1
HALIFAX CORPORATION
FORM 10-Q
DECEMBER 31, 2000
FORM 10Q -- QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 312905 eff. 4/26/93.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended
December 31, 2000
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________________ to ___________________
Commission file Number 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
N/A
(former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(X)Yes ( )No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 2,023,436 shares
outstanding as of December 31, 2000.
HALIFAX CORPORATION
CONTENTS
PART I. FINANCIAL INFORMATION
page
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - December 31, 2000
and March 31, 2000 3
Consolidated Statements of Operations (Unaudited) - Three
and Nine Months Ended December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended December 31, 2000 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Item 1. FINANCIAL STATEMENTS
HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
December 31, 2000 March 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 315 $ 1,800
Restricted cash - 650
Trade accounts receivable 10,400 13,558
Inventory 4,145 4,390
Prepaid expenses and other current assets 592 719
TOTAL CURRENT ASSETS 15,452 21,117
PROPERTY AND EQUIPMENT, net 2,014 2,106
GOODWILL, net 3,234 4,113
OTHER ASSETS 566 472
TOTAL ASSETS $ 21,266 $ 27,808
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 3,306 $ 4,809
Accrued expenses 6,917 8,080
Deferred maintenance revenue 1,327 596
Current portion of long-term debt 1,143 3,962
Income taxes payable 120 36
TOTAL CURRENT LIABILITIES 12,813 17,483
LONG-TERM BANK DEBT 3,836 8,793
SUBORDINATED DEBT - AFFILIATE 4,000 4,000
Deferred Income 531 572
TOTAL LIABILITIES 21,180 30,848
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value authorized 1,500,000, - -
issued 0 shares
Common stock, $.24 par value:
Authorized - 6,000,000 shares
Issued - 2,322,370 as of December 31, 2000 and
2,316,370 as of March 31, 2000
Outstanding - 2,023,436 as of December 31, 2000 and
2,017,436 as of March 31, 2000 566 560
Additional paid-in capital 4,710 4,683
Accumulated deficit (4,978) (8,071)
Less Treasury stock at cost - 298,934 shares (212) (212)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 86 (3,040)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 21,266 $ 27,808
See notes to Consolidated Financial Statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
(UNAUDITED)
(In thousands except share data)
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
Revenues $ 14,733 $ 12,617 $ 40,065 $ 43,113
Operating costs and expenses:
Cost of services 13,763 12,069 38,010 40,552
General and administrative
716 175 1,890 1,678
Total operating costs and expenses
14,479 12,244 39,900 42,230
Operating income 254 373 165 883
Interest expense (216) (289) (686) (898)
Embezzlement - recovery - 2,500 1,821 2,500
Income from continuing operations
before income taxes 38 2,584 1,300 2,485
Income taxes 15 5 45 5
Income from continuing operations 23 2,579 1,255 2,480
Discontinued operations:
Income from discontinued operations - 246 244 608
Gain on sale of discontinued operations (net of
taxes of $200,000) - - 1,594 -
Net income $ 23 $ 2,825 $ 3,093 $ 3,088
Basic earnings per common share:
Income from continuing operations $ .01 $ 1.30 $ .62 $ 1.26
Discontinued operations - .12 .12 .31
Gain on disposition of discontinued operations - - .79 -
$ .01 $ 1.42 $ 1.53 $ 1.57
Diluted earnings per common share:
Income from continuing operations $ .01 $ 1.21 $ .62 $ 1.20
Discontinued operations - .11 .11 .28
Gain on disposition of discontinued operations
- - .73 -
$ .01 $ 1.32 $ 1.46 $ 1.48
Weighted number of shares outstanding:
Basic 2,023,436 1,984,783 2,021,331 1,975,714
Diluted 2,023,436 2,158,137 2,191,979 2,149,005
See notes to Consolidated Financial Statements
HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED (UNAUDITED)
(In Thousands)
Nine Months Ended
December 31,
2000 1999
Cash flows from operating activities:
Net income $ 3,093 $ 3,088
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 693 972
Income from discontinued operations (244) -
Gain on sale of discontinued operations (1,594) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,753) 9,957
Decrease in inventory 245 331
Decrease (increase) in other assets 295 (640)
Decrease accounts payable and accrued expenses (973) (5,683)
Increase in income taxes payable 84 -
Increase in deferred maintenance 731 368
Decrease in deferred income (41) (48)
Total adjustments (2,557) 5,257
Net cash provided by continuing operations 536 8,345
Cash flows from investing activities:
Acquisition of property and equipment (428) (516)
Net proceeds from the sale of discontinued operations 5,500 -
Net cash provided by (used in) investing activities 5,072 (516)
Cash flows from financing activities:
Proceeds from borrowing of long-term debt 20,689 48,601
Retirement of long-term debt (28,465) (53,395)
Proceeds from restricted cash 650 -
Proceeds from sale of stock upon exercise of stock options 33 232
Net cash used in financing activities (7,093) (4,562)
Net (decrease) increase in cash (1,485) 3,267
Cash at beginning of period 1,800 -
Cash at end of period $ 315 $ 3,267
See notes to Consolidated Financial Statements
Halifax Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month period
ended December 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2001. For further
information refer to the consolidated financial statements and notes
thereto included in the Halifax Corporation Annual Report on Form 10-K
for the year ended March 31, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The guidelines in
SAB No. 101 must be adopted by fourth quarter of 2000. The Company
believes that it is in compliance with this pronouncement in all
material respects.
Certain reclassifications have been made in the 1999 and 1998 financial
statements to conform to the 2000 presentation. The consolidated
statement of operations and related notes thereto have been adjusted to
reflect Discontinued Operations arising from the sale of the Company's
Operational Outsourcing Division (HTSI).
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, as amended, "Accounting for Derivative Instruments
and Hedging Activities," which established accounting and reporting
standards for derivative instruments (including some derivatives
embedded in other contracts) and for hedging activities by requiring
that all derivatives be recognized in the balance sheet and measured at
fair value. FASB Statement No. 133 will be adopted by the Company in
its fiscal year ending March 31, 2002, and the Company has not
determined what impact, if any, this Standard will have when adopted.
Note 2 - Embezzlement
On March 18, 1999, the Company announced that an internal investigation
had revealed a material embezzlement by the former controller of one of
the Company's subsidiaries. The embezzlement had a material effect on the
Company's financial statements for fiscal years 2000, 1999, 1998 and
1997. In addition to the correction for overstated assets and
understated liabilities, the Company recorded a gross embezzlement loss
of $6,093,000, $6,044,000 and $2,892,000 for fiscal years ended March
31, 1999, 1998 and 1997 respectively. The embezzlement occurred over a
four year period and aggregated approximately $15.4 million of which
approximately $15 million was embezzled from the Company and $400,000
from CMSA prior to its acquisition by Halifax. After net recoveries
through December 31, 2000, the cumulative net embezzlement was
approximately $11.1 million.
For the three months ended December 31, 1999, the Company recovered
approximately $2,500,000 (net of recovery costs of $350,000) related to
the ongoing recovery effort. For the nine months ended December 31, 2000
and 1999, the net embezzlement recovery was $1,821,000 and $2,500,000,
respectively. The specific terms and conditions associated with the
payments, including the identity of the parties, are subjects of a
confidentiality agreement that precludes disclosure.
On January 9, 2001 Halifax announced that the United States Securities
and Exchange Commission (SEC) has issued a formal order of investigation
of the Company and unnamed individuals concerning trading activity in the
Company's securities, periodic reports filed by the Company with the SEC,
certain accounting and financial matters and internal accounting
controls. The Company is cooperating fully with the SEC. In addition,
the Company has received a SEC subpoena for documents related to these
matters. The Company believes the investigation is primarily related to
the previously reported embezzlement. The Company believes the
investigation will have no material effect on its financial statements.
Note 3 - Discontinued Operations
On June 2, 2000, the Company executed and delivered a Stock Purchase
Agreement dated as of May 31, 2000, with U.S. Facilities, Inc., a
Delaware corporation (the "Buyer") providing for the sale by the Company
to the Buyer of Company's operational outsourcing business (the
"Business"). The closing of the transactions contemplated in the
Agreement (the "Closing") took place simultaneously with the execution
and delivery thereof, effective as of May 31, 2000.
At the Closing the Company sold to the Buyer, all of the capital stock of
its wholly-owned subsidiary, Halifax Technical Services, Inc. for a
purchase price of $5,600,000, of which $5,500,000 was paid by the Buyer
to the Company at Closing with the balance of $100,000 due on the first
anniversary of the Closing. The purchase price remains subject to
various adjustments set forth in the Agreement.
Summary operating results of the Discontinued Operations are as follows:
For the nine months ended December 31,
(unaudited)
2000 1999
Revenue $ 4,636,000 $ 19,392,000
Costs and expenses 4,392,000 18,784,000
Income from discontinued
operations $ 244,000 $ 608,000
Note 4 - Tax Matters
At December 31, 2000, the Company had a net operating loss carryforward
of approximately $7.4 million, virtually all of which expires in fiscal
2019. Income tax expense (primarily state taxes), for the three and nine
months ended December 31, 2000 was $15,000 and $45,000, respectively,
compared to $5,000 for the same respective periods in 1999.
Note 5 - Debt
On December 8, 2000 the Company entered into an $8 million revolving
credit facility with a maturity date of August 31, 2002. The facility
which will be used for working capital purpose replaced the Company's
former banking relationship, credit facility and term debt. At the
option of the Company, the facility bears interest at
the LIBOR rate plus 200 basis points or the bank's prime rate. The
interest rate may vary depending on the pricing ratio as further defined
in the Financing and Security Agreement. Borrowings under the facility
at December 31, 2000 were approximately $3.8 million. The Company had an
availability of approximately $3.3 million on its credit facility at
December 31, 2000.
Advances under the revolving credit agreement and term loan facilities
are collateralized by a first priority security interest in all of the
Company's assets as defined in the revolving credit agreement. The
facility is subject to certain financial covenants as described in the
agreement.
The agreement prohibits the payment of dividends or distributions as well
as the payment of principal on the Subordinated Debt - Affiliate without
the prior consent of the lender.
In September 1999, the Company entered into an agreement with a major
supplier of digital communications switch hardware for the Company's
United States Army contract where approximately $5,500,000 of outstanding
accounts payable arising since March 31, 1999 due to the supplier, was
converted to a note payable which is being paid over 18 months with
interest at 8.5%. In September and October 1999, $507,000 was paid and
$299,965 is scheduled for payment on the first day of the next
consecutive 15 months. The balance of the note at December 31, 2000 was
$1,143,000.
Note 6 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share.
( In Thousands Except Share Data)
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
Basic for earnings per share:
Net income as reported from
Continuing operations $ 23 $ 2,579 $ 1,255 $ 2,480
Discontinued operations - 246 244 608
Gain on disposition of discontinued
operations - - 1,594 -
Net income $ 23 $ 2,825 $ 3,093 $ 3,088
Diluted earnings per share:
Net income as reported from
continuing operations
After tax equivalent of interest
expense on 7% convertible debenture - 35 105 105
Net income from continuing operations
for purposes of computing diluted net
income per share $ 23 $ 2,860 $ 3,198 $ 3,193
Denominator:
Denominator for basic earnings per
share -
weighted-average shares 2,023,436 1,984,783 2,021,331 1,975,714
Effect of dilutive securities:
7% Convertible Debenture - 170,648 170,648 170,648
Employee stock options - 2,706 - 2,643
Dilutive potential common shares 0 173,354 170,648 173,291
Denominator for diluted earnings
per share weighted number of shares
outstanding 2,023,436 2,158,137 2,191,979 2,149,005
Basic earnings per common share
Income from continuing operations $ .01 $ 1.30 $ .62 $ 1.26
Discontinued operations - .12 .12 .31
Gain on disposition of discontinued
operations - - .79 -
$ .01 $ 1.42 $ 1.53 $ 1.57
Diluted earnings per common share
Income from continuing operations $ .01 $ 1.21 $ .62 $ 1.20
Discontinued operations - .11 .11 .28
Gain on disposition of discontinued
operations - - .73 -
$ .01 $ 1.32 $ 1.46 $ 1.48
Item 2
Management's Discussion and Analysis
of Financial Conditions and
Results of Operations
Forward-Looking Statements
Certain statements in this Quarterly 10-Q Report constitute "forward-
looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: general economic and business conditions in the Company's
market area, inflation, favorable banking arrangements, the availability
of capital to finance planned growth, ramifications of the embezzlement
referenced herein, changes in government regulations, availability of
skilled personnel and competition, which may, among other things impact
on the ability of the Company to implement its business strategy.
Forward-looking statements are intended to apply only at the time they
are made. Moreover, whether or not stated in connection with a forward-
looking statement, the Company undertakes no obligation to correct or
update a forward-looking statement should the Company later become aware
that it is not
likely to be achieved. If the Company were to update or correct a
forward-looking statement, investors and others should not conclude that
the Company will make additional updates or corrections thereafter.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. (Tabular information: dollars in
thousands, except per share amounts).
Three Months Ended December 31, Nine Months Ended December 31,
Results of Operations 2000 1999 Change % 2000 1999 Change %
Revenues $14,733 $ 12,617 $2,116 17% $40,065 $43,113 $(3,048) -7%
Cost of services 13,763 12,069 1,694 14% 38,010 40,552 (2,542) -6%
Percent of revenues 93% 96% 95% 94%
General and Administrative 716 175 541 309% 1,890 1,678 212 13%
Percent of revenues 5% 1% 5% 4%
Operating cost and 14,479 12,244 2,235 18% 39,900 42,230 (2,330) -6%
expenses:
Percent of revenues 98% 97% 100% 98%
Operating income 254 373 (119) -32% 165 883 (718) -81%
Percent of revenues 2% 3% 0% 2%
Interest expense 216 289 (73) -25% 686 898 (212) -24%
Other - - - -
Embezzlement recovery - 2,500 (2,500) N/M 1,821 2,500 (679) -27%
Income from operations 38 2,584 (2,546) N/M 1,300 2,485 (1,185) -48%
Income tax expense 15 5 10 N/M 45 5 40 N/M
Income from continuing 23 2,579 (2,556) N/M 1,255 2,480 (1,225) N/M
operations
Income from discontinued - 246 (246) N/M 244 608 (364) N/M
operations
Gain on sale of
discontinued operations - - - - 1,594 - 1,594 N/M
Net income $ 23 $ 2,825 $(2,802) -99% $ 3,093 $ 3,088 $ 5 0%
Earnings per share -
basic:
Continuing operations $ 0.01 $ 1.30 $ 0.62 $ 1.26
Discontinued operations - 0.12 0.12 0.31
Gain on sale of
discontinued operations - - 0.79 -
$ 0.01 $ 1.42 $ 1.53 $ 1.57
Earnings per share -
diluted:
Continuing operations $ 0.01 $ 1.21 $ 0.62 $ 1.20
Discontinued operations - 0.11 0.11 0.28
Gain on sale of
discontinued operations - - .73 -
$ 0.01 $ 1.32 $ 1.46 $ 1.48
Weighted average number of
common shares outstanding
- basic 2,023,436 1,984,783 2,021,331 1,975,714
Weighted average number
of common shares
outstanding - diluted 2,023,436 2,158,137 2,191,979 2,149,005
Revenues
Revenues for the three months ended December 31, 2000, increased 17%
from the comparable period in 1999 primarily due to increases in
technology services revenues. For the nine months ended December
31, 2000 and 1999 revenues decreased 7%, principally due to
reductions in hardware orders from the US Army and seat management
installations.
Operating Costs and Expenses
Cost of services for the three months ended December 31, 2000
increased by 14% from the comparable period in 1999, primarily as a
result of the increased costs associated with the increase in
revenues from the aforementioned technology services revenue.
For the nine months ended December 31, 2000 and 1999 cost of
services decreased 6%, primarily attributable to the decline in
revenues from the US Army and seat management installations.
General and administrative expenses for the three and nine months
ended December 31, 2000 increased by 309% and 13%, respectively,
from the comparable periods in 1999, principally due to a
nonrecurring reduction in costs related to certain payment received
in December 1999.
Operating Income
For the three and nine months ended December 31, 2000, the Company had
operating income of $254,000 and $165,000, respectively, as compared to
operating income of $373,000 and $883,000 for the comparable periods
ended in 1999. The principal reason for the lower operating income in
the periods ended December 31, 2000 versus December 31, 1999 was the
additional investment in sales and marketing activity in the current
fiscal year related to the Company's IT services and solutions markets
and the reduction in hardware orders from the US Army and seat management
installations.
Interest Expense
Interest expense for the three and nine month periods ended December
31, 2000 and 1999 decreased by 25% and 24%, respectively,
principally as a result of reduction of debt.
Embezzlement Recovery
Embezzlement recoveries for the three months ended December 31, 1999
were $2,500,000 (net of settlement costs). For additional
discussion see "Embezzlement Matter" in Note 2 to the condensed
consolidated financial statements. For the nine months ended
December 31, 2000 and 1999, the net embezzlement recovery was
$1,821,000 and $2,500,000, respectively.
Income Taxes
Income tax expense for the three and nine months ended December 31,
2000 was $15,000 and $45,000, respectively. For the three and nine
months ended December 31, 1999 income tax expense was $5,000.
Discontinued Operations
In May 2000 the Company sold its Operational Outsourcing Division
and, accordingly, the financial results for this division have been
reclassified as Discontinued Operations. (See Note 3 to the
condensed consolidated financial statements.) The Company
recognized a one time gain on the sale of the Division amounting to
approximately $1,594,000 (net of taxes of $200,000).
Net Income
Net income for the three months ended December 31, 2000 and 1999 was
$23,000 and $2,825,000, respectively. Included in net income for
the three months ended December 31, 1999 were embezzlement
recoveries of $2,500,000 and income from discontinued operations of
$246,000. For the nine months ended December 31, 2000 and 1999 net
income was $3,093,000 and $3,088,000, respectively. Interest
expense was $686,000 compared to $898,000 for the nine months ended
December 31, 2000 and 1999, respectively.
Included in net income for the nine months ended December 31, 2000
was embezzlement recoveries of $1,821,000, income form discontinued
operations of $244,000 and a gain on the sale of discontinued
operations of $1,594,000. This compares to embezzlement recoveries
of $2,500,000 and income for discontinued operations of $608,000 for
the nine months ended December 31, 1999.
Factors That May Affect Future Results
The Company's future operating results may be affected by a number of
factors including uncertainties relative to national economic conditions,
especially as they affect interest rates, industry factors, the Company's
ability to successfully increase its business and effectively manage
expense margins.
The Company must continue to effectively manage expense margins in
relation to revenues by directing new business development towards
markets that complement or improve existing service lines. The Company
must also continue to emphasize operating efficiencies through cost
containment strategies, reengineering efforts and improved service
delivery techniques.
The Company serves its customer base by providing consulting, integration,
networking, maintenance and installation services. This industry has
been characterized by rapid technological advances that have resulted in
frequent introductions of new products, product enhancements and
aggressive pricing practices, which also impact pricing of service
activities. The Company's operating results could be adversely affected
by industry-wide pricing pressures, the ability of the Company to
recruit, train and retain personnel integral to the Company's operations
and the presence of competitors with greater financial and other
resources. Also, the Company's operating results could be adversely
impacted should it be unable to effectively achieve the revenue growth
necessary to provide profitable operating margins in various operations.
The Company's plan for growth includes intensified marketing efforts, an
expanding commercial sales program, strategic alliances and, where
appropriate, acquisitions that expand market share. There can be no
assurances these efforts will be successful.
Liquidity and Capital Resources
At December 31, 2000, the Company's working capital of $2,639,000 and
current ratio of 1.21 indicated the continuing improvement in the
Company's financial strength which was negatively impacted by the
embezzlement matter previously discussed. Cash was also provided through
bank borrowings.
Capital expenditures for the nine months ended December 31, 2000 were
$428,000 compared to $516,000 during the same period in 1999. The
Company does not expect capital expenditures to increase during the
current fiscal year.
On December 8, 2000 the Company entered into an $8 million revolving
credit facility with a maturity date of August 31, 2002. The facility
which will be used for working capital purpose replaced the Company's
former banking relationship credit facility and term debt. At the option
of the Company, the facility bears interest at the LIBOR rate plus 200
basis points or the bank's prime rate. The interest rate may vary
depending on the pricing ratio as further defined in the Financing and
Security Agreement. The facility is subject to certain financial
covenants as described in the agreement. Borrowings under the facility
at December 31, 2000 were approximately $3.8 million. The Company had
approximately $3.3 million available under its credit facility at
December 31, 2000.
The bank term notes aggregating $4.6 million at March 31, 1999 were
renegotiated effective September 1, and amended December 21, 1999 to
amounts aggregating $3.5 million. Bank term notes outstanding at
December 31, 2000 were $0.
In September 1999, the Company entered into an agreement with a major
supplier of digital communications switch hardware for the Company's
United States Army contract where approximately $5,500,000 of outstanding
accounts payable arising since March 31, 1999 due to the supplier was
converted to a note payable which is being paid over 18 months with
interest at 8.5%. In September and October 1999 $507,000 was paid and
$299,965 is being paid on the first day of the next consecutive 15
months. The balance of the note at December 31, 2000 was $1,143,000.
The Company believes that funds generated from operations, bank
borrowings, embezzlement recoveries and investing activities (including
the sale of the Company's Operational Outsourcing Division) should be
sufficient to meet its current operating cash requirements although there
can be no assurances that all the aforementioned sources of cash can be
realized.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates, primarily as result
of the bank debt which partially finances its business. The floating
interest debt exposes the Company to interest rate risk, with the primary
interest rate exposure resulting from changes in the LIBOR rate. It is
assumed that the LIBOR rate will remain constant in the future. Adverse
changes in interest rates or the Company's inability to refinance its
long-term obligations may have a material negative impact on the
Company's operations.
The definitive extent of the Company's interest rate risk is not
quantifiable or predictable because of the variability of future interest
rates and business financing requirements. The Company does not believe
such risk is material. The Company does not customarily use derivative
instruments to adjust the Company's interest rate risk profile.
The information below summarizes the Company's sensitivity to market
risks as of December 31, 2000. The table presents principal cash flows
and related interest rates by year of maturity of the Company's funded
debt. Note 5 to the condensed consolidated financial statements
contains descriptions of the Company's funded debt and should be read in
conjunction with the table below (amount in thousands).
Period Ending December 31,
Total Debt
Long-term debt (including current maturities) 2001 2002 2000 Fair Value
Revolving credit agreement at the LIBOR
rate plus 2.00%. Due August 31, 2002.
Average interest rate of 9.19%. $ 3,836 $ 0 $ 3,836 $ 3,836
Total variable debt 3,836 0 3,836 3,836
7% subordinated note from affiliate due
January 27, 2003. Estimated yield of 8.56%
for 2001 and 9.0% for 2002. 2,000 2,000 2,000 1,960
8% subordinated notes from affiliate due
July 1, 2001 2,000 2,000 2,000 2,000
Subordinated debt dated September 2, 1999
with interest at 8.5%. Due February 1, 2001. 1,143 - 1,143 1,143
Total fixed debt 5,143 4,000 5,143 5,103
Total debt $ 8,979 $ 4,000 $ 8,979 $ 8,939
At present, all transactions are billed and denominated in U.S. dollars
and consequently, the Company does not currently have any material
exposure to foreign exchange rate fluctuation risk.
Item 3.
Quantitative and Qualitative
Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates.
Adverse changes in interest rates will have a material effect on the
Company's operations.
At December 31, 2000, the Company had $8,979,000 of debt outstanding of
which $3,836,000 has variable interest rates. If the interest rates
charged to the Company on its variable rate debt were to increase
significantly, it could have a materially adverse effect on future
operations.
The Company conducts a limited amount of business overseas. At present
all transactions are billed and denominated in U.S. dollars and
consequently, the Company believes it does not currently have any
material exposure to foreign exchange rate fluctuation risks.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 4.8 - Financing and Security Agreement
(b)Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HALIFAX CORPORATION
(Registrant)
Date: February 13, 2001 By: s/Charles L. McNew
Charles L. McNew
President & CEO
Date: February 13, 2001 By: s/Joseph Sciacca
Joseph Sciacca
Vice President, Finance & CFO