<PAGE> 1
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
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED COMMISSION FILE
JUNE 30, 1998 NO. 0-24108
</TABLE>
--------------
SARNIA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 1, 1998 was approximately $1,890,470.
The number of shares of Common Stock outstanding as of September 1,
1998 was 4,572,545.
The Exhibit Index is located on Pages 15 through 16 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 1998 Annual Meeting of
Stockholders scheduled to be held on November 18, 1998 are incorporated by
reference into Part III hereof.
<PAGE> 2
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 110,000 square feet) which was constructed in
1986. During the past two years, the interior of the 6850 Building has been
extensively reconditioned and upgraded. At the end of June 1998, the 6850
Building was 98% leased and the 6800 Building was 100% 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 68,414. Versar and National Capital Preferred Provider
Organization, Inc. ("NCPPO") are the major tenants leasing approximately 87% of
the 6850 Building and have leases which terminate in May 2009 and June 2000,
respectively. Four major tenants, the General Services Administration ("GSA"),
Cornet, C-Cubed Corporation and RGE Engineering, lease approximately 72% 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.
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.
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<PAGE> 3
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 growth, combined with the
past lack of new buildings under 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 1998 through
1994 was 98%, 98%, 93%, 99% and 94%, respectively. The occupancy rate for the
6800 Building for fiscal years 1998 through 1994 was 100%, 97%, 94%, 93% and
85%, 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. 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 has lease agreements with Sarnia for 68,414 square feet of office
space in the 6850 Building, and 4,078 square feet of storage space in the 6800
Building, at an annual aggregate rent of $1,072,000. 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 $14.60, $14.02, $13.59, $13.52 and $13.41 for fiscal years
1998, 1997, 1996, 1995 and 1994, respectively. With respect to the 6800
Building, the average effective annual rental per square foot was $13.13,
$12.60, $11.76, $11.52 and $11.29 for fiscal years 1998, 1997, 1996, 1995 and
1994, respectively. In addition, the average net rental rates per square foot
for both buildings were $7.40, $7.01, $6.09, $6.30 and $5.42 for fiscal years
1998, 1997, 1996, 1995 and 1994, respectively. The net rental rates per square
foot for Versar alone, as a significant tenant, were $7.85, $7.83, $6.88, $7.06
and $7.57 for fiscal years 1998, 1997, 1996, 1995 and 1994, 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.
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<PAGE> 4
The following table sets forth the schedule of the lease expirations for
each of the ten years commencing with calendar year 1998:
<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>
1998 3 15,084 $ 115,000 4.0%
1999 3 33,887 $ 460,000 15.9%
2000 7 68,409 $ 900,000 31.2%
2001 2 25,876 $ 338,000 11.7%
2002 -- --- --- ---
2003 -- --- --- ---
2004 -- --- --- ---
2005 -- --- --- ---
2006 -- --- --- ---
2007 -- --- --- ---
</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 $ 612,591 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> 5
The real property tax rate is $1.23 per $100 of assessed value. Annual
real property taxes for 1998 are approximately $76,000 and $81,000 for the 6850
Building and the 6800 Building, respectively.
EMPLOYEES
At June 30, 1998, 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 AND DIRECTORS
The current executive officers and directors of Sarnia, their ages as of
September 1, 1998, their current offices or positions and their business
experience for the past five years are set forth below.
<TABLE>
<CAPTION>
Name Age Business Experience
- ---- --- -------------------
During Last Five Years
----------------------
and Other Information
---------------------
<S> <C> <C>
Charles I. Judkins, Jr. 67 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 57 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 36 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 75 DIRECTOR
President, WEST*GROUP Management
LLC, a real estate development and
construction firm and its predecessors,
since 1962.
Michael Markels, Jr. 72 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.
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
Name Age Business Experience
- ---- --- -------------------
During Last Five Years
----------------------
and Other Information
---------------------
<S> <C> <C>
Thomas G. Hotz 38 DIRECTOR
Partner, Magnum Capital Partners,
L.L.C., since 1996; Managing Director of
Julian J. Studley, Inc., a national real
estate firm, from 1989 through 1996.
William G. Denbo 55 VICE PRESIDENT AND GENERAL MANAGER
Maintenance Supervisor and general
manager of Sarnia Corporation for the
past five years.
James N. Schwarz 53 DIRECTOR
Partner of Patton Boggs LLP since
September 1998; Partner of Ginsburg,
Feldman and Bress, a chartered law firm
in Washington, D.C., from February 1996
to August 1998; Senior Vice President,
General Counsel and Corporate Secretary
of Steuart Petroleum Company from 1991
to 1996.
</TABLE>
6
<PAGE> 7
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 110,000 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 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
At June 30, 1998, the Company had 743 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> 8
low actual trade prices without adjustments for mark-ups, mark-downs, or
commissions during fiscal years 1998 and 1997 are presented below.
<TABLE>
<CAPTION>
Fiscal Year High Low
- ----------------------- ------- ------
<S> <C> <C> <C>
1998 4th Quarter.................... $ 0.7813 $ 0.3750
3rd Quarter.................... 0.4688 0.3750
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
</TABLE>
No dividends were paid on the Company's common stock in fiscal year 1998
or 1997 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.
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<PAGE> 9
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,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
related data:
Real estate rental revenue $ 3,127 $ 2,911 $ 2,771 $ 2,676 $ 2,446
Net income (loss) before
cumulative effect of change
in accounting principle 149 84 (235) (270) (684)
Cumulative effect of
adoption of SFAS 109 --- --- --- --- (440)
Net income (loss) 149 84 (235) (270) (1,124)
Net income (loss) applicable
to common stock 70 5 (269) (270) (1,124)
Balance Sheet related data:
Total assets 11,847 12,308 12,762 13,305 13,362
Short-term debt 495 480 452 1,405 355
Long-term debt 9,292 9,787 10,287 10,657 12,048
-------- -------- -------- -------- --------
Total debt 9,787 10,267 10,739 12,062 12,403
Total stockholders' deficit (722) (792) (797) (1,278) (1,008)
Earnings per share information:
Net income (loss) per share before
cumulative effect of change
in accounting principle $ 0.02 $ --- $ (0.06) $ (0.06) $ (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 $ 0.02 $ --- $ (0.06) $ (0.06) $ (0.25)
Number of shares out-
standing 4,664 4,603 4,573 4,573 4,573
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 10
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 1998 of $3,127,000 was $216,000 (7%) higher than
the $2,911,000 of rental revenue reported in 1997. The increase is due to rent
escalations and a higher occupancy rate. The average occupancy rate for the two
buildings in fiscal year 1998 was 99%. 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 increased occupancy rates
in both buildings.
Real estate expenses in 1998 of $1,419,000 were $130,000 (10%) higher
than the $1,289,000 reported in 1997. The increase is due to higher operating
costs in support of higher occupancy rate and higher real estate taxes as a
result of the completion of building renovations which have increased the
property value. 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.
Depreciation/amortization expenses in 1998 were $573,000, a decrease of
$34,000 (6%) when compared to prior fiscal year of 1997. The decrease is due to
minimum capital expenditures spent in fiscal year 1998.
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 were greater than the new
capital expenditures in 1997.
General and administrative expenses in 1998 of $94,000 remained
relatively at the same level as fiscal year 1997 of $93,000. General and
administrative expenses in 1997 were $9,000 (9%) lower than 1996 due to a
decrease in insurance expense. 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. After the risk experiencing rate was
established a year later, the insurance expense decreased in 1997.
Interest expense of $793,000 in 1998 was $45,000 (5%) lower compared to
interest expense of $838,000 in 1997. Interest expense in 1997 decreased by
$139,000 (14%) when compared to 1996. The decreases are due to the refinancing
of debt at lower interest rates and principal payments made in 1997 and 1998.
Sarnia recorded $79,000, $79,000 and $34,000 of preferred stock
dividends in fiscal years 1998, 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 in 1997 because the preferred equity
was issued in January 1996. Therefore, fiscal year 1996 had only five months of
dividends.
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<PAGE> 11
The net income applicable to common stock in 1998 was $70,000, an
increase of $65,000 over that reported in 1997. 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 improvements are
attributable to the combination of higher rental revenue, controlled operating
expenses, and lower interest expenses in fiscal years 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities was $674,000, 735,000 and
$508,000 for fiscal years 1998, 1997 and 1996, respectively. Principal payments
on the mortgages for fiscal years 1998, 1997 and 1996 were $480,000, $472,000
and $1,323,000, 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 $52,000, $13,000 and $83,000 in fiscal years 1998, 1997
and 1996, respectively, leaving the balance of $117,000.
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% 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% which was 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 with the Riggs
National Bank was paid off on July 1, 1997. 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 five-year Treasury Rate
plus three hundred (300) basis points per annum (currently 8.5%), but not to
exceed 9% per annum. The note matures in five years with $300,000 principal
payment per year starting July 1, 1997. As of June 30, 1998, the outstanding
balance on the loan was $1,200,000.
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 rents should be sufficient
to meet Sarnia's operating needs, including capital expenditures in fiscal year
1999.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 was effective beginning in 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" was issued in October, 1995 and was effective
beginning in 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> 12
stock compensation plans. The Company has opted to continue to account for its
stock option plan in accordance with Accounting Principles Board ("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" 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 adopted the
provisions of the standard in fiscal year 1998 and restated prior year's
earnings per share amounts to comply with the new standard.
IMPACT OF INFLATION
Sarnia continually seeks to protect itself from the effects of
inflation. The majority of its leases provide for annual increases based on
fixed percentages or increases in the Consumer Price Index.
YEAR 2000
Certain computer programs have been written using two digits rather than
four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000. This,
in turn, could result in major system failures and in miscalculations, and is
generally referred to as the "Year 2000" problem. Sarnia is in the process of
evaluating the different options that are available to upgrade the Company's
existing data processing and financial reporting software applications to be
Year 2000 compliant. Presently, Sarnia does not believe that Year 2000
compliance will result in any material investments, nor does Sarnia anticipate
that the Year 2000 problem will have material adverse effects on the business
operations or financial performance of Sarnia. The Company is in the process of
requesting each of its tenants and material suppliers, including Virginia Power,
to advise as to their systems being Year 2000 compliant. Except for a failure by
Virginia Power to become Year 2000 compliant, the failure of any tenant or other
supplier to be Year 2000 compliant would not have a material adverse effect on
the Company.
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 1998 Annual
Meeting of Stockholders which is expected to be filed with the Commission not
later than 120 days after the Company's 1998 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.
12
<PAGE> 13
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
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 1998 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 1998 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, 1998 and 1997
c) Statements of Operations for the Years Ended June 30, 1998,
1997 and 1996
d) Statements of Changes in Stockholders' Deficit for the Years
Ended June 30, 1998, 1997 and 1996
e) Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996
f) Notes to Financial Statements
(2) Financial Statement Schedules:
There are no financial statement schedules applicable to the
Company.
13
<PAGE> 14
(3) Exhibits:
The exhibits to this Form 10-K are set forth in a separate
Exhibit Index which is included on page 15 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 1998.
14
<PAGE> 15
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.................................................................. (E)
11 Statement Re: Computation of Per Share Earnings................................. 18
27 Financial Data Schedule..........................................................
</TABLE>
15
<PAGE> 16
- --------------------------------------------------------------------------
(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).
(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) Incorporated 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.
(E) Incorporated by reference to the similarly numbered exhibit to the
Registrant's form 10-K Annual Report for the fiscal year ended June 30,
1997 ("FY 1997 Form 10K") filed with the Commission on September 18, 1997.
16
<PAGE> 17
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 15, 1998 /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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/S/ Charles I. Judkins, Jr. President & CEO September 15, 1998
- -----------------------------------------
Charles I. Judkins, Jr.
/S/ Benjamin M. Rawls Chairman & Director September 15, 1998
- --------------------------------------
Benjamin M. Rawls
/S/ Lawrence W. Sinnott Treasurer and Principal September 15, 1998
- -------------------------------------- Accounting Officer
Lawrence W. Sinnott
/S/ Michael Markels, Jr. Director September 15, 1998
- ----------------------------------------
Michael Markels, Jr.
/S/ Gerald T. Halpin Director September 15, 1998
- ----------------------------------------
Gerald T. Halpin
/S/ Thomas G. Hotz Director September 15, 1998
- ---------------------------------------
Thomas G. Hotz
/S/ James N. Schwarz Director September 15, 1998
- ---------------------------------------
James N. Schwarz
</TABLE>
17
<PAGE> 18
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
/S/ Arthur Andersen LLP
-------------------------
Arthur Andersen LLP
Washington, D.C.
September 15, 1998
F-1
<PAGE> 19
SARNIA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
----------- ----------
(In thousands)
ASSETS
<S> <C> <C>
Property and equipment ......................... $ 17,710 $ 17,690
Accumulated depreciation/amortization .......... (6,267) (5,746)
-------- --------
11,443 11,944
Cash ........................................... 139 96
Rents and other receivables, net ............... 79 64
Prepaid expenses and other assets .............. 186 204
-------- --------
Total assets .............................. $ 11,847 $ 12,308
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages ...................................... $ 9,787 $ 10,267
Accounts payable ............................... 32 165
Loan from Versar ............................... 117 169
Accrued salaries ............................... 18 17
Deferred income taxes .......................... 1,855 1,756
Tenant security deposits ....................... 436 468
Other liabilities .............................. 324 258
-------- --------
Total liabilities .......................... 12,569 13,100
-------- --------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, $25 par value; Series A
cumulative convertible; 1,000,000 shares
authorized; 30,000 shares issued and
outstanding at June 30, 1998 and
June 30, 1997 .............................. 750 750
Common stock, no par value; 20,000,000 shares
authorized at June 30, 1998 and 1997;
4,572,545 shares issued and outstanding
at June 30, 1998 and 1997 .................. --- ---
Accumulated deficit ......................... (1,472) (1,542)
-------- --------
Total stockholders'
deficit ................................ (722) (792)
-------- --------
Total liabilities and
stockholders' deficit .................. $ 11,847 $ 12,308
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 20
SARNIA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1998 1997 1996
---------- --------- -------
(In thousands, except per share data)
<S> <C> <C> <C>
Real estate rental revenue .............. $ 3,127 $ 2,911 $ 2,771
Real estate expenses .................... 1,419 1,289 1,308
------- ------- -------
1,708 1,622 1,463
Depreciation/amortization ............... 573 607 619
General and administrative .............. 94 93 102
------- ------- -------
Income from real estate ................. 1,041 922 742
Interest expense ........................ 793 838 977
------- ------- -------
Net income (loss) before income taxes ... 248 84 (235)
Income taxes ............................ 99 --- ---
------- ------- -------
Net income (loss) ....................... 149 84 (235)
Dividends on preferred stock ............ 79 79 34
------- ------- -------
Net income (loss) applicable to common
stock .................................. $ 70 $ 5 $ (269)
======= ======= =======
Net income (loss) per share applicable to
common stock - basic and diluted ....... $ 0.02 $ --- $ (0.06)
======= ======= =======
Weighted average number of
shares outstanding - diluted ....... 4,664 4,603 4,573
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 21
SARNIA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Total
----------------------- Stock-
Preferred Number of Accumulated holders'
Stock Shares Amount Deficit Deficit
--------- --------- ---------- ------------- -----------
Years Ended June 30, 1998, 1997, 1996
---------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
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)
-------- --------- --------- --------- ---------
Net income ...................... --- --- --- 149 149
Preferred stock dividend accrued --- --- --- (79) (79)
-------- --------- --------- --------- ---------
Balance, June 30, 1998 .......... $ 750 4,572,545 $ --- $ (1,472) $ (722)
======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 22
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1998 1997 1996
----------- ------------ ----------
(In thousands)
Cash flow from operating activities
<S> <C> <C> <C>
Net income (loss) applicable to common stock ....... $ 70 $ 5 $ (269)
Adjustments to reconcile net income (loss)
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization ..................... 573 607 619
Increase in deferred taxes .................... 99 --- ---
-------- -------- --------
Comparative funds from operations ........... 742 612 350
Preferred stock dividend accrued .............. 79 79 34
Provision for doubtful accounts ............... 5 --- ---
(Increase) decrease in rents and other
receivables ................................. (20) 73 (9)
(Increase) decrease in prepaid and other assets (33) (76) 28
(Decrease) increase in accounts payable ....... (133) 29 23
Increase (decrease) in accrued salaries ....... 1 (13) 4
Increase in other liabilities ................. 33 31 78
-------- -------- --------
Net cash provided by operating activities .............. 674 735 508
-------- -------- --------
Cash flow from investing activities
Improvements to real estate ........................ (20) (136) (43)
Disposition of property and equipment .............. --- 26 ---
-------- -------- --------
Net cash used in investing activities .................. (20) (110) (43)
-------- -------- --------
Cash flow from financing activities
Mortgage principal payments ........................ --- --- (12,062)
Refinanced new mortgage ............................ --- --- 11,000
Principal payments on new mortgage ................. (480) (472) (261)
Loan from Versar, net .............................. (52) (13) (83)
Issuance of preferred stock ........................ --- --- 750
Deposit received ................................... --- --- 250
Payment of dividend on preferred stock ............. (79) (99) (7)
-------- -------- --------
Net cash used in financing activities .................. (611) (584) (413)
-------- -------- --------
Net increase in cash ................................... 43 41 52
Cash at beginning of period ............................ 96 55 3
-------- -------- --------
Cash at end of period .................................. $ 139 $ 96 $ 55
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest ......................................... $ 808 $ 888 $ 987
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 23
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, Springfield, Virginia.
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.
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 revenue is recognized based upon tenant lease
agreements in accordance with Statement of Financial Accounting Standards
("SFAS") No. 13, "Accounting for Leases". 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: Basic 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. 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.
F-6
<PAGE> 24
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" 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" was issued in October, 1995 and
is effective beginning with 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" in February 1997. SFAS 128
requires a company to present basic and diluted earnings per share amounts on
the face of the Statement of Operations. The Company adopted the provisions of
the standard in fiscal year 1998 and restated all prior periods to comply with
the new standard.
NOTE C PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated June 30,
Useful Life -----------------------
in Years 1998 1997
---------------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Land................... --- $ 650 $ 650
Buildings.............. 40 15,733 15,733
Equipment.............. 5 136 136
Leasehold improvements. Life of Lease 1,191 1,171
------- -------
17,710 17,690
Accumulated depreciation
and amortization....... (6,267) (5,746)
------- -------
$11,443 $11,944
======= =======
</TABLE>
Depreciation and amortization of property and equipment included as
expense in the accompanying Statements of Operations was $521,000, $539,000, and
$546,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
Amortization of brokerage fees of $52,000, $68,000, and $73,000 were included in
the Statements of Operations for the fiscal years ended June 30, 1998, 1997 and
1996, respectively.
Maintenance and repair expenses (included in real estate expenses)
approximated $201,000, $207,000 and $206,000 for the years ended June 30, 1998,
1997 and 1996, respectively.
F-7
<PAGE> 25
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% which was 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 with the Riggs
National Bank was paid off on July 1, 1997. 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 five-year 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, 1998.
Outstanding balances at June 30, are as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
----------- -------
(In thousands)
<S> <C> <C>
I.D.S. mortgage....................................... $ 8,587 $ 8,767
NationsBank note...................................... 1,200 1,500
-------- -------
Total debt....................................... $ 9,787 $10,267
======== =======
</TABLE>
Maturity of the loans is as follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- ------
(In thousands)
<S> <C> <C>
1999 495
2000 511
2001 527
2002 546
2003 152
2004 and thereafter 7,556
-----------
$ 9,787
===========
</TABLE>
F-8
<PAGE> 26
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 employment of the Company and encourages superior performance for
the Company's benefit. The Company originally segregated 300,000 shares of stock
for inclusion in the Plan, which was increased to 600,000 in 1998 after
shareholder approval. 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), as required by the 1994
Plan on their first anniversary of membership plus three officers (62,500
shares) and one service provider (25,000 shares). There were no stock options
granted in fiscal year 1997. In fiscal year 1998, options to purchase 25,000
shares were granted to one employee at the fair market price.
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 Accounting Principles Board (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:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands, except
per share data)
<S> <C> <C>
Net Income (Loss): As Reported $ 70 $ 5
Pro Forma 61 (4)
Net Income (Loss) Per Share: As Reported $0.02 $ ---
Pro Forma 0.01 ---
</TABLE>
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 $0.15 during
1998. 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 1998: expected volatility of 50.7 percent; risk-free interest rate of
5 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> 27
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G INCOME TAXES
At June 30, 1998, the Company had, for tax reporting purposes,
approximately $2,625,000 of net operating loss carryforwards available to offset
future taxable income through 2012.
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
------- ------
(In thousands)
Deferred tax liabilities
<S> <C> <C>
Depreciation...................... $(2,320) $ (2,292)
Other............................. (34) (21)
Deferred tax assets
Net operating loss carryforwards.. 997 1,059
Other............................. 16 8
-------- --------
(1,341) (1,246)
Valuation allowance............... (514) (510)
-------- ---------
Net deferred tax liabilities........ $(1,855) $ (1,756)
======== =========
</TABLE>
The tax provision was composed of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
1998 1997 1996
--------- --------- -------
(In thousands)
<S> <C> <C> <C>
Expected (provision) benefit at Federal statutory rate $(84) $(28) $ 80
Provision at State statutory rate .................... (15) --- ---
Effect of net operating losses and
reserves ............................................. --- 28 (80)
---- ---- ----
Tax provision ........................................ $(99) $--- $---
==== ==== ====
</TABLE>
F-10
<PAGE> 28
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 repaid Versar's loan by $52,000, $13,000 and
$83,000 in fiscal years 1998, 1997 and 1996, respectively, leaving a loan
balance of $117,000 on June 30, 1998.
NOTE I RENTAL UNDER OPERATING LEASES
Leases between Sarnia and its tenants expire from 1998 to 2009. During
the years ended June 30, 1998, 1997 and 1996, rentals to major tenants were as
follows:
<TABLE>
<CAPTION>
Lease Years Ended June 30,
Termination --------------------------------
Date 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Versar.............................. 2009 $ 1,072 $ 1,037 $ 1,111
General Services Administration..... 1999 201 196 170
RGE Engineering..................... 2000 339 319 300
C-Cubed Corporation................. 1999 223 219 216
NCPPO............................... 2000 350 350 236
</TABLE>
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 June 30, 1998, 99% of Sarnia's space
was leased.
<TABLE>
<CAPTION>
Years Ending June 30, Versar Total
--------------------- ---------- --------
(In thousands)
<S> <C> <C>
1999 1,115 2,934
2000 956 1,990
2001 993 1,391
2002 1,032 1,037
2003 1,073 1,073
Beyond 2003 6,284 6,284
-------- --------
$ 11,453 $ 14,709
======== ========
</TABLE>
F-11
<PAGE> 29
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal years 1998 and 1997 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1997
---------------------------------------------- ----------------------------------------
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. $ 812 $ 782 $ 750 $ 783 $ 746 $ 724 $ 716 $ 725
Net income............. 55 28 37 29 34 15 10 25
Net income (loss) applicable to
common stock......... 35 9 17 9 14 (4) (10) 5
Net income (loss) per share
applicable to common
stock - diluted...... $ 0.01 $ --- $ --- $ --- $ --- $ --- $ --- $ ---
======== ======== ======== ======== ======== ======== ======== =======
Weighted average number of
shares outstanding -
diluted.............. 4,708 4,601 4,579 4,606 4,573 4,573 4,573 4,573
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Quarterly financial data may not equal annual totals due to rounding. Quarterly
earnings per share data will not equal annual total due to fluctuations in
common shares outstanding.
F-12
<PAGE> 1
EXHIBIT 11
SARNIA CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK ............................. $ 70 $ 5 $ (269)
=========== =========== ===========
Weighted average common shares outstanding 4,572,545 4,572,545 4,572,545
=========== =========== ===========
NET INCOME (LOSS) PER SHARE - BASIC ....... $ 0.02 $ --- $ (0.06)
=========== =========== ===========
Common shares from above .................. 4,572,545 4,572,545 4,572,545
Assumed exercise of options (treasury stock
method) .................................. 91,647 30,383 ---
----------- ----------- -----------
4,664,192 4,602,928 4,572,545
=========== =========== ===========
NET INCOME (LOSS) PER SHARE -
DILUTED .................................. $ 0.02 $ --- $ (0.06)
=========== =========== ===========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 139
<SECURITIES> 0
<RECEIVABLES> 84
<ALLOWANCES> 5
<INVENTORY> 0
<CURRENT-ASSETS> 404
<PP&E> 17,710
<DEPRECIATION> 6,267
<TOTAL-ASSETS> 11,847
<CURRENT-LIABILITIES> 491
<BONDS> 9,787
0
750
<COMMON> 0
<OTHER-SE> (1,472)
<TOTAL-LIABILITY-AND-EQUITY> 11,847
<SALES> 0
<TOTAL-REVENUES> 3,127
<CGS> 0
<TOTAL-COSTS> 1,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 793
<INCOME-PRETAX> 169
<INCOME-TAX> 99
<INCOME-CONTINUING> 70
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
