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, 2000 Commission File Number 0-24108
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SARNIA CORPORATION
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1215366
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (703) 642-6800
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Not Applicable
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(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
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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 30, 2000
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no par value 4,572,545 shares
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SARNIA CORPORATION
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Balance Sheets as of
September 30, 2000 and June 30, 2000. 3
Statements of Operations for the Three-Month
Periods Ended September 30, 2000 and 1999. 4
Statements of Cash Flows
for the Three-Month Periods Ended September 30,
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 10
ITEM 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
September 30, June 30,
2000 2000
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(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . $ 17,876 $ 17,865
Accumulated depreciation/amortization . . . . (7,444) (7,322)
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10,432 10,543
Cash. . . . . . . . . . . . . . . . . . . . . 143 172
Restricted cash . . . . . . . . . . . . . . . 2,287 2,287
Rents and other receivables, net. . . . . . . 50 69
Prepaid expenses and other assets . . . . . . 490 409
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Total assets. . . . . . . . . . . . . $ 13,402 $ 13,480
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LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages . . . . . . . . . . . . . . . . . . $ 8,651 $ 8,782
Accounts payable. . . . . . . . . . . . . . . 25 35
Accrued salaries. . . . . . . . . . . . . . . 22 23
Deferred income taxes . . . . . . . . . . . . 2,570 2,509
Tenant security deposits. . . . . . . . . . . 155 158
Other liabilities . . . . . . . . . . . . . . 316 388
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Total liabilities . . . . . . . . . . 11,739 11,895
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Commitments and contingencies
Stockholders' Equity
Preferred stock, $25 par value; Series A
cumulative convertible; 1,000,000 shares
authorized; 30,000 shares issued and
outstanding at September 30, 2000 and
June 30, 2000. . . . . . . . . . . . . . . 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, 2000. . . . . . . . . . . . . --- ---
Accumulated equity. . . . . . . . . . . . . 913 835
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Total stockholders' equity. . . . . . 1,663 1,585
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Total liabilities and stockholders'
equity . . . . . . . . . . . . . . . $ 13,402 $ 13,480
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The accompanying notes are an integral part of
these financial statements.
3
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SARNIA CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
For the Three-Month
Periods Ended September 30,
2000 1999
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Real estate rental revenue . . . . . . . . . . $ 837 $ 845
Real estate expenses . . . . . . . . . . . . . 353 349
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484 496
Depreciation/amortization. . . . . . . . . . . 131 145
General and administrative . . . . . . . . . . 23 24
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Income from real estate. . . . . . . . . . . . 330 327
Interest expense . . . . . . . . . . . . . . . 171 181
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Net income before income taxes . . . . . . . . 159 146
Income taxes . . . . . . . . . . . . . . . . . 61 56
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Net income . . . . . . . . . . . . . . . . . . 98 90
Dividends on preferred stock . . . . . . . . . 20 20
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Net income applicable to common stock. . . . . $ 78 $ 70
============ ============
Net income per share applicable to common
stock - basic and diluted. . . . . . . . . . $ .02 $ .02
============ ============
Weighted average number of
shares outstanding - basic . . . . . . . . . 4,573 4,573
============ ============
Weighted average number of
shares outstanding - diluted . . . . . . . . 4,679 4,667
============ ============
The accompanying notes are an integral part of
these financial statements.
4
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SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Three-Month Periods
Ended September 30,
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2000 1999
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Cash flows from operating activities
Net income applicable to common
stock . . . . . . . . . . . . . . . . . . $ 78 $ 70
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization . . . . . . . 131 145
Deferred tax provision. . . . . . . . . 61 56
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Comparative funds from operations. . . 270 271
Preferred stock dividends accrued . . . 20 20
Decrease (increase) in rents and other
receivables. . . . . . . . . . . . . . 19 (11)
Increase in prepaid and other assets. . (90) (64)
(Decrease) increase in accounts
payable . . . . . . . . . . . . . . . (10) 59
(Decrease) increase in accrued
salaries. . . . . . . . . . . . . . . (1) 24
(Decrease) increase in other
liabilities . . . . . . . . . . . . . (75) 31
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Net cash provided by operating activities. . 133 330
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Cash flows from investing activities
Improvements to real estate. . . . . . . . (11) (40)
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Cash flows from financing activities
Mortgage principal payments. . . . . . . . (131) (109)
Payment of dividend on preferred stock . . (20) (20)
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Net cash used in
financing activities . . . . . . . . . . . (151) (129)
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Net (decrease) increase in cash. . . . . . . (29) 161
Cash at beginning of period. . . . . . . . . 172 312
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Cash at end of period. . . . . . . . . . . . $ 143 $ 473
============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . $ 159 $ 182
Taxes. . . . . . . . . . . . . . . . . . $ 60 $ 10
The accompanying notes are an integral part of
these financial statements.
5
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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, 2000 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, 2000 and the results of
operations for the three-month periods ended September 30, 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 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.
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
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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 net income per
share 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 net income per share to the
weighted average number of shares outstanding for diluted net income per share.
For the Three-Month
Periods Ended September 30,
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2000 1999
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Weighted average common shares
outstanding. . . . . . . . . . . . . . . 4,572,545 4,572,545
Assumed exercise of options (treasury
stock method). . . . . . . . . . . . . . 106,043 94,163
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4,678,588 4,666,708
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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, 2000, the Company had approximately $2.5
million in deferred tax liabilities. 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
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First Quarter Comparison for Fiscal Year 2001 and 2000
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Forward Looking Statements
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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 2001
decreased by $8,000 (1%) compared to the first quarter of fiscal year 2000.
The decrease is attributable to the expiration of a lease. Subsequently, a
portion of the vacant space has been filled.
Real estate expenses in the first quarter of fiscal year 2001 increased
by $4,000 (1%) compared to the first quarter of fiscal year 2000. The increase
is due to slightly higher labor costs and building maintenance expenses.
Depreciation/amortization expense of $131,000 for the first quarter of
fiscal year 2001 decreased by $14,000 (10%) compared to the $145,000 for the
first quarter of fiscal year 2000. The decrease was due to tenant build-outs
constructed in fiscal year 1995 that were fully amortized in fiscal year 2001.
General and administrative expense in the first quarter of fiscal year
2001 of $23,000 was $1,000 lower compared to the $24,000 for the first quarter
of fiscal year.
Interest expense for the first quarter of fiscal year 2001 was $10,000
(6%) lower than that reported in the first quarter of fiscal year 2000. The
decrease is due to the principal payments in the past year.
Income taxes for the first quarter of fiscal year 2001 of $61,000 were
higher than the income taxes of $56,000 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 2001 and
2000 were $20,000 for each of the quarters, respectively.
The net income applicable to common stock for the first quarter of fiscal
year 2001 was $78,000 compared to the net income applicable to common stock of
$70,000 in the same time last year. The improvement in earnings was
attributable to lower interest expenses as the slight increase in operating
income was offset by the increase in income taxes.
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 $133,000 for the first
quarter of fiscal year 2001 compared to the $330,000 for the same period last
year. Decreases in accounts payable and other liabilities resulted in lower
net cash provided by operating activities. During the first quarter of fiscal
year 2001, Sarnia paid $131,000 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 2001. 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
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In connection with the improvement and expansion of the Springfield
interchange highway system, the Virginia Department of Transportation (VDOT)
has taken pursuant to eminent domain approximately 2.54 acres of Sarnia's
property. In addition, VDOT took additional easements for fire protection
water mains. The Company 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 negotiation or by
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 third quarter of fiscal year 2000, the Company received an offer from
the VDOT for approximately $2,300,000 for approximately 2.54 acres of Sarnia's
property and easements. After thorough review of the proposal and advice of
retained experts, the Company has decided to reject the VDOT offer. The
Company is seeking to increase the amount of the VDOT offer by negotiation.
If unsuccessful, the Company will commence litigation to receive fair
compensation.
The Company recorded a gain on the condemnation of property of
approximately $2,196,000 during fiscal year 2000. The proceeds of $2,287,000
from the condemnation are restricted by IDS for the purpose of correcting
damage caused by the VDOT condemnation. The Company will be required to build
a new parking garage for the 6850 building and an access road to the 6800
building. The Company estimates that it will cost approximately $3,000,000
to complete the project. The Company is seeking additional compensation from
VDOT for the shortfall and is also seeking alternate financing sources in the
event the Company is not successful with VDOT or if the timing of the
construction is prior to settlement with VDOT.
9
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
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
10
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SIGNATURES
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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
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(Registrant)
By: /S/ Charles I. Judkins, Jr.,
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Charles I. Judkins, Jr.,
President and Chief Executive
Officer
(duly authorized officer and
Principal Financial Officer)
Date: November 10, 2000
11
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