SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED September 30, 1999 ------------------ 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 incorporation or organization) Number 8401 Connecticut Avenue, Chevy Chase, Maryland 20815 ------------------------------------------------------ (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (301) 986-6200 -------------- Number of shares outstanding of each of the registrant's classes of common stock, as of November 10, 1999: Common Stock par value $0.01 per share: 13,333,506 --------------------------------------------------- Indicate by check mark whether the 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 requirement for the past 90 days. YES X NO _____ -----
SAUL CENTERS, INC. PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements (Unaudited) -------------------------------- (a) Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998............................................... 4 (b) Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and 1998............... 5 (c) Consolidated Statements of Stockholders' Equity as of September 30, 1999 and December 31, 1998........................ 6 (d) Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............................... 7 (e) Notes to Consolidated Financial Statements...................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------- Results of Operations --------------------- (a) Liquidity and Capital Resources................................. 17 (b) Results of Operations Three months ended September 30, 1999 compared to three months ended September 30, 1998.......................................... 22 Nine months ended September 30, 1999 compared to nine months ended September 30, 1998.......................................... 23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................. 26 -------------------------------- -2-
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Basis of Presentation In the opinion of management, the accompanying consolidated financial statements reflect all adjustments necessary for fair presentation of the financial position and results of operations of Saul Centers, Inc. All such adjustments are of a normal recurring nature. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements of Saul Centers, Inc. for the year ended December 31, 1998, which are included in its Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. -3-
Saul Centers, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> September 30, December 31, (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Real estate investments Land $ 63,795 $ 64,339 Buildings and equipment 291,670 283,722 ------------- -------------- 355,465 348,061 Accumulated depreciation (109,838) (101,910) ------------- -------------- 245,627 246,151 Construction in progress 22,665 4,506 Cash and cash equivalents 2,304 2,395 Accounts receivable and accrued income, net 7,186 6,347 Prepaid expenses 8,402 6,873 Deferred debt costs, net 3,304 3,604 Other assets 1,771 1,158 ------------- -------------- Total assets $ 291,259 $ 271,034 ============= ============== Liabilities Notes payable $ 302,511 $ 290,623 Accounts payable, accrued expenses and other liabilities 18,122 14,856 Deferred income 3,231 2,839 ------------ -------------- Total liabilities 323,864 308,318 ------------ -------------- Minority interests -- -- ------------ -------------- Stockholders' equity (deficit) Common stock, $0.01 par value, 30,000,000 shares authorized, 13,198,675 and 12,836,378 shares issued and outstanding, respectively 132 129 Additional paid-in capital 42,755 31,967 Accumulated deficit (75,492) (69,380) ------------- -------------- Total stockholders' equity (deficit) (32,605) (37,284) ------------- -------------- Total liabilities and stockholders' equity $ 291,259 $ 271,034 ============= ============== </TABLE> The accompanying notes are an integral part of these statements. -4-
Saul Centers, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> For the Three For the Nine Months Months Ended September Ended September 30, 30, - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue Base rent $ 14,952 $ 14,044 $ 43,752 $ 41,505 Expense recoveries 2,529 2,625 7,410 7,339 Percentage rent 478 588 1,508 1,995 Other 450 393 1,723 1,644 ---------- ----------- ----------- ----------- Total revenue 18,409 17,650 54,393 52,483 ---------- ----------- ----------- ----------- Operating expenses Property operating expenses 2,074 2,016 5,909 5,902 Provision for credit losses 57 123 182 275 Real estate taxes 1,476 1,577 4,636 4,563 Interest expense 5,636 5,696 16,734 16,972 Amortization of deferred debt expense 104 106 312 315 Depreciation and amortization 3,004 2,840 8,793 8,488 General and administrative 913 865 2,710 2,552 ---------- ----------- ----------- ----------- Total operating expenses 13,264 13,223 39,276 39,067 ---------- ----------- ----------- ----------- Operating income 5,145 4,427 15,117 13,416 Extraordinary item Early extinguishment of debt -- (50) -- (50) Cumulative effect of change in accounting method -- -- -- (771) ---------- ----------- ----------- ----------- Net income before minority interests 5,145 4,377 15,117 12,595 ---------- ----------- ----------- ----------- Minority interests Minority share of income (1,451) (1,177) (4,203) (3,338) Distributions in excess of earnings (567) (650) (1,703) (2,029) ---------- ---------- ----------- ----------- Total minority interests (2,018) (1,827) (5,906) (5,367) ---------- ---------- ----------- ----------- Net income $ 3,127 $ 2,550 $ 9,211 $ 7,228 ========== ========== =========== =========== Net income per share (basic and dilutive) Net income before minority interests $ 0.28 $ 0.26 $ 0.84 $ 0.74 ========== ========= =========== =========== Net income $ 0.24 $ 0.20 $ 0.71 $ 0.57 ========== ========= =========== =========== </TABLE> The accompanying notes are an integral part of these statements. -5-
Saul Centers, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Additional Common Paid-in Accumulated (Dollars in thousands, except per share amounts) Stock Capital Deficit Total - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Stockholders' equity (deficit): 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 121,090 shares of common stock 1 1,702 -- 1,703 Issuance of 126,702 convertible limited partnership units in the Operating Partnership -- 1,782 -- 1,782 Net income -- -- 3,120 3,120 Distributions payable ($.39 per share) -- -- (5,075) (5,075) --------- ---------- ----------- ----------- Balance, March 31, 1999 130 35,451 (71,335) (35,754) Issuance of 117,361 shares of common stock 1 1,791 -- 1,792 Issuance of 119,887 convertible limited partnership units Operating Partnership -- 1,831 -- 1,831 Net income -- -- 2,964 2,964 Distributions payable ($.39 per share) -- -- (5,100) (5,100) --------- ---------- ------------ ----------- Balance, June 30, 1999 131 39,073 (73,471) (34,267) Issuance of 123,846 shares of common stock 1 1,804 -- 1,805 Issuance of 126,967 convertible limited partnership units Operating Partnership -- 1,878 -- 1,878 Net income -- -- 3,127 3,127 Distributions payable ($.39 per share) -- -- (5,148) (5,148) --------- ---------- ------------ ----------- Balance, September 30, 1999 $132 $42,755 $(75,492) $(32,605) ========== =========== ============ ============ </TABLE> The accompanying notes are an integral part of these statements. -6-
Saul Centers, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> For the Nine Months Ended September 30, (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 9,211 $ 7,228 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 5,906 5,367 Cumulative effect of change in accounting method -- 771 Loss on early extinguishment of debt -- 50 Depreciation and amortization 9,105 8,803 Provision for credit losses 182 275 Increase in accounts receivable (1,021) (1,082) Increase in prepaid expenses (2,394) (1,964) Increase in other assets (613) (452) Increase in accounts payable, accrued expenses and other liabilities 3,266 2,504 Increase in deferred income 392 294 Other, net -- (37) ---------- ---------- Net cash provided by operating activities 24,034 21,757 --------- ---------- Cash flows from investing activities: Additions to real estate investments (7,948) (3,537) Additions to construction in progress (17,615) (6,132) ---------- ---------- Net cash used in investing activities (25,563) (9,669) ---------- ---------- Cash flows from financing activities: Proceeds from notes payable 21,582 17,400 Repayments on notes payable (9,694) (16,718) Additions to deferred debt expense (12) (200) Proceeds from the issuance of common stock and convertible limited partnership units in the Operating Partnership 10,791 8,211 Distributions to common stockholders and holders of convertible limited partnership units in the Operating Partnership (21,229) (20,084) ---------- ---------- Net cash provided by (used in) financing activities 1,438 (11,391) ---------- ---------- Net increase (decrease) in cash (91) 697 Cash, beginning of period 2,395 688 ---------- ---------- Cash, end of period $ 2,304 $ 1,385 ========== ========== </TABLE> The accompanying notes are an integral part of these statements. -7-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) 1. Organization, Formation and Structure 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. As of September 30, 1999, 13,198,675 shares of common stock are issued and outstanding; no shares of preferred stock have been issued. 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 a Class A mixed-use office/retail complex on the site of a former shopping center property (the "Development Property") and repositioning an under-performing shopping center to an industrial / warehouse use (the "Industrial Property"). Therefore, as of September 30, 1999, the Company's properties (the "Current Portfolio Properties") consisted of 28 operating shopping center properties (the "Shopping Centers"), the Industrial Property and five predominantly office properties and the Development Property (the "Office Properties"). 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. -8-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) 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 29 Shopping Centers are anchored by a grocery store and offer primarily day-to-day necessities and services. As of December 1998, no single shopping center accounted for more than 11.4% of the total shopping center gross leasable area. Only one retail tenant, Giant Food at 7.1%, accounted for more than 1.7% of the Company's 1998 total revenues. No office tenant other than the United States General Service Administration, at 10.4%, accounted for more than 1.8% of 1998 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. Real Estate Investment Properties 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. 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. Real estate investment properties are reviewed for potential impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of an individual property's undiscounted expected future cash flows is less than its carrying amount, the Company's policy is to recognize an impairment loss measured by the amount the depreciated cost of the property exceeds its fair value. Fair value is calculated as the present value of expected future cash flows. Interest, real estate taxes and other carrying costs are capitalized on projects under development and construction. Interest expense capitalized during the nine month periods ended September 30, 1999 and 1998, was $607,000 and $133,000, respectively. Once construction is -9-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) substantially completed and the assets are placed in service, their rental income, direct operating expenses and depreciation are included in current operations. Expenditures for repairs and maintenance are charged to operations as incurred. 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, at September 30, 1999 and December 31, 1998, accounts receivable included $1,657,000 and $1,443,000, respectively, representing minimum rental income accrued on a straight-line basis to be paid by tenants over the terms of the respective leases. Receivables are reviewed monthly and reserves are established 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 $491,000 and $657,000, at September 30, 1999 and December 31, 1998, respectively. Deferred Debt Costs Deferred debt costs consist of financing fees and costs incurred to obtain long-term financing. 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 $902,000 at September 30, 1999. 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. -10-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) 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. 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, as if the limited partners had exercised their right to convert their partnership ownership into shares of Saul Centers, and is computed using weighted average shares of 18,288,000 and 17,342,000, for the quarters and 18,043,000 and 17,124,000 for the nine month periods ended September 30, 1999 and 1998, respectively. The per share impact of extraordinary item, early extinguishment of debt is less than $.01 for the quarter and nine month period ended September 30, 1998. The per share impact of the cumulative effect of change in accounting method is $.05 for the nine month period ended September 30, 1998. Per share data relating to net income after minority interests is computed using weighted average shares of 13,158,000 and 12,691,000, for the quarters and 13,037,000 and 12,592,000 for the nine month periods ended September 30, 1999 and 1998, respectively. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassifications have no impact on operating results previously reported. Minority Interests - Holders of Convertible Limited Partner Units in the Operating Partnership The Saul Organization has a 28.2% limited partnership interest, represented by 5,172,000 convertible limited partnership units in the Operating Partnership, as of September 30, 1999. These Convertible Limited Partnership Units are convertible into shares of Saul Centers' common stock on a one-for-one basis. The impact of The Saul Organization's 28.2% limited partnership interest in the Operating Partnership is reflected as minority interests in the accompanying financial statements. -11-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) 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 September 30, 1999, 120,000 shares were authorized and registered for use under the Plan, and 68,000 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. New Accounting Pronouncements In September 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" which establishes standards for the reporting and display of comprehensive income in the Company's financial statements. The Company adopted this standard in the first quarter of 1998. The Company had no comprehensive income during the nine month period ended September 30, 1999. In September 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Disclosures required by this new standard are presented in Note 6. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company doesn't own derivative instruments nor does it engage in hedging activities, and therefore expects that SFAS 133 will not have an impact on the Company's financial condition or its results of operations. -12-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) Change In Accounting Method On May 21, 1998, the 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 is not expected to materially affect the amount of percentage rent income reported on an annual basis, but is expected to have an impact on the recognition of percentage rent income reported on a quarterly basis by increasing revenues the Company reports 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. 3. 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 September 30, 1999 and December 31, 1998 are as follows: Construction in Progress ------------------------ (In thousands) September 30, 1999 December 31, 1998 ------------------ ----------------- <TABLE> <S> <C> <C> North Washington St....................... $ 10,201 - Shops at Fairfax......... 6,276 $ 702 Avenel Business Park V...... 3,906 2,800 French Market............... 1,985 949 Other....................... 297 55 ------- ------- Total....................... $ 22,665 $ 4,506 ======== ======= </TABLE> 4. Notes Payable Notes payable totaled $302.5 million at September 30, 1999, of which $268.4 million (88.7%) was fixed rate debt and $34.1 million (11.3%) was floating rate debt. At September 30, 1999, the Company had a $60 million unsecured revolving credit facility with outstanding borrowings of $28.0 million and additional borrowing availability of $32.0 million. The facility requires monthly interest payments at a rate of LIBOR plus 1.5%. Notes payable totaled $290.6 million at December 31,1998, of which $272.6 million (93.8%) was fixed rate debt and $18.0 million (6.2%) was floating rate debt. Outstanding borrowings on -13-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) the $60 million unsecured revolving credit facility were $18.0 at December 31,1998, with additional borrowing availability of $42.0 million. At September 30, 1999, the Company had borrowed $6.1 million of a $38.0 million construction loan secured by the new North Washington Street development in Alexandria, Virginia. The facility requires monthly interest payments at a rate of LIBOR plus 1.9%. At September 30, 1999, the scheduled maturities of all debt for years ending December 31, were as follows: Debt Maturity Schedule ---------------------- (In thousands) <TABLE> <S> <C> October 1 through December 31, 1999......... $ 1,071 2000........................................ 33,615 2001........................................ 6,074 2002........................................ 11,884 2003........................................ 6,232 2004........................................ 15,999 Thereafter.................................. 227,636 ------- Total....................................... $302,511 ======== </TABLE> 5. Shareholders' Equity and Minority Interests 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. The Shareholders' Equity reported on the Consolidated Balance Sheets does not reflect any increase in the value resulting from the difference between the current value and the net book value of the Company's assets. Therefore, Shareholders' Equity reported on the Consolidated Balance Sheets does not reflect the market value of stockholders' investment in the Company. The Consolidated Statement of Operations for the nine months ended September 30, 1999 includes a charge for minority interests of $5,906,000 consisting of $4,203,000 related to The Saul Organization's share of the net income for the 1999 period and $1,703,000 related to distributions to minority interests in excess of allocated net income for the 1999 period. The charge for the nine month period ended September 30, 1998 of $5,367,000 consists of $3,338,000 related to The Saul Organization's share of net income for the 1998 period, and $2,029,000 related to distributions to minority interests in excess of allocated net income for the 1998 period. -14-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments The Company has two reportable business segments: shopping centers and office properties. The accounting policies for the segments presented below are the same as those described in the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon net operating income for properties in each segment. <TABLE> <CAPTION> <S> <C> <C> <C> <C> (Dollars thousands) Shopping Office Corporate Consolidated Centers Properties and Other (1) Totals ---------- ------------ ----------- ------------ - ----------------------------------- | Quarter ended September 30, 1999| - ----------------------------------- Real estate rental operations: Revenues........................................... $ 13,444 $ 4,941 $ 24 $ 18,409 Expenses........................................... (2,362) (1,242) (3) (3,607) ---------- --------- ---------- ----------- Income from real estate.............................. 11,082 3,699 21 14,802 Interest expense & amortization of debt costs..... (5,740) (5,740) General and administrative........................ (913) (913) ---------- --------- ----------- ----------- Subtotal............................................. 11,082 3,699 (6,632) 8,149 Depreciation and amortization..................... (2,095) (887) (22) (3,004) Minority interests................................ (2,018) (2,018) ---------- --------- ----------- ----------- Net income........................................... $ 8,987 $ 2,812 $ (8,672) $ 3,127 ========== ========= =========== =========== Capital investment................................... $ 10,304 $ 1,016 $ 312 $ 11,632 ========== ========= =========== =========== Total assets......................................... $ 195,283 $ 70,559 $ 25,417 $ 291,259 - ----------------------------------- | Quarter ended September 30, 1998| - ----------------------------------- Real estate rental operations: Revenues........................................... $ 13,085 $ 4,525 $ 40 $ 17,650 Expenses........................................... (2,352) (1,300) (64) (3,716) ------------ ---------- ----------- ------------ Income from real estate.............................. 10,733 3,225 (24) 13,934 Interest expense & amortization of debt costs...... (5,802) (5,802) General and administrative......................... (865) (865) ------------ ---------- ----------- ------------ Subtotal............................................. 10,733 3,225 (6,691) 7,267 Depreciation and amortization...................... (1,973) (848) (19) (2,840) Early extinguishment of debt....................... (50) (50) Minority interests................................. (1,827) (1,827) ----------- ---------- ----------- ------------ Net income........................................... $ 8,760 $ 2,377 $ (8,587) $ 2,550 ----------- ---------- ----------- ------------ Capital investment................................... $ 4,257 $ 1,048 $ 53 $ 5,358 =========== ========== =========== ============ Total assets......................................... $ 177,033 $ 69,997 $ 2,006 $ 249,036 =========== ========== =========== ============ (1) Includes the Industrial Property, Crosstown. The United States Government provided 10.6% of total revenues for the quarter ended September 30, 1999. </TABLE> -15-
SAUL CENTERS, Inc. Notes to Consolidated Financial Statements (Unaudited) <TABLE> <CAPTION> <S> <C> <C> <C> <C> (Dollars thousands) Shopping Office Corporate Consolidated Centers Properties and other (1) Totals - --------------------------------------- ----------- --------------- ------------ ---------------- | Nine months ended September 30, 1999| - -------------------------------------- Real estate rental operations: Revenues........................................... $ 40,133 $ 14,188 $ 72 $ 54,393 Expenses........................................... (7,238) (3,484) (5) (10,727) ----------- ----------- ----------- ------------ Income from real estate.............................. 32,895 10,704 67 43,666 Interest expense & amortization of debt costs...... (17,046) (17,046) General and administrative......................... (2,710) (2,710) ----------- ------------ ----------- ------------ Subtotal............................................. 32,895 10,704 (19,689) 23,910 Depreciation and amortization...................... (6,104) (2,623) (66) (8,793) Minority interests................................... (5,906) (5,906) ---------- ------------ ------------ ------------- Net income........................................... $ 26,791 $ 8,081 $ (25,661) $ 9,211 ========== ============ ============ ============= Capital investment................................... $ 22,301 $ 2,764 $ 498 $ 25,563 ========== ============ ============ ============= Total assets......................................... $ 195,283 $ 70,559 $ 25,417 $ 291,259 ========== ============ ============ ============= - --------------------------------------- | Nine months ended September 30, 1998| - --------------------------------------- Real estate rental operations: Revenues........................................... $ 38,974 $ 13,406 $ 103 $ 52,483 Expenses........................................... (7,087) (3,513) (140) (10,740) ----------- ------------ ----------- ------------- Income from real estate.............................. 31,887 9,893 (37) 41,743 Interest expense & amortization of debt costs...... (17,287) (17,287) General and administrative......................... (2,552) (2,552) ----------- ------------- ----------- ------------- Subtotal............................................. 31,887 9,893 (19,876) 21,904 Depreciation and amortization...................... (5,803) (2,607) (78) (8,488) Early extinguishment of debt....................... (50) (50) Cumulative effect of accounting method change...... (771) (771) Minority interests................................. (5,367) (5,367) ----------- ------------- ----------- ------------- Net income........................................... $ 26,084 $ 7,286 $ (26,142) $ 7,228 =========== ============= =========== ============= Capital investment................................... $ 7,497 $ 2,017 $ 155 $ 9,669 =========== ============= =========== ============ Total assets......................................... $ 177,033 $ 69,997 $ 2,006 $ 249,036 (1) Includes the Industrial Property, Crosstown. The United States Government provided 10.5% of total revenues for the nine months ended September 30, 1999. </TABLE> -16-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- The following discussion is based primarily on the consolidated financial statements of Saul Centers, Inc. ("Saul Centers") and, together with its wholly owned subsidiaries and the limited partnerships of which it or one of its wholly owned subsidiaries is the sole general partner (the "Company"), as of September 30, 1999 and for the three and nine month periods ended September 30, 1999. 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, renovation, and redevelopment 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 Internal Revenue Code of 1986, as amended. 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 current year the Company may: 1) redevelop certain of the Shopping Centers, 2) develop additional freestanding outparcels or expansions within certain of the Shopping Centers, 3) acquire existing neighborhood and community shopping centers and/or office properties and 4) 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 current year, any developments, redevelopments, 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, which include the Company's credit line of which $32,050,000 was available for borrowing as of September 30, 1999, will be sufficient to meet its liquidity needs for the foreseeable future. -17-
Financial Information - --------------------- For the third quarter of 1999, the Company reported Funds From Operations ("FFO") of $8,149,000. This represents an 12.1% increase over the comparable 1998 period's FFO of $7,267,000. FFO is presented on a fully converted basis and as the most widely accepted measure of operating performance for REITs is defined as net income before extraordinary and nonrecurring items and before real estate depreciation and amortization. The following table represents a reconciliation from net income before minority interests to FFO: Funds From Operations Schedule - ------------------------------ (In thousands) For the Three Months Ended September 30, ---------------------------------------- 1999 1998 ---- ---- <TABLE> <S> <C> <C> Net income before minority interests................................. $5,145 $4,377 Add: Depreciation and amortization of real property............................ 3,004 2,840 Extraordinary and nonrecurring items: Early extinguishment of debt............................. - 50 ------ ------ Funds From Operations...................... $8,149 $7,267 ====== ====== <CAPTION> For the Nine Months Ended September 30, --------------------------------------- 1999 1998 ---- ---- <S> <C> <C> Net income before minority interests................................. $15,117 $12,595 Add: Depreciation and amortization of real property................................ 8,793 8,488 Extraordinary and nonrecurring items: Early extinguishment of debt................................. - 50 Change in accounting method............................... - 771 ------- ------- Funds From Operations..................... $23,910 $21,904 ======= ======= </TABLE> FFO, as defined by the National Association of Real Estate Investment Trusts, is net income excluding gains or losses from debt restructuring, sales of property, and adjustments for unconsolidated partnerships and joint ventures, plus depreciation and amortization. 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 -18-
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. Cash flow from operating activities, financing activities and investing activities for the nine months ended September 30, 1999 and 1998 are as follows: <TABLE> <CAPTION> Cash Flow provided by (used in): - -------------------------------- (In thousands) For the Nine Months Ended September 30, --------------------------------------- 1999 1998 ---- ---- <S> <C> <C> Operating activities.............. $ 24,034 $ 21,757 Investing activities.............. -25,563 -9,669 Financing activities.............. 1,438 -11,391 </TABLE> 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. In January 1999, the Company closed a $38 million construction loan, which it anticipates will substantially fund the development costs associated with the 230,000 square foot North Washington Street mixed-use office/retail complex, located in Old Town Alexandria, Virginia. The loan has an initial three-year term with an interest rate of LIBOR plus 1.90%, which will decline as leasing of the office and retail space proceeds. At October 31, 1999, outstanding borrowings on this construction loan totaled $7.9 million. At October 31, 1999, outstanding borrowings on the Company's $60 million unsecured credit line totaled $34.2 million, leaving $25.8 million of credit availability. The Company has fixed interest rates on approximately 86% of its total debt outstanding, which now has a weighted remaining term of approximately 11 years. -19-
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 Beacon Center, Shops at Fairfax, Ashburn, Avenel, North Washington Street and Crosstown Business Center. The Company has 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 during the third quarter of this year. Lowe's celebrated their grand opening during the first week in November. Adjacent to the new home improvement store, 8,000 square feet of new small shop space was constructed in late 1998 and is fully occupied. The Company 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. The adjacent small shops are 100% leased with substantially all projected to open by year-end. The facade of the adjacent Boulevard shopping center, also owned by the Company, was renovated and modernized. This renovation features a new 12,000 square foot Party City store and a 4,200 square foot Fitness Warehouse. The Boulevard redevelopment complements the new construction at Shops at Fairfax and positions the combined properties as an attractive neighborhood center. 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 will be developed into a 32,000 square foot in-line expansion to the existing shopping center, containing approximately 18,000 square feet of retail space and 14,000 square feet of professional office suites. Several free-standing retail buildings will also be included in this phase of the development. Leases for approximately 14,000 square feet have been signed with several other spaces under negotiation. Construction began during the first week of November, with substantial completion scheduled for the spring of 2000. Office development and acquisition activities have been an integral part of the Company's focus during 1999 and will continue into 2000. In July 1998, the Company began development of approximately 27,000 square feet of additional office / flex space at Avenel Business Park. Construction of this new project (Avenel V) was substantially completed during January 1999. Approximately 78% of the space is leased, and negotiations continue for the remaining space. Including this new development, Avenel Business Park is approximately 95% leased. -20-
In February 1999, the Company announced the development of a new 230,000 square foot Class A mixed-use office / retail complex along North Washington Street in historic Old Town Alexandria in Northern Virginia. The project is well located on a two-acre site along Alexandria's main street. Demolition of the Company's existing 41,500 square foot building, formerly leased to Mastercraft furniture, was completed in March 1999. Construction of the underground parking deck has been substantially completed, and concrete work on the first and second floors of the office buildings is continuing. Base building construction is scheduled to be completed by the summer of 2000. 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 3-story atrium lobbies, a fitness center, concierge service, a 600 space parking structure and a computerized energy management system. The street level will have 45,000 square feet of retail space, of which 19,000 square feet is leased with substantially all of the balance under negotiation. The Company is marketing the 185,000 square feet of office space to corporate users, professionals and trade associations. 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, 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 200,000 square feet of predominantly warehouse space. The Company is completing the facade and interior build-out for an 18,000 square foot space, with occupancy to commence November 1999. The Company is negotiating with several prospects to lease substantial portions of the remaining space. Portfolio Leasing Status - ------------------------ At September 30, 1999, the portfolio consisted of twenty-nine 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, and two properties in a research park located in a Maryland suburb of Washington, D.C. At September 30, 1999, 91.4% of the Company's 5.9 million square feet of leasable space was leased to tenants, as compared to 90.0% at September 30, 1998. The shopping center portfolio was 94.0% leased at September 30, 1999 versus 92.6% as of September 30, 1998. The Office Properties were 96.3% leased at September 30, 1999 and September 30, 1998. Excluding the 200,000 square foot warehouse redevelopment which is currently 9% leased, 94.3% of the portfolio was leased. The improvement was primarily impacted by the Company's successful leasing of the former Caldor space at Great Eastern. -21-
Results of Operations - --------------------- The following discussion compares the results of the Company for the three month and nine month periods ended September 30, 1999 and 1998, respectively. This information should be read in conjunction with the accompanying consolidated financial statements and the notes related thereto. These financial statements include all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the interim periods presented. Three Months Ended September 30, 1999 Compared to Three Months Ended September - ------------------------------------------------------------------------------ 30, 1998 - -------- Revenues for the three month period ended September 30, 1999 (the "1999 Quarter"), totaled $18,409,000 compared to $17,650,000 for the comparable quarter in 1998 (the "1998 Quarter"), an increase of $759,000 (4.3%). Base rent was $14,952,000 for the 1999 Quarter, compared to $14,044,000 for the 1998 Quarter, representing an increase of $908,000 (6.5%). The increase in base rent resulted primarily from new leases in effect at recently redeveloped shopping centers (French Market, Seven Corners, Beacon Center, Thruway and Boulevard), leases rolling-over to higher rents in the Office Properties and the rollover of two anchor tenant leases into higher paying base rent in lieu of percentage rent at White Oak 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 North Washington and Shops at Fairfax developments. Expense recoveries were $2,529,000 for the 1999 Quarter compared to $2,625,000 for the comparable 1998 Quarter, representing a decrease of $96,000 (3.7%). Percentage rent was $478,000 in the 1999 Quarter, compared to $588,000 in the 1998 Quarter a decrease of $110,000 (18.7%). The decrease in percentage rent resulted primarily from the rollover of two anchor tenant leases into higher paying base rent in lieu of percentage rent at White Oak and Giant shopping centers. Other income, which primarily consists of parking income, kiosk and temporary leasing, and fees associated with early termination of leases, was $450,000 in the 1999 Quarter, compared to $393,000 in the 1998 Quarter, representing an increase of $57,000 (14.5%). The increase in other income resulted primarily from the collection of three shopping center lease termination fees. Operating expenses, consisting primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses, increased $58,000 (2.9%) to $2,074,000 in the 1999 Quarter from $2,016,000 in the 1998 Quarter. The provision for credit losses decreased $66,000 (53.7%) to $57,000 in the 1999 Quarter from $123,000 in the 1998 Quarter. The credit loss decrease resulted from lower credit loss activity in the 1999 Quarter compared to the 1998 Quarter when a tenant at Avenel Business Park filed for bankruptcy protection. -22-
Real estate taxes decreased $101,000 (6.4%) to $1,476,000 in the 1999 Quarter from $1,577,000 in the 1998 Quarter. Decreased real estate tax expense was reported at several of the Company's shopping centers redeveloped during 1999. Interest expense decreased $60,000 (1.1%) to $5,636,000 for the 1999 Quarter from $5,696,000 reported for the 1998 Quarter. Amortization of deferred debt expense decreased $2,000 (1.9%) to $104,000 in the 1999 Quarter from $106,000 in the 1998 Quarter. Depreciation and amortization expense increased $164,000 (5.8%) from $2,840,000 in the 1998 Quarter to $3,004,000 in the 1999 Quarter. General and administrative expense, which consists of payroll, administrative and other overhead expense, was $913,000 for the 1999 Quarter, an increase of $48,000 (5.5%) over the 1998 Quarter. The increase in 1999 expenses compared to 1998 resulted primarily from increases in payroll related expenses. Nine months Ended September 30, 1999 Compared to Nine months Ended September 30, - -------------------------------------------------------------------------------- 1998 - ---- Revenues for the nine month period ended September 30, 1999 (the "1999 Period"), totaled $54,393,000 compared to $52,483,000 for the comparable period in 1998 (the "1998 Period") an increase of $1,910,000 (3.6%). Base rent was $43,752,000 for the 1999 Period, compared to $41,505,000 for the 1998 Period, representing an increase of $2,247,000 (5.4%). 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 North Washington and Shops at Fairfax developments. Expense recoveries were $7,410,000 for the 1999 Period compared to $7,339,000 for the comparable 1998 Period, representing an increase of $71,000 (1.0%). Percentage rent was $1,508,000 in the 1999 Period, compared to $1,995,000 in the 1998 Period, a decrease of $487,000 (24.4%). 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 primarily consists of parking income, kiosk and temporary leasing, and fees associated with early termination of leases, was $1,723,000 in the 1999 Period, compared to $1,644,000 in the 1998 Period, representing an increase of $79,000 (4.8%). -23-
Operating expenses, consisting primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses, increased $7,000 (0.1%) to $5,909,000 in the 1999 Period from $5,902,000 in the 1998 Period. The provision for credit losses decreased $93,000 (33.8%) to $182,000 in the 1999 Period from $275,000 in the 1998 Period. The credit loss decrease resulted from lower credit loss activity in the 1999 Period compared to the 1998 Period, when a tenant at Avenel Business Park filed for bankruptcy protection. Real estate taxes increased $73,000 (1.6%) to $4,636,000 in the 1999 Period from $4,563,000 in the 1998 Period. The credit loss decrease resulted from lower credit loss activity in the 1999 Period compared to the 1998 Period, when a tenant at Avenel Business Park filed for bankruptcy protection. Interest expense of $16,734,000 for the 1999 Period represented a decrease of $238,000 (1.4%) from $16,972,000 reported for the 1998 Period. Amortization of deferred debt expense decreased $3,000 (1.0%) to $312,000 in the 1999 Period from $315,000 in the 1998 Period. Depreciation and amortization expense increased $305,000 (3.6%) from $8,488,000 in the 1998 Period to $8,793,000 in the 1999 Period. General and administrative expense, which consists of payroll, administrative and other overhead expense, was $2,710,000 for the 1999 Period, an increase of $158,000 (6.2%) over the 1998 Period. The increase in 1999 expenses compared to 1998 resulted from increases in payroll and state income tax expenses. Year 2000 Issue - --------------- The year 2000 issue relates to whether computer systems will properly recognize date sensitive information to allow accurate processing of transactions and data relating to the year 2000 and beyond. In addition, the year 2000 issue relates to whether non-Information Technology (IT) systems that depend upon embedded electronic technology will recognize the year 2000. Systems that do not properly recognize such information could generate erroneous information or fail. In 1995, the Company contracted to replace virtually all of its management information and accounting systems and install a local area network (LAN). One of the selection criteria of the new software and hardware was that they be fully year 2000 compliant. The new LAN and management and accounting information systems have been installed . Therefore, the Company's management information and accounting systems are fully year 2000 compliant. As a result of its efforts, the Company does not expect to incur any additional expense for its information systems related to the year 2000 issue. The Company's property management staff has conducted a comprehensive review of its non-IT systems at its shopping centers and office buildings to determine whether any computer hardware and software in mechanical systems (i.e. escalators, elevators, security, heating, ventilating and air conditioning systems, etc.) are not year 2000 compliant. Work has -24-
commenced on repairs and replacements required to make the Company's non-IT systems year 2000 compliant. The costs were less than $100,000 and work was substantially completed in July 1999. The Company believes there is risk that its operations may be affected by vendors and tenants who are unable to perform as contracted due to their own year 2000 exposure. It is very difficult to identify "the most reasonably likely worst case scenario" at this time. The Company's potential exposure is widespread; however there is no known or expected major direct exposure. The Company believes that the most likely worst case exposure is at this indirect level where vendors and tenants fail to perform their obligations to the Company. For example, the Company believes it is possible that certain tenants' information systems may fail, which may delay the payment of rents. To help minimize this risk, the Company sent a letter to each tenant prior to January 1, 1999 advising the tenant that rent payments due January 1, 2000 must be paid on time. A second reminder was sent in September and a final letter will be sent in December 1999. The Company's leases contain provisions empowering it to take certain actions to enforce its right to the timely payment of rent, regardless of the tenant's year 2000 exposure. While it is not possible at this time to determine the likely impact of these potential problems, the Company will continue to evaluate these areas and develop contingency plans, as appropriate. Related Party Transactions - -------------------------- The Company acquired a 6.58 acre parcel of land at a cash purchase price of $1,438,000 in October 1999, from a subsidiary of Chevy Chase Bank, F.S.B., a member of The Saul Organization. An expansion to the Ashburn Village shopping center will be developed on this parcel of land. The Company believes that the price paid to the seller was fair and was comparable to the price that would have been obtained from an unrelated third party. The Company also signed a contract with the seller to purchase an additional 7.4 acre parcel of land at Ashburn Village. The price to be paid will be determined based on the timing of the closing, which may not be later than December 2001. -25-
PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K 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, 1994 and filed as Exhibit 3.(a) of the 1993 Annual Report of the Company on Form 10-K are 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 are hereby incorporated by reference. The First Amendment to the First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary I Limited Partnership, 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 3.(b) of the 1997 Annual Report of the Company on Form 10-K are 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 are 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 June 30, 1998 Quarterly Report of the Company is hereby incorporated by reference. -26-
(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 are hereby incorporated by reference. (c) First Amended and Restated Agreement of Limited Partnership of Saul Subsidiary II Limited 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. (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, as amended and restated by the Deferred Compensation and Stock Plan for Directors, dated as of March 18, 1999, filed as Exhibit 10.(k) of the March 31, 1999 Quarterly Report of the Company, is hereby incorporated by reference. -27-
(l) Deed of Trust, Assignment of Rents, and Security Agreement dated as of September 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 June 30, 1998 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 June 30, 1998 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 June 30, 1998 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 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 filed as Exhibit 10.(q) of the 1997 Annual Report of the Company on Form 10-K is hereby incorporated by reference. (r) Construction Loan Agreement dated as of January 11, 1999 by and between Saul Holdings Limited Partnership and Saul Centers, Inc. as Borrower and Wells Fargo Bank National Association as Lender filed as Exhibit 10.(r) of the March 31, 1999 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. (s) Promissory Note dated as of January 11, 1999 by and between Saul Holdings Limited Partnership and Saul Centers, Inc. as Borrower and Wells Fargo Bank National Association as Lender filed as Exhibit 10.(s) of the March 31, 1999 Quarterly Report of the Company on Form 10-Q is hereby incorporated by reference. -28-
27. Financial Data Schedule 99. Schedule of Portfolio Properties Reports on Form 8-K ------------------- None. -29-
SIGNATURES Pursuant to the requirements 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: November 10, 1999 /s/ Philip D. Caraci ------------------ -------------------------------------- Philip D. Caraci, President Date: November 10, 1999 /s/ Scott V. Schneider ------------------ -------------------------------------- Scott V. Schneider Senior Vice President, Chief Financial Officer -30-