-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CrT6Nmqd0QIfkM2VteHfRfO9ukKzOmQDoJ4/kOWqhMIk57QHYQ0TZJJ5J5h+J9jA Q/+CkAKIcKYJSLDaaxS82w== 0000928385-00-001034.txt : 20000331 0000928385-00-001034.hdr.sgml : 20000331 ACCESSION NUMBER: 0000928385-00-001034 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAUL CENTERS INC CENTRAL INDEX KEY: 0000907254 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 521833074 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12254 FILM NUMBER: 587185 BUSINESS ADDRESS: STREET 1: 8401 CONNECTICUT AVE CITY: CHEVY CHASE STATE: MD ZIP: 20815 BUSINESS PHONE: 3019866207 MAIL ADDRESS: STREET 1: 8401 CONNECTICUT AVE CITY: CHEVY CHASE STATE: MD ZIP: 20815 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ------ EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ------ EXCHANGE ACT OF 1934 For the transition period from to ---------------- ------------------- Commission File number 1-12254 SAUL CENTERS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 52-1833074 - --------------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8401 Connecticut Avenue Chevy Chase, Maryland 20815 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (301) 986-6200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of each class registered ------------------- ------------------------------ Common Stock, Par Value $0.01 Per Share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: N/A Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ---- The number of shares of Common Stock, $0.01 par value, outstanding as of February 28, 2000 was 13,468,259. TABLE OF CONTENTS -----------------
PART I Page Numbers ------------------- Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10. Directors and Executive Officers of the Registrant 22 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management 22 Item 13. Certain Relationships and Related Transactions 22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 FINANCIAL STATEMENT SCHEDULE Schedule III. Real Estate and Accumulated Depreciation F-18
2 PART I Item 1. Business General - ------- Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland General Corporation Law on June 10, 1993. Saul Centers operates as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Saul Centers generally will not be subject to federal income tax, provided it annually distributes at least 95% of its REIT taxable income to its stockholders and meets certain organizational and other requirements. Saul Centers has made and intends to continue to make regular quarterly distributions to its stockholders. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the "Company". B. Francis Saul II serves as Chairman of the Board of Directors and Chief Executive Officer of Saul Centers. The Company's principal business activity is the ownership, management and development of income-producing properties. The Company's long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate. Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B.F. Saul Real Estate Investment Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the "Operating Partnership"), and two newly formed subsidiary limited partnerships (the "Subsidiary Partnerships", and collectively with the Operating Partnership, the "Partnerships"), shopping center and office properties, and the management functions related to the transferred properties. Since its formation, the Company has purchased and developed additional properties. The Company is currently developing Washington Square at Old Town, a 235,000 square foot Class A mixed-use office/retail complex, on the two-acre site of the former North Washington shopping center property, and Ashburn Village II, a 39,700 square foot retail and office suite expansion to the Company's Ashburn Village shopping center and repositioning an under-performing shopping center to an industrial/warehouse use (the "Industrial Property"). On December 16, 1999, the District of Columbia purchased the Park Road retail property as part of an assemblage of parcels for a neighborhood revitalization project. Therefore, as of December 31, 1999, the Company's properties (the "Current Portfolio Properties") consisted of 27 operating shopping center properties and Ashburn II (the "Shopping Centers"), three predominantly office operating properties and Washington Square at Old Town (the "Office Properties") and the Industrial Property. To facilitate the placement of collateralized mortgage debt, the Company established Saul QRS, Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of Saul Centers. Saul Centers serves as the sole general partner of the Operating Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc. serves as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties. Management of the Current Portfolio Properties - ---------------------------------------------- The Partnerships manage the Current Portfolio Properties and will manage any subsequently acquired properties. The management of the properties includes performing property management, leasing, design, renovation, development and accounting duties for each property. The Partnerships provide each property with a fully integrated property management capability, utilizing a staff of approximately 50 employees who have developed an extensive and mature network of relationships with tenants and potential tenants as well as with members of the brokerage and property owners' communities. The Company currently does not, and does not intend to, retain third party managers or provide management services to third parties. The Company augments its property management capabilities by sharing with The Saul Organization certain ancillary functions, at cost, such as computer and payroll services, benefits administration and in-house legal 3 services. The Company also shares insurance administration expenses on a pro rata basis with The Saul Organization. The Saul Organization subleases office space to the Company at its cost. Management believes that these arrangements result in lower costs than could be obtained by contracting with third parties. These arrangements permit the Company to capture greater economies of scale in purchasing from third party vendors than would otherwise be available to the Company alone and to capture internal economies of scale by avoiding payments representing profits with respect to functions provided internally. The terms of all sharing arrangements with The Saul Organization, including payments related thereto, are reviewed periodically by the Audit Committee of the Company's Board of Directors. Principal Offices - ----------------- The principal offices of the Company are located at 8401 Connecticut Avenue, Chevy Chase, Maryland 20815, and the Company's telephone number is (301) 986-6200. The Company's internet web address is www.saulcenters.com. Operating Strategies - -------------------- The Company's primary operating strategy is to focus on its community and neighborhood shopping center business and to operate its properties to achieve both cash flow growth and capital appreciation. Community and neighborhood shopping centers typically provide reliable cash flow and steady long-term growth potential. Management intends to actively manage its property portfolio by engaging in strategic leasing activities, tenant selection, lease negotiation and shopping center expansion and reconfiguration. The Company seeks to optimize tenant mix by selecting tenants for its shopping centers that provide a broad spectrum of goods and services, consistent with the role of community and neighborhood shopping centers as the source for day-to-day necessities. Management believes that such a synergistic tenanting approach results in increased cash flow from existing tenants by providing the Shopping Centers with consistent traffic and a desirable mix of shoppers, resulting in increased sales and, therefore, increased cash flows. Management believes there is significant potential for growth in cash flow as existing leases for space in the Shopping Centers expire and are renewed, or newly available or vacant space is leased. The Company intends to renegotiate leases aggressively and seek new tenants for available space in order to maximize this potential for increased cash flow. As leases expire, management expects to revise rental rates, lease terms and conditions, relocate existing tenants, reconfigure tenant spaces and introduce new tenants to increase cash flow. In those circumstances in which leases are not otherwise expiring, management intends to attempt to increase cash flow through a variety of means, including renegotiating rents in exchange for additional renewal options or in connection with renovations or relocations, recapturing leases with below market rents and re-leasing at market rates, as well as replacing financially troubled tenants. When possible, management also will seek to include scheduled increases in base rent, as well as percentage rental provisions in its leases. The Shopping Centers contain numerous undeveloped parcels within the centers which are suitable for development as free-standing retail facilities, such as restaurants, banks, auto centers or cinemas. Management will continue to seek desirable tenants for facilities to be developed on these sites and to develop and lease these sites in a manner that complements the Shopping Centers in which they are located. The Company will also seek growth opportunities in its Washington, D.C. metropolitan area office portfolio, primarily through development and redevelopment. Management also intends to negotiate lease renewals or to re- lease available space in the Office Properties, while considering the strategic balance of optimizing short-term cash flow and long-term asset value. It is management's intention to hold properties for long-term investment and to place strong emphasis on regular maintenance, periodic renovation and capital improvement. Management believes that such characteristics as cleanliness, lighting and security are particularly important in community and neighborhood shopping centers, which are frequently visited by shoppers during hours outside of the normal work day. Management believes that the Shopping Centers and Office Properties generally are attractive and well maintained. The Shopping Centers and Office Properties will undergo expansion, renovation, reconfiguration and modernization from time to time when management believes that such action is warranted by opportunities or changes in the competitive environment of a property. Several of the Shopping Centers have been renovated recently. During 1999 and 1998, the Company was 4 involved in predevelopment and/or development of 12 of its properties. The Company will continue its practice of expanding existing properties by undertaking new construction on outparcels suitable for development as free standing retail or office facilities. Redevelopment, Renovations and Acquisitions - ------------------------------------------- The Company's redevelopment, renovation and acquisition objective is to selectively and opportunistically redevelop and renovate its properties, by replacing leases with below market rents with strong, traffic-generating anchor stores such as supermarkets and drug stores, as well as other desirable local, regional and national tenants. The Company's strategy remains focused on continuing the operating performance and internal growth of its existing Shopping Centers, while enhancing this growth with selective retail redevelopments and renovations. Management believes that attractive opportunities for investment in existing and new shopping center properties will continue to be available. Management believes that the Company will be well situated to take advantage of these opportunities because of its access to capital markets, ability to acquire properties either for cash or securities (including Operating Partnership interests in tax advantaged transactions) and because of management's experience in seeking out, identifying and evaluating potential acquisitions. In addition, management believes its shopping center expertise should permit it to optimize the performance of shopping centers once they have been acquired. Management also believes that opportunities exist for investment in new office properties. It is management's view that several of the office sub- markets in which the Company operates have very attractive supply/demand characteristics. The Company will continue to evaluate new office development and redevelopment as an integral part of its overall business plan. In evaluating a particular redevelopment, renovation, acquisition, or development, management will consider a variety of factors, including (i) the location and accessibility of the property; (ii) the geographic area (with an emphasis on the Mid-Atlantic region) and demographic characteristics of the community, as well as the local real estate market, including potential for growth and potential regulatory impediments to development; (iii) the size of the property; (iv) the purchase price; (v) the non-financial terms of the proposed acquisition; (vi) the availability of funds or other consideration for the proposed acquisition and the cost thereof; (vii) the "fit" of the property with the Company's existing portfolio; (viii) the potential for, and current extent of, any environmental problems; (ix) the current and historical occupancy rates of the property or any comparable or competing properties in the same market; (x) the quality of construction and design and the current physical condition of the property; (xi) the financial and other characteristics of existing tenants and the terms of existing leases; and (xii) the potential for capital appreciation. Although it is management's present intention to concentrate future acquisition and development activities on community and neighborhood shopping centers and office properties in the Mid-Atlantic region, the Company may, in the future, also acquire other types of real estate in other regions of the country. Capital Strategies - ------------------ As a general policy, the Company intends to maintain a ratio of its total debt to total asset value of 50% or less and to actively manage the Company's leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Asset value is the aggregate fair market value of the Current Portfolio Properties and any subsequently acquired properties as reasonably determined by management by reference to the properties' aggregate cash flow. Given the Company's current debt level, it is management's belief that the ratio of the Company's debt to total asset value as of December 31, 1999 remains less than 50%. The organizational documents of the Company do not limit the absolute amount or percentage of indebtedness that it may incur. The Board of Directors may, from time to time, reevaluate the Company's debt capitalization policy in light of current economic conditions, relative costs of capital, market values of the Company property portfolio, opportunities for acquisition, development or expansion, and such other factors as the Board of Directors then deems relevant. The Board of Directors may modify the Company's debt capitalization policy based on such a reevaluation and consequently, may increase or decrease the Company's debt to total asset ratio above or below 50%. The Company selectively continues to refinance or renegotiate the terms of its outstanding debt in 5 order to achieve longer maturities, and obtain generally more favorable loan terms, whenever management determines the financing environment is favorable. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources --Borrowing Capacity." The Company intends to finance future acquisitions and to make debt repayments by utilizing the sources of capital then deemed to be most advantageous. Such sources may include undistributed operating cash flow, secured or unsecured bank and institutional borrowings, private and public offerings of debt or equity securities, proceeds from the Company's Dividend Reinvestment and Stock Purchase Plan, and proceeds from the sale of properties. Borrowings may be at the Operating Partnership or Subsidiary Partnerships' level and securities offerings may include (subject to certain limitations) the issuance of Operating Partnership interests convertible into common stock or other equity securities. Competition - ----------- As an owner of, or investor in, commercial real estate properties, the Company is subject to competition from a variety of other owners of similar properties in connection with their sale, lease or other disposition and use. Management believes that success in such competition is dependent in part upon the geographic location of the property, the tenant mix, the performance of property managers, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors impacting retail and commercial properties include the ease of access to the properties, the adequacy of related facilities such as parking, and the demographic characteristics in the markets in which the properties compete. Overall economic circumstances and trends and new properties in the vicinity of each of the Current Portfolio Properties are also competitive factors. Environmental Matters - --------------------- The Current Portfolio Properties are subject to various laws and regulations relating to environmental and pollution controls. The effect upon the Company of the application of such laws and regulations either prospectively or retrospectively is not expected to have a materially adverse effect on the Company's property operations. As a matter of policy, the Company requires an environmental study be performed with respect to a property that may be subject to possible environmental hazards prior to its acquisition to ascertain that there are no material environmental hazards associated with such property. Employees - --------- As of February 28, 2000, the Company employed approximately 50 persons, including six full-time leasing officers. None of the Company's employees are covered by collective bargaining agreements. Management believes that its relationship with employees is good. Recent Developments - ------------------- Property Acquisitions, Developments and Redevelopments. A significant enhancement to the Company's sustained historical internal growth in shopping centers has been its continuing program of renovation, redevelopment and expansion activities. These development activities serve to position the Company's centers as architecturally consistent with the times in terms of facade image, site improvements and flexibility to accommodate tenant size requirements and merchandising evolution. The Company completed a significant redevelopment during 1999 with the opening of a 53,000 square foot SuperFresh grocery store at the Shops at Fairfax, located in Fairfax, Virginia. A small, enclosed mall comprising a portion of the shopping center was demolished and replaced by the new SuperFresh building and an additional 7,500 square feet of small shop space. SuperFresh opened for business in late September and the small shop space is 100% leased and occupied. The Company also completed a facade renovation of the adjacent 56,000 square foot Boulevard shopping center, similar in appearance with the Shops at Fairfax. 6 In late 1999, the Company completed redevelopment of the Beacon Center, located along U.S. Route 1 in Alexandria, Virginia. Beacon Center's central enclosed mall area was demolished and construction of a 148,000 square foot Lowe's home improvement and garden center store was completed and opened during the first week in November. In addition to the new Lowe's, 8,000 square feet of new small shop space was also constructed and is 100% leased and occupied. During 1999, the Company completed construction on a facade renovation and retenanting of a 103,000 square foot anchor space at the 213,000 square foot French Market center in Oklahoma City, Oklahoma. In December, a 90,000 square foot lease was signed with Burlington Coat Factory ("Burlington") to locate in the adjacent enclosed mall portion of the center. The common areas of the mall will become part of the Burlington leasable area, increasing the center to 247,000 square feet upon completion of tenant improvements. Mall tenants have been relocated to other space in the center or have ceased operations, which allowed construction to commence in February 2000. Burlington is scheduled to open in the fall of 2000, increasing the center's occupancy to over 95%. The Company recently purchased land located within the 1,580 acre community of Ashburn Village in Loudoun County, Virginia, adjacent to its 108,000 square foot Ashburn Village neighborhood shopping center. The land is being developed into Ashburn Village II, a 39,700 square foot in-line and pad building expansion to the existing shopping center, containing 23,600 square feet of retail space and 16,100 square feet of professional office suites. Pad sites are being leased to restaurant and other users for free-standing buildings, with a 5,400 square foot pad lease completed. Construction began in November with substantial completion scheduled for the spring of 2000. Approximately 56% of the new space has been pre-leased. Office development and acquisition activities were an integral part of the Company's focus during 1999, and substantial efforts in this area will continue throughout 2000. Development of the Company's 235,000 square foot, class A mixed-use office/retail complex located along North Washington Street in historic Old Town Alexandria, Virginia is proceeding on schedule. Two twin four- story buildings will feature a brick and cast stone exterior facade with a glass curtain wall overlooking a spacious courtyard. Amenities will include three- story atrium lobbies, a fitness center, concierge service, a 600 space parking structure and the latest computerized energy management system. Office space will total 190,000 square feet, with the top floor containing walk-out terraces. Construction of the underground parking deck has been substantially completed, with building frames for the retail and office levels completed to the roof deck. Precast facade features and brick work is being installed and base building construction of the two buildings is scheduled to be completed by late summer 2000. The 45,000 square feet of retail space is 62% pre-leased. In January 1999, the Company completed construction of approximately 27,000 square feet of additional office/flex space at Avenel Business Park, in the Maryland suburbs of Washington, D.C. on excess land that it owns. Approximately 78% of the space is leased. During late 1998, the Company obtained the necessary approvals to convert an under-performing shopping center located on a 27 acre parcel in Tulsa, Oklahoma, into an industrial/warehouse use property, in order to capitalize on the property's proximity to interstate highways and the Tulsa International Airport. Crosstown Business Center is being redeveloped to provide approximately 197,000 square feet of predominantly warehouse space. The first tenant occupied its space in December 1999 and the project is now 15% leased. Property Dispositions. In December 1999, the District of Columbia purchased the Park Road retail property as part of an assemblage of parcels for a neighborhood revitalization project. The Company recognized a net gain of approximately $553,000 on the sale of the property. 7 Item 2. Properties Overview - -------- The Company is the owner and operator of a real estate portfolio of 33 properties totaling approximately 6.1 million square feet of gross leasable area ("GLA") located primarily in the Washington, D.C./Baltimore metropolitan area. The portfolio is composed of 28 neighborhood and community Shopping Centers, 4 Office Properties and one Industrial Property, totaling approximately 4.9, 1.0 and 0.2 million square feet of GLA, respectively. Only the United States Government (10.6%), a tenant of seven properties and Giant Food (7.3%), a tenant of eight Shopping Centers, individually accounted for more than 1.6% of the Company's total revenues for the year ending December 31, 1999. With the exception of five Shopping Center properties and a portion of one Office Property purchased or developed during the past four years, the Company's Current Portfolio Properties consist of seasoned properties that have been owned and managed by The Saul Organization for 15 years or more. The Company expects to hold its properties as long-term investments, and it has no maximum period for retention of any investment. It plans to selectively acquire additional income-producing properties and to expand, renovate, and improve its properties when circumstances warrant. See "Item 1. Business--Operating Strategies" and "Business--Capital Strategies." The Shopping Centers - -------------------- Community and neighborhood shopping centers typically are anchored by one or more supermarkets, discount department stores or drug stores. These anchors offer day-to-day necessities rather than apparel and luxury goods and, therefore, generate consistent local traffic. By contrast, regional malls generally are larger and typically are anchored by one or more full-service department stores. The Shopping Centers (typically) are seasoned community and neighborhood shopping centers located in well established, highly developed, densely populated, middle and upper income areas. Based upon census data, the average estimated population within a three and five-mile radius of the Shopping Centers is approximately 105,000 and 255,000, respectively. The average household income within a three and five mile radius of the Shopping Centers is $63,000 each, compared to a national average of $54,000. Because the Shopping Centers generally are located in highly developed areas, management believes that there is little likelihood that any significant numbers of competing centers will be developed in the future. The Shopping Centers range in size from 5,000 to 561,000 square feet of GLA, with seven in excess of 300,000 square feet, and a weighted average of approximately 172,000 square feet. A majority of the Shopping Centers are anchored by several major tenants and other tenants offering primarily day-to- day necessities and services. Eighteen of the 28 Shopping Centers are anchored by a grocery store. As of February 2000, no single Shopping Center accounted for more than 11.5% of the total Shopping Center GLA. The Office Properties - --------------------- The four Office Properties are all located in the Washington, D.C. metropolitan area and contain an aggregate GLA of approximately 975,000 square feet, comprised of 884,000 and 86,000 square feet of office and retail space, respectively. The Office Properties represent three distinct styles of facilities, are located in differing commercial environments with distinctive demographic characteristics, and are geographically removed from one another. As a consequence, management believes that the Office Properties compete for tenants in different commercial and geographic sub-markets of the metropolitan Washington, D.C. market and do not compete with one another. 601 Pennsylvania Ave. is a nine-story, Class A office building (with a small amount of street level retail space) built in 1986 and located in a prime downtown location. Van Ness Square is a six-story office/retail building rebuilt in 1990. Van Ness Square is located in a highly developed commercial area of Northwest Washington, D.C. which offers extensive retail and restaurant amenities. Management believes that the Washington, D.C. office market is one of the strongest and most stable leasing markets in the nation, with relatively low vacancy rates in 8 comparison to other major metropolitan areas. It believes that the long-term stability of this market is attributable to the status of Washington, D.C. as the nation's capital and to the presence of the federal government, international agencies, and an expanding private sector job market. Avenel Business Park (Phases I-III) is a research park located in a Maryland suburb of Washington, D.C. On April 1, 1998, the Company purchased Avenel IV, a newly constructed and 100% leased office / flex building located adjacent to Avenel Phases I-III. Two additional buildings (Avenel V) were completed in January 1999. The combined business park consists of 11 one-story buildings built in five phases which were completed in 1981, 1985, 1989, 1998 and 1999. Management believes that, due to its desirable location, the high quality of the property and the relative scarcity of research and development space in its immediate area, Avenel should continue to attract and retain desirable tenants in the future. Washington Square at Old Town is a new 235,000 square foot Class A mixed- use office/retail complex being developed on a two-acre site along Alexandria's main street, North Washington Street, in historic Old Town Alexandria. Washington Square features two twin four-story buildings with brick and cast stone exterior facades and glass curtain walls overlooking a spacious courtyard. Prospective tenants will be attracted by the property's three-story atrium lobbies, fitness center, concierge service, 600 space parking structure and computerized energy management system. The Company is marketing the 190,000 square feet of office space to corporate users, professionals and trade associations. The project's office tenants and Alexandria's residents will be served by 45,000 square feet of street-level retail businesses. Construction of Washington Square is scheduled to be completed and ready for occupancy by late summer 2000. The Industrial Property - ----------------------- The Industrial Property, Crosstown Business Center, is a 197,135 square foot warehouse and flex office complex located in Tulsa, Oklahoma. The Company is capitalizing on the property's close proximity to Tulsa's international airport and complimentary facilities by converting the former strip shopping center into a use more suitable to the property's location and physical layout. The following table sets forth, at the dates indicated, certain information regarding the Current Portfolio Properties: 9 Saul Centers, Inc Schedule of Current Portfolio Properties December 31, 1999
Leasable Year Area Developed Land (Square or Acquired Area Property Location Feet) (Renovated) (Acres) ========================== =========================== ================ ================== ========== Shopping Centers - ---------------- Ashburn Village Ashburn, VA 108,204 1994 12.7 Ashburn Village II (a) Ashburn, VA 39,700 1999/2000 6.6 Beacon Center Alexandria, VA 355,659 1972 (1993/99) 32.3 Belvedere Baltimore, MD 54,941 1972 4.8 Boulevard Fairfax, VA 56,350 1994 (1999) 5.0 Clarendon Arlington, VA 6,940 1973 0.5 Clarendon Station Arlington, VA 4,868 1996 0.1 Flagship Center Rockville, MD 21,500 1972, 1989 0.5 French Market Oklahoma City, OK 247,393 1974 (1984/98) 13.8 Germantown Germantown, MD 26,241 1992 2.7 Giant Baltimore, MD 70,040 1972 (1990) 5.0 The Glen Lake Ridge, VA 112,639 1994 14.7 Great Eastern District Heights, MD 255,448 1972 (1995) 23.9 Hampshire Langley Langley Park, MD 134,425 1972 (1979) 9.9 Leesburg Pike Baileys Crossroads, VA 97,880 1966 (1982/95) 9.4 Lexington Mall Lexington, KY 315,707 1974 30.0 Lumberton Lumberton, NJ 189,898 1975 (1992/96) 23.3 Olney Olney, MD 53,765 1975 (1990) 3.7 Ravenwood Baltimore, MD 87,750 1972 8.0 Seven Corners Falls Church, VA 560,998 1973 (1994-7) 31.6 Shops at Fairfax Fairfax, VA 68,743 1975 (1993/99) 6.7 Southdale Glen Burnie, MD 483,874 1972 (1986) 39.6 Percentage Leased Dec-99 Dec-98 Anchor/Significant Tenants ====== ====== ========================== 100% 100% Giant Food, Blockbuster (a) (a) Giant Food, Blockbuster 100% 100% Lowe's, Giant Food, Office Depot, Outback Steakhouse, Marshalls, Hollywood Video, Hancock Fabrics 89% 100% Food King, McCrory 100% 92% Danker Furniture, Petco, Party City 100% 100% 100% 78% 100% 100% 94% 65% Burlington Coat Factory, Bed Bath & Beyond, Famous Footwear, Lakeshore Learning Center, BridesMart, Staples 97% 100% 100% 100% Giant Food 97% 97% Safeway Marketplace, CVS Pharmacy 98% 96% Giant Food, Pep Boys, Big Lots, Run N' Shoot 100% 100% Safeway, McCrory 100% 93% Zany Brainy, CVS Pharmacy, Hollywood Video 82% 91% Dillard's, Dawahares of Lexington, Rite Aid 85% 89% SuperFresh, Rite Aid, Blockbuster, Ace Hardware 99% 94% Rite Aid 100% 100% Giant Food, Hollywood Video 100% 100% Home Depot, Shoppers Club, Best Buy, Michaels, Barnes & Noble, Ross Dress For Less, G Street Fabrics, Champs 100% 100% SuperFresh, Blockbuster 100% 100% Giant Food, Circuit City, Kids R Us, Michaels, Marshalls, PetSmart, Value City Furniture
10 Saul Centers, Inc Schedule of Current Portfolio Properties December 31, 1999
Leasable Year Area Developed Land (Square or Acquired Area Property Location Feet) (Renovated) (Acres) ========================== =========================== ================ ================== ========== Shopping Centers (continued) - ----------------------------- Southside Plaza Richmond, VA 352,964 1972 32.8 South Dekalb Plaza Atlanta, GA 183,199 1976 14.6 Thruway Winston-Salem, NC 345,534 1972 (1997) 30.5 Village Center Centreville, VA 142,881 1990 17.2 West Park Oklahoma City, OK 77,810 1975 11.2 White Oak Silver Spring, MD 480,156 1972 (1993) 28.5 ---------------- ---------- Total Shopping Centers 4,935,507 419.6 ---------------- ---------- Office Properties - ------------------ Avenel I-III Gaithersburg, MD 284,739 1981/85/89 28.2 Avenel IV Gaithersburg, MD 46,227 1998 3.2 Avenel V Gaithersburg, MD 27,667 1999 2.0 601 Pennsylvania Ave Washington, DC 225,223 1973 (1986) 1.0 Van Ness Square Washington, DC 156,182 1973 (1990) 1.2 Washington Square (a) Alexandria, VA 235,000 1975 (2000) 2.0 ---------------- ---------- Total Office Properties 975,038 35.6 ---------------- ---------- Industrial Property - ------------------- Crosstown (b) Tulsa, OK 197,135 1975 (2000) 21.5 ---------------- ---------- Total Portfolio 6,107,680 SF 476.7 ================ ========== Percentage Leased Dec-99 Dec-98 ====== ====== 92% 92% CVS Pharmacy, Community Pride Supermarket, Maxway 82% 95% MacFrugals, Pep Boys, The Emory Clinic 96% 95% Bed, Bath & Beyond, Stein Mart, Harris Teeter, Fresh Market, Eckerd Drugs, Houlihan's, Borders Books, Zany Brainy, Blockbuster 98% 91% Giant Food, Tuesday Morning 58% 74% Homeland Stores, Family Dollar 100% 100% Giant Food, Sears, Rite Aid, Blockbuster - ------- --------- 95% 95% - ------- --------- 95% 91% Quanta Systems, General Services Administration, GeneLogic, Ventana Medical, Paragea Communications 100% - Boston Biomedica, MicroAge 78% - 100% 100% General Services Administration, Alltel, American Arbitration, Capital Grille 96% 96% United Mine Workers Pension Trust, Office Depot, Pier 1 (a) (a) - --------- -------- 96% 95% - --------- --------- 15% 2% Compass Group, Roxtec - --------- --------- 93% 92% ========= =========
(a) Under construction and not operational at yearend December 31, 1999. (b) Currently operational, but under development to convert former shopping center to warehouse use. 11 Item 3. Legal Proceedings In the normal course of business, the Company is involved in litigation, including litigation arising out of the collection of rents, the enforcement or defense of the priority of its security interests, and the continued development and marketing of certain of its real estate properties. In the opinion of management, litigation that is currently pending should not have a material adverse impact on the financial condition or future operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information - ------------------ Saul Centers completed its initial public offering on August 26, 1993. Shares of common stock were sold at an initial offering price of $20 per share and the net offering proceeds were used to acquire general partnership interests in the Operating Partnership and Subsidiary Partnerships. The shares are listed on the New York Stock Exchange under the symbol "BFS". The high and low sales prices for the common stock shares for each quarter of 1999 and 1998 were as follows: Period Share Price -------- ----------- High Low ------------- ------------- October 1, 1999 - December 31, 1999 $1515/16 $ 14 July 1, 1999 - September 30, 1999 $ 173/8 $1413/16 April 1, 1999 - June 30, 1999 $ 171/8 $ 143/4 January 1, 1999 - March 31, 1999 $ 159/16 $ 141/2 October 1, 1998 - December 31, 1998 $ 16 3/4 $ 153/8 July 1, 1998 - September 30, 1998 $ 183/16 $ 153/16 April 1, 1998 - June 30, 1998 $1815/16 $ 173/16 January 1, 1998 - March 31, 1998 $1815/16 $ 173/8 On February 28, 2000, the closing price was 143/8. Holders - ------- The approximate number of holders of record of the common stock was 500 as of February 28, 2000. 12 Dividends - --------- The Company paid four quarterly distributions in the amount of $0.39 per share, during each of the years ended December 31, 1999 and 1998, totaling $1.56 per share for each of these years, or an annual yield of 10.8% based on the closing price of the common stock on the New York Stock Exchange as of February 28, 2000. The Company has determined that 86.09% of the total $1.56 per share paid in calendar year 1999 represents currently taxable dividend income to the stockholders, while the balance of 13.91% is considered return of capital. The Company's estimate of cash flow available for distributions is believed to be based on reasonable assumptions and represents a reasonable basis for setting distributions. However, the actual results of operations of the Company will be affected by a variety of factors, including actual rental revenue, operating expenses of the Company, interest expense, general economic conditions, federal, state and local taxes (if any), unanticipated capital expenditures, and the adequacy of reserves. While the Company intends to continue paying regular quarterly distributions, any future payments will be determined solely by the Board of Directors and will depend on a number of factors, including cash flow of the Company, its financial condition and capital requirements, the annual distribution requirements required to maintain its status as a REIT under the Code, and such other factors as the Board of Directors deems relevant. Under the Code, REIT's are subject to numerous organizational and operation requirements, including the requirement to distribute at least 95% of REIT taxable income. The Company distributed amounts greater than the required amount in 1999 and 1998. Actual distributions by the Company were $28,231,000 in 1999 and $26,971,000 in 1998. Item 6. Selected Financial Data The selected financial data of the Company contained herein has been derived from the consolidated financial statements of the Company. The data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this report. The historical selected financial data have been derived from audited financial statements for all periods. 13 SELECTED FINANCIAL DATA to be inserted.
Saul Centers, Inc. SELECTED FINANCIAL DATA (In thousands, except per share data) Years Ended December 31, 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Operating Data: - -------------- Total revenue ................................ $ 73,791 $ 70,583 $ 67,717 $ 64,023 $ 61,469 Operating expenses ........................... 53,124 53,393 50,722 49,761 47,258 --------- --------- --------- --------- --------- Operating income ............................. 20,667 17,190 16,995 14,262 14,211 Non-operating income (loss) Gain on sale of property................... 553 Change in accounting method ............... (771) Sale of interest rate protection agreements............................... -- -- (4,392) (972) -- --------- --------- --------- --------- --------- Net income before extraordinary item and minority interests.......................... 21,220 16,419 12,603 13,290 14,211 Extraordinary item: Early extinguishment of debt .................................... -- (50) (3,197) (587) (998) --------- --------- --------- --------- --------- Net income before minority interests ......... 21,220 16,369 9,406 12,703 13,213 Minority interests ........................... (7,923) (7,240) (6,854) (6,852) (6,852) --------- --------- --------- --------- --------- Net income ................................... $ 13,297 $ 9,129 $ 2,552 $ 5,851 $ 6,361 ========= ========= ========= ========= ========= Per Share Data: - -------------- Net income before extraordinary item and minority interests ......................... $ 1.17 $ 0.95 $ 0.76 $ 0.81 $ 0.87 ========= ========= ========= ========= ========= Net income ................................... $ 1.01 $ 0.72 $ 0.21 $ 0.49 $ 0.54 ========= ========= ========= ========= ========= Weighted average shares outstanding : Fully converted ........................... 18,148 17,233 16,690 16,424 16,285 ========= ========= ========= ========= ========= Common stock............................... 13,100 12,644 12,297 12,031 11,892 ========= ========= ========= ========= ========= Dividends Paid: -------------- Cash dividends to common stockholders (1)... $ 20,308 $ 19,731 $ 19,063 $ 18,669 $ 18,531 ========= ========= ========= ========= ========= Cash dividends per share ................... $ 1.56 $ 1.56 $ 1.56 $ 1.56 $ 1.56 ========= ========= ========= ========= ========= Balance Sheet Data: - ------------------ Income-producing properties (net of accumulated depreciation) .......... $ 256,110 $ 246,151 $ 242,653 $234,699 $ 229,425 Total assets .................................. 299,665 271,034 260,942 263,495 269,407 Total debt, including accrued interest ........ 311,114 291,576 286,072 273,731 273,979 Total stockholders' equity (deficit) .......... (31,859) (37,284) (38,054) (26,361) (16,735) Other Data - ---------- Funds from operations (2) Net income before minority interests ....... $ 21,220 $ 16,369 $ 9,406 $ 12,703 $ 13,213 Depreciation and amortization of real property ................................. 12,163 12,578 10,642 10,860 10,425 Gain on sale of property ................... (553) -- -- -- -- Change in accounting method ................ -- 771 -- -- -- Debt restructuring losses: Sale of interest rate protection agreements ............................. -- -- 4,392 972 -- Early extinguishment of debt ............. -- 50 3,197 587 998 --------- --------- --------- --------- --------- Funds from operations ......................... $ 32,830 $ 29,768 $ 27,637 $ 25,122 $ 24,636 ========= ========= ========= ========= ========= Cash flow provided by ( used in ) : Operating activities ....................... $ 31,645 $ 29,686 $ 28,936 $ 29,677 $ 25,055 Investing activities ....................... $ (36,920) $ (14,776) $ (16,094) $ (8,035) $ (20,992) Financing activities ....................... $ 3,837 $ (13,203) $ (12,192) $(22,278) $ (4,416) - -------------------------------------------------------------------------------------------------------------------------------- (1) By operation of the Company's dividend reinvestment plan, $6,914, $6,366 and $4,305, was reinvested in newly issued common stock during 1999, 1998 and 1997, respectively. (2) Funds From Operations (FFO) as defined by the National Association of Real Estate Investment Trusts (NAREIT), represents net income excluding gains or losses from debt restructuring, sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund cash needs. FFO may not be comparable to similarly titled measures employed by other REITs.
14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section should be read in conjunction with the selected financial data and the Consolidated Financial Statements of the Company and The Saul Organization and the accompanying notes in "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data," respectively, of this report. Historical results and percentage relationships set forth in these Items and this section should not be taken as indicative of future operations of the Company. Capitalized terms used but not otherwise defined in this section, have the meanings given to them in Items 1 - 6 of this Form 10-K. This Form 10- K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally characterized by terms such as "believe", "expect" and "may". Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those given in the forward-looking statements as a result of changes in factors which include among others, the following: general economic and business conditions, which will, among other things, affect demand for retail and office space; demand for retail goods; availability and credit worthiness of the prospective tenants; lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies and technology, risks of real estate development and acquisition, governmental actions and initiatives, debt refinancing risk, conflicts of interests, maintenance of REIT status and environmental/safety requirements. General - ------- The following discussion is based on the consolidated financial statements of the Company as of December 31, 1999 and for the year ended December 31, 1999. Prior year data is based on the Company's consolidated financial statements as of December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997. Liquidity and Capital Resources - ------------------------------- The Company's principal demands for liquidity are expected to be distributions to its stockholders, debt service and loan repayments, expansion and renovation of the Current Portfolio Properties and selective acquisition and development of additional properties. In order to qualify as a REIT for federal income tax purposes, the Company must distribute to its stockholders at least 95% of its "real estate investment trust taxable income," as defined in the Code. The Company anticipates that operating revenues will provide the funds necessary for operations, debt service, distributions, and required recurring capital expenditures. Balloon principal repayments are expected to be funded by refinancings. Management anticipates that during the coming year the Company may: i) redevelop certain of the Shopping Centers, ii) develop additional freestanding outparcels or expansions within certain of the Shopping Centers, iii) acquire existing neighborhood and community shopping centers and/or office properties, and iv) develop new shopping center or office sites. Acquisition and development of properties are undertaken only after careful analysis and review, and management's determination that such property is expected to provide long- term earnings and cash flow growth. During the coming year, any developments, expansions or acquisitions are expected to be funded with bank borrowings from the Company's credit line, construction financing, proceeds from the operation of the Company's dividend reinvestment plan or other external capital resources available to the Company. The Company expects to fulfill its long range requirements for capital resources in a variety of ways, including undistributed cash flow from operations, secured or unsecured bank and institutional borrowings, private or public offerings of debt or equity securities and proceeds from the sales of properties. Borrowings may be at the Saul Centers, Operating Partnership or Subsidiary Partnership level, and securities offerings may include (subject to certain limitations) the issuance of additional limited partnership interests in the Operating Partnership which can be converted into shares of Saul Centers common stock. Management believes that the Company's current capital resources, including approximately $29,000,000 of the Company's credit line which was available for borrowing as of December 31, 1999, will be sufficient to meet its liquidity needs for the foreseeable future. 15 Capital Strategy and Financing Activity - --------------------------------------- The Company's capital strategy is to maintain a ratio of total debt to total asset value of 50% or less, and to actively manage the Company's leverage and debt expense on an ongoing basis in order to maintain prudent coverage of fixed charges. Management believes that current total debt remains less than 50% of total asset value. Over 80% of the Company's debt has a maturity beyond the year 2010. The Company's interest expense coverage ratio increased to 2.48 during the past year, from 2.33 in 1998. During 1999, the Company closed a $38,000,000 construction loan to fund the development costs associated with Washington Square, the mixed-use office/retail complex which the Company is constructing in Old Town Alexandria, Virginia. In October 1999, the Company secured a $4,000,000 increase in the construction loan in order to fully fund the increase in the overall project size from 225,000 leasable square feet to 235,000 leasable square feet and additional construction costs. The loan has an initial three-year term with an interest rate of LIBOR plus 1.90%, with the spread over LIBOR declining as leasing of the office and retail space is achieved. In conjunction with the Company's April 1998 acquisition of Avenel IV and the development of the 28,000 square foot Avenel V during 1999, the Company closed a $6,400,000 permanent loan in September 1998. The new loan term is 13 years, maturing in December 2011, and requires monthly principal and interest payments based on a 25-year amortization schedule and a rate of 7.09%. This loan is a part of a cross-collateralized mortgage pool totaling $76,914,000 at December 31, 1999. See "Note 4-Notes Payable in Item 8. Financial Statements and Supplemental Data." As of February 28, 2000, outstanding borrowings on the Company's $60,000,000 unsecured credit line totaled $35,000,000, leaving $25,000,000 of credit availability. The Company has fixed interest rates on approximately 83.3% of its total debt outstanding, which now has a weighted remaining term of 10.2 years. 16 Financial Information - --------------------- In 1999, the Company reported Funds From Operations (FFO) of $32,830,000 on a fully converted basis. This represents a 10.3% increase over 1998 FFO of $29,768,000. The following table represents a reconciliation from net income before minority interests to FFO:
For the Years Ended December 31, (Dollars in thousands) 1999 1998 1997 - ---------------------- ---- ---- ---- Net income before minority interests $21,220 $16,369 $ 9,406 Subtract: Gain on sale of property 553 - - Add: Depreciation and amortization of real property 12,163 12,578 10,642 Debt restructuring losses: Disposition of interest rate protection agreements - - 4,392 Write-off of unamortized loan costs - 50 3,197 ------- ------- ------- 32,830 28,997 27,637 Add: Retroactive impact of change in accounting method(1) - 771 - ------- ------- ------- Funds From Operations(2) $32,830 $29,768 $27,637 ======= ======= =======
Cash flow from operating activities, investing activities and financing activities are as follows:
Cash flow provided by (used in): - ------------------------------- (Dollars in thousands) For the Years Ended December 31, - --------------------- 1999 1998 1997 ---- ---- ---- Operating activities $ 31,645 $ 29,686 $ 28,936 Investing activities -36,920 -14,776 -16,094 Financing activities 3,837 -13,203 -12,192
- -------------------------- 1 Retroactive to January 1, 1998, the Company began recognition of percentage rental income in accordance with a new accounting pronouncement. 2 FFO, as defined by the National Association of Real Estate Investment Trusts, is calculated as net income excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, as an indicator of the Company's operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs. 17 Redevelopment, Renovations and Acquisitions - ------------------------------------------- The Company has been selectively involved in redevelopment, renovation and acquisition activities. It continues to evaluate land parcels for retail and office development and potential acquisitions of operating properties for opportunities to enhance operating income and cash flow growth. The Company also continues to take advantage of redevelopment, renovation and expansion opportunities within the portfolio, as demonstrated by its activities at Washington Square, Ashburn II, French Market and Crosstown Business Center. The Company also completed development activity during 1999 at Beacon Center, Shops at Fairfax and Avenel Business Park. In February 1999, the Company announced the development of Washington Square at Old Town, a new Class A mixed-use office / retail complex along North Washington Street in historic Old Town Alexandria in Northern Virginia. The project will provide 235,000 square feet of leaseable area and is well located on a two-acre site, formerly leased to Mastercraft furniture, along Alexandria's main street. Construction of the underground parking deck has been substantially completed, with building frames for the retail and office levels completed to the roof deck. Precast facade features and brick work is being installed and base building construction of the two buildings is scheduled to be completed by the summer of 2000. The 45,000 square feet of retail space is 62% pre-leased. The Company recently purchased land located within the 1,580 acre community of Ashburn Village in Loudoun County, Virginia, adjacent to its 108,000 square foot Ashburn Village neighborhood shopping center. The land is being developed into Ashburn II, a 39,700 square foot in-line and pad expansion to the existing shopping center, containing 23,600 square feet of retail space and 16,100 square feet of professional office suites. Pad sites are being leased to restaurant and other users for free-standing buildings. Construction began in November with substantial completion scheduled for the spring of 2000. Approximately 56% of the new space has been pre-leased. During 1999, the Company completed construction on a facade renovation and retenanting of a 103,000 square foot anchor space at the 213,000 square foot French Market center in Oklahoma City, Oklahoma. In December, a 90,000 square foot lease was signed with Burlington Coat Factory ("Burlington") to locate in the adjacent enclosed mall portion of the center. The common areas of the mall will become part of the Burlington leasable area, increasing the center to 247,000 square feet upon completion of tenant improvements. Mall tenants have been relocated to other space in the center or have ceased operations, which allowed construction to commence in February 2000. Burlington is scheduled to open in the fall of 2000, increasing the center's occupancy to over 95%. The conversion of the under-performing Tulsa, Oklahoma shopping center formerly anchored by Wal-Mart, to an industrial/office campus named Crosstown Business Center has commenced. The first tenant occupied its space in December 1999 and the project is now 15% leased. In late 1999, the Company completed redevelopment of the Beacon Center, located along U.S. Route 1 in Alexandria, Virginia. Beacon Center's central enclosed mall area was demolished and construction of a 148,000 square foot Lowe's home improvement and garden center store was completed and opened during the first week in November. In addition to the new Lowe's, 8,000 square feet of new small shop space was constructed and is 100% leased and occupied. The Company also recently completed another significant redevelopment during 1999 with the opening of a 53,000 square foot SuperFresh grocery store at the Shops at Fairfax, located in Fairfax, Virginia. A small, enclosed mall comprising a portion of the shopping center was demolished and replaced by the new SuperFresh building and an additional 7,500 square feet of small shop space. SuperFresh opened for business in late September, and the shop space is 100% leased and occupied. The 1998 acquisition of Avenel IV and the completion in 1999 of the 27,000 square foot Avenel V expansion, increased the leasable area of the Company's Avenel Business Park by 26% to 359,000 square feet. Avenel Business Park is currently over 97% leased. 18 Portfolio Leasing Status - ------------------------ At December 31, 1999, the portfolio consisted of twenty eight Shopping Centers, four Office Properties and one Industrial Property, all of which are located in seven states and the District of Columbia. The Office Properties consist of one office property and one office/retail property, both located in the District of Columbia, a research park located in a Maryland suburb of Washington, D.C. and an office/retail property under construction in Old Town Alexandria, Virginia. At December 31, 1999, 92.7% of the Company's 5.8 million square feet of operating leasable space was leased to tenants, as compared to 92.1% at December 31, 1998. The shopping center portfolio was 95.2% leased at both December 31, 1999 and 1998. The Office Properties (excluding the Washington Square project under development) were 96.3% leased at December 31, 1999 compared to 95.4% as of December 31, 1998. The Industrial Property was 15% leased at December 31, 1999 compared to 2% as of December 31, 1998. The overall improvement in the year-end 1999 leasing percentage resulted primarily from the Company's successful leasing at Avenel Business Park and the commencement of leasing at Crosstown Business Center. Results of Operations - --------------------- The following discussion compares the results of the Company for the year ended December 31, 1999 with the year ended December 31, 1998, and compares the year ended December 31, 1998 with the year ended December 31, 1997. This information should be read in conjunction with the accompanying consolidated financial statements and the notes related thereto. Years Ended December 31, 1999 and 1998 - -------------------------------------- Base rent increased to $59,200,000 in 1999 from $55,542,000 in 1998, representing a $3,658,000 (6.6%) increase. The increase in base rent resulted primarily from new leases in effect at recently redeveloped shopping centers (French Market, Seven Corners, Beacon Center and Thruway), leases rolling-over to higher rents in the Office Properties and the rollover of three anchor tenant leases into higher paying base rent in lieu of percentage rent at White Oak, Ravenwood and Giant shopping centers. The increase in base rent was diminished in part by the temporary absence of rental income on space being redeveloped at the Washington Square at Old Town and Shops at Fairfax developments. Expense recoveries increased to $10,176,000 in 1999 from $9,911,000 in 1998, representing an increase of $265,000 (2.7%). Expense recovery income increased primarily as a result of increases in real estate tax expense billed and collected from the Company's shopping center tenants. Percentage rent was $2,222,000 in 1999, compared to $2,755,000 in 1998, representing a decrease of $533,000 (19.3%). The decrease in percentage rent resulted primarily from the rollover of three anchor tenant leases into higher paying base rent in lieu of percentage rent at White Oak, Ravenwood and Giant shopping centers. Other income, which consists primarily of parking income at two of the Office Properties, kiosk leasing, temporary leases and payments associated with early termination of leases, was $2,193,000 in 1999, compared to $2,375,000 in 1998, representing a decrease of $182,000 (7.7%). The decrease in other income resulted from reduced lease termination payments in the Office Properties compared to the prior year. As a consequence of the foregoing, the 1999 total revenues of $73,791,000 represented an increase of $3,208,000 (4.5%) over 1998 total revenues of $70,583,000. Operating expenses, which consist mainly of repairs and maintenance, utilities, payroll and insurance expense, decreased $110,000 (1.4%) to $7,720,000 in 1999 from $7,830,000 in 1998. The provision for credit losses was $295,000 in 1999 compared to $418,000 in 1998, representing a decrease of $123,000 (29.4%). The credit loss decrease resulted from lower credit loss activity in 1999 compared to 1998, when a tenant at Avenel Business Park filed for bankruptcy protection. 19 Real estate taxes were $6,207,000 in 1999 compared to $6,128,000 in 1998, representing an increase of $79,000 (1.3%). Interest expense was $22,568,000 in 1999 compared to $22,627,000 in 1998, representing a decrease of $59,000 (0.3%). Amortization of deferred debt expense was $416,000 in 1999 compared to $419,000 in 1998, a decrease of $3,000 (0.7%). Depreciation and amortization expense was $12,163,000 in 1999 compared to $12,578,000 in 1998, representing a decrease of $415,000 (3.3%). General and administrative expense, which consists primarily of administrative payroll and other overhead expenses, was $3,755,000 in 1999 compared to $3,393,000 in 1998, representing an increase of $362,000 (10.7%). The increase in 1999 expenses compared to 1998 resulted from increases in payroll and state income tax expenses. Gain on sale of property of $553,000 in 1999 resulted from the District of Columbia's purchase of the Company's Park Road property as part of an assemblage of parcels for a neighborhood revitalization project. There were no property sales in the 1998 year. Extraordinary item, early extinguishment of debt, resulted in losses of $50,000 in 1998. The losses resulted from the write-off of unamortized loan costs when the Company refinanced a portion of its loan portfolio. There were no such losses in 1999. Cumulative effect of change in accounting method occurred in 1998, when the Company adopted a new accounting method as directed by the Emerging Issues Task Force (EITF), Issue 98-9, Accounting for Contingent Rent In Interim Financial Periods. The Company recorded a charge of $771,000 for contingent rents recognized under the previous method. Years Ended December 31, 1998 and 1997 - -------------------------------------- Base rent increased to $55,542,000 in 1998 from $51,779,000 in 1997, representing a $3,763,000 (7.3%) increase. The increase in base rent resulted primarily from improved occupancy at the redeveloped Seven Corners and Beacon Center, increased minimum rents on lease rollover from three tenants previously paying percentage rent, and to a lesser extent, generally higher rents on lease renewals. Expense recoveries increased to $9,911,000 in 1998 from $9,479,000 in 1997, representing an increase of $432,000 (4.6%). The equal increases in common area maintenance expense recoveries and real estate tax expense recovery occurred due to improved occupancy primarily at Seven Corners and the addition of the Avenel IV property to the Company's portfolio during 1998. Percentage rent was $2,755,000 in 1998, compared to $2,948,000 in 1997, representing a decrease of $193,000 (6.5%). This decrease resulted primarily from the rollover of three leases into higher paying base rent in lieu of percentage rent. Other income, which consists primarily of parking income at two of the Office Properties, kiosk leasing, temporary leases and payments associated with early termination of leases, was $2,375,000 in 1998, compared to $3,511,000 in 1997, representing a decrease of $1,136,000 (32.4%). The decrease in other income resulted from two large lease termination payments collected from former tenants at Seven Corners and Beacon Center in 1997. As a consequence of the foregoing, the 1998 total revenues of $70,583,000 represented an increase of $2,866,000 (4.2%) over 1997 total revenues of $67,717,000. Operating expenses, which consist mainly of repairs and maintenance, utilities, payroll and insurance expense, decreased $245,000 (3.0%) to $7,830,000 in 1998 from $8,075,000 in 1997. 20 The provision for credit losses was $418,000 in 1998 compared to $505,000 in 1997, representing a decrease of $87,000 (17.2%). The decrease resulted from fewer uncollectible rent receivables resulting from tenants vacating their space prior to lease expiration. Real estate taxes were $6,128,000 in 1998 compared to $6,084,000 in 1997, representing an increase of $44,000 (0.7%). Interest expense was $22,627,000 in 1998 compared to $20,308,000 in 1997, representing an increase of $2,319,000 (11.4%). This increase is primarily attributable to higher interest rates resulting from the Company's October 1997 refinancing and conversion of approximately $147.0 million of its mortgage debt from interest rate capped floating rate loans to longer term, fixed rate loans. New debt associated with the acquisition of Avenel IV in April 1998 also added approximately $210,000 to interest expense in 1998. Amortization of deferred debt expense decreased $1,310,000 (75.8%) to $419,000 in 1998 from $1,729,000 in 1997. The decrease in the 1998 expense resulted from the elimination of amortization on interest rate protection agreements with notional values of $162.8 million sold during the fourth quarter of 1997, and reduced amortization because new debt costs related to the October 1997 refinancings are being amortized over a longer term than the prior debt costs. Depreciation and amortization expense increased $1,936,000 (18.2%) from $10,642,000 in 1997 to $12,578,000 in 1998. The increase resulted from the non- recurring write-off of unamortized tenant improvement costs due to the early termination of tenant leases at Beacon Center and Shops At Fairfax redevelopments and increased recurring expense related to new assets placed in service during 1998 and the latter half of 1997. General and administrative expense, which consists primarily of administrative payroll and other overhead expenses, was $3,393,000 in 1998 compared to $3,379,000 in 1997, representing an increase of $14,000 (0.4%). Non-operating item, sales of interest rate protection agreements, resulted in a loss of $4,392,000 in 1997 due to the write-off of unamortized costs in excess of sale proceeds received when the Company sold its remaining interest rate protection agreements. No such sales occurred in 1998. Extraordinary item, early extinguishment of debt, resulted in losses of $50,000 and $3,197,000, in 1998 and 1997, respectively. The losses in each period resulted from the write-off of unamortized loan costs when the Company refinanced a portion of its loan portfolio. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by management as an integral part of the Company's overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company's results of operations. The Company does not enter into financial instruments for trading purposes. The Company is exposed to interest rate fluctuations primarily as a result of its variable rate debt used to finance the Company's development and acquisition activities and for general corporate purposes. As of December 31, 1999, the Company had variable rate indebtedness totalling $43,278,000. Interest rate fluctuations will affect the Company's annual interest expense on its variable rate debt. If the interest rate on the Company's variable rate debt instruments outstanding at December 31, 1999 had been one percent higher, our annual interest expense relating to these debt instruments would have increased by $310,000, based on those balances. Interest rate fluctuations will also affect the fair value of the Company's fixed rate debt instruments. As of December 31, 1999, the Company had fixed rate indebtedness totalling 26,990,000. If interest rates on the Company's fixed rate debt instruments at December 31, 1999 had been one percent higher, the fair value of those debt instruments on that date would have decreased by approximately $17,030,000. 21 Item 8. Financial Statements and Supplementary Data The financial statements of the Company and its consolidated subsidiaries are included in this report on the pages indicated, and are incorporated herein by reference:
Page - ------ F-1 (a) Report of Independent Public Accountants F-2 (b) Consolidated Balance Sheets - December 31, 1999 and 1998 F-3 (c) Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997. F-4 (d) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997. F-5 (e) Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997. F-6 (f) Notes to Consolidated Financial Statements
The selected quarterly financial data included in Note 15 of the Notes to Consolidated Financial Statements referred to above are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Certain information Part III requires will be filed in a definitive proxy statement with the SEC pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information to be included therein is incorporated herein by reference. Only those sections or pages of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Item 10. Directors and Executive Officers of the Registrant The information this Item requires is incorporated by reference to the information under the captions "Election of Directors" and "Compensation of Directors" on pages 3 through 7 of the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held on April 28, 2000. Item 11. Executive Compensation The information this Item requires is incorporated by reference to the information under the captions "Executive Compensation," "Compensation Committee Report" and "Performance Graph" on pages 8 through 11 of the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held on April 28, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management The information this Item requires is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" on page 12 of the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held on April 28, 2000. Item 13. Certain Relationships and Related Transactions The information this Item requires is incorporated by reference to the information under the caption "Certain Relationships and Transactions" on page 13 of the Company's Proxy Statement to be filed with the SEC for its annual shareholders' meeting to be held on April 28, 2000. 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements -------------------- The following financial statements of the Company and their consolidated subsidiaries are incorporated by reference in Part II, Item 8. (a) Report of Independent Public Accountants (b) Consolidated Balance Sheets - December 31, 1999 and 1998 (c) Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997 (d) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997 (e) Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 (f) Notes to Consolidated Financial Statements 2. Financial Statement Schedule and Supplementary Data --------------------------------------------------- (a) Selected Quarterly Financial Data for the Company are incorporated by reference in Part II, Item 8 (b) Report of Independent Public Accountants on the Schedule (included in Report of Independent Public Accountants on the Financial Statements) (c) Schedule of the Company: Schedule III - Real Estate and Accumulated Depreciation All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits -------- 3. (a) First Amended and Restated Articles of Incorporation of Saul Centers, Inc. filed with the Maryland Department of Assessments and Taxation on August 23, 1993 and filed as Exhibit 3.(a) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at and after August 24, 1993 and as of August 26, 1993 and filed as Exhibit 3 (b) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited 23 Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 3.(b) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference. 10. (a) First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to Registration Statement No. 33-64562 is hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, the Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership, and the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. The Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Holdings Limited Partnership filed as Exhibit 10.(a) of the March 31, 1997 Quarterly Report of the Company is hereby incorporated by reference. (b) First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto filed as Exhibit 10.2 to Registration Statement No. 33-64562 are hereby incorporated by reference. The Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, the Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership and the Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership as filed as Exhibit 10.(b) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (c) First Amended and Restated Agreement of Limited Partnership of Saul II Subsidiary Partnership and Amendment No. 1 thereto filed as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby incorporated by reference. (d) Property Conveyance Agreement filed as Exhibit 10.4 to Registration Statement No. 33-64562 is hereby incorporated by reference. (e) Management Functions Conveyance Agreement filed as Exhibit 10.5 to Registration Statement No. 33-64562 is hereby incorporated by reference. (f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference. (g) Exclusivity and Right of First Refusal Agreement filed as Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference. (h) Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8 to Registration Statement No. 33-64562 is hereby incorporated by reference. (i) Agreement of Assumption dated as of August 26, 1993 executed by Saul Holdings Limited Partnership and filed as Exhibit 10. (I) of the 1993 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (j) Saul Centers, Inc. 1995 Dividend Reinvestment and Stock Purchase Plan as filed with the Securities and Exchange Commission as File No. 33-80291 is hereby incorporated by reference. 24 (k) Deferred Compensation Plan for Directors dated as of December 13, 1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (l) Deed of Trust, Assignment of Rents, and Security Agreement dated as of June 9, 1994 by and between Saul Holdings Limited Partnership and Ameribanc Savings Bank, FSB as filed as Exhibit 10.(t) of the 1995 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (m) Deed of Trust Note dated as of January 22, 1996 by and between Saul Holdings Limited Partnership and Clarendon Station Limited Partnership, filed as Exhibit 10.(s) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (n) Loan Agreement dated as of November 7, 1996 by and among Saul Holdings Limited Partnership, Saul Subsidiary II Limited Partnership and PFL Life Insurance Company, c/o AEGON USA Realty Advisors, Inc., filed as Exhibit 10.(t) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (o) Promissory Note dated as of January 10, 1997 by and between Saul Subsidiary II Limited Partnership and The Northwestern Mutual Life Insurance Company, filed as Exhibit 10.(z) of the March 31, 1997 Quarterly Report of the Company, is hereby incorporated by reference. (p) Loan Agreement dated as of October 1, 1997 between Saul Subsidiary I Limited Partnership, as Borrower and Nomura Asset Capital Corporation, as Lender, is as filed as Exhibit 10.(p) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (q) Revolving Credit Agreement dated as of October 1, 1997 by and between Saul Holdings Limited Partnership and Saul Subsidiary II Limited Partnership, as Borrower and U.S. Bank National Association, as agent, is as filed as Exhibit 10.(q) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (r) Promissory Note, dated as of November 30, 1999 between Saul Holdings Limited Partnership, as Borrower and Wells Fargo Bank, National Association, as Lender, is filed herewith. 23. Consent of Independent Public Accountants is filed herewith. 27. Financial Data Schedule is filed herewith. Reports on Form 8-K. -------------------- None. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SAUL CENTERS, INC. (Registrant) Date: March 23, 2000 /s/ B. Francis Saul II ------ ---------------------- B. Francis Saul II Chairman of the Board of Directors & Chief Executive Officer (Principal Executive Officer) Date: March 23, 2000 /s/ B. Francis Saul III ------ ----------------------- B. Francis Saul III, Vice Chairman and Director Date: March 23, 2000 /s/ Philip D. Caraci ------ -------------------- Philip D. Caraci, President and Director Date: March 23, 2000 /s/ Scott V. Schneider ------ ---------------------- Scott V. Schneider, Senior Vice President and Secretary (Principal Financial and Accounting Officer) Date: March 23, 2000 /s/ Gilbert M. Grosvenor ------ ------------------------ Gilbert M. Grosvenor, Director Date: March 23, 2000 /s/ Philip C. Jackson Jr. ------ ------------------------- Philip C. Jackson Jr., Director Date: March 23, 2000 /s/ General Paul X. Kelley ------ -------------------------- General Paul X. Kelley, Director Date: March 23, 2000 /s/ Charles R. Longsworth ------ ------------------------- Charles R. Longsworth, Director Date: March 23, 2000 /s/ Patrick F. Noonan ------ --------------------- Patrick F. Noonan, Director Date: March 23, 2000 /s/ Mr. Mark Sullivan III ------ ------------------------- Mark Sullivan III, Director Date: March 23, 2000 /s/ James W. Symington ------ ---------------------- James W. Symington, Director Date: March 23, 2000 /s/ John R. Whitmore ------ -------------------- John R. Whitmore, Director 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Saul Centers, Inc.: We have audited the accompanying consolidated balance sheets of Saul Centers, Inc. (a Maryland corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the three years ended December 31, 1999, 1998 and 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Saul Centers, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years ended December 31, 1999, 1998 and 1997 in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the financial statements, effective June 30, 1998, the Company changed its method of accounting for percentage rent. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule III "Real Estate and Accumulated Depreciation" on page F-18 and F-19 is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. The schedule has been subject to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Vienna, Virginia February 7, 2000 F-1 Saul Centers, Inc. CONSOLIDATED BALANCE SHEETS
December 31, (Dollars in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Assets Real estate investments Land $ 64,233 $ 64,339 Buildings and equipment 304,149 283,722 ----------------- ----------------- 368,382 348,061 Accumulated depreciation (112,272) (101,910) ----------------- ----------------- 256,110 246,151 Construction in progress 21,201 4,506 Cash and cash equivalents 957 2,395 Accounts receivable and accrued income, net 8,723 6,347 Prepaid expenses 7,959 6,873 Deferred debt costs, net 3,197 3,604 Other assets 1,518 1,158 ----------------- ----------------- Total assets $ 299,665 $ 271,034 ================= ================= Liabilities Notes payable $ 310,268 $ 290,623 Accounts payable, accrued expenses and other liabilities 18,391 14,856 Deferred income 2,865 2,839 ----------------- ----------------- Total liabilities 331,524 308,318 ----------------- ----------------- Minority interests -- -- ----------------- ----------------- Stockholders' equity (deficit) Common stock, $0.01 par value, 30,000,000 shares authorized, 13,334,145 and 12,836,378 shares issued and outstanding, respectively 133 129 Additional paid-in capital 44,616 31,967 Accumulated deficit (76,608) (69,380) ----------------- ----------------- Total stockholders' equity (deficit) (31,859) (37,284) ----------------- ----------------- Total liabilities and stockholders' equity (deficit) $ 299,665 $ 271,034 ================= ================= The accompanying notes are an integral part of these statements.
F-2 Saul Centers, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, (Dollars in thousands, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue Base rent $59,200 $55,542 $51,779 Expense recoveries 10,176 9,911 9,479 Percentage rent 2,222 2,755 2,948 Other 2,193 2,375 3,511 ------------------ ------------------ ---------------------- Total revenue 73,791 70,583 67,717 ------------------ ------------------ ---------------------- Operating expenses Property operating expenses 7,720 7,830 8,075 Provision for credit losses 295 418 505 Real estate taxes 6,207 6,128 6,084 Interest expense 22,568 22,627 20,308 Amortization of deferred debt expense 416 419 1,729 Depreciation and amortization 12,163 12,578 10,642 General and administrative 3,755 3,393 3,379 ------------------ ------------------ ---------------------- Total operating expenses 53,124 53,393 50,722 ------------------ ------------------ ---------------------- Operating income 20,667 17,190 16,995 Non-operating items Gain on sale of property 553 -- -- Sales of interest rate protection agreements -- -- (4,392) ------------------ ------------------ ---------------------- Net income before extraordinary item, cumulative effect of change in accounting method and minority interests 21,220 17,190 12,603 Extraordinary item Early extinguishment of debt -- (50) (3,197) Cumulative effect of change in accounting method -- (771) -- ------------------ ------------------ ---------------------- Net income before minority interests 21,220 16,369 9,406 ------------------ ------------------ ---------------------- Minority interests Minority share of income (5,899) (4,354) (2,483) Distributions in excess of earnings (2,024) (2,886) (4,371) ------------------ ------------------ ---------------------- Total minority interests (7,923) (7,240) (6,854) ------------------ ------------------ ---------------------- Net income $ 13,297 $ 9,129 $ 2,552 ================== ================== ====================== Per share (basic and dilutive) Net income before extraordinary item, cumulative effect of change in accounting method and minority interests $ 1.17 $ 1.00 $ 0.76 Extraordinary item -- -- (0.19) Cumulative effect of change in accounting method -- (0.05) -- ------------------ ------------------ ---------------------- Net income before minority interests $ 1.17 $ 0.95 $ 0.57 ================== ================== ====================== Net income $ 1.01 $ 0.72 $ 0.21 ================== ================== ======================
F-3 Saul Centers, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Common Paid-in Accumulated (Dollars in thousands, except per share amounts) Stock Capital Deficit Total - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' equity (deficit): Balance, December 31, 1996 $ 121 $ 15,950 $ (42,011) $ (25,940) Issuance of 275,374 shares of common stock 3 4,497 -- 4,500 Net income -- -- 2,552 2,552 Distributions ($1.17 per share) -- -- (14,334) (14,334) Distributions payable ($.39 per share) -- -- (4,832) (4,832) ------------------ ----------------- ---------------- ---------------- Balance, December 31, 1997 124 20,447 (58,625) (38,054) Issuance of 408,233 shares of common stock 5 6,629 -- 6,634 Issuance of 405,532 convertible limited partnership units in the Operating Partnership -- 4,891 -- 4,891 Net income -- -- 9,129 9,129 Distributions ($1.17 per share) -- -- (14,899) (14,899) Distributions payable ($.39 per share) -- -- (4,985) (4,985) ------------------ ----------------- ---------------- ---------------- Balance, December 31, 1998 129 31,967 (69,380) (37,284) Issuance of 497,767 shares of common stock 4 7,158 -- 7,162 Issuance of 373,546 convertible limited partnership units in the Operating Partnership -- 5,491 -- 5,491 Net income -- -- 13,297 13,297 Distributions ($1.17 per share) -- -- (15,323) (15,323) Distributions payable ($.39 per share) -- -- (5,202) (5,202) ------------------ ----------------- ---------------- ---------------- Balance, December 31, 1999 $ 133 $ 44,616 $ (76,608) $ (31,859) ================== ================= ================ ================ The accompanying notes are an integral part of these statements.
F-4 Saul Centers, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 13,297 $ 9,129 $ 2,552 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 7,923 7,240 6,854 Gain on sale of property (553) -- -- Sales of interest rate protection agreements -- -- 4,392 Cumulative effect of change in accounting method -- 771 -- Loss on early extinguishment of debt -- 50 3,197 Depreciation and amortization 12,579 12,997 12,371 Provision for credit losses 295 418 505 Increase in accounts receivable (2,671) (1,346) (406) Increase in prepaid expenses (2,434) (2,742) (1,426) Decrease (increase) in other assets (360) 3 2,548 Increase (decrease) in accounts payable, accrued expenses and other liabilites 3,535 1,763 (1,640) Increase (decrease) in deferred income 26 1,409 (11) Other, net 8 (6) -- ------------------ ----------------- ------------------- Net cash provided by operating activities 31,645 29,686 28,936 ------------------ ----------------- ------------------- Cash flows from investing activities: Net proceeds from sale of property 1,718 -- -- Additions to real estate investments (11,587) (6,607) (4,377) Additions to construction in progress (27,051) (8,169) (11,717) ------------------ ----------------- ------------------- Net cash used in investing activities (36,920) (14,776) (16,094) ------------------ ----------------- ------------------- Cash flows from financing activities: Proceeds from notes payable 33,979 20,900 223,600 Repayments on notes payable (14,334) (18,407) (212,388) Proceeds from sale of interest rate protection agreements -- -- 1,370 Note prepayment fees -- -- (95) Additions to deferred debt expense (13) (220) (3,159) Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership 12,653 11,648 4,500 Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership (28,448) (27,124) (26,020) ------------------ ----------------- ------------------- Net cash provided by (used in) financing 3,837 (13,203) (12,192) activities ------------------ ----------------- ------------------- Net increase (decrease) in cash (1,438) 1,707 650 Cash, beginning of year 2,395 688 38 ------------------ ----------------- ------------------- Cash, end of year $ 957 $ 2,395 $ 688 ================== ================= =================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amount capitalized $ 22,698 $ 22,575 $ 19,804 The accompanying notes are an integral part of these statements.
F-5 SAUL CENTERS, INC. Notes to Consolidated Financial Statements 1. ORGANIZATION, FORMATION, AND BASIS OF PRESENTATION Organization Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland General Corporation Law on June 10, 1993. The authorized capital stock of Saul Centers consists of 30,000,000 shares of common stock, having a par value of $0.01 per share, and 1,000,000 shares of preferred stock. Each holder of common stock is entitled to one vote for each share held. Saul Centers, together with its wholly owned subsidiaries and the limited partnerships of which Saul Centers or one of its subsidiaries is the sole general partner, are referred to collectively as the "Company". Saul Centers operates as a real estate investment trust under the Internal Revenue Code of 1986, as amended (a "REIT"). Formation and Structure of Company Saul Centers was formed to continue and expand the shopping center business previously owned and conducted by the B.F. Saul Real Estate Investment Trust, the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul Organization transferred to Saul Holdings Limited Partnership, a newly formed Maryland limited partnership (the "Operating Partnership"), and two newly formed subsidiary limited partnerships (the "Subsidiary Partnerships") shopping center and office properties, and the management functions related to the transferred properties. Since its formation, the Company has purchased and developed additional properties. The Company is currently developing Washington Square at Old Town, a 235,000 square foot Class A mixed-use office/retail complex, on the 2-acre site of the former North Washington shopping center property, and Ashburn II, a 39,700 square foot retail and office suite expansion to the Company's Ashburn Village shopping center and repositioning an under-performing shopping center to an industrial/warehouse use (the "Industrial Property"). On December 16, 1999, the District of Columbia purchased the Park Road retail property as part of an assemblage of parcels for a neighborhood revitalization project. Therefore, as of December 31, 1999, the Company's properties (the "Current Portfolio Properties") consisted of 27 operating shopping center properties and Ashburn II (the "Shopping Centers"), 3 predominantly office operating properties and Washington Square at Old Town (the "Office Properties") and the Industrial Property. To facilitate the placement of collateralized mortgage debt, the Company established Saul QRS, Inc. and SC Finance Corporation, each of which is a wholly owned subsidiary of Saul Centers. Saul QRS, Inc. was established to succeed to the interest of Saul Centers as the sole general partner of Saul Subsidiary I Limited Partnership. As a consequence of the transactions constituting the formation of the Company, Saul Centers serves as the sole general partner of the Operating Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc., Saul Centers' wholly owned subsidiary, serves as the sole general partner of Saul Subsidiary I Limited Partnership. The remaining limited partnership interests in Saul Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are held by the Operating Partnership as the sole limited partner. Through this structure, the Company owns 100% of the Current Portfolio Properties. Basis of Presentation The accompanying financial statements of the Company have been presented on the historical cost basis of The Saul Organization because of affiliated ownership and common management and because the assets and liabilities were the subject of a business combination with the Operating Partnership, the Subsidiary Partnerships and Saul Centers, all newly formed entities with no prior operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company, which conducts all of its activities through its subsidiaries, the Operating Partnership and Subsidiary Partnerships, engages in the ownership, operation, management, leasing, acquisition, renovation, expansion, development and financing of community and neighborhood shopping centers and office properties, primarily in the Mid-Atlantic region. A majority of the Shopping Centers are anchored by several major tenants. Eighteen of the Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and F-6 SAUL CENTERS, INC. Notes to Consolidated Financial Statements services. As of December 31, 1999, no single Shopping Center accounted for more than 11.5% of the total Shopping Center gross leasable area. Only one retail tenant, Giant Food, at 7.3%, accounted for more than 1.6% of the Company's 1999 total revenues. No office tenant other than the United States Government, at 10.6%, accounted for more than 1.8% of 1999 total revenues. Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of Saul Centers, its subsidiaries, and the Operating Partnership and Subsidiary Partnerships which are majority owned by Saul Centers. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Investment Properties Real estate investment properties are stated at the lower of depreciated cost or fair value less cost to sell. Management believes that these assets have generally appreciated in value and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Company's liabilities as reported in these financial statements. These financial statements are prepared in conformity with generally accepted accounting principles, and accordingly, do not report the current value of the Company's real estate assets. Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is substantially complete and the assets are placed in service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. Expenditures for repairs and maintenance are charged to operations as incurred. Repairs and maintenance expense totaled $2,815,000, $2,616,000, and $2,479,000, for calendar years 1999, 1998 and 1997, respectively, and is included in operating expenses in the accompanying financial statements. Interest expense capitalized totaled $934,000, $257,000 and $297,000, for calendar years 1999, 1998 and 1997, respectively. In the initial rental operations of development projects, a project is considered substantially complete and available for occupancy upon completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Depreciation is calculated using the straight-line method and estimated useful lives of 33 to 50 years for buildings and up to 20 years for certain other improvements. Leasehold improvements are amortized over the lives of the related leases using the straight-line method. Accounts Receivable and Accrued Income Accounts receivable primarily represent amounts currently due from tenants in accordance with the terms of the respective leases. In addition, accounts receivable included $1,803,000, $1,443,000 and $1,663,000, at December 31, 1999, 1998 and 1997, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the term of the respective leases. Receivables are reviewed monthly and reserves are established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable in the accompanying financial statements are shown net of an allowance for doubtful accounts of $594,000, $657,000 and $506,000, at December 31, 1999, 1998 and 1997, respectively. F-7 SAUL CENTERS, INC. Notes to Consolidated Financial Statements Allowance for Doubtful Accounts ------------------------------- (In thousands)
For the Years Ended December 31, ----------------------------------- 1999 1998 1997 ---------- ---------- ----------- Beginning Balance................................. $ 657 $ 506 $ 427 Provision for Credit Losses....................... 295 418 505 Charge-offs....................................... -358 -267 -426 ----- ----- ----- Ending Balance ................................... $ 594 $ 657 $ 506 ===== ===== =====
Deferred Debt Costs Deferred debt costs consists of fees and costs incurred to obtain long-term financing, construction financing and the revolving line of credit. These fees and costs are being amortized over the terms of the respective loans or agreements. Deferred debt costs in the accompanying financial statements are shown net of accumulated amortization of $1,005,000, $589,000 and $171,000, at December 31, 1999, 1998 and 1997, respectively. Revenue Recognition Rental and interest income is accrued as earned except when doubt exists as to collectibility, in which case the accrual is discontinued. When rental payments due under leases vary from a straight-line basis because of free rent periods or stepped increases, income is recognized on a straight-line basis in accordance with generally accepted accounting principles. Expense recoveries represent a portion of property operating expenses billed to the tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period when the expenses are incurred. Rental income based on a tenant's revenues ("percentage rent") is accrued when a tenant reports sales that exceed a specified breakpoint. Income Taxes The Company made an election to be treated, and intends to continue operating so as to qualify as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1993. A REIT generally will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 95% of its REIT taxable income to stockholders and complies with certain other requirements. Therefore, no provision has been made for federal income taxes in the accompanying financial statements. As of December 31, 1999 and 1998, the total tax basis of the Company's assets was $323,080,000 and $296,658,000, and the tax basis of the liabilities was $317,474,000 and $298,280,000, respectively. Deferred Compensation and Stock Plan for Directors Saul Centers has established a Deferred Compensation and Stock Plan for Directors (the "Plan") for the benefit of its directors and their beneficiaries. A director may elect to defer all or part of his or her director's fees and has the option to have the fees paid in cash, in shares of common stock or in a combination of cash and shares of common stock upon termination from the Board. If the director elects to have fees paid in stock, the number of shares allocated to the director is determined by the market price of the common stock on the day the fee is earned. As of December 31, 1999, 120,000 shares were authorized and registered for use under the Plan, and 72,000 shares had been credited to the directors' deferred fee accounts. Beginning in 1999, pursuant to the Plan, 100 shares of the Company's common stock are awarded annually as additional compensation to each director serving on the Board of Directors as of the record date for the Annual Meeting of Stockholders. The shares are issued on the date of the Annual Meeting, their issuance may not be deferred and transfer of the shares is restricted for a period of twelve months following the date of issue. F-8 SAUL CENTERS, INC. Notes to Consolidated Financial Statements Change In Accounting Method On May 21, 1998, the Emerging Issues Task Force ("EITF") discussed Issue 98-9 "Accounting for Contingent Rent In Interim Financial Periods" and reached a consensus that lessors should defer the accounting recognition of contingent rent, such as percentage rent, until the specific tenant sales breakpoint is achieved. The Company's prior accounting method, which was permitted under generally accepted accounting principles, recognized percentage rent when a tenant's achievement of its sales breakpoint was considered probable. This EITF consensus was implemented retroactively to January 1, 1998, as a change in accounting method. The new accounting method did not affect the amount of percentage rent income reported on an annual basis, but did impact the recognition of percentage rent income reported on an interim basis by increasing revenues the Company reported in the first and fourth quarters and decreasing revenues reported in the second and third quarters. The change in accounting method has no impact on the Company's cash flows. As a result of adoption of EITF Issue 98-9, the Company recorded a $771,000 charge for the cumulative effect of change in accounting method, which is included in the consolidated statement of operations for the year ended December 31, 1998. Construction in Progress Construction in progress includes the costs of active development projects and other predevelopment project costs. Development costs include direct construction costs and indirect costs such as architectural, engineering, construction management and carrying costs consisting of interest, real estate taxes and insurance. Construction in progress balances as of December 31, 1999 and 1998 are as follows: Construction in Progress ------------------------ (In thousands)
December 31, ---------------------------- 1999 1998 ------------- ------------- Washington Square................................. $18,009 $ -- Ashburn Village II................................ 2,326 -- French Market..................................... 509 949 Crosstown Business Center......................... 357 55 Avenel V.......................................... -- 2,800 Shops At Fairfax.................................. -- 702 ------- ------ Balance .......................................... $21,201 $4,506 ======= ======
Cash and Cash Equivalents Cash and cash equivalents includes cash and short-term investments with maturities of three months or less. Per Share Data Per share data is calculated in accordance with SFAS No. 128, "Earnings Per Share". The Company has no dilutive securities, therefore, basic and diluted earnings per share are identical. Net income before minority interests is presented on a fully converted basis, that is, assuming the limited partners exercise their right to convert their partnership ownership into shares of Saul Centers and is computed using weighted average shares of 18,147,954, 17,233,047 and 16,690,417, shares for the years ended December 31, 1999, 1998 and 1997, respectively. Per share data relating to net income after minority interests is computed on the basis of 13,100,295, 12,643,639 and 12,297,254, weighted average common shares for the years ended December 31, 1999, 1998 and 1997, respectively. F-9 SAUL CENTERS, INC. Notes to Consolidated Financial Statements 3. MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNERSHIP UNITS IN THE OPERATING PARTNERSHIP The Saul Organization has a 27.9% limited partnership interest, represented by 5,172,241 convertible limited partnership units, in the Operating Partnership, as of December 31, 1999. These convertible limited partnership units are convertible into shares of Saul Centers' common stock on a one-for-one basis, provided the rights may not be exercised at any time that The Saul Organization owns, directly or indirectly, in the aggregate more than 24.9% of the outstanding equity securities of Saul Centers. The impact of the Saul Organization's 27.9% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying consolidated financial statements. 4. NOTES PAYABLE December 31, 1999 During 1999 the Company obtained a $42,000,000 loan to fund the construction of the Washington Square at Old Town project in Alexandria, Virginia. Borrowings totaled $31,000,000 on the Company's $60,000,000 unsecured revolving credit facility at December 31, 1999, leaving $29,000,000 available for future use. The Company has the option to pay a fee of 1/4% and extend the term one year, however, the Company and lender are currently negotiating a new three year facility. Notes payable totaled $310,268,000 at December 31, 1999, as follows:
Principal Interest Scheduled Notes Payable Outstanding Rate * Maturity * -------------- ------------------------------------------------ (In thousands) Fixed Rate Mortgages: $142,772 (a) 7.67 % Oct 2012 76,914 (b) 8.52 % Dec 2011 36,874 (c) 7.88 % Jan 2013 10,430 (d) 6.88 % May 2004 --------------------------------------------- Total Fixed Rate 266,990 7.91 % 12.2 Years --------------------------------------------- Variable Rate Loans: Construction Loan 12,278 (e) 8.40 % Jan 2002 Line of Credit 31,000 (f) 8.00 % Sep 2000 --------------------------------------------- Total Variable Rate 43,278 8.26 % 1.1 Years --------------------------------------------- Total Notes Payable $310,268 7.96 % 10.7 Years ============================================= * Weighted averages computed for interest and scheduled maturity totals.
(a) The loan is collateralized by nine shopping centers. (b) The loan is collateralized by Avenel Business Park, Van Ness Square, Ashburn Village I and II, Leesburg Pike, Lumberton Plaza and Village Center. The loan was amended during 1998 to include new borrowings of $6,400,000 at a rate of 7.09%. Avenel IV (acquired in 1998) and Avenel V (under construction at year-end 1998 and substantially completed during 1999) were added as collateral. The 8.52% blended interest rate is the weighted average of the initial loan rate and the additional borrowings rate. (c) The loan is collateralized by 601 Pennsylvania Avenue. (d) The loan is collateralized by The Glen shopping center. (e) The loan is a construction loan totaling $42,000,000. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.45% to 1.9% (determined by certain leasing and/or construction benchmarks) or upon the bank's prime rate at the Company's option. The loan may be extended for 2 one-year terms with payment of a fee of 1/4% at the Company's option. The interest rate in effect on December 31, 1999 was based on a LIBOR of 6.5% and spread of 1.9%. (f) The loan is a revolving credit facility totaling $60,000,000. Interest expense is calculated based upon the 1,2,3 or 6 month LIBOR rate plus a spread of 1.375% to 1.625% (determined by certain debt service coverage and leverage tests) or upon the bank's reference rate plus 1/2% at the Company's option. The line may be extended one year with payment of a fee of 1/4% at the Company's option. The interest rate in effect on December 31, 1999 was based on a LIBOR of 6.5% and spread of 1.5%. F-10 SAUL CENTERS, INC. Notes to Consolidated Financial Statements Notes payable balances outstanding at December 31, 1999 have a weighted average remaining term of 10.7 years, and a weighted average interest rate of 7.96%. Of the $310,268,000 total debt at December 31, 1999, $266,990,000 was fixed rate (86.1% of the total notes payable) and $43,278,000 was variable rate (13.9% of the total notes payable). The December 31, 1999 depreciated cost of properties collateralizing the mortgage notes payable totaled $193,696,000. Certain loans are subject to covenant test. The Company believes it is in compliance with all such covenant tests. Notes payable of $266,990,000 at December 31, 1999 require monthly installments of principal and interest, with principal amortization on schedules averaging approximately 20 years. The remaining notes payable totaling $43,278,000 at December 31, 1999 require monthly installments of interest only. Notes payable at December 31, 1999 totaling $221,075,000 are guaranteed by members of The Saul Organization. As of December 31, 1999, the scheduled maturities of all debt for years ended December 31, are as follows: Debt Maturity Schedule ---------------------- (In thousands) 2000............. $ 36,297 2001............. 6,074 2002............. 18,030 2003............. 6,232 2004............. 15,999 Thereafter....... 227,636 -------- $ 310,268 =========
December 31, 1998 The Company assumed a $3,700,000 loan when it acquired Avenel IV on April 1, 1998. In September 1998, the Company closed a $6,400,00 permanent fixed rate loan to replace the variable rate loan assumed on the acquisition of Avenel IV. The balance of the loan, $2,700,000, was used to fund construction of the new Avenel V development. The new loan term was 13 years and required monthly principal and interest payments based upon a 25 year amortization schedule and an interest rate of 7.09%. Borrowings totaled $18,000,000 on the Company's $60,000,000 unsecured revolving credit facility at December 31, 1998, leaving $42,000,000 available for future use. Notes payable totaled $290,623,000 at December 31, 1998. Notes payable balances outstanding at December 31, 1998 had a weighted average remaining term of 12.5 years, and a weighted average interest rate of 7.84%. Of the $290,623,000 total debt at December 31, 1998, $272,623,000 was fixed rate (93.8% of the total notes payable) and $18,000,000 was variable rate (6.2% of the total notes payable). The December 31, 1998 depreciated cost of properties collateralizing the mortgage notes payable totaled $192,000,000. Notes payable of $272,422,000 at December 31, 1998 required monthly installments of principal and interest, with principal amortization on schedules averaging approximately 20 years. The $201,000 note required monthly interest and an annual principal payment of $100,000. The remaining notes payable totaling $18,000,000 at December 31, 1998 required monthly installments of interest only. Notes payable at December 31, 1998 totaling $211,000,000 were guaranteed by members of The Saul Organization. 5. LEASE AGREEMENTS Lease income includes primarily base rent arising from noncancellable commercial leases. Base rent for the years ended December 31, 1999, 1998 and 1997, amounted to $59,200,000, $55,542,000 and $51,779,000, respectively. Future base rent under noncancellable leases for years ended December 31, are as follows: F-11 SAUL CENTERS, INC. Notes to Consolidated Financial Statements
Future Base Rental Income - ------------------------- (In thousands) 2000........... $ 59,121 2001........... 52,658 2002........... 45,705 2003........... 39,176 2004........... 34,022 Thereafter..... 246,062 -------- $476,744 ========
The majority of the leases also provide for rental increases and expense recoveries based on increases in the Consumer Price Index or increases in operating expenses, or both. These increases generally are payable in equal installments throughout the year based on estimates, with adjustments made in the succeeding year. Expense recoveries for the years ended December 31, 1999, 1998 and 1997 amounted to $10,176,000, $9,911,000 and $9,479,000, respectively. In addition, certain retail leases provide for percentage rent based on sales in excess of the minimum specified in the tenant's lease. Percentage rent amounted to $2,222,000, $2,755,000 and $2,948,000, for the years ended December 31, 1999, 1998 and 1997, respectively. 6. LONG-TERM LEASE OBLIGATIONS Certain properties are subject to noncancellable long-term leases which apply to land underlying the Shopping Centers. Certain of the leases provide for periodic adjustments of the base annual rent and require the payment of real estate taxes on the underlying land. The leases will expire between 2058 and 2068. Reflected in the accompanying consolidated financial statements is minimum ground rent expense of $154,000, $152,000 and $152,000, for each of the years ended December 31, 1999, 1998 and 1997, respectively. The minimum future rental commitments under these ground leases are as follows:
Ground Lease Rental Commitments - ------------------------------- (In thousands) Annual Rent Total 2000 2001 2002-2004 Thereafter ------------------------------------------ ---------- Beacon Center $ 47 $ 51 $ 53 $ 3,395 Olney 50 50 50 4,575 Southdale 60 60 60 3,785 ----- ----- ---------- ------- Total $ 157 $ 161 $ 163 $11,755 ===== ===== ========== =======
The Company's Flagship Center consists of two developed outparcels that are part of a larger adjacent community shopping center formerly owned by The Saul Organization and sold to an affiliate of a tenant in 1991. The Company has a 90-year ground leasehold interest which commenced in September 1991 with a minimum rent of one dollar per year. F-12 SAUL CENTERS, INC. Notes to Consolidated Financial Statements 7. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS The consolidated statement of operations for the year ended December 31, 1999 includes a charge for minority interests of $7,923,000, consisting of $5,899,000 related to The Saul Organization's share of the net income for the year and $2,024,000 related to distributions to minority interests in excess of allocated net income for the year. The charge for the year ended December 31, 1998 of $7,240,000 consists of $4,354,000 related to The Saul Organization's share of net income for the year and $2,886,000 related to distributions to minority interests in excess of allocated net income for the year. The charge for the year ended December 31, 1997 of $6,854,000 consists of $2,483,000 related to The Saul Organization's share of the net income for the year and $4,371,000 related to distributions to minority interests in excess of allocated net income for the year. 8. RELATED-PARTY TRANSACTIONS In October 1999, the Company purchased land located within the 1,580 acre community of Ashburn Village in Loudoun County, Virginia, adjacent to its 108,000 square foot Ashburn Village neighborhood shopping center at a price of $1,438,000. The land is being developed into a 39,700 square foot expansion to the existing shopping center, containing approximately 23,600 square feet of retail and restaurant space and 16,100 square feet of professional office suites. The seller was a member of The Saul Organization. In April 1998, the Company purchased, through its Operating Partnership, a 46,227 square foot office/flex property known as Avenel IV. The $5,600,000 purchase price consisted of $3,657,000 in variable rate debt assumption, with the balance paid through the issuance of 105,922 new units in Saul Centers' Operating Partnership. The seller was a member of The Saul Organization. Chevy Chase Bank, an affiliate of The Saul Organization, leases space in twelve of the Company's properties. Total rental income from Chevy Chase Bank amounted to $1,169,000, $1,192,000 and $1,181,000, for the years ended December 31, 1999, 1998 and 1997, respectively. The Chairman and Chief Executive Officer, the Vice Chairman and the President of the Company are officers of The Saul Organization but devote a substantial amount of time to the management of the Company. The annual compensation for these officers is fixed by the Compensation Committee of the Board of Directors. The Company shares with The Saul Organization on a prorata basis certain ancillary functions such as computer and payroll services and insurance expense based on management's estimate of usage or time incurred, as applicable. Also, The Saul Organization subleases office space to the Company. The terms of all such arrangements with The Saul Organization, including payments related thereto, are periodically reviewed by the Audit Committee of the Board of Directors. Included in general and administrative expense for the years ended December 31, 1999, 1998 and 1997, are charges totaling $1,798,000, $1,685,000 and $1,624,000, related to shared services, of which $1,773,000, $1,480,000 and $1,436,000, was paid during the years ended December 31, 1999, 1998 and 1997, respectively. 9. STOCK OPTION PLAN The Company has established a stock option plan for the purpose of attracting and retaining executive officers and other key personnel. The plan provides for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares are available under the plan. The plan authorizes the Compensation Committee of the Board of Directors to grant options at an exercise price which may not be less than the market value of the common stock on the date the option is granted. The Compensation Committee has granted options to purchase a total of 180,000 shares (90,000 shares from incentive stock options and 90,000 shares from nonqualified stock options) to five Company officers. The options vested 25% per year over four years, have an exercise price of $20 per share and a term of ten years, subject to earlier expiration upon termination of employment. A total of 170,000 of the options expire September 23, 2003 and 10,000 expire September 24, 2004. As of December 31, 1999, all 180,000 of the options were fully vested. No compensation expense has been recognized as a result of these grants. F-13 SAUL CENTERS, INC. Notes to Consolidated Financial Statements 10. NON-OPERATING ITEMS Sales of Interest Rate Protection Agreements The Company sold the remaining portion of its interest rate protection agreements with a notional value of $162,800,000 in October 1997. The sales resulted in the write-off of unamortized costs in excess of the proceeds received totaling $4,392,000 for the year ended December 31, 1997. Gain on Sale of Property Gain on sale of property of $553,000 in 1999 resulted from the District of Columbia's purchase of the Company's Park Road property as part of an assemblage of parcels for a neighborhood revitalization project. There were no property sales in the 1998 year. 11. EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT The consolidated statements of operations for the years ending December 31, 1998 and 1997, include $50,000 and $3,197,000, respectively, related to the write-off of deferred financing costs on loans that were prepaid. There was no such write-off for the year ended December 31, 1999. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure about the fair value for all financial instruments. The carrying values of cash, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. Based on interest rates currently available to the Company, the carrying value of the variable rate credit line payable is a reasonable estimation of fair value, because the debt bears interest based on short-term interest rates. Based upon management's estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing in the amount of the total notes payable, the fair value is not materially different from its carrying value. 13. COMMITMENTS AND CONTINGENCIES Neither the Company nor the Current Portfolio Properties are subject to any material litigation, nor, to management's knowledge, is any material litigation currently threatened against the Company, other than routine litigation and administrative proceedings arising in the ordinary course of business. Management believes that these items, individually or in the aggregate, will not have a material adverse impact on the Company or the Current Portfolio Properties. F-14 SAUL CENTERS, INC. Notes to Consolidated Financial Statements 14. DISTRIBUTIONS In December 1995, the Company established a Dividend Reinvestment and Stock Purchase Plan (the "Plan"), to allow its stockholders and holders of limited partnership interests an opportunity to buy additional shares of common stock by reinvesting all or a portion of their dividends or distributions. The Plan provides for investing in newly issued shares of common stock at a 3% discount from market price without payment of any brokerage commission, service charges or other expenses. All expenses of the Plan are paid by the Company. The January 31, 1996 dividend was the initial dividend payment date when the Company's stockholders and holders of limited partnership interests could participate in the Plan. Of the distributions paid during 1999, $1.34 per share represented ordinary dividend income and $0.22 per share represented return of capital to the shareholders. The following summarizes distributions paid during the years ended December 31, 1999, 1998 and 1997, including activity in the Plan:
Total Distributions to Dividend Reinvestment Plan ---------------------- -------------------------- Limited Common Common Partnership Stock Units Discounted Stockholders Unitholders Issued Issued Share Price - ------------------------------------------------------------------------------------------------------------------------- (in thousands) (in thousands) - ------------------------------------------------------------------------------------------------------------------------- Distributions during 1999 - ------------------------------ - ------------------------------------------------------------------------------------------------------------------------- October 29 $ 5,148 $2,017 130,753 -- $13.76 - ------------------------------------------------------------------------------------------------------------------------- July 30 5,100 2,018 119,142 126,967 14.79 - ------------------------------------------------------------------------------------------------------------------------- April 30 5,075 1,967 111,990 119,877 15.28 - ------------------------------------------------------------------------------------------------------------------------- January 29 4,985 1,921 116,727 126,702 14.07 ------- ------ ------- ------- - ------------------------------------------------------------------------------------------------------------------------- $20,308 $7,923 478,612 373,546 ======= ====== ======= ======= - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Distributions during 1998 - ------------------------------ - ------------------------------------------------------------------------------------------------------------------------- October 30 $ 4,980 $1,873 105,756 112,867 $15.40 - ------------------------------------------------------------------------------------------------------------------------- July 29 4,969 1,827 101,739 106,010 16.01 - ------------------------------------------------------------------------------------------------------------------------- April 30 4,950 1,827 90,856 80,733 17.40 - ------------------------------------------------------------------------------------------------------------------------- January 30 4,832 1,713 94,304 -- 16.19 ------- ------ ------- ------- - ------------------------------------------------------------------------------------------------------------------------- $19,731 $7,240 392,655 299,610 ======= ====== ======= ======= - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Distributions during 1997 - ------------------------------ - ------------------------------------------------------------------------------------------------------------------------- October 31 $ 4,808 $1,713 72,901 -- $17.10 - ------------------------------------------------------------------------------------------------------------------------- July 31 4,782 1,715 63,291 -- 16.98 - ------------------------------------------------------------------------------------------------------------------------- April 30 4,744 1,713 68,913 -- 15.16 - ------------------------------------------------------------------------------------------------------------------------- January 31 4,729 1,713 58,728 -- 16.01 ------- ------ ------- ------- - ------------------------------------------------------------------------------------------------------------------------- $19,063 $6,854 263,833 -- ======= ====== ======= ======= - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
In December 1999, 1998 and 1997, the Board of Directors of the Company authorized a distribution of $0.39 per share payable in January 2000, 1999 and 1998, to holders of record on January 17, 2000, January 15, 1999 and January 16, 1998, respectively. As a result, $5,202,000, $4,985,000 and $4,832,000 was paid to common shareholders on January 31, 2000, January 29, 1999 and January 30, 1998, respectively. Also, $2,017,000, $1,921,000 and $1,713,000, was paid to limited partnership unitholders on January 31, 2000, January 29, 1999 and January 30, 1998 ($0.39 per Operating Partnership unit), respectively. These amounts are reflected as a reduction of stockholders' equity and are included in accounts payable in the accompanying consolidated financial statements. F-15
SAUL CENTERS, INC. Notes to Consolidated Financial Statements 15. INTERIM RESULTS (UNAUDITED) The following summary presents the results of operations of the Company for the quarterly periods of years 1999 and 1998. (In thousands, except Three Months Ended -------------------------------------------------------------- per share amounts) 12/31/99 09/30/99 06/30/99 03/31/99 ------------- ----------- ------------ ------------------ Revenues $ 19,398 $ 18,409 $ 18,020 $ 17,964 ------------- ----------- ------------ ------------------ Net income before extraordinary item and minority interests 6,103 5,145 4,931 5,041 Minority interests (2,017) (2,018) (1,967) (1,921) ------------- ----------- ------------ ------------------ Net income $ 4,086 $ 3,127 $ 2,964 $ 3,120 ============= =========== ============ ================== Per Share Data : Net income before extraordinary item and minority interests $ 0.33 $ 0.28 $ 0.27 $ 0.28 ============= =========== ============ ================== Net income $ 0.31 $ 0.24 $ 0.23 $ 0.24 ============= =========== ============ ================== 12/31/99 09/30/99 06/30/99 03/31/99 ------------- ----------- ------------ ------------------ Revenues $ 18,100 $ 17,650 $ 17,505 $ 17,143 ------------- ----------- ------------ ------------------ Net income before extraordinary item and minority interests 3,774 4,427 4,326 4,478 Extraordinary item-Early extinguishment of debt -- (50) -- -- Minority interests (1,873) (1,827) (1,827) (1,713) ------------- ----------- ------------ ------------------ Net income $ 1,901 $ 2,550 $ 2,499 $ 2,765 ============= =========== ============ ================== Per Share Data : Net income before extraordinary item and minority interests $ 0.21 $ 0.26 $ 0.25 $ 0.27 ============= =========== ============ ================== Net income $ 0.15 $ 0.20 $ 0.20 $ 0.22 ============= =========== ============ ================== In June 1998, the Company adopted a new accounting method as directed by the Emerging Issues Task Force (EITF) Issue 98-9 "Accounting for Contingent Rent In Interim Financial Periods" which reallocated the amount of annual percentage rent income recognized in its quarterly reports. (See Note 2, Summary of Significant Accounting Policies-Change In Accounting Method.) The Company adopted the new accounting method during the second quarter of 1998, retroactive to January 1, 1998. The Company reported revenues and net income, of $34,833,000 and $4,678,000, respectively, for the six months ended June 30, 1998. The six month results included additional percentage rent income of $185,000 and the cumulative effect of change in accounting method of ($771,000), which would have been reported in the first quarter had the accounting method been then adopted. The 1998 second, third and fourth quarter interim results presented above reflect application of the new accounting method. The 1998 first quarter does not reflect the allocation of percentage rent income earned in accordance with the new accounting method and therefore is not comparable with the 1999 results. The application of the change in accounting method had no impact on the Company's cash flows nor the amount of revenues reported for the year ended December 31, 1999 and 1998.
F-16 SAUL CENTERS, INC. Notes to Consolidated Financial Statements 16. Business Segments The company has two reportable business segments: Shopping Centers and Office Properties. The accounting policies of the segments presented below are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates performance based upon income from real estate for the combined properties in each segment.
(in thousands) Shopping Office Corporate Consolidated Centers Properties and Other Totals ------------ -------------- --------------- ------------------ - ---------------------------------------------- | 1999 | - ---------------------------------------------- Real estate rental operations: Revenues ............................... $ 54,510 $ 19,178 $ 103 $ 73,791 Expenses ............................... (9,604) (4,611) (7) (14,222) ------------ -------------- --------------- ------------------ Income from real estate .................. 44,906 14,567 96 59,569 Interest expense & amortization of debt costs ................................ -- -- (22,984) (22,984) General and administrative -- -- (3,755) (3,755) ------------ -------------- --------------- ------------------ Subtotal ................................. 44,906 14,567 (26,643) 32,830 Depreciation and amortization .......... (8,414) (3,662) (87) (12,163) Gain on property sale .................. 553 -- -- 553 Minority interests ..................... -- -- (7,923) (7,923) ------------ -------------- --------------- ------------------ Net income ............................. $ 37,045 $ 10,905 $ (34,653) $ 13,297 ============ ============== =============== ================== Capital investment ..................... $ 16,939 $ 21,397 $ 302 $ 38,638 ============ ============== =============== ================== Total assets ........................... $ 186,769 $ 88,310 $ 24,586 $ 299,665 ============ ============== =============== ================== - --------------------------------------------- | 1998 | - --------------------------------------------- Real estate rental operations: Revenues ............................... $ 52,595 $ 17,871 $ 117 $ 70,583 Expenses ............................... (9,523) (4,723) (130) (14,376) ------------ -------------- --------------- ------------------ Income (loss) from real estate ........... 43,072 13,148 (13) 56,207 Interest expense & amortization of debt costs ................................ -- -- (23,046) (23,046) General and administrative ............. -- -- (3,393) (3,393) ------------ -------------- --------------- ------------------ Subtotal ................................. 43,072 13,148 (26,452) 29,768 Depreciation and amortization........... (8,758) (3,694) (126) (12,578) Early extinguishment of debt ........... -- -- (50) (50) Cumulative effect of accounting method change ............................... -- -- (771) (771) Minority interests ..................... -- -- (7,240) (7,240) ------------ -------------- --------------- ------------------ Net income ............................... $ 34,314 $ 9,454 $ (34,639) $ 9,129 ============ ============== =============== ================== Capital investment ....................... $ 11,807 $ 2,892 $ 77 $ 14,776 ============ ============== =============== ================== Total assets ............................. $ 178,459 $ 70,182 $ 22,393 $ 271,034 ============ ============== =============== ================== - --------------------------------------------- | 1997 | - --------------------------------------------- Real estate rental operations: Revenues ............................... $ 51,096 $ 16,302 $ 319 $ 67,717 Expenses ............................... (9,771) (4,691) (202) (14,664) ------------ -------------- --------------- ------------------ Income from real estate .................. 41,325 11,611 117 53,053 Interest expense & amortization of debt costs ................................ -- -- (22,037) (22,037) General and administrative ............. -- -- (3,379) (3,379) ------------ -------------- --------------- ------------------ Subtotal ................................. 41,325 11,611 (25,299) 27,637 Depreciation and amortization .......... (7,144) (3,373) (125) (10,642) Sales of interest rate protection agreements ........................... -- -- (4,392) (4,392) Early extinguishment of debt ........... -- -- (3,197) (3,197) Minority interests ..................... -- -- (6,854) (6,854) ------------ -------------- --------------- ------------------ Net income ............................... $ 34,181 $ 8,238 $ (39,867) $ 2,552 ============ ============== =============== ================== Capital investment ....................... $ 15,240 $ 849 $ 5 $ 16,094 ============ ============== =============== ================== Total assets ............................. $ 174,556 $ 67,016 $ 19,370 $ 260,942 ============ ============== =============== ==================
F-17 Schedule III
SAUL CENTERS, INC. Real Estate and Accumulated Depreciation December 31, 1999 (Dollars in Thousands) Costs Capitalized Basis at Close of Period --------------------------------------------------------------- Subsequent Buildings Initial to and Leasehold Basis Acquisition Land Improvements Interests Total ----------- --------------- ------------- --------------- ----------------- ------------ Shopping Centers Ashburn Village, Ashburn, VA $ 11,431 $ 423 $ 3,738 $ 8,116 $ -- $ 11,854 Beacon Center, Alexandria, VA 1,493 14,117 -- 14,516 1,094 15,610 Belvedere, Baltimore, MD 932 583 263 1,252 -- 1,515 Boulevard, Fairfax, VA 4,883 1,273 3,687 2,469 -- 6,156 Clarendon, Arlington, VA 385 398 635 148 -- 783 Clarendon Station, Arlington, VA 834 35 425 444 -- 869 Flagship Center, Rockville, MD 160 9 169 -- -- 169 French Market, Oklahoma City, OK 5,781 5,096 1,118 9,759 -- 10,877 Germantown, Germantown, MD 3,576 289 2,034 1,831 -- 3,865 Giant, Baltimore, MD 998 262 422 838 -- 1,260 The Glen, Lake Ridge, VA 12,918 343 5,300 7,961 -- 13,261 Great Eastern, District Heights., MD 3,472 9,266 2,264 10,474 -- 12,738 Hampshire Langley, Langley Park, MD 3,159 1,807 1,856 3,110 -- 4,966 Leesburg Pike, Baileys Crossroads, VA 2,418 5,039 1,132 6,325 -- 7,457 Lexington Mall, Lexington, KY 4,868 5,793 2,111 8,550 -- 10,661 Lumberton Plaza, Lumberton, NJ 4,400 7,613 950 11,063 -- 12,013 Olney, Olney, MD 1,884 1,150 -- 3,034 -- 3,034 Ravenwood, Baltimore, MD 1,245 987 703 1,529 -- 2,232 Seven Corners, Falls Church, VA 4,848 38,836 4,913 38,771 -- 43,684 Shops at Fairfax, Fairfax, VA 2,708 10,147 992 11,863 -- 12,855 Southdale, Glen Burnie, MD 3,650 14,891 -- 17,919 622 18,541 Southside Plaza, Richmond, VA 6,728 3,387 1,878 8,237 -- 10,115 Sunshine City, Atlanta, GA 2,474 2,340 703 4,111 -- 4,814 Thruway, Winston-Salem, NC 4,778 10,991 5,464 10,200 105 15,769 Village Center, Centreville, VA 16,502 694 7,851 9,345 -- 17,196 West Park, Oklahoma City, OK 1,883 598 485 1,996 -- 2,481 White Oak, Silver Spring, MD 6,277 3,624 4,787 5,114 -- 9,901 ----------- --------------- ------------- --------------- ----------------- ------------ Total Shopping Centers 114,685 139,991 53,880 198,975 1,821 254,676 ----------- --------------- ------------- --------------- ----------------- ------------ Commercial Properties Avenel Business Park, Gaithersburg, MD 21,459 11,996 3,251 30,204 -- 33,455 601 Pennsylvania Ave., Washington DC 5,479 44,333 5,667 44,145 -- 49,812 Van Ness Square, Washington, DC 812 25,801 831 25,782 -- 26,613 ----------- --------------- ------------- --------------- ----------------- ------------ Total Commercial Properties 27,750 82,130 9,749 100,131 -- 109,880 ----------- --------------- ------------- --------------- ----------------- ------------ Industrial Property Crosstown, Tulsa, OK 3,454 372 604 3,222 -- 3,826 --------------------------------------------------------------------------------------------- Total $ 145,889 $ 222,493 $ 64,233 $ 302,328 $ 1,821 $ 368,382 =============================================================================================
Buildings and Improvements Accumulated Related Date of Date Depreciable Depreciation Debt Construction Acquired Lives in Years ---------------- ----------- -------------- ------------- ---------------------- Shopping Centers Ashburn Village, Ashburn, VA $ 1,184 $ 12,096 1994 3/94 40 Beacon Center, Alexandria, VA 5,309 6,064 1960 & 1974 1/72 40 & 50 Belvedere, Baltimore, MD 713 2,681 1958 1/72 40 Boulevard, Fairfax, VA 188 1,306 1969 4/94 40 Clarendon, Arlington, VA 35 271 1949 7/73 33 Clarendon Station, Arlington, VA 45 -- 1949 1/96 40 Flagship Center, Rockville, MD -- 449 -- 1/72 -- French Market, Oklahoma City, OK 3,037 1,883 1972 3/74 50 Germantown, Germantown, MD 404 985 1990 8/93 40 Giant, Baltimore, MD 579 2,719 1959 1/72 40 The Glen, Lake Ridge, VA 1,186 10,430 1993 6/94 40 Great Eastern, District Heights., MD 2,425 11,655 1958 & 1960 1/72 40 Hampshire Langley, Langley Park, MD 1,722 10,674 1960 1/72 40 Leesburg Pike, Baileys Crossroads, VA 2,862 12,046 1965 2/66 40 Lexington Mall, Lexington, KY 4,362 6,487 1971 & 1974 3/74 50 Lumberton Plaza, Lumberton, NJ 5,796 8,498 1975 12/75 40 Olney, Olney, MD 1,575 2,156 1972 11/75 40 Ravenwood, Baltimore, MD 627 6,881 1959 1/72 40 Seven Corners, Falls Church, VA 9,884 46,585 1956 7/73 33 Shops at Fairfax, Fairfax, VA 2,012 1,501 1975 6/75 50 Southdale, Glen Burnie, MD 10,112 7,663 1962 & 1987 1/72 40 Southside Plaza, Richmond, VA 5,133 10,315 1958 1/72 40 Sunshine City, Atlanta, GA 2,183 2,143 1970 2/76 40 Thruway, Winston-Salem, NC 3,984 26,647 1955 & 1965 5/72 40 Village Center, Centreville, VA 1,728 9,478 1990 8/93 40 West Park, Oklahoma City, OK 914 92 1974 9/75 50 White Oak, Silver Spring, MD 2,743 24,615 1958 & 1967 1/72 40 ---------------- ----------- Total Shopping Centers 70,742 226,320 ---------------- ----------- Commercial Properties Avenel Business Park, Gaithersburg, MD 10,855 26,633 1984, 1986, 12/84, 8/85, 35 & 40 1990 & 1998 2/86 & 4/98 601 Pennsylvania Ave., Washington DC 17,923 36,874 1986 7/73 35 Van Ness Square, Washington, DC 10,801 8,162 1990 7/73 35 ---------------- ----------- Total Commercial Properties 39,579 71,669 ---------------- ----------- Industrial Property Crosstown, Tulsa, OK 1,951 -- 1974 10/75 40 ----------------------------- Total $ 112,272 $297,989 =============================
F-18 Schedule III SAUL CENTERS, INC. Real Estate and Accumulated Depreciation December 31, 1999 Depreciation and amortization related to the real estate investments reflected in the statements of operations is calculated over the estimated useful lives of the assets as follows: Base building 33 - 50 years Building components 20 years Tenant improvements The lesser of the term of the lease or the useful life of the improvements The aggregate remaining net basis of the real estate investments for federal income tax purposes was approximately $280,759,000 at December 31, 1999. Depreciation and amortization are provided on the declining balance and straight-line methods over the estimated useful lives of the assets. The changes in total real estate investments and related accumulated depreciation for each of the years in the three year period ended December 31, 1999 are summarized as follows.
(In thousands) 1999 1998 1997 - ----------------------------------------------------------- ------------------- ------------------- ------------------- Total real estate investments: Balance, beginning of year $ 348,061 $ 335,268 $ 329,664 Improvements 21,943 14,784 17,785 Sales 1,192 -- -- Retirements 430 1,991 12,181 ------------------- ------------------- ------------------- Balance, end of year $ 368,382 $ 348,061 $ 335,268 =================== =================== =================== Total accumulated depreciation: Balance, beginning of year $ 101,910 $ 92,615 $ 94,965 Depreciation expense 10,714 10,409 9,797 Sales 42 -- -- Retirements 310 1,114 12,147 ------------------- ------------------- ------------------- Balance, end of year $ 112,272 $ 101,910 $ 92,615 =================== =================== ===================
F-19 EX-10 2 REPLACEMENT PROMISSORY NOTE REPLACEMENT PROMISSORY NOTE --------------------------- $42,000,000.00 November 30, 1999 FOR VALUE RECEIVED, the undersigned, SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership and SAUL CENTERS, INC., a Maryland corporation (hereinafter collectively called "Maker"), promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association (hereinafter, together with all subsequent holders of this Note, called "Payee"), on or before the 12th day of January, 2002 (the "Maturity Date"), the principal sum of FORTY-TWO MILLION AND NO/100 DOLLARS ($42,000,000.00), or so much thereof as may actually be advanced from time to time hereunder, together with interest on the unpaid principal balance from time to time outstanding at the rate per annum equal to the "Prime Rate" (as herein defined) of interest as it fluctuates (hereinafter called the "Applicable Rate"); provided, however, subject to the limitations stated herein, Maker may elect in accordance with the procedures set forth below to have interest accrue and be paid on all or a portion of the outstanding principal balance hereof at a rate per annum equal to the "Fixed Increment Rate" (as herein defined). 1. Defined Terms. Certain terms used herein shall be defined as set -------------- forth above or immediately below. All capitalized terms, unless otherwise specifically defined herein, shall be defined as set forth in the Deed of Trust (as herein defined). (a) "Appraisal": An appraisal of the Trust Property, in form and --------- substance acceptable to Payee, prepared at Maker's expense, by a third-party appraiser approved by Payee with such adjustments as Payee's appraisal division may reasonably determine on review. (b) "Average Rent": The aggregate annual rent from all leases in ------------ question, as Rent is determined in the second sentence of Section 1(t), divided by the aggregate rentable square feet demised by such leases. (c) "Business Day": (i) With respect to any borrowing, payment or ------------ rate determination for a Fixed Increment Rate, a day, other than a Saturday or Sunday, on which Payee is open for business in Washington, D.C. and San Francisco, California and on which dealings in U.S. dollars are carried on in the London interbank market; and (ii) for all other purposes, any day, excluding (x) Saturday and Sunday, (y) any day which is a legal holiday under the laws of the State of California and the District of Columbia, and (z) any day on which banking Initials:________ institutions located in California or the District of Columbia are required or authorized by law or other governmental action to close. (d) "Debt Constant Test": The determination by Payee, in its sole but ------------------ reasonable discretion, that Net Operating Income from the most recent fiscal quarter multiplied by four (4) is not less than an amount equal to the Loan Amount (as defined below) multiplied by twelve percent (12%). (e) "Event of Default": As that term is defined in the Deed of Trust. ---------------- (f) "Extension Test".: The determination by Payee, in its sole but -------------- reasonable discretion, that (i) there is no Event of Default arising under any of the Loan Documents, (ii) the Loan to Value Test has been satisfied, and (iii) the Debt Constant Test has been satisfied. (g) "First Leasing Requirement". The delivery to Payee of fully ------------------------- executed leases covering not less than 100,000 rentable square feet of office space and not less than 25,000 rentable square feet of retail space in the Improvements on the Trust Property (as such terms are defined in the Deed of Trust), approved by Payee or which, under the terms of the Deed of Trust, do not require the approval of Payee generating in the aggregate Average Rent equal to at least the Minimum Rent. (h) "Fixed Increment": The portion of the outstanding principal --------------- balance hereof specified by Maker to Payee effective as of the applicable Fixed Period Commencement Date (as herein defined); provided, however, in no event shall the initial Fixed Increment be less than One Million and No/100 Dollars ($1,000,000.00) and all other Fixed Increments shall be available in increments of Five Hundred Thousand and No/100 Dollars ($500,000.00) or the remaining outstanding principal balance under this Note. (i) "Fixed Increment Rate": The interest rate with respect to a Fixed -------------------- Increment shall be equal to the sum of (i) One and Ninety Hundredths percent (1.90%) plus (ii) the Fixed LIBO Rate, which Fixed LIBO Rate is divided by one (1.00) minus the LIBO Rate Reserve Requirement; provided, however, that upon request of Maker and the submission to Payee of all necessary documentation evidencing (as determined by Payee) that the First Leasing Requirement (as herein defined) is satisfied, the interest rate with respect to a Fixed Increment shall be equal to the sum of (i) One and Seventy Hundredths percent (1.70%) plus (ii) the Fixed LIBO Rate, which Fixed LIBO Rate is divided by one (1.00) minus the LIBO Rate Reserve Requirement, provided, further, however, that upon request of Maker and the submission to Payee of all necessary documentation evidencing (as determined by Payee) that the Second Leasing Requirement (as herein defined) is satisfied, the interest rate with respect to a Fixed Increment shall be equal to the sum of (i) One and Forty-five Hundredths percent (1.45%) plus (ii) the Fixed LIBO Initials:________ -2- Rate, which Fixed LIBO Rate is divided by one (1.00) minus the LIBO Rate Reserve Requirement. The Fixed Increment Rate shall be rounded upward to the nearest whole multiple of one-hundredth of one percent (.01%). Effective on the first day of the month immediately succeeding the determination by Payee that the First Leasing Requirement or the Second Leasing Requirement, as applicable, is satisfied, the interest rate with respect to all Fixed Increments then in effect shall be reduced to the applicable level set forth in this Paragraph 1(h). (j) "Fixed LIBO Rate": The rate of interest quoted by Payee as the --------------- London Inter Bank Offered Rate for deposits in U.S. Dollars at approximately 9:00 A.M. Pacific time, on a Fixed Period Commencement Date, for purposes of calculating effective rates of interest for loans or obligations making reference thereto for an amount approximately equal to a Fixed Increment and for a period of time approximately equal to a Fixed Period. The Fixed LIBO Rate shall be rounded, if necessary, to the next highest one sixteenth of one percent (1/16%). (k) "Fixed Period": A period as designated by Maker of thirty (30), ------------ sixty (60), ninety (90) or one hundred eighty (180) days from the Fixed Period Commencement Date. Notwithstanding the foregoing, in no event shall any Fixed Period extend beyond the Maturity Date. (l) "Fixed Period Commencement Date": The proposed commencement of ------------------------------ the applicable Fixed Period. (m) "Fixed Rate Notice". A written notice in the form prescribed by ------------------- Payee which confirms the Fixed Increment Rate for a particular Fixed Increment. (n) "LIBO Rate Reserve Requirement": The daily average during the ----------------------------- Fixed Period of the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments or other schedule changes in reserve requirements during the Fixed Period) which is imposed under Regulations K and D (defined below) against Eurocurrency liabilities. (o) "Loan": The loan advanced under this Note and evidenced hereby ---- and by the other Loan Documents. (p) "Loan Amount": The principal amount outstanding under this Note ----------- from time to time. (q) "Loan Documents": As that term is defined in the Deed of Trust. -------------- (r) "Loan to Value Test": The determination by Payee, in its sole but ------------------ reasonable discretion pursuant to the Appraisal that the Loan to Value Ratio (as herein defined) does not exceed seventy-five percent (75%). Initials:________ -3- (s) "Loan to Value Ratio": The ratio obtained by dividing (i) the Loan ------------------- Amount by (ii) the then current market value of the Trust Property determined pursuant to the Appraisal dated no earlier than sixty (60) days prior to the date of calculation of such ratio. (t) "Minimum Rent": In the case of office space, $20.50 per rentable ------------ square foot triple net with no expense stop or $28.50 per rentable square foot on a full service basis with an estimated base year expense of $8.00 per rentable square foot, and in the case of retail space, $27.50 per rentable square foot triple net with no expense stop. Rent, as used in this paragraph as applied to each lease, shall mean the nominal rent on an annual basis stated in such lease less the sum, amortized on an annual basis over the term of such lease in years, of any and all (i) rent abatements, (ii) tenant improvements in excess of $25 per rentable square foot funded by Maker, and (iii) other tenant concessions. (u) "Net Operating Income": The sum of (i) all net income generated by -------------------- the Trust Property as determined on a GAAP accrual basis plus (to the extent deducted in determining such net income) interest, depreciation and amortization and less rent concessions applicable on a cash basis to the period in question (to the extent included in receipts in the determination of net income) as generated pursuant to leases with bona fide third party tenants in possession of their space pursuant to leases which are in full force and effect and have been previously approved by Payee (or for which Payee's approval is not required under the Loan Documents), and (ii) all other income other than from leases arising from direct operations of or licenses or operating agreements for any part of the Improvements determined on a GAAP accrual basis. Maker shall provide Payee with all information and materials required by Payee necessary for the determination of Net Operating Income. (v) "Prime Rate": The base rate of interest per annum established from ---------- time to time by Payee, San Francisco, California, and designated as its prime rate. Changes in the Applicable Rate resulting from changes in the Prime Rate shall become effective on the date each such change in such Prime Rate is established by Payee. (w) "Regulation D": Regulation D of the Board of Governors of the ------------ Federal Reserve System from time to time in effect and shall include any successor or other regulation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. (x) "Regulation K": Regulation K of the Board of Governors of the ------------ Federal Reserve System from time to time in effect and shall include any successor or other regulation of said Board of Governors relating to the international and Initials:________ -4- foreign activities of United States banking organizations applicable to member banks of the Federal Reserve System. (y) "Second Leasing Requirement". Attainment of the First Leasing -------------------------- Requirement, Substantial Completion of the Base Building, as defined in the Construction Loan Agreement and the delivery to Payee of fully executed leases covering not less than eighty-five (85%) of the net rentable square footage of the Improvements on the Trust Property, approved by Payee or which, under the terms of the Deed of Trust, do not require the approval of Payee, generating (in the aggregate) Average Rent equal to at least the Minimum Rent. (z) "Unmatured Event of Default": Any event, happening or occurrence -------------------------- which would constitute an Event of Default under the Loan Documents after the giving of any required notice or expiration of any applicable cure period or grace period. 2. Interest Rates; Term; Repayment. ------------------------------- (a) Accrual of Interest; Repayment of Loan. Interest based on -------------------------------------- a 360-day year will accrue on the number of days funds are actually outstanding. Interest shall be calculated on a daily basis and shall be payable monthly in arrears on the first day of each and every month following the date hereof until the Maturity Date, at which time all accrued and unpaid interest and the unpaid principal balance hereof shall be due and payable in full. (b) Extension of Maturity Date. The Maturity Date of this Note -------------------------- may be extended by Maker for two (2) periods of one (1) year each (an "Extension Period") upon the written request of Maker given not less than sixty (60) days nor more than one hundred twenty (120) days prior to the then-effective Maturity Date to be extended, each such extension being subject to satisfaction of the following: (1) Payment at the commencement of each applicable Extension Period by Maker of an extension fee equal to One Quarter of One percent (0.25%) of the principal amount of this Note; (2) Payment prior to the first day of each applicable Extension Period by Maker of any tax, together with penalties and interest thereon (if any) due to either the City of Alexandria or the Commonwealth of Virginia in connection with the Loan or any extension thereof; (3) The delivery by Maker to Payee of an extension agreement and such other documentation as Payee may reasonably require in connection therewith, all of which shall be in form and substance acceptable to Payee (including a modification of this Note to provide that the maximum amount of interest payable from the date of such modification shall not exceed the Initials:________ -5- maximum amount payable under law in effect during the applicable Extension Period); (4) At the time of such notice and on the first day of the applicable Extension Period, there shall exist no uncured Event of Default under any of the Loan Documents ( as defined in the Deed of Trust); (5) Maker shall, if requested by Payee, deliver to Payee an opinion of counsel in form and substance acceptable to Payee, stating that, inter alia, the Loan Documents create valid and binding obligations of Maker and are enforceable in accordance with their terms, subject to customary qualifications; (6) Maker shall deliver to Payee an endorsement to or reissuance of the existing title insurance policy held by Payee in connection with the Loan, revising the effective date of the policy to the first day of the applicable Extension Period and stating that the coverage afforded thereby, or the agreements thereunder, shall not be adversely affected because of such extension; (7) An Appraisal having an effective date not earlier than sixty (60) days and delivered not later than thirty (30) days prior to the Maturity Date indicating that the Loan to Value Test is satisfied; (8) The delivery by Maker to Payee of all financial information reasonably requested by Payee, as provided for in the Deed of Trust; (9) Maker shall pay, at its sole cost and expense, all reasonable costs incurred by Payee in connection with such extension, including appraisal fees, inspection fees, survey and survey recertification fees, reasonable legal fees, and fees for environmental studies and reports and such other professional services which Payee in good faith determines at the time such extension is requested are necessary to satisfy any Legal Requirement (as defined in the Deed of Trust) and to protect the value of the Trust Property and Improvements; the payment by Maker of these costs and expenses shall not be credited, in any way or to any extent, against any portion of the outstanding balance of this Note; and (10) Payee is satisfied that the Extension Test has been met. (c) No Obligation to Extend. Notwithstanding Maker's right to ----------------------- extend the Maturity Date of the Loan as set forth hereinabove, Maker hereby agrees that Payee shall have no commitment or obligation to extend the Maturity Date beyond January 12, 2004. (d) Election to Fix Interest Rate. Any election to fix the ----------------------------- interest rate with respect to each Fixed Increment may be made only (i) once during any Initials:________ -6- thirty (30) day period and (ii) while no Event of Default or Unmatured Event of Default is in existence hereunder or under any of the other Loan Documents. Maker, at its option and upon satisfaction of the conditions set forth herein, may request a Fixed Increment Rate to be used in calculating interest on the portion of the unpaid principal balance and for the period selected in accordance with and subject to the following conditions: (i) One Business Day before requesting a Fixed Increment Rate, Maker shall give Payee advance telephonic notice that it will request a rate quotation for a portion of the principal balance of this Note and for a period of time which conforms to a Fixed Increment and Fixed Period as defined herein. (ii) At approximately 9:00 A.M. (Pacific time) on the Business Day next following said advance notice, Maker may telephonically request Payee to quote telephonically an applicable Fixed Increment Rate for the Fixed Increment and Fixed Period selected by Maker. At any one time during the term hereof, no more than five (5) Fixed Increments may be outstanding. Maker shall not be released from its obligation to pay interest at the Applicable Rate and Payee shall incur no liability to Maker if Maker is unable to obtain a telephonic quote on any Business Day. (iii) If Maker accepts Payee's telephonic quote of the Fixed Increment Rate requested within five (5) minutes of the quotation thereof by Payee, interest at said Fixed Increment Rate shall accrue on the Fixed Increment and for the Fixed Period selected. The date the quoted Fixed Increment Rate is telephonically accepted by Maker shall be the Fixed Period Commencement Date for that Fixed Period. Payee is authorized to rely upon the telephonic request and acceptance of Scott V. Schneider and William Anhut as Maker's duly authorized agents, or such additional authorized agents as Maker shall designate in writing to Payee. Maker's telephonic notices, requests and acceptances shall be directed to such officers of Payee as Payee may from time to time designate. If Maker elects the Fixed Increment Rate, but the applicable Fixed Period will commence on a date which is not a Business Day, such Fixed Period shall be deemed to commence on the next Business Day after it would otherwise commence, and any interest which accrues hereunder in the interim shall accrue at the Applicable Rate. (e) Fixed Rate Notice. Maker's acceptance of a Fixed Increment ----------------- Rate shall be confirmed by a written Fixed Rate Notice, which Payee shall deliver to Maker. Payee's failure to deliver the Fixed Rate Notice shall not release Maker from Maker's obligation to pay interest at the Applicable Rate pursuant to the terms hereof. Initials:________ -7- (f) Nonavailability of Funds. Notwithstanding anything contained ------------------------ herein to the contrary, if Maker elects the Fixed Increment Rate to apply but Payee is unable for any reason to obtain funds in the amount of the Fixed Increment elected for the Fixed Period elected, interest on such Fixed Increment shall accrue at the Applicable Rate unless and until a new election of the Fixed Increment Rate is made by Maker and Payee is then able to obtain such funds. (g) No Effective Election. In the absence of an effective election by --------------------- Maker of the Fixed Increment Rate in accordance with the above procedures prior to the expiration of the then current Fixed Period with respect to any Fixed Increment, interest on such Fixed Increment shall accrue at the Applicable Rate, effective immediately upon the expiration of such Fixed Period. (h) Payment of Fees and Costs. Maker shall (i) pay all legal fees ------------------------- reasonably incurred by Payee in connection with the preparation of this Note and any and all other Loan Documents contemplated hereby (including, but not limited to, any amendments hereto or thereto or consents, releases or waivers hereunder or thereunder); (ii) reimburse Payee promptly upon demand for all amounts expended, advanced or incurred by Payee pursuant to the terms of the Loan Documents to satisfy any obligation of Maker under this Note or any other Loan Documents, which amounts shall include all court costs, reasonable attorneys' fees (including, without limitation, for trial, appeal or other proceedings), fees of auditors and accountants, and investigation expenses reasonably incurred by Payee in connection with any such matter; and (iii) any and all other costs and expenses payable by Maker pursuant to the Loan Documents, including, without limitation, the Loan fee in the amount of $283,776.00, an appraisal fee in the amount of $12,000.00, an environmental review fee in the amount of $425.00, documentary taxes and recording, brokerage, reasonable attorneys', surveyors', accountants', engineers', architects' and inspectors' fees and title insurance premiums. Except to the extent that certain of these costs and expenses are included within the definition of Indebtedness (as defined in the Deed of Trust), the costs and expenses shall not be credited, in any way or to any extent, against any portion of the Indebtedness. 3. Special Provisions Applicable to Fixed LIBO Rate. Notwithstanding any ------------------------------------------------ other provisions hereof: (a) Costs of Payee. Maker acknowledges and agrees that Payee may -------------- incur costs, expenses and losses, including, without limitation, costs, expenses and losses resulting from the occurrence of any of the events referred to in subsections (b) and (c) below which increase the cost to Payee of maintaining the Loan on a Fixed LIBO Rate basis. Accordingly, Maker shall pay to Payee within twenty (20) days of written demand, in addition to all other amounts due under this Note and under the Loan Documents, all amounts reasonably determined by Payee required to compensate Payee for all such costs, expenses and losses, if any, to the Initials:________ -8- extent that such costs, expenses and losses increase the cost to Payee of maintaining the Loan on a Fixed LIBO Rate basis, provided that Payee agrees, as soon as reasonably possible, to give Maker notice of any such increased costs, expenses, or losses, which written notice shall include an explanatory certificate in reasonable detail as to the increased costs. (b) Change in Law. If any change in applicable law or regulations or ------------- any interpretation thereof by any government, central bank, or agency or instrumentality of either ("Governmental Authority") charged with the administration thereof shall: (i) impose, modify, or deem applicable any reserve, special deposit or special requirements against assets held by, or deposits in or for the account of, or loans by, or any other acquisition of funds for advances by Payee; or (ii) impose on Payee any other conditions regarding this Note; or (iii) subject Payee (or make it apparent that Payee is subject) to any tax (including, without limitation, any international interest equalization tax), levy, impost, duty, charge, fee, deduction or withholding on or from payment due from Maker under this Note and the other Loan Documents, other than income and franchise taxes of the United States and its political subdivisions, or (iv) change the basis of taxation of payments due from Maker to Payee hereunder (other than by a change in the statutory rate of taxation of the overall income of Payee); and any of the foregoing results in an increase in the cost to Payee of maintaining the Loan on a Fixed LIBO Rate basis, then upon demand made by Payee to Maker, Maker shall pay to Payee, from time to time, as reasonably determined and certified by Payee, additional amounts that shall compensate Payee for such increased cost. Payee will notify Maker of any event that entitles Payee to such additional amounts and will furnish Maker with an explanatory certificate in reasonable detail as to the increased cost as a result of any such event mentioned in this subsection. Maker shall within twenty (20) days of written demand pay such additional amounts to Payee. All such determinations by Payee that are certified to Maker shall be presumed to be correct, absent manifest computational errors, provided they are made in good faith. (c) Reserve Cost Requirement. Maker shall pay Payee on the days on ------------------------ which interest is payable under this Note the actual costs to Payee, as determined in good faith by Payee and evidenced by an explanatory notice delivered to Maker by Payee, of Payee's complying with any reserve, special deposit or similar requirements (including, but not limited to, state law requirements and, to the extent not already paid by Maker by inclusion within the definition of LIBO Rate Initials:________ -9- Reserve Requirement, Regulations K and D of the Board of Governors of the Federal Reserve System of the United States) imposed or deemed applicable against foreign assets held by, or deposits in or for the account of, or loans by, or any other acquisition of funds for advances by Payee of any Governmental Authority charged with the administration of such requirements, to the extent that such requirements increase the cost to Payee of maintaining the Loan on a Fixed LIBO Rate basis. 4. Prepayment ---------- (a) Ability to Prepay. Maker shall have the right prior to the ----------------- Maturity Date, upon ten (10) days' prior written notice, to prepay all or any portion (except any portion constituting a Fixed Increment during its applicable Fixed Period which may only be prepaid as set forth in the following paragraphs) of the principal balance owing hereunder from time to time; provided, however, that (x) if such prepayment is only a partial payment of the then outstanding principal balance hereof, such prepayment shall be accompanied by the payment of all accrued but unpaid interest on the portion of the outstanding principal balance of the Note being so paid through the date the prepayment is made, and (y) for same day credit all monies shall be received at Payee's office at Wells Fargo Bank, 2120 East Park Place, Suite 100, E1 Segundo, California 90245 on or before 11:00 a.m., Pacific Standard Time or Pacific Daylight Time (as applicable). All monies received after this time shall be deemed received on the following Business Day and shall continue to accrue interest in accordance with the terms hereof to the date funds are deemed received. (b) Prepayment of Fixed Increment. Maker shall have the right to ------------------------------- prepay any Fixed Increment only upon payment to Payee, at the time of such prepayment, of an amount equal to all costs, fees and penalties incurred by Payee in connection with such prepayment, such amounts to include that sum which is equal to the excess of (i) the interest that would have been payable by Maker for such Fixed Increment for the remainder of the applicable Fixed Period at the applicable Fixed Increment Rate had such prepayment not been made by Maker, over (ii) the interest that would have been payable by Maker for such Fixed Increment for the remainder of the applicable Fixed Period at the applicable Fixed Increment Rate in effect on the date of prepayment. (c) Prepayment Resulting from Acceleration. In addition, in any such -------------------------------------- event, the provisions of the immediately preceding paragraph hereto (relating to the obligation of Maker to pay to Payee certain amounts in the event of the prepayment of a Fixed Increment prior to the last day of the applicable Fixed Period) shall apply with respect to any Fixed Increment prepaid by Maker prior to the last day of the applicable Fixed Period as a result of the acceleration by Payee of the outstanding principal balance hereof. Initials:________ -10- 5. General Provisions. ------------------ (a) Application of Payments. All payments on this Note shall, at the ----------------------- option of Payee, be applied first to the payment of late charges, if any, then to the payment of accrued interest, and after all such interest has been paid, any remainder shall be applied to reduction of the principal balance, and, from and after the occurrence of an Event of Default, in such order as Payee may designate. All payments hereunder shall be delivered to Payee at Payee's office at Wells Fargo Bank, 2120 East Park Place, Suite 100, El Segundo, California 90245 or at such other address as Payee may from time to time designate in writing to Maker. (b) Waivers. Except as otherwise specifically provided in the Loan ------- Documents, Maker and any endorsers hereof jointly and severally waive presentment and demand for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protest or notice of protest and nonpayment, bringing of suit and diligence in taking any action to collect any sums owing hereunder or in proceeding against any of the rights and properties securing payment hereof. Maker and any endorsers hereof agree that the time for any payments hereunder may be extended from time to time without notice and consent to the acceptance of further security or the release of any existing security for this Note, all without in any manner affecting their liability under or with respect to this Note. No extension of time for the payment of this Note or any installment hereof shall affect the liability of Maker under this Note even though Maker is not a party to such agreement. (c) Acceleration. If an Event of Default shall occur under any of the ------------ Loan Documents, then Payee may, at its option, without further notice or demand, declare the unpaid principal balance and accrued and unpaid interest on this Note, together with any other sums owing at the time of such declaration, at once due and payable; foreclose all security deeds, deeds of trust, mortgages and liens securing payment hereof; pursue any and all other rights, remedies, and recourses available to Payee, or pursue any combination of the foregoing, all remedies hereunder and under the Loan Documents being cumulative. (d) No Waiver. Failure to exercise any of the foregoing options shall --------- not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect to any other event. The acceptance by Payee of any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing options at that time or at any subsequent time or nullify any prior exercise of any such option without the express written consent of Payee. (e) Late Charges. If any payment required under this Note (other than ------------ the payment of the principal hereof at the Maturity Date or upon acceleration) Initials:________ -11- is not paid within ten (10) days after it becomes due and payable, Payee of this Note may require an additional payment of a late charge for late payment to compensate for Payee's loss of use of funds and for the expenses of handling the delinquent payment, in an amount not to exceed three percent (3%) of such delinquent payment. Said late charge shall be paid in any event not later than the due date of the next subsequent installment of principal and/or interest. In the event the maturity of the Indebtedness hereunder is accelerated by Payee, this paragraph shall apply only to payments overdue prior to the time of such acceleration. This paragraph shall not be deemed to be a waiver of Payee's right to accelerate payment of this Note under the terms hereof. (f) Interest Rate After an Event of Default. Upon the occurrence of --------------------------------------- an Event of Default, at the option of Payee (i) all amounts hereunder then bearing interest at a Fixed Increment Rate shall bear interest at the Applicable Rate, and (ii) all amounts payable hereunder or under the Loan Documents shall bear interest for the period beginning with the date of occurrence of such default at a rate of interest per annum (the "Default Rate"), payable on the first day of each and every month, equal to four percent (4%) above the Applicable Rate, as it fluctuates, or four percent (4%) above the Fixed Increment Rate to the extent that Payee does not exercise its option to change the Fixed Increment Rate to the Applicable Rate, as set forth in subparagraph (5)(f)(i) above, whichever is applicable, as in effect from time to time and continuing until such Event of Default shall have been cured. (g) Default Rate on Outstanding Balance. Notwithstanding any other ----------------------------------- provision of this Note to the contrary, from and after the Maturity Date of this Note (as it may have been extended pursuant to the terms hereof), or such earlier date as the unpaid principal owing on this Note becomes due and payable upon acceleration or otherwise pursuant to the terms hereof, the whole of the unpaid principal and interest owing on this Note shall thereafter bear interest until paid in full at the Default Rate. (h) Legal Tender; Costs of Collection. All amounts payable hereunder --------------------------------- are payable in lawful money of the United States of America. Maker agrees to pay all costs of collection hereof when incurred, including reasonable attorneys' fees, whether or not any legal action shall be instituted to enforce this Note. (i) Security. This Note is issued pursuant to that certain -------- Construction Loan Agreement dated January 11, 1999 as amended by that certain Modification of Loan Documents of even date herewith executed by Maker and Payee and is secured, inter alia, by a certain Deed of Trust, Security Agreement and ----- ---- Assignment of Leases and Rents dated January 11, 1999 as amended by that certain First Amendment to Credit Line Deed of Trust, Security Agreement and Assignment of Leases and Rents and to Assignment of Leases and Rents dated of even date herewith (collectively the "Deed of Trust") executed by Maker and given Initials:________ -12- to Payee, covering certain real and personal property situated in the City of Alexandria, Commonwealth of Virginia, as more particularly described therein. All of the agreements, conditions, covenants, warranties, representations, provisions and stipulations made by or imposed upon Maker under the Loan Documents are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully inserted herein, and Maker covenants and agrees to keep and perform the same, or cause them to be kept and performed, strictly in accordance with their terms. (j) Joint and Several Liability. If this Note is executed by more --------------------------- than one party, each such party shall be jointly and severally liable for the obligations of Maker under this Note. If Maker is a partnership, each general partner of Maker shall be jointly and severally liable hereunder, and each such general partner hereby waives any requirement of law that, in the Event of a Default hereunder or under any of the Loan Documents, Payee exhaust any assets of Maker before proceeding against such general partner's assets. (k) Time of Essence. MAKER AGREES THAT TIME IS OF THE ESSENCE IN THE --------------- PERFORMANCE OF ALL OBLIGATIONS HEREUNDER. (l) Governing Law. This Note shall be governed by and construed ------------- according to the laws of the Commonwealth of Virginia. (m) Usury. It is expressly stipulated and agreed to be the intent of ----- Maker and Payee at all times to comply with the applicable law now or hereafter governing the interest payable on this Note or the Loan (or applicable United States federal law to the extent that it permits Payee to contract for, charge, take, reserve, or receive a greater amount of interest than under Virginia law). If the applicable law is ever revised, repealed, or judicially interpreted so as to render usurious any amount called for under this Note, or under any of the Loan Documents, or contracted for, charged, taken, reserved or received with respect to the Loan, or if Payee's exercise of the option herein contained to accelerate the maturity of this Note, or if any prepayment by Maker results in Maker's having paid any interest in excess of that permitted by applicable law, then it is Maker's and Payee's express intent that all excess amounts theretofore collected by Payee be credited on the principal balance of this Note (or if the Note has been paid in full, refunded to Maker), and the provisions of this Note and the Loan Documents immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. (n) Amortization. All sums paid or agreed to be paid to Payee for the ------------ use, forbearance or detention of the indebtedness evidenced hereby and by the other Loan Documents shall, to the extent permitted by applicable law, be Initials:________ -13- amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to the Loan for so long as debt is outstanding under the Loan. (o) Successors and Assigns. The term "Maker" as used in this Note ---------------------- shall mean and have reference to, collectively, all parties and each of them directly or indirectly obligated for the indebtedness evidenced by this Note, whether as principal maker, endorser, or otherwise, together with all parties who have acquired the property conveyed by the Deed of Trust or any portion or portions thereof, together with the respective heirs, administrators, executors, legal representatives, successors and assigns of each of the foregoing. (p) No Merger. Except as may be permitted by the terms of the Deed of --------- Trust, Maker shall not merge into or with any other company, firm or corporation without the prior written consent of Payee; provided, however, if any merger occurs, then the resulting merged company, firm or corporation shall become liable as Maker under this Note to the same extent as Maker hereunder. Maker warrants and represents that Maker has full power and authority to make and execute this Note, and that this Note is fully and legally binding upon Maker. (q) Notices. All notices or other communications required or ------- permitted to be given pursuant to this Note shall be in writing and shall be considered as properly given if mailed by first-class United States mail, postage prepaid, registered or certified with return receipt requested, or if sent by Federal Express or other overnight delivery service, or by delivering same in person to the intended addressee or by prepaid telegram. Notice given in any manner shall be effective upon receipt. For purposes of notice, the addresses of the parties shall be as set forth below: The address of Maker is: Saul Holdings Limited Partnership c/o Saul Centers, Inc. 8401 Connecticut Avenue Chevy Chase, MD 20815 Attention: Chief Financial Officer With copies of all notices to Maker to: Shaw Pittman 2300 N Street, N.W. Washington, DC 20037 Attention: Sheldon J. Weisel, Esq. Initials:________ -14- The address of Payee is: Wells-Fargo Bank, National Association Real Estate Group 2020 K Street, N.W., Suite 420 Washington, D.C. 20006-1806 With copies of all notices to Payee to: Wells Fargo Bank Real Estate Group 420 Montgomery Street San Francisco, CA 94111 Attention: Chief Credit Officer provided, however that any party hereto shall have the right to change its address for notice hereunder to any other location within the continental United States by the giving of fifteen (15) business days' notice to the other party in the manner set forth hereinabove. (r) Purpose. The undersigned and all endorsers of this Note, and ------- other parties primarily or secondarily liable hereon, each represents and warrants that the amounts advanced or to be advanced under this Note and Loan Documents and evidenced hereby are greater than $5,000 and are being made exclusively in connection with a loan made for business or investment purposes within the meaning and intent of Section 6.1-330.75 of the Code of Virginia (1950), as amended. (s) Interpretation. Whenever possible, each provision of this Note -------------- shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. (t) Amendments. This Note may not be changed orally, but only by an ---------- agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. (u) WAIVER OF JURY TRIAL. EACH PARTY TO THIS NOTE AND, BY ITS -------------------- ACCEPTANCE HEREOF, PAYEE, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN Initials:________ -15- CONNECTION THEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND EACH PARTY AND PAYEE HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS NOTE AND PAYEE MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO AND PAYEE TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 6. Reduction in Recourse Provision. -------------------------------- (a) Subject to the exceptions and qualifications described below, upon (i) Substantial Completion of the Base Building and (ii) receipt by Payee of estoppel certificates reasonably acceptable to Payee from tenants providing for in the aggregate Average Rent equal to at least the Minimum Rent under leases approved by Payee or which do not require the approval of Payee pursuant to the Deed of Trust, for not less than fifty percent (50%) of the rentable space in the Improvements, the undersigned shall thereafter no longer be personally liable for the payment of the indebtedness evidenced by or created or arising under this Note or arising under the Loan Documents for any amount in excess of (x) Twenty-One Million Dollars ($21,000,000.00) plus (y) any and all interest and fees set forth in this Note, plus (z) any unreimbursed expenses incurred by Wells Fargo in protecting, preserving or defending its interests in connection with the Loan or under the Loan Documents, including, without limitation all reasonable attorneys' fees and all other expenses incurred by Wells Fargo in connection with any trustee's sale or foreclosure and/or sale of all or any of the Trust Property or other collateral covered by the Loan Documents (the "Adjusted Amount), and any judgment or decree in any action brought to enforce the obligation of the undersigned to pay such indebtedness in excess of the Adjusted Amount shall be enforceable against the undersigned only to the extent of its interest in the property encumbered by the Deed of Trust and the other Loan Documents and any such judgment or decree shall not be subject to execution upon or be a lien upon the assets of the undersigned other than its interest in such property. All proceeds of any trustee's sale or foreclosure and/or sale of all or any of the Trust Property or other collateral covered by the Loan Documents applicable by their terms to the amount of this Note shall be allocated first to the portion of this Note for which Maker is not personably liable and then to the portion of this Note for which Maker is personably liable, and Maker acknowledges that Payee may pursue any and all rights, remedies, and recourses available to Payee under this Note or under the Loan Documents, or pursue any combination of the foregoing, in such order as Payee may Initials:________ -16- determine in its sole discretion, and that all rights, remedies and recourses hereunder and under the Loan Documents are cumulative. (b) The foregoing limitation of personal liability shall be subject to the following exceptions and qualifications: The undersigned shall be fully and personally liable for all costs, expenses or losses incurred by Payee as a result of any of the following: (A) Failure to pay taxes, assessments and any other charges which could result in prior liens against any portion of the property covered by the Deed of Trust or the other Loan Documents; (B) Failure to pay and discharge any mechanic's liens, materialmen's liens or other liens against any portion of the property covered by the Deed of Trust or the other Loan Documents; (C) Fraud, misrepresentation or waste; (D) Retention by the undersigned of any rental income or other income arising with respect to any property covered by the Deed of Trust or the other Loan Documents which, under the terms thereof, should have been paid to Payee hereof; (E) All insurance proceeds, condemnation awards or other similar funds or payments attributable to any property covered by the Deed of Trust or the other Loan Documents which, under the terms thereof, should have been paid to Payee hereof; (F) Failure to maintain, repair or restore any property covered by the Deed of Trust or the other Loan Documents in accordance with the terms thereof; (G) The removal, demolition, damage or destruction of any property covered by the Deed of Trust or the other Loan Documents which is neither permitted by the terms of the Loan Documents, consented to in writing by Payee nor is fully compensated for by insurance proceeds or condemnation awards; and (H) The failure of the Deed of Trust or any Other Loan Document to constitute a first and prior lien upon the property subject only to the exceptions set forth in Exhibit "B" to the Deed of Trust and any exceptions permitted by any other Loan Document. Initials:________ -17- (I) Any expense, damage, loss or liability incurred by the Lender arising from the presence of oil, toxic or hazardous waste on the property encumbered by the Deed of Trust and the other Loan Documents. (c) Nothing contained in this paragraph shall affect or limit the ability of Payee hereof to enforce any of its rights or remedies with respect to any property encumbered by the Deed of Trust and the other Loan Documents. (d) Nothing contained in this paragraph shall affect or limit the rights of Payee hereof to proceed against any person or entity, including the undersigned or any partner in the undersigned, with respect to the enforcement of any separate guaranties of payment or guaranties of performance and completion or other similar rights, but the foregoing shall not be construed to extend and relate to any obligation of Saul Centers, Inc. arising under this Note or any other Loan Document executed prior to or contemporaneously with this Note, all of which obligations are subject to the limitations of liability contained in this Paragraph 6. (e) The limitation contained in this paragraph shall be void and completely ineffective in the event that the undersigned or any general partner of the undersigned shall voluntarily file any petition or commence any case or proceeding under any provision or chapter of the Federal Bankruptcy Act, the Federal Bankruptcy Code, or any other federal or state law relating to insolvency, bankruptcy or reorganization, or the entry of any order of relief under the Federal Bankruptcy Code with respect to the undersigned or any general partner in the undersigned. 7. This Note is issued in replacement of that certain Promissory Note in the amount of Thirty-Eight Million Dollars ($38,000,000.00) dated January 11, 1999 from Maker to the order of the Payee (the "Original Note") secured by that certain Deed of Trust, Security Agreement and Assignment of Leases and Rents recorded among the Land Records of the City of Alexandria on January 14, 1999 in Deed Book 1679 at page 1307. The Original Note has been delivered to the Maker and marked "Replaced by that certain Replacement Promissory Note in the principal amount of Forty-Two Million Dollars ($42,000,000.00) dated ________ from the Maker to the order of the Payee." Initials:________ -18- IN WITNESS WHEREOF, this Note has been duly executed as of the date first above written. WITNESS/ATTEST: SAUL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited partnership [CORPORATE SEAL] By: Saul Centers, Inc., a Maryland corporation General Partner __________________________ By: ______________________________ B. Francis Saul II Chairman [CORPORATE SEAL] SAUL CENTERS, INC., a Maryland corporation __________________________ By: ________________________ B. Francis Saul II Chairman This signature page is attached to and is a part of that certain Replacement Promissory Note in the original principal amount of Forty-Two Million and No/100 Dollars ($42,000,000.00), from Saul Holdings Limited Partnership and Saul Centers, Inc., collectively as "Maker", to Wells Fargo Bank, National Association, as "Payee." Initials:________ -19- CERTIFICATE OF IDENTIFICATION ----------------------------- This Note is secured by a Deed of Trust, Security Agreement, and Assignment of Leases and Rents ") dated January 11, 1999 (the "Deed of Trust") on property located in the City of Alexandria, Virginia from Saul Holdings Limited Partnership and Saul Centers, Inc. to Thomas G. McGarry and Joseph B. Whitebread, Jr., Trustees as amended by that certain First Amendment to Deed of Trust, Security Agreement and Assignment of Leases and Rents and to Assignment of Leases and Rents dated of even date herewith (the "Amendment"). THIS IS TO CERTIFY that this is the Note described in such Deed of Trust as so amended, said Amendment and this Note having been executed in my presence. ---------------------------------- Notary Public My Commission Expires: ___________________ Initials:________ EX-23.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in the Company's December 31, 1999 Form 10-K into the previously filed Registration Statement File No. 33-80291. Arthur Andersen LLP Vienna, Virginia March 27, 2000 EX-27 4 EX27
5 This schedule contains summary financial information extracted from "financial statements, schedules and other disclosure contained in" "Form 10-K for the period ended December 31, 1999 of Saul Centers, Inc." and is qualified in its entirety by refernce to such financial "statements, schedules and other disclosure." 1000 12-MOS DEC-31-1999 DEC-31-1999 957 0 8723 0 0 0 368,382 112,272 299,665 0 310,268 0 0 133 (31,992) 299,665 0 73,791 0 19,883 6,207 295 22,984 21,220 0 21,220 0 0 0 13,297 1.01 1.01
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