**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-KSB**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

| For the fiscal year  ended **December 31, 2002** |   | Commission file  number **1-7228** |
|--------------------------------------------------|--------|------------------------------------|

 

**THE WASHINGTON CORPORATION**

(Name of Small Business Issuer in Its Charter)

 

| **Maryland**              |   | **52-1157845**                        |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

 

4**421 Chestnut Street**

** Bethesda, Maryland 20814**

(Address of principal executive offices)

**(301) 657-3640**

(Issuer’s telephone number)

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**Securitiesregistered pursuant to Section 12(b) of the Act:**

None

 **Securitiesregistered pursuant to Section 12(g) of the Act:**

Class B Common Stock, $.01 par value per share

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Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.                                                                      Yes  ý     No  o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-KSB or any amendment to this Form 10-KSB.     ý

 

The registrant’s revenuesfor the fiscal year ended December 31, 2002 were:  $3,449,333

 

The Registrant has beenunable to ascertain any market for the Registrant’s securities, and, therefore,the Registrant believes that the best estimate of the market value of itsvoting stock held by non-affiliates is $0 at the present time.

 

 

As of December 31, 2002,the number of shares outstanding of each class of the registrant’s classes ofcommon stock were as follows:

1,640,327 shares of Class A Common Stock

21,476 shares of Class B Common Stock

45,119 shares of Class C Common Stock

 

 

EXHIBITS BEGIN ON PAGE 33

 

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### PART I

 

FORWARD-LOOKINGSTATEMENTS

 

The statements containedin this report that are not purely historical are forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, including without limitation,statements about the Company’s expectations, beliefs, intentions or strategiesregarding the future.  Allforward-looking statements included in this report are based on informationavailable to the Company on the date hereof, and the Company assumes noobligation to update any such forward-looking statements.  The forward-looking statements containedherein involve risks and uncertainties. The Company’s actual results could differ materially from those anticipatedin these forward-looking statements as a result of certain factors, includingthose set forth in this report.

 

ITEM 1.  DESCRIPTION OF BUSINESS

 

(a) BUSINESSDEVELOPMENT

 

The WashingtonCorporation (individually, “TWC” and together with its affiliates that areconsolidated with it for financial reporting purposes, the “Company”), aMaryland corporation, was organized in 1979. The Company’s operations consist of the ownership of real estate, bothincome-producing and unimproved, and office building management, primarily inthe metropolitan Washington, D.C. area. The Company has been pursuing a plan to divest its three remainingnon-income-producing properties, and has obtained appropriate financing and along-term lease for its primary income-producing asset.

 

RecentDevelopments.   The following are descriptions of materialdevelopments within the past three years.

 

Timberlake

 

TWC, through awholly-owned subsidiary, the Nanjemoy Associates Limited Partnership (“NALP”)owned 361 acres in Charles County, Maryland for future residential development(the “Timberlake Project”).  NALPdefaulted on its quarterly interest payments on the purchase money mortgagemade to NALP (“PMM”) that was secured by 313 of the 361 acres comprising theTimberlake property.  The principalamount of the PMM was $880,000 and it matured on January 15, 1998.  The PMM was not guaranteed by TWC and thenote contained a provision that the holder will rely solely on the property forrepayment of the PMM.  This defaultresulted in NALP losing 313 of the 361 acres of land due to foreclosure actionby the note holder on February 2, 1999. As a result, the approved preliminary site plan was voided together withthe various entitlements for the development of the property.  For the fiscal year ending December 31,1998, the net book value of the property was reduced by the $880,000 principalbalance on the PMM, and $177,449 of accrued interest and real estatetaxes.  Management estimated the valueof the remaining property to be $200,000, resulting in an additional estimatedloss on asset valuation of $97,771 for the fiscal year ended December 31,1999.  Management made an additionaladjustment to the net realizable value of the property during 2000 due to thepoor results of land development zoning tests on several of the remaininglots.  This resulted in a provision forestimated loss on asset valuation of $75,000 for the year ended December 31,2000.  No additional provision wasconsidered necessary in 2001.  Theremaining 48 acres most likely will be divided into lots.  The number of lots that can be sold dependsprimarily on the results of percolation tests and the issuance of on-sitesewage discharge permits by the state of Maryland, among other issues.  To date, the Company has only been able toobtain sewage discharge permits for five lots.

 

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Electionof Directors

 

TWC did not hold anannual or special stockholder’s meeting in 2002, and did not elect directors in2002.

 

TWC’s Amended andRestated Charter (“Charter”) provides that the number of directors of TWC shallbe seven (7), consisting of:  (i) five(5) directors (“Class A Directors”) elected by the holders of TWC’s Class ACommon Stock, par value $.01 per share (the “Class A Common Stock”), votingseparately as a class; and (ii) two (2) directors (the “Class B and Class CDirectors”) elected by holders of TWC’s Class B Common Stock, par value $.01per share (the “Class B Common Stock”), and Class C Common Stock, par value$.01 per share (the “Class C Common Stock”), voting together as a single class.  Under TWC’s Bylaws, two (2) directors, atleast one of which is a Class A Director, constitute a quorum for a Board ofDirectors meeting and the vote of a majority of the Class A Directorsparticipating at such meeting is necessary for TWC’s Board of Directors to act.  However, under Maryland Law, TWC is onlyrequired to have one (1) director.

 

On October 25, 1996 atTWC’s last annual stockholders meeting, William N. Demas, formerly a Class Band Class C Director was elected as a Class A Director and Jose Ma. C. Castrowas elected as a Class B and Class C Director to fill the position held by Mr.Demas.  Jonathan C. Kinney was alsore-elected as a Class B and Class C Director. In December of 2000, Jose Ma. C. Castro resigned as a Director of theCompany.  In January of 2002, JonathanC. Kinney resigned as a Director of the Company.  Subsequently, TWC has searched for Class B and Class C Directors.

 

(b)  BUSINESS OF THE REGISTRANT

 

 The Company’s operations consist of theownership of real estate, both income-producing and unimproved land, and themanagement of these real estate assets. The Company has a policy of not investing in any additional investments.

 

Ownership ofIncome-Producing Properties

 

TWC, directly and throughArlington Square, Inc. (“ASI”), owns a 74% interest in Arlington Square LimitedPartnership (“ASLP”).  ASLP owns 1.07acres of land and an office building constructed thereon located in Arlington,Virginia.  The building is leased to anagency of the U.S. Government under a ten year lease expiring in September of2008.  See “Business Development - Awardof Bid and Lease Execution.”  During theyear ended December 31, 2001, approximately 97% of the Company’s revenues werederived from income on the Arlington Square Project.  In November 1998, the Arlington Square Project was refinanced,and in connection therewith, ASLP executed a promissory note and various otherloan documents and TWC entered into a guaranty agreement with MetLife.  See “Description of Properties - ArlingtonSquare Project.”

 

TWC also owns a parcel ofland which is leased to Fort Washington Inn Associates (“FWIA”), anon-affiliate of the Company, until March of 2024.  The land is improved with a 222-room Holiday Inn which is ownedby FWIA.  TWC receives base rent plusoverage rent under the lease both of which are paid monthly.  See “Description of Properties - FortWashington.”

 

Ownership of Land

 

TWC, through wholly-ownedsubsidiaries, currently owns four parcels of unimproved land - Timberlake,River Oaks, Winchester, and Port-O-Dumfries. TWC is currently marketing each of these properties for sale.

 

 

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Management of RealEstate

 

TWC manages the ArlingtonSquare Project.  TWC receives managementfees equal to 5% of monthly revenues of the Arlington Square Project.  See “Description of Properties - ArlingtonSquare Project”.

 

Competition

 

The Company believes thatthe Washington, D.C. area real estate market has fully recovered from most ofthe problems associated with the general downturn in the real estate industrythat occurred in the early 1990’s, however, the Company must compete with otherowners of real property that is now or will be for sale.  A lack of buyers and financing may make thesale of real estate extremely difficult. Management believes this condition is expected to continue for theforeseeable future.  The value ofimproved property, such as the Arlington Square Project, has stabilized inrecent years.

 

RegulatoryApprovals

 

In the past, when theCompany acquired land for development, certain regulatory approvals and permitswere required to either improve, develop, lease or sell the property.  Additional county, state and federal permitswill be required for a purchaser to develop each of the Company’s four propertiesheld for resale and the receipt of such permits and approvals may be acondition of any purchase contract.  Ifthe cost to develop these properties exceeds their market value, then theproperties may have no value.

 

Employees

 

As of December 31, 2002,the Company employed three full-time persons and two part-time persons.  Two of the Company’s employees work at theArlington Square Project as the Chief Engineer and the Assistant Engineer.

 

ITEM 2.  DESCRIPTION OF PROPERTIES

 

The Company’s operationsinvolve ownership of income-producing properties and unimproved land.  The Company currently owns four principalproperties and leases its corporate headquarters.

 

The following tablesummarizes, as of December 31, 2002, the Company’s ownership interests in itsfour principal properties and in two properties of secondary importance.  More detailed disclosure relating to theprincipal properties follows immediately after the table.

 

 

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**THE WASHINGTON CORPORATION AND SUBSIDIARIES**

**REAL ESTATE PROPERTIES OWNED**

 
| **NAME**                       |   | **DESCRIPTION**                                                                                          |   | **PERCENTAGE  OWNERSHIP** |   | **ENCUMBRANCES  INCLUDING ACCRUED INTEREST AND TAXES** |   | **LOAN  MATURITY DATE** |   | **LAND**  |   | **COSTS  CAPITALIZED SUBSEQUENT TO PURCHASE** |   | **WRITE UP/  (DOWN) TO FAIR VALUE** |   | **NET BOOK  VALUE** |   |
|--------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|--------------------------------------------------------|--------|-------------------------|--------|-----------|--------|-----------------------------------------------|--------|-------------------------------------|--------|---------------------|--------|
|                           |   |                                                                                                     |   |                      |   |                                                   |   |                    |   |      |   |                                          |   |                                |   |                |   |
| Arlington Square Project  |   | 46,481 sq. ft. of land with  a building of approximately  135,000  sq. ft. in Arlington County, Va. |   | 74                        | %      | $21,105,417                                            |   | 12/10                   |   | 0         |   | 12,352,799                                    |   | 2,307,794                           |   | $17,193,631         | (3)    |
|                           |   |                                                                                                     |   |                      |   | $1,672,613                                             |   | 06/08                   |   |      |   |                                          |   |                                |   |                |   |
|                           |   |                                                                                                     |   |                      |   |                                                   |   |                    |   |      |   |                                          |   |                                |   |                |   |
| Timberlake                     |   | 48 acres of land zoned for  residential development located in Charles County, Md.(1)                    |   | 100                       | %      | —                                                 |   |                    |   | 297,771   |   | —                                        |   | (172,771                            | )      | $125,000            | (4)    |
|                           |   |                                                                                                     |   |                      |   |                                                   |   |                    |   |      |   |                                          |   |                                |   |                |   |
| Ft. Washington                 |   | 7.3 acres of land with a  222-room hotel located in Ft. Washington, Pa.(2)                               |   | 100                       | %      | —                                                 |   |                    |   | 400,000   |   | —                                        |   | —                              |   | $400,000            |   |
|                           |   |                                                                                                     |   |                      |   |                                                   |   |                    |   |      |   |                                          |   |                                |   |                |   |
| River Oaks                     |   | 16.6 acres of land zoned  for commercial development located in Prince William County, Va.               |   | 100                       | %      | —                                                 |   |                    |   | 1,821,670 |   | 520,220                                       |   | (2,141,890                          | )      | $200,000            |   |
|                           |   |                                                                                                     |   |                      |   |                                                   |   |                    |   |      |   |                                          |   |                                |   |                |   |
| Winchester                     |   | 23.21 acres of land zoned  for multi-family garden apartments located in Memphis, Tn.                    |   | 100                       | %      | —                                                 |   |                    |   | 100,000   |   | —                                        |   | (100,000                            | )      | 0                   |   |
|                           |   |                                                                                                     |   |                      |   |                                                   |   |                    |   |      |   |                                          |   |                                |   |                |   |
| Port-O- Dumfries               |   | 7 townhouse lots totaling  approximately 19,436 sq. ft. located in Dumfries, Va.                         |   | 100                       | %      | —                                                 |   |                    |   | 14,829    |   | —                                        |   | (14,829                             | )      | 0                   |   |

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(1)          This property is owned by an wholly owned subsidiaryof TWC.

 

(2)          The lease onthis property is subordinated to a first mortgage secured by the land and theleasehold which consists of a 222-room Holiday Inn.  The Company has no payment obligation on the loan which had abalance of $0 as of December 31, 2002.

 

(3)          This amountreflects depreciation, deferred loan closing costs, and deferred rentalconcessions.

 

(4)          The value ofthe Timberlake property was written down $75,000 due to the poor results ofland development zoning tests in several of the remaining lots.  The property was written down an additional$1,057,449 in 1999, the amount of principal and interest outstanding a loansecured by an additional 3.3 of the original 361 acres of the property, toreflect the foreclosure by the lender on such 313 acres.

 

 

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PROPERTIES

 

Arlington SquareProject

 

TWC, directly and througha wholly-owned affiliate, owns a 74% interest in ASLP.  ASLP owns 1.07 acres of land and an officebuilding containing 135,000 gross square feet constructed thereon located inArlington, Virginia.  The building andparking garage is 100% leased to an agency of the U.S. Government under a tenyear lease expiring in September of 2008. The terms of the lease require the tenant to pay base rent plus its proportionateshare of certain operating expense increases. Also, the lease requires the tenant to pay base rent on the parkinggarage subject to 5% annual increases. During 2002 and 2001, the Company realized rental income ofapproximately $3,392,000 and $3,316,000, respectively, per year, orapproximately $24.67 and $24.57, respectively, per rentable square foot basedon a Building Owners and Managers Association (“BOMA”) standard.  During 2002 and 2001, approximately 97% and97%, respectively, of the Company’s revenues was derived from the ArlingtonSquare Project.

 

Refinancing of theArlington Square Loan.  From November1997 to November 25, 1998, ASLP’s property was encumbered by mortgage notes toAllied Capital Commercial Corporation (“Allied”).  The outstanding principal balance on the mortgage loans accruedinterest at a blended rate of 10% based on the LIBOR rates.  The notes were cash-flow mortgages with allexcess cash flow, as defined, being applied to reduce the principal balance andto fund the required escrows.  One ofthe mortgage agreements provided for the lender to receive a participationinterest of 30% in the net cash flow and a 30% equity value in the property ifand when it is sold, with such provision to survive any payoff of the mortgage.

 

On November 25, 1998, theAllied Loan was repaid with proceeds of a loan obtained by ASLP and secured bythe 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 theamount of $373,477.  The MetLife Loanhas a fixed interest rate of 6.80% and matures on December 1, 2010.

 

Upon refinancing of theAllied Loan, Allied gave notice of demand for full payment of its participationinterest in the equity value and net cash flow of the Arlington SquareProject.  ASLP entered into a forbearanceagreement with Allied which (i) established the value for Allied’sparticipation interest at $1,850,000 and (ii) established a payment term of 9 1⁄2years with interest at 7.5% and monthly payments at $22,739.

 

ForbearanceTermination.  On December 31, 1999, theparties to the forbearance agreement (Note 6) entered into a termination of theforbearance agreement, since all further payment obligations of the parties arecontained in the Amended and Restated Promissory Note dated as of December 1,1998, and the related security and guarantee agreements and amendments thereto.

 

Interest Payments andAmortization. The annual interest rate on the outstanding principal balance ofthe MetLife Loan in the amount of $21,500,000 is 6.80% payable in monthlyprincipal and interest payments of $147,058. The note matures on December 1, 2010. The MetLife Loan is amortized over 26 years with a balloon payment ofall remaining indebtedness after 12 years. Prepayment of the MetLife Loan is not permitted during the first sixyears of the term, and is permitted thereafter with a prepayment penalty.

 

 

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Escrow and ReserveAccounts.  The MetLife Loan requiresthat ASLP fund $21,563 monthly into an escrow account held by MetLife for thepurpose of paying the semi-annual payments of real estate taxes.  ASLP is also required to deposit $12,500 permonth into a Leasing Escrow account held by MetLife for the purpose ofaccumulating the funds that may be required to pay for any improvement requiredunder the terms of a new ten year lease with the U.S. Government.

 

Agreements SecuringPayment of the MetLife Loan.  Payment ofobligations under the MetLife Loan are secured by (i) the Deed of Trust,Security Agreement and Fixture Filing, dated November 25, 1998 among ASLP andtrustees for the benefit of MetLife (the “MetLife Deed of Trust”); (ii) theAssignment of Leases dated November 25, 1998 between ASLP and MetLife; and(iii) the Assignment of Contracts and Agreements dated November 25, 1998,between ASLP and MetLife.

 

In a Guaranty Agreementdated November 25, 1998, TWC has guaranteed to MetLife the payment andperformance of certain obligations of ASLP under the note and the otherdocumentation related to the MetLife Loan. In a separate Unsecured Indemnity Agreement, dated November 25, 1998,TWC has an obligation to indemnify MetLife against any Environmental Claimsuntil the loan is paid in full, as defined in the Unsecured IndemnityAgreement, which directly or indirectly relate to the Arlington SquareProperty.  Finally, TWC has entered intoa Subordination of Management Agreement dated November 25, 1998, whereby TWCsubordinates all of its rights under the Management Agreement between TWC andASLP to any obligations of ASLP to MetLife.

 

General Information.  For federal income tax purposes at December31, 2002, the basis of the Arlington Square Project, including the land,building, tenant improvements on the project and equipment (including asset adjustmentsunder Section 754 of the Internal Revenue Code of 1986, as amended) are statedas follows:

 

| Land                           |   | $          | 2,791,072  |   |
|--------------------------------|--------|------------|------------|--------|
| Building                       |   | 19,422,020 |       |
| Tenant  improvements           |   | 1,587,548  |       |
| Equipment                      |   | 34,589     |       |
|                           |   | 23,835,229 |       |
| Less accumulated  depreciation |   | (9,082,230 | )          |
| Total                          |   | $          | 14,752,999 |   |

 

Depreciation isdetermined using the straight-line method over the estimated useful lives ofthe assets.  Building and tenantimprovements are depreciated over 31.5 and 39 years respectively, and equipmentis depreciated over seven years.  Therealty tax rate on the project is 1.029%, and in 2002 ASLP paid an aggregate of$251,223 in realty taxes.

 

Fort Washington.  TWC owns a fee simple interest in a parcelof land on which a 222-room hotel is built. The property is located in Fort Washington, Pennsylvania.  Pursuant to a certain Lease Agreement datedMarch 24, 1974, TWC, as landlord, is paid an annual minimum rent of $66,000,plus one percent of gross room sales, but not less than $1,000 a month.  The lease provides that upon termination ofthe lease on March 29, 2024, the property together with all improvementsthereon shall accrue to the landlord free and clear of all liens.  The Company believes that the FortWashington property is adequate for its present use.  During 2002 and 2001 the Company recorded revenues of $106,088and $108,484 respectively, under the lease agreement.

 

 

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Timberlake.  TWC, through wholly-owned subsidiaries, owns48 acres for future residential development in Charles County, Maryland.  The Company has no plans for the futuredevelopment of the Timberlake property, as its preliminary site plan was voidedby the foreclosure by the note holder on 313 additional acres.  The Company believes that the remaining 48acres can be divided into lots, depending on the results of percolation testsand the issuance of on-site sewage discharge permits by the State ofMaryland.  To date, the Company has onlybeen able to obtain sewage discharge permits for five lots.  See “Business Development - RecentDevelopments - Timberlake.”

 

River Oaks.  TWC, through a wholly-owned subsidiary, owns100% of the partnership interests of Four Year Trail Limited Partnership.  The partnership owns 16.6 acres of land zonedB-1 for commercial use  located inPrince William County, Virginia, known as River Oaks.  The Company has no obligations on this property except for theperiodic payment of real estate taxes and has no plan for the improvement ofthis or any other property.

 

 Company Headquarters

 

TWC has an operatinglease for its office space at 4550 Montgomery Avenue, Suite 220 North,Bethesda, Maryland 20814, which expires on January 31, 2004.  Currently, TWC’s rent obligations under thelease are $24,938 per annum.  The rentincreases annually at a rate of 3%.  However,the Company has moved to 4421 Chestnut Street, Bethesda, Maryland 20814 and isattempting to mitigate the obligation to pay rent through the end of the leaseterm.

 

COMPETITION

 

The Company believes thatthe real estate market in the Washington, D.C. area has fully recovered frommost of the problems associated with the general downturn in the real estateindustry that occurred in the early 1990’s, however, the Company must competewith other owners of real property that is for sale.  A lack of buyers and financing may make the sale of the Company’sproperties extremely difficult.  Thevalue of the Arlington Square Project has stabilized in recent years.

 

Competition for tenantsto lease land and office space is also very strong, however, the Company’s twoprincipal income producing properties, the Arlington Square Project located inArlington, Virginia and the Fort Washington property located in FortWashington, Pennsylvania, as of December 31, 2002, are fully under lease totenants until 2008 and 2024, respectively. Leasing is extremely competitive in these two areas.

 

INSURANCE

 

The Company believes thatall of the Company’s primary real estate assets are adequately covered byinsurance.  This includes comprehensiveliability and property damage insurance which includes loss of rents.

 

INVESTMENT POLICIES

 

No limitations exist onthe percentage of the Company’s assets which may be invested in any oneinvestment, or type of investment. However, approval by the shareholders of a majority of the outstandingshares of Class A, Class B and Class C Common Stock, voting jointly as a class,is required before a sale or other disposition of all or substantially all ofthe assets of the Company or any material subsidiary.

 

 

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Management’s objectivehas in the past been to retain the income-producing properties and to preparefor sale all non-income-producing real estate assets.  If the non-income-producing properties can be sold, then managementwill proceed to sell the remaining income-producing assets.  In the foreseeable future, the Companycontemplates no new investments in real estate, interests in real estate, realestate mortgages or securities of, or interests in, entities primarily engagedin real estate activities.  In addition,during such period, the Company does not intend to acquire other assets, eitherprimarily for possible capital gain or primarily for income.

 

ITEM 3.  LEGAL PROCEEDINGS

 

None.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None.

 

 

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PART II

 

 

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS

 

Under TWC’s Amended andRestated Charter, filed July 30, 1992 with the Maryland Department ofAssessments and Taxation (“TWC’s Charter”), TWC has three classes of commonstock:  Class A Common Stock, Class BCommon Stock, and Class C Common Stock (Class A, B and C Common Stockcollectively referred to herein as the “New Common Stock”).  At the present time, there is no establishedpublic trading market for any class of the New Common Stock.  As of December 31, 2002, there were 123record holders of the Class A Common Stock, 418 record holders of the Class BCommon Stock, and 16 record holders of the Class C Common Stock.  There are no outstanding options or warrantsto purchase securities convertible into common equity of the Company.  The Company does not have any equitycompensation plans.

 

TWC has been unable toascertain any market for TWC’s common stock during 2002 or 2001.  Consequently, TWC does not have anyinformation concerning high and low bids on any class of its common stockduring 2002 or 2001.

 

TWC has not paid anydividends or distributions on its common stock since 1990.

 

Under TWC’s Charter and exceptas may otherwise be required by law, holders of Class A Common Stock areentitled to receive 100% of all dividends and other distributions (the“Dividend Preference”) made by TWC in respect of its capital stock until suchtime as dividends and other distributions paid to the holders of Class A CommonStock equal, in aggregate, to approximately $5,500,000 (the “First Trigger”).

 

Following the FirstTrigger, if it occurs, the holders of Class A Common Stock are to receiveapproximately 98.6%, and holders of Class B Common Stock are to receive theremaining approximate 1.4%, of all dividends and other distributions paid inrespect of TWC’s capital stock until such time as the Dividend Preference paidto the holders of Class A Common Stock equal 100% of the unsecured allowedclaims in excess of $500 (“Allowed Class 7 Claims”) (the “SecondTrigger”).  Until the occurrence of theSecond Trigger, if any, the holders of Class C Common Stock have no right toreceive any dividends in respect of Class C Common Stock.

 

In addition, under theCharter, the Class A Common Stock has an aggregate liquidation preference in anamount equal to approximately $11,000,000 reduced (but not below zero) by theaggregate amount of dividends and other distributions paid to the holders ofthe Class A Common Stock.

 

Under the Charter,following the Second Trigger, if it occurs, all outstanding shares of Class ACommon Stock, Class B Common Stock and Class C Common Stock will automaticallybe converted into a single class of common stock (the “Single Class CommonStock”).  Upon such conversion, theholders of Class B Common Stock and the holders of the Class C Common Stockwill receive an aggregate of 25% of the outstanding shares of the Single ClassCommon Stock, such 25% to be allocated prorata based on thenumber of shares of Class B Common Stock and Class C Common Stock outstandingat the time of such conversion.  Exceptas otherwise provided in the Charter or required by law, upon the occurrence ofthe Second Trigger:  (i) shares of theSingle Class Common Stock will rank paripassu and will shareequally, share for share, in any dividends or other distributions made by  TWC, and will be identical in all respects;and (ii) the holders of the Single Class Common Stock will be entitled to onevote per share on all matters submitted for shareholder vote.

 

 

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Following the SecondTrigger, if it occurs, TWC is required to provide the holders of outstandingshares of Class A Common Stock, Class B Common Stock and Class C Common Stockwith a quarterly statement (which may be contained in reports periodicallyfiled by TWC with the Securities and Exchange Commission or regularly providedby TWC to its shareholders) of the then-current amount of the DividendPreference and other distributions theretofore paid to the holders of Class ACommon Stock.  As of December 31, 1998,the then-current amount of the Dividend Preference was approximately$11,000,000.  The aggregate amount ofthe Dividend Preference paid to holders of the Class A Common Stock was $0.

 

ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Material Changes inFinancial Condition

##  

During the year endedDecember 31, 2002 the Company’s total assets were reduced by $692,000 from$17,533,000 to $16,841,000.  Suchdecrease was primarily the result of depreciation of operating property andequipment, and a decrease in cash and cash equivalents, partially offset by anincrease in escrow deposits.

 

Operating property andequipment decreased by $763,000 from $15,656,000 at December 31, 2001 to$14,893,000 at December 31, 2002.  Suchdecrease was primarily the result of depreciation and the amortization of deferredrent concessions on the Arlington Square Project.

 

Cash and cash equivalentsdecreased by $20,000 from $248,000 at December 31, 2001 to $228,000 at December31, 2002.  Such decrease was primarilythe result of escrow deposits made on the Arlington Square Project and areduction in the installment obligation on the Arlington Square Project.

 

Escrow deposits increasedby $83,000 from $575,000 at December 31, 2001 to $658,000 at December 31,2002.  Such increase was primarily theresult of periodic deposits made to the reserves on the Arlington SquareProject.

 

Accounts receivable —tenant increased by $8,000 from $312,000 at December 31, 2001 to $320,000 atDecember 31, 2002.  This increase wasprimarily the result of an increase in parking garage lease income receivable inthe Arlington Square Project.

 

During the year endedDecember 31, 2002, the Company’s total liabilities decreased by $544,000 from$22,050,000 at December 31, 2001 to $21,506,000 at December 31, 2002.  Such decrease was primarily the result of a reductionin the installment obligation for the Arlington Square Project, offset by anincrease in accounts payable and other liabilities.

 

Installmentobligation/Notes payable - Arlington Square Project decreased by $554,000 from$21,894,000 at December 31, 2001 to $21,340,000 at December 31, 2002.  Such decrease was the result of principalpayments on the two mortgages.

 

 

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Accounts payable andother liabilities increased by $14,000 from $31,000 at December 31, 2001 to$45,000 at December 31, 2002.  Suchincrease was primarily the result of an increase in accrued expenses.

 

Results of Operations

 

Revenues increased by$9,000 from $3,506,000 for the year ended December 31, 2001 to $3,515,000 forthe year ended December 31, 2002.  Suchincrease was primarily the result of an increase in operating property rentalincome offset by decreases in other income and interest income.

 

Operating property rentalincome increased by $76,000 from $3,316,000 for the year ended December 31,2001 to $3,392,000 for the year ended December 31, 2002.  This increase was the result of increasedincome received from the Arlington Square Project, which is the Company’sprimary source of rental income.

 

Other income decreased by$36,000 from $36,000 for the year ended December 31, 2001 to $0 for the yearended December 31, 2002.  This decreasewas the result of expense reimbursements received from the Arlington SquareProject.

 

Total expenses decreasedby $63,000 from $2,942,000 for the year ended December 31, 2001 to $2,879,000for the year ended December 31, 2002. This decrease is primarily due to a decrease in operating propertyexpenses, interest expense, offset by an increase in general and administrativeexpenses.

 

Operating propertyexpenses decreased by $62,000 from $980,000 for the year ended December 31,2001 to $918,000 for the year ended December 31, 2002.  This decrease is due to a decrease inoperating expenses relating to the Arlington Square Project.

 

Interest expensedecreased by $56,000 from $1,536,000 for the year ended December 31, 2001 to$1,480,000 for the year ended December 31, 2002.  This decrease was the result of current payments on the ArlingtonSquare Project mortgage balance.

 

General andadministrative expenses increased by $54,000 from $426,000 for the year endedDecember 31, 2001 to $480,000 for the year ended December 31, 2002.  This decrease is due to an increase inadministrative expenses relating to The Washington Corporation.

 

Net income beforedepreciation and amortization increased by $72,000 to income of $636,000 forthe year ended December 31, 2002 from $564,000 for the year ended December 31,2001.  Such increase was a result of adecrease in total income as described above, and a decrease in expenses.

 

Depreciation and amortizationdecreased by $4,000 from $789,000 for the year ended December 31, 2001 to$785,000 for the year ended December 31, 2002. This decrease results primarily from depreciation on the ArlingtonSquare Project.

 

Net loss decreased by$77,000 from a net loss of $225,000 for the year ended December 31, 2001 to anet loss of $148,000 for the year ended December 31, 2002.  This decrease was the result of the changesin the items described above.

 

 

12

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Liquidity and CapitalResources:  Outlook

 

The Company’s primarysources of funds for 2002 came from rental income and property managementfees.  As of December 31, 2002, theCompany had cash and cash equivalents and escrow deposits totalingapproximately $886,000 of which $658,000 was escrow deposits.  The Company expects its primary source offunds for 2003 to continue to be rents received on the Arlington SquareProject.  However, room occupancy at theHoliday Inn on the Fort Washington property dropped significantly in 2002 andis expected to remain at a lower rate for the coming year.  This will have a negative impact on the rentcollected since a portion of the rent is tied to room sales.  See page 3, “Ownership of Income-ProducingProperties”.

 

During 2002, cash andcash equivalents decreased by $20,000 as compared to a decrease of $178,000 for2001.  This decrease in 2002 wasprimarily due to the result of escrow deposits made on the Arlington SquareProject and a reduction in the installment obligation on the Arlington SquareProject. Future sources of funds are anticipated to come from the rents andproperty management fees.  The Companyhas tried without success to sell its remaining assets.

 

TWC’s agreement to managethe Arlington Square Project provides for management fees approximating$169,000 annually.  See “Description ofProperties - Arlington Square Project”. The continued ownership of the Arlington Square Project is necessary toprovide the Company with sufficient cash for operations.

 

The Company’s primary useof operating funds is anticipated to be for corporate overhead expenses,property expenses such as real estate taxes and insurance and principal andinterest payments on the ASLP Notes. The rising cost of insurance and the possibility of rising real estatetax rates may have a significant negative impact on liquidity.

 

On October 25, 1996 atTWC’s annual stockholders meeting, William N. Demas, formerly a Class B andClass C Director was elected as a Class A Director and Jose Ma. C. Castro was electedas a Class B and Class C Director to fill the position held by Mr. Demas.  Jonathan C. Kinney was also re-elected as aClass B and Class C Director.  InDecember of 2000, Jose Ma. C. Castro resigned as a Director of thecompany.  In January of 2002, JonathanC. Kinney resigned as a Director of the Company.

 

The Company does not havea plan to address its liquidity problems other than to continue to try to sellassets held for investment and to continue to manage and collect rents from theArlington Square Project.  If theseattempts are not successful, or, if the Arlington Square Project were to suffera significant setback, the Company may be forced to sell its remainingproperties for significantly less than recorded values.  See Note 13 to the Company’s financialstatements for a further explanation of the Company’s ability to continue as agoing concern.

 

Recent AccountingPronouncements

 

SFAS No. 144, *Accountingfor the Impairment of Disposal of Long Lived Assets.* Addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  This Statement supercedes SFASNo. 121 and requires a loss be recognized only if the carrying amount of along-lived asset is not recoverable from its undiscounted cash flows and thatthe impairment be measured as the difference between the carrying amount andthe fair value of the asset.  Thisstatement also requires (a) that a long-lived asset to be abandoned, exchangedfor a similar productive asset or distributed to the owners in a spin-off beconsidered held and used until it is disposed and (b) that long-lived assets tobe disposed of by sale due to discontinued operations are no longer measured ona net realizable value basis, and future operations losses are no longerrecognized before to occur.  The Companywill comply with this Standard and does not believe it will have any impact onits financial statements.

 

 

13

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SFAS No. 145, *Recission ofFASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 andTechnical Corrections. *Amongother clarifications, the Statement eliminates an inconsistency betweenrequired accounting for sale-leaseback transactions and the required accountingfor certain lease modifications that are economically similar to sale-leasebacktransactions.  The portion of theStatement applicable to Statement No. 4, *Reporting Gains and Losses from Extinguishment ofDebt,* has the effect of changing the accounting for gains and lossesfrom debt extinguishments from extraordinary to operating.  Management does not believe this will haveany impact on the financial statements.

 

SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities.* ThisStatement nullifies Emerging Issues Task Force Issue No. 94-3, which requiredthe recognition of a liability for an exit cost at the date an entity made acommitment to an exit plan.  SFAS No.146 concludes that mere commitment to a plan, by itself, does not create anobligation to others that meets the definition of a liability.  This Statement describes the costs to exitan activity and when a liability for those costs should be recognized.  This Statement is applicable to exit ordisposal activities initiated after December 31, 2002.  Management will adopt this pronouncementupon entering an official plan to sell its properties.

 

 

14

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ITEM 7.  FINANCIAL STATEMENTS

 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Independent Auditor’s Report

 

Consolidated Balance Sheets at December31, 2002 and 2001

 

ConsolidatedStatements of Operations for the years ended December 31, 2002 and December 31,2001

 

Consolidated Statements of Deficiency inStockholders’ Equity 

 

Consolidated Statements of Cash Flows

 

Notes toConsolidated Financial Statements

 

 

15

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700 KING FARM BOULEVARD,SUITE 300

ROCKVILLE, MARYLAND 20850

PHONE 301.231.6200

FAX 301.231.7630

[LOGO]

 

**Independent Auditor’s Report**

 

Board of Directors and Shareholders

**The Washington Corporation**

Bethesda, Maryland

 

We have audited the accompanying Consolidated Balance Sheets of **The Washington Corporation and**

**Subsidiaries**(the “Company”) as of December 31, 2002and 2001, and the related Consolidated Statements of Operations, Deficiency inStockholders’ Equity and Cash Flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of **The Washington Corporation and Subsidiaries**asof December 31, 2002 and 2001, and the results of their operations and theircash flows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 13 to thefinancial statements, the Company has incurred continuing losses fromoperations and has been unable to dispose of certain of its real estate assets.As a result, the Company may not be able to continue to meet its obligations asthey come due. These conditions raise substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard to thesematters are also discussed in Note 13. The consolidated financial statements donot include any adjustments that might arise from the outcome of thisuncertainty.

 

/s/ Aronson & Company

 

Rockville, Maryland

February 10, 2003

 

 

16

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**THEWASHINGTON CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AT DECEMBER31, 2002 AND 2001**

 
|                                                                          |   | **2002**   |       | **2001**   |   |
|-------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| ASSETS                                                                        |   |       |       |       |   |
|                                                                          |   |       |       |       |   |
| Operating  property and equipment, net                                        |   | $          | 14,893,441 |       | $      | 15,656,154 |   |
| Real estate and  development property                                         |   | 325,002    |       | 325,002    |   |
| Cash and cash  equivalents                                                    |   | 228,113    |       | 248,434    |   |
| Accounts  receivable — Arlington Square Project                          |   | 319,903    |       | 312,279    |   |
| Escrow deposits                                                               |   | 658,335    |       | 574,909    |   |
| Land purchase  leaseback                                                      |   | 400,000    |       | 400,000    |   |
| Other assets                                                                  |   | 16,551     |       | 16,210     |   |
| Total Assets                                                                  |   | $          | 16,841,345 |       | $      | 17,532,988 |   |
|                                                                          |   |       |       |       |   |
| LIABILITIES                                                                   |   |       |       |       |   |
|                                                                          |   |       |       |       |   |
| Installment  obligation — Arlington Square Project                       |   | $          | 21,339,691 |       | $      | 21,894,105 |   |
| Accrued interest  payable                                                     |   | 121,640    |       | 124,895    |   |
| Accounts payable  and other liabilities                                       |   | 45,432     |       | 31,201     |   |
| Total  Liabilities                                                            |   | 21,506,763 |       | 22,050,201 |   |
|                                                                          |   |       |       |       |   |
| COMMITMENTS AND  CONTINGENCIES                                                |   |       |       |       |   |
|                                                                          |   |       |       |       |   |
| DEFICIENCY IN  STOCKHOLDERS’ EQUITY                                      |   |       |       |       |   |
|                                                                          |   |       |       |       |   |
| Common stock,  $.01 par value; shares issued                                  |   |       |       |       |   |
| Class A —  1,675,163 authorized, 1,640,327 shares issued and outstanding |   | 16,403     |       | 16,403     |   |
| Class B — 24,429  authorized, 21,476 shares issued and outstanding       |   | 215        |       | 215        |   |
| Class C — 45,639  authorized, 45,119 shares issued and outstanding       |   | 451        |       | 451        |   |
| Additional  paid-in capital                                                   |   | 2,804,821  |       | 2,804,821  |   |
| Accumulated  deficit                                                          |   | (7,487,308 | )          | (7,339,103 | )      |
| Accumulated  deficit                                                          |   |       |       |       |   |
| Total Deficiency  in Stockholders’ Equity                                |   | (4,665,418 | )          | (4,517,213 | )      |
|                                                                          |   |       |       |       |   |
| Total  Liabilities and Deficiency in Stockholders’ Equity                |   | $          | 16,841,345 |       | $      | 17,532,988 |   |

 

 

The accompanying Notes to ConsolidatedFinancial Statements are an integral part of these financial statements.

 

 

17

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**THEWASHINGTON CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**FOR THEYEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                             |   | **2002**  |      | **2001**  |   |
|--------------------------------------------------|--------|-----------|-----------|-----------|--------|
| REVENUES                                         |   |      |      |      |   |
|                                             |   |      |      |      |   |
| Operating  property rental income                |   | $         | 3,391,656 |      | $      | 3,316,103 |   |
| Rent from land  purchase leaseback               |   | 106,088   |      | 108,484   |   |
| Other income                                     |   | 0         |      | 35,618    |   |
| Interest income                                  |   | 14,189    |      | 45,460    |   |
|                                             |   |      |      |      |   |
| Total revenues                                   |   | 3,511,933 |      | 3,505,665 |   |
|                                             |   |      |      |      |   |
| EXPENSES                                         |   |      |      |      |   |
|                                             |   |      |      |      |   |
| Operating  property expenses                     |   | 918,243   |      | 979,981   |   |
| Interest expense                                 |   | 1,479,890 |      | 1,535,898 |   |
| General and  administrative expenses             |   | 480,394   |      | 425,701   |   |
|                                             |   |      |      |      |   |
| Total expenses                                   |   | 2,878,527 |      | 2,941,580 |   |
|                                             |   |      |      |      |   |
| NET INCOME  BEFORE DEPRECIATION AND AMORTIZATION |   | 636,406   |      | 564,085   |   |
|                                             |   |      |      |      |   |
| DEPRECIATION AND  AMORTIZATION                   |   | 784,611   |      | 789,000   |   |
|                                             |   |      |      |      |   |
| NET LOSS                                         |   | $         | (148,205  | )         | $      | (224,915 | ) |
|                                             |   |      |      |      |   |
| LOSS PER COMMON  SHARE                           |   | $         | (0.09     | )         | $      | (0.13 | ) |
|                                             |   |      |      |      |   |
| LOSS PER COMMON  SHARE (BASIC):                  |   | $         | (0.13     | )         | $      | (0.29 | ) |

 

 

The accompanying Notes to ConsolidatedFinancial Statements are an integral part of these financial statements.

 

 

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**THEWASHINGTON CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001**

 

 
|                        |   | **COMMON  STOCK** |   | **ADDITIONAL  PAID-IN  CAPITAL** |      | **ACCUMULATED    DEFICIT** |   | **TOTAL**   |       |
|-----------------------------|--------|-------------------|--------|----------------------------------|-----------|---------------------------------|--------|-------------|------------|
|                        |   |              |   |                             |      |                            |   |        |       |
| BALANCE, JANUARY  1, 2001   |   | 17,069            |   | $                                | 2,804,821 |                            | $      | (7,114,188  | )          | $ | (4,292,298 | ) |
|                        |   |              |   |                             |      |                            |   |        |       |
| NET LOSS                    |   | —            |   | —                           |      | (224,915                        | )      | ($224,915   | )          |
|                        |   |              |   |                             |      |                            |   |        |       |
| BALANCE,  DECEMBER 31, 2001 |   | 17,069            |   | 2,804,821                        |      | (7,339,103                      | )      | ($4,517,213 | )          |
|                        |   |              |   |                             |      |                            |   |        |       |
| NET LOSS                    |   | —            |   | —                           |      | (148,205                        | )      | ($148,205   | )          |
|                        |   |              |   |                             |      |                            |   |        |       |
| BALANCE,  DECEMBER 31, 2002 |   | $                 | 17,069 |                             | $         | 2,804,821                       |   | $           | (7,487,308 | ) | $ | (4,665,418 | ) |
|                             |        |                   |        |                                  |           |                                 |        |             |            |  |  |  |  |

 

 

The accompanying Notes to ConsolidatedFinancial Statements are an integral part of these financial statements.

 

 

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**THE WASHINGTON CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDEDDECEMBER 31, 2002 AND 2001**

 

 
|                                                                             |   | **2002** |      | **2001** |   |
|----------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                           |   |     |      |     |   |
| Net loss                                                                         |   | $        | (148,205  | )        | $      | (224,915 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |     |      |     |   |
| Depreciation and  amortization                                                   |   | 719,011  |      | 723,400  |   |
| Amortization of  deferred rent concessions                                       |   | 65,600   |      | 65,600   |   |
| Interest earned  on restricted escrows                                           |   | (8,794   | )         | (16,393  | )      |
| Decrease  (increase) in accounts receivable — Arlington Square Project      |   | (7,624   | )         | (28,267  | )      |
| Decrease in  other assets                                                        |   | (341     | )         | 62,047   |   |
| Decrease in  accrued interest payable                                            |   | (3,255   | )         | (2,975   | )      |
| Decrease in  accounts payable and other liabilities                              |   | 14,231   |      | (62,683  | )      |
| Net cash  provided by operating activities                                       |   | 630,623  |      | 515,814  |   |
|                                                                             |   |     |      |     |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                           |   |     |      |     |   |
| Purchase of  fixed assets                                                        |   | (21,898  | )         | (34,510  | )      |
| Withdrawals from  restricted escrows                                             |   | 251,224  |      | 252,177  |   |
| Deposits to  restricted escrows                                                  |   | (325,856 | )         | (391,860 | )      |
| Net cash used in  investing activities                                           |   | (96,530  | )         | (174,193 | )      |
|                                                                             |   |     |      |     |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                           |   |     |      |     |   |
| Curtailments of  installment obligation — Arlington Square Project          |   | (554,414 | )         | (519,554 | )      |
| Net cash used in  financing activities                                           |   | (554,414 | )         | (519,554 | )      |
|                                                                             |   |     |      |     |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                         |   | (20,321  | )         | (177,933 | )      |
|                                                                             |   |     |      |     |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                  |   | 248,434  |      | 426,367  |   |
|                                                                             |   |     |      |     |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                        |   | $        | 228,113   |     | $      | 248,434 |   |
|                                                                             |   |     |      |     |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION                                              |   |     |      |     |   |
| Interest paid  during the year                                                   |   | $        | 1,483,145 |     | $      | 1,518,005 |   |

 

 

The accompanying Notes to ConsolidatedFinancial Statements are an integral part of these financial statements.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

ACCOUNTING POLICIES

PRINCIPLES OFCONSOLIDATION

 

The accompanyingconsolidated statements include the accounts of The Washington Corporation(“TWC”) and all entities over 50% owned by TWC (collectively, the“Company”).  All significantintercompany transactions have been eliminated in consolidation.  The Company considers its operatingactivities to be all within one operating segment.

 

REVENUE RECOGNITION ANDDEFERRED RENTAL CONCESSIONS

 

Profit on the sale ofreal estate is recognized at the time the sale is settled.  Rental income from leases, with scheduledrental increases during their lease terms, is recognized for financialreporting purposes on a straight-line basis.

 

REAL ESTATE ANDDEVELOPMENT PROPERTY

 

The Company records itsreal estate and development property at the lower of accumulated cost orestimated net realizable value.  TheCompany follows the policy of charging, as current expenses, the holding costsof real estate such as taxes, insurance and interest, to the extent theproperties are not currently being developed. Direct development and engineering costs are capitalized as part ofproperty cost.  No interest wascapitalized during either of the years ended December 31, 2002 and 2001.

 

OPERATING PROPERTY ANDEQUIPMENT

 

Depreciation iscalculated using the straight-line method over the estimated useful livesof the assets.  Buildings and relatedimprovements are depreciated over 31.5 and 39 years, respectively.  Tenant improvements are amortized using thestraight-line method over the lesser of the term of the life of therespective lease or the useful life of the improvements.  Deferred rental concessions are amortizedover the term of the lease.

 

CASH AND CASH EQUIVALENTS

 

For purposes of thestatements of cash flows, the Company considers all highly liquid instrumentspurchased with a maturity of three months or less to be cash equivalents.  The Company periodically has cash balanceswhich may exceed federally insured limits. The Company does not believe that this results in any significant creditrisk.

 

FINANCIAL INSTRUMENTS

 

Management believes thefair market value of all financial instruments approximates the amountsreported on the accompanying balance sheets.

 

MANAGEMENT ESTIMATES

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

 

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ASSET IMPAIRMENT

 

It is the Company’spolicy to review long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.

 

NOTE 2

REAL ESTATE ANDDEVELOPMENT PROPERTY

 

Residential developmentefforts in the past included the acquisition of raw land for the development ofplanned sites or finished building lots for sale to homebuilders.  The Company, through a wholly-ownedsubsidiary, owned 363 acres known as Timberlake in Charles County,Maryland.  In February, 1999, 313 acresof this project was foreclosed upon by the lender.  Upon foreclosure, the recorded value of the property was reducedby $1,057,449 which represented the outstanding principal balance of $880,000plus accrued interest of $177,449. Management estimated the net realizable value of the property’s remaining48 acres to be  $200,000, resulting inan estimated loss on asset valuation of $97,771 for the year ended December 31,1999.  Management made an additionaladjustment to the net realizable value of the property during 2000 due to poorresults from land development zoning tests on several of the remaininglots.  This resulted in a provision forestimated loss on asset valuation of $75,000 for the year ended December 31,2000.  No additional provision wasconsidered necessary in 2002 or 2001.

 

The Company also owns16.6 acres, known as River Oaks, that was intended to be a retail developmentsite in Prince William County, Virginia. Pursuant to its Chapter 11 reorganization plan, the lender has releasedits debt and security interest on the property in exchange for the Company’srelease of the lender’s development obligations.  The property had been revalued in “fresh start” accounting to$200,000.

 

In addition, the Companyowns 23.21 acres in Memphis, Tennessee zoned for multi-family garden apartmentsand seven townhome lots in Dumfries, Virginia. Management has estimated the net realizable value of these properties asbeing almost worthless, resulting in a provision for estimated loss on assetvaluation of $7,998 for the year ended December 31, 2000.  No additional provision was considered necessaryin 2002 or 2001.

 

NOTE 3

LAND LEASE

 

The Company owns a feesimple interest in land that is leased by a company owning a hotel located inFt. Washington, Pennsylvania.  Theproperty had an original cost and estimated current value of $400,000.  The minimum annual rent under the lease,which expires in 2024, is $66,000 plus one percent of gross room sales of theproperty, but not less than $1,000 a month. As of December 31, 2002, the minimum lease payments due pursuant to thislease through expiration are as follows:

 

| 2003       |   | $         | 78,000    |   |
|------------|--------|-----------|-----------|--------|
| 2004       |   | 78,000    |      |
| 2005       |   | 78,000    |      |
| 2006       |   | 78,000    |      |
| 2007       |   | 78,000    |      |
| Thereafter |   | 1,345,500 |      |
|       |   | $         | 1,735,500 |   |

 

 

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NOTE 4

OTHER ASSETS

 

Other assets includesprepaid expenses, security deposits and prepaid management fees.

 

NOTE 5

ESCROW DEPOSITS

 

At December 31, 2002 and2001, deposited funds of $658,335 and $574,909, primarily for the ArlingtonSquare Project, were restricted for replacement reserve, and tax and insuranceescrows.

 

NOTE 6

INSTALLMENT OBLIGATIONS -ARLINGTON SQUARE PROJECT

 

From November 1997 toNovember 25, 1998, ASLP’s property was encumbered by two mortgage notes toAllied in the amount of $24,300,000. The outstanding principal balance on the mortgage loans accrued interestat a blended rate of 10%, based on the LIBOR. The notes were cash-flow mortgages with all excess cash flow, asdefined, being applied to reduce the principal balance and to fund the requiredescrows.  One of the mortgage agreementsprovided for the lender to receive a participation interest of 30% in the netcash flow and a 30% equity value in the property if and when it is sold, withsuch provision to survive any payoff of the mortgage.

 

On November 25, 1998,ASLP refinanced the above described mortgages with a new mortgage with MetLifein the amount of $21,500,000, secured by a first deed of trust on the land andbuilding.  This note bears interest at6.8% and both principal and interest are payable in monthly installments of$147,058 beginning in January 1999, with the outstanding principal ofapproximately $15.9 million balance due on December 1, 2010.

 

On December 1, 1998, ASLPentered into a forbearance agreement with Allied whereby Allied gave notice ofdemand for full payment of its participation interest in the equity value ofthe property and established the value of that interest at $1,850,000,including Allied’s cash flow interest for the period October 1 through December31, 1998.  Under the agreement, thepartnership is to pay Allied its participation interest in equal monthlyinstallments of $22,739, including interest at 7.5% over a term of 9 1⁄2years.  Allied’s participation interestis collaterized by a deed of trust in the real estate and is guaranteed by allof the partners.  Each partner’sguarantee is secured by a pledge of its interest in the partnership.  Allied agreed to forebear on certain of itssurviving rights from the mortgage note, including an abatement of its right tothe property’s net cash flow, provided all payments under the agreement arepaid when due.  In addition, Alliedsubordinated its deed of trust to the deed of trust of MetLife.  On December 31, 1999, the parties to theforbearance agreement entered into a termination of the forbearance agreement,since all further payment obligations of the parties are contained in theAmended and Restated Promissory Note dated as of December 1, 1998.

 

The outstanding balanceon the ASLP installment obligations were $21,339,691 and $21,894,105 for theyear ended December 31, 2002 and 2001.

 

 

23

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At December 31, 2002, thescheduled future maturities of the obligations are as follows:

 

| **Year Ending   December 31** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2003                          |       | $          | 596,833    |   |
| 2004                          |       | 640,106    |       |
| 2005                          |       | 686,523    |       |
| 2006                          |       | 736,313    |       |
| 2007                          |       | 789,724    |       |
| Thereafter                    |       | 17,890,192 |       |
|                          |       | $          | 21,339,691 |   |

 

NOTE 7

OPERATING PROPERTY ANDEQUIPMENT - ARLINGTON SQUARE PROJECT

 

At December 31, 2002 and2001, operating property and equipment is stated at the net “fresh start” valueof $23,000,000, less related accumulated depreciation and amortization ofrelated intangibles.  For “fresh start”reporting purposes, the Arlington Square Project was revalued to an amountequal to the original amount of the non-recourse debt secured by the property.

 

At December 31, 2002 and2001, operating property and equipment consisted of:

 
|                                |   | **2002**    |       | **2001**    |   |
|-------------------------------------|--------|-------------|------------|-------------|--------|
| Land, building  and equipment       |   | $           | 23,651,839 |        | $      | 23,629,941 |   |
| Tenant  improvements                |   | 1,603,452   |       | 1,603,452   |   |
| Deferred rental  concessions, net   |   | 377,200     |       | 442,800     |   |
| Deferred loan  closing costs, net   |   | 183,124     |       | 214,972     |   |
|                                |   | 25,815,615  |       | 25,891,165  |   |
| Less  depreciation and amortization |   | (10,932,174 | )          | (10,235,011 | )      |
|                                |   | $           | 14,893,441 |        | $      | 15,656,154 |   |

 

NOTE 8

INCOME TAXES

 

As of December 31, 2002,the Company had tax net operating loss carryforwards of approximately$19,951,000.  The deferred tax assetassociated with these net operating loss carryforwards of approximately$7,324,000 is offset by a valuation allowance applied to the total deferred taxasset.  The net operating losses forincome tax reporting purposes will expire as follows:

 
| 2004 - |   | $1,309,000 |   | 2008 - |   | $1,429,000 |   | 2021 - $29,000 |   |
|--------|--------|------------|--------|--------|--------|------------|--------|----------------|--------|
| 2005 - |   | 5,652,000  |   | 2018 - |   | 91,000     |   | 2022 - $65,000 |   |
| 2006 - |   | 155,000    |   | 2019 - |   | 1,565,000  |   |           |   |
| 2007 - |   | 9,405,000  |   | 2020 - |   | 250,000    |   |           |   |

 

 

24

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NOTE 9

RELATED PARTYTRANSACTIONS

 

During 2002 and 2001, theCompany engaged a law firm in which one former director of the Company servesas partner in the firm.  During 2002 and2001, the Company paid $644 and $1,830, respectively, in fees to this law firm.

 

NOTE 10

COMMON STOCK ANDDISTRIBUTIONS

 

In connection with areorganization in 1992, the equity interests of the Company have beenrestructured as follows:

 

Unsecured creditors withpre-confirmation claims totaling approximately $11,000,000 exchanged theirinterests for 1,675,163 shares of the Class A Common Stock, representing 100%of such class.

 

Pre-confirmationshareholders of the Company (other than controlling shareholders as defined inthe Plan) exchanged 610,736 shares of Old Common Stock for 24,429 shares of theClass B Common Stock, representing 100% of such class.

 

Controlling shareholdersof the Company exchanged their 1,134,225, shares of Old Common Stock for 45,369shares of the Class C Common Stock, representing 100% of such class.

 

Under the terms of thePlan, holders of the Class A Common Stock will receive 100% of all dividendspaid by the Company in respect of its capital stock until such time as thecumulative dividends and other distributions paid to holders of Class A CommonStock equal 50% of the allowed Class 7 bankruptcy claims of approximately$11,000,000 (the “First Trigger”).

 

Following the FirstTrigger, the holders of the Class A Common Stock will receive approximately98.6% (with Class B stockholders receiving 1.4%) of all dividends paid inrespect of the Company’s capital stock until such time as the cumulativedividends and other distributions paid to holders of Class A Common Stock equal100% of the allowed Class 7 bankruptcy claims (the “Second Trigger”).

 

Following the SecondTrigger, all outstanding shares of Class A Common Stock, Class B Common Stockand Class C Common Stock will automatically convert into a single class of commonstock.

 

The holders of Class ACommon Stock also have an aggregate liquidation preference of an amount equalto the amount of Class 7 bankruptcy claims allowed in the Company’s Chapter 11case.  All dividends or distributionsmade with respect to the Class A Common Stock shall reduce the liquidationpreference dollar for dollar.

 

As of December 31, 2002,the number of common shares outstanding is as follows:

 

 

| Class A |   | 1,640,327 |   |
|---------|--------|-----------|--------|
| Class B |   | 21,476    |   |
| Class C |   | 45,119    |   |

 

 

25

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NOTE 11

LESSOR ARRANGEMENTS

 

The Company,through its 74% interest in ASLP, owns a building and parking garage which is100% leased to an agency of the U.S. Government under a ten year lease expiringin September, 2008.  During the yearsended December 31, 2002 and 2001, the Company realized income from this leaseof approximately $3,392,000 and $3,316,000, net of rental concessions,respectively, or 97% and 97% of total revenues, respectively. The terms of thelease require the tenant to pay base rent plus its proportionate share ofincreases in certain operating expenses. Also, the lease requires the tenant to pay base rent on the parkinggarage subject to 5% annual increases.

 

The minimum leasepayments due pursuant to this lease at December 31, 2002 are as follows:

 

| 2003       |   | $         | 3,299,277  |   |
|------------|--------|-----------|------------|--------|
| 2004       |   | 3,363,184 |       |
| 2005       |   | 3,374,491 |       |
| 2006       |   | 3,386,364 |       |
| 2007       |   | 3,398,830 |       |
| Thereafter |   | 2,556,394 |       |
| Total      |   | $         | 22,649,848 |   |

 

NOTE 12

OFFICE LEASE

 

The Company is obligatedunder an operating lease for its office space which expires January 31,

2004.  The rent increases annually by 3%.  The future annual rents under this leaseare:

 

| 2003  |   | 25,750 |   |
|-------|--------|--------|--------|
| 2004  |   | 2,151  |   |
| Total |   | $      | 27,901 |   |
|       |        |        |        |  |

 

Rental expense under theCompany’s office lease agreements was $23,838 and $24,938 for 2002  and 2001, respectively.  The Company moved into new office spaceowned by the CEO at the end of 2002, and is in negotiations with the formerlandlord to limit the obligation to pay rent through the end of the leaseterm.  The new office space is leased ona month-to-month basis.  No rent expensewas paid for 2002.

 

NOTE 13

GOING CONCERN

 

The Company has continuedto incur losses and has been unable to liquidate certain of its real estateassets in a timely manner and is facing certain liquidity problems in the nearfuture if these assets cannot be sold. These factors raise substantial doubt about the Company’s ability tocontinue as a going concern.  Managementdoes not have a formal plan to address these possible liquidity problems althoughthey will continue to monitor and reduce administrative costs and/or attempt todelay payment for certain services until properties are sold.  If these attempts are not successful, theCompany may be forced to sell its remaining properties for significantly lessthan the recorded values.  The eventualoutcome of these matters cannot be determined. The accompanying financial statements do not include any adjustments toassets or recorded liabilities of the Company if it is forced to liquidateprematurely and sales of assets and settlement of liabilities are not conductedin the normal course of business.

 

 

26

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NOTE 14

NET LOSS PER SHARE

 

 

The following is areconciliation of the numerators and denominators of the basic net loss pershare computations for 2002 and 2001:

 
|                      |   | **2002**        |     |
|---------------------------|--------|-----------------|----------|
|                      |   | **Loss**        |     | **Shares** |   | **Per Share** |   |
|                      |   | **(Numerator)** |     | **(Denominator)** |   | **Amount** |   |
|                      |   |            |     |   |   |   |   |
| Basic net loss  per share |   |            |     |   |   |   |   |
| Net loss                  |   | $               | (148,205 | ) | 1,706,922 |   | $ | (0.09 | ) |
|                      |   |            |     |   |   |   |   |
|                      |   | **2001**        |     |
|                      |   | **Loss**        |     | **Shares** |   | **Per Share** |   |
|                      |   | **(Numerator)** |     | **(Denominator)** | ** ** | **Amount** |   |
|                      |   |            |     |   |   |   |   |
| Basic net loss  per share |   |            |     |   |   |   |   |
| Net Loss                  |   | $               | (224,915 | ) | 1,706,922 |   | $ | (.13 | ) |

 

 

27

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ITEM 8.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

28

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PART III

 

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS ANDCONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

 

Executive Officers andDirectors of the Company

 

TWC’s Bylaws require noless than two (2) directors, at least one of which is a Class A Director, shallconstitute a quorum for a Board of Directors meeting and the vote of a majorityof the Class A Directors participating at such meeting is necessary for theBoard to act.  The Board of Directors iscomposed of one (1) Class A Director and two (2) Class B and C Directors.  On October 25, 1996, William N. Demas,formerly a Class B and Class C Director was elected as a Class A Director andJose Ma. C. Castro was elected as a Class B and Class C Director to fill theposition held by Mr. Demas.  In Decemberof 2000, Jose Ma. C. Castro resigned as a Class B Director of the Company.  In January of 2002, Jonathan C. Kinneyresigned as a Class B Director of the Company. TWC is currently searching for Class B and C Directors.  Directors are elected to serve until thenext annual meeting of shareholders or the next special meeting of shareholderscalled for the election of directors, and until their successors have beenelected and qualified.  TWC did not holdan annual or special meeting of shareholders in 2002.  See “Description of Business - Business Development - RecentDevelopments.”

 

TWC’s executive officersand directors are:

 

 
| **NAME**         |   | **AGE** |   | **POSITION**                                                               |   |
|------------------|--------|---------|--------|----------------------------------------------------------------------------|--------|
|             |   |    |   |                                                                       |   |
| William N. Demas |   | 66      |   | Chairman of the Board of Directors,  Chief Executive Officer and President |   |
|             |   |    |   |                                                                       |   |
| Geraldine Piatt  |   | 67      |   | Secretary                                                                  |   |

 

WilliamN. Demas has been Chairman of the Board of Directors, Chief Executive Officerand President of TWC since it was established in 1979.  Mr. Demas served as Chairman of the Board ofDirectors and Chief Executive Officer of Capital Mortgage Investors, TWC’spredecessor, from 1969 to 1979.  Mr.Demas also manages properties unrelated to TWC.

 

Geraldine Piatt hasserved as the Secretary of the Company since 1992.  As Secretary, she files reports with the state in which TWC doesbusiness and executes documents that require her signature.  Ms. Piatt also serves as property managementadministrator since 1989.  This is herprincipal responsibility and includes preparing communications with (i) theGeneral Services Administration (“GSA”), the tenant at Arlington Square and theU.S. Fish and Wildlife Service, the occupant of Arlington Square; (ii) thevarious vendors that perform services for Arlington Square; and (iii) the twooperating engineers that work on site at Arlington Square.

 

Section 16(a)Beneficial Ownership Reporting Compliance

 

Section16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),requires that directors and officers of a registrant and persons owning morethan ten percent of such registrant’s equity securities registered underSection 12 of the Securities Exchange Act file reports of ownership and changesin ownership (“Section 16 Filings”) with the Securities and Exchange Commission(the “SEC”).  The SEC requires thatcopies of all such Section 16 Filings be furnished by the filers to the registrant.  TWC has not received any Section 16 Filingsduring Fiscal 2002.

 

 

29

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ITEM 10.  EXECUTIVE COMPENSATION

 

SummaryCompensation Table

 

Thefollowing table sets forth information concerning the annual compensationearned by the President and Chief Executive Officer of TWC  (the “Named Executive Officer”) for servicesrendered to TWC in all capacities for the fiscal years ended December 31, 2002(“Fiscal 2002”), December 31, 2001 (“Fiscal 2001”) and December 31, 2000(“Fiscal 2000”):

 

SUMMARY COMPENSATIONTABLE

 
|                             |   | **Annual  Compensation** |   |       |   |
|----------------------------------|--------|--------------------------|--------|------------|--------|
| **Name and  Principal Position** |   | **Year**                 |   | **Salary** |   | **Bonus** |   | **Other  Annual  Compensation** |   | **All  Other  Compensation** |   |
|                             |   |                     |   |       |   |   |   |   |   |   |   |
| William N.  Demas, Chief         |   |                     |   |       |   |   |   |   |   |   |   |
| Executive  Officer               |   | 2002                     |   | 86,000     |   |   |   | 11,182 | (1) | 17,012 | (2) |
| and President                    |   |                     |   |       |   |   |   |   |   |   |   |
|                             |   | 2001                     |   | 96,546     |   | — |   | 20,570 | (1) | 24,852 | (2) |
|                             |   |                     |   |       |   |   |   |   |   |   |   |
|                             |   | 2000                     |   | 123,631    |   | — |   | — |   | 24,852 | (2) |

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(1)   Auto allowance

(2)   Since August 1993, TWC has paid the premiumson a life insurance policy for Mr. Demas (“the Demas Policy”).  The amounts shown represent TWC’s totalannual payments therefor in Fiscal 2002, Fiscal 2001 and Fiscal 2000.  In all three years, TWC reduced Mr. Demas’sbase salary by the amount equal to the costs of the Demas Policy.

 

TWC has not grantedstock options, restricted stock awards, or share appreciation rights duringFiscal 2002, Fiscal 2001, and Fiscal 2000. Since its reorganization in 1992, TWC has not had a long-term incentiveplan or pension plan.  The Company alsodoes not have any equity compensation plans. However, in 1992, TWC established a noncontributory Salary Reduction SEPon behalf of its employees (including Mr. Demas), pursuant to which employees,at their election, may defer a percentage of their annual salaries.

 

EmploymentAgreement with William N. Demas

 

On July 30, 1992,William N. Demas entered into an agreement with TWC providing for hisemployment as President and Chief Executive Officer of TWC (the “EmploymentAgreement”).  The Employment Agreementexpired on July 30, 1995.

 

Since theexpiration of the Employment Agreement on July 30, 1995, Mr. Demas has beenacting as the President and Chief Executive Officer of TWC without a writtenemployment agreement.  Mr. Demas hasbeen serving in such positions for a base salary of approximately $87,000 peryear and performs such services on a part-time basis, not to exceed 25 hoursper week.  In addition, Mr. Demasreceives as benefits health insurance and reimbursement of expenses incurred onbehalf of TWC.

 

In addition, sinceAugust 1993, in lieu of paying Mr. Demas’ full salary, TWC has paid the monthlypremiums on a life insurance policy for Mr. Demas.

 

 

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Compensation ofDirectors

 

In accordance withTWC’s Bylaws, directors may be reimbursed for any reasonable expenses incurredin connection with their service on the Board of Directors.  There are no other arrangements pursuant towhich directors of TWC are compensated for services as director.  Mr. Demas did not seek or receive anyreimbursement for his expenses in Fiscal 2002.

 

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

PrincipalShareholders

 

The followingtable shows with respect to each person or entity known by TWC to be thebeneficial owner of more than 5% of any class of TWC’s voting securities as ofDecember 31, 2002, (i) the number of shares so owned, and (ii) the percentageof all shares represented by such ownership (based upon the number of shares outstandingin the class) as of December 31, 2002.

 
| **Title of**           |   |                                                                                                                                                    |   | **Shares  Beneficially Owned** |   |
|------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
| **Class**              |   |                                                                                                                                                    |   | **# of  Shares**               |   | **% of  Class(1)** |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class A   Common Stock |   | Kevin E. Foley, Deputy Superintendent of Insurance  of the State of New York, as Agent of the Rehabilitator of Executive Life  Insurance of New York(2) |   | 410,618                        |   | 24.7 |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class A   Common Stock |   | AIF II, L.P.(3)                                                                                                                                         |   | 325,242                        |   | 19.6 |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class A   Common Stock |   | Lion Advisors, L.P.(3)                                                                                                                                  |   | 325,242                        |   | 19.6 |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class C   Common Stock |   | The Antonelli Creditors Liquidating Trust                                                                                                               |   | 18,206                         |   | 40.1 |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class C   Common Stock |   | Andrea Kinney Greene                                                                                                                                    |   | 4,116                          |   | 9.1 |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class C   Common Stock |   | David B. Kinney                                                                                                                                         |   | 5,326                          |   | 11.7 |   |
|                   |   |                                                                                                                                                    |   |                           |   |   |   |
| Class C   Common Stock |   | David H. Kinney                                                                                                                                         |   | 4,154                          |   | 9.2 |   |

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(1)  For purposes of this table and the table setforth immediately below, under the heading “Directors and Executive Officers”,the percentage of shares owned by each shareholder listed is based on thenumber of Class A Common Stock, Class B Common Stock and Class C Common Stock(the “New Shares”) that have been authorized pursuant to TWC’s plan ofreorganization.  The authorized New Shares  equal the number of New Shares issued andoutstanding.  Under the plan ofreorganization, shareholders could claim their New Shares until July 30, 1995,after which date TWC would have the right to cancel any and all of theunclaimed New Shares.  Because the NewShares have not been registered under the Securities Act of 1933, shareholdersare not required to file statements with the SEC under section 13(d) and 13(g)concerning their beneficial ownership of such shares.  The information set forth in the table is based principally uponinformation provided by the Company’s transfer agent and plan ofreorganization.

 

(2)  Mr. Foley’s address is 123 Williams Street,New York, NY  10038-3889.

 

(3)  The address for AIF II, L.P. and LionAdvisors, L.P. c/o Apollo Advisors, L.P. is 1999 Avenue of the Stars, Suite1050, Los Angeles, CA  90067.

 

(4)  The address for the trust is the AntonelliLiquidating Trust  c/o Bailey RealtyCorporation, 1130 Connecticut Avenue, N.W., Washington, D.C.  20036.

 

(5) Andrea KinneyGreene, the sister of Jonathan Kinney  who was a director of TWC, owns approximately 4,116 shares ofClass C Common Stock.  In addition,Andrea Kinney Greene, as custodian for her children, holds approximately 132 sharesof Class B Common Stock.  The addressprovided to TWC by Andrea Kinney Greene is Route 2, Box 782, Purcellville, VA22132.

 

(6)  This total includes approximately 584 sharesof Class C Common Stock over which David B. Kinney has voting and investmentpowers in his capacity as general partner of K-F Associates, a Virginia limitedpartnership, which interests are owned by members of the Kinney Family.  David B. Kinney is the father of Jonathan C.Kinney and David H. Kinney.  The addressprovided to TWC by David B. Kinney is 754 Walker Road, 2nd Floor, Great Falls,VA 22066.

 

 

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(7)  Mr. David H. Kinney is the brother ofJonathan C. Kinney.  The addressprovided to TWC by David H. Kinney is 1056 Manning Street, Great Falls, VA22066.

 

Directors andExecutive Officers 

 

The followingtable sets forth, as of December 31, 2002, information with respect tobeneficial ownership of TWC’s capital stock by (i) the Named ExecutiveOfficers, (ii) each director and (iii) all directors and executive officers ofTWC as a group.  The Company does nothave any equity compensation plans.

 
| **Name and Address of  Beneficial Owner(1)** |   | **Title of  Class**  |   | **Amount and  Nature of  Beneficial   Ownership** |   | **Percentage  of Class  Outstanding** |   |
|----------------------------------------------|--------|----------------------|--------|---------------------------------------------------|--------|---------------------------------------|--------|
|                                         |   |                 |   |                                              |   |                                  |   |
| William N. Demas                             |   | Class A Common Stock |   | 7,608                                             |   | *                                     |   |
|                                         |   | Class C Common Stock |   | 8,982                                             | (2)    | 19.8                                  |   |
|                                         |   |                 |   |                                              |   |                                  |   |
| Jonathan C.  Kinney                          |   | Class A Common Stock |   | 523                                               | (3)    | *                                     |   |
|                                         |   | Class C Common Stock |   | 4,564                                             | (4)    | 10.1                                  |   |
|                                         |   |                 |   |                                              |   |                                  |   |
| Directors and  Officers as a Group           |   | Class A Common Stock |   | 8,131                                             |   | *                                     |   |
| (2 persons)                                  |   | Class C Common Stock |   | 13,546                                            |   | 29.9                                  |   |

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*   Less than 1% of outstanding shares of theClass

 

(1)  The address for each director and officer isc/o TWC, 4421 Chestnut Street, Bethesda, Maryland 20814.

 

(2)  This total includes 1,340 shares of Class CCommon Stock which Mr. Demas owns with his wife in joint tenancy; however, itdoes not include approximately 440 shares of Class C Common Stock beneficiallyowned by Mr. Demas’ daughter Edith Demas. In addition, Mr. Demas, as custodian for his children, Amy, James andSarah Demas, holds 164 shares of Class B Common Stock.

 

(3)  Mr. Kinney disclaims beneficial ownership ofthese shares of Class A Common Stock which are held by Bean, Kinney &Korman, P.C., a law firm in which Mr. Kinney is a stockholder.  In January of 2002, Mr. Kinney resigned as aDirector of the Company.

 

(4)  This total includes 8 shares of Class CCommon Stock which are held by Mr. Kinney’s wife and 146 shares of Class CCommon Stock held by Mr. Kinney as a limited partner in K-F Associates, alimited partnership which interests are owned by members of the KinneyFamily.  Mr. Kinney disclaims beneficialownership of shares held by K-F Associates. In addition, Mr. Kinney, ascustodian for his children, David N.A. and Rachael W.K. Kinney, holds 232shares of Class B Common Stock.

ITEM 12. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

Mr. JonathanKinney and certain members of Mr. Kinney’s family (collectively, the “KinneyFamily”) have a 16% ownership interest (6% of which is Mr. Kinney’s personalholding) in ASLP, which owns the Arlington Square Project.  Mr. Demas has a 7% ownership interest inASLP. ­ The Company owns 53% of the equity in ASLP directly and 21% indirectlythrough its 100% ownership of Arlington Square, Inc., its general partner.  In Fiscal 2002, Messrs. Demas and Kinney andthe Kinney Family did not receive partnership distributions from their limitedpartnership inter­ests.  See“Description of Properties - Arlington Square Project.

 

In Fiscal 2002 andFiscal 2001, the Company paid legal fees of approximately $644 and $1,830respectively to Bean, Kinney & Korman, P.C., the law firm in which Mr.Kinney is partner and stockholder.

 

 

32

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ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K

 

(a)           Exhibits

 

3.1                                 The Company’s Amended and RestatedCharter, filed with the Maryland Department of Assessments and Taxation on July30, 1992, which was filed as Exhibit 2.2 to the Company’s RegistrationStatement on Form 8-A filed with the Commission on August 10, 1992, isincorporated herein by reference.

 

3.2                                 The Company’s Bylaws, dated as of July30, 1992, which were filed as Exhibit 2.3 to the Company’s RegistrationStatement on Form 8-A filed with the Commission on August 10, 1992, areincorporated by reference.

 

4.1                                 The Second Amended Joint Plan ofReorganization of The Washington Corporation, Carlin Springs Associates LimitedPartnership, Second Fair Ridge Associates Limited Partnership andWilson-Randolph Limited Partnership, dated May 28, 1992, as modified, which wasfiled as Exhibit 2.1 to the Company’s Report on Form 8-K filed with theCommission on July 29, 1992, Commission File No. 0-20518, is incorporatedherein by reference.

 

4.2                                 The Registration Rights Agreement, datedas of July 30, 1992, by and among the Company and certain holders of theCompany’s Class A Common Stock which was filed as Exhibit 4.4 to the Company’sForm 10-Q filed with the Commission on August 14, 1992, Commission File No.0-20518, is incorporated herein by reference.

 

10.1                           Agreement of Limited Partnership ofArlington Square Limited Partnership dated September 17, 1985, by and among TWCProperties Partnership and the limited partners, which was filed as Exhibit10.1 to the Company’s report on Form 10-KSB filed with the Commission April 6,1995, is incorporated herein by reference.

 

10.2                           The U. S. Government Lease of RealProperty (Arlington Square Project) dated May 13, 1988 including Riders 1, 2and 3 which was filed as Exhibit 10 to the Company’s Form 10-K filed with theCommission on March 29, 1990, Commission File No. 0-20518, is incorporatedherein by reference.

 

10.3                           The Lease Agreement dated March 24, 1974between the Company and Fort Washington Inn Associates, which was filed asExhibit 10.5 to the Company’s Form 10-KSB filed with the Commission April 6,1993, is incorporated herein by reference.

 

10.4                           The Stock Purchase Agreement datedNovember 1, 1994 relating to the sale of 2900 South Glebe, Inc, between TheWashington Corporation and William N. Demas, which was filed as Exhibit 10.5 tothe Company’s Form 10-KSB filed with the Commission on April 6, 1995, isincorporated herein by reference.

 

10.5                           The First Amendment to Agreement ofLimited Partnership of Arlington Square Limited Partnership dated December 14,1990, by and among TWC Properties Partnership, William N. Demas, John D. Wolfand The Ballston Corporation, which was filed as Exhibit 10.8 to the Company’sreport on Form 10-KSB filed with the Commission April 6, 1995, is incorporatedherein by reference.

 

 

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10.6                           The Second Amendment to Agreement ofLimited Partnership of Arlington Square Limited Partnership dated March 8,1991, by and among TWC Properties Partnership, William N. Demas, John D. Wolf,The Ballston Corporation and Arlington Square, Inc., which was filed as Exhibit10.9 to the Company’s report on Form 10-KSB filed with the Commission April 6,1995, is incorporated herein by reference.

 

10.7                           The Third Amendment to Agreement ofLimited Partnership of Arlington Square Limited Partnership dated March 8,1991, between TWC Properties Partnership, William N. Demas, John D. Wolf, TheBallston Corporation, Arlington Square Incorporated, Jonathan C. Kinney, DavidB. Kinney and Barbara A. Kinney evidencing the transfer of a 16% partnershipinterest in ASLP to Jonathan C. Kinney, David B. Kinney and Barbara A. Kinney,which was filed as Exhibit 10.1 to the Company’s Form 10-KSB filed with theCommission on April 13, 1993, is incorporated herein by reference.

 

10.8                           The Fourth Amendment to Agreement ofLimited Partnership of Arlington Square Limited Partnership dated January 1,1993, by and among TWC Properties Partnership, Arlington Square, Inc., and TheWashington Corporation, is incorporated herein by reference.

 

10.9                         Promissory Note in the original principalamount of $23,000,000 dated November 20, 1997 between Arlington Square LimitedPartnership and Allied Capital Commercial Corporation, which was filed asExhibit 10.9 to the Company’s Form 10-KSB filed with the Commission on May 8,1998, is incorporated herein by reference.

 

10.10                     Promissory Note in the original principal amount of$1,000,000 dated November 20, 1997 between Arlington Square Limited Partnershipand Allied Capital Commercial Corporation, which was filed as Exhibit 10.10 tothe Company’s Form 10-KSB filed with the Commission on May 8, 1998, isincorporated herein by reference.

 

10.11                     Loan Agreement in the amount of $24,300,000 datedNovember 20, 1997 between Arlington Square Limited Partnership and Allied CapitalCommercial Corporation, which was filed as Exhibit 10.11 to the Company’s Form10-KSB filed with the Commission on May 8, 1998, is incorporated herein byreference.

 

10.12                     Amended and Restated Agreement of Limited Partnershipof Arlington Square Limited Partnership, which was filed as Exhibit 10.12 tothe Company’s Form 10-KSB filed with the Commission on May 8, 1998, isincorporated herein by reference.

 

10.13                     Assignment of Leases and Rents dated November 20, 1997by Arlington Square Limited Partnership to Allied Capital CommercialCorporation, which was filed as Exhibit 10.13 to the Company’s Form 10-KSBfiled with the Commission on May 8, 1998, is incorporated herein by reference.

 

10.14                     Assignment of Leases and Rents (GSA) dated November20, 1997 by Arlington Square Limited Partnership to Allied Capital CommercialCorporation, which was filed as Exhibit 10.14 to the Company’s Form 10-KSBfiled with the Commission on May 8, 1998, is incorporated herein by reference.

 

10.15                     Guaranty by Arlington Square Limited Partnership toAllied Capital Commercial Corporation, which was filed as Exhibit 10.15 to theCompany’s Form 10-KSB filed with the Commission on May 8, 1998, is incorporatedherein by reference.

 

 

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10.16                     Indemnity Agreement dated November 20, 1997 betweenArlington Square Limited Partnership and Allied Capital Commercial Corporation,which was filed as Exhibit 10.16 to the Company’s Form 10-KSB filed with theCommission on May 8, 1998, is incorporated herein by reference.

 

10.17                     Deed of Trust and Security Agreement “A” datedNovember 20, 1997 between Arlington Square Limited Partnership and AlliedCapital Commercial Corporation, which was filed as Exhibit 10.17 to theCompany’s Form 10-KSB filed with the Commission on May 8, 1998, is incorporatedherein by reference.

 

10.18                     Deed of Trust and Security Agreement “B” datedNovember 20, 1997 between Arlington Square Limited Partnership and AlliedCapital Commercial Corporation, which was filed as Exhibit 10.18 to theCompany’s Form 10-KSB filed with the Commission on May 8, 1998, is incorporatedherein by reference.

 

10.19                     Assignment of Limited Partnership interest of AshtonGlen Associates dated December 11, 1997 from The Washington Corporation to K-FAssociates, which was filed as Exhibit 10.19 to the Company’s Form 10-KSB filedwith the Commission on May 8, 1998, is incorporated herein by reference.

 

10.20                     First Amendment to the Limited Partnership Agreementof Ashton Glen Associates dated December 11, 1997 which was filed as Exhibit10.20 to the Company’s Form 10-KSB filed with the Commission on May 8, 1998, isincorporated herein by reference.

 

10.21                     Promissory Note dated November 25, 1998 in theoriginal principal amount of $21,500,000 with Arlington Square LimitedPartnership as borrower and Metropolitan Life Insurance Company as holder,which was filed as Exhibit 10.21 to the Company’s Form 10-KSB filed with theCommission on June 2, 1999, is incorporated herein by reference.

 

10.22                     Deed of Trust, Security Agreement and Fixture Filingfrom Arlington Square Limited Partnership to Keith J. Willner and Scott A.Morehouse as Trustees for the benefit of Metropolitan Life Insurance Company,dated November 25, 1998, which was filed as Exhibit 10.22 to the Company’s Form10-KSB filed with the Commission on June 2, 1999, is incorporated herein byreference.

 

10.23                     Assignment of Leases between Arlington Square LimitedPartnership and Metropolitan Life Insurance Company dated November 25, 1998,which was filed as Exhibit 10.23 to the Company’s Form 10-KSB filed with theCommission on June 2, 1999, is incorporated herein by reference.

 

10.24                     Assignment of Contracts and Agreements betweenArlington Square Limited Partnership and Metropolitan Life Insurance Company datedNovember 25, 1998, which was filed as Exhibit 10.24 to the Company’s Form10-KSB filed with the Commission on June 2, 1999, is incorporated herein byreference.

 

10.25                     Unsecured Indemnity Agreement among Arlington SquareLimited Partnership, Metropolitan Life Insurance Company and The WashingtonCorporation dated November 25, 1998, which was filed as Exhibit 10.25 to theCompany’s Form 10-KSB filed with the Commission on June 2, 1999, isincorporated herein by reference.

 

 

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10.26                     Financing Statement dated November 25, 1998 executedby Arlington Square Limited Partnership as debtor and Metropolitan LifeInsurance Company as secured party, which was filed as Exhibit 10.26 to theCompany’s Form 10-KSB filed with the Commission on June 2, 1999, isincorporated herein by reference.

 

10.27                     Subordination of Management Agreement dated November25, 1998 by and among The Washington Corporation, Arlington Square LimitedPartnership and Metropolitan Life Insurance Company, which was filed as Exhibit10.27 to the Company’s Form 10-KSB filed with the Commission on June 2, 1999,is incorporated herein by reference.

 

10.28                     Guaranty Agreement dated November 25, 1998 by andbetween The Washington Corporation, Arlington Square Limited Partnership andMetropolitan Life Insurance Company, which was filed as Exhibit 10.28 to theCompany’s Form 10-KSB filed with the Commission on June 2, 1999, isincorporated herein by reference.

 

10.29                     Subordination Agreement dated November 25, 1998, byand among Arlington Square Limited Partnership, Metropolitan Life InsuranceCompany and Allied Capital Commercial Corporation, which was filed as Exhibit10.29 to the Company’s Form 10-KSB filed with the Commission on June 2, 1999,is incorporated herein by reference.

 

10.30                     Subordination, Non-Disturbance and AttornmentAgreement among Metropolitan Life Insurance Company, Arlington Square LimitedPartnership and United States of America - General Services Administrationdated November 25, 1998, which was filed as Exhibit 10.30 to the Company’s Form10-KSB filed with the Commission on June 2, 1999, is incorporated herein byreference.

 

10.31                     Subordination, Non-Disturbance and AttornmentAgreement among Metropolitan Life Insurance Company, U.S. Fish and WildlifeService, and Arlington Square Limited Partnership, dated November 25, 1998,which was filed as Exhibit 10.31 to the Company’s Form 10-KSB filed with theCommission on June 2, 1999, is incorporated herein by reference.

 

10.32                     Forbearance Agreement dated December 1, 1998, by andamong Arlington Square Limited Partnership, Arlington Square, Inc., TheWashington Corporation, and Allied Capital Corporation, which was filed asExhibit 10.32 to the Company’s Form 10-KSB filed with the Commission on June 2,1999, is incorporated herein by reference.

 

99.1                           Amended and Restated Promissory Notedated December 1, 1998, in the original principal amount of  $1,850,000 with Arlington Square LimitedPartnership as borrower and Allied  CapitalCorporation as holder, which was filed as Exhibit 10.33 to the Company’s Form10-KSB filed with the Commission on June 2, 1999, is incorporated herein byreference.

 

10.34                     Termination of Forbearance Agreement dated December31, 1999, by and among Arlington Square Limited Partnership,  Arlington Square, Inc., The WashingtonCorporation, and Allied Capital Corporation, which was filed as Exhibit 10.34to the Company’s Form 10-KSB filed with the Commission on June 2, 1999, isincorporated herein by reference.

 

 

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10.35                     First Modification to Deed of Trust and SecurityAgreement “B” dated November 24, 1998, by and between Arlington Square LimitedPartnership and Allied Capital Corporation, which was filed as Exhibit 10.35 tothe Company’s Form 10-KSB filed with the Commission on June 2, 1999, isincorporated herein by reference.

 

10.36                     Second Modification to Deed of Trust and SecurityAgreement “B” dated December 31, 1999, by and between Arlington Square LimitedPartnership and Allied Capital Corporation, which was filed as Exhibit 10.36 tothe Company’s Form 10-KSB filed with the Commission on June 2, 1999, isincorporated herein by reference.

 

10.37                     Guarantor’s Consent and Acknowledgment dated November24, 1998, by and between Arlington Square Limited Partnership and AlliedCapital Corporation, which was filed as Exhibit 10.37 to the Company’s Form10-KSB filed with the Commission on June 2, 1999, is incorporated herein byreference.

 

11.                                 Computation of per share earnings for theyears ended December 31, 2002 and 2001 is attached hereto.

 

21.           Subsidiaries of the Registrant as ofDecember 31, 2002 is attached hereto.

 

99.1                           Certification

 

(b)                                 Reports on Form 8-K. The Company filed no report on Form 8-K during fourth quarter of 2002.

 

 

Item 14.  Controls and Procedures

 

Within the 90 daysprior to the date of this report, the Company carried out an evaluation, underthe supervision of the Principal Executive Officer/Principal Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rule 13a — 14 under the Securities ExchangeAct of 1934.  Based upon thatevaluation, the Principal Executive Officer/Principal Financial Officerconcluded that the Company’s disclosure control and procedures were effective.

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect such controls subsequent to the date of theirevaluation.

 

 

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SIGNATURES

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 

THE WASHINGTONCORPORATION

 

 
| Date:  | 4/15/03 |   | By:                                                              | /s/William N.  Demas |
|--------|---------|--------|------------------------------------------------------------------|----------------------|
|   |    |   | William N. Demas  Chairman of the Board of Directors/  President |

 

 

 

 

 

 

In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 

 

 
| Date:  | 4/15/03 |   | By:                                                              | /s/William N.  Demas |
|--------|---------|--------|------------------------------------------------------------------|----------------------|
|   |    |   | William N. Demas  Chairman of the Board of Directors/  President |

 

 

CERTIFICATION

 

 

I, William N.Demas, certify that:

 

1.               I have reviewed this year end report onForm 10-KSB of The Washington Corporation;

 

2.               Based on my knowledge, this year endreport does not contain any untrue statement of  a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisyear end report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this year end report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this year end report;

 

4.               I am responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

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a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this year end report isbeing prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this year end report (the “Evaluation Date”); and

 

c)              presented in this year end report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               I have disclosed, based on my most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significant deficiencies in thedesign or operating of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether or not material, thatinvolves management or other employee who have a significant role in theregistrant’s internal controls; and

 

6.               I have indicated in this year end reportwhether there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 

 
| Date:  | 4/15/03 |   |                                                                                  |                 |
|--------|---------|--------|---------------------------------------------------------------------------------------|----------------------|
|   |    |   | By:                                                                                   | /s/William N.  Demas |
|   |    |   | William N. Demas  Chief Executive Officer and Chief Financial Officer  April 15, 2003 |

 

 

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