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SYS Technologies becomes Kratos subsidiary.

SYS Technologies : 22 February, 2008  (Company News)
Stock transaction leads to greater penetration capabilities for US defence and homeland security market for both companies.
SYS Technologies has entered into a definitive merger agreement with Kratos Defense & Security Solutions 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.
Kratos will issue approximately 25 million shares of KTOS common stock for 100 percent of SYS' shares. The transaction is subject to customary closing conditions, including approval by the shareholders of both companies. The transaction is expected to close towards the end of the second calendar quarter, and is expected to be accretive to Kratos' 2008 operating and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) margins. The annualized revenue run rate of the combined company is expected to be nearly $400 million by the end of 2008.

The combined company will provide the Department of Defense, Department of Homeland Security and other government customers with an expanded portfolio of command, control, communications, computing, combat systems, intelligence, surveillance and reconnaissance (C5ISR) services and solutions. Additionally, the combined company will have significantly enhanced customer relationships, portfolio of contract vehicles, and past performance qualifications which will further position Kratos to capture a larger share of its target markets as a prime contractor.

Under the agreement, which has been unanimously approved by both boards of directors, SYS stock will be converted into Kratos stock at an exchange ratio of 1.2582 shares of Kratos common stock for each outstanding share of SYS common stock. Upon closing, SYS shareholders will own approximately 23 percent and current Kratos shareholders approximately 77 percent of the combined company, which includes the estimated hold-back shares to be issued to Haverstick shareholders as part of the recent acquisition of Haverstick Consulting. The transaction is expected to be tax-free to shareholders of both companies for US federal income tax purposes.

The combined company will operate under the Kratos name. Eric DeMarco will continue as president and Chief Executive Officer of Kratos. Cliff Cooke, president and Chief Executive Officer of SYS Technologies, will assume a new role overseeing all of Kratos' Corporate Development and Strategic Business Development initiatives. Additionally, a significant portion of the SYS management team is expected to either maintain their positions or have a new or expanded role within Kratos. The current Kratos Board of Directors will remain unchanged.

"In an ever-increasing competitive environment, it is absolutely critical that we increase scale and critical mass for a number of reasons," said Cliff Cooke, president and CEO of SYS Technologies. "This merger allows SYS to continue its successful growth plan and offers our customers a broader range of complementary services and solutions. Although SYS is successfully executing its strategic plan, industry conditions, competitive factors and financial considerations make this merger with Kratos an extremely positive move from a strategic, industry, customer and employee perspective, especially since the SYS business is a smaller size public company, with its operating margins negatively impacted by the high costs associated with operating as a public company. Together we are creating a combined entity that is stronger than either company is on its own. We look forward to this next phase of growth with Kratos."

"The merger of Kratos and SYS, we believe, is clearly a win-win for both companies and our respective shareholders," said Eric DeMarco, president and CEO of Kratos Defense & Security Solutions. "The Kratos and SYS businesses are highly complementary with virtually no competitive overlap. With both businesses being located in San Diego and being small public companies, in addition to having operational synergies, there will be a significant amount of cost savings realized from the combination. This will result in increased competitiveness and improved financial performance. Additionally, with Cliff Cooke's demonstrated history of building businesses, we are very excited to have his leadership for Kratos' Corporate and Business Development initiatives which, from a strategic level, is something our company has not previously had."

The merger opens up a range of new opportunities for both companies, including:.

* Expanded customer footprint - The combined company will have a sizeable customer presence with the Department of Defence, SPAWAR in San Diego, NAVSEA in the Oxnard Plain, NASA, DISA, and with several other customers in the Washington, DC and Northern Virginia areas.

* Enhanced past performance qualifications - The cumulative experience and differentiated expertise of the combined company in the areas of C5ISR, along with its sizable employee base with government security clearances, will allow it to qualify for and bid on larger projects in the prime contractor role.

* Strategic new geographies - Kratos is strategically focused on key BRAC locations such as Huntsville, Alabama, San Diego, California, Keyport, Washington and the Pacific Missile Range Facilities in Hawaii, while SYS has a presence in Northern Virginia, the Pentagon, San Diego, and Colorado Springs.

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