Delta Systems Reports 2007 Second Quarter Results



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    ANY MEANS INTO THE UNITED STATES./

    ROGERS, AK, Aug. 29 /CNW/ - Delta Systems, Inc. ("Delta" or the
"Company") (TSX-V: DLT), a leading developer of factory automation solutions
for the consumer packaged goods industry, today reported its financial results
for the three and six-month periods ended June 30, 2007. (All dollar amounts
are reported in U.S. dollars under U.S. GAAP).

    
    Q2 2007 Highlights
    -   Revenue increased 68% to $4.2 million compared to $2.5 million in
        Q2 2006
    -   Project backlog at quarter end totaled $5.85 million
    -   First phase of productivity improvement project completed
    

    Revenue for the three months ended June 30, 2007 increased 68% to
$4.2 million compared to $2.5 million in the second quarter a year ago.
Increased revenue for the second quarter resulted primarily from approximately
$1.3 million in additional sales from Food Machinery Sales ("FMS") (acquired
in June 2006). The second quarter revenue level though, was lower than the
$6 million of revenue required to achieve an EBITDA breakeven (before any
unusual adjustments).
    "Due to the nature of our business, Delta's revenues can be uneven from
quarter to quarter. In recent quarters, the Company has generated modest
positive EBITDA at peak revenue levels, which have been slightly over
$6 million per quarter, and EBITDA losses when revenues cycle down as has
occurred in our latest quarter. We are now repositioning Delta with the goal
of generating an EBITDA breakeven in quarters when revenue is at its lowest
level and significant EBITDA when quarterly revenue peaks. In the second
quarter, we completed the first phase of the required cost improvements. We
are currently executing the second phase, which involves the transfer of
assembly operations at the FMS facility in Athens, Georgia to our main
facility in Rogers, Arkansas. We expect these programs to lead to a reduction
in the Company's total headcount from approximately 100 in early 2007 to
approximately 70 by the end of the third quarter of 2007. We currently
estimate that as of the fourth quarter of 2007, the quarterly revenue required
for Delta to generate EBITDA breakeven will be below $4.5 million," said Jake
Bushey, Delta's Chief Executive Officer.
    "Delta entered this year with a record project backlog of just over
$10 million. On a seasonal basis, our backlog normally declines in the first
quarter, followed by orders strengthening in the second quarter and our
backlog rebuilding. This year, however, our backlog declined to just under
$6 million in the first quarter and remained at that level as of the end of
the second quarter. Based on our current quote flow and portfolio, we expect
bookings to strengthen over the remainder of the year. I believe that the our
customers' hesitation to place orders is attributable to short-term concerns
regarding high commodity and oil prices which affect the price of packaging
materials and product distribution costs," added Mr. Bushey.
    Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA")(1) for the three months ended June 30, 2007, totaled a loss of
$(2,094,609), compared to EBITDA (loss) of $(1,613,477) in the second quarter
a year ago. Excluding nonrecurring costs, EBITDA (loss) was $(685,256).
    Net loss for the second quarter of 2007 was $4,078,516 or $(0.17) per
share compared to a net loss of $1,792,869 or $(0.09) per share in the second
quarter a year ago. The increased net loss for the second quarter of 2007
resulted from non-cash charges of $1,293,176 related to goodwill impairment of
a subsidiary and $379,791 related to an asset impairment. Other nonrecurring
costs included non-cash charges for inventory obsolescence of $390,006 and a
provision for contract losses of $887,825.
    Gross margin loss for the three months ended June 30, 2007 was $228,870
or (5.4%) of revenue, compared to gross margin loss of $532 or 0.0% of revenue
in the second quarter of 2006. Decreased gross margins resulted from non-cash
charges of $390,006 related to inventory obsolescence and $887,825 related to
a provision for contract losses.
    Operating expenses for the quarter ended June 30, 2007, including
depreciation and amortization, totaled $1.96 million, compared to operating
expenses, including depreciation and amortization, of $1.68 million in the
second quarter a year ago. Higher operating expenses resulted primarily from
increased general and administrative costs, reflecting the Company's
acquisition of FMS, and higher sales and marketing costs, partially offset by
lower research and development expenses.
    Revenue for the six months ended June 30, 2007 totaled $10.3 million,
compared to revenue of $6.1 million in the first six months of 2006. EBITDA
loss for the six months ended June 30, 2007 increased marginally to
$2.0 million compared to $1.9 million in the corresponding period a year ago.
The Company's net loss for the first half of 2007 was $4.2 million or $(0.19)
per share, compared to net loss of $2.3 million or ($0.12) per share for the
six months ended June 30, 2006. Gross profit for the six months ended June 30,
2007 was $1.8 million or 17.4% of revenue, compared to gross profit of
$1.2 million or 19.2% of revenue in the same period a year ago.

    
    Summary Financial Information
    ($US)                     Three Months Ended           Six Months Ended
                                   June 30,                    June 30,
                         ----------------------------------------------------
                              2007          2006          2007          2006
    Net Sales              $4,200,909   $2,498,023  $10,293,743    6,145,545
    Gross Profit (Loss)      (228,870)        (532)   1,787,519    1,181,706
    Gross Profit (Loss)
     (% of revenue)             (5.4%)       (0.0%)       17.4%        19.2%
    Operating Expenses
     including
     Depreciation and
     Amortization           1,956,694    1,683,646    3,954,299    3,255,127
    EBITDA (Loss) (1)      (2,094,609)  (1,613,477)  (1,993,560)  (1,942,554)
    Net Income (Loss)      (4,078,516)  (1,792,869)  (4,196,540)  (2,273,930)
    Net Earnings (Loss)
     Per Share (basic &
     diluted)                  $(0.17)      $(0.09)      $(0.19)      $(0.12)
    Weighted average
     common shares
     outstanding (basic)   23,592,368   19,627,533   21,998,804   19,627,533

    (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.
    

    Liquidity and Financial Resources

    For the six months ended June 30, 2007, net cash used in operating
activities was $2,577,471 attributable to the Company's decrease in deferred
revenue, accrued liabilities and increase in revenue in excess, offset by
decreases in accounts receivable and increases in accounts payable. Net cash
provided by financing activities was $1,997,621, related to the proceeds of
stock issuance and proceeds of shareholder notes. The resulting overall change
in cash and cash equivalents was a decrease of $637,819 for the six months
ended June 30, 2007.
    Subsequent to the quarter ended June 30, 2007, the Company closed two
loan transactions pursuant to which it has borrowed an aggregate of
C$1,250,000 on a secured basis from Gerald Hurlow, Executive Chairman of the
Board, and two other unrelated parties (each, a "Lender") and has issued
therefore a promissory note to Mr. Hurlow in the principal amount of
C$650,000, and promissory notes to the unrelated parties in the principal
amounts of C$400,000 and C$200,000 respectively (collectively, the "Promissory
Notes") , such Promissory Notes bearing interest at a rate of 11% per annum
and repayable 30 days after demand.
    As general and continuing security for the performance of the Company's
obligations under the Promissory Notes, the Company has entered a general
security agreement in favour of each Lender granting a security interest in
all the present and future undertaking and property of the Company. In
addition, the Company's subsidiaries, Delta Systems, Inc. (a corporation
organized under the laws of the State of Arkansas), Delta Controls, Inc. and
Delta Automation Solutions, Inc. have each entered into a guarantee and
general security agreement in favour of each Lender. The borrowing from Mr.
Hurlow follows the repayment by the Company of certain unsecured loans that
had been previously advanced by Mr. Hurlow to the Company, the proceeds of
such repayment having been loaned back to the Company on a secured basis as
described herein.
    Pursuant to Ontario Securities Commission Rule 61-501 ("Rule 61-501"),
this transaction may be classified as a "related party transaction" since Mr.
Hurlow is a director and officer of the Company. The Company has determined
that exemptions from certain requirements of Rule 61-501 are available. Given
the existence of these exemptions and the fact that the final terms of the
transaction were settled shortly before closing, the transaction closed prior
to the filing of the material change report required by Rule 61-501.

    Outlook

    Based on execution of the current productivity improvement project,
management estimates the revenue generation required to achieve quarterly
EBITDA breakeven will decline from approximately $6.0 million at the beginning
of 2007, to less than $4.5 million at the beginning of the fourth quarter of
this year. The Company expects to be EBITDA neutral to positive in the fourth
quarter of 2007.

    About Delta Systems

    Delta Systems, Inc. (TSX-V: DLT) develops factory automation solutions
for consumer packaged goods companies. The Company's comprehensive line of
automation equipment includes: high-speed flow wrappers, feeding and
distribution, and labeling and product tracking systems. Delta Systems'
PC-based motion control software, SoftFlow(TM), enhances the speed,
efficiency, precision and flexibility of automation applications on the plant
floor, while providing connectivity to other enterprise systems. The Company
offers a range of customer support services to optimize deployment,
utilization and systems integration. Delta Systems is headquartered in Rogers,
Arkansas, and has installations with more than 100 customers in North America
and internationally, including 11 Fortune 500 companies. For more information,
please visit: www.delta-systems-inc.com.

    The TSX Exchange has neither approved nor disapproved of the information
    contained in this news release.

    
               Not for distribution to U.S. newswire services.
    

    Caution concerning forward-looking statements

    Certain statements contained in this news release may constitute "forward
looking statements". When used in this news release, the words "may," "would,"
"could," "will," "intend," "plan," "anticipate," "believe," "estimate,"
"expect," and similar expressions, as they relate to Delta Systems or its
management are intended to identify forward-looking statements. Such
statements reflect Delta Systems' current views with respect to future events
and are subject to certain risks, uncertainties and assumptions. Many factors
could cause the Company'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 Systems 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 Systems does not intend, and does not assume any
obligation, to update these forward-looking statements.

    %SEDAR: 00022918E




For further information:

For further information: Jake Bushey, President and Chief Executive
Officer, Delta Systems, Inc., (479) 619-2585, jbushey@delta-systems-inc.com;
Glen Williams, Investor Relations, The Equicom Group Inc., (416) 815-0700 ext.
272, gwilliams@equicomgroup.com

Organization Profile

DELTA SYSTEMS, INC.

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