SYS Technologies Reports Fiscal 2008 Third Quarter and Nine Months Results

Business Wire, May 12, 2008

-- Gross Margins Reach Record High at 28.6%; Operating Margins up Threefold Year Over Year; Sets Shareholder Meeting Date of June 24, 2008 for Shareholder Vote on Merger with Kratos Defense & Security Solutions --

SAN DIEGO -- SYS Technologies (SYS), (AMEX:SYS), a leading provider of information connectivity solutions that enable real-time, complex decision-making, today reported results for the third quarter and the nine months ended March 28, 2008. Earlier in the third quarter, SYS announced an agreement to merge with Kratos Defense & Security Solutions ("Kratos") (Nasdaq:KTOS).

Cliff Cooke, chief executive officer of SYS Technologies, said, "We had a very strong third quarter with record gross margins driven by our network management software business. Revenues of $18.7 million for the third quarter were slightly below our guidance range of $19.0 million to $20.0 million; however, the shortfall was predominantly due to subcontractor and other direct cost based revenues from our government contracts services business which carry lower operating margins. Importantly, due to the strong product mix and continued cost containment efforts we were able to deliver solid profitability."

Third quarter 2008 revenues were $18.7 million, down $0.4 million from the prior year third quarter. The decrease in revenues was attributable to a $1.6 million decrease in service revenues which was partially offset by a $1.2 million increase from product sales. The decrease in service revenues was attributable to decreases in IT support programs, particularly subcontractor and other direct cost based revenues related to those programs. Growth in learning and performance training solutions and public safety solutions partially offset these other services decreases.

Gross margin was 28.6 percent in the quarter as compared to 22.3 percent in the prior year as a result of increased software products based revenues together with higher overall margins on the services business due to growth in time and material contracts. Operating expenses were $4.9 million, including $0.5 million of non-recurring merger related costs, or 26.1 percent of revenues, in the current year quarter, as compared to $5.4 million, or 28.1 percent of revenues, in the prior year. Adjusted EBITDA for the quarter was $1.6 million or 8.6 percent of revenues as compared to a negative Adjusted EBITDA of $0.5 million in the prior year quarter. SYS calculates Adjusted EBITDA by adjusting net income (loss) for the effects of interest, taxes, depreciation, amortization, non-cash expenditures for share based compensation, and non-recurring merger transaction costs. The reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, is included at the end of this release.

Cooke stated that, "I'm very pleased with both the mix of revenues in the third quarter and the consistent trend of operating profitability that we established as a key target for this fiscal year. We've been able to hold the line on costs while continuing to invest in key product and business development areas. Our EBITDA margins were in line with our expectations especially after factoring in the $0.5 million non-recurring merger related costs."

Management has included information about non-GAAP net income because management believes it provides a more meaningful measure of quarter-over-quarter and year-over-year financial performance. A reconciliation of generally accepted accounting principles (GAAP) results to non-GAAP net income results follows in this press release. Non-GAAP net income and non-GAAP net income per share are non-GAAP measures and exclude amortization of intangibles from acquisitions, non-cash share-based compensation charges and asset impairment charges, if any, all net of their related tax effect. For further information, please refer to the section of the press release titled, "Note Regarding Use of Non-GAAP Financial Measures."

Third quarter 2008 net income was $26,000, or $0.00 per diluted share, compared to a net loss of $1.1 million, or a loss of $0.06 per share, in the prior year's third quarter. For the third quarter of 2008, the company reported non-GAAP net income of $73,000 or $0.00 per diluted share, compared to net loss of $0.6 million or a loss of $0.03 per share in the prior year's third quarter.

At March 28, 2008, the company had a cash balance of $1.6 million, working capital of $8.1 million and an available credit facility balance of $3.3 million.

Cooke added, "As announced on February 21, 2008, we entered into a definitive merger agreement with Kratos, a leading national defense and security solutions provider, in an all-stock transaction. Under the terms of the agreement, SYS will become a wholly owned subsidiary of Kratos and all of SYS' outstanding common shares will be converted into Kratos common shares. We jointly filed the Registration Statement on Form S-4 and Preliminary Joint Proxy with the SEC on April 10, 2008, and we recently received a 'no review' letter from the SEC. Consequently we expect the Registration Statement to be declared 'effective' when we refile the joint proxy statement updated for our third quarter results and Kratos' first quarter results. Accordingly, we have set our shareholder meeting date for June 24, 2008 and, if approved, anticipate this transaction will close by the end of June."