<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
FOR THE FISCAL YEAR ENDED COMMISSION FILE
JUNE 30, 1999 NO. 0-24108
--------------
SARNIA CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1215366
(State or other jurisdiction of (I.R.S.employer identification no.)
incorporation or organization)
6850 VERSAR CENTER, SPRINGFIELD, VIRGINIA 22151
(Address of principal executive offices) (Zip code)
(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, 1999 was approximately $2,155,136.
The number of shares of Common Stock outstanding as of September 1, 1999 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 1999 Annual Meeting of Stockholders
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 or the Company's
ability to attract new tenants. 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
regional 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. Since 1996, the interior of the 6850 Building has been extensively
reconditioned and upgraded. At the end of June 1999, the 6850 Building was 98%
leased and the 6800 Building was 89% leased. 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 60% of the 6800 Building and have leases which terminate between
June 1999 and February 2004. The tenant whose lease expired in June 1999 has
renewed its lease with Sarnia through June 2005.
Sarnia believes that the relatively stable employment base provided by the
federal government, supplemented by robust technical business growth in the
region, makes Versar Center an attractive real estate investment. Because of the
presence of the federal government and the increasing technical business
presence, 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.
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 three 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 led to an increase in occupancy and
generally higher rentals for vacant or renewed office space.
2
<PAGE> 3
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 1999 through 1995
was 98%, 98%, 98%, 93% and 99%, respectively. The occupancy rate for the 6800
Building for fiscal years 1999 through 1995 was 89%, 100%, 97%, 94% and 93%,
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, a computer software assembly firm, a health care
provider organization and other various service businesses. Versar and 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 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 aggregate annual rent of $1,115,000. Both leases expire on May
31, 2009. The lease on the 6850 Building has an annual 2% escalation in rent
costs with fair market adjustment on June 1, 2004. The lease on the 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 $15.18, $14.60, $14.02, $13.59 and $13.52 for fiscal years 1999,
1998, 1997, 1996 and 1995, respectively. With respect to the 6800 Building, the
average effective annual rental per square foot was $13.04, $13.13, $12.60,
$11.76 and $11.52 for fiscal years 1999, 1998, 1997, 1996 and 1995,
respectively. In addition, the average net rental rates per square foot for both
buildings were $7.98, $7.40, $7.01, $6.09 and $6.30 for fiscal years 1999, 1998,
1997, 1996 and 1995, respectively. The net rental rates per square foot for
Versar alone, as a significant tenant, were $8.43, $7.85, $7.83, $6.88 and $7.06
for fiscal years 1999, 1998, 1997, 1996 and 1995, 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> 4
The following table sets forth the schedule of the lease expirations for
each of the ten years commencing with calendar year 2000:
<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>
2000 7 64,501 $ 881,000 30.4%
2001 3 11,634 $ 174,000 6.0%
2002 -- --- --- ---
2003 1 5,584 $ 70,000 2.4%
2004 1 10,680 $ 179,000 6.2%
2005 -- --- --- ---
2006 -- --- --- ---
2007 -- --- --- ---
2008 -- --- --- ---
2009 1 72,492 $1,115,000 38.4%
</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 $ 648,459 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 1999 were approximately $84,000 and $90,000 for the 6850
Building and the 6800 Building, respectively.
EMPLOYEES
At June 30, 1999, 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, 1999, 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. 68 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 58 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 37 TREASURER
Chief Financial Officer and Treasurer
of Versar from May 1994 to present;
Treasurer and Controller of Versar
from June 1992 to April 1994.
William G. Denbo 56 VICE PRESIDENT AND GENERAL MANAGER
Maintenance Supervisor and general
manager of Sarnia Corporation for the
past five years.
Gerald T. Halpin 76 DIRECTOR
President, WEST*GROUP Management LLC,
a real estate development and
construction firm and its predecessors,
since 1962.
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
Name Age Business Experience
- ---- --- --------------------
During Last Five Years
----------------------
and Other Information
----------------------
<S> <C> <C>
Michael Markels, Jr. 73 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.
Thomas G. Hotz 39 DIRECTOR
Partner, HMG Realty Advisors, since
January 1, 1999; Partner, Magnum Capital
Partners, L.L.C., September 1, 1996
through December 31, 1998; Managing Director
of Julian J. Studley, Inc., a national real
estate firm, from 1989 through 1996.
James N. Schwarz 54 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-7
for details.
The Company is aware that the Virginia Department of Transportation (VDOT)
plans include the taking of approximately 2.4 acres of Sarnia's property in
connection with the improvements and expansion of the Springfield interchange
highway system. However, this is subject to change based upon the final design
plans of VDOT. The Company has retained counsel and other professional
assistance in determining the effect of such change on the property, its value
to Sarnia and any actions which are required to maintain Versar Center as an
attractive property to existing and prospective tenants. While we are unaware of
the timing of such plans, we anticipate discussions and possible action by VDOT
during fiscal year 2000.
By law, VDOT is required to pay fair market value for the property that it
acquires and damages to the remaining property, either by negotiations or by the
exercise of its powers of eminent domain. No offer for the acquisition has been
made, but an offer is expected in the near future. Sarnia has employed the
services of an expert real estate appraiser as well as a professional engineer
to aid in the determination of the appropriate value of the acquisition and any
adverse impact on the remainder of the property.
If it is determined that the offer of VDOT when made is inadequate as not
representing fair market value, then in that event, the property will be
condemned and the fair compensation issue will be litigated. It is anticipated
that a fair award will be recovered for this taking. Management of Sarnia is
responding in a vigorous manner to protect itself in this matter.
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 1999.
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<PAGE> 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
At June 30, 1999, the Company had 723 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 low actual trade prices
without adjustments for mark-ups, mark-downs, or commissions during fiscal years
1999 and 1998 are presented below.
<TABLE>
<CAPTION>
Fiscal Year High Low
- ---------------------- ------ -----
<S> <C> <C> <C>
1999 4th Quarter........................... $ 0.6000 $ 0.4500
3rd Quarter........................... 0.5000 0.4063
2nd Quarter........................... 0.5100 0.3750
1st Quarter........................... 0.8125 0.5000
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
</TABLE>
No dividends were paid on the Company's common stock since the Company
became public. 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> 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,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- --------------- --------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations related data:
Real estate rental revenue $ 3,256 $ 3,127 $ 2,911 $ 2,771 $ 2,676
Net income (loss) 259 149 84 (235) (270)
Net income (loss) applicable
to common stock 180 70 5 (269) (270)
Balance Sheet related data:
Total assets 11,454 11,847 12,308 12,762 13,305
Short-term debt 512 495 480 452 1,405
Long-term debt 8,780 9,292 9,787 10,287 10,657
------------- ------------- --------------- --------------- --------------
Total debt 9,292 9,787 10,267 10,739 12,062
Total stockholders' deficit (542) (722) (792) (797) (1,278)
Earnings per share information:
Net income (loss) per share
applicable to common stock $ 0.04 $ 0.02 $ --- $ (0.06) $ (0.06)
Weighted average number of
shares outstanding - diluted 4,665 4,664 4,603 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 or the Company's
ability to attract new tenants. 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
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 fiscal year 1999 of $3,256,000 was $129,000 (4%)
higher than the $3,127,000 of real estate revenue reported in 1998. The increase
was due to rent escalations. The average occupancy rate for the two buildings in
fiscal year 1999 was 94%. Real estate revenue in fiscal year 1998 of $3,127,000
was $216,000 (7%) higher than the $2,911,000 of real estate revenue reported in
fiscal year 1997. The increase was attributable to rent escalations and
increased occupancy rates in both buildings.
Real estate expense in fiscal year 1999 of $1,422,000 remained relatively
at the same level of $1,419,000 as reported in fiscal year 1998. The $3,000
increase was due to higher real estate taxes offset by the utility cost savings
as a result of energy efficient devices installed in the buildings in fiscal
year 1999. Real estate expenses in fiscal year 1998 of $1,419,000 were $130,000
(10%) higher than the $1,289,000 of expense reported in fiscal year 1997. The
increase was 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 of Versar Center.
Depreciation/amortization expenses in fiscal year 1999 of $580,000 were
$7,000 (1%) higher than depreciation/amortization expenses of the $573,000 in
fiscal year 1998. The increase was due to building improvements placed in
service in fiscal year 1999. Depreciation/amortization expenses in fiscal year
1998 were $573,000, a decrease of $34,000 (6%) when compared to fiscal year
1997. The decrease was due to fully amortized assets that were placed in service
in prior years that outpaced the new capital expenditures in fiscal year 1998.
General and administrative expenses were $94,000, $94,000 and $93,000 for
fiscal years 1999, 1998 and 1997, respectively. General and administrative
expenses consist of administrative services provided by Versar at a fixed annual
fee of $36,000 (refer to Note B on page F-6) and property and general liability
insurance.
Interest expense of $742,000 in fiscal year 1999 was $51,000 (6%) lower
compared to interest expense of $793,000 in fiscal year 1998. Interest expense
in fiscal year 1998 decreased by $45,000 (5%) when compared to fiscal year 1997.
These decreases were due to the principal payments made in fiscal years 1999 and
1998.
Income tax expenses were $159,000 and $99,000 for fiscal years 1999 and
1998, respectively. There were no income tax expenses in fiscal year 1997 as a
result of net operating losses carried forward.
Sarnia recorded $79,000 of preferred stock dividends in each of the fiscal
years 1999, 1998 and 1997. Preferred stock dividends are paid quarterly, on the
first day of March, June, September and December of each year.
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<PAGE> 11
The net income applicable to common stock in 1999 was $180,000, an increase
of $110,000 over that reported in fiscal year 1998. The net income applicable to
common stock was $70,000 in fiscal year 1998 compared to net income applicable
to common stock of $5,000 in fiscal year 1997. The significant improvements in
net income were attributable to the combination of higher rental revenue,
controlled operating expenses, and lower interest expense in fiscal years 1999
and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities was $900,000, $674,000 and
$735,000 for fiscal years 1999, 1998 and 1997, respectively. Principal payments
on the mortgages for fiscal years 1999, 1998 and 1997 were $495,000, $480,000
and $472,000, respectively. In fiscal year 1996, Sarnia issued $750,000 of
preferred stock and received a $250,000 rent deposit from Versar. In fiscal year
1999, Sarnia returned $100,000 of the rent deposit to Versar. In fiscal year
1995, Versar loaned $265,000 to Sarnia, primarily for leasehold improvements.
Sarnia paid the loan in full during fiscal year 1999.
Sarnia has a first mortgage of $9 million with I.D.S. Life Insurance
Company at the fixed rate of 7.75% that is being amortized over twenty-two years
and with a balloon payment due in February 2003.
Sarnia has a $1.5 million five year term loan with NationsBank. The loan is
guaranteed by Versar, Inc. and bears interest at the five-year Treasury Rate
plus three hundred (300) basis points per annum (currently 8.88%), 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, 1999, the outstanding
balance on the loan was $900,000.
Sarnia expects that it will require $75,000 for capital expenditures to be
made during fiscal year 2000. 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
2000.
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 has upgraded the
Company's existing data processing and financial reporting software applications
to be Year 2000 ready. Total costs incurred for the Year 2000 ready program is
approximately $10,000. Versar, Inc., who provides significant administrative
services to Sarnia, has notified the Company that the systems that are involved
in such services are Year 2000 ready. The Company has requested each of its
tenants and material suppliers, including Virginia Power, to advise as to their
systems being Year 2000 ready. Except for a failure by Virginia Power to become
Year 2000 ready, the failure of any tenant or other supplier to be Year 2000
ready 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.
11
<PAGE> 12
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 1999 Annual Meeting
of Stockholders which is expected to be filed with the Commission not later than
120 days after the Company's 1999 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
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
12
<PAGE> 13
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, 1999 and 1998
c) Statements of Operations for the Years Ended June 30, 1999, 1998
and 1997
d) Statements of Changes in Stockholders' Deficit for the Years
Ended June 30, 1999, 1998 and 1997
e) Statements of Cash Flows for the Years Ended June 30, 1999, 1998
and 1997
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 1999.
13
<PAGE> 14
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........................................... 17
27 Financial Data Schedule....................................................................
</TABLE>
14
<PAGE> 15
- --------------------------------------------------------------------------------
(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.
15
<PAGE> 16
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)
/S/ Charles I. Judkins, Jr.
Date: September 15, 1999
----------------------------
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, 1999
- ----------------------------------
Charles I. Judkins, Jr.
/S/ Benjamin M. Rawls
Chairman & Director September 15, 1999
- ----------------------------------
Benjamin M. Rawls
/S/ Lawrence W. Sinnott
Treasurer and Principal September 15, 1999
- ---------------------------------- Accounting Officer
Lawrence W. Sinnott
/S/ Michael Markels, Jr.
Director September 15, 1999
- ----------------------------------
Michael Markels, Jr.
/S/ Gerald T. Halpin
Director September 15, 1999
- ----------------------------------
Gerald T. Halpin
/S/ Thomas G. Hotz
Director September 15, 1999
- ----------------------------------
Thomas G. Hotz
/S/ James N. Schwarz
Director September 15, 1999
- ----------------------------------
James N. Schwarz
</TABLE>
16
<PAGE> 17
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
/S/ Arthur Andersen LLP
-------------------------------
Arthur Andersen LLP
Vienna, VA
September 10, 1999
F-1
<PAGE> 18
SARNIA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1999 1998
--------------- ---------------
(In thousands)
<S> <C> <C>
ASSETS
Property and equipment.............................................. $ 17,746 $ 17,710
Accumulated depreciation/amortization............................... (6,792) (6,267)
--------------- ---------------
10,954 11,443
Cash ............................................................ 312 139
Rents and other receivables, net.................................... 23 79
Prepaid expenses and other assets................................... 165 186
--------------- --------------
Total assets................................................ $ 11,454 $ 11,847
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Mortgages........................................................... $ 9,292 $ 9,787
Accounts payable.................................................... 14 32
Loan from Versar.................................................... --- 117
Accrued salaries.................................................... 19 18
Deferred income taxes............................................... 2,014 1,855
Tenant security deposits............................................ 262 436
Other liabilities................................................... 395 324
--------------- --------------
Total liabilities........................................... 11,996 12,569
--------------- --------------
Commitments and contingencies
Stockholders' Deficit
Preferred stock, $25 par value; Series A
cumulative convertible; 1,000,000 shares
authorized; 30,000 shares issued and
outstanding at June 30, 1999 and
June 30, 1998................................................. 750 750
Common stock, no par value; 20,000,000 shares
authorized at June 30, 1999 and 1998;
4,572,545 shares issued and outstanding
at June 30, 1999 and 1998................................... --- ---
Accumulated deficit.............................................. (1,292) (1,472)
--------------- ---------------
Total stockholders'
deficit................................................. (542) (722)
--------------- ---------------
Total liabilities and
stockholders' deficit................................... $ 11,454 $ 11,847
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 19
SARNIA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------
1999 1998 1997
------------- ------------- ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Real estate rental revenue.................................. $ 3,256 $ 3,127 $ 2,911
Real estate expenses........................................ 1,422 1,419 1,289
------------- ------------- ------------
1,834 1,708 1,622
Depreciation/amortization................................... 580 573 607
General and administrative.................................. 94 94 93
------------- ------------- ------------
Income from real estate..................................... 1,160 1,041 922
Interest expense............................................ 742 793 838
------------- ------------- ------------
Net income before income taxes.............................. 418 248 84
Income tax expense.......................................... 159 99 ---
------------- ------------- ------------
Net income.................................................. 259 149 84
Dividends on preferred stock................................ 79 79 79
------------- ------------- ------------
Net income applicable to common
stock...................................................... $ 180 $ 70 $ 5
============= ============= ============
Net income per share applicable to
common stock - basic and diluted........................... $ 0.04 $ 0.02 $ ---
============= ============= ============
Weighted average number of
shares outstanding - basic............................. 4,573 4,573 4,573
============= ============= ============
Weighted average number of
shares outstanding - diluted........................... 4,665 4,664 4,603
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 20
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, 1999, 1998, 1997
-------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996....... $ 750 4,572,545 $ --- $ (1,547) $ (797)
Net income................... --- --- --- 84 84
Preferred stock dividends.... --- --- --- (79) (79)
--------------- --------------- --------------- --------------- ---------------
Balance, June 30, 1997....... $ 750 4,572,545 $ --- $ (1,542) $ (792)
--------------- --------------- --------------- --------------- ---------------
Net income................... --- --- --- 149 149
Preferred stock dividends.... --- --- --- (79) (79)
--------------- --------------- --------------- --------------- ---------------
Balance, June 30, 1998....... $ 750 4,572,545 $ --- $ (1,472) $ (722)
--------------- --------------- --------------- --------------- ---------------
Net income................... --- --- --- 259 259
Preferred stock dividends.... --- --- --- (79) (79)
--------------- --------------- --------------- --------------- ---------------
Balance, June 30, 1999....... $ 750 4,572,545 $ --- $ (1,292) $ (542)
=============== =============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 21
SARNIA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Cash flow from operating activities
Net income applicable to common stock........... $ 180 $ 70 $ 5
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Depreciation/amortization.................. 580 573 607
Increase in deferred taxes................. 159 99 ---
-------------- -------------- --------------
Comparative funds from operations........ 919 742 612
Preferred stock dividend accrued........... 79 79 79
Provision for doubtful accounts receivable. 5 5 ---
Decrease (increase) in rents and other
receivables.............................. 50 (20) 73
Increase in prepaid and other assets . . . (33) (33) (76)
(Decrease) increase in accounts payable.... (18) (133) 29
Increase (decrease) in accrued salaries.... 1 1 (13)
(Decrease) increase in other liabilities
and security deposits.................... (103) 33 31
-------------- -------------- --------------
Net cash provided by operating activities........... 900 674 735
-------------- -------------- --------------
Cash flow from investing activities
Improvements to real estate..................... (36) (20) (136)
Disposition of property and equipment........... --- --- 26
-------------- -------------- --------------
Net cash used in investing activities............... (36) (20) (110)
-------------- -------------- --------------
Cash flow from financing activities
Mortgage principal payment...................... (495) (480) (472)
Payment to Versar, net.......................... (117) (52) (13)
Payment of dividend on preferred stock.......... (79) (79) (99)
-------------- -------------- --------------
Net cash used in financing activities............... (691) (611) (584)
-------------- -------------- --------------
Net increase in cash................................ 173 43 41
Cash at beginning of period......................... 139 96 55
-------------- -------------- --------------
Cash at end of period............................... $ 312 $ 139 $ 96
============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest...................................... $ 745 $ 808 $ 888
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 22
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.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: These financial statements are presented using the
accrual basis of accounting.
Sarnia Corporation has a Master Corporate Services and Support Agreement
with Versar. 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.
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 per share applicable to common stock: Basic income per share
applicable to common stock is computed by dividing net income applicable to
common stock by the weighted average number of shares outstanding during the
applicable period being reported upon. Diluted net income per share is computed
by dividing net income applicable to common stock by the weighted average number
of shares outstanding plus the effect of assumed exercise of stock options using
the Treasury Stock Method.
Income taxes: The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of other assets and liabilities.
Stock Options: The Company accounts 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 and per share information as if the fair value based method for
accounting defined in SFAS No. 123, "Accounting for Stock-Based Compensation"
had been applied.
F-6
<PAGE> 23
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated June 30,
Useful Life -------------------------------------
in Years 1999 1998
---------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Land.................................. --- $ 650 $ 650
Buildings............................. 40 15,733 15,733
Equipment............................. 5 136 136
Leasehold improvements................ Life of Lease 1,227 1,191
-------------- -------------
17,746 17,710
Accumulated depreciation
and amortization...................... (6,792) (6,267)
-------------- --------------
$ 10,954 $ 11,443
============== ==============
</TABLE>
Depreciation and amortization of property and equipment included as expense
in the accompanying Statements of Operations was $525,000, $521,000, and
$539,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
Amortization of brokerage fees of $55,000, $52,000, and $68,000 were included in
the Statements of Operations for the fiscal years ended June 30, 1999, 1998 and
1997, respectively.
Maintenance and repair expenses (included in real estate expenses)
approximated $200,000, $201,000 and $207,000 for the fiscal years ended June 30,
1999, 1998 and 1997, respectively.
NOTE D MORTGAGES
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 February 2003. The I.D.S.
mortgage is collateralized by the first deed of trust on the 6800 and 6850
buildings.
Sarnia has a $1.5 million five-year term loan with NationsBank. The loan is
guaranteed by Versar 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 is in compliance with the financial covenants at June
30, 1999.
Outstanding balances at June 30, are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1999 1998
--------------- --------------
(In thousands)
<S> <C> <C>
I.D.S. mortgage....................................... $ 8,392 $ 8,587
NationsBank note...................................... 900 1,200
--------------- --------------
Total debt................................. $ 9,292 $ 9,787
=============== ==============
</TABLE>
F-7
<PAGE> 24
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Maturity of the loans is as follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- -----------------
(In thousands)
<S> <C> <C>
2000 512
2001 527
2002 546
2003 7,707
-----------------
$ 9,292
=================
</TABLE>
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 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 officer at the fair market value. There were no stock options
granted in fiscal year 1999.
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 Opinion No. 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 and net income per share would
have been reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Income: As Reported $ 180 $ 70
Pro Forma 171 61
Net Income Per Share: As Reported $ 0.04 $ 0.02
Pro Forma 0.04 0.01
</TABLE>
As permitted by 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 1999.
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
1999 and 1998: expected volatility of 51 percent; risk-free interest rate of
5.67 percent and 5.00 percent, respectively; and expected lives of five years
from the grant date.
F-8
<PAGE> 25
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE G INCOME TAXES
At June 30, 1999, the Company had, for tax reporting purposes,
approximately $1,889,000 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,
--------------------------------------
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities
Depreciation................................. $ (2,252) $ (2,320)
Other........................................ (33) (34)
Deferred tax assets
Net operating loss carryforwards............. 718 997
Other........................................ 67 16
-------------- --------------
(1,500) (1,341)
Valuation allowance.......................... (514) (514)
-------------- --------------
Net deferred tax liabilities................... $ (2,014) $ (1,855)
============== ==============
</TABLE>
The tax provision was composed of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Expected provision at Federal statutory rate................ $ 142 $ 84 $ 28
Provision at State statutory rate, net of
federal benefit............................................. 17 15 ---
Effect of net operating losses and
reserves.................................................... --- --- (28)
------------ ------------ ------------
Tax provision............................................... $ 159 $ 99 $ ---
============ ============ ===========
</TABLE>
F-9
<PAGE> 26
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H COMMITMENTS AND CONTINGENCIES
In fiscal year 1995, Versar loaned $265,000 to Sarnia primarily for
leasehold improvements. Sarnia repaid Versar's loan in full in fiscal year 1999.
The Company is aware that the Virginia Department of Transportation (VDOT)
plans include the taking of approximately 2.4 acres of Sarnia's property in
connection with the improvements and expansion of the Springfield interchange
highway system. However, this is subject to change based upon the final design
plans of VDOT. The Company has retained counsel and other professional
assistance in determining the effect of such change on the property, its value
to Sarnia and any actions which are required to maintain Versar Center as an
attractive property to existing and prospective tenants. While we are unaware of
the timing of such plans, we anticipate discussions and possible action by VDOT
during fiscal year 2000.
By law, VDOT is required to pay fair market value for the property that it
acquires and damages to the remaining property, either by negotiations or by the
exercise of its powers of eminent domain. No offer for the acquisition has been
made, but an offer is expected in the near future. Sarnia has employed the
services of an expert real estate appraiser as well as a professional engineer
to aid in the determination of the appropriate value of the acquisition and any
adverse impact on the remainder of the property.
If it is determined that the offer of VDOT when made is inadequate as not
representing fair market value, then in that event, the property will be
condemned and the fair compensation issue will be litigated. It is anticipated
that a fair award will be recovered for this taking. Management of Sarnia is
responding in a vigorous manner to protect itself in this matter.
NOTE I RENTAL UNDER OPERATING LEASES
Leases between Sarnia and its tenants expire from 1999 to 2009. During the
years ended June 30, 1999, 1998 and 1997, rentals to major tenants were as
follows:
<TABLE>
<CAPTION>
Lease Years Ended June 30,
Termination ----------------------------------------------------------
Date 1999 1998 1997
---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Versar...................................... 2009 $ 1,115 $ 1,072 $ 1,037
General Services Administration............. 2004 191 201 196
RGE Engineering............................. 2000 325 339 319
C-Cubed Corporation......................... 1999 166 223 219
NCPPO....................................... 2000 350 350 350
</TABLE>
Noncancellable leases provide for approximate minimum rental payments
during each of the next five years as set forth below. As to the Versar lease,
it is assumed that the payments for the third five-year period (the actual
amounts of which will depend upon fair values at the adjustment date) will be
the same as the payments for the first
F-10
<PAGE> 27
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1999, 94% of Sarnia's space was leased.
<TABLE>
<CAPTION>
Years Ending June 30, Versar Total
--------------------- ------------- -------------
(In thousands)
<S> <C> <C>
2000 1,115 2,807
2001 1,137 2,006
2002 1,160 1,912
2003 1,183 1,960
2004 1,207 1,865
Beyond 2004 4,973 5,508
------------- -------------
$ 10,775 $ 16,058
============= =============
</TABLE>
F-11
<PAGE> 28
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal years 1999 and 1998 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year 1999
-----------------------------------------------------------------
Quarter ending Jun 30 Mar 31 Dec 31 Sept 30
- ------------------------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Real estate rental revenue $ 780 $ 794 $ 871 $ 811
Net income............ 74 56 80 50
Net income applicable to
common stock........ 54 36 60 30
Net income per share
applicable to common
stock - diluted..... $ 0.01 $ 0.01 $ 0.01 $ 0.01
============ ============== ============== =============
Weighted average number of
shares outstanding -
diluted............. 4,636 4,620 4,618 4,686
============= ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998
-------------------------------------------------------------------
Quarter ending Jun 30 Mar 31 Dec 31 Sept 30
- ------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Real estate rental revenue $ 812 $ 782 $ 750 $ 783
Net income............ 55 28 37 29
Net income applicable to
common stock........ 35 9 17 9
Net income per share
applicable to common
stock - diluted..... $ 0.01 $ --- $ --- $ ---
============= ============= ============= =============
Weighted average number of
shares outstanding -
diluted............. 4,708 4,601 4,579 4,606
============= ============= ============= =============
</TABLE>
Quarterly financial data may not equal annual totals due to rounding. Quarterly
earnings per share data may 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,
-------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
NET INCOME APPLICABLE TO
COMMON STOCK.................................. $ 180 $ 70 $ 5
================= ================= ===============
Weighted average common shares outstanding..... 4,572,545 4,572,545 4,572,545
================= ================= ===============
NET INCOME PER SHARE - BASIC................... $ 0.04 $ 0.02 $ ---
================= ================= ===============
Common shares from above....................... 4,572,545 4,572,545 4,572,545
Assumed exercise of options (treasury stock
method)....................................... 91,973 91,647 30,383
---------------- ----------------- ---------------
4,664,518 4,664,192 4,602,928
================ ================= ===============
NET INCOME PER SHARE -
DILUTED....................................... $ 0.04 $ 0.02 $ ---
================ ================= ===============
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 312
<SECURITIES> 0
<RECEIVABLES> 33
<ALLOWANCES> 10
<INVENTORY> 0
<CURRENT-ASSETS> 500
<PP&E> 17,746
<DEPRECIATION> 6,792
<TOTAL-ASSETS> 11,454
<CURRENT-LIABILITIES> 428
<BONDS> 9,292
0
750
<COMMON> 0
<OTHER-SE> (1,292)
<TOTAL-LIABILITY-AND-EQUITY> 11,454
<SALES> 0
<TOTAL-REVENUES> 3,256
<CGS> 0
<TOTAL-COSTS> 2,002
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 742
<INCOME-PRETAX> 339
<INCOME-TAX> 159
<INCOME-CONTINUING> 180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
