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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
( X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 1998
( ) 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 9, 1998 was $9,974,851
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 9, 1998
Common Stock 2,010,482
$.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 MANAGEMENT COMPANY
Halifax Corporation is a Technology Services and Facilities
Management 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
Management 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/local governments; and the Company 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), 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 Management, operation and support services are provided
by HTSI for federal, state, and local governments.
PRIMARY SERVICES PROVIDED
TELECOMMUNICATIONS SERVICES
Services include engineering, installation, maintenance and
logistic services for telecommunications systems and networks
worldwide.
TECHNOLOGY CONSULTING AND SYSTEMS INTEGRATION SERVICES
A full range of consulting and systems integration services to
include design and implementation of networks and information
systems. Consulting services are geared to solving government and
business problems through technology and field-proven management
methodology.
Y2K DESKTOP AND NETWORK SOLUTIONS
Services include year 2k desktop solutions for enterprise PC
hardware and software compliance. Implementation approach
comprises assessment, remediation consulting and support, and
testing and validation.
INTERACTIVE TECHNOLOGIES
Services include website design, development and marketing,
Internet/Intranet services, and multimedia sales and educational
tools.
COMPUTER MAINTENANCE AND REPAIR
A comprehensive blend of nationwide coverage, multi-vendor and
multi-systems support, project management expertise, and
customized service programs including on-site, on-call and depot
repair.
SIMULATION SYSTEMS SERVICES
Operation, integration, and maintenance of simulations systems for
aircraft, missiles, automobiles, and other applications.
FACILITIES MANAGEMENT AND OUTSOURCING SERVICES
Total facilities and maintenance outsourcing capabilities for a
wide range of diverse organizations and applications.
HISTORY
The Company was incorporated in Virginia in 1967 as Halifax
Engineering, Inc., the successor to the business begun as a sole
proprietorship in 1967. On April 1, 1970, Halifax acquired the
Field Service Division of United Industries. This expanded the
business base in technical services and field engineering. In
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
non-federal business and provided an additional service line for
simulator operations, maintenance and integration.
On April 1, 1996, the Company completed the acquisition of
privately held CMS Automation, Inc. (CMSA), a Richmond, Virginia
computer systems integration company. On April 23,1997, the name
of CMSA was changed to Halifax Technology Services Company
("HTSC").
On November 25, 1996, the Company through its wholly-owned
subsidiary, CMSA, acquired the ongoing computer network
integration business of Consolidated Computer Investors, Inc.
("CCI") of Hanover, Maryland through an asset purchase. The
combined entity name was changed to Halifax Technology Services
Company (HTSC).
The discontinuation of various service lines since October, 1984
has enabled the Company to focus on Technology Services and
Facilities Management.
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
1998, 1997 and 1996, the Company received revenues from 95, 183
and 491 Government contracts respectively, which accounted for
approximately 35%, 47% and 73%, respectively, of the Company's
total revenues. In 1998 the number of contracts does not
separately count the tasks orders completed under IDIQ (Indefinite
Delivery Indefinite Quantity) contracts as in prior years, however
the number of primary contracts is consistent across the years.
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 thereof. Under time-and-materials
contracts, the Company receives a fixed hourly rate intended to
cover salary costs attributable to work performed on the contracts
and related indirect expenses, as well as 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,
1998 1997 1996
Commercial $ 28,595,000 39% $ 22,587,000 30% $6,004,000 13%
State/Local 19,062,000 26% 17,580,000 23% 6,730,000 14%
Federal 26,080,000 35% 47% 34,425,000 73%
Government 36,111,000
Total $ 73,737,000 100% $76,278,000 100% $47,159,000 100%
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,
1998 1997 1996
Cost $ 6,252,000 8% $ 7,195,000 9% $ 2,232,000 5%
reimbursable
Time & 7,967,000 11% 8,576,000 11% 7,333,000 16%
materials
Fixed-price $ 59,518,000 81% $60,507,000 80% 37,594,000 79%
Total $ 73,737,000 100% $76,278,000 100% $ 47,159,000 100
%
Accounts Receivable
Accounts receivable at March 31, 1998 and 1997 represented 55% and
54% of total assets, respectively. Accounts receivable are
comprised of billed receivables and unbilled receivables. Billed
receivables represent invoices presented to the Customer.
Unbilled receivables represent future payments due from the
Customer for which invoices 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, 1998 and 1997, see Note 3 to the accompanying
Consolidated Financial Statements.
Backlog
The Company's funded backlog for services as of March 31, 1998,
1997 and 1996 was $45,000,00, $29,000,000, and $24,000,000,
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, 1998, 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 $364,000,000. The unfunded portion is $319,000,000
which includes $89,000,000 in options and $230,000,000 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 significantly 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.
The Company's 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, 1998, the Company had 622 employees of which 83 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 November 6, 1997, the Company concluded the sale of its twin-
building office complex for $5,250,000 and the lease back of the
Company's headquarters building. The transaction resulted in
other income of $1,494,000 of which $714,000 will be amortized
over the 12 year lease-back of its headquarters building. The net
sale proceeds were applied to the reduction of debt.
The Company is obligated under approximately 28 small short-term
facility leases connected with its nationwide maintenance service
operations.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the
Company is a party. The Company is engaged in ordinary routine
litigation incidental to the Company's business to which the
Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders in the
fourth quarter of fiscal 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock, par value $0.24, is traded on the
American Stock Exchange. At June 22, 1998, there were
approximately 743 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.
Fiscal Year 1998 Fiscal Year 1997
Fiscal Quarter, High Low High Low
April - June 11-1/2 6-3/4 8-1/8 4-5/8
July - Sept. 10-7/8 7-5/8 7-7/8 6-5/8
Oct. - Dec. 13-1/8 8-3/4 13-1/8 7-5/8
Jan. - March 10 7-1/2 15 10-1/8
In fiscal 1998, the Company paid a cash dividend of $0.05 per share
on June 10, 1997, September 10, 1997, December 10, 1997 and March
10, 1998 to shareholders of record on May 27, 1997, August 27,
1997, November 26, 1997 and February 26, 1998, respectively.
In fiscal 1997, the Company paid a cash dividend of $0.043 per
share on June 10, 1996 to shareholders of record on May 24, 1996,
cash dividends of $0.047 per share on September 10, 1996 and
December 10, 1996 to shareholders of record on August 22, 1996
and November 27, 1996, respectively, and a cash dividend of $0.05
per share on March 10, 1997 to shareholders of record on February
21, 1997.
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.
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):
1998 1997 1996 1995 1994
Revenue $ 73,737 $76,278 $ 47,159 $ 45,603 $ 72,501
Net Income 442 954 763 858 853
per common share - .22 .47 .43 .48 .47
basic
per common share - .21 .46 .43 .48 .47
diluted
Long-term obligations
including current
maturities 15,709 17,174 3,869 7,230 10,031
Cash dividends per
common share .20 .187 .17 .16
.173
Total assets at
year-end 37,975 41,000 24,828 22,107 24,728
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual 10K Report and the documents incorporated
herein by reference constitute "forward-looking statements" within
the meaning of the United States Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others,
the following: general economic and business conditions in the
Company's market area, inflation, continuation of favorable
banking arrangements, the availability of capital to finance
planned growth, changes in government regulations and competition,
which will, among other things impact on the ability of the
Company to implement its business strategy.
Forward-looking statements are intended to apply only at the time
they are made. Moreover, whether or not stated in connection with
a forward-looking statement, the Company undertakes no obligation
to correct or update a forward-looking statement should the
Company later become aware that it is not likely to be achieved.
If the Company were to update or correct a forward-looking
statement, investors and others should not conclude that the
company will make additional updates or corrections thereafter.
Readers are referred to the "Factors that May Affect Future
Results" section within this Item 7 of Form 10K which identifies
important risk factors that could cause actual results to differ
from those contained in the forward-looking statements.
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 1998 Change 1997 Change 1996
Revenues $ 73,737 (3%) $76,278 62% $ 47,159
Operating cost and 72,397 (2%) 74,160 62% 45,687
expenses:
Percent of revenue 98% 97% 97%
Operating income 1,340 (37%) 2,118 44% 1,472
Percent of revenue 2% 3% 3%
Net income 442 (54%) 954 25% 763
Net income per share - .22 (54%) .48 9% .43
basic
Net income per share - .21 (55%) .47 7% .43
diluted
Revenues
1998 revenues decreased 3% from 1997, primarily because of a large
revenue gap created by the completion of a major digital switch
contract and the subsequent delay in the award and implementation
of a similar but larger contract.
Operating Costs and 1998 Change 1997 Change 1996
Expenses
Cost of services $67,081 (4%) $ 69,530 67% $ 41,675
Percent of revenues 91% 91% 88%
Selling, General & 5,316 15% 4,630 25% 3,692
Administrative
Percent of revenues 7% 6% 8%
Litigation expense - - 320
Percent of revenues - - 0.7%
The Company's 1998 cost of services decreased in relative
proportion to the decrease 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.
The increase in selling, general and administrative (S,G&A)
expenses since 1996 is due primarily to the acquisition of CMSA
and CCI. The proportion of S,G&A expense increased to 7% of
Revenues compared with 6% of Revenues in 1997 due to the Company's
conforming the treatment of S,G&A at HTSC to the parent company's
treatment. The Company achieved the objective of maintaining
expenditures as a percentage of revenue at 6-7% in 1998.
Operating Income
Operating income decreased by $778,000 and from 3% to 2% of
Revenues compared with 1997. Operating income increased $646,000
in 1997 when compared to 1996 yet remained flat at 3% of Revenues.
Interest and Other Income 1998 Change 1997 Change 1996
or Expense
Interest expense $ 62% $ 950 66% $ 573
1,535
Other (income) (1,004) 90% (409) 13% (362)
Interest expense significantly increased by $585,000 or 62% from
1997. The increase came from increased debt levels to fund the
Company's working capital requirements, losses during the year in
its Computer Maintenance division and additions to inventory
levels and capital equipment. This increase resulted despite a
decrease in the Company's average interest rate. Interest expense
had increased in 1997 when compared to 1996, because of increased
capital requirements.
In 1998, other income is comprised of a gain from the sale of the
Company's office park of $780,000 and $224,000 of sublease income,
net of expenses, from the Company's office park. The total gain
on the sale was $1.494 million of which $714,000 was deferred over
the life of the lease-back of the Company's headquarters building.
Income Taxes 1998 Change 1997 Change 1996
Income taxes $ 367 41% $ 623 25% $ 498
Effective tax 45.4% 39.5% 39.5%
rate
These fluctuations in income taxes were relatively proportional to
changes in pretax income. However, the Company's effective tax
rate increased in 1998 compared with the 1997 and 1996 rates
primarily due to the treatment of the sale of the Company's office
park and taxation of certain costs deferred for accounting
treatment.
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 1998 1997 1996
Resources
Cash $ 67,000 $ 268,000 $ 2,743,000
Working capital 20,363,000 17,487,000 5,924,000
Net cash (used) provided by (1,848,000) (6,875,000) 7,110,000
operations
Net cash provided (used) in 3,472,000 (1,757,000) (644,000)
investment activities
Net cash (used) provided by (1,825,000) 6,157,000 (3,741,000)
financing activities
At March 31, 1998, the Company's working capital of $20,363,000 and
current ratio of 2.87 indicate strength consistent with the prior
years. A large prepayment to the Company on a hardware delivery
order in the fourth quarter of 1996, which was applied to reduce
long-term debt, resulted in working capital of $5,924,000 and a
current ratio of 1.50. The current ratio adjusted for that
transaction would have been 2.4, consistent with 1997.
In fiscal 1998, the sale of the Company's office complex provided
over $4.8 million of cash net of selling expenses which was used
to retire mortgage debt of $2.5 million and other operating debt
as well as pay income taxes on the transaction. In January, 1998
in a private placement without public registration, the Company
issued a $2 Million 7% Convertible Subordinated Debenture due
January, 2003 to Research Industries, Incorporated. The net
proceeds were applied to the reduction in the Company's Revolving
Line of Credit. Otherwise in 1998, operations required $1,848,000
for working capital needs.
In 1997, 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
financiers.
The Company leases approximately 28 field sites. Disclosure of the
future minimum lease payment is in Note 9 to the consolidated
financial statements. Capital expenditures in 1998 approximated
1997 levels. The Company continues to sublease a portion of its
headquarters building generating net other income of approximately
$112,000 annually.
Effective June 25, 1998, the company renegotiated its borrowing
agreement to provide significantly increased funding availability
from its current collateral base and to provide for planned growth
in operation levels. This debt package, including term debt and a
revolving line of credit, remains long term, coming due in July
2000, and is annually extendible. After this refinancing, 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.
Year 2000 Compliance
As a service provider to commercial and government entities for
the assessment, remediation, and testing for Year 2000 readiness
of computer desktop devices and networks, Halifax has established
a program for compliance of its own hardware, software, and files.
The Company is planning for the remediation of in-house systems
associated with accounting/finance, service call management, local
and wide area networks, messaging systems, and administration.
Some of these features are being taken care of as a by-product of
the Company's program to web-enable (Internet) many of its systems
to meet customer requirements and/or promote efficiency and
competitive advantage. The Company estimates its costs to be
fully compliant by mid-1999 at $200,000.
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-four, 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-eight, 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 seventy, 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-two, 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-three, elected Director of the
Company on March 25, 1985, is an attorney engaged in the private
practice of law as a member of the firm of Pompan, Murray, Ruffner
& Werfel in Alexandria, Virginia. He has been an attorney for 33
years. Mr. Ruffner is a graduate of the United States Military
Academy, served as a First Lieutenant in the United States Army
Corps of Engineers and has been a Director of Research Industries
Incorporated since 1983. Mr. Ruffner has been Secretary of the
Company since 1985. In January 1992, he was given the additional
designation of Counsel of the Company, and in September 1994, he
was elected General Counsel (See Item 13).
Alvin E. Nashman, age seventy-one, 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-two, 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-eight, Vice President Finance and
Accounting and Chief Financial Officer, Controller and Treasurer,
joined Halifax on April 10, 1996. He previously served as Vice
President Finance for CTA International, Inc. and CTA Space
Systems, subsidiaries of CTA Incorporated. Prior to that he served
in various executive finance 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-five, 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-four, is President of Halifax
Technology Services Company, a wholly owned subsidiary of Halifax
and Vice President and Chief Information Officer (CIO) of Halifax
Corporation. 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-three, 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-nine, 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-four, 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-six, 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
$100,000 serving at the close of the fiscal year ended March 31,
1998 for services rendered in all capacities during the fiscal
years ended March 31, 1998, 1997, and 1996.
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
Awards Payouts
Other
Annual Restri All Other
Salary Bonus Compen- cted Options LTIP Compen-sation
sation Stock SARs payouts
Awards
Year ($) ($) ($) (1) ($) (#) ($) ($)
Howard C. 1998 164,417 none 4,119 none none none 3,227(2)
Mills(5)
CEO/President 1997 160,804 43,200 4,323 none 7,200 none 3,135(2)
1996 149,925 28,336 5,623 none 7,200 none 2,999(2)
James L. 1998 106,156 none none none none none 2,136(2)
Sherwood IV
1997 101,550 14,400 none none 3,000 none 2,013(2)
1996 96,785 13,970 none none 1,800 none 5,284(3)
James C. 1998 112,390 17,950 none none none none 2,607(2)
Dobrowolski
1997 113,549 28,430 none none 6,375 none 6,117(3)
1996 96,940 13,627 2,400 none 3,600 none 599(2)
Melvin L. 1998 103,650 54,096 none none none none 3,345(2)
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)
Thomas L. 1998 129,996 none none none none none 2,700(2)
Mountcastle
1997 127,497 none none none 13,500 none 1,200(2)
Thomas E. 1998 111,177 8,439 none none 1,500 none 2,399(2)
Nolan
1997 107,623 none none none 6,375 none 13,768(4)
Frank J. 1998 110,240 none none none 5,000 none 1,823(2)
Ostronic
John D. 1998 102,412 none none none 4,000 none 2,050(2)
D'Amore
(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
3,674 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 has registered the shares issuable to the plan
with the SEC.
The 1994 Plan is administered by a Committee selected by the Board
and is comprised of not less than three members of the Board. The
Committee has the sole and absolute discretion to establish from
time-to-time the criteria for participation in the 1994 Plan and
to select the officers and other key employees to whom Options may
be granted, to determine all claims for benefits under the 1994
Plan, to impose such conditions and restrictions on Options as it
determines appropriate, with the consent of the recipient, to
cancel Options and to substitute new Options for previously
awarded Options which, at the time of such substitution, have an
exercise price in excess of fair market value of the underlying
shares of Company Common Stock.
The Committee also has the sole and absolute discretion to grant
options entitling the Participants to purchase shares of Company
Common Stock from the Company in such number, at such price and on
such terms and subject to such conditions, not inconsistent with
the terms of the 1994 Plan, as may be established by the
Committee. 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 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.
In fiscal year 1998, options totaling 15,500 shares were offered
to employees at exercise prices ranging form $7.56 to $10.25, the
market price on the dates of issuance
At the September 19, 1997 Annual Meeting of Shareholders, the
shareholders approved the new Non-Employee Director Stock Option
Plan. The maximum number of shares subject to the plan and
approved for issuance is 100,000 shares of the Company's Common
Stock either authorized and unissued or shares held in treasury.
This number is subject to adjustment in the event of stock splits,
stock dividends or other recapitalization of the Company's Common
Stock. The Company has registered the shares issuable to the plan
with the SEC. The plan will be administered by the Board of
Directors in whom the plan vests all powers and authority under
the plan.
Under the terms of the plan, each year on the first day of the
first month following the Annual Meeting of Shareholders of the
Company, each Non-Employee Director who has been elected or
reelected as a Board member shall receive an option. This option
may be either a first option or subsequent option. At initial
election to the Board a first option shall be granted for 5000
Common Stock shares. A first option becomes exercisable in
installments cumulatively with respect to one sixtieth of the
Option Stock per month after the date of grant, so that one
hundred percent shall be exercisable five years after the date of
grant. Upon each annual reelection as a Board Member, a
subsequent option shall be granted of up to a maximum of 2000
Common Stock shares. A subsequent option becomes exercisable in
installments cumulatively with respect to one-twelfth of the
optioned stock per month after the date of grant, so that one
hundred percent shall be exercisable one year after the date of
grant. The total maximum number of shares of Common Stock for
which any director shall be granted options under this plan is
13,000. No option or any part of an option shall be exercisable
after the expiration of ten years from the date the Option was
granted.
In fiscal 1998, options totaling 30,000 shares were offered to non-
employee Directors at $10.25 per share, the market price on date
of issuance.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of June 9, 1998 (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 660,300 32.8
Incorporated (1)(2)(3)
123 North Pitt Street
Alexandria, VA 22314
Arch C. Scurlock (1)(5) 661,800 32.9
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
Thomas L. Mountcastle 32,666 1.6
2215 Tomlynn Street
Richmond, VA 23230
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent
Melvin L. Schuler 7,450 0.4
5250 Cherokee Avenue
Alexandria, VA 22312
John D. D'Amore 450 0
5250 Cherokee Avenue
Alexandria, VA 22312
James L. Sherwood IV 425 0
5250 Cherokee Avenue
Alexandria, VA 22312
Frank J. Ostronic 150 0
5250 Cherokee Avenue
Alexandria, VA 22312
Thomas E. Nolan 100 0
5250 Cherokee Avenue
Alexandria, VA 22312
James C. Dobrowolski 0 0
5250 Cherokee Avenue
Alexandria, VA 22312
All officers and directors 783,558 38.9
as a group, including
the above
(14 persons) (5)
(1) Research Industries Incorporated is 93% owned by Arch C. Scurlock,
Chairman of the Company's Board of Directors. Dr. Scurlock is also
President and a director of Research Industries Incorporated.
(2) 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 660,300 shares owned by Research Industries
Incorporated.
(6) Research Industries Incorporated owns $2 Million face amount
of the Company's 7% Convertible
Subordinated Debenture dated January 27, 1998.
Item 13. Certain Relationships and Related Transactions
Ernest L. Ruffner, Secretary and General Counsel and a Director of
the Company, is a member of the law firm of Pompan, Murray,
Ruffner & Werfel. During the fiscal year ended March 31, 1998,
the Company paid $62,000 for legal services to Mr. Ruffner as
General Counsel.
Jacob Pompan of Pompan, Murray, Ruffner & Werfel has represented
the Company in its government contract affairs since 1984. During
the fiscal year ended March 31, 1998, the Company paid $9,096 to
the firm for this representation.
Alvin E. Nashman, a Director of the Company, provides consulting
services to the Company under an agreement. During the fiscal
year ended March 31, 1998, the Company paid $24,000 for consulting
services to Mr. Nashman.
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, 1998, 1997 and 1996
o Consolidated Balance Sheets as of March 31,
1998 and 1997
o Consolidated Statements of Cash Flows for
the years ended March 31, 1998, 1997 and 1996
o Consolidated Statements of Changes
in Stockholders' Equity for the years ended March 31,
1998, 1997 and 1996
o Notes to Consolidated Financial Statements
2. Financial Statement Schedule
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. 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: 6/29/98
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 6/29/98
Howard C. Mills Chief Executive
Principal Executive Officer Officer, Director
/s/John D. D'Amore Vice President, 6/29/98
John D. D'Amore Chief Financial Officer,
Principal Financial and Treasurer & Controller
Accounting Officer
Chairman of the
Arch C. Scurlock Board of Directors
/s/John H. Grover Director 6/29/98
John H. Grover
Director
Clifford M. Hardin
/s/Ernest L. Ruffner Director 6/29/98
Ernest L. Ruffner
/s/Alvin E. Nashman Director 6/29/98
Alvin E. Nashman
/s/John Toups Director 6/29/98
John Toups
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Halifax Corporation
We have audited the accompanying consolidated balance sheets of
Halifax Corporation as of March 31, 1998 and 1997, 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, 1998. Our audits also included the financial
statement schedule listed in the index at item 14(a)2. These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Halifax Corporation at March 31, 1998 and 1997, and
the consolidated results of its operations and its cash flows for
each of the three years in the period ended March 31, 1998, 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 15, 1998, except for Note 5
as to which the date is June 25, 1998
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
Revenues (Note 1)
$73,737,000 $76,278,000 $ 47,159,000
Operating costs and expenses:
Cost of services 67,081,000 69,530,000 41,675,000
Litigation expense - 320,000
Selling, general and 5,316,000 4,630,000 3,692,000
administrative
Total operating costs and expenses 72,397,000 74,160,000 45,687,000
Operating income 1,340,000 2,118,000 1,472,000
Interest expense 1,535,000 950,000 573,000
Other income (1,004,000) (409,000) (362,000)
Income before income taxes 809,000 1,577,000 1,261,000
Income taxes (Note 8) 367,000 623,000 498,000
Net earnings $ 442,000 $ 954,000 $ 763,000
Net earnings per common share - $ .22 $ .48 $ .43
basic
Net earnings per common share - $ .21 $ .47 $ .43
diluted
Weighted average number of common
shares outstanding - basic 2,006,603 1,985,599 1,756,881
Weighted average number of common
shares outstanding - diluted 2,067,499 2,050,609 1,756,919
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND 1997
March
31
1998 1997
ASSETS
CURRENT ASSETS
Cash $ 67,000 $ 268,000
Trade accounts receivable (Note 3) 20,814,000 21,951,000
Other receivables - 62,000
Inventory 8,203,000 6,860,000
Prepaid expenses and other current 1,811,000 1,300,000
assets
Income taxes receivable 4,000 43,000
Deferred income taxes (Notes 1 and 483,000 659,000
8)
TOTAL CURRENT ASSETS 31,382,000 31,143,000
PROPERTY AND EQUIPMENT, at cost less
accumulated 3,578,000 6,624,000
depreciation and amortization (Notes
1 and 4)
COST IN EXCESS OF NET ASSETS ACQUIRED,
net of accumulated 2,481,000 2,583,000
amortization (Notes 1 and 2)
OTHER ASSETS 534,000 650,000
TOTAL ASSETS $ 37,975,000 $ 41,000,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued $ 7,004,000 $ 8,382,000
expenses (Note 6)
Deferred maintenance revenue 1,461,000 2,265,000
Bank overdrafts 1,768,000 1,803,000
Current portion of long-term debt & 786,000 1,206,000
mortgage note payable (Note 5)
TOTAL CURRENT LIABILITIES 11,019,000 13,656,000
LONG-TERM DEBT (Note 5) 14,923,000 13,570,000
MORTGAGE NOTE PAYABLE (Note 5) - 2,398,000
DEFERRED INCOME TAXES (Notes 1 and 8) 735,000 853,000
DEFERRED INCOME 690,000
-
TOTAL LIABILITIES 27,367,000 30,477,000
STOCKHOLDERS' EQUITY (Note 7)
Common stock, $.24 par value:
Authorized - 4,500,000 shares
Issued - 2,267,166 in 1998 and
2,258,866 in 1997
Outstanding - 2,010,482 in 1998 and 544,000 542,000
2,000,632 in 1997
Additional paid-in capital 4,399,000 4,358,000
Retained earnings 5,877,000 5,836,000
10,820,000 10,736,000
Less treasury stock at cost - 256,684 212,000 213,000
shares in 1998 and 258,234 in 1997
TOTAL STOCKHOLDERS' EQUITY 10,608,000 10,523,000
TOTAL LIABILITIES AND STOCKHOLDERS' $ 37,975,000 $ 41,000,000
EQUITY
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
1998 1997 1996
Cash flows from operating
activities:
Net income $ 442,000 $ 954,000 $ 763,000
Adjustments to reconcile net
income to net
cash provided (used) by
operating activities:
Depreciation and amortization 1,329,000 1,060,000 599,000
(Gain) loss on sale of (776,000) 164,000 -
property and equipment
(Increase) decrease in 1,138,000 (5,355,000) (562,000)
accounts receivable
(Increase) decrease in other 62,000 83,000 1,000
receivables
(Increase) decrease in (1,343,000) (1,284,000) 688,000
inventory
(Increase) decrease in
prepaid expense and other (336,000) (1,005,000) 77,000
current assets
Increase in other assets (43,000) (367,000) (44,000)
(Increase) decrease in income 39,000 (184,000) (111,000)
tax receivable
Increase (decrease) in
accounts payable accrued expenses
and other current liabilities (2,217,000) (1,036,000) 5,502,000
Increase (decrease) in income - (91,000) 90,000
taxes payable
(Decrease) increase in deferred
income taxes (118,000) 186,000 107,000
Decrease in deferred income (25,000) - -
Total adjustment (2,290,000) (7,829,000) 6,347,000
Net cash (used) provided by (1,848,000) (6,875,000) 7,110,000
operating activities
Cash flows from investing
activities:
Acquisition of property and
equipment, net of (1,384,000) (1,684,000) (247,000)
purchased operations
Proceeds from sale of property 4,856,000 41,000 3,000
and equipment
Acquisitions - (114,000) (400,000)
Net cash provided (used) in 3,472,000 (1,757,000) (644,000)
investing activities
Cash flows from financing
activities:
Proceeds from borrowing of 36,849,000 40,216,000 16,271,000
long-term debt
Retirement of long-term debt (38,316,000) (33,866,000) (19,632,000)
Cash dividends paid (401,000) (371,000) (305,000)
Proceeds from sale of stock
upon exercise of
stock options 43,000 178,000 -
Purchase of treasury stock - - (75,000)
Net cash (used) provided by (1,825,000) 6,157,000 (3,741,000)
financing activities
Net (decrease) increase in cash (201,000) (2,475,000) 2,725,000
Cash at beginning of year 268,000 2,743,000 18,000
Cash at end of year $ 67,000 $ 268,000 $ 2,743,000
See notes to consolidated financial statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
Additional Treasury
Common Stock Stock
Paid-In Retained
Shares Par Value Capital Earnings Shares Cost Total
Balance
March 31, 2,220,022 $ 518,000 $ 3,401,000 $ 4,795,000 449,529 $ (313,000) $ 8,401,000
1995
Cash
Dividends
($.173 per - - - (305,000) - - (305,000)
share)
Net income - - - 763,000 - - 763,000
Purchase of
Treasury - - - - 18,150 (75,000) (75,000)
stock
Balance
March 31, 2,220,022 $ 518,000 $ 3,401,000 $ 5,253,000 467,679 $ (388,000) $ 8,784,000
1996
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 - 803,000 - (209,445) 175,000 978,000
Acquisition -
Balance
March 31, 2,258,866 $ 542,000 $ 4,358,000 $ 5,836,000 258,234 $ (213,000) $ 10,523,000
1997
Cash
Dividends
($.20 per - - - (401,000) - - (401,000)
share)
Net income - - - 442,000 - - 442,000
Exercise of
Stock Options 8,300 2,000 41,000 - - - 43,000
CMSA
Acquisition
Earnout (1,550) 1,000 1,000
Balance
March 31, 2,267,166 $ 544,000 $ 4,399,000 $ 5,877,000 256,684 $ (212,000) $ 10,608,000
1998
See notes to consolidated financial statements.
HALIFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
Business Activity - Halifax Corporation, (the Company)
provides Technology Services and Facilities Management for
commercial and government activities. These services include
the integration, systems engineering, installation,
maintenance and training for computer systems, communications
systems, and simulation systems; and the management,
operations and maintenance support of military bases,
prisons, waterways, major office complexes, and
communications sites. Revenues from services rendered to
the United States Government and the relative percentages of
such revenues to total revenues for the years ended March 31,
1998, 1997 and 1996 are $26,080,000 (35%), $36,111,000 (47%),
and $34,425,000 (73%), respectively. The reduction in United
States Government revenue in 1998 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.
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
recognized when the loss is considered probable and
reasonably determinable in amount. Deferred maintenance
revenue is recognized ratably 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 computer and computer peripheral hardware
and software in the process of delivery upon resale to
customers valued at the lower of cost or market on the
average cost basis and is displayed on the consolidated
balance sheet net of allowances for inventory valuation of
$356,000 and $499,000 at March 31, 1998 and 1997,
respectively.
Accounts Receivable and Inventories - Receivables and
inventories are primarily attributable to long-term contracts
or programs in progress for which the related operating
cycles are longer than one year. In accordance with industry
practice, these items are included in current assets.
Income Taxes - Deferred taxes are provided on all
temporary differences measured using enacted tax rates
expected to be in effect during the periods in which the
temporary differences reverse.
Cost in Excess of Net Assets Acquired - Cost in excess of net
assets of acquired companies, described in Note 2, is being
amortized using the straight-line method over 25 years.
Accumulated amortization was $335,000 and $219,000 as of
March 31, 1998 and 1997, respectively.
Earnings Per Common Share - The computation of basic earnings
per share is based on the weighted average number of shares
outstanding during the period.
The computation of 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 average
market price of the common stock and contingently issuable
shares based on an earn-out provision related to the acquisition
of CMSA.
New Accounting Pronouncements - Effective December 31, 1997,
the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which
established new standards for computing and disclosing
earnings per share. The Statement requires dual presentation
of "basic" and "diluted" earnings per share, each as defined
therein, which replace primary and fully diluted earnings per
share, respectively, required under previous guidance. In
accordance with SFAS No. 128, all earnings per share amounts
included in the consolidated financial statements have been
restated to conform (see Note 13).
In 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards
for the way in which publicly-held companies report financial
and descriptive information about their operating segments in
financial statements for both interim and annual periods, and
requires additional disclosures with respect to products and
services, geographic areas of operation and major customers.
The Statement is effective for fiscal years beginning after
December 15, 1997. The Company intends to comply with
the provisions of this standard in fiscal year 1999, however
disclosure under SFAS 14, "Disclosures about Segments of an
Enterprise and Related Information," the predecessor standard
to SFAS 131 is included in the accompanying consolidated
financial statements. (See Note 14.)
2. ACQUISITIONS
CMS Automation, Inc. (CMSA) and Consolidated ComputerInvestors,
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
through fiscal 1999 based on the annual earnings of CMSA.
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 cost in excess of 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 $114,000 in cash and assumed secured debt totaling
$1,680,000.
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 $375,000 which was capitalized as cost in excess of net
assets acquired.
The Company's fiscal 1997 results include CMSA's and CCI's results
of operations beginning April 1, 1996 and November 1, 1996,
respectively. The proforma impact of the CCI acquisition on
fiscal 1997 is immaterial. The following fiscal 1996 proforma
information is unaudited and reflects both of the acquisitions as
if the purchase transactions had occurred on April 1, 1995.
For the
Year Ended
March 31 Dec. Profor Dec. Proform
1996 31, ma Profor 31, a Proforma
Halifax 1995 Adjust ma 1995 Adjustm Combined
CMSA ments Combin CCI ents
& Tax ed & Tax
Effect Effect
($ In
thousands,
except per
share
data)
Revenues $47,159 $21,249 $- $68,408 $13,526 $- $81,934
Net Income $ 763 $(109) $137 $ 791 $(231) $313 $873
(Loss)
Earnings per $ .43 N/A $.40 NA $.44
share-basic
Weighted #1,966,326
Average
Number of
Common
Shares
Outstanding-
basic
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,
1998 1997
Amounts billed $ 17,987,000 $ 19,708,000
Amounts unbilled:
Amounts currently billable 2,871,000 1,800,000
Retainages and amounts 272,000 677,000
awaiting audit
Total 21,130,000 22,185,000
Allowance for doubtful accounts (316,000) (234,000)
Total $ 20,814,000 $ 21,951,000
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, 1998 will be substantially collected within one year.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
March 31,
Estimated
1998 1997 Useful Lives
Automotive equipment $ 351,000 $ 375,000 4 years
Machinery and equipment 8,045,000 6,260,000 3 - 10 years
Furniture and fixtures 1,381,000 1,323,000 5 - 10 years
Building and improvements 150,000 3,955,000 32 years
Land - 648,000
Total 9,927,000 12,561,000
Accumulated depreciation 6,349,000 5,937,000
and amortization
Total $ 3,578,000 $ 6,624,000
5. LONG-TERM DEBT AND MORTGAGE NOTE PAYABLE
March 31,
1998 1997
Long-term debt consists of:
Revolving credit agreement amended effective
February 4, 1997, April 30, 1997, June 30,
1997, September 5, 1997 and December 3,
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 $ 11,130,000 $ 11,046,000
at either the prime rate plus 1/4% or the
LIBOR rateplus 1.6% to 1.9% depending upon
a leverage ratio. At March 31, 1997 the
interest rate was 7.587%. This agreement
was to expire July 31, 1998, however it was
replaced by a new agreement effective
June 25, 1998.
7% Convertible Subordinated Debenture dated
January 27, 1998. Principal due in full on
January 27, 2003. Interest payable
semiannually in arrears beginning August 1,
1998. May be prepaid by the Company on any
date more than two years after January 27, $ 2,000,000 -
1998. Convertible by noteholder at any time
at a conversion price of $11.72 per common
share. The closing market price of the
company's common stock on March 31, 1998 was
$9.25.
Other notes payable and capital lease
obligations with interest rates ranging from
the prime rate to 15%, due in monthly $ 5,000 $ 20,000
installments and maturing at dates through
1999. The prime rate was 8.5% at March 31,
1998.
Mortgage note paid off on November 6, 1997.
Previously payable in monthly installments
of $10,257 plus interest at prime plus 1/4%
through August 31, 2001. At March 31, 1998, - $ 2,531,000
the interest rate was 8.75%. The note was
collateralized by buildings and land which
have been sold.
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. $ 203,000 $ 645,000
Interest accrues at either the prime rate
plus 1/2% or the LIBOR rate plus 2.5%. At
March 31, 1998, the prime rate and LIBOR
options were at 9% and 8.125%, respectively.
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 $ 1,845,000 $ 2,202,000
$1,785,712 due on June 30, 1998 plus
interest. Interest accrues at the prime
rate plus 1/4%. At March 31, 1998, the
interest rate was 8.75%.
CCI acquisition term loan facility dated
November 26, 1996. Note is payable in 48
equal monthly installments of $16,979 plus $ 526,000 $ 730,000
interest. Interest accrues at the prime
rate plus 1/4%. At March 31, 1998, the
interest rate was 8.75%.
15,709,000 $ 17,174,000
Less current maturities 786,000 1,206,000
Total $ 14,923,000 $ 15,968,000
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
other assets. 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 amount of $11,130,000 has been excluded from
current liabilities because the Company intends that at least
that amount would remain outstanding under this agreement for
an uninterrupted peroid extending beyound one year from the
balance sheet date.
The Company signed a new banking agreement on June 25, 1998 which
restructures all of the Company's debt as presented at March 31,
1998 except for the "7% Convertible Subordinated Debenture" and the
"Other Notes Payable." The new debt structure consists of a
revolving line of credit and two term loans which in total
make $17.5 million of credit available to the Company.
Advances under the revolving line of credit 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 other assets of
the Company except for the inventory of HTSC. The agreement
contains covenants which require the Company to maintain or
achieve certain net worth, capital, cash flow and other
financial statement ratios or values. Pricing is performance
driven and based on LIBOR with a range from LIBOR plus 1.5%
to 3.55%. Term loan principal amortization is required on a
quarterly basis.
The aggregate annual maturities of long-term debt, based on the
terms of the new banking agreement, are:
1999 - 786,000
2000 - 560,000
2001 - 11,589,000
2002 - 357,000
2003 - 2,357,000
Thereafter - 60,000
Total - $ 15,709,000
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
March 31,
1998 1997
Accounts payable $ 3,075,000 $ 5,328,000
Accrued expenses 2,152,000 1,381,000
Accrued vacation 829,000 859,000
Accrued payroll 594,000 563,000
Payroll taxes accrued and 354,000 251,000
withheld
$ 7,004,000 $ 8,382,000
7. COMMON STOCK
Stock Options - Under the Company's 1984 Stock Option
and Stock Appreciation Rights Plan (as amended), options to
purchase shares of the Company's common stock 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, 1995 58,650 $4.59 - 5.67 $280,000 $ 4.77
Options forfeited upon retirement/
termination of employees (6,000) 4.59 - 5.00 (28,140) 4.69
Balance March 31, 1996 $ 4.59 - 5.00 $ 251,860 $ 4.78
52,650
Options exercised (38,611) 4.59 - 5.00 (178,795) 4.63
Options forfeited upon retirement/
termination of employees (1,688) 5.00 (8,440) 5.00
Balance March 31, 1997 12,351 $ 5.00 - 5.67 $ 64,625 $ 5.23
Options exercised or forfeited upon
retirement/termination of
employees (8,677) $ 5.00 - 5.67 (46,255) 5.27
Balance March 31, 1998 3,674 $ 5.00 $ 18,370 $ 5.00
Options exercisable at
March 31, 1998 3,674 $ 5.00 $ 18,370 $ 5.00
1994 PLAN
Balance March 31, 1995 48,000 $ 4.67 $ 224,000 $ 4.67
Options granted 23,700 4.58 - 4.83 114,175 4.82
Options forfeited upon retirement/
termination of employees (4,500) 4.58 - 4.83 (21,250) 4.72
Balance March 31, 1996 $ 4.58 - 4.83 $ 316,925 $ 4.72
67,200
Options granted 105,600 4.67 - 7.67 680,800 6.45
Options forfeited upon retirement/
termination of employees (24,000) 4.67 - 7.33 (137,810) 5.74
Balance March 31, 1997 148,800 $ 4.58 - 7.67 $ 859,915 $ 5.78
Options exercisable at
March 31, 1998 16,200 $ 4.67 $ 75,654 $ 4.67
Options granted 15,500 7.56 - 10.25 134,665 8.69
Options forfeited upon retirement/
termination of employees (25,000) 6.13 - 10.25 (207,525) 8.13
Balance March 31, 1998 138,800 $ 4.58 - 10.25 $ 787,055 $ 5.92
NON-EMPLOYEE DIRECTORS STOCK OPTION
PLAN
Options granted 30,000 307,500 10.25
10.25
Balance March 31, 1998 30,000 $ 10.25 $ 307,500 $ 10.25
All stock-based incentive awards granted in 1998, 1997 and 1996
under the 1984 and 1994 Plans were stock options which have 5 year
terms and vest at the end of the third and fourth years. All
awards granted in 1998 under the Non-Employee Directors Stock
Options Plan were stock options which have 5 year terms and vest
in installments cumulatively with respect to one-sixtieth of that
option stock per month after the date of grant. Exercise prices
of all options awarded in all years under all plans were equal to
the market price of the stock on the date of grant. Proforma
information regarding net earnings and earnings per share as
required by SFAS No. 123 has been determined as if the Company had
accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998 and 1997: risk-
free interest rate of 5.99% to 6.52% and 6.16% respectively,
dividend yield of 2% and 3.1% respectively, volatility factor
related to the expected market price of the Company's common stock
of .262, and weighted-average expected option life of three
years. The weighted average fair values of options granted during
1998 and 1997 were $2.56 and $1.25, 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 1998 1997 1996
per share data)
Proforma net earnings $ 402 $ 930 $ 759
Proforma earnings per
common share:
Basic .20 .46 .43
Diluted .19 .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 $199,000 in 1998, $191,000 in 1997 and $157,000 in 1996.
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:
1998 1997 1996
Current:
Federal $ 256,000 $ 494,000 $ 355,000
State 53,000 101,000 75,000
Total current: 309,000 595,000
430,000
Deferred 58,000 28,000 68,000
Total $ 367,000 $ 623,000 $ 498,000
The components of the Company's deferred tax assets and
liabilities consist of the following at March 31:
1998 1997
Deferred tax assets - current
Accounts receivable/reserves $ 36,000 $ 102,000
Inventory 174,000 234,000
Accrued compensation/vacation 273,000 323,000
Net operating loss carry 51,000 51,000
forwards - HTSC
AMT credit carry forward - 15,000 15,000
HTSC
Less: valuation allowance (66,000) (66,000)
$ 483,000 $ 659,000
Deferred tax liability
(asset)-noncurrent
Deferred start-up costs $ 62,000 $ -
Deferred gain on building sale (258,000) -
Depreciation/amortization 895,000
785,000
Sublease rental income 2,000 33,000
Contract claims/Other 34,000 35,000
$ 735,000 $ 853,000
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:
1998 1997 1996
Provision for income taxes
at statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal 4.6 4.4 4.3
benefit
Permanent differences 4.8 1.1 1.4
Other 2.0 - (.2)
Total 45.4% 39.5% 39.5%
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, 1998.
Year ending March 31,
1999 $ 1,273,000
2000 869,000
2001 700,000
2002 696,000
2003 694,000
thereafter 3,308,000
Total minimum lease payments $ 4,540,000
Total rental expense under operating leases was
$954,000, $411,000 and $201,000 for the years ended March 31,
1998, 1997, and 1996, respectively. Aggregate future minimum
rentals to be received under noncanceable subleases as of
March 31, 1998 are $84,000
10.RELATED PARTY TRANSACTIONS
During the years ended March 31, 1998, 1997, and 1996,
the Company paid $62,000, $77,000 and $0, respectively, for
legal services to a Company Board member as General Counsel;
$9,096, $4,651 and $9,000 respectively to a law firm in which
a Company Board member is a partner; and $24,000, $0 and $0,
respectively, for consulting services to another Company Board
member.
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 $418,000.
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:
1998 1997 1996
Interest $ 1,532,000 $ 950,000 $ 573,000
Income taxes $ 578,000 $ 722,000 $ 457,000
13 - Earnings per share
The following table sets forth the computation of basic and
diluted earnings per share:
1998 1997 1996
Numerator:
Net earnings $ 442,000 $ 954,000 $ 763,000
Numerator for basic
earnings per share-
income available to $ 442,000 $ 954,000 $ 763,000
common stockholders
Numerator for diluted
earnings per share-
income available to
common stockholders
after assumed $ 442,000 $ 954,000 $ 763,000
converstions
Denominator:
Denominator for basic 2,006,603 1,985,599 1,756,881
earnings per share-
weighted-average shares
Effect of dilutive
securities:
Employee stock options 55,536 63,153 38
Contingent stock- 5,360 1,857 -
acquisition
7% Convertible - - -
Subordinated Debenture
Dilutive potential common
shares
Denominator for diluted
earnings per
share - adjusted
weighted-average
shares and assumed 2,067,499 2,050,609 1,756,919
conversions
Earnings per share:
Basic earnings per share $ .22 $ .48 $ .43
Diluted earnings per share $ .21 $ .47 $ .43
14.Information on Industry Segments and Related Information
The Company operates in two principal business segments:
technology services and facilities management.
Technology Services includes the integration, systems
engineering, installation, maintenance and training for
computer systems, communications systems and simulation systems as
well as the resale of telephone communications switches. Other
primary services provided include year 2000 desktop solutions for
enterprise PC hardware and software compliance, interactive
technologies including website design, development and
marketing, Internet/Intranet services and multimedia sales and
educational tools.
Facilities Management includes the management, operations and
maintenance support of military bases, prisons, waterways, major
office complexes and communications sites.
Selected Financial Data by 1998 1997 1996
Business Segment
Net Sales
Technology Services $ 59,890 $ 62,263 $ 37,537
Facilities Management 13,847 14,015 9,622
$ 73,737 $ 76,278 $ 47,159
Operating Profit
Technology Services $ 1,115 $ 991 $ 1,024
Facilities Management 225 1,127 448
$ 1,340 $ 2,118 $ 1,472
Depreciation and Amortization
Technology Services $ 1,237 $ 968 $ 507
Facilities Management 92
92 92
$1,329 $ 1,060 $ 599
Expenditures for Property and
Equipment
Technology Services $ 1,374 $ 1,673 $ 237
Facilities Management
10 11 10
$ 1,384 $ 1,684 $ 247
Identifiable Assets
Technology Services $ 35,163 $ 36,575 $ 22,083
Facilities Management 3,114 4,425 2,745
$ 38,277 $ 41,000 $ 24,828
Net Sales by Customer Category 1998 1997 1996
US. Government
Technology Services $ 18,417 $ 29,327 $ 28,017
Facilities Management 7,663 6,784 6,408
$ 26,080 $ 36,111 $ 34,425
State and Local government
Technology Services $ 12,877 $ 10,349 $ 3,473
Facilities Management 7,231 3,257
6,185
$ 19,062 $ 17,580 $ 6,730
Commercial
Technology Services $ 28,595 $ 22,587 $ 6,004
Facilities Management
- - -
$ 28,595 $ 22,587 $ 6,004
15.QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except on a per share basis)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1998
Revenues $18,035 $ 18,673 $18,232 $ 18,797
Income before income (384) 196 452 545
taxes
Net income (232) 118 274 282
Per share
Earnings per share - (.11) .06 .14 .14
basic
Earnings per share - (.11) .06 .13 .14
diluted
Dividends per share .05 .05 .05 .05
Market price
High 11-1/2 10-7/8 13-1/8 10
Low 6-3/4 7-5/8 8-3/4 7-1/2
Basic EPS totals to $.23 versus $.22 for the year due to
rounding during computation at fiscal quarters.
Diluted EPS totals to $.22 versus $.21 for the year due to
rounding during computation at fiscal quarters.
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
basic
Earnings per share - .14 .15 .17 .00
diluted
Dividends per share .043 .047 .047 .05
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
Diluted EPS totals to $.46 versus $.47 for the year due to
rounding during computation at fiscal quarters.
Halifax Corporation
Schedule II, Valuation and Qualifying Accounts
March 31, 1998
Balance at Additions Balance at
beginning charged to end of
of year cost & Deductions year
expense
Year Ended March
31, 1998:
Allowance for
doubtful
accounts $234,000 $288,000 $206,000 $316,000
Allowance for
inventory
obsolescence $499,000 $1,986,000 $2,129,000 $356,000
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
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Halifax Corporation's
Registration Statement (Form S-8) pertaining to the Halifax Corporation
1994 Key Employee Stock Option Plan and Non-Employee Directors Stock
Option Plan of our report dated June 15, 1998, except for note 5 as to
which the date is June 25, 1998, with respect to the consolidated
financial statements and schedule of Halifax Corporation included in its
Annual Report (Form 10-K) for the year ended March 31, 1998, filed with
the Securities and Exchange Commission.
/s/ERNST & YOUNG LLP
Washington, C.C.
June 29, 1998