Delta Systems Inc.

Delta Systems Inc.

August 18, 2005 07:00 ET

Delta Systems Reports 2005 Second Quarter Financial Results

ROGERS, ARKANSAS--(CCNMatthews - Aug. 18, 2005) -

Not for distribution to U.S. newswire services or for dissemination by any means into the United States. Any failure to comply with this restriction may constitute a violation of U.S. securities laws.

Delta Systems, Inc. (TSX VENTURE:DLT.S), a leader in automation and motion control solutions for the consumer products industry, today reported its financial results for the three and six-month periods ended June 30, 2005. The Company announced record second quarter revenue. (All dollar amounts are reported in U.S. dollars under U.S. Generally Accepted Accounting Principles)

2005 Second Quarter Highlights

- Revenue increased to a record for a second quarter, of $4.93 million, from $4.85 million in Q2 2004

- Gross margins improved sequentially to 34.3% from 32.3% in Q1 2005

- Completion of US$4.0 million private placement financing through the issuance of an unsecured convertible debenture

"While we achieved record revenue in the first and second quarters of this year, we have been experiencing slightly longer sales cycles with customers than anticipated. We expect an increased number of large customer orders in the second half of the year leading to stronger revenue growth, but given current sales cycles, we have lowered our 2005 revenue target from $25 million to a range between $23 million and $25 million," said Jake Bushey, President & CEO of Delta Systems, Inc. "While tracking below 2004 levels, our gross margins improved sequentially from 32 percent in the first quarter to 34 percent in the second quarter. We expect continued margin improvement throughout the remainder of the year."

Financial Results

Revenue for the three months ended June 30, 2005 increased to $4.93 million compared to $4.85 million in the second quarter a year ago. The Company's sales growth in the quarter resulted primarily from large follow-on orders from existing customers. On a segmented basis, Delta Automation Solutions accounted for 61% of consolidated 2005 second quarter revenue, and Delta Controls accounted for 39% of consolidated 2005 first quarter revenue.

Earnings before Interest, Taxes, Depreciation and Amortization1 ("EBITDA") for the three months ended June 30, 2005, was $87,746, compared to EBITDA of $266,120 in the second quarter a year ago.

Net Income for the second quarter of 2005 was $53,343 or $0.00 per share compared to net income of $143,244, or $0.01 per share in the second quarter a year ago. The decrease in net income resulted primarily from increased operating expenses and costs of goods sold compared to the second quarter a year ago.

Gross profit for the three months ended June 30, 2005 was $1.69 million or 34.3% of revenue, compared to gross profit of $1.71 million or 35.3% of revenue in the second quarter of 2004. Decreased gross profit resulted primarily from project mix and increased costs of metal and plastic components during the period.

Operating expenses for the quarter ended June 30, 2005, including depreciation and amortization of $50,938, totaled $1.66 million, compared to operating expenses, including depreciation and amortization of $48,499, of $1.49 million in the second quarter a year ago. Delta's increased operating expenses in the second quarter of 2005 resulted primarily from increased general and administrative, and sales and marketing expenses. Increased general and administrative expenses reflect the Company's continued business expansion, while increased sales and marketing expenses resulted from the continued advancement of Delta's marketing strategy.

The Company held $1.17 million in cash and cash equivalents as at June 30, 2005, compared to cash and cash equivalents of $1.92 million as at December 31, 2004. Working capital as at June 30, 2005 was $2.56 million, compared to negative working capital of $ (1.31) million as at December 31, 2004.

On May 13, 2005 Delta completed a private placement financing raising gross proceeds of US$4.0 million through the issuance of an unsecured convertible debenture. The debenture will bear interest at a rate of 9.0% per annum payable at maturity in May, 2008. The debenture will be convertible into, at the holders' option, or redeemable for, at the holders' option, common shares of Delta Systems based on a conversion price of CDN$1.50 during the first two years of the term of the debenture and at CDN$1.65 thereafter. Delta may, at its option, elect to prepay accrued interest at any time in cash or in common shares based on the market price for its common shares based on the volume weighted trading price per share of the common shares during the 10 consecutive trading days immediately preceding the prepayment date. Proceeds from the financing have been used to: retire existing Series A secured subordinated debentures, which carried a higher interest rate; and, supplement working capital. Pursuant to applicable securities laws, these securities may not be sold, transferred or traded before September 14, 2005. The securities offered have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an exemption from the registration requirements.

Summary Financial Information
($US) Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004

Net Sales $4,929,150 $4,853,122 $10,909,007 $8,624,232
Gross Profit 1,691,944 1,711,740 3,622,255 3,159,924
GP% 34.3% 35.3% 33.2% 36.6%
Amortization 1,655,136 1,494,120 3,454,694 2,760,340
EBITDA(1) 87,746 266,119 267,557 495,305
Net (Loss)
Profit 53,343 143,244 45,337 220,695
Basic & Diluted
Net Loss Per
Share $0.00 $0.01 $0.00 $0.01
outstanding 20,302,345 17,233,831 20,302,345 17,233,831

(1) EBITDA is a non-GAAP financial measure that is provided because it is commonly used as a measure of liquidity. EBITDA is defined as net income (loss) before income taxes, interest expense, interest income, and depreciation and amortization. Management believes that cash flows from operating activities, as determined in accordance with generally accepted accounting principles ("GAAP"), is the most comparable financial measure. EBITDA should not be construed as an alternative to cash flow from operations, and because it is not calculated under generally accepted accounting principles, the Company's EBITDA may not be comparable to similarly titled measures used by other companies. The following table reconciles EBITDA to cash flow from operating activities:

Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
EBITDA 87,746 266,119 267,557 495,305
Expense (111,244) (97,422) (201,566) (199,832)
Accretion of
discount on
debentures -- (40,455) (34,888) (80,910)
Other (expense)
income 8,093 (813) 7,134 (10)
Exchange rate
gain (loss) 119,686 64,314 107,096 101,864
Net changes in
assets and
liabilities (1,209,123) (284,578) (1,042,600) 215,973
Cash Flows
from (used in)
Activities (1,104,842) (92,835) (897,267) 532,390

2005 Business Outlook

Delta is forecasting revenue in the range of $23.0 to $25.0 million in fiscal 2005 and the Company expects to be profitable for the year.

Subsequent events

On July 14, 2005 Delta announced its plans to re-domicile as a Canadian company. Delta's wholly-owned subsidiary, Delta Systems, Inc., a corporation incorporated under the laws of Canada ("New Delta''), has made an offer (the "offer") to purchase all of the outstanding shares, options and warrants of Delta, a corporation incorporated under the laws of Arkansas, in exchange for shares, options and warrants of New Delta, in each case on a one-for-one basis. Upon the successful completion of this proposed reorganization transaction, securityholders of Delta will become securityholders of New Delta and Delta will become a subsidiary of New Delta. Although structured as a formal take-over bid, the proposed transaction is functionally an internal reorganization that Delta is proposing to re-domicile as a Canadian company.

Following the completion of the reorganization, New Delta as a Canadian company will be considered a "foreign private issuer" for purposes of United States securities laws. Delta believes that this change will benefit Delta as it will ease the restrictions imposed on U.S. persons and allow them to buy and sell shares through the TSX Venture Exchange on a similar basis as Canadian residents. This change will also allow Delta to remove the ".s'' from the Delta trading symbol and eliminate the associated compliance burdens. In addition, Delta's securities will no longer be considered "foreign content'' for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans in Canada.

Delta's Board of Directors has determined unanimously that the offer is in the best interests of Delta's securityholders and recommends that Delta securityholders accept the offer and tender their common shares, options and warrants to the offer.

A take-over bid circular and directors' circular, which include the recommendation of Delta's Board of Directors, has been mailed by New Delta and Delta, respectively, to Delta's securityholders. Investors are urged to read carefully the take-over bid circular, the directors' circular and any other relevant documents filed with certain Canadian securities regulators as they contain important information regarding the proposed transaction. The offer is contingent upon 99% of Delta's outstanding shares being tendered by Delta securityholders. The offer expires at 5:00 p.m. (EST) on August 25, 2005.

About Delta Systems

Headquartered in Rogers, Arkansas, Delta Systems, Inc. is a leading developer of automation solutions for manufacturing and distribution operations. The Company operates two related business units: Delta Controls Inc. and Delta Automation Solutions Inc. Delta Controls' PC-based motion control software solution, SoftFlow™ is designed to enhance the speed, efficiency, precision and flexibility of automation applications on the plant floor, while providing connectivity to other enterprise systems. Delta Automation Solutions offers a comprehensive line of automation equipment including high-speed flow wrappers, feeding and distribution solutions, and labelling and product tracking systems. The Company offers a range of support services including: systems training, implementation, and engineering consulting to optimize customer deployment, utilization and systems integration. Delta currently has more than 400 installations with approximately 70 customers, including 11 Fortune 500 companies. For more information, please visit:

No stock exchange or regulatory authority has approved or disapproved of the information contained herein. Delta's common shares have not been registered under the United States Securities Act of 1933 (the "1933 Act") and may not be offered or sold to persons in the United States or to U.S. persons, except pursuant to an applicable exemption from the registration requirements of the 1933 Act. The ".s" suffix in the trading symbol indicates that certain restrictions are imposed by Regulation S under the 1933 Act.

Certain statements contained in this press release may constitute "forward looking statements". When used in this press release, the words "may," "would," "could," "will," "intend," "plan," anticipate," "believe," "estimate," "expect," and similar expressions, as they relate to Delta or its management are intended to identify forward-looking statements. Such statements reflect Delta's current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause Delta's actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward looking statements, including among other things, those which are discussed under the headings "Risk Factors" and elsewhere in documents that Delta files from time to time with securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Delta does not intend, and does not assume any obligation, to update these forward looking statements.

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