5
HALIFAX CORPORATION
FORM 10-Q
SEPTEMBER 30, 2000
<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, 2000
( ) 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 0-12712 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.
( )Yes (X )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. 2,023,436 as of
September 30, 2000.
HALIFAX CORPORATION
CONTENTS
PART I. FINANCIAL INFORMATION
page
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000
(Unaudited) and March 31, 2000 4
Consolidated Statements of Operations - Six Months Ended
September 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows - Six Months Ended
September 30, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K 17
<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND
MARCH 31, 2000
<CAPTION>
September March 31,
30, 2000 2000
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,277,000 $ 1,800,000
Restricted cash - 650,000
Trade accounts receivable 12,056,000 13,558,000
Inventory 4,341,000 4,390,000
Prepaid expenses and other current assets 486,000 719,000
TOTAL CURRENT ASSETS 18,160,000 21,117,000
PROPERTY AND EQUIPMENT, net 1,876,000 2,106,000
GOODWILL, net 3,309,000 4,113,000
OTHER ASSETS 618,000 472,000
TOTAL ASSETS $ 23,963,000 $27,808,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 3,545,000 $ 4,809,000
Accrued expenses 6,863,000 8,080,000
Deferred maintenance revenue 1,647,000 596,000
Current portion of long-term debt 1,733,000 3,962,000
Income taxes payable 240,000 36,000
TOTAL CURRENT LIABILITIES 14,028,000 17,483,000
LONG-TERM BANK DEBT 5,326,000 8,793,000
SUBORDINATED DEBT - AFFILIATE 4,000,000 4,000,000
Deferred Income 546,000 572,000
TOTAL LIABILITIES 23,900,000 30,848,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value authorized
1,500,000, issued 0 shares - -
Common stock, $.24 par value:
Authorized - 6,000,000 shares
Issued - 2,322,370 as of September 30, 2000
and 2,316,370 as of March 31, 2000
Outstanding - 2,023,436 as of September 30,
2000 and 2,017,436 as of March 31, 2000 566,000 560,000
Additional paid-in capital 4,710,000 4,683,000
Accumulated deficit (5,001,000) (8,071,000)
Less Treasury stock at cost - 298,934 shares (212,000) (212,000)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 63,000 (3,040,000)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 23,963,000 $27,808,000
</TABLE>
See notes to Consolidated Financial Statements
See Form 10-K for the fiscal year ended March 31, 2000
<PAGE>
<TABLE>
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues $12,422,000 $15,344,000 $25,332,000 $30,496,000
Operating costs and expenses:
Cost of services 11,867,000 14,415,000 24,247,000 28,483,000
General and administrative 608,000 792,000 1,174,000 1,503,000
Total operating costs and expenses 12,475,000 15,207,000 25,421,000 29,986,000
Operating (loss) income (53,000) 137,000 (89,000) 510,000
Interest expense (292,000) (260,000) (470,000) (609,000)
Embezzlement - recovery 2,075,000 - 1,821,000 -
Income (loss) from continuing operations
before income taxes 1,730,000 (123,000) 1,262,000 (99,000)
Income taxes 15,000 - 30,000 -
Income (loss) from continuing operations 1,715,000 (123,000) 1,232,000 (99,000)
Discontinued operations:
Income from discontinued operations - 270,000 244,000 362,000
Gain on sale of discontinued operations
(net of taxes of $200,000) - - 1,594,000 -
Net income $ 1,715,000 $ 147,000 $ 3,070,000 $ 263,000
Basic earnings per common share:
Income (loss) from continuing operations $ .85 $ (.06) $ .61 $ (.05)
Discontinued operations - .13 .12 .18
Gain on disposition of discontinued operations - - .79 -
$ .85 $ .07 $ 1.52 $ .13
Diluted earnings per common share:
Income (loss) from continuing operations $ .80 $ (.06) $ .57 $ (.05)
Discontinued operations - .13 .11 .18
Gain on disposition of discontinued operations - - .72 -
$ .80 $ .07 $ 1.40 $ .13
Weighted number of shares outstanding:
Basic 2,023,436 2,013,602 2,019,819 2,011,820
Diluted 2,196,505 2,013,602 2,192,102 2,011,820
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
<TABLE>
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<CAPTION>
Six Months Ended
September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,070,000 $ 263,000
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Depreciation and amortization 573,000 602,000
Income from discontinued operations (244,000) -
Gain on sale of discontinued operations (1,594,000) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,409,000) 7,658,000
Decrease (increase) in inventory 49,000 (112,000)
Decrease (increase) in other assets 349,000 (107,000)
Decrease accounts payable and accrued expenses (788,000) (5,514,000)
Increase in income taxes payable 204,000 -
Increase in deferred maintenance 1,051,000 936,000
Decrease in deferred income (26,000) (32,000)
Total adjustments (3,835,000) 3,431,000
Net cash (used) provided by continuing operations (765,000) 3,694,000
Cash flows from investing activities:
Acquisition of property and equipment (245,000) (427,000)
Net proceeds from the sale of discontinued operations 5,500,000 -
Net cash provided (used) in investing activities 5,255,000 (427,000)
Cash flows from financing activities:
Proceeds from borrowing of long-term debt 14,272,000 29,157,000
Retirement of long-term debt (19,968,000) (32,432,000)
Proceeds from restricted cash 650,000 -
Proceeds from sale of stock upon exercise of stock options 33,000 8,000
Net cash used by financing activities (5,013,000) (3,267,000)
Net decrease in cash (523,000) -
Cash at beginning of period 1,800,000 -
Cash at end of period $ 1,277,000 $ -
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
Halifax Corporation
Notes to 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 six month period ended
September 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2001. 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, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The guidelines in
SAB No. 101 must be adopted by the fourth quarter of 2000. The Company
is in the process of evaluating the potential impact of SAB No. 101 on
its financial position and results of operations.
Note 2 - Embezzlement
On March 18, 1999, the Company announced that an internal investigation
had revealed a material embezzlement by the former controller of one of
the Company's subsidiaries. The embezzlement had a material effect on the
Company's financial statements for fiscal years 2000, 1999, 1998 and
1997. In addition to the correction for overstated assets and
understated liabilities, the Company recorded a gross embezzlement loss
of $6,093,000, $6,044,000 and $2,892,000 for fiscal years ended March
31, 1999, 1998 and 1997 respectively. The embezzlement occurred over a
four year period and aggregated approximately $15.4 million of which
approximately $15 million was embezzled from the Company and $400,000
from CMSA prior to its acquisition by Halifax. After net recoveries
through March 31, 2000, the cumulative net embezzlement was approximately
$9.3 million.
For the three months ended September 30, 2000, the Company recovered
approximately $2,075,000 (net of recovery costs of $350,000) related to
the ongoing recovery effort. The specific terms and conditions
associated with the payment, including the identity of the party, are
subjects of a confidentiality agreement that precludes disclosure. For
the six months ended September 30, 2000, the net embezzlement recovery
was $1,821,000.
<PAGE>
Note 3 - Discontinued Operations
On June 2, 2000, the Company executed and delivered a Stock Purchase
Agreement dated as of May 31, 2000, with U.S. Facilities, Inc., a
Delaware corporation (the "Buyer") providing for the sale by the Company
to the Buyer of Company's operational outsourcing business (the
"Business"). The closing of the transactions contemplated in the
Agreement (the "Closing") took place simultaneously with the execution
and delivery thereof, effective as of May 31, 2000.
At the Closing the Company sold to the Buyer, all of the capital stock of
its wholly-owned subsidiary, Halifax Technical Services, Inc. for a
purchase price of $5,600,000, of which $5,500,000 was paid by the Buyer
to the Company at Closing with the balance of $100,000 due on the first
anniversary of the Closing. The purchase price remains subject to
various adjustments set forth in the Agreement.
A portion of the proceeds received by the Company, in the approximate
amount of $2,900,000, was applied on the date of the Closing to the
repayment of a portion of its outstanding bank debt. The Company
recorded a gain on the sale of $1,594,000 (net of income taxes of
$200,000)
The Company and the Buyer executed and exchanged at Closing, a Transition
Agreement pursuant to which the Company, for a limited period of time
following the Closing, provided administrative assistance and other
transition services to the Buyer in connection with the Buyer's
acquisition of the Business.
Summary operating results of the Discontinued Operations are as follows:
<TABLE>
<CAPTION>
For the six months ended
September 30,
(unaudited)
2000 1999
<S> <C> <C>
Revenue $ 4,636,000 $ 12,190,000
Costs and expenses 4,392,000 11,828,000
Income from discontinued
operations $ 244,000 $ 362,000
</TABLE>
Note 4 - Tax Matters
At September 30, 2000, the Company had a net operating loss carryforward
of approximately $7.4 million, virtually all of which expires in fiscal
2019. Income tax expense (primarily state taxes), for the three and six
months ended September 30, 2000 was $15,000 and $30,000, respectively,
compared to $0 for the same respective periods in 1999.
Note 5 - Debt
Advances under the revolving credit agreement and term loan facilities
are collateralized by a first priority security interest in all of the
Company's assets as defined in the revolving credit agreement. The
banking agreement also contains financial covenants and financial
reporting covenants. At September 30, 2000, the Company has excluded
$4,925,000 of the revolving credit agreement from current liabilities
because it anticipates it would remain outstanding for an uninterrupted
period extending beyond one year from the balance sheet date.
The Company amended its banking agreement on July 5, 2000, which extended
the agreement through July 1, 2001. The Company agreed to make certain
accelerated payments on the term loan portion of its debt, apply a
portion of settlement proceeds, if any, to term debt balances outstanding
and to reduce its maximum line and the revolving credit agreement to
$6,000,000. In accordance with the terms of the new banking arrangement,
the Company made additional principal payments on the Tier II and Tier
III Term Notes. In addition, the Company paid certain fees in connection
with the amendment and will be subject to additional monthly fees
commencing January 1, 2001 if the current banking arrangement has not
been refinanced. The Company is presently pursuing alternative financing
sources.
The agreement prohibits the payment of dividends or distributions as well
as the payment of principal or interest on subordinated debt. Interest
expense on subordinated debt is accrued on a current basis.
In September 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 due to the supplier, was
converted to a note payable which is being paid over 18 months with
interest at 8.5%. In September and October 1999, $507,000 was paid and
$299,965 is being paid on the first day of the next consecutive 15
months, with a final payment of $299,974 is due on February 1, 2001. The
balance of the note at September 30, 2000 was $1,733,000.
The balance of debt at September 30, 2000 and 1999 was $7,059,000 and
$13,602,000, respectively. The balance of the subordinated debt was
$4,000,000 at September 30, 2000 and 1999. The current portion of long-
term debt was $1,733,000 and $2,775,000 at September 30, 2000 and 1999,
respectively.
<PAGE>
Note 6 - 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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic for earnings per share:
Net income as reported from
Continuing operations $1,715,000 $ (123,000) $1,232,000 $(99,000)
Discontinued operations - 270,000 244,000 362,000
Gain on disposition of discontinued operations - - 1,594,000 -
Net income $1,715,000 $ 147,000 $3,070,000 $263,000
Diluted earnings per share:
Net income (loss) as reported from continuing $1,715,000 $ (123,000) $1,232,000 $(99,000)
operations
After tax equivalent of interest expense on 7%
convertible debenture 35,000 - 70,000 -
Net income from continuing operations for purposes
of computing diluted net income per share $1,750,000 $ (123,000) $1,302,000 $ (99,000)
Denominator:
Denominator for basic earnings per share -
weighted-average shares 2,023,436 2,013,602 2,019,819 2,011,820
Effect of dilutive securities:
7% Convertible Debenture 170,648 - 170,648 -
Employee stock options 2,421 - 1,635 -
Dilutive potential common shares 173,069 - 172,283 -
Denominator for diluted earnings per
share weighted number of shares outstanding 2,196,505 2,013,602 2,192,102 2,011,820
Basic earnings (loss) per common share
Income (loss) from continuing operations $ .85 $ (.06) $ .61 $ (.05)
Discontinued operations - .13 .12 .18
Gain on disposition of discontinued operations - - .79 -
$ .85 $ .07 $ 1.52 $ .13
Diluted earnings (loss) per common share
Income (loss) from continuing operations $ .80 $ (.06) $ .57 $ (.05)
Discontinued operations - .13 .11 .18
Gain on disposition of discontinued operations - - .72 -
$ .80 $ .07 $ 1.40 $ .13
</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, 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).
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30 Six Months Ended September 30
Results of Operations 2000 1999 Change % 2000 1999 Change %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 12,422 $15,344 $(2,922) -19% $25,332 $30,496 $(5,164) -17%
Cost of services 11,867 14,415 (2,548) -18% 24,247 28,483 (4,236) -15%
Percent of revenues 96% 94% 96% 93%
General & Administrative 608 792 (184) -23% 1,174 1,503 (329) -22%
Percent of revenues 5% 5% 5% 5%
Operating cost and 12,475 15,207 (2,732) -18% 25,421 29,986 (4,565) -15%
expenses:
Percent of revenues 100% 99% 100% 98%
Operating (loss) income (53) 137 (190) -139% (89) 510 (599) -117%
Percent of revenues 1% 2%
Interest expense (292) (260) 32 12% (470) (609) (139) -23%
Embezzlement recovery 2,075 - 2,075 N/M 1,821 - 1,821 N/M
Income (loss) from
operations 1,730 (123) 1,853 N/M 1,262 (99) 1,361 N/M
Income tax expense 15 - 15 N/M 30 - 30 N/M
Income (loss) before
discontinued operations 1,715 (123) 1,853 N/M 1,232 (99) 1,331 N/M
Income from discontinued
operations - 270 (270) N/M 244 362 (118) -33%
Gain on sale of
discontinued operations - - - - 1,594 - 1,594 N/M
Net income $ 1,715 $ 147 $1,568 1,067% $ 3,070 $ 263 $ 2,807 1,067%
Earnings per share - basic:
Continuing operations $ 0.85 $ (0.06) $ 0.61 $ (0.05)
Discontinued operations - 0.13 0.12 0.18
Gain on sale of
discontinued operations - - 0.79 -
$ 0.85 $ 0.07 $ 1.52 $ 0.13
Earnings per share -
diluted:
Continuing operations $ 0.80 $ (0.06) $ 0.57 $ (0.05)
Discontinued operations - 0.13 0.11 0.18
Gain on sale of
discontinued operations - - .72 -
$ 0.80 $ 0.07 $ 1.40 $ 0.13
Weighted average number of
common shares outstanding -
basic 2,023,436 2,013,602 2,019,819 2,011,820
Weighted average number of
common shares outstanding
- diluted 2,196,505 2,013,602 2,192,102 2,011,820
</TABLE>
<PAGE>
Revenues
Revenues for the three and six months ended September 30, 2000,
decreased 19% and 17% , respectively from the comparable periods
in 1999, principally due to reductions in hardware orders, IT
services and seat management installation.
Operating Costs and Expenses
Cost of services for the three and six months ended September 30,
2000 decreased by 18% and 15%, respectively, from the comparable
periods in 1999, primarily as a result of the decline in revenues
from the aforementioned hardware sales and services.
General and administrative expenses for the three and six months
ended September 30, 2000 decreased by 23% and 22%, respectively,
from the comparable periods in 1999, principally due to an ongoing
cost containment program which was further accelerated by the sale
of the Company's Operational Outsourcing Division.
Operating Income
For the three and six months ended September 30, 2000, the Company
incurred an operating loss of $53,000 and $89,000, respectively, as
compared to operating income of $137,000 and $510,000 for the comparable
periods ended September 30, 1999. The principal reason for the lack of
operating income in the period ended September 30, 2000 was the
additional investment in sales and marketing activity related to the
Company's IT services and solutions markets and the reduction in hardware
sales and services and reduction in US Army revenue.
Interest Expense
Interest expense for the three months ended September 30, 2000
increased by 12% from the comparable periods in 1999, principally
as a result of increased loan fees. For the six months ended
September 30, 2000, interest expense decreased by 23% from the
comparable periods in 1999, principally as a result of curtailment
of debt.
Embezzlement Recovery
Embezzlement recoveries for the three months ended September 30,
2000 were $2,075,000 (net of settlement costs). For additional
discussion see "Embezzlement Matter" in Note 2 to the condensed
consolidated financial statements. For the six months ended
September 30, 2000, the net embezzlement recovery was $1,821,000.
Income Taxes
Income taxes for the three and six months ended September 30, 2000
relate to state obligations of $15,000 and $30,000, respectively.
The Company did not record any income tax expense for the six months
ended September 30, 1999.
Discontinued Operations
In May 2000 the Company sold its Operational Outsourcing Division
and, accordingly, the financial results for this division have been
reclassified as Discontinued Operations. (See Note 3 to the
condensed consolidated financial statements.) The Company
recognized a one time gain on the sale of the Division amounting to
approximately $1,594,000 (net of taxes of $200,000).
Net Income (Loss)
Net income for the six months ended September 30, 2000 was
$3,070,000, principally due to the embezzlement recovery and sale of
the Operational Outsourcing Division. Net income was somewhat
offset by the loss from operations which was primarily related to
interest expense. For the three and six months ended September 30,
1999 net income was $147,000 and $263,000, respectively.
Factors That May Affect Future Results
The Company's future operating results may be affected by a number of
factors including uncertainties relative to national economic conditions,
especially as they affect interest rates, industry factors, the Company's
ability to successfully increase its business and effectively manage
expense margins.
The Company must continue to effectively manage expense margins in
relation to revenues by directing new business development towards
markets that complement or improve existing service lines. The Company
must also continue to emphasize operating efficiencies through cost
containment strategies, reengineering efforts and improved service
delivery techniques.
The Company serves its customer base by providing consulting, integration,
networking, maintenance and installation services. This industry has
been characterized by rapid technological advances that have resulted in
frequent introductions of new products, product enhancements and
aggressive pricing practices, which also impact pricing of service
activities. The Company's operating results could be adversely affected
by industry-wide pricing pressures, the ability of the Company to
recruit, train and retain personnel integral to the Company's operations
and the presence of competitors with greater financial and other
resources. Also, the Company's operating results could be adversely
impacted should it be unable to effectively achieve the revenue growth
necessary to provide profitable operating margins in various operations.
The Company's plan for growth includes intensified marketing efforts, an
expanding commercial sales program, strategic alliances and, where
appropriate, acquisitions that expand market share. There can be no
assurances these efforts will be successful.
Liquidity and Capital Resources
At September 30, 2000, the Company's working capital of $4,132,000 and
current ratio of 1.29 indicated the continuing improvement in the
Company's financial strength which was negatively impacted by the
embezzlement matter. In October and November 1998, in a series of
private placements, the Company issued $2 million of subordinated notes
due July 1, 2001 to Research Industries Incorporated, a private
investment company and an affiliate of the Company. Cash was also
provided through bank borrowings.
Capital expenditures for the three months ended September 30, 2000 have
been substantially reduced from prior periods. The Company does not
expect capital expenditures to increase during the current fiscal year.
At March 31, 2000 the Company was in technical default under its bank
credit facility and amended the agreement effective July 5, 2000
extending the term of the agreement through July 1, 2001. In the
amendment, the Company agreed to certain accelerated payments of its term
debt and reduced the availability of the revolving credit agreement to $6
million (See Note 6 to the March 31, 2000 audited consolidated financial
statements). The availability of credit is subject to borrowing base
requirements
primarily tied to levels of accounts receivable. In conjunction with cash
derived from the sale of the Company's Operational Outsourcing Division
the Company paid down its credit line by approximately $3.3 million and
term debt by $500,000. In conjunction with the embezzlement recovery,
the Company further reduced its term debt to the bank by $1,215,5000.
The bank term notes aggregating $4.6 million at March 31, 1999 were
renegotiated effective September 1, and amended December 21, 1999 to
amounts aggregating $3.5 million. Bank term notes outstanding at
September 30, 2000 amounted to $401,000.
The subordinated debt agreements with an affiliate totaled $4 million at
September 30, 2000. The banking agreement dated September 1, 1999
prohibits the payments of principal or interest on subordinated debt.
(See Note 5 to the consolidated financial statements.)
In September 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 due to the supplier was
converted to a note payable which is being paid over 18 months with
interest at 8.5%. In September and October 1999 $507,000 was paid,
$299,965 is being paid on the first day of the next consecutive 15
months, with a final payment of $299,974 due in February 2001. The
balance of the note at September 30, 2000 was $1,733,000.
The Company believes that funds generated from operations, bank
borrowings, embezzlement recoveries and investing activities (including
the sale of the Company's Operational Outsourcing Division) should be
sufficient to meet its current operating cash requirements through July
1, 2001 although there can be no assurances that all the aforementioned
sources of cash can be realized.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates, primarily as result
of the bank debt which partially finances its business. The floating
interest debt exposes the Company to interest rate risk, with the primary
interest rate exposure resulting from changes in the LIBOR rate. It is
assumed that the LIBOR rate will remain constant in the future. Adverse
changes in interest rates or the Company's inability to refinance its
long-term obligations may have a material negative impact on the
Company's operations.
The definitive extent of the Company's interest rate risk is not
quantifiable or predictable because of the variability of future interest
rates and business financing requirements. The Company does not believe
such risk is material. The Company does not customarily use derivative
instruments to adjust the Company's interest rate risk profile.
The information below summarizes the Company's sensitivity to market
risks as of September 30, 2000. The table presents principal cash flows
and related interest rates by year of maturity of the Company's funded
debt. Note 5 to the condensed consolidated financial statements
contains descriptions of the Company's funded debt and should be read in
conjunction with the table below (amount in thousands).
<PAGE>
<TABLE>
<CAPTION>
Period Ending September 30,
Long-term debt (including current 2001 2002 Total Debt Fair Value
maturities)
<S> <C> <C> <C> <C>
Revolving credit agreement at the LIBOR rate
plus 2.55%. Due July 1, 2001. Average
interest rate of 8.46%. $ - $ 4,925 $ 4,925 $ 4,925
Tier II term note dated June 25, 1998 at the
LIBOR rate plus 2.65%. Due July 1, 2001.
Average interest rate of 8.56%. - 401 401 401
Tier III term note dated June 25, 1998 at
the LIBOR rate plus 2.65%. Due July 1, 2001.
Average interest rate of 8.56%. - - - -
Total variable debt - 5,326 5,326 5,326
7% subordinated note from affiliate due
January 27, 2003. Estimated yield of 8.56%
for 2001 and 9.0% for 2002. - 2,000 2,000 1,960
8% subordinated notes from affiliate due
July 1, 2001 - 2,000 2,000 2,000
Subordinated debt dated September 2, 1999
with interest at 8.5%. Due February 1,
2001. 1,733 - 1,733 1,733
Total fixed debt 1,733 4,000 5,733 5,693
Total debt $ 1,733 $ 9,326 $ 11,059 $ 11,019
</TABLE>
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.
<PAGE>
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 will have a material effect on the
Company's operations.
At September 30, 2000, the Company had $11,059,000 of debt outstanding
of which $5,733,000 has variable interest rates. If the interest rates
charged to the Company on its variable rate debt were to increase
significantly, it could have a materially adverse effect on 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 believes it
does not currently have any material exposure to foreign exchange rate
fluctuation risks.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Not applicable
(b)Reports on Form 8-K - Item 2. Disposition of
Assets dated June 15, 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: November 9 , 2000 By: s/Charles L. McNew
Charles L. McNew
President & CEO
Date: November 9, 2000 By: s/Joseph Sciacca
Joseph Sciacca
Vice President, Finance & CFO
