-----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, RmlREfgYgEnWMTSTzUSnmSCfmH4df5yiNAX7eWJEjLwlA7MdKN5Ni5Ugpv/V2b1i JvommwaPgYZiF6OCKf8nPw== 0000950133-99-002982.txt : 19990909 0000950133-99-002982.hdr.sgml : 19990909 ACCESSION NUMBER: 0000950133-99-002982 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990908 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-K405 SEC ACT: SEC FILE NUMBER: 001-08964 FILM NUMBER: 99707943 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-K405 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended March 31, 1999 ---------------------- ( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 (Fee Required) For the transition period from __________________ to ___________________ Commission file Number 0-12712 1-8964 ---------------------------------------------------------- Halifax Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter)
Virginia 54-0829246 - -------------------------------------------------------------- --------------------------------- (State or other jurisdiction of incorporation of organization) (IRS Employer Identification No.)
5250 Cherokee Avenue, Alexandria, VA 22312 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (703) 750-2202 ---------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($.24 par value) American Stock Exchange - ------------------------------- ------------------------------------- - ------------------------------- ------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: None - -------------------------------------------------------------------------------- (Title of class) - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( )Yes (X)No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) 2 The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 7, 1999 was $9,998,295 computed based on the closing price on March 17, 1999, the day trading in stock was halted. Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date.
Class Outstanding at September 7, 1999 ----- -------------------------------- Common Stock 2,013,406 $0.24 par value
DOCUMENTS INCORPORATED BY REFERENCE -None- Certain statements in this Annual 10-K Report constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in the Company's market area, inflation, continuation of favorable banking arrangements, the availability of capital to finance planned growth, ramifications of the embezzlement referenced herein, changes in government regulations, availability of skilled personnel and competition, which may, among other things impact on the ability of the Company to implement its business strategy. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. 2 3 PART I ITEM 1. GENERAL DESCRIPTION OF THE BUSINESS Halifax Corporation, headquartered in Alexandria, Virginia, is principally focused on providing a comprehensive range of technology services. The Company operates in two principal business segments: technology services and facilities management. Technology Services includes the integration, systems engineering, installation, maintenance and training for computer systems and communications systems. Other primary services provided include interactive technologies including website design, development and marketing, Internet/Intranet services, multimedia sales and educational tools and year 2000 desktop solutions for enterprise PC hardware and software compliance. Facilities Management includes the management, operations and maintenance support of prisons, waterways, major office complexes and communications sites. Footnote 16 to the accompanying financial statements highlights the Company's industry segments. The Company's information technology services segment provides a complete array of IT services including but not limited to: - Seat Management (providing a cradle-to-grave personal computer resource): Needs assessment, planning, procurement, configuration, implementation, training and help desk support. - Networks: Design, implementation and management - Interactive Applications: Web site design, web hosting and e-commerce - Y2K: Assessment, remediation, validation and contingency planning The Company provides computer maintenance including a full spectrum of repair and upgrade services for a wide range of technologies installed in more than 20,000 locations across the United States. It offers on-site support, depot support, and asset management services. Additionally, the Company engineers, installs and maintains telecommunications systems and networks on a worldwide basis. The Company's facilities management and outsourcing segment provides complete facilities and maintenance outsourcing capabilities to assist institutional, government and commercial clients in outsourcing facility operations. While the Company has performed its services in both the national and international marketplaces, the Company continues to concentrate its activities in Virginia, Maryland and Pennsylvania. In this regard, the Company's current strategy is to continue to develop an important presence in the eastern United States, while seeking to provide services nationwide and internationally for selected engagements. The Company's general business strategy is to secure a prominent position as a leading provider of a broad range of information technology services to address the needs of a marketplace which continues to increase its dependency on technology. Investment in the Company involves various risks. Additionally, certain of the information contained herein may be deemed to constitute "forward looking statements". Reference is made to Item 7 hereof. 3 4 HISTORY The Company was incorporated in Virginia in 1967 as Halifax Engineering, Inc., the successor to the business begun as a sole proprietorship in 1967. On April 1, 1970, Halifax acquired the Field Service Division of United Industries. This expanded the business base in technical services and field engineering. On June 30, 1993, the Company acquired the services division of Electronic Associates, Inc. The division expanded the Company's non-federal business and provided an additional service line for simulator operations, maintenance and integration. On April 1, 1996, the Company completed the acquisition of privately held CMS Automation, Inc. "CMSA", a Richmond, Virginia computer systems integration company. On April 23,1997, the name of CMSA was changed to Halifax Technology Services Company ("HTSC"). On November 25, 1996, the Company, through its wholly owned subsidiary, CMSA, acquired the ongoing computer network integration business of Consolidated Computer Investors, Inc. ("CCI") of Hanover, Maryland. The combined entity name was changed to Halifax Technology Services Company (HTSC), a wholly owned subsidiary of Halifax Corporation. On April 1, 1999, HTSC was merged into Halifax Corporation and began operating as the Technology Services Division of the Company. The Company maintains its principal executive offices at Halifax Office Park, 5250 Cherokee Avenue, Alexandria, Virginia 22312. Its telephone number is (703) 750-2202 and its internet website is www.hxcorp.com. 4 5 RECENT DEVELOPMENTS Embezzlement Matter On March 18, 1999, the Company announced that an internal investigation had revealed an apparent material embezzlement by the former controller of one of the Company's subsidiaries. The embezzlement occurred at, and was confined to, the Company's Richmond, VA based Halifax Technology Services Company ("HTSC"). At the time of the embezzlement, HTSC was a wholly owned subsidiary of Halifax Corporation, which resulted from a merger of CMSA (acquired by Halifax on April 1, 1996), and CCI (acquired by Halifax on November 25, 1996). On April 1, 1999, HTSC was merged into Halifax Corporation and is now a division of the Company. The Company believes that a single individual, the former controller of HTSC, perpetrated the embezzlement. She was immediately terminated, has since been indicted, has pleaded guilty, and currently awaits sentencing. Under the terms of an agreement entered into with the Company, she is cooperating with the Company's recovery efforts. The embezzlement occurred over a period of nearly four years and aggregated approximately $15.4 million, of which $15 million was embezzled from the Company and $400,000 from CMSA before it was acquired by Halifax. To conceal the embezzlement in the accounting records, the former controller made fraudulent adjustments totaling more than $21 million. Of the $21 million, the $15.0 million embezzled was recorded in the Company's statements of operations and balance sheets after the acquisition, approximately $2.2 million related to amounts reflected in the acquisition date balance sheet, and approximately $3.8 million related to other overstatements of operating results during the three year period subsequent to the CMSA acquisition. Under the terms of an agreement with the Company, the embezzler has transferred certain assets back to the Company. Some of the recovered assets have been converted into approximately $1.4 million in cash as of August 31, 1999. With an estimated $1.1 million of assets awaiting conversion to cash, the Company estimates approximately $2.5 million will ultimately be recovered from the embezzler. In addition, the full policy amount of $1 million from each of two separate theft insurance polices, or an aggregate of $2 million, has been received to date. Therefore, from these sources, the Company expects a total recovery of $4.5 million (excluding recovery costs) . The Company estimates that, net of recovery costs, approximately $3.5 million will be recovered. At March 31, 1999, the Company had received approximately $670,000 from its recovery efforts and recorded a $2.83 million recovery receivable to recognize its expectation of receiving the estimated $3.5 million of total net recoveries. See Note 4 to the consolidated financial statements. Due to the corresponding overstatement of taxable income, reported by the Company during the period of the embezzlement, the Company will file for a tax refund of approximately $808,000. The receivable is recorded in "Income Taxes Receivable" in the consolidated financial statements. The embezzlement had a material effect on the Company's financial statements for fiscal years 1999, 1998 and 1997. In addition to the correction for overstated assets and understated liabilities, the Company recorded an embezzlement loss of approximately $2,593,000, $6,044,000 and $2,892,000 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. The embezzlement loss recorded in fiscal 1999 is net of the actual and projected net recoveries aggregating $3,500,000. In addition to the notification and involvement of the appropriate authorities, and the intensive and ongoing investigative efforts, the Company has taken other important steps as a result of the embezzlement. The Board of Directors appointed a special committee of the Board to focus on the recovery of assets taken from the Company and minimization of the damages sustained as a result of the embezzlement. The employment contract of the HTSC president was not renewed, and he is no longer employed by the Company. Furthermore, new executives have been hired to manage the technology services division and to consolidate the Company's financial and administrative activities. The Company has also transferred key accounting and cash management functions of HTSC to Company headquarters. 5 6 FEDERAL GOVERNMENT CONTRACTS A significant portion of the Company's revenues have historically been derived from contracts or subcontracts with the United States Government. In fiscal years 1999, 1998 and 1997, the Company received revenues from 32, 95 and 183 Government contracts, respectively, which accounted for approximately 45%, 35% and 47%, respectively, of the Company's total revenues. In fiscal 1999 and 1998, the number of contracts does not separately reflect the task orders completed under IDIQ (Indefinite Delivery Indefinite Quantity) contracts compared to 1997. The embezzlement matter did not involve or affect the Company's fulfillment of its Government contracts nor its accounting thereof and its detection did not trigger any termination provisions. The services of the Company are performed under cost reimbursable, time-and-materials and fixed-price contracts and subcontracts. Under cost reimbursable contracts the Government reimburses the Company for its allowable costs permitted by Government regulations and pays the Company a negotiated fixed fee, incentive fee, award fee or combination thereof. Under time-and-materials contracts, the Company receives a fixed hourly rate intended to cover salary costs attributable to work performed on the contracts and related indirect expenses, as well as a profit margin, and reimbursement for other direct costs. Under fixed-price contracts, the Government pays the Company an agreed-upon price for services rendered. In addition, under certain fixed price contracts, incentive fees are allowed if established performance goals are met or exceeded and penalties are imposed if goals are not attained. Under fixed-price contracts and time-and-materials contracts, the Company bears any risk of increased or unexpected costs that may reduce its profits or cause it to sustain losses. The Company's Government contracts and subcontracts are subject to termination, reduction or modification as a result of changes in the Government's requirements or budgetary restrictions. When the Company participates as a subcontractor, it is subject to the risk that the primary contractor may fail or become unable to perform the prime contract. All Government contracts are subject to termination at the convenience of the Government. If a contract were to be terminated for convenience, the Company would be reimbursed for its allowable costs incurred up to the date of termination and would be paid a proportionate amount of the stipulated profits or fees attributable to the work actually performed. Since the inception of the Company's federal Government contracting activities, the Government has only terminated four contracts with the Company for convenience. Contracts with the Government are generally complex in nature, and require Halifax to comply with numerous Federal regulations regarding discrimination in the hiring of personnel, fringe benefits for employees, safety, safeguarding classified information, responsibility for Government property, fire prevention, equipment maintenance, record keeping and accounting, management qualifications, drug free work place and numerous other matters. The Company has not experienced any material difficulty in complying with applicable federal regulations. The Company is sensitive to the present climate in the Government with respect to fraud, waste and abuse, and has adopted a Code of Business Ethics and Standards of Conduct and associated Company procedures. In addition, all employees receive training in ethics and associated Company procedures and a hot line has been established to encourage reporting of potential ethical violations. Under certain circumstances the Government can suspend or debar individuals or firms from obtaining future contracts with the Government for specified periods of time. Any such suspension or debarment could have a material adverse effect upon the Company. The books and records of the Company are subject to audit by the Defense Contract Audit Agency (DCAA), which can result in adjustments to contract costs and fees. Audits by DCAA have been completed for years through fiscal year 1995 with minimal adjustment to the Company's cost accounting records and contract revenue reimbursement. 6 7 COMMERCIAL AND STATE/MUNICIPAL GOVERNMENT CONTRACTS The Company continues to work towards expanding its commercial and state/municipal government business. Commercial revenues are being pursued by targeting non-federal and outsourcing opportunities. The Company's expanding development of computer network solutions, integration and management services follows from its prior acquisition strategy where these basic capabilities were brought into the Company. State/municipal government contracts may expand from privatization opportunities. The following table reflects the distribution of revenues by type of customer (see Item 7 for further discussion):
Years Ended March 31, As Restated As Restated 1999 1998 1997 ---- ---- ---- Commercial $ 23,725,000 29% $ 28,770,000 39% $ 22,647,000 30% State/Local 21,271,000 26% 19,180,000 26% 17,362,000 23% Federal Government 36,816,000 45% 25,820,000 35% 35,480,000 47% --------------- ----- --------------- ----- --------------- ----- Total $ 81,812,000 100% $ 73,770,000 100% $ 75,489,000 100% =============== ===== =============== ===== =============== =====
TYPE OF CONTRACTS The following table reflects, by type of contract, the amount of revenues derived for the periods indicated:
Years Ended March 31, As Restated As Restated 1999 1998 1997 ---- ---- ---- Cost reimbursable $ 1,723,000 2% $ 5,843,000 8% $ 6,783,000 9% Time & materials 12,594,000 15% 8,114,000 11% 8,304,000 11% Fixed-price 67,495,000 83% 59,813,000 81% 60,402,000 80% -------------- ----- --------------- ----- --------------- ----- Total $ 81,812,000 100% $ 73,770,000 100% $ 75,489,000 100% ============== ===== =============== ===== =============== =====
ACCOUNTS RECEIVABLE Trade accounts receivable at March 31, 1999 and 1998 represented 61% and 53% of total assets, respectively. Accounts receivable are comprised of billed receivables and unbilled receivables. Billed receivables represent invoices presented to the Customer. Unbilled receivables represent future payments due from the Customer for which invoices will not be presented until a later period. The reasons that invoices are not presented may be categorized as follows: (1) fee and cost retainage rights of the Government; (2) billable documents in transit; (3) excess of actual direct and indirect costs over amounts currently billable under cost reimbursement contracts to the extent they are expected to be billed and collected; and (4) amounts in excess of billings arising on fixed-price contracts from recognition of revenues under the percentage of completion method. 7 8 The financing of receivables requires bank borrowings and the payment of associated interest expense. Interest expense is not reimbursable under Government contracts. For a summary of the amounts of retainages and unbilled receivables as of March 31, 1999 and 1998, see Note 4 to the consolidated financial statements. BACKLOG The Company's funded backlog for services as of March 31, 1999, 1998 and 1997 was $33,000,000, $45,000,000, and $29,000,000, respectively. "Funded" backlog represents commercial orders and Government contracts to the extent that funds have been appropriated by Congress and allotted to the contract by the procuring Government agency. Some of the Company's contract orders provide for potential funding materially in excess of the monies initially provided by the Government. Additional monies are subsequently and periodically authorized in the form of incremental funding documents. The excess of potential future funding over funding provided represents unfunded backlog. A majority of the Company's customer orders or contract awards and extensions for contracts previously awarded are received or occur at various times during the year and may have varying periods of performance. The increased level of funded backlog at March 31, 1998 resulted from the timing of orders received on a digital communication switch contract with the United States Army. Depending upon the volume and timing of orders received on this multi year Indefinite Delivery Indefinite Quantity ("IDIQ") contract, revenue realized may exceed 10% of revenue although no assurances can be given. In fiscal 1999, revenues from this contract amounted to approximately $12.2 million. As of March 31, 1999, based on total amounts bid on contracts awarded, the Company's five-year potential revenues for work remaining to be performed under existing contracts are approximately $433,000,000. The unfunded portion is $400,000,000 which includes $101,000,000 in options and $299,000,000 in undefinitized work. The realization of these potential revenues is dependent upon a variety of contract contingencies beyond the control of the Company, such as complete funding and the exercise of all existing contract options by the Government and commercial clients. There can be no assurance that such revenues will be realized. Commercial contracts do not typically have multi-year options, and accordingly, related backlog levels are not significantly increasing in proportion to total revenues. MARKETING The Company contracts with the Federal Government, State/Local Governments and commercial entities, each of which requires a different marketing approach. The Federal Government maintains that it buys from companies rather than having companies sell to it, and marketing is more related to keeping abreast of the Government's specified needs versus building markets within the Government for the Company's services. However, the Company conducts a large portion of its business within the commercial and state/local government sectors, and consequently uses traditional marketing approaches to determine commercial customer needs and to enhance the chances that its services will be considered for those needs. The Company's ability to compete successfully for Government work is largely dependent on recognizing Government requirements and opportunities, the submission of responsive and cost-effective proposals, and a reputation for the successful completion of government contracts. Recognition of Government requirements and opportunities come from inclusion on bidders lists, from participation in activities of professional organizations and from literature published by the Government and other organizations. Commercial marketing involves the determination of customer needs that match the services offered by the Company, and this is accomplished through individuals who conduct sales calls, attend trade shows, and build a network of customer knowledge and confidence in the Company. Those activities, along with the development of strategic alliances and the reputation the Company has built, represent the normal manner in which the Company's commercial business is obtained. 8 9 COMPETITION The Company has numerous competitors in all areas in which it does business. Some competitors are large diversified firms having substantially greater financial resources and larger technical staffs than the Company, including, in some cases, the manufacturers of the systems being supported. Government in-house capabilities can also be deemed to be competitors of the Company in that they perform certain services which might otherwise be performed by the Company. It is not possible to predict the extent of competition which present or future activities of the Company will encounter because of changing competitive conditions, customer requirements, technological developments and other factors. The principal competitive factors for the type of service business in which the Company is engaged are technology skills, quality, responsiveness, ability to perform within estimated time and expense limits and pricing. PERSONNEL On March 31, 1999, the Company had 649 employees of whom 85 were part time. Because of the nature of services provided, many employees are professional or technical personnel with high levels of training and skills, including engineers, and skilled technicians and mechanics. The Company believes its employee relations are excellent. Although many of the Company's personnel are highly specialized and there is a nationwide shortage of certain qualified technical personnel, the Company has not experienced material difficulties obtaining the personnel required to perform under its contracts and generally does not bid on contracts where difficulty may be encountered in hiring personnel. The Company interfaces with labor unions on four of its federal and state/local government contracts. To date, relations with these unions have been excellent. Management believes that the future growth and success of the Company will depend, in part, upon its continued ability to retain and attract highly qualified personnel. ITEM 2. PROPERTIES On November 6, 1997, the Company sold the twin-building office complex for $5,250,000 and leased back the Company's headquarters building. The transaction generated other income of $1,490,000 of which $715,000 is being amortized over the 12 year lease-back of its headquarters building. The net sale proceeds were applied to the reduction of debt. The Company is obligated under 14 short-term facility leases connected with its operations. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party. The Company is engaged in ordinary routine litigation incidental to the Company's business to which the Company is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders in the fourth quarter of fiscal 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, par value $0.24, is listed on the American Stock Exchange. Due to the material nature of the embezzlement matter (see Item 1 and Note 2 to the consolidated financial statements), the Company and the American Stock Exchange halted trading of the Company's stock on March 17, 1999, while the Company developed definitive disclosure on the matter. The Company can give no assurances as to when trading may resume. At September 7, 1999, there were approximately 743 holders of record of the Company's Common Stock as reported by the Company's transfer agent. 9 10 The following table sets forth the quarterly range of high and low sales prices on the American Stock Exchange.
Fiscal Year 1999 Fiscal Year 1998 ---------------- ---------------- Fiscal Quarter, High Low High Low --------------- ---- --- ---- --- April - June 9-1/2 7-5/8 11-1/2 6-3/4 July - Sept. 9-1/4 6-5/8 10-7/8 7-5/8 Oct. - Dec. 9-3/8 5-1/4 13-1/8 8-3/4 Jan. - March 17, 1999 11 7 10 7-1/2
In fiscal 1999, the Company paid a cash dividend of $0.05 per share on June 10, 1998, September 10, 1998, December 10, 1998 and March 10, 1999 to shareholders of record on May 20, 1998, August 21, 1998, November 25, 1998 and February 24, 1999, respectively. In fiscal 1998, the Company paid a cash dividend of $0.05 per share on June 10, 1997, September 10, 1997, December 10, 1997 and March 10, 1998 to shareholders of record on May 27, 1997, August 27, 1997, November 26, 1997 and February 26, 1998, respectively. In fiscal 1997, the Company paid a cash dividend of $0.043 per share on June 10, 1996 to shareholders of record on May 24, 1996, cash dividends of $0.047 per share on September 10, 1996 and December 10, 1996 to shareholders of record on August 22, 1996 and November 27, 1996, respectively, and a cash dividend of $0.05 per share on March 10, 1997 to shareholders of record on February 21, 1997. The Company did not declare a cash dividend to be paid in the first quarter of fiscal year 2000 and there is no assurance it will do so in future periods. Amendments, dated June 23, 1999 and September 7, 1999, to the current bank loan agreement prohibit the payout of dividends. ITEM 6. SELECTED FINANCIAL DATA The following table includes certain selected financial data (fiscal 1998 and 1997 are restated) of the Company for the fiscal years and periods indicated (amounts in thousands except per share data):
Restated Restated 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenue $81,812 $ 73,770 $ 75,489 $ 47,159 $ 45,603 Net income (loss) (5,299) (5,600) (3,320) 763 858 per common share - basic (2.63) (2.79) (1.67) .43 .48 per common share - diluted (2.63) (2.79) (1.67) .43 .48 Long-term obligations including current maturities 20,225 15,709 17,162 3,869 7,230 Cash dividends per common share .20 .20 .187 .173 .17 Total assets at year-end 38,735 30,967 37,776 24,828 22,107
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual 10-K 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 10 11 and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in the Company's market area, inflation, continuation of favorable banking arrangements, the availability of capital to finance planned growth, ramifications regarding the embezzlement matter changes in government regulations and competition, which may, among other things affect the ability of the Company to implement its business strategy. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. Readers are referred to the "Factors that May Affect Future Results" section within this Item 7 of Form 10-K which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. As more fully discussed in Note 2 to the financial statements, on March 18, 1999, the Company announced that an internal investigation had revealed an apparent material embezzlement by the former controller of one of the Company's subsidiaries. The embezzlement matter had a material effect on the Company's financial statements for fiscal years 1999, 1998 and 1997, and accordingly, the Company's previously reported financial statement for 1998 and 1997 have been restated. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on the Company's fiscal year ended March 31. (Tabular information: dollars in thousands, except per share amounts).
Restated Restated Results of Operations 1999 Change 1998 Change 1997 - --------------------- ---- ------ ---- ------ ---- Revenues $ 81,812 11% $ 73,770 (2%) $ 75,489 Cost of services 78,558 14% 68,556 (4%) 71,384 Percent of revenues 96% 93% 95% General & Administrative 3,833 (6)% 4,074 4% 3,904 Percent of revenues 5% 6% 5% Operating cost and expenses: 82,391 13% 72,630 (3%) 75,288 Percent of revenues 101% - 98% - 100% Operating (loss) income (579) N/A 1,140 467% 201 Percent of revenues (1%) - 2% - - Interest expense 1,454 (5%) 1,535 62% 950 Other expense (income) 773 N/A (923) 156% (360) Embezzlement (loss) (2,593) N/A (6,044) N/A (2,892) Income tax (benefit) expense (100) - 84 - 39 Effective tax rate - - - Net loss (5,299) N/A (5,600) N/A (3,320) Net loss per share - basic $ (2.63) $ (2.79) $ (1.67) Net loss per share - diluted $ (2.63) $ (2.79) $ (1.67)
11 12 Revenues 1999 consolidated revenues increased by 11% from 1998, principally due to increased orders delivered on a new digital communications switch contract with the United States Army and the ramping up of a new facilities management contract with HUD. 1998 consolidated revenues decreased modestly (2%) from 1997, primarily because of a large revenue gap created by the completion of a major digital switch contract with the United States Army and the subsequent delay in the award and implementation of a similar but larger contract. 1999 technology services revenues increased 5% from $59.2 million in 1998 to $62.2 million in 1999 primarily due to the increased orders delivered on the new digital communications switch contract. 1998 technology service revenues decreased 2% in 1998 to $59.2 from $60.2 in 1997 primarily because of the gap in revenue between the predecessor digital communications switch contract and its follow on contract. 1999 facilities management revenues increased 34% from $14.6 million in 1998 to $19.6 million in 1999 primarily due to the ramping up of a new facilities management contract with HUD. 1998 facilities management revenues of $14.6 million was consistent with 1997 revenues of $14.9 million. Operating Costs and Expenses The Company's 1999 cost of services increased 14%, which was somewhat larger than the comparable revenue increase of 11%. Cost of services for 1999 rose at a more rapid rate than revenue due to lower profit margins permitted by the government on a new digital communications switch contract and a rampup of marketing and service efforts in the technology segment. In addition, the 1999 costs of services reflects a significant provision for inventory obsolescence and shut down costs for the closing of an unprofitable computer maintenance contract. Also the increase in costs as a percentage of revenues in 1999 reflects costs associated with pursuing the higher margin services component of information technology business. The 1998 cost of services decreased from 1997 in relative proportion to the decrease in revenues from the prior year. General and administrative expenses (G&A) declined 6% in 1999 from 1998 primarily due to controlling facililty and insurance costs and lower depreciation charges. They increased 4% in 1998 from 1997 primarily because of higher office rental cost after the sale and lease back of the Company's headquarters and increased printing costs. Operating Income Operating income decreased by $1,719,000 in 1999 principally due to a sales mix shift within the technology segment which resulted in tighter margins on the new telecommunications switch contract, increased provision for inventory obsolescence and shut-down costs for the closing of an unprofitable computer maintenance contract. Operating income increased by $939,000 (467%) in 1998 as compared to 1997 as a result of reengineering of the computer maintenance services in the technology segment, and higher margins experienced in the facilities segment on maintenance contracts. Interest and Other Income or Expense Interest expense declined 5% in 1999 principally due to a decline in effective interest rates. Interest expense increased 62% in 1998 as compared to 1997 as a result of increases in outstanding borrowings. Other expense in 1999 was related to one-time writeoffs of certain fixed assets. Other income increased by 156% in 1998 as compared to 1997 principally due to gains arising from the sale/leaseback of corporate headquarters. Embezzlement Loss Embezzlement losses reflect the cash amounts embezzled from the Company. The embezzlement loss in 1999 is net of $3.5 million of total net recoveries realized and/or anticipated from certain recovered assets (net of recovery costs) and insurance proceeds. For additional discussion, see "Embezzlement Matter" in Item 1 and Note 2 of the consolidated financial statements. 12 13 Income Taxes As a result of the Company's losses, federal and state tax refunds of approximately $808 thousand are anticipated from taxes paid for previous periods and have been recorded as a receivable as of March 31, 1999. In addition, the Company has net operating loss carryforwards amounting to approximately $12,500,000 which expire in 2019. Due to the uncertainty of future realization, the Company has not recorded a net benefit for these operating loss carry forwards in its financial statements. Factors That May Affect Future Results The Company's future operating results may be affected by a number of factors including uncertainties relative to national economic conditions, especially as they affect interest rates, industry factors, the Company's ability to successfully increase its business and effectively manage expense margins. The Company must continue to effectively manage expense margins in relation to revenues by directing new business development towards markets that complement or improve existing service lines. The Company must also continue to emphasize operating efficiencies through cost containment strategies, reengineering efforts and improved service delivery techniques. The Company serves its customer base by providing consulting, integration, networking, maintenance and installation services. This industry has been characterized by rapid technological advances that have resulted in frequent introduction of new products, product enhancements and aggressive pricing practices, which also impacts pricing of service activities. The Company's operating results could be adversely affected by industry-wide pricing pressures, the ability of the Company to recruit, train and retain personnel integral to the Company's operations and the presence of competitors with greater financial and other resources. Also, the Company's operating results could be adversely impacted should the Company be unable to effectively achieve the revenue growth necessary to provide profitable operating margins in various operations. The Company's plan for growth includes intensified marketing efforts, an expanding commercial sales program, strategic alliances and, where appropriate, acquisitions that expand market share. There can be no assurances these efforts will be successful.
Restated Restated Liquidity and Capital Resources 1999 1998 1997 - ------------------------------- ---- ---- ---- Cash $ 0 $ 0 $ 274,000 Working capital 736,000 7,363,000 10,598,000 Net cash (used) provided by operations before impact of embezzlement 1,944,000 4,804,000 (8,051,000) Net cash (used) due to embezzlement (5,421,000) (6,044,000) (2,892,000) ----------- ----------- ----------- Net cash (used) in operating activities (3,477,000) (1,240,000) (10,943,000) Net cash (used) provided by investment activities (651,000) 2,776,000 (4,626,000) Net cash provided (used) by financing activities 4,128,000 (1,810,000) 13,100,000
At March 31, 1999, the Company's working capital of $736,000 and current ratio of 1.02 indicate the diminution in the Company's financial strength caused by the embezzlement matter which resulted in the use of cash in operations during the three fiscal years ended March 31, 1999. In October and November 1998 in a series of private placements, the Company issued $2 million of subordinated notes due April 1, 2000 to Research Industries Incorporated, a private investment company and an affiliate of the Company. Cash was also provided through bank borrowings. In fiscal 1998, the sale of the Company's office complex provided over $4.8 million of cash, net of selling expenses, which was used to retire mortgage debt of $2.5 million and other operating debt as well as pay income taxes on the transaction. In a January 1998 private placement, the Company issued a $2 million 7% Convertible Subordinated Debenture due January 2003 to Research Industries, Incorporated. The net proceeds were applied to reduce the Company's revolving line of credit. Otherwise in 1998, operations required $1,240,000 for working capital needs. 13 14 In 1997, the uses of cash in operations of $10,943,000 and investment activities of $4,626,000 reflected the effect of the acquisitions of CMSA and CCI and the insertion of working capital into the two companies including the substitution by the Company of approximately $7.3 million of bank debt at significantly reduced interest rates for prior high-interest rate financing from nonbank sources. A summary of future minimum lease payments is in Note 10 to the consolidated financial statements. Capital expenditures in 1999 were substantially reduced from prior years to conserve cash and the Company does not expect fiscal year 2000 technology requirements to result in greater capital expenditures than fiscal year 1999. The Company continues to sublease a portion of its headquarters building generating approximately $112,000 annually. As a direct result of the material nature of the embezzlement matter, the Company was in technical default of its $14.5 million revolving credit agreement and related term notes (aggregating $4.6 million) that were in place at March 31, 1999. In the interim months, the Company entered into a series of forebearence agreements which enabled the borrowing agreement to remain in effect. Effective September 1, 1999, the Company re-negotiated its borrowing agreement to provide funding availability from its current collateral base. The revolving credit agreement availability has been reduced to $12 million subject to borrowing base requirements primarily tied to levels of accounts receivable. At August 31, 1999, the Company had approximately $2.3 million of excess borrowing capacity under the $12 million line of credit. The bank term notes aggregating $4.6 million at March 31, 1999 have also been renegotiated effective September 1, 1999 to amounts aggregating $3.5 million. Based on the re-negotiated payment terms, the aggregate term notes will be further reduced during fiscal year 2000 based on cash received from embezzlement recoveries, tax refunds and potential asset sales, if any. See Note 6 to the financial statements. The subordinated debt agreements with an affiliate, which aggregated $4 million at March 31, 1999, are not in default and their terms have remained unchanged, however, the new banking agreement dated September 1, 1999 prohibits the payments of principal or interest through September 15, 2000. See Note 6 to the financial statements. The Company believes that funds generated from operations, bank borrowings, embezzlement recoveries, tax refunds 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. On September 2, 1999, the Company entered into an agreement with a major supplier of digital communications switch hardware for the Company's United States Army contract where approximately $5,500,000 of outstanding accounts payable arising since March 31, 1999 and currently due to the supplier will be paid over 18 months with interest at 8.5%. $506,945 was paid on September 2, 1999 and will be paid on October 1, 1999, $299,965 will be paid on the first day of the next ensuing 15 months and a final payment of $299,974 is due on February 1, 2001. Year 2000 Compliance State of Readiness: During fiscal 1999 the Company undertook a formal Year 2000 readiness project assessment of all information technology assets to ensure the compliance of all applications, operating systems and hardware on its PC desktop suites and LAN and WAN server and communications platforms; the compliance of voice and data network software and hardware; to address issues related to non-IT systems in buildings, facilities and equipment which may contain date logic in embedded chips; and to address the compliance of key vendors and other third parties. The phases of the Project are : (i) inventorying Year 2000 items and assigning priorities, (ii) assessing the Year 2000 compliance of items, (iii) remediating or replacing items that are determined not to be Year 2000 compliant; (iv) testing items for year 2000 compliance, and (v) designing and implementing Year 2000 contingency and business continuity plans. To determine that all IT systems (whether internally developed or purchased) are Year 2000 compliant, each system is tested using a standard testing methodology which includes unit testing, baseline testing, and future date testing. Future date testing includes critical dates near the end of 1999 and into the year 2000, including leap year testing. 14 15 The inventory and assessment phases of the Project were completed in mid fiscal 1999. At March 31, 1999, all of the Company's application systems had been remediated and current date tested. Essentially all critical hardware and software was compliant and tested by March 31, 1999. The remaining items will be resolved, tested and remediated by October 1999. The Company is addressing non-information technology systems readiness through direct contact with our critical supplier chain to validate Year 2000 readiness. As part of the Project, significant service and information providers, external vendors, suppliers, and other third parties (including telecommunication, electrical, security, and HVAC systems), that are believed to be critical to business operations after January 1, 2000, have been identified and contacted. Procedures are being undertaken in an attempt to reasonably ascertain their state of Year 2000 readiness through questionnaires, compliance letters, interviews, on-site visits, and other available means. The Company paid particular attention to suppliers and shippers of the product comprising its hardware inventory. Cost: The estimated total cost of the Year 2000 Project is approximately $90,000, including $30,000 of internal labor costs devoted to the project. Costs incurred during fiscal 1999 were approximately $62,000, with the remainder of the estimated total being incurred during the first and second quarters of FY 2000. Risk: The Company believes that its Year 2000 readiness program will prepare the Company for Year 2000 compliance in a timely manner. There can be no assurance, however, that the Company's internal systems or equipment or those external parties on which the Company relies will be Year 2000 compliant in a timely manner or that the Company's or external parties contingency plans will mitigate the effects of any noncompliance. Given the current status of the Company's year 2000 Project, management believes that the most probable worst case scenario could result in short term business interruptions. However, failure by the Company and/or external parties to complete year 2000 readiness work in a timely manner could have a materially adverse effect on the Company's financial position and its results of operations. Contingency Plans: The Company is developing a Year 2000 Contingency Plan designed to address problems arising from Year 2000 failures of critical third parties and will be directed towards providing alternate sources of supply to the Company. The Company expects to complete its contingency planning phase for Year 2000 by November 1, 1999. ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates. Adverse changes in interest rates can have a material effect on the Company's operations. At March 31, 1999, the Company had $20,225,000 of debt outstanding of which $4,000,000 bears fixed interest rates. If the interest rates charged to the Company on its variable rate debt were to increase significantly, the effect could be materially adverse to future operations. The Company conducts a limited amount of businesses overseas, principally in Western Europe. At present all transactions are billed and denominated in U.S. dollars and consequently, the Company does not currently have any material exposure to foreign exchange rate fluctuation risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data of the Company are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 15 16 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following paragraphs set forth the name and age of each executive officer and the members of the Board of Directors of the Company, together with their respective periods of service as officers and directors and other positions with the Company. All directors hold office for one (1) year or until their successors are duly elected and qualified. DIRECTORS Arch C. Scurlock, age seventy-nine, presently Chairman of the Board of Directors, has been a Director of the Company since 1973. He had served from 1969 to 1992 as Chairman of the Board of TransTechnology Corporation, a manufacturer of aerospace-defense and other industrial products. Since 1968, he has been President and a Director and controlling shareholder of Research Industries Incorporated, a private investment company. John J. Reis, age fifty-six, joined the Company on March 1, 1999, as President and Chief Executive Officer, and was elected to the Board of Directors on March 24, 1999. He was President, CEO and Director of NumereX Corporation from 1996 to 1998 and President and CEO of MAXM Systems Corporation, a provider of automation software and services for enterprise wide systems and network management, from 1989 to 1996. Howard C. Mills, age sixty-five, has been a Director of the Company since October 1984, and he was President and Chief Executive Officer from October 1984 until his retirement on April 16, 1999. He also serves on the Board of the Virginia Tech Corporate Research Center. The Company entered into a consulting agreement with Mr. Mills whereby he will provide certain advisory services to the Company. See Item 11 for further discussion. John H. Grover, age seventy-one, has been a Director of the Company since 1984. He has served as Executive Vice President, Treasurer and Director of Research Industries Incorporated, since 1968 and as a Director of TransTechnology Corporation from 1969 to 1992. Ernest L. Ruffner, age sixty-four, elected Director of the Company on March 25, 1985, is an attorney engaged in the private practice of law as a member of the firm of Pompan, Murray, Ruffner & Werfel in Alexandria, Virginia. He has been an attorney for 33 years. Mr. Ruffner is a graduate of the United States Military Academy, served as a First Lieutenant in the United States Army Corps of Engineers and has been a Director of Research Industries Incorporated since 1983. Mr. Ruffner has been Secretary of the Company since 1985. In January 1992, he was given the additional designation of Counsel of the Company, and in September 1994, he was elected General Counsel (See Item 13). Alvin E. Nashman, age seventy-two, elected Director of the Company on September 17, 1993, served on the Board of Directors of Computer Sciences Corporation (CSC) and as President of its Systems Group until 1996 and 1991 respectively. Dr. Nashman currently serves on the Boards of Andrulis Corporation, Spaceworks, Inc., Micros to Mainframes, Inc. (OTC), and on the Advisory Boards of Dominion Wireless, Unitech Inc., and Trawick Associates. John Toups, age seventy-three, elected Director of Company on September 17, 1993, served as President and CEO of Planning Research Corporation (PRC) from 1978 to 1987. He also served as interim Chairman of the Board and CEO of the National Bank of Washington and Washington Bancorp and is currently a Director of CACI International, NVR, Inc., Telepad Corporation, Thermatrix, Inc. and GTSI. OTHER EXECUTIVE OFFICERS In addition to Messrs. Reis and Ruffner, the following persons serve as executive officers of the Company: John D. D'Amore, age forty-nine, Vice President Finance and Accounting and Chief Financial Officer, Controller and Treasurer, joined Halifax on April 10, 1996. He previously served as Vice President Finance for CTA International, Inc. and CTA Space Systems, subsidiaries of CTA Incorporated. Prior to that he served in various executive finance 16 17 positions including five years as Vice President Finance with Presearch Inc. Mr. D'Amore is a Certified Public Accountant and a member of the Virginia Bar. James C. Dobrowolski, age thirty-six, joined Halifax as a result of the Company acquiring EAI Services which he had managed for two years. Mr. Dobrowolski currently serves as the Vice President in charge of the Simulation and Facilities Services Division. Prior to joining EAI as Director of Contracts in April 1988, he was with Engineering and Professional Services Inc. where he served as Manager of Subcontract Administration for two years. Charles L. McNew, age forty-seven, Executive Vice President, joined Halifax in July 1999. From 1994 through July 1999 he was Chief Financial Officer and more recently Chief Operating Officer for NumereX Corporation, an international data transport company. Prior to that he served in various executive finance and operations positions for publicly held companies. Mr. McNew is a Certified Public Accountant. Thomas F. Nolan, age fifty-four, has been Vice President, Computer Services Division since December 1995. Before joining the Company, Mr. Nolan worked six years as an independent executive in Financial Services Management. Prior to that, he was Senior Vice President, Marketing for Decision Data Services, Inc, a nation wide computer maintenance firm. For sixteen years Mr. Nolan held various executive positions with Bell Atlantic Corporation's SORBUS Service Division. Frank J. Ostronic, age seventy, Vice President Federal Services Division, joined Halifax on May 24, 1996. Mr. Ostronic has over thirty-nine years experience in various executive positions including fourteen years with Computer Science Corporation as Vice President of Program Development. A U.S. Naval Academy graduate, Mr. Ostronic retired from the U.S. Navy with the rank of Captain. Robert V. Santmyer, age thirty-nine, Vice President and General Manager, Technology Services Division since June 1999. Prior to joining Halifax he was Vice President, Professional Services, Dictaphone Corporation. Other positions held were General Manager, DCX Systems LTD of NumereX; Vice President, Professional Services, MAXM Systems Corporation; and Manager, Network Provisioning, Sprint. Melvin L. Schuler, age fifty-five, is Vice President, Communications Services Division. Mr. Schuler has been with Halifax since 1972, serving in various management positions within the Communications services line of business. James L. Sherwood, IV, age fifty-seven, is Vice President, Contracts and Administration. He previously served as Vice President of the Company's Facilities Services Division. He has been with the Company and its subsidiaries for twenty years. He previously served as Vice President and manager for the Company's former Facilities Services Division. 17 18 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information on the Chief Executive Officer and the only other officers whose compensation exceeded $100,000 serving at the close of the fiscal year ended March 31, 1999 for services rendered in all capacities during the fiscal years ended March 31, 1999, 1998, and 1997. SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation ----------------------- ----------------------------- Awards Payouts --------- -------- Other Annual Restricted All Other Salary Bonus Compen- Stock Options LTIP Compen- sation Awards SARs payouts sation Year ($) ($) ($) (1) ($) (#) ($) ($) ---- ------ ----- ------- ---------- ----- ------- ---- John J. Reis(6) 1999 11,539 - - - 50,000 - - CEO/President Howard C. Mills(5) 1999 172,603 - 4,697 - - - 22,900(3) Former CEO/President 1998 164,417 - 4,119 - - - 3,227(2) 1997 160,804 43,200 4,323 - 7,200 - 3,135(2) James L. Sherwood IV 1999 111,348 3,220 - - 5,000 - 9,453(3) 1998 106,156 - - - - - 2,136(2) 1997 101,550 14,400 - - 3,000 - 2,013(2) James C. Dobrowolski 1999 113,659 6,864 2,400 - 8,000 - 2,130 1998 112,390 17,950 - - - - 2,607(2) 1997 113,549 28,430 - - 6,375 - 6,117(3) Melvin L. Schuler 1999 108,764 - - - 3,000 - 2,443(3) 1998 103,650 54,096 - - - - 3,345(2) 1997 97,786 57,670 - - 4,500 - 1,956(2) Thomas E. Nolan 1999 117,219 19,107 - - 5,000 - 3,032(3) 1998 111,177 8,439 - - 1,500 - 2,399(2) 1997 107,623 - - - 6,375 - 13,768(4) Frank J. Ostronic 1999 114,162 - - - 3,000 - 4,186(3) 1998 110,240 - - - 5,000 - 1,823(2) John D. D'Amore 1999 108,764 2,963 - 5,000 - 2,266(3) 1998 102,412 - - - 4,000 - 2,050(2)
(1) Value of Company furnished auto. (2) Amounts contributed to officer under 401(k) plan. (3) Amounts contributed to officer under 401(k) plan, insurance plans, and paid vacation. (4) Amounts contributed to officer under 401(k) plan and living expenses. (5) Mr. Mills retired from the Company effective April 16, 1999. The Company entered into a consulting agreement with Mr. Mills whereby he will provide certain advisory services to the Company. The Agreement is for a term of ten (10) years commencing April 16, 1999 and ending April 15, 2009. Mr. Mills will receive $50,000 per year, payable monthly, in exchange for his services. (6) The Company entered into an Executive Severance Agreement ("Agreement") with Mr. Reis on March 1, 1999. The Agreement provides benefits under certain circumstances including a change in control of the 18 19 Company and is automatically renewed from year to year. It confirms that employment is at will and provides for termination without additional compensation in the event of death, resignation, retirement or for cause. Except in connection with a change of control, termination for any other reason results in compensation equal to eighteen (18) months salary. In the event of termination within one (1) year after a change in control or in the event Mr. Reis resigns or retires during the first ninety (90) days after a change in control, he would receive compensation equal to thirty-six (36) months salary subject to statutory limitations. DIRECTOR COMPENSATION Except for Howard Mills, who became a Consultant to the Company upon his retirement as President and CEO, directors who are not officers of the Company receive an annual fee of $1,000 and also receive $2,000 and reimbursement of expenses incurred for each meeting of the Board of Directors which they attend. Alvin Nashman also receives $2,000 per month for consulting services provided to the Company. STOCK OPTION PLANS The 1984 Incentive Stock Option and Stock Appreciation Rights Plan (the 1984 "Plan") terminated on May 15, 1994. All options expired prior to July 18, 1998 (See Note 8 to the consolidated financial statements). In 1994, the Company's shareholders approved the 1994 Key Employee Stock Option Plan (the 1994"Plan"). The Company's key employees, including officers, were eligible to participate. Directors who were not officers were not eligible. At the 1998 Annual Meeting of Shareholders, the shareholders approved amendments to the 1994 Plan which increased to 280,000 the number of shares authorized for issuance pursuant to the 1994 Plan. The 1994 Plan is administered by a committee selected by the Board and is comprised of not less than three members of the Board. The committee has the sole and absolute discretion to establish from time-to-time the criteria for participation in the 1994 Plan and to select the officers and other key employees to whom options may be granted, to determine all claims for benefits under the 1994 Plan, to impose such conditions and restrictions on options as it determines appropriate, with the consent of the recipient, to cancel options and to substitute new options for previously awarded options which, at the time of such substitution, have an exercise price in excess of fair market value of the underlying shares of Company Common Stock. The committee also has the sole and absolute discretion to grant options entitling the Participants to purchase shares of Company Common Stock from the Company in such number, at such price and on such terms and subject to such conditions, not inconsistent with the terms of the 1994 Plan, as may be established by the Committee. Due to the broad discretion of the Committee, it is not possible to determine at this time the benefits or amounts that will in the future be received by or allocated to the participants, if any. Except as otherwise expressly provided in the 1994 Plan, the Committee may designate, at the time of the grant of an Option, the Option as an Incentive Stock Option under Section 422 of the Internal Revenue Code. The Purchase Price of each share of Company Common Stock which may be purchased upon exercise of any Option granted under the 1994 Plan shall be established by the Committee in its discretion, and in the case of Incentive Stock Options, such Purchase Price shall not be less than 100% of the Fair Market Value on the Date of Grant. Each Option granted under the 1994 Plan shall be exercised by written notice to the Company. The Purchase Price of shares purchased upon exercise of an Option granted under the 1994 Planis required to be paid in full. No option may be exercised in whole or in part prior to six months from the Date of Grant. The Board has complete power and authority to amend the 1994 Plan at any time as it deems necessary or appropriate and no approval by the stockholders of the Company or by any other person, committee or entity of any kind is required to make any amendment; provided, however, that the Board shall not, without the affirmative approval of stockholders of the Company, increase the number of shares of Company Common Stock available for 19 20 Option grants thereunder or make any other amendment which requires stockholder approval under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 as amended. In fiscal year 1997, options totaling 105,600 shares were granted to employees at exercise prices ranging from $4.67 to $7.67, the market prices on the dates of issuance. In fiscal year 1998, options totaling 15,500 shares were granted to employees at exercise prices ranging from $7.56 to $10.25, the market price on the dates of issuance. In fiscal year 1999, options totaling 87,000 shares were granted to employees at exercise prices ranging from 7.81 to $7.875, the market price on the dates of issuance. At the September 19, 1997 Annual Meeting of Shareholders, the shareholders approved the new Non-Employee Director Stock Option Plan. The maximum number of shares subject to the plan and approved for issuance is 100,000 shares of the Company's Common Stock either authorized and unissued or shares held in treasury. This number is subject to adjustment in the event of stock splits, stock dividends or other recapitalization of the Company's Common Stock. The Company has registered the shares issuable to the plan with the SEC. The plan will be administered by the Board of Directors in whom the plan vests all powers and authority under the plan. Under the terms of the plan, each year on the first day of the first month following the Annual Meeting of Shareholders of the Company, each Non-Employee Director who has been elected or reelected as a Board member shall receive an option. This option may be either a first option or subsequent option. At initial election to the Board, a first option shall be granted for 5,000 Common Stock shares. A first option becomes exercisable in installments cumulatively with respect to one sixtieth of the Option Stock per month after the date of grant, so that one hundred percent shall be exercisable five years after the date of grant. Upon each annual reelection as a Board Member, a subsequent option shall be granted of up to a maximum of 2,000 Common Stock shares. A subsequent option becomes exercisable in installments cumulatively with respect to one-twelfth of the optioned stock per month after the date of grant, so that one hundred percent shall be exercisable one year after the date of grant. The total maximum number of shares of Common Stock for which any director shall be granted options under this plan is 13,000. No option or any part of an option shall be exercisable after the expiration of ten years from the date the Option was granted. In fiscal 1998, options totaling 30,000 shares were granted to non-employee Directors at $10.25 per share, the market price on date of issuance. In fiscal 1999, options totaling 12,000 shares were granted to non-employee Directors at $7.03 per share, the market price on date of issuance. See Note 8 to the consolidated financial statements. 20 21 ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of September 7, 1999 (1) the number of shares of the Company's Common Stock owned beneficially by each person who owned of record, or was known by the Company to have owned beneficially, more than 5% of such shares then outstanding, (2) the number of shares owned beneficially by each director and executive officer of the Company, and (3) the number of shares owned beneficially by all officers and directors as a group. Information as to the beneficial ownership is based upon statements furnished to the Company by such persons.
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent - ------------------- -------------------- ------- Research Industries 680,300 33.8 Incorporated (1)(3)(6) 123 North Pitt Street Alexandria, VA 22314 Arch C. Scurlock (1)(2) 681,800 33.9 123 North Pitt Street Alexandria, VA 22314 Howard C. Mills (5) 68,367 3.4 5221 Mountain View Drive Broad Run, VA 20137 Alvin E. Nashman 4,500 * 3609 Ridgeway Terrace Falls Church, VA 22042 John Toups 4,500 * 1209 Stuart Robeson Dr. McLean, VA 22101 John H. Grover (2)(3) 1,500 * 123 North Pitt Street Alexandria, VA 22314 Ernest L. Ruffner (4) 150 * 209 North Patrick Street Alexandria, VA 22314
21 22
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent - ------------------- -------------------- ------- Melvin L. Schuler 6,850 * 5250 Cherokee Avenue Alexandria, VA 22312 John D. D'Amore 560 * 5250 Cherokee Avenue Alexandria, VA 22312 James L. Sherwood IV 425 * 5250 Cherokee Avenue Alexandria, VA 22312 Frank J. Ostronic 250 * 5250 Cherokee Avenue Alexandria, VA 22312 Thomas E. Nolan 175 * 5250 Cherokee Avenue Alexandria, VA 22312 All officers and directors 769,077 38.2 as a group, including the above (14 persons)
*Less than 1% (1) Research Industries Incorporated is 93% owned by Arch C. Scurlock, Chairman of the Company's Board of Directors. Dr. Scurlock is also President and a director of Research Industries Incorporated. (2) Includes 680,300 shares owned by Research Industries Incorporated. (3) Mr. Grover is also a 5% owner, a director and Executive Vice President and Treasurer of Research Industries Incorporated. (4) Mr. Ruffner is a director of Research Industries Incorporated. (5) Includes 450 shares held by Mr. Mills' wife. (6) Research Industries Incorporated owns $2 million face amount of the Company's 7% Convertible Subordinated Debenture dated January 27, 1998 and $690,000, $310,000, $500,000 and $500,000 face amount of the Company's Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. 22 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Ernest L. Ruffner, Secretary and General Counsel and a Director of the Company, is a member of the law firm of Pompan, Murray, Ruffner & Werfel however, he received no fees therefrom for services to the Company. During the fiscal year ended March 31, 1999, the Company paid $74,250 for legal services to Mr. Ruffner as General Counsel. Jacob Pompan of Pompan, Murray, Ruffner & Werfel has represented the Company in its government contract affairs since 1984. During the fiscal year ended March 31, 1999, the Company paid $88,247 to the firm for services rendered. Alvin E. Nashman, a Director of the Company, provides consulting services under an agreement with the Company. During the fiscal year ended March 31, 1999, the Company paid $24,000 for consulting services to Mr. Nashman. Research Industries, Incorporated, the owner of 680,300 shares or 33.8% of the Company's common stock, owns $2 million face amount of the Company's 7% Convertible Subordinated Debenture dated January 27, 1998 and $690,000, $310,000, $500,000 and $500,000 face amount of the Company's Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. See Note 6 to the consolidated financial statements for further discussion. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements - Report of Independent Auditors - Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997 - Consolidated Balance Sheets as of March 31, 1999 and 1998 - Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 - Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended March 31, 1999, 1998 and 1997 - Notes to Consolidated Financial Statements 2. Financial Statement Schedule - Schedule II, Valuation and Qualifying Accounts All other schedules are omitted since they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits 3.1 Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended March 31, 1995.) 3.2 By-laws, as amended. (Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended March 31, 1995.) 4.1 Loan and Security Agreement dated January 30, 1989 between the Company and Crestar Bank. (Incorporated by reference to Exhibit 4.1 to Form 10-K for the year ended March 31, 1989.) 23 24 4.2 First Amendment to Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated Dec. 11, 1992 and amended and restated revolving note. (Incorporated by reference to Exhibit 4.2 to Form 10-K for the Year ended March 31, 1993.) 4.3 Loan agreement dated June 30, 1993 between the Company and Crestar Bank. (Incorporated by reference to Exhibit 4.3 to Form 10-K for the year ended March 31, 1994.) 4.4 Second Amendment to Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated November 14, 1994 and amended and restated revolving note. (Incorporated by reference to Exhibit 4.4 to Form 10-K for the year ended March 31, 1995.) 4.5 Fifth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated June 25, 1998 and restated notes (Incorporated by reference to Form 8-K dated October 6, 1998.) 4.6 Sixth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated September 7, 1999 and restated notes. 10.1 1984 Incentive Stock Option and Stock Appreciation Rights Plan, as amended. (Incorporated by reference to Exhibit 10.3 to the Form 10-K for the year ended March 31, 1989). 10.2 Agreement of purchase and sale with amendments dated June 7, 1992, between the Company and ReCap Inc. for the Halifax Office Complex. (Incorporated by reference to Exhibit 10.5 of the Form 10-K for the year ended March 31, 1992). 10.3 1994 Key Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the year ended March 31, 1995). 10.6 John J. Reis Executive Severance Agreement. 22 Subsidiaries of the registrant. 23 Consent of Ernst &Young LLP, Independent Auditors. (b) Reports on Form 8-K Form 8-K dated March 18, 1999 - Halifax Reports Embezzlement. 24 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HALIFAX CORPORATION By /s/John J. Reis ---------------- John J. Reis President and Chief Executive Officer Date: 9/8/99 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/John J. Reis - --------------------------- President and 9/8/99 John J. Reis Chief Executive Principal Executive Officer Officer, Director /s/John D. D'Amore - --------------------------- Vice President, 9/8/99 John D. D'Amore Chief Financial Officer, Principal Financial and Treasurer & Controller Accounting Officer /s/Arch C. Scurlock - --------------------------- Chairman of the 9/8/99 Arch C. Scurlock Board of Directors /s/John H. Grover Director 9/8/99 - --------------------------- John H. Grover /s/Howard C. Mills Director 9/8/99 - --------------------------- Howard C. Mills /s/Alvin E. Nashman Director 9/8/99 - --------------------------- Alvin E. Nashman /s/Ernest L. Ruffner Director 9/8/99 - --------------------------- Ernest L. Ruffner /s/John Toups Director 9/8/99 - --------------------------- John Toups
25 26 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Halifax Corporation We have audited the accompanying consolidated balance sheets of Halifax Corporation as of March 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 1999. Our audits also included the financial statement schedule listed in the index at item 14(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Halifax Corporation at March 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Washington , D.C. September 7, 1999 27 27 HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Restated Restated 1999 1998 1997 ---- ---- ---- Revenues (Note 1) $ 81,812,000 $ 73,770,000 $ 75,489,000 Operating costs and expenses: Cost of services 78,558,000 68,556,000 71,384,000 General and administrative 3,833,000 4,074,000 3,904,000 --------------- -------------- ---------------- Total operating costs and expenses 82,391,000 72,630,000 75,288,000 --------------- -------------- ---------------- Operating (loss) income (579,000) 1,140,000 201,000 Interest expense (1,454,000) (1,535,000) (950,000) Other (expense) income (773,000) 923,000 360,000 Embezzlement loss (Note 2) (2,593,000) (6,044,000) (2,892,000) --------------- -------------- ---------------- Loss before income taxes (5,399,000) (5,516,000) (3,281,000) Income tax (benefit) expense (Note 10) (100,000) 84,000 39,000 --------------- -------------- ---------------- Net loss $ (5,299,000) $ (5,600,000) $ (3,320,000) =============== ============== ================ Net loss per common share - basic $ (2.63) $ (2.79) $ (1.67) =============== ============== ================ Net loss per common share - diluted $ (2.63) $ (2.79) $ (1.67) =============== ============== ================ Weighted average number of common shares outstanding - basic 2,012,611 2,006,603 1,985,599 --------------- -------------- ---------------- Weighted average number of common shares outstanding - diluted 2,012,611 2,006,603 1,985,599 --------------- -------------- ----------------
See notes to consolidated financial statements 28 28 HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND 1998
March 31 ------------------------- Restated 1999 1998 ---- ---- ASSETS CURRENT ASSETS Cash $ 0 $ 0 Trade accounts receivable (Note 4) 23,800,000 16,475,000 Other receivables (Note 4) 2,848,000 60,000 Inventory 3,949,000 5,258,000 Prepaid expenses and other current assets 569,000 293,000 Income taxes receivable (Notes 1 and 10) 808,000 0 Deferred income taxes (Notes 1 and 10) 0 582,000 ------------- ------------- TOTAL CURRENT ASSETS 31,974,000 22,668,000 PROPERTY AND EQUIPMENT, net (Notes 1 and 5) 2,230,000 3,375,000 GOODWILL, net (Notes 1 and 3) 4,044,000 4,298,000 OTHER ASSETS 487,000 626,000 ------------- ------------- TOTAL ASSETS $ 38,735,000 $ 30,967,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable and accrued expenses (Note 7) $ 21,930,000 $ 12,678,000 Deferred maintenance revenue 1,588,000 1,841,000 Current portion of long-term debt (Note 6) 7,720,000 786,000 ------------- ------------- TOTAL CURRENT LIABILITIES 31,238,000 15,305,000 LONG-TERM BANK DEBT (Note 6) 8,505,000 12,923,000 SUBORDINATED DEBT - AFFILIATE (Note 6) 4,000,000 2,000,000 DEFERRED INCOME 630,000 690,000 ------------- ------------- TOTAL LIABILITIES 44,373,000 30,918,000 STOCKHOLDERS' EQUITY (DEFICIT) (Note 8) Common stock, $.24 par value: Authorized - 4,500,000 shares Issued - 2,270,090 in 1999 and 2,267,166 in 1998 Outstanding - 2,013,406 in 1999 and 2,010,482 in 1998 545,000 544,000 Additional paid-in capital 4,413,000 4,399,000 Retained earnings (deficit) (10,384,000) (4,682,000) ------------- ------------- (5,426,000) 261,000 Less treasury stock at cost - 256,684 shares in 1999 and 1998 212,000 212,000 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (5,638,000) 49,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 38,735,000 $ 30,967,000 ============= =============
See notes to consolidated financial statements 29 29 HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Restated Restated 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net loss $ (5,299,000) $ (5,600,000) $ (3,320,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,277,000 1,404,000 1,237,000 Loss (gain) on sale or disposal of property and equipment 773,000 (695,000) 49,000 (Increase) decrease in accounts receivable (7,282,000) 2,899,000 (7,675,000) (Increase) decrease in other receivables (2,831,000) 20,000 (45,000) Decrease (increase) in inventory 1,309,000 54,000 (2,520,000) (Increase) decrease in prepaid expenses and other current assets (276,000) 418,000 (504,000) Decrease (increase) in other assets 139,000 93,000 (719,000) (Increase) decrease in income tax receivable (226,000) (434,000) (148,000) Increase (decrease) in accounts payable, accrued expenses and other current liabilities 8,999,000 (132,000) 3,233,000 Increase (decrease) in income taxes payable - - (90,000) (Decrease) increase in deferred income taxes - 43,000 (441,000) (Decrease) increase in deferred income (60,000) 690,000 - ---------------- --------------- --------------- 1,822,000 4,360,000 (7,623,000) ---------------- --------------- --------------- Net cash used in operating activities (3,477,000) (1,240,000) (10,943,000) Cash flows from investing activities: Purchase of property and equipment, net of acquisitions (651,000) (2,030,000) (2,032,000) Proceeds from sale of property and equipment - 4,856,000 - Acquisitions - (50,000) (2,594,000) ---------------- --------------- --------------- Net cash (used in) provided by investing activities (651,000) 2,776,000 (4,626,000) Cash flows from financing activities: Proceeds from debt borrowings 53,431,000 36,862,000 47,159,000 Repayments of debt (48,915,000) (38,315,000) (33,866,000) Cash dividends paid (403,000) (401,000) (371,000) Proceeds from sale of stock upon exercise of stock options 15,000 44,000 178,000 ---------------- --------------- --------------- Net cash provided by (used in) financing activities 4,128,000 (1,810,000) 13,100,000 ---------------- --------------- --------------- Net decrease in cash - (274,000) (2,469,000) Cash at beginning of year - 274,000 2,743,000 -------------- --------------- --------------- Cash at end of year $ - $ - $ 274,000 ================ =============== ===============
30 30 See notes to consolidated financial statements HALIFAX CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
Common Stock Additional Retained Treasury Stock ------------------------ Paid-In Earnings ------------------------ Shares Par Value Capital (Deficit) Shares Cost Total ------ --------- ------- --------- ------ ---- ----- Restated March 31, 1996 2,220,022 $ 518,000 $ 3,401,000 $ 5,010,000 467,679 $ (388,000) $ 8,541,000 ========== ========== ============ ============== ======= ============ ============= Cash Dividends ($.187 per share) - - - (371,000) - - (371,000) Net loss (restated) - - - (3,320,000) - - (3,320,000) Exercise of Stock Options 38,611 9,000 169,000 - - - 178,000 Stock Split 233 15,000 (15,000) - - - - CMSA Acquisition - - 803,000 - (209,445) 175,000 978,000 ---------- ---------- ------------ -------------- ------- ------------ ------------- Restated March 31, 1997 2,258,866 $ 542,000 $ 4,358,000 $ 1,319,000 258,234 $ (213,000) $ 6,006,000 ========== ========== ============ ============== ======= ============ ============= Cash Dividends ($.20 per share) - - - (401,000) - - (401,000) Net loss (restated) - - - (5,600,000) - - (5,600,000) Exercise of Stock Options 8,300 2,000 41,000 - - - 43,000 CMSA Acquisition Earnout (1,550) 1,000 1,000 ---------- ---------- ------------ -------------- ------- ------------ ------------- Restated March 31, 1998 2,267,166 $ 544,000 $ 4,399,000 $ (4,682,000) 256,684 $ (212,000) $ 49,000 ========== ========== ============ ============== ======= ============ ============= Cash Dividends ($.20 per share) - - - (403,000) - - (403,000) Net loss - - - (5,299,000) - - (5,299,000) Exercise of Stock Options 2,924 1,000 14,000 - - 15,000 ---------- ---------- ------------ -------------- ------- ------------ ------------- March 31, 1999 2,270,090 $ 545,000 $ 4,413,000 $ (10,384,000) 256,684 $ (212,000) $ (5,638,000) ========== ========== ============ ============== ======= ============ =============
See notes to consolidated financial statements. 31 31 HALIFAX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY Business Activity - Halifax Corporation, (the Company) provides Technology Services and Facilities Management for commercial and government activities. These services include the integration, systems engineering, installation, maintenance and training for computer systems, communications systems, and simulation systems; and the management, operations and maintenance support of military bases, prisons, waterways, major office complexes, and communications sites. Revenues from services rendered to the United States Government and the relative percentages of such revenues to total revenues for the years ended March 31, 1999, 1998 and 1997 are $36,816,000 (45%), $25,820,000 (35%), and $35,480,000 (47%), respectively. The reduction in United States Government revenue in fiscal 1998 was primarily a result of reduced deliveries of digital telecommunications switches under long-term contracts. Principles of Consolidation - The Company's consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Revenue Recognition - On cost type contracts, revenues are recorded as reimbursable costs are incurred and related fixed and award fees are recorded using the percentage of completion method generally using units of delivery as the measurement basis for effort accomplished. On time and materials contracts, revenues are recorded at the contractual rates as labor hours and other direct expenses are incurred. On fixed price contracts, revenues are recorded using the percentage of completion method generally using units of delivery as the measurement basis for effort accomplished. Sales under certain long-term fixed-price contracts which, among other things, provide for the delivery of minimal quantities or require a significant amount of development effort in relation to total contract value, are recorded upon achievement of performance milestones or using the cost-to-cost method of accounting where sales and profits are recorded based on the ratio of costs incurred to estimated total costs at completion. Revenues collected in advance for commercial maintenance contracts are deferred and recognized over the term of the related agreements. For all contracts, recognition is made of any anticipated losses when identified. Disputes involving amounts owed the Company by customers arise in the normal course of the Company's business. These disputes are primarily due to changes in contract specifications and disagreements over the interpretation of contract provisions. Any amounts due related to such disputes are recorded at the lesser of their estimated net realizable value or actual costs incurred. Claims against the Company are recognized when the loss is considered probable and reasonably determinable in amount. Revenue on sales of information technology hardware is realized upon delivery to the customer. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment - Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. 32 32 Inventory - Inventory consists principally of spare computer parts and computer and computer peripheral hardware and software in the process of delivery upon resale to customers. All inventories are valued at the lower of cost or market on the first-in first-out basis. These inventories are recorded on the consolidated balance sheet net of allowances for inventory valuation of $1,500,000 and $356,000 at March 31, 1999 and 1998, respectively. Accounts Receivable and Inventories - Receivables and inventories are primarily attributable to long-term contracts or programs in progress for which the related operating cycles are longer than one year. In accordance with industry practice, these items are included in current assets. Income Taxes - Deferred taxes are provided on all temporary differences measured using enacted tax rates expected to be in effect during the periods in which the temporary differences reverse. Goodwill - Goodwill in acquired companies, described in Note 3, is being amortized using the straight-line method over periods ranging from 10 to 25 years. Accumulated amortization was $1,159,000 and $905,000 as of March 31, 1999 and 1998, respectively (See Note 3). Management periodically reviews the appropriateness of the carrying value of goodwill. Earnings Per Common Share - The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. Due to the net loss in each period, the computation of diluted earnings per share is based on the weighted average number of shares outstanding during the period and does not include dilutive common stock equivalents. New Accounting Pronouncements - In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way in which publicly-held companies report financial and descriptive information about their operating segments in financial statements for both interim and annual periods, and requires additional disclosures with respect to products and services, geographic areas of operation and major customers. The Statement is effective for fiscal years beginning after December 15, 1997. The Company adopted the provisions of this standard in fiscal year 1999. (See Note 16) 2. EMBEZZLEMENT MATTER AND RESTATEMENT OF 1998 AND 1997 CONSOLIDATED FINANCIAL STATEMENTS Embezzlement Matter On March 18, 1999, the Company announced that an internal investigation had revealed an apparent material embezzlement by the former controller of one of the Company's subsidiaries. The embezzlement occurred at, and was confined to, the Company's Richmond, VA based Halifax Technology Services Company ("HTSC"). At the time of the embezzlement, HTSC was a wholly owned subsidiary of Halifax Corporation, which resulted from a merger of CMSA (acquired by Halifax on April 1, 1996), and CCI (acquired by Halifax on November 25, 1996). On April 1, 1999, HTSC was merged into Halifax Corporation and is now a division of the Company. The Company believes that a single individual, the former controller of HTSC, perpetrated the embezzlement. She was immediately terminated, has since been indicted, has pleaded guilty, and currently awaits sentencing. Under the terms of an agreement entered into with the Company, she is cooperating with the Company's recovery efforts. The embezzlement occurred over a period of nearly four years and aggregated approximately $15.4 million, of which $15 million was embezzled from the Company and $400,000 from CMSA before it was acquired by Halifax. To conceal the embezzlement in the accounting records, the former controller made fraudulent adjustments totaling more 33 33 than $21 million. Of the $21 million, the $15.0 million embezzled was recorded in the Company's statements of operations and balance sheets after the acquisition, approximately $2.2 million related to amounts reflected in the acquisition date balance sheet, and approximately $3.8 million related to other overstatements of operating results during the three year period subsequent to the CMSA acquisition. Under the terms of an agreement with the Company, the embezzler has transferred certain assets back to the Company. Some of the recovered assets have been converted into approximately $1.4 million in cash as of August 31, 1999. With an estimated $1.1 million of assets awaiting conversion to cash, the Company estimates approximately $2.5 million will ultimately be recovered from the embezzler. In addition, the full policy amount of $1 million from each of two separate theft insurance polices, or an aggregate of $2 million, has been received to date. Therefore, from these sources, the Company expects a total recovery of $4.5 million (excluding recovery costs) . The Company estimates that, net of recovery costs, approximately $3.5 million will be recovered. At March 31, 1999, the Company had received approximately $670,000 from its recovery efforts and recorded a $2.83 million recovery receivable to recognize its expectation of receiving the estimated $3.5 million of total net recoveries. See Note 4 to the consolidated financial statements. Due to the corresponding overstatement of taxable income, reported by the Company during the period of the embezzlement, the Company will file for a tax refund of approximately $808,000. The receivable is recorded in "Income Taxes Receivable" in the consolidated financial statements. The embezzlement had a material effect on the Company's financial statements for fiscal years 1999, 1998 and 1997. In addition to the correction for overstated assets and understated liabilities, the Company recorded an embezzlement loss of approximately $2,593,000, $6,044,000 and $2,892,000 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. The embezzlement loss recorded in fiscal 1999 is net of the actual and projected net recoveries aggregating $3,500,000. In addition to the notification and involvement of the appropriate authorities, and the intensive and ongoing investigative efforts, the Company has taken other important steps as a result of the embezzlement. The Board of Directors appointed a special committee of the Board to focus on the recovery of assets taken from the Company and minimization of the damages sustained as a result of the embezzlement. The employment contract of the HTSC president was not renewed, and he is no longer employed by the Company. Furthermore, new executives have been hired to manage the technology services division and to consolidate the Company's financial and administrative activities. The Company has also transferred key accounting and cash management functions of HTSC to Company headquarters. The Company's fiscal 1998 and 1997 financial statements have been restated to reflect corrections due to the embezzlement. The effect of the restatement on results of operations and balance sheets for fiscal 1998 and 1997 is as follows:
Year Ended ---------- March 31, 1998 March 31, 1997 -------------- -------------- Previously Previously Statement of Operations: Reported Restated Reported Restated - ------------------------ ---------- -------- ---------- -------- Revenues $ 73,737,000 $ 73,770,000 $ 76,278,000 $ 75,489,000 Cost of services 67,081,000 68,556,000 69,530,000 71,384,000 SG&A expenses 5,316,000 4,074,000 4,630,000 3,904,000 ------------- ---------------- ---------------- ---------------- Operating income 1,340,000 1,140,000 2,118,000 201,000 Interest expense (1,535,000) (1,535,000) (950,000) (950,000) Other income 1,004,000 923,000 409,000 360,000 Embezzlement loss 0 (6,044,000) 0 (2,892,000) ------------- ---------------- ---------------- ---------------- Income (loss) before taxes 809,000 (5,516,000) 1,577,000 (3,281,000) Income taxes 367,000 84,000 623,000 39,000 ------------- ---------------- ---------------- ---------------- Net income (loss) $ 442,000 $ (5,600,000) $ 954,000 $ (3,320,000) ============= ================ ================ ================ Net income (loss) per share-basic $ 0.22 $ (2.79) $ 0.48 $ (1.67) ============= ================ ================ ================
34 34
March 31, 1998 March 31, 1997 -------------- -------------- Balance Sheet: Previously Previously - -------------- Reported Restated Reported Restated ---------- -------- ---------- -------- Current assets $ 31,382,000 $ 22,668,000 $ 31,143,000 $ 25,899,000 Total assets $ 37,975,000 $ 30,967,000 $ 41,000,000 $ 37,776,000 Current liabilities $ 11,019,000 $ 15,305,000 $ 13,656,000 $ 15,814,000 Total liabilities $ 27,367,000 $ 30,918,000 $ 30,477,000 $ 31,770,000 Stockholders' equity $ 10,608,000 $ 49,000 $ 10,523,000 $ 6,006,000
3. ACQUISITIONS CMS Automation, Inc. (CMSA) and Consolidated Computer Investors, Inc. (CCI) On April 1, 1996, the Company completed the acquisition of CMS Automation, Inc. (CMSA), a private Richmond, VA based computer network integration and solutions company Financial consideration was in the Company's stock with an assumption of debt. There was an initial payment of approximately 209,400 shares valued at approximately $978,000 from Treasury Stock representing approximately 12% of Halifax's outstanding shares at closing. The Company assumed secured debt totaling approximately $5,085,000. 1,550 additional shares were paid out in fiscal 1998 as additional consideration. On November 25, 1996, the Company through its wholly-owned subsidiary, CMSA, acquired the ongoing computer network integration business of Consolidated Computer Investors, Inc. ("CCI") of Hanover, Maryland through an asset purchase. The Company paid $114,000 in cash and assumed secured debt totaling $1,680,000. On April 23, 1997, CMSA was renamed Halifax Technology Services Company (HTSC) and on April 1, 1999 became a division of the Company. On June 30, 1993, the Company purchased substantially all of the assets and liabilities of the Field Services Division of Electronics Associates, Inc. (EAI) which was primarily engaged in the maintenance of electronic equipment and software for an initial purchase price of approximately $2.4 million. Additional payments of $1,000,000 were paid over the next 3 years as certain revenue objectives were achieved. The Company paid $200,000 relating to this requirement in 1994 and $400,000 in both 1995 and 1996. The Company's change in focus to its technology services segment over the last three fiscal years is intended to secure a prominent future as a leading provider of a broad range of information technology services to technology dependent companies and other users of technology. The purchased assets and ongoing lines of business of HTSC have provided the impetus for this thrust and contributed over $70 million of revenue beginning with their purchase in fiscal 1997. Because the high-technology and services orientation of the HTSC lines of business have a higher rate of change and evolution, the goodwill of approximately $2,968,000 is being amortized over 20 years beginning in fiscal 1997. The fiscal 1994 acquisition of Electronic Associates, Inc., which provided complementary technology capability in the maintenance of electronic and computer equipment and software, resulted in approximately $2,235,000 of goodwill which is being amortized over 25 years.
March 31, Restated 1999 1998 ---- ---- Goodwill $ 5,203,000 $ 5,203,000 Accumulated Amortization 1,159,000 905,000 ------------ -----------
35 35 Net Goodwill $ 4,044,000 $ 4,298,000 ============ ============
4. ACCOUNTS RECEIVABLE Trade Accounts receivable consist of:
March 31, Restated 1999 1998 ---- ---- Amounts billed $ 19,341,000 $ 15,004,000 Amounts unbilled: Amounts currently billable 4,908,000 1,571,000 Retainages and amounts awaiting audit 208,000 272,000 --------------- ----------------- Total 24,457,000 16,847,000 Allowance for doubtful accounts (657,000) (372,000) --------------- ----------------- Total $ 23,800,000 $ 16,475,000 =============== ================= Other receivables consist of: Embezzlement recoveries (see Note 2) 2,828,000 - Warranty and other 20,000 60,000 --------------- ----------------- $ 2,848,000 $ 60,000 =============== =================
Embezzlement recoveries receivable represents the difference between the estimated $3.5 million of total net recoveries and $672 thousand of cash received at March 31, 1999. Retainages are generally billable upon acceptance of work by customers or completion of contract audits by the Government. It is anticipated that the accounts receivable balance at March 31, 1999 will be substantially collected within one year. 5. PROPERTY AND EQUIPMENT Property and equipment consists of:
March 31, Restated Estimated 1999 1998 Useful Lives ---- ---- ------------ Automotive equipment $ 338,000 $ 351,000 4 years Machinery and equipment 5,648,000 6,534,000 3 - 10 years Furniture and fixtures 1,386,000 1,365,000 5 - 10 years Building and improvements 630,000 604,000 12 years ---------------- ----------------- Total 8,002,000 8,854,000 Accumulated depreciation and amortization (5,772,000) (5,479,000) ---------------- ----------------- Total $ 2,230,000 $ 3,375,000 ================ =================
6. LONG-TERM DEBT AND MORTGAGE NOTE PAYABLE 36 36
March 31, Restated 1999 1998 ---- ---- Long-term debt consists of: Revolving credit agreement amended effective February 23, 1999, with a maximum credit line of $14,500,000. Amounts available under this agreement are determined by applying stated percentages to the Company's eligible billed and unbilled receivables. Interest accrues at Libor plus 1.75% to 2.25% depending on a leverage ratio. The Libor rate on March 31, 1999 was 5.4%. $ 11,600,000 $ 11,130,000 Tier II Term Note dated June 25, 1998. Principal to be paid in quarterly installments due on the last day of March, June, September and December commencing on the first scheduled payment date following payment in full of the Tier III Term Note. Interest accrues on the principal at the prime rate plus 2.10% to 2.65% depending on a leverage ratio. 2,500,000 - Tier III Term Note dated June 25, 1998. Principal is to be paid in $125,000 quarterly installments due on the last day of March, June, September and December commencing September 1998. Interest accrues on the principal at the prime rate plus 3.00% to 3.55% depending on a leverage ratio. 2,125,000 - Other notes payable and capital lease obligations with interest rates ranging from the prime rate to 15%, due in monthly installments and maturing at dates through 1999. - 5,000 EAI acquisition term loan facility dated June 30, 1993 paid off June 25, 1998. Note was payable in 60 equal monthly installments of $41,666 plus interest. The note was apportionable between prime rate and LIBOR rate options. Interest accrued at either the prime rate plus 1/2% or LIBOR plus 2.5%. At March 31, 1998, the prime rate and LIBOR options were at 9% and 8.125%, respectively. - 203,000 CMSA acquisition term loan facility dated June 14, 1996 paid off June 25, 1998. Note was previously payable in 24 equal monthly installments of $29,762 plus interest and a final installment of $1,785,712 due on June 30, 1998 plus interest. Interest accrued at the prime rate plus 1/4%. - 1,845,000 CCI acquisition term loan facility dated November 26, 1996 paid off June 25, 1998. Note was previously payable in 48 equal monthly installments of $16,979 plus interest. Interest accrued at the prime rate plus 1/4%. - 526,000 -------------------- --------------- Subtotal bank debt 16,225,000 13,709,000 -------------------- --------------- 7% Convertible Subordinated Debenture with an affiliate dated January 27, 1998. Principal due in full on January 27, 2003. Interest payable semiannually in arrears beginning August 1, 1998. May be prepaid by the Company on any date more than two years after January 27, 1998. Convertible by noteholder at any time at a conversion price of $11.72 per common share. 2,000,000 2,000,000 Subordinated note with an affiliate dated October 8, 1998. Principal due in full April 1, 2000 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 690,000 -
37 37 Subordinated note with an affiliate dated October 13, 1998. Principal due in full April 1, 2000 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 310,000 - Subordinated note with an affiliate dated November 2, 1998. Principal due in full April 1, 2000 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 500,000 - Subordinated note with an affiliate dated November 5, 1998. Principal due in full April 1, 2000 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%. 500,000 - -------------- ------------- Subtotal - debt affilitated parties 4,000,000 2,000,000 -------------- ------------- Total debt 20,225,000 15,709,000 Less current maturities 7,720,000 786,000 -------------- ------------- Long term debt $ 12,505,000 $ 14,923,000 ============== =============
Advances under the revolving credit agreement and term loan facilities are collateralized by a first priority security interest in all of the Company's assets except for the computer resale inventory of HTSC. Additionally, advances under the CMSA and CCI acquisition term loan facilities were secured by the acquired assets. The banking agreement also contains financial covenants and financial reporting covenants. $6,440,000 of the revolving credit agreement has been excluded from current liabilities because the Company anticipates it would remain outstanding for an uninterrupted period extending beyond one year from the balance sheet date. The Company signed a new banking agreement on September 1, 1999 which refinances the Company's bank debt as presented at March 31, 1999. The new debt continues to consist of a revolving line of credit ($12,000,000 revised facility) and two term loans ($1,000,000 and $2,500,000 revised facilities), however the principal reduction and interest rate provisions of the term loans have been revised as have the interest rate provisions. Standard closing and unused balance fees are included. The revised facilities make $15,500,000 of credit available to the Company. This agreement expires on September 8, 2000. All assets of the Company remain as collateral in accordance with the prior agreement. Financial covenants have been revised to require only prospective operational performance objectives including minimum quarterly net income of $100,000 beginning September 30, 1999 and quarterly increases in tangible net worth of $150,000. The new agreement prohibits the payment of dividends or distributions as well as the payment of principal or interest on Subordinated Debt. Interest expense on Subordinated Debt is accrued on a current basis. In connection with the new banking agreement, the revolving credit agreement was reduced from a maximum credit line of $14,500,000 to $12,000,000. Amounts available are determined by applying stated percentages to the Company's eligible billed and unbilled accounts receivable. Interest now accrues at LIBOR plus 4.25%. The Tier III Term Note principal balance was reduced by $125,000 at closing which reduced the outstanding principal balance on that date to $1,000,000. Interest is payable monthly on the principal at LIBOR plus 5.55%. The Tier II Term Note facility remains $2,500,000. The principal balance is to be reduced by $125,000 on December 15, 1999 and by $500,000 quarterly beginning March 15, 2000. Any unpaid balance is due September 15, 2000. Interest is payable monthly on the principal at LIBOR plus 4.65%. 38 38 The Company is required to make certain additional term note balance reductions from the future proceeds of various embezzlement recoveries, tax refunds and potential asset sales if any. In addition the Company is required to pay quarterly fees on outstanding term note credit facilities. Such fees will range from .35% to .45%. The aggregate annual maturities of long-term debt, based on the terms of the new banking agreement, (excluding any debt reductions related to proceeds from the above specified non-operational events) are as follows: 2000 - $ 7,720,000 2001 - 10,505,000 2002 - 0 2003 - 2,000,000 2004 - 0 Thereafter - 0 ----------- Total - $20,225,000 ===========
The carrying value of total debt approximates fair market value at March 31, 1999 and 1998. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of:
March 31, Restated 1999 1998 ---- ---- Accounts payable and outstanding checks $ 14,091,000 $ 8,986,000 Accrued expenses 5,715,000 1,687,000 Accrued vacation 867,000 908,000 Accrued payroll 974,000 623,000 Payroll taxes accrued and withheld 283,000 268,000 Income taxes payable 0 206,000 -------------- --------------- $ 21,930,000 $ 12,678,000 ============== ===============
On September 2, 1999, the Company entered into an agreement with a major supplier of digital communications switch hardware for the Company's United States Army contract where approximately $5,500,000 of outstanding accounts payable arising since March 31, 1999 and currently due to the supplier will be paid over 18 months with interest at 8.5%. $506,945 was paid on September 2, 1999 and will be paid on October 1, 1999, $299,965 will be paid on the first day of the next ensuing 15 months and a final payment of $299,974 is due on February 1, 2001. 8. COMMON STOCK Stock Options - Under the Company's 1984 Stock Option and Stock Appreciation Rights Plan (as amended), options to purchase shares of the Company's common stock were granted to officers and key employees at a price not less than the fair market value of the stock at the date of grant. Any grants of options or stock appreciation rights under the plan were limited to a maximum of 165,000 shares of the Company's common stock. Options and/or stock appreciation rights expired five years after the date of grant. The 1984 plan terminated May 15, 1994. All options under this plan had been exercised or terminated by July 18, 1998. On September 16, 1994 the shareholders approved the new Key Employee Stock Option Plan ("1994 Plan"). The maximum number of shares of the Company's common stock subject to the 1994 Plan and approved for issuance is 280,000 shares either authorized and unissued or 39 39 shares held in treasury. This number is subject to adjustment in the event of stock splits, stock dividends or other recapitalization of the Company's common stock. 40 40 A summary of options activity is as follows:
Weighted Optioned Option Price Average Shares Per Share Total Exercise price -------- ------------ ----- --------------- 1984 PLAN --------- March 31, 1996 52,650 $ 4.59 - 5.67 $ 251,860 $ 4.78 Options exercised (38,611) 4.59 - 5.00 (178,795) 4.63 Options forfeited upon retirement/ termination of employees (1,688) 5.00 (8,440) 5.00 ------------ -------------- -------------- ------------ March 31, 1997 12,351 $ 5.00 - 5.67 $ 64,625 $ 5.23 Options exercised (8,677) 5.00 - 5.67 (46,255) 5.33 ------------ -------------- -------------- ------------ March 31, 1998 3,674 $ 5.00 $ 18,370 $ 5.00 Options exercised (2,924) 5.00 (14,620) 5.00 Options forfeited upon retirement/ termination of employees (750) 5.00 (3,750) 5.00 ------------ -------------- -------------- ------------ March 31, 1999 0 $ 0 $ 0 $ 0 ============ ============== ============== ============ Options exercisable at March 31, 1999 0 $ 0 $ 0 $ 0 ============ ============== ============== ============ 1994 PLAN --------- March 31, 1996 67,200 $ 4.67 - 4.83 $ 316,925 $ 4.72 Options granted 105,600 4.67 - 7.67 680,800 6.45 Options forfeited upon retirement/ termination of employees (24,000) 4.67 - 7.33 (137,810) 5.74 ------------ -------------- -------------- ------------ March 31, 1997 148,800 $ 4.67 - 7.67 $ 859,915 $ 5.78 Options granted 15,500 7.56 - 10.25 134,665 8.69 Options forfeited upon retirement/ termination of employees (25,500) 4.67 - 10.25 (192,995) 7.57 ------------ -------------- -------------- ------------ March 31, 1998 138,800 $ 4.67 - 10.25 $ 801,585 $ 5.78 Options granted 87,000 7.81 - 7.88 682,720 7.85 Options forfeited upon retirement/ termination of employees 0 0 0 0 ------------ -------------- -------------- ------------ March 31, 1999 225,800 $ 4.67 - 10.25 $ 1,484,305 $ 6.57 ============ ============== ============== ============ Options exercisable at March 31, 1999 41,175 $ 4.16 - 4.83 $ 176,886 $ 4.30 ============ ============== ============== ============ NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN ---------------------------------------- Options granted 30,000 10.25 307,500 10.25 ------------ -------------- -------------- ------------ March 31, 1998 30,000 $ 10.25 $ 307,500 $ 10.25 Options granted 12,000 7.03 84,360 7.03 ------------ -------------- -------------- ------------
41 41 March 31, 1999 42,000 $ 7.03 - 10.25 $ 391,860 $ 9.33 ============ ================ ============== ============ Options exercisable at March 31, 1999 14,030 $ 7.03 - 10.25 $ 126,806 $ 9.04 ============ ================ ============== ============
All stock-based incentive awards granted in 1999, 1998 and 1997 under the 1994 Plan were stock options which have 5 year terms and vest at the end of the third and fourth years. All awards granted in 1999 and 1998 under the Non-Employee Directors Stock Options Plan were stock options which have 5 year terms and vest in installments cumulatively with respect to one-sixtieth of that option stock per month after the date of grant. Exercise prices of all options awarded in all years under all plans were equal to the market price of the stock on the date of grant. Proforma information regarding net earnings and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997: risk-free interest rate of 5.36%, 5.99% and 6.16% respectively, dividend yield of 2%, 2% and 2% respectively, volatility factor related to the expected market price of the Company's common stock of .262, and weighted-average expected option life of five years. The weighted average fair value of options granted during 1999, 1998 and 1997 were $2.35, $2.66 and $1.57, respectively. For purposes of proforma disclosures, the options' estimated fair values are amortized to expense over the options' vesting periods. The Corporation's proforma information for the years ended March 31, is as follows:
Restated Restated (In thousands, except per share data) 1999 1998 1997 ---- ---- ---- Proforma net (loss) $ (5,354,000) $ (5,634,000) $ (3,344,000) Proforma net (loss) per common share: Basic $ (2.66) $ (2.81) $ (1.68) Diluted $ (2.66) $ (2.81) $ (1.68)
9. EMPLOYEE 401(K) RETIREMENT PLAN The Company sponsors a 401(k) retirement plan covering substantially all non-union employees with more than 3 months of service. The plan provides that the Company will contribute an amount equal to 50% of a participant contribution up to 4% of salary, and at the Company's discretion, additional amounts based upon the profitability of the Company. The Company's contributions were $230,000 in 1999, $199,000 in 1998 and $191,000 in 1997. The Company has an Employee Stock Purchase Plan under which all employees of the Company are eligible to contribute funds for the purchase of the Company's common stock on the open market at market value. Under the Plan, the Company agrees to pay all brokerage commissions associated with such purchases. 10. INCOME TAXES Deferred tax assets and liabilities on the balance sheets reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The deferred tax assets and liabilities are classified on the balance sheets as current or non current based on the classification of the related assets and liabilities. The components of income tax expense are as follows for the years ended March 31:
Restated Restated 1999 1998 1997 ---- ---- ---- Current (benefit) expense: Federal $ (627,000) $ 424,000 $ 234,000 State (55,000) 94,000 52,000 ------------ -------------- ----------
42 42 Total current: (682,000) 518,000 286,000 Deferred expense (benefit): Federal 512,000 (403,000) (224,000) State 70,000 (31,000) (23,000) -------------- -------------- --------------- Total deferred: 582,000 (434,000) (247,000) -------------- -------------- --------------- Income tax (benefit) expense $ (100,000) $ 84,000 $ 39,000 ============== ============== ===============
The components of the Company's deferred tax assets and liabilities consist of the following at March 31:
Restated 1999 1998 ---- ---- Deferred tax assets: Accounts receivable/reserves $ 117,000 $ 53,000 Inventory 597,000 137,000 Accrued compensation/vacation 238,000 274,000 AMT credit carryforwards 45,000 45,000 Net operating loss carryforward 4,789,000 50,000 Deferred gain on building sale 248,000 271,000 Embezzlement loss 210,000 4,223,000 ----------------- ----------------- 6,244,000 5,053,000 Deferred tax liabilities: Deferred start-up costs (5,000) (69,000) Depreciation/amortization (815,000) (970,000 Contract claims/other (2,000) (44,000) ----------------- ----------------- (822,000) (1,083,000) ----------------- ----------------- 5,442,000 3,970,000 ================= ================= Valuation allowance (5,422,000) (3,388,000) ================= ================= Net deferred tax asset $ 0 $ 582,000 ================= =================
Due to the uncertainty of future realization, the Company has not recorded a net benefit for these operating loss carryforwards and other deferred tax assets in its fiscal 1999 financial statements. As of March 31, 1998, a valuation allowance was also provided against the net deferred tax asset except to the extent taxes paid for the years ended March 31, 1997 and 1998 are recoverable through the carryback of the Company's net operating loss arising in the year ended March 31, 1999. The change in the valuation allowance of $2,034,000 results primarily from the increase in the net operating loss carryforward due to the embezzlement loss and the reclassification of the defered tax asset as of March 31, 1998 into a current tax receivable as of March 31, 1999. The differences between the provision for income taxes at the expected statutory rate and those shown in the consolidated statements of operations are as follows for the years ended March 31:
Restated Restated 1999 1998 1997 ---- ---- ---- Provision (benefit) for income taxes at statutory rate (34.0)% (34.0)% (34.0)% State taxes, net of federal benefit (4.4) (4.4) (4.4) Permanent differences 1.0 1.0 1.9 Valuation allowance and other 35.1 39.0 37.6 ---------- ---------- ---------- Total (2.3)% 1.6% 1.1% ------ ----- -----
The Company has a $12.5 million net operating loss carryover virtually all of which expires in fiscal 2019. As a part of the restatement of the financial statements , tax assets, tax liabilities and tax provisions were also 43 43 restated which resulted in an adjustment of $243,000 to the March 31, 1996 retained earnings. The $808,000 income tax receivable at March 31, 1999 consists of net operating loss carryback refunds of $682,000 and $126,000 of estimated tax payments made in fiscal 1999. 11. LEASING ACTIVITY The Company is obligated under operating leases for office space and certain equipment. The following are future minimum lease payments under operating leases as of March 31, 1999.
Year ending March 31, -------------------- 2000 $ 990,000 2001 726,000 2002 717,000 2003 714,000 2004 719,000 thereafter 2,294,000 ----------- Total minimum lease payments $ 6,160,000 ===========
Total rent expense under operating leases was $1,188,000, $954,000 and $411,000 for the years ended March 31, 1999, 1998 and 1997, respectively. The Company sold its office complex on November 6, 1997 and leased back its headquarter's building for 12 years which resulted in increased rental expense and future minimum lease payments since fiscal 1997. Aggregate future minimum rentals to be received under noncancelable subleases as of March 31, 1999 are $8,000. 12. RELATED PARTY TRANSACTIONS During the years ended March 31, 1999, 1998 and 1997, the Company paid $74,250, $62,000 and $77,000, respectively, for legal services to a Board member serving as General Counsel; $88,247, $9,096 and $4,651, respectively, to a law firm in which the same Board member is a partner; and $24,000, $24,000 and $22,000, respectively, for consulting services to another Board member. Research Industries, Incorporated, the owner of 680,300 shares or 33.8% of the Company's common stock, owns $2 million face amount of the Company's 7% Convertible Subordinated Debenture dated January 27, 1998 and $690,000, $310,000, $500,000 and $500,000 face amount of the Company's Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. Interest expense on the subordinated debt totaled $222,000 and $37,000 for 1999 and 1998, respectively. See Note 6 . 13. COMMITMENTS AND CONTINGENCIES The Company's contracts with the U.S. Government are subject to cost audit by Government authorities. Such audits have been completed through fiscal years ended March 31, 1995. It is not possible to predict the outcome of future audits but it is the opinion of the Company's management that liabilities, if any, arising from such audits would not have a material adverse effect on the Company's consolidated financial position or results of operations. Upon the death of certain former officers and at the option of their estates, the Company is committed to purchase 54,112 of their shares of the Company's common stock at current book value. At March 31, 1999, the book value of the Company was a deficit and therefore, the Company had no obligation. There are no material pending legal proceedings to which the Company is a party. The Company is engaged in ordinary routine litigation incidental to the Company's business to which the Company is a party. 44 44 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid the following amounts for interest and income taxes during the years ended March 31:
Restated Restated 1999 1998 1997 ---- ---- ---- Interest $ 1,454,000 $ 1,535,000 $ 950,000 ============== ============== ============= Income taxes $ 325,000 $ 578,000 $ 722,000 ============== ============== =============
45 45 15. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Years Ended March 31, --------------------- Restated Restated 1999 1998 1997 ---- ---- ---- Numerator: Net loss $ (5,299,000) $ (5,600,000) $ (3,320,000) Numerator for basic earnings per share- Loss attributable to common stockholders $ (5,299,000) $ (5,600,000) $ (3,320,000) Numerator for diluted earnings per share- Loss attributable to common stockholders after assumed conversions $ (5,299,000) $ (5,600,000) $ (3,320,000) Denominator: Denominator for basic earnings per share- 2,012,611 2,006,603 1,985,599 Weighted-average shares Effect of dilutive securities:* Employee stock options - - - 7% Convertible Subordinated Debenture - - - Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 2,012,611 2,006,603 1,985,599 Earnings per share: Basic earnings per share $ (2.63) $ (2.79) $ (1.67) =============== ================ =============== Diluted earnings per share $ (2.63) $ (2.79) $ (1.67) =============== ================ ===============
*Because of losses, no effect is given to dilutive securities. 46 46 16. INFORMATION ON INDUSTRY SEGMENTS AND RELATED INFORMATION The Company operates in two principal business segments: technology services and facilities management. Technology Services includes the integration, systems engineering, installation, maintenance and training for computer systems and communications systems. Other primary services provided include interactive technologies including website design, development and marketing, Internet/Intranet services, multimedia sales and educational tools and Year 2000 desktop solutions for enterprise PC hardware and software compliance. Facilities Management includes the management, operations and maintenance support of prisons, waterways, major office complexes and communications sites.
Years Ended March 31, --------------------- Restated Restated Selected Financial Data by Business Segment 1999 1998 1997 ------------------------------------------- ---- ---- ---- Net Sales Technology Services $ 61,919 $ 59,213 $ 60,524 Facilities Management 19,893 14,557 14,965 ----------- ----------- ----------- $ 81,812 $ 73,770 $ 75,489 Operating Income (Loss) Technology Services $ (2,510) $ 773 $ (1,125) Facilities Management 1,931 367 1,326 ----------- ----------- ----------- $ (579) $ 1,140 $ 201 Depreciation and Amortization Technology Services $ 1,245 $ 1,312 $ 1,145 Facilities Management 32 92 92 ----------- ----------- ----------- $ 1,277 $ 1,404 $ 1,237 Expenditures for Property and Equipment Technology Services $ 609 $ 2,020 $ 2,021 Facilities Management 42 10 11 ----------- ----------- ----------- $ 651 $ 2,030 $ 2,032 Identifiable Assets Technology Services $ 34,186 $ 27,136 $ 32,694 Facilities Management 4,549 3,831 5,082 ----------- ----------- ----------- $ 38,735 $ 30,967 $ 37,776
Years Ended March 31, --------------------- Restated Restated Net Sales by Customer Category 1999 1998 1997 ------------------------------ ---- ---- ---- US Government Technology Services $ 23,598 $ 18,094 $ 26,954 Facilities Management 13,218 7,726 8,526 ---------- ------------ ------------ $ 36,816 $ 25,820 $ 35,480 State and Local government Technology Services $ 14,596 $ 12,349 $ 10,923 Facilities Management 6,675 6,831 6,439 ---------- ------------ ------------ $ 21,271 $ 19,180 $ 17,362 Commercial
47 47 Technology Services $ 23,725 $ 28,770 $ 22,647 Facilities Management - - - ---------- ------------ ------------ $ 23,725 $ 28,770 $ 22,647
Halifax Corporation SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS March 31, 1999
Balance at Additions Balance at beginning charged to end of of year cost & expense Deductions Year ------- -------------- ---------- ---- Year Ended March 31, 1999: - -------------------------- Allowance for doubtful accounts $ 372,000 $ 605,000 $ 320,000 $ 657,000 Allowance for inventory obsolescence $ 356,000 $ 1,680,000 $ 536,000 $ 1,500,000 Year Ended March 31, 1998 - Restated: - ------------------------------------- Allowance for doubtful accounts $ 215,000 $ 363,000 $ 206,000 $ 372,000 Allowance for inventory obsolescence $ 499,000 $ 1,376,000 $ 1,519,000 $ 356,000 Year Ended March 31, 1997 - Restated: - ------------------------------------- Allowance for doubtful accounts $ 241,000 $ 86,000 $ 112,000 $ 215,000 Allowance for inventory obsolescence $ 804,000 $ 809,000 $ 1,114,000 $ 499,000
48 48 INDEX TO EXHIBITS Exhibit Number 4.6 Sixth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated September 7, 1999 and restated notes 10.6 John J. Reis Executive Severance Agreement 23 Consent of Ernst & Young LLP, Independent Auditors EX-4.6 2 SIXTH AMEND. & RESTATED LOAN & SECURITY AGREEMENT 1 EXHIBIT 4.6 SIXTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS SIXTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of the 1st day of September, 1999 (the Agreement), is made by and between CRESTAR BANK, a Virginia banking corporation (the Lender), and HALIFAX CORPORATION, a Virginia corporation (the Company), HALIFAX ENGINEERING, INC., a Virginia corporation (Engineering), HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation (Technical), and HALIFAX REALTY, INC., a Virginia corporation (Realty), and each other Subsidiary (as defined below) that becomes a party to this Agreement with the Lender's approval, in accordance with the provisions set forth below (together with the Company and Engineering, Technical and Realty, collectively, the Borrowers, and individually, a Borrower). RECITALS The Lender has agreed to provide financing to the Borrowers, subject to the terms and conditions of this Agreement. Each Borrower will derive substantial direct and indirect benefits by the credit extended by the Lender to the other Borrowers. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Lender and the Borrowers agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings assigned to them below, which meanings shall be equally applicable to the singular and plural forms of the terms defined. "Accounts Receivable" means, collectively, and includes all of the following, whether now owned or hereafter acquired by a Borrower: all property included within the definitions of "accounts," "chattel paper," "documents" and "instruments" set forth in the UCC; all present and future rights to payments for goods sold or leased or for services rendered, whether or not represented by instruments or chattel paper, and whether or not earned by performance; contract rights; all present and future rights to payments for computer software, computer hardware or computer systems sold, leased or licensed; proceeds of any letter of credit of which a Borrower is a beneficiary; all forms of obligations whatsoever owed to a Borrower, together with all instruments and documents of title representing any of the foregoing; all rights in any goods that any of the foregoing may represent; any and all rights in any returned or repossessed goods; and all rights, security and guaranties with respect to any of the foregoing, including, without limitation, any right of stoppage in transit. "Affiliate" means, with respect to any specified Person, any other Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, direct or indirect, 2 of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of common stock, by contract or otherwise. "Aging" means a schedule of all outstanding Receivables of the Borrowers showing the age of such Receivables in intervals of 30 days. "Agreement" means this Loan and Security Agreement, as the same may be amended, modified or supplemented from time to time. "Assignment of Claims Act" means, collectively, the Assignment of Claims Act of 1940, as amended, 31 U.S.C. Section 3727, 41 U.S.C. Section 15, any applicable rules, regulations and interpretations issued pursuant thereto, and any amendments to any of the foregoing. "Assumption Agreement" means each Assumption Agreement, substantially in the form of Exhibit A attached to this Agreement, executed by a Subsidiary that becomes a party to this Agreement in accordance with the provisions of Section Section 7.3 below. "Borrowing Base" means, at any time, without duplication, the sum of (a) 90% of Eligible Billed Government Receivables, plus (b) 85% of Eligible Billed Commercial Receivables, plus (c) until such time as the HTSI Sale occurs, the Tier Two Contribution, provided that at no time shall the Borrowing Base attributable to the Tier Two Contribution exceed $2,000,000, and upon the closing of the HTSI Sale, the Tier Two Contribution shall not be included as part of the Borrowing Base. The Lender agrees that Eligible Billed Commercial Receivables due from Siemens may be included in the Borrowing Base, provided that the Borrowing Base attributable thereto shall not exceed $1,000,000 at any time. "Borrowing Base Certificate" means a certificate of the Company containing a computation of the Borrowing Base and certifying that no Default or Event of Default has occurred and is continuing, in substantially the form of Exhibit B attached to this Agreement. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks are authorized or required to close under the laws of the State, and, with respect to the determination of LIBOR, on which banks in the London interbank market are open for business. "Capital Expenditures" means, for any period, expenditures made by the Company or any of its Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, but excluding repairs) during such period, computed in accordance with GAAP. "Capital Lease" means any lease that has been or should be capitalized on the books of the lessee in accordance with GAAP. 2 3 "Cash Management Agreement" means any applicable agreement between the Company and the Lender pursuant to which funds are transferred automatically to and from the Company's operating account or controlled disbursement account with the Lender, as any such agreement may be amended, modified or supplemented from time to time. "Closing" means the satisfaction of all conditions precedent set forth in Section Section 7 of this Agreement. "Closing Date" means the date of the Closing. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and all regulations issued pursuant thereto. "Collateral" means, collectively, and includes all Accounts Receivable, Deposit Accounts, Equipment, General Intangibles, Intellectual Property, Inventory, Investment Property and all other property of a Borrower in which a Lien is granted to the Lender pursuant to this Agreement or any other Loan Document. "Commercial Receivable" means any Account Receivable that does not arise out of a Government Contract on which a Borrower is the prime contractor. An Account Receivable arising out of a Government Contract on which a Borrower is a subcontractor shall be a Commercial Receivable. "Covenant Compliance Certificate" means a certificate executed by a Principal Officer of the Company, substantially in the form of Exhibit C attached to this Agreement, containing a calculation of the financial covenants contained in Section Section 6.11 below and certifying that no Default or Event of Default has occurred. "Customer" means any Person obligated on a Receivable. "Customer List" means a schedule of all Customers of the Borrowers, showing the address of each Customer and a listing of the active contracts between each Borrower and such Customer, which is otherwise in form and substance satisfactory to the Lender. "Date Affected Information Technology" means a system comprised of one or more components including computer hardware, computer software or equipment with computerized functions, which reads, produces or processes date data by input, output or otherwise. "Debt" means, collectively, and includes, without duplication, with respect to any specified Person, (a) indebtedness or liability for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of assets to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such assets from such Person) or for the deferred purchase price of property or services; (b) obligations as a lessee under a Capital Lease; (c) obligations to reimburse the issuer of letters of credit or acceptances; (d) all guaranties, 3 4 endorsements (other than for collection or deposit in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any other Person or otherwise to assure a creditor against loss; (e) obligations under interest rate swap, cap or collar agreements or similar agreements or arrangements designed to protect that Person against fluctuations in interest rates; (f) obligations under any foreign exchange contract, currency swap or other similar agreements or arrangements designed to protect that Person against fluctuations in currency values; and (g) obligations secured by any Lien on property owned by the specified Person, whether or not the obligations have been assumed. "Default" means any event that, with the giving of notice, the lapse of time, or both, would constitute an Event of Default. "Default Rate" means the rate at which interest accrues on the loans upon the occurrence of an Event of Default, determined in accordance with the provisions of Section Section 2.4. "Deposit Account" means any "deposit account," as defined in Section 9-105 of the UCC, whether now owned or hereafter acquired by a Borrower. "Dollars" and "$" means the lawful currency of the United States of America. "Eligible Billed Commercial Receivable" means an Eligible Billed Receivable that is not an Eligible Billed Government Receivable. "Eligible Billed Government Receivables" means Eligible Billed Receivables arising out of a Government Contract on which a Borrower is the prime contractor. "Eligible Billed Receivables" means Eligible Receivables that have been billed to the appropriate Customer and are aged not greater than 90 days from the date of the initial invoice. For the purposes of this definition, the term "initial invoice" shall mean the first invoice relating to the applicable goods shipped or services rendered, and not any subsequent invoice relating thereto. "Eligible Bonded Receivables" means, at any time, Accounts Receivable of a Borrower that satisfy all of the criteria of Eligible Billed Receivables other than the requirement that such Accounts Receivable not arise out of a contract secured by a surety bond. "Eligible Receivables" means Accounts Receivable of a Borrower (a) that represent valid obligations incurred by a Customer for software, goods or services licensed, shipped and delivered, installed or completed under valid contracts of license, sale, or service that have been formally awarded to a Borrower, for which all required contract documents have been executed by such Borrower and such Customer, and, if the Government is the Customer, for which funds have been appropriated and allocated; (b) that are due and payable not more than 30 days from the date of the initial invoice; (c) on which the Customer is not an Affiliate or Subsidiary of a Borrower; (d) with respect to which no Borrower has knowledge or notice of any inability of the 4 5 Customer to make full payment; (e) from the face amounts of which have been deducted all payments, setoffs, amounts subject to adverse claims made in writing to a Borrower, contractual allowances, bad debt reserves and other credits applicable thereto; (f) that are subject to no Liens other than those permitted by this Agreement; (g) that continue to be in full conformity with the representations and warranties made by the Borrowers to the Lender in this Agreement; (h) with respect to which the Lender is and continues to be satisfied with the credit standing of the Customer; (i) on which the Customer is not a creditor of a Borrower; (j) on which the Customer is not a Foreign Customer, unless the Foreign Customer's obligations are secured by a letter of credit acceptable to the Lender, or the Lender elects, in its sole discretion, to permit such Account Receivable to be included in the Borrowing Base if it otherwise is an Eligible Receivable, at such advance percentage as the Lender may elect in its sole discretion; (k) that are not subject to any dispute; (l) with respect to which the applicable software, goods or services have been accepted by the applicable Customer on an absolute sale basis and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis or on the basis of any other similar understanding pursuant to which such Borrower would repurchase or accept a return of, or give a credit for, any such software, goods or services; and (m) that are not subject to any contingencies, and (n) no portion of which has been assigned, in whole or in part, to any Person other than the Lender; provided, however, and without limiting any other provisions of this Agreement with respect to the exclusion of Accounts Receivable from the category of Eligible Receivables and the Borrowing Base, that (1) if the Lender reasonably determines that the collectibility of any Account Receivable makes it unacceptable for inclusion in the Borrowing Base and gives written notice to the Company indicating the reasons for such determination, then such Account Receivable shall thereafter be excluded from the category of Eligible Receivables, (2) if more than 50% of the aggregate face amount of Accounts Receivable owed by a Customer are aged 90 days or more, then all Accounts Receivable owed by such Customer shall be excluded from the category of Eligible Receivables, (3) in no case shall Eligible Receivables include any Accounts Receivable representing or arising out of retainages, holdbacks, progress billings, the final payment due under a Government Contract, revenues recognized or costs incurred in excess of approved or allowed reimbursement rates, cost overruns, unauthorized work or work beyond the scope of a contract, rebillings, contracts secured by surety bonds or classified Government Contracts; (4) an Account Receivable arising out of a Material IP Agreement shall not be an Eligible Receivable unless the applicable Intellectual Property, and an appropriately completed instrument sufficient to file and record the Lender's Lien with respect thereto, shall be duly registered and filed with the United States Copyright Office and the United States Patent and Trademark Office, as applicable; (5) Receivables arising out of the obligation of any Person to purchase or finance Receivables of a Borrower shall not be Eligible Receivables; and (6) no Receivables arising out of the VDOT Contract shall be Eligible Receivables. If required by the Lender, no Eligible Receivable shall be included in more than three month-end Borrowing Base calculations. "Embezzlement" means the embezzlement of funds from Technology by a perpetrator identified by the Borrowers prior to the date of this Agreement and any Person acting in concert with such perpetrator. 5 6 "Equipment" means collectively and includes all of the following, whether now owned or hereafter acquired by a Borrower: equipment and fixtures, including, without limitation, computer hardware, computer software, computer systems, furniture, machinery, vehicles and trade fixtures together with any and all accessories, accessions, parts and appurtenances thereto, substitutions therefor and replacements thereof, together with all other such items that are included within the definitions of "equipment" and "fixtures" as set forth in the UCC. "Equity Issuance" means any issuance or sale by a Person of its capital stock or other similar equity security, or any warrants, options or similar rights to acquire, or securities convertible into or exchangeable for, such capital stock or other similar equity security. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and all regulations issued pursuant thereto. "Event of Default" means any of the events specified as an "Event of Default" under this Agreement, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Existing Agreement" means the Fifth Amended and Restated Loan and Security Agreement, dated as of June 25, 1998, between the Lender, the Borrowers and Technology, as amended to the date hereof. "Existing Subordination Agreement" means the Subordination Agreement, dated as of January 27, 1998, between the Lender, the Company and Research Industries. "Foreign Customer" means a Customer that is a foreign government, an entity organized under the laws of a country other than the United States or an individual who is not a United States citizen. "Fully Date Capable" means the ability to correctly process date data (including, but not limited to, reading, producing, calculating, comparing, and sequencing date data) from, into, and between the twentieth and twenty-first centuries) without material degradation in performance and without unusual intervention, including correct and continuous processing during the transition between 1999 and 2000, and correct processing of leap years. "GAAP" means generally accepted accounting principles consistently applied. "General Intangibles" means, collectively, and includes all of the following, whether now owned or hereafter acquired by a Borrower: all property that is included within the definition of "general intangibles" as set forth in the UCC; choses in action, causes of action and all other intangible property of every kind and nature, including, without limitation, corporate or other business records, inventions, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, good will, registrations, copyrights, licenses, franchises, 6 7 customer lists, tax refunds, tax refund claims, rights of claims against carriers and shippers, leases and rights to indemnification. "Government" means the United States of America or any agency or instrumentality thereof. "Government Contract" means any contract with the Government under which a Borrower is a prime contractor or a subcontractor. "HTSI Sale" means the sale of all or substantially all of the assets or stock, or both, as applicable, of Technical. "Increased Costs" means any reserve, special deposit, capital adequacy guideline or similar requirement relating to any extensions of credit, Letters of Credit, or other assets of the Lender, or the deposits with or other liabilities of the Lender, that (a) is imposed as a result of any Regulatory Change or as a result of the application of existing capital adequacy guidelines (including, without limitation, any Regulatory Change or capital adequacy guideline that requires that letters of credit issued, or lines of credit established, by the Lender be classified as "risk assets" for purposes of, or otherwise be subject to the provisions of, any capital adequacy guidelines applicable to the Lender), and (b) increases the cost to the Lender of making, issuing or maintaining any Loan or Letter of Credit, reduces the amount receivable by the Lender in connection with any Loan or Letter of Credit, or reduces the rate of return on the Lender's capital as a consequence of its obligations under this Agreement. "Intellectual Property" means, collectively, and includes all of the following, whether now owned or hereafter acquired by a Borrower: all copyrights (whether registered or unregistered), copyright registrations, trademarks, servicemarks, patents and rights as a licensor or licensee of any of the foregoing and all applications with respect to any of the foregoing. "Interest Payment Date" means the first day of each calendar month. "Inventory" means collectively and includes all of the following, whether now owned or hereafter acquired by a Borrower: all goods, computer hardware, computer software and computer systems held or intended for sale, lease, installation or licensing by a Borrower, or furnished or to be furnished under contracts of service, all raw materials, work in process, finished goods, materials and supplies of every nature used or usable in connection with the manufacture, packing, shipping, advertising or sale of any such goods, together with all property including within the definition of "inventory" set forth in the UCC. "Investment Property" means all of the following, whether now owned or hereafter acquired by a Borrower: all property that is included within the definition of "investment property" as set forth in the UCC, including all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, and any commercial paper, securities, 7 8 repurchase agreements, deposit accounts or other instruments or obligations purchased for the Borrower pursuant to a Cash Management Agreement. "Letters of Credit" means any letter of credit issued by the Lender for the account of any Borrower, whether now outstanding or issued after the date of this Agreement. "Letter of Credit Agreement" means, collectively and individually, each standard form of Application and Agreement for Irrevocable Standby Letter of Credit, to be executed and delivered by the Borrowers to the Lender in connection with each Letter of Credit, as any of the same may be amended, modified or supplemented from time to time. "LIBOR" means for each calendar month, the rate at which dollar deposits with a one-month maturity are offered to leading banks in the London interbank market at 11:00 a.m. (London time) on the first Business Day of such calendar month, based on the British Bankers Association quotations published by an On-Line Information Service, selected by the Lender, plus adjustments (expressed as a percentage) for reserve requirements, deposit insurance premium assessments, broker's commissions and other regulatory costs, all of the foregoing as determined by the Lender's Funds Management Division in accordance with its customary practices. "Lien" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement, or preferential arrangement, charge or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capital Lease and the filing of any financing statement under the UCC or comparable law of any jurisdiction to evidence any of the foregoing). "Loans" means the Revolving Loans, Term Loan One and Term Loan Two. "Loan Documents" means this Agreement, the Notes, each Assumption Agreement, each Letter of Credit Agreement, each Cash Management Agreement, the Existing Subordination Agreement, the Release Agreement, and any other document now or hereafter executed or delivered in connection with the Obligations, in evidence thereof or as security therefor, including, without limitation, any life insurance assignment, pledge agreement, security agreement, deed of trust, mortgage, guaranty, promissory note or subordination agreement. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole, (b) the ability of any Borrower to perform its obligations under any Loan Document or (c) the rights of or benefits available to the Lender under any Loan Document. "Material Contract" means any contract or other arrangement (other than the Loan Documents), whether written or oral, to which a Borrower or any Subsidiary is a party (a) requiring annual payments by any party thereto of more than 10% of the annual consolidated gross revenues of the Company and its Subsidiaries, or (b) as to which the breach, 8 9 nonperformance, cancellation or failure to renew by any party thereto could have a Material Adverse Effect. "Material IP Agreement" means any contract or agreement between a Borrower and a Customer providing for the sale or licensing to such Customer of Intellectual Property owned by such Borrower and subject or entitled to United States copyright, patent or trademark protection, unless such sale or license is ancillary to other goods or services provided under such contract or agreement and is not a material element of such goods or services. "Maximum Amount" means $12,000,000, as the same may be permanently reduced from time to time pursuant to Section Section 2.8 hereof. "Minimum Compliance Level" means Tangible Net Worth as of March 31, 1999, and adjusted upward, effective as of September 30, 1999, and as of the end of each fiscal quarter thereafter, by (a) $150,000, plus (b) the net proceeds of cash and other consideration received by the Borrower or any Subsidiary in respect of any Equity Issuance issued after March 31, 1999, minus (c) extraordinary, unusual or non-recurring gains for such period, as determined in accordance with GAAP, plus (d) extraordinary, unusual or non-recurring losses for such period, as determined in accordance with GAAP. "Net Income" means, for any Person for any period, the consolidated gross revenues (including extraordinary, unusual or non-recurring losses) of such Person and its Subsidiaries for such period less all consolidated operating and non-operating expenses (including extraordinary, unusual or non-recurring gains) of such Person and its Subsidiaries for such period, all as determined in accordance with GAAP. "Notes" means the Revolving Note, Term Note One and Term Note Two. "Obligations" means the Loans, the Notes, the Letter of Credit Agreements, all indebtedness and obligations of a Borrower under this Agreement and the other Loan Documents and all other indebtedness and obligations of a Borrower to the Lender, now existing or hereafter arising, of every kind and description, direct or indirect, fixed or contingent, liquidated or unliquidated, due or to become due, secured or unsecured, joint, several or joint and several, as amended, modified, renewed, extended or increased from time to time, including, without limitation, any overdrafts in any Deposit Account maintained by a Borrower with the Lender. "On-Line Information Service" means a text line or other on-line information service provided to the Lender by any of Reuters Information Services, Inc., Knight-Ridder Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial Markets News Services, or any comparable reporting service selected by the Lender. "Optional Termination Date" means the date on which the Borrowers elect to terminate the Lender's obligations to make Loans and issue Letters of Credit in accordance with a notice given pursuant to Section Section 2.9. 9 10 "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority, limited liability company or other entity of whatever nature. "Primary Operating Account" means any deposit account or controlled disbursement account on which the Company draws to pay all or substantially all of its operating expenses. "Prime Rate" means the rate of interest established and announced from time to time by the Lender and recorded in its Central Credit Administration Division as its Prime Rate, it being understood and agreed that the Prime Rate is used as a reference for fixing the lending rate on commercial loans and is not necessarily the lowest or most favorable rate of interest charged by the Lender on such loans. "Principal Officer" means the President, the Chief Executive Officer or the Chief Financial Officer of the Company. "Receivables" means the Accounts Receivable and the General Intangibles. "Recoveries" means any amounts collected or recovered by the Borrowers, directly or indirectly, with respect to, or arising out of, the Embezzlement, whether prior to or subsequent to the date of this Agreement, including, without limitation, the proceeds of restitution made by any perpetrator, insurance proceeds, and tax refunds and claims attributable to the effect of the Embezzlement. "Regulatory Change" means any change, after the date of this Agreement, in any federal or state laws, rules and regulations, or interpretations thereof, or the adoption after the date of this Agreement of any rules, interpretations, directives or requests, applying to a class of financial institutions including the Lender, under any federal or state laws or regulations by any court or regulatory authority charged with the interpretation or administration thereof. "Release Agreement" shall mean the Release Agreement, in the form of Exhibit E, between the Borrowers and the Lender. "Research Industries" means Research Industries Incorporated, a Delaware corporation. "Revolving Loans" means the loans to be made by the Lender to the Borrowers pursuant to Section Section 2.1 of this Agreement. "Revolving Note" means a promissory note in the principal amount equal to the Maximum Amount, in substantially the form of Exhibit D attached to this Agreement, made by the Borrowers and payable to the order of the Lender, as amended, modified or supplemented from time to time. 10 11 "Siemens" means Siemens Atiengesellschaft, a corporation organized under the laws of the Federal Republic of Germany, and its Affiliates and Subsidiaries. "State" means the Commonwealth of Virginia. "Subordinated Debt" means (a) the Debt of the Company to Research Industries outstanding on the date hereof and subject to the terms of the Existing Subordination Agreement, and (b) any unsecured Debt of the Company incurred after the date hereof that has a maturity of not less than three years, is subordinated to the Obligations pursuant to a subordination agreement containing terms that are identical in all material respects to those contained in the Existing Subordination Agreement, and accruing interest at a rate acceptable to the Lender. "Subsidiary" as to any Person, means a corporation, partnership, limited partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Synthetic Lease" means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where the transaction is considered Debt for borrowed money for federal income tax purposes but is classified as an operating lease in accordance with GAAP for financial reporting purposes. "Tangible Net Worth" means, at any time, amounts that would be included under redeemable preferred stock and stockholders' equity on the consolidated balance sheet of the Company and its Subsidiaries, provided that, in any event, such amounts are to be net of amounts carried on the books of the Company and its Subsidiaries for (1) any write-up in the book value of any assets of the Company resulting from a revaluation subsequent to the date of this Agreement, (2) investments in non-marketable securities, (3) treasury stock, (4) unamortized debt discount expense, (5) any cost of investments in excess of net assets acquired at any time of acquisition, (6) loans, advances or other amounts owed to the Company or any of its Subsidiaries by any of its officers, directors, shareholders, employees or Affiliates, except for travel advances made in the ordinary course of business, (7) leasehold improvements, (8) prepaid expenses, and (9) patents, patent applications, copyrights, trademarks, trade names, goodwill, research and development costs, organizational expenses, capitalized software costs and other like intangibles. "Technology" means Halifax Technology Services Company, a Virginia corporation, which has been merged into the Company. "Term Loan One" means the loan to be made by the Lender to the Borrowers pursuant to Section Section 2.2 of this Agreement. 11 12 "Term Loan Two" means the loan to be made by the Lender to the Borrowers pursuant to Section Section 2.3 of this Agreement. "Term Note One" means the $2,500,000 promissory note, in substantially the form of Exhibit F attached to this Agreement, evidencing the joint and several obligations of the Borrowers to repay Term Loan One, together with interest thereon, and all extensions, renewals, modifications and amendments of such note. "Term Note Two" means the $1,000,000 promissory note, in substantially the form of Exhibit G attached to this Agreement, evidencing the joint and several obligations of the Borrowers to repay Term Loan Two, together with interest thereon, and all extensions, renewals, modifications and amendments of such note. "Termination Date" means September 8, 2000. "Tier Two Contribution" means, at any time 80% of Eligible Bonded Receivables in excess of $1,500,000 outstanding, provided that the Tier Two Contribution shall not exceed $2,000,000 at any time. "UCC" means the Uniform Commercial Code as adopted in the State, and all amendments thereto. "VDOT Contract" means Contract Number 844 between Technology and the Virginia Department of Transportation. SECTION 2. LOANS AND LETTERS OF CREDIT. SECTION 2.1. REVOLVING LOANS AND LETTERS OF CREDIT. (a) Subject to the terms and conditions of this Agreement, the Lender agrees to make Revolving Loans to the Borrowers from time to time until the Termination Date in an aggregate principal amount not to exceed at any one time outstanding the Maximum Amount. Up to the Maximum Amount, the Borrowers may borrow, repay without penalty and reborrow hereunder from the date of this Agreement until the Termination Date; provided, however, that no Revolving Loan will be disbursed by the Lender if, after such disbursement the aggregate principal amount of the Revolving Loans and outstanding Letters of Credit would exceed the Borrowing Base. (b) The proceeds of the Revolving Loans shall be used to refinance Debt outstanding under the Existing Agreement and for short-term working capital purposes. (c) The Company authorizes the Lender to make Revolving Loans from time to time in amounts sufficient to pay checks drawn on the operating accounts of the Company with the Lender, subject to the limitation set forth in Section Section 2.1((a)) above, all as more 12 13 particularly described in the Cash Management Agreement. In addition, the Company may request that a Revolving Loan be made. Any request for a Revolving Loan must be received by the Lender no later than 12:00 noon (Washington, D.C. time) on the date on which the Revolving Loan is to be made. Each request must specify the amount of the Revolving Loan and, at the option of the Lender, shall be accompanied by a current Borrowing Base Certificate and a current Aging. The Lender, in its sole discretion, may accept requests from the Company by telephone. If required by the Lender, any request made by telephone shall include all of the information required by a current Borrowing Base Certificate and a current Aging. Requests made by telephone shall be confirmed in writing and delivered to the Lender, and if requested by the Lender, accompanied by the current Borrowing Base Certificate and the current Aging, within two Business Days after the date of the request. Each Borrower appoints the Company as its agent to request and receive the proceeds of the Revolving Loans on behalf of all Borrowers. The Company agrees to distribute the proceeds of the Revolving Loans among the Borrowers when and as needed by the Borrowers for working capital. Revolving Loans may be requested by those individuals designated by the Company from time to time in written instruments delivered to the Lender; provided, however, that the Borrowers shall remain liable with respect to any Revolving Loan disbursed by the Lender in good faith hereunder, even if such Loan is requested by an individual who has not been so designated. The proceeds of each Revolving Loan will be credited to a Deposit Account maintained with the Lender by the Company pursuant to the Cash Management Agreement. The Company agrees to confirm in writing from time to time, when and as requested by the Lender, the purpose for which the proceeds of each Revolving Loan were used. (d) The unpaid principal balance of the Revolving Loans shall bear interest at a rate per annum equal to LIBOR plus 4.25%. The interest rate on the Revolving Loans shall be determined initially based on LIBOR in effect on the Closing Date and shall be adjusted on the first Business Day of each succeeding calendar month (to be effective as of the first day of such calendar month if not a Business Day) to reflect LIBOR then in effect. Payments of interest on each Revolving Loan shall be made on each Interest Payment Date, beginning on the Interest Payment Date next succeeding the date of disbursement of such Revolving Loan. (e) The joint and several obligations of the Borrowers to repay the Revolving Loans, together with interest thereon, shall be evidenced by the Revolving Note. The unpaid principal balance of the Revolving Note shall be payable on the Termination Date. (f) Subject to the terms and conditions of this Agreement, the Lender, in its sole and absolute discretion, may issue Letters of Credit for the account of the Borrowers from time to time until the Termination Date, upon the request of the Company; provided, however, that no Letter of Credit will be issued by the Lender if, after such issuance, the aggregate principal amount of the outstanding Revolving Loans and Letters of Credit would exceed the Borrowing Base. Prior to the issuance of any Letter of Credit, the Lender must receive an appropriately completed Letter of Credit Agreement, executed by the Borrowers, not less than five Business Days prior to the date on which the Letter of Credit is to be issued. Each such request shall 13 14 specify the name of the beneficiary of the Letter of Credit, the amount and expiration date of the Letter of Credit and the purpose for which the Letter of Credit is being issued. Unless otherwise approved by the Lender in its sole discretion, no Letter of Credit shall have a stated maturity of more than one year after the date of its issuance, and in no event shall a Letter of Credit expire later than the Termination Date. The purpose for which each Letter of Credit is to be issued and the form of each Letter of Credit shall be subject to the Lender's approval. The Borrowers shall pay to the Lender upon its demand therefor any amounts paid by the Lender under a Letter of Credit, together with interest on such amounts from the date of demand at the applicable per annum rate specified by the Lender in the applicable Letter of Credit Agreement. The Borrowers shall pay such fees and commissions as the Lender shall require with respect to any Letter of Credit. Any outstanding letter of credit issued prior to the date hereof for the account of any Borrower or Technology shall be deemed to be an outstanding Letter of Credit under this Agreement. Notwithstanding anything to the contrary contained in the foregoing sentence, the issuance of any letter of credit deemed to be an outstanding Letter of Credit hereunder, which letter of credit is separately secured by cash collateral acceptable to the Lender in its sole discretion, shall not cause a reduction in the Borrowing Base by the face amount of such letter of credit. SECTION 2.2. TERM LOAN ONE. (a) Subject to the terms and conditions of this Agreement, the Lender agrees to make Term Loan One to the Borrowers in a principal amount equal to $2,500,000. The proceeds of Term Loan One shall be used to refinance Debt of the Borrowers to the Lender under the Existing Agreement. (b) The unpaid principal balance of Term Loan One from time to time outstanding shall bear interest at a per annum rate equal to LIBOR plus 4.65%. The interest rate on Term Loan One shall be determined initially based on LIBOR in effect on the Closing Date and shall be adjusted on the first Business Day of each succeeding calendar month (to become effective as of the first day of such calendar month if not a Business Day) to reflect LIBOR then in effect. Payments of interest on Term Loan One shall be made on each Interest Payment Date, beginning on the Interest Payment Date next succeeding the Closing Date. (c) The joint and several obligations of the Borrowers to repay Term Loan One, together with interest thereon, shall be evidenced by Term Note One. The principal of Term Loan One and Term Loan Two shall be payable in consecutive quarterly installments of $125,000 due on December 15, 1999, $500,000 due on March 15, 2000, and $500,000 due on June 15, 2000, with such installments being applied first to Term Loan Two and then to Term Loan One. On the Termination Date, the unpaid principal balance of Term Loan One and all accrued and unpaid interest thereon shall be due and payable. The Borrowers shall have the right to prepay Term Note One in whole or in part at any time after Term Note Two has been paid in full. Partial prepayments of Term Note One shall be applied to installments due thereunder in the inverse 14 15 order of their maturities. Amounts prepaid with respect to Term Loan One may not be reborrowed. SECTION 2.3. TERM LOAN TWO. (a) Subject to the terms and conditions of this Agreement, the Lender agrees to make Term Loan Two to the Borrowers in a principal amount equal to $1,000,000. The proceeds of Term Loan Two shall be used to refinance Debt of the Borrowers to the Lender under the Existing Agreement. (b) The unpaid principal balance of Term Loan Two from time to time outstanding shall bear interest at a per annum rate equal to LIBOR plus 5.55%. The interest rate on Term Loan Two shall be determined initially based on LIBOR in effect on the Closing Date and shall be adjusted on the first Business Day of each succeeding calendar month (to become effective as of the first day of such calendar month if not a Business Day) to reflect LIBOR then in effect. Payments of interest on Term Loan Two shall be made on each Interest Payment Date, beginning on the Interest Payment Date next succeeding the Closing Date. (c) The joint and several obligations of the Borrowers to repay Term Loan Two, together with interest thereon, shall be evidenced by Term Note Two. The principal of Term Loan Two shall be payable on the respective dates and in the respective amounts set forth in Section Section 2.2((c)) of this Agreement. If not sooner paid, the entire unpaid principal balance of Term Loan Two and all accrued and unpaid interest thereon shall be due and payable in full on the Termination Date. The Borrowers shall have the right to prepay Term Note Two in whole or in part at any time. Partial prepayments of Term Note Two shall be applied to installments due thereunder in the inverse order of their maturities. Amounts prepaid with respect to Term Loan Two may not be reborrowed. SECTION 2.4. PAYMENTS AND COMPUTATIONS. All payments due under this Agreement (including any payment or prepayment of principal, interest, fees and other charges) or with respect to the Notes, the Letter of Credit Agreements or the Loans shall be made in lawful money of the United States of America, in immediately available funds, without defense, setoff or counterclaim, to the Lender at its office at Commercial Loan Services, P.O. Box 26202, Richmond, Virginia 23260-6202, or at such other place as the Lender may designate, and shall be applied first to accrued fees, next to accrued late charges, next to accrued interest and then to principal. If any payment of principal, interest or fees is due on a day other than a Business Day, then the due date will be extended to the next succeeding full Business Day and interest and fees will be payable with respect to the extension. If any payment of principal, interest or fees is not made within ten days of its due date, the Borrowers agree to pay to the Lender a late charge equal to 5% of the amount of the payment; provided, however, that as long as a Borrower makes payments of principal, interest and fees through the Lender's automatic debit service, no late charge shall be payable if the Lender fails to debit any such payment when it is due (if sufficient collected funds are on deposit in such Borrower's account with the Lender), and such failure shall 15 16 not constitute an Event of Default hereunder. Upon the occurrence of an Event of Default and during the continuation of such Event of Default, interest shall accrue on the Loans at a per annum rate of 2% above the rate of interest that otherwise would be applicable. Interest and fees shall be computed on the basis of a year of 360 days and actual days elapsed. The Lender may, but shall not be obligated to, debit the amount of any payment due from the Borrowers under this Agreement to any deposit or investment account of any Borrower maintained with the Lender or any Affiliate of the Lender. No setoff, claim, counterclaim, reduction or diminution of any obligation of any defense of any kind or nature that a Borrower has or may have against the Lender (other than the defense of payment) shall be available against the Lender in any suit or action brought by the Lender to enforce this Agreement or any other Loan Document, including, without limitation, any UCC Claim (as such term is defined in the Release Agreement). The foregoing shall not be construed as a waiver by the Borrowers of any rights or claims that the Borrowers may have against the Lender, but any recovery upon such rights and claims shall be had from the Lender separately, it being the intent of this Agreement and the other Loan Documents that the Borrowers shall be obligated to pay, absolutely and unconditionally, all amounts due hereunder and under the other Loan Documents. SECTION 2.5. INCREASED COSTS. If, as a result of any Regulatory Change or for any other reason, the Lender incurs Increased Costs, the Borrowers agree to pay such Increased Costs to the Lender within ten Business Days after receipt by the Company of the Lender's invoice therefor. The invoice will be accompanied by a written statement of the Lender setting forth in reasonable detail the basis and the calculation of the Increased Costs. The Lender's calculation shall include reasonable averaging and attribution methods to determine the Increased Costs attributable to the Loans and the Letters of Credit. SECTION 2.6. FEES. (a) In consideration of the expenses incurred by the Lender in connection with administering the Loans and monitoring the Borrowing Base, the Borrowers agree to pay to the Lender a commitment fee on the daily average balance of the amount by which the Maximum Amount exceeds the amount of outstanding Revolving Loans and Letters of Credit. The commitment fee shall be payable for the period beginning on the date of this Agreement and ending on the Termination Date at a .35% per annum rate. The commitment fee shall be payable quarterly, in arrears, on the last day of each March, June, September and December, beginning on September 30, 1999, and on the Termination Date. (b) On the Closing Date, the Borrowers shall pay to the Lender a structuring and underwriting fee equal to $46,500. (c) Unless the Borrowers have exercised their termination rights pursuant to Section Section 2.9 below, and made the payments required thereby, the Borrower shall pay to the Lender, on the dates set forth below, the applicable fee set forth below, applied to the sum of 16 17 the Maximum Amount then in effect plus the unpaid principal balances of Term Loan One and Term Loan Two then outstanding:
DATE FEE ---- --- November 30, 1999 .35% February 28, 2000 .40% May 30, 2000 .45%
SECTION 2.7. PRIMARY DEPOSITORY RELATIONSHIP. If the Company fails to maintain its Primary Operating Account with the Lender, interest shall accrue on the Loans at a per annum rate of 1.0% above the rate of interest that otherwise would be applicable, effective as of the first day following the day on which the Company moves its Primary Operating Account. SECTION 2.8. MANDATORY PREPAYMENT. (a) The Borrowers shall first prepay the Revolving Loans and then provide cover for the Letters of Credit, as specified below, upon the Lender's demand therefor, to the extent that the aggregate amount of outstanding Revolving Loans and Letters of Credit exceeds the Borrowing Base or the Maximum Amount, or both, at any time. In the event that the Borrowers shall be required to provide cover for the Letters of Credit, the Borrowers shall effect the same by paying to the Lender immediately available funds in an amount equal to the required amount, which funds shall be retained by the Lender in a cash collateral account until such time as the Letters of Credit shall have been terminated and all Obligations with respect to the Letter of Credit are paid in full. (b) The Borrowers shall deliver to the Lender 90% of any Recoveries arising out of the sale of the ___ acre ranch located at __________________, the condominium located at __________________, Florida, or the 199___ Chevrolet Tahoe immediately upon receipt by the Borrowers. The Lender shall apply the proceeds of such Recoveries to the prepayment of Term Loan Two, then to Term Loan One and then to the Revolving Loans. (c) Upon the first to occur of November 30, 1999, or the receipt of the Recoveries arising out of the Company's income tax refund attributable to the Embezzlement, the Borrowers shall make a principal prepayment of the Obligations in an amount equal to 90% of such Recoveries, with such amount being applied first to Term Loan Two and then to Term Loan One. If neither such Recoveries have been received nor the HTSI Sale has been consummated by such date, the value of such Recoveries for purposes of such calculation on such date shall be deemed to be $600,000. 17 18 (d) Upon the first to occur of November 30, 1999, or the receipt of the Recoveries arising out of the sale of certain jewelry, the Borrowers shall make a prepayment of the Obligations in an amount equal to 90% of the net sales proceeds of such Recoveries, with such amount being applied first to Term Loan Two, then to Term Loan One and then to the Revolving Loans. If neither such Recoveries have been received nor the HTSI Sale has been consummated by such date, the value of such Recoveries for purposes of such calculation on such date shall be deemed to be $200,000. (e) Upon the closing of the HTSI Sale, (1) the Borrowers shall make a $2,000,000 principal prepayment of Term Loan Two and Term Loan One (with such amount being applied first to Term Loan Two and then to Term Loan One), (2) the Maximum Amount shall be permanently reduced to $10,000,000, (3) the references to "90%" in Sections Section 2.8((b)), Section 2.8((c)), Section 2.8((d)) and Section 2.8((f)) hereof shall be reduced to and otherwise deemed to be references to "50%" for purposes of such Sections, (4) the words "the first to occur of November 30, 1999, or" in the first line of Section Section 2.8((c)) and Section Section 2.8((d)) hereof shall be deemed to be deleted for purposes of such Sections, and (5) the references to "$500,000" in Section Section 2.2((c)) hereof shall be reduced to and otherwise deemed to be references to "$125,000" for purposes of such Section. (f) The Borrowers shall prepay Term Loan One and Term Loan Two in an amount equal to 90% of the net proceeds received with respect to any Recoveries of $150,000 or more, other than those Recoveries otherwise described in this Section Section 2.8, with each such prepayment being made upon receipt of the applicable Recoveries. SECTION 2.9. OPTIONAL TERMINATION DATE. The Borrowers may terminate the Lender's obligations to make Revolving Loans and issue Letters of Credit under this Agreement provided that (a) the Company gives the Lender not less than one Business Day's prior written notice of such termination, specifying the Optional Termination Date, (b) the Borrowers pay in full, on the Optional Termination Date, all Obligations, and (c) the Borrowers, on the Optional Termination Date, provide cover for the Letters of Credit pursuant to Section Section 2.8(a). SECTION 3. COVENANTS, REPRESENTATIONS AND OTHER TERMS REGARDING COLLATERAL. SECTION 3.1. SECURITY INTEREST. To secure the Obligations, each Borrower ratifies and affirms the grant in the Existing Agreement, and again grants hereby, to the Lender, its successors and assigns, a first priority security interest in the Accounts Receivable, the Deposit Accounts, the Equipment, the General Intangibles, the Intellectual Property, the Inventory and the Investment Property, all additions and accessions thereto and replacements thereof, all proceeds and products thereof, all books of account and records, including all computer software relating thereto, all policies of insurance on any property of a Borrower and all proceeds of such policies. 18 19 SECTION 3.2. RECEIVABLES. (a) Each Borrower represents and warrants as to each and every Eligible Receivable now existing that: (1) it is a bona fide existing obligation, valid and enforceable against the Customer, for software installed or licensed, goods sold or leased or services rendered in the ordinary course of business; (2) it is subject to no dispute, defense or offset in excess of $75,000 except as disclosed in writing to the Lender; (3) all instruments, chattel paper and other evidence of indebtedness issued to a Borrower with respect to any Eligible Receivable have been delivered to the Lender, and, together with all supporting documents delivered to the Lender, are genuine, complete, valid and enforceable in accordance with their terms; (4) it is not subject to any discount, allowance or special terms of payment except as disclosed in writing to the Lender; and (5) it is not and shall not be subject to any prohibition or limitation upon assignment. Each Borrower covenants and agrees that each Eligible Receivable arising after the date of this Agreement will be in conformance with the foregoing representations. (b) Each Borrower shall immediately notify the Lender of (1) any dispute in excess of $75,000 with a Customer and (2) the bankruptcy, insolvency, receivership, assignment for the benefit of creditors or suspension of business of any Customer of which such Borrower has knowledge. No Borrower shall compromise or discount any Receivable of more than $10,000 without the prior written consent of the Lender except for (i) ordinary trade discounts or allowances for prompt payment, and (ii) prior to the occurrence of a Default or an Event of Default, such compromises or discounts that, after giving effect thereto, will not cause the Borrowing Base to be less than the unpaid principal balance of the Revolving Loans and Letters of Credit then outstanding. (c) Upon the written request of the Lender, each Borrower shall establish and maintain a lockbox with the Lender and shall direct all Customers to make payments on Receivables to such lockbox by printing such direction on all invoices given to Customers. Each Borrower also shall remit to such lockbox or deliver to the Lender all payments on Receivables received by such Borrower. Such payments shall be remitted or delivered in their original form on the day of receipt. All notes, checks and other instruments so received by each Borrower shall be duly endorsed to the order of the Lender. The payments remitted to the lockbox and all payments delivered to the Lender shall be credited to a cash collateral account maintained by the Lender in the name of the Company over which the Lender shall have the exclusive power of withdrawal. All funds in the cash collateral account shall be retained in the cash collateral account and be held as security for the Obligations, and funds in the cash collateral account may be applied to the Obligations by the Lender from time to time, whether or not such Obligations are then due. (d) Upon the occurrence of a Default or an Event of Default, the Lender shall have the right to notify account debtors of its security interest in the Receivables and require payments to be made directly to the Lender, and to facilitate direct collection of the Receivables, the Lender shall have the right to take over the post office boxes of the Borrowers or make other arrangements, with which the Borrowers shall cooperate, to receive the mail of each Borrower, 19 20 provided that the Lender shall not be entitled to receive any mail that does not concern the Receivables. (e) The Borrowers shall execute all other agreements, instruments and documents and shall perform all further acts that the Lender may require with respect to Receivables owing by the Government to ensure compliance with the Assignment of Claims Act. SECTION 3.3. INVENTORY AND EQUIPMENT. (a) All of the Inventory and Equipment will be kept only at the places of business listed on Schedule 3.3 to this Agreement. The Borrowers shall give the Lender prior written notice before any Inventory or Equipment is moved or delivered to a location other than such designated places of business, and the Lender's lien and security interest will be maintained despite the location of the Inventory or Equipment. Without the prior written consent of the Lender, no Borrower shall move or deliver the Inventory or Equipment with a book value in any instance or in the aggregate of $100,000 or more to a location outside of the United States of America. (b) Each Borrower shall keep and maintain the Equipment in good operating condition and repair, reasonable wear and tear excepted. No Borrower shall permit any of the Equipment to become a fixture to any real estate unless subordination agreements satisfactory to the Lender are obtained by any owner or mortgagee of such real estate. Each Borrower, immediately on demand therefore by the Lender, shall deliver to the Lender any and all evidence of ownership of any of the Equipment. None of the Equipment shall be sold, transferred, leased or otherwise disposed of without the prior written consent of the Lender, except for (1) sales or dispositions of obsolete or unnecessary Equipment, and (2) sales or dispositions of any item of Equipment that is replaced contemporaneously with Equipment of comparable value and utility. (c) The Lender's security interest shall extend and attach to Inventory that is presently in existence and is owned by each Borrower or in which a Borrower purchases or acquires an interest at any time and from time to time in the future, whether such Inventory is in transit or in such Borrower's constructive, actual or exclusive occupancy or possession or not and wherever the same may be located, including, without limitation, all Inventory that may be located at the premises of a Borrower or upon the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents, finishers, convertors or other third parties who may have possession of the Inventory. (d) Upon the sale, exchange, lease or disposition of the Inventory, the security interest of the Lender, without break in continuity and without further formality or act, shall continue in and attach to all cash and non-cash proceeds of such sale, exchange, lease or disposition, including Inventory returned or rejected by Customers or repossessed by either a Borrower or the Lender. As to any such sale, exchange, lease or disposition, the Lender shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, detinue and reclamation. 20 21 (e) Except for licenses, sales or leases made in the ordinary course of business and Liens permitted by this Agreement, no Borrower shall sell, lease, encumber, license or dispose of, or permit the sale, lease, encumbrance or disposal of, any Inventory without the prior written consent of the Lender. (f) Each Borrower shall have the Equipment and Inventory insured against loss or damage by fire, theft, burglary, pilferage, loss in transportation and such other hazards as the Lender shall specify, by insurers satisfactory to the Lender, in amounts satisfactory to the Lender and under policies containing loss payable clauses satisfactory to the Lender. Any such insurance policies, or evidence thereof satisfactory to the Lender, shall be deposited with the Lender. Each Borrower agrees that the Lender shall have a security interest in such policies and the proceeds thereof, and, if any loss should occur, the proceeds may be applied to the payment of the Obligations or to the replacement or restoration of the Inventory or Equipment damaged or destroyed, as the Lender may elect or direct. After the occurrence of a Default or an Event of Default, the Lender shall have the right to file claims under any insurance policies, to receive, receipt and given acquittance for any payments that may be made thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect to the collection, compromise, or settlement of any claims under any of the insurance policies. SECTION 3.4. INTELLECTUAL PROPERTY. (a) All of each Borrower's present and future Intellectual Property that is subject to United States copyright, patent or trademark protection, the sale, licensing or other disposition of which results in the creation of Receivables pursuant to a Material IP Agreement, shall be registered with the United States Copyright Office or the United States Patent and Trademark Office, as applicable, prior to the date such Borrower includes any such Receivables in the Borrowing Base. (b) Upon the occurrence of an Event of Default, in addition to any other remedies available to the Lender, each Borrower agrees that the Lender shall have a non-exclusive, royalty-free license to use, or to grant a license to use, the Intellectual Property. SECTION 3.5. DEFENSE OF COLLATERAL. Each Borrower, at its expense, will defend the Collateral against any claims or demands adverse to the Lender's security interest and will promptly pay when due all taxes or assessments levied against such Borrower on the Collateral. SECTION 3.6. INFORMATION REGARDING COLLATERAL. Each Borrower shall provide the Lender such information as the Lender from time to time reasonably may request with respect to the Collateral, including, without limitation, statements describing, designating, identifying and evaluating all Collateral. SECTION 3.7. PERFECTION OF SECURITY INTEREST. Each Borrower shall perform any and all steps in all relevant or appropriate jurisdictions as may be necessary or reasonably requested by 21 22 the Lender to perfect, maintain and protect the Lender's security interest in the Collateral. All instruments and chattel paper that are part of the Collateral shall be delivered to the Lender, duly endorsed to the order of the Lender. Each Borrower shall pay the taxes and costs of, or incidental to, any recording or filing of any financing statements concerning the Lender's security interests. Each Borrower agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. SECTION 3.8. POWER OF ATTORNEY. Each Borrower appoints the Lender and any officer, employee or agent of the Lender, as the Lender from time to time may designate, as attorneys-in-fact for a Borrower to perform all actions necessary or desirable in the discretion of the Lender to effect the provisions of this Agreement and to carry out the intent of this Agreement, to do any act that a Borrower is required to do pursuant to the terms of this Agreement and to exercise such rights and powers as each Borrower might exercise with respect to the Collateral, all at the cost and expense of the Borrowers. Each Borrower agrees that neither the Lender nor any other such attorney-in-fact will be liable for any acts of omission or commission, unless such acts were willful and malicious or grossly negligent, nor for any error of judgment or mistake of law or fact. This power is coupled with an interest and is irrevocable so long as any Obligations are outstanding. The Lender agrees that it shall not be entitled to exercise its rights under this Section Section 3.8 prior to the occurrence of a Default or an Event of Default. SECTION 3.9. LIMITATIONS ON OBLIGATIONS. It is expressly agreed by each Borrower that, notwithstanding any other provision of this Agreement, each Borrower shall remain liable under each Receivable and contract giving rise to each Receivable to observe and perform all the conditions and obligations to be observed and performed by each Borrower in accordance with and pursuant to the terms and provisions of each such Receivable and contract. The Lender shall not have any obligation or liability under any Receivable or contract by reason of or arising out of this Agreement or the assignment of such Receivable or contract to the Lender or the receipt by the Lender of any payment relating to the Receivable pursuant to this Agreement, nor shall the Lender be required or obligated in any manner to perform or fulfill any of the obligations of a Borrower under or pursuant to any Receivable or contract, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party under any Receivable, or to present or file any claim, or to take any action to collect or enforce any performance or the payment of any amounts that may have been assigned to it or to which it may be entitled at any time or times. SECTION 3.10. INDEMNIFICATION. In any suit, proceeding or action brought by or against the Lender relating to the Collateral, the Borrowers will save, indemnify and keep the Lender harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever of any obligor thereunder, arising out of a breach by a Borrower of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such obligor or its successors from a Borrower, and all such obligations of the Borrowers shall be and remain enforceable against and only against the Borrowers and shall not be enforceable against the Lender. The foregoing 22 23 obligation of the Borrowers to indemnify the Lender shall not extend to any suit, proceeding or action arising out of the Lender's gross negligence or willful or malicious misconduct. SECTION 4. REPRESENTATIONS AND WARRANTIES. Each Borrower represents and warrants that: SECTION 4.1. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. Each Borrower (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation; (b) has the power and authority to own its assets and to transact the business in which it is now engaged or in which it is proposed to be engaged; and (c) is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required. On _________________, 1999, Technology was merged into the Company. As of the date of this Agreement, the Company has no Subsidiaries other than Engineering, Technical and Realty, and no other Borrower has any Subsidiary. SECTION 4.2. POWER AND AUTHORITY. The execution, delivery and performance by the Borrowers of the Loan Documents have been duly authorized by all necessary corporate actions and do not and will not (a) require any consent or approval of, or filing or registration with, any governmental agency or authority or the stockholders of a Borrower; (b) contravene a Borrower's articles of incorporation or bylaws; (c) result in a breach of or constitute a default under any agreement or instrument to which a Borrower is a party or by which it or its properties may be bound or affected; (d) result in or require the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by a Borrower; or (e) cause a Borrower to be in default under any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award applicable to the Borrower. SECTION 4.3. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, legal, valid and binding obligations of each Borrower, enforceable against each Borrower in accordance with their respective terms. SECTION 4.4. FINANCIAL STATEMENTS. The financial statements of the Borrowers that have been furnished to the Lender in connection with this Agreement are complete and correct and fairly present the financial condition of the Borrowers as of the dates of such statements. Since the dates of such statements, there has been no Material Adverse Change in the condition (financial or otherwise), business or operations of the Borrowers. SECTION 4.5. LITIGATION. There is no pending or threatened action, investigation or proceeding against or affecting a Borrower before any court, governmental agency or arbitrator, that, in any one case or in the aggregate, if adversely determined, would have a Material Adverse Effect on the financial condition, operations, properties or business of a Borrower. 23 24 SECTION 4.6. OWNERSHIP AND LIENS. Each Borrower has title to all of its assets, including the Collateral, and none of the Collateral or such assets is subject to any Lien, except Liens permitted by this Agreement. SECTION 4.7. ERISA. No Borrower has incurred any material "accumulated funding deficiency" within the meaning of Section 302 of ERISA or Section 412 of the Code, nor has the Borrower incurred any material liability to the PBGC in connection with any "employee pension benefit plan" (as defined in Section 3(2) of ERISA) established or maintained by a Borrower. None of the employee pension benefit plans (as defined above) of a Borrower, nor any trusts created thereunder, nor any trustee or administrator thereof, has engaged in a "prohibited transaction," as such term is defined in Section 406 of ERISA or Section 4975 of the Code, that could subject such plans or any of them, any such trust, or any trustee or administrator thereof, or any party dealing with such plans or any such trust to any material liability or tax or penalty on prohibited transactions imposed by such Sections 406 or 4975. Neither the Borrowers nor any Affiliate of the Borrowers are now, or at any time in the past have been, obligated to make contributions to a "multiemployer plan," as such term is defined in Section 4001(a)(3) of ERISA. SECTION 4.8. TAXES. Each Borrower has filed all tax returns (federal, state and local) required to be filed and has paid all taxes, assessments and governmental charges and levies thereon to be due, including interest and penalties. SECTION 4.9. DEBT. No Borrower is in no manner directly or contingently obligated with respect to any Debt that is not permitted by this Agreement. No Borrower is in default with respect to any Debt. SECTION 4.10. CORPORATE NAME; CHIEF EXECUTIVE OFFICE. During the five years immediately preceding the date of this Agreement, no Borrower nor any predecessor of a Borrower has used any name other than its current corporate name and the names listed on Schedule 4.10. The chief executive office of each Borrower, within the meaning of Section 9.103(3)(d) of the UCC, is at 5250 Cherokee Avenue, Alexandria, Virginia. SECTION 4.11. DEBARMENT AND SUSPENSION. No event has occurred and no condition exists that may result in the debarment or suspension of a Borrower from any contracting with the Government, and no Borrower nor any Affiliate of a Borrower has been subject to any such debarment or suspension prior to the date of this Agreement. SECTION 4.12. YEAR 2000. Each Borrower has undertaken reasonable efforts to determine whether all material Date Affected Information Technology used in the business operations of each Borrower is Fully Date Capable, and, to the extent necessary, each Borrower has initiated efforts to make its material Date Affected Information Technology Fully Date Capable prior to the date that the failure to be Fully Date Capable would adversely affect the operation thereof. 24 25 SECTION 4.13. MATERIAL CONTRACTS. Attached hereto as Schedule 4.13 is a correct and complete list, as of the date of this Agreement, of each Material Contract. No Borrower, Subsidiary or any other party thereto is in material default under any Material Contract. SECTION 4.14. INTELLECTUAL PROPERTY. As of the date hereof, the Borrowers and the Subsidiaries do not own or hold any Intellectual Property subject or entitled to United States copyright, patent or trademark protection, other than as listed on Schedule 4.14 attached hereto. All such Intellectual Property has been registered with the United States Patent and Trademark Office and the Register of Copyrights. Each Borrower and each Subsidiary owns or has the right to use under valid license agreements or otherwise all Intellectual Property that is required or necessary for the conduct of the business of each Borrower and its Subsidiaries as now conducted or proposed to be conducted without any conflict with any rights of any other Person. SECTION 4.15. TRUE AND COMPLETE INFORMATION. All factual and financial information (taken as a whole) previously furnished to the Lender in connection with this Agreement by the Borrowers and each Subsidiary is, and all factual and financial information (taken as a whole) furnished to the Lender by the Borrowers and the Subsidiaries after the date of this Agreement will be, true and accurate in all material respects on the date on which such information is dated, certified or furnished, and is not, and will not be, incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. SECTION 4.16. INTEGRATED BUSINESS. The Borrowers and the Subsidiaries will be engaged as an integrated group in providing services and goods to their respective Customers. The integrated operation will require financing on such a basis that credit supplied to the Borrowers be made available from time to time to all Borrowers and Subsidiaries of the Borrowers, as required for the successful operation of the Borrowers and the Subsidiaries separately, and the integrated operation as a whole. In that connection, the Borrowers and the Subsidiaries will request that the Lender provide the Loans to and issue the Letters of Credit for the Borrowers to finance such operation. Each Borrower will derive benefit, directly and indirectly, from the credit so extended to the Borrowers, both in its separate capacity and as a member of the integrated group. SECTION 4.17. EMPLOYEE RELATIONS. Except as set forth on Schedule 4.17, no Borrower is a party to any collective bargaining agreement nor has any labor union been recognized as the representative of its employees. No Borrower knows of any pending, threatened or contemplated strikes, work stoppage or other collective labor disputes involving its employees. SECTION 4.18. BURDENSOME PROVISIONS. No Borrower is a party to any indenture, agreement, lease or other instrument, or subject to any corporate or partnership restriction, governmental approval or applicable law which is so unusual or burdensome as in the foreseeable future could be reasonably expected to have a Material Adverse Effect. The Borrowers do not 25 26 presently anticipate that future expenditures needed to meet the provisions of any statutes, orders, rules or regulations of a governmental authority will be so burdensome as to have a Material Adverse Effect. SECTION 4.19. ABSENCE OF DEFAULTS. No event has occurred and is continuing which constitutes a Default or an Event of Default. No event has occurred and is continuing which constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by any Borrower under any Material Contract or judgment, decree or order to which any Borrower is a party or by which any Borrower or any of its properties may be bound or which would require any Borrower to make any payment thereunder prior to the scheduled maturity date therefor. SECTION 4.20. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All statements contained in any certificate, financial statement or other instrument delivered by or on behalf of any Borrower to the Lender pursuant to or in connection with this Agreement or any of the other Loan Documents (including, but not limited to, any such statement made in or in connection with any amendment thereto or any statement contained in any certificate, financial statement or other instrument delivered by or on behalf of any Borrower prior to the date hereof and delivered to the Lender in connection with closing the transactions contemplated hereby) shall constitute representations and warranties made by the Borrowers under this Agreement. All representations and warranties made under this Agreement and the other Loan Documents shall be deemed to be made at and as of the date hereof, the Closing Date and at and as of the date of the disbursement of any Loan or issuance of any Letter of Credit, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date). All such representations and warranties shall survive the effectiveness of this Agreement, the execution and delivery of the Loan Documents, the making of the Loans and the issuance of the Letters of Credit. SECTION 5. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that: SECTION 5.1. MAINTENANCE OF EXISTENCE. Each Borrower will preserve and maintain its corporate existence and good standing in the jurisdiction of its formation, and qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is required. SECTION 5.2. MAINTENANCE OF RECORDS. Each Borrower will keep adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all financial transactions of such Borrower. The principal records and books of account, including those concerning the Collateral, shall be kept at the chief executive office of the Borrowers described above. No Borrower will move such records and books of account or change its chief executive office or the name under which it does business without (a) giving the Lender at least 30 days' prior written notice, and (b) executing and delivering financing statements satisfactory to the Lender prior to such move or change. 26 27 SECTION 5.3. MAINTENANCE OF PROPERTIES. Each Borrower will maintain, keep and preserve all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. SECTION 5.4. CONDUCT OF BUSINESS. Each Borrower will continue to engage in a business of the same general type as conducted by it on the date of this Agreement. SECTION 5.5. MAINTENANCE OF INSURANCE. Each Borrower will maintain insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated, including, without limitation, insurance covering the Inventory and Equipment as required hereby. SECTION 5.6. COMPLIANCE WITH LAWS. Each Borrower will comply in all respects with all applicable laws, rules, regulations and orders (including, without limitation, ERISA), such compliance to include, without limitation, paying, before the same become delinquent, all taxes, assessments and governmental charges imposed upon it or upon its property. SECTION 5.7. RIGHT OF INSPECTION. At any reasonable time and from time to time, with reasonable notice, each Borrower will permit the Lender or any agent or representative of the Lender to audit, examine and verify the Collateral, examine and make copies of and abstracts from the records and books of account of, and visit the properties of, each Borrower, and to discuss the affairs, finances and accounts of each Borrower with any of its officers and directors and each Borrower's independent accountants. The Borrowers agree to reimburse the Lender for all reasonable audit and Collateral verification and examination expenses incurred by it. SECTION 5.8. REPORTING REQUIREMENTS. The Borrowers will furnish to the Lender: (a) Monthly Financial Statements of the Company. As soon as available and in any event within 30 days after the end of each calendar month, financial statements of the Company and its Subsidiaries as of the end of such month in substantially the same format as Schedule 5.8(a) attached hereto, and prepared in accordance with the GAAP. Such financial statements shall be certified to be accurate by a Principal Officer of the Company (subject to year-end adjustments) and each of the statements for each fiscal quarter end shall be accompanied by a Covenant Compliance Certificate for such quarterly period; (b) Annual Financial Statements of the Company. As soon as available and, in any event, within 90 days after the end of each fiscal year of the Company, audited financial statements consisting of the consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of such fiscal year, and consolidated and consolidating statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year, all in reasonable detail and all prepared in accordance with GAAP, accompanied by an opinion thereon acceptable to the Lender of Ernst & Young or any other independent certified public accounting firm selected by the Company and acceptable to the Lender; 27 28 (c) Management Letters. Promptly upon receipt thereof, copies of any reports submitted to the Company by independent certified public accountants in connection with examination of the financial statements of the Company made by such accountants; (d) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, investigations and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting a Borrower, that, if determined adversely to such Borrower, could have a Material Adverse Effect; (e) Notice of Defaults and Events of Default. As soon as possible and, in any event, within ten days after the occurrence of each Default and Event of Default, a written notice setting forth the details of such Default or Event of Default and the action that is proposed to be taken by the Borrowers with respect thereto; (f) SEC Reports; Proxy Statements, etc. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that the Company files with the Securities and Exchange Commission or sends to its stockholders; (g) Borrowing Base Certificate and Receivables Detail. As soon as available and, in any event, within 20 days after the end of each calendar month, (1) a Borrowing Base Certificate appropriately completed and executed by a Principal Officer of the Company and including a computation of the Borrowing Base as of the last day of such calendar month, accompanied by (i) an Aging as of the last day of the previous calendar month, (ii) such other supporting documents as the Lender from time to time reasonably may request, and (iii) such invoices, instruments, chattel paper and other evidence of indebtedness representing any Receivables, duly endorsed to the Lender, as the Lender may request; (2) an unbilled Receivables report in form and detail acceptable to the Lender, and (3) a contract backlog report reflecting all contracts of the Borrowers, the work completed and billed under such contracts, the work remaining to be completed and billed and the type and term of each contract. A copy of each item described in this Section Section 5.8((g)) shall be delivered within the deadline specified to the Lender's Government Contracts Administration Division at 8245 Boone Boulevard, 3rd Floor, Vienna, Virginia 22182-3871, Attention: Timothy J. Duggan, Senior Vice President; (h) Inventory Report. Within 20 days after the end of each calendar month, a report, in form and detail acceptable to the Lender, listing all Inventory of the Borrowers on hand as of the last day of such calendar month, which reports shall specify the locations of all such Inventory and a reconciliation of such Inventory then on hand to the Inventory on hand as of the last day of the immediately preceding calendar month; (i) Customer List. If required by the Lender, within 90 days after the end of each fiscal quarter of the Company, a current Customer List; (j) Management Changes. At least 30 days prior written notice of any new appointments to the offices of the president, chairman or chief financial officer of any Borrower; 28 29 (k) Projections. At least 30 days prior to the end of each fiscal year, consolidated and consolidating balance sheets, income statements and cash flows of the Borrowers setting forth projections for each fiscal quarter of the next succeeding fiscal year, and setting forth in reasonable detail the assumptions underlying such projections; (l) Notice of Material Adverse Effect. Prompt notice of any change in the business, assets, liabilities, financial condition, results of operations or business prospects of the Company or any Subsidiary which has had or may have a Material Adverse Effect; (m) Government Contract Audits. Promptly after a Borrower's receipt thereof, notice of any final decision of a contracting officer disallowing costs aggregating more than $100,000; (n) Material Contracts. Promptly after entering into any Material Contract or amendment thereof (other than contracts awarded to a Borrower in the ordinary course of business and amendments thereof), a notice containing a description of such Material Contract or amendment (with copies thereof if requested by the Lender), and prompt written notice of the termination or breach by any Person of a Material Contract; (o) Additional Monthly Reports. Within 20 days after the end of each calendar month (1) a listing and aging of accounts payable at the end of such calendar month and (2) a written summary, in form and detail acceptable to the Lender, of variances between the budgeted and actual results of operations of the Borrowers, material balance sheet adjustments and material adjustments of actual and projected cash flow needs of the Borrowers; (p) Updated Cash Flow Forecast. On the first and the sixteenth day of each calendar month, a written forecast, in form and detail acceptable to the Lender, of projected cash flow of the Borrowers for the next succeeding three-month period, including comparisons of actual cash flow to prior projections delivered to the Lender; and (q) General Information. Such other information respecting the condition or operations, financial or otherwise, of the Borrowers as the Lender from time to time reasonably may request. SECTION 5.9. YEAR 2000 COMPLIANCE. The Borrowers shall initiate and maintain a program to identify any Date Affected Information Technology used in the business operations of the Borrowers that is not Fully Date Capable, and, in connection therewith, undertake in good faith to make all material Date Affected Information Technology used in such business operations Fully Date Capable prior to the date that the failure to be Fully Date Capable would adversely affect the operation thereof. The Borrowers shall advise the Lender in the event that any Borrower has reason to believe that any material Date Affected Information Technology will not be Fully Date Capable prior to the date that the failure to be Fully Date Capable would adversely affect the operation thereof, and advise the Lender in the event that any Borrower has reason to believe that it will be adversely affected by the failure of any affiliated or nonaffiliated entity to 29 30 have its Date Affected Information Technology Fully Date Capable. Each Borrower agrees to provide the Lender, upon request, access to and copies of information necessary to permit the Lender to determine whether such Borrower's Date Affected Information Technology is, or will be, Fully Date Capable, including, without limitation, (i) minutes, resolutions and reports to and from such Borrower's Board of Directors or committee thereof, (ii) internally generated reports, consultant reports or auditor's report regarding the status of such Borrower's Date Affected Information Technology, (iii) all documents relating to a "Year 2000" program, and (iv) officer certificates or other statements requested by the Lender regarding the status of Date Affected Information Technology. The Borrowers acknowledge that the Lender's right to receive, or the Lender's receipt of, the foregoing information does not impose any obligation on the Lender to assess the accuracy or effect of such information, or to recommend or require remedial action of any kind. The Borrowers hereby acknowledge that the actual or potential failure or degradation of any material Date Affected Information Technology due to its failure to be Fully Date Capable may constitute a Material Adverse Effect. SECTION 6. NEGATIVE COVENANTS. The Borrowers agree that, without first obtaining the prior written consent of the Lender: SECTION 6.1. LIENS. The Borrowers will not create, incur, assume or permit to exist, any Lien upon or with respect to any of their properties, now owned or hereafter acquired, except: (a) Liens in favor of the Lender; (b) Liens that are incidental to the conduct of the business of a Borrower, are not incurred in connection with the obtaining of credit and do not materially impair the value or use of assets of such Borrower; (c) purchase-money Liens, whether now existing or hereafter arising (including those arising out of a Capital Lease) on any fixed assets provided that (1) any property subject to a purchase-money Lien is acquired by a Borrower in the ordinary course of its respective business and the Lien on any such property is created contemporaneously with such acquisition, (2) each such Lien shall attach only to the property so acquired, (3) the Debt secured by all such Liens shall not exceed the aggregate at any time outstanding $600,000 in the aggregate for all of the Borrowers; and (d) Liens on the specific items of Inventory for which IBM Credit Corporation has provided purchase money financing, provided that IBM Credit Corporation acknowledges in writing that any such Liens in Receivables arising out of the sale, lease or other disposition of such Inventory are subordinate to the Lien of the Lender in such Receivables. SECTION 6.2. DEBT. The Borrowers will not create, incur, assume or permit to exist, any Debt, except: (a) the Obligations; (b) Subordinated Debt; (c) ordinary trade accounts payable; (d) Debt of a Borrower (including Debt arising out of a Capital Lease) or any Subsidiary secured by purchase-money Liens permitted by this Agreement; and (e) Debt to IBM Credit Corporation arising out of the Inventory floor plan financing provided by IBM Credit Corporation. SECTION 6.3. MERGERS, ETC. No Borrower will merge or consolidate with any Person, or permit any Subsidiary to do so, except that one Borrower may merge into or transfer assets to any other Borrower. 30 31 SECTION 6.4. SALE AND LEASEBACK; SYNTHETIC LEASES. No Borrower will (a) sell, transfer or otherwise dispose of, any real or personal property to any Person and thereafter, directly or indirectly, lease back the same or similar property; or (b) create, incur, assume, or permit to exist any obligations under a Synthetic Lease. SECTION 6.5. DIVIDENDS; DISTRIBUTIONS; SUBORDINATED DEBT PAYMENTS. The Company will not declare or pay any dividends or distributions; or make any payments with respect to Subordinated Debt; or purchase, redeem, retire, prepay or otherwise acquire for value any of its capital stock or Subordinated Debt now or hereafter outstanding; or make any distribution of assets to its stockholders as such whether in cash, assets or obligations of the Company; or allocate or otherwise set apart any sum for the payment of any dividend or distribution on, or for the purchase, redemption or retirement of, any shares of its capital stock; or make any other distribution by reduction of capital or otherwise in respect of any shares of its capital stock. SECTION 6.6. SALE OF ASSETS. No Borrower will sell, lease, assign, transfer, license or otherwise dispose of, any of its now owned or hereafter acquired assets, except for (a) Inventory and Intellectual Property sold, licensed or leased in the ordinary course of business, (b) the sale or other disposition of assets other than Inventory and $100,000 in the aggregate for all Borrowers during any fiscal year, and (c) the HTSI Sale, provided that the prepayments required by Section Section 2.8 hereof are made contemporaneously with the closing of the HTSI Sale. SECTION 6.7. LOANS. No Borrower will make any loan or advance to any Person except for (a) travel advances or other advances in an aggregate amount not to exceed $100,000 at any one time outstanding, which are made to any employee of any Borrower in the ordinary course of such Borrower's business and in furtherance of such employee's performance under a contract with a Customer and (b) loans made to a Borrower by any other Borrower, and (c) loans to officers and employees of the Borrowers not to exceed $100,000 in the aggregate outstanding at any time for all Borrowers, provided that, after giving effect thereto, no Default or Event of Default shall occur. SECTION 6.8. GUARANTIES, ETC. No Borrower will assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable (including, but not limited to, any liability arising out of any agreement to purchase any obligation, stock, assets, goods or services, or to supply or advance any funds, assets, goods or services, or to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss) for obligations of any Person, or permit any such guaranties or liabilities to exist, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. SECTION 6.9. ACQUISITIONS. No Borrower will form a Subsidiary, become a partner or joint venturer with any person, or purchase or acquire all or substantially all of the assets of any Person, or any capital stock of or ownership interest in any other Person. If the Lender consents to the acquisition or formation of a Subsidiary by a Borrower, such Borrower will cause such 31 32 Subsidiary to (a) execute and deliver to the Lender an Assumption Agreement, and (b) satisfy all of the conditions set forth in Section Section 7.3. The Lender agrees that it will not withhold its consent to a Borrower entering into a joint venture or teaming agreement with another Person in the ordinary course of business, provided that such Borrower does not assume any obligations of any other Person in connection therewith. SECTION 6.10. TRANSACTIONS WITH AFFILIATES. No Borrower will enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of such Borrower's business and upon fair and reasonable terms no less favorable to such Borrower than would be applicable in a comparable arm's-length transaction with a Person not an Affiliate. SECTION 6.11. FINANCIAL COVENANTS. The Company will not: (a) TANGIBLE NET WORTH. Permit Tangible Net Worth to be less than the Minimum Compliance Level as of the end of any fiscal quarter, beginning with the fiscal quarter ended on June 30, 1999; (b) CAPITAL EXPENDITURES. Incur Capital Expenditures of greater than $250,000 during any fiscal quarter; or (c) NET INCOME. Permit the consolidated Net Income of the Company and its Subsidiaries to be less than $100,000 for any fiscal quarter, beginning with the fiscal quarter ending on September 30, 1999. SECTION 6.12. CLAIMS. No Borrower will assert any UCC Claim, as defined in the Release Agreement, unless the Borrowers shall first terminate the credit facilities provided for herein in accordance with the provisions of Section Section 2.9 of this Agreement. SECTION 7. CONDITIONS OF LENDING. The making of the Loans shall be subject to the following conditions: SECTION 7.1. CONDITIONS PRECEDENT TO CLOSING. The initial disbursement of the Loans shall be subject to the following conditions precedent, provided, however, that if the Lender elects to make such initial disbursement prior to all of such conditions precedent being satisfied, the Borrowers agree that they shall cause all such conditions to be satisfied within 30 days after such disbursement: (a) The Loan Documents shall have been appropriately completed, duly executed by the parties thereto, recorded where necessary and delivered to the Lender. (b) No Default or Event of Default shall have occurred and be continuing. 32 33 (c) All representations and warranties contained herein shall be true and correct at the Closing Date. (d) All legal matters incident to the Loans shall be satisfactory to counsel for the Lender, and the Borrowers agree to execute and deliver to the Lender such additional documents and certificates relating to the Loans as the Lender reasonably may request. (e) Financing statements in form and substance satisfactory to the Lender shall have been properly filed in each office where necessary to perfect the Lender's security interest in the Collateral, termination statements shall have been filed with respect to any other financing statements covering all or any portion of the Collateral and all taxes and fees with respect to such recording and filing shall have been paid by the Borrowers. (f) All Intellectual Property subject or entitled to United States copyright, patent or trademark protection, and such documents as are necessary to perfect the Lender's security interest therein, shall have been duly registered with the United States Patent and Trademarks Office or the Register of Copyrights, as applicable, and the Lender shall have received a search report confirming that no Liens are recorded with respect thereto. (g) The Borrowers shall have delivered to the Lender (1) certified copies of evidence of all corporate actions taken by the Borrowers to authorize the execution and delivery of the Loan Documents, (2) certified copies of the article of incorporation, and bylaws of the Borrowers, (3) a certificate of incumbency for the officers of the Borrowers executing the Loan Documents, (4) a good standing certificate, dated not more than 30 days prior to the Closing Date, from the appropriate state official of any state in which the Borrowers are incorporated or qualified to do business, and (5) such additional supporting documents as the Lender or counsel for the Lender reasonably may request. (h) The Lender shall have received (1) a Borrowing Base Certificate, (2) an Aging, and (3) a report setting forth the status of all contracts relating to Eligible Receivables from the most recent fiscal month and shall be in form and substance satisfactory to the Lender. (i) The Lender shall have received a field examination report of the Collateral in form and substance acceptable to it. (j) The Lender shall have received the written opinion of counsel to the Company, in form and substance satisfactory to the Lender. (k) The Lender shall have received financing statement, judgment and tax lien searches reflecting that there are no Liens outstanding against the Collateral other than those permitted by the Agreement. (l) The Lender shall have received evidence that the Borrowers have obtained the insurance required by this Agreement. 33 34 (m) The Lender shall have received such landlord and mortgage waivers as it shall require. (n) The Lender shall have received the audited financial statements of the Company for its fiscal year ending on March 31, 1999. (o) The Lender shall have received the Release Agreement, duly executed by the Borrowers. (p) The Lender shall have received such merger documents evidencing the merger of Technology into the Company as the Lender shall require. SECTION 7.2. CONDITIONS PRECEDENT TO SUBSEQUENT DISBURSEMENTS. The disbursement and issuance of subsequent Loans and Letters of Credit shall be subject to the following conditions precedent: (a) No Default or Event of Default shall have occurred and be continuing. (b) No Material Adverse Effect shall have occurred in the financial condition of any Borrower. (c) All representations and warranties of the Borrowers contained in the Loan Documents shall be true and correct at the date of such disbursement. (d) No change shall have occurred in any law or regulations thereunder or interpretations thereof that, in the opinion of counsel for the Lender, would make it illegal for the Lender to make Loans hereunder. (e) If required by the Lender, the Company shall have delivered to the Lender a current Borrowing Base Certificate and a current Aging, duly executed by the president or treasurer of the Company and appropriately completed, and such other supporting data and documentation relating to the Collateral as may be required by the Lender in its reasonable discretion. SECTION 7.3. CONDITIONS PRECEDENT TO SUBSIDIARIES BECOMING BORROWERS. Any Subsidiary of the Company shall become a Borrower under this Agreement, subject to the satisfaction of the following conditions precedent: (a) The Subsidiary shall execute and deliver to the Lender an Assumption Agreement. (b) No Default or Event of Default shall have occurred and be continuing. (c) All legal matters incident to such Subsidiary becoming a Borrower shall be satisfactory to counsel for the Lender, and the Subsidiary shall execute and deliver to the Lender 34 35 such additional documents and certificates relating to the Loans as the Lender may reasonably request. (d) The Lender shall have received an opinion of counsel to the Subsidiary, addressed to the Lender, covering such matters as the Lender may request, in form and substance satisfactory to the Lender. (e) Financing statements in form and substance satisfactory to the Lender shall have been properly filed in each office where necessary to perfect the security interest of the Lender in the Collateral of the Subsidiary, termination statements shall have been filed with respect to any other financing statements covering all or any portion of such Collateral (except with respect to Liens or security interests permitted by this Agreement), all taxes and fees with respect to such recording and filing shall have been paid by such Subsidiary and the Lender shall have received such lien searches or reports as it shall require confirming that the foregoing filings and recordings have been completed. (f) The Subsidiary shall have delivered the following documents to the Lender, each of which shall be certified as of the date on which it is to become a Borrower, by its secretary or representative performing similar functions: (1) copies of evidence of all actions taken by the Subsidiary to authorize the execution and delivery of the Assumption Agreement and the other Loan Documents; (2) copies of the articles or certificate of incorporation and bylaws (or comparable organizational documents) of the Subsidiary; and (3) a certificate as to the incumbency and signatures of the officers executing the Loan Documents. (g) The Lender shall have received a certificate of good standing and qualification (or similar instrument) issued by the appropriate state official of the state of incorporation of the Subsidiary, dated within 30 days of the date of the applicable Loan Documents. (h) The Lender shall have received a listing and aging of Accounts Receivable, a Borrowing Base Certificate, an Inventory schedule, a report setting forth the status of all contracts relating to its Eligible Receivables and such other financial information of such Subsidiary as may be requested by the Lender from time to time, all of which shall be of a current date and shall be in form and substance satisfactory to the Lender. (i) If required by the Lender, the Lender shall have received a satisfactory field examination of the Collateral and internal control systems of the Subsidiary performed by a consultant selected by the Lender, and the Borrowers shall have reimbursed the Lender for the cost of such consultant. (j) If required by the Lender, it shall have received a landlord waiver from each landlord of the Subsidiary, which shall be in form and substance acceptable to the Lender. 35 36 (k) All Intellectual Property of such Subsidiary that is subject to a Material IP Agreement shall have been duly registered with the Register of Copyrights or the United States Patent and Trademark Office, as applicable, all documents necessary to perfect the Lender's security interest therein shall have been recorded in such office, and the Lender shall have received evidence that it has a first priority perfected Lien with respect thereto. (l) The Borrowers agree no Receivable of a Subsidiary shall be included in the Borrowing Base prior to the date on which all of the foregoing conditions are satisfied. SECTION 8. DEFAULT. SECTION 8.1. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: (a) Failure of a Borrower to pay any Obligation to the Lender, including, without limitation, the principal of or interest on any Notes or the Loans, or amounts due under a Letter of Credit Agreement, when the same shall become due and payable, whether at maturity, or otherwise, and such failure shall continue for a period of ten days; or (b) If a Borrower refuses to permit the Lender to inspect, examine, verify or audit the Collateral in accordance with the provisions of this Agreement; or (c) Failure of a Borrower to perform or observe any covenant contained in Section Section 6 of this Agreement; or (d) Failure of the Borrowers to perform their obligations under Section Section 5.8(g) and such failure shall continue for a period of five days; or (e) Failure of a Borrower to perform or observe any other term, condition, covenant, warranty, agreement or other provision contained in this Agreement (except any such failure resulting in the occurrence of another Event of Default described in this Section), within 30 days after the earlier of actual knowledge thereof by such Borrower or written notice from the Lender to the Company specifying such failure; or (f) If any representation or warranty made or deemed made by a Borrower in this Agreement, any Loan Document or any statement or representation made in any certificate, report or opinion delivered pursuant to this Agreement (including any Covenant Compliance Certificate, Borrowing Base Certificate or financial statements) or in connection with any borrowing under this Agreement was materially untrue or is breached in any material respect; or (g) If, as a result of default, any other obligation of a Borrower for the payment of any Debt becomes or is declared to be due and payable prior to the expressed maturity thereof, unless and to the extent that the declaration is being contested in good faith in a court of appropriate jurisdiction; or 36 37 (h) A Borrower makes an assignment for the benefit of creditors, files a petition in bankruptcy, petitions or applies to any tribunal for any receiver or any trustee of such Borrower or any substantial part of its property, or commences any proceeding relating to such Borrower under any reorganization, arrangement, readjustments of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (i) If, within 60 days after the filing of a bankruptcy petition or the commencement of any proceeding against a Borrower seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the proceeding shall not have been dismissed, or, if, within 60 days after the appointment, without the consent or acquiescence of such Borrower, of any trustee, receiver or liquidator of a Borrower or of all or any substantial part of the properties of a Borrower, the appointment shall not have been vacated; or (j) Any judgment against a Borrower in excess of $100,000 or any attachment in excess of $100,000 against any property of a Borrower that remains unpaid, undischarged, unbonded or undismissed for a period of 30 days, unless and to the extent that the judgment or attachment is appealed in good faith in a court of higher jurisdiction and the appeal remains pending; or (k) If any of the following events shall occur or exists with respect to any Borrower or any employee benefit or other plan established, maintained or to which contributions have been made by any Borrower, any Affiliate of any Borrower or any other Person that, together with the Borrower, would be treated as a single employer under Section 4001 of ERISA, and the Lender determines that the same would have a Material Adverse Effect: (1) any prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code), (2) any reportable event (as defined in Section 4043 of ERISA and the regulations issued thereunder), (3) the filing under Section 4041 of ERISA of a notice of intent to terminate any such plan or the termination of such plan, or (4) the institution of proceedings by the PBGC under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any such plan; or (l) If any Borrower, any Subsidiary or any Affiliate of any Borrower or Subsidiary shall be debarred or suspended from any contracting with the Government; or (m) The Loan Documents shall for any reason cease to create a valid and perfected first priority security interest in any of the Collateral purported to be covered thereby or if any Loan Document ceases to be in full force and effect; or (n) If the Lender, in good faith, deems itself insecure in its reasonable judgment or determines that an event has occurred that will result in a Material Adverse Effect, and the cause for such determination is not cured to the Lender's satisfaction within 30 days after notice from the Lender to the Company specifying the Lender's basis therefor; or (o) The dissolution, liquidation or termination of existence of a Borrower; or 37 38 (p) If a Borrower fails to give the Lender any notice required by this Agreement within ten days after the occurrence of the event giving rise to the obligation to give such notice, provided that such failure to give notice shall not constitute an Event of Default if the applicable Event of Default or breach is cured within any grace period that otherwise would have been applicable had the notice been timely given; or (q) The occurrence of an event of default under any other Loan Document and the expiration of all applicable cure periods; or (r) If: (1) Any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), but excluding Research Industries and Arch C. Scurlock, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 25% of the total voting power of the then outstanding voting stock of the Company; or (2) During any twelve-month period (commencing on or after the Agreement Date), a majority of the Board of Directors of the Company shall no longer be composed of individuals (A) who were members of such Board of Directors on the first date of such period, (B) whose election or nomination to such Board of Directors was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of such Board of Directors or (C) whose election or nomination to such Board of Directors was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of such Board of Directors; or (s) If any Subordinated Debt holder gives written notice to the Lender purporting to terminate the effect of the subordination thereof to the Obligations. SECTION 8.2. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, the following provisions shall be applicable: (a) The Lender, at its option, may terminate its obligation to make Loans and issue Letters of Credit under this Agreement and declare all Obligations, whether incurred prior to, contemporaneous with or subsequent to the date of this Agreement, and whether represented in writing or otherwise, immediately due and payable and may exercise all of its rights and remedies against the Borrowers and any Collateral. The Lender also may require the Borrowers to pay, and the Borrowers agree to pay, to the Lender an amount of cash equal to the aggregate amount of the Letters of Credit then outstanding, and any amounts paid by the Borrowers shall be held by the Lender in a cash collateral account, over which the Lender shall have the exclusive 38 39 power of withdrawal, as security for the Obligations arising out of the Letters of Credit and the Letter of Credit Agreements. (b) The Lender may foreclose its lien and security interest in the Collateral in any way permitted by law and shall have, without limitation, the remedies of a secured party under the UCC. The Lender may enter the premises of any Borrower without legal process and without incurring liability to any Borrower and remove the Collateral to such place or places as the Lender may deem advisable, or the Lender may require the Borrowers to assemble the Collateral and make the Collateral available to the Lender at a convenient place and, with or without having the Collateral at the time or place of sale, the Lender may sell or otherwise dispose of all or any part of the Collateral whether in its then condition or after further preparation or processing, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, at any time or place, in one or more sales and upon such terms and conditions as the Lender may elect. The Lender shall give not less than five Business Days' prior written notice to the Borrowers of the time and place of any public sale of the Collateral or the time after which the Collateral may be sold in a private sale, which each Borrower agrees constitutes commercially reasonable notice. At any such sale the Lender may be the purchaser, subject to the applicable provisions of the UCC. (c) The proceeds from any sale of the Collateral by the Lender shall first be applied to any costs and expenses in securing possession of the Collateral and to any expenses in connection with the sale. The net proceeds will be applied toward the payment of the Obligations. Application of the net proceeds as to particular Obligations or as to principal, interest and fees shall be in the Lender's absolute discretion. Any deficiency will be paid to the Lender by the Borrowers forthwith upon demand, and any surplus will be paid to the Borrowers, as applicable. (d) The Lender is hereby authorized at any time or from time to time, without notice to the Borrowers (any such notice being expressly waived by each Borrower), to setoff and apply any deposit (general or special, time or demand, provisional or final) or investment account at any time held, including any certificate of deposit, and other indebtedness at any time owed by the Lender or any of its affiliates, whether or not any such deposit or indebtedness is then due, to or for the credit or account of any Borrower against any and all of the Obligations. The Lender shall give prompt written notice of any setoff to the Borrowers. (e) EACH BORROWER, HAVING KNOWLEDGE THAT IT MAY BE ENTITLED TO NOTICE AND A HEARING PRIOR TO REPOSSESSION OF THE COLLATERAL, WAIVES ANY RIGHT THAT IT MAY HAVE UNDER EXISTING OR FUTURE LAW TO NOTICE OF FORECLOSURE AND ANY OTHER ACT DESCRIBED HEREIN, TO ANY HEARING THAT MAY BE HELD RELATING TO FORECLOSURE OR ANY OTHER SUCH ACTS, AND TO ANY NOTICE THAT MAY BE REQUIRED TO BE GIVEN BY THE LENDER PRIOR TO SUCH HEARING, OTHER THAN THE NOTICES REQUIRED BY THE LOAN DOCUMENTS OR THE UCC. THE LENDER AND EACH BORROWER EXPRESSLY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY WITH RESPECT TO ANY 39 40 LITIGATION RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. (f) The Lender itself may perform or comply, or otherwise cause performance or compliance, with the obligations of a Borrower contained in this Agreement, including, without limitation, the obligations of each Borrower to defend and insure the Collateral. The expenses of the Lender incurred in connection with such performance or compliance, together with interest thereon at the Prime Rate plus 2%, shall be payable by the Borrowers to the Lender on demand and shall constitute Obligations. SECTION 9. MISCELLANEOUS. SECTION 9.1. COLLECTION COSTS. The Borrowers shall pay all of the reasonable costs and expenses incurred by the Lender in connection with the enforcement of this Agreement and the other Loan Documents, including, without limitation, reasonable attorneys' fees and expenses. SECTION 9.2. MODIFICATION AND WAIVER. Except for the other documents expressly referred to in this Agreement, this Agreement contains the entire agreement between the parties and supersedes all prior agreements between the Lender and the Borrowers concerning the Loans and the Letters of Credit. No modification or waiver of any provision of this Agreement or any other Loan Document and no consent by the Lender to any departure therefrom by any Borrower shall be effective unless such modification or waiver shall be in writing and signed by an officer of the Lender with a title of vice president or any higher office, and the same shall then be effective only for the period and on the conditions and for the specific instances and purposes specified in such writing. No notice to or demand on any Borrower in any case shall entitle any Borrower to any other or further notice or demand in similar or other circumstances. No failure or delay by the Lender in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Lender contained in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights or remedies otherwise provided by law. SECTION 9.3. NOTICES. All notices, requests, demands or other communications provided for in this Agreement (except for requests for Loans made by telephone as described in Section Section 2.1 above) shall be in writing and shall be delivered by hand, sent prepaid by Federal Express (or a comparable overnight delivery service) or sent by the United States mail, certified, postage prepaid, return receipt requested, to the Lender at 8245 Boone Boulevard, 3rd Floor, Vienna, Virginia 22182, Attention: Mr. Timothy J. Duggan, or to the Borrowers at 5250 Cherokee Avenue, Alexandria, Virginia 22312, Attention: ________________________. Any notice, request, demand or other communication delivered or sent in the foregoing manner shall be deemed given or made (as the case may be) upon the earliest of (a) the date it is actually received, (b) the business day after the day on which it is delivered by hand, (c) the business day after the day on which it is properly delivered to Federal Express (or a comparable overnight 40 41 delivery service), or (d) the third business day after the day on which it is deposited in the United States mail. Any Borrower or the Lender may change its address by notifying the other party of the new address in any manner permitted by this Section Section 9.3. Rejection or other refusal to accept or the inability to deliver because of a changed address of which no notice was given shall not affect the date of such notice, election or demand sent in accordance with the foregoing provisions. SECTION 9.4. COUNTERPARTS. This Agreement may be executed by the parties hereto individually or in any combination, in one or more counterparts, each of which shall be an original and all of which together constitute one and the same agreement. SECTION 9.5. CAPTIONS. The captions of the various sections and paragraphs of this Agreement have been inserted only for the purposes of convenience; such captions are not a part of this Agreement and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement. SECTION 9.6. SURVIVAL OF AGREEMENTS. All agreements, representations and warranties made herein shall survive the delivery of this Agreement and the making and renewal of the Loans hereunder. SECTION 9.7. FEES AND EXPENSES. Whether or not any Loans are made hereunder, the Borrowers shall pay on demand all out-of-pocket costs and expenses incurred by the Lender in connection with the preparation, negotiation, execution, delivery, filing, recording and enforcement of this Agreement and any of the documents executed or delivered in connection herewith, including, without limitation, the reasonable fees and expenses of counsel to the Lender, and local counsel who may be retained by the Lender, with respect to this Agreement and such documents and any amendments thereof and with respect to advising the Lender as to its rights and responsibilities thereunder. SECTION 9.8. USE OF DEFINED TERMS. All terms defined in this Agreement shall have the defined meanings when used in certificates, reports or other documents made or delivered pursuant to this Agreement, unless the context shall otherwise require. SECTION 9.9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and bind the respective parties hereto and their successors and assigns; provided, however, that no Borrower may assign its rights hereunder without the prior written consent of the Lender. SECTION 9.10. ACCOUNTING TERMS. All accounting terms used herein that are not otherwise expressly defined in this Agreement shall have the meanings respectively given to them in accordance with GAAP in effect on the date of this Agreement. Except as otherwise provided herein, all financial computations made pursuant to this Agreement shall be made in accordance with GAAP and all balance sheets and other financial statements shall be prepared in accordance with GAAP. Except as otherwise provided herein, whenever reference is made in any provision 41 42 of this Agreement to a balance sheet or other financial statement or financial computation with respect to a Borrower, such terms shall mean a consolidated balance sheet or other financial statement or financial computation, as the case may be, with respect to such Borrower and its Subsidiaries. SECTION 9.11. CONFIDENTIALITY. Except as otherwise provided by applicable law, the Lender shall utilize all non-public information obtained pursuant to the requirements of this Agreement which has been identified as confidential or proprietary by the Company in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices but in any event may make disclosure: (a) to any of its affiliates (provided they shall agree to keep such information confidential in accordance with the terms of this Section); (b) as reasonably required by any bona fide assignee, participant or other transferee in connection with the contemplated transfer of any Loan or participations therein (provided they shall agree to keep such information confidential in accordance with the terms of this Section); (c) as required by any governmental authority or representative thereof or pursuant to legal process; (d) to the Lender's independent auditors, counsel and other professional advisors (provided they shall be notified of the confidential nature of the information and they agree to keep such information confidential); and (e) after the happening and during the continuance of an Event of Default, to any other Person, in connection with the exercise by the Lender of rights hereunder or under any of the other Loan Documents. SECTION 9.12. LIMITATION OF LIABILITY. Each Borrower hereby waives, releases, and agrees not to sue the Lender or any of the Lender's Affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or financed hereby. SECTION 9.13. WAIVER. EACH OF THE LENDER AND THE BORROWERS EXPRESSLY WAIVES ITS RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION OR OTHER DISPUTE RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. SECTION 9.14. SEVERABILITY. If any provision of any Loan Document is held to be illegal, invalid or unenforceable under present or future laws during the term of this Agreement, such provision shall be fully severable, such Loan Document shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of such Loan Document, and the remaining provisions of such Loan Document shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from such Loan Document. SECTION 9.15. CONSENT TO JURISDICTION. Each party to this Agreement hereby irrevocably submits generally and unconditionally for itself and in respect of its property to the jurisdiction of the Circuit Court for Fairfax County, Virginia, or the United States District Court for the Eastern 42 43 District of Virginia, Alexandria Division, over any suit, action or proceeding arising out of or relating to this Agreement, any Loan Document or the Obligations. Each party to this Agreement hereby irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue in any such court and any claim that any such court is an inconvenient forum. Each Borrower hereby agrees and consents that, in addition to any methods of service of process provided for under applicable law, all service of process in any such suit, action or proceeding in the courts designated above may be made by certified or registered mail, return receipt requested, directed to such Borrower at its address for notice stated in Section Section 9.3 above, or at a subsequent address of which the Lender received actual notice from such Borrower in accordance with the terms hereof, and service so made shall be complete five days after the same shall have been so mailed. The foregoing provisions shall not limit the right of the Lender or any other party hereto to serve process in any other manner permitted by law or limit the right of the Lender or other party hereto to bring any suit, action or proceeding or to obtain execution on any judgment rendered in any suit, action or proceeding in any other appropriate jurisdiction or in any other manner. SECTION 9.16. INTERPRETATION. (a) This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the State, without reference to conflict of laws principles. (b) The representations, warranties, covenants and agreements contained in this Agreement shall be deemed to have been given and undertaken by the Borrowers jointly and severally. SECTION 9.17. AMENDMENT AND RESTATEMENT. The Lender and the Borrowers agree that the Existing Agreement is amended and restated in its entirety by this Agreement. This Agreement is an amendment, and not a novation, of the Existing Agreement. [SIGNATURES ON FOLLOWING PAGE] 43 44 IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Agreement to be signed by their duly authorized representatives all as of the day and year first above written. LENDER: CRESTAR BANK, a Virginia banking corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- BORROWERS: HALIFAX CORPORATION, a Virginia corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- HALIFAX ENGINEERING, INC., a Virginia corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation By: ------------------------------------ Name: --------------------------------- Title: -------------------------------- [SIGNATURES CONTINUE ON FOLLOWING PAGE] 44 45 HALIFAX REALTY, INC., a Virginia corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 45 46 LIST OF SCHEDULES & EXHIBITS
Exhibit A - Assumption Agreement Exhibit B - Borrowing Base Certificate Exhibit C - Covenant Compliance Certificate Exhibit D - Form of Revolving Note Exhibit E - Release Agreement Exhibit F - Form of Term Note One Exhibit G - Form of Term Note Two Schedule 3.3 - Equipment and Inventory Locations Schedule 4.10 - Corporate Names and Chief Executive Offices Schedule 4.13 - Intellectual Property Schedule 4.14 - Material Contracts Schedule 4.17 - Collective Bargaining Agreements Schedule 5.8(a) - Form of Monthly Financials
47 EXHIBIT A FORM OF ASSUMPTION AGREEMENT THIS ASSUMPTION AGREEMENT (as the same may be amended, modified or supplemented from time to time, the Assumption), dated as of _____________, _____, made by ____________________________, a _____________ corporation (the Subsidiary), in favor of the Lender (as defined below), recites and provides: R E C I T A L S Pursuant to the terms of a Sixth Amended and Restated Loan and Security Agreement, dated as of September 1, 1999 (as amended, modified or supplemented from time to time, the Loan Agreement), between Halifax Corporation, a Virginia corporation (the Company), Halifax Engineering, Inc., a Virginia corporation (Engineering), Halifax Technical Services, Inc., a Virginia corporation (Technical) and Halifax Realty, Inc., a Virginia corporation (Realty, and together with the Company, Engineering and Technical, the Original Borrowers), and Crestar Bank, a Virginia banking corporation (the Lender), the Lender agreed to extend credit to the Original Borrowers. Terms defined in the Loan Agreement shall have the same defined meanings when such terms are used in this Assumption. The Company owns [100%] [____%] of the capital stock of the Subsidiary. The Original Borrowers and the Subsidiary, together with the other Subsidiaries of the Original Borrowers, are engaged in business on a consolidated and integrated basis, and their integrated operations include applying for and making use of credit on a joint basis. Accordingly, the Original Borrowers have requested that the Subsidiary become a Borrower under the Loan Agreement and the other Loan Documents. The Lender has agreed to accept the Subsidiary as a Borrower thereunder, and the Subsidiary has agreed to assume the Obligations. Accordingly, the Subsidiary agrees as follows: 48 SECTION 10. The Subsidiary (a) assumes and agrees to be jointly and severally liable with each other Borrower for all of the Obligations now existing or hereafter arising, including, without limitation, the Obligations arising out of the Loan Agreement, the Loans, the Notes, the Letter of Credit Agreements and the other Loan Documents, and (b) agrees to be jointly and severally bound by all of the terms, covenants and conditions of the Loan Agreement, the Notes, the Letter of Credit Agreements and the other Loan Documents, and hereby assumes all of the Obligations of the Borrowers thereunder and agrees to be jointly and severally liable therefor. SECTION 11. The Subsidiary represents that (a) its chief executive office, within the meaning of Section 9.103(3)(d) of the UCC, is located at [______________________], and (b) during the five years prior to the date of this Assumption, the Subsidiary has not used any fictitious or corporate name other than its current corporate name. All of the representations and warranties set forth in the Loan Agreement are incorporated by reference in this Assumption, and shall be deemed to have been made and given by the Subsidiary as of the date hereof as though such representations and warranties were applicable to it. SECTION 12. The Subsidiary grants to the Lender, in accordance with and subject to the provisions of the Loan Agreement, a security interest in all of the Collateral of the Subsidiary as security for the Obligations. SECTION 13. The Subsidiary also agrees to execute, deliver and, if applicable, record, such additional instruments, documents and agreements as the Lender may reasonably require for the purpose of effecting the assumption described herein. IN WITNESS WHEREOF, the Subsidiary has caused this Assumption to be executed by its duly authorized representative as of the day and year first written above. , a --------------------- ----------- By: ----------------------------------- Name: ---------------------------------- Title: -------------------------------- A-2 49 EXHIBIT B FORM OF BORROWING BASE CERTIFICATE [DATE] Crestar Bank 8245 Boone Boulevard 3rd Floor Vienna, Virginia 22182-3871 Attention: Timothy J. Duggan, Vice President Ladies and Gentlemen: In connection with the terms of the Sixth Amended and Restated Loan and Security Agreement, dated as of September 1, 1999 (as further amended, modified or supplemented from time to time, the Loan Agreement) between Halifax Corporation (the Parent), Halifax Engineering, Inc. (Engineering), Halifax Technical Services, Inc. (Technical), and Halifax Realty, Inc. (Realty, and together with the Parent, Engineering and Technical, collectively, the Borrowers), and Crestar Bank (the Lender), the undersigned, on behalf of the Parent and the other Borrowers, certifies that the following is true and correct: - --------------------------------------------------------------------------------
I. TIER ONE A. ACCOUNTS RECEIVABLE Billed Accounts Receivable as of last report dated $ --------------- --------- Additions: (a) New Billings (b) Adjustments $ --------- Less: (a) Collections since last report $ --------- (b) Adjustments $ --------- 1. Total Billed Accounts Receivable: $ ---------
50 2. Less Ineligible Receivables: (a) Receivables aged over 90 days-not including bonded: $ --------- (b) Bonded Receivables $ --------- (c) "At Risk" Work $ --------- (d) Rebills $ --------- (e) Other Ineligible Receivables(1) (VDOT/MLC/Siemens(2)) $ --------- 3. Total Ineligible Receivables (Line A(2)(a)-A(2)(e)) $ --------- 4. Total Eligible Billed Accounts Receivable: $ --------- 5. Eligible Billed Government Accounts Receivable on Line 4: $ --------- 6. Government contribution to Borrowing Base (90% of Line 5): $ --------- 7. Eligible Billed Commercial Accounts Receivable on Line 4: $ --------- 8. Commercial contribution to Borrowing Base (85% of Line 7): $ --------- 9. Tier One Borrowing Base (A6 + A8): $ --------- II. TIER TWO CONTRIBUTION(3) A. BONDED CONTRACT ACCOUNTS RECEIVABLE: 1. Total Billed Bonded Accounts Receivable: $ --------- 2. Less $1,500,000 excess factor: $1,500,000 3. Less Ineligible Receivables: (a) Receivables aged over 90 days: $ --------- (b) "At Risk"/Rebills: $ --------- (c) Other Ineligible Receivables: $ ---------
- ----------------------------- (1) Receivables arising out of any Person's obligation to purchase Receivables of a Borrower shall not be included as a part of the Borrowing Base. (2) All Siemens Receivables are Ineligible Receivables to the extent they exceed $1,000,000. (3) Upon the closing of the HTSI Sale, the Tier Two Contribution shall not be included as a part of the Borrowing Base. B-4 51 4. Total Ineligible Bonded Accounts Receivable (Line A(3)(a)-A(3)(c)): $ --------- 5. Total Eligible Bonded Accounts Receivable (Line 1-2-4): $ --------- 6. Contribution to Borrowing Base (80% of Line 5; Not to exceed $2,000,000 cap): $ --------- B. TOTAL BORROWING BASE (TIER I BORROWING BASE + TIER II CONTRIBUTION) (NOT TO EXCEED $12,000,000(4)) $ =========
As of the date of this Borrowing Base Certificate, no Default or Event of Default has occurred and is continuing. Capitalized terms used in this Borrowing Base Certificate shall have the same meanings as those assigned to them in the Loan Agreement. The foregoing is true and correct as of - -------------, ----. HALIFAX CORPORATION By: ---------------------------------------------- Title: Vice President Finance & Accounting, CFO Date: ------------------------------------ - ---------------------------------- (4) To be reduced to $10,000,000 immediately upon the closing of the HTSI Sale. B-5 52 EXHIBIT C FORM OF COVENANT COMPLIANCE CERTIFICATE In connection with the terms of the Sixth Amended and Restated Loan and Security Agreement, dated as of September 1, 1999 (as amended, modified or supplemented from time to time, the Loan Agreement), between Halifax Corporation, a Virginia corporation (the Company), the Subsidiaries of the Company that are parties to the Loan Agreement, and Crestar Bank, a Virginia banking corporation (the Lender), the undersigned certifies that the following information is true and correct as of the date of this Covenant Compliance Certificate: 1. No Default or Event of Default has occurred and is continuing. 2. The Minimum Compliance Level as of _______________________ was required to be $_____, and Tangible Net Worth as of such date was $___________ calculated as set forth in Schedule 1. 3. Net Income of the Company and its Subsidiaries for the fiscal quarter ended on ____________ was required to be $100,000, and as of such date was $_______________ calculated as set forth in Schedule 2. Capitalized terms used in this Covenant Compliance Certificate shall have the same meanings as those assigned to them in the Loan Agreement. The foregoing is true and correct as of _______________, 19___. Dated ______________, 19___. ------------------------------------------ Name: ------------------------------------- Chief Financial Officer Halifax Corporation 53 SCHEDULE 1 TANGIBLE NET WORTH AND MINIMUM COMPLIANCE LEVEL TANGIBLE NET WORTH 1. Tangible Net Worth: $___________ (a) Consolidated stockholder equity of the Company and its Subsidiaries as of ________________: $___________ (b) Write-up in book value of assets of the Company and its Subsidiaries subsequent to the date of the Agreement $___________ (c) Investments in non-marketable securities $___________ (d) Treasury stock $___________ (e) Unamortized debt discount expense $___________ (f) Costs of investments in excess of net assets acquired at time of acquisition $___________ (g) Loans, advances and other amounts owed to the Company and its Subsidiaries by officers, directors, shareholders, employees or Affiliates $___________ (h) Leasehold improvements $___________ (i) Patents, patent applications, copyrights, trademarks, trade names, goodwill, research and development costs, organizational expenses, capitalized software costs and other like intangibles $___________ TOTAL [(a) minus (b) through (i)] $___________
C-7 54 MINIMUM COMPLIANCE LEVEL 1. Tangible Net Worth as of __________________ *___________ 2. $150,000 Step-Up $___________ 3. Equity Issuances from March 31, 1999 $___________ 4. Extraordinary, unusual or non-recurring losses $___________ 5. Extraordinary, unusual or non-recurring gains $___________ 6. Minimum Compliance Level (1 + 2 + 3 + 4 - 5)** $___________
*$_______________ as of 3/31/99, and adjusted upward by $150,000 as of June 30, 1999, and as of the end of each fiscal quarter thereafter. **Upward adjustment arising out of items 2 through 4 to be made as of June 30, 1999, and as of the end of each fiscal quarter thereafter. Downward adjustment arising out of item 5 to be made as of June 30, 1999 and as of the end of each fiscal quarter thereafter. C-8 55 SCHEDULE 2 NET INCOME 1. Net Income: (a) Consolidated Net Income $___________ (b) Extraordinary, unusual or non-recurring gains $___________ (c) Extraordinary, unusual or non-recurring losses $___________ TOTAL ((a) minus (b) plus (c))* $__________
*Aggregate (as adjusted) amount to be calculated as of June 30, 1999 and as of the end of each fiscal quarter thereafter. C-9 56 EXHIBIT D FORM OF REVOLVING NOTE $12,000,000 _______________, 1999 Alexandria, Virginia FOR VALUE RECEIVED, the undersigned, each a Virginia corporation (collectively, the Borrowers and individually, a Borrower) hereby jointly and severally promise to pay to the order of CRESTAR BANK, a Virginia banking corporation (the Lender), at Commercial Loan Services, P.O. Box 26202, Richmond, Virginia 23260-6202, or such other location as the holder hereof may in writing designate, the principal sum of TWELVE MILLION AND NO/00 DOLLARS ($12,000,000) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Revolving Loans made by the Lender to the Borrowers under the Loan Agreement (as defined below)), in lawful money of the United States of America in immediately available funds, on the Termination Date, without defense, offset or counterclaim, and to pay interest on the unpaid principal amount of the Revolving Loans, at such office, in like money and funds, for the period commencing on the date of each Revolving Loan until such Revolving Loan shall be paid in full, at the applicable rate per annum and on the dates provided in the Loan Agreement. The Borrowers may borrow, prepay, and reborrow hereunder in accordance with the provisions of the Loan Agreement. The Lender is hereby authorized by the Borrowers to maintain records of the amount of each Revolving Loan made by the Lender, the date such Revolving Loan is made, and the amount of each payment or prepayment of principal of such Revolving Loan received by the Lender. Each Borrower agrees that the amounts so evidenced in such records, absent manifest error, shall constitute conclusive evidence of the amount owed hereunder. This Revolving Note is the Revolving Note referred to in the Sixth Amended and Restated Loan and Security Agreement (as amended, modified or supplemented from time to time, the Loan Agreement), dated as of September 1, 1999, between the Borrowers and the Lender, and evidences Revolving Loans made by the Lender thereunder. Undefined capitalized terms used in this Revolving Note have the respective meanings assigned to them in the Loan Agreement. Upon the occurrence and continuation of an Event of Default, the principal hereof and accrued interest hereon may be declared to be, or may become, forthwith due and payable in the manner, upon the conditions and with the effect provided in the Loan Agreement. Each Borrower, and every guarantor and endorser hereof, hereby waive presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Revolving Note. 57 This Revolving Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles. IN WITNESS WHEREOF, each Borrower has caused this Revolving Note to be executed by its duly authorized representative as of the day and year first above written. BORROWERS: HALIFAX CORPORATION, a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX ENGINEERING, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- [SIGNATURES CONTINUE ON FOLLOWING PAGE] D-2 58 HALIFAX REALTY, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- D-3 59 EXHIBIT E FORM OF RELEASE AGREEMENT THIS RELEASE AGREEMENT (the Agreement), dated as of September 1, 1999, is made by and between HALIFAX CORPORATION, a Virginia corporation (the Company), HALIFAX ENGINEERING, INC., a Virginia corporation (Engineering), HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation (Technical), HALIFAX REALTY, INC., a Virginia corporation (Realty, and together with the Company, Engineering and Technical, collectively, the Borrowers), and CRESTAR BANK, a Virginia banking corporation (the Bank). RECITALS The Borrowers, Halifax Technology Services Company, a Virginia corporation, (Technology) and the Bank are parties to the Fifth Amended and Restated Loan and Security Agreement, dated as of June 25, 1998, as amended by the First Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of February 23, 1999, by and between the Borrowers, Technology and the Bank, and by the Sixth Amended and Restated Loan and Security Agreement, dated as of September 1, 1999, by and between the Borrowers and the Bank (as further amended, modified or supplemented from time to time, the Loan Agreement). Terms defined in the Loan Agreement shall have the same defined meanings when such terms are used in this Amendment. Technology was merged into the Company on the date set forth in Section 4.1 of the Loan Agreement. The Borrowers have requested that the Bank amend certain provisions of the Loan Agreement. The Bank has agreed to do so, subject to its receipt of this Agreement. Accordingly, for valuable consideration, the receipt and sufficiency of which are acknowledged, the Borrowers and the Bank agree as follows: 1. Except for the UCC Claim (as defined below), each Borrower irrevocably and unconditionally releases and forever discharges the Bank, its predecessors, successors, and assigns, and its parents, affiliates, subsidiaries, divisions, agents and subagents, if any, as well as the past, present, and future shareholders, officers, directors, partners, employees, agents attorneys, and insurers of each of them from all causes of action, suits, debts, liens, contracts, agreements, obligations, promises, liabilities, claims, rights, demands, damages, controversies, losses, costs, and expenses, specifically including attorney's fees and costs, of any nature whatsoever, known or unknown, suspected or unsuspected, fixed or contingent, which it has, owns, holds, claims to have, claims to own, or claims to hold against the Bank in connection with, relating to or arising from the Loans or the Loan Documents and against the Bank or Bankers Trust (Delaware), or both, in connection with, relating to or arising from the Technology Embezzlement (as defined below), checks or other items, paid or any deposit account maintained 60 by Technology with the Bank or Bankers Trust (Delaware), or withdrawals from any such deposit account of Technology. 2. Each Borrower represents and warrants as follows: a. through its duly authorized representatives, it has carefully read this Agreement and knows and understands its contents completely; b. it has consulted with its attorneys and is entering into this Agreement of its own free will, act and deed; c. in making this Agreement, it has not relied upon any statement or representation made by the persons, firms, organizations or corporations who are hereby released, or by any person or persons representing them, other than as is expressly stated in this Agreement; and d. each individual signing for and on behalf of a Borrower has complete and full authority to act upon its behalf and has the authority to bind it and all other persons or entities with any right, title or interest in it. 3. As used herein: a. "Technology Embezzlement" means the embezzlement of funds from Technology by a perpetrator identified by the Borrowers prior to the date hereof and any person acting in concert with such perpetrator. b. "UCC" means the Virginia Uniform Commercial Code. c. "UCC Claim" means the claims of any of the Borrowers against the Bank or Bankers Trust (Delaware) under Sections 8.3A-404, 8.3A-405, 8.3A-406, 8.4-401 and 8.4-406 of the UCC with respect to checks paid by the Bank or Bankers Trust (Delaware) and charged against any of Technology's deposit accounts at the Bank or Bankers Trust (Delaware) after February 16, 1998. Such claims in the aggregate shall not exceed the aggregate face amount of the checks that the Borrowers allege were not properly payable from Technology's deposit account(s) at the Bank or Bankers Trust (Delaware) after February 16, 1998, or were negligently paid by the Bank or Bankers Trust (Delaware) after February 16, 1998, plus interest and costs. Such claims shall not include punitive, consequential, incidental, special or other damages of any nature, and shall not include attorneys' fees or expenses of any nature. The parties agree that nothing in this Agreement shall limit the admissibility of checks or other account records for Technology's deposit accounts at the Bank or Bankers Trust (Delaware) created prior to February 16, 1998, at the trial of any UCC Claim, and the parties reserve their respective rights to introduce into evidence checks and other account records for Technology's deposit accounts at the Bank or Bankers Trust (Delaware) created prior to February 16, 1998. E-2 61 4. The Borrowers agree that nothing in this Agreement shall be construed as an admission by the Bank of any wrongdoing, liability or breach of contract, and that the Bank reserves all of its rights to contest the UCC Claim, including, without limitation, the right to assert that (a) checks drawn on Technology's account bore authorized signatures, (b) Technology did not exercise reasonable promptness in examining its statements of account in order to discover unauthorized payments, (c) Technology's failure to exercise ordinary care substantially contributed to any loss it suffered, and (d) the Bank's subrogation rights, under section 8.4-407 of the UCC, have been impaired by Technology. 5. Each Borrower agrees and understands that this Agreement shall be binding on, and inures to the benefit of, the Borrowers and the Bank, their legal representatives, assigns, parents, subsidiaries, successors and all who succeed to their rights. 6. The Borrowers and the Bank agree that this Agreement is final and incorporates all of the understandings between the parties, and that there are no other agreements, conditions, or understanding between them that are not incorporated into this Agreement. 7. The Borrower and the Bank agree that this Agreement shall be governed by and construed under the laws of the Commonwealth of Virginia, and agree that the terms of this Agreement are contractual and shall continue in full force and effect after the date of the Agreement. 8. Any amendment to this Agreement must be in writing, and be endorsed by all parties. This Agreement may be executed in counterparts. [SIGNATURES ON FOLLOWING PAGES] E-3 62 WITNESS the following signatures. BANK: CRESTAR BANK, a Virginia banking corporation By: --------------------------- Thomas F. Kelley Executive Vice President BORROWERS: HALIFAX CORPORATION, a Virginia corporation By: --------------------------- John J. Reis President and CEO HALIFAX ENGINEERING, INC., a Virginia corporation By: --------------------------- John J. Reis President and CEO HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation By: --------------------------- John J. Reis President and CEO [SIGNATURES CONTINUE ON FOLLOWING PAGE] E-4 63 HALIFAX REALTY, INC., a Virginia corporation By: --------------------------- John J. Reis President and CEO E-5 64 EXHIBIT F FORM OF TERM NOTE ONE $2,500,000 _______________, 1999 Alexandria, Virginia FOR VALUE RECEIVED, the undersigned, each a Virginia corporation (collectively, the Borrowers and individually, a Borrower) hereby jointly and severally promise to pay to the order of CRESTAR BANK, a Virginia banking corporation (the Lender), at Commercial Loan Services, P.O. Box 26202, Richmond, Virginia 23260-6202, or such other location as the holder hereof may in writing designate, the principal sum of TWO MILLION FIVE HUNDRED THOUSAND AND NO/00 DOLLARS ($2,500,000), in lawful money of the United States of America in immediately available funds, on the dates set forth below, without defense, offset or counterclaim, and to pay interest on the unpaid principal amount hereof, at such office, in like money and funds, for the period commencing on the date of disbursement of Term Loan One until Term Loan One shall be paid in full, at the applicable rate per annum and on the dates provided in the Loan Agreement. The principal balance hereof shall be payable in quarterly installments, each in the amount and on the date set forth in the Loan Agreement. If not sooner paid, the unpaid principal balance hereof, and all accrued and unpaid interest thereon, shall be due and payable in full on the Termination Date. This Note is Term Note One referred to in the Sixth Amended and Restated Loan and Security Agreement (as amended, modified or supplemented from time to time, the Loan Agreement), dated as of September 1, 1999, between the Borrowers and the Lender, and evidences Term Loan One made by the Lender thereunder. Undefined capitalized terms used in this Note have the respective meanings assigned to them in the Loan Agreement. Upon the occurrence and continuation of an Event of Default, the principal hereof and accrued interest hereon may be declared to be, or may become, forthwith due and payable in the manner, upon the conditions and with the effect provided in the Loan Agreement. Each Borrower, and every guarantor and endorser hereof, hereby waive presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles. IN WITNESS WHEREOF, each Borrower has caused this Note to be executed by its duly authorized representative as of the day and year first above written. 65 BORROWERS: HALIFAX CORPORATION, a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX ENGINEERING, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX REALTY, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- F-2 66 EXHIBIT G FORM OF TERM NOTE TWO $1,000,000 ________________, 1999 Alexandria, Virginia FOR VALUE RECEIVED, the undersigned, each a Virginia corporation (collectively, the Borrowers and individually, a Borrower) hereby jointly and severally promise to pay to the order of CRESTAR BANK, a Virginia banking corporation (the Lender), at Commercial Loan Services, P.O. Box 26202, Richmond, Virginia 23260-6202, or such other location as the holder hereof may in writing designate, the principal sum of ONE MILLION AND NO/00 DOLLARS ($1,000,000), in lawful money of the United States of America in immediately available funds, on the dates set forth below, without defense, offset or counterclaim, and to pay interest on the unpaid principal amount hereof, at such office, in like money and funds, for the period commencing on the date of disbursement of Term Loan Two until Term Loan Two shall be paid in full, at the applicable rate per annum and on the dates provided in the Loan Agreement. The principal balance hereof shall be payable in the respective amounts and on the respective dates set forth in the Loan Agreement. If not sooner paid, the unpaid principal balance hereof, and all accrued and unpaid interest thereon, shall be due and payable in full on the Termination Date. This Note is Term Note Two referred to in the Sixth Amended and Restated Loan and Security Agreement (as amended, modified or supplemented from time to time, the Loan Agreement), dated as of September 1, 1999, between the Borrowers and the Lender, and evidences Term Loan Two made by the Lender thereunder. Undefined capitalized terms used in this Note have the respective meanings assigned to them in the Loan Agreement. Upon the occurrence and continuation of an Event of Default, the principal hereof and accrued interest hereon may be declared to be, or may become, forthwith due and payable in the manner, upon the conditions and with the effect provided in the Loan Agreement. Each Borrower, and every guarantor and endorser hereof, hereby waive presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles. 67 IN WITNESS WHEREOF, each Borrower has caused this Note to be executed by its duly authorized representative as of the day and year first above written. BORROWERS: HALIFAX CORPORATION, a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX ENGINEERING, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX TECHNICAL SERVICES, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- HALIFAX REALTY, INC., a Virginia corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- G-2 EX-10.6 3 JOHN J. REIS EXECUTIVE SEVERANCE AGREEMENT 1 EXHIBIT 10.6 EXECUTIVE SEVERANCE AGREEMENT AGREEMENT, dated as of March 1, 1999, between Halifax Corporation, a Virginia corporation ("Company"), and John J. Reis ("Executive"). WITNESSETH: WHEREAS, Executive has been employed by the Company in a position of high responsibility and authority and is presently its chief executive officer, and WHEREAS, it is in the best interest of the parties hereto that orderly and equitable provisions be made in the event of termination of the Executive. NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The Company and the Executive agree that the Executive is employed on an at-will basis. Unless otherwise specifically provided in a written agreement signed by both the Company and the Executive, the parties understand that the Executive is employed for no fixed term or period, that either the Company or the Executive may terminate the Executive's employment with the Company at any time with or without a reason, and that this Agreement creates no contract of employment between the Company and the Executive. 2. This Agreement shall remain in full force and effect so long as the Executive continues to be employed by the Company. 3. The Company shall have the right to terminate the Executive's employment without payment of severance as provided below in the event of the Executive's death, or on thirty (30) days written notice in the event that the Executive shall be unable, or shall fail, to perform all of the services required of his position with the Company as a result of any mental or physical incapacitating disability, to the extent that such inability or failure to perform required duties shall exist for any consecutive ninety (90) day period. The Company's right to terminate the Executive's employment without payment of severance under this Paragraph shall not limit or reduce in any way the Executive's right to receive benefits under any disability insurance or plan maintained by the Company for the benefit of the Executive. 4. The Executive shall have the right to terminate his employment with the Company at any time on written notice to the Company indicating the Executive's desire to retire or to resign from the Company's employment. 5. Except as provided in Paragraph 3 and 4, the Executive's employment with the Company may be terminated without payment of severance as provided below only in the event of a termination 2 2 for cause as defined in this Paragraph. For the purposes of this Agreement, "Cause" shall be defined as gross negligence, willful misconduct, fraud, willful disregard of the Board of Directors' direction or breach of published Company policy. The Executive may be terminated for Cause only in accordance with a resolution duly adopted by an absolute majority of the Company's Board of Directors finding that, in the good faith opinion of the Board of Directors, the Executive engaged in conduct justifying a termination for Cause as that term is defined above and specifying the particulars of the conduct motivating the Board's decision to terminate the Executive. Such resolution may be adopted by the Board of Directors only after the Board has provided to the Executive (1) five (5) days advance written notice of a meeting of the Board called for the purpose of determining Cause for termination of the Executive, (2) a statement setting forth the alleged grounds for termination, and (3) an opportunity for the Executive and, if the Executive so desires, the Executive's counsel to be heard before the Board. 6. In the event of termination without cause prior to November 30, 1999, Executive shall receive two (2) months of his then current salary for every one (1) month of employment. Thereafter, except in connection with a Change of Control Disposition as defined in Paragraph 12, if the Executive's employment with the Company is terminated for any reason other than those set forth in Paragraphs 3, 4 or 5 above, then the Company shall pay to the Executive an amount equal to eighteen (18) months salary based upon the current salary of the Executive at the time of termination. 7. If following a Change of Control Disposition (herein "Change of Control Disposition" shall be as defined below in Paragraph 12) of the Company, the Executive's employment is terminated within one (1) year of the "Change of Control Disposition Date" (as herein defined below in Paragraph 12) for any reason other than the reasons set forth in Paragraphs 3, 4 or 5 above, then the Company shall pay to the Executive an amount equal to two (2) times the amount that the Company would have been required to pay the Executive under Paragraph 6 above if the Executive's employment had been terminated in the absence of a Change of Control Disposition. In the event Executive is terminated for any reason within ninety (90) days following the Change of Control Disposition Date, the Company shall pay to the Executive an amount equal to three (3) times his then current salary. Notwithstanding the foregoing, maximum compensation payable to the Executive pursuant to this Paragraph is limited to no more than 299% of the "base amount" of Executive's compensation as defined in the Tax Reform Act of 1984 (Section 280G and applicable regulations thereunder and any amendments thereto). 8. At the time of termination of the Executive's employment for any reason the Executive shall be paid all other compensation and benefits due to the Executive at the time of termination. 9. The Executive may elect to receive the compensation payable in accordance with this Agreement in a lump sum or in equal payments at intervals no more often than semimonthly, over a period of the Executive's choice not to exceed the number of months of compensation due him pursuant to this Agreement. 10. The Executive shall not disclose, publish, or use for any purpose not directly related to the performance of the Executive's duties for the Company, or permit anyone else to disclose, publish, 3 3 or use any proprietary or confidential information or trade secrets of the Company at any time during or after his employment with the Company. This obligation shall continue so long as such information remains legally protectable as to persons receiving it in a confidential relationship. Executive agrees to return to the Company all proprietary material which he possesses on the date of termination of the Executive's active employment with the Company. 11. For a period of six (6) months following termination of Executive's employment with the Company for any reason other than "Cause," as defined in Paragraph 5 above, the Executive shall not (1) directly or indirectly, sell, market, or otherwise provide any client or previously identified prospective client of the Company, products or services similar to or in competition with those sold or distributed by the Company, in any geographic area in which the Company offers any such products or services, or (2) participate directly or indirectly in the hiring or soliciting for employment of any person employed by the Company. 12. By reason of the special and unique nature of the obligations hereunder, it is agreed that neither party hereto may assign any interests, rights or duties which the party may have in this Agreement without the prior written consent of the other party, except that upon any "Change of Control Disposition" of the Company through purchase, merger, consolidation, liquidation, change in control by reason of any single entity (individual or group) other than Research Industries Incorporated, the Company or a Company Employee Stock Ownership Plan and Trust, acquiring twenty-five percent (25%) or more of the voting power of the Company's stock, or sale of all or substantially all of the assets of the Company to another party whether or not the Company is the surviving corporation, this Agreement shall inure to the benefit of and be binding upon the Executive and the purchasing, surviving or resulting entity, company or corporation in the same manner and to the same extent as though such entity, company or corporation were the Company. Notwithstanding the foregoing, a sale of Company stock by Research Industries Incorporated shall not be included in a "Change of Control determination. The "Change of Control Disposition Date" shall be that calendar date on which the Change of Control Disposition event was consummated and legally binding upon the parties. 13. Any controversy or claim arising out of, or relating to this Agreement, or its breach, or otherwise arising out of or relating to the Executive's employment (including without limitation to any claim of discrimination whether based on race, color, religion, national origin, gender, age, sexual preference, disability, status as a disabled or Vietnam-era veteran, or any other legally protected status, and whether based on federal or State law, or otherwise) by the Company shall be resolved by arbitration. This arbitration shall be held in Fairfax County, Virginia in accordance with the model employment arbitration procedures of the American Arbitration Association. Judgment upon award rendered by the arbitrator shall be binding upon both parties and may be entered and enforced in any court of competent jurisdiction. 14. In consideration of any payment made to the Executive pursuant to this Agreement, the Executive, for himself, his heirs and legal representatives, releases and forever discharges the Company, its predecessors, successors or anyone, and all of the past, present or future officers, directors, agents and employees of the Company from any and all claims, demands, or causes of action, whether known or unknown, exactly at the time of payment or arising subsequently 4 4 thereto, arising out of or related to the Executive's employment by the Company. 15. This Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Virginia. 16. This Agreement constitutes the entire understanding and agreement between the Company and the Executive with regard to all matters herein. This Agreement may be amended only in writing, signed by both parties hereto. In witness whereof the parties have executed this Agreement to be effective the day and year first above written. HALIFAX CORPORATION By: /s/Arch C. Scurlock --------------------------- Chairman of the Board EXECUTIVE /s/John J. Reis ------------------------------- John J. Reis 5 EX-23 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Halifax Corporation's Registration Statement (Form S-8) pertaining to the Halifax Corporation 1994 Key Employee Stock Option Plan of our report dated September 7 1999, with respect to the consolidated financial statements of Halifax Corporation included in its Annual Report on Form 10-K for the year ended March 31, 1999, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Washington, D.C. September 7, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 1 0 12-MOS MAR-31-1999 APR-1-1998 MAR-31-1999 1 0 0 27,305,000 657,000 3,949,000 31,974,000 8,002,000 5,772,000 38,735,000 31,238,000 0 0 0 545,000 (6,183,000) 38,735,000 81,812,000 81,812,000 78,558,000 82,391,000 773,000 2,593,000 1,454,000 (5,339,000) (100,000) (5,299) 0 0 0 (5,299,000) (2.63) (2.63)
-----END PRIVACY-ENHANCED MESSAGE-----