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, 2000 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 28, 2000
--------------------- -----------------------------
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, 2000 and June 30, 1999. 3
Statements of Operations for the Three-Month and
Nine-Month Periods Ended March 31, 2000 and 1999. 4
Statements of Cash Flows for the Nine-Month Periods
Ended March 31, 2000 and 1999. 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)
March 31, June 30,
2000 1999
---------- ----------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . . . $ 17,970 $ 17,746
Accumulated depreciation/amortization . . . . . . (7,194) (6,792)
---------- ----------
10,776 10,954
Cash. . . . . . . . . . . . . . . . . . . . . . . 156 312
Rents and other receivables . . . . . . . . . . . 81 23
Prepaid expenses and other assets . . . . . . . . 325 165
---------- ----------
Total assets. . . . . . . . . . . . . . . $ 11,338 $ 11,454
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Mortgages . . . . . . . . . . . . . . . . . . . . $ 8,911 $ 9,292
Accounts payable. . . . . . . . . . . . . . . . . 92 14
Accrued salaries. . . . . . . . . . . . . . . . . 23 19
Deferred income taxes . . . . . . . . . . . . . . 1,652 2,014
Tenant security deposits. . . . . . . . . . . . . 173 262
Other liabilities . . . . . . . . . . . . . . . . 326 395
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . 11,177 11,996
---------- ----------
Commitments and contingencies
Stockholders' Equity (Deficit)
Preferred stock, $25 par value; Series A
cumulative convertible; 1,000,000 shares
authorized; 30,000 shares issued and
outstanding at March 31, 2000 and
June 30, 1999 . . . . . . . . . . . . . . . . 750 750
Common stock, no par value; 20,000,000
shares authorized; 4,572,545 shares
issued and outstanding at March 31, 2000
and June 30, 1999 . . . . . . . . . . . . . . --- ---
Accumulated deficit. . . . . . . . . . . . . . (589) (1,292)
---------- ----------
Total stockholders' equity (deficit). . . 161 (542)
---------- ----------
Total liabilities and stockholders'
equity (deficit) . . . . . . . . . . . . $ 11,338 $ 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 For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Real estate rental revenue:. $ 863 $ 794 $ 2,558 $ 2,476
Real estate expenses . . . . 388 348 1,118 1,102
---------- ---------- ---------- ----------
475 446 1,440 1,374
Depreciation/amortization. . 150 146 438 436
General and administrative . 20 24 66 70
---------- ---------- ---------- ----------
Income from real estate. . . 305 276 936 868
Interest expense . . . . . . 176 184 536 560
---------- ---------- ---------- ----------
Income before income taxes . 129 92 400 308
Income tax expense
(benefit) . . . . . . . . . 50 36 (362) 123
---------- ---------- ---------- ----------
Net income . . . . . . . . . 79 56 762 185
Dividends on preferred
stock . . . . . . . . . . . 20 20 59 59
---------- ---------- ---------- ----------
Net income applicable to
common stock. . . . . . . . $ 59 $ 36 $ 703 $ 126
========== ========== ========== ==========
Net income per share
applicable to common
stock - basic . . . . . . . $ 0.01 $ 0.01 $ 0.15 $ 0.03
========== ========== ========== ==========
Net income per share
applicable to common
stock - diluted . . . . . . $ 0.01 $ 0.01 $ 0.15 $ 0.03
========== ========== ========== ==========
Weighted average number of
shares outstanding
- basic . . . . . . . . . . 4,573 4,573 4,573 4,573
========== ========== ========== ==========
Weighted average number of
shares outstanding
- diluted . . . . . . . . . 4,688 4,625 4,682 4,625
========== ========== ========== ==========
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,
--------------------------
2000 1999
----------- -----------
Cash flows from operating activities
Net income applicable to common
stock. . . . . . . . . . . . . . . . . . . . $ 703 $ 126
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization. . . . . . . . . 438 436
Deferred tax provision . . . . . . . . . . (362) 123
----------- -----------
Comparative funds from operations. . . . 779 685
Preferred stock dividends accrued. . . . . 59 59
(Increase) decrease in rents and other
receivables. . . . . . . . . . . . . . . (58) 18
Increase in prepaid and other assets . . . (196) (43)
Increase (decrease) in accounts payable. . 78 (22)
Increase in accrued salaries . . . . . . . 4 7
Decrease in tenant security deposits
and other liabilities . . . . . . . . . . (158) (35)
----------- -----------
Net cash provided by operating activities . . . 508 669
----------- -----------
Cash flow used in investing activities
Improvements to real estate . . . . . . . . . (224) (30)
----------- -----------
Cash flow used in financing activities
Mortgage principal payments . . . . . . . . . (381) (370)
Payment to Versar, net. . . . . . . . . . . . --- (117)
Payment of dividend on preferred stock. . . . (59) (59)
----------- -----------
Net cash flow used in
financing activities. . . . . . . . . . . . . (440) (546)
----------- -----------
Net (decrease) increase in cash . . . . . . . . (156) 93
Cash at beginning of period . . . . . . . . . . 312 139
----------- -----------
Cash at end of period . . . . . . . . . . . . . $ 156 $ 232
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest. . . . . . . . . . . . . . . . . . $ 537 $ 562
Income taxes. . . . . . . . . . . . . . . . 20 ---
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 located in Springfield, Virginia.
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 March 31, 2000 and the results of
operations for the nine-month periods ended March 31, 2000 and 1999. 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 if these services were provided elsewhere.
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.
6
<PAGE
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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 For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Weighted average common
shares outstanding . . . . 4,572,545 4,572,545 4,572,545 4,572,545
Assumed exercise of options
(Treasury stock method). . 115,458 52,316 109,094 52,316
----------- ----------- ----------- -----------
4,688,003 4,624,861 4,681,639 4,624,861
=========== =========== =========== ===========
Income taxes: 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 and $0.8 million of
deferred tax assets related to net operating loss carryforwards. Due to the
concerns about rent roll turnover in the year 2000, the Company retained its
valuation allowance of approximately $514,000 against the deferred tax assets.
Management has determined that it is more likely than not that all of the
benefits of the NOLs will be realized and, accordingly, reversed the valuation
allowance in the second quarter. Income tax expense is calculated on income
before preferred dividends at an estimated annual effective rate of 38%.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
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, the impact of potential eminent domain taking by the Virginia
Department of Transportation, 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.
Third Quarter Comparison for Fiscal Year 2000 and 1999
- ------------------------------------------------------
Real estate rental revenue in the third quarter of fiscal year 2000
increased by $69,000 (9%) compared to the third quarter of fiscal year 1999.
The increase is due to a higher occupancy rate and increased third party
services.
Real estate expenses in the third quarter of fiscal year 2000 increased
by $40,000 (11%) compared to the third quarter of fiscal year 1999. The
increase is primarily due to the higher legal costs in addressing the Virginia
Department of Transportation eminent domain taking. Refer to properties
paragraph on page 10.
Depreciation/amortization for the third quarter of fiscal year 2000 of
$150,000 increased by $4,000 (3%) compared to the $146,000 as reported in the
third quarter of fiscal year 1999. The depreciation/amortization increased
due to the capitalized tenant improvements in fiscal year 2000.
General and administrative expense in the third quarter of fiscal year
2000 of $20,000 was $4,000 lower than the third quarter of fiscal year 1999.
The decrease is due to lower insurance cost for the quarter.
Interest expense for the third quarter of fiscal year 2000 was $8,000
(4%) lower than that reported in the third quarter of fiscal year 1999. The
decrease is due to the principal payments in the past year.
Income tax expense for the third quarter of fiscal year 2000 was $50,000
compared to the income tax expense of $36,000 recorded in the same period of
last year. The increase is due to the higher income during the quarter.
Income tax is recorded at an effective rate of 38%.
Preferred stock dividends for the third 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 third quarter of
fiscal year 2000 was $59,000 compared to the net income applicable to common
stock of $36,000 in the same time last year.
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Nine Month Comparison for Fiscal Year 2000 and 1999
- ---------------------------------------------------
Real estate rental income for the nine months of fiscal year 2000 was
$2,558,000, an increase of $82,000, compared to the rental income of
$2,476,000 in the nine months a year ago. The increase is attributable to a
6% increase in rental income of $141,000 reduced by $59,000 of lower tenant
requested and third party services.
Real estate expenses in the first nine months of fiscal year 2000
increased by $16,000 (1%) compared to the real estate expense in the first
nine months of fiscal year 1999. The increase is due to increased legal
accruals offset by capitalized labor and direct materials for new tenant
build-outs.
Depreciation/amortization for the first nine months of fiscal year 2000
increased by $2,000 compared to the same period last year. The increase is
due to additional leasehold improvements during fiscal year 2000.
General and administrative expense for the nine months of fiscal year
2000 of $66,000 was $4,000 lower than the nine months of fiscal year 1999, due
to lower insurance costs.
Interest expense for the first nine months of fiscal year 2000 of
$536,000 was $24,000 (4%) lower than that reported in the first nine months of
fiscal year 1999. The decrease is due to lower outstanding debt and the
continuous principal payment throughout the year.
Income tax benefit for the first nine months of fiscal year 2000 was
$362,000 compared to the income tax expense of $123,000 for the nine months of
fiscal year 1999. The recognition of the tax benefit was due to the reversal
of tax valuation allowance in the second quarter due to the stable
profitability and solidified rent rolls. Refer to Income Taxes in Note B.
Preferred stock dividends for the first nine months of fiscal year 2000
and 1999 were at the fixed level of $59,000.
The net income applicable to common stock for the first nine months of
fiscal year 2000 was $703,000, an increase of $577,000 when compared to the
net income of $126,000 for the comparable period last year. The improved
earnings are primarily attributable to the reversal of tax valuation
allowance, higher rental income, lower operating expense and lower interest
expense as mentioned above.
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operating activities was $508,000 for the nine
months of fiscal year 2000 compared to the $669,000 for the same period last
year. Increase in assets and decrease in other liabilities resulted in lower
net cash provided by operating activities. During the nine months of fiscal
year 2000, Sarnia spent $224,000 in tenant build-outs, paid $381,000 for
mortgage principal and $59,000 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.
9
<PAGE>
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Subject to the need to build a parking garage in response to an eminent
domain taking of certain portions of Versar Center by the Virginia Department
of Transportation, Sarnia expects that it will require $50,000 for capital
expenditures to be made during the remaining portion of fiscal year 2000.
Approximately $25,000 of the $50,000 will be used for remodeling vacant space,
and the remaining $25,000 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, except for the parking garage which will be financed by the
condemnation proceeds or from a lending institution.
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. In
addition, the Company has been informed that additional easements will be
sought for fire protection water mains. 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.
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. 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.
In January 2000, the Company received an offer from the VDOT in the
amount of $2,272,000 for approximately 2.4 acres of Sarnia's property.
Nothing has yet been offered for the fire protection water main easements.
After thorough review of the proposal and advice of retained experts, the
Company has decided to reject the VDOT offer. The Company will seek to
increase the amount of the VDOT offer by negotiation. If unsuccessful, the
Company will commence litigation to receive fair compensation.
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. To the
best of the management's knowledge, there have been no Year 2000 failures at
Versar Center and no failure of the Company's tenants or suppliers that had
any effect on the Company or its operations.
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: May 12, 2000
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 156
<SECURITIES> 0
<RECEIVABLES> 91
<ALLOWANCES> 10
<INVENTORY> 0
<CURRENT-ASSETS> 562
<PP&E> 17,970
<DEPRECIATION> 7,194
<TOTAL-ASSETS> 11,338
<CURRENT-LIABILITIES> 441
<BONDS> 8,911
0
750
<COMMON> 0
<OTHER-SE> (589)
<TOTAL-LIABILITY-AND-EQUITY> 11,338
<SALES> 0
<TOTAL-REVENUES> 2,558
<CGS> 0
<TOTAL-COSTS> 1,556
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> 341
<INCOME-TAX> (362)
<INCOME-CONTINUING> 703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
