<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 MARCH 31, 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 March 31, 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 11.
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THE WASHINGTON CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flow -
Three Months Ended March 31, 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 - 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
</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>
March 31,
1999 December 31,
(unaudited) 1998
----------- ------------
<S> <C> <C>
ASSETS
Real estate and development properties $505,771 $1,563,220
Operating property and equipment, net 17,763,245 17,965,953
Cash and short-term investments 759,918 828,893
Escrow deposits 155,619 57,655
Land purchase leaseback 400,000 400,000
Other assets 373,859 301,879
Equity in and advances to unconsolidated partnerships 0 5
----------- -----------
Total Assets $19,958,412 $21,117,605
----------- -----------
----------- -----------
LIABILITIES
Note payable - Arlington Square $23,251,312 $23,350,000
Other notes and loans payable 0 891,698
Interest payable 140,452 310,985
Accounts payable and other liabilities 176,498 173,298
----------- -----------
Total Liabilities 23,568,262 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) (6,431,740) (6,430,266)
----------- -----------
Total Stockholders' Equity (3,609,850) (3,608,376)
----------- -----------
Total Liabilities and Stockholders' Equity $19,958,412 $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 MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
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<S> <C> <C>
REVENUES
Operating property rental income $821,197 $795,257
Rent from land purchase leaseback 27,510 27,361
Other income 151,011 35,187
Interest income 7,657 1,290
--------- ---------
1,007,375 859,095
--------- ---------
EXPENSES
Interest expense 394,880 539,433
Operating property expenses 250,807 229,225
Other expenses 82,092 0
General and administrative expenses 78,362 81,820
--------- ---------
806,141 850,478
--------- ---------
Net income before depreciation and amortization 201,234 8,617
Depreciation and amortization 202,708 283,797
--------- ---------
Net loss ($1,474) ($275,180)
--------- ---------
--------- ---------
Earnings (loss) per share:
Net income before depreciation and amortization $0.12 $0.00
Depreciation and amortization $0.12 $0.17
--------- ---------
Net Loss $0.00 ($0.17)
--------- ---------
--------- ---------
</TABLE>
The accompanying 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 MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,474) ($275,180)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 202,708 331,335
Increase (Decrease) in interest payable 6,916 8,100
Decrease (increase) in other assets (71,975) (60,095)
Decrease in accounts payable and other liabilities 3,200 52,300
-------- --------
NET CASH PROVIDED BY OPERATING ACTIIVITIES 139,375 56,460
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in escrow deposits (97,964) (106,190)
-------- --------
NET CASH USED IN INVESTING ACTIVITES: (97,964) (106,190)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (110,386) (1,529)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES: (110,386) (1,529)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,975) (51,259)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 828,893 222,821
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $759,918 $171,562
-------- --------
-------- --------
CASH PAID DURING THE PERIOD FOR INTEREST $394,880 $531,333
-------- --------
-------- --------
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 Washington Corporation and subsidiaries as
of March 31, 1999, and the results of operations for the three months ended
March 31, 1999 and 1998 and statements of cash flow for the three months ended
March 31, 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 $1,160,000 from $21,118,000 at December 31,
1998 to $19,958,000 at March 31, 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 March 31, 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 $203,000 from $17,966,000
at December 31, 1998 to $17,763,000 at March 31, 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 $69,000 from $829,000 at
December 31, 1998 to $760,000 at March 31, 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 $98,000 from $58,000 at December 31, 1998
to $156,000 at March 31, 1999. Such increase was the result of periodic payments
made to the reserve on the
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Arlington Square Project.
Other assets increased by $72,000 from $302,000 at December 31, 1998 to
$374,000 at March 31, 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 $1,158,000 from $24,726,000 at December
31, 1998 to $23,568,000 at March 31, 1999. Such increase was primarily the
result of decreases in notes payable, other loans and notes payable, and
interest payable.
Note payable-Arlington Square decreased by $99,000 from $23,350,000 as
of December 31, 1998 to $23,251,000 as of March 31, 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 March 31, 1999. As previously stated (see real
estate and development properties), 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 $171,000 from $311,000 at December 31,
1998 to $140,000 at March 31, 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).
There was no material change in accounts payable and other liabilities.
The Company's stockholders equity decreased by $2,000 from
$($3,608,000) at December 31, 1998 to ($3,610,000) at March 31, 1999. Such
decrease was the result of recorded net loss of $1,474 for the three months
ended March 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
Revenues increased to $1,007,000 for the three months ended March 31,
1999 ("First Quarter 1999") from $859,000 for the three months ended March 31,
1998 ("First Quarter 1998"), an increase of $148,000. Such increase was
primarily the result of an increase in other income and operating property
rental income.
Operating property rental income increased to $821,000 for First
Quarter 1999 compared to $795,000 for First Quarter 1998, an increase of
$26,000. This increase was due to income relating to the Arlington Square
Project.
Other income increased to $151,000 for First Quarter 1999 compared to
$35,000 for First
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Quarter 1998, an increase of $116,000. Such increase was primarily the result of
special construction work relating to the Arlington square project, and
management fees. Associated costs related to this construction work is shown in
other expenses.
Interest income increased to $7,657 for First Quarter 1999 compared to
$1,290 for First Quarter 1998, an increase of $6,367. This increase was due to
the additional cash and investment balances on hand during First Quarter 1999.
Total operating expenses decreased to $825,000 for First Quarter 1999
compared to $850,000 for First Quarter 1998, a decrease of $25,000. This
decrease was due to a decrease in interest expense offset by an increase in
other expenses and operating property expenses.
Interest expense decreased by $144,000 to $395,000 in First Quarter
1999 from $539,000 in First Quarter 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).
Operating property expenses increased by $22,000 from $229,000 in First
Quarter 1998 to $251,000 in First Quarter 1999. This increase was related to the
Arlington Square Project.
Other expenses increased to $82,000 for First Quarter 1999 compared
to $0 for First Quarter 1998, an increase of $82,000. Such increase was
primarily the result of special construction work relating to the Arlington
square project. Associated income related to this work is shown in other
income.
General and Administrative expenses decreased by $4,000 from $82,000 in
First Quarter 1998 to $78,000 in First Quarter 1999.
Net income before depreciation and amortization increased to $201,000
for the First Quarter 1999 from $9,000 for the First Quarter 1998, an increase
of $192,000. 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 $1,474 for the First Quarter 1999 as
compared to a net loss of $275,000 for the First Quarter 1998, a decreased loss
of $274,000. This decrease was the result of a $192,000 increase in net income
before depreciation and a decrease in depreciation of $81,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for the period ended March 31,
1999 came from rental income and property management fees from Arlington Square.
As of March 31, 1999, the Company had cash, short term investments, and escrow
deposits totaling approximately $759,918 exclusive of cash restricted for the
Arlington Square Project reserve of approximately $155,619.
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During the First Three Months 1999, cash and short-term investments
decreased by $69,000. This decrease in the First Three Months 1999 is primarily
due to 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. If asset sales do not occur in a timely
fashion, the Company will have insufficient cash to continue operations. In
addition, 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 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 Three Months 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
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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 and is guaranteed by all of the partners of ASLP.
LIQUIDITY
The Company does not have a plan to address its liquidity problems. The
Company will continue to attempt to reduce its general and administrative
expenses and, if necessary, attempt to delay payment for certain services until
properties are sold. If these attempts are not successful, the Company will be
forced to sell its remaining properties for significantly less than recorded
values and/or seek protection from its creditors under the Bankruptcy Code.
10
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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 March 31,
1999 (included in Part I, Item 1).
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during
the first quarter of 1999.
11
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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: June 24, 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)
/s/Jose Ma. C. Castro
-----------------------------
Jose Ma. C. Castro
Controller
(Principal financial officer)
DATE: June 24, 1999
<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> MAR-31-1999
<CASH> 759,918
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 929,478
<PP&E> 25,386,934
<DEPRECIATION> (7,623,689)
<TOTAL-ASSETS> 19,958,412
<CURRENT-LIABILITIES> 316,950
<BONDS> 23,251,312
0
0
<COMMON> 17,069
<OTHER-SE> (362,919)
<TOTAL-LIABILITY-AND-EQUITY> 19,958,412
<SALES> 0
<TOTAL-REVENUES> 1,007,375
<CGS> 0
<TOTAL-COSTS> 250,807
<OTHER-EXPENSES> 159,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394,880
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,474)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,474)
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
