<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
Commission File Number 1-12994
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THE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1802283
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1300 Wilson Boulevard, Arlington, Virginia 22209
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(Address of principal executive offices - zip code)
(703) 526-5000
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(Registrant's telephone number, including area code)
3000 K Street, NW, Washington, D.C. 20007
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(Former name, former address and former fiscal year, if changed since last
report)
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 requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
16,905,953 shares of Common Stock
$.01 par value as of August 14, 1996
<PAGE> 2
THE MILLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995. 1
Consolidated Statements of Operations for the
Three Months Ended June 30, 1996 and June 30, 1995. 2
Consolidated Statements of Operations for the
Six Months Ended June 30, 1996 and June 30, 1995. 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and June 30, 1995 4
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(Unaudited) (Note)
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<S> <C> <C>
ASSETS
Income producing property:
Land and land improvements . . . . . . . . . $ 166,168 $ 165,994
Building and improvements . . . . . . . . . 656,496 652,706
Furniture, fixtures and equipment . . . . . 21,110 21,943
Less: accumulated depreciation
and amortization . . . . . . . . . . . . (166,338) (152,713)
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Total income producing property . . . . . . . . . 677,436 687,930
Land held for investment and/or sale . . . . . . 975 3,225
Real estate development in progress . . . . . . . 36,957 36,282
Investment in partnerships . . . . . . . . . . . 35,318 14,115
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Total real estate and development assets . . . . 750,686 741,552
Cash and cash equivalents . . . . . . . . . . . . 1,816 14,550
Restricted cash . . . . . . . . . . . . . . . . . 16,739 19,354
Accounts receivable . . . . . . . . . . . . . . . 19,088 17,274
Notes receivable . . . . . . . . . . . . . . . . 7,191 7,357
Deferred costs, net . . . . . . . . . . . . . . . 50,789 49,596
Other assets . . . . . . . . . . . . . . . . . . 5,580 3,374
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TOTAL ASSETS . . . . . . . . . . . . . . . . . . $ 851,889 $ 853,057
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages, notes, and loans payable . . . . . . . $ 697,063 $ 676,435
Accounts payable and other liabilities . . . . . 41,658 39,375
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Total liabilities . . . . . . . . . . . . . . . . 738,721 715,810
Minority interest . . . . . . . . . . . . . . . . 55,610 66,839
STOCKHOLDERS' EQUITY
Common stock $.01 par value, authorized
100,000,000 shares, issued and outstanding
16,905,953 shares . . . . . . . . . . . . . 169 169
Additional paid-in capital . . . . . . . . . 309,813 309,813
Accumulated deficit . . . . . . . . . . . . (252,424) (239,574)
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Total stockholders' equity . . . . . . . . 57,558 70,408
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . $ 851,889 $ 853,057
============ =============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE> 4
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
June 30, 1996 June 30, 1995
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<S> <C> <C>
RENTAL REVENUES:
Minimum rent $ 23,434 $ 22,208
Percentage rents 1,084 1,024
Recoveries from tenants 11,378 11,108
Other revenue 1,176 1,112
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Total rental revenues 37,072 35,452
PROPERTY OPERATING COSTS:
Recoverable from tenants 10,335 9,859
Other operating 1,820 907
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Total property operating costs 12,155 10,766
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PROPERTY OPERATING INCOME: 24,917 24,686
OTHER INCOME (EXPENSE):
Fee income 956 343
Interest income 739 586
Interest expense (11,130) (11,002)
General and administrative (2,081) (1,441)
Depreciation and amortization ( 9,547) (10,298)
Other 478 (68)
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(20,585) (21,880)
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Income before extraordinary item and minority interest 4,332 2,806
Extraordinary loss on debt extinguishment (153) -
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Income before minority interest 4,179 2.806
Minority interest (2,053) (1,367)
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Net income $ 2,126 $ 1,439
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Income per common share before extraordinary item $ 0.13 $ 0.09
============= ============
Net income per common share $ 0.13 $ 0.09
============= ============
Dividend declared per common share $ 0.4725 $ 0.4725
============= ============
Weighted average common shares outstanding 16,905,953 16,905,953
============= ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 5
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
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<S> <C> <C>
RENTAL REVENUES:
Minimum rent $ 46,332 $ 44,434
Percentage rents 2,305 2,057
Recoveries from tenants 22,919 21,940
Other revenue 2,437 1,984
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Total rental revenues 73,993 70,415
PROPERTY OPERATING COSTS:
Recoverable from tenants 20,664 19,256
Other operating 3,528 1,839
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Total property operating costs 24,192 21,095
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PROPERTY OPERATING INCOME: 49,801 49,320
OTHER INCOME (EXPENSE):
Fee income 1,787 667
Interest income 1,193 1,168
Interest expense (22,719) (21,782)
General and administrative (4,189) (3,783)
Depreciation and amortization (19,596) (19,960)
Other 2,216 (123)
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(41,308) (43,813)
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Income before extraordinary item and minority interest 8,493 5,507
Extraordinary loss on debt extinguishment (983) (419)
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Income before minority interest 7,510 5,088
Minority interest (3,690) (2,478)
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Net income $ 3,820 $ 2,610
============= =============
Income per common share before extraordinary item $ 0.26 $ 0.17
============= =============
Net income per common share $ 0.23 $ 0.15
============= =============
Dividend declared per common share $ 0.945 $ 0.945
============= =============
Weighted average common shares outstanding 16,905,953 16,905,953
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 6
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Income before minority interest $ 7,510 $ 5,088
Adjustments to reconcile income before minority
interest to net cash provided by operating
activities:
Net accretion of note receivable (350) (350)
Depreciation and amortization 21,494 21,858
Provision for losses on accounts receivable 822 415
Net gain on sale of land and equipment (2,238) -
Extraordinary loss on debt extinguishment 983 419
Other changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,555) (1,587)
(Increase) decrease in notes receivable 516 295
(Increase) decrease in other assets (2,208) (1,945)
(Decrease) increase in accounts payable and
other liabilities 2,002 1,535
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Net cash provided by operating activities 25,976 25,728
INVESTING ACTIVITIES:
Investment in real estate and development assets (25,912) (23,954)
Proceeds from sale of land and furniture and
equipment 4,222 -
Deferred costs (8,693) (6,607)
------------ ------------
Net cash used in investing activities (30,383) (30,561)
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 84,601 65,686
Repayments of mortgages, notes and loans payable (63,974) (23,882)
Funding (to) from affiliates (158) 331
Restricted cash 2,615 1,182
Dividends (15,976) (15,976)
Distributions (15,435) (15,174)
------------ ------------
Net cash provided by (used in) financing activities (8,327) 12,167
------------ ------------
Net increase (decrease) in cash and cash equivalents (12,734) 7,334
Cash and cash equivalents at beginning of period 14,550 20,057
------------ ------------
Cash and cash equivalents at end of period $ 1,816 $ 27,391
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 23,750 $ 19,934
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 7
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Mills Corporation (the "Company") was incorporated in Virginia on January
2, 1991 and was reincorporated in Delaware in 1994. The Company elected to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended, for the year ended December 31, 1994 and thereafter.
In connection with its re-incorporation, the Company completed its initial
public offering of 14,380,000 shares of its common stock on April 21, 1994 (the
"Offering" or "IPO"). The net proceeds of the Offering of approximately $310.0
million and other assets of the Company were contributed to The Mills Limited
Partnership (the "Operating Partnership") in exchange for a 51.3% interest
therein, including a 1% interest as the sole general partner. The Operating
Partnership was formed prior to consummation of the Offering and is the
successor to the operations of the Mills Entities (the "Predecessor").
Simultaneously with the Offering, the individual property partnerships
comprising the Predecessor transferred their assets to the Operating
Partnership in exchange for limited partnership units ("Units") in the
Operating Partnership and/or the assumption of their debt. On January 25,
1996, the Operating Partnership acquired additional partnership interests of
Franklin Mills of approximately 6% in exchange for 274,777 Units. Following
such acquisition, the Company owned a 50.9% interest in the Operating
Partnership. Such Units are exchangeable into common stock of the Company, or
cash (at the option of the Company, as the general partner of the Operating
Partnership) equal to the fair market value of the number of shares of common
stock into which such Units are exchangeable. The Company has reserved
16,332,517 shares of common stock relating to this exchangeability. The
Operating Partnership also acquired certain investors' interests in the Mills
Entities for cash and Units. Purchase accounting was applied to the
acquisition of all investor interests for which cash consideration was paid.
Contributed assets and liabilities related to interests of all Mills Entities
which received only Units and/or the assumption of debt by the Operating
Partnership have been accounted for as a reorganization of entities under
common control, and, accordingly, have been recorded at the Predecessor's cost.
The Company, through the Operating Partnership, is engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion, and
development of super regional "value-oriented" malls (the "Mills") and
community shopping centers (the "Community Centers") . As of June 30, 1996,
the Operating Partnership owns or holds an interest in the following operating
properties:
<TABLE>
<CAPTION>
Mills Location
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<S> <C>
Franklin Mills Philadelphia, PA
Gurnee Mills Gurnee, IL
Potomac Mills Woodbridge, VA
Sawgrass Mills Sunrise, FL
</TABLE>
<TABLE>
<CAPTION>
Community Centers Location
----------------- --------
<S> <C>
Butterfield Plaza Downers Grove, IL
Coopers Plaza Voorhees, NJ
Crosswinds Center St. Petersburg, FL
Fashion Place Columbia, SC
Germantown Commons Shopping Center Germantown, MD
</TABLE>
5
<PAGE> 8
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
ORGANIZATION (CONTINUED):
<TABLE>
<CAPTION>
Community Centers Location
----------------- --------
<S> <C>
Gwinnett Marketfair Duluth, GA
Liberty Plaza Philadelphia, PA
Montgomery Village Off-Price Center Gaithersburg, MD
Mount Prospect Plaza Mount Prospect, IL
West Falls Church Outlet Center Falls Church, VA
Western Hills Plaza Cincinnati, OH
</TABLE>
In addition to the operating properties, the Company is actively involved in
the development of a number of new Mills.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The results of operations for the
six month period ended June 30, 1996, is not necessarily indicative of the
results that may be expected for the full year. These financial statements
should be read in conjunction with the Company's audited financial statements
and footnotes thereto, included in the Mills Corporation Annual Report on Form
10-K for the year ended December 31, 1995.
The accompanying consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries, including its majority owned
subsidiary, the Operating Partnership. The accounts of the Operating
Partnership include the accounts of all Properties which are wholly owned or
controlled by the Operating Partnership as well as its wholly-owned
subsidiaries Mills Management L.L.C. ("Mills Management"), and Management
Associates Limited Partnership ("MALP"). In addition, the Operating
Partnership owns 5% of the voting common stock and 99% of the preferred stock
of the Mills Services Corporation ("MSC"), an entity formed in connection with
the Offering to provide development, management, leasing and finance services
to the Company and other entities owned by affiliates of the Company. As a
result of the Operating Partnership's ownership of 99% of the economic
interests, MSC is consolidated with the Operating Partnership. All significant
intercompany transactions and balances have been eliminated in consolidation.
Minority interests represent the ownership interests in the Operating
Partnership not held by the Company.
2. RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1996 presentation.
3. PARTNERSHIP INVESTMENT ACTIVITIES
In April, 1996, the Operating Partnership formed Arizona Mills, L.L.C. with
Simon Property Group, L.P. ("Simon"), The Taubman Realty Group Limited
Partnership ("Taubman"), and Grossman Spectrum Associates, Limited Partnership
("Grossman") to develop Arizona Mills, a 1.2 million square foot super-regional
value-oriented mall in Tempe, Arizona. The ownership percentages for the
Operating Partnership, Simon, Taubman, and Grossman are 35%, 25%, 35%, and 5%,
respectively, with each partner entitled to an annual preferred return equal to
9% of its unreturned capital.
6
<PAGE> 9
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. PARTNERSHIP INVESTMENT ACTIVITIES (CONTINUED)
In July, 1996, effective as of January, 1996, the Operating Partnership formed
Grapevine Mills Limited Partnership and Grapevine Mills Residual Limited
Partnership with Simon and Kan Am, the largest investor in the Operating
Partnership, to develop Grapevine Mills, a 1.9 million square foot
super-regional value-oriented mall in Grapevine (Dallas), Texas. The
ownership percentages for the Operating Partnership, Simon, and Kan Am are
37.5%, 37.5% and 25%, respectively, with each partner entitled to an annual
preferred return equal to 9% of its unreturned capital.
In connection with its limited partnership agreements, the Company is committed
to providing certain levels of equity investment in addition to amounts
invested to date.
At June 30, 1996, the Operating Partnership's unconsolidated partnerships had
total assets of approximately $121 million and total liabilities of
approximately $47 million.
4. DECLARATION OF DIVIDEND
On May 23, 1996, the Company declared a dividend of $.4725 per share which was
paid on July 16, 1996 to stockholders of record as of July 1, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of quarter ended June 30, 1996 to quarter ended June 30, 1995
Income before minority interest for the quarter ended June 30, 1996, increased
by approximately $1.4 million to $4.2 million (48.9%) as compared with the
quarter ended June 30, 1995. This increase was the result of an increase in
property operating income of approximately $0.2 million (1.0%) compared with
the second quarter of 1995 and a decrease in other expense (net of other
income) of approximately $1.3 million (5.9%). These increases were offset by a
$0.1 million increase in the loss on debt extinguishment.
Property Operating Income:
Minimum rents for the quarter ended June 30, 1996, increased by approximately
$1.2 million (5.5%) compared with the quarter ended June 30, 1995. The
increase was primarily due to the expansion of Sawgrass Mills and Liberty
Plaza, which accounted for $0.8 million and $0.2 million of the increase,
respectively.
Recoveries from tenants for the quarter ended June 30, 1996, increased
approximately $0.3 million (2.4%) compared with the quarter ended June 30,
1995. This increase was attributable to the expansion of Sawgrass Mills and
to increases in recoverable expenses at the other centers.
Recoverable operating expenses for the quarter ended June 30, 1996, increased
approximately $0.5 million (4.8%) compared with the quarter ended June 30,
1995. The increase was primarily due to a $0.4 million increase in real estate
tax expense across all of the properties, and to an increase in expenses due to
the expansion of Sawgrass Mills.
7
<PAGE> 10
RESULTS OF OPERATIONS (CONTINUED)
Other operating expenses for the quarter ended June 30, 1996, increased
approximately $0.9 million (100.7%) compared with the quarter ended June 30,
1995. This increase was primarily due to an increase in bad debt expense of
$0.3 million at certain projects and an increase in contributions to promotional
programs of $0.4 million at Franklin Mills and Gurnee Mills.
Other Income and Expense:
Fee income increased by approximately $0.6 million (178.7%) for the quarter
ended June 30, 1996, compared with the quarter ended June 30, 1995. The
increase was primarily due to development, leasing, and finance fees earned
from the projects under development.
General and administrative expense increased $0.6 million (44.4%) for the
quarter ended June 30, 1996, compared with the quarter ended June 30, 1995.
The increase was primarily due to the Company reaching stabilized staff levels
in 1996.
Depreciation and amortization decreased $0.8 million (7.3%) for the quarter
ended June 30, 1996, compared with the quarter ended June 30, 1995. The
decrease was due to a $0.3 million decrease in amortization of loan costs as a
result of refinancing the debt secured by the community centers and a $0.4
million decrease due to assets reaching their depreciable lives.
Net other income increased $0.5 million for the quarter ended June 30, 1996,
compared with the quarter ended June 30, 1995. The increase is primarily due
to a $1.3 million gain on land sales and was partially offset by a $0.8 million
loss on disposal of furniture, fixtures and equipment.
Comparison of six months ended June 30, 1996 to six months ended June 30, 1995
Income before minority interest for the six months ended June 30, 1996,
increased by approximately $2.4 million to $7.5 million as compared with the
six months ended June 30, 1995. The increase was the result of an increase in
Property Operating Income of approximately $0.5 million (1.0%), a decrease in
Other Expense (net of other income) of approximately $2.5 million (5.7%),
and an increase in the loss on debt extinguishment of $0.6 million.
Property Operating Income:
Minimum rents for the six months ended June 30, 1996, increased approximately
$1.9 million (4.3%) compared with the six months ended June 30, 1995. The
increase was primarily due to the expansion of Sawgrass Mills and Liberty
Plaza, which accounted for increases of $1.4 million and $0.2 million,
respectively. Other increases include an expansion of the company's pushcart
program, which generated increased revenues of $0.2 million.
Recoveries from tenants for the six months ended June 30, 1996, increased
approximately $1.0 million (4.5%) compared with the six months ended June 30,
1995. The increase was primarily due to an increase of $0.8 million in
recoverable expenses at Sawgrass Mills due to the recent expansion.
8
<PAGE> 11
RESULTS OF OPERATIONS (CONTINUED)
Other revenues for the six months ended June 30, 1996, increased $0.5 million
compared with the six months ended June 30, 1995. The increase was primarily
due to an increase in income from tenants who occupy space on a temporary
basis.
Recoverable operating expenses for the six months ended June 30, 1996,
increased approximately $1.4 million (7.3%) compared with the six months ended
June 30, 1995. The increase was primarily due to increased expenses at
Sawgrass Mills of $0.9 million related to its expansion, and an increase of
$0.3 million at Franklin Mills as a result of the heavy snowfall during the
first quarter of 1996.
Other operating expenses for the six months ended June 30, 1996, increased
approximately $1.7 million (91.8%) compared with the six months ended June 30,
1995. This increase is primarily due to an increase in contribution to
promotional programs of $0.6 million, an increase in bad debt of $0.4 million
at certain projects, an increase in legal fees of $0.1 million for
landlord/tenant litigation, an increase of $0.2 million for the expansion of the
Company's push cart program, and an increase of $0.1 million for other taxes at
Franklin Mills.
Other Income and Expense:
Fee income for the six months ended June 30, 1996, increased $1.1 million
(167.9%) compared with the six months ended June 30, 1995. The increase was
due primarily to development, leasing and finance fees earned from projects
under development.
Interest expense increased by approximately $0.9 million (4.3%) for the six
months ended June 30, 1996, compared with the six months ended June 30, 1995.
This increase was primarily due to additional debt associated with the
expansion of Sawgrass Mills which opened November 16, 1995.
General and administrative expense increased $0.4 million (10.7%) for the six
months ended June 30, 1996, compared with the six months ended June 30, 1995.
The increase was due to the Company reaching stabilized staff levels in 1996.
Depreciation and amortization decreased $0.4 million (1.8%) for the six months
ended June 30, 1996, compared with the six months ended June 30, 1995. The
decrease was due to a $0.3 million decrease in amortization of loan costs as a
result of refinancing the debt secured by the community centers.
The net other income/expenses for the six months ended June 30, 1996, increased
$2.3 million compared with the six months ended June 30, 1995. The increase
was primarily due to a $3.1 million gain on land sales offset by $0.8 million
loss on disposal of furniture, fixtures and equipment.
The extraordinary loss on debt extinguishment for the six months ended June 30,
1996, increased $0.5 million compared with the six months ended June 30, 1995.
The increase was primarily due to refinancing the debt secured by the community
centers in January, 1996.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Historically, rental revenue from tenants has been the principal source of
funds to meet the Operating Partnership's operating expense requirements, debt
service and capital expenditures. During the past three years and prior to the
IPO, the Operating Partnership's primary portfolio growth has come from the
expansion of existing centers. During this period, the expansion has been
funded by long-term mortgages and the IPO proceeds combined with cash flows
provided by operations.
In order for the Operating Partnership to continue its planned development
activities, it will have to obtain significant sources of equity and debt
financing. A typical development project may require a capital investment
ranging from $5.0 million to as much as $50.0 million prior to obtaining
construction financing. Such financing is also generally contingent upon
pre-leasing activity in the range of 40% to 60% of GLA. As of June 30, 1996,
management had procured certain of the required equity and debt financing for
its planned near-term development projects. On January 31, 1996, the
Operating Partnership secured $76.0 million of permanent financing to repay its
$60.0 million interim Community Center loan. This debt has a fixed interest
rate of 7.16%, matures February 1, 2001, and amortizes on an 18 year basis. On
January 11, 1996, the Company entered into a Master Repurchase Agreement by
which it has effectively established a revolving credit facility in the amount
of $8.7 million. Borrowings under this facility bear interest at Libor plus
1.25%. On August 6, 1996, the Operating Partnership borrowed $12.0 million
pursuant to a promissory note and loan agreement secured by a first mortgage on
the expansion at Sawgrass Mills. This note bears interest at Libor plus 2.35%
and has a two year maturity. The proceeds from these borrowings will fund
further development.
For most of the current projects under development, the Operating Partnership
has elected to complete development on a joint venture basis and thereby obtain
a portion of the required equity from its joint venture partners. For
instance, the Operating Partnership has formed a partnership with Kan Am, its
largest investor, to provide $20.0 million or half of the required equity
financing for the Ontario Mills project in exchange for a 25% general and
limited partnership interest. Kan Am funded its equity on September 30, 1995.
In December 1995, the Operating Partnership formed Ontario Mills L.L.C.
("OMLLC") with Simon Property Group, L.P. ("Simon") whereby Simon is required
to provide an additional $15.0 million of equity financing for the Ontario
Mills project in exchange for an effective 25% general and limited partnership
interest in the Ontario Mills Limited Partnership ("OMLP"). On November 9,
1995, OMLP executed a $110 million construction loan agreement with several
commercial lenders to fund construction of the Ontario Mills project. Loan
funding occurred in May, 1996 after all the lender equity requirements had been
met.
On January 31, 1996, the Operating Partnership elected not to exercise its
option to acquire a site proposed for its Columbus Mills project near Columbus,
Ohio. The Operating Partnership is pursuing an alternative site in Columbus
and is continuing its due diligence to ascertain its feasibility for the
Columbus Mills development project. The Operating Partnership expects to
recover all of its development costs incurred to date (approximately $8.5
million) in connection with the development of the Columbus Mills project.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On August 16, 1995, the Operating Partnership executed a letter of intent to
form an alliance with Simon to co-develop several "Mills" projects. In
December 1995, the parties formed a joint venture to develop Grapevine Mills in
Grapevine, Texas. Kan Am became an equity partner in this project effective
January, 1996, and a construction loan commitment was obtained in July, 1996.
In April, 1996, a joint venture comprised of the Operating Partnership, Simon,
Taubman Realty Group and Grossman Company Properties was formed to develop
Arizona Mills in Tempe, Arizona. While management believes it can raise the
funds necessary to complete the projects that were under development at June
30, 1996, there can be no assurance that the Operating Partnership will obtain
such funds.
As a result of debt extinguishment at the time of the IPO, cash flow from
operations has increased due to lower interest costs. The Operating Partnership
has limited its exposure to interest rate increases by purchasing interest rate
caps on $293.0 million of its $325.9 million variable rate debt.
The Company has paid and intends to continue to pay regular quarterly dividends
to its shareholders. Dividends payable by the Company are at the discretion of
the Board of Directors and depend on the cash available to the Operating
Partnership, its financial condition, capital and other requirements, and such
other factors as the Board of Directors deems relevant. The Company
anticipates that its annual cash flow will provide adequate liquidity, in the
short and long term, to conduct its operations, fund administrative costs and
interest payments on debt and allow future distributions to the company's
stockholders in excess of the requirements under the Internal Revenue Code for
qualification as a REIT.
ECONOMIC TRENDS
Because inflation has remained relatively low during the last three years, it
has had little impact on the operation of the Mills Entities and the Company
during the period. Even in periods of higher inflation, however, tenant leases
provide, in part, a mechanism to help protect the Company. As operating costs
increase, leases permit a pass-through of the common area maintenance and other
operating costs, including real estate taxes and insurance, to the tenants.
Furthermore, most of the leases contain base rent steps that generally coincide
with inflationary increases and percentage rent clauses that provide additional
rent after a certain minimum sales level is achieved. Thus, during
inflationary periods, the Company should receive additional rental income.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds From Operations ("FFO") an
appropriate measure of performance for an equity REIT. As defined by the
National Association of Real Estate Investment Trusts, "Funds From Operations"
means net income (loss) (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property (other than undepreciated property incidental to the REIT's
main business), plus depreciation and amortization of real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures. The
Company reports FFO on a consolidated basis before minority interest. FFO (i)
does not represent cash flow from operations as defined by generally accepted
accounting principles, (ii) is not indicative of cash available to fund all
cash flow needs or ability to make distributions, and (iii) should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance.
11
<PAGE> 14
FUNDS FROM OPERATIONS (CONTINUED)
For the quarter ended June 30, 1996, FFO increased 12.8% to $13.3 million,
compared with $11.7 million for the second quarter of the previous year. FFO
for the six months ended June 30, 1996, increased 14.6% to $26.1 million
compared with $22.8 million for the comparable period in 1995. FFO
amounts were calculated in accordance with the National Association of Real
Estate Investment Trust's revised definition of FFO. Under the previous method
of reporting, FFO for the second quarter of 1996 was $15.4 million compared to
$13.8 million for the comparable quarter of 1995 and $30.5 million for the
first six months of 1996, compared to $27.1 million for the previous year. The
difference between the two methods is primarily attributable to non-cash items
relating to amortization of interest rate buydown fees and interest rate caps
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS CALCULATION - NEW DEFINITION (1):
Income before extraordinary item
and minority interest $ 4,332 $ 2,806 $ 8,493 $ 5,507
Adjustments:
Add: Depreciation and amortization of
real estate assets 8,156 8,883 16,862 17,290
Add: Loss on sale of furniture, fixtures
and equipment 776 - 776 -
---------- ---------- ---------- ----------
Funds from operations $ 13,264 $ 11,689 $ 26,131 $ 22,797
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS CALCULATION - OLD DEFINITION:
Income before extraordinary item
and minority interest $ 4,332 $ 2,806 $ 8,493 $ 5,507
Adjustments:
Add: Depreciation and amortization of
real estate assets 8,156 8,883 16,862 17,290
Add: Amortization of interest rate
buydown fee 950 950 1,900 1,900
Add: Amortization of interest rate caps 678 678 1,356 1,356
Add: Other depreciation and amortization 713 737 1,378 1,314
Add: Straight-line interest expense 35 118 65 189
Add: Loss on sale of furniture, fixtures
and equipment 776 - 776 -
Less: Straight-line rent adjustment (256) (333) (361) (481)
----------- --------- --------- ---------
Total adjustments 11,052 11,033 21,976 21,568
----------- --------- --------- ---------
Funds from operations $ 15,384 $ 13,839 $ 30,469 $ 27,075
=========== ========= ========= =========
</TABLE>
12
<PAGE> 15
FUNDS FROM OPERATIONS (CONTINUED)
(1) The new definition of FFO does not permit the add-back of amortization of
loan costs, including amortization relating to buydown fees and interest
rate caps. The annual amortization related to these items is not a cash
expense to the Company, although it reduces FFO. The impact of these items
on the Company's effective interest rate and other relevant information is
detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Franklin Mills Gurnee Mills Potomac Mills
-------------- ------------ -------------
<S> <C> <C> <C>
Loan Amount $165,000 $151,152 $136,000
Deferred Cost Type Rate buydown (a) Rate cap (b) Rate cap (c)
Deferred amount $17,500 $4,632 $5,834
Current Rate 7.13% 7.00% 6.28%
Effective rate with amortization
of cap or buydown 9.43% 8.02% 7.13%
Amortization:
Period 4.6 yrs 3 yrs 5 yrs
End date Dec-98 Apr-97 Oct-99
Annual amortization $3,800 $1,544 $1,167
</TABLE>
30 day Libor at 6/18/96: 5.47%
(a) On April 21, 1994 (IPO date), the Company paid $17.5 million to reduce
the interest rate on this mortgage to 7.125% from 9.625% and to extend
the maturity date.
(b) On April 21, 1994 (IPO date), the Company paid $4.6 million for an
interest rate cap. Through April 1, 1997, Libor is capped at 5.25%,
provided Libor is below 7.25%. If Libor is 7.25% or above, the cap
increases to 6.25%.
(c) On October 19, 1994, the Company paid $5.8 million for an interest
rate cap. Through October 19, 1997, Libor is capped at 6.00% provided
Libor is below 8.00%. If Libor is greater than 8.00%. From October
20, 1997 though October 19, 1999, Libor is capped at 8.00%.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of The Mills Corporation was held
on May 23, 1996. The following is a tabulation of the voting
on each proposal presented at the Annual Meeting and a listing of
Directors whose term of office as Directors continued after the
meeting:
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
TERM VOTES FOR VOTES WITHHELD
EXPIRES
<S> <C> <C> <C>
Peter A. Gordon 1999 14,164,821 30,243
Franz von Perfall 1999 14,161,969 33,095
Laurence C. Siegel 1999 14,162,969 32,095
CONTINUING DIRECTORS
Charles R. Black, Jr. 1997
Dietrich von Boetticher 1997
John M. Ingram 1997
Peter B. McMillan 1997
Herbert S. Miller 1997
James C. Braithwaite 1998
The Hon. Joseph B. Gildenhorn 1998
Harry H. Nick 1998
Robert P. Pincus 1998
</TABLE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS--ERNST & YOUNG, LLP
<TABLE>
<S> <C>
Votes for 14,162,871
Votes against 14,970
Votes withheld 17,223
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Exhibit Index attached hereto is hereby incorporated by reference
to this item.
No reports on Form 8-K were filed by the registrant during the
applicable quarter covered by this report.
14
<PAGE> 17
SIGNATURE
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.
THE MILLS CORPORATION
August 14, 1996 By: /s/ Kenneth R. Parent
- ------------------------- -----------------------------------------------
(Date) Kenneth R. Parent
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
15
<PAGE> 18
THE MILLS CORPORATION
EXHIBIT INDEX
(Pursuant to item 601 of Regulation S-K)
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
<S> <C>
*3.1 Amended and restated Certificate of incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company
**3.3 Limited Partnership Agreement of the Operating Partnership (filed as
part of Exhibit 10.3)
*4.1 Specimen Common Stock Certificate of Company
*4.2 Agreement dated March 15, 1994, among Richard L. Kramer, the A.J. 1989
Trust, the Irrevocable Intervivos Trust for the Benefit of the Kramer
Children, the N Street Investment Trust, Equity Resources Associates,
Herbert S. Miler, The Mills Corporation and The Mills Limited
Partnership (filed as Exhibit 10.19)
**4.3 Non-Affiliate Registration Rights and Lock-Up Agreement
**4.4 Affiliate Registration Rights and Lock-Up Agreement
*10.1 Form of Employee Non-Compete/Employment Agreements
*10.2 1994 Executive Equity Incentive Plan
**10.3 Limited Partnership Agreement of Operating Partnership
*10.4 Option Agreement (Sunrise Residuals/Parcels 4 and 5)
*10.5 Form of Noncompetition Agreement between the Company, the Operating
Partnership and each of Kan Am and the Kan Am Partnerships
*10.6 Form of Noncompetition Agreement with Kan Am Directors
*10.7 Trust and Servicing Agreement, dated as of December 1, 1993, among
Sawgrass Finance L.L.C., as depositor, The First National Bank of
Chicago, as servicer, and State Street Bank and Trust Company, as
Trustee
*10.8 Amended and Restated Mortgage, Security Agreement, Assignment of Lessee
and Rents and Fixture filing, dated as of December 1, 1993, by Sunrise
Mills Limited Partnership, as mortgagor, in favor of Sawgrass Finance
L.L.C., as mortgagee
*10.9 Assignment of Leases and Rents, dated as of December 1, 1993, between
Sunrise Mills Limited Partnership and Sawgrass Finance L.L.C.
*10.10 Assignment of Note, Mortgage, and Assignment of Rents dated as of
December 21, 1993, by Sawgrass Finance L.L.C. in favor of State Street
Bank & Trust Co.
*10.11 Promissory Note, dated as of November 16, 1993, by Western Hills
Associates Limited Partnership in favor of Connecticut General Life
Insurance Company
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
<S> <C>
*10.12 Assignment of Rents and Leases, dated as of November 16, 1993, by
Western Hills Associates Limited Partnership in favor of Connecticut
General Life Insurance Company
*10.13 Open-End Mortgage, Security Agreement and Fixture Filing, dated as of
November 16, 1993, by Western Hills Associates Limited Partnership in
favor of Connecticut General Life Insurance Company
*10.19 Agreement dated March 15, 1994 among Richard L. Kramer, the A.J. 1989
Trust, the Irrevocable Intervivos Trust for the Benefit of the Kramer
Children, the N Street Investment Trust, Equity Resources Associates,
Herbert S. Miller, The Mills Corporation and The Mills Limited
Partnership
*10.20 Form of Promissory Note made payable by Franklin Mills Associates
Limited Partnership to and for the benefit of the Operating Partnership
*10.21 Form of Mortgage, Security Agreement and Assignment of Rents and Leases
by Franklin Mills Associates Limited Partnership to and for the benefit
of the Operating Partnership
*10.22 Form of Sale of Partnership Interests Agreement (Franklin Mills) by and
between the Operating Partnership and Herbert S. Miller, Laurence C.
Siegel, Harry H. Nick, Western Franklin Mills Corp., Kan Am USA IX
Limited Partnership and Kan Am USA X Limited Partnership
*10.23 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers
+10.24 Construction Loan Agreement dated November 9, 1995, by and between
Ontario Mills Limited Partnership and Canadian Bank of Commerce,
Bayerische Hypotheken-Und Wechsel-Bank Aktiengesellschaft and The
Mitsubishi Bank of Commerce
+10.25 Construction Deed of Trust, Security Agreement, Assignment of Leases
and Rents, Fixture Filing and Financing Statement dated as of December
26, 1995 in favor of Canadian Imperial Bank of Commerce, Bayerische
Hypotheken-Und Wechsel-Bank Aktiengesellschaft and The Mitsubishi Bank
of Commerce
+10.26 Loan Agreement dated as of January 31, 1996 by and among Coopers
Crossing Associates (MLP) Limited Partnership, Crosswinds Center
Associates of St. Petersburg (MLP) Limited Partnership, Echo Hills
Center Associates (MLP) Limited Partnership, Fashion Center Associates
of Illinois No. 1 (MLP) Limited Partnership, Fashion Place Associates
(MLP) Limited Partnership, Germantown Development Associates (MLP)
Limited Partnership, Gwinnett Market Fair Associates (MLP) Limited
Partnership, Montgomery Village Associates (MLP) Limited Partnership,
Montgomery Village Ground (MLP) Limited Partnership, Mount Prospect
Plaza (MLP) Limited Partnership (collectively, "The Mills Corporation,
et. al."), and PFL Life Insurance Company
+10.27 First Amended and Restated Promissory Note dated as of January 31,
1996, made by and among The Mills Corporation, et al., and PFL Life
Insurance Company
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
<S> <C>
+10.28 Absolute Assignment of Mortgage and Loan Documents dated January 31,
1996 by and between CS First Boston Mortgage Capital Corporation as
assignor and PFL Life Insurance Company as assignee
10.29-10.33 Intentionally Omitted
***10.34 Promissory Note dated October 26, 1994 by Washington Outlet Mall
Limited Partnership and Potomac Mills - Phase III Limited Partnership
in favor of Potomac Mills Finance Corporation
***10.35 Amended and Restated Deed of Trust, Security Agreement, Assignment of
Leases and Rents and Fixture Filing dated as of October 1, 1994, by
Washington Outlet Mall Limited Partnership and Potomac Mills - Phase
III Limited Partnership in favor of Potomac Mills Finance Corp. and R.
Eric Taylor as trustee
***10.36 Limited Guaranty dated as of October 26, 1994, by The Mills Limited
Partnership in favor of Potomac Mills Finance Corp.
***10.37 Trust and Servicing Agreement dated as of October 1, 1994, among
Potomac Mills Finance Corp., as depositor; The First National Bank of
Chicago, as servicer; ABN Amro Bank, N.V., as fiscal agent; and LaSalle
National Bank, as trustee
10.38-10.49 Intentionally Omitted
****10.50 First Amendment to Trust and Servicing Agreement (Exhibit 10.7) dated
as of June 1, 1995, among Sawgrass Finance L.L.C., as depositor, The
First National Bank of Chicago, as servicer, and State Street Bank and
Trust Company, as trustee.
****10.51 Prepayment Premium Agreement dated as of June 1, 1995, between The
Mills Limited Partnership and State Street Bank and Trust Company, as
trustee.
*21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to the Registrant's Registration Statement on Form
S-11, Registration No. 33-71524, which was declared effective by Securities
and Exchange Commission on April 14, 1994 (Commission File No. 1-12994).
** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the first quarter ended March 31, 1994 (Commission File No. 1-12994).
<PAGE> 21
*** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994.
**** Incorporated by reference to the Registrant's Quarterly by Report on Form
10-Q for the second quarter ended June 30, 1995.
+ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,816
<SECURITIES> 0
<RECEIVABLES> 26,279
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 843,774
<DEPRECIATION> 166,338
<TOTAL-ASSETS> 851,889
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 169
<OTHER-SE> 112,999
<TOTAL-LIABILITY-AND-EQUITY> 851,889
<SALES> 0
<TOTAL-REVENUES> 37,072
<CGS> 0
<TOTAL-COSTS> 12,155
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,130
<INCOME-PRETAX> 4,332
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (153)
<CHANGES> 0
<NET-INCOME> 2,126
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0
</TABLE>
