<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 quarterly period ended September 30, 1999
( ) 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 filed 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 filing 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 be 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 of the latest practicable date. 2,015,206 as of November
12, 1999
HALIFAX CORPORATION
CONTENTS
PART I. FINANCIAL INFORMATION
page
Item 1.Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and March 31, 1999 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 1999
and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Six Months EndedSeptember 30, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risks 14
PART II OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders 14
Item 6.Exhibits and Reports on Form 8-K 14
<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND MARCH 31, 1999
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 0 $ 0
Accounts receivable 18,990,000 26,648,000
Inventory 4,061,000 3,949,000
Prepaid expenses and other current
assets 1,971,000 1,377,000
TOTAL CURRENT ASSETS 25,022,000 31,974,000
PROPERTY AND EQUIPMENT, at cost less
accumulated 2,213,000 2,230,000
depreciation and amortization
OTHER ASSETS AND COST IN EXCESS OF NET
ASSETS ACQUIRED, net of
accumulated amortization 4,330,000 4,531,000
TOTAL ASSETS $ 31,565,000 $ 38,735,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 18,909,000 $ 23,518,000
Current portion of long-term debt &
mortgage note payable 2,775,000 7,720,000
TOTAL CURRENT LIABILITIES 21,684,000 31,238,000
LONG-TERM DEBT AND OTHER LIABILITIES
15,256,000 13,135,000
TOTAL LIABILITIES 36,940,000 44,373,000
STOCKHOLDERS' EQUITY
Common stock 545,000 545,000
Additional paid-in capital 4,413,000 4,413,000
Retained earnings
(10,121,000 (10,384,000)
(5,163,000) (5,426.000)
Less treasury stock at cost
(212,000) (212,000)
TOTAL STOCKHOLDERS' EQUITY
(5,375,000) (5,638,000
TOTAL LIABILITIES AND STOCKHOLDERS' $ 31,565,000 $ 38,735,000
EQUITY
See notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
Restated Restated
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $21,716,000 $17,127,000 $42,686,000 $33,290,000
Operating costs and expenses:
Cost of services 20,064,000 16,445,000 39,444,000 31,964,000
General and administrative
1,132,000 947,000 2,153,000 1,812,000
Total operating costs and
expenses 21,196,000 17,392,000 41,597,000 33,776,000
Operating income (loss) 520,000 (265,000) 1,089,000 (486,000)
Interest expense 373000 272,000 826,000 627,000
Embezzlement Loss
- 1,953,000 - 3,751,000
Income (loss) before income 147,000 (2,490,000) 263,000 (4,864,000)
taxes
Income taxes (benefit) 58,000 (36,000) 104,000 (70,000)
Utilization of net loss
carryforward (58,000) - (104,000) -
Income tax (benefit)
- (36,000) - (70,000)
Net earnings (loss)
$ 147,000 (2,454,000) 263,000 (4,794,000)
Net earnings (loss) per common $ .07 $ (1.16) $ .13 $ (2.38)
share - basic
Net earnings (loss) per common $ .07 $ (1.16) $ .13 $ (2.38)
share - diluted
Weighted average number of
common shares
outstanding - basic 2,013,602 2,013,029 2,013,504 2,011,820
Weighted average number of
common shares
outstanding - diluted 2,013,602 2,013,029 2,013,504 2,011,820
See notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited)
<CAPTION>
Six Months Ended
September 30
Restated
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)
$ 263,000 $ (5,755,000)
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation and amortization 602,000 728,000
Decrease in accounts receivable 7,658,000 1,551,000
(Increase) decrease in inventory (112,000) 491,000
(Increase) in other assets (107,000) (111,000)
(Decrease) increase in accounts payable
and accrued expenses (4,610,000) 101,000
Total adjustments
3,431,000 2,760,000
Net cash provided (used) by operating
activities 3,694,000 (2,995,000)
Cash flows from investing activities:
Acquisition of property and equipment (427,000) (373,000)
Net cash used in investing activities (427,000) (373,000)
Cash flows from financing activities:
Proceeds from borrowing of long-term debt 29,157,000 34,093,000
Retirement of long-term debt (32,432,000) (30,533,000)
Cash dividends paid - (202,000)
Proceeds from sale of stock upon exercise
of stock options 8,000 10,000
Net cash provided (used) by financing
activities (3,267,000) 3,368,000
Net increase in cash - -
Cash at beginning of period
- -
Cash at end of period
$ - $ -
See notes to Condensed Consolidated Financial Statements.
</TABLE>
Halifax Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - 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 six month periods ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 2000. 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, 1999.
Note 2 - Embezzlement Matter and Restatement of Consolidated Financial
Statements
On March 18, 1999, the Company announced that an internal investigation had
revealed an apparent material embezzlement by the former controller of one
of the Company's subsidiaries. The embezzlement occurred at, and was
confined to, the Company's Richmond, VA based Halifax Technology Services
Company ("HTSC"). At the time of the embezzlement, HTSC was a wholly owned
subsidiary of Halifax Corporation, which resulted from a merger of CMSA
(acquired by Halifax on April 1, 1996), and CCI (acquired by Halifax on
November 25, 1996). On April 1, 1999, HTSC was merged into Halifax
Corporation and is now a division of the Company.
The Company believes that a single individual, the former controller of HTSC,
perpetrated the embezzlement. She was immediately terminated, has since been
indicted, has pleaded guilty and been sentenced. Under the terms of an
agreement entered into with the Company, she cooperated with the Company's
recovery efforts.
The embezzlement occurred over a period of nearly four years and aggregated
approximately $15.4 million, of which $15 million was embezzled from the
Company and $400,000 from CMSA before it was acquired by Halifax. To conceal
the embezzlement in the accounting records, the former controller made
fraudulent adjustments totaling more than $21 million. Of the $21 million,
the $15.0 million embezzled was recorded in the Company's statements of
operations and balance sheets after the acquisition, approximately $2.2
million related to amounts reflected in the acquisition date balance sheet,
and approximately $3.8 million related to other overstatements of operating
results during the three year period subsequent to the CMSA acquisition.
Under the terms of an agreement with the Company, the embezzler has
transferred certain assets back to the Company. Some of the recovered
assets have been converted into approximately $1.7 million in cash as of
October 31, 1999. With an estimated $.8 million of assets awaiting
conversion to cash, the Company estimates approximately $2.5 million will
ultimately be recovered from the embezzler. In addition, the full policy
amount of $1 million from each of two separate theft insurance polices, or an
aggregate of $2 million, has been received to date.
Therefore, from these sources, the Company expects a total recovery of $4.5
million (excluding recovery costs) . The Company estimates that, net of
recovery costs, approximately $3.5 million
will be recovered. At March 31, 1999, the Company had received approximately
$670,000 from its recovery efforts and recorded a $2.83 million recovery
receivable to recognize its expectation of receiving the estimated $3.5
million of total net recoveries.
Due to the corresponding overstatement of taxable income reported by the
Company during the period of the embezzlement, the Company will file for a
tax refund of approximately $808,000. The receivable is recorded in "Income
Taxes Receivable" in the consolidated financial statements.
The embezzlement had a material effect on the Company's financial statements
for fiscal years 1999, 1998 and 1997. In addition to the correction for
overstated assets and understated liabilities, the Company recorded an
embezzlement loss of approximately $2,593,000, $6,044,000 and $2,892,000 for
the fiscal years ended March 31, 1999, 1998 and 1997, respectively. The
embezzlement loss recorded in fiscal 1999 is net of the actual and projected
net recoveries aggregating $3,500,000.
In addition to the notification and involvement of the appropriate
authorities, and the intensive and ongoing investigative efforts, the
Company has taken other important steps as a result of the embezzlement. The
Board of Directors appointed a special committee of the Board to focus on the
recovery of assets taken from the Company and minimization of the damages
sustained as a result of the embezzlement.
The employment contract of the HTSC president was not renewed, and he is no
longer employed by the Company. Furthermore, new executives have been hired
to manage the technology services division and to consolidate the Company's
financial and administrative activities. The Company has also transferred
key accounting and cash management functions of HTSC to Company headquarters.
The Company's financial statements for the three and six months ended
September 30, 1998 have been restated to reflect corrections due to the
embezzlement. The effect of the restatement on results of operations for the
three and six months ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, 1998 September 30, 1998
Previously Previously
Statement of Operations: Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenues $ 18,306,000 $17,127,000 $35,570,000 $ 33,290,000
Cost of services 16,731,000 16,445,000 32,054,000 31,964,000
G&A expenses
1,220,000 947,000 2,526,000 1,812,000
Operating income (loss) 355,000 (265,000) 990,000 (486,000)
Other income 48,000 - 48,000 -
Interest expense 320,000 272,000 675,000 627,000
Embezzlement loss
- (1,953,000) - (3,751,000)
Income (loss) before 83,000 (2,490,000) 363,000 (4,864,000)
taxes
Income taxes (benefit)
51,000 (36,000) 180,000 (70,000)
Net income (loss) $ 32,000 $(2,454,000 $ 183,000 $(4,794,000)
)
Net income (loss) per $ .01 $ (1.16) $ .09 $ (2.38)
share-basic
Net income (loss) per $ .01 $ (1.16) $ .09 $ (2.38)
share-diluted
</TABLE>
<PAGE>
Note 3 - Debt
The Company signed a new banking agreement on September 1, 1999 which
refinances the Company's bank debt as presented at March 31, 1999. The new
debt continues to consist of a revolving line of credit ($12,000,000
revised facility) and two term loans ($1,000,000 and $2,500,000 revised
facilities), however the principal reduction and interest rate provisions of
the term loans have been revised. Standard closing and unused balance fees
are included. The revised facilities make $15,500,000 of credit available
to the Company. This agreement expires on October 1, 2000. All assets of
the Company remain as collateral in accordance with the prior agreement.
Financial covenants have been revised to require only prospective
operational performance objectives including minimum quarterly net income of
$100,000 beginning September 30, 1999 and quarterly increases in tangible
net worth of $150,000.
The new agreement prohibits the payment of dividends or distributions as
well as cash payment of principal or interest on Subordinated Debt.
Interest expense on Subordinated Debt is accrued on a current basis. The
Company is presently finalizing an arrangement whereby certain past due
interest payments on Subordinated Debt will be satisfied via the issuance of
an equivalent fair market value amount of the Company's common stock.
In connection with the new banking agreement, the revolving credit agreement
was reduced from a maximum credit line of $14,500,000 to $12,000,000.
Amounts available are determined by applying stated percentages to the
Company's eligible billed and unbilled accounts receivable. Interest now
accrues at LIBOR plus 4.25%.
The Tier III Term Note principal balance was reduced by $125,000 at closing
which reduced the outstanding principal balance on that date to
$1,000,000. Interest is payable monthly on the principal at LIBOR plus
5.55%.
The Tier II Term Note facility remains $2,500,000. The principal balance is
to be reduced by $125,000 on December 15, 1999 and by $500,000 quarterly
beginning March 15, 2000. Any unpaid balance is due September 15, 2000.
Interest is payable monthly on the principal at LIBOR plus 4.65%.
The Company is required to make certain additional term note balance
reductions from the future proceeds of various embezzlement recoveries, tax
refunds and potential asset sales if any. In addition the Company is
required to pay quarterly fees on outstanding term note credit facilities.
Such fees will range from .35% to .45%.
In addition, on September 2, 1999, the Company entered into an agreement
with a major supplier of digital communications switch hardware for the
Company's United States Army contract where approximately $5,500,000 of
outstanding accounts payable arising since March 31, 1999 and currently due
to the supplier will be paid over 18 months with interest at 8.5%.
$506,945 was paid on September 2, 1999 and October 1, 1999, and $299,965
was paid on November 1, 1999 and will be paid on the first day of the next
ensuing 14 months and a final payment of $299,974 is due on February 1,
2001. At September 30, 1999, $1,469,000 of amounts then outstanding are
classified as noncurrent obligations.
<PAGE>
Note 4 - Tax Matters
The Company has a $12.5 million net operating loss carryover virtually all
of which expires in fiscal 2019. At September 30, 1999, the balance sheet
includes an $808,000 income tax receivable which consists of net operating
loss carryback refunds of $682,000 and $126,000 of estimated tax payments
made in fiscal 1999.
Note 5 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
Restated Restated
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ 147,000 $(2,454,000) $ 263,000 $(4,794,000)
Numerator for basic earnings
(loss) per share -
income available to common $ 147,000 $(2,454,000) $ 263,000 $(4,794,000)
stockholders
Numerator for diluted
earnings (loss) per share -
income available to
common stockholders
after assumed $ 147,000 $(2,454,000) $ 263,000 $(4,794,000)
conversions
Denominator:
Denominator for basic
earnings per share -
weighted-average shares 2,013,602 2,013,029 2,013,504 2,011,820
Effect of dilutive securities:
Employee stock options - - - -
Contingent stock- - - - -
acquisition
7% Convertible
Subordinated Debenture - - - -
Dilutive potential common - - - -
shares
Denominator for diluted
earnings per share - adjusted
weighted-average shares
and assumed conversions 2,013,602 2,013,029 2,013,504 2,011,820
Basic earnings (loss) per $ 0.07 $ (1.16) $ 0.13 $ (2.38)
share
Diluted earnings (loss) per $ 0.07 $ (1.16) $ 0.13 $ (2.38)
share
</TABLE>
<PAGE>
Note 6 - Selected Financial Date by Business Seqment
The Company operates in two principal business segments: technology
services and facilities management.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
Restated Restated
Selected Financial Data by 1999 1998 1999 1998
Business Segment
<S> <C> <C> <C> <C>
Net Sales
Technology Services $ 15,344 $ 11,539 $ 30,496 $ 22,976
Facilities Management 6,372 5,588 12,190 10,314
$ 21,716 $ 17,127 $ 42,686 $ 33,290
Operating Income (Loss)
Technology Services $ 154 $ (442) $ 459 $ (740)
Facilities Management 366 177 630 254
$ 520 $ (265) $ 1,089 $ (486)
</TABLE>
Technology Services sales for the quarter ended September 30, 1999 increased
over 1998 as a result of increased levels of business generally. Facilities
Management sales increased due to the HUD contract being fully ramped up in
1999.
Technology Services operating income increased because of the increased
level of sales and improved product mix.
Item 2
Management's Discussion and Analysis
of Financial Conditions and
Results of Operations
Forward-Looking Statements
Certain statements in this Quarterly 10-Q Report constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions in the Company's market area, inflation, continuation of favorable
banking arrangements, the availability of capital to finance planned growth,
ramifications of the embezzlement referenced herein, changes in government
regulations, availability of skilled personnel and competition, which may,
among other things impact on the ability of the Company to implement its
business strategy.
Forward-looking statements are intended to apply only at the time they are
made. Moreover, whether or not stated in connection with a forward-looking
statement, the Company undertakes no obligation to correct or update a
forward-looking statement should the Company later become aware that it is
not likely to be achieved. If the Company were to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. (Tabular information: dollars in
thousands, except per share amounts).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
Restated Restate
Results of Operations 1999 1998 Change 1999 d Change
1998
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 21,716 $ 17,127 27% $42,686 $33,290 28%
Cost of services 20,064 16,445 22% 39,444 31,964 23%
Percent of revenues 92% 96% 92% 96%
General& Administrative 1,132 947 20% 2,153 1,812 19%
Percent of revenues 5% 6% 5% 5%
Operating cost and 21,196 17,492 21% 41,597 33,776 23%
expenses:
Percent of revenues 98% 102% 97% 101%
Operating (loss) 520 (265) -296% 1,089 (486) -324%
income
Percent of revenues 2% -2% 3% -1%
Interest expense 375 272 38% 826 627 32%
Embezzlement loss - 1,953 - 3,751
Income tax (benefit) - (36) - (70)
Net income (loss) $ 147 $(2,454) 263 (4,794)
Net income (loss) per $ 0.07 $ (1.16) $ 0.13 $(2.38)
share - basic
Net income (loss) per $ 0.07 $ (1.16) $ 0.13 $(2.38)
share - diluted
</TABLE>
Revenues
Revenues for the three months and the six months ended September 30,
1999 increased 27% and 28%, respectively, over the comparable periods
in 1998 principally as a result of increased levels of information
technology services business.
Operating Costs and Expenses
Operating costs and expenses for the three months and the six months
ended September 30, 1999 increased 21% and 23 %, respectively, over
the comparable periods in 1998 primarily as a result of the increase in
revenues.
<PAGE>
Operating Income (Loss)
The increased level of revenue and an improved product mix of higher
margin services resulted in operating income for the three and six
months ended September 30, 1999 of $520,000 and $1,089,000,
respectively as compared to operating losses for the three and six
months ended September 30, 1998 amounting to $(265,000) and $(486,000),
respectively.
Interest Expense
Interest expense for the three months and the six months ended
September 30, 1999 increased 38% and 32%, respectively, over the
comparable periods in 1998 principally due to increases in effective
interest rates and higher amounts of outstanding borrowings.
Embezzlement Loss
Embezzlement losses reflect the cash amounts embezzled from the
Company. Embezzlement losses for the three months and the six months
ended September 30, 1998 were $1,953,000 and $3,751,000 respectively.
There were no embezzlement losses for the three and six months ended
September 30, 1999. For additional discussion see Note 2 of the
condensed consolidated financial statements.
Income Taxes
The Company did not incur income tax expense for the three and six
month periods ended September 30, 1999 because of the utilization of
available net operating loss carryforwards. For the three months and
the six months ended September 30, 1998 the Company recorded income tax
benefits amounting to $(36,000) and $(70,000), respectively.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of $3,338,000
and its current ratio was 1.15. The Company is actively engaged in
embezzlement recovery activities which involve significant legal and
other costs and expenses. The Company has recorded provisions for
certain recovery costs and believes that such provisions are adequate
to cover anticipated expenditures through January 2000.
Additional cash demands arise from the Company's debt service which
include approximately $300,000 per month to a major supplier (as
described in footnote 3) and above prime interest costs and fees
related to the Company's bank debt.
The Company is presently experiencing difficulty maintaining current
terms status with certain vendors and has undertaken action to mitigate
such circumstances. Should the Company be unable to satisfy such
vendors in a timely fashion, ongoing operations could be severely
jeopardized.
As previously announced, the Company is seeking to recover losses
sustained by the embezzlement and has recently initiated a broad range
of recovery activities involving actions against various parties.
However, there can be no assurances that the Company's actions will be
successful, or if they are successful, of the extent or timing of any
related recoveries.
The Company has announced the engagement of an investment banking firm
to serve as financial advisor for the purposes of identifying and
facilitating initiatives designed to maximize shareholder value.
The Company believes that actions currently underway, in conjunction
with funds generated from operations, bank borrowings, embezzlement
recoveries, tax refunds and certain investing activities will be
sufficient to meet cash flow requirements through the current quarter,
although there can be no assurances that the aforementioned sources of
funding can be realized.
However, the Company believes that subsequent equity or debt
financings, or material near-term cash inflows from our embezzlement
recovery activities will be necessary to continue to fund operations,
recovery activities and implement the Company's current business
strategy.
Year 2000 Readiness
State of Readiness: During fiscal 1999 the Company undertook a formal Year
2000 readiness project assessment of all information technology assets to
ensure the readiness of all applications, operating systems and hardware on
its PC desktop suites and LAN and WAN server and communications platforms;
the readiness of voice and data network software and hardware; to address
issues related to non-IT systems in buildings, facilities and equipment
which may contain date logic in embedded chips; and to address the readiness
of key vendors and other third parties.
The phases of the Project are : (i) inventorying Year 2000 items and
assigning priorities, (ii) assessing the Year 2000 readiness of items, (iii)
remediating or replacing items that are determined not to be Year 2000
ready; (iv) testing items for year 2000 readiness, and (v) designing and
implementing Year 2000 contingency and business continuity plans. To
determine that all IT systems (whether internally developed or purchased)
are Year 2000 ready, each system is tested using a standard testing
methodology which includes unit testing, baseline testing, and future date
testing. Future date testing includes critical dates near the end of 1999
and into the year 2000, including leap year testing.
The inventory and assessment phases of the Project were completed in mid
fiscal 1999. At March 31, 1999, all of the Company's application systems
had been remediated and current date tested. Essentially all critical
hardware and software was ready and tested by March 31, 1999. The remaining
items will be resolved, tested and remediated by November 1999.
The Company is addressing non-information technology systems readiness
through direct contact with our critical supplier chain to validate Year
2000 readiness. As part of the Project, significant service and information
providers, external vendors, suppliers, and other third parties (including
telecommunication, electrical, security, and HVAC systems), that are
believed to be critical to business operations after January 1, 2000, have
been identified and contacted. Procedures are being undertaken in an
attempt to reasonably ascertain their state of Year 2000 readiness through
questionnaires, compliance letters, interviews, on-site visits, and other
available means. The Company paid particular attention to suppliers and
shippers of the product comprising its hardware inventory.
Cost: The estimated total cost of the Year 2000 Project is approximately
$90,000, including $30,000 of internal labor costs devoted to the project.
Costs incurred to date are approximately $85,000, with the remainder of the
estimated total to be incurred during the third quarter of FY 2000.
Risk: The Company believes that its Year 2000 readiness program will
prepare the Company for Year 2000 in a timely manner. There can be no
assurance, however, that the Company's internal systems or equipment or
those external parties on which the Company relies will be Year 2000 ready
in a timely manner or that the Company's or external parties contingency
plans will mitigate the effects of any nonreadiness. Given the current
status of the Company's year 2000 Project, management believes that the most
probable worst case scenario could result in short term business
interruptions. However, failure by the Company and/or external parties to
complete year 2000 readiness work in a timely manner could have a materially
adverse effect on the Company's financial position and its results of
operations.
Contingency Plans: The Company is developing a Year 2000 Contingency Plan
designed to address problems arising from Year 2000 failures of critical
third parties and will be directed towards providing alternate sources of
supply to the Company.
The Company expects to complete its contingency planning phase for Year 2000
by December 1, 1999.
Item 3.
Quantitative and Qualitative
Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates.
Adverse changes in interest rates can have a material effect on the
Company's operations.
At September 30, 1999, the Company had $15,449,00 of debt outstanding of
which $5,469,000 bears fixed interest rates. If the interest rates charged
to the Company on its variable rate debt were to increase significantly,
the effect could be materially adverse to future operations.
The Company conducts a limited amount of business overseas, principally in
Western Europe. At present all transactions are billed and denominated in
U.S. dollars and consequently, the Company does not currently have any
material exposure to foreign exchange rate fluctuation risk.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Not applicable
(b)Reports on Form 8-K - Changes in Registrant's
Certifying Accountant, dated October 26, 1999
<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: November 15, 1999 By: s/John J. Reis
John J. Reis
President
Date: November 15, 1999 By: s/Charles L. McNew
Charles L. McNew
Executive V. P. & CFO
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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