<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1994
REGISTRATION NO. 33-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
B.F. SAUL REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 6798 52-6053341
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
(301) 986-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
STEPHEN R. HALPIN, JR.
B.F. SAUL REAL ESTATE INVESTMENT TRUST
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
(301) 986-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
Richard J. Parrino
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
(202) 663-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the Securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
11 5/8% Series B Senior Secured
Notes due 2002................... $175,000,000 100% $175,000,000 $60,345
<FN>
(1) Estimated solely for purposes of calculation of the registration fee
pursuant to Rule 457.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
B.F. SAUL REAL ESTATE INVESTMENT TRUST
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF
ITEMS OF FORM S-4
---------------------------------------------------------------
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Facing Page of Registration Statement; Cross
Reference Sheet; Outside Front and Inside
Front Cover Pages of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Pages of Prospectus;
Outside Back Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information......... Summary; Risk Factors and Other
Considerations
4. Terms of the Transaction................ The Exchange Offer; Description of the Notes;
Certain Federal Income Tax Considerations
5. Pro Forma Financial Information......... Not Applicable
6. Material Contacts with the Company Being
Acquired............................... Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.............. Plan of Distribution
8. Interests of Named Experts and Counsel.. Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to
S-3 Registrants........................ Not Applicable
11. Incorporation of Certain Information by
Reference.............................. Not Applicable
12. Information with respect to S-2 or S-3
Registrants............................ Not Applicable
13. Incorporation of Certain Information by
Reference.............................. Not Applicable
14. Information with Respect to Registrants
other Than S-3 or S-2 Registrants...... Summary; Capitalization; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Description of the Notes; Index to
Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
C. INFORMATION ABOUT THE COMPANY TO BE ACQUIRED
15. Information With Respect to
S-3 Companies.......................... Not Applicable
16. Information With Respect to S-2 or S-3
Companies.............................. Not Applicable
17. Information With Respect to Companies
Other Than S-3 or S-2 Companies........ Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to Be Solicited..... Not Applicable
19. Information if Proxies, Consents or
Authorizations Are Not to Be Solicited
or in an Exchange Offer................ Trustees and Executive Officers; Executive
Compensation; Related Party Transactions
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, MODIFICATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 6, 1994
PROSPECTUS
OFFER TO EXCHANGE
11 5/8% SERIES B SENIOR SECURED NOTES DUE 2002
FOR
ALL OUTSTANDING
11 5/8% SENIOR SECURED NOTES DUE 2002
($175,000,000 PRINCIPAL AMOUNT OUTSTANDING)
OF
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
---------------
THE EXCHANGE OFFER
WILL EXPIRE AT P.M., NEW YORK CITY TIME,
ON , 1994, UNLESS EXTENDED
------------------------
B.F. Saul Real Estate Investment Trust (the "Trust") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal, to exchange $1,000 principal amount of its
11 5/8% Series B Senior Secured Notes due 2002 (the "New Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined) of which this
Prospectus constitutes a part, for each $1,000 principal amount of the Trust's
outstanding 11 5/8% Senior Secured Notes due 2002 (the "Old Notes"), of which
$175,000,000 aggregate principal amount is outstanding (the "Exchange Offer").
The New Notes and the Old Notes are collectively referred to herein as the
"Notes."
The Trust will accept for exchange any and all Old Notes that are validly
tendered on or prior to p.m., New York City time, on the date the Exchange
Offer expires, which will be , 1994, unless the Exchange Offer is
extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time prior to p.m., New York City time, on the business day prior to the
Expiration Date, unless previously accepted for payment. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain conditions which
may be waived by the Trust and to the terms and provisions of the Registration
Rights Agreement (as defined). Old Notes may be tendered only in denominations
of $1,000 and integral multiples thereof. The Trust has agreed to pay the
expenses of the Exchange Offer. See "The Exchange Offer."
The New Notes will be obligations of the Trust entitled to the benefits of
the Indenture (as defined) relating to the Old Notes. The form and terms of the
New Notes are identical in all material respects to the form and terms of the
Old Notes, except that the New Notes have been registered under the Securities
Act. Following the completion of the Exchange Offer, none of the Notes will be
entitled to contingent increases in the interest rates provided for in the
Registration Rights Agreement. See "The Exchange Offer."
SEE "RISK FACTORS AND OTHER CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED PRIOR TO AN INVESTMENT IN THE NEW NOTES.
The New Notes will bear interest from March 30, 1994. Interest on the New
Notes is payable semiannually on April 1 and October 1 of each year, commencing
on October 1, 1994. Interest on the New Notes will accrue from March 30, 1994 at
a rate of 11 5/8%. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued from March 30, 1994 to
the date of issuance of the New Notes.
(CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1994.
<PAGE>
The Trust's ability to pay interest on the Notes will depend in significant
part on its receipt of payments from Chevy Chase Bank, F.S.B. ("Chevy Chase" or
the "Bank"), 80% of the common stock of which is owned by the Trust. See "Risk
Factors and Other Considerations -- Ability to Pay Principal and Interest on the
Notes," "-- Restrictions on Dividends From the Bank" and "-- Considerations
Relating to Tax Sharing Agreement." The Notes will mature on April 1, 2002. On
or after April 1, 1998, the Notes will be redeemable at any time at the option
of the Trust, in whole or in part, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the redemption date. See
"Description of the Notes -- Optional Redemption." In addition, upon the
occurrence of a Change of Control Triggering Event (as defined), each Holder of
the Notes may require the Trust to repurchase all or a portion of such Holder's
Notes at 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase. See "Description of the Notes --
Certain Covenants -- Change of Control Triggering Event."
The Old Notes are, and the new Notes will be, secured, general obligations
of the Trust ranking PARI PASSU with all other unsubordinated obligations of the
Trust. The Old Notes are, and the New Notes will be, secured by a first priority
perfected security interest in 80% (8,000 shares) of the issued and outstanding
common stock of the Bank (the "Pledged Bank Stock") and by certain other assets
of the Trust, as described herein. See "Risk Factors and Other Considerations --
Regulatory Considerations Affecting Enforcement of Remedies Following an Event
of Default." There currently is no public market for the Bank's common stock.
The Trust may substitute $25,000 of cash or U.S. Government Securities (as
defined) for each share of Pledged Bank Stock (adjusted for stock splits and
combinations), provided the Notes are secured at all times by at least 66 2/3%
of the issued and outstanding shares of both Voting Stock (as defined) and
common stock of the Bank. In addition, the Old Notes are, and the New Notes will
be, secured by cash, U.S. Government Securities, Certificates of Deposit (as
defined) or Margin Securities (as defined) in an account (the "Liquidity
Maintenance Account") with the Trustee. At the time of issuance of the Old
Notes, the Collateral Value (as defined) of the Liquidity Maintenance Account
was $25.8 million, which equalled the sum of (a) one year's interest payments on
the Old Notes and (b) one year's estimated interest payments on the amount of
Retail Notes (as defined) then outstanding. Each quarter after the issuance of
the Notes, such liquidity maintenance requirement will be recalculated based on
the estimated amount of one year's interest payments on the amount of then
outstanding Notes and Retail Notes and the then current Collateral Value of the
collateral on deposit in the Liquidity Maintenance Account. If the required
Collateral Value exceeds such current Collateral Value, the Trust will be
required to make an additional deposit into the Liquidity Maintenance Account to
remedy such deficit. See "Description of the Notes -- Security." The Old Notes
are, and the New Notes will be, effectively subordinated to all existing and
future liabilities, including indebtedness and trade payables, of subsidiaries
of the Trust. At December 31, 1993, on a PRO FORMA basis after giving effect to
the sale of the Old Notes, and the application of the net proceeds therefrom,
the aggregate amount of indebtedness of the Trust would have been $347.3 million
and the aggregate amount of indebtedness of subsidiaries of the Trust (other
than the Bank and its subsidiaries) would have been $61.5 million. See
"Capitalization."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission"), issued to third parties, the Trust believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by a holder thereof (other
than (i) a broker-dealer who purchased such Old Notes directly from the Trust
for resale pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" of the Trust within the
meaning of Rule 405 of the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the New Notes in its ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes. Holders of Old
Notes wishing to accept the Exchange Offer must represent to the Trust that such
conditions have been met.
(CONTINUED ON NEXT PAGE)
2
<PAGE>
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Trust has agreed that, for a period of 180 days after the date
of this Prospectus, it will make this Prospectus available to any broker-dealer
for use in connection with any such resales. See "Plan of Distribution."
The Trust believes that none of the registered holders of the Old Notes is
an "affiliate" of the Trust within the meaning of Rule 405 under the Securities
Act.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Trust does not intend to list the New Notes on any securities exchange or to
seek approval for quotation of the New Notes through any automated quotation
system. The Trust has been advised by Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Friedman, Billings, Ramsey & Co., Inc., as the initial
purchasers of the Old Notes (the "Initial Purchasers"), that, following
completion of the Exchange Offer, they presently intend to make a market in the
New Notes; however, neither such entity is obligated to do so and any
market-making activities with respect to the New Notes may be discontinued at
any time. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors and Other Considerations -- Absence of a Public
Market for the Notes."
The Trust will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE TRUST ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
------------------------
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS
TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN
EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT
THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION.
IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
3
<PAGE>
SUMMARY
THIS SUMMARY, INCLUDING THE SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA,
IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. CAPITALIZED
TERMS USED IN THIS SUMMARY AND NOT DEFINED THEREIN HAVE THE MEANINGS ASCRIBED TO
SUCH TERMS ELSEWHERE IN THIS PROSPECTUS.
THE TRUST HAS PREPARED ITS FINANCIAL STATEMENTS AND OTHER DISCLOSURES ON A
FULLY CONSOLIDATED BASIS. THE TERM "TRUST" AS USED IN THIS PROSPECTUS GENERALLY
REFERS TO THE COMBINED ENTITY, WHICH INCLUDES B.F. SAUL REAL ESTATE INVESTMENT
TRUST AND ITS SUBSIDIARIES, INCLUDING CHEVY CHASE BANK, F.S.B. ("CHEVY CHASE" OR
THE "BANK") AND THE BANK'S SUBSIDIARIES. "REAL ESTATE TRUST" REFERS TO B.F. SAUL
REAL ESTATE INVESTMENT TRUST AND ITS SUBSIDIARIES, EXCLUDING CHEVY CHASE AND
CHEVY CHASE'S SUBSIDIARIES. THE OPERATIONS CONDUCTED BY THE REAL ESTATE TRUST
ARE DESIGNATED AS "REAL ESTATE," WHILE THE BUSINESS CONDUCTED BY THE BANK AND
ITS SUBSIDIARIES IS IDENTIFIED BY THE TERM "BANKING."
THE TRUST
The Trust has been engaged since 1964 in the ownership and development of
income-producing properties. The Trust owns 80% of the issued and outstanding
common stock of Chevy Chase, whose assets accounted for 95.3% of the Trust's
consolidated assets at December 31, 1993. The Trust is subject to federal
regulation as a thrift holding company by virtue of its ownership of a majority
interest in Chevy Chase. See "Business -- Real Estate -- Holding Company
Regulation." The Trust will pledge all of the common stock of the Bank which it
currently owns as security for the Notes. See "Description of the Notes --
Security." The Trust's ability to pay interest on the Notes will depend in
significant part on its receipt of payments from the Bank. See "Risk Factors and
Other Considerations -- Ability to Pay Principal and Interest on the Notes."
The family of B. Francis Saul II, the Trust's Chairman and Chief Executive
Officer, has played a prominent role in the development and management of real
estate in the Washington, D.C. area for over 100 years. The Real Estate Trust's
long-term objectives are to increase cash flow from operations and to maximize
capital appreciation of its real estate. The properties owned by the Real Estate
Trust are located predominantly in the Mid-Atlantic and Southeastern regions of
the United States and consist principally of office and industrial properties,
hotels and undeveloped land parcels. The Trust terminated its status as a
qualified real estate investment trust for federal income tax purposes in 1978
and is now taxable as a corporation.
In August 1993, the Real Estate Trust consummated a series of transactions
in which it transferred its 22 shopping center properties and one of its office
properties and the debt associated with such properties to a newly organized
limited partnership, Saul Holdings Limited Partnership ("Saul Holdings
Partnership"), and one of two newly organized subsidiary limited partnerships of
Saul Holdings Partnership. In exchange for the transferred properties, the Real
Estate Trust received securities representing a 21.5% limited partnership
interest in Saul Holdings Partnership, which it holds directly and through
wholly-owned subsidiaries. Saul Centers, Inc. ("Saul Centers"), a newly
organized, publicly held real estate investment trust, received a 73.0% general
partnership interest in Saul Holdings Partnership in exchange for the
contribution of approximately $220.7 million to Saul Holdings Partnership. The
Real Estate Trust's limited partnership interest represents 3,495,713
partnership units in Saul Holdings Partnership. Beginning in August 1996, the
partnership units are convertible, on a one-for-one basis, into shares of Saul
Centers common stock, which are traded on the New York Stock Exchange under the
symbol "BFS." Saul Centers, which is the sole general partner of Saul Holdings
Partnership and each of the two subsidiary limited partnerships, generally has
full, exclusive and complete responsibility and discretion in the management and
control of each such partnership. B. Francis Saul II serves as Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers. See "Business --
Real Estate -- Investment in Saul Holdings Limited Partnership" for a further
discussion of this investment and certain tax considerations relating thereto.
4
<PAGE>
The principal offices of the Trust are located at 8401 Connecticut Avenue,
Chevy Chase, Maryland 20815, and the Trust's telephone number is (301) 986-6000.
CHEVY CHASE
Chevy Chase is a federally chartered and federally insured stock savings
bank which at December 31, 1993 was conducting business from 76 full-service
offices and 300 automated teller machines ("ATMs") in Maryland, Virginia and the
District of Columbia. The Bank, which is headquartered in Montgomery County,
Maryland, a suburban community of Washington, D.C., also maintains 18 loan
production offices in Maryland and Virginia which are operated by a wholly-owned
mortgage banking subsidiary. At December 31, 1993, the Bank had total assets of
$5.1 billion, total deposits of $3.9 billion and stockholders' equity of $293.0
million. Based on total consolidated assets at December 31, 1993, Chevy Chase is
the largest savings institution operating primarily in the Washington, D.C.
metropolitan area and is also the largest savings institution headquartered in
Maryland.
The Bank's tangible, core (or leverage) and total risk-based regulatory
capital ratios at December 31, 1993 were 4.55%, 5.30% and 11.56%, respectively,
compared to the regulatory requirements of 1.5%, 3.0% and 8.0%, respectively. At
December 31, 1993, the Bank's leverage, tier 1 risk-based and total risk-based
regulatory capital ratios of 5.30%, 6.88% and 11.56%, respectively, were
sufficient for the Bank to meet the standards of 5.0%, 6.0% and 10.0%,
respectively, for classification as "well capitalized" under the "prompt
corrective action" regulations of the Office of Thrift Supervision (the "OTS"),
the Bank's primary regulator. On a fully phased-in basis at December 31, 1993,
the Bank was in compliance with all of its regulatory capital requirements and
the Bank's regulatory capital ratios would meet the ratios established for
"adequately capitalized" institutions under the prompt corrective action
regulations. See "Risk Factors and Other Considerations -- Regulatory
Considerations Affecting Chevy Chase."
Chevy Chase is a consumer-oriented retail bank offering a wide range of
products and services. The Bank has emphasized consumer lending programs that it
believes contribute to market share growth in its local markets by attracting
new depositors, promoting a high degree of customer loyalty and brand awareness
and providing opportunities to cross-market other products of the Bank. At March
31, 1993, according to industry statistics, the Bank, which entered the credit
card business in June 1985, was the third largest thrift issuer of credit cards
in terms of outstanding receivables, including receivables owned by the Bank and
receivables securitized, sold and serviced by the Bank (both types of
receivables collectively referred to herein as "managed" receivables). At
December 31, 1993, Chevy Chase had $1.7 billion of managed credit card
receivables and approximately 890,000 cards in circulation. See "Risk Factors
and Other Considerations -- Risks of Credit Card Lending by Chevy Chase." The
Bank's portfolio of other consumer loans, including automobile loans, overdraft
lines of credit and unsecured loans, totaled $191.7 million at December 31,
1993.
The Bank is currently expanding the retail origination network of its
mortgage banking subsidiary. Residential single-family loan originations in the
three months ended December 31, 1993 and in fiscal 1993 totaled $540.4 million
and $1.4 billion, respectively. In addition, at December 31, 1993, Chevy Chase
serviced approximately $3.2 billion of mortgage loans for its own portfolio as
well as for third-party investors. The Bank increased its servicing portfolio by
purchasing the rights to service $1.2 billion and $333.1 million of mortgage
loans during fiscal 1993 and fiscal 1992, respectively. During fiscal 1993, 1992
and 1991, the Bank sold the rights to service $552.2 million, $255.7 million and
$1.0 billion, respectively, of mortgage loans.
Chevy Chase was the first major Washington, D.C. metropolitan area financial
institution to offer revolving home equity credit line loans, and currently is
the leading originator of home equity credit lines in its primary market area.
The Bank's home equity credit line loan provides revolving credit secured
principally by a second mortgage on the borrower's home. At December 31, 1993,
the Bank had $552.0 million of managed home equity credit line receivables and
approximately 20,000 individual credit lines totaling $1.1 billion in available
credit.
5
<PAGE>
Retail consumer deposits constitute the Bank's primary source of funds for
its lending and other business operations. Chevy Chase has developed its branch
network in furtherance of its corporate strategy to solidify its relationships
with existing customers, achieve a broader retail base to support future growth
and improve its ability to compete with other depository institutions in the
Washington, D.C. metropolitan area. With 34 of its 76 branches located in
Montgomery County, which has one of the nation's highest per capita incomes, the
Bank ranks second in market share of deposits in that community. Fourteen of the
Bank's branches are located in Prince George's County, Maryland, the Bank's
second largest source of funds, where Chevy Chase ranks third in deposit share
behind two of the area's leading commercial banks. The Bank's branch network
also includes locations in Northern Virginia (18 branches), other Maryland
counties (eight branches) and the District of Columbia (two branches). In
addition to locations at deposit branch sites, the Bank's network of 300 ATMs
includes locations bearing Chevy Chase's name and logo in shopping malls,
museums, family entertainment and sports parks, and 106 stores operated by
Safeway Inc., a national grocery chain.
Chevy Chase has accessed the capital markets as an additional means of
funding its operations and managing its capital ratios and asset growth. Since
1988, the Bank has securitized approximately $3.2 billion of credit card, home
equity credit line and automobile loan receivables. At December 31, 1993, the
Bank serviced $778.4 million, $444.0 million and $23.2 million of securitized
credit card, home equity credit line and automobile loan receivables,
respectively. Chevy Chase derives fee-based income from servicing these
securitized portfolios.
The deposits of Chevy Chase are insured by the Savings Association Insurance
Fund (the "SAIF"), which is administered by the Federal Deposit Insurance
Corporation (the "FDIC"). The Bank is subject to comprehensive regulation,
examination and supervision primarily by the OTS.
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Trust is offering to exchange $1,000 principal
amount of New Notes for each $1,000 principal amount of
Old Notes that are properly tendered and accepted. The
Trust will issue the New Notes on or promptly after the
Expiration Date. As of the date of this Prospectus,
$175,000,000 aggregate principal amount of Old Notes was
outstanding. See "The Exchange Offer."
Resale of New Notes............... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, including "Exxon Capital Holdings
Corporation" (available May 13, 1988), "Morgan Stanley &
Co. Incorporated" (available June 5, 1991), "Mary Kay
Cosmetics, Inc." (available June 5, 1991) and "Warnaco,
Inc." (available October 11, 1991), the Trust believes
that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any holder thereof (other
than (i) a broker-dealer who purchased such Old Notes
directly from the Trust for resale pursuant to Rule 144A
or any other available exemption under the Securities
Act or (ii) a person that is an "affiliate" of the Trust
within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that
the holder is acquiring the New Notes in its ordinary
course of business and is not participating, and has no
arrangement or understanding with any person to
participate, in the distribution of the New
</TABLE>
6
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Notes. In the event that the Trust's belief is
inaccurate, holders of New Notes that transfer New Notes
in violation of the prospectus delivery provisions of
the Securities Act and without an exemption from
registration thereunder may incur liability under the
Securities Act. The Trust does not assume or indemnify
holders against such liability, although the Trust does
not believe that any such liability should exist.
Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading activities.
The Trust has agreed that, for a period of 180 days
after the date of this Prospectus, it will make this
Prospectus available to any broker-dealer for use in
connection with any such resales. See "Plan of
Distribution."
This Exchange Offer is not being made to, nor will the
Trust accept surrenders for exchange from, holders of
Old Notes in any jurisdiction in which this Exchange
Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such
jurisdiction.
Expiration Date................... p.m., New York City time, on , 1994, unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended. See "The Exchange Offer
-- Expiration Date; Extensions; Amendments."
Accrued Interest on the New Notes
and the Old Notes................. Interest on the New Notes will accrue from March 30,
1994. Holders of Old Notes whose Old Notes are accepted
for exchange will be deemed to have waived the right to
receive any payment in respect of interest on such Old
Notes accrued from March 30, 1994 to the date of the
issuance of the New Notes. Consequently, holders who
exchange their Old Notes for New Notes will receive the
same interest payment on October 1, 1994 (the first
interest payment date with respect to the New Notes)
that they would have received had they not accepted the
Exchange Offer. See "The Exchange Offer -- Interest on
the New Notes."
Termination of the Exchange
Offer............................. The Trust may terminate the Exchange Offer if it
determines that (i) the Exchange Offer, or the making of
any exchange, would violate any applicable law or any
interpretation of applicable law by the staff of the
Commission or (ii) the Trust's
</TABLE>
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ability to proceed with the Exchange Offer could be
materially impaired due to any legal or governmental
action or proceeding or the enactment of any new law,
statute, rule or regulation. The Trust does not expect
any of the foregoing conditions to occur, although there
can be no assurances in this regard. See "The Exchange
Offer -- Termination."
Procedures for Tendering Old
Notes............................. Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged
and any other required documentation to
, as Exchange Agent, at the address
set forth herein and therein or effect a tender of Old
Notes pursuant to the procedures for book-entry transfer
as provided for herein. By executing the Letter of
Transmittal, each holder will represent to the Trust
that, among other things, (i) the New Notes acquired
pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such
New Notes, whether or not such person is the holder,
(ii) neither the holder nor any such other person has
any arrangement or understanding with any person to
participate in the distribution of such New Notes and
(iii) neither the holder nor any such other person is an
"affiliate" of the Trust within the meaning of Rule 405
under the Securities Act. See "The Exchange Offer --
Procedures for Tendering."
Special Procedures for Beneficial
Owners............................ Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender
on behalf of such beneficial owner. If a beneficial
owner wishes to tender on its own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering its Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or
obtain a properly completed bond power from the
registered holder. The transfer of record ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date.
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes (or who cannot complete
the procedure of book-entry transfer on a timely basis)
and a properly completed Letter of Transmittal or any
other documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date may
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
</TABLE>
8
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Withdrawal Rights................. Tenders of Old Notes may be withdrawn at any time prior
to p.m., New York City time, on the business day
prior to the Expiration Date, unless previously accepted
for exchange. See "The Exchange Offer -- Withdrawal of
Tenders."
Acceptance of Old Notes and
Delivery of New Notes............. Subject to certain conditions (as summarized above in
"Termination of the Exchange Offer" and described more
fully in "The Exchange Offer -- Termination"), the Trust
will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior
to p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration Date.
Certain Tax Considerations........ The exchange pursuant to the Exchange Offer will
generally not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax Considerations
-- Exchange Offer."
Exchange Agent.................... is serving as exchange agent (the "Exchange
Agent") in connection with the Exchange Offer. The
mailing address, address for hand deliveries and for
deliveries by overnight courier of the Exchange Agent
is . For information with
respect to the Exchange Offer, the telephone number for
the Exchange Agent is and the facsimile number
for the Exchange Agent is .
Use of Proceeds................... There will be no cash proceeds payable to the Trust from
the issuance of the New Notes pursuant to the Exchange
Offer.
</TABLE>
SUMMARY OF TERMS OF THE NOTES
The Exchange Offer applies to $175,000,000 aggregate principal amount of the
Old Notes. The form and terms of the New Notes will be the same as the form and
terms of the Old Notes, except that the New Notes will be registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof. The New Notes will evidence the same indebtedness as the Old Notes,
will be entitled to the benefits of the Indenture and will be treated as a
single class thereunder with the Old Notes. See "Description of the Notes --
General."
<TABLE>
<S> <C>
Maturity Date..................... April 1, 2002.
Interest Payment Dates............ April 1 and October 1 of each year, commencing on
October 1, 1994.
Optional Redemption............... The Old Notes are, and the New Notes will be, redeemable
at the option of the Trust, in whole or in part, on or
after April 1, 1998, at the redemption prices set forth
herein, together with accrued and unpaid interest, if
any, to the redemption date. See "Description of the
Notes -- Optional Redemption."
Change of Control Triggering
Event............................. Upon the occurrence of a Change of Control Triggering
Event, each holder of the Notes may require the Trust to
repurchase all or a portion of such holder's Notes at a
purchase price in cash equal to 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to
</TABLE>
9
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<S> <C>
the date of repurchase. See "Description of the Notes --
Certain Covenants -- Change of Control Triggering
Event." Failure of the Trust to repurchase such holder's
Notes would constitute an Event of Default. The Trust's
ability to repurchase the Notes may be limited by the
amount of its available cash and other factors. See
"Risk Factors and Other Considerations -- Ability to Pay
Principal and Interest on the Notes."
Mandatory Redemption.............. None.
Ranking........................... The Old Notes represent, and the New Notes will
represent, general, secured obligations of the Trust
ranking PARI PASSU with all other unsubordinated
obligations of the Trust. The Old Notes are, and the New
Notes will be, effectively subordinated to all existing
and future liabilities, including indebtedness and trade
payables, of subsidiaries of the Trust. At December 31,
1993, on a PRO FORMA basis after giving effect to the
sale of the Old Notes and the application of the net
proceeds therefrom, the aggregate amount of indebtedness
of the Trust would have been $347.3 million and the
aggregate amount of indebtedness of the subsidiaries of
the Trust (other than the Bank and its subsidiaries)
would have been $61.5 million. Under the Indenture, the
Trust and its subsidiaries will be able to incur
additional indebtedness, including indebtedness between
the Trust and its subsidiaries. See "Description of the
Notes -- Certain Covenants -- Limitation on
Indebtedness." The New Notes will rank PARI PASSU with
the Old Notes if any Old Notes remain outstanding upon
consummation of the Exchange Offer.
Security.......................... The Old Notes are, and the New Notes will be, secured by
a first priority perfected security interest in 80%
(8,000 shares) of the issued and outstanding common
stock of the Bank (the "Pledged Bank Stock") and by
certain dividends, cash, instruments and other property
and proceeds from time to time received, receivable or
otherwise distributed in respect of or in exchange for
any of the foregoing. So long as no Default or Event of
Default has occurred and is continuing, the Trust may
substitute $25,000 of cash or U.S. Government Securities
for each share of Pledged Bank Stock (adjusted for stock
splits and combinations), provided the Notes are secured
by at least 66 2/3% of the issued and outstanding shares
of both Voting Stock and common stock of the Bank. The
Trust will be required to deposit any such cash or U.S.
Government Securities that are substituted for the
Pledged Bank Stock into a collateral account (the
"Collateral Account") with the Trustee and, provided no
Default or Event of Default has occurred and is
continuing and subject to certain restrictions, may
direct the Trustee to invest amounts on deposit in the
Collateral Account in U.S. Government Securities or
Certificates of Deposit. The Indenture does not restrict
the issuance of additional common stock by the Bank, but
the Trust has agreed in the Indenture that at all times
it will be the legal and beneficial owner of at least
66 2/3% of the issued and outstanding
</TABLE>
10
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shares of both Voting Stock and common stock of the Bank
and that the Pledged Bank Stock will constitute at all
times at least 66 2/3% of the issued and outstanding
shares of both Voting Stock and common stock of the
Bank.
Liquidity Maintenance
Requirement....................... The Old Notes also are, and the New Notes will be,
secured by a first priority perfected security interest
in cash, U.S. Government Securities, Certificates of
Deposit or Margin Securities (the "Liquidity Maintenance
Collateral") in an additional collateral account (the
"Liquidity Maintenance Account") with the Trustee. At
the time of issuance of the Old Notes, the Collateral
Value (as described below) of the Liquidity Maintenance
Collateral was $25.8 million, which equalled the sum of
(i) one year's interest payments on the Old Notes and
(ii) one year's estimated interest payments on the
amount of the Trust's Retail Notes then outstanding.
Each calendar quarter thereafter, the then current
Collateral Value of the Liquidity Maintenance Collateral
will be recalculated and, in addition, the required
Collateral Value of the Liquidity Maintenance Collateral
will be recalculated based on the estimated amount of
one year's interest payments on the amount of
outstanding Notes and Retail Notes. At the beginning of
each calendar quarter, no more than 50% of the required
aggregate Collateral Value of the Liquidity Maintenance
Collateral may be represented by Margin Securities and
the current Collateral Value of all Liquidity
Maintenance Collateral must at least equal the required
amount thereof, as calculated for such calendar quarter.
Any excess collateral in the Liquidity Maintenance
Account will be returned to the Trust upon request, and
the Trust will be required to make an additional deposit
into the Liquidity Maintenance Account to remedy any
deficit. See "Description of the Notes -- Security."
Provided no Default or Event of Default has occurred and
is continuing and subject to certain restrictions, the
Trust may require the Trustee to invest Liquidity
Maintenance Collateral in U.S. Government Securities,
Certificates of Deposit and Margin Securities. Upon
giving effect to any such investment, no more than 50%
of the required aggregate Collateral Value of the
Liquidity Maintenance Collateral may be represented by
Margin Securities and the current Collateral Value of
all Liquidity Maintenance Collateral must at least equal
the required amount thereof, as calculated for the
current calendar quarter.
The Collateral Value of the Liquidity Maintenance
Collateral will equal, in the case of cash, the amount
thereof, in the case of U.S. Government Securities and
Certificates of Deposit, the principal amount thereof,
and, in the case of Margin Securities, 50% of their
market value, determined as provided in the Indenture.
Margin Securities may include the common stock of Saul
Centers, an affiliate of the Trust.
</TABLE>
11
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The Notes may be secured by margin stock within the
meaning of the margin regulations (Regulations G, T and
U) issued by the Board of Governors of the Federal
Reserve System. If the Notes become secured by margin
stock, a purchaser of Notes that is a bank within the
meaning of Regulation U will have to comply with
Regulation U and a purchaser of Notes other than a bank
subject to Regulation U or a broker or dealer subject to
Regulation T must comply with Regulation G, including
the requirement that, if it is purchasing Notes in the
ordinary course of business within the meaning of
Regulation G, it must be registered under Regulation G
or become registered within 30 days after the end of any
calendar quarter during which (i) the amount of credit
extended by it that is secured by margin stock
(including the Notes) equals $200,000 or more or (ii)
the amount of such credit extended by it (including the
Notes) at any time during such calendar quarter equals
$500,000 or more. The purchase of the Old Notes did not
constitute a purpose credit within the meaning of
Regulation G, T or U and was not subject to the
collateral requirements of those Regulations.
Restrictive Covenants............. The Indenture contains certain covenants, including, but
not limited to, covenants with respect to the following
matters: (i) limitation on indebtedness; (ii) limitation
on restricted payments; (iii) limitation on transactions
with affiliates; (iv) limitation on asset sales; (v)
restriction on transfer of assets to subsidiaries; (vi)
limitation on subsidiaries; (vii) limitation on dividend
and other payment restrictions affecting subsidiaries;
(viii) limitation on issuances and sales of subsidiary
stock; (ix) required ownership of Bank common stock; (x)
limitation on disposal of, or liens on, the Collateral;
(xi) change of control triggering event; and (xii)
restrictions on merger, consolidation and sale of assets
of the Trust. See "Description of the Notes -- Certain
Covenants" and "Description of the Notes -- Merger,
Consolidation or Sale of Assets."
Exchange Offer;
Registration Rights............... In connection with the sale of the Old Notes, the Trust
agreed in the Registration Rights Agreement to (i) file
within 30 calendar days after March 30, 1994, the date
of original issue of the Old Notes, a registration
statement (the "Registration Statement") with respect to
a registered offer to exchange the Old Notes (the
Exchange Offer made hereby) for notes of the Trust with
terms identical in all material respects to the terms of
the Old Notes, (ii) use its best efforts to cause the
Registration Statement to become effective within 160
calendar days after the date of original issue of the
Old Notes and (iii) use its best efforts to cause the
Exchange Offer to be consummated within 190 days after
the date of original issue of the Old Notes. The Trust
also agreed that, in the event that any changes in law
or the applicable interpretations thereof by the staff
of the Commission do not permit the Trust to
</TABLE>
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effect the Exchange Offer, if for any other reason the
Exchange Offer is not consummated within 190 days after
the date of original issue of the Old Notes, if any
holder (other than an Initial Purchaser) is not eligible
to participate in the Exchange Offer or upon the request
of either Initial Purchaser (under certain
circumstances), the Trust will use its best efforts to
cause to become effective as promptly as practicable a
shelf registration statement with respect to the resale
of the Old Notes (the "Shelf Registration Statement")
and to keep the Shelf Registration Statement effective
until three years after the effective date thereof or
for such shorter period that will terminate when all of
the Old Notes covered by the Shelf Registration
Statement have been sold pursuant to the Shelf
Registration Statement.
The Trust agreed in the Registration Rights Agreement
that the interest rate borne by the Old Notes would
increase by an additional one-half of one percent per
annum upon each of the following events: (i) failure of
the Registration Statement to be filed with the
Commission on or prior to the 30th calendar day
following the date of original issue of the Old Notes,
(ii) failure of the Registration Statement to be
declared effective on or prior to the 160th calendar day
following the date of original issue of the Old Notes or
(iii) failure of the Exchange Offer to be consummated or
a Shelf Registration Statement with respect to the Old
Notes to be declared effective on or prior to the 190th
calendar day following the date of original issue of the
Old Notes. The aggregate amount of any such increases
from the original interest rate on the Old Notes may not
exceed 1.5% per annum. The Trust further agreed that,
upon (x) the filing of the Registration Statement in the
case of clause (i) above, (y) the effectiveness of the
Registration Statement in the case of clause (ii) above
or (z) the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the
case may be, in the case of clause (iii) above, the
interest rate borne by the Old Notes from the date next
succeeding the date of such filing, effectiveness or
consummation, as the case may be, would be reduced in
each case by one-half of one percent per annum (but, in
any event, not below the original interest rate) and
after the Exchange Offer is consummated or a Shelf
Registration Statement is declared effective, the
interest rate borne by the Old Notes would be reduced to
the original interest rate. The Registration Statement,
of which this Prospectus is a part, was filed on April
6, 1994, within 30 calendar days following the date of
original issue of the Old Notes, and was declared
effective by the Commission on , 1994, within 160
calendar days following the date of original issue of
the Old Notes, and thus no increase in the interest rate
borne by the Old Notes has been made under clause (i) or
clause (ii) above.
Holders of any Old Notes not tendered in the Exchange
Offer will not be entitled to require the Trust to file
the Shelf Registration Statement, and the interest rate
on such Old
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Notes will remain at their initial level of 11 5/8%. Any
Old Notes remaining outstanding following consummation
of the Exchange Offer will be treated together with the
New Notes as one series for purposes of the Indenture.
See "Description of the Notes -- General."
Use of Proceeds................... The net proceeds to the Trust from the sale of the Old
Notes were estimated to be approximately $166.2 million
after deduction of the amount of the Initial Purchasers'
discount and estimated expenses payable by the Trust. Of
this amount, the Trust applied approximately $83.0
million to repay certain mortgage indebtedness and a
working capital loan of the Real Estate Trust. Net
proceeds in the amount of $25.8 million were deposited
into the Liquidity Maintenance Account to satisfy the
initial liquidity maintenance requirement with respect
to the Notes. See "Description of the Notes -- Securi-
ty." The Trust will use the balance of the net proceeds
for other general corporate purposes, which may include
repayment of other mortgage indebtedness and acquisition
of income-producing properties and certain other
investments. See "Use of Proceeds -- Sale of Old Notes."
</TABLE>
RISK FACTORS
See "Risk Factors and Other Considerations" for a discussion of risk factors
and other considerations relating to the Trust and an investment in the New
Notes.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Trust herein have
been derived from the Consolidated Financial Statements of the Trust, which
statements for the years ended September 30, 1993, 1992 and 1991 have been
audited by Stoy, Malone & Company, P.C., independent public accountants, and for
the three months ended December 31, 1993 by Arthur Andersen & Co., independent
public accountants, as indicated by their reports with respect thereto which are
included in this Prospectus. The Consolidated Financial Statements of the Trust
for the three-month period ended December 31, 1992 are unaudited. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements included elsewhere in this Prospectus. In the opinion of the
management of the Trust, the amounts shown for the three months ended and as of
December 31, 1992 include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the consolidated
results for such periods and as of such dates. The results of operations for any
interim period are not necessarily indicative of the results for an entire
fiscal year.
14
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS --------------------- ------------------------------------------------
AND OTHER DATA) 1993 (1) 1992 1993 (1) 1992 1991 1990 1989
- --------------------------------------------------------- -------- ----------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REAL ESTATE:
Revenues................................................. $ 14,854 $ 24,250 $ 93,245 $100,179 $102,013 $104,299 $ 99,076
Operating expenses....................................... (25,671) (30,673 ) (137,256) (127,936) (142,144) (143,504) (136,216)
Equity in earnings (losses) of partnership investments... 725 -- (668) (208) (212) (57) (155)
Gain (loss) on sales of property......................... -- (539 ) 184 (546) 20,308 -- 1,370
-------- ----------- -------- -------- -------- -------- --------
Real estate operating loss............................... (10,092) (6,962 ) (44,495) (28,511) (20,035) (39,262) (35,925)
-------- ----------- -------- -------- -------- -------- --------
BANKING:
Interest income.......................................... 81,656 92,144 348,814 403,033 487,572 503,507 500,998
Interest expense......................................... 42,220 44,988 167,518 214,761 325,711 361,418 361,636
-------- ----------- -------- -------- -------- -------- --------
Net interest income...................................... 39,436 47,156 181,296 188,272 161,861 142,089 139,362
Provision for loan losses................................ (12,095) (27,754 ) (62,513) (89,062) (147,141) (78,300) (70,331)
-------- ----------- -------- -------- -------- -------- --------
Net interest income after provision for loan losses...... 27,341 19,402 118,783 99,210 14,720 63,789 69,031
-------- ----------- -------- -------- -------- -------- --------
Other income:
Credit card, loan servicing and deposit service fees... 27,405 24,968 91,063 92,291 105,441 134,166 102,775
Earnings (loss) on real estate held for investment..... (284) (19,601 ) (12,722) (50,649) (47,495) (53,290) 9,490
Gain on sales of assets................................ 3,298 12,664 40,270 44,259 81,927 99,028 42,520
Gain on sales of mortgage servicing rights............. 2,572 1,724 4,828 3,750 9,137 -- --
Other.................................................. 2,338 1,803 7,314 10,766 12,133 9,725 8,025
-------- ----------- -------- -------- -------- -------- --------
Total other income....................................... 35,329 21,558 130,753 100,417 161,143 189,629 162,810
-------- ----------- -------- -------- -------- -------- --------
Operating expenses....................................... 56,675 39,694 185,687 156,218 181,975 200,367 181,736
-------- ----------- -------- -------- -------- -------- --------
Banking operating income (loss).......................... 5,995 1,266 63,849 43,409 (6,112) 53,051 50,105
-------- ----------- -------- -------- -------- -------- --------
TOTAL COMPANY:
Operating income (loss) before income taxes,
extraordinary items, cumulative effect of change in
accounting principle, and minority interest............. (4,097) (5,696 ) 19,354 14,898 (26,147) 13,789 14,180
Provision for income taxes............................... (708) 232 11,703 7,385 3,225 13,698 18,918
-------- ----------- -------- -------- -------- -------- --------
Income (loss) before extraordinary items, cumulative
effect of change in accounting principle and minority
interest................................................ (3,389) (5,928 ) 7,651 7,513 (29,372) 91 (4,738)
Extraordinary items:
Adjustment for tax benefit of net operating loss
carryforwards......................................... -- -- 7,738 3,817 -- -- 6,192
Loss on early extinguishment of debt, net of taxes..... (6,333) -- -- (132) -- -- (6)
-------- ----------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle and minority interest.............. (9,722) (5,928 ) 15,389 11,198 (29,372) 91 1,448
Cumulative effect of change in accounting principle...... 36,260 -- -- -- -- -- --
-------- ----------- -------- -------- -------- -------- --------
Income (loss) before minority interest................... 26,538 (5,928 ) 15,389 11,198 (29,372) 91 1,448
Minority interest held by affiliates..................... (505) (118 ) (6,582) (5,261) 2,113 (6,013) (7,484)
Minority interest -- other............................... (2,438) -- (4,334) -- -- -- --
-------- ----------- -------- -------- -------- -------- --------
Total company net income (loss).......................... $ 23,595 $ (6,046 ) $ 4,473 $ 5,937 $(27,259) $ (5,922) $ (6,036)
-------- ----------- -------- -------- -------- -------- --------
-------- ----------- -------- -------- -------- -------- --------
Net income (loss) available to common shareholders....... $ 22,240 $ (7,401 ) $ (947) $ 517 $(32,679) $ (7,277) $ (6,036)
-------- ----------- -------- -------- -------- -------- --------
-------- ----------- -------- -------- -------- -------- --------
Net income (loss) per common share:
Income (loss) before extraordinary items, cumulative
effect of change in accounting principle and minority
interest................................................ $ (0.98) $ (1.51 ) $ 0.46 $ 0.43 $ (7.21) $ (0.26) $ (0.98)
Extraordinary items:
Adjustment for tax benefit of net operating loss
carryforwards......................................... -- -- 1.60 0.79 -- -- 1.28
Loss on early extinguishment of debt, net of taxes..... (1.31) -- -- (0.03) -- -- --
-------- ----------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle and minority interest.............. (2.29) (1.51 ) 2.06 1.19 (7.21) (0.26) 0.30
Cumulative effect of change in accounting principle...... 7.51 -- -- -- -- -- --
-------- ----------- -------- -------- -------- -------- --------
Income (loss) before minority interest................... 5.22 (1.51 ) 2.06 1.19 (7.21) (0.26) 0.30
Minority interest held by affiliates..................... (0.10) (0.02 ) (1.36) (1.08) 0.44 (1.25) (1.55)
Minority interest -- other............................... (0.51) -- (0.90) -- -- -- --
-------- ----------- -------- -------- -------- -------- --------
Total company net income (loss).......................... $ 4.61 $ (1.53 ) $ (0.20) $ 0.11 $ (6.77) $ (1.51) $ (1.25)
-------- ----------- -------- -------- -------- -------- --------
-------- ----------- -------- -------- -------- -------- --------
<FN>
- ------------------------------
(1) On August 26, 1993, the Real Estate Trust transferred its 22 shopping
center properties and one office property to Saul Holdings Partnership and
a subsidiary limited partnership of Saul Holdings Partnership in exchange
for securities representing a 21.5% limited partnership interest in Saul
Holdings Partnership. See "Business -- Real Estate -- Investment in Saul
Holdings Limited Partnership" and Note 2 to the Consolidated Financial
Statements in this Prospectus.
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED DECEMBER
31, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND ----------------------- ------------------------------------------------------------
OTHER DATA) 1993 (1) 1992 1993 (1) 1992 1991 1990 1989
- ------------------------------------------- ---------- ----------- ---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Real estate assets......................... $ 254,840 $ 358,059 $ 220,556 $ 334,378 $ 346,088 $ 370,564 $ 366,688
Income-producing properties, net......... 159,964 255,794 162,356 254,700 261,822 271,073 264,851
Land parcels............................. 38,416 49,780 38,411 50,981 56,353 58,900 54,877
Banking assets............................. 5,130,599 4,736,653 4,872,771 4,998,756 4,821,407 5,219,018 4,753,667
Total company assets....................... 5,385,439 5,094,712 5,093,327 5,333,134 5,167,495 5,589,582 5,120,355
Liabilities:
Real estate liabilities.................... 452,766 528,405 450,153 522,760 505,793 538,577 509,458
Mortgage notes payable................... 264,914 431,619 264,776 429,968 350,693 369,134 347,919
Notes payable -- unsecured............... 39,887 47,758 38,661 50,417 86,532 108,512 113,513
Bank borrowings.......................... -- -- -- -- 38,273 36,645 25,594
Banking liabilities........................ 4,891,173 4,622,049 4,634,001 4,885,189 4,747,715 5,106,446 4,659,915
Redeemable preferred stock................. -- 25,000 -- -- -- -- --
Minority interest held by affiliates....... 36,646 28,031 34,495 27,912 22,651 24,764 18,750
Minority interest -- other................. 74,307 -- 74,307 -- -- -- --
Total company liabilities.................. 5,454,892 5,203,485 5,192,956 5,435,861 5,276,159 5,669,787 5,188,123
Shareholders' deficit...................... (69,453) (108,773 ) (99,629) (102,727) (108,664) (80,205) (67,768)
OTHER DATA:
Hotels:
Number of hotels......................... 9 9 9 9 9 9 8
Number of guest rooms.................... 2,415 2,409 2,409 2,356 2,400 2,418 2,289
Average occupancy........................ 57% 56% 63% 68% 63% 66% 65%
Average room rate........................ $ 53.95 $ 54.78 $ 54.90 $ 54.02 $ 56.54 $ 57.88 $ 58.72
Shopping centers:
Number of properties..................... N/A 23 N/A 23 23 23 21
Leasable area (square feet).............. N/A 4,408,000 N/A 4,408,000 4,416,000 4,809,000 4,707,000
Average occupancy........................ N/A 95% N/A 95% 95% 95% 94%
Office properties:
Number of properties..................... 9 10 9 10 10 10 8
Leasable area (square feet).............. 1,365,000 1,537,000 1,365,000 1,537,000 1,537,000 1,537,000 1,362,000
Average occupancy........................ 80% 83% 77% 81% 89% 90% 90%
Land parcels
Number of parcels........................ 10 10 10 12 12 13 12
Total acreage............................ 433 433 433 1,496 9,529 9,535 9,476
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND ---------------------- ----------------------------------------------------------
OTHER DATA) 1993 (1) 1992 1993 (1) 1992 1991 1990 1989
- ---------------------------------------------- --------- ----------- ---------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash flows provided by (used in) operating
activities:
Real estate................................. $ (5,795) $ 4,709 $ (3,149) $ (884) $ (16,374) $ (17,381) $ (19,956)
Banking..................................... 78,497 395,338 1,157,157 1,043,648 1,521,024 (296,840) 59,196
--------- ----------- ---------- ----------- ----------- --------- ---------
Total Company............................... 72,702 400,047 1,154,008 1,042,764 1,504,650 (314,221) 39,240
--------- ----------- ---------- ----------- ----------- --------- ---------
Net cash flows provided by (used in) investing
activities:
Real estate................................. (919) (3,567 ) (2,999) (1,333) 25,731 (11,409) (14,443)
Banking..................................... (289,695) (101,935 ) (898,649) (1,241,043) (1,183,033) (16,611) (697,227)
--------- ----------- ---------- ----------- ----------- --------- ---------
Total Company............................... (290,614) (105,502 ) (901,648) (1,242,376) (1,157,302) (28,020) (711,670)
--------- ----------- ---------- ----------- ----------- --------- ---------
Net cash flows provided by (used in) financing
activities:
Real estate................................. 1,087 (1,584 ) 3,230 169 (41,709) 12,016 32,206
Banking..................................... 249,283 (261,051 ) (190,850) 157,183 (348,624) 413,957 554,758
--------- ----------- ---------- ----------- ----------- --------- ---------
Total Company............................... 250,370 (262,635 ) (187,620) 157,352 (390,333) 425,973 586,964
--------- ----------- ---------- ----------- ----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. $ 32,458 $ 31,910 $ 64,740 $ (42,260) $ (42,985) $ 83,732 $ (85,466)
--------- ----------- ---------- ----------- ----------- --------- ---------
--------- ----------- ---------- ----------- ----------- --------- ---------
CASH FLOW -- INDENTURE (2):
a. Real estate operating loss................. $ (10,092) $ (6,962 ) $ (44,495) $ (28,511) $ (20,035) $ (39,262) $ (35,925)
b. Depreciation and amortization expense...... 2,554 3,769 15,486 15,098 17,556 16,919 17,151
c. Interest expense........................... 9,764 12,835 50,470 51,326 57,382 59,703 56,641
d. Equity in losses of partnership
investments................................ -- -- 668 208 212 57 155
e. Equity in earnings of partnership
investments................................ (725) -- -- -- -- -- --
f. Losses on sales of property................ -- 539 -- 546 -- -- --
g. Gains on sales of property................. -- -- (184) -- (20,308) -- (1,370)
h. Non-cash charges........................... 1,380 -- 13,104 -- -- -- --
i. Non-cash gains............................. -- -- -- -- -- -- --
j. Cash distributions received from
partnership investments (3)................ 524 -- -- -- -- -- --
k. Tax sharing payments paid by the Bank to
the Trust.................................. 4,585 -- 5,000 -- 29,600 20,800 --
l. Dividends paid by the Bank to the Trust.... -- -- -- -- -- -- --
--------- ----------- ---------- ----------- ----------- --------- ---------
Cash Flow -- Indenture (2).................... $ 7,990 $ 10,181 $ 40,049 $ 38,667 $ 64,407 $ 58,217 $ 36,652
--------- ----------- ---------- ----------- ----------- --------- ---------
--------- ----------- ---------- ----------- ----------- --------- ---------
RECONCILIATION OF CASH FLOW FROM OPERATING
ACTIVITIES TO CASH FLOW -- INDENTURE (2):
Cash flow from operating activities........... $ (5,795) $ 4,709 $ (3,149) $ (884) $ (16,374) $ (17,381) $ (19,956)
Tax sharing payments from the Bank............ 4,585 -- 5,000 -- 29,600 20,800 --
--------- ----------- ---------- ----------- ----------- --------- ---------
Subtotal.................................... (1,210) 4,709 1,851 (884) 13,226 3,419 (19,956)
Interest expense.............................. 9,764 12,835 50,470 51,326 57,382 59,703 56,641
Cash distributions from partnerships (3)...... 524 -- -- -- -- -- --
Decrease (increase) in accounts receivable and
accrued income............................... 858 24 (98) (2,906) 1,380 (5,645) (2,447)
Increase (decrease) in accounts payable and
accrued expenses............................. 1,319 (2,238 ) (7,047) (11,594) (5,700) 42 (2,728)
Cash payments for taxes....................... 8 3 346 32 58 38 37
Other......................................... (3,273) (5,152 ) (5,473) 2,693 (1,939) 660 5,105
--------- ----------- ---------- ----------- ----------- --------- ---------
Cash Flow -- Indenture (2).................. $ 7,990 $ 10,181 $ 40,049 $ 38,667 $ 64,407 $ 58,217 $ 36,652
--------- ----------- ---------- ----------- ----------- --------- ---------
--------- ----------- ---------- ----------- ----------- --------- ---------
<FN>
- ------------------------------
(2) Cash Flow -- Indenture, as defined in the Indenture, means, with respect to
the Trust, for any period, all as determined in accordance with GAAP and
without duplication, the sum of the following items: (a) real estate
operating income (loss) PLUS (b) depreciation and amortization expense,
PLUS (c) interest expense, PLUS (d) equity in losses of partnership
investments, LESS (e) equity in earnings of partnership investments, PLUS
(f) losses on sales of property, LESS (g) gains on sales of property, PLUS
(h) non-cash charges, LESS (i) non-cash gains, PLUS (j) cash distributions
received from partnership investments, PLUS (k) tax sharing payments paid
by the Bank to the Trust, PLUS (l) dividends paid by the Bank to the Trust.
Cash Flow -- Indenture does not represent cash generated from operating
activities in accordance with generally accepted accounting principles.
(3) Cash distributions from partnerships in the three months ended December 31,
1993 represent the initial distribution of Saul Holdings Partnership for
the period from August 26, 1993 (inception) through September 30, 1993. The
Real Estate Trust's limited partnership interest represents 3,495,713
partnership units in Saul Holdings Partnership, and the current estimated
annual distribution rate is $1.56 per unit.
</TABLE>
17
<PAGE>
RISK FACTORS AND OTHER CONSIDERATIONS
AN INVESTMENT IN THE NEW NOTES INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER
CONSIDERATIONS RELATING TO THE TRUST AND THE NOTES BEFORE DECIDING WHETHER TO
INVEST IN THE NEW NOTES.
ABILITY TO PAY PRINCIPAL AND INTEREST ON THE NOTES
The Real Estate Trust had negative cash flow from operating activities of
$5.8 million in the three months ended December 31, 1993, $3.1 million in fiscal
1993, $0.9 million in fiscal 1992 and $16.4 million in fiscal 1991, before tax
sharing payments from the Bank of $4.6 million in the three months ended
December 31, 1993, $5.0 million in fiscal 1993 and $29.6 million in fiscal 1991.
The Trust's ability to pay interest on the Notes will depend in significant part
on its receipt of dividends from the Bank and tax sharing payments from the Bank
pursuant to a tax sharing agreement dated June 28, 1990, as amended, among the
Trust, the Bank and their subsidiaries (the "Tax Sharing Agreement"). The
availability and amount of dividends and tax sharing payments in future periods,
however, is uncertain and dependent upon, among other things, the Bank's
operating performance and income, regulatory and contractual restrictions on
such payments and (in the case of tax sharing payments) the continued
consolidation of the Bank and the Bank's subsidiaries with the Trust for federal
income tax purposes. See "Restrictions on Dividends From the Bank" and
"Considerations Relating to Tax Sharing Agreement" below. There can be no
assurance that the Real Estate Trust will receive dividends or tax sharing
payments in the future or, if it receives funds from these sources, that such
funds will be in an amount sufficient to pay interest or other amounts on the
Notes when due.
The Trust currently anticipates that in order to pay the principal amount of
the Notes at maturity or upon the occurrence of an Event of Default, to redeem
the Notes or to repurchase the Notes upon a Change of Control Triggering Event,
it will be required to borrow funds, sell equity securities, sell assets or seek
capital contributions from affiliates. There can be no assurance that any of
such actions could be effected on satisfactory terms or that any of the
foregoing actions would enable the Trust to make any of the foregoing payments
on the Notes. None of the affiliates of the Trust will be required to make any
capital contributions or other payments, whether by loan or the purchase of
equity securities or assets, to the Trust in respect of the Trust's obligations
on the Notes, nor is there any assurance that any of the affiliates of the Trust
would have the financial, legal or contractual ability to do so.
The Trust currently expects that it will have to continue to rely on
external funding sources to meet its cash needs for the repayment of principal
on its other outstanding indebtedness and to pay capital improvement costs. Such
sources would include, in addition to dividends and tax sharing payments from
the Bank, sales of Retail Notes and refinancings of existing mortgage
indebtedness. The Trust's ability to raise such cash will be subject to
significant contingencies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Real Estate."
OPERATING LOSSES AND DEFICIT IN SHAREHOLDERS' EQUITY
The Real Estate Trust has recorded a loss from real estate operations before
gain on sale of properties in each of the last ten fiscal years. For the Real
Estate Trust's operating results in the three months ended December 31, 1993 and
in fiscal 1993, 1992 and 1991, see Note 37 to the Consolidated Financial
Statements in this Prospectus, which presents condensed financial statements of
the Trust without consolidation of the Bank and the Bank's subsidiaries. At
December 31, 1993, on a PRO FORMA basis after giving effect to the sale of the
Old Notes and the application of the net proceeds therefrom, the Trust's
consolidated shareholders' equity would have reflected a deficit of $73.7
million. See "Capitalization."
SUBSTANTIAL LEVEL OF INDEBTEDNESS
The Real Estate Trust employs significant amounts of indebtedness to finance
its investments and operations, and the total amount of the Real Estate Trust's
indebtedness outstanding has increased as a result of issuance of the Old Notes.
At December 31, 1993, on a PRO FORMA basis after giving effect to the sale of
the Old Notes and the application of the net proceeds therefrom, the Trust
18
<PAGE>
would have had $408.8 million of consolidated indebtedness, excluding
indebtedness of the Bank and the Bank's subsidiaries. See "Capitalization." The
high degree to which the Trust is leveraged could have important consequences to
the holders of the Notes. Such consequences include, but are not limited to, the
following: (i) the Trust's ability to obtain additional financing in the future
for capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (ii) a significant portion of the Trust's cash flow
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Trust for its operations; (iii)
certain of the Trust's borrowings are, and will continue to be, at variable
rates of interest, which could result in higher interest expense in the event of
increases in interest rates that could have an adverse effect on the Trust's
operating results and could adversely affect the amounts that would be available
for payment of interest and principal on the Notes; and (iv) the instruments
evidencing such indebtedness contain and will contain financial and restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Trust.
Substantially all of the Trust's assets consist of the assets of its
subsidiaries, and 95.3% of the Trust's consolidated assets at December 31, 1993
consisted of assets of the Bank. Accordingly, the Old Notes are, and the New
Notes will be, effectively subordinated to all existing and future liabilities,
including indebtedness and trade payables, of subsidiaries of the Trust, except
to the extent that the Trust may be a creditor with recognized claims against
its subsidiaries. At December 31, 1993, on a PRO FORMA basis after giving effect
to the sale of the Old Notes and the application of the net proceeds therefrom,
the aggregate amount of indebtedness of the Trust would have been $347.3 million
and the aggregate amount of indebtedness of subsidiaries of the Trust (other
than the Bank and its subsidiaries) would have been $61.5 million. Under the
Indenture, the Trust and its subsidiaries will be able to incur additional
indebtedness, including indebtedness between the Trust and its subsidiaries. See
"Description of the Notes -- Certain Covenants -- Limitation on Indebtedness."
SECURITY FOR THE NOTES
The Trust's obligations under the Indenture and the Notes will be secured
initially in part by a pledge of 80% (8,000 shares) of the issued and
outstanding shares of the Bank's common stock. The Trust has agreed in the
Indenture that the Pledged Bank Stock will constitute at all times at least
66 2/3% of the issued and outstanding shares of common stock of the Bank.
Affiliates of the Trust currently own the remaining 20% of the issued and
outstanding shares of the Bank's common stock. Upon an Event of Default under
the Indenture, the Trustee would not have the power to effect a foreclosure sale
of all of the issued and outstanding shares of the Bank's common stock. The
inability of the Trustee to convey ownership of all of the common stock of the
Bank may have an adverse effect on the sales price of the Pledged Bank Stock.
There can be no assurance that the proceeds from the sale or sales of the
Pledged Bank Stock will be sufficient to satisfy the amounts due on the Notes.
There currently is no public market for the Bank's common stock.
If, upon a foreclosure by the Trustee on the Pledged Bank Stock and other
assets securing the Notes, such collateral were insufficient to satisfy the
entire amount due on the Notes, the claim by the holders of the Notes against
the Trust for such deficiency would rank PARI PASSU with the claims of the other
general, unsubordinated creditors of the Trust. At December 31, 1993, the amount
of such PARI PASSU liabilities, which consisted of Retail Notes and accounts
payable and accrued expenses, totaled $61.4 million. There can be no assurance
that the remaining assets of the Real Estate Trust would be sufficient to
satisfy any such deficiency. Most of the Real Estate Trust properties will
continue to be encumbered by indebtedness incurred to finance the Real Estate
Trust's investments and operations, and the claims to the Real Estate Trust's
assets represented by the Notes will be subject to the payment of such secured
indebtedness and other prior claims. At December 31, 1993, after giving effect
to the sale of the Old Notes and the application of the net proceeds therefrom,
the Real Estate Trust had $190.4 million of secured debt (consisting of mortgage
notes payable), which effectively will be prior in right of payment to the
claims of general creditors.
19
<PAGE>
REGULATORY CONSIDERATIONS AFFECTING ENFORCEMENT OF REMEDIES FOLLOWING AN EVENT
OF DEFAULT
The ability of the Trustee to effect a foreclosure sale of or vote the
Pledged Bank Stock upon the occurrence of an Event of Default may be limited by
various regulatory considerations. Under applicable OTS regulations relating to
acquisition of control of savings associations and their holding companies (the
"Control Regulations"), the right to effect the disposition of 25% or more of
the Bank's outstanding common stock pursuant to a foreclosure sale, the right or
power to vote 25% or more of the Bank's outstanding common stock or the
acquisition of 25% or more of the Bank's outstanding common stock pursuant to a
foreclosure sale or otherwise upon or after the occurrence of an Event of
Default generally would be deemed to constitute acquisition of control of the
Bank. The Control Regulations also establish certain presumptions of control
which may apply to the power to dispose of, the acquisition of, or the power to
vote as little as 10% of the Bank's outstanding common stock (including such
power possessed by several persons acting in concert).
Under the Control Regulations, any acquisition of control of the Bank upon
or after the occurrence of an Event of Default would cause the Trustee and could
cause the holders of the Notes that are companies to become "savings and loan
holding companies" subject to supervision, regulation and examination by the
OTS. If it was determined that the pledge was made to "secure a loan contracted
for in good faith" and the loan was "made in the ordinary course of the business
of the lender," the Trustee and/or the holders of the Notes could hold or vote
the Pledged Bank Stock for up to one year without OTS approval. If the borrowing
evidenced by the Notes were deemed to have satisfied these conditions, the
Trustee and/or the holders of the Notes would be required to report to the OTS
within 30 days after the acquisition of control of the Bank. Upon application by
the Trustee and/or the holders of the Notes, the OTS would have the authority to
approve, on an annual basis, an extension of the holding period for the Pledged
Bank Stock for a maximum of an additional three years if it found that such an
extension was warranted and would not be detrimental to the public interest. If,
however, it was determined that the loan was not made in the ordinary course of
business of the lender, the Trustee and/or the holders of the Notes could be
required to file with the OTS a "change-of-control" application within 90 days
after the occurrence of an Event of Default and the Trustee and/or such holders
could not take any action to direct the management or policies of the Bank prior
to the approval of the application. If the OTS did not approve the application,
the Trustee and/or such holders would be required to divest the Pledged Bank
Stock within one year after OTS action on the application or within such shorter
period and in such manner as the OTS may require, and could not take any action
to control the Bank during such period.
The Control Regulations as applied to any entity acquiring control of the
Bank could reduce the attractiveness of the Bank's common stock to potential
purchasers and, accordingly, could adversely affect the value of the Pledged
Bank Stock realized in the event of a foreclosure sale. Prospective purchasers
of a controlling block of the Bank's common stock from the Trustee would be
required to file with the OTS a "change-of-control" application for prior
approval to acquire such shares. Any purchaser that is a company would become a
"savings and loan holding company" subject to comprehensive supervision,
examination and regulation by the OTS. As such a regulated entity, the
purchasing company would become subject to restrictions on transactions between
it and the Bank and might be required to guarantee the Bank's compliance with
any capital restoration plan that would be required to be filed by the Bank if
the Bank became undercapitalized. Such regulatory requirements may limit the
number of potential bidders for the Pledged Bank Stock and may delay any sale,
either of which events could have an adverse effect on the sale price of the
Pledged Bank Stock.
In May 1988, in connection with the merger of a Virginia thrift into the
Bank, the B.F. Saul Company, a shareholder of the Trust (the "Saul Company"),
and the Trust entered into an agreement (the "Capital Maintenance Agreement")
with the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the
FDIC's predecessor agency, under which the Trust and the Saul Company agreed to
maintain the Bank's regulatory capital at the levels prescribed by applicable
regulatory requirements. See "Business -- Real Estate -- Holding Company
Regulation." The Capital Maintenance Agreement provides that it is binding upon
the "successors and assigns" of the Trust. As a result,
20
<PAGE>
upon or after an acquisition of control of the Bank by the Trustee and/or the
holders of the Notes, it is possible that the OTS, the Resolution Trust
Corporation or the FDIC might seek to impose upon the holders of the Notes
obligations under the Capital Maintenance Agreement, if it remained in effect at
such time. Under the terms of the Indenture, the Trustee may not take any action
that would expose holders of the Notes to liability under the Capital
Maintenance Agreement.
OTS regulations require the Trust, to the extent it remains subject to the
Capital Maintenance Agreement, to file a notice with the OTS prior to
"divestiture" of the Bank so that the OTS may determine if there is any
outstanding obligation under the Capital Maintenance Agreement. If the OTS were
to treat the acquisition of control of the Pledged Bank Stock upon or after the
occurrence of an Event of Default as a "divestiture" for purposes of this
regulation, the ability of the Trustee to hold a foreclosure sale or exercise
voting rights with respect to the Pledged Bank Stock on behalf of the holders of
the Notes would be delayed and, if the OTS were to determine that an outstanding
obligation under the Capital Maintenance Agreement existed, could be conditioned
upon the satisfaction of such obligation.
RESTRICTIONS ON DIVIDENDS FROM THE BANK
To date, the Real Estate Trust has not received any cash dividends from the
Bank. The Bank's ability to declare and pay cash dividends on its common stock
is subject to a number of restrictions, including restrictions under regulations
issued by the OTS and restrictions imposed by various agreements. Each of such
restrictions, as discussed below, ties the Bank's dividend-paying ability
primarily to its levels of regulatory capital and/or income. The Bank's efforts
to maintain the required levels of capital and to generate the required levels
of income will be subject to all of the risks affecting its business, including
the risks discussed elsewhere in this section. The payment of any dividends on
the Bank's common stock will be determined by the Bank's Board of Directors
based on the Bank's liquidity, asset quality profile, capital adequacy and
recent earnings history, as well as economic conditions and other factors deemed
relevant by the Board of Directors, including the restrictions discussed below.
OTS REGULATIONS. The OTS prompt corrective action regulations prohibit
thrift institutions such as the Bank from making "capital distributions"
(defined to include a cash distribution or a stock redemption, but excluding
dividends in the form of additional shares of capital stock) unless the
institution is at least "adequately capitalized" under the OTS prompt corrective
action regulations. Currently, an institution is considered "adequately
capitalized" for this purpose if it has a leverage (or core capital) ratio of at
least 4.0%, a tier 1 risk-based capital ratio of at least 4.0% and a total
risk-based capital ratio of at least 8.0%. At December 31, 1993, the Bank's
leverage, tier 1 risk-based and total risk-based capital ratios of 5.30%, 6.88%
and 11.56%, respectively (4.14%, 5.47% and 9.81%, respectively, on a fully
phased-in basis), would meet the ratios established for "adequately capitalized"
institutions. See "Business -- Regulation -- Prompt Corrective Action."
In addition to the prompt corrective action regulations, the OTS has issued
a capital distribution regulation that limits the ability of thrift institutions
such as the Bank to make "capital distributions" (defined to include a cash
distribution or a stock redemption, but excluding dividends in the form of
additional shares of capital stock) based primarily upon the institution's
regulatory capital levels and earnings. At December 31, 1993, the Bank had
sufficient levels of regulatory capital to be treated as a "Tier 1" institution
eligible to make capital distributions without OTS approval in amounts up to the
greater of (i) 100% of its net income for the calendar year to date, plus the
amount that would reduce by one-half the institution's surplus capital ratio
(i.e., the excess of the institution's total risk-based capital ratio over the
fully phased-in requirement) at the beginning of the calendar year in which the
distribution is made or (ii) 75% of its net income for the most recent four
quarters. The OTS, however, retains the discretion to treat the Bank as a "Tier
2" institution eligible to make capital distributions in amounts only up to its
net income for the most recent four quarters and to impose additional
restrictions, including the requirement for prior OTS approval, on capital
distributions by the Bank if it were to deem the Bank to be in need of more than
normal supervision. In
21
<PAGE>
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distributions on general safety and soundness grounds, and must be given
30 days advance notice of all capital distributions, during which 30-day period
it may object to any proposed distribution. See "Business -- Regulation --
Dividends and Other Capital Distributions."
Management of the Trust believes that, in determining whether to object to
any proposed payment of dividends on the Bank's common stock, the OTS will
consider factors similar to those it considers in determining whether to object
to payment of dividends on the Bank's outstanding 13% Noncumulative Perpetual
Preferred Stock (the "13% Preferred Stock"). See Note 25 to the Consolidated
Financial Statements in this Prospectus. The OTS has approved the payment by the
Bank of dividends on the 13% Preferred Stock, provided that (i) immediately
after giving effect to the dividend payment, the Bank's core and total
risk-based regulatory capital ratios would be not less than 4.0% and 8.0%,
respectively; (ii) dividends are earned and payable in accordance with the OTS's
capital distribution regulation; and (iii) the Bank continues to make progress
in the disposition and reduction of its nonperforming loans and real estate
owned. There can be no assurance that the OTS will not consider different or
additional factors in determining whether to permit the Bank to pay cash
dividends on its common stock.
REGULATORY AGREEMENTS. In the Capital Maintenance Agreement it entered into
with the FSLIC (see "Business -- Real Estate -- Holding Company Regulation"),
the Trust agreed not to cause the Bank without prior written approval of its
federal regulator to pay "dividends" in any fiscal year in excess of 50% of the
Bank's net income for that fiscal year, provided that any dividends permitted
under such limitation could be deferred and paid in a subsequent year. The
Capital Maintenance Agreement also provided that dividends could not be paid or
stock repurchased by the Bank if such dividend or repurchase would reduce the
regulatory capital of the Bank below its regulatory capital requirements.
In 1985, in response to the FSLIC's conditional order approving the Bank's
application for federal deposit insurance, the Bank submitted a letter to the
FSLIC (the "1985 Letter") in which it represented that it would limit
"dividends" to 50% of net income, "exclusive of all income funded through Chevy
Chase loan proceeds." The 1985 Letter does not specify whether net income is to
be measured over a particular period (such as a fiscal year) or whether it is to
be aggregate net income from 1985 until the date of the distribution. In case
net income is measured over a particular period (such as a year), the 1985
Letter does not specify whether any dividends permitted under such limitations
could be deferred and paid in a subsequent period.
INDENTURE FOR SUBORDINATED DEBENTURES. The indenture pursuant to which $150
million principal amount of the Bank's outstanding 9 1/4% Subordinated
Debentures due 2005 were issued in 1993 (the "1993 Debentures") provides that
the Bank may not pay cash dividends on its capital stock unless, after giving
effect to the dividend, no event of default shall have occurred and be
continuing and the Bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15 million, (ii) 66 2/3% of the Bank's consolidated net income
(as defined in the indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the Bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the aggregate amount of any restricted payments made by the
Bank. Notwithstanding these restrictions on dividends, provided no default or
event of default has occurred and is continuing under the indenture, the
indenture does not restrict the payment of dividends on the 13% Preferred Stock.
TERMS OF THE 13% PREFERRED STOCK. Assuming payment of the full
noncumulative cash dividends accrued in respect of the four quarterly dividend
periods in each year, annual dividends on the 13% Preferred Stock total $9.75
million. Such payments count against the various income limits under the OTS
capital distribution regulation and the regulatory agreements discussed above in
calculating amounts available for payment of cash dividends on the Bank's common
stock. Such payments do not count against the dividend income limit contained in
the indenture for the 1993 Debentures. If the
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Board of Directors does not declare the full amount of the noncumulative cash
dividend accrued in respect of any quarterly dividend period, in lieu thereof
the Board of Directors will be required to declare (subject to regulatory and
other restrictions) a stock dividend in the form of a new series of
payment-in-kind preferred stock of the Bank (the "PIK Preferred Stock"). The
material terms of any series of PIK Preferred Stock will be the same as the
terms of the 13% Preferred Stock, except that (i) the annual dividend rate of
the PIK Preferred Stock will be fixed at the time of its issuance by the Board
of Directors in its discretion at an annual rate equal to or greater than the
rate on the 13% Preferred Stock, up to a maximum annual rate of 20%, and (ii)
the PIK Preferred Stock will be redeemable at any time after the date of issue
at the option of the Bank. The Bank may not declare or pay any cash dividend on
its common stock unless, with respect to each of the four most recent quarterly
dividend periods, (i) the Bank has paid full cash dividends on the 13% Preferred
Stock or (ii) the Bank has redeemed PIK Preferred Stock of any one or more
series in an aggregate dollar amount at least equal to the unpaid cash dividend
for such dividend period.
CONSIDERATIONS RELATING TO TAX SHARING AGREEMENT
The Trust, the Bank and the other companies in the Trust's affiliated group
filing consolidated federal income tax returns entered into the Tax Sharing
Agreement on June 28, 1990. In recent years, the operations of the Trust have
generated significant net operating losses for federal income tax purposes,
while during the same period the Bank has reported taxable income. Under the Tax
Sharing Agreement, the Bank is obligated to make payments to the Trust based on
its taxable income. See "Business -- Federal Taxation -- Consolidated Tax
Returns; Tax Sharing Payments."
OTS RESTRICTIONS ON TAX SHARING PAYMENTS. Tax sharing payments by the Bank
are expected to constitute one of the Trust's sources of cash to pay interest on
the Notes. The Bank, however, must receive the written approval of the OTS
before making any payments under the Tax Sharing Agreement. The OTS may decline
to grant such approval on, among other grounds, general safety and soundness
considerations. The Bank made tax sharing payments of $20.6 million and $29.6
million in fiscal 1990 and 1991, respectively, and, pursuant to the written
agreement between Bank and the OTS (see "Regulatory Considerations Affecting
Chevy Chase" below), did not make any further tax sharing payments until the
third quarter of fiscal 1993. Following an improvement in the Bank's financial
condition and the pledge by the Trust of certain Real Estate Trust assets to
secure certain of its obligations under the Tax Sharing Agreement, the OTS
approved, and the Bank made through the date of this Prospectus, additional tax
sharing payments of $14.6 million. There can be no assurance that the OTS will
approve future tax sharing payments by the Bank even if the Trust is able to
pledge assets satisfactory to the OTS.
RISK OF DECONSOLIDATION. The Indenture does not contain provisions that
would restrict the Trust from taking any action that might result in a
deconsolidation of the Trust and the Bank for federal income tax purposes. Upon
the occurrence of any event resulting in deconsolidation, the Trust and the Bank
generally would not be able to file a consolidated tax return with respect to
periods beginning on or after the date of such event. In such case, no
additional tax sharing payments from the Bank or its subsidiaries would arise
under the Tax Sharing Agreement with respect to such periods. In certain
circumstances, however, the Trust could be obligated to make payments to the
Bank pursuant to the Tax Sharing Agreement with respect to Bank losses in such
periods to comply with certain OTS guidelines. Among the events that would
result in deconsolidation are a public offering by the Bank of its common stock,
a foreclosure and sale of any of the Pledged Bank Stock and, possibly, the
Trustee's exercise of, or acquisition of the right to exercise, the power to
vote the Pledged Bank Stock following an Event of Default under the Indenture.
ALLOCATION OF TAX LIABILITIES. Under the consolidated return regulations,
each member of the Trust's consolidated group is jointly and severally liable
for the group's entire federal income tax liability. Although such tax liability
is contractually allocated among the members of the Trust's consolidated group
pursuant to the Tax Sharing Agreement, the Internal Revenue Service (the "IRS")
generally may seek payment from any member of the group. If the Trust (or
members of the
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Trust group) have tax liabilities that are not paid, the Bank could be required
to pay such amounts to the IRS. Such payments could have an adverse effect on
the value of the Bank and, hence, on the value of the Pledged Bank Stock. Among
the transactions that may cause the Trust to recognize significant taxable
income are the sale or other disposition of assets, including some or all of its
partnership interest in Saul Holdings Partnership, the sale or other disposition
by Saul Holdings Partnership or its subsidiary partnerships of certain of their
real properties or a reduction in the amount of the total indebtedness of Saul
Holdings Partnership and its subsidiary partnerships. See "Business -- Real
Estate -- Investment in Saul Holdings Limited Partnership -- Tax Conflicts."
TRUST REIMBURSEMENT OBLIGATION. If in any year the Bank has net operating
losses and the Trust's consolidated group uses such losses to offset taxable
income of the Trust (or other members of the Trust group), the Trust generally
would be required to make tax sharing payments to the Bank pursuant to the Tax
Sharing Agreement. The sum of any such payments and any payments actually made
to the IRS for such taxable year would not exceed the amount otherwise required
to be paid to the IRS for such year if the Trust group had not been able to use
the the Bank's net operating losses. In addition, to the extent that in any year
the Bank has net operating losses that are not used in that year to offset
taxable income of the Trust (or other members of the Trust group), the Bank
generally would carry back such losses to the three immediately preceding
taxable years, obtaining a refund of taxes it paid to the IRS or, pursuant to
the Tax Sharing Agreement, a reimbursement of tax sharing payments it made to
the Trust, or both, depending on the amount of the losses and the taxable year
in which they occur. Any payments made by the Trust to the Bank pursuant to the
Tax Sharing Agreement could have a material adverse effect on the Trust's
liquidity.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The obligations of the Trust incurred under the Notes and the Indenture,
including the security interest in the Collateral created thereunder, may be
subject to review under relevant federal and state fraudulent conveyance
statutes (the "fraudulent conveyance statutes") in a bankruptcy, reorganization
or rehabilitation case or similar proceeding or a lawsuit by or on behalf of
unpaid creditors of the Trust. The requirements for establishing a fraudulent
conveyance or revocatory transfer vary depending on the law of the jurisdiction
which is being applied. If under relevant fraudulent conveyance statutes a court
were to find that, at the time the Old Notes were issued, (i) the Trust issued
the Old Notes or granted the security interest in the Collateral with the intent
of hindering, delaying or defrauding current or future creditors of the Trust,
or (ii) (a) the Trust received less than reasonably equivalent value or fair
consideration for issuing the Old Notes or granting such security interest and
(b) the Trust (A) was insolvent or was rendered insolvent by reason of the
issuance of the Old Notes, (B) was engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital, (C)
intended to incur, or believed that it would incur, indebtedness beyond its
ability to pay as such indebtedness matured (as all of the foregoing terms are
defined in or interpreted under the applicable fraudulent conveyance statutes)
or (D) was a defendant in an action for money damages, or had a judgment for
money damages docketed against it (if, in either case, the judgment is
unsatisfied after final judgment), such court could avoid or subordinate the
Notes to presently existing and future indebtedness of the Trust, avoid the
granting of the security interest in the Collateral and take other action
detrimental to the holders of the Notes, including, under certain circumstances,
invalidating the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or local law that is being applied in any such
proceeding. Generally, however, the Trust would be considered insolvent if, at
the time it incurred the indebtedness constituting the Notes, either (i) the
fair market value (or fair saleable value) of its assets was less than the
amount required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured or (ii) it was incurring indebtedness beyond its ability to pay as such
indebtedness matures.
The Trust believes that at the time of issuance of the Old Notes it received
reasonably equivalent value or fair consideration for issuing the Old Notes and
granting the security interest in the
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Collateral and that it (i) was (a) neither insolvent nor rendered insolvent
thereby for purposes of the foregoing standards, (b) in possession of sufficient
capital to meet its obligations as such obligations mature or become due and to
operate its businesses effectively and (c) incurring obligations within its
ability to pay such obligations as they mature or become due and (ii) had
sufficient assets to satisfy any probable money judgment against it in any
pending action. No assurance can be given, however, that a court passing on such
issues would reach the same conclusions.
POSSIBLE CONFLICTS OF INTEREST; LIMITATIONS ON AFFILIATE TRANSACTIONS
The Trust may be subject to potential conflicts of interests in its business
relationships with certain entities which are under the common control of B.
Francis Saul II, Chairman and Chief Executive Officer of the Trust.
Mr. Saul and his affiliates own 99.6% of the Trust's common shares of
beneficial interest and thus control the Trust. See "Security Ownership." Mr.
Saul also controls the Saul Company, which in turn controls B. F. Saul Advisory
Company (the "Advisor") and Franklin Property Company ("Franklin"). The Advisor
acts as the Real Estate Trust's investment advisor, while Franklin acts as
leasing and management agent for most of the income-producing properties owned
by the Real Estate Trust and plans and oversees the development of other new
properties and the expansion and renovation of existing properties. The
compensation received by the Advisor and Franklin is determined by the Trust's
Board of Trustees, only a minority of whom are considered independent. The
Indenture permits, subject to certain annual payment limits and other conditions
specified therein, the payment of advisory, management, leasing, construction
and development, legal and other fees to the Advisor, Franklin and other
affiliates of the Trust. See "Description of the Notes -- Certain Covenants --
Limitation on Transactions with Affiliates." The Saul Company and its affiliated
companies actively engage in various activities relating to the general business
of real estate development and finance. No provision in the Declaration of Trust
or the advisory contract with the Advisor prohibits the Advisor, Franklin, the
Saul Company, their affiliates or any officer, director or employee of such
companies from performing investment advisory services for parties other than
the Real Estate Trust, engaging in activities similar to or competitive with the
investment operations of the Real Estate Trust, or making real estate
investments that might be suitable or desirable for the Real Estate Trust. The
advisory contract provides that the Real Estate Trust has priority with respect
to any investment made by the Saul Company, the Advisor and their directors and
officers, for their account or for the account of any enterprise (other than a
savings and loan institution) in which they have a beneficial interest
aggregating 40% or more, although there are no procedural safeguards to ensure
this priority. Potential conflicts of interest also may arise from Mr. Saul's
role as Chairman and Chief Executive Officer of Saul Centers, the general
partner of Saul Holdings Partnership, although Saul Centers, Saul Holdings
Partnership and its subsidiary limited partnerships have entered into agreements
with the Trust, which owns a 21.5% limited partnership interest in Saul Holdings
Partnership, that are intended to minimize such potential conflicts. See
"Business -- Real Estate -- Investment in Saul Holdings Limited Partnership --
Exclusivity Agreement and Right of First Refusal."
The Indenture provides that, with certain exceptions, transactions between
the Trust and its affiliates must be on terms that are no less favorable to the
Trust than those that could have been obtained in a comparable transaction in
arm's-length dealings with an unaffiliated third party. The Indenture further
provides that, with respect to any transaction involving aggregate payments in
excess of $2.5 million, such transaction must be approved by a majority of the
disinterested members of the Board of Trustees and, with respect to any
transaction involving aggregate payments in excess of $10 million, the Trust
must deliver to the Trustee a written opinion of a nationally recognized expert
stating that such transaction is fair to the Trust from a financial point of
view or, if the transaction involves real property, that the rental or sale
price of such real property is the fair market value thereof. See "Description
of the Notes -- Certain Covenants -- Limitation on Transactions with
Affiliates."
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EFFECT OF NET INTEREST SPREAD ON CHEVY CHASE OPERATING RESULTS
The Bank's operating results depend to a large extent on its net interest
income, which is the difference between the interest the Bank receives from its
loans, securities and other assets and the interest the Bank pays on its
deposits and other liabilities. Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic and international
economic and political conditions. Conditions such as inflation, recession,
unemployment, money supply, international disorders and other factors beyond the
control of the Bank may affect interest rates. If generally prevailing interest
rates increase, the "net interest spread" of the Bank, which is the difference
between the rates of interest earned and the rates of interest paid by the Bank,
is likely to contract, resulting in less net interest income.
Although the Bank pursues an asset-liability management strategy designed to
control its risk from changes in market interest rates, the Bank's liabilities
have shorter terms and are more interest-sensitive than its assets. At December
31, 1993, the Bank's one-year interest-sensitivity "gap" (the sum of all
interest-earning assets to be repriced within one year minus all
interest-bearing liabilities to be repriced within one year, as a percentage of
total assets) was negative 24.9%. As a result of its gap position, the Bank's
net interest spread will narrow, and its operating results will be adversely
affected, during periods of rising market interest rates if the Bank is unable
to reduce its gap. There can be no assurance that the Bank will be able to
adjust its gap sufficiently to offset any negative effect of changing market
interest rates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Banking -- Asset and
Liability Management." On March 22, 1994, the Federal Reserve Board decided to
take action that resulted in an increase in the federal funds rate from 3 1/4%
to 3 1/2% per annum. Management of the Bank does not anticipate that the Bank's
operating results or financial condition will be adversely affected by the
Federal Reserve Board's recent action, although there can be no assurances that
interest rates will not further increase in the future.
As part of its asset-liability management strategy, the Bank has emphasized
the origination of credit card loans, which generally have shorter terms and
higher yields than mortgage loans. The credit card industry is highly
competitive and characterized by increasing use of pricing competition in
interest rates and annual membership fees, as both established and new credit
card issuers seek to expand or to enter the market. Management of the Bank
anticipates that competitive pressures will continue to require adjustments from
time to time to the pricing of the Bank's credit card products and could
adversely affect the level of the Bank's managed credit card receivables. See
"Business -- Banking -- Lending Activities -- Credit Card Lending." Such
competitive pressures may adversely affect the Bank's net interest spread and,
as a result, its net interest income and operating results.
FLUCTUATIONS IN CHEVY CHASE NON-INTEREST INCOME
In recent years, the Bank's operating results have been significantly
affected by non-interest income, which is reflected as "Other income" under
"Banking" in the Consolidated Statements of Operations included in this
Prospectus. The Bank has earned non-interest income primarily from gains on
sales of credit card relationships, loans and mortgage-backed securities, and
from loan servicing fees. In fiscal 1993, 1992, 1991, 1990 and 1989, the Bank
recognized non-interest income of $130.8 million, $100.4 million, $161.1
million, $189.6 million and $162.8 million, respectively. Of the non-interest
income in fiscal 1991 and 1990, $20.7 million and $100.3 million, respectively,
resulted from sales of credit card relationships. The Bank will consider future
sales of credit card relationships depending on market prices for these assets
and other factors and plans to continue securitizing the receivables associated
with such assets. The Bank's loan servicing fees have varied based, among other
factors, on the volume of securitized receivables serviced by the Bank and on
its levels of purchased mortgage servicing rights. The Bank's ability to realize
these types of non-interest income will continue to be dependent upon market
interest rates, the demand for mortgage and credit card loans, conditions in the
loan sale market, the level of securitization activity and other factors. The
amount of such income therefore is subject to substantial fluctuations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
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HIGH LEVEL OF CHEVY CHASE NON-PERFORMING ASSETS
Although Chevy Chase's non-performing assets have continued to decrease from
their peak in February 1992, Chevy Chase's level of non-performing assets at
December 31, 1993, after $101.3 million of valuation allowances on real estate
held for sale ("REO"), totaled $367.9 million (or 7.2% of total assets). In
addition, the Bank maintained $5.8 million of valuation allowances on its
non-accrual loans and non-accrual real estate held for investment ("REI"). The
increase in the Bank's non-performing real estate assets (consisting of REO,
non-accrual loans and non-accrual REI) began in fiscal 1990 and resulted
primarily from the deterioration of the real estate markets in the Washington,
D.C. metropolitan area. Non-performing credit card loans as a percentage of
total credit card loans also increased over a three-year period beginning in
fiscal 1990 primarily as a result of adverse economic conditions in the
Washington, D.C. metropolitan area and other areas in which there is a
significant concentration of holders of Chevy Chase credit cards. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Banking -- Asset Quality."
At December 31, 1993, the ratio of the Bank's reserves to non-performing
assets was 38.0%. The Bank reviews on a quarterly basis the carrying value of
its REO in order to make any adjustments required to present such assets at fair
value. Although the Bank believes it has a reasonable basis for estimating
reserves, no assurance can be given that the Bank will not sustain losses in any
particular period that exceed the amount of the reserves at the beginning of
that period, or that subsequent evaluations of the asset portfolio, in light of
factors then prevailing (including economic conditions, the Bank's internal
review process and the results of regulatory examinations), will not require
significant increases in the reserves. In November 1990, the Commission
initiated an informal investigation concerning the Bank's reserves for losses
and related matters and requested documents from the Bank covering the period
since October 1, 1988.
At December 31, 1993, approximately $243.2 million (or 77.7%), after
valuation allowances, of the Bank's aggregate book value of REO was attributable
to its five planned unit developments (the "Communities"), four of which are
under active development. Under its written agreement with the OTS, the Bank is
required to make every effort to reduce its exposure on certain of its real
estate development properties, including the four active Communities. The Bank
from time to time obtains updated appraisals on its REO and, in the past, has
been directed to do so by the OTS in connection with regulatory examinations. As
a result of such updated appraisals, the Bank could be required to increase its
reserves. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Banking -- Asset Quality."
RISKS OF CREDIT CARD LENDING BY CHEVY CHASE
At December 31, 1993, Chevy Chase's credit card loans constituted 33.5% of
the Bank's loan portfolio. Credit card loans entail greater credit risks than
residential mortgage loans. Changes in credit card use and payment patterns by
cardholders, including increased defaults, may result from a variety of social,
legal and economic factors. Economic factors affecting credit card use include
the rate of inflation and relative interest rates offered for various types of
loans. Adverse changes in economic conditions could have a direct impact on the
timing and amount of payments by borrowers. Default rates on credit card loans
generally may be expected to exceed default rates on residential mortgage loans.
As a percentage of outstanding credit card loans, credit card delinquencies, net
charge-offs on credit card loans and the reserve for credit card loans increased
each year from fiscal 1990 to fiscal 1992.
In November 1990, the Bank ceased active national solicitation of new credit
card accounts due in part to the significant initial cost of acquiring accounts
and the Bank's desire to enhance its capital position. As a result of the
improvement in the Bank's regulatory capital ratios, in June 1993 the Bank
reinstated the active national solicitation of new credit card accounts in
markets which the Bank considers to have favorable demographic characteristics.
As a result, the Bank expects credit card loans to increase as a percentage of
its total loan portfolio in future periods. Although the Bank
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believes it has appropriate underwriting criteria to mitigate the risks
associated with such new accounts, there can be no assurance that charge-offs
and delinquencies will not increase as a result of the Bank's resumption of
active solicitation of new accounts. See "Business -- Banking -- Lending
Activities -- Credit Card Lending."
REGULATORY CONSIDERATIONS AFFECTING CHEVY CHASE
REGULATORY CAPITAL. As a federal savings association, Chevy Chase is
subject to minimum capital requirements prescribed by federal statute and OTS
regulations. At December 31, 1993, the Bank was in compliance with all of its
regulatory capital requirements under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), with tangible, core (or
leverage) and total risk-based regulatory capital ratios of 4.55%, 5.30% and
11.56%, respectively, compared to the regulatory requirements of 1.50%, 3.00%
and 8.00%, respectively. Chevy Chase's levels of regulatory capital have been
adversely affected over the past few years by the substantial increase in Chevy
Chase's level of non-performing assets beginning in fiscal 1990, which was due
primarily to a downturn of the real estate markets and the general deterioration
of economic conditions in the Washington, D.C. metropolitan area, Chevy Chase's
principal market area. Chevy Chase's regulatory capital levels also have been,
and will continue to be, reduced by the required phase-out of certain assets
from the calculation of regulatory capital.
The OTS prompt corrective action regulations that took effect on December
19, 1992 establish five capital categories for thrift institutions: well
capitalized, adequately capitalized, undercapitalized, severely undercapitalized
and critically undercapitalized. A thrift is considered "well capitalized" if it
has a leverage (or core capital) ratio of at least 5.0%, a tier 1 risk-based
capital ratio of at least 6.0%, a total risk-based capital ratio of at least
10.0% and is not subject to any written agreement, order, capital directive or
prompt corrective action directive to meet and maintain a specific capital
level. A thrift is considered at least "adequately capitalized" if it has a
leverage (or core capital) ratio of at least 4.0% (3.0% if rated in the highest
supervisory category), a tier 1 risk-based capital ratio of at least 4.0% and a
total risk-based capital ratio of at least 8.0%. The Bank's leverage, tier 1
risk-based and total risk-based regulatory capital ratios at December 31, 1993
of 5.30%, 6.88% and 11.56%, respectively, were sufficient to meet the standards
for classification of the Bank as a "well capitalized" institution, and the Bank
was not subject to any applicable written agreement, order or directive to meet
and maintain a specific capital level. The OTS has the discretion to reclassify
an institution from one capital category to the next lower category, for example
from "well capitalized" to "adequately capitalized," if, after notice and an
opportunity for a hearing, the OTS determines that the institution is being
operated in an unsafe or unsound condition or has received and has not corrected
a less than satisfactory examination rating for asset quality, management,
earnings or liquidity. See "Business -- Regulation -- Prompt Corrective Action."
The regulatory capital requirements applicable to Chevy Chase will become
more stringent over time as certain deductions from regulatory capital are
phased in over a period ending July 1, 1996. On the basis of its December 31,
1993 balance sheet, Chevy Chase would meet the fully phased-in capital
requirements under FIRREA that will apply in future periods as certain
deductions from capital are phased in and, after giving effect to those
deductions, would meet the capital standards for "adequately capitalized"
institutions under the prompt corrective action regulations.
Chevy Chase's levels of non-performing assets may result in reductions in
capital to the extent losses are recognized as a result of deteriorating
collateral values or general economic conditions. In addition, OTS capital
regulations provide a five-year holding period (or such longer period approved
by the OTS) for REO to qualify for an exception from treatment as an equity
investment. If REO is considered an equity investment, its then-current book
value is deducted from total risk-based capital. Accordingly, if the Bank is
unable to dispose of an REO property (through bulk sales or otherwise) prior to
the end of its applicable five-year holding period and is unable to obtain an
extension of such five-year holding period from the OTS, the Bank could be
required to deduct the then-current book value of that REO property from
risk-based capital. There can be no assurance that the Bank will be
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able to dispose of all of its REO properties within the applicable five-year
period or obtain any necessary extensions. Accordingly, there can be no
assurances that Chevy Chase will be able to maintain compliance with the fully
phased-in FIRREA capital requirements or maintain levels of capital sufficient
to meet the standards for classification as at least "adequately capitalized"
under the prompt corrective action regulations. See "Business -- Regulation --
Regulatory Capital."
REGULATORY RESTRICTIONS. On September 30, 1991, after it failed to meet
certain regulatory capital requirements, Chevy Chase entered into a written
agreement with the OTS designed to expedite its return to full capital
compliance. Among the areas addressed by the agreement were transactions with
affiliates, capital enhancement, profitability enhancement, reduction of
existing levels of REO, asset quality and various internal controls, policies
and procedures. Among other things, the Bank agreed that it would not increase
its investment in certain of its real estate development properties, including
the four active Communities, beyond specified levels without OTS approval, would
make every effort to reduce its exposure in those properties and would notify
the OTS 15 days before rejecting any written purchase offers for those
properties. In addition, Chevy Chase agreed to provide the OTS with 15 days
notice before selling significant business assets and to make every effort to
obtain an infusion of capital in an amount sufficient to meet its fully
phased-in capital requirements by June 30, 1992 and, if necessary, to seek a
merger or acquisition partner. As a result of improved operating results and the
receipt of $71.9 million in net proceeds from the sale of the 13% Preferred
Stock in April 1993, the Bank met its fully phased-in FIRREA capital
requirements at September 30, 1993.
In October 1993, the OTS amended the written agreement to remove the
provisions relating to capital enhancement, profitability enhancement, and
various internal controls, policies and procedures. Among other things, the OTS
removed the provisions requiring the Bank to make every effort to obtain an
infusion of capital in an amount sufficient to meet its fully phased-in capital
requirements and, if necessary, to seek a merger or acquisition partner. The
provisions of the agreement relating to transactions with affiliates and to
asset quality were not materially modified, except that a provision was removed
that required prior OTS approval before the Bank could pay common stock
dividends to the Trust, and the threshold for notifying the OTS prior to the
sale of any asset was increased from $5 million to $20 million.
The Bank is subject to growth restrictions, the highest levels of OTS
assessments, higher FDIC insurance premiums and a requirement to obtain OTS
approval for changes in directors and senior executive officers. The Bank has
received a limited waiver of restrictions on its growth pursuant to which it is
authorized to increase its total assets up to $500 million during the period
from July 1, 1993 through June 30, 1994. See "Business -- Regulation --
Regulatory Capital" and "-- Growth Restrictions."
The OTS prompt corrective action regulations require appointment of an
conservator or receiver for "critically undercapitalized" institutions. An
institution is considered critically undercapitalized if its ratio of "tangible
equity" (generally defined by the OTS as core capital plus cumulative perpetual
preferred stock) to total assets is 2.0% or below. At December 31, 1993, Chevy
Chase's tangible equity ratio was 5.30%. Appointment of a conservator or
receiver for the Bank would be likely to have a material adverse effect on the
value of the Pledged Bank Stock.
RELIANCE ON B. FRANCIS SAUL II
The success of the Trust is largely dependent upon the efforts and skills of
B. Francis Saul II, the Trust's Chairman and Chief Executive Officer. Mr. Saul
and his family have played a prominent role in the development and management of
real estate in the Washington, D.C. area for over 100 years. The loss of Mr.
Saul's services could materially and adversely affect the Trust.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
There has previously been no public market for the Notes. Although the
Initial Purchasers have informed the Trust that they currently intend to make a
market in the Old Notes and, if issued, the
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New Notes, they are not obligated to do so, and any such market-making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the New Notes. The Trust
does not intend to apply for listing of the New Notes on any securities exchange
or for quotation of the New Notes through any automated quotation system.
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144 under the Securities Act. Old Notes will continue to be subject to the
following restrictions on transfer: (i) Old Notes may be resold only if
registered pursuant to the Securities Act, or if an exemption from registration
is available thereunder, and (ii) Old Notes will bear a legend restricting
transfer in the absence of registration or an exemption therefrom.
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USE OF PROCEEDS
ISSUANCE OF NEW NOTES
The Trust will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Trust will receive in exchange Old Notes in like
principal amount, the terms of which are identical to the New Notes, except that
the New Notes will not bear legends restricting the transfer thereof. The Old
Notes surrendered in exchange for New Notes will be retired and canceled and may
not be reissued. Accordingly, issuance of the New Notes will not result in any
increase in the indebtedness of the Trust.
SALE OF OLD NOTES
The net proceeds to the Trust from the sale of the Old Notes were estimated
to be approximately $166.2 million after deduction of the amount of the Initial
Purchasers' discount and estimated expenses payable by the Trust. Of this
amount, the Trust applied approximately $83.0 million to repay certain mortgage
indebtedness and a working capital loan of the Real Estate Trust. Net proceeds
in the amount of $25.8 million were deposited into the Liquidity Maintenance
Account to satisfy the initial liquidity maintenance requirement with respect to
the Notes. See "Description of the Notes -- Security." The Trust will use the
balance of the net proceeds for corporate purposes, which may include repayment
of other mortgage indebtedness and acquisition of income-producing properties
and certain other investments.
Of the $83.0 million in net proceeds applied to outstanding indebtedness,
the Trust used $8.9 million to repay two loans from affiliates. Certain of the
loans that were repaid accrued interest at fixed annual interest rates ranging
from 9.0% to 15.0%. Other loans that were repaid had variable interest rates
that adjusted periodically based on changes in the applicable interest rate
index. At December 31, 1993, such variable-rate loans accrued interest at annual
rates ranging from 4.88% to 7.50%. The loans had maturity dates ranging from
January 1997 to December 1999.
The following table summarizes the estimated sources and uses of the
proceeds from the sale of the Old Notes:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Sources:
Sale of Old Notes.............................................. $175.0
------
------
Uses:
Repayment of third-party mortgage indebtedness (1)............. $ 74.1
Repayment of affiliate indebtedness............................ 8.9
General corporate purposes (2)................................. 83.2
Offering expenses.............................................. 8.8
------
Total.................................................. $175.0
------
------
<FN>
- ------------------------------
(1) Includes prepayment costs of $4.0 million.
(2) Includes proceeds of $25.8 million deposited into the Liquidity
Maintenance Account to satisfy the initial liquidity maintenance
requirement with respect to the Notes. See "Description of the Notes --
Security."
</TABLE>
Concurrently with the application of the net proceeds of the sale of the Old
Notes, the terms of certain of the loans that were repaid in part were modified
to waive deferred interest, reduce interest rates and extend maturities. After
the application of such net proceeds and the modification of such loans, the
final maturity of loans with total balances of $111.1 million was 12 years and
the final maturity of a loan with a balance of $15.1 million was 15 years. The
following table presents, at December 31, 1993, certain information regarding
the loans repaid with the net proceeds of the sale of the Old Notes, the
application of such proceeds and, on a PRO FORMA basis after giving effect to
such application and the concurrent modification of the related loan agreements,
the principal balance, weighted average maturity and accrual rate of such loans.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIOR TO SALE OF OLD NOTES
--------------------------------------
WEIGHTED OFFERING DEFERRED
LOAN AVERAGE ACCRUAL PROCEEDS INTEREST
BALANCE MATURITY (1) RATE (2) APPLIED ADJUSTMENTS (3)
----------- ------------ -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Third-Party Lenders........... $234,295 3 yrs 2 mos 12.26% $74,093 $8,706
Affiliated Lenders............ 8,900(5) 1 mo 7.06% 8,900 --
----------- -------- -------- -------
$243,195 12.07% $82,993 $8,706
----------- -------- -------- -------
----------- -------- -------- -------
<CAPTION>
AFTER SALE OF OLD NOTES
----------------------------------
WEIGHTED
LOAN AVERAGE ACCRUAL ECONOMIC
BALANCE MATURITY (1) RATE (2) BENEFIT (4)
-------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Third-Party Lenders........... $151,496 9 yrs 10 mos 7.61% $17,196
Affiliated Lenders............ -- -- -- 628
-------- --- -----------
$151,496 7.61% $17,824
-------- --- -----------
-------- --- -----------
<FN>
- ------------------------------
(1) Weighted Average Maturity represents (i) the sum of the products of
scheduled principal payments on each loan and the period between (a)
December 31, 1993, in the case of Prior to Sale of Old Notes, and (b) the
date of issuance of the Old Notes, in the case of After Sale of Old Notes,
and the date such scheduled payment is to be made, divided by (ii) the sum
of the applicable Loan Balances.
(2) Accrual Rate represents (i) the sum of the products of the interest rate
of each loan and the outstanding Loan Balance of such loan divided by (ii)
the sum of the outstanding Loan Balances of all loans.
(3) Represents the waiver of deferred interest in the amount of $11.7 million
resulting from the modification of loans with a single lender, PLUS the
application of $1.0 million of cash held in escrow by such lender, LESS
costs of $4.0 million related to the prepayment in full of a loan to
another lender.
(4) Economic Benefit represents the difference between (i) the product of Loan
Balance Prior to Sale of Old Notes and Accrual Rate Prior to Sale of Old
Notes and (ii) the product of Loan Balance After Sale of Old Notes and
Accrual Rate After Sale of Old Notes.
(5) Reflects aggregate payments of $2.0 million made by the Trust to an
affiliated lender after December 31, 1993 and before the sale of Old
Notes.
</TABLE>
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Trust at December
31, 1993 and as adjusted to give effect to (i) the sale of the Old Notes and
(ii) the application of the net proceeds of the sale of the Old Notes to payment
of certain outstanding indebtedness of the Trust. See "Use of Proceeds -- Sale
of Old Notes." The table should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Trust included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED (1)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Real Estate
11 5/8% Senior Secured Notes due 2002....................................................... $ -- $ 175,000
Mortgage notes payable...................................................................... 264,914 190,411
Notes payable -- unsecured.................................................................. 39,887 39,887
Working capital loan........................................................................ 3,900 --
Deferred interest........................................................................... 16,796 3,500
--------- --------------
Total Real Estate....................................................................... 325,497 408,798
--------- --------------
Banking
Capital Notes -- subordinated............................................................... 160,000 160,000
--------- --------------
Minority Interest............................................................................. 110,953 110,953
--------- --------------
Shareholders' Equity (Deficit)
Preferred shares of beneficial interest..................................................... 516 516
Common shares of beneficial interest........................................................ 6,642 6,642
Paid-in-surplus............................................................................. 92,943 92,943
Deficit..................................................................................... (134,287) (138,576)
Net unrealized holding gains................................................................ 6,581 6,581
--------- --------------
(27,605) (31,894)
Less cost of common shares of beneficial interest in treasury................................. (41,848) (41,848)
--------- --------------
Total shareholders' equity (deficit)........................................................ (69,453) (73,742)(2)
--------- --------------
Total capitalization.......................................................................... $ 526,997 $ 606,009
--------- --------------
--------- --------------
<FN>
- ------------------------
(1) Does not include a deferred gain of $11.7 million which will result from
the modification of loans from one lender with aggregate balances at
December 31, 1993 of $145.9 million, accounted for in accordance with
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings." The amount of this
deferred gain will be recognized using the level-yield interest method
over the lives of the affected loans.
(2) Total shareholders' deficit will increase by $4.3 million as a result of
the modification and repayment of certain loans as follows:
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Prepayment costs.................................................... $ 4,000
Write-off of unamortized debt issuance costs........................ 3,148
-------
Subtotal.......................................................... 7,148
Related income tax effect........................................... (2,859)
-------
$ 4,289
-------
-------
</TABLE>
32
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On March 30, 1994, the date of original issuance of the Old Notes, the Trust
and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Friedman, Billings,
Ramsey & Co., Inc., as the initial purchasers of the Old Notes (the "Initial
Purchasers"), entered into an agreement governing registration rights with
respect to the Old Notes (the "Registration Rights Agreement"). Pursuant to the
Registration Rights Agreement, the Trust agreed to (i) file with the Commission
the Registration Statement of which this Prospectus is a part with respect to
the New Notes within 30 calendar days after the date of original issuance of the
Old Notes, (ii) use its best efforts to cause the Registration Statement to
become effective within 160 calendar days after the date of original issuance of
the Old Notes and (iii) use its best efforts to cause the Exchange Offer to be
consummated within 190 calendar days after the date of original issuance of the
Old Notes. The Trust agreed in the Registration Rights Agreement that the
interest rate borne by the Old Notes would increase by an additional one-half of
one percent per annum upon each of the following events: (i) failure of the
Registration Statement to be filed with the Commission on or prior to the 30th
calendar day following the date of original issue of the Old Notes, (ii) failure
of the Registration Statement to be declared effective on or prior to the 160th
calendar day following the date of original issue of the Old Notes or (iii)
failure of the Exchange Offer to be consummated or a Shelf Registration
Statement with respect to the Old Notes to be declared effective on or prior to
the 190th calendar day following the date of original issue of the Old Notes.
The aggregate amount of any such increases from the original interest rate on
the Old Notes may not exceed 1.5% per annum. The Trust further agreed that, upon
(x) the filing of the Registration Statement in the case of clause (i) above,
(y) the effectiveness of the Registration Statement in the case of clause (ii)
above or (z) the consummation of the Exchange Offer or the effectiveness of a
Shelf Registration Statement, as the case may be, in the case of clause (iii)
above, the interest rate borne by the Old Notes from the date next succeeding
the date of such filing, effectiveness or consummation, as the case may be,
would be reduced in each case by one-half of one percent per annum (but, in any
event, not below the original interest rate) and after the Exchange Offer is
consummated or a Shelf Registration Statement is declared effective, the
interest rate borne by the Old Notes would be reduced to the original interest
rate. The Registration Statement was filed on April 6, 1994, within 30 calendar
days following the date of original issue of the Old Notes, and was declared
effective by the Commission on , 1994, within 160 calendar days following
the date of original issue of the Old Notes, and thus no increase in the
interest rate borne by the Old Notes has been made under clause (i) or clause
(ii) above.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, including "Exxon Capital Holdings
Corporation" (available May 13, 1988), "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay Cosmetics, Inc." (available June 5, 1991)
and "Warnaco, Inc." (available October 11, 1991), the Trust believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than (i) a broker-dealer who purchased such Old Notes directly from the
Trust for resale pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an "affiliate" of the Trust within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the New Notes in its ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes. In the event that
the Trust's belief is inaccurate, holders of New Notes that transfer New Notes
in violation of the prospectus delivery provisions of the Securities Act and
without an exemption from registration thereunder may incur liability under the
Securities Act. The Trust does not assume or indemnify holders against such
liability, although the Trust does not believe that any such liability should
exist.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
33
<PAGE>
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Trust has agreed that, for a period
of 180 days after the date of this Prospectus, it will make this Prospectus
available to any broker-dealer for use in connection with any such resales. See
"Plan of Distribution."
This Exchange Offer is not being made to, nor will the Trust accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
In the event the Exchange Offer is consummated, the Trust will not be
required to file a Shelf Registration Statement to register any outstanding Old
Notes, and the interest rate on such Old Notes will remain at its initial level
of 11 5/8%. Holders of any Old Notes remaining outstanding after the Exchange
Offer seeking liquidity in their investment would have to rely on exemptions to
registration requirements under applicable securities laws, including the
Securities Act, in connection with any proposed transfer of such Old Notes. See
"Risk Factors and Other Considerations -- Consequences of Failure to Exchange."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Trust will accept any and all
Old Notes properly tendered prior to p.m., New York City time, on the
Expiration Date. The Trust will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer in denominations of $1,000 and integral multiples thereof.
As of the date of this Prospectus, $175,000,000 aggregate principal amount of
Old Notes is outstanding.
The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes, except that the New Notes will be
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof. The New Notes will evidence the same indebtedness as the
Old Notes and will be issued under, and will be entitled to the benefits of, the
Indenture.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the Trust's books or any other person who
has obtained a properly completed bond power from the registered Holder or (ii)
any person whose Old Notes are held of record by The Depository Trust Company
(the "Depositary") who desires to deliver such Old Notes by book-entry transfer
at the Depositary.
The Trust will be deemed to have accepted validly tendered Old Notes when,
as and if the Trust has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving New Notes from the Trust and delivering New Notes to such
Holders. See "Exchange Agent" below.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant
to the Exchange Offer. The Trust will pay all charges and expenses, other than
certain applicable taxes, in connection with the Exchange Offer. See "Fees and
Expenses" below.
34
<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 1994, unless the Trust, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" will mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Trust will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
Holders of Old Notes an announcement thereof, each prior to p.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Such announcement may state that the Trust is extending the Exchange Offer
for a specified period of time.
The Trust reserves the right, in its sole discretion, (i) to delay
acceptance of any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer and to refuse to accept Old Notes not previously accepted, if any
of the conditions set forth below under "Termination" shall have occurred and
shall not have been waived by the Trust (if permitted to be waived by the
Trust), by giving oral or written notice of such delay, extension or termination
to the Exchange Agent, and (ii) to amend the terms of the Exchange Offer in any
manner. Any such delay in acceptance or any such extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the Exchange Offer is amended in a manner determined by the Trust to
constitute a material change, the Trust will promptly disclose such amendment in
a manner reasonably calculated to inform the Holders of such amendment.
Without limiting the manner in which the Trust may choose to make public
announcements of any delay in acceptance or any extension, termination or
amendment of the Exchange Offer, the Trust shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement, other than by
making a timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
Interest on the New Notes will accrue from March 30, 1994, payable
semiannually on April 1 and October 1 of each year, commencing on October 1,
1994, at the rate of 11 5/8% per annum. Holders whose Old Notes are accepted for
exchange will be deemed to have waived the right to receive any payment in
respect of interest on the Old Notes accrued from March 30, 1994 until the date
of the issuance of the New Notes. Consequently, Holders who exchange their Old
Notes for New Notes will receive the same interest payment on October 1, 1994
(the first interest payment date with respect to the New Notes) that they would
have received had they not accepted the Exchange Offer.
PROCEDURES FOR TENDERING
Only a Holder may tender its Old Notes in the Exchange Offer. To tender in
the Exchange Offer, a Holder must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have the signatures thereof guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with the Old Notes (unless such
tender is being effected pursuant to the procedure for book-entry transfer
described below) and any other required documents, to the Exchange Agent, prior
to p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility system may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer into
the Exchange Agent's account at the Depositary, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Exchange Agent at its addresses set forth herein under
"Exchange Agent" prior to p.m., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
35
<PAGE>
The tender by a Holder will constitute an agreement between such Holder and
the Trust in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein and in the Letter of Transmittal. Holders may also request that
their respective brokers, dealers, commercial banks, trust companies or nominees
effect such tender for such Holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Holders. Instead of delivery by mail, it is recommended that Holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Trust.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact such registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf. If a beneficial owner wishes
to tender on its own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from the registered Holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act (an "Eligible Institution") unless the Old Notes tendered
pursuant thereto are tendered (i) by a registered Holder who has not completed
the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" in the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
Holder listed therein, the applicable Old Notes must be endorsed or accompanied
by appropriate bond powers which authorize such person to tender the Old Notes
on behalf of the registered Holder, in either case signed as the name of the
registered Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Trust,
evidence satisfactory to the Trust of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Trust in its discretion, which determination will be final and binding.
The Trust reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Trust's acceptance of which would, in the
opinion of counsel for the Trust, be unlawful. The Trust also reserves the
absolute right to waive any irregularities or conditions of tender as to
particular Old Notes. The Trust's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Trust shall determine. Although the Trust intends to notify Holders
of defects or irregularities with respect to tenders of Old Notes, neither the
Trust, the Exchange Agent nor any other person will be under any duty to give
notification of defects or irregularities with respect to tenders of Old Notes
nor will any of them incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such
36
<PAGE>
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering Holder unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Trust reserves the right in its sole discretion to (i)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (ii) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchase or offers may differ from the terms of the Exchange
Offer.
By tendering, each Holder will represent to the Trust that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, (ii) neither the Holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes and (iii) neither the Holder
nor any such other person is an "affiliate" of the Trust within the meaning of
Rule 405 under the Securities Act.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or if such Holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number or
numbers of such Holder's Old Notes and the principal amount of such Old
Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within five business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes to be tendered in proper form for
transfer and any other documents required by the Letter of Transmittal, will
be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at the Depositary of
Old Notes delivered electronically) and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five
business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to p.m., New York City time, on
the business day prior to the Expiration Date and prior to acceptance for
exchange thereof by the Trust. Any such notice of withdrawal must (i) specify
the name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii) be
signed by the Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantee) or be accompanied by documents of transfer
sufficient to permit the registrar and transfer agent with
37
<PAGE>
respect to the Old Notes to register the transfer of such Old Notes into the
name of the Depositor withdrawing the tender and (iv) specify the name in which
any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Trust,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes that have been
tendered but are not accepted for exchange will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Trust will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes if it determines that
(i) the Exchange Offer, or the making of any exchange, would violate any
applicable law or any interpretation of applicable law by the staff of the
Commission or (ii) the Trust's ability to proceed with the Exchange Offer could
be materially impaired due to any legal or governmental action or proceeding or
the enactment of any new law, statute, rule or regulation. The Trust does not
expect any of the foregoing conditions to occur, although there can be no
assurances in this regard.
If the Trust determines that it may terminate the Exchange Offer, as set
forth above, the Trust may (i) refuse to accept any Old Notes and return any Old
Notes that have been tendered to the Holders thereof, (ii) extend the Exchange
Offer and retain all Old Notes tendered prior to the Expiration Date of the
Exchange Offer, subject to the rights of such Holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Trust will disclose such change by means of a supplement to
this Prospectus that will be distributed to each registered Holder, and the
Trust will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during such
period.
EXCHANGE AGENT
, has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail, Hand or
Overnight Courier:
Facsimile Transmission:
Confirm by Telephone:
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Trust. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Trust and their affiliates in person, by
telegraph, telephone or telecopier.
The Trust has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange
38
<PAGE>
Offer. The Trust, however, will pay the Exchange Agent reasonable and customary
fees for its services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Trust also may pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letter of Transmittal and related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Trust.
The Trust will pay all transfer taxes, if any, applicable to the exchange of
Old Notes pursuant to the Exchange Offer. If, however, certificates representing
New Notes or Old Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Trust upon
the consummation of the Exchange Offer. The expenses of the Exchange Offer will
be amortized by the Trust over the term of the New Notes under generally
accepted accounting principles.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Trust has prepared its financial statements and other disclosures on a
fully consolidated basis. The term "Trust" as used in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" generally refers
to the combined entity, which includes B.F. Saul Real Estate Investment Trust
and its subsidiaries, including Chevy Chase and Chevy Chase's subsidiaries.
"Real Estate Trust" refers to B.F. Saul Real Estate Investment Trust and its
subsidiaries, excluding Chevy Chase and Chevy Chase's subsidiaries. The
operations conducted by the Real Estate Trust are designated as "Real Estate,"
while the business conducted by the Bank and its subsidiaries is identified by
the term "Banking."
The financial data on Banking reflect certain purchase accounting
adjustments made by the Trust in connection with its acquisition of the Bank and
therefore differ in certain respects from the comparable financial data set
forth in the unconsolidated financial statements of the Bank.
RESULTS OF OPERATIONS
The Real Estate Trust's ability to generate revenues from property ownership
and development is significantly influenced by a number of factors, including
national and local economic conditions, the level of mortgage interest rates,
governmental actions (such as changes in real estate tax rates) and the type,
location, size and stage of development of the Trust's properties. Most of the
operating expenses and virtually all of the debt service payments associated
with income-producing properties are not decreased by reductions in occupancy or
rental income. Therefore, the ability of the Trust to produce net income in any
year from its income-producing properties is highly dependent on the Real Estate
Trust's ability to maintain or increase the properties' levels of rental income
and hotel sales revenues. The relative illiquidity of real estate investments
tends to limit the ability of the Real Estate Trust to vary its portfolio
promptly in response to changes in economic, demographic, social, financial and
investment conditions.
The Bank's operating results historically have depended primarily on its net
interest spread, which is the difference between the rates of interest earned on
its loans and securities investments and the rates of interest paid on its
deposits and borrowings. The deterioration of the real estate market and other
adverse economic conditions in the Washington, D.C. metropolitan area in fiscal
1990 and 1991 caused the Bank to rely on alternative sources of income in
addition to net interest spread, including sales of credit card relationships,
loans and mortgage-backed securities, and securitizations of credit card and
home equity credit line receivables. During fiscal 1991, non-interest income
from gains on sales of credit card relationships, loans and mortgage-backed
securities had a significant effect on net income. The Bank's income from such
sources decreased in fiscal 1992 and 1993 from the levels of such income in
fiscal 1991. See "Risk Factors and Other Considerations -- Fluctuations in Chevy
Chase Non-Interest Income." In addition to interest paid on its interest-bearing
liabilities, the Bank's principal expenses are operating expenses.
THREE MONTHS ENDED DECEMBER 31, 1993 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1992
The Trust recorded net income of $23.6 million for the three months ended
December 31, 1993, compared to a net loss of $6.0 million for the three months
ended December 31, 1992. Net income for the three-month period ended December
31, 1993 reflected the effect of a change in the method of accounting for income
taxes to implement Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The cumulative effect of the
adoption of this change in accounting principle was to increase net income by
approximately $36.3 million. The Real Estate Trust's operating loss increased to
$10.1 million in the December 1993 quarter from $7.0 million in the prior
corresponding quarter. The Bank recorded operating income before income taxes,
extraordinary items and cumulative effect of change in accounting principle of
$6.0 million in the December 1993 quarter, compared to operating income before
income taxes, extraordinary items and cumulative effect of change of accounting
principle of $1.3 million in the prior corresponding quarter.
40
<PAGE>
REAL ESTATE
The following table sets forth, for the three-month periods ended December
31, 1993 and 1992, respectively, direct operating results for the Real Estate
Trust's (i) shopping center and office properties, (ii) commercial properties
portfolio, which presents the shopping center and office property results on a
combined basis, and (iii) hotel properties. On August 26, 1993, the Real Estate
Trust transferred its 22 shopping center properties and one of its office
properties to Saul Holdings Partnership and a subsidiary limited partnership of
Saul Holdings Partnership in exchange for securities representing a 21.5%
limited partnership interest in Saul Holdings Partnership (the "Saul Centers
Transaction"). See "Business -- Real Estate -- Investment in Saul Holdings
Limited Partnership" and Note 2 to the Consolidated Financial Statements in this
Prospectus. As a result of the Saul Centers Transaction, the operating results
of commercial properties for the current quarter are not entirely comparable to
the prior period's results, which included the operations of the transferred
properties.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER
31,
-----------------
1993(1) 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
SHOPPING CENTERS
Revenue
Base rent................................................. $ -- $ 5,502
Expense recoveries........................................ -- 1,286
Percentage rent........................................... -- 828
Other..................................................... -- 204
------- -------
Total revenues.......................................... -- 7,820
------- -------
Direct operating expenses
Real estate taxes......................................... -- 527
Repairs and maintenance................................... -- 245
Utilities................................................. -- 252
Payroll................................................... -- 257
Insurance................................................. -- 90
Ground rent............................................... -- 139
Other..................................................... -- 250
------- -------
Total direct operating expense.......................... -- 1,760
------- -------
Income after direct operating expenses...................... $ -- $ 6,060
------- -------
------- -------
OFFICE PROPERTIES
Revenue
Base rent................................................. $ 3,478 $ 4,658
Expense recoveries........................................ 151 417
Other..................................................... 94 102
------- -------
Total revenues.......................................... 3,723 5,177
------- -------
Direct operating expenses
Real estate taxes......................................... 375 483
Repairs and maintenance................................... 385 411
Utilities................................................. 578 569
Payroll................................................... 137 143
Insurance................................................. 65 76
Other..................................................... 165 209
------- -------
Total direct operating expenses......................... 1,705 1,891
------- -------
Income after direct operating expenses...................... $ 2,018 $ 3,286
------- -------
------- -------
<FN>
- ------------------------
(1) Reflects the Real Estate Trust's transfer, in August 1993, of its 22
shopping center properties and one of its office properties to Saul
Holdings Partnership and a subsidiary limited partnership of Saul Holdings
Partnership. See "Business -- Real Estate -- Investment in Saul Holdings
Limited Partnership."
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER
31,
-----------------
1993(1) 1992
COMMERCIAL PROPERTIES ------- -------
(COMBINED RESULTS OF
SHOPPING CENTER AND OFFICE PROPERTIES) (IN THOUSANDS)
<S> <C> <C>
Revenue
Base rent................................................. $ 3,478 $10,160
Expense recoveries........................................ 151 1,703
Percentage rent........................................... -- 828
Other..................................................... 94 306
------- -------
Total revenues.......................................... 3,723 12,997
------- -------
Direct operating expenses
Real estate taxes......................................... 375 1,010
Repairs and maintenance................................... 385 656
Utilities................................................. 578 821
Payroll................................................... 137 400
Insurance................................................. 65 166
Ground rent............................................... -- 139
Other..................................................... 165 459
------- -------
Total direct operating expenses......................... 1,705 3,651
------- -------
Income after direct operating expenses...................... $ 2,018 $ 9,346
------- -------
------- -------
HOTELS
Revenue
Room sales................................................ $ 6,794 $ 6,715
Food sales................................................ 2,254 2,385
Beverage sales............................................ 766 898
Other..................................................... 868 783
------- -------
Total revenues.......................................... 10,682 10,781
------- -------
Direct operating expenses
Payroll................................................... 3,555 3,556
Cost of sales............................................. 1,069 1,222
Utilities................................................. 677 689
Repairs and maintenance................................... 564 550
Advertising and promotion................................. 532 593
Property taxes............................................ 230 289
Insurance................................................. 140 139
Other..................................................... 1,138 990
------- -------
Total direct operating expenses......................... 7,905 8,028
------- -------
Income after direct operating expenses...................... $ 2,777 $ 2,753
------- -------
------- -------
<FN>
- ------------------------
(1) Reflects the Real Estate Trust's transfer, in August 1993, of its 22
shopping center properties and one of its office properties to Saul
Holdings Partnership and a subsidiary limited partnership of Saul Holdings
Partnership. See "Business -- Real Estate -- Investment in Saul Holdings
Limited Partnership."
</TABLE>
The Real Estate Trust recorded a loss before depreciation, amortization and
non-cash charges of $6.2 million and an operating loss of $10.1 million for the
three-month period ended December 31, 1993, compared to a loss before
depreciation, amortization and non-cash charges of $3.2 million and an operating
loss of $7.0 million for the prior corresponding period. In addition, the Real
Estate Trust
42
<PAGE>
received a tax sharing payment of $4.6 million from the Bank in the December
1993 quarter. Cash flow from operations before interest expense and after such
tax sharing payment was $8.6 million for the three months ended December 31,
1993, compared to $17.5 million for the prior corresponding period.
Income after direct operating expenses in the three months ended December
31, 1993 from commercial properties, which includes only office properties,
decreased $7.3 million (78.4%), compared to such income in the three months
ended December 31, 1992, which includes income from both shopping center and
office properties. Because of the Saul Centers Transaction, the Real Estate
Trust received no income from shopping centers in the current period. Income
after direct operating expenses from commercial properties held during both
periods declined $825,000 (29.0%). The performance of the office portfolio was
adversely affected by a reduction in the leasing rate, to 79% at December 31,
1993 from 83% at December 31, 1992. The lower leasing rate generally reflected
recessionary economic conditions in the markets in which these properties are
located, including the effects of the termination at March 31, 1993 of a lease
for 134,000 square feet of space in one of the Trust's office buildings located
in Atlanta.
Income after direct operating expenses from hotel properties increased
$24,000 (0.9%) in the December 1993 quarter. Room sales increased by $79,000
(1.2%), while food and beverage sales declined by $263,000 (8.0%). The net
decline in total revenues of $99,000 (0.9%) was more than offset by reductions
of $123,000 (1.5%) in operating costs.
Interest expense decreased by $3.1 million (23.9%) in the current period
primarily as a result of the transfer of the mortgage debt associated with the
properties conveyed in the Saul Centers Transaction. Average balances of the
Real Estate Trust's outstanding borrowings declined to $297.2 million in the
three months ended December 31, 1993 from $477.9 million in the prior
corresponding period. The decline was primarily a result of the transfer of the
mortgage debt associated with the properties conveyed in the Saul Centers
Transaction.
Depreciation declined $1.1 million (33.8%) primarily as a result of the
transfer of properties in the Saul Centers Transaction.
Advisory, management and leasing fees-related parties declined $151,000
(9.0%) from the level in the three months ended December 31, 1992. The monthly
advisory fee in the December 1993 quarter was $250,000, compared to $97,000 in
the prior period. The effect of this increase was offset by decreases in
management and leasing fees, primarily because of the transfer of properties in
the Saul Centers Transaction and, to a lesser extent, reductions in rental and
sales income on which these fees are based.
Higher legal and accounting expense in the current quarter contributed to an
increase of $167,000 (50.0%) in general and administrative expenses.
Writedown of real estate to net realizable value reflects a $1.4 million
reduction in the carrying value of a hotel property. Although this hotel has
produced satisfactory operating results in the past, the Real Estate Trust
reduced the carrying value of the asset based on management's evaluation of the
hotel's location, recent operating history and unlikely prospects for a
near-term recovery.
BANKING
OVERVIEW. The Bank recorded operating income before income taxes,
extraordinary items and cumulative effect of change in accounting principle of
$6.0 million during the three months ended December 31, 1993, compared to
operating income before income taxes, extraordinary items and cumulative effect
of change in accounting principle of $1.3 million for the corresponding period
in fiscal 1993. The increase in the December 1993 quarter was attributable to a
$15.7 million decrease in the provision for loan losses and a $13.8 million
increase in other (non-interest) income. The positive effect of these items was
offset in part by a $7.7 million decrease in net interest income before
provision for loan losses and by a $17.0 million increase in operating expenses.
A substantial portion of the increase in operating expenses was attributable to
increased advertising and other expenses
43
<PAGE>
incurred in connection with the resumption of active national solicitation of
credit card accounts. At December 31, 1993, the Bank had $1.7 billion of managed
credit card receivables and approximately 890,000 cards in circulation.
The Bank's net income in the current quarter reflected a $6.3 million
extraordinary loss, net of related income taxes, resulting from the Bank's
redemption of $128.5 million principal amount of outstanding subordinated
capital debentures in December 1993. See "Financial Condition -- Banking --
General" and Note 24 to the Consolidated Financial Statements in this
Prospectus.
The Bank adopted SFAS 109 effective October 1, 1993. The cumulative effect
of this change in accounting principle of $5.1 million was recognized as a
benefit in the operating results for the December 1993 quarter.
NET INTEREST INCOME. Net interest income, before the provision for loan
losses, decreased $7.7 million (or 16.4%) in the three months ended December 31,
1993, as the average yield on interest-earning assets decreased at a rate
greater than the decrease in the average rate on interest-bearing liabilities.
See "Financial Condition -- Banking -- Asset and Liability Management."
The Bank would have recorded interest income of $3.2 million for the three
months ended December 31, 1993 if non-accrual assets and restructured loans had
been current in accordance with their original terms. Interest income of $0.6
million was actually recorded on non-accrual assets and restructured loans for
the three months ended December 31, 1993. The Bank's net interest income in
future periods will continue to be adversely affected by the Bank's
non-performing assets.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resulting yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread and net
yield on interest-earning assets.
44
<PAGE>
NET INTEREST MARGIN ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1992
--------------------------------- ---------------------------------
DECEMBER 31, AVERAGE YIELD/ AVERAGE YIELD/
1993 YIELD/ RATE BALANCES INTEREST RATE BALANCES INTEREST RATE
---------------- ---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1)............. 9.67% $2,483,114 $ 59,164 9.53% $2,113,138 $ 62,135 11.76%
Mortgage-backed securities (2)........ 5.84 1,457,544 20,769 5.70 1,590,149 25,906 6.52
Federal funds sold.................... 3.00 17,487 131 3.00 18,533 138 2.98
Investment securities................. 4.33 4,688 81 6.91 173,333 2,789 6.44
Other interest-earning assets......... 3.42 208,643 1,511 2.90 162,334 1,176 2.90
---------- --------- ---------- ---------
Total............................... 8.24 4,171,476 81,656 7.83 4,057,487 92,144 9.08
--- --------- ----- --------- -----
Non-interest earning assets:
Cash.................................. 113,301 101,089
Real estate held for investment or
sale................................. 391,983 524,555
Property and equipment, net........... 136,011 144,788
Cost in excess of net assets acquired,
net.................................. 9,333 12,225
Other assets.......................... 163,340 158,757
---------- ----------
Total assets........................ $4,985,444 $4,998,901
---------- ----------
---------- ----------
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits..................... 2.92 $ 800,230 5,376 2.69 $ 719,725 4,377 2.43
Savings deposits.................... 3.46 1,053,995 8,710 3.31 770,053 6,311 3.28
Time deposits....................... 4.16 804,299 8,041 4.00 1,077,711 12,530 4.65
Money market deposits............... 3.28 1,181,021 9,256 3.13 1,287,366 10,364 3.22
---------- --------- ---------- ---------
Total deposits...................... 3.43 3,839,545 31,383 3.27 3,854,855 33,582 3.48
Borrowings............................ 4.75 792,038 10,837 5.47 919,306 11,406 4.96
---------- --------- ---------- ---------
Total............................... 3.67 4,631,583 42,220 3.65 4,774,161 44,988 3.77
--- --------- ----- --------- -----
Non interest-bearing items:
Non-interest bearing deposits......... 55,742 34,374
Other liabilities..................... 37,186 38,335
Stockholders' equity.................. 260,933 152,031
---------- ----------
Total liabilities and stockholders'
equity............................. $4,985,444 $4,998,901
---------- ----------
---------- ----------
Net interest income....................... $ 39,436 $ 47,156
--------- ---------
--------- ---------
Net interest spread (3)................... 4.18% 5.31%
----- -----
----- -----
Net yield on interest-earning assets
(4)...................................... 3.78% 4.65%
----- -----
----- -----
Interest-earning assets to
interest-bearing liabilities............. 90.07% 84.99%
----- -----
----- -----
<FN>
- ------------------------------
(1) Includes loans held for sale and/or securitization. Interest on
non-accruing loans has been included only to the extent reflected in the
Consolidated Statements of Operations; however, the loan balance is
included in the average amount outstanding until transferred to real
estate acquired in settlement of loans.
(2) Includes mortgage-backed securities held for sale for the three months
ended December 31, 1992.
(3) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(4) Equals net interest income divided by the average balances of total
interest-earning assets.
</TABLE>
45
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Bank during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1993 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1992 INCREASE
(DECREASE) DUE TO CHANGE IN (1)
-----------------------------------
VOLUME RATE TOTAL CHANGE
--------- ---------- ------------
<S> <C> <C> <C>
Interest income:
Loans (2)................................................................ $ 43,811 $ (46,782) $ (2,971)
Mortgage-backed securities (3)........................................... (2,048) (3,089) (5,137)
Federal funds sold....................................................... (13) 6 (7)
Investment securities.................................................... (4,035) 1,327 (2,708)
Other interest-earning assets............................................ 335 -- 335
--------- ---------- ------------
Total interest income.................................................. 38,050 (48,538) (10,488)
--------- ---------- ------------
Interest expense:
Deposit accounts......................................................... (136) (2,063) (2,199)
Borrowings............................................................... (5,707) 5,138 (569)
--------- ---------- ------------
Total interest expense................................................. (5,843) 3,075 (2,768)
--------- ---------- ------------
Increase (decrease) in net interest income................................. $ 43,893 $ (51,613) $ (7,720)
--------- ---------- ------------
--------- ---------- ------------
<FN>
- ------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rate.
(2) Includes loans held for sale and/or securitization.
(3) Includes mortgage-backed securities held for sale.
</TABLE>
Interest income for the three months ended December 31, 1993 decreased $10.5
million from the level in the prior corresponding period, primarily as a result
of lower average yields earned by the Bank on the principal categories of its
interest-earning assets. The effect of the lower average yields on interest
income was offset in part by higher average balances of certain interest-earning
assets, principally loans receivable and, to a lesser extent, interest-bearing
deposits.
The Bank's net interest spread declined to 4.18% from 5.31%, reflecting in
part the effect of the Bank's actions to restructure its balance sheet as part
of its capital maintenance program. As described below, in order to reduce its
overall risk-based capital requirement, the Bank invested the proceeds from the
securitization and sale of home equity credit line and credit card receivables
in lower-yielding securities. In view of its improved capital position, the Bank
does not currently anticipate that it will be required in future periods to
continue to pursue comparable asset reallocations that could adversely affect
its net interest spread, although other factors, including the continued impact
of the prior reallocations, may adversely affect the net interest spread in such
periods.
The Bank securitizes and sells credit card, home equity credit line and
automobile loan receivables through asset-backed securitizations as a means of
managing its assets and regulatory capital levels. The Bank continues to service
the underlying loans and receives significant fee income from such servicing.
The effect of securitizations is to reduce net interest income and provision for
loan
46
<PAGE>
losses and increase fee income. An additional effect of the securitization
program is to reduce the overall yield on the Bank's remaining net assets
because the higher yielding receivables are initially replaced with
lower-yielding short-term assets pending investment into more receivables.
Interest income on loans, the largest category of interest-earning assets,
declined by $3.0 million (or 4.8%), compared to interest income on loans in the
December 1992 quarter. The decline in interest income was attributable to lower
average yields on the loan portfolio, which reflected a decline in market
interest rates. The average yield on the portfolio in the current quarter
decreased by 223 basis points (to 9.53% from 11.76%) from the average yield in
the three months ended December 31, 1992. Special introductory and promotional
interest rates to new and existing credit card holders contributed to a decline
in the average yield on credit card loans to 15.1% from 18.2% and a decline of
$7.8 million in interest income on these loans. The average yield on
single-family residential loans declined to 6.83% from 7.72%, while the average
yield on home equity credit line loans decreased to 6.59% from 7.25%. Both of
these loan types generally bear interest at variable rates that adjust based on
specified market interest rates, which declined significantly from levels
prevailing in the three months ended December 31, 1992. The effect of these
lower yields was offset in part by an increase in the average yield on
construction and ground loans of 165 basis points (from 6.02% to 7.67%).
An increase in average loan balances partially offset the effects of lower
average yields. Average balances of single-family residential permanent loans
increased $407.5 million as a result of increased origination of such loans
during the December 1993 quarter. Interest income on these loans increased $4.9
million from the prior period. An increase of $1.8 million (or 107.8%) in
interest income on consumer loans (other than credit card loans) was
attributable to increased originations of automobile loans. Average balances of
commercial permanent loans increased $33.1 million (or 55.8%) primarily as a
result of an increase in loans made to purchasers of certain of the Bank's REO
in connection with the sales of such REO. Average balances of credit card and
home equity credit line loans declined during the current quarter, largely as a
result of the Bank's loan securitization and sale activity. The Bank securitized
and sold $150.0 million and $200.0 million of credit card receivables in March
1993 and August 1993, respectively, but experienced an increase in new account
originations in connection with the Bank's resumption of active national
solicitation of new credit card accounts. As a net result, average balances of
credit card loans decreased $30.2 million (or 3.5%). The securitization and sale
of $194.2 million and $146.2 million of home equity credit line receivables in
December 1992 and September 1993, respectively, resulted in a decline of $134.6
million (or 61.3%) in average balances of home equity credit line receivables,
which contributed to a $2.6 million decline in interest income. Average loan
balances in the construction and ground loan categories decreased $19.9 million
(or 24.4%) from the level in the prior corresponding period primarily as a
result of loan principal repayments and the acquisition of the underlying
collateral through foreclosure.
Interest income on mortgage-backed securities decreased $5.1 million because
of lower average interest rates and, to a lesser extent, lower average balances
resulting from the sale of $127.8 million of mortgage-backed securities in March
1993. Average interest rates declined to 5.70% from 6.52%, reflecting a decline
in market interest rates. The Bank's mortgage-backed securities principally bear
interest at variable rates that adjust based on market interest rates.
Interest income on investment securities decreased $2.7 million as the
result of the sale in June 1993 of U.S. Government securities with a book value
of $172.9 million, which resulted in lower average balances of such securities.
Interest expense decreased $2.8 million (or 6.2%) for the three months ended
December 31, 1993 primarily because of a decline of $2.2 million in interest
expense on deposits, the largest category of interest-bearing liabilities.
Interest expense on deposits decreased principally as a result of a decrease in
average rates (to 3.27% from 3.48%), which reflected a decline in market
interest rates, and, to a lesser extent, a decrease of $15.3 million in average
deposit balances.
Interest on borrowings decreased $0.6 million in the December 1993 quarter
primarily because of a decrease in interest expense on repurchase transactions.
The decrease was offset in part by increased interest expense on Federal Home
Loan Bank advances and on the Bank's subordinated
47
<PAGE>
debentures. The Bank paid interest on its outstanding 13 1/2% Subordinated
Capital Debentures due July 15, 2002 and 15% Subordinated Capital Debentures due
November 15, 2003 through December 23, 1993 and December 24, 1993, respectively,
when it redeemed those securities with the proceeds of the 1993 Debentures,
which were issued on November 23, 1993. See "Financial Condition -- Banking --
General."
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses decreased
to $12.1 million in the December 1993 quarter from $27.8 million in the prior
period. The provision for losses on credit card loans decreased $11.7 million
primarily as a result of a decline in net charge-offs of credit card loans in
fiscal 1993. The provision for losses on real estate loans decreased $3.9
million, reflecting the Bank's implementation of Statement of Position 92-3,
"Accounting for Foreclosed Assets" ("SOP 92-3") in the December 1992 quarter.
See "Financial Condition -- Banking -- Asset Quality -- Reserves for Losses" and
"Summary of Significant Accounting Policies -- The Bank" in the Notes to the
Consolidated Financial Statements in this Prospectus.
OTHER INCOME. The increase in other income (to $35.3 million in the
December 1993 quarter from $21.6 million in the December 1992 quarter) was
primarily attributable to an increase in earnings on real estate held for
investment or sale and an increase in loan and deposit servicing fees. These
increases were partially offset by decreased gains on sales of credit card
relationships, loans and mortgage-backed securities.
The $19.3 million increase in earnings on real estate held for investment or
sale was primarily attributable to a decrease of $18.8 million in the provision
for losses on such assets. The Bank's implementation of SOP 92-3 in the three
months ended December 31, 1992 resulted in additional provisions for real estate
losses in that period. See "Financial Condition -- Banking -- Asset Quality --
Reserves for Losses." The decreased provision was partially offset by a $1.1
million decrease in the operating income generated by the Bank's REO properties.
An increase of $4.2 million in excess servicing fees earned by the Bank in
servicing its portfolios of securitized credit card loans contributed to an
increase of $2.5 million (or 14.3%) in loan and deposit servicing fees. Excess
servicing fees represent the contractual interest and fees paid by credit card
holders less certificate interest paid to holders of certificates in the trusts,
administrative fees paid to providers of services to the trusts and the portion
of the charge-offs allocated to the holders of the certificates. The $4.2
million increase in excess servicing fees earned from servicing the credit card
portfolios resulted from increased securitization activity by the Bank in recent
periods. The higher level of securitized credit card receivables also resulted
in increased credit card servicing fees of $0.7 million. As the Bank securitizes
and sells assets, purchases mortgage servicing rights, or sells mortgage loans
and retains the servicing rights on those loans, servicing fee income levels
increase. The level of servicing fee income declines upon repayment of assets
previously securitized and sold and upon prepayment of mortgage loans serviced
for others. The positive effect of these items on loan and deposit servicing
fees was offset in part by a $1.6 million increase in rebate expenses on credit
card retail purchases, which the Bank incurred in connection with repricing
activities undertaken beginning in 1993. The amortization of the excess
servicing assets related to home equity credit line securitizations increased
$2.2 million during the three months ended December 31, 1993 from the prior
corresponding period. The increase was primarily attributable to the
securitization and sale of $194.2 million and $146.2 million of home equity
credit line receivables in December 1992 and September 1993, respectively.
Gain on sales of credit card relationships, loans and mortgage-backed
securities in the three months ended December 31, 1993 totaled $2.5 million,
which represented a decrease of $10.2 million from the prior corresponding
period. The prior period's results were affected by the sale of $194.2 million
of home equity credit line receivables in the December 1992 quarter, which
resulted in a gain of $10.4 million.
OPERATING EXPENSES. Operating expenses in the quarter ended December 31,
1993 increased $17.0 million primarily as a result of increases in advertising
expenses, salaries and employee benefits and loan expenses. The $5.9 million
increase in advertising expenses was primarily attributable to
48
<PAGE>
increased solicitation by the Bank of its credit card products and services in
connection with the resumption of active national solicitation of new credit
card accounts. The $5.1 million increase in salaries and employee benefits
resulted primarily from staffing increases and discretionary bonuses paid to
substantially all employees in December 1993. The $3.8 million increase in loan
expenses was primarily attributable to the accelerated amortization of purchased
mortgage servicing rights, which resulted from increased prepayments of the
underlying loans. In order to take advantage of additional opportunities to
enhance profitability, the Bank may be required to incur increased expenditures
for salaries and employee benefits, loan expenses and advertising expenses,
which will contribute to higher operating expenses in future periods.
FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992
The Trust recorded net income of $4.5 million in the fiscal year ended
September 30, 1993, compared to net income of $5.9 million in the fiscal year
ended September 30, 1992. The Real Estate Trust's operating loss increased to
$44.5 million in fiscal 1993 from $28.5 million in fiscal 1992. The Bank
recorded operating income of $63.8 million in fiscal 1993, compared to operating
income of $43.4 million in the prior year.
REAL ESTATE
The following table sets forth, for the fiscal years ended September 30,
1993, 1992 and 1991, direct operating results for the Real Estate Trust's (i)
shopping center and office properties, (ii) commercial properties portfolio,
which presents the shopping center and office property results on a combined
basis, and (iii) hotel properties. On August 26, 1993, the Real Estate Trust
transferred its 22 shopping center properties and one of its office properties
to Saul Holdings Partnership and a subsidiary limited partnership of Saul
Holdings Partnership in exchange for securities representing a 21.5% limited
partnership interest in Saul Holdings Partnership. See "Business -- Real Estate
- -- Investment in Saul Holdings Limited Partnership" and Note 2 to the
Consolidated Financial Statements in this Prospectus. As a result of the Saul
Centers Transaction, the fiscal 1993 operating results of commercial properties,
which included the transferred properties, are not entirely comparable to the
prior year's results.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
SHOPPING CENTERS
Revenue
Base rent.................................................................... $ 19,635 $ 21,284 $ 21,446
Expense recoveries........................................................... 4,488 4,857 5,259
Percentage rent.............................................................. 2,231 2,608 2,762
Other........................................................................ 725 1,157 386
--------- --------- ---------
Total revenues............................................................. 27,079 29,906 29,853
--------- --------- ---------
Direct operating expenses
Real estate taxes............................................................ 1,977 2,053 2,384
Repairs and maintenance...................................................... 1,186 1,152 1,304
Utilities.................................................................... 929 951 976
Payroll...................................................................... 891 924 925
Insurance.................................................................... 304 347 397
Ground rent.................................................................. 429 467 452
Other........................................................................ 769 818 856
--------- --------- ---------
Total direct operating expenses............................................ 6,485 6,712 7,294
--------- --------- ---------
Income after direct operating expenses......................................... $ 20,594 $ 23,194 $ 22,559
--------- --------- ---------
--------- --------- ---------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
OFFICE PROPERTIES
<S> <C> <C> <C>
Revenue
Base rent.................................................................... $ 16,975 $ 19,101 $ 20,823
Expense recoveries........................................................... 1,272 1,916 2,658
Other........................................................................ 410 566 701
--------- --------- ---------
Total revenues............................................................. 18,657 21,583 24,182
--------- --------- ---------
Direct operating expenses
Real estate taxes............................................................ 1,508 1,733 2,210
Repairs and maintenance...................................................... 1,718 1,695 1,785
Utilities.................................................................... 2,261 2,326 2,363
Payroll...................................................................... 548 549 551
Insurance.................................................................... 282 296 328
Other........................................................................ 906 1,105 1,431
--------- --------- ---------
Total direct operating expenses............................................ 7,223 7,704 8,668
--------- --------- ---------
Income after direct operating expenses......................................... $ 11,434 $ 13,879 $ 15,514
--------- --------- ---------
--------- --------- ---------
COMMERCIAL PROPERTIES
(COMBINED RESULTS OF
SHOPPING CENTER AND OFFICE PROPERTIES)
Revenues
Base rent.................................................................... $ 36,610 $ 40,385 $ 42,269
Expense recoveries........................................................... 5,760 6,773 7,917
Percentage rent.............................................................. 2,231 2,608 2,762
Other........................................................................ 1,135 1,723 1,087
--------- --------- ---------
Total revenues............................................................. 45,736 51,489 54,035
--------- --------- ---------
Direct operating expenses
Real estate taxes............................................................ 3,485 3,786 4,594
Repairs and maintenance...................................................... 2,904 2,847 3,089
Utilities.................................................................... 3,190 3,277 3,339
Payroll...................................................................... 1,439 1,473 1,476
Insurance.................................................................... 586 643 725
Ground rent.................................................................. 429 467 452
Other........................................................................ 1,675 1,923 2,287
--------- --------- ---------
Total direct operating expenses............................................ 13,708 14,416 15,962
--------- --------- ---------
Income after direct operating expenses......................................... $ 32,028 $ 37,073 $ 38,073
--------- --------- ---------
--------- --------- ---------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
HOTELS
<S> <C> <C> <C>
Revenue
Room sales................................................................... $ 30,517 $ 31,715 $ 31,105
Food sales................................................................... 8,885 8,703 9,056
Beverage sales............................................................... 2,985 3,258 3,064
Other........................................................................ 2,998 2,952 2,544
--------- --------- ---------
Total revenues............................................................. 45,385 46,628 45,769
--------- --------- ---------
Direct operating expenses
Payroll...................................................................... 14,887 15,145 15,882
Cost of sales................................................................ 4,729 4,862 4,826
Utilities.................................................................... 3,027 2,957 2,892
Repairs and maintenance...................................................... 2,426 2,447 2,685
Advertising and promotion.................................................... 2,301 2,331 2,168
Property taxes............................................................... 1,194 1,084 1,382
Insurance.................................................................... 543 544 700
Other........................................................................ 4,390 4,593 4,564
--------- --------- ---------
Total direct operating expenses............................................ 33,497 33,963 35,099
--------- --------- ---------
Income after direct operating expenses......................................... $ 11,888 $ 12,665 $ 10,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Real Estate Trust recorded a loss before depreciation, amortization and
non-cash charges of $15.9 million and an operating loss of $44.5 million for the
fiscal year ended September 30, 1993, compared to a loss before depreciation,
amortization and non-cash charges of $13.4 million and an operating loss of
$28.5 million for the prior corresponding period. In addition, the Real Estate
Trust received a tax sharing payment of $5.0 million from the Bank in fiscal
1993. The operating results for fiscal 1993 reflected a non-cash charge of $13.1
million resulting from the write-off of previously capitalized costs on
development projects which management has determined have no continuing value to
the Real Estate Trust. Cash flow from operations before interest expense and
after tax sharing payments received from the Bank was $52.3 million for fiscal
1993, compared to $50.4 million for fiscal 1992.
Income after direct operating expenses from commercial properties, which
include both shopping center and office properties, decreased $5.0 million
(13.6%) in fiscal 1993 from the prior fiscal year. Income from shopping centers
after direct operating expenses declined by $2.6 million (11.2%) from the fiscal
1992 level, while income from office buildings declined by $2.4 million (17.6%).
The decline in shopping center income and, to a lesser extent, office property
income was primarily attributable to the transfer of 22 shopping centers and one
office property to Saul Holdings Partnership and a subsidiary limited
partnership in the Saul Centers Transaction, which effectively limited fiscal
1993 operating results for the major part of the commercial property portfolio
to approximately 11 months of operations. The performance of the office property
portfolio also was adversely affected by a decline in the leasing rate, to 77%
at September 30, 1993 from 81% at September 30, 1992. The lower leasing rate
generally reflected the recessionary economic conditions in the markets in which
these properties are located, including the effects of the termination on March
31, 1993 of a lease for 134,000 square feet of space in one of the Trust's
office buildings located in Atlanta.
Income after direct operating expenses from hotel properties decreased $0.8
million (6.1%) in fiscal 1993 from the prior fiscal year. Room sales declined
$1.2 million (3.8%), reflecting continued softness in some of the hotel markets
and a significant decrease in occupancy rates at one of the nine properties.
Direct operating expenses, which include a number of variable costs tied to
occupancy, decreased $0.5 million (1.4%) in the current year.
51
<PAGE>
Interest expense declined $0.9 million (1.7%) in fiscal 1993 as a result of
lower interest rates and lower average total indebtedness. Average balances of
the Real Estate Trust's outstanding borrowings declined to $452.7 million in
fiscal 1993 from $478.9 million in fiscal 1992, primarily as a result of the
transfer of the mortgage debt associated with the properties conveyed in the
Saul Centers Transaction.
Advisory, management and leasing fees-related parties increased $0.2 million
(2.2%) in fiscal 1993 primarily as the result of an increase, effective January
1, 1993, in the monthly advisory fee to $157,000 from $97,000. The effect of
this increase was partially offset by a decrease of $0.4 million in management
and leasing fees as a result of lower rental and sales income on which these
fees are based.
General and administrative expense decreased $2.1 million (49.9%) in fiscal
1993 from the level in the prior fiscal year. Such expense in fiscal 1992
reflected payment of $1.3 million in connection with a litigation judgment
awarded against the Trust and associated costs and expenses. Most of the balance
of the decreased expenses in the current fiscal year was attributable to lower
legal expense.
The $13.1 million write-off of abandoned development costs, which were
incurred primarily before fiscal 1990, represents the expensing of costs
capitalized in previous years by the Real Estate Trust on projects for various
types of income-producing properties located in Georgia, Virginia, Kansas and
Florida. Because of changed economic circumstances in those locations,
management has determined that it would not be in the best interests of the Real
Estate Trust to continue development and that the costs expended to date have no
continuing value to the Real Estate Trust.
BANKING
OVERVIEW. The Bank recorded operating income of $63.8 million for the year
ended September 30, 1993, compared to operating income of $43.4 million for
fiscal 1992. The increase in operating income for the year ended September 30,
1993 was primarily attributable to a $26.5 million decrease in the provision for
loan losses, a $7.0 million increase in loan and deposit servicing fees, an $8.9
million increase in gain on sales of securities and a $37.9 million decrease in
loss on real estate held for investment or sale. The positive effect of these
items was offset in part by a $7.0 million decrease in net interest income
before provision for loan losses, an $8.2 million decrease in credit card fees,
a $12.9 million decrease in gains on sales of credit card relationships, loans
and mortgage-backed securities and a $29.5 million increase in operating
expenses.
NET INTEREST INCOME. Net interest income, before the provision for loan
losses, decreased $7.0 million (or 3.7%) for the year ended September 30, 1993,
as the average yield on interest-earning assets decreased at a rate greater than
the decrease in the average rate on interest-bearing liabilities. See "Financial
Condition -- Banking -- Asset and Liability Management."
The Bank would have recorded additional net interest income of $7.4 million
for the year ended September 30, 1993 if the Bank's non-accrual assets and
restructured loans had been current in accordance with their original terms.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resulting yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread and net
yield on interest-earning assets.
52
<PAGE>
NET INTEREST MARGIN ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1993 1992
SEPTEMBER 30, ----------------------------- -----------------------------
1993 AVERAGE YIELD/ AVERAGE YIELD/
YIELD/RATE BALANCES INTEREST RATE BALANCES INTEREST RATE
-------------- ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1)..................... 9.93% $2,136,157 $240,443 11.26% $2,411,405 $307,740 12.76%
Mortgage-backed securities (2)................ 5.95 1,508,948 95,085 6.30 1,115,975 83,504 7.48
Federal Funds sold............................ -- 14,283 427 2.99 25,919 1,063 4.10
Trading securities............................ -- -- -- -- -- -- --
Investment securities......................... 4.21 125,255 8,086 6.46 64,569 4,159 6.44
Other interest-earning assets................. 3.27 168,432 4,773 2.83 163,453 6,567 4.02
---------- -------- ---------- --------
Total....................................... 8.19 3,953,075 348,814 8.82 3,781,321 403,033 10.66
--- -------- ------ -------- ------
Non-interest earning assets:
Cash.......................................... 104,195 106,297
Real estate held for investment or sale....... 466,717 564,325
Property and equipment, net................... 141,690 151,350
Cost in excess of net assets acquired, net.... 11,117 14,161
Other assets.................................. 172,178 172,888
---------- ----------
Total assets................................ $4,848,972 $4,790,342
---------- ----------
---------- ----------
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits............................. 2.89 $ 750,816 18,569 2.47 $ 714,736 22,523 3.15
Savings deposits............................ 3.46 860,280 27,980 3.25 689,882 27,800 4.03
Time deposits............................... 4.32 964,926 41,813 4.33 1,347,438 75,914 5.63
Money market deposits....................... 3.28 1,242,175 39,430 3.17 1,332,776 55,384 4.16
---------- -------- ---------- --------
Total deposits.............................. 3.48 3,818,197 127,792 3.35 4,084,832 181,621 4.45
Borrowings.................................... 5.81 755,111 39,726 5.26 484,377 33,140 6.84
---------- -------- ---------- --------
Total....................................... 3.83 4,573,308 167,518 3.66 4,569,209 214,761 4.70
--- -------- ------ -------- ------
Non interest-bearing items:
Non-interest bearing deposits................. 46,670 38,489
Other liabilities............................. 36,145 46,534
Stockholders' equity.......................... 192,849 136,110
---------- ----------
Total liabilities and stockholders'
equity..................................... $4,848,972 $4,790,342
---------- ----------
---------- ----------
Net interest income............................... $181,296 $188,272
-------- --------
-------- --------
Net interest spread (3)........................... 5.16% 5.96%
------ ------
------ ------
Net yield on interest-earning assets (4).......... 4.59% 4.98%
------ ------
------ ------
Interest-earning assets to interest-bearing
liabilities...................................... 86.44% 82.76%
------ ------
------ ------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1991
-----------------------------
AVERAGE YIELD/
BALANCES INTEREST RATE
---------- -------- ------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1)..................... $3,111,735 $391,176 12.57%
Mortgage-backed securities (2)................ 680,382 62,429 9.18
Federal Funds sold............................ 65,337 4,608 7.05
Trading securities............................ 158,638 14,283 9.00
Investment securities......................... 117,710 7,658 6.51
Other interest-earning assets................. 112,737 7,418 6.58
---------- --------
Total....................................... 4,246,539 487,572 11.48
-------- ------
Non-interest earning assets:
Cash.......................................... 123,295
Real estate held for investment or sale....... 447,960
Property and equipment, net................... 159,338
Cost in excess of net assets acquired, net.... 17,434
Other assets.................................. 190,454
----------
Total assets................................ $5,185,020
----------
----------
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposit accounts:
Demand deposits............................. $ 681,785 35,169 5.16
Savings deposits............................ 483,985 27,313 5.64
Time deposits............................... 1,675,588 120,905 7.22
Money market deposits....................... 1,571,634 97,323 6.19
---------- --------
Total deposits.............................. 4,412,992 280,710 6.36
Borrowings.................................... 545,722 45,001 8.25
---------- --------
Total....................................... 4,958,714 325,711 6.57
-------- ------
Non interest-bearing items:
Non-interest bearing deposits................. 23,435
Other liabilities............................. 63,403
Stockholders' equity.......................... 139,468
----------
Total liabilities and stockholders'
equity..................................... $5,185,020
----------
----------
Net interest income............................... $161,861
--------
--------
Net interest spread (3)........................... 4.91%
------
------
Net yield on interest-earning assets (4).......... 3.81%
------
------
Interest-earning assets to interest-bearing
liabilities...................................... 85.44%
------
------
<FN>
- ------------------------------
(1) Includes loans held for sale and/or securitization. Interest on
non-accruing loans has been included only to the extent reflected in the
Consolidated Statements of Operations; however, the loan balance is
included in the average amount outstanding until transferred to real
estate acquired in settlement of loans. Includes $19, $2,315 and $5,673 of
amortized loan fees, premiums and discounts in interest income for the
years ended September 30, 1993, 1992 and 1991.
(2) Includes mortgage-backed securities held for sale.
(3) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.
(4) Equals net interest income divided by the average balances of total
interest-earning assets.
</TABLE>
53
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Bank during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and total changes in rate and volume.
VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1993 YEAR ENDED SEPTEMBER 30, 1992
COMPARED TO YEAR ENDED SEPTEMBER COMPARED TO YEAR ENDED SEPTEMBER
30, 1992 INCREASE (DECREASE) DUE 30, 1991 INCREASE (DECREASE) DUE
TO CHANGE IN (1) TO CHANGE IN (1)
---------------------------------- ----------------------------------
TOTAL TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (2).................................... $ (33,153) $ (34,144) $ (67,297) $ (89,265) $ 5,829 $ (83,436)
Mortgage-backed securities (3)............... 26,187 (14,606) 11,581 34,290 (13,215) 21,075
Federal funds sold........................... (397) (239) (636) (2,093) (1,452) (3,545)
Trading securities........................... -- -- -- (14,283) -- (14,283)
Investment securities........................ 3,914 13 3,927 (3,406) (93) (3,499)
Other interest-earning assets................ 196 (1,990) (1,794) 2,636 (3,487) (851)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income...................... (3,253) (50,966) (54,219) (72,121) (12,418) (84,539)
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
Deposit accounts............................. (11,245) (42,584) (53,829) (19,666) (79,423) (99,089)
Borrowings................................... 15,490 (8,904) 6,586 (4,706) (7,155) (11,861)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense..................... 4,245 (51,488) (47,243) (24,372) (86,578) (110,950)
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net interest income..... $ (7,498) $ 522 $ (6,976) $ (47,749) $ 74,160 $ 26,411
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<FN>
- ------------------------
(1) The net change attributable to the combined impact of volume and rate has
been allocated in proportion to the absolute value of the change due to
volume and the change due to rates.
(2) Includes loans held for sale and/or securitization.
(3) Includes mortgage-backed securities held for sale.
</TABLE>
Interest income in fiscal 1993 decreased $54.2 million from the level in
fiscal 1992 as a result of lower average yields on the loan portfolio and lower
average balances of loans. The effect of the lower average yields on loans,
which reflected a decline in market interest rates, and lower average loan
balances was partially offset by higher average balances of certain
interest-earning assets, principally mortgage-backed securities and, to a lesser
extent, U.S. Government securities.
The Bank's net interest spread declined to 5.16% from 5.96%, reflecting in
part the effect of the Bank's actions to restructure its balance sheet as part
of its capital enhancement program. See "Liquidity and Capital Resources --
Banking -- Capital." As described below, in order to reduce its overall
risk-based capital requirement, the Bank invested the proceeds from the
securitization and sale of home equity credit line and credit card receivables
in lower-yielding securities. In view of its improved capital position, the Bank
does not currently anticipate that it will be required in future periods to
continue to pursue comparable asset reallocations that could adversely affect
its net interest spread, although other factors, including the continued impact
of the prior reallocations, may adversely affect the net interest spread in such
periods.
54
<PAGE>
Interest income on loans, the largest category of the Bank's
interest-earning assets, declined by $67.3 million (or 21.9%) due to lower
average balances and decreased yields. The Bank's loan securitization and sale
activity was the single largest factor in reducing loan balances. The
securitization and sale of $194.2 million and $146.2 million of home equity
credit line receivables in the first and fourth quarters of fiscal 1993,
respectively, were reflected in a decrease of $27.5 million (or 15.0%) in
average balances of this loan type. A decrease of $259.5 million in average
credit card loan balances resulting from the securitization and sale of $200.0
million of credit card receivables in the fourth quarter of fiscal 1993 and
$150.0 million and $280.0 million of credit card receivables in the March 1993
and 1992 quarters, respectively, contributed to a $51.9 million decrease in
interest income from this category of loans. Average loan balances in the
construction and ground loan categories decreased $49.6 million (or 42.5%) from
the level in fiscal 1992 primarily as a result of loan principal repayments and
the acquisition of the underlying collateral through foreclosure or
categorization of the loans as in-substance foreclosed. Average loan balances of
residential permanent loans increased $10.1 million as a result of the Bank's
increased origination of single-family residential loans during fiscal 1993.
A decrease of 150 basis points in the average yield on the loan portfolio
for the year ended September 30, 1993 resulted primarily from a decrease to
7.33% from 8.62% in the average yield on residential permanent loans and a
decrease to 7.05% from 8.51% in the average yield on home equity credit line
loans. The Bank's residential permanent loans and home equity credit line loans
generally bear interest at variable rates that adjust based on specified market
interest rates, which declined from levels prevailing in fiscal 1992. See
"Business -- Banking -- Lending Activities -- Single-Family Residential Real
Estate Lending."
Interest income on mortgage-backed securities increased $11.6 million
primarily as a result of higher average balances of these assets. Average
balances increased $393.0 million (or 35.2%) from the level in fiscal 1992
primarily as a result of increased purchases of mortgage-backed securities
during the year. Mortgage-backed security balances increased primarily as result
of management's desire to reduce its overall risk-based capital requirement.
Management accomplished this objective by reinvesting proceeds from the
securitization and sale of home equity credit line and credit card receivables
securitizations, and to a lesser extent, early curtailments on its residential
loans into government and mortgage-backed securities. The effects of the higher
average balances were offset in part by lower average yields on these securities
resulting from lower market interest rates.
Interest income on securities increased $3.9 million as a result of higher
average balances of U.S. Government securities. As discussed above, the Bank's
higher balances in U.S. Government securities was a result of management's
desire to reduce risk-based capital requirements. Other interest income
decreased $2.4 million during the year ended September 30, 1993 primarily
because of lower average yields of interest bearing deposits, which declined to
4.3% from 4.9% (or 12.2%), and lower average yields and balances of federal
funds sold, which declined to 3.0% from 4.1% and to $14.3 million from $25.9
million (or 44.9%), respectively. The Bank's decrease in federal funds sold,
resulted primarily from the immediate reinvestment of various securitization
proceeds into agency mortgage-backed securities rather than into federal funds.
Interest expense decreased $47.2 million (or 22.0%) for the year ended
September 30, 1993 because of a decline of $53.8 million in interest expense on
deposits, the largest category of interest-bearing liabilities. Interest expense
on deposits decreased primarily as a result of a decrease in average rates (to
3.35% from 4.45%), which reflected a decline in market interest rates, and
secondarily to a decline of $266.6 million in average deposit balances. The
decline in average deposit balances, which began in fiscal 1992, has been
primarily attributable to two factors. First, thrifts and banks generally
experienced a net outflow of deposits in 1992 and 1993 as a result of low market
interest rates and the relative strength and attractiveness of bonds and equity
securities as alternate investments. Second, the Bank pursued a more
conservative strategy in fiscal 1992 than certain of its competitors in setting
interest rates on deposits, particularly on more costly certificates of deposit
and money market
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deposits. Interest on borrowings increased by $6.6 million, primarily because of
higher average balances of short-term borrowings which replaced decreased
deposit balances. The higher average balances of such borrowings were offset in
part by lower average interest rates.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses decreased
to $62.5 million in the year ended September 30, 1993 from $89.1 million in the
prior fiscal year. The decrease was primarily attributable to a decrease of
$23.7 million in the provision for losses on credit card loans. The
securitization and sale of $200.0 million of credit card receivables in the
fourth quarter of fiscal 1993 and of $150.0 million and $280.0 million of credit
card receivables in the March 1993 and 1992 quarters, respectively, reduced the
amount of such receivables against which the Bank maintains the reserve. See
"Financial Condition -- Banking -- Asset Quality -- Reserves for Losses."
OTHER INCOME. The increase in other (non-interest) income to $130.8 million
for the year ended September 30, 1993 from $100.4 million for fiscal 1992 was
primarily attributable to an increase in loan servicing fees, an increase in the
gain on sales of investment securities and a decrease in the loss on real estate
held for investment or sale. These items were partially offset by decreases in
credit card fees and in gain on sales of credit card relationships, loans and
mortgage-backed securities.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $8.2 million for the year ended
September 30, 1993 from the level in fiscal 1992. The decrease was attributable
to a decrease in interchange fees, a decrease in late charges collected and a
decrease in annual membership fees as a result of a lower number of accounts due
primarily to credit card securitization activity.
Loan servicing fees increased $6.2 million for the year ended September 30,
1993. Higher levels of securitized receivables serviced by the Bank contributed
to an increase of $6.9 million in credit card servicing fees, and higher levels
of purchased mortgage servicing rights contributed to an increase of $2.6
million in residential single-family mortgage servicing fees. As the Bank
securitizes and sells assets, purchases mortgage servicing rights, or sells
mortgage loans and retains the servicing rights on those loans, servicing fee
income levels increase. The level of servicing fee income declines upon
repayment of assets previously securitized and sold and upon prepayment of
mortgage loans serviced for others. The amortization of the excess servicing
assets related to home equity credit line securitizations increased $3.5
million, primarily due to an increase in the average prepayment rate of the
underlying receivables, which reflected continued high levels of loan prepayment
activity.
The gain on sales of investment securities increased to $8.9 million as a
result of the Bank's sale in June 1993 of its portfolio of five-year U.S.
Government securities with a book value of $172.9 million. The Bank sold these
securities primarily to permit increased mortgage loan origination activity
which would otherwise have been limited under the asset growth limitations
imposed on the Bank by the OTS. See "Liquidity and Capital Resources -- Banking
- -- Capital -- Regulatory Action and Requirements."
The $37.9 million decrease in the loss on real estate held for investment or
sale was primarily attributable to a decrease in the provision for losses on
these assets of $30.2 million. See "Financial Condition -- Banking -- Asset
Quality -- Reserves for Losses."
Gain on sales of credit card relationships, loans and mortgage-backed
securities decreased $12.9 million to $31.4 million in fiscal 1993 from $44.3
million in fiscal 1992, primarily because of a decrease in the amount of
mortgage-backed securities sold and, to a lesser extent, because no credit card
relationships were sold in fiscal 1993. During fiscal 1992, the Bank sold $438.4
million of long-term fixed-rate mortgage-backed securities, which resulted in a
gain of $21.0 million, in order to mitigate the effects on the Bank's capital
levels of an increase in the Bank's reserves for losses on real estate and real
estate-related charge-offs taken during the period. The decrease in the gain on
sales of credit card relationships, loans and mortgage-backed securities was
partially offset by a $4.8 million gain recognized on the sale of the Bank's
portfolio of seven-year balloon fixed-rate mortgage-backed securities, totaling
$127.8 million, in the March 1993 quarter. These securities were sold primarily
to
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<PAGE>
provide the Bank with flexibility under existing regulatory growth limits and to
reduce the Bank's exposure to possible future increases in long-term interest
rates. In addition, the Bank recognized aggregate gains of $16.8 million on its
securitization and sale of home equity credit line receivables in fiscal 1993
compared to gains of $15.1 million in fiscal 1992. See "Liquidity and Capital
Resources -- Banking -- Capital -- Regulatory Action and Requirements."
OPERATING EXPENSES. Operating expenses for the year ended September 30,
1993 increased $29.5 million (18.9%) from the level in fiscal 1992. This
increase was primarily attributable to increases in salaries and employee
benefits, loan expenses and advertising expenses. Salaries and employee benefits
increased $7.0 million, of which $5.5 million resulted from staffing increases,
primarily in the asset workout, loan origination support and telemarketing
areas. The remaining increase was attributable to the increase in the level of
the Bank's contributions to its employee profit sharing plan. The $8.5 million
increase in advertising expenses was primarily attributable to increased direct
mail solicitation by the Bank of its credit card products and services in
connection with the resumption of active national solicitation of new credit
card accounts. See "Business -- Banking -- Lending -- Credit Card Lending." The
$14.2 million increase in loan expenses was due primarily to a $10.5 million
increase in the amortization of purchased mortgage servicing rights, which
resulted from the amortization of the purchase price of approximately $1.2
billion principal amount of residential single-family mortgage servicing rights
acquired by the Bank during fiscal 1993 and the increased prepayments of the
underlying loans. See "Business -- Banking -- Lending Activities -- Loan
Servicing."
FISCAL YEAR 1992 COMPARED TO FISCAL YEAR 1991
The Trust recorded net income of $5.9 million for the fiscal year ended
September 30, 1992, compared to a net loss of $27.3 million for the fiscal year
ended September 30, 1991. The Real Estate Trust's operating loss increased to
$28.5 million in fiscal 1992 from $20.0 million in fiscal 1991. The Bank
recorded operating income of $43.4 million in fiscal 1992, compared to an
operating loss of $6.1 million in the prior year.
REAL ESTATE
The Real Estate Trust recorded an operating loss of $28.5 million for the
fiscal year ended September 30, 1992, which represented an $8.5 million increase
from the $20.0 million operating loss recorded for fiscal 1991. The operating
results for fiscal 1991 included a $20.3 million gain on the sale of a shopping
center, while fiscal 1992 results reflected a $0.5 million loss on property
sales. Excluding the effect of property sales in the two years, the Real Estate
Trust's operating loss declined to $28.0 million in fiscal 1992 from $40.3
million in fiscal 1991. This decreased operating loss was principally
attributable to lower interest expense as a result of declining market interest
rates and lower average indebtedness, a reduction in advisory fee payments and a
decrease in general and administrative costs. Of the loss recorded in fiscal
1992, $15.1 million consisted of depreciation and amortization charges, compared
to $17.6 million of such charges in fiscal 1991. In addition the Real Estate
Trust received tax sharing payments from the Bank totaling $29.6 million during
fiscal 1991.
Income after direct operating expenses from commercial properties, which
include both shopping center and office properties, decreased $1.0 million
(2.6%) in fiscal 1992 from the prior fiscal year. The decrease was attributable
to a decline of $1.6 million (or 10.5%) in income from the office portfolio.
Base rent and expense recoveries, which declined 4.5% and 14.5%, respectively,
from the previous year, were adversely affected in fiscal 1992 by a reduction in
the leasing rate for the office portfolio. The level of leased office space
decreased to 81% at September 30, 1992 from 89% at September 30, 1991. The lower
leasing rate reflected the general recessionary economic conditions in the
markets in which these properties are located. Income from shopping centers
increased $0.6 million (or 2.8%) in fiscal 1992. An increase in lease
termination payments in fiscal 1992 more than offset slight declines in base
rent, expense recoveries and percentage rent.
Income after direct operating expenses from hotel properties increased $2.0
million (18.7%) in fiscal 1992 from the prior fiscal year. Approximately $0.9
million of the increase was attributable to a
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1.9% increase in income, which resulted primarily from higher room sales, while
$1.1 million of the increase reflected a 3.2% reduction in operating costs,
which consisted principally of lower employment costs, property taxes and
maintenance costs.
Lower interest rates and lower average total indebtedness contributed to a
decrease of $6.1 million (10.6%) in interest expense. Average balances of the
Real Estate Trust's outstanding borrowings declined to $478.9 million in fiscal
1992 from $492.9 million in fiscal 1991, primarily as the result of scheduled
amortization. A decrease in market interest rates, on which adjustments to the
interest rates of the Real Estate Trust's mortgage notes are based, was
reflected in a decline in the average interest rate paid on borrowings to 11.1%
in fiscal 1992 from 11.9% in fiscal 1991.
Advisory, management and leasing fees-related parties decreased $1.9 million
(21.5%) in fiscal 1992, primarily as the result of a reduction in the monthly
advisory fee, effective April 1, 1991, to $97,000 from $318,000.
General and administrative expense decreased $847,000 (16.7%) in fiscal 1992
from the level in the prior year. Fiscal 1991 general and administrative expense
reflected the inclusion of a $2.1 million write-off of costs associated with an
abandoned securities offering. Legal expenses increased in fiscal 1992 by $1.3
million as a result of the payment of a litigation judgment awarded against the
Trust and payment of associated costs and expenses.
BANKING
OVERVIEW. The Bank recorded operating income of $43.4 million for the year
ended September 30, 1992, compared to a operating loss of $6.1 million for
fiscal 1991. The increase in operating income for the year ended September 30,
1992 was primarily due to an increase in the Bank's net interest spread (from
4.91% to 5.96%), which generated higher profits in the Bank's core businesses of
mortgage banking, home equity credit line lending and credit card lending,
reductions in operating expenses and a decrease in the provision for loan
losses. The increase in net interest income after provision for loan losses
during the current period was offset by a significant decrease in other income
resulting primarily from reduced gains on sales of credit card relationships,
loans and mortgage-backed securities.
NET INTEREST INCOME. Net interest income, before the provision for loan
losses, increased $26.4 million (or 16.3%) for the year ended September 30,
1992, reflecting an increase of 105 basis points in the Bank's net interest
spread. Because market interest rates generally declined in fiscal 1992, the
Bank's interest sensitivity gap contributed to the higher net interest spread,
as the average rate on interest-bearing liabilities (primarily deposits)
decreased at a rate greater than the decrease in the average yield on
interest-earning assets. See "Financial Condition -- Banking -- Asset and
Liability Management."
The Bank would have recorded additional net interest income of $11.3 million
for the year ended September 30, 1992 if the Bank's non-accrual assets and
restructured loans had been current in accordance with their original terms.
During fiscal years 1990 and 1991, the Bank's non-interest income had a
significant effect on net income, because the Bank pursued a strategy of
generally selling all of its long-term fixed-rate mortgage production and
securitizing and selling credit card and home equity credit line receivables, in
part in furtherance of its asset-liability management strategy. See "Financial
Condition -- Banking -- Asset and Liability Management." Sales of such assets by
the Bank reduce the Bank's level of interest-earning assets, which will
contribute to lower interest income in the future. Such sales also may
contribute to an increase in other income, as a result of increased servicing
fees earned by the Bank on portfolios of home equity credit line and credit card
receivables securitized and sold by the Bank.
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<PAGE>
Interest income decreased $84.5 million in fiscal 1992 from the level in
fiscal 1991. Lower average balances of loans and, to a lesser extent, reduced
yields on mortgage-backed securities resulting from lower market interest rates
contributed to the decrease.
Interest income on loans, the largest category of interest-earning assets,
declined by $83.4 million due primarily to lower average balances. The Bank's
loan securitization and sale activity was the single largest factor in reducing
loan balances, although interest income on commercial permanent, construction
and ground loans decreased $13.2 million due to the increase in the level of the
Bank's real estate acquired in settlement of loans. Interest income on
residential permanent loans decreased $21.1 million due in part to lower loan
balances in that category resulting from the exchange of $616.4 million of
single-family mortgages for private label, AA-rated mortgage-backed securities
in the March 1992 quarter. Interest income on home equity credit line loans
decreased $22.1 million due primarily to decreases in average balances of $159.4
million resulting from the securitization and sale of $600.1 million and $253.6
million of these types of loans in the first quarter of fiscal 1991 and the
first quarter of 1992, respectively. Interest income on other consumer loans
decreased $16.5 million primarily because average balances on these loans
decreased $143.4 million as the result of the securitization and sale of $113.9
million of automobile loan receivables in the fourth quarter of fiscal 1991.
Interest income on credit card loans decreased $7.9 million primarily due to
reduced average balances resulting from the securitization and sale of $280.0
million of credit card receivables in March 1992.
A yield increase of 19 basis points on the loan portfolio for the year ended
September 30, 1992 resulted primarily from an increase in the yield on credit
card loans, from 17.80% to 18.24%. Partially offsetting this increase was a
decrease in the yield on residential permanent loans of 77 basis points, from
9.39% to 8.62%. The Bank's residential permanent loans generally bear interest
at variable rates that adjust based on specified market interest rates, which
declined from levels prevailing in fiscal 1991.
Interest income on mortgage-backed securities increased $21.1 million
primarily as the result of higher average balances due to the $616.4 million
exchange in the March 1992 quarter. The increase was partially offset by lower
average yields on these securities resulting from lower market interest rates.
Interest income on trading securities declined $14.3 million, as the Bank
did not hold trading securities during fiscal 1992.
Interest income on investment securities decreased $3.5 million as the
result of lower average balances of U.S. Government securities.
Other interest income decreased $4.4 million from fiscal 1991 primarily due
to a decline in income on federal funds sold. Interest income on federal funds
sold decreased $3.5 million as average balances decreased $39.4 million and the
average yield declined by 295 basis points.
Interest expense decreased $111.0 million (or 34.1%) for the year ended
September 30, 1992 primarily because of a decline of $99.1 million in interest
expense on deposits, the largest category of interest-bearing liabilities.
Interest expense on deposits decreased primarily due to a decrease in average
rates (from 6.36% to 4.45%), which reflected a decline in market interest rates,
and secondarily to a decline of $328.2 million in average deposit balances.
Interest on borrowings decreased $11.9 million because of lower average interest
rates and, to a lesser extent, lower average balances.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $58.1
million in fiscal 1992 from the provision in fiscal 1991. The provision for
credit card and other consumer loans decreased $35.7 million, primarily because
the March 1992 securitization and sale of $280.0 million of credit card
receivables reduced the amount of receivables against which the Bank maintains
the reserve. The provision for losses on real estate loans decreased by $22.4
million, as corresponding balances on real estate construction and ground loans
decreased by $41.6 million.
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<PAGE>
OTHER INCOME. The significant decrease in other income (to $100.4 million
for the year ended September 30, 1992 from $161.1 million for the year ended
September 30, 1991) was primarily attributable to (i) a decline in loan
servicing fee income, (ii) a decline in credit card fees, (iii) an increase in
the loss on real estate held for investment and (iv) a decrease in gains on
sales of credit card relationships, loans and mortgage-backed securities.
Loan servicing fees decreased $7.7 million (or 16.2%) in fiscal 1992
compared to fiscal 1991. The decline was partially attributable to a net
decrease of $3.4 million in home equity credit line and automobile loan
servicing fees. A decrease of $10.8 million related to changes in the method of
amortizing gains previously recognized on the securitization and sale of home
equity credit line and automobile loan receivables, and a decrease of $6.6
million in credit card servicing fees, which was related to temporary
subservicing agreements on credit card relationships previously sold, was
partially offset by an increase of $7.4 million in fees earned by the Bank in
servicing portfolios of home equity credit line receivables securitized in
December 1990 and December 1991. In addition, credit card servicing fees
increased by $3.6 million due to the securitization and sale of $280.0 million
of credit card receivables in March 1992. As the Bank securitizes and sells
assets, purchases mortgage servicing rights, or sells mortgage loans and retains
the servicing rights on those loans, the level of servicing fee income
increases. Servicing fee income declines upon repayment of assets previously
securitized and sold and repayment of mortgage loans serviced for others.
Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $7.2 million (or 17.3%) for the year
ended September 30, 1992, compared to fiscal 1991. The decline was primarily
attributable to lower volumes of cardholder purchases on which the Bank receives
fees.
The increase of $3.2 million in the loss on real estate held for investment
or sale in fiscal 1992 resulted primarily from an increase in the provision for
losses on real estate of $12.6 million. The increased provision was partially
offset by a $9.4 million increase in operating income and gains on sales
attributable to the Bank's real estate held for investment or sale.
The gain on sales of credit card relationships, loans and mortgage-backed
securities decreased $24.9 million from the gain recorded for fiscal 1991 to
$44.3 million. During the year ended September 30, 1992, the Bank sold long-term
fixed-rate mortgage-backed securities with a book value of $817.5 million, of
which $387.7 million constituted sales of mortgage-backed securities from the
Bank's mortgage banking operations, and recognized net gains of $16.7 million,
securitized and sold $253.6 million of home equity credit line receivables and
recognized a gain of $15.1 million, and sold credit card relationships with
related receivables balances of $14.9 million and recognized a gain of $1.5
million. During fiscal 1991, mortgage-backed securities with a book value of
$815.9 million were sold, of which $189.2 million constituted mortgage-backed
securities from the Bank's mortgage banking operations, $600.1 million of home
equity credit line receivables were securitized and sold and credit card
relationships with $273.4 million of credit card receivable balances were sold,
resulting in gains of $20.0 million, $25.8 million and $20.7 million,
respectively. See "Business -- Banking -- Lending Activities -- Sales of
Mortgage-Backed Securities."
The $3.8 million gain on sales of mortgage servicing rights during the year
ended September 30, 1992 resulted from the sale of $255.7 million of such
rights. The $9.1 million gain in fiscal 1991 resulted from the sale of $1.0
billion of mortgage servicing rights. The Bank will continue to sell mortgage
servicing rights related to mortgage loans which are originated for sale to
third parties.
OPERATING EXPENSES. Operating expenses decreased $25.8 million (or 14.2%)
in fiscal 1992 from the level in the previous year. The decrease reflects the
effects of the Bank's program to reduce operating expenses, which was initiated
in the latter half of fiscal 1990 and was reflected in the Bank's capital plan.
The principal components of the overall decline were a decrease of $15.6 million
in
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salaries and employee benefits (primarily as a result of reduced staffing
levels), a decrease of $5.1 million in computer expenses and a decrease of $2.2
million in advertising expenses. The lower computer and advertising expenses
were achieved primarily by the curtailment of the Bank's credit card account
solicitation activities.
FINANCIAL CONDITION
REAL ESTATE
The Real Estate Trust's investment portfolio at December 31, 1993, which
consisted primarily of office properties, hotels and undeveloped land parcels,
was relatively unchanged from September 30, 1993. On August 26, 1993, the Real
Estate Trust transferred its 22 shopping center properties and one of its office
properties, together with the debt associated with such properties, to Saul
Holdings Partnership and a subsidiary limited partnership in exchange for
securities representing a 21.5% limited partnership interest in Saul Holdings
Partnership. See "Business -- Real Estate -- Investment in Saul Holdings Limited
Partnership" and Note 2 to the Consolidated Financial Statements in this
Prospectus.
Office space in the Real Estate Trust's office property portfolio was 80%
leased at December 31, 1993, compared to a leasing rate of 77% at September 30,
1993 and 83% at December 31, 1992. The decline in the leasing rate from the
December 1992 quarter reflected adverse economic conditions in the metropolitan
areas in which the Trust maintains office properties. At December 31, 1993, the
Real Estate Trust's office property portfolio had a total gross leasable area of
1,365,000 square feet. Of the gross leasable area at December 31, 1993, 155,000
square feet (11.3%), 432,000 square feet (31.7%) and 194,000 square feet (14.2%)
are subject to leases whose terms expire in the balance of fiscal 1994 and in
fiscal 1995 and 1996, respectively. Due to a decline in lease rates for office
space in the markets served by these properties, the terms of certain of the new
leases to be entered into in fiscal 1994 are expected to be less favorable to
the Real Estate Trust than the terms of the expiring leases. The ability of the
Real Estate Trust to re-lease office space subject to leases expiring in fiscal
1995 and fiscal 1996, and the terms of any such new leases, will depend on
conditions in the markets for the applicable properties during such periods.
For the three months ended December 31, 1993, the nine hotel properties
owned by the Real Estate Trust experienced an average occupancy rate of 57% and
a $53.95 average room rate, compared to an average occupancy rate of 56% and a
$54.78 average room rate in the first three months of fiscal 1992. Five of the
hotels showed improved occupancy rates over the prior corresponding period,
while occupancy rates at four properties declined from the rates in the December
1992 quarter.
BANKING
GENERAL. The Bank recorded operating income before income taxes,
extraordinary items and cumulative effect of change in accounting principle of
$6.0 million for the three months ended December 31, 1993, compared to operating
income before income taxes, extraordinary items and cumulative effect of change
in accounting principle of $1.3 million in the prior corresponding period. The
increase for the December 1993 quarter was primarily attributable to a decrease
in the provision for loan losses, a decrease in losses on real estate held for
investment or sale and an increase in loan and deposit servicing fees. The
positive effect of these items was offset by a decrease in net interest income
before the provision for loan losses, and an increase in operating expenses.
On November 23, 1993, the Bank sold $150.0 million principal amount of
9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures"). On December 23,
1993 and December 24, 1993, the Bank redeemed its outstanding 13 1/2%
Subordinated Capital Debentures due July 15, 2002 (the "1987 Debentures") and
15% Subordinated Capital Debentures due November 15, 2003 (the "1988
Debentures"), respectively. The Bank received net proceeds of $143.6 million
from the sale of the 1993 Debentures, of which approximately $134.2 million was
used to redeem the 1987 Debentures and the 1988 Debentures. The remaining net
proceeds were used for general corporate purposes. The Bank
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incurred a loss of $6.3 million, after related income taxes, in connection with
the redemption of the 1987 Debentures and the 1988 Debentures. The OTS has
approved the inclusion of the principal amount of the 1993 Debentures in the
Bank's supplementary capital for regulatory capital purposes.
At December 31, 1993, the Bank remained in compliance with all of its
regulatory capital requirements under FIRREA. The Bank's tangible, core (or
leverage) and risk-based regulatory capital ratios were 4.55%, 5.30% and 11.56%,
respectively, compared to the requirements of 1.5%, 3.0% and 8.0%, respectively.
Additionally, at December 31, 1993, the Bank's leverage, tier 1 risk-based and
total risk-based capital ratios of 5.30%, 6.88% and 11.56%, respectively,
exceeded the corresponding ratios of 5.0%, 6.0% and 10.0% established under the
prompt corrective action regulations for "well capitalized" institutions. On the
basis of its balance sheet at December 31, 1993, the Bank met the
FIRREA-mandated fully phased-in capital requirements.
During the first quarter of fiscal 1994, the Bank adopted three new
Statements of Financial Accounting Standards: SFAS 109, Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), and Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
SFAS 109 changes the manner in which companies record deferred tax
liabilities or assets and requires ongoing adjustments for enacted changes in
tax rates and regulations. The cumulative effect of this change in accounting
principle amounted to an increase in the Bank's net income and deferred tax
asset of $5.1 million.
Effective October 1, 1993, the Bank adopted, on a prospective basis, SFAS
114, which was issued in May 1993. SFAS 114 requires that impaired loans be
measured based on the present value of expected future cash flows, discounted at
the loan's effective interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price, or the fair value of the
collateral, if the loan is collateral-dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. A subsequent change in the fair value
of the impaired loan is reported as an increase in or reduction to the provision
for loan losses. In addition, SFAS 114 requires impaired loans for which
foreclosure is probable to be accounted for as loans instead of REO. Two such
loans, with aggregate principal balances of $15.0 million, were reclassified
from real estate held for sale to loans receivable during the quarter ended
December 31, 1993. No additional reserves were required by adoption of this
pronouncement. Impaired loans that are also nonperforming are included in
nonperforming assets. See "Summary of Significant Accounting Policies -- The
Bank" in the Notes to the Consolidated Financial Statements in this Prospectus.
SFAS 115 requires companies to classify certain equity securities and all
debt securities into one of three categories on the date of acquisition and the
date of all subsequent financial statements. Under SFAS 115, securities are
categorized as either "held-to-maturity," "available-for-sale" or "trading." As
a result of implementing SFAS 115, the Bank determined that both its investment
security and mortgage-backed security portfolios should be classified as
available-for-sale. The Bank implemented SFAS 115 effective October 1, 1993 and
recorded $16.3 million of net unrealized holding gains, net of related income
taxes, as a separate component of stockholders' equity as of that date. At
December 31, 1993, net unrealized holding gains of $8.2 million are reported as
a separate component of stockholders' equity. This net unrealized holding gain,
which will fluctuate based on market interest rates and the composition of the
Bank's investment security and mortgage-backed security portfolios, is fully
includable in tier 1 capital for regulatory capital purposes pursuant to interim
guidance issued by the OTS. The OTS has announced its intention to issue a
proposed rule on this subject and has stated that any final rule may differ from
the interim guidance based on consideration of any comments received on the
proposal and consultations with the other federal bank regulatory agencies. See
"Summary of Significant Accounting Policies -- The Bank" in the Notes to the
Consolidated Financial Statements in this Prospectus.
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ASSET QUALITY. The Bank's asset quality has improved in recent periods as a
result of a number of significant actions taken by management to resolve problem
real estate assets and enhance risk management efforts. The Bank has committed
substantial resources to problem asset resolution and has reorganized its staff
in order to facilitate the resolution and workout of problem real estate assets.
NON-PERFORMING ASSETS. The following table sets forth information
concerning the Bank's non-performing assets at the dates indicated. The figures
shown are after charge-offs and, in the case of real estate acquired in
settlement of loans ("real estate held for sale" or "REO"), all valuation
allowances.
NON-PERFORMING AND POTENTIAL PROBLEM ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------------------------------------
1993 1993 1992 1991 1990 1989
------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential................................... $ 8,830 $ 9,108 $ 12,865 $ 17,913 $ 8,119 $ 5,945
Commercial and multifamily.................... 3,066(1) -- 3,694 -- -- --
Residential construction and ground........... -- -- 11,196 30,469 45,622 --
Commercial construction and ground............ 11,942(1) -- 3,412 15,629 31,661 16,663
------------ --------- --------- --------- --------- ---------
Total non-accrual real estate loans......... 23,838 9,108 31,167 64,011 85,402 22,608
Credit card................................... 21,657 20,557 26,780 33,682 23,798 21,761
Consumer and other............................ 258 314 3,572 3,331 1,207 145
------------ --------- --------- --------- --------- ---------
Total non-accrual loans (2)................. 45,753 29,979 61,519 101,024 110,407 44,514
------------ --------- --------- --------- --------- ---------
Non-accrual real estate held for investment
(2)............................................ 8,898 8,898 8,893 8,892 17,236 --
------------ --------- --------- --------- --------- ---------
Real estate acquired in settlement of loans..... 414,507(1) 434,616 541,352 537,490 338,999 16,367
Reserve for losses on real estate acquired in
settlement of loans............................ (101,275) (101,462) (94,125) (53,337) (10,078) --
------------ --------- --------- --------- --------- ---------
Real estate acquired in settlement of loans,
net.......................................... 313,232 333,154 447,227 484,153 328,921 16,367
------------ --------- --------- --------- --------- ---------
Total non-performing assets................. $ 367,883 $ 372,031 $ 517,639 $ 594,069 $ 456,564 $ 60,881
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
Potential problem assets:
Commercial and multifamily...................... $ 28,743 $ 28,004 $ 48,272 $ 59,779 $ 68,132 $ 18,973
Residential construction and ground............. 27,887 28,003 9,768 12,709 12,569 9,341
Commercial construction and ground.............. 9,424 10,701 37,598 25,977 39,307 --
Other........................................... 6,763 6,931 13,390 15,632 -- --
------------ --------- --------- --------- --------- ---------
Total potential problem assets.............. $ 72,817 $ 73,639 $ 109,028 $ 114,097 $ 120,008 $ 28,314
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
Reserve for losses on loans....................... $ 66,940 $ 68,040 $ 78,818 $ 89,745 $ 58,339 $ 41,934
Reserve for losses on real estate held for
investment (3)................................... 10,188 10,182 14,919 4,161 2,800 --
Reserve for losses on real estate acquired in
settlement of loans (3).......................... 101,275 101,462 94,125 53,337 10,078 --
------------ --------- --------- --------- --------- ---------
Total reserves for losses..................... $ 178,403 $ 179,684 $ 187,862 $ 147,243 $ 71,217 $ 41,934
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
<FN>
- ------------------------------
(1) As a result of implementation of SFAS 114, the Bank transferred these
loans from Real estate acquired in settlement of loans to Non-accrual
loans. See "Summary of Significant Accounting Policies -- The Bank" in the
Notes to the Consolidated Financial Statements in this Prospectus.
(2) Before deduction of reserves for losses.
(3) The Bank initially established its reserve for losses on real estate held
for investment or sale in fiscal year 1990.
</TABLE>
63
<PAGE>
NON-PERFORMING AND POTENTIAL PROBLEM ASSETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------------------
1993 1993 1992 1991 1990 1989
-------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ratios:
Non-performing assets to total assets (1)......... 7.17% 7.63% 10.36% 12.32% 8.75% 1.28%
Reserve for losses on real estate loans to
non-accrual real estate loans (2)................ 80.29%(5) 219.29% 53.16% 23.72% 22.38% 6.62%
Reserve for losses on credit card loans to
non-accrual credit card loans (2)................ 216.49% 228.08% 214.96% 209.73% 151.03% 185.63%
Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (2)......... 354.65% 376.11% 131.10% 117.68% 272.08% 28.97%
Reserve for losses on loans to non-accrual loans
(2).............................................. 146.31%(5) 226.96% 128.12% 88.84% 52.84% 94.20%
Reserve for losses on real estate held for
investment to non-accrual real estate held for
investment (2)(3)................................ 114.50% 114.43% 167.76% 46.79% 16.25% --
Reserve for losses on real estate held for
investment or sale to non-performing real estate
held for investment or sale (2)(3)............... 26.33%(5) 25.17% 19.82% 10.52% 3.62% --
Reserve for losses on loans to total loans
receivable (2)(4)................................ 2.35% 2.83% 3.52% 2.79% 1.83% 1.27%
Reserve for losses on real estate held for
investment to real estate held for investment
(2)(3)........................................... 15.77% 15.55% 16.65% 4.95% 2.95% --
Potential problem assets to total
assets (2)....................................... 1.42% 1.51% 2.18% 2.37% 2.30% 0.60%
<FN>
- ------------------------------
(1) Non-performing assets is presented after valuation allowances on real
estate acquired in settlement of loans but before reserves for losses on
non-accrual loans and non-accrual real estate held for investment.
(2) Before deduction of reserves for losses.
(3) The Bank initially established its reserve for losses on real estate held
for investment or sale in fiscal year 1990.
(4) Includes loans receivable and loans held for sale and/or securitization,
before deduction of reserve for losses.
(5) Reflects the implementation of SFAS 114. See "Summary of Significant
Accounting Policies -- The Bank" in the Notes to the Consolidated
Financial Statements in this Prospectus.
</TABLE>
Non-performing assets include non-accrual loans (loans contractually past
due 90 days or more or with respect to which other factors indicate that full
payment of principal and interest is unlikely), non-accrual real estate held for
investment ("non-accrual REI"), and real estate acquired in settlement of loans,
either pursuant to in-substance foreclosure (prior to the adoption of SFAS 114
in the December 1993 quarter) or through foreclosure or deed-in-lieu of
foreclosure.
Non-performing assets totaled $367.9 million, after valuation allowances on
REO of $101.3 million, or 7.2% of total assets at December 31, 1993, compared to
$372.0 million, after valuation allowances on REO of $101.5 million, or 7.6% of
total assets at September 30, 1993. In addition to the valuation allowances on
REO, the Bank maintained $5.8 million and $4.5 million of valuation allowances
on its non-accrual loans and non-accrual real estate held for investment at
December 31, 1993 and September 30, 1993, respectively. The decrease in
non-performing assets was primarily attributable to the sale of one REO property
with a book balance of $5.5 million. As a result of implementation of SFAS 114,
the Bank transferred $15.0 million of non-performing assets from REO to
non-accrual loans. See "Summary of Significant Accounting Policies -- The Bank"
in the Notes to the Consolidated Financial Statements in this Prospectus.
The Bank's non-performing real estate assets, which include non-accrual real
estate loans, non-accrual real estate held for investment and REO, totaled
$346.0 million at December 31, 1993 or 94.0%
64
<PAGE>
of total non-performing assets at that date. As shown in the following table,
the Bank's non-performing real estate assets, after valuation allowances on such
assets, have declined from their peak of $567.6 million in February 1992 to
$342.5 million at December 31, 1993, reflecting both additional write-downs on
non-performing assets during that period and, in more recent periods, asset
sales.
<TABLE>
<CAPTION>
TOTAL
VALUATION CUMULATIVE
TOTAL ALLOWANCES ON TOTAL DECLINE FROM
NON-PERFORMING NON-ACCRUAL REAL NON-PERFORMING FEBRUARY 29, 1992
REAL ESTATE ESTATE LOANS AND REAL ESTATE --------------------
ASSETS (1) NON-ACCRUAL REI(2) ASSETS, NET AMOUNT PERCENT
-------------- ------------------ --------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1991.................. $ 559,665 $ 6,692 $ 552,973 -- --
February 29, 1992.................. 574,321 6,712 567,609 -- --
March 31, 1992..................... 551,960 5,490 546,470 ($ 21,139) (3.7)%
June 30, 1992...................... 512,729 10,224 502,505 (65,104) (11.5)%
September 30, 1992................. 487,287 7,147 480,140 (87,469) (15.4)%
December 31, 1992.................. 427,113 2,332 424,781 (142,828) (25.2)%
March 31, 1993..................... 394,672 2,635 392,037 (175,572) (30.9)%
June 30, 1993...................... 382,657 2,634 380,023 (187,586) (33.1)%
September 30, 1993................. 351,160 2,427 348,733 (218,876) (38.6)%
December 31, 1993.................. 345,968 3,493 342,475 (225,134) (39.7)%
<FN>
- ------------------------
(1) Represents total non-accrual real estate loans and non-accrual REI before
deduction of valuation allowances and REO, after deduction of valuation
allowances.
(2) Represents valuation allowances on non-accrual real estate loans and
non-accrual REI. At December 31, 1993, valuation allowances on non-accrual
real estate loans and non-accrual REI were $1.5 million and $2.0 million,
respectively.
</TABLE>
A larger portion of the affected properties financed by the Bank involves
residential rather than commercial properties. In general, the residential real
estate market has been less significantly affected by the downturn in recent
years than the commercial real estate market. At December 31, 1993, $298.0
million or 86.1% of the Bank's total non-performing real estate assets related
to residential real estate properties, including the Communities.
NON-ACCRUAL LOANS. The Bank's non-accrual loans totaled $45.8 million at
December 31, 1993, an increase of $15.8 million from $30.0 million at September
30, 1993. At December 31, 1993, non-accrual loans consisted primarily of $23.8
million of non-accrual real estate loans and $21.7 million of non-accrual credit
card loans. Non-accrual loans increased primarily because of the
reclassification from REO to non-accrual real estate loans of two loans with
aggregate principal balances of $15.0 million as a result of the implementation
of SFAS 114. See "Summary of Significant Accounting Policies -- The Bank" in the
Notes to the Consolidated Financial Statements in this Prospectus. A slight
increase in non-accrual credit card loans of $1.1 million was partially offset
by net principal repayments and reductions of non-accrual residential loans and
other consumer loans of $0.2 million and $0.1 million, respectively.
At December 31, 1993, the Bank had $21.7 million of credit card loans which
were classified for regulatory purposes as substandard and disclosed as
non-performing assets because they were 90 days or more past due. At that date,
the Bank also had $8.7 million of credit card loans classified for regulatory
purposes as substandard and $115.4 million of credit card loans classified for
regulatory purposes as special mention which were not disclosed as either
non-performing assets (i.e., credit card loans which are 90 days or more past
due) or potential problem assets. The amount classified as substandard but not
disclosed as non-performing assets ($8.7 million) primarily related to accounts
for which the customers have agreed to modified payment terms, but which were
60-89 days past due. Of the $8.7 million, $1.0 million was current, $0.3 million
was 30-59 days past due and $7.4 million
65
<PAGE>
was 60-89 days past due at December 31, 1993. The amount classified as special
mention ($115.4 million) primarily related to accounts which have had purchasing
privileges suspended, including accounts for which the customers have agreed to
modified payment terms and which were less than 60 days past due. Of the $115.4
million reported as special mention, $90.1 million was current, $15.5 million
was 30-59 days past due and $9.8 million was 60-89 days past due at December 31,
1993. All delinquent amounts are included in the table of delinquent loans. See
"Delinquent Loans."
NON-ACCRUAL REAL ESTATE HELD FOR INVESTMENT. At December 31, 1993 and
September 30, 1993, a participating loan to a developer with a balance of $8.9
million, before valuation allowances of $2.0 million, was non-performing.
REO. In the past, the Bank was an active lender on residential real estate
development projects and, to a lesser extent, commercial buildings and land. The
majority of the amount of loans originated were to developers for the
acquisition and development of residential planned unit developments. The
majority of the loans contained provisions that entitled the Bank to a portion
of the profits generated by the underlying properties. Beginning in mid-1990 and
extending through 1992, as a result of the slowdown in the Washington, D.C. area
economy, the Bank took active control, either through foreclosure or
deed-in-lieu of foreclosure, of most of the properties securing these loans. The
Bank decided that completing the infrastructure of the properties, implementing
an aggressive marketing program, and then selling building lots to home builders
represented the most effective method of recovering the Bank's investment in
these properties.
At December 31, 1993, the Bank's REO totaled $313.2 million, after valuation
allowances on such assets of $101.3 million. The principal component of REO is
five planned unit developments ("Communities") with an aggregate book value of
$243.2 million at that date. Four of the Communities are under active
development.
During the three months ended December 31, 1993, REO decreased $19.9 million
primarily due to the sale of one commercial construction property with a book
value of $5.5 million after valuation allowances, and the reclassification from
REO to non-accrual real estate loans of two loans with an aggregate book value
of $13.9 after valuation allowances of $1.1 million, as a result of implementing
SFAS 114. See "Summary of Significant Accounting Policies -- The Bank" in the
Notes to the Consolidated Financial Statements in this Prospectus.
The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development. See
"Disposition of REO." The Bank capitalized interest in the amount of $2.3
million during the three months ended December 31, 1993, all of which related to
the Bank's four active Communities.
DISPOSITION OF REO. During the three months ended December 31, 1993, the
Bank received proceeds of approximately $28.2 million upon the disposition of
REO consisting of one industrial building ($5.7 million), 225 residential lots
or units in the Communities and other smaller residential properties ($19.5
million), various single-family residential properties ($1.4 million) and 2.5
acres of land in two of its Communities ($1.6 million).
The Bank's objective with respect to its REO is to sell such properties as
expeditiously as possible and in an orderly manner which will best preserve the
value of the Bank's assets. The Bank's ability to achieve this objective will
depend on a number of factors, some of which are beyond its control, including
continued improvement in general economic conditions in the Washington, D.C.
metropolitan area and increased availability of financing for the potential
purchasers of these properties. In addition, under its written agreement with
OTS, the Bank is required to make every effort to reduce its exposure in certain
of its real estate development properties, including the four active
Communities. In accordance with this requirement, management of the Bank is
pursuing several strategies. First, the Bank has focused its efforts on
marketing building lots directly to home builders. The Bank is proceeding with
lot finishing to meet the requirements of existing and new contracts with
builders and is accelerating the record plat process so that individual lots can
be sold at the earliest possible
66
<PAGE>
time. Second, the Bank continues to seek and negotiate with potential purchasers
of retail and commercial ground in the Communities. Finally, the Bank continues
to engage in discussions with potential investors concerning the possibility of
larger scale or bulk purchases of ground at the Communities.
The following table sets forth the Bank's REO at December 31, 1993.
<TABLE>
<CAPTION>
BALANCE BALANCE
BEFORE ALL AFTER
VALUATION VALUATION VALUATION
ALLOWANCES ALLOWANCES ALLOWANCES
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Communities................................................................ $ 318,054 $ 74,828 $ 243,226
Residential ground and construction........................................ 62,669 19,334 43,335
Retail centers............................................................. 2,765 608 2,157
Commercial land............................................................ 21,161 4,948 16,213
Office buildings........................................................... 7,161 1,424 5,737
Single-family residential properties....................................... 2,697 133 2,564
----------- ----------- -----------
Total REO................................................................ $ 414,507 $ 101,275 $ 313,232
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Approximately $243.2 million (or 77.7%), after valuation allowances, of the
Bank's aggregate book value of REO at December 31, 1993 was attributable to the
five Communities. At December 31, 1993, the Bank's remaining 22.3% of REO
consisted of various types of properties, including residential ground and
construction (13.8%), retail centers (0.7%), commercial land (5.2%), office
buildings (1.8%) and single-family residential properties (0.8%). These
properties had an aggregate book value of $70.0 million, after valuation
allowances, at December 31, 1993. At December 31, 1993, the Bank had executed
contracts to sell seven of these properties at their aggregate book value of
$16.9 million at that date.
The four active Communities consist primarily of 13,425 residential lots or
units and 172.5 acres of land designated for retail use. At December 31, 1993,
8,493 residential units (63.3%) had been sold to builders, consisting of 6,077
units (45.3%) which had been settled and 2,416 units (18.0%) which were under
contract and pending settlement, and approximately 89.0 acres (51.6%) of retail
land had been sold to developers, including 21.1 acres (12.2%) which were under
contract and pending settlement. In addition, at December 31, 1993, the Bank was
engaged in discussions with potential purchasers regarding the sale of
additional residential units and retail land.
The rate of home sales at the Bank's four active Communities has increased
in recent periods. Home sales at these Communities increased slightly from 308
units during the three months ended December 31, 1992 to 318 units during the
three months ended December 31, 1993. In addition, home sales increased 43.5%
from 1,061 units during fiscal 1992 to 1,522 units during fiscal 1993.
Management believes that the positive trend in home sales activity indicates
that the demand for the Bank's lots will increase, because builders generally
will not purchase a lot from the Bank until the home is under contract with the
home purchaser and because inventories of lots previously purchased by builders
are being depleted. There can be no assurance, however, that home sales will
remain at these levels in future periods.
67
<PAGE>
The Bank in some cases has made financing available in an attempt to
facilitate sales of lots in the four Communities under active development. The
following table presents, at the periods indicated, the outstanding balances of
loans provided by the Bank (subsequent to its acquisition of title to the
properties) to facilitate sales of lots in such Communities.
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------
1993 1993 1992
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential construction loans.............................................. $ 9,344 $ 10,386 $ 3,138
Single-family permanent loans (1)........................................... 68,916 79,104 93,856
------------ --------- ---------
Total..................................................................... $ 78,260 $ 89,490 $ 96,994
------------ --------- ---------
------------ --------- ---------
<FN>
- ------------------------
(1) Includes $9.6 million, $8.8 million and $13.3 million of loans classified
as held for sale at December 31, 1993 and September 30, 1993 and 1992,
respectively, in the Consolidated Financial Statements in this Offering
Memorandum.
</TABLE>
The Bank anticipates that it will provide construction financing for
approximately 20% of the remaining unsold lot inventory in the Communities. The
Bank also anticipates that it will provide permanent financing for approximately
25% of the homes to be sold in the Communities. The Bank retains in its
portfolio certain single-family permanent loans for which the date of initial
application is prior to October 1, 1991. The Bank's policy is to sell all such
single-family permanent loans for which the date of initial application is
subsequent to September 30, 1991. At December 31, 1993, the Bank had originated
$128.0 million and sold $118.4 million of such loans with application dates
subsequent to September 30, 1991. The remaining $9.6 million of such loans are
classified as held for sale and generally are expected to be sold in the second
quarter of fiscal 1994. Certain of the single-family permanent loans made by the
Bank to purchasers of homes in the Communities have terms which are more
favorable to the borrower than the terms of other single-family permanent loans
made by the Bank. The total pre-tax cost to the Bank of granting more favorable
terms to the borrowers was approximately $1.9 million, or 1.5% of the $128.0
million principal amount of the loans made. The estimated cost is generally
recognized by the Bank as a cost of sale at the time that the Bank sells
building lots to developers.
In furtherance of its objective of facilitating sales, the Bank in the past
has elected to use its own funds to continue development of some of the
Communities to the extent proceeds generated by sales of lots or housing units
at the Communities have been insufficient to fund development costs, and may do
so again in the future. The following table presents net funds provided or used
by the Bank to continue development at the four active Communities for the years
indicated.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED SEPTEMBER
ENDED 30,
DECEMBER 31, --------------------
1993 1993 1992
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales proceeds.............................................................. $ 13,978 $ 66,291 $ 39,594
Development costs........................................................... 15,976 51,649 35,803
------------ --------- ---------
Net funds (used for) provided by development................................ $ (1,998) $ 14,642 $ 3,791
------------ --------- ---------
------------ --------- ---------
</TABLE>
Sales proceeds were insufficient to fund development costs for the three
months ended December 31, 1993 as a result of the seasonal decline in lot sales
during the quarter. The Bank currently anticipates that sales proceeds will
exceed the significant development costs expected in future periods. In the
event development costs exceed sales proceeds in future periods, the Bank
believes that adequate funds will be available from its primary liquidity
sources to fund such costs. See "Liquidity and Capital Resources -- Banking --
Liquidity."
68
<PAGE>
In addition to the four active Communities, REO includes a fifth Community,
consisting of approximately 2,900 acres in Loudoun County, Virginia, which is in
the pre-development stage. At December 31, 1993, this property had a book value
of $36.1 million, after valuation allowances. The Bank continues to assess
various strategies for the ultimate disposition of the property.
Under its written agreement with the OTS, the Bank may not increase its
investments in certain of its large REO properties beyond levels existing at
September 30, 1991 without OTS approval. The Bank had submitted to the OTS
budgets for additional investments in these properties, and the OTS did not
object to the implementation of those budgets through September 30, 1993. The
Bank has submitted to the OTS project budgets for fiscal 1994.
The Bank will continue to monitor closely its major non-performing and
potential problem assets in light of current and anticipated market conditions.
The Bank's asset workout group focuses its efforts in resolving these problem
assets as expeditiously as possible. While the Bank does not anticipate any
significant increases in non-performing and potential problem assets, additional
charge-offs or reserves could be required absent a continued recovery of the
local real estate markets.
POTENTIAL PROBLEM ASSETS. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. The
majority of the Bank's potential problem assets involve borrowers or properties
experiencing cash flow problems due primarily to the downturn in recent years of
the real estate markets in which the properties are located.
At December 31, 1993, potential problem assets totaled $72.8 million before
valuation allowances of $14.5 million, as compared to $73.6 million, before
valuation allowances of $15.4 million at September 30, 1993.
DELINQUENT LOANS. At December 31, 1993, delinquent loans totaled $62.9
million or 2.2% of gross loans compared to $49.1 million or 2.0% of gross loans
at September 30, 1993. The following table sets forth information regarding the
Bank's delinquent loans at December 31, 1993.
<TABLE>
<CAPTION>
PRINCIPAL BALANCE TOTAL AS A
--------------------------------- PERCENTAGE
MORTGAGE NON-MORTGAGE OF GROSS
LOANS LOANS TOTAL LOANS (1)
-------- ------------ ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans delinquent for:
30-59 days.................... $ 7,133 $27,825 $34,958 1.2%
60-89 days.................... 11,803 16,166 27,969 1.0%
-------- ------------ ------- -----
Total....................... $18,936 $43,991 $62,927 2.2%
-------- ------------ ------- -----
-------- ------------ ------- -----
<FN>
- ------------------------
(1) Includes loans held for sale and/or securitization, before deduction of
reserves.
</TABLE>
Total delinquent mortgage loans increased to $18.9 million at December 31,
1993 from $8.9 million at September 30, 1993. The $10.0 million increase was
primarily attributable to a residential construction loan with a principal
balance of $9.7 million which became 60-89 days delinquent during the quarter.
Subsequent to December 31, 1993, this loan, which is a troubled debt
restructuring, became current in accordance with its restructured payment terms.
The 30-59 day delinquency category and the balance of the 60-89 day delinquency
category consists of single-family permanent residential mortgage loans and home
equity credit line loans.
Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased slightly to $44.0 million at December 31, 1993 from $40.2 million at
September 30, 1993, but decreased as a
69
<PAGE>
percentage of total non-mortgage loans outstanding to 3.8% at December 31, 1993
from 4.5% at September 30, 1993, as a result of an increase in the balance of
the Bank's portfolio of non-mortgage loans during the period.
TROUBLED DEBT RESTRUCTURINGS. A troubled debt restructuring occurs when the
Bank agrees to modify significant terms of a loan in favor of the borrower, when
the borrower is experiencing financial difficulties. The following table sets
forth loans accounted for as troubled debt restructurings, before deduction of
valuation allowances, at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1992 1993 1992
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Troubled debt restructurings......................................... $ 36,238 $ 36,729 $ 39,685
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
At December 31, 1993, loans accounted for as troubled debt restructurings
included three commercial permanent loans with principal balances totaling $17.2
million, two residential construction loans with principal balances totaling
$9.8 million and a residential ground loan with a principal balance of $9.2
million. One residential construction loan with a principal balance of $9.7
million became delinquent 60-89 days during the quarter. Subsequent to December
31, 1993, this loan became current in accordance with its present repayment
terms. Since becoming restructured, the remaining loans are paying principal and
interest in accordance with their present repayment terms. Loans accounted for
as troubled debt restructurings with principal balances totaling $36.0 million
were classified as potential problem assets at December 31, 1993; the remaining
$0.2 million represents the principal balance of one residential construction
loan which, other than an extension of its maturity date, was performing in
accordance with its original terms. At December 31, 1993, the Bank had
commitments to lend $3.5 million of additional funds on loans that have been
restructured.
REAL ESTATE HELD FOR INVESTMENT. At December 31, 1993, real estate held for
investment consisted of seven properties with an aggregate book value of $54.5
million, net of accumulated depreciation of $11.6 million and valuation
allowances of $10.2 million. This category includes one office building (which
was approximately 89% leased at such date) and two apartment buildings (which
were approximately 98% and 99% leased at such date and are financed with bonds
issued by a local housing finance agency). These properties are owned and
operated by subsidiaries of the Bank. Also included is a loan to a developer
with a book value of $8.9 million at December 31, 1993, before valuation
allowances of $2.0 million, which has a profit participation feature. The loan,
which is secured by commercial land, is included in non-performing assets. The
Bank has discussions from time to time with potential investors concerning the
possible sale of certain of its real estate.
RESERVES FOR LOSSES. The following tables show loss experience by asset
type and the components of the reserve for losses on loans and the reserve for
losses on real estate held for investment or sale. These tables reflect
charge-offs taken against assets during the periods indicated and may include
charge-offs taken against assets which the Bank disposed of during such periods.
70
<PAGE>
ANALYSIS OF RESERVE BALANCES ON AND CHARGE-OFFS OF LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------------------
1993 1993 1992 1991 1990 1989
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year................. $ 68,040 $ 78,818 $ 89,745 $ 58,339 $ 41,934 $ 26,189
------------- ---------- ---------- ---------- ---------- ----------
Provision for loan losses.................... 12,095 62,513 89,062 147,141 78,300 70,331
------------- ---------- ---------- ---------- ---------- ----------
Charge-offs:
Residential................................ 660 45 581 78 -- --
Commercial and multifamily................. -- 766 1,855 1,500 1,622 --
Ground..................................... -- 4,274 1,650 16,899 2,375 --
Residential construction................... -- -- 1,971 3,564 517 --
Commercial construction.................... -- -- 1,431 13,421 1,944 --
Credit card................................ 15,806 78,445 103,158 89,294 64,493 59,586
Consumer and other......................... 134 3,664 1,898 1,695 560 284
------------- ---------- ---------- ---------- ---------- ----------
Total charge-offs........................ 16,600 87,194 112,544 126,451 71,511 59,870
------------- ---------- ---------- ---------- ---------- ----------
Recoveries:
Ground..................................... 8 -- -- -- 120 20
Credit card................................ 3,324 13,601 12,196 10,618 8,732 4,939
Other...................................... 73 302 359 98 764 325
------------- ---------- ---------- ---------- ---------- ----------
Total recoveries......................... 3,405 13,903 12,555 10,716 9,616 5,284
------------- ---------- ---------- ---------- ---------- ----------
Charge-offs, net of recoveries............... 13,195 73,291 99,989 115,735 61,895 54,586
------------- ---------- ---------- ---------- ---------- ----------
Balance at end of year....................... $ 66,940 $ 68,040 $ 78,818 $ 89,745 $ 58,339 $ 41,934
------------- ---------- ---------- ---------- ---------- ----------
------------- ---------- ---------- ---------- ---------- ----------
Provision for loan losses to average loans
(1)(2)...................................... 1.95% 2.93% 3.69% 4.72% 2.36% 2.06%
Net loan charge-offs to average loans
(1)(2)...................................... 2.13% 3.43% 4.15% 3.72% 1.86% 1.60%
Ending reserve for losses on loans to total
loans (2)(3)................................ 2.35% 2.83% 3.52% 2.79% 1.83% 1.27%
<FN>
- ------------------------------
(1) Annualized.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of reserves.
</TABLE>
71
<PAGE>
COMPONENTS OF RESERVE FOR LOSSES ON LOANS BY TYPE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------------
DECEMBER 31, 1993 1993 1992 1991
------------------------ ------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- --------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
allocated to:
Residential permanent.... $ 2,874 49.9% $ 4,235 53.6% $ 2,335 41.6% $ 2,326 41.7%
Home equity.............. 377 3.8 250 2.5 504 9.9 597 9.0
Commercial and
multifamily............. 9,812 3.5 9,606 3.9 5,907 2.7 4,655 2.1
Residential
construction............ 3,452 1.2 4,125 1.5 4,470 2.6 3,683 2.2
Commercial construction.. 1,178 0.8 345 0.4 729 0.5 1,754 0.7
Ground................... 1,446 0.6 1,412 0.7 2,624 1.0 2,168 1.3
Credit card.............. 46,886 33.5 46,886 31.4 57,566 38.9 70,642 40.4
Consumer and other....... 915 6.7 1,181 6.0 4,683 2.8 2,997 2.6
--------- --------- --------- ---------
Subtotal............... 66,940 68,040 78,818 88,822
Unallocated............ -- -- -- 923
--------- --------- --------- ---------
Total................ $ 66,940 $ 68,040 $ 78,818 $ 89,745
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------
1990 1989
------------------------ ------------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Balance at end of period
allocated to:
Residential permanent.... $ 1,263 32.2% $ 1,155 27.1%
Home equity.............. 470 22.2 -- --
Commercial and
multifamily............. 3,960 2.8 -- --
Residential
construction............ 1,708 2.2 -- --
Commercial construction.. 1,407 1.9 341 9.4
Ground................... 10,305 4.5 -- --
Credit card.............. 35,942 27.6 40,396 37.9
Consumer and other....... 1,132 6.6 42 4.4
--------- ---------
Subtotal............... 56,187 41,934
Unallocated............ 2,152 --
--------- ---------
Total................ $ 58,339 $ 41,934
--------- ---------
--------- ---------
</TABLE>
72
<PAGE>
ANALYSIS OF RESERVE BALANCES ON AND CHARGE-OFFS OF
REAL ESTATE HELD FOR INVESTMENT OR SALE
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------
1993 1993 1992 1991 1990(1)
------------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period:
Real estate held for investment................ $ 10,182 $ 14,919 $ 4,161 $ 2,800 $ --
Real estate held for sale...................... 101,462 94,125 53,337 10,078 --
------------ ----------- ----------- --------- ---------
Total........................................ 111,644 109,044 57,498 12,878 --
------------ ----------- ----------- --------- ---------
Provision for real estate losses:
Real estate held for investment................ 6 1,470 12,673 4,724 45,586
Real estate held for sale...................... 3,861 28,945 47,923 43,259 10,078
------------ ----------- ----------- --------- ---------
Total........................................ 3,867 30,415 60,596 47,983 55,664
------------ ----------- ----------- --------- ---------
Charge-offs:
Real estate held for investment:
Residential construction..................... -- -- -- -- 117
Residential ground........................... -- -- -- -- 41,585
Commercial ground............................ -- -- 1,550 3,363 1,084
Commercial permanent......................... -- -- 365 -- --
Commercial construction...................... -- 6,207 -- -- --
------------ ----------- ----------- --------- ---------
Total...................................... -- 6,207 1,915 3,363 42,786
------------ ----------- ----------- --------- ---------
Real estate held for sale:
Residential.................................. -- -- 3,002 -- --
Residential construction..................... -- 79 -- -- --
Residential ground........................... -- 259 348 -- --
Commercial ground............................ -- 1,353 3,785 -- --
Commercial permanent......................... 4,048 761 -- -- --
Commercial construction...................... -- 19,156 -- -- --
------------ ----------- ----------- --------- ---------
Total...................................... 4,048 21,608 7,135 -- --
------------ ----------- ----------- --------- ---------
Total charge-offs on real estate held for
investment or sale............................ 4,048 27,815 9,050 3,363 42,786
------------ ----------- ----------- --------- ---------
Balance at end of period:
Real estate held for investment................ 10,188 10,182 14,919 4,161 2,800
Real estate held for sale...................... 101,275 101,462 94,125 53,337 10,078
------------ ----------- ----------- --------- ---------
Total........................................ $ 111,463 $ 111,644 $ 109,044 $ 57,498 $ 12,878
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
<FN>
- ------------------------
(1) The Bank initially established its reserve for losses on real estate held
for investment or sale in fiscal year 1990.
</TABLE>
73
<PAGE>
COMPONENTS OF RESERVE FOR LOSSES
ON REAL ESTATE HELD FOR INVESTMENT OR SALE
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------------------------------
1993 1993 1992 1991 1990(1)
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for losses on real estate held for
investment:
Commercial and multifamily................... $ 7,945 $ 7,945 $ 8,037 $ 2,389 $ 839
Commercial construction...................... -- -- 4,995 506 506
Ground....................................... 1,972 1,972 1,682 1,266 1,455
Other........................................ 271 265 205 -- --
------------ ----------- ----------- ----------- -----------
Total...................................... 10,188 10,182 14,919 4,161 2,800
------------ ----------- ----------- ----------- -----------
Reserve for losses on real estate held for
sale:
Residential.................................. 81 102 447 2,813 1,906
Home equity.................................. 52 53 21 4 3
Commercial and multifamily................... 1,424 4,678 1,705 1,564 96
Commercial construction...................... 608 1,387 15,439 6,899 2,115
Residential construction..................... 3,002 2,924 2,294 1,664 307
Ground....................................... 96,108 92,318 74,219 40,393 5,651
------------ ----------- ----------- ----------- -----------
Total...................................... 101,275 101,462 94,125 53,337 10,078
------------ ----------- ----------- ----------- -----------
Total reserve for losses on real estate
held for investment or
sale...................................... $ 111,463 $ 111,644 $ 109,044 $ 57,498 $ 12,878
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
The Bank maintains reserves for estimated losses on loans and real estate.
The Bank's total reserves for losses on loans and real estate held for
investment or sale decreased by $1.3 million from the level at September 30,
1993 to $178.4 million at December 31, 1993. The $1.3 million decrease was
primarily attributable to decreased reserves on real estate assets. During the
three months ended December 31, 1993, the Bank recorded net charge-offs of $4.7
million on loans secured by real estate and real estate held for investment or
sale and provided an additional $3.7 million in valuation allowances on these
assets.
74
<PAGE>
The following table shows reserves for losses on performing and
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------
PERFORMING NON-PERFORMING TOTAL
----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserves for losses on:
Loans:
Real estate........................................................... $ 17,618 $ 1,521 $ 19,139
Credit card........................................................... 44,720 2,166 46,886
Consumer and other.................................................... 787 128 915
----------- -------------- -----------
Total reserve for losses on loans................................... 63,125 3,815 66,940
----------- -------------- -----------
Real estate held for investment......................................... 8,216 1,972 10,188
Real estate held for sale............................................... -- 101,275 101,275
----------- -------------- -----------
Total reserve for losses on real estate held for investment or sale..... 8,216 103,247 111,463
----------- -------------- -----------
Total reserves for losses............................................... $ 71,341 $ 107,062 $ 178,403
----------- -------------- -----------
----------- -------------- -----------
<CAPTION>
SEPTEMBER 30, 1993
----------------------------------------
PERFORMING NON-PERFORMING TOTAL
----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserves for losses on:
Loans:
Real estate........................................................... $ 19,518 $ 455 $ 19,973
Credit card........................................................... 44,830 2,056 46,886
Consumer and other.................................................... 1,125 56 1,181
----------- -------------- -----------
Total reserve for losses on loans................................... 65,473 2,567 68,040
----------- -------------- -----------
Real estate held for investment......................................... 8,210 1,972 10,182
Real estate held for sale............................................... -- 101,462 101,462
----------- -------------- -----------
Total reserve for losses on real estate held for investment or sale..... 8,210 103,434 111,644
----------- -------------- -----------
Total reserves for losses............................................... $ 73,683 $ 106,001 $ 179,684
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
Reserves for losses on loans secured by real estate and real estate held for
investment or sale totaled $130.6 million at December 31, 1993, which
constituted 29.2% of total non-performing real estate assets, before valuation
allowances. This amount represented a $1.0 million decrease from the September
30, 1993 level of $131.6 million, or 29.1% of total non-performing real estate
assets, before valuation allowances, at that date.
When real estate collateral securing an extension of credit is initially
recorded as REO, it is written down to fair value on the basis of an appraisal.
Such initial write-downs represent management's best estimate of exposure to the
Bank at the time that the collateral becomes REO and in effect substitutes for
reserves that would otherwise be recorded if the collateral had not become REO.
As circumstances change, it may be necessary to provide additional reserves
based on new information. Depending on the nature of the information, these new
reserves may be valuation allowances, which reflect additional impairment with
respect to a specific asset, or may be unallocated reserves, which provide
protection against changes in management's perception of overall economic
factors. Accordingly, the Bank believes that relatively lower levels of reserves
are initially required for REO because of the Bank's policy of adjusting the
book basis of its REO to reflect the fair value of the collateral.
75
<PAGE>
Reserves for losses on real estate held for sale at December 31, 1993 are in
addition to approximately $62.2 million of cumulative charge-offs previously
taken against assets remaining in the Bank's portfolio at December 31, 1993.
The Bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans. As a result of such updated appraisals, the
Bank could be required to increase its reserves.
Net charge-offs of credit card loans for the three months ended December 31,
1993 were $12.5 million, compared to $19.2 million for the three months ended
December 31, 1992. The decrease in net charge-offs resulted primarily from a
decline in payment defaults. The allowance at any balance sheet date relates
only to receivable balances that exist as of that date. Because of the nature of
a revolving credit card account, however, the cardholder may enter into
transactions (such as retail purchases and cash advances) subsequent to a
balance sheet date, which increases the outstanding balance of the account.
Accordingly, charge-offs in any fiscal period relate both to balances that
existed at the beginning of the period and to balances created during the period
and may therefore exceed the levels of reserves established at the beginning of
the fiscal period.
The reserve for losses on credit card loans remained constant from September
30, 1993 to December 31, 1993 at $46.9 million. The ratios of the reserve for
such losses to non-performing credit card loans and to outstanding credit card
loans decreased to 216.5% and 4.9%, respectively, at December 31, 1993 from
228.1% and 6.2%, respectively, at September 30, 1993.
The reserve for losses on consumer and other loans decreased to $0.9 million
at December 31, 1993 from $1.2 million at September 30, 1993. The ratios of the
reserves for losses on consumer and other loans to non-performing consumer and
other loans and to outstanding consumer and other loans declined to 354.7% and
0.5%, respectively, at December 31, 1993 from 376.1% and 0.8%, respectively, at
September 30, 1993.
In November 1990, the Commission initiated an informal investigation
concerning the Bank's reserves for losses and related matters and has requested
documents from the Bank covering the period since October 1, 1988. Based upon
the information available to it at this time, management believes that the
matter should be resolved in a manner that will not result in a material adverse
financial impact on the Bank.
ASSET AND LIABILITY MANAGEMENT. A key element of banking is the monitoring
and management of liquidity risk and interest-rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to stabilize
the net interest spread is referred to as asset and liability management. The
objective of asset and liability management is to maximize the net interest
yield within the constraints imposed by prudent lending and investing practices,
liquidity needs and capital planning.
The Bank is pursuing an asset-liability management strategy to control its
risk from changes in market interest rates principally by originating
interest-sensitive loans for its portfolio. In furtherance of this strategy, the
Bank emphasizes origination and retention of ARMs, adjustable-rate home equity
credit line loans and credit card loans, which generally have shorter terms and
higher yields than mortgage loans. At December 31, 1993, ARMs and home equity
credit line loans with rates adjustable in one year or less accounted for 16.0%
of total loans, and credit card loans accounted for 33.5% of total loans.
In recent periods, the Bank's policy has generally been to sell all of its
long-term fixed-rate mortgage production, thereby avoiding the exposure to
market interest rate fluctuations typically associated with long-term fixed-rate
lending. The Bank retains in its portfolio the majority of its variable-rate
mortgage production.
A traditional measure of interest-rate risk within the savings industry is
the interest sensitivity "gap," which is the sum of all interest-earning assets
minus all interest-bearing liabilities to be repriced within the same period. A
negative gap like that shown below for the Bank implies that, if
76
<PAGE>
market interest rates rise, the Bank's average cost of funds will increase more
rapidly than the concurrent increase in the average yield on interest-earning
assets. In a period of rising market interest rates, the differential effect on
the average yield on interest-earning assets and the average cost of
interest-bearing liabilities will decrease the Bank's net interest spread and
thereby adversely affect the Bank's operating results. Conversely, in a period
of declining interest rates, a negative gap would result in an increase in the
Bank's net interest spread.
The Bank views control over interest rate sensitivity as a key element in
its financial planning process and monitors its interest rate sensitivity
through its forecasting system. The Bank manages its interest rate exposure and
will narrow or widen its gap, depending on its perception of interest rate
movements and the composition of its balance sheet. For the reasons discussed
above, the Bank might take action to narrow its gap if it believes that market
interest rates will experience a significant prolonged increase, and might widen
its gap if it believes that market interest rates will decline or remain
relatively stable. A number of asset and liability management strategies are
available to the Bank in structuring its balance sheet. These include selling or
retaining certain portions of the Bank's current residential mortgage loan
production; altering the Bank's pricing on certain deposit products to emphasize
or de-emphasize particular maturity categories; altering the type and maturity
of securities acquired for the Bank's investment portfolio when replacing
securities following normal portfolio maturation and turnover; lengthening or
shortening the maturity or repricing terms for any current period asset
securitizations; and altering the maturity or interest rate reset profile of
borrowed funds, if any, including funds borrowed from the Federal Home Loan Bank
("FHLB") of Atlanta.
The following table presents the contractual maturities of the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 1993,
as adjusted for estimated prepayments and amortization and provisions for
adjustable interest rates. Adjustable and floating rate loans are included in
the period in which their interest rates are next scheduled to adjust, and the
prepayment rates assumed in each period for the Bank's loans are those rates
published most recently by the FHLB of Atlanta. Statement savings and passbook
accounts with balances under $20,000 are classified based upon management's
assumed attrition rate of 17.5%, and those with balances of $20,000 or more, as
well as all NOW accounts, are assumed to be subject to repricing within six
months or less.
77
<PAGE>
INTEREST RATE SENSITIVITY (GAP)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MORE THAN SIX MORE THAN MORE THAN
MONTHS ONE YEAR THREE YEARS
SIX MONTHS OR THROUGH ONE THROUGH THROUGH FIVE MORE THAN
LESS YEAR THREE YEARS YEARS FIVE YEARS TOTAL
------------- ------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1993
Mortgage loans:
Adjustable-rate................ $ 386,224 $ 162,898 $ 290,410 $ 301,396 $ 36,278 $1,177,206
Fixed-rate..................... 16,934 16,369 60,761 52,410 54,916 201,390
Loans held for sale............ 211,476 -- -- -- -- 211,476
Home equity credit lines and
second mortgages.............. 113,645 62 -- -- -- 113,707
Credit card and other............ 694,073 21,324 76,528 50,365 3,328 845,618
Loans held for securitization and
sale............................ 300,000 -- -- -- -- 300,000
Mortgage-backed securities....... 305,464 275,611 421,683 348,308 -- 1,351,066
Other investments................ 129,461 -- 4,394 102 -- 133,957
------------- ------------- ------------ ------------ ------------ ----------
Total interest-earning
assets...................... 2,157,277 476,264 853,776 752,581 94,522 4,334,420
Total non-interest earning
assets.......................... -- -- -- -- 796,179 796,179
------------- ------------- ------------ ------------ ------------ ----------
Total assets................. $ 2,157,277 $ 476,264 $ 853,776 $ 752,581 $ 890,701 $5,130,599
------------- ------------- ------------ ------------ ------------ ----------
------------- ------------- ------------ ------------ ------------ ----------
Deposits:
Fixed maturity deposits........ $ 386,386 $ 149,414 $ 164,420 $ 73,072 $ -- $ 773,292
NOW, statement and passbook
accounts...................... 1,494,957 37,692 125,539 85,445 182,093 1,925,726
Money market deposit accounts.. 1,164,091 -- -- -- -- 1,164,091
Borrowings:
Capital notes --
subordinated.................. 10,000 -- -- -- 150,000 160,000
Other.......................... 594,079 75,409 24,178 622 6,598 700,886
------------- ------------- ------------ ------------ ------------ ----------
Total interest-bearing
liabilities..................... 3,649,513 262,515 314,137 159,139 338,691 4,723,995
Total non-interest bearing
liabilities..................... -- -- -- -- 167,178 167,178
Stockholders' equity............. -- -- -- -- 239,426 239,426
------------- ------------- ------------ ------------ ------------ ----------
Total liabilities &
stockholders' equity........ $ 3,649,513 $ 262,515 $ 314,137 $ 159,139 $ 745,295 $5,130,599
------------- ------------- ------------ ------------ ------------ ----------
------------- ------------- ------------ ------------ ------------ ----------
Gap.............................. ($1,492,236) $ 213,749 $ 539,639 $ 593,442 $ (244,169)
Cumulative gap................... $(1,492,236) $(1,278,487) $ (738,848) $ (145,406) $ (389,575)
Cumulative gap as a percentage of
total assets.................... (29.1)% (24.9)% (14.4)% (2.8)% (7.6)%
</TABLE>
The one-year gap, as a percentage of total assets, was a negative 24.9% at
December 31, 1993, compared to a negative 26.3% at September 30, 1993. As noted
above, the Bank's negative one-year gap would adversely affect the Bank's net
interest spread and earnings if interest rates rise and the Bank is unable to
take steps to reduce its gap.
In addition to gap measurements, the Bank measures and manages interest-rate
risk with the extensive use of computer simulation. This simulation includes
calculations of Market Value of Portfolio Equity and Net Interest Margin as
promulgated by the OTS's Thrift Bulletin 13.
Effective January 1, 1994, the OTS's risk-based capital requirements were
amended to incorporate interest-rate risk measures to complement those already
established for credit risk. Under the amendments, an institution that would
experience a decrease in "portfolio equity" in an amount in excess of 2.0% of
the market value of the institution's assets as a result of an increase or
decrease in the general level of interest rates of as much as 200 basis points
is required to maintain additional amounts of risk-based capital. Additional
capital will have to be maintained by affected institutions beginning July 1,
1994 based on interest rate exposure as of December 31, 1993. Although the OTS
analysis of the Bank's interest rate exposure at December 31, 1993 is not yet
available, based upon
78
<PAGE>
management's internal analysis at December 31, 1993 and an OTS analysis of the
Bank's exposure at September 30, 1993, management believes that the Bank would
not experience a decrease in "portfolio equity" in an amount in excess of 2.0%
of its assets under this test and therefore believes that the Bank will not be
required to maintain additional amounts of risk-based capital beginning July 1,
1994.
DEFERRED TAX ASSET. At December 31, 1993, the Bank's net deferred tax asset
was $38.6 million, which generally represents the cumulative temporary
differences between the financial reporting basis and the tax basis of the
Bank's assets and liabilities. This net deferred tax asset is reported on the
Bank's financial statements in accordance with SFAS 109.
In January 1993, the OTS issued Thrift Bulletin 56 ("TB 56") setting forth
additional guidance regarding the treatment of net deferred tax assets for
regulatory reporting and capital purposes. For purposes of the Reports of
Condition and Income and the Thrift Financial Reports and other regulatory
reporting, TB 56 provides that thrift institutions are required to report their
net deferred tax assets in accordance with SFAS 109.
For regulatory capital purposes, TB 56 generally sets forth a limitation on
the amount of a thrift's net deferred tax asset reported under SFAS 109 that can
be included in a thrift's regulatory capital. TB 56 provides that deferred tax
assets which "can be realized from taxes paid in prior carryback years are
generally not limited." To the extent realization of deferred tax assets depends
on an institution's future taxable income, such deferred tax assets are limited
for regulatory capital purposes to the lesser of (i) the amount that can be
realized within one year of the quarter-end report date or (ii) 10% of core
capital. For regulatory capital purposes, the amount of the Bank's deferred tax
asset is not affected by the above limitations of TB 56.
LIQUIDITY AND CAPITAL RESOURCES
REAL ESTATE
GENERAL. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.
Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. As described below, this condition
currently exists and is expected to continue to exist for the foreseeable
future. The Real Estate Trust's internal sources of funds, primarily cash flow
generated by its income-producing properties, generally have been sufficient to
meet its cash needs other than the repayment of principal on outstanding debt,
including outstanding unsecured notes ("Retail Notes") sold to the public, and
the payment of capital improvement costs. In the past, the Real Estate Trust has
funded such shortfalls through a combination of external funding sources,
primarily new financings (including the sale of Retail Notes), refinancings of
maturing mortgage debt, asset sales and tax sharing payments from the Bank. See
Note 4 to the Consolidated Financial Statements in this Prospectus.
The Real Estate Trust's current program of Retail Note sales was initiated
in the 1970's as a vehicle for supplementing other external funding sources.
Retail Note sales were suspended in June 1990, but resumed in November 1992.
During the period from the date of resumption of Retail Note sales through
January 31, 1994, the Real Estate Trust sold $18.4 million of Retail Notes.
RECENT LIQUIDITY TRENDS. The Real Estate Trust's liquidity position was
positively affected by two developments in fiscal 1993. Short-term liquidity
constraints were eased as a result of OTS approval of the resumption of tax
sharing payments by the Bank to the Real Estate Trust following a significant
improvement in the Bank's regulatory capital ratios and overall financial
condition. See "Business -- Federal Taxation." The Real Estate Trust's long-term
liquidity prospects improved as a result of the transfer to Saul Holdings
Partnership and a subsidiary limited partnership of the mortgage debt
encumbering the 22 shopping centers and one office property conveyed by the Real
Estate Trust to such partnerships in August 1993. A substantial portion of such
mortgage debt was scheduled to
79
<PAGE>
mature in fiscal years 1993 to 1997. See "Business -- Real Estate -- Investment
in Saul Holdings Limited Partnership" and Note 2 to the Consolidated Financial
Statements in this Offering Memorandum.
Application of the net proceeds of the sale of the Old Notes will enable the
Real Estate Trust to achieve a further improvement in its liquidity position.
The Real Estate Trust applied $83.0 million of such proceeds to repay a working
capital loan and certain mortgage indebtedness. Concurrently with the
application of such proceeds, the terms of certain of the mortgage loans repaid
in part were modified to waive deferred interest, reduce interest rates and
extend maturities. See "Use of Proceeds."
The following table sets forth the maturity schedule for Real Estate Trust's
outstanding mortgage and Retail Note debt at December 31, 1993, as adjusted to
give effect to the sale of the Old Notes and the application of the net proceeds
therefrom.
<TABLE>
<CAPTION>
FISCAL MORTGAGE NOTES PAYABLE --
YEAR NOTES UNSECURED TOTAL
- ------------------------------------ --------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1994 (1)............................ $ 5,073 $11,077 $ 16,150
1995................................ 11,744 7,034 18,778
1996................................ 8,056 5,553 13,609
1997................................ 19,068 2,904 21,972
1998................................ 6,908 7,990 14,898
Thereafter.......................... 139,562 5,329 144,891
<FN>
- ------------------------
(1) January 1, 1994 to September 30, 1994.
</TABLE>
The Real Estate Trust expects that its capital improvements costs in the
next several fiscal years for its existing property portfolio will be in the
range of $2.0 to $3.0 million per year.
The Real Estate Trust believes that the proceeds of the sale of the Old
Notes remaining after application to the specific uses identified in "Use of
Proceeds -- Sale of Old Notes," together with cash generated by operations,
sales of Retail Notes, refinancings of existing mortgage debt and tax sharing
payments and dividends from the Bank will be sufficient to fund both debt
amortization and capital improvement costs in 1994 and future years. The Real
Estate Trust's ability to generate cash from such sources will be subject to
significant contingencies. In order to pay the principal amount of the Notes at
maturity or upon the occurrence of an Event of Default, to redeem the Notes or
to repurchase the Notes upon a Change of Control Triggering Event, the Real
Estate Trust will be required to borrow funds, sell equity securities, sell
assets or seek capital contributions from its affiliates. See "Risk Factors and
Other Considerations -- Ability to Pay Principal and Interest on the Notes."
The Real Estate Trust's ability to refinance its existing mortgage debt will
depend on the value and types of properties in its portfolio as well as the
availability of long-term mortgage financing for such types of properties. In
recent periods, the availability of long-term fixed-rate mortgage financing for
income-producing properties on satisfactory terms or at acceptable interest
rates has been significantly curtailed. The unavailability of such financing has
impaired the Real Estate Trust's ability to refinance income-producing
properties in its portfolio. No assurance can be given as to the availability of
financing for income-producing properties at acceptable terms and interest rates
in the future.
The Real Estate Trust is currently selling Retail Notes principally to pay
outstanding Retail Notes as they mature. In paying maturing Retail Notes with
proceeds of Retail Note sales, the Real Estate Trust effectively is refinancing
its outstanding Retail Notes with similar new unsecured debt at the lower
interest rates currently prevailing in today's market. To the degree that the
Real Estate Trust does not sell new Retail Notes in an amount sufficient to
finance completely the scheduled repayment of outstanding Retail Notes as they
mature, which was the case in fiscal 1993, it believes it will be able to
finance such repayments from other sources of funds.
80
<PAGE>
The Real Estate Trust believes that the improved financial condition and
operating results of the Bank in recent periods should enhance the Real Estate
Trust's prospects to receive tax sharing payments and dividends from the Bank,
but there can be no assurances in this regard. The Trust's ability to pay
interest on the Notes will depend in significant part on its receipt of tax
sharing payments and dividends. The Bank must receive the written approval of
the OTS before making any payments to the Real Estate Trust under the Tax
Sharing Agreement. The OTS may decline to grant such approval on, among other
grounds, general safety and soundness considerations. Further, OTS regulations
tie the Bank's ability to pay dividends and make other capital distributions
primarily to its levels of regulatory capital and earnings. See "Risk Factors
and Other Considerations -- Restrictions on Dividends From the Bank" and "--
Considerations Relating to Tax Sharing Agreement." Management believes that the
Bank's ability to make tax sharing payments and pay dividends to the Real Estate
Trust will depend on the Bank's financial condition and operating performance.
See "Risk Factors and Other Considerations" for a discussion of certain factors
that may adversely affect the Bank's future operations.
As the owner, directly and through two wholly-owned subsidiaries, of a 21.5%
limited partnership interest in Saul Holdings Partnership, the Real Estate Trust
will share in cash distributions from operations and from capital transactions
involving the sale or refinancing of the properties of Saul Holdings
Partnership. The partnership agreement of Saul Holdings Partnership provides for
quarterly distributions to the partners out of net cash flow. See "Business --
Real Estate -- Investment in Saul Holdings Limited Partnership." In October
1993, the Real Estate Trust received its first cash distribution, which was for
a partial period, in the amount of $524,000, from Saul Holdings Partnership. In
February 1994, the Real Estate Trust received its second cash distribution, in
the amount of $1,363,000.
BANKING
LIQUIDITY. The standard measure of liquidity in the savings industry is the
ratio of cash and short-term U.S. Government and other specified securities to
net withdrawable accounts and borrowings payable in one year or less.
The OTS has established a minimum liquidity requirement, which may vary from
time to time depending upon economic conditions and deposit flows. The required
liquidity level is currently 5.0%. The Bank's liquidity ratio at December 31,
1993 was 24.1%, compared to 24.3% at September 30, 1993.
The Bank's primary sources of funds historically have consisted of (i)
principal and interest payments on loans and mortgage-backed securities, (ii)
savings deposits, (iii) sales of loans, mortgage-backed securities and
investments and (iv) borrowed funds. The Bank's holdings of readily marketable
securities constitute another important source of liquidity. At December 31,
1993, the Bank's portfolio included mortgage loans, U.S. Government securities
and mortgage-backed securities with outstanding principal balances of $676.5
million, $4.7 million and $1.3 billion, respectively. The amount which the Bank
could have borrowed from the FHLB of Atlanta and various securities brokers
against its unpledged mortgage loans, U.S. Government securities and
mortgage-backed securities totaled $1.0 billion at December 31, 1993, after
market-value and broker adjustments of the collateral.
In recent periods, the proceeds from sales of credit card relationships and
other assets and securitization and sale of credit card, home equity credit line
and automobile loan receivables have been significant sources of liquidity for
the Bank. At December 31, 1993, the Bank was considering the securitization and
sale of approximately $300.0 million of credit card receivables during the
second and third quarters of fiscal 1994. As part of its operating strategy, the
Bank will continue to explore opportunities to sell assets and to securitize and
sell credit card and home equity credit line receivables to meet liquidity and
other balance sheet objectives.
The ability of the Bank to securitize and sell assets in the future will
depend on a number of factors, including conditions in the market for
asset-backed securities and competitive pressures in the credit card industry.
The Bank does not currently anticipate relying upon securitizations of
receivables other than credit card and home equity credit line receivables. The
Bank's currently
81
<PAGE>
projected levels of securitization of credit card and home equity credit line
receivables reflect in part a reduction in the pool of receivables eligible for
such securitizations. The reduction in the amount of eligible receivables has
resulted from prior securitization and sales activities. Management believes
that to support future securitization activity, a sufficient pool of eligible
receivables will be provided by the existing portfolio of receivables, the
amortization of existing credit card trusts, increased usage of existing
accounts and originations of new accounts.
The Bank uses its liquidity primarily to meet its commitments to fund
maturing savings certificates and deposit withdrawals, fund existing and
continuing loan commitments, repay borrowings and meet operating expenses. For
the three months ended December 31, 1993, the Bank used the cash provided by
operating, investing and financing activities primarily to meet its commitments
to fund maturing savings certificates and deposit withdrawals of $2.8 billion,
repay borrowings of $1.5 billion, fund existing and continuing loan commitments
(including real estate held for investment or sale) of $766.5 million, purchase
investments and loans of $146.1 million and meet operating expenses, before
depreciation and amortization, of $43.2 million. These commitments were funded
primarily through proceeds from customer deposits and sales of certificates of
deposit of $2.9 billion, proceeds from borrowings of $1.7 billion, proceeds from
sales of loans, securities and real estate of $409.2 million, and principal and
interest collected on investments, loans and mortgage-backed securities of
$335.3 million.
The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card, home equity credit line and automobile
loan receivables. Of the $1.2 billion of outstanding trust certificate balances
at December 31, 1993, the primary recourse to the Bank was approximately $77.0
million.
The Bank also is obligated under various recourse provisions related to the
swap of single-family residential loans for participation certificates and
mortgage-backed securities issued to the Bank by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA"). At
December 31, 1993, recourse to the Bank under these arrangements was
approximately $6.0 million.
82
<PAGE>
The Bank's commitments at December 31, 1993 are set forth in the following
table:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Commitments to originate loans.................................................................... $ 54,440
--------------
Loans in process (collateralized loans):
Home equity..................................................................................... 524,174
Real estate construction........................................................................ 25,626
Commercial and multifamily...................................................................... 1,406
Residential ground.............................................................................. 2,679
--------------
553,885
--------------
Loans in process (unsecured loans):
Credit cards.................................................................................... 2,980,576
Overdraft lines................................................................................. 36,012
Commercial...................................................................................... 20
--------------
3,016,608
--------------
Total commitments to extend credit............................................................ 3,624,933
Letters of credit................................................................................. 74,387
Recourse arrangements on asset-backed securitizations............................................. 77,019
Recourse arrangements on mortgage-backed securities............................................... 5,991
--------------
Total commitments............................................................................. $ 3,782,330
--------------
--------------
</TABLE>
Based on historical experience, the Bank expects to fund substantially less
than the total amount of its outstanding credit card and home equity credit line
commitments, which together accounted for 92.7% of commitments at December 31,
1993.
At December 31, 1993, repayments of borrowed money scheduled to occur during
the next 12 months were $564.5 million. Certificates of deposit maturing during
the next 12 months amounted to $535.8 million, of which a substantial portion is
expected to remain with the Bank.
There were no material commitments for capital expenditures at December 31,
1993.
The Bank's liquidity requirements in fiscal 1994 and for years subsequent to
fiscal 1994 will continue to be affected both by the asset size of the Bank, the
growth of which will be constrained by capital and other regulatory
requirements, and the composition of the asset portfolio. Management believes
that the Bank's primary sources of funds, described above, will be sufficient to
meet the Bank's foreseeable long-term liquidity needs. The mix of funding
sources utilized from time to time will be determined by a number of factors,
including capital planning objectives, lending and investment strategies and
market conditions.
CAPITAL. At December 31, 1993, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, including FIRREA-mandated fully
phased-in capital requirements. The following table shows the Bank's regulatory
capital levels at December 31, 1993, in relation to the regulatory requirements
in effect at that date. The information below is based upon the Bank's
understanding of the regulations and interpretations currently in effect and may
be subject to change.
83
<PAGE>
REGULATORY CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACTUAL CAPITAL REQUIRED
------------------------ -------------------------
AS A % OF AS A % OF EXCESS
AMOUNT ASSETS AMOUNT ASSETS CAPITAL
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Capital per the Bank's financial statements................. $ 292,982
Adjustments for tangible and core capital:
Intangible assets......................................... (54,234)
Non-includable subsidiaries (1)........................... (6,412)
-----------
Total tangible capital.................................. 232,336 4.55% $ 76,651 1.50% $ 155,685
----- ----------- --- -----------
----- ----------- --- -----------
Supervisory goodwill...................................... 38,325
-----------
Total core capital (2)(3)............................... 270,661 5.30% $ 153,301 3.00% $ 117,360
----------- ----- ----------- --- -----------
----- ----------- --- -----------
Total tier 1 risk-based capital (2)..................... 270,661 6.88% N/A N/A N/A
----------- ----- ----------- --- -----------
----- ----------- --- -----------
Adjustments for risk-based capital:
Subordinated capital debentures........................... 154,300
Reserve for general loan losses........................... 59,068
-----------
Total supplementary capital............................. 213,368
Excess loan loss reserves................................. (9,782)
-----------
Adjusted supplementary capital............................ 203,586
-----------
Total available capital................................. 474,247
Equity investments (1).................................... (19,584)
-----------
Total risk-based capital (2)(3)......................... $ 454,663 11.56% $ 314,651 8.00% $ 140,012
----------- ----- ----------- --- -----------
----------- ----- ----------- --- -----------
<FN>
- ------------------------
(1) Reflects an aggregate offset of $6.3 million representing the amount of
general reserves maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a "credit" against the deductions from capital otherwise
required for such investments.
(2) Under the OTS prompt corrective action regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
and a total risk-based capital ratio of at least 10.0%.
(3) Effective January 1, 1994, the amount of supervisory goodwill includable
as core capital under OTS regulations decreased from 0.75% to 0.375% of
tangible assets. If the 0.375% limit had been in effect on December 31,
1993, the Bank's core and total risk-based regulatory capital ratios would
have been 4.92% and 11.12%, respectively, and the Bank's core and total
risk-based capital would have been $98.2 million and $122.2 million,
respectively, above the FIRREA-mandated regulatory requirements.
</TABLE>
REGULATORY ACTION AND REQUIREMENTS. The Bank is subject to a written
agreement, dated September 30, 1991 as amended in October 1993, with the OTS
which imposes certain restrictions on the Bank's operations and requires certain
affirmative actions by the Bank. Primarily because of its level of
non-performing assets, the Bank is also subject to restrictions on asset growth.
Under the applicable OTS requirements, the Bank may not increase its total
assets during any calendar quarter in excess of an amount equal to net interest
credited on deposit liabilities during the quarter without prior written
approval from OTS. In September 1993, the Bank received OTS approval, subject to
certain conditions, to increase incrementally its total assets during the period
from July 1, 1993 through June 30, 1994 by an amount up to $500 million. The
Bank is also subject to a requirement to obtain OTS approval for changes in
directors and senior executive officers and the imposition of increased OTS
assessments and FDIC insurance premiums. In January 1994, the OTS approved the
84
<PAGE>
appointment of three additional directors to the Bank's Board of Directors. The
OTS has approved the payment of dividends on the 13% Preferred Stock provided
certain conditions are met. In the future, if the Bank is unable to maintain
capital compliance, the Bank could be subject to additional regulatory
sanctions.
CAPITAL MAINTENANCE STRATEGIES. The regulatory capital requirements
applicable to the Bank will continue to increase over time as a result of the
gradual phase-out of various assets from regulatory capital. On the basis of its
balance sheet at December 31, 1993, the Bank met the FIRREA-mandated fully
phased-in capital requirements. On a fully phased-in basis, at December 31, 1993
the Bank's tangible, core (or leverage) and total risk-based capital ratios were
4.14%, 4.14% and 9.81%, respectively, compared with the requirements of 1.5%,
3.0% and 8.0%, respectively. At December 31, 1993, the Bank had $30.4 million,
after subsequent valuation allowances, of extensions of credit to, and
investments in, subsidiaries engaged in activities impermissible for national
banks ("non-includable subsidiaries") which are currently subject to a 25%
phase-out from all three FIRREA capital requirements. This phase-out will
gradually increase to 100% on July 1, 1996, in accordance with a delayed
phase-in period approved by the OTS pursuant to legislation enacted in October
1992. At December 31, 1993, the Bank also had one equity investment with a
balance, after subsequent valuation allowances, of $41.2 million which is
currently subject to a 60% phase-out from total capital for risk-based capital
purposes. This phase-out will increase to 100% on July 1, 1994. Pursuant to OTS
guidelines, $6.3 million of general reserves maintained against the Bank's
non-includable subsidiaries and equity investments is available as a "credit"
against the deduction from capital otherwise required for such investments. The
OTS adopted a rule, effective April 19, 1993, eliminating the capital deduction
for equity investments that are permissible for national banks.
The Bank will continue to attempt to reduce the level of its investments in
non-includable subsidiaries and its level of equity investments. The level of
the Bank's investments in non-includable subsidiaries is a key factor in the
capital calculation because, under the fully phased-in capital requirements,
those investments represent dollar-for-dollar reductions in core capital, which
in turn limit the amount of supplementary capital which may be included for
risk-based capital purposes. The Bank does not anticipate entering into any new
transactions that would result in an increase in its investments in
non-includable subsidiaries, and is attempting to reduce the existing level of
those investments over the next several years.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from risk-based capital. The following table sets
forth the Bank's REO at December 31, 1993, after valuation allowances of $101.3
million, by the fiscal year in which the property was acquired through
foreclosure.
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- -------------------------------------------------------------------- --------------
<S> <C>
1990 (1)............................................................ $ 145,141
1991................................................................ 125,547
1992................................................................ 21,255
1993................................................................ 14,451
1994................................................................ 6,838
--------------
Total REO........................................................... $ 313,232
--------------
--------------
<FN>
- ------------------------
(1) Includes one property with a net book value of $36.1 million, which the
Bank agreed in fiscal 1991 to treat as an equity investment for regulatory
capital purposes.
</TABLE>
85
<PAGE>
At December 31, 1993, the Bank had $51.3 million in supervisory goodwill, of
which $38.3 million was includable in core capital pursuant to statutory
provisions limiting the includable amount of supervisory goodwill to an amount
not to exceed 0.75% of tangible assets beginning January 1, 1993, 0.375%
beginning January 1, 1994 and 0% beginning January 1, 1995.
The Bank's ability to maintain capital compliance will be subject to general
economic conditions, particularly in the Bank's local markets. Continued
softness in general economic conditions or a renewed downturn in local real
estate markets could require further additions to the Bank's reserves for losses
and further charge-offs. Any such developments would adversely affect the Bank's
earnings and thus its ability to maintain capital compliance. The failure of the
Bank to maintain capital compliance could result in further regulatory
sanctions.
PROMPT CORRECTIVE ACTION. Under the OTS prompt corrective action
regulations which became effective on December 19, 1992, an institution is
categorized as "well capitalized" if it has a leverage (or core capital) ratio
of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total
risk-based capital ratio of at least 10.0% and is not subject to any written
agreement, order, capital directive or prompt corrective action directive to
meet and maintain a specific capital level. An institution is considered
"adequately capitalized" if such capital ratios are at least 4.0% (3.0% if rated
in the highest supervisory category), 4.0% and 8.0%, respectively. At December
31, 1993, the Bank's leverage, tier 1 risk-based and total risk-based capital
ratios were 5.30%, 6.88% and 11.56%, respectively, which exceeded the ratios
established for "well capitalized" institutions, and the Bank was not subject to
any applicable written agreement, order or directive to meet and maintain a
specific capital level. The OTS has the discretion to reclassify an institution
from one category to the next lower category, for example from "well
capitalized" to "adequately capitalized," if, after notice and an opportunity
for a hearing, the OTS determines that the institution is in an unsafe or
unsound condition or has received and has not corrected a less than satisfactory
examination rating for asset quality, management, earnings or liquidity. The
Bank's levels of non-performing assets may result in reductions in capital to
the extent losses are recognized as a result of deteriorating collateral value
or economic conditions. Further, under the OTS's regulatory capital
requirements, the Bank is required to phase out from regulatory capital
supervisory goodwill and loans to and investments in non-includable subsidiaries
and equity investments. On a fully phased-in basis at December 31, 1993, the
Bank's leverage, tier 1 risk-based and total risk-based capital ratios of 4.14%,
5.47% and 9.81%, respectively, would meet the ratios established for "adequately
capitalized" institutions.
86
<PAGE>
BUSINESS
The Trust has prepared its financial statements and other disclosures on a
fully consolidated basis. The term "Trust" as used in "Business" generally
refers to the combined entity, which includes B.F. Saul Real Estate Investment
Trust and its subsidiaries, including Chevy Chase and Chevy Chase's
subsidiaries. "Real Estate Trust" refers to B.F. Saul Real Estate Investment
Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking."
REAL ESTATE
REAL ESTATE INVESTMENTS
The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at December 31, 1993.
OFFICE PROPERTIES
<TABLE>
<CAPTION>
LEASING PERCENTAGES
---------------------------------
GROSS SEPTEMBER 30,
LEASABLE DECEMBER 31, ------------------
LOCATION NAME AREA (SF) 1993 1993 1992 1991
- ----------------- ---------------------- --------- ------------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
FLORIDA
Fort Lauderdale Commerce Center --
Phase II 64,000 67% 53% 62% 56%
GEORGIA
Atlanta 900 Circle 75 Parkway 346,000 92% 85% 82% 93%
1000 Circle 75 Parkway 88,000 98% 97% 82% 88%
1100 Circle 75 Parkway 267,000 49% 49% 84% 98%
Perimeter Way 58,000 42% 50% 52% 57%
LOUISIANA
Metairie Metairie Tower 91,000 91% 90% 90% 93%
VIRGINIA
Chantilly Dulles South (1) 38,000 54% 55% 49% 39%
McLean 8201 Greensboro Drive 354,000 91% 90% 87% 96%
Sterling Dulles North (2) 59,000 100% 86% 84% 83%
---------
1,365,000 80% 77% 81% 89%
---------
---------
<CAPTION>
EXPIRING LEASES (SF)
----------------------------------------------
JANUARY 1994- OCTOBER 1994- OCTOBER 1995-
LOCATION SEPTEMBER 1994 SEPTEMBER 1995 SEPTEMBER 1996
- ----------------- -------------- -------------- --------------
<S> <C> <C> <C>
FLORIDA
Fort Lauderdale
5,000 5,000 3,000
GEORGIA
Atlanta 19,000 116,000 83,000
20,000 11,000 22,000
35,000 46,000 14,000
14,000 9,000 2,000
LOUISIANA
Metairie 33,000 25,000 10,000
VIRGINIA
Chantilly 3,000 4,000 8,000
McLean 16,000 216,000 36,000
Sterling 10,000 -- 16,000
-------------- -------------- --------------
155,000 432,000 194,000
-------------- -------------- --------------
-------------- -------------- --------------
<FN>
- ------------------------------
(1) A Trust subsidiary owns a 50% interest in this office building.
(2) A Trust subsidiary owns a 99% interest in this office building.
</TABLE>
87
<PAGE>
HOTELS
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
------------------------------------
THREE MONTHS YEAR ENDED
ENDED SEPTEMBER 30,
AVAILABLE DECEMBER 31, --------------------
LOCATION NAME ROOMS 1993 1993 1992 1991
- -------------- ---------------------------------------------------------- --------- ------------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COLORADO
Pueblo Holiday Inn -- Pueblo 193 70% 76% 78% 75%
MARYLAND
Gaithersburg Holiday Inn -- Gaithersburg 304 50% 59% 66% 60%
NEW YORK
Rochester Holiday Inn -- Rochester 282 59% 69% 74% 77%
OHIO
Cincinnati Holiday Inn -- Sharonville 274 41% 52% 51% 49%
VIRGINIA
Arlington Howard Johnsons -- National Airport 279 65% 73% 69% 69%
McLean Holiday Inn -- Tysons Corner 314 74% 78% 77% 68%
Norfolk Howard Johnsons -- Hotel Norfolk 344 41% 33% 69% 51%
Sterling Hampton Inn -- Dulles Airport (2) 128 68% 81% 71% 64%
Holiday Inn -- Dulles Airport 297 55% 66% 62% 60%
---------
TOTALS 2,415 57% 63% 68% 63%
---------
---------
<FN>
- ------------------------
(1) Average occupancy is calculated by dividing the rooms occupied by the
rooms available.
(2) A Trust subsidiary owns a 99% interest in this hotel.
</TABLE>
OTHER REAL ESTATE INVESTMENTS
<TABLE>
<CAPTION>
LOCATION NAME
- ------------------------ ------------------------------------------------
PURCHASE -- LEASEBACK PROPERTIES (1)
Number
APARTMENTS of Units
---------------
<S> <C> <C> <C>
Louisiana Metairie Chateau Dijon 336
Tennessee Knoxville Country Club 232
---------------
Total 568
---------------
---------------
<CAPTION>
Gross Leasable
SHOPPING CENTERS Area (sf)
---------------
<S> <C> <C> <C>
Georgia Atlanta Old National 160,000
Warner Robbins Houston Mall 264,000
Wyoming Casper Beverly Plaza 150,000
---------------
Total 574,000
---------------
---------------
<CAPTION>
APARTMENT PROJECT
Number
of Units
---------------
<S> <C> <C> <C>
Texas Dallas San Simeon 124
---------------
---------------
<CAPTION>
MISCELLANEOUS PROPERTY (RETAIL)
Gross Leasable
Area (sf)
---------------
<S> <C> <C> <C>
Maryland Oxon Hill Wheeler Road 24,000
---------------
---------------
<FN>
- ------------------------
(1) The Trust owns the ground under certain income-producing properties and
receives fixed ground rent, which is subject to periodic escalation, from
the owners of the improvements. In certain instances, the Trust also
receives percentage rent based upon the income generated by the
properties.
</TABLE>
88
<PAGE>
LAND PARCELS
<TABLE>
<CAPTION>
LOCATION NAME ACRES ZONING
- ------------------------ --------------------------------------- ----- ----------------------------------
<S> <C> <C> <C>
FLORIDA
Boca Raton Arvida Park of Commerce (1) 20 Mixed Use
Fort Lauderdale Commerce Center 14 Office & Warehouse
GEORGIA
Atlanta Circle 75 128 Office & Industrial
Perimeter Way 2 Office & Industrial
KANSAS
Overland Park Overland Park 162 Residential, Office and Retail
MARYLAND
Gaithersburg Avenel Business Park 8 Commercial
Rockville Flagship Centre 8 Commercial
NEW YORK
Rochester Holiday Inn -- Rochester Airport 3 Commercial
VIRGINIA
Loudoun County Church Road 40 Office & Industrial
Sterling Boulevard (2) 48 Industrial
---
Total 433
---
---
<FN>
- ------------------------
(1) A Trust subsidiary owns a 50% interest in 11 acres of this parcel.
(2) A Trust subsidiary owns a 99% interest in this parcel.
</TABLE>
The investment portfolio consists principally of seasoned operating
properties. The Real Estate Trust expects to hold its properties as long-term
investments and has no maximum period for retention of any investment. It may
acquire additional income-producing properties, expand and improve its
properties, or sell such properties, as and when circumstances warrant. The Real
Estate Trust also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership.
Real estate development in certain areas of the country suffers from
overbuilding or adverse local economic conditions, or both. In recent periods,
the Real Estate Trust's office building leasing rates have experienced a decline
due to recessionary economic conditions in the metropolitan areas in which the
office properties are located. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Real
Estate."
INVESTMENT IN SAUL HOLDINGS LIMITED PARTNERSHIP
On August 26, 1993, the Real Estate Trust consummated a series of
transactions (together with related transactions, the "Formation Transactions")
in which it transferred its 22 shopping center properties and one of its office
properties (the "Transferred Properties"), together with the debt associated
with such properties, to Saul Holdings Partnership and one of two newly
organized subsidiary limited partnerships of Saul Holdings Partnership (the
"Subsidiary Partnerships" and, collectively with Saul Holdings Partnership, the
"Partnerships"). In exchange for the Transferred Properties, the Real Estate
Trust received securities representing a 21.5% limited partnership interest in
Saul Holdings Partnership, which it holds directly and through two wholly-owned
subsidiaries. Saul Centers, a newly organized, publicly held real estate
investment trust, received a 73.0% general partnership interest in Saul Holdings
Partnership in exchange for the contribution of approximately $220.7 million to
Saul Holdings Partnership. Entities under common control with the Trust (the
"Trust Affiliates") received limited partnership interests collectively
representing a 5.5% partnership interest in Saul Holdings Partnership in
exchange for the transfer of property management functions (the "Management
Functions") and certain other properties to the Partnerships. In addition, the
89
<PAGE>
Trust Affiliates received certain cash distributions from Saul Holdings
Partnership and purchased 4.0% of the common stock of Saul Centers in a private
offering consummated concurrently with the initial public offering of such
common stock.
Saul Centers, which is the sole general partner of each of the Partnerships,
generally has full, exclusive and complete responsibility and discretion in the
management and control of each Partnership. B. Francis Saul II, the Chairman of
the Board of Trustees and Chief Executive Officer of the Trust, serves as
Chairman of the Board of Directors and Chief Executive Officer of Saul Centers.
The Transferred Properties accounted for revenues of $29.1 million in fiscal
1993 prior to the Formation Transactions (31.3% of the Real Estate Trust's total
revenues), $32.1 million in fiscal 1992 (32.1% of total revenues) and $32.1
million in fiscal 1991 (31.4% of total revenues). Because the Real Estate Trust
does not allocate its expenses to different classes of properties in its real
estate portfolio, it is unable to provide comparable data on the relative
contribution of the Transferred Properties to its operating profit (loss).
In determining the percentage interest in Saul Holdings Partnership
allocated to the Real Estate Trust in exchange for the contribution of the
Transferred Properties, the Real Estate Trust considered "funds from operations"
historically generated by the Transferred Properties and currently projected
increases or decreases therein. Funds from operations was defined to mean net
income (loss), as computed in accordance with generally accepted accounting
principles, excluding gains and losses from debt restructurings and property
sales, plus depreciation, amortization of financing costs and property
writedowns. Independent third-party appraisals were not used in the
determination of such percentage.
The Real Estate Trust disposed of the Transferred Properties in exchange for
an interest in Saul Holdings Partnership because of management's belief that
such disposition provided the best strategy under current and reasonably
foreseeable market conditions for maximizing the Real Estate Trust's return on
this portion of its investment portfolio and providing for the repayment or
refinancing of the mortgage debt encumbering the Transferred Properties. The
Transferred Properties were contributed subject to mortgage debt of $184.9
million at June 30, 1993, which constituted 43.3% of the Real Estate Trust's
total mortgage debt at such date. A substantial portion of such mortgage debt at
the date of transfer was scheduled to mature in fiscal years 1993 to 1997.
As a limited partner of Saul Holdings Partnership, the Real Estate Trust
will share in cash distributions from operations and capital transactions
involving the sale or refinancing of the properties of Saul Holdings
Partnership. The annual cash flow anticipated to be received by the Real Estate
Trust in the form of distributions from Saul Holdings Partnership could be less
initially than the annual cash flow (after debt service, capital improvements
and maintenance) generated by the Transferred Properties prior to this
transaction. However, because the mortgage debt encumbering the Transferred
Properties is no longer a direct obligation of the Real Estate Trust, the
transaction is expected overall to have a positive effect on the Real Estate
Trust's long-term liquidity position. See "Reimbursement Agreement" below for a
discussion of the Real Estate Trust's contingent liability with respect to a
portion of such mortgage debt.
CONSEQUENCES OF FORMATION TRANSACTIONS. As a result of consummation of the
Formation Transactions:
- Saul Holdings Partnership currently owns, directly or indirectly through
the Subsidiary Partnerships, 26 community and neighborhood shopping
centers (including the 22 shopping centers transferred by the Real Estate
Trust) located in seven states and the District of Columbia, one office
property and one office/retail property located in the District of
Columbia and one research park located in the Maryland suburbs of
Washington, D.C. (the "Portfolio Properties").
- Saul Centers is the sole general partner of, and owns a 73.0% interest in,
Saul Holdings Partnership and is the sole general partner of, and owns a
1.0% interest in, each of the Subsidiary Partnerships.
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- Saul Holdings Partnership holds directly the Management Functions and the
Portfolio Properties not held by the Subsidiary Partnerships and holds a
99.0% limited partnership interest in each of the Subsidiary Partnerships.
- The purchasers of common stock in the Saul Centers public offering own
96.0% of the Saul Centers common stock.
- The Trust Affiliates own 4.0% of the Saul Centers common stock and a 5.5%
limited partnership interest in Saul Holdings Partnership. The Real Estate
Trust owns a 21.5% limited partnership interest (and 3,495,713 partnership
units corresponding thereto) in Saul Holdings Partnership. At December 31,
1993, the Trust and one of its wholly-owned subsidiaries had pledged
495,713 partnership units in Saul Holdings Partnership to Chevy Chase to
secure certain of the Trust's obligations under the Tax Sharing Agreement
and a second wholly-owned subsidiary of the Trust had pledged 3,000,000
partnership units to a lender. The loan from such lender was repaid in
full with the proceeds of the sale of the Old Notes.
- The Real Estate Trust and the Trust Affiliates own rights (the "Rights")
enabling them to convert their limited partnership interests in Saul
Holdings Partnership into shares of Saul Centers common stock on the basis
of one share of Saul Centers common stock for each partnership unit at the
end of a 36-month period commencing after the initial public offering,
provided that they do not own Rights to the extent that they collectively
would be treated as owning, directly or indirectly, more than 24.9% of the
value of the outstanding equity securities of Saul Centers. The shares of
Saul Centers common stock are listed on the New York Stock Exchange
(trading symbol "BFS").
SAUL CENTERS. Saul Centers has announced that it intends to make an
election to be treated as a real estate investment trust ("REIT") for federal
income tax purposes under Sections 856 through 860 of the Internal Revenue Code
commencing with the year ending December 31, 1993. If Saul Centers so qualifies,
it generally will not be subject to federal income tax, provided it makes
certain distributions to its stockholders and meets certain organizational and
other requirements. Under the Internal Revenue Code, REITs are subject to
numerous organizational and operational requirements. Saul Centers has announced
that it intends to make regular quarterly dividend distributions to its
stockholders.
MANAGEMENT OF THE PROPERTIES. The Partnerships will manage the Portfolio
Properties and any subsequently acquired properties through the Management
Functions, which include personnel and such functions as property management,
leasing, design, renovation, development and accounting. The Management
Functions provide the Partnerships with a fully integrated property management
capability through approximately 150 employees and with an extensive and mature
network of relationships with tenants and potential tenants as well as with
members of the brokerage and property owners' communities.
Saul Centers will share with the Real Estate Trust and the Trust Affiliates
certain ancillary functions at cost, such as computer and payroll services,
benefits administration and in-house legal services, and will share insurance
expense on a pro rata basis. The Real Estate Trust and the Trust Affiliates will
sublease office space to Saul Centers at their cost. The terms of all sharing
arrangements, including payments related thereto, will be reviewed periodically
by the independent directors of Saul Centers, who constitute five of the nine
members of the Board of Directors.
EXCLUSIVITY AGREEMENT AND RIGHT OF FIRST REFUSAL. The Trust has entered
into an Exclusivity Agreement (the "Exclusivity Agreement") with, and has
granted a right of first refusal (the "Right of First Refusal") to, Saul Centers
and the Partnerships (collectively, the "Company"). The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust and the Company. The Exclusivity Agreement and Right of First
Refusal generally require the Real Estate Trust to conduct its shopping center
business exclusively through the Company and to grant the Company a right of
first refusal to purchase commercial properties and development sites that
become available to the Real Estate Trust in the District of Columbia or
adjacent suburban Maryland. Subject to the Exclusivity Agreement and Right of
First Refusal, the Real Estate Trust will continue to develop, acquire, own and
manage commercial properties and own land suitable for development as, among
other things, shopping centers and other commercial properties.
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ALLOCATIONS AND DISTRIBUTIONS OF SAUL HOLDINGS PARTNERSHIP. The net income
or net loss of Saul Holdings Partnership for tax purposes generally will be
allocated to Saul Centers and the limited partners in accordance with their
percentage interests, subject to compliance with the applicable provisions of
the Internal Revenue Code and the regulations promulgated thereunder. Net cash
flow after reserves of Saul Holdings Partnership and after reimbursement of
specified expenses will be distributed quarterly to the partners in proportion
to their respective partnership interests.
REIMBURSEMENT AGREEMENT. Pursuant to a reimbursement agreement among the
partners of the Partnerships, the Real Estate Trust and those of its
subsidiaries that are partners in the Partnerships have agreed to reimburse Saul
Centers and the other partners in the event the Partnerships fail to make
payments with respect to certain portions of the Partnerships' debt obligations
and Saul Centers or any such other partners personally make payments with
respect to such debt obligations. At the date of the Formation Transactions, the
maximum potential obligations of the Real Estate Trust and its subsidiaries
under this agreement totalled $116.1 million. See Note 2 to the Consolidated
Financial Statements in this Prospectus. The Real Estate Trust believes that the
Partnerships will be able to make all payments due with respect to their debt
obligations.
TAX CONFLICTS. The fair market value of each of the properties contributed
to the Partnerships by the Real Estate Trust and its subsidiaries at the date of
the Formation Transactions (the "FMV" of each such property) exceeded the tax
basis of such property (with respect to each property, such excess is referred
to as the "FMV-Tax Difference"). In the event Saul Centers, as general partner
of the Partnerships, causes the Partnerships to dispose of, or there is an
involuntary disposition of, one or more of such properties, a disproportionately
large share of the total gain for federal income tax purposes would be allocated
to the Real Estate Trust or its subsidiaries as a result of the property
disposition. In general, if the gain recognized by the Partnerships on such a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), all such gain will be allocated to the
Real Estate Trust or its subsidiaries. To the extent the gain recognized by the
Partnerships on the property disposition exceeds the FMV-Tax Difference (as
adjusted), such excess generally will be allocated among all partners in Saul
Holdings based on their relative percentage interests. In general, the amount of
federal income tax liability in respect of gain allocated to the Real Estate
Trust or its subsidiaries in the event of such a property disposition is likely
to exceed, perhaps substantially, the amount of cash, if any, distributable to
the Real Estate Trust or its subsidiaries as a result of the property
disposition. In addition, future reductions in the level of the Partnerships'
debt, any release of the guarantees of such debt by the Real Estate Trust or its
subsidiaries (described above under "Reimbursement Agreement") or any
refinancings in which the Real Estate Trust or its subsidiaries do not assume a
comparable obligation to that contained in the Reimbursement Agreement could
cause the Real Estate Trust or its subsidiaries to have taxable constructive
distributions without the receipt of any corresponding amounts of cash. See Note
2 to the Consolidated Financial Statements in this Prospectus.
SAUL CENTERS REGISTRATION RIGHTS. Saul Centers has granted the Real Estate
Trust and the Trust Affiliates certain "demand" and "piggyback" registration
rights (collectively, the "Saul Centers Registration Rights") with respect to
the shares of Saul Centers common stock acquired in connection with the
Formation Transactions or as a consequence of exercise of the Rights (the "Saul
Centers Registration Shares"). Subject to certain limitations, the Saul Centers
Registration Rights grant the holders of Saul Centers Registration Shares the
opportunity to register all or any portion of their respective Saul Centers
Registration Shares once in each calendar year and to have such Shares
registered incidentally to any registration, by Saul Centers, of shares of
common stock or other securities substantially similar to common stock. Except
with respect to the Saul Centers Registration Rights incident to a pledge of
Saul Centers Registration Shares or Saul Holdings Partnership interests, the
demand Saul Centers Registration Rights may be exercised only after the transfer
restrictions imposed in connection with the Saul Centers initial public offering
have lapsed and prior to such time, if any, as the holder is permitted to sell
the Saul Centers Registration Shares pursuant to Rule 144(k) under the
Securities Act. Saul Centers will bear expenses incident to its registration
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<PAGE>
obligations upon exercise of the Saul Centers Registration Rights, except that
it will not bear any underwriting discounts or commissions, Commission or state
Blue Sky registration fees, or transfer taxes relating to registration of Saul
Centers Registration Shares.
COMPETITION
As an owner of, or investor in, commercial real estate properties, the Real
Estate Trust 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 upon the
geographic location of the property, the performance of property managers, the
amount of new construction in the area and the maintenance and appearance of the
property. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities such as parking, and the ability to provide rent concessions
and additional tenant improvements without increasing rent. Management believes
that general economic circumstances and trends and new properties in the
vicinity of each of the Real Estate Trust's properties also will be competitive
factors.
ENVIRONMENTAL MATTERS
The Real Estate Trust's properties are subject to various laws and
regulations relating to environmental and pollution controls. Although the
effect upon the Real Estate Trust of the application of such laws and
regulations cannot be predicted with certainty, management believes that their
application either prospectively or retrospectively will not have a material
adverse effect on the Real Estate Trust's property operations. As a matter of
policy, the Real Estate Trust requires an environmental study to be performed
with respect to a property that may be subject to possible environmental hazards
prior to its acquisition to ascertain there are no material environmental
hazards associated with such property.
RELATIONSHIPS WITH B. F. SAUL COMPANY
The Real Estate Trust has significant relationships with the Saul Company
and two of the Saul Company's subsidiaries, B.F. Saul Advisory Company (the
"Advisor") and Franklin Property Company ("Franklin"). The Saul Company, founded
in 1892, specializes in real estate investment, financing and management
services, including acquisitions, management and leasing and insurance. B.
Francis Saul II, Chairman of the Board of Trustees and Chief Executive Officer
of the Trust, is Chairman and President of the Saul Company.
The Advisor acts as the Real Estate Trust's investment advisor and carries
on the day-to-day general management, financial, accounting, legal and
administrative affairs of the Real Estate Trust. Franklin acts as leasing and
management agent for most of the income-producing properties owned by the Real
Estate Trust, and plans and oversees the development of new properties and the
expansion and renovation of existing properties.
The Trustees, including the two independent Trustees, review the fees and
compensation arrangements between the Trust and the Saul Company and its related
entities and affiliates and believe that such fees and compensation arrangements
are as favorable to the Trust as would be obtainable from unaffiliated sources.
See "Related Party Transactions."
HOLDING COMPANY REGULATION
The Trust and the Saul Company, by virtue of their direct and indirect
control of the Bank (see "Security Ownership"), are "savings and loan holding
companies" subject to comprehensive regulation, examination and supervision by
the OTS. The Bank is prohibited from making or guaranteeing loans or advances to
or for the benefit of the Trust, the Saul Company or other affiliates engaged in
activities beyond those permissible for bank holding companies and from
investing in the securities of the Trust, the Saul Company or other affiliates.
Further, transactions between Chevy Chase and the Trust or the Saul Company must
be on terms substantially the same, or at least as favorable to Chevy Chase, as
those that would be available to non-affiliates.
The Trust and the Saul Company must obtain the prior approval of the OTS
before acquiring any federally insured savings institution or any savings and
loan holding company by merger, consolidation or purchase of assets. As unitary
savings and loan holding companies, the Trust and the Saul Company are virtually
unrestricted in the types of business activities in which they may engage,
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provided the Bank continues to meet the qualified thrift lender test. See
"Regulation -- Qualified Thrift Lender ("QTL") Test." If the Trust and the Saul
Company were to acquire one or more federally insured institutions and operate
them as separate subsidiaries rather than merging them into Chevy Chase, the
Trust and the Saul Company would become "multiple" savings and loan holding
companies. As multiple savings and loan holding companies, the Trust and the
Saul Company would be subject to limitations on the types of business activities
in which they would be permitted to engage, unless the additional thrifts were
troubled institutions acquired pursuant to certain emergency acquisition
provisions and all subsidiary thrifts met the QTL test. The Trust and the Saul
Company may acquire and operate additional savings institution subsidiaries
outside of Maryland and Virginia only if the laws of the target institution's
state specifically permit such acquisitions or if the acquisitions are made
pursuant to emergency acquisition provisions.
In 1988, the Trust and the Saul Company entered into the Capital Maintenance
Agreement with the FDIC's predecessor agency, the FSLIC, in which they agreed to
maintain Chevy Chase's regulatory capital at the required levels and, if
necessary, to infuse additional capital to enable Chevy Chase to meet those
requirements. The agreement provides that it is binding on the "successors and
assigns" of the Trust and the Saul Company. Since the execution of that
agreement, the OTS has changed its policy and now accepts more limited
agreements from those acquiring thrift institutions. In addition, the regulatory
capital requirements applicable to Chevy Chase have changed significantly as a
result of FIRREA. The OTS has stated that capital maintenance agreements entered
into prior to such modification of OTS policy and the enactment of FIRREA were
not affected by such changes. The Trust and the Saul Company have not sought to
modify or terminate the existing agreement.
Following the Bank's failure to meet its risk-based capital requirement in
June 1991, the OTS advised the Trust that, based on the Trust's liquidity
position, the OTS did not plan to enforce the Trust's obligations under the
Capital Maintenance Agreement at that time. Subsequently, at September 30, 1992,
the Bank returned to capital compliance. However, to the extent the Bank is
unable to meet its regulatory capital requirements in the future, the OTS could
seek to enforce the Trust's obligations under the Agreement. The Bank's business
plan does not contemplate any future capital contributions from the Trust.
OTS regulations require the Trust and Saul Company, as parties to a capital
maintenance agreement, to file a notice with the OTS prior to "divestiture" of
the Bank for the purpose of determining whether there is any outstanding
obligation under such agreement. If the OTS were to determine that an
outstanding obligation existed, approval of the divestiture likely would be
conditioned upon the satisfaction of such obligation.
If the Bank becomes "undercapitalized" under the OTS prompt corrective
action regulations, it would be required to file a capital restoration plan with
OTS setting forth, among other things, the steps the Bank would take to become
"adequately capitalized." The OTS could not accept the plan unless the Trust and
the Saul Company guaranteed in writing the Bank's compliance with that plan. The
aggregate liability of the Trust and the Saul Company under such a commitment
would be limited to the lesser of (i) an amount equal to 5.0% of the Bank's
total assets at the time the Bank became undercapitalized and (ii) the amount
necessary to bring the Bank into compliance with all applicable capital
standards as of the time the Bank fails to comply with its capital plan. If
either of the holding companies did not provide the guarantee, the Bank would be
subject to the more restrictive supervisory actions applicable to significantly
undercapitalized institutions.
In the event of a bankruptcy proceeding involving the Trust, any outstanding
obligations of the Trust under either the Capital Maintenance Agreement or a
guarantee, if any, of the Bank's capital restoration plan, as discussed above,
would have priority in such a proceeding over the claims of the Trust's general
unsecured creditors (other than certain tax, wage and employee benefit and other
claims that are given priority in bankruptcy proceedings), including the claims
of secured creditors to the extent that the collateral securing their claims
were insufficient to satisfy the entire amount of their claim.
In a bankruptcy under Chapter 11 of the Bankruptcy Code, the Trust, as
debtor-in-possession, or its bankruptcy trustee would be required to cure
immediately any deficit under the Capital Maintenance Agreement or any capital
restoration plan guarantee and thereafter to perform all of the Trust's
obligations with respect thereto, and any subsequent breach of such obligations
would give rise to a priority
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<PAGE>
claim in favor of the OTS in the Trust's bankruptcy proceedings. The United
States Court of Appeals for the Fourth Circuit (the federal jurisdiction in
which the Trust and the Bank are headquartered and conduct substantial business
activities) has held that a company must fulfill its obligations under any net
worth maintenance commitments before it may reorganize under Chapter 11.
BANKING
MARKET AREA
The Bank's principal deposit and lending markets are located in the
Washington, D.C. metropolitan area. Service industries and federal, state and
local governments employ a significant portion of the Washington, D.C. area
labor force, while a substantial number of the nation's 500 largest corporations
have some presence in the area. The Washington, D.C. area's seasonally
unadjusted unemployment rate is generally below the national rate and was 4.1%
in November 1993, compared to the national rate of 6.1%.
Chevy Chase historically has relied on retail deposits originated in its
branch network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and, to a lesser extent, Fairfax County in
Virginia. Approximately 25.3% of the Bank's deposits at December 31, 1993 were
obtained from depositors residing outside of Maryland, primarily in Northern
Virginia. Chevy Chase ranked second to a commercial bank for the largest market
share of deposits in Montgomery County at June 30, 1993, according to published
industry statistics. The per capita income of Montgomery and Fairfax Counties
ranks among the highest of counties and equivalent jurisdictions nationally.
These two counties are also the Washington, D.C. area's largest suburban
employment centers, with a substantial portion of their labor force consisting
of federal, state and local government employees. Private employment is
concentrated in services and retail trade centers. Unemployment in both
Montgomery and Fairfax Counties in November 1993 (3.2% and 2.9%, respectively)
was below the national and state rates for the same month.
The Bank historically has concentrated its lending activities in the
Washington, D.C. metropolitan area. See "Lending Activities."
INVESTMENTS AND OTHER SECURITIES
The Bank is required by OTS regulations to maintain a specific minimum
amount of liquid assets and short-term liquid assets invested in certain
qualifying types of investments. See "Regulation -- Liquidity Requirements." To
meet these requirements, the Bank maintains a portfolio of cash, federal funds
and Agency mortgage-backed securities with final maturities of five years or
less. The balance of investments in excess of regulatory requirements reflects
management's objective of maintaining liquidity at a level sufficient to assure
adequate funds to meet expected and unexpected balance sheet fluctuations.
Effective October 1, 1993, the Bank adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." At December 31, 1993, all
investment securities and mortgage-backed securities held by the Bank are
classified as available-for-sale and reported at fair value. See "Summary of
Significant Accounting Policies -- The Bank" in the Notes to the Consolidated
Financial Statements in this Prospectus.
The OTS has adopted guidelines governing investment securities held by
SAIF-insured institutions. The guidelines require that investments in securities
be accounted for in accordance with GAAP, summarize the applicable accounting
principles and provide guidance regarding the application of GAAP in determining
whether securities are properly classified as held-to-maturity,
available-for-sale or trading.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At December 31, 1993, the Bank's loan portfolio
totaled $2.8 billion, which represented 54.2% of its total assets. (All
references in this Offering Memorandum to the Bank's "loan portfolio" refer to
loans, whether they are held for sale and/or securitization or for investment,
unless the context otherwise indicates.) Loans collateralized by single-family
residences constituted 53.7% of the loan portfolio at that date.
The following table sets forth information concerning the Bank's loan
portfolio (net of unfunded commitments) for the periods indicated.
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LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------------------------------
DECEMBER 31, 1993 1993 1992 1991 1990
------------------ ------------------ ------------------ ------------------ ------------------
% OF % OF % OF % OF % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential (1)........... $1,418,708 49.9% $1,287,333 53.6% $ 933,867 41.6% $1,345,409 41.7% $1,031,628 32.2%
Home equity (1)........... 107,972 3.8 60,549 2.5 223,148 9.9 289,976 9.0 711,363 22.2
Commercial and
multifamily.............. 99,037 3.5 94,079 3.9 61,522 2.7 69,097 2.1 89,759 2.8
Real estate construction
and ground............... 73,095 2.6 62,637 2.6 92,215 4.1 133,852 4.2 277,061 8.6
Credit card (1)........... 953,647 33.5 754,520 31.4 872,672 38.9 1,302,008 40.4 883,722 27.6
Automobile................ 150,899 5.3 106,725 4.4 19,910 0.9 16,924 0.5 115,083 3.6
Other..................... 40,802 1.4 38,048 1.6 42,019 1.9 67,659 2.1 96,476 3.0
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
2,844,160 100.0 2,403,891 100.0% 2,245,353 100.0% 3,224,925 100.0% 3,205,092 100.0%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
------ ------ ------ ------ ------
Less:
Unearned premiums and
discounts.............. 1,636 1,543 2,589 6,002 7,037
Deferred loan
origination fees
(costs),net............ (6,521) (3,472) 1,889 6,612 7,721
Reserve for loan
losses................. 66,940 68,040 78,818 89,745 58,339
---------- ---------- ---------- ---------- ----------
62,055 66,111 83,296 102,359 73,097
---------- ---------- ---------- ---------- ----------
Total loans
receivable........... $2,782,105 $2,337,780 $2,162,057 $3,122,566 $3,131,995
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<CAPTION>
SEPTEMBER 30,
------------------
1989
------------------
% OF
BALANCE TOTAL
---------- ------
<S> <C> <C>
Residential (1)........... $ 900,528 27.1%
Home equity (1)........... 602,447 18.1
Commercial and
multifamily.............. 103,413 3.1
Real estate construction
and ground............... 312,958 9.4
Credit card (1)........... 1,262,388 37.9
Automobile................ 60,468 1.8
Other..................... 84,834 2.6
---------- ------
3,327,036 100.0%
---------- ------
------
Less:
Unearned premiums and
discounts.............. 9,354
Deferred loan
origination fees
(costs),net............ 13,534
Reserve for loan
losses................. 41,934
----------
64,822
----------
Total loans
receivable........... $3,262,214
----------
----------
<FN>
- ------------------------------
(1) Includes loans held for sale and/or securitization.
</TABLE>
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The Bank will continue to adjust the composition of its loan portfolio in
response to regulatory capital and qualified thrift lender requirements.
CONTRACTUAL PRINCIPAL REPAYMENTS OF LOANS. The following table shows the
scheduled contractual principal repayments of the Bank's loans at September 30,
1993. The entire balance of loans held for sale and/or securitization is shown
in the year ending September 30, 1994 because such loans are expected to be sold
in less than one year.
CONTRACTUAL PRINCIPAL REPAYMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL APPROXIMATE PRINCIPAL REPAYMENTS
BALANCE DUE IN YEARS ENDING SEPTEMBER 30,
OUTSTANDING -----------------------------------------------------------------------------
AT SEPTEMBER 1997- 1999- 2004- 2009 AND
30, 1993 (1) 1994 1995 1996 1998 2003 2008 THEREAFTER
------------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................... $ 1,111,306 $ 16,271 $ 25,756 $ 28,912 $ 55,125 $ 150,179 $ 138,564 $ 696,499
Home equity..................... 60,549 2,277 1,045 3,296 9,370 274 10,631 33,656
Commercial and multifamily...... 94,079 71,655 3,328 3,064 3,555 6,022 6,455 --
Real estate construction and
ground......................... 62,637 33,842 27,610 1,185 -- -- -- --
Credit card (2)................. 454,520 82,442 67,489 59,372 83,607 103,181 36,949 21,480
Other........................... 144,773 44,651 34,427 35,092 23,453 2 2 7,146
Loans held for sale............. 176,027 176,027 -- -- -- -- -- --
Loans held for securitization
and sale....................... 300,000 300,000 -- -- -- -- -- --
------------- --------- --------- --------- --------- --------- --------- -----------
Total loans receivable
(3)........................ $ 2,403,891 $ 727,165 $ 159,655 $ 130,921 $ 175,110 $ 259,658 $ 192,601 $ 758,781
------------- --------- --------- --------- --------- --------- --------- -----------
------------- --------- --------- --------- --------- --------- --------- -----------
Fixed-rate loans................ $ 308,389 $ 43,374 $ 40,045 $ 44,931 $ 47,028 $ 64,054 $ 17,557 $ 51,400
Adjustable-rate loans........... 1,619,475 207,764 119,610 85,990 128,082 195,604 175,044 707,381
Loans held for sale............. 176,027 176,027 -- -- -- -- -- --
Loans held for securitization
and sale....................... 300,000 300,000 -- -- -- -- -- --
------------- --------- --------- --------- --------- --------- --------- -----------
Total loans receivable
(3)........................ $ 2,403,891 $ 727,165 $ 159,655 $ 130,921 $ 175,110 $ 259,658 $ 192,601 $ 758,781
------------- --------- --------- --------- --------- --------- --------- -----------
------------- --------- --------- --------- --------- --------- --------- -----------
<FN>
- ------------------------------
(1) Of the total amount of loans outstanding at September 30, 1993 which were
due after one year, an aggregate principal balance of approximately $265.0
million had fixed interest rates and an aggregate principal balance of
approximately $1.4 billion had adjustable interest rates.
(2) Estimated repayments of credit card loans reflect the required minimum
payments.
(3) Before deduction of reserve for loan losses, unearned discounts and
deferred loan origination fees (costs).
</TABLE>
Actual payments may not reflect scheduled contractual principal repayments
due to the effect of loan refinancings, prepayments and enforcement of
due-on-sale clauses, which give the Bank the right to declare a "conventional
loan," one that is neither insured by the Federal Housing Administration ("FHA")
nor partially guaranteed by the Veterans' Administration ("VA"), immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. Although the Bank's
single-family residential loans historically have had stated maturities of
generally 30 years, such loans normally have remained outstanding for
substantially shorter periods because of these factors. At September 30, 1993,
$43.4 million of fixed-rate loans and $207.8 million of adjustable-rate loans
were contractually due to be repaid within one year.
ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS. The following table
shows changes in the composition of the Bank's real estate loan portfolio and
the net change in mortgage-backed securities.
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ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------------
1993 1993 1992 1991
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Real estate loan originations and purchases: (1)
Residential and home equity......................... $ 615,578 $ 1,758,484 $ 1,246,367 $ 1,120,461
Commercial and multifamily.......................... 4,958 42,718 5,350 --
Real estate construction and ground................. 8,662 41,675 40,943 44,302
------------ -------------- ------------- --------------
Total originations and purchases.................... 629,198 1,842,877 1,292,660 1,164,763
------------ -------------- ------------- --------------
Principal repayments................................ (114,540) (346,645) (251,865) (284,519)
Sales (2)........................................... (178,777) (785,255) (568,955) (795,993)
Loans transferred to real estate acquired in
settlement of loans or in-substance foreclosures... 13,808 (23,158) (43,046) (177,582)
Other............................................... -- -- (1,809) (2,685)
------------ -------------- ------------- --------------
(279,509) (1,155,058) (865,675) (1,260,779)
Transfers to mortgage-backed securities (3)......... (155,475) (493,973) (954,567) (175,461)
------------ -------------- ------------- --------------
Increase (decrease) in real estate loans............ $ 194,214 $ 193,846 $ (527,582) $ (271,477)
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
<FN>
- ------------------------
(1) Excludes unfunded commitments.
(2) Includes securitization and sale of home equity credit line receivables of
$340.4 million, $253.6 million and $600.1 million for the years ended
September 30, 1993, 1992 and 1991, respectively.
(3) Represents real estate loans which were pooled and exchanged for FHLMC,
FNMA, GNMA and private label, AA-rated mortgage-backed securities.
</TABLE>
As a federally chartered savings institution, the Bank has general authority
to make loans secured by real estate located throughout the United States.
Although in the past the Bank has made loans secured by properties located
outside of its primary market area, approximately 94.0% of the Bank's real
estate loans at December 31, 1993 by principal balance were secured by
properties located in Maryland, Virginia or the District of Columbia.
The Bank originates VA, FHA and a wide variety of conventional residential
mortgage loans through its wholly-owned mortgage banking subsidiary, B. F. Saul
Mortgage Company. Commercial, real estate construction and ground and home
equity credit line loans are originated directly by the Bank.
In the latter part of fiscal 1990, the Bank began developing a wholesale
network of correspondents, including loan brokers and financial institutions, in
order to supplement its direct origination of single-family adjustable-rate
residential mortgage loans in the Washington, D.C. metropolitan area. The loans
are originated or purchased on a "flow" basis, with some loans settling directly
in the Bank's name and some loans purchased by the Bank after settlement in the
name of the correspondents. The Bank determines the specific loan products and
rates under which the correspondents originate the loans, and subjects the loans
to the Bank's underwriting criteria and review. During the three months ended
December 31, 1993 and the year ended September 30, 1993, approximately $97.5
million and $259.8 million, respectively, of loans settled under the
correspondent program. The Bank intends to continue to develop its wholesale
network.
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Loan sales provide the Bank with liquidity and additional funds for lending,
enabling the Bank to increase the volume of loans originated and thereby
increase loan interest and fee income, and in recent periods have produced
additional non-interest income in the form of gains on sales of loans. In the
three months ended December 31, 1993 and in fiscal 1993, sales of mortgage loans
originated or purchased for sale by the Bank totaled $324.5 million and $853.0
million, respectively. The marketability of loans, loan participations and
mortgage-backed securities depends on purchasers' investment limitations,
general market and competitive conditions, mortgage loan demand and other
factors. The Bank originates fixed-rate, single-family, long-term loans on terms
which conform to the FHLMC and the FNMA guidelines in order to ensure their
saleability in the public secondary mortgage market. In order to manage its
interest-rate exposure, the Bank hedges its fixed-rate mortgage loan pipeline by
entering into whole loan and mortgage-backed security forward sale commitments.
Sales of residential mortgage loans are generally made without recourse to the
Bank. At December 31, 1993 and September 30, 1993, the Bank had $211.5 million
and $176.0 million, respectively, of single-family residential loans held for
sale to investors.
When the Bank sells a whole loan or loan participation and retains
servicing, or purchases mortgage servicing rights from third parties, it
continues to collect and remit loan payments, inspect the properties, make
certain insurance and tax payments on behalf of borrowers and otherwise service
the loans. The normal servicing fee, generally ranging from 0.25% to 0.50% of
the outstanding loan principal amount per annum, is recognized as income over
the life of the loans. The Bank also typically derives income from temporary
investment for its own account of loan collections pending remittance to the
participation or whole loan purchaser. At December 31, 1993, the Bank was
servicing residential permanent loans totaling $1.8 billion for other investors.
SALES OF MORTGAGE-BACKED SECURITIES. A significant portion of the Bank's
sales of mortgage-backed securities involve sales pursuant to the Bank's normal
mortgage banking operations. In accordance with SFAS 115, effective October 1,
1993, such mortgage-backed securities are classified as trading securities.
Generally, the Bank's policy is to sell its fixed-rate mortgage production
which, in the case of most conforming fixed-rate loans, is accomplished by first
pooling such loans into mortgage-backed securities. The mortgage-backed
securities sold as part of the Bank's mortgage banking operations are generally
issued in the same month as the sale of such securities. The securities are
formed from conforming fixed-rate loans originated for sale or from fixed-rate
loans resulting from the borrower's election to convert from a variable-rate
loan to a fixed-rate loan. As a result, prior to October 1, 1993, the
Consolidated Statements of Cash Flows in this Prospectus reflect significant
proceeds from the sales of mortgage-backed securities held for sale even though
there are no balances of mortgage-backed securities to report as held for sale.
In addition, for the three months ended December 31, 1993, the Consolidated
Statements of Cash Flows reflect proceeds from sales of trading securities even
though there are no balances of trading securities to report as held for sale.
Instead, these fixed-rate loans are designated as held for sale in the
Consolidated Balance Sheets in this Prospectus.
Sales of mortgage-backed securities from the Bank's investment portfolio
during fiscal years 1991, 1992 and 1993 generally were effected in connection
with the Bank's restructuring of its balance sheet in response to a variety of
factors. Prior to October 1, 1993, when management determined that certain
securities would be sold, such securities were reclassified from the investment
category to the held for sale category. Such transfers are shown as supplemental
information in the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements in this Prospectus. In March 1991, the Bank
sold $323.3 million of variable-rate mortgage-backed securities, which
constituted all variable-rate mortgage-backed securities then owned by the Bank.
The sale of these securities occurred primarily to offset the regulatory capital
impact of the Bank's decision to increase its reserves for losses by $29.9
million in the March 1991 quarter and to permit the Bank to remain in compliance
with its minimum risk-based capital requirement.
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<PAGE>
In September 1991, the Bank sold $303.3 million of mortgage-backed
securities acquired in June 1991. The securities had been acquired with borrowed
funds in anticipation of a contemplated sale of assets designed to improve the
Bank's regulatory capital levels. The contemplated sale subsequently was
determined not to be in the best long-term interests of the Bank.
In the June 1992 quarter, the Bank sold its remaining $438.4 million of
long-term fixed-rate mortgage-backed securities. The sale was designed to
mitigate the effects on the Bank's capital levels of an increase in the Bank's
reserves for losses on real estate and real estate-related charge-offs taken in
the same quarter. The Bank subsequently classified the securities sold in June
1992 as held for sale as of March 31, 1992.
In the second quarter of fiscal 1993, the Bank sold its entire portfolio of
seven-year balloon fixed-rate mortgage-backed securities, totaling $127.8
million, primarily to provide the Bank with flexibility under the Bank's
previous asset growth limitations imposed by its various agreements with the OTS
to permit increased mortgage loan origination activity resulting from low market
interest rates and in order to reduce its exposure to possible future increases
in long-term interest rates. The Bank subsequently classified such
mortgage-backed securities as held for sale as of December 31, 1992.
The earlier sales of mortgage-backed securities from the Bank's investment
portfolio were for reasons related to its capital position and growth
limitations and in furtherance of its asset and liability management objectives.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank originates a
variety of loans secured by single-family residential structures, which are
structures consisting of up to four separate dwelling units. At December 31,
1993, $1.5 billion (or 53.7%) of the Bank's loan portfolio consisted of loans
secured by first or second mortgages on such properties, including $66.6 million
of FHA-insured or VA-guaranteed loans.
Chevy Chase currently offers fixed-rate loans with maturities of 15 to 30
years and adjustable-rate residential mortgage loans ("ARMs"), principally with
maturities of 30 years. At December 31, 1993, 16.0% of the Bank's loans
consisted of ARMs and home equity credit line loans scheduled to have interest
rate adjustments within one year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Banking
- -- Asset and Liability Management." The interest rates on these loans (other
than the interest rates on home equity credit line loans) generally are adjusted
annually based on changes in the applicable interest rate index. Interest rates
on the majority of the Bank's ARMs are adjusted based on changes in yields on
U.S. Treasury securities of varying maturities, primarily one year. The interest
rate adjustment provisions of the Bank's ARMs contain limitations on the
frequency and maximum amount of interest rate adjustments, although such
limitations are not required by law. These limitations are determined by a
variety of factors, including mortgage loan competition in the Bank's markets.
The ARMs currently offered by the Bank are generally subject to a limitation on
the annual increase in the interest rate of 2.0% and a limitation on the
increase over the term of the loan of from 6.0% to 9.0%.
In the past, the Bank has originated six-month ARMs with a negative
amortization feature. Interest is accrued at the coupon rate (which adjusts
every six months), with differences between interest computed at the coupon rate
and interest computed at the payment rate capitalized to the loan balance. At
December 31, 1993, the balance of such loans was $73.8 million, of which $1.9
million represented deferred interest capitalized to the loan balance. The Bank
does not currently originate loans which have a negative amortization feature.
Consistent with its commitment to serve local communities, including low-and
moderate-income areas and borrowers, the Bank established the Chevy Chase
Community Development Loan Fund in March 1993. The fund provided $25.0 million
of below-market rate mortgage financing to low-income and moderate-income
families in the Washington, D.C. metropolitan area. In October 1993, the Bank
committed $1.0 million to the Prince George's County Revitalization Fund, a fund
dedicated to
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<PAGE>
providing assistance to small businesses located inside the Washington, D.C.
Beltway. In December 1993, the Bank committed $20.0 million to the First Time
Home Buyers Program to be implemented in conjunction with Washington, D.C.'s
Home Purchase Assistance Program and Employer Assisted Housing Program. This
fund provides assistance with closing costs to first-time home buyers.
The Bank's home equity credit line loan provides revolving credit secured
principally by a second mortgage on the borrower's home. Home equity credit line
loans bear interest at a variable rate that adjusts quarterly based on changes
in the applicable interest rate index and generally are subject to a maximum
annual interest rate of between 18.0% and 24.0%. In order to promote its home
equity credit line loan program, the Bank currently offers prospective borrowers
a below-market interest rate for an introductory period and settlement without
closing costs.
Securitizations of home equity credit line receivables have been an integral
element of the Bank's strategies to enhance liquidity, to further asset and
liability management objectives and to maintain compliance with regulatory
capital requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Banking." The Bank
transferred $340.4 million, $253.6 million and $600.1 million of home equity
credit line receivables in fiscal 1993, fiscal 1992 and fiscal 1991,
respectively, to trusts for securitization and sale to investors. Gains of $16.8
million, $15.1 million and $25.8 were recognized by the Bank as a result of
these transactions. The Bank continues to service the underlying accounts.
COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING. In its past four fiscal
years, the Bank has deemphasized permanent commercial real estate loans, land
acquisition and land development loans, and loans for construction of commercial
income-producing properties. This type of lending generally is considered to
involve a higher level of risk than single-family mortgages or other consumer
lending due to the concentration of principal in a limited number of loans and
borrowers. However, beginning in fiscal 1993, the Bank provides financing
generally at market rates, to certain purchasers of its commercial REO.
Additionally, the Bank continues to finance the construction of residential real
estate, principally single-family detached homes and townhouses, but generally
only after a home is sold by the builder to a consumer.
Aggregate balances of residential construction, commercial construction,
ground and commercial and multifamily loans increased 9.8% in the three months
ended December 31, 1993 to $172.1 million from $156.7 million at September 30,
1993.
CREDIT CARD LENDING. Since June 1985, Chevy Chase has been providing retail
credit through its credit card program, which offers VISA-R- and MasterCard-R-
credit cards. Chevy Chase's credit card loan portfolio accounted for 33.5% of
Chevy Chase's total loans at December 31, 1993. According to statistics
published in AMERICAN BANKER, Chevy Chase is the third largest issuer of credit
cards among thrift institutions, based on total credit card loans outstanding.
At December 31, 1993, credit card loans outstanding totaled $953.6 million and
managed credit card receivables, including receivables owned by the Bank and
receivables securitized, sold and serviced by the Bank, totaled $1.7 billion.
The Bank's revenue related to the credit card portfolio is derived primarily
from interest income, fees on its credit card accounts and interchange income.
The Bank has emphasized credit card lending in recent years because the
shorter term and normally higher interest rates on such loans help it maintain a
profitable spread between its average loan yield and its cost of funds. In
addition, credit card accounts typically may be sold at a premium over their
receivables balances, thus further enhancing their potential value to the Bank.
Chevy Chase also believes its credit card program contributes to market share
growth in its local markets by attracting new depositors, promoting a high
degree of customer loyalty and providing opportunities to cross-market other
products of the Bank. For this reason, the Bank has not sold any credit card
accounts maintained by cardholders having addresses in Maryland, Virginia or the
District of Columbia, the Bank's primary market area.
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The Bank historically has obtained new credit card accounts through direct
mailings and telemarketing. In November 1990, the Bank ceased active national
solicitation of new credit card accounts due in part to the significant initial
cost of acquiring accounts and the Bank's desire to enhance its capital
position. As a result of the improvement in the Bank's regulatory capital
ratios, in June 1993 the Bank reinstated the active national solicitation of new
credit card accounts in markets which the Bank considers to have favorable
demographic characteristics.
Chevy Chase's pricing methodology reflects a risk-based pricing approach
pursuant to which customers with better credit qualifications generally receive
more favorable pricing. Pricing parameters include a combination of the annual
percentage rate, annual membership fees and a rebate on sales exceeding
specified threshold levels. The Bank also offers promotional rates to certain
customers to encourage increased usage of the Bank's credit cards.
The credit card industry is highly competitive and characterized by
increasing use of advertising, target marketing, pricing competition in interest
rates and annual membership fees, and other features (such as buyer protection
plans), as both established and new credit card issuers seek to expand or to
enter the market. Management anticipates that competitive pressures will
continue to require adjustments from time to time to the pricing of the Bank's
credit card products.
Chevy Chase services the credit card portfolio from its offices located in
Maryland. Until May 1993, certain data processing and administrative functions
associated with the servicing of the credit card accounts were performed on
behalf of the Bank by the Atlantic States Bankcard Association ("ASBA") from its
facilities in Raleigh, North Carolina. In May 1993, ASBA was acquired by First
Data Resources Incorporated ("First Data Resources"). In October 1993, the Bank
converted its credit card processing to First Data Resources, which provides a
variety of data processing and administrative services to the Bank, including
processing and settlement of transactions, maintenance of individual cardholder
accounts, processing of cardholder statements and issuance of plastic cards. The
fee per account charged by First Data Resources to perform such services on
behalf of the Bank will generally be less than the fee per account formerly
charged by ASBA for comparable services.
Securitizations of credit card receivables and, in prior years, sales of
credit card relationships have been integral elements of the Bank's strategies
to enhance liquidity, to further asset and liability management objectives and
to maintain compliance with regulatory capital and "qualified thrift lender"
requirements. The Bank transferred $350.0 million, $280.0 million and $450.0
million of credit card receivables in fiscal 1993, fiscal 1992 and fiscal 1990,
respectively, to trusts for securitization and sale to investors. No gain or
loss was recognized by the Bank as a result of these transactions; however, the
Bank continues to service the underlying accounts, and excess servicing fees are
recognized over the related lives of the transactions. These excess servicing
fees represent the contractual interest and fees paid by the cardholders less
certificate interest paid to the certificateholders and administrative fees paid
to providers of services to the trusts. In fiscal 1992, 1991 and 1990, the Bank
sold, at a premium over their receivables balances of $14.9 million, $273.4
million and $646.0 million, respectively, 367,897 credit card relationships. No
such sales occurred during the three months ended December 31, 1993 or in fiscal
1993.
From time to time, regulation of credit card interest rates has been the
subject of legislative debate and concern among various consumer interest
groups. Although no interest rate caps have been enacted into law, publicity
resulting from these congressional actions could lead to increased consumer
demand for reduced credit card interest rates and interest rate regulation
provisions could be enacted in future legislation.
Changes in credit card use and payment patterns by cardholders, including
increased defaults, may result from a variety of social, legal and economic
factors. Economic factors affecting credit card use include the rate of
inflation and relative interest rates offered for various types of loans.
Adverse changes in economic conditions could have a direct impact on the timing
and amount of payments by borrowers. During times of economic recession, default
rates on credit card loans generally may be
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<PAGE>
expected to increase more rapidly than the default rates on residential mortgage
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Banking -- Asset Quality --
Delinquent Loans" and "-- Reserves for Losses."
Credit card loans are not subject to those provisions of federal laws and
regulations that limit to 35% of an institution's total assets the amount of
consumer loans that a federally chartered savings institution may make.
CONSUMER AND OTHER LENDING. Federal laws and regulations permit a federally
chartered savings institution to make secured and unsecured consumer loans up to
35% of the institution's total assets. In addition, a federally chartered
savings institution has lending authority above the 35% limit for certain
consumer loans which include, in addition to credit card loans, home
improvement, secured deposit account and educational loans.
Chevy Chase currently offers a variety of consumer loans other than credit
card loans, including automobile loans, overdraft lines of credit and unsecured
loans for traditional consumer purchases and needs. The Bank's portfolio of such
consumer loans totaled $191.7 million at December 31, 1993. Consumer and other
loans (other than credit card loans) accounted for 6.7% of total loans at
September 30, 1993.
REAL ESTATE LOAN UNDERWRITING. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. Credit approval is vested with the
Board of Directors and delegated to the Executive Loan Committee and certain
senior officers in accordance with the credit authorizations approved by the
Board of Directors. All construction and commercial real estate loans are
reviewed and approved by the Executive Loan Committee. Any significant loan not
conforming to the Bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer. All loans of $15 million or more
are presented to the Board of Directors for final approval.
The approval process for all types of real estate loans includes on-site
appraisals of the properties securing such loans and a review of the applicant's
financial statements and credit, payment and banking history, financial
statements of any guarantors, and tax returns of guarantors of construction and
commercial real estate loans. Appraisals supporting major construction and
commercial loans are generally performed by independent appraisers selected by
the Bank.
In an effort to minimize the increased risk of loss associated with
construction and development loans, Chevy Chase considers the reputation of the
borrower and the contractor, reviews pre-construction sale and leasing
information, and requires an independent inspecting engineer or architect to
review the progress of multifamily and commercial real estate projects. In
addition, the Bank generally requires personal guarantees of developers for all
development loans and, if a general contractor is used by the developer, may
require the posting of a performance bond.
The Bank generally lends up to 95% of the appraised value of single-family
residential dwellings to be owner-occupied. The Bank also lends up to 85% of the
appraised value of the completed project to finance the construction of such
dwellings, and, on a case-by-case basis, the Bank may, on occasion, lend up to
90% of such appraised value when such financing is limited to pre-sold units.
The loan-to-value ratio generally applied by the Bank to commercial real estate
loans and multifamily residential loans has been 80% of the appraised value of
the completed project. In December 1992, the Bank reduced its acceptable
loan-to-value ratios for many types of commercial real estate loans and
increased the required preleasing levels and equity investment by the developer.
Currently, the Bank generally does not originate a second mortgage loan
(including a home equity credit line loan) if the aggregate loan-to-value ratio
of the second loan and the related first mortgage loan exceeds 80% of the
appraised value of the property. Loan-to-value ratios are determined at the time
a loan is originated. Consequently, subsequent declines in the values of the
security properties could expose the Bank to losses.
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<PAGE>
OTS regulations issued pursuant to FDICIA require savings institutions to
adopt internal real estate lending policies, including loan-to-value limitations
conforming to specific guidelines established by the OTS. The Bank's current
lending policies conform to these new regulations.
Under current OTS regulations, certain "high ratio" land loans and
non-residential construction loans are considered "equity investments." The
amount of the loan which exceeds an 80% loan-to-value ratio must be deducted
from capital. See "Regulation -- Regulatory Capital."
On all loans secured by real estate (other than certain home equity credit
line loans), Chevy Chase requires title insurance policies protecting the
priority of the Bank's liens. The Bank requires fire and casualty insurance for
permanent loans (including home equity credit line loans) and fire, casualty and
builders' risk insurance for construction loans. The borrower selects the
insurance carrier, subject to Chevy Chase's approval. Generally, for any
residential loan in an amount exceeding 80% of the appraised value of the
security property, Chevy Chase currently requires mortgage insurance from an
independent mortgage insurance company. The majority of the Bank's mortgage
insurance is placed with four carriers.
Substantially all fixed-rate mortgage loans originated by the Bank contain a
"due on sale" clause providing that the Bank may declare a loan immediately due
and payable in the event, among other things, that the borrower sells the
property securing the loan without the consent of the Bank. The Bank's ARMs
generally are assumable.
CREDIT CARD LOAN UNDERWRITING. Prior to February 1993, the Bank generally
did not pre-approve accounts for its credit card loans. However, beginning with
the resumption of active solicitation of new accounts in February 1993, the Bank
generates new accounts through direct-mail and telemarketing solicitation
campaigns directed at individuals who have been preapproved. The Bank identifies
potential cardholders for preapproved solicitations by supplying a list of
credit criteria to a credit bureau, which generates a list of individuals who
meet such criteria. When the Bank receives an acceptance certificate from an
individual that received a preapproved solicitation, the Bank obtains a credit
report on such individual issued by an independent credit reporting agency, and
the credit limit and terms of the account are subject to certain post-screening
underwriting reviews performed by the Bank.
The Bank's underwriting approach to account approval supplements a
computerized credit scoring system with an individual evaluation of each
completed application for creditworthiness. In the underwriting process, the
Bank considers the prospective cardholder's income, credit history, outstanding
debt as a percentage of gross income and other factors intended to provide a
general indication of the applicant's willingness and ability to repay his
obligations. The Bank also reviews a credit report on each applicant issued by
an independent credit reporting agency and, for certain applicants,
independently verifies employment, income or other information contained in the
credit application.
If an application is approved, the Bank establishes an initial credit limit
on the cardholder's account based on the limit requested in the credit
application and the Bank's evaluation of the cardholder's creditworthiness. This
credit limit is adjusted from time to time based on the Bank's continuing
evaluation of the cardholder's repayment ability as evidenced by the
cardholder's payment history and other factors. The Bank also may increase the
credit limit at the cardholder's request after completion of an evaluation
comparable to that performed during the initial underwriting.
Management reviews credit losses on a monthly basis and adjusts its
underwriting standards as appropriate.
LOAN SERVICING. In addition to interest earned on loans, the Bank receives
income through servicing of loans and fees in connection with loan origination,
loan modification, late payments, changes of property ownership and for
miscellaneous services related to its loans. Loan servicing income, principally
servicing income earned on the Bank's securitized credit card, home equity
credit line and other consumer receivables portfolios, has been a source of
substantial earnings for the Bank
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in recent periods. At December 31, 1993, the Bank serviced $778.4 million,
$444.0 million and $23.2 million of securitized credit card, home equity credit
line and automobile loan receivables, respectively. Income from these activities
varies with the volume and type of loans made and sold.
The following table sets forth certain information relating to the Bank's
servicing income as of or for the periods indicated.
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
THREE MONTHS ENDED -------------------------------------------
DECEMBER 31, 1993 1993 1992 1991
------------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts of loans serviced for others at end of period
(1)................................................. $ 3,072,430 $ 3,423,578 $ 2,379,095 $ 2,771,534
Loan servicing fee income (2)........................ $ 15,111 $ 46,083 $ 39,924 $ 47,632
<FN>
- ------------------------
(1) The Bank's basis in its servicing rights at December 31, 1993, September
30, 1993, 1992 and 1991 was $40.6 million, $48.0 million, $42.6 million
and $46.8 million, respectively.
(2) In the three months ended December 31, 1993 and each of the years ended
September 30, 1993, 1992 and 1991, loan servicing fee income as a
percentage of net interest income before provision for loan losses was
38.3%, 25.4%, 21.2% and 29.4%, respectively.
</TABLE>
The Bank earns fees in connection with the servicing of home equity credit
line loans, credit card loans, automobile loans and single-family residential
mortgage loans. The Bank's level of servicing fee income increases or decreases
with increases or decreases in securitized and/or serviced balances of these
loan types. The Bank's level of servicing income for the fiscal year ended
September 30, 1992 reflected a decrease of $8.3 million related to a change in
the method of amortizing gains previously recognized on the securitization and
sale of home equity credit line receivables. The Bank's level of servicing fee
income declines upon repayment of assets previously securitized and sold and
repayment of mortgage loans serviced for others. As the Bank securitizes and
sells assets, purchases mortgage servicing rights, or sells mortgage loans and
retains the servicing rights on those loans, the level of servicing fee income
increases. During fiscal 1993, the Bank securitized and sold $340.4 million of
home equity credit line receivables and $350.0 million of credit card
receivables. Pursuant to these transactions, the Bank will continue to service
the underlying loans. The Bank did not securitize and sell any such receivables
during the three months ended December 31, 1993.
During the three months ended December 31, 1993 and in fiscal 1993, the Bank
purchased the rights to service approximately $0.1 million and $1.2 billion
principal amount of fixed-rate FHLMC and FNMA mortgages. During fiscal 1993, the
Bank sold approximately $1.2 million of previously purchased rights to service
mortgage loans with an aggregate principal balance of approximately $76.1
million. There were no sales of purchased mortgage servicing rights during the
three months ended December 31, 1993.
For the three months ended December 31, 1993 and the year ended September
30, 1993, the Bank sold the rights to service mortgage loans with an aggregate
principal balance of $151.5 million and $476.1 million, respectively, which were
originated by the Bank in connection with its mortgage banking activities.
The Bank's investment in loan servicing rights (including purchased mortgage
servicing rights and excess loan servicing assets), and the amortization of such
rights, are evaluated quarterly based on the discounted value of estimated
future net cash flows to be generated by the underlying loans. Changes in the
discounted value are recorded as amortization expense (in the case of purchased
mortgage servicing rights) or as a reduction of fee income (in the case of
excess loan servicing assets) in the period in which the change occurs. Several
estimates are used when determining the discounted value, the most significant
of which is the estimated rate of repayment of the underlying loans.
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Interest rates charged on new mortgage loans have declined in recent years,
resulting in high levels of mortgage refinance activity. This activity has
caused significant declines in loans serviced by the Bank as well as increases
in the estimated rates at which loans will repay in the future. As a result, the
rate of amortization of these rights was accelerated in fiscal 1993.
In addition to the Bank's acquisition of $1.2 billion principal amount of
mortgage loans, the Bank securitized and sold $340.4 million of home equity
credit lines during fiscal 1993. Because of these transactions and also because
of the increased repayment activity referred to above, during fiscal 1993,
purchased mortgage servicing rights amortization expense increased $10.5 million
and home equity credit line receivable servicing income decreased $3.8 million.
While management believes that its estimates of future repayment rates are
reasonable, there can be no assurance that future adjustments to the rate of
amortization will not be necessary.
The Bank's current origination fees on its single-family mortgage loans
generally range from 1.0% to 3.0% of the principal amount of the loan. Its
current origination fees on construction and multifamily residential and
commercial real estate loans generally range from 0.5% to 2.0% of the principal
amount of the loan.
Loan origination and commitment fees, and the related costs associated with
making the loans, are deferred in accordance with Statement of Financial
Accounting Standards No. 91, "Accounting for Nonrefundable Fees Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases." For fully
amortizing loans originated for the Bank's portfolio, the net deferred fees are
accreted to interest income over the estimated life of the loans using the
level-yield method. Fees deferred on revolving credit lines or loans which have
no scheduled amortization originated for the Bank's portfolio are accreted to
income over the estimated lives of the underlying loans using the straight-line
method, which is not materially different from the level-yield method.
Fees deferred on loans originated and held for sale are not accreted to
income but instead are used in determining the gain or loss on the sale of the
loans.
DELINQUENCIES, FORECLOSURES AND RESERVES FOR LOSSES
DELINQUENCIES AND FORECLOSURES. When a borrower fails to make a required
payment on a mortgage loan, the loan is considered delinquent and, after
expiration of the applicable cure period, the borrower is charged a late fee.
The Bank follows practices customary in the banking industry in attempting to
cure delinquencies and in pursuing remedies upon default. Generally, if the
borrower does not cure the delinquency within 90 days, the Bank initiates
foreclosure action. If the loan is not reinstated, paid in full or refinanced,
the security property is sold. In some instances, the Bank may be the purchaser.
Thereafter, such acquired property is listed in the Bank's account for real
estate acquired in settlement of loans until the property is sold. Deficiency
judgments generally may be enforced against borrowers in Maryland, Virginia and
the District of Columbia, but may not be available or may be subject to
limitations in other jurisdictions in which loans are originated by the Bank.
The total outstanding balances of credit card loans (the largest category of
the Bank's consumer loans) are contractually delinquent if the minimum payment
indicated on the cardholder's statement is not received by the due date
indicated on such statement. Efforts to collect contractually delinquent credit
card receivables currently are made by the Bank's service center personnel or
the Bank's designees. Collection activities include statement messages, formal
collection letters and telephone calls. The Bank may, at its option, enter into
arrangements with cardholders to extend or otherwise change payment schedules.
Delinquency levels are monitored by collection managers and information is
reported regularly to senior management. Accounts are charged off when they
become 180 days contractually delinquent, although the Bank continues to attempt
to collect balances due and, in some cases, may refer the accounts to outside
collection agencies.
106
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Financial Condition -- Banking -- Asset Quality -- Delinquent
Loans" for a discussion of the Bank's delinquent loan portfolio at December 31,
1993.
RESERVES FOR LOSSES. It is the Bank's policy to maintain adequate reserves
for estimated losses on loans and real estate. Generally, the reserves are based
on, among other things, historical loan loss experience, evaluation of economic
conditions in general and in various sectors of the Bank's customer base, and
periodic reviews of loan portfolio quality by Bank personnel. Reserves for
losses on loans and real estate are based on estimates of future losses. Actual
losses may vary from current estimates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Condition
- -- Banking -- Asset Quality -- Reserves for Losses."
The Bank's specific methods for establishing the appropriate levels of
reserves vary depending upon the assets involved. The Bank's reserve for credit
card loans is based on a number of factors, including historical charge-off and
repayment experience and the age of the portfolio. The Bank has developed a
static pool model to extrapolate its reserve needs based on an analysis of the
characteristics of the portfolio and trends at any particular time. In this
regard, the Bank considers historical charge-off information relative to
origination date, borrower profiles, age of accounts, delinquencies,
bankruptcies and other factors. Although industry standards are considered, they
are given comparatively less weight due to management's belief that comparisons
among different institutions' portfolios are potentially misleading because of
significant differences in underwriting standards, curing and re-aging
procedures and charge-off policies. Chevy Chase's policy is to charge off credit
card receivables when they become 180 days contractually delinquent. The Bank's
actual charge-off experience for credit card loans may vary from the levels
forecasted by the Bank's static pool model because credit card loans typically
are more sensitive to general economic conditions than certain other types of
loans. For example, an unforeseen decline in economic activity may result in
increased bankruptcy losses which the model is unable to forecast. Nevertheless,
because the Bank's model employs a rolling 12-month base, such unforeseen losses
are incorporated into the model as they occur and reserves are adjusted
accordingly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Banking -- Asset Quality --
Reserves for Losses."
The Bank's methods for determining the reserve for loans secured by real
estate vary depending on whether the loans are secured by residential homes or
by other real estate. For residential mortgage loans, management computes the
reserve by stratifying residential permanent loans on a state by state and
ownership (i.e., investor or homeowner) basis. After the residential permanent
portfolio has been stratified by state, historical loss ratios (as adjusted for
predictable or quantifiable trends, if known) for the specific states are
applied to delinquent loans. The sum of these calculations is the component
assigned to residential permanent loans. In the Bank's experience, this approach
has resulted in timely recognition of necessary reserves, which has been
supported by the Bank's favorable results on the ultimate disposition of the
underlying collateral.
The Bank assesses the adequacy of its general reserves for non-residential
(i.e., other than single-family residential) mortgage loans, REO and real estate
held for investment based primarily on an ongoing evaluation of individual
assets. This evaluation takes into consideration a variety of factors, including
cash flow analyses, independent appraisals, market studies, economic trends and
management's knowledge of the market and experience with particular borrowers.
The Bank obtains current appraisals when properties are classified as REO. The
Bank periodically reviews appraisals and orders new appraisals as appropriate
based on a number of factors, including the date of the previous appraisal,
changes in market conditions and regulatory requirements.
The Bank regularly reviews its overall loan portfolio consisting of
performing non-classified assets and, based on such review, establishes
additional reserves for losses.
107
<PAGE>
In addition to the general reserves described above, valuation allowances
are provided for individual loans where the ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
of the loan or guarantees, if applicable.
To date, sales of REO, non-residential mortgage loans and loans classified
as investments in real estate have resulted in no material additional aggregate
loss to the Bank above the amounts already reserved. However, these results do
not necessarily assure that the Bank will not suffer losses in the future beyond
its level of reserves.
The Bank's individualized asset review takes place within its Loan Review
Group and the Asset Classification Committee (the "Committee"). The Loan Review
Group is part of the Credit Department and accumulates and analyzes data
relating to assets of $1.0 million or more and makes appropriate recommendations
regarding asset classifications to the Committee. The Committee meets on a
regular basis to discuss classifications of such assets and to review the
reserves for losses. The Committee generally reviews the status of various
projects, including, for example, data on recent lot sales for residential
development projects and leasing activity on commercial projects. Actual
progress is compared to pro forma projections made when the related loan was
underwritten. Local economic conditions and known trends are also reviewed. The
Committee also considers steps being taken by borrowers to address problems, and
reviews financial information relating to borrowers and guarantors as well as
reports by loan officers who are responsible for continually evaluating the
projects. The actions of the Committee are reported to the Board of Directors.
REO is carried at the lower of cost or fair value. In January 1993, the OTS
adopted a rule effective December 31, 1992 which (i) required savings
associations to use fair value, rather than net realizable value, in determining
appropriate write-downs of foreclosed assets and (ii) permitted savings
associations to reduce the risk-weighting for all repossessed assets, equity
investments and assets more than 90 days past due from 200% to 100%, thus
reducing the amount of capital that an association was required to maintain
against such assets. The effect of this change was to conform OTS policy to
Statement of Position 92-3, "Accounting for Foreclosed Assets," issued by the
American Institute of Certified Public Accountants ("SOP 92-3"). See Summary of
Significant Accounting Policies in the Consolidated Financial Statements in this
Prospectus. In connection with this rule and the Bank's adoption of SOP 92-3,
the Bank recorded valuation allowances against its foreclosed assets of $40.5
million for the quarter ended December 31, 1992, of which $21.5 million had been
previously provided during the year ended September 30, 1992. In August 1993,
the OTS adopted a new policy, effective September 30, 1993, for the valuation
and classification of troubled, collateral-dependent loans. The impact of the
new policy on the Bank is not material.
Effective October 1, 1993, the Bank adopted, on a prospective basis, SFAS
114, which was issued in May 1993. SFAS 114 requires that impaired loans be
measured based on the present value of expected future cash flows, discounted at
the loan's effective interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price, or the fair value of the
collateral, if the loan is collateral-dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. A change in the fair value of the
impaired loan is reported as an increase in or reduction of the provision for
loan losses. In addition, SFAS 114 requires that impaired loans for which
foreclosure is probable be accounted for as loans. Such loans, with aggregate
principal balances of $15.0 million were reclassified from real estate held for
sale to loans receivable during the quarter ended December 31, 1993. No
additional reserves were required by adoption of this pronouncement. See
"Summary of Significant Accounting Policies -- The Bank" in the Notes to the
Consolidated Financial Statements in this Prospectus.
The OTS, together with the other federal bank regulatory agencies, has
issued a policy statement concerning the maintenance of general reserves by all
federally-insured financial institutions. The policy statement addresses general
reserves for loans and leases but not for other assets such as REO.
108
<PAGE>
The policy statement provides that examiners will rely on management's
evaluation of the adequacy of general reserves when management has established
effective systems and controls to identify, monitor, and address asset quality
problems; analyzed all significant factors that affect the collectibility of the
portfolio in a reasonable manner; and established an acceptable reserve
evaluation process that meets objectives discussed in the policy statement. The
policy statement sets forth quantitative and qualitative factors for reviewing
management's analysis and calculating the appropriate level of general reserves.
Based on its review of the policy statement, the Bank believes that its
evaluation of the adequacy of the general reserves complies with the policy
statement and that its levels of general reserves at December 31, 1993 generally
meet the standards contained therein, although there can be no assurances that
the OTS will not seek to require the Bank to increase its levels of general
reserves.
The Bank's assets are also subject to review and classification by the OTS
and the FDIC upon examination. Based on such examinations, the Bank could be
required to establish additional reserves or incur additional charge-offs.
DEPOSITS AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to deposits, Chevy
Chase receives funds from loan repayments and loan sales. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
influenced by general interest rates and money-market conditions. Borrowings may
be used to compensate for reductions in normal sources of funds, such as deposit
inflows at less than projected levels or deposit outflows, or to support the
Bank's operating or investing activities.
DEPOSITS. Chevy Chase currently offers a variety of deposit accounts with a
range of interest rates and maturities designed to attract both long-term and
short-term deposits. Its deposit programs include Super Statement Savings, Super
NOW, Insured Money Fund, Checking, Simple Statement Savings, Young Savers,
Certificate, and special programs for Individual Retirement and Keogh self-
employed retirement accounts. All jumbo certificates of deposit are sold
directly by the Bank to depositors, either through its branches or through its
money desk operation.
Chevy Chase attracts deposits through its branch network and advertisements,
and offers depositors access to their accounts through 300 ATMs, including 106
ATMs located in Safeway Inc. stores. The Bank is a member of the regional
"MOST"-R- ATM network which offers over 2,500 locations. The Bank is also a
member of the "PLUS"-R- ATM network, which offers over 50,000 locations
worldwide. In addition, the Bank has the right to install ATMs in Safeway stores
in the greater Washington, D.C./ Baltimore/Richmond area which do not currently
have ATM service. The acquisition of these ATMs and installation rights in April
1992 significantly expanded both the number of ATMs and the number of locations
in the Bank's ATM network and enhanced the Bank's position as a leading provider
of convenient ATM service in its primary market area.
The Bank obtains deposits primarily from customers residing in Montgomery
and Prince George's Counties in Maryland and Northern Virginia. Approximately
25.3% of the Bank's deposits at December 31, 1993 were obtained from depositors
residing outside of Maryland, with approximately 11.0% of the Bank's deposits
being obtained from depositors residing in Northern Virginia. The following
table shows the amounts of Chevy Chase's deposits by type of account at the
dates indicated.
109
<PAGE>
DEPOSIT ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------------------------------------------
DECEMBER 31,
1993 1993 1992 1991 1990 1989
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW
accounts....... $ 898,589 22.8% $ 835,084 21.6% $ 743,214 19.0% $ 729,559 17.1% $ 574,016 13.1% $ 511,160 12.0%
Money market
deposit
accounts....... 1,164,091 29.5 1,196,690 30.9 1,292,779 33.0 1,364,390 32.0 1,702,699 38.9 1,686,304 39.5
Statement
savings
accounts....... 1,058,638 26.8 941,289 24.3 690,328 17.6 595,181 14.0 390,710 8.9 459,405 10.8
Jumbo
certificate
accounts....... 55,610 1.4 56,218 1.5 42,423 1.1 128,288 3.0 206,496 4.7 197,210 4.6
Other
certificate
accounts....... 717,682 18.2 790,465 20.4 1,099,833 28.1 1,400,853 32.9 1,461,632 33.4 1,371,244 32.1
Other deposit
accounts....... 51,662 1.3 50,277 1.3 47,381 1.2 44,759 1.0 43,034 1.0 42,862 1.0
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total
deposits... 3,946,272 100.0% 3,870,023 100.0% 3,915,958 100.0% 4,263,030 100.0% 4,378,587 100.0% 4,268,185 100.0%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Deferred premium
on certificate
accounts....... -- -- -- 3 7 20
---------- ---------- ---------- ---------- ---------- ----------
Total....... $3,946,272 $3,870,023 $3,915,958 $4,263,033 $4,378,594 $4,268,205
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
110
<PAGE>
AVERAGE COST OF DEPOSITS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
THREE MONTHS ENDED -------------------------------------
DECEMBER 31, 1993 1993 1992 1991
------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Demand and NOW accounts.......................................... 2.69% 2.47% 3.15% 5.16%
Money market accounts............................................ 3.13% 3.17% 4.16% 6.19%
Statement savings and other deposit accounts..................... 3.31% 3.25% 4.03% 5.64%
Certificate accounts............................................. 4.00% 4.33% 5.63% 7.22%
Total deposit accounts....................................... 3.27% 3.35% 4.45% 6.36%
</TABLE>
The range of deposit account products offered by the Bank through its
extensive branch and ATM network allows the Bank to be competitive in obtaining
funds from its local retail deposit market. At the same time, however, as
customers have become increasingly responsive to changes in interest rates and
the Bank has become relatively more conservative in its pricing, the Bank has
experienced a net outflow of deposit balances. Chevy Chase's ability to attract
and maintain deposits and its cost of funds will continue to be significantly
affected by market conditions and its pricing strategy. The Bank does not
solicit brokered deposits.
The following table sets forth Chevy Chase's deposit flows during the
periods indicated.
DEPOSIT FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
THREE MONTHS ENDED -------------------------------------------------
DECEMBER 31, 1993 1993 1992 1991
------------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits................................ $ 2,903,083 $ 10,801,085 $ 11,173,419 $ 13,544,669
Withdrawals from accounts............... (2,860,037) (10,985,541) (11,721,253) (13,959,696)
------------------- --------------- --------------- ---------------
Net cash to (from) accounts............. 43,046 (184,456) (547,834) (415,027)
Interest credited to accounts........... 33,203 138,521 200,759 299,466
------------------- --------------- --------------- ---------------
Net increase (decrease) in deposit
balances............................... $ 76,249 $ (45,935) $ (347,075) $ (115,561)
------------------- --------------- --------------- ---------------
------------------- --------------- --------------- ---------------
</TABLE>
Deposit growth may be moderated by the Bank from time to time either to take
advantage of lower cost funding alternatives or in response to more modest
expectations for loan and other asset growth.
The following table sets forth, by weighted average interest rates, the
types and amounts of deposits as of December 31, 1993 maturing during the fiscal
years indicated.
111
<PAGE>
WEIGHTED AVERAGE INTEREST RATES OF DEPOSITS
AS OF DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEMAND, NOW AND STATEMENT PASSBOOK
MONEY MARKET DEPOSIT SAVINGS AND OTHER CERTIFICATE
ACCOUNTS ACCOUNTS CORE ACCOUNTS ACCOUNTS TOTAL
-------------------- -------------------- ----------------- ------------------ --------------------
MATURING DURING WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
PERIOD ENDING AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
SEPTEMBER 30, AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ------------------------- ---------- -------- ---------- -------- ------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994..................... $2,062,680 3.01 % $1,058,638 3.48 % $51,662 2.99 % $454,269 3.95 % $3,627,249 3.26 %
1995..................... -- -- -- -- -- -- 198,979 4.00 198,979 4.00
1996..................... -- -- -- -- -- -- 42,681 4.77 42,681 4.77
1997..................... -- -- -- -- -- -- 24,407 5.60 24,407 5.60
1998..................... -- -- -- -- -- -- 36,785 5.42 36,785 5.42
1999..................... -- -- -- -- -- -- 16,171 5.23 16,171 5.23
---------- ---------- ------- -------- ----------
Total.................... $2,062,680 3.01 % $1,058,638 3.48 % $51,662 2.99 % $773,292 4.16 % $3,946,272 3.36 %
---------- ---------- ------- -------- ----------
---------- ---------- ------- -------- ----------
</TABLE>
The following table summarizes maturities of certificate accounts in amounts
of $100,000 or greater as of December 31, 1993.
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 30, AMOUNT WEIGHTED AVERAGE RATE
- ------------------------------------------------------------ --------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1994........................................................ $ 32,327 3.68 %
1995........................................................ 8,774 4.11
1996........................................................ 2,646 4.73
1997........................................................ 1,656 5.88
1998 and thereafter......................................... 5,861 5.33
---------
Total................................................... $ 51,264 4.07 %
---------
---------
</TABLE>
The following table represents the amounts of deposits by various interest
rate categories as of December 31, 1993 maturing during the periods indicated.
112
<PAGE>
MATURITIES OF DEPOSITS BY INTEREST RATES
AS OF DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCOUNTS MATURING DURING PERIOD ENDING SEPTEMBER 30,
-------------------------------------------------------------------------------------
INTEREST RATE 1994 1995 1996 1997 1998 1999 TOTAL
- ---------------------------------- ------------- ----------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits (0%).............. $ 83,163 $ -- $ -- $ -- $ -- $ -- $ 83,163
0.00% to 1.99%.................... 299 -- -- 20 -- 14 333
2.00% to 2.99%.................... 162,702 -- -- -- -- -- 162,702
3.00% to 3.99%.................... 3,188,567 140,973 -- -- -- -- 3,329,540
4.00% to 4.99%.................... 127,656 38,295 30,237 2,776 839 -- 199,803
5.00% to 5.99%.................... 16,362 17,020 2,222 10,676 35,897 16,157 98,334
6.00% to 7.99%.................... 41,851 2,124 10,214 10,935 4 -- 65,128
8.00% to 9.99%.................... 6,649 567 8 -- 45 -- 7,269
------------- ----------- --------- --------- --------- --------- -------------
Total......................... $ 3,627,249 $ 198,979 $ 42,681 $ 24,407 $ 36,785 $ 16,171 $ 3,946,272
------------- ----------- --------- --------- --------- --------- -------------
------------- ----------- --------- --------- --------- --------- -------------
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank providing
credit for member institutions. As a member of the FHLB of Atlanta, Chevy Chase
is required to own capital stock in the FHLB of Atlanta and is authorized to
apply for advances on the security of such stock and certain of its mortgages
and other assets (principally securities which are obligations of, or guaranteed
by, the United States or its agencies), provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
credit programs, and the granting of advances is subject to the discretion of
the FHLB of Atlanta.
Each credit program has its own interest rate and range of maturities. The
FHLB of Atlanta prescribes the acceptable uses for the funds advanced pursuant
to each program, as well as limitations on the amount of advances. Limitations
on the amount of advances generally are based on the FHLB's assessment of the
institution's creditworthiness. The Bank had outstanding FHLB advances of $474.5
million at December 31, 1993.
From time to time, the Bank enters into repurchase agreements, which are
treated as financings. The Bank sells securities (usually U.S. Government or
mortgage-backed securities) to a dealer and agrees to buy back the same
securities at a specified time (generally within seven to 90 days). The Bank
pays a stated interest rate for the use of the funds for the specified time
period to the dealer. The obligation to repurchase the securities sold is
reflected as a liability and the securities underlying the agreements are
included in assets in the Consolidated Balance Sheets in this Prospectus. These
arrangements are, in effect, borrowings by the Bank secured by the securities
sold. The Bank had $189.2 million of repurchase agreements outstanding at
December 31, 1993.
113
<PAGE>
The following table sets forth a summary of the repurchase agreements of the
Bank as of the dates and for the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ------------------------
1993 1993 1992
------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities sold under repurchase agreements:
Balance at period-end.................................................... $ 189,157 $ 83,151 $ 446,367
Average amount outstanding during the period............................. 141,626 265,176 123,480
Maximum amount outstanding at any month-end.............................. 189,157 478,534 485,067
Weighted average interest rate during period (1)......................... 3.34% 3.28% 3.64%
Weighted average interest rate on period-end balances.................... 3.41% 3.23% 3.36%
<FN>
- ------------------------
(1) The weighted average interest rate during the period is computed daily
using a daily rate and balance.
</TABLE>
On November 23, 1993, the Bank sold $150 million 9 1/4% Subordinated
Debentures due 2005. Interest on the Debentures is payable semiannually on
December 1 and June 1 of each year. The OTS has approved the inclusion of the
principal amount of the 1993 Debentures in the Bank's supplementary capital for
regulatory capital purposes. On or after December 1, 1998, the Debentures will
be redeemable, in whole or in part, at any time at the option of the Bank. Under
the OTS capital regulations, redemption of the Debentures prior to their stated
maturity would be subject to prior approval of the OTS unless the Debentures
were redeemed with the proceeds of, or replaced by, a like amount of "a similar
or higher quality" capital instrument.
In December 1986, the Bank issued an unsecured ten-year subordinated capital
note in the original principal amount of $10.0 million to BACOB Savings Bank,
s.c., a foreign private savings bank. Unless the note is earlier redeemed, the
note principal is payable in one payment on December 31, 1996. Interest is
payable in arrears on May 15 and November 15 of each year at a variable rate of
3% over the six-month London Interbank Offered Rate ("LIBOR"). The note may be
redeemed at the Bank's option, at par, without premium or penalty, together with
accrued interest.
SUBSIDIARIES
OTS regulations generally permit the Bank to make investments in service
corporation subsidiaries in an amount not to exceed 3.0% of the Bank's assets,
provided that any investment in excess of 2.0% of assets serves primarily
community, inner city or community development purposes. Such regulations also
permit the Bank to make "conforming loans" to such subsidiaries and joint
ventures in an amount not to exceed 50% of the Bank's regulatory capital. At
December 31, 1993, 2.0% and 3.0% of the Bank's assets was equal to $102.9
million and $154.3 million, respectively, and the Bank had $54.9 million
invested in its subsidiaries, $36.0 million of which was in the form of
conforming loans. The Bank may establish operating subsidiaries to engage in any
activities that the Bank may engage in directly.
Chevy Chase engages in significant activities through B.F. Saul Mortgage
Company. See "Lending Activities." The Bank engages in other activities through
its subsidiaries, including those described below.
REAL ESTATE DEVELOPMENT ACTIVITIES. Manor Investment Company ("Manor") is
in the business of real estate development. In the past, its real estate
development activities consisted of the construction of income-producing
properties, the purchase, and in some cases, improvement of land for resale
without project construction and participation in joint ventures with other
developers. As a result of the stringent capital requirements that FIRREA
applies to investments in subsidiaries, such as Manor, that engage in activities
impermissible for national banks, Manor has not entered, and does not intend to
enter, into any new real estate development activities.
114
<PAGE>
SECURITIES BROKERAGE SERVICES. Chevy Chase Securities, Inc., a licensed
broker-dealer, is in the business of selling securities on a retail basis to the
general public, including customers and depositors of the Bank.
INSURANCE SERVICES. Chevy Chase Insurance Agency, Inc. is a licensed
insurance broker offering a variety of "personal line" insurance programs in the
property and casualty field (primarily homeowner and automobile insurance) and
in the life insurance field (primarily mortgage and credit card life and
disability programs).
SPECIAL PURPOSE SUBSIDIARIES. At December 31, 1993, Chevy Chase owned 29
active subsidiaries that were formed for the sole purpose of acquiring title to
various real estate projects pursuant to foreclosure or deed-in-lieu of
foreclosure. The Bank's investment in the active subsidiaries was $337.7 million
at December 31, 1993. The Bank's investments in these subsidiaries are not
subject to the 3.0% service corporation investment limit discussed above. See
"Regulation -- Regulatory Capital." FIRREA generally requires the Bank to
provide 30 days advance notice to the OTS and to the FDIC before establishing a
new subsidiary or conducting a new activity in an existing subsidiary.
EMPLOYEES
The Bank and its subsidiaries had 2,115 full-time and 555 part-time
employees at December 31, 1993. The Bank provides its employees with a
comprehensive range of employee benefit programs, including group health
benefits, life insurance, disability insurance, paid sick leave and an employee
loan program. The Bank offers home mortgage and credit card loans to employees
at prevailing market rates, but waives up to one point of any loan origination
fees on home mortgage and the annual fee on credit card loans, and provides a
yearly rebate equal to 0.5% of the outstanding loan balance of home mortgage
loans at calendar year-end. The Bank also offers employees a one percent
discount on the interest rate on overdraft lines of credit. None of the Bank's
employees is represented by a collective bargaining agent. The Bank believes
that its employee relations are good.
COMPETITION
Chevy Chase encounters strong competition both in attracting deposits and
making real estate and other loans in its markets. The Bank's most direct
competition for deposits has come from other thrift institutions, commercial
banks and credit unions, as well as from money market funds and corporate and
government securities. In addition to offering competitive interest rates, Chevy
Chase offers a variety of services, convenient ATM locations and convenient
office locations and hours to attract deposits. Competition for real estate and
other loans comes principally from other thrifts, banks, mortgage banking
companies, insurance companies and other institutional lenders. Chevy Chase
competes for loans through interest rates, loan fees and the variety and quality
of services provided to borrowers and brokers.
The Bank's major competition historically has come from local depository
institutions, but deregulation of the financial services industry and changing
market demands in recent years have eroded distinctions between providers of
financial services. In addition, both depository and non-depository institutions
have greater nationwide access to attractive markets, such as the Washington,
D.C. area, than they have had in past years. Chevy Chase now competes with
regional financial institutions and national providers of investment
alternatives, as well as a number of large money center and regional banks that
have acquired subsidiary institutions in the area.
The Bank estimates that it competes principally with approximately 15
depository institutions in its deposit-taking activities, with approximately
seven institutions in the origination of single-family residential mortgage
loans (other than home equity credit line loans) and with approximately ten
depository institutions in the origination of home equity credit line loans. At
June 30, 1993, according to published industry statistics, Chevy Chase, ranked
second in market share (approximately 18.5%) of deposits in Montgomery County,
Maryland, and Chevy Chase ranked third in market share of deposits in Prince
George's County, Maryland. Based on publicly available information, Chevy Chase
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estimates that, in the Washington, D.C. metropolitan area, it maintains a
significant market share of single-family residential mortgage loans and the
leading market share of home equity credit line loans.
Interstate banking laws enacted by state legislatures have intensified the
competition faced by the Bank in attracting deposits and making loans. A number
of large out-of-state financial institutions have established or acquired
banking operations in Maryland, Virginia and the District of Columbia pursuant
to these provisions.
FEDERAL TAXATION
The Trust terminated its status as a real estate investment trust for
federal income tax purposes in 1978 and is now taxable as a corporation. The
Trust's real estate operations have generated sizeable depreciation, interest
and other deductions in excess of its income, and as a result the Trust has had
substantial net operating loss carryovers for federal income tax purposes
("NOLs"). The Trust and its affiliated subsidiaries join in the filing of a
consolidated federal income tax return using the accrual method of accounting on
the basis of a fiscal year ending September 30.
Since June 28, 1990, the Bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Prior to June 28, 1990, the Bank and its subsidiaries filed consolidated
federal income tax returns on a calendar year basis.
Savings institutions such as the Bank generally are taxed in the same manner
as other corporations. There are, however, several special rules that apply
principally to savings institutions (and, in some cases, other financial
institutions). Certain significant aspects of the federal income taxation of the
Bank are discussed below.
The IRS has completed audits of the federal income tax returns of the Bank
for the taxable years ended December 31, 1988, December 31, 1989 and June 27,
1990, and is auditing the Bank's return for the taxable year ended September 30,
1990. The Trust is included in the audit for the taxable year ended September
30, 1990.
BAD DEBT RESERVE. Savings institutions that satisfy certain requirements
(so-called "qualifying institutions" as defined by the Internal Revenue Code)
are permitted to establish reserves for bad debts and to deduct each year
reasonable additions to those reserves in lieu of taking a deduction for bad
debts actually sustained during the taxable year. To be treated as a qualifying
institution, at least 60% of a savings institution's assets must be "qualifying
assets," which include cash, certain U.S. Government and state government
securities, obligations of certain deposit insurance corporations, loans secured
by interests in residential real property and loans made for the improvement of
residential real property.
A qualifying institution may deduct in each taxable year the sum of (i) an
addition to a reserve for losses on "qualifying real property loans" (generally,
loans secured by interests in real property) and (ii) an addition to a reserve
for losses on "nonqualifying loans" (such as credit card loans). A qualifying
institution generally may compute the amount of the addition to the reserve for
losses on qualifying real property loans under the more favorable of the
"experience method," which is based on the institution's actual loan loss
experience over a prescribed period, or the "percentage of taxable income
method," which is based on a fixed percentage (i.e., 8%) of the institution's
taxable income. The Bank has calculated the bad debt deduction for tax purposes
under the experience method since calendar year 1988.
An institution's addition to the reserve for losses on qualifying real
property loans is determined by special rules. The amount of the addition is
generally limited to an amount necessary to increase the reserve to the greater
of (i) the reserve determined under the experience method or (ii) the reserve
allowed at the end of the institution's base year, which for the Bank is 1987.
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For fiscal 1994 and prior years, the Bank is a qualifying institution
permitted to use the reserve method to determine the amount of its bad debt
deduction for federal income tax purposes. If the Bank were not treated as a
qualifying institution for any taxable year, it would be required to recapture
its bad debt reserve (for 1993, approximately $81.8 million) into taxable
income. Under certain proposed regulations, the bad debt reserve generally would
be recaptured into taxable income over six taxable years. In addition, the Bank
would be allowed to deduct only those bad debts that actually were sustained
during the taxable year. The Bank believes it will be a qualifying institution
for the foreseeable future.
CONSOLIDATED TAX RETURNS; TAX SHARING PAYMENTS. On June 28, 1990, the Trust
increased its interest in Chevy Chase from 60% to 80% of its common stock. As a
result of the Trust's 80% ownership of the Bank's common stock, for federal
income tax purposes Chevy Chase became a member of the Trust's affiliated group
filing consolidated federal income tax returns for taxable years beginning on
and after June 28, 1990. In recent years, the operations of the Trust have
generated significant net operating losses, while during the same period Chevy
Chase has reported taxable income. The Trust's net operating loss ("NOL")
carryovers to its taxable year beginning October 1, 1993 are approximately $11.5
million. It is anticipated that, because Chevy Chase's operations will be
included in the Trust's consolidated returns, these NOLs, and any other
operating losses generated by the Trust or its other subsidiaries, will be
available to reduce the federal income taxes that otherwise would be payable by
Chevy Chase (and the other members of the Trust's affiliated group that have
taxable income). Under the terms of the Tax Sharing Agreement, Chevy Chase is
obligated to make payments to the Trust based on its taxable income, as
explained more fully below. However, under the written agreement between Chevy
Chase and the OTS (see "Regulation -- Regulatory Capital"), Chevy Chase has
agreed not to make tax sharing payments without the prior approval of the OTS.
The Tax Sharing Agreement generally provides that each member of the Trust's
affiliated group is required to pay the Trust an amount equal to 100% of the tax
liability that the member would have been required to pay to the IRS if the
member had filed on a separate return basis. These amounts generally must be
paid even if the affiliated group has no tax liability or the group's tax
liability is less than the sum of such amounts. Under the Tax Sharing Agreement,
the Trust, in turn, is obligated to pay to the applicable taxing authorities the
overall tax liability, if any, of the group. In addition, to the extent the net
operating losses or tax credits of a particular member reduce the overall tax
liability of the group, the Trust is required to reimburse such member on a
dollar-for-dollar basis, thereby compensating the member for the group's use of
its net operating losses or tax credits.
The Bank made tax sharing payments of $20.6 million and $29.6 million in
fiscal 1990 and 1991, respectively, and pursuant to the written agreement
between the Bank and the OTS, did not make any further tax sharing payments
until the third quarter of fiscal 1993. Following an improvement in the Bank's
financial condition and the pledge by the Trust of certain Real Estate Trust
assets to secure certain of its obligations under the Tax Sharing Agreement, the
OTS approved, and the Bank made through the date of this Prospectus, additional
tax sharing payments of $14.6 million. It is expected that the Bank will have
taxable income over the next several years and that the Trust's NOLs and any
additional operating losses will be utilized to reduce the overall tax liability
of the group which would otherwise arise from such taxable income of the Bank
(or from the taxable income of other members of the Trust's affiliated group).
At December 31, 1993, the amount of tax sharing payments due to the Trust, but
then unpaid, was $20.1 million, of which $5.0 million was paid by the Bank to
the Trust subsequent to that date.
If the Bank has net operating losses or unused tax credits in the current or
any future year, under the Tax Sharing Agreement the Trust would be obligated to
reimburse the Bank in an amount generally equal to (i) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (ii) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
which the Bank would otherwise have been able to claim if it were not being
included in the consolidated federal income tax return of the group (but not in
excess of the net amount paid by the Bank to the Trust pursuant to the
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Tax Sharing Agreement). There is no assurance that the Trust would be able to
fulfill this obligation. If the Trust did not make the reimbursement, the OTS
could attempt to characterize such nonpayment as an unsecured extension of
credit by the Bank to the Trust which, as described under "Real Estate --
Holding Company Regulation," is prohibited under current law. The Tax Sharing
Agreement itself does not provide for any remedies upon a breach by any party of
its obligations under the agreement. As noted above, at December 31, 1993, $20.1
million of tax sharing payments were due to the Trust, of which $5.0 million was
paid to the Trust after such date. Any reimbursement obligation of the Trust
should be available to be offset against any obligation of the Bank to the Trust
under the Tax Sharing Agreement that is unpaid at the time the reimbursement
obligation arises.
STATE TAXATION
Maryland law does not provide for the filing of consolidated income tax
returns, and thus the Real Estate Trust, the Bank and the subsidiaries of the
Real Estate Trust and the Bank all file separately in Maryland. Under Maryland
law, the Real Estate Trust and the Bank and their respective subsidiaries are
each subject to a 7% tax on "taxable income." "Taxable income," for purposes of
Maryland taxation, is based on federal taxable income, subject to certain
modifications and apportionment. The Real Estate Trust, the Bank and their
respective subsidiaries are also subject to income taxes in other states.
PROPERTIES
REAL ESTATE. A list of the investment properties of the Real Estate Trust
is set forth under "Real Estate -- Real Estate Investments."
At December 31, 1993, the Trust conducted its business from its executive
offices at 8401 Connecticut Avenue, Chevy Chase, Maryland. The Trust sells its
Retail Notes from a sales office located at 7200 Wisconsin Avenue, Suite 903,
Bethesda, Maryland. The Saul Company leases both of such office facilities on
behalf of the Trust.
BANKING. At December 31, 1993, the Bank conducted its business from its
executive offices at 8401 Connecticut Avenue, Chevy Chase, Maryland; its
operations centers at 6200 Chevy Chase Drive, Laurel, Maryland and 7215
Corporate Court, Frederick, Maryland; its office facilities at 7700 Old
Georgetown Road, Bethesda, Maryland; and 76 full-service offices located in
Maryland, Virginia and the District of Columbia. On that date, the Bank owned
the building and land for 13 of its branch offices and leased its remaining 63
branch offices. Chevy Chase leases the office facilities at 8401 Connecticut
Avenue, 6200 Chevy Chase Drive and 7215 Corporate Court and owns the land and
building at 7700 Old Georgetown Road. In addition, the Bank leases office space
in which its subsidiaries are housed. The leases have various terms expiring
from 1994 to 2029. See Note 17 to the Consolidated Financial Statements in this
Prospectus for lease expense and commitments.
Subsequent to September 30, 1993, the Bank received OTS approval to open
five additional branches. During the three months ended December 31, 1993, two
branches were opened in Maryland. The remaining branches, one in Maryland and
two in Virginia, are scheduled to open in fiscal 1994.
At December 31, 1993, the net book value of the Bank's office facilities
(including leasehold improvements) was $90.8 million. See Note 16 to the
Consolidated Financial Statements in this Prospectus.
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The Bank has plans to build a facility in Frederick, Maryland to house some
of the Bank's employees and operations. At December 31, 1993, the Bank had
invested $2.5 million for the purchase of the land and $1.4 million for capital
expenditures.
In fiscal 1991, the Bank purchased an historic office building and the
underlying land in downtown Washington, D.C. with plans to establish a deposit
branch office and a trust office in the building. Although the Bank terminated
its trust business in fiscal 1991, it still plans to establish a branch in the
building.
The Bank owns additional assets, including furniture and data processing
equipment. At December 31, 1993, these other assets had a net book value of
$48.1 million. The Bank also has operating leases, primarily for certain
automobiles and data processing equipment and software. The leases for
automobiles are generally for periods of less than four years; the leases for
the data processing equipment and software have month-to-month or year-to-year
terms.
LEGAL PROCEEDINGS
In November 1990, the Trust was notified that the Commission had initiated
an informal inquiry concerning the Bank's reserves for losses and related
matters, and the Bank was requested to provide the Commission with certain
documents relating to the Bank covering the period since October 1, 1988. The
Trust and the Bank cooperated fully with the Commission's inquiry and, pursuant
to the Commission's original request, the last set of documents was produced on
February 6, 1991. On March 27, 1992, the Trust received a letter from the
Commission staff seeking additional documents in connection with the inquiry.
The last documents responsive to this additional request were produced on July
31, 1992. The Commission has not taken any additional action to date with
respect to the inquiry. Based upon the information available to it at this time,
management believes that the matter should be resolved in a manner that will not
result in a material adverse financial impact on the Bank.
In the normal course of business, the Trust is involved in certain
litigation, including litigation arising out of the collection of loans, 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 which is currently pending will not have a
material adverse impact on the financial condition or future operations of the
Trust.
REGULATION
Chevy Chase's operations have been significantly affected in recent years by
substantial changes in applicable banking laws and regulations. The most
significant changes resulted from the FIRREA and FDICIA.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Atlanta. The 12 FHLBs are administered by the Federal
Housing Finance Board, an independent agency within the executive branch of the
federal government. The FHLBs serve as a central credit facility for member
institutions. Their primary credit mission is to enhance the availability of
residential mortgages.
Under the credit policies of the FHLB of Atlanta, credit may be extended to
any creditworthy member bank based on financial condition and the adequacy of
collateral pledged to secure the credit. Requests for advances with an original
term to maturity of less than five years may be approved for any sound business
purpose in which a borrower is authorized to engage. Requests for longer term
advances may be approved only for the purpose of enabling the borrower to
provide funds for residential housing finance. Such borrowings may be obtained
pursuant to several different credit programs, each of which has its own rate
and range of maturities. Advances from the FHLB of Atlanta must be secured by
certain types of collateral with a value, as determined by the FHLB of Atlanta,
at
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least equal to 100% of the borrower's outstanding advances. At December 31,
1993, the interest rates on the advances from the FHLB of Atlanta ranged from
3.32% to 4.13%, depending on the maturity of the advance. See Note 23 to the
Consolidated Financial Statements in this Prospectus.
As a member of the FHLB of Atlanta, the Bank is required to acquire and hold
shares of capital stock in that bank in an amount equal to the greater of: (i)
1.0% of mortgage-related assets (i.e., home mortgage loans, home-purchase
contracts and similar obligations); (ii) 0.3% of total assets; or (iii) 5.0% of
outstanding advances. Pursuant to this requirement, the Bank had an investment
of $31.5 million in FHLB stock at December 31, 1993. The earnings of the FHLBs
have been reduced as a result of legislation requiring contributions from the
FHLBs to the Resolution Funding Corporation and the provision of subsidies to
certain low income housing projects, thereby reducing the dividends paid by the
FHLBs to member institutions. The Bank earned dividends of $0.4 million, $1.7
million and $1.9 million during the three months ended December 31, 1993 and
years ended September 30, 1993 and 1992, respectively, at a weighted average
rate of 5.04%, 5.63% and 6.68% per annum during such periods, respectively.
LIQUIDITY REQUIREMENTS. The Bank is required to maintain a daily average
balance of liquid assets (including cash, federal funds, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and commercial
paper, securities of certain mutual funds and specified U.S. Government, state
government and federal agency obligations) equal to a specified percentage of
its average daily balance of deposits (based upon the preceding month's average
balances), plus borrowings (or portions thereof) payable in one year or less.
This liquidity requirement is currently 5.0%. Federal regulations also require
that each institution maintain an average daily balance of short-term liquid
assets equal to at least 1.0% of its average daily balance of deposits, plus
borrowings payable in one year or less. If an institution's liquid assets at any
time do not at least equal (on an average daily basis for the month) the amount
required by the OTS, the institution could be subject to various monetary
penalties imposed by the OTS. At December 31, 1993, the Bank was in compliance
with both requirements, with a liquid assets ratio of 24.1% and a short-term
liquid assets ratio of 7.2%.
DEPOSIT INSURANCE PREMIUMS. Under FDIC insurance regulations, the Bank is
required to pay premiums to SAIF for insurance of its accounts. FIRREA
established the following levels of premiums for SAIF members expressed as a
percentage of deposits: 0.23% through December 31, 1993, 0.18% through December
31, 1997 and 0.15% thereafter. However, amendments to FIRREA's deposit insurance
provisions enacted in November 1990 and December 1991 gave the FDIC broad
authority to increase SAIF premiums beyond the levels established by FIRREA and
require that the FDIC convert to a risk-based assessment system. Pursuant to
this authority, the FDIC adopted a transitional risk-based premium system, which
took effect January 1, 1993, that increased the premiums for all but the
healthiest institutions. Under this system, an institution paid premiums for
deposit insurance ranging from 0.23% to 0.31% based on supervisory evaluations
and on the institution's capital category under the OTS prompt corrective action
regulations. See "Prompt Corrective Action." On June 25, 1993, the FDIC
established a permanent risk-based premium system that became effective October
1, 1993 based substantially on the transitional system then in effect.
The deposit insurance premium rate for the semi-annual periods beginning
January 1, 1993 and July 1, 1993 were based in part on the Bank's capital ratios
at June 30, 1992 and December 31, 1992, respectively. Although the Bank's
capital levels met the standards for classification as well capitalized under
the prompt corrective action regulations at September 30, 1993, the Bank's
capital ratios did not meet the standard for classification as adequately
capitalized at June 30, 1992 or at December 31, 1992. As a result, the Bank's
deposit insurance premium for the semi-annual periods between January 1, 1993
and June 30, 1993 and between July 1, 1993 and December 31, 1993 was increased
to 0.31% of total deposits. Based on the Bank's June 30, 1993 regulatory capital
ratios, the Bank's premium for the semi-annual period between January 1, 1994
and June 30, 1994 decreased to 0.29% of total deposits.
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SAIF insurance may be terminated by the FDIC, after notice and a 30-day
corrective period, upon a finding by the FDIC that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The 30-day period may be eliminated by the FDIC
with the approval of the OTS.
REGULATORY CAPITAL. FIRREA imposed significantly more stringent capital
requirements upon federally insured savings associations than those previously
in effect. The requirements, as implemented by OTS regulations, contain three
elements: a minimum tangible capital requirement, a minimum core (or leverage)
capital requirement and a minimum total risk-based capital requirement. Each of
these requirements generally must be no less stringent than the capital
standards for national banks. At December 31, 1993, the Bank's tangible, core
and total risk-based regulatory capital ratios were 4.55%, 5.30% and 11.56%,
respectively, compared to the minimum requirements of 1.50%, 3.00% and 8.00%,
respectively.
Under the minimum leverage ratio, Chevy Chase must maintain a ratio of "core
capital" to tangible assets of not less than 3.0%. "Core capital" generally
includes common stockholders' equity, noncumulative perpetual preferred stock
and minority interests in consolidated subsidiaries, less loans to and
investments in certain subsidiaries and certain intangible assets, except that
purchased mortgage servicing rights ("PMSRs") may be included at the lowest of
90% of fair market value (if determinable), 90% of original cost or 100% of the
current amortized book value as determined under generally accepted accounting
principles ("GAAP"). In addition, PMSRs are subject to a limit of 50% of core
capital. At December 31, 1993, the Bank had qualifying PMSRs of $15.7 million,
which constituted 5.8% of core capital at that date. In February 1994, the OTS
adopted revisions to its regulations that, effective March 4, 1994, (i)
eliminate the 90%-of-original-cost limitation for purposes of calculating the
amount of PMSRs that can be included in core capital and (ii) permit inclusion
of purchased credit card relationships ("PCCRs") as well as PMSRs in core
capital up to an aggregate limit of 50% of core capital and a separate sublimit
of 25% of core capital for PCCRs.
The amount of qualifying supervisory goodwill that may be included in core
capital was limited to 1.0% of adjusted tangible assets from January 1, 1992
through December 31, 1992, to 0.75% from January 1, 1993 through December 31,
1993, and is limited to 0.375% beginning January 1, 1994 and 0% beginning
January 1, 1995. Phase-outs from capital are also established for investments
in, and loans to, subsidiaries engaged in activities not permissible for
national banks, for equity investments that are not permissible for national
banks and for the portion of land loans and non-residential construction loans
in excess of an 80% loan-to-value ratio.
The tangible capital requirement adopted by the OTS requires a savings
institution to maintain "tangible capital" in an amount not less than 1.5% of
tangible assets, which is the minimum limit permitted by FIRREA. "Tangible
capital" is defined as core capital less any intangible assets (including
supervisory goodwill), plus qualifying PMSRs valued at the amount includable in
core capital.
The risk-based capital requirements issued by the OTS provide that the
capital ratio applicable to an asset is adjusted to reflect the degree of credit
risk associated with that asset and that the asset base for computing a savings
institution's capital requirement includes off-balance-sheet assets. Capital
must be maintained against the full amount of assets sold with recourse despite
the fact that the assets are treated as having been sold under GAAP. However,
the amount of capital required need not exceed the amount of recourse retained.
There are currently four categories of risk-weightings: 0% for cash and
similar assets, 20% for qualifying mortgage-backed securities, 50% for
qualifying residential permanent real estate loans and 100% for other loans,
including credit card loans, commercial real estate loans and loans more than 90
days past due and for real estate acquired in settlement of loans. Savings
institutions generally are required to maintain risk-based capital equal to 8.0%
of risk-weighted assets, with at least half of that amount in the form of core
capital.
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A savings institution's supplementary capital may be used to satisfy the
risk-based capital requirement only to the extent of the institution's core
capital. Supplementary capital includes cumulative perpetual preferred stock,
qualifying non-perpetual preferred stock, qualifying subordinated debt,
nonwithdrawable accounts and pledged deposits, and general loan and lease loss
reserves (up to a maximum of 1.25% of risk-weighted assets). At December 31,
1993, the Bank had $59.1 million in general reserves on loans and leases, $49.3
million of which was includable as supplementary capital.
Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its term to maturity. The phase-out established
for such maturing capital instruments by the OTS permits an institution to
include such instruments in supplementary capital under one of two phase-out
options: (i) at the beginning of each of the last five years prior to the
maturity date of the instrument, the institution may reduce the amount eligible
to be included by 20% of the original amount or (ii) the institution may include
only the aggregate amount of maturing capital instruments that mature in any one
year during the seven years immediately prior to an instrument's maturity that
does not exceed 20% of the institution's capital. Once an institution selects
either the first or second option, it must continue to select the same option
for all subsequent issuances of maturing capital instruments as long as there is
any outstanding balance of such instruments for which an option has been
selected. Maturing capital instruments issued before November 7, 1989 may be
treated according to the rule stated above or the rule in effect at that date.
At December 31, 1993, the Bank had $160.0 million in maturing capital
instruments, of which $154.3 million was includable as supplementary capital.
See "Banking -- Deposits and Other Sources of Funds -- Borrowings."
Effective January 1, 1994, the OTS's risk-based capital requirements were
amended to incorporate interest-rate risk measures to complement those already
established for credit risk. Under the amendments, an institution that would
experience a decrease in "portfolio equity" in an amount in excess of 2.0% of
the market value of the institution's assets as a result of an increase or
decrease in the general level of interest rates of as much as 200 basis points
is required to maintain additional amounts of risk-based capital. Additional
capital will have to be maintained by affected institutions beginning July 1,
1994 based on interest rate exposure as of December 31, 1993. Although the OTS
analysis of the Bank's interest rate exposure at December 31, 1993 is not yet
available, based upon management's internal analysis as of December 31, 1993 and
an OTS analysis of the Bank's exposure at September 30, 1993, management
believes that the Bank would not experience a decrease in "portfolio equity" in
an amount in excess of 2.0% of its assets under this test and therefore believes
that the Bank will not be required to maintain additional amounts of risk-based
capital beginning July 1, 1994.
OTS regulations contain special rules affecting savings institutions with
certain kinds of subsidiaries. For purposes of determining compliance with each
of the capital standards, a savings institution's investments in, and extensions
of credit to, non-includable subsidiaries are, with certain exceptions, deducted
from the savings institution's capital. At December 31, 1993, investments in
non-includable subsidiaries are subject to a 25% phase-out from all three FIRREA
capital requirements. Under legislation enacted in 1992, the amount of the
Bank's investment in non-includable subsidiaries that may be included in capital
is limited to 75% through June 30, 1994, 60% beginning July 1, 1994, 40%
beginning July 1, 1995 and 0% beginning July 1, 1996.
All or a portion of the assets of each of a savings institution's
subsidiaries are generally consolidated with the assets of the savings
institution for regulatory capital purposes unless all of the savings
institution's investments in, and extensions of credit to, such subsidiary are
deducted from capital. Chevy Chase's real estate development subsidiaries are
its only subsidiaries engaged in activities not permissible for a national bank.
At December 31, 1993, the Bank's investments in, and extensions of credit to,
its non-includable subsidiaries totaled approximately $30.4 million, which was
$41.1 million less than the level of such investments in, and extensions of
credit to, its non-includable subsidiaries as of April 12, 1989. Of the $30.4
million, $6.4 million constituted a deduction from tangible capital. Chevy Chase
currently intends to continue to operate its non-includable subsidiaries, but to
reduce gradually its aggregate investments in, and extensions of credit to, such
subsidiaries.
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OTS capital regulations also require the deduction from total capital of all
equity investments that are not permissible for national banks and the portion
of land loans and non-residential construction loans in excess of an 80%
loan-to-value ratio. At December 31, 1993, these investments were subject to a
60% phase-out from total capital; beginning July 1, 1994, the phase-out will
increase to 100%. In April 1993, the OTS adopted a rule that eliminated the
capital deduction for equity investments permissible for national banks. Based
on the April 1993 rule, the Bank's only equity investment at December 31, 1993
is a property classified as real estate held for sale that the Bank agreed with
OTS in 1991 to treat as an equity investment for regulatory capital purposes. At
December 31, 1993, the book value of that property, after subsequent valuation
allowances, amounted to $41.2 million of which $19.6 million was required to be
deducted from total capital. At December 31, 1993, the Bank did not have any
land loans or non-residential construction loans with loan-to-value ratios in
excess of 80%.
OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital at the then-current phase-in percentage. Accordingly, if the Bank is
unable to dispose of any REO property (through bulk sales or otherwise) prior to
the end of its applicable five-year holding period and is unable to obtain an
extension of such five-year holding period from the OTS, the Bank could be
required to deduct the then-current book value of such REO property from
risk-based capital.
The Bank is actively managing its levels of investments in, and loans to,
non-includable subsidiaries and equity investments to minimize the impact of the
deductions from capital for these investments as the deductions continue to
increase. The Bank's ability to implement successfully these and other
strategies for maintaining capital compliance is dependent on a number of
factors, including, for example, general economic conditions and the continued
recovery of local real estate markets. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Banking -- Capital -- Capital Maintenance Strategies."
In July 1993, the OTS released the Bank from a capital plan to which the
Bank had been subject as a result of its failure to meet all applicable
regulatory capital requirements in prior periods. In connection with the release
of the Bank from its capital plan, the OTS also released the Bank from a related
capital directive which had imposed certain restrictions on the Bank's
operations and required the Bank to achieve compliance with applicable capital
requirements by June 30, 1992 (which deadline was subsequently extended by the
OTS until December 31, 1992).
In October 1993, the Bank and the OTS amended a written agreement dated
September 30, 1991 that imposed certain restrictions on the Bank. As amended,
the agreement continues to address transactions with affiliates, reduction of
real estate acquired in settlement of loans, and asset quality. Specifically,
the Bank has agreed that it will not, without receiving the prior approval of
the OTS, (i) increase its investment in certain of its real estate development
properties, including the four active Communities, beyond specified levels, (ii)
make any additional tax sharing payments to the Trust or (iii) engage in any
other transaction with the Trust. In addition, the Bank must (i) provide the OTS
with 15 days notice prior to selling any asset with a value over $20 million,
(ii) make every effort to reduce its exposure in certain of its real estate
development properties, including the four active Communities, (iii) notify the
OTS 15 days prior to rejecting any purchase offers for those properties and (iv)
sell any single-family permanent loans for purchases of homes in those
properties if the terms of those loans are more favorable to the borrowers than
terms prevailing in the general market. The amended agreement also requires the
Bank to submit various periodic reports to the OTS. A material violation of the
agreement could subject the Bank to additional regulatory sanctions. Management
believes the Bank is in material compliance with the agreement.
The October 1993 amendment eliminated among other things, provisions that
required the Bank to (i) provide the OTS with 15 days notice prior to selling
certain significant assets with a value over
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$5 million, (ii) adopt a formal expense reduction plan, (iii) make every effort
to convert its outstanding subordinated debentures to another form of capital
(although no deadline for achieving such a conversion was specified in the
agreement), (iv) review the pricing of its major products and fees, (v) review
certain compensation arrangements with the original developers of certain of its
large REO projects, (vi) obtain the prior written approval of the OTS to pay
dividends on its common stock or to increase senior executive compensation
beyond specified levels and (vii) make every effort to obtain an infusion of
capital in an amount sufficient to meet its fully phased-in capital requirements
by June 30, 1992, and, if necessary, to seek a merger or acquisition partner.
The OTS has the authority to require an institution to maintain capital at
levels above the minimum levels generally required, but has not indicated to the
Bank any intention to exercise its authority to do so with respect to the Bank.
PROMPT CORRECTIVE ACTION. Pursuant to FDICIA, the OTS and the other federal
agencies regulating financial institutions have adopted regulations which,
effective December 19, 1992, apply to every FDIC-insured commercial bank and
thrift institution a system of mandatory and discretionary supervisory actions
which generally become more severe as the capital levels of an individual
institution decline. The regulations establish five capital categories to which
institutions are assigned for purposes of determining their treatment under
these prompt corrective action provisions. An institution is categorized as
"well capitalized" under the regulations if (i) it has a leverage ratio of at
least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%, and (ii) is not subject to any
written agreement, order, capital directive or prompt corrective action
directive issued by OTS to meet and maintain a specific capital level. An
institution is considered "adequately capitalized" if such capital ratios are at
least 4.0% (3.0% if rated in the highest supervisory category), 4.0% and 8.0%,
respectively. An institution with a leverage ratio below 4.0% (3.0% if rated in
the highest supervisory category), a tier 1 risk-based capital ratio below 4.0%
or a total risk-based capital ratio below 8.0%, is considered "undercapitalized"
and an institution with ratios under 3.0%, 3.0% or 6.0%, respectively, is
considered "significantly undercapitalized." An institution is considered
"critically undercapitalized," and subject to provisions mandating appointment
of a conservator or receiver, if its ratio of "tangible equity" (generally
defined by the OTS as core capital plus cumulative perpetual preferred stock) to
total assets is 2.0% or less. An institution's classification category could be
downgraded if, after notice and an opportunity for a hearing, the OTS determines
that the institution is in an unsafe or unsound condition or has received and
has not corrected a less than satisfactory examination rating for asset quality,
management, earnings or liquidity.
At December 31, 1993, the Bank's leverage, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.30%, 6.88% and 11.56%, respectively,
which exceeded the corresponding ratios of 5.0%, 6.0% and 10.0% established
under the prompt corrective action regulations for "well capitalized"
institutions, and the Bank was not subject to any applicable written agreement,
order or directive to maintain a specific capital level. On a fully phased-in
basis at December 31, 1993, the Bank's leverage, tier 1 risk-based and total
risk-based capital ratios of 4.14%, 5.47% and 9.81%, respectively, would meet
the ratios established for "adequately capitalized" institutions.
GROWTH RESTRICTIONS. Primarily because of its level of non-performing
assets, the Bank remains subject to restrictions on asset growth. Under the
applicable OTS requirements, the Bank may not increase its total assets during
any calendar quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter without prior written approval from OTS.
The OTS notified the Bank on September 10, 1993 that OTS would waive this
restriction for the period from July 1, 1993 through June 30, 1994 to allow for
an increase in total assets of up to $500 million, subject to the conditions,
among others, that the Bank's regulatory capital ratios increase with asset
growth and that the Bank maintain sufficient capital to meet the "well
capitalized" ratios under the OTS's prompt corrective action regulations.
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The Bank's ability to increase its regulatory capital ratios to support
additional asset growth and to remain "well capitalized" is dependent on a
number of factors, including, for example, general economic conditions and the
continued recovery of local real estate markets.
QUALIFIED THRIFT LENDER ("QTL") TEST. Insured savings institutions like the
Bank must meet a QTL test to avoid imposition of certain restrictions.
Legislation enacted in 1991 and 1992 significantly changed the QTL test. Under
the modified requirements, thrifts must maintain a "thrift investment
percentage" equal to a minimum of 65%. The numerator of such percentage is the
thrift's "qualified thrift investments"; the denominator is the thrift's
"portfolio assets." "Portfolio assets" is defined as total assets minus (i) the
thrift's premises and equipment used to conduct its business, (ii) liquid
assets, as defined, and (iii) intangible assets, including goodwill and
purchased residential mortgage loan servicing rights. The QTL test must be met
on a monthly average basis in nine out of every 12 months.
At December 31, 1993, the Bank had 82.3% of its portfolio assets invested in
qualified thrift investments, and the Bank met the QTL test in each of the
previous 12 months.
Assets that may be included in a thrift's "qualified thrift investments"
without limit include: residential housing loans (including home equity loans
and manufactured housing loans), mortgage-backed securities and FHLB stock.
Portions of other assets are also includable, provided that the total of these
assets does not exceed 20% of portfolio assets. Assets in this category include:
50% of residential housing loans originated and sold within 90 days; investments
in real estate-oriented service corporations; 200% of mortgage loans for
residences, churches, schools, nursing homes and small businesses in areas with
unmet credit needs (low or moderate income areas where credit demand exceeds
supply); loans for personal, family household or educational purposes (which may
not exceed 10% of portfolio assets); 200% of certain "starter" home loans; FNMA
stock; and FHLMC stock. Intangible assets, including goodwill, are specifically
excluded from qualified thrift investments.
An institution which fails to meet the QTL test is subject to significant
penalties. Immediately after an institution ceases to be a QTL, it (i) may not
make any new investment or engage directly or indirectly in any other new
activity unless the investment or activity would be permissible for a national
bank, (ii) may not establish any new branch office at any location at which a
national bank could not establish a branch office, (iii) may not obtain new
advances from the applicable FHLB and (iv) may not pay dividends beyond the
amounts permissible if it were a national bank. One year following an
institution's failure to meet the test, the institution's holding company parent
must register and be subject to supervision as a bank holding company. Three
years after failure to remain a QTL, an institution may not retain any
investments or engage in any activities that would be impermissible for a
national bank, and must repay any outstanding FHLB advances as promptly as
possible consistent with the safe and sound operation of the institution.
Because Chevy Chase is engaged in activities that are not permissible for
national banks (most significantly, its investments in subsidiaries that engage
in real estate development activities), failure to satisfy the QTL test would
require a significant change in Chevy Chase's current activities and would
require a divestiture of any prohibited assets held at such time. Depending on
the level of such activities at the time, compliance with these restrictions
could have a significant adverse effect on the Bank. In addition, because the
Trust is engaged in real estate ownership and development, which are activities
that are currently prohibited for bank holding companies, failure by Chevy Chase
to remain a QTL, in the absence of a significant restructuring of the Trust's
operations, would, in effect, require the Trust to reduce its ownership of Chevy
Chase to a level at which it no longer would be deemed to control the Bank.
The Bank has taken, and will continue to take, steps to meet the QTL test by
structuring its balance sheet to include the required percentage of qualified
thrift investments. The Bank's credit card loan and automobile loan
securitization and sales activity to date have been undertaken, in part, to meet
these objectives.
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DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Under OTS regulations, the
ability of thrift institutions such as the Bank to make "capital distributions"
(defined to include payment of dividends, stock repurchases, cash-out mergers
and other distributions charged against the capital accounts of an institution)
varies depending primarily on the institution's regulatory capital level. The
regulations do not apply to interest or principal payments on debt, including
interest or principal payments on the Bank's outstanding subordinated
debentures.
Institutions are divided into three tiers for purposes of these regulations.
Tier 1 institutions are those in compliance with their "fully phased-in" capital
requirements under FIRREA and which have not been notified by the OTS that they
are "in need of more than normal supervision." Tier 1 institutions may make
capital distributions without regulatory approval in amounts up to the greater
of (i) 100% of net income for the calendar year to date, plus the amount that
would reduce by one-half the institution's surplus capital ratio (i.e., the
excess of the institution's total risk-based capital ratio over the fully
phased-in requirement) at the beginning of the calendar year in which the
distribution is made or (ii) 75% of net income for the most recent four
quarters.
Tier 2 institutions are those in compliance with their current capital
requirements, but do not qualify as Tier 1 institutions. Tier 2 institutions may
make distributions without regulatory approval of up to 75% of their net income
for the most recent four quarters. Tier 1 and Tier 2 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to such
distributions.
Tier 1 and Tier 2 institutions may seek OTS approval to pay dividends beyond
these amounts.
Tier 3 institutions have capital levels below their current required minimum
levels and may not make any capital distributions without the prior written
approval of the OTS.
At December 31, 1993, the Bank had sufficient levels of capital to be a Tier
1 institution. However, the OTS retains discretion under its capital
distribution regulation to treat an institution that is in need of more than
normal supervision (after written notice) as a Tier 2 or Tier 3 institution.
The OTS retains general discretion to prohibit any otherwise permitted
capital distributions on general safety and soundness grounds and must be given
30 days advance notice of all capital distributions. The OTS has approved the
payment of dividends on the 13% Preferred Stock, provided that (i) immediately
after giving effect to the dividend payment, the Bank's core and risk-based
regulatory capital ratios would be not less than 4.0% and 8.0%, respectively;
(ii) dividends are earned and payable in accordance with the OTS capital
distribution regulation; and (iii) the Bank continues to make progress in the
disposition and reduction of its non-performing loans and real estate owned.
In May 1988, in connection with the merger of a Virginia thrift into the
Bank, the Saul Company and the Trust entered into the Capital Maintenance
Agreement in which they agreed not to cause the Bank without prior written
approval of its federal regulator to pay "dividends" in any fiscal year in
excess of 50% of the Bank's net income for that fiscal year, provided that any
dividends permitted under such limitation could be deferred and paid in a
subsequent year. The 1988 Agreement also provided that dividends could not be
paid or stock repurchased by the Bank if such dividend or repurchase would
reduce the regulatory capital of the Bank below its regulatory capital
requirements.
In response to the FSLIC's conditional order approving the Bank's
application for federal deposit insurance, the Bank submitted the 1985 Letter to
the FSLIC in which it represented that it would limit "dividends" to 50% of net
income, "exclusive of all income funded through Chevy Chase loan proceeds." The
1985 Letter does not specify whether net income is to be measured over a
particular period (such as a fiscal year) or whether it is to be aggregate net
income from 1985 until the date of the distribution. In case net income is
measured over a particular period (such as a year), the 1985 Letter does not
specify whether any dividends permitted under such limitations could be deferred
and paid in a subsequent period.
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The indenture pursuant to which $150 million of the Bank's 9 1/4%
Subordinated Debentures due 2005 were sold in November 1993 provides that the
Bank may not pay a dividend on its capital stock unless, after giving effect to
the dividend, no default or event of default shall have occurred and be
continuing and the Bank shall be in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15 million, (ii) 66 2/3% of the Bank's consolidated net income
(as defined in the indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the Bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
securities, minus the amount of any restricted payments made by the Bank. See
Note 24 to the Consolidated Financial Statements in this Prospectus.
The payment of any dividends on the Bank's common stock and 13% Preferred
Stock will be determined by the Board of Directors based on the Bank's
liquidity, asset quality profile, capital adequacy and recent earnings history,
as well as economic conditions and other factors deemed relevant by the Board of
Directors, including applicable government regulations and policies.
LENDING LIMITS. FIRREA generally subjects thrift institutions to the same
loans-to-one-borrower limits that apply to national banks. These limits, which
became effective August 9, 1989, were substantially more restrictive than the
previous limits applicable to thrift institutions. With certain exceptions, the
limits prohibit an institution from lending to one borrower (including certain
related entities of the borrower) in an amount in excess of 15% of the
institution's unimpaired capital and unimpaired surplus, plus an additional 10%
for loans fully secured by readily marketable collateral. The Bank's
loans-to-one-borrower limit was approximately $76.9 million at December 31,
1993, and no group relationships exceeded this limit at that date.
SAFETY AND SOUNDNESS STANDARDS. FDICIA requires the Bank's regulators to
devise standards to evaluate the operations of depository institutions, as well
as standards relating to asset quality, earnings and compensation. The
operational standards must cover internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and employee compensation.
The asset quality and earnings standards must specify a maximum ratio of
classified assets to capital and minimum earnings sufficient to absorb losses.
Any institution that fails to meet these standards must submit a plan for
corrective action within 30 days. If a savings association fails to submit or
implement an acceptable plan, the OTS must order it to correct the deficiency,
and may restrict its rate of asset growth, prohibit asset growth entirely,
require the institution to increase its ratio of tangible equity to assets,
restrict the interest rate paid on deposits to the prevailing rates of interest
on deposits of comparable amounts and maturities or require the institution to
take any other action that the OTS determines will better carry out the purpose
of prompt corrective action. Imposition of these sanctions is within the
discretion of the OTS in most cases but is mandatory if the savings institution
commenced operations or experienced a change in control during the 24 months
preceding the institution's failure to meet these standards, or underwent
extraordinary growth during the preceding 18 months.
In November 1993, the OTS and the other federal bank regulators published a
joint notice of proposed rulemaking that solicited comment on proposed standards
in these areas. Among other things, the proposed regulation's asset quality
standards specify that the ratio of an institution's assets classified as
substandard or doubtful to the sum of its total capital plus any allowances for
loan losses not included in total capital should not exceed 100%. Based on its
preliminary review of the proposed regulation, management does not believe that
these new requirements, if adopted substantially in the form proposed, would
have a material adverse effect on the Bank's operations.
DISPOSITION OF ADC INVESTMENTS. The Bank was advised in October 1989 by the
Atlanta District of the OTS that ADC loans classified as investments in real
estate for accounting purposes must be considered as ownership interests in real
estate and, therefore, are not authorized investments for the Bank to hold
directly. The OTS directed the Bank to refrain from entering into additional
transactions of this nature in the future and to seek opportunities to remove
existing ADC transactions that constitute real estate investments from its books
as quickly as possible without material loss.
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At December 31, 1993, the Bank had only one ADC loan, with a book value of
$8.9 million, before valuation allowances of $2.0 million, classified as an
investment in real estate. The Bank's levels of ADC loans have declined
significantly in recent years as a result of the Bank's acquisition of title to
the properties following the default of borrowers. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Banking -- Asset Quality."
REGULATORY ASSESSMENTS. FIRREA contained provisions authorizing the OTS to
assess fees to fund its operations. Pursuant to that authority, the OTS has
adopted the following fees: (i) asset-based assessments for all savings
institutions, (ii) examination fees for certain affiliates of savings
associations, (iii) application fees, (iv) securities filing fees and (v)
publication fees. Of these fees, the asset-based assessments are the most
significant. Such assessments, which are paid semi-annually every January 31 and
July 31, incorporate a "general assessment" which varies depending on the asset
size of the institution and an additional "premium assessment" for certain
institutions requiring increased supervision. The Bank was subject to this 50%
"premium assessment" effective October 1, 1991. As a result, the semi-annual
assessment paid on January 31, 1994 for the six-month period ending June 30,
1994 was $528,130, comprising a general assessment of $352,087 and a premium
assessment of $176,043.
OTHER REGULATIONS AND LEGISLATION. As a thrift institution, Chevy Chase
continues to be subject to a requirement that it obtain prior approval of the
OTS before merging with another institution or before increasing its insured
accounts through merger, consolidation, purchase of assets or assumption of
liabilities. In addition, FIRREA contains provisions that (i) impose a five-year
moratorium on conversions from SAIF insurance; (ii) permit a savings institution
to convert to a commercial bank charter if it retains SAIF insurance; (iii)
permit bank holding companies to acquire healthy as well as failing thrifts;
(iv) substantially strengthen the enforcement powers of the federal agencies
regulating financial institutions and increase the maximum penalties for
violations of laws and regulations to as much as $1 million per day; and (v)
place new restrictions on transactions between thrift institutions and their
affiliates and insiders.
In addition to the provisions noted above, FDICIA, among other things, (i)
requires regulators to revise their risk-based capital standards to take into
account interest-rate risk, concentration of credit risk and the risks of
non-traditional activities; (ii) requires annual on-site regulatory examinations
of institutions; (iii) requires management to prepare annual reports on the
financial condition of the institution; (iv) requires independent audit
committees for all insured depository institutions; (v) mandates certain
accounting reforms, including the development of methods to disclose the
estimated fair market value of assets and liabilities; (vi) requires the
regulators to adopt uniform regulations prescribing standards for loans that are
secured by real estate or that are made for the purpose of constructing a
building or improving real estate; (vii) imposes limits on the ability of the
Federal Reserve Banks to lend to undercapitalized institutions; and (viii)
permits banks and thrifts to combine and to be controlled by the same holding
company. FDICIA also contains a number of consumer-oriented provisions that (i)
reduce deposit insurance assessments for institutions offering "lifeline
accounts" and/or loans to low-and moderate-income persons in distressed
communities; (ii) require uniform disclosures regarding deposit accounts; and
(iii) require advance notification to customers and regulators of branch
closings.
Under amendments to OTS regulations adopted in 1992, federally chartered
thrifts like Chevy Chase were permitted, for the first time, to establish
branches anywhere in the United States, provided they meet their regulatory
capital requirements and are "qualifying institutions" that meet the domestic
building and loan test of section 7701(a)(19) of the Internal Revenue Code or
the asset composition test of subparagraph (c) of that section and if, with
respect to each state outside of its home state where the association has
established branches, the branches, taken alone, also satisfy the building and
loan test.
Under legislation adopted in 1993, amounts realized by the FDIC from the
liquidation or other resolution of any insured depository institution must be
distributed to pay claims (other than secured
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claims to the extent of any such security) in the following order of priority:
(i) administrative expenses of the receiver, (ii) any deposit liability of the
institution, (iii) any other general or senior liability of the institution
(which is not an obligation described in clause (iv) or (v)), (iv) any
obligation subordinated to depositors or general creditors (which is not an
obligation described in clause (v)) and (v) any obligation to stockholders
arising as a result of their status as stockholders.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board ("FRB") requires
depository institutions, including federal savings banks, to maintain reserves
against their transaction accounts and certain non-personal deposit accounts.
Because reserves generally must be maintained in cash or non-interest-bearing
accounts, the effect of the reserve requirement is to decrease the Bank's
earning asset base. FRB regulations generally require that reserves be
maintained against net transaction accounts. Effective December 21, 1993, the
first $4.0 million of a depository institution's transaction accounts were
subject to a 0% reserve requirement. The next $47.9 million in net transaction
accounts were subject to a 3.0% reserve requirement and any net transaction
accounts over $51.9 million were subject to a 10.0% reserve requirement. The
reserve requirement ratios for certain non-personal time deposits and
"Eurocurrency liabilities" are 0%. The Bank met its reserve requirements for
each period during the three months ended December 31, 1993. The balances
maintained to meet the reserve requirements imposed by the FRB also may be used
to satisfy liquidity requirements which are imposed by the OTS.
Savings institutions may borrow from the FRB "discount window," although FRB
regulations require these institutions to exhaust all reasonable alternate
sources of funds, including FHLB sources, before borrowing from the FRB. FDICIA
imposes additional limitations on the ability of the FRB to lend to
undercapitalized institutions through the discount window. See "Other
Regulations and Legislation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act (the
"CRA") and the OTS's implementing regulations, a savings association has a
continuing and affirmative obligation to help meet the credit needs of its local
communities, including low-and moderate-income neighborhoods, consistent with
the safe and sound operation of the institution. The CRA requires the board of
directors of each savings association to adopt a CRA statement for each
delineated local community that describes, among other things, its efforts to
help meet community credit needs and the specific types of credit that the
institution is willing to extend. In connection with its examination of a
savings association, the OTS is required to assess the institution's record in
satisfying the intent of the CRA. In addition, the OTS is required to take into
account the institution's record of meeting the credit needs of its community in
determining whether to grant approval for certain types of applications.
On December 21, 1993, the federal bank regulatory agencies issued for public
comment proposed revisions to the CRA regulations that are designed to focus the
CRA examination process on an institution's actual performance in meeting the
credit needs of low-and moderate-income neighborhoods rather than on its CRA
compliance procedures. Specifically, an institution would be evaluated on the
basis of its loans to, branches or other services in, and investments in low-and
moderate-income areas. Institutions, like the Bank, with more than $250 million
in assets, would be required to report additional data concerning consumer and
small business loans. In addition, the proposed regulations would provide
expressly that the agencies could take enforcement actions against institutions
receiving the lowest CRA ratings. No assurance can be given as to the final form
of any such regulation, the date of its effectiveness or its effect on the Bank.
OTHER ASPECTS OF FEDERAL LAW. The Bank is also subject to federal statutory
provisions covering other items, including security procedures, currency
transactions reporting, insider and affiliated party transactions, management
interlocks, truth-in-lending, electronic funds transfers, funds availability and
equal credit opportunity.
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TRUSTEES AND EXECUTIVE OFFICERS
The Declaration of Trust provides that there shall be no fewer than three
nor more than twelve Trustees, as determined from time to time by the Trustees
in office. In March 1989, the Board of Trustees reduced its permanent membership
to five Trustees divided into three classes with overlapping three-year terms.
The term of each class expires at the Annual Meeting of shareholders, which is
usually held on the last Friday of January.
The following list sets forth the name, age, position with the Trust,
present principal occupation or employment and material occupations, positions,
offices or employments during the past five years of each Trustee and executive
officer of the Trust. Unless otherwise indicated below, the business address of
each Trustee or executive officer of the Trust is 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815 and, unless otherwise indicated, each individual has held
an office with the Trust for at least the past five years.
CLASS TWO TRUSTEE--TERM ENDS AT 1995 ANNUAL MEETING
George M. Rogers, Jr, age 60, has served as a Trustee since 1969. His
professional corporation is a partner in the law firm of Shaw, Pittman, Potts &
Trowbridge, Washington, D.C., which serves as counsel to the Trust and the Bank.
Mr. Rogers serves as a Director of B.F. Saul Company, Chevy Chase Property
Company, Chevy Chase, Westminster Investing Corporation and Chevy Chase Lake
Corporation. His business address is 2300 N Street, N.W., Washington, D.C.
20037.
CLASS THREE TRUSTEES--TERMS END AT 1996 ANNUAL MEETING
Garland J. Bloom, Jr., age 63, has served as a Trustee since 1964. He is
currently a real estate consultant. He was formerly Executive Vice President and
Principal, GMB Associates, Inc. (a real estate finance and management firm) from
1988 to 1990 and Vice Chairman and Chief Operating Officer of Smithy-Braedon
Company (a real estate finance and management firm) from 1985 to 1987.
John R. Whitmore, age 60, has served as a Trustee since 1984. He also serves
as Director, President and Chief Executive Officer of The Bessemer Group,
Incorporated and its Bessemer Trust Company subsidiaries with which he has a
been associated since 1975 (a financial management and banking group) and as a
Director of Bessemer Securities Corporation, Chevy Chase Property Company, B.F.
Saul Company and Saul Centers, Inc. His business address is 630 Fifth Avenue,
New York, NY 10111.
CLASS ONE TRUSTEES -- TERMS END AT 1997 ANNUAL MEETING
Gilbert M. Grosvenor, age 62, has served as a Trustee since 1971. He also
serves as President and Chairman of the Board of Trustees of the National
Geographic Society and as a Director of Chevy Chase, Saul Centers, Inc.,
Marriott International Corp., Chesapeake and Potomac Telephone Company, Ethyl
Corporation and Charles Allmon Trust, Inc. His business address is 1145 17th
Street, N.W., Washington, D.C. 20036.
B. Francis Saul II, age 61, has served as Chairman and Chief Executive
Officer of the Trust since 1969 and as a Trustee since 1964. He also serves as
President and Chairman of the Board of Directors of B.F. Saul Company, Chevy
Chase Property Company, B.F. Saul Advisory Company and Chevy Chase Lake
Corporation, as Chairman of the Board of Chevy Chase and Saul Centers, Inc., as
President and Chairman of Westminster Investing Corporation and as a Trustee of
the National Geographic Society and the Brookings Institute.
EXECUTIVE OFFICERS OF THE TRUST WHO ARE NOT DIRECTORS
Philip D. Caraci, age 55, serves as Senior Vice President and Secretary of
the Trust, Senior Vice President of B.F. Saul Company and B.F. Saul Advisory
Company, President of Franklin Property Company and a Director and President of
Saul Centers, Inc.
Stephen R. Halpin, Jr., age 38, was appointed Vice President and Chief
Financial Officer of the Trust in fiscal 1994. He also serves as Senior Vice
President and Chief Financial Officer of the Bank.
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Ross E. Heasley, age 55, serves as Vice President of the Trust, Senior Vice
President of B.F. Saul Company, and Vice President of B.F. Saul Advisory
Company, Franklin Property Company and Saul Centers, Inc.
Henry Ravenel, Jr., age 60, serves as Vice President of the Trust and as
Vice President of B.F. Saul Company, B.F. Saul Advisory Company and Saul
Centers, Inc.
William K. Albright, age 62, serves as Vice President and Treasurer of the
Trust, Vice President and Treasurer of B.F. Saul Company, Franklin Property
Company and B.F. Saul Advisory Company, and Vice President of Saul Centers, Inc.
COMMITTEES OF THE BOARD OF TRUSTEES
The Board of Trustees met four times during fiscal 1993. Each member of the
Board attended at least 75% of the aggregate number of meetings of the Board and
of the Committees of the Board on which he served.
The Board of Trustees has three standing committees: the Audit Committee,
the Executive Committee, and the Nominating Committee.
The Audit Committee is composed of Messrs. Bloom and Grosvenor. Its duties
include nominating the Trust's independent auditors, discussing with them the
scope of their examination of the Trust, reviewing with them the financial
statements and accompanying report, and being generally available to receive
their recommendations regarding internal controls and related matters. This
Committee met four times during fiscal 1993.
The Executive Committee is composed of Messrs. Rogers, Saul and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Franklin in
connection with the operation of the Trust, including the acquisition,
administration, sale or disposition of investments. This Committee did not meet
during fiscal 1993.
The Nominating Committee is composed of Messrs. Rogers and Whitmore. Its
function is to screen and make recommendations to the Board of Trustees
regarding potential candidates for membership on the Board and to perform such
other duties as may be assigned to it from time to time. This Committee met once
during fiscal 1993.
Trustees of the Trust are currently paid an annual retainer of $12,500 and a
fee of $600 for each Board or Committee meeting attended. Trustees from outside
the Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul is not paid for attending
Executive Committee meetings. For the fiscal year ended September 30, 1993, the
Real Estate Trust paid total compensation of $78,700 to the Trustees, including
$14,700 to Mr. Saul.
EXECUTIVE COMPENSATION
The Trust pays no compensation to its executive officers for their services
in such capacity. Mr. Saul receives compensation from Chevy Chase, the Trust's
subsidiary, for his services to Chevy Chase as Chairman of the Board of
Directors and Chief Executive Officer. No other executive officer of the Trust
during the fiscal years ended September 30, 1993, 1992 or 1991 received any
compensation from the Trust or its subsidiaries with respect to any one of such
fiscal years.
The following table sets forth the cash compensation paid by the Bank to Mr.
Saul for or with respect to the fiscal years ended September 30, 1993, 1992 and
1991 for all capacities in which he served during such fiscal years.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ----------------------------------------------------- --------- ----------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
B. Francis Saul II 1993 $ 432,504 $ -- $ -- $ 98,048(1)
Chairman and Chief 1992 432,504 -- -- 12,540(2)
Executive Officer 1991 581,775 -- (3) (3)
<FN>
- ------------------------
(1) The amount shown in the "All Other Compensation" column for fiscal 1993
consists of contributions of $25,740 made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul and accrued
earnings of $72,308 on an award previously made under the Bank's deferred
compensation plan on behalf of Mr. Saul.
(2) The amount shown in the "All Other Compensation" column for fiscal 1992
consists of contributions of $12,540 made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul.
(3) No disclosure is required under the transition rules adopted in October
1992 by the Commission relating to the implementation of the executive
compensation rules.
</TABLE>
SECURITY OWNERSHIP
The following table sets forth certain information, at January 1, 1994,
concerning beneficial ownership of Common Shares and Preferred Shares of
Beneficial Interest ("Preferred Shares") by Trustees and executive officers of
the Trust.
<TABLE>
<CAPTION>
AGGREGATE NUMBER
OF SHARES
NAME OF POSITION WITH THE TRUST: BENEFICIALLY PERCENT OF
BENEFICIAL OWNERS PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT OWNED(1) CLASS(1)
- --------------------- ------------------------------------------------------------ ---------------- -----------
<S> <C> <C> <C>
B. Francis Saul II Chairman and Trustee of the Trust; Chairman of the Board of Preferred: 100.00%
Chevy Chase Bank, F.S.B.; President and Chairman of the 516,000(2)
Board of B.F. Saul Company, B.F. Saul Advisory Company and Common: 99.60%
Westminster Investing Corporation; Chairman of the Board and 4,807,510(3)
Chief Executive Officer of Saul Centers, Inc.
Philip D. Caraci Senior Vice President and Secretary of the Trust, Senior Common: 0.40%
Vice President, B.F. Saul Company and of B.F. Saul Advisory 19,400(4)
Company; President of Franklin Property Company; Director
and President of Saul Centers, Inc.
<FN>
- ------------------------
(1) Beneficial ownership and percent of class are calculated pursuant to Rule
13d-3 under the Securities Exchange Act of 1934.
(2) Consists of Preferred Shares owned by B.F. Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than
10% shareholder (comprising 270,000 Preferred Shares owned by B.F. Saul
Company, 90,000 Preferred Shares owned by Franklin Development Company,
Inc., 90,000 Preferred Shares owned by The Klingle Corporation, and 66,000
Preferred Shares owned by Westminster Investing Corporation). The address
of each person listed in this footnote is 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815. Pursuant to Rule 13d-3, the Preferred Shares
described above are considered to be beneficially owned by Mr. Saul
because he has or may be deemed to have sole or shared voting and/or
investment power in respect thereof.
(3) Consists of Common Shares owned by B.F. Saul Company and other companies
of which Mr. Saul is an officer and director and/or more than 10%
shareholder (comprising 1,125,739 Common Shares owned by Westminster
Investing Corporation, 43,673 Common Shares owned by Derwood Investment
Corporation (a subsidiary of Westminster Investing Corporation), 34,400
Common
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Shares owned by Somerset Investment Company, Inc. (a subsidiary of
Westminster Investing Corporation), 2,545,362 Common Shares owned by B.F.
Saul Company, 206,300 Common Shares owned by Columbia Credit Company (a
subsidiary B.F. Saul Company), 283,400 Common Shares owned by Columbia
Securities Company of Washington, D.C., 172,918 Common Shares owned by
Franklin Development Company, Inc., and 395,718 Common Shares owned by The
Klingle Corporation). All of the common shares of the Trust that are owned
by B.F. Saul Company and Columbia Credit Company, representing
approximately 57% of such shares outstanding, are pledged as collateral
for two loans to B.F. Saul Company with an aggregate outstanding balance
of approximately $8.6 million at January 1, 1994. Neither loan is in
default. The address of each person listed in this footnote is 8401
Connecticut Avenue, Chevy Chase, Maryland 20815. Pursuant to Rule 13d-3,
the Common Shares described above are considered to be beneficially owned
by Mr. Saul because he has or may be deemed to have sole or shared voting
and/or investment power in respect thereof.
(4) Mr. Caraci has entered into an agreement with the Trust under which he is
required to sell all Common Shares he then owns to the Trust when his
employment by B.F. Saul Company and any of its affiliates ceases for any
reason, including retirement, termination, death or disability. The price
Mr. Caraci will receive for his Common Shares will be the greater of
$28.00 per Share or the price the Trust determines at the time is the fair
market value thereof.
</TABLE>
Except as noted above, no other Trustee or executive officer of the Trust
owned any Common or Preferred Shares at January 1, 1994.
The Preferred Shares were issued in June 1990 in connection with the
transaction in which the Trust increased its equity interest in the Bank from
60% to 80% of the Bank's common stock. The dividend rate on the Preferred Shares
is $10.50 per share per annum. Dividends are cumulative and are payable annually
or at such other times as the Trustees may determine, as and when declared by
the Trustees out of any assets legally available therefor. The Preferred Shares
have a liquidation preference of $100 per share. Subject to limits in certain of
the Trust's loan agreements, the Preferred Shares are subject to redemption at
the option of the Trust at any time on or after the fifth anniversary of their
issuance at a redemption price equal to their liquidation preference. Except as
otherwise required by applicable law, the holders of Preferred Shares are
entitled to vote only in certain limited situations, such as the merger of the
Trust or a sale of all or substantially all of the assets of the Trust.
RELATED PARTY TRANSACTIONS
REAL ESTATE
TRANSACTIONS WITH B.F. SAUL COMPANY AND ITS SUBSIDIARIES. The Real Estate
Trust is managed by the Advisor, a wholly-owned subsidiary of the Saul Company.
All of the officers of the Trust and B. Francis Saul II, George M. Rogers, Jr.
and John R. Whitmore, each of whom is a Trustee of the Trust, are also officers
and/or directors of the Saul Company and/or its subsidiary corporations. The
Advisor is paid a fixed monthly fee subject to annual review by the Trustees.
During the period July 1, 1990 through March 31, 1991, the fee was $318,000 per
month. Effective April 1, 1991, the fee was reduced to $97,000 per month in
recognition of the lower level of advisory services anticipated for future
periods (since the Trust was not then engaging in any new property acquisitions
or development activities) and the financial condition of the Trust. The fee was
adjusted during fiscal 1993 to $157,000 per month effective January 1993 and
$250,000 per month effective October 1993. The advisory contract was extended
until September 30, 1994, and will continue thereafter unless cancelled by
either party at the end of any contract year. Certain loan agreements prohibit
termination of this contract.
The Saul Company and Franklin, a wholly-owned subsidiary of the Saul
Company, provide services to the Real Estate Trust in the areas of commercial
property management and leasing, hotel and restaurant management, development
and construction management, and acquisitions, sales and financings of real
property. The fee schedules of the Saul Company and Franklin are reviewed and
approved by the Trustees. The Trustees believe that these fees are as favorable
to the Real Estate
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Trust as would be obtainable from unaffiliated sources. Fees to the Saul Company
and Franklin amounted to $1.1 million in the three months ended December 31,
1993, $7.7 million in fiscal 1993, $8.7 million in fiscal 1992 and $7.7 million
in fiscal 1991.
The Real Estate Trust reimburses the Advisor and Franklin for costs and
expenses incurred in connection with the acquisition and development of real
property on behalf of the Real Estate Trust, in-house legal expenses and for all
travel expenses incurred in connection with the affairs of the Real Estate
Trust.
The Real Estate Trust pays the Advisor 1% of the principal amount of
publicly offered Retail Notes as they are issued to offset the Advisor's costs
of administering the program. The Advisor received $42,000 in the three months
ended December 31, 1993 and $118,000 in fiscal 1993. There were no payments made
to the Advisor in fiscal 1992 or 1991.
B.F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the Saul
Company, is a general insurance agency that receives commissions and
countersignature fees in connection with the Real Estate Trust's insurance
program. Such commissions and fees amounted to approximately $55,000 in the
three months ended December 31, 1993, $221,000 in fiscal 1993, $229,000 in
fiscal 1992 and $219,000 in fiscal 1991.
The Saul Company has made a working capital loan to the Real Estate Trust.
The amount outstanding under the loan was $5.9 million at December 31, 1993,
$3.3 million at September 30, 1993 and $100,000 at September 30, 1992.
Subsequent to December 31, 1993, payments by the Real Estate Trust on the loan
reduced the amount outstanding to $3.9 million. The loan accrues interest at a
rate of prime plus 1/2%. The Real Estate Trust incurred interest of $56,000 with
respect to the three months ended December 31, 1993, $7,000 with respect to
fiscal 1993 and $2,000 with respect to fiscal 1992. This loan was repaid in full
with the proceeds of the sale of the Old Notes. See "Use of Proceeds -- Sale of
Old Notes."
The Real Estate Trust obtained a $5.0 million secured loan from The Klingle
Corporation in August 1992. The loan matures on April 30, 1994. The amount
outstanding under the loan was $5.0 million at December 31, 1993, $5.0 million
at September 30, 1993 and $2.9 million at September 30, 1992. The loan accrues
interest at a rate of prime plus 1.5%. The Real Estate Trust incurred interest
expense of $96,000 with respect to the three months ended December 31, 1993,
$365,000 with respect to fiscal 1993 and $15,000 with respect to fiscal 1992.
This loan was repaid in full with the proceeds of the sale of the Old Notes. See
"Use of Proceeds -- Sale of Old Notes."
REMUNERATION OF TRUSTEES AND OFFICERS. For the three months ended December
31, 1993 and the fiscal years ended September 30, 1993, 1992 and 1991, the Real
Estate Trust paid the Trustees $17,000, $79,000, $88,000 and $79,000,
respectively, for their services. See "Trustees and Executive Officers." No
compensation was paid to the officers of the Real Estate Trust for acting as
such; however, Mr. Saul was paid by the Bank for his services as Chairman and
Chief Executive Officer of the Bank and Gilbert M. Grosvenor, George M. Rogers,
Jr. and Mr. Saul have been paid as directors of the Bank. Messrs. Saul, Rogers
and Whitmore and all of the officers of the Real Estate Trust receive
compensation from the Saul Company and/or its subsidiary corporations as
directors or officers thereof.
LEGAL SERVICES. For legal services to the Real Estate Trust and its
subsidiaries, the law firm in which the professional corporation of George M.
Rogers, Jr., a Trustee of the Trust, is a partner received $0.2 million in the
three months ended December 31, 1993, $1.2 million in fiscal 1993, $2.1 million
in fiscal 1992 and $2.2 million in fiscal 1991, excluding expense
reimbursements.
SALE OF AVENEL BUSINESS PARK -- PHASE I. In 1984, the Real Estate Trust
sold Avenel Business Park -- Phase I to an affiliate, Avenel Associates Limited
Partnership ("Avenel"), for $8.9 million based on an independent appraisal. The
managing general partner of Avenel was a subsidiary of the Saul Company, and a
subsidiary of the Bank owned an approximately 45% interest in Avenel. The Real
Estate Trust received the sales price for the property in the form of cash, a
purchase money note in the
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<PAGE>
amount of $1.7 million and the assumption of a first trust loan. The net gain
realized upon the sale was $3.0 million, after deducting a $781,000 discount of
the purchase money note due to its below-market interest rate. The Real Estate
Trust has continued to defer recognition of this gain for accounting purposes
pending a sale of the property to an unaffiliated entity. In late August 1993,
Avenel sold the property to Saul Holdings Partnership and redeemed the purchase
money note held by the Real Estate Trust . See "Business -- Real Estate --
Investment in Saul Holdings Limited Partnership." Since Saul Holdings
Partnership is an affiliate of the Real Estate Trust, this transaction has had
no effect on the status of recognition of the gain deferred since 1984.
OTHER TRANSACTIONS. The Real Estate Trust leases space to the Bank,
Franklin and the Saul Company at several of its income-producing properties.
Minimum rents and recoveries paid by these affiliates amounted to approximately
$13,000 in the three months ended December 31, 1993, $460,000 in fiscal 1993,
$533,000 in fiscal 1992 and $558,000 in fiscal 1991.
In August 1993, the Real Estate Trust transferred its 22 shopping center
properties and one of its office properties, together with the debt associated
with such properties, to Saul Holdings Partnership and a subsidiary limited
partnership of Saul Holdings Partnership. Mr. Saul is the Chairman of the Board
of Directors and Chief Executive Officer of Saul Centers, the general partner of
Saul Holdings Partnership. See "Business -- Real Estate -- Investment in Saul
Holdings Limited Partnership."
BANKING
Set forth below are certain transactions between the Bank and executive
officers and directors of the Trust and certain of their affiliates. Management
believes that the transactions with related parties described herein have been
conducted on substantially the same terms as similar transactions with unrelated
parties.
LOANS. The Bank made a permanent loan to a partnership in which its
wholly-owned subsidiary, Manor, was a limited partner. The amount outstanding
under the loan agreement was $270,000 at September 30, 1993, $355,000 at
September 30, 1992 and $426,000 at September 30, 1991. The loan had a fixed
interest rate of 10.0%. In fiscal 1993, 1992 and 1991, contractual interest on
the loan amounted to $31,000, $39,000 and $46,000, respectively. At September
30, 1993, this loan was current in accordance with its terms. Subsequent to
September 30, 1993, the loan was repaid in full and Manor sold its limited
partnership interest to the general partner.
SERVICES. The Saul Company and its subsidiaries provide certain services to
the Bank and its subsidiaries. These services have included property management,
cafeteria management, leasing, insurance brokerage and data processing. The Bank
paid the Saul Company fees for these services totaling $121,000 in the three
months ended December 31, 1993, $630,000 in fiscal 1993, $603,000 in fiscal 1992
and $460,000 in fiscal 1991. Subject to certain restrictions under applicable
OTS conflict of interest rules, the Bank intends to continue using the Saul
Company and its subsidiaries for many of these services, provided that the fees
remain competitive with fees charged for similar services by unrelated parties.
OTHER TRANSACTIONS. For legal services to the Bank and its subsidiaries,
the law firm in which the professional corporation of Mr. Rogers, a Trustee of
the Trust, is a partner received $1.1 million in the three months ended December
31, 1993, $2.7 million in fiscal 1993, $3.0 million in fiscal 1992 and $3.0
million in fiscal 1991, excluding expense reimbursements.
The Bank or a wholly-owned subsidiary leases certain branches or offices
from the Trust and certain branch offices from other affiliates of which Mr.
Saul is an officer, director and may be deemed to own beneficially more than 10%
of the equity. Payments to the Trust under the leases were $0 in the three
months ended December 31, 1993, $399,000 in fiscal 1993, $477,000 in fiscal 1992
and $483,000 in fiscal 1991. Payments to the other affiliates under the leases
were $205,000 in the three months ended December 31, 1993, $268,000 in fiscal
1993, $195,000 in fiscal 1992 and $124,000 in fiscal 1991.
135
<PAGE>
The Bank leases its operations center from Chevy Chase Lake Corporation
("Lake"), an affiliate of which Mr. Saul is an officer, director and may be
deemed to own beneficially more than 10% of the equity. Payments under this
lease totaled approximately $372,000 in the three months ended December 31, 1993
and $1.4 million in each of fiscal 1993, 1992 and 1991.
Lake, the Trust and the Saul Company from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled $13.4
million at December 31, 1993, $17.1 million at September 30, 1993, $3.7 million
at September 30, 1992 and $6.2 million at September 30, 1991. The Bank paid
interest on the accounts amounting to $127,000 in the three months ended
December 31, 1993, $113,000 in fiscal 1993, $134,000 in fiscal 1992 and $595,000
in fiscal 1991.
Manor owned approximately 45% of the limited partnership interests in
Avenel, which owned a commercial property. See "Real Estate -- Sale of Avenel
Business Park -- Phase I." The general partner of Avenel was a subsidiary of the
Saul Company. In August 1993, Avenel sold this property and the Bank transferred
two real estate properties to Saul Holdings Partnership. See "Business -- Real
Estate -- Investment in Saul Holdings Partnership." These assets were
transferred at amounts that exceeded their net carrying values. During December
1993, upon payment of a final distribution to its partners, Avenel was
dissolved.
The Bank traditionally has offered home mortgage loans, home equity credit
line loans, automobile loans and credit card loans to its executive officers and
directors, some of whom are also executive officers and directors of the Trust.
Management does not believe these loans involve more than the normal risk of
collectibility. Each loan bears interest at prevailing market rates. All such
loans are currently made to executive officers and directors of the Bank on
substantially the same terms prevailing at the time for comparable transactions
with unrelated parties. FIRREA imposes certain limits on loans, including
prohibitions on preferential loans, by the Bank to its directors, executive
officers, principal shareholders and their related interests.
At December 31, 1993, September 30, 1993, September 30, 1992 and September
30, 1991, the aggregate dollar amount of the indebtedness to the Bank of
executive officers and directors of the Bank and their immediate family members
or companies with which they are affiliated was $4.5 million, $4.3 million, $4.1
million and $3.7 million, respectively. This amount represented 1.5% of the
Bank's stockholders' equity at December 31, 1993 and September 30, 1993, 2.3% at
September 30, 1992 and 2.4% at September 30, 1991.
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<PAGE>
DESCRIPTION OF THE NOTES
The Old Notes were issued, and the New Notes will be issued, under an
indenture, dated as of March 30, 1994 (the "Indenture"), between the Trust, as
issuer, and Norwest Bank Minnesota, National Association, as trustee (the
"Trustee"), a copy of the form of which will be made available to prospective
purchasers of the Notes upon request. The Indenture is subject to and governed
by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
summary of certain provisions of the Indenture and the Notes set forth below
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Indenture and the Notes. For definitions of certain
capitalized terms used in the following summary, see "Certain Definitions."
Capitalized terms not otherwise defined herein have the meanings specified in
the Indenture.
As used in "Description of the Notes," the term "Trust" generally refers to
B.F. Saul Real Estate Investment Trust.
GENERAL
The Notes will mature on April 1, 2002 and will be limited in aggregate
original principal amount to $175,000,000.The Old Notes are, and the New Notes
will be, general, secured obligations of the Trust. The New Notes will be issued
in fully registered form only in denominations of $1,000 and integral multiples
in excess thereof solely in exchange for an equal principal amount of Old Notes
pursuant to the Exchange Offer. See "The Exchange Offer." Principal of, premium,
if any, and interest on the Notes will be payable and the Notes will be
transferable (subject to compliance with transfer restrictions imposed by
applicable securities laws with respect to any Old Notes remaining outstanding
after the Exchange Offer) at the Corporate Trust office or agency of the Trustee
in The City of New York maintained for such purposes at Norwest Trust Company, 3
New York Plaza, 15th Floor, New York, New York 10004, unless the Trust shall
designate and maintain some other office or agency for such purposes. In
addition, interest may be paid, at the option of the Trust, by check mailed to
the Person entitled thereto as shown on the security register. No service charge
will be made for any transfer, exchange or redemption of Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.
Old Notes, if any, that remain outstanding after the consummation of the
Exchange Offer and New Notes will be treated as a single class of securities
under the Indenture.
INTEREST AND PRINCIPAL PAYMENTS
Each Note will bear interest at a rate of 11 5/8% from March 30, 1994 or
from the most recent interest payment date to which interest has been paid,
payable in cash semiannually in arrears on April 1 and October 1 of each year,
commencing on October 1, 1994, to the Person in whose name the Note (or any
predecessor Note) is registered in the Note Register at the close of business on
the March 15 or September 15 next preceding such interest payment date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Interest on the Old Notes accepted for exchange pursuant to the Exchange
Offer will cease to accrue upon issuance of the New Notes. Holders of Old Notes
whose Old Notes are accepted for exchange will be deemed to have waived the
right to receive any payment in respect of interest on the Old Notes accrued
from March 30, 1994 to the date of issuance of the New Notes. Consequently,
holders who exchange their Old Notes for New Notes will receive the same
interest payment on October 1, 1994 (the first interest payment date with
respect to the New Notes) that they would have received had they not accepted
the Exchange Offer.
As described under "The Exchange Offer -- Purpose and Effect of the Exchange
Offer," the interest rate borne by the Old Notes will increase by an additional
one-half of one percent per annum if the Exchange Offer is not consummated or a
Shelf Registration Statement is not declared effective, in each case, on or
prior to the 190th calendar day following March 30, 1994, the date of original
issue of the Old Notes. Upon the consummation of the Exchange Offer or the
effectiveness of a Shelf
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Registration Statement, as the case may be, after such 190-day period, the
interest rate borne by the Old Notes from the date next succeeding the date of
such consummation or effectiveness, as the case may be, will be reduced to the
original interest rate.
SECURITY
The Old Notes are, and the New Notes will be, secured by a first priority
perfected security interest in 80% (8,000 shares) of the common stock of the
Bank issued and outstanding as of the date of issuance of the Old Notes (the
"Pledged Bank Stock") and by certain dividends, cash, instruments and other
property and proceeds from time to time distributed with respect to the Pledged
Bank Stock. The ability of the Trustee to obtain and maintain a first priority
perfected security interest in such distributions may be limited to the extent
that the Trustee does not, or is not able to, cause the Pledged Bank Stock to be
registered in its name. See "Certain Regulatory Considerations" below.
So long as no Default or Event of Default has occurred and is continuing,
the Trust may require the Trustee to release Pledged Bank Stock from the Lien of
the Indenture by depositing, in the form of cash or U.S. Government Securities,
into a collateral account (the "Collateral Account") with the Trustee $25,000
for each share of Pledged Bank Stock (adjusted for stock splits and
combinations) that is to be released from such Lien. Any shares so released will
no longer be included in the Pledged Bank Stock. The Trustee will have a first
priority lien on and security interest in the collateral (together with the
Pledged Bank Stock, the "Bank Collateral") deposited in the Collateral Account
as security for the Notes. The Trust has covenanted, whether or not it obtains
the release of any Pledged Bank Stock, that it will ensure that the Pledged Bank
Stock at all times constitutes at least 66 2/3% of the aggregate issued and
outstanding shares of both Voting Stock and common stock of the Bank.
The Old Notes also are, and the New Notes will be, secured by a first
priority perfected security interest in cash, U.S. Government Securities,
Certificates of Deposit or (after the consummation of the Exchange Offer) Margin
Securities (the "Liquidity Maintenance Collateral" and, with the Bank
Collateral, the "Collateral") in an additional collateral account (the
"Liquidity Maintenance Account") with the Trustee. At the time of issuance of
the Old Notes, the Collateral Value (as described below) of the Liquidity
Maintenance Collateral was $25.8 million, which equalled the sum of (i) one
year's interest payments on the Notes and (ii) one year's estimated interest
payments on the Trust's Retail Notes. Each calendar quarter thereafter, the then
current Collateral Value of the Liquidity Maintenance Collateral will be
recalculated and the required Collateral Value will be recalculated based on, in
the case of the Notes, the principal amount thereof outstanding as of the end of
such calendar quarter, and, in the case of the Retail Notes, the annualized
amount of the aggregate amount of interest accrued during the preceding calendar
quarter. At the beginning of each calendar quarter, no more than 50% of the
required aggregate Collateral Value of the Liquidity Maintenance Collateral may
be represented by Margin Securities and the current Collateral Value of all
Liquidity Maintenance Collateral must at least equal the required amount
thereof, as calculated for such calendar quarter. If there is any excess
Liquidity Maintenance Collateral at the time of such recalculations, such excess
will be returned to the Trust upon request, and if there is any deficiency, the
Trust will be required to make an additional deposit of Liquidity Maintenance
Collateral into the Liquidity Maintenance Account with a Collateral Value
sufficient to remedy the deficit. The term "Collateral Value" means, for cash,
the amount thereof, for U.S. Government Securities and Certificates of Deposit,
the principal amount thereof and, for Margin Securities, 50% of the market value
thereof, determined as provided in the Indenture. Margin Securities to be
pledged as Collateral may not include securities of any Affiliate of the Trust,
other than the common stock of Saul Centers.
So long as no Default or Event of Default has occurred and is continuing,
the Trust is entitled to receive all cash dividends, other distributions (other
than distributions constituting a return of capital) and interest in respect of
the Collateral. While a Default or Event of Default has occurred and is
continuing, the Trustee is entitled to hold all such dividends, distributions
and interest as additional Collateral.
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The Trust, subject to certain restrictions, may require the Trustee to
invest Bank Collateral (other than the Pledged Bank Stock) in U.S. Government
Securities or Certificates of Deposit, and Liquidity Maintenance Collateral in
U.S. Government Securities, Certificates of Deposit or (after the consummation
of the Exchange Offer) Margin Securities. Upon giving effect to any such
investment of Liquidity Maintenance Collateral, no more than 50% of the required
aggregate Collateral Value of the Liquidity Maintenance Collateral may be
represented by Margin Securities and the current Collateral Value of all
Liquidity Maintenance Collateral must at least equal the required amount
thereof, as calculated for the current calendar quarter. The Trust's rights to
direct the sale and investment of Collateral will be suspended when a Default or
an Event of Default has occurred and is continuing.
So long as no Event of Default has occurred and is continuing, the Trust is
entitled to exercise all voting rights with respect to the Pledged Bank Stock
and other Collateral, provided that no vote is cast that is inconsistent with
the provisions of the Indenture. While an Event of Default has occurred and is
continuing, the Trustee may exercise all such rights with respect to Collateral
other than Pledged Bank Stock and, on five days' notice to the Trust and subject
to the satisfaction of any regulatory requirements, exercise all such rights
with respect to the Pledged Bank Stock.
If an Event of Default shall have occurred and be continuing, the Trustee
may exercise certain rights and remedies with respect to the Collateral,
including those of a secured party under the Uniform Commercial Code and the
right to sell some or all of the Collateral at a public or private sale as
provided in the Indenture. The Trustee's exercise of remedies with respect to
the Collateral will be subject to the satisfaction of any regulatory
requirements, and will be limited by bankruptcy law in the event of a bankruptcy
and pursuant to other applicable laws, including antitrust laws and securities
laws.
The Trust has entered into a registration rights agreement with the Trustee
that will obligate the Trust to use its best efforts to cause the Bank to
register the Pledged Bank Stock if the Trustee shall so require in connection
with any exercise of remedies with respect thereto, but no assurance can be
given that such a registration will be practicable in the future.
Under the Indenture and subject to certain limitations set forth therein,
the Holders of not less than a majority in outstanding principal amount of the
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee.
Proceeds from the exercise of remedies with respect to the Collateral shall
be applied first to amounts due the Trustee under the Indenture and second to
the payment of principal, premium, if any, and interest on the Notes, ratably,
without preference or priority. Such proceeds may not be sufficient to satisfy
all amounts owing with respect to the Notes.
Upon satisfaction by the Trust of the conditions to its legal defeasance
option or its covenant defeasance option or the discharge of the Indenture, the
Lien of the Indenture on all the Collateral will terminate and all the
Collateral will be released. Upon any partial redemption of the Notes, however,
the Lien of the Indenture on the Collateral will not terminate.
CERTAIN REGULATORY CONSIDERATIONS. Regulatory considerations may affect the
ability of the Trustee to exercise certain remedies upon the occurrence of an
Event of Default, including the registration of the Pledged Bank Stock in its
name. OTS regulations require the Trust, to the extent it remains subject to the
Capital Maintenance Agreement, to file a notice with the OTS prior to
"divestiture" of the Bank so that the OTS may determine if there is any
outstanding obligation under the Capital Maintenance Agreement. If the OTS were
to determine that an outstanding obligation under the Capital Maintenance
Agreement existed, holding a foreclosure sale or exercising voting rights with
respect to the Pledged Bank Stock could be conditioned upon the satisfaction of
such obligation. Under the terms of the Indenture, the Trustee may not take any
action that would expose Holders of the Notes to liability under the Capital
Maintenance Agreement. See "Risk Factors and Other Considerations -- Regulatory
Considerations Affecting Enforcement of Remedies Following an Event of Default."
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CERTAIN BANKRUPTCY LIMITATIONS. The right of the Trustee to foreclose on
and dispose of the Collateral or to exercise voting rights with respect to the
Pledged Bank Stock upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Trust prior to the Trustee having
foreclosed on and disposed of the Collateral. Under the Bankruptcy Code, a
secured creditor such as the Trustee is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval. Moreover, the
Bankruptcy Code permits the debtor to continue to retain and use collateral (and
the proceeds, products, offspring, rents or profits of such collateral) even
though the debtor is in default under the applicable debt instruments, provided
that the secured creditor is given "adequate protection." The meaning of the
term "adequate protection" may vary according to circumstances, but it is
intended in general to protect the value of the secured creditor's interest in
the collateral and may include, if approved by the court, cash payments or the
granting of additional security for any diminution in the value of the
collateral as a result of the stay of repossession or disposition or any use of
the collateral by the debtor during the pendency of the bankruptcy case. In view
of the lack of a precise definition of the term "adequate protection" and the
broad discretionary powers of a bankruptcy court, it is impossible to predict
how long payments under the Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could repossess or dispose of the
Collateral or whether or to what extent Holders of the Notes would be
compensated for any delay in payment or loss of value of the Collateral through
the requirement of "adequate protection."
OPTIONAL REDEMPTION
The Notes will be subject to redemption at any time on or after April 1,
1998, at the option of the Trust, in whole or in part, at the following
redemption prices (expressed as a percentage of the principal amount), if
redeemed during the 12-month period beginning April 1 of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................. 105.70%
1999............................................................................. 103.80%
2000............................................................................. 101.90%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to but excluding the redemption date
(subject to the right of Holders of record on each Regular Record Date to
receive interest due on the related Interest Payment Date).
In addition, as described below, upon the occurrence of a Change of Control
Triggering Event, the Trust is obligated to make an offer to purchase all
outstanding Notes at a redemption price of 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of purchase. See "Certain Covenants
- -- Change of Control Triggering Event."
If at any time less than all of the Notes then outstanding are to be
redeemed, the Trustee shall select the Notes or portions thereof to be redeemed
pro rata, by lot or by any other method the Trustee shall deem fair and
reasonable. Notes in denominations larger than $1,000 may be redeemed in part in
integral multiples of $1,000. Notice of redemption will be mailed to each Holder
of Notes to be redeemed at such Holder's registered address at least 30, but not
more than 60, days before the redemption date. On or after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption.
NO SINKING FUND
The Old Notes are not, and the New Notes will not be, entitled to the
benefit of any sinking fund.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
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LIMITATION ON INDEBTEDNESS. (a) The Trust will not create, incur, issue,
assume, guarantee or otherwise in any other manner become directly or indirectly
liable for the payment of any Indebtedness (including Acquired Indebtedness),
other than Permitted Indebtedness, unless the Trust's Operating Cash Flow
Coverage Ratio for the four full fiscal quarters immediately preceding the
incurrence of such Indebtedness, taken as one period and after giving PRO FORMA
effect to the incurrence of such Indebtedness (and all other Indebtedness
incurred since the end of the most recently completed fiscal quarter of the
Trust preceding the date of determination) and (if applicable) the application
of the net proceeds therefrom (and from any such other Indebtedness), including
to refinance other Indebtedness, as if such Indebtedness (and any such other
Indebtedness) had been incurred on the first day of such four-quarter period,
would have been greater than or equal to 2.0 to 1.0.
If the Trust or any Subsidiary has acquired (whether by purchase, merger or
otherwise) or disposed of (whether by sale, merger or otherwise) any company,
entity or business since the first day of such four-quarter period preceding the
date of determination, the foregoing calculation shall be made on a PRO FORMA
basis as if such acquisition or disposition had been completed on the first day
of such four-quarter period.
(b) The Trust will not permit any of its Subsidiaries (other than the Bank
and its Subsidiaries) to incur any Indebtedness (including any Acquired
Indebtedness), other than Permitted Subsidiary Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Trust will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, the Trust's Capital Stock (other than dividends or distributions to the
extent payable in Qualified Capital Stock of the Trust),
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any Capital Stock of the Trust or any direct or indirect
parent of the Trust or any options, warrants or other rights to acquire such
Capital Stock,
(iii) declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of any Subsidiary (other than with respect to (A) any
such Capital Stock held by the Trust or any of its Wholly Owned Subsidiaries
or (B) any such Capital Stock of the Bank or any of its Subsidiaries) or
purchase, redeem or otherwise acquire or retire for value, any Capital Stock
of any Subsidiary (other than (A) any such Capital Stock held by the Trust
or any of its Wholly Owned Subsidiaries or (B) any Capital Stock held by the
Bank or its Subsidiaries of any of their Subsidiaries),
(iv) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness of the Trust,
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Trust (other than with respect to (A) guarantees of
Indebtedness of any Wholly Owned Subsidiaries by the Trust or by any
Subsidiary of the Trust, (B) guarantees of Indebtedness of the Trust by any
Subsidiary or (C) guarantees of Indebtedness of the Bank or its Subsidiaries
by any Affiliate of the Trust), or
(vi) make any Investment in any Person
(each of the foregoing actions described in (but not excluded from) clauses (i)
through (vi), other than any such action that is a Permitted Payment (as defined
below), is referred to herein as a "Restricted Payment") UNLESS after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined in good faith by the Board of
Trustees of the Trust, whose determination shall be conclusive and evidenced by
a Board Resolution), (1) no Default
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or Event of Default shall have occurred and be continuing and (2) the aggregate
amount of all such Restricted Payments declared or made after the date of the
Indenture shall not exceed the sum (without duplication) of:
(A) 25% of the aggregate Consolidated Net Income (Loss) of the Trust
accrued on a cumulative basis during the period beginning on April 1, 1994
and ending on the last day of the Trust's last fiscal quarter ending prior
to the date of the Interest Payment Date immediately preceding the date of
such proposed Restricted Payment (or, if such Consolidated Net Income (Loss)
shall be a loss, minus 100% of such loss);
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock of the Trust (other than Redeemable
Capital Stock) or warrants, options or rights to purchase such shares of
Capital Stock of the Trust;
(C) the aggregate net cash proceeds received after the date of the
Indenture by the Trust as capital contributions;
(D) the aggregate net cash proceeds received after the date of the
Indenture by the Trust (other than from any of its Subsidiaries) upon the
exercise of options, warrants or rights to purchase shares of Capital Stock
of the Trust (other than Redeemable Capital Stock);
(E) the aggregate net cash proceeds received after the date of the
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of debt securities that have been converted into or exchanged
for Capital Stock of the Trust (other than Redeemable Capital Stock),
together with the aggregate net cash proceeds received by the Trust at the
time of such conversion or exchange; and
(F) $15,000,000;
PROVIDED that the provisions of paragraph (a) will not restrict the payment of
any dividend within 60 days after the date of declaration thereof if, at such
date of declaration, such declaration and payment were permitted by the
provisions of paragraph (a).
(b) Notwithstanding paragraph (a) above, the Trust and its Subsidiaries may
take the following actions (each a "Permitted Payment") so long as no Default or
Event of Default shall have occurred and be continuing:
(i) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Trust, in exchange for, or out
of the net cash proceeds of, a substantially concurrent issuance and sale
(other than to a Subsidiary) of shares of Capital Stock (other than
Redeemable Capital Stock) of the Trust;
(ii) the exchange by the Bank of the 13% Preferred Stock for new
Indebtedness of the Bank which has no Stated Maturity of principal (or any
required repurchase, redemption, defeasance or sinking fund payments) on or
prior to the final Stated Maturity of principal of the Notes; PROVIDED that,
after giving effect to such exchange, the Bank has (i) a leverage (core)
capital ratio equal to or in excess of 5.5%, (ii) a tier 1 risk-based
capital ratio equal to or in excess of 6.5% and (iii) a total risk-based
capital ratio equal to or in excess of 11%, as such ratios are calculated in
accordance with 12 C.F.R. Section 567 or any successor law or regulation;
(iii) the redemption by the Bank of any of the PIK Preferred Stock;
(iv) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness (other than Redeemable
Capital Stock) in exchange for or out of the net cash proceeds of a
substantially concurrent issuance and sale (other than to a Subsidiary) of
shares of Capital Stock (other than Redeemable Capital Stock) of the Trust;
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(v) the repurchase of any Subordinated Indebtedness of the Trust at a
purchase price not greater than 101% of the principal amount of such
Subordinated Indebtedness in the event of a Change of Control pursuant to a
provision similar to the "Change of Control Triggering Event" covenant;
PROVIDED that prior to such repurchase the Trust has made the Change of
Control Offer as provided in such covenant with respect to the Notes and has
repurchased all Notes validly tendered for payment in connection with such
Change of Control Offer;
(vi) the repurchase, redemption or other acquisition or retirement for
value of Subordinated Indebtedness (other than Redeemable Capital Stock), in
exchange for, or out of the net cash proceeds of a substantially concurrent
issue and sale (other than to a Subsidiary of the Trust) of new Subordinated
Indebtedness of the Trust (such a transaction, a "refinancing"); PROVIDED
that any such new Indebtedness of the Trust (a) shall be in a principal
amount that does not exceed an amount equal to the sum of (i) 101% of an
amount equal to the principal amount so refinanced less any discount from
the face amount of the Indebtedness to be refinanced expected to be deducted
from the amount payable to the holders of such Indebtedness in connection
with such refinancing, (ii) the amount of any premium expected to be paid in
connection with such refinancing pursuant to the terms of the Subordinated
Indebtedness refinanced or the amount of any premium reasonably determined
by the Trust as necessary to accomplish such refinancing by means of a
tender offer, privately negotiated repurchase or otherwise and (iii) the
amount of expenses of the Trust incurred in connection with such
refinancing; PROVIDED, FURTHER, that for purposes of this clause (a), the
principal amount of any Indebtedness shall be deemed to mean the principal
amount thereof or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination;
(b) (x) if such refinanced Subordinated Indebtedness has an Average Life to
Stated Maturity shorter than that of the Notes or a final Stated Maturity
earlier than the final Stated Maturity of the Notes, such new Indebtedness
shall have an Average Life to Stated Maturity no shorter than the Average
Life to Stated Maturity of such refinanced Indebtedness and a final Stated
Maturity no earlier than the final stated Maturity of such refinanced
Indebtedness or (y) in all other cases, each Stated Maturity of principal
(or any required repurchase, redemption or sinking fund payments) of such
new Indebtedness shall be on or after the final Stated Maturity of principal
of the Notes; and (c) is (x) made expressly subordinate to the Notes to
substantially the same extent as the Subordinated Indebtedness being
refinanced or (y) expressly subordinated to such refinanced Subordinated
Indebtedness;
(vii) guarantees of Indebtedness of Saul Holdings Partnership and its two
subsidiary partnerships pursuant to the Reimbursement Agreement; and
(viii) Permitted Investments.
The actions described in clauses (i), (iv) and (v) of this paragraph (b) shall
be Restricted Payments that shall be permitted to be taken in accordance with
this paragraph (b) but shall reduce the amount that would otherwise be available
for Restricted Payments under clause (2) of paragraph (a) to the extent, in the
case of clauses (i) and (iv), the Trust receives net cash proceeds, and the
actions described in clauses (ii), (iii), (vi), (vii) and (viii) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (2) of paragraph
(a).
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Trust will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Trust (except that the Bank and any of its
Subsidiaries may enter into any transaction or series of related transactions
with any Subsidiary of the Bank or any Securitization Entity, and the Trust and
any Wholly Owned Subsidiary of the Trust may enter into any transaction or
series of related transactions with any Wholly Owned Subsidiary of the Trust
without limitation under this covenant) UNLESS (i) such transaction or series of
related transactions is in writing on terms
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that are no less favorable to the Trust or such Subsidiary, as the case may be,
than would be available in a comparable transaction in an arm's-length dealing
with a Person that is not such an Affiliate or, in the absence of such a
comparable transaction, on terms that in good faith would be offered to a Person
that is not an Affiliate, (ii) with respect to any transaction or series of
related transactions involving aggregate payments in excess of $2,500,000, the
Trust delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (i) above and
such transaction or series of related transactions has been approved by a
majority of the Disinterested Trustees of the Board of Trustees of the Trust and
(iii) with respect to any transaction or series of related transactions
involving aggregate payments in excess of $10,000,000, or in the event no
members of the Board of Trustees of the Trust are Disinterested Trustees with
respect to any transaction or series of related transactions included in clause
(ii), (x) in the case of a transaction involving real property, the aggregate
rental or sale price of such real property shall be the fair market sale or
rental value of such real property as determined in a written opinion by a
nationally recognized expert with experience in appraising the terms and
conditions of the type of transaction or series of transactions for which
approval is required and (y) in all other cases, the Trust delivers to the
Trustee a written opinion of a nationally recognized expert with experience in
appraising the terms and conditions of the type of transaction or series of
transactions for which approval is required to the effect that the transaction
or series of transactions are fair to the Trust or such Subsidiary from a
financial point of view.
The limitation set forth in the above paragraph will not apply to (i)
transactions entered into pursuant to Management Agreements, (ii) residential
mortgage, credit card and other consumer loans to an Affiliate who is an
officer, director or employee of the Trust or any of its Subsidiaries, (iii) any
transaction or series of related transactions in which the total amount involved
does not exceed $100,000, (iv) transactions pursuant to the Tax Sharing
Agreement, (v) payment of legal expenses incurred on behalf of the Trust or its
Subsidiaries in an aggregate amount not to exceed $300,000 in any fiscal year,
(vi) payment of construction and development fees incurred on behalf of the
Trust or its Subsidiaries in an aggregate amount not to exceed $500,000 in any
fiscal year, (vii) payment of financing fees of up to 1% of the aggregate
principal amount of Retail Notes issued and sold after the date of the
Indenture, (viii) transactions permitted under the "Limitation on Restricted
Payments" covenant and (ix) payment of up to $3,500,000 of Advisory Fees in any
fiscal year, after adjustment for annual increases in the consumer price index,
as reported by the United States Department of Labor, Bureau of Labor
Statistics; PROVIDED, HOWEVER, that Advisory Fees may only be paid so long as
(i) the Trust does not hire employees and (ii) no Default or Event of Default
shall have occurred and be continuing.
(b) If (i) the Trust shall fail to have delivered to the Trustee within 60
days after the end of each of the Bank's fiscal quarters, (x) a written
certification executed by the chief financial officer and any vice chairman or
any other senior vice president of the Bank stating that the Bank, as of the end
of its most recent fiscal quarter, was in substantial compliance with any
memorandum of understanding, written agreement, prompt corrective action
directive, capital directive or cease and desist order applicable to the Bank
which memorandum, agreement, directive or order relates to matters involving
asset quality, capital, reserves, earnings, liquidity, management or growth and
is entered into with or issued by any Federal bank regulatory authority (and
identifying each such memorandum, agreement, directive and order), which
certification shall be supported in each instance by a copy of excerpts of the
minutes of a meeting of the Audit Committee of the Board of Directors of the
Bank (together with the report to the Board of Directors reviewed by the Audit
Committee) addressing the compliance by the Bank with each such memorandum,
agreement, directive or order (whether or not then required pursuant to such
memorandum, agreement, directive or order) or (y) a written certification (which
may be combined with the certification described in clause (x) above) executed
by the chief financial officer and any vice chairman or any other senior vice
president of the Bank stating that the Bank, as of the end of its most recent
fiscal quarter, had a composite rating under the CRA and its implementing
regulations or any successor law or regulation as "satisfactory" or better (or
any other equivalent rating) or, if not rated as "satisfactory" or better, that
any failure to be so rated would not have a
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material adverse effect on the condition (financial or otherwise), earnings,
business affairs or business prospects of the Bank or (ii) the Bank shall fail
to comply with any of its Regulatory Capital Requirements, then, in any such
case, (A) the Trust shall not and shall not permit any Subsidiary (other than
the Bank or its Subsidiaries) to, directly or indirectly, make any payments
pursuant to clauses (a)(v), (vi) or (vii) above, any Restricted Payments
otherwise permitted by clause (a)(2) of the "Limitation on Restricted Payments"
covenant, any Permitted Payments, other than actions permitted by clauses (iii),
(vi), (vii) and (viii) of paragraph (b) of the "Limitation on Restricted
Payments" covenant, or any Investments in any Person (other than Permitted
Investments permitted by clauses (i), (ii), (iii), (vi), or (vii) of the
definition thereof) or otherwise engage in any activity (including purchases,
acquisition by lease and other acquisitions of additional real property and
buildings) other than operating its then existing businesses in the ordinary
course and (B) the amount of Advisory Fees permitted to be paid by the Trust
shall be reduced to $2,500,000 in any fiscal year until, in each case, the Trust
shall have delivered each of such written certifications and excerpts of Audit
Committee minutes (together with such report reviewed by the Audit Committee)
and the Bank shall have complied with all of its Regulatory Capital
Requirements.
(c) The Trust will not, and will not permit any of its Subsidiaries, to
amend, modify or in any way alter the terms of the Management Agreements or the
Advisory Agreement in a manner adverse to the interests of the Holders of the
Notes, except as otherwise permitted by the Indenture, or to change the
properties subject to the Management Agreements.
LIMITATION ON ASSET SALES. The Trust will not, and will not permit any of
its Subsidiaries (other than the Bank and its Subsidiaries) to, engage in any
Asset Sale unless (i) such Asset Sale is for not less than the fair market value
of the shares of Capital Stock or assets sold and (ii) the consideration
received by the Trust or the relevant Subsidiary in respect of such Asset Sale
consists of 100% cash, Cash Equivalents or securities that can be immediately
converted into Margin Securities. The term fair market value means, with respect
to property received in connection with an Asset Sale, (i) for cash, the amount
thereof, (ii) for U.S. Government Securities, Indebtedness directly and fully
guaranteed by the United States of America or any instrumentality thereof,
certificates of deposit and commercial paper, the face amount thereof, and (iii)
for Partnership Units, Margin Securities and securities that can be immediately
converted into Margin Securities, the market value thereof.
RESTRICTION ON TRANSFER OF ASSETS TO SUBSIDIARIES. The Trust will not sell,
convey, transfer or otherwise dispose of its assets or property to any of its
Subsidiaries except for (i) sales, conveyances, transfers or other dispositions
of assets or property in an amount permitted by the "Limitation on Restricted
Payments" covenant and (ii) sales, conveyances, transfers or other distributions
of Real Estate Property to Single Asset Subsidiaries.
LIMITATION ON SUBSIDIARIES. The Trust will not (i) permit any of its Single
Asset Subsidiaries to acquire additional Real Estate Property or make
Investments in any other Person other than the Trust or (ii) create any new
Subsidiaries other than Single Asset Subsidiaries.
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Trust will not, and will not permit any Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Subsidiary that
receives Real Estate Property from the Trust after the date of the Indenture to
(i) pay dividends or make any other distributions on or in respect of its
Capital Stock or any other interest or participation in, or measured by, its
profits, (ii) pay any Indebtedness owed to the Trust or any other Subsidiary,
(iii) make loans or advances to the Trust or any other Subsidiary, (iv) transfer
any of its properties or assets to the Trust or any Subsidiary or (v) guarantee
any Indebtedness of the Trust or any Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (1) applicable law, (2) customary
non-assignment provisions of any lease governing a leasehold interest or
equipment of the Trust or any Subsidiary, (3) customary due on sale and other
restrictions on transfer contained in mortgages and deeds of trust and (4) the
Indenture.
LIMITATION ON ISSUANCES AND SALES OF SUBSIDIARY STOCK. The Trust (i) will
not permit any Subsidiary (other than the Bank and its Subsidiaries) to issue
any Capital Stock (other than to the Trust or a Wholly Owned Subsidiary) and
(ii) will not permit any Person (other than the Trust, a Wholly Owned Subsidiary
or the Bank and its Subsidiaries) to own any Capital Stock of any of its
Subsidiaries; PROVIDED, HOWEVER, that this covenant shall not prohibit (1) the
issuance and sale of all, but not less than all, of the issued and outstanding
Capital Stock of any Wholly Owned Subsidiary owned by the Trust or any of its
Subsidiaries in compliance with the other provisions of the Indenture, (2) the
ownership by directors of director's qualifying shares or the ownership by
foreign nationals of Capital Stock of any Subsidiary, to the extent mandated by
applicable law or (3) the ownership by any Person of any Capital Stock of any
Subsidiary of the Trust that is not a Wholly Owned Subsidiary on the date of the
Indenture.
REQUIRED STOCK OWNERSHIP. The Trust will at all times be the legal and
beneficial owner of the Pledged Bank Stock and will not sell, transfer or
otherwise dispose of any Capital Stock of the Bank regardless of when acquired.
The Trust will at all times be the legal and beneficial owner in the aggregate
of at least 66 2/3% of the issued and outstanding Voting Stock and common stock
of the Bank.
CHANGE OF CONTROL TRIGGERING EVENT. Upon the occurrence of a Change of
Control Triggering Event, the Trust shall be obligated to make an offer to
purchase the Notes (a "Change of Control Offer"), and shall purchase, on a
business day (the "Change of Control Purchase Date") not more than 60 nor less
than 45 days from the date the Change of Control Notice referred to below is
given to Holders, all of the then outstanding Notes validly tendered pursuant to
such Change of Control Offer, at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the Change of Control Purchase Date. The Change of
Control Offer is required to remain open until the close of business on the
Change of Control Purchase Date or such later date as may be necessary for the
Trust to comply with requirements under the Exchange Act.
If a Change of Control Offer is made, there can be no assurance that the
Trust will have available funds sufficient to pay the Change of Control Purchase
Price for all of the Notes that might be delivered by Noteholders seeking to
accept the Change of Control Offer. Neither the Trust's Board of Trustees nor
the Trustee would have the authority to rescind or limit the application of this
provision, including in connection with any transaction initiated or supported
by the Trust, its management or any affiliate.
In order to effect such Change of Control Offer, the Trust shall, not later
than the 30th day after the Change of Control, mail to each Holder notice of the
Change of Control Offer (the "Change of Control Notice") and shall state, among
other things, the procedures that Holders must follow to accept the Change of
Control Offer.
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The Trust will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent Rule 14e-1 and/or such
laws and regulations are applicable, in the event that a Change of Control
Triggering Event occurs and the Trust is required to offer to purchase Notes as
described above.
See "Certain Definitions" for the definition of "Change of Control." A
transaction involving the Trust's management or its affiliates, or a transaction
involving a recapitalization of the Trust, will result in a Change of Control if
it is the type of transaction specified by such definition.
PROVISION OF REPORTS. The Indenture requires that the Trust file on a
timely basis with the Commission, to the extent such filings are accepted by the
Commission, the annual, quarterly and other reports required by Section 13(a),
13(c) or 15(d) of the Exchange Act regardless of whether such Sections of the
Exchange Act are applicable to the Trust. The Trust also will be required (a) to
file with the Trustee, and provide to each Holder of Notes upon request, copies
of such reports and documents within 15 days after the date on which the Trust
files such reports and documents with the Commission or the date on which the
Trust would be required to file such reports and documents if the Trust were so
required and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply
copies of such reports and documents to any prospective holder of Notes promptly
upon request and at the Trust's cost.
ADDITIONAL COVENANTS. The Indenture also contains covenants with respect
to, among others, the following matters: (i) payment of principal, premium and
interest; (ii) maintenance of an office or agency in The City of New York for
payment or for registration of transfer or exchange of the Notes; (iii)
arrangements regarding the handling of money held in trust; (iv) maintenance of
corporate existence; (v) prohibitions on certain actions that would affect the
ability of holders of the Bank's Capital Stock to effect certain corporate
governance matters; (vi) payment of taxes and other claims; (vii) maintenance of
properties; (viii) the Trust's use of its best efforts to obtain a rating on the
Notes by S&P and Moody's within nine months after the date of the Indenture;
(ix) maintenance of insurance; (x) limitation on disposal of, or liens on, the
Collateral; and (xi) restriction on use of proceeds of the sale of the Old Notes
to purchase securities. The Indenture also restricts payments by the Trust or
any of its Subsidiaries for consent to amendments of any terms of the Indenture,
unless such payments are made to all Holders that provide such consent.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Under the Indenture, the Trust may not, in a single transaction or a series
of related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets to any Person or group of
affiliated Persons unless (i) either (a) the Trust shall be the continuing
entity or (b) the Person (if other than the Trust) formed by such consolidation
or into which the Trust is merged or the Person which acquires by sale,
assignment, conveyance, transfer, lease or other disposition all or
substantially all of the property and assets of the Trust (the "Surviving
Entity") is a corporation organized and existing under the laws of the United
States of America or a state thereof or the District of Columbia and such
Surviving Entity expressly and unconditionally assumes by supplemental
indenture, executed and delivered to the Trustee, in form reasonably
satisfactory to the Trustee, all the Trust's obligations on the Notes and under
the Indenture, and the Indenture shall remain in full force and effect, (ii)
immediately after giving effect to such transaction or series of transactions,
no Default or Event of Default shall have occurred and be continuing, (iii)
immediately after giving effect to such transaction or series of transactions on
a PRO FORMA basis, the Consolidated Net Worth of the Trust, or the Surviving
Entity, as applicable, is not less than the Consolidated Net Worth of the Trust
immediately before such transaction or series of transactions less the aggregate
amount of all reasonable transaction costs incurred in connection with such
transaction or series of transactions, and (iv) immediately after giving effect
to such transaction or series of transactions, the Trust or the Surviving
Entity, as applicable, shall have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel,
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each to the effect that such consolidation, merger, transfer, sale, assignment,
conveyance, transfer, lease or other disposition and the supplemental indenture
in respect thereto comply with the Indenture and that all conditions precedent
provided for relating to such transaction have been complied with.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture to include:
(i) failure by the Trust to pay interest on any Note when due and
payable, if such failure continues for a period of 30 days;
(ii) failure by the Trust to pay the principal of (and premium, if any,
on) any Note when due and payable at maturity or upon redemption or
acceleration or otherwise;
(iii) failure to make or consummate a Change of Control Offer in
accordance with the provisions of the "Change of Control Triggering Event"
covenant;
(iv) failure by the Trust to perform or observe any other term, covenant
or agreement contained in the Notes or the Indenture (other than a default
specified in clause (i), (ii) or (iii) above) for a period of 60 days after
written notice of such failure requiring the Trust to remedy the same shall
have been given (x) to the Trust by the Trustee or (y) to the Trust and the
Trustee by the Holders of 25% in aggregate principal amount of the Notes
then outstanding;
(v) default (other than a default on Nonrecourse Indebtedness or on less
than $5 million of Trust Nonrecourse Indebtedness at any one time) under any
instrument or any other obligation (x) representing indebtedness for
borrowed money of the Trust or any of its Subsidiaries, (y) representing
indebtedness evidenced by bonds, notes, debentures or other similar
instruments of the Trust or any of its Subsidiaries or (z) constituting a
guarantee by the Trust or any of its Subsidiaries of Guaranteed Indebtedness
of any other Person representing money borrowed or any obligation of such
other Person evidenced by bonds, notes, debentures or other similar
instruments, which default (a) consists of the failure to pay an amount
aggregating in excess of $10,000,000 if such default continues for a period
of 30 days after written notice of such failure requiring the Trust to
remedy the same shall have been given (A) to the Trust by the Trustee or (B)
to the Trust and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding, or (b) results in the
acceleration of such indebtedness or guarantee in an aggregate principal
amount in excess of $10,000,000;
(vi) failure by the Bank (x) to comply with any General Capital
Requirement, which failure shall continue for a period of 270 days; PROVIDED
that an Event of Default under this clause (vi)(x) shall not occur if a
capital plan submitted to the OTS by the Bank has been approved by the OTS
prior to the expiration of such 270-day period and, thereafter, the Bank
does not receive written notice from the OTS that the Bank is not in
compliance in any material respect with such capital plan or (y) to maintain
a consolidated total stockholders' equity at least equal to $250,000,000,
which failure shall continue for a period of one year or more unless as of
the expiration of such one-year period, and for so long as the consolidated
total stockholders' equity of the Bank remains below $250,000,000 after the
expiration of such one-year period, the Bank has the minimum amount of
capital required for the Bank to be considered as a "well capitalized"
savings association pursuant to 12 U.S.C. Section 1831o and 12 C.F.R.
Section 565 (and any amendment to either thereof) or any successor law or
regulation;
(vii) existence of one or more judgments against the Trust or any of its
Subsidiaries for the payment of money in excess of $10 million, either
individually or in the aggregate, which remain undischarged 60 days after
all rights to review directly such judgment, whether by appeal or writ, have
been exhausted or have expired;
(viii) certain provisions of Article Twelve of the Indenture relating to
the Collateral shall cease, for any reason, to be in full force and effect
in any material respect, or the Trust shall so
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assert in writing; or the Trustee shall cease to have a first priority
perfected security interest, for the benefit of the Trustee and the Holders,
in the Collateral (other than by reason of the release of any such security
interest in accordance with the Indenture); or the Trust shall default in
the observance or performance of any of the covenants or agreements to be
performed by it contained in Article Twelve beyond any applicable grace or
cure period provided in the Indenture; and
(ix) occurrence of certain events of bankruptcy, receivership,
conservatorship, insolvency or reorganization with respect to the Trust or
any Material Subsidiary.
The Trust has agreed in the Indenture to file quarterly with the Trustee a
statement regarding compliance by the Trust with the terms of the Indenture and
specifying any defaults of which the signer may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of not less than 25% in principal amount of the Notes then outstanding may
declare all the Notes to be immediately due and payable by notice to the Trust
(and to the Trustee if given by the Holders). After a declaration of
acceleration, but before a judgment or decree for payment of the money due has
been obtained by the Trustee, the Holders of a majority in aggregate principal
amount of the Notes outstanding, by written notice to the Trust and the Trustee,
may rescind such declaration if (a) the Trust has paid or deposited with the
Trustee a sum sufficient to pay (i) all overdue interest on all outstanding
Notes, (ii) all unpaid principal of (and premium, if any, on) any outstanding
Notes which has become due otherwise than by such declaration of acceleration,
and interest on such unpaid principal at the rate borne by the Notes, (iii) to
the extent that payment of such interest is lawful, interest upon overdue
interest at the rate borne by the Notes and (iv) all sums paid or advanced by
the Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel; and (b) all
Events of Default, other than the non-payment of principal of the Notes which
have become due solely by such declaration of acceleration, have been cured or
waived. The Trustee is under no obligation to exercise any of the rights or
powers vested in it by the Indenture at the request or direction of any of the
Holders, unless such Holders offer to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction. The Trustee is not required
under the Indenture to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers thereunder if it has reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Trust may, at its option and at any time, elect to have its obligation
and the obligation of any of its Subsidiaries with respect to the outstanding
Notes discharged ("defeasance"). Such defeasance means that the Trust shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, and premium, if any, and
interest on, such Notes when such payments are due and certain provisions of the
Indenture with respect to the registration and transfer of the Notes. In
addition, the Trust may, at its option and at any time, elect to have its
obligations and the obligations of any of its Subsidiaries with respect to
certain covenants described in the Indenture released ("covenant defeasance")
and thereafter any failure to comply with such covenants shall not constitute a
Default or an Event of Default. In the event of a covenant defeasance, certain
other events (not including non-payment, bankruptcy, receivership and insolvency
events) described under "Events of Default" will no longer constitute a Default
or an Event of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the Trust
must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Notes, cash in United States dollars, U.S. Government Securities
(as defined in the Indenture), or a combination thereof (collectively, the
"trust fund"), in such amounts as will be sufficient (without considering any
reinvestment of amounts earned on such U.S. Government Securities), in the
opinion of a nationally recognized firm
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of independent public accountants, to pay and discharge interest on the
outstanding Notes as it becomes due and to pay and discharge the principal of
and premium, if any, on the outstanding Notes at redemption or maturity; (ii) in
the case of defeasance, the Trust must deliver to the Trustee an opinion of
independent counsel in the United States stating that (A) the Trust has received
from, or there has been published by, the Internal Revenue Service a ruling or
(B) since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, the Holders of
the outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred; (iii) in the case
of covenant defeasance, the Trust must deliver to the Trustee an opinion of
independent counsel in the United States to the effect that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such covenant defeasance had not occurred; (iv) no
Default or Event of Default may have occurred and be continuing on the date of
such deposit; (v) such defeasance or covenant defeasance may not cause the
Trustee for the Notes to have a conflicting interest with respect to any
securities of the Trust; (vi) such defeasance or covenant defeasance may not
result in a breach or violation of, or constitute a Default under, the Indenture
or any other material agreement or instrument to which the Trust is a party or
by which it is bound; (vii) the Trust must deliver to the Trustee an opinion of
independent counsel in the United States to the effect that the trust fund will
not be subject to the effect of any applicable bankruptcy, insolvency,
receivership, conservatorship, reorganization or similar laws affecting
creditors' rights generally (including, without limitation, fraudulent and
avoidable transfers); (viii) the Trust must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Trust with the intent
of preferring the Holders of the Notes over the other creditors of the Trust or
with the intent of defeating, hindering, delaying or defrauding creditors of the
Trust; (ix) no event or condition may exist that would prevent the Trust from
making payments of the principal of, and premium, if any, and interest on, the
Notes, on the date of such deposit; and (x) the Trust must deliver to the
Trustee an Officers' Certificate and an opinion of independent counsel in the
United States, each stating that all conditions precedent relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable, or will become due and
payable or are to be called for redemption within one year, and the Trust has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of, and
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions to the Trustee from the Trust directing the Trustee to
apply such funds to the payment thereof at maturity or redemption, as the case
may be; (ii) the Trust has paid all other sums payable under the Indenture by
the Trust; and (iii) the Trust has delivered to the Trustee an Officers'
Certificate and an opinion of counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
MODIFICATION AND AMENDMENT OF THE INDENTURE; WAIVER OF COVENANTS
Modifications and amendments of the Indenture may be made by the Trust and
the Trustee with the consent of the Holders of greater than 50% in aggregate
principal amount of the Notes then outstanding; PROVIDED, HOWEVER, that no such
modification or amendment may, without the consent of
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the Holder of each outstanding Note affected thereby, (i) change the Stated
Maturity of the principal of, or any installment of interest on, any Note or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the coin or currency in
which any Note or any premium or the interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment after the Stated
Maturity thereof; (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment or modification, or the consent of whose Holders is required for any
waiver; (iii) modify any of the provisions relating to supplemental indentures
requiring the consent of Holders or relating to the waiver of past defaults or
relating to the waiver of certain covenants, except to increase the percentage
of outstanding Notes required for such action or to provide that certain other
provisions of the Indenture may not be modified or waived without the consent of
the Holder of each Note affected thereby; (iv) except as otherwise permitted
under the "Consolidation, Merger or Sale of Assets" provisions of the Indenture,
consent to the assignment or transfer by the Trust of any of its rights and
obligations under the Indenture; (v) make any change in the provisions relating
to Collateral that adversely affects the Holders; or (vi) waive a default in
payment with respect to any Note (other than a default in payment that is due
solely because of acceleration of the maturity of the Notes).
Notwithstanding the foregoing, without the consent of any Holders of the
Notes, the Trust and the Trustee may modify or amend the Indenture (a) to
evidence the succession of another Person to the Trust and the assumption by any
such successor of the covenants of the Trust in the Indenture and in the Notes
in accordance with the "Consolidation, Merger or Sale of Assets" provisions of
the Indenture; (b) to add any additional Events of Default, to add to the
covenants of the Trust for the benefit of the Holders of the Notes, or to
surrender any right or power herein conferred upon the Trust in the Indenture or
in the Notes; (c) to cure any ambiguity, to correct or supplement any provision
in the Indenture which may be defective or inconsistent with any other provision
in the Indenture or in the Notes, PROVIDED that any such action shall not
adversely affect in any material respect the interests of any Holder of any
Note; (d) to secure further the Notes or add a guarantor under the Indenture;
(e) to evidence and provide the acceptance of the appointment of a successor
Trustee under the Indenture; or (f) to make any other provisions with respect to
matters or questions arising under the Indenture or the Notes, PROVIDED that
such provisions shall not adversely affect in any material respect the interests
of any Holder of any Note.
The Holders of greater than 50% in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary of any other Person or (ii) assumed in
connection with the acquisition of assets from such Person, in each case, other
than Indebtedness incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary of such other Person or such acquisition. Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from such Person or the date such Person becomes a
Subsidiary of such other Person.
"Advisory Fees" means fees pursuant to that certain Amended and Restated
Advisory Contract, dated as of October 1, 1992, between B.F. Saul Company and
the Trust, as most recently amended by Amendment No. 8 thereto dated as of
October 1, 1993, as the same may be further amended or supplemented in
accordance with the "Limitation on Transactions with Affiliates" covenant.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly Controlling or Controlled by or under direct or indirect
common Control with such specified Person and any legal or beneficial owner,
directly or indirectly, of 20% or more of the Voting Stock of such specified
Person.
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"Asset Sale" means any conveyance, transfer, lease or other disposition
(including, without limitation, by way of merger or consolidation)
(collectively, for purposes of this definition, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (A) any Capital Stock
of any Subsidiary; (B) all or substantially all of the properties and assets of
any division or line of business of the Trust or its Subsidiaries; or (C) any
other properties or assets of the Trust or any Subsidiary other than in the
ordinary course of business. For purposes of this definition, the term "Asset
Sale" shall not include any transfer of properties and assets or Capital Stock
(i) that is governed by the provisions described under the "Merger,
Consolidation or Sale of Assets" section of the Indenture or (ii) of the Trust
or any Subsidiary to the Trust or any Single Asset Subsidiary of the Trust.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bank" means Chevy Chase Bank, F.S.B.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents or interests in
(however designated) capital stock in such Person, including, with respect to a
corporation, common stock, Preferred Stock and other corporate stock and, with
respect to a partnership, partnership interests, whether general or limited, and
any rights (other than debt securities convertible into corporate stock,
partnership interests or other capital stock), warrants or options exchangeable
for or convertible into such corporate stock, partnership interests or other
capital stock.
"Cash Flow -- Indenture" means with respect to the Trust, for any period,
all as determined in accordance with GAAP and without duplication, the sum of
the following items: (a) real estate operating income (loss), PLUS (b)
depreciation and amortization expense, PLUS (c) interest expense, PLUS (d)
equity in losses of partnership investments, LESS (e) equity in earnings of
partnership investments, PLUS (f) losses on sales of property, LESS (g) gains on
sales of property, PLUS (h) non-cash charges, LESS (i) non-cash gains, PLUS (j)
cash distributions received from partnership investments, PLUS (k) tax sharing
payments paid by the Bank to the Trust, PLUS (l) dividends paid by the Bank to
the Trust.
"Cash Equivalent" means (a) any evidence of Indebtedness with a maturity of
180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (b) certificates of deposit, time deposits, deposits in money market
accounts or any other deposit accounts or acceptances with a maturity of 180
days or less of any financial institution that is a member of the Federal
Reserve System that issues (or the parent of which issues) commercial paper or
certificates of deposit rated as described in clause (c) below and that has
combined capital and surplus and undivided profits of not less than
$500,000,000; (c) commercial paper with a maturity of 180 days or less issued by
a corporation that is not an Affiliate of the Trust and is organized under the
laws of any state of the United States or the District of Columbia and rated at
least A-1 by S&P or at least P-1 by Moody's; and (d) Partnership Units and
Margin Securities.
"Certificates of Deposit" means certificates of deposit or acceptances with
a maturity of 180 days or less of any financial institution that is not an
affiliate of the Trust, that is a member of the Federal Reserve System that
issues (or the parent of which issues) commercial paper or certificates of
deposit rated as described in clause (c) of the definition of Cash Equivalent,
that has combined capital and
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surplus and undivided profits of not less than $500,000,000 and, in the case of
any non-negotiable certificate of deposit or acceptance, that has explicitly
waived any right of set-off against such certificate or acceptance.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all securities that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total Voting Stock of the Trust; (b) the Trust consolidates
with, or merges with or into, another Person or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, or any Person consolidates with, or merges with or into,
the Trust, in any such event pursuant to a transaction in which any Voting Stock
of the Trust is reclassified or changed into or exchanged for cash, securities
or other property, other than any such transaction where (i) any Voting Stock of
the Trust is reclassified or changed into or exchanged for Voting Stock (other
than Redeemable Capital Stock) of the surviving or transferee corporation and
(ii) immediately after such transaction no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted
Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
surviving or transferee corporation; (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Trustees of the Trust (together with any new trustees whose election by such
Board of Trustees or whose nomination for election by the stockholders of the
Trust was approved by a vote of 66 2/3% of the trustees then still in office who
were either trustees at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Trustees of the Trust then in office; or
(d) any final order, judgment or decree of a court of competent jurisdiction
shall be entered against the Trust decreeing the dissolution or liquidation of
the Trust.
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Closing Date" means the date on which the Old Notes were originally issued
under the Indenture.
"Consolidated Interest Expense" means, with respect to the Trust, for any
period, the amount, as determined in accordance with GAAP, of interest expense
of the Trust and its Subsidiaries (excluding all amounts relating to interest
expense of the Bank and its Subsidiaries).
"Consolidated Net Income (Loss)" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary gains and losses (other than those relating
to the use of net operating losses of such Person carried forward), less all
fees and expenses relating thereto, net of taxes, (ii) the portion of net income
(or loss) of any Person (other than such Person and any of its consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period, (iii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of interest"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (v) the net income of any Subsidiary of such Person (other than
the Bank and its Subsidiaries in the case of the Trust) to the extent that the
declaration or payment of dividends or similar distributions by that Subsidiary
of that income is not at
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the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Subsidiary or its shareholders;
PROVIDED that, upon the termination or expiration of such dividend or
distribution restrictions, the portion of net income (or loss) of such
Subsidiary allocable to such Person and previously excluded shall be added to
the Consolidated Net Income (Loss) of such Person to the extent of the amount of
dividends or other distributions actually paid to such Person in cash by such
Subsidiary and (vi) all gains resulting from the sale of credit card
relationships.
"Consolidated Net Worth" means, at any date, the consolidated shareholders'
equity of the Trust, less the amount of shareholders' equity attributable to (i)
Redeemable Capital Stock or treasury stock of the Trust and its Subsidiaries,
determined on a consolidated basis in accordance with GAAP, and (ii)
extraordinary gains subsequent to March 31, 1994 and any gains resulting from
the sale, transfer or other disposition of Partnership Units.
"Consolidated Tax Subsidiary" means any Subsidiary of the Trust that joins
with the Trust in the filing of a consolidated federal income tax return.
"Default" means an event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default.
"Disinterested Trustee" means, with respect to any transaction or series of
related transactions, a member of the Board of Trustees of the Trust or a member
of the board of directors of any successor corporation who does not have any
material direct or indirect financial interest in or with respect to such
transaction or series of related transactions.
"Exchange Notes" means the New Notes issued pursuant to the Exchange Offer.
"Exchange Offer" means this Exchange Offer effected pursuant to the
Registration Rights Agreement.
"Fair Market Value" means, with respect to any property received by the
Trust in connection with the issuance or sale of Capital Stock, or the
conversion or exchange of securities into Capital Stock, the fair market value
of such property as determined in good faith by the Board of Trustees, whose
determination shall be conclusive in all circumstances, net of attorney's fees,
accountant's fees and brokerage, consulting, underwriting and other fees and
expenses actually incurred in connection with such transaction and net of taxes
paid or payable by the Trust as a result thereof.
"GAAP" means generally accepted accounting principles, consistently applied.
"General Capital Requirement" means the minimum amount of capital required
to meet each of the industry-wide regulatory capital requirements applicable to
the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R. Section 567 (and
any amendment to either thereof) or any successor law or regulation (but
excluding any higher individual minimum capital requirement imposed on the Bank
pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and any
amendment to either thereof) or any successor law or regulation).
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a creditor
with respect to Indebtedness against loss; PROVIDED that the term "guarantee"
shall not include endorsements for collection or deposit, in either case in the
ordinary course of business.
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"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
and in connection with any agreement by such Person to make payment to purchase,
redeem, exchange, convert or otherwise acquire for value any Capital Stock of
such Person now or hereafter outstanding, (ii) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, (iii) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under Interest Rate Agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends payable by other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien, upon
or with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or asset
or the amount of the obligations so secured), (vii) all guarantees by such
Person of Guaranteed Indebtedness, (viii) all Redeemable Capital Stock (valued
at the greater of book value and voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends) of such Person and (ix) any
amendment, supplement, modification, deferral, renewal, extension, refunding or
refinancing of any liability of the types referred to in clauses (i) through
(viii) above. For purposes hereof, (x) the "maximum fixed repurchase price" of
any Redeemable Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Redeemable Capital Stock as
if such Redeemable Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value to be determined in good faith
by the board of directors (or any duly authorized committee thereof) of the
issuer of such Redeemable Capital Stock, and (y) Indebtedness is deemed to be
incurred pursuant to a revolving credit facility or any other facility providing
for partial advances each time an advance is made thereunder.
"Interest Rate Agreements" means interest rate protection agreements
(including, without limitation, interest rate swaps, caps, floors, collars and
similar agreements) and/or other types of interest rate hedging agreements.
"Investment" means any direct or indirect advance, loan (other than advances
to customers in the ordinary course of business, which are recorded as accounts
receivable on the balance sheet of the Trust or its Subsidiaries) or other
extensions of credit or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities issued by, any other Person.
"Investment Grade" means BBB-or higher by S&P or Baa3 or higher by Moody's
or the equivalent of such ratings by S&P or Moody's. In the event that the Trust
shall select any other Rating Agency, the equivalent of such ratings by such
Rating Agency shall be used.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A Person shall be deemed to own subject to a Lien any
property that such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
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"Management Agreements" means (a) the Amended and Restated Commercial
Property Leasing and Management Agreement dated as of October 1, 1982, as
amended, between the Trust and Franklin Property Company relating to the leasing
and management of real property owned by the Trust and its Subsidiaries (other
than the Bank and its Subsidiaries) other than their hotel properties, and (b)
any written hotel management agreement between a Subsidiary of the Trust and
Franklin Property Company relating to the management of such hotel properties
entered into in the ordinary course of business and consistent with past
practice, in each case as further amended or modified in accordance with the
terms of the Indenture.
"Margin Securities" means "margin stock" as defined in Regulation G (12
C.F.R. Section 207, as amended) of the Board of Governors of the Federal Reserve
System; provided that the term "Margin Securities" shall not include the
securities of an Affiliate of the Trust, other than common stock of Saul
Centers, Inc. and capital stock of the Bank (to the extent the same would
otherwise constitute Margin Securities).
"Material Subsidiary" means, at any particular time, (i) any Subsidiary of
the Trust that, together with the Subsidiaries of such Subsidiary, (a) accounted
for more than 10% of the consolidated revenues or earnings of the Trust and its
Subsidiaries (other than the Bank and its Subsidiaries) for the most recently
completed fiscal year of the Trust or (b) was the owner of more than 10% of the
consolidated assets of the Trust and its Subsidiaries (other than the Bank and
its Subsidiaries) as of the end of such fiscal year, all as shown on the
consolidated financial statements of the Trust and its Subsidiaries for such
fiscal year, and (ii) the Bank.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Nonrecourse Indebtedness" means Indebtedness incurred by any Subsidiary of
the Trust as to which, subject to exceptions for fraud and certain environmental
violations, (i) neither the Trust nor any other Subsidiary provides credit
support or is directly or indirectly liable for such Indebtedness and (ii) no
default with respect to such Indebtedness would permit (upon notice, lapse of
time or both) any holder of other Indebtedness of the Trust or any other
Subsidiary to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its Stated Maturity.
"Operating Cash Flow Coverage Ratio" means, with respect to the Trust, at
any date of determination, the ratio of (i) Cash Flow -- Indenture to (ii)
Consolidated Interest Expense.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Partnership Units" means limited partnership interests in Saul Holdings
Partnership.
"Permitted Holders" means the descendants of Bernard Francis Saul, any of
their spouses or any Person controlled, directly or indirectly, or beneficially
owned by such descendants or spouses.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Trust under the Notes;
(ii) Indebtedness of the Trust outstanding on the date of this
Indenture;
(iii) obligations of the Trust pursuant to interest rate contracts
designed to protect the Trust against fluctuations in interest rates in
respect of Indebtedness of the Trust, which obligations do not exceed the
aggregate principal amount of such Indebtedness;
(iv) Indebtedness of the Trust consisting of guarantees, indemnities or
obligations in respect of purchase price adjustments in connection with the
acquisition or disposition of assets;
(v) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by the
Trust of any Indebtedness of the Trust, including any successive
refinancings by the Trust, so long as (A) any such new Indebtedness shall be
in a principal amount that does not exceed the principal amount (or, if such
Indebtedness being
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refinanced provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination) so refinanced, plus the amount of
any premium required to be paid under the terms of the instrument governing
such Indebtedness being so refinanced or the amount of any premium
reasonably determined by the Trust as necessary to accomplish such
refinancing through means of a tender offer or privately negotiated
transaction (it being understood that, with respect to the refinancing of
the Indebtedness permitted to be incurred pursuant to clause (vi) below, the
amount of such Indebtedness outstanding pursuant to such clause (vi),
together with any refinancings thereof, shall not at any one time exceed
$70,000,000 PLUS 20% of the increase in Consolidated Net Worth of the Trust
from April 1, 1994 and it being further understood that any sales of the
Retail Notes will be considered a refinancing thereof to the extent that the
total principal amount of Retail Notes outstanding at any one time does not
exceed the principal amount thereof outstanding on the date of the
Indenture), (B) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, (1) such new Indebtedness is made subordinate to
the Notes at least to the same extent as the Subordinated Indebtedness being
refinanced and (2) such new Indebtedness has an Average Life to Stated
Maturity and final Stated Maturity of principal that exceeds the Average
Life to Stated Maturity and final Stated Maturity of the Subordinated
Indebtedness being refinanced); and (C) in the case of any refinancing of
Trust Nonrecourse Indebtedness, such new Indebtedness is made nonrecourse to
the same extent as the Indebtedness refinanced;
(vi) Indebtedness that has an aggregate principal amount outstanding at
any one time not in excess of the sum of $70,000,000 PLUS 20% of the
increase in Consolidated Net Worth of the Trust from April 1, 1994; and
(vii) Indebtedness of the Trust to any of its Subsidiaries, except that
any transfer of such Indebtedness by any Subsidiary will be deemed to be an
incurrence of Indebtedness; PROVIDED that such Indebtedness is subordinated
to the Notes as provided in the Indenture.
"Permitted Investment" means any Investment (i) in Cash Equivalents, (ii)
consisting of capital contributions or loans to Subsidiaries of the Trust of up
to $2,500,000, PROVIDED that any loan under this clause (ii) shall be for a term
of not more than one year and shall be repaid with interest at a rate of 10% per
annum, (iii) loans to Subsidiaries of the Trust of up to $5,000,000, PROVIDED
that any loan under this clause (iii) shall be for a term of not more than one
year and shall be repaid with interest at a rate of 10% per annum, (iv) of up to
$50,000,000 in cash in Single Asset Subsidiaries less any amounts contributed or
loaned by the Trust under clauses (ii) and (iii) above, (v) permitted by the
"Restriction on Transfer of Assets to Subsidiaries" covenant, (vi) in the Bank
or its Subsidiaries, and (vii) constituting cash advances on an intercompany
open account basis (A) from the Trust to its Subsidiaries required for working
capital, the payment of interest and premium, if any, on and principal of any
Indebtedness, expenditures for maintenance and capital improvements, and other
operating expenses, to the extent Subsidiaries have advanced cash to the Trust
or (B) from any Subsidiary to the Trust, of excess cash on hand from time to
time, in each case made in the ordinary course of business and consistent with
past practice.
"Permitted Subsidiary Indebtedness" means any of the following:
(i) Indebtedness of any Subsidiary outstanding on the date of the
Indenture;
(ii) obligations of any Subsidiary pursuant to interest rate contracts
designed to protect such Subsidiary against fluctuations in interest rates
in respect of Indebtedness of such Subsidiary, which obligations do not
exceed the aggregate principal amount of such Indebtedness;
(iii) Indebtedness of any Subsidiary consisting of guaranties,
indemnities or obligations in respect of purchase price adjustments in
connection with the acquisition or disposition of assets, including, without
limitation, shares of Capital Stock of Subsidiaries;
(iv) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by any
Subsidiary of any Indebtedness of such Subsidiary,
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including any successive refinancings by such Subsidiary, so long as (A) any
such new Indebtedness shall be in a principal amount that does not exceed
the principal amount (or, if such Indebtedness being refinanced provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the amount of any premium required to be
paid under the terms of the instrument governing such Indebtedness being so
refinanced or the amount of any premium reasonably determined by such
Subsidiary as necessary to accomplish such refinancing through means of a
tender offer or privately negotiated transaction (it being understood that,
(A) with respect to the refinancing of the Indebtedness permitted to be
incurred pursuant to clause (v) below, the amount of such Indebtedness
outstanding pursuant to clause (v), together with any refinancings thereof,
shall not at any time exceed $70,000,000 PLUS 20% of the increase in
Consolidated Net Worth of the Trust from April 1, 1994 outstanding at any
one time and (B) with respect to the refinancing of the Indebtedness
permitted to be incurred pursuant to clause (vi) below, the amount of such
Indebtedness outstanding pursuant to clause (vi), together with any
refinancings thereof, shall not at any time exceed $260,000,000 plus 40% of
the increase in Consolidated Net Worth of the Trust from April 1, 1994), and
(B) in the case of any refinancing of Nonrecourse Indebtedness, such new
Indebtedness is Nonrecourse Indebtedness;
(v) Indebtedness which, together with any other outstanding Indebtedness
incurred pursuant to clause (vi) of the definition of "Permitted
Indebtedness", has an aggregate principal amount outstanding at any one time
not in excess of the sum of $70,000,000 PLUS 20% of the increase in
Consolidated Net Worth of the Trust from April 1, 1994;
(vi) Nonrecourse Indebtedness which, together with any other outstanding
Indebtedness incurred pursuant to clause (v) above and clause (vi) of the
definition of "Permitted Indebtedness", has an aggregate principal amount
outstanding at any one time not in excess of the sum of $260,000,000 PLUS
40% of the increase in Consolidated Net Worth of the Trust from April 1,
1994; and
(vii) Indebtedness of any Subsidiary of the Trust to the Trust, to the
extent permitted by the "Limitation on Restricted Payments" covenant, except
that any transfer of any such Indebtedness by the Trust shall be deemed to
be an incurrence of Indebtedness.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
unincorporated organization or government or any agency or political
subdivisions thereof.
"PIK Preferred Stock" means any and all payment-in-kind Preferred Stock
issued in lieu of cash dividends on the 13% Preferred Stock or in lieu of cash
dividends on such payment-in-kind Preferred Stock.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Capital
Stock of any other class in such Person.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Rating Agencies" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's
or both shall not make a rating of the Notes publicly available, a nationally
recognized securities rating agency or agencies, as the case may be, selected by
the Trust, which shall be substituted for S&P or Moody's or both, as the case
may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's any of the following categories: Ba, B, Caa, Ca, C and D
(or equivalent successor categories); and (iii) the equivalent of any
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such category of S&P or Moody's used by another Rating Agency. In determining
whether the rating of the Notes has decreased by one or more gradations within
Rating Categories, + and - for S&P, 1, 2 and 3 for Moody's, or the equivalent
gradations for another Rating Agency shall be taken into account (e.g., with
respect to S&P, a decline in rating from BB+ to BB, as well as from BB- to B+,
will constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by the Trust to effect a Change of Control.
"Rating Decline" means the occurrence of the following on, or within 90 days
after, the date of public notice of the occurrence of a Change of Control or of
the intention by the Trust to effect a Change of Control (which period shall be
extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies): (a) in the
event the Notes are rated by either Moody's or S&P on the Rating Date as
Investment Grade, the rating of the Notes by both Rating Agencies shall be below
Investment Grade, or (b) in the event the Notes are rated below Investment Grade
by both Rating Agencies on the Rating Date, the rating of the Notes by either
Rating Agency shall be decreased by one or more gradations (including gradations
within Rating Categories as well as between Rating Categories).
"Real Estate Property" means (i) real property, (ii) a building or group of
related buildings or (iii) real property upon which are located a building or
group of related buildings.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is, or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity of principal, or is convertible into or exchangeable
for debt securities at any time prior to any such Stated Maturity of principal
at the option of the holder thereof.
"Registration Rights Agreement" means the agreement between the Trust and
the Initial Purchasers, dated as of the Closing Date, described under "The
Exchange Offer -- Purpose and Effect of the Exchange Offer."
"Regulatory Capital Requirements" means the minimum amount of capital
required (i) for the Bank to meet each capital ratio necessary for the Bank to
be classified as an "adequately capitalized" savings association pursuant to 12
U.S.C. Section 1831o and 12 C.F.R. Section 565 (and any amendment to either
thereof) or any successor law or regulation and (ii) to meet each of the
industry-wide regulatory capital requirements applicable to the Bank pursuant to
12 U.S.C. Section 1464(t) and 12 C.F.R. Section 567 (and any amendment to either
thereof) or any successor law or regulation (but excluding any higher individual
minimum capital requirement imposed on the Bank pursuant to 12 U.S.C. Section
1464(s) and 12 C.F.R. Section 567.3 (and any amendment to either thereof) or any
successor law or regulation).
"Reimbursement Agreement" means the Reimbursement Agreement dated August 26,
1993 among Saul Holdings Partnership, the Trust and certain of its Subsidiaries
and affiliates, as such agreement may be amended or supplemented; PROVIDED, that
the aggregate amount of the contingent reimbursement obligations assumed by the
Trust and its Subsidiaries outstanding at any time shall not exceed the
aggregate amount thereof at the date of the Indenture.
"Retail Notes" means the unsecured notes of the Trust sold from time to time
at varying interest rates with maturities of one to ten years.
"S&P" means Standard & Poor's Corporation and its successors.
"Saul Holdings Partnership" means Saul Holdings Limited Partnership, a
Maryland limited partnership.
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"Securitization Entity" means any pooling arrangement or entity (except for
any entity in corporate or partnership form) formed or originated for the
purpose of holding, and issuing securities representing interests in, one or
more pools of mortgages, leases, credit card receivables, home equity loan
receivables, automobile loans, leases or installment sales contracts, other
consumer receivables or other financial assets of the Bank or any Subsidiary,
and shall include, without limitation, any grantor trust, owner trust or real
estate mortgage investment conduit.
"Single Asset Subsidiary" means any Wholly Owned Subsidiary of the Trust
that owns no more than one Real Estate Property and owns no Investments in any
other Person, other than the Trust.
"Stated Maturity," when used with respect to any Indebtedness (including,
without limitation, the Notes) means the dates specified in the instrument
governing such Indebtedness as the fixed dates on which any principal amount of
such Indebtedness is due and payable (including, without limitation, by reason
of any required redemption, purchase or sinking fund payment) and, when used
with respect to any installment of interest on Indebtedness, means the date on
which such installment is due and payable.
"Subordinated Indebtedness" means any Indebtedness of the Trust expressly,
by the terms of the instrument creating or evidencing such Indebtedness,
subordinated in right of payment to the Notes.
"Subsidiary" with respect to any Person, means any other Person a majority
of the equity ownership or a majority of the Voting Stock of which is at the
time owned, directly or indirectly, by such Person, by one or more Subsidiaries
of such Person, or by such Person and one or more Subsidiaries of such Person.
"Tax Sharing Agreement" means (i) the Tax Sharing Agreement dated June 28,
1990, as amended, between the Trust and other members of the affiliated group of
corporations joining with the Trust in the filing of a consolidated federal
income tax return (the "Affiliated Group"), as such Tax Sharing Agreement may be
further amended or modified from time to time, PROVIDED that (A) such further
amendments or modifications reflect only the addition or deletion of parties to
such Tax Sharing Agreement, legislative, judicial or administrative changes in
the provisions, rules, application or effect of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury regulations promulgated under the
Code (the "Regulations") or applicable state law, or amendments or
modifications, requested, required or approved by the OTS and (B) any such
further modification or amendment is approved by the OTS, to the extent such
approval is required by the rules and regulations of the OTS, and (ii) any other
tax sharing agreement to which the Trust or any Consolidated Tax Subsidiaries
may become a party, PROVIDED that such other tax sharing agreement (A)
consistently reflects the applicable tax liabilities of, and the benefit of the
use of losses, deductions, credits and other tax attributes by, the Trust and
the other members of the Affiliated Group pursuant to the Code, the Regulations
and applicable state law (except as otherwise may be requested, required or
approved by the OTS or required for compliance with any guidelines, orders or
other authority issued by the OTS) and (B) is approved by the OTS, to the extent
such approval is required by the rules and regulations of the OTS, and PROVIDED,
FURTHER, that the Trust shall have received an opinion of independent counsel to
the Trust or of a nationally recognized accounting firm to the effect that such
other tax sharing agreement satisfies the condition in subclause (A) of the
first proviso of this clause (ii) and that such other tax sharing agreement is
not materially less beneficial to the Trust than the tax sharing agreement
described in clause (i).
"13% Preferred Stock" means the 3,000,000 shares of the 13% Noncumulative
Perpetual Preferred Stock, Series A of the Bank.
"Trust Nonrecourse Indebtedness" means Indebtedness as to which, subject to
exceptions for fraud and certain environmental violations, (i) the sole recourse
for collection of principal, interest and premium with respect to such
Indebtedness is against the specific property or assets identified in the
instruments evidencing or securing such Indebtedness, (ii) no other property or
assets may be realized upon in collection of principal, interest or premium of
such Indebtedness, (iii) the Trust does
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not provide credit support and is not directly or indirectly liable for such
Indebtedness and (iv) no default with respect to such Indebtedness would permit
(upon notice, lapse of time or both) any holder of other Indebtedness of the
Trust or any Subsidiary of the Trust to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"U.S. Government Securities" means any evidence of Indebtedness with an
initial maturity of 180 days or less issued by the United States of America.
"Voting Stock" means Capital Stock of the class or classes of which the
holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at the
time Capital Stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency) or (ii) in respect of the
Trust, the general voting power under ordinary circumstances to elect the Board
of Trustees or other governing board of the Trust.
"Wholly Owned Subsidiary" means a Subsidiary of the Trust all the
outstanding Capital Stock (other than directors' qualifying shares) of which is
owned by the Trust, by one or more other Wholly Owned Subsidiaries, or by the
Trust and one or more other Wholly Owned Subsidiaries.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material federal income tax consequences
to holders of the Notes who hold the Notes as an investment and not for sale to
customers in the ordinary course of a trade or business. This discussion is
based upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions now in effect, all of
which are subject to change. The following does not discuss all aspects of
federal income taxation that may be relevant to a particular investor in light
of the investor's particular investment circumstances or to certain types of
investors subject to special treatment under the federal income tax laws (for
example, life insurance companies, tax-exempt organizations, broker-dealers and
others who do not hold their Notes as "capital assets" within the meaning of
Section 1221 of the Code, and non-U.S. taxpayers) and does not discuss any
aspects of state, local or foreign tax laws or any estate or gift tax
considerations. Prospective investors should consult their own tax advisers
regarding the federal, state, local, and foreign income and other tax
considerations of owning the New Notes or participating in the Exchange Offer.
EXCHANGE OFFER
The Trust believes that, for federal income tax purposes, the exchange of
New Notes for Old Notes pursuant to the Exchange Offer will be disregarded and
each New Note will be treated as a continuation of the corresponding Old Note
because the terms of the New Notes are not materially different from the terms
of the Old Notes. Accordingly, holders of Old Notes will not realize gain or
loss upon the exchange.
PAYMENT OF INTEREST ON THE NEW NOTES
A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on the New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is required to include interest in
ordinary income as such interest accrues, while a cash basis holder must include
interest in income when payments are received (or made available for receipt) by
such holder.
SALE, EXCHANGE OR RETIREMENT OF THE NEW NOTES
A holder of a New Note will generally have a tax basis in the New Note equal
to the price paid for the New Note or the Old Note exchanged therefor. A holder
of a New Note generally will recognize gain or loss on the sale, exchange,
redemption or retirement of the New Note equal to the difference (if any)
between the amount realized from such sale, exchange, redemption or retirement
and the holder's basis in the New Note. Such gain or loss generally will be
long-term capital gain or loss if the New Note has been held for more than one
year (including any holding period with respect to an Old Note exchanged
therefor) and otherwise will be short-term capital gain or loss (but see
discussion of market discount below).
MARKET DISCOUNT
A purchaser of either an Old Note subsequent to its initial issue or a New
Note, in either case, at a price that is less than the stated redemption price
of the Note at maturity generally will be subject to the market discount
provisions of sections 1276 through 1278 of the Code. Market discount is
generally equal to the excess of the stated redemption price of the Note at
maturity over the holder's tax basis in such Note. Market discount will be
considered to be zero if such market discount is less than 0.25% of the stated
redemption price at maturity of the Note times the number of complete years to
maturity that remain after the holder's acquisition of the Note.
If a holder realizes a gain upon disposition of a New Note, the lesser of
(i) the excess of the amount received on such disposition over the holder's tax
basis in the New Note or (ii) the portion of the market discount that accrued
while the New Note was held by such holder (including any holding period with
respect to an Old Note exchanged therefor) and that was not previously included
in income generally will be treated as ordinary interest income at the time of
disposition. If a holder disposes of a New Note in any transaction other than a
sale, exchange or involuntary conversion (e.g.,
162
<PAGE>
as a gift), that holder generally will be treated as having realized an amount
equal to the fair market value of the New Note and will be required to recognize
as ordinary income any gain on disposition to the extent of the accrued market
discount. As a result, a holder could be required to recognize ordinary interest
income, even though the disposition would not otherwise be taxable. Market
discount will be considered to accrue ratably during the period from the date of
acquisition to the maturity date of the New Note, unless the holder elects to
accrue on the basis of semiannual compounding.
A holder of a New Note generally will be required to defer the deduction of
all or a portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry such New Note until the maturity of the New Note
or its earlier disposition in a taxable transaction.
A holder may elect to include market discount in income currently as it
accrues (on either a ratable or a semiannual compounding basis), in which case
the rules described above regarding the treatment as ordinary income of gain
upon the disposition of New Notes and regarding the deferral of interest
deductions will not apply.
AMORTIZABLE BOND PREMIUM
If a holder's tax basis in a Note immediately after such holder acquires it
exceeds the amount payable at maturity, such holder should consult a tax adviser
to determine the availability of an election to deduct the excess as amortizable
bond premium pursuant to section 171 of the Code.
BACKUP WITHHOLDING
A holder of a Note may be subject to backup withholding at the rate of 31%
with respect to certain payments of principal, premium, if any, and interest, on
the Notes, and to proceeds of the sale or redemption of the Notes, unless such
holder (i) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of a Note who does not provide the Trust with his
correct taxpayer identification number may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be creditable against the
holder's income tax liability. Information reporting requirements and backup
withholding will not apply to the exchange of Old Notes for New Notes pursuant
to the Exchange Offer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Trust has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resales.
The Trust will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under
163
<PAGE>
the Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
The Trust has agreed in the Registration Rights Agreement to pay all
expenses incident to the Exchange Offer, other than commissions or concessions
of any brokers or dealers and expenses of counsel for the holders of the Notes,
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
New Notes will be passed upon for the Trust by Shaw, Pittman, Potts &
Trowbridge, Washington, D.C., a partnership including professional corporations.
George M. Rogers, Jr., whose professional corporation is a member of that firm,
is a trustee of the Trust and a director of the Saul Company and the Bank.
EXPERTS
The Trust's Consolidated Financial Statements at September 30, 1993 and 1992
and for the years ended September 30, 1993, 1992 and 1991 included in this
Prospectus and the consolidated financial statement schedules included in the
Registration Statement of which this Prospectus is a part have been audited by
Stoy, Malone & Company, P.C., independent public accountants, as set forth in
their reports dated November 4, 1993, and have been included in reliance upon
the authority of such firm as experts in auditing and accounting.
The Trust's Consolidated Financial Statements at December 31, 1993 and for
the three months ended December 31, 1993 included in this Prospectus have been
audited by Arthur Andersen & Co., independent public accountants, as set forth
in their report dated February 11, 1994, and have been included in reliance upon
the authority of such firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Trust has filed with the Commission the Registration Statement on Form
S-4 under the Securities Act with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information with respect to the Trust and the New Notes,
reference is made to the Registration Statement, including the exhibits thereto
and the financial statements, notes and schedules filed as part thereof. The
Registration Statement (and the exhibits and schedules thereto), may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, Northwestern
Atrium Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material also may be obtained at prescribed rates by writing to
the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
The Trust is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports and other information with
the Commission relating to its business, financial statements and other matters.
Reports and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Suite 1400, Northwestern Atrium
164
<PAGE>
Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of
such material also may be obtained at prescribed rates by writing to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549.
The Indenture requires the Trust to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission, the
annual, quarterly and other reports required by Section 13(a), 13(c) or 15(d) of
the Exchange Act regardless of whether such Sections of the Exchange Act are
applicable to the Trust. The Trust also will be required (a) to file with the
Trustee, and provide to each holder of Notes upon request, copies of such
reports and documents within 15 days after the date on which the Trust files
such reports and documents with the Commission or the date on which the Trust
would be required to file such reports and documents if the Trust were so
required and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply
copies of such reports and documents to any prospective holder of Notes promptly
upon request and at the Trust's cost.
165
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The Trust's Consolidated Financial Statements as of December 31, 1993 and
September 30, 1993 and 1992 and for the three months ended December 31, 1993 and
(unaudited) 1992 and the years ended September 30, 1993, 1992 and 1991 are set
forth at the pages indicated below:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Reports of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets -- As of December 31, 1993 and September 30, 1993 and 1992..................... F-4
Consolidated Statements of Operations -- For the three months ended December 31, 1993 and (unaudited) 1992
and the years ended September 30, 1993, 1992 and 1991..................................................... F-6
Consolidated Statements of Shareholders' Deficit -- For the three months ended December 31, 1993 and
(unaudited) 1992 and the years ended September 30, 1993, 1992 and 1991.................................... F-8
Consolidated Statements of Cash Flows -- For the three months ended December 31, 1993 and (unaudited) 1992
and the years ended September 30, 1993, 1992 and 1991..................................................... F-9
Notes to Consolidated Financial Statements................................................................. F-12
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B. F. Saul Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheet of B. F. Saul
Real Estate Investment Trust (the "Trust") and subsidiaries as of December 31,
1993, and the related consolidated statements of operations, shareholders'
deficit and cash flows for the three months ended December 31, 1993. These
financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 audit provides 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 B. F. Saul Real Estate
Investment Trust and subsidiaries as of December 31, 1993, and the results of
their operations and their cash flows for the three months ended December 31,
1993, in conformity with generally accepted accounting principles.
As explained in the Summary of Significant Accounting Policies in the notes
to the financial statements, effective October 1, 1993, the Trust changed its
method of accounting for income taxes, impaired loans and investments in
securities and mortgage-backed securities.
ARTHUR ANDERSEN & CO.
Washington, D.C.
February 11, 1994
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
B. F. Saul Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of B. F. Saul
Real Estate Investment Trust as of September 30, 1993 and 1992, and the related
consolidated statements of operations, shareholders' deficit, and cash flows for
each of the years in the three-year period ended September 30, 1993. These
financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of B. F. Saul
Real Estate Investment Trust as of September 30, 1993 and 1992, and the results
of its operations and its cash flows for each of the years in the three-year
period ended September 30, 1993, in conformity with generally accepted
accounting principles.
As explained in Summary of Significant Accounting Policies -- the Bank,
effective December 31, 1992, the Bank changed its method of accounting for
foreclosed assets.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
November 4, 1993
F-3
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------
1993 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
REAL ESTATE
Income-producing properties
Commercial..................................................................... $ 109,796 $ 109,513 $ 231,315
Hotel.......................................................................... 110,309 111,484 111,662
Other.......................................................................... 4,543 3,985 7,189
------------- ------------- -------------
224,648 224,982 350,166
Accumulated depreciation....................................................... (64,684) (62,626) (95,466)
------------- ------------- -------------
159,964 162,356 254,700
Land parcels..................................................................... 38,416 38,411 50,981
Cash and cash equivalents........................................................ 1,668 2,710 628
Other assets..................................................................... 54,792 17,079 28,069
------------- ------------- -------------
Total real estate assets................................................... 254,840 220,556 334,378
------------- ------------- -------------
BANKING
Cash and due from banks.......................................................... 162,643 178,508 115,975
Interest-bearing deposits........................................................ 24,056 4,691 4,566
Federal funds sold............................................................... 30,000 -- --
Investment securities (market value $4,796, $4,822 and $180,845 respectively).... 4,796 4,789 173,390
Loans held for sale.............................................................. 211,476 176,027 175,698
Loans held for securitization and sale........................................... 300,000 300,000 350,000
Mortgage-backed securities (market value $1,351,066, $1,528,060 and $1,640,819,
respectively)................................................................... 1,351,066 1,501,192 1,599,653
Loans receivable (net of reserve for losses of $66,940, $68,040 and $78,818,
respectively)................................................................... 2,270,629 1,861,753 1,636,359
Federal Home Loan Bank stock..................................................... 31,543 31,150 29,385
Real estate held for investment or sale (net of reserve for losses of $111,463,
$111,644 and $109,044, respectively)............................................ 367,647 388,459 521,927
Property and equipment, net...................................................... 138,836 135,800 145,726
Cost in excess of net assets acquired, net....................................... 8,593 9,383 12,244
Excess servicing assets, net..................................................... 22,115 27,573 29,549
Purchased mortgage servicing rights, net......................................... 18,449 20,472 13,007
Other assets..................................................................... 188,750 232,974 191,277
------------- ------------- -------------
Total banking assets....................................................... 5,130,599 4,872,771 4,998,756
------------- ------------- -------------
TOTAL ASSETS..................................................................... $ 5,385,439 $ 5,093,327 $ 5,333,134
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
CONTINUED ON FOLLOWING PAGE.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------
1993 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES
REAL ESTATE
Mortgage notes payable........................................................... $ 264,914 $ 264,776 $ 429,968
Notes payable -- unsecured....................................................... 39,887 38,661 50,417
Deferred gains -- real estate.................................................... 109,253 109,027 4,687
Other liabilities and accrued expenses........................................... 38,712 37,689 37,688
------------- ------------- -------------
Total real estate liabilities.............................................. 452,766 450,153 522,760
------------- ------------- -------------
BANKING
Deposit accounts................................................................. 3,946,272 3,870,023 3,915,958
Securities sold under repurchase agreements and other short-term borrowings...... 194,189 88,266 450,321
Bonds payable.................................................................... 24,320 24,605 25,130
Notes payable.................................................................... 7,877 7,925 8,640
Federal Home Loan Bank advances.................................................. 474,500 412,000 275,000
Custodial accounts............................................................... 23,857 25,925 14,518
Amounts due to banks............................................................. 26,262 26,723 22,950
Other liabilities and accrued expenses........................................... 33,896 40,034 34,172
Capital notes -- subordinated.................................................... 160,000 138,500 138,500
------------- ------------- -------------
Total banking liabilities.................................................. 4,891,173 4,634,001 4,885,189
------------- ------------- -------------
Commitments and contingencies
Minority interest held by affiliates............................................. 36,646 34,495 27,912
Minority interest -- other....................................................... 74,307 74,307 --
------------- ------------- -------------
TOTAL LIABILITIES................................................................ 5,454,892 5,192,956 5,435,861
------------- ------------- -------------
SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90
million shares authorized, 516,000 shares issued and outstanding, liquidation
value $51.6 million............................................................. 516 516 516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
6,641,598 shares issued......................................................... 6,642 6,642 6,642
Paid-in surplus.................................................................. 92,943 92,943 92,943
Deficit.......................................................................... (134,287) (157,882) (160,980)
Net unrealized holding gains..................................................... 6,581 -- --
------------- ------------- -------------
(27,605) (57,781) (60,879)
Less cost of 1,814,688 common shares of beneficial interest in treasury.......... (41,848) (41,848) (41,848)
------------- ------------- -------------
TOTAL SHAREHOLDERS' DEFICIT...................................................... (69,453) (99,629) (102,727)
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT...................................... $ 5,385,439 $ 5,093,327 $ 5,333,134
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
-------------------- -------------------------------
1993 1992 1993 1992 1991
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REAL ESTATE
Income
Commercial properties................................................ $ 3,723 $ 12,997 $ 45,736 $ 51,489 $ 54,035
Hotels............................................................... 10,682 10,781 45,385 46,628 45,769
Other................................................................ 449 472 2,124 2,062 2,209
--------- --------- --------- --------- ---------
Total income........................................................... 14,854 24,250 93,245 100,179 102,013
--------- --------- --------- --------- ---------
Expenses
Direct operating expenses:
Commercial properties.............................................. 1,705 3,651 13,708 14,416 15,962
Hotels............................................................. 7,905 8,028 33,497 33,963 35,099
Land parcels and other............................................. 329 372 1,623 1,814 2,036
Interest expense..................................................... 9,764 12,835 50,470 51,326 57,419
Interest capitalized................................................. -- -- -- -- (37)
Amortization of debt expense......................................... 479 635 3,029 1,698 2,729
Depreciation......................................................... 2,075 3,134 12,457 13,400 14,827
Advisory, management and leasing fees -- related parties............. 1,533 1,684 7,249 7,093 9,036
General and administrative........................................... 501 334 2,119 4,226 5,073
Abandoned development costs.......................................... -- -- 13,104 -- --
Write-down of real estate to net realizable value.................... 1,380 -- -- -- --
--------- --------- --------- --------- ---------
Total expenses......................................................... 25,671 30,673 137,256 127,936 142,144
--------- --------- --------- --------- ---------
Equity in earnings (losses) of partnership investments................. 725 -- (668) (208) (212)
--------- --------- --------- --------- ---------
Gain (loss) on sales of property....................................... -- (539) 184 (546) 20,308
--------- --------- --------- --------- ---------
REAL ESTATE OPERATING LOSS............................................. (10,092) (6,962) (44,495) (28,511) (20,035)
--------- --------- --------- --------- ---------
BANKING
Interest income
Loans................................................................ 59,164 62,135 240,443 307,740 391,176
Mortgage-backed securities........................................... 20,357 25,906 95,085 83,504 62,429
Trading securities................................................... 412 -- -- -- 14,283
Investment securities................................................ 81 2,789 8,086 4,159 7,658
Other................................................................ 1,642 1,314 5,200 7,630 12,026
--------- --------- --------- --------- ---------
Total interest income.................................................. 81,656 92,144 348,814 403,033 487,572
--------- --------- --------- --------- ---------
Interest expense
Deposit accounts..................................................... 31,383 33,582 127,792 181,621 280,710
Short-term borrowings................................................ 3,218 4,769 13,333 12,169 24,135
Long-term borrowings................................................. 7,619 6,637 26,393 20,971 20,866
--------- --------- --------- --------- ---------
Total interest expense................................................. 42,220 44,988 167,518 214,761 325,711
--------- --------- --------- --------- ---------
Net interest income.................................................... 39,436 47,156 181,296 188,272 161,861
Provision for loan losses.............................................. (12,095) (27,754) (62,513) (89,062) (147,141)
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses.................... 27,341 19,402 118,783 99,210 14,720
--------- --------- --------- --------- ---------
Other income
Credit card fees..................................................... 7,401 7,461 26,405 34,611 41,856
Loan servicing fees.................................................. 15,111 12,871 46,083 39,924 47,632
Deposit service fees................................................. 4,893 4,636 18,575 17,756 15,953
Gain on sales of trading securities, net............................. 808 -- -- -- 11,651
Gain on sales of investment securities, net.......................... -- -- 8,895 -- 1,159
Loss on real estate held for investment or sale, net................. (284) (19,601) (12,722) (50,649) (47,495)
Gain on sales of credit card relationships, loans and mortgage-backed
securities, net..................................................... 2,490 12,664 31,375 44,259 69,117
Gain on sales of mortgage servicing rights, net...................... 2,572 1,724 4,828 3,750 9,137
Other................................................................ 2,338 1,803 7,314 10,766 12,133
--------- --------- --------- --------- ---------
Total other income..................................................... 35,329 21,558 130,753 100,417 161,143
--------- --------- --------- --------- ---------
</TABLE>
CONTINUED ON FOLLOWING PAGE.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED SEPTEMBER
ENDED DECEMBER 31, 30,
-------------------- -------------------------------
1993 1992 1993 1992 1991
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BANKING (CONTINUED)
Operating expenses
Salaries and employee benefits............................ 21,406 16,308 69,739 62,725 78,344
Loan expenses............................................. 6,474 2,699 22,001 7,799 9,394
Property and equipment.................................... 6,331 5,932 24,039 24,481 24,653
Advertising expenses...................................... 7,305 1,369 13,157 4,632 6,831
Computer expenses......................................... 6,334 5,708 22,249 22,801 27,940
Deposit insurance premiums................................ 2,958 2,329 11,273 9,736 9,941
Amortization of cost in excess of net assets acquired..... 516 744 2,863 3,143 3,279
Other..................................................... 5,351 4,605 20,366 20,901 21,593
--------- --------- --------- --------- ---------
Total operating expenses.................................... 56,675 39,694 185,687 156,218 181,975
--------- --------- --------- --------- ---------
BANKING OPERATING INCOME (LOSS)............................. 5,995 1,266 63,849 43,409 (6,112)
--------- --------- --------- --------- ---------
TOTAL COMPANY
Operating income (loss) before income taxes, extraordinary
items, cumulative effect of change in accounting principle,
and minority interest...................................... (4,097) (5,696) 19,354 14,898 (26,147)
Provision for income taxes.................................. (708) 232 11,703 7,385 3,225
--------- --------- --------- --------- ---------
Income (loss) before extraordinary items, cumulative effect
of change in accounting principle and minority interest.... (3,389) (5,928) 7,651 7,513 (29,372)
Extraordinary items:
Adjustment for tax benefit of net operating loss
carryforwards............................................ -- -- 7,738 3,817 --
Loss on early extinguishment of debt, net of taxes........ (6,333) -- -- (132) --
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle and minority interest................. (9,722) (5,928) 15,389 11,198 (29,372)
Cumulative effect of change in accounting principle......... 36,260 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before minority interest...................... 26,538 (5,928) 15,389 11,198 (29,372)
Minority interest held by affiliates........................ (505) (118) (6,582) (5,261) 2,113
Minority interest -- other.................................. (2,438) -- (4,334) -- --
--------- --------- --------- --------- ---------
TOTAL COMPANY NET INCOME (LOSS)............................. $ 23,595 $ (6,046) $ 4,473 $ 5,937 $ (27,259)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS.......... $ 22,240 $ (7,401) $ (947) $ 517 $ (32,679)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary items, cumulative effect
of change in accounting principle and minority interest.... $ (0.98) $ (1.51) $ 0.46 $ 0.43 $ (7.21)
Extraordinary items:
Adjustment for tax benefit of net operating loss
carryforwards............................................ -- -- 1.60 0.79 --
Loss on early extinguishment of debt, net of taxes........ (1.31) -- -- (0.03) --
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle and minority interest................. (2.29) (1.51) 2.06 1.19 (7.21)
Cumulative effect of change in accounting principle......... 7.51 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before minority interest...................... 5.22 (1.51) 2.06 1.19 (7.21)
Minority interest held by affiliates........................ (0.10) (0.02) (1.36) (1.08) 0.44
Minority interest -- other.................................. (0.51) -- (0.90) -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER COMMON SHARE.......................... $ 4.61 $ (1.53) $ (0.20) $ 0.11 $ (6.77)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-7
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------- ----------------------------------------
1993 1992 1993 1992 1991
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares)................. $ 516 $ 516 $ 516 $ 516 $ 516
------------ ------------ ------------ ------------ ------------
COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares)............... 6,642 6,642 6,642 6,642 6,642
------------ ------------ ------------ ------------ ------------
PAID-IN SURPLUS
Beginning and end of period.................................. 92,943 92,943 92,943 92,943 92,943
------------ ------------ ------------ ------------ ------------
DEFICIT
Beginning of period.......................................... (157,882) (160,980) (160,980) (166,917) (138,458)
Net income (loss)............................................ 23,595 (6,046) 4,473 5,937 (27,259)
Dividend distributions:
Real Estate Trust:
Redeemable preferred (per share: 1993 -- $550.00)........ -- -- (1,375) -- --
Preferred (per share: 1991 -- $2.32)..................... -- -- -- -- (1,200)
------------ ------------ ------------ ------------ ------------
End of period................................................ (134,287) (167,026) (157,882) (160,980) (166,917)
------------ ------------ ------------ ------------ ------------
NET UNREALIZED HOLDING GAINS
Beginning of period.......................................... -- -- -- -- --
Cumulative effect of change in accounting for securities..... 13,009 -- -- -- --
Decrease in net unrealized holding gains..................... (6,428) -- -- -- --
------------ ------------ ------------ ------------ ------------
End of period................................................ 6,581 -- -- -- --
------------ ------------ ------------ ------------ ------------
TREASURY SHARES
Beginning and end of period (1,814,688 shares)............... (41,848) (41,848) (41,848) (41,848) (41,848)
------------ ------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS' DEFICIT.................................. $ (69,453) $ (108,773) $ (99,629) $ (102,727) $ (108,664)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-8
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------ ----------------------------------------
1993 1992 1993 1992 1991
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
REAL ESTATE
Net income (loss)............................................ $ 21,574 $ (6,520) $ (21,857) $ (15,108) $ (18,809)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................... 2,075 3,134 12,457 13,400 14,827
Abandoned development costs................................ -- -- 13,104 -- --
Write-down of real estate to net realizable value.......... 1,380 -- -- -- --
(Gain) loss on sales of property........................... -- 539 (184) 546 (20,308)
Decrease (increase) in accounts receivable and accrued
income.................................................... (858) (24) 98 2,906 (1,380)
Increase in net deferred tax asset......................... (37,186) -- -- -- --
Increase (decrease) in accounts payable and accrued
expenses.................................................. (1,319) 2,238 7,047 11,594 5,700
(Increase) decrease in tax sharing receivable.............. 5,512 (445) (22,984) (13,567) (1,284)
Amortization of debt expense............................... 479 635 3,029 1,698 2,729
Equity in (earnings) loss of partnership investments....... (725) -- 668 208 212
Loss on early extinguishment of debt....................... -- -- -- 132 --
Other...................................................... 3,273 5,152 5,473 (2,693) 1,939
----------- ----------- ------------ ------------ ------------
(5,795) 4,709 (3,149) (884) (16,374)
----------- ----------- ------------ ------------ ------------
BANKING
Net income (loss)............................................ 2,021 474 26,330 21,045 (8,450)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Accretion of premiums, discounts and deferred loan fees.... (614) (3,192) (7,896) (17,775) (25,218)
Depreciation and amortization.............................. 4,208 3,999 16,191 15,773 14,672
Amortization of cost in excess of net assets acquired,
purchased mortgage servicing rights and excess servicing
assets.................................................... 8,873 4,956 36,410 24,663 15,175
Loss on extinguishment of debt............................. 10,476 -- -- -- --
Provision for loan losses.................................. 12,095 27,754 62,513 89,062 147,141
Purchases of trading securities............................ -- -- -- -- (147,605)
Net fundings of loans held for sale........................ (370,761) (215,665) (903,941) (768,149) (258,383)
Proceeds from sales of trading securities.................. 205,109 -- -- -- 441,044
Proceeds from sales of loans and securities held for sale
and/ or securitization.................................... 181,650 570,906 1,946,826 1,708,234 1,383,972
Equity (earnings) loss from investments in limited
partnerships.............................................. (461) 15 (1,694) (391) 598
(Gain) loss on real estate held for investment or sale..... (1,848) (702) (9,503) 244 3,124
Provision for losses on real estate held for investment or
sale...................................................... 3,867 22,694 30,415 60,596 47,983
Gain on sales of trading securities, net................... (808) -- (8,895) -- (12,810)
Gain on sales of credit card relationships, loans and
mortgage-backed securities, net........................... (2,490) (12,664) (31,375) (44,259) (69,117)
Gain on sales of mortgage servicing rights, net............ (2,572) (1,724) (4,828) (3,750) (9,137)
Minority interest held by affiliates....................... 505 118 6,582 5,261 (2,113)
Minority interest -- other................................. 2,438 -- 4,334 -- --
(Increase) decrease in other assets........................ 40,538 (2,743) (41,710) (42,621) (403)
Increase (decrease) in other liabilities and accrued
expenses.................................................. (6,599) (2,088) 9,635 (19,709) (10,107)
Increase (decrease) in tax sharing payable................. (5,512) 445 22,984 13,567 1,284
Other, net................................................. (1,618) 2,755 4,779 1,857 9,374
----------- ----------- ------------ ------------ ------------
78,497 395,338 1,157,157 1,043,648 1,521,024
----------- ----------- ------------ ------------ ------------
Net cash provided by operating activities.................... 72,702 400,047 1,154,008 1,042,764 1,504,650
----------- ----------- ------------ ------------ ------------
</TABLE>
CONTINUED ON FOLLOWING PAGE.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-9
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------ ----------------------------------------
1993 1992 1993 1992 1991
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
REAL ESTATE
Capital expenditures -- properties........................... (1,037) (3,928) (7,465) (6,193) (7,720)
Property sales............................................... -- 386 3,780 4,908 34,544
Equity investment in unconsolidated entities................. 112 (28) (150) (58) (1,551)
Other investing activities................................... 6 3 836 10 458
----------- ----------- ------------ ------------ ------------
(919) (3,567) (2,999) (1,333) 25,731
----------- ----------- ------------ ------------ ------------
BANKING
Proceeds from sales of investment securities................. -- -- -- -- 246,990
Proceeds from maturities of investment securities............ -- -- -- 140,000 520,000
Proceeds from sales of mortgage-backed securities............ -- -- -- -- 646,678
Proceeds from sales of loans................................. -- 4,553 4,954 7,834 428,920
Net proceeds from sales of real estate....................... 22,448 24,191 150,115 44,287 21,776
Net proceeds from sales of mortgage servicing rights......... 2,572 1,724 5,978 4,790 19,009
Net fundings of loans receivable............................. (302,692) (114,381) (463,919) (73,984) (1,473,390)
Principal collected on mortgage-backed securities............ 162,319 128,827 447,951 133,152 61,733
Purchases of investment securities........................... -- -- (4,682) (173,414) (801,438)
Purchases of mortgage-backed securities...................... (48,636) (40,550) (664,284) (1,157,759) (440,076)
Purchases of loans receivable................................ (97,505) (76,743) (259,770) (115,557) (281,011)
Purchases of property and equipment.......................... (4,297) (1,606) (4,602) (3,373) (12,091)
Purchases of mortgage servicing rights....................... (876) (3,723) (20,716) (1,604) (3,525)
Excess servicing assets capitalized.......................... -- (11,841) (19,471) (16,943) (41,596)
Disbursements for real estate held for investment or sale.... (23,736) (6,673) (74,320) (28,652) (76,716)
Other investing activities, net.............................. 708 (5,713) 4,117 180 1,704
----------- ----------- ------------ ------------ ------------
(289,695) (101,935) (898,649) (1,241,043) (1,183,033)
----------- ----------- ------------ ------------ ------------
Net cash used in investing activities........................ (290,614) (105,502) (901,648) (1,242,376) (1,157,302)
----------- ----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
REAL ESTATE
Proceeds from mortgage financing............................. 461 1,900 2,603 35,070 --
Repayments of mortgages...................................... -- -- (1,907) (5,126) (16,000)
Principal curtailments of mortgages.......................... (323) (249) (4,268) (5,065) (2,441)
Proceeds from sales of unsecured notes....................... 3,005 1,187 6,184 -- --
Repayments of unsecured notes................................ (1,779) (3,846) (17,940) (17,115) (21,980)
Proceeds from bank borrowings................................ -- -- -- 5,520 12,725
Repayments of bank borrowings................................ -- -- (404) (8,441) (11,936)
Costs of obtaining financings................................ (277) (576) (1,170) (4,674) (577)
Net proceeds from the issuance of redeemable preferred
stock....................................................... -- -- 21,507 -- --
Dividends paid............................................... -- -- (1,375) -- (1,500)
----------- ----------- ------------ ------------ ------------
1,087 (1,584) 3,230 169 (41,709)
----------- ----------- ------------ ------------ ------------
</TABLE>
CONTINUED ON FOLLOWING PAGE.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-10
<PAGE>
B. F. SAUL REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------ ----------------------------------------
1993 1992 1993 1992 1991
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BANKING
Proceeds from customer deposits and sales of certificates of
deposit..................................................... 2,903,083 2,607,133 10,801,085 11,173,419 13,544,669
Customer withdrawals of deposits and payments for maturing
certificates of deposit..................................... (2,826,834) (2,668,746) (10,847,020) (11,520,494) (13,660,230)
Net increase (decrease) in securities sold under repurchase
agreements.................................................. 106,006 (248,370) (363,216) 446,367 (398,052)
Advances from Federal Home Loan Bank......................... 283,000 100,000 744,000 480,000 630,000
Repayments of advances from Federal Home Loan Bank........... (220,500) (50,000) (607,000) (405,000) (430,000)
Proceeds from other borrowings............................... 18,163 13,205 59,580 62,583 75,264
Repayments of other borrowings............................... (18,579) (14,223) (59,658) (64,277) (107,137)
Net proceeds from sale of preferred stock.................... -- -- 71,869 -- --
Cash dividends paid on preferred stock....................... (2,438) -- (1,896) -- --
Repayment of capital notes -- subordinated................... (134,153) -- -- -- --
Net proceeds from sale of capital notes -- subordinated...... 143,603 -- -- -- --
Other financing activities, net.............................. (2,068) (50) 11,406 (15,415) (3,138)
----------- ----------- ------------ ------------ ------------
249,283 (261,051) (190,850) 157,183 (348,624)
----------- ----------- ------------ ------------ ------------
Net cash provided by (used in) financing activities.......... 250,370 (262,635) (187,620) 157,352 (390,333)
----------- ----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents......... 32,458 31,910 64,740 (42,260) (42,985)
----------- ----------- ------------ ------------ ------------
Cash and cash equivalents at beginning of period............. 185,909 121,169 121,169 163,429 206,414
----------- ----------- ------------ ------------ ------------
Cash and cash equivalents at end of period................... $ 218,367 $ 153,079 $ 185,909 $ 121,169 $ 163,429
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)..................... $ 56,625 $ 57,580 $ 215,427 $ 275,184 $ 385,187
Income taxes............................................. 220 214 6,522 5,170 (1,472)
Supplemental schedule of noncash investing and financing
activities:
Rollovers of notes payable -- unsecured.................... 1,198 656 5,681 -- --
Loans receivable exchanged for mortgage-backed
securities................................................ -- 51,956 51,956 646,785 121,286
Loans held for sale exchanged for mortgage-backed
securities held for sale.................................. 155,475 190,026 442,017 307,782 54,175
Mortgage-backed securities transferred to loans and
securities held for sale.................................. -- 131,390 131,390 442,412 --
Investment securities transferred to loans and securities
held for sale............................................. -- -- 173,036 -- --
Loans receivable transferred to loans held for
securitization and sale................................... -- -- 440,361 350,000 647,507
Loans receivable transferred to loans held for sale........ -- -- -- 288,313
Loans made in connection with the sale of real estate...... 5,993 23,576 54,061 7,766 --
Loans receivable transferred to real estate acquired in
settlement of loans....................................... 1,200 18,113 23,158 43,046 177,582
Investments in real estate ventures transferred to real
estate acquired in settlement of loans.................... -- -- -- -- 8,502
Mortgage notes payable assumed in connection with
foreclosure on real estate properties..................... -- -- -- -- 14,377
Loans classified as in-substance foreclosed transferred to
loans receivable.......................................... 15,008 -- -- -- --
Loans held for securitization and sale transferred to loans
receivable................................................ -- 5,823 -- -- --
Investment securities transferred to investment securities
available-for-sale........................................ 4,789 -- -- -- --
Mortgage-backed securities transferred to mortgage-backed
securities available-for-sale............................. 1,501,192 -- -- -- --
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
B. F. Saul Real Estate Investment Trust (the "Parent Company") and its
wholly-owned subsidiaries (collectively, the "Real Estate Trust") operate as a
Maryland real estate investment trust. The principal business activity of the
Real Estate Trust is the ownership and development of income-producing
properties. The properties owned by the Real Estate Trust are located
predominantly in the Mid-Atlantic and Southeastern regions of the United States
and consist principally of office projects, hotels and various undeveloped land
parcels.
B. F. Saul Real Estate Investment Trust also owns 80% of the outstanding
common stock of Chevy Chase Bank, F.S.B., and its subsidiaries (the "Bank" or
the "Corporations"), whose assets accounted for approximately 95% of the
consolidated assets of B. F. Saul Real Estate Investment Trust and its
consolidated subsidiaries (the "Trust") at December 31, 1993. The Bank is a
federally chartered and federally insured stock savings bank. B. F. Saul Real
Estate Investment Trust is a thrift holding company by virtue of its ownership
of a majority interest in the Bank. The accounting and reporting practices of
the Trust conform to generally accepted accounting principles and, as
appropriate, predominant practices within the real estate and banking
industries.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the the Real
Estate Trust and the Bank. Accordingly, the accompanying financial statements
reflect the assets, liabilities, operating results, and cash flows for two
business segments: Real Estate and Banking. All significant intercompany
balances and transactions have been eliminated.
INCOME TAXES
The Trust files a consolidated federal income tax return which includes
operations of all 80% or more owned subsidiaries. The Bank became a member of
the Trust's affiliated group filing consolidated federal income tax returns for
taxable years and partial taxable years beginning on or after June 28, 1990.
Effective October 1, 1993, the Trust adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which
was issued in February 1992. SFAS 109 establishes financial accounting and
reporting standards for the effects of income taxes that result from the Trust's
activities during the current and preceding years. It requires an asset and
liability approach in accounting for income taxes versus the deferred method
previously used under Accounting Principles Board Opinion No. 11, "Accounting
for Income Taxes" ("APB 11"). The adoption of SFAS 109 on October 1, 1993 was
recorded as a cumulative effect of a change in accounting principle of
approximately $36.3 million and had the effect of increasing the Trust's net
deferred tax asset by approximately $33.5 million.
Under SFAS 109, deferred income taxes are recorded using enacted tax laws
and rates for the years in which taxes are expected to be paid. To the extent
that realization of such assets is more likely than not, SFAS 109 provides for
the recognition of deferred tax assets based on tax loss and tax credit
carryforwards. The Trust's net deferred tax asset at December 31, 1993 under
SFAS 109 was $43.6 million. At December 31, 1993, there were no valuation
allowances recorded for deferred tax assets.
Income tax provisions for the three months ended December 31, 1992 and
fiscal years 1993, 1992 and 1991 were determined under APB 11 and have not been
restated to reflect adoption of SFAS 109.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is determined by dividing net income
(loss), after deducting preferred share dividend requirements, by the weighted
average number of common shares outstanding during the year. The weighted
average number of shares used in the calculation for the three-month periods
ended December 31, 1993 and 1992 and the years ended September 30, 1993, 1992
and 1991 was 4,826,910 each period or year.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1993, 1992 and 1991 to conform with
the presentation used for the period ended December 31, 1993.
UNAUDITED INTERIM FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
The consolidated financial statements as of December 31, 1992 and for the
three months ended December 31, 1992 are unaudited; however in the opinion of
management, all necessary adjustments have been made to the financial statements
for a fair presentation. The results for the three-month periods ended December
31, 1993 and 1992 are not necessarily indicative of the results to be obtained
for a full fiscal year.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- REAL ESTATE TRUST
CASH EQUIVALENTS
The Real Estate Trust considers all highly liquid, temporary investments
with an original maturity of three months or less to be cash equivalents.
PROPERTIES
Income-producing properties are stated at the lower of depreciated cost,
except those which were acquired through foreclosure or equivalent proceedings,
the carrying amounts of which are based on the lower of cost or fair value at
the time of acquisition, or net realizable value based on management's intent
and ability to hold such properties on a long-term basis. Under the net
realizable value approach, management evaluates, on an ongoing basis, the
recoverability of the investment in each property by analyzing cash flow after
capital improvements, but before interest costs, to determine that such cash
flow is sufficient to recover the recorded investment in the property over the
estimated useful life of the asset.
Interest, real estate taxes and other carrying costs are capitalized on
projects under construction. Once construction is completed and the assets are
placed into 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.
In the initial rental operations of development projects, the Real Estate
Trust considers a project to be substantially complete and held 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 interests are amortized over the lives of the
related leases using the straight-line method.
INCOME RECOGNITION
Rental and interest income are accrued as earned except when doubt exists as
to their collectibility, in which case accrual is discontinued. When rentals
vary from a straight-line basis due to free
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- REAL ESTATE TRUST (CONTINUED)
rent periods or scheduled increases, income is recognized on a straight-line
basis. Additional rental income based on tenants' gross revenues ("overage
rent") is accrued on the basis of the prior year's overage rents adjusted to
give effect to currently available sales data.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short-term
maturity of these instruments.
LIABILITIES
The carrying amount of Mortgage notes payable, excluding the carrying amount
of deferred financing costs, approximates fair value because most of the debt
has been financed in recent periods at prevailing market interest rates. The
fair value of Notes payable -- unsecured is based on the rates currently offered
by the Real Estate Trust for similar notes. At December 31 and September 30,
1993 the fair value of Notes payable -- unsecured was $43.6 and $41.6 million,
respectively.
The Real Estate Trust and certain of its subsidiaries are obligated to
reimburse the partners of certain partnerships, including a partnership in which
the Real Estate Trust has an equity interest, in an amount up to $116.1 million
if those partnerships fail to make payments with respect to specified debt . The
operations of those partnerships have been adequate to service the specified
debt. Accordingly, as of the balance sheet date, the Real Estate Trust has
determined that the fair value of this contingent obligation was zero. See Note
2.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- THE BANK
GENERAL
The Bank is a federally chartered and federally insured stock savings bank
and, as such, is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is principally engaged in the
business of attracting deposits from the public and using such deposits,
together with borrowings and other funds, to make loans secured by real estate,
primarily residential mortgage loans, and various types of consumer loans,
primarily credit card loans.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits.
The Bank is required to maintain reserve balances with the Federal Reserve
Bank. Average reserves maintained at the Federal Reserve Bank were $22.7, $14.8,
$21.8, $30.2 and $41.1 million during the three months ended December 31, 1993
and 1992, and the years ended September 30, 1993, 1992 and 1991, respectively.
LOANS HELD FOR SALE
The Bank engages in mortgage banking activities. At December 31, 1993,
September 30, 1993 and 1992, loans held for sale are composed of single-family
residential loans originated or purchased for sale in the secondary market and
are carried at aggregate cost which is lower than aggregate market value.
Single-family residential loans held for sale will either be sold or will be
exchanged for mortgage-backed securities and then sold. Gains and losses on
sales of whole loans held for sale are determined using the specific
identification method. See "Trading Securities" and Note 29.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- THE BANK (CONTINUED)
LOANS HELD FOR SECURITIZATION AND SALE
The Bank periodically sells receivables through asset-backed
securitizations, in which receivables are transferred to a trust, and the Bank
sells certificates to investors representing ownership interests in the trust.
The amount of asset-backed securitizations contemplated to occur during the
six-month period subsequent to the balance sheet date is classified as held for
securitization and sale to the extent that such amounts are outstanding. Such
assets held for securitization and sale are reported at the lower of aggregate
cost or aggregate market value for each asset type.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Effective October 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"), which was issued in May 1993. SFAS 115 requires
institutions to classify and account for debt and equity securities in one of
three categories as follows:
1. Debt securities that an institution has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at
amortized cost.
2. Debt and equity securities that are purchased and held principally for
the purpose of selling them in the near term and mortgage-backed
securities held for sale in conjunction with mortgage banking activities
are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. See "Trading
Securities."
3. Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale and reported at
fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders' equity, net of the
related tax effect.
At December 31, 1993, all investment securities and mortgage-backed
securities held by the Bank are classified as available-for-sale and recorded at
fair value. At December 31, 1993, net unrealized holding gains in the amount of
$8.2 million, net of the related income tax effect, are included in
stockholders' equity as a separate component. See Notes 10 and 11.
Premiums and discounts on investment securities and mortgage-backed
securities available-for-sale are amortized or accreted using the level-yield
method. Realized gains and losses are determined using the specific
identification method.
Prior to October 1, 1993, the Bank's investment and mortgage-backed
securities were held for investment and stated at cost, adjusted for
amortization of premiums and accretion of discounts. These securities were
carried at amortized cost because the Bank had the ability to hold such
securities until maturity and it was management's intent to hold such securities
for the foreseeable future. When management determined that certain securities
might be sold in response to changes in interest rates, changes in prepayment
risks or the need to increase regulatory capital, such securities were
transferred from the held for investment category to the held for sale category.
Such held for sale securities were transferred in and carried at the lower of
aggregate cost or aggregate market value. Gains and losses resulting from the
sale of investment and mortgage-backed securities were determined using the
specific identification method.
Prior to October 1, 1993, securities to be held for indefinite periods of
time, including securities that management intended to use as part of its
asset-liability strategy, or that could be sold in response to changes in
interest rates, changes in prepayment risks, the need to increase regulatory
capital or
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- THE BANK (CONTINUED)
other similar factors, were classified as held for sale and were carried at the
lower of aggregate cost or aggregate market value. Gains and losses on sales of
securities held for sale were determined using the specific identification
method.
TRADING SECURITIES
As part of its mortgage banking activities, the Bank exchanges loans held
for sale for mortgage-backed securities and then sells the mortgage-backed
securities to third-party investors in the month of issuance. In accordance with
SFAS 115, these mortgage-backed securities are classified as trading securities.
Proceeds from sales of trading securities were $205.1 million during the three
months ended December 31, 1993. The Bank realized net gains on the sale of
trading securities of $0.8 million for the three months ended December 31, 1993.
There were no mortgage-backed securities classified as trading securities at
December 31, 1993.
Trading securities, which were purchased during fiscal 1990 and sold during
fiscal 1991, were valued at market with gains and losses, both realized and
unrealized, included in gain on sales of trading securities. There were no
realized or unrealized gains or losses for the three months ended December 31,
1992 and the years ended September 30, 1993 and 1992. Realized gains for the
year ended September 30, 1991 were $11.7 million. The Bank had no trading
securities at September 30, 1993 and 1992.
LOAN ORIGINATION AND COMMITMENT FEES
Nonrefundable loan fees, such as origination and commitment fees, and
incremental loan origination costs relating to loans originated or purchased are
deferred. Net deferred fees (costs) related to loans held for investment are
amortized over the life of the loan using the level-yield or straight-line
method. Net fees (costs) related to loans held for sale are deferred until such
time as the loan is sold, at which time the net deferred fees (costs) become a
component of the gain or loss on sale.
CREDIT CARD FEES AND COSTS
Credit card membership fees are deferred and recognized as income on a
straight-line basis over the period the fee entitles the cardholder to use the
card, which is one year. Credit card origination costs are deferred and
recognized as a reduction of income on a straight-line basis over the privilege
period which ranges from one to two years.
IMPAIRED LOANS
Effective October 1, 1993, the Bank adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"), which was issued in May 1993. Under SFAS
114, a loan is impaired when, based on all current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the agreement, including all scheduled principal and
interest payments. SFAS 114 requires that impaired loans be measured based on
the present value of expected future cash flows, discounted at the loan's
effective interest rate. As a practical expedient, impairment may be measured
based on the loan's observable market price, or, if the loan is
collateral-dependent, the fair value of the collateral. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. A change in the fair value of the
impaired loan is reported as an increase in or reduction to the provision for
loan losses. In addition, SFAS 114 changes the method of accounting for loans
for which foreclosure is probable and requires that such impaired loans be
accounted for as loans. Such loans, with aggregate principal balances of $15.0
million, were reclassified from loans classified as in-substance foreclosed to
loans receivable during the quarter ended December 31, 1993. The Bank also
classifies certain credit card loans for which customers have agreed to modified
payment terms, as impaired loans in accordance with SFAS 114.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- THE BANK (CONTINUED)
At December 31, 1993, the recorded investment in loans and related reserve
for losses on loans for which impairment has been recognized in accordance with
SFAS 114 is as follows:
<TABLE>
<CAPTION>
RESERVE FOR
IMPAIRED LOSSES ON
LOANS LOANS
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Real estate.................................................. $ 15,008 $ 1,093
Credit card.................................................. 26,927 2,693
--------- -----------
Total.................................................... $ 41,935 $ 3,786
--------- -----------
--------- -----------
</TABLE>
RESERVES FOR LOSSES
Management reviews the loan, real estate held for investment and real estate
held for sale portfolios to establish reserves for estimated losses. The
reserves for losses are reviewed periodically, and reserves are provided after
consideration of the borrower's financial condition and the estimated value of
collateral, including estimated selling and holding costs. Reserves are also
provided by management after considering such factors as the economy in lending
areas, delinquency statistics, past loss experience and estimated future loss
experience.
The reserves for losses are based on estimates, and ultimate losses may vary
from current estimates. As adjustments to the reserves become necessary,
provisions for losses are reported in operations in the periods they are
determined to be necessary.
ACCRUED INTEREST RECEIVABLE ON LOANS
Loans are reviewed on a monthly basis and are placed on a non-accrual status
when, in the opinion of management, the full collection of principal or interest
has become unlikely. Uncollectible accrued interest receivable on non-accrual
loans is charged against current period interest income.
REAL ESTATE HELD FOR INVESTMENT OR SALE
REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment consists of an office building, apartment
buildings, developed land and investments in limited partnerships all of which
are owned by one of the Bank's subsidiaries. Real estate held for investment is
carried at the lower of aggregate cost or net realizable value. Also included in
real estate held for investment is a loan to a developer with a 50% profit
participation feature. This investment in a real estate venture, which was
non-performing at December 31, 1993, is accounted for as an acquisition,
development and construction ("ADC") arrangement.
REAL ESTATE HELD FOR SALE
Real estate held for sale consists of real estate acquired in settlement of
loans and is recorded at the lower of cost or fair value at acquisition. Prior
to December 31, 1992, real estate acquired in settlement of loans was carried at
the lower of adjusted cost or net realizable value. Effective December 31, 1992,
real estate acquired in settlement of loans is carried at the lower of adjusted
cost or fair value (less estimated selling costs). Costs relating to development
and improvement of property, including interest, are capitalized, whereas costs
relating to the holding of property are expensed. Capitalized interest amounted
to $2.3, $2.6, $10.2, $13.2 and $15.8 million for the three months ended
December 31, 1993 and 1992, and the years ended September 30, 1993, 1992 and
1991, respectively.
Prior to October 1, 1993 and the implementation of SFAS 114, real estate
held for sale also included in-substance foreclosures. In-substance foreclosures
included those investments for which the Bank had determined that (i) the debtor
had little or no equity in the collateral, considering the current fair value of
the collateral, (ii) proceeds for repayment of the loan could be expected to
come only from the operation or sale of the collateral and (iii) the debtor had
either formally or effectively
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- THE BANK (CONTINUED)
abandoned control to the Bank or retained control of the collateral but, because
of the current financial condition of the debtor, or the economic prospects for
the debtor and/or the collateral, it was doubtful that the debtor would be able
to rebuild equity in the collateral or otherwise repay the loan in the
foreseeable future. In accordance with SFAS 114, during the quarter ended
December 31, 1993, the Bank transferred certain loans previously classified as
in-substance foreclosed at September 30, 1993, to loans receivable. See
"Impaired Loans."
Effective December 31, 1992, OTS regulations required that foreclosed assets
be carried at the lower of cost or fair value. The effect of this regulatory
change required the Bank to adopt Statement of Position 92-3, "Accounting for
Foreclosed Assets" ("SOP 92-3"), issued by the Accounting Standards Division of
the American Institute of Certified Public Accountants, before the September 30,
1993 deadline for adoption that otherwise would have applied to the Bank. SOP
92-3 requires that foreclosed assets held for sale, including assets classified
as in-substance foreclosed (prior to the implementation of SFAS 114), be carried
at the lower of fair value (less estimated selling costs) or cost. Under SOP
92-3, the Bank's real estate acquired in settlement of loans is considered to be
held for sale. Due to the early adoption of SOP 92-3, the Bank was required to
revise its method of accounting for real estate held for sale. Based on
management's internal calculations and preliminary information with respect to
certain appraisals, the Bank recorded valuation allowances against its
foreclosed assets at December 31, 1992 of approximately $40.5 million to reduce
the book balance of foreclosed assets to fair value. Because the increase in the
Bank's reserves during the year ended September 30, 1992 was designed in part to
reduce the effects of SOP 92-3, $21.5 million of valuation allowances previously
provided partially offset the valuation allowances required by SOP 92-3.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method which allocates the cost of the applicable assets over
their estimated useful lives. Major improvements and alterations to Bank
premises and leaseholds are capitalized. Leasehold improvements are amortized
over the shorter of the terms of the respective leases (including renewal
options that are expected to be exercised) or 20 years. Maintenance and repairs
are charged to operating expenses as incurred.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is stated net of accumulated
amortization and is being amortized using the straight-line method generally
over a period of 15 years. Accumulated amortization was $28.7, $28.2 and $25.3
million at December 31, 1993, September 30, 1993 and 1992, respectively.
MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights, which are stated net of accumulated
amortization, are being amortized in proportion to the estimated remaining
pre-tax income from the mortgage servicing rights purchased. Amortization of
these assets amounted to $2.9, $0.7, $12.1, $1.6 and $2.3 million for the three
months ended December 31, 1993 and 1992, and the years ended September 30, 1993,
1992 and 1991, respectively. Accumulated amortization was $34.5, $31.6 and $22.1
million at December 31, 1993, September 30, 1993 and 1992, respectively. During
the three months ended December 31, 1993 and 1992, and fiscal 1993, 1992 and
1991, the Bank capitalized $0.9, $3.7, $20.7, $1.6 and $3.5 million,
respectively, related to the acquisition of mortgage servicing rights. In fiscal
1993 and 1991, the Bank sold approximately $1.2 and $9.9 million, respectively,
of rights to service mortgage loans with principal balances of approximately
$76.1 and $977.0 million, respectively, and recognized a loss of $380 thousand
in fiscal 1993 and a gain of $8.6 million in fiscal 1991. There were no sales of
previously purchased mortgage servicing rights during the three months ended
December 31, 1993 and the year ended September 30, 1992.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- THE BANK (CONTINUED)
In the three months ended December 31, 1993 and 1992, and the years ended
September 30, 1993, 1992 and 1991, the Bank sold the rights to service mortgage
loans with principal balances of approximately $151.5, $171.7, $476.1, $255.7
and $29.6 million, respectively, which were originated by the Bank in connection
with its mortgage banking activities, and recognized gains of $2.6, $1.7, $5.2,
$3.8 and $0.6 million, respectively.
Management periodically evaluates the carrying value of purchased mortgage
servicing rights taking into consideration current portfolio factors such as
prepayment rates. Any adjustments to the carrying value of such rights as a
result of this evaluation are included in the amortization for the respective
period.
EXCESS SERVICING ASSETS
When loans are sold with the servicing rights retained by the Bank, the net
present value of estimated future servicing income in excess of normal servicing
income is recorded as an adjustment to the sales price of the loans. Estimated
future losses are deducted in the computation of such excess servicing income.
The resulting assets are amortized using the level-yield ("interest") method
over the estimated lives of the underlying loans. Amortization of these assets
amounted to $5.5, $3.5, $21.4, $20.0 and $9.7 million for the three months ended
December 31, 1993 and 1992, and the years ended September 30, 1993, 1992 and
1991, respectively. Accumulated amortization was $57.9, $52.5 and $31.0 million
at December 31, 1993, September 30, 1993 and 1992, respectively. Excess
servicing assets capitalized in the three months ended December 31, 1993 and
1992, and the years ended September 30, 1993, 1992 and 1991 of $0, $11.8, $19.5,
$16.9 and $41.6 million, respectively, were the result of the servicing retained
on the securitization of home equity credit line and automobile loan
receivables. See Note 16.
Management periodically evaluates the carrying value of excess servicing
assets taking into consideration current portfolio factors such as prepayment
rates. Any adjustments to the carrying value of such assets as a result of this
evaluation are included in the amortization for the respective period.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. LIQUIDITY AND CAPITAL RESOURCES -- REAL ESTATE TRUST
Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. This condition is currently the case and
is expected to continue to be so for the foreseeable future. The Real Estate
Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes ("Unsecured Notes") sold to the public (see Note 4),
and the payment of capital improvement costs. In the past, the Real Estate Trust
has funded such shortfalls through a combination of external funding sources,
primarily new financings (including sales of Unsecured Notes), refinancings of
maturing mortgage debt, asset sales and tax sharing payments from the Bank.
The Real Estate Trust believes that, in subsequent fiscal years, its
operating cash flow will continue to be sufficient to satisfy its liquidity
requirements other than its need for cash to pay debt amortization and capital
improvement costs. As indicated in the "Debt Maturity Schedule" in Note 4, the
Real Estate Trust has significant debt maturities over the next several years.
In addition, the Real Estate Trust believes that capital improvement costs for
the existing property portfolio in the next several years will be in the range
of $2 to $3 million per year. In order to meet these cash needs, the Real Estate
Trust will be required to raise substantial amounts of cash from a combination
of mortgage loan refinancings, Unsecured Notes sales and tax sharing payments
and cash dividends from the Bank. Its ability to do so will be subject to
significant contingencies.
In management's opinion, the Real Estate Trust's liquidity position was
constrained in the last three fiscal years, primarily because of the persistence
of recessionary conditions in the Real Estate Trust's major real estate markets.
Those conditions have significantly curtailed the availability of long-term
fixed-rate mortgage financing on satisfactory terms. Additionally, the Bank's
inability to make tax sharing payments has also constrained the Real Estate
Trust's liquidity position. However, the Real Estate Trust has actively pursued
a number of strategies over the last two fiscal years to improve its ability to
meet its cash requirements.
As more fully described in Note 4, the Real Estate Trust refinanced
approximately $349 million of debt in the first quarter of 1992. In December
1992, the Parent Company completed the sale to an institutional investor for $25
million of 100% of the preferred stock of a newly organized subsidiary. Such
preferred stock was subsequently redeemed in exchange for notes of the Parent
Company held by such newly organized subsidiary (see Note 4). In late August
1993, the Real Estate Trust was relieved of approximately $196 million in
mortgage debt and deferred interest in connection with the formation of Saul
Holdings Limited Partnership ("Saul Holdings") (see Note 2). However, the Real
Estate Trust has made guarantees with respect to approximately $116.1 million of
the debt of Saul Holdings or its subsidiary partnerships (see Note 2).
The Real Estate Trust's current program of Unsecured Note sales was
initiated in the 1970's as a vehicle for supplementing other external funding
sources. Unsecured Note sales were suspended in June 1990, but resumed in
November 1992. The Real Estate Trust is currently selling Unsecured Notes
principally to pay outstanding Unsecured Notes as they mature. In paying
maturing Unsecured Notes with proceeds of new Unsecured Note sales, the Real
Estate Trust effectively is refinancing its outstanding Unsecured Notes with
similar new unsecured debt at lower interest rates currently prevailing in
today's market. During the period from the date of resumption of Unsecured Note
sales through January 31, 1994, the Real Estate Trust sold $18.4 million of
Unsecured Notes. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will be required to
finance such repayments from other sources of funds.
In fiscal 1991, the Bank made tax sharing payments totalling $29.6 million.
The Bank has agreed not to make any additional tax sharing payments to the Real
Estate Trust without the prior approval of the OTS. In April 1993, the Bank
successfully completed a $75 million offering of preferred stock,
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. LIQUIDITY AND CAPITAL RESOURCES -- REAL ESTATE TRUST (CONTINUED)
which significantly strengthened the Bank's regulatory capital ratios. In
management's opinion, this capital infusion, together with the Bank's improved
operating results, should enhance the prospects of the Real Estate Trust to
receive tax sharing payments and dividends from the Bank in the future. In June
1993, after receiving approval of the OTS, the Bank made a $5.0 million payment
to the Real Estate Trust pursuant to the tax sharing agreement between the Bank
and the Real Estate Trust. OTS approval of this payment was conditioned on a
pledge by the Real Estate Trust of certain assets, including partnership units
in Saul Holdings, to secure certain of the obligations of the Parent Company
under the tax sharing agreement (see Note 2). Following execution of the pledge,
the OTS approved, and the Bank made during the period October 1, 1993 through
December 31, 1993, additional tax sharing payments of $4.6 million to the Real
Estate Trust. At December 31, 1993, the estimated tax sharing payment due to the
Real Estate Trust from the Bank was $20.1 million. Subsequent to December 31,
1993, the Bank made a tax sharing payment of $5.0 million to the Real Estate
Trust.
The Parent Company has never received cash dividends from the Bank. The
Bank's ability to declare and pay cash dividends on its common stock is subject
to a number of restrictions, including its ability to generate earnings,
restrictions under regulations issued by the OTS and restrictions imposed by
various agreements. Each of such restrictions ties the Bank's dividend-paying
ability to its levels of regulatory capital and/or income. The Bank's efforts to
maintain the required levels of capital and generate the required levels of
income will be subject to all of the risks affecting its business. The Bank's
written agreement with the OTS was amended in October 1993 to eliminate the
requirement that the Bank obtain the written approval of the OTS before
declaring or paying any dividends on its common stock.
As the owner, directly and through two wholly-owned subsidiaries, of a 21.5%
limited partnership interest in Saul Holdings (see Note 2), the Real Estate
Trust will share in cash distributions from operations and from capital
transactions involving the sale or refinancing of the properties of Saul
Holdings. Saul Holdings intends to make quarterly cash distributions to the
partners out of net cash flow. In October 1993, the Real Estate Trust received
its first cash distribution, which was for a partial period, in the amount of
$524,000 from Saul Holdings. In February 1994, the Real Estate Trust received
its second cash distribution, in the amount of $1,363,000. However, there can be
no assurance that these distributions will continue in the future.
The Parent Company is currently considering a $150 million offering of
secured notes. Net proceeds from the proposed offering would be used to repay
certain mortgage indebtedness, establish a collateral account to satisfy the
liquidity maintenance requirements of the secured notes and for other general
corporate purposes. The terms of certain of the mortgage loans to be repaid in
part with proceeds from the proposed offering will be modified to waive certain
deferred interest, reduce interest rates and extend maturities.
While the Real Estate Trust's ability to satisfy its liquidity requirements
is contingent on future events, which include the sale of new Unsecured Notes in
an amount sufficient to finance scheduled maturities of outstanding Unsecured
Notes and the Bank's ability to pay tax sharing payments and dividends, the Real
Estate Trust believes it will be able to consummate the transactions described
above as well as explore other financing opportunities in order to raise
sufficient proceeds to fund its liquidity requirements.
2. SAUL HOLDINGS LIMITED PARTNERSHIP -- REAL ESTATE TRUST
In late August 1993, the Real Estate Trust entered into a series of
transactions undertaken in connection with an initial public offering of common
stock of a newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The
Real Estate Trust transferred all of its 22 shopping center properties and one
of its office properties together with the debt associated with such properties
to a newly formed partnership, Saul Holdings, in which the Real Estate Trust
owns (directly and through
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SAUL HOLDINGS LIMITED PARTNERSHIP -- REAL ESTATE TRUST (CONTINUED)
two wholly-owned subsidiaries) a 21.5% interest, other entities affiliated with
the Real Estate Trust own a 5.5% interest, and Saul Centers owns a 73.0%
interest. B. Francis Saul II, Chairman of the Board of Trustees of the Trust, is
also Chairman of the Board of Directors and Chief Executive Officer of Saul
Centers, which is the sole general partner of Saul Holdings. The Real Estate
Trust has pledged 495,713 partnership units in Saul Holdings to the Bank to
secure certain of the Parent Company's obligations under the tax sharing
agreement and has pledged 3,000,000 partnership units to a lender (see Note 4).
In connection with the transfer of its properties to Saul Holdings, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest. Pursuant to a reimbursement agreement among the partners of
Saul Holdings and its subsidiary limited partnerships (collectively, the
"Partnerships"), the Real Estate Trust and those of its subsidiaries that are
partners in the Partnerships have agreed to reimburse Saul Centers and the other
partners in the event the Partnerships fail to make payments with respect to
certain portions of the Partnerships' debt obligations and Saul Centers or any
such other partners personally make payments with respect to such debt
obligations. At December 31, 1993, the maximum potential obligations of the Real
Estate Trust and its subsidiaries under this agreement totalled approximately
$116.1 million.
The fair market value of each of the properties contributed to the
Partnerships by the Real Estate Trust and its subsidiaries at the date of
transfer (the "FMV" of each such property) exceeded the tax basis of such
property (with respect to each property, such excess is referred to as the
"FMV--Tax Difference"). In the event Saul Centers, as general partner of the
Partnerships, causes the Partnerships to dispose of, or there is an involuntary
disposition of, one or more of such properties, a disproportionately large share
of the total gain for federal income tax purposes would be allocated to the Real
Estate Trust or its subsidiaries as a result of the property disposition. In
general, if the gain recognized by the Partnerships on such a property
disposition is less than or equal to the FMV--Tax Difference for such property
(as previously reduced by the amounts of special tax allocations of depreciation
deductions to the partners), all such gain will be allocated to the Real Estate
Trust or its subsidiaries. To the extent the gain recognized by the Partnerships
on the property disposition exceeds the FMV--Tax Difference (as adjusted), such
excess generally will be allocated among all the partners in Saul Holdings based
on their relative percentage interests. In general, the amount of Federal income
tax liability in respect of gain allocated to the Real Estate Trust or its
subsidiaries in the event of such a property disposition is likely to exceed,
perhaps substantially, the amount of cash, if any, distributable to the Real
Estate Trust or its subsidiaries as a result of the property disposition. In
addition, future reductions in the level of the Partnerships' debt, any release
of the guarantees of such debt by the Real Estate Trust or its subsidiaries (as
provided in the reimbursement agreement described above), or any refinancings of
such debt in which the Real Estate Trust or its subsidiaries do not assume a
comparable obligation to that contained in the reimbursement agreement described
above could cause the Real Estate Trust or its subsidiaries to have taxable
constructive distributions without the receipt of any corresponding amounts of
cash.
Since the assets and liabilities of the properties were not sold, but
instead were transferred, to Saul Holdings, they were recorded in Saul Holdings
at their historical costs rather than at their market values. At the date of
transfer, liabilities exceeded assets on an historical cost basis. Consequently,
the Real Estate Trust has recorded its investment in Saul Holdings at zero and
has recorded the excess of liabilities over assets transferred, which amounted
to approximately $104.3 million, as "Deferred gains -- real estate" in the
accompanying Consolidated Balance Sheets.
The Condensed Consolidated Balance Sheet at December 31, 1993 and September
30, 1993 and the Condensed Consolidated Statement of Operations for October 1,
1993 through December 31, 1993 and for August 27, 1993 through September 30,
1993 of Saul Centers follow.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SAUL HOLDINGS LIMITED PARTNERSHIP -- REAL ESTATE TRUST (CONTINUED)
SAUL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1993
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Assets
Real estate investments................................................. $ 263,519 $ 262,408
Accumulated depreciation................................................ (75,029) (72,931)
Other assets............................................................ 24,875 21,245
------------ -------------
Total assets.......................................................... $ 213,365 $ 210,722
------------ -------------
------------ -------------
Liabilities and Stockholders' Equity
Notes payable........................................................... $ 192,063 $ 192,299
Other liabilities....................................................... 12,205 5,603
------------ -------------
Total liabilities....................................................... 204,268 197,902
Total stockholders' equity.............................................. 9,097 12,820
------------ -------------
Total liabilities and stockholders' equity............................ $ 213,365 $ 210,722
------------ -------------
------------ -------------
</TABLE>
SAUL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 1, 1993 AUGUST 27, 1993
THROUGH THROUGH
DECEMBER 31, 1993 SEPTEMBER 30, 1993
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Revenue
Base rent...................................................... $ 10,537 $ 3,854
Other revenue.................................................. 3,114 1,014
-------- -------
Total revenue................................................ 13,651 4,868
-------- -------
Expenses
Operating expenses............................................. 3,723 1,137
Interest expense............................................... 2,617 1,122
Amortization of deferred debt expense.......................... 809 275
Depreciation and amortization.................................. 2,216 806
General and administrative..................................... 708 181
-------- -------
Total expenses............................................... 10,073 3,521
-------- -------
Operating income before extraordinary item and holders of
convertible limited partnership units in operating
partnership..................................................... 3,578 1,347
Extraordinary item -- loss on early extinguishment of debt....... -- (3,519)
-------- -------
Net income (loss) before holders of convertible limited
partnership units in operating partnership...................... 3,578 (2,172)
Holders of convertible limited partnership units in operating
partnership..................................................... 966 (586)
-------- -------
Net income (loss)................................................ $ 2,612 $ (1,586)
-------- -------
-------- -------
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT PROPERTIES -- REAL ESTATE TRUST
The following table summarizes the cost basis of income-producing properties
and land parcels together with their related debt.
<TABLE>
<CAPTION>
BUILDINGS AND LEASEHOLD RELATED
NO. LAND IMPROVEMENTS INTERESTS TOTAL DEBT
--- ------ ------------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993
Income-producing properties
Office & industrial......... 8 $5,670 $104,126 -$- $109,796 $112,207
Hotels...................... 9 8,872 101,437 -- 110,309 89,876
Other....................... 7 3,575 819 149 4,543 454
--- ------ ------------- --------- -------- --------
24 $18,117 $206,382 $149 $224,648 $202,537
--- ------ ------------- --------- -------- --------
--- ------ ------------- --------- -------- --------
Land parcels.................. 10 $38,416 -- -- $ 38,416 $ 63,550
--- ------ ------------- --------- -------- --------
--- ------ ------------- --------- -------- --------
SEPTEMBER 30, 1993
Income-producing properties
Office & industrial......... 8 $5,249 $104,264 -$- $109,513 $112,242
Hotels...................... 9 8,872 102,612 -- 111,484 90,234
Other....................... 7 3,575 261 149 3,985 --
--- ------ ------------- --------- -------- --------
24 $17,696 $207,137 $149 $224,982 $202,476
--- ------ ------------- --------- -------- --------
--- ------ ------------- --------- -------- --------
Land parcels.................. 10 $38,411 -- -- $ 38,411 $ 63,625
--- ------ ------------- --------- -------- --------
--- ------ ------------- --------- -------- --------
SEPTEMBER 30, 1992
Income-producing properties
Shopping centers............ 22 $21,194 $85,983 1$,821 $108,998 $178,395
Office & industrial......... 9 5,920 116,397 -- 122,317 137,482
Hotels...................... 9 8,872 102,790 -- 111,662 92,933
Other....................... 8 4,064 2,976 149 7,189 2,040
--- ------ ------------- --------- -------- --------
48 $40,050 $308,146 1$,970 $350,166 $410,850
--- ------ ------------- --------- -------- --------
--- ------ ------------- --------- -------- --------
Land parcels.................. 12 $40,095 $10,684 $202 $ 50,981 $ 20,517
--- ------ ------------- --------- -------- --------
--- ------ ------------- --------- -------- --------
</TABLE>
4. DEBT -- REAL ESTATE TRUST
Mortgage notes payable are secured by various income-producing properties
and land parcels. Almost all mortgage notes are payable in monthly installments,
have maturity dates ranging to 2003 and accrue interest at annual rates from
5.4% to 18.7%. Certain mortgages contain a number of restrictions, including
cross-default provisions.
In the first quarter of fiscal 1992, the Real Estate Trust obtained new
financing from existing lenders and reached agreement with its five principal
lenders on refinancings of approximately $330 million of existing secured debt
and $19 million of previously unsecured debt which became secured debt. Three of
the lenders agreed to make available a total of approximately $25.5 million in
new loans, of which approximately $8.7 million was used to retire existing
indebtedness, yielding approximately $16.8 million in net proceeds to the Real
Estate Trust. As a result of these transactions, the maturities of $264 million
of the Real Estate Trust's secured borrowings were extended for five years, and
the Real Estate Trust received options for further extensions of $146 million of
such borrowings for up to another five years. Interest payment rates on the
affected loans in some cases were permanently reduced and in other cases were
reduced for a specified period subject to payment of the deferred interest in
the future.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT -- REAL ESTATE TRUST (CONTINUED)
In March 1992, the Real Estate Trust received $3.75 million in loan proceeds
pursuant to collateralized borrowings. It also sold certain land parcels for
approximately $4 million in cash. The proceeds from these two transactions were
used to fund operations, including payment of past-due real estate taxes.
The Real Estate Trust obtained a $5.0 million 18-month secured loan from an
affiliate in August 1992. Borrowings under this loan totalled $5.0 million at
December 31, 1993 and September 30, 1993 and $2.9 million at September 30, 1992.
Interest accrues at prime plus 1.5%. Subsequent to December 31, 1993, the loan
was extended to April 30, 1994.
At September 30, 1992, mortgage notes payable included two nonrecourse
mortgage loans with a combined principal balance of approximately $2.0 million,
one of which matured in August 1992 and the other of which matured in September
1992. The Real Estate Trust repaid these loans in fiscal 1993 with funds from
the sale of the associated income-producing property.
In December 1992, the Trust completed the sale to an institutional investor,
for $25 million, of 100% of the preferred stock of a newly organized subsidiary
of the Parent Company to which the the Parent Company contributed certain real
estate and other assets. The assets contributed included six shopping centers
and one office building, several parcels of unencumbered raw land, and a capital
note in the amount of $58 million secured by a junior lien on 30% of the Bank's
common stock. The net proceeds of the transaction were lent by the subsidiary to
the Parent Company in exchange for a Parent Company note (the "Trust Note")
secured by specified real estate properties and other assets, including a first
lien on 30% of the Bank's stock. Such proceeds were applied by the Trust for its
general corporate purposes, with approximately $2.3 million of such proceeds
being reserved for capital improvements to certain of the real estate properties
contributed to the new subsidiary. In late August 1993, the Real Estate Trust
was relieved of approximately $196 million in mortgage debt and deferred
interest in connection with the formation of Saul Holdings (See Note 2). As a
part of this transaction, the preferred stock issued to the institutional
investor was redeemed in exchange for the Trust Note and in connection
therewith, as additional security for the Trust Note, the subsidiary guaranteed
the Trust Note and pledged its 3,000,000 partnership units in Saul Holdings.
Notes payable -- unsecured includes notes which have been sold by the Real
Estate Trust directly to investors at varying interest rates with maturities of
one to ten years (see Note 1). These Unsecured Notes do not contain any
provisions for conversion, sinking fund or amortization. Unsecured Notes sold
after November 14, 1986 are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates of the
outstanding Unsecured Notes at December 31, 1993, September 30, 1993 and 1992
were 12.3%, 12.7% and 13.7%, respectively. No Unsecured Notes were sold during
fiscal 1992. During fiscal 1993 the Real Estate Trust sold Unsecured Notes
amounting to approximately $11.9 million. During the three-month period ended
December 31, 1993, the Trust sold Unsecured Notes amounting to approximately
$4.2 million.
The maturity schedule for the Real Estate Trust's outstanding debt at
December 31, 1993 for the fiscal years commencing October 1, 1993 is set forth
in the following table.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT -- REAL ESTATE TRUST (CONTINUED)
DEBT MATURITY SCHEDULE
<TABLE>
<CAPTION>
UNSECURED
FISCAL YEAR MORTGAGE NOTES NOTES TOTAL
- ------------------------------------------- ----------------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
1994(a).................................... $ 9,194 $ 11,077 $ 20,271
1995....................................... 9,643 7,034 16,677
1996....................................... 7,011 5,553 12,564
1997....................................... 179,692(b)(c) 2,904 182,596(b)(c)
1998....................................... 16,024 7,990 24,014
Thereafter................................. 43,350 5,329 48,679
----------------- ----------- -----------------
$ 264,914 $ 39,887 $ 304,801
----------------- ----------- -----------------
----------------- ----------- -----------------
<FN>
- ------------------------
(a) January 1, 1994 to September 30, 1994.
(b) The Real Estate Trust has five one-year options to extend $146 million of
this amount upon payment of $9 million in reduction of principal in fiscal
1997 and $8 million in reduction of principal each year thereafter.
(c) Balance does not include deferred interest accrued in the accompanying
consolidated balance sheets, which amounted to approximately $16.8 million
at December 31, 1993 and is payable at maturity.
</TABLE>
5. LONG-TERM LEASE OBLIGATIONS -- REAL ESTATE TRUST
The Real Estate Trust had several noncancelable long-term leases which
applied principally to land underlying some of its shopping centers that were
transferred to Saul Holdings in August 1993. The only remaining lease provides
for periodic adjustments of the basic annual rent. This lease will expire in
2061. The minimum future rental commitments under this lease amount to $101,000
per year for the next five fiscal years; thereafter, the total commitment is
$6.3 million.
The Consolidated Statements of Operations contain minimum ground rent
expense of $14,000, $78,000, $286,000, $312,000, and $308,000 for the three
months ended December 31, 1993 and 1992 and in fiscal 1993, 1992 and 1991,
respectively. In addition to the minimum ground rent payments, real estate taxes
on the land are an obligation of the Real Estate Trust.
6. RENTS FROM COMMERCIAL PROPERTIES -- REAL ESTATE TRUST
This income classification includes minimum and overage rent arising from
noncancelable commercial leases. Minimum rent for the three months ended
December 31, 1993 and 1992 and for fiscal years 1993, 1992, and 1991 amounted to
$3.7, $10.5, $38.0, $41.7 and $43.6 million, respectively. Overage rent for
these periods amounted to $0.1, $0.9, $2.7, $3.0 and $3.2 million, respectively.
Future minimum rentals as of December 31, 1993 under noncancelable leases are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- -------------------------------------------------------------------- --------------
<S> <C>
1994(1)............................................................. $ 9,975
1995................................................................ 10,087
1996................................................................ 3,802
1997................................................................ 1,789
1998................................................................ 811
Thereafter.......................................................... 369
<FN>
- ------------------------
(1) Represents the period January 1, 1994 through September 30, 1994.
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. TRANSACTIONS WITH RELATED PARTIES -- REAL ESTATE TRUST
TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES
The Real Estate Trust is managed by B. F. Saul Advisory Company (the
"Advisor"), a wholly-owned subsidiary of B. F. Saul Company ("Saul Co."). All of
the Real Estate Trust's officers and three Trustees of the Trust are also
officers and/or directors of Saul Co. and/or its subsidiary corporations. The
Advisor is paid a fixed monthly fee which is subject to annual review by the
Trustees. The monthly fee was $318,000 during the period from July 1, 1990
through March 31, 1991. The fee was decreased effective April 1, 1991 to $97,000
per month and remained at that rate through December 31, 1992. Effective January
1, 1993, the monthly fee rate was increased to $157,000. As of October 1, 1993,
the monthly rate was increased to $250,000. The advisory contract has been
extended until September 30, 1994, and will continue thereafter unless cancelled
by either party at the end of any contract year. Certain loan agreements of Saul
Co. prohibit termination of this contract. Advisory fees payable to the Advisor
at December 31, 1993 were approximately $266,000.
Saul Co. and Franklin Property Company ("Franklin"), a wholly-owned
subsidiary of Saul Co., provide services to the Real Estate Trust in the areas
of commercial property management and leasing, hotel management, development and
construction management, and acquisitions, sales and financings of real
property. Fees paid to Saul Co. and Franklin amounted to $1.1, $1.6, $7.7, $8.7
and $7.7 million for the three months ended December 31, 1993 and 1992 and
fiscal 1993, 1992 and 1991, respectively. The Real Estate Trust reimburses the
Advisor and Franklin for costs and expenses incurred in connection with the
acquisition and development of real property on behalf of the Real Estate Trust,
in-house legal expenses and for all travel expenses incurred in connection with
the affairs of the Real Estate Trust.
The Real Estate Trust pays the Advisor 1% of the principal amount of the
Unsecured Notes as they are issued to offset its costs of administering the
program. These payments amounted to $42,000, $18,000 and $118,000 for the three
months ended December 31, 1993 and 1992 and fiscal 1993, respectively. There
were no such payments in fiscal 1992 or 1991.
A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trust's
insurance program. Such commissions and fees amounted to $55,000, $55,000,
$221,000, $229,000 and $219,000 for the three months ended December 31, 1993 and
1992 and in fiscal 1993, 1992 and 1991, respectively.
The Real Estate Trust has a payable to the Saul Co. of approximately $5.9
and $3.3 million as of December 31, 1993 and September 30, 1993, respectively,
bearing interest at the rate of prime plus 1/2 percent per annum. The Trust owed
no amounts to the Saul Co. as of September 30, 1992. The funds are used for
general operating purposes.
REMUNERATION OF TRUSTEES AND OFFICERS
For the three months ended December 31, 1993 and 1992 and for fiscal years
1993, 1992, and 1991, the Real Estate Trust paid the Trustees $17,000, $17,000,
$79,000, $88,000 and $79,000, respectively, for their services. No compensation
was paid to the officers of the Real Estate Trust for acting as such; however,
one Trustee was paid by the Bank for his services as Chairman and Chief
Executive Officer of the Bank, and two received payments for their services as
directors of the Bank. Three of the Trustees and all of the officers of the Real
Estate Trust receive compensation from Saul Co. and/or its subsidiary
corporations as directors or officers thereof.
LEGAL SERVICES
The law firm in which one of the Trustees is a partner received $0.2, $0.6,
$1.2, $2.1 and $2.2 million, excluding expense reimbursements, during the three
months ended December 31, 1993 and 1992 and fiscal 1993, 1992, and 1991,
respectively, for legal services to the Real Estate Trust.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. TRANSACTIONS WITH RELATED PARTIES -- REAL ESTATE TRUST (CONTINUED)
SALE OF AVENEL BUSINESS PARK-PHASE I
In 1984, the Real Estate Trust sold Avenel Business Park-Phase I to an
affiliate, Avenel Associates Limited Partnership (the"Partnership"), for $8.9
million based on an independent appraisal. The managing general partner of the
Partnership was a subsidiary of Saul Co., and a subsidiary of the Bank owned a
45% interest in the Partnership. The Real Estate Trust received the sales price
for the property in the form of cash, a purchase money note in the amount of
$1,735,000 and the assumption of a first trust loan. The net gain realized upon
the sale was $3,023,000, after deducting a $781,000 discount of the purchase
money note due to its below market interest rate. The Real Estate Trust has
continued to defer recognition of this gain pending a sale of the property to an
unaffiliated entity.
In late August 1993, the Partnership sold Avenel Business Park-Phase I to
Saul Holdings and redeemed the purchase money note held by the Real Estate
Trust. The gain has continued to be deferred in accordance with the accounting
policy for gain recognition described in Note 2.
SAUL HOLDINGS LIMITED PARTNERSHIP
See Note 2 for a description of this partnership. The Real Estate Trust
accounts for this investment under the equity method. The Real Estate Trust's
share of earnings for the three months ended December 31, 1993 was $725,000. The
Real Estate Trust's share of losses for Saul Holdings for its initial period of
operations, August 27, 1993 through September 30, 1993, was $467,000.
OTHER TRANSACTIONS
The Real Estate Trust leases space to the Bank, Franklin and Saul Co. at
several of its income-producing properties. Minimum rents and recoveries paid by
these affiliates amounted to approximately $13,000, $133,000, $460,000, $533,000
and $558,000, in the three months ended December 31, 1993 and 1992 and in fiscal
1993, 1992 and 1991, respectively.
8. REGULATORY MATTERS -- THE BANK
At December 31, 1993 the Bank was in compliance with all of its regulatory
capital requirements under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), with tangible, core and risk-based capital
ratios of 4.55%, 5.30% and 11.56%, respectively. See Note 27.
The Bank is subject to a written agreement with the OTS dated September 30,
1991. The agreement, as amended on October 29, 1993, addresses, among other
things, transactions with affiliates, reductions of real estate acquired in
settlement of loans and asset quality. Specifically, the Bank agreed that,
without receiving the prior approval of the OTS, it would not increase its
investment in certain real estate projects beyond specified levels. In addition,
the Bank must provide the OTS with 15 days notice prior to selling certain
significant business assets.
The Parent Company and an affiliated entity have entered into an agreement
with the OTS to maintain the Bank's regulatory capital at the required levels
and, if necessary, to infuse additional capital for that purpose. To the extent
the Bank is unable to meet its regulatory capital requirements in the future,
the OTS could seek to enforce the Parent Company's obligations under the
agreement.
9. LOANS HELD FOR SECURITIZATION AND SALE -- THE BANK
Loans held for securitization and sale are composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ------------------------
1993 1993 1992
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Credit card receivables........................................ $ 300,000 $ 300,000 $ 150,000
Home equity credit line receivables............................ -- -- 200,000
------------ ----------- -----------
Total........................................................ $ 300,000 $ 300,000 $ 350,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INVESTMENT SECURITIES -- THE BANK
At December 31, 1993, all investment securities are classified as
available-for-sale in accordance with SFAS 115. Gross unrealized holding gains
and losses in the Bank's investment securities at December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING AGGREGATE
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
U.S. Government securities............................ $ 4,690 $ 4 $ -- $ 4,694
Other securities...................................... 102 -- -- 102
----------- ----------- ----------- -----------
Total............................................... $ 4,792 $ 4 $ -- $ 4,796
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
As discussed in the Summary of Significant Accounting Policies -- The Bank,
at September 30, 1993 and 1992, investment securities were carried at amortized
cost. The gross unrealized gains and losses for the Bank's investment securities
at September 30, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1993
U.S. Government securities......................... $ 4,686 $ 33 $ -- $ 4,719
Other securities................................... 103 -- -- 103
----------- ----------- ----------- -----------
Total............................................ $ 4,789 $ 33 $ -- $ 4,822
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SEPTEMBER 30, 1992
U.S. Government securities......................... $ 173,285 $ 7,455 $ -- $ 180,740
Other securities................................... 105 -- -- 105
----------- ----------- ----------- -----------
Total............................................ $ 173,390 $ 7,455 $ -- $ 180,845
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
A comparison of amortized cost and fair value for investment securities,
along with the contractual maturity dates, by category of investments at
December 31, 1993, is as follows:
<TABLE>
<CAPTION>
AGGREGATE
AMORTIZED FAIR
COST VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1993
Investment securities available-for-sale:
U.S. Government securities
Maturing within one year................................................... $ 296 $ 296
Maturing after one year, but within five years............................. 4,394 4,398
----------- -----------
Total U.S. Government securities......................................... 4,690 4,694
----------- -----------
Other securities:
Maturing within one year................................................... 102 102
----------- -----------
Total other securities................................................... 102 102
----------- -----------
Total investment securities available-for-sale......................... $ 4,792 $ 4,796
----------- -----------
----------- -----------
</TABLE>
Proceeds from sales of investment securities, including securities held for
sale, during fiscal 1993 and 1991 were $181.8 and $247.0 million. Gross gains of
$8.9 and $1.4 million and gross losses of
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INVESTMENT SECURITIES -- THE BANK (CONTINUED)
$0 and $0.2 million were realized on those sales for fiscal 1993 and 1991,
respectively. There were no sales of investment securities during the three
months ended December 31, 1993 and 1992, and the year ended September 30, 1992.
At December 31, 1993, certain investment securities were pledged as
collateral for certain letters of credit. See Note 29.
11. MORTGAGE-BACKED SECURITIES -- THE BANK
At December 31, 1993, mortgage-backed securities are classified as
available-for-sale in accordance with SFAS 115. Gross unrealized holding gains
and losses of the Bank's mortgage-backed securities at December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED AGGREGATE
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
FNMA........................................... $ 46,184 $ 311 $ (159) $ 46,336
FHLMC.......................................... 1,046,148 11,231 (1,726) 1,055,653
Private label, AA-rated........................ 245,128 3,949 -- 249,077
------------- ----------- ----------- -------------
Total........................................ $ 1,337,460 $ 15,491 $ (1,885) $ 1,351,066
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
As discussed in the Summary of Significant Accounting Policies -- The Bank,
at September 30, 1993 and 1992, mortgage-backed securities were carried at
amortized cost. The gross unrealized gains and losses for the Bank's
mortgage-backed securities at September 30, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED CARRYING MARKET
BALANCE PREMIUMS DISCOUNTS VALUE VALUE
------------- ------------ ---------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1993
FNMA.......................... $ 51,535 $ 954 $ (24) $ 52,465 $ 53,234
FHLMC......................... 1,138,175 17,663 (1,465) 1,154,373 1,173,539
Private label, AA-rated....... 295,558 -- (1,204) 294,354 301,287
------------- ------------ ---------- ------------- -------------
Total....................... $ 1,485,268 $ 18,617 $ (2,693) $ 1,501,192 $ 1,528,060
------------- ------------ ---------- ------------- -------------
------------- ------------ ---------- ------------- -------------
SEPTEMBER 30, 1992
FNMA.......................... $ 88,861 $ 1,018 $ (351) $ 89,528 $ 91,630
FHLMC......................... 974,862 13,331 (2,149) 986,044 1,011,744
Private label, AA-rated....... 525,833 -- (1,752) 524,081 537,445
------------- ------------ ---------- ------------- -------------
Total....................... $ 1,589,556 $ 14,349 $ (4,252) $ 1,599,653 $ 1,640,819
------------- ------------ ---------- ------------- -------------
------------- ------------ ---------- ------------- -------------
</TABLE>
Gross unrealized gains were $27.1 and $41.2 million at September 30, 1993
and 1992, respectively. Gross unrealized losses were $230 and $5 thousand at
September 30, 1993 and 1992, respectively.
Proceeds from sales of mortgage-backed securities, including mortgage-backed
securities held for sale, were $0, $230.6, $810.8, $834.2 and $835.9 million
during the three months ended December 31, 1993 and 1992, and the years ended
September 30, 1993, 1992 and 1991, respectively. Gross gains of $0, $0.7, $10.2,
$23.0 and $21.0 million and gross losses of $0, $0.6, $4.4, $3.0 and $1.0
million were realized on the sale of mortgage-backed securities, including
mortgage-backed securities held for sale, during the three months ended December
31, 1993 and 1992, and the years ended September 30, 1993, 1992 and 1991,
respectively.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. MORTGAGE-BACKED SECURITIES -- THE BANK (CONTINUED)
Accrued interest receivable on mortgage-backed securities totaled $7.9, $8.9
and $10.1 million at December 31, 1993, September 30, 1993 and 1992,
respectively, and is included in other assets in the Consolidated Balance
Sheets.
At December 31, 1993, certain mortgage-backed securities were pledged as
collateral for securities sold under repurchase agreements, other short-term
borrowings and other recourse arrangements. See Notes 20 and 29. Other
mortgage-backed securities with a book value of $92.3 million were pledged as
collateral primarily for credit card settlement obligations.
12. LOANS RECEIVABLE -- THE BANK
Loans receivable is composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------------
1993 1993 1992
-------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Single-family residential................................ $ 1,207,232 $ 1,111,306 $ 758,169
Home equity.............................................. 107,972 60,549 23,148
Commercial and multifamily............................... 99,971 95,611 61,522
Real estate construction................................. 83,221 69,940 88,428
Ground................................................... 18,651 19,340 30,008
Credit card.............................................. 653,647 454,520 722,672
Automobile............................................... 150,899 106,725 19,910
Overdraft lines of credit................................ 43,192 42,198 38,963
Other.................................................... 33,642 31,295 35,119
-------------- -------------- -------------
2,398,427 1,991,484 1,777,939
-------------- -------------- -------------
Less:
Undisbursed portion of loans........................... 65,743 63,620 58,284
Unearned discounts..................................... 1,636 1,543 2,589
Net deferred loan origination fees (costs)............. (6,521) (3,472) 1,889
Reserve for losses on loans............................ 66,940 68,040 78,818
-------------- -------------- -------------
127,798 129,731 141,580
-------------- -------------- -------------
Total.................................................. $ 2,270,629 $ 1,861,753 $ 1,636,359
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
The Bank serviced loans owned by others amounting to $3,072.4, $3,423.6,
$2,379.1 and $2,771.5 million at December 31, 1993, September 30, 1993, 1992 and
1991, respectively.
Accrued interest receivable on loans totaled $16.8, $16.0 and $17.3 million
at December 31, 1993, September 30, 1993 and 1992, respectively, and is included
in other assets in the Consolidated Balance Sheets.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REAL ESTATE HELD FOR INVESTMENT OR SALE -- THE BANK
Real estate held for investment or sale is composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------
1993 1993 1992
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land, development, construction and rental properties........ $ 69,434 $ 69,313 $ 92,363
Investments in limited partnerships.......................... (2,105) (1,580) (1,222)
Investments in real estate ventures.......................... 8,898 8,898 8,892
------------ ------------ ------------
Total real estate held for investment...................... 76,227 76,631 100,033
------------ ------------ ------------
Real estate held for sale.................................... 414,507 434,616 541,352
------------ ------------ ------------
Less:
Reserve for losses on real estate held for investment...... 10,188 10,182 14,919
Reserve for losses on real estate held for sale............ 101,275 101,462 94,125
Accumulated depreciation and amortization.................. 11,624 11,144 10,414
------------ ------------ ------------
Total real estate held for investment or sale............ $ 367,647 $ 388,459 $ 521,927
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Earnings (loss) on real estate held for investment or sale is composed of
the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1993 1992
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Provision for losses............................................................ $ (3,867) $ (22,694)
Net income from operating properties............................................ 1,274 2,406
Equity earnings (loss) from investments in limited partnerships................. 461 (15)
Net gain on sales............................................................... 1,848 702
--------- ----------
Total......................................................................... $ (284) $ (19,601)
--------- ----------
--------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for losses.............................................. $ (30,415) $ (60,596) $ (47,983)
Net income from operating properties.............................. 6,496 9,800 4,210
Equity earnings (loss) from investments in limited partnerships... 1,694 391 (598)
Net gain (loss) on sales.......................................... 9,503 (244) (3,124)
---------- ---------- ----------
Total........................................................... $ (12,722) $ (50,649) $ (47,495)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Corporations have an ADC arrangement with, and hold partnership
interests in, various limited partnerships. The partnerships and ADC arrangement
were formed for the purpose of acquiring, developing, operating and selling real
estate and are accounted for under the equity method with profits and losses
allocated proportionately among the partnership interests. At December 31, 1993,
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REAL ESTATE HELD FOR INVESTMENT OR SALE -- THE BANK (CONTINUED)
there were no outstanding commitments, lines of credit or other arrangements
between the Corporations and the partnerships relating to these investments.
Combined, condensed financial information for the partnerships and ADC
arrangement is presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------
1993 1993 1992
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Land, buildings, construction in progress and other assets...... $ 47,786 $ 77,803 $ 91,941
------------ --------- ---------
------------ --------- ---------
LIABILITIES AND PARTNERSHIP EQUITY
Notes payable to the Corporations............................... $ 8,898 $ 9,168 $ 9,248
Other liabilities............................................... 48,018 69,241 78,596
Partnership (deficit) equity:
-- Corporations............................................... (2,850) (2,344) (1,986)
-- Others..................................................... (6,280) 1,738 6,083
------------ --------- ---------
$ 47,786 $ 77,803 $ 91,941
------------ --------- ---------
------------ --------- ---------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Income............................................................................ $ 1,810 $ 3,082
Expenses.......................................................................... (1,799) (3,148)
--------- ---------
Net income (loss)............................................................. $ 11 $ (66)
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income............................................................ $ 12,492 $ 12,041 $ 9,832
Expenses.......................................................... (13,669) (12,155) (11,113)
Gain on sales of property......................................... 4,892 -- 197
---------- ---------- ----------
Net income (loss)............................................. $ 3,715 $ (114) $ (1,084)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
With respect to the ADC arrangement, the limited partnership classifies the
Bank's investment in the real estate project as a liability payable to the Bank
rather than as equity.
During the December 1993 quarter, the Bank sold its interests in three
limited partnerships to other partners at an aggregate amount that exceeded the
net carrying values of these assets.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESERVES FOR LOSSES -- THE BANK
Activity in the reserves for losses on loans receivable and real estate held
for investment or sale is summarized as follows:
<TABLE>
<CAPTION>
REAL ESTATE HELD
LOANS FOR INVESTMENT OR
RECEIVABLE SALE
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Balance, September 30, 1990.................................. $ 58,339 $ 12,878
Provision for losses....................................... 147,141 47,983
Charge-offs................................................ (126,451) (3,363)
Recoveries................................................. 10,716 --
------------ -----------------
Balance, September 30, 1991.................................. 89,745 57,498
Provision for losses....................................... 89,062 60,596
Charge-offs................................................ (112,544) (9,050)
Recoveries................................................. 12,555 --
------------ -----------------
Balance, September 30, 1992.................................. $ 78,818 $ 109,044
Provision for losses....................................... 62,513 30,415
Charge-offs................................................ (87,194) (27,815)
Recoveries................................................. 13,903 --
------------ -----------------
Balance, September 30, 1993.................................. 68,040 111,644
Provision for losses....................................... 12,095 3,867
Charge-offs................................................ (16,600) (4,048)
Recoveries................................................. 3,405 --
------------ -----------------
Balance, December 31, 1993................................... $ 66,940 $ 111,463
------------ -----------------
------------ -----------------
</TABLE>
The reserves for losses at December 31, 1993 are based on management's
estimates of the amount of reserves required to reflect the risks in the loan
and real estate portfolios based on circumstances and conditions known at the
time. The Bank's primary lending and real estate investment market is the
Washington, D.C. metropolitan area, which was adversely affected by the downturn
in recent years in the local real estate market. The ultimate impact of these
economic developments, the absence of a continued recovery in the real estate
markets and the effect of general market conditions on the Bank's borrowers
could result in difficulties in certain borrowers meeting their obligations to
the Bank and the Bank's ability to dispose of its real estate properties. As a
result, the Bank may incur additional provisions for losses.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. NON-PERFORMING ASSETS -- THE BANK
The Bank's primary lending and real estate investment market is the
Washington, D.C. metropolitan area, which was adversely affected by the
prolonged downturn in the local real estate market in recent years.
Non-performing assets are composed of the following at December 31, 1993:
<TABLE>
<CAPTION>
NON-ACCRUAL REAL ESTATE
LOANS (1) TOTAL
----------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Single-family residential.................................. $ 8,830 $ 2,564 $ 11,394
Residential land, development and construction............. -- 286,561 286,561
Office buildings........................................... -- 5,737 5,737
Retail centers............................................. 15,008 2,157 17,165
Commercial land (2)........................................ -- 25,111 25,111
----------- -------------- -------------
Total real estate assets................................. 23,838 322,130 345,968
Credit card................................................ 21,657 -- 21,657
Other...................................................... 258 -- 258
----------- -------------- -------------
Total non-performing assets.............................. $ 45,753 $ 322,130 $ 367,883
----------- -------------- -------------
----------- -------------- -------------
Reserves for Losses........................................
Real estate.............................................. $ 19,139 $ 111,463 $ 130,602
Credit card.............................................. 46,886 -- 46,886
Other.................................................... 915 -- 915
----------- -------------- -------------
Total.................................................. $ 66,940 $ 111,463 $ 178,403
----------- -------------- -------------
----------- -------------- -------------
Reserves for Losses as a Percentage of
Non-performing Assets (3)
Real estate.............................................. 80.29% 26.33% 29.20%
Credit card.............................................. 216.49% -- 216.49%
Other.................................................... 354.65% -- 354.65%
----------- -------------- -------------
Total.................................................. 146.31% 26.33% 38.03%
----------- -------------- -------------
----------- -------------- -------------
<FN>
- ------------------------
(1) Real estate acquired in settlement of loans is shown net of valuation
allowances.
(2) An $8.9 million participating loan to a joint venture is classified for
accounting purposes as real estate held for investment and, accordingly,
is presented in the above table as Real Estate.
(3) The ratio of reserves for losses to non-performing assets is calculated
before the deduction of such reserves.
</TABLE>
Approximately 17.8% of the Bank's non-performing credit card loans are
located in the Washington, D.C. metropolitan area. In general, the Bank's
remaining non-performing assets are located in the Washington, D.C. metropolitan
area, including approximately 55.9% located in Loudoun County, Virginia.
The ultimate collection or realization of the Bank's non-performing assets
will be primarily dependent on the general economic conditions in the
Washington, D.C. metropolitan area. Based upon current economic conditions and
other factors, the Bank has provided loss reserves and initial write-downs for
real estate acquired in settlement of loans. See Note 14. As circumstances
change, it may be necessary to provide additional reserves based on new
information.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. NON-PERFORMING ASSETS -- THE BANK (CONTINUED)
At December 31, 1993, September 30, 1993 and 1992, the Bank had $36.2, $36.7
and $31.7 million, respectively, of loans accounted for as troubled debt
restructurings, of which $0, $0 and $5.3 million, respectively, were included as
non-accrual loans. At December 31, 1993, the Bank had commitments to lend $3.5
million of additional funds on loans which have been restructured.
The amount of interest income that would have been recorded if non-accrual
assets and restructured loans had been current in accordance with their original
terms was $3.2, $3.1, $10.5, $16.3 and $21.3 million for the three months ended
December 31, 1993 and 1992, and the years ended September 30, 1993, 1992 and
1991, respectively. The amount of interest income that was recorded on these
loans was $0.6, $0.9, $3.0, $5.0 and $5.1 million for the three months ended
December 31, 1993 and 1992, and the years ended September 30, 1993, 1992 and
1991, respectively.
16. SIGNIFICANT SALES TRANSACTIONS -- THE BANK
The Bank periodically sells credit card receivables through asset-backed
securitizations, in which credit card receivables are transferred to trusts, and
the Bank sells certificates to investors representing ownership interests in the
trusts. The Bank sold and received gross proceeds of $350.0 and $280.0 million
for these asset-backed certificates for the years ended September 30, 1993 and
1992, respectively. There were no such securitizations during the three months
ended December 31, 1993 and 1992, and the year ended September 30, 1991. No
gains or losses were recorded on the transactions; however, excess servicing
fees are recognized over the related lives of the transactions. In fiscal 1991,
the Bank repurchased $231.2 million of trust certificates representing
securitized receivables previously sold in order to sell certain of the
underlying account relationships as discussed below. Outstanding trust
certificate balances related to these and previous securitizations were $778.4,
$841.8 and $689.2 million at December 31, 1993, September 30, 1993 and 1992,
respectively. The related receivable balances contained in the trusts were
$1,072.3, $1,232.8 and $830.9 million at December 31, 1993, September 30, 1993
and 1992, respectively. The Bank continues to service the underlying loans and
is contingently liable under various letters of credit or surety bonds that were
issued in connection with these transactions. See Note 29.
During the three months ended December 31, 1992 and fiscal years 1992 and
1991, the Bank sold credit card relationships with related outstanding
receivable balances of $14.9, $14.9 and $273.4 million, respectively. Gains of
$1.5, $1.5 and $20.7 million were recorded in connection with these sales for
the three months ended December 31, 1992 and the years ended September 30, 1992
and 1991, respectively, and the Bank no longer services these relationships. No
such sales occurred during the three months ended December 31, 1993 and the year
ended September 30, 1993.
For the three months ended December 31, 1992 and fiscal years 1993, 1992 and
1991, the Bank sold home equity credit line receivables through asset-backed
securitizations, in which home equity credit line receivables were transferred
to trusts, and the Bank sold certificates to investors representing ownership
interests in the trusts. The amount of receivables sold and gross proceeds
received was $194.2, $340.4, $253.6 and $600.1 million, respectively. Gains
recognized on these transactions were $10.4, $16.8, $15.1 and $25.8 million,
respectively, and the Bank continues to service the underlying loans. There were
no such sales during the three months ended December 31, 1993. The outstanding
trust certificate balances and the related receivable balances contained in the
trusts were $444.0, $530.1 and $457.2 million at December 31, 1993, September
30, 1993 and 1992, respectively. The Bank is contingently liable under various
surety bonds issued in connection with these transactions. See Note 29.
In September 1991, the Bank sold automobile loan receivables through an
asset-backed securitization, in which automobile loan receivables were
transferred to a trust, and the Bank sold certificates to investors representing
ownership interests in the trust. The amount of receivables sold and
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SIGNIFICANT SALES TRANSACTIONS -- THE BANK (CONTINUED)
gross proceeds received was $113.9 million. A gain of $4.3 million was
recognized on this transaction and the Bank continues to service the underlying
loans. The outstanding trust certificate balances and the related receivable
balances contained in the trust were $23.2, $29.6 and $64.2 million at December
31, 1993, September 30, 1993 and 1992, respectively. The Bank is contingently
liable under a surety bond issued in connection with this transaction. See Note
29.
17. PROPERTY AND EQUIPMENT -- THE BANK
Property and equipment is composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
ESTIMATED DECEMBER 31, ------------------------
USEFUL LIVES 1993 1993 1992
-------------- ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Land........................................... -- $ 24,035 $ 23,033 $ 23,045
Construction in progress....................... -- 3,089 2,366 2,287
Buildings and improvements..................... 10-45 years 47,304 47,001 49,391
Leasehold improvements......................... 5-20 years 48,487 44,164 43,652
Furniture and equipment........................ 5-10 years 108,229 106,603 101,289
Automobiles.................................... 3-5 years 999 791 233
------------ ----------- -----------
232,143 223,958 219,897
Less:
Accumulated depreciation and amortization.... 93,307 88,158 74,171
------------ ----------- -----------
Total...................................... $ 138,836 $ 135,800 $ 145,726
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Depreciation expense amounted to $4.4, $3.7, $14.8, $14.5 and $14.2 million
for the three months ended December 31, 1993 and 1992, and the years ended
September 30, 1993, 1992 and 1991, respectively.
18. LEASES -- THE BANK
The Corporations have noncancelable, long-term leases for office premises
and retail space, which have a variety of terms expiring from 1994 to 2029.
These leases are accounted for as operating leases. Some of the leases are
subject to rent adjustments in the future based upon changes in the Consumer
Price Index and some also contain renewal options. The following is a schedule
by years of future minimum lease payments required at December 31, 1993:
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30, (IN THOUSANDS)
- ----------------------------------------------------------------- --------------
<S> <C>
1994............................................................. $ 9,102(1)
1995............................................................. 8,022
1996............................................................. 7,390
1997............................................................. 6,342
1998............................................................. 5,585
Thereafter....................................................... 51,179
--------------
Total........................................................ $ 87,620
--------------
--------------
<FN>
- ------------------------
(1) Represents the period January 1, 1994 through September 30, 1994.
</TABLE>
Rent expense totaled $2.3, $2.3, $9.2, $9.0 and $9.0 million for the three
months ended December 31, 1993 and 1992, and the years ended September 30, 1993,
1992 and 1991, respectively.
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DEPOSIT ACCOUNTS -- THE BANK
An analysis of deposit accounts and the related weighted average effective
interest rates follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------
WEIGHTED
AMOUNT AVERAGE RATE
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Demand accounts............................................................... $ 83,163 --
NOW accounts.................................................................. 815,426 2.92%
Money market deposit accounts................................................. 1,164,091 3.28%
Statement savings accounts.................................................... 1,058,638 3.48%
Other deposit accounts........................................................ 51,662 2.99%
Certificate accounts, less than $100.......................................... 722,028 4.17%
Certificate accounts, $100 or more............................................ 51,264 4.07%
-------------
Total..................................................................... $ 3,946,272 3.36%
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------
1993 1992
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand accounts..................................... $ 72,518 -- $ 51,306 --
NOW accounts........................................ 762,566 2.89% 691,908 2.62%
Money market deposit accounts....................... 1,196,690 3.28% 1,292,779 3.47%
Statement savings accounts.......................... 941,289 3.48% 690,328 3.48%
Other deposit accounts.............................. 50,277 2.99% 47,381 2.99%
Certificate accounts, less than $100................ 790,806 4.33% 1,067,816 5.20%
Certificate accounts, $100 or more.................. 55,877 4.18% 74,440 4.77%
------------- -------------
Total........................................... $ 3,870,023 3.42% $ 3,915,958 3.77%
------------- -------------
------------- -------------
</TABLE>
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DEPOSIT ACCOUNTS -- THE BANK (CONTINUED)
Interest expense on deposit accounts is composed of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
NOW accounts..................................................................... $ 5,366 $ 4,360
Money market deposit accounts.................................................... 9,256 10,364
Statement savings accounts....................................................... 8,348 5,975
Other deposit accounts........................................................... 363 337
Certificate accounts............................................................. 8,040 12,530
--------- ---------
31,373 33,566
Custodial accounts............................................................... 10 16
--------- ---------
Total........................................................................ $ 31,383 $ 33,582
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
NOW accounts..................................................... $ 18,523 $ 22,442 $ 35,048
Money market deposit accounts.................................... 39,430 55,384 97,323
Statement savings accounts....................................... 26,598 26,081 25,008
Other deposit accounts........................................... 1,381 1,719 2,306
Certificate accounts............................................. 41,813 75,914 120,905
----------- ----------- -----------
127,745 181,540 280,590
Custodial accounts............................................... 47 81 120
----------- ----------- -----------
Total........................................................ $ 127,792 $ 181,621 $ 280,710
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Outstanding certificate accounts at December 31, 1993 mature in the periods
indicated as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30, (IN THOUSANDS)
- ----------------------------------------------------------------- --------------
<S> <C>
1994............................................................. $ 454,269
1995............................................................. 198,979
1996............................................................. 42,681
1997............................................................. 24,407
1998............................................................. 36,785
1999............................................................. 16,171
--------------
Total........................................................ $ 773,292
--------------
--------------
</TABLE>
At December 31, 1993, certificate accounts of $100 thousand or more have
contractual maturities as indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Three months or less................................................ $ 21,039
Over three months through six months................................ 8,777
Over six months through 12 months................................... 7,016
Over 12 months...................................................... 14,432
--------------
Total........................................................... $ 51,264
--------------
--------------
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM
BORROWINGS -- THE BANK
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------------------
1993 1993 1992 1991
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements:
Balance at period-end..................................... $ 189,157 $ 83,151 $ 446,367 $ --
Average amount outstanding during the period.............. 141,626 265,176 123,480 213,185
Maximum amount outstanding at any month-end............... 189,157 478,534 485,067 471,062
Amount maturing within 30 days............................ 189,157 83,151 446,367 --
Weighted average interest rate during the period.......... 3.34% 3.28% 3.64% 6.96%
Weighted average interest rate on period-end balances..... 3.41% 3.23% 3.36% --
Other short-term borrowings:
Balance at period-end..................................... $ 5,032 $ 5,115 $ 3,954 $ 3,459
Average amount outstanding during the period.............. 1,615 2,212 2,918 4,021
Maximum amount outstanding at any month-end............... 5,032 5,115 6,112 7,869
Amount maturing within 30 days............................ 5,032 5,115 3,954 3,459
Weighted average interest rate during the period.......... 2.78% 2.77% 4.03% 6.22%
Weighted average interest rate on period-end balances..... 2.60% 3.71% 4.00% 5.34%
</TABLE>
The investment and mortgage-backed securities underlying the repurchase
agreements had a book value, plus accrued interest, of $195.8 million at
December 31, 1993. The securities underlying these agreements were delivered to
the dealers who arranged the transactions. The dealers may have loaned such
securities to other parties in the normal course of their operations and have
agreed to resell to the Bank the identical securities at the maturities of the
agreements.
At December 31, 1993, the Bank had pledged mortgage-backed securities with a
book value of $9.7 million to secure certain other borrowings.
21. BONDS PAYABLE -- THE BANK
Bonds payable represent bonds (term and serial) issued by a local housing
finance agency secured by land and two residential apartment buildings having an
aggregate net book value of $26.2, $26.4 and $27.0 million at December 31, 1993,
September 30, 1993 and 1992, respectively. The assets securing these bonds are
included in real estate held for investment or sale.
The term bonds amounting to $23.7 million mature November 1, 2006, and
currently bear interest at 9.7%. On November 1, 1995, November 1, 1998, November
1, 2001 and November 1, 2004, the interest rate on the outstanding term bonds
will be adjusted to be equal to the rate at which such bonds could be sold at
par on such date. The term bonds are not redeemable prior to November 1, 1995.
On or after such date, the term bonds will be redeemable, in whole or in part,
at the option of the Corporations, at a redemption price equal to the principal
amount redeemed plus accrued interest to the redemption date. Beginning May 1,
1995, and continuing each November 1 and May 1 thereafter, the term bonds will
be subject to mandatory sinking fund redemption payments. Such payments will
retire approximately 55.0% of the principal amount of the term bonds prior to
November 1, 2006.
Serial bonds amounting to $595 thousand mature from May 1, 1994 to November
1, 1994. Interest rates on these bonds are 9.30%.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. BONDS PAYABLE -- THE BANK (CONTINUED)
The aggregate principal payments on the bonds payable outstanding at
December 31, 1993 for the next five years are summarized as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30, (IN THOUSANDS)
- -------------------------------------------------------------------- --------------
<S> <C>
1994................................................................ $ 290
1995................................................................ 630
1996................................................................ 685
1997................................................................ 760
1998................................................................ 830
Thereafter.......................................................... 21,125
--------------
Total........................................................... $ 24,320
--------------
--------------
</TABLE>
Deferred debt issuance costs, net of accumulated amortization, amounted to
$0.7, $0.8 and $1.1 million at December 31, 1993, September 30, 1993 and 1992,
respectively, and are included in other assets in the Consolidated Balance
Sheets. These amounts are being amortized using the level-yield method over the
life of the related debt.
At December 31, 1993, $3.0 million of bond proceeds were held in a
restricted cash account by the trustee for the purpose of paying principal and
interest on the bonds in the event that the Corporations are unable to fund
payments. This amount is included in interest-bearing deposits in the
Consolidated Balance Sheets.
22. NOTES PAYABLE -- THE BANK
Notes payable bear interest at rates ranging from 8.9% to 13.0% and are due
in varying installments through 2004.
Scheduled repayments of notes payable at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30, (IN THOUSANDS)
- -------------------------------------------------------------------- --------------
<S> <C>
1994................................................................ $ 148
1995................................................................ 215
1996................................................................ 236
1997................................................................ 260
1998................................................................ 286
Thereafter.......................................................... 6,732
-------
Total........................................................... $ 7,877
-------
-------
</TABLE>
23. FEDERAL HOME LOAN BANK ADVANCES -- THE BANK
At December 31, 1993, the Bank had $474.5 million of advances from the
Federal Home Loan Bank of Atlanta ("FHLB"). The interest rates on $225.0 million
of the advances adjust quarterly based primarily on the three-month London
Interbank Offered Rate ("LIBOR"). At December 31, 1993, the interest rates
ranged from 3.32% to 3.39%. The weighted average interest rate on
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. FEDERAL HOME LOAN BANK ADVANCES -- THE BANK (CONTINUED)
$190.0 million of advances was 3.80% and is fixed for the term of the advances.
The interest rate on the remaining $59.5 million of advances was 3.18% and
reprices daily. Advances with the FHLB mature in the years indicated as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30, (IN THOUSANDS)
- -------------------------------------------------------------------- --------------
<S> <C>
1994................................................................ $ 374,500
1995................................................................ --
1996................................................................ 100,000
--------------
Total......................................................... $ 474,500
--------------
--------------
</TABLE>
Under a Specific Collateral Agreement with the FHLB, advances are secured by
all of the Bank's FHLB stock, qualifying first mortgage loans with a total
principal balance of $374.0 million and mortgage-backed securities with a book
value of $342.8 million. The FHLB requires that members maintain qualifying
collateral at least equal to 100% of the member's outstanding advances at all
times. The collateral held by the FHLB in excess of the December 31, 1993
advances is available to secure additional advances from the FHLB, subject to
its collateralization guidelines. Certain documents for each of the mortgage
loans have been delivered to the FHLB pursuant to its requirements.
24. CAPITAL NOTES -- SUBORDINATED -- THE BANK
Capital notes, which are subordinated to the interest of deposit account
holders, are composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ------------------------ INTEREST
1993 1993 1992 RATE
------------ ----------- ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Private placement:
BACOB Savings Bank, s.c., due 1996................ $ 10,000 $ 10,000 $ 10,000 LIBOR + 3.0%
Public placements:
Subordinated debentures due 2002.................. -- 78,500 78,500 13 1/2%
Subordinated debentures due 2003.................. -- 50,000 50,000 15%
Subordinated debentures due 2005.................. 150,000 -- -- 9 1/4%
------------ ----------- -----------
Total....................................... $ 160,000 $ 138,500 $ 138,500
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
On November 23, 1993, the Bank sold $150.0 million 9 1/4% Subordinated
Debentures due 2005 (the "1993 Debentures"). The Bank received net proceeds of
$143.6 million from the sale of the 1993 Debentures, of which approximately
$134.2 million was used to redeem $78.5 million of debentures due in 2002 and
$50.0 million of debentures due in 2003 on December 23, 1993 and December 24,
1993, respectively. The remaining net proceeds were used for general corporate
purposes. The Bank incurred a loss of $6.3 million, after related income taxes,
in connection with the redemption of these debentures. The OTS has approved the
inclusion of the principal amount of the 1993 Debentures in the Bank's
supplementary capital for regulatory capital purposes.
The indenture pursuant to which the 1993 Debentures were sold ("the
Indenture") provides that the Bank may not pay dividends on its capital stock
unless, after giving effect to the dividend, no event of default shall have
occurred and be continuing and the Bank is in compliance with its regulatory
capital requirements. In addition, the amount of the proposed dividend may not
exceed the sum of (i) $15 million, (ii) 66 2/3% of the Bank's consolidated net
income (as defined in the Indenture) accrued on a cumulative basis commencing on
October 1, 1993 and (iii) the aggregate net cash proceeds received by the Bank
after October 1, 1993 from the sale of qualified capital stock or certain debt
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. CAPITAL NOTES -- SUBORDINATED -- THE BANK (CONTINUED)
securities, minus the aggregate amount of any restricted payments made by the
Bank. Notwithstanding the above restrictions on dividends, provided no event of
default has occurred or is continuing, the Indenture does not restrict the
payment of dividends on the Preferred Stock or any payment-in-kind preferred
stock issued in lieu of cash dividends on the Preferred Stock or the redemption
of any such payment-in-kind preferred stock.
Deferred debt issuance costs, net of accumulated amortization, amounted to
$6.1, $4.9 and $5.2 million at December 31, 1993, September 30, 1993 and 1992,
respectively, and are included in other assets in the Consolidated Balance
Sheets.
25. PREFERRED STOCK -- THE BANK
In April 1993, the Bank sold $75.0 million of its Noncumulative Perpetual
Preferred Stock, Series A ("Preferred Stock") in a private offering. Cash
dividends on the Preferred Stock are payable quarterly in arrears at an annual
rate of 13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the Bank (the "PIK Preferred Stock"). The
material terms of any series of PIK Preferred Stock will be the same as the
terms of the Preferred Stock except that (i) the annual dividend rate of the PIK
Preferred Stock will be fixed at the time of its issuance by the Board of
Directors in its discretion at an annual rate equal to or greater than the 13%
rate on the Preferred Stock, up to a maximum annual rate of 20%, and (ii) the
PIK Preferred Stock will be redeemable at any time after the date of issue at
the option of the Bank. The Bank may not declare or pay any cash dividend on its
common stock unless, with respect to each of the four most recent quarterly
dividend periods, (i) the Bank has paid full cash dividends on the Preferred
Stock or (ii) the Bank has redeemed PIK Preferred Stock of any one or more
series in an aggregate dollar amount at least equal to the unpaid cash dividend
for such dividend period.
The OTS has approved the inclusion of the Preferred Stock as tier 1 or core
capital and has approved the payment of dividends on the Preferred Stock,
provided certain conditions are met. The Preferred Stock is not redeemable until
May 1, 2003 and is redeemable thereafter at the option of the Bank. The holders
of the Preferred Stock have no voting rights, except in certain limited
circumstances.
Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid dividends
for the then-current dividend period in the event of any voluntary liquidation
of the Bank, after payment of the deposit accounts and other liabilities of the
Bank, and out of the assets available for distribution to shareholders. The
Preferred Stock ranks superior and prior to the issued and outstanding common
stock of the Bank with respect to dividend and liquidation rights.
26. RETIREMENT PLAN -- THE BANK
The Corporations participate in a defined contribution profit sharing
retirement plan (the "Plan") which covers those full-time employees who meet the
requirements as specified in the Plan. The Plan, which can be modified or
discontinued at any time, requires participating employees to contribute 2.0% of
their compensation. Corporate contributions, which are discretionary, were three
times the employee contribution prior to January 1, 1991, equal to the employee
contribution from January 1, 1991 to June 30, 1992 and three times the employee
contribution subsequent to June 30, 1992. Corporate contributions were $0.9,
$0.8, $3.1, $1.5 and $1.5 million for the three months ended December 31, 1993
and 1992, and the years ended September 30, 1993, 1992 and 1991, respectively.
There are no past service costs associated with the Plan and the Corporations
have no liability under the Plan other than their current contributions. The
Plan owns 4.0% of the Bank's common stock.
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27. REGULATORY CAPITAL -- THE BANK
Under FIRREA, the Bank's regulatory capital requirements at December 31,
1993 were a 1.5% tangible capital requirement, a 3.0% core capital requirement
and an 8.0% risk-based capital requirement. At December 31, 1993, the Bank was
in compliance with its tangible, core and risk-based regulatory capital
requirements. The information below is based upon the Trust's understanding of
the applicable regulations and related interpretations.
<TABLE>
<CAPTION>
ACTUAL CAPITAL REQUIREMENT
------------------------ -------------------------------------
AS A % OF AS A % OF EXCESS
(DOLLARS IN THOUSANDS) AMOUNT ASSETS AMOUNT ASSETS CAPITAL
- ------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Capital per the Bank's financial statements............ $ 292,982
Adjustments for tangible and core capital:
Intangible assets.................................... (54,234)
Non-includable subsidiaries.......................... (6,412)
-----------
Total tangible capital............................... 232,336 4.55% $ 76,651 1.50% $ 155,685
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supervisory goodwill................................... 38,325
-----------
Total core capital (1)............................... 270,661 5.30% $ 153,301 3.00% $ 117,360
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Tier 1 risk-based capital (2).......................... 270,661 6.88% N/A N/A N/A
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Adjustments for risk-based capital:
Subordinated capital debentures...................... 154,300
Reserve for general loan losses...................... 59,068
-----------
Total supplementary capital.......................... 213,368
Excess loan loss reserves............................ (9,782)
Adjusted supplementary capital......................... 203,586
-----------
Total available capital.............................. 474,247
Equity investments................................... (19,584)
-----------
Total risk-based capital............................. $ 454,663 11.56% $ 314,651 8.00% $ 140,012
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<FN>
- ------------------------
(1) Reflects an aggregate offset of $6.3 million representing the amount of
general reserves maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a "credit" against the deductions from capital otherwise
required for such investments.
(2) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well-capitalized" are a leverage (or "core capital")
ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
and a total risk-based capital ratio of at least 10.0%.
</TABLE>
At December 31, 1993, the Bank had $30.4 million in loans to and investments
in subsidiaries engaged in activities impermissible for national banks
("non-includable subsidiaries") which are required to be phased-out from all
three capital requirements according to the following schedule (which reflects
OTS approval of the Bank's use of a delayed phase-in period pursuant to
legislation enacted in October 1992): 25% beginning July 1, 1991; 40% beginning
July 1, 1994; 60% beginning July 1, 1995; and 100% beginning July 1, 1996. At
December 31, 1993, the Bank also had $41.2 million in equity investments
required to be phased-out from total capital for risk-based capital purposes
according to the following schedule: 60% beginning July 1, 1993 and 100%
beginning July 1, 1994. The OTS adopted a rule which was effective April 19,
1993, eliminating the capital deduction for equity investments that are
permissible for national banks.
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27. REGULATORY CAPITAL -- THE BANK (CONTINUED)
As of December 31, 1993, the Bank had $51.3 million in supervisory goodwill,
of which $38.3 million was included in core capital subject to a limitation of
0.75% of tangible assets. The percentage includable in core capital declines to
a maximum of 0.375% and 0% of tangible assets effective January 1, 1994 and
January 1, 1995, respectively.
Under OTS "prompt corrective action" regulations which became effective on
December 19, 1992, an institution is categorized as "well-capitalized" if it has
a leverage ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%. The Bank's
regulatory capital ratios exceeded the requirements for a well-capitalized
institution at December 31, 1993.
28. TRANSACTIONS WITH RELATED PARTIES -- THE BANK
LOANS RECEIVABLE
From time to time, in the normal course of business, the Bank may make loans
to executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the three months ended December 31, 1993 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Balance, September 30, 1993......................................... $ 4,302
Additions......................................................... 607
Collections....................................................... (420)
-------
Balance, December 31, 1993.......................................... $ 4,489
-------
-------
</TABLE>
SERVICES
Saul Co., which is a shareholder of the Trust, and its subsidiaries provide
certain services to the Corporations. These services include property
management, cafeteria management, insurance brokerage and leasing. Fees for
these services were $121, $154, $630, $603 and $460 thousand for three months
ended December 31, 1993 and 1992, and the years ended September 30, 1993, 1992
and 1991, respectively.
The law firm in which one director of the Bank is a partner received $1.1,
$1.1, $2.7, $3.0 and $3.0 million for legal services rendered to the
Corporations during the three months ended December 31, 1993 and 1992, and the
years ended September 30, 1993, 1992 and 1991, respectively.
For the three months ended December 31, 1992, and the years ended September
30, 1993 and 1992, one of the directors of the Bank was paid $6, $28, and $25
thousand, respectively, for consulting services rendered to the Bank. Two of the
directors of the Bank were paid total fees of $20 and $220 thousand for the
three months ended December 31, 1993 and the year ended September 30, 1991,
respectively, for consulting services.
A director of the Bank and his wife are entitled to $125 thousand per year
in supplemental retirement benefits under an agreement entered into by the Bank
in 1990 in connection with the director's former employment as a Vice Chairman
of the Bank. In addition, the director receives compensation under the agreement
for his service as a Vice Chairman and for ongoing services provided to the
Bank. Amounts paid to the director under this agreement totaled $42, $42 and
$165 thousand in the three months ended December 31, 1993 and 1992, and fiscal
1993.
TAX SHARING AGREEMENT
The Bank and the other companies in the Trust's affiliated group entered
into a tax sharing agreement dated June 28, 1990, as amended (the "Tax Sharing
Agreement"). The Tax Sharing Agreement provides for payments to be made by
members of the Trust's affiliated group to the Trust
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28. TRANSACTIONS WITH RELATED PARTIES -- THE BANK (CONTINUED)
based on their separate company tax liabilities. The Tax Sharing Agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce the overall tax liability of the Trust's affiliated
group, such member will be reimbursed by the other members of the affiliated
group that have taxable income in an amount equal to such tax reduction. The
Bank paid $4.6, $5.0 and $29.6 million to the Parent Company during the three
months ended December 31, 1993 and the years ended September 30, 1993 and 1991,
respectively, under the Tax Sharing Agreement. There were no tax sharing
payments made to the Parent Company during the year ended September 30, 1992.
OTS approval of the $4.6 and $5.0 million payment during the three months ended
December 31, 1993 and fiscal 1993, respectively, was conditioned on a pledge by
the Parent Company and a subsidiary of certain assets to secure certain of the
Parent Company's obligations under the Tax Sharing Agreement (see Note 2). After
receipt of OTS approval, the Bank made an additional tax sharing payment of $5.0
million to the Parent Company subsequent to December 31, 1993. Under the terms
of the Bank's written agreement dated September 30, 1991, as amended, with the
OTS, the Bank has agreed not to make any tax sharing payments to the Parent
Company unless such payments are approved by the OTS. However, the Bank
continues to account for income taxes in accordance with the Tax Sharing
Agreement. At December 31, 1993, September 30, 1993 and 1992, the estimated tax
sharing payment payable by the Bank under the Tax Sharing Agreement was $20.1,
$21.9 and $13.6 million, respectively.
OTHER
The Corporations paid $0.9, $0.9, $3.5, $3.4 and $3.9 million for office
space leased from or managed by companies affiliated with the Bank or its
directors during the three months ended December 31, 1993 and 1992, and the
years ended September 30, 1993, 1992 and 1991, respectively.
The Corporations owned approximately 45% of Avenel Associates Limited
Partnership ("Avenel"), which owned a commercial property. The general partner
in the partnership was a subsidiary of Saul Co. In August 1993, Avenel sold this
property and the Bank sold two real estate properties to Saul Holdings (see Note
2), in which the Real Estate Trust owns a 21.5% interest, other affiliated
entities of the Trust own a 5.5% interest and public shareholders own a 73%
interest. These assets were sold at amounts that exceeded their net carrying
values. During December 1993, upon payment of a final distribution to its
partners, Avenel was dissolved.
29. FINANCIAL INSTRUMENTS -- THE BANK
The Bank, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit, letters of credit and assets sold with limited
recourse.
The contract or notional amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. The
Bank's exposure to credit loss in the event of nonperformance by the other party
is represented by the contractual notional amount of these instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
COMMITMENTS TO EXTEND CREDIT
The Bank had $3.6 billion of outstanding commitments to extend credit at
December 31, 1993. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the Bank's normal underwriting and credit evaluation policies and procedures.
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
29. FINANCIAL INSTRUMENTS -- THE BANK (CONTINUED)
Loans approved but not closed are commitments for fixed or adjustable rate
residential loans which are secured by real estate. The Bank currently requires
borrowers to obtain private mortgage insurance on all loans where the
loan-to-value ratio exceeds 80%.
To manage the potentially adverse impact of interest rate movements on its
fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by entering into
whole loan and mortgage-backed security forward sale commitments. At December
31, 1993, the Bank had whole loan and mortgage-backed security forward sale
commitments of $36.6 and $203.1 million, respectively. In addition, at December
31, 1993, the Bank had $31.4 million in mortgage-backed security forward
purchase commitments related to its hedging activities.
LETTERS OF CREDIT
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At December 31, 1993,
the Bank had written letters of credit in the amount of $74.4 million, of which
$67.5 million were issued to guarantee the performance of and irrevocably assure
payment by customers under construction projects and $6.9 million were issued to
assure payment of specified financial obligations of customers.
Of the total, $29.1 million will expire in fiscal 1994 and the remainder
will expire over time through fiscal 2000. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers. Investment and mortgage-backed securities with a book
value of $8.1 million were pledged as collateral for certain of these letters of
credit at December 31, 1993.
RECOURSE ARRANGEMENTS
The Bank is obligated under various recourse provisions (primarily related
to credit losses) related to the securitization and sale of credit card, home
equity credit line and automobile loan receivables through the asset-backed
securitizations described in Note 16. At December 31, 1993, the primary recourse
to the Bank was $77.0 million. As a result of recourse provisions, the Bank
maintained restricted cash accounts amounting to $97.6, $125.8 and $96.2
million, at December 31, 1993, September 30, 1993 and 1992, respectively, which
are included in other assets in the Consolidated Balance Sheets.
The Bank is obligated under various recourse provisions related to the swap
of single-family residential loans for participation certificates and
mortgage-backed securities issued to the Bank by FHLMC and FNMA. At December 31,
1993, recourse to the Bank under these arrangements was $6.0 million. As
security for the payment of funds due under the FHLMC recourse obligations, the
Bank is required to post collateral. At December 31, 1993, mortgage-backed
securities pledged as collateral under these obligations had a book value of
$5.5 million.
CONCENTRATIONS OF CREDIT
The Bank's principal real estate lending market is the metropolitan
Washington, D.C. area. In addition, approximately 16.8% of the Bank's
outstanding credit card loans at September 30, 1993 were generated by
cardholders residing in the metropolitan Washington, D.C. area. Service
industries and Federal, state and local governments employ a significant portion
of the Washington, D.C. area labor force. Adverse changes in economic conditions
could have a direct impact on the timing and amount of payments by borrowers.
30. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS -- THE BANK
The majority of the Bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS -- THE BANK (CONTINUED)
in a great degree of subjectivity inherent in the indicated fair value amounts.
Comparability among financial institutions may be difficult due to the wide
range of permitted valuation techniques and the numerous estimates and
assumptions which must be made. The estimated fair values of the Bank's
financial instruments at December 31, 1993 and September 30, 1993 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 SEPTEMBER 30, 1993
------------------------------- -------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------- ------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash due from banks, interest-bearing deposits
and Federal funds sold........................ $ 216,699 $ 216,699 $ 183,199 $ 183,199
Loans held for sale............................ 211,476 213,182 176,027 179,615
Loans held for securitization and sale......... 300,000 300,000 300,000 300,000
Investment securities.......................... 4,796 4,796 4,789 4,822
Mortgage-backed securities..................... 1,351,066 1,351,066 1,501,192 1,528,060
Loans receivable, net of reserve............... 2,270,629 2,327,291 1,861,753 1,938,886
Other financial assets......................... 240,923 240,923 275,609 275,609
Financial liabilities:
Deposit accounts with no stated maturities..... 3,172,979 3,172,979 3,023,340 3,023,340
Deposit accounts with stated maturities........ 773,293 765,812 846,683 854,398
Securities sold under repurchase agreements and
other short-term borrowings, bonds payable,
notes payable and Federal Home Loan Bank
advances...................................... 700,143(1) 703,825 531,973(1) 536,831
Capital notes -- subordinated.................. 153,871(1) 161,875 133,596(1) 144,153
Other financial liabilities.................... 68,762 68,762 76,580 76,580
<FN>
- ------------------------
(1) Net of deferred debt issuance costs which are included in other assets in
the Consolidated Balance Sheets.
</TABLE>
The following methods and assumptions were used to estimate the fair value
amounts at December 31, 1993 and September 30, 1993:
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS AND FEDERAL FUNDS
SOLD: Carrying amount approximates fair value.
LOANS HELD FOR SALE: Fair value is determined using quoted prices for
loans, or securities backed by loans with similar characteristics, or
outstanding commitment prices from investors.
LOANS HELD FOR SECURITIZATION AND SALE: The carrying value of credit card
loans held for securitization and sale approximates fair value because such
receivables are sold at face value.
INVESTMENT SECURITIES: Fair value is based on quoted market prices.
MORTGAGE-BACKED SECURITIES: Fair value is based on quoted market prices,
dealer quotes or estimates using dealer quoted market prices for similar
securities.
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS -- THE BANK (CONTINUED)
LOANS RECEIVABLE, NET OF RESERVE. Fair value of certain homogeneous groups
of loans (e.g., single-family residential, non-credit card consumer loans and
fixed-rate commercial and multifamily loans) is estimated using discounted cash
flow analyses based on contractual repayment schedules. The discount rates used
in these analyses are based on either the interest rates paid on U.S. Treasury
securities of comparable maturities adjusted for credit risk and non-interest
operating costs, or the interest rates currently offered by the Bank for loans
with similar terms to borrowers of similar credit quality. For loans which
reprice frequently at market rates (e.g., home equity, variable-rate commercial
and multifamily, real estate construction and ground loans), the carrying amount
approximates fair value. Because credit card receivables are generally sold at
face value through the Bank's securitization program, such face value is used as
the estimated fair value of these receivables. The fair value of the Bank's loan
portfolio as presented above does not include the value of established credit
card and home equity credit line customer relationships, or the value relating
to estimated cash flows from future receivables and the associated fees
generated from existing customers.
OTHER FINANCIAL ASSETS: The carrying amount of Federal Home Loan Bank
stock, accrued interest receivable, excess servicing assets, interest-bearing
deposits maintained pursuant to various asset securitizations and other
short-term receivables approximates fair value.
DEPOSIT ACCOUNTS WITH NO STATED MATURITIES: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
Bank's established deposit customer relationships.
DEPOSIT ACCOUNTS WITH STATED MATURITIES: Fair value of fixed-rate
certificates of deposit is estimated based on discounted cash flow analyses
using the remaining maturity of the underlying accounts and interest rates
currently offered on certificates of deposit with similar maturities.
BORROWINGS: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, bonds payable, notes payable and
Federal Home Loan Bank advances. For borrowings which either reprice frequently
to market interest rates or are short-term in duration, the carrying amount
approximates fair value. Fair value of the remaining amounts borrowed is
estimated based on discounted cash flow analyses using interest rates currently
charged by the lender for comparable borrowings with similar remaining
maturities.
CAPITAL NOTES-SUBORDINATED: Fair value of the 1993 Debentures is based on
quoted market prices. The carrying amount of the $10.0 million private placement
approximates fair value because it has a variable rate.
OTHER FINANCIAL LIABILITIES: The carrying amount of custodial accounts,
amounts due to banks, accrued interest payable and other short-term payables
approximates fair value.
OFF-BALANCE SHEET INSTRUMENTS: There is no market value associated with the
Bank's commitments to extend credit and letters of credit because any prices
charged by the Bank are consistent with the prices charged by other companies
for similar agreements. Fair value of forward commitments is based on the
estimated amount that the Bank would pay to terminate the arrangements at the
reporting date, taking into account the remaining terms of the arrangements and
the counterparties' credit standing, where applicable.
31. LITIGATION -- THE BANK
During the normal course of business, the Corporations are involved in
certain litigation, including litigation arising out of the collection of loans,
the enforcement or defense of the priority of their security interests, and the
continued development and marketing of certain of their real estate properties.
Although the amounts claimed in some of these suits in which the Corporations
are
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31. LITIGATION -- THE BANK (CONTINUED)
defendants are material, the Corporations deny liability and, in the opinion of
management, litigation which is currently pending will not have a material
impact on the financial condition or future operations of the Corporations.
32. COMMITMENTS AND CONTINGENCIES -- THE TRUST
In November 1990, the Trust was notified that the Securities and Exchange
Commission (the "SEC") had initiated an informal inquiry concerning the Bank's
reserves for losses on loans and related matters, and the Bank was requested to
provide the SEC with certain documents relating to the Bank covering the period
since October 1, 1988. The Real Estate Trust and the Bank have cooperated fully
with the SEC's inquiry and, pursuant to the SEC's original request, the last set
of documents was produced on February 6, 1991. On March 27, 1992, the Trust
received a letter from the SEC staff seeking additional documents in connection
with the inquiry. The last documents responsive to this additional request were
produced on July 31, 1992. The SEC has not taken any additional action to date
with respect to the inquiry. Based upon the information available to it at this
time, management believes that the matter should be resolved in a manner that
will not result in a material adverse financial impact on the Trust.
The Parent Company has pledged 1,200 shares of its common stock in the Bank
as security for a term loan made to Saul Co., a shareholder of the Parent
Company, 3,000 shares of its common stock in the Bank as security for the Trust
Note (see Note 4) and an additional 1,000 shares of its common stock in the Bank
as security for a mortgage note payable to a lender.
The Trust is involved in a number of lawsuits arising from the normal course
of its business. On the basis of consultations with counsel, management does not
believe that any material loss will result.
33. INCOME TAXES -- THE TRUST
The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978.
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
33. INCOME TAXES -- THE TRUST (CONTINUED)
As discussed in Organization and Summary of Significant Accounting Policies,
the Real Estate Trust adopted SFAS 109 effective October 1, 1993. For the three
months ended December 31, 1992, and the fiscal years ended 1993, 1992 and 1991,
the Trust accounted for income taxes under APB No. 11. The provisions for income
taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------------------
1993 1993 1992 1991
------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal Tax Provision (Benefit)
Real Estate Trust
Current............................. $ (3,001) $ (15,246) $ (9,750) $ (1,284)
Deferred............................ (298) -- -- --
The Bank
Current............................. 1,641 14,189 16,504 13,191
Deferred............................ 566 8,795 (2,937) (11,907)
------------- --------- --------- ---------
Total............................. (1,092) 7,738 3,817 --
------------- --------- --------- ---------
State Tax Provision (Benefit)
Real Estate Trust
Current............................. 8 346 32 58
Deferred............................ (22)
The Bank
Current............................. 265 3,625 5,332 4,121
Deferred............................ 133 (6) (1,796) (954)
------------- --------- --------- ---------
Total............................. 384 3,965 3,568 3,225
------------- --------- --------- ---------
Total Tax Provision (Benefit)
Real Estate Trust
Current............................. (2,993) (14,900) (9,718) (1,226)
Deferred............................ (320) -- -- --
The Bank
Current............................. 1,906 17,814 21,836 17,312
Deferred............................ 699 8,789 (4,733) (12,861)
------------- --------- --------- ---------
Total............................. $ (708) $ 11,703 $ 7,385 $ 3,225
------------- --------- --------- ---------
------------- --------- --------- ---------
Tax Effect of Other Items:
Cumulative effect of adoption of SFAS
109.................................. $(36,260) -- -- --
Extraordinary item.................... (4,143) (7,738) (3,817) --
Tax effect of net unrealized holding
gains reported in shareholders'
deficit.............................. 4,307(1) -- (68) --
------------- --------- --------- ---------
$(36,804) $ 3,965 $ 3,500 $ 3,225
------------- --------- --------- ---------
------------- --------- --------- ---------
<FN>
- ------------------------
(1) Net unrealized holding gains on securities available-for-sale recorded in
conjunction with SFAS 115 are reflected net of the related taxes in the
shareholders' deficit section in the accompanying Consolidated Balance
Sheets.
</TABLE>
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
33. INCOME TAXES -- THE TRUST (CONTINUED)
On August 10, 1993 Congress passed the Tax Revenue Reconciliation Act of
1993, retroactively increasing the Federal corporate income tax rate from 34% to
35% effective January 1, 1993. As a result, the Trust's statutory income tax
rate for the three months ended December 31, 1993 and the year ended September
30, 1993 is 35.00% and 34.75%, respectively.
For the periods presented, the effective income tax rate varies from the
statutory federal income tax rate because of the following factors:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------------
1993 1993 1992 1991
------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Trust
Computed tax at statutory Federal
income tax rate...................... $ (3,532) $(15,246) $ (9,750) $ (6,812)
Increase (reduction) in taxes
resulting from:
Loss for which no tax benefit could
be recognized...................... -- -- -- 5,528
Effect of interim report............ 233 -- -- --
State income taxes.................. (14) 346 32 58
------------ -------- -------- --------
Subtotal.......................... (3,313) (14,900) (9,718) (1,226)
------------ -------- -------- --------
The Bank
Computed tax at statutory Federal
income tax rate...................... 2,181 22,188 14,759 (2,078)
Increase (reduction) in taxes
resulting from:
Goodwill............................ 371 -- -- --
Purchase accounting basis
adjustments........................ -- 1,965 32 4,551
State franchise tax effect.......... 289 2,359 2,171 2,091
Effect of interim reporting......... (260) -- -- --
Other............................... 24 91 141 (113)
------------ -------- -------- --------
Subtotal.......................... 2,605 26,603 17,103 4,451
------------ -------- -------- --------
Total Company........................... $ (708) $ 11,703 $ 7,385 $ 3,225
------------ -------- -------- --------
------------ -------- -------- --------
</TABLE>
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
33. INCOME TAXES -- THE TRUST (CONTINUED)
The deferred income tax provision (benefit) results from temporary
differences between the financial reporting basis and the tax basis of the
Trust's assets and liabilities. Under SFAS 109, the components of the net
deferred tax asset as of December 31, 1993 were as follows:
<TABLE>
<CAPTION>
REAL
ESTATE
GROSS DEFERRED TAX ASSETS BANK TRUST TOTAL
- ------------------------------------------------------------------------------ ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for Losses in Excess of Deductions.................................. $ 60,127 $ -- $ 60,127
Property...................................................................... -- 5,824 5,824
Net Operating Losses.......................................................... 506 4,548 5,054
Real Estate Mortgage Investment Conduit....................................... 4,139 -- 4,139
Alternative Minimum Tax Credit................................................ -- 2,700 2,700
Partnership Investments....................................................... -- 1,219 1,219
Deferred Loan Fees............................................................ 1,087 -- 1,087
Other......................................................................... 1,445 -- 1,445
---------- --------- ----------
Total....................................................................... 67,304 14,291 81,595
---------- --------- ----------
<CAPTION>
GROSS DEFERRED TAX LIABILITIES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Gains................................................................ -- (8,114) (8,114)
Net Unrealized Holding Gains.................................................. (10,899) -- (10,899)
Depreciation.................................................................. (10,400) 1,658 (8,742)
Purchase Accounting........................................................... -- (2,804) (2,804)
FHLB Stock Dividends.......................................................... (4,970) -- (4,970)
Other......................................................................... (2,440) -- (2,440)
---------- --------- ----------
Total....................................................................... (28,709) (9,260) (37,969)
---------- --------- ----------
Net Deferred Tax Asset.................................................... $ 38,595 $ 5,031 $ 43,626
---------- --------- ----------
---------- --------- ----------
</TABLE>
The adoption of SFAS 109 on October 1, 1993 had the effect of increasing the
Trust's net deferred tax asset by approximately $33.5 million. In the opinion of
management, the net deferred tax asset will be realized through projected future
earnings primarily attributable to the Bank and available tax planning
strategies. As indicated in the consolidated statements of operations, the Trust
has achieved net income of $4.5 and $5.9 million for fiscal years 1993 and 1992,
respectively. This represents substantial improvement from the loss of
approximately $27.3 million in fiscal year 1991. Management believes that the
positive earnings trend will continue as a result of continued improvement in
the Bank's operating results and the anticipated stabilization of the Real
Estate Trust's operations.
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
33. INCOME TAXES -- THE TRUST (CONTINUED)
The tax effect of each timing difference resulting in a deferred tax
provision for the years ending September 30, 1993, 1992 and 1991 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1993 1992 1991
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred loan fees............................................................ $ (938) $ 2,121 $ 164
Provision for loan losses less than (in excess of) deductible amounts......... 13,477 (8,493) (25,062)
Depreciation.................................................................. (2,864) 1,610 2,587
Valuation allowances.......................................................... 19 77 5,928
Delinquent interest........................................................... 960 346 (2,619)
Real estate mortgage investment conduit....................................... (1,454) (624) 204
State taxes................................................................... (211) -- 324
State net operating losses.................................................... (1,577) -- 1,564
Other......................................................................... 1,377 230 4,049
--------- --------- ----------
Total......................................................................... $ 8,789 $ (4,733) $ (12,861)
--------- --------- ----------
--------- --------- ----------
</TABLE>
TAX SHARING AGREEMENT
As a result of the Parent Company's increase in its equity interest in the
Bank to 80% of the outstanding common stock, for federal income tax purposes the
Bank became a member of the Trust's affiliated group filing consolidated federal
income tax returns for taxable years and partial taxable years beginning on or
after June 28, 1990. In addition, the companies in the Trust's affiliated group,
including the Bank, entered into a tax sharing agreement dated June 28, 1990.
See Note 28.
At September 30, 1993, the Trust's NOL's for federal income tax purposes
were approximately $11.5 million which will expire in 2008. At September 30,
1993, the Trust had a federal alternative minimum tax credit carryforward of
$2.7 million.
34. SHAREHOLDERS' DEFICIT -- THE TRUST
In July 1988, the Trust and an affiliated company, Westminster Investing
Corporation ("Westminster"), jointly made a tender offer to purchase all shares
of the Trust held by nonaffiliated shareholders at a price of $28 per share. By
the terms of the offer, Westminster was to purchase the first 770,000 shares
tendered and the Trust to purchase the remainder. Simultaneously, holders of the
Trust's 6 1/2% Convertible Subordinated Debentures were notified that they could
elect to convert their debentures at the conversion price of $23 per share and
tender their new shares at the $28 per share purchase price in the tender offer.
Debenture conversions resulted in the issuance of 556,852 shares of $1 par value
per share with resulting paid-in surplus of $12.2 million. Including the
newly-issued shares, 1,643,953 total shares were tendered, of which 873,953 were
purchased by the Trust as treasury shares in fiscal 1988. The approximate cost
of this transaction to the Trust was $25 million. At a meeting on October 24,
1988, shareholders approved a merger pursuant to which the Trust and its
affiliates would acquire the remaining equity ownership of the Trust
(approximately 3% of the outstanding shares) at $28 per share. In fiscal 1989,
the Trust acquired an additional 161,399 shares at an approximate cost of $5
million.
In June 1990, the Parent Company acquired from affiliated companies an
additional equity interest in the Bank. The acquisition raised the Parent
Company's ownership share of the Bank from 60% to 80% of the outstanding common
stock. In exchange for the interest acquired, the Parent Company issued 450,000
shares of a new class of $10.50 cumulative preferred shares of beneficial
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
34. SHAREHOLDERS' DEFICIT -- THE TRUST (CONTINUED)
interest with a par value of $1 ("preferred shares"). The transaction has been
accounted for at historical cost in a manner similar to the pooling of interests
method because the entities are considered to be under common control.
In addition, the Trust acquired two real estate properties from Westminster
in June 1990, and assumed the related debt of $2.5 million in exchange for
66,000 preferred shares. The transaction has been accounted for at historical
cost because the entities are considered to be under common control. The debt
assumed by the Trust exceeded the carrying amount of the properties by $736,000.
Accordingly, this transaction had no effect on total shareholders' equity. The
$736,000 excess will remain on the Real Estate Trust's balance sheet until the
property is sold to an independent party. The real estate properties were
included in the transfer of properties to Saul Holdings in August 1993 (See Note
2).
At December 31, 1993 and 1992 and at September 30, 1993, 1992, and 1991, the
amount of dividends in arrears on the preferred shares was $17.2 ($33.26 per
share), $11.8 ($22.76 per share) $15.8 ($30.64 per share), $10.4 ($20.14 per
share), and $5.0 million ($9.64 per share), respectively.
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
35. QUARTERLY FINANCIAL DATA (UNAUDITED) -- THE TRUST
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1993
----------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Real Estate Trust
Total income................................................. $ 24,250 $ 23,205 $ 25,257 $ 20,533
Operating loss............................................... (6,962) (7,388) (6,465) (23,680)
The Bank
Interest income.............................................. 92,144 87,745 83,243 85,682
Interest expense............................................. 44,988 41,188 40,281 41,061
Provision for loan losses.................................... (27,754) (15,207) (12,933) (6,619)
Gain (loss) on real estate held for investment or sale,
net......................................................... (19,601) 978 38 5,863
Gain on sales of credit card relationships, loans and
mortgage-backed securities, net............................. 12,664 5,820 2,390 10,501
Operating income............................................. 1,266 21,670 20,823 20,090
Total Company
Operating income (loss) before income taxes, extraordinary
items and minority interest................................. (5,696) 14,282 14,358 (3,590)
Income (loss) before extraordinary items and minority
interest.................................................... (5,928) 9,962 8,272 (4,655)
Extraordinary items.......................................... -- 2,554 4,790 394
Income (loss) before minority interest....................... (5,928) 12,516 13,062 (4,261)
Net income (loss)............................................ (6,046) 9,910 9,033 (8,424)
Net income (loss) per common share........................... (1.53) 1.77 1.59 (2.03)
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1992
----------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Real Estate Trust
Total income................................................. $ 24,666 $ 23,789 $ 26,109 $ 25,615
Operating loss............................................... (7,221) (8,230) (5,140) (7,920)
The Bank
Interest income.............................................. 112,262 105,257 94,080 91,434
Interest expense............................................. 65,451 54,309 49,282 45,719
Provision for loan losses.................................... (27,061) (12,990) (34,692) (14,319)
Loss on real estate held for investment or sale, net......... (3,285) (2,525) (43,385) (1,454)
Gain on sales of credit card relationships, loans and
mortgage-backed securities, net............................. 17,710 1,447 21,843 3,259
Operating income (loss)...................................... 20,468 18,206 (21,032) 25,767
Total Company
Operating income (loss) before income taxes, extraordinary
items and minority interest held by affiliates.............. 13,247 9,976 (26,172) 17,847
Income (loss) before extraordinary items and minority
interest held by affiliates................................. 6,946 5,111 (16,856) 12,312
Extraordinary items.......................................... 4,132 2,855 (7,119) 3,817
Income (loss) before minority interest held by affiliates.... 11,078 7,966 (23,975) 16,129
Net income (loss).............................................. 8,733 5,866 (21,882) 13,220
Net income (loss) per common share............................. 1.53 0.93 (4.81) 2.46
</TABLE>
F-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
36. INDUSTRY SEGMENT INFORMATION -- THE TRUST
Industry segment information with regard to the Real Estate Trust is
presented below. For information regarding the Bank please refer to the
"Banking" sections of the accompanying financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1993 1993 1992 1991
-------------------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME
Commercial properties................................. $ 3,723 $ 45,736 $ 51,489 $ 54,035
Hotels................................................ 10,682 45,385 46,628 45,769
Other................................................. 449 2,124 2,062 2,209
---------- -------- -------- ---------
$ 14,854 $ 93,245 $100,179 $ 102,013
---------- -------- -------- ---------
---------- -------- -------- ---------
OPERATING PROFIT (LOSS)
Commercial properties................................. $ 1,017 $ 24,316 $ 28,531 $ 28,324
Hotels................................................ 1,709 7,228 7,937 5,812
Other................................................. 839 (252) (90) (259)
---------- -------- -------- ---------
3,565 31,292 36,378 33,877
Gain (loss) on sales of property...................... -- 184 (546) 20,308
Interest and debt expense (net of interest
capitalized)......................................... (10,243) (53,499) (53,024) (60,111)
Advisory fee, management and leasing fees -- related
parties.............................................. (1,533) (7,249) (7,093) (9,036)
General and administrative............................ (501) (2,119) (4,226) (5,073)
Abandoned development costs........................... -- (13,104) -- --
Write-down of assets to net realizable value.......... (1,380) -- -- --
---------- -------- -------- ---------
Operating loss........................................ $ (10,092) $(44,495) $(28,511) $ (20,035)
---------- -------- -------- ---------
---------- -------- -------- ---------
IDENTIFIABLE ASSETS (AT PERIOD END)
Commercial properties:
Operating properties................................ $ 85,793 $ 87,142 $183,731 $ 186,045
Properties under development........................ -- -- 640 669
Hotels -- operating properties........................ 81,451 82,472 83,897 86,541
Other................................................. 87,596 50,942 66,110 72,833
---------- -------- -------- ---------
$ 254,840 $220,556 $334,378 $ 346,088
---------- -------- -------- ---------
---------- -------- -------- ---------
DEPRECIATION
Commercial properties................................. $ 1,001 $ 7,712 $ 8,542 $ 9,749
Hotels................................................ 1,068 4,660 4,728 4,858
Other................................................. 6 85 130 220
---------- -------- -------- ---------
$ 2,075 $ 12,457 $ 13,400 $ 14,827
---------- -------- -------- ---------
---------- -------- -------- ---------
CAPITAL EXPENDITURES
Commercial properties:
Operating properties................................ $ 268 $ 5,996 $ 3,814 $ 4,722
Properties under development........................ -- -- 32 64
Hotels -- operating properties........................ 205 1,458 2,279 2,822
Other................................................. 564 11 68 112
---------- -------- -------- ---------
$ 1,037 $ 7,465 $ 6,193 $ 7,720
---------- -------- -------- ---------
---------- -------- -------- ---------
</TABLE>
F-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
37. CONDENSED FINANCIAL STATEMENTS -- THE TRUST
These condensed financial statements reflect the Real Estate Trust and all
its consolidated subsidiaries except for the Bank which has been reflected on
the equity method.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ------------------------
1993 1993 1992
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Income-producing properties.............................................. $ 224,648 $ 224,982 $ 350,166
Accumulated depreciation................................................. (64,684) (62,626) (95,466)
------------ ----------- -----------
159,964 162,356 254,700
Land parcels............................................................. 38,416 38,411 50,981
Equity investment in savings bank........................................ 128,473 129,968 85,655
Cash and cash equivalents................................................ 1,668 2,710 628
Other assets............................................................. 54,792 17,079 28,069
------------ ----------- -----------
Total assets......................................................... $ 383,313 $ 350,524 $ 420,033
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES
Mortgage notes payable................................................... $ 264,914 $ 264,776 $ 429,968
Notes payable -- unsecured due 1992-2003................................. 39,887 38,661 50,417
Deferred gains -- real estate............................................ 109,253 109,027 4,687
Other liabilities and accrued expenses................................... 38,712 37,689 37,688
------------ ----------- -----------
Total liabilities.................................................... 452,766 450,153 522,760
TOTAL SHAREHOLDERS' DEFICIT*............................................. (69,453) (99,629) (102,727)
------------ ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT.............................. $ 383,313 $ 350,524 $ 420,033
------------ ----------- -----------
------------ ----------- -----------
<FN>
- ------------------------
*See Consolidated Statements of Shareholders' Deficit
</TABLE>
F-58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
37. CONDENSED FINANCIAL STATEMENTS -- THE TRUST (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------------
1993 1993 1992 1991
------------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total income............................................ $ 14,854 $ 93,245 $ 100,179 $ 102,013
Total expenses.......................................... (25,671) (137,256) (127,936) (142,144)
Equity in earnings (losses) of partnership
investments............................................ 725 (668) (208) (212)
Gain (loss) on sales of property........................ -- 184 (546) 20,308
------------- ------------ ------------ ------------
Real estate operating loss.............................. (10,092) (44,495) (28,511) (20,035)
Equity in earnings (losses) of savings bank............. (3,491) 49,314 34,612 (7,166)
------------- ------------ ------------ ------------
Total company operating income (loss)................... (13,583) 4,819 6,101 (27,201)
Provision for income taxes (income tax benefit)......... (312) 346 32 58
------------- ------------ ------------ ------------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............... (13,271) 4,473 6,069 (27,259)
Extraordinary item: loss on early extinguishment of
debt................................................... -- -- (132) --
------------- ------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle................................... (13,271) 4,473 5,937 (27,259)
Cumulative effect of change in accounting principle..... 36,866 -- -- --
------------- ------------ ------------ ------------
TOTAL COMPANY NET INCOME (LOSS)......................... $ 23,595 $ 4,473 $ 5,937 $ (27,259)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
F-59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
37. CONDENSED FINANCIAL STATEMENTS -- THE TRUST (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------
1993 1993 1992 1991
------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................. $ 23,595 $ 4,473 $ 5,937 $ (27,259)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation................................................ 2,075 12,457 13,400 14,827
Abandoned development costs................................. -- 13,104 -- --
Write-down of real estate to net realizable value........... 1,380 -- -- --
Loss (gain) on sales of property............................ -- (184) 546 (20,308)
Equity in losses (earnings) of savings bank................. 3,491 (49,314) (34,612) 7,166
Increase in deferred tax asset.............................. (37,186) -- -- --
Decrease (increase) in accounts receivable and accrued
income..................................................... (858) 98 2,906 (1,380)
Increase (decrease) in accounts payable and accrued
expenses................................................... (1,319) 7,047 11,594 5,700
Other....................................................... 3,027 9,170 (655) 4,880
------------- ---------- ---------- ----------
Net cash used in operating activities......................... (5,795) (3,149) (884) (16,374)
------------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures -- properties............................ (1,037) (7,465) (6,193) (7,720)
Property sales................................................ -- 3,780 4,908 34,544
Equity investment in unconsolidated entities.................. 4,697 4,850 (58) 28,049
Other investing activities.................................... 6 836 10 458
------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities........... 3,666 2,001 (1,333) 55,331
------------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt.................................. 3,466 8,787 40,590 12,725
Repayments of long-term debt.................................. (2,102) (24,519) (35,747) (52,357)
Costs of obtaining financings................................. (277) (1,170) (4,674) (577)
Proceeds from the issuance of redeemable preferred stock...... -- 21,507 -- --
Dividends paid................................................ -- (1,375) -- (1,500)
------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities........... 1,087 3,230 169 (41,709)
------------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......... (1,042) 2,082 (2,048) (2,752)
Cash and cash equivalents at beginning of period.............. 2,710 628 2,676 5,428
------------- ---------- ---------- ----------
Cash and cash equivalents at end of period.................... $ 1,668 $ 2,710 $ 628 $ 2,676
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
</TABLE>
F-60
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE NEW NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE TRUST SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary........................................ 4
Risk Factors and Other Considerations.......... 18
Use of Proceeds................................ 31
Capitalization................................. 32
The Exchange Offer............................. 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 40
Business....................................... 87
Trustees and Executive Officers................ 130
Executive Compensation......................... 131
Security Ownership............................. 132
Related Party Transactions..................... 133
Description of the Notes....................... 137
Certain Federal Income Tax Considerations...... 162
Plan of Distribution........................... 163
Legal Matters.................................. 164
Experts........................................ 164
Available Information.......................... 164
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
UNTIL , 1994 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$175,000,000
EXCHANGE OFFER
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
11 5/8% SERIES B SENIOR SECURED NOTES DUE 2002
---------------------------
PROSPECTUS
---------------------------
, 1994
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article III of the Amended and Restated Declaration of Trust of the Trust
provides that no Trustee or officer of the Trust shall be liable for any action
or failure to act except for his own bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties, and, except as stated, Trustees
and officers are entitled to be reimbursed and indemnified for all loss,
expenses and outlays which they may suffer because they are Trustees or officers
of the Trust.
Section 5 of the Registration Rights Agreement dated as of March 30, 1994
among the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Friedman, Billings, Ramsey & Co., Inc., filed herewith as
Exhibit 4(c), provides that, in the case of a "shelf" registration statement of
the Trust which covers the Trust's 11 5/8% Senior Secured Notes due 2002 (the
"Registrable Notes"), on an appropriate form under the Securities Act of 1933
(the "Securities Act"), the holders of the Registrable Notes will indemnify the
Trust, each controlling person of the Trust (within the meaning of Section 15 of
the Securities Act or Section 20 of the Securities Exchange Act of 1934), each
Trustee of the Trust and each of the Trust's officers who signed such
registration statement against certain liabilities, including liabilities under
the Securities Act.
Section 2 of the Bank Stock Registration Rights Agreement dated as of March
30, 1994 between the Trust and Norwest Bank Minnesota, National Association, as
trustee (the "Trustee"), filed herewith as Exhibit 4(d), provides that, in the
event common stock of Chevy Chase Bank, F.S.B. (the "Bank") is registered under
the rules and regulations of the Office of Thrift Supervision (the "OTS Rules
and Regulations"), the Trustee, each holder of such common stock and certain
other persons will indemnify the Trust, each controlling person of the Trust
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934) and each Trustee of the Trust against certain
liabilities under the OTS Rules and Regulations and other applicable securities
laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
3.(a) Amended and Restated Declaration of Trust filed with the Maryland State
Department of Assessments and Taxation on June 22, 1990 as filed as Exhibit 3(a)
to Registration Statement No. 33-34930 is hereby incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected in Secretary
Certificate filed with the Maryland State Department of Assessments and Taxation
on June 26, 1990 as filed on Exhibit 3(b) to Registration Statement No. 33-34930
is hereby incorporated by reference.
(c) Amended and Restated By-Laws of the Trust dated as of February 28, 1991 as filed
as Exhibit T3B to the Trust's Form T-3 Application for Qualification of
Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is hereby
incorporated by reference.
*4.(a) Indenture dated as of March 30, 1994 between the Trust and Norwest Bank
Minnesota, National Association, as Trustee, including the form of 11 5/8%
Series B Senior Secured Note due 2002.
* (b) Form of 11 5/8% Series B Senior Secured Note due 2002 (included in Exhibit
4(a)).
* (c) Registration Rights Agreement dated as of March 30, 1994 among the Trust,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Friedman, Billings, Ramsey & Co., Inc.
* (d) Bank Stock Registration Rights Agreement dated as of March 30, 1994 between the
Trust and Norwest Bank Minnesota, National Association, as Trustee.
**5. Opinion of Shaw, Pittman, Potts & Trowbridge.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.(a) Advisory Contract with B.F. Saul Advisory Company effective October 1, 1982
filed as Exhibit 10(a) to Registration Statement No. 2-80831 is hereby
incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective October 1, 1982
between the Trust and Franklin Property Company filed as Exhibit 10(b) to
Registration Statement No. 2-80831 is hereby incorporated by reference.
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy Chase Savings
Bank F.S.B. and certain of their subsidiaries filed as Exhibit 10(c) to
Registration Statement No. 33-34930 is hereby incorporated by reference.
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company, Franklin
Development Co., Inc., The Klingle Corporation and Westminster Investing
Corporation relating to the transfer of certain shares of Chevy Chase Savings
Bank, F.S.B. and certain real property to the Trust in exchange for preferred
shares of beneficial interest of the Trust filed as Exhibit 10(d) to
Registration Statement No. 33-34930 is hereby incorporated by reference.
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988 among B.F.
Saul Company, the Trust and the Federal Savings and Loan Insurance Corporation
filed as Exhibit 10(e) to the Trust's Annual Report on Form 10-K (File No.
1-7184) for the fiscal year ended September 30, 1991 is hereby incorporated by
reference.
(f) Written Agreement dated September 30, 1991 between the Office of Thrift
Supervision and Chevy Chase Savings Bank, F.S.B. filed on Exhibit 10(f) to
Registration Statement No. 33-34930 is hereby incorporated by reference.
(g) Indenture with respect to the Trust's Senior Notes Due from One Year to Ten
Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No.
33-19909 is hereby incorporated by reference.
(h) First Supplemental Indenture with respect to the Trust's Senior Notes due from
One Year to Ten Years from Date of Issue as filed as Exhibit T-3C to the Trust's
Form T-3 Application for Qualification of Indentures under the Trust Indenture
Act of 1939 (File No. 22-20838) is hereby incorporated by reference.
(i) Indenture with respect to the Trust's Senior Notes due from One Year to Ten
Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No.
33-9336 is hereby incorporated by reference.
(j) Fourth Supplemental Indenture with respect to the Trust's Senior Notes due from
One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration Statement No. 2-95506 is hereby incorporated by reference.
(k) Third Supplemental Indenture with respect to the Trust's Senior Notes due from
One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration Statement No. 2-91126 is hereby incorporated by reference.
(l) Second Supplemental Indenture with respect to the Trust's Senior Notes due from
One Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
Registration Statement No. 2-80831 is hereby incorporated by reference.
(m) Supplemental Indenture with respect to the Trust's Senior Notes due from One
Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration
Statement No. 2-68652 is hereby incorporated by reference.
(n) Indenture with respect to the Trust's Senior Notes due from One Year to Five
Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3
Application for Qualification of Indentures under the Trust Indenture Act of
1939 (File No. 22-10206) is hereby incorporated by reference.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
(o) Amendments to Commercial Property Leasing and Management Agreement between the
Trust and Franklin Property Company dated as of December 31, 1992 (Amendment No.
5), July 1, 1989 (Amendment No. 4), October 1, 1986 (Amendment No. 3), January
1, 1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed as Exhibit
10(o) to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(p) Advisory Contract between B.F. Saul Advisory Company and Dearborn Corporation
dated as of December 31, 1992 filed as Exhibit 10(p) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(q) Commercial Property Leasing and Management Agreement between Dearborn
Corporation and Franklin Property Company dated as of December 31, 1992 filed as
Exhibit 10(q) to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(r) Registration Rights and Lock-Up Agreement dated August 26, 1993 by and among
Saul Centers, Inc. and the Trust, Westminster Investing Corporation, Van Ness
Square Corporation, Dearborn Corporation, Franklin Property Company and Avenel
Executive Park Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement
No. 33-64562 is hereby incorporated by reference.
(s) Exclusivity and Right of First Refusal Agreement dated August 26, 1993 among
Saul Centers, Inc., the Trust, B. F. Saul Company, Westminster Investing
Corporation, Franklin Property Company, Van Ness Square Corporation, and Chevy
Chase Savings Bank, F.S.B. as filed as Exhibit 10.7 to Registration Statement
No. 33-64562 is hereby incorporated by reference.
(t) Reimbursement Agreement dated as of August 26, 1993 by and among Saul Centers,
Inc., Saul Holdings Limited Partnership, Saul Subsidiary I Limited Partnership,
Saul Subsidiary II Limited Partnership, Avenel Executive Park Phase II, Inc.,
Franklin Property Company, Westminister Investing Corporation Van Ness Square
Corporation, Dearborn Corporation and the Trust filed as Exhibit 10(t) to
Registration Statement No. 33-34930 is hereby incorporated by reference.
(u) Amendment to Written Agreement dated October 29, 1993 between the Office of
Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as Exhibit 10(u)
to Registration Statement No. 33-34930 is hereby incorporated by reference.
(x) Indenture dated as of September 1, 1992 with respect to the Trust's Notes due
from One to Ten Years from Date of Issue filed as Exhibit 4(a) to Registration
Statement No. 33-34930 is hereby incorporated by reference.
*12. Statement re: Computation of Ratio of Earnings to Fixed Charges.
*21. Subsidiaries of the Trust.
**23.(a) Consent of Stoy, Malone & Company, P.C.
** (b) Consent of Arthur Andersen & Co.
** (c) Consent of Shaw, Pittman, Potts & Trowbridge (included in Exhibit 5).
*24. Power of Attorney (included in signature page II-5).
*25. Statement of Eligibility of Norwest Bank Minnesota, National Association on Form
T-1.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
<FN>
- ------------------------
* Filed herewith.
** To be filed by amendment.
</TABLE>
II-3
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
Schedule III -- Condensed Financial Information -- Years ended September 30, 1993, 1992,
and 1991.
Schedule X -- Consolidated Schedule of Supplementary Income Statement Information --
Years ended September 30, 1993, 1992, 1991.
Schedule XI -- Consolidated Schedule of Investment Properties -- September 30, 1993.
</TABLE>
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether or not
such indemnification is against public policy as expressed in the Securities Act
of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chevy Chase,
Maryland on this the 6th day of April 1994.
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
By /s/ B. FRANCIS SAUL II
--------------------------------------
B. Francis Saul II
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen R. Halpin, Jr. and Ross E. Heasley, or
any one of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all pre-or post-effective
amendments to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below on this 6th day of April 1994.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ B. FRANCIS SAUL II
------------------------------------------- Trustee, Chairman of the Board and Principal Executive
B. Francis Saul II Officer
/s/ STEPHEN R. HALPIN, JR.
------------------------------------------- Chief Financial Officer
Stephen R. Halpin, Jr.
/s/ ROSS E. HEASLEY
------------------------------------------- Principal Accounting Officer
Ross E. Heasley
/s/ GARLAND J. BLOOM, JR.
------------------------------------------- Trustee
Garland J. Bloom, Jr.
/s/ GILBERT M. GROSVENOR
------------------------------------------- Trustee
Gilbert M. Grosvenor
/s/ GEORGE M. ROGERS, JR.
------------------------------------------- Trustee
George M. Rogers, Jr.
/s/ JOHN R. WHITMORE
------------------------------------------- Trustee
John R. Whitmore
</TABLE>
II-5
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE SCHEDULES
To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust:
We have audited the consolidated financial statements of B.F. Saul Real
Estate Investment Trust as of September 30, 1993 and 1992, and for each of the
years in the three-year period ended September 30, 1993, and have issued our
report thereon dated November 4, 1993; such consolidated financial statements
and report are included elsewhere in this Registration Statement. Our audits
also included the consolidated financial statement schedules of B.F. Saul Real
Estate Investment Trust. These financial statement schedules are the
responsibility of the Trust's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
November 4, 1993
S-1
<PAGE>
CONDENSED FINANCIAL INFORMATION
SCHEDULE III
(a) Required condensed financial information on the Trust is disclosed in the
audited consolidated financial statements included herewith.
(b) Amounts of cash dividends paid to the Trust by consolidated subsidiaries
were as follows:
<TABLE>
<CAPTION>
Year Ended September 30
- -------------------------------
1993 1992 1991
- --------- --------- ---------
<S> <C> <C>
None None None
</TABLE>
S-2
<PAGE>
SCHEDULE X
CONSOLIDATED SCHEDULE OF SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED SEPTEMBER 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Repairs and maintenance
Real Estate Trust............................................................ $ 5,257 $ 5,190 $ 5,613
The Bank..................................................................... 6,064 5,170 5,718
Depreciation
Real Estate Trust............................................................ 12,457 13,400 14,827
The Bank..................................................................... 16,191 15,773 14,672
Amortization of intangible assets
The Bank..................................................................... 36,640 24,901 15,468
Taxes, other than payroll and income taxes
Real Estate Trust............................................................ 5,616 5,839 6,966
The Bank..................................................................... 2,608 2,834 2,566
Advertising
Real Estate Trust............................................................ 2,501 2,563 2,450
The Bank..................................................................... 13,157 4,632 6,831
</TABLE>
S-3
<PAGE>
SCHEDULE XI
CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES -- REAL ESTATE TRUST
SEPTEMBER 30, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Costs Basis at Close of Period
Capitalized ------------------------------------------------------
Initial Subsequent Buildings
Basis to to and Leasehold
Trust Acquisition Land improvements Interest Total
--------- ------------ --------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL
900 Circle 75 Pkway, Atlanta, GA........ $ 34,458 $ (169) $ 563 $ 33,726 $ -- $ 34,289
1000 Circle 75 Pkway, Atlanta, GA....... 2,820 1,016 248 3,588 -- 3,836
1100 Circle 75 Pkway, Atlanta, GA....... 22,746 138 419 22,465 -- 22,884
8201 Greensboro, Tysons Corner, VA...... 28,890 2,533 1,633 29,790 -- 31,423
Commerce Ctr. -- Ph II, Ft. Laud., FL... 4,266 300 782 3,784 -- 4,566
Dulles North., Loudoun Co., VA.......... -- 5,306 -- 5,306 -- 5,306
Metairie Tower, Metairie, LA............ 2,729 572 403 2,898 -- 3,301
Perimeter Way, Atlanta, GA.............. 6,950 (3,042) 1,201 2,707 -- 3,908
--------- ------------ --------- --------------- --- ---------
Subtotal -- Commercial.................. $ 102,859 $ 6,654 $ 5,249 $ 104,264 $ -- $ 109,513
--------- ------------ --------- --------------- --- ---------
<CAPTION>
HOTELS
<S> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn-Dulles, Sterling, VA........ $ -- 5,644 $ 290 $ 5,354 $ -- $ 5,644
Holiday Inn, Cincinnati, OH............. 6,859 1,083 245 7,697 -- 7,942
Holiday Inn, Dulles, VA................. 6,950 17,982 862 24,070 -- 24,932
Holiday Inn, Gaithersburg, MD........... 3,849 13,168 1,781 15,236 -- 17,017
Holiday Inn, Pueblo, CO................. 3,458 955 561 3,852 -- 4,413
Holiday Inn, Rochester, NY.............. 3,340 8,499 605 11,234 -- 11,839
Holiday Inn, Tysons Corner, VA.......... 6,976 10,498 3,117 14,357 -- 17,474
Howard Johnsons, Arl., VA............... 10,187 1,878 1,183 10,882 -- 12,065
Howard Johnsons, Norfolk, VA............ 5,275 2,825 228 7,872 -- 8,100
The Chase Rest., Tysons Corner, VA...... -- 973 -- 973 -- 973
The Chase Rest., Atlanta, GA............ -- 1,085 -- 1,085 -- 1,085
--------- ------------ --------- --------------- --- ---------
Subtotal -- Hotels...................... $ 46,894 $ 64,590 $ 8,872 $ 102,612 $ -- $ 111,484
--------- ------------ --------- --------------- --- ---------
<CAPTION>
Buildings Gross
and Leasable
Improvements Area
Accumulated Related Date of Date Depreciable (Sq Ft In
Depreciation Debt Construction Acquired Lives (Years) Thousands)
------------- --------- ------------- --------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL
900 Circle 75 Pkway, Atlanta, GA........ $ 8,312 $ 32,820 1985 12/85 35 346
1000 Circle 75 Pkway, Atlanta, GA....... 1,616 5,450 1974 4/76 40 86
1100 Circle 75 Pkway, Atlanta, GA....... 7,399 22,232 1982 9/82 40 267
8201 Greensboro, Tysons Corner, VA...... 7,887 37,823 1985 4/86 35 354
Commerce Ctr. -- Ph II, Ft. Laud., FL... 743 3,300 1986 1/87 35 64
Dulles North., Loudoun Co., VA.......... 456 5,617 1990 10/90 31.5 59
Metairie Tower, Metairie, LA............ 1,310 -- 1974 11/76 40 91
Perimeter Way, Atlanta, GA.............. 723 5,000 1973 & 1974 6/84 35 58
------------- --------- -------------
Subtotal -- Commercial.................. $ 28,446 $ 112,242 1,325
------------- --------- -------------
HOTELS ROOMS
-------------
<S> <C> <C> <C> <C> <C> <C>
Hampton Inn-Dulles, Sterling, VA........ $ 1,504 $ 2,509 1987 4/87 31.5 128
Holiday Inn, Cincinnati, OH............. 3,209 3,950 1975 2/76 40 274
Holiday Inn, Dulles, VA................. 7,285 17,961 1971 11/84 28 297
Holiday Inn, Gaithersburg, MD........... 4,404 10,325 1972 6/75 45 304
Holiday Inn, Pueblo, CO................. 1,687 4,370 1973 3/76 40 193
Holiday Inn, Rochester, NY.............. 4,001 16,786 1975 3/76 40 282
Holiday Inn, Tysons Corner, VA.......... 4,647 19,227 1971 6/75 47 314
Howard Johnsons, Arl., VA............... 3,680 10,518 1973 11/83 30 280
Howard Johnsons, Norfolk, VA............ 3,166 4,588 1960 2/79 33 325
The Chase Rest., Tysons Corner, VA...... 191 -- 1967 5/87 35 --
The Chase Rest., Atlanta, GA............ 238 -- 1985 2/86 35 --
------------- --------- -------------
Subtotal -- Hotels...................... $ 34,012 $ 90,234 2,397
------------- --------- -------------
</TABLE>
S-4
<PAGE>
SCHEDULE XI-CONTINUED
CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES -- REAL ESTATE TRUST
SEPTEMBER 30, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS BASIS AT CLOSE OF PERIOD
CAPITALIZED --------------------------------------------------
INITIAL SUBSEQUENT BUILDINGS
BASIS TO TO AND LEASEHOLD ACCUMULATED
TRUST ACQUISITION LAND IMPROVEMENTS INTERESTS TOTAL DEPRECIATION
--------- ----------- --------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PURCHASE-LEASEBACKS
Beverly Plaza, Casper, WY...... $ 500 $ -- $ 500 $ -- $ -- $ 500 $ --
Chateau di Jon, Metairie, LA... 1,125 -- 1,125 -- -- 1,125 --
Country Club, Knoxville, TN.... 500 -- 500 -- -- 500 --
Houston Mall, Warner Robbins,
GA............................ 650 -- 650 -- -- 650 --
Old National, Atlanta, GA...... 550 -- 550 -- -- 550 --
San Simeon, Dallas, TX......... 250 -- 250 -- -- 250 --
--------- ----------- --------- ------------- ----- --------- -------------
Subtotal -
Purchase-Leasebacks........... $ 3,575 $ -- $ 3,575 $ -- $ -- $ 3,575 $ --
--------- ----------- --------- ------------- ----- --------- -------------
OTHER
Wheeler Road, Oxon Hill, MD.... $ 383 $ 27 $ -- $ 261 $ 149 $ 410 $ 168
--------- ----------- --------- ------------- ----- --------- -------------
Total Income-Producing
Properties.................... $ 153,711 $ 71,271 $ 17,696 $ 207,137 $ 149 $ 224,982 $ 62,626
LAND PARCELS
Arvida Park of Commerce, Boca
Raton, FL..................... 7,378 125 7,503 -- -- 7,503 --
Avenel, Gaithersburg, MD....... 361 3 364 -- -- 364 --
Church Road, Loudoun Co., VA... 2,586 2,192 4,778 -- -- 4,778 --
Circle 75, Atlanta, GA......... 10,006 1,144 11,150 -- -- 11,150 --
Flagship Centre, Rockville,
MD............................ 1,729 39 1,768 -- -- 1,768 --
Holiday Inn - Rochester, Roch.,
NY............................ 68 1 69 -- -- 69 --
Overland Park, Overland Park,
KA............................ 3,771 397 4,168 -- -- 4,168 --
Perimeter Way Land, Atlanta,
GA............................ 2,921 -- 2,921 -- -- 2,921 --
Prospect Indust. Pk, Ft. Laud.,
FL............................ 2,203 9 2,212 -- -- 2,212 --
Sterling Blvd., Loudoun Co.,
VA............................ -- 3,478 3,478 -- -- 3,478 --
--------- ----------- --------- ------------- ----- --------- -------------
Subtotal....................... $ 31,023 $ 7,388 $ 38,411 $ -- $ -- $ 38,411 $ --
--------- ----------- --------- ------------- ----- --------- -------------
Total Investment Properties.... $ 184,734 $ 78,659 $ 56,107 $ 207,137 $ 149 $ 263,393 $ 62,626
--------- ----------- --------- ------------- ----- --------- -------------
--------- ----------- --------- ------------- ----- --------- -------------
<CAPTION>
BUILDINGS GROSS
AND LEASABLE
IMPROVEMENTS AREA
RELATED DATE OF DATE DEPRECIABLE (SQ FT IN
DEBT CONSTRUCTION ACQUIRED LIVES (YEARS) THOUSANDS)
--------- ------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
PURCHASE-LEASEBACKS
Beverly Plaza, Casper, WY...... $ -- 4/74
Chateau di Jon, Metairie, LA... -- 11/73
Country Club, Knoxville, TN.... -- 5/76
Houston Mall, Warner Robbins,
GA............................ -- 2/72
Old National, Atlanta, GA...... -- 8/71
San Simeon, Dallas, TX......... -- 7/72
---------
Subtotal -
Purchase-Leasebacks........... $ --
---------
OTHER
Wheeler Road, Oxon Hill, MD.... $ -- 1964 1/72 40 24
---------
Total Income-Producing
Properties.................... $ 202,476
LAND PARCELS NO. OF ACRES
-------------
Arvida Park of Commerce, Boca
Raton, FL..................... 19,000 12/84 & 5/85 9
Avenel, Gaithersburg, MD....... -- 12/76 8
Church Road, Loudoun Co., VA... -- 9/84 & 4/85 40
Circle 75, Atlanta, GA......... 11,812 2/77 & 1/84 134
Flagship Centre, Rockville,
MD............................ -- 8/85 8
Holiday Inn - Rochester, Roch.,
NY............................ -- 9/86 3
Overland Park, Overland Park,
KA............................ 31,253 1/77 & 2/85 162
Perimeter Way Land, Atlanta,
GA............................ -- 10/86 2
Prospect Indust. Pk, Ft. Laud.,
FL............................ 1,560 10/83 & 8/84 14
Sterling Blvd., Loudoun Co.,
VA............................ -- 4/84 54
---------
Subtotal....................... $ 63,625 434
---------
Total Investment Properties.... $ 266,101
---------
---------
</TABLE>
S-5
<PAGE>
SCHEDULE XI (CONT'D)
CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES -- REAL ESTATE TRUST
NOTES:
(1) See Summary of Significant Accounting Policies for basis of recording
investment properties and computing depreciation. Investment properties are
discussed in Note 3 of Notes to Consolidated Financial Statements.
(2) A reconciliation of the basis of investment properties and accumulated
depreciation follows.
BASIS OF INVESTMENT PROPERTIES
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Balance at October 1....................................................... $ 401,147 $ 408,739 $ 416,713
Additions (reductions) during the year:
Capital expenditures..................................................... 7,465 6,161 7,656
Construction & development............................................... -- 32 64
Sales -- nonaffiliates................................................... (4,414) (5,453) (10,725)
Abandoned development costs.............................................. (13,104) -- --
Properties exchanged for partnership investment.......................... (127,995) -- --
Other.................................................................... 294 (8,332) (4,969)
----------- ----------- -----------
Balance at September 30.................................................... $ 263,393 $ 401,147 $ 408,739
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at October 1........................................................... $ 95,466 $ 90,564 $ 86,655
Additions (reductions) during the year:
Depreciation expense......................................................... 12,457 13,400 14,827
Sales -- nonaffiliates....................................................... (820) (10) (2,261)
Properties exchanged for partnership investment.............................. (40,870) -- --
Other........................................................................ (3,607) (8,488) (8,657)
--------- --------- ---------
Balance at September 30........................................................ $ 62,626 $ 95,466 $ 90,564
--------- --------- ---------
--------- --------- ---------
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ------------ --------------------------------------------------------------------------------------------- -----
<C> <S> <C>
3. (a) Amended and Restated Declaration of Trust filed with the Maryland State Department of
Assessments and Taxation on June 22, 1990 as filed as Exhibit 3(a) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected in Secretary Certificate
filed with the Maryland State Department of Assessments and Taxation on June 26, 1990 as
filed on Exhibit 3(b) to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(c) Amended and Restated By-Laws of the Trust dated as of February 28, 1991 as filed as Exhibit
T3B to the Trust's Form T-3 Application for Qualification of Indentures under the Trust
Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference.
*4. (a) Indenture dated as of March 30, 1994 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, including the form of 11 5/8% Series B Senior Secured Note due 2002.
* (b) Form of 11 5/8% Series B Senior Secured Note due 2002 (included in Exhibit 4(a)).
* (c) Registration Rights Agreement dated as of March 30, 1994 among the Trust, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Friedman, Billings, Ramsey & Co.,
Inc.
* (d) Bank Stock Registration Rights Agreement dated as of March 30, 1994 between the Trust and
Norwest Bank Minnesota, National Association, as Trustee.
**5. Opinion of Shaw, Pittman, Potts & Trowbridge.
10. (a) Advisory Contract with B.F. Saul Advisory Company effective October 1, 1982 filed as Exhibit
10(a) to Registration Statement No. 2-80831 is hereby incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective October 1, 1982 between the
Trust and Franklin Property Company filed as Exhibit 10(b) to Registration Statement No.
2-80831 is hereby incorporated by reference.
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy Chase Savings Bank F.S.B.
and certain of their subsidiaries filed as Exhibit 10(c) to Registration Statement No.
33-34930 is hereby incorporated by reference.
(d) Agreement dated June 28, 1990 among the Trust, B.F. Saul Company, Franklin Development Co.,
Inc., The Klingle Corporation and Westminster Investing Corporation relating to the transfer
of certain shares of Chevy Chase Savings Bank, F.S.B. and certain real property to the Trust
in exchange for preferred shares of beneficial interest of the Trust filed as Exhibit 10(d)
to Registration Statement No. 33-34930 is hereby incorporated by reference.
(e) Regulatory Capital Maintenance/Dividend Agreement dated May 17, 1988 among B.F. Saul Company,
the Trust and the Federal Savings and Loan Insurance Corporation filed as Exhibit 10(e) to
the Trust's Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September
30, 1991 is hereby incorporated by reference.
(f) Written Agreement dated September 30, 1991 between the Office of Thrift Supervision and Chevy
Chase Savings Bank, F.S.B. filed on Exhibit 10(f) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
(g) Indenture with respect to the Trust's Senior Notes Due from One Year to Ten Years from Date
of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-19909 is hereby
incorporated by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ------------ --------------------------------------------------------------------------------------------- -----
<C> <S> <C>
(h) First Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is
hereby incorporated by reference.
(i) Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date
of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-9336 is hereby
incorporated by reference.
(j) Fourth Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-95506
is hereby incorporated by reference.
(k) Third Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-91126
is hereby incorporated by reference.
(l) Second Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-80831
is hereby incorporated by reference.
(m) Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten
Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-68652 is
hereby incorporated by reference.
(n) Indenture with respect to the Trust's Senior Notes due from One Year to Five Years from Date
of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for Qualification of
Indentures under the Trust Indenture Act of 1939 (File No. 22-10206) is hereby incorporated
by reference.
(o) Amendments to Commercial Property Leasing and Management Agreement between the Trust and
Franklin Property Company dated as of December 31, 1992 (Amendment No. 5), July 1, 1989
(Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1, 1985 (Amendment No. 2) and
July 1, 1984 (Amendment No. 1) filed as Exhibit 10(o) to Registration Statement No. 33-34930
is hereby incorporated by reference.
(p) Advisory Contract between B.F. Saul Advisory Company and Dearborn Corporation dated as of
December 31, 1992 filed as Exhibit 10(p) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(q) Commercial Property Leasing and Management Agreement between Dearborn Corporation and
Franklin Property Company dated as of December 31, 1992 filed as Exhibit 10(q) to
Registration Statement No. 33-34930 is hereby incorporated by reference.
(r) Registration Rights and Lock-Up Agreement dated August 26, 1993 by and among Saul Centers,
Inc. and the Trust, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn
Corporation, Franklin Property Company and Avenel Executive Park Phase II, Inc. as filed as
Exhibit 10.6 to Registration Statement No. 33-64562 is hereby incorporated by reference.
(s) Exclusivity and Right of First Refusal Agreement dated August 26, 1993 among Saul Centers,
Inc., the Trust, B. F. Saul Company, Westminster Investing Corporation, Franklin Property
Company, Van Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as filed as
Exhibit 10.7 to Registration Statement No. 33-64562 is hereby incorporated by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ------------ --------------------------------------------------------------------------------------------- -----
<C> <S> <C>
(t) Reimbursement Agreement dated as of August 26, 1993 by and among Saul Centers, Inc., Saul
Holdings Limited Partnership, Saul Subsidiary I Limited Partnership, Saul Subsidiary II
Limited Partnership, Avenel Executive Park Phase II, Inc., Franklin Property Company,
Westminister Investing Corporation Van Ness Square Corporation, Dearborn Corporation and the
Trust filed as Exhibit 10(t) to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(u) Amendment to Written Agreement dated October 29, 1993 between the Office of Thrift
Supervision and Chevy Chase Savings Bank, F.S.B. filed as Exhibit 10(u) to Registration
Statement No. 33-34930 is hereby incorporated by reference.
(x) Indenture dated as of September 1, 1992 with respect to the Trust's Notes due from One to Ten
Years from Date of Issue filed as Exhibit 4(a) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
*12. Statement re: Computation of Ratio of Earnings to Fixed Charges.
*21. Subsidiaries of the Trust.
**23. (a) Consent of Stoy, Malone & Company, P.C.
** (b) Consent of Arthur Andersen & Co.
** (c) Consent of Shaw, Pittman, Potts & Trowbridge (included in Exhibit 5).
*24. Power of Attorney (included in signature page II-5).
*25. Statement of Eligibility of Norwest Bank Minnesota, National Association on Form T-1.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
<FN>
- ------------------------
* Filed herewith.
** To be filed by amendment.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
B.F. SAUL REAL ESTATE INVESTMENT TRUST,
Issuer
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
Trustee
-----------------------
Indenture
Dated as of March 30, 1994
------------
$175,000,000
11 5/8% Senior Secured Notes
due 2002
11 5/8% Series B Senior Secured Notes
due 2002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
B.F. SAUL REAL ESTATE INVESTMENT TRUST
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of March 30, 1994
-------------------------------------------------
Trust Indenture Indenture
Act Section Section
- --------------- ----------
SECTION 310(a)(1) ............................... 607(a)
(a)(2) ............................... 607(a)
(b) ............................... 608
SECTION 312(c) ............................... 701
SECTION 313(c) ............................... 702
SECTION 314(a) ............................... 703
(a)(4) ............................... 1008(a)
(b)(1) ............................... 1214(b)
(b)(2) ............................... 1214(c)
(c)(1) ............................... 102
(c)(2) ............................... 102
(d)(1) ............................... 1214(a)(i)
(d)(2) ............................... 1214(a)(ii)
(d)(3) ............................... 1214(a)(iii)
(e) ............................... 102
SECTION 315(b) ............................... 601
SECTION 316(a)(last
sentence) ............................... 101 ("Outstanding")
(a)(1)(A) ............................... 502, 512
(a)(1)(B) ............................... 513
(b) ............................... 508
(c) ............................... 104(d)
SECTION 317(a)(1) ............................... 503
(a)(2) ............................... 504
(b) ............................... 1003
SECTION 318(a) ............................... 111
- ---------------
Note: This reconciliatin and tie shall not, for any purpose, be deemed to be
a part of the Indenture.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Acquired Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 2
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agent Member. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Asset Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Average Life to Stated Maturity . . . . . . . . . . . . . . . . . . . . 3
Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Bank Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . 3
Bank Collateral Sub-Account A . . . . . . . . . . . . . . . . . . . . . 3
Bank Collateral Sub-Account B . . . . . . . . . . . . . . . . . . . . . 3
Bank Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Bank Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Board Resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Business Day. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Lease Obligation. . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Maintenance Agreement . . . . . . . . . . . . . . . . . . . . . 4
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cash Collateral Deficit . . . . . . . . . . . . . . . . . . . . . . . . 4
Cash Equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cash Flow -- Indenture . . . . . . . . . . . . . . . . . . . . . . . . 5
Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . 5
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Change of Control Triggering Event. . . . . . . . . . . . . . . . . . . 6
Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Collateral Deficit Amount . . . . . . . . . . . . . . . . . . . . . . . 6
Collateral Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
- ---------------
Note: This table of contents shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE>
ii
Page
----
Consolidated Interest Expense . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Net Income (Loss). . . . . . . . . . . . . . . . . . . . . 6
Consolidated Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . 7
Consolidated Tax Subsidiary . . . . . . . . . . . . . . . . . . . . . . 7
Corporate Trust Office. . . . . . . . . . . . . . . . . . . . . . . . . 7
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Depositary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Disinterested Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 8
Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Exchange Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FDIA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FDIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . 9
FRBNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
General Capital Requirement . . . . . . . . . . . . . . . . . . . . . . 9
Guaranteed Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 9
Holder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Initial Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Initial Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Rate Agreements. . . . . . . . . . . . . . . . . . . . . . . . 11
Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Grade. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Liquidity Maintenance Account . . . . . . . . . . . . . . . . . . . . . 11
Liquidity Maintenance Amount. . . . . . . . . . . . . . . . . . . . . . 11
Liquidity Maintenance Sub-Account A . . . . . . . . . . . . . . . . . . 12
Liquidity Maintenance Sub-Account B . . . . . . . . . . . . . . . . . . 12
Management Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 12
Margin Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Market Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Material Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Nonrecourse Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . 13
Non-U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
iii
Page
----
Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 14
Operating Cash Flow Coverage Ratio. . . . . . . . . . . . . . . . . . . 14
Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Permitted Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Permitted Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . 15
Permitted Investment. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Permitted Subsidiary Indebtedness . . . . . . . . . . . . . . . . . . . 17
Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PIK Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Pledged Bank Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Predecessor Security. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Private Placement Legend. . . . . . . . . . . . . . . . . . . . . . . . 18
QIB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Qualified Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 19
Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Rating Category . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Rating Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Rating Decline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Real Estate Property. . . . . . . . . . . . . . . . . . . . . . . . . . 19
Redeemable Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . 19
Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . 20
Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulation S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulatory Capital Requirements . . . . . . . . . . . . . . . . . . . . 20
Reimbursement Agreement . . . . . . . . . . . . . . . . . . . . . . . . 20
Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Retail Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Sale Deficit Amount . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Secured Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Securities Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Securitization Entity . . . . . . . . . . . . . . . . . . . . . . . . . 21
Security Register and Security Registrar. . . . . . . . . . . . . . . . 21
Single Asset Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . 21
Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
iv
Page
----
Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Surviving Entity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Tax Sharing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 22
13% Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Trust Indenture Act or TIA. . . . . . . . . . . . . . . . . . . . . . . 23
Trust Nonrecourse Indebtedness. . . . . . . . . . . . . . . . . . . . . 23
Trust Request or Trust Order. . . . . . . . . . . . . . . . . . . . . . 23
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . 23
U.S. Government Obligations . . . . . . . . . . . . . . . . . . . . . . 23
U.S. Government Securities. . . . . . . . . . . . . . . . . . . . . . . 23
Vice President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Voting Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Wholly Owned Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 102. Incorporation by Reference of Trust Indenture Act. . . . . . . 24
SECTION 103. Compliance Certificates and Opinions.. . . . . . . . . . . . . 24
SECTION 104. Form of Documents Delivered to Trustee.. . . . . . . . . . . . 25
SECTION 105. Acts of Holders. . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 106. Notices, Etc., to Trustee and Trust. . . . . . . . . . . . . . 27
SECTION 107. Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . 27
SECTION 108. Effect of Headings and Table of Contents.. . . . . . . . . . . 28
SECTION 109. Successors and Assigns.. . . . . . . . . . . . . . . . . . . . 28
SECTION 110. Separability Clause. . . . . . . . . . . . . . . . . . . . . . 28
SECTION 111. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . 28
SECTION 112. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 113. Legal Holidays.. . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 114. Execution of Agreement by Trust. . . . . . . . . . . . . . . . 29
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally. . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 202. Restrictive Legends. . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE THREE
THE SECURITIES
SECTION 301. Title and Terms. . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 302. Denominations. . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 303. Execution, Authentication, Delivery and Dating.. . . . . . . . 34
<PAGE>
v
Page
----
SECTION 304. Temporary Securities.. . . . . . . . . . . . . . . . . . . . . 35
SECTION 305. Registration, Registration of Transfer and Exchange. . . . . . 35
SECTION 306. Book-Entry Provisions for U.S. Global Security.. . . . . . . . 37
SECTION 307. Special Transfer Provisions. . . . . . . . . . . . . . . . . . 38
SECTION 308. Mutilated, Destroyed, Lost and Stolen Securities.. . . . . . . 42
SECTION 309. Payment of Interest; Interest Rights Preserved.. . . . . . . . 43
SECTION 310. Persons Deemed Owners. . . . . . . . . . . . . . . . . . . . . 44
SECTION 311. Cancellation.. . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 312. Computation of Interest. . . . . . . . . . . . . . . . . . . . 45
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture. . . . . . . . . . . . 45
SECTION 402. Application of Trust Money . . . . . . . . . . . . . . . . . . 46
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default. . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 502. Acceleration of Maturity; Rescission and Annulment . . . . . . 49
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee . .. . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 504. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . 51
SECTION 505. Trustee May Enforce Claims Without Possession of Debentures. . 52
SECTION 506. Application of Money Collected . . . . . . . . . . . . . . . . 52
SECTION 507. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . 53
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium
and Interest. . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 509. Restoration of Rights and Remedies.. . . . . . . . . . . . . . 54
SECTION 510. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . 54
SECTION 511. Delay or Omission Not Waiver.. . . . . . . . . . . . . . . . . 54
SECTION 512. Control by Holders . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 513. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . 55
SECTION 514. Waiver of Stay or Extension Laws . . . . . . . . . . . . . . . 55
SECTION 515. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . 55
ARTICLE SIX
THE TRUSTEE
<PAGE>
vi
Page
----
SECTION 601. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 602. Certain Rights of Trustee. . . . . . . . . . . . . . . . . . . 56
SECTION 603. Trustee Not Responsible for Recitals or Issuance of
Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 604. May Hold Securities. . . . . . . . . . . . . . . . . . . . . . 58
SECTION 605. Money Held in Trust. . . . . . . . . . . . . . . . . . . . . . 58
SECTION 606. Compensation and Reimbursement . . . . . . . . . . . . . . . . 58
SECTION 607. Corporate Trustee Required; Eligibility. . . . . . . . . . . . 59
SECTION 608. Resignation and Removal; Appointment of Successor. . . . . . . 59
SECTION 609. Acceptance of Appointment by Successor . . . . . . . . . . . . 61
SECTION 610. Merger, Conversion, Consolidation or Succession to Business. . 61
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND TRUST
SECTION 701. Disclosure of Names and Addresses of Holders . . . . . . . . . 62
SECTION 702. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 703. Reports by the Trust . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Trust May Consolidate, Etc., Only on Certain Terms . . . . . . 64
SECTION 802. Successor Substituted. . . . . . . . . . . . . . . . . . . . . 64
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders . . . . . . 65
SECTION 902. Supplemental Indentures with Consent of Holders. . . . . . . . 66
SECTION 903. Execution of Supplemental Indentures . . . . . . . . . . . . . 67
SECTION 904. Effect of Supplemental Indentures. . . . . . . . . . . . . . . 67
SECTION 905. Conformity with Trust Indenture Act. . . . . . . . . . . . . . 67
SECTION 906. Reference in Securities to Supplemental Indentures . . . . . . 67
SECTION 907. Notice of Supplemental Indentures. . . . . . . . . . . . . . . 67
SECTION 908. Payment for Consent. . . . . . . . . . . . . . . . . . . . . . 68
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ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, If Any, Interest. . . . . . . 68
SECTION 1002. Maintenance of Office or Agency . . . . . . . . . . . . . . . 68
SECTION 1003. Money for Security Payments to Be Held in Trust . . . . . . . 69
SECTION 1004. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 1005. Payment of Taxes and Other Claims . . . . . . . . . . . . . . 70
SECTION 1006. Maintenance of Properties . . . . . . . . . . . . . . . . . . 70
SECTION 1007. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 1008. Statement by Officers As to Default . . . . . . . . . . . . . 71
SECTION 1009. Provision of Financial Statements . . . . . . . . . . . . . . 71
SECTION 1010. Limitation on Indebtedness. . . . . . . . . . . . . . . . . . 72
SECTION 1011. Limitation on Restricted Payments . . . . . . . . . . . . . . 72
SECTION 1012. Limitation on Transactions with Affiliates. . . . . . . . . . 76
SECTION 1013. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . 78
SECTION 1014. Restriction on Transfer of Assets to Subsidiaries . . . . . . 78
SECTION 1015. Limitation on Subsidiaries. . . . . . . . . . . . . . . . . . 78
SECTION 1016. Limitation on Dividend and other Payment Restrictions
Affecting Subsidiaries. . . . . . . .. . . . . . . . . . . . 79
SECTION 1017. Limitation on Issuances and Sales of Subsidiary Stock . . . . 79
SECTION 1018. Required Stock Ownership. . . . . . . . . . . . . . . . . . . 79
SECTION 1019. Change of Control Triggering Event. . . . . . . . . . . . . . 79
SECTION 1020. Obtaining a Rating on the Notes . . . . . . . . . . . . . . . 81
SECTION 1021. Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 1022. Waiver of Certain Covenants . . . . . . . . . . . . . . . . . 81
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption . . . . . . . . . . . . . . . . . . . . . 81
SECTION 1102. Applicability of Article. . . . . . . . . . . . . . . . . . . 81
SECTION 1103. Election to Redeem; Notice to Trustee . . . . . . . . . . . . 82
SECTION 1104. Selection by Trustee of Securities to Be Redeemed . . . . . . 82
SECTION 1105. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . 82
SECTION 1106. Deposit of Redemption Price . . . . . . . . . . . . . . . . . 83
SECTION 1107. Securities Payable on Redemption Date . . . . . . . . . . . . 83
SECTION 1108. Securities Redeemed in Part . . . . . . . . . . . . . . . . . 83
ARTICLE TWELVE
SECURITY AND PLEDGE OF COLLATERAL
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SECTION 1201. Grant of Security Interest. . . . . . . . . . . . . . . . . . 84
SECTION 1202. Secured Obligations . . . . . . . . . . . . . . . . . . . . . 84
SECTION 1203. Delivery, Investment and Release of Collateral. . . . . . . . 85
SECTION 1204. Delivery and Holding of Collateral. . . . . . . . . . . . . . 91
SECTION 1205. Representations, Warranties and Covenants . . . . . . . . . . 94
SECTION 1206. Further Assurances. . . . . . . . . . . . . . . . . . . . . . 96
SECTION 1207. Dividends; Voting Rights; Etc . . . . . . . . . . . . . . . . 96
SECTION 1208. Trustee Appointed Attorney-in-Fact. . . . . . . . . . . . . . 97
SECTION 1209. Trustee May Perform . . . . . . . . . . . . . . . . . . . . . 97
SECTION 1210. Remedies upon Event of Default. . . . . . . . . . . . . . . . 97
SECTION 1211. Application of Proceeds . . . . . . . . . . . . . . . . . . . 99
SECTION 1212. Continuing Lien; Termination. . . . . . . . . . . . . . . . . 99
SECTION 1213. Certificates and Opinions . . . . . . . . . . . . . . . . . . 99
SECTION 1214. Additional Covenants of the Trust . . . . . . . . . . . . . . 101
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Trust's Option to Effect Defeasance or Covenant Defeasance. . 103
SECTION 1302. Defeasance and Discharge. . . . . . . . . . . . . . . . . . . 103
SECTION 1303. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . 103
SECTION 1304. Conditions to Defeasance or Covenant Defeasance . . . . . . . 104
SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held
in Trust; Other Miscellaneous Provisions . . . . . . . . . . 106
SECTION 1306. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . 107
TESTIMONIUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
SIGNATURES AND SEALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
EXHIBITS
Exhibit A - Form of Securities, Trustee's Certificate of Authentication
Exhibit B - Form of Certificate to be Delivered upon Termination of
Restricted Period
Exhibit C - Form of Certificate to be Delivered in Connection with Transfers
to Non-QIB Institutional Accredited Investors
Exhibit D - Form of Certificates to be Delivered in Connection with Transfers
Pursuant to Regulation S
Exhibit E - Form of Subordination Agreement
<PAGE>
INDENTURE, dated as of March 30, 1994 between B.F. SAUL REAL ESTATE
INVESTMENT TRUST, an unincorporated business trust duly organized and existing
under the laws of the State of Maryland (herein called the "Trust"), having its
principal office at 8401 Connecticut Avenue, Chevy Chase, Maryland, and NORWEST
BANK MINNESOTA, NATIONAL ASSOCIATION, a national bank duly organized and
existing under the laws of the United States, Trustee (herein called the
"Trustee").
RECITALS OF THE TRUST
The Trust has duly authorized the creation of an issue of 11 5/8%
Senior Secured Notes due 2002 (herein called the "Initial Securities") and 11
5/8% Series B Senior Secured Notes due 2002 (the "Exchange Securities" and,
together with the Initial Securities, the "Securities"), of substantially the
tenor and amount hereinafter set forth, and to provide therefor the Trust has
duly authorized the execution and delivery of this Indenture.
Upon the issuance of the Exchange Securities or the effectiveness of
the Registration Statement filed in connection with the Exchange Offer (as
defined herein), this Indenture will be subject to the provisions of the Trust
Indenture Act of 1939, as amended, that are required to be part of this
Indenture and shall, to the extent applicable, be governed by such provisions.
All things necessary have been done to make the Securities, when
executed by the Trust and authenticated and delivered hereunder and duly issued
by the Trust, the valid obligations of the Trust and to make this Indenture a
valid agreement of the Trust, in accordance with their and its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
<PAGE>
2
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein, and the terms "cash transaction" and "self-
liquidating paper", as used in TIA Section 311, shall have the meanings
assigned to them in the rules of the Commission adopted under the Trust
Indenture Act;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as
are generally accepted at the date of such computation; and
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article Ten, are defined in that
Article.
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at
the time such Person becomes a Subsidiary of any other Person or (ii) assumed in
connection with the acquisition of assets from such Person, in each case other
than Indebtedness incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary of such other Person or such acquisition. Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from such Person or the date such Person becomes a
Subsidiary of such other Person.
"Act", when used with respect to any Holder, has the meaning specified
in Section 105.
"Advisory Fees" means fees pursuant to that certain Amended and
Restated Advisory Contract, dated as of October 1, 1992, between B.F. Saul
Company and the Trust, as most recently amended by Amendment No. 8 thereto dated
as of October 1, 1993, as the same may be further amended or supplemented in
accordance with Section 1012.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person and any legal or beneficial owner directly or
indirectly, of 20% or more of the Voting Stock of such specified Person.
Notwithstanding the foregoing, no Securitization Entity shall be deemed an
Affiliate of the Bank or the Trust or any of their Subsidiaries. The fact that
an Affiliate of any Specified Person is a partner (or a shareholder, director or
officer of a partner) of a law firm that renders services to such specified
Person or its Affiliates does not mean that the law firm is an Affiliate of such
specified Person. For the purposes of this definition, "control" when used with
respect to any specified Person means
<PAGE>
3
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities (or pledge of
voting securities if the pledgee thereof may exercise or control, on the date of
determination, the exercise of the voting rights of the owner of such voting
securities), by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agent Member" has the meaning specified in Section 306.
"Asset Sale" means any conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger or consolidation)
(collectively, for purposes of this definition, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (a) any Capital Stock
of any Subsidiary; (b) all or substantially all of the properties and assets of
any division or line of business of the Trust or its Subsidiaries; or (c) any
other properties or assets of the Trust or any Subsidiary other than in the
ordinary course of business. For purposes of this definition, the term "Asset
Sale" shall not include any transfer of properties and assets or Capital Stock
(i) that is governed by the provisions described under the "Merger,
Consolidation or Sale of Assets" section of the Indenture or (ii) of the Trust
or any Subsidiary to the Trust or any Single Asset Subsidiary of the Trust.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (a) the sum of the products of (i) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal payments.
"Bank" means Chevy Chase Bank, F.S.B., a federally chartered savings
bank and a controlled subsidiary of the Trust.
"Bank Collateral Account" means the Bank Collateral Account
established by the Trustee pursuant to Section 1204(g).
"Bank Collateral Sub-Account A" means the Bank Collateral Sub-Account
A of the Bank Collateral Account established by the Trustee pursuant to Section
1204(g).
"Bank Collateral Sub-Account B" means the Bank Collateral Sub-Account
B of the Bank Collateral Account established by the Trustee pursuant to Section
1204(g).
"Bank Common Stock" means the Bank Stock and any other class or series
of capital stock of the Bank not preferred to the Bank Stock as to dividends or
distributions on the liquidation of the Bank or both.
"Bank Stock" means the common stock, par value $1.00 per share, of the
Bank.
<PAGE>
4
"Board of Trustees" means either the board of trustees of the Trust or
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Trust to have been duly adopted by
the Board of Trustees and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in Minneapolis,
Minnesota, Chevy Chase, Maryland, or The City of New York are authorized or
obligated by law or executive order to close.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of this Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Maintenance Agreement" means the regulatory capital
maintenance agreement dated May 17, 1988 among the Trust, the B.F. Saul Company
and the former Federal Savings and Loan Insurance Corporation.
"Capital Stock" in any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents or
interest in (however designated) capital stock in such Person, including, with
respect to a corporation, common stock, Preferred Stock and other corporate
stock with respect to a trust, shares or other evidence of beneficial interests,
and, with respect to a partnership, partnership interests, whether general or
limited, and any rights (other than debt securities convertible into corporate
stock, partnership interests or other capital stock), warrants or options
exchangeable for or convertible into such corporate stock, partnership interests
or other capital stock.
"Cash Collateral Deficit" has the meaning specified in Section
1203(b).
"Cash Equivalent" means (a) any evidence of Indebtedness with a
maturity of 180 days or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (b) certificates of deposit, time deposits,
deposits in money-market accounts or any other deposit accounts or acceptances
with a maturity of 180 days or less of any financial institution that is a
member of the Federal Reserve System that issues (or the parent of which issues)
commercial paper or certificates of deposit rated as described in clause (c)
below and that has combined capital and surplus and undivided profits of not
less than $500,000,000; (c) commercial paper with a maturity of 180 days or less
issued by a corporation that is not an Affiliate of the Trust and
<PAGE>
5
is organized under the laws of any state of the United States or the District of
Columbia and rated at least A-1 by S&P or at least P-1 by Moody's; and (d)
Partnership Units and Margin Securities.
"Cash Flow -- Indenture" means with respect to the Trust, for any
period, all as determined in accordance with GAAP and without duplication, the
sum of the following items: (a) real estate operating income (loss), PLUS (b)
depreciation and amortization expense, PLUS (c) interest expense, PLUS (d)
equity in losses of partnership investments, LESS (e) equity in earnings of
partnership investments, PLUS (f) losses on sales of property, LESS (g) gains on
sales of property, PLUS (h) non-cash charges, LESS (i) non-cash gains, PLUS (j)
cash distributions received from partnership investments, PLUS (k) tax sharing
payments paid by the Bank to the Trust, PLUS (l) dividends paid by the Bank to
the Trust.
"Certificates of Deposit" means certificates of deposit or acceptances
with a maturity of 180 days or less of any financial institution (other than an
Affiliate of the Trust) that, in the case of any book-entry certificates of
deposit, is organized under the laws of the State of New York, that is a member
of the Federal Reserve System that issues (or the parent of which issues)
commercial paper or certificates of deposit rated as described in clause (c) of
the definition of Cash Equivalent, that has combined capital and surplus and
undivided profits of not less than $500,000,000 and that, in the case of any
non-negotiable certificate of deposit or acceptance, has explicitly waived any
right of set-off or banker's lien against such certificate or acceptance.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Section 13(d) and
14(d) of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Trust; (b) the
Trust consolidates with, or merges with or into, another Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, the Trust, in any such event pursuant to a transaction
in which any Voting Stock of the Trust is reclassified or changed into or
exchanged for cash, securities or other property, other than any such
transaction where (i) any Voting Stock of the Trust is reclassified or changed
into or exchanged for Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation and (ii) immediately after such transaction
no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
shall be deemed to have "beneficial ownership" of all securities that such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time) directly or indirectly, of more than 50% of
the total Voting Stock of the surviving or transferee corporation; (c) during
any consecutive two-year period, individuals
<PAGE>
6
who at the beginning of such period constituted the Board of Trustees of the
Trust (together with any new trustees whose election by such Board of Trustees
or whose nomination for election by the stockholders of the Trust was approved
by a vote of 66 2/3% of the trustees then still in office who were either
trustees at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Trustees of the Trust then in office; or (d) any
final order, judgment or decree of a court of competent jurisdiction shall be
entered against the Trust decreeing the dissolution or liquidation of the Trust.
"Change of Control Triggering Event" means the occurrence of both a
Change of Control and a Rating Decline.
"Closing Date" means the date on which the Securities are originally
issued under the Indenture.
"Collateral" has the meaning specified in Section 1201.
"Collateral Deficit Amount" has the meaning specified in Section
1203(b).
"Collateral Value" means, as of any date of determination, (a) for
cash, the amount thereof, (b) for Certificates of Deposit and U.S. Government
Securities, the principal amount thereof, and (c) for Margin Securities, 50% of
the Market Value thereof as of such date.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or, if at any time
after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Consolidated Interest Expense" means, with respect to the Trust, for
any period, the amount, as determined in accordance with GAAP, of interest
expense of the Trust and its Subsidiaries (excluding all amounts relating to
interest expense of the Bank and its Subsidiaries).
"Consolidated Net Income (Loss)" of any Person means, for any period
the consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP adjusted, to
the extent included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary gains and losses (other than those relating
to the use of net operating losses of such Person carried forward) less all fees
and expenses relating thereto, net of taxes, (ii) the portion of net income (or
loss) of any Person (other than such Person and any of its consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period,
<PAGE>
7
(iii) net income (or loss) of any Person combined with such Person or any of its
Subsidiaries on a "pooling of interest" basis attributable to any period prior
to the date of combination, (iv) any gain or loss, net of taxes, realized upon
the termination of any employee pension benefit plan, (v) the net income of any
Subsidiary of such Person (other than the Bank and its Subsidiaries in the case
of the Trust) to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Subsidiary or its shareholders;
PROVIDED that, upon the termination or expiration of such dividend or
distribution restrictions, the portion of net income (or loss) of such
Subsidiary allocable to such Person and previously excluded shall be added to
the Consolidated Net Income (Loss) of such Person to the extent of the amount of
dividends or other distributions actually paid to such Person in cash by such
Subsidiary and (vi) all gains resulting from the sale of credit card
relationships.
"Consolidated Net Worth" means, at any date, the consolidated
shareholders' equity of the Trust, less the amount of shareholders' equity
attributable to (i) Redeemable Capital Stock or treasury stock of the Trust and
its Subsidiaries, determined on a consolidated basis in accordance with GAAP,
and (ii) extraordinary gains subsequent to March 31, 1994 and any gains
resulting from the sale, transfer or other disposition of Partnership Units.
"Consolidated Tax Subsidiary" means any Subsidiary of the Trust that
joins with the Trust in the filing of a consolidated federal income tax return.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee, at which at any particular time its corporate trust business shall
be administered, which office at the date of execution of this Indenture is
located at Norwest Center, Sixth Street and Marquette Avenue, Minneapolis,
Minnesota, except that with respect to presentation of Securities for payment or
for registration of transfer or exchange, such term shall mean the office or
agency of the Trustee at which, at any particular time, its corporate agency
business shall be conducted, which agency at the date of execution of this
Indenture is Norwest Trust Company, whose office is located at 3 New York Plaza,
15th Floor, New York, New York 10004.
"Corporation" includes corporations, associations, companies and
business trusts.
"Custodian Agreement" means the Custodian Account Agreement dated as
of July 14, 1988 between the Trustee and Bankers Trust Company or another
custodian agreement with Bankers Trust Company or another Custodian on similar
terms.
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8
"Custodian" means (i) Bankers Trust Company or (ii) another financial
institution in the State of New York selected by the Trustee, acting as the
agent and designee of the Trustee pursuant to a Custodian Agreement, that
(a) is a financial intermediary (not a clearing corporation) within
the meaning of Section 8-313(4) of the Uniform Commercial Code carrying on
business in the State of New York,
(b) issues (or whose parent issues) commercial paper or
certificates of deposit rated as described in clause (c) of the definition
of Cash Equivalent,
(c) has combined capital and surplus and undivided profits of not
less than $500,000,000 and
(d) enters into a Custodian Agreement.
"Default" means any event or condition the occurrence of which would,
with the lapse of time or the giving of notice or both, become an Event of
Default.
"Defaulted Interest" has the meaning specified in Section 309.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Disinterested Trustee" means, with respect to any transaction or
series of related transactions, a member of the Board of Trustees of the Trust
or a member of the board of directors of any successor corporation who does not
have any material direct or indirect financial interest in or with respect to
such transaction or series of related transactions.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the exchange offer that may be effected
pursuant to the Registration Rights Agreement.
"Exchange Securities" has the meaning stated in the first recital of
this Indenture and refers to any Exchange Securities containing terms
substantially identical to the Initial Securities (except that such Exchange
Securities shall be registered under the Securities Act) that are issued and
exchanged for the Initial Securities pursuant to the Registration Rights
Agreement and this Indenture.
<PAGE>
9
"Fair Market Value" means, with respect to any property received by
the Trust in connection with the issuance or sale of Capital Stock, or the
conversion or exchange of securities into Capital Stock, the fair market value
of such property as determined in good faith by the Board of Trustees, whose
determination shall be conclusive in all circumstances, net of attorney's fees,
accountant's fees and brokerage, consulting, underwriting and other fees and
expenses actually incurred in connection with such transaction and net of taxes
paid or payable by the Trust as a result thereof.
"FDIA" means the Federal Deposit Insurance Act, 12 U.S.C. Sections
1811 - 1833, as amended from time to time.
"FDIC" means the Federal Deposit Insurance Corporation or any
successor thereto.
"Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the
United States Code, as amended from time to time.
"FRBNY" has the meaning specified in Section 1204(c).
"GAAP" means generally accepted accounting principles, consistently
applied.
"General Capital Requirement" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation (but excluding any higher individual minimum capital requirement
imposed on the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section
567.3 (and any amendment to either thereof) or any successor law or regulation).
"Guaranteed Indebtedness" of any Person means, without duplication,
all Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
Person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Indebtedness or to assure the holder of such Indebtedness against loss,
(iii) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring that
such property be received or such services be rendered), (iv) to maintain
working capital or equity capital of the debtor, or otherwise to maintain the
net worth, solvency or other financial condition of the debtor or (v) otherwise
to assure a creditor with respect to Indebtedness against loss; PROVIDED that
the term "guarantee" shall not include endorsements for collection or deposit,
in either case in the ordinary course of business.
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10
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of such
Person in connection with any letters of credit issued under letter of credit
facilities, and in connection with any agreement by such Person to make payment
to purchase, redeem, exchange, convert or otherwise acquire for value any
Capital Stock of such Person now or hereafter outstanding, (ii) all obligations
of such Person evidenced by bonds, notes, debentures or other similar
instruments, (iii) all indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all obligations under Interest Rate Agreements of such Person,
(v) all Capital Lease Obligations of such Person, (vi) all Indebtedness referred
to in clauses (i) through (v) above of other Persons and all dividends payable
by other Persons, the payment of which is secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness (the amount of
such obligations being deemed to be the lesser of the value of such property or
asset or the amount of the obligations so secured), (vii) all guarantees by such
Person of Guaranteed Indebtedness, (viii) all Redeemable Capital Stock (valued
at the greater of book value and voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends) of such Person and (ix) any
amendment, supplement, modification, deferral, renewal, extension, refunding or
refinancing of any liability of the types referred to in clauses (i) through
(viii) above. For purposes hereof, (x) the "maximum fixed repurchase price" of
any Redeemable Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Redeemable Capital Stock as
if such Redeemable Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to this Indenture, and
if such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value to be determined in good faith
by the board of directors (or any duly authorized committee thereof) of the
issuer of such Redeemable Capital Stock, and (y) Indebtedness is deemed to be
incurred pursuant to a revolving credit facility or any other facility providing
for partial advances each time an advance is made thereunder.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
<PAGE>
11
"Initial Purchasers" means Merrill Lynch & Co. and Friedman, Billings,
Ramsey & Co., Inc., as the initial purchasers of the Initial Securities pursuant
to the Purchase Agreement dated March 30, 1994 between such Persons and the
Trust.
"Initial Securities" has the meaning stated in the first recital of
this Indenture.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Interest Rate Agreements" means interest rate protection agreements
(including, without limitation, interest rate swaps, caps, floors, collars and
similar agreements) and/or other types of interest rate hedging agreements.
"Investment" means any direct or indirect advance, loan (other than
advances to customers in the ordinary course of business, which are recorded as
accounts receivable on the balance sheet of the Trust or its Subsidiaries),
other extensions of credit or capital contribution to (by means of any transfer
of cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities issued by, any other Person.
"Investment Grade" means BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such ratings by S&P or Moody's. In the event that
the Trust shall select any other Rating Agency, the equivalent of such ratings
by, such Rating Agency shall be used.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property that such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Liquidity Maintenance Account" means the Liquidity Maintenance
Account established by the Trustee pursuant to Section 1204(g).
"Liquidity Maintenance Amount" means, as of any date of determination,
(a) the aggregate amount of interest that will accrue on the
Securities during one calendar year, assuming that the aggregate principal
amount of the Securities Outstanding,
(i) if such date is before March 31, 1994, on the date
hereof,
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12
(ii) if such date is on or after March 31, 1994 and is the
last day of a calendar quarter, on such date, or
(iii) if such date is after March 31, 1994 and is not the last
day of a calendar quarter, on the last day of the calendar quarter
immediately preceding such date,
remained Outstanding for all of such year, PLUS
(b) (i) the aggregate amount of interest accrued on the Retail
Notes, if such date is the last day of a calendar quarter, during the
calendar quarter then ended, or, if such date is not the last day of a
calendar quarter, during the calendar quarter immediately preceding such
date, MULTIPLIED by (ii) four.
"Liquidity Maintenance Sub-Account A" means the Liquidity Maintenance
Sub-Account A of the Liquidity Maintenance Account established by the Trustee
pursuant to Section 1204(g).
"Liquidity Maintenance Sub-Account B" means the Liquidity Maintenance
Sub-Account B of the Liquidity Maintenance Account established by the Trustee
pursuant to Section 1204(g).
"Management Agreements" means (a) the Amended and Restated Commercial
Property Leasing and Management Agreement dated as of October 1, 1982, as
amended, between the Trust and Franklin Property Company relating to the leasing
and management of real property owned by the Trust and its Subsidiaries (other
than the Bank and its Subsidiaries) other than their hotel properties, and (b)
any written hotel management agreement between a Subsidiary of the Trust and
Franklin Property Company relating to the management of such hotel properties
entered into in the ordinary course of business and consistent with past
practice, in each case as further amended or modified in accordance with the
terms of this Indenture.
"Margin Securities" means "margin stock" as defined in Regulation
G (12 C.F.R. SECTION 207, as amended) of the Board of Governors of the Federal
Reserve System; PROVIDED that "Margin Securities" shall not include the
securities of any Affiliate of the Trust, other than common stock of Saul
Centers, Inc. or for purposes of this Indenture other than Article Twelve,
capital stock of the Bank (to the extent the same otherwise would constitute
Margin Securities); and PROVIDED FURTHER that for purposes of Article Twelve,
Margin Securities shall not include any uncertificated securities, as defined in
Section 8-102(1)(b) of the Uniform Commercial Code as in effect in the State of
New York.
"Market Value" means, as of any date of determination,
(i) with respect to cash, the amount thereof;
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13
(ii) with respect to a U.S. Government Security or Certificate of
Deposit, the principal amount thereof; and
(iii) with respect to a Margin Security, the average of the daily
market prices of such security for the 20 consecutive trading days
preceding the fifth day prior to such date, with the daily market price for
each such trading day being:
(a) if such security is listed or admitted to trading on any
securities exchange, the closing price, regular way, on such day on
the principal securities exchange on which such security is traded;
(b) if such security is not listed on or admitted to trading
on any securities exchange, the last reported sale price on such day,
or if no sale takes place on such day, the average of the closing bid
and ask prices on such day, as reported by a reputable quotation
source designated by the Trust; and
(c) if such security is not then listed or admitted to
trading on any securities exchange and no such reported sale price or
bid and asked prices are available, the average of the closing bid and
asked prices on such day in the over-the-counter market, as furnished
by any member firm of the National Association of Securities Dealers,
Inc.
"Material Subsidiary" means, at any particular time (i) any Subsidiary
of the Trust, that, together with the Subsidiaries of such Subsidiary, (a)
accounted for more than 10% of the consolidated revenues or earnings of the
Trust and its Subsidiaries (other than the Bank and its Subsidiaries) for the
most recently completed fiscal year of the Trust or (b) was the owner of more
than 10% of the consolidated assets of the Trust and its Subsidiaries (other
than the Bank and its Subsidiaries) as of the end of such fiscal year, all as
shown on the consolidated financial statements of the Trust and its Subsidiaries
for such fiscal year,and (ii) the Bank.
"Maturity", when used with respect to any Security, means the date on
which the principal of such Security or an installment of principal becomes due
and payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, notice of redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Nonrecourse Indebtedness" means Indebtedness incurred by any
Subsidiary of the Trust as to which, subject to exceptions for fraud and certain
environmental violations, (i) neither the Trust nor any other Subsidiary
provides credit support or is directly or indirectly liable for such
Indebtedness and (ii) no default with respect to such Indebtedness would permit
(upon notice, lapse of time or both) any holder of other Indebtedness of the
<PAGE>
14
Trust or any other Subsidiary to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"Non-U.S. Person" means a person who is not a U.S. person, as defined
in Regulation S.
"Officers' Certificate" means a certificate signed by (i) the Chairman
or Vice Chairman of the Board of Trustees, the President or any Vice President
of the Trust and (ii) the Treasurer, any Assistant Treasurer, the Secretary or
any Assistant Secretary of the Trust, and delivered to the Trustee by the terms
of this Indenture; PROVIDED that, in the event an officer of the Trust holds a
position set forth in clause (i) above and a position set forth in clause (ii)
above, such officer may sign an Officers' Certificate only in his capacity as
officer under either clause (i) or (ii) above, but not under both.
"Operating Cash Flow Coverage Ratio" means with respect to the Trust,
at any date of determination, the ratio of (i) Cash Flow - Indenture to (ii)
Consolidated Interest Expense.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Trust, including an employee of the Trust, and who shall be
acceptable to the Trustee.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Securities, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent (other than the Trust) in trust or set
aside and segregated in trust by the Trust (if the Trust shall act as its
own Paying Agent) for the Holders of such Securities; PROVIDED that, if
such Securities are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made;
(iii) Securities, except to the extent provided in Sections 1302 and
1303, with respect to which the Trust has effected defeasance and/or
covenant defeasance as provided in Article Thirteen; and
<PAGE>
15
(iv) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands the Securities are valid obligations of the Trust;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, consent, notice or waiver hereunder, and for the
purpose of making the calculations required by TIA Section 313, Securities owned
by the Trust or any other obligor upon the Securities or any Affiliate of the
Trust or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in making such calculation or in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Securities which the
Trustee knows to be so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Trust or any
other obligor upon the Securities or any Affiliate of the Trust or such other
obligor.
"Partnership Units" means limited partnership interests in Saul
Holdings Partnership.
"Paying Agent" means any Person (including the Trust acting as Paying
Agent) authorized by the Trust to pay the principal of (and premium, if any, on)
or interest on any Securities on behalf of the Trust.
"Permitted Holders" means the descendants of Bernard Francis Saul, any
of their spouses or any Person controlled, directly or indirectly, or
beneficially owned by such descendants or spouses.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Trust under the Notes;
(ii) Indebtedness of the Trust outstanding on the date of this
Indenture;
(iii) obligations of the Trust pursuant to interest rate contracts
designed to protect the Trust against fluctuations in interest rates in
respect of Indebtedness of the Trust, which obligations do not exceed the
aggregate principal amount of such Indebtedness;
(iv) Indebtedness of the Trust consisting of guarantees, indemnities
or obligations in respect of purchase price adjustments in connection with
the acquisition or disposition of assets;
<PAGE>
16
(v) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by the
Trust of any Indebtedness of the Trust, including any successive
refinancings by the Trust, so long as (A) any such new Indebtedness shall
be in a principal amount that does not exceed the principal amount (or, if
such Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced, plus the amount of any premium required to be paid under the
terms of the instrument governing such Indebtedness being so refinanced or
the amount of any premium reasonably determined by the Trust as necessary
to accomplish such refinancing through means of a tender offer or privately
negotiated transaction (it being understood that, with respect to the
refinancing of the Indebtedness permitted to be incurred pursuant to clause
(vi) below, the amount of such Indebtedness outstanding pursuant to such
clause (vi), together with any refinancings thereof, shall not at any one
time exceed $70,000,000 PLUS 20% of the increase in Consolidated Net Worth
of the Trust from April 1, 1994 and it being further understood that any
sales of the Retail Notes will be considered a refinancing thereof to the
extent that the total principal amount of Retail Notes outstanding at any
one time does not exceed the principal amount thereof outstanding on the
date of this Indenture); (B) in the case of any refinancing of Indebtedness
that is Subordinated Indebtedness, (1) such new Indebtedness is made
subordinate to the Securities at least to the same extent as the
Subordinated Indebtedness being refinanced and (2) such new Indebtedness
has an Average Life to Stated Maturity and final Stated Maturity of
principal that exceeds the Average Life to Stated Maturity and final Stated
Maturity of the Subordinated Indebtedness being refinanced); and (C) in the
case of any refinancing of Trust Nonrecourse Indebtedness, such new
Indebtedness is made nonrecourse to the same extent as the Indebtedness
refinanced;
(vi) Indebtedness that has an aggregate principal amount outstanding
at any one time not in excess of the sum of $70,000,000 PLUS 20% of the
increase in Consolidated Net Worth of the Trust from April 1, 1994; and
(vii) Indebtedness of the Trust to any of its Subsidiaries, except
that any transfer of such Indebtedness by any Subsidiary will be deemed to
be an incurrence of Indebtedness; PROVIDED that such Indebtedness is
subordinated to the Securities pursuant to a subordination agreement
substantially in the form of Exhibit E..
"Permitted Investment" means any Investment (i) in Cash Equivalents,
(ii) consisting of capital contributions or loans to Subsidiaries of the Trust
of up to $2,500,000, PROVIDED that any loan under this clause (ii) shall be for
a term of not more than one year and shall be repaid with interest at a rate of
10% per annum, (iii) loans to Subsidiaries of the Trust of up to $5,000,000,
PROVIDED that any loan under this clause (iii) shall be for a term of not more
than one year and shall be repaid with interest at a rate of 10% per annum, (iv)
of up to $50,000,000 in cash in Single Asset Subsidiaries less any
<PAGE>
17
amounts contributed or loaned by the Trust under clauses (ii) and (iii) above,
(v) permitted by Section 1014, the "Restriction on Transfer of Assets to
Subsidiaries" covenant, (vi) in the Bank or its Subsidiaries, and (vii)
constituting cash advances on an intercompany open account basis (A) from the
Trust to its Subsidiaries required for working capital, the payment of interest
and premium, if any, on and principal of any Indebtedness, expenditures for
maintenance and capital improvements, and other operating expenses, to the
extent Subsidiaries have advanced cash to the Trust, or (B) from any Subsidiary
to the Trust, of excess cash on hand from time to time, in each case made in the
ordinary course of business and consistent with past practice.
"Permitted Subsidiary Indebtedness" means any of the following:
(i) Indebtedness of any Subsidiary of the Trust outstanding on the
date of this Indenture;
(ii) obligations of any Subsidiary of the Trust pursuant to interest
rate contracts designed to protect such Subsidiary against fluctuations in
interest rates in respect of Indebtedness of such Subsidiary, which
obligations do not exceed the aggregate principal amount of such
Indebtedness;
(iii) Indebtedness of any Subsidiary of the Trust consisting of
guaranties, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock of Subsidiaries;
(iv) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by any
Subsidiary of the Trust of any Indebtedness of such Subsidiary, including
any successive refinancings by such Subsidiary, so long as (A) any such new
Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the amount of any premium required to be
paid under the terms of the instrument governing such Indebtedness being so
refinanced or the amount of any premium reasonably determined by such
Subsidiary as necessary to accomplish such refinancing through means of a
tender offer or privately negotiated transaction (it being understood that,
(A) with respect to the refinancing of the Indebtedness permitted to be
incurred pursuant to clause (v) below, the amount of such Indebtedness
outstanding pursuant to clause (v), together with any refinancings thereof,
shall not at any time exceed $70,000,000 PLUS 20% of the increase in
Consolidated Net Worth of the Trust from April 1, 1994, and (B) with
respect to the refinancing of the Indebtedness permitted to be incurred
pursuant to clause (vi) below, the amount of such Indebtedness outstanding
pursuant to clause (vi), together with any refinancings thereof, shall not
at any time exceed $260,000,000 plus 40% of the
<PAGE>
18
increase in Consolidated Net Worth of the Trust from April 1, 1994), and (B) in
the case of any refinancing of Nonrecourse Indebtedness, such new Indebtedness
is Nonrecourse Indebtedness;
(v) Indebtedness which, together with any other outstanding
Indebtedness incurred pursuant to clause (vi) of the definition of
"Permitted Indebtedness", has an aggregate principal amount outstanding at
any one time not in excess of the sum of $70,000,000 PLUS 2% of the
increase in Consolidated Net Worth of the Trust from April 1, 1994;
(vi) Nonrecourse Indebtedness which, together with any other
outstanding Indebtedness incurred pursuant to clause (v) above and clause
(vi) of the definition of "Permitted Indebtedness", has an aggregate
principal amount outstanding at any one time not in excess of the sum of
$260,000,000 PLUS 40% of the increase in Consolidated Net Worth of the
Trust from April 1, 1994; and
(vii) Indebtedness of any Subsidiary of the Trust to the Trust, to
the extent permitted under Section 1011, except that any transfer of any
such Indebtedness by the Trust shall be deemed to be an incurrence of
Indebtedness.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"PIK Preferred Stock" means any and all payment-in-kind Preferred
Stock issued in lieu of cash dividends on the 13% Preferred Stock or in lieu of
cash dividends on such payment-in-kind Preferred Stock.
"Pledged Bank Stock" has the meaning specified in Section 1201(a).
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for a mutilated
security or in lieu of a lost, destroyed or stolen Security shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Security.
"Preferred Stock" means, with respect to any Person, any Capital Stock
of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over
Capital Stock of any other class in such Person.
"Private Placement Legend" means the legend initially set forth on the
Securities in the form set forth in Section 202(a)(i).
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19
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Redeemable Capital Stock.
"Rating Agencies" means (i) S&P, and (ii) Moody's or (iii) if S&P or
Moody's or both shall not make a rating of the Securities publicly available, a
nationally recognized securities rating agency or agencies, as the case may be,
selected by the Trust, which shall be substituted for S&P or Moody's or both, as
the case may be.
"Rating Category" means (i) with respect to S&P any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's any of the following categories: Ba, B, Caa, Ca, C and D
(or equivalent successor categories); and (iii) the equivalent of any such
category of S&P or Moody's used by another Rating Agency. In determining
whether the rating of the Notes has decreased by one or more gradations within
Rating Categories, + and - for S&P, 1,2 and 3 for Moody's, or the equivalent
gradations for another Rating Agency shall be taken into account (e.g., with
respect to S&P, a decline in rating from BB+ to BB, as well as from BB- to B+,
will constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of
(i) a Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by the Trust to effect a Change of Control.
"Rating Decline" means the occurrence of the following on, or within
90 days after, the date of public notice of the occurrence of a Change of
Control or of the intention by the Trust to effect a Change of Control (which
period shall be extended so long as the rating of the Securities is under
publicly announced consideration for possible downgrade by any of the Rating
Agencies): (a) in the event the Securities are rated by either Moody's or S&P
on the Rating Date as Investment Grade, the rating of the Securities by both
Rating Agencies shall be below Investment Grade, or (b) in the event the
Securities are rated below Investment Grade by both Rating Agencies on the
Rating Date, the rating of the Securities by either Rating Agency shall be
decreased by one or more gradations (including gradations within Rating
Categories as well as between Rating Categories).
"Real Estate Property" means (i) real property, (ii) a building or
group of related buildings or (iii) real property upon which is located a
building or group of related buildings.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed prior to any Stated Maturity of the
principal of the Securities or is redeemable at the option of the holder thereof
at any time prior to any such Stated Maturity of principal, or is
<PAGE>
20
convertible into or exchangeable for debt securities at any time prior to any
such Stated Maturity of principal at the option of the holder thereof.
"Redemption Date", when used with respect to any Security to be
redeemed, in whole or in part, means the date fixed for such redemption by or
pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, in whole or in part, means the price at which such Security (or
portion thereof) is to be redeemed pursuant to this Indenture.
"Registration Rights Agreement" means the agreement between the Trust
and the Initial Purchasers, dated as of the Closing Date.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the September 15 or March 15 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act.
"Regulatory Capital Requirements" means the minimum amount of capital
required (i) for the Bank to meet each capital ratio necessary for the Bank to
be classified as an "adequately capitalized" savings association pursuant to 12
U.S.C. Section 1831o and 12 C.F.R. Section 565 (and any amendment to either
thereof) or any successor law or regulation and (ii) to meet each of the
industry-wide regulatory capital requirements applicable to the Bank pursuant to
12 U.S.C. Section 1464(t) and 12 C.F.R. Section 567 (and any amendment to either
thereof) or any successor law or regulation (but excluding any higher individual
minimum capital requirement imposed on the Bank pursuant to 12 U.S.C. Section
1464(s) and 12 C.F.R. Section 567.3 (and any amendment to either thereof) or any
successor law or regulation).
"Reimbursement Agreement" means the Reimbursement Agreement dated
August 26, 1993 among Saul Holdings Partnership, the Trust and certain of its
Subsidiaries and affiliates, as such agreement may be amended or supplemented;
PROVIDED that the aggregate amount of the contingent reimbursement obligations
assumed by the Trust and its Subsidiaries outstanding at any time shall not
exceed the aggregate amount thereof at the date of this Indenture.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee
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21
customarily performing functions similar to those performed by any of the above-
designated officers, and also means, with respect to a particular corporate
trust matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Retail Notes" means the unsecured notes of the Trust sold from time
to time at varying interest rates with maturities of one to ten years.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Corporation and its successors.
"Sale Deficit Amount" has the meaning specified in Section 1203(e).
"Saul Holdings Partnership" means Saul Holdings Limited Partnership, a
Maryland limited partnership.
"Secured Obligations" has the meaning specified in Section 1202.
"Securities" has the meaning stated in the first recital of this
Indenture and more particularly means any Securities authenticated and delivered
under this Indenture. For all purposes of this Indenture, the term "Securities"
shall include any Exchange Securities to be issued and exchanged for any Initial
Securities pursuant to the Registration Rights Agreement and this Indenture and,
for purposes of this Indenture, all Initial Securities and Exchange Securities
shall vote together as one series of Securities under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Securitization Entity" means any pooling arrangement or entity
(except for any entity in corporate or partnership form) formed or originated
for the purpose of holding, and issuing securities representing interests in,
one or more pools of mortgages, leases, credit card receivables, home equity
loan receivables, automobile loans, leases or installment sales contracts, other
consumer receivables or other financial assets of the Bank or any Subsidiary and
shall include, without limitation, any grantor trust, owner trust or real estate
mortgage investment conduit.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Single Asset Subsidiary" means any Wholly Owned Subsidiary of the
Trust that owns no more than one Real Estate Property and owns no Investments in
any other Person, other than the Trust.
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22
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 309.
"Stated Maturity", when used with respect to any Indebtedness
(including, without limitation, the Securities) means the dates specified in the
instrument governing such Indebtedness as the fixed dates on which any principal
amount of such Indebtedness is due and payable (including, without limitation,
by reason of any required redemption, purchase or sinking fund payment) and,
when used with respect to any installment of interest on Indebtedness, means the
date on which such installment is due and payable.
"Subordinated Indebtedness" means any Indebtedness of the Trust
expressly, by the terms of the instrument creating or evidencing such
Indebtedness, subordinated in right of payment to the Securities.
"Subsidiary", with respect to any Person, means any other Person a
majority of the equity ownership or a majority of the Voting Stock of which is
at the time owned, directly or indirectly, by such Person, by one or more
Subsidiaries of such Person, or by such Person and one or more Subsidiaries of
such Person.
"Surviving Entity" has the meaning set forth in Section 801.
"Tax Sharing Agreement" means (i) the Tax Sharing Agreement dated
June 28, 1990, as amended, between the Trust and other members of the affiliated
group of corporations joining with the Trust in the filing of a consolidated
federal income tax return (the "Affiliated Group"), as such Tax Sharing
Agreement may be further amended or modified from time to time, PROVIDED that
(A) such further amendments or modifications reflect only the addition or
deletion of parties to such Tax Sharing Agreement, legislative, judicial or
administrative changes in the provisions, rules, application or effect of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated under the Code (the "Regulations") or applicable state law, or
amendments or modifications, requested, required or approved by the OTS and (B)
any such further modification or amendment is approved by the OTS, to the extent
such approval is required by the rules and regulations of the OTS, and (ii) any
other tax sharing agreement to which the Trust or any Consolidated Tax
Subsidiaries may become a party, PROVIDED that such other tax sharing agreement
(A) consistently reflects the applicable tax liabilities of, and the benefit of
the use of losses, deductions, credits and other tax attributes by, the Trust
and the other members of the Affiliated Group pursuant to the Code, the
Regulations and applicable state law (except as otherwise may be requested,
required or approved by the OTS or required for compliance with any guidelines,
orders or other authority issued by the OTS) and (B) is approved by the OTS, to
the extent such approval is required by the rules and regulations of the OTS,
and PROVIDED FURTHER that the Trust shall have received an opinion of
independent counsel to the Trust or of a nationally recognized accounting firm
to the effect that such other tax sharing agreement satisfies the condition in
subclause (A) of the first proviso of this clause (ii); and
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23
that such other tax sharing agreement is not materially less beneficial to the
Trust than the tax sharing agreement described in clause (i).
"13% Preferred Stock" means the 3,000,000 shares of the 13%
Noncumulative Perpetual Preferred Stock, Series A of the Bank.
"Trust" means the Person named as the "Trust" in the first paragraph
of this Indenture, until a successor Person shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trust" shall mean
such successor Person.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939
as in force at the date as of which this Indenture was executed, except as
provided in Section 905.
"Trust Nonrecourse Indebtedness" means Indebtedness as to which,
subject to exceptions for fraud and certain environmental violations, (i) the
sole recourse for collection of principal, interest and premium with respect to
such Indebtedness is against the specific property or assets identified in the
instruments evidencing or securing such Indebtedness, (ii) no other property or
assets may be realized upon in collection of principal, interest or premium of
such Indebtedness, (iii) the Trust does not provide credit support and is not
directly or indirectly liable for such Indebtedness and (iv) no default with
respect to such Indebtedness would permit (upon notice, lapse of time or both)
any holder of other Indebtedness of the Trust or any Subsidiary of the Trust to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Trust Request" or "Trust Order" means a written request or order
signed in the name of the Trust by its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Uniform Commercial Code" means the Uniform Commercial Code in any
applicable jurisdiction as in effect from time to time.
"U.S. Government Obligations" has the meaning specified in Section
1304.
"U.S. Government Securities" means any evidence of Indebtedness with
an initial maturity of 180 days or less issued by the United States of America
and in which an interest may be acquired by book-entry transfer pursuant to the
regulations of the U.S. Department of the Treasury and the rules and procedures
of the Federal Reserve System for U.S. Treasury securities.
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24
"Vice President", when used with respect to the Trust or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
"Voting Stock" means Capital Stock of the class or classes of which
the holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at the
time Capital Stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency) or (ii) in respect of the
Trust, the general voting power under ordinary circumstances to elect the Board
of Trustees or other governing board of the Trust.
"Wholly Owned Subsidiary" means a Subsidiary of the Trust all the
outstanding Capital Stock (other than directors' qualifying shares) of which is
owned by the Trust, by one or more other Wholly Owned Subsidiaries, or by the
Trust and one or more other Wholly Owned Subsidiaries.
SECTION 102. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture. The following Trust Indenture Act terms used in this Indenture have
the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Holder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture securities means the Trust or any other
obligor on the Securities.
All other Trust Indenture Act terms used in this Indenture that are
defined by the Trust Indenture Act, defined by reference in the Trust Indenture
Act to another statute or defined by a rule of the Commission and not otherwise
defined herein shall have the meanings assigned to them therein.
SECTION 103. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Trust to the Trustee to take
any action under any provision of this Indenture, the Trust shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture
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25
(including any covenant compliance with which constitutes a condition precedent)
relating to the proposed action have been complied with and an Opinion of
Counsel stating that in the opinion of such counsel all such conditions
precedent, if any, have been complied with, except that in the case of any such
application or request as to which the furnishing of one or both of such
documents is specifically required by any provision of this Indenture relating
to such particular application or request, no additional certificate or opinion
need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant to
Section 1008(a)) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 104. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Trust may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Trust stating that the
information with respect to such factual matters is in the possession of the
Trust, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
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26
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 105. ACTS OF HOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Trust. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Trust, if made in the
manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The principal amount and serial numbers of Securities held by
any Person, and the date of holding the same, shall be proved by the Security
Register.
(d) If the Trust shall solicit from the Holders of Securities any
request, demand, authorization, direction, notice, consent, waiver or other Act,
the Trust may, at its option, by or pursuant to Board Resolution, fix in advance
a record date for the determination of Holders entitled to give such request,
demand, authorization, direction, notice, consent, waiver or other Act, but the
Trust shall have no obligation to do so. Notwithstanding TIA Section 316(c),
such record date shall be the record date specified in or pursuant to such Board
Resolution, which shall be a date not earlier than the date 30 days prior to the
first solicitation of Holders generally in connection therewith and not later
than the date such solicitation is completed. If such a record date is fixed,
such request, demand, authorization, direction, notice, consent, waiver or other
Act may be given before or after such record date, but only the Holders of
record at the close of business on such record date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of Outstanding Securities have authorized or agreed or consented to
such
<PAGE>
27
request, demand, authorization, direction, notice, consent, waiver or other Act,
and for that purpose the Outstanding Securities shall be computed as of such
record date; PROVIDED that no such authorization, agreement or consent by the
Holders on such record date shall be deemed effective unless it shall become
effective pursuant to the provisions of this Indenture not later than eleven
months after the record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Trust in reliance thereon, whether or not notation of such action is made upon
such Security.
SECTION 106. NOTICES, ETC., TO TRUSTEE AND TRUST.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Trust shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office, Attention: Corporate
Trust Division, Structured Finance, or
(2) the Trust by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if
in writing and mailed, first-class postage prepaid, or delivered by
recognized courier to the Trust addressed to it at the address of its
principal office specified in the first paragraph of this Indenture, or at
any other address previously furnished in writing to the Trustee by the
Trust.
SECTION 107. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice of any event to Holders by
the Trust or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder affected by such event, at his address as it
appears in the Security Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice. In
any case where notice to Holders is given by mail, neither the failure to mail
such notice, nor any defect in any notice so mailed, to any particular Holder
shall affect the sufficiency of such notice with respect to other Holders. Any
notice mailed to a Holder in the manner herein prescribed shall be conclusively
deemed to have been received by such Holder, whether or not such Holder actually
receives such notice. Where this Indenture provides for notice in any manner,
such notice may be waived in writing by the Person entitled to receive such
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28
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
In case by reason of the suspension of or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice is required to be given pursuant
to any provision of this Indenture, then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.
SECTION 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 109. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Trust shall bind
its successors and assigns, whether so expressed or not.
SECTION 110. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto, any Paying Agent, any
Securities Registrar and their successors hereunder and the Holders any benefit
or any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. GOVERNING LAW.
This Indenture and the Securities shall be governed by and construed
in accordance with the law of the State of New York. Upon the issuance of the
Exchange Securities or the effectiveness of the Registration Statement filed in
connection with the Exchange Offer, this Indenture will be subject to the
provisions of the Trust Indenture Act of 1939, as amended, that are required to
be part of this Indenture and shall, to the extent applicable, be governed by
such provisions.
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29
SECTION 113. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity or Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest or principal (and premium, if any) need not be made on such
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the Interest Payment Date, Redemption Date or sinking
fund payment date, or at the Stated Maturity or Maturity; PROVIDED that no
interest shall accrue on such payment for the period from and after such
Interest Payment Date, Redemption Date, Stated Maturity or Maturity, as the case
may be, if such payment is made in accordance with this Indenture on the next
succeeding Business Day.
SECTION 114. EXECUTION OF AGREEMENT BY TRUST.
The name "B.F. Saul Real Estate Investment Trust" is the designation
of the trustees of the Trust under a Declaration of Trust. All Persons dealing
with the Trust must look solely to the property and assets of the Trust for the
enforcement of any claims against the Trust and neither the trustees,
shareholders, officers, employees or agents of the Trust in their individual
capacities assume any personal liability for the obligations of the Trust and
the respective properties of the trustees, shareholders, officers, employees and
agents of the Trust in their individual capacities shall not be subject to the
claims of any such Persons with respect to any such obligations.
ARTICLE TWO
SECURITY FORMS
SECTION 201. FORMS GENERALLY.
The Initial Securities shall be known as the "11 5/8% Senior Secured
Notes due 2002" and the Exchange Securities shall be known as the "11 5/8%
Series B Senior Secured Notes due 2002", in each case, of the Trust. The
Securities and the Trustee's certificate of authentication shall be in
substantially the form annexed hereto as Exhibit A. The Securities may have
such appropriate insertions, omissions, substitutions and other variations as
are required or permitted by the Indenture and may have such letters, notations
or other marks of identification and such notations, legends or endorsements as
may be required by law, or to comply with the rules on any securities exchange
or agreements to which the Trust is subject or as may, consistently herewith, be
determined by the officers executing such Securities, as evidenced by their
execution of the Securities. Any portion of the text of any Security may be set
forth on the reverse thereof, with an appropriate reference thereto on the face
of the Security. The Trust shall approve the form of the Securities and any
notation, legend or endorsement on the Securities. Each Security shall be dated
the date of its authentication.
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30
The terms and provisions contained in the form of the Securities
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Indenture. To the extent applicable, the Trust and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Initial Securities offered and sold in reliance on Rule 144A shall be
issued initially in the form of one or more permanent global Securities
substantially in the form set forth in Exhibit A (the "U.S. Global Security")
deposited with the Trustee, as custodian for the Depositary, duly executed by
the Trust and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of the U.S. Global Security may from time to time be
increased or decreased by adjustments made on the records of the Trustee,
as custodian for the Depositary or its nominee, as hereinafter provided.
Initial Securities offered and sold in reliance on Regulation S shall
be issued initially in the form of temporary certificated Securities in
registered form substantially in the form set forth in Exhibit A (the
"Temporary Offshore Physical Securities"). The Temporary Offshore Physical
Securities will be registered in the name of, and held by, a temporary
certificate holder designated by Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated until the later of the completion of the
distribution of the Initial Securities and the termination of the "restricted
period" (as defined in Regulation S) with respect to the offer and sale of the
Initial Securities (the "Offshore Securities Exchange Date"). At any time
following the Offshore Securities Exchange Date, upon receipt by the Trustee and
the Trust of a certificate substantially in the form of Exhibit B hereto, the
Trust shall execute, and the Trustee shall authenticate and deliver, one or more
permanent certificated Securities in registered form substantially in the form
set forth in Exhibit A (the "Permanent Offshore Physical Securities"), in
exchange for the surrender of Temporary Offshore Physical Securities of like
tenor and amount.
Initial Securities offered and sold other than as described in the
preceding two paragraphs shall be issued in the form of permanent certificated
Securities in registered form in substantially the form set forth in Exhibit A
(the "U.S. Physical Securities").
The Temporary Offshore Physical Securities, Permanent Offshore
Physical Securities and U.S. Physical Securities are sometimes collectively
herein referred to as the "Physical Securities".
The definitive Securities shall be printed, lithographed or engraved
on steel-engraved borders or may be produced in any other manner, all as
determined by the officers of the Trust executing such Securities, as evidenced
by their execution of such Securities.
SECTION 202. RESTRICTIVE LEGENDS.
(a) Unless and until an Initial Security is exchanged for an Exchange
Security in connection with an effective Registration Statement pursuant to the
Registration Rights
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31
Agreement, each such U.S. Global Security, Temporary Offshore Physical Security
and each U.S. Physical Security shall bear the following legend on the face
thereof:
(i) THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF
THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS
THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF
AND THE LAST DATE ON WHICH THE TRUST OR ANY AFFILIATE OF THE
TRUST WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
THIS SECURITY) ONLY (A) TO THE ISSUER OF THIS SECURITY, (B)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE
SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D)
PURSUANT TO OFFERS AND SALE TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (a)(2),
(a)(3) OR (a)(7) OF RULE 501 UNDER THE SECURITIES ACT WITH
TOTAL ASSETS IN EXCESS OF $25 MILLION THAT IS ACQUIRING THIS
SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL "ACCREDITED INVESTOR", FOR INVESTMENT PURPOSES
AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION
WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR
(F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE
TRUST'S AND THE
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32
TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER (i) PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR
OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) IN
EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE
TRUSTEE.
(ii) THE SECURITY REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT BY AND BETWEEN
THE TRUST AND THE HOLDERS NAMED THEREIN. THE TRUST WILL
FURNISH A COPY OF SUCH AGREEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE TRUST AT
ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
(b) Each U.S. Global Security, whether or not an Initial Security,
shall also bear the following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE TRUST OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO
CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE
OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
<PAGE>
33
MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION
307 OF THE INDENTURE.
ARTICLE THREE
THE SECURITIES
SECTION 301. TITLE AND TERMS.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $175,000,000,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Section 303,
304, 305, 306, 307, 308, 906, or 1108.
The Initial Securities shall be known and designated as the "11 5/8%
Senior Secured Notes due 2002" of the Trust. The Stated Maturity of the
Securities shall be April 1, 2002, and they shall bear interest at the rate of
11 5/8% per annum from March 30, 1994, or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, payable on October 1,
1994 and semiannually thereafter on each April 1 and October 1 in each year and
at said Stated Maturity, until the principal thereof is paid or duly provided
for.
The principal of (and premium, if any, on) and interest on the
Securities shall be payable at the office or agency of the Trust maintained for
such purpose in The City of New York, or at such other office or agency of the
Trust as may be maintained for such purpose; PROVIDED, HOWEVER, that, at the
option of the Trust, interest may be paid by check mailed to addresses of the
Persons entitled thereto as such addresses shall appear on the Security
Register; PROVIDED FURTHER that, in the case of any Holder of at least
$1,000,000 aggregate principal amount of Securities, any such Holder may elect,
such election to be made in writing and received by the Security Registrar prior
to the Regular Record Date and to include applicable account information (which
account shall be located in the United States), such payment to be made by
transfer to the account specified in the election notice.
The Securities shall be redeemable as provided in Article Eleven.
SECTION 302. DENOMINATIONS.
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
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SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Securities shall be executed on behalf of the Trust by its
Chairman or a Vice Chairman, its President or a Vice President, under its
corporate seal reproduced thereon and attested by its Secretary or an Assistant
Secretary. The signature of any of these officers on the Securities may be
manual or facsimile signatures of the present or any future such authorized
officer and may be imprinted or otherwise reproduced on the Securities.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Trust shall bind the Trust,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Trust may deliver Initial Securities executed by the Trust
to the Trustee for authentication, together with a Trust Order for the
authentication and delivery of such Initial Securities, and the Trustee in
accordance with such Trust Order shall authenticate and deliver for original
issue Initial Securities in the aggregate principal amount of $175,000,000. On
a Trust Order, the Trustee or an authenticating agent shall authenticate for
original issue Exchange Securities in an aggregate principal amount not to
exceed $175,000,000; PROVIDED that such Exchange Securities shall be issuable
only upon the valid surrender for cancellation of Initial Securities of a like
aggregate principal amount in accordance with an Exchange Offer (as defined in
the Registration Rights Agreement) pursuant to the Registration Rights
Agreement. The Officers' Certificate and Opinion of Counsel provided for in
Section 103 shall not be applicable to the initial Trust Order to authenticate
and deliver the Initial Securities to the Initial Purchasers. In each case
thereafter, the Trustee shall be entitled to receive an Officers' Certificate
and an Opinion of Counsel of the Trust in connection with such authentication of
Securities as provided in Section 103. Such Trust Order shall specify the
amount of Securities to be authenticated and the date on which the original
issue of Initial Securities or Exchange Securities is to be authenticated.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for in Exhibit
A duly executed by the Trustee by manual signature of an authorized signatory,
and such certificate upon any Security shall be conclusive evidence, and the
only evidence, that such Security has been duly authenticated and delivered
hereunder and is entitled to the benefits of this Indenture.
In case the Trust, pursuant to Article Eight, shall be consolidated or
merged with or into any other Person or shall convey, transfer, lease or
otherwise dispose of its properties and assets substantially as an entirety to
any Person, and the successor Person resulting from such consolidation, or
surviving such merger, or into which the Trust shall
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have been merged, or the Person which shall have received a conveyance,
transfer, lease or other disposition as aforesaid, shall have executed an
indenture supplemental hereto with the Trustee pursuant to Article Eight, any of
the Securities authenticated or delivered prior to such consolidation, merger,
conveyance, transfer, lease or other disposition may, from time to time, at the
request of the successor Person, be exchanged for other Securities executed in
the name of the successor Person with such changes in phraseology and form as
may be appropriate, but otherwise in substance of like tenor as the Securities
surrendered for such exchange and of like principal amount; and the Trustee,
upon Trust Request of the successor Person, shall authenticate and deliver
Securities as specified in such request for the purpose of such exchange. If
Securities shall at any time be authenticated and delivered in any new name of a
successor Person pursuant to this Section in exchange or substitution for or
upon registration of transfer of any Securities, such successor Person, at the
option of the Holders but without expense to them, shall provide for the
exchange of all Securities at the time Outstanding for Securities authenticated
and delivered in such new name.
SECTION 304. TEMPORARY SECURITIES.
Pending the preparation of definitive Securities, the Trust may
execute, and upon Trust Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as conclusively evidenced
by their execution of such Securities.
If temporary Securities are issued, the Trust will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Trust designated for such purpose pursuant to Section 1002,
without charge to the Holder. Upon surrender for cancellation of any one or
more temporary Securities, the Trust shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations. Until so exchanged, the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
SECTION 305. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.
The Trust shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
referred to as the "Security Register") in which, subject to such reasonable
regulations as it may prescribe, the Trust shall provide for the registration of
Securities and of transfers of Securities. The Security Register shall be in
written form or any other form capable of being converted into written form
within a reasonable time. At all reasonable times, the Security Register shall
be open to inspection by
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the Trustee. The Trustee is hereby initially appointed as security registrar
(the "Security Registrar") for the purpose of registering Securities and
transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security at the
office or agency of the Trust designated pursuant to Section 1002, the Trust
shall execute, and the Trustee shall authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Securities of any
authorized denomination or denominations of a like aggregate principal amount.
Furthermore, any Holder of the U.S. Global Security shall, by
acceptance of such Global Security, agree that transfers of beneficial interest
in such Global Security may be effected only through a book-entry system
maintained by the Depositary for such Global Security), and that ownership of a
beneficial interest in the Security shall be required to be reflected in a book
entry.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denomination and of a like aggregate principal
amount, upon surrender of the Securities to be exchanged at such office or
agency. Whenever any Securities are so surrendered for exchange (including an
exchange of Initial Securities for Exchange Securities), the Trust shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive; PROVIDED that no exchange
of Initial Securities for Exchange Securities shall occur until a Registration
Statement shall have been declared effective by the Commission and that the
Securities to be exchanged for the Exchange Securities shall be cancelled by the
Trustee.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Trust, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Trust or the Security Registrar) be
duly endorsed, or be accompanied by a written instrument of transfer, in form
satisfactory to the Trust and the Security Registrar, duly executed by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange or redemption of Securities, but the Trust may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 303, 304, 906, or 1108 not involving any
transfer.
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The Trust shall not be required (i) to issue, register the transfer of
or exchange any Security during a period beginning at the opening of business 15
days before the selection of Securities to be redeemed under Section 1104 and
ending at the close of business on the day of such mailing of the relevant
notice of redemption, or (ii) to register the transfer of or exchange any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
SECTION 306. BOOK-ENTRY PROVISIONS FOR U.S. GLOBAL SECURITY.
(a) The U.S. Global Security initially shall (i) be registered in
the name of the Depositary for such Global Security or the nominee of such
Depositary, (ii) be delivered to the Trustee as custodian for such Depositary
and (iii) bear legends as set forth in Section 202.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any U.S. Global Security
held on their behalf by the Depositary, or the Trustee as its custodian, or
under the U.S. Global Security, and the Depositary may be treated by the Trust,
the Trustee and any agent of the Trust or the Trustee as the absolute owner of
such U.S. Global Security for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Trust, the Trustee or any agent of
the Trust or the Trustee, from giving effect to any written certification, proxy
or other authorization furnished by the Depositary or shall impair, as between
the Depositary and its Agent Members, the operation of customary practices
governing the exercise of the rights of a holder of any Security.
(b) Transfers of the U.S. Global Security shall be limited to
transfers of such U.S. Global Security in whole, but not in part, to the
Depositary, its successors or their respective nominees. Interests of
beneficial owners in the U.S. Global Security may be transferred in accordance
with the rules and procedures of the Depositary and the provisions of
Section 307. Beneficial owners may obtain U.S. Physical Securities in exchange
for their beneficial interests in the U.S. Global Security upon request in
accordance with the Depositary's and the Registrar's procedures. In addition,
U.S. Physical Securities shall be transferred to all beneficial owners in
exchange for their beneficial interests in the U.S. Global Security if (i) the
Depositary notifies the Trust that it is unwilling or unable to continue as
Depositary for the U.S. Global Security and a successor depositary is not
appointed by the Trust within 90 days of such notice or (ii) an Event of Default
has occurred and is continuing and the Registrar has received a request from the
Depositary to transfer U.S. Physical Securities to all beneficial owners.
(c) In connection with any transfer of a portion of the beneficial
interest in the U.S. Global Security to beneficial owners pursuant to subsection
(b) of this Section, the Registrar shall reflect on its books and records the
date and a decrease in the principal amount of the U.S. Global Security in an
amount equal to the principal amount of the beneficial interest in the U.S.
Global Security to be transferred, and the Trust shall execute,
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and the Trustee shall authenticate and deliver, one or more U.S. Physical
Securities of like tenor and amount.
(d) In connection with the transfer of the entire U.S. Global
Security to beneficial owners pursuant to subsection (b) of this Section, the
U.S. Global Security shall be deemed to be surrendered to the Trustee for
cancellation, and the Trust shall execute, and the Trustee shall authenticate
and deliver, to each beneficial owner identified by the Depositary in exchange
for its beneficial interest in the U.S. Global Security, an equal aggregate
principal amount of U.S. Physical Securities of authorized denominations.
(e) Any U.S. Physical Security delivered in exchange for an
interest in the U.S. Global Security pursuant to subsection (b) or subsection
(c) of this Section shall, except as otherwise provided by paragraph (a)(i)(x)
and paragraph (f) of Section 307, bear the applicable legend regarding transfer
restrictions applicable to the U.S. Physical Security set forth in Section 202.
(f) The registered holder of the U.S. Global Security may grant
proxies and otherwise authorize any person, including Agent Members and persons
that may hold interests through Agent Members, to take any action which a Holder
is entitled to take under this Indenture or the Securities.
SECTION 307. SPECIAL TRANSFER PROVISIONS.
Unless and until (i) an Initial Security is sold under an effective
Registration Statement, or (ii) an Initial Security is exchanged for an Exchange
Security in connection with an effective Registration Statement, in each case
pursuant to the Registration Rights Agreement, the following provisions shall
apply:
(a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The
following provisions shall apply with respect to the registration of any
proposed transfer of an Initial Security to any institutional "accredited
investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D
Under the Securities Act) which is not a QIB (excluding Non-U.S. Persons):
(i) The Registrar shall register the transfer of any Initial
Security, whether or not such Initial Security bears the Private
Placement Legend, if (x) the requested transfer is at least three
years after the later of the original issue date of the Initial
Securities and the last date on which such Security was held by an
Affiliate of the Trust or by the Trust or (y) the proposed transferee
has delivered to the Registrar a certificate substantially in the form
of Exhibit C hereto.
(ii) If the proposed transferor is an Agent Member holding a
beneficial interest in the U.S. Global Security, upon receipt by the
Registrar of
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(x) the documents, if any, required by paragraph (i) and
(y) instructions given in accordance with the Depositary's and the
Registrar's procedures therefor, the Registrar shall reflect on its
books and records the date and a decrease in the principal amount of
the U.S. Global Security in an amount equal to the principal amount of
the beneficial interest in the U.S. Global Security to be transferred,
and the Trust shall execute, and the Trustee shall authenticate and
deliver, one or more U.S. Physical Certificates of like tenor and
amount.
(b) TRANSFERS TO QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of an Initial Security
to a QIB (excluding Non-U.S. Persons):
(i) If the Security to be transferred consists of U.S.
Physical Securities, Temporary Offshore Global Securities or Permanent
Offshore Physical Securities, the Registrar shall register the
transfer if such transfer is being made by a proposed transferor who
has checked the box provided for on the form of Initial Security
stating, or has otherwise advised the Trust and the Registrar in
writing, that the sale has been made in compliance with the provisions
of Rule 144A to a transferee who has signed the certification provided
for on the form of Initial Security stating, or has otherwise advised
the Trust and the Registrar in writing, that it is purchasing the
Initial Security for its own account or an account with respect to
which it exercises sole investment discretion and that it, or the
person on whose behalf it is acting with respect to any such account,
is a QIB within the meaning of Rule 144A, and is aware that the sale
to it is being made in reliance on Rule 144A and acknowledges that it
has received such information regarding the Trust as it has requested
pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon
its foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, and the
Initial Security to be transferred consists of U.S. Physical
Securities, Temporary Offshore Physical Securities or Permanent
Offshore Physical Securities, upon receipt by the Registrar of
instructions given in accordance with the Depositary's and the
Registrar's procedures therefor, the Registrar shall reflect on its
books and records the date and an increase in the principal amount of
the U.S. Global Security in an amount equal to the principal amount of
the U.S. Physical Securities or Permanent Offshore Physical
Securities, as the case may be, to be transferred, and the Trustee
shall cancel the Physical Security so transferred.
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(c) TRANSFERS BY NON-U.S. PERSONS ON OR PRIOR TO MAY 9, 1994. The
following provisions shall apply with respect to registration of any
proposed transfer of an Initial Security by a Non-U.S. Person on or prior
to May 9, 1994:
(i) The Registrar shall register the transfer of any Initial
Security (x) if the proposed transferee is a Non-U.S. Person and the
proposed transferor has delivered to the Registrar a certificate
substantially in the form of Exhibit D hereto or (y) if the proposed
transferee is a QIB and the proposed transferor has checked the box
provided for on the form of Initial Security stating, or has otherwise
advised the Trust and the Registrar in writing, that the sale has been
made in compliance with the provisions of Rule 144A to a transferee
who has signed the certification provided for on the form of Initial
Security stating, or has otherwise advised the Trust and the Registrar
in writing, that it is purchasing the Initial Security for its own
account or an account with respect to which it exercises sole
investment discretion and that it, or the person on whose behalf it is
acting with respect to any such account, is a QIB within the meaning
of Rule 144A, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such
information regarding the Trust as it has requested pursuant to
Rule 144A or has determined not to request such information and that
it is aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A. Unless clause (ii) below is applicable, the
Trust shall execute, and the Trustee shall authenticate and deliver,
one or more Temporary Offshore Physical Securities of like tenor and
amount.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Registrar of instructions given in accordance with the
Depositary's and the Registrar's procedures therefor, the Registrar
shall reflect on its books and records the date and an increase in the
principal amount of the U.S. Global Security in an amount equal to the
principal amount of the Temporary Offshore Physical Security to be
transferred, and the Trustee shall cancel the Temporary Offshore
Physical Security so transferred.
(d) TRANSFERS BY NON-U.S. PERSONS ON OR AFTER MAY 9, 1994. The
following provisions shall apply with respect to any transfer of an Initial
Security by a Non-U.S. Person on or after May 9, 1994:
(i) (x) If the Initial Security to be transferred is a
Permanent Offshore Physical Security, the Registrar shall register
such transfer, (y) if the Initial Security to be transferred is a
Temporary Offshore Physical Security, upon receipt of a certificate
substantially in the form of Exhibit D from the proposed transferor,
the Registrar shall register such transfer and (z) in the case of
either clause (x) or (y), unless clause (ii) below is applicable, the
Trust shall execute, and the Trustee shall
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authenticate and deliver, one or more Permanent Offshore Physical
Securities of like tenor and amount.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Registrar of instructions given in accordance with the
Depositary's and the Registrar's procedures therefor, the Registrar
shall reflect on its books and records the date and an increase in
the principal amount of the U.S. Global Security in an amount equal
to the principal amount of the Temporary Offshore Physical Security
or Permanent Offshore Physical Security to be transferred, and the
Trustee shall cancel the Physical Security so transferred.
(e) TRANSFERS TO NON-U.S. PERSONS AT ANY TIME. The following
provisions shall apply with respect to any transfer of an Initial Security
to a Non-U.S. Person:
(i) Prior to May 9, 1994, the Registrar shall register any
proposed transfer of an Initial Security to a Non-U.S. Person upon
receipt of a certificate substantially in the form of Exhibit D hereto
from the proposed transferor and the Trust shall execute, and the
Trustee shall authenticate and deliver, one or more Temporary Offshore
Physical Securities of like tenor and amount.
(ii) On and after May 9, 1994, the Registrar shall register
any proposed transfer to any Non-U.S. Person (w) if the Initial
Security to be transferred is a Permanent Offshore Physical Security,
(x) if the Initial Security to be transferred is a Temporary Offshore
Physical Security, upon receipt of a certificate substantially in the
form of Exhibit D hereto from the proposed transferor, (y) if the
Initial Security to be transferred is a U.S. Physical Security or an
interest in the U.S. Global Security, upon receipt of a certificate
substantially in the form of Exhibit D hereto from the proposed
transferor and (z) in the case of either clause (w), (x) or (y), the
Trust shall execute, and the Trustee shall authenticate and deliver,
one or more Permanent Offshore Physical Securities of like tenor and
amount.
(iii) If the proposed transferor is an Agent Member holding a
beneficial interest in the U.S. Global Security, upon receipt by the
Registrar of (x) the document, if any, required by paragraph (i) or
paragraph (ii) and, as the case may be, (y) instructions in accordance
with the Depositary's and the Registrar's procedures therefor, the
Registrar shall reflect on its books and records the date and a
decrease in the principal amount of the U.S. Global Security in an
amount equal to the principal amount of the beneficial interest in the
U.S. Global Security to be transferred, and if the transfer is made on
or after May 9, 1994, the Trust shall execute, and the Trustee shall
authenticate and deliver, one or more Temporary Offshore Physical
Securities or
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Permanent Offshore Physical Securities, as applicable, of like tenor and
amount.
(f) PRIVATE PLACEMENT LEGEND. Upon the transfer, exchange or
replacement of Securities not bearing the Private Placement Legend, the
Registrar shall deliver Securities that do not bear the Private Placement
Legend. Upon the transfer, exchange or replacement of Securities bearing
the Private Placement Legend, the Registrar shall deliver only Securities
that bear the Private Placement Legend unless either (i) the circumstances
contemplated by the last sentence of the fourth paragraph of Section 201 or
paragraph (a)(i)(x), (d)(i) or (e)(ii) of this Section 307 exist or
(ii) there is delivered to the Registrar an Opinion of Counsel reasonably
satisfactory to the Trust and the Trustee to the effect that neither such
legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act.
(g) GENERAL. By its acceptance of any Security bearing the Private
Placement Legend, each Holder of such a Security acknowledges the
restrictions on transfer of such Security set forth in this Indenture and
in the Private Placement Legend and agrees that it will transfer such
Security only as provided in this Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 306 or this Section 307.
The Trust shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time upon the giving
of reasonable written notice to the Registrar.
SECTION 308. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
If (i) any mutilated Security is surrendered to the Trustee, or (ii)
the Trust and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the Trust
and the Trustee such security or indemnity as may be required by them to save
each of them harmless, then, in the absence of notice to the Trust or the
Trustee that such Security has been acquired by a bona fide purchaser, the Trust
shall execute and upon Trust Order the Trustee shall authenticate and deliver,
in exchange for any such mutilated Security or in lieu of any such destroyed,
lost or stolen Security, a new Security of like tenor and principal amount,
bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Trust in its discretion may,
instead of issuing a new Security, pay such Security.
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Upon the issuance of any new Security under this Section, the Trust
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Trust, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 309. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name such Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest at the
office or agency of the Trust maintained for such purpose pursuant to Section
1002; PROVIDED that payment of interest shall be made by check mailed to the
address of the Person entitled thereto as such address shall appear on the
Security Register; PROVIDED FURTHER that, in the case of any Holder of at least
$1,000,000 aggregate principal amount of Securities, any such Holder may elect,
such election to be made in writing and received by the Security Registrar prior
to the Regular Record Date and to include applicable account information (which
account shall be located in the United States), such payment to be made by
transfer to the account specified in the election notice.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date shall forthwith cease to
be payable to the Holder on the Regular Record Date by virtue of having been
such Holder, and such defaulted interest and (to the extent lawful) interest on
such defaulted interest at the rate borne by the Securities (such defaulted
interest and interest thereon herein collectively called "Defaulted Interest")
may be paid by the Trust, at its election in each case, as provided in clause
(1) or (2) below:
(1) The Trust may elect to make payment of any Defaulted Interest
to the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest, which shall
be fixed in the following manner. The Trust shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on each
Security and the date of the proposed payment, and at the same time the
Trust shall deposit with the Trustee an amount of money equal to the
aggregate
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amount proposed to be paid in respect of such Defaulted Interest or shall
make arrangements satisfactory to the Trustee for such deposit prior to the
date of the proposed payment, such money when deposited to be held in trust
for the benefit of the Persons entitled to such Defaulted Interest as in
this clause provided. Thereupon the Trustee shall fix a Special Record
Date for the payment of such Defaulted Interest which shall be not more
than 15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify the
Trust of such Special Record Date, and in the name and at the expense of
the Trust, shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be given in the manner
provided for in Section 107, not less than 10 days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor having been so given, such Defaulted
Interest shall be paid to the Persons in whose names the Securities (or
their respective Predecessor Securities) are registered at the close of
business on such Special Record Date and shall no longer be payable
pursuant to the following clause (2).
(2) The Trust may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Trust to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
SECTION 310. PERSONS DEEMED OWNERS.
Prior to the due presentment of a Security for registration of
transfer, the Trust, the Trustee and any agent of the Trust or the Trustee may
treat the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of (and premium, if
any, on) and (subject to Sections 305 and 309) interest on such Security and for
all other purposes whatsoever, whether or not such Security be overdue, and none
of the Trust, the Trustee or any agent of the Trust or the Trustee shall be
affected by notice to the contrary.
SECTION 311. CANCELLATION.
All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the
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45
Trustee and shall be promptly cancelled by it. The Trust may at any time
deliver to the Trustee for cancellation any Securities previously authenticated
and delivered hereunder which the Trust may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Securities previously authenticated
hereunder which the Trust has not issued and sold, and all Securities so
delivered shall be promptly cancelled by the Trustee. If the Trust shall so
acquire any of the Securities, however, such acquisition shall not operate as a
redemption or satisfaction of the indebtedness represented by such Securities
unless and until the same are surrendered to the Trustee for cancellation. No
Securities shall be authenticated in lieu of or in exchange for any Securities
cancelled as provided in this Section, except as expressly permitted by this
Indenture. All cancelled Securities held by the Trustee shall be disposed of by
the Trustee in accordance with its customary procedures and certification of
their disposal delivered to the Trust unless by Trust Order the Trust shall
direct that cancelled Securities be returned to it.
SECTION 312. COMPUTATION OF INTEREST.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Trust Request cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of
Securities herein expressly provided for) and the Trustee, at the expense of the
Trust, shall execute proper instruments acknowledging satisfaction and discharge
of this Indenture when
(1) either
(a) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 308 and
(ii) Securities for whose payment money has theretofore been deposited
in trust with the Trustee or any Paying Agent or segregated and held
in trust by the Trust and thereafter repaid to the Trust or discharged
from such trust, as provided in Section 1003) have been delivered to
the Trustee for cancellation; or
(b) all such Securities not theretofore delivered to the
Trustee for cancellation
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46
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the
expense, of the Trust,
and the Trust, in the case of (i), (ii) or (iii) above, has
irrevocably deposited or caused to be deposited with the Trustee as
trust funds in trust for the purpose an amount sufficient to pay and
discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal (and premium,
if any) and interest to the date of such deposit (in the case of
Securities which have become due and payable) or to the final Stated
Maturity or Redemption Date, as the case may be;
(2) the Trust has paid or caused to be paid all other sums payable
hereunder by the Trust; and
(3) the Trust has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Trust to the Trustee under Section 606 and, if money shall
have been deposited with the Trustee pursuant to subclause (b) of clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Trust acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
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47
ARTICLE FIVE
REMEDIES
SECTION 501. EVENTS OF DEFAULT.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) failure by the Trust to pay interest on any Security when due
and payable, if such failure continues for a period of 30 days;
(ii) failure by the Trust to pay the principal of (and premium, if
any, on) any Security when due and payable at Maturity or upon redemption
or acceleration or otherwise;
(iii) failure by the Trust to make or consummate a Change of Control
Offer in accordance with the provisions of Section 1019;
(iv) failure by the Trust to perform or observe any other term,
covenant or agreement contained in the Securities or this Indenture (other
than a default specified in clause (i), (ii) or (iii) above or (ix) below)
for a period of 60 days after written notice of such failure requiring the
Trust to remedy the same shall have been given (x) to the Trust by the
Trustee or (y) to the Trust and the Trustee by the Holders of at least 25%
in aggregate principal amount of the Securities then Outstanding;
(v) default (other than a default on Nonrecourse Indebtedness or on
less than $5 million of Trust Nonrecourse Indebtedness at any one time)
under any instrument or any other obligation (x) representing indebtedness
for borrowed money of the Trust or any of its Subsidiaries, (y)
representing indebtedness evidenced by bonds, notes, debentures or other
similar instruments of the Trust or any of its Subsidiaries or
(z) constituting a guarantee by the Trust or any of its Subsidiaries of
Guaranteed Indebtedness of any other Person representing money borrowed or
any obligation of such other Person evidenced by bonds, notes, debentures
or other similar instruments, which default (a) consists of the failure to
pay an amount aggregating in excess of $10 million if such default
continues for a period of 30 days after written notice of such failure
requiring the Trust to remedy the same shall have been given (A) to the
Trust by the Trustee or (B) to the Trust and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Securities then
Outstanding, or (b) results in the acceleration of such indebtedness or
guarantee in an aggregate principal amount in excess of $10 million;
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(vi) failure by the Bank (x) to comply with any General Capital
Requirement, which failure shall continue for a period of 270 days;
PROVIDED that an Event of Default under this clause (vi) (x) shall not
occur if a capital plan submitted to the OTS by the Bank has been approved
by the OTS prior to the expiration of such 270-day period and, thereafter,
the Bank does not receive written notice from the OTS that the Bank is not
in compliance in any material respect with such capital plan or (y) to
maintain a consolidated total stockholders' equity at least equal to
$250,000,000, which failure shall continue for a period of one year or more
unless as of the expiration of such one-year period, and for so long as the
consolidated total stockholders' equity of the Bank remains below
$250,000,000 after the expiration of such one-year period, the Bank has the
minimum amount of capital required for the Bank to be considered as a "well
capitalized" savings association pursuant to 12 U.S.C. Section 1831o and 12
C.F.R. Section 565 (and any amendment to either thereof) or any successor
law or regulation;
(vii) existence of one or more judgments against the Trust or any of
its Subsidiaries for the payment of money in excess of $10 million, either
individually or in the aggregate, which remain undischarged 60 days after
all rights to review directly such judgment or judgments, whether by appeal
or writ, have been exhausted or have expired;
(viii) any provision of Article Twelve of this Indenture relating to
the Collateral (other than Section 1204, insofar as it relates to
obligations of the Trustee, or 1213(a)) shall cease, for any reason (other
than under the terms of a supplemental indenture entered into pursuant to
Section 982), to be in full force and effect in any material respect, or
the Trust shall so assert in writing; or the Trustee shall cease to have a
first priority perfected security interest, for the benefit of the Trustee
and the Holders, in the Collateral (other than by reason of the release of
any such security interest in accordance with this Indenture) , or any
representation, warranty or certification of the Trust made in or pursuant
to Section 1203 or 1205 shall be false in any material respect as of the
date when made;
(ix) failure by the Trust to perform or observe
(a) any term, covenant or agreement contained in Section
1214(a), to the extent that such failure relates to the creation or
existence of a non-consensual Lien on the Collateral, for a period of
45 days after the Trust shall have knowledge of such failure,
(b) any other term, covenant or agreement contained in Section
1214(a) or any term, covenant or agreement contained in Section
1214(b) or
(c) any other term, covenant or condition contained in Article
Twelve for a period of 30 days after written notice of such failure
requiring
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the Trust to remedy the same shall have been given to the Trust by the
Trustee or to the Trust and the Trustee by the Holders of at least 25%
in aggregate principal amount of the Securities then Outstanding;
(x) the entry of a decree or order by a court having jurisdiction
in the premises adjudging the Trust or any Material Subsidiary a bankrupt
or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Trust or any Material Subsidiary under the Federal Bankruptcy Code or
any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
the Trust or any Material Subsidiary or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period
of 90 consecutive days; or
(xi) the institution by the Trust or any Material Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the consent by it
to the institution of bankruptcy or insolvency proceedings against it, or
the filing by it of a petition or answer or consent seeking reorganization
or relief under the Federal Bankruptcy Code or any other applicable federal
or state law, or the consent by it to the filing of any such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Trust or any Material Subsidiary or of
any substantial part of its property, or the making of an assignment for
the benefit of creditors, or the admission by it in writing of its
inability to pay its debts generally as they become due.
SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing, then and in every
such case the Trustee or the Holders of not less than 25% in principal amount of
the Securities Outstanding may declare the principal amount of all the
Securities to be due and payable immediately, by notice in writing to the Trust
(and to the Trustee if given by the Holders), and upon any such declaration such
principal amount shall become immediately due and payable.
At any time after a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereafter in this Article Five provided, the Holders of a
majority in principal amount of the Outstanding Securities, by written notice to
the Trust and the Trustee, may rescind and annul such declaration and its
consequences if
(1) the Trust has paid or deposited with the Trustee a sum
sufficient to pay,
(A) all overdue interest on all Outstanding Securities,
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(B) all unpaid principal of (and premium, if any, on) any
Outstanding Securities which has become due otherwise than by such
declaration of acceleration, and interest on such unpaid principal at
the rate borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest on overdue interest at the rate borne by the Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default, other than the nonpayment of amounts of
principal of (or premium, if any, on) or interest on Securities which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration
of acceleration in respect of the Securities because an Event of Default
specified in Section 501(v) shall have occurred and be continuing, such
declaration of acceleration shall be automatically annulled if the Indebtedness
that is the subject of such Event of Default has been discharged or the holders
of such Indebtedness have rescinded their declaration of acceleration in respect
of such Indebtedness, and written notice of such discharge or rescission, as the
case may be, shall have been given to the Trustee by the Trust and countersigned
by the holders of such Indebtedness or a trustee, fiduciary or agent for such
holders, within 30 days after such declaration of acceleration in respect of the
Securities, and no other Event of Default has occurred during such 30-day period
which has not been cured or waived during such period.
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Trust covenants that if
(a) default is made in the payment of any installment of interest
on any Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(b) default is made in the payment of the principal of (or premium,
if any, on) any Security at the Maturity thereof,
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the Trust will, upon demand of the Trustee, pay to the Trustee for the benefit
of the Holders of such Securities, the whole amount then due and payable on such
Securities for principal thereof (and premium, if any, thereon) and interest
thereon, and interest on any overdue principal (and premium, if any) and, to the
extent that payment of such interest shall be legally enforceable, upon any
overdue installment of interest, at the rate borne by the Securities, and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Trust fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name, as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Trust or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Trust or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any insolvency, bankruptcy, receivership,
liquidation, conservatorship, arrangement, adjustment, composition or other
judicial proceeding relative to the Trust or any other obligor upon the
Securities or the property of the Trust or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Trust for the payment of overdue principal, premium, if any, or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(i) to file and prove a claim for the whole amount of principal
(and premium, if any) and interest owing and unpaid in respect of the
Securities and to file such other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
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52
and any custodian, receiver, conservator, assignee, trustee, liquidator,
sequestrator or similar official in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 606.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
DEBENTURES.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
and as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 506. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article Five shall
be applied in the following order, at the date or dates fixed by the Trustee
and, in case of the distribution of such money on account of principal (or
premium, if any) or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: to the payment of all amounts due to the Trustee under Section
606;
SECOND: to the payment of the amounts then due and unpaid for
principal of (and premium, if any, on) and interest on the Securities in
respect of which or for the benefit of which such money has been collected,
ratably, without preference or
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53
priority of any kind, according to the amounts due and payable on such
Securities for principal (and premium, if any) and interest, respectively; and
THIRD: the balance, if any, to the Person or Persons entitled
thereto.
SECTION 507. LIMITATION ON SUITS.
No Holder of any Securities shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee
of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding;
and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority
or more in principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, but subject to
the provisions of Section 515, the Holder of any Security shall have the right,
which is absolute and unconditional, to receive payment, as provided herein and
in such Security, of the principal of (and premium, if any, on) and interest on
such Security on the respective Stated Maturities expressed in such Security
(or, in the case of redemption, on the Redemption
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54
Date) and to institute suit for the enforcement of any such payment, and such
rights shall not be impaired without the consent of such Holder.
SECTION 509. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Trust, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in the last paragraph
of Section 308, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
SECTION 511. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article Five or
by law to the Trustee or to the Holders may be exercised from time to time, and
as often as may be deemed expedient, by the Trustee or by the Holders, as the
case may be.
SECTION 512. CONTROL BY HOLDERS.
The Holders of not less than a majority in principal amount of the
Outstanding Securities shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, PROVIDED that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
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55
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve it in
personal liability or be unjustly prejudicial to the Holders not
consenting.
SECTION 513. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Securities may on behalf of the Holders of all the Securities waive
any past Default hereunder and its consequences, except a Default
(1) in respect of the payment of the principal of (or premium, if
any, on) or interest on any Security, or
(2) in respect of a covenant or provision hereof which under
Article Nine may not be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
SECTION 514. WAIVER OF STAY OR EXTENSION LAWS.
The Trust covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Trust (to the extent that it may lawfully
do so) hereby expressly waives all benefit or advantage of any such law and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law had been enacted.
SECTION 515. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for any enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in such suit, having due regard to the
merits and
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56
good faith of the claims or defenses made by such litigant party; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder or group of Holders holding in the
aggregate more than 25% in aggregate principal amount of the Outstanding
Securities, or to any suit instituted by any Holder for enforcement of the
payment of principal of (or premium, if any, on) or interest on any Security on
or after the respective Stated Maturities expressed in such Security (or, in the
case of redemption, on or after the Redemption Date).
ARTICLE SIX
THE TRUSTEE
SECTION 601. NOTICE OF DEFAULTS.
Within 90 days after the occurrence of any Default hereunder, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such Default hereunder known to the Trustee, unless such
Default shall have been cured or waived; PROVIDED, HOWEVER, that, except in the
case of a Default in the payment of the principal of (or premium, if any, on) or
interest on any Security or in the payment of any sinking fund installment, the
Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee or a trust committee of directors
and/or Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interests of the Holders; and PROVIDED
FURTHER that in the case of any Default of the character specified in Section
501(4) no such notice to Holders shall be given until at least 30 days after the
occurrence thereof.
SECTION 602. CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of TIA Sections 315(a) through 315(d), which
are incorporated herein by reference:
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(2) any request or direction of the Trust mentioned herein shall be
sufficiently evidenced by a Trust Request or Trust Order and any resolution
of the Board of Trustees may be sufficiently evidenced by a Board
Resolution;
(3) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or
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57
omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part, rely
upon an Officers' Certificate;
(4) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(6) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the Trust,
personally or by agent or attorney;
(7) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder; and
(8) the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this
Indenture.
(9) The Trustee shall not be required to expend or risk its own
funds or otherwise incur any financial liability in the performance of any
of its duties hereunder, or in the exercise of any of its rights or powers
if it shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
SECTION 603. TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF
SECURITIES.
The recitals contained herein and in the Securities, except for the
Trustee's certificates of authentication, shall be taken as the statements of
the Trust, and the Trustee
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assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Securities, except that the Trustee represents that it is duly authorized to
execute and deliver this Indenture, authenticate the Securities and perform its
obligations hereunder and that the statements made by it in a Statement of
Eligibility and Qualification of Form T-1 supplied to the Trust are true and
accurate, subject to the qualifications set forth therein. The Trustee shall
not be accountable for the use or application by the Trust of Securities or the
proceeds thereof.
SECTION 604. MAY HOLD SECURITIES.
The Trustee, any Paying Agent, any Security Registrar or any other
agent of the Trust or of the Trustee, in its individual or any other capacity,
may become the owner or pledgee of Securities and, subject to TIA Sections
310(b) and 311, may otherwise deal with the Trust with the same rights it would
have if it were not Trustee, Paying Agent, Security Registrar or such other
agent.
SECTION 605. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Trust.
SECTION 606. COMPENSATION AND REIMBURSEMENT.
The Trust agrees:
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee for, and to hold it harmless against,
any loss, liability or expense incurred without negligence or bad faith on
its part, arising out of or in connection with the acceptance or
administration of this trust, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Trustee shall
notify the Trust promptly of any action, suit or proceeding for which it
may seek indemnity. The Trust shall defend such action, suit or proceeding
and the Trustee
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may have separate counsel. If the Trust has failed to assume the defense
and employ counsel, or if the named parties to any such action, suit or
proceeding (including any impleaded parties) include both the Trustee and
the Trust, and the Trustee shall have been advised by its counsel that
representation of the Trustee and the Trust by the same counsel would be
inappropriate under applicable standards of professional conduct due to
actual or potential differing interests between them, the Trust shall pay
the reasonable fees and expenses of one separate counsel to the Trustee.
The Trust need not pay for any settlement made without its consent which
shall not be unreasonably withheld.
The obligations of the Trust under this Section to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless the Trustee shall constitute
additional indebtedness hereunder and shall survive the satisfaction and
discharge of this Indenture. As security for the performance of such
obligations of the Trust, the Trustee shall have a claim prior to the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the payment of principal of (and premium, if any, on) or
interest on particular Securities.
SECTION 607. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined
capital and surplus of at least $50,000,000. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of federal, state, territorial or District of Columbia supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect hereinafter specified in this Article.
SECTION 608. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of
a successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 609.
(b) The Trustee may resign at any time by giving written notice
thereof to the Trust. If the instrument of acceptance by a successor Trustee
required by Section 609 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
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(c) The Trustee may be removed at any time by Act of the Holders of
not less than a majority in principal amount of the Outstanding Securities,
delivered to the Trustee and to the Trust.
(d) If the Trustee has or shall acquire any conflicting interest
within the meaning of Section 310(b) of the TIA, then
(i) within 90 days after ascertaining that it has such conflicting
interest, and if the Default to which such conflicting interest relates has
not been cured or duly waived or otherwise eliminated before the end of
such 90-day period, the Trustee shall either eliminate such conflicting
interest or, except as otherwise provided in Section 310(b) of the TIA,
resign, and the Trust shall take prompt steps to have a successor appointed
in the manner provided in this Indenture, and
(ii) in the event that the Trustee shall fail to comply with clause
(i) of this Subsection (d), the Trustee shall, within 10 days after the
expiration of such 90-day period, transmit notice of such failure to the
Holders in the manner provided in the TIA.
(e) If at any time:
(1) the Trustee shall fail to comply with the provisions of TIA
Section 310(b) after written request therefor by the Trust or by any Holder
who has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 607 and
shall fail to resign after written request therefor by the Trust or by any
Holder who has been a bona fide Holder of a Security for at least six
months, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Trust, by a Board Resolution, may remove the
Trustee, or (ii) subject to Section 515, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(f) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Trust, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee
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shall be appointed by Act of the Holders of a majority in principal amount of
the Outstanding Securities delivered to the Trust and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment, become the successor Trustee and supersede the successor Trustee
appointed by the Trust. If no successor Trustee shall have been so appointed by
the Trust or the Holders and accepted appointment in the manner hereinafter
provided, any Holder who has been a bona fide Holder of a Security for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee.
(g) The Trust shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Securities in the manner provided for in Section 107. Each notice
shall include the name of the successor Trustee and the address of its Corporate
Trust Office.
SECTION 609. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Trust and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee; but, on request of the Trust or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee,
the Trust shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 610. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so
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authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities; and in case at that time any of the Securities
shall not have been authenticated, any successor Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor Trustee; and in all such cases such certificates shall have the full
force which it is anywhere in the Securities or in this Indenture provided that
the certificate of the Trustee shall have; PROVIDED, HOWEVER, that the right to
adopt the certificate of authentication of any predecessor Trustee or to
authenticate Securities in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND TRUST
SECTION 701. DISCLOSURE OF NAMES AND ADDRESSES OF HOLDERS.
Every Holder of Securities, by receiving and holding the same, agrees
with the Trust and the Trustee that none of the Trust or the Trustee or any
agent of either of them shall be held accountable by reason of the disclosure of
any such information as to the names and addresses of the Holders in accordance
with TIA Section 312, regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of mailing
any material pursuant to a request made under TIA Section 312(b).
SECTION 702. REPORTS BY TRUSTEE.
Within 60 days after May 15 of each year commencing with the first
May 15 after the first issuance of Securities, the Trustee shall transmit to the
Holders, in the manner and to the extent provided in TIA Section 313(c), a brief
report dated as of such May 15 if required by TIA Section 313(a).
The Trustee also shall transmit to the holders, in the manner and to
the extent provided by TIA Section 313(c), within the times hereinafter
specified, a brief report with respect to
(a) the release, or release and substitution, of property subject
to the Lien of this Indenture (and the consideration therefor, if any),
unless the fair value of such property, as set forth in the certificate or
opinion required by Section 1214(a)(i), is less than 10% of the principal
amount of the Securities Outstanding at the time of such Release, or such
release and substitution, such report to be so transmitted within 90 days
after such time, and
(b) the character and amount of any advances made by it as such
since the date of the last report transmitted pursuant to the provisions of
the first paragraph of
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this Section 702 (or, if no such report has yet been so transmitted, since
the date of execution of this Indenture), for the reimbursement of which it
claims or may claim a lien or charge, prior to that of the Securities, on
the trust estate or on property or funds held or collected by it as
Trustee, and which it has not previously reported pursuant to this
Subsection (b), if such advances remaining unpaid at any time aggregate
more than 10% of the principal amount of the Securities Outstanding at such
time, such report to be so transmitted within 90 days of such time.
SECTION 703. REPORTS BY THE TRUST.
The Trust shall:
(1) file with the Trustee, within 15 days after the Trust is
required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from time to time by
rules and regulations prescribe) which the Trust may be required to file
with the Commission pursuant to Section 13 or Section 15(d) of the Exchange
Act; or, if the Trust is not required to file information, documents or
reports pursuant to either of such Sections, then it shall file with the
Trustee and the Commission, in accordance with rules and regulations
prescribed from time to time by the Commission, such of the supplementary
and periodic information, documents and reports which may be required
pursuant to Section 13 of the Exchange Act in respect of a security listed
and registered on a national securities exchange as may be prescribed from
time to time in such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Trust with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, in the manner and to the
extent provided in TIA Section 313(c), within 30 days after the filing
thereof with the Trustee, such summaries of any information, documents and
reports required to be filed by the Trust pursuant to paragraphs (1) and
(2) of this Section as may be required by rules and regulations prescribed
from time to time by the Commission.
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ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. TRUST MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Trust shall not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other corporation or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, unless:
(1) either (A) the Trust shall be the continuing corporation or (B)
the Person (if other than the Trust) formed by such consolidation or into
which the Trust is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially
all of the property and assets of the Trust (the "Surviving Entity") (i) is
a corporation organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and (ii)
shall expressly and unconditionally assume, by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the Trust's obligations on the Securities and under the Indenture and
the Indenture shall remain in full force and effect;
(2) immediately after giving effect to such transaction or series
of transactions, no Default or Event of Default shall have occurred and be
continuing;
(3) immediately after giving effect to such transaction or series
of transactions on a pro forma basis, the Consolidated Net Worth of the
Trust, or the Surviving Entity, as applicable, is not less than the
Consolidated Net Worth of the Trust immediately before such transaction or
series of transactions, less the aggregate amount of all reasonable
transaction costs incurred in connection with such transaction or series of
transactions; and
(4) immediately after giving effect to such transaction or series
of transactions, the Trust or the Surviving Entity, as applicable, shall
have delivered, or caused to be delivered, to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an Officers' Certificate
and an Opinion of Counsel, each to the effect that such consolidation,
merger, sale, assignment, conveyance, transfer, lease or other disposition
and the supplemental indenture in respect thereto comply with this
Indenture and that all conditions precedent herein provided for relating to
such transaction have been complied with.
SECTION 802. SUCCESSOR SUBSTITUTED.
Upon any consolidation of the Trust with or merger of the Trust with
or into any other Person or any sale, assignment, conveyance, transfer, lease or
other disposition of
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all or substantially all of the property and assets of the Trust to any Person
in accordance with Section 801, the successor Person formed by such
consolidation or into which the Trust is merged or to which such sale,
assignment, conveyance, transfer, lease or other disposition is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Trust under this Indenture with the same effect as if such successor Person
had been named as the Trust herein, and in the event of any such sale,
assignment, conveyance, transfer, lease or other disposition, the Trust (which
term shall for this purpose mean the Person named as the "Trust" in the first
paragraph of this Indenture or any successor Person which shall theretofore
become such in the manner described in Section 801), except in the case of a
lease, shall be discharged of all obligations and covenants under this Indenture
and the Securities and may be dissolved and liquidated.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Trust, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Trust and
the assumption by any such successor of the covenants of the Trust
contained herein and in the Securities in accordance with the provisions of
Article Eight; or
(2) to add to the covenants of the Trust for the benefit of the
Holders or to surrender any right or power herein conferred upon the Trust;
or
(3) to add any additional Events of Default; or
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of Section
609; or
(5) to correct any typographical error, to cure any ambiguity, to
correct or supplement any defective provision or other provision herein
which may be inconsistent with any other provision herein or in the
Securities, or to make any other provisions with respect to matters or
questions arising under this Indenture or the Securities; PROVIDED that
such action shall not adversely affect the interests of the Holders in any
material respect; or
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(6) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture under the TIA, or under any similar federal statute hereinafter
enacted.
SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of greater than 50% in aggregate
principal amount of the Outstanding Securities, by Act of said Holders delivered
to the Trust and the Trustee, the Trust, when authorized by a Board Resolution,
and the Trustee may enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of modifying in any
manner the rights of the Holders under this Indenture; PROVIDED, HOWEVER, that
no such supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof or change the coin or currency in which any Security or
any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date); or
(2) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences provided for in this Indenture;
or
(3) modify any of the provisions of this Section or Sections 513,
1018, 1019 or 1214(a), (b) or (d), except to increase the percentage of
Outstanding Securities required for such action or to provide that certain
other provisions of this Indenture may not be modified or waived without
the consent of the Holder of each Outstanding Security affected thereby; or
(4) except as otherwise permitted under the provisions of Article
Eight, consent to the assignment or transfer by the Trust of any of its
rights and obligations under this Indenture; or
(5) make any change in any of the provisions of this Indenture
relating to the Collateral that adversely affects the Holders; or
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(6) waive a default in payment with respect to any Security (other
than a default in payment that is due solely because of acceleration of the
final Stated Maturity of the Securities).
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and shall be fully protected in relying upon, an Opinion of Counsel stating that
the execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
SECTION 905. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Trust shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Trust, to any such supplemental indenture may be prepared and executed by the
Trust and authenticated and delivered by the Trustee in exchange for Outstanding
Securities.
SECTION 907. NOTICE OF SUPPLEMENTAL INDENTURES.
Promptly after the execution by the Trust and the Trustee of any
supplemental indenture pursuant to the provisions of Section 902, the Trust
shall give notice thereof to the
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Holders of each Outstanding Security affected, in the manner provided for in
Section 107, setting forth in general terms the substance of such supplemental
indenture.
SECTION 908. PAYMENT FOR CONSENT.
Neither the Trust, any Affiliate of the Trust nor any of its
Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Securities unless such consideration is
offered to be paid or agreed to be paid to all Holders which so consent, waive
or agree to amend in the time frame set forth in solicitation documents relating
to such consent, waiver or amendment.
ARTICLE TEN
COVENANTS
SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, INTEREST.
The Trust covenants and agrees for the benefit of the Holders that it
will duly and punctually pay the principal of (and premium, if any, on) and
interest on the Securities in accordance with the terms of the Securities and
this Indenture.
SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY.
The Trust will maintain in The City of New York, an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Trust in respect of the Securities and this Indenture
may be served. The Corporate Trust Office of the Trustee shall be such office
or agency of the Trust, unless the Trust shall designate and maintain some other
office or agency for one or more of such purposes. The Trust will give prompt
written notice to the Trustee of any change in the location of any such office
or agency. If at any time the Trust shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Trust hereby appoints the Trustee
as its agent to receive all such presentations, surrenders, notices and demands.
The Trust may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Securities
may be presented or surrendered for any or all such purposes and may from time
to time rescind any such designation; PROVIDED, HOWEVER, that no such
designation or rescission shall in any manner relieve the Trust of its
obligation to maintain an office or agency in The City of New York
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for such purposes. The Trust will give prompt written notice to the Trustee of
any such designation or rescission and any change in the location of any such
other office or agency.
SECTION 1003. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Trust shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (and premium, if any, on) or
interest on any of the Securities, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal (and
premium, if any) or interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee of its action or failure so to act.
Whenever the Trust shall have one or more Paying Agents for the
Securities, it will, on or before each due date of the principal of (and
premium, if any, on), or interest on, any Securities, deposit with a Paying
Agent a sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Trust will promptly notify the Trustee of such action or any
failure so to act.
The Trust will cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of
(and premium, if any, on) or interest on Securities in trust for the
benefit of the Persons entitled thereto until such sums shall be paid to
such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Trust (or any
other obligor upon the Securities) in the making of any payment of
principal (and premium, if any) or interest; and
(3) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent.
The Trust may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Trust Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Trust or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Trust or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
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Any money deposited with the Trustee or any Paying Agent, or then held
by the Trust, in trust for the payment of the principal of (and premium, if any,
on) or interest on any Security and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall be
paid to the Trust on Trust Request, or (if then held by the Trust) shall be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Trust for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Trust as trustee thereof, shall thereupon cease;
PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Trust cause to be
published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in the Borough of
Manhattan, The City of New York, notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Trust.
SECTION 1004. EXISTENCE.
Subject to Article Eight, the Trust will do or cause to be done all
things necessary to preserve and keep in full force and effect the existence,
rights (charter and statutory) and franchises of the Trust and each Subsidiary;
PROVIDED, HOWEVER, that the Trust shall not be required to preserve any such
right or franchise if the Board of Trustees shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Trust and its Subsidiaries as a whole and that the loss thereof is not
disadvantageous in any material respect to the Holders.
SECTION 1005. PAYMENT OF TAXES AND OTHER CLAIMS.
The Trust will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon the Trust or any Subsidiary or upon
the income, profits or property of the Trust or any Subsidiary and (b) all
lawful claims for labor, materials and supplies, which, if unpaid, might by law
become a lien upon the property of the Trust or any Subsidiary; PROVIDED,
HOWEVER, that the Trust shall not be required to pay or discharge or cause to be
paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
SECTION 1006. MAINTENANCE OF PROPERTIES.
The Trust will cause all properties owned by the Trust or any
Subsidiary or used or held for use in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Trust may be necessary
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so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this
Section shall prevent the Trust from discontinuing the maintenance of any of
such properties if such discontinuance is, in the judgment of the Trust,
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the Holders.
SECTION 1007. INSURANCE.
The Trust will at all times keep all of its and its Subsidiaries
properties which are of an insurable nature insured with insurers, believed by
the Trust to be responsible, against loss or damage to the extent that property
of similar character is usually so insured by corporations similarly situated
and owning like properties.
SECTION 1008. STATEMENT BY OFFICERS AS TO DEFAULT.
(a) The Trust will deliver to the Trustee, within 30 days after the
end of each fiscal quarter, a brief certificate from the principal executive
officer, principal financial officer or principal accounting officer as to his
or her knowledge of the Trust's compliance with all conditions and covenants
under this Indenture. For purposes of this Section 1008(a), such compliance
shall be determined without regard to any period of grace or requirement of
notice under this Indenture.
(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Trust or any Subsidiary gives any notice or takes any other
action with respect to a claimed default by the Trust or any Subsidiary in the
payment of an amount aggregating in excess of $1,000,000, the Trust shall
deliver to the Trustee by registered or certified mail, by courier or by
telegram, telex or facsimile transmission an officers' certificate specifying
such event, notice or other action within five Business Days of its occurrence.
SECTION 1009. PROVISION OF FINANCIAL STATEMENTS.
The Trust shall file on a timely basis with the Commission, to the
extent such filings are accepted by the Commission, the annual, quarterly and
other reports required by Section 13(a), 13(c) or 15(d) of the Exchange Act
regardless of whether such Sections of the Exchange Act are applicable to the
Trust. The Trust also will (a) file with the Trustee, and provide to each
Holder of Securities upon request, copies of such reports and documents within
15 days after the date on which the Trust files such reports and documents with
the Commission or the date on which the Trust would be required to file such
reports and documents if the Trust were so required and (b) if filing such
reports and documents with the Commission is not accepted by the Commission or
is prohibited under the Exchange Act, to supply copies of such reports and
documents to any prospective holder of Securities promptly upon request and at
the Trust's cost.
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SECTION 1010. LIMITATION ON INDEBTEDNESS.
(a) The Trust will not create, incur, issue, assume, guarantee or
otherwise in any other manner become directly or indirectly liable for the
payment of any Indebtedness (including Acquired Indebtedness), other than
Permitted Indebtedness, unless the Trust's Operating Cash Flow Coverage Ratio
for the four full fiscal quarters immediately preceding the incurrence of such
Indebtedness, taken as one period and after giving PRO FORMA effect to the
incurrence of such Indebtedness (and all other Indebtedness incurred since the
end of the most recently completed fiscal quarter of the Trust preceding the
date of determination) and (if applicable) the application of the net proceeds
therefrom (and from any such other Indebtedness), including to refinance other
Indebtedness, as if such Indebtedness (and any such other Indebtedness) had been
incurred on the first day of such four-quarter period, would have been greater
than or equal to 2.0 to 1.0.
If the Trust or any Subsidiary has acquired (whether by purchase,
merger or otherwise) or disposed of (whether by sale, merger or otherwise) any
company, entity or business since the first day of such four-quarter period
preceding the date of determination, the foregoing calculation shall be made on
a PRO FORMA basis as if such acquisition or disposition had been completed on
the first day of such four-quarter period.
(b) The Trust will not permit any of its Subsidiaries (other than
the Bank and its Subsidiaries) to incur any Indebtedness (including any Acquired
Indebtedness), other than Permitted Subsidiary Indebtedness.
SECTION 1011. LIMITATION ON RESTRICTED PAYMENTS.
(a) The Trust will not, and will not permit any Subsidiary to,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to
holders of, the Trust's Capital Stock (other than dividends or
distributions to the extent payable in Qualified Capital Stock of the
Trust),
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the Trust or any direct or
indirect parent of the Trust or any options, warrants or other rights to
acquire such Capital Stock,
(iii) declare or pay any dividend on, or make any distribution to
holders of, any Capital Stock of any Subsidiary (other than with respect to
(A) any such Capital Stock held by the Trust or any of its Wholly Owned
Subsidiaries or (B) any such Capital Stock of the Bank or any of its
Subsidiaries) or purchase, redeem or otherwise acquire or retire for value,
any Capital Stock of any Subsidiary (other than (A) any such Capital Stock
held by the Trust or any of its Wholly Owned Subsidiaries or (B) any
Capital Stock held by the Bank or its Subsidiaries of any of their
Subsidiaries),
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(iv) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness of the Trust,
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Trust (other than with respect to (A) guarantees of
Indebtedness of any Wholly Owned Subsidiaries by the Trust or by any
Subsidiary of the Trust, (B) guarantees of Indebtedness of the Trust by any
Subsidiary or (C) guarantees of Indebtedness of the Bank or its
Subsidiaries by any Affiliate of the Trust), or
(vi) make any Investment in any Person
(each of the foregoing actions described in (but not excluded from) clauses (i)
through (vi), other than any such action that is a Permitted Payment (as defined
below), is referred to herein as a "Restricted Payment") UNLESS after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined in good faith by the Board of
Trustees of the Trust, whose determination shall be conclusive and evidenced by
a Board Resolution), (1) no Default or Event of Default shall have occurred and
be continuing and (2) the aggregate amount of all such Restricted Payments
declared or made after the date of the Indenture shall not exceed the sum
(without duplication) of:
(A) 25% of the aggregate Consolidated Net Income (Loss) of the
Trust accrued on a cumulative basis during the period beginning on April 1,
1994 and ending on the last day of the Trust's last fiscal quarter ending
prior to the date of the Interest Payment Date immediately preceding the
date of such proposed Restricted Payment (or, if such Consolidated Net
Income (Loss) shall be a loss, minus 100% of such loss);
(B) the aggregate net cash proceeds received after the date of this
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock of the Trust (other than
Redeemable Capital Stock) or warrants, options or rights to purchase such
shares of Capital Stock of the Trust;
(C) the aggregate net cash proceeds received after the date of this
Indenture by the Trust as capital contributions;
(D) the aggregate net cash proceeds received after the date of this
Indenture by the Trust (other than from any of its Subsidiaries) upon the
exercise of options, warrants or rights to purchase shares of Capital Stock
of the Trust (other than Redeemable Capital Stock);
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(E) the aggregate net cash proceeds received after the date of this
Indenture by the Trust from the issuance or sale (other than to any of its
Subsidiaries) of debt securities that have been converted into or exchanged
for Capital Stock of the Trust (other than Redeemable Capital Stock),
together with the aggregate net cash proceeds received by the Trust at the
time of such conversion or exchange; and
(F) $15,000,000;
PROVIDED that the provisions of paragraph (a) will not restrict the payment of
any dividend within 60 days after the date of declaration thereof if at such
date of declaration, such declaration and payment were permitted by the
provisions of paragraph (a).
(b) Notwithstanding paragraph (a) above, the Trust and its
Subsidiaries may take the following actions (each a "Permitted Payment") so long
as no Default or Event of Default shall have occurred and be continuing:
(i) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Trust, in exchange for, or out
of the net cash proceeds of, a substantially concurrent issuance and sale
(other than to a Subsidiary) of shares of Capital Stock (other than
Redeemable Capital Stock) of the Trust;
(ii) the exchange by the Bank of the 13% Preferred Stock for new
Indebtedness of the Bank which has no Stated Maturity of principal (or any
required repurchase, redemption, defeasance or sinking fund payments) on or
prior to the final Stated Maturity of principal of the Notes; PROVIDED
that, after giving effect to such exchange, the Bank has (i) a leverage
(core) capital ratio equal to or in excess of 5.5%, (ii) a tier 1
risk-based capital ratio equal to or in excess of 6.5% and (iii) a total
risk-based capital ratio equal to or in excess of 11%, as such ratios are
calculated in accordance with 12 C.F.R. Section 567 or any successor law or
regulation;
(iii) the redemption by the Bank of any of the PIK Preferred Stock;
(iv) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for or out of the net cash proceeds
of a substantially concurrent issuance and sale (other than to a
Subsidiary) of shares of Capital Stock (other than Redeemable Capital
Stock) of the Trust;
(v) the repurchase of any Subordinated Indebtedness of the Trust at
a purchase price not greater than 101% of the principal amount of such
Subordinated Indebtedness in the event of a Change of Control pursuant to a
provision similar to Section 1019, the "Change of Control Triggering Event"
covenant; PROVIDED that prior to such repurchase the Trust has made the
Change of Control Offer as provided in
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such covenant with respect to the Securities and has repurchased all
Securities validly tendered for payment in connection with such Change of
Control Offer;
(vi) the repurchase, redemption or other acquisition or retirement
for value of Subordinated Indebtedness (other than Redeemable Capital
Stock), in exchange for, or out of the net cash proceeds, of a
substantially concurrent issue and sale (other than to a Subsidiary of the
Trust) of new Subordinated Indebtedness of the Trust (such transaction, a
"refinancing"); PROVIDED that any such new Indebtedness of the Trust (a)
shall be in a principal amount that does not exceed an amount equal to the
sum of (i) 101% of an amount equal to the principal amount so refinanced
less any discount from the face amount of the Indebtedness to be refinanced
expected to be deducted from the amount payable to the holders of such
Indebtedness in connection with such refinancing, (ii) the amount of any
premium expected to be paid in connection with such refinancing pursuant to
the terms of the Subordinated Indebtedness refinanced or the amount of any
premium reasonably determined by the Trust as necessary to accomplish such
refinancing by means of a tender offer, privately negotiated repurchase or
otherwise and (iii) the amount of expenses of the Trust incurred in
connection with such refinancing; PROVIDED FURTHER that for purposes of
this clause (a), the principal amount of any Indebtedness shall be deemed
to mean the principal amount thereof, or if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof such lesser amount as of the date of
determination; (b) (x) if such refinanced Subordinated Indebtedness has an
Average Life to Stated Maturity shorter than that of the Securities or a
final Stated Maturity earlier than the final Stated Maturity of the
Securities, such new Indebtedness shall have an Average Life to Stated
Maturity no shorter than the Average Life to Stated Maturity of such
refinanced Indebtedness and a final Stated Maturity no earlier than the
final stated Maturity of such refinanced Indebtedness or (y) in all other
cases, each Stated Maturity of principal (or any required repurchase,
redemption or sinking fund payments) of such new Indebtedness shall be on
or after the final Stated Maturity of principal of the Securities; and (c)
is (x) made expressly subordinate to the Securities to substantially the
same extent as the Subordinated Indebtedness being refinanced or (y)
expressly subordinated to such refinanced Subordinated Indebtedness;
(vii) guarantees of Indebtedness of Saul Holdings Partnership and its
two subsidiary partnerships pursuant to the Reimbursement Agreement; and
(viii) Permitted Investments.
The actions described in clauses (i), (iv) and (v) of this paragraph (b) shall
be Restricted Payments that shall be permitted to be taken in accordance with
this paragraph (b) but shall reduce the amount that would otherwise be available
for Restricted Payments under clause (2) of paragraph (a) to the extent, in the
case of clauses (i) and (iv), the Trust receives net cash proceeds, and the
actions described in clauses (ii), (iii), (vi), (vii) and (viii) of this
paragraph
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(b) shall be Restricted Payments that shall be permitted to be taken in
accordance with this paragraph and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (2) of paragraph
(a).
SECTION 1012. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
(a) The Trust will not, and will not permit any of its Subsidiaries
to, directly or indirectly, enter into any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of the Trust (except
that the Bank and any of its Subsidiaries may enter into any transaction or
series of related transactions with any Subsidiary of the Bank or any
Securitization Entity, and the Trust and any Wholly Owned Subsidiary of the
Trust may enter into any transaction or series of related transactions with any
Wholly Owned Subsidiary of the Trust without limitation under this covenant)
UNLESS (i) such transaction or series of related transactions is in writing on
terms that are no less favorable to the Trust or such Subsidiary, as the case
may be, than would be available in a comparable transaction in an arm's-length
dealing with a Person that is not such an Affiliate or, in the absence of such a
comparable transaction, on terms that in good faith would be offered to a Person
that is not an Affiliate, (ii) with respect to any transaction or series of
related transactions involving aggregate payments in excess of $2,500,000, the
Trust delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (i) above and
such transaction or series of related transactions has been approved by a
majority of the Disinterested Trustees of the Board of Trustees of the Trust and
(iii) with respect to any transaction or series of related transactions
involving aggregate payments in excess of $10,000,000, or in the event no
members of the Board of Trustees of the Trust are Disinterested Trustees with
respect to any transaction or series of related transactions included in
clause (ii), (x) in the case of a transaction involving real property, the
aggregate rental or sale price of such real property shall be the fair market
sale or rental value of such real property as determined in a written opinion by
a nationally recognized expert with experience in appraising the terms and
conditions of the type of transaction or series of transactions for which
approval is required and (y) in all other cases, the Trust delivers to the
Trustee a written opinion of a nationally recognized expert with experience in
appraising the terms and conditions of the type of transaction or series of
transactions for which approval is required to the effect that the transaction
or series of transactions are fair to the Trust or such Subsidiary from a
financial point of view.
The limitation set forth in the above paragraph will not apply to
(i) transactions entered into pursuant to Management Agreements,
(ii) residential mortgage, credit card and other consumer loans to an Affiliate
who is an officer, director or employee of the Trust or any of its Subsidiaries,
(iii) any transaction or series of related transactions in which the total
amount involved does not exceed $100,000, (iv) transactions pursuant to the Tax
Sharing Agreement, (v) payment of legal expenses incurred on behalf of the Trust
or its Subsidiaries in an aggregate amount not to exceed $300,000 in any fiscal
year, (vi) payment of construction and development fees incurred on behalf of
the Trust or its Subsidiaries in an
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aggregate amount not to exceed $500,000 in any fiscal year, (vii) payment of
financing fees of up to 1% of the aggregate principal amount of Retail Notes
issued and sold after the date of this Indenture, (viii) transactions permitted
under Section 1011, the "Limitation on Restricted Payments" covenant, and
(ix) payment of up to $3,500,000 of Advisory Fees in any fiscal year, after
adjustment for annual increases in the consumer price index, as reported by the
United States Department of Labor, Bureau of Labor Statistics; PROVIDED,
HOWEVER, that Advisory Fees may only be paid so long as (i) the Trust does not
hire employees and (ii) no Default or Event of Default shall have occurred and
be continuing.
(b) If (i) the Trust shall fail to have delivered to the Trustee
within 60 days after the end of each of the Bank's fiscal quarters, (x) a
written certification executed by the chief financial officer and any vice
chairman or any other senior vice president of the Bank stating that the Bank,
as of the end of its most recent fiscal quarter, was in substantial compliance
with any memorandum of understanding, written agreement, prompt corrective
action directive, capital directive or cease and desist order applicable to the
Bank which memorandum, agreement, directive or order relates to matters
involving asset quality, capital, reserves, earnings, liquidity, management or
growth and is entered into with or issued by any Federal bank regulatory
authority (and identifying each such memorandum, agreement, directive and
order), which certification shall be supported in each instance by a copy of
excerpts of the minutes of a meeting of the Audit Committee of the Board of
Directors of the Bank (together with the report to the Board of Directors
reviewed by the Audit Committee) addressing the compliance by the Bank with each
such memorandum, agreement, directive or order (whether or not then required
pursuant to such memorandum, agreement, directive or order) or (y) a written
certification (which may be combined with the certification described in clause
(x) above) executed by the chief financial officer and any vice chairman or any
other senior vice president of the Bank stating that the Bank, as of the end of
its most recent fiscal quarter, had a composite rating under the Community
Reinvestment Act and its implementing regulations or any successor law or
regulation as "satisfactory" or better (or any other equivalent rating), or if
not rated as "satisfactory" or better, that any failure to be so rated would not
have a material adverse effect on the condition (financial or otherwise),
earnings, business affairs or business prospects of the Bank or (ii) the Bank
shall fail to comply with any of its Regulatory Capital Requirements, then, in
any such case, (A) the Trust shall not and shall not permit any Subsidiary
(other than the Bank or its Subsidiaries) to, directly or indirectly, make any
payments pursuant to clause (a)(v), (vi) or (vii) above, any Restricted Payments
otherwise permitted by clause (a)(2) of Section 1011, the "Limitation on
Restricted Payments" covenant, any Permitted Payments, other than actions
permitted by clauses (iii), (vi), (vii) and (viii) of paragraph (b) of Section
1011, the "Limitation on Restricted Payments" covenant, or any Investments in
any Person (other than Permitted Investments permitted by clause (i), (ii),
(iii), (vi) or (vii) of the definition thereof) or otherwise engage in any
activity (including purchases, acquisition by lease and other acquisitions of
additional real property and buildings) other than operating its then existing
businesses in the ordinary course and (B) the amount of Advisory Fees permitted
to be paid by the Trust shall be reduced to $2,500,000 in any fiscal year until,
in each case, the Trust shall have delivered each of such written certifications
and excerpts of
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Audit Committee minutes (together with such report reviewed by the Audit
Committee) and the Bank shall have complied with all of its Regulatory Capital
Requirements.
(c) The Trust will not, and will not permit any of its
Subsidiaries, to amend, modify or in any way alter the terms of the Management
Agreements or the Advisory Agreement in a manner adverse to the interests of
the Holders of the Notes, except as otherwise permitted by the Indenture or to
change the properties subject to the Management Agreements.
SECTION 1013. LIMITATION ON ASSET SALES.
The Trust will not, and will not permit any of its Subsidiaries (other
than the Bank and its Subsidiaries) to, engage in any Asset Sale unless (i) such
Asset Sale is for not less than the fair market value of the shares of Capital
Stock or assets sold and (ii) the consideration received by the Trust or the
relevant Subsidiary in respect of such Asset Sale consists of 100% cash, Cash
Equivalents or securities that can be immediately converted into Margin
Securities. The term fair market value means, with respect to property received
in connection with an Asset Sale, (i) for cash, the amount thereof (ii) for U.S.
Government Securities, Indebtedness directly and fully guaranteed by the United
States of America or any instrumentality thereof, certificates of deposit,
commercial bank deposits (including time deposits and deposits in money market
accounts) and commercial paper, the face amount thereof, (iii) for Partnership
Units and securities that can be immediately converted into Margin Securities,
the market value of the Margin Securities into which such Partnership Units and
securities may be converted, and (iv) for Margin Securities, the market value
thereof.
SECTION 1014. RESTRICTION ON TRANSFER OF ASSETS TO SUBSIDIARIES.
The Trust will not sell, convey, transfer or otherwise dispose of its
assets or property to any of its Subsidiaries except for (i) sales, conveyances,
transfers or other dispositions of assets or property in an amount permitted by
Section 1011, the "Limitation on Restricted Payments" covenant, and (ii) sales,
conveyances, transfers or other distributions of Real Estate Property to Single
Asset Subsidiaries.
SECTION 1015. LIMITATION ON SUBSIDIARIES.
The Trust will not (i) permit any of its Single Asset Subsidiaries to
acquire additional Real Estate Property or make Investments in any other Person
other than the Trust or (ii) create any new Subsidiaries other than Single Asset
Subsidiaries.
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SECTION 1016. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES.
The Trust will not, and will not permit any Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Subsidiary that receives Real
Estate Property from the Trust after the date of this Indenture to (i) pay
dividends or make any other distributions on or in respect of its Capital Stock
or any other interest or participation in, or measured by, its profits, (ii) pay
any Indebtedness owed to the Trust or any other Subsidiary, (iii) make loans or
advances to the Trust or any other Subsidiary, (iv) transfer any of its
properties or assets to the Trust or any Subsidiary or (v) guarantee any
Indebtedness of the Trust or any Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (1) applicable law, (2) customary
non-assignment provisions of any lease governing a leasehold interest or
equipment of the Trust or any Subsidiary, (3) customary due on sale and other
restrictions on transfer contained in mortgages and deeds of trust and (4) this
Indenture.
SECTION 1017. LIMITATION ON ISSUANCES AND SALES OF SUBSIDIARY STOCK.
The Trust (i) will not permit any Subsidiary (other than the Bank and
its Subsidiaries) to issue any Capital Stock (other than to the Trust or a
Wholly Owned Subsidiary) and (ii) will not permit any Person (other than the
Trust, a Wholly Owned Subsidiary or the Bank and its Subsidiaries) to own any
Capital Stock of any of its Subsidiaries; PROVIDED, HOWEVER, that this covenant
shall not prohibit (1) the issuance and sale of all, but not less than all, of
the issued and outstanding Capital Stock of any Wholly Owned Subsidiary owned by
the Trust or any of its Subsidiaries in compliance with the other provisions of
this Indenture, (2) the ownership by directors of director's qualifying shares
or the ownership by foreign nationals of Capital Stock of any Subsidiary, to the
extent mandated by applicable law or (3) the ownership by any Person of any
Capital Stock of any Subsidiary of the Trust that is not a Wholly Owned
Subsidiary on the date of this Indenture.
SECTION 1018. REQUIRED STOCK OWNERSHIP.
The Trust will at all times be the legal and beneficial owner of the
Pledged Bank Stock and will not sell, transfer or otherwise dispose of any
Capital Stock of the Bank regardless of when acquired. The Trust will at all
times be the legal and beneficial owner in the aggregate of at least 66-2/3% of
the issued and outstanding Voting Stock of the Bank and at least 66-2/3% of the
issued and outstanding Bank Common Stock.
SECTION 1019. CHANGE OF CONTROL TRIGGERING EVENT.
(a) Upon the occurrence of a Change of Control Triggering Event,
the Trust shall make an offer to purchase the Securities (a "Change of Control
Offer"), and shall purchase, on a Business Day (the "Change of Control Purchase
Date") not more than 60 nor less than 45 days from the date the Change of
Control Notice referred to below is given to
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Holders, all of the then outstanding Securities validly tendered pursuant to
such Change of Control Offer at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the Change of Control Purchase Date in accordance
with the procedures set forth in paragraphs (b) and (c) of this Section. The
Change of Control Offer shall remain open until the close of business on the
Change of Control Purchase Date or such later date as may be necessary for the
Trust to comply with requirements under the Exchange Act.
(b) Within 30 days following any Change in Control Triggering
Event, the Trust shall give to each Holder of the Securities in the manner
provided in Section 107 a notice stating:
(1) that a Change in Control Triggering Event has occurred and that
such Holder has the right to require the Trust to repurchase such Holder's
Securities at the Change of Control Purchase Price;
(2) the circumstances and relevant facts regarding such Change in
Control Triggering Event (including but not limited to information with
respect to pro forma historical income, cash flow and capitalization after
giving effect to such Change in Control);
(3) the Change of Control Purchase Date, which shall be no earlier
than 45 days nor later than 60 days from the date such notice is mailed;
and
(4) the instructions a Holder must follow in order to have its
Securities repurchased in accordance with paragraph (c) of this Section.
(c) Holders electing to have Securities purchased will be required
to surrender such Securities to the Trust at the address specified in the notice
at least five Business Days prior to the Change of Control Purchase Date.
Holders will be entitled to withdraw their election if the Trust receives,
not later than three Business Days prior the Change of Control Purchase Date,
a telegram, telex, facsimile transmission or letter setting forth the name of
the Holder, the principal amount of the Securities delivered for purchase by
the Holder as to which his election is to be withdrawn and a statement that
such Holder is withdrawing his election to have such Securities purchased.
Holders whose Securities are purchased only in part will be issued new
Securities equal in principal amount to the unpurchased portion of the
Securities surrendered.
(d) The Trust will comply with Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent
Rule 14e-1 and/or such laws and regulations are applicable, in the event that a
Change of Control Triggering Event occurs and the Trust is required to offer to
purchase Securities as described above.
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SECTION 1020. OBTAINING A RATING ON THE NOTES.
The Trust will use its best efforts to obtain a rating on the
Securities by S&P and Moody's on or before December 31, 1994.
SECTION 1021. AMENDMENTS, ETC.
The Trust will not amend, modify, or change in any manner or permit
any of its Subsidiaries to amend, modify or change in any manner, any term or
condition of its or any of its Subsidiaries' certificates of incorporation,
charters, bylaws or other similar documents or instruments, except amendments,
modifications or changes that (i) would not have an adverse effect on the rights
and remedies of the Trustee or the Holders of the Securities, (ii) are required
by this Indenture or (iii) are required by law.
SECTION 1022. WAIVER OF CERTAIN COVENANTS.
The Trust may omit in any particular instance to comply with any term,
provision or condition set forth in Sections 1007 through 1017, inclusive, or
Sections 1020 or 1021, if before or after the time for such compliance the
Holders of at least a majority in principal amount of the Outstanding
Securities, by Act of such Holders, waive such compliance in such instance with
such term, provision or condition, but no such waiver shall extend to or affect
such term, provision or condition except to the extent so expressly waived, and,
until such waiver shall become effective, the obligations of the Trust and the
duties of the Trustee in respect of any such term, provision or condition shall
remain in full force and effect.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. RIGHT OF REDEMPTION.
The Securities may be redeemed at the election of the Trust, as a
whole or from time to time in part, at any time on or after April 1, 1998,
subject to the conditions and at the Redemption Prices specified in the form of
Security, together with accrued interest to the Redemption Date.
SECTION 1102. APPLICABILITY OF ARTICLE.
Redemption of Securities at the election of the Trust or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
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SECTION 1103. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Trust to redeem any Securities pursuant to Section
1101 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Trust, the Trust shall, at least 60 days prior to the Redemption
Date fixed by the Trust (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date and of the principal amount
of Securities to be redeemed and shall deliver to the Trustee such documentation
and records as shall enable the Trustee to select the Securities to be redeemed
pursuant to Section 1104.
SECTION 1104. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption, by such method as the Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
of the principal of Securities; PROVIDED, HOWEVER, that no such partial
redemption shall reduce the portion of the principal amount of a Security not
redeemed to less than $1,000.
The Trustee shall promptly notify the Trust in writing of the
Securities selected for redemption and, in the case of any Securities selected
for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Securities shall relate, in
the case of any Security redeemed or to be redeemed only in part, to the portion
of the principal amount of such Security which has been or is to be redeemed.
SECTION 1105. NOTICE OF REDEMPTION.
Notice of redemption shall be given in the manner provided for in
Section 107 not less than 30 nor more than 60 days prior to the Redemption Date,
to each Holder of Securities to be redeemed.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Securities are to be redeemed, the
identification (and, in the case of a partial redemption, the principal
amounts) of the particular Securities to be redeemed,
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(4) that on the Redemption Date the Redemption Price (together with
accrued interest, if any, to the Redemption Date payable as provided in
Section 1107) will become due and payable upon each such Security, or the
portion thereof, to be redeemed, and that interest thereon will cease to
accrue on and after said date, and
(5) the place or places where such Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Trust shall be given by the Trust or, at the Trust's request, by the Trustee
in the name and at the expense of the Trust.
SECTION 1106. DEPOSIT OF REDEMPTION PRICE.
Prior to any Redemption Date, the Trust shall deposit with the Trustee
or with a Paying Agent (or, if the Trust is acting as its own Paying Agent,
segregate and hold in trust as provided in Section 1003) an amount of money
sufficient to pay the Redemption Price of, and (except if the Redemption Date
shall be an Interest Payment Date) accrued interest on, all the Securities which
are to be redeemed on that date.
SECTION 1107. SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with accrued interest, if any, to
the Redemption Date), and from and after such date (unless the Trust shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest. Upon surrender of any such Security
for redemption in accordance with said notice, such Security shall be paid by
the Trust at the Redemption Price, together with accrued interest, if any, to
the Redemption Date; PROVIDED, HOWEVER, that installments of interest whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 309.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Securities.
SECTION 1108. SECURITIES REDEEMED IN PART.
Any Security which is to be redeemed only in part shall be surrendered
at the office or agency of the Trust maintained for such purpose pursuant to
Section 1002 (with, if the Trust or the Trustee so requires, due endorsement by,
or a written instrument of transfer in form satisfactory to the Trust and the
Trustee duly executed by, the Holder thereof or
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such Holder's attorney duly authorized in writing), and the Trust shall execute,
and the Trustee shall authenticate and deliver to the Holder of such Security
without service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder, in aggregate principal amount equal to
and in exchange for the unredeemed portion of the principal of the Security so
surrendered.
ARTICLE TWELVE
SECURITY AND PLEDGE OF COLLATERAL
SECTION 1201. GRANT OF SECURITY INTEREST.
The Trust grants to the Trustee, for the benefit of the Trustee and
the Holders, a security interest in all its right, title and interest in and to
the following (the "Collateral"):
(a) the shares of Bank Stock from time to time deposited with the
Trustee pursuant to this Article Twelve (the "Pledged Bank Stock"),
together with the certificates representing the Pledged Bank Stock, and,
subject to Section 1207(a), all dividends, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such Pledged Bank Stock;
(b) cash, U.S. Government Securities and Margin Securities
deposited with the Trustee from time to time pursuant to Section 1203,
Certificates of Deposit (whether or not they are deemed to be instruments)
in which such Collateral (or proceeds thereof) may be invested from time to
time, all other investments from time to time pursuant to Section 1203(e),
all notes, checks and other instruments and all Certificates of Deposit
(whether or not they are deemed to be instruments) from time to time issued
or held in the name of, delivered to or otherwise possessed by the Trustee
(directly or through the Custodian) in substitution for or in addition to
or upon payment or collection of any or all of the foregoing and, subject
to Section 1207(a), all interest, dividends, cash, instruments and other
property and proceeds from time to time received, receivable or otherwise
distributed in respect of or in exchange for any of the foregoing; and
(c) all proceeds of any and all of the foregoing (including without
limitation proceeds constituting property of the types described above).
SECTION 1202. SECURED OBLIGATIONS.
This Indenture secures the payment of all obligations of the Trust now
or hereafter existing under this Indenture and the Securities, whether for
principal, interest, fees, expenses or otherwise (collectively, the "Secured
Obligations"). Without limiting the
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generality of the foregoing, this Indenture secures the payment of all amounts
that constitute part of the Secured Obligations and would be owed by the Trust
but for the fact that they are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding involving the
Trust.
SECTION 1203. DELIVERY, INVESTMENT AND RELEASE OF COLLATERAL.
(a) On the date hereof, the Trust will deliver to the Trustee
(i) certificates evidencing all Bank Stock owned legally or
beneficially by the Trust on such date, in form suitable for transfer by
delivery or accompanied by duly executed instruments of assignment in
blank, all in form and substance satisfactory to the Trustee, and
(ii) cash or U.S. Government Securities, or both, the aggregate
Collateral Value of which as of such date is at least equal to the
Liquidity Maintenance Amount as of such date.
Collateral delivered to the Trustee pursuant to clause (i) above and any related
instruments of assignment shall be immediately delivered to the Custodian and
shall be accounted for by the Trustee in Bank Collateral Sub-Account B, and
Collateral delivered to the Trustee pursuant to clause (ii) above shall be
accounted for by the Trustee in Liquidity Maintenance Sub-Account A, all as
provided in Section 1204.
(b) Not later than 15 Business Days after each March 31, June 30,
September 30 and December 31, commencing March 31, 1994, the Trust shall deliver
to the Trustee an Officers' Certificate certifying
(i) (A) as to whether the aggregate Collateral Value, as of the
March 31, June 30, September 30 or December 31, as the case may be,
immediately preceding the date of such Officers' Certificate, of all
Collateral then held by the Trustee in the Liquidity Maintenance
Account at least equaled the Liquidity Maintenance Amount as of such
March 31, June 30, September 30 or December 31,
(B) if it did not, the amount (the "Collateral Deficit
Amount") by which the amount calculated pursuant to clause (A) above
exceeded the Liquidity Maintenance Amount, and
(C) if it did, the amount (the "Collateral Surplus Amount"),
if any, by which the amount calculated pursuant to clause (A) above
exceeded the Liquidity Maintenance Amount, and
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(ii) (A) as to whether the aggregate Collateral Value, as of the
March 31, June 30, September 30 or December 31, as the case may be,
immediately preceding the date of such Officers' Certificate, of all
cash, Certificates of Deposit and U.S. Government Securities then held
by the Trustee in the Liquidity Maintenance Account at least equaled
50% of the Liquidity Maintenance Amount as of such March 31, June 30,
September 30 or December 31, and
(B) if it did not, the amount (the "Cash Collateral Deficit
Amount") by which such 50% of the Liquidity Maintenance Amount
exceeded the aggregate Collateral Value of such cash, Certificates of
Deposit and U.S. Government Securities,
together with calculations in reasonable detail showing the basis for such
certification.
If such Officers' Certificate shall certify that a Collateral Deficit
Amount exists, within five Business Days after delivering such Officers'
Certificate the Trust will deliver to the Trustee, to be held in accordance with
the applicable provisions of Section 1204 and accounted for by the Trustee in
the Liquidity Maintenance Account, cash, U.S. Government Securities and/or
Margin Securities the aggregate Collateral Value of which as of such date is at
least equal to the Collateral Deficit Amount.
If such Officers' Certificate shall certify that a Cash Collateral
Deficit Amount exists, within five Business Days after delivering such Officers'
Certificate the Trust will deliver to the Trustee, to be held in accordance with
the applicable provisions of Section 1204 and accounted for by the Trustee in
the Liquidity Maintenance Account, cash and/or U.S. Government Securities the
aggregate Collateral Value of which as of such date is at least equal to the
Cash Collateral Deficit Amount.
If such Officers' Certificate shall certify that a Collateral Surplus
Amount exists, the Trust may, within five Business Days after the delivery of
such Officers' Certificate, direct the Trustee to release from the Liquidity
Maintenance Account Collateral the Collateral Value of which is no greater than
to the Collateral Surplus Amount. Such direction shall specify the Collateral
to be released. Promptly upon its receipt of such direction, the Officers'
Certificate required by Section 1203(f) and any documents required by Sections
103 and 1213, and, if no Default or Event of Default shall have occurred and be
continuing, the Trustee shall deliver to the Trust the Collateral specified by
the Trust.
(c) The Trust may, on any date, deliver to the Trustee
(i) as additional Collateral to be accounted for in the Liquidity
Maintenance Account cash, U.S. Government Securities and/or, after the
consummation of the Exchange Offer, Margin Securities,
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(ii) as additional Collateral to be accounted for in the Bank
Collateral Account cash, U.S. Government Securities and additional shares
of Bank Stock.
At the time of any deposit of Bank Stock, the Trust shall deliver to
the Trustee the same certificates and documents with respect thereto as are
referred to in Section 1203(a)(i) with respect to Bank Stock delivered to the
Trustee on the date hereof.
(d) The Trust may from time to time direct the Trustee to exchange
some of the Pledged Bank Stock for other Collateral to be provided by the Trust
on the basis specified in this Section 1203(c) and to release the Pledged Bank
Stock so exchanged from the Lien of this Indenture. Such direction shall
specify the number of shares of Pledged Bank Stock to be exchanged and upon such
exchange to be released from the Lien of this Indenture. On the date on which
it shall deliver such direction to the Trustee, the Trust will deliver to the
Trustee, to be held in accordance with the applicable provisions of Section
1204, cash and/or U.S. Government Securities the aggregate Collateral Value of
which as of such date is at least equal to $25,000 for each share of Pledged
Bank Stock (adjusted to reflect any splits or combinations of Bank Stock after
the date hereof) that the Trust has directed the Trustee to exchange for other
Collateral.
Promptly following its receipt of such direction, such substitute
Collateral, the Officers' Certificate required by Section 1203(f), the Opinion
of Counsel required by Section 1203(g) and any documents required by Sections
103 and 1213, and, if no Default or Event of Default shall have occurred and be
continuing, the Trustee will (if necessary, after receiving from the Bank
separate certificates evidencing the Bank Stock to be delivered to the Trust and
the Bank Stock that will continue to be Pledged Bank Stock in exchange for the
certificates evidencing the Pledged Bank Stock) deliver to the Trust
certificates evidencing the number of shares of Pledged Bank Stock that the
Trust shall have directed the Trustee to release from the Lien of this
Indenture. Any shares so released shall no longer be included in the Pledged
Bank Stock.
Collateral delivered to the Trustee under this Subsection (d) shall be
held by it in the Bank Collateral Account and shall not be released from the
Lien of this Indenture except pursuant to Section 1207(a) or 1212.
(e) The Trust may, from time to time, so long as no Default or
Event of Default shall have occurred and be continuing, direct the Trustee
(i) to sell Certificates of Deposit and U.S. Government Securities
in, and account for the proceeds of such sale in, the Bank Collateral
Account,
(ii) to sell Certificates of Deposit, U.S. Government Securities and
Margin Securities in, and account for the proceeds of such sale in, the
Liquidity Maintenance Account,
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(iii) to invest cash in the Bank Collateral Account in Certificates
of Deposit and/or U.S. Government Securities and to account for such
investments in such account, and
(iv) to invest cash in the Liquidity Maintenance Account in
Certificates of Deposit, U.S. Government Securities and/or, after the
consummation of the Exchange Offer, Margin Securities and to account for
such investments in such account;
PROVIDED that the Trust shall not direct the Trustee to invest any Collateral
held in Bank Collateral Sub-Account A or Liquidity Maintenance Sub-Account A in
U.S. Government Securities or Margin Securities.
Any brokerage costs and other fees or expenses related to such sale or
investment and amounts relating to accrued or accreted interest required to be
paid to purchase any investment shall be paid by the Trust at the time of its
direction to the Trustee pursuant to this Subsection (e) and not from the
Collateral. If
(x) the principal amount paid to the Trustee on the maturity of any
Certificate of Deposit or U.S. Government Security in the Bank Collateral
Account shall be less than the purchase price therefor paid by the Trustee
and attributable to principal, or
(y) the price paid to the Trustee on the sale of any Certificate of
Deposit or U.S. Government Security in the Bank Collateral Account
attributable to the principal amount thereof shall be less than the
purchase price therefor paid by the Trustee and attributable to principal,
(such difference being a "Sale Deficit Amount"), the Trustee will so notify the
Trust and the Trust, within five days after its receipt from the Trustee of such
notice, will deliver to the Trustee, to be held in accordance with the
applicable provisions of Section 1204 and accounted for in the Bank Collateral
Account, cash or U.S. Government Securities, or both, the aggregate Collateral
Value of which is at least equal to such Sale Deficit Amount. Any direction by
the Trust to the Trustee pursuant to this Subsection (e) shall specify the
investments to be made or sold by the Trustee and the account and sub-account
from which such investments are to be made or sold.
Any investments and any proceeds of any sale of Collateral pursuant to
this Subsection (e) shall be recorded or held in the same account and sub-
account as the Collateral that was used to purchase such investment or that was
sold.
Promptly after receiving such direction, the brokerage fees and other
amounts referred to in the preceding paragraph and, if such sale or investment
involves Collateral in the Liquidity Maintenance Account, the Officers'
Certificate required by Section 1203(f), the Trustee will make the sales or
investments as directed by the Trust. During any time when a Default or an
Event of Default has occurred and is continuing, the Trustee may, but shall be
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under no obligation to, sell Margin Securities and invest cash held by it as
Collateral in Certificates of Deposit and/or U.S. Government Securities selected
by it. Any losses on investments of Collateral, or on Collateral delivered to
the Trustee, shall be for the account of the Trust.
(f) On each date (other than the date hereof) on which the Trust
shall deliver Collateral to the Trustee, and as a condition to the release,
exchange, sale or investment of any Collateral, the Trust will deliver to the
Trustee an Officers' Certificate, dated the date of such delivery or of any
direction to effect any such release, exchange, sale or investment (as
applicable), certifying, as of the date of such Officers' Certificate, to the
effect required by Section 103 and further certifying as follows:
(i) that no Default or Event of Default has occurred and is
continuing or would occur after giving effect to any delivery, exchange,
sale, investment or release of Collateral to occur as of such date;
(ii) if such Officers' Certificate is being delivered in connection
with the delivery of any Collateral,
(A) to the effect set forth in Sections 1205(a), (b) and (c)
and, if the Collateral being delivered includes Bank Stock, the first
sentence of Section 1205(d),
(B) (1) if such Collateral consists of cash, that it has
traced the source of such cash (describing in reasonable detail
such source) and whether or not such cash constitutes direct or
indirect proceeds of the issue and sale of the Securities, and
(2) if such Collateral consists of Bank Stock, U.S.
Government Securities or Margin Securities, that it has traced
the source of funds used for the purchase of such Collateral
(and describing in reasonable detail the source of such funds)
and that such funds do not constitute the direct or indirect
proceeds of the issue and sale of the Securities;
(iii) if such Officers' Certificate is being delivered in connection
with the delivery of any Collateral to remedy a Collateral Deficit Amount,
that
(A) the aggregate Collateral Value, as of the date of such
Officers' Certificate, of the Collateral being delivered is at least
equal to the Collateral Deficit Amount then being remedied, and
(B) as of the date of such Officers' Certificate and after
giving effect to such delivery, the aggregate Collateral Value of all
cash, Certificates
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of Deposit and U.S. Government Securities then in the Liquidity
Maintenance Account will be at least equal to 50% of the Liquidity
Maintenance Amount;
(iv) if such Officers' Certificate is being delivered in connection
with the delivery of any Collateral to remedy a Cash Collateral Deficit
Amount, that the aggregate Collateral Value, as of the date of such
Officers' Certificate, of the cash and U.S. Government Securities being
delivered is at least equal to the Cash Collateral Deficit Amount then
being remedied;
(v) if such Officers' Certificate is being delivered in connection
with the delivery of any Collateral to remedy a Sale Deficit Amount, that
the aggregate Collateral Value, as of the date of such Officers'
Certificate, of the cash and U.S. Government Securities being delivered is
at least equal to the Sale Deficit Amount then being remedied;
(vi) if such Officers' Certificate is being delivered in connection
with the release of any Collateral to eliminate a Collateral Amount
Surplus, that
(A) the Collateral to be released has an aggregate Collateral
Value not in excess of the Collateral Amount Surplus, and
(B) as of the date of such Officers' Certificate and after
giving effect to such release, the aggregate Collateral Value of all
cash, Certificates of Deposit and U.S. Government Securities in the
Liquidity Maintenance Account will be at least equal to 50% of the
Liquidity Maintenance Amount;
(vii) if such Officers' Certificate is being delivered in connection
with a direction that the Trustee sell or invest Collateral in the
Liquidity Maintenance Account, after giving effect to any such sale or
investment,
(A) the aggregate Collateral Value, as of the date of such
Officers' Certificate, of all Collateral in the Liquidity Maintenance
Account will be at least equal to the Liquidity Maintenance Amount as
of such date, and
(B) as of the date of such Officers' Certificate, the
aggregate Collateral Value of all cash, Certificates of Deposit and
U.S. Government Securities in the Liquidity Maintenance Account will
be at least equal 50% of the Liquidity Maintenance Amount; and
(viii) if such Officers' Certificate is being delivered in connection
with a direction that the Trustee exchange Pledged Bank Stock for other
Collateral, as to the aggregate number of shares of Voting Stock of the
Bank and Bank Common Stock outstanding as of the date of such Officers'
Certificate and that, immediately following the release of such Pledged
Bank Stock, the Pledged Bank Stock will
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constitute at least 66 2/3% of such aggregate number of shares of each
class and series of Voting Stock of the Bank and at least 66 2/3% of such
aggregate number of shares of Bank Common Stock.
(g) On each date on which the Trust shall deliver Collateral to the
Trustee pursuant to this Section 1203, the Trust will deliver to the Trustee an
Opinion of Counsel with respect to such Collateral, substantially to the effect
set forth in Section 1213(c).
(h) Any Collateral released by the Trustee pursuant to this Section
1203 shall be assigned, transferred and delivered to the Trust at the Trust's
expense, together with any necessary assignment or endorsement, against receipt
but without any recourse, warranty or representation whatsoever. The Trustee
shall, in connection with any such release, at the request and expense of the
Trust, execute and deliver to the Trust an instrument or instruments
acknowledging the release of such Collateral from the Lien of this Indenture.
(i) In connection with any delivery of Collateral to the Trustee
pursuant to this Section 1203, the Trust will advise the Trustee of the account
and sub-account, as provided in Section 1204(g) in which such Collateral shall
be recorded and the Trustee shall record such Collateral in the account and
sub-account specified by the Trust. The Trust shall not direct the Trustee to
record in Bank Collateral Sub-Account B or Liquidity Maintenance Sub-Account B
any cash that constitutes direct or indirect proceeds of the issue and sale of
the Securities or any U.S. Government Securities or Margin Securities that were
purchased with funds that constitute such direct or indirect proceeds.
SECTION 1204. DELIVERY AND HOLDING OF COLLATERAL.
(a) The Trustee will take and thereafter continuously retain (or
cause the Custodian to take and thereafter continuously retain) possession in
the State of New York of all certificates evidencing Pledged Bank Stock, and any
related instruments of assignment, delivered to the Trustee by the Trust
pursuant to Section 1203.
(b) With respect to all Collateral constituting instruments or
certificated securities (as defined in Section 8-102(1)(a) of the Uniform
Commercial Code), other than Pledged Bank Stock, the Trustee will do one of the
following:
(i) take and thereafter continuously retain (or cause the Custodian
to take and thereafter continuously retain) possession in the State of New
York of the certificates evidencing such securities or of such instruments
and any related instruments of assignment; or
(ii) if such certificated securities are in the custody of a
clearing corporation (as defined in Section 8-102(3) of the Uniform
Commercial Code) or of a custodian (as defined in Section 8-102(4) of the
Uniform Commercial Code) or a nominee of either of them, are subject to the
control of the clearing corporation or
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custodian, and are in bearer form, or indorsed in blank by an appropriate
person, or registered in the name of such clearing corporation, custodian
or nominee,
(A) cause an appropriate entry to a custodial or similar
account of the Trustee or the Custodian to be made on the books of
such clearing corporation, and
(B) cause the Custodian to send to the Trustee confirmation of
the Trustee's interest in such certificated securities and, by book
entry or otherwise, to identify the interest of the Trustee in and to
such certificated securities; or
(iii) cause a financial intermediary (as defined in Section 8-313(4)
of the Uniform Commercial Code) in the State of New York (including without
limitation the Custodian) to acquire possession of such certificated
securities specially indorsed to or issued in the name of the Trustee.
(c) With respect to investments of the Collateral in U.S.
Government Securities, the Trustee will do one of the following:
(i) if the Custodian has an account with the Federal Reserve Bank
of New York (the "FRBNY"),
(A) cause such U.S. Government Securities to be credited to
such account, and
(B) cause the Custodian to send the Trustee confirmation of
its interest in such U.S. Government Securities and, by book entry or
otherwise, to identify the interest of the Trustee therein and
thereto, or
(ii) if the Custodian does not have an account with the FRBNY,
(A) cause such U.S. Government Securities to be credited to
the account of a financial intermediary at the FRBNY, and
(B) cause such financial intermediary to send the Trustee
confirmation of the Trustee's interest in such U.S. Government
Securities and, by book entry or otherwise, to identify the interest
of the Trustee therein and thereto.
The Trustee shall ensure that the Person in whose account with the FRBNY any
Collateral consisting of U.S. Government Securities is held is located in and
maintains its records relating to such securities in the State of New York.
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(d) With respect to all Collateral constituting cash, until such
cash is invested in other Collateral as provided in Section 1203, the Trustee
shall keep such cash on deposit, segregated in separate accounts and sub-
accounts as provided in Section 1204(g) below with the Custodian or another
financial institution (as agreed to by the Trustee and the Trust or, absent
agreement, selected by the Trustee in its discretion) that is located in the
State of New York, that is a member of the Federal Reserve System, that has a
combined capital and surplus and individual profits of not less than
$500,000,000 and that issues (or whose parent issues) commercial paper or
certificates of deposit rated at least A-1 by S&P or at least P-1 by Moody's.
Cash may be deposited in any type of deposit account offered by any such
financial institution, including time deposits and money-market accounts, as may
be agreed between the Trustee and the Trust or, absent agreement, as may be
determined by the Trustee in its discretion. All such deposit accounts shall be
in the name, and under the sole dominion and control, of the Trustee and the
Trustee shall cause each financial institution at which any such deposit account
is maintained explicitly to agree that such deposit accounts shall not be
subject to any right of set off or banker's lien of the financial institution at
which such account is maintained. The Trustee shall, or shall cause the
Custodian on its behalf to, take and thereafter continuously retain in the State
of New York possession of any passbook or other evidence of any such deposit
account.
(e) The Trustee shall
(i) with respect to all Certificates of Deposit represented by a
physical certificate, cause such Certificate of Deposit to be issued in the
name of the Trustee (or of the Custodian) and shall, or shall cause the
Custodian on its behalf to, take and thereafter continuously retain
possession in the State of New York of such physical certificate,
(ii) with respect to all Certificates of Deposit in book-entry form,
cause such Certificate of Deposit to be issued and recorded on the books of
the issuer thereof in the name of the Trustee (or the Custodian) and, if
any receipt, confirmation or other document is issued in connection with
such Certificate of Deposit, take or cause the Custodian on its behalf to
take, and thereafter continuously retain in the State of New York
possession thereof,
(iii) have the right at any time in its discretion and without notice
to the Trust, to transfer to or to register in the name of the Trustee, the
Custodian or any of their nominees any or all other Collateral, other than
Pledged Bank Stock and (with respect to registering the same in the name of
the Trustee) U.S. Government Securities, and
(iv) at any time after the occurrence and during the continuance of
an Event of Default, in its discretion and without notice to the Trust,
subject to the satisfaction of any regulatory requirements, to transfer to
or to register in the name of the Trustee, the Custodian or any of their
nominees any or all Pledged Bank Stock.
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In addition, the Trustee shall have the right at any time to exchange
certificates or instruments representing or evidencing Collateral for
certificates or instruments of different denominations.
(f) If there shall occur a change in applicable law or regulations
regarding the steps necessary to obtain and maintain a perfected security
interest in U.S. Government Securities or any other Collateral , or if there is
Collateral for which the foregoing procedures are not effective to perfect a
security interest, the Trust will immediately upon its becoming aware thereof so
notify the Trustee and will deliver to the Trustee an Opinion of Counsel setting
forth the steps necessary for the Trustee to obtain and maintain such a
perfected security interest in the Collateral affected by such change or for
which the foregoing procedures are not effective to perfect a security interest,
and the Trustee, instead of the actions specified in this Section 1204, shall
take such other action, as specified in such Opinion of Counsel, as will create
and maintain such perfected security interest.
(g) The Trustee shall establish two accounts, (i) the "Bank
Collateral Account" with two sub-accounts, "Bank Collateral Sub-Account A" and
"Bank Collateral Sub-Account B", and (ii) the "Liquidity Maintenance Account"
with two sub-accounts, "Liquidity Maintenance Sub-Account A" and "Liquidity
Maintenance Sub-Account B", in which all of the Collateral held, directly or
indirectly, by the Trustee pursuant to this Article Twelve shall be recorded
and, to the extent held directly by the Trustee, deposited. Each such account
(and each sub-account thereof) shall be in the name of and under the sole
dominion and control of the Trustee and subject to the terms of this Indenture.
Except as provided in this Indenture, no Collateral shall be paid, delivered or
released to or for the account of, or withdrawn by or for the account of, the
Trust or any other Person from either such account or either sub-account.
(h) The Trustee shall not be obligated to, and shall not, accept
any Collateral from the Trust if it has knowledge of or has been advised by the
Trust of any adverse claim with respect thereto, that it is overdue or has been
dishonored or of any defense against or claim to it on the part of any Person.
(i) Except as otherwise specifically provided in this Section 1204,
the Trustee may retain possession of Collateral as provided in this Article
Twelve itself or through the Custodian or another Person acting on the Trustee's
behalf.
SECTION 1205. REPRESENTATIONS, WARRANTIES AND COVENANTS.
The Trust represents, warrants and covenants that:
(a) As of the time of its deposit of any Collateral with the
Trustee pursuant to this Indenture it will be the sole beneficial owner of
such Collateral, free and clear of any Lien, except for the Lien of this
Indenture.
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(b) It has full power, authority and legal right to pledge all
Collateral in which a security interest is or shall be granted by it
pursuant to this Indenture.
(c) Upon the delivery of any Collateral to the Trustee and the
accomplishment of the applicable actions to be performed by the Trustee
under Section 1204, the Trustee will have a valid and perfected
first-priority Lien on such Collateral, securing payment of the Secured
Obligations.
(d) The shares of Bank Stock owned by the Trust have been duly
authorized, are validly issued, fully paid and non-assessable. As of the
date of this Indenture, there are 10,000,000 shares of Bank Stock
authorized and 10,000 shares of Bank Stock outstanding; the Bank has no
Voting Stock or Bank Common Stock except for Bank Stock; there are no
outstanding options, warrants, calls, convertible securities or commitments
of any character relating to any authorized and unissued Bank Stock; the
Trust owns 8,000 shares of Bank Stock; and such shares constitute 80% of
all shares of Bank Stock issued and outstanding.
(e) No authorization, approval or other action by, or notice to, or
filing with, any governmental authority or regulatory body is required
under existing laws and regulations on the date hereof
(i) for the grant or perfection of the security interests
contemplated hereby or for the execution, delivery or performance of
this Indenture by the Trust, except as may be set forth in Section
1204 with respect to actions to be taken by the Trustee, the Custodian
or a financial intermediary holding Collateral and except for the
filings referred to in Section 1206(b) that may be required in the
future, or
(ii) for the exercise by the Trustee of the voting or other
rights provided for in this Indenture or its rights and remedies in
respect of the Collateral pursuant to this Indenture, except
(A) as may be required in connection with the
disposition of Collateral by laws affecting the offering and
sale of securities generally, and
(B) with respect to Pledged Bank Stock, for
authorizations, approvals, notices and filings that may be
required pursuant to 12 U.S.C. SECTION 1817(j), 12 U.S.C.
SECTION 1467a, 12 C.F.R. Part 563g, 12 C.F.R. SECTION 567.13
or 12 C.F.R. SECTION 574, or any successor laws or
regulations.
(f) The chief place of business and chief executive office of
the Trust are located at 8401 Connecticut Avenue, Chevy Chase, Maryland
20815. The Trust uses no trade name in connection with its operations.
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SECTION 1206. FURTHER ASSURANCES.
(a) The Trust, at any time and from time to time, at its expense,
will promptly give, execute, deliver, file and/or record any financing
statement, notice, instruments, certificates and other documents and take all
further action that may be necessary or that the Trustee may reasonably request
in order to create, preserve, perfect or validate the first-priority security
interest granted or purported to be granted hereby or to enable the Trustee to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral.
(b) Without limitation of the foregoing, the Trust will file or
cause to be filed, on or before the date of this Indenture, in the appropriate
filing offices in the State of Maryland, Uniform Commercial Code financing
statements adequately describing the Collateral and, thereafter, such renewals,
amendments or continuations thereof or such additional financing statements in
such additional offices in such jurisdictions or in the appropriate filing
offices in such additional jurisdictions as shall be required from time to time
under the Uniform Commercial Code in order to perfect and to continue the
perfection of the security interest in the Collateral.
SECTION 1207. DIVIDENDS; VOTING RIGHTS; ETC.
(a) So long as no Default or Event of Default shall have occurred
and be continuing, the Trust shall be entitled to receive all cash dividends and
distributions (other than any dividends or distributions constituting a return
of capital) and interest paid in respect of the Collateral, and the Trustee,
promptly upon its receipt thereof, if the same are not paid directly to the
Trust, shall deliver the same to the Trust. Upon the occurrence and during the
continuance of a Default or an Event of Default the Trustee shall be entitled to
retain all such dividends, distributions and interest as additional Collateral,
and all such dividends, other distributions and interest shall, if received by
the Trust, be received in trust for the benefit of the Trustee, be segregated
from the other property or funds of the Trust, and be forthwith delivered to the
Trustee to be retained as additional Collateral in the same form as so received
(with any necessary endorsement or assignment); PROVIDED that, if such Default
or Event of Default, and all other Defaults or Events of Default that shall have
thereafter occurred, shall be cured prior to the acceleration of the Securities
or the exercise by the Trustee or the Holders of any other remedies hereunder,
any such dividends, distributions and interest then being held by the Trustee
shall be distributed to the Trust, free of the Lien of this Indenture, promptly
following the Trust's request therefor. Dividends and distributions that
constitute a return of capital and interest that is to be retained by the
Trustee shall be retained by the Trustee in the Collateral account and sub-
account holding the underlying security, investment, instrument or account on
which such dividend or distribution is made or such interest is earned.
(b) The Trust shall be entitled to exercise any and all voting and
other consensual rights relating to Collateral or any part thereof for any
purpose; PROVIDED that no
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vote shall be cast, and no consent, waiver or ratification given or action
taken, that would be inconsistent with or violate Section 1214 or any other
provision of this Indenture or the Securities; and PROVIDED FURTHER that
(i) with respect to Collateral other than Pledged Bank Stock, the
Trust shall no longer have such rights, and such rights shall be vested in
the Trustee, upon notice from the Trustee to the Trust following the
occurrence and during the continuance of a Default or an Event of Default,
and
(ii) with respect to Pledged Bank Stock, the Trust shall no longer
have such rights, and such rights shall be vested in the Trustee, on
five-day's advance notice from the Trustee to the Trust following the
occurrence and during the continuance of an Event of Default and subject to
the satisfaction of any regulatory requirements.
(c) In order to permit the Trustee to exercise the voting and other
consensual rights which it may be entitled to exercise pursuant to Section
1207(b), and to receive all dividends and distributions that it may be entitled
to receive under Section 1207(a), the Trust will, upon written notice from the
Trustee, from time to time execute and deliver to the Trustee such proxies and
other instruments as the Trustee may reasonably request.
SECTION 1208. TRUSTEE APPOINTED ATTORNEY-IN-FACT.
The Trust appoints the Trustee as its attorney-in-fact, with full
authority in the place and stead and in its name or otherwise, from time to time
in the Trustee's discretion, to take any action and to execute any instrument
which the Trustee may deem necessary or advisable in order to accomplish the
purposes of this Article Twelve, including to receive, endorse and collect all
instruments made payable to the Trust representing any dividend, interest
payment or other distribution in respect of the Collateral or any part thereof
and to give full discharge for the same. This power, being coupled with an
interest, is irrevocable.
SECTION 1209. TRUSTEE MAY PERFORM.
If the Trust fails to perform any agreement contained in this Article
Twelve, the Trustee may, but shall not be obligated to, itself perform, or cause
performance of, such agreement, and the expenses of the Trustee incurred in
connection therewith shall be payable by the Trust under Section 606.
SECTION 1210. REMEDIES UPON EVENT OF DEFAULT.
If any Event of Default shall have occurred and be continuing, the
Trustee may exercise in respect of the Collateral, subject, in the case of
Pledged Bank Stock, to the satisfaction of any regulatory requirements, in
addition to other rights and remedies provided for herein or otherwise available
to it, all the rights and remedies provided a secured party
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upon the default of a debtor under the Uniform Commercial Code at that time, and
the Trustee may also, without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at any exchange, broker's board or at any of the Trustee's offices or elsewhere,
for cash, on credit or for future delivery, upon such terms as the Trustee may
determine to be commercially reasonable, and the Trustee or any Holder may be
the purchaser of any or all of the Collateral so sold and, subject to any
applicable requirements of Section 9-504(4) of the Uniform Commercial Code,
thereafter hold the same, absolutely, free from any right or claim of whatsoever
kind. The Trust agrees that, to the extent notice of sale shall be required by
law, at least 30 days' notice to it (in the case of Pledged Bank Stock) or 10
days' notice to it (in the case of any other Collateral) of the time and place
of any public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Trustee shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given. The
Trustee may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned. The Trustee shall
incur no liability as a result of the sale of the Collateral, or any part
thereof, at any private sale conducted in a commercially reasonable manner and
in accordance with Section 9-504(3) of the Uniform Commercial Code and any other
applicable legal requirements. The Trust hereby waives any claims against the
Trustee arising by reason of the fact that the price at which any Collateral may
have been sold at such a private sale was less than the price which might have
been obtained at the public sale, even if the Trustee accepts the first offer
received and does not offer such Collateral to more than one offeree.
The Trust recognizes that, by reason of certain prohibitions contained
in the Securities Act and applicable state securities laws, the Trustee may be
compelled, with respect to any sale of certain of the Collateral, to limit
purchasers to those who will agree, among other things, to acquire such
securities for their own account, for investment, and not with a view to the
distribution or resale thereof. The Trust acknowledges and agrees that any such
sale may result in prices and other terms less favorable to the seller than if
such sale were a public sale without such restrictions. The Trustee shall be
under no obligation to delay the sale of any of the Pledged Shares for the
period of time necessary to permit the Trust to register such securities for
public sale under the Securities Act, or under applicable state securities laws,
even if the Trust would agree to do so.
In connection with the exercise of its rights and remedies under this
Article Twelve or otherwise available to it, the Trustee is authorized to file
such notices, applications and filings as may be necessary or appropriate in
respect of the Pledged Bank Stock.
The Trustee is not authorized or empowered to take any action or
exercise any rights or remedies under this Article Twelve or otherwise available
to it that would expose any Holder to liability under the Capital Maintenance
Agreement or any capital restoration plan guaranty applicable to the Bank.
Neither this Indenture, nor the exercise by the Trustee or any Holder of any
remedies hereunder, nor the acquisition of the Pledged Bank Stock by
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the Trustee or any other Person in any foreclosure sale or otherwise is intended
to cause the Trustee, any Holder or any other Person to have any successor
liability under the Capital Maintenance Agreement.
SECTION 1211. APPLICATION OF PROCEEDS.
Upon the occurrence and during the continuance of an Event of Default
and after the acceleration of the Securities pursuant to Section 502 (so long as
such acceleration has not been rescinded) any cash held by the Trustee as
Collateral and all cash proceeds received by the Trustee in respect of any sale
of, collection from, or other realization upon, all or any part of the
Collateral, shall be applied by the Trustee in the manner specified in Section
506.
SECTION 1212. CONTINUING LIEN; TERMINATION.
Except as provided in Section 1203 and 1207(a) and this Section 1212,
this Indenture shall create a continuing Lien on the Collateral that shall (a)
remain in full force and effect until the payment in full of all Secured
Obligations, (b) be binding upon the Trust and its successors and assigns and
(c) inure to the benefit of the Trustee and its successors, transferees and
assigns.
Notwithstanding anything to the contrary in this Article Twelve, upon
(a) satisfaction by the Trust of the conditions set forth in
Article Four to the satisfaction and discharge of this Indenture,
(b) the payment in full of all Secured Obligations or
(c) the defeasance of the Securities and this Indenture as provided
in Section 1302,
the security interests created under this Indenture shall terminate, and the
Trustee shall, at the request and expense of the Trust, cause to be assigned,
transferred and delivered, against receipt but without any recourse, warranty or
representation whatsoever, any remaining Collateral, to or on the order of the
Trust and shall execute and deliver to the Trust an instrument or instruments
acknowledging the release of such Collateral from the Lien of this Indenture.
SECTION 1213. CERTIFICATES AND OPINIONS.
(a) The Trust will furnish to the Trustee, a certificate or opinion
of an engineer, appraiser or other expert as to the fair value:
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(i) of any property or securities to be released from the Lien of
this Indenture, which certificate or opinion shall state that in the
opinion of the Person making the same the proposed release will not impair
the security under this Indenture in contravention of the provisions
thereof, and which certificate or opinion shall be made by an independent
engineer, appraiser or other expert, if the fair value of such property or
securities and of all other property or securities released since the
commencement of the then-current calendar year, as set forth in the
certificates or opinions required by this Subsection (i), is 10% or more of
the aggregate principal amount of the Securities at the time Outstanding;
but such a certificate or opinion of an independent engineer, appraiser or
other expert shall not be required in the case of any release of property
or securities, if the fair value thereof as set forth in the certificate
required by this Subsection (a) is less than $25,000 or less than 1% of the
aggregate principal amount of the Securities at the time Outstanding;
(ii) to the Trust of any securities, the deposit of which is to be
made the basis for the withdrawal of cash constituting a part of the trust
estate or the release of property or securities subject to the Lien of this
Indenture, and if the fair value to the Trust of such securities and of all
other such securities made the basis of any such withdrawal or release
since the commencement of the then current calendar year, as set forth in
the certificates or opinions required by this subsection (ii), is 10% or
more of the aggregate principal amount of the Securities at the time
Outstanding, such certificate or opinion shall be made by an independent
engineer, appraiser or other expert; but such certificate of an independent
engineer, appraiser or other expert shall not be required with respect to
any securities so deposited, if the fair value thereof to the Trust as set
forth in the certificate or opinion required by this subsection (ii) is
less than $25,000 or less than 1% of the aggregate principal amount of the
Securities at the time Outstanding; and
(iii) to the Trust of any property the subjection of which to the
Lien of this Indenture is to be made the basis for the withdrawal of cash
constituting a part of the trust estate, or the release of property or
securities subject to the Lien of this Indenture, and if
(A) within six months prior to the date of acquisition thereof
by the Trust, such property has been used or operated by a person or
persons other than such obligor, in a business similar to that in
which it has been or is to be used or operated by the Trust, and
(B) the fair value to the Trust of such property as set forth
in such certificate or opinion is not less than $25,000 and not less
than 1% of the aggregate principal amount of the Securities at the
time Outstanding,
such certificate or opinion shall be made by an independent engineer,
appraiser or other expert.
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Any such certificate or opinion may be made by an officer or employee
of the Trust who is duly authorized to make such certificates or opinions by the
Trust from time to time, except in cases in which this Subsection (a) requires
that such certificate or opinion be made by an independent person. In such
cases, such certificate or opinion shall be made by an independent engineer,
appraiser or other expert selected or approved by the Trustee in the exercise of
reasonable care.
At the time it shall deliver to the Trustee any certificate pursuant
to the first paragraph of this Subsection (a), the Trust also shall deliver to
the Trustee an Officers' Certificate as to whether or not a Default or an Event
of Default has occurred and is at such time continuing.
(b) Promptly after the execution and delivery of this Indenture,
the Trust will deliver to the Trustee an Opinion of Counsel either stating that
in the opinion of such counsel this Indenture has been properly recorded and
filed so as to make effective the Lien intended to be created hereby, and
reciting the details of such action, or stating that in the opinion of such
counsel no such action is necessary to make such Lien effective.
(c) Not later than the 120th day after the end of each of its
fiscal years, beginning with its fiscal year ending in 1994, the Trust will
deliver to the Trustee an Opinion of Counsel either stating that in the opinion
of such counsel such action has been taken with respect to the recording,
filing, re-recording and refiling of this Indenture as is necessary to maintain
the Lien of this Indenture, and reciting the details of such action, or stating
that in the opinion of such counsel no such action is necessary to maintain such
Lien. Such Opinion of Counsel shall also state such actions as may be necessary
or appropriate in order to obtain and maintain a perfected security interest in
the Collateral, if such actions are other than as provided in this Indenture, or
shall state that no such actions shall be necessary or appropriate other than as
provided in this Indenture.
SECTION 1214. ADDITIONAL COVENANTS OF THE TRUST.
Until such time as the Secured Obligations shall have been paid in
full, the Trust shall
(a) not sell, assign (by operation of law or otherwise) or
otherwise dispose of, or grant any option or other right with respect to,
any of the Collateral, or create or permit to exist any Lien upon or with
respect to the Collateral, except (i) for the Lien of this Indenture, (ii)
as permitted under Section 1203(e) and (iii) for any such right that shall
not be effective until the Lien of this Indenture on the Collateral shall
have been terminated pursuant to Section 1212;
(b) not permit the Bank to adopt any resolution, by-law, charter
amendment or other proposal, or enter into any contractual restriction, the
effect of which would be to
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(i) alter the number of shares of Voting Stock that must be
voted in favor of any matter to cause its adoption by the Bank or,
except to the extent required by law or that the charter of the Bank
may otherwise provide as of the date of this Indenture, permit any
charter, by-law or other provisions applicable to any class or series
of Voting Stock of the Bank to provide for a class or series vote or
that any action or resolution may be taken or adopted by holders of
the shares of such class or series other than by the vote of a
majority thereof at a meeting duly called and held at which a quorum
is present or the consent of holders of at least a majority of the
shares of such class or series then outstanding, or any class, or
(ii) classify any directors of the Bank (beyond any
classification in effect on the date hereof), permit cumulative voting
for directors or take any action that would diminish the ability of a
holder of Pledged Bank Stock to remove directors;
(c) if any portion of the Collateral shall consist of Margin
Securities, timely notify any Holder of Initial Securities that shall not
have theretofore exchanged such Initial Securities for Exchange Securities
that the Collateral includes Margin Securities and that such Holder may be
required to comply with certain requirements of Regulation G (12 C.F.R.
Part 207, as amended) or U (12 C.F.R. Part 221, as amended) of the Board of
Governors of the Federal Reserve System and deliver in timely fashion to
such Holders such forms as may be required from time to time by Regulation
G or U;
(d) not use any portion of the proceeds of the issue and sale of
the Securities for the purpose, whether immediate or incidental, of
(i) buying or carrying "margin stock" within the meaning of
Regulation G or U, or
(ii) buying, carrying or trading in "securities" within the
meaning of Regulation T (12 C.F.R. Part 220, as amended) or buying or
carrying any part of an investment contract security which shall be
deemed credit for the purpose of buying or carrying the entire
security; and
(e) not change its chief place of business or chief executive
office, or change its name, identity or corporate structure in any manner
that might make any financing or continuation statements filed hereunder
seriously misleading within the meaning of Section 9-402(7) of the Uniform
Commercial Code (or any other applicable provision of the Uniform
Commercial Code), unless it shall have given the Trustee at least 10 days'
prior notice thereof (which notice also shall specify the new chief place
of business and chief executive office of the Trust, if applicable) and an
Opinion of Counsel to the effect specified in Section 1213(c) and unless it
shall have
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taken all such action as may be required under Section 1206 as a result of
such change.
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. TRUST'S OPTION TO EFFECT DEFEASANCE OR COVENANT
DEFEASANCE.
The Trust may, at its option by Board Resolution, at any time, with
respect to the Securities, elect to have either Section 1302 or Section 1303 be
applied to all Outstanding Securities upon compliance with the conditions set
forth below in this Article Thirteen.
SECTION 1302. DEFEASANCE AND DISCHARGE.
Upon the Trust's exercise under Section 1301 of the option applicable
to this Section 1302, the Trust shall be deemed to have been discharged from its
obligations with respect to all Outstanding Securities on the date the
conditions set forth in Section 1304 are satisfied (hereinafter, "defeasance").
For this purpose, such defeasance means that the Trust shall be deemed to have
paid and discharged the entire indebtedness represented by the Outstanding
Securities, which shall thereafter be deemed to be "Outstanding" only for the
purposes of Section 1305 and the other Sections of this Indenture referred to in
(A) and (B) below, and to have satisfied all its other obligations under such
Securities and this Indenture insofar as such Securities are concerned (and the
Trustee, at the expense of the Trust, shall execute proper instruments
acknowledging the same), except for the following which shall survive until
otherwise terminated or discharged hereunder: (A) the rights of Holders of
Outstanding Securities to receive, solely from the trust fund described in
Section 1304 and as more fully set forth in such Section, payments in respect of
the principal of (and premium, if any, on) and interest on such Securities when
such payments are due, (B) the Trust's obligations with respect to such
Securities under Sections 304, 305, 308, 1002 and 1003, (C) the rights, powers,
trusts, duties and immunities of the Trustee hereunder and (D) this Article
Thirteen. Subject to compliance with this Article Thirteen, the Trust may
exercise its option under this Section 1302 notwithstanding the prior exercise
of its option under Section 1303 with respect to the Securities.
SECTION 1303. COVENANT DEFEASANCE.
Upon the Trust's exercise under Section 1301 of the option applicable
to this Section 1303, the Trust shall be released from its obligations under any
covenant contained in Sections 801 and 1009 through 1021 with respect to the
Outstanding Securities on and after the date the conditions set forth below are
satisfied (hereinafter, "covenant defeasance"), and the Securities shall
thereafter be deemed not to be "Outstanding" for the
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purposes of any direction, waiver, consent or declaration or Act of Holders (and
the consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "Outstanding" for all other purposes hereunder. For this
purpose, such covenant defeasance means that, with respect to the Outstanding
Securities, the Trust may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 501(iv),
but, except as specified above, the remainder of this Indenture and such
Securities shall be unaffected thereby.
SECTION 1304. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to application of either Section
1302 or Section 1303 to the Outstanding Securities:
(1) The Trust shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 607 who shall agree to comply with the provisions of this
Article Thirteen applicable to it) as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Securities, (A)
money in United States dollars in an amount, or (B) U.S. Government
Obligations (as defined below) which through the scheduled payment of
principal and interest in respect thereof in accordance with their terms
will provide, not later than one day before the due date of any payment,
money in an amount, or (C) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to
pay and discharge, and which shall be applied by the Trustee (or other
qualifying trustee) to pay and discharge, the principal of (and premium, if
any, on) and interest on the Outstanding Securities on the Stated Maturity
(or Redemption Date, if applicable) of such principal (and premium, if any)
or installment of interest; PROVIDED that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to said payments with respect to the Securities.
Before such a deposit, the Trust may give to the Trustee, in accordance
with Section 1103 hereof, a notice of its election to redeem all of the
Outstanding Securities at a future date in accordance with Article Eleven
hereof, which notice shall be irrevocable. Such irrevocable redemption
notice, if given, shall be given effect in applying the foregoing. For
this purpose, "U.S. Government Obligations" means securities that are (x)
direct obligations of the United States of America for the timely payment
of which its full faith and credit is pledged or (y) obligations of a
Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the timely payment of which
is unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in either case, are not callable or
redeemable at the option of the
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issuer thereof, and shall also include a depository receipt issued by a
bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as
amended), as custodian with respect to any such U.S. Government Obligation
or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder
of such depository receipt, PROVIDED that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific
payment of principal of or interest on the U.S. Government Obligation
evidenced by such depository receipt.
(2) No Default or Event of Default with respect to the Securities
shall have occurred and be continuing on the date of such deposit.
(3) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or
any other material agreement or instrument to which the Trust is a party
or by which it is bound.
(4) In the case of an election under Section 1302, the Trust shall
have delivered to the Trustee an Opinion of Counsel stating that (x) the
Trust has received from, or there has been published by, the Internal
Revenue Service a ruling, or (y) since the date of this Indenture, there
has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon such opinion shall confirm that, the
Holders of the Outstanding Securities will not recognize income, gain or
loss for federal income tax purposes as a result of such defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred.
(5) In the case of an election under Section 1303, the Trust shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Securities will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant
defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred.
(6) Such defeasance or covenant defeasance may not cause the
Trustee for the Securities to have a conflicting interest with respect to
any securities of the Trust or any of its subsidiaries.
(7) The Trust must deliver to the Trustee an opinion of independent
counsel in the United States to the effect that the trust fund will not be
subject to the effect of any applicable bankruptcy, insolvency,
receivership, conservatorship, reorganization or similar laws affecting
creditors' rights generally (including, without limitation, laws relating
to fraudulent and avoidable transfers).
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(8) The Trust must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Trust with the intent of
preferring the Holders of the Securities over the other creditors of the
Trust or with the intent of defeating, hindering, delaying or defrauding
creditors of the Trust.
(9) No event or condition may exist that would prevent the Trust
from making payments of the principal of (and premium, if any, on), and
interest on the Securities, on the date of such deposit.
(10) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance under Section 1302
or the covenant defeasance under Section 1303 (as the case may be) have
been complied with.
SECTION 1305. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE
HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee--collectively for purposes of this
Section 1305, the "Trustee") pursuant to Section 1304 in respect of the
Outstanding Securities shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Trust acting
as its own Paying Agent) as the Trustee may determine, to the Holders of such
Securities of all sums due and to become due thereon in respect of principal
(and premium, if any) and interest, but such money need not be segregated from
other funds except to the extent required by law.
The Trust shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Governmental Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Securities.
Anything in this Article Thirteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Trust from time to time upon Trust Request
any money or U.S. Government Obligations held by it as provided in Section 1304
which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent defeasance or covenant defeasance, as
applicable, in accordance with this Article.
<PAGE>
107
SECTION 1306. REINSTATEMENT.
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 1305 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Trust's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to Section 1302 or 1303, as the case may be, until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 1305; PROVIDED, HOWEVER, that if the Trust makes any payment of
principal of (or premium, if any, on) or interest on any Security following the
reinstatement of its obligations, the Trust shall be subrogated to the rights of
the Holders of such Securities to receive such payment from the money held by
the Trustee or Paying Agent.
This Indenture may be signed in any number of counterparts each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Indenture.
<PAGE>
108
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
[SEAL] By /s/ PHILIP D. CARACI
---------------------------------------
Title: Senior Vice President
Attest: /s/ JEANNELL CHRISTIAN
____________________________
Title: Assistant Secretary
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ WILLIAM C. SCHMOKER
--------------------------------------------
Title: Corporate Trust Officer
<PAGE>
EXHIBIT A
[FACE OF NOTE]
B. F. SAUL REAL ESTATE
INVESTMENT TRUST
11 5/8% [Series B]* Senior Secured Note due 2002
CUSIP 804396 AK 5
No. ___________ $______________________
B. F. SAUL REAL ESTATE INVESTMENT TRUST, an unincorporated business
trust duly organized and existing under the laws of the State of Maryland (the
"Trust", which term includes any successor under the Indenture hereinafter
referred to), for value received, promises to pay to ________________, or its
registered assigns, the principal sum of _________ ($__________), on April 1,
2002.
[Initial Interest Rate: 11 5/8% per annum.]**
[Interest Rate: 11 5/8% per annum.]*
Interest Payment Dates: October 1 and April 1, commencing
October 1, 1994.
Regular Record Dates: September 15 and March 15.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
- ---------------
* Include only for Exchange Securities.
** Include only for Initial Securites.
<PAGE>
A-2
IN WITNESS WHEREOF, the Trust has caused this Note to be
signed manually or by facsimile by its duly authorized officers.
Date: ___________ B. F. SAUL REAL ESTATE
INVESTMENT TRUST
By: ____________________________________
Title:
[Corporate Seal]
Attest:
_________________________________________________
[Assistant] Secretary
<PAGE>
A-3
(Form of Trustee's Certificate of Authentication)
CERTIFICATE OF AUTHENTICATION
This is one of the 11 5/8% [Series B]* enior Secured Notes due 2002 described in
the within-mentioned Indenture.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Trustee
By:________________________
Authorized Signatory
- ---------------
* Include only for Exchange Securities
<PAGE>
A-4
[REVERSE SIDE OF NOTE]
B. F. SAUL REAL ESTATE
INVESTMENT TRUST
11 5/8% [Series B]* Senior Secured Note due 2002
1. PRINCIPAL AND INTEREST.
The Trust will pay the principal of this Note on April 1, 2002.
The Trust promises to pay interest on the principal amount of this
Note on each Interest Payment Date, as set forth below, at the rate of 11 5/8%
per annum (subject to adjustment as provided below)]** [11 5/8% per annum,
except that interest accrued on this Note (or the predecessor Note hereto)
pursuant to the penultimate paragraph of this Section 1 for periods prior to the
applicable Exchange Date (as such term is defined in the Registration Rights
Agreement) will accrue at the rate or rates borne by the predecessor Note hereto
from time to time during such periods pursuant to the Registration Rights
Agreement as set forth below].*
Interest will be payable semiannually on each Interest Payment Date,
commencing October 1, 1994, to the holders of record of the Notes or any
predecessor Notes at the close of business on the September 15 or March 15
immediately preceding the Interest Payment Date.
[The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated March 30, 1994, between the Trust and the
Initial Purchasers party thereto (the "Registration Rights Agreement"). In the
event that either (a) the Exchange Offer Registration Statement (as such term is
defined in the Registration Rights Agreement) is not filed with the Securities
and Exchange Commission on or prior to the 30th calendar day following the date
of original issue of the Notes, (b) the Exchange Offer Registration Statement
has not been declared effective on or prior to the 160th calendar day following
the date of original issue of the Notes or (c) the Exchange Offer (as such term
is defined in the Registration Rights Agreement) is not consummated or a Shelf
Registration Statement (as such term is defined in the Registration Rights
Agreement) is not declared effective on or prior to the 190th calendar day
following the date of original issue of the Notes, the interest
- ---------------
* Include only for Exchange Securities.
** Include only for Initial Securities.
<PAGE>
A-5
rate borne by this Note shall be increased by one-half of one percent per annum
following such 30-day period in the case of clause (a) above, such 160-day
period in the case of clause (b) above or such 190-day period in the case of
clause (c) above; PROVIDED, HOWEVER, that in no event shall the interest rate
borne by this Note be increased by more than 1.5% per annum. Upon (x) the
filing of the Exchange Offer Registration Statement after the 30-day period
described in clause (a) above, (y) the effectiveness of the Exchange Offer
Registration Statement after the 160-day period described in clause (b) above or
(z) the consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, after the 190-day period described
in clause (c) above, the interest rate borne by this Note from the date next
succeeding the date of such filing, effectiveness or consummation, as the case
may be, will be reduced in each case by one-half of one percent per annum (but
in any event, not below the original interest rate set forth above), and after
the Exchange Offer is consummated or a Shelf Registration Statement is declared
effective, the interest rate borne by the Notes will be the original interest
rate.]*
Interest on this Note will accrue from the most recent date to which
interest has been paid [on this Note or the Note surrendered in exchange
herefor]** or, if no interest has been paid, from March 30, 1994; PROVIDED that,
if there is no existing default in the payment of interest and if this Note is
authenticated between a Regular Record Date referred to on the face hereof and
the next succeeding Interest Payment Date, interest shall accrue from such
Interest Payment Date. Interest will be computed on the basis of a 360-day year
of twelve 30-day months.
The Trust will pay interest on overdue principal and premium, if any,
and interest on overdue installments of interest, to the extent lawful, at a
rate per annum equal to the rate of interest applicable to the Notes.
2. METHOD OF PAYMENT.
The Trust will pay interest (except Defaulted Interest) on the
principal amount of the Notes on each October 1 and April 1 to the persons who
are Holders (as reflected in the Security Register at the close of business on
the September 15 or March 15 immediately preceding the Interest Payment Date),
in each case, even if the Note is cancelled on registration of transfer or
registration of exchange after such record date. The Trust will pay the
principal of this Note to the Holder that surrenders this Note to any Paying
Agent on or after April 1, 2002.
The Trust will pay principal, premium, if any, and interest in money
of the United States that at the time of payment is legal tender for payment of
public and private,
- ---------------
* Include only for Initial Securities.
** Include only for Exchange Securities.
<PAGE>
A-6
debts. However, the Trust may pay principal, premium, if any, and, except to
the extent otherwise provided in the Indenture, interest by its check payable
in such money. The Trust will pay interest payable by check by mailing such
check to a Holder's registered address (as reflected in the Security Register).
If a payment date is a date other than a Business Day, payment may be made on
the next succeeding day that is a Business Day and, subject to the provisions of
the Indenture, no interest shall accrue for the intervening period.
3. PAYING AGENT AND REGISTRAR.
Initially, the Trustee will act as authenticating agent, Paying Agent
and Registrar. The Trust may change any authenticating agent, Paying Agent or
Registrar upon written notice thereto. The Trust, any Subsidiary or any
Affiliate of any of them may act as Paying Agent, Registrar or co-registrar.
4. INDENTURE; LIMITATIONS.
The Trust issued the Notes under an Indenture, dated as of March 30,
1994 (the "Indenture"), between the Trust and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee"). Capitalized terms herein are used as
defined in the Indenture unless otherwise indicated. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act. The Notes are subject to all such terms,
and Holders are referred to the Indenture and the Trust Indenture Act for a
statement of all such terms. To the extent permitted by applicable law, in the
event of any inconsistency between the terms of this Note and the terms of the
Indenture, the terms of the Indenture shall control.
The Notes are secured general obligations of the Trust, secured by the
Collateral. The Indenture limits the aggregate principal amount of the Notes to
$175,000,000.
5. REDEMPTION.
The Notes may be redeemed at the election of the Trust, in whole or in
part, at any time and from time to time on or after April 1, 1998, at the
following Redemption Prices (expressed in percentages of principal amount), plus
accrued interest to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date to receive interest due on the
applicable Interest Payment Date), if redeemed during the 12-month period
beginning April 1 of each of the years set forth below:
<PAGE>
A-7
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.70 %
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.80 %
2000 and thereafter. . . . . . . . . . . . . . . . . . . . . 101.90 %
</TABLE>
Notice of a redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each Holder of Notes to be redeemed
at such Holder's last address as it appears in the Security Register. Notes in
original denominations larger than $1,000 may be redeemed in part in integral
multiples of $1,000. On and after the Redemption Date, interest ceases to
accrue on Notes or portions of Notes called for redemption, unless the Trust
defaults in the payment of the Redemption Price.
6. REPURCHASE UPON A CHANGE IN CONTROL TRIGGERING EVENT.
Upon the occurrence of a Change in Control Triggering Event, the Trust
shall be obligated to make an offer to repurchase such Holder's Notes, in whole
or in part, in integral multiples of $1,000, at a purchase price in cash in an
amount equal to 101% of the principal amount thereof, plus accrued interest (if
any) to the date of purchase (the "Change in Control Payment").
A notice of each Change in Control Triggering Event will be mailed
within 30 days after such Change in Control Triggering Event occurs to each
Holder at his last address as it appears in the Security Register. Notes in
original denominations larger than $1,000 may be sold to the Trust in part. On
and after the Change in Control Purchase Date, interest ceases to accrue on
Notes or portions of Notes surrendered for purchase by the Trust, unless the
Trust defaults in the payment of the Change in Control Payment.
7. DENOMINATIONS; TRANSFER; EXCHANGE.
The Notes are in registered form without coupons, in denominations of
$1,000 and multiples of $1,000 in excess thereof. A Holder may register the
transfer or exchange of Notes in accordance with the Indenture. The Registrar
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by law or
permitted by the Indenture. The Registrar need not register the transfer or
exchange of any Notes selected for redemption (except the unredeemed portion of
any Note being redeemed in part). Also, it need not register the transfer or
exchange of any Notes for a period of 15 days before a selection of Notes to be
redeemed is made.
<PAGE>
A-8
8. PERSONS DEEMED OWNERS.
A Holder may be treated as the owner of a Note for all purposes.
9. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Trust. After that, Holders entitled to the money must look to
the Trust for payment, unless an abandoned property law designates another
Person, and all liability of the Trustee and such Paying Agent with respect to
such money shall cease.
10. AMENDMENT; SUPPLEMENT; WAIVER.
Subject to certain exceptions, the Indenture or the Notes may be
amended or supplemented with the consent of the Holders of greater than 50% in
aggregate principal amount of the Notes then outstanding, and any existing
default or compliance with any provision may be waived with the consent of the
Holders of greater than 50% in aggregate principal amount of the Notes then
outstanding. Without notice to or the consent of any Holder, the parties
thereto may amend or supplement the Indenture or the Notes to, among other
things, cure any ambiguity or inconsistency provided such change does not
adversely affect in any material respect the interests of any Holder.
11. RESTRICTIVE COVENANTS.
The Indenture contains certain covenants, including but not limited
to, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
transactions with affiliates; (iv) limitation on asset sales; (v) restriction on
transfer of assets to subsidiaries; (vi) limitation on subsidiaries; (vii)
limitation on dividend and other payment restrictions affecting subsidiaries;
(viii) limitation on issuances and sales of subsidiary stock; (ix) required
ownership of Bank common stock; (x) limitation on disposal of, or liens on, the
Collateral; (xi) restriction on use of proceeds to purchase securities; (xii)
change of control triggering event; and (xiii) restrictions on merger,
consolidation and sale of assets of the Trust. At the end of each fiscal
quarter, the Trust must report to the Trustee on compliance with such covenants.
12. SUCCESSOR PERSONS.
When a successor Person assumes all the obligations of its predecessor
under the Notes and the Indenture in accordance with the Indenture, the
predecessor Person will be released from those obligations.
<PAGE>
A-9
13. DEFAULTS AND REMEDIES.
If an Event of Default shall occur and be continuing, the principal of
all the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
14. SECURITY.
This Note is secured by a security interest in certain Collateral, as
provided in the Indenture, and is entitled to the benefits thereof.
15. TRUSTEE DEALINGS WITH TRUST.
The Trustee under the Indenture, in its individual or any other
capacity, may become the owner or pledgee of Notes and may make loans to, accept
deposits from, perform services for, and otherwise deal with, the Trust and its
Affiliates as if it were not the Trustee.
16. AUTHENTICATION.
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
17. ABBREVIATIONS.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
18. DEFEASANCE.
The Indenture contains provisions for defeasance, at any time, of the
Indebtedness represented by this Note or the covenants governing the
Indebtedness represented by this Note, upon compliance by the Trust with certain
conditions set forth in the Indenture.
19. COPY OF INDENTURE.
The Trust will furnish a copy of the Indenture to any Holder upon
written request and without charge. Requests may be made to B. F. Saul Real
Estate Investment Trust, 8401 Connecticut Avenue, Chevy Chase, Maryland 20815,
Attention: Secretary.
20. NO PERSONAL LIABILITY.
<PAGE>
A-10
The covenants and obligations set forth in this Note and in the
Indenture as having been made by the Trust have been made or assumed by the
trustees or officers of the Trust acting as such trustees or officers pursuant
to the authority vested in them under the Declaration of Trust under which the
Trust is governed. This Note and the Indenture have been executed by trustees
or officers of the Trust in their capacities as trustees or officers under such
Declaration of Trust, and not individually, and, in accordance with the
provisions of the Declaration of Trust, the covenants and obligations of the
Trust or the trustees of the Trust hereunder and under the Indenture are not
personally binding upon, nor shall resort be had to the private property of, any
of the trustees or shareholders, officers, employees or agents of the Trust, but
the property of the Trust only shall be bound.
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture or any indenture supplemental
thereto, personally, against any organizer of the Trust, holder of shares of
beneficial interest of the Trust, officer or trustee, past, present or future,
as such, of the Trust or of any predecessor or successor of the Trust whether by
virtue of any constitution, statute or rule of law or equity, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
<PAGE>
A-11
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
INSERT TAXPAYER IDENTIFICATION NO.
______________________________
______________________________
(Please print or typewrite name and address including zip code of assignee)
______________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing
______________________________
its attorney to transfer such Note on the books of the Trust with full power of
substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL CERTIFICATES
EXCEPT PERMANENT OFFSHORE PHYSICAL
CERTIFICATES]
In connection with any transfer of this Note occurring prior to the
date which is the earlier of the (i) date of an effective Registration Statement
or (ii) three years after the later of the original issuance of this Note or the
last date on which this Note was held by a Affiliate of the Trust, the
undersigned confirms that without utilizing any general solicitation or general
advertising:
[CHECK ONE]
/ / (a) this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by
Rule 144A thereunder,
OR
/ / (b) this Note is being transferred other than in accordance with (a) above
and documents are being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
<PAGE>
A-12
If neither of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 307 of the Indenture shall have
been satisfied.
Date: ______________
_____________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face of
the within-mentioned instrument in every particular,
without alteration or any change whatsoever.
Signature Guarantee*:_______________________________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it or such account is a "qualified institutional
buyer" within the meaning of Rule 144A under the Securities Act of 1933, as
amended, and that each is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Trust as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that each is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated: ____________ ______________________________
NOTICE: To be executed by an
executive officer
- ---------------
*Guarantor must be a member of the Securities Transfer Agents Medallion
Program ("STAMP"), the New York Stock Exchange Medallion Signature Program
("MSP") or the Stock Exchange Medallion Program ("SEMP").
<PAGE>
A-13
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Trust pursuant to
Section 1019 of the Indenture, check the Box: / /.
If you wish to have a portion of this Note purchased by the Trust
pursuant to Section 1019 of the Indenture, state the amount (in original
principal amount) below:
$_________.
Date: ______________
Your Signature: ___________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee*:_______________________________________
- ---------------
*Guarantor must be a member of the Securities Transfer Agents Medallion
Program ("STAMP"), the New York Stock Exchange Medallion Signature Program
("MSP") or the Stock Exchange Medallion Program ("SEMP").
<PAGE>
EXHIBIT B
Form of Certificate
to be Delivered Upon
Termination of Restricted Period
--------------------------------
[On or after ________], ____
Norwest Bank Minnesota,
National Association, as Trustee
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Re: B. F. Saul Real Estate Investment Trust (the "Trust") 11 5/8%
[Series B]* Senior Secured Notes due 2002 (the "Securities")
-------------------------------------------------------------
Ladies and Gentlemen:
This letter relates to U.S. $__________________ principal amount of
Securities represented by the temporary global note certificate (the "Temporary
Certificate"). Pursuant to Section 201 of the Indenture dated as of March 30,
1994 relating to the Securities (the "Indenture"), we hereby certify that (1) we
are the beneficial owner of such principal amount of Securities represented by
the Temporary Certificate and (2) we are a person outside the United States to
whom the Securities could be transferred in accordance with Rule 904 of
Regulation S promulgated under the U.S. Securities Act of 1933, as amended.
Accordingly, you are hereby requested to issue a Certificated Note representing
the undersigned's interest in the principal amount of Securities represented by
the Temporary Certificate, all in the manner provided by the Indenture.
You and the Trust are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:_____________________________________
Authorized Signature
- ---------------
* Include only for Exchange Securities
<PAGE>
EXHIBIT C
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Institutional Accredited Investors
-------------------------------------------------------
____________, ____
B. F. Saul Real Estate Investment Trust
8401 Connecticut Avenue
Chevy Chase, Maryland 20835
Norwest Bank Minnesota,
National Association, as Trustee
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Re: B. F. Saul Real Estate Investment Trust (the "Trust") 11 5/8%
Senior Secured Notes due 2002 (the "Securities")
-------------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of $___________________
aggregate principal amount of the Securities, we confirm that:
1. We have received such information regarding the Trust and Chevy
Chase Bank, F.S.B. as we deem necessary in order to make our
investment decision.
2. We understand that the Securities have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), and, unless
so registered, may not be sold except as permitted in the following
sentence. We agree on our own behalf and on behalf of any investor account
for which we are purchasing the Securities to offer, sell or otherwise
transfer such Securities prior to the date which is three years after the
later of the date of original issue and the last date on which the Trust or
any affiliate of the Trust was the owner of such Securities, or any
predecessor thereto (the "Resale Restriction Termination Date") only (a) to
the Trust, (b) pursuant to a registration statement which has been declared
effective under the
<PAGE>
C-2
Securities Act, (c) for so long as the Securities are eligible for resale
pursuant to Rule 144A under the Securities Act, to a person we reasonably
believe is a qualified institutional buyer under Rule 144A (a "QIB") that
purchases for its own account or for the account of a QIB and to whom
notice is given that the transfer is being made in reliance on Rule 144A,
(d) pursuant to offers and sales to non-U.S. persons that occur outside the
United States within the meaning of Regulations S under the Securities
Act, (e) to an institutional "accredited investor" within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 of Regulation D under the
Securities Act with total assets in excess of $25,000,000 that is acquiring
the Securities for its own account or for the account of such an
institutional "accredited investor" for investment purposes and not with a
view to, or for offer or sale in connection with, any distribution thereof
in violation of the Securities Act or (f) pursuant to any other available
exemption from the registration requirements of the Securities Act, subject
in each of the foregoing cases to any requirement of law that the
disposition of our property and the property of such investor account or
accounts be at all times within our or their control and to compliance with
any applicable state securities laws. The foregoing restrictions on resale
will not apply subsequent to the Resale Restriction Termination Date. If
any resale or other transfer of the Securities is proposed to be made
pursuant to clause (e) above prior to the Resale Restriction Termination
Date, the transferor shall deliver a letter from the transferee
substantially in the form of this letter to the Trustee, which shall
provide, among other things, that the transferee is an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2), (3)
or (7) or Rule 501 under the Securities Act with total assets in excess of
$25,000,000 and that it is acquiring such Securities for investment
purposes and not for distribution in violation of the Securities Act. We
acknowledge that the Trust and the Trustee reserve the right prior to any
offer, sale or other transfer prior to the Resale Restriction Termination
Date of the Securities pursuant to clauses (d), (e) and (f) above to
require the delivery of an opinion of counsel, certifications and/or other
information satisfactory to the Trust and the Trustee.
3. We are an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
with total assets in excess of $25,000,000) purchasing for our own account
or for the account of such an institutional "accredited investor," and we
are acquiring the Securities for investment purposes and not with a view
to, or for offer or sale in connection with, any distribution in violation
of the Securities Act, and we have such knowledge and experience in
financial and business matters as to be capable of evaluating the merits
and risks of our investment in the Securities, and we and any accounts for
which we are acting are each able to bear the economic risk of our or its
investment.
4. We are acquiring the Securities purchased by us for our own
account or for one or more accounts as to each of which we exercise sole
investment discretion.
<PAGE>
C-3
5. You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party
in any administrative or legal proceeding or official inquiry with respect
to the matters covered hereby.
Very truly yours,
By:____________________________________________________
(NAME OF PURCHASER)
Date:___________________________________
Upon transfer, the Securities should be registered in the name of the
new beneficial owner as follows:
Name:______________________________
Address:___________________________
Taxpayer ID Number:________________
<PAGE>
EXHIBIT D
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
- -----------------------------------
____________, ____
Norwest Bank Minnesota,
National Association, as Trustee
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Re: B. F. Saul Real Estate Investment Trust (the "Trust") 11 5/8%
Senior Secured Notes due 2002 (the "Securities")
-------------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of $________________________ aggregate
principal amount of the Securities, we confirm that such sale has been effected
pursuant to and in accordance with Regulation S under the Securities Act of
1933, as amended, and, accordingly, we represent that:
(1) the offer of the Securities was not made to a person in the United States;
(2) either (a) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf reasonably
believed that the transferee was outside the United States or (b) the
transaction was executed in, on or through the facilities of a designated
off-shore securities market and neither we nor any person acting on our behalf
knows that the transaction has been pre-arranged with a buyer in the United
States;
(3) no directed selling efforts have been made in the United States in
contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S,
as applicable; and
(4) the transaction is not part of a plan or scheme to evade the registration
requirements of the U.S. Securities Act of 1933, as amended. In addition, if
the sale is made during a restricted period and the provisions of Rule 903(c)(3)
or Rule 904(c)(1) of Regulation S are
<PAGE>
D-2
applicable thereto, we confirm that such sale has been made in accordance with
the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may
be.
You and the Trust are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceedings or official inquiry with respect to the
matters covered hereby. Terms used in this certificate have the meanings set
forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:_____________________________
Authorized Signature
<PAGE>
EXHIBIT E
SUBORDINATION AGREEMENT
AGREEMENT, dated as of _______ __, ____ between B.F. SAUL REAL ESTATE
INVESTMENT TRUST, an unincorporated business trust duly organized and existing
under the laws of the State of Maryland (the "Trust"), and ____________________,
a _______________________________ (the "Subsidiary")
RECITAL
A. The Trust has issued and may in the future issue its 11 5/8%
Senior Secured Notes due 2002 and 11 5/8% Series B Senior Secured Notes due 2002
pursuant to the Indenture (the "Indenture") dated as of March 30, 1994 between
the Trust and Norwest Bank Minnesota, National Association, as Trustee.
Capitalized terms used herein and not otherwise defined have the respective
meanings specified in the Indenture.
B. Indebtedness of the Trust to the Subsidiary at March 31, 1994
amounted in to $___________________ in aggregate principal amount (such
indebtedness in such principal amount being the "Initial Indebtedness").
C. The Subsidiary may, from time to time after March 31, 1994,
provide additional loans to the Trust (such loans, whether or not constituting a
refunding or refinancing of the Initial Indebtedness, being the "New Subsidiary
Loans").
D. It is a condition to permitting the New Subsidiary Loans under
certain covenants of the Indenture, and the Subsidiary and the Trust desire,
that all such loans from the Subsidiary to the Trust be, governed by and subject
to the provisions of this Agreement.
NOW, THEREFORE, in consideration of the premises hereof, and for other
good and valuable consideration, the parties agree as follows:
Section 1. SUBORDINATION. (a) DEFINITION OF SENIOR INDEBTEDNESS.
For purposes of this Agreement, "Senior Indebtedness" means all principal of and
premium, if any, and interest on (such interest, wherever referred to in this
Agreement, being deemed to include interest accruing after the filing of a
petition initiating any proceeding pursuant to any bankruptcy law in accordance
with and at the rate (including any applicable default rate, to the extent
lawful) specified in any document evidencing such Senior Indebtedness, whether
or not the claim for such interest is allowed as a claim after such filing in
any proceeding under such bankruptcy law) the Securities.
(b) SUBORDINATION OF NEW SUBSIDIARY LOANS. The Trust and the
Subsidiary each covenants and agrees that, to the extent and in the manner
hereinafter set forth in this Section, the New Subsidiary Loans owing from time
to time by the Trust to the Subsidiary and the payment of the principal of and
premium, if any, and interest on the New Subsidiary
<PAGE>
2
Loans are hereby expressly made subordinate and subject in right of payment to
the prior payment in full, in cash or cash equivalents, of the Senior
Indebtedness.
This Agreement shall constitute a continuing offer to all persons who
become Holders, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and the Holders are made obligees hereunder and any one or
more of them may enforce such provisions. Holders need not prove reliance on
the subordination provisions hereof.
(c) PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of
(i) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to the Trust or to its creditors, as such, or to its assets,
or (ii) any liquidation, dissolution or other winding up of the Trust, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (iii) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of the Trust, then and in any such event:
(1) the holders of all Senior Indebtedness shall be entitled to
receive payment in full, in cash or cash equivalents, of all amounts due or
to become due on or in respect of all Senior Indebtedness, or provision
shall be made for such payment in cash or cash equivalents, before the
Subsidiary is entitled to receive any payment on account of principal of
(or premium, if any) or interest on the New Subsidiary Loans; and
(2) any payment or distribution of assets of the Trust of any kind or
character, whether in cash, property or securities, by set-off or
otherwise, to which the Subsidiary would be entitled but for the provisions
of this Agreement, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other indebtedness
of the Trust being subordinated to the payment of the New Subsidiary Loans,
shall be paid by the liquidating trustee or agent or other person making
such payment or distribution, whether a trustee in bankruptcy, a receiver
or liquidating trustee or otherwise, directly to the Trustee, to the extent
necessary to make payment in full, in cash or cash equivalents, of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness; and
(3) in the event that, notwithstanding the foregoing provisions of
this Section, the Subsidiary shall have received any such payment or
distribution of assets of the Trust of any kind or character, whether in
cash, property or securities, on account of the New Subsidiary Loans,
including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Trust
being subordinated to the payment of the New Subsidiary Loans, before all
Senior Indebtedness is paid in full, in cash or cash equivalents, then and
in such event such payment or distribution shall be paid over or delivered
forthwith to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other Person making payment or distribution
of assets of the Trust for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, in cash or cash equivalents,
<PAGE>
3
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
(d) NO PAYMENT WHEN SPECIFIED SENIOR INDEBTEDNESS IN DEFAULT.
(1) (i) In the event of and during the continuation of any default in the
payment of principal of (or premium, if any) or interest on any Senior
Indebtedness beyond any applicable grace period with respect thereto, or (ii)
in the event that any other Event of Default with respect to any Senior
Indebtedness shall have occurred and be continuing and shall have resulted in
such Senior Indebtedness becoming or being declared due and payable prior to
the date on which it would otherwise have become due and payable, then no
payment shall be made by the Trust on account of the principal of (or premium,
if any) or interest on the New Subsidiary Loans or on account of the purchase or
redemption or other acquisition of New Subsidiary Loans, unless and until such
Event of Default shall have been cured or waived or shall have ceased to exist
or any acceleration of the Senior Indebtedness shall have been rescinded or
annulled or the Holders or their agents shall have waived the benefits of this
Section or the Senior Indebtedness shall have been paid in full.
In the event that, notwithstanding the foregoing, the Trust shall make
any payment to the Subsidiary prohibited by the foregoing provisions of this
Section, then and in such event such payment shall be paid over and delivered
forthwith to the Trustee.
(e) PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this
Section shall prevent the Trust, at any time except during the pendency of any
case, proceeding, dissolution, liquidation or other winding up, assignment for
the benefit of creditors or other marshalling of assets and liabilities of the
Trust referred to in Subsection (c) above or under the conditions described in
Subsection (d) above, from making payments at any time of principal of (and
premium, if any) or interest on the New Subsidiary Loans.
(f) SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject
to the payment in full, in cash or cash equivalents, of all Senior Indebtedness,
the Subsidiary shall be subrogated to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness until the principal of (and
premium, if any) and interest on the New Subsidiary Loans shall be paid in full.
(g) PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of
this Section are and are intended solely for the purpose of defining the
relative rights of the Subsidiary on the one hand and the holders of Senior
Indebtedness on the other hand. Nothing contained in this Article or elsewhere
in this Agreement is intended to or shall (1) impair, as among the Trust, its
creditors other than holders of Senior Indebtedness and the Subsidiary, the
obligation of the Trust, which is absolute and unconditional, to pay to the
Subsidiary the principal of (and premium, if any) and interest on the New
Subsidiary Loans as and when the same shall become due and payable in accordance
with their terms; or (2) affect the relative rights against the Trust of the
Subsidiary and creditors of the Trust other than the holders of Senior
Indebtedness; or (3) prevent the Subsidiary from exercising all remedies
otherwise permitted by applicable law upon default under the New Subsidiary
Loans, subject to the rights, if any, under this Section of the holders of
Senior Indebtedness
<PAGE>
4
(i) in any case, proceeding, dissolution, liquidation or other winding up,
assignment for the benefit of creditors or other marshalling of assets and
liabilities of the Trust referred to in Subsection (c) above, to receive,
pursuant to and in accordance with such Section, cash, property and securities
otherwise payable or deliverable to the Trustee or such Holder, or (ii) under
the conditions specified in Subsection (d), to prevent any payment prohibited by
such Subsection.
(h) NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present
or future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Trust or by any act or failure to act, in good
faith, by any such holder, or by any non-compliance by the Trust with the terms,
provisions and covenants of this Indenture, regardless of any knowledge thereof
any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Subsidiary, without incurring
responsibility to the Subsidiary and without impairing or releasing the
subordination provided in this Section or the obligations hereunder of the
Subsidiary to the holders of Senior Indebtedness, do any one or more of the
following: (1) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness or any instrument
evidencing the same or any agreement under which Senior Indebtedness is
outstanding; (2) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any
Person liable in any manner for the collection of Senior Indebtedness; and
(4) exercise or refrain from exercising any rights against the Trust and any
other Person.
(i) NOTICE TO SUBSIDIARY. The Trust shall give prompt written notice
to the Subsidiary of any fact known to the Trust which would prohibit the making
of any payment to the Subsidiary in respect of the New Subsidiary Loans.
(j) RESCISSION. The provisions of this Section shall continue to be
effective or be reinstated, as the case may be, if at any time any payment in
respect of any Senior Indebtedness is rescinded or must otherwise be returned by
the holder thereof upon the insolvency, bankruptcy or reorganization of the
Trust or otherwise, all as though such payment had not been made.
Section 2. ALLOCATION OF REPAYMENTS FIRST TO INITIAL INDEBTEDNESS.
All repayments of Indebtedness owing by the Trust to the Subsidiary shall be
applied first to the Initial Indebtedness and second to the New Subsidiary
Loans.
Section 3. AMENDMENTS, ETC. No amendment or waiver of any provision
of this Agreement, or consent to depart therefrom is permitted at any time for
any reason, except with the consent of the Holders of greater than 50% in
aggregate principal amount of the Outstanding Securities.
<PAGE>
5
Section 4. ASSIGNMENT. No party to this Agreement may assign, in
whole or in part, any of its rights and obligations under this Agreement, except
to its legal successor-in-interest.
Section 5. THIRD PARTY BENEFICIARIES. The Trustee and the Holders
shall be third party beneficiaries to this Agreement and shall have the right to
enforce this Agreement against the Trust and the Subsidiary.
Section 6. HEADINGS. Section and Subsection headings in this
Agreement are included for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 7. ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement of the parties with respect to its subject matter and supersedes all
previous understandings, written or oral, in respect thereof.
Section 8. GOVERNING LAW. This agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 9. TERMINATION OF AGREEMENT. This Agreement shall terminate
at such time as the Lien of the Indenture on the Collateral shall terminate
pursuant to Section 1212 of the Indenture or the Trust shall be released from
its obligations under the covenants contained in Section 1010 of the Indenture
upon the exercise of its option under Section 1301 thereof to effectuate a
covenant defeasance under Section 1303 thereof.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first above stated.
B.F. SAUL REAL ESTATE INVESTMENT TRUST
By___________________________________________
Title:
_____________________________________________
By___________________________________________
Title:
<PAGE>
EXHIBIT 4(C)
Registration Rights Agreement
Dated as of March 30, 1994
among
B. F. Saul Real Estate Investment Trust
and
Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
and
Friedman, Billings, Ramsey & Co., Inc.
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into this 30th day of March, 1994, among B. F. Saul Real Estate
Investment Trust, an unincorporated Maryland business trust (the "Trust"), and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Friedman, Billings, Ramsey & Co., Inc. (collectively, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement, dated as of
March 23, 1994, among the Trust and the Initial Purchasers (the "Purchase
Agreement"), which provides for the sale by the Trust to the Initial Purchasers
of $175,000,000 aggregate principal amount of the Trust's 11 5/8% Senior Secured
Notes due 2002 (the "Notes"). In order to induce the Initial Purchasers to
enter into the Purchase Agreement, the Trust has agreed to provide to the
Initial Purchasers and their direct and indirect transferees the registration
rights set forth in this Agreement. The execution of this Agreement is a
condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"1993 Act" shall mean the Securities Act of 1933, as amended from time
to time.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"Closing Date" shall mean the Closing Date as defined in the Purchase
Agreement.
"Depositary" shall mean The Depository Trust Company, or any other
depositary appointed by the Trust, PROVIDED, HOWEVER, that such depositary must
have an address in the Borough of Manhattan, in the City of New York.
"Exchange Notes" shall mean the 11 5/8% Series B Senior Secured Notes
due 2002 issued by the Trust under the Indenture containing terms identical to
the Notes in all material respects (except that (i) interest thereon shall
accrue from the last interest payment date on which interest was paid on the
Notes or, if no interest has been paid, from the date of original issue of the
Notes, (ii) the transfer restrictions on the Notes shall be modified or
eliminated, as appropriate, and (iii) certain provisions relating to an increase
in the stated rate of interest of the Notes shall be eliminated), to be offered
to Holders of Notes in exchange for Notes pursuant to the Exchange Offer.
<PAGE>
2
"Exchange Offer" shall mean the exchange offer by the Trust of
Exchange Notes for Registrable Notes pursuant to Section 2.1 hereof.
"Exchange Offer Registration" shall mean a registration under the 1933
Act effected pursuant to Section 2.1 hereof.
"Exchange Offer Registration Statement" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another appropriate
form), and all amendments and supplements to such registration statement, in
each case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"Failure To Register" shall have the meaning set forth in Section 3
hereof.
"Holders" shall mean the Initial Purchasers, for so long as they own
any Registrable Notes, and each of their successors, assigns and direct and
indirect transferees who become registered owners of Registrable Notes under the
Indenture, PROVIDED that, for purposes of Section 4 of this Agreement, the term
"Holder" shall include Participating Broker-Dealers (as defined in Section 3(f)
hereof).
"Indenture" shall mean the Indenture relating to the Notes dated as of
March 30, 1994 between the Trust and Norwest Bank Minnesota, National
Association, as trustee, as the same may be amended from time to time in
accordance with the terms thereof.
"Initial Purchaser" or "Initial Purchasers" shall have the meaning set
forth in the preamble.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Notes; PROVIDED that
whenever the consent or approval of Holders of a specified percentage of
Registrable Notes is required hereunder, Registrable Notes held by the Trust
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage or amount.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Notes covered by a Shelf Registration Statement, and by all other
amendments and supplements to a prospectus, including post-effective amendments,
and in each case including all material incorporated by reference therein.
<PAGE>
3
"Purchase Agreement" shall have the meaning set forth in the preamble.
"Registrable Notes" shall mean the Notes; PROVIDED, HOWEVER, that the
Notes shall cease to be Registrable Notes when (i) a Registration Statement with
respect to such Notes shall have been declared effective under the 1933 Act and
such Notes shall have been disposed of pursuant to such Registration Statement,
(ii) such Notes have been sold to the public pursuant to Rule 144(k) (or any
similar provision then in force, but not Rule 144A) under the 1933 Act, (iii)
such Notes shall have ceased to be outstanding or (iv) such Notes have been
exchanged for Exchange Notes upon the consummation of the Exchange Offer.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Trust with this Agreement, including without
limitation: (i) all SEC, stock exchange or National Association of Securities
Dealers, Inc. (the "NASD") registration and filing fees, including, if
applicable, the fees and expenses of any "qualified independent underwriter"
(and the reasonable fees of its counsel) that is required to be retained by any
holder of Registrable Notes in accordance with the rules and regulations of the
NASD, (ii) all fees and expenses incurred in connection with compliance with
state securities or blue sky laws and compliance with the rules of the NASD
(including reasonable fees and disbursements of counsel for any underwriters or
Holders in connection with blue sky qualification of any of the Exchange Notes
or Registrable Notes), (iii) all expenses of any Persons in preparing or
assisting in preparing, word processing, printing and distributing any
Registration Statement, any Prospectus, any amendments or supplements thereto,
any underwriting agreements, securities sales agreements and other documents
relating to the performance of and compliance with this Agreement, (iv) all fees
and expenses incurred in connection with the listing, if any, of any of the
Registrable Notes on any securities exchange or exchanges, (v) all rating agency
fees, (vi) the fees and disbursements of counsel for the Trust and of the
independent public accountants of the Trust, including the expenses of any
special audits or "cold comfort" letters required by or incident to such
performance and compliance, but excluding fees of counsel to the underwriters or
the Holders and underwriting discounts and commissions and transfer taxes, if
any, relating to the sale or disposition of Registrable Securities by a Holder,
(vii) the fees and expenses of the Trustee, and any escrow agent or custodian,
and (viii) any fees and disbursements of the underwriters customarily required
to be paid by issuers or sellers of securities and the reasonable fees and
expenses of any special experts retained by the Trust in connection with any
Registration Statement, but excluding underwriting discounts and commissions and
transfer taxes, if any, and the expenses of any such Holder's counsel relating
to the sale or disposition of Registrable Notes by a Holder.
"Registration Statement" shall mean any registration statement of the
Trust which covers any of the Exchange Notes or Registrable Notes pursuant to
the provisions of this Agreement, and all amendments and supplements to any such
Registration Statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
<PAGE>
4
"SEC" shall mean the Securities and Exchange Commission.
"Shelf Registration" shall mean a registration effected pursuant to
Section 2.2 hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Trust pursuant to the provisions of Section 2.2 of this
Agreement which covers all of the Registrable Notes on an appropriate form under
Rule 415, under the 1933 Act, or any similar rule that may be adopted by the
SEC, and all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"Trust" shall have the meaning set forth in the preamble and shall
also include the Trust's successors.
"Trustee" shall mean the trustee with respect to the Notes under the
Indenture.
2. REGISTRATION UNDER THE 1933 ACT.
2.1 EXCHANGE OFFER. (a) The Trust shall (i) prepare and, not later
than 30 days following the Closing Date, file with the SEC an Exchange Offer
Registration Statement under the 1933 Act with respect to a proposed offer (the
"Exchange Offer") to the Holders to issue and deliver to such Holders, in
exchange for the Registrable Notes, a like principal amount of Exchange Notes,
(ii) use its best efforts to cause the Exchange Offer Registration Statement to
be declared effective under the 1933 Act within 160 days after the Closing Date,
(iii) use its best efforts to keep the Exchange Offer Registration Statement
effective until the closing of the Exchange Offer, subject to its use by
Participating Broker-Dealers (as defined below) as contemplated in Section 3(f)
below, and (iv) use its best efforts to cause the Exchange Offer to be
consummated not later than 190 days following the Closing Date. The Exchange
Notes will be issued under the Indenture. Upon the effectiveness of the
Exchange Offer Registration Statement, the Trust shall promptly commence the
Exchange Offer, it being the objective of such Exchange Offer to enable each
Holder eligible and electing to exchange Registrable Notes for Exchange Notes
(assuming that such Holder is not an affiliate of the Trust within the meaning
of Rule 405 under the 1933 Act, acquires the Exchange Notes in the ordinary
course of such Holder's business and has no arrangements or understandings with
any Person to participate in the Exchange Offer for the purpose of distributing
the Exchange Notes) to trade such Exchange Notes from and after their receipt
without any limitations or restrictions under the 1933 Act and without material
restrictions under the securities laws of a substantial proportion of the
several states of the United States.
(b) In connection with the Exchange Offer, the Trust shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the
<PAGE>
5
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(ii) keep the Exchange Offer open for not less than 30 days after
the date notice thereof is mailed to the Holders (or longer if required by
applicable law);
(iii) use the services of the Depositary for the Exchange Offer;
(iv) permit Holders to withdraw tendered Registrable Notes at any
time prior to the close of business, New York time, on the last business
day on which the Exchange Offer shall remain open, by sending to the
institution specified in the notice a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Registrable Notes delivered for exchange, and a statement that
such Holder is withdrawing his election to have such Notes exchanged; and
(v) otherwise comply in all respects with all applicable laws
relating to the Exchange Offer.
(c) As soon as practicable after the close of the Exchange Offer, the
Trust shall:
(i) accept for exchange all Registrable Notes duly tendered and
not validly withdrawn pursuant to the Exchange Offer in accordance with the
terms of the Exchange Offer Registration Statement and the letter of
transmittal which is an exhibit thereto;
(ii) deliver to the Trustee for cancellation all Registrable
Notes so accepted for exchange; and
(iii) cause the Trustee promptly to authenticate and deliver
Exchange Notes to each Holder of Registrable Notes equal in principal
amount to the Registrable Notes of such Holder so accepted for exchange.
Interest on each Exchange Note will accrue from the last interest
payment date on which interest was paid on the Registrable Notes surrendered in
exchange therefor or, if no interest has been paid on the Registrable Notes,
from the date of original issue of the Registrable Notes. The Exchange Offer
shall not be subject to any conditions, other than that (i) the Exchange Offer,
or the making of any exchange by a Holder, does not violate applicable law or
any applicable interpretation of the staff of the SEC, (ii) no action or
proceeding shall have been instituted or threatened in any court by or before
any governmental agency with respect to the Exchange Offer which, in the Trust's
judgment, might impair the ability of the Trust to proceed with the Exchange
Offer or (iii) there shall not have been adopted or enacted any law, statute,
rule or regulation which, in the Trust's
<PAGE>
6
judgment, would materially impair the ability of the Trust to proceed with the
Exchange Offer. Each Holder of Registrable Notes (other than Participating
Broker-Dealers (as defined below)) who wishes to exchange such Registrable Notes
for Exchange Notes in the Exchange Offer will be required to represent that (i)
it is not an affiliate of the Trust, (ii) any Exchange Notes to be received by
it were acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer it has no arrangement with any Person to
participate in the distribution (within the meaning of the 1933 Act) of the
Exchange Notes. The Trust shall inform the Initial Purchasers of the names and
addresses of the Holders to whom the Exchange Offer is made, and the Initial
Purchasers shall have the right to contact such Holders and otherwise facilitate
the tender of Registrable Notes in the Exchange Offer.
2.2 SHELF REGISTRATION. (a) (i) If, because of any change in law or
applicable interpretations thereof by the staff of the SEC, the Trust is not
permitted to effect the Exchange Offer as contemplated by Section 2.1 hereof, or
(ii) if for any other reason the Exchange Offer is not consummated within 190
days of the date hereof, or (iii) if any Holder (other than an Initial
Purchaser) is not eligible to participate in the Exchange Offer, or (iv) upon
the request of either Initial Purchaser (with respect to any Registrable Notes
which it acquired directly from the Trust) following consummation of the
Exchange Offer if such Initial Purchaser shall hold Registrable Notes which it
acquired directly from the Trust and if such Initial Purchaser is not permitted,
in the opinion of counsel to such Initial Purchaser, pursuant to applicable law
or applicable interpretation of the staff of the SEC to participate in the
Exchange Offer, the Trust shall, at its cost,
(A) as promptly as practicable, file with the SEC, and thereafter
shall use its best efforts to cause to be declared effective as promptly as
practicable, a Shelf Registration Statement relating to the offer and sale
of the Registrable Notes by the Holders from time to time in accordance
with the methods of distribution elected by the Majority Holders and set
forth in such Shelf Registration Statement. In the event the Trust is
required to file a Shelf Registration Statement upon the request of any
Holder (other than an Initial Purchaser) not eligible to participate in the
Exchange Offer pursuant to clause (iii) above or either Initial Purchaser
pursuant to clause (iv) above, the Trust shall file and use its best
efforts to have declared effective by the SEC both an Exchange Offer
Registration Statement pursuant to Section 2.1 hereof with respect to all
Registrable Notes and a Shelf Registration Statement (which may be a
combined Registration Statement with the Exchange Offer Registration
Statement) with respect to offers and sales of Registrable Notes held by
such Holders or such Initial Purchasers after completion of the Exchange
Offer;
(B) use its best efforts to keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming part
thereof to be usable by Holders for a period of three years from the date
the Shelf Registration Statement is declared effective by the SEC or for
such shorter period that will terminate when all Registrable Securities
covered by the Shelf Registration Statement have been sold pursuant to the
Shelf Registration Statement or cease to be outstanding; and
<PAGE>
7
(C) notwithstanding any other provisions hereof, use its best efforts
to ensure that (i) any Shelf Registration Statement and any amendment
thereto and any Prospectus forming part thereof and any supplement thereto
complies in all material respects with the 1933 Act and the rules and
regulations thereunder, (ii) any Shelf Registration Statement and any
amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading and (iii) any Prospectus forming part of any Shelf Registration
Statement, and any supplement to such Prospectus (as amended or
supplemented from time to time), does not include an untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading.
(b) The Trust further agrees, if necessary, to supplement or amend
the Shelf Registration Statement if reasonably requested by the Majority Holders
with respect to information relating to the Holders and otherwise as required by
Section 3(b) hereof, to use its best efforts to cause any such amendment to
become effective and such Shelf Registration to become usable as soon as
thereafter practicable and to furnish to the Holders of Registrable Notes copies
of any such supplement or amendment promptly after its being used or filed with
the SEC.
2.3 EXPENSES. The Trust shall pay all Registration Expenses in
connection with the registration pursuant to Section 2.1 or 2.2 and, in the case
of any Shelf Registration Statement, will reimburse the Holders or Initial
Purchasers for the reasonable fees and disbursements of one firm or counsel
designated in writing by the Majority Holders to act as counsel for the holders
of the Notes in connection therewith, and, in the case of an Exchange Offer
Registration Statement, will reimburse the Initial Purchasers, as applicable,
for the reasonable fees and disbursements of one firm or counsel in connection
therewith. Each Holder shall pay all expenses of its counsel, underwriting
discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such Holder's Registrable Notes pursuant to the Shelf
Registration Statement.
2.4 EFFECTIVENESS. (a) The Trust will be deemed not to have used
its best efforts to cause the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, to become, or to remain, effective
during the requisite period if it voluntarily takes any action that would result
in any such Registration Statement not being declared effective or in the
Holders of Registrable Notes covered thereby not being able to exchange or offer
and sell such Registrable Notes during the period unless (i) such action is
required by applicable law or (ii) such action is taken by the Trust in good
faith and for valid business reasons (not including avoidance of the Trust's
obligations hereunder), including the acquisition or divestiture of assets, so
long as the Trust promptly complies with the requirements of Section 3(b)
hereof, if applicable.
(b) An Exchange Offer Registration Statement pursuant to Section 2.1
hereof
<PAGE>
8
or a Shelf Registration Statement pursuant to Section 2.2 hereof will not be
deemed to have become effective unless it has been declared effective by the
SEC; PROVIDED, HOWEVER, that if, after a Shelf Registration Statement has been
declared effective, the offering of Registrable Notes pursuant to such Shelf
Registration Statement is interfered with by any stop order, injunction or other
order or requirement of the SEC or any other governmental agency or court, such
Shelf Registration Statement will be deemed not to have become effective during
the period of such interference, until the offering of Registrable Notes
pursuant to such Shelf Registration Statement may legally resume.
2.5 ADDITIONAL INTEREST. In the event that (i) the Exchange Offer
Registration Statement is not filed with the SEC on or prior to the 30th
calendar day following the date hereof, (ii) the Exchange Offer Registration
Statement is not declared effective on or prior to the 160th calendar day
following the date hereof or (iii) the Exchange Offer is not consummated or the
Shelf Registration Statement is not declared effective on or prior to the 190th
calendar day following the date hereof, the interest rate borne by the Notes
shall be increased by one-half of one percent per annum following such 30-day
period in the case of clause (i) above, one-half of one percent per annum
following such 160-day period in the case of clause (ii) above and one-half of
one percent per annum following such 190-day period in the case of clause (iii)
above. The aggregate amount of such increase from the original interest rate
pursuant to these provisions in no event will exceed 1.5% per annum. Upon (x)
the filing of the Exchange Offer Registration Statement in the case of clause
(i) above, (y) the effectiveness of the Exchange Offer Registration Statement in
the case of clause (ii) above or (z) the consummation of the Exchange Offer or
the effectiveness of a Shelf Registration Statement, as the case may be, in the
case of clause (iii) above, and provided that none of the conditions set forth
in clauses (i), (ii) and (iii) above continues to exist, the interest rate borne
by the Notes from the date of such filing, effectiveness or consummation, as the
case may be, will be reduced by the full amount of such increase from the
original interest rate.
2.6 SPECIFIC ENFORCEMENT. Without limiting the remedies available to
the Initial Purchasers and the Holders, the Trust acknowledges that any failure
by the Trust to comply with its obligations under Section 2.1 and Section 2.2
hereof may result in material irreparable injury to the Initial Purchasers or
the Holders for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of any such failure, the Initial Purchasers or any Holder may obtain such relief
as may be required to specifically enforce the Trust's obligations under Section
2.1 and Section 2.2 hereof.
3. REGISTRATION PROCEDURES.
In connection with the obligations of the Trust with respect to the
Registration Statements pursuant to Sections 2.1 and 2.2 hereof, the Trust
shall:
(a) prepare and file with the SEC a Registration Statement, within
the time
<PAGE>
9
period specified in Section 2, on the appropriate form under the 1933 Act, which
form (i) shall be selected by the Trust, (ii) shall, in the case of a Shelf
Registration, be available for the sale of the Registrable Notes by the selling
Holders thereof and (iii) shall comply as to form in all material respects with
the requirements of the applicable form and include or incorporate by reference
all financial statements required by the SEC to be filed therewith, and use its
best efforts to cause such Registration Statement to become effective and remain
effective in accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary under applicable
law to keep such Registration Statement effective for the applicable period;
cause each Prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the 1933 Act; and
comply with the provisions of the 1933 Act with respect to the disposition of
all securities covered by each Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by the
selling Holders thereof;
(c) in the case of a Shelf Registration, (i) notify each Holder of
Registrable Notes, at least five days prior to filing, that a Shelf Registration
Statement with respect to the Registrable Notes is being filed and advising such
Holders that the distribution of Registrable Notes will be made in accordance
with the method elected by the Holder of a majority in principal amount of the
Notes being registered; and (ii) furnish to each Holder of Registrable Notes, to
counsel for the Initial Purchasers, to counsel for the Holders and to each
underwriter of an underwritten offering of Registrable Notes, if any, without
charge, as many copies of each Prospectus, including each preliminary
Prospectus, and any amendment or supplement thereto and such other documents as
such Holder or underwriter may reasonably request, including financial
statements and schedules and, if the Holder so requests, all exhibits (including
those incorporated by reference) in order to facilitate the public sale or other
disposition of the Registrable Notes; and (iii) subject to the penultimate
paragraph of Section 3, hereby consent to the use of the Prospectus or any
amendment or supplement thereto by each of the selling Holders of Registrable
Notes in connection with the offering and sale of the Registrable Notes covered
by the Prospectus or any amendment or supplement thereto;
(d) use its best efforts to register or qualify the Registrable Notes
under all applicable state securities or "blue sky" laws of such jurisdiction as
any Holder of Registrable Notes covered by a Registration Statement and each
underwriter of an underwritten offering of Registrable Notes shall reasonably
request by the time the applicable Registration Statement is declared effective
by the SEC, to cooperate with the Holders in connection with any filings
required to be made with the NASD, and do any and all other acts and things
which may be reasonably necessary or advisable to enable each such Holder and
underwriter to consummate the disposition in each such jurisdiction of such
Registrable Notes owned by such Holder; PROVIDED, HOWEVER, that the Trust shall
not be required to (i) qualify as a foreign corporation or as a dealer in
securities in any jurisdiction where it would
<PAGE>
10
not otherwise be required to qualify but for this Section 3(d) or (ii) take any
action which would subject it or its board of trustees to general service of
process or taxation in any such jurisdiction where it is not then so subject;
(e) in the case of a Shelf Registration, notify each Holder of
Registrable Notes and counsel for the Initial Purchasers promptly and, if
requested by such Holder or counsel, confirm such advice in writing promptly (i)
when a Shelf Registration Statement has become effective and when any
post-effective amendments and supplements thereto become effective, (ii) of any
request by the SEC or any state securities authority for post-effective
amendments and supplements to a Shelf Registration Statement and Prospectus or
for additional information after the Shelf Registration Statement has become
effective, (iii) of the issuance by the SEC or any state securities authority of
any stop order suspending the effectiveness of a Shelf Registration Statement or
the initiation of any proceedings for that purpose, (iv) if, between the
effective date of a Shelf Registration Statement and the closing of any sale of
Registrable Notes covered thereby, the representations and warranties of the
Trust contained in any underwriting agreement, securities sales agreement or
other similar agreement, if any, relating to the offering of Registrable Notes
cease to be true and correct in all material respects, (v) of the happening of
any event or the discovery of any facts during the period a Shelf Registration
Statement is effective which makes any statement made in such Shelf Registration
Statement or the related Prospectus untrue in any material respect or which
requires the making of any changes in such Shelf Registration Statement or
Prospectus in order to make the statements therein not misleading, (vi) of the
receipt by the Trust of any notification with respect to the suspension of the
qualification of the Registrable Notes for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose and (vii) of any
determination by the Trust that a post-effective amendment to a Shelf
Registration Statement would be appropriate;
(f) (i) in the case of the Exchange Offer (A) include in the
Exchange Offer Registration Statement a "Plan of Distribution" section covering
the use of the Prospectus included in the Exchange Offer Registration Statement
by broker-dealers who have exchanged their Registrable Notes for Exchange Notes
for the resale of such Exchange Notes, (B) furnish to each broker-dealer who
desires to participate in the Exchange Offer, without charge, as many copies of
each Prospectus included in the Exchange Offer Registration Statement, including
any preliminary prospectus, and any amendment or supplement thereto, as such
broker-dealer may reasonably request, (C) include in the Exchange Offer
Registration Statement a statement that any broker-dealer who holds Registrable
Notes acquired for its own account as a result of market-making activities or
other trading activities (a "Participating Broker-Dealer"), and who receives
Exchange Notes for Registrable Notes pursuant to the Exchange Offer, may be a
statutory underwriter and must deliver a prospectus meeting the requirements of
the 1933 Act in connection with any resale of such Exchange Notes, (D) subject
to the penultimate paragraph of Section 3, hereby consent to the use of the
Prospectus forming part of the Exchange Offer Registration Statement or any
amendment or supplement thereto, by any broker-dealer in connection with the
sale or transfer of the Exchange Notes covered by the Prospectus or any
amendment or
<PAGE>
11
supplement thereto, and (E) include in the transmittal letter or similar
documentation to be executed by an exchange offeree in order to participate in
the Exchange Offer (x) the following provision:
"If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a
broker-dealer that will receive Exchange Notes for its own account in
exchange for Registrable Notes, it represents that the Registrable
Notes to be exchanged for Exchange Notes were acquired by it as a
result of market-making or other trading activities and acknowledges
that it will deliver a prospectus meeting with the requirements of the
1933 Act in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter"
within the meaning of the 1933 Act;" and
(y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus in
connection with the exchange of Registrable Notes, the broker-dealer will
not be deemed to admit that it is an underwriter within the meaning of the
1933 Act; and
(ii) to the extent any Participating Broker-Dealer participates
in the Exchange Offer, the Trust shall use its best efforts to cause to be
delivered at the request of an entity representing the Participating
Broker-Dealers (which entity shall be one of the Initial Purchasers, unless
they elect not to act as such representative) only one, if any, "cold
comfort" letter with respect to the Prospectus in the form existing on the
last date on which exchanges will be accepted and with respect to each
subsequent amendment or supplement, if any, effected during the period
specified in clause (D) below; and
(iii) to the extent any Participating Broker-Dealer participates
in the Exchange Offer, the Trust shall use its best efforts to maintain the
effectiveness of the Exchange Offer Registration Statement for a period of
one year following the closing of the Exchange Offer; and
(iv) the Trust shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement, as would
otherwise be contemplated by Section 3(b) hereof or take any other action
as a result of this Section 3(f), during the period commencing 180 days
after the last date for which exchanges are accepted pursuant to the
Exchange Offer (as such period may be extended by the Trust) and
Participating Broker-Dealers shall not be authorized by the Trust and shall
not deliver such Prospectus after such period in connection with resales
contemplated by this Section 3; and
<PAGE>
12
(v) (A) in the case of an Exchange Offer, furnish counsel for
the Initial Purchasers and (B) in the case of a Shelf Registration, furnish
counsel for the Holders of Registrable Notes, copies of any request by the
SEC or any state securities authority for amendments or supplements to a
Registration Statement and Prospectus or for additional information; and
(vi) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement at the earliest
possible moment and provide immediate notice to each Holder of the
withdrawal of any such order.
(g) in the case of a Shelf Registration, furnish to each Holder of
Registrable Notes, and each underwriter, if any, without charge, at least one
conformed copy of each Registration Statement and any post-effective amendment
thereto, including financial statements and schedules (without documents
incorporated therein by reference and all exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the selling
Holders of Registrable Notes to facilitate the timely preparation and delivery
of certificates representing Registrable Notes to be sold and not bearing any
restrictive legends; and enable such Registrable Notes to be in such
denominations (consistent with the provisions of the Indenture) and registered
in such names as the selling Holders or the underwriters, if any, may reasonably
request at least three business days prior to the closing of any sale of
Registrable Notes;
(i) in the case of a Shelf Registration, upon the occurrence of any
event or the discovery of any facts, each as contemplated by Section 3(e)(v)
hereof, use its best efforts to prepare a supplement or post-effective amendment
to the Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Notes, such
Prospectus will not contain at the time of such delivery any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Trust agrees to notify each Holder to suspend use of the
Prospectus as promptly as practicable after the occurrence of such an event, and
each Holder hereby agrees to suspend use of the Prospectus until the Trust has
amended or supplemented the Prospectus to correct such misstatement or omission.
At such time as such public disclosure is otherwise made or the Trust determines
that such disclosure is not necessary, the Trust agrees promptly to notify each
Holder of such determination, to amend or supplement the Prospectus if necessary
to correct any untrue statement or omission therein and to furnish each Holder
such numbers of copies of the Prospectus, as amended or supplemented, as such
Holder may reasonably request;
(j) a reasonable time prior to the filing of any Registration
Statement, any Prospectus, any amendment to a Registration Statement or
amendment or supplement to a
<PAGE>
13
Prospectus or any document which is to be incorporated by reference into a
Registration Statement or a Prospectus after initial filing of a Registration
Statement, provide copies of such document to the Initial Purchasers, on behalf
of such Holders, and their counsel and make representatives of the Trust as
shall be reasonably requested by the Holders of Registrable Notes, or the
Initial Purchasers on behalf of such Holders, available for discussion of such
document and shall not at any time file or make any amendment to the
Registration Statement, any Prospectus or any amendment of or supplement to a
Registration Statement or a Prospectus or any document which is to be
incorporated by reference into a Registration Statement or a Prospectus, of
which the Initial Purchasers, on behalf of such Holders, and its counsel shall
not have previously been advised and furnished a copy or to which the Initial
Purchasers, on behalf of such Holders, or its counsel shall reasonably object;
(k) obtain a CUSIP number for all Exchange Notes or Registrable
Notes, as the case may be, not later than the effective date of a Registration
Statement, and provide the Trustee with printed certificates for the Exchange
Notes or the Registrable Notes, as the case may be, in a form eligible for
deposit with the Depositary;
(l) (i) cause the Indenture to be qualified under the Trust Indenture
Act of 1939 (the "TIA") in connection with the registration of the Exchange
Notes or Registrable Notes, as the case may be, (ii) cooperate with the Trustee
and the Holders to effect such changes to the Indenture as may be required for
the Indenture to be so qualified in accordance with the terms of the TIA and
(iii) execute, and use its best efforts to cause the Trustee to execute, all
documents as may be required to effect such changes, and all other forms and
documents required to be filed with the SEC to enable the Indenture to be so
qualified in a timely manner;
(m) in the case of a Shelf Registration, enter into agreements
(including underwriting agreements) and take all other customary and appropriate
actions (including those reasonably requested by the Majority Holders) in order
to expedite or facilitate the disposition of such Registrable Notes and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration:
(i) make such representations and warranties to the Holders of
such Registrable Notes and the underwriters, if any, in form, substance and
scope as are customarily made by issuers to underwriters in similar
underwritten offerings as may be reasonably requested by them;
(ii) obtain opinions of counsel to the Trust and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, and the
holders of a majority in principal amount of the Registrable Notes being
sold) addressed to each selling Holder and the underwriters, if any,
covering the matters customarily covered in opinions requested in sales of
securities or underwritten offerings and such other matters as may be
<PAGE>
14
reasonably requested by such Holders and underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Trust's independent certified public accountants addressed to the
underwriters, if any, and use its best efforts to have such letters
addressed to the selling Holders of Registrable Notes, such letters to be
in customary form and covering matters of the type customarily covered in
"cold comfort" letters to underwriters in connection with similar
underwritten offerings;
(iv) enter into a securities sales agreement with the Holders and
an agent of the Holders providing for, among other things, the appointment
of such agent for the selling Holders for the purpose of soliciting
purchases of Registrable Notes, which agreement shall be in form, substance
and scope customary for similar offerings;
(v) if an underwriting agreement is entered into, cause the same
to set forth indemnification provisions and procedures substantially
equivalent to the indemnification provisions and procedures set forth in
Section 5 hereof with respect to the underwriters and all other parties to
be indemnified pursuant to said Section; and
(vi) deliver such documents and certificates as are customarily
delivered in similar offerings and as may be reasonably requested by the
Holders of a majority in principal amount of the Registrable Notes being
sold and the managing underwriters, if any.
The above shall be done at (i) the effectiveness of such Shelf Registration
Statement (and each post-effective amendment thereto) and (ii) each closing
under any underwriting or similar agreement as and to the extent required
thereunder. In the case of any underwritten offering, the Trust shall provide
written notice to the Holders of all Registrable Notes of such underwritten
offering at least 30 days prior to the filing of a Prospectus supplement for
such underwritten offering. Such notice shall (x) offer each such Holder the
right to participate in such underwritten offering, (y) specify a date, which
shall be no earlier than 10 days following the date of such notice, by which
such Holder must inform the Trust of its intent to participate in such
underwritten offering and (z) include the instructions such Holder must follow
in order to participate in such underwritten offering;
(n) in the case of a Shelf Registration, upon the execution of a
confidentiality agreement reasonably requested by the Trust, make available for
inspection by representatives of the Holders of the Registrable Notes and any
underwriters participating in any disposition pursuant to a Shelf Registration
Statement and any counsel or accountant retained by such Holders or
underwriters, all financial and other records, pertinent corporate documents and
properties of the Trust reasonably requested by any such persons, and cause the
respective officers, directors, employees and any other agents of the Trust to
supply all information reasonably requested by any such representative,
underwriter, special counsel or
<PAGE>
15
accountant in connection with a Registration Statement;
(o) (i) a reasonable time prior to the filing of any Exchange Offer
Registration Statement, any Prospectus forming a part thereof, any amendment to
an Exchange Offer Registration Statement or amendment or supplement to a
Prospectus, provide copies of such document to the Initial Purchasers and make
such changes in any such document prior to the filing thereof as any of the
Initial Purchasers may reasonably request; and (ii) in the case of a Shelf
Registration, a reasonable time prior to filing any Shelf Registration
Statement, any Prospectus forming a part thereof, any amendment to such Shelf
Registration Statement or amendment or supplement to such Prospectus, provide
copies of such document to the Holders of Registrable Notes, to the Initial
Purchasers, to counsel on behalf of the Holders and to the underwriter or
underwriters of an underwritten offering of Registrable Notes, if any, make such
changes in any such document prior to the filing thereof as counsel for the
Trust and counsel for the Majority Holders and the underwriter or underwriters
may reasonably agree and cause the representatives of the Trust available for
discussion of such document as shall be reasonably requested by the Holders of
Registrable Notes, the Initial Purchasers on behalf of such Holders or any
underwriter; PROVIDED that any party receiving any document pursuant to this
clause (ii) who does not raise any objections to the filing of such document
within five days after receipt of such document shall be deemed to have no
objection to the filing of such document;
(p) in the case of a Shelf Registration, use its best efforts to
cause all Registrable Notes to be listed on any securities exchange on which
similar debt securities issued by the Trust are then listed if so requested by
the Majority Holders or by the underwriter or underwriters of an underwritten
offering of Registrable Notes, if any;
(q) in the case of a Shelf Registration, use its best efforts to
cause the Registrable Notes to be rated with the appropriate rating agencies if
so requested by the Majority Holders or by the underwriter or underwriters of
an underwritten offering of Registrable Securities, if any;
(r) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering at least 12
months which shall satisfy the provisions of Section 11(a) of the 1933 Act and
Rule 158 thereunder; and
(s) cooperate and assist in any filings required to be made with the
NASD and, in the case of a Shelf Registration, in the performance of any due
diligence investigation by any underwriter and its counsel (including any
"qualified independent underwriter" that is required to be retained in
accordance with the rules and regulations of the NASD).
In the case of a Shelf Registration Statement, the Trust may (as a
condition to such Holder's participation in the Shelf Registration) require each
Holder of Registrable Notes to furnish to the Trust such information regarding
the Holder and the proposed
<PAGE>
16
distribution by such Holder of such Registrable Notes as the Trust may from time
to time reasonably request in writing.
In the case of a Shelf Registration Statement, each Holder agrees
that, upon receipt of any notice from the Trust of the happening of any event or
the discovery of any facts, each of the kind described in Section 3(e)(ii)-(vii)
hereof, such Holder will forthwith discontinue disposition of Registrable Notes
pursuant to a Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 3(i) hereof,
and, if so directed by the Trust, such Holder will deliver to the Trust (at its
expense) all copies in its possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Registrable Notes
current at the time of receipt of such notice. If the Trust shall give any such
notice to suspend the disposition of Registrable Notes pursuant to a Shelf
Registration Statement as a result of the happening of any event or the
discovery of any facts, each of the kind described in Section 3(e)(v) hereof,
the Trust shall be deemed to have used its best efforts to keep the Shelf
Registration Statement effective during such period of suspension provided that
the Trust shall use its best efforts to file and have declared effective (if an
amendment) as soon as practicable an amendment or supplement to the Shelf
Registration Statement and shall extend the period during which the Shelf
Registration Statement shall be maintained effective pursuant to this Agreement
by the number of days during the period from and including the date of the
giving of such notice to and including the date when the Holders shall have
received copies of the supplemented or amended Prospectus necessary to resume
such disposition.
4. UNDERWRITTEN REGISTRATIONS.
If any of the Registrable Notes covered by any Shelf Registration are
to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Majority Holders of such Registrable Notes included in such offering and
shall be reasonably acceptable to the Trust.
No Holder of Registrable Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
5. INDEMNIFICATION AND CONTRIBUTION.
(a) The Trust agrees to indemnify and hold harmless the Initial
Purchasers, each participating Holder, each Participating Broker-Dealer, each
other person who participates in an offering of the Registrable Securities,
including underwriters (as defined in the 1933 Act and referred to herein as
"Underwriters"), and each person, if any, who controls any participating Holder,
Initial Purchaser or any other participating person within
<PAGE>
17
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act (each
of the foregoing being an "Indemnitee"), as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) pursuant to which Exchange Notes or
Registrable Notes were registered under the 1933 Act, including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage, and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Trust; and
(iii) against any and all expense whatsoever, as incurred
(including fees and disbursements of counsel chosen by any Indemnitee),
reasonably incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under
subparagraph (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity shall not apply to any loss, liability,
claim, damage or expense to the extent arising out of any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with written information furnished to the Trust by the Initial
Purchasers, any Holder or any Underwriter expressly for use in a Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement thereto).
(b) In the case of a Shelf Registration, each Holder agrees,
severally and not jointly, to indemnify and hold harmless the Trust, the Initial
Purchasers, each Underwriter and the other selling Holders, and each of their
respective "controlling persons" (within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act) and the trustees of the Trust and each of the
Trust's officers who signed the Shelf Registration Statement against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in
<PAGE>
18
Section 5(a) hereof, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Shelf
Registration Statement (or any amendment thereto) or any Prospectus included
therein (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Trust expressly for use in
the Shelf Registration Statement (or any amendment thereto) or such Prospectus
(or any amendment or supplement thereto); PROVIDED, HOWEVER, that no such Holder
shall be liable for any claims hereunder in excess of the amount of net proceeds
received by such Holder from the sale of Registrable Notes pursuant to such
Shelf Registration Statement.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure so
to notify an indemnifying party shall not relieve such indemnifying party from
any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of such action. If it so elects within a reasonable time after receipt
of such notice, an indemnifying party, jointly with any other indemnifying
parties receiving such notice, may assume the defense of such action with
counsel chosen by it and approved by the indemnified parties defendant in such
action, unless such indemnified parties reasonably object to such assumption on
the ground that there may be legal defenses available to them which are
different from or in addition to those available to such indemnifying party. If
an indemnifying party assumes the defense of such action, the indemnifying
parties shall not be liable for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection with such action. In no
event shall the indemnifying party or parties be liable for the fees and
expenses of more than one counsel separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances.
(d) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason held to be unenforceable by the indemnified parties although
applicable in accordance with its terms, the Trust, the Holders and the Initial
Purchasers shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity incurred by
the Trust, the Holders and the Initial Purchasers; PROVIDED, HOWEVER, that no
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation. As between the Trust, the
Holders and the Initial Purchasers, such parties shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement in such proportions as shall be
appropriate to reflect (i) the relative benefits received by the Trust on the
one hand, the Holders on another hand and the Initial Purchasers on another
hand, from the offering of the Exchange Notes or Registrable Notes included in
such offering, and (ii) the relative fault of the Trust on one hand, the Holders
on another hand and the Initial Purchasers on another
<PAGE>
19
hand, with respect to the statements or omissions which resulted in such loss,
liability, claim, damage or expense, or action in respect thereof, as well as
any other relevant equitable considerations. The Trust, the Holders and the
Initial Purchasers agree that it would not be just and equitable if contribution
pursuant to this Section 5 were to be determined by pro rata allocation or by
any other method of allocation which does not take into account the relevant
equitable considerations. For purposes of this Section 5, each Person, if any,
who controls the Initial Purchasers or a Holder within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Initial Purchasers or such Holder, and each trustee of the
Trust, each officer of the Trust who signed the Registration Statement, and each
Person, if any, who controls the Trust within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Trust. The parties hereto agree that any underwriting
discount or commission or reimbursement of fees paid to any Initial Purchaser
pursuant to the Purchase Agreement shall not be deemed to be a benefit received
by any Initial Purchaser in connection with the offering of the Exchange Notes
or Registrable Notes included in such offering.
6. MISCELLANEOUS.
6.1 RULE 144 AND RULE 144A. For so long as the Trust is subject to
the reporting requirements of Section 13 or 15 of the 1934 Act, the Trust
covenants that it will file the reports required to be filed by it under the
1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and
regulations adopted by the SEC thereunder, that if it ceases to be so required
to file such reports, it will upon the request of any Holder of Registrable
Notes (a) make publicly available such information as is necessary to permit
sales pursuant to Rule 144 under the 1933 Act, (b) deliver such information to a
prospective purchaser as is necessary to permit sales pursuant to Rule 144A
under the 1933 Act and it will take such further action as any Holder of
Registrable Notes may reasonably request, and (c) take such further action that
is reasonable in the circumstances, in each case, to the extent required from
time to time to enable such Holder to sell its Registrable Notes without
registration under the 1933 Act within the limitation of the exemptions provided
by (i) Rule 144 under the 1933 Act, as such Rule may be amended from time to
time, (ii) Rule 144A under the 1933 Act, as such Rule may be amended from time
to time, or (iii) any similar rules or regulations hereafter adopted by the SEC.
Upon the request of any Holder of Registrable Securities, the Trust each will
deliver to such Holder a written statement as to whether it has complied with
such requirements.
6.2 NO INCONSISTENT AGREEMENTS. The Trust has not entered into, and
the Trust will not after the date of this Agreement enter into, any agreement
which is inconsistent with the rights granted to the Holders of Registrable
Notes in this Agreement or which otherwise conflicts with the provisions hereof.
The rights granted to the Holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Trust's other
issued and outstanding securities under any such agreements.
<PAGE>
20
6.3 AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Trust has obtained the written consent of Holders
of at least a majority in aggregate principal amount of the outstanding
Registrable Notes affected by such amendment, modification, supplement, waiver
or departure; PROVIDED, HOWEVER, that no amendment, modification, supplement,
waiver or consent to any departure from the provisions of Section 5 hereof shall
be effective as against any Holder of Registrable Notes unless consented to in
writing by such Holder.
6.4 NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (a) if to a Holder, at the most current address given by such Holder to
the Trust by means of a notice given in accordance with the provisions of this
Section 6.4, which address initially is, with respect to each Initial Purchaser,
the address set forth in the Purchase Agreement; and (b) if to the Trust,
initially at the Trust's address set forth in the Purchase Agreement and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 6.4.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee under the
Indenture, at the address specified in such Indenture.
6.5 SUCCESSOR AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; PROVIDED that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Notes in
violation of the terms of the Purchase Agreement. If any transferee of any
Holder shall acquire Registrable Notes, in any manner, whether by operation of
law or otherwise, such Registrable Notes shall be held subject to all of the
terms of this Agreement, and by taking and holding such Registrable Notes such
person shall be conclusively deemed to have agreed to be bound by and to perform
all of the terms and provisions of this Agreement, including the restrictions on
resale set forth in this Agreement and, if applicable, the Purchase Agreement,
and such person shall be entitled to receive the benefits hereof.
6.6 THIRD PARTY BENEFICIARIES. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Trust, on the one
hand, and the Initial
<PAGE>
21
Purchasers, on the other hand, and shall have the right to enforce such
agreements directly to the extent they deem such enforcement necessary or
advisable to protect their rights.
6.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
6.8 HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
6.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
6.10 SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
6.11 EXECUTION OF AGREEMENT BY TRUST. The name "B.F. Saul Real Estate
Investment Trust" is the designation of the trustees of the Trust under a
Declaration of Trust. All Persons dealing with the Trust must look solely to
the property and assets of the Trust for the enforcement of any claims against
the Trust; neither the trustees, shareholders, officers, employees or agents of
the Trust in their individual capacities assume any personal liability for the
obligations of the Trust; and the respective properties of the trustees,
shareholders, officers, employees and agents of the Trust in their individual
capacities shall not be subject to the claims of any such Persons with respect
to any such obligations.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
B. F. Saul Real Estate
Investment Trust
By: /s/ PHILIP D. CARACI
------------------------
Name: Philip D. Caraci
Title: Senior Vice President
<PAGE>
22
CONFIRMED AND ACCEPTED,
As of the date first above
written:
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Friedman, Billings, Ramsey & Co., Inc.
By Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By: /s/ ERIK N. VAN NISPEN
-----------------------
Name: Erik N. Van Nispen
Title: Director
<PAGE>
EXHIBIT 4(d)
Bank Stock Registration Rights Agreement
Dated as of March 30, 1994
between
B.F. Saul Real Estate Investment Trust
and
Norwest Bank Minnesota, National Association, as Trustee
<PAGE>
BANK STOCK REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into this 30th day of March, 1994, between B.F. Saul Real Estate
Investment Trust, an unincorporated Maryland business trust (the "Trust"), and
Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
The Trust has entered into an Indenture dated as of March 30, 1994 (as
amended from time to time, the "Indenture") with the Trustee in connection with
the Trust's issuance of $175,000,000 aggregate principal amount of its 11 5/8%
Senior Secured Notes due 2002 (the "Notes"). Pursuant to Article Twelve of the
Indenture, the Trust has, among other things, pledged to the Trustee certain
shares of Bank Stock (such term and other capitalized terms used herein and not
otherwise defined having the respective meanings specified in the Indenture).
This Agreement is intended to permit the Trustee to exercise its remedies under
Article Twelve in respect of the Pledged Bank Stock through a public offering
thereof. The execution and delivery of this Agreement by the Trust is a
condition to the issuance of the Notes under the Indenture.
In consideration of the foregoing, the parties hereto agree as
follows:
1. REGISTRATION RIGHTS. If the Trustee shall have determined to
exercise its right to sell all or any of the Pledged Bank Stock pursuant to
Article Twelve of the Indenture, the Trust agrees that, upon request of the
Trustee and at the Trust's expense, the Trust will use its best efforts to cause
Chevy Chase Bank, F.S.B. (the "Bank") to, and, if possible under applicable law,
will:
(a) execute and deliver, and cause the directors and officers of the
Bank or the Trust to execute and deliver, all such instruments and
documents, and do or cause to be done all such other acts and things, as
may be necessary or, in the opinion of the Trustee, advisable to register
the Pledged Bank Stock pursuant to 12 C.F.R. Section 563g of the rules and
regulations of the Office of Thrift Supervision (the "OTS") (all of the
rules and regulations of the OTS set forth in Chapter V of Title 12 of the
Code of Federal Regulations, including, without limitation, 12 C.F.R.
Section 563g, and the rules and regulations of the Securities and Exchange
Commission (the "Commission") made applicable to offering circulars by the
rules and regulations of the OTS, and all amendments to such regulations
and successor regulations and other applicable law, are hereinafter
collectively referred to as the "Rules and Regulations"), to cause the
offering circular on Form OC relating thereto (the "Offering Circular") to
become effective under the Rules and Regulations (such Form OC, as amended
at the time the Offering Circular becomes effective under the Rules and
Regulations, the "Form OC") and to remain effective for such period as
offering circulars are required by law to be furnished and to make all
amendments and
<PAGE>
2
supplements thereto and to the related offering circular that, in the
opinion of the Trustee, are necessary or advisable, all in conformity with
the Rules and Regulations;
(b) use its best efforts to qualify the Pledged Bank Stock under all
applicable state securities or "Blue Sky" laws and to obtain all necessary
governmental approvals for the sale of the Pledged Bank Stock, as requested
by the Trustee;
(c) if required by applicable law, make available to the security
holders of the Bank, as soon as practicable, an earnings statement that
will satisfy the provisions of Section 11(a) of the Securities Act of 1933,
as amended (the "1933 Act");
(d) provide the Trustee with such other information as may be
necessary or, in the opinion of the Trustee, advisable to enable the
Trustee to effect the sale of the Pledged Bank Stock; and
(e) do or cause to be done all such other acts and things as may be
necessary to make such sale of the Pledged Bank Stock or any part thereof
valid and binding and in compliance with applicable law.
The Trustee is authorized, in connection with any sale of the Pledged
Bank Stock pursuant to Article Twelve of the Indenture, to the extent permitted
by applicable law, to deliver or otherwise disclose to any prospective purchaser
of the Pledged Bank Stock (i) any Form OC or offering circular, and all
supplements and amendments thereto, prepared pursuant to clause (a) above, (ii)
any information provided to it pursuant to clause (d) above and (iii) any other
information in its possession relating to the Pledged Bank Stock.
Without limiting the remedies available to the Trustee and the
Holders, the Trust acknowledges that any failure by the Trust to comply with its
obligations under this Section 1 may result in material irreparable injury to
the Trustee or the Holders for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that, in
the event of any such failure, the Trustee or any Holder may obtain such relief
as may be required to specifically enforce the Trust's obligations under this
Section 1.
2. INDEMNIFICATION AND CONTRIBUTION. (a) The Trust agrees, and
agrees to use its best efforts to cause the Bank to agree, to indemnify and hold
harmless the Trustee, each participating Holder, each other person who
participates in the offering of the Pledged Bank Stock, including underwriters
(as defined in the 1933 Act and referred to herein as "Underwriters"), and each
person, if any, who controls the Trustee or any participating Holder or other
participating person within the meaning of Section 15 of the 1933 Act or Section
20 of the Securities Exchange Act of 1934, as amended (the "1934 Act") (each of
the foregoing being an "Indemnitee"), as follows:
<PAGE>
3
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any preliminary Form OC or
the Form OC (or any amendment or supplement thereto) including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary offering circular or Offering Circular (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage, and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Trust and the Bank; and
(iii) against any and all expense whatsoever, as incurred (including
fees and disbursements of counsel chosen by any Indemnitee), reasonably
incurred in investigating, preparing or defending against any litigation,
or investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under subparagraph (i) or (ii)
above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage, or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Trust or the
Bank by any Indemnitee expressly for use in any preliminary Form OC or the Form
OC (or any amendment or supplement thereto) or any preliminary offering circular
or Offering Circular (or any amendment or supplement thereto).
(b) In connection with any underwritten offering, the Trust also
will, and will use its best efforts to cause the Bank to agree to, indemnify
each person who participates as an Underwriter, if any, and each Person who
controls such Persons within the meaning of either Section 15 of the 1933 Act or
Section 20 of the 1934 Act to the same extent as provided above with respect to
the indemnification of the Holders, if requested in connection with any
Registration Statement.
(c) Each Indemnitee shall be required to severally agree to indemnify
and
<PAGE>
4
hold harmless the Trust, the Bank and each of their respective trustees or
directors and each officer of the Bank who signed the Form OC and each Person,
if any, who controls the Trust, the Bank or any other Indemnitee within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in Section 2(a) hereof, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in any
preliminary Form OC or the Form OC (or any amendment or supplement thereto) or
any preliminary offering circular or Offering Circular included therein (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Trust and the Bank expressly for use in any
preliminary Form OC or the Form OC (or any amendment or supplement thereto) or
any such preliminary offering circular or Offering Circular (or any amendment or
supplement thereto); PROVIDED, HOWEVER, that no such Indemnitee shall be liable
for any amount hereunder in excess of the amount of net proceeds received by
such Indemnitee from the sale of Pledged Bank Stock.
(d) Each indemnified party shall be required to give notice as
promptly as reasonably practicable to each indemnifying party of any action
commenced against it in respect of which indemnity may be sought hereunder, but
failure to so notify an indemnifying party shall not relieve such indemnifying
party from any liability which it may have otherwise than on account of this
indemnity agreement. An indemnifying party may participate at its own expense in
the defense of any such action. If it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and approved by the indemnified parties
defendant in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying party or parties be liable for fees and
expenses of more than one counsel separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnity provisions set forth in this Section 2 are
for any reason held to be unenforceable by the indemnified parties although
applicable in accordance with their terms, the Trust and each Indemnitee shall,
and the Trust shall use its best efforts to cause the Bank to agree to,
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement incurred by the Trust, the
Bank and the Indemnitees, as incurred; PROVIDED, HOWEVER, that no Person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any Person who was not guilty of
such fraudulent misrepresentation. The parties hereto agree, and the Trust shall
use its best efforts to cause the Bank to agree, that,
<PAGE>
5
as between the Trust, the Bank and each Indemnitee, such parties shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement in such proportions as shall
be appropriate to reflect (i) the relative benefits received by the Trust and
the Bank on the one hand and each Indemnitee on another hand from the offering
of the Pledged Bank Stock included in such offering, and (ii) the relative fault
of the Trust and the Bank on one hand and each Indemnitee on another hand
with respect to the statements or omissions which resulted in such loss,
liability, claim, damage or expense, or action in respect thereof, as well as
any other relevant equitable considerations; PROVIDED, HOWEVER, that no
Indemnitee shall be liable for any amount hereunder in excess of the amount of
net proceeds received by such Indemnitee from the sale of Pledged Bank Stock.
The parties hereto agree, and the Trust shall use its best efforts to cause the
Bank to agree, that it would not be just and equitable if contribution
pursuant to this Section 2 were to be determined by pro rata allocation or by
any other method of allocation which does not take into account the relevant
equitable considerations. The parties hereto agree, and the Trust shall use its
best efforts to cause the Bank to agree, that, for purposes of this Section 2,
each Person, if any, who controls an Indemnitee within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as such Indemnitee, and each trustee of the Trust, each director of
the Bank, each officer of the Bank who signed the Form OC, and each Person, if
any, who controls the Trust or the Bank within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Trust and the Bank.
3. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders, Indemnitees and the Bank.
4. THIRD PARTY BENEFICIARIES. The Holders, Indemnitees and the Bank
shall be third party beneficiaries to the agreements made hereunder and shall
have the right to enforce such agreements directly to the extent they deem such
enforcement necessary or advisable to protect their rights hereunder.
5. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same agreement.
6. HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
6
8. SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
9. EXECUTION OF AGREEMENT BY TRUST. The name "B.F. Saul Real Estate
Investment Trust" is the designation of the trustees of the trust under a
Declaration of Trust. All Persons dealing with the Trust must look solely to the
property and assets of the Trust for the enforcement of any claims against the
Trust; neither the trustees, shareholders, officers, employees and agents of
the Trust in their individual capacities assume any personal liability for the
obligations of the Trust; and the respective properties of the trustees,
shareholders, officers, employees and agents of the Trust in their individual
capacities shall not be subject to the claims of any such Persons with respect
to any such obligations.
<PAGE>
7
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
B.F. SAUL REAL ESTATE
INVESTMENT TRUST
By: /s/ Philip D. Caraci
-----------------------------
Name: Philip D. Caraci
Title: Senior Vice President
Confirmed and accepted as
of the date first above
written:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as trustee
By: /s/ William C. Schmoker
- ------------------------------------
Name: William C. Schmoker
Title: Corporate Trust Officer
<PAGE>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED FOR THE TWELVE MONTHS ENDED SEPTEMBER 30
DECEMBER 31 -----------------------------------------------------------------------
1993 1993 1992 1991 1990 1989
--------------- ----------- --------------- --------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest and debt expense $ 21,644 $ 95,499 $ 88,042 $ 107,228 $ 103,520 $ 115,756
(excluding interest on
deposits)......................
Preferred stock dividend 2,242 8,932 8,830 8,830 2,208 --
requirement*...................
Ground rent..................... 21 506 542 533 535 506
--------------- ----------- --------------- --------------- ----------- -----------
Total fixed charges for ratio 23,907 104,937 97,414 116,591 106,263 116,262
excluding interest on
deposits.....................
Interest on deposits............ 33,142 135,726 192,929 294,445 326,981 313,221
--------------- ----------- --------------- --------------- ----------- -----------
Total fixed charges for ratio $ 57,049 $ 240,663 $ 290,343 $ 411,036 $ 433,244 $ 429,483
including interest on
deposits.....................
--------------- ----------- --------------- --------------- ----------- -----------
--------------- ----------- --------------- --------------- ----------- -----------
EARNINGS:
Operating income (loss)......... $ (4,097) $ 19,354 $ 14,898 $ (26,147) $ 13,789 $ 14,180
Total fixed charges for ratio 23,907 104,937 97,414 116,591 106,263 116,262
excluding interest on
deposits.......................
Preferred stock dividend (2,242) (8,932) (8,830) (8,830) (2,208) --
requirement....................
Capitalized interest............ (564) (2,274) (1,878) (2,116) (1,157) (1,710)
--------------- ----------- --------------- --------------- ----------- -----------
Total earnings for ratio 17,004 113,085 101,604 79,498 116,687 128,732
excluding interest on
deposits.....................
Interest on deposits............ 33,142 135,726 192,929 294,445 326,981 313,221
Capitalized interest............ (1,759) (7,934) (11,308) (13,735) (5,706) (6,326)
--------------- ----------- --------------- --------------- ----------- -----------
Total earnings for ratio $ 48,387 $ 240,877 $ 283,225 $ 360,208 $ 437,962 $ 435,627
including interest on
deposits.....................
--------------- ----------- --------------- --------------- ----------- -----------
--------------- ----------- --------------- --------------- ----------- -----------
RATIO OF EARNINGS TO FIXED
CHARGES:
Excluding interest on Less than 1 1.1 x 1.0 x Less than 1 1.1 x 1.1 x
deposits.....................
--------------- ----------- --------------- --------------- ----------- -----------
--------------- ----------- --------------- --------------- ----------- -----------
Including interest on Less than 1 1.0 x Less than 1 Less than 1 1.0 x 1.0 x
deposits.....................
--------------- ----------- --------------- --------------- ----------- -----------
--------------- ----------- --------------- --------------- ----------- -----------
Excess (deficiency) of available $ (8,662) $ 214 $ (7,118) $ (50,828) $ 4,718 $ 6,144
earnings to fixed charges
including interest on
deposits.......................
--------------- ----------- --------------- --------------- ----------- -----------
--------------- ----------- --------------- --------------- ----------- -----------
<FN>
- ------------------------
* Statutory federal and state income rates were used in the computation of the
preferred stock dividend requirement.
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
DATE OF
SITE OF ACQUISITION/ CURRENT PRINCIPAL BUSINESS
INCORPORATION FORMATION ACTIVITY
------------- ----------- ----------------------------------
<S> <C> <C> <C>
100% OWNED SUBSIDIARIES
Avenel Executive Park Phase II, Inc. Maryland 1987 Real Estate Partner
BFS Funding Corporation Maryland 1988 Corporate Nominee
The Chase Restaurants, Inc. Georgia 1985 Inactive
Circle 75 Health Club, Inc. Georgia 1985 Inactive
Circle 75 Hotel Corp. Georgia 1980 Inactive
Commerce Center Development Corp. Florida 1980 Office Park Owner
Crosstown Shopping Center, Inc. Oklahoma 1991 Inactive
Crystal City Hospitality Corp. Virginia 1986 Hotel Owner
Dearborn Corporation Delaware 1992 Office Bldg. & Land Owner
Dulles Airport Hotel Corp. Virginia 1986 Inactive
Dulles Hospitality Corp. Virginia 1986 Inactive
Flagship Centre Corporation Maryland 1985 Land Owner
French Market Mall, Inc. Oklahoma 1991 Inactive
MHC Airport Inn, Inc. (a) New York 1980/1976 Hotel Operator
MHC Corporation Maryland 1980/1974 Hotel Operator
NVA Development Corporation Virginia 1984 Gen'l Part/Real Est. P/ship
PDS Development Corporation Florida 1979 Inactive
Peachtree/Northeast Corp. Georgia 1979 Office Park Owner
Perimeter Hotel Corp. Georgia 1985 Inactive
Pueblo Hotel Corp. Colorado 1985 Hotel Owner
Rochester Airport Hotel Corp. New York 1986 Inactive
Satellite Blvd. Hotel Corp. Georgia 1985 Inactive
Scope Hospitality Corporation Virginia 1986 Hotel Owner
Sharonville Hotel Corporation Ohio 1986 Inactive
Sullyfield Corporation Virginia 1984 Inactive
Timber Resources, Inc. Delaware 1988 Inactive
Town Centre Corporation Kansas 1985 Inactive
Tysons Corner Hospitality Corp. Virginia 1986 Inactive
Wheeler Road, Inc. Maryland 1992 Inactive
800 Building, Inc. Georgia 1985 Inactive
900 Corporation Georgia 1979 Office Bldg. Owner
1100 Corporation Georgia 1979 Office Bldg. Owner
1113 Corporation Florida 1984 Gen'l Part/Real Est. P/ship
80% OWNED SUBSIDIARY
Chevy Chase Bank, FSB United States 1969 Savings Bank
Continued on Following Page
<FN>
- ------------------------------
(a) Subsidiary of MHC Corporation.
</TABLE>
<PAGE>
LIST OF SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DATE OF
SITE OF ACQUISITION/ CURRENT PRINCIPAL BUSINESS
NOTE INCORPORATION FORMATION ACTIVITY
--------- ------------- ----------- ----------------------------------
<S> <C> <C> <C> <C>
80% OWNED SUBSIDIARIES
Ashburn Village Development Corporation (A) Maryland 1991 Real Estate Owned (REO)
Bailey's Corporation (A) Maryland 1993 REO
Balmoral Golf Corporation (A) Maryland 1992 REO
Bondy Way Development Corporation (A) Maryland 1990 REO
Brambleton Land Corporation (A) Maryland 1977 REO
Brooke Manor Land Corporation (A) Maryland 1990 REO
Brookshire Manor Corporation (A) Maryland 1992 REO
B. F. Saul Mortgage Company (A) Maryland 1984 Loan Originator
CCRE,Inc. (B) Maryland 1984 REO
Cherrytree Corporation (A) Maryland 1993 REO
Chevy Chase Insurance Agency, Inc. (A) Maryland 1985/1971 Insurance Agency
Chevy Chase Mortgage Company (A) Maryland 1972 Inactive
Chevy Chase Securities, Inc. (A) Maryland 1984 Securities Broker/Dealer
Colt's Neck, Inc. (A) Maryland 1992 REO
Country Roads Property Corp. (A) Maryland 1992 REO
Crossing, Inc. (A) Maryland 1992 REO
Duvall Village Corporation (A) Maryland 1992 REO
First Balmoral Corp. (A) Maryland 1991 REO
Glen Road Property Corp. (A) Maryland 1992 REO
Goldsboro Heights Property Corp. (A) Maryland 1992 REO
Great Seneca Development Corporation (A) Maryland 1991 REO
Group Investment Corporation (B) Maryland 1986 Real Estate Finance
Inglewood Corporation (A) Maryland 1990 REO
Jayselle Corporation (A) Maryland 1992 REO
MVEP Corporation (A) Maryland 1993 REO
Manor Investment Company (A) Maryland 1971 Real Estate Ownership/Development
Marbury I Corporation (A) Maryland 1991 REO
Marbury II Corporation (A) Maryland 1991 REO
Marlboro Square, Inc. (A) Maryland 1992 REO
North Ode Street Development Corporation (B) Maryland 1981 Real Estate Finance/Development
Oak Den, Inc. (A) Maryland 1991 REO
Old Chapel Corporation (A) Maryland 1992 REO
One and Two Centre Park, Inc. (A) Maryland 1992 REO
PMC Corporation (A) Maryland 1991 REO
Presley Corporation (A) Maryland 1993 REO
Primrose Development Corporation (A) Maryland 1990 REO
Ridgeview Centre Corp. (A) Maryland 1992 REO
Ronam Corporation, Inc. (B) Maryland 1986 Real Estate
Seven Lakes Development Corporation (A) Maryland 1991 REO
Shoppes of Jefferson, Ltd. (A) Virginia 1991 REO
Sidebay, Ltd. (A) Virginia 1991 REO
Six Commerce Park Corp. (A) Virginia 1991 REO
Sully Park Corporation (A) Maryland 1990 REO
Sully Station Corporation (A) Maryland 1990 REO
Summit 66 Corporation (A) Maryland 1991 REO
Sycolin-Leesburg Corporation (A) Maryland 1992 REO
Technology Trading Corp. (A) Maryland 1991 REO
Terminal Drive Properties Corporation (A) Maryland 1991 REO
Wister Corp. (A) Maryland 1992 REO
Wisteria Corporation (A) Maryland 1991 REO
11440 Commerce Park Corp. (A) Virginia 1991 REO
<FN>
- ------------------------------
(A) Subsidiary of Chevy Chase Bank, F. S. B.
(B) Subsidiary of Manor Investment Company.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 25
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
---------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT
TO SECTION 305(b)(2)___
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
A National Banking Association 41-1592157
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national Identification No.)
bank)
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
(Address of principal executive offices) (Zip code)
---------------------------
B.F. Saul Real Estate Investment Trust
(Exact name of obligor as specified in its charter)
Maryland 52-6053341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(Address of principal executive offices) (Zip Code)
---------------------------
$175,000,000
11 5/8% Series B Senior Secured Notes
Due 2002
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 1. GENERAL INFORMATION. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust
powers.
Item 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-15 of this Form T-1 because the obligor is
not in default as provided under Item 13.
Item 16. LIST OF EXHIBITS List below all exhibits filed as a part of this
Statement of Eligibility. The trustee incorporates
by reference into this Form T-1 the exhibits
attached hereto, as indicated.
Exhibit 1. a. A copy of Articles of Association of the trustee
now in effect.*
Exhibit 2. a. A copy of the certificate of authority of the
trustee to commence business issued June 28, 1872,
by the Comptroller of the Currency to The
Northwestern National Bank of Minneapolis.*
b. A copy of the certificate of the Comptroller of
the Currency dated January 2, 1934, approving the
consolidation of the Northwestern National Bank of
Minneapolis and the Minnesota Loan and Trust
Company of Minneapolis.*
c. A copy of the certificate of the Acting
Comptroller of the Currency dated January 12,
1943, as to change of corporate title of
Northwestern National Bank and Trust Company of
Minneapolis to Northwestern National Bank of
Minneapolis.*
d. A copy of the certificate of the Comptroller of
the Currency dated May 1, 1983, authorizing
Norwest Bank Minneapolis, National Association, to
act as fiduciary.*
<PAGE>
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued January 2, 1934, by the
Federal Reserve Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b)
of the Act.*
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.**
Exhibit 8. A copy of the certificate dated May 10, 1983 of name
change from Northwestern National Bank Minneapolis to
Norwest Bank Minneapolis, National Association.*
Exhibit 9. A copy of the certificate dated January 11, 1988, of
name change from Norwest Bank Minneapolis, National
Association to Norwest Bank Minnesota, National
Association.*
* Incorporated by reference to the exhibit of the same number filed with the
registration statement number 33-66086.
** Filed herewith.
<PAGE>
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Expires February 28, 1995
- --------------------------------------------------------------------------------
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
1
Please refer to page i,
Table of Contents, for
the required disclosure
of estimated burden.
- --------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR
A BANK WITH DOMESTIC AND FOREIGN OFFICES-FFIEC 031
REPORT AT THE CLOSE OF BUSINESS DECEMBER 31, 1993 (931231)
--------
RCRT 9999
This report is required by law: 12 U.S.C. Section 324 (State member banks); 12
U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. Section 161 (National
banks).
This report form is to be filed by banks with branches and consolidated
subsidiaries in U.S. territories and possessions, Edge or Agreement
subsidiaries, foreign branches, consolidated foreign subsidiaries, or
International Banking Facilities.
- --------------------------------------------------------------------------------
NOTE: The Reports of Condition and Income must be signed by an authorized
officer and the Report of Condition must be attested to by not less than two
directors (trustees) for State nonmember banks and three directors for State
member and National banks.
I, Mark P. Wagener, Director, Bank & Service Accounting,
-----------------------------------------------------
Name and title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of Condition and
Income (including the supporting schedules) have been prepared in
conformance with the instructions issued by the appropriate Federal
regulatory authority and are true to the best of my knowledge and belief.
/s/ Mark P. Wagener
- --------------------------------------------------
Signature of Officer Authorized to Sign Report
1/28/94
- --------------------------------------------------
Date of Signature
The Reports of Condition and Income are to be prepared in accordance with
Federal regulatory authority instructions. NOTE: These instructions may in some
cases differ from generally accepted accounting principles.
We, the undersigned directors (trustees), attest to the correctness of this
Report of Condition (including the supporting schedules) and declare that it has
been examined by us and to the best of our knowledge and belief has been
prepared in conformance with the instructions issued by the appropriate Federal
regulatory authority and is true and correct.
/s/
- --------------------------------------------------
Director (Trustee)
/s/
- --------------------------------------------------
Director (Trustee)
/s/
- --------------------------------------------------
Director (Trustee)
- --------------------------------------------------------------------------------
FOR BANKS SUBMITTING HARD COPY REPORT FORMS:
STATE MEMBER BANKS: Return the original and one copy to the appropriate Federal
Reserve District Bank.
STATE NONMEMBER BANKS: Return the original only in the SPECIAL RETURN ADDRESS
ENVELOPE PROVIDED. If express mail is used in lieu of the special return address
envelope, return the original only to the FDIC, c/o Quality Data Systems, 2139
Espey Court, Crofton, MD 21114.
NATIONAL BANKS: Return the original only in the SPECIAL RETURN ADDRESS ENVELOPE
PROVIDED. If express mail is used in lieu of the special return address
envelope, return the original only to the FDIC, c/o Quality Data Systems, 2139
Espey Court, Crofton, MD 21114.
- --------------------------------------------------------------------------------
FDIC Certificate Number 0 5 2 0 8
---------
RCRI 9060 CALL NO. 186 31 12-31-93
CERT: 05208 00017 STBK 27-4095
NORWEST BANK MINNESOTA, NATIONAL ASS
SIXTH STREET AND MARQUETTE AVENUE
MINNEAPOLIS, MN 55479-0016
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE>
2
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR
A BANK WITH DOMESTIC AND FOREIGN OFFICES
TABLE OF CONTENTS
SIGNATURE PAGE COVER
REPORT OF INCOME
Schedule RI--Income Statement RI-1,2,3
Schedule RI-A--Changes in Equity Capital RI-3
Schedule RI-B--Charge-offs and Recoveries and Changes in
Allowance for Loan and Lease Losses RI-4,5
Schedule RI-C--Applicable Income Taxes by Taxing Authority RI-5
Schedule RI-D--Income from International Operations RI-6
Schedule RI-E--Explanations RI-7,8
REPORT OF CONDITION
Schedule RC--Balance Sheet RC-1,2
Schedule RC-A--Cash and Balances Due From Depository Institutions RC-3
Schedule RC-B--Securities RC-4,5
Schedule RC-C--Loans and Lease Financing Receivables:
Part I. Loans and Leases RC-6,7
Part II. Loans to Small Businesses and Small Farms
(included in the forms for June 30 only) RC-7a,7b
Schedule RC-D--Assets Held in Trading Accounts in
Domestic Offices Only (to be completed only by banks with
$1 billion or more in total assets) RC-8
Schedule RC-E--Deposit Liabilities RC-9,10
Schedule RC-F--Other Assets RC-11
Schedule RC-G--Other Liabilities RC-11
Schedule RC-H--Selected Balance Sheet Items for Domestic Offices RC-12
Schedule RC-I--Selected Assets and Liabilities of IBFs RC-12
Schedule RC-K--Quarterly Averages RC-13
Schedule RC-L--Off-Balance Sheet Items RC-14,15
Schedule RC-M--Memoranda RC-16,17
Schedule RC-N--Past Due and Nonaccrual Loans, Leases,
and Other Assets RC-18,19
Schedule RC-O--Other Data for Deposit Insurance Assessments RC-19,20
Schedule RC-R--Risk-Based Capital RC-21,22
Optional Narrative Statement Concerning the Amounts Reported
in the Reports of Condition and Income RC-23
Special Report (to be completed by all banks)
Schedule RC-J--Repricing Opportunities (sent only to and
to be completed only by savings banks)
Disclosure of Estimated Burden
The estimated average burden associated with this information collection is 29.2
hours per respondent and is estimated to vary from 14.6 to 150 hours per
response, depending on individual circumstances. Burden estimates include the
time for reviewing instructions, gathering and maintaining data in the required
form, and completing the information collection, but exclude the time for
compiling and maintaining business records in the normal course of a
respondent's activities. Comments concerning the accuracy of this burden
estimate and suggestions for reducing this burden should be directed to the
Office of Information and Regulatory Affairs, Office of Management and Budget,
Washington D.C. 20503, and to one of the following:
Secretary
Board of Governors of the Federal Reserve System
Washington, D.C. 20551
Legislative and Regulatory Analysis Division
Office of the Comptroller of the Currency
Washington, D.C. 20219
Assistant Executive Secretary
Federal Deposit Insurance Corporation
Washington, D.C. 20429
For information or assistance, national and state nonmember banks should contact
the FDIC's Call Reports Analysis Unit, 530 17th Street, NW, Washington, D.C.
20429, toll free on (800) 688-FDIC (3342), Monday through Friday between
8:00 a.m. and 5:00 p.m., Eastern time. State member banks should contact their
Federal Reserve District Bank.
<PAGE>
3
Consolidated Report of Income
for the period January 1, 1993 - December 31, 1993
All Report of Income schedules are to be reported on a calendar year-to-date
basis in thousands of dollars.
Schedule RI - Income Statement
<TABLE>
<CAPTION>
I480 -
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Interest income:
a. Interest and fee income on loans:
(1) In domestic offices: RIAD
----
(a) Loans secured by real estate________________________________________________ 4011 427,147 1.a.1a
(b) Loans to depository institutions____________________________________________ 4019 58 1.a.1b
(c) Loans to finance agricultural production and other loans to farmers_________ 4024 315 1.a.1c
(d) Commercial and industrial loans_____________________________________________ 4012 179,309 1.a.1d
(e) Acceptances of other banks__________________________________________________ 4026 309 1.a.1e
(f) Loans to individuals for household, family, and other personal expenditures:
(1) Credit cards and related plans__________________________________________ 4054 14,887 1.a.1f1
(2) Other___________________________________________________________________ 4055 52,406 1.a.1f2
(g) Loans to foreign governments and official institutions______________________ 4056 0 1.a.1g
(h) Obligations (other than securities and leases) of states and political
subdivisions in the U.S.:
(1) Taxable obligations_____________________________________________________ 4503 5 1.a.1h1
(2) Tax-exempt obligations__________________________________________________ 4504 1,644 1.a.1h2
(i) All other loans in domestic offices_________________________________________ 4058 3,644 1.a.1i
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs___________________ 4059 4,290 1.a.2
b. Income from lease financing receivables:
(1) Taxable leases__________________________________________________________________ 4505 32,215 1.b.1
(2) Tax-exempt leases_______________________________________________________________ 4307 0 1.b.2
c. Interest income on balances due from depository institutions:(1)
(1) In domestic offices_____________________________________________________________ 4105 41 1.c.1
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs___________________ 4106 949 1.c.2
d. Interest and dividend income on securities:
(1) U.S. Treasury securities and U.S. Government agency and corporation
obligations_____________________________________________________________________ 4027 89,653 1.d.1
(2) Securities issued by states and political subdivisions in the U.S.:
(a) Taxable securities__________________________________________________________ 4506 0 1.d.2a
(b) Tax-exempt securities_______________________________________________________ 4507 5,329 1.d.2b
(3) Other domestic debt securities__________________________________________________ 3657 8,945 1.d.3
(4) Foreign debt securities_________________________________________________________ 3658 0 1.d.4
(5) Equity securities (including investments in mutual funds)_______________________ 3659 9,144 1.d.5
e. Interest income from assets held in trading accounts________________________________ 4069 3,907 1.e
- ----------
<FN>
(1) Includes interest income on time certificates of deposit not held in trading
accounts.
</TABLE>
<PAGE>
4
Schedule RI - Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Interest income (continued)
f. Interest income on federal funds sold and securities purchased
under agreements to resell in domestic offices of the bank RIAD Year-to-date
----
and of its Edge and Agreement subsidiaries, and in IBFs_________ 4020 44,718 1.f
g. Total interest income (sum of items 1.a through 1.f)____________ 4107 878,915 1.g
2. Interest expense:
a. Interest on deposits:
(1) Interest on deposits in domestic offices:
(a) Transaction accounts (NOW accounts, ATS accounts, and
telephone and preauthorized transfer accounts)__________ 4508 12,242 2.a.1a
(b) Nontransaction accounts:
(1) Money market deposit accounts (MMDAs)_______________ 4509 38,738 2.a.1b1
(2) Other savings deposits______________________________ 4511 8,342 2.a.1b2
(3) Time certificates of deposit of $ 100,000 or more___ 4174 15,108 2.a.1b3
(4) All other time deposits_____________________________ 4512 93,597 2.a.1b4
(2) Interest on deposits in foreign offices, Edge and
Agreement subsidiaries, and IBFs____________________________ 4172 22,514 2.a.2
b. Expense of federal funds purchased and securities sold under
agreements to repurchase in domestic offices of the bank and
of its Edge and Agreement subsidiaries, and in IBFs_____________ 4180 92,030 2.b
c. Interest on demand notes issued to the U.S. Treasury and on
other borrowed money____________________________________________ 4185 64,684 2.c
d. Interest on mortgage indebtedness and obligations under
capitalized leases______________________________________________ 4072 122 2.d
e. Interest on subordinated notes and debentures___________________ 4200 6,469 2.e
f. Total interest expense (sum of items 2.a through 2.e)___________ 4073 353,846 2.f
3. Net interest income (item 1.g minus 2.f)___________________________ 4074 525,069 3.
4. Provisions:
a. Provision for loan and lease losses_____________________________ 4230 16,480 4.a
b. Provision for allocated transfer risk___________________________ 4243 0 4.b
5. Noninterest income:
a. Income from fiduciary activities________________________________ 4070 92,025 5.a
b. Service charges on deposit accounts in domestic offices_________ 4080 63,366 5.b
c. Trading gains (Losses) and fees from foreign exchange
transactions____________________________________________________ 4075 6,781 5.c
d. Other foreign transaction gains (Losses)________________________ 4076 2,403 5.d
e. Gains (losses) and fees from assets held in trading accounts____ 4077 5,082 5.e
f. Other noninterest income:
(1) Other fee income____________________________________________ 5407 134,840 5.f.1
(2) All other noninterest income*_______________________________ 5408 74,300 5.f.2
g. Total noninterest income (sum of items 5.a through 5.f)_________ 4079 378,797 5.g
6. Gains (losses) on securities not held in trading accounts__________ 4091 24,577 6.
7. Noninterest expense:
a. Salaries and employee benefits__________________________________ 4135 240,974 7.a
b. Expense of premises and fixed assets (net of rental income)
(excluding salaries and employee benefits and mortgage
interest)_______________________________________________________ 4217 67,796 7.b
c. Other noninterest expense*______________________________________ 4092 190,469 7.c
d. Total noninterest expense (sum of items 7.a through 7.c)________ 4093 499,239 7.d
8. Income (loss) before income taxes and extraordinary items and
other adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6,
and 7.d)___________________________________________________________ 4301 412,724 8.
9. Applicable income taxes (on item 8)________________________________ 4302 150,783 9.
10. Income (loss) before extraordinary items and other adjustments
(item 8 minus 9)__________________________________________________ 4300 261,941 10.
- ----------
<FN>
* Describe on Schedule RI-5 - Explanations.
</TABLE>
<PAGE>
5
Schedule RI - Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11. Extraordinary items and other adjustments:
a. Extraordinary items and other adjustments, gross of income RIAD Year-to-date
----
taxes*_________________________________________________________ 4310 0 11.a
b. Applicable income taxes (on item 11.a)*________________________ 4315 0 11.b
c. Extraordinary items and other adjustments, net of
income taxes (item 11.a minus 11.b)____________________________ 4320 0 11.c
12. Net income (loss) (sum of items 10 and 11.c)______________________ 4340 261,941 12.
</TABLE>
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Interest expense incurred to carry tax-exempt securities, loans, and leases acquired RIAD Year-to-date
----
after August 7, 1986, that is not deductible for federal income tax purposes_________ 4513 38 M.1
2. Not applicable______________________________________________________________________
3. Estimated foreign tax credit included in applicable income taxes, items 9 and 11.b
above________________________________________________________________________________ 4309 0 M.3
4. To be completed only by banks with $1 billion or more in total assets:
Taxable equivalent adjustment to "Income (loss) before income taxes and extraordinary
items and other adjustments" (item 8 above)__________________________________________ 1244 6,276 M.4
Number
5. Number of full-time equivalent employees on payroll at end of current period (round to ------
nearest whole number)________________________________________________________________ 4150 4,735 M.5
</TABLE>
Schedule RI-A - Changes in Equity Capital
Indicate decreases and losses in parentheses.
<TABLE>
<CAPTION>
I483 -
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Total equity capital originally reported in the December 31, 1992, Reports of RIAD
----
Condition and Income_________________________________________________________________ 3215 886,118 1.
2. Equity capital adjustments from amended Reports of Income, net*______________________ 3216 0 2.
3. Amended balance end of previous calendar year (sum of items 1 and 2)_________________ 3217 886,118 3.
4. Net income (loss) (must equal Schedule RI, item 12)__________________________________ 4340 261,941 4.
5. Sale, conversion, acquisition, or retirement of capital stock, net___________________ 4346 0 5.
6. Changes incident to business combinations, net_______________________________________ 4356 5,817 6.
7. LESS: Cash dividends declared on preferred stock_____________________________________ 4470 0 7.
8. LESS: Cash dividends declared on common stock________________________________________ 4460 105,000 8.
9. Cumulative effect of changes in accounting principles from prior years* (see
instructions for this schedule)______________________________________________________ 4411 0 9.
10. Corrections of material accounting errors from prior years* (see instructions for
this schedule)_______________________________________________________________________ 4412 0 10.
11. Change in net unrealized loss on marketable equity securities________________________ 4413 12,007 11.
12. Foreign currency translation adjustments_____________________________________________ 4414 ( 111) 12.
13. Other transactions with parent holding company* (not included in items 5, 7, or
8 above)_____________________________________________________________________________ 4415 22,227 13.
14. Total equity capital end of current period (sum of items 3 through 13) (must equal
Schedule RC, item 28)________________________________________________________________ 3210 1,082,999 14.
- ----------
<FN>
* Describe on Schedule RI-E - Explanations.
</TABLE>
<PAGE>
6
Schedule RI-B - Charge-offs and Recoveries and Changes in Allowance
for Loan and Lease Losses
Part I. Charge-offs and Recoveries on Loans and Leases
Part I includes charge-offs and recoveries through the allocated transfer risk
reserve.
<TABLE>
<CAPTION>
I486 -
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------
--------------calendar year-to-date------------
(Column A) (Column B)
Charge-offs Recoveries
------------------------------ ----------------
<S> <C> <C> <C> <C> <C>
1. Loans secured by real estate: RIAD RIAD
---- ----
a. To U.S. addressees (domicile)________________________ 4651 11,825 4661 17,834 1.a
b. To non-U.S. addressees (domicile)____________________ 4652 0 4662 0 1.b
2. Loans to depository institutions and acceptances of
other banks:
a. To U.S. banks and other U.S. depository
institutions_________________________________________ 4655 0 4663 0 2.a
b. To foreign banks_____________________________________ 4654 0 4664 0 2.b
3. Loans to finance agricultural production and other
loans to farmers________________________________________ 4655 0 4665 0 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile)________________________ 4645 12,927 4617 11,842 4.a
b. To non-U.S. addressees (domicile)____________________ 4644 0 4618 248 4.b
5. Loans to individuals for household, family, and other
personal expenditures:
a. Credit cards and related plans_______________________ 4656 3,256 4666 374 5.a
b. Other (includes single payment, installment, and
all student loans)___________________________________ 4657 6,386 4667 2,876 5.b
6. Loans to foreign governments and official institutions__ 4643 0 4627 867 6.
7. All other loans_________________________________________ 4644 2,394 4628 745 7.
8. Lease financing receivables:
a. Of U.S. addressees (domicile)________________________ 4658 2,002 4668 184 8.a
b. Of non-U.S. addressees (domicile)____________________ 4659 0 4669 0 8.b
9. Total (sum of items 1 through 8)________________________ 4635 37,790 4605 34,970 9.
</TABLE>
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- -------------------------------------------------------------------------------------------------------------------------
To be completed by national banks only. ----Cumulative Charge-offs---- ----Cumulative Recoveries-----
<S> <C> <C> <C> <C>
1. Charge-offs and recoveries of Special-Category Loans, Jan 1 1986 through Dec 31 1989 Jan 1 1986 through Report Date
as defined for this Call Report by the Comptroller of RIAD RIAD
---- ----
the Currency____________________________________________ 4784 9,159 M.1
<CAPTION>
-------------calendar year-to-date-------------
Memoranda items 2 and 3 are to be completed (Column A) (Column B)
by all banks Charge-offs Recoveries
---------------------- -----------------
2. Loans to finance commercial real estate, construction, RIAD RIAD
---- ----
and land development activities (not secured by real
estate) included in Schedule RI-B, part 1,
items 4 and 7, above___________________________________ 5409 0 5410 0 M.2
3. Loans secured by real estate in domestic offices
(included in Schedule R1-B, part 1, item 1, above):
a. Construction and land development___________________ 3582 0 3583 3,261 M.3.a
b. Secured by farmland_________________________________ 3584 0 3585 0 M.3.b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4
family residential properties and extended
under lines of credit___________________________ 5411 0 5412 0 M.3.c1
(2) All other loans secured by 1-4 family
residential properties__________________________ 5413 2,975 5414 262 M.3.c2
d. Secured by multifamily (5 or more) residential
properties__________________________________________ 3588 0 3589 0 M.3.d
e. Secured by nonfarm nonresidential properties________ 3590 8,850 3591 14,311 M.3.e
</TABLE>
<PAGE>
7
Schedule RI-B - Continued
Part II. Changes in Allowance for Loan and Lease Losses
and in Allocated Transfer Risk Reserve
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------------
(Column A) (Column B)
Allowance for Loan and Lease Allocated Transfer Risk
Losses Reserve
---------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1. Balance originally reported in the December 31, 1992, RIAD RIAD
---- ----
Reports of Condition and Income________________________ 3124 163,425 3131 0 1.
2. Recoveries (column A must equal part I, item 9,
column B above)________________________________________ 4605 34,970 3132 0 2.
3. LESS: Charge-offs (column A must equal part I, item 9,
column A above)________________________________________ 4635 37,790 3133 0 3.
4. Provision (column A must equal Schedule RI, item 4.a;
column B must equal schedule RI, item 4.b)_____________ 4230 16,480 4243 0 4.
5. Adjustments* (see instructions for this schedule)______ 4815 1,750 3134 0 5.
6. Balance end of current period (sum of items 1 through
5) (column A must equal Schedule RC, item 4.b; column B
must equal Schedule RC, item 4.c)______________________ 3123 178,835 3128 0 6.
- ----------
<FN>
* Describe on Schedule RI-E - Explanations.
</TABLE>
Schedule RI-C - Applicable Income Taxes by Taxing Authority
<TABLE>
<CAPTION>
I489 -
Schedule RI-C is to be reported with the December Report of Income. Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------------
RIAD
----
<S> <C> <C> <C>
1. Federal_______________________________________________________________________________________ 4780 134,970 1.
2. State and local_______________________________________________________________________________ 4790 15,262 2.
3. Foreign_______________________________________________________________________________________ 4795 551 3.
4. Total (sum of items 1 through 3) (must equal sum of Schedule RI, items 9 and 11.b)____________ 4770 150,783 4.
RIAD
----
5. Deferred portion of item 4______________________________ 4772 17,093 5.
</TABLE>
<PAGE>
8
SCHEDULE RI-D - INCOME FROM INTERNATIONAL OPERATIONS
For all banks with foreign offices, Edge or Agreement subsidiaries, or IBFs
where international operations account for more than 10 percent of total
revenues, total assets, or net income.
PART I. ESTIMATED INCOME FROM INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
__________________________________________________________________________________________________________________________
RIAD Year-to date
<S> <C> <C> <C>
1. Interest income and expense booked at foreign offices, Edge and Agreement
subsidiaries, and IBFs:
a. Interest income booked__________________________________________________ 4837 8,339 1.a
b. Interest expense booked_________________________________________________ 4838 3,502 1.b
c. Net interest income booked at foreign offices, Edge and Agreement
subsidiaries, and IBFs (item 1.a minus 1.b)_____________________________ 4839 4,831 1.c
2. Adjustments for booking location of international operations:
a. Net interest income attributable to international operations booked at
domestic offices________________________________________________________ 4840 2,340 2.a
b. Net interest income attributable to domestic business booked at foreign
offices_________________________________________________________________ 4841 N/A 2.b
c. Net booking location adjustment (item 2.a minus 2.b)____________________ 4842 2,340 2.c
3. Noninterest income and expense attributable to international operations:
a. Noninterest income attributable to international operations_____________ 4097 15,973 3.a
b. Provision for loan and lease losses attributable to
international operations________________________________________________ 4235 ( 1,374) 3.b
c. Other noninterest expense attributable to international
operations______________________________________________________________ 4239 23,798 3.c
d. Net noninterest income (expense) attributable to international
operations (item 3.a minus 3.b and 3.c)_________________________________ 4843 ( 6,451) 3.d
4. Estimated pretax income attributable to international operations before
capital allocation adjustment (sum of items 1.c, 2.c, and 3.d)_____________ 4844 720 4.
5. Adjustment to pretax income for internal allocations to international
operations to reflect the effects of equity capital on overall bank funding
costs______________________________________________________________________ 4845 N/A 5.
6. Estimated pretax income attributable to international operations after
capital allocation adjustment (sum of items 4 and 5)_______________________ 4846 720 6.
7. Income taxes attributable to income from international operations as
estimated in item 6 _______________________________________________________ 4797 213 7.
8. Estimated net income attributable to international operations (item 6 minus
7)_________________________________________________________________________ 4341 507 8.
<CAPTION>
MEMORANDA
Dollar amounts in thousands
___________________________________________________________________________________________________________________________
1. Intracompany interest income included in item 1.a above ___________________ 4847 2,973 M.1
2. Intracompany interest expense included in item 1.b above __________________ 4848 5 M.2
</TABLE>
PART II. SUPPLEMENTARY DETAILS ON INCOME FROM INTERNATIONAL OPERATIONS REQUIRED
BY THE DEPARTMENTS OF COMMERCE AND TREASURY FOR PURPOSES OF THE U.S.
INTERNATIONAL ACCOUNTS AND THE U.S. NATIONAL INCOME AND PRODUCT ACCOUNTS
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
_________________________________________________________________________________________________________________________________
RIAD Year-to-date
<S> <C> <C> <C>
1. Interest income booked at IBFs ____________________________________________ 4849 0 1.
2. Interest expense booked at IBFs __________________________________________ 4850 0 2.
3. Noninterest income attributable to international operations booked at domestic
offices (excluding IBFs):
a. Gains (losses) and extraordinary items ________________________________ 5491 361 3.a
b. Fees and other noninterest income _____________________________________ 5492 6,845 3.b
4. Provision for loan and lease losses attributable to international operations
booked at domestic offices (excluding IBFs) _______________________________ 4852 ( 1,357) 4.
5. Other noninterest expense attributable to international operations booked at
domestic offices (excluding IBFs)__________________________________________ 4853 12,231 5.
</TABLE>
<PAGE>
9
SCHEDULE RI-E - EXPLANATIONS
SCHEDULE RI-E IS TO BE COMPLETED EACH QUARTER ON A CALENDAR YEAR-TO-DATE BASIS
Detail all adjustments in Schedules RI-A and RI-B, all extraordinary items and
other adjustments in Schedule RI, and all significant items of other noninterest
income and other noninterest expense in Schedule RI. (See instructions for
details.)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
______________________________________________________________________________________________________________________________
RIAD Year-to-date
<S> <C> <C> <C>
1. All other noninterest income (from Schedule RI, item 5.f.(2))
Report amounts that exceed 10% of Schedule RI, item 5.f.(2):
a. Net gains in other real estate owned __________________________________ 5415 N/A 1.a
b. Net gains on sales of loans ___________________________________________ 5416 N/A 1.b
c. Net gains on sales of premises and fixed assets _______________________ 5417 N/A 1.c
Itemize and describe the three largest other amounts that exceed 10% of
Schedule RI, item 5.f.(2):
TEXT RIAD
---- ----
d. 4461: PROCESSING FEES 4461 28,937 1.d
------------------------------------------------------------------------
e. 4462: UNREALIZED GAINS ON CAPS, FLOORS, SWAPS 4462 13,714 1.e
------------------------------------------------------------------------
f. 4463: SECURITIZATION CLEAN-UP CALL GAIN 4463 9,626 1.f
------------------------------------------------------------------------
2. Other noninterest expense (from Schedule RI, item 7.c):
a. Amortization expense of intangible assets_______________________________ 4531 11,059 2.a
Report amounts that exceed 10% of Schedule RI, item 7.c:
b. Net losses on other real estate owned___________________________________ 5418 N/A 2.b
c. Net losses on sales of loans____________________________________________ 5419 N/A 2.c
d. Net losses on sales of premises and fixed assets________________________ 5420 N/A 2.d
Itemize and describe the three largest other amounts that exceed 10% of
Schedule RI, item 7.c:
TEXT RIAD
---- ----
e. 4464: PROCESSING EXPENSE
------------------------------------------------------------------------ 4464 44,987 2.e
f. 4467 4467 N/A 2.f
------------------------------------------------------------------------
g. 4468 4468 N/A 2.g
------------------------------------------------------------------------
3. Extraordinary items and other adjustments (from Schedule RI, item 11.a) and
applicable income tax effect (from Schedule RI, item 11.b) (itemize and
describe all extraordinary items and other adjustments):
<CAPTION>
TEXT RIAD
---- ----
<S> <C> <C> <C> <C> <C>
a. (1) 6440: Effect of adopting FASB Statement No. 109, "Accounting
------------------------------------------------------------------
for Income Taxes"
----------------- 6440 0 3.a.1
(2) Applicable income tax effect____________ 4486 0 3.a.2
b. (1) 4487:___________________________________ 4487 0 3.b.1
(2) Applicable income tax effect____________ 4488 0 3.b.2
c. (1) 4489:___________________________________ 4489 0 3.c.1
(2) Applicable income tax effect____________ 4491 0 3.c.2
4. Equity capital adjustments from amended Reports of Income (from Schedule
RI-A, item 2 ) (itemize and describe all adjustments):
<CAPTION>
<C> <C> <C> <C>
TEXT RIAD
---- ----
a. 4492:_____________________________________________________________________ 4492 N/A 4.a
b. 4493:_____________________________________________________________________ 4493 N/A 4.b
5. Cumulative effect of changes in accounting principles from prior years (from
Schedule RI-A, item 9) (itemize and describe all changes in accounting
principles):
TEXT RIAD
---- ----
a. 4494:_____________________________________________________________________ 4494 N/A 5.a
b. 4495:_____________________________________________________________________ 4495 N/A 5.b
6. Corrections of material accounting errors from prior years (from Schedule RI-A,
item 10) (itemize and describe all corrections):
TEXT RIAD
---- ----
a. 4496:_____________________________________________________________________ 4496 N/A 6.a
b. 4497:_____________________________________________________________________ 4497 N/A 6.b
</TABLE>
<PAGE>
10
SCHEDULE RI-B - CONTINUED
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
____________________________________________________________________________________________________________________________________
7. Other transactions with parent holding company (from Schedule RI-A, item 13) (itemize
and describe all such transactions):
TEXT RIAD Year-to-date
---- ---- ------------
<S> <C> <C> <C>
a. 4498: CAPITAL INFUSION 4498 22,227 7.A
---------------------------------------------------------------------
b. 4499:_____________________________________________________________________ 4499 N/A 7.b
8. Adjustments to allowance for loan and lease losses (from Schedule RI-B, part II,
item 5) (itemize and describe all adjustments):
TEXT
----
a. 4521: CREDIT CARD IN POOL PARTICIPATION 4521 910 8.a
---------------------------------------------------------------------
b. 4522: PURCHASED ALLOWANCE (NET) 4522 840 8.b
---------------------------------------------------------------------
I
</TABLE>
9. Other explanations (the space below is provided for the bank to briefly
describe, at its option, any other significant items affecting the Report of
Income):
No comment: X (RIAD 4769)
Other explanations (please type or print clearly):
(TEXT 4769)
<PAGE>
11
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED
SAVINGS BANKS FOR DECEMBER 31, 1993
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
<TABLE>
<CAPTION>
C400 -
Dollar Amounts in Thousands
________________________________________________________________________________________________________________________________
RCFD
----
<S> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin (1)____________________ 0081 770,961 1.a
b. Interest-bearing balances (2)_____________________________________________ 0071 37,486 1.b
2. Securities (from Schedule RC-B)_____________________________________________ 0390 1,823,588 2.
3. Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and
in IBFs:
a. Federal funds sold________________________________________________________ 0276 1,402,112 3.a
b. Securities purchased under the agreement to resell________________________ 0277 150,719 3.b
4. Loans and lease financing receivables: RCFD
a. Loans and leases, net of unearned income ----
(from Schedule RC-C)_________________________________ 2122 10,764,757 . . . . . . 4.a
b. LESS: Allowances for loan and lease losses___________ 3123 178,835 . . . . . . 4.b
c. LESS: Allocated transfer risk reserve________________ 3128 0 . . . . . . 4.c
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.6 and 4.c)_______________________ 2125 10,585,922 4.d
5. Assets held in trading accounts______________________________________________ 2146 109,922 5.
6. Premises and fixed assets (including capitalized leases)_____________________ 2145 110,447 6.
7. Other real estate owned (from Schedule RC-H) _______________________________ 2150 17,938 7.
8. Investments in unconsolidated subsidiaries and associated companies (from
Schedule RC-H)______________________________________________________________ 2130 2,698 8.
9. Customers' liability to this bank on acceptances outstanding_________________ 2155 32,335 9.
10. Intangible assets (from Schedule RC-H)_______________________________________ 2143 40,342 10.
11. Other assets (from Schedule RC-F)____________________________________________ 2160 210,224 11.
12. Total assets (sum of items 1 through 11)_____________________________________ 2170 15,294,694 12.
<FN>
- -----------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held in trading accounts.
</TABLE>
<PAGE>
12
SCHEDULE RC - CONTINUED
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
LIABILITIES
13. Deposits: RCOH
a. In domestic offices (sum of totals of columns A and C ----
from Schedule RC-B, Part I)____________________________________ 2200 7,923,922 13.a
(1) Noninterest-bearing (1)____________________________________ 6631 2,469,017 13.a.1
(2) Interest-bearing___________________________________________ 6636 5,454,905 13.a.2
RCFH
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs ----
(from Schedule RC-B, part II) _________________________________ 2200 804,867 13.b
(1) Noninterest-bearing ______________________________________ 6631 738,551 13.b.1
(2) Interest-bearing __________________________________________ 6636 66,316 13.b.2
14. Federal funds purchased and securities sold under agreements to
repurchase in domestic offices of the bank and of its Edge and RCFD
Agreement subsidiaries, and in IBFs: ----
a. Federal funds purchased________________________________________ 0278 1,711,846 14.a
b. Securities sold under agreements to repurchase_________________ 0279 863,941 14.b
RCOH
15. Demand notes issued to the ----
U.S. Treasury_____________________________________________________ 2840 199,558 15.
RCFD
16. Other borrowed ----
money_____________________________________________________________ 2850 2,206,217 16.
17. Mortgage indebtedness and obligations under capitalized
leases____________________________________________________________ 2910 1,335 17.
18. Bank's liability on acceptances executed and outstanding__________ 2920 32,335 18.
19. Subordinated notes and debentures_________________________________ 3200 161,718 19.
20. Other liabilities (from Schedule RC-G)____________________________ 2930 305,956 20.
21. Total liabilities (sum of items 13 through 20)____________________ 2948 14,211,695 21.
22. Limited-life preferred stock and related surplus__________________ 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus_____________________ 3838 0 23.
24. Common stock ____________________________________________________ 3230 100,000 24.
25. Surplus (exclude all surplus related to preferred stock)__________ 3839 537,762 25.
26. a. Undivided profits and capital reserves_________________________ 3632 433,341 26.a
b. LESS: Net unrealized loss on marketable equity securities______ 0297 ( 12,007) 26.b
27. Cumulative foreign currency translation adjustments_______________ 3284 ( 111) 27.
28. Total equity capital (sum of items 23 through 27) ________________ 3210 1,082,999 28.
29. Total liabilities, limited-life preferred stock, and equity
capital (sum of items 21,22, and 28)______________________________ 3300 15,294,694 29.
</TABLE>
<TABLE>
<CAPTION>
MEMORANDUM
To be reported with the March Report of Condition
<S> <C> <C> <C>
1. Indicate in the box as the right the number of the statement HCFD NUMBER
below that best describes the most comprehensive level of ---- ------
auditing work performed for the bank by independent external
auditors as of any date during 1992 _______________________________ 6724 N/A N,1
1 - Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank.
2 - Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not the bank separately)
3 - Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 - Directors' examination of the bank performed by other external auditors (may
be required by state chartering authority)
5 - Review of the bank's financial statements by external auditors
6 - Compilation of the bank's financial statements by external auditors
7 - Other audit procedures (excluding tax preparation work)
8 - No external audit work
<FN>
- --------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
</TABLE>
<PAGE>
13
Schedule RC-A - Cash and Balances Due from Depository Institutions
Exclude assets held in trading accounts.
C405 -
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------
(Column A) (Column B)
Consolidated Bank Domestic Offices
----------------- ----------------
RCFD RCON
---- ----
<S> <C> <C> <C> <C> <C>
1. Cash items in process of collection, unposted
debits, and currency and coin__________________________0022 521,394 1.
a. Cash items in process of collection and unposted
debits______________________________________________ 0020 456,317 1.a
b. Currency and coin___________________________________ 0080 64,933 1.b
2. Balances due from depository institutions in the U.S.__ 0082 36,993 2.
a. U.S. branches and agencies of foreign banks
(including their IBFs)______________________________0083 0 2.a
b. Other commercial banks in the U.S. and other
depository institutions in the U.S. (including
their IBFs)_________________________________________0085 40,064 2.b
3. Balances due from banks in foreign countries and
foreign central banks__________________________________ 0070 4,807 3.
a. Foreign branches of other U.S. banks________________0073 4,807 3.a
b. Other banks in foreign countries and foreign
central banks_______________________________________0074 36,057 3.b
4. Balances due from Federal Reserve Banks________________0090 206,125 0090 205,290 4.
5. Total (sum of items 1 through 4) (total of column A
must equal Schedule RC, item 1)________________________0010 808,447 0010 768,340 5.
</TABLE>
<TABLE>
<CAPTION>
Memorandum
Dollar Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCON
1. Noninterest-bearing balances due from commercial banks in the U.S. ----
(included in item 2, column B above)_______________________________________0050 36,048 H.1
</TABLE>
<PAGE>
14
Schedule RC-B - Securities
Exclude assets held in trading accounts.
C410 -
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ---------------------------------------------------------------------------------------------------------------
---------Consolidated Bank--------- -Domestic Offices-
(Column A) (Column B) (Column C)
Book Value Market Value(1) Book Value
---------------- ---------------- ------------------
RCFD RCFD RCON
---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
1. U.S. Treasury securities______________________0400 56,109 0401 56,109 0400 56,109 1.
2. U.S. Government agency and corporation
obligations:
a. All holdings of U.S. Government-issued or
"guaranteed certificates of participation
in pools of residential mortgages:
(1) Issued by FNMA and FHLMC_______________3760 1,327,924 3761 1,327,924 3760 1,327,924 2.a1
(2) Guaranteed by GNMA (exclude FNMA
and FHLMC issues)______________________3762 129,521 3763 129,521 3762 129,521 2.a2
b. All other__________________________________0604 74,434 0605 74,434 2.b
(1) Collateralized mortgage obligations
issued by FNMA and FHLMC (included
RENICs)________________________________ 3764 66,039 2.b1
(2) All other U.S. Government-sponsored
agency obligations (2)_________________ 3765 8,395 2.b2
(3) All other U.S. Government agency
obligations (3)________________________ 3766 0 2.b3
3. Securities issued by states and political
subdivisions in the U.S.______________________0402 69,969 0403 74,339 3.
a. General obligations________________________ 3767 21,530 3.a
b. Revenue obligations________________________ 3768 48,389 3.b
c. Industrial development and similar
obligations________________________________ 3769 50 3.c
4. Other domestic debt securities:
a. All holdings of private (i.e., non-
government-issued or -guaranteed)
certificates of participation in pools
of residential mortgages___________________0408 467 0409 467 0408 467 4.a
b. All other domestic debt securities:
(1) Privately-issued collateralized
mortgage obligations (include
(RENICs)_______________________________5361 37,725 5362 37,725 5361 37,725 4.b1
(2) All other______________________________5363 2,953 5364 2,953 5363 2,953 4.b2
5. Foreign debt securities_______________________3639 1,865 3636 1,865 3635 0 5.
6. Equity securities:
a. Marketable equity securities:
(1) Investments in mutual funds____________3637 0 3638 0 3637 0 6.a1
(2) Other marketable equity securities_____3639 17 3640 17 3639 17 6.a2
(3) Less: Net unrealized loss on
marketable equity securities___________3641 0 3641 0 6.a3
b. Other equity securities (includes
Federal Reserve stack)_____________________3642 122,604 3643 122,604 3642 122,604 6.b
7. Total (sum of items 1 through 6) (total of
column A must equal Schedule RC, item 2)______0390 1,823,588 0391 1,827,958 0390 1,821,723 7.
<FN>
_________________________
(1) See discussion in Glossary entry for "market value of securities."
(2) Includes obligations (other than certificates of participation in pools of
residential mortgages, CMOs, and RENICs) issued by the Farm Credit System,
the Federal Home Loan Bank System, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Financing
Corporation, Resolution Funding Corporation, the Student Loan Marketing
Association, and the Tennessee Valley Authority.
(3) Includes Small Business Administration "Guaranteed Loan Pool
Certificates," U.S. Maritime Administration obligations, and Export-Import
Bank participation certificates.
</TABLE>
<PAGE>
15
Schedule RC-B - Continued
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------
-Consolidated Bank-
Book Value
-------------------
RCFD
----
<S> <C> <C> <C>
1. Pledged securities____________________________________________________________________0416 1,684,807 H.1
2. Maturity and repricing data for debt securities (1,2) (excluding those in nonaccrual
status):
a. Fixed rate debt securities with a remaining maturity of:
(1) Three months or less___________________________________________________________0343 26,456 H.2.a1
(2) Over three months through 12 months____________________________________________0344 34,096 H.2.a2
(3) Over one year through five years_______________________________________________0345 47,531 H.2.a3
(4) Over five years________________________________________________________________0346 913,004 H.2.a4
(5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1)
through 2.a.(4))_______________________________________________________________0347 1,021,087 M.2.a5
b. Floating rate debt securities with a repricing frequency of:
(1) Quarterly or more frequently___________________________________________________4544 556,657 M.2.b1
(2) Annually or more frequently, but less frequently than quarterly________________4545 122,534 M.2.b2
(3) Every five years or more frequently, but less frequently than annually_________4551 222 M.2.b3
(4) Less frequently than every 5 years_____________________________________________4552 0 M.2.b4
(5) Total floating rate debt securities (sum of Memorandum items 2.b.(1)
through 2.b.(4))_______________________________________________________________4553 679,413 M.2.b5
c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must equal
total debt securities from Schedule RC-B, sum of items 1 through 5, column A, minus
nonaccrual debt securities included in Schedule RC-H, item 9 column C)_____________0393 1,700,500 M.2.c
3. Taxable securities issued by states and political subdivisions in the U.S.
(included in Schedule RC-B, item 3, column A, above)__________________________________0301 0 M.3
4. Debt securities restructured and in compliance with modified terms (included in
Schedule RC-B, items 3 through 5, column A, above)____________________________________5365 1,629,261 M.4
5. Debt securities held for sale (included in Schedule RC-S, items 1 through 5,
column A, above)______________________________________________________________________5366 0 M.5
6. Floating rate debt securities with a remaining maturity of one year or less (included
in Memorandum item 2.b.(5) above)_____________________________________________________5519 0 H.6
<FN>
- -------------------------
(1) Exclude equity securities, e.g., investments in mutual funds, Federal
Reserve stock, common stock, and preferred stock.
(2) Memorandum item 2 is not applicable to savings banks that must complete
supplemental Schedule RC-J.
</TABLE>
<PAGE>
16
Schedule RC-C - Loans and Lease Financing Receivables
Part I. Loans and Leases
Do not deduct the allowance for loan and lease losses from amounts reported in
this schedule. Report total loans and leases, net of unearned income. Exclude
assets held in trading accounts.
C415 -
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------
(Column A) (Column B)
RCFD Consolidated Bank RCON Domestic Offices
---- ----------------- ---- ----------------
<S> <C> <C> <C> <C> <C>
1. Loans secured by real estate____________________________1410 6,445,216 1.
a. Construction and land development____________________ 1415 92,095 1.a
b. Secured by farmland (including farm residential and
other improvements)__________________________________ 1420 3,237 1.b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family
residential properties and extended under lines
of credit________________________________________ 1797 101,713 1.c1
(2) All other loans secured by 1-4 family
residential properties:
(a) Secured by first liens________________________ 5367 5,455,047 1.a2a
(b) Secured by junior liens_______________________ 5368 337,846 1.a2b
d. Secured by multifamily (5 or more) residential
properties___________________________________________ 1460 60,023 1.d
e. Secured by nonfarm nonresidential properties_________ 1480 395,143 1.e
2. Loans to depository institutions:
a. To commercial banks in the U.S.______________________ 1505 28,563 2.a
(1) To U.S. branches and agencies of foreign banks___1506 6,748 2.a1
(2) To other commercial banks in the U.S.____________1507 25,140 2.a2
b. To other depository institutions in the U.S._________1517 660 1517 660 2.b
c. To banks in foreign countries________________________ 1510 530 2.c
(1) To foreign branches of other U.S. banks__________1513 694 2.c1
(2) To other banks in foreign countries______________1516 64,553 2.c2
3. Loans to finance agricultural production and other
loans to farmers________________________________________1590 3,628 1590 3,628 3.
4. Commercial and industrial loans:
a. To U.S. addresses (domicile)_________________________1763 2,365,754 1763 2,360,952 4.a
b. To non-U.S. addresses (domicile)_____________________1764 11,203 1764 10,715 4.b
5. Acceptances of other banks:
a. Of U.S. banks________________________________________1756 0 1756 0 5.a
b. Of foreign banks_____________________________________1757 0 1757 0 5.b
6. Loans to individuals for household, family, and other
personal expenditures (i.e., consumer loans) (includes
purchased paper)________________________________________ 1975 875,090 6.
a. Credit cards and related plans (includes check
credit and other revolving credit plans)_____________2008 154,039 6.a
b. Other (includes single payment, installment, and all
student loans)_______________________________________2011 721,051 6.b
7. Loans to foreign governments and official institutions
(including foreign central banks)_______________________2081 12,623 2081 4,250 7.
8. Obligations (other than securities and leases) of
states and political subdivisions in the U.S. (includes
nonrated industrial development obligations):
a. Taxable obligations__________________________________2033 248 2033 248 8.a
b. Tax-exempt obligations_______________________________2079 22,323 2079 22,323 8.b
9. Other Loans_____________________________________________1563 433,611 9.
a. Loans for purchasing or carrying securities (secured
and unsecured)_______________________________________ 1545 30,001 9.a
b. All other loans (exclude consumer loans)_____________ 1564 398,806 9.b
10. Lease financing receivables (net of unearned income)____ 2165 508,614 10.
a. Of U.S. addresses (domicile)_________________________2182 508,614 10.a
b. Of non-U.S. addresses (domicile)_____________________2183 0 10.b
11. LESS: Any unearned income on loans reflected in items
1-9 above.______________________________________________2123 11,288 2123 11,253 11.
12. Total loans and leases, net of unearned income (sum of
items 1 through 10 minus item 11) (total of column A
must equal Schedule RC, item 4.a)_______________________2122 10,764,757 2122 10,678,231 12.
</TABLE>
<PAGE>
17
Schedule RC-C - Continued
Part I. Continued
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- -------------------------------------------------------------------------------------------------------------------------
(Column A) (Column B)
Consolidated Bank Domestic Offices
---------------------- ----------------------
RCFD RCON
---- ----
<S> <C> <C> <C> <C> <C>
1. Commercial paper included in Schedule RC-C, part I,
above___________________________________________________1496 0 1496 0 M.1
2. Loans and leases restructured and in compliance with
modified terms (included in Schedule RC-C, part I,
above):
a. Loans secured by real estate:
(1) To U.S. addressees (domicile)____________________1687 0 M.2.a1
(2) To non-U.S. addressees (domicile)________________1689 0 M.2.a2
b. Loans to finance agricultural production and other
loans to farmers_____________________________________1613 0 M.2.b
c. Commercial and industrial loans:
(1) To U.S. addressees (domicile)____________________1758 0 M.2.c1
(2) To non-U.S. addressees (domicile)________________1759 0 M.2.c2
d. All other loans (exclude loans to individuals for
household, family, and other personal expenditures)__1615 0 M.2.d
e. Lease financing receivables:
(1) Of U.S. addressees (domicile)____________________1789 0 M.2.e1
(2) Of non-U.S. addressees (domicile)________________1790 0 M.2.e2
f. Total (sum of Memorandum items 2.a through 2.e)______1616 0 M.2.f
3. Maturity and repricing data for loans and leases (1)
(excluding those in nonaccrual status):
a. Fixed rate loans and leases with a remaining maturity
of:
(1) Three months or less_____________________________0348 5,096,437 M.3.a1
(2) Over three months through 12 months______________0349 413,619 M.3.a2
(3) Over one year through five years_________________0356 1,899,402 M.3.a3
(4) Over five years__________________________________0357 809,306 M.3.a4
(5) Total fixed rate loans and leases (sum of
Memorandum items 3.a.(1) through 3.a.(4))________0358 8,218,764 M.3.a5
b. Floating rate loans with a repricing frequency of:
(1) Quarterly or more frequently_____________________4554 2,422,031 M.3.b1
(2) Annually or more frequently, but less frequently
than quarterly___________________________________4555 74,235 M.3.b2
(3) Every five years or more frequently, but less
frequently than annually_________________________4561 2,788 M.3.b3
(4) Less frequently than every five years____________4564 0 M.3.b4
(5) Total floating rate loans (sum of Memorandum
items 3.b.(1) through 3.b.(4))___________________4567 2,499,054 M.3.b5
c. Total loans and leases (sum of Memorandum items
3.a.(5) and 3.b.(5)) (must equal the sum of total
loans and leases, net, from Schedule RC-C, part I,
item 12, plus unearned income from Schedule RC-C,
part I, item 11, minus total nonaccrual loans and
leases from Schedule RC-N, sum of items 1 through 8,
column C)____________________________________________1479 10,717,818 M.3.c
4. Loans to finance commercial real estate, construction,
and land development activities (not secured by real
estate) included in Schedule RC-C, part I, items 4 and
9, column A, page RC-6 (2)______________________________2746 0 M.4
5. Loans and leases held for sale (included in
Schedule RC-C, part I, above)___________________________5369 3,937,748 M.5
6. Adjustable rate closed-end loans secured by first liens
on 1-4 family residential properties (included in
Schedule RC-C, part I, item 1.c.(2)(a), column B,
page RC-6)______________________________________________ 5370 924,596 M.6
<FN>
_________________________
(1) Memorandum item 3 is not applicable to savings banks that must complete
supplemental Schedule RC-J.
(2) Exclude loans secured by real estate that are included in Schedule RC-C,
part I, item 1, column A.
</TABLE>
<PAGE>
18
Schedule RC-D is to be completed only by banks with $1 billion or more in total
assets.
Schedule RC-D - Assets Held in Trading Accounts in Domestic Offices Only
<TABLE>
<CAPTION>
C420 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCON
----
1. U.S. Treasury securities_________________________________________________________1010 N/A 1.
2. U.S. Government agency and corporation obligations_______________________________1020 109,922 2.
3. Securities issued by states and political subdivisions in the U.S._______________1023 N/A 3.
4. Other bonds, notes, and debentures_______________________________________________1045 N/A 4.
5. Certificates of deposit__________________________________________________________1026 N/A 5.
6. Commercial paper_________________________________________________________________1027 N/A 6.
7. Bankers acceptances______________________________________________________________1028 N/A 7.
8. Other____________________________________________________________________________1029 N/A 8.
9. Total (sum of items 1 through 8)_________________________________________________2946 109,922 9.
</TABLE>
<PAGE>
19
Schedule RC-E - Deposit Liabilities
Part I. Deposits in Domestic Offices
<TABLE>
<CAPTION>
C425 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
---------------Transaction Accounts-------------- --Nontransaction Accounts--
(Column A) (Column B) (Column C)
Total transaction Memo: Total demand
accounts (including total deposits (included in Total nontransaction
demand deposits) column A) accounts (including MDAs)
- --------------------------------------------- ------------------------- ------------------------ ----------------------------
<S> <C> <C> <C>
RCON RCON RCON
Deposits of: ---- ---- ----
1. Individuals, partnerships and corporations__2201 3,116,314 2240 2,061,496 2346 4,354,311 1.
2. U.S. Government_____________________________2202 45,106 2280 45,106 2520 0 2.
3. States and political subdivisions in
the U.S.____________________________________2203 30,618 2290 23,556 2530 26,357 3.
4. Commercial banks in the U.S.________________2206 288,406 2310 288,406 4.
a. U.S. branches and agencies of foreign
banks____________________________________ 2347 0 4a
b. Other commercial banks in the U.S.________ 2348 10,857 4b
5. Other depository institutions in the U.S.___2207 9,502 2312 9,502 2349 0 5.
6. Banks in foreign countries__________________2213 7,496 2320 7,496 6.
a. Foreign branches of other U.S. banks______ 2367 0 6a
b. Other banks in foreign countries_________ 2373 1,500 6b
7. Foreign governments and official institu-
tions (including foreign central banks)_____2216 0 2300 0 2377 0 7.
8. Certified and official checks_______________2330 33,455 2330 33,455 8.
9. Total (sum of items 1 through 8) (sum of
columns A and C must equal Schedule RC,
item 13.a)__________________________________2215 3,530,897 2210 2,469,017 2385 4,393,025 9.
</TABLE>
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCON
1. Selected components of total deposits (i.e., sum of item 9, columns A and C): ----
a. Total Individual Retirement Accounts (IRAs) and Keogh Plan accounts__________________6835 632,493 M.1.a
b. Total brokered deposits______________________________________________________________2365 1,000 M.1.b
c. Fully insured brokered deposits (included in Memorandum item 1.b above):
(1) Issued in denominations of less than $ 100,000___________________________________2343 0 M.1.c1
(2) Issued either in denominations of $ 100,000 or in denominations greater than
$ 100,000 and participated out by the broker in shares of $ 100,000 or less______2344 0 M.1.c2
d. Total deposits denominated in foreign currencies_____________________________________3776 5,494 M.1.d
e. Preferred deposits (deposits of states and political subdivisions in the U.S.
reported in item 3, above which are secured or collateralized)_______________________5590 56,975 M.1.e
2. Components of total nontransaction accounts (sum of Memoranda items 2.a through 2.d must
equal item 9, column C above):
a. Savings deposits:
(1) Money market deposit accounts (MMDAs)____________________________________________6810 1,769,912 M.2.a1
(2) Other savings deposits (excludes MMDAs)__________________________________________0352 437,229 M.2.a2
b. Total time deposits of less than $ 100,000___________________________________________6648 1,828,058 M.2.b
c. Time certificates of deposit of $ 100,000 or more____________________________________6645 256,753 M.2.c
d. Open-account time deposits of $ 100,000 or more______________________________________6646 101,073 M.2.d
3. All NOW accounts (included in column A above)___________________________________________2398 1,061,880 M.3
</TABLE>
<PAGE>
20
Schedule RC-E - Continued
Part I. Continued
Memoranda (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Deposit Totals for FDIC Insurance Assessments (1)
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCON
4. Total deposits in domestic offices (sum of item 9, column A and item 9, column C) ----
(must equal Schedule RC, item 13.a)____________________________________________________2200 7,923,922 M.4
a. Total demand deposits (must equal item 9, column B)_________________________________2210 2,469,017 M.4.a
b. Total time and savings deposits (2) (must equal item 9, column A plus item 9,
column C minus item 9, column B)____________________________________________________2350 5,454,905 M.4.b
<FN>
___________
(1) An unended Certified Statement should be submitted to the FDIC if the
deposit totals reported in this item are amended after the semiannual
Certified Statement originally covering this report date has been filed
with the FDIC.
(2) For FDIC insurance assessment purposes, "total time and savings deposits"
consists of nontransaction accounts and all transaction accounts other than
demand deposits.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5. Time deposits of less than $ 100,000 and open-account time deposits of $ 100,000 or
more (included in Memorandum items 2.b and 2.d above) with a remaining maturity or RCON
repricing frequency of: (1) ----
a. Three months or less________________________________________________________________0339 430,022 M.5.a
b. Over three months through 12 months (but not over 12 months)________________________3644 732,117 M.5.b
6. Maturity and repricing data for time certificates of deposit of $ 100,000 or more: (1)
a. Fixed rate time certificates of deposit of $ 100,000 or more with a remaining
maturity of:
(1) Three months or less____________________________________________________________2761 75,413 M.6.a1
(2) Over three months through 12 months_____________________________________________2762 89,453 M.6.a2
(3) Over one year through five years________________________________________________2763 89,286 M.6.a3
(4) Over five years_________________________________________________________________2765 2,601 M.6.a4
(5) Total fixed rate time certificates of deposit of $ 100,000 or more (sum of
Memorandum items 6.a.(1) through 6.a.(4))_______________________________________2767 256,753 M.6.a5
b. Floating rate time certificates of deposit of $100,000 or more with a repricing
frequency of:
(1) Quarterly or more frequently____________________________________________________4568 0 M.6.b1
(2) Annually or more frequently, but less frequently than quarterly_________________4569 0 M.6.b2
(3) Every five years or more frequently, but less frequently than annually__________4571 0 M.6.b3
(4) Less frequently than every five years___________________________________________4572 0 M.6.b4
(5) Total floating rate time certificates of deposit of $ 100,000 or more (sum of
Memorandum items 6.b.(1) through 6.b.(4))_______________________________________4573 0 M.6.b5
c. Total time certificates of deposit of $ 100,000 or more (sum of memorandum items
4.a.(5) and 6.b.(5)) (must equal Memorandum item 2.c above)_________________________6645 256,753 M.6.c
<FN>
___________
(1) Memorandum item 5 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
</TABLE>
<PAGE>
21
Schedule RC-E - Continued
Part II. Deposits in Foreign Offices (including Edge and Agreement subsidiaries
and IBFs)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCFN
Deposits of: ----
1. Individuals, partnerships, and corporations____________________________________________2621 156,034 1.
2. U.S. banks (including IBFs and foreign branches of U.S. banks)_________________________2623 603,346 2.
3. Foreign banks (including U.S. branches and agencies of foreign banks,
including their IBFs)__________________________________________________________________2625 43,750 3.
4. Foreign governments and official institutions (including foreign central banks)________2650 0 4.
5. Certified and official checks__________________________________________________________2330 651 5.
6. All other deposits_____________________________________________________________________2668 1,086 6.
7. Total (sum of items 1 through 6) (must equal Schedule RC, item 13.b)___________________2200 804,867 7.
</TABLE>
Schedule RC-F - Other Assets
<TABLE>
<CAPTION>
C430 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCFD
----
1. Income earned, not collected on loans__________________________________________________2164 38,942 1.
2. Net deferred tax assets (1)____________________________________________________________2148 0 2.
3. Excess residential mortgage servicing fees receivable__________________________________5371 0 3.
4. Other (itemize and describe amounts that exceed 25% of this item)______________________2168 171,282 4.
TEXT RCFD
---- ----
a. 3549:______________________________________________3549 N/A 4.a
b. 3550:______________________________________________3550 N/A 4.b
c. 3551:______________________________________________3551 N/A 4.c
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 11)_____________________2160 210,224 5.
</TABLE>
Memorandum
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCFD
----
1. Deferred tax assets disallowed for regulatory capital purposes_________________________5610 0 M.1
</TABLE>
Schedule RC-G - Other Liabilities
<TABLE>
<CAPTION>
C435 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCON
----
1. a. Interest accrued and unpaid on deposits in domestic offices (2)_____________________3645 31,204 1.a
RCFD
b. Other expenses accrued and unpaid (includes accrued ----
income taxes payable)_______________________________________________________________3646 205,275 1.b
2. Wet deferred tax liabilities (1)_______________________________________________________3049 62,851 2.
3. Minority interest in consolidated subsidiaries_________________________________________3000 1,026 3.
4. Other (itemize and describe amounts that exceed 25% of this item)______________________2938 5,600 4.
TEXT RCFD
---- ----
a. 3552: UNEARNED INCOME _____________________________3552 4,720 4.a
b. 3553:______________________________________________3553 N/A 4.b
c. 3554:______________________________________________3554 N/A 4.c
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 20)_____________________2930 305,956 5.
<FN>
___________
(1) See discussion of deferred income taxes in Glossary entry on "income
taxes."
(2) For savings banks, include "dividends" accrued and unpaid on deposits.
</TABLE>
<PAGE>
22
Schedule RC-H - Selected Balance Sheet Items for Domestic Offices
<TABLE>
<CAPTION>
C440 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic Offices
------------------------------
<S> <C> <C> <C>
RCON
----
1. Customers' liability to this bank on acceptances outstanding___________________________2155 25,395 1.
2. Bank's liability on acceptances executed and outstanding_______________________________2920 25,395 2.
3. Federal funds sold and securities purchased under agreements to resell_________________1350 1,552,831 3.
4. Federal funds purchased and securities sold under agreements to repurchase_____________2800 2,575,787 4.
5. Other borrowed money___________________________________________________________________2850 2,206,217 5.
EITHER
6. Net due from own foreign offices, Edge and Agreement subsidiaries, and IBFs____________2163 N/A 6.
OR
7. Net due to own foreign offices, Edge and Agreement subsidiaries, and IBFs)_____________2941 676,617 7.
8. Total assets (excludes net due from foreign offices, Edge and Agreement
subsidiaries, and IBFs)________________________________________________________________2192 15,153,221 8.
9. Total liabilities (excludes net due to foreign offices, Edge and Agreement
subsidiaries, and IBFs)________________________________________________________________3129 13,393,605 9.
</TABLE>
Memorandum (to be completed only by banks with IBFs and other "foreign" offices)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EITHER
1. Net due from the IBF of the domestic offices of the reporting bank_____________________3051 N/A M.1
OR
2. Net due to the IBF of the domestic offices of the reporting bank_______________________3059 0 M.2
</TABLE>
Schedule RC-I - Selected Assets and Liabilities of IBFs
To be completed only by banks with IBFs and other "foreign" offices.
<TABLE>
<CAPTION>
C445 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCFN
----
1. Total IBF assets of the consolidated bank (component of Schedule RC, item 12)__________2133 N/A 1.
2. Total IBF loans and lease financing receivables (component of Schedule RC-C, part I,
item 12, column A)_____________________________________________________________________2076 N/A 2.
3. IBF commercial and industrial loans (component of Schedule RC-C, part I, item 4,
column A)______________________________________________________________________________2077 N/A 3.
4. Total IBF liabilities (component of Schedule RC, item 21)______________________________2898 N/A 4.
5. IBF deposit liabilities due to banks, including other IBFs (component of Schedule
RC-E, part II, items 2 and 3)__________________________________________________________2379 N/A 5.
6. Other IBF deposit liabilities (component of Schedule RC-E, part II, items 1, 4, 5,
and 6)_________________________________________________________________________________2381 N/A 6.
</TABLE>
<PAGE>
23
Schedule RC-K - Quarterly Averages (1)
<TABLE>
<CAPTION>
C455 --
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ASSETS RCFD
----
1. Interest-bearing balances due from depository institutions_____________________________________ 3381 35,820 1.
2. U.S. Treasury securities and U.S. Government agency and corporation obligations________________ 3382 1,472,512 2.
3. Securities issued by states and political subdivisions in the U.S._____________________________ 3383 73,014 3.
4. a. Other debt securities_______________________________________________________________________ 3647 143,644 4.a
b. Equity securities (includes investments in mutual funds and Federal Reserve stock)__________ 3648 122,691 4.b
5. Federal funds sold and securities purchased under agreements to resell in domestic offices of
the bank and of its Edge and Agreement subsidiaries, and in 1BFs_______________________________ 3365 1,823,055 5.
6. Loans:
a. Loans in domestic offices: RCON
----
(1) Total loans_____________________________________________________________________________ 3360 10,737,582 6.a.1
(2) Loans secured by real estate____________________________________________________________ 3385 6,606,729 6.a.2
(3) Loans to finance agricultural production and other loans to farmers_____________________ 3386 4,517 6.a.3
(4) Commercial and industrial loans_________________________________________________________ 3387 2,744,516 6.a.4
(5) Loans to individuals for household, family, and other personal expenditures_____________ 3388 889,259 6.a.5
(6) Obligations (other than securities and leases) of states and political subdivisions in
the U.S.________________________________________________________________________________ 3389 23,536 6.a.6
RCFN
----
b. Total loans in foreign offices, Edge and Agreement subsidiaries, and 1BFs___________________ 3360 101,726 6.b
RCFD
----
7. Assets held in trading accounts________________________________________________________________ 3401 84,532 7.
8. Lease financing receivables (net of unearned income)___________________________________________ 3484 468,538 8.
9. Total assets___________________________________________________________________________________ 3368 15,845,877 9.
LIABILITIES
RCON
----
10. Interest-bearing transaction accounts in domestic offices (NOW accounts, ATS accounts, and
telephone and preauthorized transfer accounts) (exclude demand deposits)_______________________ 3485 977,714 10.
11. Nontransaction accounts in domestic offices:
a. Money market deposit accounts (MMDAs)_______________________________________________________ 3486 1,750,021 11.a
b. Other savings deposits______________________________________________________________________ 3487 425,202 11.b
c. Time certificates of deposit of $100,000 or more____________________________________________ 3345 288,950 11.c
d. All other time deposits_____________________________________________________________________ 3469 1,936,196 11.d
RCFN
----
12. Interest-bearing deposits in foreign offices, Edge and Agreement subsidiaries, and 1BFs________ 3404 1,430,020 12.
RCFD
----
13 Federal funds purchased and securities sold under agreements to repurchase in domestic offices
of the bank and of its Edge and Agreement subsidiaries, and in 1BFs____________________________ 3353 2,503,604 13.
14. Other borrowed money___________________________________________________________________________ 3355 2,460,743 14.
<FN>
- ---------------
(1) For all items, banks have the option of reporting either (1) an average of
daily figures for the quarter, or (2) an average of weekly figures (i.e.,
the Wednesday of each week of the quarter).
</TABLE>
<PAGE>
24
Please read carefully the instructions for the preparation of Schedule RC-L.
Some of the amounts reported in Schedule RC-L are regarded as volume indicators
and not necessarily as measures of risk.
Schedule RC-L - Off-Balance Sheet Items
<TABLE>
<CAPTION>
C460 -
DOLLAR AMOUNTS IN THOUSANDS
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RCFD
----
1. Unused commitments:
a. Revolving, open-end lines secured by 1-4 family residential properties, e.g., home equity
lines_______________________________________________________________________________________ 3814 111,419 1.a
b. Credit card lines___________________________________________________________________________ 3815 0 1.b
c. Commercial real estate, construction, and land development:
(1) Commitments to fund loans secured by real estate________________________________________ 3816 10,367 1.c.1
(2) Commitments to fund loans not secured by real estate____________________________________ 6550 0 1.c.2
d. Securities underwriting_____________________________________________________________________ 3817 0 1.d
e. Other unused commitments____________________________________________________________________ 3818 2,842,102 1.a
2. Financial standby letters of credit and foreign office guarantees______________________________ 3819 666,193 2.
RCFD
a. Amount of financial standby letters of credit ----
conveyed to others_________________________________ 3820 256,255 2.a
3. Performance standby letters of credit and foreign office guaranteed____________________________ 3821 50,861 3.
RCFD
a. Amount of performance standby letters of credit ----
conveyed to others_________________________________ 3822 13,653 3.a
4. Commercial and similar letters or credit_______________________________________________________ 3411 387,297 4.
5. Participations in acceptances (as described in the instructions) conveyed to others by the
reporting bank_________________________________________________________________________________ 3428 0 5.
6. Participations in acceptances (as described in the instructions) acquired by the reporting
(nonaccepting) bank____________________________________________________________________________ 3429 0 6.
7. Securities borrowed____________________________________________________________________________ 3432 1,918,647 7.
8. Securities lent (including customers' securities lent where the customer is indemnified against
loss by the reporting bank)____________________________________________________________________ 3433 139,112 8.
9. Mortgages transferred (i.e., sold or swapped) with recourse that have been treated as sold for
Call Report purposes:
a. FHMA and FHLMC residential mortgage loan pools:
(1) Outstanding principal balance of mortgages transferred as of the report date____________ 3650 41,564 9.a.1
(2) Amount of recourse exposure on these mortgages as of the report date____________________ 3651 41,564 9.a.2
b. Private (nongovernment-issued or -guaranteed) residential mortgage loan pools:
(1) Outstanding principal balance of mortgages transferred as of the report date____________ 3652 0 9.b.1
(2) Amount of recourse exposure on these mortgages as of the report date____________________ 3653 0 9.b.2
c. Parmar Mac agriculture mortgage loan pools:
(1) Outstanding principal balance of mortgages transferred as of the report date____________ 3656 0 9.c.1
(2) Amount of recourse exposure on these mortgages as of the report date____________________ 3655 0 9.c.2
10. When-issued securities:
a. Gross commitments to purchase_______________________________________________________________ 3434 0 10.a
b. Gross commitments to sell___________________________________________________________________ 3435 0 10.b
11. Interest rate contracts (exclude when-issued securities):
a. Notional value of interest rate swaps________________________________________________________ 3450 2,091,207 11.a
b. Futures and forward contracts_______________________________________________________________ 3823 0 11.b
c. Option contracts (e.g., options on Treasuries):
(1) Written option contracts________________________________________________________________ 3824 552,027 11.c.1
(2) Purchased option contracts______________________________________________________________ 3825 8,846,593 11.c.2
12. Foreign exchange rate contracts:
a. Notional value of exchange swaps (e.g., cross-currency swaps)_______________________________ 3826 0 12.a
b. Commitments to purchase foreign currencies and U.S. dollar exchange (spot, forward, and
futures)____________________________________________________________________________________ 3415 742,340 12.b
c. Option contracts (e.g., options on foreign currency):
(1) Written option contracts________________________________________________________________ 3827 8,945 12.c.1
(2) Purchased option contracts______________________________________________________________ 3828 79,536 12.c.2
</TABLE>
<PAGE>
25
Schedule RC-L - Continued
<TABLE>
<CAPTION>
C461 --
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RCFD
----
13. Contracts on other commodities and equities:
a. Notional value of other swaps (e.g., oil swaps)________________________________________________ 3829 0 13.a
b. Futures and forward contracts (e.g., stock index and commodity - precious metals, wheat,
cotton, livestock - contracts)_________________________________________________________________ 3830 0 13.b
c. Option contracts (e.g., options on commodities, individual stocks and stock indexes):
(1) Written option contracts___________________________________________________________________ 3831 0 13.c1
(2) Purchased option contracts_________________________________________________________________ 3832 0 13.c2
14. All other off-balance sheet liabilities (itemize and describe each component of this item over
25% of Schedule RC, item 28, "Total equity capital")______________________________________________ 3430 0 14.
TEXT RCFD
---- ----
a. 3555: ___________________________________ 3555 N/A 14.a
b. 3556: ___________________________________ 3556 N/A 14.b
c. 3557: ___________________________________ 3557 N/A 14.c
d. 3558: ___________________________________ 3558 N/A 14.d
15. All other off-balance sheet assets (itemize and describe each component of this item over 25%
of Schedule RC, item 28, "Total equity capital")_______________________________________________ 5591 0 15.
TEXT RCFD
---- ----
a. 5592: ___________________________________ 5592 N/A 15.a
b. 5593: ___________________________________ 5593 N/A 15.b
c. 5594: ___________________________________ 5594 N/A 15.c
d. 5595: ___________________________________ 5595 N/A 15.d
</TABLE>
Memoranda
<TABLE>
<CAPTION>
DOLLAR AMOUNTS IN THOUSANDS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Loans originated by the reporting bank that have been sold or participated to others during RCFD
the calendar quarter ending with the report date (exclude the portions of such loans retained ----
by the reporting bank; see instructions for other exclusions)_____________________________________ 3431 22,509 M.1
2. Loans purchased by the reporting bank during the calendar quarter ending with the report date
(see instructions for exclusions)_________________________________________________________________ 3488 11,321 M.2
3. Unused commitments with an original maturity exceeding one year that are reported in
Schedule RC-L, items 1.a through 1.e, above (report only the unused portions of commitments
that are fee paid or otherwise legally binding)___________________________________________________ 3833 2,568,602 M.3
RCFD
a. Participations in commitments with an original ----
maturity exceeding one year conveyed to others_____ 3834 112,947 M.3a
4. To be completed only by banks with $1 billion or more in total assets: Standby letters of
credit and foreign office guarantees (both financial and performance) issued to non-U.S.
addressees (domicile) included in Schedule RC-L, items 2 and 3, above_____________________________ 3377 449 M.4
5. To be completed for the September report only:
Installment loans to individuals for household, family, and other personal expenditures that
have been securitized and sold without recourse (with servicing retained), amounts outstanding
by type of loan:
a. Loans to purchase private passenger automobiles________________________________________________ 2741 N/A M.5.a
b. Credit cards and related plans_________________________________________________________________ 2742 N/A M.5.b
c. All other consumer installment credit (including mobile home loans)____________________________ 2743 N/A M.5.c
</TABLE>
<PAGE>
26
Schedule RC-M - Memoranda
<TABLE>
<CAPTION>
C465 --
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RCFD
----
1. Extensions of credit by the reporting bank to its executive officers, directors, principal
shareholders, and their related interests as of the report date:
a. Aggregate amount of all extensions of credit to all executive officers, directors, principal
shareholders, and their related interests___________________________________________________ 6164 11,845 1.a
b. Number of executive officers, directors, and
principal shareholders to whom the amount of all
extensions of credit by the reporting bank
(including extensions of credit to related
interests) equals or exceeds the lesser of $500,000 RCFD NUMBER
or 5 percent of total capital as defined for this ---- ------
purpose in agency regulations______________________ 6165 5 1.b
2. Federal funds sold and securities purchased under agreements to resell with U.S. branches and
agencies of foreign banks (1) (included in Schedule RC, items 3.a and 3.b)_____________________ 3405 0 2.
3. Not applicable.
4. Outstanding principal balance of 1-4 family residential mortgage loans serviced for others
(include both retained servicing and purchased servicing):
a. Mortgages serviced under a GNMA contract____________________________________________________ 5500 0 4.a
b. Mortgages serviced under a FHLMC contract:
(1) Serviced with recourse to servicer______________________________________________________ 5501 0 4.b.1
(2) Serviced without recourse to servicer___________________________________________________ 5502 0 4.b.2
c. Mortgages serviced under a FNMA contract:
(1) Serviced under a regular option contract________________________________________________ 5503 0 4.c.1
(2) Serviced under a special option contract________________________________________________ 5504 0 4.c.2
d. Mortgages serviced under other servicing contracts__________________________________________ 5505 0 4.d
5. To be completed only by banks with $1 billion or more in total assets:
Customers' liability to this bank on acceptances outstanding (sum of items 5.a and 5.b must
equal Schedule RC, item 9):
a. U.S. addressees (domicile)__________________________________________________________________ 2103 21,386 5.a
b. Non-U.S. addressees (domicile)______________________________________________________________ 2104 10,949 5.b
6. Intangible asssets:
a. Mortgage servicing rights___________________________________________________________________ 3164 0 6.a
b. Other identifiable intangible assets:
(1) Purchased credit card relationships_____________________________________________________ 5506 0 6.b.1
(2) All other identifiable intangible assets________________________________________________ 5507 613 6.b.2
c. Goodwill____________________________________________________________________________________ 3163 39,729 6.c
d. Total (sum of items 6.a through 6.c) (must equal Schedule RC, item 10)______________________ 2143 40,342 6.d
e. Intangible assets that have been grandfathered for regulatory capital purposes______________ 6442 0 6.e
Yes No
7. Does your bank have any mandatory convertible debt that is part of your primary or secondary --- -- 7.
capital?_______________________________________________________________________________________ 6167 X
If yes, complete items 7.a through 7.e:
a. Total equity contract notes, gross__________________________________________________________ 3290 N/A 7.a
b. Common or perpetual preferred stock dedicated to redeem the above notes_____________________ 3291 N/A 7.b
c. Total equity commitment notes, gross________________________________________________________ 3293 N/A 7.c
d. Common or perpetual preferred stock dedicated to redeem the above notes_____________________ 3294 N/A 7.d
e. Total (item 7.a minus 7.b plus 7.c minus 7.d)_______________________________________________ 3295 N/A 7.e
<FN>
- ---------------
(1) Do not report federal funds sold and securities purchased under agreements
to resell with other commercial banks in the U.S. in this item.
</TABLE>
<PAGE>
27
Schedule RC-M - Continued
<TABLE>
<CAPTION>
C465 --
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCFD
----
8. a. Other real estate owned:
(1) Direct and indirect investments in real estate ventures_________________________________ 5372 0 8.a.1
RCON
(2) All other real estate owned: ----
(a) Construction and land development in domestic offices_______________________________ 5508 92 8.a.2a
(b) Farmland in domestic offices________________________________________________________ 5509 0 8.a.2b
(c) 1-4 family residential properties in domestic offices_______________________________ 5510 3,893 8.a.2c
(d) Multifamily (5 or more) residential properties in domestic offices__________________ 5511 0 8.a.2d
(e) Nonfarm nonresidential properties in domestic offices_______________________________ 5512 13,953 8.a.2e
RCFN
----
(f) In foreign offices__________________________________________________________________ 5513 0 8.a.2f
RCFD
----
(3) Total (sum of items 8.a.(1) and 8.a.(2)) (must equal Schedule RC, item 7)_______________ 2150 17,938 8.a.3
b. Investments in unconsolidated subsidiaries and associated companies:
(1) Direct and indirect investments in real estate ventures_________________________________ 5374 0 8.b.1
(2) All other investments in unconsolidated subsidiaries and associated companies___________ 5375 2,698 8.b.2
(3) Total (sum of items 8.b.(1) and 8.b.(2)) (must equal Schedule RC, item 8)_______________ 2130 2,698 8.b.3
c. Total assets of unconsolidated subsidiaries and associated companies________________________ 5376 2,934 8.c
9. Noncumulative perpetual preferred stock and related surplus included in Schedule RC, item 23,
"Perpetual preferred stock and related surplus"________________________________________________ 3778 0 9.
</TABLE>
Memoranda
<TABLE>
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Interbank holdings of capital instruments (to be completed for the December report only):
a. Reciprocal holdings of banking organizations' capital instruments___________________________ 3836 0 M.1.a
b. Nonreciprocal holdings of banking organizations' capital instruments________________________ 3837 0 M.1.b
</TABLE>
<PAGE>
28
Schedule RC-N - Past Due and Nonaccrual Loans, Leases, and Other Assets
The FFIEC regards the information reported in all of Memorandum item 1, in items
1 through 10, column A, and in Memorandum items 2 and 3, column A, as
confidential.
<TABLE>
<CAPTION>
C470 --
Dollar Amounts In Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
---(Column A)--- ---(Column B)--- ---(Column C)---
Past due 30 through 89 Past due 90 days or more Nonaccrual
days and still accruing and still accruing
------------------------- ------------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
RCFD RCFD RCFD
1. Loans secured by real estate: ---- ---- ----
a. To U.S. addresses (domicile)____________1245 32,267 1246 2,466 1247 24,195 1.a
b. To non-U.S. addressees (domicile)_______1248 0 1249 0 1250 0 1.b
2. Loans to depository institutions and
acceptances of other banks:
a. To U.S. banks and other U.S.
depository institutions_________________5377 0 5378 0 5379 0 2.a
b. To foreign banks________________________5380 0 5381 0 5382 0 2.b
3. Loans to finance agricultural production
and other loans to farmers_________________1594 0 1597 0 1583 0 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile)___________1251 36,401 1252 27 1253 20,996 4.a
b. To non-U.S. addressees (domicile)_______1254 0 1255 0 1256 0 4.b
5. Loans to individuals for household,
family, and other personal expenditures:
a. Credit cards and related plans__________5383 224 5384 480 5385 -0 5.a
b. Other (includes single payment,
installment, and all student loans)_____5386 5,214 5387 1,065 5388 4,159 5.b
6. Loans to foreign governments and
official institutions______________________5389 0 5390 0 5391 0 6.
7. All other loans____________________________5459 6,350 5460 157 5461 0 7.
8. Lease financing receivables:
a. Of U.S. addressees (domicile)___________1257 0 1258 0 1259 8,877 8.a
b. Of non-U.S. addressees (domicile)_______1271 0 1272 0 1791 0 8.b
9. Debt securities and other assets (exclude
other real estate owned and other
repossessed assets)________________________3505 0 3506 0 3507 467 9.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Amounts reported in items 1 through 8 above include unguaranteed and guaranteed
portions of past due and nonaccrual loans and leases. Report in item 10 below
certain guaranteed loans and leases that have already been included in the
amounts reported in items 1 through 8.
10. Loans and leases reported in items 1
through 8 above which are wholly or RCFD RCFD RCFD
partially guaranteed by the U.S. ---- ---- ----
Government________________________________5612 1,109 5613 237 5614 242 10.
a. Guaranteed portion of loans and leases
included in item 10 above______________5615 830 5616 123 5617 181 10.a
</TABLE>
<PAGE>
29
Schedule RC-N - Continued
Memoranda
<TABLE>
<CAPTION>
C473 --
Dollar Amounts In Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RCFD RCFD RCFD
1. Restructured loans and leases included in ---- ---- ----
Schedule RC-N, items 1 through 8, above____1658 0 1659 0 1661 0 M.1
2. Loans to finance commercial real estate,
construction, and land development
activities (not secured by real estate)
included in Schedule RC-N, items 4 and
7, above___________________________________6558 0 6559 0 6560 0 M.2
3. Loans secured by real estate in domestic
offices (included in Schedule RC-N, item RCON RCON RCON
1, above): ---- ---- ----
a. Construction and land development_______2759 1,619 2769 0 3492 663 M.3a
b. Secured by farmland_____________________3493 29 3494 0 3495 0 M.3b
c. Secured by 1-4 family residential
properties:
(1) Revolving, open-end loans secured
by 1-4 family residential properties
and extended under lines of credit__5398 78 5399 8 5400 0 M.3c1
(2) All other loans secured by 1-4
family residential properties_______5401 16,503 5402 2,428 5403 7,022 M.3c2
d. Secured by multifamily (5 or more)
residential properties__________________3499 2,037 3500 0 3501 1,793 M.3d
e. Secured by nonfarm nonresidential
properties______________________________3502 12,001 3503 30 3504 14,717 M.3e
</TABLE>
Schedule RC-O - Other Data for Deposit Insurance Assessments
An amended Certified Statement should be submitted to the FDIC if the amounts
reported in items 1 through 9 of this schedule are amended after the semiannual
Certified Statement originally covering this report date has been filed with the
FDIC.
<TABLE>
<CAPTION>
C475 --
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RCON
1. Unposted debits (see instructions): ----
a. Actual amount of all unposted debits_______________________________________________________________0030 N/A 1.a
OR
b. Separate amount of unposted debits:
(1) Actual amount of unposted debits to demand deposits____________________________________________0031 0 1.b1
(2) Actual amount of unposted debits to time and savings deposits (1)______________________________0032 0 1.b2
2. Unposted credits (see instructions):
a. Actual amount of all unposted credits______________________________________________________________3510 N/A 2.a
OR
b. Separate amount of unposted credits:
(1) Actual amount of unposted credits to demand deposits___________________________________________3512 0 2.b1
(2) Actual amount of unposted credits to time and savings deposits (1)_____________________________3514 0 2.b2
3. Uninvested trust funds (cash) held in bank's own trust department (not included in
total deposits in domestic offices)___________________________________________________________________3520 0 3.
4. Deposits of consolidated subsidiaries in domestic offices and in insured branches in
Puerto Rico and U.S. territories and possessions (not included in total deposits):
a. Demand deposits of consolidated subsidiaries_______________________________________________________2211 16,372 4.a
b. Time and savings deposits (1) of consolidated subsidiaries_________________________________________2351 0 4.b
c. Interest accrued and unpaid on deposits of consolidated subsidiaries_______________________________5514 0 4.c
5. Deposits of insured branches in Puerto Rico and U.S. territories and possessions:
a. Demand deposits in insured branches (included in Schedule RC-E, Part II)___________________________2229 0 5.a
b. Time and savings deposits (1) in insured branches (included in Schedule RC-E,
Part II)___________________________________________________________________________________________2383 0 5.b
c. Interest accrued and unpaid on deposits in insured branches (included in
Schedule RC-G, item 1.b)___________________________________________________________________________5515 0 5.c
<FN>
__________________
(1) For FDIC insurance assessment purposes, "time and savings deposits"
consists of nontransaction accounts and all transaction accounts other
than demand deposits.
</TABLE>
<PAGE>
30
Schedule RC-O - Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Item 6 is not applicable to state nonmember banks that have not been authorized by the
Federal Reserve to set as pass-through correspondents.
6. Reserve balances actually passed through to the Federal Reserve by the reporting bank on
behalf of its respondent depository institutions that are also reflected as deposit
liabilities of the reporting bank: RCON
a. Amount reflected in demand deposits (included in Schedule RC-E, Part 1, ----
Memorandum item 4.a)_______________________________________________________________________________2314 631 6.a
b. Amount reflected in time and savings deposits (1) (included in Schedule RC-E,
Part 1, Memorandum item 4.b)_______________________________________________________________________2315 0 6.b
7. Unamortized premiums and discounts on time and savings deposits:(1)
a. Unamortized premiums_______________________________________________________________________________5316 1,869 7.a
b. Unamortized discounts______________________________________________________________________________5317 0 7.b
8. To be completed by banks with "Oaker deposits."
Total "Adjusted Attributable Deposits" of all institutions acquired under
Section 5(d)(3) of the Federal Deposit Insurance Act (from most recent FDIC Oaker
Transaction Worksheet(s))_____________________________________________________________________________5518 2,377,306 8.
9. Deposits in lifeline accounts_________________________________________________________________________5596 9.
<FN>
_______________
(1) For FDIC insurance assessment purposes, "time and savings deposits" consists
of nontransaction accounts and all transaction accounts other than demand
deposits.
<CAPTION>
Memoranda
(to be completed each quarter except as noted) Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Total deposits in domestic offices of the bank
(sum of Memorandum items 1.a.(1) and 1.b.(1) must equal Schedule RC, item 13.a): RCON
a. Deposit accounts of $ 100,000 or less: ----
(1) Amount of deposit accounts of $ 100,000 or less________________________________________________2702 4,868,233 M.1a1
RCON Number
(2) Number of deposit accounts of $ 100,000 or less ---- ------
(to be completed for the June report only)____________3779 N/A M.1a2
b. Deposit accounts of more than $ 100,000:
(1) Amount of deposit accounts of more than $ 100,000______________________________________________2710 3,055,689 M.1b1
RCON Number
(2) Number of deposit accounts of more than ---- ------
$ 100,000_____________________________________________2722 6,100 M.1b2
2. Estimated amount of uninsured deposits in domestic offices of the banks
a. An estimate of your bank's uninsured deposits can be determined by multiplying the number of
deposit accounts of more than $ 100,000 reported in Memorandum item 1.b.(2) above by $100,000
and subtracting the result from the amount of deposit accounts of more than $ 100,000 reported
in Memorandum item 1.b.(1) above.
Indicate in the appropriate box at the right whether your bank has a method or RCON YES NO
procedure for determining a better estimate of uninsured deposits than the ---- --- --
estimate described above___________________________________________________________________________6861 X M.2.a
b. If the box marked YES has been checked, report the estimate of uninsured deposits
determined by using your bank's method or procedure________________________________________________5597 N/A M.2.b
</TABLE>
C477 -
- --------------------------------------------------------------------------------
Person to whom questions about the Reports of Condition and Income should be
directed:
612 667 9895
BRIAN JARZYNSKI, SUPERVISOR REG REPORTING
- --------------------------------------------------------------------------------
Name and Title (TEXT 8901) Area code and phone number (TEXT 8902)
<PAGE>
31
Schedule RC-R - Risk-Based Capital
This schedule must be completed by all banks as follows: Banks that reported
total assets of $1 billion or more in Schedule RC, item 12, for June 30, 1992,
must complete items 2 through 9 and Memorandum item 1. Banks with assets of
less than $1 billion must complete items 1 through 3 below or Schedule RC-R in
its entirety, depending on their response to item 1 below.
1. Test for determining the extent to which
Schedule RC-R must be completed. To be
completed only by banks with total assets
of less than $1 billion. Indicate in the C480 -
appropriate box at the right whether the
bank has total capital greater than or RCFD YES NO
equal to eight percent of adjusted total ---- --- --
assets_____________________________________6056 N/A 1.
For purposes of this test, adjusted total assets equals total assets less
cash, U.S. Treasuries, U.S. Government agency obligations, and 80 percent of
U.S. Government-sponsored agency obligations plus the allowance for loan and
lease losses and selected off-balance sheet items as reported on Schedule
RC-L (see instructions).
If the box marked YES has been checked, then the bank only has to complete
items 2 and 3 below. If the box marked NO has been checked, the bank must
complete the remainder of this schedule.
A NO response to item 1 does not necessarily mean that the bank's actual
risk-based capital ratio is less than eight percent or that the bank is not
in compliance with the risk-based capital guidelines.
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
(Column A) (Column B)
Subordinated Debt (1) and
Items 2 and 3 are to be completed by all banks. Intermediate Term Other Limited-Life
Preferred Stock Capital Instruments
--------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
2. Subordinated debt(1) and other limited-life capital
instruments (original weighted average maturity of at RCFD RCFD
lease five years) with a remaining maturity of: ---- ----
a. One year or less__________________________________________3780 8 3786 0 2.a
b. Over one year through two years___________________________3781 8 3787 0 2.b
c. Over two years through three years________________________3782 8 3788 0 2.c
d. Over three years through four years_______________________3783 1,508 3789 0 2.d
e. Over four years through five years________________________3784 8 3790 0 2.e
f. Over five years___________________________________________3785 160,178 3791 0 2.f
<CAPTION>
<S> <C> <C> <C>
RCFD
3. Total qualifying capital (i.e., Tier 1 and Tier 2 capital) allowable under the ----
risk-based capital guidelines____________________________________________________________3792 1,320,492 3.
</TABLE>
Items 4-9 and Memorandum item 1 are to be completed by banks that answered NO to
item 1 above and by banks with total assets of $1 billion or more.
<TABLE>
<CAPTION>
(Column A) (Column B)
Assets Recorded on the Credit Equivalent Amount
Balance Sheet of Off-Balance Sheet Items (2)
---------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
4. Assets and credit equivalent amounts of off-balance
sheet items assigned to the Zero percent risk category:
a. Assets recorded on the balance sheet:
(1) Securities issued by, other claims on, and
claims unconditionally guaranteed by, the U.S. RCFD RCFD
Government and its agencies and other OECD ---- ----
central governments___________________________________3794 185,630 4.a.1
(2) All other_____________________________________________3795 289,471 4.a.2
b. Credit equivalent amount of off-balance sheet items 3796 0 4.b
<FN>
_______________
(1) Exclude mandatory convertible debt reported in Schedule RC-M, item 7.e,
"Total."
(2) Do not report in column B the risk-weighted amount of assets reported in
column A.
</TABLE>
<PAGE>
32
Schedule RC-R - Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
(Column A) (Column B)
Assets Recorded on the Credit Equivalent Amount
Balance Sheet of Off-Balance Sheet Items (1)
------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
5. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 20 percent risk category:
a. Assets recorded on the balance sheet:
(1) Claims conditionally guaranteed by the U.S. RCFD RCFD
Government and its agencies and other OECD ---- ----
central governments___________________________________3798 1,659,585 5.a.1
(2) Claims collateralized by securities issued by
the U.S. Government and its agencies and other
OECD central governments; by securities issued
by U.S. Government-sponsored agencies; and by
cash on deposit_______________________________________3799 0 5.a.2
(3) All other_____________________________________________3800 3,822,572 5.a.3
b. Credit equivalent amount of off-balance sheet items_ 3801 454,656 5.b
6. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 50 percent risk category:
a. Assets recorded on the balance sheet______________________3802 3,938,001 6.a
b. Credit equivalent amount of off-balance sheet items_ 3803 134,908 6.b
7. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 100 percent risk category:
a. Assets recorded on the balance sheet______________________3804 5,558,297 7.a
b. Credit equivalent amount of off-balance sheet items_ 3805 1,694,375 7.b
8. On-balance sheet values (or portions thereof) of
interest rate, foreign exchange rate, and commodity
contracts which have a capital assessment for their
off-balance sheet exposure under the risk-based capital
guidelines and those contracts (e.g., futures contracts)
excluded from the calculation of the risk-based capital
ratio (exclude margin accounts and accrued receivables
from this item)______________________________________________3806 19,973 8.
9. Total assets recorded on the balance sheet (sum of
items 4.a, 5.a, 6.a, 7.a, and 8, column A) (must equal
Schedule RC, item 12 plus items 4.b and 4.c, plus
Schedule RC-B, item 6.a.(3), column A)_______________________3807 15,473,529 9.
</TABLE>
Memorandum
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
(Column A) (Column B)
National Principal Replacement Cost
Value (Market Value)
------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
1. National principal value and replacement cost of
interest rate and foreign exchange rate contracts
(in column B, report only those contracts with a RCFD RCFD
positive replacement cost): ---- ----
a. Interest rate contracts (exclude futures contracts)_ 3808 27,748 M.1.a
(1) With a remaining maturity of one year or less 3809 9,005,988 M.1.a1
(2) With a remaining maturity of over one year____________3810 1,831,812 M.1.a2
b. Foreign exchange rate contracts (exclude contracts
with an original maturity of 14 days or less and
futures contracts)________________________________________ 3811 5,875 M.1.b
(1) With a remaining maturity of one year or less_________3812 631,953 M.1.b1
(2) With a remaining maturity of over one year____________3813 15,558 M.1.b2
<FN>
_______________
(1) Do not report in column B the risk-weighted amount of assets reported in column A.
</TABLE>
<PAGE>
33
Optional Narrative Statement Concerning the Amounts
Reported in the Reports of Condition and Income
at close of business on December 31, 1993
Norwest Bank Minnesota, N.A. Minneapolis MN
- ------------------------------------ ----------------------------- -----------
Legal Title of Bank City State
The management of the reporting bank may, if it wishes, submit a brief narrative
statement on the amounts reported in the Reports of Condition and Income. This
optional statement will be made available to the public, along with the publicly
available data in the Reports of Condition and Income, in response to any
request for individual bank report data. However, the information reported in
column A and in all of Memorandum item 1 of Schedule RC-N is regarded as
confidential and will not be released to the public. BANKS CHOOSING TO SUBMIT
THE NARRATIVE STATEMENT SHOULD ENSURE THAT THE STATEMENT DOES NOT CONTAIN THE
NAMES OR OTHER IDENTIFICATIONS OF INDIVIDUAL BANK CUSTOMERS, REFERENCES TO THE
AMOUNTS REPORTED IN THE CONFIDENTIAL ITEMS IN SCHEDULE RC-N, OR ANY OTHER
INFORMATION THAT THEY ARE NOT WILLING TO HAVE MADE PUBLIC OR THAT WOULD
COMPROMISE THE PRIVACY OF THEIR CUSTOMERS. Banks choosing not to make a
statement may check the "No comment" box below and should make no entries of any
kind in the space provided for the narrative statement; i.e., DO NOT enter in
this space such phrases as "No statement," "Not applicable," "N/A," "No
comment," and "None."
The optional statement must be entered on this sheet. The statement should not
exceed 100 words. Further, regardless of the number of words, the statement
must not exceed 750 characters, including punctuation, indentation, and standard
spacing between words and sentences. If any submission should exceed 750
characters, as defined, it will be truncated at 750 characters with no notice to
the submitting bank and the truncated statement will appear as the bank's
statement both on agency computerized records and in computer-file releases to
the public.
All information furnished by the bank in the narrative statement must be
accurate and not misleading. Appropriate efforts shall be taken by the
submitting bank to ensure the statement's accuracy. The statement must be
signed, in the space provided below, by a senior officer of the bank who thereby
attests to its accuracy.
If, subsequent to the original submission, material changes are submitted for
the data reported in the Reports of Condition and Income, the existing narrative
statement will be deleted from the files, and from disclosure; the bank, at its
option, may replace it with a statement, under signature, appropriate to the
amended data.
The optional narrative statement will appear in agency records and in release to
the public exactly as submitted (or amended as described in the preceding
paragraph) by the management of the bank (except for the truncation of
statements exceeding the 750-character limit described above). THE STATEMENT
WILL NOT BE EDITED OR SCREENED IN ANY WAY BY THE SUPERVISORY AGENCIES FOR
ACCURACY OR RELEVANCE. DISCLOSURE OF THE STATEMENT SHALL NOT SIGNIFY THAT ANY
FEDERAL SUPERVISORY AGENCY HAS VERIFIED OR CONFIRMED THE ACCURACY OF THE
INFORMATION CONTAINED THEREIN. A STATEMENT TO THIS EFFECT WILL APPEAR ON ANY
PUBLIC RELEASE OF THE OPTIONAL STATEMENT SUBMITTED BY THE MANAGEMENT OF THE
REPORTING BANK.
- --------------------------------------------------------------------------------
C471 C472 --
No comment: X (RCON 6979)
BANK MANAGEMENT STATEMENT (please type or print clearly) (TEXT 6980):
/s/ 1/28/94
-------------------------------------- -----------------
Signature of Executive Officer of Bank Date of Signature
<PAGE>
34
THIS PAGE IS TO BE COMPLETED BY ALL BANKS
- --------------------------------------------------------------------------------
OMB No. For OCC: 1557-0081
OMB No. For FDIC: 3064-0052
OMB No. For Federal Reserve: 7100-0036
Expiration Date: 02/28/95
SPECIAL REPORT
(Dollar amounts in Thousands)
CLOSE OF BUSINESS DATE: FDIC Certificate Number:
December 31, 1993 05208 C700 --
- --------------------------------------------------------------------------------
LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date)
- --------------------------------------------------------------------------------
The following information is required by Public Laws 90-44 and 102-242, but
does not constitute a part of the Report of Condition. With each Report of
Condition, these Laws require all banks to furnish a report of all loans or
other extensions of credit to its executive officers made since the date of
the previous Report of Condition. Date regarding individual loans or other
extensions of credit are not required. If no such loans or other extensions
of credit were made during the period, insert "none" against subitem (a).
(Exclude the first $ 5,000 of indebtedness of each executive officer under
bank credit card plan.) See Sections 215.2 and 215.3 of Title 12 of the
Code of Federal Regulations (Federal Reserve Board Regulation 6) for the
definitions of "executive officer" and "extension of credit," respectively.
Exclude loans and other extensions of credit to directors and principal
shareholders who are not executive officers.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
a. Number of loans made to executive officers since the previous Call Report date_____3561 1 a.
b. Total dollar amount of above loans (in thousands of dollars)_______________________3562 530 b.
c. Range of interest charged on above loans (example: 9-3/4% = 9.75______________7701/7702 4.00% to 4.00% c.
</TABLE>
/s/ Mark P. Wagener 1/28/94
- --------------------------------------------------------------------------------
SIGNATURE AND TITLE OF OFFICER DATE (Month, Day, Year)
AUTHORIZED TO SIGN REPORT
- ------------------------------------------- -----------------------------------
NAME AND TITLE OF PERSON TO WHOM AREA CODE/PHONE NUMBER (TEXT 8904)
INQUIRIES MAY BE DIRECTED (TEXT 8903) 612-667-9895
BRAIN JARZYNSKI, SUPERVISOR REG REPORTING
- --------------------------------------------------------------------------------
FDIC 8040/53 (12-92)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Minneapolis and State of Minnesota on the 1st day of April 1994.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ William C. Schmoker
-------------------------
William C. Schmoker
Corporate Trust Officer
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
11 5/8% SERIES B SENIOR SECURED NOTES DUE 2002
OF
B.F. SAUL REAL ESTATE INVESTMENT TRUST
PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF
ALL OF ITS OUTSTANDING 11 5/8% SENIOR SECURED NOTES DUE 2002
FOR
11 5/8% SERIES B SENIOR SECURED NOTES DUE 2002
PURSUANT TO THE PROSPECTUS DATED , 1994
THE EXCHANGE OFFER WILL EXPIRE AT P.M., NEW YORK CITY TIME, ON
, 1994 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE
"EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY
TIME PRIOR TO P.M. ON THE BUSINESS DAY PRIOR TO THE EXPIRATION
DATE.
To: , Exchange Agent
<TABLE>
<S> <C>
BY MAIL, HAND OR OVERNIGHT COURIER: BY FACSIMILE:
Confirm by Telephone:
</TABLE>
Delivery of this Letter of Transmittal to an address, or transmission via
telegram, telex or facsimile, other than as set forth above will not constitute
a valid delivery. The instructions contained herein should be read carefully
before this Letter of Transmittal is completed.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
(the "Prospectus"), dated , 1994, of B.F. Saul Real Estate
Investment Trust (the "Trust"), which, together with this Letter of Transmittal
and the instructions hereto (the "Letter of Transmittal"), constitutes the
Trust's offer (the "Exchange Offer") to exchange $1,000 principal amount of its
11 5/8% Series B Senior Secured Notes due 2002 (the "New Notes") that have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which the Prospectus constitutes a part,
for each $1,000 principal amount of its outstanding 11 5/8% Senior Secured Notes
due 2002 (the "Old Notes"), upon the terms and subject to the conditions set
forth in the Prospectus.
This Letter of Transmittal is to be used by Holders if: (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders; (ii) tender of Old Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company ("DTC")
pursuant to the procedures set forth in the Prospectus under "The Exchange Offer
- -- Procedures for Tendering" by any financial institution that is a participant
in DTC and whose name appears on a security position listing as the owner of Old
Notes (such participants, acting on behalf of Holders, are referred to herein,
together with such Holders, as "Acting Holders"); or (iii) tender of Old Notes
is to be made according to the guaranteed delivery procedures set forth in the
Prospectus under "The Exchange Offer -- Procedures for Tendering." DELIVERY OF
DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
<PAGE>
The term "Holder" with respect to the Exchange Offer means any person (i) in
whose name Old Notes are registered on the books of the Trust or any other
person who has obtained a properly completed bond power from the registered
Holder; or (ii) whose Old Notes are held of record by DTC who desires to deliver
such Old Notes by book-entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this letter in its entirety.
All capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, list the certificate numbers and principal
amounts on a separately executed schedule and affix the schedule to this Letter
of Transmittal. Tenders of Old Notes will be accepted only in principal amounts
equal to $1,000 or integral multiples thereof.
<TABLE>
<S> <C> <C>
DESCRIPTION OF OLD NOTES
CERTIFICATE
NUMBER(S)* AGGREGATE PRINCIPAL
NAME(S) AND ADDRESS(ES) OF HOLDER(S) (ATTACH SIGNED AMOUNT TENDERED
(PLEASE FILL IN, IF BLANK) LIST IF NECESSARY) (IF LESS THAN ALL)**
TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to all Old Notes listed.
See Instruction 2.
</TABLE>
<PAGE>
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE
EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
---------------------------------------------------------------------------
DTC Book-Entry Account No.:
---------------------------------------------------------------------------
Transaction Code No.:
---------------------------------------------------------------------------
If Holders desire to tender Old Notes pursuant to the Exchange Offer and (i)
certificates representing such Old Notes are not lost but are not immediately
available, (ii) time will not permit this Letter of Transmittal, certificates
representing such Old Notes or other required documents to reach the Exchange
Agent prior to the Expiration Date or (iii) the procedures for book-entry
transfer cannot be completed prior to the Expiration Date, such Holders may
effect a tender of such Old Notes in accordance with the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer -- Procedures
for Tendering."
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Holder(s) of Old Notes:
- --------------------------------------------------------------------------------
Window Ticket No. (if any):
---------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
---------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
---------------------------------------------------------------------------
DTC Book-Entry Account No.:
---------------------------------------------------------------------------
If Delivered by Book-Entry Transfer:
Name of Tendering Institution:
---------------------------------------------------------------------------
Transaction Code No.:
---------------------------------------------------------------------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
---------------------------------------------------------------------------
Address:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
GENTLEMEN:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Trust the principal amount of Old Notes indicated above. Subject to and
effective upon the acceptance for exchange of the principal amount of Old Notes
tendered in accordance with this Letter of Transmittal, the undersigned sells,
assigns and transfers to, or upon the order of, the Trust all right, title and
interest in and to the Old Notes tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Trust) with respect to the tendered Old Notes with full power of
substitution to (i) deliver certificates for such Old Notes to the Trust, or
transfer ownership of such Old Notes on the account books maintained by DTC,
together, in either such case, with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Trust and (ii) present such Old
<PAGE>
Notes for transfer on the books of the Trust and receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that it has full power and
authority to tender, sell, assign and transfer the Old Notes tendered hereby and
that the Trust will acquire good and unencumbered title thereto, free and clear
of all liens, restrictions, charges and encumbrances and not subject to any
adverse claim, when the same are acquired by the Trust. The undersigned also
acknowledges that this Exchange Offer is being made in reliance upon an
interpretation by the staff of the Securities and Exchange Commission that the
New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer
may be offered for sale, resold and otherwise transferred by holders thereof
(other than any such holder that is an "affiliate" of the Trust within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to participate in
the distribution of such New Notes. If the undersigned is not a broker-dealer,
the undersigned represents that is is not engaged in, and does not intend to
engage in, a distribution of the New Notes.
The undersigned represents that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of such holder's
business, (ii) such holder has no arrangements with any person to participate in
the distribution of such New Notes and (iii) such holder is not an "affiliate"
of the Trust within the meaning of Rule 405 of the Securities Act or, if such
holder is an affiliate, that such holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of New Notes.
If the undersigned is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes, it represents that the Old Notes to be
exchanged for New Notes were acquired by it as a result of market-making
activities or other trading activities and acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Trust to be necessary or desirable
to complete the assignment and transfer of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Trust shall be deemed to have
accepted validly tendered Old Notes, when, as and if the Trust has given oral or
written notice thereof to the Exchange Agent. If any tendered Old Notes are not
accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Old Notes will be returned (except as noted
below with respect to tenders through DTC), without expense, to the undersigned
at the address shown below or at a different address as may be indicated under
"Special Issuance Instructions" as promptly as practicable after the Expiration
Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Trust upon the terms and
subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and return any Old Notes not tendered or not
exchanged, in the name(s) of the undersigned (or in either such event in the
case of Old Notes tendered by DTC, by credit to the account at DTC). Similarly,
unless otherwise indicated under "Special Delivery Instructions," please send
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old
<PAGE>
Notes not tendered or not exchanged (and accompanying documents, as appropriate)
to the undersigned at the address shown below the undersigned's signatures,
unless, in either event, tender is being made through DTC. In the event that
both "Special Issuance Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange and return any Old Notes not
tendered or not exchanged in the name(s) of, and send such certificates to, the
person(s) so indicated. The undersigned recognizes that the Trust has no
obligation pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the registered
holder(s) thereof if the Trust does not accept for exchange any of the Old Notes
so tendered.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES REGARDLESS
OF WHETHER OLD NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in DTC, exactly as such participant's name appears on
a security position listing as the owner of Old Notes or by person(s) authorized
to become registered Holder(s) by endorsements and documents transmitted with
this Letter of Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person acting in a
fiduciary or representative capacity, such person must set forth his full title
below under "Capacity" and submit evidence satisfactory to the Trust of such
person's authority so to act. See Instruction 3 herein.
If the signature appearing below is not of the registered Holder(s) of the
Old Notes, then the registered Holder(s) must sign a valid proxy.
<TABLE>
<S> <C>
X ------------------------------------------------ Date: ------------------------------
X ------------------------------------------------ Date: ------------------------------
Signature(s) of Holder(s) or
Authorized Signatory
Name(s): ------------------------------------------ Address: ---------------------------------------------------
------------------------------------------
-----------------------------------------------------------
(Please Print) (Including Zip Code)
Capacity: Area Code and Telephone No: -------------------------------
- ------------------------------------------
Social Security No.:
- -------------------------------
</TABLE>
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE (SEE INSTRUCTION 3 HEREIN)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
- --------------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures)
- --------------------------------------------------------------------------------
(Address (including zip code) and Telephone Number (including area code) of
Firm)
- --------------------------------------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Printed Name)
- --------------------------------------------------------------------------------
(Title)
Date:
- ---------------------------
<PAGE>
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN) (SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certificates for Old To be completed ONLY if certificates for Old Notes in
Notes in a principal amount not tendered are to be a principal amount not tendered or not accepted for
issued in the name of, or the New Notes issued purchase or the New Notes issued pursuant to the
pursuant to the Exchange Offer are to be issued to Exchange Offer are to be sent to someone other than
the order of, someone other than the person or the person or persons whose signature(s) appear(s)
persons whose signature(s) appear(s) within this within this Letter of Transmittal or to an address
Letter of Transmittal or issued to an address different from that shown in the box entitled
different from that shown in the box entitled "Description of Old Notes" within this Letter of
"Description of Old Notes" within this Letter of Transmittal.
Transmittal, or if Old Notes tendered by book-entry
transfer that are not accepted for purchase are to be
credited to an account maintained at DTC.
Name: ---------------------------------- Name: ----------------------------------
(Please Print) (Please Print)
Address: --------------------------------- Address: ---------------------------------
(Please Print) (Please Print)
- ------------------------------------------ ------------------------------------------
Zip Code Zip Code
- ------------------------------------------ ------------------------------------------
Taxpayer Identification or Social Security Number Taxpayer Identification or Social Security Number
(See Substitute Form W-9 herein) (See Substitute Form W-9 herein)
</TABLE>
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER AND THE SOLICITATION
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. The certificates
for the tendered Old Notes (or a confirmation of a book-entry into the Exchange
Agent's account at DTC of all Old Notes delivered electronically), as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile hereof and any other documents required by this Letter of Transmittal
must be received by the Exchange Agent at its address set forth herein prior to
P.M., New York City time, on the Expiration Date. The method of delivery of
the tendered Old Notes, this Letter of Transmittal and all other required
documents to the Exchange Agent is at the election and risk of the Holder and,
except as otherwise provided below, the delivery will be deemed made only when
actually received by the Exchange Agent. Instead of delivery by mail, it is
recommended that the Holder use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Trust.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date must tender their Old Notes and follow the guaranteed
delivery procedures set forth in the Prospectus. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution; (ii) prior
to the Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder of the Old Notes, the certificate number or numbers of
such Old Notes and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, this Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a confirmation
of electronic delivery of book-entry delivery into the Exchange Agent's account
at DTC) and any of the required documents will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal (or facsimile hereof), as well as all other
documents required by this Letter of Transmittal and the certificate(s)
representing all tendered Old Notes in proper form for transfer (or a
confirmation of electronic mail delivery of book-entry delivery into the
Exchange Agent's account at DTC), must be received by the Exchange Agent within
five business days after the Expiration Date, all as provided in the Prospectus
under the caption "Guaranteed Delivery Procedures." Any Holder of Old Notes who
wishes to tender such Holder's Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery prior to P.M., New York City time, on the
Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Trust in its sole discretion, which determination will be final and binding.
The Trust reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Trust's acceptance of which would, in the
opinion of counsel for the Trust, be unlawful. The Trust also reserves the right
to waive any irregularities or conditions of tender as to particular Old Notes.
The Trust's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the Trust
shall determine. Neither the Trust, the Exchange Agent nor any other person
shall be under any duty to give notification of defects or irregularities with
respect to tenders of Old Notes, nor shall any of them incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned without cost by the Exchange Agent to the tendering Holders of Old
Notes, unless otherwise provided in this Letter of Transmittal, as soon as
practicable following the Expiration Date.
<PAGE>
2. PARTIAL TENDERS. Tenders of Old Notes will be accepted in all
denominations of $1,000 and integral multiples in excess thereof. If less than
the entire principal amount of any Old Notes is tendered, the tendering Holder
should fill in the principal amount tendered in the third column of the chart
entitled "Description of Old Notes." The entire principal of Old Notes delivered
to the Exchange Agent will be deemed to have been tendered unless otherwise
indicated. If the entire principal amount of all Old Notes is not tendered, Old
Notes for the principal amount of Old Notes delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated. If the entire
principal amount of all Old Notes is not tendered, Old Notes for the principal
amount of Old Notes not tendered and a certificate or certificates representing
New Notes issued in exchange for any Old Notes accepted will be sent to the
Holder at its registered address, unless a different address is provided in the
appropriate box on this Letter of Transmittal or unless tender is made through
DTC, promptly after the Old Notes are accepted for exchange.
3. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of Old Notes tendered and the certificate(s) for New Notes
issued in exchange therefor is to be issued (or any untendered principal amount
of Old Notes is to be reissued) to the registered Holder, such Holder need not
and should not endorse any tendered Old Note, nor provide a separate bond power.
In any other case, such Holder must either properly endorse the Old Notes
tendered or transmit a properly completed separate bond power with this Letter
of Transmittal, with the signatures on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder(s) of any Old Notes listed, such Old Notes must
be endorsed or accompanied by appropriate bond powers signed as the name of the
registered Holder(s) appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Trust, evidence satisfactory to the Trust of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution unless the Old Notes tendered pursuant
thereto are tendered (i) by a registered Holder (including any participant in
DTC whose name appears on a security position listing as the owner of Old Notes)
who has not completed the box set forth herein entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" or (ii) for
the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable spaces, the name and address to which New Notes or
substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal (or in the case of tender of the Old
Notes through DTC, if different from DTC). In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
5. TRANSFER TAXES. The Trust will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering
<PAGE>
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with this Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
6. WAIVER OF CONDITIONS. The Trust reserves the absolute right to amend,
waive or modify specified conditions in the Exchange Offer in the case of any
Old Notes tendered.
7. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instruction.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified in the Prospectus. Holders may also contact their broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
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<S> <C> <C>
CERTIFICATE SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
Delivery Prepared by ------------ Checked by ------------ Date ------------
</TABLE>
<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Old Notes are
accepted for payment is required to provide the Exchange Agent (as payer) with
such Holder's correct TIN on Substitute Form W-9 below or otherwise establish a
basis for exemption from backup withholding. If such Holder is an individual,
the TIN is his social security number. If the Exchange Agent is not provided
with the correct TIN, a $50 penalty may be imposed by the Internal Revenue
Service, and payments made with respect to Old Notes purchased pursuant to the
Exchange Offer may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed Internal Revenue Service Form W-8,
signed under penalties of perjury, attesting to that Holder's exempt status. A
Form W-8 can be obtained from the Exchange Agent. See the enclosed "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
If backup withholding applies, the Exchange Agent is required to withhold
20% of any payments made to the Holder or other payee. Backup withholding is not
an additional federal income tax. Rather, the federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the Exchange
Offer, the Holder is required to provide the Exchange Agent with either: (i) the
Holder's correct TIN by completing the form below, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such Holder is awaiting a
TIN) and that (A) the Holder has not been notified by the Internal Revenue
Service that the Holder is subject to backup withholding as a result of failure
to report all interest or dividends or (B) the Internal Revenue Service has
notified the Holder that the Holder is no longer subject to backup withholding;
or (ii) an adequate basis or exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (E.G., social
security number or employer identification number) of the registered Holder of
the Old Notes. If the Old Notes are held in more than one name or are held not
in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
<PAGE>
PAYER'S NAME:
------------------------------------
<TABLE>
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR ----------------------------------
FORM W-9 TIN IN THE BOX AT RIGHT AND Social Security Number
CERTIFY BY SIGNING AND DATING OR
BELOW ----------------------------------
Employer Identification Number
DEPARTMENT OF THE PART 2 -- Certification --
TREASURY Under Penalties of Perjury, I
INTERNAL REVENUE SERVICE certify that: PART 3 --
PAYER'S REQUEST FOR (1) The number shown on this Awaiting TIN / /
TAXPAYER form is my correct Taxpayer
IDENTIFICATION NUMBER Identification Number (or I
(TIN) am waiting for a number to be
issued to me) and
(2) I am not subject to
backup withholding because I
have not been notified by the
Internal Revenue Service
("IRS") that I am subject to
backup withholding as a
result of failure to report
all interest or dividends, or
the IRS has notified me that
I am no longer subject to
backup withholding.
CERTIFICATE INSTRUCTION -- You must cross out item (2) in Part 2
above if you have been notified by the IRS that you are subject
to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by
the IRS that you were subject to backup withholding you received
another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out Item (2).
SIGNATURE ------------------------------------ DATE
----------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 20% OF ANY PAYMENTS MADE TO HOLDERS OF NEW NOTES PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within 60 days, 20 percent of all
reportable payments made to me thereafter will be withheld until I provide a
number.
- -------------------------------------------
- -------------------------------------------
Signature Date
<PAGE>
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
<TABLE>
<S> <C>
BY MAIL, HAND OR OVERNIGHT COURIER: BY FACSIMILE:
Confirm by Telephone:
</TABLE>
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
11 5/8% SERIES B SENIOR SECURED NOTES DUE 2002
OF
B.F. SAUL REAL ESTATE INVESTMENT TRUST
As set forth in the Prospectus, dated , 1994 (the "Prospectus"),
of B.F. Saul Real Estate Investment Trust (the "Trust") in the accompanying
Letter of Transmittal and instructions thereto (the "Letter of Transmittal"),
this form or one substantially equivalent hereto must be used to accept the
Trust's exchange offer (the "Exchange Offer") to purchase all of its outstanding
11 5/8% Senior Secured Notes due 2002 (the "Old Notes") if (i) certificates
representing the Old Notes to be tendered for purchase and payment are not lost
but are not immediately available, (ii) time will not permit the Letter of
Transmittal, certificates representing such Old Notes or other required
documents to reach the Exchange Agent prior to the Expiration Date or (iii) the
procedures for book-entry transfer cannot be completed prior to the Expiration
Date. This form may be delivered by an Eligible Institution by mail or hand
delivery or transmitted, via telegram, telex or facsimile, to the Exchange Agent
as set forth below. All capitalized terms used herein but not defined herein
shall have the meanings ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT P.M., NEW YORK CITY TIME, ON
, 1994 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE
"EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY
TIME PRIOR TO P.M. ON THE BUSINESS DAY PRIOR TO THE EXPIRATION
DATE.
THE EXCHANGE AGENT:
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<S> <C>
BY MAIL, HAND OR OVERNIGHT COURIER: BY FACSIMILE:
Confirm by Telephone:
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA A TELEGRAM,
TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
LADIES AND GENTLEMEN:
The undersigned hereby tender(s) to the Trust, upon the terms and subject to
the conditions set forth in the Exchange Offer and the Letter of Transmittal,
receipt of which is hereby acknowledged, the aggregate principal amount of Old
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus.
The undersigned understands that tenders of Old Notes will be accepted only
in principal amounts equal to $1,000 or integral multiples thereof. The
undersigned understands that tenders of Old Notes pursuant to the Exchange Offer
may not be withdrawn after p.m., New York City time, on the business day
prior to the Expiration Date. Tenders of Old Notes may also be withdrawn if the
Exchange Offer is terminated without any such Old Notes being purchased
thereunder or as otherwise provided in the Prospectus.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
1
<PAGE>
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) or Authorized
Signatory: _____________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Principal Amount of Old Notes Tendered: ________________________________________
________________________________________________________________________________
Certificate No(s). of Old Notes (if available): ________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Date: __________________________________________________________________________
Name(s) of Registered Holder(s):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
Area Code and Telephone No.: ___________________________________________________
If Old Notes will be delivered by book-entry transfer at The Depository Trust
Company, insert
Depository Account No.: ________________________________________________________
<TABLE>
<S> <C> <C> <C>
This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Old Notes exactly
as its (their) name(s) appear on certificates for Old Notes or on a security position listing as
the owner of Old Notes, or by person(s) authorized to become registered Holder(s) by endorsements
and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary
or representative capacity, such person must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Capacity:
-------------------------------------------------------------------------------------
Address(es):
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
DO NOT SEND OLD NOTES WITH THIS FORM. OLD NOTES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH
A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL.
</TABLE>
<TABLE>
<S> <C> <C> <C>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company having an office
or a correspondent in the United States, hereby (a) represents that each holder of Old Notes
on whose behalf this tender is being made "own(s)" the Old Notes covered hereby within the
meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) represents
that such tender of Old Notes complies with such Rule 14e-4, and (c) guarantees that, within
five Nasdaq trading days from the date of this Notice of Guaranteed Delivery, a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof), together with
certificates representing the Old Notes covered hereby in proper form for transfer (or
confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at
The Depository Trust Company, pursuant to the procedure for book-entry transfer set forth in
the Prospectus) and required documents, will be deposited by the undersigned with the Exchange
Agent.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND OLD NOTES
TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME PERIOD SET FORTH ABOVE AND THAT FAILURE
TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED.
Name of Firm: -------------------------------
----------------------------------------------
Authorized Signature
Address: ------------------------------------ Name: ---------------------------------------
Title:
---------------------------------------------- ----------------------------------------
Area Code and Telephone No: ---------------- Date: ----------------------------------------
</TABLE>
2
