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, 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 October 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
September 30, 1998 and June 30, 1998. 3
Statements of Operations for the Three-Month
Periods Ended September 30, 1998 and 1997. 4
Statements of Cash Flows
for the Three-Month Periods Ended September 30,
1998 and 1997. 5
Notes to Financial Statements 6-7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-8
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
2
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
September 30, June 30,
1998 1998
------------- -------------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . $ 17,733 $ 17,710
Accumulated depreciation/amortization . . . . (6,398) (6,267)
------------- -------------
11,335 11,443
Cash. . . . . . . . . . . . . . . . . . . . . 252 139
Rents and other receivables . . . . . . . . . --- 79
Prepaid expenses and other assets . . . . . . 195 186
------------- -------------
Total assets. . . . . . . . . . . . . . . $ 11,782 $ 11,847
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . . . $ 9,665 $ 9,787
Accounts payable. . . . . . . . . . . . . . . 14 32
Due to Versar . . . . . . . . . . . . . . . . 87 117
Accrued salaries. . . . . . . . . . . . . . . 21 18
Deferred income taxes . . . . . . . . . . . . 1,888 1,855
Tenant security deposits. . . . . . . . . . . 434 436
Other liabilities . . . . . . . . . . . . . . 365 324
------------- -------------
Total liabilities . . . . . . . . . . . . 12,474 12,569
------------- -------------
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,
1998 . . . . . . . . . . . . . . . . . . 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, 1998. . . . . . . . . . . . --- ---
Accumulated deficit. . . . . . . . . . . . (1,442) (1,472)
------------- -------------
Total stockholders' deficit . . . . . . . (692) (722)
------------- -------------
Total liabilities and stockholders'
deficit . . . . . . . . . . . . . . . . $ 11,782 $ 11,847
============= =============
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,
----------------------------
1998 1997
------------- -------------
Real estate rental revenue . . . . . . . . . . $ 811 $ 783
Real estate expenses . . . . . . . . . . . . . 369 361
------------- -------------
442 422
Depreciation/amortization. . . . . . . . . . . 145 145
General and administrative . . . . . . . . . . 24 24
------------- -------------
Income from real estate. . . . . . . . . . . . 273 253
Interest expense . . . . . . . . . . . . . . . 190 204
------------- -------------
Net income before income taxes . . . . . . . . 83 49
Income taxes . . . . . . . . . . . . . . . . . 33 20
------------- -------------
Net income . . . . . . . . . . . . . . . . . . 50 29
Dividends on preferred stock . . . . . . . . . 20 20
------------- -------------
Net income applicable to common stock. . . . . $ 30 $ 9
============= =============
Net income per share applicable to common
stock - basic and diluted. . . . . . . . . . $ .01 $ ---
============= =============
Weighted average number of
shares outstanding - basic . . . . . . . . . 4,573 4,573
============= =============
Weighted average number of
shares outstanding - diluted . . . . . . . . 4,686 4,604
============= =============
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,
----------------------------
1998 1997
------------- -------------
Cash flows from operating activities
Net income applicable to common
stock . . . . . . . . . . . . . . . . . . . . $ 30 $ 9
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization. . . . . . . . . . 145 145
Deferred tax provision . . . . . . . . . . . 33 20
------------- -------------
Comparative funds from operations . . . . . 208 174
Preferred stock dividends accrued. . . . . . 20 20
Provision for doubtful accounts receivable . --- 5
Decrease (increase) in rents and other
receivables . . . . . . . . . . . . . . . . 79 (35)
Increase in prepaid and other assets . . . . (23) (40)
(Decrease) in accounts payable . . . . . . . (18) (78)
Increase in accrued salaries . . . . . . . . 3 5
Increase in other liabilities. . . . . . . . 39 11
------------- -------------
Net cash provided by operating activities. . . . 308 62
------------- -------------
Cash flow used in investing activities
Improvements to real estate. . . . . . . . . . (23) (1)
------------- -------------
Cash flow used in financing activities
Mortgage principal payments. . . . . . . . . . (122) (119)
Payment to Versar, net . . . . . . . . . . . . (30) ---
Payment of dividend on preferred stock . . . . (20) ---
------------- -------------
Net cash flow used in
financing activities . . . . . . . . . . . . . (172) (119)
------------- -------------
Net increase (decrease) in cash. . . . . . . . . 113 (58)
Cash at beginning of period. . . . . . . . . . . 139 96
------------- -------------
Cash at end of period. . . . . . . . . . . . . . $ 252 $ 38
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . $ 247 $ 216
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, 1998 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, 1998 and the results of
operations for the three-month periods ended September 30, 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.
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
<PAGE>
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: Basic income per share
applicable to common stock is computed by dividing net income applicable to
common stock by the weighted average number of shares outstanding during the
applicable period being reported upon. Diluted net income per share is
computed by dividing net income applicable to common stock by the weighted
average number of shares outstanding plus the effect of assumed exercise of
stock options using the Treasury Stock Method.
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, 1998, the Company had approximately $2.4
million in deferred tax liabilities, which was offset by $1 million of net
operating loss carryforwards. Due to the potential rent roll turnover in the
year 2000, the Company has established a valuation allowance of approximately
$514,000. As future rent rolls are solidified the valuation allowance will be
reduced and added into income. Net income before preferred dividends will
accrue income tax expense at an estimated effective rate of 40%.
Impact of Accounting Standards: Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("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 provisions of the standard in
fiscal year 1998, and restated prior years' earnings per share to comply with
the new standard.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
First Quarter Comparison for Fiscal Year 1999 and 1998
- ------------------------------------------------------
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 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 1999
increased by $28,000 (4%) compared to the first quarter of fiscal year 1998.
The increase is attributable to rent escalations.
Real estate expenses in the first quarter of fiscal year 1999 increased by
$8,000 (2%) compared to the first quarter of fiscal year 1998. The increase is
due to higher operating expenses in the area of janitorial services,
maintenance and repairs and utilities as a result of higher occupancy rate.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Depreciation/amortization for the first quarter of fiscal year 1999
remained at the same level of $145,000 as reported in fiscal year 1998. The
depreciation/amortization expenses for the new assets that were placed in
service in fiscal year 1999 were offset by the fully amortized assets that were
placed in service in prior years.
General and administrative expense in the first quarter of fiscal year
1999 of $24,000 remained relatively at the same level as in the first quarter
of fiscal year 1998.
Interest expense for the first quarter of fiscal year 1999 was $14,000
(7%) lower than that reported in the first quarter of fiscal year 1998. The
decrease is due to the principal payments in the past year.
Income taxes for the first quarter of fiscal year 1999 of $33,000 were
higher than the income taxes of $20,000 recorded in the same period of last
year due to higher earnings. The Company recorded 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 1999 and
1998 were $20,000 for each of the quarters.
The net income applicable to common stock for the first quarter of fiscal
year 1999 was $30,000 compared to the net income applicable to common stock of
$9,000 in the same time last year. The improvement in earnings was due to
higher real estate rental income and lower interest expenses as mentioned
above.
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operating activities was $308,000 for the first
quarter of fiscal year 1999 compared to the $62,000 for the same period last
year. Increase in other liabilities and decreased accounts receivables and
other assets resulted in higher net cash provided by operating activities.
During the first quarter of fiscal year 1999, payments of $122,000 were made to
mortgage principal, $30,000 to Versar's loan and $20,000 to preferred stock
dividends.
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 1999. It is anticipated that of such $75,000,
approximately $40,000 will be used for remodeling vacant space, and
approximately $35,000 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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Sarnia is not a party to any litigation.
Item 6 - Exhibits and Reports on Form 8-K.
(A) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedules
(B) Reports on Form 8-K
None
9
<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: November 12, 1998
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,
----------------------------
1998 1997
------------- -------------
NET INCOME APPLICABLE TO
COMMON STOCK . . . . . . . . . . . . . . . $ 30 $ 9
============= =============
Weighted average common shares
outstanding. . . . . . . . . . . . . . . . 4,572,545 4,572,545
============= =============
NET INCOME PER SHARE - BASIC. . . . . . . . $ 0.01 $ ---
============= =============
Common shares from above. . . . . . . . . . 4,572,545 4,572,545
Assumed exercise of options (treasury
stock method). . . . . . . . . . . . . . . 113,784 31,942
------------- -------------
4,686,329 4,604,487
============= =============
NET INCOME PER SHARE -
DILUTED . . . . . . . . . . . . . . . . . $ 0.01 $ ---
============= =============
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<ARTICLE> 5
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<PERIOD-TYPE> 3-MOS
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<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 5
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 447
<PP&E> 17,733
<DEPRECIATION> 6,398
<TOTAL-ASSETS> 11,782
<CURRENT-LIABILITIES> 487
<BONDS> 9,665
0
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<COMMON> 0
<OTHER-SE> (1,442)
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