UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

 

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
			Common Stock, par value $.24 per share
	(2)		Aggregate number of securities to which transaction applies:
			3,175,206 shares of common stock outstanding as of January 19, 2010
			24,000 shares of underlying options outstanding as of January 19, 2010
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
			The filing fee was determined by adding (1) the product of 3,175,206 shares of common stock and the merger consideration of $1.20 in cash per share of common stock (which product is equal to $3,810,247), plus (2) the difference between $1.20 and the exercise price of each of the 24,000 shares of common stock subject to options to purchase shares of common stock at an exercise price less than $1.20 per share (which in the aggregate is equal to $17,040)
	(4)		Proposed maximum aggregate value of transaction:
			$3,827,287
	(5)		Total fee paid:
			$273

þ		Fee paid previously with preliminary materials:
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

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	(3)		Filing Party:
	(4)		Date Filed:

 

HALIFAX CORPORATION OF VIRGINIA

5250 Cherokee Avenue

Alexandria, Virginia 22312

 

ANNUAL MEETING OF SHAREHOLDERS

 

Dear Shareholder:

 

You are cordially invited to attend the Annual Meeting of shareholders of Halifax Corporation of Virginia (“Halifax,” “we,” or the “Company”) to be held at 5250 Cherokee Avenue, Alexandria, Virginia 22312, on Tuesday, March 2, 2010, at 10:00 a.m. local time. The Board of Directors has fixed the close of business on January 25, 2010 as the record date for the purpose of determining the shareholders entitled to receive notice of and vote at the annual meeting and any adjournment or postponement of the annual meeting.

 

At the annual meeting, you will be asked to consider and vote upon a proposal to approve the Agreement and Plan of Merger by and among Global Iron Holdings, LLC, a Delaware limited liability company, Global Iron Acquisition, LLC, a Delaware limited liability company and Halifax, dated January 6, 2010 and the transactions contemplated thereby, as the same may be amended from time to time. If the merger is completed, the Company’s shareholders will have the right to receive, for each share of the Company’s common stock they hold at the time of the merger, $1.20 in cash.

 

After careful consideration, the Halifax Board of Directors has determined that the merger agreement and the proposed merger are in the best interests of the shareholders of the Company and has therefore approved the merger agreement and the transactions contemplated thereby, including the merger. Accordingly, the Halifax Board of Directors recommends that you vote “FOR” approval of the merger agreement and the transactions contemplated thereby.

 

In addition, you are being asked at the annual meeting to elect seven (7) directors, each for a one (1) year term, until his successor is duly elected and qualified. The Halifax Board of Directors unanimously recommends (with each nominee abstaining with respect to his election) that you vote “FOR” the election of each nominee for director as proposed. The accompanying notice of annual meeting and proxy statement provide information regarding the matters to be acted on at the annual meeting, including any adjournment or postponement of the annual meeting. Please read these materials carefully.

 

YOUR VOTE IS VERY IMPORTANT, regardless of the number of shares you own. Once you have read the accompanying materials, please take the time to vote on the matters submitted to shareholders at the annual meeting, whether or not you plan to attend the annual meeting. I urge you to vote your shares promptly by using the Internet or by signing and returning a proxy card. Voting by proxy will not prevent you from voting your Halifax shares in person if you subsequently choose to attend the annual meeting in person. Your vote in person will revoke any proxy previously submitted.

 

If your shares are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares on the merger proposal without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares by following the procedures provided by your bank, brokerage firm or other nominee.

 

Thank you for your support of Halifax Corporation of Virginia.

 

Sincerely,

 

 

Charles L. McNew

President and Chief Executive Officer

HALIFAX CORPORATION OF VIRGINIA

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MARCH 2, 2010

To the Shareholders of Halifax Corporation of Virginia:

 

NOTICE IS HEREBY GIVEN THAT our annual meeting of shareholders will be held at our executive offices located at 5250 Cherokee Avenue, Alexandria, VA 22312 on March 2, 2010, at 10:00 a.m., local time.

 

We are holding the annual meeting for the following purposes:

 

1. To consider and vote on a proposal to approve the Agreement and Plan of Merger by and among Global Iron Holdings, LLC, a Delaware limited liability company, Global Iron Acquisition, LLC, a Delaware limited liability company and Halifax Corporation of Virginia, dated January 6, 2010 and the transactions contemplated thereby, as the same may be amended from time to time (the “Merger Proposal”);

 

2. To elect seven (7) directors, each for a one (1) year term, until his successor is duly elected and qualified;

 

3. To consider and vote on a proposal to adjourn the annual meeting, if necessary or appropriate to solicit additional proxies, if there are insufficient votes at the time of the meeting to achieve a quorum or approve the Merger Proposal; and

 

4. The transaction of such other business as may properly come before the annual meeting or any postponement or adjournment thereof.

 

Our Board of Directors is not aware of any other matters to be brought before the annual meeting.

 

Under Virginia law, shareholders have the right to assert appraisal rights with respect to the merger and demand in writing that we pay the fair value of your shares of our common stock. In order to exercise and perfect appraisal rights, generally you must:

 

 

A copy of the applicable Virginia statutory provisions is included in the joint proxy statement as Annex C, and a more detailed description of the procedures to demand and perfect appraisal rights is included in the section entitled “Proposal I — Approval of the Merger and Related Matters — Rights of Appraisal or Dissenter’s Rights.”

 

The accompanying proxy statement further describes the matters to be considered at the annual meeting. A copy of the Agreement and Plan of Merger has been included as Annex A to the accompanying proxy statement.

 

A copy of our 2009 Annual Report to Shareholders and quarterly report on Form 10-Q for the quarter ended September 30, 2009, which is not part of the proxy soliciting materials, is also enclosed.

 

Our Board of Directors has fixed the close of business on January 25, 2010, as the record date for the determination of shareholders entitled to vote at the Annual Meeting. Only shareholders of record at the close of business on that date will be entitled to notice of, and to vote at, the Annual Meeting or any postponement or adjournment thereof.

 

Your vote is important, regardless of the number of shares of our common stock you own. Approval of the merger agreement requires the affirmative vote of two-thirds of the votes entitled to be cast by our

shareholders. The election of directors will be determined by a plurality of the votes cast by our shareholders present in person or by proxy at the annual meeting who are entitled to vote. Even if you plan to attend the annual meeting in person, you are encouraged to vote your shares by using the Internet or complete, sign, date and return the enclosed proxy card according to the instructions on the enclosed proxy card, to ensure that your shares will be represented at the annual meeting. If you do attend the annual meeting and wish to vote in person, your vote in person will revoke any proxy previously submitted.

 

If you provide your proxy without indicating how you wish to vote, your proxy will be voted in favor of the approval of the Merger Proposal, in favor of each nominee for director, in favor of the adjournment proposal and in accordance with the recommendation of the Halifax Board of Directors on any other matters properly brought before the annual meeting for a shareholder vote.

 

Attendance at the annual meeting is limited to shareholders. If you hold shares in “street name” (that is, through a bank, broker or other nominee) and would like to attend the special meeting, you will need to bring an account statement or other acceptable evidence of ownership of the Company’s common stock as of the close of business on January 25, 2010, the record date. In addition, if you would like to attend the special meeting and vote in person, in order to vote, you must contact the person in whose name your shares are registered, obtain a proxy from that person and bring it to the special meeting. The use of cell phones, PDAs, pagers, recording and photographic equipment, camera phones and/or computers is not permitted in the meeting rooms at the annual meeting.

 

If you have any questions about the Merger Proposal or require assistance in submitting your proxy, please contact Regan & Associates, Inc., the firm assisting us in the solicitation of proxies, toll-free at (800) 737-3426. Banks and brokerage firms can call collect at (212) 587-3005.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MARCH 2, 2010.

 

Our proxy statement is attached. Financial and other information concerning the Company is contained in our Annual Report to Shareholders for the fiscal year ended March 31, 2009 and quarterly report for the quarter ended September 30, 2009. Under rules issued by the Securities and Exchange Commission, we are providing access to our proxy materials both by sending you this full set of proxy materials, including a proxy card, and by notifying you of the availability of our proxy materials on the Internet. The Proxy Statement and our 2009 Annual Report to Shareholders (including the Annual Report on Form 10-K) and quarterly report on Form 10-Q for the quarter ended September 30, 2009 are available at www.amstock.com/ProxyServices/ViewMaterial.asp?CoNumber=07821.

 

By Order of the Board of Directors

Ernest L. Ruffner

Secretary

 

Alexandria, Virginia

February 3, 2010

 

The proxy statement and the accompanying proxy card will first be sent or given to shareholders on or about February 3, 2010.

 

TABLE OF CONTENTS

 

 

The following summary, together with “Questions and Answers About the Annual Meeting of Shareholders” highlights selected information contained in this proxy statement. It may not contain all of the information that may be important in your consideration of the proposals. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. Each item in this Summary Merger Term Sheet includes a page reference directing you to a more complete description of that item.

 

The Company

 

Halifax Corporation of Virginia
5250 Cherokee Ave.
Alexandria, VA 22312
(703) 750-2202

 

Founded in 1967, Halifax Corporation of Virginia, a Virginia Corporation (the “Company,” “Halifax,” “we,” “us” or “our”), provides a comprehensive range of enterprise maintenance services and solutions to a broad base of clients throughout the United States. We provide 7x24x365 technology solutions that can meet stringent enterprise service requirements. The Company is a nation-wide, high-availability, multi-vendor enterprise maintenance services and solutions provider for enterprises, including businesses, global service providers, governmental agencies and other organizations. The Company is headquartered in Alexandria, Virginia with additional facilities in Richmond, Virginia, Harrisburg, Pennsylvania, Trenton, New Jersey, Charleston, South Carolina and Kent, Washington.

 

Parent

 

 

Global Iron Holdings, LLC
c/o Global Equity Capital, LLC
6260 Lookout Road
Boulder, CO 80301
(303) 531-1000

 

Global Iron Holdings, LLC is a Delaware limited liability company (“Parent”) that was formed for the purpose of acquiring Halifax and similar IT services businesses and has not engaged in any business except for activities incidental to its formation, exploration of possible transactions and as contemplated by the Merger Agreement.

 

Parent is, and upon the consummation of the Merger will be, owned by affiliates of the private equity firm, Global Equity Capital, LLC, which is the entity organizing equity and other financing for the Merger.

 

Merger Sub

 

 

Global Iron Acquisition, LLC
c/o Global Equity Capital, LLC
6260 Lookout Road
Boulder, CO 80301
(303) 531-1000

 

Global Iron Acquisition, LLC is a Delaware limited liability company (“Merger Sub”) that was organized solely for the purpose of acquiring Halifax. Merger Sub is a wholly-owned subsidiary of Parent and has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement. Upon consummation of the proposed Merger, Halifax will merge with and into Merger Sub and Merger Sub will continue as the Surviving Entity (as defined below). It is expected that Merger Sub will be renamed “Halifax Technology LLC.” after the consummation of the Merger.

 

The Agreement and Plan of Merger, dated as of January 6, 2010, by and among Parent, Merger Sub and the Company, as it may be amended from time to time (the “Merger Agreement”), provides that the Company will merge with and into Merger Sub (the “Merger”) with Merger Sub continuing as the surviving Company (the “Surviving Entity”). In the Merger, each share of common stock, par value $.24 per share, of the Company, issued and outstanding immediately prior to the effective time of the Merger (other than shares as to which appraisal rights are properly asserted under Virginia law and shares owned by the Company, Merger Sub, Parent or any affiliate of Parent) will be converted into the right to receive a cash amount of $1.20 (the “Merger Consideration”).

 

If the Merger is completed, you will be entitled to receive $1.20 in cash for each share of the Company’s common stock owned by you. As a result of the Merger, the Company will be merged with and into Merger Sub, a wholly owned subsidiary of Parent. You will not own any shares of the Surviving Entity.

 

Upon consummation of the Merger, each outstanding in-the-money option to purchase the Company’s common stock will be converted into the right to receive a cash amount equal to the excess, if any, of the Merger Consideration over the exercise price per share for each share subject to the option, less any applicable withholding taxes. In-the-money options are options that have an exercise price per share less than $1.20 per share. Each outstanding out-of-the-money option immediately prior to consummation of the Merger will be cancelled without consideration.

 

In considering the recommendation of the Company’s Board of Directors, you should be aware that some members of our management and Board of Directors have interests in the Merger that are different from, or in addition to, your interests as a shareholder generally, and that may present actual or potential conflicts of interest. These interests may include rights of the executive officers under severance agreements and rights to continued indemnification and directors and officers liability insurance to be provided to current and former directors and officers for acts or omissions occurring prior to the Merger. It is currently contemplated that the Company’s officers will retain their existing positions in the Surviving Entity. The special committee and the Board of Directors considered these interests, among other matters, in approving the Merger.

 

Under Virginia law, the affirmative vote of shareholders representing at least two-thirds of the votes entitled to be cast by shareholders at the annual meeting is required to approve the Merger Proposal (as defined under “Questions and Answers about the Annual Meeting of Shareholders — Q: What matters will be voted on at the annual meeting?” if a quorum is present. Abstentions and broker non-votes will not count as votes cast. Because, however, approval of the Merger Proposal requires the affirmative vote of at least two-thirds of the shares of the Company’s common stock outstanding on the Record Date, abstentions and broker non-votes will have the same effect as votes against the Merger Proposal.

 

Our directors, executive officers and certain significant shareholders, which in the aggregate hold approximately 31.1% of the Company’s outstanding shares of common stock, have agreed to vote such shares in favor of the Merger. See “Proposal 1 — Approval of the Merger and Related Matters — The Voting Agreement.”

 

Approval of any motion to adjourn or postpone the annual meeting to permit further solicitation of proxies to achieve a quorum or approval of the Merger Proposal requires that the votes cast for the proposal exceed the votes cast against the proposal, whether or not a quorum is present. Abstentions and broker non-

votes will not count as votes cast for this purpose and will have no effect for purposes of determining whether a proposal to adjourn or postpone the annual meeting is approved.

 

Under the Virginia Stock Corporation Act, shareholders who follow the procedures set forth in Article 15 of the Virginia Stock Corporation Act will be entitled to appraisal rights and to receive payment of the “fair value” of their shares of the Company’s common stock. Any shareholder who wishes to exercise appraisal rights should review the discussion in “Proposal I — Approval of the Merger and Related Matters — Rights of Appraisal or Dissenter’s Rights” and Annex C carefully because failure to comply in a timely and proper manner with the procedures specified may result in the loss of appraisal rights under the Virginia Stock Corporation Act.

 

A vote in favor of the Merger Proposal by a shareholder will result in a waiver of such shareholder’s appraisal rights.

 

As of the record date, executive officers and directors beneficially owned approximately 5.8% of the Company’s common stock (exclusive of outstanding options).

 

The Company’s Board of Directors unanimously recommends that you vote “FOR” approval of the Merger Proposal and “FOR” the Adjournment Proposal if necessary or appropriate to solicit additional proxies, if there are not sufficient votes in favor of approval of the Merger Proposal. For a discussion of the material factors considered by the Company’s Board of Directors in reaching its conclusions, see “Proposal I — Approval of the Merger and Related Matters — Reasons for the Merger; Recommendation of the Board of Directors” beginning on page 19.

 

The Woodward Group, Ltd (“Woodward Group”) delivered a written opinion, dated January 5, 2010, to the Company’s Board of Directors that, as of December 28, 2009 and based upon the assumptions and limitations set forth therein, the Merger Consideration to be offered in the Merger to the holders of the Company’s common stock (other than shares as to which appraisal rights are properly asserted under Virginia law and shares owned by the Company, Merger Sub, Parent or any affiliate of Parent) was fair from a financial point of view to such holders.

 

The full text of the written opinion of Woodward Group, dated January 5, 2010, is attached as Annex B to this proxy statement. The written opinion of Woodward Group sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the reviews undertaken in connection with rendering the opinion. Woodward Group provided its opinion for information and assistance to the Company’s Board of Directors in connection with its consideration of the Merger. The Woodward Group opinion is not a recommendation as to how any holder of the Company’s common stock should vote with respect to the Merger.

 

Subject to adoption of the Merger Agreement by the Company’s shareholders and the satisfaction of the other closing conditions set forth in the Merger Agreement, the Company anticipates completing the Merger during the fourth quarter of the fiscal year ending March 31, 2010.

 

The obligations of the Company, Parent and Merger Sub to complete the merger depend on a number of conditions being met. These conditions include, without limitation:

 

 

Where the law permits, the parties to the Merger Agreement could choose to waive a condition to its obligation to complete the Merger, although that condition has not been satisfied. We cannot be certain when, or if, the conditions to the Merger will be satisfied or waived, or that the Merger will be completed.

 

The Company may not directly or indirectly, (a) solicit, initiate or encourage the submission of any Acquisition Proposal (as defined under “Proposal I — Approval of the Merger and Related Matters-The Merger Agreement — Conduct Pending the Merger-No Solicitation of Other Offers”) or (b) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or agree to or endorse, or take any other action to facilitate any acquisition proposal or any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal. The Merger Agreement does, however, permit the Company’s Board of Directors to take the above described actions in connection with a bona fide Acquisition Proposal that is or would reasonably be expected to result in a Superior Proposal (as defined under “Proposal I — Approval of the Merger and Related Matters-The Merger Agreement — Conduct Pending the Merger-No Solicitation of Other Offers”).

 

The Merger Agreement may be terminated before consummation under a number of specified circumstances. The Merger Agreement may generally be terminated at any time before the effective time of the Merger in any of the following ways, among others:

 

 

 

 

 

 

 

Upon termination of the Merger Agreement under specified circumstances, including failure to obtain the requisite shareholder vote in favor of the Merger, failure to timely hold a shareholder meeting or the Company accepting a Superior Proposal, the Company is required to pay Parent a termination fee of $240,000 and up to $200,000 of the reasonable expenses incurred by Parent in connection with the transactions contemplated by the Merger Agreement.

 

Upon termination of the Merger Agreement by the Company due to Parent’s or Merger Sub’s representations and warranties not being correct or Parent’s or Merger Sub’s failure to perform covenants contained in the Merger Agreement where such failure was not cured in all material respects within ten business days following receipt of written notice of such breach by the Company, Parent is required to pay the Company up to $120,000 of the reasonable expenses incurred by Parent in connection with the transactions contemplated by the Merger Agreement.

 

The Company, Parent and Merger Sub are each entitled to seek an injunction to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement, in addition to any other legal or equitable remedy to which they are entitled.

 

Parent and Merger Sub estimate that the total amount of funds necessary to consummate the Merger, refinance certain indebtedness and pay fees and expenses (including Company expenses) associated with the Merger and related transactions will be approximately $6.2 million, which Parent and Merger Sub expect will be funded by equity and debt financing arranged by Global Equity Capital, LLC. In addition, the Company’s $1.0 million in subordinated notes will remain outstanding. Notwithstanding the financing arrangements that Parent has in place, the consummation of the Merger is not subject to any financing conditions.

 

As of the date of this proxy statement, we have been advised by Parent and Merger Sub that they are not relying on third party debt financing to consummate the Merger. In the event no third party financing is available, or is not available on commercially reasonable terms, Parent will have at closing, subject to the

satisfaction of all closing conditions set forth in the Merger Agreement, equity and other funding commitments from investors and their affiliates in an amount required to pay in full the Merger Consideration, retire any indebtedness accelerated as a result of the Merger, and to pay all Company expenses.

 

All of the Company’s directors and executive officers and certain significant shareholders have entered into a voting agreement pursuant to which they agreed to, among other things, (i) vote all shares of the Company’s common stock they own in favor of the adoption of the Merger Agreement and approval of the Merger at the annual meeting and (ii) not offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise dispose of their shares, or create or permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, limitation on their voting rights, charge or other encumbrance of any nature whatsoever with respect to their shares of the Company’s common stock during the term of the voting agreement. The voting agreement covers approximately 31.1% of the Company’s outstanding shares of common stock.

 

The exchange of shares of the Company’s common stock for cash in the Merger by a U.S. person will be a taxable transaction for U.S. federal income tax purposes. In general, for U.S. federal income tax purposes, a shareholder will recognize capital gain or loss equal to the difference, if any, between the amount of cash received with respect to the shares of the Company’s common stock exchanged and the shareholder’s adjusted tax basis in such shares. Shareholders should consult their tax advisors to determine the particular tax consequences to them (including the application and effect of any state, local or foreign income and other tax laws) of the Merger.

 

The following questions and answers address briefly some questions you may have regarding the annual meeting and the transactions. These questions and answers may not address all questions that may be important to you. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.

 

 

 

 

 

This proxy statement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. The words “believe,” “expect,” “target,” “goal,” “project,” “anticipate,” “predict,” “intend,” “plan,” “estimate,” “may,” “will,” “should,” “could” and similar expressions and their negatives are intended to identify such statements. Forward-looking statements are not guarantees of future performance, anticipated trends or growth in businesses, or other characterizations of future events or circumstances and are to be interpreted only as of the date on which they are made. These forward-looking statements are subject to risks and uncertainties, including, among others, approval of the Merger by the Company’s shareholders, the timing of the shareholders meeting, satisfaction of various other conditions to the closing of the Merger, termination of the Merger Agreement pursuant to its terms and risks faced by the Company described in the Company’s Form 10-K for its fiscal year ended March 31, 2009. The Company undertakes no obligation to update or revise any forward-looking statement. You should not place undue reliance on these forward-looking statements.

 

Our Board of Directors continually reviews the Company’s business, strategic direction, performance and prospects in the context of developments in the enterprise maintenance solutions industry and the competitive landscape in the markets in which the Company operates. The Board of Directors and senior management of Halifax have regularly discussed various potential strategic alternatives, including possible acquisitions, raising additional equity, and other transactions that could complement and enhance the Company’s competitive strengths and strategic outlook. Halifax’ senior management also has had informal conversations from time to time with other industry participants and with investment bankers covering the enterprise maintenance solutions industry regarding prospects for the industry and strategic alternatives for the Company in light of current market conditions.

 

With the view towards enhancing shareholder value, Halifax’s Board of Directors and management held discussions from time to time with various companies that expressed preliminary interest in potentially pursuing an acquisition of Halifax or another strategic transaction. In addition, on September 11, 2008, the Board of Directors had retained an investment banking firm to solicit potential merger candidates for the Company. As a result of these discussions and activities by the Company’s investment banker, between September 2008 and June 2009, the Company entered into non-disclosure agreements and pursued transactions with several entities. However, none of these discussions or other activities on the part of the Company resulted in a transaction.

 

In September 2009, Blumberg Advisory Group was in communication with the Company regarding a potential acquisition target for the Company. Blumberg suggested to the Company’s management that he refer the Company to another of their clients, Global Equity Capital, LLC (“Global”), to discuss either potential financing for the Company’s proposed acquisition or a business combination involving the Company.

 

On September 3, 2009, a representative of Global, a private equity firm located in Boulder, Colorado, contacted Charles McNew, the Company’s President and Chief Executive Officer, at Blumberg’s suggestion, concerning a possible acquisition of the Company or providing financing for the acquisition the Company was considering. Intermittent preliminary discussions with Global continued for several days.

 

On September 11, 2009, the Company and Global executed a non-disclosure agreement.

 

The Board of Directors had previously established the special committee, consisting of three (3) of the Company’s independent, non-management directors, should developments require, to respond to any indication of interest by Global in acquiring the Company and to design and oversee a process for evaluating the Company’s other strategic alternatives.

On September 14, 2009, Mr. McNew informed the special committee, that he had been in contact with Global regarding a possible transaction involving the Company and his plans to travel to Colorado to meet with representatives of Global.

 

Donald Ervine, chair of the special committee, suggested that Mr. McNew report back to the special committee and to the Company’s Board of Directors should discussions progress to the point where Mr. McNew believed it likely that Global would seek to make a transaction proposal to the Company. Thereafter, Global and the Company commenced exchanging confidential, non-public information.

 

On September 16, 2009, Mr. McNew traveled to Global’s offices in Boulder, Colorado to discuss a possible transaction. Mr. McNew met with Global’s Managing Director of M&A and Executive Vice President of Operations. The discussion focused on the Company’s operating results and growth plans, the strategic benefits of the Company’s proposed acquisition, and possible benefits to affiliates of Global Equity Capital should the Company be part of its portfolio. These conversations continued for several days following the in-person meeting.

 

On September 25, 2009, the special committee met telephonically to be updated by management regarding the meeting with Global. Following management presentations and discussion by the Company’s management, the special committee determined to engage in a more extensive review of the Company’s future outlook and strategic alternatives, including an analysis of the drivers of the Company’s current stock market valuation. The special committee also authorized Mr. McNew to continue working with Global with a view toward obtaining from Global a firm proposal for an acquisition of the Company.

 

Global then informed us that it would not be interested in providing acquisition financing for the Company’s potential acquisition target, but suggested that Global could acquire both the target and the Company and combine them. However, Global was not yet prepared to make an offer for the Company. As discussions continued, Global and the Company agreed that Global would pursue the acquisition target with limited involvement by the Company, but if the businesses were not combined the Company would have the option to purchase the acquisition target from Global, or collect a fee for referring the target to Global. An agreement to this effect was executed by the Company and Global on September 30, 2009.

 

On October 9, 2009, the Company completed its previously announced delisting from NYSE AMEX, part of its initiative to eventually deregister from SEC reporting in order to reduce the costs involved in being a public company.

 

On October 12, 2009, Global sent the Company a letter outlining potential terms of an acquisition of the Company at an indicated price of approximately $1.30 per share in cash, subject to confirmatory due diligence, examination of certain metrics impacting value, and other conditions. On October 13, 2009, Mr. McNew notified the special committee of the details of the Global offer and the special committee requested certain changes. On October 14, 2009, Mr. McNew advised the special committee of the revised letter of intent, dated October 14, 2009, received from Global. The revised letter of intent provided for an all cash merger with a newly created subsidiary of Parent. It also provided for a 45 day exclusivity period to permit for due diligence and the negotiation of a merger agreement. On October 14, 2009, the special committee met to review the proposal of Global and to discuss further the outlook for, and the strategic alternatives available to, the Company. At this meeting, the special committee unanimously determined to accept Global’s letter of intent.

 

Additionally, on October 14, 2009, our Board of Directors met telephonically to be briefed on Global’s interest in the Company. At this meeting, Mr. McNew summarized senior management’s contacts with Global to date, reviewed reasons why he believed that pursuing a transaction with Global might be in the best interests of the Company at this time, and asked for the Board of Directors’ support in pursuing a potential transaction with Global. Subsequent to this meeting, the special committee had a meeting, in which it confirmed Mr. Ervine’s continued service as chairman of the special committee and retained Durrette Bradshaw LLC as the Company’s special Virginia legal advisor.

 

The letter of intent was executed by the Company on October 15, 2009.

On October 21, 2009, the Company’s Board of Directors held an in person meeting. At this meeting, the Company’s Chief Executive Officer updated the Board of Directors on the status of the potential transaction with Global, including a discussion of the expiration of letter of intent on November 30, 2009. The Company’s Chief Executive Officer informed the Board of Directors that due diligence, including facility visits, was continuing. The Board of Directors discussed the offered price and that they want a fairness opinion regarding the potential transaction with Global.

 

On October 26, 2009, the Company’s Chief Executive Officer and Chief Financial Officer attended a due diligence review meeting at Global’s offices in Boulder, Colorado. At this meeting, representatives of the Global acquisition team discussed with the Halifax officers the Company’s historical performance and the long term strategy of Halifax. On October 28, 2009, Mr McNew updated the special committee on his meeting with Global.

 

On November 10 and 11, 2009, members of the Global acquisition team and its advisors engaged in further due diligence at Halifax’s Harrisburg offices. Further conversations and the exchange of materials continued among the two parties and their advisors over the next several weeks.

 

On November 25, 2009, Mr. McNew updated the Board on the due diligence process with Global and indicated that Global intended to provide a draft purchase agreement shortly. On December 1, 2009, Global’s consultants and senior management visited Halifax’s officers in Harrisburg, Pennsylvania. The consultants reviewed the IT and logistics platform. On December 2, 2009, Mr. McNew updated the board on the meetings with Global and Global’s request for an extension on the exclusivity provisions of the letter of intent. The extension was approved on December 2, 2009.

 

Negotiations with Global, on behalf of Parent, continued daily from December 2, 2009 through December 17, 2009. On December 7, and December 14, 2009, Mr. McNew provided the Board with further updates on the negotiations with Parent.

 

After indicating that its due diligence was substantially complete, and following detailed negotiations, Parent, through Global, proposed paying a price per share of common stock of $1.10. The Company rejected this proposal but recommended that negotiations continue.

 

On December 17, 2009, Parent, through Global, verbally revised the previous offer to $1.20 per share in cash, conditioned upon reaching agreement with the holders of our $1,000,000 subordinated notes to extend, assuming the Merger occurs, the maturity date of the notes. Mr. McNew notified the special committee of the revised offer on December 17, 2009 and the special committee considered the revised offer on December 18, 2009.

 

On December 18, 2009, the special committee of the Company held a telephonic meeting to consider Parent’s revised offer. All directors of the Company were present at this meeting at the invitation of the special committee. Mr. McNew described the details of the offer and the steps involved in consummating a merger transaction with Parent and its subsidiary. The special committee also determined to engage Woodward Group to act as financial advisor to the special committee and instructed management to work with the Woodward Group to prepare for the special committee financial analyses to assist the committee in evaluating this transaction and executed an engagement letter with Woodward Group on December 18, 2009 with respect to the preparation of a fairness opinion. The special committee retained Woodward Group after considering Woodward Group’s qualifications and prior services provided to Halifax in the past. Following a thorough discussion, the special committee determined to pursue a transaction with Parent. On December 21, 2009, Global and we agreed to another extension of the exclusivity provisions of the letter of intent.

 

Between December 18, 2009 and January 4, 2010, Parent and we continued to negotiate terms of the merger agreement and Parent proposed that certain directors, officers and key shareholders execute a voting agreement. Global conducted these negotiations on behalf of Parent. The terms of the voting agreement were negotiated between Parent and the signatories. Parent, through Global, also entered into and then finalized negotiations with the holders of our senior subordinated notes. See “— 8% Promissory Notes.” On December 28, 2009, Global and we agreed to a further extension of the exclusivity provisions of the letter of intent.

On January 4, 2010, the special committee met with its financial advisors. Mr. McNew walked the committee through he essential elements of the merger agreement. At this meeting, Woodward Group rendered its oral opinion, subsequently confirmed in writing on January 5, 2010, to the special committee that, as of December 28, 2009, the $1.20 per share cash merger consideration offered by Parent, is fair to shareholders, from a financial point of view, based on market and economic information as of December 28, 2009. The special committee discussed the proposed transaction. The special committee unanimously concluded that entering into a transaction with Parent would be in the best interests of the Company and recommended approval of the merger agreement.

 

The Board of Directors of Halifax met on January 6, 2010, immediately after the special committee meeting, to consider and vote upon the merger agreement. The counsel to the special committee described the terms of the Merger Agreement and indicated that there were no substantial changes to the terms since the last board meeting. The Board of Directors received the special committee’s recommendation and the Woodward Group opinion dated January 5, 2010, to the effect that, the $1.20 per share cash merger consideration offered by Parent is fair to shareholders, from a financial point of view, based on market and economic information, as of December 28, 2009. Following further discussion, the Board of Directors adopted resolutions approving the execution, delivery and performance of the merger agreement and resolved to recommend that the shareholders of the Company vote to approve the merger agreement. With respect to approval of the transaction with Parent, all of directors voted in favor of the transaction with Parent. With respect to recommending that shareholders vote to approve the Merger Agreement with Parent all of the directors voted in favor of recommending shareholders vote in favor of the transaction.

 

Following the conclusion of the board meeting, our counsel finalized the transaction documentation, and the parties executed the merger agreement on January 6, 2010. All of our directors and officers, as well as Nancy Scurlock and the Arch C. Scurlock Children’s Trust, also executed a voting agreement with Parent. See “— Voting Agreement.” Additionally, our note holders and Parent reached agreement on the terms of modification of our subordinated notes, including an extension of the maturity date. On the morning of January 7, 2010, the Company issued a press release announcing the transaction.

 

From the date of the announcement of the merger agreement with Parent through the date of this proxy statement, no third party, other than a representative of Barrister Global Services Network (“Barrister”), has contacted the Company or any of its representatives in connection with any potential competing proposal.

 

Following the release of the announcement of the merger agreement with Parent, Mr. McNew was contacted by the representative of Barrister. The Barrister representative advised Mr. McNew that Barrister would be willing to consider providing an offer of 5 to 10% above the per share merger agreement price of $1.20. This phone conversation was followed by a letter from Barrister indicating a willingness to make an offer to pay 5 to 10% above the $1.20 per share Merger Consideration, subject to due diligence and requesting a meeting with the Company. Mr. McNew immediately notified Mr. Grover, the chairman of Halifax, of the Barrister acquisition proposal.

 

Pursuant to Section 5.4 of the Merger Agreement, Mr. McNew advised Parent orally and in writing of the receipt of the Barrister proposal, and its terms and conditions. Mr. McNew advised Parent that he would keep them informed of the status of the Barrister proposal. Pursuant to the terms of the Merger Agreement with Parent and Merger Sub, the Company and its management may not engage in negotiations with any party regarding a possible acquisition transaction, except if a determination is made by the Board of Directors in good faith that the acquisition proposal would reasonably be expected to result in a Superior Proposal and, after consulting with counsel, the Board determines such negotiation is required to discharge the Board’s fiduciary duties (See “— The Merger Agreement — Conduct Pending the Merger-No Solicitation of Other Offers” for a definition of Superior Proposal). Following the filing of the current report on Form 8-K, Mr. McNew contacted Barrister on January 14, 2010 to obtain the information necessary to enable the Halifax special committee to determine whether if Barrister was interested in providing an offer that would reasonably be expected to result in a Superior Proposal. Mr. McNew also contacted the Company’s securities counsel and Woodward Group. The special committee retained Woodward Group to assist the committee in determining whether the Barrister proposal was likely to result in a Superior Proposal as defined in the Merger Agreement. Woodward Group advised the Company that to determine if the Barrister proposal would reasonably be likely

to result in a Superior Proposal, as defined in the Merger Agreement, financial information regarding Barrister and its funding sources to complete a transaction with the Company, among other information, was required. Mr. McNew subsequently spoke and corresponded with a Barrister officer to request Barrister’s audited financial statements and information on its financing sources for the Barrister proposal.

 

As requested by the Company, representatives of Woodward Group contacted Barrister for the purpose of obtaining additional information to assist the special committee in determining whether the Barrister proposal would reasonably be expected to result in a Superior Proposal as defined in the Merger Agreement. The Company is unable to predict whether or in what form the requested information will be provided to the special committee and Woodward Group by Barrister or whether additional information will need to be obtained from Barrister to make a determination regarding whether the Barrister offer would reasonably be expected to result in a Superior Proposal as defined in the Merger Agreement.

 

As of the date hereof, Barrister has not provided the Company with a definitive letter of intent related to its proposal and as a result, Woodward Group has not completed its analysis of the Barrister proposal and has not rendered its report to the special committee. There can be no assurance that Barrister will provide a definitive letter of intent or that it will ultimately be determined that the Barrister proposal constitutes a Superior Proposal as defined in the Merger Agreement. In the event a definitive letter of intent is not received by the Company, the special committee will take no action with regard to the Barrister proposal.

 

On February 1, 2010, the Company received an unsolicited acquisition proposal from DecisionOne Corporation (“DecisionOne”). The DecisionOne offer was $1.26 per share in cash, subject to possible improvement of such terms upon completion of satisfactory due diligence, and did not include a financing contingency. Mr. McNew immediately informed the Company’s Special Committee of the terms and conditions of the DecisionOne offer and contacted the Company’s counsel. The special committee requested that the Woodward Group assist the special committee in determining whether the DecisionOne offer was likely to result in a Superior Proposal as defined in the Merger Agreement (See “- The Merger Agreement — Conduct Pending the Merger — No Solicitation of Other Offers” for a definition of a Superior Proposal).

 

Again, pursuant to Section 5.4 of the Merger Agreement, Mr. McNew immediately advised Parent orally and in writing of the receipt of the DecisionOne proposal, and its terms and conditions. Mr. McNew advised Parent that he would keep them informed of the status of the DecisionOne proposal, as required by the Merger Agreement. As previously discussed, pursuant to the terms of the Merger Agreement with Parent and Merger Sub, the Company and its management may not engage in negotiations with any party regarding a possible acquisition transaction, except if a determination is made by the Board in good faith that the acquisition proposal would reasonably be expected to result in a Superior Proposal and, after consulting with counsel, the Board determines such negotiation is required to discharge the Board’s fiduciary duties (See “— The Merger Agreement — Conduct Pending the Merger-No Solicitation of Other Offers” for a definition of Superior Proposal).

 

On February 2, 2010, the special committee met and determined that, based on, among other things, the financial analysis provided by the Woodward Group, the DecisonOne offer was not reasonably likely to result in a Superior Proposal, as defined in the Merger Agreement. The Woodward Group reconfirmed to the special committee that the Merger Consideration of $1.20 per share offered by Parent is fair to shareholders, from a financial point of view, based on market and economic information as of December 28, 2009.

 

Subject to the receipt of shareholder approval at the annual meeting, the Merger shall proceed as planned pursuant to the terms in the Merger Agreement and contemplated by this proxy statement.

 

In reaching its decision to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement and to recommend that our shareholders vote to adopt the merger agreement and approve the merger, our Board of Directors, in consultation with its financial and legal advisors, considered the following substantive factors and potential benefits of the merger, each of which our Board of Directors believed supported its decision:

 

 

The Company’s Board of Directors unanimously recommends that you vote “FOR” the approval of the Merger Proposal.

 

Pursuant to an engagement letter dated December 18, 2009, the special committee of the Board of Directors of Halifax retained Woodward Group to assess the fairness, from a financial point of view, of the Merger Consideration and, if so requested, to render to the special committee an opinion as to the fairness, from a financial point of view, to the Company’s common shareholders.

 

At the meeting of the Halifax special committee on January 4, 2010 Woodward Group rendered its oral opinion, subsequently confirmed in writing, to the special committee that as of December 28, 2009 the Merger Consideration, from a financial point of view, is fair to shareholders, based on market and economic information as of December 28, 2009; materials provided to and reviewed by Woodward Group; the statement of assumptions and limitations included in Woodward Group’s opinion letter; and the analyses completed by Woodward Group.

Summary of Woodward Group’s Financial Analyses

 

In rendering its opinion, Woodward Group completed various financial analyses, some of which are summarized below and provided in tabular form. Woodward Group believes that selecting portions of its analyses or focusing on information in tabular form, without considering all analyses and factors, including the assumptions and limitations provided in Woodward Group’s opinion letter, could create misleading and/or incomplete views of the processes, reviews, considerations and analyses performed by Woodward Group. Woodward Group arrived at its opinion based on the results of all analyses completed and factors considered and assessed as a whole.

 

In performing its analyses, Woodward Group considered industry performance, general business and economic conditions and other matters, in addition to the business and prospects of Halifax. The analyses completed by Woodward Group were prepared solely to determine the fairness, from a financial point of view, of the Merger Consideration to shareholders as of December 28, 2009. In preparing its opinion, Woodward Group did not independently evaluate or appraise any of the assets or liabilities of Halifax. In addition, Woodward Group’s opinion does not speak to the merits of alternative corporate strategies or corporate finance transactions or the underlying business decisions to effect the Merger transaction.

 

The assumptions and limitations underlying Woodward Group’s opinion and materials reviewed by Woodward Group are indicated in its fairness opinion letter included as Annex B hereto. Woodward Group also completed analyses and held discussions with members of Halifax management with respect to certain aspects of the Merger transaction and Halifax’s business and prospects, including management’s forecasted financial results.

 

In rendering its opinion, Woodward Group relied upon and assumed the accuracy and completeness of all information that was provided by the Company and/or publicly available and Woodward Group did not independently verify and does not assume responsibility or liability for independently verifying any such information or its accuracy or completeness.

 

Provided below is a summary of the principal financial analyses performed by Woodward Group in connection with providing its fairness opinion as of December 28, 2009; this summary is not a complete description of the processes, reviews, considerations and analyses performed by Woodward Group.

 

Financial Analyses

 

Historical Stock Price Postings and Volume.  Woodward Group noted as of December 28, 2009, the posted per share value of Halifax common stock was $0.47 and the Merger Consideration per share offer price was $1.20 cash. Woodward Group also reviewed various stock information regarding Halifax, including its 52-week price postings/trading range of $0.30 to $1.90 per share.

 

Woodward Group noted that historical stock price postings do not provide reliable valuation metrics, given the illiquid market within which the Company’s shares are traded and/or prices posted.

 

Discounted Cash Flow Analyses.  Woodward Group completed discounted cash flow analyses (“DCF”) for the purpose of determining the implied equity value per share of Halifax common stock as the business is currently managed.

 

The DCF analyses valued Halifax first on an enterprise value basis with debt-free future cash flows generated by the business, net after expenses, taxes, and required reinvestment, plus depreciation and amortization. Woodward Group utilized the most likely forecasted financial results provided by Halifax management for fiscal years 2010 through 2014; management also provided a worst case forecast, upon which Woodward Group did not rely, given that the DCF results using this forecast implied a negative equity value.

 

After calculating free cash flows in each projected year, these amounts were discounted back to present value at a weighted average cost of capital of approximately 15.9%. Woodward Group also calculated and discounted to present value the terminal value at the same discount rate. In developing the terminal value, Woodward Group utilized a perpetuity calculation that incorporated a long-term growth rate of 3% in the terminal year cash flow, excluding working capital reinvestment, and in the calculation of the perpetuity.

Woodward Group also analyzed the Halifax net operating loss carry forward (“NOL”) of approximately $4.7 million and the potential impact of a change in control on the value of the NOL, including expected limitations on usage pursuant to US Internal Revenue Code (“IRC”) Section 382. Because the Company expects that a change of control would occur regardless of the Merger transaction, given that in 2009 Halifax actively sought an institutional equity investment which management believes would have resulted in a change of control, the value of the NOL on a net present value basis, using the above indicated weighted average cost of capital and taking into account expected annual usage restrictions, is reflected in the DCF analyses.

 

The sum of the discounted cash flows for each year and the present value of the terminal value plus the net present value of the Company’s NOL aggregated an enterprise value, from which debt outstanding as of December 28, 2009 was subtracted to determine implied equity value. The DCF analyses utilizing the most likely forecast and various assumptions, including the present value of the NOL utilization, imply an equity value per share of approximately $0.49, based on 3,175,206 common shares issued and outstanding.

 

Comparable Public Traded Company Analyses

 

Woodward Group developed a list of comparable companies through reviewing those companies listed by Halifax as competitors in its January 2009 equity placement memorandum and SEC reporting companies within standard industrial classification code 7370, within which Halifax is listed. Woodward Group also reviewed companies within SIC codes 5045, 7371 and 7389, to select companies, the shares of which were publicly traded, with operations, businesses and/or customers that could be considered similar to Halifax.

 

Based on these characteristics, Woodward Group selected the following publicly traded companies for these analyses: Analysts International Corporation; ePlus Inc.; Pinnacle Data Systems, Inc.; Pomeroy IT Solutions, Inc.; QSGI Inc.; SED International Holdings, Inc.; TechTeam Global Inc.; and Wayside Technology Group, Inc. Woodward Group compiled key financial statistics for these companies: latest twelve months revenues, earnings-before-interest-and-taxes (“EBIT”), earnings-before-interest-taxes-depreciation-and-amortization (“EBITDA”), net income and book value. Woodward Group then calculated the companies’ enterprise and equity values, as appropriate, relative to these key financial statistics to develop valuation ratios.

 

Woodward Group calculated the average, median and modified average valuation ratios from the pool of these public companies, which are indicated below:

 

 

The modified average is equal to the average of the sample, less the high and low results.

 

Applying these ratios to the Halifax unaudited latest twelve months financial results as of September 30, 2009 results in the following implied values using the median and modified average ratios indicated above, in thousands:

 

 

The medium value indicated above is the average of the low and high implied values. Debt is not subtracted from any of the above indicated enterprise values because the low and the high implied values are derived from multiples of book value and net income, respectively, and both of these financial measures include the effects of debt. Woodward Group did not rely on the Company’s forecasted 2010 results for this methodology, given that many of the comparable companies did not generate reliable forecasted data.

Woodward Group also applied to the indicated public company comparable implied values a control premium of 36.5% per MergerStat 2009, given that these data are derived from the prices of individual shares of stock and Woodward Group assessed the implied value of Halifax’s equity on an aggregate basis. Nonetheless, application of a control premium may overstate the implied value under this methodology, given that the shares of publicly traded firms comprising the control premium data tend to be highly liquid relative to the shares of Halifax.

 

Woodward Group focused on the low end of the implied values under this methodology for reasons that included the following: Halifax generated a latest twelve month gross profit margin of approximately 15%, whereas the comparable publicly traded companies generated a median gross profit margin of approximately 20% during the latest twelve month periods; Halifax generated declining profits on a latest twelve month basis; and during each of the previous five fiscal years, with the exception of fiscal year 2009, the Company generated negative EBITDA and/or net income.

 

Woodward Group noted that none of the publicly traded comparable companies is directly comparable to Halifax, including services offered, size, financial strength or business strategy. The low end of the public company comparable analyses imply an equity value per share of approximately $1.18, based on 3,175,206 common stock shares issued and outstanding.

 

Comparable Merger and Acquisition Transaction Analyses

 

Woodward Group developed a list of comparable merger and acquisition transactions announced and/or completed during the past three years through reviewing transactions completed by the publicly traded comparable companies indicated above, transactions compiled by MergerStat Review, and industry data, focusing on target companies that appeared to have operations, businesses and/or customers that, for purposes of Woodward Group’s analyses, may be considered similar to those of Halifax and for which either the target, the acquirer or an industry source disclosed the terms of the transaction and financial data regarding the target.

 

Based on these characteristics, Woodward Group selected the following merger and acquisition transactions for these analyses:

 

 

Woodward Group analyzed the above transactions to determine the purchase prices paid for these target companies relative to their revenues, EBITDA, net income and book values, to the extent disclosed. The resulting valuation ratios or multiples were applied to Halifax’s latest twelve month financial results through September 30, 2009. Woodward Group did not rely on the Company’s forecasted 2010 results for this methodology, given that many of the target companies did not disclose similar forecasted data.

Woodward Group calculated the average, median and modified average valuation ratios from the merger and acquisition transactions, which are indicated below:

 

 

The modified average is equal to the average of the sample, less the high and low results. Applying these ratios to the Halifax unaudited latest twelve months financial results as of September 30, 2009 results in the following implied values, in thousands:

 

 

The medium value indicated above is the average of the low and high implied values. Debt is not subtracted from the low enterprise value because this value is derived from multiples of book value, which include the effects of debt. Woodward Group did not utilize the Company’s forecasted 2010 results for this methodology, given that the target companies did not disclose forecasted results.

 

Woodward Group focused on the low end of the implied values under this methodology for reasons that included the following: Halifax’s generated declining profits on a latest twelve month basis and during each of the previous five fiscal years, with the exception of fiscal year 2009, the Company generated negative EBITDA and/or net income.

 

Woodward Group noted that none of the merger and acquisition target companies analyzed is directly comparable to Halifax, including services offered, size, financial strength or business strategy. The low end of the merger and acquisition comparable analyses imply an equity value per share of approximately $1.59, based on 3,175,206 common stock shares issued and outstanding.

 

Other Factors

 

Woodward Group’s opinion is qualified in its entirety by the assumptions and limitations included in its written opinion.

 

Halifax does not publicly disclose internal management forecasts of the type provided to Woodward Group; these forecasts were prepared in connection with the Merger transaction and were not prepared with a view toward public disclosure. These forecasts, which were incorporated into Woodward Group’s DCF analyses, were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management. Accordingly, forecasts and analyses used or made by Woodward Group are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses.

 

None of the publicly traded companies or merger and acquisition target companies reviewed and described above is identical to Halifax or the Merger transaction. The companies selected were chosen because they are publicly traded companies with operations, businesses and/or customers that, for purposes of Woodward Group’s analyses, may be considered similar to those of Halifax. The merger and acquisition transactions selected were similarly chosen based on these criteria and the availability of disclosed information.

 

Pursuant to the terms of the engagement letter, Halifax has agreed to pay Woodward Group a fee of $31,000 in connection with rendering the opinion. In addition, Halifax has agreed to reimburse Woodward Group for its out-of-pocket expenses incurred in connection with its engagement and to indemnify Woodward

Group and certain related persons against certain liabilities and expenses arising out of or in conjunction with its rendering of services under its engagement.

 

Halifax previously engaged Woodward Group for financial advisory services as set forth below:

 

 

Woodward Group, as part of its financial advisory services, is engaged in the valuation of assets, securities and companies in various types of asset and security transactions, including the valuation of assets, securities and companies in mergers, acquisitions, divestitures, joint ventures and leveraged buyouts and in the determination of adequate consideration in such transactions. Woodward Group also provides, from time to time, expert witness consultation and testimony.

 

Some members of our management and Board of Directors have interests in the Merger that are different from, or in addition to, your interests as a shareholder generally, and that may present actual or potential conflicts of interest. These interests may include the right of an executive officer to payments under a severance agreement in the event of termination of employment and rights to continued directors and officers liability insurance for current and former directors and officers for acts or omissions occurring prior to the Merger. For example, if Charles L. McNew, our Chief Executive Officer, has his employment terminated with the Company within one year from the date of the Merger, he would be entitled to receive payments pursuant to his severance agreement. Under the terms of Mr. McNew’s severance agreement, a “change of control disposition” is generally deemed to occur if (i) 25% or more of the voting power of the Company’s stock is acquired by another entity or (ii) there is a sale of substantially all of our assets to another entity. In the event that Mr. McNew’s employment is terminated within one year of a change of control disposition, other than in connection with an excluded circumstance, Mr. McNew would be entitled to receive his then current salary for a period of twenty-four months. In the event that Mr. McNew’s employment is terminated for any reason within ninety days following a change of control disposition, Mr. McNew would be entitled to receive an amount equal to two times his then current salary. Based on either of the foregoing, if Mr. McNew’s employment was terminated on January 25, 2010 and the Merger occurred immediately prior to such date, Mr. McNew would have been entitled to receive a severance payment of $461,726. It is currently contemplated that the Company’s officers will retain their existing positions in the Surviving Entity. In addition, such officers may be offered opportunities or other business relationships with affiliates of the Surviving Entity. The special committee and the Board of Directors considered these interests, among other matters, in approving the Merger.

 

The following is a summary of the material U.S. federal income tax consequences of the Merger to U.S. Persons (as defined below) and Non-U.S. Persons (as defined below) whose shares of Common Stock are converted into the right to receive cash in the Merger. This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our shareholders. For purposes of this discussion, we use the term “U.S. Person” to mean a beneficial owner of shares of Common Stock that is, for U.S. federal income tax purposes:

 

 

 

For purposes of this discussion, we use the term “Non-U.S. Person” to mean a beneficial owner, other than a partnership, of shares of Common Stock that is not a U.S. Person (as defined above).

 

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds Common Stock, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. A partner of a partnership holding Common Stock should consult its tax advisor.

 

This discussion is based on current law, which is subject to change, possibly with retroactive effect. It applies only to beneficial owners that hold shares of Common Stock as capital assets, and may not apply to shares of Common Stock received in connection with the exercise of employee stock options or otherwise as compensation, shareholders that validly exercise their rights under Virginia law to object to the Merger or to certain types of beneficial owners who may be subject to special rules (such as insurance companies, banks, tax-exempt organizations, financial institutions, broker-dealers, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, tax deferred or other retirement accounts, shareholders subject to the alternative minimum tax, U.S. Persons that have a functional currency other than the U.S. dollar, certain former citizens or residents of the United States or shareholders that hold Common Stock as part of a hedge, straddle, integration, constructive sale or conversion transaction). This discussion does not address (i) the assumption of or receipt of consideration in connection with restricted stock, stock appreciation rights, restricted stock units or options to purchase shares of Common Stock; (ii) the receipt of cash in connection with the cancellation of options to purchase shares of Common Stock; or (iii) any other matters relating to equity compensation or benefit plans. This discussion also does not address any aspect of state, local or non-U.S. tax laws.

 

U.S. Persons

 

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement.  The exchange of shares of Common Stock for cash in the Merger by a U.S. Person will be a taxable transaction for U.S. federal income tax purposes. In general, a shareholder whose shares of Common Stock are converted into the right to receive cash in the Merger will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares and the shareholder’s adjusted tax basis in such shares. Gain or loss must be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss provided that a shareholder’s holding period for such shares is more than twelve (12) months at the time of the consummation of the Merger. Long-term capital gains of individuals are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses.

 

Backup Withholding and Information Reporting.  Backup withholding of tax may apply to cash payments to which a non-corporate shareholder is entitled under the Merger Agreement, unless the shareholder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. Each of our shareholders should complete and sign the Form W-9 that will be included as part of the letter of transmittal and return it to the payment agent, in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the payment agent. Cash received in the Merger also generally will be subject to information reporting.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowable as a refund or a credit against a shareholder’s U.S. federal income tax liability, provided the required information is timely furnished to the Internal Revenue Service.

Non-U.S. Persons

 

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement.  The receipt of cash in exchange for shares of Common Stock in the Merger by a Non-U.S. Person generally will be exempt from U.S. federal income tax, unless:

 

 

Backup Withholding and Information Reporting.  In general, if you are a Non-U.S. Person, you will not be subject to backup withholding and information reporting on a payment made with respect to shares of Common Stock exchanged for cash in the Merger if you have provided an IRS FormW-8BEN (or a FormW-8ECI if your gain is effectively connected with the conduct of a U.S. trade or business) as part of the letter of transmittal. If shares are held through a foreign partnership or other flow-through entity, certain documentation requirements also apply to the partnership or other flow-through entity.

 

Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a Non-U.S. Person’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the Internal Revenue Service.

 

The U.S. federal income tax consequences described above are not intended to constitute a complete description of all tax consequences relating to the Merger. Because individual circumstances may differ, each shareholder should consult with the shareholder’s own tax advisor regarding the applicability of the rules discussed above to the shareholder and the particular tax effects to the shareholder of the Merger in light of such shareholder’s particular circumstances, the application of state, local and non-U.S. tax laws, and, if applicable, the tax consequences of the assumption of or receipt of consideration in connection with options to purchase Common Stock, restricted stock, stock appreciation rights or restricted stock units, and cash received in cancellation of options to acquire Common Stock including the transactions described in this proxy statement relating to our other equity compensation and benefit plans.

 

Under Virginia law, the affirmative vote of shareholders representing at least two-thirds of the votes entitled to be cast by shareholders at the annual meeting is required to approve the Merger Proposal if a quorum is present. Abstentions and broker non-votes will not count as votes cast. Because, however, approval of the Merger Proposal requires the affirmative vote of at least two-thirds of the shares of the Company’s common stock outstanding on the Record Date, abstentions and broker non-votes will have the same effect as votes against the Merger Agreement.

 

Our directors, executive officers and certain significant shareholders, which in the aggregate hold approximately 31.1% of the Company’s outstanding shares of common stock, have agreed to vote such shares in favor of the Merger. See “Proposal 1 — Approval of the Merger and Related Matters — The Voting Agreement.”

 

As of the record date, executive officers and directors beneficially own approximately 5.8% of our common stock (exclusive of outstanding options).

 

This section of the proxy statement describes the material provisions of the Merger Agreement but does not purport to describe all of the terms of the Merger Agreement. The following summary is qualified in its entirety by reference to the complete text of the Merger Agreement, which is attached as Annex A to this proxy statement and incorporated by reference into this proxy statement. We urge you to read the full text of the Merger Agreement because it is the legal document the governs the Merger. It is not intended to provide you with any other factual information about us.

 

The Merger

 

The Merger Agreement provides that the Company will merge with and into Merger Sub with Merger Sub continuing as the surviving company.

 

Consummation of the Merger

 

The Merger will be effective upon the filing of a certificate of merger with the Office of the Secretary of State of the State of Delaware and the State Corporation Commission of the Commonwealth of Virginia or at such time as the Company, Parent and Merger Sub agree provided in the certificate of merger. We expect to complete the Merger as promptly as practicable after shareholders adopt the Merger Proposal.

 

Unless otherwise agreed by the parties to the Merger Agreement, the parties are required to close the Merger two business days after the satisfaction or waiver of the last to be satisfied or waived of the conditions described under “-Conditions to the Merger.”

 

Effects of the Merger

 

If the Merger is completed, you will be entitled to receive $1.20 in cash for each share of the Company’s common stock owned by you. As a result of the Merger, the Company will be merged with and into Merger Sub, a wholly owned subsidiary of Parant. The Company will cease to exist, and you will not own any shares of the Surviving Entity.

 

Merger Consideration

 

In the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares as to which appraisal rights are properly asserted under Virginia law and shares owned by the Company, Merger Sub, Parent or any affiliate of Parent) will be converted into the right to receive a cash amount of $1.20.

 

After the Merger is effective, each holder of a certificate representing any shares of the Company’s common stock will no longer have any rights with respect to the shares, except for the right to receive the Merger Consideration.

 

Treatment of Outstanding Options

 

Upon consummation of the Merger, each outstanding in-the-money option to purchase the Company’s Common Stock will be converted into the right to receive a cash amount equal to the excess, if any, of the Merger Consideration over the exercise price per share for each share subject to the option, less any applicable withholding taxes (“Option Consideration”). In-the-money options are options that have an exercise price per share less than $1.20 per share. Each outstanding out-of-the-money option immediately prior to consummation of the Merger will be cancelled without consideration.

Payment for the Shares of the Company’s Common Stock and Options

 

Parent will designate a payment agent reasonably acceptable to the Company to make payment of the Merger Consideration as described above. Upon the consummation of the Merger, Parent will deposit with the payment agent the funds appropriate to pay the Merger Consideration to the shareholders.

 

The Surviving Company will have the funds necessary to pay the Option Consideration in cash to persons providing a notice of exercise of in-the-money options.

 

Promptly and in no event later than five business days following the consummation of the Merger, the Surviving Entity will cause the payment agent to send each holder of record immediately prior to the effective time of the Merger a letter of transmittal and written instructions advising you how to surrender your certificates and uncertificated shares in exchange for an amount in cash equal to the product obtained by multiplying the aggregate number of shares of the Company’s common stock represented by your certificate(s) or the uncertificated shares, as the case may be, and $1.20, without interest and less any applicable withholding taxes. The payment agent will pay you your merger consideration after you have surrendered your certificates for cancellation to the payment agent together with the letter of transmittal duly completed and validly executed, or upon receipt of an “agent’s message” by the payment agent in the case of a book-entry transfer or uncertificated shares. Interest will not be paid or accrue in respect of the merger consideration. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYMENT AGENT WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.

 

If any portion of the cash deposited with the payment agent remains undistributed within twelve (12) months following the consummation of the Merger, this undistributed cash will be delivered to the Surviving Entity upon demand, subject to any applicable unclaimed property laws. Any holders of shares of the Company’s common stock that were outstanding immediately prior to the effective time of the Merger who have not previously exchanged such shares for the Merger Consideration will only be entitled to request payment of the Merger Consideration from the Surviving Entity, subject to abandoned property, escheat or other similar laws.

 

If you want the payment agent to pay some or all of your portion of the Merger Consideration to someone other than you, as the registered owner of a stock certificate or of uncertificated shares, you must have your certificate(s) properly endorsed or otherwise in proper form for transfer, and you must pay any transfer or other taxes payable by reason of the transfer or establish to the paying agent’s reasonable satisfaction that the taxes have been paid or are not required to be paid.

 

In the event that you have lost your certificate or option grant award or other instrument representing shares or options, or if it has been stolen or destroyed, the payment agent will only issue to you your portion of the Merger Consideration or Option Consideration in exchange for such lost, stolen or destroyed certificates upon the making of an affidavit of that fact. Surviving Entity may, in its sole discretion and as a condition precedent to the payment of your portion of the Merger Consideration or Option Consideration, require that you deliver a bond in an amount that directs as indemnity against any claim that may be made against Surviving Entity, the Surviving Entity or the payment agent with respect of the lost, stolen or destroyed certificate or option grant award.

 

Representations and Warranties

 

The Merger Agreement contains representations and warranties made by the Company to Parent and Merger Sub and representations and warranties made by Parent and Merger Sub to the Company. The representations and warranties of each party set forth in the Merger Agreement, which were made at the time of execution of the Merger Agreement, were made solely for purposes of risk allocation and to provide contractual remedies to the Company, Parent and Merger Sub. In addition, such representations and warranties, which were made at the time of execution of the Merger Agreement, (i) were qualified by disclosure schedules that the Company provided to Parent in connection with signing the Merger Agreement, (ii) provided that such representations and warranties would not survive the consummation of the Merger, (iii) were, at the time they

were made, subject to materiality standards that may differ from what may be viewed as material by investors, and (iv) if applicable, were made only as of the dates specified in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosure.

 

In the Merger Agreement, the Company, Parent and Merger Sub each made representations and warranties relating to, among other things:

 

 

In the Merger Agreement, Parent and Merger Sub also each made representations and warranties relating to the operations of Merger Sub.

 

The Company also made representations and warranties relating to among others:

 

 

 

Conduct Pending the Merger

 

The Company has agreed in the Merger Agreement that, until the consummation of the Merger, and unless the Merger Agreement is terminated pursuant to the termination provisions described below, the Company will:

 

 

The Company has also agreed in the Merger Agreement that, until the consummation of the Merger, and unless the Merger Agreement is terminated pursuant to the termination provisions described below, the Company will not:

 

 

No Solicitation of Other Offers

 

The Company may not directly or indirectly, (a) solicit, initiate or encourage the submission of any Acquisition Proposal (as defined under below) or (b) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or agree to or endorse, or take any other action to facilitate any acquisition proposal or any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal. The Merger Agreement does, however, permit the Company’s Board of Directors to take the above described actions in connection with a bona fide Acquisition Proposal that is or would reasonably be expected to result in a Superior Proposal (as defined below).

 

The Company may, however, furnish information concerning its businesses, properties or assets to any person or “group” (as defined in the Exchange Act and the rules promulgated thereunder) and may negotiate and participate in discussions and negotiations with such person or group concerning a superior proposal (as defined below), provided (i) that such person or group shall have entered into a confidentiality agreement (which shall be no less restrictive than the confidentiality agreement executed by Parent in connection with this Agreement and the transactions contemplated hereby) and (ii) that:

 

 

 

Except after receipt by the Company of a superior proposal, the Board shall not, among other things, withdraw or modify the Board recommendation regarding the Merger, propose to approve or recommend, any other acquisition proposal or postpone, adjourn or cancel the shareholders meeting at which the Merger was to be considered by shareholders.

 

An “Acquisition Proposal’ as defined in the Merger Agreement means any offer, proposal or other indication of interest for a merger, consolidation, tender offer, exchange offer, acquisition or similar transaction or any other business combination involving the Company, any unsolicited proposal, offer or other indication of interest to acquire in any manner a substantial equity interest in, or a substantial portion of the business assets of the Company, any proposal, offer or other indication of interest with respect to any recapitalization or restructuring of the Company, or any proposal, offer or other indication of interest with respect to any other transaction similar to any of the foregoing with respect to the Company.

 

A “Superior Proposal” as defined in the Merger Agreement means any unsolicited Acquisition Proposal that the Board determines in good faith, taking into consideration such matters that it deems relevant to be more favorable to the Company shareholders than the Merger (based on advice of the Company’s financial advisor that the value of the consideration provided for in such proposal is superior to the value of the Merger Consideration), for which financing (which shall be no less certain than the financing secured or expected to be secured by Parent), to the extent required, is (based upon the advice of the Company’s financial advisor) capable of being obtained in a reasonable time period.

 

Conditions to the Merger

 

The obligations of the Company, Parent and Merger Sub to complete the Merger depend on a number of conditions being met. These conditions include, without limitation:

 

 

The obligations of Parent and Merger Sub to complete the Merger depend on the following conditions being met:

 

 

 

The obligations of the Company to complete the Merger depends on the following conditions being met:

 

 

“Material Adverse Change (or Effect)” as defined in the Merger Agreement means an event, occurrence or change in facts or circumstances that has had or would reasonably be expected to have a material adverse effect on the business, assets, properties, liabilities, condition (financial or otherwise) or results of operations of the Company, or a material adverse effect on the ability of the parties to consummate the transactions contemplated hereby, or a Material Net Asset Decrease; provided, however that any reduction in the market price or trading volume of the Company Common Stock or changes in general economic conditions not disproportionately affecting the Company, in and of itself, shall not be deemed to constitute a Material Adverse Effect on the Company. “Material Net Asset Decrease” as defined in the Merger Agreement means the net assets of the Company as of a Measurement Date or immediately prior to the Effective Time are at least $400,000 less than the Net Assets at September 30, 2009, as reported in the Company’s Form 10-Q for the period then ended. “Measurement Date” as defined in the Merger Agreement means the last day of any month between the date of this Agreement and the Effective Time.

 

Where the law permits, the parties to the Merger Agreement could choose to waive a condition to its obligation to complete the Merger, although that condition has not been satisfied. We cannot be certain when, or if, the conditions to the Merger will be satisfied or waived, or that the Merger will be completed.

 

Cancellation of Equity Commitments

 

Prior to the consummation of the Merger, the Company must take all steps necessary to cancel all equity commitments (other than awards made under the Key Employee Stock Option Plan or the 2005 Stock Option and Stock Incentive Plan).

 

Officer and Director Liability Insurance

 

The Company must purchase a “tail” or similar insurance policy providing the Company’s present and former officers and directors liability insurance for a period following the consummation of the Merger of no less than three years.

 

Termination of the Merger Agreement

 

The Merger Agreement may be terminated at any time before the effective time of the Merger in any of the following ways:

 

 

 

 

 

 

 

 

 

 

Termination Fees and Expenses

 

Company Payments

 

Upon termination of the Merger Agreement under specified circumstances, described below, the Company is required to pay Parent a termination fee of $240,000 (“Termination Fee”) and up to $200,000 of the reasonable expenses incurred by Parent in connection with the transactions contemplated by the Merger Agreement (“Termination Expenses”). The Company agreed to pay to Parent Termination Expenses no later than 10 business days following termination of the Merger Agreement If prior to the termination of the Merger Agreement, an Acquisition Proposal is disclosed, announced, commenced, submitted or made and the grounds for termination were any of the following:

 

 

Additionally, the Company is required to pay to Parent the Termination Fee if within one year from the date of the termination of the Merger Agreement, the Company consummates or enters into a definitive agreement with respect to an Acquisition Proposal.

 

If the Merger Agreement is terminated and an Acquisition Proposal has not been disclosed, announced, commenced, submitted, or made and the grounds for termination were any of the following:

 

 

then, the Company agreed to pay Parent Termination Expenses.

 

If the Merger Agreement is terminated and an Acquisition Proposal has not been disclosed, announced, commenced, submitted, or made and the grounds for termination were any of the following:

 

 

then, the Company agreed to pay Parent Termination Expenses and Termination Fee.

 

Parent Payments

 

Upon termination of the Merger Agreement by the Company due to Parent’s or Merger Sub’s representations and warranties not being correct or Parent’s or Merger Sub’s failure to perform covenants contained in the Merger Agreement where such failure was not cured in all material respects within ten business days following receipt of written notice of such breach by the Company, Parent is required to pay the Company up to $120,000 of the reasonable expenses incurred by Parent in connection with the transactions contemplated by the Merger Agreement.

 

Specific Performance

 

The Company, Parent and Merger Sub are each entitled to seek an injunction to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement, in addition to any other legal or equitable remedy to which they are entitled.

 

Amendment and Waiver

 

The Merger Agreement may not be amended, modified, replaced, terminated or cancelled unless agreed to in writing and signed by Parent and the Company. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, may be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising because of any prior or subsequent such occurrence.

 

Parent and Merger Sub estimate that the total amount of funds necessary to consummate the Merger, refinance certain indebtedness and pay fees and expenses (including Company expenses) associated with the Merger and related transactions will be approximately $6.2 million, which Parent and Merger Sub expect will be funded by equity and debt financing arranged by Global Equity Capital, LLC. In addition, the Company’s $1.0 million in subordinated notes will remain outstanding. Notwithstanding the financing arrangements that Parent has in place, the consummation of the Merger is not subject to any financing conditions.

 

As of the date of this proxy statement, we have been advised by Parent and Merger Sub that they are not relying on third party debt financing to consummate the Merger. In the event no third party financing is available, or is not available on commercially reasonable terms, Parent will have at closing, subject to the satisfaction of all closing conditions set forth in the Merger Agreement, equity and other funding commitments from investors and their affiliates in an amount required to pay in full the Merger Consideration, retire any indebtedness accelerated as a result of the Merger, and to pay all Company expenses.

 

Subject to adoption of the Merger Agreement by the Company’s shareholders and the satisfaction of the other closing conditions set forth in the Merger Agreement, the Company anticipates completing the Merger during the fourth quarter of the fiscal year ending March 31, 2010.

 

All of the Company’s directors and executive officers and certain significant shareholders have entered into a voting agreement pursuant to which they agreed to, among other things, (i) vote all shares of the Company’s common stock they own in favor of the adoption of the Merger Agreement and approval of the Merger at the annual meeting and (ii) not offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise dispose of their shares, or create or permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, limitation on their voting rights, charge or other encumbrance of any nature whatsoever with respect to their shares of the Company’s common stock during the term of the voting agreement. The voting agreement covers approximately 31.1% of the Company’s outstanding shares of common stock.

 

On January 6, 2010, Nancy Scurlock and the Arch C. Scurlock Children’s Trust, holders of the Company’s 8% promissory notes due July 1, 2010 entered into an agreement with Parent and Merger Sub to exchange at the effective time of the Merger all of the Company’s 8% promissory notes for notes of same principal amount issued by the entity surviving the Merger along with other modifications such as an extension of the maturity date. At September 30, 2009, such notes had an aggregate principal balance totaling $1.0 million and accrued interest of $322,000.

 

Shareholders of record who comply with the procedures described below will be entitled to appraisal rights under Article 15 of the Virginia Stock Corporation Act. Where appropriate, shareholders are urged to consult with their legal counsel to determine the appropriate procedures for the making of a notice of intent to demand payment (as described below). No further notice of the events giving rise to appraisal rights or deadlines for related actions will be provided by the Company to you prior to its annual meeting.

 

A vote in favor of the merger by a shareholder will result in a waiver of such shareholder’s appraisal rights.

 

The following discussion is only a summary, does not purport to be a complete statement of the law pertaining to appraisal rights under the Virginia Stock Corporation Act and is qualified in its entirety by reference to Article 15 of the Virginia Stock Corporation Act. Shareholders are urged to consult Article 15 of the Virginia Stock Corporation Act, which is reprinted in its entirety as Annex D to this proxy statement.

 

Under the Virginia Stock Corporation Act, shareholders who follow the procedures set forth in Article 15 of the Virginia Stock Corporation Act will be entitled to receive payment of the “fair value” of their shares of the Company’s common stock. Any shareholder who wishes to exercise appraisal rights should review the following discussion and Annex D carefully because failure to comply in a timely and proper manner with the procedures specified may result in the loss of appraisal rights under the Virginia Stock Corporation Act.

 

A shareholder wishing to exercise appraisal rights must deliver to the Company, prior to or at the annual meeting (but in any event before the vote is taken), a written notice of intent to demand payment for such shareholder’s shares if the merger becomes effective. A shareholder delivering a notice of intent must not vote his or her shares in favor of the merger or he or she will lose his or her appraisal rights. All notices of intent should be sent or delivered to Corporate Secretary, Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

If the Merger is approved and becomes effective, within 10 days after the effective date of the Merger, the Surviving Entity will deliver an appraisal notice in writing to all shareholders who correctly and timely delivered a notice of intent and also did not vote for the Merger, as described above. Such shareholders are referred to herein as “dissenting shareholders.” The appraisal notice will (i) state where the dissenting shareholder’s payment demands should be sent and where and when stock certificates should be deposited; (ii) set a date by which the Surviving Entity must receive the payment demand; (iii) the Company’s estimate of the fair value of its shares; and (iv) include such other information as required by the Virginia Stock Corporation Act.

 

A dissenting shareholder to whom an appraisal notice is sent must demand payment within the time specified in the appraisal notice, deposit his or her stock certificates in accordance with the terms of the appraisal notice and make certain certifications required by the Virginia Stock Corporation Act. If a dissenting shareholder fails to take such actions, the dissenting shareholder loses his or her appraisal rights.

 

Within 30 days of the due date for receipt of payment demands, the Company must pay each dissenting shareholder the Company’s estimate of the fair value of each dissenting shareholder’s shares of the Company’s common stock plus accrued interest. With any payment, the Company must provide its most recent annual and quarterly financial statements, an explanation of how the Company calculated the fair value of the shares and interest, and a description of the procedure a dissenting shareholder may follow if he or she is not satisfied with the payment.

 

The Company may elect to deliver an appraisal notice after the effective time of the merger if a dissenting shareholder acquired, or is deemed to have acquired in accordance with Article 15 of the Virginia Stock Corporation Act, his or her shares after the Merger Agreement was announced or publicized. In theses circumstances, the Company will estimate the fair value of the dissenting shareholder’s shares of the Company’s common stock plus accrued interest and will offer to pay this amount to each dissenting shareholder who agrees to accept it in full satisfaction of his demand. With any such offer, the Company must provide its most recent annual and quarterly financial statements, an explanation of how the Company calculated the fair value of the shares and interest, and a description of the procedure a dissenting shareholder may follow if he or she is not satisfied with the offer.

 

A dissenting shareholder who is not satisfied with the amount paid or offered by the Company must notify the Company in writing of the dissenting shareholder’s own estimate of the fair value of his or her shares of the Company’s common stock and the amount of interest due (less any amount that may have been already received by the dissenting shareholder from the Company) and demand that the Company pay this estimated amount. This notice must be given in writing within 30 days of the date that the Company made or offered to make payment for the dissenting shareholder’s shares of the Company’s common stock.

 

If a dissenting shareholder’s demand for payment remains unsettled, the Company is obligated to commence a proceeding in a Virginia circuit court to determine the fair value of the shares of the Company’s common stock and accrued interest within 60 days of the receipt of the dissenting shareholder’s payment demand. If the Company fails to commence such proceeding in accordance with the Virginia Stock Corporation Act, the Company must pay the dissenting shareholder the amount demanded by the dissenting shareholder.

 

Dissenting shareholders considering seeking appraisal should be aware that the fair value of their shares of the Company’s common stock, as determined under Article 15 of the Virginia Stock Corporation Act, could be more than, the same as or less than the merger consideration that would be paid to them pursuant to the Merger Agreement. The costs and expenses of any appraisal proceeding will be determined by the court and assessed against the Company unless the court determines that the dissenting shareholder did not act in good faith in demanding payment of the fair value of their shares of the Company’s common stock, in which case such costs and expenses may be assessed against the dissenting shareholder.

 

If any shareholder who demands appraisal of his or her shares under Article 15 fails to perfect, or effectively withdraws or loses, his or her right to appraisal, as provided in the Virginia Stock Corporation Act, such shareholder’s shares of the Company’s common stock will be converted into the right to receive the Merger Consideration in accordance with the Merger Agreement.

 

The cash received by dissenting shareholders for their shares of the Company’s common stock will be taxable to such dissenting shareholders.

 

Our bylaws, as amended, referred to as the Bylaws in this proxy statement, provide that we shall be managed by a Board of Directors consisting of between three and seven members, the precise number of directors to be fixed from time to time by resolution of the Board of Directors. The number of directors is currently fixed at seven.

 

Each director is elected to serve until the next annual meeting of shareholders or until the election and qualification of his respective successor. Our Board of Directors, based upon recommendations from the Nominating and Corporate Governance Committee, has nominated the nominees named on the following page, which nominees are currently serving as directors and have indicated their willingness to continue serving as directors. Our Board of Directors knows of no reason why such nominees would be unable to serve as directors. We expect each nominee to be able to serve if elected, but if any nominee notifies us before the meeting that he is unable to do so, then the proxies will be voted for the remainder of those nominated and, as designated by our Board of Directors, may be voted (i) for a substitute nominee or nominees, or (ii) to elect such lesser number to constitute the whole Board of Directors as equals the number of nominees who are able to serve.

 

In accordance with the merger agreement pursuant to which we acquired Microserv, Inc. (the Microserv agreement”), we agreed that the former shareholders of Microserv, Inc. shall have the right to nominate a director to our Board of Directors so long as such former shareholders collectively own greater than 50% of the number of shares of common stock issued to them pursuant to the Microserv agreement, referred to as the Microserv nominee in this document. As of February 16, 2000, the former shareholders of Microserv, Inc. collectively owned greater than 50% of the number of shares of common stock issued to them pursuant to the Microserv agreement. Pursuant to the Microserv agreement, we also agreed to recommend, consistent with the fiduciary duties of our Board of Directors, the Microserv nominee to our shareholders and to undertake our best efforts to secure the election of such nominee. In addition, pursuant to a voting agreement executed in connection with the Microserv agreement, Charles L. McNew, Joseph Sciacca, Hugh M. Foley and Thomas J. Basile, subject to certain limitations concerning the qualification of the Microserv nominee, are required to vote their respective shares of our voting capital stock in favor of the Microserv nominee. We were notified by the former shareholders of Microserv that they would not provide a nominee.

 

In addition, pursuant to a voting agreement executed in connection with the Microserv agreement, Charles L. McNew, Joseph Sciacca, Hugh M. Foley and Thomas J. Basile, subject to certain limitations concerning the qualification of the Microserv nominee, are required to vote their respective shares of our voting capital stock in favor of the Microserv nominee.

 

Directors

 

The following table sets forth the name of each of the nominees to our Board of Directors, together with their respective ages as of January 25, 2010, periods of service as directors, principal occupations or employment for the past five years and the names of other public companies in which such persons hold directorships, if any.

 

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE “FOR” THE NOMINEES FOR DIRECTOR.

 

Below is a list of our executive officers, who are not also directors, together with their respective ages as of January 25, 2010, principal occupations or employment for the past five years.

 

Robert W. Drennen, age forty-two, is our Chief Financial Officer and Treasurer. Mr. Drennen was the Vice President of Finance and the Chief Financial Officer for Smooth Fitness, a fitness equipment E-retailer, from July 2008 to December 2009 where he assisted with the implementation of a pre-liquidation turnaround strategy of this company. From April 2007 to June 2008, he was employed by Unreal Marketing, an on-line marketing company, as Executive Vice President of Finance and Operations where he was involved in a restructuring strategy for this company. From September 2005 to April 2007, Mr. Drennen was the founder of and a principal in a financial consulting practice serving small businesses. From January 2002 to September 2005, he was Vice President of Finance for Puricore plc, an international products distributor. Mr. Drennen’s experience also includes over 5 years in the finance department of publicly traded companies and over 5 years with a regional CPA firm. Mr. Drennen attended Loyola College and is a certified public accountant.

 

Hugh Foley, age fifty-eight, is our Vice President of Operations. As Vice President of Operations, a position held since April 2002, Mr. Foley manages the service delivery operations for our seat management program, staff augmentation services, as well as IT professional services and product offerings. Mr. Foley joined us in November 1998, initially to manage and implement the Virginia Department of Transportation / Virginia Retirement Systems seat management contract. Prior to joining us, Mr. Foley spent 16 years in the computer service industry in various sales, operations and financial management positions with Sorbus, Bell Atlantic Business Systems, and DecisionOne. Mr. Foley has a Master Degree in Business Administration from Drexel University and a Bachelor of Science Degree in Business Administration from Villanova University.

 

Douglas H. Reece, age forty, is our Vice President of Sales. Mr. Reece has been with us since November 2001 as Director of Sales and Marketing, and was promoted to Vice President of Sales on April 3, 2006. From October 1999 through November 2001, Mr. Reece worked for Veritas Corporation, a software company, and from August 1999 through September 1999, he was employed by Ernst & Young, LLP where he held various service, sales and operating positions. Mr. Reece has a Master Degree in International Transactions from George Mason University and a Bachelor of Arts in Political Science Degree from West Virginia University.

 

Our business is managed under the direction of our Board of Directors. Our Board of Directors has the responsibility of establishing corporate policies for our overall performance. Our Board of Directors meets at least quarterly during the year to review significant developments affecting our business and to act upon matters requiring Board of Directors approval. In addition, our Board of Directors receives monthly reports of significant activities that occur between meetings. Our Board of Directors also may hold special meetings when important matters require action between scheduled quarterly meetings. Members of senior management attend Board of Directors meetings to report on and discuss their areas of responsibility. During fiscal year 2009, we held eight meetings of our Board of Directors.

 

During fiscal 2009, all of our directors attended 75% or more of all of the meetings of our Board of Directors (held during the period for which he was a director) and the meetings of all committees of our Board of Directors on which such director served.

 

Our Board of Directors has established an Audit Committee, Compensation and Employee Benefits Committee, and Nominating and Corporate Governance Committee, each of which is briefly described below.

For purposes of SEC disclosure, our Board of Directors has chosen to use the definition of independence set forth in the NYSE Amex LLC Company Guide, referred to as the NYSE Amex Company Guide.

 

Audit Committee.  The Board of Directors has established a standing Audit Committee. The Audit Committee assists our Board of Directors in maintaining the integrity of our financial statements and financial reporting processes and systems of internal audit controls, and our compliance with legal and regulatory requirements. The Audit Committee reviews the scope of independent audits and assesses the results. The Audit Committee meets with management to consider the adequacy of the internal control over, and the objectivity of, financial reporting. The Audit Committee also meets with the independent registered public accounting firm and with appropriate financial personnel concerning these matters. The Audit Committee selects, compensates, appoints and oversees our independent registered public accounting firm. The independent registered public accounting firm periodically meet alone with the Audit Committee and always have unrestricted access to the Audit Committee. The Audit Committee also approves related party transactions. The Audit Committee currently consists of Messrs. Toups (Chairman), Young and Hewitt and met four times in fiscal 2009. Our Board of Directors has determined that each of Messrs. Toups, Young and Hewitt is independent as defined in the NYSE Amex Company Guide and Rule 10A-3 of the Exchange Act and that each of Messrs. Toups and Young qualifies as an “audit committee financial expert” as such term is defined in Item 407 of Regulation S-K.

 

The Audit Committee has adopted a charter. A copy of the Audit Committee’s charter is included as Annex E to this proxy statement.

 

Compensation and Employee Benefits Committee.  The Compensation and Employee Benefits Committee, also referred to as the Compensation Committee in this proxy statement, administers incentive compensation plans, including stock option plans, and advises our Board of Directors regarding employee benefit plans. The Compensation Committee establishes the compensation structure for our senior managers and approves the compensation of our senior executives. Our Chief Executive Officer assists in this process by offering salary recommendations to the Compensation Committee for senior executives, other than himself. The Compensation Committee also makes recommendations to the independent directors of our Board of Directors with respect to the compensation of our Chief Executive Officer and periodically reviews the compensation for outside directors and is responsible for recommending to our Board of Directors changes in director compensation. The Compensation Committee, which currently consists of Messrs. Grover (Chairman), Toups and Hewitt, met one time in fiscal 2009. Each member is independent as defined in the applicable rules of the NYSE Amex Company Guide. In addition, each member is a non-employee director as defined in Rule 16b-3(b)(3) of the Exchange Act.

 

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee advises and makes recommendations to our Board of Directors on all matters concerning directorships, including the selection of candidates as nominees for election as directors and committee membership. The Nominating and Corporate Governance Committee is responsible for developing corporate governance policies and administering our Code of Business Conduct and Ethics. The Nominating and Corporate Governance Committee also recommends potential successors for key management positions. The Nominating and Corporate Governance Committee, which currently consists of Messrs. Grover (Chairman), Toups and Young, met two times in fiscal 2009. Each member is independent as defined in the applicable rules of the NYSE Amex Company Guide. On January 19, 2010, the Nominating and Corporate Governance Committee recommended to the Board of Directors the slate of director nominees for election at the Annual Meeting.

 

General Information.  Our standing Nominating and Corporate Governance Committee of the Board of Directors is responsible for, among other matters, determining the types of backgrounds needed to strengthen and balance our Board of Directors, establishing criteria for selecting new directors, recommending nominees for director and recommending directors for membership on various Board of Directors committees for consideration of the full Board of Directors.

A copy of the Nominating and Corporate Governance Committee’s charter is available on our website, www.hxcorp.com, via the Investors page. None of the information on our website or any other website identified herein is part of this proxy statement. All website addresses in this proxy statement are intended to be inactive textual references only. A copy of the Nominating and Corporate Governance Committee’s charter is also available in print to any shareholder on request to the Corporate Secretary at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

In addition, the Nominating and Corporate Governance Committee provides oversight with regard to our Code of Business Conduct and Ethics, which applies to our Chief Executive Officer, Chief Financial Officer and any other accounting officer, controller or persons performing similar functions. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to, or waivers from, any provision of our Code of Business Conduct and Ethics by posting that information on our website. A copy of the Code of Business Conduct and Ethics is available on our website, www.hxcorp.com, via the Investors page. It is also available in print to any shareholder on request to the Corporate Secretary at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

Consideration of Director Candidates Recommended or Nominated by Shareholders.  The Nominating and Corporate Governance Committee will consider properly submitted shareholder recommendations of director candidates. A shareholder who wishes to recommend a prospective director nominee should send a letter to the Chairman of the Nominating and Corporate Governance Committee at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312. Such letter must be signed and dated and the following information must be included in or attached to the letter:

 

 

The deadline for submitting the letter recommending a prospective director nominee for the annual meeting of shareholders related to the 2010 fiscal year, is October 7, 2010, provided the shareholder making the recommendation would like the Nominating and Corporate Governance Committee to consider recommending such recommended candidate to the full Board of Directors for inclusion into the proxy materials for the next year’s annual meeting of shareholders.

 

In addition, Section 10 of Article III of our Bylaws permits a shareholder to nominate directors for election at the annual shareholder meeting, provided the shareholder follows the procedures summarized below.

 

 

 

 

Our Bylaws are available upon the shareholder’s written request, at no cost, to the Corporate Secretary at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

Director Qualifications.  In order to be nominated for director, a director candidate must meet the following criteria:

 

 

Additional special criteria apply to directors being considered to serve on a particular committee of our Board of Directors, including, but not limited to, the Audit Committee. For instance, the Nominating and Corporate Governance Committee will review whether the director nominee is independent, as independence is defined in the NYSE Amex Company Guide.

 

Identifying and Evaluating Nominees for Director.  The Nominating and Corporate Governance Committee assesses the appropriate size of our Board of Directors in accordance with our Articles of Incorporation, as amended, referred to as the Articles of Incorporation in this proxy statement, and Bylaws, whether any vacancies on our Board of Directors are expected and what incumbent directors will stand for re-election at the next annual meeting of shareholders. If vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee considers candidates for director suggested by members of the Nominating and Corporate Governance Committee and other Board of Directors members as well as management, shareholders and other parties. The Nominating and Corporate Governance Committee makes recommendations to the full Board of Directors regarding proposed candidates to fill the vacancy. The Nominating and Corporate Governance Committee also has the sole authority to retain a search firm to identify and evaluate director candidates. Except for incumbent directors standing for re-election as described below, there are no differences in the manner in which the Nominating and Corporate Governance Committee evaluates nominees for director, including those recommended by a shareholder or any other party.

 

In the case of an incumbent director whose term of office expires, the Nominating and Corporate Governance Committee reviews such director’s service during the past term, including, but not limited to, the number of Board of Directors and committee meetings attended, as applicable, quality of participation and whether the candidate continues to meet the general qualifications for a Board of Directors member, as outlined above, including the director’s independence, as well as any special qualifications required for a member of a Board of Directors committee if such director serves on one or more committees of our Board of Directors and makes a recommendation regarding such director’s nomination for re-election to the full Board of Directors. When a member of the Nominating and Corporate Governance Committee is an incumbent director eligible to stand for re-election, such director does not participate in the discussion of such director’s recommendation for nomination for election as a director by the Nominating and Corporate Governance Committee.

In the case of a new director candidate, the Nominating and Corporate Governance Committee will evaluate whether the nominee is independent, as independence is defined in the NYSE Amex Company Guide, and whether the nominee meets the qualifications for a Board of Directors member outlined above as well as any special qualifications applicable to a member of the Board of Directors committee, on which the nominee may be appointed to serve if elected. In connection with such evaluation, the Nominating and Corporate Governance Committee determines whether the committee should interview the nominee, and if warranted, one or more members of the Nominating and Corporate Governance Committee interview the nominee in person or by telephone.

 

Upon completing the evaluation, and the interview in case of a new candidate, the Nominating and Corporate Governance Committee makes a recommendation to our full Board of Directors as to whether to nominate the director nominee for election at the shareholders meeting.

 

Our Board of Directors has determined that Messrs. Grover, Toups, Hewitt and Young are independent as defined by the applicable rules of the NYSE Amex Company Guide. In addition, our Board of Directors has determined that a majority of its members are independent as defined by the applicable rules of the NYSE Amex Company Guide. In making this determination, our Board of Directors considered the relationship of Mr. Grover as a trustee of The Arch C. Scurlock Children’s Trust, one of our 10% shareholders.

 

Our shareholders may communicate issues or concerns regarding our business or the functions of our Board of Directors to our Board of Directors or individual members of our Board of Directors, including the Chairman of the Nominating and Corporate Governance Committee, Compensation and Employee Benefits Committee or Audit Committee, by sending a letter to the Corporate Secretary at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

Our Corporate Secretary will review all correspondence and will create a log of all correspondence received. The Secretary will periodically forward any correspondence received from a shareholder that deals with concerns regarding our business or with the functions of our Board of Directors or which our Secretary otherwise determines requires attention, to our Board of Directors or to the member of our Board of Directors to whom the correspondence is addressed. Directors may at any time review the log of all correspondence received and request copies of any such correspondence. Concerns relating to questionable accounting, internal controls or auditing matters will be brought to the attention of our Board of Directors in accordance with the procedures established by the Audit Committee with respect to such matters and set forth in our Whistle Blower Policy. A copy of our Whistle Blower Policy is available on our website, www.hxcorp.com, via the Investors page. It is also available in print to any shareholder on request to the Corporate Secretary at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

Our Board of Directors has adopted a policy that a majority of our directors attend the annual meeting of shareholders. All of our directors attended last year’s annual meeting of shareholders.

 

Our compensation program for outside directors is designed to enable us to attract, retain and motivate highly qualified directors to serve on our Board of Directors. It is also intended to further align the interests of our directors with those of our shareholders. The following table sets forth information regarding the compensation of our outside directors for the fiscal year 2009.

 

 

 

 

 

Under our Non-Employee Directors Stock Option Plan, each director was granted options to purchase 5,000 shares of common stock on the first of the month following the date of the annual meeting of shareholders on which he was initially elected and was granted options to purchase up to 2,000 shares of common stock on each annual re-election by the shareholders as one of our directors. Such options were granted at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. No further options may be granted pursuant to our Non-Employee Directors Stock Option Plan. Each non-employee director is eligible to receive awards under our 2005 Stock Option and Stock Incentive Plan.

 

On September 10, 2008, the outside directors received options to purchase 2,000 shares of our common stock at an exercise price of $0.66 per share. This option award vests in one year from the date of grant.

 

On March 26, 2009, the outside directors were each issued options to purchase 2,000 shares of the Company’s common stock at an exercise price $0.32 per share. This option award vests at the rate of 20% per year commencing on the first anniversary of the option grant date.

 

The Audit Committee of the Board of Directors of Halifax Corporation of Virginia, referred to as the Company in this section, has reviewed and discussed the audited consolidated financial statements with management of the Company and Reznick Group, P.C. (“Reznick Group”), independent registered public accountant firm for the Company. Management represented to the Audit Committee that the Company’s audited consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States.

 

The Audit Committee has discussed with Reznick Group the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU Section 380).

 

The Audit Committee has received the written disclosures and confirming letter from Reznick Group required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and has discussed with Reznick Group their independence from the Company.

 

Based on the reviews and discussions with management of the Company and Reznick Group referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements of the Company and its subsidiaries for the fiscal year ended March 31, 2009 be included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009.

 

This Audit Committee Report shall not be deemed incorporated by reference in any document previously or subsequently filed with the SEC that incorporates by reference all or any portion of this proxy statement.

 

Audit Committee
John M. Toups, Chairman
Daniel R. Young
Thomas L. Hewitt

 

The following table sets forth information concerning the compensation awarded to, earned by, or paid to our named executive officers for all services rendered in all capacities to us and our subsidiaries during our fiscal years ended March 31, 2009, 2008 and 2007, respectively.

 

 

 

 

Elements of compensation for our named executive officers include salary, options to purchase shares of our common stock and other perquisites, as applicable. We do not have a pension plan, do not pay non-equity incentive plan based compensation and do not offer nonqualified deferred compensation arrangements. Further, we did not grant stock equity incentive plan awards or issue stock awards in fiscal year 2009. As a result, the column related to this item has been deleted from the table above.

 

On January 4, 2010, Robert W. Drennen was appointed as our Chief Financial Officer. His annual base salary is set at $150,000.

 

There were no plan-based awards granted to our named executive officers under our 2005 Stock Option and Stock Incentive Plan during fiscal 2009.

 

No restricted stock awards held by our named executive officers vested during fiscal 2009 and no options were exercised by our named executive officers during fiscal 2009.

 

The following table sets forth the information regarding the outstanding equity awards to our named executive officers at March 31, 2009.

 

 

 

 

Severance Agreement with Mr. McNew

 

On March 31, 2003, we entered into an amended and restated Executive Severance Agreement with Mr. McNew, our President and Chief Executive Officer. This agreement provides severance benefits to Mr. McNew under certain circumstances and remains in effect so long as we continue to employ Mr. McNew. The agreement confirms that Mr. McNew’s employment is at will and provides for termination without

additional compensation in the event of death, disability, resignation, retirement or termination for cause, referred to as the excluded circumstances in this document. “Cause” is defined as “gross negligence, willful misconduct, fraud, willful disregard of the Board of Directors’ direction or breach of a published Company policy.”

 

Termination for Any Reason Other Than in Connection with an Excluded Circumstance.  Under the terms of the agreement, except in connection with a change of control disposition, in the event that Mr. McNew’s employment is terminated other than in connection with an excluded circumstance, Mr. McNew would be entitled to receive his then current salary for a period of twelve months. Based on the foregoing, if Mr. McNew’s employment was terminated on March 31, 2009, Mr. McNew would be entitled to receive a severance payment of $230,863.

 

Termination in Connection with a Change of Control Disposition.  Under the terms of the agreement, a “change of control disposition” is generally deemed to occur if (i) 25% or more of the voting power of our stock is acquired by another entity or (ii) there is a sale of substantially all of our assets to another entity. In the event that Mr. McNew’s employment is terminated within one year of a change of control disposition, other than in connection with an excluded circumstance, Mr. McNew would be entitled to receive his then current salary for a period of twenty-four months. In the event that Mr. McNew’s employment is terminated for any reason within ninety days following a change of control disposition, Mr. McNew would be entitled to receive an amount equal to two times his then current salary. Based on either of the foregoing, if Mr. McNew’s employment was terminated on March 31, 2009, Mr. McNew would be entitled to receive a severance payment of $461,726.

 

The agreement provides that Mr. McNew may elect to receive his severance payments in a lump sum or in equal payments at intervals of no more often than semimonthly over a period of his choice that is not to exceed the number of months of compensation due to him.

 

General Requirements.  Pursuant to the terms of the agreement, Mr. McNew may not disclose, publish or use, or permit anyone else to disclose, publish or use, any of our proprietary or confidential information or trade secrets for any purpose unrelated to his employment at any time during or after his employment. Mr. McNew must also return to us all proprietary material that he possesses on the date his employment is terminated. In addition, should Mr. McNew’s employment be terminated for any reason other than “Cause,” Mr. McNew may not (i) directly or indirectly, sell, market, or otherwise provide any client or previously identified prospective client, products or services similar to or in competition with those sold or distributed by us, in any geographic area in which we offer any such products or services, or (ii) participate directly or indirectly in the hiring or soliciting for employment of any person we employ.

 

Termination/Separation Agreement with Joseph Sciacca

 

We had an amended and restated severance arrangement with Joseph Sciacca, our Chief Financial Officer. This agreement provided severance benefits to Mr. Sciacca under certain circumstances and remained in effect so long as we continued to employ Mr. Sciacca. The agreement confirmed that Mr. Sciacca’s employment was at will and provided for termination without additional compensation in the event of death, disability, resignation, retirement or termination for cause, referred to as the excluded circumstances in this proxy statement. “Cause” was defined as “gross negligence, willful misconduct, fraud, willful disregard of the Board of Directors’ direction or breach of a published Company policy.”

 

Under the terms of the agreement, except in connection with a change of control disposition, in the event that Mr. Sciacca’s employment was terminated other than in connection with an excluded circumstance, Mr. Sciacca would have been entitled to receive his then current salary for a period of twelve months.

 

Under the terms of the agreement, a “change of control disposition” was generally deemed to occur if (i) 25% or more of the voting power of our stock was acquired by another entity or (ii) there was a sale of substantially all of our assets to another entity. In the event that Mr. Sciacca’s employment was terminated within one year of a change of control disposition, other than in connection with an excluded circumstance, Mr. Sciacca would have been entitled to receive his then current salary for a period of one year. In the event

that Mr. Sciacca’s employment was terminated for any reason within ninety days following a change of control disposition, Mr. Sciacca would have been entitled to receive an amount equal to one year’s then current salary.

 

If the employment of Mr. Sciacca was terminated without cause on March 31, 2009 and assuming the terms of the Amended and Restated Severance Agreement were in effect on such date, Mr. Sciacca would have been entitled to receive a payment of $151,668 over a twelve month period.

 

Mr. Sciacca resigned effective January 4, 2010. He currently serving as a consultant to us until September 2010.

 

Termination/Separation Agreements with other Executives.

 

We entered into a termination/separation agreement with Mr. Foley on January 17, 2003, Mr. Reece on April 19, 2006 and Mr. Drennan, our Chief Financial Officer, on December 2, 2009.

 

As per their respective termination/separation agreements, in the event that the employment of Messrs. Foley or Reece is terminated without cause, each individual would be entitled to receive his then current salary for a period of six months. In the event that the employment of Mr. Drennen is terminated without cause, he would be entitled to receive his then current salary for a period of three months. In each of the aforementioned termination/separation agreements, “Cause” is defined to mean: “A good faith finding by us of your failure to perform the duties reasonably assigned to you; dishonesty, gross negligence or misconduct, or your conviction, or your entry of a pleading of guilty or nolo contender, to any crime involving more turpitude or any felony.”

 

If the employment of Mr. Foley or Mr. Reece was terminated without cause on March 31, 2009, each would be entitled to receive a payment of $69,674 and $69,181, respectively, over a six month period. If Mr. Drennen’s employment was terminated as of the date of this proxy statement, he would be entitled to receive a payment of $37,500 over a three month period.

 

2005 Stock Option and Stock Incentive Plan

 

Restricted shares awarded to a participant in the 2005 Stock Option and Stock Incentive Plan will be forfeited and returned to us in the event of a termination of continuous service by the participant for any reason other than death or disability. In the event of death or disability, such shares will not be forfeited and will no longer be subject to restrictions. With respect to unexercised options granted under the 2005 Stock Option and Stock Incentive Plan, in the event of termination of employment for any reason other than death or disability, such options, will terminate three months after the date of termination of employment. In the event of death or disability, the participant’s executor, administrator, legal guardian or custodian, as applicable, may exercise the participant’s vested options within one year of termination of employment.

 

If the continuous service of a participant is involuntarily terminated for any reason, other than for cause, within 18 months of a change in control, any restricted period with respect to restricted stock awarded will lapse and such shares will become fully vested. A “change in control,” as defined in the 2005 Stock Option and Stock Incentive Plan, includes a change in holders of more than 50% of our outstanding voting stock within a 12 month period or any other event deemed to be a change in control by the Compensation Committee.

 

In the event of a change in control, options to purchase shares of our common stock awarded under the 2005 Stock Option and Stock Incentive Plan may be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option and the vesting date may accelerate accordingly. In addition, in the event of a sale or a proposed sale of the majority of our stock or assets or a proposed change in control, the Compensation Committee has the right to terminate options granted under the 2005 Stock Option and Stock Incentive Plan upon thirty days prior written notice, subject to the participant’s right to exercise such option to the extent vested prior to such termination.

 

If the change of control had occurred on March 31, 2009, our named executive officers would not have received the value of the potential benefit that each such executive might be entitled to receive upon a change

of control under our 2005 Stock Option and Stock Incentive Plan because the per share exercise price of unvested options exceeded the $0.32 closing price per share of our common stock on March 31, 2009.

 

1994 Key Employee Stock Option Plan

 

Upon termination of a participant’s employment for reason other than death, disability or retirement (defined as termination of employment by a participant on or after attainment of age 65), the participant may, within three months from the date of such termination, exercise all or any part of the participant’s vested options, provided such termination was not for cause. If such termination was for cause, the right of the participant to exercise such options will terminate immediately.

 

Upon termination of a participant’s employment by reason of disability or retirement, the participant may, within two years after the date of retirement or the date which is six months after the participant is first absent from active employment due to disability exercise all or a part of the participant’s vested options. In the event of the death of a participant, the participant’s beneficiary shall have the right to exercise vested options until the expiration of the earlier of two years from the date of the participant’s death or the date of expiration of the options pursuant to the termination provisions of the 1994 Key Employee Stock Option Plan.

 

All unvested options expire at the date of the termination of employment. Notwithstanding the foregoing, the Compensation Committee may permit a participant, who terminates employment by retirement (prior to or after the attainment of age 65) and who will continue to render significant services to us or one of our subsidiaries after his or her retirement, to continue to accrue service with respect to the right to exercise his or her options during the period in which the individual continues to render such services.

 

The following table sets forth as of the Record Date the number of shares of common stock beneficially owned by: (1) each person who owned of record, or is known by us to have beneficially owned, more than 5% of such shares then outstanding; (2) each director and nominee for director; (3) the current executive officers named in the Summary Compensation Table contained in this proxy statement; and (4) all executive officers, directors and director nominees as a group. Unless otherwise indicated, the address for each of the shareholders in the table below is c/o Halifax.

 

 

 

 

 

 

On June 29, 2007, we amended our 8% promissory note in the aggregate principal amount of $500,000 dated November 2, 1998, as amended June 29, 2005, and 8% promissory note in the aggregate principal amount of $500,000 dated November 5, 1998, as amended June 29, 2005, to extend the maturity date of each promissory note to July 1, 2009. All other terms and conditions of the promissory notes remain the same. The holders of the 8% promissory notes are The Arch C. Scurlock Children’s Trust and Nancy M. Scurlock. Each holder owns more than 10% of our common stock. Arch C. Scurlock, Jr., a beneficiary and trustee of The Arch C. Scurlock Children’s Trust, and John H. Grover, a trustee of The Arch C. Scurlock Children’s Trust, are members of our Board of Directors. During our 2007 fiscal year, we paid $50,000 of accrued interest on the promissory notes. During our 2009 fiscal year, we did not make any interest payment on the promissory notes. At March 31, 2009, the aggregate balance of the promissory notes was $1.0 million.

 

Joseph Sciacca, our former Chief Financial Officer and Treasurer resigned, effective January 4, 2010, to pursue other opportunities. In connection with his resignation, we entered into a consulting arrangement with Mr. Sciacca which provides for his provision of consulting services to us until September 30, 2010 for a monthly payment of $12,534 per month.

 

On May 24, 2007, the Audit Committee adopted written policies and procedures regarding related party transactions. Our related party transactions policy covers any transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships in which we or any of our subsidiaries was, is or will be a participant and the amount involved exceeds $1,000, and in which any related party had, has or will have a direct or indirect interest. Under this policy, the Audit Committee must approve all related party

transactions between us or one of our subsidiaries and a director, nominee for director, executive officer, five percent shareholder, certain related entities or immediate family members of a director, executive officer or five percent shareholder that would be required to be disclosed in our proxy statements. The policy also authorizes the Chairperson of the Audit Committee to approve, or reject, proposed related party transactions in those instances in which it is not practicable or desirable for us to wait until the next Audit Committee meeting. Pursuant to the policy, the Audit Committee or the Chairperson of the Audit Committee, as applicable, is authorized to approve only those related party transactions that are reasonably necessary to our business and fair to us, as the Audit Committee or its Chairperson determines in good faith.

 

All interested parties who wish to communicate with our Audit Committee may do so by addressing their written correspondence to the Audit Committee at Halifax Corporation of Virginia, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

We have adopted a Code of Conduct and Ethics that applies to all directors, officers, including our chief executive officer, chief financial officer, principal accounting officer, controller and persons performing similar functions, and employees. Copies of our Code of Conduct and Ethics are available without charge upon written request directed to Halifax Corporation of Virginia, Attn: Secretary, 5250 Cherokee Avenue, Alexandria, VA 22312.

 

Grant Thornton LLP, referred to as Grant Thornton in this document, served as our independent public accountant and our subsidiaries from July 2004 to January 7, 2008. On January 7, 2008, the Audit Committee of the Company elected to dismiss Grant Thornton as the Company’s independent auditor effective January 7, 2008. The reports of Grant Thornton, on the financial statements of the Company during the two-year period ended March 31, 2007, did not contain an adverse opinion, or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the two-year period ended March 31, 2007 and interim period from April 1, 2007 through January 7, 2008, (1) the Company did not have any disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Grant Thornton, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports, and (2) no reportable events as described in Item 304(a)(1) of Regulation S-K occurred except that, as disclosed in Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007 and in Item 4 of the Company’s Quarterly Reports on Form 10-Q for the quarters ended June 30, 2007 and September 30, 2007, we were advised by Grant Thornton that control deficiencies in our internal control over financial reporting relating to income tax reporting existed as of March 31, 2007 that constituted a material weakness within the meaning of the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 2 as a result of the lack of qualified personnel to properly review and administer the Company’s tax matters. In July 2007, management completed the remediation of the material weakness by retaining an outside professional service firm to assist in the area of income tax reporting.

 

On January 25, 2008, the Audit Committee formally approved Reznick Group as our independent public accountant for the fiscal year ended March 31, 2009. No consultations occurred between the Company and Reznick Group during the two most recent fiscal years and any subsequent interim period prior to Reznick Group’s appointment regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K. In the course of its discussions concerning the appointment, the Company did provide and discuss with Reznick Group the information in the Company’s Current Report on Form 8-K with respect to the dismissal of the Company’s former independent registered public accounting firm which was filed with the Securities and Exchange Commission on January 11, 2008.

The audit committee appointed Reznick Group to serve as our independent public accountant for the fiscal year ending March 31, 2010. Representatives of Reznick Group are expected to attend the Annual Meeting, will have the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.

 

Aggregate fees for professional services rendered for us by Reznick Group for the fiscal years ended March 31, 2009 and 2008 were as follows:

 

 

All services performed by Reznick Group were pre-approved by the Audit Committee. The Audit Committee has considered whether the provision of services covered in the preceding paragraphs is compatible with maintaining Reznick Group’s independence.

 

Audit Fees.  The audit fees billed by Reznick Group for the fiscal year ended March 31, 2009 and March 31, 2008 were for professional services rendered for the audits of our financial statements, quarterly reviews, issuance of consents, and assistance with the review of documents filed with the SEC.

 

Audit-Related Fees.  There were no audit related fees billed for the fiscal years ended March 31, 2009 and 2008.

 

Tax Fees.  There were no tax fees billed for the fiscal years ended March 31, 2009 and 2008.

 

All Other Fees.  There were no other fees billed for the fiscal years ended March 31, 2009 and 2008.

 

The Audit Committee must approve all auditing services and non-audit services provided by our independent public accountant. The non-audit services specified in Section 10A(g) of the Exchange Act may not be provided by our independent public accountant. The Audit Committee will periodically review fees for services rendered with the full Board of Directors.

 

We were advised by Reznick Group that no member of Reznick Group has any direct or indirect interest in our business or any of our subsidiaries or has had, since its appointment, any connection with us or any of our subsidiaries in the capacity of promoter, underwriter, voting trustee, director, officer or employee.

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act in this document, requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. We believe that all of the filing requirements were complied with by our officers and directors and by the beneficial owners of more than 10% of our common stock. On making the foregoing statements, we relied upon copies of the reporting forms that we received and certain written representations.

 

In the event that there are not sufficient votes to constitute a quorum or to approve the Merger Proposal to be considered at the time of the annual meeting and the Merger contemplated thereby cannot be approved unless the annual meeting is adjourned to a later date or dates in order to permit further solicitation of proxies, if necessary, the Company has submitted the question of adjournment to its shareholders as a separate matter for their consideration. The Company’s Board of Directors recommends that its shareholders vote FOR the adjournment proposal. If it is necessary to adjourn a meeting, no notice of such adjourned meeting is required to be given to shareholders, other than an announcement before adjournment at the annual meeting of the place, date and time to which the meeting is adjourned, so long as a new record date is not needed for the adjourned meeting. If a new record date for the adjourned meeting is required to be fixed, a notice of the adjourned meeting will be given to all persons who are shareholders as of the new record date.

 

Pursuant to the proxy rules under the Exchange Act, our shareholders are notified that the deadline for providing us with timely notice of any shareholder proposal to be submitted outside of the Rule 14a-8 process for consideration at our annual meeting of shareholders related to the 2010 fiscal year will be October 7, 2010. As to all such matters which we do not have notice on or prior to October 7, 2010, discretionary authority shall be granted to the persons designated in the proxy card related to the 2010 annual meeting of shareholders. A shareholder proposal regarding the annual meeting of shareholders related to the 2010 fiscal year must be submitted to our office located at 5250 Cherokee Avenue, Alexandria, Virginia 22312, by October 7, 2010 to receive consideration for inclusion in our proxy materials related to the 2010 fiscal year. Any such proposal must also comply with the proxy rules under the Exchange Act, including Rule 14a-8.

 

As of the date of this proxy statement, the Board of Directors knows of no additional matters to be presented for vote of the shareholders at the Annual Meeting, other than the approval of the minutes of the last shareholders’ meeting, which action shall not be construed as approval or disapproval of any of the matters referred to in such minutes, nor has it been advised that others will present any other matters. Should any matters be properly presented at the Annual Meeting for a vote of the shareholders, the proxies will be voted in accordance with the best judgment of the proxy cardholders.

 

This proxy statement is accompanied by the Annual Report to Shareholders for the year ended March 31, 2009, which includes a copy of our annual report on Form 10-K for the year ended March 31, 2009 as filed with the SEC, as well as the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

 

EACH PERSON SOLICITED HEREUNDER CAN OBTAIN AN ADDITIONAL COPY OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2009, AND ANY AMENDMENTS THERETO, WITHOUT CHARGE, EXCEPT FOR EXHIBITS TO THE REPORT, BY SENDING A WRITTEN REQUEST TO: HALIFAX CORPORATION OF VIRGINIA, 5250 CHEROKEE AVENUE, ALEXANDRIA, VA 22312, ATTENTION: CORPORATE SECRETARY.

 

 

AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GLOBAL IRON HOLDINGS, LLC
A DELAWARE LIMITED LIABILITY COMPANY,
GLOBAL IRON ACQUISITION, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
AND
HALIFAX CORPORATION OF VIRGINIA
A VIRGINIA CORPORATION

Dated January 6, 2010

 

AGREEMENT AND PLAN OF MERGER

 

This AGREEMENT AND PLAN OF MERGER (this “Agreement”) is entered into as of January 6, 2010 by and among Global Iron Holdings, LLC, a Delaware limited liability Company (“Parent”), Global Iron Acquisition, LLC, a Delaware limited liability Company and a wholly-owned subsidiary of Parent (“Merger Sub”), and Halifax Corporation of Virginia, a Virginia corporation (the “Company”), with respect to the facts and circumstances set forth below. Parent, Merger Sub and the Company may be referred hereinafter each as a “Party” or collectively as the “Parties.”

 

RECITALS

 

WHEREAS, the board of directors or managers of each of the Parent, the Merger Sub and the Company has approved, and deems it fair to, advisable and in the best interests of its respective stockholders and members to consummate a merger of the Company with and into the Merger Sub (the “Merger”) on the terms and subject to the conditions set forth herein;

 

WHEREAS, pursuant to the Merger, the outstanding shares of capital stock of the Company shall be converted into the right to receive a per-share cash payment at the rate and subject to the conditions set forth herein;

 

WHEREAS, the board of directors of the Company has determined that the transactions contemplated by this Agreement are fair to and in the best interests of the Company and the Company Stockholders and has resolved to recommend that the Company Stockholders adopt this Agreement and approve the Merger and the other transactions contemplated hereby upon the terms and subject to the conditions set forth in this Agreement; and

 

WHEREAS, simultaneously with the execution and delivery of this Agreement, those individuals set forth on Schedule 1 who hold in the aggregate approximately 31% of the outstanding shares of Company Common Stock, are entering into an agreement pursuant to which such Persons will agree to, among other things, vote in favor of the Merger (the “Voting Agreement”).

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants contained herein and intending to be legally bound, the parties hereto agree as follows:

 

ARTICLE 1.

 

DEFINITIONS

 

1.1  Defined Terms.  Unless otherwise defined, capitalized terms used herein shall have the following meanings:

 

“Action” means any action, appeal, petition, plea, charge, complaint, claim, suit, litigation, arbitration, mediation, hearing, inquiry, investigation or similar event, occurrence or proceeding.

 

“Affiliate” with respect to any specified Person, means a Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such specified Person.

 

“Applicable Tax Law” shall mean any Law of any Governmental Entity relating to Taxes, including regulations and other official pronouncements of such jurisdiction charged with interpreting such laws.

 

“Code” shall mean the Internal Revenue Code of 1986, as amended.

 

“Common Stock Per Share Merger Consideration” means $1.20 cash.

 

“Company” unless the context clearly indicates otherwise (such as a reference to Company Common Stock), means the Company and its Subsidiaries on a consolidated basis.

 

“Company Board” means the Board of Directors of the Company.

 

“Company Common Stock” means the Common Stock of the Company, $0.24 par value per share.

 

“Company Debt” means the amount of Indebtedness of the Company (including prepayment penalties) outstanding as of the Effective Time, as evidenced by a payoff letter from the Company’s lenders providing for a release of all Encumbrances or other evidence reasonably satisfactory to Parent.

 

“Company Expenses” means the accrued (or incurred) and unpaid fees and expenses of financial advisors, proxy solicitors, legal counsel, accountants, transfer and paying agents, and all other third parties representing the Company, retention or change in control bonuses payable to Company employees, severance or termination payments incurred but not yet paid, payments required to obtain Company Consents, costs of D&O Insurance for Company directors and officers, director fees paid or payable outside the ordinary course of business, accrued but unpaid interest, fees, charges and other amounts payable in respect of the Credit Facility to the extent not otherwise included in Company Debt, and all other fees, expenses and out-of-pocket costs incurred by the Company or payable by the Company on behalf of other Persons, all in connection with the sale of the Company, including the negotiation, execution and consummation of this Agreement and the transactions contemplated hereby.

 

“Company Optionholders” means the holders of Options.

 

“Company Stockholders” means the stockholders of the Company, as they may be constituted from time-to-time.

 

“Consent” means any consent, approval, notification, waiver, or other similar action required pursuant to a Contract or Law.

 

“Contract” means any contract, agreement, license, lease, arrangement, commitment, letter of intent, memorandum of understanding, promise, obligation, right or instrument, whether written or oral, to which Company is a party or to which any of its assets are bound.

 

“Copyrights” means all copyrights in both published works and unpublished works including any registrations and applications therefor and whether registered or unregistered.

 

“Credit Facility” means a credit facility with Sonabank in effect on the date hereof, or with any substitute lender under a loan agreement obtained in accordance with the terms hereof.

 

“Employee Benefit Plans” means all employee benefit plans or arrangements of any kind, including bonus, deferred compensation, incentive compensation, equity compensation, equity purchase, equity option, equity appreciation rights, restricted equity, severance or termination pay, fringe benefit, vacation, scholarship or tuition reimbursement, dependent care assistance, hospitalization, medical, life or other insurance, immigration assistance, salary continuation, employee loan or loan guarantee, split dollar arrangement, supplemental unemployment benefits, profit-sharing, savings, pension, retirement, or supplemental retirement plan, program, agreement or arrangement, and any other employee benefit plan, agreement, arrangement, or commitment maintained by the Company which covers any employee or former employee of the Company (or beneficiary or dependent of either), whether or not a plan described in Section 3(3) of ERISA.

 

“Encumbrance” means any mortgage, Security Interest, lien, hypothecation, pledge, charge, claim of ownership, option to purchase, or encumbrance of any kind, easement, deed of trust, assignment, deposit arrangement, priority or other preferential arrangement, title defect covenant, community property interest, equitable interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other general attribute of ownership, but does not include Permitted Liens.

 

“Equity Commitment” means (a) options, warrants, convertible securities, exchangeable securities, subscription rights, conversion rights, exchange rights, or other Contracts that could require the Company to issue any of its Equity Interests or to sell any Equity Interests it owns in another Person; (b) statutory pre-emptive rights or pre-emptive rights granted under the Organizational Documents of the Company; and (c) stock appreciation rights, phantom stock, profit participation, or other similar rights with respect to the Company.

 

“Equity Interest” means any and all shares of the Company’s capital stock or other ownership or equity interest, participation or securities (whether voting or non-voting, whether preferred, common or

otherwise, and including any stock appreciation, contingent interest or similar right), and any option, warrant, security or other right (including debt securities) directly or indirectly convertible into or exercisable or exchangeable for, or otherwise representing the right to acquire directly or indirectly any ownership or equity interest, participation or security described above.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“GAAP” means United States generally accepted accounting principles, applied on a consistent basis in accordance with past practice.

 

“Governmental Entity” means any legislature, agency, bureau, branch, department, division, commission, court, tribunal, magistrate, justice, multi-national organization, quasi-governmental body, or other similar recognized organization or body of any federal, state, county, municipal, local, or foreign government or other similar recognized organization or body exercising similar powers or authority.

 

“Indebtedness” means, with respect to any Person, (a) any obligation of such Person (i) for borrowed money, (ii) evidenced by a note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any property or assets, including securities, or (iii) for the deferred purchase price of property or services; (b) any guarantee (or keepwell agreement) by such Person of any indebtedness of others described in the preceding clause (a); (c) any obligation to reimburse any bank or other Person for amounts paid under a letter of credit or similar instrument; (d) any factoring arrangement or obligation secured by or representing the disposition of assets that would be Acquired Assets but for the incurrence of such obligation (e) any other obligation upon which interest charges are customarily paid, or that was issued or assumed as full or partial payment for property, except trade accounts payable and similar liabilities arising in the Ordinary Course of Business and not more than 60 days from the invoice date and (f) any capital leases.

 

“Intellectual Property” means (a) any Marks, Patents, Copyrights, Trade Secrets or rights, licenses, software, methodologies and/or other claims that any Person may have regarding the foregoing or to prevent the modification of, to withdraw from circulation or control the publication or distribution of any Marks, Patents, Copyrights or Trade Secrets, (b) corporate names and fictitious names, technical and confidential information (including, without limitation, designs, plans, specifications, formulas, processes, methods, methodologies, shop rights, know-how, show-how, and other business or technical confidential information in each case whether or not such rights are patentable, copyrightable, or registerable), (c) computer software and hardware programs and systems, source code, object code, know-how, show-how, processes, formulas, specifications and designs, data bases, and documentation relating to the foregoing, (d) other proprietary information owned, controlled, created, under development or used by the Company or in which the Company has any interest whatsoever, whether or not registered, including rights or obligations under any license agreement or other agreement with any other Person, and (e) Internet domain names, and all registrations and applications for registration, and web sites and web pages and related items (and all intellectual property and proprietary rights incorporated therein), IP addresses and email addresses.

 

“In-The-Money Options” means Options, including all Options that have had their vesting periods accelerated immediately prior to the Effective Time in accordance with Section 2.12 hereof, that have an exercise price less than the Common Stock Per Share Merger Consideration, determined immediately prior to the Effective Time.

 

“Knowledge” of any Party shall mean the actual knowledge of the officers of that party after such officers shall have made all reasonable inquiries of those directly reporting to such officers likely to have such knowledge. For purposes of this definition, the officers of the Company to whom knowledge may be attributed are listed in Schedule 1.1(a) attached hereto.

 

“Law” means any law (statutory, common, or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, executive order, or other similar authority enacted, adopted, promulgated, or applied by any Governmental Entity, each as amended and in effect as of the date hereof.

 

“Legal Requirement” means any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any governmental body.

 

“Marks” means all fictitious business names, trade names, corporate names, registered and unregistered trademarks, service marks, designs and general intangibles of like nature and applications, together with all goodwill related to the foregoing.

 

“Material Adverse Change (or Effect)” means an event, occurrence or change in facts or circumstances that has had or would reasonably be expected to have a material adverse effect on the business, assets, properties, liabilities, condition (financial or otherwise) or results of operations of the Company, or a material adverse effect on the ability of the Parties to consummate the transactions contemplated hereby, or a Material Net Asset Decrease; provided, however that any reduction in the market price or trading volume of the Company Common Stock or changes in general economic conditions not disproportionately affecting the Company, in and of itself, shall not be deemed to constitute a Material Adverse Effect on the Company.

 

“Material Net Asset Decrease” means that the Net Assets of the Company as of a Measurement Date or immediately prior to the Effective Time are at least $400,000 less than the Net Assets at September 30, 2009, as reported in the Company’s Form 10-Q for the period then ended.

 

“Measurement Date” shall the last day of any month between the date of this Agreement and the Effective Time.

 

“Merger Consideration” shall mean the aggregate Common Stock Per Share Merger Consideration.

 

“Net Assets” means Total Assets less Total Liabilities, computed in accordance with GAAP consistent with past practice, except if past practice was not in accordance with GAAP, GAAP shall apply.

 

“Options” mean options or warrants to purchase Company Common Stock.

 

“Order” means any order, ruling, decision, verdict, decree, writ, subpoena, mandate, precept, command, directive, consent, approval, award, judgment, injunction, or other similar determination or finding by, before, or under the supervision of any Governmental Entity, arbitrator or mediator.

 

“Ordinary Course of Business” means, with respect to any Person, that Person’s ordinary course of business consistent with past custom and practice (including with respect to quantity, quality and frequency).

 

“Organizational Documents” means the articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, regulations, operating agreement, certificate of limited partnership, partnership agreement, and all other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of a non-natural Person, including any amendments thereto.

 

“Out-of-the-Money Options” mean Options with an exercise price higher than the Common Stock Per Share Merger Consideration, determined immediately prior to the Effective Time.

 

“Outstanding Common Stock Equivalents” means the number of shares of Company Common Stock Outstanding, plus the number of In-The-Money Options, determined immediately prior to the Effective Time.

 

“Patents” means all (A) patents and patent applications and any continuations, continuations in part, renewals and applications therefor, and (B) any inventions and discoveries that may be patentable.

 

“Permit” means any permit, license, certificate, approval, consent, notice, waiver, franchise, registration, filing, accreditation, or other similar authorization required by any Law or Governmental Entity.

 

“Permitted Liens” means (i) Encumbrances for taxes, assessments, governmental charges, or claims which are not yet due and payable or are being duly contested in good faith by appropriate Actions, (ii) statutory liens of landlords and warehousemen’s, carriers’, mechanics’, suppliers’, materialmen’s, repairmen’s, or other like liens (including Contractual landlords’ liens) arising in the Ordinary Course of Business or with respect to amounts not yet delinquent or being contested in good faith by appropriate Actions; (iii) liens incurred or deposits made in the Ordinary Course of Business in connection with

workers’ compensation, unemployment insurance and other similar types of social security, (iv) Encumbrances set forth on Schedule 1.1(c), (v) restrictions on transfers of securities imposed by federal and state securities laws; and (vi) Encumbrances consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real property or irregularities in title thereto which do not materially detract from the value of, or impair the use of, such property by the Company in the operation of its business; provided that none of the foregoing are, individually or in the aggregate, material.

 

“Person” means any individual, partnership, limited liability Company, corporation, association, joint stock Company, trust, entity, joint venture, labor organization, unincorporated organization, or Governmental Entity.

 

“Registered Intellectual Property” shall mean all registered United States and foreign Patents, Marks, Copyrights, and applications therefor, if any, owned by the Company including continuation, divisional, and continuation in part, and reissue Patents, Marks, and Copyrights.

 

“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002, as amended.

 

“SEC” means the Securities and Exchange Commission.

 

“Security Interest” means any security interest, deed of trust, mortgage, pledge, Encumbrance, charge, claim, or other similar interest or right, except for Permitted Liens.

 

“Software” means any and all (i) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code; (ii) testing, validation, verification and quality assurance materials; (iii) databases, conversion, interpreters and compilations, including any and all data and collections of data, whether machine readable or otherwise; (iv) descriptions, schematics, flow-charts and other work product used to design, plan, organize and develop any of the foregoing; (v) software development processes, practices, methods and policies recorded in permanent form, relating to any of the foregoing; (vi) performance metrics, sightings, bug and feature lists, build, release and change control manifests recorded in permanent form, relating to any of the foregoing; and (vii) documentation, including user manuals, web materials, and architectural and design specifications and training materials, relating to any of the foregoing.

 

“Tax” means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs, ad valorem, duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

 

“Tax Authority” shall mean, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Taxes for such entity or subdivision.

 

“Tax Return” means any return, declaration, report, claim for refund or information return or statement relating to any Taxes required to be filed with any Governmental Entity, including any schedule or attachment thereto, and including any amendment thereof.

 

“Total Assets” shall mean the total assets of the Company determined in accordance with GAAP.

 

“Total Liabilities” shall mean the total liabilities of the Company determined in accordance with GAAP, plus an estimate of accrued and unpaid Company Expenses and a projection of additional accrued but unpaid interest, fees and other amounts in relation to Company Debt as of the applicable measurement date.

 

“Trade Secrets” means all know-how, trade secrets, confidential information, customer lists, Software, databases, works of authorship, mask works, technical information, data, process technology, plans, drawings, blue prints know-how, proprietary processes, formulae, algorithms, models, user interfaces, inventions, discoveries, concepts, ideas, techniques, methods, methodologies and, with respect to all of the foregoing, related confidential data or information.

 

1.2  Other Defined Terms.  The following capitalized terms shall have the meanings given to them in the Sections set forth below:

 

 

ARTICLE 2.

 

THE MERGER

 

2.1  The Merger.  Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Delaware Limited Liability Company Act (the “DLLCA”), at the Effective Time, the Company shall be merged with and into Merger Sub, the separate corporate existence of the Company shall thereupon cease, and Merger Sub shall be the successor or Surviving Company and shall continue its existence under the Laws of the State of Delaware as a wholly-owned subsidiary of Parent. Merger Sub, as the Surviving Company after the consummation of the Merger, shall be sometimes hereinafter referred to as the “Surviving Company.”

 

2.2  Effective Time.  Subject to the provisions of this Agreement, the Parties shall cause the Merger to be consummated by filing a duly executed certificate of merger of Merger Sub and the Company (the “Certificate of Merger”) with the Office of the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with, the relevant provisions of the DLLCA, as soon as practicable on the Closing Date, and with the State Corporation Commission of the Commonwealth of Virginia, as required under the Virginia Stock Corporation Act (“VSCA”), and shall take all other action required by Law to effect the Merger. The Merger shall become effective upon such filing or at such time thereafter as shall be agreed by the Parties and provided in the Certificate of Merger (the “Effective Time”).

 

2.3  Closing.  Unless this Agreement shall have been terminated pursuant to Article 7, the closing of the Merger (the “Closing”) shall take place at 9:00 a.m., local time, at the offices of the Company, on the second business day after all of the conditions to the obligations of the Parties to consummate the Merger have been satisfied or waived (other than those conditions that, by their terms, are to be satisfied or waived on the Closing Date), or such other date, time or place as shall be agreed to in writing by the Parties (the “Closing Date”).

 

2.4  Effect of the Merger.  At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of the DLLCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Company, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Company.

 

2.5  Certificate of Formation; Name.  The certificate of formation of Merger Sub shall be the certificate of formation of the Surviving Company until thereafter amended in accordance with the DLLCA and such certificate of formation. At the Effective Time, the name of Merger Sub shall be changed to Halifax Technology, LLC.

 

2.6  Limited Liability Company Agreement.  Immediately prior to the Effective Time, the limited liability Company agreement of Merger Sub shall be amended so that the sections regarding indemnification therein shall be no less favorable to the indemnified persons than those relevant sections in the Company’s bylaws as in effect immediately prior to the Effective Time (the “Merger Sub LLC Agreement Amendment”) and such limited liability Company agreement, as so amended, shall be the limited liability Company agreement of the Surviving Company until thereafter amended as provided therein and by applicable law.

 

2.7  Additional Actions.  If, at any time after the Effective Time, the Surviving Company shall consider or be advised that any further deeds, assignments or assurances in Law or any other acts are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in the Surviving Company its right, title or interest in, to or under any of the rights, properties or assets of the Company, or (b) otherwise carry out the provisions of this Agreement, the officers and directors of the Surviving Company are authorized to take, and will take, any and all such lawful actions.

 

2.8  Managers.  The managers of Merger Sub at the Effective Time shall be the same persons who are the initial managers of the Surviving Company, until their respective successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Company’s certificate of formation and limited liability Company agreement.

 

2.9  Officers.  The officers of the Company at the Effective Time shall be the same persons who are the initial officers of the Surviving Company, until their respective successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Company’s certificate of formation and limited liability Company agreement.

 

2.10  Merger Consideration, Conversion and Cancellation of Shares.  At the Effective Time, pursuant to this Agreement and by virtue of the Merger and without any action on the part of Parent, Merger Sub or the Company, or the holders of any of the following securities:

 

(a) Pursuant to Section 18-209 of the DLLCA, each share of Company Stock issued and outstanding immediately prior to the Effective Time (including shares of Company Common Stock issued upon exercise of Equity Commitments of the Company, but excluding any Dissenting Shares and shares to be cancelled pursuant to Section 2.10(b)), shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive its designated share of the Common Stock Per Share Merger Consideration. The aggregate amount payable shall be deposited with the Paying Agent and disbursed to the Company Stockholders as provided in a Paying Agent Agreement (the “Paying Agent Agreement”) by and among Parent, the Company and the Paying Agent in customary form.

 

(b) Each share of stock held in the treasury of the Company or held by Parent, Merger Sub or any other Affiliate of Parent, if any, immediately prior to the Effective Time, shall be cancelled without any conversion thereof and no payment or distribution shall be made with respect thereto.

 

(c) If between the date of this Agreement and the Effective Time the number of outstanding shares of capital stock of the Company shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split-up, combination, exchange of shares or the like other than pursuant to the Merger, the amount payable to each holder of Shares shall be correspondingly adjusted.

 

(d) Subject to Section 2.11, as a result of the Merger and without any action on the part of the holders of Company Stock, at the Effective Time, all shares of Company Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled and retired and shall cease to be outstanding and to exist and the holders thereof shall thereafter cease to have any rights with respect to such Company Common Stock except the right to receive the Common Stock Per Share Merger Consideration, as applicable, described in subsections (a) and (b) above upon the surrender of Share Certificates (as defined below) representing such shares of Company Common Stock to the Paying Agent in accordance with the terms of the Paying Agent Agreement.

 

2.11  Dissenting Shares.  Notwithstanding anything in this Agreement to the contrary, to the extent that the provisions of Section 13-1.730 of the VSCA are or, prior to the Effective Time become, applicable to the Merger, any shares of Company Common Stock that, as of the Effective Time, are held by holders who have

as of the Effective Time preserved appraisal rights under the VSCA with respect to such shares (“Dissenting Shares”) shall not be converted into or represent the right to receive the Common Stock Per Share Merger Consideration, as the case may be, in accordance with Section 2.10, and the holder or holders of such shares shall be entitled only to such rights as may be provided to such holder or holders pursuant to the VSCA; provided, however, that if such appraisal rights shall not be perfected or the holders of such shares shall otherwise lose their appraisal rights with respect to such shares, then, as of the later of the Effective Time or the time of the failure to perfect such status or the loss of such rights, such shares shall automatically be converted into and shall represent only the right to receive (upon the surrender of the certificate or certificates representing such shares), without interest thereon, the Common Stock Per Share Merger Consideration, as the case may be, in accordance with Section 2.10. The Company shall give Parent prompt notice of any demands received by the Company for appraisal of shares, and, prior to the Effective Time, Parent shall have the right to participate in all negotiations and proceedings with respect to such demands and be consulted with respect to the Company’s response thereto. Prior to the Effective Time, the Company shall not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demands.

 

2.12  Options.  Each holder of a then outstanding In-The-Money Option to purchase shares of Company Common Stock, shall, in settlement thereof, receive from the Surviving Company, for each share of Company Common Stock subject to such an option, an amount equal to the excess of the Common Stock Per Share Merger Consideration over the exercise price for such option at the Effective Time, less applicable withholding tax (the “Option Consideration”). At the Effective Time, each In-The-Money Option shall be deemed cancelled and converted solely into the right to receive the Option Consideration, and each holder of an In-The-Money Option shall have the opportunity, promptly after the Effective Time, to surrender such option to the Surviving Entity. Each Out-of-the-Money Option shall be cancelled without consideration. The committee appointed by the Company Board to administer the Halifax Corporation of Virginia 2005 Stock Option and Stock Incentive Plan (the “2005 Plan”), Non-Employee Director Stock Option Plan (the “1997 Plan”) and Key Employee Stock Option Plan (the “1994 Plan”) shall adopt, in accordance with the 2005 Plan, the 1997 Plan and the 1994 Plan, resolutions (i) immediately prior to the Effective Time, accelerating the vesting periods of all Options and (ii) terminating all Options in accordance with this Agreement at the Effective Time, and take such other measures as necessary to effect such vesting or termination. Payments of Option Consideration may be made at a regularly scheduled payroll date of the Surviving Company, within 45 days of the Effective Date.

 

2.13  Payment of Cash for Shares.

 

(a) At or prior to the Effective Time, Parent shall irrevocably deposit or cause to be deposited with a paying agent appointed by Parent and reasonably acceptable to the Company (the “Paying Agent”), as agent for the holders of shares to be cancelled in accordance with Section 2.10(a) and (b) and Options to be cancelled in accordance with Section 2.12, cash in the aggregate amount of the Merger Consideration pursuant to a Paying Agent Agreement. Pending distribution pursuant to Section 2.13(b) of the cash deposited with the Paying Agent, such cash shall be held in trust for the benefit of the holders of the shares of Company Stock converted pursuant to the Merger and such cash shall not be used for any other purposes. Promptly, and in no event later than five (5) business days after the Effective Time, the Surviving Company shall cause the Paying Agent to mail to each Person who was, at the Effective Time, a holder of record of shares of Company Stock entitled to receive the Merger Consideration pursuant to Section 2.10 and Section 2.12 hereof, a letter of transmittal in a customary form reasonably acceptable to the Company (the “Letter of Transmittal”) (which shall specify that delivery shall be effected, and risk of loss and title to the certificates evidencing the shares of Company Stock (the “Share Certificates”) shall pass, only upon proper delivery of the Share Certificate(s) to the Paying Agent) and instructions for use in effecting the surrender of the Share Certificate(s) pursuant to such letter of transmittal. On the business day following the Closing (with respect to any Company Stockholders who has delivered a Letter of Transmittal and Share Certificate on or prior to the Closing), and as soon as practicable following surrender by any other Company Stockholder to the Paying Agent of a Letter of Transmittal and Share Certificate, in each case, duly completed and validly executed in accordance with the instructions thereto, the holder of such Share Certificate shall be paid in exchange therefor the Merger Consideration, as the case may be, for each share of Company Stock formerly evidenced by such Share Certificate, and such Share Certificate shall thereupon be cancelled. No interest shall accrue or be paid on the

Merger Consideration payable upon the surrender of any Share Certificate for the benefit of the holder of such Share Certificate and any required withholding taxes on the Merger Consideration may be withheld by the Surviving Company or the Paying Agent.

 

(b) The Surviving Company shall after the Merger have the funds necessary to pay the Option Consideration in cash to persons providing a notice of exercise of an In-the-Money Option under a valid Option Grant.

 

(c) Until so surrendered and cancelled in accordance with subsection (a), each such Share Certificate or Option Grant or other instrument shall, after the Effective Time, be deemed to represent only the right to receive the Merger Consideration or Option Consideration, and until such surrender and cancellation, no cash shall be paid to the holder of such outstanding Share Certificate or Option Grant or other instrument in respect thereof. From and after the Effective Time, the holders of shares of Company Stock or Options outstanding immediately prior to the Effective Time shall cease, except for Dissenting Shares and otherwise as required by law, to have any rights with respect to such shares of Company Stock or Options, other than the right to receive the Merger Consideration or Option Consideration as provided in this Agreement.

 

(d) If payment is to be made to a Person other than the registered holder of the shares of Company Stock represented by the Share Certificate or Option Grant or other instrument so surrendered in exchange therefor, it shall be a condition to such payment that the Share Certificate or Option Grant or other instrument so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Paying Agent or Company any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such shares of Company Stock or Options or establish to the satisfaction of the Paying Agent or Company that such tax has been paid or is not payable.