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, 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 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 February 1, 1999
--------------------- -------------------------------
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, 1998 and June 30, 1998. 3
Statements of Operations for the Three-Month
and Six-Month Periods Ended December 31, 1998
and 1997. 4
Statements of Cash Flows for the Six-Month
Periods Ended December 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 9
ITEM 4 - Submission of Matters to Vote of Stockholders 9
SIGNATURES 10
EXHIBIT 11 - Computation of Per Share Earnings 11
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
(In thousands)
December 31, June 30,
1998 1998
------------ ------------
(Unaudited)
ASSETS
Property and equipment. . . . . . . . . . . . $ 17,739 $ 17,710
Accumulated depreciation/amortization . . . . (6,529) (6,267)
------------ ------------
11,210 11,443
Cash. . . . . . . . . . . . . . . . . . . . . 112 139
Rents and other receivables . . . . . . . . . 61 79
Prepaid expenses and other assets 227 186
------------ ------------
Total assets. . . . . . . . . . . . . $ 11,610 $ 11,847
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages . . . . . . . . . . . . . . . . . . $ 9,541 $ 9,787
Accounts payable. . . . . . . . . . . . . . . 20 32
Due to Versar . . . . . . . . . . . . . . . . --- 117
Accrued salaries. . . . . . . . . . . . . . . 18 18
Deferred income taxes . . . . . . . . . . . . 1,941 1,855
Tenant security deposits. . . . . . . . . . . 342 436
Other liabilities . . . . . . . . . . . . . . 380 324
------------ ------------
Total liabilities 12,242 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 December 31,
and June 30, 1998. . . . . . . . . . . . . --- ---
Accumulated deficit . . . . . . . . . . . . (1,382) (1,472)
------------ ------------
Total stockholders' deficit . . . . . (632) (722)
------------ ------------
Total liabilities and stockholders'
deficit. . . . . . . . . . . . . . . $ 11,610 $ 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 For the Six-Month
Periods Ended December 31, Periods Ended December 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Real estate rental
revenue: . . . . . . $ 871 $ 750 $ 1,683 $ 1,533
Real estate expenses . 385 324 754 685
----------- ----------- ----------- -----------
486 426 929 848
Depreciation/
amortization . . . . 145 143 290 288
General and
administrative . . . 23 22 47 46
----------- ----------- ----------- -----------
Income from real
estate . . . . . . . 318 261 592 514
Interest expense . . . 185 200 376 404
----------- ----------- ----------- -----------
Net income before
income taxes. . . . . 133 61 216 110
Income taxes . . . . . 53 24 87 44
----------- ----------- ----------- -----------
Net income . . . . . . 80 37 129 66
Dividends on preferred
stock . . . . . . . . 20 20 39 40
----------- ----------- ----------- -----------
Net income applicable
to common stock $ 60 $ 17 $ 90 $ 26
=========== =========== =========== ===========
Net income per share
applicable to common
stock - basic and
diluted . . . . . . . $ 0.01 $ --- $ 0.02 $ 0.01
=========== =========== =========== ===========
Weighted average number
of shares outstanding -
basic . . . . . . . . 4.573 4,573 4,573 4,573
=========== =========== =========== ===========
Weighted average number of
of shares outstanding -
diluted . . . . . . . 4,618 4,580 4,674 4,646
=========== =========== =========== ===========
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,
-------------------------
1998 1997
----------- -----------
Cash flows from operating activities
Net income applicable to common
stock. . . . . . . . . . . . . . . . . . . . $ 90 $ 26
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization. . . . . . . . . 289 288
Deferred tax provision . . . . . . . . . . 87 44
----------- -----------
Comparative funds from operations. . . . 466 358
Preferred stock dividends accrued. . . . . 39 40
Provision for doubtful accounts
receivable. . . . . . . . . . . . . . . . --- 5
Decrease (increase) in rents and other
receivables . . . . . . . . . . . . . . . 17 (55)
Increase in prepaid and other assets . . . (68) (36)
Decrease in accounts payable . . . . . . . (12) (42)
Increase in accrued salaries . . . . . . . --- 8
Decrease in other liabilities. . . . . . . (38) (37)
----------- -----------
Net cash provided by operating activities . . . 404 241
----------- -----------
Cash flow used in investing activities
Improvements to real estate . . . . . . . . . (29) (1)
----------- -----------
Cash flow used in financing activities
Mortgage principal payments . . . . . . . . . (246) (238)
Payment to Versar, net. . . . . . . . . . . . (117) ---
Payment of dividend on preferred stock. . . . (39) (39)
----------- -----------
Net cash flow used in
financing activities. . . . . . . . . . . . . (402) (277)
----------- -----------
Net increase (decrease) in cash . . . . . . . . (27) (37)
Cash at beginning of period . . . . . . . . . . 139 96
----------- -----------
Cash at end of period . . . . . . . . . . . . . $ 112 $ 59
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest. . . . . . . . . . . . . . . . . . $ 378 $ 417
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 December 31, 1998 and the results of operations
for the six-month periods ended December 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.
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
- ---------------------
Second 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 second quarter of fiscal
year 1999 increased by $121,000 (16%) compared to the second
quarter of fiscal year 1998. The increase is attributable to
rent escalations for existing tenants and higher demand for third
party and tenant requested services.
-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
1999 increased by $61,000 (19%) compared to the second quarter of
fiscal year 1998. The increase is due to higher subcontract and
material costs associated with the increased third party and
tenant requested services.
Depreciation/amortization for the second quarter of fiscal
year 1999 was $2,000 higher than the $143,000 reported in fiscal
year 1998. The increase is due to minor building improvement put
into place in fiscal year 1999.
General and administrative expense in the second quarter of
fiscal year 1999 of $23,000 was $1,000 more than the second
quarter of fiscal year 1998. The increase is attributable to
higher insurance expenses.
Interest expense for the second quarter of fiscal year 1999
was $15,000 (7.5%) lower than that reported in the second quarter
of fiscal year 1998. The decrease is due to the principal
payments in the past year.
Preferred stock dividends for the second quarter of fiscal
year 1999 and 1998 were $20,000, respectively.
The net income applicable to common stock for the second
quarter of fiscal year 1999 was $60,000 compared to the net
income applicable to common stock of $17,000 in the same time
last year. The increase in net income was due to higher real
estate rental income and lower interest expenses.
Six Month Comparison for Fiscal Year 1999 and 1998
- --------------------------------------------------
Real estate rental income for the six months of fiscal year
1999 was $1,683,000, an increase of $150,000 (10%) compared to
the rental income of $1,533,000 a year ago. The increase is
attributable to rent escalations and increased third party and
tenant requested services.
Real estate expenses in the first six months of fiscal year
1999 increased $69,000 (10%) compared to the real estate expense
in the first six months of fiscal year 1998. The increase is due
to higher direct subcontract and material costs as mentioned
above as well as higher operating expenses as a result of higher
occupancy rate.
Depreciation/amortization for the first six months of fiscal
year 1999 increased by $2,000 compared to the same period last
year. The increase is due to building improvement placed in
service in fiscal year 1999.
General and administrative expense for the six months of
fiscal year 1999 of $47,000 was $1,000 higher than that of a year
ago. The increase is due to higher insurance expense when
compared to fiscal year 1998.
Interest expense for the first six months of fiscal year
1999 was $28,000 (7%) lower than that reported in the first six
months of fiscal year 1998. 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 1999 was $39,000, slightly lower than the $40,000 compared
to the first six months of fiscal year 1998.
The net income applicable to common stock for the first six
months was $90,000, an increase of $64,000 when compared to the
net income of $26,000 for the comparable period last year. The
improved earnings are primarily attributable to higher rental
income and lower interest expense as mentioned above.
-8-
<PAGE>
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operating activities was $403,000 for
the first six months of fiscal year 1999 compared to the $241,000
for the same period last year. In the first half of fiscal year
1999, payments of $246,000 were made to mortgage principal,
$117,000 to Versar's loan and $39,000 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. At December
31, 1998, the loan balances for I.D.S. Life Insurance Company and
NationsBank are approximately $8,491,000 and $1,050,000,
respectively. 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.
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 18, 1998. The matters voted on at the Annual meeting
were as follows:
(1) The Election of Director
The nomination of Gerald T. Halpin to serve as
director of the Company was approved as indicated
below:
Vote Withheld
for Authority
------ ---------
Gerald T. Halpin 3,656,272 12,070
(2) Ratification of the Appointment of Arthur Andersen LLP
as the Independent Accountants for fiscal year 1999.
Arthur Andersen was ratified as the Company's
independent accountants as follows:
For Against Abstain
----- ------- -------
3,641,533 17,492 9,317
-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: February 9, 1999
-10-
<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,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET INCOME APPLICABLE
TO COMMON STOCK . . . . $ 60 $ 17 $ 90 $ 26
=========== =========== =========== ===========
Weighted average
common shares
outstanding . . . . . . 4,572,545 4,572,545 4,572,545 4,572,545
=========== =========== =========== ===========
NET INCOME PER SHARE -
BASIC . . . . . . . . . $ 0.01 $ --- $ 0.02 $ 0.01
=========== =========== =========== ===========
Common shares from
above . . . . . . . . . 4,572,545 4,572,545 4,572,545 4,572,545
Assumed exercise of
options (treasury
stock method) . . . . . 45,244 7,169 101,749 73,281
----------- ----------- ----------- -----------
4,617,789 4,579,714 4,674,294 4,645,826
=========== =========== =========== ===========
NET INCOME PER SHARE -
DILUTED . . . . . . . . $ 0.01 $ --- $ 0.02 $ 0.01
=========== =========== =========== ===========
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 112
<SECURITIES> 0
<RECEIVABLES> 66
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 400
<PP&E> 17,739
<DEPRECIATION> 6,529
<TOTAL-ASSETS> 11,610
<CURRENT-LIABILITIES> 418
<BONDS> 9,541
0
750
<COMMON> 0
<OTHER-SE> (1,382)
<TOTAL-LIABILITY-AND-EQUITY> 11,610
<SALES> 0
<TOTAL-REVENUES> 1,683
<CGS> 0
<TOTAL-COSTS> 1,044
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 376
<INCOME-PRETAX> 177
<INCOME-TAX> 87
<INCOME-CONTINUING> 90
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
