HALIFAX CORPORATION
FORM 10-Q
DECEMBER 31, 1997
<PAGE>
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, 1997
(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 2,010,485 as of
January 31, 1998.
HALIFAX CORPORATION
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements page
Condensed Consolidated Balance Sheets - December 31, 1997
(Unaudited) and March 31, 1997 3
Condensed Consolidated Statements of Earnings - Three and
Nine Months Ended December 31, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statements of Stockholders'
Equity - Nine Months Ended December 31, 1997 and 1996
(Unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1997 and 1996 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
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 11
Item 1. FINANCIAL STATEMENTS
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1997
<CAPTION>
December 31, MARCH 31,
1997 1997*
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,141,000 $ 268,000
Accounts receivable 19,436,000 22,013,000
Inventory 7,419,000 6,860,000
Prepaid expenses and other
current assets 1,947,000 2,002,000
TOTAL CURRENT ASSETS 29,943,000 31,143,000
PROPERTY AND EQUIPMENT, at cost less
accumulated 3,687,000 6,624,000
depreciation and amortization
OTHER ASSETS AND COST IN EXCESS OF
NET ASSETS
ACQUIRED, net of accumulated 3,261,000 3,233,000
amortization
TOTAL ASSETS $36,891,000 $ 41,000,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued $ 9,900,000 $ 12,450,000
expenses
Current portion of long-term debt
& mortgage note payable 1,007,000 1,206,000
TOTAL CURRENT LIABILITIES 10,907,000 13,656,000
LONG-TERM DEBT AND OTHER LIABILITIES
15,558,000 16,821,000
TOTAL LIABILITIES 26,465,000 30,477,000
STOCKHOLDERS' EQUITY
Common stock 544,000 542,000
Additional paid-in capital 4,400,000 4,358,000
Retained earnings
5,694,000 5,836,000
10,638,000 10,736,000
Less treasury stock at cost
212,000 213,000
TOTAL STOCKHOLDERS' EQUITY
10,426,000 10,523,000
TOTAL LIABILITIES AND STOCKHOLDERS' $ 36,891,000 $ 41,000,000
EQUITY
</TABLE>
*Condensed from March 31, 1997 Audited Financial Statements. See Form
10-K filed June 30, 1997.
See notes to condensed consolidated financial statements.
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<CAPTION>
Three Months Nine Months Ended
Ended December 31,
December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $18,232,000 $21,913,000 $54,940,000 $58,084,000
Operating costs and
expenses:
Cost of services 16,246,000 20,109,000 49,970,000 52,396,000
Disposal of Inventory 600,000 - 600,000 -
Selling, general and 1,325,000 936,000 3,689,000 3,357,000
administrative expenses
Total operating costs and 18,171,000 21,045,000 54,259,000 55,753,000
expenses
Operating income 61,000 868,000 681,000 2,331,000
Other Income 776,000 - 776,000 -
Interest expense 385,000 274,000 1,193,000 766,000
Income before income taxes 452,000 594,000 264,000 1,565,000
Income taxes 178,000 235,000 104,000 618,000
Net earnings $ 274,000 $359,000 $160,000 $947,000
Net earnings per common $ 0.14 $ 0.18 $ 0.08 $ 0.48
share - basic
Net earnings per common $ 0.13 $ 0.17 $ 0.08 $ 0.47
share - diluted
Weighted average number of
common shares
outstanding - basic 2,009,675 1,997,021 2,005,334 1,981,073
Weighted average number of
common shares
outstanding - diluted 2,069,369 2,058,664 2,048,886 2,020,151
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (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, 2,258,866 $ 542,000 $ 4,358,000 $ 5,836,000 258,234 $ (213,000) $ 10,523,000
1997
Net Income
- - - 160,000 - - 160,000
Cash - - - (302,000) - - (302,000)
Dividends
Exercise
of 8,303 2,000 42,000 - - - 44,000
Stock
Options
Issuance
of - - - - (1,550) 1,000 1,000
Treasury
Stock
Balance
December 2,267,169 $ 544,000 $ 4,400,000 $ 5,694,000 256,684 $ (212,000) $ 10,426,000
31, 1997
Balance
April 1, 2,220,022 $518,000 $ 3,401,000 $ 5,253,000 467,679 $ (388,000) $ 8,784,000
1996
Net Income - - - 947,000 - - 947,000
Cash
Dividends - - - (272,000) - - (272,000)
Stock
Options 36,911 8,000 162,000 - - - 170,000
HTSC - - 803,000 - (209,445) 175,000 978,000
Acquisitio
n
Balance
December 2,256,933 $ 526,000 $ 4,366,000 $ 5,928,000 258,234 $ (213,000) $ 10,607,000
31, 1996
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
<CAPTION>
Nine Months Ended
December 31,
1997 1996
<S> <C> <C>
Cash flows from operating
activities:
Net earnings $ 160,000 $ 947,000
Adjustments to reconcile net income
to net
cash provided (used) by operating
activities:
Depreciation and amortization 983,000 772,000
Loss (gain) on disposal of (776,000) 142,000
property, plant & equipment
Decrease (increase) in accounts 2,577,000 (7,688,000)
receivable
Decrease (increase) in inventory (559,000) (1,611,000)
Decrease (increase) in other (232,000) (785,000)
assets
(Decrease) increase in accounts
payable
and accrued expenses (2,507,000) 398,000
Total adjustments
(514,000) (8,772,000)
Net cash provided by (used in)
operating activities (354,000) (7,825,000)
Cash flows from investing
activities:
Proceeds from sale of 4,855,000 -
property and equipment
Acquisition of property and
equipment net of purchased (1,202,000) (888,000)
operations
Net cash provided by (used in)
investing activities 3,653,000 (888,000)
Cash flows from financing
activities:
Proceeds from borrowing of long- 26,329,000 30,652,000
term debt
Retirement of long-term debt (28,497,000) (23,609,000)
Issuance of treasury stock - 108,000
Cash dividends paid (302,000) (272,000)
Proceeds from sale of stock upon
exercise of stock options 44,000 170,000
Net cash provided by (used in)
financing activities (2,426,000) 7,049,000
Net (decrease) increase in cash 873,000 (1,664,000)
Cash beginning of period
268,000 2,743,000
Cash end of period $ 1,141,000 $ 1,079,000
</TABLE>
See notes to condensed consolidated financial statements.<PAGE>
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, 1997 are not necessarily indicative of the results
that may be expected for the year ending March 31, 1998. 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, 1997.
Note B - 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
shareholders who held promissory notes of CMS in the amount of
$450,000 converted said debt to equity in CMS. In addition to
the initial issuance of 209,445 shares of Halifax stock to CMS
shareholders which was based on the net equity value of CMS,
Halifax stock will be awarded annually for three (3) years
subsequent of the merger to the CMS shareholders on a pro-rate
basis, excluding Halifax stock issued as a result of the
conversion of debt to equity, having a value equal to one-third of
the net after tax income of CMSA operating as a wholly-owned
subsidiary of Halifax. 1,550 common shares were issued from
Treasury Stock for fiscal year 1997 in recognition of this earn-
out provision.
The assets acquired 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 the transaction.
In April 1997, CMSA was renamed to Halifax Technology Services
Company ("HTSC")
On November 25, 1996 through its wholly-owned subsidiary, HTSC, the
Company 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 HTSC.
Note C - Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended December 31,
December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Numerator:
Net earnings $274,000 $359,000 $160,000 $947,000
Numerator for basic
earnings per share -
income available to $274,000 $359,000 $160,000 $947,000
common stockholders
Numerator for diluted
earnings per share -
income available to
common stockholders
after assumed $274,000 $359,000 $160,000 $947,000
conversions
Denominator:
Denominator for basic
earnings per share -
weighted-average 2,009,675 1,997,021 2,005,334 1,981,073
shares
Effect of dilutive
securities:
Employee stock 53,550 54,215 41,504 33,555
options
Contingent stock- 6,144 7,428 2,048 5,523
acquisition
Dilutive potential
common shares
Denominator for
diluted earnings per
share - adjusted
weighted-average
shares and assumed 2,069,369 2,058,664 2,048,886 2,020,151
conversions
Basic earnings per share $0.14 $ 0.18 $ 0.08 $0.48
Diluted earnings per share $0.13 $ 0.17 $ 0.08 $0.47
</TABLE>
Note D - Contingent Matters
The Company is a co-defendant or is a defendant in various lawsuits
wherein any potential liability is fully insured against. The Company
provides for cost 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 position or results of
operations 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.
Part 1, Item 2.
Management's' Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
In addition to normal operating income, the Company is reporting two
separate events occurring during the quarter ended December 31, 1997
which affected income. The sale of its office complex in Alexandria,
Virginia for $5,250,000 resulted in other income of $1,490,000 of which
$714,000 will be amortized over the 12 year lease-back of its
headquarters building. Under FASB 121, the Company also evaluated the
carrying value of its assets based on certain operational changes
resulting in an inventory disposal program where value for unused but
useful items will be realized. This program resulted in additional
operating expense charges of $600,000 in the quarter.
Revenues for the third quarter and nine months ended December 31, 1997
of $18,232,000 and $54,940,000 represent decreases of $3,681,000 or
17% and $3,144,000 or 5% respectively over those in the comparable
periods ended December 31, 1996. The decreases are due to phase-down
of the LTLCS Digital Switch Support contract since the beginning of the
fiscal year and delays in revenue generation by the new LTLCS contract
awarded in November, 1997.
Total operating costs and expenses as a percentage of revenues were 99%
and 96% for the third quarter and 99% and 96% for the nine months of FY
1998 and FY 1997, respectively. Included in cost of services in the
current quarter of FY 1998 is the $600,000 additional operating expense
for the inventory disposal program. Without this charge, the ratio to
revenues would have been 96% and 95% in the current quarter and year-to-
date periods for FY 1998.
Interest expense for the third quarter and nine months increased
between fiscal years from 1.3% for both periods in FY 1997 to 2.1% and
2.2% in FY 1998 due to increased borrowing to fund losses experienced
earlier in the fiscal year and increasing product sales including the
acquired operations of CCI which operates as a division of HTSC.
Net income for the third quarter was $274,000 compared with $359,000
for the same quarter of the prior year. For the nine months ended
December 31, 1997, net income was $160,000 compared with $947,000 for
the prior year. Income for the nine-months was off largely due to
first-half losses in the Computer Maintenance Division which has now
recovered and is operating profitably. Fourth quarter income will be
influenced by the current revenue level which is not likely to increase
before the new fiscal year. The combination of the $776,000 gain
recognized in the quarter on the sale of the office-complex and the
$600,000 additional operating expense for the inventory disposal
program contributed $176,000 of income to the FY 1998 balances.
Financial Condition
The financial condition of the Company remains solid with working
capital of $19,036,000 and a current ratio of 2.75:1.0.
Liquidity and Sources of Capital
Net cash used by operating activities during the nine months ended
December 31, 1998 was $354,000 compared with $1,151,000 for the first
six months of this fiscal year. The net proceeds from the office-
complex sale were used to retire mortgage debt of $2,454,000 and
paydown operating lines-of-credit.
As of December 31, 1997, the permanent commitment on the Company's
operating line-of-credit was $12.8 million. A temporary $1.2 million
addition to the line-of-credit was in place effective through February
28, 1998. Approximately $12.2 million was outstanding as of December
31, 1997. 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.
On January 27, 1998 in a private placement without public
registration, the Company issued a $2,000,000 principal amount 7%
Convertible Subordinated Debenture due January 2003. The Debenture is
convertible to common stock at $11.72 per share. On January 27, 1998,
the closing price of the Company's Common stock on the American Stock
Exchange was $9.375 per share. <PAGE>
Part II. Other information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities
On December 11, 1997, the Company filed SEC Form S-8 to register
280,000 shares of the Company's common stock pursuant to the Company's
1994 Key Employee Stock Option Plan and the Non-Employee Directors
Stock Option Plan.
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
On November 6, 1997 the, Company concluded the sale of its twin-
building office complex and the lease-back of the Company's
headquarters building. The purchase price was $5.25 million. The sale
resulted in other income of $1,490,000 of which $714,000 will be
amortized over the 12 year lease-back of the headquarters building.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Not applicable
(b) Reports on Form 8-K - None.
<PAGE>
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, 1998 By: s/Howard C. Mills
Howard C. Mills
President
Date: February 14, 1998 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-1997
<MULTIPLIER> 1
<CURRENCY> 0
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 1,141,000
<SECURITIES> 0
<RECEIVABLES> 19,436,000
<ALLOWANCES> 0
<INVENTORY> 7,419,000
<CURRENT-ASSETS> 29,943,000
<PP&E> 3,687,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,891,000
<CURRENT-LIABILITIES> 10,907,000
<BONDS> 0
0
0
<COMMON> 544,000
<OTHER-SE> 9,882,000
<TOTAL-LIABILITY-AND-EQUITY> 36,891,000
<SALES> 54,940,000
<TOTAL-REVENUES> 54,940,000
<CGS> 49,970,000
<TOTAL-COSTS> 54,259,000
<OTHER-EXPENSES> (776,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,193,000
<INCOME-PRETAX> 264,000
<INCOME-TAX> 104,000
<INCOME-CONTINUING> 160,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
