HALIFAX CORPORATION
FORM 10-Q
SEPTEMBER 30, 2001
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 September 30, 2001
( ) 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 1-8964
Halifax Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-0829246
(State or other jurisdiction (IRS Employer
of incorporation of organization) 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.
(X)Yes ( )No
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. 2,065,686 as of September 30,
2001.
HALIFAX CORPORATION
CONTENTS
PART I. FINANCIAL INFORMATION
page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2001 (Unaudited) and March 31, 2001............ 3
Condensed Consolidated Statements of Operations - Six Months Ended September 30, 2001 and 2000
(Unaudited).......................................................................................... 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2001 and 2000
(Unaudited).......................................................................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 15
PART II OTHER INFORMATION
1
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 15
Item 6. Exhibits and Reports on Form 8-K............................................................ 16
2
Item 1. FINANCIAL STATEMENTS
HALIFAX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
September 30, 2001 March 31, 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 100 $ 231
Trade accounts receivable net of reserve of $176 and
$319 at September 30, 2001 and March 31, 2001 9,212 8,643
Inventory net of reserve of $780 at September 30, 2001
and $700 March 31, 2001 3,109 2,889
Prepaid expenses and other current assets 435 612
TOTAL CURRENT ASSETS 12,856 12,375
PROPERTY AND EQUIPMENT, net 1,672 1,956
GOODWILL, net 3,087 3,192
OTHER ASSETS 495 443
TOTAL ASSETS $ 18,110 $17,966
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 3,347 $ 2,604
Accrued expenses 4,415 8,386
Deferred maintenance revenue 1,998 855
Current portion of long-term debt - 632
Income taxes payable 115 -
TOTAL CURRENT LIABILITIES 9,875 12,477
LONG-TERM BANK DEBT 5,584 2,886
SUBORDINATED DEBT - AFFILIATE 4,000 4,000
Deferred Income 486 516
TOTAL LIABILITIES 19,945 19,879
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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 September 30, 2001 and March 31, 2001
Outstanding - 2,065,686 shares as of September 30, 2001
and 2,023,436 shares as of March 31, 2001 562 562
Additional paid-in capital 4,710 4,710
Accumulated deficit (6,895) (6,973)
Less Treasury stock at cost - 256,684 shares (212) (212)
TOTAL STOCKHOLDERS' DEFICIT (1,835) (1,913)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,110 $ 17,966
See notes to condensed consolidated financial statements See Form 10-K for the
fiscal year ended March 31, 2001
1
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
(Amounts in thousands except share and per share data)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
Revenues $ 11,672 $12,422 $22,489 $25,332
Cost of services 10,461 11,867 20,102 24,247
Gross Margin 1,211 555 2,387 1,085
Marketing, general and administrative 959 608 1,945 1,174
Operating income (loss) 252 (53) 442 (89)
Interest expense 177 292 334 470
Embezzlement recoveries - (2,075) - (1,821)
Income from continuing operations
before income taxes 75 1,730 108 1,262
Income taxes 15 15 30 30
Income from continuing operations 60 1,715 78 1,232
Discontinued operations:
Income from discontinued operations - - - 244
Gain on sale of discontinued operations (net of
taxes of $200) - - - 1,594
Net income $ 60 $ 1,715 $ 78 $ 3,070
Earnings per common share - basic:
Continuing operations $ .03 $ .85 $ .04 $ .61
Discontinued operations - - - .12
Gain on disposition of discontinued operations - - - .79
$ .03 $ .85 $.04 $1.52
Earnings per common share - diluted:
Continuing operations $ .03 $.80 $ .04 $ .57
Discontinued operations - - - .11
Gain on disposition of discontinued operations - - - .72
$ .03 $ .80 $.04 $1.40
Weighted number of shares outstanding:
Basic 2,065,686 2,023,436 2,065,686 2,019,819
Diluted 2,065,686 2,196,505 2,065,686 2,192,102
See notes to Condensed Consolidated Financial Statements
2
HALIFAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
(Amounts in thousands) Six Months Ended
September 30,
2001 2000
Cash flows from operating activities:
Net income $78 $ 3,070
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation and amortization 422 573
Income from discontinued operations - (244)
Gain on sale of discontinued operations - (1,594)
Changes in operating assets and liabilities:
Increase in accounts receivable (569) (3,409)
(Increase) decrease in inventory (220) 49
Decrease in other assets 125 349
Decrease in accounts payable and accrued expenses (3,228) (788)
Increase in income taxes payable 115 204
Increase in deferred maintenance 1,143 1,051
Decrease in deferred income (30) (26)
Total adjustments (2,242) (3,835)
Net cash used by operating activities of continuing operations (2,164) (765)
Cash flows from investing activities:
Acquisition of property and equipment (33) (245)
Net proceeds from the sale of discontinued operations - 5,500
Net cash (used in) provided by investing activities by continuing
operations (33) 5,255
Cash flows from financing activities:
Proceeds from borrowing of long-term debt 12,473 14,272
Retirement of long-term debt (10,407) (19,968)
Proceeds from restricted cash - 650
Proceeds from sale of stock upon exercise of stock options - 33
Net cash provided by (used in) financing activities by continuing
operations 2,066 (5,013)
Net decrease in cash (131) (523)
Cash at beginning of period 231 1,800
Cash at end of period $100 $1,277
See notes to condensed consolidated financial statements
3
Halifax Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and note disclosures required by accounting principles generally accepted in
the United States of America 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 interim periods are not necessarily indicative of the results
that may be expected for the year ending March 31, 2002. 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, 2001 and subsequent quarterly report on Form 10-Q for the
quarter ended June 30, 2001.
Recent Accounting Pronouncements:
Effective April 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contract and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The adoption of SFAS 133 did not have any
impact on the financial position, results of operations, or cash flows of the
Company.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company does not believe that the adoption of
SFAS 141 will have any impact on its financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires goodwill and intangible assets with
indefinite useful lives to no longer be amortized but to be tested for
impairment at least annually. Intangible assets that have finite lives will
continue to be amortized over their useful lives. The amortization and
nonamortization provisions of SFAS 142 will be applied to all goodwill and
intangible assets acquired after June 30, 2001. Effective April 1, 2002 for
the Company, SFAS 142 is required to be applied to all goodwill and intangible
assets recognized in the financial statements at that date. The Company is
currently assessing, but has not yet determined , the impact of SFAS 142 on
its financial position and results of operations.
1
Note 2 - Sales of Accounts Receivable
The Company routinely transfers receivables to a third party in connection
with equipment leased to an end user. Under the provisions of Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," the 2001 and
2000 transfers were accounted for as sales and as a result, the related
receivables have been excluded from the accompanying Condensed Consolidated
Balance Sheets. The amount paid to the Company for the receivables by the
transferee is equal to the Company's carrying value and therefore no gain or
loss is recognized. The end user remits its monthly payments directly to an
escrow account held by a third party from which payments are made to the
transferee and the Company, for various services provided to the end users.
The Company provides limited monthly servicing whereby the Company invoices
the end user on behalf of the transferee.
Note 3 - Embezzlement
In March 18, 1999, the Company announced that an internal investigation had
revealed a material embezzlement by the former controller of the Company's
subsidiaries. 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 thousand prior to its acquisition by Halifax. After
net recoveries through March 31, 2001, the cumulative net embezzlement loss to
the Company before taxes was approximately $7.7 million.
For the six months ended September 30, 2001 the Company incurred no costs
related to the ongoing recovery effort. Recoveries for the three and six
months ended September 30, 2000 were approximately $2 million and $1.8
million, respectively net of recovery costs.
On January 9, 2001, the Securities and Exchange Commission ("SEC") 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 an SEC subpoena for documents
related to these matters. The staff of the SEC has advised that the inquiry is
confidential and should not be construed as an indication by the Commission or
its staff that any violation of law has occurred, or has an adverse reflection
on any person, entity or security. The Company believes the investigation is
primarily related to the previously reported embezzlement by one the Company's
former employees.
Note 4 - Debt
On December 8, 2000, the Company entered into a new revolving credit agreement
with a financial institution which refinanced the Company's revolving credit
line. Advances under the revolving agreement are collateralized by a first
priority security interest
2
on all the Company's assets as defined in the financing and security
agreement.
The agreement also contains certain financial covenants and reporting
covenants. Subsequent to September 30, 2001, the agreement, which originally
matured on August 31, 2002, was extended to November 15, 2002.
The revolving credit agreement prohibits the payment of dividends or
distributions as well as the payment of principal or interest on the Company's
outstanding subordinated debt, which is owned by an affiliate. Interest
expense on Subordinated Debt is accrued on a current basis. Pursuant to the
terms of a subordination agreement related to the subordinated debt,
concurrent with the extension of the revolving credit line discussed above,
the due date of the subordinated debt was extended from July 1, 2002 to
November 15, 2002.
The Company's credit facility requires it to satisfy two financial covenants;
funded debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"), and fixed charge coverage ratio. The Company was not in compliance
with the funded debt to EBITDA ratio at September 30, 2001. Its lender has
agreed to an amendment to waive the violations. It is the intention of the
lender and the Company to restructure the covenants to assure that compliance
can be achieved.
Note 5 - Concentration of Risk
The Company has a number of major customers. The Company's largest customer
accounted for 21.9% and 10.8% of the Company's revenues for the three months
and 18.7% and 15.2% of revenues for the six months ended September 30, 2001
and 2000, respectively. The Company's five largest customers collectively
accounted for 40% and 35% of revenues for the six months ended September 30,
2001 and 2000, respectively. The Company anticipates that significant customer
concentration will continue for the foreseeable future although the companies
which constitute the Company's largest customers may change.
3
Note 6 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share.
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
Numerator for earnings per share:
Net income as reported from
Continuing operations $ 60,000 $1,715,000 $ 78,000 $1,232,000
Discontinued operations - - - 244,000
Gain on disposition of discontinued operations - - - 1,594,000
Net income $ 60,000 $1,715,000 $0 $3,070,000
Diluted earnings per share:
Net income as reported from continuing operations $ 60,000 $1,715,000 $ 78,000 $1,232,000
After tax equivalent of interest expense on 7%
convertible debenture - 35,000 - 70,000
Net income from continuing operations for purposes of
computing diluted net income per share $ 60,000 $1,750,000 $ 78,000 $1,302,000
Denominator:
Denominator for basic earnings per share -
weighted-average shares 2,065,686 2,023,436 2,065,686 2,019,819
Effect of dilutive securities:
7% Convertible Debenture - 170,648 - 170,648
Employee stock options - 2,421 - 1,635
Dilutive potential common shares - 173,069 - 172,283
Denominator for diluted earnings per
share weighted number of shares outstanding 2,065,686 2,196,505 2,065,686 2,192,102
Basic earnings per common share:
Income from continuing operations $ .03 $ .85 $ .04 $.61
Discontinued operations - . - - .12
Gain on disposition of discontinued operations - - - .79
$ .03 $ .85 $ .04 $1.52
Diluted earnings per common share:
Income from continuing operations $ .03 $ .80 $ .04 $ .57
Discontinued operations - - - .11
Gain on disposition of discontinued operations - - - .72
$ .03 $ .80 $ .04 $1.40
1
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.
he following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. (Tabular information: dollars in
thousands, except per share amounts).
1
Three Months Ended September 30, Six Months Ended September 30,
Results of Operations 2001 2000 Change % 2001 2000 Change %
Revenues $ 11,672 $ 12,422 $ (750) -6% $ 22,489 $ 25,332 $(2,843) -11%
Cost of services 10,461 11,867 (1,406) -12% 20,102 24,247 (4,145) -17%
Percent of revenues 90% 96% 89% 96%
Gross margin 1,211 555 656 118% 2,387 1,085 1,302 120%
Percentage of revenues 10% 4% 11% 4%
Marketing, general & administrative 959 608 351 58% 1,945 1,174 771 66%
Percent of revenues 8% 5% 9% 5%
Operating income 252 (53) 305 N/M 442 (89) 531 N/M
Percent of revenues 2% 0% 2% 0%
Interest expense 177 292 (115) -39% 334 470 (136) -29%
Embezzlement recovery - (2,075) 2,075 -100% - (1,821) 1,821 -100%
Income from continuing operations before
income tax 75 1,730 (1,655) -96% 108 1,262 (1,154) -91%
Income tax expense 15 15 - 0% 30 30 - 0%
Income from continuing operations 60 1,715 (1,655) -97% 78 1,232 (1,154) -94%
Income from discontinued operations - - - - - 244 (244) N/M
Gain on sale of discontinued operations - - - - - 1,594 (1,594) N/M
Net income $ 60 $ 1,715 $(1,655) N/M $ 78 $ 3,070 $(2,992) N/M
Earnings per share - basic:
Continuing operations $ 0.03 $ 0.85 $ 0.04 $ 0.61
Discontinued operations - - - 0.12
Gain on sale of discontinued operations - - - 0.79
$ 0.03 $ 0.85 $ 0.04 $ 1.52
Earnings per share - diluted:
Continuing operations $ 0.03 $ 0.80 $ 0.04 $ 0.57
Discontinued operations - - - 0.11
Gain on sale of discontinued operations - - - .72
$ 0.03 $ 0.80 $ 0.04 $ 1.40
Weighted average number of common shares
outstanding - basic 2,065,686 2,023,436 2,065,686 2,019,819
Weighted average number of common shares
outstanding - diluted 2,065,686 2,196,505 2,065,686 2,192,102
1
Revenues
Revenues for the three months ended September 30, 2001 and 2000, decreased 6%,
or $750 thousand to $11.7 million from $12.4 million, respectively. For the
six months ended September 30, 2001, revenues decreased from $25.3 million in
2000 to $22.5 million in 2001, a decrease of $2.8 million, or 11%. The decline
in revenues was principally due to decreased hardware sales offset by
increases in higher margin service and recurring revenues on long-term
contracts. The decline in hardware sales has been characterized by lengthening
sales cycles and increased price competition brought on by the economic slow
down.
Gross Margin, Costs and Expenses
Cost of services for the three and six months ended September 30, 2001
decreased by $1.4 million, from $11.8 million to 10.4 million, or 12%, and
$4.1 million, from $24.2 million to $20.1 million, or 17%, respectively, from
the comparable period in 2000, primarily as a result of the decline in
revenues from the aforementioned hardware sales. The decrease in cost of
services was attributable to reductions in hardware sales, cost containment
measures and a continued shift in sales mix to higher margin services.
As a percent of revenues, gross margin has improved from 4% for the three and
six months ended September 30, 2000 to 10% and 11%, respectively, for the same
periods in 2001.
For the three months ended September 30, 2001 and marketing and general and
administration expense increased from $608 thousand to $959 thousand, an
increase of $351 thousand, or 58%, and for the six months ended September 30,
2001, marketing and general and administration increased from $1.2 million to
$1.9 million, an increase of $771 thousand, or 66%, over the same period last
fiscal year. The increase was primarily due to the creation of the
company-wide marketing group, associated with marketing and promotional
investments and workshops and higher levels of professional fees and business
insurance.
Operating Income
For the three months ended September 30, 2001 the Company had operating income
of $252 thousand compared to an operating loss of $53 thousand for the three
months ended September 30, 2000. Operating income for the six months ended
September 30, 2001 was $442 thousand compared to a loss of $89 thousand for
the comparable period ended September 30, 2000. The improvement was
attributable to the quality of the new revenue and gains realized from cost
cutting measures implemented by the organization during 2000.
Interest Expense
Interest expense for the three months ended September 30, 2001 decreased by
39% from the comparable period in 2000. For the six months ended September 30,
2001, interest expense decreased by 29% from the comparable period in 2000,
principally as a result of curtailment of debt and lower interest rates.
1
Embezzlement Recovery
Embezzlement recoveries (net of settlement costs) for the three and six months
ended September 30, 2000 were $2.1 million and $1.8 million, respectively.
There were no embezzlement recoveries for the three and six months ended
September 30, 2001. For additional discussion see "Embezzlement Matter" in
Note 3 to the condensed consolidated financial statements.
Income Taxes
Income taxes for the three and six months ended September 30, 2001and 2000
related primarily to state obligations of $15 thousand and $30 thousand,
respectively.
Discontinued Operations
In June 2000 the Company sold its Operational Outsourcing Division and,
accordingly, the financial results for this division have been reclassified as
Discontinued Operations. The Company recognized a one time gain on the sale of
the Division amounting to approximately $1.6 million (net of taxes of $200
thousand).
Net Income
For the three months ended September 30, 2001, net income was $60 thousand
compared to $1.7 million for the comparable period in 2000. For the six months
ended September 30, 2001 net income was $78 thousand compared to $3.07 million
for September 30, 2001.
For the three months ended September 30, 2000, the Company reported
embezzlement recoveries of $2.1 million. Excluding this item the Company would
have reported a net loss of $360 thousand compared to net income of $60
thousand for this year's second quarter. The six months ended September 30,
2000, included income from discontinued operations of $244 thousand, a gain on
the sale of discontinued operations of $1.6 million and embezzlement
recoveries of $1.8 million. With these items excluded, the Company would have
reported a net loss of $589 thousand compared to net income of $78,000 for the
first half of this year.
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 believes it must also continue
to emphasize operating
2
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
Historically the Company's primary sources of funding have been cash flows
from operations and borrowing under our credit facilities. In prior years
through a series of private placements, the Company issued $4 million of
subordinated notes due July 1, 2002, and extended to November 15, 2002
pursuant to a subordination agreement dated December 2000 to Research
Industries Incorporated, a private investment company and an affiliate of the
Company. At September 30, 2001, the Company's working capital was $2.99
million and its current ratio of 1.3. Improvement in the Company's financial
strength was attributable to more stringent cash management, accelerated
collection activities and improved inventory and expense management. Pursuant
to the Company's credit facility the Company is required to satisfy two
financial covenants; funded debt to EBITDA and fixed charge coverage ratio.
The Company was not in compliance with the funded debt ratio as of September
30, 2001. The lender has waived the covenant violation at September 30, 2001.
The Company and the lender have extended the orginal maturity date from August
31, 2002 to November 15, 2002. (See Note 4 to the condensed consolidated
financial statements.)
Capital expenditures for the six months ended September 30, 2001 have been
substantially reduced from prior periods. The Company does not expect capital
expenditures to increase significantly during the current fiscal year.
The subordinated debt agreements with an affiliate totaled $4 million at
September 30, 2001. The credit facility agreement dated December 8, 2000
prohibits the payments of principal or interest on the subordinated debt. (See
Note 4 to the condensed consolidated financial statements.)
The Company believes that funds generated from operations, bank borrowings,
and investing activities should be sufficient to meet its current operating
cash requirements although there can be no assurances that all the
aforementioned sources of cash can be realized.
Quantitative and Qualitative Disclosures about Market Risk
3
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. 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 September 30, 2001. The table presents principal cash flows and related
interest rates by year of maturity of the Company's funded debt. Note 6 to the
consolidated financial statements in the annual report on Form 10-K contains
descriptions of the Company's funded debt and should be read in conjunction
with the table below (amount in thousands).
Period Ending
September 30,
( Amounts in thousands)
Long-term debt (including current maturities) 2002 2003 Total Debt Fair Value
Revolving credit agreement at the LIBOR rate plus 2.5%. Due
August 31, 2002. Average interest rate of 7.5%. $ - $ 5,584 $ 5,584 $ 5,584
7% subordinated note from affiliate due January 27, 2003. - 2,000 2,000 1,960
8% subordinated notes from affiliate due July 1, 2002. - 2,000 2,000 2,000
Total fixed debt - 4,000 4,000 3,960
Total debt $ - $ 9,584 $ 9,584 $ 9,544
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.
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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 September 30, 2001, the Company had $9.6 million of debt outstanding of
which $5.6 million 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.
At present the Company is not conducting any foreign business.
Part II. Other Information
Item 4. Submission of matters to a vote of Security Holders
Annual Stockholders Meeting of September 20, 2001
ANNUAL SHAREHOLDERS MEETING
SEPTEMBER 20, 2001
RESULTS OF
1. ELECTION OF DIRECTORS
BY PROXIES
%OF %OF
WITHOLD INSTRUCTED TOTAL VOTING OUSTANDING
NOMINEE FOR AUTHORITY AGAINST BY BALLOT FOR SHARES SHARES
SCURLOCK 1,856,737 2,437 --- 99.87 89.88
MCNEW 1,856,737 2,437 --- 99.87 89.88
GROVER 1,856,737 2,437 --- 99.87 89.88
TOUPS 1,856,737 2,437 --- 99.87 89.88
HEWITT 1,856,737 2,437 --- 99.87 89.88
YOUNG 1,856,737 2,437 --- 99.87 89.88
2. PROPOSAL TO RATIFY DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS
OF THE COMPANY FOR THE FISCAL YEAR ENDING MARCH 31, 2002
FOR AGAINST ABSTAIN
1,855,984 --- 3,190
NOTE: SHARES VOTED 1,859,174
SHARES OUTSANDTING 2,065,686
QUORUM %
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.9 James L. Sherwood Severance Arrangement, dated
November 15, 1999
10.10 James L. May Severance Arrangement, dated March 15, 2001
10.11 Joseph Sciacca Severance Arrangement, dated May 10, 2000
10.12 Thomas J. Basile Severance Arrangement, dated
March 15, 2001
(b) Reports on Form 8-K - None
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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: November 15, 2001 By: s/Charles L. McNew
Charles L. McNew
President & CEO
Date: November 15, 2001 By: s/Joseph Sciacca
Joseph Sciacca
Vice President, Finance & CFO
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