<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 JUNE 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 June 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.
<PAGE>
THE WASHINGTON CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1999 and 1998 and Six Months
Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flow -
Six Months Ended June 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>
2
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PART I. FINANCIAL STATEMENTS
ITEM I: FINANCIAL STATEMENTS
THE WASHINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
June 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 17,565,624 17,965,953
Cash and short-term investments 774,614 828,893
Escrow deposits 138,413 57,655
Land purchase leaseback 400,000 400,000
Other assets 314,495 301,879
Equity in and advances to unconsolidated partnerships 0 5
----------- ------------
Total Assets $19,698,917 $21,117,605
----------- ------------
----------- ------------
LIABILITIES
Note payable - Arlington Square $23,127,586 $23,350,000
Other notes and loans payable 0 891,698
Interest payable 131,707 310,985
Accounts payable and other liabilities 167,291 173,298
----------- ------------
Total Liabilities 23,426,584 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) (6,549,557) (6,430,266)
----------- ------------
Total Stockholders' Equity (3,727,667) (3,608,376)
----------- ------------
----------- ------------
Total Liabilities and Stockholders' Equity $19,698,917 $21,117,605
----------- ------------
----------- ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
3
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THE WASHINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Operating property rental income $780,428 $785,138 $1,601,625 $1,580,395
Rent from land purchase leaseback 28,873 28,918 56,383 56,279
Other income 41,264 59,444 76,712 94,631
Interest income 5,721 2,887 13,378 4,177
-------- --------- ---------- ----------
856,286 876,387 1,748,098 1,735,482
-------- --------- ---------- ----------
EXPENSES
Interest expense 395,999 505,371 790,879 1,044,804
Operating property expenses 264,994 265,955 515,801 495,180
General and administrative expenses 75,498 104,513 160,380 186,334
-------- --------- ---------- ----------
736,491 875,839 1,467,060 1,726,318
-------- --------- ---------- ----------
Net income before depreciation and amortization 119,795 548 281,038 9,164
Depreciation and amortization 197,621 296,357 400,329 580,154
-------- --------- ---------- ----------
Net loss ($77,826) ($295,809) ($119,291) ($570,990)
-------- --------- ---------- ----------
-------- --------- ---------- ----------
Earnings (loss) per share:
Net income before depreciation and amortization $0.07 $0.00 $0.16 $0.00
Depreciation and amortization $0.11 $0.18 $0.23 $0.35
-------- --------- ---------- ----------
Net Loss ($0.04) ($0.18) ($0.07) ($0.35)
-------- --------- ---------- ----------
-------- --------- ---------- ----------
</TABLE>
The accompany Notes to Consolidated Financial Statements are an integral
part of these financial statements.
4
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THE WASHINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($119,291) ($570,990)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 400,329 671,328
Increase (Decrease) in interest payable (1,829) 30,581
Decrease (increase) in other assets (12,611) 14,996
Decrease in accounts payable and other liabilities (6,007) (18,018)
-------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 260,591 127,897
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in escrow deposits (80,758) (73,846)
-------- ----------
NET CASH USED IN INVESTING ACTIVITIES: (80,758) (73,846)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (234,112) 0
-------- ----------
NET CASH USED IN FINANCING ACTIVITIES: (234,112) 0
-------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (54,279) 54,051
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 828,893 222,821
-------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $774,614 $276,872
-------- ----------
-------- ----------
CASH PAID DURING THE PERIOD FOR INTEREST $790,879 $1,014,223
-------- ----------
-------- ----------
</TABLE>
Non-Cash Transactions:
Foreclosure on land for outstanding non-recourse debt and interest
Land 1,057,449
Debt and Interest Payable (1,057,449)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
5
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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 Washington Corporation and subsidiaries as
of June 30, 1999, and the results of operations for the six months ended June
30, 1999 and 1998 and statements of cash flow for the six months ended June 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 $1,419,000 from $21,118,000 at December 31,
1998 to $19,699,000 at June 30, 1999. Such decrease was primarily the result of
decreases in real estate and development properties, cash and short-term
investments, and depreciation on operating property and, in part, offset by an
increase in escrow deposits and other assets.
Real estate and development properties decreased by $1,057,000 from
$1,563,000 at December 31, 1998 to $506,000 as of June 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 $400,000 from $17,966,000
at December 31, 1998 to $17,566,000 at June 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 $54,000 from $829,000 at
December 31, 1998 to $775,000 at June 30, 1999. Such decrease was primarily the
result of cash flow used in operating activities by the payment of required
interest payments on the ASLP Note (as defined below).
Escrow deposits increased by $80,000 from $58,000 at December 31, 1998
to $138,000 at June 30, 1999. Such increase was the result of periodic payments
made to the reserve on the
6
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Arlington Square Project.
Other assets increased by $12,000 from $302,000 at December 31, 1998 to
$314,000 at June 30, 1999. Such increase was the result of an increase in rent
receivable on the Arlington Square Project and Land Purchase Leaseback.
Total liabilities decreased by $1,382,000 from $24,726,000 at December
31, 1998 to $23,344,000 at June 30, 1999. Such decrease was primarily the result
of decreases in notes payable, other loans and notes payable, and interest
payable.
Note payable-Arlington Square decreased by $222,000 from $23,350,000 as
of December 31, 1998 to $23,128,000 as of June 30, 1999. This reduction was the
result of payments made and the resulting principal amortization on the
Arlington Square note payable.
Other notes and loans payable decreased by $892,000, from $892,000 as
of December 31, 1998, to $0 as of June 30, 1999. As previously stated (see real
estate and development properties) in the first quarter 1999, the secured
lenders 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
investment of 361 acres. As a result of the foreclosure, the company's remaining
investment is 48 acres, owned on a debt free basis.
Interest payable decreased by $179,000 from $311,000 at December 31,
1998 to $132,000 at June 30, 1999. Such decrease was primarily the result of a
decrease in interest accrued on the Nanjemoy land notes. The decrease is a
result of the foreclosure of a portion of the Nanjemoy land investment (see
other notes and loans payable).
Accounts payable and other liabilities decreased by $6,000 from
$173,000 at December 31, 1998 to $167,000 at June 30, 1999. Such decrease was
primarily the result of a decrease in accounts payable and accrued expenses on
the Arlington square project.
The Company's stockholders equity decreased by $119,000 from
($3,608,000) at December 31, 1998 to ($3,728,000) at June 30, 1999. Such
decrease was the result of recorded net loss of $119,000 for the six months
ended June 30, 1999.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
Revenues increased to $1,748,000 for the six months ended June 30, 1999
("First Half 1999") from $1,735,000 for the six months ended June 30, 1998
("First Half 1998"), an increase of $13,000. Such increase was primarily the
result of an increase in other income and operating property rental income.
Operating property rental income increased to $1,602,000 for the First
Half 1999 compared to $1,580,000 for the First Half 1998, an increase of
$22,000. This increase was due to income relating to the Arlington Square
Project.
7
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Other income decreased to $77,000 for First Half 1999 compared to
$95,000 for First Half 1998, a decrease of $18,000. Such decrease was primarily
the result of management fees.
Interest income increased to $13,000 for First Half 1999 compared to
$4,000 for First Half 1998, an increase of $9,000. This increase was due to the
additional cash and investment balances.
Total operating expenses decreased to $1,467,000 for First Half 1999
compared to $1,726,000 for First Half 1998, a decrease of $259,000. This
decrease was due to a decrease in interest expense offset by an increase in
operating property expenses.
Interest expense decreased by $254,000 to $791,000 in First Half 1999
from $1,045,000 in First Half 1998. This decrease was primarily due to a
reduction in interest expense relating to the Nanjemoy land investment. The
note, partially secured by the Nanjemoy land investment, was foreclosed in
February, 1999 (as described above). In addition interest expense decreased on
the Arlington Square project due to the refinancing of the project.
Operating property expenses increased by $21,000 from $495,000
in First Half 1998 to $516,000 in First Half 1999. This increase was related
to the Arlington Square Project.
General and Administrative expenses decreased by $26,000 from
$186,000 in First Half 1998 to $160,000 in First Half 1999.
Net income before depreciation and amortization increased to $281,000
for the First Half 1999 from $9,000 for the First Half 1998, an increase of
$272,000. Such increase was primarily the result of an increase in total income
and a decrease in total expenses as outlined above.
The Company recorded a net loss of $119,000 for the First Half 1999 as
compared to a net loss of $571,000 for the First Half 1998, a decreased loss of
$452,000. This decrease was the result of a $272,000 increase in net income
before depreciation and a decrease in depreciation and amortization of $180,000.
THREE MONTHS ENDED JUNE 30, 1999
Revenues decreased to $856,000 for the three months ended June 30, 1999
("Second Quarter 1999") from $876,000 for the three months ended June 30, 1998
("Second Quarter 1998"), a decrease of $20,000. Such decrease was primarily the
result of a decrease in other income and operating property rental income.
Operating property rental income decreased to $780,000 for Second
Quarter 1999 compared to $785,000 for Second Quarter 1998, a decrease of $5,000
due to income relating to the Arlington Square Project.
Other income decreased to $41,000 for Second Quarter 1999
compared to $59,000 for Second Quarter 1998, a decrease of $18,000.
8
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Interest income increased to $5,721 for Second Quarter 1999 compared to
$2,887 for Second Quarter 1998, an increase of $2,834. This increase was due to
the additional cash and investment balances on hand during Second Quarter 1999.
Total operating expenses decreased to $736,000 for Second Quarter 1999
compared to $876,000 for Second Quarter 1998, a decrease of $140,000. This
decrease was due to a decrease in interest expense and a decrease in general and
administrative expenses.
Interest expense decreased by $109,000 to $396,000 in Second Quarter
1999 from $505,000 in Second Quarter 1998. This decrease was partially due to a
reduction in interest expense relating to the Nanjemoy land investment. The
note, partially secured by the Nanjemoy land investment, was foreclosed in
February, 1999 (as described above). In addition interest expense decreased on
the Arlington Square project due to the refinancing of the project
There was no significant change in operating property expenses.
General and Administrative expenses decreased by $30,000 from
$105,000 in Second Quarter 1998 to $75,000 in Second Quarter 1999.
Net income before depreciation and amortization increased to $120,000
for the Second Quarter 1999 from $548 for the Second Quarter 1998, an increase
of $119,000. Such increase was primarily the result of a decrease in total
expenses as outlined above.
The Company recorded a net loss of $78,000 for the Second Quarter 1999
as compared to a net loss of $296,000 for the Second Quarter 1998, a decreased
loss of $218,000. This decrease was the result of a $119,000 increase in net
income before depreciation and a decrease in depreciation of $99,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for the period ended June 30,
1999 came from rental income and property management fees from Arlington Square.
As of June 30, 1999, the Company had cash, short term investments, and escrow
deposits totaling approximately $774,614 exclusive of cash restricted for the
Arlington Square Project reserve of approximately $138,413.
During the First Half 1999, cash and short-term investments decreased
by $54,000. This decrease in the First Half 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. Future sources of funds are anticipated to come from
the rents and a property management fee from Arlington Square. 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.
9
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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 is
$880,000 and it matured on January 15, 1998. The PMM is not guaranteed by TWC
and the note contains 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 REFINANCING
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 Half 1999, approximately 96% of the
Company's revenues were derived from rental income and construction income on
the Arlington Square Project.
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"). 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
10
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and is guaranteed by all of the partners of ASLP.
LIQUIDITY
The Company has sufficient liquidity to meet its current obligations.
11
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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 three months ended June
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 second quarter of 1999.
12
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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)
/s/ Jose Ma. C. Castro
---------------------------------
Jose Ma. C. Castro
Controller
(Principal financial officer)
DATE: August 13th, 1999
13
<TABLE> <S> <C>
<PAGE>
<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>
<CIK> 0000314625
<NAME>THE WASHINGTON CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 774,614
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,227,522
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,698,917
<CURRENT-LIABILITIES> 298,998
<BONDS> 23,127,586
0
0
<COMMON> 17,069
<OTHER-SE> (3,744,736)
<TOTAL-LIABILITY-AND-EQUITY> 19,698,917
<SALES> 0
<TOTAL-REVENUES> 1,748,098
<CGS> 0
<TOTAL-COSTS> 676,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 790,879
<INCOME-PRETAX> (119,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (119,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (119,291)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
