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, 1996 Commission File Number 0-24108
--------------- --------
SARNIA CORPORATION
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1215366
- - ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6850 Versar Center
Springfield, Virginia 22151
- - ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 642-6800
----------------------------
Not Applicable
- - ------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class of Common Stock Outstanding at April 30, 1996
--------------------- -----------------------------
no par value 4,572,545 shares
SARNIA CORPORATION
INDEX TO FORM 10-Q
PAGE
----
<TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Balance Sheets as of
March 31, 1996 and June 30, 1995. 3
Statements of Operations for the Three and
Nine-Month Periods Ended March 31,
1996 and 1995. 4
Statements of Cash Flows
for the Nine-Month Periods Ended March 31,
1996 and 1995. 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
</TABLE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate, at cost. . . . . . . . . $17,448 $17,419
Other fixed assets, at cost . . . . . 136 122
Accumulated depreciation/
amortization . . . . . . . . . . . . (5,081) (4,670)
-------- --------
12,503 12,871
Cash and cash equivalents . . . . . . 3 3
Rents and other receivables . . . . . 123 138
Prepaid expenses and other
assets . . . . . . . . . . . . . . . 229 293
-------- --------
Total assets. . . . . . . . . . $12,858 $13,305
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . $10,890 $12,062
Accounts payable. . . . . . . . . . . 158 113
Due to Versar . . . . . . . . . . . . 158 265
Accrued salaries. . . . . . . . . . . 17 26
Deferred income taxes . . . . . . . . 1,756 1,756
Tenant security deposits. . . . . . . 343 96
Other liabilities . . . . . . . . . . 259 265
-------- --------
Total liabilities . . . . . . . 13,581 14,583
-------- --------
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, 1996. . . . . . . . . . 750 ---
Common stock, no par value;
20,000,000 shares authorized;
4,572,545 shares issued and
outstanding at March 31, 1996
and June 30, 1995. . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . (1,473) (1,278)
-------- --------
Total stockholders'
deficit. . . . . . . . . . . . (723) (1,278)
-------- --------
Total liabilities and
stockholders' deficit. . . . . $12,858 $13,305
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
SARNIA CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three-Month For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Real estate rental revenue:
Versar. . . . . . . . . . . $ 275 $ 354 $ 836 $ 1,061
Others. . . . . . . . . . . 410 344 1,217 888
-------- -------- -------- --------
Total real estate
rental revenue . . . . . . . 685 698 2,053 1,949
Real estate expenses. . . . . 316 317 952 884
-------- -------- -------- --------
369 381 1,101 1,065
Depreciation/amortization . . 155 141 465 417
General and administrative. . 24 17 72 52
-------- -------- -------- --------
Income from real estate . . . 190 223 564 596
Interest expense. . . . . . . 243 274 760 808
-------- -------- -------- --------
Loss before income taxes. . . (53) (51) (196) (212)
Income taxes. . . . . . . . . --- --- --- ---
-------- -------- -------- --------
Net loss. . . . . . . . . . . $ (53) $ (51) $ (196) $ (212)
======== ======== ======== ========
Net loss per share. . . . . . $ (.01) $ (.01) $ (.04) $ (.05)
======== ======== ======== ========
Weighted average number
of shares outstanding. . . . 4,573 4,573 4,573 4,573
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
For the Nine-Month Periods
Ended March 31,
--------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . $ (196) $ (212)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation/amortization. . . . . . . 465 417
Decrease (increase) in accounts
receivable. . . . . . . . . . . . . . 15 (45)
Decrease (increase) in prepaid and
other assets. . . . . . . . . . . . . 11 (34)
Increase (decrease) in accounts
payable . . . . . . . . . . . . . . . 45 (35)
Decrease in accrued salaries . . . . . (9) (2)
(Decrease) Increase in other
liabilities. . . . . . . . . . . . . (9) 195
-------- --------
Net cash provided by operating activities. 322 284
Cash flow from investing activities
Improvements to real estate. . . . . . . (43) (105)
-------- --------
Cash flow from financing activities
Mortgage principal payments. . . . . . . (12,062) (246)
Refinanced new mortgage. . . . . . . . . 11,000 ---
Principal payments on new mortgage . . . (110) ---
(Payments to) Proceeds from Versar, net. (107) 67
Issuance of preferred stock. . . . . . . 750 ---
Deposits Received. . . . . . . . . . . . 250 ---
-------- --------
Net cash used in financing activities (279) (179)
-------- --------
Net change in cash . . . . . . . . . . . . 0 0
Cash at beginning of period. . . . . . . . 3 3
-------- --------
Cash at end of period. . . . . . . . . . . $ 3 $ 3
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . $ 828 $ 890
Income taxes . . . . . . . . . . . . . 0 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(A) GENERAL INFORMATION
Sarnia Corporation (the Company or Sarnia), formerly Versar Virginia,
Inc., was a wholly-owned real estate subsidiary of Versar, Inc. (Versar). The
Company was established in 1982 to own and operate the 6850 Building and the
6800 Building in Versar Center, the headquarters buildings of Versar, Inc.
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 given their distinct financial, investing and
operating characteristics so that each could 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, 1995 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, 1996, and the results of
operations for the three-month and nine-month periods ended March 31, 1996 and
1995. The results of operations for such periods, however, are not
necessarily indicative of the results to be expected for a full fiscal year.
Certain general and administrative functions, including general
management, treasury, financial service, legal, benefits and human resources
administration, investor and public relations and information management are
provided by Versar on a fixed fee basis. 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.
Revenue recognition: Rental income is recognized based upon tenant lease
agreements. Provisions for any anticipated lease losses are made in the
period that the losses become evident.
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 loss per share: Net loss per share is computed by dividing net loss by
the number of shares outstanding during the applicable period being reported
upon.
Income taxes: The Company accounts for certain income and expense items
differently for financial reporting purposes than for income tax reporting
purposes. Provisions for deferred income taxes are made in recognition of
temporary differences between book and tax bases of accounting.
6
(B) SIGNIFICANT ACCOUNTING POLICIES (continued)
Refinancing: On January 25, 1996, the Company completed the refinancing of
all of its outstanding debt and issued 30,000 shares of preferred stock.
With regard to the refinancing, Sarnia obtained a first mortgage of $9
million with I.D.S. Life Insurance Company at the fixed rate of 7.75% to be
amortized over twenty-two years and with a balloon payment due in 2003.
Sarnia also obtained a second mortgage of $500,000 with the Riggs National
Bank at the prime rate plus 2% payable in 12 equal monthly installments.
Sarnia also entered into a $1.5 million term loan with the Riggs National Bank
at the prime rate plus 1%. The term loan is amortized over seven years
payable in 66 equal monthly installments starting on the 18th month from the
date of funding. Versar guarantees Sarnia's $1.5 million term loan. In
addition, Sarnia has issued $750,000 of its Series A Cumulative Convertible
Preferred stock to a group of private investors. In connection with these
transactions, Sarnia received a rent deposit of $250,000 from Versar and
repaid the majority of the loans it owed to Versar.
Preferred stock: At the Company's annual stockholders meeting on November
16, 1995, the Sarnia stockholders approved an amendment to the Articles of
Incorporation of the Company authorizing the issuance of up to 1,000,000
shares of "blank-check" preferred stock, the terms of which may be set by the
Board of Directors without further stockholder action. Following approval of
the "blank-check" preferred stock by the stockholders, the Board of Directors
adopted an amendment to the Company's Articles of Incorporation to authorize
the issuance of 30,000 shares of Series A Cumulative Convertible Preferred
Stock, and to set the rights, privileges and preferences of such series. All
30,000 shares of the Series A preferred stock were issued by the Company as
stated above for an aggregate price of $750,000. The Series A preferred stock
bears a $25 par value and is entitled to receive preferential cumulative
dividends at the annual rate of $2.625 per share. Also, the Series A
preferred stock is redeemable at the option of the Company and is convertible
into common stock, at the option of the holders, at a conversion price of $.40
per share.
Impact of Accounting Standard not yet Effective: In March 1995, the
Financial Accounting Standard Board issued a statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 is effective for
fiscal year 1997, and requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The adoption of SFAS 121 is not expected
to have a material effect on the financial position of the Company.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- - ---------------------
Third Quarter Comparison for Fiscal Year 1996 and 1995
- - ------------------------------------------------------
Real estate rental revenue in the third quarter of fiscal year 1996
decreased by $13,000 (2%) compared to the third quarter of the prior fiscal
year. The decrease is attributable to tenant requested improvements which
decreased by $23,000 in the third quarter of fiscal year 1996 as compared to
the third quarter of fiscal year 1995.
Real estate expenses in the third quarter of fiscal year 1996 remained
at the same level as the third quarter of fiscal year 1995.
7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Depreciation/amortization for the third quarter of fiscal year 1996 was
$14,000 (10%) higher than the $141,000 reported in fiscal year 1995. The
increase is due to the amortization of building improvements that were placed
into service for new tenants in fiscal year 1995.
General and administrative expense in the third quarter of fiscal year
1996 of $24,000 was $7,000 (41%) higher than that reported in the third
quarter of fiscal year 1995 due to increased insurance costs. After the spin-
off from Versar, Sarnia entered into separate insurance coverage on a stand-
alone basis, which resulted in higher insurance expenses.
Interest expense for the third quarter of fiscal year 1996 was $31,000
(11%) lower than that reported in the third quarter of fiscal year 1995. The
decrease is primarily due to lower debt and the refinancing of debt at lower
interest rates.
The net loss for the third quarter of fiscal 1996 was $53,000, an
increase of $2,000 over the loss reported in the third quarter of fiscal year
1995. The increase is primarily attributable to lower tenant requested
improvements income which was off-set by the lower interest expenses as
mentioned above.
Nine-Month Comparison for Fiscal Year 1996 and 1995
- - ---------------------------------------------------
Real estate rental revenue for the nine months of fiscal year 1996 was
$2,053,000, an increase of $104,000 (5%) compared to the rental revenue of
$1,949,000 a year ago. The increase is attributable to $28,000 of tenant
requested improvements and $76,000 of rent escalations.
Real estate expenses in the nine months of fiscal year 1996 increased
$68,000 (8%) compared to the real estate expense in the nine months of fiscal
year 1995. The increase is due to the materials and subcontractor's costs
associated with the tenant requested improvements as mentioned above.
Depreciation/amortization for the nine months of fiscal year 1996
increased by $48,000 (12%) compared to the same period last year. The
increase is due to the amortization of building improvements that were placed
in service for new tenants in fiscal year 1995.
General and administrative expense for the nine months of fiscal year
1996 of $72,000 was $20,000 (38%) higher than that of a year ago due to
increased insurance costs. After the spin-off from Versar, Sarnia entered
into separate insurance coverage on a stand-alone basis, which resulted in
higher insurance expenses.
Interest expense for the nine months was $48,000 (6%) lower than that
reported in the nine months of fiscal year 1995. The decrease is due to the
principal payments on the mortgage loans and the refinancing of debt at lower
interest rates.
The net loss for the nine months was $196,000, a decrease of $16,000
when compared to the net loss of $212,000 for the comparable period last year.
The decrease is primarily attributable to higher rental revenue and lower
interest expenses off-set by higher real estate costs as mentioned above.
Liquidity and Capital Resources
- - -------------------------------
Cash flow provided by operating activities was $322,000 for the nine
months of fiscal year 1996 compared to the $284,000 for the same period last
year. Cash flow increased in the nine months of fiscal year 1996 due to
improved operating results during fiscal year 1996.
8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
On January 25, 1996, Sarnia completed the refinancing of all of its
outstanding debt. Sarnia obtained a first mortgage of $9 million with I.D.S.
Life Insurance Company at the fixed rate of 7.75% to be amortized over twenty-
two years and with a balloon payment due in 2003. Sarnia also obtained a
second mortgage of $500,000 with the Riggs National Bank at the prime rate
plus 2% payable in 12 equal monthly installments. Sarnia also entered into a
$1.5 million term loan with the Riggs National Bank at the prime rate plus 1%.
The term loan is amortized over seven years payable in 66 equal monthly
installments starting on the 18th month from the date of funding. Versar
guarantees Sarnia's $1.5 million term loan. In addition, Sarnia issued
$750,000 of its Series A Cumulative Convertible Preferred stock to a group of
private investors. The preferred stock bears a par value of $25 per share.
The holders of the preferred stock will be entitled to receive dividends at
the annual rate of $2.625 per share. At the option of the holders, the
preferred stock can be converted at the initial conversion price of $.40 per
share. In connection with these transactions, Sarnia received a rent deposit
of $250,000 from Versar and repaid the majority of the loans it owed to
Versar. As a result of the refinancing, Sarnia believes it will be able to
generate sufficient cash flow to meet its short-term operating needs.
It is anticipated that Sarnia will require $50,000 for miscellaneous
capital expenditures during fiscal year 1996.
Impact of Inflation
- - -------------------
Sarnia continually seeks to protect itself from the effects of
inflation. The majority of its leases provide for annual increases based on
fixed percentages or increases in the Consumer Price Index.
9
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
None
(B) Reports on Form 8-K
None
10
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 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 123
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 355
<PP&E> 17,584
<DEPRECIATION> (5,081)
<TOTAL-ASSETS> 12,858
<CURRENT-LIABILITIES> 1,515
<BONDS> 10,890
0
750
<COMMON> 0
<OTHER-SE> (1,473)
<TOTAL-LIABILITY-AND-EQUITY> 12,858
<SALES> 0
<TOTAL-REVENUES> 2,053
<CGS> 0
<TOTAL-COSTS> 1,489
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 760
<INCOME-PRETAX> (196)
<INCOME-TAX> 0
<INCOME-CONTINUING> (196)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (196)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
