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
June 30, 2004 000-33215
EMPS CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization
87-0617371
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(I.R.S. Employer Identification No.)
2319 Foothill Blvd. Suite 250, Salt Lake City, Utah 84109
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(Address of principal executive offices)
(801) 746-3700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act: Common,
$0.001 par value
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 13, 2004 we had 31,200,000 shares of our $0.001 par value, common
stock outstanding.
EMPS CORPORATION AND SUBSIDIARIES
FORM 10-QSB
TABLE OF CONTENTS
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of
June 30, 2004 and December 31, 2003................................ 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three months and six months ended
June 30, 2004 and 2003............................................. 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the six months ended June 30, 2004 and 2003........ 5
Notes to Condensed Consolidated Financial Statements (Unaudited)..... 7
Item 2. Managements Discussion and Analysis or Plan of Operation........13
Item 3. Controls and Procedures.........................................21
PART II-- OTHER INFORMATION
Item 2. Changes in Securities...........................................22
Item 5. Other Information................................................22
Item 6. Exhibits and Reports on Form 8-K................................24
Signatures...............................................................25
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands except share and per share data)
June 30, December 31,
2004 2003
-------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 838 $ 401
Trade accounts receivable, net of allowance of $16 and $6 respectively 1,588 1,735
Other receivables 71 -
Advances to related parties, net 101 48
Inventories 129 51
Prepaid expenses and other current assets 678 322
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Total Current Assets 3,405 2,557
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Vessels, equipment and property, net 9,870 8,965
Drydocking costs, net 450 313
Goodwill 656 -
Investments 2,966 124
Notes receivable from related parties 700 407
-------------------------------------------------------------------------------------------------------------
Total Assets $ 18,047 $ 12,366
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,802 $ 1,816
Income tax payable 32 1,338
Deferred revenue 518 12
Advances from related parties 200 -
Notes payable - related parties 3,845 842
Current portion of long-term debt 4,975 5,200
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Total Current Liabilities 13,372 9,208
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Minority Interest 2,083 1,962
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Shareholders' Equity
Common stock, $0.001 par value, 150,000,000 shares authorized,
31,200,000 and 30,000,000 shares issued and outstanding, respectively 31 30
Additional paid-in capital 4,731 1,456
Accumulated other comprehensive income (loss) 12 (7)
Accumulated deficit (2,182) (283)
-------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,592 1,196
-------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 18,047 $ 12,366
=============================================================================================================
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 share and per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------
Revenues
Vessel revenues $ 1,460 $ 3,280 $ 2,309 $ 3,843
Product sales 274 175 451 296
Geophysical service revenues 246 - 246 -
-----------------------------------------------------------------------------------------------------------------
Total Revenues 1,980 3,455 3,006 4,139
-----------------------------------------------------------------------------------------------------------------
Operating Expenses
Vessel operating costs 1,598 1,574 2,638 2,040
Cost of product sold 101 60 202 150
Geophysical costs of revenues 164 - 164 -
Depreciation 212 124 420 389
General and administrative 574 776 1,071 1,051
-----------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,649 2,534 4,495 3,630
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Income (Loss) from Operations (669) 921 (1,489) 509
-----------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (285) (312) (507) (495)
Exchange loss (4) (2) (5) (2)
Income (Loss) from equity
method investees 117 - 112 (10)
Grant revenue - - - 2
Grant expense - - - (2)
Other income 2 24 2 45
-----------------------------------------------------------------------------------------------------------------
Net Other Expense (170) (290) (398) (462)
-----------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Income Tax
and Minority Interest (839) 631 (1,887) 47
Provision for income tax (9) (122) (9) (122)
Minority interest (25) 65 (3) 66
-----------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (873) $ 574 $ (1,899) $ (9)
================================================================================================================
Income (Loss) Per Common Share $ (0.03) $ 0.02 $ (0.06) $ (0.00)
================================================================================================================
Weighted Average Common Shares
Outstanding 30,461,538 30,000,000 30,230,769 30,000,000
================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands except share and per share data)
Six Months Ended June 30,
--------------------------
2004 2003
-----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (1,899) $ (9)
Adjustments to reconcile net loss to net cash from operating activities:
Loss on disposal of equipment - 1
Depreciation and amortization 505 413
Minority interest 3 (66)
Net loss (gain) in equity method investees (112) 10
Foreign currency exchange loss 5 2
Changes in current assets and liabilities:
Trade accounts receivable 378 (1,163)
Other receivables (57) -
Prepaid expenses and other current assets (289) 6
Inventories (23) (2)
Accounts payable and accrued expenses 1,704 981
Deferred revenue 223 1
Income taxes payable (1,307) 158
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (869) 332
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investments (210) -
Cash acquired in purchase of Tatarka 220 -
Advances on related party notes receivable (300) -
Repayment on related party notes receivable 7 -
Payment of drydocking costs (181) -
Proceeds from sale of equipment - 1
Purchase of vessels and equipment (1,019) (477)
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Net cash used in investing activities (1,483) (476)
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of short-term debt to related parties 3,053 477
Proceeds from issuance of debt 69 -
Change in advances to/from related parties 46 11
Principal payments on short-term debt to related parties (50) (70)
Principal payments on notes payable (333) (150)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,785 268
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Effect of exchange rate changes on cash 4 1
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Net change in cash 437 125
Cash at beginning of period 401 132
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Cash at end of period $ 838 $ 257
===========================================================================================================
(Continued)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EMPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(Dollars in thousands except share and per share data)
Six Months Ended June 30,
-------------------------
2004 2003
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 349 $ 495
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Cash paid for income taxes $ 1,316 $ 2
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Supplemental disclosure of non-cash investing and financing information:
--------------------------------------------------------------------------------------------------------
Accrued interest converted to a note payable $ - $ 366
Issuance of stock for investment in TatArka $ 546 $ -
Issuance of stock for investment in Kazmorgeophysica $ 2,730 $ -
--------------------------------------------------------------------------------------------------------
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)
(Dollars in thousands, except share and per share data)
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 ("Caspian"), CJSC Bauta
("Bauta"), and TatArka LLP ("TatArka"), 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 EMPS Corporation for the years
ended December 31, 2003 and 2002, included in the Company's Form 10-KSB filed
with the Securities and Exchange Commission on April 14, 2004. 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, 2004.
Business Condition -- The Company has accumulated deficits of $2,182 and $283 as
of June 30, 2004 and December 31, 2003, respectively, and has negative working
capital of $9,967 and $6,651 as of June 30, 2004 and December 31, 2003,
respectively. The Company has bank debt of $4,937 shown as a current liability
because of its August 2004 due date and because the payment terms with the bank
have not been fully determined. The Company hopes to refinance this obligation
with payment terms that extend into the future.
The Company is subject to seasonal fluctuation in its vessel operations marked
by decreased revenue during winter months. The Company has net a loss of $1,899
and $192 for the six and twelve months ended June 30, 2004 and December 31,
2003, respectively. The Company's operations used cash of $869 and provided cash
of $1,746 for the six and twelve months ended June 30, 2004 and December 31,
2003, respectively. Through negotiations with the bank to structure its debt
payments, and generation of cash from operations, management believes it will be
able to meet its operating and debt cash requirements through 2004. If needed,
certain shareholders are prepared to assist the company on a short-term basis
with cash advances. During the six months ended June 30, 2004, certain
shareholders and a company related through common ownership provided $3,053 to
the Company for 9% and 10% short-term notes due October and December 2004.
Reclassifications -- Certain reclassifications have been made in the 2003
financial statements to conform to the current presentation. The
reclassifications had no effect on net income.
NOTE 2 - ACQUISITION OF TATARKA AND KAZMORGEOPHYSICA
On May 26, 2004, EMPS closed its acquisition of all of the membership interests
of TatArka LLP ("TatArka") and 50% of the outstanding common stock of
Kazmorgeophysica CJSC ("KMG") in exchange for total consideration of $3,276
which consisted of EMPS issuing 200,000 shares of common stock in exchange for
all of the membership interests in TatArka and 1,000,000 shares of common stock
in exchange for 50% of the outstanding common stock of KMG. The consideration
given and the purchase price were recorded at the estimated fair value of the
stock issued, or $3,276. The remaining 50% of the outstanding common stock of
KMG not purchased by EMPS was held by the Chairman and CEO of EMPS before and
after the acquisition.
7
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
TatArka was formed as a limited liability partnership under the laws of
Kazakhstan on July 17, 2001 to provide seismic data acquisition services to
onshore oil and gas exploration companies operating in the Republic of
Kazakhstan. Most of TatArka's customers are foreign oil and gas corporations
operating in Kazakhstan.
Kazmorgeophysica was organized under the laws of Kazakhstan on February 12, 2002
to provide seismic data acquisition services to offshore oil and gas exploration
companies operating in the Kazakhstan sector of the North Caspian Sea and the
adjacent transition zone. The Company also provides seismic data interpretation
through its joint venture data processing center with PGS Onshore, Inc. (Texas)
and Help, LLP (Kazakhstan). Most of KMG's customers are Kazakh oil and gas
corporations operating in Kazakhstan.
As oil and gas exploration companies often require both onshore and offshore
seismic data acquisition and interpretation services, TatArka and
Kazmorgeophysica often contract with the other to provide services for their
respective customers.
The Company acquired TatArka and the investment in Kazmorgeophysica in an effort
to enhance the services offered to the onshore and offshore oil and gas
exploration and development industry operating in the Kazakh Sector of the North
Caspian Sea.
The purchase price for the acquisitions of TatArka and stock interest in KMG was
$546 and $2,730, respectively, or $2.73 per share. EMPS estimated the value of
the 1,200,000 shares of common stock issued based on the quoted market price of
the EMPS common stock on May 26, 2004, adjusted for the effects of quantities
traded, and price fluctuations between the acquisition date and the prices
during July 2004, through which an active market in EMPS stock was established.
EMPS allocated the $546 purchase price related to the 200,000 shares issued for
TatArka to the assets acquired and liabilities assumed on May 26, 2004, based on
their estimated fair values. The $655 excess of the purchase price over the fair
value of the assets acquired and liabilities assumed was recognized as goodwill
because EMPS is in the process of identifying and valuing the intangible assets,
if any. Since EMPS is in the process of determining valuations of certain
intangible assets or resulting goodwill the allocation of the purchase price is
subject to refinement. The TatArka assets acquired and liabilities assumed were
as follows:
------------------------------------------------------------------
Assets Acquired
Current assets $ 573
Receivables from related parties 97
Property and equipment 214
Goodwill 656
------------------------------------------------------------------
Total Assets Acquired 1,540
------------------------------------------------------------------
Liabilities Assumed
Current liabilities 762
Deferred revenue 232
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Total Liabilities Assumed 994
------------------------------------------------------------------
Net Assets Acquired $ 546
==================================================================
8
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
The purchase price of $2,730 for 50% of the KMG common stock was accounted for
in accordance with APB 18, The Equity Method of Accounting for Investments in
Common Stock, and the difference between the cost of the investment and the
amount of underlying equity in net assets of KMG was accounted for as if KMG
were a consolidated subsidiary, and therefore EMPS recognized equity method
goodwill of $2,654.
The following pro forma operating information for the six months ended June 30,
2004 and 2003 have been prepared to present the effects of the acquisitions as
though the acquisitions had occurred on January 1, 2004 and 2003, respectively.
The pro forma financial information is illustrative of the effects of the
acquisitions and does not necessarily reflect results of operations that would
have resulted had the acquisitions 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, 2004, or any
other period.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- --------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------
Revenue $ 2,019 $ 5,213 $ 3,078 $ 5,897
Net Income (Loss) $ (998) $ 730 $ (2,067) $ (126)
Net Income (Loss) Per Common Share $ (0.04) $ 0.02 $ (0.07) $ -
-------------------------------------------------------------------------------------------------
NOTE 3 - VESSELS AND EQUIPMENT
In February 2004, Caspian entered into an agreement for the construction and
purchase of a new high speed aluminum crew boat. The boat is a 33 meter boat
capable of transporting up to 70 passengers and 35 tons of cargo at speeds up to
25 knots. The vessel will be used to ferry oilfield workers between offshore
installations and land bases. The vessel will also be equipped as an emergency
response craft with a fire pump and monitor. The Company has paid $600 towards
the contract price of $1,800 with the remainder due at various progress points.
The vessel is tentatively scheduled for mobilization to the Caspian Sea at the
start of the 2005 work season.
During June, 2004, the Company entered into an agreement for the purchase of a
used 45m shallow draft multi-purpose utility vessel for $575. The Company made a
$58 deposit in June 2004 and paid the remaining $517 in July 2004. The vessel
has accommodation facilities for up to 20 client passengers, and a back deck
area of 170sqm for the deployment of survey equipment. The vessel is also
equipped with electric bow thrusters, making it a highly maneuverable vessel.
The Company took possession of the vessel on July 7, 2004 and re-named it the
Caspian Galiya. The Caspian Galiya is currently in drydock undergoing repairs
and certification. The Caspian Galiya is expected to be on charter beginning the
first week of September 2004, through the end of the operating season.
The Company's vessels Caspian Maria and Caspian Yelena have undergone a
scheduled drydocking during the winter months of 2004 and have not been on
contract since the related contracts expired in November 2003. During April
2004, the Caspian Dinara underwent an unscheduled drydocking for repairs.
Current contract periods and extension provisions for all vessels are as
follows:
9
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
Vessel Contract Expiration Extension Option
--------------------------------------------------------------------------------
Baskunchak November 2006 1-year
Caspian Eva October 2004 1-year
Caspian Maria November 2004 -
Caspian Yelena - -
Caspian Dinara November 2006 1-year
Coastal Bigfoot October 2004 -
--------------------------------------------------------------------------------
NOTE 4 - DEFERRED REVENUE
During June 2003, Bauta entered into an agreement with Agip KCO, its major
customer, for the construction of a 2,000 cubic meter water storage tank. Bauta
estimated total construction costs for the tank to be $170. Agip KCO agreed to
advance $140 to Bauta for the construction of the tank, for which Bauta will
sell water to Agip KCO at a discounted rate over 5 years with a renewal option
for an additional 5 years. By June 30, 2004, Bauta received $102 from Agip KCO
which was recognized as deferred revenue. Construction was completed during June
2004 and in July 2004, Agip KCO advanced the remaining $38. During June 2004,
the Company began selling water to Agip KCO at the contracted rates and began
amortizing the deferred revenue.
NOTE 5 - NOTES PAYABLE
During January and March 2004 the Company's subsidiary, Bauta, entered into two
short-term loan agreements with banks for an aggregate $70 in notes payable with
a weighted-average interest rate of 18.6%. At June 30, 2004, $33 had been
repaid. In July 2004, $15 was repaid and the remaining $22 due in October 2004.
At June 30, 2004, the Company had total notes payable to banks in the amount of
$4,937, primarily due August of 2004. The Company and the banks are currently
structuring payment terms for the notes. As a result, the entire amount is
classified on the balance sheet as a current liability. The company also has $38
of notes payable with no established terms.
NOTE 6- COMMITMENTS AND CONTINGENCIES
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
10
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
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.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company paid another company owned by a shareholder, note holder and officer
of Caspian, $25 and $61 for the six months ended June 30, 2004 and 2003,
respectively, for services related to statutory tax audit, corporate travel,
Kazakh visas, and entry and exit services.
Notes Receivable -- In December 2003, the Company entered into an agreement with
Bautino Development Company to provide $1,100 in funding to build, furnish and
equip the phase-two addition to the hotel. The Company plans to provide the loan
to Bautino Development Company in installments, which began during December 2003
in amounts ranging from $400 to $100. Through June 30, 2004, the Company
advanced $700 in accordance with the agreement. Interest will begin accruing
upon the completion of phase two or no later than January 1, 2005 at the rate of
6% and will be received quarterly until the principal has been received in full.
The terms provide for Bautino Development Company to repay the loan in
semi-annual installments of $138 plus interest beginning June 15, 2005 and
through December 15, 2008.
Payables -- TatArka and Kazmorgeophysica often contract with the other to
provide services for their respective customers. At June 30, 2004, TatArka had a
payable to KMG in the amount of $197 for services received prior to May 26,
2004. As the Company's investment in KMG is not consolidated, these transactions
have not been eliminated and are reported as accounts payable.
Notes Payable -- During April and June 2004, the Company's subsidiary, Caspian,
entered into two short-term loan agreements from a group of shareholders and a
company related through common management for an aggregate $3,053 in notes
payable. These notes bear interest at nine and ten percent interest and are due
in October and December 2004. At June 30, 2004, the Company had total notes
payable to related parties of $3,845.
NOTE 8 - SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information."
The Company has operations in four segments of its business, namely: Vessel
Operations, Geophysical Services, Water Desalinization and Corporate
Administration. The vessel operations, water desalinization and geophysical
services are located in the Republic of Kazakhstan. The administration
operations are located in the United States of America. Information regarding
the operations and assets of these reportable business segments follows:
11
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except share and per share data)
As of and for the six months Vessel Geophysical Water Corporate
ended June 30, 2004 Operations Services Desalinization Administration Total
---------------------------------------------------------------------------------------------------------------------------------
Sales to external customers $ 2,309 $ 246 $ 451 $ - $ 3,006
Intersegment sales - - - 76 76
Depreciation and amortization 399 3 17 1 420
Interest expense 501 - 3 3 507
Income (loss) from equity
method investees (52) 164 - - 112
Provision for taxes - 9 - - 9
Minority interest - - 3 - 3
Segment income (loss) (1,914) 203 4 (192) (1,899)
Segment assets 12,373 4,562 2,663 597 20,195
Investments in equity
method investees 72 2,894 - - 2,966
For the six months Vessel Geophysical Water Corporate
ended June 30, 2003 Operations Services Desalinization Administration Total
---------------------------------------------------------------------------------------------------------------------------------
Sales to external customers $ 3,843 $ - $ 296 $ - $ 4,435
Depreciation and amortization 370 - 18 1 407
Interest expense 491 - - 4 495
Income (loss) from equity
method investees (10) - - - (10)
Provision for taxes 122 - - - 122
Minority interest - - 66 - 132
Segment income (loss) 282 - (85) (206) (94)
Vessel Geophysical Water Corporate
As of December31, 2003 Operations Services Desalinization Administration Total
---------------------------------------------------------------------------------------------------------------------------------
Segment assets $ 11,478 $ - $ 2,389 $ 58 $ 16,314
Investments in equity
method investees 313 - - - 313
Consolidated Total Assets
June 30, 2004 2003
-----------------------------------------------------------------------------------------------------------------
Total assets for reportable segments $ 20,195 $ 16,314
Elimination of intersegment assets (2,148) (1,559)
-----------------------------------------------------------------------------------------------------------------
Consolidated Total Assets $ 18,047 $ 14,755
=================================================================================================================
12
Item 2. Management's Discussion and Analysis or Plan of Operations
All dollar amounts stated in this Item 2 are presented in thousands,
unless stated otherwise.
Business Review
During the second quarter 2004, we operated four business segments:
Vessel Operations, Geophysical Services, Water Desalinization and Corporate
Administration. The following discussion and analysis of results of operations
should be read in conjunction with the Condensed Consolidated Financial
Statements and notes thereto.
(Stated in thousands)
Second Quarter Six Months
% %
2004 2003 Change 2004 2003 Change
---- ---- ------ ---- ---- ------
VESSEL OPERATIONS
Operating Revenue $ 1,460 $ 3,280 55% $ 2,309 $ 3,843 40%
Pretax Operating Income/(Loss)1 $ (1,054) $ 762 238% $ (1,914) $ 282 779%
GEOPHYSICAL SERVICES
Operating Revenue $ 246 $ - n/a $ 246 $ - n/a
Pretax Operating Income/(Loss)1 $ 212 $ - n/a $ 212 $ - n/a
WATER DESALINIZATION
Operating Revenue $ 274 $ 175 57% $ 451 $ 296 52%
Pretax Operating Income/(Loss)1 $ 32 $ (84) 138% $ 4 $ (85) 105%
CORPORATE ADMINISTRATION
Operating Revenue $ - $ - n/a $ - $ - n/a
Pretax Operating Income/(Loss)1 $ (63) $ (104) 13% $ (192) $ (206) 7%
Three Months ended June 30, 2004 Compared to the Three Months Ended June 2003
Revenue
Total revenue for the three months ended June 30, 2004, was $1,980
compared to $3,455 during the same three months ended June 30, 2003, a decrease
of 43%. Total operating expenses increased by $115 or 5% to $2,649 in the second
quarter 2004, compared to the same quarter 2003. Loss from operations for the
period ended June 30, 2004, was $669, compared to income from operations of $921
during the three months ended June 30, 2003, a $1,590 or 173% decrease in income
from operations. Net loss for the second quarter 2004 was $873 versus net income
of $574 in 2003, a decrease of 252%.
--------
1 Pretax operating loss represents income before taxes and minority interest.
13
Vessel Operations revenue of $1,460 increased 71% compared to the first
quarter of 2004, and decreased 55% compared to the same quarter of 2003. Pretax
operating loss of $1,054 increased 24% sequentially and 238% year-on-year.
On May 26, 2004, we acquired 100% of the outstanding partnership
interests in TatArka LLP, a Kazakhstan limited liability partnership ("TatArka")
and 50% of Kazmorgeophysica CJSC, a Kazakh corporation ("KMG"). TatArka provides
geophysical services on land, including seismic data acquisition services to oil
and gas exploration companies operating in the Republic of Kazakhstan and KMG
provides marine and transition zone seismic data acquisition and processing
services to oil and gas exploration companies operating in the Kazakh sector of
the Caspian Sea. During the quarter ended June 30, 2004, revenue from
geophysical services was $246, with pretax operating income of $212.
Water Desalinization revenue of $274 was 55% greater sequentially and
57% higher year-on-year. The pretax operating income at June 30, 2004, was $32
compared to a loss of $28 in the first quarter 2004 and a loss of $85 in the
second quarter 2003.
The Corporate Administration segment of the Company's business refers
primarily to the administration of Company affairs in the United States.
Corporate Administration generated a pretax operating loss of $63 during the
second quarter 2004, which represents a 39% decrease compared to the first
quarter 2004 and a 7% decrease compared to the same quarter of 2003.
Due to weather conditions in the north Caspian Sea where our operations
are centered, exploration and production activities typically do not begin until
late March or early April, thus limiting our revenue and cash flow from vessel
operations and water desalinization during the first fiscal quarter of each
year. Therefore, significant increases in second quarter income are typical. The
decrease in vessel revenue in the second quarter 2004 compared to the
corresponding quarter of 2003 is the result of underutilization of our vessels
during the second quarter 2004.
Vessel Operations
Second quarter revenue of $1,460 increased 72% sequentially and
decreased 40% year-on-year. Pretax operating loss of $1,054 during the second
quarter 2004 increased 23% compared to the first quarter 2004 and increased 238%
compared to the second quarter 2003.
The increase in revenue from the first quarter to the second quarter is
typical because weather conditions do not permit our clients to conduct their
exploration, development and production activities from January to March.
Therefore, our vessels were not in operation during the first quarter 2004.
While the vessels were not in operation during the first quarter, typically, our
vessel charters provide for the payment of winter day rates, which are generally
significantly less than the day rates paid by our clients during active
operations.
The significant decrease in revenue and change from pretax operating
profit to pretax operating loss in the second quarter 2004 compared to the
second quarter 2003 is the direct result of two of our vessels, the Caspian
14
Yelena and the Caspian Maria, being unchartered and inactive during the entire
second quarter 2004. Also, for much of the second quarter 2004, the Caspian
Dinara was out of service for unexpected repairs.
During the quarter ended June 30, 2003, we had four vessels in our
fleet. During the quarter ended June 30, 2004, we had six vessels in our fleet.
Vessel revenues are affected by utilization and day rates. Although we had more
vessels in our fleet in the second quarter 2004 as compared to 2003, utilization
decreased in 2004, by virtue of three of our vessels being inactive for all or
most of the second quarter 2004, while average day rates remained flat from the
second quarter 2003 to 2004.
At the end of the second quarter 2004, we acquired a 45 meter
multi-purpose shallow draft utility vessel. This vessel can accommodate up to 20
client passengers and has a 170 sqm back deck area that can be used for
deploying survey equipment. We took possession of the vessel in July 2004. The
vessel has been named the Caspian Galiya and is currently in drydock for repairs
and certification. The Caspian Galiya is under charter beginning the first week
of September 2004 through the end of the 2004 work season.
Our two accommodation vessels are chartered through November 2006. One
of our supply vessels, the Caspian Maria, was placed into service on August 6,
2004, under a temporary one month tender, with the possibility of extending the
charter through the end of the 2004 work season. We continue to negotiate the
charter of the Caspian Yelena, and hope to have it in service by the end of
August. Our multi-purpose supply and tugboat and our multi-purpose survey vessel
are under charter through the end of October 2004.
We anticipate chartering all or most of our fleet of vessels before the
end of the third quarter 2004, firm commitments for two of our currently
unchartered vessels have been received. Based on ongoing negotiations, we expect
average day rates to increase for the third and fourth quarters for some of our
vessels, due to high demand towards the end of the operating season in 2004. As
evidenced by the decrease in our vessel revenue for the second quarter 2004
compared to 2003, if we are unable to charter all or some of our vessels during
the remainder of the 2004 work season our vessel revenue may continue to be
adversely affected.
Vessel operating costs of $1,598 during the second quarter 2004
increased 54% sequentially and 2% compared to the second quarter 2003. As
discussed above, the increase in operating costs is the result of our vessels
being active during the entire second quarter 2004, while all vessels were
inactive during the first quarter 2004. Year-on-year vessel operating costs were
almost flat. While we had three vessels that were not earning revenue for most
or all of the second quarter 2004, we continue to incur many of the costs we
would incur if the vessels were in active operations. Moreover, a
disproportionate percentage of our vessel operating costs are attributable to
the Coastal Bigfoot, which was in active operations during the second quarter
2004. We operate the Coastal Bigfoot under an agreement with Rederij Waterweg.
Pursuant to that agreement we pay a day rate to Rederij Waterweg for the vessel.
While it costs us more to operate the Coastal Bigfoot than to operate our own
vessels we are willing to operate the Coastal Bigfoot at a reduced profit margin
to gain access to Rederij Waterweg's large fleet of shallow draft vessels which
should allow us to meet future demand for vessels without incurring the
significant expense of purchasing additional vessels
We anticipate that the significant reduction in vessel revenues in the
second quarter 2004 compared to 2003, will not continue through the third
quarter 2004.
15
Geophysical Services
At the end of May 2004, we finalized the acquisition of 100% of the
outstanding membership interests of TatArka and 50% of the outstanding common
stock of KMG. In accordance with accounting principles generally accepted in the
United States of America, as a wholly owned subsidiary, the financial statements
of TatArka are consolidated with and reflected in the EMPS Corporation financial
statements. Our 50% interest in KMG has been accounted for as an investment in
an equity method investee.
Revenue from geophysical services during the quarter ended June 30,
2004 was $246, with realized pretax operating income of $212.
We anticipate revenue and the costs of providing geophysical services
will continue to increase as we fulfill contracts we have in place and as we
acquire additional contracts to provide services.
Water Desalinization
Revenue from product sales in the quarter ended June 30, 2004, was
$274, a 55% increase as compared to the quarter ended March 31, 2004 and a 57%
increase in revenue compared to the quarter ended June 30, 2003. Pretax
operating income was $32 during the second quarter 2004 compared to a pretax
operating loss of $28 during the first quarter 2004, and an $84 pretax operating
loss during the second quarter 2003. As product sales of both bulk and bottled
water are primarily to oilfield camps in the Bautino area, a significant
increase in revenue is typical in the second quarter when most camps become
active. The year-on-year increase in product sales is primarily the result of
increased demand for bulk water by Agip KCO and other local companies.
Cost of product sold during the second quarter 2004 of $101 was flat
sequentially and increased $41 or 68% year-on-year. As discussed in the
preceding paragraph, the year-on-year increase in cost of product sold is
primarily the result of increases in labor and material costs resulting from the
increased demand for water. We anticipate water desalinization revenue and costs
of product sold during the third quarter to be consistent with the second
quarter and to decrease during the fourth quarter 2004, as the work season ends.
During June 2003, Bauta entered into an agreement with Agip KCO, its
major customer, for the construction of a 2,000 cubic meter water storage tank.
Bauta estimated total construction costs for the tank to be $170. Agip KCO
agreed to advance $140 to Bauta for the construction of the tank, for which
Bauta will sell water to Agip KCO at a discounted rate over the next five years,
with a renewal option for an additional five years. During the quarter, Bauta
received no funds from Agip KCO. Bauta finished construction of the storage tank
in June 2004. Subsequent to quarter end, in July 2004, Bauta received the
remaining $38 from Agip KCO. The full $140 has been recognized as deferred
revenue. During June 2004, Bauta began selling water to Agip KCO at the
contracted rate and began amortizing the deferred revenue.
16
Corporate Administration
In the quarter ended June 30, 2004, Corporate Administration generated
expenses of $54, 61% and 48% decreases sequentially and year-on-year,
respectively. The decreases compared to the first quarter 2004, and the second
quarter 2003, are primarily the result of efforts of our concerted effort to
control costs. We anticipate expenses incurred in corporate administration
throughout the remainder of 2004 to remain consistent with those incurred in the
second quarter 2004.
Consolidated Results
General and Administrative Expense
General and administrative expense decreased by $202, or 26%, to $574
for the quarter ended June 30, 2004 compared to the comparable period of 2003.
The primary contributing factor to the decrease in general and administrative
expense was a concerted effort to control general and administrative costs.
Interest Expense
Interest expense decreased 9% to $285 in the second quarter 2004,
compared to the second quarter 2003. The decrease in interest expense was
primarily due to the refinancing of certain debt obligations subsequent to the
second quarter 2003 with an interest rate increase from 11% to 16%. As a result
of the refinance, the principal amount we owed increased from $5,186 to $5,553
after including accrued interest in the refinanced principal. During the quarter
we paid $50 to reduce the principal amount of this debt obligation
Six Months ended June 30, 2004 Compared to the Six Months Ended June 2003
Revenue
Total revenue for the six months ended June 30, 2004, was $3,006
compared to $4,139 during the six months ended June 30, 2003, a decrease of 27%.
Total operating expenses increased by $865 or 24% to $4,495 in the six months
ended June 30, 2004, compared to the comparable six months ended June 30, 2003.
Loss from operations for the six month period ended June 30, 2004, was $1,489,
compared to income from operations of $509 during the six months ended June 30,
2003, a $1,998 or 393% decrease in income from operations. Net loss for the six
months ended June 30, 2004, was $1,899 compared to a net loss of $9 in the
corresponding period 2003, an increase of $1,890.
Vessel Operations revenue of $2,309 decreased 40% in the six months
ended June 30, 2004, compared to the same period 2003. Vessel operations
provided a loss of $1,914 for the six months ended June 30, 2004, compared to
income of $282 for the comparable period of 2003.
During the six months ended June 30, 2004, revenue from geophysical
services was $246, with operating income of $212.
Water Desalinization revenue of $451 was 52% greater during the six
months ended June 30, 2004, compared to the 2003. Operating income of $4 for the
six months ended June 30, 2004, was $89 greater compared to the same period
2003.
17
During the six months ended June 30, 2004, Corporate Administration
generated a pretax operating loss of $192, which represents a 7% decrease over
the corresponding six month period of 2003.
The decrease in vessel revenue in the six months ended June 30, 2004
compared to the corresponding period of 2003 is the result of underutilization
of our vessels during the second quarter 2004.
Vessel Operation
Revenue for the six months ended June 30, 2004, of $2,309 was a 40%
decrease compared to June 30, 2003. Pretax operating loss of $1,914 for the six
months ended June 30, 2004 was a 779% increase compared to the same period ended
June 30, 2003.
The significant decrease in revenue and change from pretax operating
profit to pretax operating loss is the direct result of two of our vessels, the
Caspian Yelena and the Caspian Maria, being unchartered and inactive during the
entire second quarter 2004. Also, for much of the second quarter 2004, the
Caspian Dinara was out of service for unexpected repairs.
During the six months ended June 30, 2003, we had four vessels in our
fleet. During the six months ended June 30, 2004, we had six vessels in our
fleet. Vessel revenues are affected by utilization and day rates. Although we
had more vessels in our fleet in 2004 and vessel day rates remained flat from
2003 to 2004, vessel utilization actually decreased in the first six months of
2004, by virtue of three of our vessels being inactive for all or most of the
2004 work season.
We anticipate chartering all or most of our fleet of vessels before the
end of the third quarter 2004, firm commitments for two of our currently
unchartered vessels have been received. Based on ongoing negotiations, we expect
average day rates to increase for the third and fourth quarters for some of our
vessels, due to high demand towards the end of the operating season in 2004. As
evidenced by the decrease in our vessel revenue for the second quarter 2004
compared to 2003, if we are unable to charter all or some of our vessels during
the remainder of the 2004 work season our vessel revenue may continue to be
adversely affected
Vessel operating costs of $2,638 during the six months ended June 30,
2004, increased 29% compared to the same period ended June 30, 2003. This
increase in vessel operating costs is primarily the result of the increase in
the size of our fleet from four vessels at June 30, 2003, to six vessels at June
30, 2004. While we had three vessels that were inactive for most or all of the
second quarter 2004, we continue to incur many of the costs we would incur if
the vessels were in active operations. Moreover, a disproportionate percentage
of our vessel operating costs are attributable to the Coastal Bigfoot, which has
been under charter for the 2004 work season. We operate the Coastal Bigfoot
under an agreement with Rederij Waterweg. Pursuant to that agreement we pay a
day rate to Rederij Waterweg for the vessel. While it costs us more to operate
the Coastal Bigfoot than to operate our own vessels we are willing to operate
the Coastal Bigfoot at a reduced profit margin to gain access to Rederij
Waterweg's large fleet of shallow draft vessels which should allow us to meet
future demand for vessels without incurring the significant expense of
purchasing additional vessels
We anticipate that the significant reduction in vessel revenues in the
second quarter 2004 compared to 2003, will not continue through the third
quarter 2004.
18
Geophysical Services
Revenue from geophysical services for the six months ended June 30,
2004 was $246. During the six months ended June 30, 2004, we realized operating
income of $212 from geophysical services, including income of $164 from KMG.
Costs of providing geophysical services for the six months ended June 30, 2004,
was $207.
We anticipate revenue and the costs of providing geophysical services
will continue to increase as we fulfill contracts we have in place and as we
acquire additional contracts to provide services.
Water Desalinization
Revenue from product sales for the six months ended June 30, 2004, was
$451, a 52% increase as compared to the corresponding period of 2003. Pretax
operating income of $4 at June 30, 2004, is an $89 increase over the pretax
operating loss of $85 during the six months ended June 30, 2003. This increase
in product sales is primarily the result of increased demand for bulk water by
Agip KCO and other local companies.
Cost of product sold during the six months ended June 30, 2004, of $202
increased 35% compared to the same six month period ended June 30, 2003. This
increase in cost of product sold is primarily the result of increases in labor
and material costs resulting from the increased demand for water.
Corporate Administration
During the six months ended June 30, 2004, Corporate Administration
generated expenses of $268, an increase of $61 compared to June 30, 2003. This
decrease is primarily the result of our concerted efforts to control costs.
Consolidated Results
General and Administrative Expense
General and administrative expense increased $20, or 2%, to $1,071 for
the six months ended June 30, 2004, compared to the comparable period 2003.
General and administrative costs have remained essentially unchanged as a result
of our efforts to control general and administrative expenses. We will continue
our efforts to control increases in general and administrative expenses.
Interest Expense
Interest expense increased 2% to $507 for the six month period ended
June 30, 2004 compared to the six months ended June 30, 2003. Interest expense
remained relatively flat over the 2003 and 2004 periods as decreases in interest
expense resulting from the refinancing of certain debt obligations subsequent to
the second quarter 2003 with an interest rate increase from 11% to 16%. As a
19
result of the refinance, the principal amount we owed increased from $5,186 to
$5,553 after including accrued interest in the refinanced principal. Subsequent
to the quarter end, in April 2004, we paid $50 to reduce the principal amount of
this debt obligation. The decrease in interest expense during the six months
ended June 30, 2004, was partially offset by interest expense incurred in
connection with two short-term loans entered into by Bauta for an aggregate of
$70, bearing a weighted-average interest rate of 18.6% during the second quarter
2004. At June 30, 2004, $33 had been repaid and the remaining $37 was repaid in
July 2004.
Cash Flow
At June 30, 2004, cash used in operations was $869 as net loss, income
tax payable, net loss in equity method investees, other receivables, and prepaid
expenses and inventories were only partially offset by accounts payable and
accrued expenses, depreciation and amortization, trade accounts receivable and
deferred revenue. Cash used in investing activities was $1,483 and included
investments, advances on related party notes receivable, payment of drydocking
costs and purchase of vessels and equipment offset primarily by cash acquired in
the purchase of TatArka. Cash provided by financing activities was $2,785 with
proceeds from the issuance of short-term debt to related parties, proceeds from
the issuance of other debt and changes in advances to/from related parties only
partially offset by principal payments on short-term debt to related parties and
principal payments on notes payable.
Financing
During February 2002, Caspian entered into a note payable agreement
with a bank to refinance $3,333 used to finance initial asset acquisitions. The
proceeds were used to restructure related party notes payable collateralized by
the Maria and Yelena. During February 2003, Caspian refinanced the note payable
in the amount of $3,333 plus accrued interest of $367 for a total amount of
$3,700 and extended the due date to August 15, 2004. The Company is currently
negotiating with the bank to extend the term of the notes.
Notes payable to related parties consisted of the following at June 30,
2004:
(Stated in thousands) June 30, 2004
--------------------------------------------------------------------------------
Note payable to a company related through common management
bearing interest at 10%; no set payments required; due on
demand; unsecured. $ 200
Notes payable to a stockholder bearing interest at 10% until
January 1, 2003, at which time the notes bear interest at 10%;
no set payments required; due upon demand; unsecured $ 592
Note payable to Company related through common Management
bearing interest at 10%; due December 2004; unsecured $ 600
Note payable to a voting trust of shareholders bearing
Interest at 9%; due October 2004; unsecured $ 2,453
--------------------------------------------------------------------------------
TOTAL NOTES PAYABLE TO RELATED PARTIES $ 3,845
================================================================================
20
We did not advance any funds to Bautino for the construction of Phase
II of the Chagala Hotel during the quarter ended June 30, 2004. We are required
to advance an additional $400 for construction by the end of the year. As of
June 30, 2004, the foundation, civil and design works and outside framing for
Phase II have been completed. Construction of Phase II is scheduled to be
complete and the hotel ready to operate during the fourth quarter 2004.
During the quarter we agreed to purchase the vessel now known as the
Caspian Galiya for $575. We made a $58 down payment in June 2004 and paid the
remaining $517 in July 2004.
Forward Looking Information and Cautionary Statement
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we note 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
our actual results of operations. We face a number of risks and uncertainties,
many of which are beyond our control, 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.
Readers should also consider that the operating season for our vessels is
dependent upon weather conditions in the north Caspian Sea. Drilling and
exploration activities in that region typically commence in late March or early
April and continue through late October or early November. Therefore, our
vessels are typically inactive from November to March and demand for water and
onshore accommodations also decreases significantly as exploration activities
during this time are limited.
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 we have assessed but which
by its nature is dynamic and subject to rapid and possibly abrupt changes. Our
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 information contained in this analysis should be read in
conjunction with the condensed consolidated financial statements contained
herein and related disclosures.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Principal
Executive Officer and Principal Financial Officer have conducted an evaluation
of our 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, our Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
21
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 our 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.
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 during
the quarter ended June 30, 2004.
During the quarter we issued 200,000 restricted common shares to the
three holders of the outstanding partnership interests in TatArka in exchange
for their partnership interests. The shares were issued without registration
under the Securities Act of 1933 in reliance on an exemption from registration
provided by Regulation S of the rules and regulations promulgated by the
Securities and Exchange Commission under the Securities Act.
During the quarter we issued 1,000,000 restricted common shares to the
holder of 50% of the outstanding common stock of KMG in exchange for its 50%
interest in KMG. The shares were issued without registration under the
Securities Act of 1933 in reliance on an exemption from registration provided by
Regulation S of the rules and regulations promulgated by the Securities and
Exchange Commission under the Securities Act.
Item 5. Other Information
As discussed herein, during the quarter we consummated the acquisition
of interests in TatArka LLP and Kazmorgeophysica CJSC. Following is additional
information about each of those entities.
TatArka LLP
TatArka was formed on July 17, 2001, under the laws of the Republic of
Kazakhstan. The principle executive offices of TatArka are located at 63 Dostyk
Street in Almaty, Kazakhstan. TatArka provides 2D and 3D seismic data
acquisition services to companies engaged in onshore oil and gas exploration in
the Republic of Kazakhstan. TatArka provides its services under project specific
partnerships with other local service providers as required by the Republic of
Kazakhstan. TatArka has held a general state license to conduct geophysical
works since September 4, 2001.
The onshore seismic market in Kazakhstan is comparably mature and is
dominated by local companies. The acquisition of onshore seismic data requires
considerably less effort, and is less complex, than the acquisition of offshore
seismic data. As a result onshore seismic data acquisition services are far less
expensive than offshore services.
22
The current onshore seismic data acquisition services market in
Kazakhstan is dominated primarily by four local companies: Kazakhstancaspishelf,
Azimut, SIF Dank and TatArka. Most of TatArka's competitors have acquired and
rely upon up-to-date recording systems and vibrator energy sources in performing
their services. Until recently, TatArka has leased the recording systems and
vibrators it used to provide its services. To allow it to compete more favorably
in the market, in June 2004, TatArka entered into a $2,500,000 Credit Line
Agreement with KazKomertz Bank in Almaty, Kazakhstan so it could purchase
up-to-date equipment. TatArka has drawn down approximately $2,150,000 of its
credit line to purchase five vibrator energy source trucks. The loan provides of
repayment terms through July 2005, with an interest rate of 14%.
TatArka currently has 140 employees, including 40 full time employees.
Kazmorgeophysica CJSC
KMG was incorporated on February 12, 2002, under the laws of the
Republic of Kazakhstan. The principal executive offices of KMG are located at 63
Dostyk Street in Almaty, Kazakhstan. KMG provides 2D and 3D transition zone and
marine seismic data acquisition services to oil and gas exploration companies
operating in the Kazakhstan sector of the Caspian Sea. KMG also provides seismic
data processing and interpretation services through a revenue sharing agreement
with the PGS-GIS Centre data processing center in Almaty. KMG has held a general
state license to conduct geophysical works since May 29, 2002.
In contrast to the onshore seismic market, the marine seismic market in
Kazakhstan is still developing. The first modern marine seismic survey was
conducted between 1994 and 1996. Since that time, only a small number of marine
or transition zone surveys have been conducted. We believe this is primarily due
to the limited number of entities currently holding exploration licenses in
Kazakhstan. In early 2004, the government of Kazakhstan announced that the first
round of licensing for new offshore blocks in the Kazakhstan sector of the
Caspian Sea would likely occur in late 2004 or early 2005. We expect that the
release of new license blocks will attract significant interest form the
international oil and gas community. We also anticipate that a direct result of
the release of new license blocks will be a significant increase in demand for
marine and transition zone seismic data acquisition services and data
processing.
The complexity of modern marine seismic data collection methods, and
the associated costs, has meant that only large international exploration
companies with advanced technology and sufficient capital have been capable of
providing marine seismic services in Kazakhstan. KMG believes this trend will
change as more local companies gain access to the technology and methodologies
used and as they obtain sufficient capital to acquire the necessary equipment
and vessels to provide these services. Additionally, under the laws of
Kazakhstan to provide marine seismic services the service provider must meet the
country's local content requirements, either through local ownership or by
partnership. The other 50% owner of KMG is 100% owned by a Kazakh entity, which
satisfies the local content requirement and gives KMG an advantage over its
international competitors.
KMG currently competes with two local companies, Kazakhstancaspishelf
and Uzhmaorgeologia and four international firms, Westerngeco, CGG, PGS and
Veritas. As discussed above, the international firms are required to tender with
a local partner to satisfy the local content requirements of Kazakhstan.
23
KMG has invested $300,000 in the past two years to purchase geophysical
equipment. KMG currently has 30 employees, including 10 full time employees.
During the quarter Paul Roberts, our Chief Operating Officer and a
director, was appointed by the board of directors to act as the interim Chief
Financial Officer while Laird Garrard, our Chief Financial Officer, has been on
leave attending to personal matters. Also during the quarter, Louis Naegle
resigned as President of the Company. The board of directors appointed Stephen
Smoot to act as President on an interim basis. Following is a brief description
of the business experience of Mr. Smoot.
Stephen Smoot. During the past five years Mr. Smoot has been
self-employed as a consultant in the area of foreign technology development and
transfer. Mr. Smoot assisted in forming Caspian Service Group Limited in
December 1999, and served as President of Caspian Services from inception until
February 2002. Mr. Smoot is not a director in any other reporting company. Mr.
Smoot is 50 years old.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
In accordance with the provisions of Regulation FD, on May 27, 2004, we
filed a Current Report on Form 8-K incorporating a press release of the same day
disclosing the consummation of our agreements to acquire 100% of TatArka and 50%
of KMG.
On June 10, 2004, we filed a Current Report on Form 8-K disclosing the
details of our acquisition of 100% of TatArka and 50% of KMG. This Current
Report was subsequently amended on August 9, 2004 to provide required financial
statements and pro forma financial information.
(B) Exhibits. The following exhibits are included as part of this
report:
Exhibit 31.1 Certification of Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Principal Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
24
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
August 20, 2004 /s/ Mirgali Kunayev
---------------------------------
Mirgali Kunayev,
Chief Executive Officer
August 20, 2004 /s/ Paul Roberts
---------------------------------
Paul Roberts,
Interim Chief Financial Officer
25