SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File
June 30, 1997 No. 0-24108
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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)
(703) 642-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 2, 1997 was approximately $1,181,622.
The number of shares of Common Stock outstanding as of September 2, 1997 was
4,572,545.
The Exhibit Index is located on Pages 14 through 15 hereof.
----------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission with respect to the 1997 Annual Meeting of Stockholders
scheduled to be held on November 12, 1997 are incorporated by reference into
Part III hereof.
<PAGE>
PART I
Item 1. Business
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 services may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive services and pricing; one or more current or future claims made
against the Company may result in substantial liabilities; and such other risks
and uncertainties as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.
Sarnia Corporation ("Sarnia" or "the Company") is the owner and
operator of commercial real estate. Its sole asset is an office park of
approximately 18.3 acres located in Springfield, Virginia known as Versar
Center. Sarnia was incorporated in Virginia on November 22, 1982 (under the name
of Versar Virginia, Inc.) to acquire property from its then parent corporation,
Versar, Inc. ("Versar"), in order to own, develop and manage the Versar Center
complex. On June 30, 1994, Versar spun-off Sarnia to Versar's shareholders on
the basis of one share of Sarnia common stock for every outstanding share of
Versar common stock. Sarnia is now a public company traded on the
over-the-counter market.
Versar Center consists of two four-story office buildings: the 6850
Building (approximately 108,000 square feet) which was constructed in 1982, and
the 6800 Building (approximately 120,500 square feet) which was constructed in
1986. At the end of June 1997, the 6850 Building was 98% leased and the 6800
Building was 97% leased. On June 29, 1994, Versar and Sarnia entered into two
15-year leases through May 2009 pursuant to which Versar leased from Sarnia
108,506 square feet (99,588 of which was located in the 6850 Building). On June
22, 1995, Versar's lease in the 6850 Building was modified to reduce the square
footage from 99,588 to 73,371. On July 1, 1996 Versar modified its lease in the
6850 Building to further reduce the square footage from 73,371 to 68,239. Four
major tenants, the General Services Administration ("GSA"), Cornet, C-Cubed
Corporation and RGE Engineering, lease approximately 68% of the 6800 Building
and have leases which terminate between February 1999 and June 2001.
Sarnia believes that the relatively stable employment base provided by
the federal government, supplemented by moderate business growth in the region,
makes Versar Center an attractive real estate investment. Because of the
presence of the federal government, the area has attracted a high percentage of
professional workers which provide the region with a private sector labor force
base particularly suited to an increasingly service-oriented national economy.
Since 1985, the Washington, D.C. metropolitan area has had the sixth
highest employment base in the nation. Population and employment growth in this
metropolitan area have historically moved outward from the District of Columbia,
first to the immediate suburbs, and then to the adjacent counties, with
Montgomery County in Maryland and Fairfax County in Virginia absorbing most of
the growth.
Fairfax County, in which Versar Center is located, has experienced
growth in the past in terms of residential, commercial and industrial
development. In the past two years, the regional economy, especially in Northern
Virginia and Fairfax County has become robust. That, combined with the lack of
new buildings under
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<PAGE>
construction has lead to an increase in occupancy and generally higher rentals
for vacant or renewed office space.
Versar Center competes for tenants with other properties throughout
Springfield and central Fairfax County. Competition for tenants is on the basis
of location and rent charged. The success of Sarnia depends on, among other
factors, the trends of the economy in the Washington, D.C. metropolitan area,
government spending and the ability of Sarnia to keep Versar Center leased at
profitable levels and controlled operating costs.
Sarnia's staff perform the actual day-to-day management functions of
Versar Center, including maintenance of the property and equipment, tenant
build-outs and other facilities management functions.
Operating Data
The occupancy rate for the 6850 Building for fiscal years 1997 through
1993 was 98%, 93%, 99%, 93% and 94%, respectively. The occupancy rate for the
6800 Building for fiscal years 1997 through 1993 was 97%, 94%, 93%, 85% and 79%,
respectively.
The principal businesses conducted by the tenants in the 6800 Building
and the 6850 Building are as follows: environmental consulting, government
agencies, government contractors, an architectural firm, a health care provider
organization and other various service businesses. Versar and National Capital
Preferred Provider Organization, Inc. ("NCPPO") are the only tenants which
occupy more than 10% of the total rentable space in the 6850 Building. Versar's
principal business is environmental engineering and consulting, and NCPPO is a
national health care provider. C-Cubed Corporation, Cornet, GSA and RGE
Engineering each occupy more than 10% of the rentable space in the 6800
building. The loss of any of these tenants, if not replaced on substantially
similar terms, would have an adverse effect on Sarnia's results of operations
and financial condition.
Versar entered into lease agreements with Sarnia for 68,239 square feet
of office space in the 6850 Building, and 4,918 square feet of storage space in
the 6800 Building, at an annual aggregate rent of $1,037,000. Both leases expire
on May 31, 2009. The lease on 6850 Building has an annual 4% escalation in rent
costs with fair market adjustment every five years at June 1, 1999 and June 1,
2004. The lease on 6800 Building is subject to 2% annual rent escalation. There
are no renewal options in the leases.
With respect to the 6850 Building, the average effective annual rental
per square foot was $14.02, $13.59, $13.52, $13.41 and $14.04 for fiscal years
1997, 1996, 1995, 1994 and 1993, respectively. With respect to the 6800
Building, the average effective annual rental per square foot was $12.60,
$11.76, $11.52, $11.29 and $11.84 for fiscal years 1997, 1996, 1995, 1994 and
1993, respectively. In addition, the average net rental rates per square foot
for both buildings were $7.01, $6.09, $6.30, $5.42 and $4.54 for fiscal years
1997, 1996, 1995, 1994 and 1993, respectively. The net rental rates per square
foot for Versar alone, as a significant tenant, were $7.83, $6.88, $7.06, $7.57
and $8.88 for fiscal years 1997, 1996, 1995, 1994 and 1993, respectively. The
average effective annual rental per square foot is derived using annual rental
income divided by occupied square feet. The net rental rate represents the
difference between income per square foot and operating expense per square foot.
3
<PAGE>
The following table sets forth the schedule of the lease expirations
for each of the ten years commencing with calendar year 1997:
<TABLE>
<CAPTION>
Percent of Gross
Number of Tenants Total Square Annual Rent Rent
Whose Leases Feet Covered Represented Represented
Year Will Expire by Leases by Leases by Leases
- ------ --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
1997 1 4,523 $ 52,000 1.9%
1998 3 10,945 $ 135,000 4.8%
1999 3 33,887 $ 449,000 16.1%
2000 7 68,499 $ 831,000 29.8%
2001 2 21,517 $ 260,000 9.3%
2002 -- -- -- --
2003 -- -- -- --
2004 -- -- -- --
2005 -- -- -- --
2006 -- -- -- --
</TABLE>
The following table sets forth information with respect to the 6850
Building and the 6800 Building regarding tax depreciation:
<TABLE>
<CAPTION>
Original
Cost Rate Method Life
---- ---- ------ ----
<S> <C> <C> <C> <C>
6850 Building $ 6,072,575 6.70% Straight-line 15
Capitalized Interest $ 750,179 Fully depreciated
(6850 Building)
Land $ 650,000 Land is nondepreciable
Leaseholds to $ 578,428 3.17% Straight-line 31.5/39
6850 Building
6800 Building $ 8,325,674 5.26% ACRS 19
Straight-line
Capitalized Interest $ 584,179 10.00% Straight-line 10
(6800 Building)
Leaseholds to $ 592,923 3.17% Straight-line 31.5/39
6800 Building
Equipment $ 31,806 8.93% Double 7
declining
balance
Security System to $ 53,002 5.26% Straight-line 19
6850 Building
Security System to $ 51,520 5.26% Straight-line 19
6800 Building
</TABLE>
4
<PAGE>
The real property tax rate is $1.231 per $100 of assessed value. Annual
real property taxes for 1997 are approximately $65,000 and $74,000 for the 6850
Building and the 6800 Building, respectively.
Employees
At June 30, 1997, Sarnia employed seven (7) full time employees. Sarnia
considers relations with its employees to be good. No employees are represented
by labor unions.
Executive Officers
The current executive officers and directors of Sarnia, their ages as
of September 2, 1997, their current offices or positions and their business
experience for the past five years are set forth below.
Business Experience
During Last Five Years
Name Age and Other Information
- ---- --- ---------------------
Charles I. Judkins, Jr. 66 President and Chief Executive Officer
President and Chief Executive Officer
from June 1994 to present; Retired former
Senior Vice President of Versar from
August 1992 to May 1993; Senior
Vice President and Chief Financial
Officer of Versar from July 1991 to
August 1992.
Benjamin M. Rawls 56 Chairman of the Board
Chairman of the Board since November
1993 and President and Chief Executive
Officer of Versar since April 1991.
Lawrence W. Sinnott 35 Treasurer
Chief Financial Officer and Treasurer
of Versar from May 1994 to present;
Treasurer and Controller of Versar from
June 1992 to April 1994.
Gerald T. Halpin 74 Director
President, WEST*GROUP Management
LLC, a real estate development and
construction firm and its predecessors,
since 1962.
Michael Markels, Jr. 71 Director
Chairman, President and CEO of Ocean
Farming, Inc. since 1995. Co-founder of
Versar; Chairman Emeritus and Director
of Versar; Retired former Chairman of the
Board of Versar from March 1991 to
November 1993.
5
<PAGE>
Business Experience
During Last Five Years
Name Age and Other Information
- ---- --- ---------------------
Thomas G. Hotz 37 Director
Partner, Magnum Capital Partners,
L.L.C., 1996; Managing Director
of Julian J. Studley, Inc., a national
real estate firm, from 1989 through
1996.
William G. Denbo 54 Vice President and General Manager
Maintenance supervision and general
manager of Sarnia Corporation for the
past five years.
James N.Schwarz 52 Director
Partner of Ginsburg, Feldman and Bress, a
chartered law firm in Washington, D.C.,
since February 1996; Senior Vice
President, General Counsel and Corporate
Secretary of Steuart Petroleum Company
from 1991 to 1996.
6
<PAGE>
Item 2. Properties
Versar Center is located at the east end of the 6900 block of Hechinger
Drive in Springfield, Virginia, one-half mile northwest of the intersection of
the Capital Beltway (I-495) and Shirley Highway (I-395). The 6800 Building and
the 6850 Building, the two four-story office buildings in Versar Center, are
located on a property encompassing 18.3 acres. The 6850 Building has
approximately 108,000 usable square feet, and the 6800 Building has
approximately 120,500 usable square feet. The property site is just inside the
Capital Beltway, approximately 14.5 miles southwest of downtown Washington, D.C.
Springfield is a major retail center with the Springfield Regional
Mall, Springfield Plaza Shopping Center and other retail properties located
within its boundaries. Major industrial parks are found on both sides of Shirley
Highway inside the Capital Beltway. Springfield is generally considered a Class
B office location.
Versar Center is located in an I-5 zoning district, which is defined as
a general industrial district; its permitted uses include the existing office
use. Under existing zoning regulations, Sarnia could construct approximately
168,000 square feet of additional office space by right and up to an additional
391,000 square feet of office space by special exception.
The 6800 Building and the 6850 Building are secured by a first deed of
trust in favor of I.D.S. Life Insurance Company. Refer to Footnote D on Page F-8
for details.
Item 3. Legal Proceedings
Sarnia is not a party to any litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the last quarter of fiscal year 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
At June 30, 1997, the Company had 784 stockholders of record, excluding
stockholders whose shares were held in nominee name.
The Company's common stock is traded on the over-the-counter market.
There is no established public trading market for the Company's common stock and
trades in the stock are sporadic. The quarterly high and
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<PAGE>
low actual trade prices without adjustments for mark-ups, mark-downs, or
commissions during fiscal years 1996 and 1997 are presented below.
Fiscal Year High Low
- ------------------------ ---- ---
1996 4th Quarter.................. $ 0.5000 $ 0.3125
3rd Quarter.................. 0.3750 0.3125
2nd Quarter.................. 0.5000 0.3125
1st Quarter.................. 0.4375 0.3125
1997 4th Quarter.................. $ 0.3438 $ 0.3125
3rd Quarter.................. 0.5000 0.3125
2nd Quarter.................. 0.3125 0.3125
1st Quarter.................. 0.3125 0.3125
No dividends were paid on the Company's common stock in fiscal year
1997 or 1996 by Sarnia. The Board of Directors intends to retain any future
earnings for use in the Company's business and does not anticipate paying cash
dividends in the foreseeable future.
8
<PAGE>
Item 6. Selected Financial Data
The selected financial data set forth below should be read in
conjunction with Sarnia's Financial Statements and notes thereto beginning on
page F-1 of this report.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
related data:
Real estate rental revenue .. $ 2,911 $ 2,771 $ 2,676 $ 2,446 $ 2,341
Net income (loss) before
cumulative effect of change
in accounting principle ... 84 (235) (270) (684) (664)
Cumulative effect of
adoption of SFAS 109 ...... -- -- -- (440) --
Net income (loss) ........... 84 (235) (270) (1,124) (664)
Net income (loss) applicable
to common stock ........... 5 (269) (270) (1,124) (664)
Balance Sheet related data:
Total assets ................ 12,308 12,762 13,305 13,362 13,799
Short-term debt ............. 480 452 1,405 355 860
Long-term debt .............. 9,787 10,287 10,657 12,048 13,432
-------- -------- -------- -------- --------
Total debt .................. 10,267 10,739 12,062 12,403 14,292
Total stockholders' deficit . (792) (797) (1,278) (1,008) (1,980)
Earnings per share
information:
Net income (loss) per share
before cumulative effect
of change in accounting
principle .................. $ --- $ (0.06) $ (0.06) $ (0.15) $ (0.15)
Net (loss) per share from
cumulative effect of change
in accounting principle ... $ --- $ --- $ --- $ (0.10) $ ---
Net income (loss) per share
applicable to common stock . $ --- $ (0.06) $ (0.06) $ (0.25) $ (0.15)
Number of shares out-
standing .................. 4,573 4,573 4,573 4,573 4,573
======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 services may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive services and pricing; one or more current or future claims made
against the Company may result in substantial liabilities; and such other risks
and uncertainties as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.
Real estate revenue in 1997 of $2,911,000 was $140,000 (5%) higher than
the $2,771,000 of rental revenue reported in 1996. The increase is attributable
to rent escalations and higher occupancy rate in both buildings. The 6850
Building occupancy rate increased from 93% to 98% while the 6800 Building's
occupancy rate increase from 94% to 97%. Real estate revenue in 1996 of
$2,771,000 was $95,000 (4%) higher than that reported in 1995. The increase is
due to rent escalations and increased tenant requested services.
Real estate expenses in 1997 of $1,289,000 were $19,000 (1%) lower than
the $1,308,000 of expenses reported in 1996. The decrease is attributable to the
lower legal expense incurred in 1997. Real estate expenses in 1996 of $1,308,000
were $100,000 (8%) higher than the $1,208,000 of expenses reported in 1995. The
increase is due to Sarnia receiving a real estate tax refund of $90,000 in
fiscal year 1995.
Depreciation/amortization expenses in 1997 of $607,000 were $12,000
(2%) lower than the $619,000 reported in 1996. The decrease is due to the fully
amortized assets that were placed in service in prior years.
Depreciation/amortization expenses in 1996 of $619,000 were $54,000 (10%) higher
than the $565,000 reported in 1995. The increase is due to the full year's
depreciation on the leasehold improvements that were placed in service for the
new tenants during 1995.
General and administrative expenses in 1997 were $9,000 (9%) lower than
1996 due to the decrease in insurance expense. General and administrative
expenses in 1996 of $102,000 were $7,000 (7%) higher than the $95,000 reported
in 1995 due to increased insurance costs. After the spin-off from Versar, Sarnia
entered into separate insurance coverage on a stand-alone basis, which resulted
in higher insurance expenses in 1996. Because the risk experiencing rate was
established, the insurance expense decreased in 1997.
Interest expense of $838,000 in 1997 decreased by $139,000 (14%) when
compared to 1996. Interest expense in 1996 of $977,000 was $101,000 (9%) lower
than that reported in 1995. The decreases are due to the refinancing of debt at
lower interest rates in the middle of 1996 and the principal payments in 1996
and 1997.
Sarnia recorded $79,000 and $34,000 of preferred stock dividends in
fiscal years 1997 and 1996, respectively. Preferred stock dividends are paid
quarterly, on the first day of March, June, September and December of each year.
Dividends increased because the preferred equity was issued in January 1996 and
therefore fiscal 1996 had only five months of dividends.
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<PAGE>
The net income applicable to common stock was $5,000 in fiscal year
1997 compared to net loss applicable to common stock of $269,000 in fiscal year
1996. The significant improvement is attributable to the combinations of higher
rental revenue and lower operating and interest expenses in fiscal year 1997.
The net loss applicable to common stock of $269,000 in fiscal year 1996 remained
relatively the same as the net loss of $270,000 in fiscal year 1995. Higher
rental revenue and lower interest expense were offset by increase in real
estate, depreciation and general and administration expenses.
Liquidity and Capital Resources
Cash flow provided by operating activities was $735,000, $508,000 and
$435,000 for fiscal years 1997, 1996 and 1995, respectively. Principal payments
on the mortgages for fiscal years 1997, 1996 and 1995 were $472,000, $1,323,000
and $341,000, respectively. In fiscal year 1996, Sarnia issued $750,000 of
preferred stock and received a $250,000 rent deposit from Versar. In fiscal year
1995, Versar loaned $265,000 to Sarnia, primarily for leasehold improvements.
Sarnia has paid Versar $83,000 and $13,000 in fiscal years 1996 and 1997,
respectively, leaving the balance of $169,000.
On January 25, 1996, Sarnia obtained a first mortgage of $9 million
with I.D.S. Life Insurance Company at the fixed rate of 7.75% to be amortized
over twenty-two years and with a balloon payment due in 2003. Sarnia also
obtained a second mortgage of $500,000 with the Riggs National Bank at the prime
rate reported in the Wall Street Journal plus 2% (currently 10.25%) payable in
12 equal monthly installments. On June 30, 1996, the maturity date of the second
mortgage was extended to July 1, 1997. Sarnia also entered into a $1.5 million
term loan with the Riggs National Bank at the prime rate reported in the Wall
Street Journal plus 1%. The term loan was to be amortized over seven years
payable in 66 equal monthly installments starting on the 18th month from the
date of funding. In addition, Sarnia has issued, for $750,000, Series A
Cumulative Convertible Preferred Stock to a group of private investors.
In April 1997, Sarnia changed its banking institution from the Riggs
National Bank to NationsBank N.A. The $500,000 second mortgage which was paid
off on July 1, 1997 remained with the Riggs National Bank. The $1.5 million term
loan was terminated and replaced by a NationsBank five year term note. The new
note is guaranteed by Versar, Inc. and bears interest at the Treasury Rate plus
three hundred (300) basis points per annum (currently 9%), but not to exceed 9%
per annum. The note matures in five years with $300,000 principal payment per
year starting July 1, 1997.
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 $35,000 will be used for other miscellaneous capital expenditures.
Management believes that funds generated from rents should be
sufficient to meet Sarnia's operating needs, including capital expenditures in
the coming years.
Impact of New Accounting Standards
In March 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
SFAS 121 is effective for fiscal year 1997, and requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
SFAS 121 had no material effect on the financial position or results of
operations of the Company.
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
11
<PAGE>
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." However, the Company has made certain pro forma
disclosures of net income (loss) and per share information as if the fair value
based method for accounting defined in SFAS 123 had been applied.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997. SFAS
128 requires a company to present basic and diluted earnings per share amounts
on the face of the Consolidated Statement of Operations. The company is required
to adopt the provisions of 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.
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.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data begin on
page F-1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item with respect to directors of the
Company will be contained in the Company's proxy statement for its 1997 Annual
Meeting of Stockholders which is expected to be filed with the Commission not
later than 120 days after the Company's 1997 fiscal year and is incorporated
herein by reference.
Information required by this item with respect to executive officers of
the Company is included in Part I of this report and is incorporated herein by
reference.
For the purpose of calculating the aggregate market value of the voting
stock of Sarnia held by non-affiliates as shown on the cover page of this
report, it has been assumed that the directors and executive officers of the
Company and the Versar Employee Savings and Stock Ownership Plan are the only
affiliates of the Company. However, this is not an admission that all such
persons are, in fact, affiliates of the Company.
The information called for in Part III by:
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
12
<PAGE>
Item 13. Certain Relationships and Related Transactions
Information required by these items is incorporated herein by
reference to the Company's proxy statement for its 1997 Annual Meeting of
Stockholders, which is expected to be filed with the Commission not later than
120 days after the end of the Company's 1997 fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A)(1) Financial Statements:
The financial statements and financial statement schedules of
Sarnia Corporation are filed as part of this report and begin on
page F-1.
a) Report of Independent Public Accountants
b) Balance Sheets as of June 30, 1997 and 1996
c) Statements of Operations for the Years Ended June 30,
1997, 1996 and 1995
d) Statements of Changes in Stockholders' Deficit for
the Years Ended June 30, 1997, 1996 and 1995
e) Statements of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995
f) Notes to Financial Statements
(2) Financial Statement Schedules:
There are no financial statement schedules applicable to the
Company.
(3) Exhibits:
The exhibits to this Form 10-K are set forth in a separate
Exhibit Index which is included on page 14 of this report.
(B) Reports on Form 8-K
No reports were filed on Form 8-K during the Company's last
quarter of fiscal year 1997.
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number/
Item No. Description Reference
- -------- ----------- ---------
<S> <C> <C>
1 Sarnia Corporation Information Statement for distribution to shareholders of
Versar, Inc., the outstanding shares of its wholly-owned subsidiary, Sarnia
Corporation, dated June 30, 1994..................................................... (A),(B)
3.1 Articles of Incorporation of Sarnia Corporation, as amended.......................... (D)
3.2 Bylaws of Sarnia Corporation......................................................... (A)
10.5 Amended and Restated Office Lease, dated June 22, 1995, between the Registrant
and Versar, Inc...................................................................... (C)
10.6 Office Lease Agreement, dated October 28, 1994, between the Registrant and
National Capital Preferred Provider Organization, Inc................................ (C)
10.7 Office Lease Agreement, dated October 28, 1994, between the Registrant and
Integrated Behavioral Care, Inc...................................................... (C)
10.8 Sarnia 1994 Stock Option Plan........................................................ (C)
10.9 The Riggs National Bank of Washington D.C.'s letter dated, September 15, 1995,
modifying certain provisions of the Revolving Loan and Security Agreement, dated
April 9, 1994........................................................................ (C)
10.10 Promissory Note, dated January 25, 1996, between the Registrant and IDS Life
Insurance Company.................................................................... (D)
10.11 Term Note, dated January 25, 1996, between the Registrant and The Riggs
National Bank of Washington, D.C..................................................... (D)
10.12 Deed of Trust Note, dated January 25, 1996, between the Registrant and The
Riggs National Bank of Washington, D.C............................................... (D)
10.13 Preferred Stock Purchase Agreement, as amended....................................... (D)
10.14 Promissory Note, dated March 27, 1997, between the Registrant and the
NationsBank N.A...................................................................... 17
11 Statement Re: Computation of Per Share Earnings..................................... 26
27 Financial Data Schedule..............................................................
</TABLE>
- --------------------------------------------------------------------------------
(A) Incorporated by reference to similarly numbered exhibit to the Registrant's
Form 10 Information Statement ("Information Statement"), effective June 30,
1994 (File No. 0-24108).
14
<PAGE>
(B) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the fiscal year ended June 30,
1994 ("FY 1994 Form 10-K") filed with the Commission on September 27, 1994.
(C) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the fiscal year ended June 30,
1995 ("FY 1995 Form 10K") filed with the Commission on September 29, 1995.
(D) Incorportated by reference to the similarly numbered exhibit to the
Registrant's Form 10-K Annual Report for the fiscal year ended June 30,
1996 ("FY 1996 Form 10K") filed with the Commission on September 24, 1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: September 16, 1997 /S/ Charles I. Judkins, Jr.
-----------------------------
Charles I. Judkins, Jr.
President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/S/ Charles I. Judkins, Jr. President & CEO September 16, 1997
- ---------------------------
Charles I. Judkins, Jr.
/S/ Benjamin M. Rawls Chairman & Director September 16, 1997
- ---------------------------
Benjamin M. Rawls
/S/ Lawrence W. Sinnott Treasurer and Principal September 16, 1997
- --------------------------- Accounting Officer
Lawrence W. Sinnott
/S/ Michael Markels, Jr. Director September 16, 1997
- ---------------------------
Michael Markels, Jr.
/S/ Gerald T. Halpin Director September 16, 1997
- ---------------------------
Gerald T. Halpin
/S/ Thomas G. Hotz Director September 16, 1997
- ---------------------------
Thomas G. Hotz
/S/ James N. Schwarz Director September 16, 1997
- ---------------------------
James N. Schwarz
16
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of Sarnia Corporation:
We have audited the accompanying balance sheets of Sarnia Corporation (a
Virginia corporation) as of June 30, 1997 and 1996, and the related statements
of operations, changes in stockholders' deficit, and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sarnia Corporation as of June
30, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/S/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Washington, D.C.
September 16, 1997
F-1
<PAGE>
SARNIA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
---- ----
(In thousands)
ASSETS
<S> <C> <C>
Property and equipment ......................... $ 17,690 $ 17,580
Accumulated depreciation/amortization .......... (5,746) (5,215)
----------- -----------
11,944 12,365
Cash ........................................... 96 55
Rents and other receivables .................... 64 145
Prepaid expenses and other assets .............. 204 197
----------- -----------
Total assets .............................. $ 12,308 $ 12,762
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages ...................................... $ 10,267 $ 10,739
Accounts payable ............................... 165 136
Loan from Versar ............................... 169 182
Accrued salaries ............................... 17 30
Deferred income taxes .......................... 1,756 1,756
Tenant security deposits ....................... 468 456
Other liabilities .............................. 258 260
----------- -----------
Total liabilities ......................... 13,100 13,559
----------- -----------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, $25 par value;
Series A cumulative convertible;
1,000,000 shares authorized; 30,000
shares issued and outstanding at
June 30, 1997 and 1996 .................... 750 750
Common stock, no par value; 20,000,000 shares
authorized at June 30, 1997 and 1996;
4,572,545 shares issued and outstanding
at June 30, 1997 and 1996 ................. -- --
Accumulated deficit ......................... (1,542) (1,547)
----------- -----------
Total stockholders'
deficit ............................... (792) (797)
----------- -----------
Total liabilities and
stockholders' deficit ................. $ 12,308 $ 12,762
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-2
<PAGE>
SARNIA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1997 1996 1995
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Real estate rental revenue ............ $ 2,911 $ 2,771 $ 2,676
Real estate expenses .................. 1,289 1,308 1,208
------- ------- -------
.1,622 1,463 1,468
Depreciation/amortization ............. 607 619 565
General and administrative ............ 93 102 95
------- ------- -------
Income from real estate ............... 922 742 808
Interest expense ...................... 838 977 1,078
------- ------- -------
Net income (loss) before
income taxes ......................... 84 (235) (270)
Income taxes .......................... -- -- --
------- ------- -------
Net income (loss) ..................... 84 (235) (270)
Dividends on preferred stock .......... 79 34 --
------- ------- -------
Net income (loss) applicable
to common stock ...................... $ 5 $ (269) $ (270)
======= ======= =======
Net income (loss) per share
applicable to common stock ........... $ -- $ (0.06) $ (0.06)
======= ======= =======
Weighted average number of
shares outstanding ............... 4,573 4,573 4,573
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-3
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
-------------------------- Total
Preferred Number of Accumulated Stockholders'
Stock Shares Amount Deficit Deficit
----- ------ ------ ------- -------
Years Ended June 30, 1997, 1996, 1995
---------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 ...................... $ -- 4,572,545 $ -- $ (1,008) $ (1,008)
--------- --------- ---------- --------- ---------
Net loss .................................... -- -- -- (270) (270)
--------- --------- ---------- --------- ---------
Balance, June 30, 1995 ...................... -- 4,572,545 -- (1,278) (1,278)
--------- --------- ---------- --------- ---------
Issuance of preferred stock ................. 750 -- -- -- 750
Net loss .................................... -- -- -- (235) (235)
Preferred stock dividend accrued ............ -- -- -- (34) (34)
--------- --------- ---------- --------- ---------
Balance, June 30, 1996 ...................... 750 4,572,545 -- (1,547) (797)
--------- --------- ---------- --------- ---------
Net income .................................. -- -- -- 84 84
Preferred stock dividend accrued ............ -- -- -- (79) (79)
--------- --------- ---------- --------- ---------
Balance, June 30, 1997 ...................... $ 750 4,572,545 $ -- $ (1,542) $ (792)
========= ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-4
<PAGE>
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flow from operating activities
Net income (loss) applicable to common stock..... $ 5 $ (269) $ (270)
Adjustments to reconcile net income (loss)
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization................... 607 619 565
Preferred stock dividend accrued............ 79 34 ---
---------- ---------- ---------
Subtotal.................................. 691 384 295
Decrease (increase) in rents and other
receivables............................... 73 (9) (102)
(Increase) decrease in prepaid and other
assets ................................... (76) 28 (47)
Increase in accounts payable................ 29 23 26
(Decrease) increase in accrued salaries..... (13) 4 2
Increase in other liabilities............... 31 78 261
---------- ---------- ---------
Net cash provided by operating activities............ 735 508 435
---------- ---------- ---------
Cash flow from investing activities
Improvements to real estate...................... (136) (43) (359)
Disposition of property and equipment............ 26 --- ---
---------- ---------- ---------
Net cash used in investing activities................ (110) (43) (359)
---------- ---------- ----------
Cash flow from financing activities
Mortgage principal payments...................... --- (12,062) (341)
Refinanced new mortgage.......................... --- 11,000 ---
Principal payments on new mortgage............... (472) (261) ---
Loan from Versar, net............................ (13) (83) 265
Issuance of preferred stock...................... --- 750 ---
Deposit received................................. --- 250 ---
Payment of dividend on preferred stock........... (99) (7) ---
---------- ---------- ---------
Net cash used in financing activities................ (584) (413) (76)
---------- ---------- ----------
Net increase in cash................................. 41 52 ---
Cash at beginning of period.......................... 55 3 3
---------- ---------- ---------
Cash at end of period................................ $ 96 $ 55 $ 3
========== ========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest....................................... $ 888 $ 987 $ 979
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-5
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 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 two businesses with distinct financial, investing and operating
characteristics so that each can adopt strategies and pursue objectives
appropriate to its specific business.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: These financial statements are presented using the
accrual basis of accounting.
Sarnia Corporation has entered into a Master Corporate Services and
Support Agreement with Versar, Inc. Certain general and administrative
functions, including general management, treasury, financial service, legal,
benefits and human resources administration, investor and public relations and
information management are provided by Versar for 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.
Revenue recognition: Rental revenue is recognized based upon tenant lease
agreements in accordance with Statement of Financial Accounting Standards 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.
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 (loss) per share applicable to common stock: Net income (loss) per
share applicable to common stock is computed by dividing net income (loss)
applicable to common stock by the weighted average number of shares outstanding
during the applicable period being reported upon.
F-6
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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." However, the Company has
made certain pro forma disclosures of net income (loss) and per share
information as if the fair value based method for accounting defined in SFAS 123
had been applied.
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 is
required to adopt the provisions of 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.
NOTE C PROPERTY AND EQUIPMENT
Estimated June 30,
Useful Life ------------------
in Years 1997 1996
---------------- -----------------
(In thousands)
Land..................... --- $ 650 $ 650
Buildings................ 40 15,733 15,733
Equipment................ 5 136 136
Leasehold improvements... Life of Lease 1,171 1,061
------ ------
17,690 17,580
Accumulated depreciation
and amortization......... (5,746) (5,215)
------ -------
$11,944 $12,365
Depreciation and amortization of property and equipment included as
expense in the accompanying Statements of Operations was $539,000, $546,000 and
$506,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
Amortization of brokerage fees of $68,000, $73,000 and $59,000 were included in
the Statements of Operations for the fiscal years ended June 30, 1997, 1996 and
1995, respectively.
Maintenance and repair expenses (included in real estate expenses)
approximated $207,000, $206,000 and $242,000 for the years ended June 30, 1997,
1996 and 1995, respectively.
F-7
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE D MORTGAGES
On January 25, 1996, the Company completed the refinancing of all its
outstanding debt.
With regard to the refinancing, Sarnia obtained a first mortgage of $9
million with I.D.S. Life Insurance Company at the fixed rate of 7.75% to be
amortized over twenty-two years and with a balloon payment due in 2003. The
I.D.S. mortgage is collateralized by the first deed of trust on the 6800 and
6850 buildings. Sarnia also obtained a second mortgage of $500,000 with the
Riggs National Bank at the prime rate plus 2% payable in 12 equal monthly
installments. On June 30, 1996, the maturity date of the second mortgage was
extended to July 1, 1997. Sarnia also entered into a $1.5 million term loan with
the Riggs National Bank at the prime rate plus 1%. The term loan is amortized
over seven years payable in 66 equal monthly installments starting on the 18th
month from the date of funding. Versar guarantees Sarnia's $1.5 million term
loan. In addition, Sarnia issued $750,000 of its Series A Cumulative Convertible
Preferred Stock to a group of private investors. Sarnia received a rent deposit
of $250,000 from Versar and repaid the majority of the amounts it owed to
Versar.
In April 1997, Sarnia changed its banking institution from the Riggs
National Bank to NationsBank N.A. The $500,000 second mortgage which was paid
off on July 1, 1997 remained with the Riggs National Bank. The $1.5 million term
loan was terminated and replaced by a NationsBank five year term note. The new
note is guaranteed by Versar, Inc. and bears an interest at the Treasury Rate
plus three hundred (300) basis points per annum, but not to exceed 9% per annum.
The note matures in five years with $300,000 principal payment per year starting
July 1, 1997. The Company was in compliance with the modified financial
covenants at June 30, 1997.
Outstanding balances at June 30, are as follows:
June 30,
--------------------------
1997 1996
---- ----
(In thousands)
I.D.S. mortgage .......................... $ 8,767 $ 8,947
Riggs mortgage ........................... -- 292
Riggs term loan .......................... -- 1,500
NationsBank note ......................... 1,500 --
------- -------
Total debt .......................... $10,267 $10,739
======= =======
Maturity of the loans is as follows:
Years Ending June 30, Amount
--------------------- ------
(In thousands)
1998 $ 480
1999 495
2000 510
2001 527
2002 546
2003 and after 7,709
------
$10,267
=======
F-8
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE E STOCK OPTIONS
The Sarnia 1994 Stock Option Plan (the "Plan") is compensatory in
nature and provides employees of the Company and certain other persons an
incentive to remain in the employ of the Company and encourages superior
performance for the Company's benefit. The Company has segregated 300,000 shares
of stock for inclusion in the Plan. During fiscal year 1996, options to purchase
an aggregate of 262,500 shares of common stock with exercise prices ranging from
$0.1875 to $0.375 were granted to seven directors (175,000 shares), three
officers (62,500 shares) and one service provider (25,000 shares) as required by
the 1994 Plan on their first anniversary of membership. There were no stock
options granted in fiscal year 1997.
Under the Plan, options may be granted to key employees at the fair
market value on the date of grant and vesting varies depending on the discretion
of the Compensation Committee. Unexercised options are cancelled on the tenth
anniversary of the grant.
The Company applies APB 25 and related interpretations in accounting
for its Plan. Accordingly, no compensation cost has been recognized for stock
options. Had compensation cost for stock options been determined based on the
fair value at the grant dates for awards under this Plan consistent with the
method of SFAS 123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated as follows:
1997 1996
---- ----
(In thousands, except
per share data)
Net Income (Loss): As Reported $ 5 $ (269)
Pro Forma (1) (275)
Net Income (Loss) Per Share: As Reported $ --- $(0.06)
Pro Forma --- (0.06)
In accordance with SFAS 123, the fair value approach to valuing stock
options used for pro forma presentation has not been applied to stock options
granted prior to July 1, 1995. The compensation cost calculated under the fair
value approach is recognized over the vesting period of the stock options.
The weighted average fair value of options granted was $0.12 during
1996. The fair value is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1996: expected volatility of 34 percent; risk-free interest rate of 6
percent; and expected lives of five years from the grant date.
NOTE F PREFERRED STOCK
On January 25, 1996, 30,000 shares of the Series A preferred stock were
issued by the Company for an aggregate price of $750,000. The Series A preferred
stock bears a $25 par value and is entitled to receive preferential cumulative
dividends at the annual rate of $2.625 per share. Also, the Series A preferred
stock is redeemable at the option of the Company and is convertible into common
stock, at the option of the holders, at a conversion price of $0.40 per share.
F-9
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE G INCOME TAXES
At June 30, 1997, the Company had, for tax reporting purposes,
approximately $2,786,000 of net operating loss carryforwards available to offset
future taxable income through 2012.
Deferred tax (liabilities) assets are comprised of the following:
June 30,
-------------------
1997 1996
---- ----
(In thousands)
Deferred tax liabilities
Depreciation ............................... $(2,292) $(2,188)
Other ...................................... (21) --
Deferred tax assets
Net operating loss
carryforwards ............................ 1,059 941
Other ...................................... 8 32
------- -------
(1,246) (1,215)
Valuation allowance ........................ (510) (541)
------- -------
Net deferred tax liabilities ................. $(1,756) $(1,756)
======= =======
The tax provision was composed
of the following:
Years ended June 30,
-----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Expected (provision) benefit at
Federal statutory rate .................... $(28) $ 80 $ 92
Utilization (limitation on use)
of net operating losses ................... 28 (80) (92)
---- ---- ----
Tax provision .............................. $ -- $ -- $ --
==== ==== ====
F-10
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE H LOAN FROM VERSAR
In fiscal year 1995, Versar loaned $265,000 to Sarnia primarily for
leasehold improvements. Sarnia paid Versar $13,000 and $83,000 in fiscal years
1997 and 1996, respectively, leaving the loan balance at $169,000 on June 30,
1997.
NOTE I RENTAL UNDER OPERATING LEASES
Leases between Sarnia and its tenants expire from 1997 to 2009. During
the years ended June 30, 1997, 1996 and 1995, rentals to major tenants were as
follows:
Years ended June 30,
-----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Versar ..................................... $1,037 $1,111 $1,415
General Services Administration ............ 196 170 208
RGE Engineering ............................ 319 300 286
C-Cubed Corporation ........................ 219 216 210
NCPPO ...................................... 350 236 --
Noncancellable leases provide for approximate minimum rental payments
during each of the next five years as set forth below. As to the Versar leases,
it is assumed that the payments for the second and third five-year periods (the
actual amounts of which will depend upon fair values at the adjustment dates)
will be the same as the payments for the first five years. Certain of the other
rentals may increase in future years based on changes in the Consumer Price
Index and other rental increase factors. At July 1, 1997, 98% of Sarnia's space
was leased.
Years ending June 30, Versar Total
--------------------- ------ -----
(In thousands)
1998 $ 1,077 $ 2,848
1999 1,119 2,738
2000 987 2,174
2001 1,025 1,339
2002 1,065 1,065
Beyond 2002 7,586 7,586
--------- ----------
$ 12,859 $ 17,750
========= ==========
F-11
<PAGE>
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE J QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal years 1997 and 1996 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996
--------------------------------------------- -----------------------------------------------
Quarter ending Jun 30 Mar 31 Dec 31 Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
-------------- ------ ------ ------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate rental revenue.. $ 746 $ 724 $ 716 $ 725 $ 718 $ 685 $ 672 $ 696
Net income (loss)........... 34 15 10 25 (47) (46) (59) (83)
Net income (loss) applicable
to common stock........... 14 (4) (10) 5 (74) (53) (59) (83)
Net income (loss) per share
applicable to common
stock..................... $ --- $ --- $ --- $ --- $ (0.02) $ (0.01) $ (0.01) $ (0.02)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of
shares outstanding........ 4,573 4,573 4,573 4,573 4,573 4,573 4,573 4,573
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
F-12
Exhibit 10.14
EXHIBIT A
PROMISSORY NOTE
$1,500,000 McLean, Virginia
March 27, 1997
FOR VALUE RECEIVED, SARNIA CORPORATION, a corporation organized under
the laws of the Commonwealth of Virginia (the "Borrower"), promises to pay to
the order of NATIONSBANK, N.A., a national banking association, its successors
and assigns (the "Lender"), the principal sum of ONE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($1,500,000) (the "Principal Sum"), together with interest
thereon at the rate or rates hereinafter provided, in accordance with the
following:
1. Interest. Commencing as of the date hereof and continuing until
repayment in full of all sums due hereunder, the unpaid Principal Sum shall bear
interest at the Treasury Rate (as hereinafter defined), plus three hundred (300)
basis points per annum, but not to exceed nine percent (9.0%) per annum. For
purposes hereof, the term "Treasury Rate" as used in this Note shall mean the
fluctuating rate equal to the daily rate of United States Treasury Securities
adjusted to a constant maturity of five (5) years as quoted by the Lender and
reported in the Federal Reserve Statistical Release H.15 (519); provided,
however, that if the Treasury Rate shall cease to be so published, the Lender
may select in its sole and absolute discretion a successor source for the
Treasury Rate. The rate of interest charged under this Note shall change
immediately and contemporaneously with any change in the Treasury Rate. All
interest payable under the terms of this Note shall be calculated on the basis
of a 360-day year and the actual number of days elapsed.
2. Payments and Maturity. The unpaid Principal Sum, together with
interest thereon at the rate or rates provided above, shall be payable as
follows:
<PAGE>
(a) Interest on the unpaid Principal Sum shall be due and
payable monthly, commencing July 1, 1997, and on the same day of each month
thereafter to maturity; and
(b) The unpaid Principal Sum shall be due and payable in
monthly installments of principal in the amount of $25,000 each, commencing
July1, 1997, and on the same day of each month thereafter to maturity; and
(c) Unless sooner paid, the entire unpaid Principal Sum,
together with all interest accrued and unpaid thereon, shall be due and payable
in full on July 1, 2002.
3. Default Interest. Upon the occurrence of an Event of Default (as
hereinafter defined), the unpaid Principal Sum shall bear interest thereafter at
a rate (the "Default Rate") two percent (2%) per annum in excess of the then
current rate or rates of interest hereunder until such Event of Default is
cured.
4. Late Charges. If the Borrower shall fail to make any payment under
the terms of this Note within ten (10) days after the date such payment is due,
the Borrower shall pay to the Lender on demand a late charge equal to five
percent (5%) of such payment.
5. Application and Place of Payments. All payments, made on account of
this Note shall be applied first to the payment of any late charge then due
hereunder, second to the payment of any prepayment fee then due hereunder, third
to the payment of accrued and unpaid interest then due hereunder, and the
remainder, if any, shall be applied to the unpaid Principal Sum, with
application first made to all principal installments then due hereunder, next to
the outstanding principal balance due and owing at maturity and thereafter to
the principal payments due in the inverse order of
<PAGE>
maturities. Notwithstanding any provision contained herein to the contrary, any
portion of a permitted partial prepayment applied to the unpaid Principal Sum
shall be applied first to the outstanding principal balance due and owing at
maturity and thereafter to the principal payments due in the inverse order of
maturities. All payments on account of this Note shall be paid in lawful money
of the United States of America in immediately available funds during regular
business hours of the Lender at its principal office in McLean, Virginia or at
such other times and places as the Lender may at any time and from time to time
designate in writing to the Borrower. The Lender is authorized to deduct any
payment (including payments of principal and/or interest as above provided) from
the Borrower's Account Number ____________ on or after the date the payment is
due; provided, however, that such authorization shall not be deemed to relieve
the Borrower from its obligation to make such payment when it is due.
6. Prepayment. The Borrower may prepay the Principal Sum in whole or in
part upon ten (10) days prior written notice to the Lender without premium or
penalty.
7. Financing Agreement and Other Financing Documents. This Note is the
"Term Note" described in a Financing Agreement dated March __, 1997 by and
between the Borrower and the Lender (as amended, modified, restated,
substituted, extended and renewed at any time and from time to time, the
"Financing Agreement"). The indebtedness evidenced by this Note is included
within the meaning of the term "Obligations" as defined in the Financing
Agreement. The term "Financing Documents" as used in this Note shall mean
collectively this Note, the Financing Agreement and any other instrument,
agreement, or document previously, simultaneously, or hereafter executed and
delivered by the Borrower and/or any other person, singularly or jointly with
<PAGE>
any other person, evidencing, securing, guaranteeing, or in connection with the
Principal Sum, this Note and/or the Financing Agreement.
8. Security. This Note is secured as provided in that certain Financing
and Security Agreement of even date herewith by and among Versar, Inc., Geomet
Technologies, Inc. and the Lender, as the same may be amended from time to time.
9. Events of Default. The occurrence of any one or more of the
following events shall constitute an event of default (individually, an "Event
of Default" and collectively, the "Events of Default") under the terms of this
Note:
(a) The failure of the Borrower to pay to the Lender within
five (5) days of when due any and all amounts payable by the Borrower to the
Lender under the terms of this Note;
(b) or The occurrence of an event of default (as defined
therein) under the terms and conditions of any of the other Financing Documents.
10. Remedies. Upon the occurrence of an Event of Default, at the option
of the Lender, all amounts payable by the Borrower to the Lender under the terms
of this Note shall immediately become due and payable by the Borrower to the
Lender without notice to the Borrower or any other person, and the Lender shall
have all of the rights, powers, and remedies available under the terms of this
Note, any of the other Financing Documents and all applicable laws. The Borrower
and all endorsers, guarantors, and other parties who may now or in the future be
primarily or secondarily liable for the payment of the indebtedness evidenced by
this Note hereby severally waive presentment, protest and demand, notice of
protest, notice of demand and of dishonor and non-payment of this Note and
expressly agree that this Note or any payment hereunder may be extended from
time to time without in any way affecting the liability of the Borrower,
guarantors and endorsers.
<PAGE>
11. Expenses. The Borrower promises to pay to the Lender on demand by
the Lender all costs and expenses incurred by the Lender in connection with the
collection and enforcement of this Note, including, without limitation,
reasonable attorneys' fees and expenses and all court costs.
12. Notices. Any notice, request, or demand to or upon the Borrower or
the Lender shall be deemed to have been properly given or made when delivered in
accordance with Section 10.01 of the Financing Agreement.
13. Miscellaneous. Each right, power, and remedy of the Lender as
provided for in this Note or any of the other Financing Documents, or now or
hereafter existing under any applicable law or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power, or remedy
provided for in this Note or any of the other Financing Documents or now or
hereafter existing under any applicable law, and the exercise or beginning of
the exercise by the Lender of any one or more of such rights, powers, or
remedies shall not preclude the simultaneous or later exercise by the Lender of
any or all such other rights, powers, or remedies. No failure or delay by the
Lender to insist upon the strict performance of any term, condition, covenant,
or agreement of this Note or any of the other Financing Documents, or to
exercise any right, power, or remedy consequent upon a breach thereof, shall
constitute a waiver of any such term, condition, covenant, or agreement or of
any such breach, or preclude the Lender from exercising any such right, power,
or remedy at a later time or times. By accepting payment after the due date of
any amount payable under the terms of this Note, the Lender shall not be deemed
to waive the right either to require prompt payment when due of all other
amounts payable under the terms of this Note or to declare an Event of Default
for the failure to effect such prompt payment of any such other amount. No
course of dealing or conduct shall be effective to amend, modify, waive,
release, or change any provisions of this Note.
<PAGE>
14. Partial Invalidity. In the event any provision of this Note (or any
part of any provision) is held by a court of competent jurisdiction to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision (or remaining part of
the affected provision) of this Note; but this Note shall be construed as if
such invalid, illegal, or unenforceable provision (or part thereof) had not been
contained in this Note, but only to the extent it is invalid, illegal, or
unenforceable.
15. Captions. The captions herein set forth are for convenience only
and shall not be deemed to define, limit, or describe the scope or intent of
this Note.
16. Applicable Law. The Borrower acknowledges and agrees that this Note
shall be governed by the laws of the Commonwealth of Virginia, even though for
the convenience and at the request of the Borrower, this Note may be executed
elsewhere.
17. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY WAIVES TRIAL BY JURY
IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES,
ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS NOTE OR (B) THE FINANCING
DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF
TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS,
INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE.
THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE
BORROWER, AND THE BORROWER HEREBY REPRESENTS THAT NO REPRESENTATIONS OF FACT OR
OPINION HAVE BEEN MADE BY ANY
<PAGE>
INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR
NULLIFY ITS EFFECT. THE BORROWER FURTHER REPRESENTS THAT IT HAS BEEN REPRESENTED
IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
18. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF THIS NOTE OR ANY
RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR
ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN
ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE
APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR ARBITRATION OF
COMMERCIAL DISPUTES OF ENDISPUTE, INC., D/B/A J.A.M.S./ENDISPUTE ("J.A.M.S.")
AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF AN INCONSISTENCY, THE
SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED
IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR
DOCUMENT MAY BRING ANY ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO
COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE RELATES IN ANY
COURT HAVING JURISDICTION OVER SUCH ACTION.
<PAGE>
(A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN FAIRFAX
COUNTY, VIRGINIA AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR. IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN NINETY (90) DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCING OF SUCH HEARING FOR AN ADDITIONAL SIXTY (60) DAYS.
(B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO: (I)
LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR
REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR
(II) BE A WAIVER BY THE LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C.
ss.91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE
LENDER: (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SET OFF,
OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO
OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED
TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE
LENDER MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR
OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE
PENDENCY OF ANY ARBITRATION PROCEEDING
<PAGE>
BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THE EXERCISE
OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF ANY ACTION FOR
FORECLOSURE OR FOR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER
OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE
THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
19. Expenses. The Borrower promises to pay to the Lender on demand by
the Lender all costs and expenses incurred by the Lender in connection with the
collection and enforcement of this Note, including, without limitation,
reasonable attorneys' fees and expenses and all court costs.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed
under seal by its duly authorized officers as of the date first written above.
WITNESS OR ATTEST: SARNIA CORPORATION
/S/ Lula Fasold By: /S/ Lawrence W. Sinnott (SEAL)
- ------------------------ -----------------------
Name: Lawrence W. Sinnott
Title: Treasurer
Exhibit 11
SARNIA CORPORATION
Statement Re: Computation of Per Share Earnings
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK......... $ 5 $ (269) $ (270)
=========== =========== ============
Weighted average common shares outstanding........... 4,572,545 4,572,545 4,572,545
----------- ----------- ------------
NET INCOME (LOSS) PER SHARE - PRIMARY................ $ --- $ (0.06) $ (0.06)
=========== =========== ============
Common shares from above............................. 4,572,545 4,572,545 4,572,545
Assumed exercise of options (treasury stock
method)............................................ 30,383 --- ---
----------- ----------- ------------
4,602,928 4,572,545 4,572,545
=========== =========== ============
NET INCOME (LOSS) PER SHARE -
FULLY DILUTED....................................... $ --- $ (0.06) $ (0.06)
=========== =========== ============
Common shares from above............................. 4,572,545 4,572,545 4,572,545
Assumed exercise of options (treasury stock
method)............................................ 30,383 --- ---
----------- ----------- ------------
4,602,928 4,572,545 4,572,545
=========== =========== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-END> Jun-30-1997
<CASH> 96
<SECURITIES> 0
<RECEIVABLES> 64
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 364
<PP&E> 17,690
<DEPRECIATION> 5,746
<TOTAL-ASSETS> 12,308
<CURRENT-LIABILITIES> 609
<BONDS> 10,267
0
750
<COMMON> 0
<OTHER-SE> (1,542)
<TOTAL-LIABILITY-AND-EQUITY> 12,308
<SALES> 0
<TOTAL-REVENUES> 2,911
<CGS> 0
<TOTAL-COSTS> 1,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 838
<INCOME-PRETAX> 5
<INCOME-TAX> 0
<INCOME-CONTINUING> 5
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
