HALIFAX CORPORATION
FORM 10-Q
DECEMBER 31, 1999
<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 December 31, 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. 2,050,686 as of February 11,
2000.
HALIFAX CORPORATION
CONTENTS
PART I. FINANCIAL INFORMATION
page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999
(Unaudited) and March 31, 1999 3
Condensed Consolidated Statements of Operations - Three and
Nine Months Ended December 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended December 31, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition andResults 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 none
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 1999
<CAPTION>
December 31, March 31,
1999 1999
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,267,000 $ -
Accounts receivable 16,691,000 26,648,000
Inventory 3,618,000 3,949,000
Income taxes receivable
808,000 808,000
Prepaid expenses
1,209,000 569,000
TOTAL CURRENT ASSETS
25,593,000 31,974,000
PLANT PROPERTY AND EQUIPMENT (net of
accumulated depreciation) 2,105,000 2,230,000
GOODWILL (net of amortization) 4,072,000 4,395,000
OTHER ASSETS 850,000 136,000
TOTAL ASSETS $32,620,000 $38,735,000
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable 6,023,000 11,586,000
Current portion long-term debt 3,946,000 7,720,000
Accrued expenses 10,866,000 10,672,000
TOTALCURRENT LIABILITIES 20,835,000 29,978,000
LONG TERM-DEBT 12,115,000 13,135,000
DEFERRED REVENUE 1,980,000 1,260,000
TOTAL LIABILITIES 34,930,000 44,373,000
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 557,000 545,000
Additional paid-in capital 4,641,000 4,413,000
Retained deficit (7,296,000) (10,384,000)
Treasury Stock (212,000) (212,000)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,310,000) (5,638,000)
$32,620,000 $38,735,000
See notes to Condensed Consolidated
Financial Statements.
</TABLE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
Restated Restated
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $19,819,000 $23,476,000 $62,505,000 $56,766,000
Operating costs and
expenses:
Cost of services 18,499,000 22,540,000 57,954,000 54,504,000
General and
administrative 576,000 987,000 2,715,000 2,799,000
Operating income (loss) 744,000 (51,000) 1,836,000 (537,000)
Interest expense (427,000) (391,000) (1,253,000) (1,018,000)
Other income 13,000 - 10,000 -
Embezzlement recovery
(loss) 2,500,000 (1,444,000) 2,500,000 (5,195,000)
Income (loss) before
income taxes 2,830,000 (1,886,000) 3,093,000 (6,750,000)
Income taxes (benefit) 5,000 (30,000) 5,000 (100,000)
Net earnings (loss) $2,825,000 $1,856,000) $3,088,000 $(6,650,000)
Net earning (loss) per
common share-basic $ 1.39 $ (0.92) $ 1.51 $ (3.30)
Net earnings (loss) per
common share - diluted $ 1.39 $ (0.92) $ 1.51 $ (3.30)
Weighted average number
of common shares
outstanding - basic 2,032,946 2,009,675 2,032,946 2,012,351
Weighted average number
of common shares
outstanding - diluted 2,035,813 2,009,675 2,044,830 2,012,351
See notes to Condensed
Consolidated Financial
Statements.
</TABLE>
<PAGE>
<TABLE>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited)
<CAPTION>
Nine Months
Ended December 31
Restated
1999 1998
<S> <C> <C>
Cash flows from operating
activities:
Net earnings (loss) $3,088,000 $ (6,650,000)
Adjustments to reconcile net
earnings (loss) to net
cash provided (used) by operating
activities:
Depreciation and amortization 972,000 960,000
Decrease (increase) in accounts
receivable 9,957,000 (3,951,000)
Decrease in other assets -
1,282,000
Decrease in inventory 331,000 1,757,000
Increase in prepaids 640,000) (252,000)
Increase in income tax receivable - (164,000)
(Increase) decrease in other (714,000) 51,000
Decrease in accounts payable (5,563,000) (4,577,000)
Increase in accrued expense 194,000 7,533,000
Increase in deferred revenue 720,000 518,000
Total adjustments 5,257,000 3,157,000
Net cash provided (used) by
operating activities 8,345,000 (3,493,000)
Cash flows from investing
activities:
Purchase of plant, property and
equipment (516,000) (389,000)
Net cash used in investing
activities (516,000) (389,000)
Cash flows from financing
activities:
Proceeds from borrowing long-term 48,601,000 43,447,000
Retirement of long-term debt (53,395,000) (39,278,000)
Cash dividends paid - (302,000)
Issuance of common stock and
exercise of stock options 232,000 15,000
Net cash (used in) provided by
financing activities (4,562,000) 3,882,000
Net increase in cash 3,267,000 -
Cash beginning of period
- -
Cash at end of period $ 3,267,000 $ -
See notes to Condensed Consolidated
Financial Statements.
</TABLE>
<PAGE>
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
nine month periods ended December 31, 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 notes
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 has been sentenced and incarcerated.
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 $2.2 million in cash as of December 31, 1999.
With an estimated $.3 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.
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 December 31, 1999 and
March 31, 1999, the Company had received approximately $3,100,000 and $670,000,
respectively, from its recovery efforts and recorded a recovery receivable of
$400,000 and $2.83 million , respectively.
Due to the corresponding overstatement of taxable income reported by the
Company during the period of the embezzlement, the Company has filed for a tax
refund of approximately $808,000. The receivable is recorded in "Income taxes
receivable" in the accompanying condensed consolidated balance sheets.
Approximately $650,000 of the refund was received in January 2000.
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.
In December 1999, the Company received an additional $2,500,000 in conjunction
with its embezzlement recovery activities. The specific terms and conditions
associated with the payment, including the identity of the party are subjects
of a confidentiality agreement that precludes disclosure.
The Company's financial statements for the three and nine months ended December
31, 1998 have been restated to reflect corrections due to the embezzlement.
The effect of the restatement on results of operations for the three and nine
months ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1998 December 31, 1998
($000's
omitted)
Previously Previously
Statement of Reported Restated Reported Restated
Operations:
<S> <C> <C> <C> <C>
Revenues $ 23,016 $23,476 $ 58,586 $ 56,766
Cost of services 20,426 22,540 52,480 54,504
General and
Acministrative 1,379 987 3,905 2,799
expenses
Operating income 1,211 (51) 2,201 (537)
(loss)
Interest expense 391 391 1,018 1,018
Embezzlement loss - 1,444 -
5,195
Income (loss)
before taxes 820 (1,886) 1,183 (6,750)
Income taxes 343 (30) 523
(benefit) (100)
Net earnings $ 477 $(1,856) $ 660 $(6,650)
(loss)
Net earnings
(loss) per share- $ 0.24 $ (0.92) $0.33 $ (3.30)
basic
Net earnings
(loss) per share- $ 0.23 $ (0.92) $0.32 $ (3.30)
diluted
</TABLE>
Note 3 - Debt
The Company signed a new banking agreement on September 1, 1999 which
refinanced 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, as modified, expires on January 2, 2001. All assets of the Company
remain as collateral in accordance with the prior agreement. Financial
covenants require 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 has
entered into an arrangement whereby certain past due interest payments on
Subordinated Debt were 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 2.25%.
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 3.55%.
The Tier II Term Note facility remains $2,500,000. The principal balance was
reduced by $125,000 in December 1999 and will continue to be reduced by
$125,000 quarterly beginning March 15, 2000. Interest is payable monthly on
the principal at LIBOR plus 2.65%.
The Company is required to make certain additional term note balance reductions
from the future proceeds of certain asset sales.
In addition, on September 2, 1999, the Company entered into an agreement with
a major supplier whereby 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, and December 1,
1999 and will be paid on the first day of the next ensuing 13 months; a final
payment of $299,974 is due on February 1, 2001. At December 31, 1999, $575,000
of amounts then outstanding are classified as noncurrent obligations.
Note 4 - Tax Matters
At December 31, 1999, the Company has a $9.4 million net operating loss
carryforward virtually all of which expires in fiscal 2019. At December 31,
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 Nine Months Ended
Months
Ended
December 31, December 31,
Restated Restated
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $2,825,000 (1,856,000) $3,088,000 $(6,650,000)
Numerator for basic
earnings (loss) per share -
income available to common $2,825,000 $(1,856,000) $3,088,000 $6,650,000)
stockholders
Numerator for diluted
earnings (loss) per share -
income available to common
stockholders
after assumed conversions $2,825,000 $(1,856,000) $3,088,000 $(6,650,000)
Denominator:
Denominator for basic
earnings per share -
eighted-average shares 2,032,946 2,009,675 2,032,946 2,012,351
Effect of dilutive
securities:
Employee stock options $ 2,867 $ - $ 11,884 $ -
Denominator for diluted
earnings per
share - adjusted weighted-
average
shares and assumed
conversions 2,035,813 2,009,675 2,044,830 2,012,351
Basic earnings (loss) per
share $ 1.39 $ (0.92) $ 1.51 $ (3.30)
Diluted earnings (loss) per
share $ 1.39 $ (0.92) $ 1.51 $ (3.30)
</TABLE>
<PAGE>
Note 6 - Selected Financial Date by Business Segment
The Company operates in two principal business segments: technology services
and operational outsourcing (formerly identified as facilities management).
<TABLE>
<CAPTION>
(000's Omitted) Three Months Ended Nine Months Ended
December 31 December 31
Restated Restated
Selected Financial Data by 1999 1998 1999 1998
Business Segment
<S> <C> <C> <C> <C>
Revenues
Technology Services $ 12,617 $ 17,645 $ 43,113 $ 40,621
Operational Outsourcing 7,202 5,831 19,392 16,145
$ 19,819 $ 23,476 $ 62,505 $ 56,766
Operating Income (Loss)
Technology Services $ 203 $ (340) $ 665 $(1,080)
Operational Outsourcing 541 289 1,171 543
$ 744 $ (51) $ 1,836 $ (537)
</TABLE>
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 Nine Months Ended
December 31 December 31
Restated Restated
Results of Operations 1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Revenues $19,819 $23,476 -16% $62,505 $56,766 10%
Cost of services 18,499 22,540 -18% 57,954 54,504 6%
Percent of revenues 93% 96% 93% 96%
General and
Administrative 576 987 -42% 2,715 2,799 -3%
Percent of revenues 3% 4% 4% 5%
Operating cost and
expenses: 19,075 23,527 -19% 60,669 57,303 6%
Percent of revenues 96% 100% 97% 101%
Operating (loss)
income 744 (51) - 1,836 (537) -
Percent of revenues 4% 0% 3% -1%
Interest expense 427 391 9% 1,253 1,018 23%
Embezzlement
(recovery) loss (2,500) 1,444 - (2,500) 5,195 -
Income tax (benefit) 5 (30) - 5 (100) -
Net earnings (loss) $ 2,825 $(1,856) - $ 3,088 $(6,650) -
Net earnings (loss)
per share - basic $ 1.39 $ (0.92) $ 1.51 $ (3.30)
Net earnings (loss)
per share - diluted $ 1.39 $ (0.92) $ 1.51 $ (3.30)
</TABLE>
Revenues
Revenues for the three months ended December 31, 1999, decreased 16% as
compared to the comparable period in 1998 principally due to decreases in
the sales of switching products to the U.S. Government.
Revenues for the nine months ended December 31, 1999, increased 10% over
the comparable period in 1998 principally as a result of increased levels
of information technology services business.
Operating Costs and Expenses
Operating costs and expense for the three months ended December 31, 1999,
decreased 19% as compared to the same period in 1998 principally due to
the decline in revenues, and a nonrecurring reduction in general and
administration expense related to certain payments received in December
1999.
For the nine months ended December 31, 1999, operating costs and expenses
increased 6% over the comparable period in 1998 primarily as a result of
the increase in revenues, this was partially offset by the nonrecurring
reduction in general and administration expense related to certain
payments received in December 1999.
Operating Income (Loss)
An improved product mix of higher margin services resulted in operating
income for the three and nine months ended December 31, 1999 of $744,000
and $1,836,000, respectively as compared to operating losses for three and
nine months ended December 31, 1998 amounting to $(51,000) and $(537,000),
respectively.
Interest Expense
Interest expense for the three months and the nine months ended December
31, 1999, increased 9% and 23%, respectively, over the comparable periods
in 1998 principally due to increases in effective interest rates and
higher borrowings outstanding.
Embezzlement Loss (Recovery)
The embezzlement recovery of $2,500,000 recognized for the three months
and the nine months ended December 31, 1999 is the result of a cash
payment received in December 1999 in conjunction with the Company's
ongoing embezzlement recovery activities. There were no embezzlement
recoveries for the three and nine months ended December 31, 1998.
Embezzlement losses reflect the cash amounts embezzled from the Company.
Embezzlement losses for the three months and the nine months ended
December 31, 1998 were $1,444,000 and $5,195,000, respectively. There
were no embezzlement losses for the three and nine months ended December
31, 1999. For additional discussion see Note 2 of the condensed financial
statements.
Income Taxes
The Company recorded no federal tax obligation and only minimal state tax
expense for the three and nine months ended December 31, 1999 because it
reduced the valuation allowance against the deferred tax asset. This
results from the Company now believing it will be able to utilize the
available net operating loss carryforwards. For the three and nine months
ended December 31, 1998 the Company recorded income tax benefits amounting
to $(30,000) and $(100,000), respectively.
Net Earnings (Loss)
Net earnings for the three and nine months ended December 31, 1999, was
$2,825,000 and $3,088,000, respectively, primarily due to the generation
of operating profit and the embezzlement recovery.
For the three and nine months ended December 31, 1998, the Company
incurred net losses of $(1,856,000) and $(6,650,000) principally as a
result of operating losses and embezzlement losses.
Liquidity and Capital Resources
At December 31, 1999, the Company had working capital of $4,758,000 and
its current ratio was 1.23. 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 March 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 note 3 of the consolidated condensed financial statements) and interest
expense related to the Company's bank debt.
In the recent past, the Company has experienced 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 initiated a broad range of recovery
actions against various parties. In December 1999, the Company received
cash payments of $3,500,000. Of this amount $2,500,000 was related to
embezzlement recoveries. However, there can be no assurances that the
Company's future recovery actions will be successful, or if successful,
the extent or timing of any additional related recoveries.
The Company previously 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 March 31, 2000 the current quarter,
although there can be no assurances that the aforementioned sources of
funding will all be realized.
However, the Company believes that additional equity or debt financing, 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 were : (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) were Year 2000 ready, each system
was tested using a standard testing methodology which included unit testing,
baseline testing, and future date 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 were
resolved, tested and remediated prior to December 31, 1999.
The Company addressed 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, were identified
and contacted. Procedures were 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 was approximately
$90,000, including $30,000 of internal labor costs devoted to the project.
Risk: The Company believes that its Year 2000 readiness program prepared the
Company for Year 2000 in a timely manner. 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.
Contingency Plans: The Company developed a Year 2000 Contingency Plan designed
to address problems arising from Year 2000 failures of critical third parties.
The plan is directed towards providing alternate sources of supply to the
Company.
As of February 2000, there have been no major problems or failures arising from
Year 2000 issues.
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 December 31, 1999, the Company had $16,061,000 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 - Item 5. Embezzlement Recoveries
dated January 4, 2000.
<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, 2000 By: s/John J.Reis
John J. Reis
President
Date: February 14, 2000 By: s/Charles L. McNew
Charles L. McNew
Executive V. P. & CFO
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