-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MYN5B02JE2cYXY6f8ty9aQs9Obk8Z+V1thfYbAVrClk47pA1Q5hJf5F2O4j119hZ O50djNVZydaXDnRYGZ94BA== 0000720671-00-000004.txt : 20000215 0000720671-00-000004.hdr.sgml : 20000215 ACCESSION NUMBER: 0000720671-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALIFAX CORP CENTRAL INDEX KEY: 0000720671 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 540829246 STATE OF INCORPORATION: VA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08964 FILM NUMBER: 541236 BUSINESS ADDRESS: STREET 1: 5250 CHEROKEE AVE CITY: ALEXANDRIA STATE: VA ZIP: 22312 BUSINESS PHONE: 7037502202 MAIL ADDRESS: STREET 1: 5250 CHEROKEE AVENUE CITY: ALEXANDRIA STATE: VA ZIP: 22312 FORMER COMPANY: FORMER CONFORMED NAME: HALIFAX ENGINEERING INC/VA DATE OF NAME CHANGE: 19911204 10-Q 1 HALIFAX CORPORATION FORM 10-Q DECEMBER 31, 1999 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 Item 1. FINANCIAL STATEMENTS HALIFAX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND MARCH 31, 1999
December 31, March 31, 1999 1999 (Unaudited) 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.
HALIFAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited)
Three Months Ended Nine Months Ended December 31 December 31 Restated Restated 1999 1998 1999 1998 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.
HALIFAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited)
Nine Months Ended December 31 Restated 1999 1998 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.
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:
Three Months Ended Nine Months Ended December 31, 1998 December 31, 1998 ($000's omitted) Previously Previously Statement of Reported Restated Reported Restated Operations: 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
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.
Three Nine Months Ended Months Ended December 31, December 31, Restated Restated 1999 1998 1999 1998 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)
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).
(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 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)
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).
Three Months Ended Nine Months Ended December 31 December 31 Restated Restated Results of Operations 1999 1998 Change 1999 1998 Change 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)
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. 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 EX-27 2 10Q-DECEMBER-1999
5 10Q-DECEMBER-1999 1 0 MAR-31-2000 APR-1-1999 DEC-30-1999 9-MOS 1 3,267,000 0 16,691,000 0 3,618,000 25,593,000 2,105,000 0 32,620,000 20,835,000 0 0 0 557,000 (2,867,000) 32,620,000 62,505,000 62,505,000 57,954,000 60,669,000 (2,510,000) 0 1,253,000 3,093,000 5,000 3,088,000 0 0 0 3,088,000 1.51 1.51
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