UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) July 30, 2002
Commission File Number 0-33215
EMPS CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 87-0617371
------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
875 Donner Way, Unit 705, Salt Lake City, Utah
---------------------------------------------
(Address of principal executive offices)
84108
-----------
(Zip Code)
(801) 582-1881
-----------------------------------------------
(Registrant's Executive Office Telephone Number)
ITEM 5. OTHER EVENTS
This Current Report on Form 8-K amends the Report on Form 8-K
previously filed by the Company on August 8, 2002, which report is incorporated
herein by this reference.
Information about Caspian Services Group, Limited
Caspian Services Group, Limited ("Caspian") was incorporated in the
British Virgin Islands on December 22, 1999, and has been primarily engaged in
providing services to the oil and gas industry in the Republic of Kazakhstan.
Caspian carries out its primary business activities from its branch located in
Aktau, Kazakhstan, which has been registered with the Ministry of Justice of the
Republic of Kazakhstan since April of 2000.
In recent years, the Republic of Kazakhstan has undergone substantial
political and economic change. As an emerging market, Kazakhstan does not
possess the well-developed business infrastructure that generally exists in more
mature free market economies. As a result, operations carried out in Kazakhstan
can involve significant risks that are not typically associated with developed
markets. Instability in the market reform process could subject Caspian 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 Caspian's ability to operate commercially. Management
of Caspian is unable to estimate what changes may occur or the resulting effect
of any such changes on Caspian's financial condition or future results of
operations.
Offshore Marine Services Industry
Caspian's customers employ Caspian's vessels to provide services
supporting the exploration, construction, positioning and ongoing operation of
offshore oil and natural gas drilling rigs and platforms ("Offshore Marine
Services"). This industry employs various types of vessels, referred to broadly
as offshore support vessels, that are used to transport materials, supplies and
personnel. Offshore Marine Service providers are employed by companies that
engage in the offshore exploration and production of oil and natural gas and
related services. Services provided by companies in this industry are performed
in numerous locations worldwide. The Gulf of Mexico, the North Sea, offshore
Southeast Asia, offshore West Africa and offshore Brazil are each major markets.
Vessel usage is also significant in other international areas, including India,
Australia, the Persian Gulf and the Mediterranean Sea. While the Caspian Sea is
not currently considered one of the major markets, it is believed to have
significant petroleum reserves.
2
After Russia, Kazakhstan was the second largest oil-producing republic
in the former Soviet Union at the time of its collapse, with production of over
half a million barrels per day (bbl/d) in 1991. According to the Energy
Information Association of the United States Department of Energy, Kazakhstan
has significant petroleum reserves, with proven reserves estimated at 5.4
billion barrels of oil. In addition, Kazakhstan's possible hydrocarbon reserves,
both onshore and offshore, dwarf its proven reserves, with estimated possible
reserves--mostly in the Kazakh sector of the Caspian Sea--of between 30 billion
and 50 billion barrels. Oil consortium operators have recently said that the
offshore Kashagan field alone may contain geological reserves of up to 38
billion barrels of oil, and recoverable reserves of 7-9 billion barrels of oil.
The Offshore Marine Services industry is directly impacted by the level
of activity in worldwide offshore oil and natural gas exploration, development
and production, which, in turn, is impacted by trends in oil and natural gas
prices. Oil and natural gas prices are affected by a host of geopolitical and
economic forces, including the fundamental principles of supply and demand. Each
of the major geophysical offshore oil and gas production regions has unique
characteristics that influence the economics of exploration and production and
consequently the market for vessels in support of these activities. While there
is some vessel interchangeability between geographic regions, barriers such as
mobilization costs and vessel suitability restrict migration of vessels between
regions. The effect of these restrictions on vessel migration has segmented
various regions into separate markets.
Caspian's Vessel Fleet
Caspian currently has a fleet of four specialized shallow draft vessels
designed for use in the shallow waters of the Caspian Sea. Caspian has one
accommodation/work barge, the "Baskunchak." This vessel is used to transport and
house personnel working on offshore production platforms, artificial islands,
and rigs. The Baskunchak can house up to 84 persons and has a heli-deck.
Caspian also owns two shallow draft landing craft supply vessels, the
"Caspian Maria" and the "Caspian Yelena." Supply vessels serve drilling and
productions facilities and support offshore construction and maintenance work.
They are differentiated from other vessels by their ro-ro cargo handling
capabilities, particularly their large capacity (approx. 1,000t) and
versatility. These vessels are used to transport supplies such as fuel, water,
drilling fluids, equipment and provisions.
Caspian has recently purchased one shallow draft tug/survey/supply
vessel, which is being mobilized to the Caspian Sea from Europe at this time.
This vessel will be used to provide tug, supply and other survey services in the
shallow water areas of the north Caspian Sea.
Caspian's fleet is time chartered to customers who rent the vessel and
hire Caspian to provide all necessary staffing and support for its safe and
efficient operation. Vessel operating expenses are typically Caspian's
responsibility except that the customer generally provides fuel and lubricants.
In return for providing time-chartered services, Caspian is paid a daily rate of
hire. Caspian also provides additional support services for the Baskunchak.
These services include:
o Room and board for the customer's personnel housed on the
vessel;
o Laundry and related services to the customer's personnel; and
o Heli-deck operations.
3
Caspian plans to expand its marine fleet to include additional supply,
work and survey vessels as well as barges and tug boats. As part of a natural
progression Caspian plans to develop a marine base in the Port of Bautino.
Eventually Caspian desires to develop an emergency response service that would
react to offshore oil spills on the Caspian Sea. Finally, Caspian is considering
the development of an offshore seismic exploration program.
Customers, Contract Terms and Competition
Caspian's customers are oil and natural gas exploration and production
companies working in the Kazakhstan sector of the Caspian Sea. Currently all of
Caspian's fleet, with the exception of the new tugboat being mobilized at this
time, is chartered to Agip Kazakhstan North Caspian Operating Company N.V.,
("Agip KCO") for use in their oil and gas explorations in Kazakhstan sector of
the Caspian Sea. Agip KCO is the operator of the Kashagan and Kalamkas fields
that lie in the north eastern sector of the Caspian Sea. Agip KCO operates the
fields on behalf of a consortium of seven international oil companies -- Eni's
Agip Caspian Sea, BG Group, ExxonMobil, Inpex, Phillips, Shell, and
TotalFinaElf.
The Baskunchak is chartered to Agip KCO through the end of May 2003.
The Caspian Maria and the Caspian Yelena are chartered to Agip KCO until the
commencement of the winter season 2003, with 1-year optional extensions. The
charters are industry standard time charters. The contracts are not cancelable
except for unsatisfactory performance of the vessel. The loss of Agip KCO as a
customer would severally adversely impact Caspian's financial condition and
results of operations if replacement contracts were not obtained.
Substantially all of Caspian's charters are fixed in U.S. dollars.
Caspian attempts to reduce currency risk by matching each vessel's contract
revenue to the currency matching its operating expenses.
Caspian's competition includes varying local companies to large
worldwide corporations. Competition is intense. Caspian currently has no known
local Kazakhstan competition, but does have to compete with many larger foreign
companies. Caspian believes that offsetting its small size, it may have an
advantage over some larger companies because it has extensive experience
operating vessels in the Caspian Sea and conducting business within and
complying with the laws and regulations of the Republic of Kazakhstan. In
addition, Caspian has developed strong relationships with government authorities
and other local companies.
Operating Risks and Insurance
Caspian's operations are subject to various operating hazards and risks
including:
o adverse sea and weather conditions;
o mechanical failure;
o navigation errors;
o collision;
4
o oil and hazardous substance spills, containment and clean up;
o labor shortages and strikes;
o damage to and loss of drilling rigs and production facilities;
and
o war, sabotage and terrorism risks.
These risks present a threat to the safety of personnel and to
Caspian's vessels, cargo, equipment in tow and other property, as well as the
environment. Caspian could be required to suspend its operations or request that
others suspend their operations as a result of these hazards. Third parties may
have significant claim against Caspian for damages due to personal injury,
death, property damage, pollution and loss of business.
Caspian's vessels are covered by Hull and Machinery Insurance, which
insures the vessels for their estimated market value against damage or loss,
including pollution risks. Caspian also carries maritime employer's liability,
and other insurance customary in the industry.
The terrorist attacks on the United States on September 11, 2001, and
the United States-led military response to counter terrorism and the continued
threat of terrorist activity and other acts of war or hostility have created
uncertainty in the insurance markets and have significantly increased the
political, economic and social instability in the geographic area in which
Caspian operates. It is possible that further acts of terrorism against the
United States domestically or abroad could be directed against properties and
personnel of U.S.-owned companies such as Caspian. The attacks and the resulting
economic and political uncertainties, including the potential for further
terrorist acts, have caused premiums charged for insurance coverage to increase,
some dramatically. After the events of September 11, 2001 occurred, insurance
underwriters imposed higher premiums for all types of insurance, including war
risk coverage, on vessels. To date, Caspian has not experienced any property
loss as a result of political, economic or social instability resulting from the
terrorist attacks.
Caspian believes that its insurance coverage is adequate. Caspian has
not experienced a loss in excess of insurance policy limits; however, there is
no assurance that Caspian's liability coverage will be adequate to cover all
potential claims that may arise nor that it will be able to maintain adequate
insurance in the future at rates considered reasonable, especially with the
current level of uncertainty in the market resulting from the terrorist attacks
on the United States on September 11, 2001.
Business Risks
Oil and Gas Prices are Highly Volatile. Commodity prices for crude oil
and natural gas are highly volatile. Prices are extremely sensitive to the
supply/demand relationship for the respective natural resources. High demand for
crude oil and natural gas and/or low inventory levels for the resources as well
as any perceptions about future supply interruptions can cause commodity prices
for crude oil and natural gas to rise, while generally, low demand for natural
resources and/or increases in crude oil and natural gas supplies cause commodity
prices for the respective natural resources to decrease.
5
Factors that affect the supply of crude oil and natural gas include but
are not limited to the following: the Organization of Petroleum Exporting
Countries' ("OPEC") ability to control crude oil production levels and pricing,
as well as, the level of production by non-OPEC countries; political and
economic uncertainties; advances in exploration and development technology;
worldwide demand for natural resources; and governmental restrictions placed on
exploration and production of natural resources.
Changes in Level of Capital Spending by our Customers. Caspian's
principal customers are oil and natural gas exploration, development and
production companies. Caspian's results of operations are highly dependent on
the level of capital spending by the energy industry. The energy industry's
level of capital spending is substantially related to the prevailing commodity
price of natural gas and crude oil. Low commodity prices have the potential to
reduce the amount of crude oil and natural gas that Caspian's customers can
produce economically. When this market dynamic occurs, it is expected that
Caspian's customers will generally reduce their capital spending budgets for
offshore drilling, exploration and development until commodity prices for
natural resources increase to levels that can support increases in production
and development and sustain growth.
Foreign Operations
Caspian derives all of its revenues from foreign sources. Caspian
therefore faces risks inherent in conducting business internationally, such as:
o Foreign currency exchange fluctuations or imposition of
currency exchange controls;
o Legal and governmental regulatory requirements;
o Potential vessel seizure or nationalization of assets;
o Import-export quotas or other trade barriers;
o Difficulties in collecting accounts receivable and longer
collection periods;
o Political and economic instability;
o Difficulties and costs of staffing and managing international
operations; and
o Language and cultural differences.
Any of these factors could materially adversely affect Caspian's
operations and consequently, its business, operating results and financial
condition.
Caspian also faces a significant potential risk of unfavorable tax
treatment and currency law violations. Legislation and regulations regarding
taxation, foreign currency transactions and licensing of foreign currency loans
in the Republic of Kazakhstan continue to evolve as the central government
manages the transformation from a command to a market-oriented economy. The
legislation and regulations are not always clearly written and their
interpretation is subject to the opinions of local tax inspectors. Instances of
inconsistent opinions between local, regional and national tax authorities is
not unusual.
6
The current regime of penalties and interest related to reported and
discovered violations of Kazakhstan's laws, decrees and related regulations are
severe. Penalties include confiscation of the amounts at issue for currency law
violations, as well as fines of generally 100% of the taxes unpaid. Interest is
assessable at rates of generally .3% per day. As a result, penalties and
interest can result in amounts that are multiples of any unreported taxes.
Caspian's operations and financial condition may be adversely affected
by Kazakh political developments, including the application of existing and
future legislation and tax regulations.
Environmental Regulations
Caspian must comply with extensive government regulation in the form of
international conventions, federal and state laws and regulations in
jurisdictions where its 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, Caspian 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 Caspian can avoid significant costs,
liabilities and penalties imposed as a result of environmental regulation in the
future.
Lack of Funds to Continue Operations
Since inception, Caspian has incurred significant losses. Moreover,
Caspian 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, Caspian has covered
its operating expense shortfall through additional contributions from its
control shareholders. Although no formal agreement has been entered between
Caspian and its previous control shareholders, it is anticipated that any
shortfall for fiscal year 2002 will be covered by additional contributions from
such shareholders unless funds are received from other funding sources. Because
of the capital requirements of Caspian, fund-raising may be difficult. There can
be no guarantee that Caspian will be able to meet its funding needs. In part,
this is because the availability of funds is a result of a variety of factors,
many of which are beyond Caspian's control, including volatility in the public
capital markets. Caspian's ability to raise funds may also be affected by
general economic conditions. All of these factors lead to significant concern
about Caspian's ability to continue as a going concern.
7
Subsidiaries
Caspian is a partner in two joint ventures located in the Port of
Bautino on the Caspian Sea. The Port of Bautino is the northernmost bay in the
Caspian Sea that does not freeze during the winter months, and the main marine
base for the oil companies conducting oil exploration and drilling operations in
the Kazakhstan sector of the north Caspian Sea.
Caspian is a joint venture partner, through its subsidiary CSJC Bauta,
in a water desalinization plant that purifies, bottles and markets and sells
water. The CSJC Bauta ("Bauta") facility is currently operational. It provides
water to the local community at cost under its infrastructure agreement and
provides water to the local Agip base. Recently, Bauta also began bottling and
selling water in five liter and one liter bottles. Bauta is currently producing
approximately 20,000 five liter bottles per week and 30,000 one liter bottles
per week. The bottled water is primarily sold to the surrounding oil field camps
and in retail locations in Aktau. Upon completion of the hotel being constructed
by Capsian's other joint venture company, Bauta will provide fresh water for the
hotel. Bauta was incorporated on February 27, 1998. Caspian acquired its 54%
interest Bauta in September 2002.
Caspian is also joint venture partner in a development company, Bautino
Development Company LLP, which is constructing a hotel that the joint venture
will manage and operate. Caspian expects the first phase of the hotel,
consisting of 48 rooms, to be completed by the end of November 2002. Based on
demand, market conditions and available financing, an additional two phases,
consisting of 48 rooms each, may also be undertaken, with the second phase
tentatively scheduled to begin during the later part of 2003. Bautino
Development Company LLP, ("Bautino") was established under the laws of
Kazakhstan on June 22, 2000. Caspian acquired its 50% interest in Bautino in
April 2001.
Employees
Caspian currently employs a total of 72 full time employees. Caspian is
committed to maximize the nationalization of its workforce in Kazakhstan.
Currently 66% of Caspian's employees are Kazakh nationals; 28% are Russian
nationals; and 6% are nationals of other countries. Caspian hires its employees
under local labor contracts complying with the governing law of the Republic of
Kazakhstan. Typically, these employment contracts are for renewable one year
terms. Caspian believes it has satisfactory relations with its employees. To
date, Caspian's operations have not been interrupted by strikes or work
stoppages.
8
Executive Offices
Caspian rents 170 square meters of office space in Almaty, Kazakhstan
as its principal executive offices. Caspian currently leases this space for
$1,200 per month. The lease expires at the end of December 2002, and is
renewable thereafter on a month-to-month basis. Caspian anticipates that the
lease on the space will increase, possibly as much as 100%, at the end of the
year. Caspian anticipates that it will continue to lease this space for at least
the next twelve months.
Caspian also maintains a branch office in 90 square meters of office
space located in Aktau, Kazakhstan. Caspian leases this space for $1,000 per
month under a one year lease that expires in March 2003. Caspian anticipates
that it will continue to lease this space for at least the next twelve months.
Both offices are leased at fair market value. Caspian operations
generally do not require highly specialized facilities, and suitable facilities
are generally available on a lease basis.
Legal Proceedings
Caspian is not currently a party to any legal proceedings, and to its
knowledge, is not the subject of any threatened or pending litigation.
Related Party Transactions
Caspian provided consulting services to GIS-Center, LLP, a related
party through a common officer and director, Mirgali Kunayev. The value of these
consulting services were provided to GIS-Center, LLP, on terms consistent with
the market value for such services. The current amount due Caspian is
US $105,000.
As of June 30, 2002, Caspian owed Conaught Finance International
Limited, US $482,000 for management and technical services provided to Caspian.
Paul Roberts, Caspian's President and a director and Laird Garrard, Caspian's
Vice President and a director may be deemed to be the beneficial owners of
Conaught.
As of June 30, 2002, Caspian owed Techgrand Company Limited, US
$100,000 for investment and marketing services provided to Caspian. At the time
the services were provided, Techgrand owned 12% of this issued and outstanding
common shares of Caspian.
As of June 30, 2002, Caspian owed Service Help Company, LLC,
US $105,000 for administrative services provided to Caspian. Service Help may be
deemed a related party through a common officer and director, Yvgeny Kurguzkin.
As of June 30, 2002, Caspian owed Arkashelf, Ltd., US $37,000 for the
balance due on the acquisition of Caspian's 50% interest in Bautino Development
Company. Caspian also received a loan from Arkashelf in September 2001, for the
purchase, transportation and modernization of the Caspian Maria and Caspian
Yelena vessels. The total amount of the loan was US $4,200,000. Maturity date on
the loan is August 2004, with principal payments beginning in June 2002. The
interest rate on the loan is 16% per annum, payable monthly. This loan is
secured by the vessels Baskunchak, Caspian Maria and Caspian Yelena and 5,400
common shares of Bauta.
9
Bauta purchased fixed assets from Kazakhstancaspishelf OJSC, 44% owner
of Bauta, and is obliged to pay the liability in semiannual installments over
the next six years. The loan bears an interest rate of 10% per annum. The loan
is secured by the fixed assets. The total amount due under the loan agreement
will be $5,755,000.
As of June 30, 2002, Caspian owed Petroleum Group Services Limited
US $490,000 for loans made to Caspian for purposes of supporting its operations.
At the time the loans were made, Petroleum Group owned 52% of the issued and
outstanding common shares of Caspian.
As of June 30 ,2002, Caspian owed Mars International Limited
US $1,072,000 for loans made to Caspian for purposes of supporting its
operations. The son of Caspian director and Vice President Mirgali Kunayev, and
may be deemed to be the beneficial owner of Mars International. These loans are
unsecured and bear an interest rate of 15% per annum. These loans have no
specific repayment terms.
As of June 30, 2002, Caspian owed two of its officers and directors,
Laird Garrard and Yevgeny Kurguzkin US $473,000 and US $634,000 respectively for
loans made to Caspian for purposes of supporting Caspian's operations. These
loans are unsecured and bear an interest rate of 15% per annum. These loans have
no specific repayment terms.
Caspian believes that all of the transactions set forth above were made
on terms no less favorable to Caspian than could have been obtained from
unaffiliated third parties. Caspian intends that all future transactions between
the Company and its officers, directors, principal stockholders and their
affiliates be approved by a majority of its board of directors, including a
majority of the independent and disinterested outside directors on the board of
directors, and be on terms no less favorable to Caspian than could be obtained
from unaffiliated third parties.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements.
Restatement of Previously Issued Financial Statements
On April 26, 2002, and May 7, 2002, respectively, EMPS filed
preliminary and definitive proxy statements on Form 14-A with the U.S.
Securities and Exchange Commission, containing financial statements of Caspian
for the year ended December 31, 2001 and for the period from December 22, 1999
(inception date) to December 31, 2000. As disclosed in a Current Report filed by
EMPS on August 27, 2002, subsequent to the filing of the definitive proxy
statement, it was determined that those financial statements required
restatement to reflect the consolidation of Caspian's 54% ownership interest in
"Bauta", an entity organized for the purpose of owning and operating a water
desalinization plant in the port of Bautino, on the Caspian Sea in Kazakhstan.
In earlier financial statements, Caspian's investment in Bauta was accounted for
under the equity method.
10
The Caspian financial statements presented in this Current Report have
been restated. The restated financial statements reflect the effects of (a)
consolidating adjustments related to Bauta and (b) additional miscellaneous
adjustments and reclassifications.
The following financial statements are filed with this amendment:
I. Audited Financial Statements of EMPS Corporation for
the Year Ended December 31, 2001;
II. Unaudited Financial Statements of EMPS Corporation
for the Six Months Ended June 30, 2002;
III. Audited Financial Statements of Caspian Services
Group Limited for the Year Ended December 31, 2001;
and
IV. Unaudited and Unreviewed Financial Statements of
Caspian Services Group Limited for the Six Months
Ended June 30, 2002.
(b) Pro Forma Financial Information:
I. Pro Forma Combined Balance Sheet and Statements of
Operations
(c) Exhibits.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Current Report on Form 8-K/A-1 to be signed
on its behalf by the undersigned hereunto duly authorized.
EMPS CORPORATION
Date: October 7, 2002 By: /s/ Louis Naegle
-------------------------------
Louis Naegle, President
Date: October 7, 2002 By: /s/ Marat Cherdabayev
--------------------------------
Marat Cherdabayev, Secretary
11
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED FINANCIAL STATEMENTS
WITH
INDEPENDENT AUDITOR'S REPORT
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONTENTS
PAGE
Independent Auditor's Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditor's Report
Board of Directors
EMPS CORPORATION
I have audited the accompanying consolidated balance sheets of EMPS Corporation
and subsidiary (development stage companies) as of December 31, 2001 and 2000
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 2001 and 2000 and the period from
inception (July 14, 1998) to December 31, 2001. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audits.
I conducted my audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that I plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of EMPS Corporation and
subsidiary (development stage companies) at December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
the years ended December 31, 2001 and 2000 and the period from Inception (July
14, 1998) to December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ David T. Thomson, P.C.
Salt Lake City, Utah
January 30, 2002
F-2
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2001 2000
--------------- --------------
CURRENT ASSETS:
Cash on hand $ 40,835 $ 50,012
Prepaid Expenses 1,050 -
------------ -----------
Total Current Assets 41,885 50,012
------------ -----------
OTHER ASSETS
Deferred offering costs - 5,472
Patents, net of amortization of $180 and $130 4,601 670
------------ -----------
Total Other Assets 4,601 6,142
------------ -----------
TOTAL ASSETS $ 46,486 $ 56,154
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 59,810 $ 26,138
Accrued interest payable - 514
Franchise tax payable 100 -
Deferred revenue 3,231 -
Due to Parent - 5,051
------------ -----------
Total Current Liabilities 63,141 31,703
------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.001 par value, 50,000,000
shares authorized, 865,100, and 850,000
shares issued and outstanding respectively 865 850
Additional paid-in capital 32,630 26,907
Deficit accumulated during the development stage (50,150) (3,306)
------------ -----------
Total Stockholders' Equity (Deficit) (16,655) 24,451
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,486 $ 56,154
============ ===========
F-3
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the For the Cumulative
Year Ended Year Ended During The
December 31, December 31, Development
2001 2000 Stage
----------------- ----------------- ----------------
REVENUE $ - $ - $ -
EXPENSES
General and administrative 47,610 795 48,994
Amortization expense 184 54 414
--------- -------- ---------
Total Expenses 47,794 849 49,408
--------- -------- ---------
NET INCOME (LOSS) FROM OPERATIONS (47,794) (849) (49,408)
OTHER INCOME (EXPENSE)
Grant revenue, net of grant expenses of $62,157,
$-0-, and $62,157 - - -
Interest income 978 22 1,000
Other income 51 - 51
Interest expense (79) (446) (684)
--------- -------- ---------
Total income (expense) 950 (424) 367
--------- -------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (46,844) (1,273) (49,041)
Cumulative effect of accounting change
for organization costs - - (1,109)
--------- -------- ---------
NET INCOME (LOSS) $ (46,844) $ (1,273) $ (50,150)
========= ======== =========
EARNINGS (LOSS) PER SHARE BEFORE ACCOUNTING CHANGE $ (0.05) $ (0.00) $ (0.06)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - (0.00)
--------- -------- ---------
EARNINGS (LOSS) PER SHARE $ (0.05) $ (0.00) $ (0.06)
========= ======== =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 863,842 804,167 819,905
========= ======== =========
F-4
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The For The Cumulative
Year Ended Year Ended During The
December 31, December 31, Development
2001 2000 Stage
--------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash from grant $ 68,228 $ - $ 68,228
Cash from interest received 978 22 1,000
Cash from other income 50 - 50
Cash paid for interest (79) - (79)
Cash paid for grant expenses (62,157) - (62,157)
Cash paid for expense (21,171) (245) (21,663)
--------- -------- ---------
Total cash used in operating activities (14,151) (223) (14,621)
--------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Patents (4,115) - (4,115)
Organization costs - - (1,000)
--------- -------- ---------
Total cash used in investing activities (4,115) - (5,115)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributed to the Company - - 1,000
Advances (payments) from Parent (5,051) 1,340 -
Sale of common stock for cash 15,100 50,000 65,100
Deferred offering costs (960) (1,105) (5,529)
--------- -------- ---------
Total cash provided by financing activities 9,089 50,235 60,571
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH (9,177) 50,012 40,835
CASH - BEGINNING OF PERIOD 50,012 - -
--------- -------- ---------
CASH - END OF PERIOD $ 40,835 $ 50,012 $ 40,835
========= ========= ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
NET INCOME (LOSS) $ (46,844) $ (1,273) $ (50,150)
--------- -------- ---------
Adjustment to reconcile net income (loss) to net
cash provided (used) by operating activities
Cumulative effect of accounting change - - 1,109
Amortization of organization and patent costs 185 54 414
Change in assets and liabilities
(Increase) in prepaid expense (1,050) - (1,050)
Increase in deferred revenue 3,231 - 3,231
Increase (decrease) in accrued interest (514) 386 -
Increase in franchise tax payable 100 - 100
Increase (decrease) in accounts payable 30,741 610 31,725
------- ---- ------
Total Adjustments 32,693 1,050 35,529
------- ------ ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (14,151) $ (223) $ (14,621)
========= ======== =========
NONCASH TRANSACTIONS
Part of consideration to purchase Subsidiary shares $ - $ - $ 2,636
========= ======== =========
Accounts payable for organizations costs $ - $ - $ 209
========= ======== =========
Accounts payable for deferred offering costs $ - $ 19,838 $ 29,670
========= ======== =========
Commons stock issued for assignment of patents $ - $ - $ 800
========= ======== =========
F-5
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During The
------------------------ Paid-in Development
Shares Amount Capital Stage
------------ ------------ ------------ ----------------
BALANCE, July 14, 1998 (inception) - $ - $ - $ -
Shares issued to parent in exchange for assignment
of patents at par value of $.001 per share,
July 14, 1998 800,000 800 - -
Capital contributed to the Company to pay costs - 1,000
Net income (loss) from inception (July 14, 1998) to
December 31, 1998 - - - (120)
------- ----- -------- ---------
BALANCE, December 31, 1998 800,000 800 1,000 (120)
Net income (loss) for the year ended
December 31, 1999 - - - (1,913)
------- ----- -------- ---------
BALANCE, December 31, 1999 800,000 800 1,000 (2,033)
Issuance of shares for cash pursuant to
public offering of common stock at $1.00
per share on December 25, 2000 50,000 50 49,950 -
Offering costs associated with shares issued - - (24,043) -
Net income (loss) for the year ended
December 31, 2000 - - - (1,273)
------- ----- -------- ---------
BALANCE, December 31, 2000 850,000 850 26,907 (3,306)
Issuance of shares for cash pursuant to the completion
of a public offering of common stock at $1.00
per share on January 31, 2001 15,100 15 15,085 -
Offering costs associated with shares issued
issued - - (9,362) -
Net income (loss) for the year ended
December 31, 2001 - - - (46,844)
------- ----- -------- ---------
BALANCE, December 31, 2001 865,100 $ 865 $ 32,630 $ (50,150)
======= ===== ======== =========
F-6
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - EMPS Corporation (The Company) was organized under the
laws of the State of Nevada on July 14, 1998 and has elected a fiscal
year end of December 31st. The Company was formed for the purpose of
furthering development and marketing of patented technology for
commercially separating nonmagnetic particulate material from other
materials without heat or water. On January 31, 2001, the Company
formed a wholly owned subsidiary by issuing cash and other
consideration for all of the issued and outstanding shares of EMPS
Research Corporation (Research) (See note 9). The Company and its
Subsidiary have not commenced planned principle operations and are
considered development stage companies as defined in SFAS No. 7. The
Company has acquired three patents having to do with the business
purpose outlined above.
Financial statements - The accompanying financial statements include
only the accounts of EMPS Corporation and it's wholly-owned subsidiary
(Research) and are not presented on a consolidated basis with Particle
Separation Technologies, L.C., (PST) which is its Parent Company. At
December 31, 2001 and 2000, PST owned 92.5%, and 94% of the common
stock of EMPS Corporation respectively.
Consolidation Policy - The consolidated balance sheet, statement of
operations, and statement of cash flows at December 31, 2001, include
the accounts of the Company and it's wholly-owned subsidiary
(Research). The consolidated statement of operations and statements of
cash flows at December 31, 2001 and 2000 excludes the Research
financial information because Research was not in existence at that
time. Intercompany transactions and balances have been eliminated in
consolidation.
Net Earnings Per Share - The computation of net income (loss) per share
of common stock is based on the weighted average number of shares
outstanding during the period presented.
Organization Costs - The Company was amortizing its organization costs,
which reflected amounts expended to organize the Company, over sixty
(60) months using the straight-line method. In 1998, the Accounting
Standards Executive Committee (AsSEC) of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-5,
"Reporting on the Cost of Start-up Activities." The SOP requires costs
of start-up activities and organization costs to be expensed as
incurred. During 1999, the Company adopted the SOP and recognized a
charge for the cumulative effect of accounting change of $1,109.
Assignment of Patent Rights - The Company is amortizing its cost
associated with the acquisition of its patents over a remaining life of
12.8 years using the straight-line method. This life is the legally
remaining protected lives of the patents. Amortization expense shown
from 1999 forward is for patents only.
Income Taxes - Due to losses at December 31, 2001 and 2000, no
provisions for income taxes has been made. There are deferred income
taxes resulting from income and expense items being reported for
financial accounting and tax reporting purposes in different periods.
The difference arises from the accelerating of the write-off of
organization costs for financial statement purposes as compared to
amortizing over 60 months for tax purposes.
F-7
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash and Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents. The Company did not have non-cash investing activities
during 2001 and 2000.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Grant revenue recognition - The DOE grant is funded on a cost
reimbursement basis and payments received from the grant are treated as
earned and recognized as revenue at the time expenditures reimbursable
under the grant are made by the Company. The grant has provisions for
advance payments. A grant receivable is recorded if expenditures exceed
amounts received under the grant and deferred revenue is recorded if
payments exceed costs expended under the grant.
Reclassification - Certain accounts have been reclassified to conform
with current presentation.
NOTE 2 - EQUITY TRANSACTIONS
The Company on July 14, 1998 issued 800,000 of $.001 par value common
stock to PST to acquire Patents to technology explained above in the
organization footnote. The stock was valued at par value for a total
acquisition cost of $800 (see Note 4). At December 31, 1998 $1,000 was
contributed to the Company to pay certain cost to organize the Company.
The Company has recorded the contributed capital as additional paid-in
capital in its financial statements.
Effective January 31, 2001, the Company completed a public offering of
its common stock. The stock was sold at $1.00 per share. The Company
sold 65,100 shares of its common stock for a total of $65,100. The
direct costs of the offering were $33,405.
NOTE 3 - RELATED PARTY TRANSACTIONS
PST (see financial statements - note 1) is providing free office space
to the Company; the free rent has been determined to have only nominal
value. At December 31, 2000, PST had paid in behalf of the Company
certain accounting, legal and other professional fees, and other minor
expenses in the amount of $5,051. These were treated as short-term
advances and had accrued interest at 9% per annum until payment was
made in 2001.
The Company has no employees. Starting in the first quarter of 2001 and
through the second quarter of 2001, compensation was paid to the
project manager of the government grant issued to Research (see note 8)
in the amount of $20,000. The project manager is a related party to
Research through PST.
F-8
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTY TRANSACTIONS - CONTINUED
As of December 31, 2001 and 2000 no compensation was paid or accrued to
any officers or directors of the Corporation holding Research's stock
due to the fact that it is of only nominal value.
NOTE 4 - ASSIGNMENTS OF PATENTS TO THE COMPANY
As outlined above, PST has assigned patents for its technology to the
Company in exchange for common stock of the Company. The term of the
assignment is for the length of time covered under the letters of
Patent. At the time of the assignment, the costs of the patents were
recorded at no more than the cost of the patents to PST. During the
year ending December 31, 2001, the Company paid, using cash, additional
legal fees on the third patent for a cost of $1,970. These patents were
then assigned to Research. (See Note 9).
NOTE 5 - STOCK OPTION PLAN
The Company has adopted a stock option plan. The total number of shares
of common stock reserved and available for distribution under the Plan
shall be 400,000 shares. At December 31, 2001 and 2000 no options have
been granted. The Company can grant incentive stock options or
non-qualified stock options. The grant-holding period, the term of the
grant, the grant exercise price, when the grant can be exercisable, and
the method of exercise are detailed in the stock option plan.
NOTE 6 - INCOME TAXES
At December 31, 2001 and 2000, the Company had net federal operating
losses (NOL) of $47,285 and $2,681, which can be carried forward to
offset operating income. The Company's NOL's will expire between the
years 2021 and 2018. Valuation allowances of $7,519 and $496 have been
established for deferred tax assets associated with the above NOL's for
2001 and 2000 and for the amortizing of organization costs for tax
purposes from 2000 forward. The change in the NOL allowances for 2001
and 2000 was $7,023 and $191.
NOTE 7 - DEPARTMENT OF ENERGY AWARD
The Department of Energy (DOE), through its Office of Industrial
Technologies (OIT) 2000 Inventions and Innovation (I&I) Program has
awarded a grant to Research. Research's application was titled
"Development of a High-Frequency Eddy-Current Separator". The grant was
approved in the amount of $199,000. The project period is from February
1, 2001 to January 1, 2003. Specific amounts have been subcontracted to
two entities to assist in the research to be conducted under the grant.
Through December 31, 2001, Research has incurred grant expenses in the
amount of $62,157.
F-9
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FORMATION OF WHOLLY OWNED SUBSIDIARY
On January 31, 2001, the Company formed EMPS Research Corporation
(Research) as a wholly owned Subsidiary by giving cash and other
consideration in exchange for 1,000,000 shares of Research common
stock. Research was incorporated on January 31, 2001 in the State of
Utah. The Company owns all of the issued and outstanding common shares
of Research (1,000,000 shares). The consideration given by the Company
to Research for its shares was $2,100 of cash, payment of organization
costs of $264 on behalf of Research, and the assignment of three
Patents owned by the Company to Research at their book value
(historical costs) at time of assignment in the amount of $2,636. Thus,
the Company paid a total price of $5,000 for the 1,000,000 shares of
common stock of Research.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to December 31, 2001, the Company's board of directors
adopted a resolution to increase the authorized capital stock of the
Company from 50 million shares of common stock to 150 million shares
and also authorized the Company to increase its total issued and
outstanding shares of common stock by effecting a three-for-one forward
stock split. The Company's total issued and outstanding common stock
immediately following the forward split was 2,595,300 shares. The par
value of the common stock will remain at $.001 per share.
Also subsequent to December 31, 2001, the Company had the following
stock and debt transactions. The Company sold 60,000 shares of
restricted common stock for cash at a price of $ .30 per share for a
total amount of $18,000. The Company pursuant its Stock Option Plan and
by resolution of the Board of Directors approved a grant and issuance
of 140,000 common shares as complete and full payment of all
outstanding legal fees to its legal counsel. The shares issued are to
be valued at fair market value at time of issuance. The amount owed to
legal counsel at December 31, 2001 was $55,664. After this transaction
the Company has available for distribution under the Stock Option Plan
260,000 shares.
F-10
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
--------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash in bank $ 8,715 $ 40,835
Prepaid expense 206 1,050
Due from U. S. Department of Energy 8,041 -
--------------- --------------
Total Current Assets 16,962 41,885
--------------- --------------
OTHER ASSETS
Patents, net of amortization of $282 and $180 4,498 4,601
--------------- --------------
Total Other Assets 4,498 4,601
--------------- --------------
TOTAL ASSETS $ 21,460 $ 46,486
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 44,302 $ 59,810
Franchise tax payable - 100
Deferred revenue - 3,231
--------------- --------------
Total Current Liabilities 44,302 63,141
--------------- --------------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 150,000,000 shares
authorized, 2,910,300 and 886,100 shares issued and
outstanding respectively 2,910 865
Additional paid-in capital 220,399 32,630
Deficit accumulated during the development stage (246,151) (50,150)
--------------- --------------
Total Stockholders' Equity (Deficit) (22,842) (16,655)
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,460 $ 46,486
=============== ==============
F-11
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Six
Months Ended Months Ended Cumulative
June 30, June 30, During the
----------------------------- --------------------------- Development
2002 2001 2002 2001 Stage
------------ ------------ ----------- ----------- -----------
REVENUE $ - $ - $ - $ - $ -
------------ ------------ ----------- ----------- -----------
EXPENSES
General and administrative 26,504 6,262 195,954 11,962 244,948
Amortization expense 51 51 102 82 516
------------ ------------ ----------- ----------- -----------
Total expenses 26,555 6,313 196,056 12,044 245,464
------------ ------------ ----------- ----------- -----------
NET INCOME (LOSS) FROM OPERATIONS (26,555) (6,313) (196,056) (12,044) (245,464)
------------ ------------ ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Grant revenue, net of grant expenses of
$20,431, $24,245, $39,893, $50,512
and $102,050 - 26,267 - - -
Interest income 47 113 58 431 1,057
Other income - 904 - 904 51
Interest expense - - (3) (40) (686)
------------ ------------ ----------- ----------- -----------
Total Other Income and Expense 47 27,284 55 1,295 422
------------ ------------ ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (26,508) 20,971 (196,001) (10,749) (245,042)
Cumulative effect of accounting
change for organization costs - - - - (1,109)
------------ ------------ ----------- ----------- -----------
NET INCOME (LOSS) $ (26,508) $ 20,971 $ (196,001) $ (10,749) $ (246,151)
============ =========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE
BEFORE ACCOUNTING CHANGE $ (0.01) $ 0.02 $ (0.07) $ (0.01) $ (0.10)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ - $ - $ - $ - $ (0.00)
------------ ------------ ----------- ----------- -----------
INCOME (LOSS) PER SHARE $ (0.01) $ 0.02 $ (0.07) $ (0.01) $ (0.10)
============ ============ =========== =========== ===========
F-12
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months Ended Cumulative
June 30, During the
------------------------ Development
2002 2001 Stage
---------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash from grant $ 39,893 $ 65,384 $ 102,050
Cash from interest received 58 431 1,057
Cash from other income - - 51
Cash paid for interest (3) (555) (686)
Cash paid for grant expenses (39,893) (44,718) (102,050)
Cash paid for expenses (50,175) (9,755) (65,163)
---------- --------- ----------
Net Cash Provided (Used) by Operating Activities (50,120) 10,787 (64,741)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Patents - (4,115) (4,115)
Organization costs - - (1,000)
---------- --------- ----------
Net Cash Used by Investing Activities - (4,115) (5,115)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributed to the Company - - 1,000
Advances (payments) - Parent - (5,051) -
Sale of common stock for cash 18,000 15,100 83,100
Deferred offering costs - (960) (5,529)
---------- --------- ----------
Net Cash Provided (Used) by Financing Activities 18,000 9,089 78,571
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH (32,120) 15,761 8,715
CASH - BEGINNING OF PERIOD 40,835 50,012 -
---------- --------- ----------
CASH - END OF PERIOD $ 8,715 $ 65,773 $ 8,715
========== ========= ==========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES
NET INCOME (LOSS) $ (196,001) $ (10,749) $ (246,151)
---------- --------- ----------
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities
Amortization of organization and patent costs 102 82 516
Common stock issued to pay payables and consulting services 116,150 - 116,150
Cumulative change in accounting principle - - 1,109
Change in assets and liabilities
(Increase) Decrease in prepaid expenses 844 - (206)
(Increase) Decrease in due from Department of Energy (8,041) - (8,041)
Increase in deferred revenue (3,231) 14,876 -
Increase (decrease) in accounts payable 40,157 7,092 71,882
Increase (decrease) in franchise tax payable (100) - -
Increase (decrease) in accrued interest - (514) -
---------- --------- ----------
Total Adjustments 145,881 21,536 181,410
---------- --------- ----------
NET CASH (USED) BY OPERATING ACTIVITIES $ (50,120) $ 10,787 $ (64,741)
========== ========= ==========
NONCASH TRANSACTIONS
Part of consideration to purchase shares of Subsidiary - patents $ - $ 2,636 $ 2,636
========== ========= ==========
Accounts payable for organization costs $ - $ - $ 209
========== ========= ==========
Accounts payable for deferred offering costs $ - $ 2,930 $ 29,670
========== ========= ==========
Common stock issued for assignment of patents $ - $ - $ 800
========== ========= ==========
Common stock issued to pay accounts payable $ 55,664 $ 2,636 $ 55,664
========== ========= ==========
F-13
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - EMPS Corporation (The Company) was organized under the
laws of the State of Nevada on July 14, 1998 and has elected a fiscal
year end of December 31st. The Company was formed for the purpose of
furthering development and marketing of patented technology for
commercially separating nonmagnetic particulate material from other
materials without heat or water. On January 31, 2001, the Company
formed a wholly owned subsidiary by issuing cash and other
consideration for all of the issued and outstanding shares of EMPS
Research Corporation (Research) (See note 7). The Company and its
Subsidiary have not commenced planned principle operations and are
considered development stage companies as defined in SFAS No. 7. The
Company has acquired three patents having to do with the business
purpose outlined above.
Financial Statements - The accompanying financial statements include
only the accounts of EMPS Corporation and its wholly-owed subsidiary
(Research) and are not presented on a consolidated basis with Particle
Separation Technologies, L.C., (PST) which is its Parent Company. At
June 30, 2002, December 31, 2001 and June 30, 2001, the PST owned
82.5%, 92.5% and 92.5% of the common stock of EMPS Corporation
respectively.
Consolidation Policy - The consolidated balance sheet, statement of
operations, and statement of cash flows at June 30, 2002 and December
31, 2001, include the accounts of The Company and its wholly-owned
subsidiary (Research). Intercompany transactions and balances have been
eliminated in consolidation.
Organization Costs - The Company was amortizing its organization costs,
which reflected amounts expended to organize the Company, over sixty
(60) months using the straight-line method. In 1998, the Accounting
Standards Executive Committee (AsSEC) of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-5,
"Reporting on the Cost of Start-up Activities." The SOP requires costs
of start-up activities and organization costs to be expensed as
incurred. During 1999, the Company adopted the SOP and recognized a
charge for the cumulative effect of accounting change of $1,109.
Assignment of Patent Rights - The Company is amortizing its cost
associated with the acquisition of its patents over a remaining life of
12.8 years using the straight-line method. These lives are the legally
remaining protected lives of the patents. Amortization expense shown
from 1999 forward is for patents only.
Income Taxes - Due to losses at June 30, 2002, December 31, 2001 and
June 30, 2001, no provisions for income taxes has been made. There are
deferred income taxes resulting from income and expense items being
reported for financial accounting and tax reporting purposes in
different periods. The difference arises from the accelerating of the
write-off of organization costs for financial statement purposes as
compared to amortizing over 60 months for tax purposes.
Cash and Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents. The Company did not have non-cash investing activities
during 2002 and 2001.
F-14
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO UNUADITED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Grant revenue recognition - The DOE grant is funded on a cost
reimbursement basis and payments received from the grant are treated as
earned and recognized as revenue at the time expenditures reimbursable
under the grant are made by the Company. The grant has provisions for
advance payments. A grant receivable is recorded if expenditures exceed
amounts received under the grant and deferred revenue is recorded if
payments exceed costs expended under the grant.
Reclassification - Certain accounts have been reclassified to conform
with current presentation.
NOTE 2 - EQUITY TRANSACTIONS
The Company on July 14, 1998 issued 800,000 shares of $.001 par value
common stock to PST to acquire Patents to technology explained above in
the organization footnote. The stock was valued at par value for a
total acquisition cost of $800 (see Note 4). At December 31, 1998,
$1,000 was contributed to the Company to pay certain cost to organize
the Company. The Company has recorded the contributed capital as
additional paid-in capital in its financial statements.
Effective January 31, 2001, the Company completed a public offering of
its common stock. The stock was sold at $1.00 per share. The Company
sold 65,100 shares of its common stock for a total of $65,100. The
direct costs of the offering were $33,405.
The Company's board of directors adopted during January 2002 a
resolution to increase the authorized capital stock of the Company from
50 million shares of common stock to 150 million shares and also
authorized the Company to increase its total issued and outstanding
shares of common stock by effecting a three-for-one forward stock
split. The Company's total issued and outstanding common stock
immediately following the forward split was 2,595,300 shares. The par
value of the common stock remained at $.001 per share. All references
in the accompanying financial statements to the per share amounts have
been restated to reflect the forward stock split.
Also during January 2002, the Company had the following stock and debt
transactions. The Company sold 60,000 post split shares of restricted
common stock to an individual and a company for cash at a price of $.30
per share for a total amount of $18,000. The Board of Directors
approved a grant and issuance of 140,000 post split common shares as
complete and full payment of all outstanding legal fees to its legal
counsel. The shares issued were valued at fair market value at time of
issuance of $.3976 per share. The amount owed to legal counsel at
December 31, 2001 was $55,664. During February 2002, the Company issued
115,000 post split shares of common shares valued at $1.01 per share in
exchange for consulting services (see Note 9).
F-15
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTY TRANSACTIONS
PST is providing free office space to the Company, to date; the free
rent has been determined to have only nominal value.
The Company has no employees. Starting in the first quarter of 2001 and
through the second quarter of 2001, compensation was paid to the
project manager of the government grant issued to Research (see note 6)
in the amount of $20,000. The project manager is a related party to
Research through PST. As of June 30, 2002 and December 31, 2001 and
2000 no compensation was paid or accrued to any officers or directors
of the Corporation due to the fact that it is of only nominal value.
NOTE 4 - ASSIGNMENTS AND PURCHASE OF PATENTS TO THE COMPANY
As outlined above, PST has assigned patents for its technology to the
Company in exchange for common stock of the Company. The term of the
assignment is for the length of time covered under the letters of
Patent. At the time of the assignment, the costs of the patents were
recorded at no more than the cost of the patents to PST. During the
year ended December 31, 2001, the Company also purchased, using cash,
an additional patent from PST for a cost of $1,970. These patents were
then assigned to Research. (See Note 7).
NOTE 5 - INCOME TAXES
At December 31, 2001 and 2000 the Company had net federal operating
losses (NOL) of $47,285 and $2,681, which can be carried forward to
offset operating income. The Company's NOL's will expire between the
years 2021 and 2018. Valuation allowances of $7,519 and $496 have been
established for deferred tax assets associated with the above NOL's for
2001 and 2000 and for the amortizing of organization costs for tax
purposes from 2000 forward. The change in the NOL allowances for 2001
and 2000 was $7,023 and $191.
At June 30, 2002, the Company and Research had consolidated interim
losses of $196,001. Losses for the year 2002, if any, will expire in
2022. A valuation allowance of $66,640 has been established for the
June 30, 2002 interim loss.
NOTE 6 - DEPARTMENT OF ENERGY AWARD AND GRANT
The Department of Energy (DOE), through its Office of Industrial
Technologies (OIT) 2000 Inventions and Innovation (I&I) Program has
awarded a grant to Research. Research's application was titled
"Development of a High-Frequency Eddy-Current Separator". The grant was
approved in the amount of $199,000. The project period is from February
1, 2001 to January 31, 2003. Specific amounts have been subcontracted
to two entities to assist in the research to be conducted under the
grant. Through June 30, 2002, Research has incurred grant expenses in
the amount of $102,050.
F-16
EMPS CORPORATION AND SUBSIDIARY
(Development Stage Companies)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 7 - FORMATION OF WHOLLY OWNED SUBSIDIARY
On January 31, 2001, the Company formed EMPS Research Corporation
(Research) as a wholly owned Subsidiary by giving cash and other
consideration in exchange for 1,000,000 shares of Research common
stock. Research was incorporated on January 31, 2001 in the State of
Utah.
The Company owns all of the issued and outstanding common shares of
Research (1,000,000 shares). The consideration given by the Company to
Research for its shares was $2,100 of cash, payment of organization
costs of $264 on behalf of Research, and the assignment of three
Patents owned by the Company to Research at their book value
(historical costs) at time of assignment in the amount of $2,636. Thus,
the Company paid a total price of $5,000 for the 1,000,000 shares of
common stock of Research.
NOTE 8 - AGREEMENT AND PLAN OF REORGANIZATION
On February 28, 2002, the Company entered into an agreement and plan of
reorganization with Caspian Services Group, Limited, a privately held
British Virgin Islands corporation (Caspian). Caspian is primarily
engaged in providing services to the oil and gas industry in the
Republic of Kazakhstan. Pursuant to the agreement, the Company will
issue 27,089,700 shares of restricted common stock in exchange for 100%
of the issued and outstanding shares of Caspian common stock.
Consummation of the agreement is contingent upon ratification of the
agreement by a majority of the Company's current shareholders. The vote
to ratify the agreement took place at a special meeting of shareholders
on May 29, 2002. As of June 30, 2002, the agreement was yet to be
completed. The Company anticipates the agreement to close in the first
part of the third quarter of 2002.
NOTE 9 - CONSULTING AGREEMENT
During February 2002, the Company entered into two consulting
agreements with two individuals. Under the agreements the individuals
are to provide oil and gas industry-consulting services to the Company.
Per the agreement $20,000 was paid and 115,000 shares of common stock
were issued to the two individuals. The shares were determined to have
a value of $1.01 per share for a total valuation of $116,150. The total
consulting expense of $136,150 paid under this agreement was recorded
in the first quarter of 2002.
NOTE 10 - STOCK OPTION PLAN
During March 2002, the Board of Directors approved, and during May
2002, the stockholders of the Company ratified the EMPS Corporation
2002 stock option plan. The plan reserves 1,000,000 common shares.
F-17
Caspian Services Group Limited
Restated Consolidated Financial Statements
For the year ended December 31, 2001 and for
the period from December 22, 1999
(Inception date) through December 31, 2000
with Report of Independent Auditors
F-18
Caspian Services Group Limited
Restated Consolidated Financial Statements
For the year ended December 31, 2001 and for the period
from December 22, 1999 (Inception date) through December 31, 2000
Contents
Report of Independent Auditors...................................F-20
Restated Consolidated Financial Statements
Restated Consolidated Balance Sheets.............................F-21
Restated Consolidated Statements of Operations and
Comprehensive Loss.............................................F-22
Restated Consolidated Statements of Cash Flows...................F-23
Restated Consolidated Statements of Changes in
Shareholders' Deficiency.......................................F-24
Notes to the Restated Consolidated Financial Statements.....F-25 - F-42
F-19
Report of Independent Auditors
To the Shareholders of Caspian Services Group Limited
We have audited the accompanying consolidated balance sheets of Caspian Services
Group Limited and subsidiary (collectively referred to as the "Company") as of
December 31, 2001 and 2000, and the related consolidated statements of
operations and comprehensive loss, changes in shareholders' equity (deficit) and
cash flows for the year ended December 31, 2001 and for the period from December
22, 1999, (Inception date) through December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for the year ended December 31, 2001, and for the period from December 22,
1999 (Inception date) through December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 21 to the accompanying consolidated financial statements,
the Company has restated its previously issued consolidated financial statements
for the year ended December 31, 2001 and for the period from December 22, 1999
(Inception date) through December 31, 2000.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 3, the Company has incurred operating losses since inception and has
deficiencies in both working capital and shareholders' equity. These and other
conditions raise substantial doubt about the Company's ability to continue as
going concern. The consolidated financial statements do not include any
adjustments 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.
/s/ Ernst & Young
Almaty, Kazakhstan
September 6, 2002
F-20
Caspian Services Group Limited
Restated Consolidated Balance Sheets
As of December 31, 2001 and 2000
(In thousands of United States Dollars)
ASSETS Notes 2001 2000
---------- ------------------- -------------------
Current Assets
Cash and cash equivalents 4 $ 259 $ 146
Trade accounts receivable, net of allowance of $76 in
2001 and $5 at December 31, 2001 and 2000 respectively 5 330 154
Due from related parties 6 105 -
Inventories 55 52
Prepaid expenses and other current assets 7 145 42
------------------- -------------------
894 394
------------------- -------------------
Non-Current Assets
Investments 8 85 -
Property and equipment, net 9 5,792 1,389
------------------- -------------------
5,877 1,389
------------------- -------------------
Total Assets 6,771 1,783
=================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Amounts due to related parties 10 1,849 1,281
Accounts payable and accrued expenses 11 461 394
Income taxes payable 363 69
Current portion of long-term borrowings from
related parties 13 4,777 311
------------------- -------------------
7,450 2,055
------------------- -------------------
Long-Term Liabilities
Long-term borrowings from related parties 13 5,081 5,158
------------------- -------------------
Shareholders' Deficiency
Common stock (50,000 common shares authorized, 100
issued, but unpaid, $1 par value) 1 - -
Accumulated other comprehensive income 104 22
Accumulated deficit (5,864) (5,452)
------------------- -------------------
(5,760) (5,430)
------------------- -------------------
Total Liabilities and Shareholders' Deficit $ 6,771 $ 1,783
=================== ===================
Accounting policies and explanatory notes on pages 6 to 22 form
an integral part of the restated consolidated financial statements.
F-21
Caspian Services Group Limited
Restated Consolidated Statements of Operations and Comprehensive Loss
For the year ended December 31, 2001 and for the period
from December 22, 1999 (Inception date) through December 31, 2000
(In thousands of United States Dollars)
2001 2000
------------------ ------------------
Revenues
Charter revenue $ 2,473 $ 1,887
Mobilization and demobilization fees 195 84
Accommodation and meals 441 327
Other revenues 389 56
------------------ ------------------
Total revenues 3,498 2,354
------------------ ------------------
Costs and expenses
Payroll and related expenses (992) (610)
Costs of food (113) (221)
Costs of fuel and materials (235) (37)
Technical and marketing services expense (267) (587)
Insurance (116) (65)
Depreciation (168) (86)
Freight charges (28) (104)
Travel and entertainment expenses (235) (62)
Telephone expense (44) (39)
Taxes other than payroll related and income (108) (128)
Bad debt expense (71) (5)
Other operating expenses (425) (297)
------------------ ------------------
Total costs and expenses (2,802) (2,241)
------------------ ------------------
Income from operating activities 696 113
Other income (loss)
Impairment of purchased goodwill - (5,346)
Equity in earnings (loss) of equity method investees (11) -
Interest expense (645) (99)
Other income (loss), net (29) 27
------------------ ------------------
Income (loss) before taxes 11 (5,305)
------------------ ------------------
Income tax expense (423) (147)
------------------ ------------------
Net loss (412) (5,452)
Other comprehensive income:
Foreign currency translation adjustments 82 22
------------------ ------------------
Comprehensive loss $ (330) $ (5,430)
================== ==================
Accounting policies and explanatory notes on pages 6 to 22 form
an integral part of the restated consolidated financial statements.
F-22
Caspian Services Group Limited
Restated Consolidated Statements of Cash Flows
For the year ended December 31, 2001 and for the period
from December 22, 1999 (Inception date)
through December 31, 2000 (In thousands of United States Dollars)
2001 2000
----------------- ----------------
Operating activities:
Net loss $ (412) $ (5,452)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 168 86
Bad debt expense 71 5
Impairment of purchased goodwill - 5,346
Loss on investment in equity method investees 11 -
Changes in operating assets and liabilities:
Trade accounts receivable (247) (159)
Due from related parties (105) -
Prepaid expenses and other current assets (103) (42)
Inventories (3) (52)
Due to related parties 568 394
Accounts payable and accrued expenses 67 394
Income taxes payable 294 69
----------------- ----------------
Net cash provided by operating activities 309 589
----------------- ----------------
Investing activities:
Investments in equity method investees (96) --
Cash paid for the purchase of Bauta, net of cash
acquired -- (432)
Capital expenditures (4,571) (1,397)
----------------- ----------------
Net cash used by investing activities (4,667) (1,829)
----------------- ----------------
Financing activities:
Proceeds from related party borrowings 4,389 1,942
----------------- ----------------
Net cash provided by financing activities 4,389 1,374
----------------- ----------------
Effect of exchange rate changes on cash 82 12
----------------- ----------------
Net increase in cash and cash equivalents 113 146
Cash and cash equivalents at the beginning of the period 146 -
----------------- ----------------
Cash and cash equivalents at the end of the period $ 259 $ 146
================= ================
Supplementary information:
Interest paid 236 10
Income tax paid 129 78
Accounting policies and explanatory notes on pages 6 to 22 form
an integral part of the restated consolidated financial statements.
F-23
Caspian Services Group Limited
Restated Consolidated Statement of Changes in Shareholders' Deficiency
For the year ended December 31, 2001 and for the period
from December 22, 1999 (Inception date) through December 31, 2000
(In thousands of United States Dollars)
Accumulated
Other
Common Stock Comprehensive Accumulated
Income Deficit Total
---------------- ------------------ ------------------ ------------------
As at December 22, 1999 (Inception
date) $ - $ - $ - $ -
Net loss - - (5,452) (5,452)
Translation adjustment - 22 - 22
---------------- ------------------ ------------------ ------------------
As at December 31, 2000 $ - $ 22 $ (5,452) $ (5,430)
Net loss - - (412) (412)
Translation adjustment - 82 - 82
---------------- ------------------ ------------------ ------------------
As at December 31, 2001 $ - $ 104 $ (5,864) $ (5,760)
================ ================== ================== ==================
Accounting policies and explanatory notes on pages 6 to 22 form
an integral part of the restated consolidated financial statements.
F-24
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements
For the year ended December 31, 2001 and
the period from December 22, 1999 (Inception date) to
December 31, 2000
(All amounts are in thousands of United States dollars unless otherwise stated)
1. Corporate Information
Caspian Services Group Limited ("Caspian") was incorporated in the British
Virgin Islands on December 22, 1999. Caspian has opened a branch (the "Branch")
in Aktau, Kazakhstan. The Branch was registered with the Ministry of Justice of
the Republic of Kazakhstan on April 12, 2000.
CJSC Bauta ("Bauta" or the "Subsidiary"), was incorporated on February 27, 1998
under the laws of the Republic of Kazakhstan and owns and operates a water
desalinization plant in the port of Bautino, on the Caspian Sea. Caspian owns
54% of the outstanding common shares of Bauta.
Caspian is 64% owned by an entity by the name of Mohul Nominees Ltd. And 36%
owned by and entity by the name of Elcan Nominees Ltd.. Both of these entities
are ultimately owned and controlled by Petroleum Group Services Limited, an
entity controlled by Hsuih Chi Hun, an individual.
The total registered share capital of Caspian as of December 31, 2001 was
US $50 thousand with 50,000 common shares authorized and 100 shares issued.
Share capital was not paid in as of either December 31, 2001 or 2000. The
nominal value of a share is US $1.
The principal activities of the Company consist of the maintenance of a vessel
"Baskunchak" (the "Vessel"), charter of the Vessel to the Bechtel-Enka Joint
Venture and to Agip Kazakhstan North Caspian Operating Company N.V. (the
"Contractors"), companies registered in Kazakhstan, and provision of associated
support services to the Contractors in the Kazakh Sector of the North Caspian
Sea. The associated support services are as follows:
o Maintenance and upkeep of the Vessel,
o Staffing of the vessel with the Company's marine crew,
o Provision of accommodation and meals for the Contractor's and Company's
personnel on the vessel;
o Provision of laundry and related services to the personnel on the
vessel.
A Baskunchak vessel charter contract was concluded between the Company and
Bechtel-Enka J.V. on August 1, 2001. The minimum guaranteed period of charter
terminated on October 31, 2001. In accordance with a term extension of contract
made on October 30, 2001, the parties agreed to continue the agreement until the
end of 2001. On March 6, 2002 the Company and Agip Kazakhstan North Caspian
Operating Company N.V. signed a letter of intention on charter of the vessel
Baskunchak for 2002.
The Company purchased another two vessels: "Caspian Yelena" and "Caspian Maria",
in September and November 2001 from third parties. Both vessels were hired by
Agip Kazakhstan North Caspian Operating Company N.V. for a three year period in
accordance with the Contract for Charter of Shallow Draft Landing Craft
effective July 2, 2001. The Caspian Maria was not put into operation during the
year, as it was not transported into Kazakhstan before the year end. The vessel
is scheduled to commence operations at the end of April 2002. As of December 31,
2001 it was moored in the Black See port of Azov in readiness for the opening of
the Volga-Don canal in mid April 2002. The Caspian Yelena's effective on hire
date commenced November 26, 2001.
The Company (including its branch and subsidiary company) employed 63 people as
of December 31, 2001 (2000: 55 people).
F-25
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
2. Current 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 any such changes on the Company's financial condition or future results of
operations.
3. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements:
Basis of presentation
The accompanying consolidated financial statements include the accounts of both
Caspian and its subsidiary Bauta. The Company acquired a 54% of interest in
Bauta in September 2000.
The Company acquired a 50% of interest in Bautino Development Company LLP
("Bautino") in April 2001 from Arkashelf LLP. Bautino was established on June
22, 2000 under the laws of the Republic of Kazakhstan and is currently
constructing a hotel in the port Bautino, on the Caspian Sea in Kazakhstan. The
owner of the remaining 50% of interest in Bautino is Caspian Group Ltd, a
company established under the laws of the British Virgin Islands. The Company's
investment in Bautino is accounted for using the equity method of accounting.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP").
Going concern
The Company has defaulted on the repayment of principal and interest of the long
term loan to the subsidiary's shareholder, Kazakhstancaspishelf OJSC (Note 13).
Management is in the process of renegotiation and restructuring the terms of
repayment of this debt.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
recurring operating losses and has both a working capital and net capital
deficiency. These and other conditions raise substantial doubt about the
Company's ability to continue as going concern. The consolidated financial
statements do not include any adjustments 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.
Comparative information
Caspian was established on December 22, 1999 and started its activities in 2000.
Consequently, comparative information in these financial statements presents the
results of the Company's operations from the date of inception until December
31, 2000.
F-26
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
3. Summary of Significant Accounting Policies (continued)
Foreign currencies
Caspian's functional currency is the United States Dollar ("USD") as a
significant portion of its revenues, costs, property and equipment purchased,
and debt and trade liabilities are either priced, incurred, payable or otherwise
measured in USD. Accordingly, transactions and balances not already measured in
USD (primarily Kazakh Tenge - "KZT") have been re-measured into USD in
accordance with the relevant provisions of Statement of Financial Accounting
Standard No. 52 ("SFAS 52"). The Company's subsidiary operation (Bauta) has a
KZT functional currency.
Under SFAS 52 revenues, costs, capital and non-monetary assets and liabilities
are re-measured at historical exchange rates prevailing on the transaction
dates. Monetary assets and liabilities are re-measured at exchange rates
prevailing on the balance sheet date. Exchange gains and losses arising from
re-measurement of monetary assets and liabilities that are not denominated in
USD are credited or charged to operations.
The KZT is not a convertible currency outside of the Republic of Kazakhstan. In
Kazakhstan official exchange rates are determined daily by the National Bank of
the Republic of Kazakhstan ("NBK") and are considered to be a reasonable
approximation of market rates. NBK rates have been used for translation purposes
in these financial statements. The exchange rate at September 6, 2002 for one
USD was 154.35 KZT (December 31, 2001: 150.20 KZT, at December 31, 2000: 144.50
KZT). The translation of KZT denominated assets and liabilities into USD for the
purpose of these consolidated financial statements does not necessarily mean
that the Company could realize or settle, in USD, the reported values of these
assets and liabilities, Likewise it does not mean that the Company could return
or distributed the reported USD value of capital to its shareholders.
Use of estimates
The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are defined as cash on hand, demand deposits and
short-term, highly liquid investments readily convertible to known amounts of
cash and subject to insignificant risk of changes in value, i.e., cash on hand
and bank deposits with less than three months to maturity.
Trade and other receivables
Trade receivables, which generally have 30-90 day terms, are recognized and
carried at original invoice amount less an allowance for any un-collectable
amounts. An estimate for doubtful debts is made when collection of the full
amount is no longer probable. Bad debts are written-off as incurred.
Receivables from related parties are recognized and carried at cost.
Bills of exchange and promissory notes which are held to maturity are measured
at amortized cost using the effective interest rate method. Those that do not
have a fixed maturity are carried at cost, being the fair value of the
consideration given.
Inventories
Inventories are carried at the lower of cost or net realizable value. Cost is
determined using the average cost method. Costs include the purchase and
production costs of raw materials and conversion costs such as direct labor and
an allocation of fixed and variable production overheads.
F-27
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
3. Summary of Significant Accounting Policies (continued)
Property and equipment
Property and equipment with useful lives greater than one year are shown in the
accompanying consolidated financial statements at historical cost less
accumulated depreciation. Cost includes purchase price, duties, and directly
attributable costs of bringing the property and equipment to working conditions
for their intended use.
Assets start to be depreciated as soon as an asset is put into operation. The
vessels are depreciated on a straight-line basis over their estimated useful
life of approximately ten years.
Goodwill
At the time of purchase, the assets and liabilities of majority owned
subsidiaries are recorded at the estimated fair value of the net assets
acquired. Goodwill represents the difference between the purchase price and fair
value of the net assets acquired. Goodwill which was recorded upon the
acquisition of Bauta has been subsequently recorded in the statement of
operations as the Company came to a conclusion that such amounts were impaired
(see Note 16).
Long-lived assets
In accordance with Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("SFAS 121"), long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the individual assets and
consolidated cash flows for long-lived assets, not identifiable individually.
As is discussed in Note 16, all long-term assets which were recorded upon the
acquisition of Bauta have been subsequently recorded in the statement of
operations as the Company came to a conclusion that such amounts were impaired.
Investments
Investments in entities where the Company exerts significant influence over the
entity are accounted for under the equity method of accounting, and the pro rata
share of income (loss) of associates is included in the statement of operations.
The Company's investment in equity securities consists of a 50% ownership
interest in Bautino Development Company, acquired during 2001 (Note 8).
Payables
Liabilities for trade and other amounts payable, are carried at cost, which is
the fair value of the consideration to be paid in the future for goods and
services received, whether or not billed to the Company.
Borrowings
All loans and borrowings are initially recognized at cost, being the fair value
of the consideration received and including acquisition charges associated with
the borrowing/loan.
F-28
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
3. Summary of Significant Accounting Policies (continued)
Revenue recognition
Revenues involving the rendering of services to third parties are recognized
when the services are supplied by reference to the stage of completion of the
transaction at the balance sheet date. Revenues are recorded net of VAT.
Deferred taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases. Deferred tax
assets are also recognized for the estimated future effects of tax loss carry
forwards. Deferred tax assets are reduced by a valuation allowance for any tax
benefits for which it is more likely than not that such tax benefits will not be
realized.
Related parties
Related parties include the Company's shareholders, investee companies and other
entities which have either the ability to control the Company or can exercise
significant influence over the Company in making financial and operating
decisions.
Payables to related parties are carried at cost.
Environmental costs
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
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 remediated along with the nature
and extent of the remediation that may be required.
Derivative instruments
The Company has no derivative financial instruments.
Recent accounting pronouncements
Accounting for Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement deals with the costs of closing facilities and
removing assets. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period it is incurred.
This cost is initially capitalized and amortized over the remaining life of
asset. Once the obligation is ultimately settled, any difference between the
final cost and the recorded liability is recognized as a gain or loss on
disposition. SFAS No. 143 is effective for years beginning after June 15, 2002.
The Company is currently evaluating the impact the pronouncement will have on
future consolidated financial statements.
F-29
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
3. Summary of Significant Accounting Policies (continued)
Accounting for Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for disposal of
segment of a business (as previously defined in that opinion). This Statement
also amends Accounting Research No. 41, "Consolidated Financial Statements", to
eliminate the exception to consolidation for which control is likely to be
temporary. This statement will be effective for financial statements issued for
fiscal year beginning after December 15, 2001. The Company is currently
evaluating the impact the pronouncement will have on future consolidated
financial statements.
4. Cash and Cash Equivalents
December 31, 2001 December 31, 2000
------------------ ------------------
Current accounts held with banks in Kazakhstan $ 243 $ 115
Current account held with Royal Bank of Scotland 12 11
Cash in hand 4 20
------------------ ------------------
$ 259 $ 146
================== ==================
The above balances are denominated in various currencies as follows:
December 31, 2001 December 31, 2000
------------------ ------------------
US Dollars $ 210 $ 127
Kazakhstan Tenge (US Dollar equivalent) 49 19
------------------ ------------------
$ 259 $ 146
================== ==================
F-30
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
5. Trade Accounts Receivable
December 31, 2001 December 31, 2000
------------------ ------------------
Trade accounts receivable $ 406 $ 159
Allowance for un-collectable amounts (76) (5)
------------------ ------------------
$ 330 $ 154
================== ==================
The Company's trade accounts receivable are represented mainly by a receivable
amounting to US $296 thousand (2000: Nil) from Agip Kazakhstan North Caspian
Operating Company N.V. and a receivable amounting to US $37 thousand (2000:
US $134 thousand) from Boskalis International.
Trade receivable are mainly denominated in USD.
6. Due from Related Party
The amount of US $105 thousand is represented by a receivable for consulting
services provided to GIS-Center LLP, a company under common ownership and
incorporated in Kazakhstan on January 22, 1998.
7. Advances Paid and Other Current Assets
December 31, 2001 December 31, 2000
------------------ ------------------
Advances to employees $ 104 $ -
Prepaid expenses 41 42
------------------ ------------------
$ 145 $ 42
================== ==================
The Company's advances to employees and prepaid expenses are mainly denominated
in USD.
8. Investments
December 31, 2001 December 31, 2000
------------------ ------------------
Investments $ 96 $ -
Equity in earnings (loss) of equity method investee (11) -
------------------ ------------------
$ 85 $ -
================== ==================
The Company bought a 50% interest in Bautino Development Company LLP ("Bautino")
in April 2001. Bautino was established on June 22, 2000 under the laws of the
Republic of Kazakhstan and is currently constructing a hotel in the port of
Bautino, on the Caspian Sea in Kazakhstan.
F-31
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
8. Investments (continued)
Summarized information as to assets, liabilities and results of operations of
Bautino consisted of the following as of December 31, 2001 and for the year then
ended:
December 31, 2001 December 31, 2000
-------------------- ------------------
Current assets $ 30 N/A
Non-current assets $ 707 N/A
Current liabilities $ 567 N/A
Net loss $ 23 N/A
Revenue $ - N/A
9. Property and Equipment, net
December 31, 2001 December 31, 2000
-------------------- ------------------
Machinery and Machinery and
equipment equipment
-------------------- ------------------
Cost as at December 31, 2000 and December 22, 1999
(Inception date) $ 1,475 $ -
Additions of Vessels 4,571 1,475
-------------------- ------------------
Cost as at December 31, 2001 and 2000 $ 6,046 $ 1,475
-------------------- ------------------
Accumulated depreciation as at December 31, 2000 and
December 22, 1999 (Inception date) $ (86) $ -
Depreciation expense (168) (86)
-------------------- ------------------
Accumulated depreciation as at December 31, 2001 and 2000 (254) (86)
-------------------- ------------------
Net book value as at as at December 31, 2001 and 2000 $ 5,792 $ 1,389
==================== ==================
In accordance with the Vessel Charter Contracts concluded between the Company
and the Contractors the Company leases the Vessel and provides Associated
Support Services ("Services") to the Contractors to support the Contractor's
operations in the Caspian Sea (Note 1).
The Company purchased another two vessels: "Caspian Yelena" and "Caspian Maria",
in September and November 2001 for US $2,523 thousand and US $2,048 thousand
respectively.
The Company has provided the vessels "Baskunchak", "Caspian Yelena", "Caspian
Maria" as collateral under a Credit Agreement (Note 13).
F-32
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
10. Due to Related Parties
Name Nature December 31, 2001 December 31, 2000
- ---- ------ ------------------ ------------------
Conaught Finance International Management and technical services
Limited (Note 15) $ 428 $ 394
Techgrand Company Limited Consulting on investing and
marketing services (Note 15) 40 -
Service Help Company LLC Administration services (Note 15) 77 -
Arkashelf Ltd Remaining due for 50% interest in
Bautino Development Company 65 -
Kazakhstancaspishelf OJSC Interest accrued on long term loan
(Note 13) 1,239 887
------------------ ------------------
$ 1,849 $ 1,281
================== ==================
11. Accounts Payable and Accrued Expenses
December 31, 2001 December 31, 2000
------------------ ------------------
Trade accounts payable $ 178 $ 107
Taxes other than income taxes 61 197
Interest payable 57 -
Accrued expenses 165 90
------------------ ------------------
$ 461 $ 394
================== ==================
The Company's trade accounts payable, interest payable and accrued expenses are
mainly denominated in USD. Taxes payable are denominated in Kazakh tenge.
12. Short-Term Loan
In accordance with the Credit Agreement dated June 6, 2000, between CJSC "ABN
AMRO Bank Kazakhstan" ("Bank") and the Company, the Bank provides the Company
with a credit line for working capital purposes. The amount of the credit line
is US $300 thousand. Interest rate is 6% plus LIBOR per annum. The loan was
fully repaid on November 15, 2000.
F-33
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
13. Long-Term Borrowings to Related Parties
Loans from related parties comprised of the following as at December 31,
December 31, 2001 December 31, 2000
------------------ ------------------
Arkashelf Ltd $ 4,200 $ -
Kazakhstancaspishelf OJSC 3,527 3,527
Petroleum Group Services Limited 490 490
Mars International Limited 1,072 1,050
Satco International Ltd 166 167
Mr. L. Garrard - 4
Mr. Y. Kurguzkin 374 230
Other 29 1
------------------ ------------------
$ 9,858 $ 5,469
================== ==================
Arkashelf Ltd's loan
The Company received a loan from Arkashelf Ltd in September 2001. Arkashelf Ltd
itself received a credit line from Bank CenterCredit in accordance with a Credit
Agreement dated August 16, 2001, and concluded between Bank CenterCredit and
Arkashelf Ltd. The Company subsequently drew down this loan for the purchase,
transportation to Kazakhstan and modernization of the vessels "Caspian Yelena"
and "Caspian Maria". The total amount drawn down totaled US $4,200 thousand.
Maturity date of the loan is August 2004. Principal is payable starting June
2002. Interest is payable monthly at the rate of 16% per annum. The Company has
provided the vessels "Baskunchak", "Caspian Yelena", "Caspian Maria" and 5,400
common shares in Bauta as collateral under Credit Agreement (Notes 8, 9).
December 31, 2001 December 31, 2000
------------------ ------------------
Liability falling due within one year $ 1,250 $ -
Liability falling due after one year 2,950 $ -
------------------ ------------------
$ 4,200 $ -
================== ==================
Maturities of the Arkashelf Ltd's loan for the years ending December 31 are as
follows:
2002 $ 1,250
2003 1,550
2004 1,400
------------
$ 4,200
============
F-34
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
13. Related Parties' Long-Term Debt (continued)
Kazakhstancaspishelf OJSC's loan
The Company's subsidiary Bauta purchased fixed assets from Kazakhstancaspishelf
OJSC, a significant shareholder of Bauta, and is obliged to repay the liability
by semiannual installments over the next three years. The loan has an interest
rate of 10% per annum. The loan is secured by the fixed assets, which are
recorded at negligible value in the accompanying consolidated financial
statements.
December 31, 2001 December 31, 2000
------------------ ------------------
Liability falling due within one year $ 1,298 $ 311
Liability falling due after one year 2,229 3,216
------------------ ------------------
$ 3,527 $ 3,527
================== ==================
Maturities of the Kazakhstancaspishelf OJSC loan to Bauta for the years ending
December 31 are as follows.:
2002 1,298
2003 1,244
2004 985
------------
$ 3,527
============
As at December 31, 2001 the Company had not paid any interest accrued or
principal amounts in accordance with the original repayment schedule and was
therefore in default of $1,370 thousand of principal and interest. Management is
in the process of renegotiation and restructuring the terms of repayment of this
debt. Accordingly, the entirety of this loan is shown as current in nature.
Other loans
The Company also received other interest free unsecured loans from its related
parties in 2001 and in 2000. In accordance with the loan agreements the total
amount of the loans at December 31, 2001 was US $2,131 thousand (2000: US $1,942
thousand). The loans have no specific repayment terms and are thus classified as
long-term liabilities in the accompanying consolidated financial statements.
The Company received all loans for the purpose of supporting its operations,
except the loans received from Kazakhstancaspishelf OJSC and from Arkashelf Ltd.
All loans are denominated in USD.
F-35
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
14. Income Taxes
The Company pays income tax in accordance with the tax legislation of the
Republic of Kazakhstan. Major components of income tax expense for the year
ended December 31, 2001 and the period from December 22, 1999 to December 31,
2000 are:
December 31, 2001 December 31, 2000
------------------ --------------------
Current income tax $ 423 $ 147
Deferred income tax - -
------------------ --------------------
$ 423 $ 147
================== ====================
The following is a reconciliation of the income tax expense to the amount that
would arise by applying 30% to the income (loss) before income taxes reported in
the Company's consolidated financial statements for 2001 and 2000:
2001 2000
------------------ --------------------
GAAP Income tax expense computed on accounting income before
taxes at the statutory tax rates of 30% $ 3 $ (853)
Permanent Differences:
Non tax deductible expenses 160 72
Temporary differences not recognized as measured by the
change in the valuation allowance during the period 260 928
------------------ --------------------
Income tax expense reported in the accompanying financial statements: $ 423 $ 147
================== ====================
The deferred tax balances are calculated by applying the statutory tax rate of
30% in effect at the balance sheet dates to the temporary differences arising
between the tax basis of assets and liabilities and the amounts reported in the
accompanying financial statements, and are comprised of the following as at
December 31, 2001 December 31, 2000
------------------ --------------------
Deferred Tax Assets:
Difference between book and tax value of fixed assets $ 1,030 $ 928
Investments' impairment loss 3 -
Loss carried forward 144 -
Bad debts reverse 11 -
------------------ --------------------
Net deferred tax asset 1,188 928
Valuation allowance (1,188) (928)
------------------ --------------------
Net deferred tax assets $ - $ -
================== ====================
Caspian has a loss carry forward of US $480 thousand which are denominated in
KZT and are available to offset future taxable income of Caspian and expire on
December 31, 2004.
F-36
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
15. Related Parties' Transactions
For the significant related parties transactions refer to the Notes 6, 8, 10
and 13.
Other transactions with related parties during the period are represented by the
following:
o Management and technical services received from Conaught Finance
International Limited, amounting to US $120 thousand.
o Administration services (transportation, hotel and tickets reservation,
VISA assistance, interpreter services, etc.) received from Service Help
Company LLC amounting to US $86 thousand.
o A 50% interest in Bautino Development Company purchased from Arkashelf
Ltd for US $96 thousand.
o The Company also rendered consulting services for GIS-Center LLP
amounting to US $105 thousand.
o The Company received consulting on investing and marketing services
provided by Techgrand Limited Company, amounting to US $120 thousand.
16. Bauta Business Combination
In September 2000 the Company was approached by the European Bank for
Reconstruction and Development ("EBRD") with an opportunity to purchase a
non-performing loan the EBRD had made to Bauta. The total amount of this loan
owed to the EBRD by Bauta was US $960 thousand. At that time, the Company
perceived that there was potential value in the proposed transaction and that it
could acquire and transform this investment over a short period of time for a
short-term profit. As part of the negotiation process the EBRD and Fund New
Europe agreed to also transfer to the Company 54% of the common voting shares of
Bauta. The total consideration for both the acquisition of the loan and the 54%
ownership was US $432 thousand.
Before the transaction was completed the Company was aware that Bauta was a loss
making enterprise with limited customers or future operating prospects based on
the current economic environment. It perceived Bauta's fixed asset base to be
fully impaired based upon its cash flow projections and then operating status.
However, the Company perceived the value attributable to the proposed EBRD deal
was specifically attributable to the debt and that the Company could avoid any
future recourse with respect to the remaining liabilities of Bauta. On such a
passive investor basis, the deal was consumated.
Shortly after closing the transaction the Company realized the ultimate recovery
of the investment would be contingent upon the ability of Bauta to generate
positive cash flow from operations, irrespective of then existing net assets.
Accordingly, the Company carried out an additional impairment analysis of its
long-term assets as of December 31, 2000 assuming a continuing operations
approach toward the activities of Bauta. During 2000 the Company assessed that
any short-term attempt to turn around the business were unfounded and therefore
it recognized a 100% impairment loss against the acquired goodwill based on its
assessment of existing economic conditions and projected future cash flows.
F-37
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
16. Bauta Business Combination (continued)
The purchase price of Bauta of US $432 thousand was therefore assigned to the
net assets acquired based on the following estimate of fair value:
Trade accounts receivable $ 28
Advances paid and other current assets 52
Inventory 56
Accounts payable and accrued expenses (1,022)
Long-term debt (4,028)
-------------------
(4,914)
Goodwill 5,346
-------------------
Total purchase price $ 432
===================
The subsequent results of the operations of the acquired business are included
in the accompanying financial statements from the date of acquisition.
Summarized information to assets, liabilities and results of operations of Bauta
consisted of the following as at December 31, 2001 and December 31, 2000 and for
the periods then ended:
December 31, 2001 December 31, 2000
------------------ ------------------
Revenues $ 301 $ 56
Assets $ 141 $ 105
Liabilities $ 5,944 $ 5,511
Net loss $ 479 $ 122
The Company has provided 5,400 common shares in Bauta as a collateral under
Credit Agreement (Note 13).
Preacquisition operations of Bauta for 2000 were not material to the Company's
consolidated results of operations and accordingly additional pro-forma
disclosures have not been presented herein.
F-38
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
17. Financial Instruments' Fair Values
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates its fair value.
Equity securities
It was not practicable to estimate the fair value of the Company's 50%
investment in the common stock of Bautino because of the lack of a quoted market
price and inability to estimate fair value without incurring excessive costs.
The $85 thousand of carrying amount at December 31, 2001 represents the original
cost of the investment ($96 thousand) less the pro-rate share of Bautino's
accumulated loss ($11 thousand).
Long-term debt
The fair values of the Company's long-term debt are estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing
interest rates for similar types of borrowing arrangements. The fair values of
the Company's interest free loans approximates its carrying value. The
assumptions were used by the Company that loans have no specific repayment terms
and therefore it is not practicable to estimate their present value.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 2001 and 2000 are as follows:
December 31, 2001 December 31, 2000
------------------------------ ------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------- --------------- --------------- --------------
Cash and cash equivalents $ 259 $ 259 $ 146 $ 146
$
Non-current equity securities $ 85 $ 85 $ - -
Long-term debt $ 9,858 $ 9,858 $ 5,469 $ 5,469
Concentration of credit risks
Financial instruments which potentially expose the Company to concentration of
credit risk consist primarily of cash in banks and trade accounts receivable.
The Company places its bank balances in reputable banks. The balances are mainly
denominated in US dollars.
During the periods ended December 31, 2001 the Company's revenue from the
provision of services to Bechtel Enka (first half of 2001 to Boskalis
International B.V.) amounted to 90% of total revenue of the Company (2000: to
Boskalis International B.V. 100%).
Currency risks
The Vessel Charter Contract is fixed in USD.
F-39
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
18. Future Rental of the Vessels
Vessel "Baskunchak"
On March 6, 2002 the Company and Agip Kazakhstan North Caspian Operating Company
N.V. awarded the Company a contract for the provision of the vessel "Baskunchak"
for April 2002 at the following rates:
o Mobilization fee - US $75 thousand,
o Demobilisation fee - US $25 thousand,
o Daily charter rate - US $8,650,
o Accomodation/feeding rate - US $65 per man per day.
Vessels "Caspian Yelena" and "Caspian Maria"
Both vessels are hired by Agip Kazakhstan North Caspian Operating Company N.V.
for a three year period in accordance with the Contract for Charter of Shallow
Draft Landing Craft effective from July 2, 2001. According to the contract terms
two vessels are hired until completion of work in the ice free period of the
2003 work season plus extension for 2 optional additional periods of 12 months
at the following rates: "Caspian Maria" - US $5,250 per day including optional
additional periods, "Caspian Yelena" - US $5,700 per day including optional
additional periods.
19. Contingencies and Commitments
Contingencies
Legislation and regulations regarding taxation, foreign currency transactions
and licensing of foreign currency loans in the Republic of Kazakhstan continue
to evolve as the central Government manages the transformation from a command to
a market-oriented economy. The 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.
The current regime of penalties and interest related to reported and discovered
violations of Kazakhstan's laws, decrees and related regulations are severe.
Penalties include confiscation of the amounts at issue (for currency law
violations), as well as fines of generally 100% of the taxes unpaid. Interest is
assessable at rates of generally 0.3% per day. As a result, penalties and
interest can result in amounts that are multiples of any unreported taxes.
The Company believes that it has paid or accrued all taxes that are applicable.
Where practice concerning the provision of taxes is unclear, the Company has
accrued tax liabilities based on management's best estimate. The Company policy
is to accrue contingencies in the accounting period in which a loss is deemed
probable and the amount is reasonably determinable. However, because of the
uncertainties associated with the Kazakh tax and legal systems, the ultimate
amount of taxes, penalties and interest, if any, assessed may be in excess of
the amount expensed to date and accrued at December 31, 2001. Although such
amounts are possible and may be material, it is the opinion of the Company's
management that these amounts are either not probable, not reasonably
determinable, or both.
F-40
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
19. Contingencies and Commitments (continued)
Contingencies (continued)
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 tax 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.
Environmental costs
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.
Commitments
In accordance with the Vessel Charter Contract concluded between the Company and
the contractor on July 1, 2001 the charter period is three years plus two
one-year options.
20. Subsequent Events
Vessel Charter
On March 6, 2002 the Company and Agip Kazakhstan North Caspian Operating Company
N.V. signed a letter of intent on the charter of the vessel Baskunchak for 2002.
Loans
On January 7, 2002 the Company received an unsecured loan from Mr. L. Garrard,
the related party, amounting to US $92 thousand for the purpose of supporting
its operations, at the rate of 15% per annum. The loan has no specific repayment
terms.
On February 1, 2002 the Company received an interest free loan amounting to
US $100 thousand from Kingsgrove Industries Ltd., a company, incorporated in
British Virgin Islands, the related party, for the purpose of supporting its
working capital. The loan was fully repaid on February 6, 2002.
On February 6, 2002 the Company received an unsecured loan from Mr. E.
Kurguzkin, the related party, amounting to US $100 thousand for the purpose of
supporting its operations, at the rate of 15% per annum. The loan has no
specific repayment terms.
F-41
Caspian Services Group Limited
Notes to the Restated Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
20. Subsequent Events (continued)
Reorganization
In accordance with the Agreement and Plan of Reorganization (the "Agreement"),
concluded in February 2002 by and between EMPS Corporation, a Nevada corporation
("EMPS"), the Company and shareholders of the Company, all outstanding shares of
the Company will be acquired by EMPS in exchange for shares of EMPS. Following
the reorganization, the Company will be a wholly owned subsidiary of EMPS. EMPS
is a company publicly traded in the United States securities market (NASDAQ:
EMPS).
21. Restatement of Previously Issued Financial Statements
The consolidated financial statements of the Company for the year ended December
31, 2001 and for the period from December 22, 1999 (Inception date) through
December 31, 2000, have been restated to reflect the correction of certain
errors. Specifically, the restated financial statements reflect the effects of
consolidating adjustments related to Bauta and additional miscellaneous
adjustments and reclassifications. The previously issued financial statements
accounted for Bauta using the equity method of accounting contrary to the
requirements of US GAAP.
The impact of the aforementioned restatement is summarized as follows:
As Previously As Restated
Reported at and for at and for the year
the year ended ended
December 31, 2001 December 31, 2001
----------------- -----------------
Current assets $ 753 $ 894
Total assets $ 6,630 $ 6,771
Current liabilities $ 2,495 $ 7,450
Total liabilities $ 7,547 $ 12,531
Shareholders deficit $ 917 $ 5,760
Revenues $ 3,197 $ 3,498
Net income/(loss) $ 67 $ (412)
F-42
Caspian Services Group Limited
Unaudited and Unreviewed Consolidated Financial Statements
For the quarter ended June 30, 2002
Contents
Consolidated Balance Sheets........................................F-44
Consolidated Statements of Operations and Comprehensive Loss.......F-45
Consolidated Statements of Cash Flows..............................F-46
Notes to Financial Statements..................................F-47 - F-55
F-43
Caspian Services Group Limited
Unaudited and Unreviewed Consolidated Financial Statements
For the quarter ended June 30, 2002
Balance Sheet
As of June 30, 2002
(In thousands of United States Dollars)
Notes 2002 2001
----- --------- ----------
ASSETS
Current Assets
Cash and cash equivalents 1 $ 436 $ 255
Trade accounts receivable 2 638 71
Due from related parties 3 105 14
Inventories 55 55
Prepaid expenses and other current assets 4 144 7
--------- ----------
1,378 401
--------- ----------
Non-Current Assets
Investments 5 85 96
Property and Equipment, net 6 5,569 1,316
--------- ----------
5,654 1,412
--------- ----------
Total Assets 7,031 1,813
========= ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Due to related party 7 1,963 1,835
Accounts payable and accrued expenses 8 304 223
Short-term loan 9 92 70
Current portion of long-term debt 9 4,777 3,527
Long Term Liabilities
Long-term borrowing from related parties 9 5,877 2,148
Shareholders' Deficiency
Common stock (50,000 common shares authorized,
100 issued, but not paid, US $1 par value) - -
Accumulated other comprehensive income 104 104
Accumulated deficit (6,086) (6,094)
--------- ----------
(6,086) (6,094)
--------- ----------
Total Shareholders' Deficiency and Liabilities $ 7,031 $ 1,813
========= ==========
F-44
Caspian Services Group Limited
Unaudited and Unreviewed Consolidated Financial Statements
For the quarter ended June 30, 2002
Consolidated Statements of Operations and Comprehensive Loss
For the quarter ended June 30, 2002
(In thousands of United States Dollars)
2002 2001
------------- -------------
Revenues
Charter revenue $ 862 $ 479
Mobilization/demobilization fee 295 -
Accommodation and meals 287 120
Other revenue 135 -
------------- -------------
Total revenue 1,579 599
------------- -------------
Costs and Expenses
Payroll and related taxes expenses 545 241
Costs of food 28 87
Costs of fuelC 82 35
Technical and marketing services expense 120 60
Insurance 122 69
Depreciation 251 74
Freight charges - -
Travel and entertainment expenses 82 26
Telephone expenses 14 18
Taxes 10 19
Bad debt expenses (33) -
Other operating expenses 570 89
------------- -------------
Total costs and expenses 1,789 717
------------- -------------
Income from operating activities (210) (117)
Other income
Investments' impairment loss - -
Finance cost - -
Other income - -
------------- -------------
Net income /(loss) before income tax (210) (117)
------------- -------------
Income tax 11 45
------------- -------------
Net income/ (loss) $ (221) $ (162)
============= =============
F-45
Caspian Services Group Limited
Unaudited and Unreviewed Consolidated Financial Statements
For the quarter ended June 30, 2002
Consolidated Statements of Cash Flows
For the quarter ended June 30, 2002
(In thousands of United States Dollars)
2002 2001
------------ ------------
Investing activities:
Investments $ - $ (96)
Purchase of property and equipment (28) -
------------ ------------
Net cash used by investing activities (28) (96)
------------ ------------
Financing activities:
Cash proceeds from related parties' long-term debt 796 178
Cash proceeds from short-term loan 92 70
Repayment of short-term loan - -
------------ ------------
Net cash provided by financing activities 888 248
------------ ------------
Net increase in cash and cash equivalents 177 81
------------ ------------
Cash and cash equivalents at the beginning of the period 259 129
------------ ------------
Cash and cash equivalents at the end of the year $ 436 $ 210
============ ============
F-46
Caspian Services Group Limited
Notes to Unaudited and Unreviewed Consolidated Financial Statements
For the quarter ended June 30, 2002
(All amounts are in thousands of United States dollars unless otherwise stated)
1. Corporate Information
Reorganization
In accordance with the Agreement and Plan of Reorganization (the "Agreement"),
concluded in February 2002 by and between EMPS Corporation, a Nevada corporation
("EMPS"), the Company and shareholders of the Company, all outstanding shares of
the Company were acquired by EMPS in exchange for shares of EMPS.
The total registered share capital of Caspian as of December 31, 2001 was US $50
thousand with 50,000 common shares authorized and 100 shares issued. Share
capital was not paid in as of June 30, 2002. The nominal value of a share is
US $1.
The principal activities of the Company consist of the provision of vessels and
offshore logistics in the Kazakhstan sector of the NE Caspian. The Company
currently has 2 shallow draft supply vessels namely: Caspian Yelena and Caspian
Maria on charter.
Vessels "Caspian Yelena" and "Caspian Maria"
Both vessels are chartered by Agip Kazakhstan North Caspian Operating Company
N.V. for a three year period in accordance with the Contract for Charter of
Shallow Draft Landing Craft effective from July 2, 2001. According to the
contract terms two vessels are hired until completion of work in the ice free
period of the 2003 work season plus extension for 2 optional additional periods
of 12 months at the following rates:
In addition to provision of the vessels, associated support services include:
o Maintenance and upkeep of the vessel,
o Staffing of the vessel with the Company's marine crew,
o Provision of accommodation and meals for the Contractor's and Company's
personnel on the vessel;
o Provision of laundry and related services to the personnel on the
vessel.
The Caspian Yelena's effective hire date commenced November 26, 2001. The
Caspian Maria's effective hire date commenced May 1, 2002.
Vessel "Baskunchak"
The Baskunchak is a large, multi-application shallow draft accommodation-work
barge designed to operate in the shallow waters of the Caspian Sea. A vessel
charter contract was concluded between the Company and Agip KCO commencing 17
March, 2002 through 29 April, 2002 at the following rates:
Mobilization fee $75,000
Demobilization fee $25,000
Operational day rate $ 8,650
The Company (including its branch and subsidiary company) employed 72 people as
of June 30, 2002.
F-47
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
2. Restatement of Previously Issued Financial Statements
The consolidated financial statements of the Company for the year ended December
31, 2001 and for the period from December 22, 1999 (Inception date) through
December 31, 2000, have been restated to reflect the correction of certain
errors. Specifically, the restated financial statements reflect the effects of
consolidating adjustments related to Bauta and additional miscellaneous
adjustments and reclassifications. The previously issued financial statements
accounted for Bauta using the equity method of accounting contrary to the
requirements of US GAAP.
The impact of the aforementioned restatement is summarized as follows:
As Previously As Restated
Reported at and for at and for the year
the year ended ended
December 31, 2001 December 31, 2001
----------------- -----------------
Current assets $ 753 $ 894
Total assets $ 6,630 $ 6,771
Current liabilities $ 2,495 $ 7,450
Total liabilities $ 7,547 $ 12,531
Shareholders deficit $ 917 $ 5,760
Revenues $ 3,197 $ 3,498
Net income / (loss) $ 67 $ (412)
3. Current Economic Environment
In recent years, Kazakhstan has undergone substantial political and economic
change. As an emerging market and although improving, Kazakhstan does not
possess a well-developed business infrastructure, which generally exists in a
more mature free market economies. 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, could significantly affect the
Company's ability to operate commercially. Management is unable to estimate what
changes may occur or the resulting effect on any such changes on the Company's
financial condition or future results of operations.
4. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements:
Basis of presentation
The accompanying consolidated financial statements include the accounts of both
Caspian and its subsidiary Bauta. The Company acquired a 54% of interest in
Bauta in September 2000.
The Company acquired a 50% of interest in Bautino Development Company LLP
("Bautino") in April 2001 from Arkashelf LLP. Bautino was established on June
22, 2000 under the laws of the Republic of Kazakhstan and is currently
constructing a hotel in the port Bautino, on the Caspian Sea in Kazakhstan. The
owner of the remaining 50% of interest in Bautino is Caspian Group Ltd, a
company established under the laws of the British Virgin Islands. The Company's
investment in Bautino is accounted for using the equity method of accounting. It
is envisaged that the hotel will be opened 31 December, 2002. First year
occupancy is projected to be approximately 50%.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP").
F-48
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
Foreign currencies
Caspian's functional currency is the United States Dollar ("USD") as a
significant portion of its revenues, costs, property and equipment purchased,
and debt and trade liabilities are either priced, incurred, payable or otherwise
measured in USD. Accordingly, transactions and balances not already measured in
USD (primarily Kazakh Tenge - "KZT") have been re-measured into USD in
accordance with the relevant provisions of Statement of Financial Accounting
Standard No. 52 ("SFAS 52"). The Company's subsidiary operation (Bauta) has a
KZT functional currency.
Under SFAS 52 revenues, costs, capital and non-monetary assets and liabilities
are re-measured at historical exchange rates prevailing on the transaction
dates. Monetary assets and liabilities are re-measured at exchange rates
prevailing on the balance sheet date. Exchange gains and losses arising from
re-measurement of monetary assets and liabilities that are not denominated in
USD are credited or charged to operations.
The KZT is not a convertible currency outside of the Republic of Kazakhstan. In
Kazakhstan official exchange rates are determined daily by the National Bank of
the Republic of Kazakhstan ("NBK") and are considered to be a reasonable
approximation of market rates. NBK rates have been used for translation purposes
in these financial statements. The exchange rate at September 6, 2002 for one
USD was 154.35 KZT (December 31, 2001: 150.20 KZT, at December 31, 2000: 144.50
KZT). The translation of KZT denominated assets and liabilities into USD for the
purpose of these consolidated financial statements does not necessarily mean
that the Company could realize or settle, in USD, the reported values of these
assets and liabilities, Likewise it does not mean that the Company could return
or distributed the reported USD value of capital to its shareholders.
Use of estimates
The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are defined as cash on hand, demand deposits and
short-term, highly liquid investments readily convertible to known amounts of
cash and subject to insignificant risk of changes in value, i.e., cash on hand
and bank deposits with less than three months to maturity.
Trade and other receivables
Trade receivables, which generally have 30-90 day terms, are recognized and
carried at original invoice amount less an allowance for any un-collectable
amounts. An estimate for doubtful debts is made when collection of the full
amount is no longer probable. Bad debts are written-off as incurred. Receivables
from related parties are recognized and carried at cost.
Bills of exchange and promissory notes which are held to maturity are measured
at amortized cost using the effective interest rate method. Those that do not
have a fixed maturity are carried at cost, being the fair value of the
consideration given.
Inventories
Inventories are carried at the lower of cost or net realizable value. Cost is
determined using the average cost method. Costs include the purchase and
production costs of raw materials and conversion costs such as direct labor and
an allocation of fixed and variable production overheads.
F-49
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
Property and equipment
Property and equipment with useful lives greater than one year are shown in the
accompanying consolidated financial statements at historical cost less
accumulated depreciation. Cost includes purchase price, duties, and directly
attributable costs of bringing the property and equipment to working conditions
for their intended use.
Assets start to be depreciated as soon as an asset is put into operation. The
vessels are depreciated on a straight-line basis over their estimated useful
life of approximately ten years.
Goodwill
At the time of purchase, the assets and liabilities of majority owned
subsidiaries are recorded at the estimated fair value of the net assets
acquired. Goodwill represents the difference between the purchase price and fair
value of the net assets acquired. Goodwill which was recorded upon the
acquisition of Bauta has been subsequently recorded in the statement of
operations as the Company came to a conclusion that such amounts were impaired
(see Note 16).
Long-lived assets
In accordance with Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("SFAS 121"), long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the individual assets and
consolidated cash flows for long-lived assets, not identifiable individually.
As is discussed in Note 16, all long-term assets which were recorded upon the
acquisition of Bauta have been subsequently recorded in the statement of
operations as the Company came to a conclusion that such amounts were impaired.
Investments
Investments in entities where the Company exerts significant influence over the
entity are accounted for under the equity method of accounting, and the pro rata
share of income (loss) of associates is included in the statement of operations.
The Company's investment in equity securities consists of a 50% ownership
interest in Bautino Development Company, acquired during 2001 (Note 8).
Payables
Liabilities for trade and other amounts payable, are carried at cost, which is
the fair value of the consideration to be paid in the future for goods and
services received, whether or not billed to the Company.
Borrowings
All loans and borrowings are initially recognized at cost, being the fair value
of the consideration received and including acquisition charges associated with
the borrowing / loan.
Revenue recognition
Revenues involving the rendering of services to third parties are recognized
when the services are supplied by reference to the stage of completion of the
transaction at the balance sheet date. Revenues are recorded net of VAT.
F-50
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
Related parties
Related parties include the Company's shareholders, investee companies and other
entities which have either the ability to control the Company or can exercise
significant influence over the Company in making financial and operating
decisions.
Payables to related parties are carried at cost.
Environmental costs
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
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 remediated along with the nature
and extent of the remediation that may be required.
Derivative instruments
The Company has no derivative financial instruments.
Accounting for Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for disposal of
segment of a business (as previously defined in that opinion). This Statement
also amends Accounting Research No. 41, "Consolidated Financial Statements", to
eliminate the exception to consolidation for which control is likely to be
temporary. This statement will be effective for financial statements issued for
fiscal year beginning after December 15, 2001. The Company is currently
evaluating the impact the pronouncement will have on future consolidated
financial statements.
F-51
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
5. Notes to the Financial Statements
1. Cash and Cash Equivalents
June 30, 2002 June 30, 2001
----------------- -----------------
Current accounts held with banks in Kazakhstan $ 348 $ 61
Current account held with Royal Bank of Scotland 78 183
Cash in hand 10 11
----------------- -----------------
$ 436 $ 255
================= =================
The above balances are denominated in various currencies as follows:
June 30, 2002 June 30, 2001
----------------- -----------------
US Dollars $ 334 $ 199
Kazakhstan Tenge (US Dollar equivalent) 102 56
----------------- -----------------
$ 436 $ 255
================= =================
2. Trade Accounts Receivable
June 30, 2002 June 30, 2001
----------------- -----------------
Trade accounts receivable $ 638 $ 71
Allowance for un-collectable amounts
----------------- -----------------
$ 638 $ 71
================= =================
The Company's trade accounts receivable are represented mainly by a receivable
amounting to US $604 from Agip Kazakhstan North Caspian Operating Company N.V.
and includes Bauta's trade accounts receivable amounting to US $34.
Trade receivable are mainly denominated in USD.
3. Due from Related Party
The amount of US $105 thousand is represented by a receivable for consulting
services provided to GIS-Center LLP, a company under common ownership and
incorporated in Kazakhstan on January 22, 1998.
F-52
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
4. Advances Paid and Other Current Assets
June 30, 2002 June 30, 2001
----------------- -----------------
Advances to employees $ 137 $ -
Prepaid expenses 7 7
----------------- -----------------
$ 144 $ 7
================= =================
The Company's advances to employees and prepaid expenses are mainly denominated
in USD.
5. Investments
June 30, 2002 June 30, 2001
----------------- -----------------
Investments $ 96 $ 96
Equity in earnings (loss) of equity method investee 11 -
----------------- -----------------
$ 85 $ 96
================= =================
6. Property and Equipment, net
June 30, 2002 June 30, 2001
----------------- -----------------
Machinery and Machinery and
equipment equipment
----------------- -----------------
Cost as at June 30, 2002 $ 6,074 $ 1,475
----------------- -----------------
Cost as at June 30, 2002 $ 6,074 $ 1,475
----------------- -----------------
Accumulated depreciation as at June 30, 2002 $ (505) $ (159)
Depreciation expense (505) (159)
----------------- -----------------
Net book value as at June 30, 2002 $ 5,569 $ 1,316
================= =================
F-53
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
7. Due to Related Parties
Name Nature June 30, 2002 June 30, 2001
- ---- ------ ----------------- -----------------
Conaught Finance International Management and technical services
Limited (Note 15) $ 482 $ 454
Techgrand Company Limited Consulting on investing and
marketing services (Note 15) 100 -
Service Help Company LLC Administration services (Note 15) 105 46
Arkashelf Ltd Remaining due for 50% interest in
Bautino Development Company 37 96
Kazakhstancaspishelf OJSC Interest accrued on long term loan
(Note 13) 1,239 1,239
----------------- -----------------
$ 1,963 $ 1,835
================= =================
8. Accounts Payable and Accrued Expenses
June 30, 2002 June 30, 2001
----------------- -----------------
Trade accounts payable $ 185 $ 176
Taxes other than income taxes 61 -
Interest payable 11 -
Accrued expenses 47 47
----------------- -----------------
$ 304 $ 223
================= =================
The Company's trade accounts payable, interest payable and accrued expenses are
mainly denominated in USD. Taxes payable are denominated in Kazakh tenge.
9. Long-Term Borrowings to Related Parties
Loans from related parties comprised of the following as at December 31,
June 30, 2002 June 30, 2001
----------------- -----------------
Arkashelf Ltd $ 4,200 $ -
Kazakhstancaspishelf OJSC 3,527 3,527
Kathleen Lootens 20
Petroleum Group Services Limited 490 490
Mars International Limited 1,072 1,050
Satco International Ltd 166 199
Mr. L. Garrard 92
Mr. Y. Kurguzkin 473 360
Other 634 29
----------------- -----------------
$ 10,654 $ 5,675
================= =================
F-54
Caspian Services Group Limited
Notes to the Unaudited and Unreviewed
Consolidated Financial Statements (continued)
(All amounts are in thousands of United States Dollars unless otherwise stated)
6. Subsequent Events
Reorganization
Reorganization was completed on July 30, 2002, the Company is a wholly owned
subsidiary of EMPS. EMPS is a company publicly traded in the United States
securities market (NASDAQ: EMPS).
Vessel Purchase
On July 11, 2002 the Company entered into an agreement to purchase the tugboat
Zwerver 1 (to be renamed to Caspian Eva) for the purchase price of 1,450,000.00.
Purchase of the vessel was completed 29 August, 2002 delivered to the Company in
the port of Ayamonte, Spain. The vessel is currently located in the port of Azov
being prepared for transiting the Volga Don canal and onward delivery to the
port of Bautino, Kazakhstan.
Baskunchak Charter
On the 21st of August 2002 CSGL entered into a Contract with Agip Kazakhstan
North Caspian Operating Company NV for the provision of the vessel Baskunchak
for the period 21st August 2002 through 31st May 2003 with an optional 1-month
extension. The vessel charter rates comprised:
Mobilization fee $42,000
Demobilization fee $65,500
Operational day rate $ 8,900
Summer standby day rate $ 4,900
Winter standby day rate $ 1,700
Medical services day rate $ 500
Loans
On August 29, 2002 the Company received a loan from Bank CentreCredit in the
amount of US $1,286 thousand for the purpose of purchasing the Zwerver 1, at the
rate of 16% per annum. The loan is to be repaid by 31 August 2004. The Company
has provided the vessel as collateral under a Credit Agreement.
F-55
EMPS CORPORATION AND SUBSIDIARY
(A Nevada Corporation)
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
(Incorporated in the British Virgin Islands)
PROFORMA COMBINED BALANCE SHEET AND STATEMENTS OF OPERATIONS
(Unaudited)
F-56
EMPS CORPORATION AND SUBSIDIARY
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
PROFORMA COMBINED BALANCE SHEET AND STATEMENTS OF OPERATIONS
(Unaudited)
The following unaudited proforma combined balance sheet and statements of
operations aggregates the consolidated balance sheet and consolidated statements
of operations of EMPS Corporation and Subsidiary (A Nevada Corporation) as of
June 30, 2002 (unaudited) and the six months ended June 30, 2002 (unaudited) and
the year ended December 31, 2001 (audited) and the restated consolidated balance
sheet and restated consolidated statement of operations and comprehensive loss
of Caspian Services Group Limited (New Subsidiary) and Subsidiary (Incorporated
in the British Virgin Islands) as of June 30, 2002 (unaudited) and the six
months ended June 30, 2002 (unaudited) and for the year ended December 31, 2001
(audited) giving effect to a transaction completed on July 30, 2002, wherein
Parent acquired New Subsidiary as a wholly-owned subsidiary (the "Acquisition").
This business combination is treated as a reverse acquisition and as a
recapitalization of New Subsidiary. Parent issued common stock in exchange for
all of the issued and outstanding shares of New Subsidiary. The following
proforma balance sheet and statements of operations uses the assumptions as
described in the notes and the historical financial information available at
June 30, 2002 and December 31, 2001.
The unaudited proforma combined balance sheet and statements of operations
should be read in conjunction with the separate financial statements and
restated financial statements and related notes thereto of Parent and New
Subsidiary. The unaudited proforma condensed combined balance sheet and
statements of operations are not necessarily indicative of the condensed
combined balance sheet and statements of operations which might have existed for
the periods indicated or the results of operations as they may appear now or in
the future.
F-57
EMPS CORPORATION AND SUBSIDIARY
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
PROFORMA COMBINED BALANCE SHEET
(In Thousands of US Dollars)
(Unaudited)
Giving effect to an Acquisition on July 30, 2002
Caspian
EMPS Services
Corporation Group Proforma
and Limited Increase Proforma
Subsidiary (Restated) (Decrease) Combined
--------------- --------------- ---------------- ---------------
ASSETS (6-30-02) (6-30-02)
Current Assets:
Cash and cash equivalent $ 9 $ 435 $ - $ 444
Accounts receivable - net - 638 - 638
Prepaid expense - - -
Due from U.S. Dept. of Energy 8 - - 8
Due from related parties - 105 - 105
Inventories - 55 - 55
Advances paid and other current assets - 144 - 144
--------- --------- -------- --------
17 1,377 - 1,394
--------- --------- -------- --------
Non-current Assets
Patents - net 4 - - 4
Investments - 85 - 85
Property and equipment - net - 5,569 - 5,569
--------- --------- -------- --------
4 5,654 - 5,658
--------- --------- -------- --------
Total Assets $ 4 $ 5,654 $ - $ 5,658
========= ========= ======== ========
The accompanying notes are an integral part of this balance sheet.
F-58
EMPS CORPORATION AND SUBSIDIARY
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
PROFORMA COMBINED BALANCE SHEET
(In Thousands of US Dollars)
(Unaudited)
Giving effect to an Acquisition on July 30, 2002
Caspian
EMPS Services
Corporation Group Proforma
and Limited Increase Proforma
Subsidiary (Restated) (Decrease) Combined
--------------- --------------- ---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (6-30-02) (6-30-02)
Current Liabilities
Due to related party $ - $ 1,963 $ - $ 1,963
Accounts payable and accrued expenses 44 304 348
Deferred revenue - - - -
Short-term loan - 92 - 92
Current portion of long-term debt - 4,777 - 4,777
--------- --------- -------- --------
44 7,136 - 7,180
--------- --------- -------- --------
Long-term Liabilities
Related parties' long-term debt - 5,877 - 5,877
--------- --------- -------- --------
- 5,877 - 5,877
--------- --------- -------- --------
Stockholders' Equity (deficit)
Common stock; $.001 par value, 150,000,000
shares authorized, 30,000,000 shares issued
and outstanding 3 - 27 (1) 30
Additional paid-in capital (discounted stock) 220 - (27) (1) (26)
(219) (2)
Accumulated other comprehensive income - 104 - 104
Accumulated deficit (246) (6,086) 219 (2) (6,113)
--------- --------- -------- --------
Total Stockholders' Equity (deficit) (23) (5,982) - (6,005)
--------- --------- -------- --------
Total Liabilities and Stockholders' Equity $ 21 $ 7,031 $ - $ 7,052
========= ========= ======== ========
The accompanying notes are an integral part of this balance sheet.
F-59
EMPS CORPORATION AND SUBSIDIARY
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
PROFORMA COMBINED STATEMENT OF OPERATIONS
(In Thousands of US Dollars)
(Unaudited)
Giving effect to an Acquisition on July 30, 2002
Caspian
EMPS Services
Corporation Group Proforma
and Limited Increase Proforma
Subsidiary (Restated) (Decrease) Combined
--------------- --------------- ---------------- ---------------
(Year ended (Year ended
12-31-01) 12-31-01)
REVENUES
Charter revenue $ - $ 2,473 $ - $ 2,473
Mobilization/demobilization fee - 195 195
Accommodation and meals - 441 441
Other revenues - 389 - 389
--------- --------- -------- --------
Total revenues - 3,498 - 3,498
--------- --------- -------- --------
COSTS AND EXPENSES
General and administrative 48 2,634 - 2,682
Depreciation expense - 168 168
Amortization expense - - - -
--------- --------- -------- --------
Total costs and expenses 48 2,802 - 2,850
INCOME (LOSS) FROM OPERATIONS (48) 696 - 648
OTHER INCOME (EXPENSE)
Grant revenue, net of grant expenses - - -
Investments' impairment loss - (11) (11)
Finance and interest expense - (645) (645)
Interest income 1 - - 1
Other income (loss), net - (30) - (30)
--------- --------- -------- --------
INCOME (LOSS) BEFORE TAXES (47) 10 - (37)
PROVISION FOR INCOME TAXES - (423) - (423)
--------- --------- -------- --------
NET INCOME (LOSS) (47) (413) - (460)
Other comprehensive income:
Foreign currency translation adjustments - 82 - 82
--------- --------- -------- --------
COMPREHENSIVE LOSS $ (47) $ (331) $ - $ (378)
========= ========= ======== ========
The accompanying notes are an integral part of this statement of operations
F-60
EMPS CORPORATION AND SUBSIDIARY
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
PROFORMA COMBINED STATEMENT OF OPERATIONS
(In Thousands of US Dollars)
(Unaudited)
Giving effect to an Acquisition on July 30, 2002
Caspian
EMPS Services
Corporation Group Proforma
and Limited Increase Proforma
Subsidiary (Restated) (Decrease) Combined
--------------- --------------- ---------------- ---------------
(Six months (Six months
ended 6-30-02) ended 6-30-02)
REVENUES
Charter revenue $ - $ 862 $ - $ 862
Mobilization/demobilization fee - 305 305
Accommodation and meals - 287 287
Other revenues - 135 - 135
--------- --------- -------- --------
Total revenues - 1,589 - 1,589
--------- --------- -------- --------
COSTS AND EXPENSES
General and administrative 27 1,538 - 1,565
Depreciation expense - 251 251
Amortization expense - - - -
--------- --------- -------- --------
Total costs and expenses 27 1,789 - 1,816
INCOME (LOSS) FROM OPERATIONS (27) (200) - (227)
OTHER INCOME (EXPENSE)
Grant revenue, net of grant expenses - - -
Investments' impairment loss - - -
Finance and interest expense - - -
Interest income - - - -
Other income - - - -
--------- --------- -------- --------
INCOME (LOSS) BEFORE TAXES (27) (200) - (227)
PROVISION FOR INCOME TAXES - (11) - (11)
--------- --------- -------- --------
NET INCOME (LOSS) $ (27) $ (211) $ - $ (238)
========= ========= ======== ========
The accompanying notes are an integral part of this statement of operations
F-61
EMPS CORPORATION AND SUBSIDIARY
CASPIAN SERVICES GROUP LIMITED AND SUBSIDIARY
PROFORMA COMBINED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
EMPS CORPORATION AND SUBSIDIARY (the Company) - was incorporated under the laws
of the State of Nevada on July 14, 1998 for the purpose of researching and
developing commercial applications for patented technology for a high frequency
eddy current separator. The Company and its subsidiary are working to develop a
prototype primarily for use in commercially separating nonmagnetic particulate
materials for use in recovering metals at foundries and smelters. The Company on
July 30, 2002 acquired Caspian Services Group Limited as a wholly owned
subsidiary.
CASPIAN SERVICES GROUP LIMITED (CSG) - is a British Virgin Islands corporation.
CSG was incorporated on December 22, 1999. CSG has been primarily engaged in
providing services to the oil and gas industry in the Republic of Kazakhstan.
CSG carries out its primary business activities from its branch located in
Aktau, Kazakhstan, which has been registered with the Ministry of Justice of the
Republic of Kazakhstan since April of 2000. CSG owns 54% of the outstanding
common shares of CJSC Bauta (subsidiary). The subsidiary was incorporated on
February 27, 1998 under the laws of the Republic of Kazakhstan and owns and
operates a water desalinization plant in the port of Bautino, on the Caspian
Sea.
Proforma Adjustments - (1) The Company acquired all of the issued and
outstanding shares of CSG in exchange for 27,089,700 restricted shares of
previously authorized but unissued shares of its common stock. The business
combination is a reverse acquisition and is treated as a recapitalization of
CSG. (2) This is part of the recapitalization transaction and entry. It
eliminates the retained deficit of the Company accounting for the transaction as
if the shares were exchanged by CSG for the net assets of the Company.
Stock Option Plan - The Company has adopted, with the approval of its
stockholders, the EMPS Corporation 2002 Stock Option Plan (the "Plan"), pursuant
to which it is authorized to grant options to purchase up to 1,000,000 shares of
common stock to the Company's key employees, officers, directors, consultants,
and other agents and advisors.
The Board of Directors will administer the Plan until a Compensation Committee
is appointed. Subject to the provisions of the Plan the Board or Committee will
determine the employees who will receive options under the Plan, the number of
shares subject to each option and the terms of those options, and interprets the
Plan and makes such rules of procedure as the Board may deem proper.
The plan permits the granting of 1,000,000 shares of Common Stock at a price
equal to one hundred percent of the fair market value of the Common Stock on the
date that the option is granted provided, however, that the price shall not be
less than the par value of the Common Stock, which is subject to the option.
Further, no Incentive Stock Option may be granted to an employee owning Common
Stock having more than 10% of the voting power of the Company unless the option
price for such employee's option is at least 110% of the fair market value of
the Common Stock subject to the option at the time the option is granted and the
option is not exercisable after the expiration of five years from the date of
granting. No option may be granted under the Plan after the tenth anniversary of
the adoption of the Plan. Unless otherwise specified by the Board, options
granted under the Plan are Incentive Stock Options under the provisions and
subject to the limitations of Section 422 of the Internal Revenue Code.
F-62