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
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BEKEM METALS, INC.
-----------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
____________________________________________________________________
2) Aggregate number of securities to which transaction applies:
____________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
____________________________________________________________________
4) Proposed maximum aggregate value of transaction:
____________________________________________________________________
5) Total fee paid:
____________________________________________________________________
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
1) Amount previously paid:___________________________________________________
2) Form, Schedule or Registration Statement No.:_____________________________
3) Filing Party:_____________________________________________________________
4) Date Filed:_______________________________________________________________
PRELIMINARY PROXY MATERIALS
BEKEM METALS, INC.
875 Donner Way, Unit 705
Salt Lake City, Utah 84108
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of Bekem Metals, Inc., (the
"Company") will be held on August ____, 2005 at 10:00 a.m., local time, at the
_____________, located at ________________, Salt Lake City, Utah, for the
following purposes:
1. To amend our Articles of Incorporation to increase the
authorized capital stock of the Company;
2. To authorize our Board of Directors to change the domicile of
the Company from the State of Utah to the State of Nevada;
3. To elect three directors to our Board of Directors and to
reserve two directorships vacant, until such time as the Board
of Directors identifies and appoints qualified candidates to
serve as Directors;
4. To ratify the appointment of Hansen, Barnett and Maxwell as
the Company's independent registered public accountants; and
5. 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 July 21,
2005, 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, 875 Donner Way, Unit 705, Salt Lake City, Utah 84108.
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,
August __, 2005
------------------------------------
Marat Cherdabayev, President
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PRELIMINARY PROXY MATERIALS
BEKEM METALS, INC.
875 Donner Way, Unit 705
Salt Lake City, Utah 84108
PROXY STATEMENT
GENERAL
SOLICITATION OF PROXIES. This proxy statement is being furnished to the
stockholders of Bekem Metals, Inc., a Utah 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_________________, Salt Lake City, Utah at 10:00
a.m., local time, on August _____, 2005, 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 August ___,
2005.
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 July 21, 2005, the record date for the meeting, will be entitled to
notice of and to vote at the meeting. On the record date, we had 38,300,000
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, 2, 4 and 5 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 3 votes may be cast by a stockholder in favor of the nominee or
withheld. With respect to Proposals 1, 2, 4 and 5, 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.
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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, 2, 4 and 5. 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 AMENDMENT TO THE
ARTICLES OF INCORPORATION OF BEKEM METALS, INC.
We are proposing to amend our Articles of Incorporation to increase our
authorized capital stock from 50,000,000 shares to 170,000,000 shares. A copy of
the Amendment to the Articles of Incorporation of Bekem Metals, Inc., 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 Annex A. The Board of
Directors has unanimously approved the Amendment 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 our Articles of Incorporation for the purpose of increasing our authorized
capital stock, thereby avoiding the costs associated with amendments. We
currently have 50,000,000 shares of authorized capital stock, all of which is
common stock. 38,300,000 shares of the 50,000,000 authorized common shares are
outstanding. By approving the Amendment, you are voting to increase our
authorized capital stock by an additional 120,000,000 shares for total
authorized capital stock of 170,000,000 consisting of 150,000,000 shares of
common stock with a par value of $0.001 and 20,000,000 shares of preferred stock
with a par value of $0.001.
POSSIBLE DILUTION RESULTING FROM INCREASE IN AUTHORIZED COMMON SHARES
AND CREATION OF AUTHORIZED PREFERRED SHARES
We currently have 50,000,000 shares of authorized capital stock. By
voting in favor of Proposal One, you are voting to increase our authorized
capital stock by an additional 120,000,000 shares for total authorized capital
stock of 170,000,000 consisting of 150,000,000 shares of common stock with a par
value of $0.001 and 20,000,000 shares of preferred stock with a par value of
$0.001. We have no present obligation to issue additional common or preferred
stock, and have not yet designated any rights, preferences, privileges 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
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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 Articles of Incorporation and the proposed Amendment.
Changes to our capital structure
Existing Proposed
Subject Article(s) Existing Provision Article(s) Proposed Provision
- ------- ---------- ------------------ ---------- ------------------
Authorized common III The total authorized amount of III The total authorized amount of
shares common stock is 50,000,000 shares, common stock is 150,000,000
$0.001 par value per share. shares, $0.001 par value per
share. Residual rights specifically
reserved to common stockholders.
Authorized n/a The current Articles of III The total authorized amount of
preferred shares Incorporation do not authorize the preferred stock is 20,000,000
Company to issue preferred stock. shares, $0.001 par value per
share, with no shares currently
outstanding. The preferred
shares have not yet been
divided into classes or series,
nor have any powers,
preferences, rights or
limitations been designated.
The Board of Directors shall be
authorized to divide the
preferred stock into classes
and/or series and to designate
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all powers, preferences, rights
and limitations associated with
each class and/or series. The
number of shares of preferred
stock may be increased or
decreased by the affirmative
vote of a majority of the
common stockholders without a
vote of the preferred
stockholders, unless such is
required by the amendment to
our Articles of Incorporation.
PROCEDURE FOR AMENDING ARTICLES OF INCORPORATION
Provided that Proposal One of this proxy is approved, the form of
amendment set forth in the Amendment to the Articles of Incorporation of Bekem
Metals, Inc. attached hereto as Annex A will become effective upon filing with
the State of Utah.
NO DISSENTERS' RIGHTS
No dissenters' rights are available under the Utah Revised Business
Corporations Act ("URBCA") or under our current or the proposed Amendment or the
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 Amendment.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" PROPOSAL ONE TO ADOPT THE
AMENDMENT TO THE ARTICLES OF INCORPORATION
OF BEKEM METALS, INC.
PROPOSAL TWO:
TO AUTHORIZE THE BOARD OF DIRECTORS
TO CHANGE OUR DOMICILE FROM THE STATE OF UTAH
TO THE STATE OF NEVADA
The Company was originally incorporated in the State of Utah. The State
of Utah charges corporate income taxes on corporations, it also imposes
franchise taxes. The State of Nevada does not impose either tax. As our business
grows, we expect the franchise tax we incur to increase. By redomiciling to the
State of Nevada, which does not impose State income tax or franchise taxes, the
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Board of Directors believes the Company may realize significant cost savings. We
recommend our shareholders authorize the Board of Directors without further
shareholder action or approval, to change the domicile of the Company from the
State of Utah to the State of Nevada. Such a change of domicile may be
accomplished by merger with a subsidiary corporation or by any other method
allowed or prescribed by law.
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 change of domicile.
OUR BOARD RECOMMENDS A VOTE "FOR" PROPOSAL TWO TO
AUTHORIZE THE BOARD OF DIRECTORS TO CHANGE
DOMICILE OF THE COMPANY FROM UTAH TO NEVADA
PROPOSAL THREE:
ELECTION OF DIRECTORS
Our Bylaws provide that our Board of Directors shall consist of not
less than two nor more than seven persons, the exact number to be fixed from
time-to-time by the Board of Directors. The Board of Directors currently
consists of two Directors. The Board of Directors believes it is in the best
interest of the Company to expand the Board to five Directors as the Board seeks
to create and fill committees of the Board. Management has nominated three
individuals to serve as Directors for the upcoming year. The remaining two
directorship positions would be treated as vacancies on the Board of Directors
to be filled by the Directors or the shareholders. The intention of the Board of
Directors is to seek at least one 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 serve as a "financial expert." The other Directorship
will likely be filled by a candidate with significant mining and exploration
expertise. Therefore, it is proposed that two Directorship positions be treated
as vacancies to be filled by the Board of Directors when qualified candidates
are identified.
Management has nominated three persons to serve as Directors for a
one-year term 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. Mr. Marat Cherdabayev, Mr. James Gunnell and Mr. Kassymkhanuly have
been nominated by management to stand for election as Directors.
NOMINEES
Set forth below is certain information as of July 15, 2005 concerning
the nominees for election at the 2005 Annual Meeting and our current officers,
including the business experience of each for at least the past five years:
Positions with
Name of Director Age Term Served as Director Bekem Metals, Inc.
- ---------------- --- ----------------------- ------------------
Marat Cherdabayev 30 Since November 2004 Chairman of the Board of
Directors, President and CEO
James Gunnell 50 Since June 2004 Chief Financial Officer,
Secretary, Treasurer and
Director
Dosan Kassymkhanuly 37
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Marat Cherdabayev. Since July 2002, Mr. Cherdabayev has served as a
director of EMPS Corporation, a U.S. reporting issuer, and former parent company
of EMPS Research Corporation. Prior to joining EMPS Corporation, Mr. Cherdabayev
worked for Caspian Services Group Limited ("CSGL") in Almaty, Kazakhstan. CSGL
is a wholly-owned subsidiary of EMPS Corporation. Mr. Cherdabayev was a Business
Development Manager for CSGL, and was responsible for developing a marketing
plan for CSGL's services. Prior to his employment with CSGL, Mr. Cherdabayev
worked for the Department of Project Finance at OJSC Kazakhtelecom in Almaty,
Kazakhstan. Mr. Cherdabayev served as the Head of Project Planning and
Monitoring, with responsibility for analyzing the financial feasibility of
investment projects. He began working for OJSC Kazakhtelecom in January 2001.
From October 2000 to January 2001, Mr. Cherdabayev served as the Advisor to the
President of TNS Plus, a private telecommunications company in Almaty,
Kazakhstan. In that capacity, he developed and advised the president on
marketing strategies, marketing analysis and optimization issues. From January
1999 to June 1999, Mr. Cherdabayev was a Mutual Fund Accountant for State Street
Corporation, in Boston, Massachusetts. His primary duties included producing and
verifying daily financial statements, monitoring general ledger activity and
pricing and reconciling five mutual funds on a daily basis. From January 1998 to
June 1998, Mr. Cherdabayev was a Financial Reporting Assistant at Boston Edison
in Boston Massachusetts. Mr. Cherdabayev graduated with a Bachelor of Science in
Business Administration from Northeastern University in June 2000. Mr.
Cherdabayev is also a director in EMPS Corporation, a reporting company.
James F. Gunnell. Mr. Gunnell graduated from Brigham Young University
in 1976 with a Bachelors of Science degree in Zoology. Mr. Gunnell brings over18
years of sales and management experience to the Company. Since 1991, Mr. Gunnell
has been employed as a Sales Manager with National Electrical Carbon
Corporation, a manufacturer of specialty graphite materials. Mr. Gunnell has
been responsible for growing and managing an independent distributor network,
for developing several new product markets and has significant increased product
sales in the areas he has managed. Mr. Gunnell is not currently serving as a
director of any other reporting company.
Dosan Kassymkhanuly. Mr. Kassymkhanuly has been the director of the
representative office of Kaznickel LLP in Astana, Kazakhstan since March 2004.
As the director, Mr. Kassymkhanuly has been primarily responsible for
negotiations with various government entities and committees on behalf of
Kaznickel. Prior to joining Kaznickel, Mr. Kassymkhanuly worked for Irtysh-Aimak
Ltd., in Ust-Kamenogorsk, Kazakhstan, a coal mining company. While with
Irtysh-Aimak, Mr. Kassymkhanuly served as the director of the representative
office of Irtysh-Aimak in Eastern Kazakhstan where he was responsible for coal
sales in Eastern Kazakhstan. Prior to joining Irtysh-Aimak, Mr. Kassymkhanuly
worked for several employers in mineral marketing and sales and has extensive
experience in this area. Mr. Kassymkhanuly is not currently serving as a
director of any other reporting company.
Mr. Cherdabayev and Mr. Kassymkhanuly are brothers-in-law.
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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 2005 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 TO APPROVE
THE RESERVATION OF TWO DIRECTORSHIPS AS VACANT,
UNTIL SUCH TIME AS THE BOARD IDENTIFIES AND APPOINTS
QUALIFIED CANDIDATES TO SERVE AS DIRECTORS, INCLUDING AT
LEAST ONE CANDIDATE WHO CAN SERVE AS A FINANCIAL EXPERT
AND INDEPENDENT DIRECTOR.
Security Ownership of Directors and Executive Officers
As of July 15, 2005 we had 38,300,000 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 and for all directors and executive officers as a
group.
Shares of % of
Name Common Stock Class
- ---- ------------ -----
Marat Cherdabayev -0- *
James Gunnell 250 *
Dosan Kassymkhanuly -0- *
- --------------------------------------------------------------------------------
All directors, nominees and executive
officers as a group (3 persons): 250 *
- --------------------------------------------------------------------------------
* Less than 1%.
Compliance with Section 16(a) of the Exchange Act
Directors and executive officers are required to comply with Section
16(a) of the Securities Exchange Act of 1934, which requires generally that such
persons file reports regarding ownership of and transactions in securities of
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the Company on Forms 3, 4, and 5. A Form 3 is an initial statement of ownership
of securities. Form 4 is to report changes in beneficial ownership. Form 5
covers annual statements of change in beneficial ownership.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during its most recent fiscal year, it appears that Mr.
Cherdabayev and Mr. Gunnell failed to timely file Form 3s at the time they
became directors of the Company.
Security Ownership of Certain Beneficial Owners
As of July 15, 2005 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
- ---- ------------ --------
Brisa Equities Corporation(1) 21,000,000 54.8%
Canby Trading Services(2) 2,088,000 5.5%
Hertel Group, S.A. (3) 3,150,000 8.2%
- --------------------------------------------------------------------------------
TOTAL 26,238,000 68.5%
(1) Mr. Louis Naegle is the sole director of Brisa Equities and may,
therefore, be deemed to have voting and investment power with respect
to all shares of record held by Brisa.
(2) Ms. Allison Kilbourn is the sole director of Canby Trading and may,
therefore, be deemed to have voting and investment power with respect
to all shares of record held by Canby.
(3) Mr. Richard Holzapfel is the sole director of Hertel Group and may,
therefore, be deemed to have voting and investment power with respect
to all shares of record held by Hertel.
Executive Compensation
The following chart sets forth the compensation paid to each of our
Executive Officers and Directors during the last three fiscal years:
10
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
----------------------------- -------------------------- -------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Year Salary sation Awards Options/ Payouts sation
Principal Position Ended ($) Bonus($) ($) ($) SARs (#) ($) ($)
- ------------------------- -------- -------- ---------- --------- ------------- ----------- -------- ------------
Terrence Chatwin (1) 12/31/04 -0- -0- -0- -0- -0- -0- -0-
Former CEO,
President and Director
- ------------------------- -------- -------- ---------- --------- ------------- ----------- -------- ------------
Timur Kunayev(2) 12/31/04 -0- -0- -0- -0- -0- -0- -0-
Former CEO and President
- ------------------------- -------- -------- ---------- --------- ------------- ----------- -------- ------------
Louis Naegle(3) 12/31/04 -0- -0- -0- -0- -0- -0- -0-
Former CEO 12/31/03 -0- -0- -0- -0- -0- -0- -0-
President and Director 12/31/02 -0- -0- -0- -0- -0- -0- -0-
- ------------------------- -------- -------- ---------- --------- ------------- ----------- -------- ------------
(1) Dr. Chatwin served as president and chief executive officer of the
Company from November 29, 2004 to May 20, 2005.
(2) Mr. Kunayev served as the chief executive officer the Company from
April 14, 2004 to November 29, 2004.
(3) Mr. Naegle served as the chief executive officer of the Company from
inception to April 14, 2004.
Compensation of Directors
No compensation has been paid directly or accrued to any other officer
or director of the Company to date. The Company has no policy for compensating
its directors for attendance at Board of Directors meetings or for other
services as directors.
Compensation of officers and directors is determined by the Company's
Board of Directors and is not subject to shareholder approval. None of the
officers and directors of the Company have employment agreements with the
Company.
In the past three years no executive officer has received any amounts
in connection with his resignation, retirement, or other termination. No
executive officer received any amounts in the last three years in connection
with a change in control of the Company of a change in the executive officer's
responsibilities after a change in control.
The Company has no retirement, pension, or benefit plan at the present
time, however, the Board of Directors may adopt plans as it deems to be
reasonable under the circumstances.
Meetings and Committees of the Board of Directors
During fiscal year ended December 31, 2004, there were two 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.
PROPOSAL FOUR
RATIFICTION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
General
As we do not currently have an Audit Committee, our Board of Directors
acts as our Audit Committee. The Board of Directors has appointed the firm of
Hansen, Barnett & Maxwell to act as out independent registered public accounting
firm for the fiscal year ending December 31, 2005, subject to ratification of
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such appointment by our shareholders. A representative of Hansen, Barnett &
Maxwell is expected to be present at the annual meeting and will be given an
opportunity to make a statement if he or she desires to do so and will be
available to respond to appropriate questions. No determination has been made as
to what action the Board of Directors would take if the stockholders do not
ratify the appointment.
Principal Accountant Fees and Services
Hansen, Barnett & Maxwell served as the Company's independent auditors
for the year ended December 31, 2004 and for the last quarter of 2003, and is
expected to serve in that capacity for the current year. David T. Thomson, P.C.,
served as the Company independent accountants during the first three quarters of
2003. Principal accounting fees for professional services rendered for us by
Hansen, Barnett & Maxwell and David T. Thomson P.C. for the years ended December
21, 2004 and 2003, are summarized as follows:
2004 2003
-----------------------------------------------------------------------
Audit $5,683 $1,845
Audit related - -
Tax 320 195
All other - 175
-----------------------------------------------------------------------
Total $6,003 $2,215
Audit Fees. Audit fees were for professional services rendered in
connection with the Company's annual financial statement audits and quarterly
reviews of financial statements for filing with the Securities and Exchange
Commission.
Tax Fees. Tax fees related to services for tax compliance and
consulting.
All Other Fees. During the fiscal year ended December 31, 2003, our
independent auditors accountant billed us $175 for review, consultation and
response to comments issued by the Securities and Exchange Commission in
connection with the Company Form 10-SB.
Board of Directors Pre-Approval Policies and Procedures. At its
regularly scheduled and special meetings, the Board of Directors, in lieu of an
established audit committee, considers and pre-approves any audit and non-audit
services to be performed by the Company's independent accountants. The Board of
Directors has the authority to grant pre-approvals of non-audit services.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of our common stock is required to ratify the selection of Hansen,
Barnett & Maxwell to serve as our independent registered public accounting firm
for fiscal 2005.
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OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE RATIFICATION OF APPOINTMENT OF
HANSEN, BARNETT & MAXWELL AS OUR INDEPENDENT REGISTERED
ACCOUNTING FIRM FOR THE 2005 FISCAL YEAR
PROPOSAL FIVE
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.
2006 SHAREHOLDER PROPOSALS
If you wish to include a proposal in the Proxy Statement for the 2006
Annual Meeting of Stockholders, your written proposal must be received by the
Company no later than November 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 Utah and our Bylaws. Stockholder proposals may be mailed to
the Corporate Secretary, Bekem Metals, Inc., 875 Donner Way, Unit 705, Salt Lake
City, Utah 84108
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 APRIL 15, 2005
Description of Business
Company History
Bekem Metals, Inc., (the "Company") was incorporated as EMPS Research
Corporation under the laws of the state of Utah on January 31, 2001, for the
purpose of researching and developing commercial applications for patented
technology for a high frequency eddy current separator that may be used to
separate nonmagnetic particulate materials from other materials without
chemicals, heat or water. The patented technology was originally acquired by the
Company's former parent company, EMPS Corporation, a Nevada corporation, from
Particle Separation Technologies, L.C., a Utah limited liability company. The
Company is in the development stage.
In February, 2001, the Company acquired Patent No. 5,439,117 issued
August 8, 1995, continuation in part Patent No. 5,772,043 issued June 30, 1998
and continuation in part Patent No. 6,095,337 issued on August 1, 2000, from
EMPS Corporation. The three patents are titled "System and Method for Separating
13
Electronically Conductive Particles." From the time the Company acquired the
patents until the end of fiscal 2004, the Company's primary business activity
has focused on efforts to develop and test prototype equipment derived from the
patents. The Company has primarily funded its research and development
activities from a research grant awarded to the Company from the Department of
Energy's Office of Industrial Technologies 2000 Inventions and Innovation
program. The Company received the research grant in January of 2001 in the
amount of $199,000. As of December 31, 2004, the Company had spent approximately
$148,750 of the grant. The research grant expires on June 30, 2005.
On January 28, 2005, the Company completed the closing of a Plan and
Agreement of Reorganization (the "Agreement") with Condesa Pacific, S.A., a
British Virgin Islands company ("Condesa") and the Condesa shareholders, whereby
the Company acquired 100% of the outstanding capital stock of Condesa in
exchange for 35,000,000 common shares of the Company. As a result, the Condesa
shareholders now own approximately 91% of the outstanding common stock of the
Company. The transaction resulted in a change of control of the Company and a
change in the reporting entity to Condesa.
Bekem Metals had 3,300,000 shares of common stock outstanding prior to
the transaction that remained outstanding. For financial reporting purposes,
Condesa is considered to have been the acquirer. The acquisition was recognized
as a forward stock split of Condesa's 50,000 shares of capital stock outstanding
prior to the reorganization for 35,000,000 common shares, or a 700-for-1 stock
split. Condesa's financial statements will continue to present its assets and
liabilities at their historical cost. The assets of Bekem Metals' are considered
to have been acquired by Condesa in exchange for the assumption of Bekem Metals'
liabilities and the issuance of 3,300,000 common shares. The assets consisted of
cash of $2,841.
The primary asset of Condesa is an exploration and production
concession held by its wholly owned subsidiary Kaznickel, LLP. This exploration
and production concession, issued by the government of the Republic of
Kazakhstan grants Kaznickel the exclusive right to explore for and produce
nickel, cobalt and other minerals in a 616 hectare (1,522 acre) area known as
the Gornostayevskoye ("Gornostai") deposit. The Gornostai deposit is located in
northeastern Kazakhstan.
Condesa acquired Kaznickel, LLP effective September 22, 2004 in a
purchase business combination valued at $750,000. In that transaction, Condesa
acquired assets with a fair value of $1,441,387, assumed liabilities of
$691,387, paid $300,000 cash, and issued Condesa shares valued at $450,000. With
the Bekem acquisition of Condesa on January 28, 2005, the primary business focus
has shifted from the development of its electromagnetic particle separating
technology to the exploration and production of the Gornostai deposit.
On February 9, 2005, the Company board of directors and holders of a
majority of the Company's outstanding shares approved a change in the name of
the Company from EMPS Research Corporation to Bekem Metals, Inc., to better
reflect the new business focus of the Company. On March 16, 2005, the Company
amended its Articles of Incorporation to change the name of the Company.
Business of the Company
From inception through the end of the 2004 fiscal year, the Company's
primary business focus has been the development, marketing and licensing its
patented technology for use in commercially separating nonmagnetic particulate
material by building and testing a high frequency eddy-current separator
14
("HFECS"). With the acquisition of Condesa and its wholly owned subsidiary
Kaznickel on January 28, 2005, the primary business focus of the Company has
become the exploitation of the exploration and production contract of Kaznickel.
While the Company will continue to pursue development of its HFECS technology,
it will no longer be the principal business focus of the Company. This contract
grants Kaznickel the exclusive right to explore for and produce nickel, cobalt
and other minerals in a 616 hectare (1,522 acre) area known as the Gornostai
deposit, through February 2, 2026.
The Nickel Market
The overall market for nickel in the world is approximately $18
billion, according to USGS. Total nickel production in 2004 was approximately
1,400,000 tons. Russia is a largest supplier of nickel in the world with almost
20% market share, followed closely by Australia, Canada and Latin America.
According to Barclays Capital, demand for nickel grew 4.1% in 2004, but
could settle at around 3-4% annually through 2010. There is some debate in the
market as to whether nickel prices will continue to increase. SMR Steel & Metals
Market Research, projects that the average price per ton of nickel will be about
$13,000, down from $13,741 in 2004, as large buyers seek cheaper alternatives in
producing stainless steel. Alternatively, Goldman Sachs predicts that actual
prices may rise to as high as $14,300 per ton in the foreseeable future. Even as
large buyers seek cheaper alternatives to nickel, it is anticipate that demand
for nickel worldwide and especially in China will remain high for the next 5
years.
There are several factors that can affect the overall worldwide nickel
demand and prices in the future, which include the following:
o New processing technologies that make the developments of
low-grade lateritic nickel deposits economically feasible;
o Expansion of new nickel capacity;
o Other sources of secondary nickel and levels of
stainless-steel scrap containing nickel;
o Reduction in stainless-steel worldwide demand.
USGS data shows that there are several laterite and sulfide projects
scheduled for completion in the next several years, which could bring
more primary nickel to the market and potentially decrease the price.
However, given the growing economies and demands of China, India and
other Asian countries, coupled with anticipated reduction in production
of several older nickel mines due to depletion, the world level of
supply is expected to remain more or less stable.
According to Inco, one of the largest nickel companies in the world, in
order to meet the growing world demand for nickel there is a need for one
project the size of its Goro project every year. Goro Nickel Project of Inco in
New Caledonia will have the capacity of 55,000 tons of nickel once it is
operational in 2006.
Stainless-steel production, the single largest end use segment of
nickel, is expected to grow steadily in the next five years, heavily
relying on the primary nickel supply for its expansion. Of course, high
nickel prices force some steel mills to substitute chromium and
manganese, in place of nickel which makes steel cheaper but less
corrosion-resistant. This lower-quality steel is mainly used in
consumer applications where it is important to have a cheap final
product, which, however, will not resist corrosion from acid or salt.
15
Resistance to corrosion makes nickel an essential element in alloys and
as a catalyst. This feature is required in such industries as aerospace,
electric power and petrochemical industries, as well as in gray-iron castings to
toughen the iron, promote graphitization and improve machineability. A new
application of nickel in nickel-based batteries for the electric and hybrid
electric vehicles represents another industry with high potential demand for
nickel.
History of the Gornostai deposit
In March 2004, Kaznickel acquired a concession for exploration and
development of Gornostai cobalt and nickel deposit (contract No. 1349 registered
by the Kazakh Ministry of Energy and Mineral Resources), covering 616 hectares
(1,522 acres) in eastern Kazakhstan.
The Company is at the exploration stage on the Gornostai deposit
located in Beskaragai district of East Kazakhstan region in Kazakhstan. The
deposit was discovered in 1958. Gornostai deposit is divided by Irtysh River
into left and right bank sides. From 1960 to 1968 a series of surveys and
evaluation works were performed on both bank sides to evaluate available
cobalt-nickel ore reserves. The surveys identified 21 ore bodies on the left
bank.
The deposit, however, was abandoned as reserves around Norilsk in
Russia were considered more attractive and it was already at the production
stage. In addition, a Soviet army nuclear test site (similar to Nevada) was
located nearby and therefore the whole surrounding territory, including the
deposit was considered a secret military zone. Therefore commercial development
of the deposit was discontinued.
The last nuclear testing in the area was conducted more than 15 years
ago. Recent tests show that the radiation levels in the soil, water and air are
within normal ranges.
Pursuant to the terms of the three-year work program approved by the
Geology Committee of the Republic of Kazakhstan Ministry of Energy and Mineral
Resources and as required under the Kaznickel exploration and production
contract, by January 1, 2005, Kaznickel had completed drilling core samples of
5,504 meters during the preceding nine months.
Characteristics of the Gornostai deposit
The Company has taken 2,000 geochemical and core samples to the
Institute of Nonferrous Metals, located in Oskemen, Kazakhstan to perform
spectrum and quantity analysis to identify the content of nickel, cobalt and
iron. The first 500 samples demonstrate nickel content of 1.1%. The Company
anticipates a final report from this Institute during the third quarter of 2005.
Once the Company has the report it will present it to the Geology Committee for
approval and the Company will seek to increase its contract territory, including
the right side bank.
Upon governmental approval, we plan to continue exploratory drilling of
an additional 8,000 meters on the left bank and 22,000 meters on the right bank.
Left bank ore bodies are bedded horizontally in a zone of leached
nontronized serpentinites area weathering crust at the depth of 4.9 meters to
13.2 meters. They have tabular shape and variable thickness. The lengths of the
ore bodies are 200 meters to 4,050 meters; the width is 200 meters to 2,000
16
meters. Thickness varies from 0.8 meters to 15 meters. Mean ore body thickness
is 4.2 meters, with a mean stripping ratio of 1.8 cubic meters per ton.
Initial evaluation of ore and metals in 1968 showed nickel cutoff grade
of 0.7%, cobalt cutoff grade of 0.5%, average nickel ore grade of 0.9%, minimum
nickel content in a measured block of 1.0%, and minimum ore body thickness of
0.5m.
The Company intends to retain the services of an independent
engineering firm to provide a reserves estimate, feasibility study and design a
flowsheet to process our laterite ore.
Mining and processing conditions
The main host rocks of nickel and cobalt are minerals such as
nontronite, hydroxides of iron and manganese formations. The ore is loose and
found mainly along small fracture lines. Coarse ore, bigger than 10 mm,
represents approximately 11.2% of all ore found at the deposit. The loose
structure of overburden and ores allows mining the deposit without drilling and
blasting works. The rocks and ores of Gornostai are relatively unstable
requiring that the pit slope not exceed 45 degrees.
Development of left bank can be performed through a system of small
open pits, starting from northern side of the deposit. Stripping rocks from the
initial pits can be placed in external dumps. Stripping from later pits could be
placed within the workout space of previous pits. According to survey data, the
Company does not anticipate pit depths to exceed 55 meters.
In 1968 and 1999 two samples were retrieved for analyses and to test
ore processing technologies.
In 1968 four processing technologies were tested: ferronickel electric
smelting, matte electric smelting, sulfuric acid leaching and ammoniac-carbonate
leaching. The tests showed that the most practical technology for processing the
silicate-cobalt-nickel ore deposit is ferronickel electric smelting. Application
of this technology allows for 90% recovery of nickel to ferronickel and 85%
recovery of cobalt. This process also allows for a reduction of reagent
consumption of 5%, and of limestone of 10-15%. Waste slag may be used to
manufacture mineral wools as well as other construction materials.
In 1999 electric smelting of deposit's ore was carried out at the
steel-casting workshop of Pavlodar Tractor Plant, Pavlodar, Kazakhstan. Two
smelting trials performed in arc heating furnace DSP-6 demonstrated the
possibility of producing ferronickel which meets technical requirements
48-3-59-84. The first smelting test produced 480 kilogram of ferronickel. The
second smelting test produced 520 kilogram of ferronickel. Recovery of nickel
metal exceeded 90%. The ferronickel content of the product was 18-20%. With
technology improvement, it should be possible to produce ferronickel FN-5, FN-6,
FN-7 and FN-8.
The Company also believes the possible application of heap leaching
technology needs to be studied, as high pressure acid leaching ("HPAL") is
generally considered to be economically efficient compared to pyrometallurgical
processing, such as electric smelting.
Competition
Total nickel production worldwide was approximately 1,400,000 tons in
2004, according to USGS. Norilsk Nickel is the largest nickel producer followed
by Inco, BHP Billiton Plc, Eramet Group, Falconbridge Limited and WMC Limited.
17
These six companies together produce around 66% of world primary nickel
production, while more than 30 medium- to small-companies produce the remaining
34%.
Companies compete with each other generally across the globe and are
best categorized by their size, reserve base and the production method due to
different extracting technologies applied and the final product.
Until recently there were no nickel producing companies in Kazakhstan.
In February 2004, Oriel Resources, a London based company, acquired 90% of
Muzbel LLC, which holds exploration and extraction rights for Shevchenko nickel
deposit in northern Kazakhstan.
We do not anticipate direct competition from Oriel Resources as nickel
and cobalt are part of a global market and a worldwide demand, where supply is
limited and growing rates of industries which use nickel and cobalt will ensure
the constant demand for any quantity of nickel and cobalt.
Competition in this industry focuses largely on price and nickel
content whether it is sold in unwrought or chemical form. High nickel content
material is sold at higher prices and is most sought after among customers.
The Company is confident that the local proximity of its deposit to
China and other Asian countries will be a major competitive factor. The Company
has already been approached by Chinese metal companies willing to buy its ore at
this "grassroot" stage and interested in purchasing finished product once the
Company reaches production stage. The Company has also been approached about
jointly developing the deposit, but has not discussed this option in details as
of yet.
Foreign Operations
In recent years, the Republic of Kazakhstan has undergone substantial
political and economic change. As an emerging market, Kazakhstan does not
possess the well-developed business infrastructure that generally exists in more
mature free market economies. As a result, operations carried out in Kazakhstan
can involve significant risks that are not typically associated with developed
markets. Instability in the market reform process could subject the Company to
unpredictable changes in the basic business infrastructure in which it currently
operates. The Company therefore faces risks inherent in conducting business
internationally, such as:
o Foreign currency exchange fluctuations or imposition of
currency exchange controls;
o Legal and governmental regulatory requirements;
o Nationalization of assets;
o Import-export quotas or other trade barriers;
o Difficulties in collecting accounts receivable and longer
collection periods;
o Political and economic instability;
o Difficulties and costs of staffing and managing international
operations; and
o Language and cultural differences.
Any of these factors could materially adversely affect the Company's
operations and consequently its business, operating results and financial
condition. At this time, management is unable to estimate what, if any, changes
may occur or the resulting effect of any such changes on the Company's financial
condition or future results of operations.
18
The Company also faces a significant potential risk of unfavorable tax
treatment and currency law violations. Legislation and regulations regarding
taxation, foreign currency transactions and licensing of foreign currency loans
in the Republic of Kazakhstan continue to evolve as the central government
manages the transformation from a command to a market-oriented economy. The
legislation and regulations are not always clearly written and their
interpretation is subject to the opinions of local tax inspectors. Instances of
inconsistent opinions between local, regional and national tax authorities are
not unusual.
The current regime of penalties and interest related to reported and
discovered violations of Kazakhstan's laws, decrees and related regulations can
be severe. Penalties include confiscation of the amounts at issue for currency
law violations, as well as fines of generally 100% of the taxes unpaid. Interest
is assessable at rates of generally 0.3% per day. As a result, penalties and
interest can result in amounts that are multiples of any unreported taxes.
The Company's operations and financial condition may be adversely
affected by Kazakh political developments, including the application of existing
and future legislation and tax regulations.
Regulation of Mining Activity
The Company's mining activities will be subject to various laws and
regulations concerning exploration, allowable production, taxes, labor
standards, environmental protection, mine safety, regulations relating to
royalties, importing and exporting of minerals and other matters. In addition,
new laws or regulations governing operations and activities could have a
material adverse impact on the Company.
Environmental Regulations
Environmental legislation in all countries is evolving in a manner
which will require stricter standards and enforcement, increased fines and
penalties for non-compliance, more stringent environmental assessments of
proposed projects and a heightened degree of responsibility for companies and
their officers, directors and employees.
All phases of the Company's operations in the Republic of Kazakhstan
are subject to environmental regulations. The regulations are comprehensive and
cover water quality, discharge limits, hazardous wastes, agricultural land and
vegetation.
Employees
During the 2004 fiscal year, the Company had no full time employees.
The officers and directors work on a part time, as needed, basis with no
commitment for full time employment. With the acquisition of Condesa, the
Company now has 23 full time employees. The Company believes it has satisfactory
relations with its employees. The Company anticipates the need to hire
additional personnel as operations expand
Patents
The Company owns U.S. Patents 5,439,117, 5,772,043, and 6,095,337, each
entitled "System and Method for Separating Electrically Conductive Particles."
19
The patents were issued on August 8, 1995, June 30, 1998, and August 1, 2000,
respectively. All three patents expire December 21, 2013. These patents cover
the technology that allows the Company to separate nonmagnetic particles from
feed material. Prior to the acquisition of Condesa, these patents were very
important to the Company's business and added significant value because they
give it an exclusive right to the covered technology. With the shift in the
primary business focus of the Company to mineral exploration and production,
these patents are no longer significant to the success of the Company.
Research and Development
In connection with the development of its electromagnetic particle
separating technology, on or about January 16, 2001, the Company received a
research grant in the amount of $199,000 from the Department of Energy ("DOE"),
through its Office of Industrial Technologies 2000 Inventions and Innovation
("I&I") program for use in developing an F-24
HFECS prototype.
As of December 31, 2004, the Company had spent approximately $148,750
of the I&I grant money in research and development of the HFECS technology. The
grant expires on June 30, 2005.
Description of Property
The Company uses one-quarter of an 800 square foot office condominium
located at 875 Donner Way, Unit 705, Salt Lake City, Utah 84108 for its
corporate offices. The Company currently pays no rent for this space pursuant to
a verbal agreement with Particle Separation Technologies, L.C. This free rent is
of nominal value. There is no lease agreement with Particle Separation
Technologies, L.C. If at any time Particle Separation Technologies, L.C.,
decides it needs or wants the space, the Company has no right to continue to
occupy the space and could be forced to move.
The Company plans to open a representative office in Almaty,
Kazakhstan. Kaznickel LLP maintains offices in Semei, Kazakhstan, the closest
city to the deposit, and a representative office in Astana, Kazakhstan.
Market Price of and Dividends on Our Common Equity and Other Shareholder Matters
The Company's shares are currently traded on the Over-the-Counter
Bulletin Board ("OTCBB") under the symbol BKMM. As of April 11, 2005, the
Company had approximately 134 shareholders holding 38,300,000 common shares. Of
the issued and outstanding common stock, approximately 1,266,270 are free
trading, the balance are "restricted securities" as that term is defined in Rule
144 promulgated by the Securities and Exchange Commission.
The Company's common stock began trading on the OTCBB on February 17,
2004. Prior to that time no quotation for the Company's common shares was quoted
on any exchange or quotation medium. Published bid and ask quotations from
February 17, 2004 through December 31, 2004, are included in the chart below.
These quotations represent prices between dealers and do not include retail
markup, markdown or commissions. In addition, these quotations do not represent
actual transactions.
20
Bid Ask
High Low High Low
---- --- ---- ---
2004
- ----
Feb. 17 thru Mar. 31 $1.00 $0.10 $2.00 $0.55
Apr. 1 thru June 30 2.50 1.00 5.00 2.00
July 1 thru Sep. 30 2.50 2.50 7.50 5.00
Oct. 1 thru Dec. 31 3.50 2.00 7.50 7.50
The above information was obtained from Pink Sheets LLC, 304 Hudson
Street, 2nd Floor, New York, New York 10013.
Dividends
The Company has not paid, nor declared, any dividends since its
inception and does not intend to declare any such dividends in the foreseeable
future. The Company's ability to pay dividends is subject to limitations imposed
by Utah law. Under Utah law, dividends may be paid to the extent that the
corporation's assets exceed it liabilities and it is able to pay its debts as
they become due in the usual course of business.
Securities Authorized for Issuance Under Equity Compensation Plans
- ------------------------- --------------------------- --------------------------- ------------------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for future
exercise of outstanding issuance under equity
outstanding options, options, warrants compensation plans
warrants and rights and rights (excluding securities reflected
in columns (a))
(a) (b) (c)
- ------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation 2,000,000 $0.10 3,000,000
plans approved by
security holders
- ------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation -0- -0- -0-
plans not approved by
security holders
- ------------------------- --------------------------- --------------------------- ------------------------------------
Total 2,000,000 $0.10 3,000,000
- ------------------------- --------------------------- --------------------------- ------------------------------------
On February 16, 2004, the Company granted options to two parties to
purchase 1,000,000 shares each for technology and asset acquisition and business
development services. The options may not be exercised until such time as the
Company has acquired assets with a fair value of at least $2,000,000, as
determined by the board of directors. The exercise price of the options is
$0.10. The options expire on February 16, 2009. The Company granted the option
holders a registration right in connection with the exercise of the options
and/or the resale of the underlying common shares. The options were granted
without registration under the Securities Act of 1933 in reliance on an
exemption from registration pursuant to Section 4(2) of the Act.
21
Plan of Operations
For a complete understanding, this Plan of Operations should be read in
conjunction with the Financial Statements and Notes to the Financial Statements
contained herein.
During 2004, the Company generated no revenue from operations. The
Company does not anticipate generating revenue until it begins production,
which, if necessary funding can be obtained, is estimated to occur in 2007.
Moreover, in reaching the production stage, the Company anticipates incurring
millions of dollars in costs. Because the Company is not currently engaged in
revenue generating activities, the Company will be completely dependent on
investment funds to support its operations until such time as production
generates sufficient revenues to cover operating expenses. The Company does not
expect to begin production until some time in 2007, and does not anticipate
generating sufficient revenue to cover operating expenses until 2007. There is
no assurance that the Company can obtain funding on favorable terms, or at all.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
The Company has developed a plan of operations that should allow it to
begin production in 2007, assuming adequate funding can be obtained. To fund
operations during 2005, the Company estimates it will need approximately
$10,000,000. The Company plans to seek this funding through private equity
investments. If the Company is successful in raising $10,000,000 it intends to
allocate the funds as follows.
Operations
Drilling
The Company has allocated approximately $2,800,000 to drilling and
exploration. This includes drilling of approximately 5,000 meters of the left
bank side of the Gornostai deposit and 14,000 meters of the ride bank side.
Estimated drilling costs include both direct and indirect drilling costs, which
include costs related to drilling such as geologist fees, site supervisors,
geological data processors, core sample takers, topographers, site procurement
specialists, etc.
Core Analysis
The Company anticipates spending approximately $170,000 for core
analysis during the next twelve months.
Transportation costs
Total transportation costs related to operations for the next twelve
months are estimated at $82,000. This includes cost of vehicle leases, drivers,
fuel, and repair and maintenance costs for all vehicles used for site
operations.
Design and Engineering
Over the next twelve months the Company plans to spend approximately
$2,500,000 for pre-feasibility and feasibility studies and to develop and
pilot-test a flowsheet and develop a plant design for ore processing. We will
also perform an independent reserves estimate and valuation.
22
Independent Reserve Estimate
The Company has allocated $500,000 to hire an independent mining
consulting firm to provide it with a reserve estimate for the Gornostai deposit.
Feasibility Study
The Company anticipates spending approximately $500,000 for the
preparation of pre-feasibility and feasibility studies. This is a minimum amount
based on market rates in the Commonwealth of Independent States of the former
Soviet Union. However, the price may increase if the Company retains an
independent western consulting firm.
Detailed Design
Detailed design cost of $1,500,000 represent prospective cost of
detailed engineering and design contract for construction of producing plant on
the territory of Gornostai deposit. This includes flowsheet design and its pilot
testing. This is a rough estimate, which will be subject to future revision
following completion of feasibility studies.
Professional Fees
The Company anticipates incurring approximately $300,000 in expenses to
its financial auditors and securities attorneys during the next twelve months.
Concession Expenses
Under the terms of the exploration and production contract, if the
Company discovers commercially feasible mineral deposits, it will be required to
pay licensing and other fees and government related costs. The Company has
allocated $450,000 for this purpose over the next year.
Administrative Expenses
The Company will allocate approximately $820,000 for administrative
expenses during the next twelve months, which includes expenses of maintaining
offices in the United States and Kazakhstan, salaries and taxes.
Office Equipment
The Company also anticipates spending approximately $100,000 for office
equipment during the next twelve months.
In the event the Company is unable to raise $10,000,000, priority will
be given to drilling and design and engineering expenses, with funds being
allocated as management determines in its business judgment to be in the best
interest of the Company.
Financial Statements
See Consolidated Financial Statement listed in the accompanying index
to the Consolidated Financial Statements on Page F-1 herein.
23
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
The Company made no changes in and had no disagreements with its
accountants on accounting and financial disclosure during the 2004 fiscal year.
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 by requesting a copy in writing from us at the following address:
Bekem Metals, Inc.
875 Donner Way, Unit 705
Salt Lake City, Utah 84108
If you would like to request documents, please do so by July 20, 2005
to receive them before the annual meeting of stockholders.
By order of the Board of Directors,
Marat Cherdabayev
President
August __, 2005
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.
24
BEKEM METALS, INC.
(Formerly EMPS Research Corporation)
(A Development Stage Company)
FINANCIAL STATEMENTS TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Report of Registered Public Accounting Firm...............................F-1
Balance Sheets as of December 31, 2004 and 2003...........................F-2
Statements of Operations for the Years Ended December 31, 2004
and 2003 and for the Cumulative Period from January 31, 2001
(Date of Inception) through December 31, 2004...........................F-3
Statements of Shareholders' Equity (Deficiency) for the Cumulative
Period from January 31, 2001 (Date of Inception) through
December 31, 2004.......................................................F-4
Statements of Cash Flows for the Years Ended December 31, 2004
and 2003 and for the Cumulative Period from January 31, 2001
(Date of Inception) through December 31, 2004...........................F-5
Notes to Financial Statements.............................................F-6
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004 (Unaudited) .........................................F-11
Consolidated Statement of Operations for the Three months ended
March 31, 2005, and 2004, and for the Period from March 5, 2004
(Date of Inception through March 31, 2005 (Unaudited)..................F-12
Consolidated Statement of Shareholders' Equity for the Period
from March 5, 2004 (Date of Inception) Through
March 31, 2005 (Unaudited).............................................F-13
Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2005, and 2004 and for the Period from March 5, 2004
(Date of Inception) Through March 31, 2005 (Unaudited).................F-14
Notes to the Unaudited Consolidated Financial Statements.................F-15
i
CONDESA PACIFIC S.A. AND SUBSIDIARY
Report of Registered Public Accounting Firm..............................F-23
Consolidated Balance Sheet - December 31, 2004...........................F-24
Consolidated Statement of Operations for the Period from March 5, 2004
through December 31, 2004..............................................F-25
Consolidated Statement of Shareholders' Deficiency for the Period
from March 5, 2004 through December 31, 2004...........................F-26
Consolidated Statement of Cash Flow for the Period from March 5, 2004
through December 31, 2004..............................................F-27
Notes to the Consolidated Financial Statements...........................F-28
ii
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750 an independant member of
Salt Lake City, UT 84180-1128 BAKER TILLY
Phone: (801) 532-2200 INTERNATIONAL
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
Bekem Metals, Inc.
We have audited the balance sheets of Bekem Metals, Inc. as of December 31, 2004
and 2003 and the related statements of operations, shareholders' equity
(deficiency) and cash flows for the years then ended and for the cumulative
period from January 31, 2001 (date of inception) through December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the auditing 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
audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Bekem Metals, Inc. as of December
31, 2004 and 2003, and the results of its operations and cash flows for the
years then ended, and for the cumulative period from January 31, 2001 (Date of
Inception) through December 31, 2004 in conformity with U.S. generally accepted
accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 31, 2005
F-1
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
BALANCE SHEETS
December 31, 2004 2003
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 2,841 $ 22,531
- -----------------------------------------------------------------------------------------------------------------
Total Current Assets 2,841 22,531
- -----------------------------------------------------------------------------------------------------------------
Patents and deferred patent costs, net of amortization
of $796 and $590 1,840 2,046
- -----------------------------------------------------------------------------------------------------------------
Total Assets $ 4,681 $ 24,577
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable $ 12,992 $ 2,413
Franchise tax payable 100 100
Deferred revenue 2,568 9,190
- -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 15,660 11,703
- -----------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Deficiency)
Common stock; $0.001 par value, 50,000,000
shares authorized, 3,300,000 and 3,300,000 shares
issued and outstanding, respectively 3,300 3,300
Additional paid-in capital 224,503 33,845
Deficit accumulated during the development stage (238,782) (24,271)
- -----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficiency) (10,979) 12,874
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity (Deficiency) $ 4,681 $ 24,577
=================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-2
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the
Cumulative
Period From
January 31, 2001
(Date of
Inception)
through
December 31,
For the years ended December 31, 2004 2003 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenue $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------------------
Expenses
General and administrative 214,305 14,999 237,945
Amortization expense 206 205 795
- --------------------------------------------------------------------------------------------------------------------------------
Total Expenses 214,511 15,204 238,740
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss From Operations (214,511) (15,204) (238,740)
Other Income (Expense)
Grant revenue 6,622 2,042 148,744
Grant expense (6,622) (2,042) (148,774)
Interest expense - - (42)
- --------------------------------------------------------------------------------------------------------------------------------
Net Other Income (Expense) - - (42)
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (214,511) $ (15,204) $ (238,782)
================================================================================================================================
Basic and Diluted Loss Per Share $ (0.07) $ (0.00)
==============================================================================================================
Weighted Average Common
Shares Outstanding 3,300,000 3,300,000
==============================================================================================================
The accompanying notes are an integral part of these financial statements.
F-3
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (JANUARY 31, 2001) TO DECEMBER 31, 2OO4
Deficit
Accumulated Total
Common Stock Additional During the Shareholders'
------------------------- Paid-in Development Equity
Shares Amount Capital Stage (Deficiency)
- ----------------------------------------------------------------------------------------------------------------------
Balance, January 31, 2001 (date of inception) - $ - $ - $ - $ -
Shares issued to EMPS Corp. in
exchange for patents and other
consideration, February 14, 2001 3,000,000 1,000 4,000 - 5,000
Capital contributed by former parent
company upon forgiveness of debt,
September 30, 2002 - - 2,145 - 2,145
Shares issued for cash consideration
at $0.10 per share, December 31, 2002 300,000 300 29,700 - 30,000
Net loss for the year ended
December 31, 2002 - - - (9,067) (9,067)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 3,300,000 3,300 33,845 (9,067) 28,078
======================================================================================================================
Net loss for the year ended
December 31, 2003 - - - (15,204) (15,204)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 3,300,000 3,300 33,845 (24,271) 12,874
======================================================================================================================
Options granted to non-employees for
services valued at $0.10 per share,
February 16, 2004 - - 190,658 - 190,658
Net loss for the year ended
December 31, 2004 - - - (214,511) (214,511)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 3,300,000 $ 3,300 $ 224,503 $ (238,782) $ (10,979)
======================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-4
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the
Cumulative
Period From
January 31,
2001 (Date of
Inception)
through
December 31,
For the years ended December 31, 2004 2003 2004
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Cash from grant $ - $ - $ 151,312
Cash paid for grant expenses (5,122) (2,042) (147,244)
Cash paid for interest - - (42)
Cash paid for non grant expense (14,568) (9,864) (33,285)
=====================================================================================================================
Cash Used in Operating Activities (19,690) (11,906) (29,259)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from sale of common stock - - 32,100
- ---------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities - - 32,100
- ---------------------------------------------------------------------------------------------------------------------
Net Change in Cash (19,690) (11,906) 2,841
Cash at the Beginning of the Period 22,531 34,437 -
- ---------------------------------------------------------------------------------------------------------------------
Cash at the End of the Period $ 2,841 $ 22,531 $ 2,841
=====================================================================================================================
Reconciliation of Net Loss to Cash
Used in Operating Activities
Net Loss $ (214,511) $ (15,204) $ (238,782)
Adjustments to reconcile net loss to
cash used in operating activities
Options granted for services 190,658 - 190,658
Amortization of patent costs 206 205 796
Organization costs paid by issuance of common stock - - 264
Impairment of patent - - 2,145
Change in assets and liabilities:
Prepaid assets - 3,441 -
Accounts payable 10,579 1,694 12,992
Franchise tax payable - - 100
Deferred revenue (6,622) (2,042) 2,568
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities $ (19,690) $ (11,906) $ (29,259)
=====================================================================================================================
Supplemental disclosure of noncash investing and financing activities
Common stock issued for assignment of patents from former Parent $ - $ - $ 2,636
=====================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-5
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Bekem Metals, Inc. (The Company) was organized as EMPS Research
Corporation under the laws of the State of Utah on January 31, 2001 and elected
a fiscal year end of December 31st. EMPS Corporation, the Company's former
parent, formed the Company by contributing cash and patented technology in
exchange for all of the issued and outstanding shares of EMPS Research
Corporation. The Company was formed to further develop and market patented
technology for commercially separating nonmagnetic particulate material from
other materials without heat or water. The Company has three patents having to
do with its business purpose but has not commenced planned principal operations
and is considered a development stage company. On January 28, 2005 the Company
acquired Condessa Pacific S.A. by issuing stock in a reverse merger transaction
resulting in a change of control and a change in the reporting entity, as more
fully described in Note 9 - Subsequent Events. On February 9, 2005 the Company
changed its name to Bekem Metals, Inc.
Basis of Presentation - The accompanying financial statements include the
accounts of EMPS Research Corporation since its inception and are not presented
on a consolidated basis with its former Parent, EMPS Corporation. EMPS Research
Corporation was spun-off from EMPS Corporation effective May 23, 2003. The
3,000,000 shares of the Company owned by EMPS Corporation were distributed to
shareholders of EMPS Corporation and from that date the Company was no longer a
subsidiary of EMPS Corporation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Amortization of Patent Rights - The Company is amortizing its cost associated
with the acquisition of its patents over a period of 12.8 years, the legally
remaining protected lives of the patents, using the straight-line method. The
patents are reviewed for impairment annually. Impairment would be recognized if
the carrying amount is not recoverable and the carrying amount exceeds the fair
value of the intangible asset. At December 31, 2004 and 2003, the Company
patents have a carrying value of $1,840, and $2,046 respectively.
Grant revenue recognition - The Company's Department of Energy (DOE) grant is
funded on a cost reimbursement basis and payments received from the grant are
treated as earned and recognized as revenue at the time expenditures
reimbursable under the grant are incurred. The grant has provisions for advance
payments. Grant receivables represent the amount by which expenditures exceed
amounts received from the DOE under the grant; deferred revenues represent
payments received from the DOE which exceed costs expended under the grant.
Income Taxes - Due to losses at December 31, 2004 and 2003 and since inception,
the Company has no provisions for income taxes. Deferred income tax results from
timing differences in recognition of income and expense for financial accounting
and tax reporting purposes. Timing differences arise from organization costs
recognized currently for financial statement purposes as compared to
amortization over 60 months for tax purposes and operating loss carry forwards.
F-6
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Share-Based Compensation - The Company adopted a share-based compensation plan
on March 12, 2003. The Company accounts for employee options using the intrinsic
value method in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. The Company accounts for options
granted to non-employees at their fair value in accordance with FAS 123,
Accounting for Stock-Based Compensation. Under FAS No. 123, stock-based
compensation is determined as the fair value of the equity instruments issued.
The measurement date for these issuances is the earlier of the date at which a
commitment for performance by the recipient to earn the equity instruments is
reached or the date at which the recipient's performance is complete.
Share-based compensation to non-employees totaled $190,658 for the year ended
December 31, 2004, and $-0- for 2003.
Net Loss Per Share - The computation of net loss per common share is based on
the weighted-average number of shares outstanding during the periods presented.
As of December 31, 2004 there were outstanding stock equivalents to purchase
2,000,000 shares of common stock that were not included in the computation of
diluted loss per share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
Recent Accounting Pronouncements - In December 2004, the FASB issued Statement
No. 123 (Revised 2004), Share-Based Payment ("Statement 123(R)"). Statement
123(R) revises Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123(R) requires the recognition of the cost of employee services
received in exchange for stock options and awards of equity instruments based on
the grant-date fair value of such options and awards, over the period they vest.
Under the modified-prospective basis alternative, which has been selected by the
Company to adopt Statement 123(R), the Company is required to adopt Statement
123(R) on January 1, 2006 and the Company will the recognize employee
compensation from stock options and awards equal to their unamortized grant-date
fair value over their remaining vesting period. As of December 31, 2004, no
employee options have been granted under the Company's Plan. Accordingly, the
effect of adopting Statement 123(R) on options outstanding at December 31, 2004
will not result in the recognition of additional after-tax compensation during
the year ending December 31, 2006.
NOTE 2 - COMMON SHARES
EMPS Corporation formed the Company as a wholly owned Subsidiary by contributing
$2,100 cash, paying $264 in expenses on behalf of the Company, and by assigning
three patents it owned to the Company. As consideration, the Company issued
3,000,000 shares of its common stock to EMPS Corporation, representing all of
the issued and outstanding common shares of the Company at the formation date.
The patents assigned to the Company were valued at their historical cost to EMPS
Corporation of $2,636.
On December 31, 2002, the Company issued 300,000 common shares for $30,000. or
$0.10 per share to Techgrand Company Ltd., a Hong Kong limited company, which
also owns shares of the common stock of the Company's former Parent.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company has no employees. Officers and directors have provided a small
amount of services since inception; however no compensation has been paid or
accrued due to the nominal value of such services. During the first six months
of 2001, compensation of $20,000 was paid to the Company's DOE grant project
manager, related by virtue of his ability to enter into business transactions
with the Company not at arms length.
The Company is receiving free office space through a related party. The value of
the free rent to date has been of nominal value.
F-7
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
On February 16, 2004 the Company issued options for one million common shares to
current shareholders for services provided to the Company more fully described
in Note 7.
The Company decided to abandon its continuation-in-part (CIP) patent application
during the quarter ended September 30, 2002. At December 31, 2001, the costs
associated with this application were recorded as deferred patent costs. At the
time of the abandonment, the costs for the CIP patent application had no future
value and the $2,145 carrying amount of the deferred patent costs were charged
to operations. The deferred patent costs had been paid on behalf of the Company
by its Parent. At the time of abandonment, the Parent forgave the debt advanced
and the Company recorded a $2,145 capital contribution.
NOTE 4 - INCOME TAXES
The Company has paid no federal or state income taxes since its incorporation.
As of December 31, 2004, the Company had net operating loss carry forwards for
federal income tax reporting purposes of $86,311 which, if unused, will expire
between 2022 and 2023. The tax effect of the operating loss carry forwards at
December 31, 2004 and 2003 is as follows:
December 31, 2004 2003
---------------------------------------------------------------------
Operating loss carry forward $ 89,053 $ 9,040
Valuation allowance (89,053) (9,040)
---------------------------------------------------------------------
Total Deferred Tax Asset $ - $ -
=====================================================================
The following is a reconciliation of the income taxes computed using the federal
statutory rate to the provision for income taxes:
For the years ended December 31, 2004 2003
---------------------------------------------------------------------
Tax at federal statutory rate (34%) $ (72,934) $ (5,169)
State tax benefit (7,079) (502)
Change in valuation allowance 80,013 5,671
---------------------------------------------------------------------
Provision for Income Taxes $ - $ -
=====================================================================
NOTE 5 - DEPARTMENT OF ENERGY AWARD
The Department of Energy (DOE), through its Office of Industrial Technologies
(OIT) 2000 Inventions and Innovation (I&I) Program, awarded a $199,000 grant to
the Company during 2001 for the Company's project entitled "Development of a
High-Frequency Eddy-Current Separator".
The grant is a DOE small business grant and thus the Company has no financial
obligation to DOE under the award. The Company is not required to compensate DOE
upon successful (or unsuccessful) commercialization of a prototype (such as for
royalties or commissions). Prior to entering into the award the Company had the
option to identify technical data that was proprietary and to elect to retain
title to this proprietary data. In so doing, the unlimited right to such
technical data by DOE was voided per DOE regulations. In accordance with DOE
regulations, a small business concern has a "subject invention" related to work
done under the award, it can obtain unlimited rights to the technical data for
the "subject invention", and has license to use the invention only for
government use and not commercial use. Even so, if proper application and
F-8
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
reporting is done for the "subject invention" the small business concern can
retain title to the "subject invention" and the above rights to DOE to use the
invention or technical data is voided. Management intends to perform the proper
reporting and application process to retain title to any "subject invention"
that may arise, if any, during the course of the award.
The original project period was from February 1, 2001 to January 31, 2003 but
has been extended to June 30, 2005. Research assistance conducted under the
grant has been subcontracted to two entities. During the years ended December
31, 2004 and 2003 the Company incurred grant expenses in the amount of $6,622
and $2,042, respectively. Total grant expense from inception through December
31, 2004 is $148,744.
NOTE 6 - PATENTS
The Company received three patents by assignment from it parent at formation.
The three patents related to the Company's particle separation technology and
were valued at their historical cost to its parent of $2,636. Amortization
expense is being recognized on a straight-line basis through 2013. Amortization
expense for the years ending December 31, 2004 and 2003 was $206 and $205. The
parents are currently carried at a value of $1,840, net of accumulated
amortization expense of $796. The amortization expense for each of the next five
years is anticipated to be $205 per year.
NOTE 7 - STOCK OPTION PLAN
On March 12, 2003, the Board of Directors approved the EMPS Research Corporation
2003 Stock Option Plan (the "Plan"), which allows for the grant of up to
5,000,000 incentive stock options or nonqualified stock options. The exercise
price of the incentive stock options granted under the Plan will be determined
by the Stock Option Committee of the Board of Directors at the time of grant and
may not be less than 100% of the fair value of the stock. The exercise price of
an incentive stock option granted to a 10% shareholder shall not be less than
110% of the fair value of the stock. Expiration and vesting terms of options
will be determined at the time of the grant.
On February 16, 2004, the Company issued two non-qualified options to purchase
an aggregate of 2,000,000 common shares at an exercise price of $0.10 per share.
The options, which expire on February 16, 2009, were issued to an outside
consultant and to a current shareholder. The exercise price was determined by
the board of directors and was equal to the cash price of the Company's most
recent sale of common shares and the value for which the Company agreed to sell
shares to Techgrand in the private placement equity agreement described below.
The option had a fair value on the award date of $190,658 and the Company
recognized a charge to operations on that date of $190,658. The options were
valued on the grant date using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 3.02%; expected dividend yield
of 0.0%; expected life of 5 years and estimated volatility of 175%.
NOTE 8 - PRIVATE EQUITY CREDIT AGREEMENT
On November 12, 2003, the Company entered into a Private Equity Credit Agreement
with Techgrand Company Limited, a Hong Kong limited company ("Techgrand"), a
current shareholder. Techgrand has agreed to provide the Company an equity
credit line of up to $470,000. Pursuant to the Agreement, the Company can
require Techgrand to purchase restricted common shares of the Company in
increments of $75,000 to $100,000, up to a total of $470,000 worth of restricted
Company common stock at the greater of $0.10 per share or 85% of the prevailing
market price as defined in the Agreement. The Company intends to use these funds
for operational expenses and to further its business activities. No funds have
been advanced and no shares of the Company's common stock have been issued under
this Agreement.
F-9
BEKEM METALS, INC.
(formerly EMPS Research Corporation)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 9 - SUBSEQUENT EVENT
On December 3, 2004 the Company entered into a Plan and Agreement of
Reorganization with Condesa Pacific S.A., a British Virgin Islands international
business company and on January 28, 2005, the Company completed the closing of
the Agreement. The Company acquired 100% of the outstanding capital stock of
Condesa Pacific, S.A. (Condesa) in exchange for the issuance of 35,000,000
common shares of the Company. As a result of the issuance, the shareholders of
Condesa now own approximately 90% of the outstanding common stock of the
Company. The consideration exchanged in connection with this transaction was
determined through negotiation by the parties. The transaction resulted in a
change of control of the Company and a change in the reporting entity.
Condesa is a British Virgin Islands international business company whose primary
asset is an exploration and production contract held by its wholly-owned
subsidiary Kaznickel, LLP. The exploration and production contract, which was
issued by the Ministry of Energy and Mineral Resources of the Republic of
Kazakhstan, grants Kaznickel the exclusive right to explore for and produce
nickel, cobalt, and other minerals in the 616 hectare (1,522 acre)
Gornostayevskoye field located in the East Beskaragaiskiy region of Kazakhstan
in the Republic of Kazakhstan. The Company intends to pursue the exploration and
development of the Gornostayevskoye field.
None of the Condesa shareholders were shareholders of the Company immediately
prior to the completion of the closing of the Agreement. None of the Company's
executive officers or directors has changed as a result of this transaction and
no change in the executive officers or directors of the Company is required
under the terms of the Agreement.
On February 9, 2005, the Company's Board of Directors approved, and holders of a
majority of the outstanding shares of the Company approved and ratified a change
in the Company's name from EMPS Research Corporation to Bekem Metals, Inc., and
on March 16, 2005 the Company filed an amendment to its Articles of
Incorporation changing its name to Bekem Metals, Inc. The Company changed its
name to better reflect its efforts to explore and develop the Gornostayevskoye
mineral field in East Kazakhstan.
F-10
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2005 2004
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 19,492 $ 4,190
Related party receivable 1,042 -
Prepaid expenses 10,070 21,337
Inventory 4,252 -
Other current assets 13,653 -
- -------------------------------------------------------------------------------------------------------------------------
Total Current Assets 48,509 25,527
- -------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment (net of accumulated depreciation of $3,341) 44,040 45,044
Long term deferred expenses 17,341 15,117
Intangible assets (net of accumulated amortization of $847) 1,789 -
Mineral property rights (net of depletion on asset retirement obligation of $12,026) 1,176,114 1,182,007
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,287,793 $ 1,267,695
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 156,985 $ 85,384
Accrued liabilities 53,700 26,959
Deferred revenue 1,716 -
Short term loan due to a related party 211,491 92,308
- -------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 423,892 204,651
Asset Retirement Obligation 686,267 675,460
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,110,159 880,111
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock; $0.001 par value, 50,000,000 shares
authorized, 38,300,000 and 35,000,000 shares outstanding 38,300 35,000
Additional paid-in capital 704,450 719,456
Deficit accumulated during the development stage (565,116) (366,872)
- -------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 177,634 387,584
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,287,793 $ 1,267,695
=========================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-11
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Period from
March 5, 2004
(Date of Inception)
Through
For the Three Months Ended March 31, 2005 2004 March 31, 2005
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
Operational Expenses
Exploratory costs 105,807 - 376,906
General and administrative expenses 93,005 4,456 192,514
- ---------------------------------------------------------------------------------------------------------------------
Total Expenses 198,812 4,456 569,420
- ---------------------------------------------------------------------------------------------------------------------
Loss From Operations (198,812) (4,456) (569,420)
Other Income (Expense)
Grant revenue 850 - 850
Grant expense (850) - (850)
Exchange rate gain 568 - 4,304
- ---------------------------------------------------------------------------------------------------------------------
Net Loss $ (198,244) $ (4,456) $ (565,116)
- ---------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss per Common Share $ (0.01) $ (0.00)
- -----------------------------------------------------------------------------------------
Weighted-Average Shares used in
Basic and Diluted Loss per Common Share 38,300,000 14,000,000
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-12
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM MARCH 5, 2004
(DATE OF INCEPTION) THROUGH MARCH 31, 2005 (UNAUDITED)
Deficit
Common Shares Accumulated Total
------------------------------- Additional During the Shareholders'
Shares Amount Paid-in Capital Development Stage Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - March 5, 2004
(Date of inception) $ - $ - $ - $ -
Shares issued for cash, August 12, 2004 14,000,000 14,000 290,456 - 304,456
Shares exchanged for 60% interest -
in Kaznickel, November 19, 2004 21,000,000 21,000 429,000 - 450,000
Net loss for period - - (366,872) (366,872)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 35,000,000 35,000 719,456 (366,872) 387,584
Shares issued in acquisition of Bekem
Metals, January 28, 2005 3,300,000 3,300 (15,006) - (11,706)
Net loss for period (198,244) (198,244)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 38,300,000 $ 38,300 $ 704,450 $ (565,116) $ 177,634
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-13
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
For the Period from
March 5, 2004
(Date of Inception)
Through
For the Three Months Ended March 31, 2005 2004 March 31, 2005
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $(198,244) $ (4,456) $ (565,116)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,026 - 3,424
Depreciation and accretion expense on
asset retirement obligation 17,025 - 33,094
Foreign currency exchange gain (7,334) - (3,598)
Change in operating assets and liabilities:
Inventory (4,328) - (4,328)
Prepaid expenses and other current assets (5,417) - 74,421
Accounts payable and accrued liabilities 89,169 4,456 170,626
Deferred grant revenue (849) - (849)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (107,952) - (292,326)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (1,152) - (25,793)
Purchase of Kaznickel and Bekem
Metals, Inc., net of cash acquired 2,648 - (176,293)
Increase in receivable from related parties (1,061) - (1,061)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 435 - (203,147)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from short-term note payable 102,101 - 193,505
Proceeds from accrued liabilities to related parties 20,958 - 20,958
Proceeds from issuance of common stock - - 304,456
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 123,059 - 518,919
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (240) - (3,954)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 15,302 - 19,492
Cash at Beginning of Period 4,190 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 19,492 $ - $ 19,492
==================================================================================================================================
Supplemental Cash Flow Information
- ----------------------------------------------------------------------------------------------------------------------------------
Non Cash Investing and Financing Activities:
Fair value of assets acquired $ 4,471 $ - $ 1,445,858
Cash paid for equity interests - - (300,000)
Fair value of shares issued for acquisitions (11,706) - (461,706)
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities Assumed $ 16,177 $ - $ 684,152
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-14
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING
POLICIES
Interim Financial Information -- The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three-month period ended March 31, 2005 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005.
Nature of Business -- Bekem Metals, Inc. is engaged through its wholly owned
subsidiary, Kaznickel LLP, (collectively, the "Company") in the acquisition and
exploration of mineral resource properties, specifically the Gornostayevskoye
("Gornostai") nickel and cobalt deposit (the "Deposit") located in the East
Kazakhstan Oblast of the Republic of Kazakhstan. Kaznickel acquired the rights
to explore and develop the Gornostai Deposit on April 22, 2004 and is active in
exploration of the Mineral Property. The Company acquired Kaznickel on September
22, 2004 in a purchase business combination as further described in Note 2.
Bekem Metals, Inc. was formerly named EMPS Research Corporation. The name change
was effected March 16, 2005.
Basis of Presentation and Principles of Consolidation - The consolidated
financial statements of the Company include the accounts of Condesa Pacific S.A.
since its inception and Kaznickel LLP ("Kaznickel"), a Kazakh partnership, since
the date of its acquisition by Condesa, and the accounts of Bekem Metals, Inc.
since its acquisition by Condesa. Condesa was incorporated under the laws of the
British Virgin Islands on March 5, 2004. Condesa acquired Bekem Metals, Inc. in
a reverse acquisition, on January 28, 2005 as further described in Note 3.
Intercompany transactions are eliminated upon consolidation.
Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the Unites States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Business Condition - The Company has no proven mineral reserves and has not yet
entered the development stage with respect to its mineral interests, and has no
production. There has been no revenue from operations, and it has incurred a net
loss of $565,116 since inception, including $198,244 for the quarter ended March
31, 2005. In addition, current liabilities exceeded current assets by $375,383
and $179,124 at March 31, 2005 and December 31, 2004, respectively. Management
expects to generate sufficient cash to fund its current activities by issuing
equity securities and receiving financial assistance, if needed, from its
shareholders. There is no assurance, however, that funds can be raised or that
the shareholders will have the ability to provide financial assistance to the
Company. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
F-15
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Exploration Stage Company - The Company is considered to be in the exploration
stage. Since its inception March 5, 2004, the Company has devoted substantially
all of its efforts in raising capital and acquiring Kaznickel, and then
exploring for mineral property under its exploration contract. The mineral
property has not reached a development or production stage and accordingly, no
revenues from production of the property have been recorded. The Company is
considered to be in the development stage for financial reporting purposes. A
separate disclosure of additional information including presentation of
cumulative amounts of revenues and expenses and cash flows from inception, and
deficits accumulated during the development stage are required under FAS 7,
"Accounting and Reporting by Development Stage Enterprises."
Currency Translation - The consolidated financial statements are presented in
U.S. dollars, the functional currency of the Company's subsidiary operating in
Kazakhstan. Non-monetary assets and liabilities of Kaznickel are translated into
U.S. dollars using historical exchange rates and monetary assets and liabilities
are translated into U.S. dollars using exchange rates on the date of the
financial statements. Results of operations are translated at the average
exchange rates during the reporting period. Exchange gains and losses resulting
from financial statement translation and from holding foreign currencies are
included in the results of operations.
Prepaid Expenses -- Prepaid expenses relate to office rent, subscriptions, and
insurance. Prepaid expenses are charged to operations in the period the related
service or work is performed.
Mineral Property Rights -- Mineral property acquisition costs, site restoration
costs and development costs on mineral properties with proven and probable
reserves are capitalized and will be depleted using the units-of-production
method over the estimated life of the reserves. If there are insufficient
reserves to use as a basis for depleting such costs, they are written off as a
mineral property or mineral interest impairment in the period in which the
determination is made. Site restoration costs are depleted over the term of
their expected life. Interest costs are capitalized on mineral properties and
mineral interests in development. The development potential of mining properties
is established by the existence of proven and probable reserves, reasonable
assurance that the property can be permitted as an operating mine and evidence
that there are no metallurgical or other impediments to the production of
saleable metals.
Exploration costs incurred on mineral interests, other than acquisition costs,
prior to the establishment of proven and probable reserves are charged to
operations as incurred. Development costs incurred on mineral interests with
proven and probable reserves will be capitalized as mineral properties. The
Company regularly performs evaluations of its investment in mineral interests to
assess the recocverability and / or the residual value of its investments in
these assets. All mineral interests and mineral properties are reviewed for
impairment whenever events or circumstances change which indicate the carrying
amount of an asset may not be recoverable, utilizing established guidelines
based upon undiscounted future net cash flows from the asset or upon the
determination that certain exploration properties do not have sufficient
potential for economic mineralization.
Management's estimates of mineral prices, recoverable probable reserves, and
operating, capital and reclamation costs, when available, are subject to certain
risks and uncertainties which may affect the recoverability of mineral property
costs. Although management has made its best estimate of these factors, it is
possible that changes could occur in the near term, which could adversely affect
the future net cash flows to be generated from the properties.
F-16
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Property, and Equipment - Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis over
the following estimated useful lives of the assets:
Buildings and constructions 12.5 years
Machinery and equipment 7 years
Vehicles 10 years
Other fixed assets 3 - 10 years
-----------------------------------------------------
Revenue Recognition - Revenues, which will arise from the sale of cobalt and
nickel ore or processed cobalt and nickel will be recorded when persuasive
evidence of an arrangement exists, title to product transfers to the customer,
and collectibility is reasonably assured. Produced, but unsold minerals or ore
will be recorded as inventory until sold.
Financial Instruments - The nature of the Company's operation exposes the
Company to fluctuations in commodity prices, foreign currency exchange risk and
credit risk. The Company recognizes these risks and manages its operation in a
manner such that exposure to these risks is minimized to the extent practical.
The Company is not exposed to fluctuations in interest rates because its loans
are interest free, as a general requirement under Kazakh law for non-financial
institutions.
Income taxes - Income taxes are calculated using the liability method of tax
accounting. Under this method, future income tax assets and liabilities are
computed based on temporary differences between the tax basis and carrying
amount on the balance sheet for assets and liabilities. Future income tax assets
and liabilities are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.
NOTE 2 - ACQUISITION OF KAZNICKEL LLP
On July 9, 2004 Condesa entered into an investment agreement under which Condesa
provided a $300,000 convertible loan to Kaznickel LLP, which was immediately
converted into a new 40 percent equity interest in Kaznickel. On September 22,
2004, Brisa Equities, a British Virgin Islands holding company, acquired a
controlling interest in Kaznickel by purchasing 60 percent of the founding
partners' 60 percent interests. As consideration for the purchase, the original
partners' obtained a commitment from Brisa to facilitate a reverse merger with a
U.S. public company, and a commitment to obtain funding enabling Kaznickel to
further develop its mineral property rights. The value of the commitment was
estimated to be $450,000 based on the percent of Kaznickel obtained for the cash
investment of $300,000 previously. On November 19, 2004, Brisa and the remaining
Kaznickel partners exchanged their 60% interest in Kaznickel for a new 60%
interest in Condesa, thereby making Kaznickel a wholly-owned subsidiary of
Condesa. The acquisition of a controlling interest in Kaznickel by Brisa and
Condesa was considered the purchase of Kaznickel with a measurement date of
September 22, 2004, the date Brisa and Condesa obtained control from the
original Kaznickel partners.
Condesa accounted for the acquisition of Kaznickel as a purchase business
combination with a purchase price of $750,000. The purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated fair
values. Negative goodwill was not recognized in connection with the acquisition
of Kaznickel. Instead, the excess of the fair value of the net assets over the
purchase price was allocated as a pro rata reduction of the amounts that
otherwise would have been assigned to the long-term assets. The Company is in
the process of obtaining an independent valuation of the net assets acquired.
F-17
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Accordingly the allocation of the purchase price is subject to refinement. At
September 22, 2004, the purchase price was allocated to the assets acquired and
the liabilities assumed as follows:
----------------------------------------------------------------
Current assets $ 231,674
Mineral property rights 713,204
Asset retirement costs of the mineral rights 474,937
Property and equipment 21,572
----------------------------------------------------------------
Total assets acquired 1,441,387
----------------------------------------------------------------
Current liabilities (25,468)
Asset retirement obligation (665,919)
----------------------------------------------------------------
Total liabilities assumed (691,387)
----------------------------------------------------------------
Net Assets Acquired $ 750,000
================================================================
Intangible assets acquired include the mineral property rights, which are
capitalized until the production phase begins, subject to impairment
considerations. Other intangible assets include the asset retirement costs of
the mineral rights which has a 20-year estimated life and is subject to
amortization at a planned rate of $24,291 per year, and the asset retirement
obligation is accreted over its 20-year life with a current estimated expense of
$43,274 per year.
NOTE 3 - PLAN AND AGREEMENT OF REORGANIZATION WITH CONDESA
On January 28, 2005 Bekem Metals, Inc. (formerly EMPS Research, Inc.), ("Bekem")
completed a Plan and Agreement of Reorganization with Condesa. Bekem acquired
100% of the outstanding capital stock of Condesa in exchange for the issuance of
35,000,000 common shares. As a result of the issuance, the shareholders of
Condesa owned 91% of the outstanding common stock of Bekem. The transaction
resulted in a change of control of Bekem and a change in the reporting entity to
Condesa.
Bekem had 3,300,000 shares of common stock outstanding prior to the transaction
that remained outstanding. For financial reporting purposes, Condesa was
considered to have been the acquirer. The acquisition was recognized as a
forward stock split of Condesa's 50,000 shares of capital stock outstanding
prior to the reorganization for 35,000,000 common shares, or a 700-for-1 stock
split. These financial statements continue to present its assets and liabilities
at their historical cost and the effect of the stock split is reflected
retroactively since the inception of Condesa. The assets of Bekem were
considered to have been acquired by Condesa in exchange for the assumption of
Bekem's liabilities and the issuance of 3,300,000 common shares. The assets
consisted of cash of $2,648 and intangible assets of $ 1,823 (net of accumulated
amortization of $ 813).
NOTE 4 - MINERAL PROPERTY RIGHTS
Kaznickel acquired its interest in the Contract on Exploration and Development
of Gornostai Cobalt and Nickel Deposit (the "Contract") issued by the Ministry
of Energy and Mineral Resources of the Republic of Kazakhstan (the "Ministry")
dated February 26, 2004. By virtue of the Contract, Kaznickel acquired the right
to exploit the mineral property including the right to explore, develop and
produce the cobalt and nickel mineral resources on the Deposit through February
26, 2026. The Company has the right to re-negotiate the contract at that time
for an additional 30 years. The government of Kazakhstan retains the title to
the property; accordingly, the Company's mineral interest is considered to be an
intangible asset. As more fully described in Note 2, the Company capitalized the
F-18
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
acquisition costs of its mineral interest upon the purchase business combination
with Kaznickel. The allocated purchase price included a capitalized amount of an
acquired asset retirement obligation. While the property is not in production,
the asset retirement cost is depleted over the life of the contract from the
date of acquisition. Capitalized costs and related accumulated amortization at
March 31, 2005 is as follows:
Mineral Property Depletion of Asset Net Mineral
Rights Retirement Cost Property Rights
- ------------------------------------------------------------------------------------------------
Cost as of September 22, 2004 $ - $ - $ -
Acquisitions:
Mineral property 713,204 713,204
Asset retirement obligation 474,936 12,026 462,910
- ------------------------------------------------------------------------------------------------
Net Carrying Value $ 1,188,140 $ 12,026 $ 1,176,114
================================================================================================
The Contract provides the Company certain rights and also imposes certain
obligations and commitments. The rights include exploration through February
2006, and development and production of minerals through February 26, 2026. The
Company may transfer its right to third parties in accordance with Kazakh laws
and regulations and has a right to renegotiate an extension of the Contract.
Significant rights and obligations and commitments of the Contract include
monetary commitments for exploration of $200,000 in 2005 and 2006, and
expenditures to support social projects amounting to $300,000 during the
production stage. In addition, the Company was required to pay a fee of $2,000
upon award of the Contract, and a fee for the use of Kazakh owned technical data
of $835,759 of which $4,179 was paid on award of the Contract and $831,580 will
be due upon a finding of commercial deposits. Royalties of 0.5% of ores
extracted and sold will be required. The Contract subjects the Company to pay
regular income tax of 30 percent and requires an excess profits tax of 15 to 60
percent if its net profits exceed 20 percent of gross profit. Obligations also
include the establishment and funding of a reclamation fund that includes the
cost of removing buildings and equipment used in the Deposit area. The Company
is also required to comply with Kazakh environmental laws and regulations.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment consist of the following:
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Equipment $ 47,381 $ 46,456
Less: Accumulated Depreciaiton (3,341) (1,412)
- --------------------------------------------------------------------------------
Net Property and Equipment $ 44,040 $ 45,044
================================================================================
NOTE 6 - LONG TERM DEFERRED EXPENSES
The Company completed a remodel of its Semipalatinsk, Kazakhstan offices, which
costs are applied against monthly office rent charges through May 1, 2007. The
current portion of long term deferred expenses is included in other current
assets.
F-19
NOTE 7 - INCOME TAXES
In accordance with the laws and regulations of the Republic of Kazakhstan income
taxes are calculated at the statutory rate of 30 percent. Net operating losses
for development companies in the exploration and development may be carried
forward for the 7 subsequent years from the date the losses are incurred.
Therefore, the Company has deferred tax assets due to the savings of income tax
in future periods. However, the Company assessed the recoverability of these
deferred tax assets and created a provision against them until it has more
evidence of its recoverability in the future periods.
Deferred tax assets and liabilities were as follows:
March 31, December 31,
2005 2004
------------------------------------------------------------------
Tax loss carryforward $ 163,944 $ 106,710
Property and equipment (4,054) (4,457)
Asset retirement obligation 202,638 202,638
Valuation allowance (362,528) (304,891)
------------------------------------------------------------------
Total deferred tax assets $ - $ -
==================================================================
The following is a reconciliation of the amount of tax that would result from
applying the federal rate to pretax income with the provision for income taxes
at March 31, 2005:
For the Three
Months Ended
March 31, 2005
-----------------------------------------------------------------
Tax at US Federal statutory rate (34%) $ (67,403)
Non-deductible expenses 1,836
Deferred tax asset valuation change 57,637
Effect of lower foreign tax rates 7,930
-----------------------------------------------------------------
Income tax provision $ -
=================================================================
NOTE 8 - RELATED PARTY TRANSACTIONS
On December 2, 2004 the Company borrowed $92,308 from CJSC Kazmorgeophysica, a
Kazakh company related by virtue of several common shareholders. The short-term
loan is denominated in Kazakh Tenge, interest free and was due on its original
terms by December 31, 2004. During March 2005 the Company borrowed an additional
$99,798 from CJSC Kazmorgeophysica, as a Kazakh Tenge denominated,
interest-free, due on demand note. In addition, during the quarter ended March
31, 2005, the Company received advances in the amount of $26,883 from certain
owners, which are short-term in nature and payable upon demand. Because the
notes are denominated in Tenge, the balance reported on the financial statements
fluctuates based upon ending exchange rates.
F-20
NOTE 9 - ASSET RETIREMENT OBLIGATION
Upon purchase of Kaznickel, the Company recorded the effects of an asset
retirement obligation in accordance with SFAS No. 143, "Accounting for Asset
Retirement Obligations," and related interpretations, which requires entities to
record the fair value of a liability for an asset retirement obligation when it
is incurred which, for the Company, is obliged as part of Kaznickel's Contract
with the Ministry. Under the Contract, the Company is required to remediate the
property from the effects of the open pit mining process. The standard applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. The Company's asset retirement obligations relate primarily to the
obligation to fill mining pits and restore surface conditions at the conclusion
of term of the Contract.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded,
the related cost is capitalized by increasing the carrying amount of the related
mineral interest rights. Over time, the liability is accreted upward for the
change in its present value each period until the obligation is settled. The
initial capitalized cost is amortized as a component of mineral rights interests
as described in Note 1.
The reconciliation of the asset retirement obligation is as follows:
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Balance at beginning of period $675,460 $665,919
Liabilities incurred - -
Accretion expense during the period 11,467 9,541
- --------------------------------------------------------------------------------
Balance at End of Period $686,927 $675,460
================================================================================
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Concentration of Risk Relating to Foreign Mining Operations -- All of the
Company's properties are located within the Republic of Kazakhstan in Central
Asia. In addition to general industry risks of nickel and cobalt price
fluctuations, and potential lack of economic viability of the claims, the
Company has a concentration of risk related to its foreign properties and
interests which are subject to political uncertainty, changes in government,
unilateral renegotiation of licenses, claims or contracts, and nationalization,
or other uncertainties. In addition, the validity of mining claims which
constitute the Company's property holdings in Kazakhstan, may, in certain cases,
be uncertain and are subject to being contested.
Kazakhstan Business Environment - Kazakhstan, as an emerging market, has a legal
and regulatory infrastructure that is not as mature and stable as those usually
existing in more developed free market economies. As a result, operations
carried out in Kazakhstan can involve risks and uncertainties that are not
typically associated with those in developed markets. The instability associated
with the ongoing transformation process to a market economy can lead to changes
in the business conditions in which the Company currently operates. Changes in
the political, legal, tax or regulatory environment could adversely impact the
Company's operations.
Tax Matters - The local and national tax environment in the Republic of
Kazakhstan is subject to change and inconsistent application, interpretation and
enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted
by the Kazakh authorities, can lead to the imposition of fines, penalties and
interest.
F-21
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Environmental Matters - Extensive national, regional and local environmental
laws and regulations in Kazakhstan affect the Company's operations. These laws
and regulations set various standards regulating certain aspects of health and
environmental quality provide for user fees, penalties and other liabilities for
the violation of these standards and establish, in some circumstances,
obligations to remediate current and former facilities and off-site locations.
The Company believes it is currently in compliance with all existing Republic of
Kazakhstan environmental laws and regulations. However, as new environmental
laws and legislation are enacted and the old laws are repealed, interpretation,
application and enforcement of the laws may become inconsistent. Compliance in
the future could require significant expenditures, which may adversely affect
the Company's operations.
Operating Leases - The Company rented a number of cars for operational purposes
and has potential commitment of $99,000 in case of loss for any reason, which is
not covered by any insurance.
NOTE 11 - COMMON STOCK
The Company entered into an investment agreement with investors on July 9, 2004
under which the Company issued 14,000,000 common shares for cash proceeds of
$304,456, or $0.02 per share, received through August 12, 2004. The Company
issued 21,000,000 shares, on November 19, 2004 in exchange for 60% of the equity
of Kaznickel as further described in Note 2. The shares issued in exchange for
the equity of Kaznickel were valued at $450,000, or $0.02 per share, based upon
the value for which investors received common shares for cash.
F-22
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750 an independant member of
Salt Lake City, UT 84180-1128 BAKER TILLY
Phone: (801) 532-2200 INTERNATIONAL
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Condesa Pacific S.A.
We have audited the accompanying consolidated balance sheet of Condesa Pacific
S.A. and subsidiary (the "Company") as of December 31, 2004 and the related
statements of operations, stockholders' equity, and cash flows for the period
from March 5, 2004 (Date of Inception) to December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the 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 Condesa Pacific,
S.A. and subsidiary as of December 31, 2004 and the results of their operations
and cash flows for the period From March 5, 2004 through December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company currently has no
proved mineral reserves and has not yet entered the development stage with
respect to its mineral interests and has no production, and therefore
insufficient cash flows to sustain operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to those matters are described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 17, 2005
F-23
CONDESA PACIFIC S.A. AND SUBSIDIARY
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
ASSETS
Current Assets
Cash $ 4,190
Prepaid expenses 21,337
- -------------------------------------------------------------------------------------------------------------------------
Total Current Assets 25,526
- -------------------------------------------------------------------------------------------------------------------------
Non-Current Assets
Property, plant and equipment (net of accumulated depreciation of $1,412) 45,044
Long term deferred expenses 15,117
Mineral property rights (net of depletion on asset retirement obligation of $6,133) 1,182,007
- -------------------------------------------------------------------------------------------------------------------------
Total Non-Current Assets 1,242,168
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,267,695
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 85,384
Accrued liabilities 26,959
Short term loan to a related party 92,308
- -------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 204,651
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Asset retirement obligation 675,460
- -------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 675,460
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 880,111
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $1 par value, 50,000 shares authorized
and issued 50,000
Additional paid-in capital 704,456
Deficit accumulated during the exploration stage (366,872)
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 387,584
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,267,695
=========================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-24
CONDESA PACIFIC S.A. AND SUBSIDIARY
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 5 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Revenue $ -
- --------------------------------------------------------------------------------------------------------
Operational Expenses
Exploratory costs 271,099
General and administrative expenses 99,509
- --------------------------------------------------------------------------------------------------------
Total Expenses 370,608
- --------------------------------------------------------------------------------------------------------
Loss From Operations (370,608)
- --------------------------------------------------------------------------------------------------------
Other Income (Expense)
Exchange rate gain 3,736
- --------------------------------------------------------------------------------------------------------
Net Loss $ (366,872)
========================================================================================================
The accompanying notes are an integral part of these financial statements.
F-25
CONDESA PACIFIC S.A. AND SUBSIDIARY
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 5 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------
Deficit
Common Shares Accumulated Total
----------------------------- Additional During the Stockholders'
Shares Amount Paid-in Capital Exploration Stage Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance - March 5, 2004
(Date of inception) - $ - $ - $ - $ -
Shares issued for cash, August 12, 2004 20,000 20,000 284,456 - 304,456
Shares exchanged for 60% interest
in Kaznickel, November 19, 2004 30,000 30,000 420,000 450,000
Net loss for period - - - (366,872) (366,872)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 50,000 $ 50,000 $ 704,456 $ (366,872) $ 387,584
================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-26
CONDESA PACIFIC S.A. AND SUBSIDIARY
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE PERIOD FROM MARCH 5 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2004
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (366,872)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 1,398
Depreciation and accretion expense on asset retirement obligation 16,069
Foreign currency exchange gain 3,736
Change in operating assets and liabilities:
Prepaid expenses and other current assets 79,838
Accounts payable and accrued liabilities 81,457
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities (184,374)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (24,641)
Cash used in acquisition of Kaznickel (300,000)
Cash acquired in purchase of Kaznickel 121,059
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (203,582)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from short-term note payable 91,404
Proceeds from issuance of common stock 304,456
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities 395,860
- ----------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (3,714)
Net Increase (Decrease) in Cash 4,190
- ----------------------------------------------------------------------------------------------------------------------
Cash at Beginning of Year -
- ----------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 4,190
======================================================================================================================
Supplemental Cash Flow Information
Acquisition of Kaznickel
Fair value of the assets acquired $1,441,387
Cash paid for a 40% equity interest (300,000)
Fair value of 30,000 shares of stock issued to acquire the remaining 60% interest (450,000)
-------------
Liabilities assumed $ 691,387
The accompanying notes are an integral part of these financial statements.
F-27
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Condesa Pacific S.A. is engaged through its wholly-owned subsidiary, Kaznickel
LLP, (collectively, the "Company") in the acquisition and exploration of mineral
resource properties, specifically the Gornostay nickel and cobalt deposit (the
"Deposit") located in the East Kazakhstan Oblast of the Republic of Kazakhstan
("RK"). Kaznickel acquired the rights to explore and develop the Gornostay
Deposit on April 22, 2004 and is active in exploration of the Mineral Property.
Condesa was incorporated under the laws of the British Virgin Islands on March
5, 2004. Condesa acquired Kaznickel on September 22, 2004 in a purchase business
combination as further described in Note 2.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of Condesa Pacific S.A. since its inception and
Kaznickel LLP ("Kaznickel"), a Kazakh partnership, since the date of its
acquisition by Condesa. Intercompany transactions are eliminated upon
consolidation.
Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the Unites States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Business Condition - The Company has no proven mineral reserves and has not yet
entered the development stage with respect to its mineral interests, and has no
production. There has been no revenue from operations, and it has incurred a net
loss of $362,435 for the period ended December 31, 2004. In addition, current
liabilities exceeded current liabilities by $179,144 at December 31, 2004.
Management expects to generate sufficient cash to fund its current activities by
issuing equity securities and receiving financial assistance, if needed, from
its shareholders. There is no assurance, however, that funds can be raised or
that the shareholders will have the ability to provide financial assistance to
the Company. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Exploration Stage Company - The Company is considered to be in the exploration
stage. Since its inception March 5, 2004, the Company has devoted substantially
all of its efforts in raising capital and acquiring Kaznickel, and then
exploring for mineral property under its exploration contract. The mineral
property has not reached a development or production stage and accordingly, no
revenues from production of the property have been recorded. The Company is
considered to be in the development stage for financial reporting purposes. A
separate disclosure of additional information including presentation of
cumulative amounts of revenues and expenses and cash flows from inception, and
deficits accumulated during the development stage are required under FAS 7,
Accounting and Reporting by Development Stage Enterprises. However, the
cumulative amounts are not described in the accompanying consolidated financial
statements during this, the first reporting year from the Company's inception
because these amounts are the cumulative amounts.
Currency Translation - The consolidated financial statements are presented in
U.S. dollars, the functional currency of the Company's subsidiary operating in
Kazakhstan. Non-monetary assets and liabilities of Kaznickel are translated into
U.S. dollars using historical exchange rates and monetary assets and liabilities
are translated into U.S. dollars using exchange rates on the date of the
financial statements. Results of operations are translated at the average
exchange rates during the reporting period. Exchange gains and losses resulting
from financial statement translation and from holding foreign currencies are
included in the results of operations.
F-28
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
Prepaid Expenses -- Prepaid expenses relate to office rent, subscriptions, and
insurance. Prepaid expenses are charged to operations in the period the related
service or work is performed.
Mineral Property Rights -- Mineral property acquisition costs, site restoration
costs and development costs on mineral properties with proven and probable
reserves are capitalized and will be depleted using the units-of-production
method over the estimated life of the reserves. If there are insufficient
reserves to use as a basis for depleting such costs, they are written off as a
mineral property or mineral interest impairment in the period in which the
determination is made. Site restoration costs are depleted over the term of
their expected life. Interest costs are capitalized on mineral properties and
mineral interests in development. The development potential of mining properties
is established by the existence of proven and probable reserves, reasonable
assurance that the property can be permitted as an operating mine and evidence
that there are no metallurgical or other impediments to the production of
saleable metals.
Exploration costs incurred on mineral interests, other than acquisition costs,
prior to the establishment of proven and probable reserves are charged to
operations as incurred. Development costs incurred on mineral interests with
proven and probable reserves will be capitalized as mineral properties. The
Company regularly performs evaluations of its investment in mineral interests to
assess the recoverability and / or the residual value of its investments in
these assets. All mineral interests and mineral properties are reviewed for
impairment whenever events or circumstances change which indicate the carrying
amount of an asset may not be recoverable, utilizing established guidelines
based upon undiscounted future net cash flows from the asset or upon the
determination that certain exploration properties do not have sufficient
potential for economic mineralization.
Management's estimates of mineral prices, recoverable probable reserves, and
operating, capital and reclamation costs, when available, are subject to certain
risks and uncertainties which may affect the recoverability of mineral property
costs. Although management has made its best estimate of these factors, it is
possible that changes could occur in the near term, which could adversely affect
the future net cash flows to be generated from the properties.
Property, and Equipment - Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis over
the following estimated useful lives of the assets:
Buildings and constructions 12.5 years
Machinery and equipment 7 years
Vehicles 10 years
Other fixed assets 3 - 10 years
----------------------------------------------------
Revenue Recognition - Revenues, which will arise from the sale of cobalt and
nickel ore or processed cobalt and nickel will be recorded when persuasive
evidence of an arrangement exists, title to product transfers to the customer,
and collectibility is reasonably assured. Produced, but unsold minerals or ore
will be recorded as inventory until sold.
Financial Instruments - The nature of the Company's operation exposes the
Company to fluctuations in commodity prices, foreign currency exchange risk and
credit risk. The Company recognizes these risks and manages its operation in a
manner such that exposure to these risks is minimized to the extent practical.
The Company is not exposed to fluctuations in interest rates because its loans
are interest free, as a general requirement under Kazakh law for non-financial
institutions.
Income taxes - Income taxes are calculated using the liability method of tax
accounting. Under this method, future income tax assets and liabilities are
computed based on temporary differences between the tax basis and carrying
amount on the balance sheet for assets and liabilities. Future income tax assets
and liabilities are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.
F-29
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - ACQUISITION OF KAZNICKEL LLP
On July 9, 2004 Condesa entered into an investment agreement under which Condesa
provided a $300,000 convertible loan to Kaznickel LLP, which was immediately
converted into a new 40 percent equity interest in Kaznickel. On September 22,
2004, Brisa Equities, a British Virgin Islands holding company, acquired a
controlling interest in Kaznickel by purchasing 60 percent of the founding
partners' 60 percent interests. As consideration for the purchase, the original
partners' obtained a commitment from Brisa to facilitate a reverse merger with a
U.S. public company, and a commitment to obtain funding enabling Kaznickel to
further develop its mineral property rights. The value of the commitment was
estimated to be $450,000 based on the percent of Kaznickel obtained for the cash
investment of $300,000 previously. On November 19, 2004, Brisa and the remaining
Kaznickel partners exchanged their 60% interest in Kaznickel for a new 60%
interest in Condesa, thereby making Kaznickel a wholly-owned subsidiary of
Condesa. The acquisition of a controlling interest in Kaznickel by Brisa and
Condesa was considered the purchase of Kaznickel with a measurement date of
September 22, 2004, the date Brisa and Condesa obtained control from the
original Kaznickel partners.
Condesa has accounted for the acquisition of Kaznickel as a purchase business
combination with a purchase price of $750,000. The purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated fair
values. Negative goodwill was not recognized in connection with the acquisition
of Kaznickel. Instead, the excess of the fair value of the net assets over the
purchase price was allocated as a pro rata reduction of the amounts that
otherwise would have been assigned to the long-term assets. The Company is in
the process of obtaining an independent valuation of the net assets acquired.
Accordingly the allocation of the purchase price is subject to refinement. At
September 22, 2004, the purchase price was allocated to the assets acquired and
the liabilities assumed as follows:
Current assets $ 231,674
Mineral property rights 713,204
Asset retirement costs of the mineral rights 474,937
Property and equipment 21,572
-------------------------------------------------------------
Total assets acquired 1,441,387
-------------------------------------------------------------
Current liabilities (25,468)
Asset retirement obligation (665,919)
-------------------------------------------------------------
Total liabilities assumed (691,387)
-------------------------------------------------------------
Net Assets Acquired $ 750,000
=============================================================
Intangibles assets acquired include the mineral property rights, which are
capitalized until the production phase begins, subject to impairment
considerations. Other intangible assets include the asset retirement costs of
the mineral rights, which has a 20-year estimated life and is subject to
amortization at a planned rate of $24,291 per year, and the asset retirement
obligation is accreted over its 20-year life with a current estimated expense of
$43,274 per year.
NOTE 3 - MINERAL PROPERTY RIGHTS
Kaznickel acquired its interest in the Contract on Exploration and Development
of Gornostay Cobalt and Nickel Deposit (the "Contract") issued by the Ministry
of Energy and Mineral Resources of the Republic of Kazakhstan (the "Ministry")
dated February 26, 2004. By virtue of the Contract, Kaznickel acquired the right
to exploit the mineral property including the right to explore, develop and
produce the cobalt and nickel mineral resources on the Deposit through February
26, 2026. The Company has the right to re-negotiate the contract at that time
for an additional 30 years. The government of Kazakhstan retains the title to
the property; accordingly, the Company's mineral interest is considered to be an
intangible asset. As more fully described in Note 2, the Company capitalized the
F-30
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
acquisition costs of its mineral interest upon the purchase business combination
with Kaznickel. The allocated purchase price included a capitalized amount of an
acquired asset retirement obligation. While the property is not in production,
the asset retirement cost is depleted over the life of the contract from the
date of acquisition. Capitalized costs and related accumulated amortization at
December 31, 2004 is as follows:
- -----------------------------------------------------------------------------------------------
Mineral Property Depletion of Asset Net Mineral
Rights Retirement Cost Property Rights
- -----------------------------------------------------------------------------------------------
Cost as of September 22, 2004 $ - $ - $ -
Acquisitions:
Mineral property 713,204 713,204
Asset retirement obligation 474,936 6,073 481,009
- -----------------------------------------------------------------------------------------------
Net Carrying Value $ 1,188,140 $ 6,073 $ 1,194,213
===============================================================================================
The Contract provides the Company certain rights and also imposes certain
obligations and commitments. The rights include exploration through February
2006, and development and production of minerals through February 26, 2026. The
Company may transfer its right to third parties in accordance with Kazakh laws
and regulations and has a right to renegotiate and extension of the Contract.
Significant rights and obligations and commitments of the Contract include
monetary commitments for exploration of $200,000 in 2005 and 2006, and
expenditures to support social projects amounting to $300,000 during the
production stage. In addition, the Company was required to pay a fee of $2,000
upon award of the Contract, and a fee for the use of Kazakh owned technical data
of $835,759 of which $4,179 was paid on award of the Contract and $831,580 will
be due upon a finding of commercial deposits. Royalties of 0.5% of ores
extracted and sold will be required. The Contract subjects the Company to pay
regular income tax of 30 percent and requires and excess profits tax of 15 to 60
percent if its net profits exceed 20 percent of gross profit. Obligations also
include the establishment and funding of a reclamation fund that includes the
cost of removing buildings and equipment used in the Deposit area. The Company
is also required to comply with Kazakh environmental laws and regulations.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment consist of the following:
Balance at March 4, 2004 $ -
Additions 46,456
Less: Accumulated Depreciaiton (1,412)
-----------------------------------------------------
Balance at December 31, 2004 $ 45,044
=====================================================
NOTE 5 - LONG TERM DEFERRED EXPENSES
The Company completed a remodel of its Semeypalatinsk, Kazakhstan offices, which
costs are applied against monthly office rent charges through May 1, 2007. The
current portion of long term deferred expenses is included in other current
assets.
NOTE 6 - INCOME TAXES
In accordance with the laws and regulations of the Republic of Kazakhstan income
taxes are calculated at the statutory rate of 30 percent. Net operating losses
for development companies in the exploration and development may be carried
forward for the 7 subsequent years from the date the losses are incurred.
F-31
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
Therefore, the Company has deferred tax assets due to the savings of income tax
in future periods. However, the Company assessed the recoverability of these
deferred tax assets and created a provision against them until it has more
evidence of its recoverability in the future periods.
Deferred tax assets and liabilities are as follows:
2004
- ------------------------------------------------------------------------
Tax loss carryforward $ 102,253
Property and equipment (4,457)
Asset retirement obligation 202,638
Valuation allowance (300,434)
- ------------------------------------------------------------------------
Total deferred tax assets $ -
========================================================================
The following is a reconciliation of the amount of tax that would result from
applying the federal rate to pretax income with the provision for income taxes:
2004
- ------------------------------------------------------------------------
Tax at US Federal statutory rate (34%) (123,479)
Non-deductible expenses 1,840
Deferred tax asset valuation change 107,112
Effect of lower foreign tax rates 14,527
- ------------------------------------------------------------------------
Income tax provision -
- ------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS
On December 2, 2004 the Company borrowed $92,308 from CJSC Kazmorgeophysika, a
Kazakh company related by virtue of several common shareholders. The short-term
loan is interest free and was due on its original terms by December 31, 2004.
During January 2005 the Company borrowed an additional $92,300 from CJSC
Kazmorgeophysica, as an interest-free, due on demand note.
NOTE 8 - ASSET RETIREMENT OBLIGATION
Upon purchase of Kaznickel, the Company recorded the effects of an asset
retirement obligation in accordance with SFAS No. 143, "Accounting for Asset
Retirement Obligations," and related interpretations, which requires entities to
record the fair value of a liability for an asset retirement obligation when it
is incurred which, for the Company, is obliged as part of Kaznickel's Contract
with the Ministry. Under the Contract, the Company is required to remediate the
property from the effects of the open pit mining process. The standard applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. The Company's asset retirement obligations relate primarily to the
obligation to fill mining pits and restore surface conditions at the conclusion
of term of the Contract.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded,
the related cost is capitalized by increasing the carrying amount of the related
mineral interest rights. Over time, the liability is accreted upward for the
change in its present value each period until the obligation is settled. The
initial capitalized cost is amortized as a component of mineral rights interests
as described in Note 1.
The reconciliation of the asset retirement obligation for the period through
December 31, 2004 is as follows:
F-32
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
Acquisition of Kaznickel $665,919
Liabilities incurred -
Accretion expense 9,996
- --------------------------------------------------------------------------
Balance December 31, 2004 $675,915
==========================================================================
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Concentration of Risk Relating to Foreign Mining Operations -- All of the
Company's properties are located within the Republic of Kazakhstan in Central
Asia. In addition to general industry risks of nickel and cobalt price
fluctuations, and potential lack of economic viability of the claims, the
Company has a concentration of risk related to its foreign properties and
interests which are subject to political uncertainty, changes in government,
unilateral renegotiation of licenses, claims or contracts, and nationalization,
or other uncertainties. In addition, the validity of mining claims which
constitute the Company's property holdings in Kazakhstan, may, in certain cases,
be uncertain and are subject to being contested.
Kazakhstan business environment - Kazakhstan, as an emerging market, has a legal
and regulatory infrastructure that is not as mature and stable as those usually
existing in more developed free market economies. As a result, operations
carried out in Kazakhstan can involve risks and uncertainties that are not
typically associated with those in developed markets. The instability associated
with the ongoing transformation process to a market economy can lead to changes
in the business conditions in which the Company currently operates. Changes in
the political, legal, tax or regulatory environment could adversely impact the
Company's operations.
Tax matters - The local and national tax environment in the Republic of
Kazakhstan is subject to change and inconsistent application, interpretation and
enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted
by the Kazakh authorities, can lead to the imposition of fines, penalties and
interest.
Environmental matters - Extensive national, regional and local environmental
laws and regulations in Kazakhstan affect the Company's operations. These laws
and regulations set various standards regulating certain aspects of health and
environmental quality, provide for user fees, penalties and other liabilities
for the violation of these standards and establish, in some circumstances,
obligations to remediate current and former facilities and off-site locations.
The Company believes it is currently in compliance with all existing Republic of
Kazakhstan environmental laws and regulations. However, as new environmental
laws and legislation are enacted and the old laws are repealed, interpretation,
application and enforcement of the laws may become inconsistent. Compliance in
the future could require significant expenditures, which may adversely affect
the Company's operations.
Operating Leases - The Company rented a number of cars for operational purposes
and has potential commitment of $99,000 in case of loss for any reason, which is
not covered by any insurance.
NOTE 10 - COMMON STOCK
The Company's authorized capital consists of 50,000 shares of $1 per share par
value. The Company entered into an investment agreement with investors on July
9, 2004 under which the Company issued 20,000 common shares for cash proceeds of
$304,456, or $15 per share, received through August 12, 2004. The remaining
30,000 shares, or 60% of the authorized capital, were issued on November 19,
2004 in exchange for 60% of the equity of Kaznickel as further described in Note
2. The shares issued in exchange for the equity of Kaznickel were valued at
$450,000, or $15 per share, based upon the value for which investors received
common shares for cash.
F-33
CONDESA PACIFIC S.A. AND SUBSIDIARY
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 11 - SUBSEQUENT EVENTS
On January 28, 2005, the Company completed the closing of the Plan and Agreement
of Reorganization (the "Agreement"), among the Company, and its shareholders,
and Bekem Metals, Inc. ("Bekem"), a U.S. publicly traded company. With the
completion of the closing, Bekem acquired 100% of the outstanding capital stock
of Condesa in exchange for the issuance of 35,000,000 of Bekem common shares. As
a result of the issuance, the shareholders of Condesa now hold 91% of the
outstanding common stock of Bekem. The reverse merger transaction constitutes a
change of control and a change in the reporting entity for Bekem because the
shareholders of Condesa maintained their control of Condesa before the merger
and control of Bekem after the closing.
F-34
Annex A
AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
BEKEM METALS, INC.
Bekem Metals, Inc., a corporation organized under the laws of the State
of Utah, on January 31, 2001, hereby adopts the following Amendment to its
Articles of Incorporation pursuant to the provisions of Utah Revised Business
Corporation Act, Section 16-10a-1006.
The Articles of Incorporation shall be amended to read as follows:
ARTICLE III
The total number of shares of stock of all classes which the
Corporation has authority to issue is 170,000,000 shares, divided into
150,000,000 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").
I. COMMON STOCK
A. Voting Rights. Except as otherwise expressly provided by
law or in this Article III, each outstanding share of Common Stock shall be
entitled to one (1) vote on each matter to be voted on by the shareholders of
the Corporation.
B. Liquidation Rights. Subject to any prior or superior rights
of liquidation as may be conferred upon any shares of Common Stock, and after
payment or provision for payment of the debts and other liabilities of the
Corporation, upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the holders of stock then
outstanding shall be entitled to receive all of the assets and funds of the
Corporation remaining and available for distribution. Such assets and funds
shall be divided among and paid to the holders of Common Stock, on a pro-rata
basis, according to the number of shares of Common Stock held by them.
C. Dividends. Dividends may be paid on the outstanding shares
of Common Stock as and when declared by the Board of Directors, out of funds
legally available therefor.
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 III,
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 III, and by filing a certificate pursuant to the applicable law of
the State of Utah, 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)
2
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 III or the certificate or
certificates establishing any additional series of such stock.
The date of the adoption of the foregoing amendment was August __,
2005. This amendment was approved by a majority of the shares of the Company at
the annual meeting of stockholders, in accordance with the provisions of Section
16-10a-722 of the Utah Revised Business Corporation Act. The number of shares
outstanding in the Corporation and entitled to vote, as of the record date, on
the foregoing amendment was 38,300,000. All common stock in the Corporation is
entitled to one vote per share for each matter coming before the shareholders. A
majority of the shares constitutes a quorum of the shareholders. The number of
shares that approved the foregoing amendment was __________ or ___% of the
outstanding shares, which is sufficient to approve the foregoing amendment.
3
Dated this __ day of August, 2005
BEKEM METALS, INC.
By:
----------------------------
Marat Cherdabayev, President
4
Proxy - Bekem Metals, Inc.
Annual Meeting of Stockholders - August __, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Marat Cherdabayev and James Gunnell, 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 BEKEM METALS, INC., of record in the name of the
undersigned at the close of business on July 21, 2005, which the undersigned is
entitled to vote at the 2005 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 August __, 2005, 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, and 5.
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 - Marat Cherdabayev [ ] [ ] 04 - Reserve vacant for [ ] [ ]
Board appointment
02 - James Gunnell [ ] [ ] 05- Reserve vacant for [ ] [ ]
Board appointment
03 - Dosan Kassymkhanuly [ ] [ ] _______________________ [ ] [ ]
(Write in name of nominee)
[B] Other Proposals
The Board of Directors recommends a vote FOR the following proposals.
For Against Abstain
2. APPROVE THE AMENDEDMENT TO THE ARTICLES OF
INCORPORATION OF BEKEM METALS, INC. [ ] [ ] [ ]
3. AUTHORIZE THE BOARD OF DIRECTORS TO CHANGE THE
DOMICILE OF THE COMPANY FROM THE STATE OF UTAH TO THE
STATE OF NEVADA. [ ] [ ] [ ]
4. RATIFY THE APPOINTMENT OF HANSEN, BARNETT &
MAXWELL AS THE COMPANY'S INDEPENDENT REGISERED PUBLIC
ACCOUNTANT FOR THE YEAR ENDING DECEMBER 31, 2005 [ ] [ ] [ ]
5. 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 2 - Please keep
signature within the box signature within the box Date (mm/dd/yyyy)
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