<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, 2000
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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's classes of common
stock as of March 31, 2000: (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 10.
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THE WASHINGTON CORPORATION
INDEX
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<CAPTION>
PAGE
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PART I FINANCIAL INFORMATION
- ----------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flow -
Three Months Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 9
PART II OTHER INFORMATION
- ----------------------------------
Item 6. Exhibits and Reports on Form 8-K 10
</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,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------------- -------------------
<S> <C> <C>
ASSETS
Real estate and development properties $408,000 $408,000
Operating property and equipment, net 16,990,867 17,193,631
Cash and short-term investments 763,193 740,401
Escrow deposits 345,929 247,965
Land purchase leaseback 400,000 400,000
Other assets 374,898 463,927
------------------- -------------------
Total Assets $19,282,887 $19,453,924
=================== ===================
LIABILITIES
Note payable - Arlington Square $22,780,897 $22,898,870
Interest payable 129,666 130,758
Accounts payable and other liabilities 227,826 217,707
------------------- -------------------
Total Liabilities 23,138,389 23,247,335
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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) (6,677,392) (6,615,301)
------------------- -------------------
Total Stockholders' Equity (3,855,502) (3,793,411)
------------------- -------------------
Total Liabilities and Stockholders' Equity $19,282,887 $19,453,924
=================== ===================
</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, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
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<S> <C> <C>
REVENUES
Operating property rental income $805,188 $821,197
Rent from land purchase leaseback 27,489 27,510
Other income 211,027 151,011
Interest income 5,412 7,657
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1,049,116 1,007,375
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EXPENSES
Interest expense 390,324 394,880
Operating property expenses 275,826 250,807
Other expenses 146,868 82,092
General and administrative expenses 113,202 78,362
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926,220 806,141
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Net income before depreciation and amortization 122,896 201,234
Depreciation and amortization 184,987 202,708
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Net loss ($62,091) ($1,474)
============= =============
Earnings (loss) per share:
Net income before depreciation and amortization $0.07 $0.00
Depreciation and amortization $0.11 $0.12
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Net Loss $0.04 ($0.00)
============= =============
</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, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($62,091) ($1,474)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 201,387 202,708
Increase (Decrease) in interest payable (1,092) 6,916
Decrease (increase) in other assets 90,432 (71,975)
Decrease in accounts payable and other liabilities 10,093 3,200
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIIVITIES 238,729 139,375
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in escrow deposits (97,964) (97,964)
------------ ------------
NET CASH USED IN INVESTING ACTIVITES: (97,964) (97,964)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (117,973) (110,386)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES: (117,973) (110,386)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,792 (68,975)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 740,401 828,893
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $763,193 $759,918
============ ============
CASH PAID DURING THE PERIOD FOR INTEREST $390,324 $394,880
============ ============
</TABLE>
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, 1999.
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, 2000, and the results of operations for the three months ended
March 31, 2000 and 1999 and statements of cash flow for the three months ended
March 31, 2000 and 1999.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included in this Form 10-QSB. This
discussion contains forward-looking statements, including statements regarding
the Company's strategy, financial performance and revenue sources which involve
risks and uncertainties. The Company's actual results may differ materially from
those anticipated in these forward-looking statements.
MATERIAL CHANGES IN FINANCIAL POSITION
Total assets decreased by $171,000 from $19,454,000 at December 31,
1999 to $19,283,000 at March 31, 2000. Such decrease was primarily the result of
depreciation on operating property equipment, and a decrease in other assets,
offset, in part, by an increase in escrow deposits and cash.
Operating property and equipment decreased by $203,000 from $17,194,000
at December 31, 1999 to $16,991,000 at March 31, 2000. Such decrease was the
result of depreciation and amortization relating to the Arlington Square Project
(as defined below).
Cash and short-term investments increased by $23,000 from $740,000 at
December 31, 1999 to $763,000 at March 31, 2000, primarily due to cash flow
provided by operating activities in the collection of rents from the Arlington
Square Project.
Escrow deposits increased by $98,000 from $248,000 at December 31, 1999
to $346,000
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at March 31, 2000. Such increase was the result of required periodic payments
made to the reserve held by the lender on the Arlington Square Project.
Other assets decreased by $89,000 from $464,000 at December 31, 1999 to
$375,000 at March 31, 2000. Such decrease was the result of a decrease in
accounts receivable due from the Lessees of the Arlington Square Project and the
Fort Washington Land Purchase Leaseback. The decrease in accounts receivable is
due to the timing of receipt of such rental payments in the ordinary course of
business.
Total liabilities decreased by $109,000 from $23,247,000 at December
31, 1999 to $23,138,000 at March 31, 2000. Such decrease was primarily the
result of principal payments on notes payable-Arlington Square.
Note payable-Arlington Square decreased by $118,000 from $22,899,000 as
of December 31, 1999 to $22,781,000 as of March 31, 2000. This reduction was the
result of payments made to the lender and the resulting principal reduction.
The Company's stockholders' equity decreased by $62,000 from
($3,793,000) at December 31, 1999 to ($3,855,000) at March 31, 2000. Such
decrease was the result of recorded net loss of $62,091 for the three months
ended March 31, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
Revenues increased to $1,049,000 for the three months ended March 31,
2000 ("First Quarter 2000") from $1,007,000 for the three months ended March 31,
1999 ("First Quarter 1999"), an increase of $42,000. Such increase was primarily
the result of an increase in other income offset in part by a decrease in
operating property rental income.
Operating property rental income decreased to $805,000 for First
Quarter 2000 compared to $821,000 for First Quarter 1999, a decrease of $16,000.
This decrease was primarily related to a decrease in monthly rent for a tenant
in the Arlington Square Project.
Other income increased to $211,000 for First Quarter 2000 compared to
$151,000 for First Quarter 1999, an increase of $60,000. Such increase was
primarily the result of special construction work relating to the Arlington
Square Project. Associated costs related to this construction work is shown in
other expenses.
Interest income decreased to $5,400 for First Quarter 2000 compared to
$7,600 for First Quarter 1999, a decrease of $2,200. This decrease was primarily
the result of lower cash balances on hand in the Arlington Square Project.
Total operating expenses increased to $926,000 for First Quarter 2000
compared to $806,000 for First Quarter 1999, an increase of $120,000. This
increase was due to an increase in operating property expense, in other expense
and general and administrative expense.
7
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Interest expense decreased by $5,000 to $390,000 in First Quarter 2000
from $395,000 in First Quarter 1999 due to the declining principal balance on
the note payable-Arlington Square.
Operating property expenses increased by $25,000 from $251,000 in First
Quarter 1999 to $276,000 in First Quarter 2000. This increase was related to
repairs and maintenance in the Arlington Square Project.
Other expenses increased to $147,000 for First Quarter 2000 compared to
$82,000 for First Quarter 1999, an increase of $65,000. 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 increased by $35,000 from $78,000
in First Quarter 1999 to $113,000 in First Quarter 2000. Such increase was
primarily the result of a reclassification of professional fees from other
expenses to general and administrative expenses in the Arlington Square Project.
Net income before depreciation and amortization decreased from $201,000
for the First Quarter 1999 to $123,000 for the First Quarter 2000, a decrease of
$78,000. Such decrease was primarily the result of an increase in total expenses
as outlined above, partially offset by an increase in total income.
The Company recorded a net loss of $1,474 for the First Quarter 1999 as
compared to a net loss of $62,000 for the First Quarter 2000, an increased loss
of $60,000. This increase was the result of a $78,000 decrease in net income
before depreciation, partially offset by a decrease in depreciation of $18,000.
ARLINGTON SQUARE PROJECT
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 1.07 acres of land and an office
building constructed thereon (the "Arlington Square Project") located in
Arlington, Virginia. During the First Three Months 2000, approximately 96% of
the Company's revenues were derived from rental income and construction income
on the Arlington Square Project.
In November 1997, ASLP obtained a loan, secured by the Arlington Square
Project, from Allied Capital Commercial Corporation ("Allied") in the original
principal amount of $24,300,000 (the "Allied Loan"). The interest rate on the
Allied Loan was 10% and the Allied Loan also included a 30% participation for
Allied in the net cash flow and net sales proceeds of ASLP.
From November 1997 to November 25, 1998, ASLP's property was
encumbered by mortgage notes to Allied. The outstanding principal balance on
the mortgage loans accrued interest at a blended rate of 10%, based on the
LIBOR rates. The notes were cash-flow
8
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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.
On December 31, 1999, the parties to the forbearance agreement entered
into a termination of the forbearance agreement, since all further payment
obligations of the parties are contained in the Amended and Restated Promissory
Note dated as of December 1, 1998, and the related security and guarantee
agreements and amendments thereto.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for the period ended March 31,
2000 came from rental income and property management fees from the Arlington
Square Project. As of March 31, 2000, the Company had cash and short term
investments, and escrow deposits totaling approximately $1,109,000 of which
$346,000 was escrow deposits.
Therefore, the Company has sufficient liquidity to meet is current obligations.
During the First Three Months 2000, cash and short-term investments
increased by $23,000. This increase in the First Three Months 2000 is primarily
due to cash flow provided by operating activities in the collection of rents
from the Arlington Square Project. Future sources of funds are anticipated to
come primarily 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.
9
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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,
2000 (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 2000.
10
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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: May 19, 2000
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
WASHINGTON CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 763,193
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,484,020
<PP&E> 26,515,100
<DEPRECIATION> (8,716,233)
<TOTAL-ASSETS> 19,282,887
<CURRENT-LIABILITIES> 357,492
<BONDS> 22,780,197
0
0
<COMMON> 17,069
<OTHER-SE> (3,872,571)
<TOTAL-LIABILITY-AND-EQUITY> 19,282,887
<SALES> 0
<TOTAL-REVENUES> 1,049,116
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 535,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390,324
<INCOME-PRETAX> (62,091)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62,091)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
