UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A-2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 26, 2004
Commission File Number 000-28638
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)
2319 Foothill Blvd. Suite 250, Salt Lake City, Utah
---------------------------------------------------
(Address of principal executive offices)
84109
---------
(Zip Code)
(801) 746-3700
------------------------------------------------
(Registrant's Executive Office Telephone Number)
This Form 8-K/A-2 amends the Amended Current Report on Form 8-K/A (the
"Amended Report") of EMPS Corporation (the "Company"), filed on August 9, 2004.
The purpose of this Amendment is to provide certain non-material technical,
formatting and typographical changes to the pro forma financial information of
the Company, and the Reports of the Independent Registered Public Accounting
Firm and Financial Statements of TatArka LLP and Kazmorgeophysica CJSC.
Item 7. Financial Statements and Exhibits.
(a) EMPS Corporation - Unaudited Pro Forma Financial Information
(b) TatArka LLP - Report of Independent Registered Public
Accounting Firm and Financial Statements
(c) Kazmorgeophysica CJSC - Report of Independent Registered
Public Accounting Firm and Financial Statements
(d) 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-2 to be signed
on its behalf by the undersigned hereunto duly authorized.
EMPS CORPORATION
Date: August 10, 2004 By: Mirgali Kunayev
----------------------------------------
Mirgali Kunayev, Chief Executive Officer
2
EMPS CORPORATION
TABLE OF CONTENTS
Page
Pro Forma Financial Information
Introductory Paragraphs to Unaudited Pro Forma Financial Information........4
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2004.......................................................5
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the three months ended March 31, 2004............................6
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2003.................................6
Notes to Unaudited Pro Forma Financial Information..........................7
Tatarka, LLP Financial Statements
Report of Independent Registered Public Accounting Firm.....................8
Financial Statements:
Balance Sheets - March 31, 2004 (Unaudited) and
December 31, 2003 and 2002..................................9
Statements of Operations and Changes in Members' Capital for the
years ended December 31, 2003 and 2002.....................10
Statements of Operations for the three months ended
March 31, 2004 and 2003 (Unaudited)........................11
Statements of Cash Flows for the years ended
December 31, 2003 and 2002.................................12
Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (Unaudited)........................13
Notes to Financial Statements.......................................14
Kazmorgeophysica, CJSC Financial Statements
Report of Independent Registered Public Accounting Firm....................19
Financial Statements:
Balance Sheets - March 31, 2004 (Unaudited),
December 31, 2003 and 2002.................................20
Statements of Operations for the years ended
December 31, 2003 and 2002.................................21
Statements of Operations for the three months ended
March 31, 2004 and 2003 (Unaudited)........................22
Statements of Stockholders' Equity
December 31, 2002 and 2003,
March 31, 2004 (Unaudited).................................23
Statements of Cash Flows for the years ended
December 31, 2003 and 2002.................................24
Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (Unaudited)........................25
Notes to Financial Statements.......................................26
3
EMPS Corporation
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On May 26, 2004, EMPS Corporation ("EMPS") closed its acquisition of all of the
membership interests of TatArka LLP and 50% of the outstanding common stock of
Kazmorgeophysica, CJSC in exchange for total consideration of $3,276,000 which
consisted of EMPS issuing 1,200,000 shares of common stock. The consideration
given and the purchase price were recorded at the estimated fair value of the
stock issued, or $3,276,000. The remaining 50% of the outstanding common stock
of Kazmorgeophysica, CJSC not purchased by EMPS was held by the Chairman and CEO
of EMPS before and after the acquisition.
The following unaudited pro forma condensed consolidated balance sheet as of
March 31, 2004 has been prepared to present the effects of the acquisition of
TatArka LLP, and acquisition of 50% of Kazmorgeophysica CJSC as though the
acquisition had occurred and the common stock had been issued on March 31, 2004.
The unaudited pro forma condensed consolidated statement of operations for the
year ended December 31, 2003 has been prepared to present the effects of the
acquisitions as though the acquisitions had occurred on January 1, 2003. The
unaudited pro forma condensed consolidated statement of operations for the three
months ended March 31, 2004 has been prepared to present the effects of the
acquisitions as though the acquisitions had occurred on January 1, 2004. The
unaudited pro forma financial information is illustrative of the effects of the
acquisitions and does not necessarily reflect the financial position or results
of operations that would have resulted had the acquisitions actually occurred at
those dates. In addition, the pro forma financial information is not necessarily
indicative of the results that may be expected for the year ending December 31,
2004, or any other period.
4
EMPS Corporation
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(U.S. DOLLARS IN THOUSANDS)
EMPS Pro Forma Pro Forma
Corporation Tatarka LLP Adjustments Results
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 96 $ 23 $ 119
Trade and other accounts receivable 915 440 1,355
Advances to related parties, net 51 80 131
Other current assets 401 65 466
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,463 608 2,071
- --------------------------------------------------------------------------------------------------------------------------------
Long-term assets 9,340 191 (A) $ (7) 9,524
Investments 119 - (B) 2,806 2,925
Goodwill - - (A) 491 491
Notes receivable from related parties 700 - 700
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 11,622 $ 799 $ 15,711
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,377 $ 731 $ 4,108
Notes payable - related parties 842 6 848
Current portion of long-term debt 5,208 - 5,208
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 9,427 737 10,164
- --------------------------------------------------------------------------------------------------------------------------------
Minority Interest 2,015 - 2,015
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $0.001 par value, 150,000,000
shares authorized, 30,000,000 and 31,200,000
shares issued and outstanding 30 - (B) 1 31
Members' equity - 62 (A) (62) -
Additional paid-in capital 1,456 - (B) 2,805 4,807
(A) 546
Accumulated other comprehensive loss 3 - 3
Accumulated deficit (1,309) - (1,309)
- --------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 180 62 3,532
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 11,622 $ 799 $ 15,711
================================================================================================================================
See the accompanying notes to unaudited pro forma financial information.
5
EMPS Corporation
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
EMPS Pro Forma Pro Forma
Corporation Tatarka LLP Adjustments Results
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue $ 1,026 $ 33 $ 1,059
Operating expense 1,846 127 1,973
- ----------------------------------------------------------------------------------------------------------------------------------
Loss from operations (820) (94) (914)
Income (loss) from equity method investee (5) - (C) $ 37 32
Other income (expense) (223) 14 (209)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss before minority interest (1,048) (80) (1,091)
Minority interest in loss of consolidated subsidiary 22 - 22
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (1,026) $ (80) $ (1,069)
==================================================================================================================================
Loss Per Common Share $ (0.03) $ (0.03)
==================================================================================================================================
Weighted Average Common Shares Outstanding 30,000,000 31,200,000
==================================================================================================================================
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
EMPS Pro Forma Pro Forma
Corporation Tatarka LLP Adjustments Results
- --------------------------------------------------------------------------------------------------------------------------------
Revenue $ 10,534 $ 5,275 $ 15,809
Operating expense 8,347 5,091 13,424
- --------------------------------------------------------------------------------------------------------------------------------
Income from operations 2,187 184 2,385
Income from equity method investee 28 - (C) $ 7 35
Net other expense (895) (7) (895)
- --------------------------------------------------------------------------------------------------------------------------------
Net income before income tax and
minority interest 1,320 177 1,525
Provision for income tax (1,599) (67) (1,666)
Minority interest in loss of consolidated subsidiary 143 - 143
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (136) $ 110 $ 2
===================================================================================================================================
Net Income (Loss) Per Common Share $ (0.00) $ - $ 0.00
===================================================================================================================================
Weighted Average Common Shares Outstanding 30,000,000 31,200,000
===================================================================================================================================
See the accompanying notes to unaudited pro forma financial information.
6
EMPS Corporation
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
A To record the consideration issued in the acquisition of TatArka LLP
and the allocation of the purchase price to the assets acquired and
liabilities assumed. In accordance with FAS No. 141 Business
Combinations, the aggregate purchase price for financial reporting
purposes was $546,000. EMPS issued 200,000 shares of common stock as
consideration. The $2.73 per share estimated value of the common stock
was determined based on the quoted market price of the EMPS common
stock on May 27, 2004, adjusted for the effects of quantities traded,
and price fluctuations between the acquisition date and the prices
during July 2004, through which an active market in EMPS stock was
established.
The purchase price was allocated to the assets acquired and liabilities
assumed on May 26, 2004, based on their estimated fair values. The
excess of the purchase price over the fair value of the assets acquired
and liabilities assumed was recognized as goodwill. EMPS is in the
process of determining valuations of certain intangible assets; thus,
the allocation of the purchase price is subject to refinement. Had the
purchase occurred on March 31, 2004, the excess of the purchase price
over the fair value would have resulted in goodwill of $491,000.
Allocation of the purchase price as if it had occurred on March 31,
2004, and allocation of the purchase price on May 26, 2004 to the
assets acquired and the liabilities assumed on May 26, 2004 was as
follows (in thousands):
Pro Forma
March 31, 2004 May 26, 2004
- ---------------------------------------------------------------------------------------
Assets Acquired
Current assets $ 528 $ 573
Receivables from related parties 80 97
Property and equipment 184 214
Goodwill 491 655
- ---------------------------------------------------------------------------------------
Total Assets Acquired 1,283 1,539
- ---------------------------------------------------------------------------------------
Liabilities Assumed
702 761
Deferred revenue 35 232
- ---------------------------------------------------------------------------------------
Total Liabilities Assumed 737 993
- ---------------------------------------------------------------------------------------
Net Assets Acquired $ 546 $ 546
=======================================================================================
B To record the consideration issued in the acquisition of
Kazmorgeophysica, CJSC and the equity method investment EMPS recorded
for the issuance. In accordance with APB 18, The Equity Method of
Accounting for Investments in Common Stock, the difference between the
cost of the investment and the amount of underlying equity in net
assets of Kazmorgeophysica was accounted for as if Kazmorgeophysica
were a consolidated subsidiary, and therefore EMPS recognized equity
method goodwill of $2,653,802. The allocation of the purchase price to
equity method goodwill is subject to refinement as EMPS is in the
process of determining valuations of certain intangible assets of
Kazmorgeophysica.
C To record 50% of the net income of Kazmorgeophysica CJSC for the
respective period.
7
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
TatArka LLP:
We have audited the balance sheets of TatArka LLP as of December 31, 2003 and
2002, and the related statements of operations and changes in members' capital
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of TatArka LLP as of December 31, 2003
and 2002, and the results of their operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 27, 2004
8
TATARKA LLP
BALANCE SHEETS
Tenge (Thousands)
----------------------------------------------------- U.S. Dollars (Thousands)
December 31, ----------------------------
March 31, ----------------------------------- March 31, December 31,
2004 2003 2002 2004 2003
- ---------------------------------------------------------------------------------------------- ----------------------------
(Unaudited) (Unaudited - Note 2)
ASSETS
Current Assets
Cash KZT 3,219 KZT 73,512 KZT 310 $ 23 $ 510
Trade accounts receivable 30,688 61,536 88,763 221 427
Other receivables 30,437 28,652 126 219 199
Other receivables from related parties 11,086 8,370 7,174 80 58
Inventories 6,166 2,964 1,972 44 21
Prepaid expenses and other current assets 2,883 1,939 320 21 13
- ---------------------------------------------------------------------------------------------- ----------------------------
Total Current Assets 84,479 176,973 98,665 608 1,228
- ---------------------------------------------------------------------------------------------- ----------------------------
Investment in 15% equity investee - 2,276 2,200 - 16
Property and equipment, net 26,497 37,973 9,011 191 263
- ---------------------------------------------------------------------------------------------- ----------------------------
Total Assets KZT 110,976 KZT 217,222 KZT 109,876 $ 799 $ 1,507
============================================================================================== ============================
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Accounts payable KZT 91,749 KZT 175,486 KZT 104,947 $ 660 $ 1,217
Accrued expenses 1,627 1,622 - 12 11
Deferred revenue 4,803 11,818 - 35 82
VAT payable, net 2,207 3,115 - 16 22
Short term notes payable 891 - - 6 -
Accrued taxes 1,073 4,887 847 8 34
- ---------------------------------------------------------------------------------------------- ----------------------------
Total Current Liabilities 102,350 196,928 105,794 737 1,366
- ---------------------------------------------------------------------------------------------- ----------------------------
Members' Equity
Members' capital 8,626 20,294 4,082 62 141
- ---------------------------------------------------------------------------------------------- ----------------------------
Total Members' Equity 8,626 20,294 4,082 62 141
- ---------------------------------------------------------------------------------------------- ----------------------------
Total Liabilities and Members' Equity KZT 110,976 KZT 217,222 KZT 109,876 $ 799 $ 1,507
============================================================================================== ============================
The accompanying notes are an integral part of these financial statements.
9
TATARKA LLP
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' CAPITAL
U.S. Dollars
Tenge (Thousands) (Thousands)
------------------------- --------------
For the years ended December 31, 2003 2002 2003
- ------------------------------------------------------------------ --------------
(Unaudited - Note 2)
Revenue KZT 760,697 KZT 232,251 $ 5,275
- -------------------------------------------------------------------- ---------------
Operating Expense
Cost of revenue 614,439 177,912 4,260
General and administrative 117,292 46,972 813
Depreciation 2,070 798 14
+-------------------------------------------------------------------- ---------------
Total Operating Expense 733,801 225,682 5,087
- -------------------------------------------------------------------- ---------------
Income from Operations 26,896 6,569 188
- -------------------------------------------------------------------- ---------------
Other Expense
Exchange loss (826) - (6)
Other expense (201) - (1)
- -------------------------------------------------------------------- ---------------
Total Other Expense (1,027) - (7)
- -------------------------------------------------------------------- ---------------
Net Income Before Income Tax 25,869 6,569 181
Provision for income tax (9,657) (2,234) (67)
- -------------------------------------------------------------------- ---------------
Net Income KZT 16,212 KZT 4,335 $ 114
- -------------------------------------------------------------------- ===============
Members' Capital - Beginning of period 4,082 (253)
- --------------------------------------------------------------------
Member's Capital - End of period KZT 20,294 KZT 4,082
====================================================================
The accompanying notes are an integral part of these financial statements.
10
TATARKA LLP
STATEMENTS OF OPERATIONS
(UNAUDITED)
U.S. Dollars
Tenge (Thousands) (Thousands)
-------------------------------------------- ------------------
For the three months ended March 31, 2004 2003 2004
- --------------------------------------------------------------------------------------------- ------------------
(Note 2)
Revenue KZT 4,546 KZT - $ 33
- --------------------------------------------------------------------------------------------- ------------------
Operating Expense
Cost of revenue 3,691 31,415 27
General and administrative 12,802 8,297 92
Depreciation 1,142 981 8
- --------------------------------------------------------------------------------------------- ------------------
Total Operating Expense 17,635 40,693 127
- --------------------------------------------------------------------------------------------- ------------------
Loss from Operations (13,089) (40,693) (94)
- --------------------------------------------------------------------------------------------- ------------------
Other income (expense) 1,422 22 10
- --------------------------------------------------------------------------------------------- ------------------
Net Loss Before Income Tax (11,667) (40,671) (84)
Provision for income tax - - -
- --------------------------------------------------------------------------------------------- ------------------
Net Loss KZT (11,667) KZT (40,671) $ (84)
============================================================================================= ==================
The accompanying notes are an integral part of these financial statements.
11
TATARKA LLP
STATEMENTS OF CASH FLOWS
U.S. Dollars
Tenge (Thousands) (Thousands)
-------------------------------------- --------------------
For the years ended December 31, 2003 2002 2003
- ------------------------------------------------------------------------------------------------------- --------------------
(Unaudited - Note 2)
Cash flows from operating activities
Net income KZT 16,212 KZT 4,335 $ 114
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 2,070 798 14
Changes in current assets and liabilities:
Trade accounts receivable 27,697 59,338 192
Trade accounts receivable - related parties (470) - (3)
Other receivables (28,526) (126) (198)
Other receivables - related parties (1,197) (7,174) (8)
Inventories (992) (1,955) (7)
Prepaid expenses and other assets (1,619) (317) (11)
Accounts payable 70,540 (44,963) 488
Accrued expenses 1,622 697 11
Deferred revenue 11,818 - 82
VAT Payable 3,115 - 22
Accrued taxes 4,040 - 28
- ------------------------------------------------------------------------------------------------------- --------------------
Net cash provided by operating activities 104,310 10,633 724
- ------------------------------------------------------------------------------------------------------- --------------------
Cash flows from investing activities:
Increase in investment in equity method investee (76) (2,200) (1)
Purchase of property and equipment (31,032) (8,384) (215)
- ------------------------------------------------------------------------------------------------------- --------------------
Net cash used in investing activities (31,108) (10,584) (216)
- ------------------------------------------------------------------------------------------------------- --------------------
Net change in cash 73,202 49 508
Cash at beginning of period 310 261 2
- ------------------------------------------------------------------------------------------------------- --------------------
Cash at end of period KZT 73,512 KZT 310 $ 510
======================================================================================================= ====================
Supplemental disclosure of cash flow information:
- -------------------------------------------------------------------------------------------------------
Cash paid for income taxes KZT 5,618 KZT 1,537
=======================================================================================================
The accompanying notes are an integral part of these financial statements.
12
TATARKA LLP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
U.S. Dollars
Tenge (Thousands) (Thousands)
------------------------------------- -----------------
For the three months ended March 31, 2004 2003 2004
- ------------------------------------------------------------------------------------------------------------- -----------------
(Note 2)
Cash flows from operating activities
Net loss KZT (11,667) KZT (40,671) $ (84)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 1,142 981 8
Changes in current assets and liabilities:
Trade accounts receivable 30,378 70,565 219
Trade accounts receivable - related parties 470 - 3
Other receivables (1,785) 104 (13)
Other receivables - related parties (439) 4,246 (3)
Inventories (3,202) (4,865) (23)
Prepaid expenses and other assets (944) 156 (7)
VAT payable (recoverable), net (908) (2,796) (7)
Accounts payable (83,739) (45,422) (603)
Accrued expenses 4 28,601 -
Deferred revenue (7,015) - (50)
Accrued taxes (3,813) (343) (27)
- ------------------------------------------------------------------------------------------------------------- -----------------
Net cash provided by (used in) operating activities (81,518) 10,556 (587)
- ------------------------------------------------------------------------------------------------------------- -----------------
Cash flows from investing activities:
Cash received from a short term related party note receivable 891 - 6
Purchase of property and equipment 10,496 - 76
Disposal of property and equipment (162) - (1)
- ------------------------------------------------------------------------------------------------------------- -----------------
Net cash provided by investing activities 11,225 - 81
- ------------------------------------------------------------------------------------------------------------- -----------------
-
Net change in cash (70,293) 10,556 (506)
Cash at beginning of period 73,512 310 529
- ------------------------------------------------------------------------------------------------------------- ----------------
Cash at end of period KZT 3,219 KZT 10,866 $ 23
============================================================================================================= =================
Supplemental disclosure of cash flow information:
- -------------------------------------------------------------------------------------------------------------
Cash paid for income taxes KZT 3,813 KZT 343
=============================================================================================================
Supplemental disclosure of non cash investing
and financing activities:
- -------------------------------------------------------------------------------------------------------------
Note receivable from sale of shares in subsidiary KZT 2,276 KZT -
=============================================================================================================
The accompanying notes are an integral part of these financial statements.
13
TATARKA LLP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND DECEMBER 31, 2003 AND 2002
(Information pertaining to March 31, 2004 and the three
months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated, monetary
amounts are stated
in thousands of Kazakh Tenge.)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations -- TatArka LLP ("TatArka" or the
"Company") was formed as a limited liability partnership under the laws of
Kazakhstan on July 17, 2001. TatArka provides on-land seismic data acquisition
services to oil and gas exploration companies operating in the Republic of
Kazakhstan.
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 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.
Inventories -- Inventories consists of materials, fuel and supplies to be used
in providing services to customers, and are stated at the lower of cost or
market, cost being determined by the first-in, first-out (FIFO) method.
Property and Equipment -- Property and equipment is recorded at cost.
Expenditures for maintenance and repairs are expensed; expenditures for renewals
and improvements are capitalized. Upon sale or retirement of property and
equipment, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is credited or charged to operations.
Depreciation of property and equipment is calculated by using the straight-line
method based on the following estimated useful lives:
Years
----------------------------------------------
Seismic equipment 7 - 10
Vehicles 7 - 10
Office equipment and furniture 3 - 10
----------------------------------------------
Depreciation expense was KZT 1,142, KZT 2,070, and KZT 798, for the three months
ended March 31, 2004 and the years ended December 31, 2003, and 2002,
respectively.
Revenue Recognition -- TatArka's services are generally sold based upon
contracts with the customer that include fixed or determinable prices and that
do not include right of return or other similar provisions or other significant
post delivery obligations. Revenue is recognized when services are rendered and
collectibility is reasonably assured. Certain revenues are recognized on a time
and materials basis, or on a percentage of completion basis, depending on the
contract, as services are provided. Revenue from time and material service
contracts is recognized as the services are provided. Revenue from fixed price
contracts lasting longer that one year is recognized over the contract term
based on the percentage of the cost of services provided during the period
compared to the total estimated cost of services to be provided over the entire
contract. Losses on contracts are recognized during the period in which the loss
first becomes probable and reasonably estimated.
14
TATARKA LLP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND DECEMBER 31, 2003 AND 2002
(Information pertaining to March 31, 2004 and the three
months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated, monetary
amounts are stated
in thousands of Kazakh Tenge.)
Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences in the balances of existing
assets and liabilities on the Company's financial statements and their
respective tax bases and attributable to operating loss carry forwards. Deferred
taxes are computed at the enacted tax rates for the periods when such amounts
are expected to be realized or settled. Because of differences which result in
calculation of income under accounting principles generally accepted in the
United States of America, and income calculated under Kazakh income tax
regulations it is possible for operations to result in local taxable income
while reflecting operating losses in the accompanying financial statements.
Interim Financial Statements -- The accompanying unaudited interim financial
statements as of March 31, 2004 and for the three months ended March 31, 2004
and 2003, have been prepared by management of the Company without audit. In the
opinion of management, these financial statements reflect all adjustments,
consisting only of normal recurring entries, necessary for a fair presentation
of financial results for the interim periods. The results of operations
presented in the accompanying interim financial statements are not necessarily
indicative of the results that may be expected for the full fiscal year ending
December 31, 2004.
NOTE 2 - BASIS FOR TRANSLATING FINANCIAL STATEMENTS
The accompanying financial statements are prepared in accordance with accounting
standards generally accepted in the United States of America. TatArka makes its
principal investing and financing transactions and its operating expenses in
Kazakh Tenge (KZT). Therefore, the financial statements are expressed in Kazakh
Tenge, the functional currency. However, solely for the convenience of the
reader, the financial statements as of and for the year ended December 31, 2003
and as of and for the three months ended March 31, 2004 have been translated
into United States dollars at the rate of KZT144.22 = U.S.$1, and KZT 138.93 =
U.S. $1, the approximate exchange rates prevailing on the Kazakhstan Stock
Exchange on December 31, 2003 and March 31, 2004, respectively. This translation
should not be construed as a representation that the amounts shown could be
converted into U.S. dollars or that the U.S. dollar amounts presented solely for
the convenience of the reader are presented with accounting principles generally
accepted in the United States of America.
NOTE 3 - TRADE ACCOUNTS RECEIVABLE
The Company's trade accounts receivable arise principally from contracts to
gather seismic data for future geophysical processing and analysis. The
receivables are current, collectable in 45 days from date of invoice, and
management believes them to be fully collectible. The related parties portion of
trade receivables from are approximately KZT 4,148, KZT 39,008, and zero at
March 31, 2004 and December 31, 2003, and 2002, respectively.
NOTE 4 - OTHER RECEIVABLES
Other Receivables - Other receivables consist of short-term unsecured
interest-free advances to unrelated parties. During 2003 an advance of KZT
30,000 was provided to a third party in consideration of future participation in
certain activities. The advance was to be repaid within one year. The Company
received no collateral for the advance. The Company recognized a KZT 1,537
15
TATARKA LLP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND DECEMBER 31, 2003 AND 2002
(Information pertaining to March 31, 2004 and the three
months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated, monetary
amounts are stated
in thousands of Kazakh Tenge.)
discount on the advance equal to the difference between the fair value and
original advance using an estimated 18% annual interest rate, and will recognize
interest income ratably over the estimated life of the note. The Company
recognized a KZT 1,537 charge to operations during 2003 as a cost of revenue.
The Company received KZT 30,000 repayment of that advance subsequent to March
31, 2004 (Unaudited).
Other Receivables from Related Parties - The Company has provided short-term
unsecured interest-free advances to employees and to companies related to the
TatArka by virtue of common management. Management believes the advances are
fully collectible. The advances are due on demand and the Company received no
collateral for the advances.
NOTE 5 -PROPERTY AND EQUIPMENT
The Company's property and equipment primarily includes technical equipment and
heavy equipment used for collecting seismic data in remote potential oil and gas
field locations. Property and equipment consisted of the following:
March 31, December 31,
------------- -----------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Seismic equipment KZT 7,682 KZT 7,682 KZT 6,653
Vehicles 16,779 27,275 1,425
Other equipment 6,046 5,883 1,731
- --------------------------------------------------------------------------------
30,507 40,841 9,809
Accumulated depreciation (4,010) (2,868) (798)
- --------------------------------------------------------------------------------
Net Property and Equipment KZT 26,497 KZT 37,973 KZT 9,011
================================================================================
NOTE 6 - INVESTMENT IN EQUITY METHOD INVESTEE
TatArka owns a 15% of the voting common stock interest in Kazmorgeophysica CJSC,
a Kazakh company that provides seismic data acquisition services to marine oil
exploration companies operating in the Kazakhstan sector of the Caspian Sea and
the adjacent transition zone. Kazmorgeophysica CJSC also provides seismic data
interpretation services.
On March 5, 2004, TatArka sold its 15% interest in Kazmorgeophysica CJSC to a
company controlled by the Company's CEO for a $15,000 note receivable. The note
receivable is denominated in U.S. Dollars equivalent to the Company's original
cash investments in Kazmorgeophysica.
NOTE 7 - ACCOUNTS PAYABLE
Trade accounts payable generally arise as a result of TatArka retaining
companies to assist in providing field services in fulfillment of the Company's
customer contracts, and may include the costs of personnel, equipment rental or
supplies from third party vendors or from related parties. The Company's trade
accounts payable consist of the following:
16
TATARKA LLP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND DECEMBER 31, 2003 AND 2002
(Information pertaining to March 31, 2004 and the three
months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated, monetary
amounts are stated
in thousands of Kazakh Tenge.)
March 31, December 31,
------------ -------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Trade Accounts payable KZT 88,567 KZT 100,285 KZT 104,947
Trade Accounts payable to related parties 75,202 -
- --------------------------------------------------------------------------------
Total Accounts Payble KZT 88,567 KZT 175,487 KZT 104,947
================================================================================
NOTE 8 - INCOME TAXES
Kazakh tax legislation and practice is in a state of continuous development and
therefore is subject to varying interpretations and frequent changes, which may
be retroactive. Further, the interpretation of tax legislation by tax
authorities as applied to the transactions and activities of the Company may not
coincide with that of management. As a result, tax authorities may challenge
transactions and the Company may be assessed additional taxes, penalties and
interest. Tax periods remain open to review by the tax authorities for five
years.
Management believes it has paid or accrued for all taxes that are applicable.
Where practice concerning the provision of taxes is unclear, management has
accrued tax liabilities based on its best estimate.
Deferred tax assets and liabilities are as follows at December 31:
December 31, 2003 2002
- ------------------------------------------------------------------------------
Property and equipment KZT 410 KZT 57
Valuation allowance (410) (57)
- ------------------------------------------------------------------------------
Net deferred tax asset KZT - KZT -
==============================================================================
The following is a reconciliation of the amount of tax that would result from
applying the Kazakh rate to pretax income with the provision for income taxes:
For the Year Ended December 31, 2003 2002
- --------------------------------------------------------------------------------
Tax at stautory rate (30%) KZT 7,761 KZT 1,971
Non-deductible expenses 1,544 705
Deferred tax asset valuation change 352 (352)
- --------------------------------------------------------------------------------
Income tax provision KZT 9,657 KZT 2,324
================================================================================
17
TATARKA LLP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND DECEMBER 31, 2003 AND 2002
(Information pertaining to March 31, 2004 and the three
months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated, monetary
amounts are stated
in thousands of Kazakh Tenge.)
NOTE 9 - SUBSEQUENT EVENT
On May 26, 2004 the TatArka members closed an agreement with EMPS Corporation, a
U.S. corporation domiciled in Nevada, whereby TatArka members sold 100% of their
membership interests to EMPS Corporation in exchange for 200,000 shares of EMPS
common stock; thereby TatArka became a wholly owned subsidiary of EMPS
Corporation. (Unaudited)
18
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders
Kazmorgeophysica CJSC
We have audited the balance sheets of Kazmorgeophysica CJSC as of December 31,
2003 and 2002, and the related statements of operations, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Kazmorgeophysica CJSC as of
December 31, 2003 and 2002, and the results of their operations and cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 27, 2004
19
KAZMORGEOPHYSICA CJSC
BALANCE SHEETS
Tenge (Thousands) U.S. Dollars (Thousands)
---------------------------------------------------- ---------------------------
March 31, December 31, March 31, December 31,
---------------------------------
2004 2003 2002 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited - Note 2)
ASSETS
Current Assets
Cash KZT 3,954 KZT 15,877 KZT 3,376 $ 28 $ 110
Trade accounts receivable 23,492 - - 169 -
Trade accounts receivable from related parties 28,450 13,954 - 205 97
Other short term receivables from related parties 8,209 3,918 19 59 27
VAT recoverable 368 - - 3 -
Inventory 1,063 566 3,764 8 4
Prepaid expenses and other current assets 1,556 3,704 26 11 26
- -------------------------------------------------------------------------------------------------- -----------------------------
Total Current Assets 67,092 38,019 7,185 483 264
Property and equipment, net 413 182 - 3 1
Long term note receivable from employee 5,395 5,229 - 39 36
- -------------------------------------------------------------------------------------------------- -----------------------------
Total Assets KZT 72,900 KZT 43,430 KZT 7,185 $ 525 $ 301
================================================================================================== =============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable KZT 36,054 KZT 14,610 KZT - $ 259 $ 102
Accrued expenses 107 2,476 - 1 17
Short term notes payable to related parties 6,750 6,654 - 49 46
Deferred revenue 9,821 9,821 3,894 71 68
- -------------------------------------------------------------------------------------------------- -----------------------------
Total Current Liabilities 52,732 33,561 3,894 380 233
- -------------------------------------------------------------------------------------------------- -----------------------------
Stockholders' Equity
Capital Stock - par value of US $100 per share,
1,000 shares authorized and outstanding 15,175 15,175 15,175 109 105
Receivable from shareholder - - (4,388) - -
Accumulated (deficit) earnings 4,993 (5,306) (7,496) 36 (37)
- -------------------------------------------------------------------------------------------------- -----------------------------
Total Stockholders' Equity 20,168 9,869 3,291 145 68
- -------------------------------------------------------------------------------------------------- -----------------------------
Total Liabilities and Stockholders' Equity KZT 72,900 KZT 43,430 KZT 7,185 $ 525 $ 301
================================================================================================== =============================
The accompanying notes are an integral part of these financial statements.
20
KAZMORGEOPHYSICA CJSC
STATEMENTS OF OPERATIONS
U.S. Dollars
(Thousands, except
Tenge (Thousands) per share amounts)
-------------------------------------- ------------------
For the years ended December 31, 2003 2002 2003
- -------------------------------------------------------------------------------- ------------------
(Unaudited - Note 2)
Revenue KZT 160,656 KZT 404 $ 1,114
- -------------------------------------------------------------------------------- ------------------
Operating Expenses
Cost of revenues 133,755 - 927
General and administrative 22,726 7,947 158
- -------------------------------------------------------------------------------- ------------------
Total Operating Expenses 156,481 7,947 1,085
- -------------------------------------------------------------------------------- ------------------
Income (Loss) from Operations 4,175 (7,543) 29
- -------------------------------------------------------------------------------- ------------------
Exchange gain (loss) (92) 47 (1)
- -------------------------------------------------------------------------------- ------------------
Net Income (Loss) Before Income Tax 4,083 (7,496) 28
Provision for income tax (1,893) - (13)
- -------------------------------------------------------------------------------- ------------------
Net Income (Loss) KZT 2,190 KZT (7,496) $ 15
================================================================================ ==================
Net Income (Loss) Per Common Share
(Thousands of Tenge) KZT 2 KZT (7) $ 15.00
================================================================================ ==================
Weighted Average Common Shares Outstanding 1,000 1,000 1,000
================================================================================ ==================
The accompanying notes are an integral part of these financial statements.
21
KAZMORGEOPHYSICA CJSC
STATEMENTS OF OPERATIONS (UNAUDITED)
U.S. Dollars
(Thousands, except
Tenge (Thousands) per share amounts)
-------------------------------------------------- ----------------------
For the three months ended March 31, 2004 2003 2004
- ------------------------------------------------------------------------------------------------------ ----------------------
(Note 2)
Revenues KZT 23,891 KZT 7,770 $ 172
- ------------------------------------------------------------------------------------------------------ ----------------------
Operating Expenses
Cost of revenues 4,283 7,326 31
General and administrative 9,469 2,910 68
- ------------------------------------------------------------------------------------------------------ ----------------------
Total Operating Expenses 13,752 10,236 99
- ------------------------------------------------------------------------------------------------------ ----------------------
Income (Loss) from Operations 10,139 (2,466) 73
Exchange gain (loss) 160 (73) 1
- ------------------------------------------------------------------------------------------------------ ----------------------
Net Income (Loss) Before Income Tax 10,299 (2,539) 74
Provision for income tax - - -
- ------------------------------------------------------------------------------------------------------ ----------------------
Net Income (Loss) KZT 10,299 KZT (2,539) $ 74
====================================================================================================== ======================
Net Income Per Common Share
(Thousands of Tenge) KZT 10 KZT (3) $ 74.00
====================================================================================================== ======================
Weighted Average Common Shares Outstanding 1,000 1,000 1,000
====================================================================================================== ======================
The accompanying notes are an integral part of these financial statements.
22
KAZMORGEOPHYSICA CJSC
STATEMENTS OF STOCKHOLDERS' EQUITY
(Tenge in Thousands, except share amounts)
Capital Stock Accumulated
------------------------------ Receivable from (Deficit) Total
Shares Amount Stockholder Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, February 12, 2002
(Date of Inception) - KZT - KZT - KZT - KZT -
Net loss for the period -
ended December 31, 2002 - - - (7,496) (7,496)
Stock issued for receivable from
stockholder February 12, 2002 1,000 15,175 (15,175) - -
Payments on stockholder receivable - - 10,787 - 10,787
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 1,000 15,175 (4,388) (7,496) 3,291
Net income for the year
ended December 31, 2003 - - - 2,190 2,190
Payments on stockholder receivable - - 4,388 - 4,388
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 1,000 15,175 - (5,306) 9,869
Net income for the period ended
March 31, 2004 (Unaudited) 10,299 10,299
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 (Unaudited) 1,000 KZT 15,175 KZT - KZT 4,993 KZT 20,168
=================================================================================================================================
Balance, December 31, 2003 in
thousands of U.S. Dollars except
share amounts (Unaudited - Note 2) 1,000 $ 105 $ - $ (37) $ 68
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
23
KAZMORGEOPHYSICA CJSC
STATEMENTS OF CASH FLOWS
U.S. Dollars
Tenge (Thousands) (Thousands)
------------------------------------- ---------------------
For the years ended December 31, 2003 2002 2003
- -------------------------------------------------------------------------------------------------------- ---------------------
(Unaudited - Note 2)
Cash flows from operating activities
Net income (loss) KZT 2,190 KZT (7,496) $ 15
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 17 - -
Discount on employee note receivable 1,985 - 14
Changes in current assets and liabilities:
Trade accounts receivable from related parties (13,954) - (97)
Other short term receivables from related parties (3,899) (19) (27)
Inventory 3,198 (3,764) 22
Prepaid expenses and other current assets (3,678) (26) (26)
Accounts payable 14,610 - 102
Accrued expenses 2,476 - 18
Deferred revenue 5,928 3,894 41
- ------------------------------------------------------------------------------------------------------- -------------------
Net cash provided by (used in) operating activities 8,873 (7,411) 62
- ------------------------------------------------------------------------------------------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (198) - (1)
Issuance of long-term receivable to employee (7,215) - (50)
Short term loan from related party 6,654 - 46
- ------------------------------------------------------------------------------------------------------- -------------------
Net cash used in investing activities (759) - (5)
- ------------------------------------------------------------------------------------------------------- -------------------
Cash flows from financing activities:
Proceeds from receivable from stockholder 4,387 10,787 30
- ------------------------------------------------------------------------------------------------------- -------------------
Net cash provided by financing activities 4,387 10,787 30
- ------------------------------------------------------------------------------------------------------- -------------------
Net change in cash 12,501 3,376 87
Cash at beginning of period 3,376 - 23
- ------------------------------------------------------------------------------------------------------- -------------------
Cash at end of period KZT 15,877 KZT 3,376 $ 110
======================================================================================================= ===================
Supplemental disclosure of cash flow information:
Cash paid for income taxes - -
=======================================================================================================
Non Cash Investing and Financing Activities:
Capital stock issued for receivable from stockholder KZT - KZT 15,175
=======================================================================================================
The accompanying notes are an integral part of these financial statements.
24
KAZMORGEOPHYSICA CJSC
STATEMENTS OF CASH FLOWS (UNAUDITED)
U.S. Dollars
Tenge (Thousands) (Thousands)
------------------------------------------- -------------------
For the three months ended March 31, 2004 2003 2004
- ----------------------------------------------------------------------------------------------------- -------------------
(Note 2)
Cash flows from operating activities
Net income (loss) KZT 10,299 KZT (2,539) $ 74
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 28 - -
Discount on employee note receivable (165) - (1)
Changes in current assets and liabilities:
Trade accounts receivable (23,492) - (169)
Trade accounts receivable from related parties (14,496) - (104)
Other short term receivables from related parties (4,291) (964) (31)
VAT recoverable (368) - (3)
Inventory (497) 3,764 (4)
Prepaid expenses and other current assets 2,148 26 15
Accounts payable 21,444 1,478 154
Accrued expenses (2,369) 161 (17)
Deferred revenue - (3,894) -
- ----------------------------------------------------------------------------------------------------- -------------------
Net cash used in operating activities (11,759) (1,968) (86)
- ----------------------------------------------------------------------------------------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (260) - (2)
Short term loan from related party 96 - 1
- ----------------------------------------------------------------------------------------------------- -------------------
Net cash used in investing activities (164) - (1)
- ----------------------------------------------------------------------------------------------------- -------------------
Net change in cash (11,923) (1,968) (86)
Cash at beginning of period 15,877 3,376 114
- ----------------------------------------------------------------------------------------------------- -------------------
Cash at end of period KZT 3,954 KZT 1,408 $ 28
===================================================================================================== ===================
Supplemental disclosure of cash flow information:
Cash paid for income taxes KZT 2,672 KZT -
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
25
KAZMORGEOPHYSICA CJSC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(Information with respect to March 31, 2004 and for the
three months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated,
monetary amounts
are stated in thousands of Kazakh Tenge.)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Kazmorgeophysica CJSC (the "Company") was organized
under the laws of Kazakhstan on February 12, 2002 to provide seismic data
acquisition services to marine oil exploration companies operating in the
Kazakhstan sector of the Caspian Sea and the adjacent transition zone. The
Company also provides seismic data interpretation through its joint venture data
processing center with PGS Onshore, Inc. (Texas) and Help, LLP (Kazakhstan). On
May 26, 2004 EMPS Corporation (Nevada) acquired a 50% stock interest in the
Company (Unaudited).
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 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.
Inventory -- Inventory consists of supplies held or staged in various locations
in Kazakhstan for use in seismic data acquisition services. Inventory is carried
on the accompanying financial statements at the lower of cost or market and is
accounted for on the first-in first-out (FIFO) method.
Property and Equipment -- Property and equipment is recorded at cost.
Expenditures for maintenance and repairs are charged to operations; expenditures
for renewals and improvements are capitalized. Upon sale or retirement of
property and equipment, the related cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is credited or charged
to operations.
Depreciation of property and equipment is calculated by using the straight-line
method based on the following estimated useful lives:
Years
-------------------------------------------------------------
Machinery and equipment 7 - 10
Office equipment and furniture 3 - 6
=============================================================
Depreciation expense was KZT 29 and KZT 16 for the three months ended March 31,
2004 and the year ended December 31, 2003, respectively.
The carrying values of the Company's long-lived assets are reviewed for
impairment at least annually and whenever events or changes in circumstances
indicate that they may not be recoverable. When projections indicate that the
carrying value of the long-lived asset is not recoverable, it is reduced by the
estimated excess of the carrying value over the projected discounted net future
cash flows of the reporting unit using the asset.
Revenue Recognition -- The Company's services are generally sold based upon
contracts with customers that include fixed or determinable prices and that do
not include right of return or other similar provisions or other significant
post delivery obligations. Revenue is recognized when services are rendered and
collectibility is reasonably assured. Certain revenues are recognized on a time
and materials basis as services are provided, or on a percentage of completion
basis, depending on the contract. Revenue from fixed price contracts lasting
longer that one year is recognized over the contract term based on the
percentage of the cost of services provided during the period compared to the
26
KAZMORGEOPHYSICA CJSC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(Information with respect to March 31, 2004 and for the
three months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated,
monetary amounts
are stated in thousands of Kazakh Tenge.)
total estimated cost of services to be provided over the entire contract. Losses
on contracts are recognized during the period in which the loss first becomes
probable and reasonably estimated.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences in the balances of existing
assets and liabilities on the Company's financial statements and their
respective tax bases and attributable to operating loss carry forwards. Deferred
taxes are computed at the enacted tax rates for the periods when such amounts
are expected to be realized or settled. Because of differences which result in
calculation of income under accounting principles generally accepted in the
United States of America, and income calculated under Kazakh income tax
regulations it is possible for operations to result in local taxable income
while reflecting operating losses in the accompanying financial statements.
Earnings Per Share -- Income per common share is computed by dividing net income
by the weighted-average number of common shares outstanding during the period.
Earnings per share amounts are presented in thousands of Tenge on the financial
statements.
Interim Financial Statements -- The accompanying unaudited interim financial
statements as of March 31, 2004 and for the three months ended March 31, 2004
and 2003, have been prepared by management of the Company without audit. In the
opinion of management, these financial statements reflect all adjustments,
consisting only of normal recurring entries, necessary for a fair presentation
of financial results for the interim periods. The results of operations
presented in the accompanying interim financial statements are not necessarily
indicative of the results that may be expected for the full fiscal year ending
December 31, 2004.
NOTE 2 - BASIS FOR TRANSLATING FINANCIAL STATEMENTS
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. Kazmorgeophysica
CJSC makes its principal investing and financing transactions and its operating
expenses in Kazakh Tenge (KZT). Therefore, the financial statements are
expressed in Kazakh Tenge, the functional currency. However, solely for the
convenience of the reader, the accompanying financial statements as of and for
the year ended December 31, 2003 and as of and for the three months ended March
31, 2004 have been translated into United States dollars at the rate of KZT
144.22 = U.S.$1, and KZT 138.93 = U.S.$1, the approximate exchange rates
prevailing on the Kazakhstan Stock Exchange on December 31, 2003 and March 31,
2004, respectively. This translation should not be construed as a representation
that amounts shown could be converted into U.S. dollars.
27
KAZMORGEOPHYSICA CJSC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(Information with respect to March 31, 2004 and for the
three months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated,
monetary amounts
are stated in thousands of Kazakh Tenge.)
NOTE 3 - JOINT DATA PROCESSING AGREEMENT
During March 2003, the Company entered into a Joint Activity Agreement Regarding
a Geophysical Data Processing Center, as amended, (the "Agreement") with PGS
Onshore, Inc. ("PGS"), a Texas corporation, and Help LLP, a Kazakh company. The
Agreement provides that the PGS and the Company combine efforts in their joint
data processing center to provide geophysical data interpretation and processing
services to customers of both PGS and the Company. Under the Agreement the
participants are entitled to their share of revenues (adjusted for certain
costs) generated by the joint processing center, 10% to the Company, 15% to
Help, and 75% to PGS. The agreement automatically renews for indefinite two year
intervals, unless 6 months notice is received by either party. Each member of
the joint processing center is required to generally bear its own costs, except
for certain supplies that are reimbursable from gross processing revenues
earned. During January 2004 the Agreement was further amended for the Company to
assume Help LLP's interests after which it receives 25% of joint processing
revenues. The Company's net share of processing revenues are included in revenue
in the accompanying financial statements. Total processing center revenue was
KZT 65,550 and KZT 51,943 for the year ended December 31, 2003 and March 31,
2004, respectively, which the Company recognized revenue of KZT 6,555 and KZT
25,452.
NOTE 4 -PROPERTY AND EQUIPMENT
The Company's equipment primarily includes technical equipment and heavy
equipment used for collecting seismic date in remote potential marine oil and
gas field locations. Property and equipment consists of the following:
NOTE 5 - RELATED PARTY RECEIVABLES
Trade Accounts Receivables from Related Parties - The Company had trade accounts
receivable from related parties of KZT 28,450 and KZT 13,954 at March 31, 2004
and December 31, 2003, respectively, and no trade accounts receivable from
related parties at December 31, 2002. Trade accounts receivable from related
parties arise from subcontracting to related companies for seismic data
gathering on behalf of third parties. Management maintains the receivables are
fully collectable and has not provided an allowance for the receivables for any
period.
Other Short-Term Receivables from Related Parties - The Company has made
short-term loans to employees and to companies related by common management that
are expected to be received currently. The receivables carry no specific
repayment terms or interest provisions.
Long-term Note Receivable from Employee - During December 2003 the Company
provided a loan to an employee in the amount of KZT 7,215 for personal housing.
The note is to be repaid to the Company in three equal yearly installments with
no interest. The Company received no collateral for the loan. The Company
recognized a KZT 1,986 discount on the note receivable equal to the difference
between the fair value and the face value of the note using an estimated 18%
annual interest rate, and will recognize interest income ratably over the 3-year
life of the note. The Company recognized a KZT 166 charge to operations during
the three months ended March 31, 2004 as compensation to the employee.
NOTE 6 - INCOME TAXES
Kazakh tax legislation and practice is in a state of continuous development and
therefore is subject to varying interpretations and frequent changes, which may
be retroactive. Further, the interpretation of tax legislation by tax
authorities as applied to the transactions and activities of the Company may not
coincide with that of management. As a result, tax authorities may challenge
transactions and the Company may be assessed additional taxes, penalties and
interest. Tax periods remain open to review by the tax authorities for five
years.
28
KAZMORGEOPHYSICA CJSC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(Information with respect to March 31, 2004 and for the
three months ended March 31, 2004 and 2003 is
unaudited. Unless otherwise indicated,
monetary amounts
are stated in thousands of Kazakh Tenge.)
Management believes it has paid or accrued for all taxes that are applicable.
Where practice concerning the provision of taxes is unclear, management has
accrued tax liabilities based on its best estimate.
Deferred tax assets and liabilities are as follows at December 31:
December 31, 2003 2002
- ------------------------------------------------------------------------------
Tax loss carry forwards KZT - KZT 3,393,741
Property and equipment 167 -
Valuation allowance (167) (3,393,741)
- ------------------------------------------------------------------------------
Net deferred tax asset KZT - KZT -
==============================================================================
The following is a reconciliation of the amount of tax that would result from
applying the Kazakh rate to pretax income with the provision for income taxes:
For the Year Ended December 31, 2003 2002
- --------------------------------------------------------------------------------
Tax at stautory rate (30%) KZT 1,224,830 KZT (2,248,800)
Non-deductible expenses 2,686,093 2,959,448
Deferred tax asset valuation changes 710,648 (710,648)
Benefit of operating loss carryforward used (2,728,574) -
- --------------------------------------------------------------------------------
Income tax provision KZT 1,892,997 KZT -
================================================================================
29