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, 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 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 April 30, 1997
--------------------- -----------------------------
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
March 31, 1997 and June 30, 1996. 3
Statements of Operations for the Three-Month
and Nine-Month Periods Ended March 31, 1997
and 1996. 4
Statements of Cash Flows for the Nine-Month
Periods Ended March 31, 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 10
ITEM 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate, at cost . . . . . . . $ 17,526 $ 17,444
Other fixed assets, at cost. . . . 136 136
Accumulated depreciation/
amortization . . . . . . . . . . (5,611) (5,215)
---------- ----------
12,051 12,365
Cash . . . . . . . . . . . . . . . 18 55
Rents and other receivables. . . . 15 145
Prepaid expenses and other
assets . . . . . . . . . . . . . 194 197
Total assets. . . . . . $ 12,278 $ 12,762
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages. . . . . . . . . . . . . $ 10,387 $ 10,739
Accounts payable . . . . . . . . . 106 136
Due to Versar. . . . . . . . . . . 175 182
Accrued salaries . . . . . . . . . 21 30
Deferred income taxes. . . . . . . 1,756 1,756
Tenant security deposits . . . . . 436 456
Other liabilities. . . . . . . . . 203 260
Total liabilities . . . 13,084 13,559
--------- ---------
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, 1997
and June 30, 1996. . . . . . . . 750 750
Common stock, no par value;
20,000,000 shares authorized;
4,572,545 shares issued and
outstanding at March 31, 1997
and June 30, 1996. . . . . . . . --- ---
Accumulated deficit . . . . . . . (1,556) (1,547)
---------- ----------
Total stockholders'
deficit . . . . . . . (806) (797)
---------- ----------
Total liabilities
and stockholders'
deficit . . . . . . . $ 12,278 $ 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 For the Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Real estate rental revenue: . . . $ 724 $ 685 $ 2,165 $ 2,053
Real estate expenses. . . . . . . 324 308 952 944
--------- --------- --------- ---------
400 369 1,213 1,101
Depreciation/amortization . . . . 154 155 460 465
General and administrative. . . . 23 24 70 72
--------- --------- --------- ---------
Income from real estate . . . . . 223 190 683 564
Interest expense. . . . . . . . . 208 235 633 752
Net income (loss) before
income taxes . . . . . . . . . . 15 (45) 50 (188)
Income taxes. . . . . . . . . . . --- --- --- ---
--------- --------- --------- ---------
Net income (loss) . . . . . . . . 15 (45) 50 (188)
Dividends on preferred stock. . . 19 8 59 8
--------- --------- --------- ---------
Net loss applicable
to common stock. . . . . . . . . $ (4) $ (53) $ (9) $ (196)
========= ========= ========= =========
Net loss per share
applicable to common stock . . . $ --- $ (.01) $ --- $ (.04)
========= ========= ========= =========
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
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
For the Nine-Month Periods
Ended March 31,
--------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities
Net loss applicable to common
stock. . . . . . . . . . . . . . . . . . . . $ (9) $ (196)
Adjustments to reconcile net
loss applicable to common
stock to net cash provided
by operating activities
Depreciation/amortization . . . . . . . . . 460 465
--------- ---------
Subtotal . . . . . . . . . . . . . . 451 269
Decrease in rents and other
receivables. . . . . . . . . . . . . . . . 96 15
(Increase) decrease in prepaid and other
assets . . . . . . . . . . . . . . . . . . (52) 11
(Decrease) increase in accounts
payable. . . . . . . . . . . . . . . . . . (30) 45
Decrease in accrued salaries. . . . . . . . (9) (9)
Decrease in other liabilities . . . . . . . (18) (1)
--------- ---------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . 438 330
--------- ---------
Cash flow from investing activities
Improvements to real estate. . . . . . . . . . (57) (43)
--------- ---------
Cash flow from financing activities
Mortgage principal payments. . . . . . . . . . --- (12,062)
Refinanced new mortgage. . . . . . . . . . . . --- 11,000
Principal payments on new mortgage . . . . . . (352) (110)
Payment to Versar, net . . . . . . . . . . . . (7) (107)
Issuance of preferred stock. . . . . . . . . . --- 750
Deposit received . . . . . . . . . . . . . . . --- 250
Payment of dividend on preferred stock . . . . (59) (8)
--------- ---------
Net cash flow used in financing
activities . . . . . . . . . . . . . . . . . . (418) (287)
--------- ---------
Net decrease in cash. . . . . . . . . . . . . . (37) 0
Cash at beginning of period . . . . . . . . . . 55 3
--------- ---------
Cash at end of period . . . . . . . . . . . . . $ 18 $ 3
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . $ 693 $ 828
</TABLE>
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 March 31, 1997 and the results of
operations for the nine-month periods ended March 31, 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.
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 $777,000 for the nine-month period of fiscal year
1997 compared to the $836,000 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 loss per share applicable to common stock: Net loss per share applicable
to common stock is computed by dividing net 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. The Company follows 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 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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997.
SFAS 128 requires a company to present basic and diluted earnings per share
amounts for net income on the face of the consolidated statement of operations.
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during this period. Diluted
earnings per share takes into consideration the effect of all potential
dilutive common shares that were outstanding during the period. The statement
is effective for period ending after December 15, 1997; earlier application is
not permitted.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary Statement Regarding 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 costs controls and reductions, the expected
resolution of delays in billing of certain projects, the possible impact of
current and future claims against the Company based upon negligence and other
theories of liability, and the possibility of the Company making acquisitions
during the next 12 to 18 months. 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
industry 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.
7
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Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations
- ---------------------
Third Quarter Comparison for Fiscal Year 1997 and 1996
- ------------------------------------------------------
Real estate rental revenue in the third quarter of fiscal year 1997
increased by $39,000 (6%) compared to the third quarter of fiscal year 1996.
The increase is attributable to existing tenants leasing additional office
space and rent escalations.
Real estate expenses in the third quarter of fiscal year 1997 increased
by $16,000 (5%) compared to the third quarter of fiscal year 1996. The
increase is due to higher real estate tax expense and higher operating
expenses as a result of increased building occupancy rates.
Depreciation/amortization for the third quarter of fiscal year 1997 was
$1,000 lower than the $155,000 reported in fiscal year 1996. The decrease is
due to fully amortized assets that were placed in service in prior years
outpacing the new assets that were placed in service in current years.
Depreciation/amortization expense related to the buildings was $98,000 with
the remainder $56,000 being related to tenant improvements and brokerage fee.
General and administrative expense in the third quarter of fiscal year
1997 of $23,000 remained at approximately the same level as in the third
quarter of fiscal year 1996.
Interest expense for the third quarter of fiscal year 1997 was $27,000
(11%) lower than that reported in the third quarter of fiscal year 1996. The
decrease is due to the refinancing of mortgage debt, which took place in the
third quarter of fiscal year 1996 at lower interest rates.
Preferred stock dividends for the third quarter of fiscal year 1997 were
$19,000 compared to the $8,000 recorded in fiscal year 1996. The preferred
stock was issued in late January 1996 and the $8,000 represented a partial
quarter worth of dividends.
The net loss applicable to common stock for the third quarter of fiscal
year 1997 was $4,000 compared to the net loss applicable to common stock of
$53,000 in the same time last year. The decrease in net loss was due to
higher real estate rental income off-set by higher real estate expense and
lower interest expenses as mentioned above.
Nine Month Comparison for Fiscal Year 1997 and 1996
- ---------------------------------------------------
Real estate rental income for the nine months of fiscal year 1997 was
$2,165,000, an increase of $112,000 (5%) compared to the rental income of
$2,053,000 a year ago. The increase is attributable to existing tenants
leasing additional space, new tenants, and rent escalations.
Real estate expenses in the first nine months of fiscal year 1997
increased $8,000 (1%) compared to the real estate expense in the first nine
months of fiscal year 1996. The increase is attributable to the increase in
real estate tax off-set by the decrease in legal expenses related to debt
refinance in fiscal year 1996.
Depreciation/amortization for the first nine months of fiscal year 1997
decreased by $5,000 (1%) compared to the same period last year. The decrease
is due to assets that were placed in service in prior years which were fully
amortized. Depreciation/amortization expense related to the buildings was
$295,000 and the remainder $165,000 being related to tenant improvements and
brokerage fee.
8
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Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
General and administrative expense for the nine months of fiscal year
1997 of $70,000 was $2,000 lower than that of a year ago. The decrease is due
to lower insurance expense when compared to fiscal year 1996.
Interest expense for the first nine months was $119,000 (16%) lower than
that reported in the first nine months of fiscal year 1996. The decrease is
due to the refinancing of debt at lower interest rate and the continuous
principal payment throughout the year.
Preferred stock dividends for the first nine months of fiscal year 1997
were $59,000 compared to $8,000 for the same period last year. The $8,000
represented the first two months of the preferred dividends since the stock
issuance in late January 1996.
The net loss applicable to common stock for the first nine months was
$9,000, a decrease of $187,000 when compared to the net loss of $196,000 for
the comparable period last year. The decrease is primarily attributable to
higher rental income, controlled real estate costs and lower interest expense
as mentioned above.
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operating activities was $438,000 for the nine-
month period of fiscal year 1997 compared to the $330,000 for the same period
last year. The decrease in net loss and the collection of accounts receivables
in higher net cash provided by operating activities. Earnings before interest,
taxes, depreciation and amortization was $1,143,000 as compared to $1,029,000
for the same period last year.
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 10.50%) 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 9.50%). 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 $35,000 for capital expenditures to
be made in the remainder of fiscal year 1997. It is anticipated that of such
$35,000, approximately $20,000 will be used for remodeling vacant space, and
approximately $15,000 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.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Sarnia is a party to various legal actions that arise in the normal course
of business. The Company believes that an ultimate unfavorable resolution of
these other legal actions will not have a material adverse effect on its
financial condition and results of operations.
Item 6 - Exhibits and Reports on Form 8-K.
(A) Exhibits
Exhibit 27 - Financial Data Schedules
(B) Reports on Form 8-K
None
<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: May 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 15
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 227
<PP&E> 17,662
<DEPRECIATION> 5,611
<TOTAL-ASSETS> 12,278
<CURRENT-LIABILITIES> 505
<BONDS> 10,387
0
750
<COMMON> 0
<OTHER-SE> (1,556)
<TOTAL-LIABILITY-AND-EQUITY> 12,278
<SALES> 0
<TOTAL-REVENUES> 2,165
<CGS> 0
<TOTAL-COSTS> 1,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633
<INCOME-PRETAX> (9)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
