United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
September 30, 2002 000-33215
EMPS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization
87-0617371
(I.R.S. Employer Identification No.)
875 Donner Way, Unit 705, Salt Lake City, Utah 84108
(Address of principal executive offices)
(801) 582-1881
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
State the number of shares outstanding of each of the registrants classes of
common equity, as of the latest practicable date.
Common stock, par value $.001; 30,000,000 shares outstanding
as of November 15, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Condensed Consolidated Balance Sheets (Unaudited) as of
September 30, 2002 and December 31, 2001........................ 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three months ended
September 30, 2002 and 2001 and for the nine
months ended September 30, 2002 and 2001........................ 4
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) for the year ended December 31, 2001 and
for the nine months ended September 30, 2002.................... 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended
September 30, 2002 and 2001..................................... 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)..................................................... 7
Item 2. Managements Discussion and Analysis or
Plan of Operation..........................................13
Item 3. Controls and Procedures......................................17
PART II-- OTHER INFORMATION
Item 2. Changes in Securities........................................18
Item 5. Other Information............................................18
Item 6. Exhibits and Reports on Form 8-K.............................18
Signatures............................................................20
Certifications Pursuant to the Sarbanes-Oxley Act of 2002.............21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
September 30, December 31,
2002 2001
---------------- ---------------
ASSETS
Current Assets
Cash $ 507 $ 259
Trade accounts receivable, net of allowance of
$37 and $76, respectively 1,017 330
Advance to related parties - 105
Inventories 74 55
Prepaid expenses and other current assets 290 145
---------------- ---------------
Total Current Assets 1,888 894
---------------- ---------------
Investments 59 85
Vessels and Equipment, net 6,836 5,792
---------------- ---------------
Total Assets $ 8,783 $ 6,771
================ ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Advances from related parties $ 2,828 $ 1,849
Accounts payable and accrued expenses 350 461
Income tax payable 433 363
Current portions of long term debt to related parties 11,014 4,777
---------------- ---------------
Total Current Liabilities 14,625 7,450
---------------- ---------------
Long-Term debt to Related Parties 322 5,081
---------------- ---------------
Stockholders' Deficit
Common stock, $0.001 par value, 150,000,000 shares
authorized, 30,000,000 shares issued and outstanding 30 27
Additional paid-in capital (53) (27)
Accumulated other comprehensive income 271 104
Accumulated deficit (6,412) (5,864)
---------------- ---------------
Total Stockholders Deficit (6,164) (5,760)
---------------- ---------------
Total Liabilities and Stockholders' Deficit $ 8,783 $ 6,771
================ ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues
Charter revenue $ 1,806 $ 1,064 $ 3,211 $ 1,543
Accomodations, meals & services 161 208 250 329
Product sales 193 80 420 192
------------- ------------- ------------- -------------
Total revenues 2,160 1,352 3,881 2,064
------------- ------------- ------------- -------------
Operating Expenses
Payroll and benefits 408 275 959 516
Costs of food 28 26 197 113
Costs of fuel 8 14 15 49
Insurance 21 29 154 98
Repairs and maintenance 9 - 147 6
Cost of product sold 54 19 138 30
Depreciation 308 37 559 111
------------- ------------- ------------- -------------
Total operating expenses 836 400 2,169 923
------------- ------------- ------------- -------------
General and Administrative 632 203 1,147 585
------------- ------------- ------------- -------------
Other Income (expense)
Interest expense (607) (143) (938) (319)
Exchange loss (54) (23) (164) (75)
Other income (expense) (7) 4 (11) 13
------------- ------------- ------------- -------------
Net other expense (668) (162) (1,113) (381)
------------- ------------- ------------- -------------
Net Income/(Loss) $ 24 $ 587 $ (548) $ 175
============= ============= ============= =============
Basic Income (Loss) per common share $ - $ - $ - $ -
============= ============= ============= =============
Weighted average common shares
outstanding - basic and diluted 29,094,573 27,089,700 27,750,647 27,089,700
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
Cumulative
Other
Common Stock Additional Compre- Total
Paid-In hensive Accumulated Stockholders'
Shares Amount Capital Loss Deficit Equity
------------- --------- ----------- ----------- ------------ ---------------
Balance, December 31, 2000 27,088,000 $ 27 $ (27) $ 22 $ (5,452) $ (5,430)
-------------
Net Loss for the year ended - - - - (412) (412)
December 31, 2001
Currency translation
adjustment - - - 82 - 82
-------------
Comprehensive Loss 330
=============
------------- --------- ----------- ----------- ------------ ---------------
Balance, December 31, 2001 27,088,000 27 (27) 104 (5,864) (5,760)
-------------
Net Loss for the nine months
ended September 30, 2002 - - - - (548) (548)
Currency translation
adjustment - - - 167 - 167
-------------
Comprehensive Loss (381)
=============
Acquisition of EMPS
Corporation - July 30, 2002 2,910,000 3 (26) - - (23)
------------- --------- ----------- ----------- ------------ ---------------
Balance, September 30, 2002 30,000,000 $ 30 $ (53) $ 271 $ (6,412) $ (6,164)
========== ====== ====== ====== ========= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the Nine Months Ended
September 30,
----------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (548) $ 175
Adjustments to reconcile net loss to nec cash
provided by operating activities:
Depreciation 559 132
Loss on investment in equity method investee 29 9
Bad debt expense - 41
Foreign currency exchange loss 164 75
Changes in operating assets and liabilities:
Trade accounts receivable (679) (260)
Prepaid expenses and other current assets (145) (76)
Inventories (19) (2)
Accounts payable and accrued expenses (154) (205)
Income taxes payable 70 135
------------ ------------
Cash (used in) provided by operating activities (723) 24
------------ ------------
Cash flows from investing activities:
Cash received in the purchase of EMPS Corporation 9 -
Purchase of vessels and equipment (318) (327)
------------ ------------
Cash used in investing activities (309) (327)
------------ ------------
Cash flows from financing activities:
Increase in advances from related parties 1,084 343
Proceeds from issuance of long term debt to related parties 597 297
Principal payments on long term debt to related parties (405) (35)
------------ ------------
Cash provided by financing activities 1,276 605
------------ ------------
Effect of exchange rate changes on cash 4 2
------------ ------------
Net change in cash 248 304
Cash at beginning of period 259 146
------------ ------------
Cash at end of period $ 507 $ 450
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 296 $ 55
============ ============
Cash paid for income taxes $ 85 $ 86
============ ============
Supplemental disclosure of non-cash investing and financing activities:
During September 2002 EMPS purchased the vessel Caspian Eva, valued at
$1,445 for cash of $159 and a note payable to a related party of $1,286.
During February 2002, EMPS partially refinanced a related party note with a
new related party note in the amount of $3,333. On May 19, 2002 Caspian
completed a "reverse merger" acquisition of EMPS Corporation wherein EMPS
issued common stock valued at ($23) to the owners of Caspian. Caspian
acquired assets with a fair value of $12, cash of $9 and assumed liabilities
of $44.
During September 2001, Caspian purchased the vessel Caspian Yelana, valued
at $2,527 for cash of $327 and a note payable to a related party of $2,200.
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Interim Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of EMPS Corporation and
its subsidiaries, Caspian Services Group Limited, CJSC Bauta, and EMPS Research
Corporation, collectively ("EMPS" or the "Company"). These financial statements
are condensed and, therefore, do not include all disclosures normally required
by accounting principles generally accepted in the United States of America.
These statements should be read in conjunction with the most recent annual
financial statements of Caspian Services Group Limited for the years ended
December 31, 2001 and 2000, included in the Company's Form 8-K/A filed with the
Securities and Exchange Commission on October 7, 2002. In particular, The
Company's significant accounting principles were presented as Note 1 to the
Consolidated Financial Statements in that Report. In the opinion of management,
all adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2002.
Reorganization and Merger - On May 29, 2002, the stockholders of EMPS
Corporation ("EMPS") and the stockholders of Caspian Services Group Limited
("Caspian") ratified an Agreement and Plan of Reorganization (the "Agreement")
with EMPS whereby EMPS agreed to acquire all of the issued and outstanding
shares of Caspian in exchange for 27,089,700 restricted common shares of EMPS.
EMPS had 2,910,300 shares of common stock outstanding immediately prior to the
transaction and had negative stockholders' equity of ($22,942). Pursuant to the
terms of the Agreement, Caspian become a wholly owned subsidiary of EMPS and the
Caspian shareholders assumed the controlling interest in EMPS.
The agreement was accounted for as the reorganization of Caspian and the
issuance of 2,910,300 common shares to the EMPS shareholders. Those shares were
recorded at ($22,942), which was the fair value of the net assets held by EMPS
at the date of reorganization. The 27,089,700 shares of common stock issued in
the transaction to the Caspian shareholders were accounted for in the
accompanying historical Caspian financial statements in a manner similar to a
stock split, retroactively restated for all periods presented. The accompanying
condensed consolidated financial statements include the operations of EMPS and
its subsidiary, EMPS Research, since the date of the reorganization.
Principles of Consolidation -- The accompanying consolidated financial
statements include operations and balances of EMPS and its wholly majority owned
subsidiaries. EMPS has a non-controlling 50% interest in Bautino Development
Company, LLC, for which it accounts for by the equity method. Intercompany
balances and transactions have been eliminated in consolidation.
Nature of Operations -- The Company's principal operations are carried out by
its wholly-owned subsidiary, Caspian Services Group, Limited ("Caspian").Caspian
was incorporated in the British Virgin Islands on December 22, 1999 and operates
a branch in Aktau, Kazakhstan where its activities consist of the operation and
maintenance of one accommodation/work barge, the "Baskunchak," and two shallow
draft landing vessels, the "Caspian Yelena" and the "Caspian Maria,"
(collectively, the "Vessels"). During September 2002, the Company purchased a
shallow draft tug/survey/supply vessel, the "Caspian Eva," but has not yet
placed it into service pending completion of its reflagging. The Vessels operate
under contract in the Kazakh Sector of the North Caspian Sea. EMPS leases its
vessels to providers of engineering, procurement, installation and commissioning
(EPIC) to the transition zone offshore energy support service companies. The
EMPS's primary current contract is with Agip Kazakhstan North Caspian Operating
7
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company N.V ("Agip") , a consortium of international oil companies with oil and
gas operations in the Caspian Sea. Agip leases the vessels from EMPS and makes
the leased vessels available to its EPIC providers. The Company's services
provided in connection with the leases are as follows:
. Maintenance and upkeep of the Vessels,
. Staffing of the vessels with the Company's marine crew,
. Provision of accommodation and meals for customer's and
Company's personnel on the vessel,
. Laundry and other services.
In addition to operating the Vessels, the Company, through its 54% owned
subsidiary CJSC Bauta ("Buata"), operates a desalinization plant and water
bottling operation in the Port of Bautino, on the Caspian Sea. The Company's
U.S. Subsidiary, EMPS Research Corporation is engaged in furthering development
and marketing of patented technology for commercially separating nonmagnetic
particulate material from other materials without heat or water.
Business Condition -- Through the activities explained above, the Company has an
accumulated deficit of $6,412,094 and $5,864,249 as of December 31, 2001 and
September 30, 2002, respectively. EMPS has suffered losses from operations, and
negative cash flows from operating activities during the nine months ended
September 30, 2002 and the year ended December 31, 2001. The Company has both a
working capital and a net capital deficiency. Caspian has defaulted on the
repayment of principal and interest of a loan from the subsidiary's shareholder.
Management is in the process of renegotiation and restructuring the terms of
repayment of this loan. These and other conditions raise substantial doubt
regarding the Company's ability to continue as a going concern. Management plans
to finance operations through additional financing from shareholders and
rescheduling the repayment of existing loans, the realization of which is not
assured. These condensed consolidated financial statements do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Foreign Currency Transactions -- The Company makes its principal investing and
financing transactions in United States dollars and the United States dollar is
therefore its functional currency. Transactions and balances denominated in
other currencies have been translated into United States dollars using
historical exchange rates. Exchange gains and losses from holding foreign
currencies and having liabilities payable in foreign currencies are included in
the results of operations. The Kazakh Tenge is Bauta's functional currency. The
effect of changes in exchange rates with respect to Bauta is recognized as a
separate component of accumulated other comprehensive loss. The translation of
Kazakh Tenge denominated assets and liabilities into United States dollars for
the purpose of these condensed consolidated financial statements does not
necessarily mean that EMPS could realize or settle, in United States dollars,
the reported values of these assets and liabilities. Likewise it does not mean
that EMPS could return or distribute the reported United States dollar value of
its Kazakh subsidiaries capital to its shareholders.
Revenue Recognition -- Revenue is generally recorded when services are rendered,
the Company has a signed charter agreement or other evidence of an arrangement,
pricing is fixed or determinable and collection is reasonably assured. Revenues
are recorded on a daily basis as services are rendered, and are recorded net of
value added taxes.
8
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Concentrations -- The transition zone offshore operations are contracted
primarily with one customer. Loss of this customer could have a material
negative effect on the Company. Services to be provided to this customer are
under contract through November 2003, however, it is always at least possible
that a loss of business could occur in the short or long term. While EMPS
expects to renew the contracts periodically, there is no assurance that the
customer will renew, or will renew on terms favorable to EMPS.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences in the balances of existing
assets and liabilities on the Company's financial statements and their
respective tax bases and attributable to operating loss carry forwards. Deferred
taxes are computed at the enacted tax rates for the periods when such amounts
are expected to be realized or settled. Because of differences which result in
calculation of income under accounting principles generally accepted in the
United States of America, and income calculated under Kazakh income tax
regulations it is possible for operations to result in local taxable income
while reflecting operating losses in the accompanying financial statements.
Recent Accounting Pronouncements -- In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," under which a liability for an exit cost was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002.
NOTE 2 - TRADE ACCOUNTS RECEIVABLE
The Company's trade accounts receivable are principally from Agip relating to
vessel charters. Agip is a consortium of world-leading petroleum exploration and
production companies operating in the Caspian Sea. The receivables are current,
collectable in 45 days from date of invoice, and management expects to collect
them in full. Receivables from vessel charter revenues are approximately
$906,000 at September 30, 2002.
A portion of the September 30, 2002 accounts receivable, represent activity
relating to the desalinization plant. An allowance of doubtful accounts equal to
$37,116 has been applied to these gross receivables of $138,941 leaving a net
amount of $101,825 at September 30, 2002.
NOTE 3 - VESSELS AND EQUIPMENT
In September 2002, the Company acquired a shallow draft multi purpose supply and
tugboat, the "Caspian Eva," specially modified to operate in the shallow waters
of the Caspian Sea valued at $1,445,241 by entering into a note payable for
$1,286,420 and paying cash of $158,821. The vessel was originally constructed in
1994 and was designed for work in the shallow waters of the Caspian Sea. The
Caspian Eva is suitable for a variety of applications including towing-pushing
operations, supply, and survey work. The vessel has not been placed into service
and no contracts have been entered into regarding is use. It is anticipated that
the vessel will be placed into service in April 2003.
At various times during the nine months ended September 30, 2002, the Company
acquired various pieces of office equipment and machinery and equipment.
9
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Vessels and equipment consisted of the following at September 31, 2002 (in
thousands):
Marine vessels...........................................$ 7,551
Office equipment......................................... 40
Machinery & equipment.................................... 59
----------
7,650
Accumulated depreciation................................. (814)
----------
Net Property and Vessels.................................$ 6,836
==========
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES
During February 2002, the Company entered into a note payable agreement with a
financing company. The Company borrowed $3,333,707 and agreed to repay
$3,700,000 on February 12, 2003. The $2,200,000 of the proceeds were used to
payoff the related party note collateralized by the Maria and $1,133,707 was
used as a payment on the related party note collateralized by the Yelena. The
new note is collateralized by the Maria and Yelena and matures in February 2003.
The difference between the face amount of the note and the amount borrowed of
$366,293 is being recognized over the life of the loan and recorded in the
accompanying financial statements as interest expense. The note carries an
effective annual interest rate of 10.99%. At September 30, 30, 2002, EMPS
recognized $209,018 as interest expense; an unamortized discount of $157,175
remains.
During August 2002, the Company entered into a note payable agreement with a
financing company for the purchase of the Caspian Eva. The Company borrowed
$1,286,000. Interest accrues at 16% per annum and quarterly payments of $321,605
begin in March 2003. The note is due on December 29, 2003.
Loans from related parties comprised of the following as of September 30, 2002
and 2001 (in thousands):
September 30,
2002 2001
------------- -------------
Arkashelf Ltd...........................$ 2,152 $ 4,200
GML International....................... 3,334 --
Kazakhstancaspishelf OJSC............... 3,527 3,527
Petroleum Group Services Limited........ 490 490
Mars International Limited.............. 1,072 1,072
Satco International Ltd................. 166 166
Mr. L. Garrard.......................... 92 --
Mr. Y. Kurguskin........................ 474 374
Other................................... 29 29
------------- -------------
Total.............................. 11,336 9,858
Less current portion............... (11,014) (4,777)
------------- -------------
Long-term portion..................$ 322 $ 5,081
============= =============
10
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - INCOME TAXES
Kazakh tax legislation and practice is in a state of continuous development and
therefore is subject to varying interpretations and frequent changes, which may
be retroactive. Further, the interpretation of tax legislation by tax
authorities as applied to the transactions and activities of the Company may not
coincide with that of management. As a result, tax authorities may challenge
transactions and the Company may be assessed additional taxes, penalties and
interest. Tax periods remain open to review by the tax authorities for five
year.
Management believes it has paid or accrued for all taxes that are applicable.
Where practice concerning the provision of taxes is unclear, management has
accrued tax liabilities based on its best estimate.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Charter Contracts -- The Company is committed to make the Vessels available for
the next several years in accordance with the Vessel Charter Contracts between
the Company and Agip. On two of the vessels, the contracts may be extended at
the option of Agip for two one-year periods.
Economic Environment -- In recent years, Kazakhstan has undergone substantial
political and economic change. As an emerging market, Kazakhstan does not
possess a well-developed business infrastructure, which generally exists in a
more mature free market economy. As a result, operations carried out in
Kazakhstan can involve significant risks, which are not typically associated
with those in developed markets. Instability in the market reform process could
subject the Company to unpredictable changes in the basic business
infrastructure in which it currently operates. Uncertainties regarding the
political, legal, tax or regulatory environment, including the potential for
adverse changes in any of these factors could significantly affect the Company's
ability to operate commercially. Management is unable to estimate what changes
may occur or the resulting effect on such changes on the Company's financial
condition or future results of operations.
Legislation and regulations regarding taxation, foreign currency translation,
and licensing of foreign currency loans in the Republic of Kazakhstan continue
to evolve as the central Government manages the transformation from a command to
a market-oriented economy. The various legislation and regulations are not
always clearly written and their interpretation is subject to the opinions of
the local tax inspectors. Instances of inconsistent opinions between local,
regional and national tax authorities are not unusual.
Environmental Uncertainties -- Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated based on ongoing engineering studies, discussions with the
environmental authorities and assumptions as to the areas that may have to be
re-mediated along with the nature and extent of the remediation that may be
required. Ultimate cost to the Company is primarily dependent upon factors
beyond its control such as the scope and methodology of the remedial action
requirements to be established by environmental and public health authorities,
new law or government regulations, and the outcome of any potential related
litigation.
11
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - SEGMENT INFORMATION
Generally accepted accounting principles establish disclosures related to
components of a company for which separate financial information is available
and evaluated regularly by a company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. They also
require segment disclosures about products and services as well as geographic
area.
The Company has operations in two segments of its business, namely: Vessel
Operations and Water Desalinization. Information regarding the operations and
assets of these reportable business segments follows (in thousands):
Vessel Water
Operations Desalinization Total
----------------- ----------------- ----------------
For the Nine Months Ended September 30, 2002
Revenues $ 3,461 $ 420 $ 3,881
Net loss (268) (280) (548)
Total assets 8,432 351 8,783
For the Nine Months Ended September 30, 2001
Revenues $ 1,872 $ 192 $ 2,064
Net income (loss) 493 (318) 175
Total assets 4,518 131 4,649
For the Three Months Ended September 30, 2002
Revenues $ 1,967 $ 193 $ 2,160
Net loss 79 (55) 24
Total assets 8,432 351 8,783
For the Three Months Ended September 30, 2001
Revenues $ 1,272 $ 80 $ 1,352
Net income (loss) 699 (112) 587
Total assets 4,518 131 4,649
12
Item 2. Management's Discussion and Analysis or Plan of Operations
OVERVIEW
The Company primarily provides services to the offshore energy industry
in the north Caspian Sea through the operation of a diversified fleet of marine
service vessels, through its wholly owned subsidiary Caspian Services Group
Limited ("Caspian"). Caspian provides its services through its registered
foreign branch office in the Republic of Kazakhstan. Revenues from marine
operations are dependent upon the activity level of the vessel fleet that is
dependent upon the level of oil and gas exploration and production in the
region, ultimately driven by the oil and natural gas prices.
In addition to the provision of marine services, Caspian has share
holdings in two joint venture companies in the Republic of Kazakhstan, both
providing onshore infrastructure related services aimed at the offshore energy
industry. CJSC Bauta is a joint venture project that owns and operates a water
desalinization plant and sells purified water. Bautino Development Company, the
other joint venture, is currently constructing a new hotel at the Port of
Bautino that is due for completion in January 2003
The Company, through its wholly owned subsidiary, EMPS Research
Corporation, also continues to develop its high-Frequency Eddy-Current Separator
("HFECS"). The anticipated primary use of the HFECS prototype will be to recover
metals in foundries and smelters that may otherwise be lost.
The following information contained in this analysis should be read in
conjunction with the un-audited condensed consolidated financial statements and
related disclosures.
FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENT
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements set
forth in this Quarterly Report on Form 10-QSB which provide other than
historical information and which are forward looking, involve risks and
uncertainties that may impact the company's actual results of operations. The
Company faces many risks and uncertainties, many of which are beyond the control
of the Company, including: fluctuations in oil and gas prices; level of fleet
additions by competitors; changes in capital spending by customers in the energy
industry for exploration, development and production; unsettled political
conditions, civil unrest and governmental actions; foreign currency
fluctuations; and environmental and labor laws. Readers should consider all of
these risk factors as well as other information contained in this report.
Forward-looking statements are predictions and not guarantees of future
performance or events. The forward-looking statements are based on current
industry, financial and economic information, which the Company has assessed but
which by its nature is dynamic and subject to rapid and possibly abrupt changes.
The Company's actual results could differ materially from those stated or
implied by such forward-looking statements due to risks and uncertainties
associated with our business. The forward-looking statements should be
considered in the context of the risk factors listed above.
13
RESULTS OF OPERATIONS
Comparison of the nine months ended September 30, 2002 and 2001
Vessel charter revenue from the Baskunchak, the Caspian Yelena and the Caspian
Maria increased by approximately $1,668,000 for the nine months ended September
30, 2002 over the nine months ended September 30, 2001. The Baskunchak was in
service during the full quarter ended September 30, 2001, the Caspian Yelena was
placed into service on September 19, 2001, and the Caspian Maria was not placed
into service until October 2001. Charter revenues are affected by day rates and
utilization. The average day rates did not change significantly during the nine
months ended September 30, 2002 compared to the same period in 2001. Revenue
from accommodations, meals, and services decreased approximately $79,000 for the
nine months ended September 30, 2002, compared with same period in 2001. Product
sales are from the sale of bottled and non-bottled water from the Company's
desalinization plant. Revenues from product sales for the nine months ended
September 30, 2002 increased over the same period in the prior year by
approximately $228,000. Gross profit from product sales also increased by
$66,000 from 2001 to 2002. The revenue increases were due primarily to increased
demand for water and increased water production.
During the nine months ended September 30, 2002 vessel direct operating expenses
were approximately $1,472,000 compared to $782,000 for the same period 2001.
Direct operating expense includes personnel costs, insurance, maintenance, and
the cost of food and fuel. The increase in direct operating expenses during the
nine months ended September 30, 2002, compared to the same period 2001, is due
to the addition of the Caspian Yelena and Caspian Maria to our fleet.
General and administrative expenses increased approximately $560,000 for nine
months ended September 30, 2002, up from $585,000 for the same period 2001.
General and administrative expenses increased in 2002 due to increases in taxes,
personnel costs, travel, professional fees, and other expenses related to the
expansion of the Company's operations.
Depreciation expense increased to $559,000 during nine months ended September
30, 2002, compared to $111,000 for the same period 2001. The increase in
depreciation is due to placing the Caspian Yelena and the Caspian Maria into
service during 2002.
Interest expense of approximately $938,000 during the nine months ended
September 30, 2002, compared to $319,000 for the comparable period 2001. The
increase is due to increases in related party loans to acquire additional
vessels and equipment.
Comparison of the three months ended September 30, 2002 and 2001
Vessel charter revenue from the Baskunchak, the Caspian Yelena and the Caspian
Maria increased $742,000 for the quarter ended September 30, 2002 over the
quarter ended September 30, 2001. The Baskunchak was in service during the full
quarter ended September 30, 2001, the Caspian Yelena was placed into service on
September 19, 2001, and the Caspian Maria was not placed into service until
October 2001. Charter revenues are affected by day rates and utilization. The
average day rates did not change significantly during the quarter ended
September 30, 2002 compared to the same period in 2001. Revenue from
accommodations, meals, and services decreased approximately $47,000 for the
quarter ended September 30, 2002, compared with same period in 2001. Such
decrease was due to decreased onboard accommodation during the period. Product
sales are from the sale of bottled and non-bottled water from the Company's
desalinization plant. Revenues from product sales for the quarter ended
September 30, 2002 increased over the same period in the prior year by $113,000.
Gross profit from product sales also increased by $78,000 from 2001 to 2002. The
revenue increases were due primarily to increased demand for water and increased
water production.
14
During the quarter ended September 30, 2002 vessel direct operating expenses
were approximately $474,000 compared to $344,000 for the same period 2001.
Direct operating expense includes personnel costs, insurance, maintenance, and
the cost of food and fuel. The increase in direct operating expenses during the
quarter ended September 30, 2002, compared to the same period 2001, is due to
the addition of the Caspian Yelena and Caspian Maria to our fleet.
General and administrative expenses increased approximately $429,000 for the
quarter ended September 30, 2002, up from $203,000 for the same period 2001.
General and administrative expenses increased in the quarter ended September 30,
2002 due to increases in taxes, personnel costs, travel, professional fees, and
other expenses related to the expansion of the Company's operations.
Depreciation expense increased approximately $271,000 during quarter ended
September 30, 2002, up from $37,000 for the same period 2001. The increase in
depreciation is due to placing into service the Caspian Yelena and the Caspian
Maria during 2002.
Interest expense of approximately $607,000 during the quarter ended September
30, 2002, compared to approximately $143,000 for the comparable period 2001. The
increase is due to increases in related party loans to acquire additional
vessels and equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's level of working capital and amount of cash flows from operations
for any year are directly related to fleet activity and vessel day rates. During
the quarter, the Company realized no revenue from the research and development
efforts on its' electromagnetic particle separation technology.
Since inception, Caspian has realized gross profits before administrative and
other costs and expenses were deducted. The Company experienced negative cash
flows from operations of approximately $723,000 in 2002 however, owing to the
upfront costs involved in expanding the Company's operations.
Operational profits, combined with related party and external financing, have
been used to fund aggressive fleet expansion. The Company anticipates that it
will be dependent for a significant period of time on additional investment
capital to fund operating expenses and development costs before achieving
profitability. Since its inception, the Company has covered its capital
requirement shortfall through additional financing from its control
shareholders. These control shareholders, however, are under no obligations and
have made no commitments to continue to fund the Company.
Because of the Company's current negative equity position, fund-raising may be
difficult resulting in continued reliance upon funding from its control
shareholders.
15
The Company has been financing all of its vessel purchases from related party
loans. The vessels have been used to collateralize the loans. Loans from related
parties were comprised of the following (000's of US Dollars):
September 30,
2002 2001
------------- -------------
Arkashelf Ltd.........................$ 2,152 $ 4,200
GML International..................... 3,334 --
Kazakhstancaspishelf OJSC............. 3,527 3,527
Petroleum Group Services Limited...... 490 490
Mars International Limited............ 1,072 1,072
Satco International Ltd............... 166 166
Mr. L. Garrard........................ 92 --
Mr. Y. Kurguskin...................... 474 374
Other................................. 29 29
Total............................ 11,336 9,858
Less current portion............. (11,014) (4,777)
Long-term portion................$ 322 $ 5,081
The Company is charging interest costs to operations as incurred on
borrowed funds used to purchase vessels.
There can be no guarantee that the Company will be able to meet its
funding needs. The Company has both working capital and net capital deficiencies
that raise substantial doubts about the Company's ability to continue as going
concern.
EFFECTS OF INFLATION
Day-to-day operating costs are generally affected by inflation.
However, because the energy services industry requires specialized goods and
services, general economic inflationary trends may not affect the Company's
operating costs. The major impact on operating costs is the level of offshore
exploration, development and production spending by energy exploration and
production companies. As spending increases, prices of goods and services used
by the energy industry and the energy services industry will increase. Future
increases in vessel day rates may shield the Company from the inflationary
effects on operating costs.
ENVIRONMENTAL MATTERS
The Company must comply with extensive government regulation in the
form of international conventions, federal and state laws and regulations in
jurisdictions where our vessels operate and/or are registered. These
conventions, laws and regulations govern matters of environmental protection,
worker health and safety, and the manning, construction and operation of
vessels. Moreover, the International Maritime Organization recently made the
regulations of the International Safety Management ("ISM") Code mandatory. The
ISM Code provides an international standard for the safe management and
operation of ships, pollution prevention and certain crew and vessel
certifications. The risks of incurring substantial compliance costs, liabilities
and penalties for non-compliance are inherent in offshore maritime operations.
Compliance with environmental, health and safety laws and regulations increases
our cost of doing business. Additionally, environmental, health and safety laws
change frequently. Therefore, the Company may be unable to predict the future
costs or other future impact of environmental, health and safety laws on its
operations. There is no assurance that the Company can avoid significant costs,
liabilities and penalties imposed as a result of environmental regulation in the
future.
16
CONTINGENCIES AND COMMITMENTS
In recent years, Kazakhstan has undergone substantial political and
economic change. As an emerging market, Kazakhstan does not possess a
well-developed business infrastructure, which generally exists in a more mature
free market. As a result, operations conducted in Kazakhstan can involve
significant risks, not typically associated with those in developed markets.
Instability in the market reform process could subject the Company to
unpredictable changes in the basic business infrastructure. Legislation and
regulations regarding taxation, foreign currency transactions, labor codes and
operating licenses and permits continue to evolve as the central government
manages the transformation from a command to a market-oriented economy. The
various legislation and regulations are not always clear and interpretations are
subject to opinion. Instances of inconsistent opinions between local, regional
and national authorities are not unusual. The current regime of penalties and
interest related to reported and discovered violations of Kazakhstan's law's,
decrees and related regulations is severe. The Company believes that it has
adhered to all laws and regulations and paid or accrued for all applicable
taxes.
The Company's operations and financial position will continue to be
affected by Kazakh political developments, including the application of existing
and future legislation and regulations. The Company does not believe that these
contingencies as related to its operations, are any more significant than those
of similar enterprises in Kazakhstan. Management is unable to estimate what
changes may occur or the resulting effect of any such changes on the Company's
financial condition or future results of operations.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have conducted an evaluation
of the Company's disclosure controls and procedures as of a date (the
"Evaluation Date") within 90 days before the filing of this quarterly report.
Based on their evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the applicable Securities and Exchange Commission rules and
forms.
(b) Changes in Internal Controls and Procedures. Subsequent to the
Evaluation Date, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls, nor
were any corrective actions required with regard to significant deficiencies and
material weaknesses.
17
PART II - OTHER INFORMATION
Item 2. Changes in Securities
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified.
The following securities, which are not registered under the Securities
Act of 1933, were issued by the Company during the quarter ended September 30,
2002.
On July 30, 2002, pursuant to the terms and conditions of the Agreement
and Plan of Reorganization between the Company and Caspian, the two Caspian
shareholders, Elcan Nominees Limited and Mohul Nominees Limited were issued
27,089,700 restricted common shares of the Company. Elcan Nominees Limited
received 9,752,408 and Mohul Nominees Limited received 17,337,408. Mr. Roberts,
a Company director may be deemed to be the beneficial owner of 3,250,764 of the
shares received by Elcan Nominees Limited. The shares were issued without
registration under the Securities Act of 1933 in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act, and from similar
applicable state securities laws, rules and regulations exempting the offer and
sale of these securities by available state exemptions. No general solicitation
was made in connection with the offer or sale of these securities.
Item 5. Other Information
During the quarter the Company appointed Mr. Laird Garrard as a Vice
President, Treasurer and Chief Financial Officer. Prior to joining the Company,
Mr. Garrard was a Vice President and Director of Caspian Services Group Limited.
Mr. Garrard joined Caspian in February 2002. From July 1999 to July 2002, Mr.
Garrard was the Financial Manager, Eastern Hemisphere for PGS Onshore, Inc., a
company specializing oilfield services. At PGS Onshore, Mr. Garrard was
primarily responsible as the regional financial manager for Europe, Africa, the
Middle East and Central Asia. Prior to joining PGS Onshore, Mr. Garrard was
employed with Western Geophysical from 1983 to July 1999. During his time at
Western Geophysical, from 1983 to 1994, Mr. Garrard held a number of positions
ranging from field work to logistics and operations management to accounting
supervisor. From 1994 to July 1999, Mr. Garrard served as Finance Controller for
Western Geophyshical. As Finance Controller he was responsible for all aspects
of finance and office administration. Mr. Garrard earned a Bachelors of Art
degree in Business Administration from Westminster University, London, England
in 1990. Mr. Garrard is 38 years old.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
On August 8, 2002, the Company filed a Current Report on Form 8-K
disclosing the execution of the Agreement and Plan of Reorganization with
Caspian and the resulting change in control and acquisition of the assets of
Caspian. The Current Report also disclosed information regarding the newly
elected directors of the Company.
On August 28, 2002, the Company filed a Current Report on Form 8-K
disclosing that the financial statements of Caspian included in the preliminary
and definitive proxy statements were incorrect and required restatement to
conform to the standards of U.S. GAAP.
18
On October 7, 2002, the Company filed an Amended Current Report on Form
8-K/A-1 amending the Current Report filed on August 8, 2002 to include a more
detailed description of the business of Caspian and to present the required
financial statements and pro forma financial information of the combined
company.
On November 4, 2002, the Company filed a Current Report of Form 8-K
disclosing a change in its certifying accountants from David T. Thomson, P.C.,
to Hansen, Barnett and Maxwell.
(B) Exhibits. The following exhibits are included as part of this
report:
Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this to be signed on its behalf by the
undersigned thereunto duly authorized.
EMPS Corporation
November 19, 2002 /s/ Louis Naegle
-----------------------------
Louis Naegle
President
November 19, 2002 /s/ Laird Garrard
-----------------------------
Laird Garrard
Chief Financial Officer
20
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Louis Naegle, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of EMPS
Corporation, (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this quarterly report;
(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company is made
known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
(6) The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 By: /s/ Louis Naegle
--------------------------------------
Louis Naegle, Chief Executive Officer
21
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Laird Garrard, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of EMPS
Corporation, (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this quarterly report;
(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company is made
known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
(6) The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 By: /s/ Laird Garrard
---------------------------------------
Laird Garrard, Chief Financial Officer
22