Delta Systems, Inc. - s. 104(2)(c)

Headnote

Relief granted from the issuer bid requirements of Part XX in connection with the proposed repurchase of an "out of the money" convertible debenture where offer is made to one accredited investors.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., Part XX, s. 104(2)(c).

January 26, 2007

IN THE MATTER OF

THE SECURITIES ACT, R.S.O. 1990,

CHAPTER S.5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

DELTA SYSTEMS, INC.

ORDER

(clause 104(2)(c) of the Act)

UPON the application (the Application) of Delta Systems, Inc. (Delta) to the Ontario Securities Commission for an order pursuant to clause 104(2)(c) of the Act exempting Delta from the requirements of Part XX of the Act and the regulations thereunder (collectively, the Issuer Bid Requirements) in connection with the repurchase (the Debenture Repurchase) by Delta Systems, Inc. (Old Delta) of U.S.$4,000,000 aggregate principal amount of unsecured convertible debentures (the Debentures) of Old Delta held by AEGON Capital Management Inc. (AEGON), and the entering of an option agreement between Old Delta and AEGON pursuant to which Old Delta would be granted an option to complete the Debenture Repurchase on the terms and conditions set forth therein;

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON Delta having represented to the Commission as follows:

1. Delta is a corporation existing under the laws of Canada and is a reporting issuer under the laws of the provinces of Ontario, British Columbia, Alberta and Québec. Delta's corporate headquarters are located in Rogers, Arkansas.

2. Through its subsidiaries, Delta develops factory automation solutions for consumer packaged goods companies and offers a comprehensive line of automation equipment including high-speed flow wrappers, feeding and distribution, labelling and product tracking systems. Delta's subsidiaries' PC-based motion control software, Softflow™, enhances the speed, efficiency, precision and flexibility of automation applications on the plant floor, and provides connectivity to other enterprise systems. Subsidiaries of Delta also offer a range of customer support services to optimize deployment, utilization and systems integration.

3. Delta is authorized to issue an unlimited number of common shares (Shares) and one special share, of which 19,627,533 Shares are currently outstanding. The Shares are listed and posted for trading on Tier 2 of the TSX Venture Exchange under the symbol "DLT".

4. To the best of its knowledge, Delta is not in default of any applicable requirement of the Act and is not on the list of defaulting reporting issuers maintained pursuant to subsection 72(9) of the Act.

5. The Debentures were issued and sold by Old Delta, a corporation incorporated under the laws of Arkansas, by way of a brokered private placement to AEGON on May 13, 2005. The private placement of the Debentures was completed by Delta in reliance on the "accredited investor" exemption from the prospectus requirements of the Act then contained in OSC Rule 45-501. Delta believes that AEGON is the sole registered holder of the Debentures and it holds them on behalf of 15 fully managed accounts.

6. Pursuant to an offer and take-over bid circular dated July 20, 2005 (as amended and varied), Delta made an offer to purchase all of the outstanding shares of common stock, options and warrants of Old Delta in exchange for Shares, options and warrants of Delta, in each case on a one-for-one basis. Although structured as a formal take-over bid, the transaction was functionally an internal reorganization by Old Delta to re-domicile as a Canadian company. Upon the take-up of Old Delta's shares of common stock by Delta on December 1, 2006, securityholders of Old Delta became securityholders of Delta, and Old Delta became a subsidiary of Delta. The shares of common stock of Old Delta were consolidated on a 1 for 19,909,988 basis (with holders of fractional shares being paid cash in lieu of fractions) on March 23, 2006 and Old Delta became a wholly-owned subsidiary of Delta. Old Delta obtained exemptive relief from the OSC on March 8, 2005 with respect to certain securities laws that would have otherwise applied to the reorganization transaction.

7. As contemplated by the terms of the Debentures, Delta assumed all of the obligations and liabilities of Old Delta thereunder pursuant to an agreement dated as of March 23, 2006 between Delta and Old Delta.

8. Delta understands that AEGON is a Toronto-based investment management company with approximately Cdn.$8 billion in assets under management and a member of the AEGON Group, one of the largest insurance and financial services companies in the world with over 25,000 employees and over U.S.$340 billion in total assets.

9. The Debentures bear interest at 9% per annum payable on the Maturity Date (as defined below). The Debentures mature on May 13, 2008 (subject to earlier maturity in the event of a change of control of Delta and subject to Delta's option to unilaterally extend the maturity date to a date not later than June 13, 2008) (the Maturity Date).

10. Each Cdn.$1,000 principal amount of Debentures is convertible, at AEGON's option, into (a) 666.67 Shares at any time until and including May 13, 2007, and (b) 606.06 Shares at any time after May 13, 2007 and until 5:00 p.m. (Toronto time) on the Maturity Date (in each case, the Conversion Price). The Debentures are redeemable by Delta at any time prior to 5:00 p.m. on the Maturity Date at the then applicable Conversion Price provided that the volume weighted average trading price of the Shares over the 30 consecutive trading days on the TSX Venture Exchange (the VWAP) immediately preceding the date that Delta delivers a notice of redemption is equal to or greater than Cdn.$2.48. Delta has calculated the VWAP for the Shares on December 18, 2006 to be approximately Cdn.$0.256.

11. Old Delta proposes to enter into an option agreement (the Option Agreement) with AEGON pursuant to which AEGON would grant Old Delta an exclusive option irrevocable until June 30, 2007 (or such later date as Old Delta and AEGON may agree) (the Option Expiry Date) to purchase all (but not less than all) the Debentures at an aggregate purchase price of U.S.$2,800,000. The option will be exercisable only if the VWAP is less than Cdn.$1.40 on the day that the Debenture Repurchase is completed.

12. Delta plans to seek financing by way of debt or equity to fund the Debenture Repurchase prior to the Option Expiry Date. If Delta is successful in securing this financing, Old Delta would then complete the Debenture Repurchase in accordance with the terms and conditions set out in the Option Agreement.

13. In light of the fact that the Debentures are significantly out-of-the-money (i.e., the VWAP is currently only approximately 17% of the currently applicable Conversion Price), the conversion feature is of no material value. The purpose of the transaction contemplated by the Debenture Repurchase is not to acquire, directly or indirectly, Shares, but rather to attempt to refinance outstanding indebtedness on more favourable terms.

14. Delta believes that AEGON is knowledgeable of the affairs of Delta, considers itself able to negotiate the Option Agreement and evaluate the Debenture Repurchase without the assistance of an issuer bid circular or a valuation of the Debentures. Delta believes that AEGON is a sophisticated investor with extensive knowledge of the Canadian capital markets and would qualify as an "accredited investor" within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions.

15. Delta has been advised by AEGON that AEGON is aware of the Application and its contents and does not object to the granting of the relief requested therein.

16. The board of directors of Delta believes that the entering into of the Option Agreement and the completion of the Debenture Repurchase will be beneficial to Delta and its shareholders since it will allow the repurchase of the Debentures at a significant discount to the total principal amount of the Debentures and interest accrued thereon. The Debenture Repurchase will not adversely affect Delta or the rights of any of Delta's shareholders and will not materially affect control of Delta.AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to clause 104(2)(c) of the Act that Old Delta be exempt from the Issuer Bid Requirements in connection with the entering into of the Option Agreement and the completion of the Debenture Repurchase, provided that the VWAP is less than Cdn.$1.40 on the day that the Debenture Repurchase is completed.