-----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, UauUIjrmRBFmZcDUzjzsGQgttzsgWaGu4lX4TqFeEyEMgoo5qluK/BghxmyPXLkc YuvpdgyU2F7277b21Nq4QA== /in/edgar/work/20000811/0000720671-00-000010/0000720671-00-000010.txt : 20000921 0000720671-00-000010.hdr.sgml : 20000921 ACCESSION NUMBER: 0000720671-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 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-Q SEC ACT: SEC FILE NUMBER: 001-08964 FILM NUMBER: 694592 BUSINESS ADDRESS: STREET 1: 5250 CHEROKEE AVE CITY: ALEXANDRIA STATE: VA ZIP: 22312 BUSINESS PHONE: 7037502202 MAIL ADDRESS: STREET 1: 5250 CHEROKEE AVENUE CITY: ALEXANDRIA STATE: VA ZIP: 22312 FORMER COMPANY: FORMER CONFORMED NAME: HALIFAX ENGINEERING INC/VA DATE OF NAME CHANGE: 19911204 10-Q 1 0001.txt HALIFAX CORPORATION FORM 10-Q JUNE 30, 2000 FORM 10Q -- QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 312905 eff. 4/26/93.) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) ( X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to _____ Commission file Number 0-12712 1-8964 Halifax Corporation (Exact name of registrant as specified in its charter) Virginia 54-0829246 (State or other jurisdiction of incorporation of organization) (IRS Employer Identification No.) 5250 Cherokee Avenue, Alexandria, VA 22312 (Address of principal executive offices) Registrant's telephone number, including area code (703) 750-2202 N/A (former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( )Yes (X )No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,023,436 as of June 30, 2000. HALIFAX CORPORATION CONTENTS PART I. FINANCIAL INFORMATION page Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 2000 (Unaudited) and March 31, 2000 4 Condensed Consolidated Statements of Operations - Three Months Ended June 30, 2000 and 1999 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended June 30, 2000 and 1999 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 17
Item 1. FINANCIAL STATEMENTS HALIFAX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND MARCH 31, 2000 June 30, March 31, 2000 2000 (Unaudited) ASSETS CURRENT ASSETS Cash $ 1,281,000 $ 1,800,000 Restricted cash 650,000 650,000 Trade accounts receivable 9,889,000 13,558,000 Inventory 4,469,000 4,390,000 Prepaid expenses and other current assets 660,000 719,000 TOTAL CURRENT ASSETS 16,949,000 21,117,000 PROPERTY AND EQUIPMENT, net 1,977,000 2,106,000 GOODWILL, net 3,347,000 4,113,000 OTHER ASSETS 576,000 472,000 TOTAL ASSETS $ 22,849,000 $ 27,808,000 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 3,842,000 $ 4,809,000 Accrued expenses 7,521,000 8,080,000 Deferred maintenance revenue 307,000 596,000 Current portion of long-term debt 3,105,000 3,962,000 Income taxes payable 145,000 36,000 TOTAL CURRENT LIABILITIES 14,920,000 17,483,000 LONG-TERM BANK DEBT 5,031,000 8,793,000 SUBORDINATED DEBT - AFFILIATE 4,000,000 4,000,000 Deferred Income 556,000 572,000 TOTAL LIABILITIES 24,507,000 30,848,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, no par value authorized 1,500,000, issued 0 shares - - Common stock, $.24 par value: Authorized - 6,000,000 shares Issued - 2,322,370 as of June 30, 2000 and 2,316,370 as of March 31, 2000 Outstanding - 2,023,436 as of June 30, 2000 and 2,017,436 as of March 31, 2000 561,000 560,000 Additional paid-in capital 4,709,000 4,683,000 Accumulated deficit (6,716,000) (8,071,000) Less Treasury stock at cost - 298,934 shares (212,000) (212,000) TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,658,000) (3,040,000) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 22,849,000 $ 27,808,000
See notes to Condensed Consolidated Financial Statements See Form 10-K for the fiscal year ended March 31, 2000
HALIFAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) Three Months Ended June 30, 2000 1999 Revenues $ 12,910,000 $ 15,152,000 Operating costs and expenses: Cost of services 12,380,000 14,068,000 General and administrative 566,000 711,000 Total operating costs and expenses 12,946,000 14,779,000 Operating (loss) income (36,000) 373,000 Interest expense 178,000 349,000 Embezzlement loss - recovery costs 254,000 - (Loss) income from continuing operations before income taxes (468,000) 24,000 Income taxes 15,000 - (Loss) income from continuing operations (483,000) 24,000 Discontinued operations: Income from discontinued operations 244,000 92,000 Gain on sale of discontinued operations (net of taxes of $200,000) 1,594,000 - Net income $ 1,355,000 $ 116,000 Basic earnings per common share: (Loss) income from continuing operations $ (0.24) $ 0.01 Discontinued operations 0.12 0.05 Gain on disposition of discontinued operations 0.79 - $ 0.67 $ 0.06 Diluted earnings per common share: (Loss) income from continuing operations $ (0.24) $ 0.01 Discontinued operations 0.12 0.05 Gain on disposition of discontinued operations 0.79 - $ 0.67 $ 0.06 Weighted number of shares outstanding: Basic 2,020,956 2,013,406 Diluted 2,023,882 2,013,406
See notes to Condensed Consolidated Financial Statements
HALIFAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) Three Months Ended June 30, 2000 1999 Cash flows from operating activities: Net income $ 1,355,000 $ 116,000 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 344,000 241,000 Income from discontinued operations (244,000) - Gain on sale of discontinued operations (1,594,000) - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (1,242,000) 3,441,000 Increase in inventory (79,000) (278,000) Decrease in other assets 217,000 73,000 Increase (decrease) in accounts payable and accrued expenses 167,000 (265,000) Increase in income taxes payable 109,000 - (Decrease) increase in deferred maintenance (289,000) 11,000 Decrease in deferred income (16,000) (16,000) Total adjustments (2,627,000) 3,207,000 Net cash (used) provided by continuing operations (1,272,000) 3,323,000 Cash flows from investing activities: Acquisition of property and equipment (155,000) (181,000) Net proceeds from the sale of discontinued operations 5,500,000 - Net cash provided (used) in investing activities 5,345,000 (181,000) Cash flows from financing activities: Proceeds from borrowing of long-term debt 8,992,000 13,680,000 Retirement of long-term debt (13,611,000) (16,710,000) Proceeds from sale of stock upon exercise of stock options 27,000 - Net cash used by financing activities (4,592,000) (3,030,000) Net (decrease) increase in cash (519,000) 112,000 Cash at beginning of period 1,800,000 0 Cash at end of period $ 1,281,000 $ 112,000 See notes to Condensed Consolidated Financial Statements
See notes to Condensed Consolidated Financial Statements Halifax Corporation Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending March 31, 2001. For further information refer to the consolidated financial statements and notes thereto included in the Halifax Corporation Annual Report on Form 10-K for the year ended March 31, 2000. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The guidelines in SAB No. 101 must be adopted by the fourth quarter of 2000. The Company is in the process of evaluating the potential impact of SAB No. 101 on its financial position and results of operations. Note 2 - Embezzlement On March 18, 1999, the Company announced that an internal investigation had revealed a material embezzlement by the former controller of one of the Company's subsidiaries. The embezzlement occurred at, and was confined to, the Company's Richmond, VA based Halifax Technology Services Company (HTSC). At the time of the embezzlement, HTSC was a wholly owned subsidiary of Halifax Corporation, which resulted from a merger of CMSA (acquired by Halifax on April 1, 1996), and CCI (acquired by Halifax on November 25, 1996). On April 1, 1999, HTSC was merged into Halifax Corporation and is now a division of the Company. The embezzlement occurred over a four year period and aggregated approximately $15.4 million of which approximately $15 million was embezzled from the Company and $400,000 from CMSA prior to its acquisition by Halifax. After net recoveries through March 31, 2000, as discussed below, the cumulative net embezzlement loss before taxes was approximately $9.3 million. The embezzlement had a material effect on the Company's financial statements for fiscal years 2000, 1999, 1998 and 1997. In addition to the correction for overstated assets and understated liabilities, the Company recorded a gross embezzlement loss of $6,093,000, $6,044,000 and $2,892,000 for fiscal years ended March 31, 1999, 1998 and 1997 respectively. The embezzlement loss for fiscal 1999 was recorded net of projected recoveries of $3,500,000 (net of recovery costs of $1,000,000) resulting in a net embezzlement loss for fiscal year 1999 of $2,593,000. During the year ended March 31, 1999 the Company recovered $672,000 creating a recovery receivable outstanding of $2,828,000. The recovery receivable was collected in fiscal 2000. During the year ended March 31, 2000 the Company recovered an additional $2,250,000 (net of recovery costs of $250,000) in conjunction with its embezzlement recovery activities. The specific terms and conditions associated with the payment, including the identity of the party, are subjects of a confidentiality agreement that precludes disclosure. For the three months ended June 30, 2000, the Company incurred costs related to the ongoing recovery effort of approximately $254,000. Note 3 - Discontinued Operations On June 2, 2000, the Company executed and delivered a Stock Purchase Agreement dated as of May 31, 2000, with U.S. Facilities, Inc., a Delaware corporation ("Buyer") providing for the sale by the Company to Buyer of Company's operational outsourcing business (the "Business"). The closing of the transactions contemplated in the Agreement (the "Closing") took place simultaneously with the execution and delivery thereof, effective as of May 31, 2000. At the Closing the Company sold to Buyer, all of the capital stock of its wholly-owned subsidiary, Halifax Technical Services, Inc. for a purchase price of $5,600,000, of which $5,500,000 was paid by Buyer to the Company at Closing with the balance of $100,000 due on the first anniversary of the Closing. The purchase price remains subject to various adjustments set forth in the Agreement. A portion of the proceeds received by the Company, in the approximate amount of $2,900,000 was applied on the date of the Closing to the repayment of a portion of its outstanding bank debt. The Company recorded a gain on the sale of $1,594,000 (net of income taxes of $200,000) The Company and the Buyer executed and exchanged at Closing, a Transition Agreement pursuant to which the Company would, for a limited period of time following the Closing, provide administrative assistance and other transition services to Buyer in connection with Buyer's take-over of the Business. Summary operating results of the Discontinued Operations are as follows:
For the three months ended June 30, 2000 1999 Revenue $ 4,636,000 $ 5,818,000 Costs and expenses 4,392,000 5,726,000 Income from discontinued operations $ 244,000 $ 92,000
Note 4 - Tax Matters At June 30, 2000, the Company has a net operating loss carryforward of approximately $8.6 million virtually all of which expires in fiscal 2019. Income tax expense (primarily state taxes), for the three months ended June 30, 2000 and 1999 was $15,000, and $0, respectively. Note 5 - Debt Advances under the revolving credit agreement and term loan facilities are collateralized by a first priority security interest in all of the Company's assets as defined in the revolving credit agreement. The banking agreement also contains financial covenants and financial reporting covenants. The Company has excluded $3,415,000 of the revolving credit agreement from current liabilities because it anticipates it would remain outstanding for an uninterrupted period extending beyond one year from the balance sheet date. At June 30, 1999, the revolving line of credit was $10,200,000, $3,760,000 of which was classified as current and $6,440,000 was classified as long-term. The Company signed a new banking agreement on September 1, 1999 as amended on December 21, 1999 which refinanced the Company's revolving credit and debt. The new debt consisted of a revolving line of credit ($12,000,000 revised facility) and two term loans ($1,000,000 and $2,500,000 revised facilities), however the principal reduction and interest rate provisions of the term loans have been revised as have the interest rate provisions. Standard closing and unused balance fees are included. The revised facilities made $15,500,000 of credit available to the Company. This agreement was to expire on January 2, 2001. All assets of the Company remain as collateral in accordance with the prior agreement. Financial covenants were revised to require only prospective operational performance objectives including minimum quarterly net income of $100,000 beginning September 30, 1999 and quarterly increases in tangible net worth of $150,000. The Company further amended its banking agreement on July 5, 2000, which extended the agreement through July 1, 2001. The Company agreed to make certain accelerated payments on the term loan portion of its debt, apply a portion of future settlement proceeds, if any, to term debt balances outstanding and to reduce its maximum line and the revolving credit agreement to $6,000,000. In accordance with the terms of the new banking arrangement, the Company made additional principal payments on the Tier II and Tier III Term Notes. In addition, the Company paid certain fees in connection with the amendment and will be subject to additional monthly fees commencing January 1, 2001 if the current banking arrangement has not been refinanced. The new agreement prohibits the payment of dividends or distributions as well as the payment of principal or interest on Subordinated Debt. Interest expense on Subordinated Debt is accrued on a current basis. In September 1999, the Company entered into an agreement with a major supplier of digital communications switch hardware for the Company's United States Army contract where approximately $5,500,000 of outstanding accounts payable arising since March 31, 1999 due to the supplier was converted to a note payable which is being paid over 18 months with interest at 8.5%. $507,000 was paid in September and October 1999, $299,965 is being paid on the first day of the next ensuing 15 months and a final payment of $299,974 is due on February 1, 2001. The balance of the note on June 30, 2000 was $2,030,000. The balance of debt at June 30, 2000 and 1999 was $8,136,000 and $15,867,000 respectively. The balance of the subordinated debt was $4,000,000 at June 30, 2000 and 1999. Current portion of long-term debt was $3,105,000 and $5,820,000 at June 30, 2000 and 1999, respectively. Note 6 - Earnings per Share The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended June 30, 2000 1999 Numerator for earning per share: Net income as reported from Continuing operations $(483,000) $ 24,000 Discontinued operations 244,000 92,000 Gain on disposition of discontinued operations 1,594,000 - Net income $1,355,000 $116,000 Denominator: Denominator for basic earnings per share - weighted-average shares 2,020,956 2,013,406 Effect of dilutive securities: 7% Convertible Debenture - - Employee stock options 2,926 - Dilutive potential common shares Denominator for diluted earnings per share weighted number of shares outstanding 2,023,882 2,013,406 Basic earnings (loss) per common share Income (loss) from continuing operations $ (0.24) $ 0.01 Discontinued operations 0.12 0.05 Gain on disposition of discontinued operations 0.79 - $ 0.67 $ 0.06 Diluted earnings (loss) per common share Income (loss) from continuing operations $ (0.24) $ 0.01 Discontinued operations 0.12 0.05 Gain on disposition of discontinued operations 0.79 - $ 0.67 $ 0.06
Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations Forward-Looking Statements Certain statements in this Quarterly 10-Q Report constitute "forward- looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in the Company's market area, inflation, continuation of favorable banking arrangements, the availability of capital to finance planned growth, ramifications of the embezzlement referenced herein, changes in government regulations, availability of skilled personnel and competition, which may, among other things impact on the ability of the Company to implement its business strategy. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward- looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. (Tabular information: dollars in thousands, except per share amounts).
Three Months Ended June 30, Results of Operations 2000 1999 Change % Revenues $ 12,910 $ 15,152 (2,242) -15% Cost of services 12,380 14,068 (1,688) -12% Percent of revenues 96% 93% General & Administrative 566 711 (145) -20% Percent of revenues 4% 5% Operating cost and expenses: 12,946 14,779 (1,833) 12% Percent of revenues 100% 98% Operating (loss) income (36) 373 (409) N/M Percent of revenues 0% 2% Interest expense 178 349 (171) -49% Embezzlement loss - recovery 254 - 254 N/M costs (Loss) income from operations (468) 24 (492) N/M Income tax expense 15 - 15 N/M (Loss)income before discontinued operations (483) 24 (507) N/M Income from discontinued operations 244 92 152 165% Gain on sale of discontinued operations 1,594 0 1,594 N/M Net income $ 1,355 $ 116 1,239 1,068% Earnings per share - basic: Continuing operations $ (0.24) $ 0.01 Discontinued operations 0.12 0.05 Gain on sale of discontinued operations 0.79 - $ 0.67 $ 0.06 Earnings per share - diluted: Continuing operations $ (0.24) $ 0.01 Discontinued operations 0.12 0.05 Gain on sale of discontinued operations .79 - $ 0.67 $ 0.06 Weighted average number of common shares outstanding - basic 2,020,956 2,013,406 Weighted average number of common shares outstanding - diluted 2,023,882 2,013,406
Revenues Revenues for the three months ended June 30, 2000, decreased 15% from the comparable period in 1999 principally due to reductions in order from the U.S. Army on a digital communications switch contract. Operating Costs and Expenses Cost of services for the three months ended June 30, 2000 decreased by 12% from the comparable period in 1999 primarily as a result of the decline in revenues from the aforementioned U.S. Army contract. General and administrative expenses for the three months ended June 30, 2000 decreased by 20% from the comparable period in 1999 principally due to an ongoing cost containment program which was further accelerated by the sale of the Company's operational outsourcing division Operating Income For the three months ended June 30, 2000 the Company incurred a small operating loss ($36K) as compared to operating income of $373K for the three months ended June 30, 1999. The principal reason for the lack of operating income in 2000 was the additional investment in sales and marketing activity related to the Company's IT services and solutions markets and the reduction in U.S. Army revenues. Interest Expense Interest expense for the three months ended June 30, 2000 declined by 49% from the comparable period in 1999 principally as a result of reductions in the amount of debt outstanding. Embezzlement Loss Embezzlement losses incurred for the three months ended June 30, 2000 reflect legal costs associated with certain ongoing recovery efforts. For additional discussion see "Embezzlement Matter" in Note 2 to the condensed consolidated financial statements. Income Taxes Income taxes for the three months ended June 30, 2000 relate to state obligations. The Company did not record any income tax expense for the three months ended June 30, 1999. Discontinued Operations In May 2000 the Company sold its Operational Outsourcing Division and accordingly the financial results for this division have been reclassified as Discontinued Operations. (See Note 3 to the condensed consolidated financial statements.) In addition the Company recognized a one time gain on the sale of the Division amounting to approximately $1.6 million (net of taxes of $200,000). Net Income (Loss) Net income for the three months ended June 30, 2000 was $1.4 million principally due to the sale of the Operational Outsourcing Division. Net income was somewhat offset by the loss from operations which was primarily related to embezzlement losses and interest expense. For the three months ended June 30, 1999 net income was $116 K. Factors That May Affect Future Results The Company's future operating results may be affected by a number of factors including uncertainties relative to national economic conditions, especially as they affect interest rates, industry factors, the Company's ability to successfully increase its business and effectively manage expense margins. The Company must continue to effectively manage expense margins in relation to revenues by directing new business development towards markets that complement or improve existing service lines. The Company must also continue to emphasize operating efficiencies through cost containment strategies, reengineering efforts and improved service delivery techniques. The Company serves its customer base by providing consulting, integration, networking, maintenance and installation services. This industry has been characterized by rapid technological advances that have resulted in frequent introduction of new products, product enhancements and aggressive pricing practices, which also impacts pricing of service activities. The Company's operating results could be adversely affected by industry-wide pricing pressures, the ability of the Company to recruit, train and retain personnel integral to the Company's operations and the presence of competitors with greater financial and other resources. Also, the Company's operating results could be adversely impacted should the Company be unable to effectively achieve the revenue growth necessary to provide profitable operating margins in various operations. The Company's plan for growth includes intensified marketing efforts, an expanding commercial sales program, strategic alliances and, where appropriate, acquisitions that expand market share. There can be no assurances these efforts will be successful. Liguidity and Capital Resources At June 30, 2000, the Company's working capital of $2,029,000 and current ratio of 1.14 indicates the continuing improvement in the Company's financial strength which was negatively impacted by the embezzlement matter which resulted in the use of cash in operations during the quarter ended June 30, 2000 and the three fiscal years ended March 31, 1999. In October and November 1998 in a series of private placements, the Company issued $2 million of subordinated notes due July 1, 2001 to Research Industries Incorporated, a private investment company and an affiliate of the Company. Cash was also provided through bank borrowings. Capital expenditures for the three months ended June 30, 2000 have been substantially reduced from prior periods. The Company does not expect capital expenditures to increase during the current fiscal year. As a direct result of the material nature of the embezzlement matter, the Company was in technical default of its $14.5 million revolving credit agreement and related term notes (aggregating $4.6 million) that were in place at March 31, 1999. In the interim months, the Company entered into a series of forbearance agreements which enabled the borrowing agreement to remain in effect. Effective September 1, 1999, and as amended December 21, 1999 the Company re-negotiated its borrowing agreement to provide funding availability from its current collateral base. At March 31, 2000 the Company was in technical default of the agreement and amended the agreement effective July 5, 2000 extending the agreement through July 1, 2001. In the amendment dated July 5, 2000, the Company agreed to certain accelerated payments of its term debt and reduced the availability of the revolving credit agreement to $6 million (See Note 6 to the March 31, 2000 audited consolidated financial statements). The revolving credit agreement availability which had been reduced to $12 million at March 31, 2000 ($6 million effective July 5, 2000) is subject to borrowing base requirements primarily tied to levels of accounts receivable. In conjunction with cash derived from the sale of the Company's Operational Outsourcing Division the Company paid down its credit line by approximately $3.3 million and term debt by $500K The bank term notes aggregating $4.6 million at March 31, 1999 were renegotiated effective September 1, and amended December 21, 1999 to amounts aggregating $3.5 million. Bank term notes outstanding at June 30, 2000 amounted to $2.7 million. The subordinated debt agreements with an affiliate totaled $4 million at June 30, 2000. The banking agreement dated September 1, 1999 prohibits the payments of principal or interest. (See Note 6 to the consolidated financial statements.) In September 1999, the Company entered into an agreement with a major supplier of digital communications switch hardware for the Company's United States Army contract where approximately $5,500,000 of outstanding accounts payable arising since March 31, 1999 due to the supplier was converted to a note payable which is being paid over 18 months with interest at 8.5%. $507,000 was paid in September and October 1999, $299,965 is being paid on the first day of the next ensuing 15 months and a final payment of $299,974 is due on February 1, 2001. The balance of the note at June 30, 2000 was $2,030,000. The Company believes that funds generated from operations, bank borrowings, embezzlement recoveries and investing activities (including the sale of the Company's Operational Outsourcing Division) should be sufficient to meet its current operating cash requirements through July 1, 2001 although there can be no assurances that all the aforementioned sources of cash can be realized. Year 2000 Compliance The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its on-going business as a result of "Year 2000" issues. However, it is possible that the full impact of the date change, which was of concern due to the possibility that computer programs that had date-sensitive software may have recognized a date using "00" as the year 1900 rather than the year 2000, has not been fully recognized. For example, it could be possible that year 2000 or similar issues, such as leap year -related problems, may occur and impair the Company's ability to process transactions, send invoices, maintain payroll or engage in similar normal business activities, such as financial closing at month or quarterly end. The Company believes that any of these types of problems that may be encountered are likely to be minor and correctable. In addition, the Company could still be negatively affected if its customers or suppliers are adversely affected by year 2000 or similar issues. The Company is not currently aware of any significant year 2000 or similar problems that have arisen for its customers and suppliers. Contingency Plans: The Company has developed a Year 2000 Contingency Plan designed to address problems arising from Year 2000 failures of critical third parties which is directed towards providing alternate sources of supply to the Company. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to changes in interest rates, primarily as result of bank debt to finance its business. The floating interest debt exposes the Company to interest rate risk, with the primary interest rate exposure resulting from changes in the LIBOR rate. It is assumed that the LIBOR rate will remain constant in the future. Adverse changes in the interest rates or the Company's inability to refinance its long-term obligations may have a material negative impact on the Company's operations. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company does not believe such risk is material. The Company does not customarily use derivative instruments to adjust the Company's interest rate risk profile. The information below summarizes the Company's sensitivity to market risks as of June 30, 2000. The table presents principal cash flows and related interest rates by year of maturity of the Company's funded debt. Note 5 to the condensed consolidated financial statements contains descriptions of the Company's funded debt and should be read in conjunction with the table below (amount in thousands).
Period Ending June 30, Long-term debt (including current 2001 2002 Total Fair maturities) Debt Value Revolving credit agreement at the LIBOR rate plus 2.55%. Due July 1, 2001. Average interest rate of 8.46%. $ - $ 3,415 $ 3,415 $ 3,415 ier II term note dated June 25, 1998 at the LIBOR rate plus 2.65%. Due July 1, 2001. Average interest rate of 8.56%. 884 1,616 2,500 2,500 Tier III term note dated June 25, 1998 at the LIBOR rate plus 2.65%. Due July 1, 2001. Average interest rate of 8.56%. 191 - 191 191 Total variable debt 1,075 5,031 6,106 6,106 7% subordinated note from affiliate due January 27, 2003. Estimated yield of 8.56% for 2001 and 9.0% for 2002. - 2,000 2,000 1,960 8% subordinated notes from affiliate due July 1, 2001 - 2,000 2,000 2,000 Subordinated debt dated September 2, 1999 with interest at 8.5%. Due February 1, 2001. 2,030 - 2,030 2,030 Total fixed debt 2,030 4,000 6,030 5,990 Total debt $3,105 $9,031 $12,136 $12,096
At present, all transactions are billed and denominated in U.S. dollars and consequently, the Company does not currently have any material exposure to foreign exchange rate fluctuation risk. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in interest rates. Adverse changes in interest rates can have a material effect on the Company's operations. At June 30, 2000, the Company had $12,136,000 of debt outstanding of which $6,030,000 bears fixed interest rates. If the interest rates charged to the Company on its variable rate debt were to increase significantly, the effect could be materially adverse to future operations. The Company conducts a limited amount of business overseas, principally in Western Europe. At present all transactions are billed and denominated in U.S. dollars and consequently, the Company does not currently have any material exposure to foreign exchange rate fluctuation risk. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - Not applicable (b)Reports on Form 8-K - Item 2. Disposition of Assets dated June 15, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HALIFAX CORPORATION (Registrant) Date: August 10, 2000 By: s/Charles L. McNew Charles L. McNew President & CEO Date: August 10, 2000 By: s/Joseph Sciacca Joseph Sciacca Vice President, Finance & CFO EX-27 2 0002.txt 10Q-JUNE-2000
5 10Q-JUNE-2000 1 0 MAR-31-2001 APR-1-2000 JUN-30-2000 3-MOS 1 1,281,000 0 9,889,000 0 4,469,000 16,949,000 1,977,000 0 22,849,000 14,920,000 0 0 0 561,000 (2,219,000) 22,849,000 12,910,000 12,910,000 12,380,000 12,946,000 (254,000) 0 178,000 (468,000) 15,000 (483,000) 1,838,000 0 0 1,355,000 .67 .67 -----END PRIVACY-ENHANCED MESSAGE-----