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, 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
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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
----- -----
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 31, 1996
--------------------- -------------------------------
no par value 4,572,545 shares
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SARNIA CORPORATION
INDEX TO FORM 10-Q
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Balance Sheets as of
September 30, 1996 and June 30, 1996. 3
Statements of Operations for the Three-Month
Periods Ended September 30, 1996 and 1995. 4
Statements of Cash Flows
for the Three-Month Periods Ended September 30,
1996 and 1995. 5
Notes to Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-8
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 9
ITEM 6 - Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate, at cost. . . . . . . . . $17,498 $17,444
Other fixed assets, at cost . . . . . 136 136
Accumulated depreciation/
amortization . . . . . . . . . . . . (5,349) (5,215)
-------- --------
12,285 12,365
Cash. . . . . . . . . . . . . . . . . 36 55
Rents and other receivables . . . . . 93 145
Prepaid expenses and other
assets . . . . . . . . . . . . . . . 199 197
-------- --------
Total assets. . . . . . . . . . $12,613 $12,762
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . $10,614 $10,739
Accounts payable. . . . . . . . . . . 158 136
Due to Versar . . . . . . . . . . . . 181 182
Accrued salaries. . . . . . . . . . . 23 30
Deferred income taxes . . . . . . . . 1,756 1,756
Tenant security deposits. . . . . . . 434 456
Other liabilities . . . . . . . . . . 239 260
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Total liabilities . . . . . . . 13,405 13,559
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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 September 30,
and June 30, 1996. . . . . . . . . . 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, 1996. . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . (1,542) (1,547)
-------- --------
Total stockholders'
deficit. . . . . . . . . . . . (792) (797)
-------- --------
Total liabilities and
stockholders' deficit. . . . . $12,613 $12,762
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended September 30,
---------------------------
1996 1995
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<S> <C> <C>
Real estate rental revenue . . . . . $ 725 $ 696
Real estate expenses . . . . . . . . 311 338
-------- --------
414 358
Depreciation/amortization. . . . . . 152 154
General and administrative . . . . . 23 24
-------- --------
Income from real estate. . . . . . . 239 180
Interest expense . . . . . . . . . . 214 263
-------- --------
Net income (loss) before
income taxes. . . . . . . . . . . . 25 (83)
Income taxes . . . . . . . . . . . . --- ---
-------- --------
Net income (loss). . . . . . . . . . 25 (83)
Dividends on preferred stock . . . . 20 ---
-------- --------
Net income (loss) applicable
to common stock . . . . . . . . . . $ 5 $ (83)
======== ========
Net income (loss) per share
applicable to common stock. . . . . $ --- $ (.02)
======== ========
Weighted average number of
shares outstanding. . . . . . . . . 4,573 4,573
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Three-Month Periods
Ended September 30,
1996 1995
-------- --------
Cash flows from operating activities
Net income (loss) applicable to
common stock. . . . . . . . . . . . . $ 5 $ (83)
Adjustments to reconcile net
income (loss) applicable to
common stock to net cash provided
by operating activities
Depreciation/amortization. . . . . . 152 154
Decrease in rents and other
receivables . . . . . . . . . . . . 53 11
Increase in prepaid and other
assets. . . . . . . . . . . . . . . (21) (22)
Increase (decrease) in accounts
payable . . . . . . . . . . . . . . 22 (11)
Decrease in accrued salaries . . . . (7) (5)
Decrease in other liabilities. . . . (23) (41)
-------- --------
Net cash provided by operating
activities. . . . . . . . . . . . . . . 181 3
-------- --------
Cash flow from investing activities
Improvements to real estate . . . . . . (54) (29)
-------- --------
Cash flow from financing activities
Mortgage principal payments . . . . . . (125) (345)
(Payment to) proceeds from
Versar, net. . . . . . . . . . . . . . (1) 371
Payment of dividend on preferred
stock. . . . . . . . . . . . . . . . . (20) ---
-------- --------
Net cash flow (used in) provided by
financing activities. . . . . . . . . . (146) 26
-------- --------
Net decrease in cash . . . . . . . . . . (19) 0
Cash at beginning of period. . . . . . . 55 3
-------- --------
Cash at end of period. . . . . . . . . . $ 36 $ 3
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the
period for Interest . . . . . . . . . $ 272 $ 260
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 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, 1996 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, 1996 and the results of
operations for the three-month periods ended September 30, 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.
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.
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. Revenue generated from the largest tenant,
Versar, Inc., was $176,000 for the first quarter of fiscal year 1997 compared to
the $285,000 in the same period last year.
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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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 (loss) applicable to common stock per share: Net income (loss)
applicable to common stock per share, is computed by dividing net income (loss)
applicable to common stock 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. On July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 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.
Impairment of Long-Lived Assets: In March 1995, the Financial Accounting
Standard Board issued 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 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 on July 1, 1996 did not 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
First Quarter Comparison for Fiscal Year 1997 and 1996
Real estate rental revenue in the first quarter of fiscal year 1997
increased by $29,000 (4%) compared to the first quarter of fiscal year 1996.
The increase is attributable to existing tenants leasing additional office space
and rent escalations.
Real estate expenses in the first quarter of fiscal year 1997 decreased by
$27,000 (8%) compared to the first quarter of fiscal year 1996. The decrease is
due to lower third party pass through costs associated with the tenant requested
improvements in the first quarter of fiscal year 1997.
Depreciation/amortization for the first quarter of fiscal year 1997 was
$2,000 (1%) lower than the $154,000 reported in fiscal year 1996. The decrease
is due to fully amortized assets that were placed in service in prior years.
General and administrative expense in the first quarter of fiscal year 1997
of $23,000 remained at the same level as in the first quarter of fiscal year
1996.
Interest expense for the first quarter of fiscal year 1997 was $49,000
(19%) lower than that reported in the first quarter of fiscal year 1996. The
decrease is due to therefinancing of mortgage debt, which took place in the
third quarter of fiscal year 1996 at lower interest rates.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Preferred stock dividends for the first quarter of fiscal year 1997 were
$20,000.
The net income applicable to common stock for the first quarter of fiscal
year 1997 was $5,000 compared to the net loss applicable to common stock of
$83,000 in the same time last year. The improvement in earnings was due to
higher real estate rental income, lower real estate costs, and lower interest
expenses as mentioned above.
Liquidity and Capital Resources
Cash flow provided by operating activities was $181,000 for the first
quarter of fiscal year 1997 compared to the $3,000 for the same period last
year. The improved net income and the collection of accounts receivables
resulted higher net cash provided by operating activities.
Sarnia is financed through a first mortgage of $9 million with I.D.S. Life
Insurance Company at the fixed rate of 7.75% which is being amortized over
twenty-two years and with a balloon payment due in 2003. Sarnia also has a
second mortgage of $500,000 with the Riggs National Bank at the prime rate
reported in the Wall Street Journal plus 2% (currently 10.25%) payable in 12
equal monthly installments. On June 30, 1996, the maturity date of the second
mortgage was extended to July 1, 1997. Sarnia also has a $1.5 million term loan
with the Riggs National Bank at the prime rate reported in the Wall Street
Journal plus 1% (currently 9.25%). The term loan is amortized over seven years
payable in 66 equal monthly installments through 2003 starting in July 1997. In
1996, Sarnia issued $750,000 of Series A Cumulative Convertible Preferred Stock
to a group of private investors.
Sarnia expects that it will require $80,000 for capital expenditures to be
made during fiscal year 1997. It is anticipated that of such $80,000,
approximately $50,000 will be used for remodeling vacant space, and
approximately $30,000 will be used for other miscellaneous capital expenditures.
Management believes that funds generated from rents should be sufficient to meet
Sarnia's operating needs, including capital expenditures. Versar is not
required to support Sarnia's operations other than guaranteeing the $1.5 million
term loan as discussed above.
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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Sarnia is not a party to any litigation.
Item 6 - Exhibits and Reports on Form 8-K.
(A) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedules
(B) Reports on Form 8-K
None
9
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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: November 13, 1996
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 93
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 328
<PP&E> 17,634
<DEPRECIATION> 5,349
<TOTAL-ASSETS> 12,613
<CURRENT-LIABILITIES> 601
<BONDS> 10,614
0
750
<COMMON> 0
<OTHER-SE> (1,542)
<TOTAL-LIABILITY-AND-EQUITY> 12,613
<SALES> 0
<TOTAL-REVENUES> 725
<CGS> 0
<TOTAL-COSTS> 463
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> 5
<INCOME-TAX> 0
<INCOME-CONTINUING> 5
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
Exhibit 11
SARNIA CORPORATION
Statement Re: Computation of Per Share Earnings
(Unaudited - in thousands, except per share data)
For the Three-Month
Periods Ended September 30,
------------------------------
1996 1995
----------- -----------
Net income (loss) applicable
to common stock. . . . . . . . . . . $ 5 $ (83)
=========== ===========
Weighted average common
shares outstanding . . . . . . . . . 4,572,545 4,572,545
=========== ===========
PRIMARY EARNINGS PER SHARE:
Net income (loss) per
share - primary. . . . . . . . . . . $ 0.00 $ (0.02)
=========== ===========
Common shares from above. . . . . . . 4,572,545 4,572,545
Assumed exercise of options
(treasury stock method). . . . . . . 29,700 0
----------- -----------
4,602,245 4,572,545
=========== ===========
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) per
share - fully diluted. . . . . . . . $ 0.00 $ (0.02)
=========== ===========
Common shares from above. . . . . . . 4,572,545 4,572,545
Assumed exercise of options
(treasury stock method). . . . . . . 29,700 0
----------- -----------
4,602,245 4,572,545
=========== ===========
