HALIFAX CORPORATION
FORM 10-Q
JUNE 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 June 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
June 30, 2000.
HALIFAX CORPORATION
CONTENTS
PART I. FINANCIAL INFORMATION
page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000
(Unaudited) and March 31, 2000 4
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 2000 and 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - Three
Months Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed 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 16
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 17
<TABLE>
<CAPTION>
Item 1. FINANCIAL STATEMENTS
HALIFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND MARCH 31, 2000
June 30, March 31,
2000 2000
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,281,000 $ 1,800,000
Restricted cash 650,000 650,000
Trade accounts receivable 9,889,000 13,558,000
Inventory 4,469,000 4,390,000
Prepaid expenses and other current assets 660,000 719,000
TOTAL CURRENT ASSETS 16,949,000 21,117,000
PROPERTY AND EQUIPMENT, net 1,977,000 2,106,000
GOODWILL, net 3,347,000 4,113,000
OTHER ASSETS 576,000 472,000
TOTAL ASSETS $ 22,849,000 $ 27,808,000
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 3,842,000 $ 4,809,000
Accrued expenses 7,521,000 8,080,000
Deferred maintenance revenue 307,000 596,000
Current portion of long-term debt 3,105,000 3,962,000
Income taxes payable 145,000 36,000
TOTAL CURRENT LIABILITIES 14,920,000 17,483,000
LONG-TERM BANK DEBT 5,031,000 8,793,000
SUBORDINATED DEBT - AFFILIATE 4,000,000 4,000,000
Deferred Income 556,000 572,000
TOTAL LIABILITIES 24,507,000 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 June 30, 2000 and
2,316,370 as of March 31, 2000
Outstanding - 2,023,436 as of June 30, 2000
and 2,017,436 as of March 31, 2000 561,000 560,000
Additional paid-in capital 4,709,000 4,683,000
Accumulated deficit (6,716,000) (8,071,000)
Less Treasury stock at cost - 298,934 shares (212,000) (212,000)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,658,000) (3,040,000)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 22,849,000 $ 27,808,000
</TABLE>
See notes to Condensed Consolidated Financial Statements
See Form 10-K for the fiscal year ended March 31, 2000
<PAGE>
<TABLE>
<CAPTION>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
Three Months Ended
June 30,
2000 1999
<S> <C> <C>
Revenues $ 12,910,000 $ 15,152,000
Operating costs and expenses:
Cost of services 12,380,000 14,068,000
General and administrative 566,000 711,000
Total operating costs and expenses 12,946,000 14,779,000
Operating (loss) income (36,000) 373,000
Interest expense 178,000 349,000
Embezzlement loss - recovery costs 254,000 -
(Loss) income from continuing
operations
before income taxes (468,000) 24,000
Income taxes 15,000 -
(Loss) income from continuing
operations (483,000) 24,000
Discontinued operations:
Income from discontinued operations 244,000 92,000
Gain on sale of discontinued
operations (net of taxes of
$200,000) 1,594,000 -
Net income $ 1,355,000 $ 116,000
Basic earnings per common share:
(Loss) income from continuing
operations $ (0.24) $ 0.01
Discontinued operations 0.12 0.05
Gain on disposition of discontinued
operations 0.79 -
$ 0.67 $ 0.06
Diluted earnings per common share:
(Loss) income from continuing
operations $ (0.24) $ 0.01
Discontinued operations 0.12 0.05
Gain on disposition of discontinued
operations 0.79 -
$ 0.67 $ 0.06
Weighted number of shares
outstanding:
Basic 2,020,956 2,013,406
Diluted 2,023,882 2,013,406
</TABLE>
See notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED
JUNE 30, 2000 AND 1999 (UNAUDITED)
Three Months Ended
June 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,355,000 $ 116,000
Adjustments to reconcile net income to net
cash (used) provided by operating
activities:
Depreciation and amortization 344,000 241,000
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 (1,242,000) 3,441,000
Increase in inventory (79,000) (278,000)
Decrease in other assets 217,000 73,000
Increase (decrease) in accounts payable
and accrued expenses 167,000 (265,000)
Increase in income taxes payable 109,000 -
(Decrease) increase in deferred maintenance (289,000) 11,000
Decrease in deferred income (16,000) (16,000)
Total adjustments (2,627,000) 3,207,000
Net cash (used) provided by continuing
operations (1,272,000) 3,323,000
Cash flows from investing activities:
Acquisition of property and equipment (155,000) (181,000)
Net proceeds from the sale of discontinued
operations 5,500,000 -
Net cash provided (used) in investing
activities 5,345,000 (181,000)
Cash flows from financing activities:
Proceeds from borrowing of long-term debt 8,992,000 13,680,000
Retirement of long-term debt (13,611,000) (16,710,000)
Proceeds from sale of stock upon exercise of
stock options 27,000 -
Net cash used by financing activities (4,592,000) (3,030,000)
Net (decrease) increase in cash (519,000) 112,000
Cash at beginning of period 1,800,000 0
Cash at end of period $ 1,281,000 $ 112,000
See notes to Condensed Consolidated Financial
Statements
</TABLE>
See notes to Condensed Consolidated
Financial Statements
<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 month period ended June
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 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 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, as discussed below, the cumulative net
embezzlement loss before taxes was approximately $9.3 million.
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 loss for fiscal 1999 was recorded net of
projected recoveries of $3,500,000 (net of recovery costs of $1,000,000)
resulting in a net embezzlement loss for fiscal year 1999 of $2,593,000.
During the year ended March 31, 1999 the Company recovered $672,000
creating a recovery receivable outstanding of $2,828,000. The recovery
receivable was collected in fiscal 2000.
During the year ended March 31, 2000 the Company recovered an additional
$2,250,000 (net of recovery costs of $250,000) 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.
For the three months ended June 30, 2000, the Company incurred costs
related to the ongoing recovery effort of approximately $254,000.
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 ("Buyer") providing for the sale by the Company to
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 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 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 would, for a limited period of
time following the Closing, provide administrative assistance and other
transition services to Buyer in connection with Buyer's take-over of the
Business.
Summary operating results of the Discontinued Operations are as follows:
<TABLE>
<CAPTION>
For the three months ended June 30,
2000 1999
<S> <C> <C>
Revenue $ 4,636,000 $ 5,818,000
Costs and expenses 4,392,000 5,726,000
Income from discontinued
operations $ 244,000 $ 92,000
</TABLE>
Note 4 - Tax Matters
At June 30, 2000, the Company has a net operating loss carryforward of
approximately $8.6 million virtually all of which expires in fiscal 2019.
Income tax expense (primarily state taxes), for the three months ended
June 30, 2000 and 1999 was $15,000, and $0, respectively.
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. The Company has excluded $3,415,000 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. At June 30, 1999,
the revolving line of credit was $10,200,000, $3,760,000 of which was
classified as current and $6,440,000 was classified as long-term.
The Company signed a new banking agreement on September 1, 1999 as
amended on December 21, 1999 which refinanced the Company's revolving
credit and debt. The new debt consisted 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 as have the
interest rate provisions. Standard closing and unused balance fees are
included. The revised facilities made $15,500,000 of credit available to
the Company. This agreement was to expire on January 2, 2001. All
assets of the Company remain as collateral in accordance with the prior
agreement. Financial covenants were 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 Company further 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 future 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 new 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%. $507,000 was paid in September and October 1999,
$299,965 is being paid on the first day of the next ensuing 15 months and
a final payment of $299,974 is due on February 1, 2001. The balance of
the note on June 30, 2000 was $2,030,000.
The balance of debt at June 30, 2000 and 1999 was $8,136,000 and
$15,867,000 respectively. The balance of the subordinated debt was
$4,000,000 at June 30, 2000 and 1999. Current portion of long-term debt
was $3,105,000 and $5,820,000 at June 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
June 30,
2000 1999
<S> <C> <C>
Numerator for earning per share:
Net income as reported from
Continuing operations $(483,000) $ 24,000
Discontinued operations 244,000 92,000
Gain on disposition of discontinued operations
1,594,000 -
Net income $1,355,000 $116,000
Denominator:
Denominator for basic earnings per share -
weighted-average shares 2,020,956 2,013,406
Effect of dilutive securities:
7% Convertible Debenture - -
Employee stock options 2,926 -
Dilutive potential common shares
Denominator for diluted earnings per
share weighted number of shares
outstanding 2,023,882 2,013,406
Basic earnings (loss) per common share
Income (loss) from continuing operations $ (0.24) $ 0.01
Discontinued operations 0.12 0.05
Gain on disposition of discontinued operations 0.79 -
$ 0.67 $ 0.06
Diluted earnings (loss) per common share
Income (loss) from continuing operations $ (0.24) $ 0.01
Discontinued operations 0.12 0.05
Gain on disposition of discontinued operations 0.79 -
$ 0.67 $ 0.06
</TABLE>
<PAGE>
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.
<PAGE>
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 June 30,
Results of Operations 2000 1999
Change %
<S> <C> <C> <C> <C>
Revenues $ 12,910 $ 15,152 (2,242) -15%
Cost of services 12,380 14,068 (1,688) -12%
Percent of revenues 96% 93%
General & Administrative 566 711 (145) -20%
Percent of revenues 4% 5%
Operating cost and expenses: 12,946 14,779 (1,833) 12%
Percent of revenues 100% 98%
Operating (loss) income (36) 373 (409) N/M
Percent of revenues 0% 2%
Interest expense 178 349 (171) -49%
Embezzlement loss - recovery 254 - 254 N/M
costs
(Loss) income from operations (468) 24 (492) N/M
Income tax expense 15 - 15 N/M
(Loss)income before discontinued
operations (483) 24 (507) N/M
Income from discontinued
operations 244 92 152 165%
Gain on sale of discontinued
operations 1,594 0 1,594 N/M
Net income $ 1,355 $ 116 1,239 1,068%
Earnings per share - basic:
Continuing operations $ (0.24) $ 0.01
Discontinued operations 0.12 0.05
Gain on sale of discontinued
operations 0.79 -
$ 0.67 $ 0.06
Earnings per share - diluted:
Continuing operations $ (0.24) $ 0.01
Discontinued operations 0.12 0.05
Gain on sale of discontinued
operations .79 -
$ 0.67 $ 0.06
Weighted average number of common
shares outstanding - basic 2,020,956 2,013,406
Weighted average number of common
shares outstanding - diluted 2,023,882 2,013,406
</TABLE>
Revenues
Revenues for the three months ended June 30, 2000, decreased 15%
from the comparable period in 1999 principally due to reductions in
order from the U.S. Army on a digital communications switch
contract.
Operating Costs and Expenses
Cost of services for the three months ended June 30, 2000 decreased
by 12% from the comparable period in 1999 primarily as a result of
the decline in revenues from the aforementioned U.S. Army contract.
General and administrative expenses for the three months ended June
30, 2000 decreased by 20% from the comparable period 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 months ended June 30, 2000 the Company incurred a
small operating loss ($36K) as compared to operating income of $373K
for the three months ended June 30, 1999. The principal reason for
the lack of operating income in 2000 was the additional investment
in sales and marketing activity related to the Company's IT services
and solutions markets and the reduction in U.S. Army revenues.
Interest Expense
Interest expense for the three months ended June 30, 2000 declined
by 49% from the comparable period in 1999 principally as a result of
reductions in the amount of debt outstanding.
Embezzlement Loss
Embezzlement losses incurred for the three months ended June 30,
2000 reflect legal costs associated with certain ongoing recovery
efforts. For additional discussion see "Embezzlement Matter" in
Note 2 to the condensed consolidated financial statements.
Income Taxes
Income taxes for the three months ended June 30, 2000 relate to
state obligations. The Company did not record any income tax
expense for the three months ended June 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.)
In addition the Company recognized a one time gain on the sale of
the Division amounting to approximately $1.6 million (net of taxes
of $200,000).
Net Income (Loss)
Net income for the three months ended June 30, 2000 was $1.4 million
principally due to the sale of the Operational Outsourcing
Division. Net income was somewhat offset by the loss from
operations which was primarily related to embezzlement losses and
interest expense. For the three months ended June 30, 1999 net
income was $116 K.
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 introduction of new products, product enhancements and
aggressive pricing practices, which also impacts 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 the Company 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.
Liguidity and Capital Resources
At June 30, 2000, the Company's working capital of $2,029,000 and current
ratio of 1.14 indicates the continuing improvement in the Company's
financial strength which was negatively impacted by the embezzlement
matter which resulted in the use of cash in operations during the quarter
ended June 30, 2000 and the three fiscal years ended March 31, 1999. 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 June 30, 2000 have been
substantially reduced from prior periods. The Company does not expect
capital expenditures to increase during the current fiscal year.
As a direct result of the material nature of the embezzlement matter, the
Company was in technical default of its $14.5 million revolving credit
agreement and related term notes (aggregating $4.6 million) that were in
place at March 31, 1999. In the interim months, the Company entered into
a series of forbearance agreements which enabled the borrowing agreement
to remain in effect. Effective September 1, 1999, and as amended
December 21, 1999 the Company re-negotiated its borrowing agreement to
provide funding availability from its current collateral base. At March
31, 2000 the Company was in technical default of the agreement and
amended the agreement effective July 5, 2000 extending the agreement
through July 1, 2001. In the amendment dated July 5, 2000, 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
revolving credit agreement availability which had been reduced to $12
million at March 31, 2000 ($6 million effective July 5, 2000) 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 $500K
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 June
30, 2000 amounted to $2.7 million.
The subordinated debt agreements with an affiliate totaled $4 million at
June 30, 2000. The banking agreement dated September 1, 1999 prohibits
the payments of principal or interest. (See Note 6 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%. $507,000 was paid in September and October 1999,
$299,965 is being paid on the first day of the next ensuing 15 months and
a final payment of $299,974 is due on February 1, 2001. The balance of
the note at June 30, 2000 was $2,030,000.
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.
Year 2000 Compliance
The Company did not experience any significant malfunctions or errors in
its operating or business systems when the date changed from 1999 to
2000. Based on operations since January 1, 2000, the Company does not
expect any significant impact to its on-going business as a result of
"Year 2000" issues. However, it is possible that the full impact of the
date change, which was of concern due to the possibility that computer
programs that had date-sensitive software may have recognized a date
using "00" as the year 1900 rather than the year 2000, has not been fully
recognized. For example, it could be possible that year 2000 or similar
issues, such as leap year -related problems, may occur and impair the
Company's ability to process transactions, send invoices, maintain
payroll or engage in similar normal business activities, such as
financial closing at month or quarterly end. The Company believes that
any of these types of problems that may be encountered are likely to be
minor and correctable. In addition, the Company could still be
negatively affected if its customers or suppliers are adversely affected
by year 2000 or similar issues. The Company is not currently aware of
any significant year 2000 or similar problems that have arisen for its
customers and suppliers.
Contingency Plans: The Company has developed a Year 2000 Contingency Plan
designed to address problems arising from Year 2000 failures of critical
third parties which is directed towards providing alternate sources of
supply to the Company.
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates, primarily as result
of bank debt to finance 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
the 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 June 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).
<TABLE>
<CAPTION>
Period Ending
June 30,
Long-term debt (including current 2001 2002 Total Fair
maturities) Debt Value
<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%. $ - $ 3,415 $ 3,415 $ 3,415
ier II term note dated June 25,
1998 at the LIBOR rate plus 2.65%.
Due July 1, 2001. Average interest
rate of 8.56%. 884 1,616 2,500 2,500
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%. 191 - 191 191
Total variable debt 1,075 5,031 6,106 6,106
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. 2,030 - 2,030 2,030
Total fixed debt 2,030 4,000 6,030 5,990
Total debt $3,105 $9,031 $12,136 $12,096
</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.
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 June 30, 2000, the Company had $12,136,000 of debt outstanding of
which $6,030,000 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 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: August 10, 2000 By: s/Charles L. McNew
Charles L. McNew
President & CEO
Date: August 10, 2000 By: s/Joseph Sciacca
Joseph Sciacca
Vice President, Finance & CFO
