-----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, JBqKyIAEj8nbKgvsGYnQ/5Fe22vVnfGGXxC+jbVS7AFz78G4Fk7ghfZhavgLvoM8 ezvN2jNch5YmBVsqxkCsDg== /in/edgar/work/0000720671-00-000009/0000720671-00-000009.txt : 20000713 0000720671-00-000009.hdr.sgml : 20000713 ACCESSION NUMBER: 0000720671-00-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALIFAX CORP CENTRAL INDEX KEY: 0000720671 STANDARD INDUSTRIAL CLASSIFICATION: [7370 ] IRS NUMBER: 540829246 STATE OF INCORPORATION: VA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08964 FILM NUMBER: 671501 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-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ( X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended March 31, 2000 ( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 (Fee Required) 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($.24 par value) American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None (Title of class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by non- affiliates of the Registrant as of June 22, 2000 was $8,719,508 computed based on the closing price for that date. Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. Class Outstanding at June 22, 2000 Common Stock 2,023,436 $0.24 par value DOCUMENTS INCORPORATED BY REFERENCE -None- Certain statements in this Annual 10-K 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 operations and 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. PART I Item 1. General Description of the Business Halifax Corporation (the "Company"), headquartered in Alexandria, Virginia is principally focused on providing a comprehensive range of information technology services and solutions to a broad base of commercial and governmental customers. The Company provides a complete array of services and solutions which are designed to enable customers to focus on using their enterprise rather than maintaining them. The Company's major initiatives presently are: * Seat Management provides customers with complete life cycle management of all desk top PCs, servers and printers, thus allowing the enterprise staff to focus on core responsibilities. * Network Solutions enables our customers to maximize their network investments by providing solutions architecture, asset solutions (hardware and software management) and systems integration solutions. The Company recently completed one of the first Windows 2000 implementations for a commercial organization and has also launched "Assure IT", a program designed to ensure the ongoing operational efficiency of a customer's network. * Business and Application development provides technical and creative service offerings which provide interactive business solutions to our customers. The Company has been developing Web sites since 1995. * Information Security provides cost effective, best practice solutions for information security problems confronting our customers. The focus is on solutions which are minimally intrusive to the operations. The range of services provided includes security policy development, firewall installation and configuration, network vulnerability audits and encryption solutions. * Computer Maintenance provides maintenance services on a nationwide basis, serving over 20,000 locations and more than 250,000 pieces of equipment through a variety of programs including: On-call and resident maintenance and repair service agreements, Warranty services for major original equipment manufacturers, Preventive Maintenance, Asset tracking, Maintenance outsourcing support, Equipment installs, moves and changes and Depot and Mail-in services. Services are provided through a network of offices dispatched by the Halifax National Support Center. Strategic alliances are maintained with certain OEMs and integrators. * Telecommunications Systems provides engineering, installation, maintenance and logistic support services for various government agencies including the Army and the U.S. Army National Guard. Orders are placed with the Company primarily using two multi-task support contracts, Long Term Life Cycle Support (LTLCS) and Digital Switch Systems Modernization Program (DSSMP). Government customers are supported in the following areas: Network engineering and installation, both secured and non secured; Network administration; EF&I of digital telephone networks; Upgrade of radio rooms; Upgrade of cable plant infrastructures; and Installation of blown fibers systems. The Company's current strategy is to continue to develop an important presence in the eastern United States, while seeking to provide services nationwide for selected engagements. The Company's general business strategy is to secure a prominent position as a leading provider of the broad range of information technology services and solutions to address the needs of a marketplace which continues to increase its dependency on technology. Investment in the Company involves various risks. Additionally, certain of the information contained herein may be deemed to constitute "forward looking statements". HISTORY The Company was incorporated in Virginia in 1967 as Halifax Engineering, Inc., the successor to the business begun as a sole proprietorship in 1967. On April 1, 1970, Halifax acquired the Field Service Division of United Industries. This expanded the business base in technical services and field engineering. In 1991 the Company's name was changed to Halifax Corporation. On June 30, 1993, the Company acquired the services division of Electronic Associates, Inc. The division expanded the Company's non-federal business and provided an additional service line for simulator operations, maintenance and integration. On April 1, 1996, the Company completed the acquisition of privately held CMS Automation, Inc. (CMSA) a Richmond, Virginia computer systems integration company. On November 25, 1996, the Company, through its wholly owned subsidiary, CMSA, acquired the ongoing computer network integration business of Consolidated Computer Investors, Inc. (CCI) of Hanover, Maryland. The combined entity name was changed to Halifax Technology Services Company (HTSC), a wholly owned subsidiary of Halifax Corporation. On April 1, 1999, HTSC was merged into Halifax Corporation and began operating as the Technology Services Division of the Company. The Company maintains its principal executive offices at Halifax Office Park, 5250 Cherokee Avenue, Alexandria, Virginia 22312. Its telephone number is (703) 750-2202 and its internet website is www.hxcorp.com. RECENT DEVELOPMENTS Sale of Operational Outsourcing Division On May 31, 2000 the Company sold its Operational Outsourcing business (See Note 15 to the consolidated financial statements) which was non-core to the company's long-term growth strategy. The Company's Operational Outsourcing Division provides complete facilities management and maintenance outsourcing capabilities to assist institutional, government and commercial clients in outsourcing facilities 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 of the capital stock of its wholly-owned subsidiary, Halifax Technical Services, Inc. ("HTSI") for a purchase price of $5,600,000, of which $5,500,000 was paid to Halifax 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. 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. (See Note 15 to the consolidated financial statements.) The Company and the Buyer executed and exchanged at Closing, a Transition Agreement pursuant to which the Company will, for a limited period of time following the Closing, provide administrative assistance and other transition services to the Buyer in connection with Buyer's take-over of HTSI. A portion of the proceeds received by Halifax, in the approximate amount of $2,900,000, was applied by Halifax on the date of the Closing to the repayment of a portion of its outstanding bank debt. Embezzlement Matter On March 18, 1999 the Company announced that a material embezzlement had occurred at one of the Company's subsidiaries. (See Note 2 to the consolidated financial statements.) 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 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. The Company continues to pursue recovery activities from certain parties, although no assurances can be given as to the timing or extent of such recoveries. Federal Government Contracts A significant portion of the Company's revenues have historically been derived from contracts or subcontracts with the United States Government. Excluding the sale of HTSI ("Discontinued Operations") in fiscal years 2000, 1999 and 1998, the Company received revenues from 29, 25 and 88 Government contracts, respectively, which accounted for approximately 25%, 36% and 26%, respectively, of the Company's total revenues. The embezzlement matter did not involve or affect the Company's fulfillment of its Government contracts nor its accounting thereof and it did not trigger any termination provisions under government contracts. The services of the Company are performed under cost reimbursable, time- and-materials and fixed-price contracts and subcontracts. Under cost reimbursable contracts the Government reimburses the Company for its allowable costs permitted by Government regulations and pays the Company a negotiated fixed fee, incentive fee, award fee or combination thereof. Under time-and-materials contracts, the Company receives a fixed hourly rate intended to cover salary costs attributable to work performed on the contracts and related indirect expenses, as well as a profit margin, and reimbursement for other direct costs. Under fixed-price contracts, the Government pays the Company an agreed-upon price for services rendered. In addition, under certain fixed price contracts, incentive fees are allowed if established performance goals are met or exceeded and penalties are imposed if goals are not attained. Under fixed-price contracts and time-and-materials contracts, the Company bears any risk of increased or unexpected costs that may reduce its profits or cause it to sustain losses. The Company's Government contracts and subcontracts are subject to termination, reduction or modification as a result of changes in the Government's requirements or budgetary restrictions. When the Company participates as a subcontractor, it is subject to the risk that the primary contractor may fail or become unable to perform the prime contract. All Government contracts are subject to termination at the convenience of the Government. If a contract were to be terminated for convenience, the Company would be reimbursed for its allowable costs incurred up to the date of termination and would be paid a proportionate amount of the stipulated profits or fees attributable to the work actually performed. Since the inception of the Company's Federal Government contracting activities, the Government has only terminated four contracts with the Company for convenience. Contracts with the Government are generally complex in nature, and require Halifax to comply with numerous Federal regulations regarding discrimination in the hiring of personnel, fringe benefits for employees, safety, safeguarding classified information, responsibility for Government property, fire prevention, equipment maintenance, record keeping and accounting, management qualifications, drug free work place and numerous other matters. The Company has not experienced any material difficulty in complying with applicable Federal regulations. The Company is sensitive to the present climate in the Government with respect to fraud, waste and abuse, and has adopted a Code of Business Ethics and Standards of Conduct and associated Company procedures. In addition, all employees receive training in ethics and associated Company procedures and a hot line has been established to encourage reporting of potential ethical violations. Under certain circumstances the Government can suspend or debar individuals or firms from obtaining future contracts with the Government for specified periods of time. Any such suspension or debarment could have a material adverse effect upon the Company. The books and records of the Company are subject to audit by the Defense Contract Audit Agency (DCAA), which can result in adjustments to contract costs and fees. Audits by DCAA have been completed for years through fiscal year 1995 with minimal adjustment to the Company's cost accounting records and contract revenue reimbursement. With the sale of the Company's Operational Outsourcing Division on May 31, 2000 the Company's dependence on Government contracts will be materially reduced from approximately $30.1 million to $4.0 million, a reduction of 85%. Commercial and State/Municipal Government Contracts The Company continues to work towards expanding its commercial and state/municipal government business. Commercial revenues are being pursued by targeting non-federal and outsourcing opportunities. The Company's expanding development of information technology services and solutions follows from its prior acquisition strategy where some expanded capabilities were brought into the Company. State/municipal government contracts may expand from privatization opportunities. The following table reflects the distribution of revenues by type of customer excluding Discontinued Operations (see Management Discussion and Analysis for further discussion):
Years Ended March 31, 2000 1999 1998 Commercial $23,394,000 44% $23,725,000 40% $ 28,770,000 51% State/Local 16,435,000 31% 13,866,000 24% 12,995,000 23% Federal Government 13,701,000 25% 21,480,000 36% 14,454,000 26% Total $53,530,000 100% $59,071,000 100% $ 56,219,000 100%
Type of Contracts The following table reflects, by type of contract (excluding Discontinued Operations), the amount of revenues derived for the periods indicated:
Years Ended March 31, 2000 1999 1998 Cost reimbursable $ 341,000 1% $ 363,000 1% $ 227,000 0% Time & materials 2,851,000 5% 3,878,000 6% 4,531,000 8% Fixed-price 50,338,000 94% 54,830,000 93% 51,461,000 92% Total $53,530,000 100% $59,071,000 100% $56,219,000 100%
Accounts Receivable Trade accounts receivable at March 31, 2000 and 1999 represented 49% and 61% of total assets, respectively. Accounts receivable are comprised of billed receivables and unbilled receivables. Billed receivables represent invoices presented to the customer. Unbilled receivables represent future payments due from the customer for which invoices will not be presented until a later period. The reasons that invoices are not presented may be categorized as follows: (1) fee and cost retainage rights of the Government; (2) billable documents in transit; (3) excess of actual direct and indirect costs over amounts currently billable under cost reimbursement contracts to the extent they are expected to be billed and collected; and (4) amounts in excess of billings arising on fixed- price contracts from recognition of revenues under the percentage of completion method. The financing of receivables requires bank borrowings and the payment of associated interest expense. Interest expense is not reimbursable under Government contracts. For a summary of the amounts of retainages and unbilled receivables as of March 31, 2000 and 1999, see Note 3 to the consolidated financial statements. Backlog Excluding Discontinued Operations, the Company's funded backlog for services as of March 31, 2000, 1999 and 1998 was $14,000,000, $25,000,000, and $31,000,000, respectively. "Funded" backlog represents commercial orders and Government contracts to the extent that funds have been appropriated by Congress and allotted to the contract by the procuring Government agency. Some of the Company's contract orders provide for potential funding in excess of the monies initially provided by the Government. Additional monies are subsequently and periodically authorized in the form of incremental funding documents. The excess of potential future funding over funding provided represents unfunded backlog. A majority of the Company's customer orders or contract awards and extensions for contracts previously awarded are received or occur at various times during the year and may have varying periods of performance. As of March 31, 2000, based on total amounts bid on contracts awarded, the Company's five-year potential revenues for work remaining to be performed under existing contracts are approximately $254,000,000. Excluding contracts associated with the Discontinued Operations the unfunded portion is $240,000,000 in undefinitized work. The realization of these potential revenues is dependent upon a variety of contract contingencies beyond the control of the Company, such as complete funding and the exercise of all existing contract options by the Government and commercial clients. There can be no assurance that such revenues will be realized. The revenues expected for fiscal year 2001 from the potential revenues is $28,000,000. Commercial contracts do not typically have multi-year options, and accordingly, related backlog levels are not significantly increasing in proportion to total revenues. Marketing Commercial marketing involves the determination of customer needs that match the services offered by the Company. This is accomplished through the Company's commercial sales and marketing group which develops service and solutions offerings, conducts sales calls, attends trade shows, and builds a network of customer knowledge and confidence in the Company. Those activities, along with the development of strategic alliances and the reputation the Company has built, represent the normal manner in which the Company's commercial business is generated. The Company contracts with the Federal Government, State/Local Governments and commercial entities, each of which requires a different marketing approach. The Federal Government maintains that it buys from companies rather than having companies sell to it, and marketing is more related to keeping abreast of the Government's specified needs versus building markets within the Government for the Company's services. However, the Company conducts a large portion of its business within the commercial and state/local government sectors, and consequently uses traditional marketing approaches to determine commercial customer needs and to enhance the chances that its services will be considered for those needs. The Company's ability to compete successfully for Government work is largely dependent on recognizing Government requirements and opportunities, the submission of responsive and cost-effective proposals, and a reputation for the successful completion of government contracts. Recognition of Government requirements and opportunities come from inclusion on bidders lists, from participation in activities of professional organizations and from literature published by the Government and other organizations. Competition The Company has numerous competitors in all areas in which it does business. Some competitors are large diversified firms having substantially greater financial resources and larger technical staffs than the Company, including, in some cases, the manufacturers of the systems being supported. Customer in-house capabilities can also be deemed to be competitors of the Company in that they perform certain services which might otherwise be performed by the Company. It is not possible to predict the extent of competition which present or future activities of the Company will encounter because of changing competitive conditions, customer requirements, technological developments and other factors. The principal competitive factors for the type of service business in which the Company is engaged are technology skills, quality, responsiveness, ability to perform within estimated time and expense limits and pricing. Technology services are predominately concentrated on the Mid-Atlantic coast, computer maintenance services are conducted on a nationwide basis. Personnel On March 31, 2000, the Company had 607 employees of whom 73 were part time. Adjusted for Discontinued Operations, there were 343 full time and 7 part time employees. Because of the nature of services provided, many employees are professional or technical personnel with high levels of training and skills, including engineers, and skilled technicians and mechanics. The Company believes its employee relations are excellent. Although many of the Company's personnel are highly specialized and there is a nationwide shortage of certain qualified technical personnel, the Company has not experienced material difficulties obtaining the personnel required to perform under its contracts and generally does not bid on contracts where difficulty may be encountered in hiring personnel. The Company interfaces with a labor union on one of its government contracts. To date, relations have been excellent. Management believes that the future growth and success of the Company will depend, in part, upon its continued ability to retain and attract highly qualified personnel. Item 2. Properties On November 6, 1997, the Company sold its headquarters office complex for $5,250,000 and leased back the building. The transaction generated other income of $1,490,000 of which $715,000 is being amortized over the 12 year lease-back of its headquarters building. The net sale proceeds were applied to the reduction of debt. The Company is obligated under 17 short-term facility leases connected with its operations. Item 3. Legal Proceedings There are no material pending legal proceedings to which the Company is a party. The Company is engaged in ordinary routine litigation incidental to the Company's business to which the Company is a party. Item 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of shareholders on March 2, 2000 at the Company's Annual Meeting of Shareholders.
Shares Voted: 1) Election of Directors For Against Abstained Arch C. Scurlock 1,896,507 - 1,566 John H. Grover 1,897,507 - 566 Thomas L. Hewitt 1,897,507 - 566 Alvin E. Nashman 1,830,557 - 67,516 John J. Ries 1,896,507 - 1,566 John M. Toups 1,830,557 - 67,516 2) Ratification of Deloitte & Touche LLP as independent public accountants of the Company for the fiscal year ending March 31, 2000 1,897,657 376 40 3) Approval of amendment of the Company's 1994 Key Employee Stock Option Plan to increase the number of shares issuable from 280,000 to 400,000. 1,204,880 19,764 1,097
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock, par value $0.24, is listed on the American Stock Exchange At June 22, 2000 there were approximately 711 holders of record of the Company's Common Stock as reported by the Company's transfer agent. The following table sets forth the quarterly range of high and low sales prices on the American Stock Exchange. Fiscal Year 2000 Fiscal Year 1999 Fiscal Quarter High Low High Low April - June (a) $ - $ - $9-1/2 $7-5/8 July - Sept. 7-1/8 4-1/2 9-1/4 6-5/8 Oct. - Dec. 7-1/8 4-1/2 9-3/8 5-1/4 Jan. - March 8 5-15/16 11 7 (a) The Company's stock did not trade from March 17, 1999 until September 13, 1999 due to an American Stock Exchange trading halt. Upon the filing of the Company's 10-K for the year ended March 31, 1999, trading was resumed. The Company did not declare a cash dividend to be paid in fiscal year 2000 and there is no assurance it will do so in future periods. Amendments to the current bank loan agreement prohibit the payment of dividends. In fiscal 1999, the Company paid a cash dividend of $0.05 per share on June 10, 1998, September 10, 1998, December 10, 1998 and March 10, 1999 to shareholders of record on May 20, 1998, August 21, 1998, November 25, 1998 and February 24, 1999, respectively. In fiscal 1998, the Company paid a cash dividend of $0.05 per share on June 10, 1997, September 10, 1997, December 10, 1997 and March 10, 1998 to shareholders of record on May 27, 1997, August 27, 1997, November 26, 1997 and February 26, 1998, respectively. Item 6. Selected Financial Data The following table includes certain selected financial data adjusted for Discontinued Operations(see Note 15 to the consolidated statements) of the Company (amounts in thousands, except per share data).
2000 1999 1998 1997 1996 Revenue - Continuing $53,530 $ 59,071 $ 56,219 $ 57,341 $33,111 Operations Income (loss) Continuing operations 1,385 (5,316) (5,512) (3,640) 577 Discontinued operations 928 17 (88) 320 186 Net income (loss) $ 2,313 $(5,299) $(5,600) $(3,320) $ 763 Total Assets $27,808 $ 38,735 $ 30,967 $ 37,776 $24,828 Long-term obligations $12,793 $ 12,505 $ 12,923 $ 15,956 $ 3,313 Income (loss) per common share - basic Continuing operations $ .70 $ (2.64) $ (2.75) $ (1.83) $ .33 Discontinued operations .47 .01 (.04) .16 .10 $ 1.17 $ (2.63) $ (2.79) $ (1.67) $ .43 Income (loss) per common share - diluted Continuing operations $ .69 $ (2.64) $ (2.75) $ (1.83) $ .33 Discontinued operations .46 .01 (.04) .16 .10 $ 1.15 $ (2.63) $ (2.79) $ (1.67) $ .43 Weighted average number of shares outstanding Basic 1,984,014 2,012,611 2,006,603 1,985,599 1,756,811 Diluted* 1,999,811 2,012,611 2,006,603 1,985,599 1,756,919 Dividends per common $ - $ .20 $ .20 $ 1.87 $ 1.73 share *Due to loss in 1999, 1998 and 1997, no effect is given to dilutive securities
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual 10-K 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 operations and planned growth, ramifications regarding the embezzlement matter and changes in government regulations and competition, which may, among other things affect 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. Readers are referred to the "Factors that May Affect Future Results" section within this Item 7 of Form 10-K which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. As more fully discussed in Note 2 to the 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 matter had a material effect on the Company's financial statements for fiscal years 2000, 1999, 1998 and 1997, and accordingly, the Company's financial statements for 1998 and 1997 have been previously restated. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on the Company's fiscal year ended March 31. (Tabular information: dollars in thousands, except per share amounts). Results of operations and related notes thereto have been adjusted for Discontinued Operations. (See Note 15 to the consolidated financial statements.)
Years Ended March 31, Results of Operations 2000 1999 Change % 1999 1998 Change % Revenues $53,530 $59,071 $(5,541) -9% $59,071 $56,219 $2,852 5% Cost of services 51,183 58,031 (6,848) -12% 58,031 53,185 4,846 9% Percent of revenues 96% 98% 98% 95% General and Administrative 2,096 2,052 44 2% 2,052 2,113 (61) -3% Percent of revenues 4% 3% 3% 4% Total operating cost and expenses 53,279 60,083 (6,804) -11% 60,083 55,298 4,785 9% Percent of revenues 100% 102% 102% 98% Operating income (loss) 251 (1,012) 1,263 N/M (1,012) 921 (1,933) N/M Percent of revenues 0% -2% -2% 2% Interest expense 1,066 1,050 16 2% 1,050 1,170 (120) -10% Other (income) expense (55) 773 (828) N/M 773 (923) 1,696 N/M Embezzlement (recovery) expense (2,250) 2,593 (4,843) N/M 2,593 6,044 (3,451) N/M Income (loss) before taxes and discontinued operations 1,490 (5,428) 6,918 N/M (5,428) (5,370) (58) -1% Income tax expense (benefit) 105 (112) 217 N/M (112) 142 (254) N/M Income (loss) before discontinued operations 1,385 (5,316) 6,701 N/M (5,316) (5,512) 196 4% Discontinued operations 928 17 911 N/M 17 (88) 105 N/M Net income (loss) $ 2,313 $(5,299) $ 7,612 N/M $(5,299) $(5,600) $ 301 5% Earnings (loss) per share - - basic Continuing operations $ .70 $ (2.64) $ (2.64) $(2.75) Discontinued operations .47 .01 .01 (.04) $ 1.17 $ (2.63) $ (2.63) $(2.79) Earnings (loss) per share - - diluted Continuing operations $ .69 $ (2.64) $ (2.64) $ (2.75) Discontinued operations .46 .01 .01 (.04) $ 1.15 $ (2.63) $ (2.63) $ (2.79)
Revenues Revenues for the fiscal year ended March 31, 2000 decreased by 9% from 1999 principally due to reductions in orders from the U.S. Army on a digital communications switch contract. This was partially offset by the ramp-up of deliveries under the Company's seat management contract with the Virginia Department of Transportation. Revenues for the fiscal year ended March 31, 1999 increased by 5% from 1998 primarily due to increased orders from the U.S. Army on a digital communications switch contract. Operating Costs and Expenses Cost of services for the fiscal year ended March 31, 2000 decreased by 12% from 1999, which was somewhat larger than the comparable revenues decline. Although revenues declined year on year, the fixed price lower margin U.S. Army business which declined was somewhat offset by growth in the higher margin technology services which resulted in cost of services decreasing at a higher percentage than the percentage of decrease in revenue. In addition, 1999 costs of services included certain unusual charges related to inventory obsolescence of approximately $1.7 million due to potential Y2K issues and the write off of an under performing maintenance services contract. Cost of services for the fiscal year ended March 31, 1999 increased by 9% over 1998 principally due to the non-recurring charges for inventory obsolescence, under performing contracts which impacted 1999, and the of higher revenues from the lower margin U.S. Army business costs. General and administrative expenses increased 2% in 2000 from 1999 principally as a result of increases in staffing in key strategic areas offset by reductions in depreciation expense. General and administrative expenses for the fiscal year ended March 31, 1999 decreased 3% from 1998 primarily due to modestly lower commercial insurance costs. Operating Income As a result of the margin improvement arising from the sales mix change and the reduction in general and administrative expenses the Company generated operating income of $251,000 in 2000 as compared to an operating loss of $1.0 million in 1999. In 1999 the Company reported an operating loss of $1.0 million as compared to operating income of $921,000 in 1998. The principal reason for the change was the increase in volume in lower margin U.S. Army business which materially increased the cost of services ratio for 1999 as compared to 1998. Interest and Other Income or Expense Interest expense increased 2% in 2000 as compared to 1999, primarily due to higher interest rates and the large amount of debt outstanding during the first half of fiscal year 2000. Interest expense for 1999 decreased 10% as compared to 1998, principally due to a decline in effective interest rates. Other income was $55,000 in 2000 as compared to expense of $773,000 in 1999 which was principally related to one-time write-offs of certain fixed assets in 1999. In 1998 other income of $923,000 was primarily attributable to a gain recognized on the sale/leaseback of the Company's corporate headquarters. Embezzlement Loss Embezzlement losses reflect the cash amounts embezzled from the Company. The embezzlement loss in 1998 reflects actual cash losses. The loss in 1999 was net of $3.5 million of total net recoveries realized from certain recovered assets (net of recovery costs) and insurance proceeds. In 2000 embezzlement recovery reflected additional recoveries net of certain recovery costs. For additional discussion see "Embezzlement Matter" in Item 1 and Note 2 of the consolidated financial statements. Income Taxes As a result of the Company's historical losses (principally from the embezzlement) the Company generated significant loss carryforwards (both federal and state). At March 31, 2000 the Company had remaining net operating loss carryforwards amounting to approximately $10.2 million. Due to the uncertainty of future realization the Company has not recorded a net benefit for these operating loss carryforwards in its financial statements. 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 15 to the consolidated financial statements.) The net of tax results for Discontinued Operations for 2000, 1999 and 1998 were $928,000, $17,000, and $(88,000), respectively. The increase in net income from 1999 to 2000 resulted principally from one-time contract modifications generated by a single cusomter. Net Income (loss) from Continuing Operations The 2000 net income of $1.4 million was principally the result of embezzlement recoveries amounting to $2.25 million. Net losses in 1999 of $5.3 million were the result of embezzlement losses of $2.6 million and operating loss, in the amount of $1.0 million. Net losses in 1998 of $5.6 million were related to embezzlement losses of $6.0 million and operating income, in the amount of $921,000. 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 issues, 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.
Liquidity and Capital Resources 2000 1999 1998 Cash $ 1,800,000 $ 0 $ 0 Working capital 3,771,000 740,000 7,363,000 Net cash provided by operations before impact of embezzlement 1,488,000 1,940,000 4,804,000 Net cash recovered (used) related to embezzlement 5,078,000 (5,421,000) (6,044,000) Net cash provided by (used in) operating activities 6,566,000 (3,481,000) (1,240,000) Net cash (used) provided by investment activities (694,000) (651,000) 2,776,000 Net cash (used) provided by financing activities $(4,072,000) $4,132,000 $(1,810,000)
At March 31, 2000, the Company's working capital of $3,771,000 and current ratio of 1.22 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 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. In fiscal 1998, the sale of the Company's office complex provided over $4.8 million of cash, net of selling expenses, which was used to retire mortgage debt of $2.5 million and other operating debt as well as pay income taxes on the transaction. In a January 1998 private placement, the Company issued a $2 million 7% Convertible Subordinated Debenture due January 2003 to Research Industries, Incorporated. The net proceeds were applied to reduce the Company's revolving line of credit. In 1998, operations required $1,240,000 for working capital needs. A summary of future minimum lease payments is in Note 10 to the consolidated financial statements. Capital expenditures in 1999 and 2000 were substantially reduced from prior years to conserve cash and the Company does not expect fiscal year 2001 technology requirements to result in greater capital expenditures than fiscal year 2000. The Company continues to sublease a portion of its headquarters building generating approximately $148,000 annually. 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 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. 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 March 31, 2000 amounted to $ 3.19 million. The subordinated debt agreements with an affiliate totaled $4 million at March 31, 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 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. Item 7A. 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 March 31, 2000. The table presents principal cash flows and related interest rates by year of maturity of the Company's funded debt. Note 6 to the consolidated financial statements contains descriptions of the Company's funded debt and should be read in conjunction with the table below (amount in thousands).
Year Ending March 31, Long-term debt (including 2001 2002 Total Fair Value current maturities) Debt Revolving credit agreement at the LIBOR rate plus 2.55%. Due July 1, 2001. Average interest rate of 8.46%. $ - $ 6,677 $ 6,677 $ 6,677 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%. 384 2,116 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%. 691 - 691 691 Total variable debt 1,075 8,793 9,868 9,868 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. 2,887 - 2,887 2,887 Total fixed debt 2,887 4,000 6,887 6,847 Total debt $3,962 $12,793 $16,755 $16,715
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 8. Financial Statements and Supplementary Data Financial statements and supplementary data of the Company are attached hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. Item 11. Executive Compensation Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. Item 13. Certain Relationships and Related Transactions Incorporated by reference from the Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- K (a) The following documents are filed as part of this report: 1.Consolidated Financial Statements o Report of Independent Auditors o Consolidated Statements of Operations for the years ended March 31, 2000, 1999 and 1998 o Consolidated Balance Sheets as of March 31, 2000 and 1999 o Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998 o Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended March 31, 2000, 1999 and 1998 o Notes to Consolidated Financial Statements 2. Financial Statement Schedule o Schedule II, Valuation and Qualifying Accounts All other schedules are omitted since they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits 3.1 Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended March 31, 1995.) 3.2 By-laws, as amended. (Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended March 31, 1995.) 3.3 Articles of Amendment to Articles of Incorporation. 4.1 Loan and Security Agreement dated January 30, 1989 between the Company and Crestar Bank. (Incorporated by reference to Exhibit 4.1 to Form 10-K for the year ended March 31, 1989.) 4.2 First Amendment to Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated Dec. 11, 1992 and amended and restated revolving note. (Incorporated by reference to Exhibit 4.2 to Form 10-K for the Year ended March 31, 1993.) 4.3 Loan agreement dated June 30, 1993 between the Company and Crestar Bank. (Incorporated by reference to Exhibit 4.3 to Form 10-K for the year ended March 31, 1994.) 4.4 Second Amendment to Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated November 14, 1994 and amended and restated revolving note. (Incorporated by reference to Exhibit 4.4 to Form 10-K for the year ended March 31, 1995.) 4.5 Fifth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated June 25, 1998 and restated notes (Incorporated by reference to Form 8-K dated October 6, 1998.) 4.6 Sixth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated September 7, 1999 and restated notes. 4.7 Third Amendment to the Sixth Amended and Restated Loan and Security Agreement between the Company and SunTrust Bank (formerly Crestar Bank) dated September 7, 1999 and related notes. 10.1 1984 Incentive Stock Option and Stock Appreciation Rights Plan, as amended. (Incorporated by reference to Exhibit 10.3 to the Form 10- K for the year ended March 31, 1989). 10.2 Agreement of purchase and sale with amendments dated June 7, 1992, between the Company and ReCap Inc. for the Halifax Office Complex. (Incorporated by reference to Exhibit 10.5 of the Form 10-K for the year ended March 31, 1992). 10.3 1994 Key Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the year ended March 31, 1995). 10.7 Charles L. McNew Executive Severance Agreement. 22 Subsidiaries of the registrant. 23 Consent of Deloitte & Touche LLP, Independent Auditors. 23.1 Consent of Ernst & Young LLP, Independent Auditors. (b) Reports on Form 8-K SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By /s/Charles L. McNew Charles L. McNew President and Chief Executive Officer Date: 7/10/00 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/Charles L. McNew President and 7/10/00 Charles L. McNew Chief Executive Principal Executive Officer Officer, Director /s/Joseph Sciacca Vice President, 7/10/00 Joseph Sciacca Finance and Chief Principal Financial and Financial Officer Accounting Officer /s/Arch C. Scurlock Chairman of the 7/10/00 Arch C. Scurlock Board of Directors /s/John H. Grover Director 7/10/00 John H. Grover /s/Thomas L. Hewitt Director 7/10/00 Thomas L. Hewitt /s/Alvin E. Nashman Director 7/10/00 Alvin E. Nashman /s/John Toups Director 7/10/00 John Toups INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Halifax Corporation: We have audited the accompanying consolidated balance sheet of Halifax Corporation and subsidiaries as of March 31, 2000, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Halifax Corporation and subsidiaries at March 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 15 to the financial statements, the Company has discontinued the operational outsourcing segment of its operations. /s/DELOITTE & TOUCHE LLP McLean, VA June 15, 2000 (July 5, 2000 as to Note 6) INDEPENDENT AUDITORS' REPORT Report Of Independent Auditors Board of Directors and Stockholders Halifax Corporation We have audited the accompanying consolidated balance sheet of Halifax Corporation as of March 31, 1999, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the two years in the period then ended. Our audits also included the financial statement schedule listed in the index at item 14(a)2 as of March 31, 1999 and 1998. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Halifax Corporation at March 31, 1999, and the consolidated results of its operations and its cash flows for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule as of March 31, 1999 and 1998, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Washington , D.C. September 7, 1999
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2000 1999 1998 Revenues (Note 1) $53,530,000 $59,071,000 $56,219,000 Operating costs and expenses: Cost of services 51,183,000 58,031,000 53,185,000 General and administrative 2,096,000 2,052,000 2,113,000 Total operating costs and expenses 53,279,000 60,083,000 55,298,000 Operating income (loss) 251,000 (1,012,000) 921,000 Interest expense (1,066,000) (1,050,000) (1,170,000) Other income (expense) 55,000 (773,000) 923,000 Embezzlement recovery (loss) 2,250,000 (2,593,000) (6,044,000) Income (loss) from continuing operations before income taxes 1,490,000 (5,428,000) (5,370,000) Income tax expense (benefit) 105,000 (112,000) 142,000 Income (loss) from continuing operations 1,385,000 (5,316,000) (5,512,000) Income from discontinued operations net of income tax expense (benefit) of $35,000, $12,000 and $(58,000) in 2000, 1999 and 1998, respectively 928,000 17,000 (88,000) Net income (loss) $ 2,313,000 $(5,299,000) $(5,600,000) Earnings (loss) per common share-basic: Continuing operations $ .70 $ (2.64) $ (2.75) Discontinued operations .47 .01 (.04) $ 1.17 $ (2.63) $ ( 2.79) Earnings (loss) per common share-diluted: Continuing operations $ .69 $ (2.64) $ (2.75) Discontinued operations .46 .01 (.04) $ 1.15 $ (2.63) $ (2.79) Weighted average number of common shares outstanding - basic 1,984,014 2,012,611 2,006,603 Weighted average number of common shares outstanding - diluted 1,999,811 2,012,611 2,006,603 See notes to consolidated financial statements
HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND 1999 March 31 2000 1999 ASSETS CURRENT ASSETS Cash $ 1,800,000 $ - Restricted cash 650,000 - Trade accounts receivable (Note 3) 13,558,000 23,800,000 Other receivables (Note 3) - 2,848,000 Inventory (Note 1) 4,390,000 3,949,000 Prepaid expenses and other current assets 719,000 569,000 Income taxes receivable (Notes 1 and 9) - 808,000 TOTAL CURRENT ASSETS 21,117,000 31,974,000 PROPERTY AND EQUIPMENT, net (Notes 1 and 4) 2,106,000 2,230,000 GOODWILL, net (Notes 1 and 5) 4,113,000 4,350,000 OTHER ASSETS 472,000 181,000 TOTAL ASSETS $27,808,000 $ 38,735,000 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 4,809,000 $ 14,091,000 Accrued expenses (Note 7) 8,080,000 7,835,000 Deferred maintenance revenue 596,000 1,588,000 Current portion of long-term debt (Note 6) 3,962,000 7,720,000 Income taxes payable 36,000 - TOTAL CURRENT LIABILITIES 17,483,000 31,234,000 LONG-TERM BANK DEBT (Note 6) 8,793,000 8,505,000 SUBORDINATED DEBT - AFFILIATE (Note 6) 4,000,000 4,000,000 DEFERRED INCOME (Note 10) 572,000 630,000 TOTAL LIABILITIES 30,848,000 44,369,000 COMMITMENTS AND CONTINGENCIES (Note 12) 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 - 2,316,370 in 2000 and 2,270,090 in 1999 Outstanding - 2,017,436 in 2000 and 2,013,406 in 1999 560,000 549,000 Additional paid-in capital 4,683,000 4,413,000 Accumulated deficit (8,071,000) (10,384,000) Less Treasury stock at cost - 298,934 and shares in 2000 and 1999 (212,000) (212,000) TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,040,000) (5,634,000) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $27,808,000 $ 38,735,000 See notes to consolidated financial statements
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2000 1999 1998 Cash flows from operating activities: Net income (loss) $ 2,313,000 $(5,299,000) $(5,600,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,055,000 1,277,000 1,404,000 Common stock issued in lieu of interest 233,000 - - Loss (gain) on sale or disposal of property and equipment - 773,000 (695,000) Changes in assets and liabilities: Decrease(increase) in accounts receivable 10,242,000 (7,282,000) 2,899,000 Decrease (increase) in other receivables 2,848,000 (2,831,000) 20,000 (Increase) decrease in inventory (441,000) 1,309,000 54,000 (Increase) decrease in prepaid expenses and other current assets (150,000) (276,000) 418,000 (Increase) decrease in other assets (291,000) 139,000 93,000 Decrease (increase) in income tax receivable 808,000 (226,000) (434,000) (Decrease) increase in accounts payable, accrued expenses and other current liabilities (10,029,000) 8,995,000 (132,000) Increase in deferred income taxes - - 43,000 Increase in income taxes payable 36,000 - - (Decrease) increase in deferred income (58,000) (60,000) 690,000 Net cash provided by (used in) operating activities 6,566,000 (3,481,000) (1,240,000) Cash flows from investing activities: Purchase of property and equipment 694,000) (651,000) (2,030,000) Proceeds from sale of property and equipment - - 4,856,000 Acquisitions - - (50,000) Net cash (used in) provided by investing activities (694,000) (651,000) 2,776,000 Cash flows from financing activities: Proceeds from debt borrowings 43,207,000 53,431,000 36,862,000 Repayments of debt (46,677,000) (48,915,000) (38,315,000) Restricted cash (650,000) - - Cash dividends paid - (403,000) (401,000) Proceeds from sale of stock upon exercise of stock options 48,000 19,000 44,000 Net cash (used in) provided by financing activities (4,072,000) 4,132,000 (1,810,000) Net increase (decrease) in cash 1,800,000 - (274,000) Cash at beginning of year - - 274,000 Cash at end of year $ 1,800,000 $ - $ - See notes to consolidated financial statements
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998 Common Additional Retained Treasury Stock Stock Paid-In Earnings Shares Par Capital (Deficit) Shares Cost Total Value March 31, 1997 2,258,866 $546,000 $4,358,000 $ 1,319,000 300,484 $ (213,000) $ 6,010,000 Cash Dividends ($.20 per share) - - - (401,000) - - (401,000) Net loss - - - (5,600,000) - - (5,600,000) Exercise of Stock Options 8,300 2,000 41,000 - - - 43,000 CMSA Acquisition Earnout (1,550) 1,000 1,000 March 31, 1998 2,267,166 $548,000 $4,399,000 $(4,682,000) 298,934 $ (212,000) $53,000 Cash Dividends ($.20 per share) - - - (403,000) - - (403,000) Net loss - - - (5,299,000) - - (5,299,000) Exercise of Stock Options 2,924 1,000 14,000 - - 15,000 March 31, 1999 2,270,090 $549,000 $4,413,000 $(10,384,00) 298,934 $ (212,000) $(5,634,000) Net income - - - 2,313,000 - - 2,313,000 Exercise of Stock Options 10,800 2,000 46,000 - - - 48,000 Issuance of Common Stock (Note 8) 35,480 9,000 224,000 - - - 233,000 March 31, 2000 2,316,370 $560,000 $4,683,000 $(8,071,000) 298,934 $ (212,000) $(3,040,000) See notes to consolidated financial statements.
HALIFAX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY Business Activity - Halifax Corporation, (the "Company") provides technology services and facilities management (See Note 15 for details regarding disposition of operational outsourcing division) for commercial and government activities. These services include the integration, systems engineering, installation, maintenance and training for computer systems, communications systems, and simulation systems; and the management, operations and maintenance support of military bases, prisons, waterways, major office complexes, and communications sites. Principles of Consolidation - The Company's consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Wholly-owned subsidiaries include Halifax Engineering, Inc., Halifax Realty, Inc., and Halifax Technology Services, Inc. (HTSI) which was sold effective March 31, 2000 (see Note 15). All significant intercompany transactions are eliminated in consolidation. Accounts Receivable and Inventories - Receivables and inventories are primarily attributable to long-term contracts or programs in progress for which the related operating cycles are longer than one year. In accordance with industry practice, these items are included in current assets. Inventory - Inventory consists principally of spare computer parts and computer and computer peripheral hardware and software in the process of delivery upon resale to customers. All inventories are valued at the lower of cost or market on the first-in first-out basis. These inventories are recorded on the consolidated balance sheet net of allowances for inventory valuation of $125,000 and $1,500,000 at March 31, 2000 and 1999, respectively. Property and Equipment - Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 4 years for automotive equipment, 3-10 years for machinery and equipment, 5-10 years for furniture and equipment and 12 years for building improvements. The Company examines the carrying value of its property and equipment to determine whether there are any impairment losses. If indicators of impairments were present, an impairment loss would be charged to expense in the period identified. No reduction of property and equipment was necessary in 2000 or in 1999. Goodwill - Goodwill in acquired companies, described in Note 5, is being amortized using the straight-line method over periods ranging from 10 to 25 years. The Company examines the carrying value of its goodwill to determine whether there are any impairment losses if indicators of impairment are present. If future cash flows are not expected to be sufficient to recover the asset's carrying amount, an impairment loss would be charged to expense in the period identified. No reduction of goodwill for impairment was necessary in 2000 or in 1999. Revenue Recognition - Service revenues result from contracts with various government agencies and private industry. Revenues on cost plus fee and fixed price contracts are recognized using the percentage of completion method generally determined on the basis of cost incurred to date as percentage of estimated total cost. Revenues on time and materials contracts are recognized at contractual rates as labor hours and materials are expended. Losses are recognized in the period in which they become determinable. Income Taxes - Deferred taxes are provided on all temporary differences measured using enacted tax rates expected to be in effect during the periods in which the temporary differences reverse. Stock-Based Compensation- The Company accounts for stock-based compensation for employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and comply with the disclosure provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25 Compensation expense is based on the difference, if any, on the measurement date, between the fair value of the common stock and the exercise price. Earnings Per Common Share - The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earning per share is based on the weighted average number of shares including adjustments to both net income and shares outstanding to assume the conversion of dilutive common stock equivalents. Due to the net loss in the years ended March 31, 1999 and 1998, the computation of diluted earnings per share for those years is based on the weighted average number of shares outstanding during the period and does not include dilutive common stock equivalents. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification - Certain reclassifications have been made in the 1999 and 1998 financial statements to conform to the 2000 presentation. The consolidated statement of operations and related notes thereto have been adjusted to reflect Discontinued Operations arising from the sale of the Company's Operational Outsourcing Division (HTSI). (See Note 15.) New Accounting Pronouncements - In March 2000, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB Opinion No. 25", which clarifies the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees" for certain issues ("Opinion No. 25"). The Interpretation clarifies (a) the definition of "employee" for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The Interpretation is effective July 1, 2000, but certain conclusions cover specific events occurring after December 15, 1998 or January 12, 2000, for which the effects are recognized on a prospective basis from July 1, 2000. The Company has not yet determined what impact, if any, will result from the adoption of this Interpretation. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments (including some derivatives embedded in other contracts) and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. FASB Statement No. 133 will be adopted by the Company in its fiscal year ending March 31, 2002, and the Company has not determined what impact, if any, this Standard will have when adopted. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement established accounting standards for cost incurred in the acquisition or development and implementation of computer software. These new standards require the capitalization of software implementation costs relating to software acquired or developed and implemented for internal use. The adoption of this statement, effective January 1, 1999, had no impact on the Company's financial position or results of operations. 2. EMBEZZLEMENT MATTER 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 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. Cash received relating to embezzlement recoveries was as follows: Fiscal 1999 $ 672,000 Fiscal 2000 6,328,000 Total cash recovered 7,000,000 Recovery costs 1,250,000 Net cash recovered $ 5,750,000 The Company continues to pursue recovery activities from certain parties although no assurances can be given as to the timing or extent of such recoveries. 3. ACCOUNTS RECEIVABLE
Trade accounts receivable consist of: March 31, 2000 1999 Amounts billed $12,457,000 $ 19,341,000 Amounts unbilled: Amounts currently billable 1,414,000 4,908,000 Retainages and amounts awaiting audit 90,000 208,000 Total 13,961,000 24,457,000 Allowance for doubtful accounts (403,000) (657,000) Total $13,558,000 $ 23,800,000 Other receivables consist of: Embezzlement recoveries (see Note 2) $ - $ 2,828,000 Warranty and other - 20,000 $ - $ 2,848,000
Embezzlement recoveries receivable represents the difference between the estimated $3.5 million of total net recoveries and $672,000 of cash received at March 31, 1999. The amount was collected during the year ended March 31, 2000. Retainages are generally billable upon acceptance of work by customers or completion of contract audits by the Government. It is anticipated that the accounts receivable balance at March 31, 2000 will be substantially collected within one year. 4. PROPERTY AND EQUIPMENT
Property and equipment March 31, consists of: Estimated 2000 1999 Useful Lives Automotive equipment $ 354,000 $ 338,000 4 years Machinery and equipment 6,215,000 5,648,000 3 - 10 years Furniture and fixtures 1,408,000 1,386,000 5 - 10 years Building and improvements 719,000 630,000 12 years Total 8,696,000 8,002,000 Accumulated depreciation and amortization (6,590,000) (5,772,000) Total $ 2,106,000 $ 2,230,000
5. GOODWILL Amortization of Goodwill is calculated using the straight-line method over the estimated useful lives ranging from 20 to 25 years. Intangibles, included in goodwill, consists of contract rights and is amortized over ten years. As of March 31, 2000 goodwill consists of $2,594,000 being amortized over 20 years, $2,485,000 being amortized over 25 years and $400,000 being amortized over 10 years. Amortization expense was $237,000 and $254,000 for March 31, 2000 and 1999, respectively.
March 31, 2000 1999 Goodwill $ 5,479,000 $ 5,479,000 Accumulated Amortization (1,366,000) (1,129,000) Net Goodwill $ 4,113,000 $ 4,350,000
As a result of the disposition of its operational outsourcing division (HTSI), the net book value of goodwill will be reduced by approximately $700,000 and resulting annual amortization of goodwill will be reduced by approximately $60,000. (See Note 15)
6. LONG-TERM DEBT March 31, Long-term debt consists of: 2000 1999 Revolving credit agreement amended effective December 21, 1999, and July 5, 2000, with a maximum credit line of $6,000,000. Amounts available under this agreement are determined by applying stated percentages to the Company's eligible billed and unbilled receivables. A maximum amount of $6,000,000 is available to the Company due July 1, 2001. At March 31, 2000, $6,680,000 was available to the Company under the terms of the prior revolving credit agreement. Interest accrues at LIBOR plus 2.25% depending on a leverage ratio. The LIBOR rate was 5.91% and 5.4% on March 31, 2000 and 1999, respectively. $6,677,000 $11,600,000 Tier II Term Note dated June 25, 1998. Principal to be paid in quarterly installments due on the 15th day of March, June, September and December commencing on the first scheduled payment date following payment in full of the Tier III Term Note. Interest accrues on the principal at the LIBOR rate plus 2.65%. The LIBOR rate was 5.91% and 5.4% on March 31, 2000 and 1999, respectively. The note is due on July 1, 2001. 2,500,000 2,500,000 Tier III Term Note dated June 25, 1998. Principal is to be paid in $125,000 quarterly installments due on the 15th day of March, June, September and December commencing September 1998. Interest accrues on the principal at the LIBOR rate plus 3.55%. The LIBOR rate was 5.91% and 5.4% on March 31, 2000 and 1999, respectively. The note is due on July 1, 2001. 691,000 2,125,000 Subtotal bank debt 9,868,000 16,225,000 7% Convertible Subordinated Debenture with an affiliate (see Note 11) dated January 27, 1998. Principal due in full on January 27, 2003. Interest payable semiannually in arrears beginning August 1, 1998. May be prepaid by the Company on any date more than two years after January 27, 1998. Convertible to common stock by note holder at any time at a conversion price of $11.72 per common share. 2,000,000 2,000,000 Subordinated note with an affiliate (see Note 11) dated October 8, 1998. Principal due in full July 1, 2001 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 690,000 690,000 Subordinated note with an affiliate (see Note 11) dated October 13, 1998. Principal due in full July 1, 2001 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 310,000 310,000 Subordinated note with an affiliate (see Note 11) dated November 2, 1998. Principal due in full July 1, 2001 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 500,000 500,000 Subordinated note with an affiliate (see Note 11) dated November 5, 1998. Principal due in full July 1, 2001 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 500,000 500,000 Subtotal - debt affiliated parties 4,000,000 4,000,000 Subordinated note dated September 2, 1999. Principal and interest payments of $299,965 due on the first of each month with a final payment due on February 1, 2001 of $299,974. The note bears interest of 8.5% 2,887,000 - Total debt 16,755,000 20,225,000 Less current maturities 3,962,000 7,720,000 Total long-term debt $12,793,000 $12,505,000
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 $6,677,000 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 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 (see Note 2), if any, to term debt balances outstanding and to reduce its maximum line and the revolving credit agreement to $6,000,000. The Company was in non- compliance under the terms of its revolving credit agreement and term loan facilities at March 31, 2000, with respect to targeted earning requirements as specified in the agreement. As part of the agreement the bank waived the non-compliance with the financial covenant. In accordance with the terms of the new banking agreement, 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 aggregate annual maturities of long-term debt, based on the terms of the new banking agreement, are as follows for the fiscal years ending March 31,: 2001 $ 3,962,000 2002 10,793,000 2003 2,000,000 2004 - 2005 - Total $ 16,755,000 The carrying value of total debt approximates fair market value at March 31, 2000 and 1999. 7. ACCRUED EXPENSES Accrued expenses consist primarily of costs incurred against various cost reimbursable contracts and payroll related costs.
March 31, 2000 1999 Accrued expenses $ 6,250,000 $ 5,711,000 Accrued vacation 820,000 867,000 Accrued payroll 905,000 974,000 Payroll taxes accrued and withheld 105,000 283,000 $ 8,080,000 $ 7,835,000
8. STOCK -BASED COMPENSATION Stock Options - On September 16, 1994 the shareholders approved the new Key Employee Stock Option Plan ("1994 Plan"). Options and/or stock appreciation rights expire five years after the date of grant. The maximum number of shares of the Company's common stock subject to the 1994 Plan and approved for issuance is 280,000 shares either authorized and unissued or shares held in treasury. This number is subject to adjustment in the event of stock splits, stock dividends or other recapitalization of the Company's common stock. On March 2, 2000 the shareholders approved amendments to the 1994 Plan which increased the number of shares available for issuance to 400,000 shares. A summary of options activity is as follows:
Weighted Average Weighted Grant Options Average Options Date Fair Exercisable Exercise Market price Value 1994 PLAN March 31, 1997 119,201 $5.78 53,249 $6.29 Options granted 15,500 8.69 - 8.69 Exercised - - - - Cancelled (25,500) 5.00 - 5.00 Balance March 31, 1998 109,201 6.38 55,249 6.33 Options granted 34,000 7.81 - 7.81 Exercised - - - - Cancelled - - - - Balance March 31, 1999 143,201 6.72 61,749 6.49 Options granted 202,000 6.07 - 6.07 Exercised (10,800) 4.80 - 4.80 Cancelled (121,033) 6.19 - 6.19 Balance March 31, 2000 213,368 $ 6.50 61,749 $ 6.49
The following table summarizes the information for options outstanding and exercisable at March 31, 2000.
Options Options outstanding Exercisable Options Weighted Options Weighted Average Average Range of Prices Outstanding Remaining Exercisab Exercise price Life le $4.67-7.67 59,368 1-2 years 53,249 $6.29 7.56-10.25 8,500 3 years 2,000 7.56 7.81-7.88 18,500 4 years 6,500 7.81 5.50-7.56 127,000 5 years - - 213,368 61,749 $6.49
The weighted average fair value of options granted during March 31, 2000, 1999 and 1998 are:
2000 1999 1998 Fair value of each option granted $ 6.07 $ 7.81 $ 8.69 Total number of options granted 202,000 34,000 15,500 Total fair value of options granted $ 1,226,140 $265,540 $134,695
A summary of Non-Employee Directors Stock Options Plan activity is as follows:
Weighted Average Weighted Grant Options Average Date Fair Exercisable Exercise Market price Value Options Options granted 30,000 $ 10.25 - $ - Balance March 31, 1998 30,000 10.25 18,750 10.25 Options granted 12,000 7.03 - - Balance March 31, 1999 42,000 9.33 23,250 9.63 Options granted - - - - Balance March 31, 2000 42,000 $ 9.33 23,250 $ 9.63
The following table summarizes the information for options outstanding and exercisable at March 31, 2000.
Options Options outstanding Exercisable Weighted Options Weighted Average Options Average Range of Outstandin Remaining Life Exercisable Exercise Prices g price $10.25 30,000 3 years 18,750 $ 10.25 7.03 12,000 4 years 4,500 7.03 42,000 23,250 $ 9.63
The weighted average fair value of options granted during March 31, 2000, 1999 and 1998 are:
2000 1999 1998 Fair value of each option granted $ - $ 7.03 $ 10.25 Total number of options granted - 12,000 30,000 Total fair value of options $ - $84,360 $307,500 granted
All stock-based incentive awards granted in 2000, 1999 and 1998 under the 1994 Plan were stock options with 5 year terms and vest at the end of the third and fourth years. All awards granted in 1999 under the Non- Employee Directors Stock Options Plan were stock options with 5 year terms and vest in installments cumulatively with respect to one-sixtieth of that option stock per month after the date of grant. Exercise prices of all options awarded in all years under all plans were equal to the market price of the stock on the date of grant. The fair value of each of the Company's option grants is estimated on the date of grant using Black- Scholes option - pricing model as prescribed by SFAS No. 123 using the following assumptions: risk-free interest rate of 5.8 %, 5.36% and 5.99% respectively, dividend yield of 0%, 2% and 2% respectively, volatility factor related to the expected market price of the Company's common stock of .449, .262, and .442 weighted-average expected option life of five years. The weighted average fair value of options granted during 2000, 1999 and 1998 were $ 2.91, $2.35 and $2.66, respectively. For purposes of proforma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. The Company's proforma information for the years ended March 31, is as follows. Consistent with the provisions of SFAS No. 123, had compensations cost been determined based on the fair value of awards granted in 2000, 1999, and 1998, the income and loss attributable to common shareholders would have been as follows:
Year Ending March 31, 2000 1999 1998 Net income (as reported) $2,313,000 $ (5,299,000) $(5,600,000) Earnings (loss) per common share (as reported): Basic $ 1.17 $ (2.63) $ (2.79) Diluted $ 1.15 $ (2.63) $ (2.79) Proforma net income (loss) $2,067,000 $ (5,354,000) $(5,634,000) Proforma earnings (loss) per common share: Basic $ 1.04 $ (2.66) $ (2.81) Diluted $ 1.03 $ (2.66) $ (2.81)
EMPLOYEE 401(K) RETIREMENT PLAN The Company sponsors a 401(k) retirement plan covering substantially all non-union employees with more than 3 months of service. The plan provides that the Company will contribute an amount equal to 50% of a participant contribution up to 4% of salary, and at the Company's discretion, additional amounts based upon the profitability of the Company. The Company's contributions were $198,000 in 2000, $230,000 in 1999 and $199,000 in 1998. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan under which all employees of the Company are eligible to contribute funds for the purchase of the Company's common stock on the open market at market value. Under the Plan, the Company agrees to pay all brokerage commissions associated with such purchases. 9. INCOME TAXES Deferred tax assets and liabilities on the balance sheets reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income-tax purposes. The deferred tax assets and liabilities are classified on the balance sheets as current or non current based on the classification of the related assets and liabilities. The components of income tax expense (benefit) for Continuing Operations are as follows for the years ended March 31:
2000 1999 1998 Current (benefit) expense: Federal $ 15,000 $ (627,000) $ 424,000 State 5,000 (55,000) 94,000 Total current: 20,000 (682,000) 518,000 Deferred expense (benefit): Federal 85,000 505,000 (345,000) State - 65,000 (31,000) Total deferred: - 570,000 (376,000) Income tax expense $ 105,000 $ (112,000) $ 142,000 (benefit)
The components of the Company's deferred tax assets and liabilities consist of the following at March 31:
2000 1999 Deferred tax assets: Accounts receivable reserves $ 195,000 $ 117,000 Inventory 119,000 597,000 Accrued compensation/vacation 326,000 238,000 AMT credit carryforwards 59,000 45,000 Net operating loss carryforward 3,793,000 4,789,000 Deferred gain on building sale 221,000 248,000 Embezzlement loss - 210,000 4,713,000 6,244,000 Deferred tax liabilities: Unbilled accounts receivable- retainage $ 39,000 $ - Deferred start-up costs - (5,000) Depreciation/amortization 526,000 (815,000) Contract claims/other 2,000 (2,000) 567,000 (822,000) 4,146,000 5,422,000 Valuation allowance (4,146,000) (5,422,000) Net deferred tax asset $ - $ -
Due to the uncertainty of future realization, the Company has not recorded a net benefit for these operating loss carryforwards and other deferred tax assets in its fiscal 2000 and 1999 financial statements. The change in the valuation allowance of $1,276,000 results primarily from the decrease in the net operating loss carryforward due to the previous carryback of this loss to the years ended March 31, 1997 and 1998. The differences between the provision for income taxes at the expected statutory rate for Continuing Operations and those shown in the consolidated statements of operations are as follows for the years ended March 31:
2000 1999 1998 Provision (benefit) for income taxes at statutory rate 34.0% (34.0)% (34.0)% State taxes, net of federal benefit 5.8 (4.4) (4.4) Other 4.5 1.0 1.0 Valuation allowance (39.5) 35.1 39.0 Total 4.8% (2.3)% 1.6%
The Company has a $10.2 million net operating loss carryover virtually all of which expires in fiscal 2019. The $808,000 income tax receivable at March 31, 1999 consists of net operating loss carryback refunds of $682,000 and $126,000 of estimated tax payments made in fiscal 1999. The balance of the income tax receivable at March 31, 2000 was $0. 10.LEASING ACTIVITY The Company is obligated under operating leases for office space and certain equipment. The following are future minimum lease payments under operating leases as of March 31, 2000:
Year ending March 31, 2001 $ 1,197,000 2002 1,173,000 2003 1,165,000 2004 1,005,000 2005 656,000 thereafter 2,493,000 Total minimum lease payments $ 7,689,000
Deferred revenue of $572,000 and $630,000 at March 31, 2000 and 1999 represents the deferred gain on the sale - lease-back of the Company's office complex. The deferred revenue is being recognized as a reduction of rent expense over the remaining life of the lease. Total rent expense under operating leases was $1,123,000, $1,188,000 and $954,000 for the years ended March 31, 2000, 1999 and 1998, respectively. The Company sold its office complex on November 6, 1997 and leased back its headquarters building for 12 years. Aggregate future minimum rentals to be received under noncancelable subleases as of March 31, 1999 are $148,000. 11.RELATED PARTY TRANSACTIONS During the years ended March 31, 2000, 1999 and 1998, the Company paid $102,575, $74,250 and $62,000, respectively, for legal services to a Board member serving as General Counsel; $53,968, $88,247 and $9,096, respectively, to a law firm in which the same Board member is a partner; and $14,000, $24,000 and $24,000, respectively, for consulting services to another Board member. Research Industries, Incorporated, the owner of 715,780 shares or 34.9% of the Company's common stock, owns $2 million face amount of the Company's 7% Convertible Subordinated Debenture dated January 27, 1998 and $690,000, $310,000, $500,000 and $500,000 face amount of the Company's Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. Interest expense on the subordinated debt totaled $222,000 and $37,000 for 1999 and 1998, respectively (See Note 6). On December 1, 1999, the Company issued 35,480 shares of common stock in the amount of $233,000 in lieu of cash in payment of interest on notes due to Research Industries through October 31, 1999. The value of the stock was equal to the market price on date of issue. At March 31, 2000, interest payable to Research Industries was $125,000. During the year ended March 31, 2000 the Company paid $105,000 to a consultant who is now an officer of the Company. 12.COMMITMENTS AND CONTINGENCIES Cost incurred by the Company on the performance of U.S. Government contracts are subject to audit by the Defense Contract Audit Agency (DCAA). In the opinion of management, the final settlement of these costs will not result in significant adjustments to recorded amounts. Upon the death of certain former officers and at the option of their estates, the Company is committed to purchase 54,112 of their shares of the Company's common stock at current book value. At March 31, 2000, the book value of the Company was a deficit and therefore, the Company had no obligation. There are no material pending legal proceedings to which the Company is a party. The Company is engaged in ordinary routine litigation incidental to the Company's business to which the Company is a party. 13.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid the following amounts for interest and income taxes during the years ended March 31:
2000 1999 1998 Interest $ 1,547,000 $ 1,454,000 $ 1,535,000 Income taxes $ 20,000 $ 325,000 $ 578,000
14. Earnings per share The following table sets forth the computation of basic and diluted earnings (loss) per share:
Years Ended March 31, 2000 1999 1998 Numerator for earnings per share: Net income (loss) as reported from: Continuing operations $1,385,000 $(5,316,000) $(5,512,000) Discontinued operations 928,000 17,000 (88,000) Net income (loss) $2,313,000 $(5,299,000) $(5,600,000) Denominator: Denominator for basic earnings 1,984,014 2,012,611 2,006,603 per share- Weighted-average shares outstanding Effect of dilutive securities:* 7% convertible debenture - - - Employee stock options 15,797 - - Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted- average shares and assumed 1,999,811 2,012,611 2,006,603 conversions Earnings (loss) per share - basic: Continuing operations $ .70 $ (2.64) $ (2.75) Discontinued operations .47 .01 (.04) Basic earnings (loss) per share $ 1.17 $ (2.63) $ (2.79) Diluted earnings (loss) per share:* Continuing operations $ .69 N/A* N/A* Discontinued operations .46 N/A* N/A* Diluted earnings (loss) per share $ 1.15 N/A* N/A*
*Because of losses, no effect is given to dilutive securities in 1999 and 1998. The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earning per share is based on the weighted average number of shares including adjustments to both net income and shares outstanding to assume the conversion of dilutive common stock equivalents. Due to the net loss in the years ended March 31, 1999 and 1998, the computation of diluted earnings per share for those years is based on the weighted average number of shares outstanding during the period and does not include dilutive common stock equivalents. For the year ended March 31, 2000, the convertible debenture was anti-dilutive and therefore not included in diluted earnings per share. 15.DISCONTINUED OPERATIONS During the fourth quarter ended March 31, 2000, the Company announced a plan to divest itself of its Operational Outsourcing Division (HTSI). On May 31, 2000 the transaction was consummated. 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 Agreement contemplates, and 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:
2000 1999 1998 Revenue $26,246,000 $ 22,741,000 $ 17,551,000 Costs and expenses 25,283,000 22,712,000 17,697,000 Operating income (loss) 963,000 29,000 (146,000) Income tax expense (benefit) 35,000 12,000 (58,000) Income (loss)from discontinued operations $ 928,000 $ 17,000 $ (88,000)
The assets of Discontinued Operations consisted primarily of billed and unbilled accounts receivable of $4,473,000 and $4,854,000, respectively, and related accounts payable and accrued expenses of $1,973,000 and $2,970,000, respectively for years ended March 31, 2000 and 1999. The net book value of goodwill will be reduced by approximately $700,000 and resulting annual amortization of goodwill will be reduced by approximately $60,000. For the years ended March 31, 2000, 1999 and 1998 interest expense of $522,000, $404,000 and $365,000, respectively was charged to the Discontinued Operations. Interest expense was allocated to Discontinued Operations based on the relationship of Discontinued Operations revenue to total revenue. The Company intends to utilize its net operating loss carryforward to offset substantially all of the taxes resulting from the gain on the disposition. 16. OTHER INFORMATION Revenues from services rendered to the United States Government and the relative percentages of such revenues to total revenues for the years ended March 31, 2000, 1999 and 1998 were $13,701,000 (25%), $21,480,000 (36%), and $14,454,000 (26%), respectively. The reduction in United States Government revenue in fiscal 2000 was primarily a result of reduced deliveries of digital telecommunications switches under long-term contracts.
Halifax Corporation Schedule II, Valuation and Qualifying Accounts March 31, 2000 Balance at Additions Balance at beginning charged to end of of year cost & Deductions Year expense Year Ended March 31, 2000 Allowance for doubtful accounts $ 657,000 $ 510,000 $ 764,000 $ 403,000 Allowance for inventory obsolescence $1,500,000 $ 628,000 $2,003,000 $ 125,000 Year Ended March 31, 1999 Allowance for doubtful accounts $ 372,000 $ 605,000 $ 320,000 $ 657,000 Allowance for inventory obsolescence $ 356,000 $1,680,000 $ 536,000 $1,500,000 Year Ended March 31, 1998: Allowance for doubtful accounts $ 215,000 $ 363,000 $ 206,000 $ 372,000 Allowance for inventory obsolescence $ 499,000 $1,376,000 $1,519,000 $ 356,000
EXHIBITS Exhibit 3.3 Articles of Amendment to Articles of Incorporation Exhibit 4.7 Third Amendment to the Sixth Amended and Restated Loan and Security Agreement Exhibit 10.7 Executive Severance Agreement Exhibit 23 Consent of Deloitte & Touche LLP, Independent Auditiors Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditiors Exhibit 27 Financial Data Schedule - - EX-3.3 2 0002.txt ARTICLES OF AMENDMENT TO ARCTICLES OF INCORPORATION Exhibit 3.3 HALIFAX CORPORATION Articles of Amendment To Articles of Incorporation The following Articles of Amendment were proposed by the Board of Directors and submitted to and adopted by the shareholders of the Corporation in accordance with Section 13.1 of the Code of Virginia. I. The name of the Corporation is "Halifax Corporation." II. The amendment so adopted is to revise and restate Article III of the Articles of Incorporation to read as follows: ARTICLE III A. The total number of shares of stock of all classes that the Corporation has authority to issue is 7,500,000, consisting of 6,000,000 shares of common stock, $0.24 par value per share (the "Common Stock"), and 1,500,000 shares of preferred stock without nominal or par value (the "Preferred Stock"). B. The Preferred Stock may be issued from time to time in one or more series. C. The Board of Directors of the Corporation is authorized to fix, in whole or in part, the preferences, limitations and relative rights, within the limits set forth in the Code of Virginia, on any wholly unissued class of Preferred Stock by the adoption of an amendment of the Articles of Incorporation as provided for in the relevant provisions of the Code of Virginia. III. The date on which the duly constituted members of the Board of Directors of the Corporation found the Amendment to be in the best interest of the corporation and directed that it be submitted for approval and adoption by the shareholders of the corporation was July 10, 1998. Such Amendment was approved and adopted by shareholders of the corporation after due notice at a meeting of shareholders held September 18, 1998. IV. The number of shares issued, outstanding and entitled to vote at the meeting, was 2,013,406, consisting entirely of one class of common stock, 1,512,648 of which were voted in favor of the proposed Amendment and 67,347 voted against the proposed Amendment. Executed in the name of the Corporation by its President and its Secretary who declare under penalties of perjury that the facts stated herein are true, correct and complete. HALIFAX CORPORATION By: President ATTEST: Secretary EX-4.7 3 0003.txt THIRD AMENDMENT TO THE SIXTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Exhibit 4.7 THIRD AMENDMENT TO SIXTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS THIRD AMENDMENT TO SIXTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Amendment"), dated as of July 5, 2000, is made by and among HALIFAX CORPORATION, a Virginia corporation (the "Company"), HALIFAX ENGINEERING, INC., a Virginia corporation ("Engineering") and HALIFAX REALTY, INC., a Virginia corporation ("Realty," and together with the Company and Engineering, collectively, the "Borrowers"), and SunTrust BANK, a Georgia banking corporation, successor by merger to CRESTAR BANK (the "Lender"). RECITALS The Borrowers and the Lender are parties to the Sixth Amended and Restated Loan and Security Agreement, dated as of September 1, 1999, as amended by the First Amendment to Sixth Amended and Restated Loan and Security Agreement, dated as of September 30, 1999 and by the Second Amendment to Sixth Amended and Restated Loan and Security Agreement, dated as of December 21, 1999 (as further amended, modified or supplemented from time to time, the "Loan Agreement"). By virtue of the closing of the HTSI Sale, Technical is no longer a party to the Loan Documents. Capitalized terms defined in the Loan Agreement and undefined herein shall have the same defined meanings when such terms are used in this Amendment. The Company is in default of the financial covenant contained in Section 6.11(c) of the Loan Agreement for the Company's fiscal quarter ended on March 31, 2000 (the "Net Profit Covenant Default"). The Borrowers have requested that the Lender waive the Net Profit Covenant Default and amend certain provisions of the Loan Agreement. The Lender has agreed to do so, subject to the terms and conditions hereof. Accordingly, for valuable consideration, the receipt and sufficiency of which are acknowledged, the Borrowers and the Lender agree as follows: AMENDMENT Notwithstanding anything to the contrary contained in the Loan Documents, the Lender waives its right to declare an Event of Default under the Loan Documents as a result of the Net Profit Covenant Default. The parties hereto acknowledge and agree that the foregoing sentence shall not constitute a waiver, either express or implied, of any other default, covenant, term or provision of the Loan Documents, nor shall it create any obligation of the Lender to waive any existing or future default or violation of any other covenant, term or provision of the Loan Documents. The parties hereto agree that Lender shall be entitled to require strict compliance by the Borrowers with the Loan Documents, notwithstanding the limited express waiver and amendment contained herein, and this waiver and amendment shall not be deemed to establish a course of action or a course of dealing with respect to requests by the Borrowers for a waiver or amendment of any default, covenant, term or provision of any Loan Document. The Loan Agreement is amended as follows: The Termination Date is extended to July 1, 2001. The Maximum Amount is permanently reduced to $6,000,000. The Borrowers shall prepay the Revolving Loans to the extent that the aggregate amount of outstanding Revolving Loans and Letters of Credit exceeds the Maximum Amount (as reduced hereby), the Borrowing Base or both. On the date of this Agreement, the Borrowers shall make a $425,000 principal prepayment (the "$425,000 Curtailment") of Term Loan Two and Term Loan One (with such amount being applied first to Term Loan Two and then to Term Loan One). The parties hereto acknowledge and agree that upon payment by the Borrowers of the $425,000 Curtailment, the $125,000 installment of Term Loan One and Term Loan Two due June 15, 2000 will be deemed to be paid in full. Upon the first to occur of (a) July 20, 2000 or (b) the date of availability for application to the Obligations of funds of the Borrowers in an amount not less than $650,000 theretofore held in any cash collateral account maintained with the Lender and securing any Letter of Credit (or the date of receipt of such funds from the purchaser of Technical pursuant to the HTSI Sale, if such cash collateral cannot be made available for such application), the Borrowers shall make an additional $450,000 principal prepayment of Term Loan Two and Term Loan One (with such amount being applied first to Term Loan Two and then to Term Loan One). On or before August 1, 2000, the Borrowers shall make an additional $200,000 principal prepayment of Term Loan Two and Term Loan One (with such amount being applied first to Term Loan Two and then to Term Loan One). The Borrowers shall prepay Term Loan Two and Term Loan One (with such amount being applied first to Term Loan Two and then to Term Loan One) in an amount equal to 50% of the proceeds received by the Borrowers with respect to any Recoveries, including without limitation Recoveries arising from the settlement of claims of the Borrowers against Ernst & Young, LLP ("E&Y") in connection with, relating to or arising from the Embezzlement, with each such prepayment being made promptly upon receipt by the Borrowers of the applicable Recoveries. The Borrowers agree that the Lender has the right (but not the obligation) to provide written notice to E&Y of the Borrowers' assignment of such percentage of such Recoveries, which notice may direct E&Y to pay such percentage of such Recoveries directly to the Lender. Notwithstanding anything to the contrary contained in the Loan Agreement or any other Loan Document, the Borrowers shall furnish to the Lender not later than the date of this Amendment the current draft of the Company's Form 10-K Annual Report for the Company's fiscal year ended on March 31, 2000, to be filed with the Securities and Exchange Commission (the "Draft 10-K"). The Draft 10-K shall be in form and substance satisfactory to the Lender in its sole discretion. Notwithstanding anything to the contrary contained in the Loan Agreement or any other Loan Documents, as soon as available and in any event not later than July 31, 2000, the Borrowers shall furnish the Lender with consolidated and consolidating balance sheets, income statements and cash flows of the Borrowers setting forth projections for each fiscal quarter of the Company's fiscal year ending on March 31, 2001, and setting forth in reasonable detail the assumptions underlying such projections. The Borrowers shall pay to the Lender a closing fee in the aggregate amount of $100,000, the first $50,000 of which (the "First Installment") shall be due and payable on the date of this Amendment and the remaining $50,000 of which (the "Second Installment") shall be due and payable on August 1, 2000. Notwithstanding the foregoing, the Second Installment shall not be due and payable, and the closing fee shall be limited to the First Installment, if all outstanding Obligations evidenced by Term Note One and Term Note Two are paid in full by the Borrowers to the Lender on or before August 1, 2000. In addition, if all Obligations have not been paid in full by the Borrowers to the Lender by January 1, 2001, the Borrowers shall pay to the Lender, on January 2, 2001 and on the first day of each calendar month thereafter until all Obligations have been paid in full, an availability fee in an amount equal to $25,000 per month. The payment to the Lender by the Borrowers of the Revolving Loan prepayment described in Paragraph 2(b) of this Amendment, the $425,000 Curtailment and the First Installment shall be conditions precedent to the effectiveness of this Amendment. In addition, receipt, review and approval by the Lender of the Draft 10-K shall be a condition precedent to the effectiveness of this Amendment. Except for the amendments to the Loan Agreement set forth above, the Loan Documents shall remain in full force and effect. The Borrowers acknowledge and agree that each reference in the Loan Documents to the Termination Date shall be deemed to be a reference to such Termination Date as extended hereby, each reference in the Loan Documents to the Maximum Amount shall be deemed to be a reference to such Maximum Amount as reduced hereby and each reference in the Loan Documents to any particular Loan Document shall be deemed to be a reference to such Loan Document as amended hereby. The Borrowers acknowledge and agree that this Amendment only amends the terms of the Loan Agreement and is not a novation, and the Borrowers ratify and confirm the remaining terms and provisions of the Loan Documents in all respects. The Borrowers acknowledge and agree that the prior grant of a security interest in the Collateral continues to secure the Obligations, is in full force and effect, and is ratified and confirmed by the Borrowers in all respects. Nothing in this Amendment shall require the Lender to grant any further amendments to the terms of the Loan Documents. Each Borrower represents and warrants that this Amendment has been duly authorized, executed and delivered by it in accordance with resolutions adopted by its board of directors. All other representations and warranties made by the Borrowers in the Loan Documents are incorporated by reference in this Amendment and are deemed to have been repeated as of the date of this Amendment with the same force and effect as if set forth in this Amendment, except that any representation or warranty relating to any financial statements shall be deemed to be applicable to the financial statements most recently delivered to the Lender in accordance with the provisions of the Loan Documents. This Amendment shall be governed by the laws of the Commonwealth of Virginia, without reference to conflict of laws principles. This Amendment may be executed by the parties individually or in any combination, in one or more counterparts, each of which shall be an original and all of which together constitute one and the same instrument. [SIGNATURES ON FOLLOWING PAGE] WITNESS the following signatures. LENDER: SunTrust BANK, a Georgia banking corporation, successor by merger to CRESTAR BANK By: ___________________________ Timothy J. Duggan Senior Vice President BORROWERS: HALIFAX CORPORATION, a Virginia corporation By: _____________________________ Name: ___________________________ Title: ____________________________ HALIFAX ENGINEERING, INC., a Virginia corporation By: _____________________________ Name: ___________________________ Title: ____________________________ HALIFAX REALTY, INC., a Virginia corporation By: _____________________________ Name: ___________________________ Title: ____________________________ EX-10.7 4 0004.txt EXECUTIVE SEVERANCE AGREEMENT Exhibit 10.7 EXECUTIVE SEVERANCE AGREEMENT AGREEMENT, dated as of May 8, 2000, between Halifax Corporation, a Virginia corporation ("Company"), and Charles L. McNew ("Executive"). WITNESSETH: WHEREAS, Executive has been employed by the Company in a position of high responsibility and authority and is presently its chief executive officer, and WHEREAS, it is in the best interest of the parties hereto that orderly and equitable provisions be made in the event of termination of the Executive. NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The Company and the Executive agree that the Executive is employed on an at-will basis. Unless otherwise specifically provided in a written agreement signed by both the Company and the Executive, the parties understand that the Executive is employed for no fixed term or period, that either the Company or the Executive may terminate the Executive's employment with the Company at any time with or without a reason, and that this Agreement creates no contract of employment between the Company and the Executive. 2. This Agreement shall remain in full force and effect so long as the Executive continues to be employed by the Company. 3. The Company shall have the right to terminate the Executive's employment without payment of severance as provided below in the event of the Executive's death, or on thirty (30) days written notice in the event that the Executive shall be unable, or shall fail, to perform all of the services required of his position with the Company as a result of any mental or physical incapacitating disability, to the extent that such inability or failure to perform required duties shall exist for any consecutive ninety (90) day period. The Company's right to terminate the Executive's employment without payment of severance under this Paragraph shall not limit or reduce in any way the Executive's right to receive benefits under any disability insurance or plan maintained by the Company for the benefit of the Executive. 4. The Executive shall have the right to terminate his employment with the Company at any time on written notice to the Company indicating the Executive's desire to retire or to resign from the Company's employment. 5. Except as provided in Paragraph 3 and 4, the Executive's employment with the Company may be terminated without payment of severance as provided below only in the event of a termination for cause as defined in this Paragraph. For the purposes of this Agreement, "Cause" shall be defined as gross negligence, willful misconduct, fraud, willful disregard of the Board of Directors' direction or breach of published Company policy. The Executive may be terminated for Cause only in accordance with a resolution duly adopted by an absolute majority of the Company's Board of Directors finding that, in the good faith opinion of the Board of Directors, the Executive engaged in conduct justifying a termination for Cause as that term is defined above and specifying the particulars of the conduct motivating the Board's decision to terminate the Executive. Such resolution may be adopted by the Board of Directors only after the Board has provided to the Executive (1) five (5) days advance written notice of a meeting of the Board called for the purpose of determining Cause for termination of the Executive, (2) a statement setting forth the alleged grounds for termination, and (3) an opportunity for the Executive and, if the Executive so desires, the Executive's counsel to be heard before the Board. 6. In the event of termination without cause prior to May 7, 2001, Executive shall receive twelve months of his then current salary. Thereafter, except in connection with a Change of Control Disposition as defined in Paragraph 12, if the Executive's employment with the Company is terminated for any reason other than those set forth in Paragraphs 3, 4 or 5 above, then the Company shall pay to the Executive an amount equal to twelve (12) months salary based upon the current salary of the Executive at the time of termination. 7. If following a Change of Control Disposition (herein "Change of Control Disposition" shall be as defined below in Paragraph 12) of the Company, the Executive's employment is terminated within one (1) year of the "Change of Control Disposition Date" (as herein defined below in Paragraph 12) for any reason other than the reasons set forth in Paragraphs 3, 4 or 5 above, then the Company shall pay to the Executive an amount equal to two (2) times the amount that the Company would have been required to pay the Executive under Paragraph 6 above if the Executive's employment had been terminated in the absence of a Change of Control Disposition. In the event Executive is terminated for any reason within ninety (90) days following the Change of Control Disposition Date, the Company shall pay to the Executive an amount equal to two (2) times his then current salary. Notwithstanding the foregoing, maximum compensation payable to the Executive pursuant to this Paragraph is limited to no more than 299% of the "base amount" of Executive's compensation as defined in the Tax Reform Act of 1984 (Section 280G and applicable regulations thereunder and any amendments thereto). 8. At the time of termination of the Executive's employment for any reason the Executive shall be paid all other compensation and benefits due to the Executive at the time of termination. 9. The Executive may elect to receive the compensation payable in accordance with this Agreement in a lump sum or in equal payments at intervals no more often than semimonthly, over a period of the Executive's choice not to exceed the number of months of compensation due him pursuant to this Agreement. 10. The Executive shall not disclose, publish, or use for any purpose not directly related to the performance of the Executive's duties for the Company, or permit anyone else to disclose, publish, or use any proprietary or confidential information or trade secrets of the Company at any time during or after his employment with the Company. This obligation shall continue so long as such information remains legally protectable as to persons receiving it in a confidential relationship. Executive agrees to return to the Company all proprietary material which he possesses on the date of termination of the Executive's active employment with the Company. 11. For a period of six (6) months following termination of Executive's employment with the Company for any reason other than "Cause," as defined in Paragraph 5 above, the Executive shall not (1) directly or indirectly, sell, market, or otherwise provide any client or previously identified prospective client of the Company, products or services similar to or in competition with those sold or distributed by the Company, in any geographic area in which the Company offers any such products or services, or (2) participate directly or indirectly in the hiring or soliciting for employment of any person employed by the Company. 12. By reason of the special and unique nature of the obligations hereunder, it is agreed that neither party hereto may assign any interests, rights or duties which the party may have in this Agreement without the prior written consent of the other party, except that upon any "Change of Control Disposition" of the Company through purchase, merger, consolidation, liquidation, change in control by reason of any single entity (individual or group) other than Research Industries Incorporated, the Company or a Company Employee Stock Ownership Plan and Trust, acquiring twenty-five percent (25%) or more of the voting power of the Company's stock, or sale of all or substantially all of the assets of the Company to another party whether or not the Company is the surviving corporation, this Agreement shall inure to the benefit of and be binding upon the Executive and the purchasing, surviving or resulting entity, company or corporation in the same manner and to the same extent as though such entity, company or corporation were the Company. Notwithstanding the foregoing, a sale of Company stock by Research Industries Incorporated shall not be included in a "Change of Control determination. The "Change of Control Disposition Date" shall be that calendar date on which the Change of Control Disposition event was consummated and legally binding upon the parties. 13. Any controversy or claim arising out of, or relating to this Agreement, or its breach, or otherwise arising out of or relating to the Executive's employment (including without limitation to any claim of discrimination whether based on race, color, religion, national origin, gender, age, sexual preference, disability, status as a disabled or Vietnam-era veteran, or any other legally protected status, and whether based on federal or State law, or otherwise) by the Company shall be resolved by arbitration. This arbitration shall be held in Fairfax County, Virginia in accordance with the model employment arbitration procedures of the American Arbitration Association. Judgment upon award rendered by the arbitrator shall be binding upon both parties and may be entered and enforced in any court of competent jurisdiction. 14. In consideration of any payment made to the Executive pursuant to this Agreement, the Executive, for himself, his heirs and legal representatives, releases and forever discharges the Company, its predecessors, successors or anyone, and all of the past, present or future officers, directors, agents and employees of the Company from any and all claims, demands, or causes of action, whether known or unknown, exactly at the time of payment or arising subsequently thereto, arising out of or related to the Executive's employment by the Company. 15. This Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Virginia. 16. This Agreement constitutes the entire understanding and agreement between the Company and the Executive with regard to all matters herein. This Agreement may be amended only in writing, signed by both parties hereto. In witness whereof the parties have executed this Agreement to be effective the day and year first above written. HALIFAX CORPORATION By: Chairman of the Board EXECUTIVE Charles L. McNew EX-23 5 0005.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-41995 of Halifax Corporation on Form S-8 pertaining to the Halifax Corporation 1994 Key Employee Stock Option Plan and Non-Employee Directors Stock Option Plan of our report dated June 15, 2000 (July 5, 2000 as to Note 6), (which report expresses an unqualified opinion and includes an explanatory paragraph relating to discontinued operations), appearing in this Annual Report on Form 10-K of Halifax Corporation for the year ended March 31, 2000. /s/DELOITTE & TOUCHE LLP McLean, VA July 11, 2000 EX-23.1 6 0006.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Halifax Corporation's Registration Statement (Form S-8) pertaining to the Halifax Corporation 1994 Key Employee Stock Option Plan of our report dated September 7 1999, with respect to the consolidated balance sheet of Halifax Corporation as of March 31, 1999 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the two years in the period then ended included in Halifax Corporation's Annual Report (Form 10-K) for the year ended March 31, 2000. /s/Ernst & Young LLP Washington, D.C. July 7, 2000 EX-27 7 0007.txt 10K-MARCH-2000
5 10K-MARCH-2000 1 0 12-MOS MAR-31-2000 APR-1-1999 MAR-31-2000 1 1,800,000 0 13,961,000 403,000 4,390,000 21,117,000 8,696,000 6,590,000 27,808,000 17,483,000 0 560,000 0 0 (3,600,000) 27,808,000 53,530,000 53,530,000 51,183,000 53,279,000 (55,000) (2,250,000) 1,066,000 1,490,000 105,000 1,385,000 928,000 0 0 2,313,000 1.17 1.15
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