SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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14a-6(e)(2))
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[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BMB MUNAI, INC.
-----------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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BMB MUNAI, INC.
20A Kazibek Bi Street
Almaty, Kazakhstan 050010
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of BMB Munai, Inc., (the "Company")
will be held at The Grand America Hotel, 555 South Main Street, Salt Lake City,
Utah on October 28, 2005, at 10:00 a.m., local time, for the following purposes:
1. To elect three Class I directors to our Board of Directors; and
2. 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 September 28,
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, 20A Kazibek Bi Street, Almaty, Kazakhstan 050010.
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,
October 4, 2005 /s/ Boris Cherdabayev
-----------------------------
Boris Cherdabayev, CEO
BMB MUNAI, INC.
20A Kazibek Bi Street
Almaty, Kazakhstan 050010
PROXY STATEMENT
GENERAL
SOLICITATION OF PROXIES. This proxy statement is being furnished to the
stockholders of BMB Munai, Inc., a Nevada corporation, in connection with the
solicitation of proxies by our Board of Directors for use at our annual meeting
of stockholders to be held at The Grand America Hotel, 555 South Main Street,
Salt Lake City, Utah at 10:00 a.m., local time, on October 28, 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 October 7, 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 September 28, 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
32,069,372 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, Proposal 2 requires 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 1 votes may be cast by a stockholder in favor of the nominee or
withheld. With respect to Proposal 2 votes may be cast by a stockholder in favor
or against the Proposal or a stockholder may elect to abstain. Since votes
withheld and abstentions will be counted for quorum purposes and are deemed to
be present for purposes of the respective proposals, they will have the same
effect as a vote against each matter.
Under the NASD Rules of Fair Practice, brokers who hold shares in
street name have the authority, in limited circumstances, to vote on certain
items when they have not received instructions from beneficial owners. A broker
will only have such authority if (i) the broker holds the shares as executor,
administrator, guardian, trustee or in a similar representative or fiduciary
capacity with authority to vote or (ii) the broker is acting under the rules of
any national securities exchange of which the broker is also a member. Broker
abstentions or non-votes will be counted for purposes of determining the
presence or absence of a quorum at the meeting. Abstentions are counted in
tabulations of the votes cast on proposals presented to stockholders, but broker
non-votes are not counted for purposes of determining whether a proposal has
been approved.
VOTING YOUR PROXY. Proxies in the accompanying form, properly executed
and received by us prior to the annual meeting and not revoked, will be voted as
directed. In the absence of direction from the stockholder, properly executed
proxies received prior to the Annual Meeting will be voted FOR the nominees of
Management to the Board of Directors and For Proposal 2. 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:
ELECTION OF DIRECTORS
Our Bylaws provide that our Board of Directors will consist of not less
than three nor more than nine persons, the exact number to be fixed from
time-to-time by the Board of Directors. The Board of Directors has fixed the
current number of Directors at seven, divided into three classes with staggered
three-year terms. We currently have three directorships designated as Class I
directors, two directorships designated as Class II directorships and two
directorships designated as Class III directorships. The term for our Class I
directorships expires in 2005. Therefore, you are being asked to elect three
directors as Class I directors at the annual meeting to serve for a three-year
term, or until their respective successors have been elected and qualified. The
nominees are Georges Benarroch, Troy Nilson and Valery Tolkachev, all of whom
are currently directors of the Company.
We intend that the proxies solicited by us will be voted for the
election of the nominees named above. If any nominee is unable to serve, the
persons named in the proxy card will vote your shares to approve the election of
any substitute proposed by the Board of Directors. At this time, the Board of
Directors knows of no reason why any nominee might be unable to serve.
Information regarding the nominees for election at the annual meeting
is provided below. Unless otherwise stated below, each nominee has held his
current occupation for the last five years. The age indicated for each
individual is as of March 31, 2005. There are no family relationships among
directors or executive officers of the Company.
Board Nominees for Election of Director
Name Age Director Since
- ---- --- --------------
Georges Benarroch 57 November 2003
Troy Nilson 40 December 2004
Valery Tolkachev 37 December 2003
Georges Benarroch. Mr. Benarroch has been a member of the Investment
Dealer Association of Canada and has served as the president and chief executive
officer of Euro Canadian Securities Limited and its successor company,
Credifinance Securities Limited, an institutional investment bank, based in
Toronto, a member of the Toronto Stock Exchange and the Montreal Exchange since
1982. Credifinance Securities Limited has been one of the North American
pioneers in providing investment banking and equity research coverage of
companies in the former Soviet Union ("FSU"). Since 1994, Credifinance
Securities Limited has acted as agent and/or underwriter, stock exchange
sponsor, and introducing broker for a number of companies operating in the FSU
and was instrumental in supporting Hurricane Hydrocarbons (now PetroKazakhstan)
and Transmeridian Exploration through its early stage of development. Mr.
Benarroch is also the president and chief executive officer of Credifinance
Capital Inc. based in Toronto, Canada and Credifinance Capital Corp. based in
Palm Beach, Florida, both companies specialized in proprietary trading, private
equity funding and venture capital. Since 1994, he has also served as president
and chief executive officer of InterUnion Financial Corporation, a "business
bank", which in 1996 created InterUnion Asset Management, a Canadian money
management firm with over $1.5 billion under management prior to being sold in
2001. Mr. Benarroch graduated from the Faculte de Droit in Toulouse (France),
with a B.Sc. degree from the Universite de Montreal (Canada) in 1970. He
received a M.Sc. International Relations and Economic Development from both the
Faculte de Droit de Nice (France) and the Institut des Hautes Etudes
Internationales, in 1972 and 1972 respectively. Mr. Benarroch completed a
Doctorat de Droit (III cycle) at the Universite de Paris (France) in 1974.
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Troy F. Nilson, CPA. Since February 2001, Mr. Nilson has served as an
Audit Partner with Chisholm, Beirwolf & Nilson, Certified Public Accountants, in
Bountiful, Utah. From December 2000 to February 2001, he served as an Audit
Manager for Crouch, Bierwolf & Associates, Certified Public Accountants, in Salt
Lake City, Utah. Prior to that time, Mr. Nilson served as the Senior Auditor for
Intermountain Power Agency in Salt Lake City, Utah from March 1995 to December
2000. In past five years, Mr. Nilson has extensive public and private company
audit, audit review and Securities and Exchange Commission disclosure and
reporting experience. Mr. Nilson received licensure as a Certified Public
Accountant in 1997. Mr. Nilson earned a Masters of Science Degree in Business
Information Systems from Utah State University in December 1992, and a Bachelor
of Science in Accounting from Utah State University in August 1990. Mr. Nilson
is not a director or nominee of any other reporting company.
Valery Tolkachev. Since 1999 Mr. Tolkachev has been employed with Aton
Investment Company in Moscow, Russia. He is currently serving as a Managing
Director of Capital Markets for Aton. From 1991 to 1999, Mr. Tolkachev served in
various positions including, broker, analyst, manager and V.P. of Equities
Department at MDM Bank, InkomBank, InkomCapital, Tveruniversalbank and TIRAbrok
Company. Mr. Tolkachev graduated with Honors from the High Military School in
Kiev, USSR in 1989. In June 2005 Mr. Tolkachev graduated from the Academy of
National Economy, Moscow Law faculty and has applied for admission to practice
law in Russia. Mr. Tolkachev serves as a director of Caspian Services, Inc., a
U.S. reporting company.
Directors Continuing in Office
Class II directors:
Stephen Smoot. During the past five years Mr. Smoot has been
self-employed as a consultant in the area of foreign technology development and
transfer. Mr. Smoot assisted in forming Caspian Service Group Limited, a
wholly-owned subsidiary of Caspian Services, Inc. in December 1999, and served
as President of Caspian Services, Inc., from inception until February 2002. Mr.
Smoot served as the Interim President of Caspian Services, Inc. from June 2004
until December 2004. Mr. Smoot is not a director in any other reporting company.
With the resignation of Alexandre Agaian from our board of directors in
July 2005, there is currently a vacant Class II directorship. The Board of
Directors has not yet identified a qualified individual to fill this vacancy at
the current time. Class II directors have terms ending in 2006.
Class III directors:
Boris Cherdabayev. Mr. Cherdabayev joined BMB Holding, Inc., and
assumed his current positions in May 2003. From May 2000 to May 2003, Mr.
Cherdabayev served as Director at LLP TengizChevroil, a multination oil and gas
company owned by Chevron, ExxonMobil, KazMunayGas and LukOil. From 1998 to May
2000, Mr. Cherdabayev served as a member of the Board of Directors,
Vice-President of Exploration and Production and Executive Director on Services
Projects Development for at NOC "Kazakhoil", an oil and gas exploration and
production company. From 1983 to 1988, he served as a people representative at
Novouzen City Council (Kazakhstan) and from 1994 to 1998; he served as a
people's representative at Mangistau Oblast Maslikhat (regional level
legislative structure) and a Chairman of the Committee on Law and Order. For his
achievements Mr. Cherdabayev has been awarded with a national "Kurmet" order.
Mr. Cherdabayev earned an engineering degree from the Ufa Oil & Gas Institute,
with a specialization in "machinery and equipment of oil and gas fields" in
1976. Mr. Cherdabayev also earned an engineering degree from Kazakh Polytechnic
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Institute, with a specialization in "mining engineer on oil and gas fields'
development." During his career he also completed an English language program in
the US, NIAI-D Program (Chevron Advanced Management Program) at Chevron
Corporation offices in San-Francisco, CA, USA, and CSEP Program (Columbia Senior
Executive Program) at Columbia University, New York, NY USA.
With the resignation from our board of directors of Bakhytbek Baiseitov
earlier this month, there is currently a vacant Class III directorship. The
Board of Directors has not yet identified a qualified individual to fill this
vacancy at the current time. Class III directors have terms ending in 2007.
VOTE REQUIRED
You are being asked to elect three Class I Directors. You are not being
asked to elect persons to fill the vacant Class II and Class II directorships
and proxies may not be voted for more than the three Class I directorships.
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 2006 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.
Security Ownership of Nominees, Directors and Executive Officers
As of September 28, 2005 we had 32,069,372 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 nominee, director and executive
officers, greater than 5% shareholders and for all directors and executive
officers as a group.
Shares of % of
Name Common Stock Class
- ---- ------------ -----
Georges Benarroch 301,658(1) *
Boris Cherdabayev 3,142,857(2)(3) 9.8%
Anuar Kulmagambetov 285,714(3) *
Troy Nilson -0- *
Stephen Smoot -0- *
Valery Tolkachev -0- *
- --------------------------------------------------------------------------------
All directors, nominees and executive
officers as a group (6 persons): 3,730,229 11.6%
* Less than 1%.
(1) The shares attributed to Mr. Benarroch are held of record by
Credifinance Capital Corp. Mr. Benarroch is the president of
Credifinance Capital Corp., and therefore may be deemed to be the
beneficial owner of those shares.
(2) Mr. Cherdabayev holds a 33.33% interest in MB-Invest LLC, (f/k/a/ BMB
Munai LLC), a Kazakhstan limited company that owns 7,657,143 shares of
our common stock. Therefore, Mr. Cherdabayev may be deemed to be the
beneficial owner of shares of BMB Munai, Inc., held of record by
MB-Invest, LLC.
(3) Mr. Cherdabayev is the Chief Executive Officer and Chairman of the
Board of Directors of the Company. Mr. Kulmagambetov is the Chief
Financial Officer of the Company.
4
Security Ownership of Certain Beneficial Owners
As of September 19, 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
- ---- ------------ --------
MB-Invest LLC 7,657,143(1) 23.9%
Bakhytbek Baiseitov 1,714,286(1) 5.3%
Toleush Tolmakov 3,180,412 9.9%
Mirgali Kunayev 1,143,571(1) 3.6%
- --------------------------------------------------------------------------------
TOTAL 13,695,412 42.7%
- -----------------
(1) MB-Invest LLC, (formerly known as BMB Munai LLC), is a Kazakhstan
limited company, in which Mr. Baiseitov holds a 33.34% interest and Mr.
Kunayev holds a 33.33% interest. Our CEO, Mr. Cherdabayev holds the
remaining 33.33% interest in MB-Invest, LLC. Therefore, Messers.
Baiseitov, Kunayev and Cherdabayev may be deemed to be the beneficial
owners of BMB Munai common shares that are held by MB-Invest LLC.
Executive Compensation
The following table sets forth information concerning the compensation
paid by us during the period from inception (May 6, 2003) through the end of the
2004 fiscal year and for the 2005 fiscal year to our chief executive officer,
former chief executive officer and other most highly compensated executive
officers.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
----------------------------------------- ---------------------- --------------------------
Restricted LTIP
Name & Principal Other Annual Stock Options Payout All Other
Position Year Salary Bonus Compensation Awards /SARs # ($) Compensation
- ----------------------- ------- ----------- ----------- ----------------- ----------- ---------- --------- ----------------
Alexandre Agaian 2005 $230,122 $-0- $-0- $-0- -- $-0- $-0-
Former CEO, 2004 168,463 -0- -0- -0- -- -0- -0-
Former President
Former Director(1)
Boris Cherdabayev 2005 200,558 -0- -0- -0- -- -0- -0-
CEO, President and 2004 10,000 105,000 -0- -0- -- -0- -0-
Director
Anuar Kulmagambetov 2005 185,667 -0- -0- -0- -- -0- -0-
CFO 2004 10,000 105,000 -0- -0- -- -0- -0-
Georges Benarroch 2005 -0- -0- 12,500 -0- -- -0- -0-
Director, Former 2004 -0- -0- -0- -0- -- -0- -0-
President and
Former CEO(2)
- -------------
5
(1) Mr. Agaian was the president, co-chief executive officer and a director
of the Company from November 2003 to July 2005.
(2) Mr. Benarroch was the president and chief executive officer of
InterUnion during the period when InterUnion was conducting no active
operations prior to its merger with BMB Holding. Mr. Benarroch resigned
as president and chief executive officer of the Company at the time of
the merger.
Options/SAR Grants to Officers and Directors
During the fiscal year ended March 31, 2005, we granted the following
stock options to our officers and directors under the BMB Munai, Inc. 2004 Stock
Incentive Plan.
Number of shares of
common stock
underlying Options Exercise Price Expiration Date
------------------ -------------- ---------------
Gary Lerner 60,000 $4.00 October 31, 2009
We did not grant any stock appreciation rights to any officer or
director of the Company during the fiscal year ended March 31, 2005.
On July 18, 2005, the Board agreed to make the following stock option
and restricted stock grants to our executive officers and directors under the
BMB Munai, Inc., 2004 Stock Incentive Plan, subject to ratification of such
grants by the individuals receiving them.
Number of shares of
common stock
underlying Options Exercise Price Expiration Date
------------------ -------------- ---------------
Georges Benarroch 68,421 $4.75 July 18, 2010
Boris Cherdayabev 410,256 $4.75 July 18, 2010
Anuar Kulmagambetov 232,632 $4.75 July 18, 2010
Valery Tolkachev 68,421 $4.75 July 18, 2010
Number of shares of
restricted common stock
-----------------------
Georges Benarroch 31,579
Boris Cherdayabev 189,744
Anuar Kulmagambetov 107,368
Valery Tolkachev 31,579
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
We currently have no employment contracts with any of our named
executive officers. No executive officer received any amounts in the last three
years in connection with a change in control of the Company or a change in the
executive officer's responsibilities after a change in control.
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Compensation of Directors
Effective as of September 2004, all our outside directors are
compensated with a stipend of $25,000 per year plus $1,000 for each directors'
meeting attended in person, plus airfare and hotel expense. No director receives
a salary as a director.
Communications with the Board
Shareholders and other parties interested in communicating with the
non-management directors as a group may do so by writing to the Chairman of the
Board of Directors, c/o Corporate Secretary, BMB Munai, Inc., 324 South 400
West, Suite 250, Salt Lake City, Utah 84101. The Corporate Secretary will review
and forward to the appropriate members of the Board copies of all such
correspondence that, in the opinion of the Corporate Secretary, deals with the
functions of the Board or its committees or that he/she otherwise determines
requires their attention. Concerns relating to accounting, internal controls or
auditing matters will be brought promptly to the attention of the Chairman of
the Audit Committee and will be handled in accordance with procedures
established by the Board's Audit Committee.
Meetings and Committees of the Board of Directors
Our board of directors has established an audit committee and adopted a
charter for the audit committee, a copy of which is attached hereto as Appendix
A. The principal functions of the audit committee are to assist the board in
monitoring the integrity of our financial statements, the independent auditor's
qualifications and independence, the performance of our independent auditors and
our compliance with legal and regulatory requirements. The audit committee has
the sole authority to retain and terminate our independent auditors and to
approve the compensation paid to our independent auditors. The audit committee
is also responsible for overseeing our internal audit function. The audit
committee is comprised of two independent directors, consisting of Troy Nilson
and Valery Tolkachev, with Mr. Nilson acting as chairman. Our board of directors
has determined that Mr. Nilson qualifies as an "audit committee financial
expert" under the rules of the SEC adopted pursuant to the requirements of the
Sarbanes-Oxley Act of 2002. Mr. Nilson and Mr. Tolkachev each qualifies as
"independent" as defined by the listing standards of the American Stock
Exchange. During fiscal 2005 our audit committee met two times.
Our board of directors has also established a compensation committee. A
copy of our compensation committee charter is attached hereto as Appendix B. The
principal function of the compensation committee is to make recommendations
regarding compensation of the Company's officers. The compensation of our chief
executive officer is recommended to the board (in a proceeding in which our
chief executive officer does not participate) by the compensation committee. Our
compensation committee is comprised of three independent directors consisting of
Troy Nilson, Valery Tolkachev and Stephen Smoot. Compensation for all other
officers is also recommended to the board for determination, by the compensation
committee. During fiscal 2005 our compensation committee met three times.
Our board of directors has adopted nominating and corporate governance
committee charter, but it has not yet appointed members to the nominating
committee. Instead, our independent directors fulfill the role of a nominating
committee. We determine independence in accordance with the listing standards of
the American Stock Exchange.
When vacancies occur the board will consider director nominees
recommended by shareholders, as well as director nominees recommended by a
majority of the directors who are then independent. A copy of our nominating and
corporate governance committee charter is attached hereto as Appendix C.
Our board may establish other committees from time to time to
facilitate our management.
During the fiscal year ended March 31, 2005 our board of directors met
twelve times.
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Code of Ethics
We have adopted a Code of Ethics that applies to our principal
executive, financial and accounting officers and persons performing similar
duties. The Code is designed to deter wrong-doing and promote honest and ethical
behavior, full, fair, timely, accurate and understandable disclosure and
compliance with applicable governmental laws, rules and regulations. It is also
designed to encourage prompt internal reporting of violations of the Code to an
appropriate person and provides for accountability for adherence to the Code. A
copy of our Code of Ethics has been posted on our website and may be viewed at
www.bmbmunai.com. A copy of the Code of Ethics will be provided to any person
without charge upon written request to our Corporate Secretary at our U.S.
offices, 324 South 400 West, Suite 250, Salt Lake City, Utah 84101.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors and officers of
the Company and persons who own more than 10% of any class of equity securities
of the Company registered under the Exchange Act to file with the Securities and
Exchange Commission and the Company initial reports of ownership and reports of
changes in ownership of such securities. Based on information provided to the
Company by the individual officers and directors, the Company believes that all
such reports were timely filed in fiscal 2005 by such directors and officers
except that (i) Valery Tolkachev failed to timely file a Form 3 at the time he
became a director. To our knowledge, Mr. Tolkachev has not held shares of
Company common stock during the time he has served as a Company director.
Independent Registered Public Accounting Firm
The firm of BDO Kazakhstanaudit, served as our independent registered
public accounting firm for the fiscal year ended March 31, 2005. Our Audit
Committee is solely responsible for the appointment, compensation, retention,
and evaluation of the independent registered public accounting firm engaged to
audit or review our financial reports, audit our report on internal control,
when required and perform any allowable non-audit service.
A representative of BDO Kazakhstanaudit is not expected to be present
at the Annual Meeting.
Audit Fees
Principal accounting fees for professional services rendered for us by
BDO Kazakhstanaudit for the years ended March 31, 2005 and 2004, are summarized
as follows:
2005 2004
- -------------------------------------------------------------------------------
Audit $149,343 $126,314
Audit related - -
Tax - -
All other - -
- -------------------------------------------------------------------------------
Total $149,343 $126,314
===============================================================================
Audit Committee Pre-Approval Policy. It is the policy of the Audit
Committee to pre-approve, prior to engagement, all audit and permissible
non-audit services provided by the independent registered public accountant firm
on an individual basis. All services described above were pre-approved by our
Audit Committee on an engagement-by-engagement basis.
8
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 July 15, 2006. 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 Nevada and our Bylaws. Stockholder proposals may be mailed to the
Corporate Secretary, BMB Munai, Inc., 324 South 400 West, Suite 250, Salt Lake
City, Utah 84101.
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 JULY 14, 2005 AND
OUR QUARTERLY REPORT ON FORM 10-QSB FILED ON AUGUST 11, 2005
Forward Looking Information
Certain of the statements contained in these excerpts including, but
not limited to, those relating to our drilling plans, future expenses, changes
in wells operated and reserves, future growth and expansion, future exploration,
future seismic data, expansion of operations, our ability to generate new
prospects, our ability to obtain a production license, review of outside
generated prospects and acquisitions, additional reserves and reserve increases,
managing our asset base, expansion and improvement of capabilities, integration
of new technology into operations, credit facilities, new prospects and drilling
locations, future capital expenditures and working capital, sufficiency of
future working capital, borrowings and capital resources and liquidity,
projected cash flows from operations, future commodity price environment,
expectations of timing, the outcome of legal proceedings, satisfaction of
contingencies, the impact of any change in accounting policies on our financial
statements, the number, timing or results of any wells, the plans for timing,
interpretation and results of new or existing seismic surveys or seismic data,
future production or reserves, future acquisitions of leases, lease options or
other land rights, management's assessment of internal control over financial
reporting, financial results, opportunities, growth, business plans and strategy
and other statements that are not historical facts contained in this report are
forward-looking statements. When used in this document, words like "expect,"
"project," "estimate," "believe," "anticipate," "intend," "budget," "plan,"
"forecast," "predict," "may," "should," "could," "will" and similar expressions
are also intended to identify forward-looking statements. Such statements
involve risks and uncertainties, including, but not limited to, market factors,
9
market prices (including regional basis differentials) of natural gas and oil,
results for future drilling and marketing activity, future production and costs
and other factors detailed herein and in our other Securities and Exchange
Commission filings. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated. These forward-looking statements speak
only as of their dates and should not be unduly relied upon. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
Business and Properties
Overview
BMB Munai, Inc., is an independent oil and natural gas company engaged
in the exploration, development, acquisition and production of crude oil and
natural gas properties in the Republic of Kazakhstan (sometimes also referred to
herein as the "ROK" or "Kazakhstan"). During the fiscal year ended March 31,
2005, we changed our domicile from the State of Delaware to the State of Nevada.
We are currently in the development stage. Our current drilling strategy is
focused toward enhancing cash flows and increasing proved developed reserves by
drilling developmental wells within a proximity of existing wells, which we
believe decreases our likelihood of drilling a dry hole, while at the same time
increasing our current production and cash flow. As our cash flow and proved
developed reserves grow, we will begin drilling exploratory wells to find new
reservoirs or extend known reservoirs. We believe this strategy will result in
growth of proved developed reserves, production and financial strength.
Recent Developments
As of the year ended March 31, 2005, our net proved reserves were 40.9
million barrels of oil equivalent ("BOE"), comprised of 34 million barrels of
oil and 42 billion cubic feet of natural gas. Reserves quoted in BOE were
calculated using a conversion of 6 Mscf/bbl. Crude oil accounted for
approximately 83% of those proved reserves. Approximately 40% of proved total
reserves were developed as of year-end 2005 and they were all located onshore in
western Kazakhstan. We began workover activities in December 2003 and drilling
activities in July 2004. Through the fiscal year ended March 31, 2005, we have
re-entered three previously existing wells and drilled two new wells. Of these
five wells, one well is currently in test production, three wells are undergoing
testing and one well is undergoing additional workover. In December 2004, the
government of Kazakhstan granted an extension of our ADE Block, which added an
additional 64,247 acres (approximately 260 square kilometers) to the ADE Block.
The additional territory is adjacent to the ADE Block. In April 2005, we
contracted with TatArka, LLP for a 3D seismic survey of the extended territory.
We believe with the completion of a 3D seismic study and data processing and
interpretation of the results of this study, we will have sufficient information
to evaluate the oil and gas reserves of the extended territory, and prepare an
efficient work program for further exploration and development of the extended
territory.
Strategy
Our goal is to increase stockholder value by investing in oil and
natural gas projects with attractive rates of return on capital employed. We
plan to achieve this goal by exploiting and developing our existing oil and gas
properties and pursuing the acquisition of additional properties. We have and
will continue to focus on the following:
10
Increasing our Production and Cash Flow. To sustain our operations we
need capital. To date, most of our operating capital has come from the sale of
our securities. We believe that to increase shareholder value and economic
stability, we need to increase our revenues by increasing our production. For
this reason, we have focused our efforts on drilling developmental wells
strategically located within proved areas with the intent to drill wells with a
high probability of success. We believe this strategy will allow us to increase
our current production and correspondingly our cash flows.
Developing and Exploiting Existing Properties. We believe that there is
significant value to be created by drilling the identified undeveloped
opportunities on our properties. As of March 31, 2005 we owned interest in 640
gross (640 net) developed acres, plus 960 gross (960 net) acres of proved
undeveloped reserves. We also own interest in approximately 49,150 gross (49,150
net) unproved, undeveloped acres. Our expected capital budget for development of
existing properties in fiscal 2006 is between $10 million and $14 million.
Pursuing Profitable Acquisitions. While our emphasis in fiscal 2006 is
anticipated to focus on the further development of our existing properties, we
will continue to look for properties with both existing cash flow from
production and future development potential. We intend to pursue acquisitions of
properties that we believe have exploitation and development potential
comparable to or greater than our existing properties. We have an experienced
team of management professionals who will identify and evaluate acquisition
opportunities.
Oil and Natural Gas Reserves
The following table sets forth our estimated net proved oil and natural
gas reserves and the present value of estimated cash flows related to such
reserves as of March 31, 2005. We engaged Chapman Petroleum Engineering, Ltd.
("Chapman"), to estimate our net proved reserves, projected future production,
estimated net revenue attributable to our proved reserves, and the present value
of such estimated future net revenue as of March 31, 2005. Chapman's estimates
are based upon a review of production histories and other geologic, economic,
ownership and engineering data provided by us. Chapman has independently
evaluated our reserves for the past nine months. In estimating the reserve
quantities that are economically recoverable, Chapman used oil and natural gas
prices in effect during March 2005 without giving effect to hedging activities.
In accordance with requirements of the Securities and Exchange Commission (the
"SEC") regulations, no price or cost escalation or reduction was considered by
Chapman. The present value of estimated future net revenues before income taxes
was prepared using constant prices as of the calculation date, discounted 10%
per annum on a pretax basis, and is not intended to represent the current market
value of the estimated oil and natural gas reserved owned by us. The oil and
natural gas reserve data included in or incorporated by reference in this
document are only estimates and may prove to be inaccurate.
Proved Reserves
------------------------------------------------------------
Developed(1) Undeveloped(2) Total
----------------- ------------------- ----------------
Oil and condensate (MBbls)(3) 13,614 20,344 33,958
Natural gas (MMcf) 15,917 25,817 41,734
Total BOE (MBbls) 16,267 24,647 40,914
Estimated future net revenue before income
taxes (M$) $ 183,285 $ 263,603 $ 446,888
Present value of estimated future net
revenue before income taxes (discounted
10% per annum) (M$)(4) $ 61,881 $ 24,107 $85,988
- --------------
11
(1) Proved developed reserves are proved reserves that are expected to be
recovered from existing wells with existing equipment and operating
methods.
(2) Proved undeveloped reserves are proved reserves which are expected to be
recovered from new wells on undrilled acreage or from existing wells where
a relatively major expenditure is required for recompletion.
(3) Includes natural gas liquids.
(4) Estimated future net reserves represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated
future production and development costs, using the average oil and gas
prices we had been receiving in the Kazakhstan domestic market, as of March
31, 2005, which were $0.50 per MMbtu of natural gas and $21.27 per Bbl of
oil.
The reserve data set forth herein represents estimates only. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner. The accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary from one another. In addition, results of
drilling, testing and production subsequent to the date of an estimate may
justify revision of such estimates, and such revisions may be material.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered. Furthermore, the estimated
future net revenue from proved reserves and the present value thereof are based
upon certain assumptions, including current prices, production levels and costs
that may not be what is actually incurred or realized.
No estimates of proved reserves comparable to those included herein
have been included in reports to any federal agency other than the SEC.
In accordance with SEC regulations, the Chapman Report used oil and
natural gas prices in effect at March 31, 2005. The prices used in calculating
the estimated future net revenue attributable to proved reserves do not
necessarily reflect market prices for oil and natural gas production subsequent
to March 31, 2005. There can be no assurance that all of the proved reserves
will be produced and sold within the periods indicated, that the assumed prices
will actually be realized for such production or that existing contracts will be
honored or judicially enforced.
Cost Information
Capitalized Costs
Capitalized costs and accumulated depletion, depreciation and
amortization relating to our oil and natural gas producing activities, all of
which are conducted in the Republic of Kazakhstan, are summarized below:
As of As of
March 31, 2005 March 31, 2004
---------------- ----------------
Developed oil and natural gas properties $ 43,031,811 $ 6,495,186
Unevaluated oil and natural gas properties - -
Accumulated depletion, depreciation and
amortization (67,452) -
---------------- ----------------
Net capitalized cost $ 42,964,359 $ 6,495,186
================ ================
12
Exploration, Development and Acquisition Capital Expenditures
The following table sets forth certain information regarding the total
costs incurred associated with exploration, development and acquisition
activities.
As of As of
March 31, 2005 March 31, 2004
---------------- ----------------
Acquisition costs:
Unproved properties $ - -
Proved properties 20,788,119 $ 1,713,119
Exploration costs 3,373,092 2,659,872
Development costs 18,870,600 2,122,195
---------------- ----------------
Subtotal 43,031,811 6,495,186
Asset retirement costs - -
---------------- ----------------
Total costs incurred $ 43,031,811 $ 6,495,186
================ ================
Oil and Natural Gas Volumes, Prices and Operating Expense
The following table sets forth certain information regarding production
volumes, average sales prices and average operating expense associated with our
sale of oil and natural gas for the periods indicated.
For the Period from
For the Year Ended Inception (May 6, 2003)
March 31, 2005 to March 31, 2004
------------------------ --------------------------
Production:
Oil and condensate (Bbls) 68,755 -
Natural gas liquids (Bbls) - -
Natural gas (Mcf) - -
Barrels of oil equivalent (BOE) - -
Average Sales Price(1):
Oil and condensate ($ per Bbl) $15.17 $ -
Natural gas liquids ($ per Bbl) $ - $ -
Natural gas ($ per Mcf) $ - $ -
Barrels of oil equivalent ($ per BOE) $ - $ -
Average oil and natural gas operating expenses including
production and ad valorem taxes ($ per BOE)(2) $ 3.08 $ -
- ---------------
(1) During the period from inception through the year ended March 31, 2005,
the Company has not engaged in any hedging activities, including
derivatives.
(2) Includes direct lifting costs (labor, repairs and maintenance,
materials and supplies), expensed workover costs and the administrative
costs of field production personnel, insurance and production and ad
valorem taxes.
Drilling Activity
The following table sets forth our drilling activity for the period
from inception (May 6, 2003) through March 31, 2004 and for the fiscal year
ended March 31, 2005. In the table, "Gross" refers to the total wells in which
we have a working interest or back-in working interest after payout and "Net"
refers to gross wells multiplied by our working interest therein.
13
For the Year Ended For the Period from Inception (May
March 31, 2005 26, 2003) to March 31, 2004
------------------------------------- ---------------------------------------
Gross Net Gross Net
---------------- ----------------- --------------- -------------------
Exploratory:
Productive - - - -
Non-productive - - - -
---------------- ----------------- --------------- -------------------
Total - - - -
---------------- ----------------- --------------- -------------------
Development:
Productive 5 5 - -
Non-productive - - - -
---------------- ----------------- --------------- -------------------
Total - - - -
---------------- ----------------- --------------- -------------------
Grand Total 5 5 - -
================ ================= =============== ===================
Productive Wells
The following table sets forth the number of productive oil and natural
gas wells in which we owned an interest as of March 31, 2005.
Company-operated Non-operated Total
-------------------------- ------------------------- ---------------------------
Gross Net Gross Net Gross Net
--------- ------------- -------- ------------- -------- ---------------
Oil 5 5 - - 5 5
Natural Gas - - - - - -
--------- ------------- -------- ------------- -------- ---------------
Total 5 5 - - 5 5
========= ============= ======== ============= ======== ===============
Our Properties
We currently own a 100% interest in a license to use subsurface mineral
resources and a hydrocarbon exploration contract issued by the ROK in 1999 and
2000, respectively (collectively referred to herein as the "license" or the
"contract"). The original contract granted its holder the right to engage in
exploration and development activities in an area of approximately 50,000 acres
referred to as the ADE Block. The ADE Block is located onshore in Kazakhstan in
the Mangistau Oblast, approximately 50 kilometers from the Kazakhstan city of
Aktau, a seaport on the Caspian Sea. The ADE Block is comprised of three fields,
the Aksaz, Dolinnoe and Emir fields. When initially granted, the exploration and
development stage of the contract had a five year term. This time for
exploration and development has since been extended to June 9, 2007. If we
desire to move from the exploration and development stage to the commercial
production stage, we must make application to the ROK before June 9, 2007.
During the fiscal year ended March 31, 2005, the territory covered
under the contract was expanded to include an additional 64,247 acres of land
adjacent to the ADE Block, (this land is sometimes referred to herein as the
"extended territory" or collectively included with the ADE Block as the "ADE
Block" or "our properties.") The extended territory is governed under the terms
of the original contract.
14
Under the terms of our contract, we currently have the right to engage
in exploration and development activities within the ADE Block, as extended,
until June 9, 2007. We also have the right to gather and sell all oil and
natural gas we produce until June 9, 2007, with the revenue from such sales
belonging to BMB. During the fiscal year ended March 31, 2005, all sales were
made to the Kazakhstan domestic market. The average price per barrel in the
Kazakhstan domestic market is approximately $25-$30 per barrel lower than the
average world market price. With the completion of additional storage capacity,
we are now capable of exporting oil for sale in the world markets. We will apply
for permission from the government to begin exporting our production for sale in
the world markets. We anticipate realizing greater revenue per barrel in the
international world markets.
To maintain our contract during the exploration and development stage
we are required to meet minimum annual capital expenditures in the exploration
and development of the ADE Block and the extended territory. The following table
shows the minimum capital expenditures we are required to make during the 2005
and 2006 calendar years and for the period from January 1, 2007 through June 9,
2007.
Year Minimum Capital Expenditure
---- ---------------------------
2005 $9,300,000
2006 $6,000,000
2007 $4,500,000
Under the terms of the contract, if we wish to move to commercial
production, we must apply to the ROK for commercial production rights. Under our
contract, we must apply for commercial production rights prior to the expiration
of the contract. The terms of our commercial production rights will be
negotiated at the time we move to commercial production. During exploration and
development stage, we have the right to produce and sell oil and natural gas at
a royalty rate of 2%. When we move to commercial production, royalty rates are
negotiated and vary depending on the reserve and production rates. Royalty rates
are established by the taxing authorities of the ROK. The royalty rate is based
on production rates and the rate increases on a sliding scale. Current royalty
rates range for 2% to 6%. Commercial production rights may also require up to
20% of the oil sold to the Kazakhstan domestic market at considerably lower
prices than received in the world export markets, as discussed above.
Under our contract, we have the exclusive right to negotiate for and
receive commercial production rights. The government is required to negotiate
the terms of these rights in good faith in accordance with the Law of Petroleum
of Kazakhstan. So long as we establish commercially producible reserves and have
fulfilled our obligations during exploration and development, the government is
required to grant us production rights. We have not yet applied for commercial
production rights because we enjoy certain economic advantages during
exploration and development as discussed herein.
During fiscal 2005 we re-entered one well in the Aksaz field,
re-entered one well and drilled two new wells in the Dolinnoe field and
re-entered one well in the Emir field. Each of these wells was successfully
completed and is either in testing, test production or additional workover.
These wells accounted for 100% of our total production during the year. In
fiscal 2006 we expect to drill one additional well in the ADE block. This well
is planned in the Aksaz field. Because we were not granted the extended
territory until December 2004, we did not engage in any exploration or
development activities in the extended territory during the fiscal year ended
March 31, 2005.
15
Title to Properties
We believe we have satisfactory title to all of our properties in
accordance with standards generally accepted in the oil and natural gas
industry. Our properties are subject to customary royalty interests, liens for
current taxes and other burdens, which we believe do not materially interfere
with the use of or affect the value of such properties. As is customary in the
industry in the case of undeveloped properties, little investigation of record
title is made at the time of acquisition (other than a preliminary review of
local records). Detailed investigations are made before commencement of drilling
operations.
Marketing
Currently we are selling all oil and natural gas produced to local
refineries at the domestic market price. Delivery is made by railcars filled at
the pouring station terminal located at the oil storage facility we lease.
We anticipate that once we begin commercial production we will market
our production to third parties consistent with industry practices.
In the domestic market, the price per barrel is lower than in world
markets. When we are able to access the world markets, our marketing objective
will be to receive the highest possible price for our product.
There are a variety of factors which affect the market for oil and
natural gas, including the extent of domestic production and imports of oil and
natural gas, the availability, proximity and capacity of natural gas pipelines
and other transportation facilities, demand for oil and natural gas, the
marketing of competitive fuels and the effects of state and federal regulations
on oil and natural gas productions and sales.
Sales to Major Customers
We sold production representing 10% or more or our total revenues for
the fiscal year ended March 31, 2005 as listed below.
Volume (Bbls) Amount ($) % of Sales
------------- ---------- ----------
Atyrau Refinery 43,959 $564,788 69%
LLC Shugla 20,210 $408,858 31%
We produced no crude oil or natural gas during the period from
inception (May 6, 2003) through March 31, 2004.
In the exploration, development and production business, production is
normally sold to relatively few customers. Substantially all of our customers
are concentrated in the oil and gas industry, and revenue can be materially
affected by current economic conditions and the price of certain commodities
such as natural gas and crude oil the cost of which is passed through to the
customer. However, based on the current demand for natural gas and crude oil and
the fact that alternate purchasers are readily available, we believe that the
loss of any of our major purchasers would not have a long-term material adverse
effect on our operations. Competition
16
Hydrocarbons exploration is highly competitive. Competition in
Kazakhstan and Central Asia includes other junior hydrocarbons exploration
companies, mid-size producers and major exploration and production companies. We
will have to compete for additional exploration and production properties with
these companies who in most cases may have greater financial resources and
larger technical staff than us.
We believe we have an advantage because we have a proven track record
with major former Soviet Union oil and gas and banking industry players forming
our board of directors and executive management team. We have several prominent
figures in the oil and gas industry and banking. In addition our staff has vast
domestic and international experience and has been working in Kazakhstan and
Russia for up to 30 years, and has developed relationships with the government
and its departments and ministries at many levels. We also employ experienced
national and foreign specialists at senior levels in our operating subsidiary.
There is significant competition for capital with other exploration and
production companies and industry sectors. At times, other industry sectors may
be more in favor with investors limiting our ability to obtain necessary
capital.
Government Regulation
Our operations are subject to various levels of government controls and
regulations in the United States and in Kazakhstan. We attempt to comply with
all legal requirements in the conduct of our operations and employ business
practices which we consider to be prudent under the circumstances in which we
operate. It is not possible for us to separately calculate the costs of
compliance with environmental and other governmental regulations as such costs
are an integral part of our operations.
In Kazakhstan, legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Pursuant to such legislation,
various governmental departments and agencies have issued extensive rules and
regulations which affect the oil and gas industry, some of which carry
substantial penalties for failure to comply. These laws and regulations can have
a significant impact on the industry by increasing the cost of doing business
and, consequentially, can adversely affect our profitability. Inasmuch as new
legislation affecting the industry is commonplace and existing laws and
regulations are frequently amended or reinterpreted, we are unable to predict
the future cost or impact of complying with such laws and regulations.
Risk Factors Relating to our Business
Limited Capital Resources and Liquidity
We are a development stage company and have not yet generated
significant production or revenues from the development of our primary
properties in Kazakhstan.
While we have raised capital to fund acquisitions, undertake our first
year work program, including 3D seismic, processing and interpretation of the
data obtained during 3D seismic, re-entering old wells in the Aksaz, Dolinnoe
and Emir fields, well work over, construction of the ground facilities for
pre-sale oil processing, drilling of several new wells, start-up expenses, etc.,
we still lack sufficient capital to complete exploration and development of our
properties. Thus we are using more cash in operations than we are generating.
Furthermore, we anticipate that the development of our properties will require
substantial additional funding before we can achieve significant production and
revenues from operations.
Inability to Obtain Additional Funding
To satisfy future capital investment commitments and liquidity needs
with respect to our ongoing operations, we may require additional equity or debt
financing. Our ability to arrange financing and the cost of financing depends
upon many factors, including:
17
* economic and capital market conditions;
* investor confidence in the oil and gas industry, in Kazakhstan
and in the Company;
* credit availability from banks and other lenders; and
* provisions of taxes and securities laws that are conducive to
raising capital.
The terms and conditions on which future funding or financing may be
made available may not be acceptable or available at all. If we issue capital
stock or convertible securities to raise funds, your ownership could be diluted
or new investors might obtain terms more favorable than yours. If we decide to
raise additional funds by incurring debt, we may become more leveraged and
subject to more restrictive financial covenants and ratios. Our inability to
procure sufficient financing could adversely affect our ability to implement our
business strategy.
Failures to Satisfy our Commitments During Exploration and Development
Stage
We have committed to the government of Kazakhstan to make various
capital investments and to develop the ADE Block in accordance with specific
requirements during exploration and development. Additionally, to undertake
commercial production, we will need to apply for and be granted commercial
production rights. The requirements of our current license may be inconsistent
with the terms of any new licenses we are issued. Additionally, we may not be
able to satisfy all commitments in the future. If we fail to satisfy these
commitments our contract may be cancelled. The cancellation of our contract
could have a material adverse effect on our business, results of operations and
financial condition. Although we would seek waivers of any breaches or to
renegotiate the terms of our commitments, we cannot assure you that we would be
successful in doing so.
Inadequate Infrastructure
Our exploration and development activities could suffer due to
inadequate infrastructure in the region. We are working to improve the
infrastructure on our properties. Any problem or adverse change affecting our
operational infrastructure, or infrastructure provided by third parties, could
have a material adverse effect on our financial condition and results of
operations. Similarly, if we are unsuccessful in developing the infrastructure
on our properties it could have a material adverse effect on our financial
conditions and results of operations.
Reliance on Third Parties for Transportation Systems
The crude oil we produce must be transported through pipelines or by
rail. These pipelines and railways are operated by state-owned entities or other
third parties, and there can be no assurance that these transportation systems
will always be functioning and available, or that the transportation costs will
remain at acceptable levels. In addition, any increase in the cost of pipeline
transportation or reduction in its availability to us could have a material
adverse effect on our results of operations. There can be no assurance that we
will be able to procure sufficient transportation capacity on economical terms,
if at all.
Liquidity of our Common Shares
Our stock has limited trading volume on the Over-the-Counter Bulletin
Board and is not listed on a national exchange. Moreover, as of March 31, 2005
approximately 91%, or 29,020,960 of our 31,958,846 outstanding common stock is
"restricted" and therefore subject to the resale restrictions set forth in Rule
144 of the rules and regulations promulgated by the Securities and Exchange
Commission under the Securities Act of 1933. These factors could adversely
affect the liquidity, trading volume, price and transferability of our common
shares.
18
Control by our Officers and Directors
In the aggregate, our executive officers and directors control
approximately 40% of the outstanding shares of our common stock. Such
concentrated control may adversely affect the price of our common stock. Our
officers and directors may be able to exert significant influence, or even
control, over matters requiring approval by our security holders, including the
election of directors. Such concentrated control may also make it difficult for
our shareholders to receive a premium for their shares of our common stock in
the event we merge with a third party or enter into a different transaction
which requires shareholder approval.
Key Personnel
Our success is dependent on the performance of our senior management
and key technical personnel each of whom have extensive experience in either the
oil and gas or finance industries. The loss of our executive officers, directors
or other key employees could have an adverse effect on our business. We do not
have employment agreements in place with our senior management or key employees.
We do not currently carry key man insurance for any of our senior management or
key employees, nor do we anticipate obtaining key man insurance in the
foreseeable future.
Risk Factors Relating to our Industry
Exploration and Development Risks
Our success is dependent on finding, developing and producing economic
quantities of oil and gas. We make use of the best information available to us
and employ current technologies and consultants to attempt to mitigate risks.
However, despite these efforts, we may be unsuccessful in finding economically
recoverable reserves. We are also subject to operating risks normally associated
with the exploration, development and production of oil and gas. These risks
include high pressure or irregularities in geological formations, blowouts,
fires, shortages or delays in obtaining equipment and qualified personnel,
equipment failure or accidents, and adverse weather conditions, such as winter
snowstorms. These risks can result in catastrophic events, or they may result in
higher costs and operating delays. We do not currently maintain insurance
coverage to compensate for these risks as such coverage is either not available
or is not considered to be cost-effective.
Oil and Gas Reserve Risks
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and projecting future rates of production and timing
of development expenditures. Changes in prices and cost levels, as well as the
timing of future development costs, may cause actual results to vary
significantly from the projected ones. The economic success of our properties is
dependent on proving existing reserves and rates of production from existing and
new wells to generate positive cash flow and provide an economic rate of return
on our investments in the fields.
19
Hydrocarbons Exploration, Development and Production Industry
Hydrocarbons exploration and development is a speculative business
characterized by a number of significant uncertainties. The marketability of
hydrocarbons acquired or discovered by us may be affected by numerous factors
that are beyond our control and that cannot be accurately predicted, such as
market fluctuations, the proximity and capacity of exploration and production
facilities, hydrocarbons markets and processing equipment, and other factors
such as government regulations, including regulations relating to royalties,
allowable production, importing and exporting of hydrocarbons, and environmental
protection, a combination of which factors may result in us not receiving an
adequate return on invested capital.
Hydrocarbons Price Fluctuations
Our future success is dependent on being able to transport and market
our production either within Kazakhstan or preferably through export to
international markets. The market price of hydrocarbons is volatile and beyond
our control and may adversely affect the feasibility or future profitability of
potential projects. The decision to put a field into production and the
commitment of the funds necessary for that purpose must be made long before the
first revenues from production will be received. Hydrocarbons price fluctuations
as well as forecast production costs between the time that such decision is made
and the commencement of production can completely change the economics of any
field.
Although it is possible to protect against hydrocarbons price
fluctuations by hedging in certain circumstances, the volatility of hydrocarbons
prices represents a substantial risk in the exploration and production industry
generally, which no amount of planning or technical expertise can eliminate.
If we are successful in establishing meaningful quantities of oil and
gas production, the prices we receive for our oil production will have a
significant impact on our future financial position and results.
Risks of Doing Business in Kazakhstan
We believe that the present policies of the government of the ROK are
favorable to foreign investment and to exploration and production and are not
aware of any impending changes. While there is a certain amount of bureaucratic
"red tape" we have significant experience working in Kazakhstan, and good
relationships with government agencies at many levels.
We, however, remain subject to all the risks inherent in international
operations, including adverse governmental actions, political risks, and
expropriation of assets, loss of revenues and the risk of civil unrest or war.
Our primary oil and gas property is located in Kazakhstan, which until 1990 was
part of the Soviet Union. Kazakhstan retains many of the laws and customs from
the former Soviet Union, but has developed and is continuing to develop its own
legal, regulatory and financial systems. As the political and regulatory
environment changes, we may face uncertainty about the interpretation of our
agreements and in the event of dispute, may have limited recourse within the
legal and political system.
If we are successful in establishing commercial production from our
properties, an application will be made for an exploration and production
contract. We have the exclusive right to negotiate this contract for the ADE
Block and extended territory, and the government is required to conduct these
negotiations under the Law of Petroleum. Such contracts are customarily awarded
upon determination that the field is capable of commercial rates of production
and that the applicant has complied with the other terms of its license and
exploration contract. The terms of the exploration and production contract will
20
establish the royalty and other payments due to the government in connection
with commercial production. At the time the commercial production contract is
issued, we will be required to begin repaying the government its historical
investment costs of exploration and development of the ADE Block and the
Extended Territory. The obligation associated with the ADE Block is
approximately $6 million. The obligation we will be required to assume in
connection with the Extended Territory has not yet been determined and is
currently being negotiated. If satisfactory terms for commercial production
rights cannot be negotiated, it could have a material adverse effect on our
financial position.
Environmental Risks
The exploration and development of our projects are subject to Kazakh
laws and regulations concerning environmental matters and the discharge of
hazardous wastes and materials. We have and intend to continue to conduct our
activities in compliance with international environmental and occupational
health and safety norms, even if they exceed the currently applicable Kazakh
requirements.
Future environmental laws and regulations could impose increased
capital or operating costs on us and could restrict and/or delay the development
or operation of our projects.
As the holder of rights to oil and gas properties, we are subject to
various federal, states, local and foreign laws and regulations relating to
discharge of materials into, and protection of, the environment. These laws and
regulations may impose liability on us for the cost of pollution cleanup
resulting from operations and could subject us to liability for pollution
damages.
Employees
At the time of this filing, we had 133 full-time employees. We believe
that our relationships with our employees are good. None of our employees are
covered by a collective bargaining agreement. From time to time we utilize the
services of independent consultants and contractors to perform various
professional services. Field and on-site production operation services, such as
pumping, maintenance, dispatching, inspection and testing are generally provided
by independent contractors.
Executive Offices
Our principal executive and corporate offices are located in an office
building located at 20A Kazibek Bi Street, in Almaty, Kakzakhstan. We lease this
space and believe it is sufficient to meet our needs for the foreseeable future.
During our fourth fiscal quarter we decided to close our New York
office. We are currently in the process of finalizing that closure and hope to
sublease this office space for the remaining term of the lease.
Reports to Security holders
We file Annual Reports on Form 10-KSB, Quarterly Reports on Form
10-QSB, Current Reports on Form 8-K and other items with the Securities and
Exchange Commission (SEC). We provide free access to all of these SEC filings,
as soon as reasonably practicable after filing, on our Internet web site located
at www.bmbmunai.com. In addition, the public may read and copy any documents we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
its Internet site www.sec.gov, which contains reports, proxy and information
statements and other information regarding issuers like BMB Munai.
21
Market Price of and Dividends on Our Common Equity and Other Shareholder
Matters.
Our shares are currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol BMBM. As of June 2, 2005, we had approximately 375
shareholders of record holding 31,958,846 common shares. Of the issued and
outstanding common stock, approximately 2,937,886 are free trading, the balance
are "restricted securities" as that term is defined in Rule 144 promulgated by
the Securities and Exchange Commission.
The published high and low bid quotations from April 1, 2003 through
March 31, 2005, were furnished to us by Pink Sheets, LLC, are included in the
chart below. These quotations represent prices between dealers and do not
include retail markup, markdown or commissions and may not represent actual
transactions.
High Low
---- ---
Fiscal year ending March 31, 2005
- ---------------------------------
First Quarter $5.75 $3.80
Second Quarter 7.65 3.00
Third Quarter 7.05 3.00
Fourth Quarter 5.40 4.60
Fiscal year ending March 31, 2004
- ---------------------------------
First Quarter $0.31 $0.15
Second Quarter 1.20 0.31
Third Quarter (Oct 1 thru Dec 11) 1.90 0.60
Third Quarter (Dec. 12 thru Dec. 31,
after 1 share for 10 reverse split) 7.00 1.05
Fourth Quarter 8.00 1.75
Cash Dividends
During the fiscal year ended March 31, 2005, the Company did not pay,
nor declare, any dividends. The Company's ability to pay dividends is subject to
limitations imposed by Nevada law. Under Nevada 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. The Board of
Directors does not, however, anticipate paying any dividends in the foreseeable
future; it intends to retain the earnings that could be distributed, if any, for
the operations, expansion and development of its business.
Securities for Issuance Under Equity Compensation Plans
As of June 12, 2005, shares of our common stock were subject to
issuance upon the exercise of outstanding options or warrants as set forth
below.
22
- ------------------------- --------------------------- --------------------------- ------------------------------------
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
column (a))
(a) (b) (c)
- ------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation
plans approved by
security holders 60,000 $4.00 4,940,000
- ------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation
plans not approved by
security holders 810,321 $4.05 -0-
- ------------------------- --------------------------- --------------------------- ------------------------------------
Total 870,321 $4.04 4,940,000
- ------------------------- --------------------------- --------------------------- -----------------------------------
In October 2004, we agreed to grant stock options under our 2004 Stock
Incentive Plan to Gary Lerner, our corporate Secretary, to purchase 60,000
shares of our common stock. The options have an exercise price of $4.00 per
share and expire in October 2009.
On November 19, 2003, we granted an option to Credifinance Securities
Limited for services rendered by Credifinance as our agent in connection with
private placements made by us in November 2003. Georges Benarroch, a Company
director is also the CEO of Credifinance and may be deemed to be a related
party. The option grants Credifinance the right to purchase up to 142,857 shares
of our common stock at an exercise price of $3.50 per share. The option expires
on November 26, 2008. The option provides for adjustments to the number of
shares and/or the price per share to protect the holder against dilution and in
the event of mergers, reorganizations and similar events. The option also
requires that in the event we determine to make a registered public offering
during the term of the option, we shall use our best efforts to include the
common shares underlying the options in the registration statement.
In December 2003, we granted Credifinance agent warrants in connection
with funds raised on our behalf. The agent warrants grant Credifinance the right
to purchase up to 275,050 shares of our common stock at an exercise price of
$2.15 and 208,000 shares of our common stock at an exercise price of $2.50 per
share. The warrants provide for adjustments to the number of shares and/or the
price per share to protect the holder against dilution and in the event of
mergers, reorganizations and similar events. In May and June 2005, Credifinance
exercised its warrants to purchase 275,050 common shares for $2.15 per share and
109,030 common shares for $2.50 per share.
In connection with a private offering of our common stock conducted
during the second fiscal quarter, we issued placement agent warrants to
Credifinance and Aton Securities, Inc., at various times from July 2004 to
September 2004. The placement agent warrants grant Credifinance the right to
purchase up to 148,980 shares of our common stock and Aton Securities the right
to purchase up to 309,454 shares of our common stock. The options are
exercisable at price of $4.00 per share and expire at various times from January
31, 2006 to March 19, 2006. The agent warrants provide for adjustments to the
number of shares and/or the price per share to protect the holder against
dilution in the event of mergers, reorganizations and similar events.
23
Subsequent to the end of our fiscal year, in April 2005 we issued
Credifinance and Aton Securities placement agent warrants in connection with
funds raised on our behalf during the quarter ended March 31, 2005. The
placement agent warrants grant Credifinance the right to purchase 50,100 shares
of our common stock and Aton Securities the right to purchase 60,000 shares of
our common stock. The warrants issued to Credifinance and Aton Securities are
exercisable at a price of $5.00 per share. The warrants expire on April 11,
2006. The option provides for adjustments to the number of shares and/or the
price per share to protect the holder against dilution and in the event of
mergers, reorganizations and similar events.
Recent Sales of Unregistered Securities.
During the quarter ended March 31, 2005 the following equity
securities, which were not registered under the Securities Act of 1933, were
issued.
During and subsequent to the quarter end, we issued 3,101,000
restricted common shares to investors for $5.00 per share, raising gross
proceeds of $15,505,000 in a private placement. The shares were issued without
registration under the Securities Act of 1933 in reliance upon exemptions from
registration pursuant to Rule 506 of Regulation D and Regulations S of the rules
and regulations promulgated by the Securities and Exchange Commission under the
Securities Act of 1933.
As discussed above, at the closing of the recent private placement we
granted placement agent warrants to Aton Securities and Credifinance, a related
company through a common director, in the amounts of 60,000 and 50,100
respectively, to purchase shares of our common stock at $5.00 per share. These
warrants are immediately exercisable and expire on April 11, 2006. The warrants
were issued without registration under the Securities Act of 1933 in reliance
upon an exemption from registration pursuant to Section 4(2) of the Securities
Act of 1933.
In May and June 2005, Credifinance exercised warrants granted in
December 2003 to purchase 275,050 common shares for $2.15 per share and 109,030
common shares for $2.50 per share, for an aggregate purchase price of $863,932.
The shares were issued without registration pursuant to Regulation S of the
rules and regulations promulgated by the Securities and Exchange Commission
under the Securities Act of 1933.
Management's Discussion and Analysis of Results of Operations as of March 31,
2005
The following discussion is intended to assist you in understanding our
results of operations and our present financial condition. Our Consolidated
Financial Statements and the accompanying notes included elsewhere in this Proxy
Statement contain additional information that should be referred to when
reviewing this material.
Statements in this discussion may be forward-looking. These
forward-looking statements involve risks and uncertainties, including those
discussed below, which could cause actual results to differ from those
expressed. Please read Forward-Looking Information on page 24.
Overview
We operate in one segment, natural gas and oil exploration and
development. We hold a contract that currently allows us to explore and develop
approximately 460 square kilometers in western Kazakhstan. Our contract includes
the ADE Block and the Extended Territory, which are collectively referred to
herein as "our properties."
24
Under our contract we are permitted to explore for oil and natural gas
within our properties. Our contract also grants us the right to sell the oil and
natural gas recovered during test production to generate revenue. We have been
engaged in test production and selling of crude oil since May 2004. Under the
terms of our contract, we are required to sell the oil and gas we produce in the
Kazakhstan domestic market until we apply for and are granted permission to
export our production. The average price per barrel of crude oil in the
Kazakhstan domestic market during the past twelve months has been approximately
$15 per barrel, significantly lower than the world market price. For most of
fiscal 2005, we lacked sufficient storage capacity to accumulate adequate
volumes of oil for exportation. With the completion of additional storage
capacity at the facility, we now have the capability to export oil for sale in
the world markets. We will apply for permission from the government to begin
exporting our production for sale in the world markets. We anticipate realizing
greater revenue per barrel once we begin exporting oil to the international
world markets.
During the fiscal year ended March 31, 2005 we generated revenue of
$973,646. We did not generate any revenue during the period from inception (May
6, 2003) through March 31, 2004 because we did not begin test production until
May 2004. For the year ended March 31, 2005 crude oil accounted for 100% of our
production and revenues.
We invested approximately $17,411,861 in cash in exploration and
development of our properties during the fiscal year ended March 31, 2005. Our
budget for exploration and development of our properties for the upcoming fiscal
year is approximately $10 million to $14 million.
We have and will continue to seek to increase our proven reserves
through continued exploration of our properties, as well as the acquisition of
other properties with exploration and production potential.
For us to operate profitability and grow in the future we need to
obtain additional capital either through additional fund raising or through
significantly increased production. Our revenue, profitability and future growth
depend substantially on factors beyond our control, such as economic, political
and potential regulatory and competition from other sources of energy. Oil and
natural gas prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for oil or natural gas could
materially and adversely affect our financial position, results of operations,
the quantities of oil and natural gas reserves that we can economically produce,
the markets into which we can sale our oil and our access to additional capital.
In a worst case scenario, future drilling operations could be largely
unsuccessful, oil and gas prices could sharply decline, we could fail to gain
access to the world oil markets and/or other factors beyond our control could
cause us to modify or substantially curtail our exploration and development
plans, which could negatively impact our earnings, cash flow and most likely the
trading price of our securities.
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
25
For the period from inception
For the year ended (May 6, 2003) through
March 31, 2005 March 31, 2004
----------------------------- ---------------------------------
Revenues:
Oil and gas sales $ 973,646 -
Expenses:
Oil and gas operating(1) 197,697 -
Production 265,149 -
Selling 206,929 -
Depreciation, depletion and
Amortization 133,903 4,758
General and administrative 4,060,962 781,757
Net Production Data:
Oil (Bbls) 68,755 -
Natural gas (Mcf) - -
Barrels of oil equivalent (BOE) - -
Average Sales Price:
Oil (per Bbl) 15.17 -
Natural gas (per Mcf) - -
Equivalent price (per BOE) - -
Expenses ($ per BOE):
Oil and gas operating(1) 3.08 -
Depreciation, depletion and
amortization(2) 1.05 -
- ---------------
(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas
properties only.
Year ended March 31, 2005 compared to the period from inception (May 6,
2003) through March 31, 2004
Revenue and Production
The following table summarizes production volumes, average sales prices
and operating revenue for our oil and natural gas operations for the year ended
March 31, 2005 and the period from inception (May 6, 2003) to March 31, 2004.
26
Fiscal 2005 Compared to the
Period from inception
(May 6, 2003) through
March 31, 2004
-----------------------------
For the Period $ %
For the Fiscal from Inception
Year ended Through Increase Increase
March 31, 2005 March 31, 2004 (Decrease) (Decrease)
------------------ -------------------- ------------ -------------
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 68,755 - 68,755 N/A
Barrels of oil equivalent (BOE) - - - -
Average Sales Price
Natural gas ($ per Mcf) $ - $ - $ - $ -
Natural gas liquids ($ per Bbl) $ - $ - $ - $ -
Oil and condensate ($ per Bbl) $ 15.17 $ - N/A N/A
Barrels of oil equivalent
($ per BOE) - $ - $ - $ -
Operating Revenue:
Natural gas $ - $ - - $ -
Natural gas liquids $ - $ - - $ -
Oil and condensate $973,646 $ - $ 973,646 N/A
Gain on hedging and derivatives(1) $ - $ - $ - $ -
------------------ -------------------- ------------ -------------
Total $973,646 $ - $ 973,646 $ -
================== ==================== ============ =============
- ---------------
(1) We did not engage in hedging transactions, including derivatives during
the fiscal year ended March 31, 2005, or the period from inception to
March 31, 2004.
Revenues. We generate revenue under our contract from the sale of oil
and natural gas recovered during test production. During the year ended March
31, 2005, we realized revenue from oil and gas sales of $973,646 compared to $0
during the year ended March 31, 2004. This increase in revenues in the 2005
fiscal year is primarily the result of the fact that in the period from
inception through March 31, 2004, we were just beginning operations and seeking
to acquire rights to oil and gas properties and we had no oil and gas sales
during that period. We anticipate revenues will continue to increase in the
upcoming fiscal year. At the present time, however, it is unclear the rate at
which our production and corresponding revenues may increase.
Our revenue is sensitive to changes in prices received for our
products. Our production is sold at the prevailing market price in Kazakhstan,
which fluctuates in response to many factors that are outside our control.
Imbalances in the supply and demand for oil can have a dramatic effect on the
prices we receive for our production. Political instability, the economy,
weather and other factors outside our control could impact supply and demand.
27
Costs and Operating Expenses
Production Expenses. During the fiscal year ended March 31, 2005, we
incurred $265,149 in production expenses. We had no similar expense during the
period from May 6, 2003, to March 31, 2004 because we were not engaged in oil
and gas production during the prior period. We expect production expenses to
continue to increase in the upcoming fiscal year. At the present time, however,
it is unclear the rate at which our production expenses may increase in the
upcoming fiscal year.
Selling Expenses. We incurred selling expenses of $206,929 during the
fiscal year ended March 31, 2005 compared to $0 during the period from inception
through March 31, 2004. We did not incur selling expenses in the prior year
period because we did not engage in the sale of oil or gas during that period.
General and Administrative Expenses. General and administrative
expenses during the fiscal year ended March 31, 2005 were $4,060,962 compared to
$781,757 during the period from inception on May 6, 2003 through March 31, 2004.
This represents a 419% increase in general and administrative expenses. This
significant increase is attributable to a 208% increase in payroll and other
compensation, a 284% increase in professional fees, a 781% increase in business
trip expenses, a 359% increase in taxes, a 2,049% increase in rent, a 992%
increase in transportation, a 5,016% increase in insurance expense, a 2,152%
increase in communication expenses and a 979% increase in other expenses. During
the 2005 fiscal year we accrued a $250,000 obligation required under our work
program to contribute to the Astana Fund, a government fund used to fund
construction and development Astana, Kazakhstan - the capital of Kazakhstan.
This was a one-time obligation. This amount was paid by us subsequent to our
fiscal year end. Additionally, we established bad debt reserves in the amount of
$129,051 on advances for inventory purchases during the fiscal year ended March
31, 2005. The significant increase in general and administrative expenses is
largely the result of hiring more personnel to operate our business, using
services of technicians, engineers, accountants and lawyers, as well as
incurring other general corporate expenses. We anticipate general and
administrative expenses will increase in the upcoming fiscal year. However, we
do not expect general and administrative expenses to increase at such a
significant rate in the upcoming year. We anticipate increases in revenue,
operating costs and selling costs will outpace the increase in general and
administrative expenses in the upcoming year.
In April 2005 we elected to relocate our U.S. offices to Salt Lake
City. Consequently we plan to sublease our office space in New York City to
another company. We also reduced the number of employees we have in our U.S.
office. We believe these measures will reduce our rent, taxes and other relevant
expenses in the upcoming fiscal year.
Loss from Operations. As a result of significantly increasing expenses,
which were only partially offset by revenue from oil and gas sales, during the
fiscal year ended March 31, 2005 we realized a loss from operations of
$3,625,845 compared to a net loss from operations of $786,515 during the period
from May 6, 2003 to March 31, 2004. Until such time as revenue from oil and gas
sales exceeds expenses we will continue to generate operating losses. At this
time, it is unclear when we will generate sufficient oil and gas to offset our
expenses.
Other Income. During the fiscal year ended March 31, 2005 we realized
total other income of $501,830 compared to $254,717 for the period from May 6,
2003 to March 31, 2004. This 97% increase in other income is largely
attributable to $428,572 increase in exchange gain resulting from fluctuations
of foreign currency rates against the U.S. Dollar, a $165,699 increase in
realized gain on dealing securities and our realizing interest income of $17,799
compared to interest payments of $84,007, partially offset by a $501,174
decrease in realized and unrealized gains on marketable securities. During the
2005 fiscal year we raised approximately $27 million through the sale of our
securities in private placement transactions. Therefore, at times during the
year, we had funds that were not being used in operations that we invested in
marketable securities. We anticipate the funds held in marketable securities
will be used to fund our operations and therefore expect gains from marketable
securities, both realized and unrealized, to decrease in the next twelve months.
28
Net Loss. During the fiscal year ended March 31, 2005 we realized a net
loss of $3,124,358 compared to a net loss of $613,782 for the period from
inception, May 6, 2003 through March 31, 2004. As discussed above this net loss
is largely the result of our engaging in active exploration and development
activities and operations for the entire 2005 fiscal year, whereas we were not
engaged in active operations for much of the prior fiscal period. We will
continue to realize net losses from operations until such time as revenues
generated from oil and gas production and sales and other income offset our
expenses. At this time, it is unclear when, or if, that may occur.
Liquidity and Capital Resources
Funding for our activities has historically been provided by funds
raised through the sale of our common stock. From inception on May 6, 2003
through March 31, 2005, we have raised $37,416,034 through the sale of our
common stock and proceeds from the issuance of convertible debt. As of March 31,
2005, we had cash and cash equivalents of $9,989,632. We anticipate our capital
resources in the upcoming twelve months will likewise consist primarily of funds
raised in financing activities and revenue from the sale of oil and gas
recovered during test production.
Our need for capital, in addition to funding our ongoing operations, is
primarily related to the exploration and development of our properties as
required under our contract, and the potential acquisition of additional oil and
gas properties. For the period from inception on May 6, 2003 through March 31,
2005, we have incurred capital expenditures of $42,964,359 for exploration,
development and acquisition activities.
Cash Flows
During the fiscal year ended March 31, 2005 cash was primarily used to
fund exploration and development expenditures. We had a net increase in cash and
cash equivalents of $7,863,277 during the current fiscal year. See below for
additional discussion and analysis of cash flow.
Period from inception
Twelve months ended (May 6, 2003) through
March 31, 2005 March 31, 2004
-------------- --------------
Net cash used in operating activities $(1,415,004) $(3,445,339)
Net cash used in investing activities $(18,001,879) $(6,564,180)
Net cash provided by financing activities $27,280,160 $12,135,874
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $7,863,277 $2,126,355
========== ==========
Our primary source of cash has been cash flows from equity offerings.
During the fiscal year ended March 31, 2005 we realized $27,280,160 from the
sale of our common stock. We primarily used this cash to fund our capital
expenditures. At March 31, 2005 we had cash on hand of $9,989,632.
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the upcoming 12 months
are $10 million to $14 million for exploration, development, production and
acquisitions. We expect to fund these expenditures primarily from additional
capital we will seek and cash on hand. In the event we are not successful in
29
raising the anticipated funds from the sale of our securities, we nevertheless
believe capital expenditures of approximately $10 million to $14 million could
be financed through cash on hand, the sale of marketable securities and revenues
from anticipated oil production. The minimum level of capital expenditures on
our properties is dictated by the contract. The amount of funds we devote to any
particular activity in excess of the minimum required capital expenditures may
increase or decrease significantly depending on available opportunities, cash
flows and development results, among others.
If we are not successful in obtaining funding, we anticipate that we
will instead seek to develop existing wells and infrastructure in hopes of
generating sufficient revenue to finance our operations. This development would
be funded by cash and cash equivalents and the sale of marketable securities we
currently hold. If the funding is limited to these sources, our anticipated
development activities would be significantly more limited than anticipated
under our present business plan.
As discussed in Note 2 to the Consolidated Financial Statements, we
hold marketable securities consisting of short-term repurchase agreements for
securities issued by Kazakhstan banks and Kazakhstan financial institutions.
Additionally, certain operating cash flows are denominated in local currency and
are translated into U.S. dollars at the exchange rate in effect at the time of
the transaction. As more fully disclosed in the "Risks of Doing Business in
Kazakhstan" section of the "Description of Business," because of the potential
for civil unrest, war and asset expropriation, some or all of these matters,
which impact operating cash flow, may affect our ability to meet our short-term
cash needs.
Contractual Obligations and Contingencies
The following table lists our significant commitments at March 31,
2005, excluding current liabilities as listed on our consolidated balance sheet:
Payments Due By Period
--------------------------------------------------------------------------
Contractual obligations Total Less than 1 1-3 years 4-5 years After 5
year years
--------------- -------------- --------------- -------------- ------------
Capital Expenditure $19,800,000 $9,300,000 $10,500,000 - -
Commitment(1)
Due to the Government of
the Republic of Kazakhstan(2)(3) $5,994,200 - $ 5,994,200 - -
Due to Reservoir Consultants $500,000 $278,000 $222,000 - -
Liquidation Fund $60,973 - - - $60,973
(1) Under the terms of our contract with the ROK, we are required to spend
a total of at least $19.8 million dollars in exploration, development
and improvements within the ADE Block, as extended during the term of
the license, including $9.3 million in the 2005 calendar year, $6
million in the 2006 calendar year and $4.5 million in the 2007 calendar
year. If we fail to do so, we may be subject to the loss of our
exploration license.
(2) In connection with our acquisition of the oil and gas contract covering
the ADE Block, we are required to repay the ROK for historical costs
incurred by it in undertaking geological and geophysical studies and
infrastructure improvements. The repayment terms of this obligation
will not be determined until such time as we apply for and are granted
commercial production rights by the ROK. Under our contract, if we wish
to commence commercial production, we must apply for such right prior
to the expiration of our exploration and development rights in June
30
2007. We are legally entitled to receive commercial production rights
and have the exclusive right to negotiate such with the ROK, and the
ROK is required to conduct the negotiations under the Law of Petroleum
in Kazakhstan. Although we can apply for commercial production rights
at any time, we enjoy certain benefits under our contract that
currently make it more economically advantageous for us to continue
exploration and development activities at this time. We anticipate that
we will apply for commercial production rights sometime during the
first half of the 2007 calendar year. Should we decide not to pursue a
commercial production contract, we can relinquish the ADE Block to the
ROK in satisfaction of this obligation.
(3) As with the ADE Block, we will also be required to repay the ROK its
historical costs for access to and use of geological and geophysical
data gathered and infrastructure improvement previously made by the ROK
within the Extended Territory. We are presently negotiating the amount
and terms of this obligation with the ROK. This approximately $6
million obligation represents only our repayment obligation with
respect to the ADE Block, and not the extended territory.
Off-Balance Sheet Financing Arrangements
As of March 31, 2005, we had no off-balance sheet financing
arrangements.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our financial statements. The impact of
these policies and associated risks are discussed throughout Management's
Discussion and Analysis and Plan of Operations where such policies affect our
reported and expected financial results. A complete discussion of our accounting
policies is included in Note 2 of the Notes to Consolidated Financial
Statements.
Development Stage
We are a development stage company and have not yet commenced our
primary revenue generating activities, which is the commercial production and
sale of oil and natural gas. Our ability to realize the carrying value of our
assets is dependent on being able to produce and sell oil from our properties.
Our Consolidated Financial Statements have been presented on the basis that we
are a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. We have
accumulated losses totaling $3,738,140 and have incurred some amount of debt in
the development phase of our operations. To fully develop our properties and
achieve positive cash flow, we will require additional funding. The Consolidated
Financial Statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities which might be necessary should we be unable to
continue in existence.
Foreign Exchange Transactions
Transactions denominated in foreign currencies are reported at the
rates of exchange prevailing at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated to U.S. dollar at
the rates of exchange prevailing at the balance sheet dates. Any gains or losses
arising from a change in exchange rates subsequent to the date of the
transaction are included as an exchange gain or loss in the Consolidated
Statements of Loss.
31
Full Cost Method of Accounting
We follow the full cost method of accounting for our costs of
acquisition, exploration and development of oil and gas properties.
Under full cost accounting rules, the net capitalized costs of
evaluated oil and gas properties shall not exceed an amount equal to the present
value of future net cash flows from estimated production of proved oil and gas
reserves, based on current economic and operating conditions, including the use
of oil and gas prices as of the end of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible
that the estimate of discounted future net cash flows from proved oil and gas
reserves could change. If oil and gas prices decline, even if only for a short
period of time, it is possible that impairments of oil and gas properties could
occur. In addition, it is reasonably possible that impairments could occur if
costs are incurred in excess of any increases in the cost ceiling, revisions to
proved oil and gas reserves occur, or if properties are sold for proceeds less
than the discounted present value of the related proved oil and gas reserves.
Recently Issued Accounting Pronouncements
In June 2004, the FASB issued an exposure draft of a proposed
statement, "Fair Value Measurements" to provide guidance on how to measure the
fair value of financial and non-financial assets and liabilities when required
by other authoritative accounting pronouncements. The proposed statement
attempts to address concerns about the ability to develop reliable estimates of
fair value and inconsistencies in fair value guidance provided by current U.S.
GAAP, by creating a framework that clarifies the fair value objective and its
application in GAAP. In addition, the proposal expands disclosures required
about the use of fair value to re-measure assets and liabilities. The standard
would be effective for financial statements issued for fiscal years beginning
after June 15, 2005. We are reviewing The Exposure Draft to determine the
potential impact, if any, on our Consolidated Financial Statements.
In November 2004, the EITF ratified Issue No. 03-13, "Applying the
Conditions in Paragraph 42 of FASB Statement No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report
Discontinued Operations." The EITF reached a consensus that classification of a
disposed of or held-for-sale component as a discontinued operation is only
appropriate if the ongoing entity (i) expects to have no continuing "direct"
cash flows, and (ii) does not retain or expect to retain an interest, contract
or other arrangement sufficient to enable it to exert significant influence over
the disposed component's operating and financial policies after the disposal
transaction. Application of this consensus did not have a material impact on our
Consolidated Financial Statements.
In December 2004, the FASB issued Statement 153, "Exchanges of
Non-monetary Assets," an amendment of APB Opinion 29, Accounting for
Non-monetary Transactions. This amendment eliminates the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. Under Statement 153, if a non-monetary exchange of similar
productive assets meets a commercial-substance criterion and fair value is
determinable, the transaction must be accounted for at fair value resulting in
recognition of any gain or loss. This statement is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005 and will not
impact our financial position or results of operations, and cash flows.
32
In December 2004, the FASB issued a revision of SFAS No. 123
"Share-Based Payment" (No. 123R). The statement establishes standards for the
accounting for transactions in which an entity exchanges its equity investments
for goods and services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. The statement does not change the accounting guidance
for share-based payments with parties other than employees. The statement
requires a public entity to measure the cost of employee service received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exception). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award (usually the vesting period). A public entity will initially measure
the cost of employee services received in exchange for an award of a liability
instrument based on its current fair value; the fair value of that award will be
remeasured subsequently at each reporting date through the settlement date.
Changes in fair value during the requisite service period will be recognized as
compensation over that period. The grant-date for fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of these instruments. We will be
required to comply with this pronouncement for periods beginning after December
15, 2005.
Effects of Inflation and Pricing
The oil and natural gas industry is very cyclical and the demand for
goods and services of oil field companies, suppliers and others associated with
the industry puts extreme pressure on the economic stability and pricing
structure within the industry. Typically, as prices for oil and natural gas
increase, so do all associated costs. Material changes in prices impact the
current revenue stream, estimates of future reserves, borrowing base
calculations of bank loans and value of properties in purchase and sale
transactions. Material changes in prices can impact the value of oil and natural
gas companies and their ability to raise capital, borrow money and retain
personnel. While we do not currently expect business costs to materially
increase, continued high prices for oil and natural gas could result in
increases in the cost of material, services and personnel.
Management's Discussion and Analysis of Results of Operations as of June 30,
2005
Recent Developments
During the quarter we completed construction of Dolinnoe-3 well, which
commenced on January 26, 2005. Preliminary tests indicated the presence of five
oil bearing zones. Inside the producing intervals core sampling, hydrodynamic
and field geophysical research and formation testing were completed and oil and
gas flow was discovered. Works for more extensive testing are currently under
way. To start test production on the Dolinnoe-3 well, we constructed a flow line
from the well to the oil collection center in the Dolinnoe field and installed a
wellhead heater. Presently, we have penetrated two bearing zones in Dolinnoe-3
well. We plan to perforate and test the other productive zones.
Subsequent to construction of the Dolinnoe-3 well, we undertook
operations to reenter the Aksaz-4 well which was drilled to a depth of 4,080
meters, but abandoned during the Soviet Union period due to lack of financing.
We performed initial underground workover of Aksaz-4 well with the purpose of
examining the condition of the drilled well bore and its preparation for further
drilling. On May 13, 2005, we commenced drilling operations on the Aksaz-4 well.
While drilling, we performed geophysical, geological and technical studies and
core sampling of Triassic formations. On the basis of available geological
information including the data obtained from the 3D seismic survey, a structure
with a probability of oil bearing capacity was discovered in Paleozoic
formations. As of August 2, 2005 drilling of the well has almost been completed.
33
During the first quarter we also continued workover of four wells which
are currently under testing and test production. We removed geophysical
equipment abandoned in the Dolinnoe-1 well and penetrated to deeper productive
horizons perforating two additional oil bearing zones.
At the Dolinnoe-2 well we perforated the second, third and fourth
horizons using high-powered perforating charges. On June 14, 2005 the well was
put on test production.
In June 2005 we performed a second perforation on the Emir-1 well to
provide more penetration capability and preparations for hydraulic fracturing of
this well with acid treatment were performed.
Repair works are also under way on the Aksaz-1 well to liquidate the
drill string-casing annulus and isolate a water-bearing horizon.
Outlook
During the remainder of the fiscal year, we will continue work over and
research operations on the existing five wells in the ADE Block. During the
upcoming quarter we also plan to complete construction of the Aksaz-4 well and
put it into test production.
In order to increase production rates in existing wells we plan to
employ new technological methods, including the use of specially formulated
acidic compositions for use when conducting hydraulic fracturing and treatment
on the wells of Dolinnoe and Emir fields. By utilizing acidic compositions that
are specifically adjusted to the properties of the geological structures, oil
content and downhole temperatures at each well, we anticipate improved results
from fracturing and increased oil production. During the upcoming quarters we
plan conduct hydraulic fracturing on the Emir-1 and Dolinnoe-2 wells. We plan to
undertake similar operations on Dolinnoe-1 and Dolinnoe-3 wells as well.
We also plan to explore opportunities for radial and horizontal
drilling and have retained the services of several leading scientific and
research project institutes to assist us.
During the first quarter we retained Chapman Petroleum Engineering LTD
("Chapman") to perform reserve and economic evaluations of oil and gas
properties in the Extended Territory. Chapman will perform the evaluation based
on the results of reinterpretation of 2D seismic data. Additionally in April
2005, we concluded a contract on 3D seismic field works in the Extended
Territory. Results of reserve evaluation by Chapman and the 3D seismic survey
will allow us to have sufficient information to evaluate the oil and gas
reserves of the Extended Territory, and prepare an efficient work program for
further exploration and development of the Extended Territory. We have commenced
well inspection and hydro-testing of a production string at Kariman-1 well
drilled during Soviet times in the Extended Territory to the depth of Jurassic
formations with the purpose of its probable deepening down to the oil-bearing
Triassic deposits.
We invested approximately $6 million in exploration and development of
our properties during the three months ended June 30, 2005. We expect to invest
an additional $4 million to $8 million in exploration and development during the
remainder of the current fiscal year. We anticipate the need to raise an
additional $40,000,000 to support exploration and development activities before
we expect income from oil production to be sufficient to meet our needs for
operating capital.
Our outlook as described above is subject to change based upon factors
that include, but are not limited to, drilling results, commodity prices, access
to capital and other factors referred to in "Forward Looking Statements."
34
We have and will continue to seek to increase our proven reserves
through continued exploration of our properties, as well as the acquisition of
other properties with exploration and production potential.
For us to operate profitability and grow in the future we need to
obtain additional capital either through additional fund raising or through
significantly increased production. Our revenue, profitability and future growth
depend substantially on factors beyond our control, such as economic, political
and potential regulatory and competition from other sources of energy. Oil and
natural gas prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for oil or natural gas could
materially and adversely affect our financial position, results of operations,
the quantities of oil and natural gas reserves that we can economically produce,
the markets into which we can sale our oil and our access to additional capital.
In a worst case scenario, future drilling operations could be largely
unsuccessful, oil and gas prices could sharply decline, we could fail to gain
access to the world oil markets and/or other factors beyond our control could
cause us to modify or substantially curtail our exploration and development
plans, which could negatively impact our earnings, cash flow and most likely the
trading price of our securities.
Results of Operations
This section includes discussion of our results of operations for the
three-month period ended June 30, 2005 as compared to the same period of the
prior year.
Three months ended June 30, 2005, compared to the three months ended
June 30, 2004
Revenue and Production
The following table summarizes production volumes, average sales prices
and operating revenue for our oil and natural gas operations for the three
months ended June 30, 2005 and the three months ended June 30, 2004.
35
Three months ended
June 30, 2005
to the three months ended
June 30, 2004
-----------------------------
$ %
For the three For the three
Months ended months ended Increase Increase
June 30, 2005 June 30, 2004 (Decrease) (Decrease)
------------------ -------------------- ------------ -------------
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 41,456 11,405 30,051 263
Barrels of Oil equivalent (BOE) - - - -
Average Sales Price
Natural gas ($ per Mcf) $ - $ - $ -
-
Natural gas liquids ($ per Bbl) $ - $ - $ -
-
Oil and condensate ($ per Bbl) $ 17.98 $13.22 $ 4.76 36
Barrels of Oil equivalent
($ per BOE) $ - $ - $ -
-
Operating Revenue:
Natural gas $ - $ - $ - -
Natural gas liquids - - - -
Oil and condensate 662,637 118,949 543,688 457
Gain on hedging and derivatives(1) - - - -
--------------- -------------------- ------------ -------------
Total $662,637 $ 118,949 $ 543,688 457
=============== ==================== ============ =============
- ----------------
(1) We did not engage in hedging transactions, including derivatives during
the three months ended June 30, 2005, or the three months ended June
30, 2004.
Revenues. We generate revenue under our contract from the sale of oil
and natural gas recovered during test production. During the three months ended
June 30, 2005 and 2004, 100% of our revenue was generated from the sale of crude
oil. During our first fiscal quarter 2005 we realized revenue from oil and gas
sales of $662,637 compared to $118,949 during our first fiscal quarter of 2004.
This increase in revenues is primarily the result of two facts. First, we
performed workover of re-entered wells and drilled two additional wells, both of
which led to increased production volume. Second, oil price in the domestic
market increased 36% during the three months ended June 30, 2005. We anticipate
production will continue to increase in the upcoming fiscal quarters. If
production increases and oil prices remain constant or continue to increase, we
expect revenue will continue to increase in the upcoming quarters. At the
present time, however, it is unclear the rate at which our production and
corresponding revenues may increase.
Our revenue is sensitive to changes in prices received for our
products. Our production is sold at the prevailing market price in Kazakhstan,
which fluctuates in response to many factors that are outside our control.
Imbalances in the supply and demand for oil can have a dramatic effect on the
prices we receive for our production. Political instability, the economy,
weather and other factors outside our control could impact supply and demand.
Costs and Operating Expenses
The following table presents a detail of our expenses for the three
months ended June 30, 2005 and 2004:
For the three months ended For the three months ended
June 30, 2005 June 30, 2004
-------------------------- --------------------------
Expenses:
Oil and gas operating(1) $ 37,811 $ 24,322
Selling 42,462 8,436
Depreciation, depletion and
amortization 60,367 9,125
General and administrative 1,001,238 550,950
Total $1,141,878 $ 592,833
============================= =================================
Expenses ($ per BOE):
Oil and gas operating(1) 1.03 2.70
Depreciation, depletion and
amortization(2) 0.81 -
- ----------------
(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas
properties only.
36
Production Expenses. During the three months ended June 30, 2005, we
incurred $67,740 in production expenses compared to $24,322 during the three
months ended June 30, 2004. A significant portion of the increase in production
expenses is attributable to accrual of depletion. During the first quarter we
accrued $29,929 depletion expenses of oil and gas properties. Additionally
production cost increased as a result of hiring more production and maintenance
personal and repair overhead. We expect production expenses to continue to
increase in the upcoming fiscal quarters. At the present time, however, it is
unclear the rate at which our production expenses may increase in upcoming
fiscal quarters.
Selling Expenses. We incurred selling expenses of $42,462 during the
three months ended June 30, 2005 compared to $8,436 during the three months
ended June 30, 2004. The increase in selling expenses is nearly proportional to
the increase in revenue during the comparable quarters as we incurred. We
transport oil produced in oilfields to railway terminals in oil tankers which
are under operational lease. Consequently we use more gasoline and incur more
overhead. We expect selling expenses to continue to increase in the upcoming
fiscal quarters as revenue continues to increase. At the present time, however,
it is unclear the rate at which our production expenses may increase in the
upcoming fiscal year.
General and Administrative Expenses. General and administrative
expenses during the three months ended June 30, 2005 were $1,001,238 compared to
$550,950 during the three months ended June 30, 2004. This represents a 82%
increase in general and administrative expenses. This significant increase is
attributable to a 140% increase in payroll and other compensation, a 139%
increase in rent expenses, a 89% increase in professional services fees, a 22%
increase in taxes, a 52% increase in transportation, a 1,314% increase in
insurance expense, a 19% increase in communication expenses and a 80% increase
in other expenses. The significant increase in general and administrative
expenses is largely the result of hiring more personnel to operate our business,
using services of technicians, engineers, accountants and lawyers, as well as
incurring other general corporate expenses. We anticipate general and
administrative expenses will increase in the upcoming fiscal quarters. However,
we do not expect general and administrative expenses to increase at such a
significant rate in the upcoming quarters. We anticipate increases in revenue,
operating costs and selling costs will outpace the increase in general and
administrative expenses in the upcoming quarters.
In April 2005 we elected to relocate our U.S. offices to Salt Lake
City. Consequently we plan to sublease our office space in New York City to
another company. We also reduced the number of employees we have in our U.S.
office. We believe these measures will reduce our rent, taxes and other relevant
expenses in the upcoming fiscal quarters.
Loss from Operations. During the three months ended June 30, 2005 we
realized a loss from operations of $479,241 compared to a net loss from
operations of $473,884 during the three months ended June 30, 2004. We realized
a 457% increase in revenue during the three months ended June 30, 2005 compared
to the comparable period 2004. This increase was offset by a 179% increase in
production cost and an 82% increase in general and administrative expenses,
which resulted in a 1% increase in loss from operations during the quarter ended
June 30, 2005 compared to the quarter ended June 30, 2004. Until such time as
revenue from oil and gas sales exceeds expenses we will continue to generate
operating losses. At this time, it is unclear when we will generate sufficient
oil and gas to offset our expenses.
37
Other Expense. During the three months ended June 30, 2005 we realized
total other expense of $58,561 compared to total other expense $168,224 for the
three months ended June 30, 2004. This decrease in other expense is largely
attributable to $7,864 increase in realized gains on marketable securities, a
$296,158 increase in unrealized gain on marketable securities and our realizing
interest income of $9,138, partially offset by a $210,069 decrease in exchange
gain resulting from fluctuations of foreign currency rates against the U.S.
Dollar. Also during the three months ended June 30, 2005 we received
approximately $5.2 million for securities sold during a private placement
transaction completed on March 31, 2005. Therefore, at times during the quarter,
we had funds that were not being used in operations that we invested in
marketable securities. We anticipate the funds held in marketable securities
will be used to fund our operations and therefore expect gains from marketable
securities, both realized and unrealized, to decrease in upcoming quarters.
Net Loss. During the three months ended June 30, 2005 we realized a net
loss of $537,802 compared to a net loss of $602,206 for the three months ended
June 30, 2004. This reduction in net loss is largely attributable to the
significant increase in revenue resulting from increased oil and gas production
during the quarter ended June 30, 2005. While our production and revenues are
increasing, we will continue to realize net losses from operations until such
time as revenues generated from oil and gas production and sales and other
income offset our expenses. At this time, it is unclear when, or if, that may
occur.
Liquidity and Capital Resources
Funding for our activities has historically been provided by funds
raised through the sale of our common stock. From inception on May 6, 2003
through June 30, 2005, we have raised $44,437,719 through the sale of our common
stock and proceeds from the issuance of convertible debt. As of June 30, 2005,
we had cash and cash equivalents of $7,885,926. We anticipate our capital
resources in the upcoming quarters will likewise consist primarily of funds
raised in financing activities and revenue from the sale of oil and gas
recovered during test production.
Our need for capital, in addition to funding our ongoing operations, is
primarily related to the exploration and development of our properties as
required under our contract, and the potential acquisition of additional oil and
gas properties. For the period from inception on May 6, 2003 through June 30,
2005, we have incurred capital expenditures of $48,955,938 for exploration,
development and acquisition activities.
Cash Flows
During the three months ended June 30, 2005 cash was primarily used to
fund exploration and development expenditures. We had a net decrease in cash and
cash equivalents of $2,103,706 during the quarter. See below for additional
discussion and analysis of cash flow.
Three months ended Three months ended
June 30, 2005 June 30, 2004
------------------ ------------------
Net cash used in operating activities $(2,086,880) $(839,491)
Net cash used in investing activities (6,102,444) (982,087)
Net cash provided by financing activities 6,085,618 -
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $(2,103,706) $(1,821,578)
================== ==================
38
Our primary source of cash has been cash proceeds from equity
offerings. During the three months ended June 30, 2005 we received cash proceeds
of $5,221,685 from the subscriptions received during our private placement that
concluded on March 31, 2005. We primarily used this cash to fund our capital
expenditures. At June 30, 2005 we had cash on hand of $7,885,926.
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the fiscal 2005 year
are $10 million to $14 million for exploration, development, production and
acquisitions. We expect to fund these expenditures primarily from additional
capital we will seek and cash on hand. In the event we are not successful in
raising the anticipated funds from the sale of our securities, we nevertheless
believe capital expenditures of approximately $10 million to $14 million could
be financed through cash on hand, the sale of marketable securities and revenues
from anticipated oil production. The minimum level of capital expenditures on
our properties is dictated by the contract. The amount of funds we devote to any
particular activity in excess of the minimum required capital expenditures may
increase or decrease significantly depending on available opportunities, cash
flows and development results, among others.
If we are not successful in obtaining funding, we anticipate that we
will instead seek to develop existing wells and infrastructure in hopes of
generating sufficient revenue to finance our operations. This development would
be funded by cash and cash equivalents and the sale of marketable securities we
currently hold. If the funding is limited to these sources, our anticipated
development activities would be significantly more limited than anticipated
under our present business plan.
We hold marketable securities consisting of short-term repurchase
agreements for securities issued by Kazakhstan banks and Kazakhstan financial
institutions. Additionally, certain operating cash flows are denominated in
local currency and are translated into U.S. dollars at the exchange rate in
effect at the time of the transaction. Because of the potential for civil
unrest, war and asset expropriation, some or all of these matters, which impact
operating cash flow, may affect our ability to meet our short-term cash needs.
Contractual Obligations and Contingencies
The following table lists our significant commitments at June 30, 2005
as listed on our consolidated balance sheet:
Payments Due By Period
--------------------------------------------------------------------------
Contractual obligations Total Less than 1 1-3 years 4-5 years After 5
year years
--------------- -------------- --------------- -------------- ------------
Capital Expenditure $19,800,000 $9,300,000 $10,500,000 - -
Commitment(1)
Due to the Government of
the Republic of Kazakhstan(2)(3) $5,994,200 - $ 5,994,200 - -
Due to Reservoir Consultants $500,000 $278,000 $222,000 - -
Liquidation Fund $100,973 - - - $100,973
Office Lease $165,010 $82,505 $82,505 - -
- ----------------
(1) Under the terms of our contract with the ROK, we are required to spend
a total of at least $19.8 million dollars in exploration, development
and improvements within the ADE Block, as extended during the term of
the license, including $9.3 million in the 2005 calendar year, $6
million in the 2006 calendar year and $4.5 million in the 2007 calendar
year. If we fail to do so, we may be subject to the loss of our
exploration license.
39
(2) In connection with our acquisition of the oil and gas contract covering
the ADE Block, we are required to repay the ROK for historical costs
incurred by it in undertaking geological and geophysical studies and
infrastructure improvements. The repayment terms of this obligation
will not be determined until such time as we apply for and are granted
commercial production rights by the ROK. Under our contract, if we wish
to commence commercial production, we must apply for such right prior
to the expiration of our exploration and development rights in June
2007. We are legally entitled to receive commercial production rights
and have the exclusive right to negotiate such with the ROK, and the
ROK is required to conduct the negotiations under the Law of Petroleum
in Kazakhstan. Although we can apply for commercial production rights
at any time, we enjoy certain benefits under our contract that
currently make it more economically advantageous for us to continue
exploration and development activities at this time. We anticipate that
we will apply for commercial production rights sometime during the
first half of the 2007 calendar year. Should we decide not to pursue a
commercial production contract, we can relinquish the ADE Block to the
ROK in satisfaction of this obligation.
(3) As with the ADE Block, we will also be required to repay the ROK its
historical costs for access to and use of geological and geophysical
data gathered and infrastructure improvement previously made by the ROK
within the Extended Territory. We are presently negotiating the amount
and terms of this obligation with the ROK. This approximately $6
million obligation represents only our repayment obligation with
respect to the ADE Block, and not the extended territory.
Off-Balance Sheet Financing Arrangements
As of June 30, 2005, we had no off-balance sheet financing
arrangements.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued Statement 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion 20, "Accounting Changes" and
FASB Statement 3, "Reporting Accounting Changes in Interim Financial
Statements." This Statement changes the requirements for the accounting for and
reporting of a change in accounting principle. Opinion 20 previously required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to
the new accounting principle. This statement requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period specific effects or
the cumulative effect of the change. This statement is effective for accounting
changes and corrections of errors made in fiscal periods that begin after
December 15, 2005 and will not impact the our financial position or results of
operations, and cash flows.
Financial Statements
See Consolidated Financial Statements listed in the accompanying index
to the Consolidated Financial Statements on Page F-1 herein.
40
Litigation
In December 2003, a complaint was filed in the 15th Judicial Court in
and for Palm Beach County, Florida, naming, among others, us, Georges Benarroch
and Alexandre Agaian, current or former BMB directors, as defendants. The
plaintiffs, Brian Savage, Thomas Sinclair and Sokol Holdings, Inc., allege
claims of breach of contract, unjust enrichment, breach of fiduciary duty,
conversion and violation of a Florida trade secret statute in connection with a
business plan for the development Aksaz, Dolinnoe and Emir oil and gas fields
owned by Emir Oil, LLC. The plaintiffs seek unspecified compensatory and
exemplary damages.
We will vigorously defend ourselves in this action and challenge the
merit of each claim alleged by plaintiffs. We have retained the law firm of
Gunster, Yoakley & Stewart, P.A., located in Fort Lauderdale, Florida to
represent the defendants in connection with this litigation. We have filed
motions to dismiss the plaintiffs' complaint on jurisdictional grounds. The
motions were scheduled for hearing in late August 2004, however, that hearing
has been stayed by stipulation of the parties to allow the parties to conduct
jurisdictional discovery. The hearing has not yet been rescheduled by the
parties. No discovery on the merits of the claims has begun and no trial date
has been set by the court.
Based on the same set of facts alleged in the Florida case, in April
2005, Sokol Holdings, Inc., also filed a complaint in United States District
Court, Southern District of New York alleging that the Company, Boris
Cherdabayev, Alexandre Agaian, Bakhytbek Baiseitov, Mirgali Kunayev and Georges
Benarroch, wrongfully induced Toleush Tolmakov to breach a contract under which
Tolmakov had agreed to sell to Sokol 70% of his 90% interest in Emir Oil LLP. In
the complaint, Sokol seeks damages in an unspecified amount exceeding $75,000 to
be determined at trial, punitive damages, specific performance in the form of an
order compelling BMB to relinquish its interest in Emir and the underlying
interest in the ADE fields to Sokol and such other relief as the court finds
just and reasonable.
We have retained the law firm of Bracewell & Giuliani located in New
York, New York to represent us in the lawsuit. We intend to answer the complaint
and to vigorously defend ourselves on jurisdictional grounds and on the merits.
The plaintiff has not named Tolmakov as a defendant in the action nor has the
plaintiff ever brought claims against Tolmakov to establish the existence or
breach of any legally binding agreement between the plaintiff and Tolmakov. A
scheduling conference has been set for August 12, 2005.
In the opinion of management, the resolution of this lawsuit will not
have a material adverse effect on our financial condition, results of operations
or cash flows.
Other than the foregoing, to the knowledge of management, there is no
other material litigation or governmental agency proceeding pending or
threatened against the Company or our management.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
41
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION
We file annual and quarterly reports with the Securities and Exchange
Commission. Stockholders may obtain, without charge, a copy of the most recent
Form 10-KSB (without exhibits) by requesting a copy in writing from us at the
following address:
BMB Munai, Inc.
324 South 400 West, Suite 250
Salt Lake City, Utah 84101
The exhibits to the Form 10-KSB are available upon payment of charges
that approximate reproduction costs. If you would like to request documents,
please do so by October 20, 2005, to receive them before the annual meeting of
stockholders.
By order of the Board of Directors,
/s/ Boris Cherdabayev
Boris Cherdabayev, Chairman of the Board
October 4, 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.
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of BDO Kazakhstanaudit, Independent Registered Public
Accounting Firm............................................................F-2
Consolidated Balance Sheets as of March 31, 2005 and 2004....................F-3
Consolidated Statements of Loss for the year ended March 31, 2005
and the period from inception (May 6, 2003) to March 31, 2004..............F-4
Consolidated Statements of Shareholders' Equity for the year
ended March 31, 2005 and the period from inception (May 6, 2003)
to March 31, 2004..........................................................F-5
Consolidated Statements of Cash Flow for the year ended March 31,
2005 and the period from inception (May 6, 2003) to March 31, 2004.........F-6
Notes to Consolidated Financial Statements for the year ended
March 31, 2005 and the period from inception (May 6, 2003) to
March 31, 2004.............................................................F-7
Consolidated Balance Sheets as of June 30, 2005 and March 31, 2005
(audited).................................................................F-28
Unaudited Consolidated Statements of Loss for the three months
ended June 30, 2005 and 2004 and the period from inception
(May 6, 2003) to June 30, 2005............................................F-29
Unaudited Consolidated Statements of Cash Flows for the three
months ended June 30, 2005 and June 30, 2004 and the period
from inception (May 6, 2003) to June 30, 2005.............................F-30
Notes to Unaudited Consolidated Financial Statements for the
three months ended June 30, 2005 and 2004 and the period from
inception (May 6, 2003) to June 30, 2005..................................F-31
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
BMB Munai, Inc.
We have audited the accompanying consolidated balance sheet of "BMB Munai" Inc.
(a company in the development stage) as of March 31, 2005, and the related
consolidated statements of loss, shareholders' equity, and cash flows for the
year ended March 31, 2005 and for the period from inception (May 6, 2003)
through March 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 audit.
We conducted an audit 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 misstatements. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for purposes of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BMB Munai, Inc. at
March 31, 2005 and the consolidated results of its operations and its cash flow
for the period from inception (May 6, 2003) through March 31, 2005 in conformity
with accounting principles generally accepted in the United States of America.
BDO Kazakhstanaudit, LLP
June 13, 2005
Almaty, Kazakhstan
F-2
BMB MUNAI, INC
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31
- ------------------------------------------------------------------------------------------------------------
Notes 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents 6 $ 9,989,632
Marketable securities 7 788,921
Trade accounts receivable 132,400
Inventories 8 3,227,411
Prepaid expenses, net 9 4,172,291
------------
Total current assets 18,310,655
------------
NON-CURRENT ASSETS
Oil and gas properties, full cost method, net 11 42,964,359
Other fixed assets, net 12 683,459
Intangible assets, net 13 14,435
Restricted cash 14 60,973
------------
Total non-current assets 43,723,226
------------
TOTAL ASSETS $ 62,033,881
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 18 $ 5,844,639
Due to reservoir consultants 14 278,000
Taxes payable 333,063
Due to Astana Fund 10 250,000
Accrued liabilities and other payables 291,969
------------
Total current liabilities 6,997,671
------------
LONG TERM LIABILITIES
Due to reservoir consultants 14 222,000
Liquidation fund 14 60,973
Deferred income tax liabilities 5 343
------------
Total long term liabilities 283,316
------------
COMMITMENTS AND CONTINGENCIES 19 -
SHAREHOLDERS' EQUITY
Share capital 16 30,514
Additional paid-in capital 16 58,460,520
Deficit accumulated during the development stage (3,738,140)
------------
Total shareholders' equity 54,752,894
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 62,033,881
============
See notes to the consolidated financial statements.
F-3
BMB MUNAI, INC
(A Development Stage Entity)
CONSOLIDATED STATEMENTS OF LOSS
- -----------------------------------------------------------------------------------------------------------------------------
Period from Period from
inception inception
Year ended (May 6, 2003) (May 6, 2003)
March 31, through through
Notes 2005 March 31, 2004 March 31, 2005
------------ -------------- --------------
REVENUES 4 $ 973,646 $ - $ 973,646
EXPENSES
Production 265,149 - 265,149
Selling 206,929 - 206,929
General and administrative 4,060,962 781,757 4,842,719
Amortization and depreciation 66,451 4,758 71,209
------------ ---------- ------------
Total expenses 4,599,491 786,515 5,386,006
------------ ---------- ------------
LOSS FROM OPERATIONS (3,625,845) (786,515) (4,412,360)
OTHER INCOME (EXPENSE)
Realized gain on marketable securities 185,067 19,368 204,435
Unrealized gain (loss) on marketable
securities (252,767) 248,407 (4,360)
Foreign exchange gain, net 499,521 70,949 570,470
Interest income, net 17,799 (84,007) (66,208)
Other income, net 52,210 - 52,210
------------ ---------- ------------
Total other income (expenses) 501,830 254,717 756,547
------------ ---------- ------------
LOSS BEFORE INCOME TAXES (3,124,015) (531,798) (3,655,813)
INCOME TAX EXPENSE 5 (343) - (343)
------------ ---------- ------------
LOSS BEFORE MINORITY INTEREST (3,124,358) (531,798) (3,656,156)
MINORTIY INTEREST 15 - 81,984 81,984
------------ ---------- ------------
NET LOSS $ (3,124,358) $ (613,782) $ (3,738,140)
============ ========== ============
WEIGHT AVERAGE COMMON SHARES
OUTSTANDING 17 26,948,437 7,398,240
LOSS PER COMMON SHARE (BASIC AND
DILUTED) 17 $ 0.116 $ 0.083
============ ==========
See notes to the consolidated financial statements.
F-4
BMB MUNAI, INC
(A Development Stage Entity)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Notes Number of Share Additional Deficit Total
shares capital paid-in accumulated
capital during the
development
stage
---------- -------- ------------ ------------ ------------
At May 6, 2003 (Inception date) 491,655 $ 492 $ (492) $ - $ -
Stock dividends 50,000 50 (50) - -
Common stock issued during
the merger 14,285,844 14,286 (14,286) - -
Conversion of debt to common
stock 571,428 571 1,999,429 - 2,000,000
Common stock issued in
private placement 4,830,494 4,830 9,931,044 - 9,935,874
Options exercised 200,000 200 199,800 - 200,000
Net loss for the period - - - (613,782) (613,782)
---------- -------- ------------ ------------ ------------
At March 31, 2004 20,429,421 20,429 12,115,445 (613,782) 11,522,092
Common stock issued in
exchange of 30% shares of
Emir Oil LLC 16 3,500,000 3,500 19,071,500 - 19,075,000
Common stock issued in
private placement 16 6,584,340 6,585 27,273,575 - 27,280,160
Common stock issued for
subscription 16 1,101,000 1,101 5,503,899 - 5,505,000
Subscription receivable 16 (1,101,000) (1,101) (5,503,899) - (5,505,000)
Net loss for the year - - - (3,124,358) (3,124,358)
---------- -------- ------------ ------------ ------------
At March 31, 2005 30,513,761 $ 30,514 $ 58,460,520 $ (3,738,140) $ 54,752,894
========== ======== ============ ============ ============
See notes to the consolidated financial statements.
F-5
BMB MUNAI, INC
(A Development Stage Entity)
CONSOLIDATED STATEMENTS OF CASH FLOW
- -------------------------------------------------------------------------------------------------------------------------------
Period from Period from
inception inception
(May 6, 2003) (May 6, 2003)
Year ended through through
Notes March 31, 2005 March 31, 2004 March 31, 2005
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,124,358) $ (613,782) $ (3,738,140)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortisation 133,903 4,758 138,661
Provision for doubtful accounts 129,051 - 129,051
Minority interest 15 (82,134) 82,134 -
Deferred income tax liabilities 5 343 - 343
Unrealized gain on dealing securities 252,767 (248,407) 4,360
Changes in operating assets and liabilities
Decrease / (increase) in dealing securities 1,837,448 (2,630,729) (793,281)
Increase in accounts receivable (132,400) - (132,400)
Increase in inventories (3,043,527) (183,884) (3,227,411)
Increase in prepaid expenses (3,758,022) (522,148) (4,280,170)
Increase in accounts payable and other accruals 6,371,925 750,726 7,122,651
------------- ------------- -------------
Net cash used in operations (1,415,004) (3,361,332) (4,776,336)
Interest paid - (84,007) (84,007)
------------- ------------- -------------
Net cash used in operating activities (1,415,004) (3,445,339) (4,860,343)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas properties (17,411,861) (6,253,186) (23,665,047)
Acquisition of other fixed assets (536,700) (264,411) (801,111)
Acquisition of intangible assets (12,345) (5,411) (17,756)
Restricted cash (40,973) (20,000) (60,973)
Deposits - (21,172) (21,172)
------------- ------------- -------------
Net cash used in investing activities (18,001,879) (6,564,180) (24,566,059)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 16 27,280,160 9,935,874 37,216,034
Proceeds from short-term financing - 500,000 500,000
Repayment of short-term financing - (500,000) (500,000)
Proceeds from issuance of convertible debt - 2,000,000 2,000,000
Proceeds from exercise of common stock options - 200,000 200,000
------------- ------------- -------------
Net cash provided by financing activities 27,280,160 12,135,874 39,416,034
------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,863,277 2,126,355 9,989,632
CASH AND CASH EQUIVALENTS at beginning of year 2,126,355 - -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS at end of year 6 $ 9,989,632 $ 2,126,355 $ 9,989,632
============= ============= =============
Non cash transactions:
Conversion of debt into common stock $ - $ 2,000,000
Accrual of liabilities to Astana Fund 10 $ 250,000 $ -
Acquisition of 30% of Emir Oil LLP by issuance of
3,500,000 shares of common stock 16 $ 19,075,000 $ -
See notes to the consolidated financial statements.
F-6
BMB MUNAI, INC
(A Development Stage Entity)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
BMB Munai, Inc. (the "Company") was incorporated in Utah in July 1981. The
Company later changed domicile to Delaware on February 7, 1994. Prior to
November 26, 2003, the Company existed under the name InterUnion Financial
Corporation ("InterUnion"). The Company changed domicile from Delaware to
Nevada in December 2004.
On November 26, 2003, InterUnion executed an Agreement and Plan of Merger
(the "Agreement") with BMB Holding, Inc ("BMB"), a private Delaware
corporation, formed for the purpose of acquiring and developing oil and
gas fields in the Republic of Kazakhstan. As a result of the merger, the
shareholders of BMB have obtained control of the Company. BMB was treated
as the acquiror for accounting purposes. A new board of directors was
elected that is comprised primarily of the former directors of BMB
Holding, Inc.
The Company's financial statements presented are a continuation of BMB,
and not those of InterUnion Financial Corporation, and the capital
structure of the Company is now different from that appearing in the
historical financial statements of InterUnion Financial Corporation due to
the effects of the recapitalization.
The Company owns one hundred percent (100%) interest in Emir Oil LLP
("Emir Oil" or "Emir"). Emir Oil is a Limited Liability Partnership formed
under the laws of the Republic of Kazakhstan for the sole purpose of
acquiring the oil and gas exploration license AI No. 1552 (the "License")
and Contract No. 482 for Exploration of Hydrocarbons in
Aksaz-Dolinnoe-Emir oil fields, located in blocks XXXVI-10-C (Partially),
F (Partially) XXXVI-11-A (Partially), D n (Partially) (the "Contract"), in
the Republic of Kazakhstan.
The Company has a Representative office in Almaty, the Republic of
Kazakhstan.
The Company has minimal operations to date and is considered to be in the
development stage. The Company began test production at one well in May
2004 and at two wells in December 2004. In the first quarter of 2005 the
Company completed drilling of one well.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The Company's financial statements present the consolidated results of BMB
Munai, Inc., and Emir Oil LLP, its 100% owned subsidiary (hereinafter
collectively referred to as the "Company"). All significant inter-company
balances and transactions have been eliminated from the Consolidated
Financial Statements.
Emir Oil has a fiscal year ending December 31, which is different from
Company's fiscal year end. All transactions of Emir Oil from the date of
its purchase by BMB (June 7, 2003) through March 31, 2005 are reflected in
the Consolidated Financial Statements and Notes to the Consolidated
Financial Statements.
These consolidated financial statements are prepared in accordance with
United States Generally Accepted Accounting Principles ("US GAAP").
F-7
BMB MUNAI, INC
(A Development Stage Entity)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
Emir Oil maintains its accounting records in Kazakhstan Tenge and prepares
separate statutory financial statements in accordance with accounting
legislation in the Republic of Kazakhstan. Statutory accounting principles
and procedures in Kazakhstan differ from accounting principles generally
accepted under US GAAP. Accordingly, the accompanying Consolidated
Financial Statements, which include Emir Oil's statutory accounting
records, reflect adjustments necessary for such financial statements to be
presented in accordance with US GAAP.
Use of estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the Consolidated
Financial Statements and revenues and expenses during the reporting
period. Accordingly, actual results could differ from those estimates and
affect the results reported in these Consolidated Financial Statements.
Licences and contracts
Emir Oil is the operator of the Aksaz, Dolinnoe and Emir oil and gas
fields in western Kazakhstan (the "ADE Block", the "ADE Fields"). The
Government of the Republic of Kazakhstan (the "Government") initially
issued the license to Zhanaozen Repair and Mechanical Plant on April 30,
1999. On September 23, 2002, the license was assigned to Emir Oil. On June
9, 2000, the contract for exploration of the Aksaz, Dolinnoe and Emir oil
and gas fields was entered into between the Agency of the Republic of
Kazakhstan on Investments and the Zhanaozen Repair and Mechanical Plant.
On September 23, 2002, the contract was assigned to Emir Oil. On September
10, 2004 the Government extended duration of the Contract for exploration
and License for seven years to June 9, 2007. On December 7, 2004 the
Government assigned to Emir Oil exclusive right to explore the additional
territory during the remaining term of the License. The Company is legally
entitled to receive this commercial production contract and has an
exclusive right to negotiate this Contract and the Government is obligated
to conduct these negotiations under the Law of Petroleum in Kazakhstan. If
no terms can be negotiated, the Company has a right to produce and sell
oil, including export oil, under the Law of Petroleum for the term of its
existing contract through June 9, 2007.
Foreign currency translation
Transactions denominated in foreign currencies are reported at the rates
of exchange prevailing at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated to U.S.
dollar at the rates of exchange prevailing at the balance sheet dates. Any
gains or losses arising from a change in exchange rates subsequent to the
date of the transaction are included as an exchange gain or loss in the
Consolidated Statements of Income.
Share-Based Compensation
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. Stock options were granted
to the "selling agents" in the private equity placement transactions and
have been offset to the proceeds as a cost of capital.
F-8
The Company has a stock option plan as described in Note 16. Compensation
expense for options granted to employees is determined based on their fair
values at the time of grant, the cost of which is recognized in the
Consolidated Statement of Income over the vesting periods of the
respective options.
Risks and uncertainties
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market oil and gas.
Currently exports from the Republic of Kazakhstan are primarily dependent
on transport routes either via rail, barge or pipeline, through Russian
territory. Domestic markets in the Republic of Kazakhstan might not permit
world market price to be obtained. However, management believes that over
the life of the project, transportation options will be improved by
further increases in the capacity of the transportation options.
Recognition of revenue and cost
Revenue and associated costs from the sale of oil are charged to the
period when goods were shipped or when ownership title transferred.
Produced but unsold products are recorded as inventory until sold. As of
March 31, 2005 the production unit of the Company - Emir Oil had test
production sales at Kazakhstan domestic market price which is considerably
lower than world market prices.
Income taxes
The Company accounts for income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under the liability method, the effect on previously
recorded deferred tax assets and liabilities resulting from a change in
tax rates is recognized in earnings in the period in which the change is
enacted.
Cash and cash equivalents
The Company considers all demand deposits and money market accounts
purchased with an original maturity of three months or less to be cash and
cash equivalents. The fair value of cash and cash equivalents approximates
their carrying amounts due to their short-term maturity.
Marketable securities
Marketable securities consist of short term repurchase agreements for
securities issued by Kazakhstan banks and Kazakhstan financial
institutions. The Company records these marketable securities as trading
securities and any change in the fair market value is recorded in
earnings.
Trade accounts receivable and prepaid expenses
Accounts receivable and prepaid expenses are stated at their net
realizable values after deducting provisions for uncollectable amounts.
Such provisions reflect either specific cases or estimates based on
evidence of collectability. The fair value of accounts receivable and
prepaid expense accounts approximates their carrying amounts due to their
short-term maturity.
F-9
Inventories
Inventories of equipment for development activities, tangible drilling
materials required for drilling operations, spare parts, diesel fuel, and
various materials for use in oil field operations are recorded at the
lower of cost and net realizable value. Under the full cost method
inventory is transferred to oil and gas properties when used in
exploration, drilling and development operations in oilfields.
Inventories of crude oil are recorded at the lower of cost and net
realizable value. Cost comprises direct materials and, where applicable,
direct labour costs and those overheads, which have been incurred in
bringing the inventories to their present location and condition. Cost is
calculated using the weighted average method. Net realizable value
represents the estimated selling price less all estimated costs to
completion and costs to be incurred in marketing, selling and
distribution.
Oil and gas properties
The Company follows the full cost method of accounting for its costs of
acquisition, exploration and development of oil and gas properties.
Under full cost accounting rules, the net capitalized costs of evaluated
oil and gas properties shall not exceed an amount equal to the present
value of future net cash flows from estimated production of proved oil and
gas reserves, based on current economic and operating conditions,
including the use of oil and gas prices as of the end of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change. If oil and gas prices decline, even if only for a
short period of time, it is possible that impairments of oil and gas
properties could occur. In addition, it is reasonably possible that
impairments could occur if costs are incurred in excess of any increases
in the cost ceiling, revisions to proved oil and gas reserves occur, or if
properties are sold for proceeds less than the discounted present value of
the related proved oil and gas reserves.
All geological and geophysical studies, with respect to the ADE Block have
been capitalized as part of the oil and gas properties.
The Company's oil and gas properties primarily include the value of the
license and other capitalized costs under this method of accounting.
Costs of acquiring unproved leases shall be evaluated for impairment until
such time as the leases are proved or abandoned. In addition, if the sums
of expected undiscounted cash flows are less than net book value,
unamortized costs at the field level will be reduced to a fair value.
Depreciation, depletion and amortization of producing properties is
computed using the unit-of-production method based on estimated proved
recoverable reserves.
Other fixed assets
Other fixed assets are valued at the historical cost adjusted for
impairment loss less accumulated depreciation. Historical cost includes
all direct costs associated with the acquisition of the fixed assets.
F-10
Depreciation of other fixed assets is calculated using the straight line
method based upon the following estimated useful lives:
Constructions 7-10 years
Machinery and equipment 6-10 years
Vehicles 3-5 years
Office equipment 3-5 years
Other 2-7 years
Maintenance and repairs is charged to expenses as incurred. Renewals and
betterments are capitalized.
Other fixed assets of the Company are evaluated for impairment. If the
sums of expected undiscounted cash flows are less than net book value,
unamortized costs of other fixed assets will be reduced to a fair value.
Intangible assets
Intangible assets include accounting and other software. Amortization of
intangible assets is calculated using straight line method upon estimated
useful life ranging from 3 to 4 years.
Restricted cash
Restricted cash includes funds deposited in a Kazakhstan bank and is
restricted to meet possible environmental obligations according to the
regulations of the Republic of Kazakhstan. The fair value of these funds
approximates their carrying amounts as amount and conditions of deposited
funds governed by the Government of the Republic of Kazakhstan (see Note
14).
Comparative figures
The presentation of certain amounts for previous year has been
reclassified to conform to the presentation adopted for the current year.
Recent accounting pronouncements
In June 2004, the FASB issued an exposure draft of a proposed statement,
"Fair Value Measurements" to provide guidance on how to measure the fair
value of financial and non-financial assets and liabilities when required
by other authoritative accounting pronouncements. The proposed statement
attempts to address concerns about the ability to develop reliable
estimates of fair value and inconsistencies in fair value guidance
provided by current US GAAP, by creating a framework that clarifies the
fair value objective and its application in GAAP. In addition, the
proposal expands disclosures required about the use of fair value to
re-measure assets and liabilities. The standard would be effective for
financial statements issued for fiscal years beginning after June 15,
2005. The Company is reviewing The Exposure Draft to determine the
potential impact, if any, on its Consolidated Financial Statements.
In November 2004, the EITF ratified Issue No. 03-13, "Applying the
Conditions in Paragraph 42 of FASB Statement No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, in Determining Whether to
Report Discontinued Operations." The EITF reached a consensus that
classification of a disposed of or held-for-sale component as a
discontinued operation is only appropriate if the ongoing entity (i)
F-11
expects to have no continuing "direct" cash flows, and (ii) does not
retain or expect to retain an interest, contract or other arrangement
sufficient to enable it to exert significant influence over the disposed
component's operating and financial policies after the disposal
transaction. Application of this consensus did not have a material impact
on the Company's Consolidated Financial Statements.
In December 2004, the FASB issued Statement 153, "Exchanges of
Non-monetary Assets", an amendment of APB Opinion 29, "Accounting for
Non-monetary Transactions." This amendment eliminates the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. Under Statement 153, if a non-monetary exchange of
similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. This statement is effective
for non-monetary transactions in fiscal periods that begin after June 15,
2005 and will not impact the Company's financial position or results of
operations, and cash flows.
In December 2004, the FASB issued a revision of SFAS No. 123 "Share-Based
Payment" (No. 123R). The statement establishes standards for the
accounting for transactions in which an entity exchanges its equity
investments for goods and services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity's equity instruments or that may
be settled by the issuance of those equity instruments. The statement does
not change the accounting guidance for share-based payments with parties
other than employees. The statement requires a public entity to measure
the cost of employee service received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exception). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award (usually
the vesting period). A public entity will initially measure the cost of
employee services received in exchange for an award of a liability
instrument based on its current fair value; the fair value of that award
will be remeasured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite service period
will be recognized as compensation over that period. The grant-date for
fair value of employee share options and similar instruments will be
estimated using option-pricing models adjusted for the unique
characteristics of these instruments. The Company will be required to
comply with this pronouncement for periods beginning after December 15,
2005.
3. ACQUISITION
On June 7, 2003, BMB acquired a 70% equity interest in Emir Oil for
$1,300,000. On May 24, 2004, the Company agreed to purchase the remaining
30% interest of its minority interest partner in Emir Oil in exchange for
3,500,000 shares of restricted Company common stock. On August 6, 2004,
the Company issued the 3,500,000 shares to its minority partner in Emir
Oil (see Note 16). The aggregate purchase price was determined to be
$19,075,000 using a price of the Company's common shares on OTCBB on
August 6, 2004 of $5.45 per share. The entire purchase price has been
allocated to oil and gas properties in the accompanying Consolidated
Balance Sheet.
The results of Emir's operations have been included in the Consolidated
Financial Statements since June 7, 2003. Emir had no operations prior to
its acquisition by BMB. Emir holds an oil and gas contract for the ADE
Block. Based on its ownership of Emir Oil, the Company is required to fund
the exploration and development efforts of Emir Oil (see Note 19).
F-12
4. REVENUES
Revenues represent sales of oil and gas during the test of exploration
wells within the domestic market of the Republic of Kazakhstan. Price for
oil and gas in a domestic market of the Republic of Kazakhstan is
substantially lower than world market prices.
5. INCOME TAXES
The income tax charge in the income statement comprised:
2005
Current tax expense $ -
Deferred tax expense 343
-------------------
$ 343
===================
Relationship between tax expenses and accounting loss for the years ended
March 31 are explained as follows:
2005 2004
Loss before income taxes and minority interest $ (3,124,015) $ (531,798)
------------------- -------------------
Expected tax provision (504,227) (129,027)
Add tax effect of:
Permanent differences 495,397 (70,973)
Change in valuation allowance 9,173 200,000
------------------- -------------------
$ 343 $ -
=================== ===================
Deferred taxes reflect the estimated tax effect of temporary differences
between assets and liabilities for financial reporting purposes and those
measured by tax laws and regulations. The components of deferred tax
assets and deferred tax liabilities are as follows:
2005 2004
Deferred tax assets
Loss carryforward $ 209,173 $ 200,000
------------------- -------------------
Deferred tax liabilities:
Unrealised interest income 343 -
Valuation allowance (209,173) (200,000)
------------------- -------------------
Net deferred tax liability $ 343 $ -
=================== ===================
F-13
6. CASH AND CASH EQUIVALENTS
As of March 31 cash and cash equivalents included:
2005
Cash at bank, US Dollars $ 9,982,103
Cash at bank, foreign currency 7,529
-------------------
$ 9,989,632
===================
As of March 31, 2005 the Company pledged cash in amount of $15,567 to
collateralize payment to oil drilling and service company for drilling
services.
7. MARKETABLE SECURITIES
Marketable securities as of March 31 were as follows:
2005
Bonds $ 418,952
Shares 369,969
-------------------
$ 788,921
===================
As of March 31, 2005 the Company pledged all marketable securities to
collateralize payment to oil drilling and service company for drilling
services.
8. INVENTORIES
Inventories as of March 31 were as follows:
2005
Construction material $ 3,103,555
Purchased semi products 59,706
Crude oil produced 7,735
Other 56,415
--------------------
$ 3,227,411
====================
F-14
9. PREPAID EXPENSES, NET
Prepaid expenses as of March 31 were as follows:
2005
Advances for material $ 2,301,074
VAT recoverable 1,217,751
Advances for services 589,944
Other 192,573
Reserves against uncollectible advances and prepayments (129,051)
--------------------
$ 4,172,291
====================
10. DUE TO ASTANA FUND
In 2004 the Government of the Republic of Kazakhstan imposed a liability
in the amount of $250,000 to make cash contributions to the Astana Fund.
The Astana Fund is a government fund used by the Government of the
Republic of Kazakhstan to accumulate cash for construction and development
of Astana, Kazakhstan, the new capital of the Republic of Kazakhstan.
11. OIL AND GAS PROPERTIES, NET
Oil and gas properties as of March 31 were as follows:
2005
Subsoil use right $ 20,788,119
Cost of drilling wells 9,334,021
Professional services received in exploration and development activities 4,798,314
Material and fuel used in exploration and development activities 2,891,765
Infrastructure development costs 1,231,391
Geological and geophysical 653,571
Other capitalized costs 3,334,630
Accumulated depreciation, depletion and amortization (67,452)
--------------------
$ 42,964,359
====================
F-15
12. OTHER FIXED ASSETS, NET
Constructions Machinery Vehicles Office Other Total
and equipment equipment
------------- ------------- --------- --------- -------- ---------
Cost
at April 1, 2004 $ 62,583 $ 114,650 $ 46,450 $ 33,286 $ 7,442 $ 264,411
Additions 23,622 119,550 266,757 95,697 31,074 536,700
Disposals - - - - (95) (95)
-------- --------- --------- --------- -------- ---------
at March 31, 2005 86,205 234,200 313,207 128,983 38,421 801,016
-------- --------- --------- --------- -------- ---------
Accumulated depreciation
at April 1, 2004 - 1,261 2,289 1,039 169 4,758
Charge for the period 10,789 17,025 56,577 22,795 5,708 112,894
Disposals - - - - (95) (95)
-------- --------- --------- --------- -------- ---------
at March 31, 2005 10,789 18,286 58,866 23,834 5,782 117,557
-------- --------- --------- --------- -------- ---------
Net book value at March
31, 2004 62,583 113,389 44,161 32,247 7,273 259,653
======== ========= ========= ========= ======== =========
Net book value at March
31, 2005 $ 75,416 $ 215,914 $ 254,341 $ 105,149 $ 32,639 $ 683,459
======== ========= ========= ========= ======== =========
In accordance with FAS No. 19, Financial Accounting and Reporting by Oil
and Gas Producing Companies, depreciation related to support equipment and
facilities used in exploration and development activities in amount of $
49,764 was capitalized to oil and gas properties.
13. INTANGIBLE ASSETS, NET
2005
Cost
Beginning balance $ 5,411
Additions 12,345
-----------------
Ending balance 17,756
Accumulated depreciation
Beginning balance -
Amortization for the period 3,321
-----------------
Ending balance 3,321
-----------------
Net book value $ 14,435
=================
14. LONG TERM LIABILITIES
a) Due to reservoir consultants
The amount of $222,000 due to reservoir consultants represents a part of
$700,000 contract with PGS Reservoir Consultants payable during 2006. The
Company paid to PGS Reservoir Consultants $200,000 during 2004 and will
pay $278,000 in 2005.
F-16
b) Liquidation fund
Under the laws of the Republic of Kazakhstan, the Company is obligated to
set aside funds for required environmental remediation. As of March 31,
2005 the Company contributed $60,973 to the Liquidation Fund.
15. MINORITY INTEREST
Minority interest represents interest of 30% shareholder of Emir Oil. On
May 24, 2004, the Company agreed to purchase the remaining 30% interest of
its minority interest partner in Emir Oil in exchange for 3,500,000 shares
of restricted Company common stock. On August 6, 2004, the Company issued
the 3,500,000 shares to its minority partner in Emir Oil (see Notes 3 and
16).
2005
Beginning balance $ 82,134
Share of minority for net loss -
Share capital portion of minority -
Recovery of minority interest after purchase of remaining interest (82,134)
-----------------
Ending balance $ -
=================
16. SHARE AND ADDITIONAL PAID IN CAPITALS
Common and preferred stock as of March 31 are as following:
2005 2004
Preferred stock, $0.001 par value
Authorised 20,000,000 20,000,000
Issued and outstanding - -
Common stock, $0.001 par value
Authorised 100,000,000 100,000,000
Issued and outstanding 30,513,761 20,429,421
Reverse merger
During the year ended March 31, 2004, the Company completed a reverse
merger with BMB Holding, Inc. Additionally the Company:
a) Completed a private placement for the total amount of $11,113,562. b)
Converted a $2,000,000 debt to the shareholders of BMB Holding, Inc. into
equity. c) Issued 200,000 shares of stock upon exercise of stock option
worth $200,000. d) Completed a 10 for 1 reverse stock split.
Acquisition
On May 24, 2004, the Company agreed to purchase the remaining 30% interest
of its minority interest partner in Emir Oil in exchange for 3,500,000
shares of restricted Company common stock. On August 6, 2004, the Company
issued the 3,500,000 shares to its minority partner in Emir Oil (see Note
3). The aggregate purchase price was determined to be $19,075,000 using a
F-17
price of the Company's common shares on OTCBB on August 6, 2004 of $5.45
per share. The entire purchase price has been allocated to oil and gas
properties in the accompanying Consolidated Balance Sheet.
Private placements
On July 2, 2004, the Company sold an aggregate of 4,584,340 common shares
of the Company at $4.00 per share in a private placement offering. The
Company received $17,311,906 net of the agent fees and out of pocket
expenses.
On March 9, 2005, the Company sold an aggregate of 2,000,000 common shares
of the Company at $5.00 per share in a private placement offering. The
Company received $9,968,254 net of the agent fees and out of pocket
expenses.
On March 31, 2005, the Company issued for subscription an aggregate of
1,101,000 common shares of the Company at $5.00 per share in a private
placement offering.
Common stocks sold at private placements as of March 31 are as following:
Number of Share price Gross amount Net amount
shares sold raised received
2004
First private placement 4,830,494 $ 2.15-$ 2.50 $ 11,113,562 $ 9,935,874
----------------- ----------------- ------------------
4,830,494 11,113,562 9,935,874
2005
Second private placement 4,584,340 $ 4.00 18,337,360 17,311,906
Third private placement (first
closing) 2,000,000 $ 5.00 10,000,000 9,968,254
Third private placement (second
closing) 1,101,000 $ 5.00 - -
----------------- ----------------- ------------------
7,685,340 28,337,360 27,280,160
12,515,834 $ 39,450,922 $ 37,216,034
================= ================= ==================
The offerings were made only to accredited investors in the United States
under Regulation D and pursuant to Regulation S to non U.S. Persons.
Share-Based Compensation
On November 19, 2003, the Company granted options to the placement agent
for services rendered in connection with a private placement of the
Company's common stock in November 2003. The first option granted the
placement agent the right to purchase up to 200,000 common shares of the
Company at an exercise price of $1.00 per share. The placement agent
exercised this option and purchased 200,000 shares for $200,000 on
December 15, 2003. The second option grants the placement agent the right
to purchase up to 142,857 common shares of the Company at an exercise
price of $3.50 per share. This option expires on November 26, 2008.
In December 2003, the Company granted warrants to a placement agent in
connection with funds raised on the Company's behalf. These warrants grant
the placement agent the right to purchase up to 275,050 shares of the
Company's common stock at an exercise price of $2.15 and 208,000 shares of
the Company's common stock at an exercise price of $2.50 per share. The
warrants expire at the end of June 2005.
F-18
On July 2004, the Company granted warrants to a placement agent in
connection with funds raised on the Company's behalf. These warrants grant
the placement agents the right to purchase up to 458,434 shares of the
Company's common stock at an exercise price of $4.00 per share. The
warrants expire at the first quarter of 2006 calendar year.
During the year ended March 31, 2005 the Board of Directors (the "Board")
of the Company approved an incentive stock option plan (the "plan") under
which directors, officers and key personnel may be granted options to
purchase common shares of the Company. The Company has reserved 5,000,000
common shares for issuance upon the exercise of options granted under the
terms of the plan. The Board determines the exercise price of each option,
provided that no option shall be granted with an exercise price at a
discount to market. The vesting periods established under the plan and the
term of the options are set by the Board. During the third quarter of the
year ended March 31, 2005 the Company granted stock options to its
corporate secretary for the past services rendered. These options grant
the employee the right to purchase up to 60,000 shares of the Company's
common stock at an exercise price of $4.00 per share. The options expire
in five years from the date of grant. Granted options vest immediately.
Compensation expense for options granted to a corporate secretary is
determined based on their fair values at the time of grant, the cost of
which in the amount of $81,000 is recognized in the Consolidated Statement
of Income and Consolidated Balance Sheet.
Stock options and warrants outstanding and exercisable as of March 31 are:
Weighted
Number of Average Exercise
shares price
----------------- -----------------
As of March 31, 2003 - $ -
granted 825,907 2.19
exercised (200,000) 1.00
----------------- -----------------
As of March 31, 2004 625,907 2.57
granted 518,434 4.00
----------------- -----------------
As of March 31, 2005 1,144,341 $ 3.22
================= =================
Stock options and warrants as of March 31, 2005 are:
Options and Warrants outstanding Options and Warrants exercisable
------------------------------------------------------------------------ ----------------------------------
Range of Options and Weighted Weighted Options and Weighted Average
exercise price Warrants Average Average Warrants Exercise Price
Exercise Price Contractual
Life (years)
------------------ ----------------- --------------- ----------------- --------------- ------------------
$ 2.15 - $ 4.00 1,144,341 $ 3.22 2.20 1,144,341 $ 3.22
F-19
The estimated fair value of the stock options and warrants issued were
determined using Black-Scholes option pricing model with the following
assumptions:
2005 2004
Risk-free interest rate 3.20% 2.00%
Expected option life 1 year 3 years
Expected volatility in the price of the Company's common shares 76% 246%
Expected dividends 0% 0%
Weighted average fair value of options and warrants granted
during the year $ 2.22 $ 3.81
17. EARNINGS PER SHARE (BASIC AND DILUTED)
The calculation of the basic and diluted earnings per share is based on
the following data:
2005 2004
Numerator
Net loss for basic and diluted loss per share 3,124,358 613,782
Denominator
Weighted average number of common shares for the purposes of
basic and diluted earnings per share 26,948,437 7,398,240
---------------- ----------------
Loss per share (basic and diluted) $ 0.116 $ 0.083
================ ================
The effect of the stock warrants and stock options is anti-dilutive.
18. RELATED PARTY TRANSACTIONS
2005 2004
Accounts payable $ 503,045 $ 103,231
Prepaid expenses 150,841 -
Services rendered 610,336 2,724,433
Operating lease of land, premises and warehouses 218,428 12,817
Loans received and repaid - 2,500,000
Guarantees received 600,000 -
On September 15, 2003 BMB Holding, Inc. obtained a short-term financing
for covering expenses related to the reverse merger and private placement
from one of its shareholders, Caspian Services Group, Ltd. The loan in the
amount of $500,000 was for a term of six months with the annual interest
rate of 16.5%. This loan was repaid in full on November 26, 2003 from the
proceeds of the private placement.
On May 25, 2004 the Company received a letter of guarantee for drilling of
exploratory wells from KazMorGeofizika CJSC. The letter of guarantee in
the amount of $1,000,000 for the period of drilling works was issued to
the supplier of drilling works and closed on February 15, 2005. On
February 15, 2005 the Company received a letter of guarantee in the amount
of $600,000 from KazMorGeofizika CJSC for drilling of another exploratory
well.
F-20
19. COMMITMENTS AND CONTINGENCIES
Historical investments by the Government of the Republic of Kazakhstan
The Government of the Republic of Kazakhstan made historical investments
in the ADE Block in total amount of $ 5,994,200. When the Company applies
for and is granted commercial production rights for the ADE Block, the
Company will be required to begin repaying these historical investments to
the Government of the Republic of Kazakhstan. The terms of repayment will
be negotiated at the time the Company applies for commercial production
rights.
Capital Commitments
Under the terms of its exploration contract, Emir Oil is required to spend
a total of $32 million in exploration and development activities on the
ADE Block. To retain its rights under the contract, the Company must spend
a minimum of $9.3 million in 2005, $6 million in 2006 and $4.5 million in
2007. The failure to make these minimum capital expenditures could result
in the loss of the contract.
Operating Environment
The Company's principal business unit, Emir Oil, operates within the
Republic of Kazakhstan. Laws and regulations affecting businesses
operating in the Republic of Kazakhstan are subject to rapid changes and
the Company's assets and operations could be at risk in the event of
negative changes in the political and business environment.
Government taxes and legislation in the Republic of Kazakhstan
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 can lead
to imposition of penalties and interest.
Environmental matters
The Company believes it is currently in compliance with all existing
Kazakhstan environmental laws and regulations. However, Kazakhstan
environmental laws and regulations may change in the future.
Pension and retirement plans
Employees of the Company receive pension benefits in accordance with the
laws and regulations of the respective countries. As of March 31, 2005 and
2004 the Company was not liable for any supplementary pensions,
post-retirement, health care, insurance benefits or retirement indemnities
to its current or former employees.
Other matters
In December 2003, a lawsuit was filed in Florida naming the Company as one
of the defendants. The claim of breach of contract, unjust enrichment,
breach of fiduciary duty, conversion and violation of a Florida trade
secret statute in connection with a business plan for the development
Aksaz, Dolinnoe and Emir oil and gas fields owned by Emir Oil. The
plaintiffs seek unspecified compensatory and exemplary damages.
F-21
In April 2005, Sokol Holdings, Inc., filed a complaint in United States
District Court, Southern District of New York alleging that the Company
wrongfully induced Mr. Tolmakov, Director of Emir Oil, to breach a
contract under which Mr. Tolmakov had agreed to sell to Sokol 70% of his
90% interest in Emir Oil LLP. Sokol Holdings, Inc. seeks damages in an
unspecified amount exceeding $75,000 to be determined at trial, punitive
damages, specific performance in the form of an order compelling BMB to
relinquish its interest in Emir and the underlying interest in the ADE
fields to Sokol Holdings, Inc. and such other relief as the court finds
just and reasonable.
The Company is confident that the matters shall be resolved in the
Company's favor. The Company has retained legal counsels to protect its
interests. In the opinion of the Company's management and legal counsels,
the resolution of those lawsuits will not have a material adverse effect
on Company's financial condition, results of operations or cash flows.
20. FINANCIAL INSTRUMENTS
The nature of the Company's operations exposes the Company to fluctuations
in commodity prices, foreign currency exchange rates, credit risk and
country risk. The Company recognizes these risks and manages operations in
a manner such that exposure to these risks minimized to the extent
practical.
As of March 31, 2005 marketable securities of $788,921 are held in short
term repurchase agreements for securities issued by Kazakhstan banks and
Kazakhstan financial institutions. As of March 31, 2005 cash and cash
equivalents include deposits in Kazakhstan banks in the amount $9,090,276.
As of March 31, 2005 the Company made advance payments to Kazakhstan
companies and budget in the amount $4,301,342. As of March 31, 2005 trade
accounts receivable of $132,400 are with the Kazakhstan oil processing
plant. Restricted cash reflected in the long-term assets consists of
$60,973 deposited in a Kazakhstan bank and restricted to meet possible
environmental obligations according to the regulations of Kazakhstan.
Furthermore, the primary asset of the Company is Emir Oil; an entity
formed under the laws of the Republic Kazakhstan.
21. SUBSEQUENT EVENTS
On March 31, 2005, the Company issued for subscription an aggregate of
1,101,000 common shares of the Company at $5.00 per share in a private
placement offering. Pursuant to the offering closing on April 12, 2005 the
Company raised total proceeds of $5,505,000 (see Note 16).
On April 12, 2005, the Company granted warrants to placement agents in
connection with funds raised on the Company's behalf. These warrants grant
the placement agents the right to purchase up to 110,100 shares of the
Company's common stock at an exercise price of $5.00 per share. The
warrants expire on April 11, 2006.
In May and June 2005 a party exercised stock warrants for 275,050 shares
at the exercise price of $2.15 and stock warrants for 109,030 shares at
the exercise price of $2.50.
On May 27, 2005 the Company made a cash contribution of $250,000 to Astana
Fund as a part of the social program of investing activity of the Company
(see Note 10).
F-22
BMB MUNAI, INC
(A Development Stage Entity)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
22. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION
DEVELOPMENT AND PRODUCTION ACTIVITIES (unaudited)
This footnote provides unaudited information required by SFAS No. 69,
"Disclosures about Oil and Natural Gas Producing Activities." The
Company's oil and natural gas properties are located in the Republic of
Kazakhstan, which constitutes one cost center.
Capitalized Costs - Capitalized costs and accumulated depletion,
depreciation and amortization relating to our oil and natural gas
producing activities, all of which are conducted in the Republic of
Kazakhstan, are summarized below:
For the period from
For the year ended inception (May 6, 2003)
March 31, 2005 to March 31, 2004
--------------------------- ---------------------------
Developed oil and natural gas properties $ 43,031,811 $ 6,495,186
Unevaluated oil and natural gas properties - -
Accumulated depletion, depreciation and
amortization (67,452) -
--------------------------- ---------------------------
Net capitalized cost $ 42,964,359 $ 6,495,186
=========================== ===========================
Costs Incurred - Costs incurred in oil and natural gas property
acquisition, exploration and development activities are summarized below:
For the period from
For the year ended inception (May 6, 2003)
March 31, 2005 to March 31, 2004
--------------------------- ---------------------------
Acquisition costs:
Unproved properties $ - $ -
Proved properties 20,788,119 1,713,119
Exploration costs 3,373,092 2,659,872
Development costs 18,870,600 2,122,195
--------------------------- ---------------------------
Subtotal 43,031,811 6,495,186
Asset retirement costs - -
--------------------------- ---------------------------
Total costs incurred $ 43,031,811 $ 6,495,186
=========================== ===========================
Results of Operations - Results of operations for the Company's oil and
natural gas producing activities are summarized below:
For the period from
For the year ended inception (May 6, 2003)
March 31, 2005 to March 31, 2004
--------------------------- ---------------------------
Oil and natural gas revenues $ 973,646 $ -
Operating expenses:
Oil and natural gas operating expenses
and ad valorem taxes 197,697 -
Production taxes - -
Accretion expense - -
Depletion expense 67,452 -
--------------------------- ---------------------------
Results of operations from oil and gas
producing activities $ 708,497 $ -
=========================== ===========================
F-23
Reserves - Proved reserves are estimated quantities of oil and natural
gas, which geological and engineering data demonstrate with reasonable
certainty to be, recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are
proved reserves that can reasonably be expected to be recovered through
existing wells with existing equipment and operating methods. Proved oil
and natural gas reserve quantities and the related discounted future net
cash flows before income taxes (see Standardized Measure) for the periods
presented are based on estimates prepared by Chapman Petroleum Engineering
Ltd., independent petroleum engineers. Such estimates have been prepared
in accordance with guidelines established by the SEC.
The Company's net ownership in estimated quantities of proved oil and
natural gas reserves, and changes in net proved reserves, all of which are
located in the Republic of Kazakhstan, are summarized below:
Natural Gas
(Mcf)
---------------------------------------------------------
For the period from
For the year ended inception (May 6, 2003) to
March 31, 2005 March 31, 2004 (1)
------------------------- ----------------------------
Proved developed and undeveloped
reserves
Beginning of the year - -
Revisions of previous estimates - -
Purchase of oil and gas properties - -
Extensions and discoveries 41,734,000 -
Sales of natural gas properties - -
Production - -
------------------------- ----------------------------
End of year 41,734,000 -
========================= ============================
Proved developed reserves at year end 15,917,000 -
========================= ============================
(1) The Company acquired the ADE Block during the period from inception through
March 31, 2004. During that period, however, the Company had insufficient
geological and engineering data to demonstrate proved reserves with
reasonable certainty during that period.
F-24
Oil, Condensate and Natural Gas Liquids
(MBbls)
---------------------------------------------------------
For the period from
For the year ended inception (May 6, 2003) to
March 31, 2005 March 31, 2004 (1)
------------------------- ----------------------------
Proved developed and undeveloped
reserves
Beginning of the year - -
Revisions of previous estimates - -
Purchase of oil and gas properties - -
Extensions and discoveries 34,026,302 -
Sales of natural gas properties - -
Production 68,755 -
------------------------- ----------------------------
End of year 33,957,547 -
========================= ============================
Proved developed reserves at year end 13,614,000 -
========================= ============================
(1) The Company acquired the ADE Block during the period from inception
through March 31, 2004. During that period, however, the Company had
insufficient geological and engineering data to demonstrate proved
reserves with reasonable certainty during that period.
F-25
Standardized Measure - The Standardized Measure of Discounted Future Net
Cash Flows relating to the Company's ownership interests in proved oil and
natural gas reserves for the period from inception (May 6, 2003) through
March 31, 2004 and for the fiscal year ended March 31, 2005 are shown
below:
For the Period from
For the Year Ended March Inception (May 6, 2003)
31, 2005 to March 31, 2004
--------------------------- ---------------------------
Future cash inflows $ 726,849,000 $ -
Future oil and natural gas operating
expenses 238,912,000 -
Future development costs 41,050,000 -
Future income tax expense 281,326,000 -
--------------------------- ---------------------------
Future net cash flows 165,561,000 -
10% discount factor 50,476,000 -
--------------------------- ---------------------------
Standardized measure of discounted future
net cash flows $ 115,085,000 $ -
=========================== ===========================
Our standardized measure of discounted future net cash flows relating to
proved oil and natural gas reserves were prepared in accordance with the
provisions of SFAS 69. Future cash inflows are computed by applying year
end prices of oil and natural gas to year end quantities of proved oil and
natural gas reserves. Future oil and natural gas production and
development costs are computed by estimating the expenditures to be
incurred in producing and developing the proved oil and natural gas
reserves at year end, based on year end costs and assuming continuation of
existing economic condition.
Future income tax expenses are calculated by applying appropriate year end
tax rates to future pre-tax net cash flows relating to proved oil and
natural gas reserves, less the tax basis of properties involved. Future
income tax expenses give effect to permanent differences, tax credits and
F-26
loss carryforwards relating to the proved oil and natural gas reserves.
Future net cash flows are discounted at a rate of 10% annually to derive
the standardized measure of discounted future net cash flows. The
Standardized Measure of Discounted Future Net Cash Flows is not intended
to represent the replacement cost or fair market value of the Company's
oil and natural gas properties.
Changes in Standardized Measure - Changes in Standardized Measure of
Discounted Future Net Cash Flows relating to proved oil and gas reserves
are summarized below:
For the Period from
For the Year Ended March Inception (May 6, 2003)
31, 2005 to March 31, 2004
---------------------------- ---------------------------
Changes due to current year operations:
Sales of oil and natural gas, net of oil
and natural gas operating expenses - -
Sales of oil and natural gas properties - -
Purchase of oil and gas properties - -
Extensions and discoveries $ 487,937,000 -
Changes due to revisions of standardized - -
variables
Prices and operating expenses - -
Revisions to previous quantity estimates - -
Estimated future development costs 41,050,000 -
Income taxes 281,326,000 -
Accretion of discount 50,476,000 -
Production rates (timing) and other - -
---------------------------- ---------------------------
Net Change 115,085,000 -
Beginning of year - -
---------------------------- ---------------------------
End of year $ 115,085,000 $ -
============================ ===========================
Sales of oil and natural gas, net of oil and natural gas operating
expenses are based on historical pre-tax results. Sales of oil and natural
gas properties, extensions and discoveries, purchases of minerals in place
and the changes due to revisions in standardized variables are reported on
a pre-tax discounted basis, while the accretion of discount is presented
on an after tax basis.
F-27
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
Notes June 30, 2005 March 31, 2005
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,885,926 $ 9,989,632
Marketable securities 492,539 788,921
Trade accounts receivable 1,178 132,400
Inventories 3 3,876,489 3,227,411
Prepaid expenses and other assets, net 4 4,447,465 4,172,291
-------------- --------------
Total current assets 16,703,597 18,310,655
-------------- --------------
NON-CURRENT ASSETS
Oil and gas properties, full cost method, net 6 48,955,938 42,964,359
Other fixed assets, net 681,811 683,459
Intangible assets, net 66,581 14,435
Restricted cash 60,973 60,973
-------------- --------------
Total non-current assets 49,765,303 43,723,226
-------------- --------------
TOTAL ASSETS $ 66,468,900 $ 62,033,881
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,085,154 $ 5,844,639
Due to reservoir consultants 278,000 278,000
Taxes payable 325,126 333,063
Due to Astana Fund 5 - 250,000
Accrued liabilities and other payables 196,594 291,969
-------------- --------------
Total current liabilities 5,884,874 6,997,671
-------------- --------------
LONG TERM LIABILITIES
Due to reservoir consultants 222,000 222,000
Liquidation fund 60,973 60,973
Deferred income tax liabilities 343 343
-------------- --------------
Total long term liabilities 283,316 283,316
-------------- --------------
COMMITMENTS AND CONTINGENCIES 9 - -
SHAREHOLDERS' EQUITY
Share capital 7 31,999 30,514
Additional paid-in capital 7 64,544,653 58,460,520
Deficit accumulated during the development stage (4,275,942) (3,738,140)
-------------- --------------
Total shareholders' equity 60,300,710 54,752,894
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,468,900 $ 62,033,881
============== ==============
See notes to the consolidated financial statements.
F-28
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
Period from
inception
Three months Three months (May 6, 2003)
ended ended through
June 30, 2005 June 30, 2004 June 30, 2005
-------------- -------------- --------------
REVENUES $ 662,637 $ 118,949 $ 1,636,283
EXPENSES
Production 67,740 24,322 332,889
Selling 42,462 8,436 249,391
General and administrative 1,001,238 550,950 5,843,957
Amortization and depreciation 30,438 9,125 101,647
-------------- -------------- --------------
Total expenses 1,141,878 592,833 6,527,884
-------------- -------------- --------------
LOSS FROM OPERATIONS (479,241) (473,884) (4,891,601)
OTHER INCOME (EXPENSE)
Realized gain on marketable securities 62,779 54,915 267,214
Unrealized (loss) gain on marketable securities (7,539) (303,697) (11,899)
Foreign exchange gain (loss), net (132,415) 77,654 438,055
Interest income, net 12,022 2,884 (54,186)
Other income, net 6,592 - 58,802
-------------- -------------- --------------
Total other income (expense) (58,561) (168,244) 697,986
-------------- -------------- --------------
LOSS BEFORE INCOME TAXES (537,802) (642,128) (4,193,615)
INCOME TAX EXPENSE - - (343)
-------------- -------------- --------------
LOSS BEFORE MINORITY INTEREST (537,802) (642,128) (4,193,958)
MINORITY INTEREST - 39,922 (81,984)
-------------- -------------- --------------
NET LOSS $ (537,802) $ (602,206) $ (4,275,942)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 31,750,558 20,429,422 29,349,498
-------------- -------------- --------------
LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.02) $ (0.03) $ (0.15)
============== ============== ==============
See notes to the consolidated financial statements.
F-29
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
Period from
inception
Three months Three months (May 6, 2003)
ended ended through
Notes June 30, 2005 June 30, 2004 June 30, 2005
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (537,802) $ (602,206) $ (4,275,942)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation, depletion and amortization 60,367 9,124 199,028
Provision for doubtful accounts - - 129,051
Minority interest in operation of subsidiary - (39,922) -
Deferred income tax expense - - 343
Unrealized loss on marketable securities 7,539 303,697 11,899
Changes in operating assets and liabilities
Decrease / (increase) in marketable securities 288,843 1,808,966 (504,438)
Decrease/ (increase) in accounts receivable 131,222 - (1,178)
Increase in inventories (649,078) (408,787) (3,876,489)
Increase in prepaid expenses (275,174) (2,314,127) (4,555,344)
(Decrease) / Increase in accounts payable and other accruals (1,112,797) 403,764 6,009,854
------------- ------------- -------------
Net cash used in operations (2,086,880) (839,491) (6,863,216)
Interest paid - - (84,007)
------------- ------------- -------------
Net cash used in operating activities (2,086,880) (839,491) (6,947,223)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties (6,004,418) (917,443) (29,669,465)
Acquisition of other fixed assets (41,281) (64,414) (842,392)
Acquisition of intangible assets (56,745) (230) (74,501)
Restricted cash - - (60,973)
Deposits - - (21,172)
------------- ------------- -------------
Net cash used in investing activities (6,102,444) (982,087) (30,668,503)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 7 5,221,685 - 42,437,719
Proceeds from short-term financing - - 500,000
Repayment of short-term financing - - (500,000)
Proceeds from issuance of convertible debt - - 2,000,000
Proceeds from exercise of common stock options 863,933 - 1,063,933
------------- ------------- -------------
Net cash provided by financing activities 6,085,618 - 45,501,652
------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,103,706) (1,821,578) 7,885,926
CASH AND CASH EQUIVALENTS
at beginning of period 9,989,632 2,126,355 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS
at end of period $ 7,885,926 $ 304,777 $ 7,885,926
============= ============= =============
Non cash transactions:
Conversion of debt into common stock $ - $ - $ 2,000,000
Accrual of liabilities to Astana Fund 5 $ - $ - $ 250,000
Acquisition of 30% of Emir Oil LLP by issuance of
3,500,000 shares of common stock 7 $ - $ - $ 19,075,000
See notes to the consolidated financial statements.
F-30
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
BMB Munai, Inc. (the "Company") was incorporated in Utah in July 1981. The
Company later changed its domicile to Delaware on February 7, 1994. Prior
to November 26, 2003, the Company existed under the name InterUnion
Financial Corporation ("InterUnion"). The Company changed its domicile
from Delaware to Nevada in December 2004.
On November 26, 2003, InterUnion executed an Agreement and Plan of Merger
(the "Agreement") with BMB Holding, Inc ("BMB"), a private Delaware
corporation, formed for the purpose of acquiring and developing oil and
gas fields in the Republic of Kazakhstan. As a result of the merger, the
shareholders of BMB have obtained control of the Company. BMB was treated
as the acquiror for accounting purposes. A new board of directors was
elected that was comprised primarily of the former directors of BMB
Holding, Inc.
The Company's financial statements presented are a continuation of BMB,
and not those of InterUnion Financial Corporation, and the capital
structure of the Company is now different from that appearing in the
historical financial statements of InterUnion Financial Corporation due to
the effects of the recapitalization.
The Company has a representative office in Almaty, the Republic of
Kazakhstan.
The Company has minimal operations to date and is considered to be in the
development stage.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial information included herein, (except the balance sheet as of
March 31, 2005, which has been derived from our Annual Report on Form 10
KSB for the year ended March 31, 2005), is unaudited. However, such
information includes all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary
for a fair statement of the results of operations for the interim periods.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for an entire year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-QSB
Report pursuant to certain rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in
conjunction with the consolidated financial statements and notes included
in our March 31, 2005 Form 10-KSB Report.
The accounting principles applied are consistent with those as set out in
the Company's annual Consolidated Financial Statements for the year ended
March 31, 2005.
F-31
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Basis of consolidation
----------------------
The Company's financial statements present the consolidated results of BMB
Munai, Inc., and its wholly owned subsidiary, Emir Oil LLP (hereinafter
collectively referred to as the "Company"). All significant inter-company
balances and transactions have been eliminated from the Consolidated
Financial Statements.
All transactions of Emir Oil from the date of its purchase by BMB (June 7,
2003) through June 30, 2005 are reflected in the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements.
Emir Oil maintains its accounting records in Kazakhstan Tenge and prepares
separate statutory financial statements in accordance with accounting
legislation in the Republic of Kazakhstan. Statutory accounting principles
and procedures in Kazakhstan differ from accounting principles generally
accepted in the United States of America. Accordingly, the accompanying
Unaudited Consolidated Financial Statements, which include Emir Oil's
statutory accounting records, reflect adjustments necessary for such
financial statements to be presented in accordance with accounting
principles generally accepted in the United States of America.
Use of estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts of assets and liabilities and the disclosures of contingent assets
and liabilities at the date of the Consolidated Financial Statements and
revenues and expenses during the reporting period. Accordingly, actual
results could differ from those estimates and affect the results reported
in these Consolidated Financial Statements.
Foreign currency translation
----------------------------
Transactions denominated in foreign currencies are reported at the rates
of exchange prevailing at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated to U.S.
dollars at the rates of exchange prevailing at the balance sheet dates.
Any gains or losses arising from a change in exchange rates subsequent to
the date of the transaction are included as an exchange gain or loss in
the Consolidated Statements of Loss.
Share-Based Compensation
------------------------
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
F-32
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. Stock options granted to
the "selling agents" in the private equity placement transactions and have
been offset to the proceeds as a cost of capital.
The Company has a stock option plan as described in Note 7. Compensation
expense for options granted to employees is determined based on their fair
values at the time of grant, the cost of which is recognized in the
Consolidated Statement of Loss over the vesting periods of the respective
options.
Risks and uncertainties
-----------------------
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market oil and gas.
Currently exports from the Republic of Kazakhstan are primarily dependent
on transport routes either via rail, barge or pipeline, through Russian
territory. Domestic markets in the Republic of Kazakhstan might not permit
world market price to be obtained. However, management believes that over
the life of the project, transportation options will be improved by
further increases in the capacity of the transportation options.
Recognition of revenue and cost
-------------------------------
Revenue and associated costs from the sale of oil are charged to the
period when goods were shipped or when ownership title transferred.
Produced but unsold products are recorded as inventory until sold. As of
June 30, 2005 the production unit of the Company - Emir Oil had test
production sales at Kazakhstan domestic market price, which is
considerably lower than world market prices.
Income taxes
------------
The Company accounts for income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under the liability method, the effect on previously
recorded deferred tax assets and liabilities resulting from a change in
tax rates is recognized in earnings in the period in which the change is
enacted.
Cash and cash equivalents
-------------------------
The Company considers all demand deposits and money market accounts
purchased with an original maturity of three months or less to be cash and
cash equivalents. The fair value of cash and cash equivalents approximates
their carrying amounts due to their short-term maturity.
F-33
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of June 30, 2005 the Company pledged cash in amount of $360,045 to
collateralize payment to an oil drilling and service company for drilling
services.
Marketable securities
---------------------
Marketable securities consist of short-term repurchase agreements for
securities issued by Kazakhstan banks and Kazakhstan financial
institutions. The Company records these marketable securities as trading
securities and any change in the fair market value is recorded in
earnings.
As of June 30, 2005 the Company pledged all marketable securities to
collateralize payment to an oil drilling and service company for drilling
services.
Trade accounts receivable and prepaid expenses
----------------------------------------------
Accounts receivable and prepaid expenses are stated at their net
realizable values after deducting provisions for uncollectable amounts.
Such provisions reflect either specific cases or estimates based on
evidence of collectability. The fair value of accounts receivable and
prepaid expense accounts approximates their carrying amounts due to their
short-term maturity.
Inventories
-----------
Inventories of equipment for development activities, tangible drilling
materials required for drilling operations, spare parts, diesel fuel, and
various materials for use in oil field operations are recorded at the
lower of cost and net realizable value. Under the full cost method,
inventory is transferred to oil and gas properties when used in
exploration, drilling and development operations in oilfields.
Inventories of crude oil are recorded at the lower of cost and net
realizable value. Cost comprises direct materials and, where applicable,
direct labour costs and overhead, which has been incurred in bringing the
inventories to their present location and condition. Cost is calculated
using the weighted average method. Net realizable value represents the
estimated selling price less all estimated costs to completion and costs
to be incurred in marketing, selling and distribution.
Oil and gas properties
----------------------
The Company follows the full cost method of accounting for its costs of
acquisition, exploration and development of oil and gas properties.
Under full cost accounting rules, the net capitalized costs of evaluated
oil and gas properties shall not exceed an amount equal to the present
value of future net cash flows from estimated production of proved oil and
gas reserves, based on current economic and operating conditions,
including the use of oil and gas prices as of the end of the period.
F-34
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Given the volatility of oil and gas prices, it is reasonably possible that
the estimate of discounted future net cash flows from proved oil and gas
reserves could change. If oil and gas prices decline, even if only for a
short period of time, it is possible that impairments of oil and gas
properties could occur. In addition, it is reasonably possible that
impairments could occur if costs are incurred in excess of any increases
in the cost ceiling, revisions to proved oil and gas reserves occur, or if
properties are sold for proceeds less than the discounted present value of
the related proved oil and gas reserves.
All geological and geophysical studies, with respect to the ADE Block,
have been capitalized as part of the oil and gas properties.
The Company's oil and gas properties primarily include the value of the
license and other capitalized costs.
Costs of acquiring unproved leases shall be evaluated for impairment until
such time as the leases are proved or abandoned. In addition, if the sums
of expected undiscounted cash flows are less than net book value,
unamortized costs at the field level will be reduced to fair value.
Depreciation, depletion and amortization of producing properties is
computed using the unit-of-production method based on estimated proved
recoverable reserves.
Other fixed assets
------------------
Other fixed assets are valued at the historical cost adjusted for
impairment loss less accumulated depreciation. Historical cost includes
all direct costs associated with the acquisition of the fixed assets.
Depreciation of other fixed assets is calculated using the straight-line
method based upon the following estimated useful lives:
Buildings and improvements 7-10 years
Machinery and equipment 6-10 years
Vehicles 3-5 years
Office equipment 3-5 years
Other 2-7 years
Maintenance and repairs are charged to expenses as incurred. Renewals and
betterments are capitalized.
F-35
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Other fixed assets of the Company are evaluated for impairment. If the
sums of expected undiscounted cash flows are less than net book value,
unamortized costs of other fixed assets will be reduced to a fair value.
In accordance with FAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies", depreciation related to support equipment
and facilities used in exploration and development activities in the
amount of $17,090 was capitalized to oil and gas properties.
Intangible assets
-----------------
Intangible assets include accounting and other software. Amortization of
intangible assets is calculated using straight-line method upon estimated
useful life ranging from 3 to 4 years.
Restricted cash
---------------
Restricted cash includes funds deposited in a Kazakhstan bank and is
restricted to meet possible environmental obligations according to the
regulations of the Republic of Kazakhstan. The fair value of these funds
approximates their carrying amounts as amount and conditions of deposited
funds governed by the Government of the Republic of Kazakhstan.
Comparative figures
-------------------
The presentation of certain amounts for the previous periods has been
reclassified to conform to the presentation adopted for the current
quarter.
Recent accounting pronouncements
--------------------------------
In May 2005, the FASB issued Statement 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion 20, "Accounting Changes" and
FASB Statement 3, "Reporting Accounting Changes in Interim Financial
Statements." This Statement changes the requirements for the accounting
for and reporting of a change in accounting principle. Opinion 20
previously required that most voluntary changes in accounting principles
be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. Statement
154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable
to determine either the period specific effects or the cumulative effect
of the change. This statement is effective for accounting changes and
corrections of errors made in fiscal periods that begin after December 15,
2005 and will not impact the Company's financial position or results of
operations and cash flows.
F-36
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. INVENTORIES
Inventories as of June 30, 2005 and March 31, 2005 were as follows:
June 30, 2005 March 31, 2005
(unaudited)
Construction material $ 3,719,351 $ 3,103,555
Spare parts 75,543 59,706
Crude oil produced 5,084 7,735
Other 76,511 56,415
------------- -------------
$ 3,876,489 $ 3,227,411
============= =============
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses as of June 30, 2005 and March 31, 2005 were as follows:
June 30, 2005 March 31, 2005
(unaudited)
Advances for services $ 1,860,448 $ 589,944
Advances for material 1,276,428 2,301,074
VAT recoverable 1,310,189 1,217,751
Other 129,451 192,573
Reserves against uncollectible advances and prepayments (129,051) (129,051)
------------- -------------
$ 4,447,465 $ 4,172,291
============= =============
5. DUE TO ASTANA FUND
In 2004 the Government of the Republic of Kazakhstan imposed a liability
in the amount of $250,000 to make cash contributions to the Astana Fund.
The Astana Fund is a government fund used by the Government of the
Republic of Kazakhstan to accumulate cash for construction and development
of Astana, Kazakhstan, the new capital of the Republic of Kazakhstan. On
May 27, 2005 the Company made a cash contribution of $250,000 to Astana
Fund.
F-37
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. OIL AND GAS PROPERTIES
Oil and gas properties as of June 30, 2005 and March 31, 2005 were as
follows:
June 30, 2005 March 31, 2005
(unaudited)
Subsoil use right $ 20,788,119 $ 20,788,119
Cost of drilling wells 12,004,832 9,334,021
Professional services received in exploration and development activities 5,780,567 4,798,314
Material and fuel used in exploration and development activities 3,588,076 2,891,765
Infrastructure development costs 1,415,791 1,231,391
Geological and geophysical 859,790 653,571
Other capitalized costs 4,616,144 3,334,630
Accumulated depreciation, depletion and amortization (97,381) (67,452)
------------ ------------
$ 48,955,938 $ 42,964,359
============ ============
7. SHARE AND ADDITIONAL PAID IN CAPITALS
Common and preferred stock as of June 30, 2005 and March 31, 2005 are as
following:
June 30, March 31,
2005 2005
(unaudited)
Preferred stock, $0.001 par value
Authorised 20,000,000 20,000,000
Issued and outstanding - -
Common stock, $0.001 par value
Authorised 100,000,000 100,000,000
Issued and outstanding 31,998,841 30,513,761
Reverse merger
--------------
During the year ended March 31, 2004, the Company completed a reverse
merger with BMB Holding, Inc. Additionally the Company:
a) Completed a private placement for the total amount of $11,113,562.
b) Converted a $2,000,000 debt to the shareholders of BMB Holding, Inc.
into equity.
c) Issued 200,000 shares of stock upon exercise of stock option worth
$200,000.
d) Completed a 10 for 1 reverse stock split.
Acquisition
-----------
On May 24, 2004, the Company agreed to purchase the remaining 30% interest
of its minority interest partner in Emir Oil in exchange for 3,500,000
shares of restricted Company common stock. On August 6, 2004, the Company
F-38
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
issued the 3,500,000 shares to its minority partner in Emir Oil. The
aggregate purchase price was determined to be $19,075,000 using a price of
the Company's common shares on OTCBB on August 6, 2004 of $5.45 per share.
The entire purchase price has been allocated to oil and gas properties in
the accompanying Consolidated Balance Sheet.
Private placements
------------------
On July 2, 2004, the Company sold an aggregate of 4,584,340 common shares
of the Company at $4.00 per share in a private placement offering. The
Company received $17,311,906 net of the agent fees and out of pocket
expenses.
On March 9, 2005, the Company sold an aggregate of 2,000,000 common shares
of the Company at $5.00 per share in a private placement offering. The
Company received $9,968,254 net of the agent fees and out of pocket
expenses.
On March 31, 2005, the Company sold an aggregate of 1,101,000 common
shares of the Company at $5.00 per share in a private placement offering.
On April 12, 2005 the Company received $5,221,685 net of the agent fees
and out of pocket expenses.
Common stock sold in private placements as of June 31, 2005 are as
following:
Number of Gross amount Net amount
shares sold Share price raised received
----------- ----------- ------------ ----------
First private placement 4,830,494 $ 2.15-$ 2.50 $11,113,562 $ 9,935,874
Second private placement 4,584,340 $ 4.00 18,337,360 17,311,906
Third private placement 3,101,000 $ 5.00 15,505,000 15,189,939
------------- ----------------- ------------------
12,515,834 $44,955,922 $42,437,719
============= ================= ==================
The offerings were made only to accredited investors in the United States
under Regulation D and pursuant to Regulation S to non U.S. Persons.
Share-Based Compensation
------------------------
On November 19, 2003, the Company granted options to the placement agent
for services rendered in connection with a private placement of the
Company's common stock in November 2003. The first option granted the
placement agent the right to purchase up to 200,000 common shares of the
Company at an exercise price of $1.00 per share. The placement agent
exercised this option and purchased 200,000 shares for $200,000 on
December 15, 2003. The second option grants the placement agent the right
to purchase up to 142,857 common shares of the Company at an exercise
price of $3.50 per share. This option expires on November 26, 2008.
In December 2003, the Company granted warrants to a placement agent in
connection with funds raised on the Company's behalf. These warrants grant
the placement agent the right to purchase up to 275,050 shares of the
Company's common stock at an exercise price of $2.15 and 208,000 shares of
F-39
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the Company's common stock at an exercise price of $2.50 per share. In May
and June 2005 a placement agent exercised stock warrants for 275,050
shares at the exercise price of $2.15 and stock warrants for 109,030
shares at the exercise price of $2.50. The remaining warrants for 98,970
shares at the exercise price of $2.50 expired at the end of June 2005.
During July 2004, the Company granted warrants to a placement agent in
connection with funds raised on the Company's behalf. These warrants grant
the placement agents the right to purchase up to 458,434 shares of the
Company's common stock at an exercise price of $4.00 per share. The
warrants expire at the first quarter of 2006 calendar year.
On April 12, 2005, the Company granted warrants to placement agents in
connection with funds raised on the Company's behalf. These warrants grant
the placement agents the right to purchase up to 110,100 shares of the
Company's common stock at an exercise price of $5.00 per share. The
warrants expire on April 11, 2006.
During the year ended March 31, 2005 the Board of Directors (the "Board")
of the Company approved an incentive stock option plan (the "plan") under
which directors, officers and key personnel may be granted options to
purchase common shares of the Company. The Company has reserved 5,000,000
common shares for issuance upon the exercise of options granted under the
terms of the plan. The Board determines the exercise price of each option,
provided that no option shall be granted with an exercise price at a
discount to market. The vesting periods established under the plan and the
term of the options are set by the Board. During the third quarter of the
year ended March 31, 2005 the Company granted stock options to its
corporate secretary for the past services rendered. These options grant
the employee the right to purchase up to 60,000 shares of the Company's
common stock at an exercise price of $4.00 per share. The options expire
in five years from the date of grant. Granted options vest immediately.
Compensation expense for options granted to a corporate secretary is
determined based on their fair values at the time of grant, the cost of
which in the amount of $81,000 is recognized in the Consolidated Statement
of Income and Consolidated Balance Sheet.
Stock options and warrants outstanding and exercisable as of June 30, 2005
are:
Weighted
Number of Average Exercise
shares price
------------ ----------------
As of March 31, 2005 1,144,341 $ 3.22
Granted 110,100 5.00
Exercised (384,080) 2.25
Expired (98,970) 2.50
------------ -----------
As of June 30, 2005 771,391 $ 4.05
============ ===========
F-40
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock options and warrants as of June 30, 2005 are:
Options and Warrants outstanding Options and Warrants exercisable
-----------------------------------------------------------------------------------------------------------
Range of Options and Weighted Weighted Options and Weighted Average
exercise price Warrants Average Average Warrants Exercise Price
Exercise Price Contractual
Life (years)
------------------ ----------------- --------------- ---------------- ----------------- ----------------
$ 2.15 - $ 5.00 771,391 4.05 2.41 771,391 4.05
The estimated fair value of the stock options and warrants issued were
determined using Black-Scholes option pricing model with the following
assumptions:
June 30, 2005 March 31, 2005
(unaudited)
Risk-free interest rate 3.63% 3.20%
Expected option life 1 year 1 year
Expected volatility in the price of the Company's common shares 74% 76%
Expected dividends 0% 0%
Weighted average fair value of options and warrants granted
during the year $ 1.74 $ 2.22
8. RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2005, the Company retained the
services of TatArka LLC. TatArka LLC was paid $2,150,562 advance payment
to obtain 3D seismic data of extended territory. TatArka LLC is a
subsidiary of a company that shares a common director with our Company.
The Company leases ground fuel tanks and other oil fuel storage facilities
and warehouses from Term Oil LLC. The lease expenses for the three months
ended June 30, 2005, totaled to $55,240. One of our shareholders is an
owner of Term Oil LLC.
During the three months ended June 30, 2005, the Company also retained the
services of several companies. Expenses for those services rendered during
the three months ended June 30, 2005, totaled to $35,769. The suppliers
which rendered services are affiliated with directors of the Company.
During the three months ended June 30, 2005, Zhanaozen Repair and
Mechanical Plant Ltd was paid $22,399 advance payment for inventory
supply. Zhanaozen Repair and Mechanical Plant Ltd is an affiliated party
with one of the shareholders of the Company.
F-41
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
Historical investments by the Government of the Republic of Kazakhstan
The Government of the Republic of Kazakhstan made historical investments
in the ADE Block in total amount of $ 5,994,200. When the Company applies
for and is granted commercial production rights for the ADE Block, the
Company will be required to begin repaying these historical investments to
the Government of the Republic of Kazakhstan. The terms of repayment will
be negotiated at the time the Company applies for commercial production
rights.
Capital Commitments
-------------------
Under the terms of its oil and gas contract, Emir Oil is required to spend
a total of $32 million in exploration and development activities on the
ADE Block. To retain its rights under the contract, the Company must spend
a minimum of $9.3 million in 2005, $6 million in 2006 and $4.5 million in
2007. The failure to make these minimum capital expenditures could result
in the loss of the contract.
Litigation
----------
In December 2003, a lawsuit was filed in Florida naming the Company as one
of the defendants. The claim of breach of contract, unjust enrichment,
breach of fiduciary duty, conversion and violation of a Florida trade
secret statute in connection with a business plan for the development
Aksaz, Dolinnoe and Emir oil and gas fields owned by Emir Oil. The
plaintiffs seek unspecified compensatory and exemplary damages.
In April 2005, Sokol Holdings, Inc., filed a complaint in United States
District Court, Southern District of New York alleging that the Company
wrongfully induced Mr. Tolmakov, Director of Emir Oil, to breach a
contract under which Mr. Tolmakov had agreed to sell to Sokol 70% of his
90% interest in Emir Oil LLP. Sokol Holdings, Inc. seeks damages in an
unspecified amount exceeding $75,000 to be determined at trial, punitive
damages, specific performance in the form of an order compelling BMB to
relinquish its interest in Emir and the underlying interest in the ADE
fields to Sokol Holdings, Inc. and such other relief as the court finds
just and reasonable.
The Company is confident that the matters shall be resolved in the
Company's favor. The Company has retained legal counsels to protect its
interests. In the opinion of the Company's management and legal counsels,
the resolution of those lawsuits will not have a material adverse effect
on Company's financial condition, results of operations or cash flows.
F-42
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
The nature of the Company's operations exposes the Company to fluctuations
in commodity prices, foreign currency exchange rates, credit risk and
country risk. The Company recognizes these risks and manages operations in
a manner such that exposure to these risks is minimized to the extent
practical.
As of June 30, 2005 and March 31, 2005 marketable securities of $492,539
and $788,921, respectively, are held in short term repurchase agreements
for securities issued by Kazakhstan banks and Kazakhstan financial
institutions. As of June 30, 2005 and March 31, 2005 cash and cash
equivalents include deposits in Kazakhstan banks in the amount $4,156,607
and $9,090,276, respectively. As of June 30, 2005 and March 31, 2005 the
Company made advance payments to Kazakhstan companies and government
bodies in the amount $4,576,516 and $4,301,342, respectively. As of June
30, 2005 and March 31, 2005 trade accounts receivable of $1,178 and
$132,400, respectively, are with the Kazakhstan oil processing plant.
Restricted cash reflected in the long-term assets consists of $60,973
deposited in a Kazakhstan bank and restricted to meet possible
environmental obligations according to the regulations of Kazakhstan.
Furthermore, the primary asset of the Company is Emir Oil; an entity
formed under the laws of the Republic Kazakhstan.
11. SUBSEQUENT EVENTS
Subsequent to the quarter ended June 30, 2005 the Company granted 70,526
common stocks to its former Chief Executive Officer and President for the
past services rendered.
F-43
APPENDIX A
AUDIT COMMITTEE CHARTER
Purpose
1.1 The Audit Committee is appointed by the Board of Directors (the "Board") of
BMB Munai, Inc., (the Company) to assist the Board in its oversight of:
- - The adequacy of the Company's internal controls and financial reporting
process and the integrity of the Company's financial statements;
- - The performance of the Company's internal auditors ("Internal Auditing") and
the qualifications, independence and performance of the Company's external
independent auditor ("Independent Auditor"); and
- - The Company's compliance with legal and regulatory requirements.
1.2 The Committee shall have the authority, in its discretion, to conduct
investigations and retain, at the Company's expense but at funding levels
determined by the Committee, special legal, accounting or other consultants or
experts to advise the Committee.
Membership
2.1 The Committee shall be comprised of not less than two members of the Board.
2.2 All members of the Committee shall meet the independence requirements of the
SEC, and of the Securities Exchange Act of 1934, applicable to members of audit
committees.
2.3 Each Committee member shall be financially literate as such qualification is
interpreted by the Board in its business judgment, or shall become financially
literate within a reasonable period of time after appointment to the Committee.
2.4 At least one member of the Committee shall meet the accounting or related
financial management expertise requirements of the SEC, as the Board interprets
such qualification in its business judgment.
2.5 The only compensation that members of the Committee may receive from the
Company is fees for service on the Board or a committee of the Board and the
regular benefits received by Directors who are not members of the Committee.
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BMB Munai * Audit Committee Charter Page 1 of 6
Such fees may be received in cash, stock of the Company, options to purchase
stock of the Company or other in-kind consideration ordinarily available to
Directors.
Committee Meetings
3.1 The Committee shall hold meetings at least quarterly each fiscal year, and
at any additional time as either the Board or Committee deems necessary.
3.2 The Committee may request that members of management, the Company's outside
counsel and/or the Company's Independent Auditor be present as needed.
3.3 Periodically, the Committee shall meet, in separate private sessions, with
each of (i) management, (ii) Internal Auditing and (iii) the Independent
Auditor. In addition, the Committee may meet with such other persons as the
Committee deems advisable.
3.4 Minutes of each meeting will be kept and distributed to the entire Board.
General Principles as to Independent Auditor
4.1 The Committee adopts the following principles with respect to the Company's
Independent Auditor:
- - The Committee has the sole authority and responsibility for the appointment,
compensation, evaluation and, where appropriate, termination of the Company's
Independent Auditor, and will review the quality control procedures, experience
and qualifications of the senior members of its audit team. The Independent
Auditor shall report directly to the Committee.
- - The Committee shall review and approve the scope of the audit and the
compensation to be paid to the Independent Auditor, which the Company shall be
obligated to fund.
- - The Committee shall, in compliance with the Securities Exchange Act of 1934
and the rules promulgated thereunder and subject to any exceptions provided for
therein, pre-approve all engagements of the Independent Auditor in connection
with audit, review or attest reports required under the securities laws
(collectively, "Audit Services") and either (i) pre-approve all engagements of
the Independent Auditor to perform any permitted service other than Audit
Services ("Non-Audit Services") or (ii) establish pre-approval policies and
procedures pursuant to which engagements for Non-Audit Services are entered, in
which case the Committee shall ensure that it is informed on a timely basis of
each Non-Audit Service approved pursuant to such policies and procedures.
- - The Committee shall be responsible for the resolution of disagreements between
management and the Independent Auditor regarding financial reporting.
4.2 The Committee shall undertake the following with respect to the Independent
Auditor's independence:
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BMB Munai * Audit Committee Charter Page 2 of 6
- - Ensure that the Independent Auditor submits periodically, a formal written
statement, including the written disclosures required by Independence Standards
Board Standard No. 1, delineating all relationships between the Independent
Auditor and the Company.
- - Actively engage in a dialogue with the Independent Auditor with respect to any
disclosed relationships or services that may impact the objectivity and
independence of the Independent Auditor.
- - At least annually, obtain and review a report by the Independent Auditor
describing that firm's internal quality-control procedures, any material issues
raised by the most recent internal quality-control review, or peer review, of
the firm, or by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more independent
audits carried out by the firm, and any steps taken in response to any such
issues. After reviewing this report and the Independent Auditor's work during
the year, review and evaluate the qualifications, performance and independence
of the lead partner of the Independent Auditor and assure regular rotation, as
required by law, of the audit engagement team partners, principals or
shareholders who perform audit, review or attest services for the Company.
- - Recommend, if determined by the Committee to be called for, that the Board
take appropriate action in response to the Independent Auditor's reports to
satisfy itself of the Independent Auditor's independence.
- - Set clear hiring guidelines for the Company's hiring of current and former
employees of the Independent Auditor.
- - Primary Responsibilities - Audit
Audits
5.1 The Committee shall review and discuss with management and the Independent
Auditor the audited financial statements of the Company, including the
disclosures under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the results of the year-end audit by the
Company's Independent Auditor.
5.2 The Committee shall discuss with the Independent Auditor the matters the
Independent Auditor determines are required to be discussed by Statement on
Auditing Standards No. 61.
5.3 The Committee shall discuss with management and the Company's Independent
Auditor (i) all critical accounting policies and practices used, (ii) any
significant financial reporting issues and judgments made in connection with the
preparation of the Company's financial statements, including analyses of the
effects of alternative accounting methods under GAAP that have been discussed
with management and the treatment preferred by the Independent Auditor, (iii)
the effect of regulatory and accounting initiatives and off-balance sheet
structures on the Company's financial statements and (iv) any other reports
required by law to be delivered by the Independent Auditor, including any
management letter or schedule of unadjusted differences.
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BMB Munai * Audit Committee Charter Page 3 of 6
5.4 Based on the review and discussions with management and the Independent
Auditor referred to in paragraphs 4.2, 5.1, 5.2, and 5.3 above, the Committee
will advise the Board whether it recommends that the audited financial
statements be included in the Company's annual report on Form 10-KSB (or
incorporated from the Annual Report to Stockholders).
5.5 The Committee shall regularly review with the Independent Auditor any audit
problems or difficulties, including any restrictions on the scope or access to
requested information and any significant disagreements with management and
management's response, and discuss with the Independent Auditor the
responsibilities, budget and staffing of the Company's Internal Auditing.
5.6 The Committee shall obtain assurance from the Independent Auditor that the
audit was conducted in a manner consistent with Section 10A of the Securities
Exchange Act of 1934.
Internal Controls
5.7 The Committee shall discuss with management, the Independent Auditor and, as
applicable, Internal Auditing:
- - The adequacy of the Company's internal accounting controls and the financial
reporting process, which shall include a review of major issues regarding
accounting principles and financial statement presentations, including any
significant changes in the Company's selection or application of accounting
principles, and major issues as to the adequacy of the Company's internal
controls and any special audit steps adopted in light of identified
deficiencies.
- - The status of internal control recommendations made by the Independent Auditor
and Internal Auditing.
5.8 The Committee shall periodically receive reports from and discuss with the
Company's General Counsel the adequacy of the policies and practices of the
Company related to compliance with legal and regulatory requirements, conflicts
of interest and ethical conduct.
Other
5.9 The Committee or the Chairman of the Committee shall discuss with management
and the Company's Independent Auditor the quarterly financial statements of the
Company, including the disclosures under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the matters the
Independent Auditor determines are required to be discussed by Statement on
Auditing Standards No. 71, prior to filing the Form 10-Q with the Securities and
Exchange Commission.
5.10 The Committee shall periodically receive reports from and discuss with the
Company's General Counsel any material government investigations, litigation or
legal matters.
5.11 The Committee shall review reports and any disclosures of significant
conflicts of interest involving directors or executive officers of the Company.
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BMB Munai * Audit Committee Charter Page 4 of 6
5.12 The Committee shall review with management and the Independent Auditor any
material issues regarding the Company's financial statements or accounting
policies raised in any correspondence with regulators or governmental agencies,
any published reports or any external or employee complaints.
5.13 The Committee shall establish procedures for (i) the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal
accounting controls, or auditing matters and (ii) the confidential, anonymous
submission by employees of the Company of concerns regarding questionable
accounting or auditing matters.
5.14 The Committee shall discuss (i) policies with respect to risk assessment
and risk management, the Company's primary risk exposures and the steps
management has taken to monitor and control such exposures and (ii) as and when
appropriate, earnings press releases that have been issued by the Company, as
well as financial information and earnings guidance that have been provided to
analysts and rating agencies.
5.15 The Committee shall review the appointment and replacement of the Company's
senior Internal Auditing executive.
5.16 The Committee may, when and to the extent it deems appropriate, obtain
advice and assistance from outside legal, accounting or other consultants or
experts.
Scope of Responsibilities
6.1 The Committee shall:
- - Review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval.
- - Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
- - Conduct an annual performance evaluation of the Committee.
- - Report regularly to the Board, both with respect to the activities of the
Committee generally and with respect to any issues that arise regarding the
quality or integrity of the Company's financial statements, the Company's
compliance with legal or regulatory requirements, the performance and
independence of the Independent Auditor or the performance of Internal Auditing.
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BMB Munai * Audit Committee Charter Page 5 of 6
6.2 While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company's financial statements are complete and accurate and
are in accordance with generally accepted accounting principles. This is the
responsibility of management and the Independent Auditor. Nor is it the duty of
the Committee to conduct investigations or to assure compliance with laws and
regulations and the Company's Code of Ethics.
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BMB Munai * Audit Committee Charter Page 6 of 6
APPENDIX B
COMPENSATION COMMITTEE CHARTER
Purpose
The purpose of the Compensation Committee (the "Committee") of the board of
directors (the "Board") of BMB Munai, Inc., (the "Corporation") is (i) to
discharge the Board's responsibilities relating to compensation of the
Corporation's directors and executive officers, (ii) to review and recommend to
the Board compensation plans, policies, benefit programs and incentive plans, as
well as approve individual executive officers compensation, and (iii) to prepare
the report on executive compensation required to be included in the
Corporation's annual proxy statement.
Composition and Term of Office
The Committee will consist of not fewer than two members each of whom shall be a
director who satisfies the independence requirements of the SEC, as interpreted
by the Board in its business judgment. One member shall serve as Chairman of the
Committee. The members of the Committee shall serve one-year terms, and shall be
appointed by the Board annually on the day of the Annual Meeting of Shareholders
or on such other date as the Board shall determine. Members of the Committee may
be removed or replaced by the Board.
Committee Meetings - Operating Principles
The Committee shall meet with such frequency and at such intervals as it shall
determine is necessary to carry out its duties and responsibilities, but in any
case, at least two times each year. Meetings of the Committee may be called as
needed by the Committee Chairman, the Chairman of the Board or the Chief
Executive Officer.
The Chairman will preside, when present, at all meetings of the Committee. The
Committee may meet by telephone or videoconference and may take action by
written consent.
The Committee shall have the right to retain and terminate compensation
consultants to assist in the evaluation of director, CEO or executive officer
compensation, including the sole authority to approve the consultant's fees and
negotiate retention terms in connection therewith.
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BMB Munai * Compensation Committee Charter Page 1 of 3
The Committee shall have the authority to obtain advice and assistance from any
officer or employee of the Corporation or from any outside legal expert or other
advisor.
The Committee may request that members of management or outside consultants and
advisors of the Committee be present to assist the Committee in performing its
duties.
Minutes of each meeting will be kept and distributed to the entire Board.
The Committee may form, and where legally permissible may delegate authority to,
subcommittees when the Committee deems it appropriate or desirable to facilitate
the operation or administration of the plans or programs. Where legally
permissible, the Committee may also delegate authority to committees consisting
of employees when the Committee deems it appropriate or desirable for the
efficient administration of employee compensation and benefit plans.
Compensation/Employee Benefits Responsibilities
The Committee shall perform the following functions:
- - Provide oversight and guidance for compensation and benefit programs for all
employees of the Corporation.
- - Review and approve corporate goals and objectives relevant to CEO
compensation, evaluate the CEO's performance in light of those goals and
objectives and have the sole authority to determine the CEO's compensation level
based on this evaluation. This includes salary, annual incentive and long term
incentive programs, whether stock or cash, and determinations relating to the
deductibility of compensation under Section 162(m) of the Internal Revenue Code
of 1986. The CEO may not be present during the deliberation or voting upon these
matters.
- - Review and approve other significant terms of employment for the CEO. The CEO
may not be present during deliberations or for voting upon these matters.
- - Review and approve the compensation, including base salary and incentive
awards and other significant terms of employment, for individuals reporting
directly to the CEO and holding a position classified as Senior Vice President
or higher (together with the CEO, the "Executive Committee").
- - Review and make recommendations to the Board with respect to incentive
compensation plans and equity-based plans.
- - Review the performance of the individual members of the Executive Committee.
- - Review and make recommendations to the Board on matters concerning the
directors' annual retainer, as well as any other compensation programs relating
to the Board.
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BMB Munai * Compensation Committee Charter Page 2 of 3
- - Prepare the report on executive compensation for inclusion in the
Corporation's proxy statement in accordance with applicable rules and
regulations.
- - Exercise any fiduciary, administrative or other function assigned to the
Committee under any of the Corporation's health, benefit or welfare plans.
Other Responsibilities
Following each Committee meeting, report at the next meeting of the full Board
all significant items discussed at the Committee meeting.
Recommend changes to this Charter to the full Board as appropriate.
Take such further actions or provide such further advice as the full Board may
from time to time delegate to the Committee.
Conduct an annual performance evaluation of the Committee.
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BMB Munai * Compensation Committee Charter Page 3 of 3
APPENDIX C
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER
This Nominating and Corporate Governance Committee Charter (this "Charter") has
been adopted by the Board of Directors (the "Board") of BMB Munai, Inc. (the
"Company").
Purpose
The Nominating and Corporate Governance Committee (the "Committee") of the Board
is responsible for developing and recommending to the Board a set of corporate
governance policies for the Company, establishing criteria for selecting new
directors, and identifying, screening and recruiting new directors. The
Committee will also select nominees for directors and recommend directors for
committee membership to the Board.
Composition
The Committee shall be comprised of three or more members, all of whom must
qualify as independent directors ("Independent Directors") under the listing
standards of the American Stock Exchange, Inc. ("AMEX"). Notwithstanding this
independence requirement, if the Committee is comprised of at least three
members, one director, who is not independent as defined in Rule 121 of the AMEX
Rules, and is not a current officer or employee or an Immediate Family Member
(as defined in Rule 121 of the AMEX Rules) of such person, may be appointed to
the Committee if the Board, under exceptional and limited circumstances,
determines that such individual's membership on the committee is required by the
best interests of the Company and its shareholders, and the Board discloses, in
the next annual meeting proxy statement subsequent to such determination, the
nature of the relationship and the reasons for the determination. A member
appointed under this exception may not serve longer than two years.
The Committee members shall be appointed by the Board. The Board shall appoint
one member of the Committee as chairperson, and may appoint one or more
co-chairpersons. If the Board fails to elect a chairperson, the Committee
members shall elect a chairperson from their members. The Board or the Committee
may divide between the chairperson and any co-chairperson, or between two
co-chairpersons, the responsibility of overseeing the duties performed under
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BMB Munai * Nominating and Corporate Governance Committee Charter Page 5 of 5
this Charter such that one individual is responsible for overseeing the
functions related to nomination of directors and the other is responsible for
overseeing functions related to corporate governance.
The chairperson shall be responsible for leadership of the Committee, including
overseeing the agenda, presiding over the meetings and reporting to the Board.
If the Committee chairperson is not present at a meeting, a co-chairperson may
act as chairperson. If neither the chairperson nor any co-chairperson is
present, the members of the Committee may designate an acting chairperson. The
members shall serve for a term of one year or until their successors shall be
appointed and qualified. No member of the Committee shall be removed except by
majority vote of the full Board. The Board shall have the authority to fill
vacancies or add additional members to the Committee.
A member shall promptly notify the Committee and the Board if the member is no
longer an Independent Director and such member shall be removed from the
Committee unless the Board determines that an exception to the Independent
Director requirement is available under the AMEX rules with respect to such
member's continued membership on the Committee.
Committee Meetings - Operating Procedures
Consistent with the Company's Certificate of Incorporation, By-Laws and
applicable state law, the following shall apply:
o The Committee shall fix its own rules of procedure, which
shall be consistent with the Bylaws of the Company and this
Charter.
o The Committee shall meet at least annually and more frequently
as circumstances require.
o The chairperson of the Committee or a majority of the members
of the Committee may call special meetings of the Committee.
o The chairperson, in consultation with other members of the
Committee, shall set the length of each meeting and the agenda
of items to be addressed at each meeting and shall circulate
the agenda to each member of the Committee in advance of each
meeting.
o A majority of the members of the Committee shall constitute a
quorum.
o The Committee may request that any directors, officers or
employees of the Company, or other persons whose advice and
counsel are sought by the Committee, attend any meeting of the
Committee and/or provide such pertinent information as the
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BMB Munai * Nominating and Corporate Governance Committee Charter Page 5 of 5
Committee requests, except that no director of the Company
shall participate in discussions or attend any portion of a
meeting of the Committee at which that director's nomination
or committee selection is being discussed.
o Following each of its meetings, the Committee shall deliver a
report on the meeting to the Board, including a description of
all actions taken by the Committee at the meeting.
o The Committee shall keep written minutes of its meetings,
which minutes shall be maintained by the Company with the
books and records of the Company. The chairperson may
designate an officer or employee of the Company to serve as
secretary to the Committee.
Responsibilities and Duties of the Nominating Committee
The Nominating Committee has the following duties and responsibilities:
Selection of Director Nominees and Committee Membership
o Determine what types of backgrounds are needed to help
strengthen and balance the Board and establish the process for
identifying and evaluating nominees for director, including
but not limited to establishing criteria for selecting new
directors.
o Determine the minimum qualifications that must be met by
nominating committee recommended candidates.
o Conduct background and qualifications checks of persons it
wishes to recommend to the Board as candidates or to fill
vacancies.
o Conduct director evaluations prior to renomination of
directors for election.
o Select the slate of nominees of directors to be proposed for
election by the stockholders and recommend to the Board
individuals to be considered by the Board to fill vacancies.
Approvals should follow a review by the Committee of the
performance and contribution of fellow directors as well as
the qualifications of proposed new directors.
o Recommend to the Board those directors to be selected for
membership on the various Board committees. Recommendations
should consider the qualifications for membership on each
committee, whether the candidate will be able to devote the
requisite time to the Committee, the extent to which there
should be a policy of periodic rotation of directors among the
committees, and any limitations on the number of consecutive
years a director should serve on any one Board committee.
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BMB Munai * Nominating and Corporate Governance Committee Charter Page 5 of 5
o Determine director and committee member/chair compensation for
those directors who are not also salaried officers of the
Company.
o Establish policies regarding the consideration of director
candidates recommended by security holders.
o Establish procedures to be followed by security holders in
submitting recommendations for director candidates.
o Recommend to the Board a process for security holders to
communicate with the Board.
Develop and Implement Policies Regarding Corporate Governance Matters
o Recommend to the Board policies to enhance the Board's
effectiveness, including with respect to the distribution of
information to Board members, the size and composition of the
Board, and the frequency and structure of Board meetings.
o Develop and review periodically, and at least annually, the
corporate governance policies of the Company to ensure that
they are appropriate for the Company and that policies of the
Company comply with applicable laws, regulations and listing
standards, and recommend any desirable changes to the Board.
o Create, maintain and recommend to the Board for adoption a
Code of Ethics for directors, officers and employees.
o Consider any other corporate governance issues that arise from
time to time, and recommend appropriate actions to the Board.
o Assist management in the review of director and officer
liability insurance requirements and the alternative methods
available for satisfying them.
Evaluation of the Board and Management
o Oversee performance evaluations for the Board as a whole, the
directors and management.
o Maintain an orientation program for new directors and
continuing education programs for directors.
Succession Planning and Other Matters
o Make recommendations to the Board with respect to potential
successors for key management positions.
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BMB Munai * Nominating and Corporate Governance Committee Charter Page 5 of 5
o Obtain advice and assistance from internal or external legal
or other advisors as required for the performance of its
duties.
o Review and evaluate the Committee's performance annually with
respect to its evaluation of its performance.
o Review and reassess the adequacy of this Charter on an annual
basis and recommend to the Board any appropriate changes.
o Perform such other duties and responsibilities as may be
assigned to the Committee, from time to time, by the Board.
Investigations and Studies; Outside Advisors
The Committee may conduct or authorize investigations into or studies of matters
within the scope of the Committee's duties and responsibilities, and may retain,
at the Company's expense, such experts and other professionals as it deems
necessary. The Committee shall have the sole authority to retain or terminate
any search firm to be used to identify director candidates, including sole
authority to approve the search firm's fees and other retention terms, such fees
to be borne by the Company.
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BMB Munai * Nominating and Corporate Governance Committee Charter Page 5 of 5
Proxy - BMB Munai, Inc.
Annual Meeting of Stockholders - October 28, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Boris Cherdabayev and Adam Cook, severally, as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated on the reverse side, all of the
shares of Common Stock of BMB MUNAI, INC., of record in the name of the
undersigned at the close of business on September 28, 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 October 4, 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 and 2.
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 following Class I director
nominees.
For Withhold
01 - Georges Benarroch [ ] [ ]
02 - Valery Tolkachev [ ] [ ]
03 - Troy Nilson [ ] [ ]
[B] Other Proposals
The Board of Directors recommends a vote FOR the following proposals.
For Against Abstain
2. 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 Signature 2 Date (mm/dd/yyyy)
___________________________ _________________________ __/__/ 2005