<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998
------------------
COMMISSION FILE NUMBER 1-12254
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SAUL CENTERS, INC.
-----------------
(Exact name of registrant as specified in its charter)
Maryland 52-1833074
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8401 Connecticut Avenue, Chevy Chase, Maryland 20815
------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (301) 986-6000
--------------
Number of shares outstanding of each of the registrant's
classes of common stock, as of November 6, 1998:
Common Stock par value $0.01 per share: 12,836,000
---------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
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<PAGE>
SAUL CENTERS, INC.
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
--------------------------------
(a) Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997............................................. 4
(b) Consolidated Statements of Operations for the three months
and nine months ended September 30, 1998 and 1997............. 5
(c) Consolidated Statements of Stockholders' Equity as of
September 30, 1998 and December 31, 1997...................... 6
(d) Consolidated Statements of Cash Flows for the three months and
nine months ended September 30, 1998 and 1997................. 7
(e) Notes to Consolidated Financial Statements.................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
---------------------
(a) Liquidity and Capital Resources............................... 16
(b) Results of Operations
Three months ended September 30, 1998 compared to three
months ended September 30, 1997............................... 21
Nine months ended September 30, 1998 compared to nine months
ended September 30, 1997...................................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 26
--------------------------------
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments necessary for fair presentation of the
financial position and results of operations of Saul Centers, Inc. All such
adjustments are of a normal recurring nature. These consolidated financial
statements and the accompanying notes should be read in conjunction with the
audited consolidated financial statements of Saul Centers, Inc. for the year
ended December 31, 1997, which are included in its Annual Report on Form 10-K.
The results of operations for interim periods are not necessarily indicative of
results to be expected for the year.
3
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
====================================================================================================
September 30, December 31,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate investments
Land $ 64,339 $ 65,630
Buildings and equipment 278,526 269,638
------------ ------------
342,865 335,268
Accumulated depreciation (100,320) (92,615)
------------ ------------
242,545 242,653
Construction in progress 6,617 974
Cash and cash equivalents 1,385 688
Accounts receivable and accrued income, net 6,226 6,190
Prepaid expenses 6,604 5,423
Deferred debt costs, net 3,688 3,853
Other assets 1,613 1,161
------------ ------------
Total assets $ 268,678 $ 260,942
============ ============
LIABILITIES
Notes payable $ 288,812 $ 284,473
Accounts payable, accrued expenses and other liabilities 15,597 13,093
Deferred income 1,724 1,430
------------ ------------
Total liabilities 306,133 298,996
------------ ------------
MINORITY INTERESTS -- --
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 30,000,000 shares
authorized, 12,726,331 and 12,428,145 shares issued and
outstanding, respectively 127 124
Additional paid-in capital 28,532 20,447
Accumulated deficit (66,114) (58,625)
------------ ------------
Total stockholders' equity (deficit) (37,455) (38,054)
------------ ------------
Total liabilities and stockholders' equity $ 268,678 $ 260,942
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
==================================================================================================
For the Three Months For the Nine Months
(Dollars in thousands, except Ended September 30, Ended September 30,
------------ ---------- ---------- ----------
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Base rent $ 14,044 $ 13,102 $ 41,505 $ 38,560
Expense recoveries 2,625 2,326 7,339 6,884
Percentage rent 588 765 1,995 2,202
Other 393 952 1,644 2,685
---------- ---------- ---------- ----------
Total revenue 17,650 17,145 52,483 50,331
---------- ---------- ---------- ----------
OPERATING EXPENSES
Property operating expenses 2,016 2,043 5,902 6,079
Provision for credit losses 123 163 275 337
Real estate taxes 1,577 1,595 4,563 4,565
Interest expense 5,696 4,957 16,972 14,611
Amortization of deferred debt expense 106 542 315 1,628
Depreciation and amortization 2,840 2,626 8,488 7,831
General and administrative 865 838 2,552 2,439
---------- ---------- ---------- ----------
Total operating expenses 13,223 12,764 39,067 37,490
---------- ---------- ---------- ----------
NET INCOME BEFORE EXTRAORDINARY ITEM,
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD AND MINORITY
INTERESTS 4,427 4,381 13,416 12,841
Extraordinary item
Early extinguishment of debt (50) -- (50) (369)
Cumulative effect of change in
accounting method -- -- (771) --
---------- ---------- ---------- ----------
NET INCOME BEFORE MINORITY INTERESTS 4,377 4,381 12,595 12,472
---------- ---------- ---------- ----------
MINORITY INTERESTS
Minority share of income (1,177) (1,149) (3,338) (3,293)
Distributions in excess of earnings (650) (566) (2,029) (1,848)
---------- ---------- ---------- ----------
Total minority interests (1,827) (1,715) (5,367) (5,141)
---------- ---------- ---------- ----------
NET INCOME $ 2,550 $ 2,666 $ 7,228 $ 7,331
========== ========== ========== ==========
NET INCOME PER SHARE (BASIC AND DILUTIVE)
Net income before extraordinary item,
cumulative effect of change in
accounting method and minority
interests $ 0.25 $ 0.26 $ 0.79 $ 0.77
Extraordinary item -- -- -- (0.02)
Cumulative effect of change in
accounting method -- -- (0.05) --
---------- ---------- ---------- ----------
Net income before minority interests $ 0.25 $ 0.26 $ 0.74 $ 0.75
========== ========== ========== ==========
Net income $ 0.20 $ 0.22 $ 0.57 $ 0.60
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
-5-
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
=====================================================================================================
Additional
Common Paid-in Accumulated
(Dollars in thousands, except per share amounts Stock Capital Deficit Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY (DEFICIT):
Balance, December 31, 1996 $ 121 $15,950 $ (42,011) $ (25,940)
Issuance of 275,374 shares of
common stock 3 4,497 -- 4,500
Net income -- -- 2,552 2,552
Distributions ($1.17 per share) -- -- (14,334) (14,334)
Distributions payable ($.39 per share) -- -- (4,832) (4,832)
-------- --------- ---------- ----------
Balance, December 31, 1997 124 20,447 (58,625) (38,054)
Issuance of 97,878 shares of
common stock 1 1,590 -- 1,591
Net income -- -- 2,179 2,179
Distributions payable ($.39 per share) -- -- (4,869) (4,869)
-------- --------- ---------- ----------
Balance, March 31, 1998 125 22,037 (61,315) (39,153)
Issuance of 94,776 shares of
common stock 1 1,651 -- 1,652
Issuance of 186,655 convertible
limited partnership units in the
Operating Partnership -- 1,282 -- 1,282
Net income -- -- 2,499 2,499
Distributions payable ($.39 per share) -- -- (4,904) (4,904)
-------- --------- ---------- ----------
Balance, June 30, 1998 126 24,970 (63,720) (38,624)
Issuance of 105,532 shares of
common stock 1 1,691 -- 1,692
Issuance of 106,010 convertible
limited partnership units in the
Operating Partnership -- 1,871 -- 1,871
Net income -- -- 2,550 2,550
Distributions payable ($.39 per share) -- -- (4,944) (4,944)
-------- --------- ---------- ----------
Balance, September 30, 1998 $ 127 $ 28,532 $ (66,114) $ (37,455)
======== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
SAUL CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
===================================================================================================
For the Nine Months
Ended September 30,
----------- ----------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,228 $ 7,331
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 5,367 5,141
Cumulative effect of change in
accounting method 771 --
Loss on early extinguishment of debt 50 369
Depreciation and amortization 8,803 9,459
Provision for credit losses 275 337
Decrease (increase) in accounts receivable (1,082) 1,234
Increase in prepaid expenses (1,964) (149)
Increase in other assets (452) (96)
Increase (decrease) in accounts payable and other liabilities 2,504 (1,082)
Increase in deferred income 294 671
Other, net (37) --
----------- ----------
Net cash provided by operating activities 21,757 23,215
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate investments (3,537) (4,655)
Additions to construction in progress (6,132) (10,426)
----------- ----------
Net cash used in investing activities (9,669) (15,081)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 17,400 56,600
Repayments on notes payable (16,718) (46,491)
Note prepayment fees -- (95)
Additions to deferred debt expense (200) (773)
Proceeds from the issuance of common stock --
and convertible limited partnership units
in the Operating Partnership 8,211 3,059
Distributions to common stockholders and
holders of convertible limited partnership
units in the Operating Partnership (20,084) (19,475)
----------- ----------
Net cash used in financing activities (11,391) (7,175)
----------- ----------
Net increase in cash 697 959
Cash, beginning of period 688 38
----------- ----------
Cash, end of period $ 1,385 $ 997
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, FORMATION AND STRUCTURE
ORGANIZATION
Saul Centers, Inc. ("Saul Centers") was incorporated under the Maryland
General Corporation Law on September 10, 1993. The authorized capital stock of
Saul Centers consists of 30,000,000 shares of common stock, having a par value
of $0.01 per share and 1,000,000 shares of preferred stock. Each holder of
common stock is entitled to one vote for each share held. Saul Centers, together
with its wholly owned subsidiaries and the limited partnerships of which Saul
Centers or one of its subsidiaries is the sole general partner, are referred to
collectively as the "Company". Saul Centers operates as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (a "REIT").
FORMATION AND STRUCTURE OF COMPANY
Saul Centers was formed to continue and expand the shopping center business
previously owned and conducted by the B.F. Saul Real Estate Investment Trust,
the B.F. Saul Company, Chevy Chase Bank, F.S.B. and certain other affiliated
entities (collectively, "The Saul Organization"). On August 26, 1993, The Saul
Organization transferred to Saul Holdings Limited Partnership, a newly formed
Maryland limited partnership (the "Operating Partnership"), and two newly formed
subsidiary limited partnerships (the "Subsidiary Partnerships") 26 shopping
center properties, one office property, one research park and one office/retail
property and the management functions related to the transferred properties.
Since its formation, the Company has purchased three additional community and
neighborhood shopping center properties, an office property and purchased a land
parcel which it developed into a community shopping center. The Company is
currently in the predevelopment and approval process of converting an under-
performing shopping center to an industrial / warehouse use. Therefore, as of
September 30, 1998, the Company's properties (the "Current Portfolio
Properties") consisted of 29 operating shopping center properties (the "Shopping
Centers"), a property planned to be converted to an industrial / warehouse
facility (the "Industrial Property") and four predominantly office properties
(the "Office Properties"). To facilitate the placement of collateralized
mortgage debt, the Company established Saul QRS, Inc. and SC Finance
Corporation, each of which is a wholly owned subsidiary of Saul Centers. Saul
QRS, Inc. was established to succeed to the interest of Saul Centers as the sole
general partner of Saul Subsidiary I Limited Partnership.
As a consequence of the transactions constituting the formation of the
Company, Saul Centers serves as the sole general partner of the Operating
Partnership and of Saul Subsidiary II Limited Partnership, while Saul QRS, Inc.,
Saul Centers' wholly owned subsidiary, serves as the sole general partner of
Saul Subsidiary I Limited Partnership. The remaining limited
8
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
partnership interests in Saul Subsidiary I Limited Partnership and Saul
Subsidiary II Limited Partnership are held by the Operating Partnership as the
sole limited partner. Through this structure, the Company owns 100% of the
Current Portfolio Properties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company, which conducts all of its activities through its subsidiaries,
the Operating Partnership and Subsidiary Partnerships, engages in the ownership,
operation, management, leasing, acquisition, renovation, expansion, development
and financing of community and neighborhood shopping centers and office
properties, primarily in the Mid-Atlantic region.
A majority of the Shopping Centers are anchored by several major tenants.
Eighteen of the 29 Shopping Centers are anchored by a grocery store and offer
primarily day-to-day necessities and services. As of December 1997, no single
shopping center accounted for more than 10.6% of the total shopping center gross
leasable area. Only one retail tenant, Giant Food at 6.5%, accounted for more
than 2.0% of total Company revenues. No other retail tenants represented more
than 2.0% of total revenues for the year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the accounts of Saul Centers, its subsidiaries, and the Operating Partnership
and Subsidiary Partnerships which are majority owned by Saul Centers. All
significant intercompany balances and transactions have been eliminated in
consolidation.
REAL ESTATE INVESTMENT PROPERTIES
Real estate investment properties are stated at the lower of depreciated
cost or fair value less cost to sell. Management believes that these assets
have generally appreciated in value and, accordingly, the aggregate current
value exceeds their aggregate net book value and also exceeds the value of the
Company's liabilities as reported in these financial statements. These
financial statements are prepared in conformity with generally accepted
accounting principles, and accordingly, do not report the current value of the
Company's real estate assets. Real estate investment properties are reviewed
for potential impairment losses whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
9
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
sum of an individual property's undiscounted expected future cash flows is less
than its carrying amount, the Company's policy is to recognize an impairment
loss measured by the amount the depreciated cost of the property exceeds its
fair value. Fair value is calculated as the present value of expected future
cash flows.
Interest, real estate taxes and other carrying costs are capitalized on
projects under development and construction. Once construction is substantially
completed and the assets are placed in service, their rental income, direct
operating expenses and depreciation are included in current operations.
Expenditures for repairs and maintenance are charged to operations as incurred.
Interest expense capitalized during the nine month periods ended September 30,
1998 and 1997, was $133,000 and $280,000, respectively.
A project is considered substantially complete and available for occupancy
upon completion of tenant improvements, but no later than one year from the
cessation of major construction activity. Substantially completed portions of a
project are accounted for as separate projects. Depreciation is calculated
using the straight-line method and estimated useful lives of 33 to 50 years for
buildings and up to 20 years for certain other improvements. Leasehold
improvements are amortized over the lives of the related leases using the
straight-line method.
ACCOUNTS RECEIVABLE AND ACCRUED INCOME
Accounts receivable primarily represent amounts currently due from tenants
in accordance with the terms of the respective leases. In addition, at
September 30, 1998 accounts receivable included $1,632,000, representing minimum
rental income accrued on a straight-line basis to be paid by tenants over the
terms of the respective leases. Receivables are reviewed monthly and reserves
are established when, in the opinion of management, collection of the receivable
is doubtful. Accounts receivable in the accompanying financial statements are
shown net of an allowance for doubtful accounts of $647,000 at September 30,
1998.
DEFERRED DEBT COSTS
Deferred debt costs consist of financing fees and costs incurred to obtain
long-term financing. These fees and costs are being amortized over the terms of
the respective loans or agreements. Deferred debt costs in the accompanying
financial statements are shown net of accumulated amortization of $486,000 at
September 30, 1998.
10
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
REVENUE RECOGNITION
Rental and interest income is accrued as earned except when doubt exists as
to collectibility, in which case the accrual is discontinued. When rental
payments due under leases vary from a straight-line basis, because of free rent
periods or stepped increases (excluding those increases which approximate
inflationary increases), income is recognized on a straight-line basis in
accordance with generally accepted accounting principles. Expense recoveries
represent property operating expenses to be billed to tenants, including common
area maintenance, real estate taxes and other recoverable costs. Expense
recoveries are recognized in the period the expenses are incurred. Percentage
rental income is recognized in accordance with Emerging Issues Task Force
("EITF") 98-9, in the quarterly periods in which a tenant's year-to-date sales
exceed an annual sales target. For periods prior to January 1, 1998, the
Company recognized percentage rent monthly on an accrual basis using estimates
of tenants' annual sales based upon prior year's sales results adjusted to give
effect to current sales data.
INCOME TAXES
The Company made an election to be treated, and intends to continue
operating so as to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ending December 31, 1993. A REIT generally will not be subject to federal income
taxation on that portion of its income that qualifies as REIT taxable income to
the extent that it distributes at least 95% of its REIT taxable income to
stockholders and complies with certain other requirements. Therefore, no
provision has been made for federal income taxes in the accompanying financial
statements.
PER SHARE DATA
Per share data is calculated in accordance with SFAS No. 128, "Earnings Per
Share." The Company has no dilutive securities; therefore, basic and diluted
earnings per share are identical. Net income before minority interests is
presented on a fully converted basis, that is, assuming the limited partners
exercise their right to convert their partnership ownership into shares of Saul
Centers, and is computed using weighted average shares of 17,342,000 and
16,723,000, for the quarters and 17,124,000 and 16,655,000, for the nine months
ended September 30, 1998 and 1997, respectively. Per share data relating to net
income after minority interests is computed using weighted average shares of
12,691,000 and 12,330,000, for the quarters and 12,592,000 and 12,262,000, for
the nine months ended September 30, 1998 and 1997, respectively.
11
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The reclassifications
have no impact on operating results previously reported.
MINORITY INTERESTS - HOLDERS OF CONVERTIBLE LIMITED PARTNER UNITS IN THE
OPERATING PARTNERSHIP
The Saul Organization has a 26.9% limited partnership interest, represented
by 4,686,000 convertible limited partnership units, in the Operating
Partnership, as of September 30, 1998. These Convertible Limited Partnership
Units are convertible into shares of Saul Centers' common stock on a one-for-one
basis, provided the rights may not be exercised at any time that The Saul
Organization owns, directly or indirectly, in the aggregate more than 24.9% of
the outstanding equity securities of Saul Centers. The impact of The Saul
Organization's 26.9% limited partnership interest in the Operating Partnership
is reflected as minority interests in the accompanying financial statements.
DIRECTORS DEFERRED COMPENSATION PLAN
A Deferred Compensation Plan was established by Saul Centers, effective
January 1, 1994, for the benefit of its directors and their beneficiaries. A
director may elect to defer all or part of his or her director's fees to be
earned subsequent to the election. A director has the option to have deferred
director's fees paid in cash, in shares of common stock or in a combination of
cash and shares of common stock. If the director elects to have the deferred
fees paid in stock, the number of shares allocated to the director is determined
based on the market value of the common stock on the day the deferred director's
fee was earned. The Company has registered 70,000 shares for use under the
plan, all of which were authorized at September 30, 1998. As of September 30,
1998, 49,000 shares had been credited to the directors' deferred fee accounts.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income in the Company's financial statements. The Company
adopted this standard in the first quarter of 1998. The Company had no
comprehensive income during the nine month period ended September 30, 1998.
12
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In September 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Adoption of the
new standard is required for the December 1998 financial statements. Because
SFAS 131 addresses only disclosure-related issues, its adoption will not have an
impact on the Company's financial condition or its results of operations.
CHANGE IN ACCOUNTING METHOD
On May 21, 1998, the EITF discussed Issue 98-9 "Accounting for Contingent
Rent In Interim Financial Periods" and reached a consensus that lessors should
defer the accounting recognition of contingent rent, such as percentage rent,
until the specific tenant sales breakpoint is achieved. The Company's prior
accounting method, which was permitted under generally accepted accounting
principles, recognized percentage rent when a tenant's achievement of its sales
breakpoint was considered probable. This EITF consensus was implemented
retroactively to January 1, 1998, as a change in accounting method. The new
accounting method is not expected to affect the amount of percentage rent income
reported on an annual basis, but is expected to have an impact on the
recognition of percentage rent income reported on a quarterly basis by
increasing revenues the Company reports in the first and fourth quarters and
decreasing revenues reported in the second and third quarters. The change in
accounting method has no impact on the Company's cash flows. The comparative
three month and nine month period financial statements ending September 30, 1997
have not been restated. Had the accounting method been retroactively applied,
net income for the three month and nine month periods ended September 30, 1997,
would have been $2,376,000 and $6,922,000, respectively.
3. CONSTRUCTION IN PROGRESS
Construction in progress includes the costs of redeveloping the French
Market and Beacon shopping centers, the development of approximately 27,000
square feet at Avenel Business Park and other predevelopment project costs.
Development costs include direct construction costs and indirect costs such as
architectural, engineering, construction management and carrying costs
consisting of interest, real estate taxes and insurance. Construction in
progress balances as of September 30, 1998 and December 31, 1997 are as
follows:
13
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Construction in Progress
------------------------
(In thousands) September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
French Market............................ $ 921 $807
Beacon Center............................ 2,988 153
Avenel Business Park V................... 2,358 -
Shops At Fairfax......................... 350 -
Other.................................... - 14
------ ----
Total.................................... $6,617 $974
====== ====
</TABLE>
4. NOTES PAYABLE
Notes payable totaled $288.8 million at September 30, 1998, of which
$273.8 million (94.8%) was fixed rate debt and $15.0 million (5.2%) was floating
rate debt.
As of September 30, 1998, the Company had a $60 million unsecured revolving
credit facility with outstanding borrowings of $15.0 million and additional
borrowing availability of $45.0 million. The facility requires monthly interest
payments at a rate of LIBOR plus 1.5%.
In September 1998, the Company closed a $6.4 million permanent loan to
replace the variable rate loan assumed with the April 1, 1998 acquisition of
Avenel IV and to finance the construction of approximately 27,000 square feet of
additional office / flex space at Avenel Business Park (Avenel V). The new loan
term is 13 years and requires monthly principal and interest payments based upon
a 25 year amortization schedule and an interest rate of 7.09% . The Company
recorded an extraordinary loss of $50,000 due to the early retirement of the
variable rate loan.
As of September 30, 1998, the scheduled maturities of all debt for years
ending December 31, were as follows:
<TABLE>
<CAPTION>
Debt Maturity Schedule
----------------------
(In thousands)
<S> <C>
October 1 through December 31, 1998........... $ 1,188
1999.......................................... 5,256
2000.......................................... 20,648
2001.......................................... 6,057
2002.......................................... 3,539
2003.......................................... 6,215
Thereafter.................................... 245,909
--------
Total......................................... $288,812
========
</TABLE>
14
<PAGE>
SAUL CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
These financial statements are prepared in conformity with generally
accepted accounting principles and accordingly do not report the current value
of the Company's real estate assets. The Shareholders' Equity reported on the
Consolidated Balance Sheets does not reflect any increase in the value resulting
from the difference between the current value and the net book value of the
Company's assets. Therefore, Shareholder's Equity reported on the Consolidated
Balance Sheets does not reflect the market value of stockholders' investment in
the Company.
The Consolidated Statement of Operations for the three months ended
September 30, 1998 includes a charge for minority interests of $1,827,000
consisting of $1,177,000 related to The Saul Organization's share of the net
income for the 1998 quarter and $650,000 related to distributions to minority
interests in excess of allocated net income for the 1998 quarter. The charge for
the three month period ended September 30, 1997 of $1,715,000 consists of
$1,149,000 related to The Saul Organization's share of net income for the 1997
quarter, and $566,000 related to distributions to minority interests in excess
of allocated net income for the 1997 quarter.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion is based primarily on the consolidated financial
statements of Saul Centers, Inc. ("Saul Centers" and, together with its wholly
owned subsidiaries and the limited partnerships of which it or one of its
wholly owned subsidiaries is the sole general partner, the "Company") as of
September 30, 1998 and for the three month and nine month periods ended
September 30, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company's principal demands for liquidity are expected to be
distributions to its stockholders, debt service and loan repayments, expansion,
renovation, and redevelopment of the Current Portfolio Properties and selective
acquisition and development of additional properties. In order to qualify as a
REIT for federal income tax purposes, the Company must distribute to its
stockholders at least 95% of its "real estate investment trust taxable income,"
as defined in the Internal Revenue Code of 1986, as amended. The Company
anticipates that operating revenues will provide the funds necessary for
operations, debt service, distributions, and required recurring capital
expenditures. Balloon principal repayments are expected to be funded by
refinancings.
Management anticipates that during the current year the Company may: 1)
redevelop certain of the Shopping Centers, 2) develop additional freestanding
outparcels or expansions within certain of the Shopping Centers, 3) acquire
existing neighborhood and community shopping centers and/or office properties
and 4) develop new shopping center sites. Acquisition and development of
properties are undertaken only after careful analysis and review, and
management's determination that such property is expected to provide long-term
earnings and cash flow growth. During the current year, any developments,
redevelopments, expansions or acquisitions are expected to be funded with bank
borrowings from the Company's credit line or other external capital resources
available to the Company.
The Company expects to fulfill its long range requirements for capital
resources in a variety of ways, including undistributed cash flow from
operations, secured or unsecured bank and institutional borrowings, private or
public offerings of debt or equity securities and proceeds from the sales of
properties. Borrowings may be at the Saul Centers, Operating Partnership or
Subsidiary Partnership level, and securities offerings may include (subject to
certain limitations) the issuance of additional limited partnership interests in
the Operating Partnership which can be converted into shares of Saul Centers
common stock.
Management believes that the Company's current capital resources, which
includes the Company's credit line of which $45,000,000 was available for
borrowing as of September 30, 1998, will be sufficient to meet its liquidity
needs for the foreseeable future.
16
<PAGE>
Financial Information
- ---------------------
For the third quarter of 1998, the Company reported Funds From Operations
("FFO") of $7,267,000. This represents an 8.2% increase over the comparable
1997 period's FFO of $6,717,000. FFO is presented on a fully converted basis and
as the most widely accepted measure of operating performance for REITs is
defined as net income before extraordinary and nonrecurring items and before
real estate depreciation and amortization. The following table represents a
reconciliation from net income before minority interests to FFO:
<TABLE>
<CAPTION>
Funds From Operations Schedule
- ------------------------------
(In thousands)
For the Quarters Ended September 30,
------------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Net income before minority interests.......................... $4,377 $4,381
Add:
Depreciation and amortization of real property........... 2,840 2,626
Debt restructuring losses:
Write-off unamortized loan costs....................... 50 -
------ ------
7,267 7,007
Retroactive impact of change in accounting method (1)... - -290
------ ------
Funds From Operations........................................ $7,267 $6,717
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net income before minority
interests................................. $12,595 $12,472
Add:
Depreciation and amortization of real property......... 8,488 7,831
Nonrecurring item:
Change in accounting method.......................... 771 -
Debt restructuring losses:
Write-off unamortized loan costs..................... 50 369
------- -------
21,904 20,672
Retroactive impact of change in accounting method (1).. - (409)
------- -------
Funds From Operations...................................... $21,904 $20,263
======= =======
</TABLE>
17
<PAGE>
(1) Retroactive to January 1, 1998, the Company began recognition of percentage
rental income in accordance with a new accounting pronouncement. The 1997
third quarter and nine month period, FFO amounts previously reported have
been reduced $290,000 and $409,000, respectively, to provide comparability.
FFO, as defined by the National Association of Real Estate Investment Trusts,
is calculated as net income excluding gains or losses from debt restructuring
and sales of property, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows
for the applicable periods. There are no material legal or functional
restrictions on the use of FFO. FFO should not be considered as an alternative
to net income, as an indicator of the Company's operating performance, or as an
alternative to cash flows as a measure of liquidity. Management considers FFO a
supplemental measure of operating performance and along with cash flow from
operating activities, financing activities and investing activities, it provides
investors with an indication of the ability of the Company to incur and service
debt, to make capital expenditures and to fund other cash needs. FFO may not be
comparable to similarly titled measures employed by other REITs.
Cash flow from operating activities, financing activities and investing
activities for the nine months ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Cash Flow provided by (used in):
- --------------------------------
(In thousands)
1998 1997
------------ --------------
<S> <C> <C>
Operating activities........................................ $ 21,757 $ 23,215
Investing activities........................................ (9,669) (15,081)
Financing activities........................................ (11,391) (7,175)
</TABLE>
Capital Strategy and Financing Activity
- ---------------------------------------
The Company's capital strategy is to maintain a ratio of total debt to total
asset value of 50% or less, and to actively manage the Company's leverage and
debt expense on an ongoing basis in order to maintain prudent coverage of fixed
charges. Management believes that current total debt remains less than 50% of
total asset value.
The Company's total notes payable as of September 30, 1998 were $288.8 million
and have a weighted average maturity of 12.9 years and a weighted average
interest rate of 7.88%. Approximately $273.8 million or 94.8% of total notes
payable is fixed rate debt. As of September 30, 1998, outstanding borrowings
under the Company's $60 million unsecured line of credit totaled $15.0 million,
leaving $45.0 million of uncommitted credit availability. This availability
provides the Company with capital to pursue new redevelopment, renovation, and
expansion opportunities within its portfolio.
18
<PAGE>
Redevelopment, Renovations and Acquisitions
- -------------------------------------------
The Company has been selectively involved in redevelopment, renovation and
acquisition opportunities. It continues to evaluate land parcels for
development and potential acquisitions of operating properties for opportunities
to enhance operating income and cash flow growth. The Company also continues to
take advantage of redevelopment, renovation and expansion opportunities within
the portfolio, as demonstrated by its redevelopment activities at French Market,
Beacon Center and Shops at Fairfax.
In February 1998, the Company commenced construction on a facade renovation
and retenanting of a 103,000 square foot anchor space at the 213,000 square foot
French Market center in Oklahoma City, Oklahoma. The Company successfully
negotiated the termination of a below market lease in the fourth quarter of
1997. Construction of the first two new tenant spaces, a 40,000 square foot
Bed, Bath and Beyond and an 8,000 square foot Lakeshore Learning, a children's
educational toy store, was completed in May 1998, with these stores now open for
business. Another 8,300 square feet occupied by BridesMart, a formal wear
retailer, was completed in September 1998, with the remaining 46,000 square feet
under active leasing negotiations. The redevelopment included a complete facade
renovation of the 103,000 square foot building which incorporates new anchor
tenant architectural features, new storefronts, tenant signage and decorative
awnings.
The Company has signed a lease with Lowe's Companies for a new 148,000 square
foot home improvement superstore and garden center at the Beacon Center in
Alexandria, Virginia. The lease has an initial term of twenty years. The area
leased by Lowe's consists of approximately 100,000 square feet of existing space
and 48,000 square feet of new building area. The enclosed mall area has been
demolished, and Lowe's will occupy a newly constructed building, scheduled for
opening in mid-1999. The center's other anchor tenants include Giant, Marshalls
and Office Depot, with a complement of small shop space and restaurants. The
350,000 square feet Beacon Center is now over 99% leased. In addition to the
new home improvement store, 8,000 square feet of new small shop space has been
constructed adjacent to Lowe's and Giant. The new small shop space will be
occupied by tenants in November 1998.
The Company commenced another significant redevelopment when it signed a lease
with SuperFresh for a new 53,000 square foot grocery store at the Shops at
Fairfax, located in Fairfax, Virginia. A portion of the shopping center which
includes a small enclosed mall will be demolished. SuperFresh will occupy a new
building, with construction projected to be completed in the fall of 1999. An
additional 7,500 square feet of shop space will be constructed adjacent to the
supermarket. Redevelopment plans also include new landscaping and a more
efficient parking scheme, which should enhance the property as a desirable
neighborhood shopping center. Subject to final governmental approvals,
construction is projected to commence by December 1998.
19
<PAGE>
On April 1, 1998, the Company purchased, through its operating partnership, a
newly constructed, 100% leased office/flex building (Avenel IV) located adjacent
to its Avenel Business Park (Phases I-III) in Gaithersburg, Maryland. Avenel IV
contains 46,227 square feet of net leasable area, which has increased the
Company's Avenel Business Park by 16%, to 332,000 square feet. An independent
appraisal determined the purchase price of $5,600,000. Payment consisted of
$3,657,000 in debt assumption, with the balance paid through the issuance of
105,922 new units in Saul Centers' operating partnership. The seller is a
member of The Saul Organization and is an existing limited partner in the
operating partnership.
In July 1998, the Company began construction of approximately 27,000 square
feet of additional office / flex space at Avenel Business Park on excess land
that it owns. This new project will be named Avenel V and is scheduled to be
completed during December 1998. Leases are pending for over 60% of this newly
developed space. In September 1998, the Company closed a $6.4 million permanent
loan for this development and to repay the variable rate debt assumed with the
April 1, 1998 acquisition described above. The new loan term is 13 years and
requires monthly principal and interest payments based upon a 25 year
amortization schedule and an interest rate of 7.09% . Excluding this new
development, Avenel Business Park (phases I-IV) is currently over 95% leased.
Portfolio Leasing Status
- ------------------------
As of September 30, 1998, the portfolio was located in seven states and the
District of Columbia and consisted of twenty nine Shopping Centers, four Office
Properties and one former shopping center the Company plans to convert into an
industrial / warehouse use, the Industrial Property. At September 30, 1998, the
Shopping Centers were 93% leased compared to 92% leased at September 30, 1997.
The Office Properties were 96% leased at September 30, 1998 compared to 94%
leased as of September 30, 1997. In total, the Company's 5.9 million square
feet of leasable space was 90% leased at September 30, 1998 and September 30,
1997.
20
<PAGE>
RESULTS OF OPERATIONS
The following discussion compares the results of the Company for the three
month and nine month periods ended September 30, 1998 and 1997, respectively.
This information should be read in conjunction with the accompanying
consolidated financial statements and the notes related thereto. These
financial statements include all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented.
Three Months Ended September 30, 1998 Compared to Three Months Ended
- --------------------------------------------------------------------
September 30, 1997
- ------------------
Revenues for the three month period ended September 30, 1998 (the "1998
Quarter"), totaled $17,650,000 compared to $17,145,000 for the comparable
quarter in 1997 (the "1997 Quarter"). Had the Company retroactively applied
the change in accounting method required by EITF 98-9, total revenues for the
1997 Quarter would have been $16,855,000. The 1998 Quarter's increase would
have been $795,000 (4.7%).
Base rent was $14,044,000 for the 1998 Quarter, compared to $13,102,000 for
the 1997 Quarter, representing an increase of $942,000 (7.2%). The increase in
base rent resulted primarily from new leases at Seven Corners, Ravenwood and
Avenel IV for the 1998 Quarter that were not present during the 1997 Quarter.
Expense recoveries were $2,625,000 for the 1998 Quarter compared to $2,326,000
for the comparable 1997 Quarter, representing an increase of $299,000 (12.9%).
Recovery income increased primarily as a result of new leases in place during
1998 at Seven Corners, Beacon Center, Southside and Avenel IV.
Percentage rent was $588,000 in the 1998 Quarter, compared to $765,000 in the
1997 Quarter. Had the Company retroactively applied the change in accounting
method required by EITF 98-9, percentage rent for the 1997 Quarter would have
been $475,000. The 1998 Quarter's increase would have been $113,000 (23.8%).
Other income, which primarily consists of parking income, kiosk and temporary
leasing, and fees associated with early termination of leases, was $393,000 in
the 1998 Quarter, compared to $952,000 in the 1997 Quarter, representing a
decrease of $559,000 (58.7%). The decrease in other income resulted primarily
from lease termination payments collected at Seven Corners, Lexington Mall and
Beacon Center during the 1997 Quarter.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, decreased
$27,000 (1.3%) to $2,016,000 in the 1998 Quarter from $2,043,000 in the 1997
Quarter. The expense decrease resulted in part from reduced property payroll
expense due to the elimination of maintenance positions associated with former
shopping mall space converted into strip shopping area and reduced legal
expenses connected with collections of tenant receivables.
21
<PAGE>
The provision for credit losses decreased $40,000 (24.5%) to $123,000 in the
1998 Quarter from $163,000 in the 1997 Quarter.
Real estate taxes decreased $18,000 (1.1%) to $1,577,000 in the 1998 Quarter
from $1,595,000 in the 1997 Quarter.
Interest expense of $5,696,000 for the 1998 Quarter represented an increase of
$739,000 (14.9 %) over $4,957,000 reported for the 1997 Quarter. This increase
is primarily attributable to higher interest rates resulting from the Company's
October 1, 1997 refinancing and conversion of approximately $147.0 million of
its mortgage debt from interest rate capped floating rate loans to longer term,
fixed rate loans. New debt associated with the acquisition of Avenel IV on
April 1, 1998 also added approximately $70,000 to interest expense in the 1998
Quarter.
Amortization of deferred debt expense decreased $436,000 (80.4%) to
$106,000 in the 1998 Quarter from $542,000 in the 1997 Quarter. The decrease in
the 1998 Quarter's expense resulted from the elimination of amortization on
interest rate protection agreements with notional values of $162.8 million sold
during the fourth quarter of 1997, and reduced loan cost amortization because
new debt costs related to October 1, 1997 refinancings are being amortized over
a longer term than the debt costs they replaced.
Depreciation and amortization expense increased $214,000 (8.1%) from
$2,626,000 in the 1997 Quarter to $2,840,000 in the 1998 Quarter, primarily as a
result of depreciation attributable to recently completed redevelopments and
renovations.
General and administrative expense, which consists of payroll,
administrative and other overhead expense, was $865,000 for the 1998 Quarter, an
increase of $27,000 (3.2%) over the 1997 Quarter.
Extraordinary item, loss on early extinguishment of debt, was $50,000 for the
1998 Quarter resulting from the write-off of unamortized loan costs when the
Company refinanced its Avenel IV loan in September 1998. No such item occurred
during the 1997 Period.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1997
- ----
Revenues for the nine month period ended September 30, 1998 (the "1998
Period"), totaled $52,483,000 compared to $50,331,000 for the comparable period
in 1997 (the "1997 Period"). Had the Company retroactively applied the change
in accounting method required by EITF 98-9, total revenues for the 1997 Period
would have been $49,922,000. The 1998 Period's increase would have been
$2,561,000 (5.1%).
22
<PAGE>
Base rent was $41,505,000 for the 1998 Period compared to $38,560,000 for the
1997 Period, representing an increase of $2,945,000 (7.6%). The increase in base
rent resulted primarily from new leases at Seven Corners, Ravenwood and Avenel
IV for the 1998 Period that were not present during the 1997 Period.
Expense recoveries were $7,339,000 for the 1998 Period compared to $6,884,000
for the comparable 1997 Period, representing an increase of $455,000 (6.6%).
Recovery income increased primarily as a result of new leases in place during
1998 at Seven Corners, Beacon Center, Southside and Avenel IV.
Percentage rent was $1,995,000 in the 1998 Period compared to $2,202,000 in
the 1997 Period. Had the Company retroactively applied the change in accounting
method required by EITF 98-9, percentage rent for the 1997 Period would have
been $1,793,000. The 1998 Period's increase would have been $202,000 (11.3%).
Other income, which primarily consists of parking income, kiosk and temporary
leasing, and fees associated with early termination of leases, was $1,644,000 in
the 1998 Period, compared to $2,685,000 in the 1997 Period, representing a
decrease of $1,041,000 (38.8%). The decrease in other income resulted primarily
from lease termination payments collected at Seven Corners, Lexington Mall and
Beacon Center during the 1997 Period.
Operating expenses, consisting primarily of repairs and maintenance,
utilities, payroll, insurance and other property related expenses, decreased
$177,000 (2.9%) to $5,902,000 in the 1998 Period from $6,079,000 in the 1997
Period. The expense decrease resulted in part from reduced property payroll
expense due to the elimination of maintenance positions associated with former
shopping mall space converted into strip shopping area and reduced legal
expenses connected with collections of tenant receivables.
The provision for credit losses decreased $62,000 (18.4%) to $275,000 in the
1998 Period from $337,000 in the 1997 Period.
Real estate taxes decreased $2,000 (0.1%) to $4,563,000 in the 1998 Period
from $4,565,000 in the 1997 Period.
Interest expense of $16,972,000 for the 1998 Period represented an increase of
$2,361,000 (16.2 %) over $14,611,000 reported for the 1997 Period. This
increase is primarily attributable to higher interest rates resulting from the
Company's October 1, 1997 refinancing and conversion of approximately
$147.0 million of its mortgage debt from interest rate capped floating rate
loans to longer term, fixed rate loans. New debt associated with the acquisition
of Avenel IV on April 1, 1998 also added approximately $140,000 to interest
expense in the 1998 Period.
Amortization of deferred debt expense decreased $1,313,000 (80.7%) to
$315,000 in the 1998 Period from $1,628,000 in the 1997 Period. The decrease in
the 1998 Period's expense resulted from the elimination of amortization on
interest rate protection agreements
23
<PAGE>
with notional values of $162.8 million sold during the fourth quarter of 1997,
and reduced loan cost amortization because new debt costs related to October 1,
1997 refinancings are being amortized over a longer term than the debt costs
they replaced.
Depreciation and amortization expense increased $657,000 (8.4%) from
$7,831,000 in the 1997 Period to $8,488,000 in the 1998 Period, primarily as a
result of depreciation attributable to recently completed redevelopments and
renovations.
General and administrative expense, which consists of payroll,
administrative and other overhead expense, was $2,552,000 for the 1998 Period,
an increase of $113,000 (4.6%) over the 1997 Period.
Extraordinary item, loss on early extinguishment of debt, was $50,000 for the
1998 Period versus $369,000 for the 1997 Period, resulting from the write-off of
unamortized loan costs when the Company refinanced portions of its loan
portfolio in September 1998 and January 1997.
Cumulative effect of change in accounting method was $771,000 for the 1998
Period, resulting from the implementation of EITF 98-9 "Accounting for
Contingent Rent" retroactive to January 1, 1998. No such item occurred during
the 1997 Period.
Year 2000 Issue
- ---------------
The year 2000 issue relates to whether computer systems will properly
recognize date sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. In addition, the
year 2000 issue relates to whether non-Information Technology (IT) systems that
depend upon embedded electronic technology will recognize the year 2000.
Systems that do not properly recognize such information could generate erroneous
information or fail.
In 1995, the Company contracted to replace virtually all of its management
information and accounting systems and install a local area network (LAN). One
of the selection criteria of the new software and hardware was that they be
fully year 2000 compliant. The new LAN and management and accounting
information systems have been installed . Therefore, the Company's management
information and accounting systems are fully year 2000 compliant. As a result
of its efforts, the Company does not expect to incur any additional expense for
its information systems related to the year 2000 issue.
The Company's property management staff has conducted a comprehensive review
of its non-IT systems at its shopping centers and office buildings to determine
whether any computer hardware and software in mechanical systems (i.e.
escalators, elevators, security, heating, ventilating and air conditioning
systems, etc.) are not year 2000 compliant. Management expects repairs and
replacements required to make its non-IT systems year 2000 compliant will cost
less than $100,000 and will be completed prior to July 1999.
24
<PAGE>
The Company believes there is risk that its operations may be affected by
vendors and tenants who are unable to perform as contracted due to their own
year 2000 exposure. It is very difficult to identify "the most reasonably
likely worst case scenario" at this time. The Company's potential exposure is
wide spread; however there is no known major direct exposure. The Company
believes that the most likely worst case exposure is at this indirect level
where vendors and tenants fail to perform their obligations to the Company. For
example, the Company believes it is possible that certain tenants' information
systems may fail, which may delay the payment of rents. To help minimize this
risk, the Company plans to send a letter to each tenant prior to January 1, 1999
advising the tenant that rent payments due January 1, 2000 must be paid on-time.
These reminders will be sent twice again later in 1999. The Company's leases
contain provisions empowering it to take certain actions to enforce its right to
the timely payment of rent, regardless of the tenant's year 2000 exposure.
While it is not possible at this time to determine the likely impact of these
potential problems, the Company will continue to evaluate these areas and
develop contingency plans, as appropriate.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
3. (a) First Amended and Restated Articles of Incorporation of Saul
Centers, Inc. filed with the Maryland Department of Assessments
and Taxation on August 23, 1994 and filed as Exhibit 3.(a) of the
1993 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
(b) Amended and Restated Bylaws of Saul Centers, Inc. as in effect at
and after August 24, 1993 and as of August 26, 1993 and filed as
Exhibit 3 (b) of the 1993 Annual Report of the Company on
Form 10-K is hereby incorporated by reference. The First
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership, the
Partnership of Saul Subsidiary I Limited Partnership, the Third
Amendment to the First Amended and Restated Agreement of Limited
Partnership of Saul Subsidiary I Limited Partnership and the
Fourth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Saul Subsidiary I Limited Partnership as
filed as Exhibit 3.(b) of the 1997 Annual Report of the Company
on Form 10-K is hereby incorporated by reference.
10. (a) First Amended and Restated Agreement of Limited Partnership of
Saul Holdings Limited Partnership filed as Exhibit No. 10.1 to
Registration Statement No. 33-64562 is hereby incorporated by
reference. The First Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership, the Second Amendment to the First Amended and
Restated Agreement of Limited Partnership of Saul Holdings
Limited Partnership, and the Third Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Holdings
Limited Partnership filed as Exhibit 10.(a) of the 1995 Annual
Report of the Company on Form 10-K is hereby incorporated by
reference. The Fourth Amendment to the First Amended and Restated
Agreement of Limited Partnership of Saul Holdings Limited
Partnership filed as Exhibit 10.(a) of the March 31, 1997
Quarterly Report of the Company is hereby incorporated by
reference.
(b) First Amended and Restated Agreement of Limited Partnership of
Saul Subsidiary I Limited Partnership and Amendment No. 1 thereto
filed as Exhibit 10.2 to Registration Statement No. 33-64562 are
hereby incorporated by reference. The Second Amendment to the
First Amended
26
<PAGE>
and Restated Agreement of Limited Partnership of Saul Subsidiary
I Limited Partnership, the Third Amendment to the First Amended
and Restated Agreement of Limited Partnership of Saul Subsidiary
I Limited Partnership and the Fourth Amendment to the First
Amended and Restated Agreement of Limited Partnership of Saul
Subsidiary I Limited Partnership as filed as Exhibit 10.(b) of
the 1997 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
(c) First Amended and Restated Agreement of Limited Partnership of
Saul II Subsidiary Partnership and Amendment No. 1 thereto filed
as Exhibit 10.3 to Registration Statement No. 33-64562 are hereby
incorporated by reference.
(d) Property Conveyance Agreement filed as Exhibit 10.4 to
Registration Statement No. 33-64562 is hereby incorporated by
reference.
(e) Management Functions Conveyance Agreement filed as Exhibit 10.5
to Registration Statement No. 33-64562 is hereby incorporated by
reference.
(f) Registration Rights and Lock-Up Agreement filed as Exhibit 10.6
to Registration Statement No. 33-64562 is hereby incorporated by
reference.
(g) Exclusivity and Right of First Refusal Agreement filed as Exhibit
10.7 to Registration Statement No. 33-64562 is hereby
incorporated by reference.
(h) Saul Centers, Inc. 1993 Stock Option Plan filed as Exhibit 10.8
to Registration Statement No. 33-64562 is hereby incorporated by
reference.
(i) Agreement of Assumption dated as of August 26, 1993 executed by
Saul Holdings Limited Partnership and filed as Exhibit 10. (I) of
the 1993 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
(j) Saul Centers, Inc. 1995 Dividend Reinvestment and Stock Purchase
Plan as filed with the Securities and Exchange Commission as File
No. 33-80291 is hereby incorporated by reference.
(k) Deferred Compensation Plan for Directors dated as of December 13,
1993 as filed as Exhibit 10.(r) of the 1995 Annual Report of the
Company on Form 10-K is hereby incorporated by reference.
(l) Deed of Trust, Assignment of Rents, and Security Agreement dated
as of September 9, 1994 by and between Saul Holdings Limited
Partnership and Ameribanc Savings Bank, FSB as filed as Exhibit
10.(t) of the 1995 Annual Report of the Company on Form 10-K is
hereby incorporated by reference.
27
<PAGE>
(m) Deed of Trust Note dated as of January 22, 1996 by and between
Saul Holdings Limited Partnership and Clarendon Station Limited
Partnership, filed as Exhibit 10.(s) of the March 31, 1997
Quarterly Report of the Company, is hereby incorporated by
reference.
(n) Loan Agreement dated as of November 7, 1996 by and among Saul
Holdings Limited Partnership, Saul Subsidiary II Limited
Partnership and PFL Life Insurance Company, c/o AEGON USA Realty
Advisors, Inc., filed as Exhibit 10.(t) of the March 31, 1997
Quarterly Report of the Company, is hereby incorporated by
reference.
(o) Promissory Note dated as of January 10, 1997 by and between Saul
Subsidiary II Limited Partnership and The Northwestern Mutual
Life Insurance Company, filed as Exhibit 10.(z) of the March 31,
1997 Quarterly Report of the Company, is hereby incorporated by
reference.
(p) Loan Agreement dated as of October 1, 1997 between Saul
Subsidiary I Limited Partnership, as Borrower and Nomura Asset
Capital Corporation, as Lender, is as filed as Exhibit 10.(p) of
the 1997 Annual Report of the Company on Form 10-K is hereby
incorporated by reference.
(q) Revolving Credit Agreement dated as of October 1, 1997 by and
between Saul Holdings Limited Partnership and Saul Subsidiary II
Limited Partnership, as Borrower and U.S. Bank National
Association, as agent, is as filed as Exhibit 10.(q) of the 1997
Annual Report of the Company on Form 10-K is hereby incorporated
by reference.
27. Financial Data Schedule
99. Schedule of Portfolio Properties
Reports on Form 8-K
-------------------
None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAUL CENTERS, INC.
(Registrant)
Date: November 13, 1998 /s/ Philip D. Caraci
----------------- --------------------
Philip D. Caraci, President
Date: November 13, 1998 /s/ Scott V. Schneider
----------------- ----------------------
Scott V. Schneider
Senior Vice President, Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements, schedules and other disclosure contained in Form 10-Q for the period
ended September 30, 1998 of Saul Centers, Inc. and is qualified in its entirety
by reference to such financial statements, schedules and other disclosure.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,385
<SECURITIES> 0
<RECEIVABLES> 6,226
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
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0
0
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</TABLE>
