8-K 1 v024815_8k.txt SECURITIES AND EXCHANGE COMMISION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report - August 19, 2005 SYSTEMS MANAGEMENT SOLUTIONS, INC. (Exact Name of Registrant as Specified in its Charter) NEVADA (State or Other Jurisdiction of Incorporation) 333-45210 88-0460457 (Commission File Number) (IRS Employer Identification Number) 7550 IH-10 West, 14th Floor San Antonio, Texas 78229 (Address of Principal Executive Offices and Zip Code) 210-541-7133 (Registrant's Telephone Number, Including Area Code) ITEM 2.01 Results of Audit and Review of Recent Acquisition. On April 6, 2005, the Registrant's wholly owned subsidiary named SMSN Merger Sub, Inc., a Texas corporation merged with SMS Envirofuels, Inc., a Texas corporation, and the Registrant. Under the terms of such Plan of Merger, the remaining entity name will be changed to SMS Envirofuels, Inc. To follow are the results of audit of Years Ended December 31, 2003 and December 31, 2004 and review of the Quarter Ended March 31, 2005 of SMS Envirofuels, Inc. In addition, pro forma statements are provided to reflect financial statement effect as if the merger took place at inception SMS Envirofuels, Inc. SMS Envirofuels, Inc. has developed a plant to produce bio-diesel from soybean oil and has recently begun marketing such bio-diesel to distributors and retailers. The Registrant plans to continue this business with the operating assets of SMS Envirofuels, Inc. and to expand the production and marketing of the bio-diesel product. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the duly authorized undersigned. SYSTEMS MANAGEMENT SOLUTION, INC. (Registrant) By: s/Jim Karlak Date: August 19 , 2005 President, Chairman of the Board and CEO TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION YEARS 2003 AND 2004.........................1 ITEM 1. FINANCIAL STATEMENTS (AUDITED)....................................1 PART II FINANCIAL INFORMATION QUARTER ENDED MARCH 31, 2005................7 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)..................................7 PART III - PROFORMA FINANCIAL STATEMENTS...................................11 SIGNATURES.................................................................15 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (AUDITED) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors SMS Envirofuels, Inc. (formerly Texas Envirofuels, LLC.) San Antonio, Texas We have audited the accompanying balance sheet of SMS Envirofuels, Inc. as of December 31, 2004, and the related statements of operations, members' equity, and cash flows for each of the two years then ended. These financial statements are the responsibility of SMS Envirofuels' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMS Envirofuels, Inc. as of December 31, 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. The accompanying financial statements have been prepared assuming that the SMS Envirofuels, Inc. will continue as a going concern. As discussed in Note 3 to the financial statements, the deficiency in working capital at December 31, 2004 and the operating losses raise substantial doubt about SMS Envirofuels, Inc.'s ability to continue as a going concern. Management's plans concerning these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Malone & Bailey, PC Houston, Texas www.malone-bailey.com August 10, 2005 SMS Envirofuels, Inc. (formerly Texas Envirofuels, LLC) BALANCE SHEET December 31, 2004 ASSETS Current Assets Inventory 22,022 Prepaids 571 ------------ Total current assets 22,593 Fixed Assets Property, plant & equipment, net of accumulated depreciation of $3,042 228,316 ------------ TOTAL ASSETS $ 250,909 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable $ 18,660 Accounts payable - related party 51,000 Accrued interest-related party 113,353 Notes payable - related party 1,281,380 ------------ Total Current Liabilities 1,464,393 ------------ Members' Equity (1,213,484) ------------ TOTAL LIABILITIES AND MEMBERS' EQUITY $ 250,909 ============ See accompanying summary of accounting policies and notes to financial statements. F-1 SMS Envirofuels, Inc. (formerly Texas Envirofuels, LLC) STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY Years Ended December 31, 2004 and December 31, 2003 2004 2003 ------------ ------------ Sales $ 7,501 $ 24,935 ------------ ------------ General and administrative (177,821) (137,560) Research and development (471,332) (445,409) ------------ ------------ Total operating expenses (649,153) (582,969) ------------ ------------ Net Operating Loss (641,652) (558,034) Interest expense (89,084) (24,714) ------------ ------------ Net Loss $ (730,736) $ (582,748) Beginning Members' Equity (482,748) - Members' Contributions - 100,000 ------------ ------------ Ending Members' Equity $ (1,213,484) $ (482,748) ============ ============ See accompanying summary of accounting policies and notes to financial statements. F-2 SMS Envirofuels, Inc. (formerly Texas Envirofuels, LLC) CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2004 and December 31, 2003 2004 2003 ------------ ------------ Cash Flows From Operating Activities Net income (loss) $ (730,736) $ (582,748) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,815 227 Changes in: Other current assets (571) - Accounts payable 18,660 - Inventory (22,022) - Accounts payable-Related Party 51,000 - Accrued expenses-Related Party 88,640 24,713 ------------ ------------ Net Cash Used In Operating Activities (592,214) (557,808) ------------ ------------ Cash Flows From Investing Activities Purchase of fixed assets (146,434) (84,924) ------------ ------------ Net Cash Used In Investing Activities (146,434) (84,924) ------------ ------------ Cash Flows From Financing Activities Proceeds from member loans 738,561 542,819 Proceeds from member contributions - 100,000 ------------ ------------ Net Cash Provided By Financing Activities 738,561 642,819 ------------ ------------ Net change in cash (87) 87 Cash at beginning of year 87 - ------------ ------------ Cash at end of year $ - $ 87 ============ ============ Supplemental disclosure: Income taxes paid $ -- $ -- Interest paid -- -- See accompanying summary of accounting policies and notes to financial statements. F-3 SMS ENVIROFUELS,INC. (formerly Texas Envirofuels, LLC) NOTES TO FINANCIAL STATEMENTS Note 1 Organization and Nature of Operations SMS Envirofuels, Inc. ("SMSE") was originally organized as Envirofuels, LLC under Wyoming State laws on August 26, 2003. In February 2004, the State of Texas certified the application of Envirofuels, L.L.C. to do business in the State of Texas under the name of Texas Envirofuels, LLC. In February 2005, the Secretary of State for Texas issued a Certificate of Conversion for Texas Envirofuels, LLC to convert to SMS Envirofuels, Inc. effectively converting the Wyoming L.L.C. to a Texas Corporation and authorizing 1,000 shares of common stock with a par value of $0.10. On April 6, 2005, Systems Management Solutions, Inc.("SMS") acquired all of the outstanding stock of SMS Envirofuels, Inc., a Texas corporation, in exchange for 1,444,444 shares of its common stock. The acquisition was accounted for under the pooling method due to the fact that a majority shareholder of SMSE is also a majority shareholder of SMS. All of the assets, liabilities, profit and loss of SMS are combined with SMSE as if the companies have been consolidated from their inception. SMSE is a manufacturer and seller of Biodiesel, an alternative fuel for diesel engines derived from vegetable oils. The corporate headquarters are located in San Antonio, Texas while the manufacturing facility is located in Poteet, Texas, approximately 20 miles south of San Antonio. Currently, SMSE is selling grade B100 Biodiesel, produced from soybean oil and methanol, to a single distributor located in Dallas/FW, Texas area. SMSE intends to capitalize on the current federal subsidy programs available for Biodiesel production and expand its customer base and manufacturing capabilities. Note 2 Summary of Significant Accounting Policies Cash Equivalents. Highly liquid investments with original maturities of three months or less are considered cash equivalents. There were no cash equivalents as of December 31, 2004. Revenue Recognition. SMSE recognizes revenue from sales of Biodiesel fuel when the earning process is complete and the risks and rewards of ownership have transferred to the customer. Service revenues are recognized as services are provided. Allowance for Doubtful Accounts. SMSE analyzes current accounts receivable for an allowance for doubtful accounts based on historical bad debt, customer credit-worthiness, the current business environment and historical experience with the customer. The allowance includes specific reserves for accounts where collection is deemed to be no longer probable. Inventory: SMSE tracks its inventory and values it using the First In First Out (FIFO) method. Raw Materials are procured and upon processing flow directly into the Finished Goods account. The entire process takes approximately 12-13 hours and therefore the need for movement in and out a WIP accounts is not cost-beneficial. Property and equipment are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Major renewals and improvements are capitalized, while minor replacements, maintenance, and repairs are charged to current operations. Long-lived Assets. Property and equipment are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Major renewals and improvements are capitalized, while minor replacements, maintenance, and repairs are charged to current operations. The costs associated with the development of the Plant's Processing system are accumulating and will begin to be depreciated when the system is fully operational. F-4 Research and Development. SMSE expenses research and development costs as incurred. Research and development costs expensed in the periods ended December 31, 2003 and December 31, 2004 are $445,499 and $471,332 respectively. Income taxes. Through December 31, 2004, SMSE was a limited liability company (Texas Envirofuels, LLC). Federal and state income taxes are not payable by, or provided for, the limited liability company. Members of Texas Envirofuels, LLC are taxed individually on their share of partnership earnings. Use of Estimates in Financial Statement Preparation. 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, the 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. Recently Issued Accounting Pronouncements. SMSE does not expect the adoption of recently issued accounting pronouncements to have a significant impact on their financial position, results of operations or cash flow. Note 3 Going Concern SMSE incurred a net loss of $582,748 and $730,736 for the years ended December 31, 2003 and December 31, 2004 respectively, and has a negative working capital of $1,441,800 as of December 31, 2004. These conditions create an uncertainty as to SMSE's ability to continue as a going concern. Management is trying to raise additional capital through sales of common stock as well as seeking financing from third parties. The financial statements do not include any adjustments that might be necessary if SMSE is unable to continue as a going concern. Note 4 Property and Equipment Property and equipment as of December 31, 2004 consisted of the following:

Note 5 Related Party Line of Credit As of December 31, 2004, the SMSE owes $1,281,380 to United Mangers Group, Inc. ("UMG"), the primary source of funding and a majority stockholder in SMSE's parent company SMS. There exists two promissory notes of $1,000,000 each issued by SMSE to UMG. The notes bear interest at 10% and are secured by all of the assets of SMSE and mature on August 10, 2006. F-5 Note 6 Related Party Commitments and Contingencies SMSE is party to a manufacturing site operating lease agreement with a related party for a term expiring on April 30, 2013. The minimum annual lease payments are summarized as follows: Lease 12 Months Ending Payments Due ---------------- ------------ December 31, 2005 $ 72,000 December 31, 2006 72,000 December 31, 2007 72,000 December 31, 2008 72,000 December 31, 2009 72,000 ------------ $ 360,000 ============ Note 7 Other Related Party Transactions The corporate headquarters of SMSE are located in the lease space of a wholly owned subsidiary of its parent, SMS. Note 8 Subsequent Event On April 6, 2005, the SMSE was acquired by SMS. The merger agreement called for the exchange of 1,444,444 shares of common stock from SMS for 100% of the common stock of the SMSE. The purchase will be accounted for using the Pooling of Interest Method due to fact that there exists a common majority ownership. SMS's majority shareholder is also the majority shareholder of SMSE. F-6 PART II. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) SMS ENVIROFUELS, INC. (Formerly Texas Envirofuels, LLC) BALANCE SHEET March 31, 2005 (Unaudited) ASSETS Current Assets Accounts Receivable $ 25,648 Inventory 9,447 Prepaids 229 ------------ Total current assets 35,324 Fixed Assets Property, plant & equipment, net of accumulated depreciation of $5,000 267,935 ------------ TOTAL ASSETS $ 303,259 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable $ 27,174 Accounts payable - related party 69,000 Accrued interest - related party 154,548 Notes payable - related party 1,448,158 ------------ Total Current Liabilities 1,698,880 ------------ Stockholders' Deficit Common stock, $.10 par value, 1,000 shares authorized, issued and outstanding 100 Additional Paid-in Capital 99,900 Accumulated deficit (1,495,621) ------------ Total Stockholders' Deficit (1,395,621) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 303,259 ============ See accompanying summary of accounting policies and notes to financial statements. F-7 SMS ENVIROFUELS, INC. (Formerly Texas Envirofuels, LLC) CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2005 and March 31, 2004 (Unaudited) 2005 2004 ------------ ------------ Sales $ 41,982 $ - ------------ ------------ General and administrative (190,649) (26,885) Research and Development - (159,547) ------------ ------------ Total operating expenses (190,649) (186,432) ------------ ------------ Net Operating Loss (148,667) (186,432) Interest expense (33,470) (15,347) ------------ ------------ NET LOSS $ (182,137) $ (201,779) ============ ============ Basic and diluted loss per share $ (182) $ - Weighted average shares outstanding 1,000 - See accompanying summary of accounting policies and notes to financial statements. F-8 SMS ENVIROFUELS, INC. (Formerly Texas Envirofuels, LLC) CONSOLIDATED STATEMENTS OF CASH FLOW For the Three Months Ended March 31, 2005 and March 31, 2004 (Unaudited) 2005 2004 ------------ ------------ Cash Flows From Operating Activities Net income (loss) $ (182,137) $ (201,779) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,731 89 Changes in: Other current assets 342 (143) Accounts receivable (25,648) -- Accounts payable 8,516 515 Inventory 12,575 (5,505) Accounts payable-related party 59,196 -- Accrued expenses-related party -- 22,160 ------------ ------------ Net Cash Used In Operating Activities (125,425) (184,663) ------------ ------------ Cash Flows From Investing Activities Purchase of fixed assets (41,350) -- ------------ ------------ Net Cash Used In Investing Activities (41,350) -- ------------ ------------ Cash Flows From Financing Activities Proceeds from shareholder loans 166,775 184,641 ------------ ------------ Net Cash Provided By Financing Activities 166,775 184,641 ------------ ------------ Net change in cash -- (22) Cash at beginning of year -- 87 ------------ ------------ Cash at end of year $ -- $ 65 ============ ============ Supplemental disclosure: Income taxes paid $ -- $ -- Interest paid -- -- See accompanying summary of accounting policies and notes to financial statements. F-9 SMS ENVIROFUELS,INC. NOTES TO FINANCIAL STATEMENTS Note 1 Basis of Presentations The accompanying unaudited interim financial statements of SMS Envirofuels, Inc. 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 financial statements filed with the SEC on this Form 8-K. 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 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 the most recent fiscal year 2004 as reported in this Form 8-K, have been omitted. F-10 PART III. PROFORMA FINANCIAL INFORMATION ITEM 1. PROFORMA FINANCIAL STATEMENTS (UNAUDITED) PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The following pro forma financial statements has been derived from the financial statements of System Management Solutions, Inc. ("SMS") at March 31, 2005, December 31, 2004 and June 30, 2004 and adjusts such information to give effect to the acquisition of SMS Envirofuels, Inc. ("SMSE"), a Texas corporation, as if the acquisition had occurred at March 31, 2005 for the pro forma consolidated condensed balance sheet and as of the beginning of the period for each of the pro forma consolidated condensed income statements. The pro forma financial statements are presented for informational purposes only and do not purport to be indicative of the financial condition that would have resulted if the acquisition had been consummated at March 31, 2005 or earlier. The pro forma financial statements should be read in conjunction with the notes thereto and the Company's consolidated financial statements and related notes thereto contained in the Company's latest annual report filed with the SEC. March 31, 2005 Pro forma Consolidated Condensed Balance Sheet:

F-11 March 31, 2005 Pro forma Consolidated Condensed Balance Sheet (Cont.):

F-12 2005 Quarter Ended March 31 Pro Forma Consolidated Condensed Income Statement:

2004 Pro Forma Consolidated Condensed Income Statement:

F-13 2003 Pro Forma Consolidated Condensed Income Statement:

NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) The Closing Date of the Merger Agreement between Systems Management Solutions, Inc. ("SMS") and SMS Envirofuels, Inc. ("SMSE") occurred April 6, 2005 . On that date, 1,444,444 shares of SMS common stock were issued to SMSE shareholders for 1,000 SMSE shares, or 100% of the outstanding stock of SMSE. The acquisition was accounted for under the pooling of interest method due to the entities being under common control, where all of SMSE's assets, liabilities and earnings are combined with SMS's. F-14 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 6, 2005 SYSTEMS MANAGEMENT SOLUTIONS, INC., a Nevada corporation By: /s/ James Karlak ----------------------------------------------- James Karlak, President and Chief Executive Officer By: /s/ Morris Kunofsky ----------------------------------------------- Morris Kunofsky, Chief Financial Officer F-15

Systems Management Solutions Inc 8-K