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, 1998 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 April 30, 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
March 31, 1998 and June 30, 1997. 3
Statements of Operations for the Three-Month and
Nine-Month Periods Ended March 31, 1998 and 1997. 4
Statements of Cash Flows for the Nine-Month
Periods Ended March 31, 1998 and 1997. 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
EXHIBIT 11 - Computation of Per Share Earnings 12
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
March 31, June 30,
1998 1997
--------- ---------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . $ 17,691 $ 17,690
Accumulated depreciation/amortization . . . . (6,137) (5,746)
---------- ----------
11,554 11,944
Cash. . . . . . . . . . . . . . . . . . . . . 63 96
Rents and other receivables . . . . . . . . . 137 64
Prepaid expenses and other assets . . . . . . 213 204
---------- ----------
Total assets. . . . . . . . . . . . . $ 11,967 $ 12,308
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . . . $ 9,908 $ 10,267
Accounts payable. . . . . . . . . . . . . . . 86 165
Due to Versar . . . . . . . . . . . . . . . . 168 169
Accrued salaries. . . . . . . . . . . . . . . 24 17
Deferred income taxes . . . . . . . . . . . . 1,819 1,756
Tenant security deposits. . . . . . . . . . . 436 468
Other liabilities . . . . . . . . . . . . . . 283 258
---------- ----------
Total liabilities . . . . . . . . . . 12,724 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 March 31, 1998 and June 30,
1997. . . . . . . . . . . . . . . . . . . 750 750
Common stock, no par value; 20,000,000
shares authorized; 4,572,545 shares
issued and outstanding at March 31, 1998
and June 30, 1997 . . . . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . . . . (1,507) (1,542)
---------- ----------
Total stockholders' deficit . . . . . (757) (792)
---------- ----------
Total liabilities and stockholders'
deficit. . . . . . . . . . . . . . . $ 11,967 $ 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
1998 1997 1998 1997
--------- --------- --------- ---------
Real estate rental
revenue: . . . . . . . . . . $ 782 $ 724 $ 2,315 $ 2,165
Real estate expenses. . . . . 372 324 1,057 952
--------- --------- --------- ---------
410 400 1,258 1,213
Depreciation/amortization . . 143 154 431 460
General and administrative. . 24 23 71 70
--------- --------- --------- ---------
Income from real estate . . . 243 223 756 683
Interest expense. . . . . . . 196 208 599 633
--------- --------- --------- ---------
Net income before income
taxes. . . . . . . . . . . . 47 15 157 50
Income taxes. . . . . . . . . 19 --- 63 ---
--------- --------- --------- ---------
Net income. . . . . . . . . . 28 15 94 50
Dividends on preferred
stock. . . . . . . . . . . . 19 19 59 59
--------- --------- --------- ---------
Net income (loss) applicable
to common stock. . . . . . . $ 9 $ (4) $ 35 $ (9)
========= ========= ========= =========
Net income (loss) per share
applicable to common stock
- basic. . . . . . . . . . . $ --- $ --- $ --- $ ---
========= ========= ========= =========
Net income (loss) per share
applicable to common stock
- diluted. . . . . . . . . . $ --- $ --- $ --- $ ---
========= ========= ========= =========
Weighted average number of
shares outstanding . . . . . 4,601 4,573 4,584 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 Nine-Month Periods
Ended March 31,
--------------------------
1998 1997
----------- -----------
Cash flows from operating activities
Net income (loss) applicable to common
stock. . . . . . . . . . . . . . . . . . . . $ 35 $ (9)
Adjustments to reconcile net income (loss)
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization . . . . . . . . 431 460
Deferred tax provision. . . . . . . . . . 63 ---
----------- -----------
Comparative funds from operations. . . . 529 451
Preferred stock dividends accrued . . . . 59 59
Provision for doubtful accounts
receivable . . . . . . . . . . . . . . . 5 ---
(Increase) decrease in rents and other
receivables. . . . . . . . . . . . . . . (78) 96
Increase in prepaid and other assets. . . (49) (52)
Decrease in accounts payable. . . . . . . (79) (30)
Increase (decrease) in accrued salaries . 7 (9)
Decrease in other liabilities . . . . . . (7) (57)
----------- -----------
Net cash provided by operating activities. . . 387 458
----------- -----------
Cash flow from investing activities
Improvements to real estate. . . . . . . . . (1) (57)
----------- -----------
Cash flow from financing activities
Mortgage principal payments. . . . . . . . . (359) (352)
Payment to Versar, net . . . . . . . . . . . (1) (7)
Payment of dividend on preferred stock . . . (59) (79)
----------- -----------
Net cash flow used in
financing activities . . . . . . . . . . . . (419) (438)
----------- -----------
Net decrease in cash . . . . . . . . . . . . . (33) (37)
Cash at beginning of period. . . . . . . . . . 96 55
----------- -----------
Cash at end of period. . . . . . . . . . . . . $ 63 $ 18
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . $ 614 $ 693
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 March 31, 1998 and the results of
operations for the nine-month periods ended March 31, 1998 and 1997. 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 restated prior years' earnings
per share. The standard does 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
- ---------------------
Third Quarter Comparison for Fiscal Year 1998 and 1997
- ------------------------------------------------------
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 materially, including, but not limited
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
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 third quarter of fiscal year 1998
increased by $58,000 (8%) compared to the third quarter of fiscal year 1997.
The increase is attributable to rent escalations for existing tenants and
increased occupancy rates.
Real estate expenses in the third quarter of fiscal year 1998 increased
by $48,000 (15%) compared to the third quarter of fiscal year 1997. The
increase is due to higher operating expenses as a result of increased building
occupancy rates.
Depreciation/amortization for the third quarter of fiscal year 1998 was
$11,000 (7%) lower when compared to the third quarter of fiscal year 1997.
The decrease is due to assets that were placed in service in prior years which
were fully amortized. There were no major capital expenditures in the first
three quarters of fiscal year 1998.
General and administrative expense in the third quarter of fiscal year
1998 of $24,000 remained at approximately the same level as in the third
quarter of last year.
Interest expense for the third quarter of fiscal year 1998 was $12,000
(6%) lower than that reported in the third quarter of fiscal year 1997. 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 1998 and
1997 were $19,000, respectively.
The net income applicable to common stock for the third quarter of
fiscal year 1998 was $9,000 compared to the net loss applicable to common
stock of $4,000 in the same time last year. The increase in net income was
due to higher real estate rental income, lower depreciation and interest
expenses.
Nine Month Comparison for Fiscal Year 1998 and 1997
- ---------------------------------------------------
Real estate rental income for the nine months of fiscal year 1998 was
$2,315,000, an increase of $150,000 (7%) compared to the rental income of
$2,165,000 a year ago. The increase is attributable to new tenants and rent
escalations.
Real estate expenses in the first nine months of fiscal year 1998
increased $105,000 (11%) compared to the real estate expense in the first nine
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 nine months of fiscal year 1998
decreased by $29,000 (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
$295,000 and the remainder $136,000 being related to tenant improvements and
brokerage fees.
General and administrative expense for the nine months of fiscal year
1998 of $71,000 was $1,000 lower than that of a year ago. The decrease is due
to lower insurance expense when compared to fiscal year 1997.
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Interest expense for the first nine months of fiscal year 1998 was
$34,000 (5%) lower than that reported in the first nine 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 nine months of fiscal year 1998
and 1997 were $59,000, respectively.
The net income applicable to common stock for the first nine months was
$35,000, an increase of $44,000 when compared to the net loss of $9,000 for
the comparable period last year. The improved net income 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 $387,000 for the first
nine months of fiscal year 1998 compared to the $458,000 for the same period
last year. Increase in other receivables and payments of accounts payables
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. The carrying
value is $1,275,000 at March 31, 1998. Sarnia also has a $1.5 million, five-
year term loan with the NationsBank, which will be fully amortized in June
2002. The NationsBank 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 $15,000 for miscellaneous capital
expenditures to be made during fiscal year 1998. 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.
Year 2000
- ---------
Certain computer programs have been written using two digits rather than
four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000.
This, in turn, could result in major system failures and in miscalculations,
and is generally referred to as the "Year 2000" problem. Sarnia is in the
process of evaluating the different options that are available to upgrade the
Company's existing data processing and financial reporting software
applications to be Year 2000 compliant. Presently, Sarnia does not believe
that Year 2000 compliance will result in any material investments, nor does
Sarnia anticipate that the Year 2000 problem will have material adverse
effects on the business operations or financial performance of Sarnia. In
addition, Sarnia is not aware of any Year 2000 problems of its customers,
suppliers or network affiliates that will have a material adverse effect on
the business, operations or financial performance of Sarnia. There can be no
assurance, however, that the year 2000 problem will not adversely affect
Sarnia and its business.
9
<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
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: May 13, 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 Nine-Month
Periods Ended March 31, Periods Ended March 31,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net income (loss)
applicable to common
stock $ 9 $ (4) $ 35 $ (9)
=========== =========== =========== ===========
Weighted average common
shares outstanding 4,572,545 4,572,545 4,572,545 4,572,545
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net income (loss) per share
applicable to common stock
- basic . . . . . . . . . . $ --- $ --- $ --- $ ---
=========== =========== =========== ===========
Common shares from above . . 4,572,545 4,572,545 4,572,545 4,572,545
Assumed exercise of options
(treasury stock method) . . 28,582 --- 11,765 ---
----------- ----------- ----------- -----------
4,601,127 4,572,545 4,584,310 4,572,545
=========== =========== =========== ===========
Net income (loss) per share
applicable to common stock
- diluted . . . . . . . . . $ --- $ --- $ --- $ ---
=========== =========== =========== ===========
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 63
<SECURITIES> 0
<RECEIVABLES> 142
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 413
<PP&E> 17,691
<DEPRECIATION> 6,137
<TOTAL-ASSETS> 11,967
<CURRENT-LIABILITIES> 561
<BONDS> 9,908
0
750
<COMMON> 0
<OTHER-SE> (1,507)
<TOTAL-LIABILITY-AND-EQUITY> 11,967
<SALES> 0
<TOTAL-REVENUES> 2,315
<CGS> 0
<TOTAL-COSTS> 1,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599
<INCOME-PRETAX> 98
<INCOME-TAX> 63
<INCOME-CONTINUING> 35
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
