SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EMPS CORPORATION
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
_________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
_________________________________________________________________________
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_________________________________________________________________________
5) Total fee paid:
_________________________________________________________________________
[ ] Fee paid previously with preliminary materials:
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0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:_______________________________________________
2) Form, Schedule or Registration Statement No.:_________________________
3) Filing Party:_________________________________________________________
4) Date Filed:___________________________________________________________
PRELIMINARY PROXY MATERIALS
EMPS CORPORATION
2319 Foothill Blvd., Suite 250
Salt Lake City, Utah 84109
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of EMPS Corporation ("we", "us", or
the "Company") will be held on June ____, 2005 at 10:00 a.m., local time, at the
_____________, located at ________________, Salt Lake City, Utah, for the
following purposes:
1. To amend our Articles of Incorporation to change our name to
"Caspian Services, Inc." or such other similar name as may be
available;
2. To elect four directors to our Board of Directors and to reserve a
fifth directorship vacant, until such time as the Board of Directors
identifies and appoints a qualified candidate to serve as a Director;
3. To ratify the appointment of Hansen, Barnett and Maxwell as our
independent registered public accountants;
4. To ratify the action of the Board of Directors changing our fiscal
year end from December 31, to September 30.
5. To ratify the actions of our directors for the last fiscal year and
for the period from the fiscal year end through the date of the annual
shareholder meeting; and
6. To transact any other business as may properly come before the
meeting or at any adjournment thereof.
Our Board of Directors has fixed the close of business on May 10, 2005,
as the record date for determining stockholders entitled to notice of, and to
vote at, the meeting. A list of stockholders eligible to vote at the meeting
will be available for inspection at the meeting and for a period of 10 days
prior to the meeting during regular business hours at our corporate
headquarters, 2319 Foothill Blvd., Suite 250, Salt Lake City, Utah 84109.
All of our stockholders are cordially invited to attend the meeting in
person. Whether or not you expect to attend the annual meeting of stockholders,
your proxy vote is important. To assure your representation at the meeting,
please sign and date the enclosed proxy card and return it promptly in the
enclosed envelope, which requires no additional postage if mailed in the United
States. Should you receive more than one proxy because your shares are
registered in different names or addresses, each proxy should be signed and
returned to assure that all your shares will be voted. You may revoke your proxy
at any time prior to the meeting. If you attend the meeting and vote by ballot,
your proxy will be revoked automatically and only your vote at the meeting will
be counted.
YOUR VOTE IS IMPORTANT
IF YOU ARE UNABLE TO BE PRESENT PERSONALLY, PLEASE MARK, SIGN AND DATE THE
ENCLOSED PROXY, WHICH IS BEING SOLICITED BY THE BOARD OF DIRECTORS, AND RETURN
IT PROMPTLY IN THE ENCLOSED ENVELOPE.
By order of the Board of Directors,
May 11, 2005 /s/ Mirgali Kunayev
----------------------------------------
Mirgali Kunayev, Chief Executive Officer
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PRELIMINARY PROXY MATERIALS
EMPS CORPORATION
2319 Foothill Blvd., Suite 250
Salt Lake City, Utah 84109
PROXY STATEMENT
GENERAL
SOLICITATION OF PROXIES. This proxy statement is being furnished to the
stockholders of EMPS Corporation, a Nevada corporation, in connection with the
solicitation of proxies by our Board of Directors for use at our annual meeting
of stockholders to be held at_________________, Salt Lake City, Utah at 10:00
a.m., local time, on June _____, 2005, or at any adjournment thereof. A copy of
the notice of meeting accompanies this proxy statement. It is anticipated that
the mailing of this proxy statement will commence on or about May ___, 2005.
COST OF SOLICITATION. We will bear the costs of soliciting proxies. In
addition to the use of the mails, certain directors or officers of our Company
may solicit proxies by telephone, telegram, facsimile, cable or personal
contact. Upon request, we will reimburse brokers, dealers, banks and trustees,
or their nominees, for reasonable expenses incurred by them in forwarding proxy
material to beneficial owners of shares of our common stock.
OUTSTANDING VOTING SHARES. Only stockholders of record at the close of
business on May 10, 2005, the record date for the meeting, will be entitled to
notice of and to vote at the meeting. On the record date, we had 38,858,446
shares of common stock outstanding, which are our only securities entitled to
vote at the meeting, each share being entitled to one vote.
VOTE REQUIRED FOR APPROVAL. Shares of common stock will vote with
respect to each proposal. Under our Bylaws, Proposals 1, 3, 4, 5 and 6 each
require the affirmative vote of a majority of the votes eligible to be voted by
holders of shares represented at the annual meeting in person or by proxy. With
respect to Proposal 2 votes may be cast by a stockholder in favor of the nominee
or withheld. With respect to Proposals 1, 3, 4, 5 and 6, votes may be cast by a
stockholder in favor or against the Proposals or a stockholder may elect to
abstain. Since votes withheld and abstentions will be counted for quorum
purposes and are deemed to be present for purposes of the respective proposals,
they will have the same effect as a vote against each matter.
Under the NASD Rules of Fair Practice, brokers who hold shares in
street name have the authority, in limited circumstances, to vote on certain
items when they have not received instructions from beneficial owners. A broker
will only have such authority if (i) the broker holds the shares as executor,
administrator, guardian, trustee or in a similar representative or fiduciary
capacity with authority to vote or (ii) the broker is acting under the rules of
any national securities exchange of which the broker is also a member. Broker
abstentions or non-votes will be counted for purposes of determining the
presence or absence of a quorum at the meeting. Abstentions are counted in
tabulations of the votes cast on proposals presented to stockholders, but broker
non-votes are not counted for purposes of determining whether a proposal has
been approved.
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VOTING YOUR PROXY. Proxies in the accompanying form, properly executed
and received by us prior to the annual meeting and not revoked, will be voted as
directed. In the absence of direction from the stockholder, properly executed
proxies received prior to the Annual Meeting will be voted FOR the nominees of
Management to the Board of Directors and For Proposals 1, 3, 4, 5 and 6. You may
revoke your proxy by giving written notice of revocation to our Secretary at any
time before it is voted, by submitting a later-dated proxy or by attending the
annual meeting and voting your shares in person. Stockholders are urged to sign
and date the enclosed proxy and return it as promptly as possible in the
envelope enclosed for that purpose.
PROPOSAL ONE:
CONSIDER AND APPROVE ADOPTION OF THE AMENDMENT TO THE
ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY
TO CASPIAN SERVICES, INC.
We are proposing to amend our Articles of Incorporation to change the
name of the Company from EMPS Corporation to Caspian Services, Inc., or such
other similar name as may be available. We believe this change in name will
better reflect our business efforts as an oilfield service company providing
services in the Caspian Sea region and western Kazakhstan. A copy of the
Amendment to the Articles of Incorporation of EMPS Corporation that you are
being asked to approve, which we refer to in this Proxy Statement as the
"Amendment," is attached to this Proxy Statement as Annex A. The Board of
Directors has unanimously approved the Amendment and recommends approval and
adoption by the shareholders.
PROCEDURE FOR AMENDING ARTICLES OF INCORPORATION
Provided that Proposal One of this proxy is approved, the form of
amendment set forth in the Amendment to the Articles of Incorporation of EMPS
Corporation. attached hereto as Annex A will become effective upon filing with
the State of Utah.
NO DISSENTERS' RIGHTS
No dissenters' rights are available under the Utah Revised Business
Corporations Act ("URBCA") or under our current or the proposed Amendment or the
Bylaws to any stockholder who dissents from this proposal.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of our common stock is required to adopt the proposed Amendment.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" PROPOSAL ONE TO ADOPT THE
AMENDMENT TO THE ARTICLES OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
TO CASPIAN SERVICES, INC.
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PROPOSAL TWO:
ELECTION OF DIRECTORS
Our Bylaws provide that our Board of Directors will consist of not less
than one nor more than five persons, the exact number to be fixed from
time-to-time by the Board of Directors. The Board of Directors has fixed the
current number of Directors at five. Management has nominated four individuals
to serve as Directors and proposed to leave the fifth directorship vacant at
this time with the intention of seeking a candidate who will qualify as a
"financial expert" and as an independent Director for service on the audit
committee of the Board of Directors to fill the vacant directorship. The Board
of Directors is continuing to search for such a candidate. Therefore, it is
proposed that one directorship position be treated as a vacancy and the Board of
Directors be authorized to fill the vacancy when a qualified candidate is
identified.
Management has nominated four persons to serve as Directors for a
one-year term expiring on the date of the Annual Meeting of Shareholders of the
Company to be held in 2006, and until their successors are duly elected and
qualified. Mr. Mirgali Kunayev, Mr. James Passin, Mr. Paul Roberts and Mr.
Valery Tolkachev have been nominated by management to stand for election as
Directors.
NOMINEES
Set forth below is certain information as of April 30, 2005 concerning
the nominees for election at the 2005 Annual Meeting and our current officers,
including the business experience of each for at least the past five years:
Term Served
Name of Nominee Age Positions with EMPS as Director
- --------------- --- ------------------- -----------
Mirgali Kunayev 46 Chief Executive Officer Since July 2002
Chairman of the Board of Directors
James Passin 33 Director Since January 2005
Paul Roberts 46 Director Since July 2002
Valery Tolkachev 36 Director Since January 2005
Mirgali Kunayev, Chief Executive Officer and Chairman of the Board of
Directors. Mr. Kunayev has been a Vice President for Caspian Services Group
Limited since 2000. Mr. Kunayev's primary responsibilities include marine oil
operations support, construction of infrastructure within the Caspian region and
negotiation of service contracts. From 1998 to 2000, Mr. Kunayev was the
President of OJSC Kazakhstancaspishelf. During that time he worked
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collaboratively on the international project JNOC-KazakhOil with geophysical
companies including, JGI, Schlumberger, Western Geophysical and PGS. From 1995
to 1998, Mr. Kunayev served as President of International Geophysics, Ltd. He
was primarily responsible to oversee geological-geophysical operations and
exploratory drilling. In January 2002, Mr. Kunayev earned a Ph.D. under the
discipline of Geological and Mineralogical Science from the Moscow Geological
University in Moscow, Russia.
James Passin, Director. In July 1999, Mr. Passin joined Firebird
Management, LLC., as a portfolio manager. In April 2000, he co-founded FGS
Advisors, LLC, which is an investment advisor to Firebird Global Master Fund,
Ltd. Mr. Passin is not a director in any other reporting company.
Paul A. Roberts, Director. Mr. Roberts has worked for Caspian Services
Group Limited since 2001. He was appointed President and Chairman of the Board
of Caspian Services in February 2002 where he oversees Caspian's operations.
Prior to that time, Mr. Roberts served as a Vice President. As such, he was
responsible for business development, financial planning, contracts, marketing
and operations in Kazakhstan and Central Asia. In this position, he worked
closely with government authorities and state and local businesses. From 1999 to
2001, Mr. Roberts was an Area Manager for PGS Onshore, Inc., in Almaty
Kazakhstan. As Area Manager, he was responsible for seismic exploration. He also
performed many of the same duties he performed in his capacity as Vice President
of Caspian. From 1997 to 1999, Mr. Roberts was the Resident Manager for
PetroAlliance (WGC) in Almaty, Kazakhstan. He was responsible for land and
marine seismic exploration. He also oversaw business and financial planning,
contract negotiations and operations in Kazakhstan and Central Asia. Mr. Roberts
is not a director or nominee in any other reporting company.
Valery Tolkachev. Since 1999, Mr. Tolkachev has served as a Deputy
Director of the Corporate Clients Department for Aton Investment Company in
Moscow, Russia. From 1991 to 1999, Mr. Tolkachev served in various positions
including, broker, analyst, manager and V.P. of Equities Department at MDM Bank,
IncomBank, IncomCapital, Tveruniversalbank and TIRAbrok Company. Mr. Tolkachev
graduated with Honors from the High Military School in Kiev, USSR in 1989. He is
currently attending the Academy of National Economy, Moscow Law faculty. Mr.
Tolkachev is also a director of BMB Munai, Inc., a reporting company.
There are no family relationships among the board of directors.
Management does not expect that any nominee will become unavailable for
election as a director, but, if for any reason that should occur prior to the
Annual Meeting, the person named in the proxy will vote for such substitute
nominee, if any, as may be recommended by Management.
VOTE REQUIRED
Directors are elected by a plurality of votes cast at the Annual
Meeting. Unless contrary instructions are set forth in the proxies, the persons
with full power of attorney to act as proxies at the 2005 Annual Meeting will
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vote all shares represented by such proxies for the election of the nominees
named therein as directors. Should any of the nominees become unable or
unwilling to accept nomination or election, it is intended that the persons
acting under the proxy will vote for the election, in the nominee's stead, of
such other persons as the Board of Directors of the Company may recommend. The
management has no reason to believe that any of the nominees will be unable or
unwilling to stand for election or to serve if elected.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" EACH OF THE NOMINEES LISTED ABOVE AND TO APPROVE
THE RESERVATION OF ONE DIRECTORSHIP AS VACANT,
UNTIL SUCH TIME AS THE BOARD IDENTIFIES AND APPOINTS
A QUALIFIED CANDIDATE WHO CAN SERVE
AS A FINANCIAL EXPERT AND INDEPENDENT DIRECTOR.
Security Ownership of Directors and Executive Officers
As of May 10, 2005 we had 38,858,446 shares of our common stock issued
and outstanding. The following table sets forth the beneficial ownership of our
Common Stock as of that date, for each director and nominee, the president, the
other executive officers and for all directors and executive officers as a
group.
Shares of % of
Name Common Stock Class
- ---- ------------ -----
Marat Cherdabayev -0- *
Laird Garrard 2,441,624 6.3%
Mirgali Kunayev(1) 11,794,858 30.4%
James Passin(2) 1,330,000 3.4%
Paul Roberts 2,441,624 6.3%
Valery Tolkachev -0- *
- --------------------------------------------------------------------------------
All directors, nominees and executive
officers as a group (6 persons): 18,008,160 46.3%
- --------------
* Less than 1%.
(1) Mr. Kunayev owns no shares in his own name. The shares attributed to Mr.
Kunayev are the shares held of record by Petroleum Group Services Limited.
On October 1, 2004, Mr. Kunayev became the managing director of Petroleum
Group Services Limited. As the managing director, he may be deemed to have
voting and investment power over the shares held by Petroleum Group Services
Limited.
(2) In his capacity as a manager of FGS Advisors, LLC, Mr. Passin may be deemed
to have shared control with respect to shares of Common Stock owned by the
Firebird Global Master Fund, Ltd.
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Compliance with Section 16(a) of the Exchange Act
Directors, executive officers and beneficial owners of greater than 10%
of the Company's outstanding common stock are required to comply with Section
16(a) of the Securities Exchange Act of 1934, which requires generally that such
persons file reports regarding ownership of and transactions in securities of
the Company on Forms 3, 4, and 5. Form 3 is an initial statement of ownership of
securities, Form 4 is to report changes in beneficial ownership and Form 5 is an
annual statement of changes in beneficial ownership.
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during its most recent fiscal year, it appears that
Laird Garrard, Paul Roberts and Petroleum Group Services Limited each failed to
timely file a Form 4 reporting the one time sale of stock for cash on October 5,
2004. Each party filed a Form 4 reporting the transaction on October 26, 2004.
Security Ownership of Certain Beneficial Owners
As of May 10, 2005 the persons named below were, to our knowledge, the
only beneficial owners of more than 5% of the outstanding common stock, other
than directors, nominees and executive officers whose beneficial ownership is
described in the above table.
Shares of Percentage
Name Common Stock of Class
- ---- ------------ --------
Dora International Limited 2,841,624 7.3%
Firebird Management LLC(1) 3,675,000 9.5%
Petroleum Group Services Limited 11,794,858 30.3%
Techgrand Company Limited 2,441,624 6.3%
- --------------------------------------------------------------------------------
TOTAL 20,753,106 53.4%
- ------------
(1) Firebird Avrora Advisors, LLC, FGS Advisors, LLC and Firebird Management,
LLC are investment advisers under common control, each of which manages
certain private investment funds. Firebird Avrora Advisors, LLC acts as
investment advisor to Firebird Avrora Fund, Ltd. ("Avrora"), a private
investment fund which owns 947,500 shares of Common Stock. FGS Advisors, LLC
acts as investment adviser to Firebird Global Master Fund, Ltd. ("Global"),
a private investment fund which owns 1,330,000 shares of Common Stock.
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Firebird Management, LLC acts as investment adviser to Firebird Republics
Fund, Ltd., a private investment fund which owns 1,325,000 shares of Common
Stock ("Republics,") and Firebird New Russia Fund, Ltd., a private
investment fund which owns 72,500 ("New Russia" and collectively with
Avrora, Global and Republics, the "Funds" and each individually a "Fund").
As investment advisers to the Funds, each of Firebird Avrora Advisors, LLC,
FGS Advisors, LLC and Firebird Management, LLC have voting and investment
control with respect to the shares of Common Stock held by their respective
advised Fund.
Executive Compensation
The following chart sets forth the compensation paid to each of our
Executive Officers and Directors during the last three fiscal years:
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
--------------------------------------- ---------------------- --------------------------
Restricted LTIP
Name & Principal Other Annual Stock Options Payout All Other
Position Year Salary Bonus Compensation Awards /SARs # ($) Compensation
- ----------------------- ------- ----------- --------- ----------------- ----------- ---------- --------- ----------------
Mirgali Kunayev(1) 2004 $51,600 $-0- $-0- $-0- -- $-0- $-0-
CEO, Director 2003 58,200 -0- -0- -0- -- -0- -0-
2002 60,000 -0- -0- -0- -- -0- -0-
Laird Garrard(1) 2004 162,000 -0- -0- -0- -- -0- -0-
Interim President 2003 162,000 -0- -0- -0- -- -0- -0-
VP, CFO 2002 97,500 -0- -0- -0- -- -0- -0-
Paul Roberts(1) 2004 162,000 -0- -0- -0- -- -0- -0-
Director 2003 162,000 -0- -0- -0- -- -0- -0-
2002 97,500 -0- -0- -0- -- -0- -0-
Marat Cherdabayev 2004 75,000 -0- -0- -0- -- -0- -0-
VP, Director 2003 75,000 -0- -0- -0- -- -0- -0-
2002 25,000 -0- -0- -0- -- -0- -0-
Arjan Goris(1) 2004 146,735 7,405 -0- -0- 100,000 -0- -0-
Regional Manager 2003 115,369 9,503 -0- -0- -- -0- -0-
Caspian Services 2002 76,245 -0- -0- -0- -- -0- -0-
Robert Jobling(1) 2004 120,576 7,405 -0- -0- 100,000 -0- -0-
Manager of 2003 103,162 9,503 -0- -0- -- -0- -0-
Engineering and 2002 90,822 -0- -0- -0- -- -0- -0-
Equipment Caspian
Services
Louis Naegle(2) 2004 30,000 -0- -0- -0- -- -0- -0-
Former CEO and 2003 -0- -0- -0- -0- -- -0- -0-
Former President 2002 -0- -0- -0- -0- -- -0- -0-
- ----------------
(1) Compensation paid to these individuals was paid to them by Caspian Services
Group Limited, our wholly owned subsidiary, in connection with services
provided to Caspian.
(2) Mr. Naegle served as the Chief Executive Officer of the Company from August
1998 until December 2002, and as President from August 1998 until June 2004.
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Compensation of Directors
No compensation has been paid directly or accrued to any other officer
or director of the Company to date. The Company has no policy for compensating
its directors for attendance at Board of Directors meetings or for other
services as directors.
Compensation of officers and directors is determined by the Company's
Board of Directors and is not subject to shareholder approval. None of the
officers and directors of the Company have employment agreements with the
Company.
In the past three years no executive officer has received any amounts
in connection with his resignation, retirement, or other termination. No
executive officer received any amounts in the last three years in connection
with a change in control of the Company of a change in the executive officer's
responsibilities after a change in control.
The Company has no retirement, pension, or benefit plan at the present
time, however, the Board of Directors may adopt plans as it deems to be
reasonable under the circumstances.
Meetings and Committees of the Board of Directors
During fiscal year ended December 31, 2004, there were four meetings of
the Board of Directors. All directors attended the meetings of the Board of
Directors. The Board of Directors currently has no standing committees.
PROPOSAL THREE
RATIFICTION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
General
As we do not currently have an Audit Committee, our Board of Directors
acts as our Audit Committee. The Board of Directors has appointed the firm of
Hansen, Barnett & Maxwell to act as out independent registered public accounting
firm for the fiscal year ending December 31, 2005, subject to ratification of
such appointment by our shareholders. A representative of Hansen, Barnett &
Maxwell is expected to be present at the annual meeting and will be given an
opportunity to make a statement if he or she desires to do so and will be
available to respond to appropriate questions. No determination has been made as
to what action the Board of Directors would take if the stockholders do not
ratify the appointment.
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Principal Accountant Fees and Services
Hansen, Barnett & Maxwell served as the Company's independent auditors
for the year ended December 31, 2004 and 2003, and is expected to serve in that
capacity for the current year. Principal accounting fees for professional
services rendered for us by Hansen, Barnett & Maxwell for the years ended
December 21, 2004 and 2003, are summarized as follows:
2004 2003
- --------------------------------------------------------------------------------
Audit $129,510 $116,860
Audit related - -
Tax 1,197 1,413
All other - -
- --------------------------------------------------------------------------------
Total $130,707 $118,273
================================================================================
Audit Fees. Audit fees were for professional services rendered in
connection with the Company's annual financial statement audits and quarterly
reviews of financial statements for filing with the Securities and Exchange
Commission.
Tax Fees. Tax fees related to services for tax compliance and
consulting.
Board of Directors Pre-Approval Policies and Procedures. At its
regularly scheduled and special meetings, the Board of Directors, in lieu of an
established audit committee, considers and pre-approves any audit and non-audit
services to be performed by the Company's independent accountants. The Board of
Directors has the authority to grant pre-approvals of non-audit services.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of our common stock is required to ratify the selection of Hansen,
Barnett & Maxwell to serve as our independent registered public accounting firm
for fiscal 2005.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE RATIFICATION OF APPOINTMENT OF
HANSEN, BARNETT & MAXWELL AS OUR INDEPENDENT REGISTERED
ACCOUNTING FIRM FOR THE 2005 FISCAL YEAR
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PROPOSAL FOUR
RATIFY THE ACTION OF OUR BOARD OF DIRECTORS
TO CHANGE OUR FISCAL YEAR END
On May 10, 2005, in accordance with our Bylaws, our Board of Directors
approved a change of our fiscal year end from December 31 to September 30,
subject to approval of our shareholders. We believe changing our year end to
September 30 will provide a clearer picture to our shareholders and the market
of our results of operations and financial condition for any given year. Our
customers are oil and exploration and production companies. In the region of the
Caspian Sea where we operate, due to weather conditions, the work season
typically runs from late March or early April through October. Changing our
fiscal year end to September 30 will allow our year end financial statements to
more closely correspond with the end of our work season. We believe this will
allow our shareholders and the market to more clearly compare the results of our
operations from one year to the next.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of our common stock is required to ratify the action of our Board of
Directors to change the fiscal year end from December 31 to September 30.
OUR BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS
VOTE "FOR" RATIFICATION OF THE CHANGE IN OUR
FISCAL YEAR END TO SEPTEMBER 30.
PROPOSAL FIVE
TO RATIFY THE ACTIONS OF OUR DIRECTORS
We recommend that shareholders ratify the actions of our directors for
the last fiscal year and for the time period from the fiscal year end through
the date of the annual shareholder meeting.
OTHER MATTERS
We know of no other matters that are to be presented for action at the
annual meeting of stockholders other than those set forth above. If any other
matters properly come before the annual meeting of stockholders, the persons
named in the enclosed proxy form will vote the shares represented by proxies in
accordance with their best judgment on such matters.
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2006 SHAREHOLDER PROPOSALS
If you wish to include a proposal in the Proxy Statement for the 2006
Annual Meeting of Stockholders, your written proposal must be received by the
Company no later than November 15, 2005. The proposal should be mailed by
certified mail, return receipt requested, and must comply in all respects with
applicable rules and regulations of the Securities and Exchange Commission, the
laws of the State of Utah and our Bylaws. Stockholder proposals may be mailed to
the Corporate Secretary, EMPS Corporation, 2319 Foothill Blvd., Salt Lake City,
Utah 84109.
For each matter that you wish to bring before the meeting, provide the
following information:
(a) a brief description of the business and the reason for bringing it
to the meeting;
(b) your name and record address;
(c) the number of shares of Company stock which you own; and
(d) any material interest (such as financial or personal interest) that
you have in the matter.
SELECTED INFORMATION FROM OUR ANNUAL REPORT ON FORM 10-KSB FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2005
Description of Business
Company History
EMPS Corporation (the "Company" or "EMPS") 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 that may be used to separate nonmagnetic particulate
materials from other materials without chemicals, heat or water.
On February 28, 2002, the Company entered into an Agreement and Plan of
Reorganization whereby it acquired all of the issued and outstanding shares of
Caspian Services Group Limited, ("Caspian") in exchange for 27,089,700
restricted common shares of the Company. Caspian became a wholly owned
subsidiary of the Company and the Caspian shareholders assumed the controlling
interest in EMPS. The shareholders of both companies approved the Agreement.
Since its acquisition of Caspian, EMPS has concentrated its business efforts to
provide diversified oilfield services to the oil and gas industry in western
Kazakhstan.
To enhance the range of oilfield services the Company can provide to
its clients, in May 2004, the Company acquired 100% of the outstanding interests
in TatArka LLP ("TatArka") and a 50% non-controlling interest in
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Kazmorgeophysica CJSC ("KMG"). Through TatArka and KMG, the Company is able to
offer onshore, transition zone and marine seismic data acquisition and
processing services to oil and gas exploration companies.
Recent Developments
In January 2005, the Company announced that it has entered into letters
of intent with Siapem SpA to provide five shallow draft vessels to support
offshore pipeline activities ongoing in the Kashagan oilfield in the north
Caspian Sea. One of the vessels will come from the Company's existing fleet. The
remaining four vessels will be new additions to the Company's fleet either
through acquisition or leasing. Construction of two multi-craft shallow draft
work boats with anchor handling capacity has been commissioned. All four vessels
will be mobilized to the Caspian Sea in November 2005 for an initial period of
two years. The letters of intent represent commitments that will result in
approximately $11,000,000 in revenue to the Company. The terms of a definitive
agreement are pending final approval by the parties.
During the first fiscal quarter of 2005, the Company completed a
private placement of 7,658,446 shares of its common stock at a price of $3.00
per share, raising $21,826,572 for the Company after deducting placement agent
fees. The funds will primarily be used to reduce outstanding debts and to
acquire vessels.
Business of the Company
The Company provides oilfield services in western Kazakhstan and the
north Caspian Sea. The Company's business focuses in three principal areas -
Offshore Marine Services; On-Geophysical Services and Water Desalinization.
Kazakhstan
Until 1991, Kazakhstan was one of 15 independent republics that
comprised the former Soviet Union. It has chosen to align with Russia and 12 of
the former republics in the Commonwealth of Independent States ("CIS"), a union
of economic and political cooperation. Upon independence fourteen years ago,
Kazakhstan embarked on a course of political and monetary reforms that have
resulted in the development of a market economy. Kazakhstan's economic prospects
are looking better than at almost any time since the collapse of the Soviet
Union, mainly due to higher world oil prices, major oil finds in the Caspian Sea
region and the development of oil production and export capabilities.
Kazakhstan belongs to the third largest world hydrocarbon basin in
terms of both known and potential hydrocarbon reserves after the Persian Gulf
and Western Siberia. This basin is estimated to contain approximately 20 Billion
proven barrels of oil in place and 200 Trillion proven cubic feet of gas in
place. Kazakhstan produces an average of 1,000,000 barrels of oil per day
("bopd"), which is expected to increase to 2,000,000 bopd by 2010.
14
The Pre-Caspian Basin recently hosted several large world-class
discoveries including LukOil and OKIOC/Agip KCO consortium. Four of the world's
giant oilfields are located in the Pre-Salt of the Pre-Caspian Basin (Tengiz,
Karachaganak, Orenburg and Astrakhan). Most major western oil & gas exploration
and production companies operate in Kazakhstan.
Since the 1990s Kazakhstan has taken efforts to attract foreign
investment to the country's economy, specifically into the oil and gas sector.
The Investment Law passed in 2003, together with a number of bilateral treaties
and multi lateral conventions ratified during recent years, are aimed to provide
protection for foreign and local investors which has stimulated dramatic growth
in the total inflow of investment capital to the country.
Petroleum Industry in Kazakhstan
Kazakhstan is an area of significant investment activity for the
international oil and gas industry. Kazakhstan's proved reserves rank among the
top 15 countries in the world with over 180 producing oil fields and 20 billion
barrels of proved reserves. Current production is approximately 1,000,000 bopd,
of which approximately 66% is exported.
The entire former Soviet Union region has recently seen significant
foreign investment and strategic alliances for exploration, acquisition and
development of oil and gas reserves. U.S. investments in Kazakhstan exceeded $6
billion at the end of 2002. The majority of this investment was focused in the
petroleum industry and specifically in the development of the Tengiz field,
which has an estimated 6-9 billion barrels of reserves, and Karachaganak, with
an estimated 2.2 billion barrels of reserves. With Caspian Sea discoveries now
estimated to hold up to 30 billion barrels of reserves, foreign investment of as
much as $140 billion may be required to develop infrastructure within Kazakhstan
for production and distribution of these resources.
The oil industry in Kazakhstan was codified in 1995 with the
development of the Law of Petroleum, which sets out the conduct of the oil and
gas industry and the roles of participants, both private and governmental. The
industry is regulated by the Ministry of Energy and Natural Resources, which
administers all contracts, licenses and investment programs. The Ministry of
Energy and Natural Resources has been through several stages of consolidation
since the country's independence in 1991. The government has been merging
various regional governmental agencies previously handling the extraction and
transportation sectors of the industry into one consolidated entity to eliminate
the bureaucracy and provide for more efficient management of the country's
natural resources. This entity maintains a direct ownership on behalf of the
Republic of Kazakshtan in most large oil field development projects as well as
sole ownership and operation of many of the interconnecting oil and gas pipeline
systems. Governmental ownership or participation in exploration and development
projects, however, is not required.
15
Offshore Marine Services Industry
The Company's customers employ its 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.
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.
Vessel Fleet
Through its subsidiary, Caspian, the Company currently operates a fleet
of seven specialized shallow draft vessels designed for use in the shallow
waters of the north Caspian Sea. The Company expects to mobilize its eighth
vessel by August 2005. Caspian owns one accommodation/work barge, the
"Baskunchak." This vessel is used to provide accommodation and food services to
personnel working on offshore production platforms, artificial islands, and
rigs. The Baskunchak can house up to 64 client personnel and 17 crewmembers. The
Baskunchak also has a heli-deck.
Caspian owns a self-propelled accommodation vessel, the "Caspian
Dinara." This vessel is used to transport and provide accommodation and food
services to personnel engaged in offshore exploration and production. The Dinara
can house up to 61 client personnel and 16 crewmembers.
16
Caspian owns two shallow draft landing craft supply vessels, the
"Caspian Maria" and the "Caspian Yelena." Supply vessels serve drilling and
production facilities and support offshore construction and maintenance work.
They are differentiated from other vessels by their shallow draft, roll on-roll
off cargo handling capabilities, particularly their large capacity,
approximately 1,000 tons and versatility. These vessels are used to transport
supplies such as fuel, water, drilling fluids, equipment and provisions.
Caspian owns one shallow draft multi-purpose supply and tugboat, the
"Caspian Eva." The Caspian Eva is suitable for a variety of applications
including towing/pushing operations, supply and survey work.
Caspian also owns a 45 meter shallow draft multi-purpose utility
vessel, the "Caspian Galiya." This vessel has accommodation facilities for up to
20 client passengers, and a back deck area of 170 square meters for the
deployment of survey equipment. The Caspian Galiya is equipped with electric bow
thrusters, making it a highly maneuverable vessel.
Caspian has commissioned the construction of a new high-speed aluminum
crew boat, the "Caspian Raushan". This boat is a 33 meter boat capable of
transporting up to 70 passengers and 35 tons of cargo at speeds up to 25 knots.
The vessel will be used to ferry oilfield workers between offshore installations
and land bases. The vessel will also be equipped as an emergency response craft
with a fire pump and monitor. The vessel is tentatively scheduled for
mobilization to the Caspian Sea by August 2005.
Caspian also operates a multi-purpose survey vessel, the "Coastal
Bigfoot," which is owned by Rederij Waterweg, a Dutch shipping company. Pursuant
to its agreement with Rederij Waterweg, the Company charters the Coastal
Bigfoot, provides the crew, operates the vessel and pays Rederij Waterweg a day
rate for the vessel when it is under charter operations.
Caspian's fleet is time chartered to customers who charter the vessels
and hire Caspian to provide all necessary staffing and support for safe and
efficient operation. Vessel operating expenses are typically Caspian's
responsibility except that the customer generally provides water, fuel,
lubricants and anti-freeze. In return for providing time-chartered services,
Caspian is paid a daily rate of hire. Caspian also provides additional support
services for the Baskunchak and the Dinara. These services include:
o Accommodation and food services for the customer's personnel
housed on the vessel;
o Laundry and related services to the customer's personnel; and
o Heli-deck operations on the Baskunchak.
As discussed above, in connection with the letters of intent it has
executed with Siapem SpA, Caspian has committed to expand its fleet by four
vessels. As future demand and funding justify, Caspian will continue to expand
its fleet.
As part of its strategic plan, Caspian plans to develop a marine base
in the Port of Bautino. A feasibility study, including an environmental impact
assessment, seabed survey and engineering design works is planned to be
conducted in May 2005 Caspian plans to develop an emergency response service
that would react to offshore oil spills and other emergencies on the Caspian
Sea. There are no assurances, however, that there will be sufficient demand in
the market to justify expanding Caspian's fleet or the services it can offer.
Similarly, even if there is sufficient demand, there is no guarantee that
17
Caspian or the Company would have sufficient funds or be able to obtain
sufficient funding to finance such expansion.
Customers, Contract Terms and Competition
Caspian's customers are oil and natural gas exploration and production
companies working in the Kazakh sector of the Caspian Sea. Currently a number of
Caspian's vessels are chartered to Agip Kazakhstan North Caspian Operating
Company N.V., ("Agip KCO") and its subcontractors for use in oil and gas
exploration. Agip KCO is the operator of the Kashagan and Kalamkas fields that
lie in the northeastern sector of the Caspian Sea. Agip KCO operates the fields
on behalf of a consortium of international oil companies.
The Baskunchak and the Dinara are chartered to a Dutch multinational
dredging company contracted to construct artificial islands in support of Agip
KCO's oilfield development activities. The contract term is through the end of
the work season 2006 with options to extend the charters through the 2007 work
season. The Maria is chartered through the 2005 work season to support survey
works related to Agip KCO's activities. The Eva is chartered through the 2005
work season. At this time, Caspian is negotiating charters for the 2005 work
season for the Maria, Yelena, Galiya and Coastal Bigfoot. The Company hopes to
have these vessels under charter by May or June of 2005.
In addition to having the Baskunchak and the Dinara chartered to
subcontractors of Agip KCO, Agip KCO is also the largest purchaser of water from
the Company's water desalinization plant, and during 2004, Agip KCO leased all
of the rooms at the Chagala Hotel owned by Caspian's 50% subsidiary Bautino
Development Company. The loss of Agip KCO as a client would severely and
adversely impact the Company's financial condition and results of operations.
Caspian's competition includes varying local companies to large
worldwide corporations. Competition is intense. Caspian currently has no known
local Kazakh competition, but does have to compete with many larger foreign
companies operating in the Kazakh sector of the Caspian Sea. Offsetting its
small size relative to some of its competition, Caspian believes 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. Based on its local regulatory compliance and business
reputation Caspian has been able to differentiate itself from its competitors.
Geophysical Services
The Company provides onshore, transition zone and marine seismic data
acquisition services to oil and gas exploration and development companies
18
operating in Kazakhstan and the Caspian Sea through its subsidiary, TatArka LLP
and its 50% equity investee, Kazmorgeophysica, CJSC.
TatArka LLP
The Company acquired TatArka as a wholly owned subsidiary of the
Company. TatArka provides 2D and 3D seismic data acquisition services to
companies engaged in onshore oil and gas exploration in the Republic of
Kazakhstan. TatArka provides its services under project specific partnerships
with other local service providers as required by the Republic of Kazakhstan.
TatArka has held a general state license to conduct geophysical works since
September 4, 2001.
The onshore seismic market in Kazakhstan is comparably mature and is
dominated by local companies. The acquisition of onshore seismic data requires
considerably less effort, and is less complex, than the acquisition of offshore
seismic data. As a result onshore seismic data acquisition services are far less
expensive than offshore services.
The current onshore seismic data acquisition services market in
Kazakhstan is dominated primarily by four local companies: Kazakhstancaspishelf,
Azimut, SIF Dank and TatArka. Most of TatArka's competitors have acquired and
rely upon up-to-date recording systems and vibrator energy sources in performing
their services. Until recently, TatArka has leased the recording systems and
vibrators it used to provide its services. To allow it to compete more favorably
in the market, in June 2004, TatArka entered into a $2,150,000 Credit Line
Agreement with KazKomertz Bank in Almaty, Kazakhstan so it could purchase
up-to-date equipment and immediately drew down the full amount available under
the line to purchase five vibrator energy source trucks. The loan bears an
interest rate of 14%. Principle payments began in February 2005 and the loan is
due in full in July 2005.
Kazmorgeophysica CJSC
The Company owns a 50% equity interest in KMG. KMG provides 2D and 3D
transition zone and marine seismic data acquisition services to oil and gas
exploration companies operating in the Kazakhstan sector of the Caspian Sea. KMG
also provides seismic data processing and interpretation services through a
joint venture data processing center with PGS Onshore, Inc. The data processing
center is located in Almaty. KMG has held a general state license to conduct
geophysical works since May 29, 2002.
In contrast to the onshore seismic market, the marine seismic market in
Kazakhstan is still developing. The first modern marine seismic survey in the
Kazakhstan sector of the Caspian Sea was conducted between 1994 and 1996. Since
that time, only a small number of marine or transition zone surveys have been
conducted. We believe this is primarily due to the limited number of entities
currently holding exploration licenses in Kazakhstan. In early 2004, the
government of Kazakhstan announced that the first round of licensing for new
offshore blocks in the Kazakhstan sector of the Caspian Sea. Current
expectations are that this will occur in mid to late 2005 or early 2006. We
19
expect that the release of new license blocks will attract significant interest
from the international oil and gas community. We also anticipate that a direct
result of the release of new license blocks will be a significant increase in
demand for marine and transition zone seismic data acquisition services and data
processing.
The complexity of modern marine seismic data collection methods, and
the associated costs, has meant that only large international exploration
companies with advanced technology and sufficient capital have been capable of
providing marine seismic services in Kazakhstan. KMG believes this trend will
change as more local companies gain access to the technology and methodologies
used and as they obtain sufficient capital to acquire the necessary equipment
and vessels to provide these services. Additionally, under the laws of
Kazakhstan to provide marine seismic services, the service provider must meet
the country's local content requirements, either through local ownership or by
partnership. The other 50% owner of KMG is 100% owned by a Kazakh entity, which
satisfies the local content requirement and gives KMG an advantage over its
international competitors.
KMG currently competes with two local companies, Kazakhstancaspishelf
and Uzhmaorgeologia and four international firms, Westerngeco, CGG, PGS and
Veritas. As discussed above, the international firms are required to tender with
a local partner to satisfy the local content requirements of Kazakhstan.
In the past two years, KMG has invested approximately $300,000 to
purchase geophysical equipment.
As oil and gas exploration companies often require both onshore and
offshore seismic data acquisition and interpretation services, TatArka and KMG
often contract with each other to provide services for their respective
customers.
Water Desalinization
Caspian owns a 56% interest in CJSC Bauta ("Bauta"), a joint venture
that operates a water desalinization plant in the Port of Bautino. At the
desalinization plant, Bauta purifies and markets drinking water in bulk and in
bottles. The Bauta facility produced approximately 65,767 metric tons of water
in 2004, which is approximately 18% of its production capacity. This wa1 s an
increase of approximately 6,556 metric tons compared to 2003. Approximately 93%
of water produced by Bauta was sold in bulk. Forty-two percent of bulk water
sales were to Agip KCO. Bauta provides bulk water to the local community at cost
under its infrastructure agreement with the government and provides water to
oilfield camps in the region. Bauta also bottles and sells water in five liter,
one-and-a half liter and one liter bottles. As much of the demand for drinking
water comes from oil field camps, water sales, like vessel operations are
seasonal, with most sales occurring during the work season. During the work
season, Bauta will produce approximately 9,400 five-liter bottles, 3,000
one-and-a-half-liter and 120 one-liter bottles per week. The bottled water is
primarily sold to the surrounding oil field camps, the local municipality and
other businesses in the region. Bauta also provides the fresh water for the
hotel owned by Caspian's other joint venture company.
20
Bautino Development Company, LLP
Caspian is also a 50% joint venture partner with the Chagala Hotel
Group, in a development company, Bautino Development Company LLP, ("Bautino").
Bautino has constructed and is operating a 96-room seaside hotel. The first
phase of the hotel, which is 48 rooms, is currently leased to Agip KCO under a
three-year lease agreement that expires in March 2006. The lease agreement may
be terminated by Agip KCO at any time upon six months written notice.
Construction of Phase II of the Chagala Hotel, which increased hotel capacity by
an additional 48 rooms, was completed in February 2005 and is fully operational.
The agreement with Agip KCO has been extended to include eight of the 48 rooms
of Phase II. Management of the hotel is currently negotiating with Agip KCO to
extend the lease up to 24 of the 48 new rooms. Negotiations are expected to be
completed during the second quarter of 2005. The remaining rooms will be rented
to other tenants through the Chagala reservation network.
Operating Risks and Insurance
The Company'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;
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 the
Company's vessels, cargo, equipment in tow and other property, as well as the
environment. The Company 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 the Company for damages due to personal
injury, death, property damage, pollution and loss of business.
The Company's vessels are covered by Hull and Machinery Insurance,
which insures the vessels for their estimated market value against damage or
loss. The Company carries Protection and Indemnity Insurance, covering third
party liability, including pollution as customary in the industry.
The continued threat of terrorist activities and other acts of war, or
hostility, has increased the risk of political, economic and social instability
in the geographic area in which the Company operates. It is possible that
further acts of terrorism could be directed against properties and personnel of
U.S.-owned companies such as Caspian. The resulting economic, political and
21
social uncertainties, including the potential for further terrorist acts and
war, could cause premiums charges for insurance coverage to increase. To date,
the Company has not experienced any property loss as a result of political,
economic or social instability, terrorism or war.
Management believes that its insurance coverage is adequate. The
Company has not experienced a loss in excess of insurance policy limits;
however, there is no assurance that the Company's liability coverage will be
adequate to cover all potential claims that may arise nor can the Company
guarantee that it will be able to maintain adequate insurance in the future at
rates considered commercially feasible, especially with the current level of
uncertainty in the market.
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.
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. The Company's
principal customers are oil and natural gas exploration, development and
production companies. The Company'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 the Company's customers can
produce economically. When this market dynamic occurs, it is expected that the
Company's customers will generally reduce their capital spending budgets for
offshore exploration, drilling and development until commodity prices for
natural resources increase to levels that can support increases in production
and development and sustain growth.
Foreign Operations
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
22
can involve significant risks that are not typically associated with 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. The Company 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 the Company's
operations and consequently its business, operating results and financial
condition. At this time, management is unable to estimate what, if any, changes
may occur or the resulting effect of any such changes on the Company's financial
condition or future results of operations.
The Company 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 are
not unusual.
The current regime of penalties and interest related to reported and
discovered violations of Kazakhstan's laws, decrees and related regulations can
be 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'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,
23
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.
Employees
The Company and its subsidiaries currently employ approximately 264
full time employees and 183 seasonal and/or part time employees. The Company and
its subsidiaries hire their employees under local labor contracts complying with
the governing law of the Republic of Kazakhstan. Typically, these employment
contracts are renewable for one-year terms.
With new labor laws passed in early 2005, all labor contracts that do
not expire or are not terminated before one year are automatically (by law)
extended for an undefined period. This means that it will become more difficult
to terminate existing employees, and the Company's exposure to expenses
associated with termination of employees is expected to increase. The Company
has managed to maintain the turnover of its work force at very low level. On
average, the Company terminates five employees per year with another 10-15 per
year leaving voluntarily. With the ongoing labor market monitoring, the Company
believes that future new labor requirements can be satisfied and there is no
significant risk of labor shortage.
The Company undertakes to provide voluntary and mandatory offshore
training and supports qualification growth of its employees. In addition there
are legislative requirements to provide a certain number of local employees per
year with formal outside training. The Company continues to satisfy these local
labor market protective measures.
At the end of 2004 the Company undertook to change the payroll
structure in its offshore operations. The changes concern payment methods and
salary calculations and are aimed to satisfy local labor and statutory
accounting requirements as well as to reduce the Company's exposure to deferred
and unpaid wages and benefits. Subsequent to the year end, the changes have been
accepted by all personnel and no increase in payroll expenses has been
attributed to this change.
The Company believes it has satisfactory relations with its employees.
To date, neither the operations of the Company, nor any of its subsidiaries,
have been interrupted by strikes or work stoppages.
24
Seasonality
As discussed herein, due to weather conditions in the north Caspian
Sea, demand for the Company's vessel fleet, desalinized water and transition
zone and marine seismic data acquisition services is seasonal and is subject to
prevailing weather conditions in the region. Typically, significant demand for
these services begins in late March or early April and continues until late
October or November. Business volume for the Company, however, is more dependent
on oil and natural gas prices and the global supply and demand conditions for
the Company's services than any seasonal variations.
Description of Property
The Company's executive offices are located at 2319 Foothill Boulevard,
Suite 250, Salt Lake City, Utah 84109. The Company's lease on this space expires
December 31, 2005. The Company and its subsidiaries also lease three offices in
Almaty and one office in Aktau, Kazakhstan. The terms of these leases range from
one year to month-to-month. The Company pays approximately $28,730 per month for
these offices.
The Company also leases four apartments in Aktau and one in Almaty for
use by Company employees. The apartments are all leased on a month-to-month
basis. The Company pays approximately $3,145 per month for these four
apartments.
The Company, through Bauta, owns the water desalinization plant. The
Bauta facility, located in Bautino, Kazakhstan consists of production and
administrative buildings, two 500 meter capacity desalinization units, f38
iltration systems, bulk storage tanks, production lines, packaging equipment and
warehouse space.
Through its 50% equity investee, "LLC Bautino Development Company", the
Company owns a 96 room seaside hotel in the Port of Bautino, Kazakhstan.
Market Price of and Dividends on Our Common Equity and Other Shareholder Matters
The Company's shares are currently traded on the Over-the-Counter
Bulletin Board ("OTCBB") under the symbol EPSC. As of April 4, 2005, the Company
had approximately 97 shareholders holding 38,858,446 common shares. Of the
issued and outstanding common stock, approximately 10,698,831 are free trading,
the balance are "restricted securities" as that term is defined in Rule 144
promulgated by the Securities and Exchange Commission.
The published bid and ask quotations from January 1, 2003 through
December 31, 2004, are included in the chart below. These quotations represent
prices between dealers and do not include retail markup, markdown or
commissions. In addition, these quotations do not represent actual transactions.
25
Bid Ask
High Low High Low
---- --- ---- ---
2004
- ----
Jan. 1 thru Mar. 31 $5.50 $2.50 $7.00 $3.50
Apr. 1 thru June 30 4.00 2.50 5.00 3.75
July 1 thru Sep. 30 3.20 2.00 4.45 3.00
Oct. 1 thru Dec. 31 3.75 2.25 4.45 3.50
2003
- ----
Jan. 1 thru Mar. 31 3.50 0.30 4.00 0.60
Apr. 1 thru June 30 5.00 2.25 5.50 3.25
July 1 thru Sep. 30 2.25 0.15 5.00 3.10
Oct. 1 thru Dec. 31 3.00 1.25 4.00 3.00
The above information was obtained from Pink Sheets LLC, 304 Hudson
Street, 2nd Floor, New York, New York 10013.
Dividends
The Company has not paid, nor declared, any dividends since its
inception and does not intend to declare any such dividends in the foreseeable
future. The Company's ability to pay dividends is subject to limitations imposed
by Nevada law. Under Nevada law, dividends may be paid to the extent that the
corporation's assets exceed it liabilities and it is able to pay its debts as
they become due in the usual course of business.
Securities Authorized for Issuance Under Equity Compensation Plans
- ------------------------- --------------------------- --------------------------- ------------------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for future
exercise of outstanding issuance under equity
outstanding options, options, warrants compensation plans
warrants and rights and rights (excluding securities reflected
in columns (a))
(a) (b) (c)
- ------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation
plans approved by
Security holders 200,000 3.00 800,000
- ------------------------- --------------------------- --------------------------- ------------------------------------
Equity compensation
plans not approved by
security holders -0- -0- -0-
- ------------------------- --------------------------- --------------------------- ------------------------------------
Total 200,000 3.00 800,000
- ------------------------- --------------------------- --------------------------- ------------------------------------
26
The Board of Directors adopted and the Company's shareholders approved
the EMPS Corporation 2002 Stock Option Plan (the "Plan") allowing it to offer
key employees, officers, directors, consultants and advisors, an opportunity to
acquire a proprietary interest in the Company. The various types of incentive
awards which may be provided under the Stock Option Plan will enable the Company
to respond to changes in compensation practices, tax laws, accounting
regulations and the size and diversity of its business. On December 31, 2004,
the Company granted options to purchase 100,000 shares each to two employees of
the Company. The options have an exercise price of $3.00 per share. Fifty
percent of the option granted to one employee vested on January 1, 2005. An
additional 25% will vest on October 1, 2006, and the remaining 25% will vest on
October 1, 2007. This option expires on September 30, 2009. Twenty five percent
of the option granted to the second employee vested on January 1, 2005, with the
remaining 75% vesting at a rate of 25% per year on October 1, 2005, October 1,
2006 and October 1, 2007. This option expires on September 30, 2010.
Subsequent to year end, in March 2005, in connection with the private
placement of its common stock, the Company granted a warrant to purchase up to
765,845 shares of restricted Company common stock to the placement agent. The
exercise price of the warrant is $3.00. The warrant is immediately exercisable
and will expire on September 15, 2006.
Management's Discussion and Analysis
All dollar amounts stated in this Item 6 are presented in thousands,
unless stated otherwise.
2004 Summary
The Company experienced a 23% decline in revenue from vessel operations
and realized a loss of $1,618 for the year ended December 31, 2004, compared to
net income of $362 for the year ended December 31, 2003. This reduction in
revenue and corresponding net loss was the result of several factors. One of our
chartered vessels, the Caspian Dinara, had to be placed in dry dock for several
months of the work season to undergo unexpected repairs. More significantly, due
to a dispute between one of the Company's largest customer and the government
during 2003, the customer significantly reduced its exploration and production
budget in the region for 2004. As a result, demand for vessels in the region was
significantly reduced. For most of the 2004 work season the Company's two supply
vessels were unchartered and inactive. Even though the vessels were unchartered
and inactive, the Company continued to incur significant costs associated with
these vessels, without receiving revenue. During 2004 the customer and the
government resolved the dispute and the Company expects the customer's budget,
and correspondingly, demand for vessels to return to more traditional levels in
2005.
In 2004 we acquired 100% of TatArka and a 50% non-controlling equity
interest in KMG. Through these entities, we can now provide onshore, transition
zone and marine seismic data acquisition and processing services to oil and gas
27
exploration companies in Kazakhstan and the north Caspian Sea. During the year,
revenue from the geophysical services provided by TatArka was $6,161 and we
enjoyed income from geophysical services of $1,700 for the year.
The Company's water desalinization plant continued to underperform in
2004, although the Company is encouraged by improvements made at the plant
during the year. During 2004, revenue increased and costs decreased. This
resulted in a net loss for water sales in 2004 of $25, compared to a net loss of
$184 during 2003. The Company hopes that through its continued efforts, the
water desalinization plant can become profitable in 2005.
Phase I of the Company's joint venture seaside hotel enjoyed 100%
occupancy for the year. Also during the year, construction of Phase II, an
additional 48 rooms, of the hotel was undertaken and completed in February 2005.
The Company hopes Phase II will enjoy similar occupancy rates as Phase I.
Looking forward to 2005, the Company expects that construction of its
fast crew boat will be completed and the vessel will be mobilized by August
2005. In connection with its letters of intent with Siapem SpA, the Company will
add four additional vessels to its fleet by November, including two newly
commissioned two multi-craft shallow draft work boats with anchor handling
capacity. Based on contracts currently in place and scheduled to be completed in
2005, the Company anticipates revenue from geophysical services to increase
significantly in 2005. Continued emphasis will also be placed on developing
oilfield infrastructure projects in and around the Kazakhstan port of Bautino.
In 2004, the Company operated four business segments: Vessel
Operations, Geophysical Services, Water Desalinization and Corporate
Administration. The following discussion and analysis of results of operations
should be read in conjunction with the Consolidated Financial Statements.
(Stated in thousands)
- --------------------------------------------------------------------------------
2004 2003 % Change
---- ---- --------
VESSEL OPERATIONS
Operating Revenue $ 7,441 $ 9,701 (23%)
Pretax Operating Income/(Loss)(1) $ (1,618) $ 1,961 (183%)
GEOPHYSICAL SERVICES
Operating Revenue $ 6,161 $ - n/a
Pretax Operating Income/(Loss)(1) $ 2,240 $ - n/a
WATER DESALINIZATION
Operating Revenue $ 960 $ 833 15%
Pretax Operating Income/(Loss)(1) $ (45) $ (327) 86%
CORPORATE ADMINISTRATION
Operating Revenue $ - $ - n/a
Pretax Operating Income/(Loss)(1) $ (252) $ (370) 47%
- --------
(1) Pretax segment income represents income before taxes and minority interest.
28
Revenue
Total revenue for the year ended December 31, 2004, was $14,562
compared to $10,534 for the year ended December 31, 2003, an increase of 38%.
This increase in total revenue was largely the result of the Company's
acquisitions of TatArka and the revenue realized from Geophysical Services
during 2004, partially offset by a decrease in revenue from Vessel Operations.
Total operating expenses increased by $5,140 or 62% to $13,487 for the 2004
fiscal year, compared to the 2003 fiscal year. This increase in operating
expenses is likewise attributable to the acquisition of TatArka as the Company
realized $2,661 in Geophysical costs of revenues, which it did not realize in
2003, and a $1,556 or 77% increase in general and administrative expenses, much
of which is attributable to TatArka's operations. Income from operations for the
2004 fiscal year was $1,075, compared to $2,187 for the 2003 fiscal year, a 51%
decrease in income from operations. Net loss for fiscal 2004 was $195 compared
to a net loss of $192 in fiscal 2003, as other expenses and provision for income
taxes were lower in fiscal 2004.
Vessel revenue of $7,441 in fiscal 2004 was 23% lower compared to
fiscal 2003. Vessel revenue less vessel operating costs in fiscal 2004 was
$1,574 compared to $4,582 during fiscal 2003.
In fiscal 2004, Geophysical service revenue was $6,161, with revenues
less Geophysical costs of revenue totaling $3,500. As the Company was not
engaged in the geophysical services industry prior to its acquisition of
TatArka, LLP, and Kazmorgeophysica, CJSC, on May 26, 2004, the Company has no
comparable prior year period against which to compare revenue and income from
operations.
Water Desalinization revenue in fiscal 2004 of $960 increased 15%
year-on-year. Revenue from Product sales less cost of product sold in fiscal
2004 was $633 compared to $415 during fiscal 2003.
The corporate administration segment of the Company's business refers
primarily to the administration of our affairs in the United States and includes
marketing services provided by that segment to the other segments of the
Company's operations. Corporate Administration generated a pretax operating loss
of $252 during the year ended December 31, 2004 compared to a pretax operating
loss of $370 during the year ended December 31, 2003.
29
Vessel Operations
As discussed herein, the decrease in revenue from vessel operations
during the 2004 fiscal year was largely attributable to a reduction in demand
for vessels resulting from a dispute between the Company's largest customer and
the government, and unexpected repairs to a chartered vessel during several
months of the 2004 work season. The increase in vessel operating costs was
largely the result of the Company having more vessels in its fleet during fiscal
2004 compared to fiscal 2003. Vessel revenues are affected by utilization and
day rates. As a result, even though the Company had a larger fleet during the
year ended December 31, 2004, the Company had fewer vessels earning revenue,
while continuing to incur costs during fiscal 2004 as compared to fiscal 2003.
As the exploration and production season in the north Caspian Sea,
where we operate, typically ends in October or November and does not commence
again until March or April, we anticipate that revenue and operating income from
vessel operations will be typically low during the first quarter of 2005. Based
on current negotiations, charters in place and anticipated increased exploration
and production activities in the Caspian Sea in the upcoming year, we expect
revenues and income from operations to increase in 2005 as compared to 2004. As
evidenced by the decrease in our vessel revenues in fiscal 2004 compared to
2003, however, if we are unable to charter all or most of our vessels for the
upcoming 2005 work season, our vessel revenue may continue to be adversely
affected.
Vessel operating costs of $5,867 during the year ended December 31,
2004 were $748 or 15% higher compared to the year ended December 31, 2003. This
increase is primarily the result of the Company having more vessels in its fleet
for the full 2004 fiscal year compared to fiscal 2003, combined with increases
in costs resulting from inflation. We anticipate vessel operating costs will
continue to increase in 2005, with the additions of the Caspian Galiya for the
full 2005 year, the Caspian Raushan, and the vessels needed to fulfill the
Company's letters of intent with Siapem SpA.
Geophysical Services
As discussed above, we began providing geophysical services at the end
of May 2004, when we acquired 100% of TatArka and 50% of Kazmorgeophysica. As a
wholly owned subsidiary, we fully consolidate the operations of TatArka into our
financial results. We account for the operations of Kazmorgeophysica by the
equity method. As a result, we have no comparable prior year revenue and income
from operations with which to compare. TatArka and KMG currently have contracts
in place to supply seismic acquisition services beginning at various times from
March 2005 to August 2005, with scheduled completion dates ranging from November
to December 2005, unless extended. With the anticipated increase in exploration
activities in the Caspian Sea region in 2005, we expect revenue and costs of
providing geophysical services to increase in the 2005 fiscal year. Unlike our
vessel operations, TatArka can provide onshore geophysical research services
throughout the year. Because Kazmorgeophysica provides marine and transition
zone geophysical services, its operations are more seasonal.
30
Water Desalinization
During fiscal 2004, revenue from water desalinization increased 15%
compared to fiscal 2003, and revenue from water sales, less the cost of water
sales increased to $633 in fiscal 2004 compared to $415 in fiscal 2003. These
increases are the result of increased demand for water arising from increased
activity in the port of Bautino, and a conscious effort on the Company's part to
reduce costs and to conduct its water desalinization operations more
efficiently. While the Company hopes to continue to reduce its costs for
producing water, it does not anticipate such significant reductions in future
years. Similarly, as much of the Company's water sales are made to exploration
and production camps operating in the Caspian Sea region, much like its vessel
operations, demand for water is directly affected by oil and gas exploration and
production in the region. With the anticipated increases in exploration and
production activities of Agip KCO in 2005, we anticipate increased revenue and
income from water desalinization in 2005.
Corporate Administration
During the year ended December 31, 2004, net loss from corporate
administration was $252 compared to $370 during the year ended December 31,
2003. This reduction in net loss is the result of corporate administration
decreasing expenses and realizing intersegment revenue for marketing services in
2004. Corporate administration realized no intersegment revenue in 2003 because
it did not provide marketing services in 2003. These intersegment revenues have
been eliminated in consolidation.
Consolidated Results
General and Administrative Expense
General and administrative expense increased by $1,556, or 77%, to
$3,577 for the 2004 fiscal year compared to $2,021 for the 2003 fiscal year. The
primary contributing factors to this increase in general and administrative
expense is the acquisition and consolidation of TatArka's general and
administrative expenses in the amount of $1,118. In addition, the Company
realized the following increases in general and administrative expenses:
Expense Amount of Increase Percentage Increase
------- ------------------ -------------------
Technical and Marketing Fees $241 492%
Audit and Legal Fees $196 180%
Communication Expenses $145 42%
Tax Penalties $137 644%
Custom Charges $117 326%
Rental Expense $ 75 178%
Bank Commissions $ 25 45%
31
These increases in general and administrative expenses were partially offset by
a $141 or 99% decrease in travel expenses, a $106 or 74% decrease in
transportation expenses and a decrease in miscellaneous tax accrual of $75 or
88%.
While we anticipate general and administrative expenses for the
upcoming year will continue to rise as we continue to expand our operations and
as we consolidate the general and administrative expenses of TatArka for the
entire year, we do not expect general and administrative expenses to increase at
such a dramatic rate in the upcoming fiscal year.
Interest Expense
Interest expense increased 30% to $1,275 during 2004, compared to $979
in 2003. The increase in interest expense was primarily due to a draw down of
$1,000 on the Company's loan facility with BankCenterCredit to make scheduled
construction payments on its new fast crew boat, interest on a $4,686 loan from
related parties, including some of the Company's officers and directors and the
consolidation of interest expenses incurred by TatArka. Subsequent to year end,
the Company completed a private placement of its common stock raising in excess
of $21,000. Proceeds from this offering have been used to significantly reduce
the Company's debt load. As a result, the Company expects interest charges to be
significantly lower in 2005.
Cash Flow
Typically, the Company realizes minimal cash flow from vessel
operations during its first fiscal quarter. Due to weather conditions in the
north Caspian Sea where the Company's vessels operate, exploration and
production activities do not begin until late March or early April. The work
season for the Company's vessels typically extends into late October or early
November, again depending upon weather conditions. Therefore, the Company
realizes significant revenues from vessel operations during its second and third
quarters, with decreasing revenues in the fourth quarter.
The following table provides an overview of the Company's cash flow
during fiscal 2004 and 2003.
Fiscal 2004 Fiscal 2003
----------- -----------
Net cash provided by (used in) operating activities $ (1,860) $ 1,746
Net cash used in investing activities (4,715) (1,259)
Net cash provided by (used in) financing activities 6,501 (220)
--------- ---------
Net Change in Cash $ (42) $ 269
========= =========
32
In fiscal 2004, net cash used in operating activities was $1,860,
compared to net cash provided by operating activities of $1,746 in fiscal 2003.
This change in cash flow from operating activities is the result of decreased
revenue from vessel operations in 2004, payment of corporate income tax of
$1,427, prepayment for the construction of the Company's new fast crew boat in
the amount of $1,100, partially offset by the consolidation of TatArka's cash
inflow from operating activities in the amount of $486 and deferral in payment
of the Company's trade liabilities and VAT.
In fiscal 2004 the Company invested $4,005 in the acquisition of
vessels and equipment, compared to $598 in 2003. This increase in cash used in
investing activities was coupled with a $600 decrease in advances on notes
receivable and a $496 decrease in repayments on related party notes in 2004,
compared to 2003. These reductions in cash from investing activities were only
partially offset by cash acquired in the purchase of TatArka of $221 and cash
from the sale of securities of $571 resulting in an increase in net cash used in
investing activities of $3,456 in fiscal 2004 compared to fiscal 2003.
Net cash provided by financing activities in fiscal 2004 was $6,501
compared to net cash used in financing activities of $220 in fiscal 2003. This
change in net cash from financing activities is primarily attributable to
increased borrowing by the Company in 2004. In 2004, the Company borrowed $9,054
from related and unrelated parties, compared to $1,179 in fiscal 2003. Decreased
cash flow from vessel operations, acquisition of additional vessels, machinery
and equipment to support operations, and the obligation to repay certain
short-term debts to related parties necessitate the increased borrowing in 2004
and the corresponding increase in net cash provided by financing activities.
Summary of Material Contractual Commitments
(Stated in thousands)
- ----------------------------------------------------------------------------------------------------
Payment Period
------------------------------------------------------
Contractual Commitments Less than After
Total 1 year 2-3 years 4-5 years 5 years
----- ------ --------- --------- -------
Long-Term Debt(2) $7,823 $3,405 $4,418 $ - $ -
Notes Payable - Related Parties(3) 5,023 5,023 - - -
Operating Leases 435 435 - - -
Vessel Purchases 700 700 - - -
- -------------------
(2) During the first quarter of 2005, the Company repaid $5,043 of these
obligations, leaving a balance due in less than one year of $2,780 and no
balance due in the 2-3 year period.
(3) During the first quarter of 2005, the Company repaid $4,986 of these
obligations, leaving a balance due in less than one year of $37.
33
Financing
During September 2004, Caspian re-financed $4,900 of notes payable with
a bank. The new note bears interest at 14% with interest payments due monthly.
The note requires three monthly principle payments of $175 for October through
December 2004. The note is collateralized by the Baskunchak, the Caspian Maria,
the Caspian Yelena, the Caspian Eva and 5,400 shares of Bauta CJSC. Subsequent
to year end, the note was paid in full.
During July 2004, Caspian entered into a $2,100 credit line with a bank
and drew $1,000 on the line. The credit line bears interest at 14% with interest
payments due monthly. The loan is collateralized by land, a vessel under
construction, and future cash flows under signed vessel operating contracts.
Subsequent to year end, the note was paid in full.
During 2004, Bauta entered into several short term note payable
agreements by borrowing a total of $112. These notes were collateralized by
inventory and bore interest at 18% - 23% interest. By December 31, 2004, $86 had
been repaid leaving a balance due of $26.
During 2004, TatArka entered into a $2,150 credit line with a bank and
immediately drew the full amount available under the line. The credit line bears
interest at 14% with interest payments due monthly. Principle payments begin in
February 2005 and the loan is due in full in July 2005. Subsequent to year end,
approximately $1,000 has been repaid on this loan. The balance is expected to be
repaid during the remaining term of the credit line through periodic payments.
During 2004, Caspian entered into short-term loan agreements from a
group of shareholders and companies related through common management for an
aggregate $4,686 in notes payable. These notes bear interest at nine and ten
percent interest and are due through March 2005. Subsequent to year end these
notes were repaid in full.
During 2004, TatArka entered into a $300 loan agreement with a company
related through common management. The note is due March 2005 with no other
stated repayment terms. Subsequent to year end, this note was repaid in full.
In December 2004, TatArka borrowed $600 by entering into a two year 14%
interest bearing note payable with a bank. The Company immediately loaned this
$600 to an unrelated third party. The loan has no stated interest rate and is
but by December 2007. Interest will be imputed on payments received at a rate of
14%. As of December 31, 2004 no payments had been received on this note.
In March 2005, the Company completed a private placement of 7,658,446
shares of common stock for $3 per share. The Company received $21,827 after
deducting placement agent fees. In connection with the offering, the Company
issued a warrant to purchase 765,845 shares of common stock. The warrant is
exercisable at $3 per share, is exercisable immediately and expires in September
2006. As discussed herein, the Company has used part of the proceeds from the
offering to reduce outstanding debt. The Company plans to use the remaining
funds to reduce additional debt and fund the acquisition of vessels.
34
Off-Balance Sheet Financing Arrangements
As of December 31, 2004 the Company had no off-balance sheet financing
arrangements.
New Accounting Standards
In December 2003, the FASB published a revision to Interpretation 46
(FIN 46R) to clarify certain provisions of FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," and to exempt certain entities
from its requirements. FIN 46R requires a company to consolidate a variable
interest entity (VIE), as defined, when the company will absorb a majority of
the variable interest entity's expected losses, receive a majority of the
variable interest entity's expected residual returns, or both. FIN 46R also
requires consolidation of existing, non-controlled affiliates if the VIE is
unable to finance its operations without investor support, or where the other
investors do not have exposure to the significant risks and rewards of
ownership. FIN 46R applies immediately to a VIE created or acquired after
January 31, 2003. For a VIE acquired before February 1, 2003, FIN 46R applies in
the first interim period ending after March 15, 2004. The company completed its
assessment of the impact of FIN 46R and concluded that the interpretation did
not affect the company's consolidated financial statements.
In December 2004, the FASB issued Statement No. 123 (Revised 2004),
Share-Based Payment ("Statement 123(R)"). Statement 123(R) revises Statement No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) requires the
recognition of the cost of employee services received in exchange for stock
options and awards of equity instruments based on the grant-date fair value of
such options and awards, over the period they vest. Under the options for
adoption available under Statement 123(R), the Company has determined to adopt
Statement 123(R) on the modified-prospective basis beginning on July 1, 2005,
which will result in the recognition of the remaining unamortized grant-date
fair value compensation over the remaining vesting period. The effect of
adopting Statement 123(R) on options outstanding at December 31, 2004 will
result in recognition of $487,169 of additional compensation during the year
ending December 31, 2005.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting
standards generally accepted in the United States requires management to make
estimates and assumptions that affect both the recorded values of assets and
liabilities at the date of the financial statements and the revenues recognized
and expenses incurred during the reporting period. The company's estimates and
assumptions affect its recognition of deferred expenses, bad debts, income
35
taxes, the carrying value of its long-lived assets and its provision for certain
contingencies. The company evaluates the reasonableness of these estimates and
assumptions continually based on a combination of historical information and
other information that comes to its attention that may vary its outlook for the
future. Actual results may differ from these estimates under different
assumptions.
Management suggests that the company's Summary of Significant
Accounting Policies, as described in Note 1 of Notes to Consolidated Financial
Statements, be read in conjunction with this Management's Discussion and
Analysis of Financial Condition and Results of Operations. The company believes
the critical accounting policies that most impact the company's consolidated
financial statements are described below.
Revenue Recognition -- Vessel revenues are derived from time charter
contracts of its vessels on a rate-per-day of service basis; therefore, vessel
revenues are recognized on a daily basis throughout the contract period. These
time charter contracts are generally on a term basis, ranging from three months
to three years. The base rate of hire for a contract is generally a fixed rate,
provided, however, that term contracts often include clauses to recover specific
additional costs, and mobilization and demobilization costs.
Geophysical service 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 than 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.
Product sales revenue is recorded upon delivery or shipment of bulk or
bottled water to the customer.
Receivables-- In the normal course of business, the company extends
credit to its customers on a short-term basis. The company's principal customers
are major oil and natural gas exploration, development and production companies.
Although credit risks associated with our customers are considered minimal, the
company routinely reviews its accounts receivable balances and makes adequate
provisions for doubtful accounts.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
- -- Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
At December 31, 2004, the Company reviewed its long-lived assets as disclosed
above and determined no impairment was necessary.
36
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 consolidated financial
statements.
Drydocking Costs -- Caspian's vessels must be periodically drydocked
and pass certain inspections to maintain their operating classification, as
mandated by certain maritime regulations. Costs incurred to drydock the vessels
for certification are deferred and amortized over the period to the next
certification dry-docking, generally 54 to 60 months. Dry-docking costs are
comprised of painting the vessel hull and sides, recoating cargo and fuel tanks,
and performing other engine and equipment maintenance activities to bring the
vessels into compliance with classification standards.
Effects of Inflation
Day-to-day operating costs are generally affected by inflation.
However, because the energy services industry requires specialized goods and
services, general economic inflationary trends may not affect the Company's
operating costs. The major impact on operating costs is the level of offshore
exploration, development and production spending by energy exploration and
production companies. As spending increases, prices of goods and services used
by the energy industry and the energy services industry will increase. Future
increases in vessel day rates may shield the Company from the inflationary
effects on operating costs.
Financial Statements
See Consolidated Financial Statement listed in the accompanying index
to the Consolidated Financial Statements on Page F-1 herein.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
The Company made no changes in and had no disagreements with its
accountants on accounting and financial disclosure during the 2004 fiscal year.
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION
We file annual and quarterly reports with the Securities and Exchange
Commission. Stockholders may obtain, without charge, a copy of the most recent
Form 10-KSB (without exhibits) by requesting a copy in writing from us at the
following address:
37
EMPS Corporation
2319 Foothill Blvd., Suite 250
Salt Lake City, Utah 84109
The exhibits to the Form 10-KSB are available upon payment of charges
that approximate reproduction costs. If you would like to request documents,
please do so by June ___, 2005, to receive them before the annual meeting of
stockholders.
By order of the Board of Directors,
/s. Mirgali Kunayev
Mirgali Kunayev
Chief Executive Officer
May 11, 2005
STOCKHOLDERS ARE REQUESTED TO MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN
IT IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. YOUR PROMPT RESPONSE WILL
BE HELPFUL, AND YOUR COOPERATION WILL BE APPRECIATED.
38
EMPS CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AND
FINANCIAL STATEMENTS
December 31, 2004 and 2003
EMPS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2003 and 2004 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL Registered with the Public Company
A Professional Corporation Accounting Oversight Board
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750 an independant member of
Salt Lake City, UT 84180-1128 BAKER TILLY
Phone: (801) 532-2200 INTERNATIONAL
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
EMPS Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of EMPS Corporation
and Subsidiaries as of December 31, 2004 and 2003, 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EMPS Corporation and
Subsidiaries as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
/s/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 5, 2005
F-2
EMPS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
December 31, 2004 2003
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 359 $ 401
Trade accounts receivable, net of allowance of $51 and $6 respectively 5,165 1,735
Other receivables 7 -
Advances to related parties, net 7 48
Inventories 286 51
Prepaid expenses and other current assets 1,473 322
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 7,297 2,557
- -------------------------------------------------------------------------------------------------------------
Vessels, equipment and property, net 12,490 8,965
Drydocking costs, net 485 313
Goodwill 264 -
Deferred tax asset 36 -
Investments 2,915 124
Note receivable 600 -
Notes receivable from related parties 1,111 407
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 25,198 $ 12,366
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 4,218 $ 1,816
Income tax payable 647 1,338
Deferred revenue 107 12
Advances from related parties 830 -
Notes payable ' related parties 5,023 842
Current portion of long-term debt 3,405 5,200
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 14,230 9,208
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt - Net of Current Portion 4,418 -
- -------------------------------------------------------------------------------------------------------------
Minority Interest 2,156 1,962
- -------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $0.001 par value, 150,000,000 shares authorized,
31,200,000 and 30,000,000 shares issued and outstanding, respectively 31 30
Additional paid-in capital 4,731 1,456
Accumulated other comprehensive income (loss) 110 (7)
Accumulated deficit (478) (283)
- -------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 4,394 1,196
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 25,198 $ 12,366
=============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
EMPS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
For the Years Ended December 31, 2004 2003
- ------------------------------------------------------------------------------------------------------
Revenues
Vessel revenues $ 7,441 $ 9,701
Geophysical service revenues 6,161 -
Product sales 960 833
- ------------------------------------------------------------------------------------------------------
Total Revenues 14,562 10,534
- ------------------------------------------------------------------------------------------------------
Operating Expenses
Vessel operating costs 5,867 5,119
Geophysical costs of revenues 2,661 -
Cost of product sold 327 418
Depreciation 1,055 789
General and administrative 3,577 2,021
- ------------------------------------------------------------------------------------------------------
Total Operating Expenses 13,487 8,347
- ------------------------------------------------------------------------------------------------------
Income from Operations 1,075 2,187
- ------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (1,275) (979)
Gain on sale of securities 571 -
Exchange gain (loss) 103 (9)
Income from equity method investees 61 28
Other (26) 37
- ------------------------------------------------------------------------------------------------------
Net Other Income (Expense) (566) (923)
- ------------------------------------------------------------------------------------------------------
Net Income Before Income Tax and Minority Interest 509 1,264
Provision for income tax (724) (1,599)
Minority interest 20 143
- ------------------------------------------------------------------------------------------------------
Net Loss $ (195) $ (192)
======================================================================================================
Loss Per Common Share - basic and diluted $ (0.01) $ (0.01)
======================================================================================================
Weighted Average Common Shares
Outstanding - basic and diluted 30,718,033 30,000,000
======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
EMPS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
Accumulated
Common Stock Additional Other Total
------------------------- Paid-in Comprehensive Accumulated Shareholders'
Shares Amount Capital Income (Loss) Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 30,000,000 $ 30 $ 1,450 $ (2) $ (91) $ 1,387
-------------
Net loss for the year ended
December 31, 2003 - - - - (192) (192)
Currency translation adjustment - - - (5) - (5)
-------------
Comprehensive loss - - - - - $ (197)
-------------
Capital contribution from the spin
off of EMPS Research - - 6 - - 6
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 30,000,000 30 1,456 (7) (283) 1,196
==============================================================================================================================
Net loss for the year ended
December 31, 2004 - - - - (195) (195)
Currency translation adjustment - - 117 - 117
-------------
Comprehensive loss - - - - - $ (78)
-------------
Acquisition of 50% interest of
Kazmorgeophysica 1,000,000 1 2,729 - - 2,730
Acquisition of TatArka 200,000 - 546 - - 546
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 31,200,000 $ 31 $ 4,731 $ 110 $ (478) $ 4,394
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
EMPS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands except share and per share data)
For the Years Ended December 31, 2004 2003
- -----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (195) $ (192)
Adjustments to reconcile net loss to net cash
from operating activities:
Loss on disposal of equipment 9 2
Depreciation and amortization 1,139 873
Minority interest (20) (143)
Net income in equity method investees (61) (28)
Gain on sale of securities (571) -
Provision for loss on related party receivables 41 40
Foreign currency exchange (gain) loss (103) 9
Changes in current assets and liabilities:
Trade accounts receivable (3,130) (517)
Trade accounts receivable - related 355 -
Inventories (167) 28
Prepaid expenses and other current assets (1,065) (72)
Accounts payable and accrued expenses 2,825 751
Income tax payable (720) 982
Deferred revenue (197) 13
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,860) 1,746
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash acquired in purchase of Tatarka 221 -
Advances on related party notes receivable (744) (919)
Advances on notes receivable (600) -
Repayments on related party notes receivable 4 500
Other receivables - related 94 -
Payment of drydocking costs (256) (242)
Proceeds from sale of securities 571 -
Purchase of vessels and equipment (4,005) (598)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (4,715) (1,259)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of short-term debt to related parties 5,217 534
Proceeds from issuance of debt 3,837 645
Change in advances to/from related parties 83 (19)
Principal payments on short-term debt to related parties (1,262) (382)
Principal payments on notes payable (1,374) (998)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,501 (220)
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 32 2
- -----------------------------------------------------------------------------------------
Net change in cash (42) 269
Cash at beginning of period 401 132
- -----------------------------------------------------------------------------------------
Cash at end of period $ 359 $ 401
=========================================================================================
(CONTINUED)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
EMPS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands except share and per share data)
For the Years Ended December 31, 2004 2003
- -----------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 851 $ 861
Cash paid for income tax $ 1,427 $ 597
Supplemental disclosure of non-cash investing and
financing information:
Refinance notes payable $ 4,900 $ 3,333
Accrued interest converted to a note payable $ - $ 366
Capital contribution from the spin-off of EMPS Research $ - $ 6
Issuance of stock for investment in TatArka $ 546 $ -
Issuance of stock for investment in Kazmorgeophysica $ 2,730 $ -
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-7
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying consolidated financial
statements include operations and balances of EMPS Corporation and its wholly
owned subsidiaries Caspian Services Group Limited ("Caspian"), and TatArka LLP
("TatArka"), and majority owned subsidiary, CJSC Bauta, and EMPS Research
Corporation, (through the date of its spin-off described hereinafter),
collectively ("EMPS" or the "Company"). EMPS has non-controlling 50% interests
in Bautino Development Company, LLC, and Kazmorgeophysica CJSC ("KMG") for which
it accounts by the equity method. Intercompany balances and transactions have
been eliminated in consolidation. TatArka and KMG were acquired in May 2004 and
explained hereinafter.
Nature of Operations
Vessel Operations -- The Company's vessel operations are carried out by Caspian.
Caspian was incorporated in the British Virgin Islands on December 22, 1999 and
operates an administrative branch in Aktau, Kazakhstan and vessel operations out
of the Port of Bautino, Kazakhstan where its activities consist of the operation
and maintenance of two accommodation/work vessels, two shallow draft landing
vessels, one shallow draft tug/survey/supply vessel, and one shallow draft
multi-purpose utility vessel. The Company also leases and operates a general
purpose, shallow draft survey vessel, (collectively, the "Vessels"). The Vessels
operate under contract in the Kazakh Sector of the North Caspian Sea. Caspian
leases its vessels to providers of engineering, procurement, installation and
commissioning (EPIC) to the transition zone offshore energy support service
companies. The Company's services provided in connection with the leases are as
follows:
. Maintenance and upkeep of the Vessels,
. Staffing of the Vessels with the Company's marine crew,
. Provision of accommodation and meals for customer's and Company's
personnel on the Vessels,
. Laundry and other services
Revenues, net earnings and cash flows from vessel operations are dependent upon
the activity level for the vessel fleet in the Caspian Sea, which is ultimately
dependent upon oil production levels in the area that, in turn, are determined
by the supply/demand relationship for oil.
Geophysical Services Operations -- During 2004, the Company acquired two seismic
companies, TatArka, a wholly owned subsidiary, and KMG, a 50% owned subsidiary
accounted for on the equity method. Both companies provide seismic data
acquisition and interpretation services to oil and gas companies operating both
onshore in Kazakhstan and offshore in the Kazakhstan sector of the North Caspian
Sea and the adjacent transition zone. These acquisitions are further explained
in Note 2. As oil and gas exploration companies often require both onshore and
offshore seismic data acquisition and interpretation services, TatArka and
Kazmorgeophysica often contract with each other to provide services for their
respective customers.
Water Desalination -- In addition to its other activities, the Company, through
its 56% owned subsidiary CJSC Bauta ("Bauta"), operates a desalinization plant
and water bottling operation in the Port of Bautino, on the Caspian Sea. Bauta
supplies water in bottles to consumers, in bulk to local municipal users and to
oil exploration companies and their contractors that require fresh water for
their crews, facilities, and to conduct oilfield operations.
F-8
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
The Company also owns a 50% equity interest in Bautino Development Company LLP
("Bautino"). Bautino's operations consist of the development and operation of a
hotel located at the Port of Bautino. The first phase of the hotel opened for
business near the end of February 2003 and contains 48 rooms. The second phase,
which also contains 48 rooms opened in February 2005. As discussed in Note 6,
the Company is providing a portion of the funding for phase two.
The Company's majority owned U.S. Subsidiary, EMPS Research Corporation was
engaged in furthering development and marketing of patented technology for
commercially separating nonmagnetic particulate material from other materials
without heat or water. On May 23, 2003, the Company's majority common
shareholders approved a spin-off of EMPS Research. The 3,000,000 shares of EMPS
Research were distributed to EMPS shareholders on a pro-rata basis during
August, 2003. At May 23, 2003, EMPS Research had assets of $7 and liabilities of
$13. As net liabilities of EMPS Research were greater than the net assets, the
spin-off was accounted for as the assumption of net liabilities and a $6 capital
contribution by the Company shareholders. The results of operations of EMPS
Research have been included in the Company's consolidated statements of
operations through May 23, 2003, the date of the spin-off for accounting
purposes.
Business Condition -- The Company has an accumulated deficit of $478 and $283 as
of December 31, 2004 and 2003, respectively, and has negative working capital
for both years.
The Company has a net loss of $195 and $192 at December 31, 2004 and 2003,
respectively. The Company's operations used cash of $1,860 at December 31, 2004
and provided cash of $1,746 at December 31, 2003.
During the year ended December 31, 2004, the Company had several vessels
unchartered due to unexpected repairs. These vessels have been repaired and
management expects these vessels to be under charter during the entire 2005 work
season. During January 2005, the Company announced they had entered into letters
of intent to provide five shallow draft vessels in support of offshore pipeline
construction activities ongoing in the Kashagan oilfield in the North Caspian
Sea. One of the vessels will be supplied from the Company's existing fleet. The
remaining four will be new additions to the Company's fleet, either through
acquisition or leasing. At least two of the vessels will be newly commissioned.
All vessels will be mobilized to the Caspian Sea in November 2005 for an initial
contract period of two years.
Between January and March 2005, the Company completed a private placement of its
common stock by issuing 7,658,446 common shares for proceeds, net of offering
costs, of $21,827. The Company plans to use the proceeds to reduce outstanding
debt and to fund the acquisition of the above mentioned vessel acquisitions.
Management believes these new contracts and the additional capital received from
the issuance of common stock will be sufficient to enable the Company to
continue its operations as a going concern; however, there is no assurance that
management's plans will be fulfilled or that profitable operations will be
obtained.
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
F-9
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Minority Interest -- Minority interest presented on the balance sheet refers to
the minority shareholder's investment in the voting stock of Bauta. In the
statement of operations, consolidated net income is increased by the minority
shareholder's proportionate share of losses.
Inventories -- Inventory consists of bulk and bottled water related to the Bauta
desalinization plant, fuel, spare parts and supplies related to the geophysical
operations of TatArka. Inventories are stated at the lower of cost or market,
cost being determined by an average cost method, which approximates the
first-in, first-out (FIFO) method.
Vessels, Equipment and Property -- Vessels, property and equipment are stated at
cost less accumulated depreciation. At the time property is disposed of, the
assets and related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is charged to other income. Major renewals and
betterments that extend the life of the property and equipment are capitalized.
Maintenance and repairs are expensed as incurred except for drydocking
expenditures, which are capitalized and amortized.
Depreciation of property and equipment is calculated by using the straight-line
method based on the following estimated useful lives:
Years
-----
Vessels 10 - 12
Machinery and equipment 2 - 20
Office equipment and furniture 2 - 3
Depreciation expense was $1,055 and $789 for the years ended December 31, 2004
and 2003, respectively.
Drydocking Costs -- Caspian's vessels must be periodically drydocked and pass
certain inspections to maintain their operating classification, as mandated by
certain maritime regulations. Costs incurred to drydock the vessels for
certification are deferred and amortized over the period to the next
certification drydocking, generally 54 to 60 months. Drydocking costs are
comprised of painting the vessel hull and sides, recoating cargo and fuel tanks,
and performing other engine and equipment maintenance activities to bring the
vessels into compliance with classification standards.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of --
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
At December 31, 2004, the Company reviewed its long-lived assets as disclosed
above and determined no impairment was necessary.
Revenue Recognition -- Vessel revenues are derived from time charter contracts
of its vessels on a rate-per-day of service basis; therefore, vessel revenues
are recognized on a daily basis throughout the contract period. These time
F-10
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
charter contracts are generally on a term basis, ranging from three months to
three years. The base rate of hire for a contract is generally a fixed rate,
provided, however, that term contracts often include clauses to recover specific
additional costs, and mobilization and demobilization costs.
Geophysical service 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 than 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.
Product sales revenue is recorded upon delivery or shipment of bulk or bottled
water to the customer.
Operating Costs -- Vessel operating costs are incurred on a daily basis and
consist primarily of costs such as crew wages, repair and maintenance,
insurance, fuel, lube oil and supplies, and other vessel expenses such as crew
personnel training costs. Vessel operating costs are recognized as incurred on a
daily basis.
Foreign Currency Transactions -- Caspian makes its principal investing and
financing transactions in United States dollars and the United States dollar is
therefore its functional currency. Transactions and balances denominated in
other currencies have been translated into United States dollars using
historical exchange rates. Exchange gains and losses from holding foreign
currencies and having liabilities payable in foreign currencies are included in
the results of operations. The Kazakh Tenge is Bauta's and TatArka's functional
currency. The effect of changes in exchange rates with respect to Bauta is
recognized as a separate component of accumulated other comprehensive income.
The translation of Kazakh Tenge denominated assets and liabilities into United
States dollars for the purpose of these consolidated financial statements does
not necessarily mean that the Company could realize or settle, in United States
dollars, the reported values of these assets and liabilities. Likewise it does
not mean that the Company could return or distribute the reported United States
dollar value of its Kazakh subsidiaries capital to its shareholders.
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 consolidated financial
statements.
Comprehensive Income -- The Company uses SFAS No. 130, "Reporting Comprehensive
Income," which requires the reporting and display of total comprehensive income
and its components in the financial statements. Total comprehensive income
represents the net change in shareholders' equity during a period from sources
other than transactions with shareholders. For the Company, accumulated other
comprehensive income is comprised of accumulated foreign currency translation
adjustments.
F-11
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
Loss Per Common Share - Basic and Diluted -- Basic loss per share is computed on
the basis of the weighted-average number of common shares outstanding during the
year. Diluted loss per share is computed on the basis of the weighted-average
number of common shares and all dilutive potentially issuable common shares
outstanding during the year.
As of December 31, 2004, there were 200,000 options outstanding that were not
included in the computation of diluted loss per common share as their effect
would have been anti-dilutive, thereby decreasing the net loss per common share.
There were no potentially issuable common shares outstanding at December 31,
2003.
Stock Option Plan -- The Company accounts for stock options issued to directors,
officers and employees under Accounting Principles Board Opinion No. 25 and
related interpretations ("APB 25"). The Company accounts for options and
warrants issued to non-employees at their fair value in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As all options were
issued at December 31, 2004, the Company recognized no compensation expense
under APB 25 or SFAS 123.
Concentrations of Credit Risk -- The Caspian Sea offshore operations are
contracted primarily with Agip KCO and service providers to Agip KCO. Loss of
these customers could have a material negative effect on the Company. Vessel
charter services provided to these customers were under contract with varying
terms and dates during 2004. However, it is possible that a loss of business
could occur in the short or long term. While Management expects to renew the
contracts periodically, there is no assurance that these customers will renew,
or will renew on terms favorable to the Company.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade and other receivables. The Company
manages its exposure to risk through ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains an allowance
for doubtful accounts for potential losses and does not believe it is generally
exposed to concentrations of credit risk that are likely to have a material
adverse impact on the Company's financial position or results of operations.
New Accounting Standards - In December 2003, the FASB published a revision to
Interpretation 46 (FIN 46R) to clarify certain provisions of FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities," and to exempt certain
entities from its requirements. FIN 46R requires a company to consolidate a
variable interest entity (VIE), as defined, when the company will absorb a
majority of the variable interest entity's expected losses, receive a majority
of the variable interest entity's expected residual returns, or both. FIN 46R
also requires consolidation of existing, non-controlled affiliates if the VIE is
unable to finance its operations without investor support, or where the other
investors do not have exposure to the significant risks and rewards of
ownership. FIN 46R applies immediately to a VIE created or acquired after
January 31, 2003. For a VIE acquired before February 1, 2003, FIN 46R applies in
the first interim period ending after March 15, 2004. The company completed its
assessment of the impact of FIN 46R and concluded that the interpretation did
not affect the company's consolidated financial statements.
In December 2004, the FASB issued Statement No. 123 (Revised 2004), Share-Based
Payment ("Statement 123(R)"). Statement 123(R) revises Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) requires the
recognition of the cost of employee services received in exchange for stock
F-12
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
options and awards of equity instruments based on the grant-date fair value of
such options and awards, over the period they vest. Under the options for
adoption available under Statement 123(R), the Company has determined to adopt
Statement 123(R) on the modified-prospective basis beginning on July 1, 2005,
which will result in the recognition of the remaining unamortized grant-date
fair value compensation over the remaining vesting period. The effect of
adopting Statement 123(R) on options outstanding at December 31, 2004 will
result in recognition of $487,169 of additional compensation during the year
ending December 31, 2005.
Reclassifications -- Certain reclassifications have been made in the 2003
financial statements to conform to the 2004 presentation. The reclassifications
had no effect on net income.
NOTE 2 - ACQUISITION OF TATARKA AND KAZMORGEOPHYSICA
On May 26, 2004, EMPS finalized its acquisition of all of the membership
interests of TatArka LLP ("TatArka") and 50% of the outstanding common stock of
Kazmorgeophysica CJSC ("KMG") in exchange for total consideration of $3,276
which consisted of EMPS issuing 200,000 shares of common stock in exchange for
all of the membership interests in TatArka and 1,000,000 shares of common stock
in exchange for 50% of the outstanding common stock of KMG. The consideration
given and the purchase price were recorded at the estimated fair value of the
stock issued, or $3,276. The remaining 50% of the outstanding common stock of
KMG not purchased by EMPS was held by the Chairman and CEO of EMPS before and
after the acquisition. Of the TatArka interests purchased, 50% was purchased
from a company controlled by the Company's CEO, who is a non-controlling
shareholder of the Company.
TatArka was formed as a limited liability partnership under the laws of
Kazakhstan on July 17, 2001 to provide seismic data acquisition services to
onshore oil and gas exploration companies operating in the Republic of
Kazakhstan. Most of TatArka's customers are foreign oil and gas corporations
operating in Kazakhstan.
Kazmorgeophysica was organized under the laws of Kazakhstan on February 12, 2002
to provide seismic data acquisition services to offshore oil and gas exploration
companies operating in the Kazakhstan sector of the North Caspian Sea and the
adjacent transition zone. The Company also provides seismic data interpretation
through its joint venture data processing center with PGS Onshore, Inc. (Texas).
Most of KMG's customers are Kazakh oil and gas corporations operating in
Kazakhstan.
As oil and gas exploration companies often require both onshore and offshore
seismic data acquisition and interpretation services, TatArka and
Kazmorgeophysica often contract with each other to provide services for their
respective customers.
The Company acquired TatArka and the investment in Kazmorgeophysica in an effort
to enhance the services offered to the oil and gas exploration and development
industry operating in the Kazakh Sector of the North Caspian Sea.
The purchase price for the acquisitions of TatArka and stock interest in KMG was
$546 and $2,730, respectively, or $2.73 per share. EMPS estimated the value of
the 1,200,000 shares of common stock issued based on the quoted market price of
the EMPS common stock on May 26, 2004, adjusted for the effects of quantities
traded, and price fluctuations between the acquisition date and the prices
through July 2004, through which an active market in EMPS stock was established.
F-13
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
EMPS allocated the $546 purchase price related to the 200,000 shares issued for
TatArka to the assets acquired and liabilities assumed on May 26, 2004, based on
their estimated fair values. The $250 excess of the purchase price over the fair
value of the assets acquired and liabilities assumed was recognized as goodwill.
The TatArka assets acquired and liabilities assumed were as follows:
------------------------------------------------------
Assets Acquired
Current assets $ 617
Receivables from related parties 459
Property and equipment 214
Goodwill 250
------------------------------------------------------
Total Assets Acquired 1,540
------------------------------------------------------
Liabilities Assumed
Current liabilities 762
Deferred revenue 232
------------------------------------------------------
Total Liabilities Assumed 994
------------------------------------------------------
Net Assets Acquired $ 546
======================================================
The purchase price of $2,730 for 50% of the KMG common stock was accounted for
in accordance with APB 18, The Equity Method of Accounting for Investments in
Common Stock, and the difference between the cost of the investment and the
amount of underlying equity in net assets of KMG was accounted for as if KMG
were a consolidated subsidiary, and therefore EMPS recognized equity method
goodwill of $2,654.
The following pro forma operating information for the years ended December 31,
2004 and 2003 have been prepared to present the effects of the acquisitions as
though the acquisitions had occurred on January 1, 2004 and 2003, respectively.
The pro forma financial information is illustrative of the effects of the
acquisitions and does not necessarily reflect results of operations that would
have resulted had the acquisitions actually occurred at those dates. In
addition, the pro forma financial information is not necessarily indicative of
the results that may be expected for the year ending December 31, 2004, or any
other period.
For year ended December, 31 2004 2003
- ------------------------------------------------------------------------------
Revenue $ 14,634 $ 15,089
Net Income (Loss) $ (362) $ 2
Net Income (Loss) Per Common Share $ (0.01) $ -
- ------------------------------------------------------------------------------
NOTE 3 - TRADE ACCOUNTS RECEIVABLE
The Company believes accounts receivable for vessel charters are fully
collectable within one year, and no allowance for doubtful accounts was deemed
F-14
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
necessary at December 31, 2004 or 2003. Receivables from vessel charter revenues
are approximately $2,040 and $1,648 at December 31, 2004 and 2003, respectively.
Accounts receivable from geophysical services arise principally from contracts
to gather seismic data for future geophysical processing and analysis. The
receivables are current and collectable in 45 days from date of invoice. At
December 31, 2004, receivables related to geophysical services totaled $3,056.
The Company provided an allowance for doubtful accounts for these receivables of
$39.
At December 31, 2004 and 2003, receivables related to desalinization operations
totaled $120 and $92 respectively. The Company provided an allowance for
doubtful accounts for these receivables of $12 and $6 for the years ended
December 31, 2004 and 2003, respectively.
NOTE 4 - VESSELS, EQUIPMENT AND PROPERTY
Vessels, equipment and property consisted of the following:
December 31, 2004 2003
- -------------------------------------------------------------------------------
Marine vessels $ 8,275 $ 7,382
Machinery and equipment 6,109 2,761
Office equipment and furniture 312 103
Land 761 589
- -------------------------------------------------------------------------------
15,457 10,835
Accumulated depreciation (2,967) (1,870)
- -------------------------------------------------------------------------------
Vessels, Equipment and Property, net $ 12,490 $ 8,965
===============================================================================
Vessels -- In February 2004, Caspian entered into an agreement for the
construction and purchase of a high speed aluminum crew boat. The boat is 33
meters long and capable of transporting up to 70 passengers and 35 tons of cargo
at speeds up to 25 knots. The vessel will be used to ferry oilfield workers
between offshore installations and land bases. The vessel will also be equipped
as an emergency response craft with a fire pump and monitor. The Company has
paid $1,100 towards the contract price of $1,800 with the remainder due at
various progress points. The vessel is tentatively scheduled for mobilization to
the Caspian Sea at the end of the 2005 work season.
During June, 2004, the Company entered into an agreement for the purchase of a
used 45 meter shallow draft multi-purpose utility vessel for $575. The Company
paid an additional $313 for shipping and repairs. The vessel has accommodation
facilities for up to 20 client passengers and a back deck area of 170 square
meters for the deployment of survey equipment and is equipped with electric bow
thrusters, making it a highly maneuverable vessel. The Company took possession
of the vessel on July 7, 2004 and re-named it the Caspian Galiya. The Caspian
Galiya became available for charter from September 30, 2004 through the end of
the operating season.
In February 2003, the Company acquired a shallow draft accommodation/work
vessel, the "Caspian Dinara", specially modified to operate in the shallow
waters of the Caspian Sea, valued at $423 by paying cash of $423. The vessel was
built in 1977 and converted in 1995 to have accommodation facilities for up to
61 client personnel and 16 crew. The "Caspian Dinara" is currently under
contract through November 2006 with a one-year extension option.
F-15
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
Current contract periods and extension provisions for all vessels are as
follows:
Vessel Contract Expiration Extension Option
- -----------------------------------------------------------------------------
Baskunchak November 2006 1-year
Caspian Dinara November 2006 1-year
Caspian Eva October 2005 -
Caspian Galiya - -
Caspian Maria October 2005 -
Caspian Yelena - -
Coastal Bigfoot - -
=============================================================================
The Company is currently in process of negotiating and renewing all contracts
that expired in 2004.
Geophysical Equipment -- The Company's geophysical equipment primarily includes
technical equipment and heavy equipment used for collecting seismic data in
remote potential oil and gas field locations.
Desalinization Plant -- The desalinization operations are located in Bautino and
consist of production and administrative buildings, two 500 meter capacity
desalinization units, filtration systems, bulk storage tank, production lines,
packaging equipment, warehouse space and various other production and
administrative equipment, furniture and fixtures.
NOTE 5 - NOTES RECEIVABLE
In December 2004, TatArka borrowed $600 by entering into a two year 14% interest
bearing note payable with a bank. The Company immediately loaned this $600 to an
unrelated third party. The loan has no stated interest rate and is due by
December 2007. Interest will be imputed on payments received at a rate of 14%.
As of December 31, 2004 no payments had been received on this note.
NOTE 6 - NOTES RECEIVABLE FROM RELATED PARTIES
In December 2003, the Company entered into an agreement with Bautino to provide
$1,100 funding to build, furnish and equip the phase two addition to the hotel.
Through December 31, 2003, the Company advanced $400 in accordance with the
agreement and through December 31, 2004, the full $1,100 had been advanced.
Interest began accruing on January 1, 2005 at the rate of 6% and will be
received quarterly until the principal has been received in full. The terms
provide for Bautino to repay the principal loaned in semi-annual installments of
$138 plus interest beginning June 15, 2005 and through December 15, 2008.
Construction of phase two was completed and opened in February 2005.
On September 10, 2003 the Company advanced $500 to BMB Holding, Inc., a Delaware
corporation related through a Company officer and director. By December 31,
2003, this note had been collected in full. The note carried an interest rate of
16.5% and was collateralized by an option to purchase BMB Holding, Inc. common
stock at 95% of its market value in exchange of the amount due to the Company on
the maturity date. As additional compensation for providing the loan, the
Company received 10 shares of BMB Holding, Inc. common stock, totaling a one
percent equity interest in BMB, and recorded the investment at $0. During August
2004, the Company sold the equity investment for proceeds of $571 and recognized
a gain on the sale of $571.
F-16
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
At December 31, 2004 and 2003, $11 and $7 in loans to employees were included in
notes receivable from related parties.
NOTE 7 - LONG-TERM DEBT
During September 2004, Caspian re-financed $4,900 of notes payable with a bank.
The new note bears interest at 14% with interest payments due monthly. The note
requires three monthly principle payments of $175 for October through December
2004. The note is collateralized by the Baskunchak, the Caspian Maria, the
Caspian Yelena, the Caspian Eva and 5,400 shares of Bauta CJSC. Subsequent to
year end, the note was paid in full.
During 2004, TatArka entered into a line availability agreement with a local
bank for up to $600, and immediately borrowed $600. The line is collateralized
by equipment and bears interest at 14%. The funds drawn are due by December
2006.
Long-term debt consists of the following:
December 31, 2004 2003
- -------------------------------------------------------------------------------
Notes payable to a bank bearing interest at 14%;
due August 2007; paid in full - March 2005 $ 4,043 $ 5,200
Note payable to a bank bearing interest at 14%;
colateralized by land and vessel under construction
paid in full - March 2005 1,000 -
Bank credit line bearing interest at 21%
due June 2005; secured by inventory 26 -
Bank credit line bearing interest at 14%; due July 2005;
secured by equipment and future cash flows 2,150 -
Bank credit line bearing interest at 14%
due by December 2006; secured by equipment 600 -
Notes payable to employees bearing interest
at 0%; no set payments required; due on
demand; unsecured 4 -
- -------------------------------------------------------------------------------
Total Long-term Debt 7,823 5,200
Less: Current Portion 3,405 5,200
- -------------------------------------------------------------------------------
Long-term Debt - Net of Current Portion $ 4,418 $ -
===============================================================================
NOTE 8 - NOTES PAYABLE - RELATED PARTIES
During 2004, Caspian entered into short-term loan agreements with a group of
shareholders and companies related through common management for an aggregate
$4,686 in notes payable. These notes bear interest at nine and ten percent
interest and are due through March 2005. Subsequent to year end these notes were
paid in full.
F-17
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
Notes payable to related parties consist of the following:
December 31, 2004 2003
- --------------------------------------------------------------------------------
Note payable to a company related through common
management bearing interest at 0%; no set payments
required; due upon demand; unsecured. $ - $ 250
Notes payable to a stockholder bearing interest at
10%; no set payments required; due upon demand;
unsecured; paid in full - March 2005 249 592
Notes payable to shareholders bearing interest at 9% and 10%
unsecured; paid in full - March 2005 4,437 -
Notes payable to a company related through
common management, bearing interest at 0%; unsecured
paid in full - March 2005 300 -
Note payable to a company related through common
management bearing interest at 0%; no set payments
required; due upon demand; unsecured 37 -
- --------------------------------------------------------------------------------
Total Notes Payable - Related Parties $ 5,023 $ 842
================================================================================
NOTE 9 - STOCK OPTIONS
On December 31, 2004, the Company granted 200,000 options to key employees to
purchase shares of common stock with an exercise price of $3.00 per share. The
market value of the common stock on the date of grant was $3.50. On January 1,
2005, 75,000 of these options were fully vested with an additional 50,000
options vesting on October 1, 2005 and 2006, respectively. The final 25,000
options vest on October 1, 2007.
A summary of the stock options issued under the Company's Plan is as follows:
Weighted-Average
Fixed options Shares Exercise Price
- ---------------------------------------------------------------------------
Outstanding at December 31, 2003 - $ -
Granted 200,000 3.00
- ---------------------------------------------------------------------------
Outstanding at December 31, 2004 200,000 3.00
===========================================================================
F-18
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
The following table summarizes information about fixed stock options under the
Plan outstanding at December 31, 2004:
Weighted-
Options Average Number
Outstanding at Remaining Weighted- Exerciseable at
December 31, Contractual Average Exercise December 31,
Exercise Price 2004 Life Price 2004
- --------------------------------------------------------------------------------
$ 3.00 200,000 4.75 $ 3.00 -
NOTE 10 - 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.
Earnings and losses before income taxes derived from United States and
international operations are as follows:
For the years ended December 31, 2004 2003
- ----------------------------------------------------------------------------
United States $ (67) $ (371)
Kazakhstan 902 1,635
- ----------------------------------------------------------------------------
$ 835 $ 1,264
- ----------------------------------------------------------------------------
Deferred tax assets and liabilities are as follows:
December 31, 2004 2003
- ----------------------------------------------------------------------------
Tax loss carry forwards $ 736 $ 519
Property and equipment 434 415
Provision for doubtful accounts and obsolete inventory - 32
Valuation allowance (1,134) (966)
- ----------------------------------------------------------------------------
Net deferred tax asset $ 36 $ -
- ----------------------------------------------------------------------------
F-19
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
The following is a reconciliation of the amount of tax that would result from
applying the federal rate to pretax income with the provision for income taxes:
For the years ended December 31, 2004 2003
- ----------------------------------------------------------------------------
Tax at US Federal statutory rate (34%) $ 284 $ 430
Non-deductible expenses 329 1,137
Deferred tax asset valuation change 167 77
Effect of lower foreign tax rates (56) (45)
- ----------------------------------------------------------------------------
Income tax provision $ 724 $ 1,599
- ----------------------------------------------------------------------------
As of December 31, 2004, EMPS has loss carry forwards of approximately $149 and
$587 in the United States and Kazakhstan, respectively. Tax loss carry forwards
available in the United States begin to expire in 2022, and tax loss carry
forwards available in Kazakhstan begin to expire in 2005.
NOTE 11 - EQUITY METHOD INVESTMENTS
The Company accounts for its 50% non-controlling equity investments in Bautino
and KMG under the equity method of accounting. The Company's investment in
Bautino was reduced from its original investment of $96 to zero from recognition
of its share of the Bautino operating losses. Summarized financial information
of Bautino and KMG for the years ended December 31, 2004 and 2003 are as
follows:
Bautino KMG
--------------------------- --------------
For year ended December, 31 2004 2003 2004
- -----------------------------------------------------------------------
Total Assets 6,857 4,559 2,519
Total Liabilities 6,124 3,892 1,971
Net Income (Loss) (333) 55 369
NOTE 12 - OPERATING LEASES
The Company maintains its corporate offices in Salt Lake City, Utah, and
administrative offices in Almaty and Aktau, Kazakhstan. The Company also leases
apartments in Almaty and Aktau for use by employees. The corporate office lease
expires in December 2005, while the offices and apartments in Kazakhstan expire
by April 2005 and are expected to be renewed. Rent expense for the years ended
December 31, 2004 and 2003 was $203 and $97, respectively.
The future minimum rental payments required under these operating leases for
2005 are $435.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
On May 26, 2004, the Company issued 1,200,000 shares of common stock valued at
$3,276 for a 100% interest in TatArka and a 50% interest in Kazmorgeophyzika.
On May 23, 2003, the Company spun-off its formerly majority owned subsidiary
EMPS Research Corporation. As net liabilities of EMPS Research were greater than
F-20
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
the net assets, the spin-off was accounted for as the assumption of net
liabilities and a $6 capital contribution by the Company shareholders.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Charter Contracts -- The Company is committed to make the Vessels available in
accordance with the Vessel Charter Contracts.
Economic Environment -- In recent years, Kazakhstan has undergone substantial
political and economic change. As an emerging market, Kazakhstan does not
possess a well-developed business infrastructure, which generally exists in a
more mature free market economy. As a result, operations carried out in
Kazakhstan can involve significant risks which are not typically associated with
those in developed markets. Instability in the market reform process could
subject the Company to unpredictable changes in the basic business
infrastructure in which it currently operates. Uncertainties regarding the
political, legal, tax or regulatory environment, including the potential for
adverse changes in any of these factors could significantly affect the Company's
ability to operate commercially. Management is unable to estimate what changes
may occur or the resulting effect on such changes on the Company's financial
condition or future results of operations.
Legislation and regulations regarding taxation, foreign currency translation,
and licensing of foreign currency loans in the Republic of Kazakhstan continue
to evolve as the central Government manages the transformation from a command to
a market-oriented economy. The various legislation and regulations are not
always clearly written and their interpretation is subject to the opinions of
the local tax inspectors. Instances of inconsistent opinions between local,
regional and national tax authorities are not unusual.
Environmental Uncertainties -- Current local laws do not impose any particular
requirements on the Company with regard to its fleet operation beyond the
standard maritime regulations followed by the Company. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable, and the
cost can be reasonably estimated based on 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.
Deferred Revenue -- During June 2003, Bauta entered into an agreement with AGIP
KCO ("AGIP"), its major customer, for the construction of a 2,000 cubic meter
water storage tank. AGIP agreed to advance $140 to Bauta for the construction of
the tank, for which Bauta would repay the $140 through the sale of water to AGIP
at a discounted rate. By December 31, 2003, Bauta placed $62 of proceeds
received from AGIP with a contractor. Construction of the tank began in January
2004 and was completed in June 2004 at a cost of approximately $173. AGIP's
payment of $140 was recorded as deferred revenue to be amortized over the period
of discounted water sales. During 2004, $46 of deferred revenue was recognized
with $94 still deferred at December 31, 2004.
NOTE 15 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003, the Company paid a company
related through common ownership by a Caspian shareholder and noteholder, $114
F-21
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
and $236, respectively, for corporate travel, Kazakh visa, entry and exit
services. A company under common management was paid $0 and $36 during the years
ended December 31, 2004 and 2003 for marketing and technical services. A company
owned by a shareholder and officer was paid $0 and $20 for transportation
services during 2004 and 2003 respectively. For related party notes receivable
and payable, see Notes 6 and 8.
NOTE 16 - SEGMENT INFORMATION
Accounting principles generally accepted in the United States of America
establish disclosures related to components of a company for which separate
financial information is available and evaluated regularly by a company's chief
operating decision makers in deciding how to allocate resources and in assessing
performance. They also require segment disclosures about products and services
as well as geographic area.
The Company has operations in four segments of its business, namely: Vessel
Operations, Geophysical Services, Water Desalinization and Corporate
Administration. The vessel operations, water desalinization and geophysical
services are located in the Republic of Kazakhstan. The administration
operations are located in the United States of America. Information regarding
the operations and assets of these reportable business segments follows:
For the year Vessel Geophysical Water Corporate
ended December 31, 2004 Operations Services Desalinization Administration Total
- ----------------------------------------------------------------------------------------------------
Sales to external customers $ 7,441 $ 6,161 $ 960 $ - $ 14,562
Intersegment sales - - - 292 292
Depreciation and amortization 816 113 123 3 1,055
Interest expense 1,125 144 6 - 1,275
Income (loss) from equity
method investee (124) 185 - - 61
Provision for income tax 724 - - 724
Minority Interest - - (20) - (20)
Segment income (loss) (1,618) 1,700 (25) (252) (195)
Segment assets 13,766 7,398 2,681 3,519 27,364
Investments in equity
method investees - 2,915 - - 2,915
F-22
EMPS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(Dollars in thousands, except share and per share data)
For the year Vessel Geophysical Water Corporate
ended December 31, 2003 Operations Services Desalinization Administration Total
- ----------------------------------------------------------------------------------------------------
Sales to external customers $ 9,701 $ - $ 833 $ - $ 10,534
Depreciation and amortization 758 - 28 3 789
Interest expense 970 - 5 4 979
Income from equity
method investees 28 - - - 28
Provision for taxes 1,599 - - - 1,599
Minority interest - - (143) - (143)
Segment income (loss) 362 - (184) (370) (192)
Segment assets 11,478 - 2,389 58 13,925
Investments in equity
method investees 124 - - - 124
Consolidated Total Assets
December 31 2004 2003
- -------------------------------------------------------------------------------------
Total assets for reportable segments $ 27,364 $ 13,925
Elimination of intersegment assets (2,166) (1,559)
- -------------------------------------------------------------------------------------
Consolidated Total Assets $ 25,198 $ 12,366
=====================================================================================
Consolidated Net Sales
For the year ended December 31, 2004 2003
- -------------------------------------------------------------------------------------
Total sales for reportable segments $ 14,854 $ 10,534
Elimination of intersegment sales (292) -
- -------------------------------------------------------------------------------------
Conolidated net sales $ 14,562 $ 10,534
=====================================================================================
NOTE 17 - SUBSEQUENT EVENTS
During March 2005, the Company completed a private placement of 7,658,446 shares
of common stock for $3 per share. The Company received $21,827 after offering
costs. In connection with the offering, the Company issued a warrant to purchase
765,845 shares of common stock. The warrant is exercisable at $3 per share, is
exercisable immediately and expires in September 2006. The Company plans to use
the proceeds to reduce outstanding debt and to fund the acquisition of vessels.
During January 2005, the Company announced they had entered into letters of
intent to provide five shallow draft vessels in support of offshore pipeline
construction activities ongoing in the Kashagan oilfield in the North Caspian
Sea. One of the vessels will be supplied from the Company's existing fleet. The
remaining four will be new additions to the Company's fleet, either through
acquisition or leasing.
F-23
Index of Annexes attached to the Proxy Statement
ANNEX A Amendment to the Article of Incorporation of EMPS Corporation.
A-1
ANNEX A
AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
EMPS CORPORATION
EMPS Corporation, a corporation organized under the laws of the State
of Nevada, on July 14, 1998, hereby adopts the following Articles of Amendment
to its Articles of Incorporation pursuant to the provisions of Chapter 78 of
Nevada Revised Statutes (the "Statute"), Sections 78.385 and 78.390.
I
The Articles of Incorporation shall be amended to read as follows:
ARTICLE I
NAME
The name of the corporation is: Caspian Services, Inc.
II
The date of the adoption of the foregoing amendment by a duly
constititued quorum of the shareholders was June ___, 2005. The number of shares
outstanding in the Corporation and entitled to vote on the amendment was
38,858,446. All stock in the Corporation is entitled to one vote per share for
each matter coming before the meeting of the shareholders. The number of shares
that voted in favor of the amendment was ___________. The number of shares that
voted against the above amendments was ________________.
A-2
IN WITNESS HEREOF, this Amendment to the Articles of Incorporation has
been executed on this __ day of June, 2005.
By: _________________________________________
Mirgali Kunayev, Chief Executive Officer
By: _________________________________________
Marat Cherdayabev, Secretary
A-3
Proxy - EMPS Corporation.
Annual Meeting of Stockholders - June __, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mirgali Kunayev and Marat Cherdabayev,
severally, as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse side, all
of the shares of Common Stock of EMPS CORPORATION, of record in the name of the
undersigned at the close of business on May 10, 2005, which the undersigned is
entitled to vote at the 2005 Annual Meeting of Stockholders of the Company and
at any and all adjournments thereof, with respect to the matters set forth on
the reverse side and described in the Notice of Annual Meeting and Proxy
Statement dated May ___, 2005, receipt of which is acknowledged.
This Proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder(s). IF NO INDICATION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, 3, 4, 5, 6 and 7.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
POSTAGE PRE-PAID ENVELOPE.
(Please See Reverse Side)
[Name and address of shareholder]
[ ] Mark this box with an X if you have made changes to your name or address
details above. Annual Meeting Proxy Card
[A] Proposal for the Election of Directors
1. The Board of Directors recommends a vote FOR the listed nominees.
For Withhold For Withhold
01 - Mirgali Kunayev [ ] [ ] 04 - Valery Tolkachev [ ] [ ]
02 - James Passin [ ] [ ] 05- Reserve vacant for [ ] [ ]
Board appointment
03 - Paul Roberts [ ] [ ] _______________________ [ ] [ ]
[B] Other Proposals
The Board of Directors recommends a vote FOR the following proposals.
2. APPROVE THE CHANGE OF THE NAME OF THE COMPANY TO For Against Abstain
CASPIAN SERVICES, INC. [ ] [ ] [ ]
3. RATIFY THE APPOINTMENT OF HANSEN, BARNETT & MAXWELL
AS THE COMPANY'S INDEPENDENT REGISERED PUBLIC
ACCOUNTANT FOR THE FISCAL YEAR ENDING DECEMBER 31,
2005 [ ] [ ] [ ]
4. RATIFY THE ACTION OF OUR BOARD OF DIRECTORS TO
CHANGE OUR FISCAL YEAR END TO SEPTEMBER 30 [ ] [ ] [ ]
5. RATIFY THE ACTIONS OF OUR DIRECTORS FOR THE LAST
FISCAL YEAR AND FOR THE PERIOD FROM THE FISCAL YEAR
END THROUGH THE DATE OF THE ANNUAL SHAREHOLDER
MEETING [ ] [ ] [ ]
6. In their discretion, the Proxies are authorized to
vote upon such other business as may properly come
before the meeting or any and all adjournments
thereof. [ ] [ ] [ ]
[C] Authorized Signatures - Sign Here - This section must be completed for your
instructions to be executed.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature 1 - Please keep Signature 2 - Please keep
signature within the box signature within the box Date (mm/dd/yyyy)
[ ] [ ] [ / / ]