#### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-QSB**

 
| **(Mark One)** |
|----------------|
| **ý**     | ** ** | **Quarterly Report Under Section 13 or 15(d)  of The Securities Exchange Act of 1934** |
|           |
| ** **     | **For the quarterly period ended  March 25,  2005** |
|           |
| **o**          | ** ** | **Transaction Report Under Section 13 or  15(d) of the Securities Exchange Act** |
|           |
| ** **     | **For the transition period  from            to****            ** |
|                |  |  |  |

 

**Commission File Number  001-32397**

 

**SYS**

(Exact Name of Small Business Issuer asSpecified in Its Charter)

 
| **California**                                                                      | ** ** | **95-2467354**                        |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                    |       | (I.R.S. Employer  Identification No.) |
|                                                                                |       |                                  |
| **5050  Murphy Canyon Road, Suite 200, San Diego, California 92123**                |
| (Address of Principal  Executive Offices)                                           |
|                                                                                |       |                                  |
| **(858)  715-5500**                                                                 |
| (Issuer’s Telephone Number,  Including Area Code)                              |
|                                                                                |       |                                  |
|                                                                                |       |                                  |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report) |

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  ý    No  o

 

State the number of shares outstanding of each ofthe issuer’s classes of common equity, as of the latest practicable date:8,974,056 shares of common stock, without par value, as of April 18,2005.

 

Transitional Small Business Disclosure Format (checkone):

 

Yes  o    No  ý

 

 

----

 

**TABLEOF CONTENTS**

 
| **PART I - FINANCIAL INFORMATION**                                                                             |   |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                           |   |   |
| Item 1. Financial Statements                                                                                   |   |   |
| Consolidated Balance Sheets March 25, 2005 and June 30,  2004                                        |   |   |
| Consolidated Statements of Operations Three  and Nine Months Ended March 25, 2005 and March 26, 2004 |   |   |
| Consolidated Statements of Cash Flows Nine  Months Ended March 25, 2005 and March 26, 2004           |   |   |
| Notes to Consolidated Financial Statements                                                                     |   |   |
|                                                                                                           |   |   |
| Item 2. Management’s Discussion and  Analysis or Plan of Operation                                        |   |   |
|                                                                                                           |   |   |
| Description of Business                                                                                        |   |   |
| Results of Operations                                                                                          |   |   |
| Liquidity and Capital Resources                                                                                |   |   |
| Off-Balance Sheet Arrangements                                                                                 |   |   |
| Critical Accounting Policies and Estimates                                                                     |   |   |
|                                                                                                           |   |   |
| Item 3. Controls and Procedures                                                                                |   |   |
|                                                                                                           |   |   |
| **PART II - OTHER INFORMATION**                                                                                |   |   |
|                                                                                                           |   |   |
| Item 1. Legal Proceedings                                                                                      |   |   |
|                                                                                                           |   |   |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                           |   |   |
|                                                                                                           |   |   |
| 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

----

 

PART IFINANCIAL INFORMATION

 

Item 1.                                     FinancialStatements

 

SYS ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Unaudited)

 
| ** **                                                                                                        | ** ** | **March 25,  2005** | ** ** | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ASSETS                                                                                                            |       |                     |       |                    |       |
| Current  assets:                                                                                                  |       |                     |       |                    |       |
| Cash                                                                                                              |       | $                        | 1,080,000  |                    | $          | 2,159,000 |   |
| Accounts  receivables, net                                                                                        |       | 10,052,000               |       | 8,118,000               |       |
| Prepaid  expenses                                                                                                 |       | 141,000                  |       | 442,000                 |       |
| Income tax  refund receivable                                                                                     |       | 58,000                   |       | —                  |       |
| Inventory                                                                                                         |       | 187,000                  |       | —                  |       |
| Total  current assets                                                                                             |       | 11,518,000               |       | 10,719,000              |       |
|                                                                                                              |       |                     |       |                    |       |
| Furniture  and equipment, less accumulated depreciation and amortization of $1,268,000 and  $1,145,000            |       | 1,118,000                |       | 749,000                 |       |
| Capitalized  software, net of accumulated amortization of $53,000 and $37,000                                     |       | 49,000                   |       | 65,000                  |       |
| Intangible  assets, net of accumulated amortization of $220,000 and $46,000                                       |       | 1,246,000                |       | 595,000                 |       |
| Goodwill                                                                                                          |       | 6,776,000                |       | 5,452,000               |       |
| Other assets                                                                                                      |       | 374,000                  |       | 137,000                 |       |
| Total assets                                                                                                      |       | $                        | 21,081,000 |                    | $          | 17,717,000 |   |
|                                                                                                              |       |                     |       |                    |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                        |       |                     |       |                    |       |
|                                                                                                              |       |                     |       |                    |       |
| Current  liabilities:                                                                                             |       |                     |       |                    |       |
| Accounts  payable                                                                                                 |       | $                        | 1,246,000  |                    | $          | 1,489,000 |   |
| Accrued  payroll and related taxes                                                                                |       | 3,205,000                |       | 2,470,000               |       |
| Income taxes  payable                                                                                             |       | 33,000                   |       | —                  |       |
| Other  accrued liabilities                                                                                        |       | 1,427,000                |       | 837,000                 |       |
| Deferred  revenue                                                                                                 |       | 56,000                   |       | —                  |       |
| Current  portion of deferred tax liabilities                                                                      |       | 546,000                  |       | 546,000                 |       |
| Current  portion of notes payable and other debt                                                                  |       | 886,000                  |       | 188,000                 |       |
| Total  current liabilities                                                                                        |       | 7,399,000                |       | 5,530,000               |       |
|                                                                                                              |       |                     |       |                    |       |
| Convertible  notes payable, net of current portion                                                                |       | 2,203,000                |       | 3,517,000               |       |
| Capital  lease obligations, net of current portion                                                                |       | —                   |       | 33,000                  |       |
| Other long  term liabilities                                                                                      |       | 4,000                    |       | —                  |       |
| Deferred tax  liabilities                                                                                         |       | 289,000                  |       | 289,000                 |       |
| Total  liabilities                                                                                                |       | 9,895,000                |       | 9,369,000               |       |
| Stockholders’  equity:                                                                                       |       |                     |       |                    |       |
| Common  stock, no par value; 48,000,000 shares authorized; 8,961,056 and 8,121,921  shares issued and outstanding |       | 9,100,000                |       | 7,143,000               |       |
| Retained  earnings                                                                                                |       | 2,086,000                |       | 1,205,000               |       |
| Total  stockholders’ equity                                                                                  |       | 11,186,000               |       | 8,348,000               |       |
| Total  liabilities and stockholders’ equity                                                                  |       | $                        | 21,081,000 |                    | $          | 17,717,000 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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SYS ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS(Unaudited)

 
| ** **                                                       | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
|                                                             |       |                     |       |                     |       |   |   |   |   |
| Revenues                                                         |       | $                        | 10,944,000 |                     | $          | 8,094,000 |   | $ | 32,513,000 |   | $ | 23,304,000 |   |
| Operating  costs and expenses:                                   |       |                     |       |                     |       |   |   |   |   |
| Contract  costs                                                  |       | 8,956,000                |       | 6,785,000                |       | 27,061,000 |   | 19,297,000 |   |
| General and  administrative expenses                             |       | 1,337,000                |       | 840,000                  |       | 3,621,000 |   | 2,863,000 |   |
| Total  operating costs and expenses                              |       | 10,293,000               |       | 7,625,000                |       | 30,682,000 |   | 22,160,000 |   |
| Income from  operations                                          |       | 651,000                  |       | 469,000                  |       | 1,831,000 |   | 1,144,000 |   |
|                                                             |       |                     |       |                     |       |   |   |   |   |
| Other  (income) expense:                                         |       |                     |       |                     |       |   |   |   |   |
| Other income                                                     |       | (19,000                  | )          | (4,000                   | )          | (19,000 | ) | (35,000 | ) |
| Interest  expense                                                | 130,000    |                     | 52,000     |                     | 366,000    |   | 118,000 |   |
| Totals                                                           |       | 111,000                  |       | 48,000                   |       | 347,000 |   | 83,000 |   |
| Income  before income taxes                                      |       | 540,000                  |       | 421,000                  |       | 1,484,000 |   | 1,061,000 |   |
| Income tax  provision                                            |       | 219,000                  |       | 172,000                  |       | 603,000 |   | 442,000 |   |
| Net income                                                       |       | $                        | 321,000    |                     | $          | 249,000 |   | $ | 881,000 |   | $ | 619,000 |   |
| Preference  dividend requirements                                |       | —                   |       | —                   |       | — |   | 4,000 |   |
| Net income  applicable to common stock                           |       | $                        | 321,000    |                     | $          | 249,000 |   | $ | 881,000 |   | $ | 615,000 |   |
| Basic net  income per common share                               |       | $                        | 0.04       |                     | $          | 0.04 |   | $ | 0.11 |   | $ | 0.10 |   |
| Diluted net  income per common share                             |       | $                        | 0.03       |                     | $          | 0.03 |   | $ | 0.09 |   | $ | 0.09 |   |
| Weighted  average shares for basic net income per common share   |       | 8,825,460                |       | 6,950,042                |       | 8,383,598 |   | 6,159,876 |   |
| Weighted  average shares for diluted net income per common share |       | 11,276,234               |       | 8,766,986                |       | 11,044,063 |   | 7,719,261 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

4

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SYS ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS(Unaudited)

 
| ** **                                                                         | ** ** | **Nine months ended**    | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                         | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
| Cash flows  from operating activities:                                             |       |                     |       |   |   |
| Net income                                                                         |       | $                        | 881,000    |   | $ | 619,000 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                     |       |   |   |
| Depreciation  and amortization                                                     |       | 396,000                  |       | 191,000 |   |
| Deferred  revenue                                                                  |       | 21,000                   |       | — |   |
| Deferred rent                                                                      |       | (98,000                  | )          | — |   |
| Increase in  allowance for doubtful accounts                                       |       | —                   |       | 30,000 |   |
| Accretion of  debt discount                                                        |       | 32,000                   |       | — |   |
| Gain on  disposition of equipment                                                  |       | (8,000                   | )          | — |   |
| Changes in  operating assets and liabilities:                                      |       |                     |       |   |   |
| Contract  receivables                                                              |       | (620,000                 | )          | (713,000 | ) |
| Income tax  refund receivable                                                      |       | (58,000                  | )          | 477,000 |   |
| Inventory                                                                          |       | (27,000                  | )          |   |   |
| Other  current assets                                                              |       | 370,000                  |       | (33,000 | ) |
| Other assets                                                                       |       | (145,000                 | )          | 103,000 |   |
| Accounts  payable                                                                  |       | (672,000                 | )          | (733,000 | ) |
| Accrued  payroll and related taxes                                                 |       | 61,000                   |       | 856,000 |   |
| Income taxes  payable                                                              |       | 114,000                  |       | 310,000 |   |
| Other  accrued liabilities                                                         |       | (183,000                 | )          | 36,000 |   |
| Net cash  provided by operating activities                                         |       | 64,000                   |       | 1,143,000 |   |
| Cash flows  from investing activities:                                             |       |                     |       |   |   |
| Additions to  furniture and equipment                                              |       | (408,000                 | )          | (105,000 | ) |
| Cash paid  for acquisitions, net of cash acquired                                  |       | (354,000                 | )          | — |   |
| Net cash  used in investing activities                                             |       | (762,000                 | )          | (105,000 | ) |
| Cash flows  from financing activities:                                             |       |                     |       |   |   |
| Net line of  credit borrowings (payments)                                          |       | —                   |       | (638,000 | ) |
| Payments of  notes payable and other borrowings                                    |       | (569,000                 | )          | (111,000 | ) |
| Payments of  capital lease obligations                                             |       | (16,000                  | )          | (19,000 | ) |
| Payments of  dividends on preference stock                                         |       | —                   |       | (4,000 | ) |
| Cash paid  due to call on preference stock                                         |       | —                   |       | (60,000 | ) |
| Proceeds  from convertible notes payable                                           |       | —                   |       | 1,600,000 |   |
| Proceeds  from issuance of common stock                                            |       | 204,000                  |       | 2,091,000 |   |
| Net cash  (used in) provided by financing activities                               |       | (381,000                 | )          | 2,859,000 |   |
| Net increase  (decrease) in cash                                                   |       | (1,079,000               | )          | 3,897,000 |   |
| Cash at  beginning of period                                                       |       | 2,159,000                |       | 19,000 |   |
| Cash at end  of period                                                             |       | $                        | 1,080,000  |   | $ | 3,916,000 |   |
|                                                                               |       |                     |       |   |   |
| Supplemental  disclosure of cash flow data:                                        |       |                     |       |   |   |
| Interest  paid                                                                     |       | $                        | 306,000    |   | $ | 93,000 |   |
| Income taxes  paid                                                                 |       | $                        | 485,000    |   | $ | 23,000 |   |
| Supplemental  disclosure of noncash investing and financing activities:            |       |                     |       |   |   |
| Common stock  issued upon exercise of convertible notes                            |       | $                        | 698,000    |   | $ | 281,000 |   |
| Common stock  issued upon conversion of preference stock                           |       |                     |       | $ | 10,000 |   |
| Common stock  issued for accrued liability                                         |       |                     |       | $ | 82,000 |   |
| Common stock  issued to ESOP as contribution                                       |       |                     |       | $ | 168,000 |   |
| Common stock  issued in connection with acquisition                                |       | $                        | 988,000    |   |   |   |
| Employee  surrender of shares for exercise of options                              |       | $                        | 174,000    |   |   |   |
|                                                                                    |            |                          |            |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Consolidated Financial Statements.

 

5

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SYS ANDSUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSMarch 25, 2005

#####  

(1)                                  General

 

In the opinion of the management of SYS andsubsidiaries (the Company) the unaudited financial information in this reportreflects all adjustments, consisting only of normal recurring accruals, whichare considered necessary for a fair presentation of the consolidated financialposition of SYS and subsidiaries as of March 25, 2005 and June 30,2004 and the consolidated results of operations and cash flows for the periodsshown.  Certain information and footnote disclosures normally included infinancial statements prepared in conformity with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to SEC regulations and financial statement reclassificationshave been made in the prior year to conform to the current year presentation.It is suggested that these financial statements be read in conjunction with theaudited financial statements included in the Company’s Report on Form 10-KSBfor the fiscal year ended June 30, 2004.

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

Substantially all of the Company’s operations areconducted in the United States. The results of operations for the nine monthsended March 25, 2005 are not necessarily indicative of the results to beexpected for the full year ending June 30, 2005.

 

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

 

The March 25, 2005 consolidated financialstatements include the accounts of SYS and its wholly owned subsidiaries,Shadow I, Inc. and Polexis.  Effective January 3, 2005, the Company completedits acquisition of all of the outstanding securities of Antin Engineering, Inc(“Antin”) through its wholly-owned subsidiary, Shadow I, Inc. under an agreementand plan of merger.  As a result of themerger, Antin merged into Shadow I, Inc. The Company purchased theassets and certain liabilities of Xsilogy on December 15, 2004.  The results of the Antin and Xsilogytransactions are included for the periods subsequent to their date ofacquisition. All significant intercompany accounts and transactions areeliminated in consolidation.

 

(2)                                  Stock-BasedCompensation

 

As allowed by SFAS No. 123, Accounting forStock-Based Compensation, the Company has chosen to continue to account forstock-based compensation using the intrinsic value method prescribed in APBOpinion No. 25 and related interpretations. Accordingly, compensation expensefor stock options is measured as the excess, if any, of the fair market valueof the company’s stock at the date of the grant over the exercise price of therelated option.  Accordingly, the Companyhas issued all stock options with exercise prices equal to the fair marketvalue of the Company’s common stock and therefore, no compensation expense hasbeen incurred.

 

Had compensation costs for the Company’s stockoptions been determined based on the fair value method under SFAS No. 123, theCompany’s net income and earnings per share would have been as follows for thethree and nine months ended March 25, 2005 and March 26, 2004,respectively:

 

6

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| ** **                                                                                                                          | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                                          | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
| Net income  applicable to common stockholders - as reported - basic                                                                 |       | $                        | 321,000    |                     | $          | 249,000 |   | $ | 881,000 |   | $ | 615,000 |   |
| Deduct total  stock-based employee compensation expense determined under fair value based  method for all awards, net of tax effect |       | 49,000                   |       | 42,000                   |       | 159,000 |   | 145,000 |   |
| Net income  applicable to common stock - pro forma - basic                                                                          |       | $                        | 272,000    |                     | $          | 207,000 |   | $ | 722,000 |   | $ | 470,000 |   |
| Net income  applicable to common stockholders - as reported - diluted                                                               |       | $                        | 378,000    |                     | $          | 277,000 |   | $ | 1,046,000 |   | $ | 671,000 |   |
| Deduct total  stock-based employee compensation expense determined under fair value based  method for all awards, net of tax effect |       | 49,000                   |       | 42,000                   |       | 159,000 |   | 145,000 |   |
| Net income  applicable to common stockholders - pro forma - diluted                                                                 |       | $                        | 329,000    |                     | $          | 235,000 |   | $ | 887,000 |   | $ | 526,000 |   |
| Basic income  per common share:                                                                                                     |       |                     |       |                     |       |   |   |   |   |
| As reported                                                                                                                         |       | $                        | 0.04       |                     | $          | 0.04 |   | $ | 0.11 |   | $ | 0.10 |   |
| Pro forma                                                                                                                           |       | $                        | 0.03       |                     | $          | 0.03 |   | $ | 0.09 |   | $ | 0.08 |   |
| Diluted  income per common share:                                                                                                   |       |                     |       |                     |       |   |   |   |   |
| As reported                                                                                                                         |       | $                        | 0.03       |                     | $          | 0.03 |   | $ | 0.09 |   | $ | 0.09 |   |
| Pro forma                                                                                                                           |       | $                        | 0.03       |                     | $          | 0.03 |   | $ | 0.08 |   | $ | 0.07 |   |
|                                                                                                                                     |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(3)                                  Accountsreceivables:

 

Accounts receivables consist of the followingat March 25, 2005 and June 30, 2004:

 
| ** **                                         | ** ** | **March 25, 2005** | ** ** | **June 30, 2004** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Amounts  billed                                    |       | $                       | 5,388,000  |                   | $          | 4,423,000 |   |
| Amounts  unbilled:                                 |       |                    |       |                   |       |
| Costs and  profits in excess of billings           |       | 3,957,000               |       | 3,188,000              |       |
| Retentions,  due upon completion of contracts      |       | 239,000                 |       | 153,000                |       |
| Recoverable  costs subject to closure of contracts |       | 468,000                 |       | 354,000                |       |
|                                               |       |                    |       |                   |       |
| Totals                                             |       | $                       | 10,052,000 |                   | $          | 8,118,000 |   |

 

At March 25, 2005, costs and profits inexcess of billings consisted of amounts billed subsequent to period-end. The balances comprising receivables pursuant to retainage provisions will bedue upon completion of the contracts and audits of overhead rates by the DefenseContract Audit Agency; based on the Company’s experience with similar contractsin recent years, the balances at March 25, 2005 are expected to becollected in fiscal 2005, 2006 and 2007.

 

Recoverable costs subject to closure ofcontracts consisted primarily of revenues recognized on specific deliveryorders as a result of actual indirect expense rates exceeding the provisionallyapproved indirect rates. These receivables will be billable upon closure ofaudits of overhead rates of the specific delivery orders or the contracts.

 

7

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(4)                                  Inventory

 

Inventory consisted of the following:

 

| Raw  materials   |   | $      | 69,000  |   |
|------------------|--------|--------|---------|--------|
| Work in  process |   | 68,000 |    |
| Finished  goods  |   | 50,000 |    |
| Total            |   | $      | 187,000 |   |

 

(5)                                  Intangible Assets

 

Intangible assets consist of the following:

 
| ** **                                             | ** ** | **March 25, 2005**     | ** ** | **June 30, 2004**        | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                             | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  contracts and related customer relationships |       | $                           | 460,000    |                          | $          | 26,000 |   | $ | 300,000 |   | $ | 6,000 |   |
| Covenants  not to compete                              |       | 11,000                      |       | 5,000                         |       | 11,000 |   | 1,000 |   |
| Tradename                                              |       | 170,000                     |       | 65,000                        |       | 60,000 |   | 15,000 |   |
| Technology                                             |       | 390,000                     |       | 49,000                        |       | 200,000 |   | 10,000 |   |
| Backlog                                                |       | 155,000                     |       | 70,000                        |       | 70,000 |   | 14,000 |   |
| Patents                                                |       | 280,000                     |       | 5,000                         |       | — |   | — |   |
| Total                                                  |       | $                           | 1,466,000  |                          | $          | 220,000 |   | $ | 641,000 |   | $ | 46,000 |   |
|                                                        |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangibleassets are being amortized over periods ranging from 1 to 17 years based ontheir estimated useful lives. Aggregate amortization expense for intangibleassets for the nine months ended March 25, 2005 and March 26, 2004were $174,000 and $0, respectively. Estimated annual amortization expense forthe remainder of fiscal year 2005 and the next 4 years is as follows:

 

| ** **                             | ** ** | **Amortization  Expense** | ** ** |
|----------------------------------------|------------|---------------------------|------------|
| Three months  ended June 30, 2005 |       | $                         | 94,000     |   |
| Year Ended June 30,  2006         |       | 233,000                   |       |
| Year Ended June 30,  2007         |       | 147,000                   |       |
| Year Ended June 30,  2008         |       | 147,000                   |       |
| Year Ended June 30,  2009         |       | 130,000                   |       |
| Total                                  |       | $                         | 751,000    |   |

 

(6)                                  Notespayable and other debt

 

Notes payable at March 25, 2005 and June 30,2004 consists of the following (in thousands):

 
| ** **                        | ** ** | **March 25, 2005** | ** ** | **June 30, 2004** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Current**             | ** ** | **Long-Term**          | ** ** | **Current** | ** ** | **Long-Term** | ** ** |
| Notes  payable                    |       | $                       | 319        |                   | $          | 1,409 |   | $ | 56 |   | $ | 1,840 |   |
| Notes  payable to related parties |       |                    | 387        |                   |       | 794 |   |   | — |   |   | 1,677 |   |
| Due to  stockholder               |       | 180                     |       | —                 |       | — |   | — |   |
| Working  capital loan             |       | —                  |       | —                 |       | 97 |   | — |   |
| Capital  lease obligations        |       | —                  |       | —                 |       | 35 |   | 33 |   |
|                              |       | $                       | 886        |                   | $          | 2,203 |   | $ | 188 |   | $ | 3,550 |   |

 

The notes payable and notes payable to related parties consists ofthree-year unsecured convertible notes all of which bear interest at 10%.  Related parties are directors, officers andemployees of the Company.  These noteswere issued in connection with private placement offerings of $2.0 million and$3.2 million in 2002 and 2004, respectively

 

8

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and the acquisition of Polexis in 2004. The conversion prices and maturities vary with $706,000 convertible at$1.00 per share and maturing in the second and third quarters of fiscal 2006;$1,600,000 convertible at $2.20 per share and maturing in December 2006;and $685,000 convertible at $2.32 per share, subordinated to Company bank debtand maturing in March 2007.  The dueto stockholder consists of $180,000 due to the principal stockholder of Antinwhich was assumed by the Company in connection with the acquisition of Antin.This amount is included in the related party balance at March 25, 2005.

 

In connection with the issuance of the notes, the Company deferredcertain expenses which are included in other assets of which, approximately$49,000 remains to be amortized over the terms of the notes. The $1.6 millionissuance of notes were issued at an aggregate discount of $129,000, which isbeing accreted through interest expense over the term of these notes.

 

At March 25, 2005, the Company had paidin full the June 30, 2004 outstanding balance of $97,000 on its workingcapital loan. 

 

(7)                                  EarningsPer Share

 

Basic net income per common share is calculated bydividing net income applicable to common stock by the weighted average numberof common shares outstanding during the period.  The calculation ofdiluted net income per common share is similar to that of basic net income percommon share, except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if all potentiallydilutive common shares, principally those issuable upon the conversion of notespayable and the exercise of stock options and warrants, were issued during theperiod.

 

The following table summarizes the calculation ofbasic and diluted net income per common share for each period:

 
| ** **                                                                                                       | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                       | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
| Numerators:                                                                                                      |       |                     |       |                     |       |   |   |   |   |
| Net income                                                                                                       |       | $                        | 321,000    |                     | $          | 249,000 |   | $ | 881,000 |   | $ | 619,000 |   |
| Deduct -  preference stock dividend requirements                                                                 |       | —                   |       | —                   |       | — |   | 4,000 |   |
| Income  applicable to common stockholders - basic                                                                |       | 321,000                  |       | 249,000                  |       | 881,000 |   | 615,000 |   |
| Add back -  interest expense on convertible notes, net of tax effects                                            |       | 57,000                   |       | 28,000                   |       | 165,000 |   | 56,000 |   |
| Net income  applicable to common stockholders - diluted                                                          |       | $                        | 378,000    |                     | $          | 277,000 |   | $ | 1,046,000 |   | $ | 671,000 |   |
|                                                                                                             |       |                     |       |                     |       |   |   |   |   |
| Denominators:                                                                                                    |       |                     |       |                     |       |   |   |   |   |
| Weighted  average shares for basic net income per common share                                                   |       | 8,825,460                |       | 6,950,042                |       | 8,383,598 |   | 6,159,876 |   |
| Add dilutive  effect of assumed exercise of stock options and warrants and application of  treasury stock method |       | 749,074                  |       | 587,430                  |       | 712,261 |   | 527,467 |   |
| Add dilutive  effect of assumed conversion of convertible promissory notes                                       |       | 1,701,700                |       | 1,229,514                |       | 1,948,204 |   | 1,031,918 |   |
| Weighted  average shares for diluted net income per common share                                                 |       | 11,276,234               |       | 8,766,986                |       | 11,044,063 |   | 7,719,261 |   |
|                                                                                                             |       |                     |       |                     |       |   |   |   |   |
| Basic net  income per common share                                                                               |       | $                        | 0.04       |                     | $          | 0.04 |   | $ | 0.11 |   | $ | 0.10 |   |
|                                                                                                             |       |                     |       |                     |       |   |   |   |   |
| Diluted  income per common share                                                                                 |       | $                        | 0.03       |                     | $          | 0.03 |   | $ | 0.09 |   | $ | 0.09 |   |
|                                                                                                                  |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Excluded from the treasury stock calculationin fiscal 2005 are 0 and 218,000 shares of common stock at the end of thequarter and period ends respectively, as these options were priced above theaverage stock price for the period and

 

9

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therefore were anti-dilutive.  Excluded from the treasury stockcalculation in fiscal 2004 are 122,000 and 227,000 shares of common stock atthe quarter and period ends, respectively, as these options were priced abovethe average stock price for the period and therefore were anti-dilutive.

 

(8)                                  Lineof Credit

 

At March 25, 2005, the Company had no borrowings under itsrevolving line of credit facility (“credit facility”) provided by Comerica Bank- California. The credit facility allows for maximum borrowings of up to$4,000,000 (“credit limit”), is limited to 80% of qualifying contractreceivables, is collateralized by substantially all of the assets of theCompany, as defined, and bears interest at 0.25% above the prime rate (aneffective rate of****5.75% at March 25,2005).  The credit facility expires on December 28, 2006.  TheCompany had available borrowing capacity of $4,000,000 at March 25, 2005on this credit facility.

 

The terms of the line of credit agreement require the Company tomaintain certain financial ratios and meet specified reporting requirements. Asof March 25, 2005, the Company was in compliance with the reportingrequirements and financial ratios, which consist of, tangible effective networth, current assets to current liabilities, debt to net worth and cash flowcoverage.

 

The credit facility allows the Company to use (i) the full $4,000,000for working capital purposes or (ii) under a Sub Facility, up to $2,000,000 ofthe credit facility for permitted acquisition purposes and $750,000 forminority investment purposes.  The Company is subject to certainrestrictions on the permitted acquisitions and minority investments and in somecases must receive Comerica’s consent prior to using the facility for suchpurposes.  If used for permitted acquisitions or minority investments,such borrowings must be repaid over 48 months.  The Company has the optionof being charged prime plus 0.25% or LIBOR plus 300 basis points on the creditfacility and prime plus 0.50% or LIBOR plus 325 basis points on the SubFacility subject to minimum advance amounts and duration under the LIBORoption.

 

(9)                                  LegalMatters

 

Periodically, we are involved in legalactions in the normal course of business, including audits and investigationsby various governmental agencies that result from our work as a governmentalcontractor. There are currently no such legal matters outstanding. 

 

(10)                            Stockholders’Equity

 

During the third quarter of fiscal 2005,163,300 shares of common stock were issued due to the exercise of stockoptions.  The Company receivedapproximately $22,000 in cash and 53,000 shares of Company common stock aspayment for these issued shares.

 

During the third quarter of fiscal 2005, theCompany issued 57,406 shares of common stock to employees that participated inthe Employee Stock Purchase Plan.  Theperiod of performance was from July 1, 2004 to December 31,2004.  The Company received approximately$135,000 from the employees that opted to participate in this Plan.  

 

The Company had one note holder from the 2002subscription offering convert a $12,500 convertible note to stock in thisquarter.  The note was converted into 12,500shares of common stock at $1.00 per share.

 

The Company exercised its right to converthalf of the outstanding Polexis convertible notes in the amount of $685,000into common stock.  295,159 shares ofcommon stock were issued based on a conversion price of $2.32 per share.

 

Effective January 3, 2005, the Companyissued 323,971 shares of common stock to the stockholders of Antin as part ofthe Antin acquisition.  Pursuant to theacquisition agreement, 314,027 shares were issued to an escrow agent and areheld in an escrow account at Union Bank and may become issuable to thestockholders upon the achievement of certain revenue milestones (see note 10).

 

(11)                            Acquisitions

 

On December 16, 2004, SYS acquired all of theassets and certain liabilities of Xsilogy, Inc. (“Xsilogy”), a privately held,San Diego-based provider of wireless sensor network technologies andapplications. The assets purchased consisted principally of intellectualproperty and technology, inventory, fixed assets and certain other intangibleassets.  The acquisition

 

10

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of Xsilogy’s wireless sensor technology is an important part of theCompany’s growth strategy, representing the Company’s first expansion into theproducts-oriented business and to customers outside of the Department ofDefense (DoD). Xsilogy provides the Company with the ability to expand itsmarkets to the industrial arenas where Xsilogy has a proven domain expertise,while offering existing customers, such as the DoD, Homeland Security and stateand local governments, these new capabilities. The Company’s goal is tointegrate products and services in order to provide complete systems solutionsfor its customers.

 

Thetotal purchase price consisted of initial cash consideration, (i) $345,000,(ii) up to approximately $900,000, of which up to $200,000 may be in the formof SYS common stock and the remainder in cash,  may be earned and paidsubject to certain milestones to be achieved from the date of closing through June 30,2005 and (iii) up to a maximum of $3.5 million in additional contingentconsideration, of which up to $2.5 million may be in the form of SYS commonstock and the remainder in cash, which may be earned and paid in installmentsupon the completion of certain criteria from the date of closing through June 30,2009. As of the end of the third quarter, total consideration was $592,000which consisted of the $345,000 in cash and $247,000 of acquisition relatedcosts.

 

Thetransaction was accounted for using the purchase method in accordance with SFASNo. 141, Business Combinations, whereby the net tangible and intangible assetsacquired and liabilities assumed were recognized at their estimated fair marketvalues at the date of acquisition.  As of the end of the third quarter,the fair market value of the total assets acquired exceeded the considerationpaid to date resulting in a contingent consideration liability of $180,000. Iffuture milestones are achieved, additional consideration will be paid.Accordingly the liability will be reduced and may result in the recording ofgoodwill. If future milestones are not achieved then the fair market value ofthe assets acquired would be reduced proportionately by the amount of anyremaining contingent liability.

 

The following table summarizes the determined fairvalues of the assets acquired and liabilities assumed at the date ofacquisition:

 

| ** **                              | ** ** | ** ** | ** ** | **Estimated  Life in years** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------|------------|
| Current  assets                         |       | $          | 180,000    |                         |       |   |
| Property,  furniture and equipment, net |       | 92,000     |       | Various  (2-5)               |       |
| Cost-method  investment                 |       | 72,000     |       |                         |       |
| Patents                                 |       | 280,000    |       | 17                           |       |
| Technology                              |       | 190,000    |       | 5                            |       |
| Trade name                              |       | 60,000     |       | 4                            |       |
| Customer  relationships                 |       | 10,000     |       | 10                           |       |
| Total assets  acquired                  |       | $          | 884,000    |                         |       |   |
| Current  liabilities                    |       | 112,000    |       |                         |       |
|                                    |       |       |       |                         |       |
| Net assets  acquired                    |       | $          | 772,000    |                         |       |   |
|                                    |       |       |       |                         |       |
| Contingent  consideration liability     |       | $          | 180,000    |                         |       |   |

 

On January 6, 2005, the Companycompleted its acquisition of all of the outstanding securities of AntinEngineering, Inc. (Antin); the effective date of the acquisition was January 3,2005. The transaction was completed pursuant to an Agreement and Plan of Merger(the Plan) by and among the Company, Shadow I, Inc. (a wholly-owned subsidiaryof the Company), Antin, and all of its stockholders. Antin is a defensecontractor that provides information technology, C4ISR (command, control,communication, computer, intelligence, surveillance and reconnaissance), andtechnical support services. This acquisition furthers the Company’s strategy ofexpanding its capabilities and broadening the customer base.

 

The aggregate initial purchase price wasapproximately $1,433,000, which consisted of $49,000 in cash paid at closingand $305,000 paid subsequent to the end of the quarter, $988,000 of commonstock and $91,000 of transaction costs that consisted primarily of fees paidfor financial advisory, legal and accounting services. The Company issued323,971 shares of common stock to the stockholders of Antin, the fair value ofwhich was based on an average of the closing price of the Company’s stock threedays prior to the acquisition date. Pursuant to the Plan, an additional 314,027shares were issued to an escrow agent, on behalf of the Antin stockholders,which shares are contingently issuable to the stockholders upon the futureoperating performance of Antin through June 30, 2007. As the contingencieshave not been met or resolved as of March 25, 2005, the value of theseshares has been excluded from the purchase price. If future payments are made,amounts will be recorded as additional purchase price based upon the fairmarket value of the Company’s common stock at that time.

 

11

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The transaction was accounted for using the purchasemethod in accordance with SFAS No. 141, Business Combinations, whereby the nettangible and intangible assets acquired and liabilities assumed were recognizedat their estimated fair market values at the date of acquisition, based onpreliminary estimates made by management. The allocation of the purchase priceis subject to refinement. The following table summarizes the estimated fairvalues of the assets acquired and liabilities assumed at the date ofacquisition:

 

| ** **                              | ** ** | ** ** | ** ** | **Estimated  Life in years** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------|------------|
| Current  assets                         |       | $          | 1,488,000  |                         |       |   |
| Property,  furniture and equipment, net |       | 104,000    |       | Various  (2-5)               |       |
| Intangible  assets                      |       | 285,000    |       | Various  (1-5)               |       |
| Goodwill                                |       | 1,359,000  |       |                         |       |
| Total assets  acquired                  |       | $          | 3,236,000  |                         |       |   |
| Liabilities  assumed                    |       | 1,803,000  |       |                         |       |
|                                    |       |       |       |                         |       |
| Net assets  acquired                    |       | $          | 1,433,000  |                         |       |   |

 

The excess purchase price over the fairvalues of assets acquired and liabilities assumed was allocated to goodwill.The goodwill is not subject to amortization and none of the amount assigned togoodwill is deductible for tax purposes.

 

The following table summarizes the unaudited proforma information of the Company for the three and nine months ended March 25,2005 and March 26, 2004, as if the Xsilogy and Antin transactions hadoccurred as of the beginning of the periods being reported. The unaudited proforma information should be read in conjunction with SYS’s separate historicalconsolidated financial statements and notes thereto as filed with the UnitedStates Securities and Exchange Commission. In management’s opinion, allmaterial adjustments necessary to reflect the effect of this transaction havebeen made.

 
| ** **                            | ** ** | **Three months ended**             | ** ** | **Nine months ended**              | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **March 25,  2005  Proforma** | ** ** | **March 26,  2004  Proforma** | ** ** | **March 25,  2005  Proforma** | ** ** | **March 26,  2004  Proforma** | ** ** |
|                                  |       |                               |       |                               |       |   |   |   |   |
| Revenues                              |       | $                                  | 10,944,000 |                               | $          | 9,287,000 |   | $ | 36,044,000 |   | $ | 26,103,000 |   |
| Income from  operations               |       | $                                  | 651,000    |                               | $          | 222,000 |   | $ | 1,483,000 |   | $ | 129,000 |   |
| Net income  (loss)                    |       | $                                  | 321,000    |                               | $          | 104,000 |   | $ | 566,000 |   | $ | 22,000 |   |
|                                  |       |                               |       |                               |       |   |   |   |   |
| Net income  per common share:         |       |                               |       |                               |       |   |   |   |   |
| Basic                                 |       | $                                  | 0.04       |                               | $          | 0.01 |   | $ | 0.07 |   | $ | 0.00 |   |
| Diluted                               |       | $                                  | 0.03       |                               | $          | 0.01 |   | $ | 0.06 |   | $ | 0.01 |   |
| Weighted  average shares outstanding: |       |                               |       |                               |       |   |   |   |   |
| Basic                                 |       | 8,861,061                          |       | 7,274,011                          |       | 8,609,651 |   | 6,483,845 |   |
| Diluted                               |       | 11,311,834                         |       | 9,090,955                          |       | 11,270,116 |   | 8,043,229 |   |

 

(12)                            SegmentReporting

 

The Company reports operating results andfinancial data for two reporting segments: Defense Solutions Group (DSG) andthe Sensor Networking Systems and Products Group (SNG). The Defense SolutionsGroup provides engineering, technical, and financial and managementservices primarily to U.S. Government customers including the U.S. Navy andGeneral Services Administration, in support of Navy, Army, and Joint programsfor Defense and Civil Government organizations.  The SensorNetworking Systems and Products Group was recently formed subsequent to the acquisition of the

 

12

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assetsof Xsilogy, Inc. (Xsilogy).  Xsilogy is a provider of wireless sensornetwork technologies and applications.  The Xsilogy business will form thebasis of the new Sensor Networking Systems and Products Group which will include sensor networktechnologies, public safety and security solutions and additional product basedsolutions to both commercial and government customers.  Antin will initially be included in the DSG.  Based upon certain quantitative thresholds,both the Defense Solutions Group and the Sensor Networking Systems andProducts Group are consideredreportable segments.

 

Summarized financial information concerning ourreportable business segments for the three and nine month periods ended March 25,2005 and March 26, 2004 are as follows:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **March 25,**     | ** ** | **March 26,**    | ** ** | **March 25,** | ** ** | **March 26,** | ** ** |
| ** **                     | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                        |       |                   |       |                  |       |   |   |   |   |
| DSG                            |       | $                      | 10,904,000 |                  | $          | 8,094,000 |   | $ | 32,473,000 |   | $ | 23,304,000 |   |
| SNG                            |       | 40,000                 |       | —                |       | 40,000 |   | — |   |
|                           |       |                   |       |                  |       |   |   |   |   |
| Totals                         |       | $                      | 10,944,000 |                  | $          | 8,094,000 |   | $ | 32,513,000 |   | $ | 23,304,000 |   |
|                           |       |                   |       |                  |       |   |   |   |   |
| Income  (loss) from operations |       |                   |       |                  |       |   |   |   |   |
| DSG                            |       | $                      | 899,000    |                  | $          | 469,000 |   | $ | 2,079,000 |   | $ | 1,144,000 |   |
| SNG                            |       | (248,000               | )          | —                |       | (248,000 | ) | — |   |
|                           |       |                   |       |                  |       |   |   |   |   |
| Totals                         |       | $                      | 651,000    |                  | $          | 469,000 |   | $ | 1,831,000 |   | $ | 1,144,000 |   |

 

Interest expense and income taxes are not reportedon an operating segment basis in accordance with the Company’s method ofinternal reporting.

 

The increase in goodwill from $5.5 million to $6.8million during the quarter is related to the acquisition of Antin.

 

(13)                            RecentlyIssued Accounting Standards

 

In December 2004, the FASB revised StatementNo. 123 (FAS 123R), Share-Based Payment, which requires companies to expensethe estimated fair value of employee stock options and similar awards. Theaccounting provisions of FAS 123R will be effective as of the beginning of thefirst interim or annual reporting period that begins after June 15 fornon-small business issuers and December 15, 2005 for small businessissuers. The Company will adopt the provisions of FAS 123R using a modifiedprospective application. Under modified prospective application, FAS 123R,which provides certain changes to the method for valuing stock-basedcompensation among other changes, will apply to new awards and to awards thatare outstanding on the effective date and are subsequently modified orcancelled. Compensation expense for outstanding awards for which the requisiteservice had not been rendered as of the effective date will be recognized overthe remaining service period using the compensation cost calculated for proforma disclosure purposes under FAS 123. The Company is in the process ofdetermining how the new method of valuing stock-based compensation asprescribed in FAS 123R will be applied to valuing stock-based awards grantedafter the effective date and the impact the recognition of compensation expenserelated to such awards will have on its financial statements.

 

Item 2.                                     Management’sDiscussion and Analysis or Plan of Operation

 

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-looking statements can be identified by theuse of words such as “intends”, “anticipates”, “believes”, “estimates”, “projects”,“forecasts”, “expects”, “plans” and “proposes”.  Although we believe thatthe expectations reflected in these forward-looking statements are based onreasonable assumptions, there are a number of risks and uncertainties thatcould cause actual results to differ materially from such forward-lookingstatements. These include, among others, the cautionary statements in the “FactorsWhich May Affect Future Results” and “Management’s Discussion and Analysis orPlan of Operations” sections of this report.  These cautionary statementsidentify important factors that could cause actual results to differ materiallyfrom those described in the forward-looking statements.

 

13

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### Description ofBusiness

 

Overview

 

SYS Technologies and subsidiaries (SYS or theCompany) has provided engineering, technical, financial and management servicesto U.S. government and commercial customers since 1966. Headquartered in SanDiego, California, the Company currently has several multiple-year managementand engineering service contracts, primarily with the U.S. Navy and GeneralServices Administration. SYS employees support these organizations at variouslocations across the country, and periodically overseas.  

 

During the first quarter of fiscal year 2005 theCompany reorganized its corporate structure.  The Company’s services werepreviously delivered through three divisions; Enterprise Solutions Division,Integrated Information Solutions Division and Systems Engineering and ManagementDivision. These Divisions were consolidated into the DSG, which has accountedfor substantially all of the Company’s revenue to date.  In the secondquarter, as a result of the acquisition of the assets of Xsilogy, Inc.(Xsilogy), the Company established the SNG as a separate business segment.Accordingly, the Company now has two reportable business segments.

 

The DSG provides engineering, technical,and financial and management services primarily to U.S. Government customersincluding the U.S. Navy and General Services Administration (“GSA”), in supportof Navy, Army, and Joint programs for the Department of Defense and civilianFederal Government agencies..  The SNG was recently formed subsequent tothe acquisition of the assets of Xsilogy, Inc. (Xsilogy).  Xsilogy is aprovider of wireless sensor network technologies and applications.  TheXsilogy business will form the basis of the new SNG which will include sensornetwork technologies, public safety and security solutions and additional productbased solutions to both commercial and government customers.  Antin will initially be included in the DSG.

 

Our revenues have grown internally by establishingnew business units with experienced senior executives who have the ability togrow market share and expand our customer base. Substantially all of ourrevenues to date have come from contracts with U.S. government customers andprincipally from the U.S. Navy and GSA. In addition, during 2004 and 2005 wecompleted acquisitions which have or will add to our revenues.  TheCompany’s business growth strategy is focused on continuing to develop our corestrengths in C4ISR (command, control, communications, computing, intelligence,surveillance and reconnaissance), information technology, and systemsintegration while adding capabilities that will allow us to grow our markets inthese areas as well as expand into other markets including commercial markets.These acquisitions form a key role in our overall growth strategy. We willcontinue to evaluate acquisition opportunities and make acquisitions if thetransactions are in line with our strategy of increasing our core competencies,profitably increasing our revenues and expanding our customer base.

 

Our operating margins are affected by the mix ofcontract types (cost reimbursement, fixed-price or time and materials) as wellas the mix of prime contracts versus subcontracts. Significant portions of ourcontracts are time and materials and cost reimbursement contracts. We arereimbursed for labor hours at negotiated hourly billing rates and other directexpenses under time and materials contracts and reimbursed for all actualcosts, plus a fee, or profit, under reimbursement contracts. The financialrisks under these contracts are generally lower than those associated withother types of contracts, and margins are also typically lower than those onfixed-price contracts. The U.S. government also has awarded us fixed-pricecontracts. Such contracts carry higher financial risks because we must deliverthe products, systems or contract services at a cost below the fixed contractvalue in order to earn a profit. 

 

The following table shows our revenues from each ofthese types of contracts as a percentage of our total revenue for the followingperiods:

 

14

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| ** **          | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|---------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **          | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
|                |       |                     |       |                     |       |   |   |   |   |
| Cost  reimbursable  |       | 76%                      |       | 61%                      |       | 68% |   | 63% |   |
| Time and  materials |       | 13%                      |       | 34%                      |       | 21% |   | 33% |   |
| Fixed price         |       | 11%                      |       | 5%                       |       | 11% |   | 4% |   |
| Total               |       | 100%                     |       | 100%                     |       | 100% |   | 100% |   |

 

We have derived a majority of our revenues fromgovernmental contracts under which we act as a prime contractor. We alsoprovide services indirectly as a subcontractor. We intend to focus on retainingand increasing the percentage of our business as prime contractor because itprovides us with client relationships that generate higher levels ofrevenue.  Currently our mix of contractsconsists of approximately 65% prime contracts and 35% subcontracts.

 

DSG

 
| ** **       | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **       | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
| Revenue for  DSG |       | $                        | 10,904,000 |                     | $          | 8,094,000 |   | $ | 32,473,000 |   | $ | 23,304,000 |   |
|                  |            |                          |            |                          |            |  |  |  |  |  |  |  |  |

 

TheDSG operates out of four major locations which include San Diego and Oxnard,California and Arlington and Chesapeake, Virginia, with a minor presence inother locations.

 

TheOxnard, California office is adjacent to major U.S. Navy facilities activities,including the Port Hueneme Division of the Naval Surface Warfare Center, theNaval Facilities Expeditionary Logistics Center and the Naval Air WarfareCenter.  Work performed through this office includes engineering services,operational analysis and information technology services in support of theseNavy customers.  Engineering services are in support of combat systems,ships, auxiliary systems, components and equipment.   Operationalanalysis and services include a full range of business functions performed bothat the Company’s facilities and under direct support at the customer site.Information technology services provide requirements determination andanalysis, software development, and documentation development as well ason-site administration, training and help desk operations as a subcontractor toa large information technology prime contractor.

 

The San Diego, Californiaoffice is located near the Space and Naval Warfare Systems Command (“SPAWAR”)and SPAWAR Systems Center San Diego.  The office’s customer base not onlyincludes these San Diego based organizations, but also has employees workingwith Naval Air Systems Command (“NAVAIR”), Defense Advanced Research ProgramsAgency (“DARPA”), the Defense Information Systems Agency (“DISA”) and numerousoperational commands.   This office also provides direct support toother DoD industry partners such as Boeing, Cubic, EDS, and RockwellCollins.  The Company’s personnel work closely with Office of NavalResearch, Assistant Secretary of the Navy for Research, Development andAcquisition, Advanced Research and Development Activity, Chief of NavalOperations, Naval Warfare Development Command, Joint Forces Command, and otherservices and Joint Agencies.

 

Work performed through this office includes C4ISRsystem engineering services and solutions.  Initiatives currently beingsupported include the use of our “The Assessment Profiling System DecisionSupport System(TAPS)  to manage theInformation Operations Campaign by the 8th Army in Korea; SystemsEngineering and high speed information transfer for the ground segments of theGlobal Hawk surveillance system; development of new communicationsarchitectures for combining strategic and tactical communications and datalinks into a single composite network; and supporting SPAWAR Headquartersassessments of FORCENet related capabilities and programs. FORCEnet is theoperational construct and architectural framework for naval warfare in theinformation age. In 2004, the Company acquired Polexis, Inc., bringingadditional information integration and knowledge management programs in theNavy, Army, and Joint Services, as well as a licensed, widely used productsuite, Extensible Information Systems (XIS). Now a division of the Company, thePolexis organization is developing the Army’s Command Post of the Future, theDefense Information Systems Agency’s (DISA) Common Operating Environment, andtwo of SPAWAR’s key initiatives: Composable FORCEnet and Extensible TacticalC4I Framework.

 

TheArlington Va. office is located in the Crystal City Complex and near numerousgovernment facilities.  The Chesapeake office is located near Norfolk,Virginia.

 

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Workperformed through the Virginia offices includes DoD acquisition programmanagement, U.S.Navy combat system safety engineering, communications and otherinformation technology engineering and support services, port engineering forship equipment installations, training, and budgeting and financialmanagement.  Typical systems supported are:  Battle Force TacticalTraining (BFTT), Fiber Optic Data Multiplex System (FODMS), the Combat SystemOperating Sequencing System (CSOSS), High Energy Laser, National DefenseUniversity projects and the Global Command and Control System - Army (GCCS-A).

 

Someof the major contracts and task initiatives which the DSG is currentlyperforming work under include:

 

•                  U.S.Navy Underway Replenishment (UNREP) prime contract that has been held by theCompany since 1982. In support of this project, the Company is definingequipment loads, speeds, operating ranges, installation geometry and powernecessary to achieve the system throughput requirements. In support of theAdvanced UNREP Program, the Company also provides engineering and technicalservices to develop and fabricate mockups and prototypes for new design conceptsand design modifications to underway replenishment equipment.

 

•                  TheSeaport prime contract (MSS) is a multiple award contract that the Company wasawarded in FY 2004 by the Naval Sea Systems Command to provide a broad range ofcomprehensive engineering, technical, and programmatic support services. Thisdelivery order replaces the majority of the work that was previously performedunder the Management, Planning, Analytical and Administration (MPAA) contract.

 

•                  NavyMarine Corps Intranet (NMCI) subcontract for information technology services.

 

•                  Variousprime contracts and a subcontract with SPAWAR to provide Engineering,Logistics, Integration, Test and Evaluation and C4ISR services. Subcontractorsinclude Northrop-Grumman, Boeing, Lucent, Science Applications InternationalCorporation (SAIC), Anteon, Booz-Allen & Hamilton and BAE.

 

•                  Technicalsupport under a GSA contract to the Battle Force Tactical Training/Total ShipTraining Systems (BFTT/TSTS) program for Naval Sea Systems Command.

 

•                  TheCompany has four contracts from the General Services Administration (GSA).These four contracts are for information technology, financial and businesssolutions, professional engineering services and management, organizational andbusiness improvement services. These contracts, which are time and materialbased, have proven to be a means to develop new customers and are registered inthe GSA Advantage System. The GSA Advantage System is an on-line serviceprovided by GSA that lists the price schedules for all registered companies.

 

SNG

 
| ** **       | ** ** | **Three months ended**   | ** ** | **Nine months ended**    | ** ** |
|------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **       | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** | **March 25,  2005** | ** ** | **March 26,  2004** | ** ** |
| Revenue for  SNG |       | $                        | 40,000     |                     | $          | — |   | $ | 40,000 |   | $ | — |   |
|                  |            |                          |            |                          |            |  |  |  |  |  |  |  |  |

 

The SNG operates out of San Diego. As noted, thisgroup was started at the beginning of the third quarter of fiscal year 2005.Management does not anticipate significant revenues from this group in thecurrent fiscal year. Current sources of revenues from this group consist ofapplications service provider (“ASP”) revenues based on monthly monitoring ofsensors for various industrial customers. Future revenues in this group will include products and equipment sales,software and engineering and installation based services for industrial andcommercial customers as well as government customers.

 

Costs incurred in this group currently are comprisedof direct labor, overhead and general and administrative costs. As this groupgrows we anticipate that the costs will include cost of goods sold and otherdirect costs associated with product and equipment sales.

 

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### Results ofOperations

 

The following table sets forth certain items, including consolidatedrevenues for the three and nine-month periods ended for fiscal years 2005 and2004 (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **Mar. 25  2005**      | ** ** | ** **            | ** ** | **Mar. 26  2004** | ** ** | ** ** | ** ** | **Mar. 25  2005** | ** ** | ** ** | ** ** | **Mar. 26  2004** | ** ** | ** ** | ** ** |
| Revenues                             |       | $                      | 10,944     |                  | 100.0%     |   | $ | 8,094 |   | 100.0% |   | $ | 32,513 |   | 100.0% |   | $ | 23,304 |   | 100.0% |   |
| Operating  costs and expenses:       |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Contract  costs                      |       | 8,956                  |       | 81.8%                 |       | 6,785 |   | 83.8% |   | 27,061 |   | 83.2% |   | 19,297 |   | 82.8% |   |
| General and  administrative expenses |       | 1,337                  |       | 12.2%                 |       | 840 |   | 10.4% |   | 3,621 |   | 11.2% |   | 2,863 |   | 12.3% |   |
| Total  operating costs and expenses  |       | 10,293                 |       | 94.1%                 |       | 7,625 |   | 94.2% |   | 30,682 |   | 94.4% |   | 22,160 |   | 95.1% |   |
| Income from  operations              |       | 651                    |       | 5.9%                  |       | 469 |   | 5.8% |   | 1,831 |   | 5.6% |   | 1,144 |   | 4.9% |   |
| Other income                         |       | (19                    | )          | (0.2)%                |       | (4 | ) | (0.0)% |   | (19 | ) | (0.1)% |   | (35 | ) | (0.2)% |   |
| Interest  expense                    |       | 130                    |       | 1.2%                  |       | 52 |   | 0.6% |   | 366 |   | 1.1% |   | 118 |   | 0.5% |   |
| Income  before income taxes          |       | 540                    |       | 4.9%                  |       | 421 |   | 5.2% |   | 1,484 |   | 4.6% |   | 1,061 |   | 4.6% |   |
| Income tax  provision                |       | 219                    |       | 2.0%                  |       | 172 |   | 2.1% |   | 603 |   | 1.9% |   | 442 |   | 1.9% |   |
| Net income                           |       | $                      | 321        |                  | 2.9%       |   | $ | 249 |   | 3.1% |   | $ | 881 |   | 2.7% |   | $ | 619 |   | 2.7% |   |

 

*Revenues*.  For the third quarter of 2005,our revenues increased 36% to $11.0 million from $8.1 million for the sameperiod in 2004.  For the nine months, our revenues increased 39% to $32.5million from $23.3 million for the same period in 2004.  These increaseswere primarily attributable to the acquisition of Polexis in 2004 and AntinEngineering in 2005 together with new contract awards, successful recompetitionwins on existing programs and growth within existing programs. During the thirdquarter the acquisitions added $3.6 million of revenues. This increase wasoffset by a reduction in revenues on certain programs, primarily the NMCI,UNREP and MSS programs, all of which were due to planned decreases inactivities by those customers. For the nine month period these acquisitionscontributed $7.9 million on or 86% of the growth in revenues with the balanceof the increase from growth in existing programs.  

 

*Contract costs*.  Includes all direct costs such as labor, materials andsubcontractor costs.  Contract costs also include indirect overhead costs suchas facilities, indirect labor, fringe benefits and other discretionary costswhich are pooled and allocated to contracts on a pro rata basis. Generally,changes in direct costs are correlated to changes in revenue as resources areconsumed in the production of that revenue.

 

As a percentage of revenue, contract costs were81.8% for the third quarter of 2005 as compared to 83.8% for the same period in2004.  For the nine months, contract costs were 83.2% as compared to 82.8%for the same period in 2004. The decrease in contract costs as a percentage ofrevenues in the third quarter is due to a reduction in subcontractor costs andoverhead costs. The increase in contract costs for the year to date as apercentage of revenues is due to an overall increase in overhead costs**.**

 

*General and administrativeexpenses*.  Generaland administrative (G&A) expenses include indirect labor, fringe benefits,bid and proposal and other indirect costs.** ** Whilethe actual dollar amounts have increased on both a quarterly and nine monthsbasis, as a percentage of revenues for the nine month period, G&A hasdecreased due to the growth in revenues.  The spending increase is due toinvestments made to expand the Company’s infrastructure to accommodate theincreased

 

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scope of the business operations from recent growth and acquisitions.The Company may increase the amount of G&A expenditures during theremainder of fiscal 2005 to develop new business lines and pursue acquisitions,which may increase G&A as a percentage of revenues.

 

*Income from operations*.  For the third quarter of 2005,the income from operations margin increased from 5.8% of revenues from theprior year to 5.9% in the current year.  This increase is due to fewer contractcosts as a percentage of revenues in the third quarter of 2005 as compared tothe prior year offset by an increase in G&A costs.  For the nine monthperiod, income from operations margin increased to 5.6% due to the 39% revenuegrowth which results in the reduction of G&A costs as a percentage ofrevenues.  

 

*Interest expense*.  For the third quarter of 2005,interest expense increased to $130,000 from $52,000 for the same period in2004.  For the nine months, interest expense increased to $366,000 from$118,000 for the same period in 2004. This increase is primarily attributableto increased interest expense from the convertible notes issued by the Company during2004 through its private placement and in connection with the Polexisacquisition. The increase is further attributable to the accretion of a debtdiscount related to the private placement.  On an annualized basis, theincrease in interest expense resulting from these notes will be approximately$300,000.

 

*Income tax provision*.  For the third quarter of 2005,the income tax provision increased 27% to $219,000 from $172,000 for the sameperiod in 2004.  For the year to date, the income tax provision increased36% to $603,000 from $442,000 for the same period in 2004.  The effectivetax rate was 40.6% for the nine month period versus 41.7% in the same period in2004.

 

*Dividends*.  There were no dividendsauthorized or paid in 2005.  For the same period in 2004, there were$4,000 in dividends paid on the Company’s preference stock.  This decreasewas attributable to the redemption of the preference stock in fiscal 2004.

 

### Liquidity and Capital Resources

 

At March 25, 2005, the Company had cashand cash equivalents of $1,080,000. This represents an overall decrease ofapproximately $1.1 million during 2005. The decrease is a result of thefollowing factors, (i) costs associated with the Polexis acquisition for alease buy-out, severance and compensation (ii) incentive compensation paymentsearned for the prior fiscal year (iii) costs associated with an SB-2registration statement (iv) acquisition of furniture and equipment, (v) costsassociated with the purchase of the Xsilogy assets and Antin Engineeringacquisitions (vi) the pay off of the working capital loan.

 

Net working capital was $4.1 million at March 25,2005 compared to $5.2 million at June 30, 2004.  Net working capitalis total current assets less total current liabilities.  The primaryreasons for the decrease in net working capital is an increase in accruedpayroll and related taxes and certain of the 2002 private placement notesbecoming short term liabilities. Accounts receivables increased by $1.9 millionat the end of the third quarter of 2005.  This increase was due primarilyto an increase in the Company’s revenues.  Accounts payable decreased by$243,000 to $1.2 million at the end of the third quarter of 2005 due to fewersubcontractor invoices.

 

The Company has convertible notes payabletotaling $3.0 million consisting of $706,000 from a $2.0 million privateplacement completed during 2002; $1.6 million (excluding $98,000 of notediscount) issued in connection with a $3.2 million private placement completedduring 2004, and $685,000 issued in connection with the acquisition ofPolexis.  The Company used the funds of $ 5.2 million received through theprivate placements to finance the Company’s growth and to complete theacquisition of Polexis. The Company had previously borrowed $500,000 under aworking capital loan and this loan was paid in full as of March 25,2005. 

 

The Company’s net assets had increased by$2.8 million at the end of the third quarter of 2005 to $11.2 million. Net assets are total assets less total liabilities.  Net furniture andequipment increased by $369,000 during the first three quarters of 2005 due primarilyto the acquisition of furniture, equipment and software. The Companyestablishes a capital expenditures plan each year in connection with its annualbudgeting process. The Company estimates that its capital expenditures for itscurrent operations during this fiscal year will range from $500,000 to$750,000.

 

The Company’s source of liquidity is fromcash generated by operations and its revolving line of credit facility for $4.0million that expires on December 28, 2006. The Company’s revolving line ofcredit facility had a zero balance and had

 

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available borrowing capacity of $4,000,000 atMarch 25, 2005.

 

Antin owed $394,000 on two lines of credit atclosing.  The Company paid in full bothlines of credit during this quarter.

 

The $4.0 million revolving line of creditfacility allows the Company to use (i) the full $4.0 million for workingcapital purposes or (ii) under a Sub Facility, up to $2.0 million of the creditfacility for permitted acquisition purposes and $750,000 for minorityinvestment purposes.  The Company must maintain certain financialcovenants, including tangible effective net worth, current assets to currentliabilities, debt to worth and cash flow coverage, is subject to certain restrictionson permitted acquisitions and minority investments, and in some cases mustreceive Comerica’s consent prior to using the facility for such purposes. If used for permitted acquisitions or minority investments these advances mustbe repaid over 48 months.  The Company has the option of being chargedprime plus 0.25% or LIBOR plus 300 basis points on the credit facility andprime plus 0.50% or LIBOR plus 325 basis points on the sub facility subject tominimum advance amounts and duration under the LIBOR option. 

 

The loan is collateralized by all of theCompany’s assets including accounts receivable. Comerica advances funds to theCompany of up to 80% of the Company’s billed accounts receivable that are lessthan 90 days old. Comerica requires the Company to maintain certaincovenants, including those described above, and at March 25, 2005 theCompany was in compliance with all of those covenants.

 

The Company also finances a portion of itsoperations through leases.  At March 25, 2005, the Company had non-cancelableoperating leases for its offices, which expire at various dates through March 2010. 

 

Annual future minimum lease payments undernon-facility operating leases with initial terms of one year or more as of March 25,2005 totaled $219,000.

 

Annual future minimum lease payments underfacility operating leases with initial terms of one year or more as of March 25,2005 totaled $2,786,000.

 

Management believes that the Company willhave sufficient cash flow from operations and funds available under the revolvingcredit agreement with Comerica to finance its operating and capitalrequirements through December 28, 2006. Long-term liquidity andcontinued acquisition related growth will depend on the Company’s ability tomanage cash, raise cash and maintain profitability.

 

### Off-Balance SheetArrangements

 

The Company does not have any off-balancesheet arrangements other than the facility leases discussed in the Liquidityand Capital Resources section above.

 

Critical Accounting Policies and Estimates

 

TheCompany’s discussion and analysis of its financial condition and results ofoperations are based upon its consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent liabilities. On an ongoing basis, management evaluates itsestimates, including those that relate to revenues and customer billings,recovery of indirect costs, long-lived assets, intangible assets, income taxcontingencies, stock based compensation and litigation. Management bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions and conditions. Ifactual results significantly differ from management’s estimates, the Company’sfinancial condition and results of operations could be materially impaired.

 

TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

SYScontracts with its government customers using various cost-type contracts. Theyinclude cost-plus fixed fee, cost-plus award fee, cost-plus incentive fee withincentives based upon both cost and/or performance, and cost sharing contracts.Revenues and profits are recognized in accordance with Accounting ResearchBulletin No. 45 and SOP 81-1. For award and incentive fee type contracts,we recognize the expected fee to be awarded by the customer at the time suchfee can

 

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be reasonably estimated,based on factors such as our prior award experience and communications with thecustomer regarding our performance, including any interim performanceevaluations rendered by the customer. Revenues are recognized under fixed-pricecontracts based on the percentage-of-completion basis, using the cost-to-costor units-of-delivery methods. To the extent that our estimated costs materiallychange, our revenues recorded under such contracts could materially be affectedand could have a material adverse effect on our operations in the futureperiods. In the nine months ended March 25, 2005, approximately   11% of our total revenues were generated byfixed-price contracts, which are generally recognized using thepercentage-of-completion method. The remaining 89% of our revenues in the ninemonths ended March 25, 2005 were generated by cost reimbursable contractsand time and materials contracts, for which percentage-of-completion is notused, and revenues are generally recognized as work is performed and billed tothe customer. 

 

Ingeneral, SYS does not recognize revenues in excess of the allowable fundinglimitations on any delivery order or contract until negotiations are finalized.On occasion, our customers request that we proceed on a tasking in advance ofthe formal contract modification. We evaluate these requests according to theircharacteristics and the circumstances in which they occur after taking allfactors into consideration such as probability of cost recovery, our experiencewith the customer, and satisfactory evidence that supports the customer’sintent to issue the modification.  If ourassessment for the probability of cost recovery changes in a subsequent perioddue to a change in circumstances then the revenues and profits associated withthose costs incurred may be reversed.

 

Contractcosts, including indirect costs, on certain U.S. Government contracts aresubject to audit by the Defense Contract Audit Agency (DCAA) before finalpayment is received. We record revenues and accounts receivable at amountsexpected to be realized upon final settlement.

 

The Company alsoderives revenues from the design and management of sensor networks which mayinclude equipment, software, services and installation. The Company recognizesrevenue when all of the following criteria have been met:

 

•                            Persuasive evidence of an arrangementexists;

•                            Delivery has occurred or services havebeen rendered;

•                            The fee for the arrangement is fixed ordeterminable; and

•                            Collectibility is reasonably assured.

 

The Company entersinto multiple-element arrangements, which may include any combination ofmonthly Application Service Provider (ASP) services, professional consultingservices or equipment sales. Accordingly, the Company separates itsdeliverables into units of accounting and recognized revenue on thesedeliverables, consistent with the provisions of Emerging Issues Task Force (“EITF”)Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.”

 

Ouraccounts receivable balances include unbilled receivables which are comprised ofwork-in-process which will be billed in accordance with contract terms anddelivery schedules, as well as amounts billable upon final execution ofcontracts, contract completion, milestones or completion of rate negotiations.Payments to us for performance on certain of our U.S. Government contracts aresubject to audit by the DCAA, and are subject to government funding. We providean allowance against our receivables for estimated losses that may result fromrate negotiations and audit adjustments. To the extent that actual adjustmentsdue to rate negotiations or audit adjustments differ from our estimates, ourrevenue may be impacted. Historically, the Company has not required significantallowances for these risks.

 

Sincethe Company’s primary customer is the U.S. Government, the Company historicallyhas not recorded significant charges for bad debt expense. Bad debt charges, ifneeded, are recognized in the period in which they are identified.

 

Goodwill represents the excess of costs over fairvalue of assets of businesses acquired. Effective January 1, 2002, theCompany adopted SFAS No. 142, “Goodwill and Other Intangible Assets,”which establishes financial accounting and reporting for acquired goodwill andother intangible assets and supersedes APB Opinion No. 17, “IntangibleAssets”. Goodwill and intangible assets acquired in a purchase businesscombination and determined to have an indefinite useful life are not amortized,but instead tested for impairment at least annually in accordance with the provisionsof SFAS No. 142. SFAS No. 142 also requires that intangible assetswith estimable useful lives be amortized over their respective estimated usefullives to their estimated residual values, and reviewed for impairment inaccordance with SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets.” 

 

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SFAS No. 142 requires that goodwill be testedfor impairment at the reporting unit level at adoption and at least annuallythereafter, utilizing a two step methodology. The initial step requires theCompany to assess whether indications of impairment exist. If indications ofimpairment are determined to exist, the second step of measuring impairment isperformed, wherein the fair value of the relevant reporting unit is compared tothe carrying value, including goodwill, of such unit. If the fair value exceedsthe carrying value, no impairment loss is recognized. However, if the carryingvalue of the reporting unit exceeds its fair value, the goodwill of thereporting unit is impaired. 

 

The Company performs its annual testing forimpairment of goodwill and other intangible assets in the fourth quarter ofeach year, prior to the release of the financial statements for the currentyear. Based on management’s annual testing as of the fourth quarter of 2004,there were no indications of impairment.

 

Risks Relating to Our Business

 

Information contained in this Form 10-QSB should bestudied carefully by any shareholder or potential investor while consideringthe following risk factors to the Company.

 

**We dependupon a single customer, the U.S. government, for the majority of our revenues,and a decrease in its demand for our services might harm our operating results.**

 

Asubstantial part of our business at the present time is with the DoD. Eventhough the level of business with this customer is growing and we havenegotiated multiple-year contracts that include option and award years, thereis no certainty that budget changes in Congress or the DoD will not seriouslyaffect us.  In addition, there is no certainty that the government willexercise each option or award year available on a contract.

 

TheCompany may, depending on the contract, perform as a prime contractor or as asubcontractor to another prime contractor. In cases where the Company performsas a subcontractor, the Company may be subject to price modifications requiredby the prime contractor. Such price modifications, if not mitigated by acorresponding reduction of costs, could have a negative impact on the Company’sprofitability.

 

**Most of ourcustomers are government agencies subject to unique political and budgetaryconstraints and have special contracting requirements that may affect ourability to obtain new government customers.**

 

Mostof our customers are government agencies, principally DoD agencies. Theseagencies often do not set their own budgets and therefore have little controlover the amount of money they can spend. In addition, these agencies experiencepolitical pressure that may dictate the manner in which they spend money. Dueto political and budgetary processes and other scheduling delays thatfrequently occur in the contract or bidding process, some government agencyorders may be canceled or substantially delayed, and the receipt of revenues orpayments may be substantially delayed.

 

In addition, future sales to government agencieswill depend on our ability to meet government contracting requirements, certainof which may be onerous or impossible to meet, resulting in our inability toobtain a particular contract. Common requirements in government contractsinclude bonding, provisions permitting the purchasing agency to modify orterminate at will the contract without penalty and provisions permitting theagency to perform investigations or audits of our business practices.

 

The U.S. Government has a program that encouragesand some times requires large prime contractors to use small businesses. The Government restricts the competition on some contracts to only qualifyingsmall businesses.  Some of the Company’s contracts and subcontracts havebeen awarded based on its small business eligibility.  The definition of asmall business changes depending on the type of product or serviceprovided.  The Government uses the North American Industry ClassificationSystem (NAICS) codes to classify the small business size standards for allindustries.  One of the Company’s primary NAICS codes has been forengineering services, and beginning in Fiscal Year 2005, the Company will no longerqualify as a small business using this code.  The Company still qualifiesas a small business using several other NAICS codes.  In addition, thesmall business contracts currently held by the Company do not expire as aresult of no longer meeting the requirements of this specific NAICSCode.   Some of these contracts have option years that go out forfive years. While the Company’s revenues to date include revenues based on theCompany qualifying as a small business pursuant to Government regulations underwhich it is no longer eligible as a small business, these revenues were notmaterial.  The Company’s future revenues may be impacted by not qualifyingas a small business under certain NAICS codes.

 

**Anyinability to adequately retain or protect our employees, customer relationshipsand proprietary technology could**

 

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**harm ourability to compete.**

 

Ourfuture success and ability to compete depends in part upon our employees andcustomer relationships, proprietary technology and trademarks, which we attemptto protect with a combination of patent, copyright, trademark and trade secretclaims, as well as with our confidentiality procedures and contractualprovisions. These legal protections afford only limited protection and aretime-consuming and expensive to obtain and/or maintain. Further, despite ourefforts, we may be unable to prevent third parties from soliciting ouremployees or customers or infringing upon or misappropriating our intellectualproperty.  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.

 

**Thedeparture of certain key personnel could harm the financial condition of theCompany.**

 

CliftonL. Cooke, Jr., Michael W. Fink, Linda E. Gagnon, Edward M. Lake, and Kenneth D.Regan, are intimately involved in our business and some have day-to-dayrelationships with critical customers. Competition for highly skilled business,product development, technical and other personnel is intense, and there can beno assurance 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 numerouscompetitors.**

 

Wehave many competitors with comparable characteristics and capabilities thatcompete for the same group of customers. Our competitors are competent andexperienced and are continuously working to take projects away from us. Some ofour competitors have greater financial, technical, marketing and otherresources than we do. Our ability to compete effectively may be adverselyaffected by the ability of these competitors to devote greater resources to thesales and marketing of their products and services than are available to us.

 

**We mustcomply with numerous Government Regulations.**

 

TheCompany could become liable for penalties under various procurement rules andregulations.  Changes in government regulations could harm our operatingresults.  Our business must comply with and is affected by variousgovernment regulations.  Among the most significant regulations are:

 

•                  theFederal Acquisition Regulations, and agency regulations supplemental to theFederal Acquisition Regulations, which comprehensively regulate the formation,administration and performance of government contracts;

•                  theTruth in Negotiations Act, which requires certification and disclosure of allcost and pricing data in connection with contract negotiations; 

•                  governmentaccounting regulations, which impose accounting requirements that govern ourright to reimbursement under certain cost-based government contracts; and 

•                  laws,regulations and executive orders restricting the use and dissemination ofinformation classified for national security purposes and the exportation ofcertain products and technical data. 

 

**Accuracy ofIndirect Billing Rates is critical.**

 

The Company’s indirect billing rates are approved atleast annually by the Defense Contract Audit Agency (DCAA).  These ratescan differ from the Company’s actual indirect rates.  The Company budgetsto have its actual indirect rates as close as possible to its DCAA approvedindirect rates at fiscal year end.  Throughout the year, managementassesses how these rates compare to forecasted rates for the year.  If asignificant variance is anticipated, provisions for such variance arerecognized at that time.  However, if the actual indirect rates atyear-end are materially different from the DCAA approved indirect rates, theCompany would have to recognize that difference at year-end, which could affectthe Company’s results of operations.

 

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**We Rely on Subcontractors.**

 

The Company regularly employs subcontractors to assistus in satisfying our contractual obligations. If these subcontractors fail toadequately perform their contractual obligations, our prime contractperformance and our ability to obtain future business could be materially andadversely impacted.

 

Our performance of government contracts may involvethe issuance of subcontracts to other companies upon which we rely to performall or a portion of the work we are obligated to deliver to ourcustomers.  There is a risk that we may have disputes with subcontractorsconcerning a number of issues including the quality and timeliness of workperformed by the subcontractor, customer concerns about the subcontractor, ourdecision not to extend task orders or issue new task orders under asubcontract, or our hiring of former personnel of a subcontractor.  Afailure by one or more of our subcontractors to satisfactorily deliver on atimely basis the agreed-upon supplies and/or perform the agreed-upon servicesmay materially and adversely impact our ability to perform our obligations as aprime contractor.  In extreme cases, such subcontractor performancedeficiencies could result in the government terminating our contract fordefault.  A default termination could expose us to liability for excesscosts of procurement by the government and have a material adverse effect onour ability to compete for future contracts and task orders.

 

**Security clearances are necessary.**

 

If the Company cannot obtain the necessary securityclearances, we may not be able to perform classified work for the governmentand our revenues may suffer.  Certain government contracts require ourfacilities and some of our employees, to maintain security clearances.  Ifwe lose or are unable to obtain required security clearances, the client canterminate the contract or decide not to renew it upon its expiration.  Asa result, to the extent we cannot obtain the required security clearances forour employees working on a particular contract, we may not derive the revenueanticipated from the contract, which, if not replaced with revenue from othercontracts, could seriously harm our operating results.

 

Security breaches in sensitive government systemscould result in the loss of clients and negative publicity.  Many of thesystems we develop involve managing and protecting information involved innational security and other sensitive government functions.  A securitybreach in one of these systems could cause serious harm to our business, couldresult in negative publicity and could prevent us from having further access tosuch critically sensitive systems or other similarly sensitive areas for othergovernment clients.

 

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

 

Weplan to grow the Company’s revenues and profits by adding to our existingcustomer base through internal growth and by the acquisition of othergovernment services or technology related companies.  Over the past fewyears we have hired senior management personnel capable of establishing newbusiness units within the Company.  The DSG’s San Diego operations wereestablished during FY 2001 and have grown steadily since inception.  TheDSG’s Arlington and Chesapeake operations were established during FY 2002 andhave also grown steadily since inception.  All of these operations werestarted 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.

 

Managementbelieves that the Company can grow through the acquisition of other governmentservices companies and technology related companies that have product offeringswhich may be sold to both commercial and government customers.  The acquisitionof other companies and growing those businesses is uncertain and contains avariety of business risks, including: integration, cultural differences,the retention of key personnel, competition, protection of intellectualproperty, profitability, industry changes and others.  Although we do nothave an agreement to acquire any specific company at this time, we intend toattempt to expand our operations through the acquisition of other companies.Acquisitions and attempted acquisitions may place a strain on our limitedpersonnel, financial and other resources. Our ability to manage this growth,should it occur, will require expansion of our capabilities andpersonnel.  We may not be able to find qualified personnel to filladditional positions or be able to successfully manage a larger organization.Further, we intend to finance these transactions through a combination of cash,equity and debt. Using our stock as a currency may have limitations as thetrading volume in our stock has been limited, our stock price has beenvolatile, and our stock may not maintain a price sufficient to supporttransactions without being excessively dilutive.

 

We have very limited assets upon which to rely foradjusting to business variations and for growing new businesses.

 

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Whilewe are likely to look for new funding to assist in the acquisition of otherprofitable businesses, it is uncertain whether such funds will be available.Our substantial reliance on our revolving line of credit facility with ComericaBank - California imposes certain limitations on us. If we are to grow andexpand our operations, we will need to raise significant amounts of additionalcapital. There can be no assurance that we will be successful in raising asufficient amount of additional capital, or if we are successful, that we willbe able to raise capital on reasonable terms. If we do raise additionalcapital, our existing shareholders may incur substantial and immediatedilution.

 

There are a large numberof shares that may be available for future sale, and the sale of these sharesmay depress the market price of our common stock.

 

As of March 25,2005, we had issued 8,961,056 shares of common stock. Up to 2,025,700 shares ofcommon stock were issuable upon exercise of employee stock options at pricesranging from $0.73 to $2.89 per share, 706,250 shares were issuable upon theconversion of convertible notes from the 2002 Private Placement at $1.00 pershare, 727,273 shares were issuable upon the conversion of convertible notesfrom the 2004 Private Placement at $2.20 per share, 295,158 shares wereissuable upon the conversion of convertible notes from the Polexis acquisition at$2.32 per share, and 2,500 shares were issuable upon the exercise of warrantsto purchase common stock at $1.00 per share.  The sale of shares issuedupon any conversion of our outstanding convertible notes or the exercise ofoutstanding options or warrants could adversely affect the market price of ourcommon stock.

 

**There is alimited market for our common stock.**

 

Ourcommon stock is traded on the American Stock Exchange.  Trading in ourcommon stock has been sporadic, and at present, there is a limited market forthe stock. There can be no assurance that a stronger market will develop. Evenif such a market does develop, it may not be sustained.  There are noanalysts currently covering the Company.

 

**Futuresales of our common stock by existing shareholders under Rule 144 coulddecrease the trading price of our common stock.**

 

Asof March 25, 2005, a total of 4,229,258 shares of our outstanding commonstock were “restricted securities” and could be sold in the public markets onlyin compliance with Rule 144 adopted under the Securities Act of 1933 or otherapplicable exemptions from registration. Rule 144 provides that a personholding restricted securities for a period of one year may thereafter sell, inbrokerage transactions, an amount not exceeding in any three-month period thegreater of either (i) 1% of the issuer’s outstanding common stock or (ii) theaverage weekly trading volume in the securities during a period of fourcalendar weeks immediately preceding the sale. Persons who are not affiliatedwith the issuer and who have held their restricted securities for at least twoyears are not subject to the volume limitation. Possible or actual sales of ourcommon stock by present shareholders under Rule 144 could have a depressiveeffect on the price of our common stock.

 

**Ourdirectors and executive officers beneficially own approximately 31.5% of ourstock, including stock options and warrants exercisable within 60 days of March 25,2005; their interests could conflict with yours; significant sales of stockheld by them could have a negative effect on our stock price; shareholders maybe unable to exercise control.**

 

Asof March 25, 2005, our executive officers, directors and affiliatedpersons were the beneficial owners of approximately 43.9% of our common stock,including stock options exercisable within 60 days of March 25, 2005. As aresult, our executive officers, directors and affiliated persons will have asignificant ability to:

 

•                  elector defeat the election of our directors;

 

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

 

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

 

•                  controlthe outcome of any other matter submitted to the shareholders for vote.

 

As a result of their ownership and positions, ourdirectors and executive officers, collectively, are able to significantlyinfluence all matters requiring shareholder approval, including the election ofdirectors and approval of significant corporate transactions. In addition,sales of significant amounts of shares held by our directors and executive

 

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officers, or the prospect of these sales, could adversely affect themarket price of our common stock. Management’s stock ownership may discourage apotential acquirer 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 bythe Securities and Exchange Commission. This classification severely andadversely affects the market liquidity for our common stock. The Commission hasadopted Rule 15g-9, which establishes the definition of a “penny stock,” forthe purposes relevant to us, as any equity security that has a market price ofless than $5.00 per share or with an exercise price of less than $5.00 pershare, subject to certain exceptions. For any transaction involving a pennystock, unless exempt, the rules require: (i) that a broker or dealer approve aperson’s account for transactions in penny stocks; and (ii) the broker ordealer receive from the investor a written agreement to the transaction,setting forth the identity and quantity of the penny stock to be purchased. Inorder to approve a person’s account for transactions in penny stocks, thebroker or dealer must (i) obtain financial information and investmentexperience objectives of the person; and (ii) make a reasonable determinationthat the transactions in penny stocks are suitable for that person and theperson has sufficient knowledge and experience in financial matters to becapable of evaluating the risks of transactions in penny stocks. The broker ordealer must also deliver, prior to any transaction in a penny stock, adisclosure schedule prepared by the Commission relating to the penny stockmarket, which, in highlight form, sets forth (i) the basis on which the brokeror dealer made the suitability determination and (ii) that the broker or dealerreceived a signed, written agreement from the investor prior to thetransaction. Disclosure also has to be made about the risks of investing inpenny 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 andProcedures

 

Evaluation of DisclosureControls and Procedures.

 

Under the supervision and with theparticipation of our executive management, including our Chief ExecutiveOfficer and Chief Financial Officer, we performed an evaluation of theeffectiveness and design of our disclosure controls and procedures as of theend of the period covered by this report.  Based on that evaluation, ourexecutive management, including our Chief Executive Officer and our ChiefFinancial Officer, concluded that our disclosure controls and procedures areeffective as of March 25, 2005.

 

Changes in internalcontrols.

 

Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, also supervised and participated in anevaluation of any changes in internal controls as of the end of the periodcovered by this report and that have materially affected, or are reasonablylikely to materially affect, our internal controls over financialreporting.  Based on that evaluation, our executive management, includingour Chief Executive Officer and our Chief Financial Officer, concluded thatthere had been no changes to our internal controls that would have had amaterial affect over the financial reporting for the period ending March 25,2005.

 

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PART II - OTHER INFORMATION

 

Item 1.                                     LegalProceedings

 

We are involved in legal actions in the normal course of business,including audits and investigations by various governmental agencies thatresult from our work as a governmental contractor.

 

Item 2.                                     UnregisteredSales of Equity Securities and Use of Proceeds

 

During the third quarter of fiscal 2005,163,300 shares of common stock were issued due to the exercise of stockoptions.  The Company receivedapproximately $22,000 in cash and 53,000 shares of Company common stock aspayment for these issued shares.

 

During the third quarter of fiscal 2005, theCompany issued 57,406 shares of common stock to employees that participated inthe Employee Stock Purchase Plan.  Theperiod of performance was from July 1, 2004 to December 31,2004.  The Company received approximately$135,000 from the employees that opted to participate in this Plan.  

 

The Company had one note holder from the 2002subscription offering convert a $12,500 convertible note to stock in thisquarter.  The note was converted into12,500 shares of common stock at $1.00 per share.

 

The Company exercised its right to converthalf of the outstanding Polexis convertible notes in the amount of $685,000into common stock.  295,159 shares ofcommon stock were issued based on a conversion price of $2.32 per share.

 

Effective January 3, 2005, the Companyissued 323,971 shares of common stock to the stockholders of Antin as part ofthe Antin acquisition.  Pursuant to theacquisition agreement, 314,027 shares were issued to an escrow agent and are heldin an escrow account at Union Bank and may become issuable to the stockholdersupon the achievement of certain revenue milestones.

 

Item 3.                                     Defaults UponSenior Securities

 

None.

 

Item 4.                                     Submissionof Matters to a Vote of Securities Holders

 

None

 

Item5.                                     Other Information

 

None

 

Item 6.                                     Exhibitsand Reports on Form 8-K

 

(a)          List of exhibits

 
| 2.1 |   | Certificate of Ownership filed with the  California Secretary of State on November 28, 1979, filed as Exhibit 2.1  to the Company’s report on Form 10-K for the fiscal year ended June 30,  1979, and incorporated by this reference.                                                                                         |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2 |   | Certificate of Ownership filed with the  California Secretary of State on March 18, 1985, incident to change of  name of the Company, filed as Exhibit 3.6 to this Company’s report on Form  10-K for the fiscal year ended June 30, 1985, and incorporated by this  reference.                                               |
| 2.3 |   | Testmasters, Inc. Stock Purchase Agreement,  filed as Exhibit 2.1 to this Company’s Registration Statement on Form SB-2  dated May 24, 2002, and incorporated by this reference.                                                                                                                                                        |
| 2.4 |   | Polexis merger agreement, filed as Exhibit  2.2 to this Company’s Registration Statement on Form SB-2 dated April 19,  2004, and incorporated by this reference.                                                                                                                                                                   |
| 2.5 |   | Asset purchase and sale agreement effective  as of December 15, 2004, by and between SYS and Xsilogy, Inc filed as  Exhibit 1 to this Company’s report on Form 10-QSB dated February 7,  2005, and incorporated by this reference.                                                                                            |
| 2.6 |   | Agreement and plan of merger effective as  of January 3, 2005 among SYS, Shadow I, Inc., a wholly-owned subsidiary  of SYS, Antin Engineering, Inc., and the stockholders of Antin Engineering,  Inc. filed as Exhibit 2 to this Company’s report on Form 10-QSB dated February 7,  2005, and incorporated by this reference. |

 

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| 3(i)  |   | Articles of Incorporation for SYS, as  amended, filed as Exhibit 3.1 to the Company’s Registration Statement on Form  SB-2, filed May 24, 2002, and incorporated by this reference.                                                                                                                                                  |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(ii) |   | Bylaws of SYS filed as Exhibit 3.2 to the  Company’s Registration Statement on Form SB-2, filed May 24, 2002, and  incorporated by this reference.                                                                                                                                                                                   |
| 4.1   |   | Certificate of Determination of Preferences  of Preferred Shares of Systems Associates, Inc., filed by the Company with  the California Secretary of State on July 28, 1968, filed as Exhibit 3.2  to the Company’s report on Form 10-K for the fiscal year ended June 30,  1981, and incorporated by this reference.      |
| 4.2   |   | Certificate of Determination of Preferences  of Preference Shares of Systems Associates, Inc., filed by the Company with  the California Secretary of State on December 27, 1968, filed as Exhibit  3.3 to the Company’s report on Form 10-K for the fiscal year ended June 30,  1981, and incorporated by this reference. |
| 4.3   |   | Certificate of Determination of Series B 9%  Cumulative Convertible Callable Non-Voting Preference Stock was filed by the  Company with the California Secretary of State on August 15, 1996, and  included in Exhibit 3(i).                                                                                                         |
| 4.4   |   | Form of Subscription Agreement from the November 2001  Offering, filed as Exhibit 4.1 to this Company’s Registration Statement on  Form SB-2 dated May 24, 2002.                                                                                                                                                                |
| 4.5   |   | Form of Convertible Note from the November 2001  Offering, filed as Exhibit 4.2 to this Company’s Registration Statement on  Form SB-2 dated May 24, 2002.                                                                                                                                                                      |
| 4.6   |   | Form of Subscription Agreement from the December 2003  Offering (Convertible Note from December 2003 Offering included), filed  as Exhibit 4.3 to this Company’s Registration Statement on Form SB-2 dated April 19,  2004.                                                                                           |
| 10.1  |   | SYS 1997 Incentive Stock Option and  Restricted Stock Plan filed as Attachment 1 to the Company’s Proxy Statement  filed on February 21, 1997, and incorporated by this reference.                                                                                                                                              |
| 10.2  |   | SYS 2003 Stock Option Plan filed as Exhibit  10.2 to the Company’s report on Form S-8 filed on April 8, 2003, and  incorporated by this reference.                                                                                                                                                                              |
| 10.3  |   | SYS 2003 Employee Stock Purchase Plan filed  as Exhibit 10.3 to the Company’s report on Form S-8 filed on April 8,  2003, and incorporated by this reference.                                                                                                                                                                   |
| 10.4  |   | Employment contract for Clifton L. Cooke,  Jr., the Company’s Chief Executive Officer filed as Exhibit 10.4 to  the Company’s report on Form 10-KSB for the fiscal year ended June 30,  2004, and incorporated by this reference.                                                                                          |
| 10.5  |   | Employment contract for Edward  M. Lake, the Company’s Chief Financial Officer and Executive Vice President  of Financial Operations filed as Exhibit 10.5 to the Company’s  report on Form 10-KSB for the fiscal year ended June 30, 2004, and  incorporated by this reference.                                           |
| 10.6  |   | Employment contract for Michael W. Fink,  the Company’s Secretary and Sr. Vice president of Finance and Contracts  filed as Exhibit 10.6 to the Company’s report on Form 10-KSB for the fiscal  year ended June 30, 2004, and incorporated by this reference.                                                              |
| 10.7  |   | Employment contract for Robert A. Babbush,  the Company’s Assistant Secretary and Sr. Vice President of Administration  filed as Exhibit 10.7 to the Company’s report on Form 10-KSB for the fiscal  year ended June 30, 2004, and incorporated by this reference.                                                         |
| 10.8  |   | Employment contract for Colin Hirayama, the  Company’s Sr. Vice President of Technology Assessment filed as Exhibit  10.8 to the Company’s report on Form 10-KSB for the fiscal year ended June 30,  2004, and incorporated by this reference.                                                                             |
| 10.9  |   | Employment contract for Robert Holmes, the  Company’s Defense Solutions Group’s Sr. Vice President of Defense Operations  filed as Exhibit 10.9 to the Company’s report on Form 10-KSB for the fiscal  year ended June 30, 2004, and incorporated by this reference.                                                  |
| 10.10 |   | Employment contract for Kenneth D. Regan,  the Company’s Defense Solutions Group’s President and Chief Operating Officer  filed as Exhibit 10.10 to the Company’s report on Form 10-KSB for the fiscal  year ended June 30, 2004, and incorporated by this reference.                                                 |
| 10.11 |   | Employment contract for Linda E. Gagnon,  the Company’s Defense Solutions Group’s Division Sr. Vice President,  Engineering and Management Solutions filed as Exhibit 10.11 to the  Company’s report on Form 10-KSB for the fiscal year ended June 30, 2004,  and incorporated by this reference.                     |
| 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

 

On December 29, 2004, the Company filedan 8-K announcing that its stock would be listed on the American Stock Exchangeeffective January 3, 2005.

 

On December 30, 2004, the Company filedan 8-K announcing that it had acquired all of the assets of Xsilogy, Inc.

 

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On January 11, 2005, the Company filedan 8-K announcing that it had acquired all of the outstanding securities ofAntin Engineering, Inc.

 

On March 23, 2005, the Company filed an8-K/A reporting the required financial statements of Xsilogy, including proforma financial information.

 

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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:  | May 6, 2005             |         | /s/ Clifton L. Cooke, Jr. |   |
|   | Clifton L. Cooke, Jr.   |
|   | Chief Executive Officer |
|   |                    |
|   |                    |
| Date:  | May 6, 2005             |         | /s/ Edward M. Lake        |   |
|   | Edward M. Lake          |
|   | Chief Financial Officer |

 

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