Back to GetFilings.com
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, 1997
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (Fee Required)
For the transition period from ________ to _____________
Commission file Number 0-12712 1-8964
Halifax Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-0829246
(State or other jurisdiction of incorporation of organization
IRS Employer Identification No.)
5250 Cherokee Avenue, Alexandria, VA 22312
(Address of principal executive offices)
Registrant's telephone number, including area code (703) 750-2202
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock ($.24 par value) American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of class)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(X)Yes ( )No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
(X)
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 16, 1997 was $10,279,538 computed by the average
of high and low prices of such stock on said date.
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
Class Outstanding at June 16, 1997
Common Stock 2,003,632
$.24 par value
DOCUMENTS INCORPORATED BY REFERENCE
-None-
For a menu of Halifax Corporation news releases available by fax
24 hours (no charge) or to retrieve a specific release, please
call 1-800-758-5804, ext. 391950, or access the address
http://www.prnewswire.com on the Internet.
PART I
Item 1. General Development of Business
A TECHNOLOGY SERVICES & FACILITIES SERVICES COMPANY
Halifax Corporation is a Technology Services and Facilities Services Company
for commercial and government activities. Technology Services includes the
integration, systems engineering, installation, maintenance and training
for computer systems, communications systems, and simulation systems.
Facilities Services includes the management, operations and maintenance
support of military bases, prisons, waterways, major office complexes, and
communications sites. Revenues are generated in three primary markets:
commercial, federal government, and state/municipal governments; and the
Company regularly conducts offshore and overseas business activities within
these markets. Key elements of the Company's business strategy are
privatization and outsourcing.
Services and associated products are developed and delivered by the parent
corporation and its three wholly-owned subsidiaries: Halifax Technology
Services Company (HTSC) (formerly CMSA), Halifax Engineering, Inc. (HEI)
and Halifax Technical Services, Inc. (HTSI). Computer and network
maintenance services and communication installation services for government
and commercial customers are largely conducted by the parent company.
Computer integration and systems engineering services are primarily
conducted by HTSC, especially in the commercial sector. Communication
systems installation and logistics services are provided for the federal
government by HEI. Facilities operation and support services are provided
by HTSI for federal, state, and municipal governments.
PRIMARY SERVICES PROVIDED
TECHNOLOGY CONSULTING SERVICES
A full range of consulting services geared to solving business problems
through technology. Service lines include Strategy and Advanced
Technologies.
SYSTEMS INTEGRATION SERVICES
A full range of network integration services including consulting, design,
and implementation of LAN/WAN systems and related applications.
TELECOMMUNICATIONS SERVICES
Engineering, installation, maintenance, and logistics services for
telecommunication systems and networks worldwide.
INTERACTIVE TECHNOLOGIES
Interactive services including website design, development and marketing;
Internet/Intranet services; and multimedia sales and educational tools.
COMPUTER MAINTENANCE AND REPAIR
National computer and network maintenance including on-site, depot repair
and outsourcing support.
SIMULATION SYSTEMS SERVICES
Operation, integration, and maintenance of simulation systems for aircraft,
missiles, automobiles, and other applications.
FACILITIES MANAGEMENT AND OUTSOURCING SERVICES
Complete facilities and maintenance outsourcing capabilities for a wide
range of diverse organizations and applications.
The Company was incorporated in Virginia in 1967 as Halifax Engineering,
Inc., the successor to the business begun as a sole proprietorship in 1967.
On April 1, 1970, Halifax acquired the Field Service Division of United
Industries. This expanded the business base in technical services and field
engineering. In January 1981, the Company acquired all of the outstanding
common stock of ASSET Incorporated ("ASSET"), a marine engineering and
naval architecture company, of Falls Church, Virginia. Subsequently, in
May, 1981, ASSET acquired all of the outstanding common stock of Blyth &
Son, Inc. ("Blyth Marine"), a boat repair facility located in Suffolk,
Virginia. On April 1, 1983, ASSET was merged into the Company.
As of October 1, 1984, the Company, under a plan adopted by the Board of
Directors, ceased operations at the boat repair facility of its wholly-
owned subsidiary, Blyth Marine, and placed the facility on the market for
sale. The remaining operations of Blyth Marine were merged into the
Company on February 1, 1985, and the facility was sold on September 13,
1985.
On October 18, 1984, the Company had a change of management and control as
the result of the founder, chairman and president of the Company selling
his stock and retiring from all activities other than serving, until
September 1993, as a member of the Board of Directors.
In February, 1990, the Company purchased the assets of the services business
of Sidereal Corporation, a division of TransTechnology Corporation. The
Sidereal Field Service Division had nationwide customers for its primary
service of maintaining electronic messaging switches. This division
contributed to the expansion of Halifax's nationwide service offerings.
On April 16, 1990, the Company purchased the assets of Del Net, Inc., a
privately owned Beltsville, Maryland, computer service company with a
Washington/Baltimore customer base which further expanded the Company's
nationwide Electronics Services business.
On September 6, 1991, the Company changed its name from Halifax Engineering,
Inc. to Halifax Corporation to reflect the expanded nature of its business
as a national provider of Electronics Services and Facilities Support for
government and industry.
On December 31, 1991, the Company sold Halifax Security Services, Inc., a
wholly-owned subsidiary which operated security services for the parent
corporation.
On June 30, 1993, the Company acquired the services division of Electronic
Associates, Inc. The division expanded the Company's field services
business and provided an additional service line for simulator operations,
maintenance and integration.
On April 1, 1996, the Company completed the acquisition of privately held
CMS Automation, Inc. (CMSA), a Richmond, Virginia computer systems
integration company. On April 23,1997, the name of CMSA was changed to
Halifax Technology Services Company ("HTSC").
On November 25, 1996, the Company through its wholly-owned subsidiary, CMSA,
acquired the ongoing computer network integration business of Consolidated
Computer Investors, Inc. ("CCI") of Hanover, Maryland through an asset
purchase.
The discontinuation of various service lines since October, 1984 has enabled
the Company to focus on Technology Services and Facilities Services.
The Company maintains its principal executive offices at Halifax Office
Park, 5250 Cherokee Avenue, Alexandria, Virginia 22312. Telephone number
(703) 750-2202.
Federal Government Contracts
Many of the Company's revenues are derived from contracts or subcontracts
with the United States Government. In fiscal years 1997, 1996 and 1995,
the Company received revenues from 183, 491 and 740 Government contracts,
which accounted for approximately 47%, 73% and 83%, respectively, of the
Company's total revenues. However, the Company's trend is toward a balance
among commercial, state/municipal government and federal government
contracts.
The services of the Company are performed under cost reimbursable, time-and-
materials and fixed-price contracts and subcontracts. Under cost
reimbursable contracts the Government reimburses the Company for its
allowable costs permitted by Government regulations and pays the Company a
negotiated fixed fee, incentive fee, award fee or combination of fees.
Under time-and-materials contracts, the Company receives a fixed hourly
rate intended to cover salary costs attributable to work performed on the
contracts and related indirect expenses, as well as profit margin, and is
reimbursed for other direct costs. Under fixed-price contracts, the
Government pays the Company an agreed-upon price for services rendered. In
addition, under certain fixed price contracts, incentive fees are allowed
if established performance goals are met or exceeded and penalties are
imposed if goals are not attained. Under fixed-price contracts and time-
and-materials contracts, the Company bears any risk of increased or
unexpected costs that may reduce its profits or cause it to sustain a loss.
The Company's Government contracts and subcontracts are subject to
termination, reduction or modification as a result of changes in the
Government's requirements or budgetary restrictions. Moreover, when the
Company participates as a subcontractor, it is subject to the risk that the
primary contractor may fail or become unable to perform the prime contract.
All Government contracts are subject to termination at the convenience of
the Government. If a contract were to be terminated for convenience, the
Company would be reimbursed for its allowable costs incurred up to the date
of termination and would be paid a proportionate amount of the stipulated
profits or fees attributable to the work actually performed. To date, the
Government has only terminated three contracts with the Company for
convenience.
Contracts with the Government are generally complex in nature, and require
Halifax to comply with numerous Federal regulations regarding
discrimination in the hiring of personnel, fringe benefits for employees,
safety, safeguarding classified information, responsibility for Government
property, fire prevention, equipment maintenance, record keeping and
accounting, management qualifications, drug free work place and numerous
other matters. The Company has not experienced any material difficulty in
complying with applicable federal regulations. Management does not believe
the proposed scaling down of the Federal defense establishment will have an
adverse effect on its revenues since the Company is not R&D oriented, and
Defense Department cutbacks affecting the Company's operation are not
considered significant. However, the Company's recent acquisitions and
reassignment of marketing resources have been accomplished which should,
management believes, reduce dependency on defense contracting.
The Company is sensitive to the present climate in the Government with
respect to fraud, waste and abuse, and has adopted a Code of Business
Ethics and Standards of Conduct and associated Company procedures. In
addition, all employees receive training in ethics and associated Company
procedures and a hot line has been established to encourage reporting of
potential ethical violations.
Under certain circumstances the Government can suspend or bar individuals or
firms from obtaining future contracts with the Government for specified
periods of time. Any such suspension or debarment could have a material
adverse effect upon the Company. The books and records of the Company are
subject to audit by the Defense Contract Audit Agency, which can result in
adjustments to contract costs and fees. Audits by such Agency have been
completed for years through fiscal 1990. While it is not possible to know
the outcome of future audits, it is the opinion of the Company's
management, that liabilities, if any, arising from such audits should not
have a material adverse effect on the Company's financial position or
results of operations.
Commercial and State/Municipal Government Contracts
The Company continues to expand its commercial and state/municipal
government business. Commercial revenues are expected to continue to grow
through the targeting of non-federal opportunities and from outsourcing
opportunities. Acquisition strategy and the in-house development of
computer network solutions, integration and management services have
significantly increased this trend in commercial services. State/municipal
government contracts are expected to expand from privatization
opportunities.
The following table reflects the aforementioned distributions of revenues by
type of customer:
Years Ended March 31,
1997 1996 1995
Commercial $ 22,587,000 $ 6,004,000 $ 4,348,000
State/Local 17,580,000 6,730,000 3,405,000
Federal 36,111,000 34,425,000 37,850,000
Government
Total $ 76,278,000 $ 47,159,000 $ 45,603,000
Type of Contracts
The following table reflects by type of contract the amount of revenues from
continuing operations derived for the periods indicated:
Years Ended March 31,
1997 1996 1995
Cost reimbursable $ 7,195,000 $ 2,232,000 $ 7,953,000
Time & materials 8,576,000 7,333,000 7,270,000
Fixed-price $ 60,507,000 37,594,000 30,380,000
Total $ 76,278,000 $ 47,159,000 $ 45,603,000
Accounts Receivable
Accounts receivable at March 31, 1997 and 1996 represented 54% and 47% 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, for various reasons, invoices
have not or cannot be presented until a later period. The reasons that
invoices for payment obligations are not presented may be categorized as
follows: (1) fee and cost retainage rights of the Government; (2) lack of
billable documents; (3) excess of actual direct and indirect costs over
amounts currently billable under cost reimbursement contracts to the extent
they are expected to be billed and collected; and (4) amounts arising on
fixed-price contracts from recognition of revenues under the percentage of
completion method.
The financing of receivables requires bank borrowings and the payment of
associated interest expense. Interest expense is a business expense not
permitted as a reimbursable item of cost under Government contracts.
For a listing of the amounts of retainages and unbilled receivables as of
March 31, 1997 and 1996, see Note 3 to the accompanying Consolidated
Financial Statements.
Backlog
The Company's funded backlog for services as of March 31, 1997, 1996 and
1995 was $34,000,000, $24,000,000, and $17,000,000, respectively.
"Funded" backlog represents commercial orders and government contracts to
the extent that funds have been appropriated by Congress and allotted to
the contract by the procuring Government agency. Some of the Company's
contracts orders provide for potential funding materially in excess of the
monies initially provided by the Government. Additional monies are
subsequently and periodically authorized in the form of incremental funding
documents. The excess of potential future funding over funding provided
represents unfunded backlog. A majority of the Company's customer orders
or contract awards and extensions for contracts previously awarded are
received or occur at random during the year and may have varying periods of
performance.
As of March 31, 1997, 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 $127,000,000. The unfunded
portion is $93,000,000 which includes $54,000,000 in options and
$39,000,000 in undefinitized work. The realization of these potential
revenues is dependent upon a variety of contract contingencies beyond the
control of the Company, such as complete funding and the exercise of all
existing contract options by the Government and commercial clients.
Accordingly, there can be no assurance that such revenues will be realized.
Commercial contracts do not typically have multi-year options, and
accordingly, backlog levels are not increasing in proportion to total
revenues.
Marketing
The Company contracts with the Federal Government, State/Local Governments
and commercial activities, each of which requires different marketing
approaches. The Federal Government maintains that it buys from companies
rather than having companies sell to it, and marketing is more related to
keeping abreast of the Government's specified needs versus building markets
within the Government for the Company's services. However, the Company
conducts a sizable portion of its business within the commercial and
state/local government sectors, and consequently uses traditional marketing
approaches to determine commercial customer needs and to assure its
services will be considered for those needs.
In February, 1997, the Company formed the Federal Services division to
promote, market and sell all of Halifax's information technology and
communications systems capabilities within the Federal Government.
The Company's ability to compete successfully for Government work is largely
dependent on recognizing Government requirements and opportunities, the
submission of responsive and cost-effective proposals, and a solid
reputation for the successful completion of government contracts.
Recognition of Government requirements and opportunities come from
inclusion on bidders lists, from participation in activities of
professional organizations and from literature published by the government
and other organizations. Associations with large corporations are being
developed to allow the Company to act as a subcontractor on some contract
efforts.
Commercial marketing involves the determination of customer needs that match
the services offered by the Company, and this is accomplished through
individuals that conduct sales calls, attend trade shows, and build a
network of customer knowledge and confidence in the Company. A field sales
program for computer services provides for direct
sales by field personnel to commercial customers. Those activities, along
with the development of strategic alliances and the reputation the Company
has built, provide the normal manner in which the Company's commercial
business is obtained.
Our April 1, 1996 and November 25, 1996 acquisitions, CMS Automation, Inc.,
and Consolidated Computer Investors, Inc., respectively, are network
integration and solutions companies which conduct their marketing and sales
activities largely through Account Managers.
The Company's President provides leadership in long-range marketing and
teaming arrangements. Operating Vice Presidents direct bid and proposal
efforts for their operating elements.
Competition
The Company has numerous competitors in all areas in which it does business.
Some competitors are large diversified firms having substantially greater
financial resources and larger technical staffs than the Company,
including, in some cases, the manufacturers of the systems being supported.
Government in-house capabilities can also be deemed to be competitors of
the Company in that they perform certain services which might otherwise be
performed by the Company. It is not possible to predict the extent of
competition which present or future activities of the Company will
encounter because of changing competitive conditions, customer
requirements, technological developments and other factors. The principal
competitive factors for the type of service business in which the Company
is engaged are quality, responsiveness, ability to perform within estimated
time and expense limits and pricing.
Personnel
On March 31, 1997, the Company had 676 employees of which 80 were part time
employees. Because of the nature of services provided, many employees are
professional or technical personnel with high levels of training and
skills, including engineers, and skilled technicians and mechanics. The
Company believes its employee relations to be excellent. Although many of
the Company's personnel are highly specialized and there is a nationwide
shortage of certain qualified technical personnel, the Company does not
normally experience any material difficulty obtaining the personnel it
requires to perform under its contracts and generally does not bid on
contracts where difficulty may be encountered in hiring personnel. The
Company interfaces with labor unions on four of its federal and
state/local government contracts. To date, relations with these units have
been excellent. Management believes that the future growth and success of
the Company will depend, in part, upon its continued ability to retain and
attract highly qualified personnel.
Item 2. Properties
On July 18, 1991, the Company purchased a two building complex that includes
its previously leased headquarters building. The complex, named Halifax
Office Park and located on Cherokee Avenue in Fairfax County, Virginia,
contains 76,000 square feet of office space on three landscaped acres.
The Company was able to take advantage of depressed real estate values and
acquire the complex for $3,750,000, a price substantially below replacement
cost and far below the price at which it sold in 1987. The cost of
ownership of the two buildings is less than the prior lease cost on one
building alone.
The Company has been able to lease 100% of the building adjacent to the
Headquarters building on leases ranging from one to five years. This space
was in excess of the Company's needs.
During 1997, the Company placed its office complex up for sale and received
an offer. However, the offeror was unable to complete the transaction.
The office complex remains for sale and another agreement to purchase has
been received which, if it closes, would result in a transaction during the
Company's 1998 second fiscal quarter.
The Company is obligated under approximately 39 small short-term facility
leases connected with its nationwide maintenance service operations.
Item 3. Legal Proceedings
Commercial Business Systems, Inc. v. Halifax Corporation, et al.
Plaintiff's claim, which has been the subject of judicial proceedings since
August of 1990 and was consolidated with a similar claim against BellSouth,
went to trial on October 18, 1995, resulting in a jury verdict against
Halifax, a former employee and a non-employee, for wrongful interference
with a prospective business relationship. The jury award for compensatory
damages plus interest was overturned by the judge in the case and final
judgment entered in favor of Halifax. The plaintiff appealed to the
Supreme Court of Virginia which ruled in favor of the trial judge thereby
confirming final judgment in favor of Halifax.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders in the fourth
quarter of fiscal 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock, par value $0.24, has been traded on the American
Stock Exchange since August 15, 1985. From June 29, 1983 to August 15,
1985, the stock was listed on the NASDAQ National Market System. At June
16, 1997, there were approximately 849 holders of record of the Company's
Common Stock as reported by the Company's transfer agent. American Stock
Transfer & Trust Co. became the Company's transfer agent and registrar on
January 1, 1996.
The following table sets forth the quarterly range of high and low sales
prices on the American Stock Exchange. All prices are adjusted to reflect
the December 27, 1996 three for two stock split.
Fiscal Year 1997 Fiscal Year 1996
Fiscal Quarter, High Low High Low
April - June 8-1/8 4-5/8 4-7/8 4-1/8
July - Sept. 7-7/8 6-5/8 4-5/8 4-1/8
Oct. - Dec. 13-1/8 7-5/8 4-5/8 3-7/8
Jan. - March 15 10-1/8 4-3/4 4-3/8
In fiscal 1997, the Company paid a cash dividend of $0.043 per share on June
10, 1996 to shareholders of record on May 24, 1996, cash dividends of
$0.047 per share on September 10, 1996 and December 10, 1996 to
shareholders of record on August 22, 1996 and November 27, 1996,
respectively, and a cash dividend of $0.05 per share on March 10, 1997 to
shareholders of record on February 21, 1997.
In fiscal 1996, the Company paid a cash dividend of $0.043 on June 10, 1995,
September 10, 1995, December 10, 1995 and March 10, 1996 to shareholders of
record on May 20, 1995, August 22, 1995, November 22, 1995 and February 23,
1996, respectively.
In fiscal 1995, the Company paid a cash dividend of $0.04 per share on June
10, 1994 to shareholders of record May 25, 1994 and a cash dividend of
$0.043 on September 10, 1994, December 10, 1994 and March 10, 1995 to
shareholders of record on August 22, 1994, November 23, 1994 and February
17, 1995, respectively.
Item 6. Selected Financial Data
The following table includes certain selected financial data of the Company
for the fiscal years and periods indicated (amounts in thousands except per
share data):
1997 1996 1995 1994 1993
Revenue $76,278 $47,159 $45,603 $ 72,501 $ 58,380
Net Income 954 763 858 853 674
per common share - .47 .43 .48 .47 .38
primary
per common share - .46 .43 .48 .47 .38
fully diluted
Long-term obligations
including current
maturities 17,174 3,869 7,230 10,031 6,465
Cash dividends per
common share .187 .173 .17 .16 .147
Total assets at
year-end 41,000 24,828 22,107 24,728 18,977
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 1997 Change 1996 Change 1995
Revenues $76,278 62% $ 47,159 3% $ 45,603
Operating cost and 74,160 62% 45,687 4% 43,918
expenses:
Percent of revenue 97% 97% 96%
Operating income 2,118 44% 1,472 (13%) 1,685
Percent of revenue 3% 3% 4%
Net income 954 25% 763 (11%) 858
Net income per share - .47 9% .43 (10%) .48
primary
Net income per share - .46 7% .43 (10%) .48
fully diluted
Revenues
1997 revenues increased 62% over 1996, 45% from the acquisitions of CMSA and
CCI and 17% from internal growth.
Operating Costs and 1997 Change 1996 Change 1995
Expenses
Cost of services $69,530 67% $ 41,675 2% $ 40,708
Percent of revenues 91% 88% 89%
Selling, General & 4,630 25% 3,692 15% 3,210
Administrative
Percent of revenues 6% 8% 7%
Litigation expense - 320 -
Percent of revenues - 0.7% -
The Company's 1997 cost of services increased primarily from acquisitions of
CMSA and CCI and in relative proportion to the increase in revenues.
Litigation expenses of $320,000 in the second fiscal quarter ended September
30, 1995, include legal costs associated with a trial of a lawsuit
described in Item 3.
The increase in selling, general and administrative (S,G&A) expenses is due
primarily to the acquisition of CMSA and CCI. The proportion of S,G&A
expense decreased to 6% of Revenues compared with 8% of Revenues in 1996
due to the Company's ability to share S,G&A with CMSA and CCI. S,G&A
expenses increased in amount as a percent of revenues in 1996 as compared
to 1995. The Company achieved the objective of maintaining expenditures as
a percentage of revenue at 6-7% in 1997.
Operating Income
Operating income increased by $646,000 but remained constant at 3% of
Revenues compared with 1996. Operating income decreased $213,000 in 1996
when compared to 1995.
Interest and Other 1997 Change 1996 Change 1995
Income or Expense
Interest expense $ 950 66% $ 573 (9%) $ 627
Other (income) (409) 13% (362) (3%) (375)
Interest expense significantly increased by $377,000 or 66% from 1996. The
increase came from increased debt levels to fund the acquisition of CMSA
and CCI and their working capital requirements. This increase resulted
despite a decrease in the Company's average interest rate. Interest
expense decreased in 1996 when compared to 1995, because of decreased
capital requirements.
Other income, net of expenses, is sublease income from the Company's office
park which is currently 100% occupied. The office park was purchased in
1993 by the Company's wholly-owned subsidiary, HRI.
Income Taxes 1997 Change 1996 Change 1995
Income taxes $ 623 25% $ 498 (13%) $ 575
Effective tax 39.5% 39.5% 40.1%
rate
These fluctuations were relatively proportional to changes in pretax income
and the Company's effective tax rate remained relatively unchanged in 1997
compared with the 1996 and 1995 rates. The Company has adopted Financial
Accounting Standard No. 109 "Accounting for Income Taxes" effective for all
periods presented.
Factors That May Affect Future Results
The Company's future operating results may be affected by a number of
factors including uncertainties relative to national economic conditions,
especially as they affect interest rates, industry factors, the Company's
ability to successfully increase its business and effectively manage
expense margins.
The Company must continue to effectively manage expense margins in relation
to revenues by directing new business development towards markets that
complement or improve existing service lines. The Company must also
continue to emphasize operating efficiencies through cost containment
strategies, reengineering efforts and improved service delivery techniques.
The Company participates in the computer industry, providing consulting,
integration, networking, maintenance and installation services. This
industry has been characterized by rapid technological advances that have
resulted in frequent introduction of new products, product enhancements and
aggressive pricing practices, which also impacts pricing of service
activities. The Company's operating results could be adversely affected by
industry wide pricing pressures. Also, the Company's operating results
could be adversely impacted should the Company be unable to effectively
achieve the revenue growth necessary to provide profitable operating
margins in its field maintenance operations. The Company's plan for
growth includes intensified marketing efforts, an expanding commercial
sales program, strategic alliances and, where appropriate, acquisitions
that expand our market share such as our CMSA and CCI acquisitions in
fiscal 1997. The Company intends to expand upon recent alliances,
acquisitions and new contracts to provide the density necessary to maintain
profitability in the competitive information technology industry.
Because of the foregoing factors as well as other factors affecting the
Company's profitability, it is difficult to project future operating
results.
Liquidity and Capital 1997 1996 1995
Resources
Cash $ 268,000 $ 2,743,000 $ 18,000
Working capital 17,487,000 5,924,000 8,845,000
Cash provided (used) by (6,875,000) 7,110,000 3,519,000
operations
Cash (used) in investment (1,757,000) (644,000) (786,000)
activities
Cash provided (used) by 6,157,000 (3,741,000) (3,224,000)
financing activities
At March 31, 1997, the Company's working capital of $17,487,000 and current
ratio of 2.28 indicate strength consistant with the prior years. A large
prepayment on a hardware delivery order in the fourth quarter of 1996
resulted in working capital of $5,924,000 and a current ration of 1.50.
The current ratio adjusted for that transaction would have been 2.4,
consistent with 1997 and 1995.
The uses of cash in operations, $6,875,000 and investment activities,
$1,757,000 reflect the effect of the acquisitions of CMSA and CCI and the
insertion of working capital into the two companies including the
substitution by the Company of approximately $7.3 million of bank debt at
significantly reduced interest rates for prior high-interest rate financing
from nonbank financers. The increase in cash generated in 1996 as compared
with 1995 is primarily a result of the large prepayment previously mentioned.
The Company leases approximately 39 field sites. Disclosure of the future
minimum lease payment is in Note 9 to the financial statements. The
Company anticipates capital expenditures in 1997 to approximate 1996
levels. A wholly owned subsidiary of the Company operates the office park
including leasing one of the two buildings.
The Company believes that its balances of cash and cash equivalents in
conjunction with funds generated from operations and from short term
borrowings should be sufficient to meet its operating cash requirements for
the foreseeable future.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data of the Company are attached
hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following paragraphs set forth the name and age of each executive
officer and the members of the Board of Directors of the Company, together
with their respective periods of service as officers and directors and
other positions with the Company. All directors hold office for one (1)
year or until their successors are duly elected and qualified.
DIRECTORS
Howard C. Mills, age sixty-three, has since October 16, 1984, been
President, Chief Executive Officer and a Director of the Company. Prior to
that time he served as Vice President and Executive Vice President of the
Company. Mr. Mills joined Halifax in 1981 when it acquired ASSET
Incorporated of which Mr. Mills was President and Chief Executive Officer.
Mr. Mills has forty one years experience in the management, engineering and
technical services business, including twelve years as President of ASSET
Incorporated, three years as President of Blyth Marine, five years as a
Division Vice President of the Stanwick Corporation, and eight years in
engineering management with the Newport News Shipbuilding and Dry Dock
Company.
Arch C. Scurlock, age seventy-seven, presently Chairman of the Board of
Directors, has been a Director of the Company since 1973. He had served
from 1969 to 1992 as Chairman of the Board of TransTechnology Corporation,
a manufacturer of aerospace-defense and other industrial products. Since
1968, he has been President and a Director and controlling shareholder of
Research Industries Incorporated, a private investment company.
John H. Grover, age sixty-nine, has been a Director of the Company since
1984. He has served as Executive Vice President, Treasurer and Director of
Research Industries Incorporated, since 1968 and as a Director of
TransTechnology Corporation from 1969 to 1992.
Clifford M. Hardin, age eighty-one, elected Director of the Company on
March 25, 1985, is a Director of SRI, Inc. Lincoln, Nebraska. Dr. Hardin
is also a Trustee of Winrock International, the American Assembly and the
University of Nebraska Foundation. Dr. Hardin's past positions have
included Chancellor of the University of Nebraska (1954-1969), Secretary,
United States Department of Agriculture (1969-1971), Vice Chairman of the
Board and Director of Corporate Research for Ralston Purina Company (1971-
1980) and Director of the Center for the Study of American Business at
Washington University (1980-1982). Dr. Hardin also served as an economist
at Washington University until 1985. From 1981 to 1987 Dr. Hardin served
as a Director of Stifel Financial Corporation, The parent corporation of
Stifel Nicolaus & Company, a St. Louis Securities brokerage firm registered
with the Securities and Exchange Commission.
Ernest L. Ruffner, age sixty-two, elected Director of the Company on March
25, 1985, is an attorney engaged in the private practice of law as a member
of the firm of Pompan, Ruffner & Werfel in Alexandria, Virginia. He has
been an attorney for 33 years. Mr. Ruffner is a graduate of the United
States Military Academy, served as a First Lieutenant in the United States
Army Corps of Engineers and has been a Director of Research Industries
Incorporated since 1983. Mr. Ruffner has been Secretary of the Company
since 1985. In January 1992, he was given the additional designation of
Counsel of the Company, and in September 1994, he was elected General
Counsel (See Item 13).
Alvin E. Nashman, age seventy, elected director of the Company on September
17, 1993, is a Board Member of Computer Sciences Corporation (CSC). He
also serves on the Boards of NYMA Corporation and MILTOPE Corporation,
where he is Chairman. Dr. Nashman headed the multi-division systems groups
of CSC for 27 years and served two terms as Chairman of the Board of the
Armed Forces Communications and Electronics Associates (AFCEA).
John Toups, age seventy-one, elected Director of Company on September 17,
1993, served as President and CEO of Planning Research Corporation (PRC)
from 1978 to 1987. He also served as interim Chairman of Board and CEO of
the National Bank of Washington and Washington Bancorp and is currently a
Director of CACI International, NVR and Telepad Corporation.
OTHER EXECUTIVE OFFICERS
John D. D'Amore, age forty-seven, Vice President Finance and Accounting,
Controller and Treasurer, joined Halifax on April 10, 1996. He previously
served as Vice President Finance for CTA International, Inc. and CTA Space
Systems, subsidiaries of CTA Incorporated. Prior to that he served in
various executive finance positions including five years as Vice President
Finance with Presearch Inc. Mr. D'Amore is a Certified Public Accountant
and a member of the Virginia Bar.
James C. Dobrowolski, age thirty-four, joined Halifax as a result of the
Company acquiring EAI Services which he had managed for two years. Mr.
Dobrowolski currently serves as the Vice President in charge of the
Simulation and Facilities Services Division. Prior to joining EAI as
Director of Contracts in April 1988, he was with Engineering and
Professional Services Inc. where he served as Manager of Subcontract
Administration for two years.
Thomas L. Mountcastle, age forty-three is President of Halifax Technology
Services Company, a wholly owned subsidiary of Halifax and Vice President
of Halifax's Network Integration Services Division. Mr. Mountcastle joined
Halifax as a result of the Company acquiring CMS Automation, Inc. on April
1, 1996 where he had served as President since 1990. Prior to that he
served in various capacities in computer technology including two years as
President of Data Support Systems.
Thomas F. Nolan, age fifty-two, has been Vice President, Computer Services
Division since December, 1995. Before joining the Company, Mr. Nolan
worked six years as an independent executive in Financial Services
Management. Prior to that, he was Senior Vice President, Marketing for
Decision Data Services, Inc, a nation wide computer maintenance firm. For
sixteen years Mr. Nolan held various executive positions with Bell Atlantic
Corporation's SORBUS Service Division.
Frank J. Ostronic, age sixty-seven, Vice President Federal Services
Division, joined Halifax on May 24, 1996. Mr. Ostronic has over thirty-
nine years experience in various executive positions including fourteen
years with Computer Science Corporation as Vice President of Program
Development. A U.S. Naval Academy graduate, Mr. Ostronic retired from the
U.S. Navy with the rank of Captain.
Melvin L. Schuler, age fifty-three, is Vice President for Operations of the
Federal Services Division. He is also Vice President for Operations of the
Company's wholly-owned subsidiary, Halifax Engineering, Inc. Mr. Schuler
has been with Halifax since 1972, serving in various management positions
within this service line.
James L. Sherwood, IV, age fifty-five, is Vice President, Contracts and
Administration. He previously served as Vice President of the Company's
Facilities Services Division. In addition, he served as Assistant Vice
President and Manager for various divisions of the Company and ASSET Inc.,
which he joined in 1978. Prior to joining ASSET Inc., Mr. Sherwood held
various electrical engineering positions with Potomac Electric Power
Company and Newport News Shipbuilding and Dry Dock Company. He is a
Registered Professional Engineer in several states including Virginia.
Item 11. Executive Compensation
The following table sets forth information on the Chief Executive Officer
and the only other officers whose compensation exceeded $100,000 serving at
the close of the fiscal year ended March 31, 1997 for services rendered in
all capacities during the fiscal years ended March 31, 1997, 1996, and
1995.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other
Annual Restricted All Other
Salary Bonus Compen- Stock Options LTIP Compen-
sation Awards SARs payout sation
s
Year ($) ($) ($) (1) ($) (#) ($) ($)
Howard C. Mills(5) 1997 160,804 43,200 4,323 none 7,200 none 3,135(2)
CEO/President 1996 149,925 28,336 5,623 none 7,200 none 2,999(2)
1995 150,188 27,067 3,331 none 14,400 none 2,604(2)
James L. Sherwood 1997 101,550 14,400 none none 3,000 none 2,013(2)
IV
1996 96,785 13,970 none none 1,800 none 5,284(3)
1995 96,962 21,886 none none 5,400 none 1,939(2)
James C. 1997 113,549 28,430 none none 6,375 none 6,117(3)
Dobrowolski
1996 96,940 13,627 2,400 none 3,600 none
599(2)
1995 95,099 23,672 none none 5,400 none 5,855(3)
Melvin L. Schuler 1997 97,786 57,670 none none 4,500 none 1,956(2)
1996 89,733 19,712 none none 1,500 none 1,794(2)
1995 89,902 8,999 none none 3,000 none 1,798(2)
Thomas L. 1997 127,497 none none none 13,500 none 1,200(2)
Mountcastle
Thomas E. Nolan 1997 107,623 none none none 6,375 none 13,768(4)
(1)Value of Company furnished auto.
(2)Amounts contributed to officer under 401(k) plan.
(3)Amounts contributed to officer under 401(k) plan and paid vacation.
(4)Amounts contributed to officer under 401(k) plan and living expenses.
(5)The Company entered into an Executive Severance Agreement ("Agreement")
with Mr. Mills in recognition of his position of high responsibility
and the substantial contributions he has made to the Company over many
years. The Agreement provides benefits under certain circumstances
including a change in control of the Company and is automatically
renewed from year to year. It confirms that employment is at will and
provides for termination without additional compensation in the event
of death, resignation, retirement or for cause. Except in connection
with a change of control, termination for any other reason results in
compensation equal to eighteen (18) months salary. In the event of
termination within one (1) year after a change in control or in the
event Mr. Mills resigns or retires during the first ninety (90) days
after a change in control, he would receive compensation equal to
thirty-six (36) months salary subject to statutory limitations.
Director Compensation
During the year, Directors who are not officers of or otherwise compensated
by the Company receive an annual fee of $1,000 and also receive $2,000 and
reimbursement of expenses incurred for each meeting of the Board of
Directors which they attend.
Stock Option Plans
In 1984, the Company's shareholders approved the 1984 Incentive Stock
Option and Stock Appreciation Rights Plan (the 1984 "Plan"). The Company's
key employees, including officers, were eligible to participate. Directors
who were not officers were not eligible.
At the 1988 Annual Meeting of Shareholders, the shareholders approved
amendments to the 1984 Plan which increased to 165,000 the number of shares
authorized for issuance pursuant to the 1984 Plan and brought the 1984 Plan
into conformity with the Tax Reform Act of 1986.
The 1984 Plan terminated May 15, 1994; however options continue to be
outstanding to officers and employees of the Company covering 12,349
shares of Common stock. These options all expire prior to July 18, 1998.
(See note 7 to the consolidated financial statements.)
At the September 16, 1994 Annual Meeting, the shareholders approved the new
Key Employee Stock Option Plan ("1994 Plan").
The maximum number of shares subject to the 1994 Plan and approved for
issuance is 180,000 shares of the Company's Common Stock either authorized
and unissued or shares held in treasury. This number is subject to
adjustment in the event of stock splits, stock dividends or other
recapitalization of the Company's Common Stock. The Company is under no
obligation to register either the Option or the Option Stock under either
Federal or State securities laws, however, the Committee has the power and
sole discretion to register the 1994 Plan. If the 1994 Plan is not
registered, both the Option and the Option Stock will be "restricted
securities" as defined in Rule 144 of the General Rules and Regulations of
the Securities Act of 1933.
The 1994 Plan will be administered by a Committee selected by the Board and
comprised of not less than three members of the Board. The Committee has
the sole and absolute discretion to establish from time-to-time the
criteria for participation in the 1994 Plan and to select the officers and
other key employees to whom Options may be granted, to determine all claims
for benefits under the 1994 Plan, to impose such conditions and
restrictions on Options as it determines appropriate, with the consent of
the recipient, to cancel Options and to substitute new Options for
previously awarded Options which, at the time of such substitution, have an
exercise price in excess of fair market value of the underlying shares of
Company Common Stock.
The Committee also has the sole and absolute discretion to grant options
entitling the Participants to purchase shares of Company Common Stock from
the Company in such number, at such price and on such terms and subject to
such conditions, not inconsistent with the terms of the 1994 Plan, as may
be established by the Committee. The Company will receive no consideration
with regard to the granting of any Option granted under this 1994 Plan.
Due to the broad discretion of the Committee, it is not possible to
determine at this time the benefits or amounts that will be received by or
allocated to the participants, if any.
Except as otherwise expressly provided in the 1994 Plan, the Committee may
designate, at the time of the grant of an Option, the Option as an
Incentive Stock Option under Section 422 of the Internal Revenue Code. The
Purchase Price of each share of Company Common Stock which may be purchased
upon exercise of any Option granted under the 1994 Plan shall be
established by the Committee in its discretion, and in the case of
Incentive Stock Options, such Purchase Price shall not be less than 100% of
the Fair Market Value on the Date of Grant.
Each Option granted under the 1994 Plan shall be exercised by written
notice to the Company. The Purchase Price of shares purchased upon
exercise of an Option granted under the 1994 Plan shall be paid in full.
No option may be exercised in whole or in part prior to six months from the
Date of Grant.
The Board has complete power and authority to amend the 1994 Plan at any
time as it deems necessary or appropriate and no approval by the
stockholders of the Company or by any other person, committee or entity of
any kind is required to make any amendment; provided, however, that the
Board shall not, without the affirmative approval of stockholders of the
Company, increase the number of shares of Company Common Stock available
for Option grants thereunder or make any other amendment which requires
stockholder approval under Rule 16b-3 of the Code.
In fiscal year 1995, options totaling 48,000 shares were offered to
employees at an exercise price of $4.67, the market price on date of
issuance.
In fiscal year 1996, options totaling 23,700 shares were offered to
employees at exercise prices ranging from $4.58 to $4.83, the market prices
on the dates of issuance.
In fiscal year 1997, options totaling 105,600 shares were offered to
employees at exercise prices ranging from $4.67 to $7.67, the market prices
on the dates of issuance.
All the above share and per share amounts are adjusted to reflect the
December 27, 1997 3 for 2 stock split.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of June 16, 1997 (1) the number of
shares of the Company's Common Stock owned beneficially by each person who
owned of record, or was known by the Company to have owned beneficially,
more than 5% of such shares then outstanding, (2) the number of shares
owned beneficially by each director of the Company, and (3) the number of
shares owned beneficially by all officers and directors as a group.
Information as to the beneficial ownership is based upon statements
furnished to the Company by such persons.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent
Research Industries 615,000 30.8
Incorporated (1)(2)(3)
123 North Pitt Street
Alexandria, VA 22314
Arch C. Scurlock (1)(5) 616,500 30.8
123 North Pitt Street
Alexandria, VA 22314
Howard C. Mills (4) 68,367 3.4
5250 Cherokee Avenue
Alexandria, VA 22312
Alvin E. Nashman 4,500 0.2
3170 Fairview Park Drive
Falls Church, VA 22042
John Toups 4,500 0.2
1209 Stuart Robeson Dr.
McLean, VA 22101
John H. Grover (2) 1,500 0.1
123 North Pitt Street
Alexandria, VA 22314
Clifford M. Hardin 1,500 0.1
10 Roan Lane
St. Louis, MO 63124
Ernest L. Ruffner (3) 150 0
209 North Patrick Street
Alexandria, VA 22314
All officers and directors 739,461 36.9
as a group, including
the above
(14 persons) (5)
(1) Research Industries Incorporated is 95% owned by Arch C. Scurlock,
Chairman of the Company's Board of Directors. Dr. Scurlock is
also President and a director of Research Industries Incorporated.
(2) Mr. Grover is also a 5% owner, a director and Executive Vice President
and Treasurer of Research Industries Incorporated.
(3) Mr. Ruffner is a director of Research Industries Incorporated.
(4) Includes 450 shares held by Mr. Mills' wife.
(5) Includes 615,000 shares owned by Research Industries Incorporated.
Item 13. Certain Relationships and Related Transactions
Ernest L. Ruffner, Secretary and General Counsel and a Director of the
Company, is a member of the law firm of Pompan, Ruffner & Werfel. During
the fiscal year ended March 31, 1997, the Company paid $76,652 for legal
services to Mr. Ruffner and the law firm.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1.Consolidated Financial Statements
o Report of Independent Auditors
o Consolidated Statements of Earnings for the years
ended March 31, 1997, 1996 and 1995
o Consolidated Balance Sheets as of March 31, 1997 and 1996
o Consolidated Statements of Cash Flows for the years
ended March 31, 1997, 1996 and 1995
o Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 1997, 1996 and 1995
o Notes to Consolidated Financial Statements
2. Financial Statement Schedules
o Schedule II, Valuation & Qualifying Accounts
All other schedules are omitted since they are not applicable, not required
or the required information is included in the consolidated financial
statements or notes thereto.
3. Exhibits
3.1 Articles of Incorporation, as amended. (Incorporated by reference
to Exhibit 3.1 to Form 10-K for the year ended March 31, 1995.)
3.2 By-laws, as amended. (Incorporated by reference to
Exhibit 3.2 to Form 10-K for the year ended March 31, 1995.)
4.1 Loan and Security Agreement dated January 30, 1989
between the Company and Crestar Bank. (Incorporated by reference to
Exhibit 4.1 to Form 10-K for the year ended March 31, 1989.)
4.2 First Amendment to Amended and Restated Loan and Security
Agreement between the Company and Crestar Bank dated Dec. 11, 1992
and Amended and restated revolving note. (Incorporated by reference
to Exhibit 4.2 to Form 10K for the Year ended March 31, 1993.)
4.3 Loan agreement dated June 30, 1993 between the
Company and Crestar Bank. (Incorporated by reference to Exhibit 4.3
to Form 10-K for the year ended March 31, 1994.)
4.4 Second Amendment to Amended and Restated Loan and
Security Agreement between the Company and Crestar Bank dated
November 14, 1994 and amended and restated revolving note.
(Incorporated by reference to Exhibit 4.4 to Form 10-K for the year
ended March 31, 1995.)
10.1 1984 Incentive Stock Option and Stock Appreciation
Rights Plan, as amended. (Incorporated by reference to Exhibit 10.3
to the 1989 10-K.)
10.2 Agreement of purchase and sale with amendments dated
June 7, 1992, between the Company and ReCap Inc. for the Halifax
Office Complex. (Incorporated by reference to Exhibit 10.5 of the
1992 10-K.)
10.3 1994 Key Employee Stock Option Plan. (Incorporated
by reference to Exhibit 10.3 to Form 10-K for the year ended March
31, 1995.)
10.4 Howard C. Mills Executive Severance Agreement
10.5 Thomas L. Mountcastle Employment Agreement
22. Subsidiaries of the registrant
23.A Consent of Ernst &Young LLP, Independent Auditors
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HALIFAX CORPORATION
By /s/Howard C. Mills
Howard C. Mills
President and Chief Executive Officer Date: 6/30/97
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Howard C. Mills President and 6/30/97
Howard C. Mills Chief Executive
Principal Executive Officer Officer, Director
/s/John D. D'Amore Vice President, 6/30/97
John D. D'Amore Treasurer and
Principal Financial and Controller
Accounting Officer
Chairman of the
Arch C. Scurlock Board of Directors
/s/John H. Grover Director 6/30/97
John H. Grover
Director
Clifford M. Hardin
/s/Ernest L. Ruffner Director 6/30/97
Ernest L. Ruffner
Director
Alvin E. Nashman
/s/John Toups Director 6/30/97
John Toups
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Halifax Corporation
We have audited the accompanying consolidated balance sheets of Halifax
Corporation and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1997.
Our audits also included the financial statement schedule listed in the
index at item 14(a)2. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Halifax
Corporation and subsidiaries at March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/Ernst & Young LLP
Washington , D.C.
June 13, 1997
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
1997 1996 1995
Revenues (Note 1) $76,278,000 $47,159,000 $45,603,000
Operating costs and expenses:
Cost of services 69,530,000 41,675,000 40,708,000
Litigation expense - 320,000 -
Selling, general and
administrative 4,630,000 3,692,000 3,210,000
Total operating costs and
expenses 74,160,000 45,687,000 43,918,000
Operating income 2,118,000 1,472,000 1,685,000
Interest expense 950,000 573,000 627,000
Other income
(409,000) (362,000) (375,000)
Income before income taxes 1,577,000 1,261,000 1,433,000
Income taxes (Note 8) 623,000 498,000 575,000
Net earnings $ 954,000 $ 763,000 $ 858,000
Net earnings per common and
common $ .47 $ .43 $ .48
equivalent share - primary
Net earnings per common and
common $ .46 $ .43 $ .48
equivalent share - fully
diluted
Weighted average number of
common shares outstanding - 2,043,795 1,756,881 1,784,506
primary
Weighted average number of
common shares outstanding -
fully diluted 2,059,682 1,756,881 1,784,506
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
March 31
1997 1996
ASSETS
CURRENT ASSETS
Cash $ 268,000 $ 2,743,000
Trade accounts receivable (Note 3) 21,951,000 11,639,000
Other receivables 62,000 95,000
Inventory 6,860,000 2,792,000
Prepaid expenses and other current assets 1,300,000 207,000
Income taxes receivable 43,000 -
Deferred income taxes (Notes 1 and 8) 659,000 512,000
TOTAL CURRENT ASSETS 31,143,000 17,988,000
PROPERTY AND EQUIPMENT, at cost less
accumulated 6,624,000 4,527,000
depreciation and amortization (Notes 1 and
4)
COST IN EXCESS OF NET ASSETS ACQUIRED, net
of accumulated
amortization (Notes 1 and 2) 2,583,000 1,923,000
OTHER ASSETS
650,000 390,000
TOTAL ASSETS $41,000,000 $24,828,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $8,382,000 $10,278,000
(Note 6)
Deferred maintenance revenue 2,265,000 293,000
Bank overdrafts 1,803,000 847,000
Current portion of long-term debt &
mortgage note payable (Note 5) 1,206,000 556,000
Income taxes payable - 90,000
TOTAL CURRENT LIABILITIES 13,656,000 12,064,000
LONG-TERM DEBT (Note 5) 13,570,000 739,000
MORTGAGE NOTE PAYABLE (Note 5) 2,398,000 2,574,000
DEFERRED INCOME TAXES (Notes 1 and 8)
853,000 667,000
TOTAL LIABILITIES 30,477,000 16,044,000
STOCKHOLDERS' EQUITY (Note 7)
Common stock, $.24 par value:
Authorized - 4,500,000 shares
Issued - 2,258,866 in 1997 and 2,220,022 in
1996
Outstanding - 2,000,632 in 1997 and 542,000 518,000
1,752,343 in 1996
Additional paid-in capital 4,358,000 3,401,000
Retained earnings
5,836,000 5,253,000
10,736,000 9,172,000
Less treasury stock at cost - 258,234 in
1997 and 467,679 shares in 1996 213,000 388,000
TOTAL STOCKHOLDERS' EQUITY
10,523,000 8,784,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $41,000,000 $24,828,000
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
1997 1996 1995
Cash flows from operating
activities:
Net income $ 954,000 $ 763,000 $ 858,000
Adjustments to reconcile net
income to net
cash provided (used) by
operating activities:
Depreciation and amortization 1,060,000 599,000 658,000
(Gain) loss on sale of equipment 164,000 - (2,000)
(Increase) decrease in accounts (5,355,000) (562,000) 2,315,000
receivable
(Increase) decrease in other 83,000 1,000 (15,000)
current receivables
(Increase) decrease in inventory (1,284,000) 688,000 (43,000)
(Increase) decrease in other (1,005,000) 77,000 189,000
current assets
(Increase) decrease in other (367,000) (44,000) 55,000
assets
(Increase) decrease in income (184,000) (111,000) (40,000)
tax receivable
Increase (decrease) in accounts
payable and
accrued expenses (1,036,000) 5,502,000 (583,000)
Increase (decrease) in income (91,000) 90,000 (154,000)
taxes payable
Increase (decrease) in deferred
income taxes 186,000 107,000 281,000
Total adjustment
(7,829,000) 6,347,000 2,661,000
Net cash provided (used) by (6,875,000) 7,110,000 3,519,000
operating activities
Cash flows from investing
activities:
Acquisition of property and
equipment, net of (1,684,000) (247,000) (393,000)
purchased operations
Proceeds from sale of property 41,000 3,000 7,000
and equipment
Acquisitions
(114,000) (400,000) (400,000)
Net cash used in investing (1,757,000) (644,000) (786,000)
activities
Cash flows from financing
activities:
Proceeds from borrowing of long- 40,216,000 16,271,000 17,199,000
term debt
Retirement of long-term debt (33,866,000) (19,632,000) (20,000,000)
Cash dividends paid (371,000) (305,000) (303,000)
Proceeds from sale of stock upon
exercise of
stock options 178,000 - -
(Purchase) issue of treasury
stock - (75,000) (120,000)
Net cash provided (used) by
financing activities 6,157,000 (3,741,000) (3,224,000)
Net (decrease) increase in cash (2,475,000) 2,725,000 (491,000)
Cash at beginning of year
2,743,000 18,000 509,000
Cash at end of year $ 268,000 $ 2,743,000 $ 18,000
See notes to consolidated financial statements
Addi
Common tion Treasur
Stock al y Stock
Paid-In Retained
Shares Par Value Capital Earnings Shares Cost Total
Balance
March 31, 1994 $ 518,000 $3,401,000 $ 4,240,000 423,879 $ (193,000) $7,966,000
2,220,022
Cash Dividends
($.170 per - - - (303,000) - - (303,000)
share)
Net Income - - - 858,000 - - 858,000
Purchase of
Treasury stock
- - - - 25,650 (120,000) (120,000)
Balance
March 31, 1995 2,220,022 $ 518,000 $3,401,000 $ 4,795,000 449,529 $ (313,000) $ 8,401,000
Cash Dividends
($.173 per - - - (305,000) - - (305,000)
share)
Net income - - - 763,000 - - 763,000
Purchase of
Treasury stock - - - - 18,150 (75,000) (75,000)
Balance
March 31, 1996 2,220,022 $ 518,000 $3,401,000 $ 5,253,000 467,679 $ (388,000) $8,784,000
Cash Dividends
($.187 per - - - (371,000) - - (371,000)
share)
Net income - - - 954,000 - - 954,000
Exercise of
Stock Options 38,611 9,000 169,000 - - - 178,000
Stock Split 233 15,000 (15,000) - - - -
CMSA
Acquisition - - 803,000 - (209,445) 175,000 978,000
Balance
March 31, 1997 2,258,866 $ 542,000 $4,358,000 $ 5,836,000 258,234 $ (213,000) $10,523,000
See notes to consolidated financial statements.
HALIFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
Business Activity - Halifax Corporation, (the Company) provides
Technology Services and Facilities Services for commercial and
government activities. These services include the integration,
systems engineering, installation, maintenance and training for
computer systems, communications systems, and simulation systems; and
the management, operations and maintenance support of military bases,
prisons, waterways, major office complexes, and communications sites.
Revenues from services rendered to the United States Government and
the relative percentages of such revenues to total revenues for the
years ended March 31, 1997, 1996 and 1995 are $36,111,000 (47%),
$34,425,000 (73%) and $37,850,000 (83%), respectively. The reduction
in United States Government revenue in 1997 is primarily a result of
the Company's acquisition activities, however the Company's trend is
toward a balance among commercial, state/municipal government and
federal government revenues. For the years ended March 31, 1997, 1996
and 1995, the Company derived 0%, 0% and 15%, respectively, of its
revenue from its MPS contract with the U.S. Marine Corps. The MPS
contract was completed in the first quarter of fiscal year 1995.
Principles of Consolidation - The Company's consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions are
eliminated in consolidation.
Revenue Recognition - On cost type contracts, revenues are recorded as
reimbursable costs are incurred and related fixed and award fees are
recorded using the percentage of completion method. On time and
materials contracts, revenues are recorded at the contractual rates as
labor hours and other direct expenses are incurred. On fixed price
contracts, revenues are recorded using the percentage of completion
method. Revenues collected in advance for commercial maintenance
contracts are deferred and recognized over the term of the related
agreements. For all contracts, recognition is made of any anticipated
losses when identified. Disputes involving amounts owed the Company
by customers arise in the normal course of the Company's business.
These disputes are primarily due to changes in contract specifications
and disagreements over the interpretation of contract provisions.
Such disputes are recorded at the lesser of their estimated net
realizable value or actual costs incurred. Claims against the Company
and contract losses are recognized when the loss is considered
probable and reasonably determinable in amount. Deferred maintenance
revenue is recognized notably over the performance period.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets.
Inventory - Inventory consists principally of spare computer parts
valued at the lower of cost or market on the first-in first-out basis
and is displayed on the consolidated balance sheet net of allowances
for inventory obsolescence of $499,000 and $804,000 at March 31, 1997
and 1996, respectively.
Accounts Receivable and Inventories - Receivables and inventories are
primarily attributable to long-term contracts or programs in progress
for which the related operating cycles are longer than one year. In
accordance with industry practice, these items are included in current
assets.
Income Taxes - The Company has adopted the provisions of Statement of
Financial Accounting Standards Number 109, "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred taxes are provided on all
temporary differences measured using enacted tax rates expected to be
in effect during the periods in which the temporary differences
reverse.
Cost in Excess of Net Assets Acquired - Cost in excess of net assets
of acquired companies, described in Note 2, are being amortized using
the straight-line method over 25 years. Accumulated amortization was
$219,000 and $113,000 as of March 31, 1997 and 1996, respectively.
Management regularly reviews the valuation and amortization to
determine possible impairment of net intangible assets. Based on its
review, the Company does not believe that an impairment exists at
March 31, 1997.
Earnings Per Common Share - The
computation of primary earnings per share is based on the weighted
average number of shares outstanding during the period plus dilutive
common stock equivalents consisting of certain shares subject to stock
options based on the average market price of the common stock. Prior
to any dilution calculation, the weighted average number of shares was
1,985,612 in 1997, the only year in which there was dilution. The
weighted average number of shares outstanding resulting from this
computation for fiscal 1997 was 2,043,795.
The computation of fully-diluted earnings
per share is based on the weighted average number of shares
outstanding during the period plus dilutive common stock equivalents
consisting of certain shares subject to stock options based on the
ending market price of the common stock and contingently issuable
shares based on an earn-out provision related to the acquisition of
CMSA. The weighted average number of shares outstanding resulting
from this computation for fiscal 1997 was 2,059,682.
All share and per share presentations take into account the 3:2 common
stock split effective December 27, 1996.(See Note 7 for further
discussion).
New Accounting Pronouncements - In fiscal year 1997, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that certain long-
lived assets to be held and used be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts
of an asset may not be recoverable. Additionally, SFAS No. 121
requires that certain long-lived assets to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell. The
impact of the adoption of this standard was not material to the
Company's consolidated earnings or financial position.
Also in 1997, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation." SFAS No. 123 allows companies to continue to
measure compensation cost for stock-based employee compensation plans
using the intrinsic value method of accounting as prescribed in
Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. The Company
elected to continue its APB Opinion No. 25 accounting treatment for
stock-based compensation, and has adopted the provisions of SFAS No.
123 requiring disclosure of the pro forma effect on net earnings and
earnings per share as if compensation cost had been recognized based
upon the estimated fair value at the date of grant for options awarded
(See Note 7 to financial statements).
2. ACQUISITIONS
CMS Automation, Inc. (CMSA) and Consolidated Computer Investors, Inc.
(CCI)
On April 1, 1996, the Company completed the acquisition of CMS Automation,
Inc. (CMSA), a private Richmond, VA based computer network integration and
solutions company. On April 23, 1997, CMSA was renamed Halifax
Technology Services Company (HTSC). Financial consideration was in the
Company's stock with an assumption of debt. There was an initial payment
of approximately 209,400 shares valued at approximately $978,000 from
Treasury Stock representing approximately 12% of Halifax outstanding shares
at closing and there may be additional payments of common stock over the
next three years based on the annual earnings of CMSA. The Company filed
reports of the Acquisition Transaction with the SEC on Form 8-K on April
16, 1996 and on June 17, 1996.
The acquisition has been accounted for as a purchase with the purchase
price allocated to the assets and liabilities based on their estimated fair
value at the date of acquisition. The initial purchase price and costs of
the transaction exceeded the fair value of net assets purchased by $391,000
which was capitalized as the purchase price in excess of the fair value of
the net assets acquired.
On November 25, 1996, the Company through its wholly-owned subsidiary,
CMSA, acquired the ongoing computer network integration business of
Consolidated Computer Investors, Inc. ("CCI") of Hanover, Maryland through
an asset purchase. The Company paid $114,210 in cash and assumed secured
debt totaling $1,679,713. The cash paid was equal to the estimated net
assets purchased. The Company filed a report of the acquisition
transaction with the SEC on Form 8-K dated November 25, 1996.
The acquisition has been accounted for as a purchase with the purchase
price allocated to the assets and liabilities based on their estimated fair
value. The initial purchase price and costs of the transaction exceeded
the fair value of net assets purchased by $375,000 which was capitalized as
the purchase price in excess of the fair value of the net assets acquired.
The Company's fiscal 1997 results include CMSA's and CCI's results of
operations beginning April 1, 1996 and November 1, 1996, respectively. The
proforma impact of the CCI acquisition on fiscal 1997 is immaterial. The
following fiscal 1996 proforma information is unaudited and reflects both
of the acquisitions as if the purchase transactions had occurred on April
1, 1995.
For the Year Ended
March 31 Dec. 31, Profor Dec. 31, Profor
1996 1995 ma Proforma 1995 ma Proforma
Halifax CMSA Adjust Combined CCI Adjust Combined
ments ments
& Tax & Tax
Effect Effect
($ In thousands, except per share data)
Revenues $ 47,159 $ 21,249 $ - $ 68,408 $ 13,526 $ - $81,934
Net Income (Loss) $ 763 $ (109) $ 137 $ 791 $ (140) $ 313 $ 964
Earning per share $ .43 N/A $ .40 NA $ .49
Weighted Average #1,966,326
Number of Common
Shares Outstanding
Electronics Associates, Inc. (EAI)
On June 30, 1993, the Company purchased substantially all of the assets
and liabilities of the Field Services Division of Electronic Associates,
Inc. (EAI) which was primarily engaged in the maintenance of electronic
equipment and software for an initial purchase price of approximately $2.4
million. Additional payments of $1,000,000 were paid over the next 3 years
as certain revenue objectives were achieved. The Company paid $200,000
relating to this requirement in 1994 and $400,000 in both 1995 and 1996.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
March 31,
1997 1996
Amounts billed $ 19,708,000 $ 10,886,000
Amounts unbilled:
Amounts currently billable 1,800,000 511,000
Retainages and amounts awaiting
audit 677,000 430,000
Total 22,185,000 11,827,000
Allowance for doubtful accounts
(234,000) (188,000)
Total $ 21,951,000 $ 11,639,000
Retainages are generally billable upon acceptance of work by customers
or completion of contract audits by the Government. It is anticipated
that the accounts receivable balance at March 31, 1997 will be
substantially collected within one year.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
March 31,
Estimated
1997 1996 Useful Lives
Automotive equipment $ 375,000 $ 336,000 4 years
Machinery and equipment 6,260,000 2,605,000 3 - 10 years
Furniture and fixtures 1,323,000 576,000 5 - 10 years
Building and improvements 3,955,000 3,834,000 32 years
Land 648,000 648,000
Total 12,561,000 7,999,000
Accumulated depreciation
and amortization 5,937,000 3,472,000
Total $ 6,624,000 $ 4,527,000
5. LONG-TERM DEBT AND MORTGAGE NOTE PAYABLE
March 31,
1997 1996
Long-term debt consists of:
Revolving credit agreement amended
effective February 4, 1997, with a maximum
credit line of $12,800,000. Amounts
available under this agreement are
determined by applying stated percentages
to the Company's eligible billed
receivables and inventory. Interest
accrues on borrowings equal to or less
than eligible billed receivables and
inventory at either the prime rate or the
LIBOR rate plus 1.6% to 1.9% depending
upon a leverage ratio. At March 31, 1997
the interest rate was 7.34%. This
agreement expires July 31, 1998, at which
time all borrowings will become due. $ 11,046,000 $ -
Other notes payable and capital lease
obligations with interest rates ranging
from 1/2% over the prime rate to 15%, due
in monthly installments and maturing at
dates through 1997. The prime rate was
8.5% at March 31, 1997. $ 20,000 $ 20,000
Mortgage note modified and extended
February 7, 1997 payable in monthly
installments of $10,257 plus interest at
prime plus 1/4% through August 31, 2001.
At March 31, 1997, the interest rate was
8.75%. The note is collateralized by
buildings and land. $ 2,531,000 $ 2,640,000
EAI acquisition term loan facility dated
June 30, 1993. Note is payable in 60
equal monthly installments of $41,666 plus
interest. The note may be apportioned
between prime rate and LIBOR rate options.
Interest accrues at either the prime rate
plus 1/2% or the LIBOR rate plus 2.5%. At
March 31, 1997, the prime rate and LIBOR
options were at 9% and 8.01%. $ 645,000 $ 1,209,000
CMSA acquisition term loan facility dated
June 14, 1996. Note is payable in 24
equal monthly installments of $29,762 plus
interest and a final installment of
$1,785,712 due on June 30, 1998 plus
interest. Interest accrues at the LIBOR
rate plus 1.9%. At March 31, 1997, the
interest rate was at 7.34%. $ 2,202,000 $ -
CCI acquisition term loan facility dated
November 26, 1996. Note is payable in 48
equal monthly installments of $16,979 plus
interest. Interest accrues at the prime
rate plus 1/4%. At March 31, 1997, the
interest rate was 8.75%. $ 730,000 $ -
$ 17,174,000 $ 3,869,000
Less current maturities
1,206,000 556,000
Total $ 15,968,000 $ 3,313,000
Advances under the revolving credit agreement and term loan
facilities are collateralized by a first priority security
interest in all of the accounts receivable of the Company, the
inventory of Halifax Corporation and all of the Company's assets
except for land and building. Additionally, advances under the
term loan facilities are secured by the acquired assets.
The revolving credit agreement also contains convenants which
require the Company to maintain certain net worth and financial
statement ratios.
The aggregate annual maturities of long-term debt are:
1998 - $ 1,206,000
1999 - 11,874,000
2000 - 684,000
2001 - 599,000
2002 - 480,000
Thereafter 2,331,000
-
Total - $ 17,174,000
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
March 31,
1997 1996
Accrued expenses $ 1,381,000 $ 1,151,000
Accounts payable 5,328,000 7,915,000
Accrued payroll 563,000 346,000
Accrued vacation 859,000 646,000
Payroll taxes accrued and 251,000 220,000
withheld
$ 8,382,000 $ 10,278,000
7. COMMON STOCK
Stock Split - On November 15, 1996, the Board of Directors
authorized a three-for-two stock split which was distributed on
December 27, 1996, to stockholders of record at December 10, 1996.
All references in the consolidated financial sttements to numbers of
shares, per share amounts and market prices of the Company's common
stock have been retroactively restated to reflect the increased number
of common shares outstanding.
Stock Options - Under the Company's 1984 Stock Option and Stock
Appreciation Rights Plan (as amended), options to purchase shares of
the Company's common stock have been granted to officers and key
employees at a price not less than the fair market value of the stock
at the date of grant. Any grants of options or stock appreciation
rights under the plan are limited to a maximum of 165,000 shares of
the Company's common stock. Options and/or stock appreciation rights
expire five years after the date of grant. The 1984 plan terminated
May 15, 1994. On September 16, 1994 the shareholders approved the new
Key Employee Stock Option Plan ("1994 Plan"). The maximum number of
shares subject to the 1994 Plan and approved for issuance is 180,000
shares of the Company's common stock either authorized and unissued or
shares held in treasury. This number is subject to adjustment in the
event of stock splits, stock dividends or other recapitalization of
the Company's common stock.
A summary of options activity is as follows:
Weighted
Optioned Option Price Average
Shares Per Share Total Exercise price
1984 Plan
Balance March 31, 63,150 $4.59 - 5.67 $301,000 $ 4.77
1994
Options forfeited
upon retirement/
termination of (4,500) 4.59 - 5.00 (21,000) 4.67
employees
Balance March 31, 58,650 $4.59 - 5.67 $280,000 $ 4.77
1995
Options forfeited
upon retirement/
termination of (6,000) 4.59 - 5.00 (28,140) 4.69
employees
Balance March 31, 52,650 $ 4.59 - 5.00 $ 251,860 $ 4.78
1996
Options exercised (38,611) 4.59 - 5.00 (178,795) 4.63
Options forfeited
upon retirement/
termination of (1,688) 5.00 (8,440) 5.00
employees
Balance March 31, 12,351 $ 5.00 - 5.67 $ 64,625 $ 5.23
1997
Options exercisable
at
March 31, 1997 10,013 $5.00 - 5.67 $ 52,075 $ 5.20
1994 Plan
Balance March 31, - $ - $ - $ -
1994
Options granted 48,000 4.67 224,000 4.67
Balance March 31, 48,000 $ 4.67 $ 224,000 $ 4.67
1995
Options Granted 23,700 4.58 - 4.83 114,175 4.82
Options forfeited
upon retirement/
termination of (4,500) 4.58 - 4.83 (21,250) 4.72
employees
Balance March 31, 67,200 $ 4.58 - 4.83 $ 316,925 $ 4.72
1996
Options Granted 105,600 4.67 - 7.67 680,800 6.45
Options forfeited
upon retirement/
termination of (24,000) 4.67 - 7.33 (137,810) 5.74
employees
Balance March 31, 148,800 $ 4.58 - 7.67 $ 859,915 $ 5.78
1997
Options exercisable
at
March 31, 1997 - $ - $ - -
All stock-based incentive awards granted in 1997 and 1996 under the Plans
were stock options which have 5 year terms and vest at the end of the third
and fourth years. Exercise prices of options awarded in all years were
equal to the market price of the stock on the date of grant. Proforma
information regarding net earnings and earnings per share as required by
SFAS No. 123 has been determined as if the Corporation had accounted for
its employee stock options under the fair value method. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for
both 1997 and 1996: risk-free interest rate of 6.16%, dividend yield of
3.1%, volatility factor related to the expected market price of the
Corporation's common stock of .262, and weighted-average expected option
life of three years. The weighted average fair values of options granted
during 1997 and 1996 were $6.46 and $4.81, respectively.
For purposes of proforma disclosures, the options' estimated fair values
are amortized to expense over the options' vesting periods. Therefore,
the proforma results presented below include up to 33% of the total
proforma expense for options awarded in that year depending upon the
date of grant. The Corporation's proforma information for the years
ended March 31, is as follows:
(In thousands, except per share data) 1997 1996
Proforma net earnings $ 930 $ 759
Proforma earnings per
common share:
Assuming no dilution .46 .43
Assuming full dilution .45 .43
Employee Plans - During fiscal 1985, the Company adopted a 401(k)
retirement plan covering substantially all non-union employees with
more than 3 months of service. The plan provides that the Company will
contribute an amount equal to 50% of a participants contribution up to
4% of salary, and at the Company's discretion, additional amounts based
upon the profitability of the Company. The Company's contributions
were $191,000 in 1997, $157,000 in 1996 and $163,000 in 1995. The
Company has an Employee Stock Purchase Plan under which all employees
of the Company are eligible to contribute funds for the purchase of the
Company's common stock on the open market at market value. Under the
Plan, the Company agrees to pay all brokerage commissions associated
with such purchases.
8. INCOME TAXES
Deferred tax assets and liabilities on the balance sheets reflect
the net tax effect of temporary differences between carrying amounts of
assets and liabilities for financial statement purposes and the amounts
used for income tax purposes. The deferred tax assets and liabilities
are classified on the balance sheets as current or non current based on
the classification of the related assets and liabilities.
The components of income tax expense are as follows for the years
ended March 31:
1997 1996 1995
Current:
Federal $ 494,000 $ 355,000 $ 250,000
State 101,000 75,000 43,000
Total current: 595,000 430,000 293,000
Deferred 28,000 68,000 282,000
Total $ 623,000 $ 498,000 $ 575,000
The components of the Company's deferred tax assets and
liabilities consist of the following at March 31:
1997 1996
Deferred tax assets - current
Accounts receivable $ 102,000 $ 71,000
Inventory 234,000 214,000
Accrued compensation/vacation 323,000 227,000
Net operating loss carry forwards - 51,000 -
CMSA
AMT credit carry forward - CMSA 15,000 -
Less: valuation allowance -
(66,000)
$ 659,000 $ 512,000
Deferred tax liability- noncurrent
Depreciation/amortization $ 785,000 $ 606,000
Sublease rental income 33,000 21,000
Other
35,000 40,000
$ 853,000 $ 667,000
The sources and tax effects of temporary differences resulting in
deferred tax expense (benefit) are as follows for the year ended March
31:
1997 1996 1995
Depreciation/amortization $ 166,000 $ 77,000 $ 471,000
Allowance and reserves for
accounts receivable (31,000) (18,000) 147,000
Income from contracts (5,000) (201,000) 28,000
Vacation expense (91,000) 8,000 3,000
Inventory costs capitalized
for tax purposes (19,000) 187,000 (270,000)
Sublease rental income 13,000 - 2,000
Deferred contract costs - - (90,000)
Deferred compensation
expense (5,000) 15,000 (9,000)
Total $ 28,000 $ 68,000 $ 282,000
The differences between the provision for income taxes at the
expected statutory rate and those shown in the consolidated statements
of earnings are as follows for the years ended March 31:
1997 1996 1995
Provision for income taxes
at statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.4 4.3 3.6
Permanent differences 1.1 1.4 2.0
Other
- (.2) .5
Total
39.5% 39.5% 40.1%
9. LEASING ACTIVITY
The Company is obligated under operating leases for office space
and certain equipment. The following is a schedule of the future
minimum lease payments under operating leases as of March 31, 1997.
Year ending March 31,
1998 $ 638,000
1999 398,000
2000 56,000
2001 -
2002
-
Total minimum lease $ 1,092,000
payments
Total rental expense under operating leases was $411,000,
$201,000 and $376,000 for the years ended March 31, 1997, 1996, and
1995, respectively.
10.RELATED PARTY TRANSACTIONS
During the years ended March 31, 1997, 1996, and 1995, the
Company paid $77,000, $9,000 and $14,000, respectively, for legal
services to a Company Board member or a law firm in which a Company
Board member is a partner.
11.COMMITMENTS AND CONTINGENCIES
The Company's contracts with the U.S. Government are subject to
cost audit by Government authorities. Such audits have been completed
through March 31, 1990. It is not possible to predict the outcome of
future audits but it is the opinion of the Company's management that
liabilities, if any, arising from such audits would not have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Upon the death of a Company officer or a certain former officer
and at the option of their estates, the Company is committed to
repurchase their shares (79,267) at current book value. At March 31,
1997, the aggregate book value of such shares was approximately
$417,000.
The Company is defendant or co-defendant in various lawsuits. In
the opinion of management, none of these lawsuits could materially
affect the consolidated financial position or results of operations of
the Company.
12.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid the following amounts for interest and income
taxes during the years ended March 31:
1997 1996 1995
Interest $ 950,000 $ 573,000 $ 627,000
Income taxes $ 722,000 $ 457,000 $ 487,000
13.QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except on a per share basis)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1997
Revenues $15,640 $20,531 $21,913 $18,194
Income before income 435 536 594 12
taxes
Net income 269 319 359 7
Per share
Earnings per share .14 .16 .18 .00
- primary
Earnings per share .14 .15 .17 .00
- fully diluted
Dividends per .043 .047 .047 .05
share
Market price
High 8-1/8 7-7/8 13-1/8 15
Low 4-5/8 6-5/8 7-5/8 10-1/8
Primary EPS totals to $.48 versus $.47 for the year due to
rounding during computation at fiscal quarters.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1996
Revenues $8,894 $9,076 $11,217 $17,920
Income before income 309 47 314 591
taxes
Net income 188 27 191 357
Per share
Earnings per share .11 .01 .11 .20
- primary
Earnings per share .11 .01 .11 .20
- fully diluted
Dividends per .043 .043 .043 .043
share
Market price
High 4-7/8 4-5/8 4-5/8 4-3/4
Low 4-1/8 4-1/8 3-7/8 4-3/8
Halifax Corporation
Schedule II, Valuation and Qualifying Accounts
March 31, 1997
Balance at Additions Balance at
beginning charged to end of
of year cost & expense Deductions year
Year Ended March
31, 1997:
Allowance for
doubtful
accounts $ 188,000 $ 158,000 $ 112,000 $ 234,000
Allowance for
inventory
obsolescence $ 804,000 $ 809,000 $1,114,000 $ 499,000
Year Ended March
31, 1996:
Allowance for
doubtful
accounts $ 170,000 $ 20,000 $ 2,000 $ 188,000
Allowance for
inventory
obsolescence $ 611,000 $ 1,195,000 $1,002,000 $ 804,000
Year Ended March
31, 1995:
Allowance for
doubtful
accounts $ 242,000 $ 39,000 $ 111,000 $ 170,000
Allowance for
inventory
obsolescence $ 539,000 $ 575,000 $ 503,000 $ 611,000
INDEX TO EXHIBITS
(Exhibit Numbers correspond to Exhibit Table
Regulation S-K, Item 601)
Exhibit
Number
Page
10.4 Howard C. Mills Executive Severance Agreement 42
10.5 Thomas L. Mountcastle Employment Agreement 46
23.A Consent of Ernst & Young LLP, Independent Auditors 50
Exhibit 10.4
EXECUTIVE SEVERANCE AGREEMENT
AGREEMENT, dated as of July 24 , 1995, between Halifax
Corporation, a Virginia corporation ("Company"), and Howard C. Mills
("Executive").
WITNESSETH:
WHEREAS, Executive has been a long-time employee of the Company in
positions of high responsibility and authority and is presently its chief
executive officer, and
WHEREAS, in recognition of the Executive's contribution to the company
it is in the best interest of the parties hereto that orderly and equitable
provisions be made in the event of termination of the Executive.
NOW, THEREFORE, in consideration of the mutual promises herein
contained and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. The Company and the Executive agree that the Executive is employed on
an at-will basis. Unless otherwise specifically provided in a written
agreement signed by both the Company and the Executive, the parties
understand that the Executive is employed for no fixed term or period,
that either the Company or the Executive may terminate the Executive's
employment with the Company at any time with or without a reason, and
that this Agreement creates no contract of employment between the
Company and the Executive.
2. The term of this Agreement shall be for one (1) year beginning
August 1, 1995, and shall automatically renew itself for an
additional one (1) year term on August 1 from year-to-year
thereafter, unless the Company provides to the Executive written
notice of the Company's decision not to renew in which event this
Agreement shall expire by its terms at the end of the full term year
that begins on the January 1 next following the date such notice is
received by the Executive.
3. The Company shall have the right to terminate the Executive's
employment without payment of severance as provided below in the event
of the Executive's death, or on thirty (30) days written notice in the
event that the Executive shall be unable, or shall fail, to perform
all of the services required of his position with the Company as a
result of any mental or physical incapacitating disability, to the
extent that such inability or failure to perform required duties shall
exist for any consecutive ninety (90) day period. The Company's right
to terminate the Executive's employment without payment of severance
under this Paragraph shall not limit or reduce in any way the
Executive's right to receive benefits under any disability insurance
or plan maintained by the Company for the benefit of the Executive.
4. The Executive shall have the right to terminate his employment with
the Company at any time on written notice to the Company indicating
the Executive's desire to retire or to resign from the Company's
employment;
5. Except as provided in Paragraph 3 and 4, the Executive's employment
with the Company may be terminated without payment of severance as
provided below only in the event of a termination for cause as defined
in this Paragraph. For the purposes of this Agreement, "Cause" shall
be defined as gross negligence, willful misconduct, fraud, willful
disregard of the Board of Directors' direction or breach of published
Company policy. The Executive may be terminated for Cause only in
accordance with a resolution duly adopted by an absolute majority of
the Company's Board of Directors finding that, in the good faith
opinion of the Board of Directors, the Executive engaged in conduct
justifying a termination for Cause as that term is defined above and
specifying the particulars of the conduct motivating the Board's
decision to terminate the Executive. Such resolution may be adopted
by the Board of Directors only after the Board has provided to the
Executive (1) five (5) days advance written notice of a meeting of the
Board called for the purpose of determining Cause for termination of
the Executive, (2) a statement setting forth the alleged grounds for
termination, and (3) an opportunity for the Executive and, if the
Executive so desires, the Executive's counsel to be heard before the
Board.
6. Except in connection with a Change of Control Disposition as defined
in Paragraph 12, if the Executive's employment with the Company is
terminated for any reason other than those set forth in Paragraphs 3,
4 or 5 above, then the Company shall pay to the Executive an amount
equal to eighteen (18) months salary based upon the current salary of
the Executive at the time of termination.
7. If following a Change of Control Disposition (herein "Change of
Control Disposition" shall be as defined below in Paragraph 12) of the
Company, the Executive's employment is terminated within one (1) year
of the "Change of Control Disposition Date" (as herein defined below
in Paragraph 12) for any reason other than the reasons set forth in
Paragraphs 3, 4 or 5 above, then the Company shall pay to the
Executive an amount equal to two (2) times the amount that the Company
would have been required to pay the Executive under Paragraph 6 above
if the Executive's employment had been terminated in the absence of a
Change of Control Disposition. In the event Executive retires or
resigns pursuant to Paragraph 4 above within ninety (90) days
following the Change of Control Disposition Date, the Company shall
pay to the Executive an amount equal to two (2) times the amount that
the Company would have been required to pay the Executive under
Paragraph 6 above if the Executive's employment had been terminated in
the absence of a Change of Control Disposition. Notwithstanding the
foregoing, maximum compensation payable to the Executive pursuant to
this Paragraph is limited to no more than 299% of the "base amount" of
Executive's compensation as defined in the Tax Reform Act of 1984
(Section 280G and applicable regulations thereunder and any amendments
thereto).
8. At the time of termination of the Executive's employment for any
reason the Executive shall be paid all other compensation and benefits
due to the Executive at the time of termination.
9. The Executive may elect to receive the compensation payable in
accordance with this Agreement in a lump sum or in equal payments at
intervals no more often than semimonthly, over a period of the
Executive's choice not to exceed the number of months of compensation
due him pursuant to this Agreement.
10. The Executive shall not disclose, publish, or use for any purpose not
directly related to the performance of the Executive's duties for the
Company, or permit anyone else to disclose, publish, or use any
proprietary or confidential information or trade secrets of the
Company at any time during or after his employment with the Company.
This obligation shall continue so long as such information remains
legally protectable as to persons receiving it in a confidential
relationship. Executive agrees to return to the Company all
proprietary material which he possesses on the date of termination of
the Executive's active employment with the Company.
11. For a period of six (6) months following termination of Executive's
employment with the Company for any reason other than "Cause," as
defined in Paragraph 5 above, the Executive shall not (1) directly or
indirectly, sell, market, or otherwise provide any client or
previously identified prospective client of the Company, products or
services similar to or in competition with those sold or distributed
by the Company, in any geographic area in which the Company offers any
such products or services, or (2) participate directly or indirectly
in the hiring or soliciting for employment of any person employed by
the Company.
12. By reason of the special and unique nature of the obligations
hereunder, it is agreed that neither party hereto may assign any interests,
rights or duties which the party may have in this Agreement without the
prior written consent of the other party, except that upon any "Change of
Control Disposition" of the Company through purchase, merger,
consolidation, liquidation, change in control by reason of any single
entity (individual or group) other than Research Industries Incorporated,
the Company or a Company Employee Stock Ownership Plan and Trust, acquiring
twenty-five percent (25%) or more of the voting power of the Company's
stock, or sale of all or substantially all of the assets of the Company to
another party whether or not the Company is the surviving corporation, this
Agreement shall inure to the benefit of and be binding upon the Executive
and the purchasing, surviving or resulting entity, company or corporation
in the same manner and to the same extent as though such entity, company or
corporation were the Company. The "Change of Control Disposition Date"
shall be that calendar date on which the Change of Control Disposition
event was consummated and legally binding upon the parties.
13. Any controversy or claim arising out of, or relating to this
Agreement, or its breach, or otherwise arising out of or relating to
the Executive's employment (including without limitation to any claim
of discrimination whether based on race, color, religion, national
origin, gender, age, sexual preference, disability, status as a
disabled or Vietnam-era veteran, or any other legally protected
status, and whether based on federal or State law, or otherwise) by
the Company shall be resolved by arbitration. This arbitration shall
be held in Fairfax County, Virginia in accordance with the model
employment arbitration procedures of the American Arbitration
Association. Judgment upon award rendered by the arbitrator shall be
binding upon both parties and may be entered and enforced in any court
of competent jurisdiction.
14. In consideration of any payment made to the Executive pursuant to this
Agreement, the Executive, for himself, his heirs and legal
representatives, releases and forever discharges the Company, its
predecessors, successors or anyone, and all of the past, present or
future officers, directors, agents and employees of the Company from
any and all claims, demands, or courses of action, whether known or
unknown, exactly at the time of payment or arising subsequently
thereto, arising out of or related to the Executive's employment by
the Company.
15. This Agreement shall be construed and enforced in accordance with the
laws of the Commonwealth of Virginia.
16. This Agreement constitutes the entire understanding and agreement
between the Company and the Executive with regard to all matters
herein. This Agreement may be amended only in writing, signed by both
parties hereto.
In witness whereof the parties have executed this Agreement to be effective
the day and year first above written.
HALIFAX CORPORATION
By:/s/Arch C. Scurlock
Chairman of the Board
EXECUTIVE
/s/Howard C. Mills
Howard C. Mills
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT made the 1st day of April , 1996, by and among
HALIFAX CORPORATION, a Virginia Corporation ("Parent"), CMSA ACQUISITION
CORPORATION, a Virginia corporation ("Sub") and Thomas L. Mountcastle
("Employee").
WHEREAS, Sub wishes to employ Employee as the President of Sub, which
shall consist of Sub and such other businesses, units, divisions,
subsidiaries or other entities of Parent as Parent shall determine in its
sole discretion from time to time, with such other duties and respon-
sibilities as Sub may reasonably assign to Employee consistent with the
nature and character of such employment (the "Position"), and Parent wishes
to elect Employee as a Vice President of Parent, and Employee wishes to
accept such employment and election subject to the terms and conditions of
this Agreement; and
WHEREAS, Parent provides services for computers, communication
systems, simulation systems and facilities and markets such services in the
United States and in various foreign countries and has accumulated valuable
and confidential information including trade secrets and know-how relating
to technology, procedures, formulas, machines, marketing plans, sources of
supply, business strategies, and other business records; and
WHEREAS, the giving of the covenants contained herein is a condition
precedent to the employment of Employee in the Position and Employee
acknowledges that the execution of this Agreement and the entering into of
these covenants is an express condition of his employment in the Position
and that said covenants are given in consideration for such employment and
other benefits conferred upon him by this Agreement.
NOW, THEREFORE, in consideration of such employment and other valuable
consideration, receipt of which is hereby acknowledged, Parent, Sub and
Employee agree as follows:
1. Employment and Compensation.
1.1 Base Salary. Sub agrees to employ Employee in the Position,
reporting to the President of Parent, at a minimum compensation of $130,000
per year ("Annual Base Salary"). Employee shall be eligible to receive
increases in Employee's Annual Base Salary pursuant to periodic salary
reviews consistent with Parent's corporate policies, it being understood
such increases are not guaranteed, but subject to Employee's job
performance.
1.2 Bonus. Employee shall receive an annual profit sharing bonus
equal to 25% of his Annual Base Salary provided the profit goals of Sub are
met. Bonus rates payable for performance above and below profit goals will
be in accordance with the chart attached hereto and made a part hereof as
Exhibit A.
1.3 Stock Options. Employee shall be granted an option to purchase
5,000 shares of Parent common stock priced at market value on the Effective
Time as defined in the Agreement and Plan of Reorganization entered into by
the parties.
Exhibit D
2. Term and Severance Pay.
2.1 Term. The term of this Agreement (the "Term") shall be through
March 31, 1999, beginning with the date on which the Effective Time occurs
(the "Start Date").
2.2 Termination by Employee.
(a) Employee shall have the right to terminate his employment with Sub
at any time for any reason ("Voluntary Termination") on thirty (30) days
prior written notice to an officer of Sub.
(b) Employee shall have the further right to terminate his Employment
with Sub ("Termination for Good Reason") if (i) Sub attempts to assign to
Employee duties or responsibilities which are materially inconsistent with
the nature and character of the Position; provided however, Employee must
first provide Sub with written notice specifying the duties or
responsibilities which have been assigned to Employee and which are
materially inconsistent with the responsibilities and duties of the
Position, and Sub shall have fifteen days in which to readjust such duties
and responsibilities so that they are materially consistent with the duties
and responsibilities of the Position or (ii) if Employee is required by Sub
to relocate outside the Richmond, Virginia metropolitan area. In the event
of a termination pursuant to this Subsection 2.2(b), Employee shall be
entitled to severance payments calculated pursuant to Subsection 2.4 and
shall be bound by the covenants contained in Sections 6 and 8.
2.3 Termination By Sub.
(a) Sub shall have the right to discharge Employee ("Termination for
Cause") at any time (i) upon 30 days' notice, during which 30 day period
Employee shall have an opportunity to cure, in the event of any willful and
continued failure by the Employee to substantially perform his duties
hereunder (other than resulting from the Employee's sickness, accident or
disability) or any violation of Section 4 of this Agreement, or (ii)
without notice in the event of the willful engaging by the Employee in
criminal misconduct that is materially injurious to Sub or its affiliates;
and
(b) Sub shall have the right to discharge Employee at any time in the
event of continued and repeated failure to discharge assigned duties for
any reason whatsoever (including without limitation, because of sickness,
accident or disability), which failure shall continue for at least 30 days
following Sub's delivery to Employee of written notice specifying the
duties which have been assigned and which Employee has failed to discharge.
Sub's discharge of Employee under this Section 2.3(b) shall not constitute
a Termination for Cause.
(c) Sub shall have the further right to discharge Employee at any
time, without cause.
2.4 Payments Upon Termination.
(a) If Employee's employment is terminated for any reason, Sub shall
pay the Employee his full salary through the date of termination at the
rate in effect at the time of termination plus accrued vacation and other
vested benefits, payable within the period required by law. In the event
of a Voluntary Termination or a Termination for Cause, such payments shall
be the only payments due Employee under this Agreement.
(b) If Employee's employment is terminated during the Term, other
than by a Voluntary Termination or a Termination for Cause, then in
addition to the amounts due under Section 2.4(a), Sub shall pay to the
Employee a lump sum payment within thirty days of the effective date of
termination (other than payments made pursuant to the proviso in
subparagraph (ii) hereof) equal to the sum of:
(I)50% of the total salary that would
have been paid to Employee during the remaining Term at the
salary rate in effect at the time of termination, plus
(ii) one year's salary at the rate in effect
at the time of termination.
3. Insurance and Other Benefits. As further consideration for the
covenants contained herein, Sub will provide Employee with such insurance,
welfare, sick leave, and other benefits as may be established by Sub from
time to time with respect to its employees in accordance with Sub's
established procedures and to reimburse Employee for authorized business
expenses incurred in accordance with policies established by Sub from time
to time. Employee shall be entitled to 4 weeks vacation until such
time as the length of the Employee's service with Sub entitles Employee to
a longer period of vacation. Employee shall be entitled to Director's and
Officer's indemnification insurance coverage to the same extent as Parent
shall provide from time to time to persons employed as officers of Parent.
4. Employee Obligation. Employee agrees to devote such of his time and
attention as may be required to perform the duties that may be reasonably
assigned to him from time to time consistent with the Position to the
exclusion of any other employment or activity which would materially
interfere with or compete with the efforts devoted on behalf of Sub, unless
Employee first obtains Sub's written consent to such other employment or
activity, which consent may be withdrawn by Sub at any time upon 30 days
notice.
5. Company Policies. Employee agrees to abide by the policies, rules,
regulations or usages applicable to Employee as established by Sub from
time to time and provided to Employee in writing, to perform the duties
assigned to him faithfully and loyally.
6. Access to Confidential Information; Noncompete. Employee agrees,
effective as of the date hereof, to sign and be bound by the obligations of
the Agreement Not to Compete (the "Noncompete Agreement") attached hereto
as Exhibit B. The obligations under the Noncompete Agreement shall survive
termination or expiration of this Agreement.
7. Board of Directors. During the Term of employment, Employee shall also
be a member of the Board of Directors of Sub.
8. Release. In the event Employee becomes entitled to payments pursuant
to Section 2.4(b) hereof, Employee shall, as a condition to such payments
being made, execute and deliver to Sub and to Parent a general release in
such form as is reasonably satisfactory to Sub and to Parent.
9. Entire Agreement. This Agreement represents the entire agreement of
the parties with respect to Employee's employment with Sub and supersedes
all prior agreements, written or oral, with respect thereof. This
Agreement may be modified or amended only by a written agreement executed
by both parties to this Agreement.
10. Miscellaneous. Nothing in this Agreement shall be construed as
creating a joint venture or partnership between Employee and Parent or Sub.
Parent shall cause Sub to honor all of Sub's obligations arising out of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed on the date first set forth above.
EMPLOYEE
By:/s/Thomas L. Mountcastle
Thomas L. Mountcastle
HALIFAX CORPORATION
By:/s/Howard C. Mills
Howard C. Mills, President
CMSA ACQUISITION CORPORATION
By:/s/Howard C. Mills
Howard C. Mills, President
Exhibit 23.A
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-24221) of Halifax Corporation and in the related
Prospectus of our report dated June 13, 1997, with respect to the
consolidated financial statements and schedule of Halifax Corporation
included in the Annual Report (Form 10-K) for the year ended March 31,
1997.
/S/ERNST & YOUNG LLP
Washington, D.C.
June 27, 1997