-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PQaDwoeSMQkUpWBPOAO9Yt7dBjOzyRh1nhtrx/T5p0TSB+TSoht+y3yrtkXaQ/kl BhdCINl5sWsSGIB9W/xg/w== 0001144204-04-016633.txt : 20041020 0001144204-04-016633.hdr.sgml : 20041020 20041020172328 ACCESSION NUMBER: 0001144204-04-016633 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041020 DATE AS OF CHANGE: 20041020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSTEMS EVOLUTION INC CENTRAL INDEX KEY: 0000104375 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 820291029 STATE OF INCORPORATION: ID FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-31090 FILM NUMBER: 041088058 BUSINESS ADDRESS: STREET 1: 10707 CORPORATE DRIVE, SUITE 156 CITY: STAFFORD STATE: TX ZIP: 77477 BUSINESS PHONE: (281) 265-7075 MAIL ADDRESS: STREET 1: 10707 CORPORATE DRIVE, SUITE 156 CITY: STAFFORD STATE: TX ZIP: 77477 FORMER COMPANY: FORMER CONFORMED NAME: WALLACE SILVER INC DATE OF NAME CHANGE: 20010118 10QSB 1 form10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2004 --------------- [ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 000-33391 ---------- SYSTEMS EVOLUTION INC. - -------------------------------------------------------------------------------- (Exact name of Small Business Issuer as specified in its charter) IDAHO 82-0291029 - ---------------------------------- ----------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 10707 CORPORATE DRIVE, SUITE 156 STAFFORD, TEXAS 77477 - -------------------------------------------------------------------------------- (Address of principal executive offices) 281-265-7075 - -------------------------------------------------------------------------------- Issuer's telephone number NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. (1) [X] Yes [ ] No (2) [X] Yes [ ] No The number of shares of issuer's Common Stock outstanding as of August 31, 2004: 54,988,699 SHARES SYSTEMS EVOLUTION INC. INDEX QUARTERLY REPORT ON FORM 10-QSB FOR QUARTERLY PERIOD ENDED August 31, 2004
PART I. FINANCIAL INFORMATION ITEM 1 - Unaudited Consolidated Financial Statements a. Consolidated Balance Sheets as of August 31, 2004 (Unaudited) and May 31, 2004 3 b. Consolidated Statements of Operations for the Three Months Ended August 31, 2004 and 2003 (Unaudited) 4 C. Consolidated Statements of Cash Flows for the Three Months Ended August 31, 2004 and 2003 (Unaudited) 5 D. Notes to Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and Analysis ITEM 3 - Controls and Procedures PART II. OTHER INFORMATION ITEM 1 - Legal proceedings ITEM 2 - Changes in Securities and Use of Proceeds ITEM 6 - Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT 10.7 - Definitive Acquisition Agreement of CMS Technology Services, L.P. EXHIBIT 31 - Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 EXHIBIT 32 - Certification pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
PART I. FINANCIAL INFORMATION ITEM 1 - Unaudited Consolidated Financial Statements SYSTEMS EVOLUTION INC. CONSOLIDATED BALANCE SHEETS AUGUST 31, 2004 (UNAUDITED) AND MAY 31, 2004
AUGUST 31, May 31, 2004 2004 -------------------- -------------------- ASSETS (Unaudited) CURRENT ASSETS: Cash $- $19,522 Accounts receivable - trade, net of allowance of $28,617 & $15,000 149,292 107,369 Other current assets 36,562 - ------------ ------------ Total current assets 185,854 126,891 INTANGIBLES 343,154 143,150 FURNITURE AND EQUIPMENT, NET 112,757 55,883 OTHER 1,642 - ------------ ------------ Total assets $643,407 $325,924 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $295,573 $48,515 Accrued expenses 248,310 192,369 Current portion, long-term debt 44,204 5,000 Notes payable 224,167 150,973 ------------ ------------ Total current liabilities 812,254 396,857 Long-term debt, net of current portion 39,387 11,137 ------------ ------------ Total liabilities 851,641 407,994 Commitments STOCKHOLDERS'(DEFICIT) Common stock 4,183,565 2,679,765 Accumulated deficit (4,391,799) (2,761,835) ------------ ------------ Total stockholders' deficit (208,234) (82,070) ------------ ------------ Total liabilities and stockholders' deficit 643,407 325,924 ============ ============
SYSTEMS EVOLUTION INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED AUGUST 31, 2004 2003 ------------ ------------ REVENUES $ 232,629 $ 186,143 OPERATING EXPENSES: Payroll and related costs 303,865 259,952 General, administrative and selling 1,695,728 87,390 ------------ ------------ Loss from Operations 1,999,593 347,342 ------------ ------------ Interest Expense 11,947 -- Net Loss (1,766,964) (161,199) ============ ============ Basic and Diluted Loss Per Share: ($0.03) $ 0.00 ============ ============ Basic and Diluted Weighted Average Shares 54,637,571 37,500,000 Outstanding ============ ============
SYSTEMS EVOLUTION INC. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED AUGUST 31, 2004 AND 2003 (UNAUDITED)
2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,766,964) $ (161,199) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 28,150 7,000 Bad debt expense 13,627 - Stock issued for services 137,000 - Stock option and warrant expense 1,387,550 - Changes in assets and liabilities: Accounts receivable - trade (20,210) 46,176 Prepaid expenses and other assets (22,684) - Accounts payable 240,311 34,741 Accrued expenses (26,136) 6,198 ----------- ----------- Net cash used in operating activities (29,356) (67,084) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of CMS (10,000) - ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable and long-term debt (14,943) (10,408) Proceeds from stockholder receivable - 9,036 Proceeds from notes payable and long-term debt 22,527 19,969 Sale of common Stock 12,250 9,300 ----------- ----------- Net provided by financing activities 19,834 38,305 ----------- ----------- Net Change in cash (19,522) (28,779) CASH, beginning of year 19,522 29,670 ----------- ----------- CASH, end of year $ - $ 891 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 11,947 $ - =========== =========== Taxes paid $ - $ - =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for Acquisition of CMS $ 104,000 $ - =========== =========== Common stock issued for computer equipment $ 52,070 $ - =========== ===========
SYSTEMS EVOLUTION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Systems Evolution Inc. ("SEVI") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for 2004 as reported in the 10-KSB have been omitted. STOCK OPTIONS SEVI accounts for its stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Statement of Financial Accounting Standard ("FAS") No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, issued in December 2002 requires pro forma net loss and pro forma net loss per share to be disclosed in interim financial statements. During fiscal 2004, the Company created the 2003 Directors, Officers, and Consultants Stock Option, Stock Warrant and Stock Award Plan ("2003 Plan"). Under the 2003 Plan, the total number of shares of common stock that may be granted is 20,000,000. As of August 31, 2004, the Company has granted a total of 13,573,333 options with exercise prices of $.05 to $.36 per share which vest over 48 months. The maximum term of the options is ten years. During the quarter ended August 31, 2004, the Company recorded compensation expense totaling $277,550 based on the intrinsic value of the options vested during the quarter. The following table illustrates the effect on net income and earnings per share if SEVI had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:
Three Months Ended August 31, ------------------------------ 2004 2003 ---------- ---------- Net loss, as reported (1,766,964) (135,341) Add: Expense recorded 277,550 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards (3,748,941) - Pro forma net loss (5,238,355) 181,762 Loss per share: Basic and diluted - as reported (.03) .00 Basic and diluted - pro forma (.10) .00
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield 0.0%, expected volatility of 191%, risk-free interest rate of 1.5%, and expected life of six months to two years. NOTE 2 - ACQUISITION Effective July 27, 2004, the Company completed the acquisition of all the issued and outstanding shares of Southwest CMS Technology Services, LP and its general partner CMS Associates, LLC ("CMS"), a San Antonio based network integration firm. Pursuant to the transaction, the Company paid $10,000 cash, issued a note payable totaling $40,000 and issued an aggregate of 200,000 shares of the Company's common stock to the owners of CMS. As of the effective date, CMS became a wholly-owned subsidiary of the Company. The acquisition was accounted for using the purchase method of accounting. The following are pro forma condensed statements of income for the three month period ended August 31, 2004 and 2003, as though the acquisition had occurred on June 1, 2003. Other historical financial statements will be included in the Company's report on Form 8-K/A when filed. Three Months Ended August 31, ----------------------------- 2004 2003 --------- --------- Revenues 286,468 471,461 Net Income/(Loss) (1,767,800) 4,233 Loss per share - basic and diluted (.03) .00 NOTE 3 - COMMON STOCK On June 21, 2004, the Company re-issued a lost certificate to Mr. Patrick L. Anderson, one of the Company's directors. Mr. Anderson provided the Company with: a request for a replacement certificate; a statement that the certificate was not endorsed; affirmation that the security had not been hypothecated, transferred, pledged or otherwise disposed; and an agreement that the original certificate be immediately surrendered if found. The lost certificate, #1000 for 8,563,094 shares, was re-issued as a certificate for 6,463,094 shares to Mr. Anderson. 2,000,000 shares of Mr. Anderson's were returned to the Company in a transaction previously disclosed in the Company's 10-KSB for the period ending May 31, 2004. The lost certificate is not considered issued or outstanding in the accompanying financials, but, has not been cancelled by the transfer agent. During the three months ending August 31, 2004, the Company sold 112,580 shares of common stock for proceeds totaling $34,900. The Company has only issued 32,258 of the shares and has recorded a liability totaling $24,900 related to the unissued shares as of August 31, 2004. The liability is included in accrued expenses at August 31, 2004. During the three months ending August 31, 2004, the Company issued 2,250,000 shares of common stock to H.C. Wainwright and 1st SB related to the exercise of warrants (see Note 5). The warrants were issued and exercised during the quarter at a exercise price of $.001 per share resulting in $1,110,000 of compensation expense being recorded based on the fair value of the warrants. During the three months ending August 31, 2004, the Company issued 200,000 shares of common stock to 8 consultants and $20,000 shares to an employee. The company recorded consulting expense totaling $137,000 based on the fair market value on the date issued (earned). Fair market value was determined by using the stock price on the date issued. During the three months ended August 31, 2004, the Company issued 200,000 shares of common stock as consideration for the acquisition of CMS (See note 2). During the three months ended August 31, 2004, the Company acquired equipment in exchange for the 100,000 shares of the Company's common stock valued at $52,070 using the stock price on the date acquired. NOTE 4 - WARRANTS During the three months ended August 31, 2004, warrants were issued to H.C. Wainwright and 1st SB for consulting services. These warrants were exercised fully during the three month period ending August 31, 2004 (NOTE 4). Subsequent to the three month period ending August 31, 2004 and in conjunction with the Purchase Agreement (See Note 6), the Notes were issued together with warrants, denominated Series A, B, C and D warrants (each, a "Warrant"), to purchase in the aggregate 36,500,000 shares of our Common Stock. Each investor received Warrants to purchase shares of Common Stock equal to the number of shares of Common Stock that are issuable upon full conversion of that investor's Note, each investor receiving an equal number of each of the four series of Warrants. The Series A Warrants are exercisable at $.06 per share commencing on the Closing Date and expire 90 days after the registration statement that we are required to file under the registration rights agreement referred to below has been declared effective by the Securities and Exchange Commission (the "Commission"). The Series B Warrants are exercisable at $.07 per share commencing on the Closing Date and expire 180 days after such registration statement is declared effective. The Series C Warrants are exercisable at $.08 per share commencing on the Closing Date and expire 270 days after such registration statement is declared effective. The Series D Warrants are exercisable at $.15 per share commencing on the Closing Date and expire five years from the Closing Date. In conjunction with the Purchase Agreement (see Note 6), 14,400,000 warrants were issued to H.C. Wainwright to purchase shares of the Company's common stock with an exercise price of $0.05, providing for a cashless exercise, and expiration of August 31, 2009. Also in conjunction with the Purchase Agreement (See note 6), 7,200,000 warrants were issued to 1st SB to purchase shares of the Company's common stock with an exercise price of $0.05, providing for a cashless exercise, and expiration of August 31, 2009. As of August 31, 2004, the Company has no outstanding warrants to acquire _____ shares of common stock at exercise prices ranging from $____ to $___. The warrants expire in ____ NOTE 5 - SUBSEQUENT EVENTS On August 31, 2004, the Company executed a Purchase Agreement with certain institutional and accredited investors under which the Company agreed to sell and the purchasers agreed to purchase convertible promissory notes due August 31, 2007 (the "Notes") in the aggregate principal amount of up to $2,500,000 bearing interest at the rate of 8% per annum and convertible into shares of our Common Stock at a conversion price of $0.05 per share. On September 9, 2004, the Company completed the sale of an aggregate of $1,825,000 in Notes and accompanying Warrants under the Purchase Agreement which resulted in net proceeds to the Company of $1,542,417. The Notes are initially convertible into 36,500,000 shares of Common Stock, and an additional 36,500,000 shares of Common Stock are reserved for issuance upon exercise of the Warrants issued to the note holders. The Company is required to file a registration statement registering the shares related to the convertible debentures and underlying warrants on or prior to October 31, 2004. The company is required to have the registration statement declared effective prior to February 7, 2004 and filed by October 31, 2004 or the Company will be in default. The Company acquired Duration Software, Inc. ("Duration"), an Austin based business and technology consulting firm, on September 24, 2004. Duration's primary focus is on custom applications and integration solutions for government, healthcare, and business. Its core service offerings include: Application Design and Development; Application Integration; Database Design, Development and Integration; and Project Management. In connection with the acquisition of Duration from its five stockholders, the Company paid the selling stockholders $450,000 in cash, and issued them $300,000 aggregate principal amount of our non-interest bearing notes due February 1, 2007, and 15,000,000 shares of our common stock. The Company entered into a definitive agreement to acquire Next Hire ("Next Hire") Consultants Inc., a Houston based staffing and permanent placement firm, on July 12, 2004, and closed the acquisition on September 23, 2004. In connection with the acquisition of Next Hire from its stockholder, the Company issued 400,000 shares of our common stock. On September 22, 2004, the Company increased its authorized number of shares of common stock to 750,000,000. ITEM 2 - Management's Discussion and Analysis FORWARD LOOKING STATEMENTS This quarterly report contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements. Our actual results are likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this section. The Company, previously known as Wallace Resources Inc., was organized in the State of Idaho on August 26, 1968. Systems Evolution Inc., our Texas operating company was acquired by the Company on September 9, 2003, and after the acquisition, the Company's current directors and management took control of the Company. We generate revenue from professional services performed for our end-user customers and the end-user customers of our software partners. Revenue is derived primarily from professional services provided on a time and materials basis, with the remaining revenue provided from fixed fee engagements. For time and material contracts, revenue is recognized and billed by multiplying the number of hours expended by our professionals in the performance of the contract by the established billing rates. For fixed fee projects, revenue is generally recognized using the proportionate performance method. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. On many projects we are also reimbursed for out-of-pocket expenses such as airfare, lodging and meals. These reimbursements are included as a component of revenue. Our revenue and operating results are subject to substantial variations based on our customers' expenditures and the frequency with which we are chosen to perform services for our customers. Revenue from any given customer will vary from period to period. Our gross margins are affected by trends in the utilization rate of our professionals (defined as the percentage of our professionals' time billed to customers, divided by the total available hours in the respective period), the salaries we pay our consulting professionals, and the average rate we receive from our customers. If a project ends earlier than scheduled or we retain professionals in advance of receiving project assignments, our utilization rate will decline and adversely affect our gross margins. RECENT DEVELOPMENTS The Company entered into a definitive agreement to acquire Southwest 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. CMS's primary focus is Microsoft and Novell network integration. In connection with the acquisition of CMS from its two stockholders, the Company paid the selling stockholders $10,000 in cash, and issued them $40,000 aggregate principal amount of our non-interest bearing notes dependent upon the note holders being retained by the Company, and 200,000 shares of our common stock. The Company entered into a definitive agreement to acquire Duration Software, Inc. ("Duration"), an Austin based business and technology consulting firm, on August 30, 2004, and closed the acquisition on September 24, 2004. Duration's primary focus is on custom applications and integration solutions for government, healthcare, and business. Its core service offerings include: Application Design and Development; Application Integration; Database Design, Development and Integration; and Project Management. In connection with the acquisition of Duration from its five stockholders, the Company paid the selling stockholders $450,000 in cash, and issued them $300,000 aggregate principal amount of our non-interest bearing notes due February 1, 2007, and 15,000,000 shares of our common stock. The Company entered into a definitive agreement to acquire Next Hire ("Next Hire") Consultants Inc., a Houston based staffing and permanent placement firm, on July 12, 2004, and closed the acquisition on September 23, 2004. In connection with the acquisition of Next Hire from its stockholder, the Company issued 400,000 shares of our common stock. RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDING AUGUST 31, 2004 Total gross revenue increased from $186,143 for the three month period ended August 31, 2003 to $232,629 for the three month period ended August 31, 2004, an increase of 25%. The increase in revenue resulted in part from addition of AXP Technologies Inc. and CMS. Net loss from operations increased from $161,199 for the three month period ended August 31, 2003 to $1,766,964 for the three month period ended August 31, 2004. OPERATING EXPENSES Payroll and related costs make up the majority of our cost of revenue. Total payroll and related costs increased from $259,952 for the three month period ended August 31, 2003 to $303,865 for the three month period ended August 31, 2004, an increase of 17%. This increase is attributed to an increase in staff. General and administrative expenses consist of salaries and benefits for sales, executive and administrative employees, training, marketing activities, investor relations, recruiting, non-reimbursable travel costs and expenses and miscellaneous expenses. General and administrative expenses increased from $87,390 for three month period ended August 31, 2003 to $1,695,728 for the three month period ended August 31, 2004. This increase is related to hiring a professional management team, including Richard N. Hartmann and Willie A. Jackson, Jr. LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities was $29,356 for the three month period ended August 31, 2004 compared to $67,084 used by operating activities for the three month period ended August 31, 2003. Net cash provided by financing activities was $19,834 for the three month period ended August 31, 2004 compared to $38,305 for three month period ended August 31, 2003. This increase was attributed to the acquisition of CMS. On August 31, 2004, the Company executed a Purchase Agreement with certain institutional and accredited investors under which the Company agreed to sell and the purchasers agreed to purchase convertible promissory notes due August 31, 2007 (the "Notes") in the aggregate principal amount of up to $2,500,000 bearing interest at the rate of 8% per annum and convertible into shares of our Common Stock at a conversion price of $0.05 per share. On September 9, 2004, the Company completed the sale of an aggregate of $1,825,000 in Notes and accompanying Warrants under the Purchase Agreement which resulted in net proceeds to the Corporation of $1,542,417. The Notes are initially convertible into 36,500,000 shares of Common Stock, and an additional 36,500,000 shares of Common Stock are reserved for issuance upon exercise of the Warrants issued to the note holders. The Company estimates that our requirements for additional capital over the next 15 months will be in the range of $675,000 to $1,800,000. There can be no assurance we will be able to raise this additional required capital on satisfactory terms, or at all. In the event we are unable to obtain such additional capital or to obtain it on acceptable terms or in sufficient amounts, the impact thereof would have a material adverse effect on our business, operating results, financial condition and may affect our ability to carry on as a Company. CRITICAL ACCOUNTING POLICIES Consulting revenues are comprised of revenue from professional services fees recognized primarily on a time and materials basis as performed. For fixed fee engagements, revenue is recognized using the proportionate performance method (based on the ratio of hours expended to total estimated hours). Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. Our normal payment terms are net 30 days. We record an expense for the expected losses on uncollectible accounts receivable each period based on known facts and circumstances for the respective period. ITEM 3 - Controls and Procedures. DISCLOSURE CONTROLS AND PROCEDURES. The Company's management, with the participation of the Company's Chief Executive Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer has concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings None. ITEM 2 - Changes in Securities and Use of Proceeds In June 2004, the Company issued 20,000 shares of restricted shares to an employee as a signing bonus. In June 2004, the Company sold 112,580 shares of stock to two private investors at $0.31 per share. The transactions are viewed as exempt from registration under the Securities Act of 1933, as amended, under section 4(2) thereof, as transactions not involving any public offering. On July 27, 2004, The Company issued 200,000 shares of stock to acquire Southwest CMS Technology Services LP and its general partner CMS Associates, LLC. On July 28 and August 25 respectively, H.C. Wainwright and 1st SB exercised warrants to purchase 1,500,000 and 750,000 shares of stock under their respective consulting agreements with the Company. ITEM 6 - Exhibits and Report on Form 8-K (a) Exhibits. Ex 10.7 Definitive Acquisition Agreement of CMS Technology Services, L.P. Ex 31 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Ex 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. (b) Reports on Form 8-K During the three month period ended August 31, 2004, the Company filed the following reports on Form 8-K: On August 30, 2004, the Company filed a report on Form 8-K concerning the change in Company's certifying accountants. On August 30, 2004, the Company filed an amendment to its Form 8-K filed March 26, 2004, relating to the acquisition of AXP Technologies, Inc. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Systems Evolution Inc. Dated: October 20, 2004 /s/ Robert C. Rhodes ------------------------- Robert C. Rhodes Chief Executive Officer And Chief Financial Officer EX-10.7 2 ex10_7.txt EXHIBIT 10.7 DEFINITIVE ACQUISITION AGREEMENT OF CMS TECHNOLOGY SERVICES, L.P. THIS ACQUISITION AGREEMENT effective as of July 1, 2004 and executed as of July 13, 2004 (this "Agreement"), is made and entered into by and among Systems Evolution Inc., a Texas corporation and Systems Evolution Inc., an Idaho corporation ("Buyer"), and Southwest CMS Technology Services LP, a Texas limited partnership acting through its general partner CMS Associates, LLC, a Texas limited liability corporation ("CMS") and the individual parties listed on Exhibit A hereto (jointly, severally and collectively the "Seller"). WHEREAS, subject to and in accordance with the terms and conditions of this Agreement, the respective Boards of Directors of Buyer and the general partner of Seller have approved an acquisition of Seller by Buyer (the "Acquisition"), in connection with which all of Seller's interest will be conveyed to Buyer in consideration of the purchase price set forth below (together with the other transactions contemplated by this Agreement, the "Transactions"); WHEREAS, the parties hereto desire to set forth certain representations, warranties and covenants made by each to the other as an inducement to the consummation of the Transactions; NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties and covenants herein contained, the parties hereto hereby agree as follows: ARTICLE I THE TRANSACTIONS 1.1 Closing Date. The closing of the Transactions (the "Closing") shall take place at the offices of the Seller in Stafford, Texas, as soon as practicable after the satisfaction or waiver of each of the conditions set forth in Article IV hereof or at such other time and place and on such other date as Buyer and Seller shall agree; provided that each of the closing conditions set forth in Article IV hereof shall have been satisfied or waived at or prior to such time. The date on which the Closing occurs is herein referred to as the "Closing Date." 1.2 The Transactions. Subject to the terms and conditions of this Agreement: (a) On the Closing Date, the interest holders of Seller, based upon ownership of Seller as listed in Exhibit A, shall tender to Buyer all interest in and to Seller and receive from Buyer the purchase price consideration set forth below (the "Purchase Price") pro rata according to their share ownership in the Seller as listed in Exhibit A. (b) The Purchase Price shall consist of: (i) two checks in the total amount of Ten Thousand Dollars ($10,000.00) made payable to Christopher A. Bunch for Two Thousand Dollars ($2,000.00) and Mitchell R. Sowards for Eight Thousand Dollars ($8,000.00); (ii) two promissory notes in the total amount of Forty Thousand Dollars ($40,000), in the form attached hereto as Exhibit B, made payable to Mitchell R. Sowards (for $32,000.00) and Christopher A. Bunch (for $8,000.00) in four (4) equal installments with no interest thereon each quarter thereafter commencing on October 1st, 2004 and ending on July 1st, 2005 ("Final Payout"); and (iii) Two Hundred Thousand (200,000) shares of restricted Common stock of Systems Evolution Inc., an Idaho corporation which is publicly traded on the OTCBB under the symbol "SEVI" ("Buyer Common Stock"). ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of Buyer. Buyer hereby represents and warrants to Seller that: (a) Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Texas and the state of Idaho. Buyer has all requisite corporate power and corporate authority to own, lease and operate all of its properties and assets and to carry on its business as now being conducted, except where the failure to be so organized, existing or in good standing would not have a Material Adverse Effect on the financial condition of Buyer and its subsidiaries, taken as a whole (a "Buyer MAE"). Buyer is duly qualified to do business, and is in good standing, in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except in such jurisdictions where the failure to be duly qualified would not have a Buyer MAE. Buyer has heretofore delivered to Seller true and complete copies of Buyer's Certificates of Incorporation, as amended, and Buyer's bylaws as in existence on the date hereof. (b) Authorization and Validity of Agreement. The execution and delivery by Buyer of this Agreement and the consummation by Buyer of the Transactions contemplated hereby have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by Buyer and is the legal valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. (c) No Conflict. The execution and delivery of this Agreement does not, and the consummation of the Transactions will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of or "put" right with respect to any obligation or to loss of a material benefit under, or result in the creation of any lien or encumbrance upon any of the properties or assets of Buyer under, any provision of (i) the charter or bylaws of Buyer, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease, guaranty or other financial assurance agreement or other agreement, instrument, permit, concession, franchise or license applicable to Buyer, and (iii) subject to governmental filing and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation or arbitration award applicable to Buyer, other than, in the case of clause (ii), any such conflicts, violations, defaults, rights or liens or encumbrances that individually or in the aggregate would not have a Buyer MAE. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or agency, domestic or foreign, including local authorities (a "Governmental Entity"), is required by or with respect to Buyer in connection with the execution and delivery of this Agreement by Buyer or the consummation by Buyer of the Transactions, except for such consents, approvals, orders, authorizations, registrations, declarations, filings and notices as are set forth in Schedule 2.1(c). 2.2 Representations and Warranties of Seller. Seller hereby, jointly and severally (according to their respective ownership interest as listed on Exhibit A hereto), represents and warrants to Buyer that: (a) Organization. Seller is a limited partnership duly organized, validly existing and in good standing under the laws of the state of Texas. Seller has all requisite corporate power and corporate authority and all necessary governmental authorizations to own, lease and operate all of its properties and assets and to carry on its business as now being conducted, except where the failure to be so organized, existing or in good standing or to have such governmental authority would not (i) have a Material Adverse Effect on the assets, properties, business, operations, or condition (financial or otherwise) of Seller, taken as a whole or (ii) prevent or materially adversely affect the ability of Seller to perform and comply with its obligations under this Agreement, or any other agreement to be executed and delivered in connection with the Transactions (a "Seller MAE"). Seller is duly qualified as a foreign corporation to transact business, and is in good standing, in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except in such jurisdictions where the failure to be duly qualified does not and would not have a Seller MAE. Seller is in compliance with all applicable laws, judgments, orders, rules and regulations, domestic and foreign, except where failure to be in such compliance would not have a Seller MAE. Seller has heretofore delivered to Buyer true and complete copies of Seller's Certificate of Limited Partnership and Limited Partnership Agreement (the "Partnership Documents"), and CMS's Articles of Organization as in existence on the date hereof. (b) Capitalization. The authorized capital stock of Seller consists of 100,000 shares of Seller Stock. As of the date of this Agreement, there were 100,000 shares of Seller Stock issued and outstanding. All issued and outstanding shares of Seller Stock are validly issued, fully paid and nonassessable, were not issued in violation of any preemptive rights or other preferential rights of subscription or purchase of any person, and no holder thereof is entitled to preemptive rights. Seller is not a party to, and is not aware of, (i) any voting agreement, voting trust or similar agreement or arrangement relating to any class or series of its capital stock, or (ii) any agreement or arrangement providing for registration rights with respect to any capital stock or other securities of Seller. (c) Authorization and Validity of Agreement. Seller has all requisite corporate power and authority to enter into this Agreement, and to perform its respective obligations hereunder. The execution and delivery by Seller of this Agreement to which it is a party and the consummation by it of the Transactions have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by Seller and is the valid and binding obligation of Seller enforceable against it in accordance with its terms. (d) No Approvals or Notices Required; No Conflict with Instruments to which Seller is a Party. The execution and delivery of this Agreement does not, and the consummation of the Transactions and compliance with the provisions hereof and thereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of or "put" right with respect to any obligation or to loss of a material benefit under, or result in the creation of any lien or encumbrance upon any of the properties or assets of Seller, any provision of (i) the Partnership Documents of Seller, (ii) except as set forth in Schedule 2.2(d), any loan or credit agreement, note, bond, mortgage, indenture, lease, guaranty or other financial assurance agreement or other agreement, instrument, permit, concession, franchise or license applicable to Seller or any of their respective properties or assets, and (iii) subject to governmental filing and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation or arbitration award applicable to Seller or their respective properties or assets, other than (A), in the case of clause (ii), any such conflicts, violations, defaults, rights or liens or encumbrances that individually or in the aggregate would not have a Seller MAE. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Seller in connection with the execution and delivery of this Agreement by Seller or the consummation by Seller of the Transactions. (e) Commission Filings; Financial Statements. Seller is not a public corporation and is not required to file any reports, registration statements and other filings with the Commission. To the best of the Seller's knowledge, each of the Seller's consolidated financial statements (including any related notes or schedules) (i) was prepared in accordance with customary accounting principles applied on a consistent basis (except as may be noted therein or in the notes or schedules thereto) and (ii) except for non-compliance that would not have a Seller MAE, complied with the rules and regulations of the Commission. Such consolidated financial statements fairly present the consolidated financial position of Seller as of the dates thereof and the results of operations, cash flows and changes in stockholders' equity for the periods then ended (subject, in the case of the unaudited interim financial statements, to the exclusion of normal year-end audit adjustments and footnote disclosures). As of the date hereof, Seller has no liabilities, absolute or contingent, that may reasonably be expected to have a Seller MAE, except (i) those incurred in the ordinary course of business consistent with past operations and not relating to the borrowing of money and (ii) those set forth in Schedule 2.2(e). (f) Conduct of Business in the Ordinary Course; Absence of Certain Changes and Events. Since the date of the initial Letter of Intent, except as contemplated by this Agreement or set forth in Schedule 2.2(e), Seller has conducted its business only in the ordinary and usual course in accordance with past practice, and there has not been: (i) a Seller MAE; (ii) to the knowledge of Seller, any other condition, event or development that reasonably may be expected to result in a Seller MAE; (iii) any change by Seller in its accounting methods, principles or practices; (iv) any revaluation by Seller of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and consistent with past practice; (v) any entry by Seller into any commitment or transaction that would be material to Seller; (vi) any declaration, setting aside or payment of any dividends or distributions in respect of the Seller Stock or any redemption, purchase or other acquisition of any of its securities; (vii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of Seller; (viii) any increase in indebtedness of borrowed money other than borrowing under existing credit facilities, the amount of which is disclosed in Schedule 2.2 (d) and (e); (ix) any granting of a security interest or lien or encumbrance on any property or assets of Seller. (g) Litigation. Except as disclosed in Schedule 2.2(g), there are no claims, actions, suits, investigations, inquiries or proceedings, pending or, to the knowledge of Seller, threatened against Seller any of their respective properties at law or in equity, wherever located (i) that exist today or (ii) that would otherwise, if adversely determined, have a Seller MAE. Seller is not subject to any judicial, governmental or administrative order, writ, judgment, injunction or decree. Seller, jointly and severally, agrees to indemnify and hold Buyer harmless for any damages, costs and expenses, including reasonable legal fees, for any and all claims, actions, suits, investigations, inquiries or proceedings arising out of those items disclosed in Schedule 2.2(g). (h) Taxes. Except as set forth in Schedule 2.2(h), (i) all returns and reports, including, without limitation, information and withholding returns and reports ("Tax Returns"), of or relating to any foreign, federal, state or local tax, assessment or other governmental charge ("Taxes" or a "Tax") that are required to be filed on or before the Closing Date by or with respect to Seller, have been or will be duly and timely filed, all such Tax Returns are or will be true, correct and complete in all material respects, and all Taxes, including interest and penalties, due and payable whether or not shown on any such Tax Return have been or will be duly and timely paid or adequately provided for in reserves established by Seller in its consolidated financial statements, except where the failure to file Tax Returns or to pay or provide for Taxes would not result in a Seller MAE; (ii) the charges, accruals and reserves for Taxes with respect to Seller reflected in the consolidated financial statements included in the Seller Commission Filings have been prepared in accordance with generally accepted accounting principles and are sufficient to cover the payment of all material Taxes, including any penalties or interest thereon and whether or not assessed or disputed, that are, or are hereafter found to be, or to have been, due with respect to the operations of Seller through the periods covered thereby and Seller has (and as of the Closing Date will have) made all estimated tax payments required with respect to Taxes for Tax Returns not yet due; (iii) there is no action, suit, proceeding, audit or claim now proposed or pending against or with respect to Seller in respect to any Taxes, and no material assessment, deficiency or adjustment has been asserted or proposed with respect to any Tax Return of or with respect to Seller that has not been adequately provided for in reserves established by Seller; (iv) no waiver or extension of any statute of limitations or the period of assessment or collection of any Taxes relating to any federal, state, local or foreign Tax matter has been given by or requested from Seller and no power of attorney with respect to any such Taxes has been filed or entered into with any Governmental Authority, in either case that will be outstanding as of the Closing Date and the time for filing any Tax Return relating to Seller has not been extended to a date later than the date of this Agreement; (v) except for statutory liens or encumbrances for current Taxes not yet delinquent, no liens or encumbrances for Taxes exist upon the assets of Seller; (vi) Seller is not a party to or bound by or has an obligation under any written Tax separation, sharing or similar agreement or arrangement; (i) Severance Payments. Except as set forth in Schedule 2.2(i), neither Seller nor any of the Seller Subsidiaries will have any liability or obligation to pay a severance payment or similar obligation to any of their respective employees, officers or directors as a result of the Transactions, nor will any of such persons be entitled to an increase in severance payments or other benefits as a result of the Transactions in the event of the subsequent termination of their employment. (j) Brokers. Except as set forth in Schedule 2.2(j), no broker, investment banker, or other Person acting on behalf of Seller is or will be entitled to any broker's, finder's or other similar fee or commission in connection with the Transactions. (k) Compliance with Laws. Seller hold all required, necessary or applicable permits, licenses, variances, exemptions, orders, franchises and approvals of all Governmental Entities, except where the failure to so hold could not reasonably be expected to have a Seller MAE (the "Seller Permits"). All applications with respect to such Seller Permits, were complete and correct in all material respects when made and Seller does not know of any reason why any of such permits, licenses, variances, exemptions, orders, franchises and approvals would be subject to cancellation. Seller is in compliance with the terms of the Seller Permits except where the failure to so comply could not reasonably be expected to have a Seller MAE. Seller has not violated or failed to comply with any statute, law, ordinance, regulation, rule, permit or order of any Federal, state or local government, domestic or foreign, or any Governmental Entity, any arbitration award or any judgment, decree or order of any court or other Governmental Entity, applicable to Seller or its business, assets or operations, except for violations and failures to comply that would not have a Seller MAE. (l) Contracts. Schedule 2.2(l) contains a complete list of the following contracts, agreements, arrangements and commitments: (A) all employment or consulting contracts or agreements to which Seller is contractually obligated; (B) current leases, sales contracts and other agreements with respect to any real property of Seller or to which Seller is contractually obligated and current leases, sales contracts or other agreements with respect to personal property of Seller is contractually obligated, in each case having (1) a remaining term of greater than one year or (2) total payments that may be required of Seller exceeding $10,000; (C) contracts or commitments for capital expenditures or acquisitions in excess of $10,000 to which Seller is obligated; (D) agreements, contracts, indentures or other instruments relating to the borrowing of money, or the guarantee of any obligation for the borrowing of money, to which Seller is a party or any of their respective properties is bound; (E) all material indemnification and guaranty or other similar obligations (other than those obligations which occur in the ordinary course of business) to which Seller is bound; (F) any outstanding bonds, letters of credit posted or guaranteed by Seller with respect to any Person, other than those that do not exceed $10,000 in the aggregate; and (G) any covenants not to compete or other obligations affecting Seller that would materially restrict any of them or their affiliates from engaging in any business or activity. True and correct copies of all the instruments described in Schedule 2.2(l) have been furnished or made available to Buyer. Except as noted in Schedule 2.2(l), all such agreements, arrangements or commitments are valid and subsisting and Seller, to the extent each is a party, has duly performed its obligations thereunder in all material respects to the extent such obligations have accrued, and no breach or default exists thereunder by Seller or, to the knowledge of Seller, any other party thereto. There are no material liabilities of any of the parties to any of the contracts between Seller and third parties arising from any breach of or default in any provision thereof, other than such breaches that, individually or in the aggregate, could not reasonably be expected to have a Seller MAE, or that would permit the acceleration of any obligation of any party thereto or the creation of a lien or encumbrance upon any asset of Seller. (m) Title to Property. (i) Seller has good and indefeasible title to, or valid leasehold interests in, all of their properties and assets including all real property and all other properties (tangible or intangible, real or personal) carried on their books as an asset or used exclusively by them in their business. (ii) Seller has complied in all material respects with the terms of all leases to which it is a party and under which it is in occupancy, and all such leases are in full force and effect. Seller enjoys peaceful and undisturbed possession under all such leases. (n) Insurance Policies. Schedule 2.2(n) contains a correct and complete description of all insurance policies of Seller covering Seller, any employees or other agents of Seller or any assets of Seller. Each such policy is in full force and effect, is with responsible insurance carriers and is substantially equivalent in coverage and amount to policies covering companies of the size of Seller and in the business in which Seller is engaged, in light of the risk to which such companies and their employees, businesses, properties and other assets may be exposed. All retroactive premium adjustments under any worker's compensation policy of Seller have been recorded in Seller's financial statements in accordance with generally accepted accounting principles and are reflected in the financial statements. (o) Loans. Schedule 2.2(o) sets forth all existing loans, advances or other extensions of credit (excluding accounts receivable arising in the ordinary course of business) by Seller to any party, including intercompany loans, advances, guaranties or extensions of credit. ARTICLE III ADDITIONAL AGREEMENTS 3.1 Filings; Consents; Reasonable Efforts. Subject to the terms and conditions of this Agreement, Seller and Buyer shall (I)make all filings necessary under the applicable Securities Acts, the Exchange Act, the Texas Corporations and Partnership Laws and applicable blue sky or similar securities laws and shall use all reasonable efforts to obtain required approvals and clearances with respect thereto; (ii) use reasonable efforts to obtain all consents, waivers, approvals, authorizations, and orders required in connection with the authorization, execution, and delivery of this Agreement; and (iii) use reasonable efforts to take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper, or advisable to make effective as promptly as practicable the Transactions. 3.2 Notification of Certain Matters. Seller shall give prompt notice to Buyer, and Buyer shall give prompt notice to Seller, orally and in writing, of (i) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate at any time from the date hereof to the Closing Date; and (ii) any material failure of Seller or Buyer, as the case may be, or any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be compiled with or satisfied by it hereunder. 3.3 Indemnification of Sellers after the Closing Date. After the Closing Date, Buyer shall cause to indemnify and hold the individual parties listed in Exhibit A harmless for any damages, costs and expenses, including reasonable legal fees, for any and all third-party claims, actions, suits, investigations, inquiries or proceedings arising after the Closing Date and out of any actions of said individuals in the ordinary course of business and within the scope of their employment or affiliation with Buyer as officers, directors, employees or independent contractors of Buyer. 3.4 Buyback Option of Seller. In the event that Buyer plans to discontinue or divest itself of all operations in the San Antonio area within three years of the Closing Date, Seller shall have a right of first refusal to purchase the entire San Antonio operations, including all of the existing accounts, assets (including rights to the trade names "CMS" and "CMS Technology Services"), and liabilities, located within the San Antonio area for a cash sum secured by a promissory note (payable in 36 equal monthly installments) calculated as follows: multiply by twenty-five percent (25%) the average annual service revenues recorded in the fiscal years prior to the year in which discontinuation of operations in San Antonio occurs. ARTICLE IV CONDITIONS 4.1 Conditions to Obligations of Each Party. The respective obligations of each party to consummate the Agreement and the Transactions shall be subject to the fulfillment of the following conditions: (a) No order shall have been entered and remain in effect in any action or proceeding before any foreign, federal or state court or governmental agency or other foreign, federal or state regulatory or administrative agency or commission that would prevent or make illegal the consummation of the Transactions; (b) There shall have been obtained any and all material permits, approvals and consents of any governmental body, commission or agency that reasonably may be deemed necessary so that the transactions contemplated thereby will be in compliance with applicable laws, the failure to comply with which would have a Seller MAE or Buyer MAE; and (c) The receipt of all approvals and consents of third persons the granting of which is necessary for the Transactions contemplated in connection therewith. (d) Seller understands and acknowledges that such Buyer Common Stock to be issued will not be registered under the Securities Act of 1933 and will be restricted stock under SEC Rule 144 for a period of at least one year from the date of issuance. Seller acknowledges that the share certificates shall bear some form of restrictive legend as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. 4.2 Additional Conditions to Obligations of Buyer. The obligation of Buyer to consummate the Agreement and the Transactions is, at the option of Buyer, also subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) The representations and warranties of Seller in this Agreement shall be true and correct on the Closing Date as if made on and as of that date, except for changes with the prior written consent of Buyer; (b) There shall have been no material adverse change in the assets, properties, business, operations, or condition (financial or otherwise) of Seller (taken as a whole); (c) There shall be no liability or claim existing with respect to Seller that is material to Seller, taken as a whole, other than such liabilities or claims the nature and amount of which have been disclosed in all material respects in this Agreement as of the date hereof; (d) All of the other terms, conditions, covenants and agreements to be complied with or performed by Seller under this Agreement on or before the Closing Date shall have been duly complied with or performed in all material respects; (e) The Closing Date shall have occurred on or before July 31, 2004; (f) Seller shall deliver to Buyer customary closing documents, each of which shall be dated as of the Closing Date, duly executed and in a form reasonably satisfactory to Buyer, including a certificate of Seller's general partner confirming all of the matters set forth in Sections 4.2(a)-(d); (g) There shall not have occurred (i) any suspension or limitation on trading in securities generally on any Stock Exchange or the establishment of minimum prices on such Exchange, (ii) a declaration of a banking moratorium either by Federal or New York State authorities or (iii) any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of Buyer, impractical or inadvisable to proceed with the consummation of the Transactions contemplated hereby to be consummated at the Closing Date. 4.3 Additional Conditions to Obligations of Seller. The obligation of Seller to consummate the Transactions contemplated by this Agreement is, at the option of Seller, also subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) The representations and warranties of Buyer contained in Section 2.1 shall be accurate as of the date of this Agreement and (except to the extent such representations and warranties speak specifically as of an earlier date) as of the Closing Date as though such representations and warranties had been made at and as of that time; all the terms, covenants and conditions of this Agreement to be complied with and performed by Buyer on or before the Closing Date shall have been duly complied with and performed in all material respects. ARTICLE V GENERAL PROVISIONS 5.1 Survival of Representations, Warranties and Indemnities. The representations, warranties and indemnities in this Agreement shall survive the confirmation of the Closing Date until Final Payout. 5.2 Public Statements. Seller and Buyer agree to consult with each other prior to issuing any press release or otherwise making any public statement with respect to the transactions contemplated hereby. 5.3 Assignment. This Agreement shall inure to the benefit of and will be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 5.4 Notices. All notices, requests, demands, claims and other communications which are required to be or may be given under this Agreement shall be in writing and shall be deemed to have been duly given if (i) delivered in Person or by courier, (ii) sent by telecopy or facsimile transmission, answer back requested, or (iii) mailed, certified first class mail, postage prepaid, return receipt requested, to the parties hereto at the following addresses: if to Seller: Mr. Mitchell R. Sowards 11123 Cedar Mountain San Antonio, Texas 78249 with a copy to: Mr. T. Drew Cauthorn 700 N. St. Mary's Suite 600 San Antonio, Texas 78205 if to Buyer: Mr. Robert C. Rhodes Systems Evolution Inc. 10707 Corporate Drive Suite 156 Stafford, Texas 77477 with a copy to: Roger L. Shoss 807 S. Post Oak Lane, Suite 223 Houston, Texas 77056 or to such other address as any party shall have furnished to the other by notice given in accordance with this Section 5.4. Such notices shall be effective, (i) if delivered in Person or by courier, upon actual receipt by the intended recipient, (ii) if sent by telecopy or facsimile transmission, when the answer back is received, or (iii) if mailed, upon the earlier of five days after deposit in the mail and the date of delivery as shown by the return receipt therefor. 5.5 Governing Law. All questions arising out of this Agreement and the rights and obligations created herein, or its validity, existence, interpretation, performance or breach shall be governed by the laws of the State of Texas, without regard to conflict of laws principles. 5.6 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provision, covenants and restrictions of this Agreement shall continue in full force and effect and shall in no way be affected, impaired or invalidated. 5.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 5.8 Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. 5.9 Entire Agreement: Third Party Beneficiaries. This Agreement shall constitute the entire agreement and supersede all other prior agreements and understandings, both oral and written, among the parties or any of them, with respect to the subject matter hereof and neither this nor any document delivered in connection with this Agreement confers upon any Person not a party hereto any rights or remedies hereunder. 5.10 Waiver and Amendment. Any provision of this Agreement may be waived at any time by the party that is, or whose stockholders are, entitled to the benefits thereof. This Agreement may not be amended or supplemented at any time, except by an instrument in writing signed on behalf of each party hereto. The waiver by any party hereto of any condition or of a breach of another provision of this Agreement shall not operate or be construed as a waiver of any other condition or subsequent breach. The waiver by any party hereto of any of the conditions precedent to its obligations under this Agreement shall not preclude it from seeking redress for breach of this Agreement other than with respect to the condition so waived. IN WITNESS WHEREOF, each of the parties caused this Agreement to be executed on its behalf by its officers thereunto duly authorized and in their individual capacities, all as of the date first above written. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] BUYER SYSTEMS EVOLUTION INC., a Texas Corporation By: /s/ Robert C. Rhodes ------------------------------- Name: Robert C. Rhodes Title: Chief Executive Officer SYSTEMS EVOLUTION INC., An Idaho Corporation By: /s/ Robert C. Rhodes ------------------------------- Name: Robert C. Rhodes Title: Chief Executive Officer SELLER SOUTHWEST CMS TECHNOLOGIES SERVICES LP, a Texas Limited Partnership acting through its General Partner, CMS Associates, LLC By: /s/ Mitchell Sowards ------------------------------- Name: ___________________________ Title: ____________________________ By: /s/ Mitchell Sowards ------------------------------- Name: Mitchell R. Sowards EXHIBIT A OWNERSHIP OF SELLER Southwest CMS Technology Services LP CMS Associates Inc., general partner..............1% Mitchell Sowards.................................79% Christopher Bunch................................20% CMS Associates, LLC Mitchell Sowards...............................100% Buyer Common Stock The 200,000 restricted shares of SEVI Common Stock referred to in Section 1.2(b) shall be distributed as follows: Mitchell Sowards to receive 160,000 restricted shares of SEVI Common stock Christopher Bunch to receive 40,000 restricted shares of SEVI Common stock EXHIBIT B FORM OF PROMISSORY NOTE PROMISSORY NOTE COUNTY OF HARRIS JULY 13, 2004 STATE OF TEXAS FOR VALUE RECEIVED, Systems Evolution Inc., a Texas corporation ("Maker") promises to pay to the order of Mitchell R. Sowards at 11123 Cedar Mountain, San Antonio, TX 78249, the principal sum of THIRTY TWO THOUSAND DOLLARS ($32,000) payable in four (4) equal installments of Eight Thousand Dollars ($8,000) each quarter commencing on October 1, 2004 and ending on July 1, 2005. If default be made in the payment when due of any part or installment of this Note, then the whole sum of the principal will become immediately due and payable at the option of the holder of this Note, without notice. Further, if Maker should at any time fail in business or become insolvent, or commit an act of bankruptcy, or if any writ of execution, garnishment, attachment, or other legal process is issued against any deposit account of or other property of the Maker, or if any assessment for taxes against Maker, other than taxes on real property, is made by the federal or state government, or any department of the federal or state government, or if Maker fails to notify holder of any material change in his financial condition, then and in such case all of the obligations of the Maker will, at the option of the holder, become due and payable immediately without demand or notice. In the event of commencement of suit to enforce payment of this Note, Maker agrees to pay such additional attorneys' fees and court costs as the court may adjudge reasonable. This Note is made and enforceable under the laws of the State of Texas. IN WITNESS OF THIS AGREEMENT, Maker has caused this Note to be executed. SYSTEMS EVOLUTION INC. ----------------------- Robert C. Rhodes Chief Executive Officer EXHIBIT B FORM OF PROMISSORY NOTE PROMISSORY NOTE COUNTY OF HARRIS JULY 13, 2004 STATE OF TEXAS FOR VALUE RECEIVED, Systems Evolution Inc., a Texas corporation ("Maker") promises to pay to the order Christopher A. Bunch, at 12358 Hart Crest, San Antonio, TX 78249, the principal sum of EIGHT THOUSAND DOLLARS ($8,000) payable in four (4) equal installments of Two Thousand Dollars ($2,000) each quarter commencing on October 1, 2004 and ending on July 1, 2005. If default be made in the payment when due of any part or installment of this Note, then the whole sum of the principal will become immediately due and payable at the option of the holder of this Note, without notice. Further, if Maker should at any time fail in business or become insolvent, or commit an act of bankruptcy, or if any writ of execution, garnishment, attachment, or other legal process is issued against any deposit account of or other property of the Maker, or if any assessment for taxes against Maker, other than taxes on real property, is made by the federal or state government, or any department of the federal or state government, or if Maker fails to notify holder of any material change in his financial condition, then and in such case all of the obligations of the Maker will, at the option of the holder, become due and payable immediately without demand or notice. In the event of commencement of suit to enforce payment of this Note, Maker agrees to pay such additional attorneys' fees and court costs as the court may adjudge reasonable. This Note is made and enforceable under the laws of the State of Texas. IN WITNESS OF THIS AGREEMENT, Maker has caused this Note to be executed. SYSTEMS EVOLUTION INC. ----------------------- Robert C. Rhodes Chief Executive Officer SCHEDULES 2.1(c) Consents and Approvals of Buyer NONE 2.2(d) Bank Liabilities of Seller (A) Bank of America "Creditline for Business" $50,000.00 line of credit, with drawn amount of $39,000.00. (B) Wells Fargo term loan number 83-7657747-6 with an outstanding balance amount of $71,000.00. (C) Revolving purchase line of credit with Ingram Micro, activated for an amount of $30,000.00. 2.2(e) Other Liabilities of Seller NONE over $10,000.00 2.2(g) Litigation NONE 2.2(h) Taxes NONE 2.2(i) Severance Payments NONE 2.2(j) Brokers NONE 2.2(l) Contracts (A) Lease Agreement dated August 1st, 2003 with Console Building LP for the premises located at 9501 Console Drive, Suite 202, San Antonio, Texas 78229, which terminates July 31, 2005. (B) Lease with City Capital for N-Central dated April 29th, 2004 for an amount of $875 per month for 36 months. 2.2(n) Insurance Policies (A) $100,000.00 life insurance policy on Mitchell R. Sowards with the USAA Life Insurance Company, policy number J568436365. (B) $100,000.00 life insurance policy on Christopher A. Bunch with the USAA Life Insurance Company, policy number M851845223. (C) General Business insurance policy with Sentry Insurance, A Mutual Company, policy number 24-20474-03, sold and represented by J. Bradley James. 2.2(o) Advances and inter-company Loans of Seller NONE EX-31 3 ex31.txt Exhibit 31 CERTIFICATIONS I, Robert C. Rhodes, Chief Executive Officer of Systems Evolution Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Systems Evolution Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and d. disclosed in this report any change in the registrant's intternal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 20, 2004 /s/ Robert C. Rhodes ------------------------- Robert C. Rhodes Chief Executive Officer And Chief Financial Officer EX-32 4 ex32.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Systems Evolution Inc. (the "Company") on Form 10-QSB for the quarter ended August 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert C. Rhodes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert C. Rhodes ------------------------- Robert C. Rhodes Chief Executive Officer And Chief Financial Officer October 20, 2004 -----END PRIVACY-ENHANCED MESSAGE-----