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, 1999 Commission File Number 0-24108
------------------ -------
SARNIA CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1215366
- -------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
- -------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 642-6800
-----------------------------
Not Applicable
- -------------------------------------------------------------------------------
(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.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at October 29, 1999
--------------------- -------------------------------
no par value 4,572,545 shares
<PAGE>
SARNIA CORPORATION
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Balance Sheets as of
September 30, 1999 and June 30, 1999. 3
Statements of Operations for the Three-Month
Periods Ended September 30, 1999 and 1998. 4
Statements of Cash Flows
for the Three-Month Periods Ended September 30,
1999 and 1998. 5
Notes to Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-10
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 11
ITEM 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
September 30, June 30,
1999 1999
------------- -------------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . $ 17,786 $ 17,746
Accumulated depreciation/amortization . . (6,924) (6,792)
------------- -------------
10,862 10,954
Cash. . . . . . . . . . . . . . . . . . . 473 312
Rents and other receivables . . . . . . . 34 23
Prepaid expenses and other assets . . . . 216 165
------------- -------------
Total assets . . . . . . . . . . $ 11,585 $ 11,454
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . $ 9,183 $ 9,292
Accounts payable. . . . . . . . . . . . . 73 14
Accrued salaries. . . . . . . . . . . . . 43 19
Deferred income taxes . . . . . . . . . . 2,070 2,014
Tenant security deposits. . . . . . . . . 241 262
Other liabilities . . . . . . . . . . . . 447 395
------------- -------------
Total liabilities. . . . . . . . 12,057 11,996
------------- -------------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, $25 par value;
Series A cumulative convertible;
1,000,000 shares authorized;
30,000 shares issued and outstanding
at September 30, and June 30,
1999. . . . . . . . . . . . . . . . . 750 750
Common stock, no par value; 20,000,000
shares authorized; 4,572,545 shares
issued and outstanding at September 30,
and June 30, 1999 . . . . . . . . . . --- ---
Accumulated deficit. . . . . . . . . . (1,222) (1,292)
------------- -------------
Total stockholders' deficit. . . (472) (542)
------------- -------------
Total liabilities and
stockholders' deficit. . . . . . $ 11,585 $ 11,454
============= =============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SARNIA CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
For the Three-Month
Periods Ended September 30,
---------------------------
1999 1998
------------ ------------
Real estate rental revenue . . . . . . . . . . $ 845 811
Real estate expenses . . . . . . . . . . . . . 349 369
------------ ------------
496 442
Depreciation/amortization. . . . . . . . . . . 145 145
General and administrative . . . . . . . . . . 24 24
------------ ------------
Income from real estate. . . . . . . . . . . . 327 273
Interest expense . . . . . . . . . . . . . . . 181 190
------------ ------------
Net income before income taxes . . . . . . . . 146 83
Income taxes . . . . . . . . . . . . . . . . . 56 33
------------ ------------
Net income . . . . . . . . . . . . . . . . . . 90 50
Dividends on preferred stock . . . . . . . . . 20 20
------------ ------------
Net income applicable to common stock. . . . . $ 70 $ 30
============ ============
Net income per share applicable to common
stock - basic and diluted. . . . . . . . . . $ .02 $ .01
============ ============
Weighted average number of
shares outstanding - basic . . . . . . . . . 4,573 4,573
============ ============
Weighted average number of
shares outstanding - diluted . . . . . . . . 4,667 4,686
============ ============
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Three-Month Periods
Ended September 30,
---------------------------
1999 1998
------------ ------------
Cash flows from operating activities
Net income applicable to common
stock . . . . . . . . . . . . . . . . . . . $ 70 $ 30
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization. . . . . . . . 145 145
Deferred tax provision . . . . . . . . . 56 33
------------ ------------
Comparative funds from operations . . . 271 208
Preferred stock dividends accrued. . . . 20 20
(Increase) decrease in rents and other
receivables . . . . . . . . . . . . . . (11) 79
Increase in prepaid and other assets . . (64) (23)
Increase (decrease) in accounts
payable . . . . . . . . . . . . . . . . 59 (18)
Increase in accrued salaries . . . . . . 24 3
Increase in other liabilities. . . . . . 31 39
------------ ------------
Net cash provided by operating activities . . 330 308
------------ ------------
Cash flow used in investing activities
Improvements to real estate. . . . . . . . . (40) (23)
------------ ------------
Cash flow used in financing activities
Mortgage principal payments. . . . . . . . . (109) (122)
Payment to Versar, net . . . . . . . . . . . --- (30)
Payment of dividend on preferred stock . . . (20) (20)
------------ ------------
Net cash flow used in
financing activities . . . . . . . . . . . . (129) (172)
------------ ------------
Net increase in cash. . . . . . . . . . . . . 161 113
Cash at beginning of period . . . . . . . . . 312 139
------------ ------------
Cash at end of period . . . . . . . . . . . . $ 473 $ 252
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . $ 182 $ 247
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(A) GENERAL INFORMATION
Sarnia Corporation (the "Company"), formerly Versar Virginia, Inc., was a
wholly-owned real estate subsidiary of Versar, Inc. ("Versar") until June 30,
1994. The Company owns and operates the 6850 Building and the 6800 Building
in Versar Center.
On June 30, 1994, Versar distributed to the holders of its common stock
substantially all of the Common Stock of the Company (the "Distribution").
The Distribution provided Versar stockholders one share of Sarnia common stock
for every outstanding share of Versar common stock. The Distribution was
effected to separate the two businesses with distinct financial, investing and
operating characteristics so that each can adopt strategies and pursue
objectives appropriate to its specific business.
(B) SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying financial statements are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all of the disclosures normally required by generally accepted
accounting principles or those normally made in Sarnia Corporation's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1999 for additional
information.
The financial information has been prepared in accordance with the
Company's customary accounting practices. In the opinion of Management, the
information reflects all adjustments necessary for a fair presentation of
the Company's financial position as of September 30, 1999 and the results of
operations for the three-month periods ended September 30, 1999 and 1998.
The results of operations for such periods, however, are not necessarily
indicative of the results to be expected for a full fiscal year.
Sarnia Corporation has entered into a Master Corporate Services and
Support Agreement with Versar, Inc. Certain general and administrative
functions, including general administrative, treasury, financial service,
legal, benefits and human resources administration, investor and public
relations and information management are provided by Versar on a fixed fee
of $36,000 per annum. Telephone expenses charged from Versar based on the
number of extensions used by the Company and its tenants are included in real
estate expenses. Management believes that these charges are made on a
reasonable basis; however, they do not necessarily indicate the costs that
would have been incurred by the Company separately.
Accounting 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.
Revenue recognition: Rental income is recognized based upon tenant lease
agreements in accordance with Statement of Financial Accounting Standard
No. 13, "Accounting for Leases" ("SFAS 13"). Provisions for any anticipated
lease losses are made in the period that the losses become evident.
Property and equipment: Property and equipment are carried at historical
cost until a decline in value which is other than temporary occurs. At such
time, the property will be reduced by a direct write-down for any impairment
in value if it is probable that the carrying amount of the property cannot
be fully recovered.
6
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
Depreciation and amortization: Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repair costs are expensed while improvements are
capitalized.
Net income per share applicable to common stock: Basic income per share
applicable to common stock is computed by dividing net income applicable to
common stock by the weighted average number of shares outstanding during the
applicable period being reported upon. Diluted net income per share is
computed by dividing net income applicable to common stock by the weighted
average number of shares outstanding plus the effect of assumed exercise of
stock options using the Treasury Stock Method. The following is a
reconciliation of the weighted average number of shares outstanding for basic
earnings per share to the weighted average number of shares outstanding for
diluted earnings per share.
For the Three-Month
Periods Ended September 30,
------------------------------
1999 1998
------------- -------------
Weighted average common shares
outstanding. . . . . . . . . . . . . . . . . 4,572,545 4,572,545
Assumed exercise of options (treasury
stock method). . . . . . . . . . . . . . . . 94,163 113,784
------------- -------------
4,666,708 4,686,329
============= =============
Income taxes: The Company accounts for certain income and expense items
differently for financial reporting purposes than for income tax reporting
purposes. The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109") which mandates a liability
method for computing deferred income taxes. Provisions for deferred income
taxes are made in recognition of temporary differences between the book and
tax bases of accounting. At June 30, 1999, the Company had approximately
$2.3 million in deferred tax liabilities, which was offset by $0.8 million of
net operating loss carryforwards. Due to the potential rent roll turnover in
the year 2000, the Company has established a valuation allowance of
approximately $514,000. As future rent rolls are solidified the valuation
allowance will be reduced and added into income. Net income before preferred
dividends will accrue income tax expense at an estimated effective rate of 38%.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
First Quarter Comparison for Fiscal Year 2000 and 1999
- ------------------------------------------------------
Forward Looking Statements
- --------------------------
The statements in this report that are forward-looking are based on
current expectations, and actual results may differ materially. The
forward-looking statements include those regarding cost controls and
reductions, the expected annual rent escalations, the possible impact of
current and future claims against the Company based upon negligence and other
theories of liability, and the possibility of tenants continuing to renew
their leases or the Company's ability to attract new tenants.
Forward-looking statements involve numerous risks and uncertainties that
could cause actual results to differ materially, including, but not limited
to, the possibilities that the demand for the Company's services may decline
as a result of possible changes in general and specific economic conditions
and the effects of competitive services and pricing; one or more current or
future claims made against the Company may result in substantial liabilities;
and such other risks and uncertainties as are described in reports and other
documents filed by the Company from time to time with the Securities and
Exchange Commission.
Real estate rental revenue in the first quarter of fiscal year 2000
increased by $34,000 (4%) compared to the first quarter of fiscal year 1999.
The increase is attributable to rent escalations.
Real estate expenses in the first quarter of fiscal year 2000 decreased
by $20,000 (5%) compared to the first quarter of fiscal year 1999. The
decrease is due to lower utility expenses.
Depreciation/amortization for the first quarter of fiscal year 2000
remained at the same level of $145,000 as reported in fiscal year 1999. The
depreciation/amortization expenses for the new assets that were placed in
service in fiscal year 2000 were offset by the fully amortized assets that
were placed in service in prior years.
General and administrative expense in the first quarter of fiscal year
2000 of $24,000 remained at the same level as in the first quarter of fiscal
year 1999.
Interest expense for the first quarter of fiscal year 2000 was $9,000
(5%) lower than that reported in the first quarter of fiscal year 1999. The
decrease is due to the principal payments in the past year.
Income taxes for the first quarter of fiscal year 2000 of $56,000 were
higher than the income taxes of $33,000 recorded in the same period of last
year due to higher earnings. The Company recorded income tax expense on
earnings before preferred dividends at an effective rate of 38%.
Preferred stock dividends for the first quarter of fiscal year 2000 and
1999 were $20,000 for each of the quarters, respectively.
The net income applicable to common stock for the first quarter of fiscal
year 2000 was $70,000 compared to the net income applicable to common stock of
$30,000 in the same time last year. The improvement in earnings was due to
higher real estate rental income, lower real estate expenses and lower
interest expenses as mentioned above.
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operating activities was $330,000 for the first
quarter of fiscal year 2000 compared to the $308,000 for the same period last
year. Increase in net income and other liabilities resulted in higher net cash
provided by operating activities. During the first quarter of fiscal year
2000, Sarnia paid $109,000 for mortgage principal and $20,000 for preferred
stock dividends.
Sarnia has a first mortgage of $9 million with I.D.S. Life Insurance
Company at the fixed rate of 7.75% which is being amortized over twenty-two
years and with a balloon payment due in 2003. Sarnia also has a $1.5
million, five-year term loan with the NationsBank, which will be fully
amortized in June 2002. The note is guaranteed by Versar, Inc. and bears
interest at the five-year Treasury Rate plus three hundred (300) basis points
per annum, but not to exceed 9% per annum. In addition, Sarnia issued
$750,000 of Series A cumulative Convertible Preferred Stock to a group of
private investors.
Sarnia expects that it will require $75,000 for capital expenditures to
be made during fiscal year 2000. Approximately $40,000 of the $75,000 will be
used for remodeling vacant space, and the remaining $35,000 will be used for
other miscellaneous capital expenditures. Management believes that funds
generated from operations should be sufficient to meet Sarnia's operating
needs, including capital expenditures.
Properties
- ----------
In connection with the improvements and expansion of the Springfield
interchange highway system, the Virginia Department of Transportation (VDOT)
plans include the taking of approximately 2.4 acres of Sarnia's property.
However, this is subject to change based upon the final design plans of VDOT.
The Company has retained counsel and other professional assistance in
determining the effect of such change on the property, its value to Sarnia
and any actions which are required to maintain Versar Center as an attractive
property to existing and prospective tenants. While we are unaware of the
timing of such plans, we anticipate discussions and possible action by VDOT
during fiscal year 2000.
By law, VDOT is required to pay fair market value for the property that
it acquires and damages to the remaining property, either by negotiations or
by the exercise of its powers of eminent domain. No offer for the acquisition
has been made, but an offer is expected in the near future. Sarnia has
employed the services of an expert real estate appraiser as well as a
professional engineer to aid in the determination of the appropriate value of
the acquisition and any adverse impact on the remainder of the property.
If it is determined that the offer of VDOT when made is inadequate as not
representing fair market value, then in that event, the property will be
condemned and the fair compensation issue will be litigated. It is anticipated
that a fair award will be recovered for this taking. Management of Sarnia is
responding in a vigorous manner to protect itself in this matter.
Impact of Inflation
- -------------------
Sarnia continually seeks to protect itself from the effects of inflation.
The majority of its leases provide for annual increases based on fixed
percentages or increases in the Consumer Price Index.
9
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Year 2000
- ---------
Certain computer programs have been written using two digits rather than
four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000.
This, in turn, could result in major system failures and in miscalculations,
and is generally referred to as the "Year 2000" problem. Sarnia has upgraded
the Company's existing data processing and financial reporting software
applications to be Year 2000 ready. Total costs incurred for the Year 2000
ready program is approximately $10,000. Versar, Inc., who provides significant
administrative services to Sarnia, has notified the Company that the systems
that are involved in such services are Year 2000 ready. The Company has
requested each of its tenants and material suppliers, including Virginia Power,
to advise the Company as to their systems being Year 2000 ready. Except for a
failure by Virginia Power to become Year 2000 ready, the failure of any tenant
or other supplier to be Year 2000 ready would not have a material adverse
effect on the Company.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Sarnia is not a party to any litigation.
Item 6 - Exhibits and Reports on Form 8-K.
(A) Exhibits
Exhibit 27 - Financial Data Schedules
(B) Reports on Form 8-K
None
11
<PAGE>
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.
SARNIA CORPORATION
--------------------------
(Registrant)
By: /S/ Charles I. Judkins, Jr.
_____________________________
Charles I. Judkins, Jr.,
President and Chief Executive
Officer
(duly authorized officer and
Principal Financial Officer)
Date: November 10, 1999
12
<PAGE>
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<PP&E> 17,786
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0
750
<COMMON> 0
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