10-Q

FORM 10Q — QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)

(X)	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended                           December 31, 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 of incorporation of organization)	(IRS Employer Identification No.)

5250 Cherokee Avenue, Alexandria, VA 22312

(Address of principal executive offices)

Registrant’s telephone number, including area code     (703) 750-2202 

N/A

(former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(X)Yes   (  )No

APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

(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. 2,175,613 as of December 31, 2001.

1

HALIFAX CORPORATION

CONTENTS

PART I. FINANCIAL INFORMATION

		page
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets — December 31, 2001 (Unaudited) and March 31, 2001		3
	Condensed Consolidated Statements of Operations — Three Months and Nine Months Ended December 31, 2001 and 2000 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended December 31, 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		10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			16
PART II OTHER INFORMATION
Item 4. Other Information			16
Item 6. Exhibits and Reports on Form 8-K			16

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Item 1. FINANCIAL STATEMENTS
HALIFAX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except share data)

			December 31, 2001			March 31, 2001
			(Unaudited)
ASSETS
CURRENT ASSETS
	Cash		$	100		$	231
	Trade accounts receivable less allowances of $240 and $319 at
		December 31, 2001 and March 31, 2001		8,830			8,643
	Inventory net of reserves of $842 at December 31, 2001 and
		$700 March 31, 2001		4,093			2,889
	Prepaid expenses and other current assets			813			612
TOTAL CURRENT ASSETS				13,836			12,375
PROPERTY AND EQUIPMENT, net				1,585			1,956
GOODWILL, net				3,034			3,192
OTHER ASSETS				478			443
TOTAL ASSETS			$	18,933		$	17,966
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
	Accounts payable		$	3,111		$	2,604
	Accrued expenses			5,408			8,386
	Deferred maintenance revenue			1,437			855
	Current portion of long-term debt			—			632
	Income taxes payable			88			—
TOTAL CURRENT LIABILITIES				10,044			12,477
LONG-TERM BANK DEBT				5,813			2,886
SUBORDINATED DEBT – AFFILIATE				4,000			4,000
DEFERRED INCOME				471			516
TOTAL LIABILITIES				20,328			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 - 2,432,297 as of December 31, 2001 and 2,322,370 as of
	March 31, 2001
Outstanding - 2,175,613 shares as of December 31, 2001 and
	2,023,436 shares as of March 31, 2001			588			562
Additional paid-in capital				5,015			4,710
Accumulated deficit				(6,786	)		(6,973	)
Less treasury stock at cost - 256,684 shares				(212	)		(212	)
TOTAL STOCKHOLDERS’ DEFICIT				(1,395	)		(1,913	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT			$	18,933		$	17,966

See notes to condensed consolidated financial statements. See Form 10-K for the fiscal year ended March 31, 2001.

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HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
DECEMBER 31, 2001 AND 2000 (UNAUDITED)

(Amounts in thousands except share and per share data)

			Three Months Ended				Nine Months Ended
			December 31,				December 31,
			2001		2000		2001		2000
Revenues			$	13,249	$	14,733	$	35,738	$	40,065
Cost of services				12,088		13,763		32,190		38,010
Gross Margin				1,161		970		3,548		2,055
Marketing, general and administrative				897		716		2,842		1,890
Operating income				264		254		706		165
Interest expense				140		216		474		686
Embezzlement recoveries				—		—		—		(1,821	)
Income from continuing operations
	before income taxes			124		38		232		1,300
Income taxes				15		15		45		45
Income from continuing operations				109		23		187		1,255
Discontinued operations:
	Income from discontinued operations			—		—		—		244
	Gain on sale of discontinued operations (net of
		taxes of $200)		—		—		—		1,594
Net income			$	109	$	23	$	187	$	3,093
Earnings per common share — basic:
Continuing operations			$	.05	$	.01	$	.09	$	.62
Discontinued operations				—		—		—		.12
Gain on disposition of discontinued operations				—		—		—		.79
			$	.05	$	.01	$	.09	$	1.53
Earnings per common share — diluted:
Continuing operations			$	.05	$	.01	$	.09	$	.62
Discontinued operations				—		—		—		.11
Gain on disposition of discontinued operations				—		—		—		.73
			$	.05	$	.01	$	.09	$	1.46
Weighted number of shares outstanding:
Basic				2,087,193		2,023,436		2,072,881		2,021,331
Diluted				2,090,664		2,023,436		2,073,756		2,191,979

See notes to condensed consolidated financial statements. See Form 10-K for the fiscal year ended March 31, 2001.

4

HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
DECEMBER 31, 2001 AND 2000 (UNAUDITED)

(Amounts in thousands)

				Nine Months Ended
				December 31,
				2001			2000
Cash flows from operating activities:
Net income				$	187		$	3,093
Adjustments to reconcile net income to net
	cash (used) provided by operating activities:
	Depreciation and amortization				650			693
	Income from discontinued operations				—			(244	)
	Gain on sale of discontinued operations				—			(1,594	)
	Stock issued in lieu of interest				105			—
Changes in operating assets and liabilities:
	Increase in accounts receivable				(187	)		(1,753	)
	(Increase) decrease in inventory				(1,204	)		245
	(Increase) decrease in other assets				(236	)		295
	Decrease in accounts payable and accrued expenses				(2,245	)		(973	)
	Increase in income taxes payable				88			84
	Increase in deferred maintenance revenue				582			731
	Decrease in deferred income				(45	)		(41	)
		Total adjustments			(2,492	)		(2,557	)
		Net cash (used in) provided by operating activities of
			continuing operations		(2,305	)		536
Cash flows from investing activities:
Acquisition of property and equipment					(121	)		(428	)
Net proceeds from the sale of discontinued operations					—			5,500
Net cash (used in) provided by investing activities by continuing
	operations				(121	)		5,072
Cash flows from financing activities:
Proceeds from borrowing of long-term debt					20,152			20,689
Retirement of long-term debt					(17,857	)		(28,465	)
Proceeds from restricted cash					—			650
Proceeds from exercise of stock options					—			33
Net cash provided by (used in) financing activities by continuing
	operations				2,295			(7,093	)
Net decrease in cash					(131	)		(1,485	)
Cash at beginning of period					231			1,800
Cash at end of period				$	100		$	315
Supplemenatal Disclosure of noncash financing activities:
Stock issued in lieu of interest					331,000			—

See notes to condensed consolidated financial statements. See Form 10-K for the fiscal year ended March 31, 2001.

5

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 reports on Form 10-Q for the quarters ended June 30, 2001 and September 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, which 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 through December 31, 2001.

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, if any, of SFAS 142 on its financial position and results of operations.

In June 2001, the FASB issued Statement of Financial Accounting Standard No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations”, which is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires asset retirement obligations to be recorded at their fair value. The Company has not yet determined the impact, if any, of SFAS 143 on its financial position and results of operations.

6

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) which is effective for fiscal years beginning after December 15, 2001. SFAS 144 supersedes Statement of Financial Accounting Standard No. 121 (“SFAS 121”) “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. SFAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves significant implementation issues related to SFAS 121. The Company has not yet determined the impact, if any, of SFAS 144 on its financial position and results of operations.

Note 2 — Sale 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

On 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 was embezzled 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 nine months ended December 31, 2001 no costs have been incurred by the Company and no recoveries have been received. Recoveries for the nine months ended December 31, 2000 were approximately $1.8 million 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 of the Company’s former employees.

7

Note 4 — Debt

On December 8, 2000, the Company entered into a revolving credit agreement with a financial institution which refinanced the Company’s revolving credit line. On February 11, 2002 the Company entered into a modification agreement (the "Modification Agreement") which extended the maturity of the loan to January 2, 2003 and modified certain of the terms of the revolving credit agreement. Under the Modification Agreement the maximum availability under the facility was reduced from $8.0 million to $6.3 million and the interest rate was changed from LIBOR plus 2.5%, to the bank's prime rate plus 2%, in addition to certain fees as described in the agreement. Advances under the revolving agreement are collateralized by a first priority security interest on all the Company’s assets as defined in the financing and security agreement and the Modification Agreement. The agreement matures on January 2, 2003.

The Company also has outstanding subordinated debt with an affiliate that totaled $4 million at December 31, 2001. The revolving credit agreement limits 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 the subordination agreement related to the subordinated debt of an affiliate, 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 January 2003 and will be extended concurrently with extensions with its revolving credit agreement.

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 December 31, 2001. In conjunction with the Modification Agreement, the lender has waived the defaults through and including December 31, 2001. Under the Modification Agreement there will be no further extensions of the terms or future waivers of defaults.

The Company has received a commitment letter and is in the process of negotiating an $8.0 million credit facility with another lender, to replace the outstanding credit facility referenced above. It is contemplated that the new facility will have a term of 24 months and will bear interest at the lenders prime rate plus 3/4% adjusted daily.

Note 5 — Transactions with Related Party

In December 2001, approximately $330,000 of accrued interest on the Company’s subordinated debt was satisfied by issuing 109,927 shares of the Company’s common stock (See Note 4 to the condensed consolidated financial statements.)

Note 6 — Concentration of Risk

The Company has a number of major customers. The Company’s largest customer accounted for 19.2% and 10.6% of the Company’s revenues for the three months and 18.6% and 12.7% of revenues for the nine months ended December 31, 2001 and 2000, respectively. The Company’s five largest customers collectively accounted for 42% and 32% of revenues for the nine months ended December 31, 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.

8

Note 7 — Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share.
(In thousands except share data)

					Three Months Ended				Nine Months Ended
					December 31,				December 31,
					2001		2000		2001		2000
Numerator for earnings per share:
Net income as reported from:
		Continuing operations			$	109	$	23	$	187	$	1255
		Discontinued operations				—		—		—		244
		Gain on disposition of discontinued operations				—		—		—		1,594
		Net income			$	109	$	23	$	187	$	3,093
Diluted earnings per share:
After tax equivalent of interest expense on 7% convertible debenture						—		—		—		105
Net income from continuing operations for purposes of computing diluted net income per share					$	109	$	23	$	187	$	3,198
Denominator:
	Denominator for basic earnings per share -
				weighted-average shares		2,087,193		2,023,436		2,072,881		2,021,331
	Effect of dilutive securities:
			7% Convertible Debenture			—		—		—		170,648
			Employee stock options			2,293		—		875		—
	Dilutive potential common shares					2,293		—		875		170,648
	Denominator for diluted earnings per
				share weighted number of shares outstanding		2,090,664		2,023,436		2,073,756		2,191,979
Basic earnings per common share:
Income from continuing operations					$	.05	$	.01	$	.09	$	.62
Discontinued operations						—		—		—		.12
Gain on disposition of discontinued operations						—		—		—		.79
					$	.05	$	.01	$	.09	$	1.53
Diluted earnings per common share:
Income from continuing operations					$	.05	$	.01	$	.09	$	.62
Discontinued operations						—		—		—		.11
Gain on disposition of discontinued operations						—		—		—		.73
					$	.05	$	.01	$	.09	$	1.46

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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, terrorism, 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.

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The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. (Tabular information: dollars in thousands, except per share amounts).

			Three Months Ended December 31,												Nine Months Ended December 31,
Results of Operations			2001			2000			Change			%			2001			2000			Change			%
Revenues			$	13,249		$	14,733		$	(1,484	)		-10	%	$	35,738		$	40,065		$	(4,327	)		-11	%
Cost of services				12,088			13,763			(1,675	)		-12	%		32,190			38,010			(5,820	)		-15	%
	Percent of revenues			91	%		93	%								90	%		95	%
Gross margin				1,161			970			191			20	%		3,548			2,055			1,493			73	%
	Percentage of revenues			9	%		7	%								10	%		5	%
Marketing, general & administrative				897			716			181			25	%		2,842			1890			952			50	%
		Percent of revenues		7	%		5	%								8	%		5	%
Operating income				264			254			10			4	%		706			165			541			328	%
	Percent of revenues			2	%		2	%								2	%		—
Interest expense				140			216			(76	)		-35	%		474			686			(212	)		-31	%
Embezzlement recovery				—			—			—			—			—			(1,821	)		1,821			-100	%
Income from continuing operations before income tax				124			38			86			226	%		232			1,300			(1,068	)		-82	%
Income tax expense				15			15			—			—			45			45			—			—
Income from continuing operations				109			23			86			374	%		187			1,255			(1,068	)		-85	%
Income from discontinued operations				—			—			—			—			—			244			(244	)		100	%
Gain on sale of discontinued operations				—			—			—			—			—			1,594			(1,594	)		100	%
Net income			$	109		$	23		$	86			374	%	$	187		$	3,093		$	(2,906	)		-94	%
Earnings per share — basic:
Continuing operations			$	.05		$	.01								$	.09		$	.62
Discontinued operations				—			—									—			.12
Gain on sale of discontinued operations				—			—									—			.79
			$	.05		$	.01								$	.09		$	1.53
Earnings per share — diluted:
Continuing operations			$			$	.01								$			$	.62
Discontinued operations				—			—									—			.11
Gain on sale of discontinued operations				—			—									—			.73
			$	.05		$	.01								$	.09		$	1.46
Weighted average number of common shares outstanding — basic				2,087,193			2,023,436									2,072,881			2,021,331
Weighted average number of common shares outstanding — diluted				2,090,664			2,023,436									2,073,756			2,191,979

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Revenues

Revenues for the three months ended December 31, 2001 and 2000, decreased 10%, or $1.5 million, to $13.2 million from $14.7 million, respectively. For the nine months ended December 31, 2001, revenues decreased from $40.0 million in 2000 to $35.7 million in 2001, a decrease of $4.3 million, or 11%. The decline in revenues was principally due to decreased hardware sales, partially 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 nine months ended December 31, 2001, decreased by $1.7 million, from $13.7 million to 12.0 million, or 12%, and from $38.0 million to $32.2 million, or 15%, respectively, from the comparable periods in 2000, primarily as a result of the decline in revenues from the aforementioned hardware sales as well as reductions in other direct costs related to supporting this revenue, partially offset by start up costs on new major contracts. For the three and nine months, the reduction in the costs of services was a result of a decrease in hardware sales, cost containment measures and a continued shift in sales mix to higher margin services.

As a percent of revenues, gross margin improved from 7% to 9%, an increase of $191 thousand for the three months ended December 31, 2001, compared to 2000. For the nine months gross margin increased from 5% of revenues in December 31, 2000 to 10% of revenues for the same period in 2001, an increase of $1.5 million. The principal reason for the improvement in gross margins was the change in mix from product sales to higher margin enterprise maintenance and professional services as discussed above.

For the three months ended December 31, 2001, marketing and general and administration expense increased from $716 thousand to $897 thousand over the comparable period last year, an increase of $181 thousand, or 25%, and for the nine months ended December 31, 2001, increased from $1.9 million to $2.8 million, an increase of $952 thousand, or 50%, over the same period last fiscal year. The increase was primarily due to the creation of the company-wide marketing group, associated marketing and promotional investments, higher professional fees and business insurance expenses. The marketing group was created to provide constant integrated and responsive customer experience through a single national sales organization. The Company refined and retooled its sales force and strategy, focusing our direct sales efforts on largest accounts and establishing strategic partners to strengthen our indirect sales channels. Professional fee increases were attributable to increases in legal, accounting and consulting services. Business insurance has increased due to market conditions brought about by business failures and a general economic slowdown.

Operating Income

For the three months ended December 31, 2001 the Company had operating income of $264 thousand compared to $254 thousand for the three months ended December 31, 2000, an increase of 4%. Operating income for the nine months ended December 31, 2001 was $706 thousand compared to $165 thousand for the comparable period ended December 31, 2000, an increase of 328%. The improvement for the three and nine months ended December 31, 2001 was attributable to the quality of the new revenue resulting from the shift in the revenue mix to

12

higher margin enterprise maintenance and professional services as discussed above. and gains realized from cost containment measures, somewhat offset by additional investments in sales and marketing activities and start-up costs on new major contracts.

Interest Expense

Interest expense for the three months ended December 31, 2001 decreased $76 thousand or 35% from the comparable period in 2000. For the nine months ended December 31, 2001, interest expense decreased $212 thousand or 31% from the comparable period in 2000. For the three and nine months the decrease in interest expense resulted primarily from lower interest rates.

Embezzlement Recovery

Embezzlement recoveries (net of settlement costs) for the nine months ended December 31, 2000 were $1.8 million. There were no embezzlement recoveries for the nine months ended December 31, 2001. For additional discussion see “Embezzlement Matter” in Note 3 to the condensed consolidated financial statements.

Income Taxes

Income taxes for the three and nine months ended December 31, 2001 and 2000 were $15 thousand and $45 thousand, respectively and related to state obligations.

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 December 31, 2001, net income was $109 thousand compared to $23 thousand for the comparable period in 2000. For the nine months ended December 31, 2001 net income was $187 thousand compared to $3.09 million for December 31, 2000.

For the nine months ended December 31, 2000, the Company reported 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 $566 thousand compared to net income of $187 thousand, respectively, for the nine months ended December 31, 2000 and 2001.

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 gross margins.

As described in Note 4, the Company entered into a Modification Agreement with its lender which among other things waived the covenant violations through and including December 31, 2001 and has extended the maturity of its credit facility through January 2, 2003. Under the provisions of the Modification Agreement there will

13

be no further extensions of the agreement or future waivers of defaults under the facility.

The Company has received a commitment letter and is in the process of negotiating an $8.0 million credit facility with another lender, to replace the outstanding credit facility referenced above. It is contemplated that the new facility will have a term of 24 months and will bear interest at the lenders prime rate plus 3/4% adjusted daily. Management anticipates that the new facility will be consumated by March 30, 2002 although no assurances can be given.

The Company must continue to effectively maintain profitable gross 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 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 credit facilities. In prior years through a series of private placements, the Company issued $4 million of subordinated notes due July 1, 2002, and subsequently extended to January 2003 pursuant to a subordinated note agreement dated December 2000 to Research Industries Incorporated, a private investment company and an affiliate of the Company. At December 31, 2001, the Company’s working capital was $3.8 million and its current ratio was 1.4. Improvement in the Company’s financial strength was attributable to more stringent cash management, accelerated collection activities, improved margins and improved expense management. Pursuant to the Company’s credit facility it 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 December 31, 2001. The lender has waived the violations through and including December 31, 2001. (See Note 4 to the condensed consolidated financial statements.)

Capital expenditures for the nine months ended December 31, 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 December 31, 2001. The credit facility agreement dated December 8, 2000 limits the payments of principal or interest on the subordinated debt. In December 2001, approximately $330,000 of accrued interest on the Company’s subordinated debt was satisfied by issuing 109,927 shares of the Company’s common stock (See Note 4 to the condensed consolidated financial statements.)

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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

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 December 31, 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
December 31,
( 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 January 2003. Average interest rate of 4.5%.	$	5,813	$	5,813	$	5813	$	5,813
7% subordinated note from affiliate due January 27, 2003.		2,000		2,000		2,000		2,000
8% subordinated notes from affiliate due January 2, 2003.		2,000		2,000		2,000		2,000
Total fixed debt		4,000		4,000		4,000		4,000
Total debt	$	9,813	$	9,813	$	9,813	$	9,813

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.

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Item 3.
Quantitative and Qualitative
Disclosures about Market Risk

The Company is exposed to market risk from changes in interest rates. Adverse changes in interest rates will have a material effect on the Company’s operations.

At December 31, 2001, the Company had $9.8 million of debt outstanding of which $5.8 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 and is therefore not subject to currency risk.

Part II. Other Information

Item 2. Changes in Securities and Use of Proceeds

     Recent Sales of Unregistered Securities under Regulation S-K Item 701

a) Securities sold.

109,927 shares of Halifax Corporation common stock, par value $.24 issued on December 6, 2001.

b) Underwriters.

No underwriter used. Shares of common stock issued to Research Industries, an affiliated company.

c) Consideration.

Exchanged for 109,927 shares of common stock $330,880 accrued interest owed on subordinated debt due to affiliate.

d) Exemption from registration claimed.

Exemption from registration claimed under Section 4(2) under the Securities Act of 1933.

e) Terms of conversion or exercise.

None

f) Use of Proceeds.

No proceeds were received. Issuance of common stock was used to satisfy accrued interest owed on subordinated debt due to an affiliate of the Company.

Item 6. Exhibits and Reports on Form 8-K

4.8    Modification Agreement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   HALIFAX CORPORATION   
                 (Registrant)

Date: February 14, 2002	By:	s/Charles L. McNew      Charles L. McNew President & CEO
Date: February 14, 2002	By:	s/Joseph Sciacca      Joseph Sciacca Vice President, Finance & CFO

17 EX-4.9 3 w57593ex4-9.htm EXHIBIT 4.9 MODIFICATION AGREEMENT

EXHIBIT 4.9

MODIFICATION AGREEMENT

     THIS MODIFICATION AGREEMENT (“AGREEMENT”) is made as of this 11th day of February, 2002 by and among Bank of America, N.A., a national banking association (the “LENDER”) and Halifax Corporation, a corporation organized under the laws of the Commonwealth of Virginia (the “BORROWER”).

RECITALS

     WHEREAS, on December 8, 2000, the LENDER extended to the BORROWER a loan in the maximum principal amount of Eight Million Dollars ($8,000,000.00)(the “LOAN”), which was evidenced by that certain Revolving Credit Promissory Note (“NOTE”) of same date executed by the BORROWER and delivered to the LENDER in the maximum principal amount of the LOAN;

     WHEREAS, repayment of the LOAN is secured by certain assets of the BORROWER, including, but not limited to, all accounts and intangibles, pursuant to the terms of a Financing and Security Agreement dated December 8, 2000, as amended pursuant to the terms of a First Amendment to Financing and Security Agreement dated September 30, 2001 (collectively, the “LOAN AGREEMENT”);

     WHEREAS, the LOAN is in default in that, among other things, the BORROWER is in violation of a number of the financial covenants contained in the LOAN AGREEMENT;

     WHEREAS, the BORROWER has requested the LENDER to waive all defaults existing as of December 31, 2001 and to extend the maturity date of the LOAN, and the LENDER has agreed to such provided that the BORROWER agrees to the below terms and conditions; and

     WHEREAS, the NOTE, LOAN AGREEMENT and this AGREEMENT, together with all other documents or writings evidencing or securing the LOAN, are collectively referred to hereinafter as the “LOAN DOCUMENTS.” Unless otherwise defined herein, capitalized terms used in this AGREEMENT shall have the definitions ascribed to such terms in the LOAN DOCUMENTS.

     NOW, THEREFORE, in consideration of the foregoing premises, the terms and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

     1.     Acknowledgment Of Obligations. The BORROWER acknowledges that: (a) all of the above Recitals are true and correct; (b) the LOAN DOCUMENTS are the valid and binding obligations of the BORROWER, and are fully enforceable in accordance with their stated terms; (c) the LENDER has the right to exercise all of its default

rights and remedies and (d) the obligations of the BORROWER under the LOAN DOCUMENTS are not subject to any set-off, defense or counterclaim or right of recoupment.

     2.     Acknowledgment Of Amounts Due Under LOAN DOCUMENTS. The BORROWER acknowledges and agrees that the amounts which are outstanding under the LOAN as of February 8, 2002 are as follows:

Principal	$	5,622,438.00
Interest		6,881.84
Total	$	5,629,319.84

Furthermore, the BORROWER is also obligated to reimburse the LENDER for all attorneys’ fees and expenses it has incurred and will incur in the future, including, but not limited to, all attorneys’ fees and expenses incurred in preparing this AGREEMENT and in enforcing the LENDER’S rights under the LOAN DOCUMENTS.

     3.     Representations And Warranties Of BORROWER. To induce the LENDER to enter into this AGREEMENT and to provide the BORROWER with the accommodations described herein, the BORROWER makes the representations and warranties set forth below and acknowledges the LENDER’S justifiable right to rely upon these representations and warranties.

          a.     No Material Adverse Changes. As of the date hereof, there have been no material adverse changes in the finances or operations of the BORROWER since the date of the most recent financial statement submitted by the BORROWER to the LENDER.

          b.     No Litigation. Except as disclosed on Schedule 3(b) or as set forth in financial statements previously provided to the LENDER or public filings made with the United States Securities and Exchange Commission, there is no action, suit, investigation, or proceeding pending or, in the knowledge of the BORROWER, threatened against the BORROWER, any collateral for the LOAN or any other assets of the BORROWER. In the event that, subsequent to the execution and delivery of this AGREEMENT, the BORROWER receives notice of, or otherwise acquires knowledge of, any such suit, investigation, or proceeding, it shall immediately disclose the same to the LENDER in writing.

          c.     Organization; Good Standing; Authorization. The BORROWER: (1) has the power to enter into this AGREEMENT and all other loan documents required to be executed by the BORROWER and has the power to perform all of their obligations hereunder and thereunder; (2) has duly authorized the entry into and performance of this AGREEMENT and all other loan documents required to be executed by the BORROWER; and (3) is in good standing in the state

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of its organization, and is in good standing and qualified in all other states in which such qualification is required. Attached hereto as Exhibit “A” is a resolution of the BORROWER authorizing the execution of this AGREEMENT.

          d.     Valid, Binding And Enforceable. This AGREEMENT and all of the other LOAN DOCUMENTS to which the BORROWER is a party constitute the valid and binding obligations of the BORROWER and are fully enforceable in accordance with their terms.

          e.     No Violation. The BORROWER’S entry into this AGREEMENT will not violate any agreements to which it is a party or by which any of its property is bound.

          f.     Confirmation of Previous Representations. The BORROWER affirms all of the representations previously made in the LOAN AGREEMENT as if made on the date hereof.

          g.     Corporate Documents. The BORROWER confirms that, except as provided in Schedule 3(g), there have been no changes or amendments to the organizational documents of the BORROWER provided to the LENDER at the closing on December 8, 2000.

     4.     Maturity. The LOAN shall be fully due and payable on January 2, 2003.

     5.     Reduction in Availability. The maximum availability under the NOTE shall be reduced to Six Million Three Hundred Thousand Dollars ($6,300,000.00). All references in the LOAN DOCUMENTS to Eight Million Dollars ($8,000,000.00) as signifying the maximum availability under any of the LOAN DOCUMENTS shall be reduced to Six Million Three Hundred Thousand Dollars ($6,300,000.00).

     6.     Payment of Interest. The BORROWER shall make all payments of interest as agreed under the LOAN DOCUMENTS.

     7.     Interest Rate. Interest shall continue to accrue on the unpaid principal amount of the debt outstanding from the date hereof until May 1, 2002 at the Prime Rate plus two percent (2%) per annum. Interest shall continue to accrue on the unpaid principal amount of the debt outstanding from May 2, 2002 until the LOAN is paid in full at the Prime Rate plus three percent (3%) per annum. The Post-Default Rate of interest shall be increased to the Prime Rate plus six percent (6%).

     8.     Advances. Absent an EVENT OF DEFAULT (as defined below), the LENDER shall continue to make advances pursuant to the terms of the LOAN AGREEMENT as amended herein.

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     9.     Waiver. The BORROWER represents and warrants that attached hereto as Exhibit “B” is a list of all of the defaults existing under the LOAN DOCUMENTS to its knowledge as of December 31, 2001. The LENDER waives all defaults listed on Exhibit “B.” However, this waiver shall not obligate the LENDER to grant any similar waivers in the future, and the LENDER has no intention to grant any future waivers. Furthermore, no defaults existing subsequent to December 31, 2001 are waived, and LENDER reserves all of its rights and remedies under the LOAN DOCUMENTS with respect thereto.

     10.     Amendment to LOAN AGREEMENT.

          (a)  Section 3.2 of the LOAN AGREEMENT is amended by deleting all of the words following “(a)” on line 2 thereof until immediately prior to “(b)”, and inserting in its place the following: “all of the personal property of the Borrower, wherever located, and now or hereafter acquired, including, but not limited to: Accounts, Chattel Paper, Inventory, Equipment, Instruments (including Promissory Notes), Investment Property, Documents, Deposit Accounts, Letter-of-Credit Rights, General Intangibles and Supporting Obligations, as such terms are defined under the Uniform Commercial Code of the Commonwealth of Virginia as of the date hereof”;

          (b)  Section 2.1.4 of the LOAN AGREEMENT is amended by deleting the words “monthly” on line one (1) thereof and inserting in its place the words “twice each month, (once on the first(1st) day of the month and once on the fifteenth (15th) day of the month),”; and

          (c)  Section 2.2 of the LOAN AGREEMENT is deleted. The intent is that the BORROWER shall have no right to have letters of credit issued by the LENDER after the date hereof.

     11.     Government Contracts. Within fifteen (15) days of the date of closing, and at all times thereafter, the BORROWER shall submit to the LENDER copies of all federal government contracts with a contract value in excess of Two Hundred Thousand Dollars ($200,000.00), together with copies of all documents novating, amending, modifying or supplementing in any way any such federal government contract of the BORROWER, and shall immediately execute and deliver to the LENDER such documents and agreements as the LENDER may request in order to ensure that all such contracts have been assigned to the LENDER in compliance with the provisions of the Assignment of Claims Act of 1940, as amended (31 U.S.C. Section 203 et seq.).

     12.     Receivables. The BORROWER shall provide to the LENDER within ten (10) days of the date of closing a list of all current receivables with names of debtors, addresses and amounts.

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     13.     Collateral Disclosure List. The BORROWER shall deliver to the LENDER a Collateral Disclosure List, as provided for in Section 3.3 of the LOAN AGREEMENT, showing the specific location of the collateral, within ten (10) days of the date of closing.

     14.     Fee. In consideration of the LENDER’S agreement to waive defaults and extend the LOAN, as set forth herein, the BORROWER shall pay to the LENDER a loan fee in the amount of Sixty Thousand Dollars ($60,000.00) (“FEE”), which FEE shall be deemed earned upon the signing of this AGREEMENT. The FEE shall be paid by the BORROWER to the LENDER as follows: (a) Twenty Thousand Dollars ($20,000.00) at the closing on this AGREEMENT; and (b) Forty Thousand Dollars ($40,000.00) on May 1, 2002, unless by such date, the LOAN has been paid in full, in which case this portion of the FEE shall be waived.

     15.     Events of Default. The following shall constitute an EVENT OF DEFAULT under this AGREEMENT and under the LOAN DOCUMENTS, entitling the LENDER to exercise all of its default rights and remedies, including, but not limited to, imposing the Post-Default Rate:

          (a)  any event of default under any of the LOAN DOCUMENTS;

          (b)  the failure of the BORROWER to comply with, or the breach by the BORROWER of, any of the provisions hereof;

          (c)  if any representation or warranty made herein is not true and accurate when made;

          (d)  the entry of a judgment exceeding Fifty Thousand Dollars ($50,000.00) (and not disclosed on Schedule 3(b))against the BORROWER or the attachment of any of its assets;

          (e)  the recordation of any federal, state or local tax lien against the BORROWER;

          (f)  if the BORROWER is not actively operating the business.

All cure periods provided for in the LOAN DOCUMENTS, if any, are hereby deleted.

     16.     Taxes. The BORROWER represents and warrants to the LENDER that: (a) as of the date of this AGREEMENT, the BORROWER is current in its tax payments to the Internal Revenue Service, the Commonwealth of Virginia, and all other taxing authorities (“TAXING AUTHORITIES”) with respect to all forms and taxes including, without limitation, federal and state income taxes, federal and state withholding taxes, state personal property taxes and county real

5

estate taxes; and (b) that during the pendency of this AGREEMENT, the BORROWER shall make all payments which the BORROWER is required to make to the TAXING AUTHORITIES with respect to all forms of taxes, when and as said payments are due.

     17.     No Further Extension. The BORROWER acknowledges and agrees that the LENDER has not made any promise, written or oral, to forbear from the exercise of its rights, or to provide any financing other than as set forth in the LOAN DOCUMENTS.

     18.     Authorization to Execute Financing Statements. The LENDER is hereby authorized to execute any and all financing statements deemed necessary by the LENDER to implement the provisions of this AGREEMENT.

     19.     No Novation; No Refinance; No Adverse Effect On Liens. The parties hereto do not intend that a novation of the LOAN or any of the LOAN DOCUMENTS shall be created or effected by the modification of any of the LOAN DOCUMENTS, as described herein. The parties hereto do not intend that the execution of this AGREEMENT, or the amendments, modifications and/or restatements to be made to the LOAN DOCUMENTS, as described herein, shall: (a) constitute a refinance of the LOANS; or (b) affect or impair the validity, enforceability, or priority of any of the liens or security interests imposed by or granted in the LOAN DOCUMENTS.

     20.     Landlord Subordinations. The BORROWER shall use its best efforts to have executed and returned to the LENDER the Lessor’s Acknowledgement and Agreement forms which were mailed by the BORROWER to the BORROWER’S various lessors in or about November 2000.

     21.     Other Terms; Confirmation Of Obligations. Other than the foregoing, all other terms and conditions of the LOAN DOCUMENTS shall remain in full force and effect and are incorporated herein by reference. The BORROWER acknowledges, ratifies and confirms its obligations under the LOAN DOCUMENTS. The BORROWER further acknowledges, ratifies and confirms that it shall remain absolutely and unconditionally obligated to pay the LENDER all present and future indebtedness that is owed to the LENDER under the LOAN DOCUMENTS in the manner provided therein, notwithstanding the LENDER’S execution of this AGREEMENT and any documents to be executed pursuant to this AGREEMENT, and notwithstanding the various agreements the LENDER has set forth herein and therein. The BORROWER acknowledges and agrees that the collateral is and shall remain in all respects subject to the liens and security interests created by, and the legal operation and effect of, the LOAN AGREEMENT and the other LOAN DOCUMENTS, and nothing contained herein, and nothing done pursuant hereto, shall affect or be construed to affect the liens and security interests created by, or

6

the legal operation and effect of, the LOAN AGREEMENT and the other LOAN DOCUMENTS, or the priority thereof over other liens, charges, encumbrances or conveyances, or to release or affect the liability of any party or parties who may now or hereafter be liable under the other LOAN DOCUMENTS.

     22.     Inconsistencies. To the extent that any of the provisions of this AGREEMENT are inconsistent with any of the provisions of the other LOAN DOCUMENTS, the provisions of this AGREEMENT shall control.

     23.     Notices. Any notice required or permitted by or in connection with this AGREEMENT or any other LOAN DOCUMENT, without implying any obligation to provide any such notice, shall be made in writing to the appropriate addresses set forth below or to such other addresses as may be hereafter specified by written notice by the LENDER or the BORROWER. Any such notice shall be deemed to be effective one (1) day after dispatch if sent by telegram, mailgram, Purolator delivery, Airborne, Express Mail or Federal Express. Notwithstanding the foregoing, all notices shall be considered to be effective immediately if accomplished by hand delivery or facsimile.

If to the LENDER:

Bank of America Strategic Solutions, Inc.
NC1-001-13-15
101 North Tryon street
Charlotte, NC 28255
Attn: Alice Byrd, Portfolio Officer
Fax: (704)386-3938

With a copy to:

Louis J Ebert, Esquire
Gebhardt & Smith LLP
9 World Trade Center
401 East Pratt Street
Baltimore, Maryland 21202
Fax: (410) 385-5119

If to the BORROWER:

Halifax Corporation
5250 Cherokee Avenue
Alexandria, Virginia 22302
Attn.: Chief Financial Officer
Fax: (703)658-2478

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     24 Miscellaneous.

          a) Incorporation. The terms and conditions of the other LOAN DOCUMENTS to which the BORROWER is a party are incorporated herein by reference and made a part hereof as if fully set forth herein. All references in the LOAN DOCUMENTS to any other LOAN DOCUMENT shall mean that LOAN DOCUMENT, as modified herein. In the event of any inconsistency between this AGREEMENT and any other LOAN DOCUMENT, the provisions of this AGREEMENT shall prevail.

          b) Integration. This AGREEMENT and the other LOAN DOCUMENTS constitute the entire agreement between the LENDER and the BORROWER with respect to the subject matter hereof, and any term or condition not expressed in this AGREEMENT or the other LOAN DOCUMENTS does not constitute a part of the agreement of the LENDER and the BORROWER with respect to such subject matter.

          c) Severability. If any provision or part of any provision of this AGREEMENT shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this AGREEMENT and this AGREEMENT shall be construed as if such invalid, illegal or unenforceable provision or part thereof had never been contained herein, but only to the extent of its invalidity, illegality, or unenforceability.

          d) Number, Gender, And Captions. As used herein, the singular shall include the plural and the plural may refer to only the singular. The use of any gender shall be applicable to all genders. The captions contained herein are for purposes of convenience only and are not a part of this AGREEMENT.

          e) Further Assurances. As part of this AGREEMENT, and in consideration for the agreements of the LENDER as set forth therein, the BORROWER agrees to execute and deliver to the LENDER such other and further documents as may, from time to time, in the sole opinion of the LENDER and the LENDER’S counsel, be necessary or appropriate to carry out the terms and conditions of this AGREEMENT and the LOAN DOCUMENTS.

          f) Waivers. No failure or delay by the LENDER in the exercise or enforcement of any of its rights under any LOAN DOCUMENT shall be a waiver of such right or remedy nor shall a single or partial exercise or enforcement thereof preclude any other or further exercise or enforcement thereof or the exercise or enforcement of an other right or remedy. The LENDER may at any time or from time to time waive all or any rights under this AGREEMENT or the other LOAN DOCUMENTS, but any such waiver must be specific and in writing and no such waiver shall constitute, unless specifically so expressed by the LENDER in writing, a future waiver of

8

performance or exact performance by the BORROWER. No notice to or demand upon the BORROWER in any instance shall entitle the BORROWER to any other or further notice or demand in the same, similar or other circumstance.

          g) Choice Of Law. The laws of the Commonwealth of Virginia (excluding, however, conflict of law principles) shall govern and be applied to determine all issues relating to this AGREEMENT and the rights and obligations of the parties hereto, including the validity, construction, interpretation, and enforceability of this AGREEMENT and its various provisions and the consequences and legal effect of all transactions and events which resulted in the execution of this AGREEMENT or which occurred or were to occur as a direct or indirect result of this AGREEMENT having been executed. Furthermore, the laws of the Commonwealth of Virginia (excluding, however, conflict of law principles) shall govern and be applied to determine all issues relating to all of the LOAN DOCUMENTS and the rights and obligations of the parties thereto, including the validity, construction, interpretation, and enforceability of the LOAN DOCUMENTS.

          h) Consent To Jurisdiction; Agreement As To Venue. The BORROWER irrevocably consents to the non-exclusive jurisdiction of the courts of the Commonwealth of Virginia and of the United States District Court for the District of Virginia (Eastern District), if a basis for federal jurisdiction exists. The BORROWER agrees that venue shall be proper in any circuit court of the Commonwealth of Virginia selected by the LENDER or in the United States District Court for the District of Virginia (Eastern District)if a basis for federal jurisdiction exists and waives any right to object to the maintenance of a suit in any of the state or federal courts of the Commonwealth of Virginia on the basis of improper venue or of inconvenience of forum.

          i) Actions Against Lender. Except as provided below, any action brought by the BORROWER against the LENDER which is based, directly or indirectly, on this AGREEMENT or any matter in or related to this AGREEMENT, including but not limited to the making and/or extension and modification of the LOAN DOCUMENTS, the LOAN or the administration or collection of the LOAN, shall be brought only in the courts of the Commonwealth of Virginia. The BORROWER may not file a counterclaim against the LENDER in a suit brought by the LENDER against the BORROWER in a state other than the Commonwealth of Virginia unless, under the rules of procedure of the court in which the LENDER brought the action, the counterclaim is mandatory, and not merely permissive, and will be considered waived unless filed as a counterclaim in the action instituted by the LENDER. The BORROWER agrees that any forum other than the Commonwealth of Virginia is an inconvenient forum and that a suit brought by the BORROWER against the LENDER in a court of any state other than the

9

Commonwealth of Virginia should be forthwith dismissed or transferred to a court located in the Commonwealth of Virginia by that court.

          j) Binding Effect; No Oral Modification. This AGREEMENT shall be binding upon and shall inure to the benefit of the parties and their respective personal representatives, successors and assigns. This AGREEMENT may not be altered, modified or amended unless such alteration, modification or amendment is in writing and executed by the LENDER.

          k) Time. Time is of the essence with respect to all of the obligations of the BORROWER under this AGREEMENT and the other LOAN DOCUMENTS.

          l) Costs Of Transaction. All costs of the transactions contemplated by this AGREEMENT, including, without limitation all attorneys’ fees and expenses incurred by the LENDER, shall be the obligation of the BORROWER, regardless of whether such costs are incurred before or after the execution and delivery of this AGREEMENT. All such costs shall be paid on demand.

     25 General Release; Waiver. As part of the agreement set forth herein, and in consideration of the same, the BORROWER hereby releases the LENDER and all of the LENDER’S past, present and future directors, officers, employees, agents and attorneys, subsidiaries and other affiliated entities and their respective successors and assigns (“LENDER RELEASEES”) from any and all claims, causes of action, demands, obligations, suits and damages (including claims for attorneys’ fees), arising at law or in equity, whether in contract or tort, whether accrued or not accrued, whether known or unknown, which the BORROWER ever had or now has against the LENDER RELEASEES arising up to and including the date hereof. This is a full and final general release of all claims of every nature and kind whatsoever arising from or connected in any way to any event, act, occurrence or omission prior to the effective date of this release.

     26 Waiver Of Jury Trial. The parties hereto agree that any suit, action, or proceeding, whether claim or counterclaim, brought or instituted by any party to this AGREEMENT, or any of their successors or assigns, on or with respect to this AGREEMENT or any other LOAN DOCUMENT or which in any way relates, directly or indirectly, to the obligations of the BORROWER to the LENDER under the LOAN DOCUMENTS, or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. THE PARTIES EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH ACTION OR PROCEEDINGS. The parties acknowledge and agree that this provision is a specific and material aspect of the agreement between

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the parties and that the parties would not enter into this AGREEMENT if this provision, or any other provision of this AGREEMENT, were not contained herein.

     27 Counterparts. This AGREEMENT may be executed in counterparts, each of which, when executed, shall be deemed an original, but all of which shall constitute one and the same agreement.

     IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the date first above written with the specific intention of creating a document under seal.

WITNESS/ATTEST:	THE BORROWER:
	HALIFAX CORPORATION
____________________________________	By:	_____________________________ (SEAL) Name: ________________________ Title: _________________________

	THE LENDER:
	BANK OF AMERICA, N.A., a national banking association
____________________________________	By:	_____________________________ (SEAL) Name: ________________________ Title: _________________________

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EX-4.9

ex4-9