####  

**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

**(MarkOne)**

 

| **ý**                                                       |   | **Quarterly Report Under Section 13 or 15(d) of The  Securities Exchange Act of 1934** |
|------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
|                                                             |
| **For the quarterly period ended  September 26, 2003** |
|                                                             |
| **o**                                                            |   | **Transaction Report Under Section 13 or 15(d) of the  Securities Exchange Act**       |

 

**For the transition period from                                   to**

 

**Commission File Number 000-04169**

 

**SYS**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

| **California**                                                  |   | **95-2467354**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**5050Murphy Canyon Road, Suite 200, San Diego, California  92123**

(Address of PrincipalExecutive Offices)

 

**(858) 715-5500**

(Issuer’sTelephone Number, Including Area Code)

 

 

(Former Name, Former Addressand Former Fiscal Year, if ChangedSince Last Report)

 

Check whether the issuer: (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes  ý   No  o

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date: 5,637,443 shares ofcommon stock, without par value, as of October 27, 2003.

 

Transitional Small Business Disclosure Format (check one):

 

Yes  o   No  ý

 

 

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**TABLEOF CONTENTS**

 
| **PART I - FINANCIAL INFORMATION** |
|------------------------------------|
|                               |   |
|                               | Item 1. | Financial Statements |
|                               |   | Condensed Balance Sheet (unaudited)  September 26, 2003 |
|                               |   | Condensed Statements of Operations  (unaudited)  Three Months Ended September 26, 2003 and September 28, 2002 |
|                               |   | Condensed Statements of Cash Flows  (unaudited)  Three Months Ended September 26, 2003 and September 28, 2002 |
|                               |   | Notes to Condensed Financial Statements  (unaudited) |
|                               |   |   |
|                               | Item 2. | Management’s Discussion and Analysis or  Plan of Operations |
|                               |   |   |
|                               |   | New Accounting Pronouncements |
|                               |   | Description of Business |
|                               |   | Results of Operations |
|                               |   | Liquidity and Capital Resources |
|                               |   |   |
|                               | Item 2a. |  Factors Which May Affect Future  Results |
|                               |   |   |
|                               | Item 3. | Controls and Procedures |
|                               |   |   |
| **PART II - OTHER INFORMATION**    |
|                               |   |   |
|                               | Item 1. | Legal Proceedings |
|                               |   |   |
|                               | Item 2. | Changes in Securities |
|                               |   |   |
|                               | Item 3. | Defaults Upon Senior Securities |
|                               |   |   |
|                               | Item 4. | Submission of Matters to a Vote of Security  Holders |
|                               |   |   |
|                               | Item 5. | Other Information |
|                               |   |   |
|                               | Item 6. | Exhibits and Reports on Form 8-K |
|                               |   |   |
| **SIGNATURES**                     |

 

2

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PART I

FINANCIAL INFORMATION

Item 1.                           Financial Statements

SYS AND SUBSIDIARIES

CONDENSED BALANCE SHEET

 
|                                                                                                              |   | **September  26,  2003** |      |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|
|                                                                                                              |   | **(Unaudited)**          |      |
| ASSETS                                                                                                            |   |                     |      |
| Current assets:                                                                                                   |   |                     |      |
| Cash                                                                                                              |   | $                        | 20,000    |   |
| Contract receivables, net of allowance for  doubtful accounts of $58,000                                          |   | 6,590,000                |      |
| Deferred tax assets                                                                                               |   | 266,000                  |      |
| Income tax refund receivable                                                                                      |   | 377,000                  |      |
| Other current assets                                                                                              |   | 183,000                  |      |
| Total current assets                                                                                              |   | 7,436,000                |      |
|                                                                                                              |   |                     |      |
| Furniture and equipment, less accumulated  depreciation and amortization of $993,000                              |   | 697,000                  |      |
| Capitalized software for internal use, net  of accumulated amortization of $22,000                                |   | 80,000                   |      |
| Other assets                                                                                                      |   | 275,000                  |      |
| Total assets                                                                                                      |   | $                        | 8,488,000 |   |
|                                                                                                              |   |                     |      |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                         |   |                     |      |
| Current liabilities:                                                                                              |   |                     |      |
| Borrowings under bank line of credit                                                                              |   | $                        | 454,000   |   |
| Current portion of working capital loan                                                                           |   | 167,000                  |      |
| Accounts payable                                                                                                  |   | 1,653,000                |      |
| Accrued payroll and related taxes                                                                                 |   | 1,298,000                |      |
| Other accrued liabilities                                                                                         |   | 470,000                  |      |
| Current portion of capital lease  obligations                                                                     |   | 32,000                   |      |
| Total current liabilities                                                                                         |   | 4,074,000                |      |
|                                                                                                              |   |                     |      |
| Working capital loan, net of current  portion                                                                     |   | 72,000                   |      |
| Convertible notes payable                                                                                         |   | 638,000                  |      |
| Convertible notes payable to related  parties                                                                     |   | 362,000                  |      |
| Capital lease obligations, net of current  portion                                                                |   | 55,000                   |      |
| Total liabilities                                                                                                 |   | 5,201,000                |      |
|                                                                                                              |   |                     |      |
| Stockholders’  equity:                                                                                       |   |                     |      |
| 9% preference stock, $1.00 par value;  2,000,000 shares authorized; 69,781 Series B shares issued and outstanding |   | 70,000                   |      |
| Common stock, no par value; 48,000,000  shares authorized; 5,511,993 shares issued and outstanding                |   | 2,870,000                |      |
| Retained earnings                                                                                                 |   | 347,000                  |      |
| Total stockholders’ equity                                                                                   |   | 3,287,000                |      |
|                                                                                                              |   | $                        | 8,488,000 |   |

 

See Notes to Condensed Financial Statements.

 

3

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SYS AND SUBSIDIARIES

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 
|                                                                                 |   | **Three  months ended** |      |
|--------------------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                                 |   | **September  26, 2003** |      | **September  28, 2002** |   |
| Contract revenues                                                                    |   | $                       | 7,552,000 |   | $ | 5,081,000 |   |
| Costs and expenses:                                                                  |   |                    |      |   |   |
| Contract costs                                                                       |   | 6,360,000               |      | 4,138,000 |   |
| General and administrative expenses                                                  |   | 935,000                 |      | 697,000 |   |
| Totals                                                                               |   | 7,295,000               |      | 4,835,000 |   |
| Income from operations                                                               |   | 257,000                 |      | 246,000 |   |
| Other (income) expense:                                                              |   |                    |      |   |   |
| Interest income                                                                      |   | (14,000                 | )         | (1,000 | ) |
| Interest expense                                                                     |   | 38,000                  |      | 53,000 |   |
| Totals                                                                               |   | 24,000                  |      | 52,000 |   |
| Income from continuing operations before  income taxes                               |   | 233,000                 |      | 194,000 |   |
| Income tax provision from continuing  operations                                     |   | 100,000                 |      | 78,000 |   |
| Income from continuing operations                                                    |   | 133,000                 |      | 116,000 |   |
| (Loss) from discontinued operations (less  applicable income tax benefit of $36,000) |   |                    |      | (54,000 | ) |
| Net income                                                                           |   | $                       | 133,000   |   | $ | 62,000 |   |
|                                                                                 |   |                    |      |   |   |
| Income from continuing operations                                                    |   | $                       | 133,000   |   | $ | 116,000 |   |
| Preference dividend requirements                                                     |   | 3,000                   |      | 3,000 |   |
| Net income applicable to common stock  attributable to continuing operations         |   | 130,000                 |      | 113,000 |   |
| Net (loss) applicable to common stock  attributable to discontinued operations       |   |                    |      | (54,000 | ) |
| Net income applicable to common stock                                                |   | $                       | 130,000   |   | $ | 59,000 |   |
|                                                                                 |   |                    |      |   |   |
| Basic net income per common share from  continuing operations                        |   | $                       | 0.02      |   | $ | 0.02 |   |
| Basic net (loss) per common share from  discontinued operations                      |   | $                       | —    |   | $ | (0.01 | ) |
| Basic net income per common share                                                    |   | $                       | 0.02      |   | $ | 0.01 |   |
|                                                                                 |   |                    |      |   |   |
| Diluted net income per common share from  continuing operations                      |   | $                       | 0.02      |   | $ | 0.02 |   |
| Diluted net (loss) per common share from  discontinued operations                    |   | $                       | —    |   | $ | (0.01 | ) |
| Diluted net income per common share                                                  |   | $                       | 0.02      |   | $ | 0.01 |   |

 

See Notes to Condensed Financial Statements.

 

4

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SYS AND SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                                                                  |   | **Three months ended**  |    |
|-----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                  |   | **September  26, 2003** |    | **September  28, 2002** |   |
| Operating activities:                                                                                                 |   |                    |    |   |   |
| Net income                                                                                                            |   | $                       | 133,000 |   | $ | 62,000 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities of continuing operations: |   |                    |    |   |   |
| Loss from discontinued operations                                                                                     |   |                    |    | 54,000 |   |
| Depreciation and amortization                                                                                         |   | 61,000                  |    | 71,000 |   |
| Deferred income taxes                                                                                                 |   | 36,000                  |    |   |   |
| Increase in allowance for doubtful accounts                                                                           |   | 30,000                  |    |   |   |
| Accretion of debt discount                                                                                            |   |                    |    | 16,000 |   |
| Issuance and release of ESOP shares for  compensation                                                                 |   | 68,000                  |    |   |   |
| Changes in operating assets and  liabilities:                                                                         |   |                    |    |   |   |
| Contract receivables                                                                                                  |   | (970,000                | )       | (734,000 | ) |
| Other receivables                                                                                                     |   |                    |    | 17,000 |   |
| Income tax refund receivable                                                                                          |   | 100,000                 |    | (111,000 | ) |
| Other current assets                                                                                                  |   | (34,000                 | )       | (93,000 | ) |
| Other assets                                                                                                          |   | (24,000                 | )       | 69,000 |   |
| Accounts payable                                                                                                      |   | 255,000                 |    | 413,000 |   |
| Accrued payroll and related taxes                                                                                     |   | 366,000                 |    |   |   |
| Income taxes payable                                                                                                  |   |                    |    | 51,000 |   |
| Other accrued liabilities                                                                                             |   | 204,000                 |    |   |   |
| Net cash provided by (used in) operating  activities of continuing operations                                         |   | 225,000                 |    | (185,000 | ) |
| Net cash used in discontinued operations                                                                              |   |                    |    | (40,000 | ) |
| Net cash provided by (used in) operating  activities                                                                  |   | 225,000                 |    | (225,000 | ) |
| Investing activities - Acquisition of  furniture and equipment                                                        |   | (15,000                 | )       | (111,000 | ) |
| Financing activities:                                                                                                 |   |                    |    |   |   |
| Net line of credit borrowings (payments)                                                                              |   | (184,000                | )       | 289,000 |   |
| Payments of related party note payable                                                                                |   |                    |    | (19,000 | ) |
| Payments of notes payable                                                                                             |   | (25,000                 | )       | (28,000 | ) |
| Payments of capital lease obligations                                                                                 |   | (7,000                  | )       | (10,000 | ) |
| Payments of dividends on preference stock                                                                             |   | (3,000                  | )       | (3,000 | ) |
| Proceeds from stock options exercised                                                                                 |   | 10,000                  |    |   |   |
| Net cash provided by (used in) financing  activities                                                                  |   | (209,000                | )       | 229,000 |   |
| Net increase (decrease) in cash                                                                                       |   | 1,000                   |    | (107,000 | ) |
| Cash at beginning of period                                                                                           |   | 19,000                  |    | 260,000 |   |
| Cash at end of period                                                                                                 |   | $                       | 20,000  |   | $ | 153,000 |   |
| Supplemental disclosure of cash flow data:                                                                            |   |                    |    |   |   |
| Interest paid                                                                                                         |   | $                       | 38,000  |   | $ | 37,000 |   |
| Income taxes paid                                                                                                     |   | $                       | —  |   | $ | 73,000 |   |

 

See Notes to Condensed Financial Statements.

 

5

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NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(1)                                  In the opinion of theCompany, the unaudited financial information in this report reflects alladjustments, consisting only of normal recurring accruals, which are considerednecessary for a fair presentation of its financial position as of September 26,2003 and its results of operations and cash flows for the periods shown.  Certain information and footnote disclosuresnormally included in financial statements prepared in conformity withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to SEC regulations.  It is suggested that these financialstatements be read in conjunction with the audited financial statementsincluded in the Company’s Report on Form 10-KSB for the fiscal year ended June30, 2003.

 

(2)                                  Basicnet income (loss) per common share is calculated by dividing net income (loss)applicable to common stock by the weighted average number of common sharesoutstanding during the period.  Thecalculation of diluted net income (loss) per common share is similar to that ofbasic net income (loss) per common share, except that the denominator isincreased to include the number of additional common shares that would havebeen outstanding if all potentially dilutive common shares, principally thoseissuable upon the conversion of notes payable and the exercise of stock optionsand warrants, were issued during the period.

 

6

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The following table summarizes thecalculation of basic and diluted net income (loss) per common share for eachperiod:

 
|                                                                                                                              |   | **Three  months ended**  |    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                                                              |   | **September  26,  2003** |    | **September  28,  2002** |   |
| Numerators:                                                                                                                       |   |                     |    |   |   |
| Income from continuing operations (A)                                                                                             |   | $                        | 133,000 |   | $ | 116,000 |   |
| Deduct - preference dividend requirements  applicable to continuing operations                                                    |   | 3,000                    |    | 3,000 |   |
| Income applicable to common stock from  continuing operations - basic (B)                                                         |   | 130,000                  |    | 113,000 |   |
| Add - interest on convertible notes, net of  tax effects                                                                          |   | 15,000                   |    | 15,000 |   |
| Income applicable to common stock from  continuing operations - diluted (C)                                                       |   | 145,000                  |    | 128,000 |   |
| Loss applicable to common stock from  discontinued operations (D)                                                                 |   | —                   |    | (54,000 | ) |
| Net income applicable to common stock (E)                                                                                         |   | $                        | 145,000 |   | $ | 74,000 |   |
| Denominators:                                                                                                                     |   |                     |    |   |   |
| Weighted average shares for basic net  income per common share (F)                                                                |   | 5,472,867                |    | 4,925,444 |   |
| Add effects of dilutive securities from  assumed exercise of stock options and warrants and application of treasury  stock method |   | 730,497                  |    | 304,673 |   |
| Add effects of the conversion of the  Company’s convertible promissory notes                                                 |   | 1,000,000                |    | 1,000,000 |   |
| Weighted average shares for diluted net  income (loss) per common share (G)                                                       |   | 7,203,364                |    | 6,230,117 |   |
|                                                                                                                              |   |                     |    |   |   |
| Basic net income per common share from  continuing operations (B/F)                                                               |   | $                        | 0.02    |   | $ | 0.02 |   |
| Basic net (loss) per common share from  discontinued operations (D/F)                                                             |   | $                        | —  |   | $ | (0.01 | ) |
| Basic net income per common share (E/F)                                                                                           |   | $                        | 0.02    |   | $ | 0.01 |   |
|                                                                                                                              |   |                     |    |   |   |
| Diluted net income per common share from  continuing operations (C/G)                                                             |   | $                        | 0.02    |   | $ | 0.02 |   |
| Diluted net loss per common share from  discontinued operations (D/G)                                                             |   | $                        | —  |   | $ | (0.01 | ) |
| Diluted income per common share (E/G)                                                                                             |   | $                        | 0.02    |   | $ | 0.01 |   |

 

(3)                                  The results ofoperations for the three months ended September 26, 2003 are not necessarilyindicative of the results to be expected for the full year ending June 30, 2004.

 

(4)                                  The Company’s fiscalyear is from July 1 through June 30. The Company uses the 5-4-4 weeks per period method for each quarter;periods one (July) and twelve (June) may vary slightly in the actual number ofdays due to the beginning and end of each fiscal year.

 

(5)                                  The Company’s primarysource of liquidity is its $1,500,000 revolving line of credit facility under aloan agreement with Comerica Bank-California that expires on December 28,2003.  The loan is collateralized by allof the Company’s assets including contract receivables.  Comerica Bank-California advances funds tothe Company of up to 80% of the Company’s billed contract receivables which areless than 90 days old.  ComericaBank-California charges an interest rate of 0.750% over prime.  Comerica Bank-California requires theCompany to maintain certain covenants; as of September 26, 2003, the Company isin compliance with all of those covenants.

 

(6)                                  Previously, theCompany identified and reported on two industry segments.  The SYS Division which works primarily as acontractor for U.S. defense contractors and the U.S. Government and theTestmasters Division which primarily provided software testing services to

 

7

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industry. The Company ceased reporting the Testmasters segment after the firstquarter of 2003 since its revenues were no longer material.  As of June 30, 2003, the Companyconsolidated its Training Division into the Testmasters Division and then soldTestmasters.  Additionally, during 2003,the Company started the Walk Up Systems Division, which was discontinued as ofJune 30, 2003.  The condensedconsolidated financial statements have been restated to reflect the lossesassociated with these Divisions as losses from discontinued operations.

 

Substantially all of the Company’s operationsare conducted in the United States.

 

(7)                                  Thefollowing table summarizes certain information regarding stock options issuedunder the SYS 1997 Incentive Stock Option and Restricted Stock Plan, SYS 2003Stock Option Plan and warrants issued for the three month periods ended:

 
|                                                                           |   | **September 26, 2003**          |   |
|--------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                           |   | **Shares or  Price  Per Share** |   | **Weighted  Average  Exercise Price** |   |
| Balance outstanding at beginning of period                                     |   | 1,846,350                       |   | $ | 1.17 |   |
| Granted                                                                        |   | 133,750                         |   | $ | 2.09 |   |
| Exercised                                                                      |   | (11,500                         | )      | $ | 0.87 |   |
| Cancelled                                                                      |   | (82,500                         | )      | $ | 1.18 |   |
| Balance outstanding at end of period                                           |   | 1,886,100                       |   | $ | 1.24 |   |
| Price range at end of period                                                   |   | $ 0.47 to $2.30                 |   |   |   |
| Weighted average fair value of options and  warrants granted during the period |   | $                               | 1.01   |   |   |   |
|                                                                                |        |                                 |        |  |  |  |  |

 

The Company accounts for stock optionsgranted to employees under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees”, and its relatedinterpretations, and has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation”.  Accordingly, only the“intrinsic value” of the options would be recognized in the financial statementsas expense.  However, there have been nosuch charges.  Had the Company’s optionsbeen determined based on the fair value method, the results of operations wouldhave been reduced to the pro forma amounts indicated below:

 
|                                                                                                               |   | **Three  months ended**  |    |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                                               |   | **September  26,  2003** |    | **September  28,  2002** |   |
| Net income - applicable to common stock -  as reported                                                             |   | $                        | 130,000 |   | $ | 59,000 |   |
| Deduct total stock-based employee  compensation expense  determined under fair value - based method for all awards |   | 93,000                   |    | 56,000 |   |
| Net income applicable to common stock - pro  forma                                                                 |   | $                        | 37,000  |   | $ | 3,000 |   |
| Basic income per common share:                                                                                     |   |                     |    |   |   |
| As reported                                                                                                        |   | $                        | 0.02    |   | $ | 0.01 |   |
| Pro forma                                                                                                          |   | $                        | 0.01    |   | $ | 0.00 |   |
| Diluted income per common share:                                                                                   |   |                     |    |   |   |
| As reported                                                                                                        |   | $                        | 0.02    |   | $ | 0.01 |   |
| Pro forma                                                                                                          |   | $                        | 0.01    |   | $ | 0.00 |   |

 

8

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(8)                                  On March 19, 2003,the Company was served notice that it was named in a lawsuit filed in theSuperior Court of California, County of Orange, on March 10, 2003.  The lawsuit was brought by associates offormer Company Chairman and Chief Executive Officer, Robert D. Mowry who had arelationship with Mowry through Big Canyon Investments, Inc. and UniPrise,Inc.  The Plaintiffs are George M.Colin, William Czapar, Dan Birdsall and Brian Patterson.  In addition to the Company, the Defendantsare Robert Mowry, an individual; William Zures, an individual; UniPrise, Inc.,a California corporation; Acrylis, Inc., a Delaware corporation; Big CanyonInvestments, Inc., a California corporation; Caldera International, Inc., aUtah corporation and several Does.

 

The Plaintiffs claim to have suffered lossesand seek damages of the principal amounts of $980,000, plus interest,administrative fees and other consideration. The Company has hired counsel and will vigorously defend thelawsuit.  While the Company believes ithas no liability in this matter, there can be no assurance that the Plaintiffswill not be successful in asserting that the Company is liable to them.  The Company is not able to predict the outcomeof this litigation and there can be no assurance that the Company will notincur substantial and protracted litigation costs.

 

(9)                                  Duringthe first quarter of FY 2004, there were 11,500 shares of common stock issueddue to the exercise of stock options for $10,000.  These options had exercise prices ranging from $0.67 to $1.00.

 

On July 23, 2003, the Company issued 41,325shares of common stock with a fair value of approximately $86,000 to C-CubedCorporation.  This was the final paymentto C-Cubed for the legal settlement in FY 2003; all expenses associated withthis transaction were taken in FY 2003.

 

On September 9, 2003, The Board of Directorsauthorized management to call the Company’s 69,781 shares of issued andoutstanding 9% Series B Preference stock. The stockholders will be offered cash or an exchange for common stockusing $1.75 as the per share price of the common stock.  No shares had been exchanged as of September26, 2003.

 

On September 15, 2003, the Company issued33,378 shares of common stock to the Company’s 401(k)/Employee Stock OwnershipPlan.  These shares, which had a fairvalue of approximately $68,000, were part of the Company’s contribution onbehalf of the employees for 2003.

 

During the quarter ended September 26, 2003,the Company retired all of their treasury stock.

 

9

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(10)                            Subsequent Events

 

On September 29, 2003, the Company issued62,500 shares of common stock to the Company’s Employee Stock Ownership Plan asits contribution for the first quarter of FY 2004.  These shares had a fair market value of $137,500.

 

On September 29, 2003, the Company issued62,950 shares of common stock to employees that participated in the EmployeeStock Purchase Plan.  The period ofperformance was from January 1, 2003 to June 30, 2003.  These shares had a fair market value of$138,490.

 

Effective October 16, 2003, Clifton L. Cooke,Jr., the Company’s President and CEO, exercised 250,000 warrants at $1.00 percommon share.  These shares had a fairmarket value of $450,000.

 

Effective October 20, 2003, Clifton L. Cooke,Jr., the Company’s President and CEO, converted his $225,000 note at $1.00 percommon share.  These shares had a fairmarket value of $405,000.

 

10

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Item 2.                           Management’s Discussionand Analysis or Plan of Operations

 

To the extent that the information presentedin this quarterly report discusses financial projections, information orexpectations about our business plans, results of operations, products ormarkets, or otherwise makes statements about future events, such statements areforward-looking.  Such forward-lookingstatements can be identified by the use of words such as “intends”,“anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”,“plans” and “proposes”.  Although webelieve that the expectations reflected in these forward-looking statements arebased on reasonable assumptions, there are a number of risks and uncertaintiesthat could cause actual results to differ materially from such forward-lookingstatements.  These include, amongothers, the cautionary statements in the “Factors Which May Affect FutureResults” and “Management’s Discussion and Analysis or Plan of Operations”sections of this report.  Thesecautionary statements identify important factors that could cause actualresults to differ materially from those described in the forward-lookingstatements.

 

New Accounting Pronouncements

 

The FASB and Accounting Standards Executive Committee of the AmericanInstitute of Certified Public Accounts had issued certain accountingpronouncements as of September 26, 2003 that will become effective insubsequent periods; however, management of the Company does not believe thatany of those pronouncements would have significantly affected the Company’sfinancial accounting measurements or disclosures had they been in effect during2004 and 2003.

 

### Description of Business

 

The Company provides engineering, managementand technical services.  The Company wasformed and incorporated in the State of California in 1966 as SystemsAssociates, Inc.  It became a publiccorporation in 1968.  The Companychanged its name to Systems Associates, Inc. of California on December 4, 1979,and, as of March 18, 1985, it was changed to SYS.  On June 19, 2002, the Board of Directors adopted a resolution touse the DBA of SYS Technologies, Inc. The Company corporate offices were moved to San Diego, California onFebruary 19, 1984, from Long Beach, California.

 

The Company provides technical professional services to multiple U.S.government agencies, state governments, and private organizations in themanagement, information technologies, engineering, finance, and communicationsindustries.  The specific servicesprovided are primarily in the fields of:

 

Systems Engineering

Naval Architecture and MarineEngineering

Program Management

Environmental Engineering

Electronic Record Management

Information Operations

Effects Based Planning

Software Training

Joint C4I Architecture

Management and AnalysisConsulting

Software Development &Testing

Information Management Systems

Logistics Analysis andEngineering

Cost Analysis and Forecasting

Theater Assessment Profiling

Total Ownership Cost

Data Fusion and KnowledgeManagement

Information Assurance

 

11

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Enterprise Solutions Division

The Company’s EnterpriseSolutions Division is based in Oxnard, California and is adjacent to major Navyactivities, which includes the Port Hueneme Division of the Naval SurfaceWarfare Center, the Naval Facilities Expeditionary Logistics Center and theNaval Air Warfare Center.  This Divisionperforms engineering services, operational analysis and information technologyservices in support of navy customers. Engineering services are in support of combat systems, ships, auxiliarysystems, components and equipment. Services include concept development and feasibility studies, design,fabrication, test and evaluation as well as installation and outfitting.  Engineering support includes all aspects ofin-service engineering including change proposals for product improvement, aswell as the logistics planning and program management planning and execution.Operational analysis and services include a full range of business functionsperformed both at the Company’s facilities for the analysis and on the customersite for direct support.  Functionalareas include public affairs, business process re-engineering, strategicplanning and financial management. Information technology services provide requirements determination andanalysis, software development, documentation development as well as on-siteadministration, training and help desk operations as a subcontractor to a largeNavy prime Information Technology contractor. This Division was established in 1983 and had revenue of $4,383,000 or58% of the Company’s revenue for the first quarter of FY 2004.  Some of this Division’s major contractsinclude:

 
| • |   | The U.S. Navy Underway Replenishment (UNREP) contract which has been  held by the Company since 1982.                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
| • |   | The Management, Planning, Analytical and Administrative (MPAA)  contract supports the U.S. Navy’s Port Hueneme Division, Naval Surface  Warfare Center. |
|   |   |                                                                                                                                                         |
| • |   | Support services for information technology services through a  subcontract in support of the Navy Marine Corps Intranet (NMCI).                             |

 

In addition, the Company provides Electronic Records Management (ERM)services and hazardous materials assessment support.

 

C4ISR Division

TheCompany’s Command, Control, Communication, Computer, Intelligence, Surveillanceand Reconnaissance (C4ISR) Division is based in San Diego, California.  This group provides C4ISR system engineeringservices and solutions, including system architecture design; advanced conceptdevelopment; advanced technology development and insertion; integrated circuitfabrication and test; system test and evaluation; effects-based operationplanning, execution and assessment; program management and business developmentsupport; organizational management analysis; and information technology andinformation operations (IO) support. The customer base includes SPAWAR Headquarters, SPAWAR Systems CenterSan Diego, NAVAIR, DARPA, as well as numerous operational commands and otherDOD industry partners such as Boeing and British Aerospace Corporation.  The C4ISR personnel work closely with Officeof Naval Research, Defense Advanced Research Programs Agency, AssistantSecretary of the Navy for Research, Development and Acquisition, AdvancedResearch and

 

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Development Activity, Chief ofNaval Operations, Naval Warfare Development Command, Joint Forces Command, andother services and Joint Agencies. This Division was established in 2000 andhad revenue of $1,889,000 or 25% of the Company’s revenue for the first quarterof FY 2004.  Some of this Division’smajor contracts include:

 
| • |   | A  prime contract with SPAWAR Systems Center’s Joint and National Systems  Division.  Subcontractors on this  contract include Northrup-Grumman, Boeing, Lucent, SAIC, and BAE. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                      |
| • |   | A subcontract with Science Applications International Corporation  (SAIC) on its SPAWAR Systems Engineering & Integration contract.                                                   |

 

Systems Engineering and Management Division

The Company’s SystemsEngineering and Management Division is based in Arlington, Virginia with asecond office located in Chesapeake, Virginia. This Division performs Department of Defense Acquisition ProgramManagement, Navy Combat System Safety Engineering, Communications and otherInformation Technology Engineering and Support Services, Port Engineering forship equipment installations, and Budgeting and Financial Management.  Typical systems supported are:  Battle Force Tactical Training (BFTT), FiberOptic Data Multiplex System (FODMS), and the Combat System Operating SequencingSystem (CSOSS).  This Division wasestablished in 2001 and had revenue of $1,280,000 or 17% of the Company’srevenue for the first quarter of FY 2004. Some of this Division’s major contracts include:

 
| • |   | As a subcontractor on the Naval Sea Systems Command’s Professional  Support Services Multiple Award Contract (NAVSEA MAC). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                            |
| • |   | Technical support to the Battle Force Tactical Training (BFTT)  program for Naval Sea Systems Command.                          |

 

All of the above Divisions

The Company has threecontracts from the General Services Administration (GSA).  These three contracts are for InformationTechnology, Financial Management Services and Professional EngineeringServices.  These contracts, which aretime and material based, have proven to be a means to develop new customers andthey are registered in the GSA Advantage System.  The GSA Advantage System is an on-line service provided by GSAthat lists the price schedules for all registered companies.

 

China Lake Division

The Company’s China LakeDivision has been consolidated into its Enterprise Solutions Division effectiveJuly 1, 2003.

 

Results ofOperations

 

The Company’s revenues for this quarter areapproximately 49% more than in the same quarter in FY 2003.  The primary reasons for the increase inrevenue are new contracts and additional tasking on the GSA, UNREP and MPAAcontracts.

 

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Total contract and general and administrativeexpenses were $7,295,000 for the first quarter of FY 2004 and $4,835,000 forFY 2003.  Interest expense is lessdue to decreased use of the Company’s line of credit with ComericaBank-California and the accretion of a debt discount recorded as interestexpense was ended in FY 2003.

 

Income from operations is $257,000 and$246,000 in the first quarter in FY 2004 and 2003, respectively.  Net income is $133,000 for the first quarterin FY 2004 as compared to $62,000 for the same quarter in FY 2003.  The funded contract backlog wasapproximately $14,977,000 at the end of the first quarter of FY 2004 comparedto $17,361,000 for the same quarter in FY 2003.

 

Liquidity and Capital Resources

 

The Company had contract receivables (net) of$6,590,000 at the end of the first quarter of FY 2004 and $5,173,000 for thesame quarter in FY 2003.  The reason forthe increase in contract receivables is due to the Company’s increased revenue.

 

The Company had accounts payable of$1,653,000 at the end of the first quarter of FY 2004 and $611,000 for the samequarter in FY 2003.  Because of theincrease in revenue, the Company has hired new employees, requiring new officeand computer equipment.  In addition,the Company engaged new subcontractors, some of which had not been paid as ofSeptember 26, 2003.

 

The Company’s primary source of liquidity isits $1,500,000 revolving line of credit facility under a loan agreement withComerica Bank-California that expires on December 28, 2003.  The outstanding balance on the Company’srevolving line of credit was $454,000 at the end of the first quarter of FY2004.  At the end of the same period inFY 2003, the line of credit balance was $289,000. The loan is collateralized byall of the Company’s assets including contract receivables.  Comerica Bank-California advances funds tothe Company of up to 80% of the Company’s billed contract receivables which areless than 90 days old.  ComericaBank-California charges an interest rate of 0.750% over prime.  Comerica Bank-California requires theCompany to maintain certain covenants; at this time the Company is incompliance with all of those covenants.

 

Management believes that the Company willhave sufficient cash flow from operations and funds available under therevolving credit agreement with Comerica Bank-California to finance its currentoperating and capital requirements through at least the current fiscalyear.  This assumes that ComericaBank-California either extends the revolving credit agreement to at least June30, 2004 or the Company obtains a new credit agreement through this period.  Long-term liquidity depends on the Company’sability to manage cash, raise cash and maintain profitability.

 

Several key factors indicating the Company’sfinancial condition include:

 
|                        |   | **September  26, 2003** |      | **June 30,  2003** |   |
|-----------------------------|--------|-------------------------|-----------|--------------------|--------|
| Current ratio               |   | 1.83                    |      | 1.92               |   |
| Debt to net worth           |   | 1.58                    |      | 1.49               |   |
| Net worth                   |   | $                       | 3,287,000 |               | $      | 3,079,000 |   |
| Net working capital         |   | $                       | 3,362,000 |               | $      | 3,166,000 |   |
| Debt to total assets        |   | 61                      | %         | 60                 | %      |
| Book value per common share |   | $                       | 0.60      |               | $      | 0.57 |   |

 

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Certain factors that may affect the Company’sfinancial performance are beyond the Company’s control. The current ratio isderived by dividing total current assets by total current liabilities.  Debt to net worth is calculated by dividingtotal liabilities (total current liabilities plus other liabilities) by networth.  Net worth is total stockholders’equity.  Net working capital is totalcurrent assets less total current liabilities. Debt to total assets is total liabilities divided by total assets.  Book value per common share is stockholders’equity related to common shares divided by the number of common sharesoutstanding at the end of the period.

 

Item 2a.                     Factors Which May Affect FutureResults

 

Information contained in this Form 10-KSBshould be studied carefully by any shareholder or potential investor whileconsidering the following risk factors to the Company.

 

**We depend upon a single customer, the U.S. government,for most of our revenues, and a decrease in its demand for our services mightharm our operating results.**

 

A substantial part of our business at the presenttime is with the U.S. Navy. Even though the level of business with thiscustomer is growing and we have negotiated multiple-year contracts, there is nocertainty that budget changes in Congress or the Department of Defense (“DoD”)will not seriously affect us.

 

**Most of our customers are government agencies subjectto unique political and budgetary constraints and have special contractingrequirements that may affect our ability to obtain new government customers.**

 

Most of our customers are government agencies,principally DoD agencies. These agencies often do not set their own budgets andtherefore have little control over the amount of money they can spend. Inaddition, these agencies experience political pressure that may dictate themanner in which they spend money. Due to political and budgetary processes andother scheduling delays that frequently occur in the contract or biddingprocess, some government agency orders may be canceled or substantiallydelayed, and the receipt of revenues or payments may be substantially delayed.

 

Inaddition, future sales to government agencies will depend on our ability tomeet government contracting requirements, certain of which may be onerous orimpossible to meet, resulting in our inability to obtain a particular contract.Common requirements in government contracts include bonding; provisionspermitting the purchasing agency to modify or terminate at will the contractwithout penalty and provisions permitting the agency to perform investigationsor audits of our business practices.

 

**Any inability to adequately retain or protect ouremployees, customer relationships and proprietary technology could harm ourability to compete.**

 

Our future success and ability to competedepends in part upon our employees, customer relationships, proprietarytechnology and trademarks, which we attempt to protect with a combination ofpatent, copyright, trademark and trade secret claims, as well as with ourconfidentiality procedures and contractual provisions. These legal protectionsafford only limited protection and are time-consuming and expensive to obtainand/or maintain. Further, despite our

 

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efforts, we may be unable toprevent third parties from soliciting our employees or customers or infringingupon or misappropriating our intellectual property.  Our employees, customer relationships and intellectual propertymay not be adequate to provide us with a competitive advantage or to preventcompetitors from entering the markets for our products and services.Additionally, our competitors could independently develop non-infringingtechnologies that are competitive with, and equivalent or superior to, ourtechnology. Monitoring infringement and/or misappropriation of intellectualproperty can be difficult, and there is no guarantee that we would detect anyinfringement or misappropriation of our proprietary rights. Even if we dodetect infringement or misappropriation of our proprietary rights, litigationto enforce these rights could cause us to divert financial and other resourcesaway from our business operations.

 

**The departure of certain key personnel could harm thefinancial condition of the Company.**

 

Clifton L. Cooke, Jr., Michael W. Fink, LindaE. Gagnon, Edward M. Lake, Kenneth D. Regan and Charles E. Vandeveer, areintimately involved in our business and some have day to day relationships withcritical customers. SYS is not able to afford additional staff to supplementthese key personnel. Competition for highly skilled business, productdevelopment, technical and other personnel is intense, and there can be noassurance that we will be successful in recruiting new personnel or inretaining our existing personnel. A failure on our part to retain the servicesof these key personnel could have a material adverse effect on our operatingresults and financial condition. We do not maintain key man life insurance onany of our employees.

 

**We face numerous competitors.**

 

We have many competitors with comparablecharacteristics and capabilities that compete for the same group of customers.Our competitors are competent and experienced and are continuously working totake projects away from us. Some of our competitors have greater financial,technical, marketing and other resources than we do. Our ability to competeeffectively may be adversely affected by the ability of these competitors todevote greater resources to the sales and marketing of their products andservices than are available to us.

 

**We must comply with numerous GovernmentRegulations.**

 

The Companycould become liable for penalties under various procurement rules andregulations.  Changes in governmentregulations could harm our operating results. Our business must comply with and is affected by various governmentregulations.  Among the most significantregulations are:

 
| • |   | the Federal Acquisition Regulations, and agency regulations  supplemental to the Federal Acquisition Regulations, which comprehensively  regulate the formation, administration and performance of government  contracts; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |
| • |   | the Truth in Negotiations Act, which requires certification and  disclosure of all cost and pricing data in connection with contract  negotiations;                                                                       |
|   |   |                                                                                                                                                                                                                      |
| • |   | government accounting regulations, which impose accounting  requirements that govern our right to reimbursement under certain cost-based  government contracts;                                                           |

 

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|   |   | and                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                |
| • |   | laws, regulations and executive orders restricting the use and  dissemination of information classified for national security purposes and  the exportation of certain products and technical data. |

 

## **Accuracyof Indirect Billing Rates is critical.**

 

The Company’s indirect billing rates are approved at least annually bythe Defense Contract Audit Agency (DCAA). These rates can differ from the Company’s actual indirect rates.  The Company budgets to have its actualindirect rates as close as possible to its DCAA approved indirect rates atfiscal year end.  If the actual indirectrates at year-end are materially different from the DCAA approved indirectrates, the Company would have to recognize that difference at year-end, whichcould affect the Company’s results of operations.

 

## **WeRely on Subcontractors.**

 

The Company regularly employs subcontractors to assist us in satisfyingour contractual obligations. If these subcontractors fail to adequately performtheir contractual obligations, our prime contract performance and our abilityto obtain future business could be materially and adversely impacted.

 

Our performance of government contracts may involve the issuance ofsubcontracts to other companies upon which we rely to perform all or a portionof the work we are obligated to deliver to our customers.  There is a risk that we may have disputes withsubcontractors concerning a number of issues including the quality andtimeliness of work performed by the subcontractor, customer concerns about thesubcontractor, our decision not to extend task orders or issue new task ordersunder a subcontract, or our hiring of former personnel of a subcontractor.  A failure by one or more of oursubcontractors to satisfactorily deliver on a timely basis the agreed-uponsupplies and/or perform the agreed-upon services may materially and adverselyimpact our ability to perform our obligations as a prime contractor.  In extreme cases, such subcontractorperformance deficiencies could result in the government terminating ourcontract for default.  A defaulttermination could expose us to liability for excess costs of procurement by thegovernment and have a material adverse effect on our ability to compete forfuture contracts and task orders.

 

## **SecurityClearances are necessary.**

 

If the Company cannot obtain the necessary security clearances, we maynot be able to perform classified work for the government and our revenues maysuffer.  Certain government contractsrequire our facilities and some of our employees, to maintain securityclearances.  If we lose or are unable toobtain required security clearances, the client can terminate the contract ordecide not to renew it upon its expiration. As a result, to the extent we cannot obtain the required securityclearances for our employees working on a particular contract, we may notderive the revenue anticipated from the contract, which, if not replaced withrevenue from other contracts, could seriously harm our operating results.

 

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Security breaches in sensitive government systems could result in theloss of clients and negative publicity. Many of the systems we develop involve managing and protectinginformation involved in national security and other sensitive governmentfunctions.  A security breach in one ofthese systems could cause serious harm to our business, could result innegative publicity and could prevent us from having further access to suchcritically sensitive systems or other similarly sensitive areas for othergovernment clients.

 

**There are risks associated with our planned growth.**

 

We plan to grow the Company’s revenues and profitsby adding to our existing customer base through internal growth and by theacquisition of other government services or technology related companies. Over the past two years we have hired senior management personnel capable ofestablishing new business units within the Company.  The San DiegoOperations Division was established during FY 2001 and has grown steadily sinceinception.  The East Coast Operations Division was established during FY2002 and has also grown steadily since inception.  Both of these divisionswere started with no assurance that they would develop into successful businessunits.  Rapid expansion through internal growth has required additionalcapital resources.  We plan to continue this approach to building ourgovernment services business.  There can be no assurance that thisapproach will result in increased profitability in the future.

 

Management believes that SYS can grow through theacquisition of other government services or technology related companies aspart of a “roll-up” strategy.  The acquisition of other companies isuncertain and contains a variety of business risks, including:  culturaldifferences, the retention of key personnel, competition, protection ofintellectual property, profitability, industry changes and others.  Although we do not have an agreement toacquire any specific company at this time, we intend to attempt to expand ouroperations through the acquisition of other companies. Acquisitions andattempted acquisitions may place a strain on our limited personnel, financialand other resources. Our ability to manage this growth, should it occur, willrequire expansion of our capabilities and personnel.  We may not be ableto find qualified personnel to fill additional positions or be able tosuccessfully manage a larger organization.

 

Wehave very limited assets upon which to rely for adjusting to businessvariations and for growing new businesses. While we are likely to look for newfunding to assist in the acquisition of other profitable businesses, it isuncertain whether such funds will be available. Our substantial reliance on ourrevolving line of credit with Comerica Bank - California imposes certainlimitations on us. If we are to grow and expand our operations, we will need toraise significant amounts of additional capital. There can be no assurance thatwe will be successful in raising a sufficient amount of additional capital, orif we are successful, that we will be able to raise capital on reasonableterms. If we do raise additional capital, our existing shareholders may incursubstantial and immediate dilution.

 

**Thereare a large number of shares that may be available for future sale, and thesale of these shares may depress the market price of our common stock.**

 

As of September 26, 2003, we had issued 5,511,993shares of common stock, convertible promissory notes that may be convertedinto 1,000,000 shares of common stock, and 252,500 warrants to purchase commonstock at a price of one dollar per share. In addition, the Company has issued882,170 exercisable stock options for the acquisition of shares of common stockat

 

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various prices.  The sale of shares issued upon anyconversion of our outstanding convertible notes or the exercise of outstandingoptions or warrants could adversely affect the market price of our commonstock.

 

**There is a limited market for our common stock.**

 

Our common stock is traded in the Over-the-CounterBulletin Board market, and this may cause delays in the timing of transactionsand reductions in the number and quality of securities analysts’ reporting onthe Company and the extent of our coverage in the media. Trading in our commonstock has been sporadic, and at present, there is a limited market for it.There can be no assurance that a stronger market will develop. Even if such amarket does develop, it may not be sustained. There are no analysts currently covering the Company.

 

**Future sales of our common stock by existingshareholders under Rule 144 could decrease the trading price of our commonstock.**

 

As of September 26, 2003, a total of 2,270,343shares of our outstanding common stock were “restricted securities” and couldbe sold in the public markets only in compliance with Rule 144 adopted underthe Securities Act of 1933 or other applicable exemptions from registration.Rule 144 provides that a person holding restricted securities for a period ofone year may thereafter sell, in brokerage transactions, an amount notexceeding in any three-month period the greater of either (i) 1% of theissuer’s outstanding common stock or (ii) the average weekly trading volume inthe securities during a period of four calendar weeks immediately preceding thesale. Persons who are not affiliated with the issuer and who have held theirrestricted securities for at least two years are not subject to the volumelimitation. Possible or actual sales of our common stock by presentshareholders under Rule 144 could have a depressive effect on the price of our commonstock.

 

**Our directors and executive officers beneficially ownapproximately 34.8% of our stock, including stock options and warrantsexercisable within 60 days of September 26, 2003; their interests couldconflict with yours; significant sales of stock held by them could have anegative effect on our stock price; shareholders may be unable to exercisecontrol.**

 

As of September 26, 2003, our executive officers,directors and affiliated persons were the beneficial owners of approximately64.4% of our common stock, including stock options exercisable within 60 daysof September 26, 2003. As a result, our executive officers, directors andaffiliated persons will have significant ability to:

 

• elect or defeat the election of ourdirectors;

• amend or prevent amendment of our articles of incorporation or bylaws;

• effect or prevent a merger, sale of assets or other corporate transaction;and

• control the outcome of any other matter submitted to the shareholders forvote.

 

As a result of their ownership and positions, our directors andexecutive officers, collectively, are able to significantly influence allmatters requiring shareholder approval, including the election of directors andapproval of significant corporate transactions. In addition, sales of significantamounts of shares held by our directors and executive officers, or the prospectof these sales, could adversely affect the market price of our common stock.Management’s stock

 

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ownership may discourage apotential acquiror from making a tender offer or otherwise attempting to obtaincontrol of us, which in turn could reduce our stock price or prevent ourshareholders from realizing a premium over our stock price.

 

**Our common stock is subject to “penny stock”rules.**

 

Our common stock is classified as a penny stock by the Securities andExchange Commission. This classification severely and adversely affects themarket liquidity for our common stock. The Commission has adopted Rule 15g-9,which establishes the definition of a “penny stock,” for the purposes relevantto us, as any equity security that has a market price of less than $5.00 pershare or with an exercise price of less than $5.00 per share, subject tocertain exceptions. For any transaction involving a penny stock, unless exempt,the rules require: (i) that a broker or dealer approve a person’s account fortransactions in penny stocks; and (ii) the broker or dealer receive from theinvestor a written agreement to the transaction, setting forth the identity andquantity of the penny stock to be purchased. In order to approve a person’saccount for transactions in penny stocks, the broker or dealer must (i) obtainfinancial information and investment experience objectives of the person; and (ii)make a reasonable determination that the transactions in penny stocks aresuitable for that person and the person has sufficient knowledge and experiencein financial matters to be capable of evaluating the risks of transactions inpenny stocks. The broker or dealer must also deliver, prior to any transactionin a penny stock, a disclosure schedule prepared by the Commission relating tothe penny stock market, which, in highlight form, sets forth (i) the basis onwhich the broker or dealer made the suitability determination and (ii) that thebroker or dealer received a signed, written agreement from the investor priorto the transaction. Disclosure also has to be made about the risks of investingin penny stocks in public offerings and secondary trading and about thecommissions payable to the broker-dealer and registered representative, currentquotations for the securities and the rights and remedies available to aninvestor in cases of fraud in penny stock transactions. Finally, monthlystatements have to be sent disclosing recent price information for the pennystock held in the account and information on the limited market in pennystocks.

 

Item 3.                           Controls and Procedures

 

TheCompany maintains certain disclosure controls and procedures that are designedto ensure that information required to be disclosed in the Company’s ExchangeAct reports is recorded, processed, summarized and reported within the timeperiods specified by the Securities and Exchange Commission and that suchinformation is accumulated and communicated to the Company’s management,including Clifton L. Cooke, Jr., the Company’s Chief Executive Officer, andEdward M. Lake, the Company’s Chief Financial Officer, as appropriate, topermit timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, the Company’s management recognizes that any controlsand procedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement’s duties require it to make its best judgment in evaluating thecost-benefit relationship of potential controls and procedures.

 

The Company andits management, including its Chief Executive Officer and Chief FinancialOfficer, engage in a variety of procedures to evaluate the effectiveness of thedesign and implementation of the Company’s disclosure controls and procedures. 

 

As noted in theCompany’s Form 10-KSB for the year ended June 30, 2003, certain “materialweaknesses” (as defined under standards established by the American Instituteof Certified Public Accountants) were identified which, if not corrected, couldresult in accounting errors or impair our ability to accurately report ourfinancial statements in a timely manner.  During the first quarter ended September 26, 2003, management tooksteps to remedy these deficiencies and will continue to monitor and evaluatefurther improvements.

 

Based uponthat evaluation and the steps noted above, Messrs Cooke and Lake concluded thatas of September 26, 2003, the Company’s disclosure controls and procedures werereasonably effective in timely alerting them to material information relatingto the Company required to be included in its periodic filings with theSecurities and Exchange Commission.

 

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PART II -OTHER INFORMATION

 

Item 1.                           Legal Proceedings

 

On March 19, 2003, the Company was servednotice that it was named in a lawsuit filed in the Superior Court ofCalifornia, County of Orange, on March 10, 2003.  The lawsuit was brought by associates of former Company Chairmanand Chief Executive Officer, Robert D. Mowry who had a relationship with Mowrythrough Big Canyon Investments, Inc. and UniPrise, Inc.  The Plaintiffs are George M. Colin, WilliamCzapar, Dan Birdsall and Brian Patterson. In addition to the Company, the Defendants are Robert Mowry, anindividual; William Zures, an individual; UniPrise, Inc., a Californiacorporation; Acrylis, Inc., a Delaware corporation; Big Canyon Investments,Inc., a California corporation; Caldera International, Inc., a Utah corporationand several Does.

 

The Plaintiffs claim to have suffered lossesand seek damages of the principal amounts of $980,000, plus agreed interest,administrative fees and other consideration. The Company has hired counsel and will vigorously defend thelawsuit.  While the Company believes ithas no liability in this matter, there can be no assurance that the Plaintiffswill not be successful in asserting that the Company is liable to them.  The Company is not able to predict theoutcome of this litigation and there can be no assurance that the Company willnot incur substantial and protracted litigation costs.

 

Item 2.                           Changes in Securities

 

During thefirst quarter of FY 2004, there were 11,500 shares of common stock issued dueto the exercise of stock options for $10,000. These options had exercise prices ranging from $0.67 to $1.00.

 

On July 23, 2003, the Company issued 41,325shares of common stock with a fair value of approximately $86,000 to C-CubedCorporation.  This was the final paymentto C-Cubed for the legal settlement in FY 2003; all expenses associated withthis transaction were taken in FY 2003.

 

On September 9, 2003, The Board of Directorsauthorized management to call the Company’s 69,781 shares of issued andoutstanding 9% Series B Preference stock. The stockholders will be offered cash or an exchange for common stockusing $1.75 as the per share price of the common stock.  No shares had been exchanged as of September26, 2003.

 

On September 15, 2003, the Company issued33,378 shares of common stock to the Company’s 401(k)/Employee Stock OwnershipPlan.  These shares, which had a fairvalue of approximately $68,000, were part of the Company’s contribution onbehalf of the employees for 2003.

 

During the quarter ended September 26, 2003,the Company retired all of their treasury stock.

 

On September 29, 2003, the Company issued62,500 shares of common stock to the

 

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Company’s Employee Stock Ownership Plan as its contribution for thefirst quarter of FY 2004.  These shareshad a fair market value of $137,500.

 

On September 29, 2003, the Company issued62,950 shares of common stock to employees that participated in the EmployeeStock Purchase Plan.  The period ofperformance was from January 1, 2003 to June 30, 2003.  These shares had a fair market value of$138,490.

 

Effective October 16, 2003, Clifton L. Cooke,Jr., the Company’s President and CEO, exercised 250,000 warrants at $1.00 percommon share.  These shares had a fairmarket value of $450,000.

 

Effective October 20, 2003, Clifton L. Cooke,Jr., the Company’s President and CEO, converted his $225,000 note at $1.00 percommon share.  These shares had a fairmarket value of $405,000.

 

Item 3.                           Defaults Upon SeniorSecurities

 

None.

 

Item 4.                           Submission of Matters toa Vote of Securities Holders

 

None.

 

Item 5.                           Other Information

 

None.

 

Item 6.                           Exhibits and Reports onForm 8-K

 
| (a)    | List of exhibits    |
|--------|---------------------|
|   | 31.1                | Certification of Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|   | 31.2                | Certification of Chief Financial Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|   | 32.1                | Certification of Chief Executive Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |
|   | 32.2                | Certification of Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |
|   |                |   |
| (b)    | Reports on Form 8-K |
|   |                |
|   | None.               |

 

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SIGNATURES

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   | SYS                     |
|--------|-------------------------|
|   | (Registrant)            |
|   |                    |
|   |                    |
| Date:  | November 10, 2003       |   | /s/ Clifton L. Cooke, Jr. |   |
|   | Clifton L. Cooke, Jr.   |
|   | Chief Executive Officer |
|   |                    |
| Date:  | November 10, 2003       |   | /s/ Edward M. Lake |   |
|   | Edward M. Lake          |
|   | Chief Financial Officer |

 

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