<PAGE>
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, 1997 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 October 31, 1997
_____________________ _______________________________
no par value 4,572,545 shares
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SARNIA CORPORATION
INDEX TO FORM 10-Q
PAGE
____
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Balance Sheets as of
September 30, 1997 and June 30, 1997. 3
Statements of Operations for the Three-Month
Periods Ended September 30, 1997 and 1996. 4
Statements of Cash Flows
for the Three-Month Periods Ended September 30,
1997 and 1996. 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 9
ITEM 6 - Exhibits and Reports on Form 8-K 9
SIGNATURES 10
EXHIBIT 11 - Computation of Per Share Earnings 11
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
September 30, June 30,
1997 1997
_____________ _____________
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . $ 17,691 $ 17,690
Accumulated depreciation/amortization . . (5,876) (5,746)
_____________ _____________
11,815 11,944
Cash. . . . . . . . . . . . . . . . . . . 38 96
Rents and other receivables . . . . . . . 94 64
Prepaid expenses and other assets . . . . 229 204
_____________ _____________
Total assets. . . . . . . . . . . $ 12,176 $ 12,308
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . $ 10,148 $ 10,267
Accounts payable. . . . . . . . . . . . . 87 165
Due to Versar . . . . . . . . . . . . . . 169 169
Accrued salaries. . . . . . . . . . . . . 22 17
Deferred income taxes . . . . . . . . . . 1,776 1,756
Tenant security deposits. . . . . . . . . 439 468
Other liabilities . . . . . . . . . . . . 318 258
_____________ _____________
Total liabilities . . . . . . . . 12,959 13,100
_____________ _____________
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, 1997. . . . . . . . . . . . 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, 1997. . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . (1,533) (1,542)
_____________ _____________
Total stockholders' deficit. . . . (783) (792)
_____________ _____________
Total liabilities and
stockholders' deficit . . . . . . $ 12,176 $ 12,308
============= =============
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
Periods Ended September 30,
___________________________
1997 1996
___________ ___________
Real estate rental revenue . . . . . . . . $ 783 $ 725
Real estate expenses . . . . . . . . . . . 361 311
___________ ___________
422 414
Depreciation/amortization. . . . . . . . . 145 152
General and administrative . . . . . . . . 24 23
___________ ___________
Income from real estate. . . . . . . . . . 253 239
Interest expense . . . . . . . . . . . . . 204 214
___________ ___________
Net income before income taxes . . . . . . 49 25
Income taxes . . . . . . . . . . . . . . . 20 ---
___________ ___________
Net income . . . . . . . . . . . . . . . . 29 25
Dividends on preferred stock . . . . . . . 20 20
___________ ___________
Net income applicable to common stock. . . $ 9 $ 5
=========== ===========
Net income per share applicable to
common stock. . . . . . . . . . . . . . . $ --- $ ---
=========== ===========
Weighted average number of
shares outstanding. . . . . . . . . . . . 4,606 4,602
=========== ===========
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,
___________________________
1997 1996
___________ ___________
Cash flows from operating activities
Net income applicable to common
stock. . . . . . . . . . . . . . . . $ 9 $ 5
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization. . . . . 145 152
Deferred tax provision . . . . . . 20 ---
___________ ___________
Comparative funds from
operations . . . . . . . . . . . 174 157
Preferred stock dividends
accrued. . . . . . . . . . . . . 20 20
Provision for doubtful accounts
receivable . . . . . . . . . . . 5 ---
(Increase) decrease in rents and
other receivables. . . . . . . . (35) 53
Increase in prepaid and other
assets . . . . . . . . . . . . . (40) (21)
(Decrease) increase in accounts
payable. . . . . . . . . . . . . (78) 22
Increase (decrease) in accrued
salaries . . . . . . . . . . . . 5 (7)
Increase (decrease) in other
liabilities. . . . . . . . . . . 11 (23)
___________ ___________
Net cash provided by operating
activities . . . . . . . . . . . . . . 62 201
___________ ___________
Cash flow from investing activities
Improvements to real estate. . . . . . (1) (54)
___________ ___________
Cash flow from financing activities
Mortgage principal payments. . . . . . (119) (125)
Payment to Versar, net . . . . . . . . --- (1)
Payment of dividend on preferred
stock . . . . . . . . . . . . . . . . --- (40)
___________ ___________
Net cash flow used in
financing activities . . . . . . . . (119) (166)
___________ ___________
Net decrease in cash . . . . . . . . . . (58) (19)
Cash at beginning of period. . . . . . . 96 55
___________ ___________
Cash at end of period. . . . . . . . . . $ 38 $ 36
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
Interest. . . . . . . . . . . . . . $ 216 $ 272
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,
1997 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, 1997 and the results of operations
for the three-month periods ended September 30, 1997 and 1996.
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 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 in accordance with Statement of Financial
Accounting Statement No. 13, "Accounting for Leases" ("SFAS 13").
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 $269,000 for the first
quarter of fiscal year 1998 compared to the $259,000 in the same
period last year.
6
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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: Net income
per share applicable to common stock is computed by dividing net
income 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. The Company adopts 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, 1997, the
Company had approximately $2.3 million in deferred tax
liabilities, which was offset by $1.1 million of net operating
loss carryforwards. Due to the history of operating losses and
potential rent roll turnover in the year 2000, the Company has
established a valuation allowance of approximately $510,000. As
future rent rolls are solidified the valuation allowance will be
reduced and added into income. Future income before preferred
dividends will accrue income tax expense at an effective rate of
40%.
Impact of accounting standards: Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in October, 1995 and is
effective for fiscal year 1997. The Statement encourages, but
does not require, adoption of the fair value based method of
accounting for employee stock options and other stock
compensation plans. The Company has opted to continue to account
for its stock option plan in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The adoption of SFAS
123 will not have a material effect on the financial position of
the Company.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") in February, 1997. SFAS 128 requires a company to
present basic and diluted earnings per share amounts on the face
of the Statement of Operations. The Company is required to adopt
the provisions of the standard during the second quarter of 1998,
and when adopted, will require restatement of prior years'
earnings per share. The standard will not have a material impact
on historical earnings per share reported by 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 1998 and 1997
______________________________________________________
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, and the possibility of tenants continuing to renew
their leases. Forward-looking statements involve numerous risks
and uncertainties that could cause actual results to differ
7
<PAGE>
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
materially, including, but not limited to, the possibilities that
the demand for the Company's facilities may decline as a result
of possible changes in general and regional economic conditions
and the effects of competitive facilities and pricing; one or
more current or future claims made against the Company may result
in substantial liabilities; major equipment replacement 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 1998 increased by $58,000 (8%) compared to the first quarter
of fiscal year 1997. The increase is attributable to increased
occupancy rate and rent escalations.
Real estate expenses in the first quarter of fiscal year
1998 increased by $50,000 (16%) compared to the first quarter of
fiscal year 1997. The increase is due to higher real estate
taxes and operating expenses. The renovation of the buildings in
the past year coupled with the moderate appreciation of the real
estate property in the local area resulted in higher assessment
value of the buildings which lead to the increase in real estate
taxes. Higher occupancy rate attributed to higher operating
expenses in the area of janitorial services, maintenance and
repairs and utilities.
Depreciation/amortization for the first quarter of fiscal
year 1998 was $7,000 (5%) lower than the $152,000 reported in
fiscal year 1997. 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 1998 of $24,000 remained relatively at the same level
as in the first quarter of fiscal year 1997.
Interest expense for the first quarter of fiscal year 1998
was $10,000 (5%) lower than that reported in the first quarter of
fiscal year 1997. The decrease is due to the principal payments
in the past year.
Income taxes of $20,000 were recorded in the first quarter
of fiscal year 1998. The Company will record income tax expense
on earnings before preferred dividends at an effective rate of
40% (see Note B).
Preferred stock dividends for the first quarter of fiscal
year 1998 and 1997 were $20,000 for each of the quarters.
The net income applicable to common stock for the first
quarter of fiscal year 1998 was $9,000 compared to the net income
applicable to common stock of $5,000 in the same time last year.
The improvement in earnings was due to higher real estate rental
income and lower interest expense off-set by the income tax
expense as mentioned above.
Liquidity and Capital Resources
_______________________________
Cash flow provided by operating activities was $62,000 for
the first quarter of fiscal year 1998 compared to the $201,000
for the same period last year. Payments of accounts payables and
increased accounts receivables and other assets resulted lower
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 $1.5 million, five-year
term loan with the NationsBank, which will be fully amortized in June
8
<PAGE>
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
2002. The note is guaranteed by Versar, Inc. and bears interest
at the 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 1998. It is
anticipated that of such $75,000, approximately $40,000 will be
used for remodeling vacant space, and approximately $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.
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 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
________________________________
Charles I. Judkins, Jr.,
President and Chief Executive Officer
(duly authorized officer and
Principal Financial Officer)
Date: November 7, 1997
10
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<PAGE>
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,
1997 1996
___________ ___________
Net income applicable to common stock. . . . $ 9 $ 5
=========== ===========
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . 4,572,545 4,572,545
=========== ===========
PRIMARY EARNINGS PER SHARE:
Net income per share - primary . . . . . . . $ 0.00 $ 0.00
=========== ===========
Common shares from above . . . . . . . . . . 4,572,545 4,572,545
Assumed exercise of options (treasury
stock method) . . . . . . . . . . . . . . . 33,860 29,700
----------- -----------
4,606,405 4,602,245
=========== ===========
FULLY DILUTED EARNINGS PER SHARE:
Net income per share - fully diluted . . . . $ 0.00 $ 0.00
=========== ===========
Common shares from above . . . . . . . . . . 4,572,545 4,572,545
Assumed exercise of options (treasury
stock method) . . . . . . . . . . . . . . . 33,860 29,700
----------- -----------
4,606,405 4,602,245
=========== ===========
11
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 99
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 361
<PP&E> 17,691
<DEPRECIATION> 5,876
<TOTAL-ASSETS> 12,176
<CURRENT-LIABILITIES> 596
<BONDS> 0
0
750
<COMMON> 0
<OTHER-SE> (1,533)
<TOTAL-LIABILITY-AND-EQUITY> 12,176
<SALES> 0
<TOTAL-REVENUES> 783
<CGS> 0
<TOTAL-COSTS> 506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 204
<INCOME-PRETAX> 29
<INCOME-TAX> 20
<INCOME-CONTINUING> 9
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
