-----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, IhgZ8spaqWGf5uWMLscl0GPsJ/Ut0KLJPKutWGznJgHEQlZ5Yi9sgUiN6EKE1RGJ ebckDc19RvtF300C1IU9wQ== 0000720671-98-000005.txt : 19980714 0000720671-98-000005.hdr.sgml : 19980714 ACCESSION NUMBER: 0000720671-98-000005 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980710 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALIFAX CORP CENTRAL INDEX KEY: 0000720671 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 540829246 STATE OF INCORPORATION: VA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-08964 FILM NUMBER: 98664125 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A No. 1 (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, 1998 ( ) 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) (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. (X)Yes ( )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. (X) The aggregate market value of the voting stock held by non- affiliates of the Registrant as of June 9, 1998 was $9,974,851 computed by the average of high and low prices of such stock on said 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 9, 1998 Common Stock 2,010,482 $.24 par value DOCUMENTS INCORPORATED BY REFERENCE -None- For a menu of Halifax Corporation news releases available by fax 24 hours (no charge) or to retrieve a specific release, please call 1-800-758-5804, ext. 391950, or access the address http://www.prnewswire.com on the Internet. PART I Item 1. General Development of Business A TECHNOLOGY SERVICES & FACILITIES MANAGEMENT COMPANY Halifax Corporation is a Technology Services and Facilities Management Company for commercial and government activities. Technology Services includes the integration, systems engineering, installation, maintenance and training for computer systems, communications systems and simulation systems. Facilities Management includes the management, operations and maintenance support of military bases, prisons, waterways, major office complexes and communications sites. Revenues are generated in three primary markets: commercial, federal government, and state/local governments; and the Company conducts offshore and overseas business activities within these markets. Key elements of the Company's business strategy are privatization and outsourcing. Services and associated products are developed and delivered by the parent corporation and its three wholly-owned subsidiaries: Halifax Technology Services Company (HTSC), Halifax Engineering, Inc. (HEI) and Halifax Technical Services, Inc. (HTSI). Computer and network maintenance services and communication installation services for government and commercial customers are largely conducted by the parent company. Computer integration and systems engineering services are primarily conducted by HTSC, especially in the commercial sector. Communication systems installation and logistics services are provided for the federal government by HEI. Facilities Management, operation and support services are provided by HTSI for federal, state, and local governments. PRIMARY SERVICES PROVIDED TELECOMMUNICATIONS SERVICES Services include engineering, installation, maintenance and logistic services for telecommunications systems and networks worldwide. TECHNOLOGY CONSULTING AND SYSTEMS INTEGRATION SERVICES A full range of consulting and systems integration services to include design and implementation of networks and information systems. Consulting services are geared to solving government and business problems through technology and field-proven management methodology. Y2K DESKTOP AND NETWORK SOLUTIONS Services include year 2k desktop solutions for enterprise PC hardware and software compliance. Implementation approach comprises assessment, remediation consulting and support, and testing and validation. INTERACTIVE TECHNOLOGIES Services include website design, development and marketing, Internet/Intranet services, and multimedia sales and educational tools. COMPUTER MAINTENANCE AND REPAIR A comprehensive blend of nationwide coverage, multi-vendor and multi-systems support, project management expertise, and customized service programs including on-site, on-call and depot repair. SIMULATION SYSTEMS SERVICES Operation, integration, and maintenance of simulations systems for aircraft, missiles, automobiles, and other applications. FACILITIES MANAGEMENT AND OUTSOURCING SERVICES Total facilities and maintenance outsourcing capabilities for a wide range of diverse organizations and applications. 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 January 1981, the Company acquired all of the outstanding common stock of ASSET Incorporated ("ASSET"), a marine engineering and naval architecture company, of Falls Church, Virginia. Subsequently, in May, 1981, ASSET acquired all of the outstanding common stock of Blyth & Son, Inc. ("Blyth Marine"), a boat repair facility located in Suffolk, Virginia. On April 1, 1983, ASSET was merged into the Company. As of October 1, 1984, the Company, under a plan adopted by the Board of Directors, ceased operations at the boat repair facility of its wholly-owned subsidiary, Blyth Marine, and placed the facility on the market for sale. The remaining operations of Blyth Marine were merged into the Company on February 1, 1985, and the facility was sold on September 13, 1985. On October 18, 1984, the Company had a change of management and control as the result of the founder, chairman and president of the Company selling his stock and retiring from all activities other than serving, until September 1993, as a member of the Board of Directors. In February, 1990, the Company purchased the assets of the services business of Sidereal Corporation, a division of TransTechnology Corporation. The Sidereal Field Service Division had nationwide customers for its primary service of maintaining electronic messaging switches. This division contributed to the expansion of Halifax's nationwide service offerings. On April 16, 1990, the Company purchased the assets of Del Net, Inc., a privately owned Beltsville, Maryland, computer service company with a Washington/Baltimore customer base which further expanded the Company's nationwide Electronics Services business. On September 6, 1991, the Company changed its name from Halifax Engineering, Inc. to Halifax Corporation to reflect the expanded nature of its business as a national provider of Electronics Services and Facilities Support for government and industry. On December 31, 1991, the Company sold Halifax Security Services, Inc., a wholly-owned subsidiary which operated security services for the parent 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 April 23,1997, the name of CMSA was changed to Halifax Technology Services Company ("HTSC"). 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 through an asset purchase. The combined entity name was changed to Halifax Technology Services Company (HTSC). The discontinuation of various service lines since October, 1984 has enabled the Company to focus on Technology Services and Facilities Management. The Company maintains its principal executive offices at Halifax Office Park, 5250 Cherokee Avenue, Alexandria, Virginia 22312. Telephone number (703) 750-2202. Federal Government Contracts Many of the Company's revenues are derived from contracts or subcontracts with the United States Government. In fiscal years 1998, 1997 and 1996, the Company received revenues from 95, 183 and 491 Government contracts respectively, which accounted for approximately 35%, 47% and 73%, respectively, of the Company's total revenues. In 1998 the number of contracts does not separately count the tasks orders completed under IDIQ (Indefinite Delivery Indefinite Quantity) contracts as in prior years, however the number of primary contracts is consistent across the years. The Company's trend is toward a balance among commercial, state/municipal government and federal 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 profit margin, and is reimbursed 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 a loss. 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. Moreover, 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. To date, the Government has only terminated three 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. Management does not believe the proposed scaling down of the Federal defense establishment will have an adverse effect on its revenues since the Company is not R&D oriented, and Defense Department cutbacks affecting the Company's operation are not considered significant. However, the Company's recent acquisitions and reassignment of marketing resources have been accomplished which should, management believes, reduce dependency on defense contracting. 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 bar 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, which can result in adjustments to contract costs and fees. Audits by such Agency have been completed for years through fiscal 1990. While it is not possible to know the outcome of future audits, it is the opinion of the Company's management, that liabilities, if any, arising from such audits should not have a material adverse effect on the Company's financial position or results of operations. Commercial and State/Municipal Government Contracts The Company continues to expand its commercial and state/municipal government business. Commercial revenues are expected to continue to grow through the targeting of non-federal opportunities and from outsourcing opportunities. Acquisition strategy and the in- house development of computer network solutions, integration and management services have significantly increased this trend in commercial services. State/municipal government contracts are expected to expand from privatization opportunities. The following table reflects the aforementioned distributions of revenues by type of customer:
Years Ended March 31, 1998 1997 1996 Commercial $ 28,595,000 39% $ 22,587,000 30% $6,004,000 13% State/Local 19,062,000 26% 17,580,000 23% 6,730,000 14% Federal 26,080,000 35% 47% 34,425,000 73% Government 36,111,000 Total $ 73,737,000 100% $76,278,000 100% $47,159,000 100%
Type of Contracts The following table reflects by type of contract the amount of revenues from continuing operations derived for the periods indicated:
Years Ended March 31, 1998 1997 1996 Cost $ 6,252,000 8% $ 7,195,000 9% $ 2,232,000 5% reimbursable Time & 7,967,000 11% 8,576,000 11% 7,333,000 16% materials Fixed-price $ 59,518,000 81% $60,507,000 80% 37,594,000 79% Total $ 73,737,000 100% $76,278,000 100% $ 47,159,000 100 %
Accounts Receivable Accounts receivable at March 31, 1998 and 1997 represented 55% and 54% 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 have not or cannot be presented until a later period. The reasons that invoices for payment obligations are not presented may be categorized as follows: (1) fee and cost retainage rights of the Government; (2) lack of billable documents; (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 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 a business expense not permitted as a reimbursable item of cost under Government contracts. For a listing of the amounts of retainages and unbilled receivables as of March 31, 1998 and 1997, see Note 3 to the accompanying Consolidated Financial Statements. Backlog The Company's funded backlog for services as of March 31, 1998, 1997 and 1996 was $45,000,00, $29,000,000, and $24,000,000, 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 contracts orders provide for potential funding materially 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 random during the year and may have varying periods of performance. As of March 31, 1998, 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 $364,000,000. The unfunded portion is $319,000,000 which includes $89,000,000 in options and $230,000,000 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. Accordingly, there can be no assurance that such revenues will be realized. Commercial contracts do not typically have multi-year options, and accordingly, backlog levels are not significantly increasing in proportion to total revenues. Marketing The Company contracts with the Federal Government, State/Local Governments and commercial activities, each of which requires different marketing approaches. 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 sizable 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 assure its services will be considered for those needs. In February, 1997, the Company formed the Federal Services division to promote, market and sell all of Halifax's information technology and communications systems capabilities within the Federal Government. 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 solid 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. Associations with large corporations are being developed to allow the Company to act as a subcontractor on some contract efforts. Commercial marketing involves the determination of customer needs that match the services offered by the Company, and this is accomplished through individuals that conduct sales calls, attend trade shows, and build a network of customer knowledge and confidence in the Company. A field sales program for computer services provides for direct sales by field personnel to commercial customers. Those activities, along with the development of strategic alliances and the reputation the Company has built, provide the normal manner in which the Company's commercial business is obtained. The Company's April 1, 1996 and November 25, 1996 acquisitions, CMS Automation, Inc., and Consolidated Computer Investors, Inc., respectively, are network integration and solutions companies which conduct their marketing and sales activities largely through Account Managers. The Company's President provides leadership in long-range marketing and teaming arrangements. Operating Vice Presidents direct bid and proposal efforts for their operating elements. 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. Government 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 quality, responsiveness, ability to perform within estimated time and expense limits and pricing. Personnel On March 31, 1998, the Company had 622 employees of which 83 were 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 to be excellent. Although many of the Company's personnel are highly specialized and there is a nationwide shortage of certain qualified technical personnel, the Company does not normally experience any material difficulty obtaining the personnel it requires to perform under its contracts and generally does not bid on contracts where difficulty may be encountered in hiring personnel. The Company interfaces with labor unions on four of its federal and state/local government contracts. To date, relations with these units 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 concluded the sale of its twin- building office complex for $5,250,000 and the lease back of the Company's headquarters building. The transaction resulted in other income of $1,490,000 of which $715,000 will be 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 approximately 28 small short-term facility leases connected with its nationwide maintenance service 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 No matters were submitted to a vote of the security holders in the fourth quarter of fiscal 1998. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock, par value $0.24, is traded on the American Stock Exchange. At June 22, 1998, there were approximately 743 holders of record of the Company's Common Stock as reported by the Company's transfer agent. American Stock Transfer & Trust Co. became the Company's transfer agent and registrar on January 1, 1996. The following table sets forth the quarterly range of high and low sales prices on the American Stock Exchange. Fiscal Year 1998 Fiscal Year 1997 Fiscal Quarter, High Low High Low April - June 11-1/2 6-3/4 8-1/8 4-5/8 July - Sept. 10-7/8 7-5/8 7-7/8 6-5/8 Oct. - Dec. 13-1/8 8-3/4 13-1/8 7-5/8 Jan. - March 10 7-1/2 15 10-1/8 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. In fiscal 1997, the Company paid a cash dividend of $0.043 per share on June 10, 1996 to shareholders of record on May 24, 1996, cash dividends of $0.047 per share on September 10, 1996 and December 10, 1996 to shareholders of record on August 22, 1996 and November 27, 1996, respectively, and a cash dividend of $0.05 per share on March 10, 1997 to shareholders of record on February 21, 1997. In fiscal 1996, the Company paid a cash dividend of $0.043 on June 10, 1995, September 10, 1995, December 10, 1995 and March 10, 1996 to shareholders of record on May 20, 1995, August 22, 1995, November 22, 1995 and February 23, 1996, respectively. Item 6. Selected Financial Data The following table includes certain selected financial data of the Company for the fiscal years and periods indicated (amounts in thousands except per share data):
1998 1997 1996 1995 1994 Revenue $ 73,737 $76,278 $ 47,159 $ 45,603 $ 72,501 Net Income 442 954 763 858 853 per common share - .22 .47 .43 .48 .47 basic per common share - .21 .46 .43 .48 .47 diluted Long-term obligations including current maturities 15,709 17,174 3,869 7,230 10,031 Cash dividends per common share .20 .187 .17 .16 .173 Total assets at year-end 37,975 41,000 24,828 22,107 24,728
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 10K Report and the documents incorporated herein by reference 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, changes in government regulations and competition, which will, 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. Readers are referred to the "Factors that May Affect Future Results" section within this Item 7 of Form 10K which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. 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 1998 Change 1997 Change 1996 Revenues $ 73,737 (3%) $76,278 62% $ 47,159 Operating cost and 72,397 (2%) 74,160 62% 45,687 expenses: Percent of revenue 98% 97% 97% Operating income 1,340 (37%) 2,118 44% 1,472 Percent of revenue 2% 3% 3% Net income 442 (54%) 954 25% 763 Net income per share - .22 (54%) .48 12% .43 basic Net income per share - .21 (55%) .47 9% .43 diluted
Revenues 1998 revenues decreased 3% from 1997, primarily because of a large revenue gap created by the completion of a major digital switch contract and the subsequent delay in the award and implementation of a similar but larger contract.
Operating Costs and 1998 Change 1997 Change 1996 Expenses Cost of services $67,081 (4%) $ 69,530 67% $ 41,675 Percent of revenues 91% 91% 88% Selling, General & 5,316 15% 4,630 25% 3,692 Administrative Percent of revenues 7% 6% 8% Litigation expense - - 320 Percent of revenues - - 0.7%
The Company's 1998 cost of services decreased in relative proportion to the decrease in revenues. Litigation expenses of $320,000 in the second fiscal quarter ended September 30, 1995, include legal costs associated with a trial of a lawsuit. The increase in selling, general and administrative (S,G&A) expenses since 1996 is due primarily to the acquisition of CMSA and CCI. The proportion of S,G&A expense increased to 7% of Revenues compared with 6% of Revenues in 1997 due to the Company's conforming the treatment of S,G&A at HTSC to the parent company's treatment. The Company achieved the objective of maintaining expenditures as a percentage of revenue at 6-7% in 1998. Operating Income Operating income decreased by $778,000 and from 3% to 2% of Revenues compared with 1997. Operating income increased $646,000 in 1997 when compared to 1996 yet remained flat at 3% of Revenues.
Interest and Other Income 1998 Change 1997 Change 1996 or Expense Interest expense $ 62% $ 950 66% $ 573 1,535 Other (income) (1,004) 90% (409) 13% (362)
Interest expense significantly increased by $585,000 or 62% from 1997. The increase came from increased debt levels to fund the Company's working capital requirements, losses during the year in its Computer Maintenance division and additions to inventory levels and capital equipment. This increase resulted despite a decrease in the Company's average interest rate. Interest expense had increased in 1997 when compared to 1996, because of increased capital requirements. In 1998, other income is comprised of a gain from the sale of the Company's office park of $780,000 and $228,000 of sublease income, net of expenses, from the Company's office park. The total gain on the sale was $1.49 million of which $715,000 was deferred over the life of the lease-back of the Company's headquarters building.
Income Taxes 1998 Change 1997 Change 1996 Income taxes $ 367 41% $ 623 25% $ 498 Effective tax 45.4% 39.5% 39.5% rate
These fluctuations in income taxes were relatively proportional to changes in pretax income. However, the Company's effective tax rate increased in 1998 compared with the 1997 and 1996 rates primarily due to the treatment of the sale of the Company's office park and taxation of certain costs deferred for accounting treatment. 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 participates in the computer industry, 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. 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 its field maintenance operations. The Company's plan for growth includes intensified marketing efforts, an expanding commercial sales program, strategic alliances and, where appropriate, acquisitions that expand our market share such as our CMSA and CCI acquisitions in fiscal 1997. The Company intends to expand upon recent alliances, acquisitions and new contracts to provide the density necessary to maintain profitability in the competitive information technology industry. Because of the foregoing factors as well as other factors affecting the Company's profitability, it is difficult to project future operating results.
Liquidity and Capital 1998 1997 1996 Resources Cash $ 67,000 $ 268,000 $ 2,743,000 Working capital 20,363,000 17,487,000 5,924,000 Net cash (used) provided by (1,712,000) (6,875,000) 7,110,000 operations Net cash provided (used) in 3,334,000 (1,757,000) (644,000) investment activities Net cash (used) provided by (1,823,000) 6,157,000 (3,741,000) financing activities
At March 31, 1998, the Company's working capital of $20,363,000 and current ratio of 2.85 indicate strength consistent with the prior years. A large prepayment to the Company on a hardware delivery order in the fourth quarter of 1996, which was applied to reduce long-term debt, resulted in working capital of $5,924,000 and a current ratio of 1.50. The current ratio adjusted for that transaction would have been 2.4, consistent with 1997. 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 January, 1998 in a private placement without public registration, the Company issued a $2 Million 7% Convertible Subordinated Debenture due January, 2003 to Research Industries, Incorporated. The net proceeds were applied to the reduction in the Company's Revolving Line of Credit. Otherwise in 1998, operations required $1,712,000 for working capital needs. In 1997, the uses of cash in operations, $6,875,000, and investment activities, $1,757,000, reflect the effect of the acquisitions of CMSA and CCI and the insertion of working capital into the two companies including the substitution by the Company of approximately $7.3 million of bank debt at significantly reduced interest rates for prior high-interest rate financing from nonbank financiers. The Company leases approximately 28 field sites. Disclosure of the future minimum lease payment is in Note 9 to the consolidated financial statements. Capital expenditures in 1998 approximated 1997 levels. The Company continues to sublease a portion of its headquarters building generating net other income of approximately $112,000 annually. Effective June 25, 1998, the company renegotiated its borrowing agreement to provide significantly increased funding availability from its current collateral base and to provide for planned growth in operation levels. This debt package, including term debt and a revolving line of credit, remains long term, coming due in July 2000, and is annually extendible. After this refinancing, the Company believes that its balances of cash and cash equivalents in conjunction with funds generated from operations and from short term borrowings should be sufficient to meet its operating cash requirements. Year 2000 Compliance As a service provider to commercial and government entities for the assessment, remediation, and testing for Year 2000 readiness of computer desktop devices and networks, Halifax has established a program for compliance of its own hardware, software, and files. The Company is planning for the remediation of in-house systems associated with accounting/finance, service call management, local and wide area networks, messaging systems, and administration. Some of these features are being taken care of as a by-product of the Company's program to web-enable (Internet) many of its systems to meet customer requirements and/or promote efficiency and competitive advantage. The Company estimates its costs to be fully compliant by mid-1999 at $200,000. 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 The following paragraphs set forth the name and age of each executive officer and the members of the Board of Directors of the Company, together with their respective periods of service as officers and directors and other positions with the Company. All directors hold office for one (1) year or until their successors are duly elected and qualified. DIRECTORS Howard C. Mills, age sixty-four, has since October 16, 1984, been President, Chief Executive Officer and a Director of the Company. Prior to that time he served as Vice President and Executive Vice President of the Company. Mr. Mills joined Halifax in 1981 when it acquired ASSET Incorporated of which Mr. Mills was President and Chief Executive Officer. Mr. Mills has forty one years experience in the management, engineering and technical services business, including twelve years as President of ASSET Incorporated, three years as President of Blyth Marine, five years as a Division Vice President of the Stanwick Corporation, and eight years in engineering management with the Newport News Shipbuilding and Dry Dock Company. Arch C. Scurlock, age seventy-eight, presently Chairman of the Board of Directors, has been a Director of the Company since 1973. He had served from 1969 to 1992 as Chairman of the Board of TransTechnology Corporation, a manufacturer of aerospace-defense and other industrial products. Since 1968, he has been President and a Director and controlling shareholder of Research Industries Incorporated, a private investment company. John H. Grover, age seventy, has been a Director of the Company since 1984. He has served as Executive Vice President, Treasurer and Director of Research Industries Incorporated, since 1968 and as a Director of TransTechnology Corporation from 1969 to 1992. Clifford M. Hardin, age eighty-two, elected Director of the Company on March 25, 1985, is a Director of SRI, Inc. Lincoln, Nebraska. Dr. Hardin is also a Trustee of Winrock International, the American Assembly and the University of Nebraska Foundation. Dr. Hardin's past positions have included Chancellor of the University of Nebraska (1954-1969), Secretary, United States Department of Agriculture (1969-1971), Vice Chairman of the Board and Director of Corporate Research for Ralston Purina Company (1971-1980) and Director of the Center for the Study of American Business at Washington University (1980-1982). Dr. Hardin also served as an economist at Washington University until 1985. From 1981 to 1987 Dr. Hardin served as a Director of Stifel Financial Corporation, The parent corporation of Stifel Nicolaus & Company, a St. Louis Securities brokerage firm registered with the Securities and Exchange Commission. Ernest L. Ruffner, age sixty-three, elected Director of the Company on March 25, 1985, is an attorney engaged in the private practice of law as a member of the firm of Pompan, Murray, Ruffner & Werfel in Alexandria, Virginia. He has been an attorney for 33 years. Mr. Ruffner is a graduate of the United States Military Academy, served as a First Lieutenant in the United States Army Corps of Engineers and has been a Director of Research Industries Incorporated since 1983. Mr. Ruffner has been Secretary of the Company since 1985. In January 1992, he was given the additional designation of Counsel of the Company, and in September 1994, he was elected General Counsel (See Item 13). Alvin E. Nashman, age seventy-one, elected director of the Company on September 17, 1993, is a Board Member of Computer Sciences Corporation (CSC). He also serves on the Boards of NYMA Corporation and MILTOPE Corporation, where he is Chairman. Dr. Nashman headed the multi-division systems groups of CSC for 27 years and served two terms as Chairman of the Board of the Armed Forces Communications and Electronics Associates (AFCEA). John Toups, age seventy-two, elected Director of Company on September 17, 1993, served as President and CEO of Planning Research Corporation (PRC) from 1978 to 1987. He also served as interim Chairman of Board and CEO of the National Bank of Washington and Washington Bancorp and is currently a Director of CACI International, NVR and Telepad Corporation. OTHER EXECUTIVE OFFICERS John D. D'Amore, age forty-eight, Vice President Finance and Accounting and Chief Financial Officer, Controller and Treasurer, joined Halifax on April 10, 1996. He previously served as Vice President Finance for CTA International, Inc. and CTA Space Systems, subsidiaries of CTA Incorporated. Prior to that he served in various executive finance positions including five years as Vice President Finance with Presearch Inc. Mr. D'Amore is a Certified Public Accountant and a member of the Virginia Bar. James C. Dobrowolski, age thirty-five, joined Halifax as a result of the Company acquiring EAI Services which he had managed for two years. Mr. Dobrowolski currently serves as the Vice President in charge of the Simulation and Facilities Services Division. Prior to joining EAI as Director of Contracts in April 1988, he was with Engineering and Professional Services Inc. where he served as Manager of Subcontract Administration for two years. Thomas L. Mountcastle, age forty-four, is President of Halifax Technology Services Company, a wholly owned subsidiary of Halifax and Vice President and Chief Information Officer (CIO) of Halifax Corporation. Mr. Mountcastle joined Halifax as a result of the Company acquiring CMS Automation, Inc. on April 1, 1996 where he had served as President since 1990. Prior to that he served in various capacities in computer technology including two years as President of Data Support Systems. Thomas F. Nolan, age fifty-three, has been Vice President, Computer Services Division since December, 1995. Before joining the Company, Mr. Nolan worked six years as an independent executive in Financial Services Management. Prior to that, he was Senior Vice President, Marketing for Decision Data Services, Inc, a nation wide computer maintenance firm. For sixteen years Mr. Nolan held various executive positions with Bell Atlantic Corporation's SORBUS Service Division. Frank J. Ostronic, age sixty-nine, Vice President Federal Services Division, joined Halifax on May 24, 1996. Mr. Ostronic has over thirty-nine years experience in various executive positions including fourteen years with Computer Science Corporation as Vice President of Program Development. A U.S. Naval Academy graduate, Mr. Ostronic retired from the U.S. Navy with the rank of Captain. Melvin L. Schuler, age fifty-four, is Vice President for Operations of the Federal Services Division. He is also Vice President for Operations of the Company's wholly-owned subsidiary, Halifax Engineering, Inc. Mr. Schuler has been with Halifax since 1972, serving in various management positions within this service line. James L. Sherwood, IV, age fifty-six, is Vice President, Contracts and Administration. He previously served as Vice President of the Company's Facilities Services Division. In addition, he served as Assistant Vice President and Manager for various divisions of the Company and ASSET Inc., which he joined in 1978. Prior to joining ASSET Inc., Mr. Sherwood held various electrical engineering positions with Potomac Electric Power Company and Newport News Shipbuilding and Dry Dock Company. He is a Registered Professional Engineer in several states including Virginia. Item 11. Executive Compensation The following table sets forth information on the Chief Executive Officer and the only other officers whose compensation exceeded $100,000 serving at the close of the fiscal year ended March 31, 1998 for services rendered in all capacities during the fiscal years ended March 31, 1998, 1997, and 1996.
SUMMARY COMPENSATION TABLE Annual Long Term Compensation Compensation Awards Payouts Other Annual Restri All Other Salary Bonus Compen- cted Options LTIP Compen-sation sation Stock SARs payouts Awards Year ($) ($) ($) (1) ($) (#) ($) ($) Howard C. 1998 164,417 none 4,119 none none none 3,227(2) Mills(5) CEO/President 1997 160,804 43,200 4,323 none 7,200 none 3,135(2) 1996 149,925 28,336 5,623 none 7,200 none 2,999(2) James L. 1998 106,156 none none none none none 2,136(2) Sherwood IV 1997 101,550 14,400 none none 3,000 none 2,013(2) 1996 96,785 13,970 none none 1,800 none 5,284(3) James C. 1998 112,390 17,950 none none none none 2,607(2) Dobrowolski 1997 113,549 28,430 none none 6,375 none 6,117(3) 1996 96,940 13,627 2,400 none 3,600 none 599(2) Melvin L. 1998 103,650 54,096 none none none none 3,345(2) Schuler 1997 97,786 57,670 none none 4,500 none 1,956(2) 1996 89,733 19,712 none none 1,500 none 1,794(2) Thomas L. 1998 129,996 none none none none none 2,700(2) Mountcastle 1997 127,497 none none none 13,500 none 1,200(2) Thomas E. 1998 111,177 8,439 none none 1,500 none 2,399(2) Nolan 1997 107,623 none none none 6,375 none 13,768(4) Frank J. 1998 110,240 none none none 5,000 none 1,823(2) Ostronic John D. 1998 102,412 none none none 4,000 none 2,050(2) D'Amore
(1) Value of Company furnished auto. (2) Amounts contributed to officer under 401(k) plan. (3) Amounts contributed to officer under 401(k) plan and paid vacation. (4) Amounts contributed to officer under 401(k) plan and living expenses. (5) The Company entered into an Executive Severance Agreement ("Agreement") with Mr. Mills in recognition of his position of high responsibility and the substantial contributions he has made to the Company over many years. The Agreement provides benefits under certain circumstances including a change in control of the Company and is automatically renewed from year to year. It confirms that employment is at will and provides for termination without additional compensation in the event of death, resignation, retirement or for cause. Except in connection with a change of control, termination for any other reason results in compensation equal to eighteen (18) months salary. In the event of termination within one (1) year after a change in control or in the event Mr. Mills resigns or retires during the first ninety (90) days after a change in control, he would receive compensation equal to thirty-six (36) months salary subject to statutory limitations. Director Compensation During the year, Directors who are not officers of or otherwise compensated by the Company receive an annual fee of $1,000 and also receive $2,000 and reimbursement of expenses incurred for each meeting of the Board of Directors which they attend. Stock Option Plans In 1984, the Company's shareholders approved the 1984 Incentive Stock Option and Stock Appreciation Rights Plan (the 1984 "Plan"). The Company's key employees, including officers, were eligible to participate. Directors who were not officers were not eligible. At the 1988 Annual Meeting of Shareholders, the shareholders approved amendments to the 1984 Plan which increased to 165,000 the number of shares authorized for issuance pursuant to the 1984 Plan and brought the 1984 Plan into conformity with the Tax Reform Act of 1986. The 1984 Plan terminated May 15, 1994; however options continue to be outstanding to officers and employees of the Company covering 3,674 shares of Common Stock. These options all expire prior to July 18, 1998. (See note 7 to the consolidated financial statements.) At the September 16, 1994 Annual Meeting, the shareholders approved the new Key Employee Stock Option Plan ("1994 Plan"). The maximum number of shares subject to the 1994 Plan and approved for issuance is 180,000 shares of the Company's Common Stock 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. The Company has registered the shares issuable to the plan with the SEC. The 1994 Plan is administered by a Committee selected by the Board and is comprised of not less than three members of the Board. The Committee has the sole and absolute discretion to establish from time-to-time the criteria for participation in the 1994 Plan and to select the officers and other key employees to whom Options may be granted, to determine all claims for benefits under the 1994 Plan, to impose such conditions and restrictions on Options as it determines appropriate, with the consent of the recipient, to cancel Options and to substitute new Options for previously awarded Options which, at the time of such substitution, have an exercise price in excess of fair market value of the underlying shares of Company Common Stock. The Committee also has the sole and absolute discretion to grant options entitling the Participants to purchase shares of Company Common Stock from the Company in such number, at such price and on such terms and subject to such conditions, not inconsistent with the terms of the 1994 Plan, as may be established by the Committee. The Company will receive no consideration with regard to the granting of any Option granted under this 1994 Plan. Due to the broad discretion of the Committee, it is not possible to determine at this time the benefits or amounts that will be received by or allocated to the participants, if any. Except as otherwise expressly provided in the 1994 Plan, the Committee may designate, at the time of the grant of an Option, the Option as an Incentive Stock Option under Section 422 of the Internal Revenue Code. The Purchase Price of each share of Company Common Stock which may be purchased upon exercise of any Option granted under the 1994 Plan shall be established by the Committee in its discretion, and in the case of Incentive Stock Options, such Purchase Price shall not be less than 100% of the Fair Market Value on the Date of Grant. Each Option granted under the 1994 Plan shall be exercised by written notice to the Company. The Purchase Price of shares purchased upon exercise of an Option granted under the 1994 Plan shall be paid in full. No option may be exercised in whole or in part prior to six months from the Date of Grant. The Board has complete power and authority to amend the 1994 Plan at any time as it deems necessary or appropriate and no approval by the stockholders of the Company or by any other person, committee or entity of any kind is required to make any amendment; provided, however, that the Board shall not, without the affirmative approval of stockholders of the Company, increase the number of shares of Company Common Stock available for Option grants thereunder or make any other amendment which requires stockholder approval under Rule 16b-3 of the Code. In fiscal year 1996, options totaling 23,700 shares were offered to employees at exercise prices ranging from $4.58 to $4.83, the market prices on the dates of issuance. In fiscal year 1997, options totaling 105,600 shares were offered to employees at exercise prices ranging from $4.67 to $7.67, the market prices on the dates of issuance. In fiscal year 1998, options totaling 15,500 shares were offered to employees at exercise prices ranging form $7.56 to $10.25, the market price on the dates of issuance At the September 19, 1997 Annual Meeting of Shareholders, the shareholders approved the new Non-Employee Director Stock Option Plan. The maximum number of shares subject to the plan and approved for issuance is 100,000 shares of the Company's Common Stock 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. The Company has registered the shares issuable to the plan with the SEC. The plan will be administered by the Board of Directors in whom the plan vests all powers and authority under the plan. Under the terms of the plan, each year on the first day of the first month following the Annual Meeting of Shareholders of the Company, each Non-Employee Director who has been elected or reelected as a Board member shall receive an option. This option may be either a first option or subsequent option. At initial election to the Board a first option shall be granted for 5000 Common Stock shares. A first option becomes exercisable in installments cumulatively with respect to one sixtieth of the Option Stock per month after the date of grant, so that one hundred percent shall be exercisable five years after the date of grant. Upon each annual reelection as a Board Member, a subsequent option shall be granted of up to a maximum of 2000 Common Stock shares. A subsequent option becomes exercisable in installments cumulatively with respect to one-twelfth of the optioned stock per month after the date of grant, so that one hundred percent shall be exercisable one year after the date of grant. The total maximum number of shares of Common Stock for which any director shall be granted options under this plan is 13,000. No option or any part of an option shall be exercisable after the expiration of ten years from the date the Option was granted. In fiscal 1998, options totaling 30,000 shares were offered to non- employee Directors at $10.25 per share, the market price on date of issuance. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of June 9, 1998 (1) the number of shares of the Company's Common Stock owned beneficially by each person who owned of record, or was known by the Company to have owned beneficially, more than 5% of such shares then outstanding, (2) the number of shares owned beneficially by each director of the Company, and (3) the number of shares owned beneficially by all officers and directors as a group. Information as to the beneficial ownership is based upon statements furnished to the Company by such persons. Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent Research Industries 660,300 32.8 Incorporated (1)(2)(3) 123 North Pitt Street Alexandria, VA 22314 Arch C. Scurlock (1)(5) 661,800 32.9 123 North Pitt Street Alexandria, VA 22314 Howard C. Mills (4) 68,367 3.4 5250 Cherokee Avenue Alexandria, VA 22312 Alvin E. Nashman 4,500 0.2 3170 Fairview Park Drive Falls Church, VA 22042 John Toups 4,500 0.2 1209 Stuart Robeson Dr. McLean, VA 22101 John H. Grover (2) 1,500 0.1 123 North Pitt Street Alexandria, VA 22314 Clifford M. Hardin 1,500 0.1 10 Roan Lane St. Louis, MO 63124 Ernest L. Ruffner (3) 150 0 209 North Patrick Street Alexandria, VA 22314 Thomas L. Mountcastle 32,666 1.6 2215 Tomlynn Street Richmond, VA 23230 Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent Melvin L. Schuler 7,450 0.4 5250 Cherokee Avenue Alexandria, VA 22312 John D. D'Amore 450 0 5250 Cherokee Avenue Alexandria, VA 22312 James L. Sherwood IV 425 0 5250 Cherokee Avenue Alexandria, VA 22312 Frank J. Ostronic 150 0 5250 Cherokee Avenue Alexandria, VA 22312 Thomas E. Nolan 100 0 5250 Cherokee Avenue Alexandria, VA 22312 James C. Dobrowolski 0 0 5250 Cherokee Avenue Alexandria, VA 22312 All officers and directors 783,558 38.9 as a group, including the above (14 persons) (5) (1) Research Industries Incorporated is 93% owned by Arch C. Scurlock, Chairman of the Company's Board of Directors. Dr. Scurlock is also President and a director of Research Industries Incorporated. (2) Mr. Grover is also a 5% owner, a director and Executive Vice President and Treasurer of Research Industries Incorporated. (3) Mr. Ruffner is a director of Research Industries Incorporated. (4) Includes 450 shares held by Mr. Mills' wife. (5) Includes 660,300 shares owned by Research Industries Incorporated. (6) Research Industries Incorporated owns $2 Million face amount of the Company's 7% Convertible Subordinated Debenture dated January 27, 1998. Item 13. Certain Relationships and Related Transactions Ernest L. Ruffner, Secretary and General Counsel and a Director of the Company, is a member of the law firm of Pompan, Murray, Ruffner & Werfel. During the fiscal year ended March 31, 1998, the Company paid $62,000 for legal services to Mr. Ruffner as General Counsel. Jacob Pompan of Pompan, Murray, Ruffner & Werfel has represented the Company in its government contract affairs since 1984. During the fiscal year ended March 31, 1998, the Company paid $9,096 to the firm for this representation. Alvin E. Nashman, a Director of the Company, provides consulting services to the Company under an agreement. During the fiscal year ended March 31, 1998, the Company paid $24,000 for consulting services to Mr. Nashman. 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 Earnings for the years ended March 31, 1998, 1997 and 1996 o Consolidated Balance Sheets as of March 31, 1998 and 1997 o Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996 o Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31, 1998, 1997 and 1996 o Notes to Consolidated Financial Statements 2. Financial Statement Schedule o Schedule II, Valuation & 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.) 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 10K 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.) 10.1 1984 Incentive Stock Option and Stock Appreciation Rights Plan, as amended. (Incorporated by reference to Exhibit 10.3 to the 1989 10-K.) 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 1992 10-K.) 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.) 10.4 Howard C. Mills Executive Severance Agreement 10.5 Thomas L. Mountcastle Employment Agreement 22. Subsidiaries of the registrant 23. Consent of Ernst &Young LLP, Independent Auditors (b) Reports on Form 8-K - None 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/Howard C. Mills Howard C. Mills President and Chief Executive Officer Date: 6/29/98 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/Howard C. Mills President and 6/29/98 Howard C. Mills Chief Executive Principal Executive Officer Officer, Director /s/John D. D'Amore Vice President, 6/29/98 John D. D'Amore Chief Financial Officer, Principal Financial and Treasurer & Controller Accounting Officer Chairman of the Arch C. Scurlock Board of Directors /s/John H. Grover Director 6/29/98 John H. Grover Director Clifford M. Hardin /s/Ernest L. Ruffner Director 6/29/98 Ernest L. Ruffner /s/Alvin E. Nashman Director 6/29/98 Alvin E. Nashman /s/John Toups Director 6/29/98 John Toups REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Halifax Corporation We have audited the accompanying consolidated balance sheets of Halifax Corporation as of March 31, 1998 and 1997, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the three years in the period ended March 31, 1998. Our audits also included the financial statement schedule listed in the index at item 14(a)2. 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 generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, 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. June 15, 1998, except for Note 5 as to which the date is June 25, 1998 HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996 Revenues (Note 1) $73,737,000 $76,278,000 $ 47,159,000 Operating costs and expenses: Cost of services 67,081,000 69,530,000 41,675,000 Litigation expense - 320,000 Selling, general and 5,316,000 4,630,000 3,692,000 administrative Total operating costs and expenses 72,397,000 74,160,000 45,687,000 Operating income 1,340,000 2,118,000 1,472,000 Interest expense 1,535,000 950,000 573,000 Other income (1,004,000) (409,000) (362,000) Income before income taxes 809,000 1,577,000 1,261,000 Income taxes (Note 8) 367,000 623,000 498,000 Net earnings $ 442,000 $ 954,000 $ 763,000 Net earnings per common share - $ .22 $ .48 $ .43 basic Net earnings per common share - $ .21 $ .47 $ .43 diluted Weighted average number of common shares outstanding - basic 2,006,603 1,985,599 1,756,881 Weighted average number of common shares outstanding - diluted 2,067,499 2,050,609 1,756,919 See notes to consolidated financial statements
HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND 1997
March 31 1998 1997 ASSETS CURRENT ASSETS Cash $ 67,000 $ 268,000 Trade accounts receivable (Note 3) 20,814,000 21,951,000 Other receivables - 62,000 Inventory 8,203,000 6,860,000 Prepaid expenses and other current 1,811,000 1,300,000 assets Income taxes receivable 4,000 43,000 Deferred income taxes (Notes 1 and 483,000 659,000 8) TOTAL CURRENT ASSETS 31,382,000 31,143,000 PROPERTY AND EQUIPMENT, at cost less accumulated 3,578,000 6,624,000 depreciation and amortization (Notes 1 and 4) COST IN EXCESS OF NET ASSETS ACQUIRED, net of accumulated 2,481,000 2,583,000 amortization (Notes 1 and 2) OTHER ASSETS 534,000 650,000 TOTAL ASSETS $ 37,975,000 $ 41,000,000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued $ 7,004,000 $ 8,382,000 expenses (Note 6) Deferred maintenance revenue 1,461,000 2,265,000 Bank overdrafts 1,768,000 1,803,000 Current portion of long-term debt & 786,000 1,206,000 mortgage note payable (Note 5) TOTAL CURRENT LIABILITIES 11,019,000 13,656,000 LONG-TERM DEBT (Note 5) 14,923,000 13,570,000 MORTGAGE NOTE PAYABLE (Note 5) - 2,398,000 DEFERRED INCOME TAXES (Notes 1 and 8) 735,000 853,000 DEFERRED INCOME 690,000 - TOTAL LIABILITIES 27,367,000 30,477,000 STOCKHOLDERS' EQUITY (Note 7) Common stock, $.24 par value: Authorized - 4,500,000 shares Issued - 2,267,166 in 1998 and 2,258,866 in 1997 Outstanding - 2,010,482 in 1998 and 544,000 542,000 2,000,632 in 1997 Additional paid-in capital 4,399,000 4,358,000 Retained earnings 5,877,000 5,836,000 10,820,000 10,736,000 Less treasury stock at cost - 256,684 212,000 213,000 shares in 1998 and 258,234 in 1997 TOTAL STOCKHOLDERS' EQUITY 10,608,000 10,523,000 TOTAL LIABILITIES AND STOCKHOLDERS' $ 37,975,000 $ 41,000,000 EQUITY See notes to consolidated financial statements
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
1998 1997 1996 Cash flows from operating activities: Net income $ 442,000 $ 954,000 $ 763,000 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,366,000 1,060,000 599,000 (Gain) loss on sale of (776,000) 164,000 - property and equipment (Increase) decrease in 1,137,000 (5,355,000) (562,000) accounts receivable (Increase) decrease in other 62,000 83,000 1,000 receivables (Increase) decrease in (1,343,000) (1,284,000) 688,000 inventory (Increase) decrease in prepaid expense and other (335,000) (1,005,000) 77,000 current assets (Increase) decrease in other assets 56,000 (367,000) (44,000) (Increase) decrease in income 39,000 (184,000) (111,000) tax receivable Increase (decrease) in accounts payable accrued expenses and other current liabilities (2,217,000) (1,036,000) 5,502,000 Increase (decrease) in income - (91,000) 90,000 taxes payable (Decrease) increase in deferred income taxes (118,000) 186,000 107,000 Decrease in deferred income (25,000) - - Total adjustment (2,154,000) (7,829,000) 6,347,000 Net cash (used) provided by (1,712,000) (6,875,000) 7,110,000 operating activities Cash flows from investing activities: Purchase of property and equipment, net of (1,472,000) (1,684,000) (247,000) acquisitions Proceeds from sale of property 4,856,000 41,000 3,000 and equipment Acquisitions (50,000) (114,000) (400,000) Net cash provided (used) in 3,334,000 (1,757,000) (644,000) investing activities Cash flows from financing activities: Proceeds from borrowing of 36,850,000 40,216,000 16,271,000 long-term debt Retirement of long-term debt (38,315,000) (33,866,000) (19,632,000) Cash dividends paid (401,000) (371,000) (305,000) Proceeds from sale of stock upon exercise of stock options 43,000 178,000 - Purchase of treasury stock - - (75,000) Net cash (used) provided by (1,823,000) 6,157,000 (3,741,000) financing activities Net (decrease) increase in cash (201,000) (2,475,000) 2,725,000 Cash at beginning of year 268,000 2,743,000 18,000 Cash at end of year $ 67,000 $ 268,000 $ 2,743,000 See notes to consolidated financial statements
HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
Additional Treasury Common Stock Stock Paid-In Retained Shares Par Value Capital Earnings Shares Cost Total Balance March 31, 2,220,022 $ 518,000 $ 3,401,000 $ 4,795,000 449,529 $ (313,000) $ 8,401,000 1995 Cash Dividends ($.173 per - - - (305,000) - - (305,000) share) Net income - - - 763,000 - - 763,000 Purchase of Treasury - - - - 18,150 (75,000) (75,000) stock Balance March 31, 2,220,022 $ 518,000 $ 3,401,000 $ 5,253,000 467,679 $ (388,000) $ 8,784,000 1996 Cash Dividends ($.187 per - - - (371,000) - - (371,000) share) Net income - - - 954,000 - - 954,000 Exercise of Stock Options 38,611 9,000 169,000 - - - 178,000 Stock Split 233 15,000 (15,000) - - - - CMSA - 803,000 - (209,445) 175,000 978,000 Acquisition - Balance March 31, 2,258,866 $ 542,000 $ 4,358,000 $ 5,836,000 258,234 $ (213,000) $ 10,523,000 1997 Cash Dividends ($.20 per - - - (401,000) - - (401,000) share) Net income - - - 442,000 - - 442,000 Exercise of Stock Options 8,300 2,000 41,000 - - - 43,000 CMSA Acquisition Earnout (1,550) 1,000 1,000 Balance March 31, 2,267,166 $ 544,000 $ 4,399,000 $ 5,877,000 256,684 $ (212,000) $ 10,608,000 1998
See notes to consolidated financial statements. HALIFAX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996 1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY Business Activity - Halifax Corporation, (the Company) provides Technology Services and Facilities Management 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. 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, 1998, 1997 and 1996 are $26,080,000 (35%), $36,111,000 (47%), and $34,425,000 (73%), respectively. The reduction in United States Government revenue in 1998 is primarily a result of the Company's acquisition activities, however the Company's trend is toward a balance among commercial, state/municipal government and federal government revenues. Principles of Consolidation - The Company's consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Revenue Recognition - On cost type contracts, revenues are recorded as reimbursable costs are incurred and related fixed and award fees are recorded using the percentage of completion method. On time and materials contracts, revenues are recorded at the contractual rates as labor hours and other direct expenses are incurred. On fixed price contracts, revenues are recorded using the percentage of completion method. Revenues collected in advance for commercial maintenance contracts are deferred and recognized over the term of the related agreements. For all contracts, recognition is made of any anticipated losses when identified. Disputes involving amounts owed the Company by customers arise in the normal course of the Company's business. These disputes are primarily due to changes in contract specifications and disagreements over the interpretation of contract provisions. Such disputes are recorded at the lesser of their estimated net realizable value or actual costs incurred. Claims against the Company recognized when the loss is considered probable and reasonably determinable in amount. Deferred maintenance revenue is recognized ratably over the performance period. 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. Property and Equipment - Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Inventory - Inventory consists principally of spare computer parts valued at the lower of cost or market on the first-in first-out basis and computer and computer peripheral hardware and software in the process of delivery upon resale to customers valued at the lower of cost or market on the average cost basis and is displayed on the consolidated balance sheet net of allowances for inventory valuation of $356,000 and $499,000 at March 31, 1998 and 1997, respectively. 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. 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. Cost in Excess of Net Assets Acquired - Cost in excess of net assets of acquired companies, described in Note 2, is being amortized using the straight-line method over 25 years. Accumulated amortization was $335,000 and $219,000 as of March 31, 1998 and 1997, respectively. Earnings Per Common Share - The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per share is based on the weighted average number of shares outstanding during the period plus dilutive common stock equivalents consisting of certain shares subject to stock options based on the average market price of the common stock and contingently issuable shares based on an earn-out provision related to the acquisition of CMSA. New Accounting Pronouncements - Effective December 31, 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which established new standards for computing and disclosing earnings per share. The Statement requires dual presentation of "basic" and "diluted" earnings per share, each as defined therein, which replace primary and fully diluted earnings per share, respectively, required under previous guidance. In accordance with SFAS No. 128, all earnings per share amounts included in the consolidated financial statements have been restated to conform (see Note 13). In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way in which publicly-held companies report financial and descriptive information about their operating segments in financial statements for both interim and annual periods, and requires additional disclosures with respect to products and services, geographic areas of operation and major customers. The Statement is effective for fiscal years beginning after December 15, 1997. The Company intends to comply with the provisions of this standard in fiscal year 1999, however disclosure under SFAS 14, "Disclosures about Segments of an Enterprise and Related Information," the predecessor standard to SFAS 131 is included in the accompanying consolidated financial statements. (See Note 14.) 2. ACQUISITIONS CMS Automation, Inc. (CMSA) and Consolidated ComputerInvestors, Inc. (CCI) On April 1, 1996, the Company completed the acquisition of CMS Automation, Inc. (CMSA), a private Richmond, VA based computer network integration and solutions company. On April 23, 1997, CMSA was renamed Halifax Technology Services Company (HTSC). Financial consideration was in the Company's stock with an assumption of debt. There was an initial payment of approximately 209,400 shares valued at approximately $978,000 from Treasury Stock representing approximately 12% of Halifax outstanding shares at closing and there may be additional payments of common stock through fiscal 1999 based on the annual earnings of CMSA. The acquisition has been accounted for as a purchase with the purchase price allocated to the assets and liabilities based on their estimated fair value at the date of acquisition. The initial purchase price and costs of the transaction exceeded the fair value of net assets purchased by $391,000 which was capitalized as cost in excess of net assets acquired. 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 through an asset purchase. The Company paid $114,000 in cash and assumed secured debt totaling $1,680,000. The acquisition has been accounted for as a purchase with the purchase price allocated to the assets and liabilities based on their estimated fair value. The initial purchase price and costs of the transaction exceeded the fair value of net assets purchased by $375,000 which was capitalized as cost in excess of net assets acquired. The Company's fiscal 1997 results include CMSA's and CCI's results of operations beginning April 1, 1996 and November 1, 1996, respectively. The proforma impact of the CCI acquisition on fiscal 1997 is immaterial. The following fiscal 1996 proforma information is unaudited and reflects both of the acquisitions as if the purchase transactions had occurred on April 1, 1995.
For the Year Ended March 31 Dec. Profor Dec. Proform 1996 31, ma Profor 31, a Proforma Halifax 1995 Adjust ma 1995 Adjustm Combined CMSA ments Combin CCI ents & Tax ed & Tax Effect Effect ($ In thousands, except per share data) Revenues $47,159 $21,249 $- $68,408 $13,526 $- $81,934 Net Income $ 763 $(109) $137 $ 791 $(231) $313 $873 (Loss) Earnings per $ .43 N/A $.40 NA $.44 share-basic Weighted #1,966,326 Average Number of Common Shares Outstanding- basic
Electronics Associates, Inc. (EAI) On June 30, 1993, the Company purchased substantially all of the assets and liabilities of the Field Services Division of Electronic Associates, Inc. (EAI) which was primarily engaged in the maintenance of electronic equipment and software for an initial purchase price of approximately $2.4 million. Additional payments of $1,000,000 were paid over the next 3 years as certain revenue objectives were achieved. The Company paid $200,000 relating to this requirement in 1994 and $400,000 in both 1995 and 1996. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of:
March 31, 1998 1997 Amounts billed $ 17,987,000 $ 19,708,000 Amounts unbilled: Amounts currently billable 2,871,000 1,800,000 Retainages and amounts 272,000 677,000 awaiting audit Total 21,130,000 22,185,000 Allowance for doubtful accounts (316,000) (234,000) Total $ 20,814,000 $ 21,951,000
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, 1998 will be substantially collected within one year. 4. PROPERTY AND EQUIPMENT Property and equipment consists of:
March 31, Estimated 1998 1997 Useful Lives Automotive equipment $ 351,000 $ 375,000 4 years Machinery and equipment 8,005,800 6,260,000 3 - 10 years Furniture and fixtures 1,420,200 1,323,000 5 - 10 years Building and improvements 150,000 3,955,000 32 years Land - 648,000 Total 9,927,000 12,561,000 Accumulated depreciation 6,349,000 5,937,000 and amortization Total $ 3,578,000 $ 6,624,000
5. LONG-TERM DEBT AND MORTGAGE NOTE PAYABLE
March 31, 1998 1997 Long-term debt consists of: Revolving credit agreement amended effective February 4, 1997, April 30, 1997, June 30, 1997, September 5, 1997 and December 3, 1997, with a maximum credit line of $12,800,000. Amounts available under this agreement are determined by applying stated percentages to the Company's eligible billed receivables and inventory. Interest accrues $ 11,130,000 $ 11,046,000 at either the prime rate plus 1/4% or the LIBOR rateplus 1.6% to 1.9% depending upon a leverage ratio. At March 31, 1998 the interest rate was 7.587%. This agreement was to expire July 31, 1998, however it was replaced by a new agreement effective June 25, 1998. 7% Convertible Subordinated Debenture 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, $ 2,000,000 - 1998. Convertible by noteholder at any time at a conversion price of $11.72 per common share. The closing market price of the company's common stock on March 31, 1998 was $9.25. Other notes payable and capital lease obligations with interest rates ranging from the prime rate to 15%, due in monthly $ 5,000 $ 20,000 installments and maturing at dates through 1999. The prime rate was 8.5% at March 31, 1998. Mortgage note paid off on November 6, 1997. Previously payable in monthly installments of $10,257 plus interest at prime plus 1/4% through August 31, 2001. At March 31, 1998, - $ 2,531,000 the interest rate was 8.75%. The note was collateralized by buildings and land which have been sold. EAI acquisition term loan facility dated June 30, 1993. Note is payable in 60 equal monthly installments of $41,666 plus interest. The note may be apportioned between prime rate and LIBOR rate options. $ 203,000 $ 645,000 Interest accrues at either the prime rate plus 1/2% or the LIBOR rate plus 2.5%. At March 31, 1998, the prime rate and LIBOR options were at 9% and 8.125%, respectively. CMSA acquisition term loan facility dated June 14, 1996. Note is payable in 24 equal monthly installments of $29,762 plus interest and a final installment of $ 1,845,000 $ 2,202,000 $1,785,712 due on June 30, 1998 plus interest. Interest accrues at the prime rate plus 1/4%. At March 31, 1998, the interest rate was 8.75%. CCI acquisition term loan facility dated November 26, 1996. Note is payable in 48 equal monthly installments of $16,979 plus $ 526,000 $ 730,000 interest. Interest accrues at the prime rate plus 1/4%. At March 31, 1998, the interest rate was 8.75%. 15,709,000 $ 17,174,000 Less current maturities 786,000 1,206,000 Total $ 14,923,000 $ 15,968,000
Advances under the revolving credit agreement and term loan facilities are collateralized by a first priority security interest in all of the accounts receivable of the Company, the inventory of Halifax Corporation and all of the Company's other assets. Additionally, advances under the term loan facilities are secured by the acquired assets. The revolving credit agreement also contains convenants which require the Company to maintain certain net worth and financial statement ratios. The amount of $11,130,000 has been excluded from current liabilities because the Company intends that at least that amount would remain outstanding under this agreement for an uninterrupted peroid extending beyound one year from the balance sheet date. The Company signed a new banking agreement on June 25, 1998 which restructures all of the Company's debt as presented at March 31, 1998 except for the "7% Convertible Subordinated Debenture" and the "Other Notes Payable." The new debt structure consists of a revolving line of credit and two term loans which in total make $17.5 million of credit available to the Company. Advances under the revolving line of credit and term loan facilities are collateralized by a first priority security interest in all of the accounts receivable of the Company, the inventory of Halifax Corporation and all other assets of the Company except for the inventory of HTSC. The agreement contains covenants which require the Company to maintain or achieve certain net worth, capital, cash flow and other financial statement ratios or values. Pricing is performance driven and based on LIBOR with a range from LIBOR plus 1.5% to 3.55%. Term loan principal amortization is required on a quarterly basis. The aggregate annual maturities of long-term debt, based on the terms of the new banking agreement, are: 1999 - 786,000 2000 - 181,000 2001 - 12,742,000 2002 - - 2003 - 2,000,000 Thereafter - - Total - $ 15,709,000
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of:
March 31, 1998 1997 Accounts payable $ 3,075,000 $ 5,328,000 Accrued expenses 2,152,000 1,381,000 Accrued vacation 829,000 859,000 Accrued payroll 594,000 563,000 Payroll taxes accrued and 354,000 251,000 withheld $ 7,004,000 $ 8,382,000
7. COMMON STOCK Stock Options - Under the Company's 1984 Stock Option and Stock Appreciation Rights Plan (as amended), options to purchase shares of the Company's common stock have been granted to officers and key employees at a price not less than the fair market value of the stock at the date of grant. Any grants of options or stock appreciation rights under the plan are limited to a maximum of 165,000 shares of the Company's common stock. Options and/or stock appreciation rights expire five years after the date of grant. The 1984 plan terminated May 15, 1994. On September 16, 1994 the shareholders approved the new Key Employee Stock Option Plan ("1994 Plan"). The maximum number of shares subject to the 1994 Plan and approved for issuance is 180,000 shares of the Company's common stock 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. A summary of options activity is as follows:
Weighted Optioned Option Price Average Shares Per Share Total Exercise price 1984 PLAN Balance March 31, 1995 58,650 $4.59 - 5.67 $280,000 $ 4.77 Options forfeited upon retirement/ termination of employees (6,000) 4.59 - 5.00 (28,140) 4.69 Balance March 31, 1996 $ 4.59 - 5.00 $ 251,860 $ 4.78 52,650 Options exercised (38,611) 4.59 - 5.00 (178,795) 4.63 Options forfeited upon retirement/ termination of employees (1,688) 5.00 (8,440) 5.00 Balance March 31, 1997 12,351 $ 5.00 - 5.67 $ 64,625 $ 5.23 Options exercised (8,677) $ 5.00 - 5.67 (46,255) 5.33 Balance March 31, 1998 3,674 $ 5.00 $ 18,370 $ 5.00 Options exercisable at March 31, 1998 3,674 $ 5.00 $ 18,370 $ 5.00 1994 PLAN Balance March 31, 1995 48,000 $ 4.67 $ 224,000 $ 4.67 Options granted 23,700 4.58 - 4.83 114,175 4.82 Options forfeited upon retirement/ termination of employees (4,500) 4.58 - 4.83 (21,250) 4.72 Balance March 31, 1996 $ 4.58 - 4.83 $ 316,925 $ 4.72 67,200 Options granted 105,600 4.67 - 7.67 680,800 6.45 Options forfeited upon retirement/ termination of employees (24,000) 4.67 - 7.33 (137,810) 5.74 Balance March 31, 1997 148,800 $ 4.58 - 7.67 $ 859,915 $ 5.78 Options exercisable at March 31, 1998 16,200 $ 4.67 $ 75,654 $ 4.67 Options granted 15,500 7.56 - 10.25 134,665 8.69 Options forfeited upon retirement/ termination of employees (25,000) 4.67 - 10.25 (172,800) 6.91 Balance March 31, 1998 138,800 $ 4.58 - 10.25 $ 821,760 $ 5.92 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN Options granted 30,000 307,500 10.25 10.25 Balance March 31, 1998 30,000 $ 10.25 $ 307,500 $ 10.25
All stock-based incentive awards granted in 1998, 1997 and 1996 under the 1984 and 1994 Plans were stock options which have 5 year terms and vest at the end of the third and fourth years. All awards granted in 1998 under the Non-Employee Directors Stock Options Plan were stock options which have 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. Proforma information regarding net earnings and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998 and 1997: risk- free interest rate of 5.99% to 6.52% and 6.16% respectively, dividend yield of 2% and 3.1% respectively, volatility factor related to the expected market price of the Company's common stock of .262, and weighted-average expected option life of three years. The weighted average fair values of options granted during 1998 and 1997 were $2.56 and $1.25, respectively. For purposes of proforma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. Therefore, the proforma results presented below include up to 33% of the total proforma expense for options awarded in that year depending upon the date of grant. The Corporation's proforma information for the years ended March 31, is as follows:
(In thousands, except 1998 1997 1996 per share data) Proforma net earnings $ 402 $ 930 $ 759 Proforma earnings per common share: Basic .20 .46 .43 Diluted .19 .45 .43
Employee Plans - During fiscal 1985, the Company adopted 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 participants 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 $199,000 in 1998, $191,000 in 1997 and $157,000 in 1996. 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. 8. 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 are as follows for the years ended March 31:
1998 1997 1996 Current: Federal $ 256,000 $ 494,000 $ 355,000 State 53,000 101,000 75,000 Total current: 309,000 595,000 430,000 Deferred 58,000 28,000 68,000 Total $ 367,000 $ 623,000 $ 498,000
The components of the Company's deferred tax assets and liabilities consist of the following at March 31:
1998 1997 Deferred tax assets - current Accounts receivable/reserves $ 36,000 $ 102,000 Inventory 174,000 234,000 Accrued compensation/vacation 273,000 323,000 Net operating loss carry 51,000 51,000 forwards - HTSC AMT credit carry forward - 15,000 15,000 HTSC Less: valuation allowance (66,000) (66,000) $ 483,000 $ 659,000 Deferred tax liability (asset)-noncurrent Deferred start-up costs $ 62,000 $ - Deferred gain on building sale (258,000) - Depreciation/amortization 895,000 785,000 Sublease rental income 2,000 33,000 Contract claims/Other 34,000 35,000 $ 735,000 $ 853,000 The differences between the provision for income taxes at the expected statutory rate and those shown in the consolidated statements of earnings are as follows for the years ended March 31:
1998 1997 1996 Provision for income taxes at statutory rate 34.0% 34.0% 34.0% State taxes, net of federal 4.6 4.4 4.3 benefit Permanent differences 4.8 1.1 1.4 Other 2.0 - (.2) Total 45.4% 39.5% 39.5%
9. LEASING ACTIVITY The Company is obligated under operating leases for office space and certain equipment. The following is a schedule of the future minimum lease payments under operating leases as of March 31, 1998.
Year ending March 31, 1999 $ 1,287,000 2000 880,000 2001 700,000 2002 696,000 2003 694,000 thereafter 2,315,000 Total minimum lease payments $ 6,572,000
Total rental expense under operating leases was $954,000, $411,000 and $201,000 for the years ended March 31, 1998, 1997, and 1996, respectively. Aggregate future minimum rentals to be received under noncanceable subleases as of March 31, 1998 are $84,000 10.RELATED PARTY TRANSACTIONS During the years ended March 31, 1998, 1997, and 1996, the Company paid $62,000, $77,000 and $0, respectively, for legal services to a Company Board member as General Counsel; $9,096, $4,651 and $9,000 respectively to a law firm in which a Company Board member is a partner; and $24,000, $22,000 and $0, respectively, for consulting services to another Company Board member. 11.COMMITMENTS AND CONTINGENCIES The Company's contracts with the U.S. Government are subject to cost audit by Government authorities. Such audits have been completed through March 31, 1990. It is not possible to predict the outcome of future audits but it is the opinion of the Company's management that liabilities, if any, arising from such audits would not have a material adverse effect on the Company's consolidated financial position or results of operations. Upon the death of a Company officer or a certain former officer and at the option of their estates, the Company is committed to repurchase their shares (79,267) at current book value. At March 31, 1998, the aggregate book value of such shares was approximately $418,000. The Company is defendant or co-defendant in various lawsuits. In the opinion of management, none of these lawsuits could materially affect the consolidated financial position or results of operations of the Company. 12.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid the following amounts for interest and income taxes during the years ended March 31:
1998 1997 1996 Interest $ 1,532,000 $ 950,000 $ 573,000 Income taxes $ 578,000 $ 722,000 $ 457,000
13 - Earnings per share The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 Numerator: Net earnings $ 442,000 $ 954,000 $ 763,000 Numerator for basic earnings per share- income available to $ 442,000 $ 954,000 $ 763,000 common stockholders Numerator for diluted earnings per share- income available to common stockholders after assumed $ 442,000 $ 954,000 $ 763,000 converstions Denominator: Denominator for basic 2,006,603 1,985,599 1,756,881 earnings per share- weighted-average shares Effect of dilutive securities: Employee stock options 55,536 63,153 38 Contingent stock- 5,360 1,857 - acquisition 7% Convertible - - - Subordinated Debenture Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted-average shares and assumed 2,067,499 2,050,609 1,756,919 conversions Earnings per share: Basic earnings per share $ .22 $ .48 $ .43 Diluted earnings per share $ .21 $ .47 $ .43
14.Information on Industry Segments and Related Information The Company operates in two principal business segments: technology services and facilities management. Technology Services includes the integration, systems engineering, installation, maintenance and training for computer systems, communications systems and simulation systems as well as the resale of telephone communications switches. Other primary services provided include year 2000 desktop solutions for enterprise PC hardware and software compliance, interactive technologies including website design, development and marketing, Internet/Intranet services and multimedia sales and educational tools. Facilities Management includes the management, operations and maintenance support of military bases, prisons, waterways, major office complexes and communications sites.
Selected Financial Data by 1998 1997 1996 Business Segment Net Sales Technology Services $ 59,180 $ 61,313 $ 35,694 Facilities Management 14,557 14,965 11,465 $ 73,737 $ 76,278 $ 47,159 Operating Income Technology Services $ 973 $ 792 $ 731 Facilities Management 367 1,326 741 $ 1,340 $ 2,118 $ 1,472 Depreciation and Amortization Technology Services $ 1,274 $ 968 $ 507 Facilities Management 92 92 92 $1,366 $ 1,060 $ 599 Expenditures for Property and Equipment Technology Services $ 1,462 $ 1,673 $ 237 Facilities Management 10 11 10 $ 1,472 $ 1,684 $ 247 Identifiable Assets Technology Services $ 34,144 $ 35,918 $ 20,613 Facilities Management 3,831 5,082 4,215 $ 37,975 $ 41,000 $ 24,828
Net Sales by Customer Category 1998 1997 1996 US. Government Technology Services $ 18,354 $ 27,585 $ 25,861 Facilities Management 7,726 8,526 8,564 $ 26,080 $ 36,111 $ 34,425 State and Local government Technology Services $ 12,231 $ 11,141 $ 3,829 Facilities Management 6,831 6,439 2,901 $ 19,062 $ 17,580 $ 6,730 Commercial Technology Services $ 28,595 $ 22,587 $ 6,004 Facilities Management - - - $ 28,595 $ 22,587 $ 6,004
15.QUARTERLY FINANCIAL DATA (unaudited) (In thousands, except on a per share basis)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 1998 Revenues $18,035 $ 18,673 $18,232 $ 18,797 Income before income (384) 196 452 545 taxes Net income (232) 118 274 282 Per share Earnings per share - (.11) .06 .14 .14 basic Earnings per share - (.11) .06 .13 .14 diluted Dividends per share .05 .05 .05 .05 Market price High 11-1/2 10-7/8 13-1/8 10 Low 6-3/4 7-5/8 8-3/4 7-1/2
Basic EPS totals to $.23 versus $.22 for the year due to rounding during computation at fiscal quarters. Diluted EPS totals to $.22 versus $.21 for the year due to rounding during computation at fiscal quarters.
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 1997 Revenues $15,640 $20,531 $21,913 $18,194 Income before income 435 536 594 12 taxes Net income 269 319 359 7 Per share Earnings per share - .14 .16 .18 .00 basic Earnings per share - .14 .15 .17 .00 diluted Dividends per share .043 .047 .047 .05 Market price High 8-1/8 7-7/8 13-1/8 15 Low 4-5/8 6-5/8 7-5/8 10-1/8
Diluted EPS totals to $.46 versus $.47 for the year due to rounding during computation at fiscal quarters. Halifax Corporation Schedule II, Valuation and Qualifying Accounts March 31, 1998
Balance at Additions Balance at beginning charged to end of of year cost & Deductions year expense Year Ended March 31, 1998: Allowance for doubtful accounts $234,000 $288,000 $206,000 $316,000 Allowance for inventory obsolescence $499,000 $1,986,000 $2,129,000 $356,000 Year Ended March 31, 1997: Allowance for doubtful accounts $188,000 $158,000 $112,000 $234,000 Allowance for inventory obsolescence $804,000 $809,000 $1,114,000 $499,000 Year Ended March 31, 1996: Allowance for doubtful accounts $170,000 $20,000 $ 2,000 $188,000 Allowance for inventory obsolescence $611,000 $1,195,000 $1,002,000 $804,000
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, 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 and Non-Employee Directors Stock Option Plan of our report dated June 15, 1998, except for note 5 as to which the date is June 25, 1998, included in the Annual Report on Form 10-K of Halifax Corporation for the year ended March 31, 1998,, with respect to the consolidated financial statements, as amended, included in this Form 10-K/A. /s/ERNST & YOUNG LLP Washington, DC July 9, 1998 EX-27 2 10K/A-MARCH-1998
5 10K/A-MARCH-1998 1 0 12-MOS MAR-31-1998 APR-1-1997 MAR-31-1998 1 67,000 0 21,130,000 316,000 8,203,000 31,382,000 9,927,000 6,349,000 37,975,000 11,019,000 0 544,000 0 0 10,064,000 37,975,000 73,737,000 73,737,000 67,081,000 72,397,000 0 0 1,535,000 809,000 367,000 442,000 0 0 0 442,000 .22 .21
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