10. NON-OPERATING ITEMS Gain on Sale of Property 11. FAIR VALUE OF FINANCIAL INSTRUMENTS 9. STOCK OPTION PLAN 12. COMMITMENTS AND CONTINGENCIES 26 Neither the Company nor the Current Portfolio Properties are subject to any material litigation,  nor, to management’s knowledge, is any material litigation currently threatened against the Company, other than routine litigation and administrative proceedings arising in the ordinary course of business. Management believes that these items, individually or in the aggregate, will not have a material adverse impact on the Company or the Current Portfolio Properties. The Compensation Committee has granted options to purchase a total of 180,000 shares (90,000 shares from incentive stock options and 90,000 shares from nonqualified stock options) to five Company officers, all of which options were granted in 1993 and 1994. The options vested 25% per year over four years, have an exercise price of $20 per share and a term of ten years, subject to earlier expiration upon termination of employment. During the year ended December 31, 2002, 86,790 options were exercised (49,900 incentive stock options and 36,890 nonqualified stock options). The remaining 93,210 unexcercised option shares are fully vested and expire September 23, 2003. No compensation expense has been recognized as a result of  these grants. The Company has established a stock option plan for the purpose of attracting and retaining executive officers and other key personnel. The plan provides for grants of options to purchase a specified number of shares of common stock. A total of 400,000 shares are available under the plan. The plan authorizes the Compensation Committee of the Board of Directors to grant options at an exercise price which may not be less than the market  value of the common stock on the date the option is granted. Statement of Financial Accounting Standards No. 107, “Disclosure about Fair Value of Financial Instruments,” requires disclosure about the fair value of financial instruments. The carrying values of  cash, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. Based on interest rates currently available to the Company, the carrying value of the variable rate credit line payable is a reasonable estimation of its fair value, because the debt bears interest based on short-term interest rates. Based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, the fair value of the fixed rate notes payable is in excess of the $294,619,000 carrying value. Management estimates that the  fair value of these fixed rate notes payable, assuming current long term interest rates of approximately 6%, would be approximately $329,000,000. The Company shares with The Saul Organization on a pro-rata basis certain ancillary functions such as computer hardware, software and support services and certain direct and indirect administrative payroll based on management’s estimate of usage or time incurred, as applicable. Also, The Saul Organization subleases office space to the Company for its corporate headquarters (see Note 6– Long-Term Lease Obligations for the terms of this lease). The terms of all such arrangements with The Saul Organization, including payments related thereto, are reviewed by the Audit Committee of the Board of Directors. Included in general and administrative expense for the years ended December 31, 2002, 2001 and 2000, are charges totaling $2,574,000, $1,971,000 and $2,091,000, related to shared services, of which $2,542,000, $2,010,000 and $2,056,000, were paid during the years ended December 31, 2002, 2001 and 2000, respectively. Gain on sale of property of $1,426,000 in 2002 represents the final proceeds received upon  appeal of the District of Columbia’s purchase of  the Company’s Park Road property as part of  an assemblage of parcels for a neighborhood revitalization project. There were no property  sales in 2001 and 2000. NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS