U.S. Securities and Exchange Commission
October 6, 2005
109813.00103/11468363v.4
October 6, 2005
By EDGAR and Facsimile to (202) 772-9210
U.S. Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 6010
Washington, D.C. 20549
Attn: Mr. Stephen Krikorian, Accounting Branch Chief
RE: Halifax Corporation ("Halifax" or the "Company")
Form 10-K for the Fiscal Year Ended March 31, 2005
Form 10-Q for the Fiscal Quarter Ended June 30, 2005
File No. 001-08964
Dear Mr. Krikorian:
The Company hereby submits the its responses to comments raised in
the Staff's letter, dated September 19, 2005 (the "Comment Letter").
The responses set forth below are numbered to correspond to the comment
numbers in the Comment Letter. The Company intends to revise its 34 Act
disclosure in future filings as indicated on page 6 below following the
Staff's review of the responses contained herein.
Form 10-K for the year ended March 31, 2005
Note 1. Significant Accounting Policies and Business Activity
Accounts Receivable, page 43
1. We note that you transfer receivables to a third party in
connection with equipment leased to end users. Tell us the nature of
the equipment that is being leased to end users and whether this leased
equipment is included as a deliverable in your sales arrangements. If
so, clarify how you account for this leased equipment in accordance
with SFAS 13. Specifically, tell us how you classify this leased
equipment pursuant to the criteria in paragraphs 6 through 8 of SFAS
13. Further, tell us your consideration of the disclosure requirements
of paragraph 23 of SFAS 13 for your lease arrangements.
RESPONSE:
Halifax has an agreement with a customer to provide seat
management services. Under this agreement, Halifax procures the
equipment at the customer's request, installs an image (software)
on the device and then installs the equipment at the customer's
location.
The equipment sold under this agreement includes computer
equipment, consisting of desk tops, lap tops, printers, file
servers, software and mass storage devices.
Upon installation, the customer acknowledges receipt of the
equipment, at which time an invoice and bill of sale and
assignment between Halifax and a leasing company is created. This
assignment conveys all contractual rights to a leasing company,
including the right to receive payment due from the customer.
Halifax retains no rights or interest in the assets leased, nor
any residual interest in the equipment at the lease termination
date, nor does Halifax provide any guarantee of payment in
connection with the payment stream from the customer. In the
event of termination of the agreement between Halifax and the
customer, the customer is still obligated to continue payments to
the escrow agent for the benefit of the leasing company.
After the sale, transfer and assignment of assets and schedule
rights to the leasing company, as the prime contractor, Halifax
functions as a servicing agent to the leasing company, invoicing
the customer for the scheduled lease payments. The customer
payments under this agreement are remitted to an independent third
party escrow account pursuant to an escrow agreement for
distribution to the leasing company.
Paragraphs 6 through 8 of SFAS 13 provide guidance for purposes of
applying the accounting and reporting standards for both the
lessee and lessor. With respect to applying the accounting and
reporting standards of paragraph 6 through 8 of SFAS 13, Halifax
is not the lessee, has no obligations under the lease arrangement,
has no beneficial interest or ownership in the underlying asset
and has no interest in the residual asset at the end of the lease.
As a result, paragraphs 6 through 8 of SFAS 13 are not applicable
to Halifax.
Paragraph 23 of SFAS 13, details the type of disclosure required
with respect to a) Sales type leases and direct financing leases
by the lessor, and b) operating leases by the lessee. In the
transaction described in note 1 to the consolidated financial
statements, Halifax is neither the lessor with respect to a
capital lease obligation, nor the lessee of an operating lease.
Therefore, the disclosure required by paragraph 23 of SFAS 13 does
not apply. The Company does not possess, use, or have any
interest in the asset, other than providing limited servicing for
which, the Company invoices the end user on behalf of the leasing
company.
As a result, we do not believe the provisions of SFAS 13 apply to
this transaction.
2. We note that you record the transfer of receivables as sales based
on the provisions of SFAS 140. Tell us the consideration that you
receive in exchange for the transferred receivables. Further, tell us
your consideration of paragraph 9 of SFAS 140 when determining that you
have surrendered control of the transferred receivables.
RESPONSE:
The consideration that Halifax receives in exchange for the
transferred receivable is cash equal to the equivalent value of
receivables transferred as specified on the invoice and bill of
sale and assignment.
With regard to the sale, transfer and assignment of the assets,
the consideration received was based upon the sale of certain
assets procured by Halifax, charges for staging, installing an
image on the desktop and a profit on the transaction.
For example: Halifax would procure a desk top computer for the end
user customer. The asset would be delivered to our warehouse,
configured with the customer's image (software) tested and then
repackaged for delivery to the customer. The asset would then be
delivered to the customer and tested to be certain the equipment
is operating to the OEM specifications. Once installed, an
invoice would be generated and electronically transmitted to the
leasing company. A bill of sale and assignment is then generated
and the consideration received by Halifax would be the amount of
the invoice consisting of amounts charged related to the
procurement, warehousing, imaging and installing of the asset
sold.
Under paragraph 9 of SFAS 140, Halifax (the "transferor") has
surrendered control over the transferred assets only if all of the
following conditions are met.
a) Transfer assets have been isolated from the transferor. As
discussed in Response 1 above, under the bill of sale and assignment,
Halifax conveys all of its contract rights to a leasing company,
including the right to receive payment due from the customer. Halifax
retains no rights or interest in the assets leased, or any residual
interest in the equipment at the lease termination date, nor does
Halifax provide any guarantee of payment in connection with the payment
stream from the customer. The payments are made to an independent
third party escrow agent pursuant to an escrow agreement.
b) Each transferee has the right to pledge or exchange the assets.
With each transfer, Halifax assigns all of its right, title and
interest in and to certain receivables to the leasing company. Halifax
retains no property interest, having made a complete disposition of the
asset from a legal perspective. As a result, the transferee, in this
case the leasing company, has the right to dispose of the transferred
property and otherwise deal with it as the transferee's absolute
property.
c) Transferor does not maintain effective control over the
transferred assets. In accordance with the terms of the agreement, the
customer makes all payments to a third party escrow account. The
transfer of control is also demonstrated by the requirements specified
in the agreement with respect to execution of documents and filings of
UCC-1 financing statements indicating that Halifax's right, title and
interest in and to the receivables and assets has been sold to the
leasing company. The Company does not possess, use or have any
interest in the asset.
Based on the foregoing, we believe that all the conditions
indicating that Halifax has transferred control have been met and
no additional disclosure is required.
Revenue Recognition, page 44
3. We note that you provide seat management contracts that involve
delivery and installation of new equipment combined with multi-year
service agreements. We further note that revenue related to the
delivery and installation of equipment on these and certain other
contracts are recognized upon the completion of both delivery and
installation activities. As these activities are combined with multi-
year service agreements, explain how you determined that the delivery
and installation of equipment represents the culmination of a separate
earnings event. Tell us your consideration of SAB Topic 13, Section
A.3.f when making this determination. As part of your response, tell
us,
The nature of the equipment that is delivered and installed;
Whether the delivery and installation of equipment are
initial setup activities for the multi-year service agreements
or separate deliverables;
Whether the equipment is delivered and installed only to allow
the provision of future service or the equipment provides benefit
to your customers outside the service agreements;
Whether you sell the delivered equipment separately? (i.e. without
your service agreement).
RESPONSE:
The equipment sold under this agreement includes computer
equipment, consisting of desk tops, lap tops, printers, file
servers, software and mass storage devices.
The delivery and installation of the computer equipment represent
one deliverable and the service agreement is a separate
deliverable. The customer may purchase hardware separately, or
services separately, and within services, select the level of
service to be offered. Variations of the services offered may
include the following:
o The customer may procure his own equipment, and may have Halifax
configure and install the equipment,
o The customer may have Halifax perform remedial services on
customer owned equipment and select the levels of service to be
delivered from a list of options and fees, or
o The customer may purchase equipment from Halifax or Halifax may
sell the delivered equipment separately without any services.
In the past, Halifax has sold hardware separately and sold
services separately to this customer. We anticipate this practice
to continue.
In addition, the services under this agreement are only billed in
arrears, after the service period is completed and revenue is
recognized on a straight line basis over the service period.
There are no upfront fees paid for services as described under SAB
Topic 13, Section A.3.f . Upon delivery of equipment, the leasing
company is invoiced instead of the customer. Upon payment of the
invoice by the leasing company, all title and interest in the
assets inure to the benefit of the leasing company. Revenue is
recognized by Halifax when the delivery is completed. Revenue for
services is recognized on a straight line basis as the services
are delivered.
As discussed above, services are billed to the customer in arrears
after the completion of the service period based upon the number
of pieces equipment being serviced times the contracted rate for
the equipment covered. Revenue for services is recognized during
the month the service is rendered.
Note 6. Long-Term Debt, page 50
4. We note you have classified your revolving credit agreement as
long-term debt as of March 31, 2004 and 2005. We further note your
disclosure on page 37 of your Form 10-K for the fiscal year ended March
31, 2004, which states that your revolving credit agreement contains a
subjective acceleration clause. Tell us whether your revolving credit
agreement contains this clause as of March 31, 2005. If so, indicate
whether the agreement also requires a lock-box arrangement. That is,
tell us how you consider EITF 95-22 in determining the proper
classification for this liability. Further, if classification as long-
term is proper, tell us your consideration of FASB Technical Bulletin
No. 79-3 to determine the appropriate classification of the revolving
credit agreement and disclosure of the subjective acceleration clause.
RESPONSE:
Under EITF 95-22, a loan must be classified as current if the loan
has both a subjective acceleration clause and a lock box
arrangement, whereby the remittances from the lock box from the
borrower's customer reduce the debt outstanding.
The revolving credit agreement referenced in the March 31, 2005
Form 10-K contains a subjective acceleration clause that provides
for an event of default if a determination is made "by the Bank in
good faith, but in its sole discretion, that the financial
condition of Borrower or any other obligor is unsatisfactory...."
which event of default would permit an acceleration of the debt.
The revolving credit agreement does not require a lock box account
whereby the remittances from the lock box from the borrower's
customer reduce the debt outstanding. The credit agreement has a
requirement that the Company maintain a cash collateral account.
The daily control over the funds in the cash collateral account
are directed and controlled by Halifax and does not automatically
reduce the outstanding debt.
FTB 79-3 raises the issue whether long-term debt should be
classified as current if the debt agreement contains a subjective
clause that would accelerate the due date. In the response,
paragraph 3, FTB 79-3 indicates that neither reclassification nor
disclosure would be required if the lender has historically not
accelerated the due dates and the borrower's financial condition
is strong and its prospects are bright.
On June 30, 2005, the lender renewed and extended its credit
agreement with Halifax extending the maturity to July 2007. In
addition, on June 30, 2005, the Company completed the sale of its
secured network services business, which had a significant
positive financial impact for the Company.
Given the renewal and extension of its revolving credit agreement
we believe that our banking relations are satisfactory and
acceleration would be remote. In addition, the sale of the secure
network services business vastly improves the balance sheet, by
significantly improving Company's stockholders' equity and
reducing debt and further strengthening the financial condition
of Halifax.
Accordingly, we believe that debt is properly classified as a long
term obligation.
The Liquidity Section of Management's Discussion and Analysis on
page 29 of its Form 10-K for the fiscal year ended March 31, 2005
and page 17 of the June 30, 2005 Form 10-Q indicated that the
cash collateral account was under the control of the Bank.
Halifax intends to clarify the disclosure regarding the cash
collateral account in future filings and such disclosure will be
as follows:
The revolving credit agreement contains representations, warranties and
covenants that are that are customary in connection with a transaction
of this type. The revolving credit agreement contains certain
covenants including, but not limited to: (i) maintaining the Company's
accounts in a cash collateral accounts at Provident Bank, the funds in
which accounts we may apply in our discretion, against our obligations
owed to Provident Bank,(ii) notifying Provident Bank in writing of any
cancellation of a contract having annual revenues in excess of
$250,000, (iii) in the event receivables arise out of government
contracts, we will assign to Provident Bank all government contracts
with amounts payable of $100,000 or greater and in duration of six
months or longer, (iv) obtaining written consent from Provident Bank
prior to permitting a change in ownership of more than 25% of the stock
or other equity interests of us and our subsidiaries or permit us or
any of such entities to enter into any merger or consolidation or sell
or lease substantially all of our or its assets, and (v) obtaining
prior written consent of Provident Bank, subject to exceptions, to make
payments of debt to any person or entity or making any distributions of
any kind to any officers, employees or members. The revolving credit
agreement also contains certain financial covenants which we are
required to maintain including, but not limited to tangible net worth,
current ratio, total liabilities to net worth ratio, debt service
coverage and current ratio, as more fully described in the revolving
credit agreement.
The Company acknowledged that:
the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action with
respect to the filing; and
the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
If any member of the Staff has questions, please do not hesitate
to contact the undersigned at (703) 658-2415 or the Company's counsel,
Jane K. Storero at (215) 569-5488.
Sincerely,
/s/Joseph Sciacca
Joseph Sciacca
Chief Financial Officer
cc: Christopher White, Staff Accountant
Charles L. McNew
Barry H. Genkin, Esquire