-----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, I2WArQLgcgyB7xfIf47/+RJduRj7JU5Puc/Zio1ocxkcejNRt+W/evBvMlOSONOU nMpM7qw+nBaD3cXkjE5XYw== 0000950133-01-503342.txt : 20020411 0000950133-01-503342.hdr.sgml : 20020411 ACCESSION NUMBER: 0000950133-01-503342 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALIFAX CORP CENTRAL INDEX KEY: 0000720671 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 540829246 STATE OF INCORPORATION: VA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08964 FILM NUMBER: 1793406 BUSINESS ADDRESS: STREET 1: 5250 CHEROKEE AVE CITY: ALEXANDRIA STATE: VA ZIP: 22312 BUSINESS PHONE: 7037502202 MAIL ADDRESS: STREET 1: 5250 CHEROKEE AVENUE CITY: ALEXANDRIA STATE: VA ZIP: 22312 FORMER COMPANY: FORMER CONFORMED NAME: HALIFAX ENGINEERING INC/VA DATE OF NAME CHANGE: 19911204 10-Q 1 w55134e10-q.txt FORM 10-Q HALIFAX CORPORATION FORM 10-Q SEPTEMBER 30, 2001 FORM 10Q -- QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 312905 eff. 4/26/93.) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission file Number 1-8964 Halifax Corporation (Exact name of registrant as specified in its charter) Virginia 54-0829246 (State or other jurisdiction (IRS Employer of incorporation of organization) Identification No.) 5250 Cherokee Avenue, Alexandria, VA 22312 (Address of principal executive offices) Registrant's telephone number, including area code (703) 750-2202 N/A (former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X)Yes ( )No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. (X)Yes ( )No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,065,686 as of September 30, 2001. HALIFAX CORPORATION CONTENTS PART I. FINANCIAL INFORMATION
page Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2001 (Unaudited) and March 31, 2001............ 3 Condensed Consolidated Statements of Operations - Six Months Ended September 30, 2001 and 2000 (Unaudited).......................................................................................... 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2001 and 2000 (Unaudited).......................................................................................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)..................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 15
PART II OTHER INFORMATION 1 Item 4. Submission of Matters to a Vote of Security Holders ....................................... 15 Item 6. Exhibits and Reports on Form 8-K............................................................ 16
2 Item 1. FINANCIAL STATEMENTS HALIFAX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share data)
September 30, 2001 March 31, 2001 (Unaudited) ASSETS CURRENT ASSETS Cash $ 100 $ 231 Trade accounts receivable net of reserve of $176 and $319 at September 30, 2001 and March 31, 2001 9,212 8,643 Inventory net of reserve of $780 at September 30, 2001 and $700 March 31, 2001 3,109 2,889 Prepaid expenses and other current assets 435 612 TOTAL CURRENT ASSETS 12,856 12,375 PROPERTY AND EQUIPMENT, net 1,672 1,956 GOODWILL, net 3,087 3,192 OTHER ASSETS 495 443 TOTAL ASSETS $ 18,110 $17,966 LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 3,347 $ 2,604 Accrued expenses 4,415 8,386 Deferred maintenance revenue 1,998 855 Current portion of long-term debt - 632 Income taxes payable 115 - TOTAL CURRENT LIABILITIES 9,875 12,477 LONG-TERM BANK DEBT 5,584 2,886 SUBORDINATED DEBT - AFFILIATE 4,000 4,000 Deferred Income 486 516 TOTAL LIABILITIES 19,945 19,879 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred stock, no par value authorized 1,500,000, issued 0 shares - Common stock, $.24 par value: Authorized - 6,000,000 shares Issued - 2,322,370 as of September 30, 2001 and March 31, 2001 Outstanding - 2,065,686 shares as of September 30, 2001 and 2,023,436 shares as of March 31, 2001 562 562 Additional paid-in capital 4,710 4,710 Accumulated deficit (6,895) (6,973) Less Treasury stock at cost - 256,684 shares (212) (212) TOTAL STOCKHOLDERS' DEFICIT (1,835) (1,913) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,110 $ 17,966
See notes to condensed consolidated financial statements See Form 10-K for the fiscal year ended March 31, 2001 1 HALIFAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) (Amounts in thousands except share and per share data)
Three Months Ended Six Months Ended September 30, September 30, 2001 2000 2001 2000 Revenues $ 11,672 $12,422 $22,489 $25,332 Cost of services 10,461 11,867 20,102 24,247 Gross Margin 1,211 555 2,387 1,085 Marketing, general and administrative 959 608 1,945 1,174 Operating income (loss) 252 (53) 442 (89) Interest expense 177 292 334 470 Embezzlement recoveries - (2,075) - (1,821) Income from continuing operations before income taxes 75 1,730 108 1,262 Income taxes 15 15 30 30 Income from continuing operations 60 1,715 78 1,232 Discontinued operations: Income from discontinued operations - - - 244 Gain on sale of discontinued operations (net of taxes of $200) - - - 1,594 Net income $ 60 $ 1,715 $ 78 $ 3,070 Earnings per common share - basic: Continuing operations $ .03 $ .85 $ .04 $ .61 Discontinued operations - - - .12 Gain on disposition of discontinued operations - - - .79 $ .03 $ .85 $.04 $1.52 Earnings per common share - diluted: Continuing operations $ .03 $.80 $ .04 $ .57 Discontinued operations - - - .11 Gain on disposition of discontinued operations - - - .72 $ .03 $ .80 $.04 $1.40 Weighted number of shares outstanding: Basic 2,065,686 2,023,436 2,065,686 2,019,819 Diluted 2,065,686 2,196,505 2,065,686 2,192,102
See notes to Condensed Consolidated Financial Statements 2 HALIFAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
(Amounts in thousands) Six Months Ended September 30, 2001 2000 Cash flows from operating activities: Net income $78 $ 3,070 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 422 573 Income from discontinued operations - (244) Gain on sale of discontinued operations - (1,594) Changes in operating assets and liabilities: Increase in accounts receivable (569) (3,409) (Increase) decrease in inventory (220) 49 Decrease in other assets 125 349 Decrease in accounts payable and accrued expenses (3,228) (788) Increase in income taxes payable 115 204 Increase in deferred maintenance 1,143 1,051 Decrease in deferred income (30) (26) Total adjustments (2,242) (3,835) Net cash used by operating activities of continuing operations (2,164) (765) Cash flows from investing activities: Acquisition of property and equipment (33) (245) Net proceeds from the sale of discontinued operations - 5,500 Net cash (used in) provided by investing activities by continuing operations (33) 5,255 Cash flows from financing activities: Proceeds from borrowing of long-term debt 12,473 14,272 Retirement of long-term debt (10,407) (19,968) Proceeds from restricted cash - 650 Proceeds from sale of stock upon exercise of stock options - 33 Net cash provided by (used in) financing activities by continuing operations 2,066 (5,013) Net decrease in cash (131) (523) Cash at beginning of period 231 1,800 Cash at end of period $100 $1,277
See notes to condensed consolidated financial statements 3 Halifax Corporation Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. For further information refer to the consolidated financial statements and notes thereto included in the Halifax Corporation Annual Report on Form 10-K for the year ended March 31, 2001 and subsequent quarterly report on Form 10-Q for the quarter ended June 30, 2001. Recent Accounting Pronouncements: Effective April 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contract and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of SFAS 133 did not have any impact on the financial position, results of operations, or cash flows of the Company. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have any impact on its financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized but to be tested for impairment at least annually. Intangible assets that have finite lives will continue to be amortized over their useful lives. The amortization and nonamortization provisions of SFAS 142 will be applied to all goodwill and intangible assets acquired after June 30, 2001. Effective April 1, 2002 for the Company, SFAS 142 is required to be applied to all goodwill and intangible assets recognized in the financial statements at that date. The Company is currently assessing, but has not yet determined , the impact of SFAS 142 on its financial position and results of operations. 1 Note 2 - Sales of Accounts Receivable The Company routinely transfers receivables to a third party in connection with equipment leased to an end user. Under the provisions of Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," the 2001 and 2000 transfers were accounted for as sales and as a result, the related receivables have been excluded from the accompanying Condensed Consolidated Balance Sheets. The amount paid to the Company for the receivables by the transferee is equal to the Company's carrying value and therefore no gain or loss is recognized. The end user remits its monthly payments directly to an escrow account held by a third party from which payments are made to the transferee and the Company, for various services provided to the end users. The Company provides limited monthly servicing whereby the Company invoices the end user on behalf of the transferee. Note 3 - Embezzlement In March 18, 1999, the Company announced that an internal investigation had revealed a material embezzlement by the former controller of the Company's subsidiaries. The embezzlement occurred over a four year period and aggregated approximately $15.4 million of which approximately $15 million was embezzled from the Company and $400 thousand prior to its acquisition by Halifax. After net recoveries through March 31, 2001, the cumulative net embezzlement loss to the Company before taxes was approximately $7.7 million. For the six months ended September 30, 2001 the Company incurred no costs related to the ongoing recovery effort. Recoveries for the three and six months ended September 30, 2000 were approximately $2 million and $1.8 million, respectively net of recovery costs. On January 9, 2001, the Securities and Exchange Commission ("SEC") issued a formal order of investigation of the Company and unnamed individuals concerning trading activity in the Company's securities, periodic reports filed by the Company with the SEC, certain accounting and financial matters and internal accounting controls. The Company is cooperating fully with the SEC. In addition, the Company has received an SEC subpoena for documents related to these matters. The staff of the SEC has advised that the inquiry is confidential and should not be construed as an indication by the Commission or its staff that any violation of law has occurred, or has an adverse reflection on any person, entity or security. The Company believes the investigation is primarily related to the previously reported embezzlement by one the Company's former employees. Note 4 - Debt On December 8, 2000, the Company entered into a new revolving credit agreement with a financial institution which refinanced the Company's revolving credit line. Advances under the revolving agreement are collateralized by a first priority security interest 2 on all the Company's assets as defined in the financing and security agreement. The agreement also contains certain financial covenants and reporting covenants. Subsequent to September 30, 2001, the agreement, which originally matured on August 31, 2002, was extended to November 15, 2002. The revolving credit agreement prohibits the payment of dividends or distributions as well as the payment of principal or interest on the Company's outstanding subordinated debt, which is owned by an affiliate. Interest expense on Subordinated Debt is accrued on a current basis. Pursuant to the terms of a subordination agreement related to the subordinated debt, concurrent with the extension of the revolving credit line discussed above, the due date of the subordinated debt was extended from July 1, 2002 to November 15, 2002. The Company's credit facility requires it to satisfy two financial covenants; funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), and fixed charge coverage ratio. The Company was not in compliance with the funded debt to EBITDA ratio at September 30, 2001. Its lender has agreed to an amendment to waive the violations. It is the intention of the lender and the Company to restructure the covenants to assure that compliance can be achieved. Note 5 - Concentration of Risk The Company has a number of major customers. The Company's largest customer accounted for 21.9% and 10.8% of the Company's revenues for the three months and 18.7% and 15.2% of revenues for the six months ended September 30, 2001 and 2000, respectively. The Company's five largest customers collectively accounted for 40% and 35% of revenues for the six months ended September 30, 2001 and 2000, respectively. The Company anticipates that significant customer concentration will continue for the foreseeable future although the companies which constitute the Company's largest customers may change. 3 Note 6 - Earnings per Share The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended Six Months Ended September 30, September 30, 2001 2000 2001 2000 Numerator for earnings per share: Net income as reported from Continuing operations $ 60,000 $1,715,000 $ 78,000 $1,232,000 Discontinued operations - - - 244,000 Gain on disposition of discontinued operations - - - 1,594,000 Net income $ 60,000 $1,715,000 $0 $3,070,000 Diluted earnings per share: Net income as reported from continuing operations $ 60,000 $1,715,000 $ 78,000 $1,232,000 After tax equivalent of interest expense on 7% convertible debenture - 35,000 - 70,000 Net income from continuing operations for purposes of computing diluted net income per share $ 60,000 $1,750,000 $ 78,000 $1,302,000 Denominator: Denominator for basic earnings per share - weighted-average shares 2,065,686 2,023,436 2,065,686 2,019,819 Effect of dilutive securities: 7% Convertible Debenture - 170,648 - 170,648 Employee stock options - 2,421 - 1,635 Dilutive potential common shares - 173,069 - 172,283 Denominator for diluted earnings per share weighted number of shares outstanding 2,065,686 2,196,505 2,065,686 2,192,102 Basic earnings per common share: Income from continuing operations $ .03 $ .85 $ .04 $.61 Discontinued operations - . - - .12 Gain on disposition of discontinued operations - - - .79 $ .03 $ .85 $ .04 $1.52 Diluted earnings per common share: Income from continuing operations $ .03 $ .80 $ .04 $ .57 Discontinued operations - - - .11 Gain on disposition of discontinued operations - - - .72 $ .03 $ .80 $ .04 $1.40
1 Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations Forward-Looking Statements Certain statements in this Quarterly 10-Q Report constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in the Company's market area, inflation, favorable banking arrangements, the availability of capital to finance planned growth, ramifications of the embezzlement referenced herein, changes in government regulations, availability of skilled personnel and competition, which may, among other things impact on the ability of the Company to implement its business strategy. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. he following discussion should be read in conjunction with the consolidated financial statements and notes thereto. (Tabular information: dollars in thousands, except per share amounts). 1
Three Months Ended September 30, Six Months Ended September 30, Results of Operations 2001 2000 Change % 2001 2000 Change % Revenues $ 11,672 $ 12,422 $ (750) -6% $ 22,489 $ 25,332 $(2,843) -11% Cost of services 10,461 11,867 (1,406) -12% 20,102 24,247 (4,145) -17% Percent of revenues 90% 96% 89% 96% Gross margin 1,211 555 656 118% 2,387 1,085 1,302 120% Percentage of revenues 10% 4% 11% 4% Marketing, general & administrative 959 608 351 58% 1,945 1,174 771 66% Percent of revenues 8% 5% 9% 5% Operating income 252 (53) 305 N/M 442 (89) 531 N/M Percent of revenues 2% 0% 2% 0% Interest expense 177 292 (115) -39% 334 470 (136) -29% Embezzlement recovery - (2,075) 2,075 -100% - (1,821) 1,821 -100% Income from continuing operations before income tax 75 1,730 (1,655) -96% 108 1,262 (1,154) -91% Income tax expense 15 15 - 0% 30 30 - 0% Income from continuing operations 60 1,715 (1,655) -97% 78 1,232 (1,154) -94% Income from discontinued operations - - - - - 244 (244) N/M Gain on sale of discontinued operations - - - - - 1,594 (1,594) N/M Net income $ 60 $ 1,715 $(1,655) N/M $ 78 $ 3,070 $(2,992) N/M Earnings per share - basic: Continuing operations $ 0.03 $ 0.85 $ 0.04 $ 0.61 Discontinued operations - - - 0.12 Gain on sale of discontinued operations - - - 0.79 $ 0.03 $ 0.85 $ 0.04 $ 1.52 Earnings per share - diluted: Continuing operations $ 0.03 $ 0.80 $ 0.04 $ 0.57 Discontinued operations - - - 0.11 Gain on sale of discontinued operations - - - .72 $ 0.03 $ 0.80 $ 0.04 $ 1.40 Weighted average number of common shares outstanding - basic 2,065,686 2,023,436 2,065,686 2,019,819 Weighted average number of common shares outstanding - diluted 2,065,686 2,196,505 2,065,686 2,192,102
1 Revenues Revenues for the three months ended September 30, 2001 and 2000, decreased 6%, or $750 thousand to $11.7 million from $12.4 million, respectively. For the six months ended September 30, 2001, revenues decreased from $25.3 million in 2000 to $22.5 million in 2001, a decrease of $2.8 million, or 11%. The decline in revenues was principally due to decreased hardware sales offset by increases in higher margin service and recurring revenues on long-term contracts. The decline in hardware sales has been characterized by lengthening sales cycles and increased price competition brought on by the economic slow down. Gross Margin, Costs and Expenses Cost of services for the three and six months ended September 30, 2001 decreased by $1.4 million, from $11.8 million to 10.4 million, or 12%, and $4.1 million, from $24.2 million to $20.1 million, or 17%, respectively, from the comparable period in 2000, primarily as a result of the decline in revenues from the aforementioned hardware sales. The decrease in cost of services was attributable to reductions in hardware sales, cost containment measures and a continued shift in sales mix to higher margin services. As a percent of revenues, gross margin has improved from 4% for the three and six months ended September 30, 2000 to 10% and 11%, respectively, for the same periods in 2001. For the three months ended September 30, 2001 and marketing and general and administration expense increased from $608 thousand to $959 thousand, an increase of $351 thousand, or 58%, and for the six months ended September 30, 2001, marketing and general and administration increased from $1.2 million to $1.9 million, an increase of $771 thousand, or 66%, over the same period last fiscal year. The increase was primarily due to the creation of the company-wide marketing group, associated with marketing and promotional investments and workshops and higher levels of professional fees and business insurance. Operating Income For the three months ended September 30, 2001 the Company had operating income of $252 thousand compared to an operating loss of $53 thousand for the three months ended September 30, 2000. Operating income for the six months ended September 30, 2001 was $442 thousand compared to a loss of $89 thousand for the comparable period ended September 30, 2000. The improvement was attributable to the quality of the new revenue and gains realized from cost cutting measures implemented by the organization during 2000. Interest Expense Interest expense for the three months ended September 30, 2001 decreased by 39% from the comparable period in 2000. For the six months ended September 30, 2001, interest expense decreased by 29% from the comparable period in 2000, principally as a result of curtailment of debt and lower interest rates. 1 Embezzlement Recovery Embezzlement recoveries (net of settlement costs) for the three and six months ended September 30, 2000 were $2.1 million and $1.8 million, respectively. There were no embezzlement recoveries for the three and six months ended September 30, 2001. For additional discussion see "Embezzlement Matter" in Note 3 to the condensed consolidated financial statements. Income Taxes Income taxes for the three and six months ended September 30, 2001and 2000 related primarily to state obligations of $15 thousand and $30 thousand, respectively. Discontinued Operations In June 2000 the Company sold its Operational Outsourcing Division and, accordingly, the financial results for this division have been reclassified as Discontinued Operations. The Company recognized a one time gain on the sale of the Division amounting to approximately $1.6 million (net of taxes of $200 thousand). Net Income For the three months ended September 30, 2001, net income was $60 thousand compared to $1.7 million for the comparable period in 2000. For the six months ended September 30, 2001 net income was $78 thousand compared to $3.07 million for September 30, 2001. For the three months ended September 30, 2000, the Company reported embezzlement recoveries of $2.1 million. Excluding this item the Company would have reported a net loss of $360 thousand compared to net income of $60 thousand for this year's second quarter. The six months ended September 30, 2000, included income from discontinued operations of $244 thousand, a gain on the sale of discontinued operations of $1.6 million and embezzlement recoveries of $1.8 million. With these items excluded, the Company would have reported a net loss of $589 thousand compared to net income of $78,000 for the first half of this year. 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 believes it must also continue to emphasize operating 2 efficiencies through cost containment strategies, reengineering efforts and improved service delivery techniques. The Company serves its customer base by providing consulting, integration, networking, maintenance and installation services. This industry has been characterized by rapid technological advances that have resulted in frequent introductions of new products, product enhancements and aggressive pricing practices, which also impact pricing of service activities. The Company's operating results could be adversely affected by industry-wide pricing pressures, the ability of the Company to recruit, train and retain personnel integral to the Company's operations and the presence of competitors with greater financial and other resources. Also, the Company's operating results could be adversely impacted should it be unable to effectively achieve the revenue growth necessary to provide profitable operating margins in various operations. The Company's plan for growth includes intensified marketing efforts, an expanding commercial sales program, strategic alliances and, where appropriate, acquisitions that expand market share. There can be no assurances these efforts will be successful. Liquidity and Capital Resources Historically the Company's primary sources of funding have been cash flows from operations and borrowing under our credit facilities. In prior years through a series of private placements, the Company issued $4 million of subordinated notes due July 1, 2002, and extended to November 15, 2002 pursuant to a subordination agreement dated December 2000 to Research Industries Incorporated, a private investment company and an affiliate of the Company. At September 30, 2001, the Company's working capital was $2.99 million and its current ratio of 1.3. Improvement in the Company's financial strength was attributable to more stringent cash management, accelerated collection activities and improved inventory and expense management. Pursuant to the Company's credit facility the Company is required to satisfy two financial covenants; funded debt to EBITDA and fixed charge coverage ratio. The Company was not in compliance with the funded debt ratio as of September 30, 2001. The lender has waived the covenant violation at September 30, 2001. The Company and the lender have extended the orginal maturity date from August 31, 2002 to November 15, 2002. (See Note 4 to the condensed consolidated financial statements.) Capital expenditures for the six months ended September 30, 2001 have been substantially reduced from prior periods. The Company does not expect capital expenditures to increase significantly during the current fiscal year. The subordinated debt agreements with an affiliate totaled $4 million at September 30, 2001. The credit facility agreement dated December 8, 2000 prohibits the payments of principal or interest on the subordinated debt. (See Note 4 to the condensed consolidated financial statements.) The Company believes that funds generated from operations, bank borrowings, and investing activities should be sufficient to meet its current operating cash requirements although there can be no assurances that all the aforementioned sources of cash can be realized. Quantitative and Qualitative Disclosures about Market Risk 3 The Company is exposed to changes in interest rates, primarily as result of the bank debt which partially finances its business. The floating interest debt exposes the Company to interest rate risk, with the primary interest rate exposure resulting from changes in the LIBOR rate. Adverse changes in interest rates or the Company's inability to refinance its long-term obligations may have a material negative impact on the Company's operations. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company does not believe such risk is material. The Company does not customarily use derivative instruments to adjust the Company's interest rate risk profile. The information below summarizes the Company's sensitivity to market risks as of September 30, 2001. The table presents principal cash flows and related interest rates by year of maturity of the Company's funded debt. Note 6 to the consolidated financial statements in the annual report on Form 10-K contains descriptions of the Company's funded debt and should be read in conjunction with the table below (amount in thousands).
Period Ending September 30, ( Amounts in thousands) Long-term debt (including current maturities) 2002 2003 Total Debt Fair Value Revolving credit agreement at the LIBOR rate plus 2.5%. Due August 31, 2002. Average interest rate of 7.5%. $ - $ 5,584 $ 5,584 $ 5,584 7% subordinated note from affiliate due January 27, 2003. - 2,000 2,000 1,960 8% subordinated notes from affiliate due July 1, 2002. - 2,000 2,000 2,000 Total fixed debt - 4,000 4,000 3,960 Total debt $ - $ 9,584 $ 9,584 $ 9,544
At present, all transactions are billed and denominated in U.S. dollars and consequently, the Company does not currently have any material exposure to foreign exchange rate fluctuation risk. 4 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in interest rates. Adverse changes in interest rates will have a material effect on the Company's operations. At September 30, 2001, the Company had $9.6 million of debt outstanding of which $5.6 million has variable interest rates. If the interest rates charged to the Company on its variable rate debt were to increase significantly, it could have a materially adverse effect on future operations. At present the Company is not conducting any foreign business. Part II. Other Information Item 4. Submission of matters to a vote of Security Holders Annual Stockholders Meeting of September 20, 2001 ANNUAL SHAREHOLDERS MEETING SEPTEMBER 20, 2001 RESULTS OF 1. ELECTION OF DIRECTORS
BY PROXIES %OF %OF WITHOLD INSTRUCTED TOTAL VOTING OUSTANDING NOMINEE FOR AUTHORITY AGAINST BY BALLOT FOR SHARES SHARES SCURLOCK 1,856,737 2,437 --- 99.87 89.88 MCNEW 1,856,737 2,437 --- 99.87 89.88 GROVER 1,856,737 2,437 --- 99.87 89.88 TOUPS 1,856,737 2,437 --- 99.87 89.88 HEWITT 1,856,737 2,437 --- 99.87 89.88 YOUNG 1,856,737 2,437 --- 99.87 89.88
2. PROPOSAL TO RATIFY DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY FOR THE FISCAL YEAR ENDING MARCH 31, 2002 FOR AGAINST ABSTAIN 1,855,984 --- 3,190 NOTE: SHARES VOTED 1,859,174 SHARES OUTSANDTING 2,065,686 QUORUM % 5 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.9 James L. Sherwood Severance Arrangement, dated November 15, 1999 10.10 James L. May Severance Arrangement, dated March 15, 2001 10.11 Joseph Sciacca Severance Arrangement, dated May 10, 2000 10.12 Thomas J. Basile Severance Arrangement, dated March 15, 2001 (b) Reports on Form 8-K - None 6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HALIFAX CORPORATION (Registrant) Date: November 15, 2001 By: s/Charles L. McNew Charles L. McNew President & CEO Date: November 15, 2001 By: s/Joseph Sciacca Joseph Sciacca Vice President, Finance & CFO 7 EX-10.9 3 w55134ex10-9.txt SEVERANCE ARRANGEMENT EXHIBIT 10.9 TO: James L. Sherwood FROM: Charles McNew DATE: November 15, 1999 RE: Severance The following termination/separation arrangements are being extended to you in the event of your separation from the Company. In the event your employment is terminated without cause, the Company will continue to pay your salary for six (6) months from the date of termination. If you decide to leave Halifax or your employment is terminated for cause, you will be paid your salary and any earned incentive compensation up to the last day of employment. "Cause" as used above is defined as: A good faith finding by the Company of your failure to perform the duties reasonably assigned to you; dishonesty, gross negligence or misconduct, or your conviction, or your entry of a pleading of guilty or nolo contrendre, to any crime involving moral turpitude or any felony. EX-10.10 4 w55134ex10-10.txt SEVERANCE ARRANGEMENT EXHIBIT 10.10 TO: James L. May FROM: Charles McNew DATE: March 15, 2001 RE: Severance The following termination/separation arrangements are being extended to you in the event of your separation from the Company. In the event your employment is terminated without cause, the Company will continue to pay your salary for six (6) months from the date of termination. If you decide to leave Halifax or your employment is terminated for cause, you will be paid your salary and any earned incentive compensation up to the last day of employment. "Cause" as used above is defined as: A good faith finding by the Company of your failure to perform the duties reasonably assigned to you; dishonesty, gross negligence or misconduct, or your conviction, or your entry of a pleading of guilty or nolo contrendre, to any crime involving moral turpitude or any felony. EX-10.11 5 w55134ex10-11.txt SEVERANCE ARRANGEMENT EXHIBIT 10.11 TO: Joseph Sciacca FROM: Charles McNew DATE: May 10, 2000 RE: Severance The following termination/separation arrangements are being extended to you in the event of your separation from the Company. In the event your employment is terminated without cause, the Company will continue to pay your salary for six (6) months from the date of termination. If you decide to leave Halifax or your employment is terminated for cause, you will be paid your salary and any earned incentive compensation up to the last day of employment. "Cause" as used above is defined as: A good faith finding by the Company of your failure to perform the duties reasonably assigned to you; dishonesty, gross negligence or misconduct, or your conviction, or your entry of a pleading of guilty or nolo contrendre, to any crime involving moral turpitude or any felony. EX-10.12 6 w55134ex10-12.txt SEVERANCE ARRANGEMENT EXHIBIT 10.12 TO: Thomas Basile FROM: Charles McNew DATE: March 15, 2001 RE: Severance The following termination/separation arrangements are being extended to you in the event of your separation from the Company. In the event your employment is terminated without cause, the Company will continue to pay your salary for six (6) months from the date of termination. If you decide to leave Halifax or your employment is terminated for cause, you will be paid your salary and any earned incentive compensation up to the last day of employment. "Cause" as used above is defined as: A good faith finding by the Company of your failure to perform the duties reasonably assigned to you; dishonesty, gross negligence or misconduct, or your conviction, or your entry of a pleading of guilty or nolo contrendre, to any crime involving moral turpitude or any felony. -----END PRIVACY-ENHANCED MESSAGE-----