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, 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
_______________________________________________________________________________
(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, 1998
_____________________ _______________________________
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, 1997 and June 30, 1997. 3
Statements of Operations for the Three-Month and
Six-Month Periods Ended December 31, 1997 and 1996. 4
Statements of Cash Flows for the Six-Month
Periods Ended December 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 9
ITEM 4 - Submission of Matters to Vote of Stockholders 9
ITEM 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBIT 11 - Computation of Per Share Earnings 12
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
December 31, June 30,
1997 1997
____________ ___________
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . $ 17,691 $ 17,690
Accumulated depreciation/amortization . . (6 007) (5,746)
__________ __________
11,684 11,944
Cash. . . . . . . . . . . . . . . . . . . 59 96
Rents and other receivables . . . . . . . 114 64
Prepaid expenses and other assets . . . . 213 204
---------- ----------
Total assets . . . . . . . . . . . $ 12,070 $ 12,308
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . $ 10,029 $ 10,267
Accounts payable. . . . . . . . . . . . . 123 165
Due to Versar . . . . . . . . . . . . . . 169 169
Accrued salaries. . . . . . . . . . . . . 25 17
Deferred income taxes . . . . . . . . . . 1,800 1,756
Tenant security deposits. . . . . . . . . 435 468
Other liabilities . . . . . . . . . . . . 255 258
---------- ----------
Total liabilities. . . . . . . . . 12,836 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 December 31, and
June 30, 1997 . . . . . . . . . . . 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, 1997 . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . (1,516) (1,542)
__________ __________
Total stockholders' deficit . . . (766) (792)
__________ __________
Total liabilities and
stockholders'deficit . . . . . . $ 12,070 $ 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 For the Six-Month
Periods Ended December 31, Periods Ended December 31,
1997 1996 1997 1996
__________ __________ __________ __________
Real estate rental
revenue: . . . . . . . $ 750 $ 716 $ 1,533 $ 1,441
Real estate expenses. . 324 317 685 629
__________ __________ __________ __________
426 399 848 812
Depreciation/
amortization . . . . . 143 155 288 306
General and
administrative . . . . 22 23 46 47
__________ __________ __________ __________
Income from real
estate . . . . . . . . 261 221 514 459
Interest expense. . . . 200 211 404 425
__________ __________ __________ __________
Net income before
income taxes. . . . . 61 10 110 34
Income taxes. . . . . . 24 --- 44 ---
__________ __________ __________ __________
Net income. . . . . . . 37 10 66 34
Dividends on preferred
stock. . . . . . . . . 20 20 40 39
__________ __________ __________ __________
Net income (loss)
applicable to common
stock. . . . . . . . . $ 17 $ (10) $ 26 $ (5)
========== ========== ========== ==========
Net income (loss) per
share applicable to
common stock . . . . . $ --- $ --- $ --- $ ---
========== ========== ========== ==========
Weighted average
number of shares
outstanding. . . . . . 4,579 4,573 4,646 4,573
========== ========== ========== ==========
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,
___________________________
1997 1996
_________ _________
Cash flows from operating activities
Net income (loss) applicable to common
stock. . . . . . . . . . . . . . . . . . . . $ 26 $ (5)
Adjustments to reconcile net income
(loss) applicable to common stock
to net cash provided by operating
activities
Depreciation/amortization . . . . . . . . 288 306
Deferred tax provision. . . . . . . . . . 44 ---
_________ _________
Comparative funds from operations. . . . 358 301
Preferred stock dividends accrued . . . . 40 39
Provision for doubtful accounts
receivable . . . . . . . . . . . . . . . 5 ---
(Increase) decrease in rents and
other receivables. . . . . . . . . . . . (55) 78
Increase in prepaid and other assets. . . (36) (40)
Decrease in accounts payable. . . . . . . (42) (13)
Increase (decrease) in accrued
salaries . . . . . . . . . . . . . . . . 8 (2)
(Decrease) increase in other
liabilities. . . . . . . . . . . . . . . (37) 16
_________ _________
Net cash provided by operating activities. . . 241 379
_________ _________
Cash flow from investing activities
Improvements to real estate . . . . . . . . . (1) (57)
_________ _________
Cash flow from financing activities
Mortgage principal payments. . . . . . . . . (238) (238)
Payment to Versar, net . . . . . . . . . . . --- (4)
Payment of dividend on preferred stock . . . (39) (59)
_________ _________
Net cash flow used in financing activities . . (277) (301)
_________ _________
Net (decrease) increase in cash. . . . . . . . (37) 21
Cash at beginning of period. . . . . . . . . . 96 55
_________ _________
Cash at end of period. . . . . . . . . . . . . $ 59 $ 76
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for Interest . . $ 417 $ 484
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.
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 December 31, 1997 and the results of
operations for the six-month periods ended December 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.
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. 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
Statement No. 13, "Accounting for Leases" ("SFAS 13"). Provisions for any
anticipated lease losses are made in the period that the losses become
evident.
6
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
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 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, 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 are expected to require 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 has not had 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 adopted
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
_____________________
Second Quarter Comparison for Fiscal Year 1998 and 1997
_______________________________________________________
Real estate rental revenue in the second quarter of fiscal year 1998
increased by $34,000 (5%) compared to the second quarter of fiscal year 1997.
The increase is attributable to rent escalations for existing tenants.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Real estate expenses in the second quarter of fiscal year 1998 increased
by $7,000 (2%) compared to the second quarter of fiscal year 1997. The
increase is due to slightly higher operating expenses as a result of increased
building occupancy rates.
Depreciation/amortization for the second quarter of fiscal year 1997 was
$12,000 lower than the $155,000 reported in fiscal year 1997. The decrease is
due to fully amortized assets that were placed in service in prior years
outpaced the new assets that were placed in service in current years.
General and administrative expense in the second quarter of fiscal year
1998 of $22,000 was slightly less than the second quarter of fiscal year 1997.
Interest expense for the second quarter of fiscal year 1998 was $11,000
(5%) lower than that reported in the second 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 second quarter of fiscal year 1998 and
1997 were $20,000, respectively.
The net income applicable to common stock for the second quarter of
fiscal year 1998 was $17,000 compared to the net loss applicable to common
stock of $10,000 in the same time last year. The increase in net income was
due to higher real estate rental income, lower depreciation and interest
expenses.
Six Month Comparison for Fiscal Year 1998 and 1997
__________________________________________________
Real estate rental income for the six months of fiscal year 1998 was
$1,533,000, an increase of $93,000 (6%) compared to the rental income of
$1,441,000 a year ago. The increase is attributable to new tenants and rent
escalations.
Real estate expenses in the first six months of fiscal year 1998
increased $56,000 (9%) compared to the real estate expense in the first six
months of fiscal year 1997. The increase is due to higher real estate taxes
and operating expenses as a result of improved property values and higher rent
rolls.
Depreciation/amortization for the first six months of fiscal year 1998
decreased by $18,000 (6%) 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
$197,000 and the remainder $91,000 being related to tenant improvements and
brokerage fees.
General and administrative expense for the six months of fiscal year
1998 of $46,000 was $1,000 lower than that of a year ago. The decrease is due
to lower insurance expense when compared to fiscal year 1997.
Interest expense for the first six months of fiscal year 1998 was
$21,000 (5%) lower than that reported in the first six months of fiscal year
1997. The decrease is due to lower outstanding debt and the continuous
principal payment throughout the year.
Preferred stock dividends for the first six months of fiscal year 1998
was $40,000, slightly higher than the $39,000 compared to the first six months
of fiscal year 1997.
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The net income applicable to common stock for the first six months was
$26,000, an increase of $31,000 when compared to the net loss of $5,000 for
the comparable period last year. The decrease is primarily attributable to
higher rental income, lower interest and depreciation expenses as mentioned
above.
Liquidity and Capital Resources
_______________________________
Cash flow provided by operating activities was $241,000 for the first
six months of fiscal year 1998 compared to the $379,000 for the same period
last year. Payments of accounts payables and other liabilities 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 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 4 - Submission of Matters to Vote of Stockholders
The Company's Annual Meeting of Stockholders was held on November 12,
1997. The matters voted on at the Annual meeting were as follows:
9
<PAGE>
Item 4 - Submission of Matters to Vote of Stockholders (continued)
(1) The Election of Directors
The nomination of Michael Markels, Jr. and Thomas Hotz to
serve as directors of the Company was approved as indicated
below:
Vote Withheld
for Authority
_________ _________
Michael Markels, Jr. 3,531,369 15,900
Thomas Hotz 3,493,389 53,880
(2) The amendment of Sarnia Corporation 1994 Stock Option Plan:
For Against Abstain
_________ _______ _______
2,215,892 307,244 22,580
(3) Ratification of the Appointment of Arthur Andersen LLP as the
Independent Accountants for fiscal year 1998. Arthur Andersen
was ratified as the Company's independent accountants as follows:
For Against Abstain
_________ _______ _______
3,525,081 18,524 3,664
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
10
<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 9, 1998
11
<PAGE>
Exhibit 11
SARNIA CORPORATION
Statement Re: Computation of Per Share Earnings
(Unaudited - in thousands, except per share data)
For the Three-Month For the Six-Month
Periods Ended December 31, Periods Ended December 31,
__________________________ __________________________
1997 1996 1997 1996
__________ __________ __________ __________
Net income (loss)
applicable to
common stock. . . . . . . . $ 17 $ (10) $ 26 $ (5)
========== ========== ========== ==========
Weighted average
common shares
outstanding . . . . . . . . 4,572,545 4,572,545 4,572,545 4,572,545
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net income per share . . . . $ 0.00 $ 0.00 $ 0.00 $ 0.00
========== ========== ========== ==========
Common shares from above . . 4,572,545 4,572,545 4,572,545 4,572,545
Assumed exercise of options
(treasury stock method) . . 7,169 --- 73,281 ---
__________ __________ __________ __________
4,579,714 4,572,545 4,645,826 4,572,545
========== ========== ========== ==========
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 59
<SECURITIES> 0
<RECEIVABLES> 114
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 386
<PP&E> 17,691
<DEPRECIATION> 6,007
<TOTAL-ASSETS> 12,070
<CURRENT-LIABILITIES> 572
<BONDS> 10,029
0
750
<COMMON> 0
<OTHER-SE> (1,516)
<TOTAL-LIABILITY-AND-EQUITY> 12,070
<SALES> 0
<TOTAL-REVENUES> 1,533
<CGS> 0
<TOTAL-COSTS> 973
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404
<INCOME-PRETAX> 26
<INCOME-TAX> 0
<INCOME-CONTINUING> 26
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
