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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, 2000
( ) 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)
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.
( )
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of June 22, 2000 was $8,719,508 computed
based on the closing price for that date.
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the latest practicable date.
Class Outstanding at June 22, 2000
Common Stock 2,023,436
$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 operations and 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.
PART I
Item 1. General Description of the Business
Halifax Corporation (the "Company"), headquartered in Alexandria, Virginia
is principally focused on providing a comprehensive range of information
technology services and solutions to a broad base of commercial and
governmental customers.
The Company provides a complete array of services and solutions which are
designed to enable customers to focus on using their enterprise rather
than maintaining them.
The Company's major initiatives presently are:
* Seat Management provides customers with complete life cycle
management of all desk top PCs, servers and printers, thus allowing the
enterprise staff to focus on core responsibilities.
* Network Solutions enables our customers to maximize their network
investments by providing solutions architecture, asset solutions
(hardware and software management) and systems integration solutions.
The Company recently completed one of the first Windows 2000
implementations for a commercial organization and has also launched
"Assure IT", a program designed to ensure the ongoing operational
efficiency of a customer's network.
* Business and Application development provides technical and creative
service offerings which provide interactive business solutions to our
customers. The Company has been developing Web sites since 1995.
* Information Security provides cost effective, best practice
solutions for information security problems confronting our customers.
The focus is on solutions which are minimally intrusive to the
operations. The range of services provided includes security policy
development, firewall installation and configuration, network
vulnerability audits and encryption solutions.
* Computer Maintenance provides maintenance services on a nationwide
basis, serving over 20,000 locations and more than 250,000 pieces of
equipment through a variety of programs including: On-call and resident
maintenance and repair service agreements, Warranty services for major
original equipment manufacturers, Preventive Maintenance, Asset tracking,
Maintenance outsourcing support, Equipment installs, moves and changes
and Depot and Mail-in services. Services are provided through a network
of offices dispatched by the Halifax National Support Center. Strategic
alliances are maintained with certain OEMs and integrators.
* Telecommunications Systems provides engineering, installation,
maintenance and logistic support services for various government agencies
including the Army and the U.S. Army National Guard. Orders are placed
with the Company primarily using two multi-task support contracts, Long
Term Life Cycle Support (LTLCS) and Digital Switch Systems Modernization
Program (DSSMP).
Government customers are supported in the following areas: Network
engineering and installation, both secured and non secured; Network
administration; EF&I of digital telephone networks; Upgrade of radio
rooms; Upgrade of cable plant infrastructures; and Installation of blown
fibers systems.
The Company's current strategy is to continue to develop an important
presence in the eastern United States, while seeking to provide services
nationwide for selected engagements.
The Company's general business strategy is to secure a prominent position
as a leading provider of the broad range of information technology
services and solutions 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".
HISTORY
The Company was incorporated in Virginia in 1967 as Halifax Engineering,
Inc., the successor to the business begun as a sole proprietorship in
1967. On April 1, 1970, Halifax acquired the Field Service Division of
United Industries. This expanded the business base in technical services
and field engineering. In 1991 the Company's name was changed to Halifax
Corporation.
On June 30, 1993, the Company acquired the services division of Electronic
Associates, Inc. The division expanded the Company's non-federal
business and provided an additional service line for simulator
operations, maintenance and integration.
On April 1, 1996, the Company completed the acquisition of privately held
CMS Automation, Inc. (CMSA) a Richmond, Virginia computer systems
integration company. On 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.
RECENT DEVELOPMENTS
Sale of Operational Outsourcing Division
On May 31, 2000 the Company sold its Operational Outsourcing business (See
Note 15 to the consolidated financial statements) which was non-core to
the company's long-term growth strategy. The Company's Operational
Outsourcing Division provides complete facilities management and
maintenance outsourcing capabilities to assist institutional, government
and commercial clients in outsourcing facilities operations
On June 2, 2000, the Company executed and delivered a Stock Purchase
Agreement dated as of May 31, 2000 with U.S. Facilities, Inc., a Delaware
corporation ("Buyer") providing for the sale by the Company of the
capital stock of its wholly-owned subsidiary, Halifax Technical Services,
Inc. ("HTSI") for a purchase price of $5,600,000, of which $5,500,000 was
paid to Halifax at Closing with the balance of $100,000 due on the first
anniversary of the Closing. The purchase price remains subject to
various adjustments set forth in the Agreement. The closing of the
transactions contemplated in the Agreement (the "Closing") took place
simultaneously with the execution and delivery thereof, effective as of
May 31, 2000. (See Note 15 to the consolidated financial statements.)
The Company and the Buyer executed and exchanged at Closing, a Transition
Agreement pursuant to which the Company will, for a limited period of
time following the Closing, provide administrative assistance and other
transition services to the Buyer in connection with Buyer's take-over of
HTSI.
A portion of the proceeds received by Halifax, in the approximate amount
of $2,900,000, was applied by Halifax on the date of the Closing to the
repayment of a portion of its outstanding bank debt.
Embezzlement Matter
On March 18, 1999 the Company announced that a material embezzlement had
occurred at one of the Company's subsidiaries. (See Note 2 to the
consolidated financial statements.) The embezzlement occurred over a
four year period and aggregated approximately $15.4 million of which
approximately $15 million was embezzled from the Company and $400,000
prior to its acquisition by Halifax. After net recoveries through March
31, 2000, as discussed below, the cumulative net embezzlement loss before
taxes was approximately $9.3 million.
The embezzlement had a material effect on the Company's financial
statements for fiscal years 2000, 1999, 1998 and 1997. In addition to
the correction for overstated assets and understated liabilities, the
Company recorded a gross embezzlement loss of $6,093,000, $6,044,000 and
$2,892,000 for fiscal years ended March 31, 1999, 1998 and 1997
respectively. The embezzlement loss for fiscal 1999 was recorded net of
projected recoveries of $3,500,000 (net of recovery costs of $1,000,000)
resulting in a net embezzlement loss for fiscal year 1999 of $2,593,000.
During the year ended March 31, 1999 the Company recovered $672,000
creating a recovery receivable outstanding of $2,828,000. The recovery
receivable was collected in fiscal 2000.
During the year ended March 31, 2000 the Company recovered an additional
$2,250,000 (net of recovery costs of $250,000) in conjunction with its
embezzlement recovery activities. The specific terms and conditions
associated with the payment, including the identity of the party, are
subjects of a confidentiality agreement that precludes disclosure.
The Company continues to pursue recovery activities from certain parties,
although no assurances can be given as to the timing or extent of such
recoveries.
Federal Government Contracts
A significant portion of the Company's revenues have historically been
derived from contracts or subcontracts with the United States Government.
Excluding the sale of HTSI ("Discontinued Operations") in fiscal years
2000, 1999 and 1998, the Company received revenues from 29, 25 and 88
Government contracts, respectively, which accounted for approximately
25%, 36% and 26%, respectively, of the Company's total revenues. The
embezzlement matter did not involve or affect the Company's fulfillment
of its Government contracts nor its accounting thereof and it did not
trigger any termination provisions under government contracts.
The services of the Company are performed under cost reimbursable, time-
and-materials and fixed-price contracts and subcontracts. Under cost
reimbursable contracts the Government reimburses the Company for its
allowable costs permitted by Government regulations and pays the Company
a negotiated fixed fee, incentive fee, award fee or combination thereof.
Under time-and-materials contracts, the Company receives a fixed hourly
rate intended to cover salary costs attributable to work performed on the
contracts and related indirect expenses, as well as 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.
With the sale of the Company's Operational Outsourcing Division on May 31,
2000 the Company's dependence on Government contracts will be materially
reduced from approximately $30.1 million to $4.0 million, a reduction of
85%.
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 information technology services and
solutions follows from its prior acquisition strategy where some expanded
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 excluding Discontinued Operations (see Management Discussion and
Analysis for further discussion):
Years Ended March 31,
2000 1999 1998
Commercial $23,394,000 44% $23,725,000 40% $ 28,770,000 51%
State/Local 16,435,000 31% 13,866,000 24% 12,995,000 23%
Federal
Government 13,701,000 25% 21,480,000 36% 14,454,000 26%
Total $53,530,000 100% $59,071,000 100% $ 56,219,000 100%
Type of Contracts
The following table reflects, by type of contract (excluding Discontinued
Operations), the amount of revenues derived for the periods indicated:
Years Ended March 31,
2000 1999 1998
Cost
reimbursable $ 341,000 1% $ 363,000 1% $ 227,000 0%
Time &
materials 2,851,000 5% 3,878,000 6% 4,531,000 8%
Fixed-price 50,338,000 94% 54,830,000 93% 51,461,000 92%
Total $53,530,000 100% $59,071,000 100% $56,219,000 100%
Accounts Receivable
Trade accounts receivable at March 31, 2000 and 1999 represented 49% and
61% 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.
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, 2000 and 1999, see Note 3 to the consolidated financial
statements.
Backlog
Excluding Discontinued Operations, the Company's funded backlog for
services as of March 31, 2000, 1999 and 1998 was $14,000,000,
$25,000,000, and $31,000,000, 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 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.
As of March 31, 2000, 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 $254,000,000. Excluding
contracts associated with the Discontinued Operations the unfunded
portion is $240,000,000 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. The revenues expected for fiscal year 2001 from the potential
revenues is $28,000,000.
Commercial contracts do not typically have multi-year options, and
accordingly, related backlog levels are not significantly increasing in
proportion to total revenues.
Marketing
Commercial marketing involves the determination of customer needs that
match the services offered by the Company. This is accomplished through
the Company's commercial sales and marketing group which develops service
and solutions offerings, conducts sales calls, attends trade shows, and
builds 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 generated.
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.
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. Customer 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. Technology services are predominately concentrated
on the Mid-Atlantic coast, computer maintenance services are conducted on
a nationwide basis.
Personnel
On March 31, 2000, the Company had 607 employees of whom 73 were part
time. Adjusted for Discontinued Operations, there were 343 full time and
7 part time employees. Because of the nature of services provided, many
employees are professional or technical personnel with high levels of
training and skills, including engineers, and skilled technicians and
mechanics. The Company believes its employee relations 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 a labor union on one of its government contracts.
To date, relations 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 its headquarters office complex for
$5,250,000 and leased back the 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 17 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
The following matters were submitted to a vote of shareholders on March 2,
2000 at the Company's Annual Meeting of Shareholders.
Shares Voted:
1) Election of Directors For Against Abstained
Arch C. Scurlock 1,896,507 - 1,566
John H. Grover 1,897,507 - 566
Thomas L. Hewitt 1,897,507 - 566
Alvin E. Nashman 1,830,557 - 67,516
John J. Ries 1,896,507 - 1,566
John M. Toups 1,830,557 - 67,516
2) Ratification of Deloitte &
Touche LLP as independent
public accountants of the
Company for the fiscal year
ending March 31, 2000 1,897,657 376 40
3) Approval of amendment of the
Company's 1994 Key Employee
Stock Option Plan to increase
the number of shares issuable
from 280,000 to 400,000. 1,204,880 19,764 1,097
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
At June 22, 2000 there were approximately 711 holders of record of the
Company's Common Stock as reported by the Company's transfer agent.
The following table sets forth the quarterly range of high and low sales
prices on the American Stock Exchange.
Fiscal Year 2000 Fiscal Year 1999
Fiscal Quarter High Low High Low
April - June (a) $ - $ - $9-1/2 $7-5/8
July - Sept. 7-1/8 4-1/2 9-1/4 6-5/8
Oct. - Dec. 7-1/8 4-1/2 9-3/8 5-1/4
Jan. - March 8 5-15/16 11 7
(a) The Company's stock did not trade from March 17, 1999 until September
13, 1999 due to an American Stock Exchange trading halt. Upon the filing
of the Company's 10-K for the year ended March 31, 1999, trading was
resumed.
The Company did not declare a cash dividend to be paid in fiscal year 2000
and there is no assurance it will do so in future periods. Amendments
to the current bank loan agreement prohibit the payment of dividends.
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.
Item 6. Selected Financial Data
The following table includes certain selected financial data adjusted for
Discontinued Operations(see Note 15 to the consolidated statements) of the
Company (amounts in thousands, except per share data).
2000 1999 1998 1997 1996
Revenue - Continuing $53,530 $ 59,071 $ 56,219 $ 57,341 $33,111
Operations
Income (loss)
Continuing operations 1,385 (5,316) (5,512) (3,640) 577
Discontinued operations 928 17 (88) 320 186
Net income (loss) $ 2,313 $(5,299) $(5,600) $(3,320) $ 763
Total Assets $27,808 $ 38,735 $ 30,967 $ 37,776 $24,828
Long-term obligations $12,793 $ 12,505 $ 12,923 $ 15,956 $ 3,313
Income (loss) per common
share - basic
Continuing operations $ .70 $ (2.64) $ (2.75) $ (1.83) $ .33
Discontinued operations .47 .01 (.04) .16 .10
$ 1.17 $ (2.63) $ (2.79) $ (1.67) $ .43
Income (loss) per common
share - diluted
Continuing operations $ .69 $ (2.64) $ (2.75) $ (1.83) $ .33
Discontinued operations .46 .01 (.04) .16 .10
$ 1.15 $ (2.63) $ (2.79) $ (1.67) $ .43
Weighted average number
of
shares outstanding
Basic 1,984,014 2,012,611 2,006,603 1,985,599 1,756,811
Diluted* 1,999,811 2,012,611 2,006,603 1,985,599 1,756,919
Dividends per common $ - $ .20 $ .20 $ 1.87 $ 1.73
share
*Due to loss in 1999, 1998 and 1997, no effect is given to dilutive securities
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 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
operations and planned growth, ramifications regarding the embezzlement
matter and 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 consolidated 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 2000, 1999, 1998 and 1997, and accordingly, the Company's
financial statements for 1998 and 1997 have been previously 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).
Results of operations and related notes thereto have been adjusted for
Discontinued Operations. (See Note 15 to the consolidated financial
statements.)
Years Ended March 31,
Results of Operations 2000 1999 Change % 1999 1998 Change %
Revenues $53,530 $59,071 $(5,541) -9% $59,071 $56,219 $2,852 5%
Cost of services 51,183 58,031 (6,848) -12% 58,031 53,185 4,846 9%
Percent of revenues 96% 98% 98% 95%
General and Administrative 2,096 2,052 44 2% 2,052 2,113 (61) -3%
Percent of revenues 4% 3% 3% 4%
Total operating cost and
expenses 53,279 60,083 (6,804) -11% 60,083 55,298 4,785 9%
Percent of revenues 100% 102% 102% 98%
Operating income (loss) 251 (1,012) 1,263 N/M (1,012) 921 (1,933) N/M
Percent of revenues 0% -2% -2% 2%
Interest expense 1,066 1,050 16 2% 1,050 1,170 (120) -10%
Other (income) expense (55) 773 (828) N/M 773 (923) 1,696 N/M
Embezzlement (recovery)
expense (2,250) 2,593 (4,843) N/M 2,593 6,044 (3,451) N/M
Income (loss) before taxes
and
discontinued operations 1,490 (5,428) 6,918 N/M (5,428) (5,370) (58) -1%
Income tax expense
(benefit) 105 (112) 217 N/M (112) 142 (254) N/M
Income (loss) before
discontinued
operations 1,385 (5,316) 6,701 N/M (5,316) (5,512) 196 4%
Discontinued operations 928 17 911 N/M 17 (88) 105 N/M
Net income (loss) $ 2,313 $(5,299) $ 7,612 N/M $(5,299) $(5,600) $ 301 5%
Earnings (loss) per share
- - basic
Continuing operations $ .70 $ (2.64) $ (2.64) $(2.75)
Discontinued operations .47 .01 .01 (.04)
$ 1.17 $ (2.63) $ (2.63) $(2.79)
Earnings (loss) per share
- - diluted
Continuing operations $ .69 $ (2.64) $ (2.64) $ (2.75)
Discontinued operations .46 .01 .01 (.04)
$ 1.15 $ (2.63) $ (2.63) $ (2.79)
Revenues
Revenues for the fiscal year ended March 31, 2000 decreased by 9% from
1999 principally due to reductions in orders from the U.S. Army on a
digital communications switch contract. This was partially offset by the
ramp-up of deliveries under the Company's seat management contract with
the Virginia Department of Transportation.
Revenues for the fiscal year ended March 31, 1999 increased by 5% from
1998 primarily due to increased orders from the U.S. Army on a digital
communications switch contract.
Operating Costs and Expenses
Cost of services for the fiscal year ended March 31, 2000 decreased by 12%
from 1999, which was somewhat larger than the comparable revenues
decline. Although revenues declined year on year, the fixed price lower
margin U.S. Army business which declined was somewhat offset by growth in
the higher margin technology services which resulted in cost of services
decreasing at a higher percentage than the percentage of decrease in
revenue. In addition, 1999 costs of services included certain unusual
charges related to inventory obsolescence of approximately $1.7 million
due to potential Y2K issues and the write off of an under performing
maintenance services contract.
Cost of services for the fiscal year ended March 31, 1999 increased by 9%
over 1998 principally due to the non-recurring charges for inventory
obsolescence, under performing contracts which impacted 1999, and the of
higher revenues from the lower margin U.S. Army business costs.
General and administrative expenses increased 2% in 2000 from 1999
principally as a result of increases in staffing in key strategic areas
offset by reductions in depreciation expense.
General and administrative expenses for the fiscal year ended March 31,
1999 decreased 3% from 1998 primarily due to modestly lower commercial
insurance costs.
Operating Income
As a result of the margin improvement arising from the sales mix change
and the reduction in general and administrative expenses the Company
generated operating income of $251,000 in 2000 as compared to an
operating loss of $1.0 million in 1999.
In 1999 the Company reported an operating loss of $1.0 million as compared
to operating income of $921,000 in 1998. The principal reason for the
change was the increase in volume in lower margin U.S. Army business
which materially increased the cost of services ratio for 1999 as
compared to 1998.
Interest and Other Income or Expense
Interest expense increased 2% in 2000 as compared to 1999, primarily due
to higher interest rates and the large amount of debt outstanding during
the first half of fiscal year 2000.
Interest expense for 1999 decreased 10% as compared to 1998, principally
due to a decline in effective interest rates.
Other income was $55,000 in 2000 as compared to expense of $773,000 in
1999 which was principally related to one-time write-offs of certain
fixed assets in 1999.
In 1998 other income of $923,000 was primarily attributable to a gain
recognized on the sale/leaseback of the Company's corporate headquarters.
Embezzlement Loss
Embezzlement losses reflect the cash amounts embezzled from the Company.
The embezzlement loss in 1998 reflects actual cash losses. The loss in
1999 was net of $3.5 million of total net recoveries realized from
certain recovered assets (net of recovery costs) and insurance proceeds.
In 2000 embezzlement recovery reflected additional recoveries net of
certain recovery costs. For additional discussion see "Embezzlement
Matter" in Item 1 and Note 2 of the consolidated financial statements.
Income Taxes
As a result of the Company's historical losses (principally from the
embezzlement) the Company generated significant loss carryforwards (both
federal and state). At March 31, 2000 the Company had remaining net
operating loss carryforwards amounting to approximately $10.2 million.
Due to the uncertainty of future realization the Company has not recorded
a net benefit for these operating loss carryforwards in its financial
statements.
Discontinued Operations
In May 2000 the Company sold its Operational Outsourcing Division and
accordingly the financial results for this division have been
reclassified as Discontinued Operations. (See Note 15 to the
consolidated financial statements.)
The net of tax results for Discontinued Operations for 2000, 1999 and 1998
were $928,000, $17,000, and $(88,000), respectively. The increase in net
income from 1999 to 2000 resulted principally from one-time contract
modifications generated by a single cusomter.
Net Income (loss) from Continuing Operations
The 2000 net income of $1.4 million was principally the result of
embezzlement recoveries amounting to $2.25 million.
Net losses in 1999 of $5.3 million were the result of embezzlement losses
of $2.6 million and operating loss, in the amount of $1.0 million.
Net losses in 1998 of $5.6 million were related to embezzlement losses of
$6.0 million and operating income, in the amount of $921,000.
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 issues, 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.
Liquidity and Capital Resources 2000 1999 1998
Cash $ 1,800,000 $ 0 $ 0
Working capital 3,771,000 740,000 7,363,000
Net cash provided by operations
before impact of embezzlement 1,488,000 1,940,000 4,804,000
Net cash recovered (used)
related to embezzlement 5,078,000 (5,421,000) (6,044,000)
Net cash provided by (used in)
operating activities 6,566,000 (3,481,000) (1,240,000)
Net cash (used) provided by
investment activities (694,000) (651,000) 2,776,000
Net cash (used) provided by
financing activities $(4,072,000) $4,132,000 $(1,810,000)
At March 31, 2000, the Company's working capital of $3,771,000 and current
ratio of 1.22 indicates the continuing improvement in the Company's
financial strength which was negatively impacted 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 July 1, 2001 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. In 1998,
operations required $1,240,000 for working capital needs.
A summary of future minimum lease payments is in Note 10 to the
consolidated financial statements. Capital expenditures in 1999 and 2000
were substantially reduced from prior years to conserve cash and the
Company does not expect fiscal year 2001 technology requirements to
result in greater capital expenditures than fiscal year 2000. The
Company continues to sublease a portion of its headquarters building
generating approximately $148,000 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 forbearance agreements which enabled the borrowing agreement
to remain in effect. Effective September 1, 1999, and as amended
December 21, 1999 the Company re-negotiated its borrowing agreement to
provide funding availability from its current collateral base. At March
31, 2000 the Company was in technical default of the agreement and
amended the agreement effective July 5, 2000 extending the agreement
through July 1, 2001. In the amendment dated July 5, 2000, the Company
agreed to certain accelerated payments of its term debt and reduced the
availability of the revolving credit agreement to $6 million (See Note 6
to the consolidated financial statements). The revolving credit
agreement availability which had been reduced to $12 million at March
31, 2000 ($6 million effective July 5, 2000) is subject to borrowing base
requirements primarily tied to levels of accounts receivable.
The bank term notes aggregating $4.6 million at March 31, 1999 were
renegotiated effective September 1, and amended December 21, 1999 to
amounts aggregating $3.5 million. Bank term notes outstanding at March
31, 2000 amounted to $ 3.19 million.
The subordinated debt agreements with an affiliate totaled $4 million at
March 31, 2000. The banking agreement dated September 1, 1999 prohibits
the payments of principal or interest. (See Note 6 to the consolidated
financial statements.)
In September 1999, the Company entered into an agreement with a major
supplier of digital communications switch hardware for the Company's
United States Army contract where approximately $5,500,000 of outstanding
accounts payable arising since March 31, 1999 due to the supplier was
converted to a note payable which is being paid over 18 months with
interest at 8.5%. $507,000 was paid in September and October 1999,
$299,965 is being paid on the first day of the next ensuing 15 months and
a final payment of $299,974 is due on February 1, 2001.
The Company believes that funds generated from operations, bank
borrowings, embezzlement recoveries and investing activities (including
the sale of the Company's Operational Outsourcing Division) should be
sufficient to meet its current operating cash requirements through July
1, 2001 although there can be no assurances that all the aforementioned
sources of cash can be realized.
Year 2000 Compliance
The Company did not experience any significant malfunctions or errors in
its operating or business systems when the date changed from 1999 to
2000. Based on operations since January 1, 2000, the Company does not
expect any significant impact to its on-going business as a result of
"Year 2000" issues. However, it is possible that the full impact of the
date change, which was of concern due to the possibility that computer
programs that had date-sensitive software may have recognized a date
using "00" as the year 1900 rather than the year 2000, has not been fully
recognized. For example, it could be possible that year 2000 or similar
issues, such as leap year -related problems,
may occur and impair the Company's ability to process transactions, send
invoices, maintain payroll or engage in similar normal business
activities, such as financial closing at month or quarterly end. The
Company believes that any of these types of problems that may be
encountered are likely to be minor and correctable. In addition, the
Company could still be negatively affected if its' customers or suppliers
are adversely affected by year 2000 or similar issues. The Company is
not currently aware of any significant year 2000 or similar problems that
have arisen for its customers and suppliers.
Contingency Plans: The Company has developed a Year 2000 Contingency Plan
designed to address problems arising from Year 2000 failures of critical
third parties which is directed towards providing alternate sources of
supply to the Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates, primarily as result
of bank debt to finance its business. The floating interest debt exposes
the Company to interest rate risk, with the primary interest rate
exposure resulting from changes in the LIBOR rate. It is assumed that
the LIBOR rate will remain constant in the future. Adverse changes in
the interest rates or the Company's inability to refinance its long-term
obligations may have a material negative impact on the Company's
operations.
The definitive extent of the Company's interest rate risk is not
quantifiable or predictable because of the variability of future interest
rates and business financing requirements. The Company does not believe
such risk is material. The Company does not customarily use derivative
instruments to adjust the Company's interest rate risk profile.
The information below summarizes the Company's sensitivity to market
risks as of March 31, 2000. The table presents principal cash flows and
related interest rates by year of maturity of the Company's funded debt.
Note 6 to the consolidated financial statements contains descriptions of
the Company's funded debt and should be read in conjunction with the
table below (amount in thousands).
Year Ending
March 31,
Long-term debt (including 2001 2002 Total Fair Value
current maturities) Debt
Revolving credit agreement at
the LIBOR rate plus 2.55%. Due
July 1, 2001. Average interest
rate of 8.46%. $ - $ 6,677 $ 6,677 $ 6,677
Tier II term note dated June
25, 1998 at the LIBOR rate plus
2.65%. Due July 1, 2001.
Average interest rate of 8.56%. 384 2,116 2,500 2,500
Tier III term note dated June
25, 1998 at the LIBOR rate plus
2.65%. Due July 1, 2001.
Average interest rate of 8.56%. 691 - 691 691
Total variable debt 1,075 8,793 9,868 9,868
7% subordinated note from
affiliate due January 27, 2003.
Estimated yield of 8.56% for
2001 and 9.0% for 2002. - 2,000 2,000 1,960
8% subordinated notes from
affiliate due July 1, 2001 - 2,000 2,000 2,000
Subordinated debt dated
September 2, 1999 with interest
at 8.5%. Due February 1, 2001. 2,887 - 2,887 2,887
Total fixed debt 2,887 4,000 6,887 6,847
Total debt $3,962 $12,793 $16,755 $16,715
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
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
Item 11. Executive Compensation
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K
(a) The following documents are filed as part of this report:
1.Consolidated Financial Statements
o Report of Independent Auditors
o Consolidated Statements of Operations for the years
ended March 31, 2000, 1999 and 1998
o Consolidated Balance Sheets as of March 31, 2000
and 1999
o Consolidated Statements of Cash Flows for the years
ended March 31, 2000, 1999 and 1998
o Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the years ended March 31,
2000, 1999 and 1998
o Notes to Consolidated Financial Statements
2. Financial Statement Schedule
o 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.)
3.3 Articles of Amendment to Articles of Incorporation.
4.1 Loan and Security Agreement dated January 30, 1989 between the
Company and Crestar Bank. (Incorporated by reference to Exhibit 4.1
to Form 10-K for the year ended March 31, 1989.)
4.2 First Amendment to Amended and Restated Loan and Security Agreement
between the Company and Crestar Bank dated Dec. 11, 1992 and amended
and restated revolving note. (Incorporated by reference to Exhibit
4.2 to Form 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.
4.7 Third Amendment to the Sixth Amended and Restated Loan and Security
Agreement between the Company and SunTrust Bank (formerly Crestar
Bank) dated September 7, 1999 and related 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).
10.7 Charles L. McNew Executive Severance Agreement.
22 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP, Independent Auditors.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
(b) Reports on Form 8-K
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/Charles L. McNew
Charles L. McNew
President and Chief Executive Officer Date: 7/10/00
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/Charles L. McNew President and 7/10/00
Charles L. McNew Chief Executive
Principal Executive Officer Officer, Director
/s/Joseph Sciacca Vice President, 7/10/00
Joseph Sciacca Finance and Chief
Principal Financial and Financial Officer
Accounting Officer
/s/Arch C. Scurlock Chairman of the 7/10/00
Arch C. Scurlock Board of Directors
/s/John H. Grover Director 7/10/00
John H. Grover
/s/Thomas L. Hewitt Director 7/10/00
Thomas L. Hewitt
/s/Alvin E. Nashman Director 7/10/00
Alvin E. Nashman
/s/John Toups Director 7/10/00
John Toups
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Halifax Corporation:
We have audited the accompanying consolidated balance sheet of Halifax
Corporation and subsidiaries as of March 31, 2000, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item
14(a)2. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Halifax Corporation and
subsidiaries at March 31, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in
our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As discussed in Note 15 to the financial statements, the Company has
discontinued the operational outsourcing segment of its operations.
/s/DELOITTE & TOUCHE LLP
McLean, VA
June 15, 2000
(July 5, 2000 as to Note 6)
INDEPENDENT AUDITORS' REPORT
Report Of Independent Auditors
Board of Directors and Stockholders Halifax Corporation
We have audited the accompanying consolidated balance sheet of Halifax
Corporation as of March 31, 1999, and the related consolidated statements
of operations, changes in stockholders' equity (deficit) and cash flows
for each of the two years in the period then ended. Our audits also
included the financial statement schedule listed in the index at item
14(a)2 as of March 31, 1999 and 1998. 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 auditing standards generally
accepted in the United States. 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 the consolidated results of
its operations and its cash flows for each of the two years in the period
then ended, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial
statement schedule as of March 31, 1999 and 1998, 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
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
Revenues (Note 1) $53,530,000 $59,071,000 $56,219,000
Operating costs and expenses:
Cost of services 51,183,000 58,031,000 53,185,000
General and administrative 2,096,000 2,052,000 2,113,000
Total operating costs and
expenses 53,279,000 60,083,000 55,298,000
Operating income (loss) 251,000 (1,012,000) 921,000
Interest expense (1,066,000) (1,050,000) (1,170,000)
Other income (expense) 55,000 (773,000) 923,000
Embezzlement recovery (loss) 2,250,000 (2,593,000) (6,044,000)
Income (loss) from continuing
operations before income taxes 1,490,000 (5,428,000) (5,370,000)
Income tax expense (benefit) 105,000 (112,000) 142,000
Income (loss) from continuing
operations 1,385,000 (5,316,000) (5,512,000)
Income from discontinued
operations net of income tax
expense (benefit) of $35,000,
$12,000 and $(58,000) in 2000,
1999 and 1998, respectively 928,000 17,000 (88,000)
Net income (loss) $ 2,313,000 $(5,299,000) $(5,600,000)
Earnings (loss) per common
share-basic:
Continuing operations $ .70 $ (2.64) $ (2.75)
Discontinued operations .47 .01 (.04)
$ 1.17 $ (2.63) $ ( 2.79)
Earnings (loss) per common
share-diluted:
Continuing operations $ .69 $ (2.64) $ (2.75)
Discontinued operations .46 .01 (.04)
$ 1.15 $ (2.63) $ (2.79)
Weighted average number of
common shares outstanding -
basic 1,984,014 2,012,611 2,006,603
Weighted average number of
common shares
outstanding - diluted 1,999,811 2,012,611 2,006,603
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND 1999
March 31
2000 1999
ASSETS
CURRENT ASSETS
Cash $ 1,800,000 $
-
Restricted cash 650,000 -
Trade accounts receivable (Note 3) 13,558,000 23,800,000
Other receivables (Note 3) - 2,848,000
Inventory (Note 1) 4,390,000 3,949,000
Prepaid expenses and other current assets 719,000 569,000
Income taxes receivable (Notes 1 and 9) - 808,000
TOTAL CURRENT ASSETS 21,117,000 31,974,000
PROPERTY AND EQUIPMENT, net (Notes 1 and 4) 2,106,000 2,230,000
GOODWILL, net (Notes 1 and 5) 4,113,000 4,350,000
OTHER ASSETS 472,000 181,000
TOTAL ASSETS $27,808,000 $ 38,735,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 4,809,000 $ 14,091,000
Accrued expenses (Note 7) 8,080,000 7,835,000
Deferred maintenance revenue 596,000 1,588,000
Current portion of long-term debt (Note 6) 3,962,000 7,720,000
Income taxes payable 36,000 -
TOTAL CURRENT LIABILITIES 17,483,000 31,234,000
LONG-TERM BANK DEBT (Note 6) 8,793,000 8,505,000
SUBORDINATED DEBT - AFFILIATE (Note 6) 4,000,000 4,000,000
DEFERRED INCOME (Note 10) 572,000 630,000
TOTAL LIABILITIES 30,848,000 44,369,000
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value authorized
1,500,000, issued 0 shares - -
Common stock, $.24 par value:
Authorized - 6,000,000 shares
Issued - 2,316,370 in 2000 and 2,270,090 in
1999
Outstanding - 2,017,436 in 2000 and 2,013,406
in 1999 560,000 549,000
Additional paid-in capital 4,683,000 4,413,000
Accumulated deficit (8,071,000) (10,384,000)
Less Treasury stock at cost - 298,934 and
shares in 2000 and 1999 (212,000) (212,000)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,040,000) (5,634,000)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $27,808,000 $ 38,735,000
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
Cash flows from operating
activities:
Net income (loss) $ 2,313,000 $(5,299,000) $(5,600,000)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 1,055,000 1,277,000 1,404,000
Common stock issued in lieu of
interest 233,000 - -
Loss (gain) on sale or disposal
of property and equipment - 773,000 (695,000)
Changes in assets and
liabilities:
Decrease(increase) in accounts
receivable 10,242,000 (7,282,000) 2,899,000
Decrease (increase) in other
receivables 2,848,000 (2,831,000) 20,000
(Increase) decrease in inventory (441,000) 1,309,000 54,000
(Increase) decrease in prepaid
expenses and other current
assets (150,000) (276,000) 418,000
(Increase) decrease in other
assets (291,000) 139,000 93,000
Decrease (increase) in income
tax receivable 808,000 (226,000) (434,000)
(Decrease) increase in accounts
payable, accrued expenses and
other current liabilities (10,029,000) 8,995,000 (132,000)
Increase in deferred income
taxes - - 43,000
Increase in income taxes payable 36,000 - -
(Decrease) increase in deferred
income (58,000) (60,000) 690,000
Net cash provided by (used in)
operating activities 6,566,000 (3,481,000) (1,240,000)
Cash flows from investing
activities:
Purchase of property and
equipment 694,000) (651,000) (2,030,000)
Proceeds from sale of property
and equipment - - 4,856,000
Acquisitions - - (50,000)
Net cash (used in) provided by
investing activities (694,000) (651,000) 2,776,000
Cash flows from financing
activities:
Proceeds from debt borrowings 43,207,000 53,431,000 36,862,000
Repayments of debt (46,677,000) (48,915,000) (38,315,000)
Restricted cash (650,000) - -
Cash dividends paid - (403,000) (401,000)
Proceeds from sale of stock
upon exercise of stock options 48,000 19,000 44,000
Net cash (used in) provided by
financing activities (4,072,000) 4,132,000 (1,810,000)
Net increase (decrease) in cash 1,800,000 - (274,000)
Cash at beginning of year - - 274,000
Cash at end of year $ 1,800,000 $ - $ -
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
Common Additional Retained Treasury Stock
Stock
Paid-In Earnings
Shares Par Capital (Deficit) Shares Cost Total
Value
March 31, 1997 2,258,866 $546,000 $4,358,000 $ 1,319,000 300,484 $ (213,000) $ 6,010,000
Cash Dividends
($.20 per share) - - - (401,000) - - (401,000)
Net loss - - - (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
March 31, 1998 2,267,166 $548,000 $4,399,000 $(4,682,000) 298,934 $ (212,000) $53,000
Cash Dividends
($.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 $549,000 $4,413,000 $(10,384,00) 298,934 $ (212,000) $(5,634,000)
Net income - - - 2,313,000 - - 2,313,000
Exercise of
Stock Options 10,800 2,000 46,000 - - - 48,000
Issuance of
Common Stock
(Note 8) 35,480 9,000 224,000 - - - 233,000
March 31, 2000 2,316,370 $560,000 $4,683,000 $(8,071,000) 298,934 $ (212,000) $(3,040,000)
See notes to consolidated financial statements.
HALIFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
Business Activity - Halifax Corporation, (the "Company") provides
technology services and facilities management (See Note 15 for details
regarding disposition of operational outsourcing division) 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.
Principles of Consolidation - The Company's consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. Wholly-owned subsidiaries include Halifax Engineering,
Inc., Halifax Realty, Inc., and Halifax Technology Services, Inc. (HTSI)
which was sold effective March 31, 2000 (see Note 15). All significant
intercompany transactions are eliminated in consolidation.
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.
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 $125,000 and $1,500,000 at March
31, 2000 and 1999, respectively.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of 4 years for automotive equipment, 3-10 years
for machinery and equipment, 5-10 years for furniture and equipment and
12 years for building improvements. The Company examines the carrying
value of its property and equipment to determine whether there are any
impairment losses. If indicators of impairments were present, an
impairment loss would be charged to expense in the period identified. No
reduction of property and equipment was necessary in 2000 or in 1999.
Goodwill - Goodwill in acquired companies, described in Note 5, is being
amortized using the straight-line method over periods ranging from 10 to
25 years. The Company examines the carrying value of its goodwill to
determine whether there are any impairment losses if indicators of
impairment are present. If future cash flows are not expected to be
sufficient to recover the asset's carrying amount, an impairment loss
would be charged to expense in the period identified. No reduction of
goodwill for impairment was necessary in 2000 or in 1999.
Revenue Recognition - Service revenues result from contracts with various
government agencies and private industry. Revenues on cost plus fee and
fixed price contracts are recognized using the percentage of completion
method generally determined on the basis of cost incurred to date as
percentage of estimated total cost. Revenues on time and materials
contracts are recognized at contractual rates as labor hours and
materials are expended. Losses are recognized in the period in which
they become determinable.
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.
Stock-Based Compensation- The Company accounts for stock-based
compensation for employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and comply
with the disclosure provision of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25 Compensation expense is based on the difference, if any, on the
measurement date, between the fair value of the common stock and the
exercise price.
Earnings Per Common Share - The computation of basic earnings per share
is based on the weighted average number of shares outstanding during the
period. Diluted earning per share is based on the weighted average
number of shares including adjustments to both net income and shares
outstanding to assume the conversion of dilutive common stock
equivalents. Due to the net loss in the years ended March 31, 1999 and
1998, the computation of diluted earnings per share for those years is
based on the weighted average number of shares outstanding during the
period and does not include dilutive common stock equivalents.
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.
Reclassification - Certain reclassifications have been made in the 1999
and 1998 financial statements to conform to the 2000 presentation. The
consolidated statement of operations and related notes thereto have been
adjusted to reflect Discontinued Operations arising from the sale of the
Company's Operational Outsourcing Division (HTSI). (See Note 15.)
New Accounting Pronouncements - In March 2000, the Financial Accounting
Standard Board (FASB) issued FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation - an interpretation of
APB Opinion No. 25", which clarifies the application of APB Opinion No.
25, "Accounting for Stock Issued to Employees" for certain issues
("Opinion No. 25"). The Interpretation clarifies (a) the definition of
"employee" for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. The
Interpretation is effective July 1, 2000, but certain conclusions cover
specific events occurring after December 15, 1998 or January 12, 2000,
for which the effects are recognized on a prospective basis from July 1,
2000. The Company has not yet determined what impact, if any, will
result from the adoption of this Interpretation.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, as amended, "Accounting for Derivative Instruments and Hedging
Activities," which established accounting and reporting standards for
derivative instruments (including some derivatives embedded in other
contracts) and for hedging activities by requiring that all derivatives
be recognized in the balance sheet and measured at fair value. FASB
Statement No. 133 will be adopted by the Company in its fiscal year
ending March 31, 2002, and the Company has not determined what impact, if
any, this Standard will have when adopted.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement
established accounting standards for cost incurred in the acquisition or
development and implementation
of computer software. These new standards require the capitalization of
software implementation costs relating to software acquired or developed
and implemented for internal use. The adoption of this statement,
effective January 1, 1999, had no impact on the Company's financial
position or results of operations.
2. EMBEZZLEMENT MATTER
On March 18, 1999, the Company announced that an internal investigation
had revealed a material embezzlement by the former controller of one of
the Company's subsidiaries. The embezzlement 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 embezzlement
occurred over a four year period and aggregated approximately $15.4
million of which approximately $15 million was embezzled from the Company
and $400,000 prior to its acquisition by Halifax. After net recoveries
through March 31, 2000, as discussed below, the cumulative net
embezzlement loss before taxes was approximately $9.3 million.
The embezzlement had a material effect on the Company's financial
statements for fiscal years 2000, 1999, 1998 and 1997. In addition to
the correction for overstated assets and understated liabilities, the
Company recorded a gross embezzlement loss of $6,093,000, $6,044,000 and
$2,892,000 for fiscal years ended March 31, 1999, 1998 and 1997
respectively. The embezzlement loss for fiscal 1999 was recorded net of
projected recoveries of $3,500,000 (net of recovery costs of $1,000,000)
resulting in a net embezzlement loss for fiscal year 1999 of $2,593,000.
During the year ended March 31, 1999 the Company recovered $672,000
creating a recovery receivable outstanding of $2,828,000. The recovery
receivable was collected in fiscal 2000.
During the year ended March 31, 2000 the Company recovered an additional
$2,250,000 (net of recovery costs of $250,000) in conjunction with its
embezzlement recovery activities. The specific terms and conditions
associated with the payment, including the identity of the party, are
subjects of a confidentiality agreement that precludes disclosure.
Cash received relating to embezzlement recoveries was as follows:
Fiscal 1999 $ 672,000
Fiscal 2000 6,328,000
Total cash recovered 7,000,000
Recovery costs 1,250,000
Net cash recovered $ 5,750,000
The Company continues to pursue recovery activities from certain parties
although no assurances can be given as to the timing or extent of such
recoveries.
3. ACCOUNTS RECEIVABLE
Trade accounts receivable consist of: March 31,
2000 1999
Amounts billed $12,457,000 $ 19,341,000
Amounts unbilled:
Amounts currently billable 1,414,000 4,908,000
Retainages and amounts awaiting audit 90,000 208,000
Total 13,961,000 24,457,000
Allowance for doubtful accounts (403,000) (657,000)
Total $13,558,000 $ 23,800,000
Other receivables consist of:
Embezzlement recoveries (see Note 2) $ - $ 2,828,000
Warranty and other - 20,000
$ - $ 2,848,000
Embezzlement recoveries receivable represents the difference between the
estimated $3.5 million of total net recoveries and $672,000 of cash
received at March 31, 1999. The amount was collected during the year
ended March 31, 2000.
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, 2000 will be substantially
collected within one year.
4. PROPERTY AND EQUIPMENT
Property and equipment March 31,
consists of:
Estimated
2000 1999 Useful Lives
Automotive equipment $ 354,000 $ 338,000 4 years
Machinery and equipment 6,215,000 5,648,000 3 - 10 years
Furniture and fixtures 1,408,000 1,386,000 5 - 10 years
Building and improvements 719,000 630,000 12 years
Total 8,696,000 8,002,000
Accumulated depreciation and
amortization (6,590,000) (5,772,000)
Total $ 2,106,000 $ 2,230,000
5. GOODWILL
Amortization of Goodwill is calculated using the straight-line method
over the estimated useful lives ranging from 20 to 25 years.
Intangibles, included in goodwill, consists of contract rights and is
amortized over ten years. As of March 31, 2000 goodwill consists of
$2,594,000 being amortized over 20 years, $2,485,000 being amortized over
25 years and $400,000 being amortized over 10 years. Amortization
expense was $237,000 and $254,000 for March 31, 2000 and 1999,
respectively.
March 31,
2000 1999
Goodwill $ 5,479,000 $ 5,479,000
Accumulated Amortization (1,366,000) (1,129,000)
Net Goodwill $ 4,113,000 $ 4,350,000
As a result of the disposition of its operational outsourcing division
(HTSI), the net book value of goodwill will be reduced by approximately
$700,000 and resulting annual amortization of goodwill will be reduced by
approximately $60,000. (See Note 15)
6. LONG-TERM DEBT
March 31,
Long-term debt consists of: 2000 1999
Revolving credit agreement amended effective
December 21, 1999, and July 5, 2000, with a
maximum credit line of $6,000,000. Amounts
available under this agreement are determined by
applying stated percentages to the Company's
eligible billed and unbilled receivables. A
maximum amount of $6,000,000 is available to the
Company due July 1, 2001. At March 31, 2000,
$6,680,000 was available to the Company under
the terms of the prior revolving credit
agreement. Interest accrues at LIBOR plus 2.25%
depending on a leverage ratio. The LIBOR rate
was 5.91% and 5.4% on March 31, 2000 and 1999,
respectively. $6,677,000 $11,600,000
Tier II Term Note dated June 25, 1998.
Principal to be paid in quarterly installments
due on the 15th 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 LIBOR rate plus 2.65%. The
LIBOR rate was 5.91% and 5.4% on March 31, 2000
and 1999, respectively. The note is due on July
1, 2001. 2,500,000 2,500,000
Tier III Term Note dated June 25, 1998.
Principal is to be paid in $125,000 quarterly
installments due on the 15th day of March, June,
September and December commencing September
1998. Interest accrues on the principal at the
LIBOR rate plus 3.55%. The LIBOR rate was
5.91% and 5.4% on March 31, 2000 and 1999,
respectively. The note is due on July 1, 2001. 691,000 2,125,000
Subtotal bank debt 9,868,000 16,225,000
7% Convertible Subordinated Debenture with an
affiliate (see Note 11) 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 to common stock
by note holder at any time at a conversion price
of $11.72 per common share. 2,000,000 2,000,000
Subordinated note with an affiliate (see Note
11) dated October 8, 1998. Principal due in
full July 1, 2001 but may be prepaid by the
Company at any time without penalty. Interest
accrues annually at 8%. 690,000 690,000
Subordinated note with an affiliate (see Note
11) dated October 13, 1998. Principal due in
full July 1, 2001 but may be prepaid by the
Company at any time without penalty. Interest
accrues annually at 8%. 310,000 310,000
Subordinated note with an affiliate (see Note
11) dated November 2, 1998. Principal due in
full July 1, 2001 but may be prepaid by the
Company at any time without penalty. Interest
accrues annually at 8%. 500,000 500,000
Subordinated note with an affiliate (see Note
11) dated November 5, 1998. Principal due in
full July 1, 2001 but may be prepaid by the
Company at any time without penalty. Interest
accrues annually at 8%. 500,000 500,000
Subtotal - debt affiliated parties 4,000,000 4,000,000
Subordinated note dated September 2, 1999.
Principal and interest payments of $299,965 due
on the first of each month with a final payment
due on February 1, 2001 of $299,974. The note
bears interest of 8.5% 2,887,000 -
Total debt 16,755,000 20,225,000
Less current maturities 3,962,000 7,720,000
Total long-term debt $12,793,000 $12,505,000
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 as defined in the revolving credit agreement. The
banking agreement also contains financial covenants and financial
reporting covenants. The Company has excluded $6,677,000 of the
revolving credit agreement from current liabilities because it
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 as
amended on December 21, 1999 which refinanced the Company's revolving
credit and debt. The new debt consisted 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 made $15,500,000 of credit available to
the Company. This agreement was to expire on January 2, 2001. All
assets of the Company remain as collateral in accordance with the prior
agreement. Financial covenants were 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 Company further amended its banking agreement on July 5, 2000, which
extended the agreement through July 1, 2001. The Company agreed to make
certain accelerated payments on the term loan portion of its debt, apply
a portion of future settlement proceeds (see Note 2), if any, to term
debt balances outstanding and to reduce its maximum line and the
revolving credit agreement to $6,000,000. The Company was in non-
compliance under the terms of its revolving credit agreement and term
loan facilities at March 31, 2000, with respect to targeted earning
requirements as specified in the agreement. As part of the agreement the
bank waived the non-compliance with the financial covenant. In
accordance with the terms of the new banking agreement, the Company made
additional principal payments on the Tier II and Tier III Term Notes. In
addition, the Company paid certain fees in connection with the amendment
and will be subject to additional monthly fees commencing January 1, 2001
if the current banking arrangement has not been refinanced.
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 September 1999, the Company entered into an agreement with a major
supplier of digital communications switch hardware for the Company's
United States Army contract where approximately $5,500,000 of outstanding
accounts payable arising since March 31, 1999 due to the supplier was
converted to a note payable which is being paid over 18 months with
interest at 8.5%. $507,000 was paid in September and October 1999,
$299,965 is being paid on the first day of the next ensuing 15 months and
a final payment of $299,974 is due on February 1, 2001.
The aggregate annual maturities of long-term debt, based on the terms of
the new banking agreement, are as follows for the fiscal years ending
March 31,:
2001 $ 3,962,000
2002 10,793,000
2003 2,000,000
2004 -
2005 -
Total $ 16,755,000
The carrying value of total debt approximates fair market value at March
31, 2000 and 1999.
7. ACCRUED EXPENSES
Accrued expenses consist primarily of costs incurred against various cost
reimbursable contracts and payroll related costs.
March 31,
2000 1999
Accrued expenses $ 6,250,000 $ 5,711,000
Accrued vacation 820,000 867,000
Accrued payroll 905,000 974,000
Payroll taxes accrued and
withheld 105,000 283,000
$ 8,080,000 $ 7,835,000
8. STOCK -BASED COMPENSATION
Stock Options - On September 16, 1994 the shareholders approved the new
Key Employee Stock Option Plan ("1994 Plan"). Options and/or stock
appreciation rights expire five years after the date of grant. 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 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. On March 2, 2000 the
shareholders approved amendments to the 1994 Plan which increased the
number of shares available for issuance to 400,000 shares.
A summary of options activity is as follows:
Weighted
Average Weighted
Grant Options Average
Options Date Fair Exercisable Exercise
Market price
Value
1994 PLAN
March 31, 1997 119,201 $5.78 53,249 $6.29
Options granted 15,500 8.69 - 8.69
Exercised - - - -
Cancelled (25,500) 5.00 - 5.00
Balance March 31, 1998 109,201 6.38 55,249 6.33
Options granted 34,000 7.81 - 7.81
Exercised - - - -
Cancelled - - - -
Balance March 31, 1999 143,201 6.72 61,749 6.49
Options granted 202,000 6.07 - 6.07
Exercised (10,800) 4.80 - 4.80
Cancelled (121,033) 6.19 - 6.19
Balance March 31, 2000 213,368 $ 6.50 61,749 $ 6.49
The following table summarizes the information for options outstanding
and exercisable at March 31, 2000.
Options Options
outstanding Exercisable
Options Weighted Options Weighted
Average Average
Range of Prices Outstanding Remaining Exercisab Exercise price
Life le
$4.67-7.67 59,368 1-2 years 53,249 $6.29
7.56-10.25 8,500 3 years 2,000 7.56
7.81-7.88 18,500 4 years 6,500 7.81
5.50-7.56 127,000 5 years - -
213,368 61,749 $6.49
The weighted average fair value of options granted during March 31, 2000,
1999 and 1998 are:
2000 1999 1998
Fair value of each option granted $ 6.07 $ 7.81 $ 8.69
Total number of options granted 202,000 34,000 15,500
Total fair value of options
granted $ 1,226,140 $265,540 $134,695
A summary of Non-Employee Directors Stock Options Plan
activity is as follows:
Weighted
Average Weighted
Grant Options Average
Date Fair Exercisable Exercise
Market price
Value
Options
Options granted 30,000 $ 10.25 - $ -
Balance March 31, 1998 30,000 10.25 18,750 10.25
Options granted 12,000 7.03 - -
Balance March 31, 1999
42,000 9.33 23,250 9.63
Options granted - - - -
Balance March 31, 2000 42,000 $ 9.33 23,250 $ 9.63
The following table summarizes the information for options outstanding
and exercisable at March 31, 2000.
Options Options
outstanding Exercisable
Weighted
Options Weighted Average Options Average
Range of Outstandin Remaining Life Exercisable Exercise
Prices g price
$10.25 30,000 3 years 18,750 $ 10.25
7.03 12,000 4 years 4,500 7.03
42,000 23,250 $ 9.63
The weighted average fair value of options granted during March 31, 2000,
1999 and 1998 are:
2000 1999 1998
Fair value of each option granted $ - $ 7.03 $ 10.25
Total number of options granted - 12,000 30,000
Total fair value of options $ - $84,360 $307,500
granted
All stock-based incentive awards granted in 2000, 1999 and 1998 under
the 1994 Plan were stock options with 5 year terms and vest at the end of
the third and fourth years. All awards granted in 1999 under the Non-
Employee Directors Stock Options Plan were stock options with 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. The fair value of each of
the Company's option grants is estimated on the date of grant using Black-
Scholes option - pricing model as prescribed by SFAS No. 123 using the
following assumptions: risk-free interest rate of 5.8 %, 5.36% and 5.99%
respectively, dividend yield of 0%, 2% and 2% respectively, volatility
factor related to the expected market price of the Company's common stock
of .449, .262, and .442 weighted-average expected option life of five
years. The weighted average fair value of options granted during 2000,
1999 and 1998 were $ 2.91, $2.35 and $2.66, respectively.
For purposes of proforma disclosures, the options' estimated fair values
are amortized to expense over the options' vesting periods. The Company's
proforma information for the years ended March 31, is as follows.
Consistent with the provisions of SFAS No. 123, had compensations cost
been determined based on the fair value of awards granted in 2000, 1999,
and 1998, the income and loss attributable to common shareholders would
have been as follows:
Year Ending March 31,
2000 1999 1998
Net income (as reported) $2,313,000 $ (5,299,000) $(5,600,000)
Earnings (loss) per common share
(as reported):
Basic $ 1.17 $ (2.63) $ (2.79)
Diluted $ 1.15 $ (2.63) $ (2.79)
Proforma net income (loss) $2,067,000 $ (5,354,000) $(5,634,000)
Proforma earnings (loss) per
common share:
Basic $ 1.04 $ (2.66) $ (2.81)
Diluted $ 1.03 $ (2.66) $ (2.81)
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 $198,000 in 2000, $230,000 in
1999 and $199,000 in 1998.
EMPLOYEE STOCK PURCHASE PLAN
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.
9. 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 (benefit) for Continuing Operations
are as follows for the years ended March 31:
2000 1999 1998
Current (benefit)
expense:
Federal $ 15,000 $ (627,000) $ 424,000
State 5,000 (55,000) 94,000
Total current: 20,000 (682,000) 518,000
Deferred expense
(benefit):
Federal 85,000 505,000 (345,000)
State - 65,000 (31,000)
Total deferred: - 570,000 (376,000)
Income tax expense $ 105,000 $ (112,000) $ 142,000
(benefit)
The components of the Company's deferred tax assets and liabilities
consist of the following at March 31:
2000 1999
Deferred tax assets:
Accounts receivable reserves $ 195,000 $ 117,000
Inventory 119,000 597,000
Accrued compensation/vacation 326,000 238,000
AMT credit carryforwards 59,000 45,000
Net operating loss carryforward 3,793,000 4,789,000
Deferred gain on building sale 221,000 248,000
Embezzlement loss - 210,000
4,713,000 6,244,000
Deferred tax liabilities:
Unbilled accounts receivable-
retainage $ 39,000 $ -
Deferred start-up costs - (5,000)
Depreciation/amortization 526,000 (815,000)
Contract claims/other 2,000 (2,000)
567,000 (822,000)
4,146,000 5,422,000
Valuation allowance (4,146,000) (5,422,000)
Net deferred tax asset $ - $ -
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 2000 and 1999 financial statements. The
change in the valuation allowance of $1,276,000 results primarily from
the decrease in the net operating loss carryforward due to the previous
carryback of this loss to the years ended March 31, 1997 and 1998.
The differences between the provision for income taxes at the expected
statutory rate for Continuing Operations and those shown in the
consolidated statements of operations are as follows for the years ended
March 31:
2000 1999 1998
Provision (benefit) for income
taxes
at statutory rate 34.0% (34.0)% (34.0)%
State taxes, net of federal
benefit 5.8 (4.4) (4.4)
Other 4.5 1.0 1.0
Valuation allowance (39.5) 35.1 39.0
Total 4.8% (2.3)% 1.6%
The Company has a $10.2 million net operating loss carryover virtually
all of which expires in fiscal 2019. 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. The
balance of the income tax receivable at March 31, 2000 was $0.
10.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, 2000:
Year ending March 31,
2001 $ 1,197,000
2002 1,173,000
2003 1,165,000
2004 1,005,000
2005 656,000
thereafter 2,493,000
Total minimum lease
payments $ 7,689,000
Deferred revenue of $572,000 and $630,000 at March 31, 2000 and 1999
represents the deferred gain on the sale - lease-back of the Company's
office complex. The deferred revenue is being recognized as a reduction
of rent expense over the remaining life of the lease.
Total rent expense under operating leases was $1,123,000, $1,188,000
and $954,000 for the years ended March 31, 2000, 1999 and 1998,
respectively. The Company sold its office complex on November 6, 1997
and leased back its headquarters building for 12 years. Aggregate future
minimum rentals to be received under noncancelable subleases as of March
31, 1999 are $148,000.
11.RELATED PARTY TRANSACTIONS
During the years ended March 31, 2000, 1999 and 1998, the Company paid
$102,575, $74,250 and $62,000, respectively, for legal services to a
Board member serving as General Counsel; $53,968, $88,247 and $9,096,
respectively, to a law firm in which the same Board member is a partner;
and $14,000, $24,000 and $24,000, respectively, for consulting services
to another Board member.
Research Industries, Incorporated, the owner of 715,780 shares or 34.9%
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).
On December 1, 1999, the Company issued 35,480 shares of common stock in
the amount of $233,000 in lieu of cash in payment of interest on notes
due to Research Industries through October 31, 1999. The value of the
stock was equal to the market price on date of issue. At March 31, 2000,
interest payable to Research Industries was $125,000.
During the year ended March 31, 2000 the Company paid $105,000 to a
consultant who is now an officer of the Company.
12.COMMITMENTS AND CONTINGENCIES
Cost incurred by the Company on the performance of U.S. Government
contracts are subject to audit by the Defense Contract Audit Agency
(DCAA). In the opinion of management, the final settlement of these
costs will not result in significant adjustments to recorded amounts.
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, 2000, 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.
13.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid the following amounts for interest and income taxes
during the years ended March 31:
2000 1999 1998
Interest $ 1,547,000 $ 1,454,000 $ 1,535,000
Income taxes $ 20,000 $ 325,000 $ 578,000
14. Earnings per share
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Years Ended March 31,
2000 1999 1998
Numerator for earnings per share:
Net income (loss) as reported
from:
Continuing operations $1,385,000 $(5,316,000) $(5,512,000)
Discontinued operations 928,000 17,000 (88,000)
Net income (loss) $2,313,000 $(5,299,000) $(5,600,000)
Denominator:
Denominator for basic earnings 1,984,014 2,012,611 2,006,603
per share-
Weighted-average shares
outstanding
Effect of dilutive securities:*
7% convertible debenture - - -
Employee stock options 15,797 - -
Dilutive potential common shares
Denominator for diluted
earnings per
share - adjusted weighted-
average
shares and assumed 1,999,811 2,012,611 2,006,603
conversions
Earnings (loss) per share -
basic:
Continuing operations $ .70 $ (2.64) $ (2.75)
Discontinued operations .47 .01 (.04)
Basic earnings (loss) per share $ 1.17 $ (2.63) $ (2.79)
Diluted earnings (loss) per
share:*
Continuing operations $ .69 N/A* N/A*
Discontinued operations .46 N/A* N/A*
Diluted earnings (loss) per share $ 1.15 N/A* N/A*
*Because of losses, no effect is given to dilutive securities in 1999 and
1998.
The computation of basic earnings per share is based on the weighted
average number of shares outstanding during the period. Diluted earning
per share is based on the weighted average number of shares including
adjustments to both net income and shares outstanding to assume the
conversion of dilutive common stock equivalents. Due to the net loss in
the years ended March 31, 1999 and 1998, the computation of diluted
earnings per share for those years is based on the weighted average
number of shares outstanding during the period and does not include
dilutive common stock equivalents. For the year ended March 31, 2000,
the convertible debenture was anti-dilutive and therefore not included in
diluted earnings per share.
15.DISCONTINUED OPERATIONS
During the fourth quarter ended March 31, 2000, the Company announced a
plan to divest itself of its Operational Outsourcing Division (HTSI). On
May 31, 2000 the transaction was consummated.
On June 2, 2000, the Company executed and delivered a Stock Purchase
Agreement dated as of May 31, 2000, with U.S. Facilities, Inc., a
Delaware corporation ("Buyer") providing for the sale by the Company to
Buyer of Company's operational outsourcing business (the "Business").
The closing of the transactions contemplated in the Agreement (the
"Closing") took place simultaneously with the execution and delivery
thereof, effective as of May 31, 2000.
At the Closing the Company sold to Buyer, all of the capital stock of its
wholly-owned subsidiary, Halifax Technical Services, Inc. for a purchase
price of $5,600,000, of which $5,500,000 was paid by Buyer to the Company
at Closing with the balance of $100,000 due on the first anniversary of
the Closing. The purchase price remains subject to various adjustments
set forth in the Agreement.
A portion of the proceeds received by the Company, in the approximate
amount of $2,900,000 was applied on the date of the Closing to the
repayment of a portion of its outstanding bank debt.
The Agreement contemplates, and the Company and the Buyer executed and
exchanged at Closing, a Transition Agreement pursuant to which the
Company would, for a limited period of time following the Closing,
provide administrative assistance and other transition services to Buyer
in connection with Buyer's take-over of the Business.
Summary operating results of the Discontinued Operations are as follows:
2000 1999 1998
Revenue $26,246,000 $ 22,741,000 $ 17,551,000
Costs and expenses 25,283,000 22,712,000 17,697,000
Operating income (loss) 963,000 29,000 (146,000)
Income tax expense (benefit) 35,000 12,000 (58,000)
Income (loss)from
discontinued operations $ 928,000 $ 17,000 $ (88,000)
The assets of Discontinued Operations consisted primarily of billed and
unbilled accounts receivable of $4,473,000 and $4,854,000, respectively,
and related accounts payable and accrued expenses of $1,973,000 and
$2,970,000, respectively for years ended March 31, 2000 and 1999.
The net book value of goodwill will be reduced by approximately $700,000
and resulting annual amortization of goodwill will be reduced by
approximately $60,000.
For the years ended March 31, 2000, 1999 and 1998 interest expense of
$522,000, $404,000 and $365,000, respectively was charged to the
Discontinued Operations. Interest expense was allocated to Discontinued
Operations based on the relationship of Discontinued Operations revenue
to total revenue. The Company intends to utilize its net operating loss
carryforward to offset substantially all of the taxes resulting from the
gain on the disposition.
16. OTHER INFORMATION
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, 2000, 1999 and 1998 were $13,701,000 (25%), $21,480,000
(36%), and $14,454,000 (26%), respectively. The reduction in United
States Government revenue in fiscal 2000 was primarily a result of
reduced deliveries of digital telecommunications switches under long-term
contracts.
Halifax Corporation
Schedule II, Valuation and Qualifying Accounts
March 31, 2000
Balance at Additions Balance at
beginning charged to end of
of year cost & Deductions Year
expense
Year Ended March 31,
2000
Allowance for doubtful
accounts $ 657,000 $ 510,000 $ 764,000 $ 403,000
Allowance for inventory
obsolescence $1,500,000 $ 628,000 $2,003,000 $ 125,000
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:
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
EXHIBITS
Exhibit 3.3 Articles of Amendment to Articles of Incorporation
Exhibit 4.7 Third Amendment to the Sixth Amended and Restated Loan
and Security Agreement
Exhibit 10.7 Executive Severance Agreement
Exhibit 23 Consent of Deloitte & Touche LLP, Independent
Auditiors
Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditiors
Exhibit 27 Financial Data Schedule
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