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 December 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 January 31, 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
December 31, 1999 and June 30, 1999. 3
Statements of Operations for the Three-Month and
Six-Month Periods Ended December 31, 1999 and
1998. 4
Statements of Cash Flows for the Six-Month
Periods Ended December 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 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)
December 31, June 30,
1999 1999
------------ ------------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . $ 17,888 $ 17,746
Accumulated depreciation/amortization . . . . (7,057) (6,792)
------------ ------------
10,831 10,954
Cash. . . . . . . . . . . . . . . . . . . . . 185 312
Rents and other receivables . . . . . . . . . 66 23
Prepaid expenses and other assets . . . . . . 274 165
------------ ------------
Total assets. . . . . . . . . . . . . . . $ 11,356 $ 11,454
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . . . $ 9,039 $ 9,292
Accounts payable. . . . . . . . . . . . . . . 65 14
Accrued salaries. . . . . . . . . . . . . . . 18 19
Deferred income taxes . . . . . . . . . . . . 1,602 2,014
Tenant security deposits. . . . . . . . . . . 173 262
Other liabilities . . . . . . . . . . . . . . 358 395
------------ ------------
Total liabilities . . . . . . . . . . . . 11,255 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 December 31 and June 30,
1999 . . . . . . . . . . . . . . . . . . . 750 750
Common stock, no par value; 20,000,000
shares authorized; 4,572,545 shares
issued and outstanding at December 31,
and June 30, 1999. . . . . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . . . . (649) (1,292)
------------ ------------
Total stockholders' equity (deficit). . . 101 (542)
------------ ------------
Total liabilities and stockholders'
equity (deficit) . . . . . . . . . . . . $ 11,356 $ 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 Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Real estate rental
revenue: . . . . . . . $ 850 $ 871 $ 1,695 $ 1,683
Real estate expenses. . 380 385 729 754
----------- ----------- ----------- -----------
470 486 966 929
Depreciation/
amortization . . . . . 142 145 288 290
General and
administrative . . . . 24 23 47 47
----------- ----------- ----------- -----------
Income from real
estate . . . . . . . . 304 318 631 592
Interest expense. . . . 179 185 361 376
----------- ----------- ----------- -----------
Income before income
taxes. . . . . . . . . 125 133 270 216
Income tax (benefit)
expense. . . . . . . . (468) 53 (412) 87
----------- ----------- ----------- -----------
Net income. . . . . . . 593 80 682 129
Dividends on preferred
stock. . . . . . . . . 20 20 39 39
----------- ----------- ----------- -----------
Net income applicable
to common stock. . . . $ 573 $ 60 $ 643 $ 90
=========== =========== =========== ===========
Net income per share
applicable to common
stock - basic. . . . . $ 0.13 $ 0.01 $ 0.14 $ 0.02
=========== =========== =========== ===========
Net income per share
applicable to common
stock - diluted. . . . $ 0.12 $ 0.01 $ 0.14 $ 0.02
=========== =========== =========== ===========
Weighted average number
of shares outstanding
- basic. . . . . . . . 4,573 4,573 4,573 4,573
=========== =========== =========== ===========
Weighted average number
of shares outstanding
- diluted. . . . . . . 4,694 4,618 4,679 4,674
=========== =========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
4
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Six-Month Periods
Ended December 31,
-------------------------
1999 1998
----------- -----------
Cash flows from operating activities
Net income applicable to common
stock. . . . . . . . . . . . . . . . . . . . . . $ 643 $ 90
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization . . . . . . . . . . 288 290
Deferred tax provision. . . . . . . . . . . . (412) 87
----------- -----------
Comparative funds from operations. . . . . . 519 467
Preferred stock dividends accrued. . . . . . 39 39
(Increase) decrease in rents and other
receivables. . . . . . . . . . . . . . . . (43) 17
Increase in prepaid and other assets . . . . (132) (69)
Increase (decrease) in accounts payable. . . 51 (12)
Decrease in accrued salaries . . . . . . . . (1) ---
Decrease in tenant security deposits
and other liabilities . . . . . . . . . . . (126) (38)
----------- -----------
Net cash provided by operating activities. . . . . 307 404
----------- -----------
Cash flow used in investing activities
Improvements to real estate. . . . . . . . . . . (142) (29)
----------- -----------
Cash flow used in financing activities
Mortgage principal payments. . . . . . . . . . . (253) (246)
Payment to Versar, net . . . . . . . . . . . . . --- (117)
Payment of dividend on preferred stock (39) (39)
----------- -----------
Net cash flow used in
financing activities . . . . . . . . . . . . . (292) (402)
----------- -----------
Net decrease in cash . . . . . . . . . . . . . . . (127) (27)
Cash at beginning of period. . . . . . . . . . . . 312 139
----------- -----------
Cash at end of period. . . . . . . . . . . . . . . $ 185 $ 112
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . $ 362 $ 378
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 December 31, 1999 and the results of operations
for the six-month periods ended December 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 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.
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 For the Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Weighted average common
shares outstanding . . . 4,572,545 4,572,545 4,572,545 4,572,545
Assumed exercise of
options (Treasury stock
method). . . . . . . . . 121,536 45,244 106,693 101,749
----------- ----------- ----------- -----------
4,694,081 4,617,789 4,679,238 4,674,294
=========== =========== =========== ===========
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. At this
time, 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
- ---------------------
Second 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, 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.
Real estate rental revenue in the second quarter of fiscal
year 2000 decreased by $21,000 (2%) compared to the second
quarter of fiscal year 1999. The decrease is due to lower tenant
requested and third party services.
Real estate expenses in the second quarter of fiscal year
2000 decreased by $5,000 (1%) compared to the second quarter of
fiscal year 1999. The decrease is due to the capitalization of
direct labor and direct materials for new tenant build-outs
offset by the legal costs in addressing the expected Virginia
Department of Transportation eminent domain taking. Refer to
properties paragraph on page 10.
Depreciation/amortization for the second quarter of fiscal
year 2000 of $142,000 decreased by $3,000 (2%) compared to the
$145,000 as reported in the second quarter of fiscal year 1999.
The depreciation/amortization expenses for the new assets that
were placed in service in fiscal year 2000 were outpaced by the
fully amortized assets that were placed in service in prior
years.
General and administrative expense in the second quarter of
fiscal year 2000 of $24,000 was $1,000 higher than the second
quarter of fiscal year 1999.
Interest expense for the second quarter of fiscal year 2000
was $6,000 (3%) lower than that reported in the second quarter of
fiscal year 1999. The decrease is due to the principal payments
in the past year.
Income tax benefit for the second quarter of fiscal year
2000 was $468,000 compared to the income tax expense of $53,000
recorded in the same period of last year. Due to the stable
profitability and the solidified rent rolls, the Company reversed
the entire $514,000 tax valuation allowance in the second quarter
of fiscal year 2000. Refer to Income Taxes in Note B.
Preferred stock dividends for the second 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 second
quarter of fiscal year 2000 was $573,000 compared to the net
income applicable to common stock of $60,000 in the same time last
year. The significant growth in the net income was due to the
reversal of tax valuation allowance as mentioned above. Without the
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
reversal net income for the second quarter of fiscal year 2000
was $1,000 lower than the net income for the second quarter of
fiscal year 1999. The slight decrease in earnings was due to
lower real estate operating income, offset by lower interest
expenses and lower income taxes as mentioned above.
Six Month Comparison for Fiscal Year 2000 and 1999
- --------------------------------------------------
Real estate rental income for the six months of fiscal year
2000 was $1,695,000, an increase of $12,000, compared to the
rental income of $1,683,000 in the six months a year ago. The
increase is attributable to rent escalation outpaced the lower
tenant requested and third party services.
Real estate expenses in the first six months of fiscal year
2000 decreased $25,000 (3%) compared to the real estate expense
in the first six months of fiscal year 1999. The decrease is due
to the capitalization of direct labor and direct materials for
new tenant build-outs offset by the legal accruals as mentioned
above.
Depreciation/amortization for the first six months of fiscal
year 2000 decreased by $2,000 compared to the same period last
year. The decrease is due to assets that were fully depreciated.
General and administrative expense for the six months of
fiscal year 2000 of $47,000 remained at same level as last year.
Interest expense for the first six months of fiscal year
2000 of $361,000 was $15,000 (4%) lower than that reported in the
first six 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 six months of fiscal year
2000 was $412,000 compared to the income tax expense of $87,000
for the six months of fiscal year 1999. The recognition of the
tax benefit was due to the reversal of tax valuation allowance as
mentioned above.
Preferred stock dividends for the first six months of fiscal
year 2000 and 1999 were at the fixed level of $39,000.
The net income applicable to common stock for the first six
months of fiscal year 2000 was $643,000, an increase of $553,000
when compared to the net income of $90,000 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 $307,000 for
the six months of fiscal year 2000 compared to the $404,000 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 six months of fiscal year 2000,
Sarnia spent $142,000 in tenant build-outs, paid $253,000 for
mortgage principal and $39,000 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 expected eminent domain taking of certain portions of Versar
Center by the Virginia Department of Transportation, Sarnia
expects that it will require $175,000 for capital expenditures to
be made during fiscal year 2000. Approximately $150,000 of the
$175,000 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. 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. 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: February 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 185
<SECURITIES> 0
<RECEIVABLES> 76
<ALLOWANCES> 10
<INVENTORY> 0
<CURRENT-ASSETS> 525
<PP&E> 17,888
<DEPRECIATION> 7,057
<TOTAL-ASSETS> 11,356
<CURRENT-LIABILITIES> 441
<BONDS> 9,039
0
750
<COMMON> 0
<OTHER-SE> (649)
<TOTAL-LIABILITY-AND-EQUITY> 11,356
<SALES> 0
<TOTAL-REVENUES> 1,695
<CGS> 0
<TOTAL-COSTS> 1,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 361
<INCOME-PRETAX> 231
<INCOME-TAX> (412)
<INCOME-CONTINUING> 643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 643
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
