UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) October 24, 2005
Commission File Number 000-50218
BEKEM METALS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
UTAH 87-0669131
------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
170 Tchaikovsky Street, 4th Floor, Almaty, Kazakhstan
------------------------------------------------------
(Address of principal executive offices)
050000
-----------
(Zip Code)
+7 3272 582 368
-----------------------------------------------
(Registrant's Executive Office Telephone Number)
Check the appropriate box below if the Form 8-K/A filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities
Act
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act
Item 2.01 Completion of Acquisition of Assets
This Form 8-K/A amends the Current Report on Form 8-K (the "Initial
Report") of Bekem Metals, Inc., (the "Company"), filed with the Securities and
Exchange Commission on October 28, 2005, disclosing that on October 24, 2005,
the Company acquired 100% of the outstanding capital stock of Kazakh Metals,
Inc., and its wholly-owned subsidiary, Kyzyl Kain Mamyt LLP. Kazakh Metals,
Inc., was organized on April 8, 2005 and it acquired 100% of the partnership
interests in Kyzyl Kain Mamyt on June 1, 2005.
The purpose of this amendment is to provide the audited financial
statements for the fiscal years ended December 31, 2004 and 2003, and the
unaudited financial statements for the five months ended May 31, 2005 of Kyzyl
Kain Maymt as required by Item 7(a) and the pro forma financial information
required by Item 7(b), which financial statements and information were excluded
from the original filing in reliance on Items 7(a)(4) and 7(b)(2), respectively,
of Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) Bekem Metals, Inc., - Unaudited Pro Forma Financial Information
(b) Kyzyl Kain Maymt, LLP. - Report of Independent Registered Public
Accounting Firm and Financial Statements
(c) Exhibits:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Current Report on Form 8-K/A to be signed on
its behalf by the undersigned hereunto duly authorized.
BEKEM METALS, INC.
Date: May 1, 2006 By: /s/ Marat Cherdabayev
----------------------------
Marat Cherdabayev,
Chief Executive Officer
2
BEKEM METALS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Pro Forma Financial Information
Unaudited Pro Forma Financial Information................................... F-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2005.......................................F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2004.......................................F-3
Notes to Unaudited Pro Forma Financial Information...........................F-4
Kyzyl Kain Mamyt LLP Financial Statements
Report of Independent Registered Public Accounting Firm......................F-5
Financial Statements:
Balance Sheets - May 31, 2005 (Unaudited) and December 31, 2004 and 2003...F-6
Statements of Operations and Changes in Partners' Equity (Deficit) for
the five months ended May 31, 2005 (Unaudited) and for the years ended
December 31, 2004 and 2003...............................................F-7
Statements of Cash Flow for the five months ended May 31, 2005 (Unaudited)
and for the years ended December 31, 2004 and 2003.......................F-8
Notes to Financial Statements................................................F-9
F-1
BEKEM METALS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Kazakh Metals, Inc., a British Virgin Islands international business company
("KMI"), was organized on April 8, 2005. On June 1, 2005, KMI closed its
acquisition of all of the partnership interests of Kyzyl Kain Mamyt LLP ("KKM")
in exchange for total consideration of $100,000 and the assumption of $6,531,255
in debt in an acquisition accounted for under the purchase method of accounting.
The consideration given and the purchase price were recorded at estimated fair
values.
On October 24, 2005, Bekem Metals, Inc. ("BMI") entered into an Acquisition
Agreement with KMI, under which Bekem acquired 100% of the outstanding common
shares of KMI in exchange for the issuance of 61,200,000 common shares. The KMI
shareholders received 61.1% of the BMI common stock outstanding after the
transaction and therefore KMI was considered the acquirer for financial
reporting purposes. Accordingly, the 2005 financial statements of BMI include
financial statements of KMI since its inception.
Brisa Equities Corporation, a British Virgin Islands holding company, together
with other entities its owners control, is the controlling shareholder of KMI
and was also the principal shareholder of BMI. Accordingly, the transaction was
considered to be between entities under common control and did not result in a
change in control of BMI. Following the transaction, entities over which
shareholder maintains voting and investment control held 51,600,000 BMI common
shares, which represent 51.5% of the 100,088,888 outstanding common shares.
The acquisition of the portion the net liabilities of BMI relating to the common
shares owned by the controlling shareholder was recorded at historical cost of
$(161,998). The acquisition of the common shares of BMI purchased from the
minority shareholders of BMI were recorded at their estimated fair value on the
transaction date of $345,000. KMI accounted for the purchase of BMI similar to a
pooling.
The results of operations of the previously separate KMI and BMI were combined
in a manner similar to a pooling for all periods prior to the acquisition, and
therefore, include the operations of KKM since its acquisition by KMI on June 1,
2005. The operations of the KMI and BMI have been consolidated since the
acquisition of October 24, 2005.
The following unaudited pro forma condensed consolidated statements of
operations for the years ended December 31, 2005 and 2004 have been prepared to
present the effects of the acquisition of KKM as though the acquisition had
occurred on January 1, 2005 and 2004, respectively. The unaudited pro forma
financial information is illustrative of the effects of the acquisition and does
not necessarily reflect the financial position or results of operations that
would have resulted had the acquisition actually occurred at those dates. In
addition, the pro forma financial information is not necessarily indicative of
the results that may be expected for the year ending December 31, 2005, or any
other period.
F-2
BEKEM METALS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
Kyzyl Kain
Mamyt, LLP
Bekem Metals, Inc. ----------------
------------------ For the Five
For the Year Ended Months Ended Pro Forma
December 31, 2005 May 31, 2005 Adjustments Pro Forma
------------------------------------------------------------------------------------------------------------------------------
Revenue $ 148,549 $ 118,029 $ - $ 266,578
Operating expenses 1,956,711 536,267 $ 2,492,978
------------------------------------------------------------------------------------------------------------------------------
Loss from operations (1,808,162) (418,239) - (2,226,400)
Other income (expense) (302,663) (113,335) (224,891)(a) (640,889)
------------------------------------------------------------------------------------------------------------------------------
Net Loss Before Minority Interest and Taxes $ (2,110,825) $ (531,574) $ (224,891) $ (2,867,289)
Deferred tax benefit 888,145 $ 888,145
Loss in minority interest (19,426) $ (19,426)
------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (1,203,254) $ (1,959,718)
==============================================================================================================================
Basic net loss per common share $ (0.03)
------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding used in calculation
of basic loss per common share 100,088,888
------------------------------------------------------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FRO THE YEAR ENDED DECEMBER 31, 2004
Kyzyl Kain
Bekem Metals, Inc. Mamyt, LLP
-------------------- ------------------
For the Year Ended For the Year Ended Pro Forma
December 31, 2004 December 31, 2004 Adjustments Pro Forma
--------------------------------------------------------------------------------------------------------------------------------
Revenue $ - $ 267,515 $ - $ 267,515
Operating expenses 214,511 2,386,405 - 2,600,916
--------------------------------------------------------------------------------------------------------------------------------
Loss from operations (214,511) (2,118,890) - (2,333,401)
Other income (expense) - 558,465 19,510 (a) 577,975
--------------------------------------------------------------------------------------------------------------------------------
Net loss $ (214,511) $ (1,560,425) $ 19,510 $ (1,755,426)
--------------------------------------------------------------------------------------------------------------------------------
Basic net loss per common share $ (0.05)
--------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding used in calculation
of basic loss per common share 38,300,000
--------------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to unaudited pro forma financial information.
F-3
BEKEM METALS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
A To include interest at 6.29% on the new loans as if they existed for 12
months and to offset the interest expense associated with the old
loans, which were assumed by Kazakh Metals Inc. as part of the
acquisition.
B KKM makes its principal investing and financing transactions and its
operating expenses in Kazakh Tenge (KZT). Therefore, its financial
statements are expressed in Kazakh Tenge, the functional currency. The
comparative table below links the KZT balances in the KKM financial
statements with the USD balances in the accompanying pro forma
financial statements using an average exchange rate for the period of
KZT 130.70 to U.S.$1, as reported by The National Bank of Kazakhstan:
Kyzyl Kain Mamyt, LLP
------------------------------------
For the Five Months Ended
May 31, 2005
------------------------------------------------------------------------------
Revenue KZT 15,426,345 $ 118,029
Operating expenses 70,090,158 536,267
------------------------------------------------------------------------------
Loss from operations (54,663,813) (418,239)
Other income (expense) (14,812,873) (113,335)
------------------------------------------------------------------------------
Net loss KZT (69,476,686) $ (531,574)
------------------------------------------------------------------------------
F-4
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Partners
Kyzyl Kain Mamyt LLP
We have audited the balance sheets of Kyzyl Kain Mamyt LLP as of December 31,
2004 and 2003 and the related statements of operations, partners' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Kyzyl Kain Mamyt LLP as of December
31, 2004 and 2003, and the results of its operations and cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 13, 2006
F-5
KYZYL KAIN MAMYT LLP
BALANCE SHEETS
U.S. DOLLARS
December 31, -------------
May 31, 2005 ---------------------------------------- May 31, 2005
(Unaudited) 2004 2003 (Unaudited)
-------------------------------------------------------------------------------------------------------- ------------
ASSETS
Current Assets
Cash KZT 3,167,788 KZT 2,437,004 KZT 24,839,625 $ 24,113
Trade accounts receivable - net 1,218,532 918,216 1,101,991 9,276
Other receivables - net 14,084,424 9,828,637 90,241,647 107,212
Inventories 39,008,075 43,031,964 50,532,857 296,933
Prepaid expenses and other current assets 4,429,719 - - 33,719
-------------------------------------------------------------------------------------------------------- ------------
Total Current Assets 61,908,538 56,215,821 166,716,120 471,253
-------------------------------------------------------------------------------------------------------- ------------
Long term receivables - net 12,000 18,450,200 - 91
Property, plant and equipment (net of
accumulated depreciation of KZT
58,033,926, KZT 56,859,736 and KZT
52,442,617) 45,344,538 46,518,728 48,975,747 345,167
Unproved mineral interests 10,741,388 11,457,481 - 81,764
-------------------------------------------------------------------------------------------------------- ------------
Total Assets KZT 118,006,464 KZT 132,642,230 KZT 215,691,867 $ 898,276
======================================================================================================== ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable KZT 51,599,993 KZT 56,096,429 KZT 84,715,380 $ 392,784
Accrued expenses 43,613,044 46,981,084 21,019,155 331,986
Deferred revenue - - 18,438,200 -
Current portion of long-term notes
payable 773,294,406 808,184,553 706,729,276 5,886,385
-------------------------------------------------------------------------------------------------------- ------------
Total Current Liabilities 868,507,443 911,262,066 830,902,011 6,611,155
Long term notes payable - net 210,750,541 113,580,229 77,026,299 1,604,252
Asset Retirement Obligation 12,825,663 12,400,432 - 97,630
-------------------------------------------------------------------------------------------------------- ------------
Total Liabilities 1,092,083,647 1,037,242,727 907,928,310 8,313,037
-------------------------------------------------------------------------------------------------------- ------------
Partners' Equity (Deficit)
Partners' Capital 97,964,900 97,964,900 97,964,900 745,718
Retained (Deficit) (1,072,042,083) (1,002,565,397) (790,201,343) (8,160,479)
-------------------------------------------------------------------------------------------------------- ------------
Total Partners' Equity (Deficit) (974,077,183) (904,600,497) (692,234,443) (7,414,761)
-------------------------------------------------------------------------------------------------------- ------------
Total Liabilities and Partners' Equity
(Deficit) KZT 118,006,464 KZT 132,642,230 KZT 215,691,867 $ 898,276
======================================================================================================== ============
The accompanying notes are an integral part of these financial statements.
F-6
KYZYL KAIN MAMYT LLP
STATEMENTS OF OPERATIONS
AND
CHANGES IN PARTNERS' EQUITY (DEFICIT)
U.S. DOLLARS
-----------------
For the Five For the Five
Months Ended For the Years Ended December 31, May,31, 2005
May 31, 2005 --------------------------------------------- Months Ended
(Unaudited) 2004 2003 (Unaudited)
---------------------------------------------------------------------------------------------------------- -----------------
Revenue KZT 15,426,345 KZT 36,392,725 KZT 11,112,864 $ 118,029
---------------------------------------------------------------------------------------------------------- -----------------
Operational Expenses
Cost of product sold 19,505,217 38,615,872 8,821,720 149,237
General and administrative expenses 50,584,941 295,477,353 664,278,142 387,031
---------------------------------------------------------------------------------------------------------- -----------------
Total Expenses 70,090,158 334,093,225 673,099,862 536,267
---------------------------------------------------------------------------------------------------------- -----------------
Loss From Operations (54,663,813) (297,700,500) (661,986,998) (418,239)
Other Income (Expense)
Other revenue 1,772,312 737,736 5,860,496 13,560
Interest expense (3,474,559) (35,499,073) (20,295,944) (26,584)
Exchange rate (loss) gain (13,110,626) 120,097,783 21,376,745 (100,311)
---------------------------------------------------------------------------------------------------------- -----------------
Net Other Income (Expense) (14,812,873) 85,336,446 6,941,297 (113,335)
Net Loss KZT (69,476,686) KZT (212,364,054) KZT (655,045,701) (531,574)
========================================================================================================== =================
Partners' Deficit - Beginning of Period (1,002,565,397) (790,201,343) (135,155,642) (7,631,616)
---------------------------------------------------------------------------------------------------------- -----------------
Partners' Deficit - End of Period KZT(1,072,042,083) KZT(1,002,565,397) KZT (790,201,343) $ (8,160,479)
========================================================================================================== =================
The accompanying notes are an integral part of these financial statements.
F-7
KYZYL KAIN MAMYT LLP
STATEMENTS OF CASH FLOW
U.S. DOLLARS
------------------
For the Five For the Five
Months Ended Months Ended
May 31, 2005 For the Years Ended December 31, May 31, 2005
-------------------------------------
(Unaudited) 2004 2003 (Unaudited)
-------------------------------------------------------------------------------------------------------------- ------------------
Cash Flows From Operating Activities
Net loss KZT (69,476,686) KZT (212,364,054) KZT (655,045,701) $ (531,574)
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 1,890,283 4,417,119 3,538,287 14,389
Accretion 425,231 942,951 - 3,237
Write off bad debt - - 412,681,818 -
Changes in operating assets and liabilities:
Accounts receivable (300,316) 183,775 (1,101,991) (2,286)
Other receivables 14,182,413 61,962,810 (72,344,465) 107,958
Inventories 4,023,889 7,500,893 (9,654,857) 30,630
Prepaid expenses (4,429,719) - - (33,719)
Accounts payable (4,496,436) (28,618,951) 19,995,380 (31,516)
Accrued expenses (3,368,040) 25,961,929 13,695,155 (25,638)
Deferred Revenue - (18,438,200) 18,438,200 -
-------------------------------------------------------------------------------------------------------------- ----------------
Net Cash From Operating Activities (61,549,381) (158,451,728) (269,798,174) (468,520)
-------------------------------------------------------------------------------------------------------------- ----------------
Cash Flows From Investing Activities
Purchase of property, plant and equipment - (1,960,100) (2,067,194) -
-------------------------------------------------------------------------------------------------------------- ----------------
-
Net Cash From Investing Activities - (1,960,100) (2,067,194) -
-------------------------------------------------------------------------------------------------------------- ----------------
Cash Flows From Financing Activities
Payments on long-term debt (56,068,726) (97,932,012) - (426,800)
Proceeds from long-term debt 118,348,891 235,941,219 296,611,993 900,882
-------------------------------------------------------------------------------------------------------------- ----------------
Net Cash From Financing Activities 62,280,165 138,009,207 296,611,993 474,082
-------------------------------------------------------------------------------------------------------------- ----------------
Net Increase (Decrease) in Cash 730,784 (22,402,621) 24,746,625 5,562
Cash At Beginning of Period 2,437,004 24,839,625 93,000 18,551
-------------------------------------------------------------------------------------------------------------- ================
Cash At End of Period KZT 3,167,788 KZT 2,437,004 KZT 24,839,625 $ 24,113
============================================================================================================== ================
The accompanying notes are an integral part of these financial statements.
F-8
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
NOTE 1 - BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business -- Kyzyl Kain Mamyt LLP ("KKM") (the "Company") was acquired
by Kazakh Metals, Inc., a British Virgin Islands international business company,
("KMI") on June 1, 2005. KKM is engaged in the acquisition, exploration, and
production of mineral resource properties. KKM holds exploration and production
licenses from the government of Kazakhstan to a 163,770 hectare (404,682 acres)
parcel, in northwestern Kazakhstan. The licenses grant KKM the right to explore
for and produce nickel and cobalt from deposits located within the territory
through October 12, 2011, which may be extended upon agreement between KKM and
the Geology and Minerals Resources Committee of the Ministry of Energy and
Minerals Resources (MEMR) of the Republic of Kazakhstan. KKM also holds a
license to explore for and produce Mamyt brown coal from a deposit located
within 40 kilometers of its cobalt and nickel deposit. This license expires on
December 11, 2018 with further possible extensions.
Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates. The more significant areas requiring the use of
management estimates and assumptions relate to mineral reserves that are the
basis for future cash flow estimates and units-of-production depreciation,
depletion and amortization calculations; environmental, reclamation and closure
obligations; asset impairments; write-down of inventory to net realizable value;
valuation allowances for deferred tax assets; reserves for contingencies and
litigation; and the fair value and accounting treatment of financial
instruments. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
Prepaid Expenses -- Prepaid expenses relate to office rent, subscriptions, and
insurance. Prepaid expenses are charged to operations in the period the related
service or work is performed.
Mineral Property Rights -- Mineral property acquisition costs, site restoration
costs and development costs on mineral properties with proven and probable
reserves are capitalized and will be depleted using the units-of-production
method over the estimated life of the reserves. If there are insufficient
reserves to use as a basis for depleting such costs, they are written off as a
mineral property or mineral interest impairment in the period in which the
determination is made. Site restoration costs are depleted over the term of
their expected life. Interest costs are capitalized on mineral properties and
mineral interests in development. The development potential of mining properties
is established by the existence of proven and probable reserves, reasonable
assurance that the property can be permitted as an operating mine and evidence
that there are no metallurgical or other impediments to the production of
saleable metals.
Exploration costs incurred on mineral interests, other than acquisition costs,
prior to the establishment of proven and probable reserves are charged to
operations as incurred. Development costs incurred on mineral interests with
proven and probable reserves will be capitalized as mineral properties. The
Company regularly performs evaluations of its investment in mineral interests to
F-9
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
assess the recoverability and/or the residual value of its investments in
these assets. All mineral interests and mineral properties are reviewed for
impairment whenever events or circumstances change which indicate the carrying
amount of an asset may not be recoverable, utilizing established guidelines
based upon undiscounted future net cash flows from the asset or upon the
determination that certain exploration properties do not have sufficient
potential for economic mineralization.
Management's estimates of mineral prices, recoverable probable reserves, and
operating, capital and reclamation costs, when available, are subject to certain
risks and uncertainties, which may affect the recoverability of mineral property
costs. Although management has made its best estimate of these factors, it is
possible that changes could occur in the near term, which could adversely affect
the future net cash flows to be generated from the properties.
Property, and Equipment - Property, plant and equipment is carried at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis over
the following estimated useful lives of the assets:
---------------------------------------------------------------
Buildings and constructions 12.5 years
Machinery and equipment 7 years
Vehicles 10 years
Other fixed assets 3 - 10 years
---------------------------------------------------------------
Depreciation expense was KZT 1,890,283 , KZT 4,417,119, and KZT 3,538,287 for
the period ended May 31, 2005 and for years ended December 31, 2004 and 2003,
respectively.
Stripping Costs - In general, mining costs are allocated to production costs,
stockpiles, and inventories, and are charged to costs applicable to sales when
minerals are sold. However, the mining industry, generally, defers and amortizes
certain mining costs on a units-of-production basis over the life of the mine.
These mining costs, which are commonly referred to as "deferred stripping"
costs, are incurred in mining activities that are normally associated with the
removal of waste rock. The deferred stripping accounting method is generally
accepted in the mining industry where mining operations have diverse grades and
waste-to-ore ratios; however, industry practice does vary. Deferred stripping
matches the costs of production with the sale of minerals, where this procedure
is employed, by assigning each quantity of mineral with an equivalent amount of
waste removal cost. When stripping costs are expensed as incurred, there might
be greater volatility in a company's period-to-period results of operations. The
Company did not acquire any deferred stripping costs in the acquisition of KKM.
In March 2005, the FASB ratified Emerging Issues Task Force Issue No. 04-6,
"Accounting for Stripping Costs Incurred during Production in the Mining
Industry," (EITF 04-6) which addresses the accounting for stripping costs
incurred during the production phase of a mine and refers to these costs as
variable production costs that should be included as a component of inventory to
be recognized in costs applicable to sales in the same period as the revenue
from the sale of inventory. As a result, capitalization of stripping costs is
appropriate only to the extent product inventory exists at the end of a
reporting period and the carrying value is less than the net realizable value.
F-10
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
The Company will adopt the provisions of EITF 04-6 on January 1, 2006. The
Company has had very limited production activity in the recent period, so the
full effect of this adoption will be felt as production increases in the future
periods.
Depreciation, Depletion and Amortization -- Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the straight-line method at
rates sufficient to depreciate such costs over the estimated future lives of
such facilities or equipment. These lives do not exceed the estimated mine life
based on proven and probable reserves as the useful lives of these assets are
considered to be limited to the life of the relevant mine.
Costs incurred to develop new properties are capitalized as incurred, where it
has been determined that the property can be economically developed based on the
existence of proven and probable reserves. At the Company's surface mines, these
costs include costs to further delineate the ore body and remove overburden to
initially expose the ore body. All such costs are amortized using the
units-of-production ("UOP") method over the estimated life of the ore body based
on recoverable tons to be mined from proven and probable reserves.
Major development costs incurred after the commencement of production are
amortized using the UOP method based on estimated recoverable ounces to be mined
from proven and probable reserves. Depending upon whether the development is
expected to benefit the entire remaining ore body, or specific ore blocks or
areas only, the UOP basis is either the life of the entire ore body, or the life
of the specific ore block or area.
The calculation of the UOP rate of amortization, and therefore the annual
amortization charge to operations, could be materially impacted to the extent
that actual production in the future is different from current forecasts of
production based on proven and probable reserves. This would generally occur to
the extent that there were significant changes in any of the factors or
assumptions used in determining reserves. These factors could include: (i) an
expansion of proven and probable reserves through exploration activities; (ii)
differences between estimated and actual cash costs of mining, due to
differences in grade, metal recovery rates and foreign currency exchange rates;
and (iii) differences between actual commodity prices and commodity price
assumptions used in the estimation of reserves. Such changes in reserves could
similarly impact the useful lives of assets depreciated on a straight-line
basis, where those lives are limited to the life of the mine, which in turn is
limited to the life of the proven and probable reserves.
The expected useful lives used in depreciation, depletion and amortization
calculations are determined based on applicable facts and circumstances, as
described above. Significant judgment is involved in the determination of useful
lives, and no assurance can be given that actual useful lives will not differ
significantly from the useful lives assumed for purpose of depreciation,
depletion and amortization calculations.
Revenue Recognition - For its operating mine, revenues currently arise from the
limited sale of ore and Mamyt brown coal. Revenue is recorded when persuasive
evidence of an arrangement exists, title to product transfers to the customer,
and collectibility is reasonably assured. Produced, but unsold minerals or ore
are recorded as inventory until sold.
Financial Instruments - The nature of the Company's operations may expose the
Company to fluctuations in commodity prices, foreign currency exchange risk and
credit risk. The Company recognizes these risks and manages its operation in a
F-11
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
manner such that exposure to these risks is minimized to the extent practical.
The Company is not exposed to fluctuations in interest rates because certain of
its loans are interest free, as a general requirement under Kazakh law for
non-financial institutions.
Income Taxes - Income taxes are calculated using the liability method of tax
accounting. Under this method, future income tax assets and liabilities are
computed based on temporary differences between the tax basis and carrying
amount on the balance sheet for assets and liabilities. Future income tax assets
and liabilities are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.
Interim Financial Statements - The accompanying unaudited interim financial
statements as of May 31, 2005 and for the period ended May 31, 2005, have been
prepared by management of the Company without an audit. In the opinion of
management, these financial statements reflect all adjustments, consisting only
of normal recurring entries, necessary for a fair presentation of financial
results for the interim periods. The results of operations presented in the
accompanying interim financial statements are not necessarily indicative of the
results that may be expected for the full fiscal year ending December 31, 2005.
NOTE 2 - BASIS FOR TRANSLATING FINANCIAL STATEMENTS
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. KKM makes its
principal investing and financing transactions and its operating expenses in
Kazakh Tenge (KZT). Therefore, the financial statements are expressed in Kazakh
Tenge, the functional currency. However, solely for the convenience of the
reader, the accompanying financial statements as of and for the five months
ended May 31, 2005 have been translated into United States dollars at the rate
of KZT 131.37 = U.S.$1 (May 31, 2005 rate) and KZT 130.70 (five-month average
rate), respectively, the approximate exchange rates reported by The National
Bank of Kazakhstan. This translation should not be construed as a representation
that amounts shown could be converted into U.S. dollars.
NOTE 3 - MINERAL PROPERTY RIGHTS
KKM holds exploration and production licenses from the government of Kazakhstan
to a 163,770 hectare (404,682 acres), in northwestern Kazakhstan. The licenses
grant KKM the right to explore for and produce nickel and cobalt from deposits
located within the territory through October 12, 2011, which may be extended
upon agreement between KKM and the Geology and Minerals Resources Committee of
the Ministry of Energy and Minerals Resources (MEMR) of the Republic of
Kazakhstan. KKM also holds a license to explore for and produce Mamyt brown coal
from a deposit located within 40 kilometers of its cobalt and nickel deposit.
This license expires on December 11, 2018 with further possible extensions.
The government of Kazakhstan retains the title to the property; accordingly, the
Company's mineral interest is considered to be an intangible asset. An asset
F-12
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
retirement obligation has been recorded. The asset retirement cost is depleted
over the life of the contract. Capitalized costs and related accumulated
amortization at May 31, 2005 are as follows:
Unproved Net Unproved
Mineral Property Depletion of Asset Mineral Property
Rights Retirement Costs Rights
---------------------------------------------------------------------------------------------------------------------------
Net Carrying Value at December 31, 2004 KZT 11,457,481 KZT 477,395 KZT 10,980,086
Acquisitions:
Asset retirement obligations - 238,698 (238,698)
---------------------------------------------------------------------------------------------------------------------------
Net Carrying Value at May 31, 2005 KZT 11,457,481 KZT 716,093 KZT 10,741,388
===========================================================================================================================
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment consist of the following:
December 31,
May 31, ---------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------
Equipment KZT 39,376,656 KZT 39,376,656 KZT 39,097,332
Vehicles 10,418,731 10,418,731 8,813,214
Buildings and construction 51,343,917 51,343,917 51,343,917
Other PP&E 2,239,160 2,239,160 2,163,901
==================================================================================================
103,378,464 103,378,464 101,418,364
Accumulated depreciation (58,033,926) (56,859,736) (52,442,617)
--------------------------------------------------------------------------------------------------
Net Property and Equipment KZT 45,344,538 KZT 46,518,728 KZT 48,975,747
==================================================================================================
NOTE 5 - INCOME TAXES
In accordance with the laws and regulations of the Republic of Kazakhstan,
income taxes are calculated at the statutory rate of 30 percent. Net operating
losses for companies in the exploration and development stage may be carried
forward for the 7 subsequent years from the date the losses are incurred.
Therefore, the Company has deferred tax assets due to the savings of income tax
in future periods. However, the Company assessed the recoverability of these
deferred tax assets and created a provision against them until it has more
evidence of its recoverability in the future periods.
Deferred tax assets and liabilities were as follows:
F-13
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
May 31, December 31,
2005 2004
------------------------------------------------------------------------------------------------------
Tax loss carryforward KZT 81,718,260 KZT 60,875,254
Asset retirement obligation (625,283) (426,104)
Valuation allowance (81,092,977) (60,449,150)
------------------------------------------------------------------------------------------------------
Total deferred tax assets KZT - KZT -
======================================================================================================
The following is a reconciliation of the amount of tax that would result from
applying the federal rate to pretax income with the provision for income taxes:
For the Five Months Ended May 31, 2005
------------------------------------------------------------------------------
Tax at statutory rate (30%) KZT (20,843,006)
Deferred tax asset valuation change 20,843,006
==============================================================================
Income tax provision KZT -
==============================================================================
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
May 31, December 31, December 31,
2005 2004 2003
---------------------------------------------------------------------------------------------------------------
Note payable to a company bearing interest at 0%;
denominated in USD; due April 2009; unsecured; KZT 65,826,474 KZT 49,508,290 KZT -
Note payable to a company bearing interest at 3%;
denominated in USD; due April 2010; unsecured; 72,732,900 - -
Note payable to a company bearing interest at 0%;
denominated in USD; due August 2008; unsecured; 64,257,367 63,173,695 71,609,800
Note payable to a company bearing interest at
LIBOR plus 2% (6.39% at December 31, 2005);
denominated in USD; due March 2010; unsecured; 7,933,800 - -
Note payable to a company bearing interest at 0%;
due on demand; unsecured; 184,712,743 184,712,743 -
Bank overdraft bearing interest at 14%; due on
demand; unsecured; 2,500,000 - -
Note payable to a bank bearing interest at 14%;
due on demand; unsecured; 586,081,663 623,471,810 706,729,276
---------------------------------------------------------------------------------------------------------------
Total Long-term Debt 984,044,947 921,764,782 783,755,575
Less: Current Portion (773,294,406) (808,184,553) (706,729,276)
---------------------------------------------------------------------------------------------------------------
Long-term Debt - Net of Current Portion KZT 210,750,541 KZT 113,580,229 KZT 77,026,299
---------------------------------------------------------------------------------------------------------------
F-14
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
NOTE 7 - ASSET RETIREMENT OBLIGATION
During 2004, the Company recorded the effects of an asset retirement obligation
in accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and related interpretations, which requires entities to record the fair value of
a liability for an asset retirement obligation when it is incurred. Under the
Contract with the Geology and Minerals Resources Committee of the Ministry of
Energy and Minerals Resources (MEMR) of the Republic of Kazakhstan, the Company
is required to remediate the property from the effects of the open pit mining
process. The standard applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development or normal use of the asset. The Company's asset retirement
obligations relate primarily to the obligation to fill mining pits and restore
surface conditions at the conclusion of the term of the Contract.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded,
the related cost is capitalized by increasing the carrying amount of the related
mineral interest rights. Over time, the liability is accreted upward for the
change in its present value each period until the obligation is settled. The
initial capitalized cost is amortized as a component of mineral rights
interests.
The reconciliation of the asset retirement obligation is as follows:
May 31, 2005 December 31, 2004
--------------------------------------------------------------------------------------
Balance at beginning of period KZT 12,400,432 KZT -
Liabilities incurred - 11,457,481
Accretion expense during the period 425,231 942,951
--------------------------------------------------------------------------------------
Balance at End of Period KZT 12,825,663 KZT 12,400,432
======================================================================================
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Concentration of Risk Relating to Foreign Mining Operations -- All of the
Company's properties are located within the Republic of Kazakhstan in Central
Asia. In addition to general industry risks of nickel and cobalt price
fluctuations, and potential lack of economic viability of the claims, the
Company has a concentration of risk related to its foreign properties and
interests which are subject to political uncertainty, changes in government,
unilateral renegotiation of licenses, claims or contracts, and nationalization,
or other uncertainties. In addition, the validity of mining claims, which
constitute the Company's property holdings in Kazakhstan, may, in certain cases,
be uncertain and are subject to being contested.
Kazakhstan Business Environment - Kazakhstan, as an emerging market, has a legal
and regulatory infrastructure that is not as mature and stable as those usually
existing in more developed free market economies. As a result, operations
carried out in Kazakhstan can involve risks and uncertainties that are not
typically associated with those in developed markets. The instability associated
with the ongoing transformation process to a market economy can lead to changes
F-15
KYZYL KAIN MAMYT LLP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Information with respect to May 31, 2005 and for the period
ended May 31, 2005 is unaudited.)
in the business conditions in which the Company currently operates. Changes in
the political, legal, tax or regulatory environment could adversely impact the
Company's operations.
Tax Matters - The local and national tax environment in the Republic of
Kazakhstan is subject to change and inconsistent application, interpretation and
enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted
by the Kazakh authorities, can lead to the imposition of fines, penalties and
interest.
Environmental Matters - Extensive national, regional and local environmental
laws and regulations in Kazakhstan affect the Company's operations. These laws
and regulations set various standards regulating certain aspects of health and
environmental quality, provide for user fees, penalties and other liabilities
for the violation of these standards and establish, in some circumstances,
obligations to remediate current and former facilities and off-site locations.
The Company believes it is currently in compliance with all existing Republic of
Kazakhstan environmental laws and regulations. However, as new environmental
laws and legislation are enacted and the old laws are repealed, interpretation,
application and enforcement of the laws may become inconsistent. Compliance in
the future could require significant expenditures, which may adversely affect
the Company's operations.
NOTE 9 - SUBSEQUENT EVENTS
On October 24, 2005, Kazakh Metals, Inc. was acquired by Bekem Metals, Inc. in a
purchase business combination under which Bekem acquired 100% of the outstanding
common shares of KMI in exchange for the issuance of 61,200,000 common shares.
The primary asset of KMI is its wholly owned subsidiary, KKM.
The principal shareholder of Bekem was also the principal shareholder of KMI.
Accordingly, the transaction was considered to be between entities under common
control and did not result in a change in control of Bekem. Following the
transaction, entities over which shareholder maintains voting and investment
control hold 51,600,000 Bekem common shares, which represent 51.5% of the
100,088,888 outstanding common shares. The acquisition of the portion of KMI
owned by the principal shareholder will be recorded at historical cost. The
portion of KMI purchased from the minority shareholders of KMI will be recorded
at fair value.
F-16