HALIFAX CORPORATION
FORM 10-Q
DECEMBER 31, 1996
FORM 10Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No 312905 eff. 4/26/93.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the period ended December 31, 1996
(x) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from
to
Commission file Number 1-8964
Halifax Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-0829246
(State or other jurisdiction of incorporation of organization
(IRS Employer Identification No.)
5250 Cherokee Avenue, Alexandria, VA 22312
(Address of Principal executive offices)
Registrant's telephone number, including area code(703) 750-2202
N/A
(former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filled by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filings requirements for the past 90 days. (x)Yes ( )No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as the latest practicable date 1,999,831 as of February
11, 1997.
HALIFAX CORPORATION
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements page
Condensed Consolidated Balance Sheets - December 31,
1996 (Unaudited) and March 31, 1996 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended December 31,
1996 and 1995 (Unaudited) 4
Condensed Consolidated Statements
of Stockholders' Equity - Nine Months Ended
December 31, 1996 and 1995 (Unaudited) 5
Condensed Consolidated Statements
of Cash Flows - Nine Months Ended December 31,
1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3. Default Upon Senior Securities 11
Item 4. Submission of Matters for a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Item 1. FINANCIAL STATEMENTS
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1996
<CAPTION>
December 31, MARCH 31,
1996 1996*
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $1,079,000 $2.743,000
Trade accounts receivable 23,061,000 11,639,000
Inventory 6,987,000 2,792,000
Prepaid expenses and other 1,160,000 814,000
current assets
TOTAL CURRENT ASSETS 32,287,000 17,988,000
PROPERTY AND EQUIPMENT, at cost less
accumulated 6,020,000 4,527,000
depreciation and amortization
INTANGIBLES AND OTHER ASSETS, net of
accumulated 3,234,000 2,313,000
amortization
TOTAL ASSETS $41,541,000 $24,828,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued $14,070,000 $11,508,000
expenses
Current portion of long-term debt 1,220,000 556,000
TOTAL CURRENT LIABILITIES 15,290,000 12,064,000
LONG-TERM DEBT AND OTHER LIABILITIES 15,644,000 3,980,000
TOTAL LIABILITIES 30,934,000 16,044,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 542,000 518,000
Additional paid-in capital 4,350,000 3,401,000
Retained earnings 5,928,000 5,253,000
10,820,000 9,172,000
Less treasury stock - at cost 213,000 388,000
TOTAL STOCKHOLDERS' EQUITY 10,607,000 8,784,000
TOTAL LIABILITIES AND STOCKHOLDERS' $41,541,000 $24,828,000
EQUITY
<FN>
*Condensed from March 31, 1996 Audited Financial Statements. See Form 10-K
filed June 28, 1996.
See notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues $21,913,000 $11,217,0000 $58,084,000 $29,239,000
Operating costs and
expenses:
Cost of services 20,109,000 9,874,000 52,396,000 25,422,000
Selling, general and 936,000 858,000 3,357,000 2,473,000
administrative expenses
Total operating costs and 21,045,000 10,732,000 55,753,000 27,895,000
expenses
Operating income 868,000 485,000 2,331,000 1,344,000
Litigation expense - 34,000 - 294,000
Interest expense 274,000 137,000 766,000 380,000
Income before income taxes 594,000 314,000 1,565,000 670,000
Income taxes 235,000 123,000 618,000 264,000
Net income $359,000 $191,000 $947,000 $406,000
Net income per common share* $0.18 $0.11 $0.48 $0.23
Weighted average number of
common 1,997,033 1,752,344 1,981,082 1,758,393
shares outstanding*
<FN>
See notes to consensed consolidated financial statements.
*Takes into account the 3:2 common stock split effective December 27, 1996.
</FN>
</TABLE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
<CAPTION>
Common Stock Additional Treasury Stock
Paid-In Retained
Shares Par Value Capital Earnings Shares Cost Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
April 1, 1,480,015 $518,000 $3,401,000 $5,253,000 311,786 $(388,000) $8,784,000
1996
Net Income - - - 947,000 - - 947,00
Cash - - - (272,000) - - (272,000)
Dividends
Stock 24,800 8,000 162,000 - - - 170,000
Options
Stock- 752,118 - - - 86,078 - -
Split 3:2
CMSA - - 803,000 - (139,630) 175,000 978,000
Acquisiton
Balance
December 2,256,933 $526,000 $4,366,000 $5,928,000 258,234 $(213,000) $10,607,000
31, 1996
Balance
April 1, 1,480,015 $518,000 $3,401,000 $4,795,000 299,686 $(313,000) $8,401,000
1995
Net Income - - - 406,000 - - 406,000
Cash - - - (229,000) - - (229,000)
Dividends
Purchase
of - - - - 12,100 (75,000) (75,000)
Treasury
Stock
Balance
December 1,480,015 $518,000 $3,401,000 $4,972,000 311,786 $(388,000) $8,503,000
31, 1995
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITIED)
Nine Months Ended
December 31,
1996 1995
<S> <C> <C>
Cash flows from operating
activities:
Net income $947,000 $406,000
Adjustments to reconcile net income
to net
cash provided by operating
activities:
Depreciation and amortization 772,000 443,000
Loss on disposal equipment 142,000 -
Decrease (Increase) in accounts (7,688,000) (569,000)
receivable
Decrease (Increase) in inventory (1,611,000) 439,000
Decrease (Increase) in other (785,000) 106,000
assets
(Decrease) Increase in accounts
payable 398,000 (1,182,000)
and accrued expenses
Total adjustments (8,772,000) (763,000)
Net cash provided (used) by (7,825,000) (357,000)
operating activities
Cash flows from investing
activities:
Acquisition of property and (888,000) (219,000)
equipment net of purchased
operations
Proceeds from sale of property and - 2,000
equipment
Net cash used in investing (888,000) (217,000)
activities
Cash flows from financing
activities:
Proceeds from borrowing of long- 30,652,000 12,587,000
term debt
Retirement of long-term debt (23,609,000) (11,173,000)
Issuance of treasury stock - CMSA 108,000 -
acquisiton
Cash dividends paid (272,000) (229,000)
Proceeds from sale of stock upon 170,000 -
exercise of stock options
Purchase of treasury stock - (75,000)
Net cash (used) provided by 7,049,000 1,110,000
financing activities
Net (decrease) increase in cash (1,664,000) 536,000
Cash beginning of period 2,743,000 18,000
Cash end of period $1,079,000 $554,000
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Halifax Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended December 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 1997. For further information refer to the consolidated
financial statements and footnotes thereto included in the Halifax
Corporation Annual Report on Form 10-K for the year ended March 31, 1996.
Note B - Acquisition
CMS Automation, Inc. Acquisition
In accordance with a Plan of Merger ("Plan") which was duly adopted by the
board of directors of both parties to the merger, CMS Automation, Inc.
("CMS"), a Virginia corporation, merged into CMSA Acquisition Corporation
("CMSA"), a Virginia corporation wholly owned by Halifax Corporation, a
Virginia corporation. CMS merged into CMSA on the following basis.
Pursuant to the Plan, each issued and outstanding share of CMS common stock
was converted into, and became exchangeable for, the number of shares of
validly issued, fully paid and nonassessable common stock of Halifax equal
to a conversion ratio meaning a fraction, the numerator of which is 139,630
and the denominator of which is equal to the sum of the number of shares of
CMS issued and outstanding on the effective date of the merger plus the
number of shares that would be represented by the conversion of $450,000
worth of debt to equity. In this regard, CMS shareholders who held
promissory notes of CMS in the amount of $450,000 converted said debt to
equity in CMS. In addition to the issuance of 139,630 shares of Halifax
common stock to CMS shareholders on the effective date of the merger, which
number of shares was based on the net equity value of CMS, additional
Halifax common stock will be issued on each of the first three
anniversaries of the effective date of the merger to CMS shareholders, on a
pro-rata basis, excluding CMS stock issued as a result of the conversion of
debt to equity, having an aggregate value equal to one-third of the net
after tax income of CMSA, operating as a wholly owned subsidiary of
Halifax, subject to certain limitations.
The assets of CMS included accounts receivable and the inventory and
equipment used in conducting and operating the business of CMS which
consists of computer systems integration including wide area and local area
networking, consulting, application development and training.
Closing of the transaction took place on April 1, 1996 with a Certificate
of Merger issued by the State Corporation Commission of Virginia effective
April 9, 1996. Results of CMSA operations have been included since the
date of closing.
Completion of Asset Purchase from Consolidated Computer Investors, Inc.
On November 25, 1996, Halifax Corporation, through its wholly-owned
subsidiary CMS Automation, Inc. ("CMSA"), acquired the ongoing computer
network integration and business solution business of Consolidated Computer
Investors, Inc. ("CCI") of Hanover, Maryland through an asset purchase.
These computer network integration and business solution activities operate
as a division of CMSA. The assets purchased included accounts receivable,
inventory and furniture, fixtures and equipment used in the conduct of
CCI's operations. The Company paid $114,210 in cash and assumed secured
debt totaling approximately $1,680,000. The cash paid was equal to the
estimated net assets purchased. The source of the consideration was the
Company's ongoing working capital line of credit.
Note C - Pro Forma Financial Information
The following unaudited pro forma combined summary statement of operations
information presents the historical results of operation of the Company,
CMSA and CCI for the nine month periods ended December 31, 1996 and 1995,
with pro forma adjustments as if the CMS acquisition transaction and the
CCI asset purchase had been consummated as of the beginning of the periods
presented. The pro forma information is based upon certain estimates and
assumptions that the management of the Company believes are reasonable in
the circumstances. The unaudited pro forma information is not necessarily
indicative of what the results of operations actually would have been if
the transaction had occurred on the dates indicated. Moreover, they are
not intended to be indicative of future results of operations.
Pro Forma Information
Nine Months Ended
December 31,
1996 1995
Revenue $68,229,000 $55,584,000
Net Income $ 1,127,000 $ 628,000
Earnings Per Common Share* $ .57 $ .32
Weighted Average Number of
Common Share Outstanding* 1,981,082 1,967,838
*Takes into account the 3:2 Halifax common stock split
effected December 27, 1996,
Note D - Contingent Matters
The Company is a defendant in various lawsuits. The Company provides for
costs related to contingencies when a loss is probable and the amount is
reasonably determinable. In the opinion of management, based on advice of
counsel, the ultimate resolution of any contingencies, to the extent not
previously provided for, will not have a material adverse effect on the
financial condition of the Company. However, depending on the amount and
timing of an unfavorable resolution of these contingencies, it is possible
that the Company's future results of operation or cash flows could be
materially affected in a particular quarter.
Note E - New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long -
Lived Assets to be Disposed of," effective April 1, 1996. SFAS No. 121
requires that certain long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Additionally, SFAS No.
121 requires that certain long-lived assets to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell. The
adoption of SFAS No. 121 did not have a material effect on the Company's
consolidated earnings and financial condition.
Part 1, Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Revenues for the third quarter and nine months ended December 31, 1996 were
$21.9 million and $58.1 million, representing growth of 96% and 99%
respectively, over comparable revenues for the same periods in the prior
year of $11.2 million and $29.2 million. The increase for the nine month
period is due approximately equally to internal growth and the CMSA
acquisition.
Total operating costs and expenses as a percentage of revenues were 96% for
both the third quarter and first nine months of FY 1997 and FY 1996,
respectively. Beginning in the second quarter of FY 1997, a change was
made to the accounting structure of the CMSA operation, acquired in the
first quarter, to align its accounting structure to that of the Company.
As a result of conforming the accounting structure, selling, general &
administrative expense for the Company declined to 6% of revenue for the
nine months ending December 31, 1996 and is expected to approximate 7% to
9% over FY 1997 based on the Company's experience in prior years.
Through the third quarter of FY 1996, $294,000 of litigation expense
associated with a trial of a lawsuit previously described was incurred.
There has been no similar litigation expense in FY 1997. Interest expense
for the third quarter and nine months remained level between fiscal years
1996 and 1997 at approximately 1.3% of revenue.
Net income for the third quarter of FY 1997 was $359,000 compared with
$191,000 for the same quarter of the prior year. For the nine months
ending December 31, 1996, net income was $947,000, compared with $406,000
for the nine month period of the prior year. The prior year was adversely
affected by the aforementioned litigation expense. Net income for the
third quarter of FY 1997 versus second quarter of FY 1997 increased by 13%
on a 7% increase in revenues.
Liquidity and Sources of Capital
The financial condition of the Company remains solid with working capital
of $17.0 million and a current ratio of 2.11. Long-term debt has increased
by more than $11.7 million between March 31, 1996 and December 31, 1996 and
was applied to convert CMSA and CCI short-term accounts receivable
financing to long-term financing at reduced interest rates, to finance the
growth in accounts receivable in the Company's communications division
which resulted from higher revenue in the second and third quarters of FY
1997 and to the purchase of inventory to support the internal growth of the
Company's computer services division.
As of December 31, 1996, the Company's line of credit was permanently
increased from $8.5 million to $9.8 million. Subsequent to December 31,
1996, a temporary $3.0 million addition to the line of credit was put in
place effective through April 30, 1997. The total line of credit
commitment is $12.8 million as of February 13, 1997. $9.6 million was
outstanding as of December 31, 1996. The Company expects that cash
generated from operations and the Company's line of credit will be
sufficient to meet its normal operating and dividend requirements in the
foreseeable future.
Part II. Other information
Item 1. Legal Proceedings
Commercial Business System, Inc. v. Halifax Corporation et al.
Plaintiff's claim, which has been the subject of judicial proceedings since
August of 1990 and was consolidated with a similar claim against BellSouth
Corporation, went to trial on October 18, 1995, resulting in a jury verdict
against Halifax, a former employee and a non-employee, for wrongful
interference with a prospective business relationship. The jury award for
compensatory damages plus interest was rejected by the trial judge who
entered final judgment in favor of Halifax and its co-defendents. The
plaintiff has been granted the right to appeal this decision to the
Virginia Supreme Court and oral argument on the appeal has been scheduled
for the week of February 24, 1997.
Item 2. Changes in Securities
On November 18, 1996, the Board of Directors approved a three-for-two stock
split of the Company's common stock. The stock split was effective for
shareholders of record on December 13, 1996. The additional shares were
mailed or delivered on December 27, 1996 by the Company's transfer agent,
American Stock Transfer & Trust Company. The table below illustrates the
effect of the stock split at December 31, 1996:
Pre Split Post Split
Par Value $ .35 $.24
Authorized Shares #3,000,000 #4,500,000
Issued Shares #1,504,815 #2,256,933
Treasury Stock Shares # 172,156 # 258,234
Outstanding Shares #1,332,659 #1,998,699
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
applicable
.
Item 5. Other information
Agreement for Sale of Office Complex
On December 26, 1996, the Company announced that it had entered into an
agreement for the sale of its two-building office complex and the lease-
back of one of the buildings, which contains the Company's
headquarters. The complex, located in Fairfax County, Virginia and
known as Halifax Office Park, will retain its name. The purchase price
is $5.25 million; however, the closing which is contingent on the
purchaser satisfactorily completing an engineering and economic study
and obtaining suitable financing, is currently scheduled to take place
prior to March 24, 1997.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits and reports included herein:
(a) Exhibits - Not applicable
(b) Reports on Form 8-K - Form 8-K, Amendment 1 dated November 25,
1996 filed on February 12, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HALIFAX CORPORATION
(Registrant)
Date: February 14, 1997 By:
s/Howard C. Mills
Howard C. Mills
President
Date: February 14, 1997 By:
s/John D. D'Amore
John D. D'Amore
Vice President, Finance &
Accounting
For a menu of Halifax
Corporation news releases available by fax 24 hours
(no charge) or to retrieve a specific release, please
call 1-800-758-5804, ext. 391950, or access the
address http://www.prnewswire.com on the Internet.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> 10Q-DECEMBER-1996
<MULTIPLIER> 1
<CURRENCY> 0
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 1,079,000
<SECURITIES> 0
<RECEIVABLES> 23,061,000
<ALLOWANCES> 0
<INVENTORY> 6,987,000
<CURRENT-ASSETS> 32,287,000
<PP&E> 6,020,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,541,000
<CURRENT-LIABILITIES> 15,290,000
<BONDS> 0
0
0
<COMMON> 542,000
<OTHER-SE> 10,065,000
<TOTAL-LIABILITY-AND-EQUITY> 41,541,000
<SALES> 58,084,000
<TOTAL-REVENUES> 58,084,000
<CGS> 52,396,000
<TOTAL-COSTS> 55,753,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 766,000
<INCOME-PRETAX> 1,565,000
<INCOME-TAX> 618,000
<INCOME-CONTINUING> 947,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 947,000
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
