10-Q 1 d10q00.txt 1 HALIFAX CORPORATION FORM 10-Q DECEMBER 31, 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 December 31, 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. (X)Yes ( )No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,023,436 shares outstanding as of December 31, 2000. HALIFAX CORPORATION CONTENTS PART I. FINANCIAL INFORMATION page Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) - December 31, 2000 and March 31, 2000 3 Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended December 31, 2000 and 1999 4 Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended December 31, 2000 and 1999 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16
Item 1. FINANCIAL STATEMENTS HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In Thousands) December 31, 2000 March 31, 2000 ASSETS CURRENT ASSETS Cash $ 315 $ 1,800 Restricted cash - 650 Trade accounts receivable 10,400 13,558 Inventory 4,145 4,390 Prepaid expenses and other current assets 592 719 TOTAL CURRENT ASSETS 15,452 21,117 PROPERTY AND EQUIPMENT, net 2,014 2,106 GOODWILL, net 3,234 4,113 OTHER ASSETS 566 472 TOTAL ASSETS $ 21,266 $ 27,808 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 3,306 $ 4,809 Accrued expenses 6,917 8,080 Deferred maintenance revenue 1,327 596 Current portion of long-term debt 1,143 3,962 Income taxes payable 120 36 TOTAL CURRENT LIABILITIES 12,813 17,483 LONG-TERM BANK DEBT 3,836 8,793 SUBORDINATED DEBT - AFFILIATE 4,000 4,000 Deferred Income 531 572 TOTAL LIABILITIES 21,180 30,848 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 December 31, 2000 and 2,316,370 as of March 31, 2000 Outstanding - 2,023,436 as of December 31, 2000 and 2,017,436 as of March 31, 2000 566 560 Additional paid-in capital 4,710 4,683 Accumulated deficit (4,978) (8,071) Less Treasury stock at cost - 298,934 shares (212) (212) TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 86 (3,040) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 21,266 $ 27,808
See notes to Consolidated Financial Statements
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED (UNAUDITED) (In thousands except share data) Three Months Ended Nine Months Ended December 31, December 31, 2000 1999 2000 1999 Revenues $ 14,733 $ 12,617 $ 40,065 $ 43,113 Operating costs and expenses: Cost of services 13,763 12,069 38,010 40,552 General and administrative 716 175 1,890 1,678 Total operating costs and expenses 14,479 12,244 39,900 42,230 Operating income 254 373 165 883 Interest expense (216) (289) (686) (898) Embezzlement - recovery - 2,500 1,821 2,500 Income from continuing operations before income taxes 38 2,584 1,300 2,485 Income taxes 15 5 45 5 Income from continuing operations 23 2,579 1,255 2,480 Discontinued operations: Income from discontinued operations - 246 244 608 Gain on sale of discontinued operations (net of taxes of $200,000) - - 1,594 - Net income $ 23 $ 2,825 $ 3,093 $ 3,088 Basic earnings per common share: Income from continuing operations $ .01 $ 1.30 $ .62 $ 1.26 Discontinued operations - .12 .12 .31 Gain on disposition of discontinued operations - - .79 - $ .01 $ 1.42 $ 1.53 $ 1.57 Diluted earnings per common share: Income from continuing operations $ .01 $ 1.21 $ .62 $ 1.20 Discontinued operations - .11 .11 .28 Gain on disposition of discontinued operations - - .73 - $ .01 $ 1.32 $ 1.46 $ 1.48 Weighted number of shares outstanding: Basic 2,023,436 1,984,783 2,021,331 1,975,714 Diluted 2,023,436 2,158,137 2,191,979 2,149,005
See notes to Consolidated Financial Statements
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED (UNAUDITED) (In Thousands) Nine Months Ended December 31, 2000 1999 Cash flows from operating activities: Net income $ 3,093 $ 3,088 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 693 972 Income from discontinued operations (244) - Gain on sale of discontinued operations (1,594) - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (1,753) 9,957 Decrease in inventory 245 331 Decrease (increase) in other assets 295 (640) Decrease accounts payable and accrued expenses (973) (5,683) Increase in income taxes payable 84 - Increase in deferred maintenance 731 368 Decrease in deferred income (41) (48) Total adjustments (2,557) 5,257 Net cash provided by continuing operations 536 8,345 Cash flows from investing activities: Acquisition of property and equipment (428) (516) Net proceeds from the sale of discontinued operations 5,500 - Net cash provided by (used in) investing activities 5,072 (516) Cash flows from financing activities: Proceeds from borrowing of long-term debt 20,689 48,601 Retirement of long-term debt (28,465) (53,395) Proceeds from restricted cash 650 - Proceeds from sale of stock upon exercise of stock options 33 232 Net cash used in financing activities (7,093) (4,562) Net (decrease) increase in cash (1,485) 3,267 Cash at beginning of period 1,800 - Cash at end of period $ 315 $ 3,267 See notes to Consolidated Financial Statements
Halifax Corporation Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month period ended December 31, 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 fourth quarter of 2000. The Company believes that it is in compliance with this pronouncement in all material respects. 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). 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. Note 2 - Embezzlement On March 18, 1999, the Company announced that an internal investigation had revealed a material embezzlement by the former controller of one of the Company's subsidiaries. The embezzlement had a material effect on the Company's financial statements for fiscal years 2000, 1999, 1998 and 1997. In addition to the correction for overstated assets and understated liabilities, the Company recorded a gross embezzlement loss of $6,093,000, $6,044,000 and $2,892,000 for fiscal years ended March 31, 1999, 1998 and 1997 respectively. The embezzlement occurred over a four year period and aggregated approximately $15.4 million of which approximately $15 million was embezzled from the Company and $400,000 from CMSA prior to its acquisition by Halifax. After net recoveries through December 31, 2000, the cumulative net embezzlement was approximately $11.1 million. For the three months ended December 31, 1999, the Company recovered approximately $2,500,000 (net of recovery costs of $350,000) related to the ongoing recovery effort. For the nine months ended December 31, 2000 and 1999, the net embezzlement recovery was $1,821,000 and $2,500,000, respectively. The specific terms and conditions associated with the payments, including the identity of the parties, are subjects of a confidentiality agreement that precludes disclosure. On January 9, 2001 Halifax announced that the United States Securities and Exchange Commission (SEC) has issued a formal order of investigation of the Company and unnamed individuals concerning trading activity in the Company's securities, periodic reports filed by the Company with the SEC, certain accounting and financial matters and internal accounting controls. The Company is cooperating fully with the SEC. In addition, the Company has received a SEC subpoena for documents related to these matters. The Company believes the investigation is primarily related to the previously reported embezzlement. The Company believes the investigation will have no material effect on its financial statements. Note 3 - Discontinued Operations On June 2, 2000, the Company executed and delivered a Stock Purchase Agreement dated as of May 31, 2000, with U.S. Facilities, Inc., a Delaware corporation (the "Buyer") providing for the sale by the Company to the Buyer of Company's operational outsourcing business (the "Business"). The closing of the transactions contemplated in the Agreement (the "Closing") took place simultaneously with the execution and delivery thereof, effective as of May 31, 2000. At the Closing the Company sold to the Buyer, all of the capital stock of its wholly-owned subsidiary, Halifax Technical Services, Inc. for a purchase price of $5,600,000, of which $5,500,000 was paid by the Buyer to the Company at Closing with the balance of $100,000 due on the first anniversary of the Closing. The purchase price remains subject to various adjustments set forth in the Agreement. Summary operating results of the Discontinued Operations are as follows:
For the nine months ended December 31, (unaudited) 2000 1999 Revenue $ 4,636,000 $ 19,392,000 Costs and expenses 4,392,000 18,784,000 Income from discontinued operations $ 244,000 $ 608,000
Note 4 - Tax Matters At December 31, 2000, the Company had a net operating loss carryforward of approximately $7.4 million, virtually all of which expires in fiscal 2019. Income tax expense (primarily state taxes), for the three and nine months ended December 31, 2000 was $15,000 and $45,000, respectively, compared to $5,000 for the same respective periods in 1999. Note 5 - Debt On December 8, 2000 the Company entered into an $8 million revolving credit facility with a maturity date of August 31, 2002. The facility which will be used for working capital purpose replaced the Company's former banking relationship, credit facility and term debt. At the option of the Company, the facility bears interest at the LIBOR rate plus 200 basis points or the bank's prime rate. The interest rate may vary depending on the pricing ratio as further defined in the Financing and Security Agreement. Borrowings under the facility at December 31, 2000 were approximately $3.8 million. The Company had an availability of approximately $3.3 million on its credit facility at December 31, 2000. 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 facility is subject to certain financial covenants as described in the agreement. The agreement prohibits the payment of dividends or distributions as well as the payment of principal on the Subordinated Debt - Affiliate without the prior consent of the lender. In September 1999, the Company entered into an agreement with a major supplier of digital communications switch hardware for the Company's United States Army contract where approximately $5,500,000 of outstanding accounts payable arising since March 31, 1999 due to the supplier, was converted to a note payable which is being paid over 18 months with interest at 8.5%. In September and October 1999, $507,000 was paid and $299,965 is scheduled for payment on the first day of the next consecutive 15 months. The balance of the note at December 31, 2000 was $1,143,000. Note 6 - Earnings per Share The following table sets forth the computation of basic and diluted earnings per share. ( In Thousands Except Share Data)
Three Months Ended Nine Months Ended December 31, December 31, 2000 1999 2000 1999 Basic for earnings per share: Net income as reported from Continuing operations $ 23 $ 2,579 $ 1,255 $ 2,480 Discontinued operations - 246 244 608 Gain on disposition of discontinued operations - - 1,594 - Net income $ 23 $ 2,825 $ 3,093 $ 3,088 Diluted earnings per share: Net income as reported from continuing operations After tax equivalent of interest expense on 7% convertible debenture - 35 105 105 Net income from continuing operations for purposes of computing diluted net income per share $ 23 $ 2,860 $ 3,198 $ 3,193 Denominator: Denominator for basic earnings per share - weighted-average shares 2,023,436 1,984,783 2,021,331 1,975,714 Effect of dilutive securities: 7% Convertible Debenture - 170,648 170,648 170,648 Employee stock options - 2,706 - 2,643 Dilutive potential common shares 0 173,354 170,648 173,291 Denominator for diluted earnings per share weighted number of shares outstanding 2,023,436 2,158,137 2,191,979 2,149,005 Basic earnings per common share Income from continuing operations $ .01 $ 1.30 $ .62 $ 1.26 Discontinued operations - .12 .12 .31 Gain on disposition of discontinued operations - - .79 - $ .01 $ 1.42 $ 1.53 $ 1.57 Diluted earnings per common share Income from continuing operations $ .01 $ 1.21 $ .62 $ 1.20 Discontinued operations - .11 .11 .28 Gain on disposition of discontinued operations - - .73 - $ .01 $ 1.32 $ 1.46 $ 1.48
Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations Forward-Looking Statements Certain statements in this Quarterly 10-Q Report constitute "forward- looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in the Company's market area, inflation, favorable banking arrangements, the availability of capital to finance planned growth, ramifications of the embezzlement referenced herein, changes in government regulations, availability of skilled personnel and competition, which may, among other things impact on the ability of the Company to implement its business strategy. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward- looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. (Tabular information: dollars in thousands, except per share amounts).
Three Months Ended December 31, Nine Months Ended December 31, Results of Operations 2000 1999 Change % 2000 1999 Change % Revenues $14,733 $ 12,617 $2,116 17% $40,065 $43,113 $(3,048) -7% Cost of services 13,763 12,069 1,694 14% 38,010 40,552 (2,542) -6% Percent of revenues 93% 96% 95% 94% General and Administrative 716 175 541 309% 1,890 1,678 212 13% Percent of revenues 5% 1% 5% 4% Operating cost and 14,479 12,244 2,235 18% 39,900 42,230 (2,330) -6% expenses: Percent of revenues 98% 97% 100% 98% Operating income 254 373 (119) -32% 165 883 (718) -81% Percent of revenues 2% 3% 0% 2% Interest expense 216 289 (73) -25% 686 898 (212) -24% Other - - - - Embezzlement recovery - 2,500 (2,500) N/M 1,821 2,500 (679) -27% Income from operations 38 2,584 (2,546) N/M 1,300 2,485 (1,185) -48% Income tax expense 15 5 10 N/M 45 5 40 N/M Income from continuing 23 2,579 (2,556) N/M 1,255 2,480 (1,225) N/M operations Income from discontinued - 246 (246) N/M 244 608 (364) N/M operations Gain on sale of discontinued operations - - - - 1,594 - 1,594 N/M Net income $ 23 $ 2,825 $(2,802) -99% $ 3,093 $ 3,088 $ 5 0% Earnings per share - basic: Continuing operations $ 0.01 $ 1.30 $ 0.62 $ 1.26 Discontinued operations - 0.12 0.12 0.31 Gain on sale of discontinued operations - - 0.79 - $ 0.01 $ 1.42 $ 1.53 $ 1.57 Earnings per share - diluted: Continuing operations $ 0.01 $ 1.21 $ 0.62 $ 1.20 Discontinued operations - 0.11 0.11 0.28 Gain on sale of discontinued operations - - .73 - $ 0.01 $ 1.32 $ 1.46 $ 1.48 Weighted average number of common shares outstanding - basic 2,023,436 1,984,783 2,021,331 1,975,714 Weighted average number of common shares outstanding - diluted 2,023,436 2,158,137 2,191,979 2,149,005
Revenues Revenues for the three months ended December 31, 2000, increased 17% from the comparable period in 1999 primarily due to increases in technology services revenues. For the nine months ended December 31, 2000 and 1999 revenues decreased 7%, principally due to reductions in hardware orders from the US Army and seat management installations. Operating Costs and Expenses Cost of services for the three months ended December 31, 2000 increased by 14% from the comparable period in 1999, primarily as a result of the increased costs associated with the increase in revenues from the aforementioned technology services revenue. For the nine months ended December 31, 2000 and 1999 cost of services decreased 6%, primarily attributable to the decline in revenues from the US Army and seat management installations. General and administrative expenses for the three and nine months ended December 31, 2000 increased by 309% and 13%, respectively, from the comparable periods in 1999, principally due to a nonrecurring reduction in costs related to certain payment received in December 1999. Operating Income For the three and nine months ended December 31, 2000, the Company had operating income of $254,000 and $165,000, respectively, as compared to operating income of $373,000 and $883,000 for the comparable periods ended in 1999. The principal reason for the lower operating income in the periods ended December 31, 2000 versus December 31, 1999 was the additional investment in sales and marketing activity in the current fiscal year related to the Company's IT services and solutions markets and the reduction in hardware orders from the US Army and seat management installations. Interest Expense Interest expense for the three and nine month periods ended December 31, 2000 and 1999 decreased by 25% and 24%, respectively, principally as a result of reduction of debt. Embezzlement Recovery Embezzlement recoveries for the three months ended December 31, 1999 were $2,500,000 (net of settlement costs). For additional discussion see "Embezzlement Matter" in Note 2 to the condensed consolidated financial statements. For the nine months ended December 31, 2000 and 1999, the net embezzlement recovery was $1,821,000 and $2,500,000, respectively. Income Taxes Income tax expense for the three and nine months ended December 31, 2000 was $15,000 and $45,000, respectively. For the three and nine months ended December 31, 1999 income tax expense was $5,000. Discontinued Operations In May 2000 the Company sold its Operational Outsourcing Division and, accordingly, the financial results for this division have been reclassified as Discontinued Operations. (See Note 3 to the condensed consolidated financial statements.) The Company recognized a one time gain on the sale of the Division amounting to approximately $1,594,000 (net of taxes of $200,000). Net Income Net income for the three months ended December 31, 2000 and 1999 was $23,000 and $2,825,000, respectively. Included in net income for the three months ended December 31, 1999 were embezzlement recoveries of $2,500,000 and income from discontinued operations of $246,000. For the nine months ended December 31, 2000 and 1999 net income was $3,093,000 and $3,088,000, respectively. Interest expense was $686,000 compared to $898,000 for the nine months ended December 31, 2000 and 1999, respectively. Included in net income for the nine months ended December 31, 2000 was embezzlement recoveries of $1,821,000, income form discontinued operations of $244,000 and a gain on the sale of discontinued operations of $1,594,000. This compares to embezzlement recoveries of $2,500,000 and income for discontinued operations of $608,000 for the nine months ended December 31, 1999. Factors That May Affect Future Results The Company's future operating results may be affected by a number of factors including uncertainties relative to national economic conditions, especially as they affect interest rates, industry factors, the Company's ability to successfully increase its business and effectively manage expense margins. The Company must continue to effectively manage expense margins in relation to revenues by directing new business development towards markets that complement or improve existing service lines. The Company must also continue to emphasize operating efficiencies through cost containment strategies, reengineering efforts and improved service delivery techniques. The Company serves its customer base by providing consulting, integration, networking, maintenance and installation services. This industry has been characterized by rapid technological advances that have resulted in frequent introductions of new products, product enhancements and aggressive pricing practices, which also impact pricing of service activities. The Company's operating results could be adversely affected by industry-wide pricing pressures, the ability of the Company to recruit, train and retain personnel integral to the Company's operations and the presence of competitors with greater financial and other resources. Also, the Company's operating results could be adversely impacted should it be unable to effectively achieve the revenue growth necessary to provide profitable operating margins in various operations. The Company's plan for growth includes intensified marketing efforts, an expanding commercial sales program, strategic alliances and, where appropriate, acquisitions that expand market share. There can be no assurances these efforts will be successful. Liquidity and Capital Resources At December 31, 2000, the Company's working capital of $2,639,000 and current ratio of 1.21 indicated the continuing improvement in the Company's financial strength which was negatively impacted by the embezzlement matter previously discussed. Cash was also provided through bank borrowings. Capital expenditures for the nine months ended December 31, 2000 were $428,000 compared to $516,000 during the same period in 1999. The Company does not expect capital expenditures to increase during the current fiscal year. On December 8, 2000 the Company entered into an $8 million revolving credit facility with a maturity date of August 31, 2002. The facility which will be used for working capital purpose replaced the Company's former banking relationship credit facility and term debt. At the option of the Company, the facility bears interest at the LIBOR rate plus 200 basis points or the bank's prime rate. The interest rate may vary depending on the pricing ratio as further defined in the Financing and Security Agreement. The facility is subject to certain financial covenants as described in the agreement. Borrowings under the facility at December 31, 2000 were approximately $3.8 million. The Company had approximately $3.3 million available under its credit facility at December 31, 2000. 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 December 31, 2000 were $0. In September 1999, the Company entered into an agreement with a major supplier of digital communications switch hardware for the Company's United States Army contract where approximately $5,500,000 of outstanding accounts payable arising since March 31, 1999 due to the supplier was converted to a note payable which is being paid over 18 months with interest at 8.5%. In September and October 1999 $507,000 was paid and $299,965 is being paid on the first day of the next consecutive 15 months. The balance of the note at December 31, 2000 was $1,143,000. 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 although there can be no assurances that all the aforementioned sources of cash can be realized. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to changes in interest rates, primarily as result of the bank debt which partially finances its business. The floating interest debt exposes the Company to interest rate risk, with the primary interest rate exposure resulting from changes in the LIBOR rate. It is assumed that the LIBOR rate will remain constant in the future. Adverse changes in interest rates or the Company's inability to refinance its long-term obligations may have a material negative impact on the Company's operations. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company does not believe such risk is material. The Company does not customarily use derivative instruments to adjust the Company's interest rate risk profile. The information below summarizes the Company's sensitivity to market risks as of December 31, 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 December 31, Total Debt Long-term debt (including current maturities) 2001 2002 2000 Fair Value Revolving credit agreement at the LIBOR rate plus 2.00%. Due August 31, 2002. Average interest rate of 9.19%. $ 3,836 $ 0 $ 3,836 $ 3,836 Total variable debt 3,836 0 3,836 3,836 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 2,000 1,960 8% subordinated notes from affiliate due July 1, 2001 2,000 2,000 2,000 2,000 Subordinated debt dated September 2, 1999 with interest at 8.5%. Due February 1, 2001. 1,143 - 1,143 1,143 Total fixed debt 5,143 4,000 5,143 5,103 Total debt $ 8,979 $ 4,000 $ 8,979 $ 8,939
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 will have a material effect on the Company's operations. At December 31, 2000, the Company had $8,979,000 of debt outstanding of which $3,836,000 has variable interest rates. If the interest rates charged to the Company on its variable rate debt were to increase significantly, it could have a materially adverse effect on future operations. The Company conducts a limited amount of business overseas. At present all transactions are billed and denominated in U.S. dollars and consequently, the Company believes it does not currently have any material exposure to foreign exchange rate fluctuation risks. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - Exhibit 4.8 - Financing and Security Agreement (b)Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HALIFAX CORPORATION (Registrant) Date: February 13, 2001 By: s/Charles L. McNew Charles L. McNew President & CEO Date: February 13, 2001 By: s/Joseph Sciacca Joseph Sciacca Vice President, Finance & CFO