<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, 2000 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, 2000 was approximately $2,268,564.
The number of shares of Common Stock outstanding as of September 1,
2000 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 2000 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; failure to obtain additional compensation in
a condemnation proceeding, 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 15.76 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 2000, the 6850 Building was 98%
leased and the 6800 Building was 88% leased. Versar and National Capital
Preferred Provider Organization, Inc. ("NCPPO") are the major tenants leasing
approximately 88% of the 6850 Building and have leases which terminate in May
2009 and June 2005, respectively. Four major tenants, the General Services
Administration ("GSA"), Cornet, C-Cubed Corporation and SAIC, lease
approximately 58% of the 6800 Building and have leases which terminate between
April 2003 and December 2009.
In the third quarter of fiscal year 2000, the Company received an
offer from the Virginia Department of Transportation ("VDOT") of approximately
$2,300,000 for approximately 2.54 acres of Sarnia's property and easements.
After thorough review of the proposal and advice of retained experts, the
Company has decided to reject the VDOT offer. As a matter of law, VDOT takes
legal possession of the property under eminent domain, yet because the Company
has not agreed to the damage assessed by VDOT, the Company is seeking additional
compensation. The Company is seeking to increase the amount of the VDOT offer by
negotiation. If unsuccessful, the Company will commence litigation to receive
fair compensation.
The Company recorded a gain on the condemnation of property of
approximately $2,196,000 during fiscal year 2000. The proceeds of $2,287,000
from the condemnation are restricted by the first mortgage with I.D.S. Life
Insurance Company ("IDS") for the purpose of correcting damage caused by the
VDOT condemnation. The Company will be required to build a new parking garage
and access road to the 6800 building. The Company estimates that it will cost
approximately $3,000,000 to complete the project. The Company is seeking
additional compensation from VDOT for the shortfall and is also seeking
alternate financing sources in the event the Company is not successful with VDOT
or if the timing of the construction is prior to settlement with VDOT.
2
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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 growth of technical business, 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 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.
Versar Center competes for tenants with other properties throughout
Springfield and central Fairfax County. Competition for tenants is based on
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 while controlling 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 2000
through 1996 was 98%, 98%, 98%, 98% and 93%, respectively. The occupancy rate
for the 6800 Building for fiscal years 2000 through 1996 was 88%, 89%, 100%, 97%
and 94%, respectively.
The principal tenants in the 6800 Building and the 6850 Building are
as follows: environmental consultants, 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, and GSA 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 3,517 square feet of storage space in the
6800 Building, at an aggregate annual rent of $1,111,000. 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 $15.36, $15.18, $14.60, $14.02 and $13.59 for fiscal
years 2000, 1999, 1998, 1997 and 1996, respectively. With respect to the 6800
Building, the average effective annual rental per square foot was $13.35,
$13.04, $13.13, $12.60 and $11.76 for fiscal years 2000, 1999, 1998, 1997 and
1996, respectively. In addition, the average net rental rates per square foot
for both buildings were $8.44, $7.98, $7.40, $7.01, and $6.09 for fiscal years
2000, 1999, 1998, 1997 and 1996, respectively. The net rental rates per square
foot for Versar alone, as a significant tenant, were $8.06, $8.43, $7.85,
3
<PAGE> 4
$7.83 and $6.88 for fiscal years 2000, 1999, 1998, 1997 and 1996, 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.
The following table sets forth the schedule of the lease expirations
for each of the ten years commencing with calendar year 2001:
<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>
2001 2 6,100 $ 96,400 3.2%
2002 1 1,375 $ 23,000 0.7%
2003 2 6,985 $ 116,000 3.8%
2004 6 43,557 $ 731,000 24.3%
2005 4 60,645 $ 845,000 28.0%
2006 -- --- --- ---
2007 -- --- --- ---
2008 -- --- --- ---
2009 2 77,131 $ 1,203,000 39.9%
</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 $ 559,710 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 $ 848,840 3.17% Straight-line 31.5/39
6800 Building
Equipment $ 40,982 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
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The real property tax rate is $1.23 per $100 of assessed value.
Annual real property taxes for 2000 were approximately $87,000 and $97,000 for
the 6850 Building and the 6800 Building, respectively.
EMPLOYEES
At June 30, 2000, 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, 2000, 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. 69 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 59 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 38 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 57 VICE PRESIDENT AND GENERAL MANAGER
Maintenance Supervisor and general
manager of Sarnia Corporation for the
past five years.
Gerald T. Halpin 77 DIRECTOR
President, WEST*GROUP Management
LLC, a real estate development and
construction firm and its predecessors,
since 1962.
</TABLE>
5
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<TABLE>
<CAPTION>
Name Age Business Experience
---- --- -------------------
During Last Five Years
----------------------
and Other Information
---------------------
<S> <C> <C>
Michael Markels, Jr. 74 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 40 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 55 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
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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 15.76 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 IDS. Refer to Footnote D on Page F-7 for details.
In connection with the improvements and expansion of the Springfield
interchange highway system, the VDOT took approximately 2.54 acres of Sarnia's
property. In addition, additional easements for fire protection water mains. The
Company 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.
By law, VDOT is required to pay fair market value for the property
that it acquires and damages to the remaining property, either by negotiation or
by exercise of its powers of eminent domain. 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.
In the third quarter of fiscal year 2000, the Company received an
offer from VDOT for approximately $2,300,000 for approximately 2.54 acres of
Sarnia's property and easements. After thorough review of the proposal and
advice of retained experts, the Company has decided to reject the VDOT offer. As
a matter of law, VDOT takes legal possession of the property under eminent
domain, yet because the Company has not agreed to the damage assessed by VDOT,
the Company is seeking additional compensation. The Company is seeking to
increase the amount of the VDOT offer by negotiation. If unsuccessful, the
Company will commence litigation to receive fair compensation.
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 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
At June 30, 2000, the Company had 709 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
2000 and 1999 are presented below.
<TABLE>
<CAPTION>
Fiscal Year High Low
----------------------------- -------- --------
<S> <C> <C> <C>
2000 4th Quarter.......................... $ 0.6500 $ 0.5800
3rd Quarter.......................... 0.6875 0.6000
2nd Quarter.......................... 0.7500 0.5700
1st Quarter.......................... 0.6875 0.4800
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
</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.
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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,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations related data:
Real estate rental revenue $ 3,487 $ 3,256 $ 3,127 $ 2,911 $ 2,771
Net income (loss) 2,206 259 149 84 (235)
Net income (loss) applicable
to common stock 2,127 180 70 5 (269)
Balance Sheet related data:
Total assets 13,480 11,454 11,847 12,308 12,762
Short-term debt 527 512 495 480 452
Long-term debt 8,255 8,780 9,292 9,787 10,287
---------- --------- --------- ---------- ---------
Total debt 8,782 9,292 9,787 10,267 10,739
Total stockholders' equity
(deficit) 1,585 (542) (722) (792) (797)
Earnings per share information:
Net income (loss) per share
applicable to common stock $ 0.45 $ 0.04 $ 0.02 $ - $ (0.06)
Weighted average number of
shares outstanding - diluted 4,681 4,665 4,664 4,603 4,573
========== ========= ========= ========== =========
</TABLE>
9
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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 regional 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; failure to obtain additional compensation in
a condemnation proceeding, 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 2000 of $3,487,000 was $231,000
(7%) higher than the $3,256,000 of real estate revenue reported in 1999. The
increase was due to rent escalations. The average occupancy rate for the two
buildings in fiscal year 2000 was 93%. 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 fiscal year 1998. The increase in fiscal year 1999 was
attributable to rent escalations and increased occupancy rates in both
buildings.
Real estate expense in fiscal year 2000 of $1,546,000 was 9% higher
than the $1,422,000 reported in fiscal year 1999. The increase was due to higher
real estate taxes and legal expenses associated with the VDOT eminent domain
taking in fiscal year 2000. Real estate expenses in fiscal year 1999 of
$1,422,000 were $3,000 higher than the $1,419,000 of expense reported in fiscal
year 1998. The increase was due to higher real estate taxes offset, in part, by
lower utility costs.
Depreciation/amortization expenses in fiscal year 2000 of $576,000
were $4,000 (1%) lower than depreciation/amortization expenses of $580,000 in
fiscal year 1999. The decrease was due to fully amortized assets during the year
that outpaced capital expenditures. Depreciation/amortization expenses in fiscal
year 1999 were $580,000, an increase of $7,000 (1%) when compared to fiscal year
1998. The increase was due to the depreciation of building improvements made
during the year.
General and administrative expenses were $90,000, $94,000 and $94,000
for fiscal years 2000, 1999 and 1998, 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. Reduced insurance rates caused the decrease in general and
administrative expenses in fiscal year 2000.
In fiscal year 2000, the Company recorded a gain from the
condemnation of property by VDOT in the amount of $2,196,000. (Refer to Note H).
Interest expense of $710,000 in fiscal year 2000 was $32,000 (4%)
lower compared to interest expense of $742,000 in fiscal year 1999. Interest
expense in fiscal year 1999 decreased by $51,000 (6%) when compared to fiscal
year 1998. These decreases were due to the principal payments made in fiscal
years 2000 and 1999.
10
<PAGE> 11
Income tax expenses were $555,000, $159,000, and $99,000 for fiscal
years 2000, 1999 and 1998, respectively. The increase in income tax expense in
fiscal year 2000 was due to taxes recorded on the gain from the VDOT
condemnation of a portion of the Company's property offset by the reversal of
the $514,000 valuation allowance maintained in fiscal year 1999.
Sarnia recorded $79,000 of preferred stock dividends in each of the
fiscal years 2000, 1999 and 1998. Preferred stock dividends are paid quarterly,
on the first day of March, June, September and December of each year.
The net income applicable to common stock in 1999 was $2,127,000, an
increase of $1,947,000 over that reported in fiscal year 1999. The increase was
attributable to the condemnation proceeds for a portion of the property. The net
income applicable to common stock was $180,000 in fiscal year 1999 compared to
net income applicable to common stock of $70,000 in fiscal year 1998. 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 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities was $659,000, $900,000 and
$674,000 for fiscal years 2000, 1999 and 1998, respectively. The decrease is due
to an increase in brokerage commissions, which are amortized over the life of
the lease and reduced rental deposits. Principal payments on the mortgages for
fiscal years 2000, 1999 and 1998 were $510,000, $495,000 and $480,000,
respectively.
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
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 9%), but not to
exceed 9% per annum. The note matures in five years with $300,000 principal
payment per year starting July 1, 1997. As of June 30, 2000, the outstanding
balance on the loan was $600,000.
Sarnia expects that it will require approximately $3,000,000 for
capital expenditures to be made during fiscal year 2001. It is anticipated that
a majority of the expenditures will be used to construct a parking garage and
access road due to the VDOT condemnation of a portion of the property.
Management believes that funds generated from rents should be
sufficient to meet Sarnia's operating needs. The proceeds of $2,287,000 from the
condemnation are restricted for the purpose of correcting damage caused by the
condemnation by VDOT. The Company will be required to build a new parking garage
and access road to the 6800 building. The Company estimates that it will cost
approximately $3,000,000 to complete the project. The Company is seeking
additional compensation from VDOT for the shortfall and is also seeking
alternate financing sources in the event the Company is not successful with VDOT
or if the timing of the construction is prior to settlement with VDOT.
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.
11
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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 2000 Annual
Meeting of Stockholders which is expected to be filed with the Commission not
later than 120 days after the Company's 2000 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
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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, 2000 and 1999
c) Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998
d) Statements of Changes in Stockholders' Deficit
for the Years Ended June 30, 2000, 1999 and
1998
e) Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998
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 2000.
13
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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)
27 Financial Data Schedule........................................................................
</TABLE>
14
<PAGE> 15
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
(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.
</TABLE>
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, 2000 --------------------------------------------
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, 2000
-----------------------------------------------------
Charles I. Judkins, Jr.
/S/ Benjamin M. Rawls Chairman & Director September 15, 2000
-----------------------------------------------------
Benjamin M. Rawls
/S/ Lawrence W. Sinnott Treasurer and Principal September 15, 2000
----------------------------------------------------- Accounting Officer
Lawrence W. Sinnott
/S/ Michael Markels, Jr. Director September 15, 2000
-----------------------------------------------------
Michael Markels, Jr.
/S/ Gerald T. Halpin Director September 15, 2000
-----------------------------------------------------
Gerald T. Halpin
/S/ Thomas G. Hotz Director September 15, 2000
-----------------------------------------------------
Thomas G. Hotz
/S/ James N. Schwarz Director September 15, 2000
-----------------------------------------------------
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, 2000 and 1999, and the related statements
of operations, changes in stockholders' equity (deficit), and cash flows for the
three years ended June 30, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of its operations and its cash flows for the
three years ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States.
/S/ Arthur Andersen LLP
--------------------------------
Arthur Andersen LLP
Vienna, VA
September 8, 2000
F-1
<PAGE> 18
SARNIA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Property and equipment.................................... $ 17,865 $ 17,746
Accumulated depreciation/amortization..................... (7,322) (6,792)
---------- -----------
10,543 10,954
Cash ............................................ 172 312
Restricted cash (see Note H).............................. 2,287 ---
Rents and other receivables, net.......................... 69 23
Prepaid expenses and other assets......................... 409 165
--------- -----------
Total assets................................ $ 13,480 $ 11,454
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Mortgages ............................................ $ 8,782 $ 9,292
Accounts payable.......................................... 35 14
Accrued salaries.......................................... 23 19
Deferred income taxes..................................... 2,509 2,014
Tenant security deposits.................................. 158 262
Other liabilities......................................... 388 395
--------- -----------
Total liabilities........................... 11,895 11,996
--------- -----------
Commitments and contingencies
Stockholders' Equity (Deficit)
Preferred stock, $25 par value; Series A
cumulative convertible; 1,000,000 shares
authorized; 30,000 shares issued and
outstanding at June 30, 2000 and
June 30, 1999............................... 750 750
Common stock, no par value; 20,000,000 shares
authorized at June 30, 2000 and 1999;
4,572,545 shares issued and outstanding
at June 30, 2000 and 1999................... --- ---
Accumulated equity (deficit)........................... 835 (1,292)
--------- -----------
Total stockholders'
equity (deficit)........................ 1,585 (542)
--------- -----------
Total liabilities and
stockholders' equity (deficit).......... $ 13,480 $ 11,454
========= ===========
</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,
-----------------------------------------
2000 1999 1998
----------- ----------- ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Real estate rental revenue ........... $ 3,487 $ 3,256 $ 3,127
Real estate expenses ................. 1,546 1,422 1,419
------- ------- -------
1,941 1,834 1,708
Depreciation/amortization ............ 576 580 573
General and administrative ........... 90 94 94
Gain from condemnation of property
(see Note H) ....................... (2,196) --- ---
------- ------- -------
Income from real estate .............. 3,471 1,160 1,041
Interest expense ..................... 710 742 793
------- ------- -------
Net income before income taxes ....... 2,761 418 248
Income tax expense ................... 555 159 99
------- ------- -------
Net income ........................... 2,206 259 149
Dividends on preferred stock ......... 79 79 79
------- ------- -------
Net income applicable to common
stock ............................... $ 2,127 $ 180 $ 70
======= ======= =======
Net income per share applicable to
common stock - basic ................ $ 0.47 $ 0.04 $ 0.02
======= ======= =======
Net income per share applicable to
common stock - diluted ............. $ 0.45 $ 0.04 $ 0.02
======= ======= =======
Weighted average number of
shares outstanding - basic ...... 4,573 4,573 4,573
======= ======= =======
Weighted average number of
shares outstanding - diluted .... 4,681 4,665 4,664
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 20
SARNIA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Total
------------------------------------ Stock-
Accumulated holders'
Preferred Number of Equity Equity
Stock Shares Amount (Deficit) (Deficit)
----------- --------- -------- ----------- -----------
Years Ended June 30, 2000, 1999, 1998
----------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
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)
=========== ========= ======== =========== ===========
Net income .................. --- --- --- 2,206 2,206
Preferred stock dividends ... --- --- --- (79) (79)
----------- --------- -------- ----------- -----------
Balance, June 30, 2000 ...... $ 750 4,572,545 $ --- $ 835 $ 1,585
=========== ========= ======== =========== ===========
</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,
-----------------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash flow from operating activities
Net income applicable to common stock ............... $ 2,127 $ 180 $ 70
Adjustments to reconcile net income
applicable to common stock to net cash
provided by operating activities
Gain from VDOT condemnation .................... (2,196) --- ---
Depreciation/amortization ...................... 576 580 573
Increase in deferred taxes ..................... 495 159 99
------- ------- -------
Comparative funds from operations ............ 1,002 919 742
Preferred stock dividend accrued ............... 79 79 79
Provision for doubtful accounts receivable ..... (3) 5 5
(Increase) decrease in rents and other
receivables .................................. (43) 50 (20)
Increase in prepaid expenses and other assets .. (290) (33) (33)
Increase (decrease) in accounts payable ........ 21 (18) (133)
Increase in accrued salaries ................... 4 1 1
(Decrease) increase in other liabilities
and security deposits ........................ (111) (103) 33
------- ------- -------
Net cash provided by operating activities ............... 659 900 674
------- ------- -------
Cash flow from investing activities
Restricted proceeds from VDOT condemnation .......... (2,287) --- ---
Improvements to real estate ......................... (210) (36) (20)
Disposition of property and equipment ............... 2,287 --- ---
------- ------- -------
Net cash used in investing activities ................... (210) (36) (20)
------- ------- -------
Cash flow from financing activities
Principal payments on debt .......................... (510) (495) (480)
Payment to Versar, net .............................. --- (117) (52)
Payment of dividend on preferred stock .............. (79) (79) (79)
------- ------- -------
Net cash used in financing activities ................... (589) (691) (611)
------- ------- -------
Net (decrease) increase in cash and cash
equivalents ........................................... (140) 173 43
Cash at beginning of period ............................. 312 139 96
------- ------- -------
Cash at end of period ................................... $ 172 $ 312 $ 139
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest .......................................... $ 711 $ 745 $ 808
Taxes ............................................. 20 4 ---
</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.
Cash and cash equivalents: For purposes of these statements, cash and cash
equivalents consist of government treasury bills and time deposits with a
maturity of ninety days or less.
Accounts receivable: It is the Company's policy to provide reserves for the
collectibility of accounts receivable when it is determined that it is probable
that the Company will not collect all amounts due and the amount of reserve
requirement can be reasonably estimated. Allowance for doubtful accounts were
$7,447 and $10,000 for the fiscal years ended June 30, 2000 and 1999,
respectively.
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.
F-6
<PAGE> 23
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of weighted average shares
outstanding for basic net income per share to diluted net income per share in
thousands:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------
2000 1999 1998
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Weighted average shares outstanding
for basic ............................... 4,573 4,573 4,573
Effect of assumed exercise of stock
options ................................. 108 92 91
------ ------ -------
Weighted average shares outstanding for
diluted ................................. 4,681 4,665 4,664
</TABLE>
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.
NOTE C PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated June 30,
Useful Life -----------------------
in Years 2000 1999
------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Land................................ --- $ 560 $ 650
Buildings........................... 40 15,733 15,733
Equipment........................... 5 146 136
Leasehold improvements.............. Life of Lease 1,426 1,227
--------- ---------
17,865 17,746
Accumulated depreciation
and amortization.................... (7,322) (6,792)
--------- ---------
$ 10,543 $ 10,954
========= =========
</TABLE>
Depreciation and amortization of property and equipment included as
expense in the accompanying Statements of Operations was $530,000, $525,000, and
$521,000 for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Amortization of brokerage fees of $46,000, $55,000, and $52,000 were included in
the Statements of Operations for the fiscal years ended June 30, 2000, 1999 and
1998, respectively. Refer to Note H regarding partial condemnation of property.
Maintenance and repair expenses (included in real estate expenses)
approximated $191,000, $200,000 and $201,000 for the fiscal years ended June 30,
2000, 1999 and 1998, respectively.
F-7
<PAGE> 24
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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, 2000.
Outstanding balances at June 30, are as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
------------ ----------
(In thousands)
<S> <C> <C>
I.D.S. mortgage.................................................... $ 8,182 $ 8,392
NationsBank note................................................... 600 900
------------ ----------
Total debt $ 8,782 $ 9,292
============ ==========
</TABLE>
Maturity of the loans is as follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- ------
(In thousands)
<S> <C>
2001 527
2002 546
2003 7,709
------------
$ 8,782
============
</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 312,500 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 years 1999 and 2000.
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.
F-8
<PAGE> 25
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 No. 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>
2000 1999 1998
----------- ---------- ----------
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
Net Income: As Reported $ 2,127 $ 180 $ 70
Pro Forma 2,114 171 61
Net Income Per Share: As Reported $ 0.47 $ 0.04 $ 0.02
Pro Forma 0.45 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.
NOTE F PREFERRED STOCK
On January 25, 1996, 30,000 shares of 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> 26
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE G INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------
2000 1999 1998
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Currently payable
Federal $ 60 $ --- $ ---
State --- --- ---
Deferred
Federal 329 134 84
State 166 25 15
---------- ----------- ----------
$ 555 $ 159 $ 99
========== =========== ==========
</TABLE>
At June 30, 2000, the Company had, for tax reporting purposes,
approximately $1,279,000 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,
--------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax liabilities
Depreciation ..................... $ (2,221) $ (2,252)
Other ............................ (56) (33)
Condemnation of property ......... (834) ---
Deferred tax assets
Net operating loss carryforwards . 486 718
Alternative minimum tax credits .. 60 ---
Other ............................ 56 67
---------- ----------
(2,509) (1,500)
Valuation allowance .............. --- (514)
---------- ----------
Net deferred tax liabilities ....... $ (2,509) $ (2,014)
========== ==========
</TABLE>
F-10
<PAGE> 27
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
The tax provision is composed of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
2000 1999 1998
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Expected provision at Federal statutory rate .. $ 939 $ 142 $ 84
Provision at State statutory rate, net of
federal benefit ............................... 110 17 15
Other ......................................... 20 --- ---
Reversal of valuation allowance ............... (514) --- ---
----- ----- -----
Tax provision ................................. $ 555 $ 159 $ 99
===== ===== =====
</TABLE>
NOTE H COMMITMENTS AND CONTINGENCIES
In connection with the improvement and expansion of the Springfield
interchange highway system, the Virginia Department of Transportation (VDOT) has
taken pursuant to eminent domain approximately 2.54 acres of Sarnia's property.
In addition, VDOT took additional easements for fire protection water mains. The
Company 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.
By law, VDOT is required to pay fair market value for the property
that it acquires and damages to the remaining property, either by negotiation or
by exercise of its powers of eminent domain. 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.
In third quarter of fiscal year 2000, the Company received an offer
from the VDOT for approximately $2,300,000 for approximately 2.54 acres of
Sarnia's property and easements. After thorough review of the proposal and
advice of retained experts, the Company has decided to reject the VDOT offer.
The Company is seeking to increase the amount of the VDOT offer by negotiation.
If unsuccessful, the Company will commence litigation to receive fair
compensation.
The Company recorded a gain on the condemnation of property of
approximately $2,196,000 during fiscal year 2000. The proceeds of $2,287,000
from the condemnation are restricted by IDS for the purpose of correcting damage
caused by the VDOT condemnation. The Company will be required to build a new
parking garage for the 6850 building and access road to the 6800 building. The
Company estimates that it will cost approximately $3,000,000 to complete the
project. The Company is seeking additional compensation from VDOT for the
shortfall and is also seeking alternate financing sources in the event the
Company is not successful with VDOT or if the timing of the construction is
prior to settlement with VDOT.
F-11
<PAGE> 28
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE I RENTAL UNDER OPERATING LEASES
Leases between Sarnia and its tenants expire from 2000 to 2009.
During the years ended June 30, 2000, 1999 and 1998, rentals to major tenants
were as follows:
<TABLE>
<CAPTION>
Lease Years Ended June 30,
Termination ------------------------------------------------
Date 2000 1999 1998
------------ ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Versar............................ 2009 $ 1,115 $ 1,115 $ 1,072
General Services Administration .. 2004 183 191 201
RGE Engineering................... 2000 183 325 339
C-Cubed Corporation............... 1999 187 166 223
NCPPO............................. 2000 357 350 350
</TABLE>
Noncancellable leases provide for approximate minimum rental payments
during each of the next five years as set forth below. It is assumed that the
payments on the Versar lease 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 ten 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, 2000, 93% of Sarnia's space was leased.
<TABLE>
<CAPTION>
Years Ending June 30, Versar Total
--------------------- --------- ---------
(In thousands)
<S> <C> <C>
2001 1,132 3,167
2002 1,155 3,257
2003 1,177 3,342
2004 1,201 3,275
2005 1,225 2,625
Beyond 2005 5,152 5,699
--------- ---------
$ 11,042 $ 21,365
========= =========
</TABLE>
F-12
<PAGE> 29
SARNIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE J QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal years 2000 and 1999 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year 2000 Fiscal Year 1999
---------------------------------------------- ----------------------------------------------
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 ... $ 929 $ 863 $ 850 $ 845 $ 780 $ 794 $ 871 $ 811
Net income ................... 1,444 79 593 90 73 56 80 50
Net income applicable to
common stock ............... 1,425 59 573 70 54 36 60 30
Net income per share
applicable to common
stock - diluted ............ $ 0.31 $ 0.01 $ 0.12 $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.01
====== ====== ====== ====== ====== ====== ====== ======
Weighted average number of
shares outstanding -
diluted .................... 4,681 4,688 4,694 4,667 4,636 4,620 4,618 4,686
====== ====== ====== ====== ====== ====== ====== ======
</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-13
