditors of BMB Holding,
Inc. In partial consideration for the shares of the Company issued pursuant to
the merger, the Company repaid those debts and the creditors have released both
the Company and BMB Holding, Inc. from obligation to pay the respective debts.
On March 1, 2004, the Company opened its Representative office in the Republic
of Kazakhstan.
The Company has minimal operations to date and is considered to be in the
development stage.
F-7
BASIS OF CONSOLIDATION
The Company's financial statements present the consolidated results of BMB
Munai, Inc., and Emir Oil LLP, its 70% owned subsidiary (hereinafter
collectively referred to as the "Company"). All significant inter-company
account balances and transactions have been eliminated.
Emir Oil has a fiscal year ending December 31, which is different from Company's
fiscal year end. All transactions of Emir Oil from the date of its purchase by
BMB (June 7, 2003) through March 31, 2004 are reflected in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements.
CASH EQUIVALENTS
The Company considers all demand deposits and money market accounts purchased
with an original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities consist of short term repurchase agreements for securities
issued by Kazakhstan banks and Kazakhstan financial institutions. The Company
records these marketable securities as trading securities and any change in the
fair market value is recorded in earnings. The fair market value of marketable
securities as of March 31, 2004 was $2,879,136.
RESTRICTED CASH
Restricted Cash reflected in the long-term assets consists of $20,000 deposited
in a Kazakhstan bank and is restricted to meet possible environmental
obligations according to the regulations of Kazakhstan (see Note F).
INVENTORY
Inventory represents equipment for development activities, tangible drilling
materials required for drilling operations, spare parts, diesel fuel, and
various materials for use in oil field operations. Inventory is valued using the
weighted average method and is recorded at the lower of cost or net realizable
value.
LICENSES AND CONTRACTS
Emir Oil is the operator of the Aksaz, Dolinnoe and Emir oil and gas fields in
Western Kazakhstan (ADE Block, ADE Fields). The Government of the Republic of
Kazakhstan (the "Government") initially issued the license to Zhanaozen Repair
and Mechanical Plant on April 30, 1999. On September 23, 2002, the license was
assigned to Emir Oil. On June 9, 2000, the contract for exploration of the
Aksaz, Dolinnoe and Emir oil and gas fields was entered into between the Agency
of the Republic of Kazakhstan on Investments and the Zhanaozen Repair and
Mechanical Plant. On September 23, 2002, the contract was assigned to Emir Oil.
The Company is in a process of obtaining a commercial production contract with
the Government of Kazakhstan. The Company is legally entitled to receive this
commercial production contract and has an exclusive right to negotiate this
contract and the Government of Kazakhstan is obligated to conduct these
negotiations under the Law of Petroleum in Kazakhstan. If no terms can be
negotiated, the Company has a right to produce and sell oil, including export
oil, under the Law of Petroleum for the term of its existing contract through
the end of 2006.
OIL AND GAS PROPERTIES
While the Company has no present production history, in the future it plans to
follow the full cost method of accounting for its costs of acquisition,
exploration and development of oil and gas properties.
F-8
Under full cost accounting rules, the net capitalized costs of evaluated oil and
gas properties shall not exceed an amount equal to the present value of future
net cash flows from estimated production of proved oil and gas reserves, based
on current economic and operating conditions, including the use of oil and gas
prices as of the end of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible that the
estimate of discounted future net cash flows from proved oil and gas reserves
could change. If oil and gas prices decline, even if only for a short period of
time, it is possible that impairments of oil and gas properties could occur. In
addition, it is reasonably possible that impairments could occur if costs are
incurred in excess of any increases in the cost ceiling, revisions to proved oil
and gas reserves occur, or if properties are sold for proceeds less than the
discounted present value of the related proved oil and gas reserves.
All geological and geophysical studies, with respect to the ADE Block have been
capitalized as part of the oil and gas properties.
The Company's oil and gas properties primarily include the value of the license
and other capitalized costs under this method of accounting.
Costs of acquiring unproved leases shall be evaluated for impairment until such
time as the leases are proved or abandoned. In addition, if the sums of expected
undiscounted cash flows are less than net book value, unamortized costs at the
field level will be reduced to a fair value.
Long-term assets include fixed assets. Fixed assets are valued at the historical
cost less accumulated depreciation. Historical cost includes all direct costs
associated with the acquisition of the fixed assets.
Depreciation and amortization of producing properties shall be computed using
the unit-of-production method based on estimated proved recoverable reserves.
Depreciation of other depreciable assets shall be calculated using the straight
line method based upon estimated useful life ranging from two to ten years.
Maintenance and repairs shall be charged to expenses as incurred. Renewals and
betterments shall be capitalized.
Amortization of intangible assets shall be calculated using straight line method
upon estimated useful life ranging from 3 to 4 years.
RISKS AND UNCERTAINTIES
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market oil and gas. Currently
exports from the Republic of Kazakhstan are primarily dependent on transport
routes either via rail, barge or pipeline, through Russian territory. Domestic
markets in the Republic of Kazakhstan might not permit world market price to be
obtained. However, management believes that over the life of the project,
transportation options will be improved by further increases in the capacity of
the transportation options.
REVENUE RECOGNITION
Revenue from the sale of oil and gas shall be recorded using the accrual method
of accounting. As of March 31, 2004 the Company has had no production sales,
including test production sales.
F-9
FOREIGN EXCHANGE TRANSACTIONS
The Company's functional currency is the U.S. dollar, thus the financial
statements of the Company's foreign subsidiary are measured using the U.S.
dollar. Accordingly, transaction gains and losses for foreign subsidiaries shall
be recognized in U.S. dollars in consolidated operations in the year of
occurrence. There are no current regulatory issues in Kazakhstan dealing with
currency conversions between the local currency in Kazakhstan and the U.S.
Dollar that are expected to negatively impact the Company's business, however,
the risk of actual currency fluctuations as it relates to the U.S. dollar is
present.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under the liability method,
the effect on previously recorded deferred tax assets and liabilities resulting
from a change in tax rates is recognized in earnings in the period in which the
change is enacted.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Accordingly, actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS 143 did not have an effect on the
Company's consolidated financial statements because the liability for plugging
and abandoning wells is borne by the Republic of Kazakhstan (see Note F).
In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities (VIEs), in an effort to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
In general, a VIE is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a VIE to be consolidated by a company if that company is subject to a
majority of the risk of loss from the VIE's activities, is entitled to receive a
majority of the VIE's residual returns, or both. FIN 46 also requires
disclosures about VIEs that the Company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to VIEs created after January 31, 2003, and to other
entities no later than the three months ended September 30, 2003. Certain
disclosure requirements are required in all financial statements issued after
January 31, 2003, regardless of when the VIE was established. The Company has
not identified any VIEs that must be consolidated.
F-10
On April 30, 2003 -- The FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in SFAS No. 149 require that contracts
with comparable characteristics be accounted for similarly. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
(with a few exceptions) and for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively only. The adoption of this
pronouncement had no effect on the Consolidated Financial Statements of the
Company.
On May 15, 2003 -- The Financial Accounting Standards Board (FASB) issued
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. The Statement improves the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. It also establishes standards for how an
issuer classifies and measures on its balance sheet certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and was otherwise
effective for us as of July 1, 2003. The adoption of the applicable provisions
of this statement as of the indicated dates has had no effect on the Company's
financial statements.
NOTE B - GOING CONCERN
The Company's consolidated financial statements have been presented on the basis
that the Company continues as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has completed a merger with BMB Holding, Inc. and has
commenced the financing of the 70% owned subsidiary of the Company - Emir Oil
LLP ("Emir Oil"), and exploration of the properties that are licensed to Emir
Oil. Prior to the merger, the Company has discontinued all its previous
businesses. The new management of the Company is in the process of building the
oil and gas business, which is intended to generate revenue to sustain the
operations of the Company. To fully develop the geographical area covered by the
oil exploration license held by Emir, the Company needs substantial additional
funding. Concurrently, prior to commencing oil production, the Company must also
obtain a commercial production contract with the Government of Kazakhstan. The
Company is legally entitled to receive this commercial production contract and
has an exclusive right to negotiate this contract and the Government of
Kazakhstan is obligated to conduct these negotiations under the law of petroleum
in Kazakhstan. If no terms can be negotiated, the Company has a right to produce
and sell oil, including export oil, under the law of petroleum for the term of
its existing contract through June 9, 2007. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
NOTE C - ACQUISITION
On June 7, 2003, BMB acquired a 70% equity interest in Emir Oil. The results of
Emir's operations have been included in the consolidated financial statements
since that date. Emir had no operations prior to its acquisition by BMB. Emir
holds oil and gas exploration license for ADE Block. The aggregate purchase
price was $1,300,000. The entire purchase price has been allocated to Emir's oil
and gas licenses in the accompanying consolidated balance sheet. BMB is in the
process of obtaining third party valuations of the oil and gas licenses; thus,
the allocation of the purchase price is subject to refinement. The Company,
based on its holding of Emir Oil, is required to fund the exploration efforts of
Emir Oil. (See Note G.) The Company anticipates the cost of exploration to be
approximately $20,000,000, which the Company will seek to fund through
additional equity financing and the sale of oil produced during well testing.
F-11
NOTE D - FOREIGN ASSETS AND ECONOMIC CONCENTRATION
Marketable securities of $2,879,136 are held in short term repurchase agreements
for securities issued by Kazakhstan banks and Kazakhstan financial institutions.
Cash and Cash Equivalents include deposits in Kazakhstan banks in the amount
$1,067. Restricted Cash reflected in the long-term assets consists of $20,000
deposited in a Kazakhstan bank and restricted to meet possible environmental
obligations according to the regulations of Kazakhstan. The deposits in the
banks of Kazakhstan and the securities are subject to country risk of the
Republic of Kazakhstan. Furthermore, the primary asset of the Company is Emir
Oil; an entity formed under the laws of the Republic Kazakhstan is also subject
to country risk in the Republic of Kazakhstan.
NOTE E - FIXED ASSETS
Summary of the fixed assets net of accumulated depreciation is provided below:
Field facilities $ 62,583
Field equipment 114,650
Field vehicles 46,450
Office equipment and furniture 40,728
Total 264,441
Accumulated Depreciation 4,758
--------
Net $259,653
========
NOTE F - LIABILITIES
Long Term Liabilities include:
1. Due to the Government of Kazakhstan represents historical investments by the
Government in the properties currently held under exploration license and
contract by Emir Oil. When Emir Oil obtains a commercial production license for
the oil fields that it currently holds exploration license to, as a condition to
receipt of the commercial production license and contract for hydrocarbons by
Emir, Emir Oil would negotiate a repayment schedule for the debt with the
Government of the Republic of Kazakhstan. Should Emir Oil not proceed with
acquisition of a production contract and license for any property, that property
would revert to the Government in settlement of Emir's obligations to the
Government.
2. The amount of $222,000 due to reservoir consultants represents a part of
$700,000 contract with PGS Reservoir Consultants payable during 2006. The
Company has paid to PGS $200,000 during 2004 and will pay $278,000 in 2005.
3. Liquidation Fund. Under the laws of the Republic of Kazakhstan, the Company
is obligated to set aside funds for required environmental remediation.
Accordingly, during the period covered in these financial statements, the
Company contributed $20,000 to the Liquidation Fund.
NOTE G - COMMITMENTS AND CONTINGENCIES
Under the terms of the five-year exploration contract, Emir Oil is required to
spend a total of $21.5 million in exploration and development activities on the
ADE Block. To retain its rights under the exploration contract, the Company must
spend a minimum of $7 million in 2004 and $9.3 million in 2005. The failure to
make these minimum capital expenditures could result in the loss of the
exploration contract.
F-12
A lawsuit was filed in Florida naming the Company as one of the defendants. The
claim alleges that the Plaintiff should have received compensation and or a
percentage of stock of the Company as a result of the merger between the Company
and BMB Holding, Inc. The Company is confident that the matter shall be resolved
in the Company's favor. The Company has retained legal counsel to protect its
interests. In the opinion of the Company's management and legal counsel, the
resolution of this lawsuit will not have a material adverse effect on our
financial condition, results of operations or cash flows
NOTE H - CAPITAL STOCK, ADDITIONAL PAID-IN-CAPITAL AND FINANCING
The following table sets forth the computation of basic and diluted loss per
share:
Period from inception
(May 6, 2003) through
March 31, 2004
Numerator:
Net loss and numerator for basic and
diluted loss per share $ (613,782)
=================
Denominator:
Denominator for basic and diluted loss
per share, weighted average shares 15,596,214
=================
The effect of the stock warrants and stock options is anti-dilutive.
During the year ended March 31, 2004, the Company completed a reverse merger
with BMB Holding, Inc. Additionally the Company:
a. Completed a private placement for the total amount of $11,113,562
(less expenses and brokerage commissions of $1,177,688).
b. Converted a $2 million debt to the shareholders of BMB Holding, Inc.
into equity.
c. Issued 200,000 shares of stock upon exercise of stock option worth
$200,000.
d. Completed a 10 for 1 reverse stock split.
The Financing
As a condition of the merger, the Company was obligated to secure equity
financing of at least $3,000,000. Pursuant to an Agency Agreement between the
Company and the Agent, the Company has issued an aggregate of 4,430,494 common
shares of the Company via private placement. The offering has been made to
accredited investors under Regulation D in the United States and Regulation S
for non U.S. Persons subject to a 12-month hold.
The shares were issued in two transactions, each of which closed on November 26,
2003. The first private placement consisted of an aggregate of 2,750,494 common
shares at US $2.15 per share. The second private placement consisted of an
aggregate of 1,680,000 shares at US $2.50 per share. The agent received a
commission equal to 8.5% of the gross proceeds received by the issuer other than
for shares issued to US Persons. In addition, the agent received warrants equal
to 10% of the number of shares sold on behalf of the Company. Further, on
F-13
November 19, 2003, the Company entered into two (2) stock option agreements with
the agent. Pursuant the first option agreement, the agent may purchase up to two
hundred thousand (200,000) common shares of the Company at an exercise price of
$1.00 per shares for a period of five (5) years from the date of the merger. The
second option agreement allows the Agent to purchase up to one hundred forty two
thousand eight hundred fifty seven (142,857) common shares of the Company at an
exercise price of $3.50 per share for a period of five (5) years from the date
of the merger. The agent also received a fee of $150,000 for advisory services
rendered to the Company in connection with the merger.
Options exercised
On December 15, 2003 the Agent exercised its first option for 200,000 shares at
the exercise price of $1.00. No other options were exercised in reported period.
NOTE I - RELATED PARTY TRANSACTIONS
On May 2, 2003 BMB Holding, Inc. obtained a short-term financing from its
shareholders in the amount of $2,000,000. Effective as of November 26, 2003, the
debt was converted into 571,429 shares of the Company's common stock.
On September 15, 2003 BMB Holding, Inc. obtained a short-term financing for
covering expenses related to the reverse merger and private placement from one
of its shareholders, Caspian Services Group, Ltd. The loan in the amount of
$500,000 for 6 months with the annual interest of 16.5% has been repaid in full
on November 26, 2003 from the proceeds of the private placement.
F-14
Index of Annexes attached to the Proxy Statement
ANNEX A Amended and Restated Certificate of Incorporation
ANNEX B The BMB Munai, Inc., 2004 Stock Incentive Plan
Proxy - BMB Munai, Inc.
Annual Meeting of Stockholders - October 8, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Alexandre Agaian and Boris Cherdabayev,
severally, as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse side, all
of the shares of Common Stock of BMB MUNAI, INC., of record in the name of the
undersigned at the close of business on August 27, 2004, which the undersigned
is entitled to vote at the 2004 Annual Meeting of Stockholders of the Company
and at any and all adjournments thereof, with respect to the matters set forth
on the reverse side and described in the Notice of Annual Meeting and Proxy
Statement dated September 17, 2004, receipt of which is acknowledged.
This Proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder(s). IF NO INDICATION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, 3, 4, 5 and 6.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
POSTAGE PRE-PAID ENVELOPE.
(Please See Reverse Side)
[Name and address of shareholder]
[ ]Mark this box with an X
if you have made changes
to your name or address
details above.
Annual Meeting Proxy Card
[A] Proposal for the Election of Directors
1. The Board of Directors recommends a vote FOR the listed nominees.
For Withhold For Withhold
01 - Alexandre Agaian [ ] [ ] 05 - Miragli Kunayev [ ] [ ]
02 - Bakhytbek Baiseitov [ ] [ ] 06 - Valery Tolkachev [ ] [ ]
03 - Georges Benarroch [ ] [ ] 07 - Reserve vacant for [ ] [ ]
Board appointment
04 - Boris Cherdabayev [ ] [ ]
__________________ [ ] [ ]
[B] Other Proposals
The Board of Directors recommends a vote FOR the following proposals.
For Against Abstain
2. APPROVE THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION. [ ] [ ] [ ]
3. APPROVE THE BMB MUNAI, INC., 2004 STOCK INCENTIVE PLAN [ ] [ ] [ ]
4. AUTHORIZE THE BOARD OF DIRECTORS, IN ITS DISCRETION,
TO CHANGE THE DOMICILE OF THE COMPANY FROM THE STATE
OF DELAWARE TO ANY OTHER STATE WITHIN THE UNITED
STATES [ ] [ ] [ ]
5. RATIFY THE ACTIONS OF OUR DIRECTORS FOR THE LAST
FISCAL YEAR AND FOR THE PERIOD FROM THE FISCAL YEAR
END THROUGH THE DATE OF THE ANNUAL SHAREHOLDER MEETING
6. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any and all
adjournments thereof.
[C] Authorized Signatures - Sign Here - This section must be completed for your
instructions to be executed.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature 1 - Please keep signature within the
box
[ ]
Signature 2 - Please keep signature within the
box Date (mm/dd/yyyy)
[ ] [ / / ]
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BMB MUNAI, INC.
(Duly Adopted in Accordance with Section 242 of the
Delaware General Corporation Law)
Originally Incorporated on February 2, 1994
(Amends and Restates)
ARTICLE I.
The name of the Corporation is BMB Munai, Inc.
ARTICLE II.
The address of the registered office of the Corporation within the
State of Delaware is 1220 N. Market St., Suite 606, Wilmington, Delaware 19801.
The name of the registered agent of the Corporation at such address is American
Incorporators, Ltd.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV.
The total number of shares of stock of all classes which the
Corporation has authority to issue is 120,000,000 shares, divided into
100,000,000 shares of Common Stock, par value $0.001 per share (herein called
the "Common Stock") and 20,000,000 shares of Preferred Stock, par value $0.001
per share (herein called "Preferred Stock"). The aggregate par value of all
shares is $120,000.
I. COMMON STOCK
A. Dividends. Subject to all of the rights of the Preferred Stock,
dividends may be paid upon the Common Stock as and when declared by the Board of
Directors out of funds legally available for the payment of dividends.
B. Liquidation Rights. In the event of any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, and after the
holders of the Preferred Stock shall have been paid in full amounts to which
they respectively shall be entitled, or an amount sufficient to pay the
aggregate amount to which such holders shall be entitled shall have been
deposited in trust with a bank or trust company for the benefit of the holders
of the Preferred Stock, the remaining net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock.
C. Voting Rights. Except as otherwise expressly provided with respect
to the Preferred Stock and except as otherwise may be required by law, the
Common Stock shall have the exclusive right to vote for the election of
directors and for all other purposes and each holder of Common Stock shall be
entitled to one vote for each share held.
D. Residual Rights. All rights accruing to the outstanding shares of
the Corporation not expressly provided for to the contrary herein or in the
Corporation's bylaws or in any Amendment hereto or thereto shall be vested in
the Common Stock.
II. PREFERRED STOCK
The Board of Directors of the Corporation is expressly authorized, as
shall be stated and expressed in the resolution or resolutions it adopts,
subject to limitations prescribed by law and the provisions of this Article IV,
to provide for the issuance of the shares of Preferred Stock in one or more
class or series, in addition to the shares thereof specifically provided for in
this Article IV, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to be
included in each such class or series, and to fix for each such class or series
such voting powers, full or limited, or no voting powers, and such distinctive
designations, powers, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof,
including without limitation, the authority to provide that any such class or
series may be (i) subject to redemption at such time or times and at such price
or prices; (ii) entitled to receive dividends (which may be cumulative or
non-cumulative) at such rates, on such conditions, and at such times, and
payable in preference to, or in relation to, the dividends payable on any other
class or classes or any other series; (iii) entitled to such rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation; (iv)
convertible into, or exchangeable for, shares of any other class or classes of
stock, or of any other series of the same or any other class or classes of
stock, of the Corporation at such price or prices or at such rates of exchange
and with such adjustments; or (v) subject to the terms and amounts of any
sinking fund provided for the purchase or redemption of the shares of such
series; all as may be stated in such resolution or resolutions.
The number of authorized shares of Series Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Series Preferred Stock, as the case
may be, or of any series thereof, unless a vote of any such holders is required
pursuant to the provisions of this Article IV or the certificate or certificates
establishing any additional series of such stock.
ARTICLE V.
A. Board of Directors of the Corporation.
1. General Provisions. The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors. The exact number
of directors shall be fixed from time to time by, or in the manner provided in,
the By-Laws of the Corporation and may be increased or decreased as therein
provided. Directors of the Corporation need not be elected by ballot unless
required by the By-Laws.
2. Classification of Board of Directors. The directors shall be divided
into three classes. Each such class shall consist, as nearly as may be possible,
of one-third of the total number of directors, and any remaining directors shall
be included within such group or groups as the Board of Directors shall
designate. At the 2004 annual meeting of stockholders, a class of directors
shall be elected for a one-year term, a class of directors for a two-year term
and a class of directors for a three-year term. At each succeeding annual
meeting of stockholders, beginning with the 2005 annual meeting of stockholders,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, but
in no case shall a decrease in the number of directors shorten the term of any
incumbent director. A director may be removed from office for cause only and,
subject to such removal, death, resignation, retirement or disqualification,
shall hold office until the annual meeting for the year in which his term
expires and until his successor shall be elected and qualify. No alteration,
amendment or repeal of this Article V or the By-Laws of the Corporation shall be
effective to shorten the term of any director holding office at the time of such
alteration, amendment or repeal, to permit any such director to be removed
without cause, or to increase the number of directors in any class or in the
aggregate from that existing at the time of such alteration, amendment or repeal
until the expiration of the terms of office of all directors then holding
office, unless (i) in the case of this Article V, such alteration, amendment or
repeal has been approved by the holders of all shares of stock entitled to vote
thereon, or (ii) in the case of the By-Laws, such alteration, amendment or
repeal has been approved by either the holders of all shares entitled to vote
thereon or by a vote of a majority of the entire Board of Directors.
3. Directors Appointed by a Specific Class of Stockholders. To the
extent that any holders of any class or series of stock other than Common Stock
issued by the Corporation shall have the separate right, voting as a class or
series, to elect directors, the directors elected by such class or series shall
be deemed to constitute an additional class of directors and shall have a term
of office for one year or such other period as may be designated by the
provisions of such class or series providing such separate voting right to the
holders of such class or series of stock, and any such class of directors shall
be in addition to the classes designated above.
ARTICLE VI.
A. General Provisions. The following provisions are hereby adopted for
the purpose of defining, limiting and regulating the powers of the Corporation
and of its directors and stockholders:
1. Amendments to the Certificate of Incorporation. Subject to the
provisions of applicable law, the Corporation reserves the right from time to
time to make any amendment to its Amended and Restated Certificate of
Incorporation, now or hereafter authorized by law, including any amendment which
alters the contract rights as expressly set forth therein, of any outstanding
stock.
2. Amendments to the By-Laws. The Board of Directors is expressly
authorized to adopt, alter and repeal the By-Laws of the Corporation in whole or
in part at any regular or special meeting of the Board of Directors, by vote of
a majority of the entire Board of Directors. Except where this Amended and
Restated Certificate of Incorporation otherwise requires a higher vote, the
By-Laws may also be adopted, altered or repealed in whole or in part at any
annual or special meeting of the stockholders by the affirmative vote of
three-fourths of the shares of the Corporation outstanding and entitled to vote
thereon.
3. No Preemptive Rights. No holder of any class of stock of the
Corporation, whether now or hereafter authorized or outstanding, shall have any
preemptive, preferential or other right to subscribe for or purchase any class
of the Corporation's stock, whether now or hereafter authorized or outstanding,
which it may at any time issue or sell, or to subscribe for or purchase any
notes, debentures, bonds or other securities which it may at any time issue or
sell, whether or not the same be convertible into or exchangeable for or carry
options or warrants to purchase shares of any class of the Corporation's stock
or other securities, or to receive or purchase any warrants or options which may
be issued or granted evidencing the right to purchase any such stock or other
securities, it being intended by this Section 3 that all preemptive rights of
any kind applicable to securities of the Corporation are eliminated.
4. Vote Required to Take Action; Action by Written Consent. Except as
otherwise provided in this Amended and Restated Certificate of Incorporation and
except as otherwise provided by applicable law, the Corporation may take or
authorize any action upon the affirmative vote of the majority of shares present
in person or represented by proxy at the meeting and entitled to vote on the
subject matter thereof. Action shall be taken by stockholders of the Corporation
only at annual or special meetings of stockholders, and stockholders may act in
lieu of a meeting if a consent or consents in writing setting forth the action
so taken, shall be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
5. Compensation of Directors. The Board of Directors may determine from
time to time the amount and type of compensation which shall be paid to its
members for service on the Board of Directors. The Board of Directors shall also
have the power, in its discretion, to provide for and to pay to directors
rendering services to the Corporation not ordinarily rendered by directors, as
such, special compensation appropriate to the value of such services, as
determined by the Board from time to time.
6. Interested Transactions. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or committee, and the Board of Directors or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction. This paragraph shall not be construed to invalidate any such
contract or transaction which would otherwise be valid under the common and
statutory law applicable thereto.
7. Indemnification. The Corporation shall indemnify (a) its directors
to the fullest extent permitted by the laws of the State of Delaware now or
hereafter in force, including the advancement of expenses under the procedures
provided by such laws, (b) all of its officers to the same extent as it shall
indemnify its directors, and (c) its officers who are not directors to such
further extent as shall be authorized by the Board of Directors and be
consistent with law. Subject only to any limitations prescribed by the laws of
the State of Delaware now or hereafter in force, the foregoing shall not limit
the authority of the Corporation to indemnify the directors, officers and other
employees and agents of this Corporation consistent with law and shall not be
deemed to be exclusive of any rights to which those indemnified may be entitled
as a matter of law or under any resolution, By-Law provision, or agreement.
8. Court-Ordered Meetings of Creditors and/or Stockholders. Whenever a
compromise or arrangement is proposed between this Corporation and its creditors
or any class of them and/or between this Corporation and its stockholders or any
class of them, any court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of this Corporation or of any creditor
or stockholder thereof, or on the application of any receiver or receivers
appointed for this Corporation under the provisions of Section 291 of Title 8 of
the Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as such court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which such application has
been made, be binding on all the creditors or class of creditors, and/or on all
the stockholders or class of stockholders, of this Corporation, as the case may
be, and also on this Corporation.
9. Liability of Directors. To the fullest extent permitted by Delaware
statutory or decisional law, as amended or interpreted, no director of this
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. This Section 9
does not affect the availability of equitable remedies for breach of fiduciary
duties.
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be executed and attested to by its duly authorized officers
this ____ day of October, 2004.
BMB MUNAI, INC.
_________________________________
By: Alexandre Agaian, President
_________________________________
By: Gary Lerner, Secretary
BMB MUNAI, INC.
2004 Stock Incentive Plan
Section 1. Purpose; Definitions.
1.1 Purpose. The purpose of The BMB Munai, Inc., (the "Company") 2004
Stock Incentive Plan (the "Plan") is to enable the Company to offer to its key
employees, officers, directors, consultants, advisors and representatives whose
past, present and/or potential contributions to the Company and its Subsidiaries
have been, are or will be important to the success of the Company, an
opportunity to acquire a proprietary interest in the Company. The various types
of long-term incentive awards which may be provided under the Plan will enable
the Company to respond to changes in compensation practices, tax laws,
accounting regulations and the size and diversity of its business.
1.2 Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Agreement" means the agreement between the Company and
the Holder setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto and the regulations promulgated
thereunder.
(d) "Committee" means the Stock Option Committee of the Board
or any other committee of the Board, which the Board may designate to administer
the Plan or any portion thereof. If no Committee is so designated, then all
references in this Plan to "Committee" shall mean the Board.
(e) "Common Stock" means the Common Stock of the Company, par
value $.001 per share.
(f) "Company" means The BMB Munai, Inc., a corporation
organized under the laws of the State of Delaware.
(g) "Deferred Stock" means Stock to be received, under an award made pursuant to
Section 9, below, at the end of a specified deferral period.
(h) "Disability" means disability as determined under procedures established by
the Committee for purposes of the Plan.
(i) "Effective Date" means the date set forth in Section 13.1,
below.
(j) "Employee" means any employee, director, general partner,
trustee (where the registrant is a business trust), officer or consultant or
advisor.
(k) "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations issued thereunder, means, as
of any given date: (i) if the Common Stock is listed on a national securities
exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, the
last sale price of the Common Stock in the principal trading market for the
Common Stock on the last trading day preceding the date of grant of an award
hereunder, as reported by the exchange or Nasdaq, as the case may be; (ii) if
the Common Stock is not listed on a national securities exchange or quoted on
the Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the
over-the-counter market, the closing bid price for the Common Stock on the last
trading day preceding the date of grant of an award hereunder for which such
quotations are reported by the OTC Bulletin Board or the National Quotation
Bureau, Incorporated or similar publisher of such quotations; and (iii) if the
fair market value of the Common Stock cannot be determined pursuant to clause
(i) or (ii) above, such price as the Committee shall determine, in good faith.
(l) "Holder" means a person who has received an award under
the Plan.
(m) "Incentive Stock Option" means any Stock Option intended
to be and designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
(n) "Nonqualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
(o) "Normal Retirement" means retirement from active
employment with the Company or any Subsidiary on or after age 65.
(p) "Other Stock-Based Award" means an award under Section 10,
below, that is valued in whole or in part by reference to, or is otherwise based
upon, Stock.
(q) "Parent" means any present or future parent corporation of
the Company, as such term is defined in Section 424(e) of the Code.
(r) "Plan" means The BMB Munai, Inc., 2004 Stock Incentive
Plan, as hereinafter amended from time to time.
(s) "Restricted Stock"means Stock, received under an award
made pursuant to Section 8, below, that is subject to restrictions under said
Section 8.
(t) "SAR Value" means the excess of the Fair Market Value (on
the exercise date) of the number of shares for which the Stock Appreciation
Right is exercised over the exercise price that the participant would have
otherwise had to pay to exercise the related Stock Option and purchase the
relevant shares.
(u) "Stock" means the Common Stock of the Company, par value
$.001 per share.
(v) "Stock Appreciation Right" means the right to receive from
the Company, on surrender of all or part of the related Stock Option, without a
cash payment to the Company, a number of shares of Common Stock equal to the SAR
Value divided by the exercise price of the Stock Option.
(w) "Stock Option" or "Option" means any option to purchase
shares of Stock which is granted pursuant to the Plan.
(x) "Stock Reload Option" means any option granted under
Section 6.3, below, as a result of the payment of the exercise price of a Stock
Option and/or the withholding tax related thereto in the form of Stock owned by
the Holder or the withholding of Stock by the Company.
(y) "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined in Section 424(f) of the
Code.
Section 2. Administration.
2.1 Committee Membership. The Plan shall be administered by the Board
or a Committee. Committee members shall serve for such terms as the Board may in
each case determine, and shall be subject to removal at any time by the Board.
2.2 Powers of Committee. The Committee shall have full authority,
subject to Section 4, below, to award, pursuant to the terms of the Plan: (i)
Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv)
Deferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based Awards.
For purposes of illustration and not of limitation, the Committee shall have the
authority (subject to the express provisions of this Plan):
(a) to select the officers, key employees, directors,
consultants, advisors and sales representatives of the Company or any Subsidiary
to whom Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred
Stock, Reload Stock Options and/or Other Stock-Based Awards may from time to
time be awarded hereunder.
(b) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, number of shares, share price, any restrictions or limitations, and
any vesting, exchange, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions, as the Committee shall determine);
(c) to determine any specified performance goals or such other
factors or criteria which need to be attained for the vesting of an award
granted hereunder;
(d) to determine the terms and conditions under which awards
granted hereunder are to operate on a tandem basis and/or in conjunction with or
apart from other equity awarded under this Plan and cash awards made by the
Company or any Subsidiary outside of this Plan;
(e) to permit a Holder to elect to defer a payment under the
Plan under such rules and procedures as the Committee may establish, including
the crediting of interest on deferred amounts denominated in cash and of
dividend equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which
Stock and other amounts payable with respect to an award hereunder shall be
deferred which may be either automatic or at the election of the Holder; and
(g) to substitute (i) new Stock Options for previously granted
Stock Options, which previously granted Stock Options have higher option
exercise prices and/or contain other less favorable terms, and (ii) new awards
of any other type for previously granted awards of the same type, which
previously granted awards are upon less favorable terms.
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Section 4 and 12, below,
the Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any award issued under the Plan (and to determine the form and
substance of all Agreements relating thereto), to otherwise supervise the
administration of the Plan. Subject to Section 12, below, all decisions made by
the Committee pursuant to the provisions of the Plan shall be made in the
Committee's sole discretion and shall be final and binding upon all persons,
including the Company, its Subsidiaries and Holders.
(b) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term or provision of the Plan relating to Incentive
Stock Options (including but limited to Stock Reload Options or Stock
Appreciation rights granted in conjunction with an Incentive Stock Option) or
any Agreement providing for Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the Holder(s) affected, to disqualify any Incentive Stock
Option under such Section 422.
Section 3. Stock Subject to Plan.
3.1 Number of Shares. The total number of shares of Common Stock
reserved and available for distribution under the Plan shall be 5,000,000
shares. Shares of Stock under the Plan may consist, in whole or in part, of
authorized and unissued shares or treasury shares. If any shares of Stock that
have been granted pursuant to a Stock Option cease to be subject to a Stock
Option, or if any shares of Stock that are subject to any Stock Appreciation
Right, Restricted Stock, Deferred Stock award, Reload Stock Option or Other
Stock-Based Award granted hereunder are forfeited or any such award otherwise
terminates without a payment being made to the Holder in the form of Stock, such
shares shall again be available for distribution in connection with future
grants and awards under the Plan. Only net shares issued upon a stock-for-stock
exercise (including stock used for withholding taxes) shall be counted against
the number of shares available under the Plan.
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of any
merger, reorganization, consolidation, recapitalization, dividend (other than a
cash dividend), stock split, reverse stock split, or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and exercise price of shares subject to outstanding Options, in the
number of shares and Stock Appreciation Right price relating to Stock
Appreciation Rights, and in the number of shares and Stock Appreciation Right
price relating to Stock Appreciation Rights, and in the number of shares subject
to, and in the related terms of, other outstanding awards (including but not
limited to awards of Restricted Stock, Deferred Stock, Reload Stock Options and
Other Stock-Based Awards) granted under the Plan as may be determined to be
appropriate by the Committee in order to prevent dilution or enlargement of
rights, provided that the number of shares subject to any award shall always be
a whole number.
Section 4. Eligibility.
Awards may be made or granted to key employees, officers, directors,
consultants, advisors and sales representatives who are deemed to have rendered
or to be able to render significant services to the Company or its Subsidiaries
and who are deemed to have contributed or to have the potential to contribute to
the success of the Company. No Incentive Stock Option shall be granted to any
person who is not an employee of the Company or a Subsidiary at the time of
grant.
Section 5. Required Six-Month Holding Period.
Any equity security issued under this Plan may not be sold prior to six
months from the date of the grant of the related award without the approval of
the Company.
Section 6. Stock Options.
6.1 Grant and Exercise. Stock Options granted under the Plan may be of
two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Any
Stock Option granted under the Plan shall contain such terms, not inconsistent
with this Plan, or with respect to Incentive Stock Options, not inconsistent
with the Code, as the Committee may from time to time approve. The Committee
shall have the authority to grant Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options and which may be granted alone or in
addition to other awards granted under the Plan. To the extent that any Stock
Option intended to qualify as an Incentive Stock Option does not so qualify, it
shall constitute a separate Nonqualified Stock Option. An Incentive Stock Option
may be granted only within the ten-year period commencing from the Effective
Date and may only be exercised within ten years of the date of grant or five
years in the case of an Incentive Stock Option granted to an optionee ("10%
Stockholder") who, at the time of grant, owns Stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company.
6.2 Terms and Conditions. Stock Options granted under the Plan shall be
subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under an Incentive Stock Option shall be determined by the Committee
at the time of grant and may not be less than 100% of the Fair Market Value of
the Stock as defined above; provided, however, that the exercise price of an
Incentive Stock Option granted to a 10% Stockholder shall not be less than 110%
of the Fair Market Value of the Stock. The exercise price per share of Stock
purchasable under any options granted that are not Incentive Stock Option, shall
be determined by the Committee at the time of grant.
(b) Option Term. Subject to the limitations in Section 6.1,
above, the term of each Stock Option shall be fixed by the Committee.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee and as set forth in Section 11, below. If the Committee provides,
in its discretion, that any Stock Option is exercisable only in installments,
i.e., that it vests over time, the Committee may waive such installment exercise
provisions at any time at or after the time of grant in whole or in part, based
upon such factors as the Committee shall determine.
(d) Method of Exercise. Subject to whatever installment,
exercise and waiting period provisions are applicable in a particular case,
Stock Options may be exercised in whole or in part at any time during the term
of the Option, by giving written notice of exercise to the Company specifying
the number of shares of Stock to be purchased. Such notice shall be accompanied
by payment in full of the purchase price, which shall be in cash or, unless
otherwise provided in the Agreement, in shares of Stock (including Restricted
Stock and other contingent awards under this Plan) or, partly in cash and partly
in such Stock, or such other means which the Committee determines are consistent
with the Plan's purpose and applicable law. Cash payments shall be made by wire
transfer, certified or bank check or personal check, in each case payable to the
order of the Company; provided, however, that the Company shall not be required
to deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of Stock
shall be valued at the Fair Market Value of a share of Stock on the day prior to
the date of exercise. Such payments shall be made by delivery of stock
certificates in negotiable form which are effective to transfer good and valid
title thereto to the Company, free of any liens or encumbrances. Subject to the
terms of the Agreement, the Committee may, in its sole discretion, at the
request of the Holder, deliver upon the exercise of a Nonqualified Stock Option
a combination of shares of Deferred Stock and Common Stock; provided that,
notwithstanding the provision of Section 9 of the Plan, such Deferred Stock
shall be fully vested and not subject to forfeiture. A Holder shall have none of
the rights of a stockholder with respect to the shares subject to the Option
until such shares shall be transferred to the Holder upon the exercise of the
Option.
(e) Transferability. Unless otherwise determined by the
Committee, no Stock Option shall be transferable by the Holder other than by
will or by the laws of descent and distribution, and all Stock Options shall be
exercisable, during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holders' employment
by the Company or a Subsidiary terminates by reason of death, any Stock Option
held by such Holder, unless otherwise determined by the Committee at the time of
grant and set forth in the Agreement, shall be fully vested and may thereafter
be exercised by the legal representative of the estate or by the legatee of the
Holder under the will of the Holder, for a period of one year (or such other
greater or lesser period as the Committee may specify at grant) from the date of
such death or until the expiration of the stated term of such Stock Option,
which ever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's
employment by the Company or any Subsidiary terminates by reason of Disability,
any Stock Option held by such Holder, unless otherwise determined by the
Committee at the time of grant and set forth in the Agreement, shall be fully
vested and may thereafter be exercised by the Holder for a period of one year
(or such other greater or lesser period as the Committee may specify at the time
of grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) Other Termination. Subject to the provisions of Section
14.3, below, and unless otherwise determined by the Committee at the time of
grant and set forth in the Agreement, if a Holder is an employee of the Company
or a Subsidiary at the time of grant and if such Holder's employment by the
Company or any Subsidiary terminates for any reason other than death or
Disability, the Stock Option shall thereupon automatically terminate, except
that if the Holder's employment is terminated by the Company or a Subsidiary
without cause or due to Normal Retirement, then the portion of such Stock Option
which has vested on the date of termination of employment may be exercised for
the lesser of three months after termination of employment or the balance of
such Stock Option's term.
(i) Additional Incentive Stock Option Limitation. In the case
of an Incentive Stock Option, the aggregate Fair Market Value of Stock
(determined at the time of grant of the Option) with respect to which Incentive
Stock Options become exercisable by a Holder during any calendar year (under all
such plans of the Company and its Parent and Subsidiary) shall not exceed
$100,000.
(j) Buyout and Settlement Provisions. The Committee may at any
time, in its sole discretion, offer to buy out a Stock Option previously
granted, based upon such terms and conditions as the Committee shall establish
and communicate to the Holder at the time that such offer is made.
(k) Stock Option Agreement. Each grant of a Stock Option shall
be confirmed by and shall be subject to the terms of, the Agreement executed by
the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after the
time of grant in the case of a Nonqualified Stock Option) a Stock Reload Option
up to the amount of shares of Stock held by the Holder for at least six months
and used to pay all or part of the exercise price of an Option and, if any,
withheld by the Company as payment for withholding taxes. Such Stock Reload
Option shall have an exercise price equal to the Fair Market Value as of the
date of the Stock Reload Option grant. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and shall expire on the date of expiration of the Option to which the
Reload Option is related.
Section 7. Stock Appreciation Rights.
7.1 Grant and Exercise. The Committee may grant Stock Appreciation
Rights to participants who have been, or are being granted, Options under the
Plan as a means of allowing such participants to exercise their Options without
the need to pay the exercise price in cash. In the case of a Nonqualified Stock
Option, a Stock Appreciation Right may be granted either at or after the time of
the grant of such Nonqualified Stock Option. In the case of an Incentive Stock
Option, a Stock Appreciation Right may be granted only at the time of the grant
of such Incentive Stock Option.
7.2 Terms and Conditions. Stock Appreciation Rights shall be subject to
the following terms and conditions:
(a) Exercisability. Stock Appreciation Rights shall be
exercisable as determined by the Committee and set forth in the Agreement,
subject to the limitations, if any, imposed by the Code, with respect to related
Incentive Stock Options.
(b) Termination. A Stock Appreciation Right shall terminate
and shall no longer be exercisable upon the termination or exercise of the
related Stock Option.
(c) Method of Exercise. Stock Appreciation Rights shall be
exercisable upon such terms and conditions as shall be determined by the
Committee and set forth in the Agreement and by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
Holder shall be entitled to receive a number of Option Shares equal to the SAR
Value divided by the exercise price of the Option.
(d) Shares Affected Upon Plan. The granting of a Stock
Appreciation Rights shall not affect the number of shares of Stock available for
awards under the Plan. The number of shares available for awards under the Plan
will, however, be reduced by the number of shares of Stock acquirable upon
exercise of the Stock Option to which such Stock Appreciation right relates.
Section 8. Restricted Stock.
8.1 Grant. Shares of Restricted Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be awarded, the number of shares to be awarded, the price
(if any) to be paid by the Holder, the time or times within which such awards
may be subject to forfeiture (the "Restriction Period"), the vesting schedule
and rights to acceleration thereof, and all other terms and conditions of the
awards.
8.2 Terms and Conditions. Each Restricted Stock award shall be subject
to the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be
represented by a stock certificate or certificates registered in the name of the
Holder to whom such Restricted Stock shall have been awarded. During the
Restriction Period, certificates representing the Restricted Stock and any
securities constituting Retained Distributions (as defined below) shall bear a
legend to the effect that ownership of the Restricted Stock (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are subject
to the restrictions, terms and conditions provided in the Plan and the
Agreement. Such certificates shall be deposited by the Holder with the Company,
together with stock powers or other instruments of assignment, each endorsed in
blank, which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued
and outstanding shares of Common Stock for all corporate purposes. The Holder
will have the right to vote such Restricted Stock, to receive and retain all
regular cash dividends and other cash equivalent distributions as the Board may
in its sole discretion designate, pay or distribute on such Restricted Stock and
to exercise all other rights, powers and privileges of a holder of Common Stock
with respect to such Restricted Stock, with the exceptions that (i) the Holder
will not be entitled to delivery of the stock certificate or certificates
representing such Restricted Stock until the Restriction Period shall have
expired and unless all other vest requirements with respect thereto shall have
been fulfilled; (ii) the Company will retain custody of the stock certificate or
certificates representing the Restricted Stock during the Restriction Period;
(iii) other than regular cash dividends and other cash equivalent distributions
as the Board may in its sole discretion designate, pay or distribute, the
Company will retain custody of all distributions ("Retained Distributions") made
or declared with respect to the Restricted Stock (and such Retained
Distributions will be subject to the same restrictions, terms and conditions as
are applicable to the restricted Stock) until such time, if ever, as the
Restricted Stock with respect to which such Retained Distributions shall have
been made, paid or declared shall have become vested and with respect to which
the Restriction Period shall have expired; (iv) a breach of any of the
restrictions, terms or conditions contained in this Plan or the Agreement or
otherwise established by the Committee with respect to any Restricted Stock or
Retained Distributions will cause a forfeiture of such Restricted Stock and any
Retained Distributions with respect thereto.
(c) Vesting; Forfeiture. Upon the expiration of the
Restriction Period with respect to each award of Restricted Stock and the
satisfaction of any other applicable restrictions, terms and conditions (i) all
or part of such Restricted Stock shall become vested in accordance with the
terms of the Agreement, subject to Section 11, below, and (ii) any Retained
Distributions with respect to such Restricted Stock shall become vested to the
extent that the Restricted Stock related thereto shall have become vested,
subject to Section 11, below. Any such Restricted Stock and Retained
Distributions that do not vest shall be forfeited to the Company and the Holder
shall not thereafter have any rights with respect to such Restricted Stock and
Retained Distributions that shall have been so forfeited.
Section 9. Deferred Stock.
9.1 Grant. Shares of Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom and the time or times at which grants of Deferred
Stock shall be awarded, the number of shares of Deferred Stock to be awarded to
any person, the duration of the period (the "Deferral Period") during which, and
the conditions under which, receipt of the shares will be deferred, and all the
other terms and conditions of the awards.
9.2 Terms and Conditions. Each Deferred Stock award shall be subject to
the following terms and conditions:
(a) Certificates. At the expiration of the Deferral Period (or
the Additional Deferral Period referred to in Section 9.2 (d) below, where
applicable), shares certificates shall be issued and delivered to the Holder, or
his legal representative, representing the number equal to the shares covered by
the Deferred Stock award.
(b) Rights of Holder. A person entitled to receive Deferred
Stock shall not have any rights of a stockholder by virtue of such award until
the expiration of the applicable Deferral Period and the issuance and delivery
of the certificates representing such Stock. The shares of Stock issuable upon
expiration of the Deferral Period shall not be deemed outstanding by the Company
until the expiration of such Deferral Period and the issuance and delivery of
such Stock to the Holder.
(c) Vesting; Forfeiture. Upon the expiration of the Deferral
Period with respect to each award of Deferred Stock and the satisfaction of any
other applicable restrictions, terms and conditions all or part of such Deferred
Stock shall become vested in accordance with the terms of the Agreement, subject
to Section 11, below. Any such Deferred Stock that does not vest shall be
forfeited to the Company and the Holder shall not thereafter have any rights
with respect to such Deferred Stock.
(d) Additional Deferral Period. A Holder may request to, and
the Committee may at any time, defer the receipt of an award (or an installment
of an award) for an additional specified period or until a specified event (the
"Additional Deferral Period"). Subject to any exceptions adopted by the
Committee, such request must generally be made at least one year prior to
expiration of the Deferral Period for such Deferred Stock awards (or such
installment).
Section 10. Other Stock-Based Awards.
10.1 Grant and Exercise. Other Stock-Based Awards may be awarded,
subject to limitations under applicable law, that are denominated or payable, in
value in whole or in part by reference to, or otherwise based on, or related to,
shares of Common Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, purchase rights, shares of
Common Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, or other rights convertible into shares
of Common Stock and awards valued by reference to the value of securities of or
the performance of specified subsidiaries. Other Stock-Based Awards may be
awarded either alone or in addition to or in tandem with any other awards under
this Plan or any other plan of the Company.
10.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such other stock-based awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such awards, and all other terms and conditions
of the awards.
10.3 Terms and Conditions. Each Other Stock-Based Award shall be
subject to such terms and conditions as may be determined by the Committee and
to Section 11, below.
Section 11. Accelerated Vesting and Exercisability.
If (i) any person or entity other than the Company and/or any
stockholders of the Company as of the Effective Date acquire securities of the
Company (in one or more transactions) having 25% or more of the total voting
power of all the Company's securities then outstanding and (ii) the Board of
Directors of the Company does not authorize or otherwise approve such
acquisition, then, the vesting periods of any and all Options and other awards
granted and outstanding under the Plan shall be accelerated and all such Options
and awards will immediately and entirely vest, and the respective holders
thereof will have the immediate right to purchase and/or receive any and all
Stock subject to such Options and awards on the terms set forth in this Plan and
the respective agreements respecting such Options and awards.
Section 12. Amendment and Termination.
Subject to Section 4 hereof, the Board may at any time, and from time
to time, amend, alter, suspend or discontinue any of the provisions of the Plan,
but no amendment, alteration, suspension or discontinuance shall be made which
would impair the rights of a Holder under any Agreement theretofore entered into
hereunder, without the Holder's consent.
Section 13. Term of Plan.
13.1 Effective Date. The Plan shall be effective as of October 1, 2004.
("Effective Date").
13.2 Termination Date. Unless terminated by the Board, this Plan shall
continue to remain effective until such time no further awards may be granted
and all awards granted under the Plan are no longer outstanding. Notwithstanding
the foregoing, grants of Incentive Stock Options may only be made during the
ten-year period following the Effective Date.
Section 14. General Provisions.
14.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed by the
Company and the Holder. The Committee may terminate any award made under the
Plan if the Agreement relating thereto is not executed and returned to the
Company within 10 days after the Agreement has been delivered to the Holder for
his or her execution.
14.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Holder by the Company, nothing contained herein shall
give any such Holder any rights that are greater than those of a general
creditor of the Company.
14.3 Employees.
(a) Engaging in Competition With the Company. In the event a
Holder's employment with the Company or a Subsidiary is terminated for any
reason whatsoever, and within one year after the date thereof such Holder
accepts employment with any competitor of, or otherwise engages in competition
with, the Company, the Committee, in its sole discretion, may require such
Holder to return to the Company the economic value of any award which was
realized or obtained by such Holder at any time during the period beginning on
that date which is six months prior to the date of such Holder's termination of
employment with the Company.
(b) Termination for Cause. The Committee may, in the event a
Holder's employment with the company or a Subsidiary is terminated for cause,
annul any award granted under this Plan to return to the Company the economic
value of any award which was realized or obtained by such Holder at any time
during the period beginning on that date which is six months prior to the date
of such Holder's termination of employment with the Company.
(c) No Right of Employment. Nothing contained in the Plan or
in any award hereunder shall be deemed to confer upon any Holder who is an
employee of the Company or any Subsidiary any right to continued employment with
the Company or any Subsidiary, nor shall it interfere in any way with the right
of the Company or any Subsidiary to terminate the employment of any Holder who
is an employee at any time.
14.4 Investment Representations. The Committee may require each person
acquiring shares of Stock pursuant to a Stock Option or other award under the
Plan to represent to and agree with the Company in writing that the Holder is
acquiring the shares for investment without a view to distribution thereof.
14.5 Additional Incentive Arrangements. Nothing contained in the Plan
shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.
14.6 Withholding Taxes. Not later than the date as of which an amount
must first be included in the gross income of the Holder for Federal income tax
purposes with respect to any option or other award under the Plan, the Holder
shall pay to the Company, or made arrangements satisfactory to the Committee
regarding the payment of, any Federal, state and local taxes of any kind
required by law to be withheld or paid with respect to such amount. If permitted
by the Committee, tax withholding or payment obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditioned upon such payment or arrangements and the Company or the
Holder's employer (if not the Company) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Holder from the Company or any Subsidiary.
14.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Delaware (without regard to choice of law provisions).
14.8 Other Benefit Plans. Any award granted under the Plan shall not be
deemed compensation for purposes of computing benefits under any retirement plan
of the Company or any Subsidiary and shall not affect any benefits under any
other benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation (unless required by
specific reference in any such other plan to awards under this Plan).
14.9 Non-Transferability. Except as otherwise expressly provided in the
Plan, no right or benefit under the Plan may be alienated, sold, assigned,
hypothecated, pledged, exchanged, transferred, encumbered or charged, and any
attempt to alienate, sell, assign, hypothecate, pledge, exchange, transfer,
encumber or charge the same shall be void.
14.10 Applicable Laws. The obligations of the Company with respect to
all Stock Options and awards under the Plan shall be subject to (i) all
applicable laws, rules and regulations and such approvals by any governmental
agencies as may be required, including, without limitation, the Securities Act
of 1933, as amended, and (ii) the rules and regulations of any securities
exchange on which the Stock may be listed.
14.11 Conflicts. If any of the terms or provisions of the Plan or an
Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of said
Section 422 of the Code. Additionally, if this Plan or any Agreement does not
contain any provision required to be included herein under Section 422 of the
Code, such provision shall be deemed to be incorporated herein and therein with
the same force and effect as if such provision had been set out at length herein
and therein. If any of the terms or provision of any Agreement conflict with any
terms or provision of the Plan, then such terms or provision shall be deemed
inoperative to the extent they so conflict with the requirements of the Plan.
Additionally, if any Agreement does not contain any provision required to be
included therein under the Plan, such provision shall be deemed to be
incorporated therein with the same force and effect as if such provision had
been set out at length therein.
14.12 Non-Registered Stock. The shares of Stock to be distributed under
this Plan have not been, as of the Effective Date, registered under the
Securities Act of 1933, as amended, or any applicable state or foreign
securities laws and the Company has no obligation to any Holder to register the
Stock or to assist the Holder in obtaining an exemption from the various
registration requirements, or to list the Stock on a national securities
exchange.
To record the adoption of the Plan by the Board of Directors, the
Company has caused its authorized officer to execute the same on this 1st day of
September, 2004.
BMB MUNAI, INC.
By: /s/ Alexandre Agaian
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Name: Alexandre Agaian
Title: Chief Executive Officer and President