<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NO. 1-7228
THE WASHINGTON CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
MARYLAND 52-1157845
(State of Incorporation) (I.R.S. Employer Identification Number)
4550 MONTGOMERY AVENUE, BETHESDA, MARYLAND
20814
(Address of principal executive office)
(301) 657-3640
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) 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
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of common
stock as of September 30, 1999: (1) 1,640,327 shares of Class A Common Stock
(2) 21,476 shares of Class B Common Stock
(3) 45,119 shares of Class C Common Stock
EXHIBITS INDEX IS ON PAGE 12 .
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THE WASHINGTON CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and 1998 and 4
Nine Months Ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flow -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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PART I. FINANCIAL STATEMENTS
ITEM I: FINANCIAL STATEMENTS
THE WASHINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30
1999 December 31,
(unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
Real estate and development properties $ 505,771 $ 1,563,220
Operating property and equipment, net 17,365,386 17,965,953
Cash and short-term investments 813,769 828,893
Escrow deposits 150,000 57,655
Land purchase leaseback 400,000 400,000
Other assets 360,659 301,879
Equity in and advances to unconsolidated partnerships 5 5
------------ ------------
Total Assets $ 19,595,590 $ 21,117,605
============ ============
LIABILITIES
Note payable - Arlington Square $ 23,012,793 $ 23,350,000
Other notes and loans payable 0 891,698
Interest payable 131,110 310,985
Accounts payable and other 206,197 173,298
------------ ------------
Total Liabilities 23,350,100 24,725,981
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; shares issued
Class A - 1,640,327 shares 16,403 16,403
Class B - 21,476 shares 215 215
Class C - 45,119 shares 451 451
Additional paid-in capital 2,804,821 2,804,821
Retained earnings (deficit) (6,576,400) (6,430,266)
------------ ------------
Total Stockholders' Equity (3,754,510) (3,608,376)
------------ ------------
Total Liabilities and Stockholders' Equity $ 19,595,590 $ 21,117,605
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
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THE WASHINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Operating property rental income $809,365 $808,783 $2,410,990 $2,389,178
Rent from land purchase leaseback 28,445 27,789 84,828 84,068
Other income 85,004 163,661 161,716 386,204
Equity interest in net income from partnership 0 0 0 0
Interest income 6,081 2,077 19,459 6,254
Net (loss) gain on sale of assets 0 0 0 0
-------- -------- ---------- ----------
928,895 1,002,310 2,676,993 2,865,704
-------- -------- ---------- ----------
EXPENSES
Provision for estimated losses on asset value adjustments 0 500,000 0 500,000
Interest expense 394,001 590,704 1,184,880 1,635,508
Operating property expenses 272,496 170,817 788,297 761,333
General and administrative expenses 117,580 65,480 257,665 220,958
Other expenses 14,305 250,062 34,610 313,494
-------- -------- ---------- ----------
798,382 1,577,063 2,265,452 3,431,293
-------- -------- ---------- ----------
Net income before depreciation and amortization 130,513 (574,753) 411,541 (565,589)
Depreciation and amortization 157,346 218,891 557,675 799,045
-------- -------- ---------- ----------
Net loss (26,833) (793,644) (146,134) (1,364,634)
======== ======== ========== ==========
Earnings (loss) per share:
Net Income (loss) before depreciation and amortization $0.08 ($0.34) $0.24 ($0.33)
Depreciation and Amortization $0.09 $0.13 $0.33 $0.49
-------- -------- ---------- ----------
Net Loss ($0.01) ($0.47) ($0.09) ($0.82)
======== ======== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
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THE WASHINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($146,134) ($1,364,634)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for estimated losses on asset value adjustments 0 500,000
Depreciation and amortization 557,675 799,045
Amortization of deferred rental concessions 49,200 143,157
Net (gain) loss on sale of real estate assets 0 0
Distributions from partnerships 0 0
Increase (Decrease) in interest payable (2,426) 93,065
Decrease (increase) in other assets (42,046) (28,935)
Decrease in accounts payable and other liabilities 32,899 165,424
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 449,168 307,122
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (23,042) (6,457)
(Increase) decrease in esrow deposits (92,345) (180,036)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES: (115,387) (186,493)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable -- --
Principal payments on notes payable (348,905) (18,009)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES: (348,905) (18,009)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,124) 102,620
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 828,893 222,821
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $813,769 $325,441
========== ==========
CASH PAID DURING THE PERIOD FOR INTEREST $1,184,880 $1,568,544
========== ==========
Non-Cash Transactions:
Foreclosure on land for outstanding non-recourse debt and interest
Land 1,057,449
Debt and Interest Payable (1,057,449)
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
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THE WASHINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The accompanying condensed consolidated financial statements have been
prepared by The Washington Corporation ("TWC" and collectively with its
affiliates that are over 50% owned by TWC and consolidated for financial
reporting purposes, the "Company") without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been condensed or
omitted from the accompanying statements. The Company believes the disclosures
made are adequate to make the information presented not misleading when read in
conjunction with the financial statements and notes thereto included in the
Company's Report on Form 10-KSB for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company and subsidiaries as of September
30, 1999, and the results of operations for the nine months ended September 30,
1999 and 1998 and statements of cash flow for the nine months ended September
30, 1999 and 1998.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL POSITION
Total assets decreased by $1,522,000 from $21,118,000 at December 31,
1998 to $19,596,000 at September 30, 1999. Such decrease was primarily the
result of decreases in real estate and development properties, offset, in part,
by an increase in escrow deposits.
There was a decrease in real estate and development properties of
$1,057,000 between December 31, 1998 and September 30, 1999. This reduction was
primarily the result of a reduction in value and the subsequent foreclosure of
the Nanjemoy property. On February 2, 1999, the lenders foreclosed on the
portion of the property that secured the non-recourse loan. As a result, the
Company remains the owner of 48 acres, on a debt free basis..
Operating property and equipment decreased by $601,000 from $17,966,000
at December 31, 1998 to $17,365,000 at September 30, 1999. Such decrease was the
result of depreciation and amortization relating to the Arlington Square Project
(as defined below).
Cash and short-term investments decreased by $15,000 from $829,000 at
December 31, 1998 to $814,000 at September 30, 1999. Such decrease was primarily
the result of cash flow used in operating activities.
Escrow deposits increased by $92,000 from $58,000 at December 31, 1998
to $150,000
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at September 30, 1999. Such increase was the result of periodic payments made to
the lender for tenant improvement and leasing reserves associated with the
Arlington Square Project.
Other assets increased by $59,000 from $302,000 at December 31, 1998 to
$361,000 at September 30, 1999. Such increase was the result of an increase in
rent receivable on the Arlington Square Project.
Total liabilities decreased by $1,376,000 from $24,726,000 at December
31, 1998 to $23,350,000 at September 30, 1999. Such decrease was primarily the
result of a decrease in other notes and loans payable and decreases in notes
payable, interest payable and accounts payable and other liabilities.
Note payable-Arlington Square Project decreased by $337,000 form
$23,350,000 at December 31, 1998 to $23,013,000 at September 30, 1999. This
reduction was the result of payments made to the lender, and the resulting
principal reduction.
Other notes and loans payable decreased by $892,000 from $892,000 as of
December 31, 1998 to $0 at September 30, 1999. As previously stated (see real
estate and development properties) in the first quarter of 1999, the secured
lender foreclosed on a portion of the Nanjemoy land investment. The notes were
non-recourse to the Company, but were secured by 313 acres of the total 361-acre
investment. As a result of the foreclosure, the Company's remaining investment
in 48 acres is owned on a debt free basis.
Interest payable decreased by $180,000 from $311,000 at December 31,
1998 to $131,000 at September 30, 1999. Such decrease was the primarily the
result of a decrease in accrued interest on the Nanjemoy land notes. The
decrease is the result of a foreclosure of a portion of the land investment (see
Other notes and loans payable).
Accounts payable and other liabilities decreased by $66,000 from
$173,000 at December 31, 1998 to $107,000 at September 30, 1999. Such decrease
was the result of a decrease in accounts payable and accrued expenses on the
Arlington Square project.
The Company's stockholders equity decreased by $146,000 from
$(3,608,000) at December 31, 1998 to $(3,754,000) at September 30, 1999. Such
decrease was the result of recorded net loss of $146,000 for the nine months
ended September 30, 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues increased to $2,677,000 for the nine months ended September
30, 1999 ("First Nine Months 1999") from $2,866,000 for the nine months ended
September 30, 1998 ("First Nine Months 1998"), an increase of $189,000. Such
increase was primarily the result of an
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increase in Operating property rental income and other income.
Operating property rental income increased to $2,411,000 for First Nine
Months 1999 compared to $2,389,000 for First Nine Months 1998, an increase of
$22,000. This increase was due to an annual rent increase relating to the
Arlington Square Project.
Other income decreased to $162,000 for First Nine Months 1999 compared
to $386,000 for First Nine Months 1998, a decrease of $224,000. Such decrease is
the result of management fees.
Total expenses decreased to $2,265,000 for First Nine Months 1999
compared to $3,431,000 for First Nine Months 1998, a decrease of $1,166,000.
This decrease was due to a decrease in provision for estimated losses on asset
value adjustment and interest expense, offset in part by an increase in
operating property expenses and general and administrative expenses.
Provision for estimated losses on asset value adjustment decreased from
$500,000 for the First Nine Months of 1998 to $0 for the First Nine Months of
1999. The decrease was the result of a loss provision recognized in 1998 for the
Company's investment relating to the Nanjemoy land investment.
Interest expense decreased by $451,000 to $1,185,000 in First Nine
Months 1999 from $1,636,000 in First Nine Months 1998. This decrease was
primarily the result of a reduction in interest expense relating to the Nanjemoy
land investment. The note, partially secured by the land investment (as
described above), was foreclosed in February, 1999.
Operating property expenses increased by $27,000 from $761,000 in First
Nine Months 1998 to $788,000 in First Nine Months 1999. This increase was
related to the Arlington Square Project.
General and Administrative expenses increased by $37,000 from $221,000
in First Nine Months 1998 to $258,000 in First Nine Months 1999.
Other expenses decreased by $278,000 from $313,000 in First Nine Months
1998 to $35,000 in First Nine Months 1999, primarily as a result of the tenant
improvement costs related to the above mentioned other income.
Net income (loss) before depreciation and amortization increased to
$500,000 for the First Nine Months 1999 from $(566,000) for the First Nine
Months 1998, an increase of $1,066,000. Such increase was the result of a
decrease in expenses as outlined above.
The Company recorded a net loss of $146,000 for the First Nine Months
1999 as compared to a net loss of $1,365,000 for the First Nine Months 1998, a
decrease of $1,219,000. This decrease was the result of a $1,022,000 increase in
net income before depreciation with
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$500,000 being attributable to a provision for estimated losses and a decrease
in depreciation of $241,000.
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues decreased to $929,000 for the three months ended September 30,
1999 ("Third Quarter 1999") from $1,002,000 for the three months ended September
30, 1998 ("Third Quarter 1998"), a decrease of $73,000. Such decrease was
primarily the result of a decrease in other income.
Operating property rental income remained the same at $809,000 for
Third Quarter 1999 and Third Quarter 1998.
Other income decreased to $85,000 for Third Quarter 1999 compared to
$164,000 for Third Quarter 1998, a decrease of $79,000, a result of the
management fees.
Total operating expenses decreased to $798,000 for Third
Quarter 1999 compared to $1,577,000 for Third Quarter 1998, a decrease of
$779,000. This decrease was due to a decrease in provision for estimated losses
on asset value adjustment, a decrease in interest expense, and a decrease in
other expenses, offset by an increase in operating property expenses and an
increase in general and administrative expenses.
Provision for estimated losses on asset value adjustment decreased from
$500,000 for the Third Quarter of 1998 to $0 for the Third Quarter of 1999. The
decrease was the result of a loss provision recognized in 1998 for the Company's
investment primarily relating to the Nanjemoy land investment.
Interest expense decreased by $197,000 to $394,000 in Third Quarter
1999 from $591,000 in Third Quarter 1998. This decrease was primarily the result
of a reduction in interest expense relating to the Nanjemoy land investment. The
note, partially secured by the land investment (as described above) was
foreclosed in February, 1999.
Operating property expenses increased by $101,000 from $171,000 in
Third Quarter 1998 to $272,000 in Third Quarter 1999. This increase is primarily
the result of expenses incurred by the Arlington Square Project.
General and Administrative expenses increased by $52,000.
Net income (loss) before depreciation and amortization increased to
$130,000 for the Third Quarter 1999 from $(575,000) for the Third Quarter 1998,
an increase of $705,000.
The Company recorded a net loss of $27,000 for the Third Quarter 1999
as compared to a net loss of $794,000 for the Third Quarter 1998, a decreased
loss of $767,000. This decrease was
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the result of the removal of a $705,000 increase in net income before
depreciation with $500,000 being attributable to a provision for estimated
losses and a decrease in depreciation of $62,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for the period ended September
30, 1999 came from rental income and property management fees from the Arlington
Square Project. As of September 30, 1999, the Company had cash, short term
investments, and escrow deposits totaling approximately $813,769 exclusive of
cash restricted for the Arlington Square Project reserve of approximately
$150,000.
During the First Nine Months 1999, cash and short-term investments
decreased by $15,000. This decrease in the First Nine Months 1999 is primarily
due to the result of cash flow used in operating activities by the payment of
required interest payments on the ASLP Note (as defined below). Future sources
of funds are anticipated to come from the rents and a property management fee
from the Arlington Square Project. The Company's primary use of operating funds
is anticipated to be for operating expenses and required payments on the ASLP
Note. The Company has tried without success to sell its remaining assets. It is
not anticipated that the Company will be able to augment its cash flow from any
outside sources, such as the issuance of additional equity or additional
borrowings.
TIMBERLAKE FORECLOSURE
TWC, through a wholly-owned subsidiary, the Nanjemoy Associates Limited
Partnership ("NALP") owned 361 acres in Charles County, Maryland for future
residential development (the "Timberlake Project"). NALP defaulted on its
quarterly interest payments on the purchase money mortgage made to NALP ("PMM")
that was secured by the Timberlake property. The principal amount of the PMM was
$880,000 and it matured on January 15, 1998. The PMM was not guaranteed by TWC
and the note contained a provision that the holder will rely solely on the
property for repayment of the PMM. This default resulted in TWC losing 313 of
the 361 acres of land owned by NALP due to foreclosure action by the note holder
on February 2, 1999. As a result, the approved preliminary site plan was voided
together with the various entitlements for the development of the property. It
is uncertain at this time how the remaining 48 acres could be developed.
ARLINGTON SQUARE LIMITED PARTNERSHIP
TWC, directly and through an affiliate, Arlington Square, Inc., a
wholly-owned subsidiary of TWC ("ASI"), owns a 74% interest in Arlington Square
Limited Partnership ("ASLP"). ASLP owns 1.75 acres of land and an office
building constructed thereon (the "Arlington Square Project") located in
Arlington, Virginia. During the First Nine Months 1999, approximately 96% of the
Company's revenues were derived from rental income and construction income on
the Arlington Square Project.
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From January 1, 1998 to November 25, 1998, ASLP's property was
encumbered by mortgage notes to Allied Capital Commercial Corporation
("Allied"). The outstanding principal balance on the mortgage loans (the "Allied
Loan") accrued interest at a blended rate of 10%, based on the LIBOR rates. The
notes were cash-flow mortgages with all excess cash flow, as defined, being
applied to reduce the principal balance and to fund the required escrows. One of
the mortgage agreements provided for the lender to receive a participation
interest of 30% in the net cash flow and a 30% equity value in the property if
and when it is sold, with such provision to survive any payoff of the mortgage.
On November 25, 1998, the Allied Loan was repaid with proceeds of a
loan obtained by ASLP and secured by the Arlington Square Project from
Metropolitan Life Insurance Company ("MetLife") in the original principal amount
of $21,500,000 (the "MetLife Loan") pursuant to a promissory note or notes
executed by the Company (the "ASLP Note"). At the closing of the MetLife Loan,
$21,500,000 was disbursed to (i) repay the Allied Loan in the amount of
$20,600,000; and (ii) to pay for costs associated with the MetLife Loan in the
amount of $373,477. The MetLife Loan has a fixed interest rate of 6.8% and
matures on December 1, 2010.
Upon refinancing of the Allied Loan, Allied gave notice of demand for
full payment of its participation interest in the equity value and net cash flow
of the Arlington Square Project. ASLP entered into a forbearance agreement with
Allied which (i) established the value for Allied's participation interest at
$1,850,000; and (ii) established a payment term of 9 1/2 years with interest at
7.5% and monthly payments at $22,739. Allied's participation interest is
collateralized by a deed of trust, subordinate to that of MetLife, in the
Arlington Square Project and is guaranteed by all of the partners of ASLP.
LIQUIDITY
The Company has sufficient liquidity to meet its current obligations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of per share earnings for the nine months ended September
30, 1999 (included in Part I, Item 1).
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during
the third quarter of 1999.
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In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE WASHINGTON CORPORATION
/s/William N. Demas
------------------------------
William N. Demas
President and Treasurer
(Duly authorized officer)
DATE: November 15, 1999
13
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
WASHINGTON CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 813769
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 25409976
<DEPRECIATION> (8044590)
<TOTAL-ASSETS> 19595590
<CURRENT-LIABILITIES> 337307
<BONDS> 23012793
0
0
<COMMON> 17069
<OTHER-SE> (3771579)
<TOTAL-LIABILITY-AND-EQUITY> 19595590
<SALES> 0
<TOTAL-REVENUES> 2676993
<CGS> 0
<TOTAL-COSTS> 1080572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1184880
<INCOME-PRETAX> (146134)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (146134)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
