UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 27, 2004
Commission File Number 000-31090
SYSTEMS EVOLUTION INC.
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(Exact name of registrant)
IDAHO 82-0291029
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(State of incorporation) (I.R.S. Employer Identification No.)
10777 Westheimer Road, Suite 810, Houston, Texas 77477
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(Address of principal executive offices and zip code)
(713) 979-1600
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(Registrant's telephone number)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
{ } Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
{ } Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a -12)
{ } Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d -2(b))
{ } Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e -4(c)) [GRAPHIC OMITTED]
Item 2. Acquisition or disposition of Assets
Purchase of CMS Technology Services LP
1. The Transaction.
Systems Evolution Inc. ("SEVI") entered into a definitive agreement to
acquire CMS Technology Services LP and its general partner CMS
Associates, LLC ("CMS"), a San Antonio based network integration firm, on June
10, 2004, and closed the acquisition on July 27, 2004. In connection with the
acquisition of CMS from its two stockholders, we paid the two selling
stockholders $10,000 in cash, issued them $40,000 aggregate principal amount of
our non-interest bearing notes dependent upon the note holders being retained by
SEVI, and directly issued the two shareholders 200,000 shares of our common
stock. The shares were valued at $0.52 per share for a total share price of
$104,000.
2. Description of Business of CMS Technology Services LP
General.
CMS's primary focus is Microsoft and Novell network integration.
Item 9.01. Financial Statements or Exhibits
a. Financial Statements.
CMS TECHNOLOGY SERVICES LP
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR'S REPORT
JUNE 30, 2004
CMS TECHNOLOGY SERVICES LP
FINANCIAL STATEMENTS
JUNE 30, 2004
CONTENTS
Page
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Independent Auditor's Report............................................. F1
Balance Sheet............................................................ F2
Statement of Operations.................................................. F3
Statement of Members' Deficit............................................ F4
Statement of Cash Flows.................................................. F5
Notes to Financial Statements............................................ F6-7
Item 9.01 Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
CMS Technology Services, LP
San Antonio, Texas
We have audited the accompanying balance sheet of CMS Technology Services LP as
of June 30, 2004, and the related statements of operations, members' deficit,
and cash flows for each of the two years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMS Technology Services LP as
of June 30, 2004, and the results of its operations and its cash flows for each
of the two years then ended in conformity with accounting principles generally
accepted in the United States of America.
Lopez, Blevins, Bork & Associates, LLP
Houston, Texas
January 3, 2005
CMS TECHNOLOGY SERVICES, LP
BALANCE SHEET
JUNE 30, 2004
ASSETS
CURRENT ASSETS:
Cash $ 6,553
Accounts receivable, net of allowance of $0 32,415
---------
Total current assets 38,968
Deposits 1,643
Furniture and Equipment, net 18,358
---------
Total assets $ 58,969
=========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of note payable $ 13,800
Line of credit 39,000
Accounts payable 43,535
Sales taxes payable 3,037
---------
Total current liabilities 99,372
LONG-TERM LIABILITIES:
Notes payable 56,649
Unearned revenue 57,549
---------
Total long-term liabilities 114,198
COMMITMENTS
PARTNERS' DEFICIT:
Partnership deficit (21,776)
Accumulated deficit (132,825)
---------
Total members' deficit (154,601)
---------
Total liabilities and members' deficit $ 58,969
=========
See accompanying summary of accounting policies and notes to
financial statements.
CMS TECHNOLOGY SERVICES, LP
STATEMENT OF OPERATIONS
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
--------- ---------
REVENUES $ 676,944 $ 874,422
COST OF SALES 362,424 414,419
--------- ---------
GROSS MARGIN 314,520 460,003
OPERATING EXPENSES:
GENERAL AND ADMINISTRATIVE EXPENSES 418,376 417,263
DEPRECIATION 4,447 1,911
IMPAIRMENT 54,000 --
GAIN ON SALE OF ASSETS (29,478) --
--------- ---------
447,345 497,810
--------- ---------
NET LOSS $(132,825) $ (37,807)
========= =========
See accompanying summary of accounting policies and notes to
financial statements.
CMS TECHNOLOGY SERVICES, LP
STATEMENTS OF MEMBERS' DEFICIT
PERIOD FROM JULY 1, 2002 THROUGH JUNE 30, 2004
Total
---------
Balances, July 1, 2002 $ (28,041)
Net loss (37,807)
Partner contributions 41,151
---------
Balances, July 1, 2003 (24,697)
Partner Contributions 43,906
Partner Distributions (40,985)
Net loss (132,825)
---------
Balances, June 30, 2004 $(154,601)
=========
See accompanying summary of accounting policies and notes to
financial statements.
CMS TECHNOLOGY SERVICES, LP
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(132,825) (37,807)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 4,447 1,911
Impairment 54,000 --
Changes in assets and liabilities:
Accounts receivable (6,941) 26,457
Inventory -- 7,804
Other Assets 79 2,436
Accounts payable 9,829 (19,219)
Accrued expenses (3,587) (2,858)
Unearned revenue 57,549 --
--------- ---------
Net cash provided by (used in) operating activities (17,449) (21,276)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (18,696) (4,145)
--------- ---------
Net cash used in investing activities (18,696) (4,145)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debit (1,314) (12,506)
Proceeds from debt 5,268 21,879
Partner Distributions (40,985) --
Partner Contributions 43,906 41,151
--------- ---------
Net provided by financing activities 6,875 50,524
--------- ---------
NET CHANGE IN CASH (29,270) 25,103
CASH, beginning of year 35,823 10,720
--------- ---------
CASH, end of year $ 6,553 $ 35,823
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,035 $ 5,793
========= =========
Income taxes paid $ -- $ --
========= =========
See accompanying summary of accounting policies and notes to
financial statements.
CMS TECHNOLOGY SERVICES, LP
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
CMS Technology Services LP (CMS) was formed in January 1, 2001. CMS is an IT
support and systems integration company providing services primarily in San
Antonio, Texas. The objective of CMS is to work with its customers to help
improve efficiency, productivity and profitability of their operations.
Cash and Cash Equivalents - CMS considers all highly liquid investments
purchased with an original maturity of three months or less to be cash and cash
equivalents.
Furniture and Equipment - Property and equipment is stated at cost with
depreciation calculated using the straight-line method over the estimated useful
lives. When assets are retired or otherwise removed from the accounts, any
resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to expense as incurred, and significant
renewals and improvements are capitalized.
Revenue Recognition - Revenues are recognized as services are provided, in
accordance with customer consulting agreements.
Allowance for Doubtful Accounts - Earnings are charged with a provision
for doubtful accounts based on past experience, current factors, and
management's judgment about collectiblility. Accounts deemed
uncollectible are applied against the allowance for doubtful accounts.
Income Taxes - The Company is a general partnership. Under this structure for
income tax purposes the net income or loss of the general partnership is
allocated directly to the respective partners and is included in their
individual tax returns. Therefore, no provision for income tax has been included
in the financial statements for these entities.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - IMPAIRMENT
During the year ended June 30, 2004, the Company made a distribution to one of
its partners in exchange for their interests in the Company and accordingly
recorded an impairment charge related to the intangible assets acquired from the
former partner's company.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following as of June 30, 2004:
ESTIMATED USEFUL
LIVES IN YEARS
----------------
Furniture and office equipment 5 - 7 $ 6,545
Computer equipment 3 - 5 18,418
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24,963
Less: accumulated depreciation (6,605)
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$ 18,358
NOTE 4 - LINE OF CREDIT
CMS entered into a revolving line of credit with Bank of America which is
unsecured. The annual interest rate on unpaid principal is the prime rate plus
2%. Principal and interest were due on October 4, 2004.
NOTE 5 - NOTES PAYABLE
CMS has a note payable to a bank that accrues interest at prime rate (4% at
December 31, 2003) plus 1% and is due in monthly installments of $1,464
including interest with the remaining unpaid principal and interest due
February 5, 2009. At June 30, 2004 $70,449 was outstanding on the note. The
note is unsecured.
Principal repayments are as follows:
Amount
------------
2005 $ 13,800
2006 14,500
2007 15,100
2008 15,800
2009 11,249
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$ 70,449
============
NOTE 6 - UNEARNED REVENUE
CMS sells blocks of time to clients for future IT repair, service, and
maintenance needs which have no expiration date. At June 30, 2004, CMS has
$57,549 remaining in future service due to clients.
NOTE 7 - MAJOR CUSTOMERS
During the year ended June 30, 2004, 27% of the Company's billings were to three
customers.
NOTE 8 - COMMITMENTS
CMS currently leases its offices and warehouses under non-cancelable agreements
which expire October 31, 2007. The lease provides for monthly payments of base
rent and an unallocated portion of building operating costs.
Minimum future lease rentals are as follows:
June 30, Amount
2005 $ 22,490
2006 26,268
2007 29,850
2008 10,348
------------
Totals $ 88,956
============
Rent expense was $17,921 and $17,896 for the years ending June 30, 2004 and
2003, respectively.
NOTE 9 - SUBSEQUENT EVENT
On July 24, 2004, Systems Evolution Inc. acquired 100% ownership of CMS for
$40,000 in notes payable and 200,000 shares of restricted common stock of
Systems Evolutions Inc.
(b) Pro forma financial information.
SYSTEMS EVOLUTION, INC.
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION
The audited pro forma consolidated balance sheet includes the historical
accounts of the Company and CMS Technology Services, LP at May 31, 2004 and
gives effect to the CMS Technology acquisition and related financings and the
issuance of $104,000 of common stock to purchase CMS Technology.
The audited pro forma consolidated statements of operations for the year ended
May 31, 2004 includes the historical operations of the Company and gives effect
to the acquisition and related financings as if they had occurred at June 1,
2003.
The audited pro forma consolidated financial statements are based on available
information and the assumptions and adjustments described in the accompanying
notes. The audited pro forma consolidated statements of operations do not
purport to represent what our results of operations actually would have been if
the events described above had occurred as of the dates indicated or what such
results will be for any future periods. The audited pro forma financial
statements are based upon assumptions and adjustments that we believe are
reasonable. The audited pro forma consolidated financial statements are
qualified in their entirety and should be read in conjunction with the
historical financial statements and accompanying notes of the Company included
in the annual report on Form 10-K/A for the year ended May 31, 2004, the
quarterly report on Form 10-Q for the six month period ended November 30, 2004
and the audited financial statements of CMS Technology Services, LP for the year
ended June 30, 2004.
The CMS Technology, LP acquisition has been accounted for using the purchase
method of accounting and, accordingly, the assets acquired and liabilities
assumed have been recorded at their estimated fair values based upon estimates
as of June 30, 2004. Further adjustments to the acquired assets and assumed
liabilities will be made following completion of a third-party appraisal of the
intangible assets acquired and following more detailed reviews by management of
tangible assets acquired and liabilities assumed. Changes in the estimated fair
value of acquired assets and assumed liabilities will be reflected as a change
in the allocated fair value of the identifiable tangible and intangible assets
and liabilities and goodwill in the period in which this determination is made.
The following audited pro forma consolidated balance sheet and statement of
operations should be read in connection with the "Notes to Audited Pro Forma
Consolidated Balance Sheet" and "Notes to Audited Pro Forma Consolidated
Statements of Operations" presented below and the historical financial
statements included elsewhere or incorporated by reference.
SYSTEMS EVOLUTION, INC.
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEETS (Audited)
MAY 31, 2004
CMS
Systems Technology Pro Forma
Evolution, Services, Adjustments Pro Forma
Inc. Inc.(a) (b) Consolidated
----------- ----------- -------- -----------
ASSETS
Cash $ 19,522 $ 6,553 $ 26,075
Accounts receivable, net of allowance of $15,000
and $0 107,369 32,415 139,784
----------- ----------- -------- -----------
Total current assets 126,891 38,968 165,859
INTANGIBLES 143,150 0 298,601(c) 441,751
FURNITURE & EQUIPMENT, NET 55,883 18,358 74,241
OTHER 1,643 1,643
----------- ----------- -------- -----------
Total assets $ 325,924 $ 58,969 $298,601 $ 683,494
=========== =========== ======== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 48,515 $ 43,535 $ 92,050
Accrued Expenses 192,369 3,037 195,406
Current portion, long-term debt 5,000 13,800 18,800
Notes payable 150,973 39,000 40,000(e) 229,973
----------- ----------- -------- -----------
Total current liabilities 396,857 99,372 40,000 536,229
Long-term debt, net of current portion 11,137 56,649 67,786
Unearned revenue 57,549 57,549
----------- ----------- -------- -----------
Total liabilities 407,994 213,570 40,000 661,564
Commitments
STOCKHOLDERS' EQUITY
Common stock, no par value 2,679,765 104,000(f) 2,783,765
Members' deficit (154,601) 154,601(g) 0
Accumulated deficit (2,761,835) (2,761,835)
----------- ----------- -------- -----------
Total stockholders' equity (82,070) (154,601) 21,930
----------- ----------- -------- -----------
Total liabilities and stockholders' equity $ 325,924 $ 58,969 $298,601 $ 683,494
=========== =========== ======== ===========
SYSTEMS EVOLUTION, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (Audited)
YEAR ENDED MAY 31, 2004
Systems CMS Technology Pro Forma Pro Forma
Evolution, Inc. Services, LP (a) Adjustments Consolidated
-------------- --------------- ----------- -----------
Revenues ........................... $ 656,676 $ 314,520 $ 971,196
Operating Expenses ................. 0
Payroll and related costs ......... 876,293 299,219 20,000(b) 1,195,512
General, administrative and selling 2,514,070 148,126 78,137(c) 2,740,333
----------- ----------- ----------- -----------
3,390,363 447,345 98,137 3,935,845
----------- ----------- ----------- -----------
Loss from operations ............... ($2,733,687) ($ 132,825) ($ 98,137) ($2,964,649)
=========== =========== =========== ===========
Earnings per Share ($0.07)
===========
Weighted Average Number
of Shares Outstanding 45,559,510
===========
Notes to Condensed Consolidated Pro Forma Statement of Income
(a) - Certain reclassifications have been made to conform CMS Technology
Services, LP's financials to the Company's presentation.
(b) - Represents the increase in salaries of senior management in connection
with the acquisition.
(c) - Represents the amortization of intangibles in connection with the
acquisition.
b. Exhibits.
99.1 Press Release by Systems Evolution, Inc. dated July 29, 2004,
concerning the acquisition of CMS Technology Services by
Systems Evolution Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
hereunto duly authorized.
Date: March 21, 2005 Systems Evolution, Inc.
/s/ Robert C. Rhodes
---------------------------
Robert C. Rhodes
Chief Executive Officer