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 March 31, 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 (Zip Code)
offices)
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 April 30, 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
March 31, 1999 and June 30, 1998. 3
Statements of Operations for the
Three-Month and Nine-Month Periods
Ended March 31, 1999 and 1998. 4
Statements of Cash Flows for the
Nine-Month Periods Ended March 31,
1999 and 1998. 5
Notes to Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7-9
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 10
ITEM 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBIT 11 - Computation of Per Share Earnings 12
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
March 31, June 30,
1999 1998
----------- -----------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . . . $ 17,740 $ 17,710
Accumulated depreciation/amortization . . . . . . (6,661) (6,267)
----------- -----------
11,079 11,443
Cash and cash equivalents . . . . . . . . . . . . 232 139
Rents and other receivables . . . . . . . . . . . 61 79
Prepaid expenses and other assets . . . . . . . . 188 186
----------- -----------
Total assets. . . . . . . . . . . . . . . $ 11,560 $ 11,847
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . . . . . $ 9,417 $ 9,787
Accounts payable. . . . . . . . . . . . . . . . . 10 32
Due to Versar . . . . . . . . . . . . . . . . . . --- 117
Accrued salaries. . . . . . . . . . . . . . . . . 25 18
Deferred income taxes . . . . . . . . . . . . . . 1,979 1,855
Tenant security deposits. . . . . . . . . . . . . 338 436
Other liabilities . . . . . . . . . . . . . . . . 387 324
----------- -----------
Total liabilities . . . . . . . . . . . . 12,156 12,569
----------- -----------
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 March 31, 1999
and June 30, 1998 . . . . . . . . . . . . . 750 750
Common stock, no par value;
20,000,000 shares authorized;
4,572,545 shares issued and
outstanding at March 31, 1999
and June 30, 1998 . . . . . . . . . . . . . --- ---
Accumulated deficit. . . . . . . . . . . . . (1,346) (1,472)
----------- -----------
Total stockholders' deficit . . . . . . . (596) (722)
----------- -----------
Total liabilities and stockholders'
deficit. . . . . . . . . . . . . . . . . $ 11,560 $ 11,847
=========== ===========
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 For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Real estate rental
revenue:. . . . . . . . . . $ 794 $ 782 $ 2,476 $ 2,315
Real estate expenses . . . . 348 372 1,102 1,057
----------- ----------- ----------- -----------
446 410 1,374 1,258
Depreciation/amortization. . 146 143 436 431
General and administrative . 24 24 70 71
----------- ----------- ----------- -----------
Income from real estate. . . 276 243 868 756
Interest expense . . . . . . 184 196 560 599
----------- ----------- ----------- -----------
Net income before income
taxes . . . . . . . . . . . 92 47 308 157
Income taxes . . . . . . . . 36 19 123 63
----------- ----------- ----------- -----------
Net income . . . . . . . . . 56 28 185 94
Dividends on preferred
stock . . . . . . . . . . . 20 19 59 59
----------- ----------- ----------- -----------
Net income applicable to
common stock. . . . . . . . $ 36 $ 9 $ 126 $ 35
=========== =========== =========== ===========
Net income per share
applicable to common stock
- basic and diluted . . . . $ 0.01 $ --- $ 0.03 $ 0.01
=========== =========== =========== ===========
Weighted average number of
shares outstanding
- basic . . . . . . . . . . 4.573 4,573 4,573 4,573
=========== =========== =========== ===========
Weighted average number of
shares outstanding
- diluted . . . . . . . . . 4,625 4,630 4,625 4,630
=========== =========== =========== ===========
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Nine-Month Periods
Ended March 31,
--------------------------
1999 1998
----------- -----------
Cash flows from operating activities
Net income applicable to common
stock . . . . . . . . . . . . . . . . . . . $ 126 $ 35
Adjustments to reconcile net income
applicable to common stock to net
cash provided by operating activities
Depreciation/amortization. . . . . . . . . 436 431
Deferred tax provision . . . . . . . . . . 123 63
----------- -----------
Comparative funds from operations. . . . 685 529
Preferred stock dividends accrued. . . . . 59 59
Provision for doubtful accounts
receivable. . . . . . . . . . . . . . . . --- 5
Decrease (increase) in rents and other
receivables . . . . . . . . . . . . . . . 18 (78)
Increase in prepaid and other assets . . . (43) (49)
Decrease in accounts payable . . . . . . . (22) (79)
Increase in accrued salaries . . . . . . . 7 7
Decrease in other liabilities. . . . . . . (35) (7)
----------- -----------
Net cash provided by operating activities. . . 669 387
----------- -----------
Cash flow used in investing activities
Improvements to real estate. . . . . . . . . (30) (1)
----------- -----------
Cash flow used in financing activities
Mortgage principal payment . . . . . . . . . (370) (359)
Payment to Versar, net . . . . . . . . . . . (117) (1)
Payment of dividend on preferred stock . . . (59) (59)
----------- -----------
Net cash flow used in
financing activities . . . . . . . . . . . . (546) (419)
----------- -----------
Net increase (decrease) in cash. . . . . . . . 93 (33)
Cash at beginning of period. . . . . . . . . . 139 96
----------- -----------
Cash at end of period. . . . . . . . . . . . . $ 232 $ 63
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . $ 562 $ 614
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, 1998 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 March 31, 1999 and the results of
operations for the nine-month periods ended March 31, 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 Statement
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>
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.
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, 1998, the Company had approximately $2.4
million in deferred tax liabilities, which was offset by $1 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 40%.
Impact of Accounting Standards: Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128") requires a company to
present basic and diluted earnings per share amounts on the face of the
Statement of Operations. The Company adopted the provisions of the standard
in fiscal year 1998, and restated prior years' earnings per share to comply
with the new standard.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Third Quarter Comparison for Fiscal Year 1999 and 1998
- ------------------------------------------------------
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 uponnegligence and other theories of
liability, and the possibility of tenants continuing to renew their leases.
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 facilities may decline as a
result of possible changes in general and regional economic conditions and the
effects of competitive facilities and pricing; one or more current or future
claims made against the Company may result in substantial liabilities; major
equipment replacement 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 third quarter of fiscal year 1999
increased by $12,000 (2%) compared to the third quarter of fiscal year 1998.
The increase is attributable to rent escalations for existing tenants offset
by the lower demand for third party and tenant requested services.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Real estate expenses in the third quarter of fiscal year 1999 decreased
by $24,000 (6%) compared to the third quarter of fiscal year 1998. The
decrease is due to lower subcontract and material costs associated with the
third party and tenant requested services and the cost savings as a result of
installing energy efficient devices in the buildings.
Depreciation/amortization for the third quarter of fiscal year 1999 was
$3,000 higher than the $143,000 reported in fiscal year 1998. The increase is
due to minor building improvements put into place in fiscal year 1999.
General and administrative expense in the third quarter of fiscal year
1999 of $24,000 remained at the same level as the third quarter of fiscal year
1998.
Interest expense for the third quarter of fiscal year 1999 was $12,000
(6%) lower than that reported in the third quarter of fiscal year 1998. The
decrease is due to the principal payments in the past year.
Income tax expenses for the third quarter of fiscal year 1999 was
$36,000, an increase of $17,000 compared to the third quarter of fiscal year
1998. The increase is due to higher pre-tax income when compared to the same
period of prior year.
Preferred stock dividends for the third quarter of fiscal year 1999 and
1998 were $20,000 and $19,000, respectively.
The net income applicable to common stock for the third quarter of fiscal
year 1999 was $36,000 compared to the net income applicable to common stock of
$9,000 in the same time last year. The increase in net income was due to
higher real estate rental income, lower real estate expenses, and lower
interest expenses.
Nine Month Comparison for Fiscal Year 1999 and 1998
- ---------------------------------------------------
Real estate rental income for the nine months of fiscal year 1999 was
$2,476,000, an increase of $161,000 (7%) compared to the rental income of
$2,315,000 a year ago. The increase is attributable to rent escalations and
increased third party and tenant requested services.
Real estate expenses in the nine months of fiscal year 1999 increased
$45,000 (4%) compared to the real estate expense in the nine months of fiscal
year 1998. The increase is due to higher direct subcontract and material
costs associated with the increased third party and tenant requested services
offset by the cost savings from the energy efficient devices as mentioned
above.
Depreciation/amortization for the first nine months of fiscal year 1999
increased by $5,000 compared to the same period last year. The increase is
due to building improvements placed in service in fiscal year 1999.
General and administrative expense for the nine months of fiscal year
1999 of $70,000 was $1,000 lower than that of a year ago. The decrease is due
to slightly lower insurance expense when compared to the same period of
fiscal year 1998.
Interest expense for the nine months of fiscal year 1999 was $39,000 (7%)
lower than that reported in the nine months of fiscal year 1998. The decrease
is due to lower outstanding debt and the continuous principal payment
throughout the year.
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Income tax expenses for the nine months of fiscal year 1999 was $123,000,
an increase of $60,000 from the $63,000 of expenses a year ago. The increase
is due to higher pre-tax income as a result of higher rental income, lower
real estate and interest expenses.
Preferred stock dividends for the nine months of fiscal year 1999 and
1998 remained at the same level of $59,000.
The net income applicable to common stock for the nine months was
$126,000, an increase of $91,000 when compared to the net income of $35,000
for the comparable period last year. The improved earnings are primarily
attributable to higher rental income, lower real estate and interest expenses
offset by higher accrued income taxes.
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operating activities was $669,000 for the nine
months of fiscal year 1999 compared to the $387,000 for the same period last
year. In the nine months of fiscal year 1999, payments of $370,000 were
made to mortgage principal, $117,000 to fully pay off Versar's loan and
$59,000 to preferred stock dividends.
Sarnia is financed through 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 Treasury Rate plus three hundred (300) basis points per
annum, but not to exceed 9% per annum. At March 31, 1999, the loan balances
for I.D.S. Life Insurance Company and NationsBank are approximately
$8,442,000 and $975,000, respectively. 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 1999. It is anticipated that of such $75,000,
approximately $40,000 will be used for remodeling vacant space, and
approximately $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.
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.
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 as to their systems being Year 2000 compliant. 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.
9
<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 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedules
(B) Reports on Form 8-K
None
10
<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: May 12, 1999
11
<PAGE>
Exhibit 11
SARNIA CORPORATION
Statement Re: Computation of Per Share Earnings
(Unaudited - in thousands, except per share data)
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO
COMMON STOCK . . . . . . . $ 36 $ 9 $ 126 $ 35
=========== =========== =========== ===========
Weighted average common
shares outstanding . . . . 4,572,545 4,572,545 4,572,545 4,572,545
=========== =========== =========== ===========
NET INCOME PER SHARE
- BASIC. . . . . . . . . . $ 0.01 $ --- $ 0.03 $ 0.01
=========== =========== =========== ===========
Common shares from above. . 4,572,545 4,572,545 4,572,545 4,572,545
Assumed exercise of
options (treasury stock
method). . . . . . . . . . 52,316 57,786 52,316 57,786
----------- ----------- ----------- -----------
4,624,861 4,630,331 4,624,861 4,630,331
=========== =========== =========== ===========
NET INCOME PER SHARE
- DILUTED. . . . . . . . . $ 0.01 $ --- $ 0.03 $ 0.01
=========== =========== =========== ===========
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 232
<SECURITIES> 0
<RECEIVABLES> 66
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 481
<PP&E> 17,740
<DEPRECIATION> 6,661
<TOTAL-ASSETS> 11,560
<CURRENT-LIABILITIES> 422
<BONDS> 9,417
0
750
<COMMON> 0
<OTHER-SE> (1,346)
<TOTAL-LIABILITY-AND-EQUITY> 11,560
<SALES> 0
<TOTAL-REVENUES> 2,476
<CGS> 0
<TOTAL-COSTS> 1,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 560
<INCOME-PRETAX> 249
<INCOME-TAX> 123
<INCOME-CONTINUING> 126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
