<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 March 31, 1997
Commission File Number 1-12994
-------
THE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1802283
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1300 Wilson Boulevard, Arlington, Virginia 22209
------------------------------------------------
(Address of principal executive offices - zip code)
(703) 526-5000
-------------
(Registrant's telephone number, including area code)
---------------------------------------
(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
---- ----
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.
22,311,486 shares of Common Stock
$.01 par value as of May 14, 1997
<PAGE> 2
THE MILLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
<S> <C>
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996. 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and March 31, 1996. 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and March 31, 1996. 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
(Unaudited) (Note)
---------------- ------------------
ASSETS Income producing property:
<S> <C> <C>
Land and land improvements...................... $ 164,443 $ 164,420
Building and improvements....................... 663,318 662,469
Furniture, fixtures and equipment............... 22,754 22,221
Less: accumulated depreciation
and amortization............................ (186,287) (179,658)
----------- -----------
Total income producing property...................... 664,228 669,452
Land held for investment and/or sale................. 3,274 3,564
Real estate development in progress.................. 31,648 28,259
Investment in partnerships........................... 57,534 66,688
----------- -----------
Total real estate and development assets............. 756,684 767,963
Cash and cash equivalents............................ 107,365 6,327
Restricted cash...................................... 12,516 13,215
Accounts receivable.................................. 20,240 19,165
Notes receivable..................................... 7,026 7,167
Deferred costs, net.................................. 44,052 45,655
Other assets ........................................ 6,867 3,132
----------- -----------
TOTAL ASSETS......................................... $ 954,750 $ 862,624
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages, notes, and loans payable.................. $ 709,082 $ 730,113
Accounts payable and other liabilities............... 43,976 43,011
----------- -----------
Total liabilities.................................... 753,058 773,124
Minority interest.................................... 85,215 43,975
STOCKHOLDERS' EQUITY
Common stock $.01 par value, authorized
100,000,000 shares, issued and outstanding
22,311,486 and 16,907,164, shares in 1997 and
1996, respectively............................. 223 169
Additional paid-in capital...................... 431,570 309,813
Accumulated deficit............................. (315,316) (264,457)
----------- -----------
Total stockholders' equity ..................... 116,477 45,525
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $ 954,750 $ 862,624
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
REVENUES:
<S> <C> <C>
Minimum rent $ 23,200 $ 22,898
Percentage rents 1,119 1,221
Recoveries from tenants 11,550 11,541
Other property revenue 1,277 1,261
Fee income 2,515 831
Interest income 563 454
------------- ------------
40,224 38,206
EXPENSES:
Recoverable from tenants 10,399 10,329
Other operating 1,323 1,708
General and administrative 2,246 2.104
Interest expense 12,049 11,589
Depreciation and amortization 8,486 10,049
------------- ------------
34,503 35,779
Other income 243 1,738
Equity in earnings of unconsolidated joint ventures 113 -
------------- ------------
Income before extraordinary item and minority interest 6,077 4,165
Extraordinary loss on debt extinguishment - (830)
------------- ------------
Income before minority interest 6,077 3,335
Minority interest (2,568) (1,640)
-------------- ------------
Net income $ 3,509 $ 1,695
============= ============
Income per common share
before extraordinary item (Note 3) $ 0.19 $ 0.13
============= ============
Net income per common share (Note 3) $ 0.19 $ 0.10
============= ============
Dividends declared per common share $ 0.4725 $ 0.4725
============= ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 5
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
OPERATING ACTIVITIES: March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Income before minority interest $ 6,077 $ 3,335
Adjustments to reconcile income before minority interest
to net cash provided by operating activities:
Net accretion of note receivable (175) (175)
Depreciation and amortization 9,437 10,999
Provision for losses on accounts receivable 9 176
Equity in earnings of unconsolidated joint ventures (113) -
Net gain on sale of land and equipment (281) (1,709)
Extraordinary loss on debt extinguishment - 830
Other changes in assets and liabilities:
(Increase) decrease in accounts receivable (961) (524)
(Increase) decrease in notes receivable 316 255
(Increase) decrease in other assets (3,735) (3,489)
(Decrease) increase in accounts payable and other liabilities 1,752 3,056
--------- ---------
Net cash provided by operating activities 12,326 12,754
INVESTING ACTIVITIES:
Investment in real estate and development assets 3,524 (26,666)
Proceeds from sale of land and furniture and equipment 650 4,195
Deferred costs (1,236) (1,448)
--------- ---------
Net cash provided by (used in) investing activities 2,938 (23,919)
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 4,082 16,000
Repayments of mortgages, notes and loans payable (25,113) (2,858)
Funding (to) from affiliates - (289)
Restricted cash 699 1,969
Dividends (7,988) (7,988)
Distributions (7,717) (7,587)
Proceeds from sale of Common Stock 121,811 -
--------- ---------
Net cash provided by (used in) financing activities 85,774 (753)
--------- ---------
Net increase (decrease) in cash and cash equivalents 101,038 (11,918)
Cash and cash equivalents at beginning of period 6,327 14,550
--------- ---------
Cash and cash equivalents at end of period $ 107,365 $ 2,632
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 12,991 $ 11,758
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 6
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share Data)
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Mills Corporation (the "Company") is a fully-integrated,
self-managed real estate investment ("REIT"). The Company was incorporated in
Virginia on January 2, 1991 and was re-incorporated in Delaware in 1994. In
connection with its re-incorporation, the Company completed its initial public
offering of 14,380,000 shares of its common stock (the "Common Stock") on April
21, 1994 (the "Offering"). The net proceeds of the Offering of approximately
$310,000 and other assets of the Company were contributed to The Mills Limited
Partnership (the "Operating Partnership") in exchange for a majority interest
therein, including a 1% interest as the sole general partner.
On March 19, 1997, the Company sold 5,175,000 shares of Common Stock in
an underwritten public offering. On March 21, 1997, the Company sold an
additional 150,000 shares of Common Stock to its underwriters to cover a
portion of their short position resulting from their over-allotments in
connection with the March 19, 1997 offering. As a result of these transactions,
the Company raised $121,811 in net proceeds and increased its ownership
interest in the Operating Partnership from 50.9% at December 31, 1996 to 57.7%
at March 31, 1997.
The Company, which conducts all of its business through the Operating
Partnership, is engaged primarily in the ownership, development, redevelopment,
leasing, acquisition, expansion, and management of super-regional, value and
entertainment-filled malls (the "Mills") and community shopping centers (the
"Community Centers"). As of March 31, 1997, the Operating Partnership owns or
holds an interest in the following operating properties:
<TABLE>
<CAPTION>
Mills Location
----- --------
<S> <C>
Franklin Mills Philadelphia, PA
Gurnee Mills Gurnee, IL (Chicago)
Potomac Mills Woodbridge, VA (Washington, DC)
Sawgrass Mills Sunrise, FL (Ft. Lauderdale)
Ontario Mills Ontario, CA (Los Angeles)
Community Centers Location
----------------- --------
Butterfield Plaza Downers Grove, IL
Coopers Plaza Voorhees, NJ
Crosswinds Center St. Petersburg, FL
Fashion Place Columbia, SC
Germantown Commons Shopping Center Germantown, MD
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, including Grapevine Mills
(Dallas), Arizona Mills (Tempe), Mills City at Orange (California), Houston
Mills, Meadowlands Mills, Columbus Mills and the sale of certain outparcels of
land.
4
<PAGE> 7
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
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 three
month period ended March 31, 1997, 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, 1996.
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 MillsServices
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. The Company's investments in the partnerships
that own Ontario Mills, Ontario Mills Residual, Grapevine Mills, Grapevine Mills
Residual, Arizona Mills, Columbus Mills and Mills City, which represent
non-controlling ownership interests, are accounted for using the equity method
of accounting. 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 1997 presentation.
3. PER SHARE DATA
Net income per share for the three months ended March 31, 1997 and
March 31, 1996 is based on the weighted average number of common shares and
common equivalent shares outstanding during such period (18,105,937 at March 31,
1997 and 16,905,953 at March 31 1996).
Limited partnership units in the Operating Partnership (16,328,884 and
16,331,306 outstanding at March 31, 1997 and December 31, 1996, respectively)
may be exchanged for shares of common stock of the Company on a one-for-one
basis in certain circumstances. This exchange right has not been considered in
the computation of per share data as it does not have a dilutive effect.
In February 1997, the financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, (FASB No. 128), which is required to
be adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. Adoption of
FASB No. 128 is not expected to have a significant impact on primary or fully
diluted earnings per share for the first quarter ended March 31, 1997 and March
31, 1996.
5
<PAGE> 8
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
4. INVESTMENT IN PARTNERSHIPS
Certain Mills under development are partially owned through joint
ventures ("Joint Ventures"). The Company is also the managing general partner of
these Joint Ventures. The Company's interest in each Joint Venture is as
follows:
<TABLE>
<CAPTION>
Ownership %
Joint Venture as of March 31, 1997
------------- --------------------
<S> <C>
Ontario Mills 50.0%
Grapevine Mills 37.5%
Arizona Mills 36.8%
Columbus Mills 75.0%
Mills City at Orange 50.0%
</TABLE>
The Company does not control these Joint Ventures since major business
decisions require the approval of at least one other general partner. As a
result, its investments are accounted for under the equity method, where the
investments are recorded at cost and subsequently adjusted for net equity in
income (loss) and cash contributions and distributions. The Company reduces its
investment in Joint Ventures to eliminate intercompany profits on sales of
services that are capitalized by the Joint Ventures.
In connection with the Joint Venture agreements, the Company is
committed to providing certain levels of equity in addition to amounts invested
to date. The Company has guaranteed repayment of $11.2 million of the Joint
Venture debt until certain debt service coverage tests are met. In addition, the
Company is contingently liable for property taxes and assessments levied against
Ontario Mills Limited Partnership by the City of Ontario Special Assessment
District. The aggregate amount of the special tax assessment is approximately
$26,000 and will be collected over a 25 year period to fund debt service on
bonds issued by the City to fund the infrastructure improvements.
Combined balance sheet and results of operations information is
presented below for all Joint Ventures at March 31, 1997, and for the three
months then ended:
<TABLE>
<CAPTION>
March 31, 1997
--------------
Assets:
<S> <C>
Income producing assets $ 133,351
Construction in progress 138,217
Other 71,180
-----------
$ 342,748
===========
Liabilities and partners' equity
Debt $ 147,282
Other liabilities 38,005
Operating Partnership's accumulated equity 30,565
Joint Venture partners' accumulated equity 126,896
-----------
$ 342,748
===========
</TABLE>
6
<PAGE> 9
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
--------------
<S> <C>
Revenues $ 6,211
Recoverable and other property expenses (2,104)
Interest expense (1,636)
Depreciation and amortization (1,861)
Other 665
Extraordinary loss on debt extinguishment (961)
---------
$ 314
=========
Operating Partnership's equity in earnings of unconsolidated joint ventures $ 113
=========
</TABLE>
The primary difference between the carrying value of the Company's
investment in unconsolidated joint ventures and the Operating Partnership's
accumulated equity noted above is due to capitalized interest on the investment
balance, capitalized development and leasing costs which are recovered by the
Operating Partnership through fees during construction and loans to the Joint
Ventures included in other liabilities above.
5. DECLARATION OF DIVIDEND
On February 14, 1997, the Company declared a dividend of $.4725 per
share which was paid on April 15, 1997 to stockholders of record as of April 1,
1997.
6. SUBSEQUENT EVENT
On May 5, 1997, the Company refinanced loans secured by Franklin Mills
totaling $165,800, with the proceeds of a new $110,000 mortgage loan and funds
from the March 1997 stock issuance. The new loan bears interest at a fixed rate
of 7.88% and amortizes over 30 years with a balloon payment in March, 2008. The
new loan can be increased to $165 million through May 4, 1998, subject to
certain financial requirements relating to increases above $130 million.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of three months ended March 31, 1997 to three months ended March 31,
1996.
Income before minority interest for the three months ended March 31,
1997, increased by approximately $2.7 million (82.2%) to $6.1 million as
compared with the three months ended March 31, 1996. The increase was the result
of an increase in revenues of approximately $2.0 million (5.3%), a decrease in
expenses of approximately $1.3 million (3.6%), a decrease in the loss on debt
extinguishment of $0.8 million offset by a decrease in other income of $1.5
million.
Revenues:
Minimum rents for the three months ended March 31, 1997, increased
approximately $0.3 million (1.3%) compared with the three months ended March 31,
1996. The increase was primarily due to the higher lease renewal rates across
the properties.
8
<PAGE> 11
RESULTS OF OPERATIONS (CONTINUED)
Fee income for the three months ended March 31, 1997, increased $1.7
million (202.6%) compared with the three months ended March 31, 1996. The
increase was due to increased development activity resulting in additional
development fees earned from projects under development, primarily Mills City at
Orange and Grapevine Mills.
Expenses:
Other operating expenses for the three months ended March 31, 1997
decreased approximately $0.4 million (22.5%) compared with the three months
ended March 31, 1996. This decrease is primarily due to a decrease in
contribution to promotional programs of $0.2 million, a decrease in bad debt
expense of $0.1 million at certain projects and a decrease in legal fees of $0.1
million for landlord/tenant litigation.
Interest expense increased by approximately $0.5 million (4.0%) for the
three months ended March 31, 1997, compared with the three months ended March
31, 1996. This increase was primarily due to interest expense associated with
Ontario Mills that was capitalized prior to opening in November 1996.
Depreciation and amortization decreased $1.6 million (15.6%) for the
three months ended March 31, 1997, compared with the three months ended March
31, 1996. The decrease was due to a decrease in amortization of loan costs as a
result of refinancing the debt secured by Potomac Mills and Gurnee Mills in 1996
and a decrease in depreciation relating to assets reaching their depreciable
lives.
Other income for the three months ended March 31, 1997, decreased $1.5
million compared with the three months ended March 31, 1996. The decrease was
due to a decrease in gain on land sales.
The extraordinary loss on debt extinguishment in 1996 was due to
refinancing the debt secured by the community centers in January, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's balance of cash and cash
equivalents was $107.4 million, not including its proportionate share of cash
held in partnerships which are not consolidated. In addition to its cash
reserves, the Company has a $40.0 million Line of Credit available (see below).
Financing Activities. During 1996 and 1997, the Company completed
various financing and refinancing activities which extended the weighted average
remaining term of the Company's total indebtedness from 3.5 years at December
31, 1995 to 5.9 years at May 5, 1997, while maintaining investment grade
interest rates (7.1% weighted average interest rate at May 5, 1997).
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As of March 31, 1996, the Company had two short term credit facilities,
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
TOTAL OUTSTANDING
NATURE OF FACILITY MATURITY INTEREST RATE TERMS FACILITY AT 3/31/97
- ------------------ -------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Line of Credit........................ 10/31/98 LIBOR + 3.00% Interest Only $40,000 $ -
Revolving Master Repurchase Agreement. Varies LIBOR + 1.25% Interest Only 10,600 10,556
------- -------
$50,600 $10,556
======= =======
</TABLE>
The amounts available under the Line of Credit are subject to certain
performance measurements and restrictive covenants. The Company was in
compliance with the applicable covenants at March 31, 1997 and anticipates
increasing the availability to $60,000 in the second quarter of 1997 under the
facility. The Revolving Master Repurchase Agreement was repaid in full in April
1997.
On May 5, 1997, loans secured by the Company's Franklin Mills project
totaling $165.8 million were refinanced with the proceeds of a new $110.0
million mortgage loan and funds from a recent stock issuance (see below). The
mortgage loan bears interest at 7.88% and amortizes over thirty years with a
baloon payment in March 2008. The new loan can be increased to $165 million
through May 4, 1998, subject to certain financial requirements relating to
increases above $130 million.
The Company filed a universal shelf registration statement on Form S-3
for up to $250 million of common stock, preferred stock and common stock
warrants which became effective October 28, 1996. Pursuant to this shelf
registration, the Company sold a total of 5,175,000 shares of common stock on
March 19, 1997. On March 21, 1997, the Company sold an additional 150,000
shares of its common stock to its underwriters to cover a portion of their sort
position resulting from their over-allotments in connection with the March 19,
1997 offering. The net proceeds of these issuances ($121,811) were contributed
to the Operating Partnership and were used to pay down debt including amounts
outstanding under the line of credit of $17,765, $10,556 outstanding under the
Revolving Master Repurchase Agreement and $55,000 of prior loans secured by the
Franklin Mills project in connection with the refinancing. The balance of the
proceeds have funded development costs or are available to fund future
development and remerchandising activities.
The Company had consolidated debt of approximately $709.1 million at
March 31, 1997 of which $656.5 million is fixed-rate debt and $52.6 million is
variable-rate debt. Scheduled principal repayments of consolidated indebtedness
over the next four years are $233.8 million ($165.0 million of which relates to
Franklin Mills which the Company refinanced in May 1997, and the remainder of
which the Company expects to refinance or repay with cash generated from
operations, external borrowings or equity issuances), with $475.3 million due
thereafter. The Company's pro rata share of unconsolidated joint venture debt
at March 31, 1997 was $61.2 million (net of tax increment financing), of which
it had guaranteed $11.2 million.
The Company's ratio of debt-to-total market capitalization was
approximately 42.1%and 47.9% at March 31, 1997 and December 31, 1996,
respectively. If the Company's pro-rata share of indebtedness of all
unconsolidated joint venture properties were included, the ratio of
debt-to-total market capitalization would be approximately 44.1% and 49.3%
respectively.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Development, Remerchandising and Expansion. The Company is involved in
the following development, remerchandising and expansion efforts:
Five Mills projects are planned to be completed in the next three
years: Grapevine Mills, Arizona Mills, Mills City at Orange, Houston Mills, and
Meadowlands Mills.
Grapevine Mills and Arizona Mills are expected to open in the fourth
quarter of 1997. Construction loans and loan commitments, aggregating
approximately $285 million (expected to increase to $300 million), equity
commitments from the Company's joint venture partners and the Company's
remaining required net equity contributions of approximately $1.0 million (as of
April 30, 1997) are considered adequate to fund the remaining development
efforts for these projects.
Mills City at Orange and Houston Mills are scheduled to open in the
fourth quarter of 1998 and in 1999, respectively. Both projects will be financed
principally with external borrowings, potential preferred and other equity
contributions from Kan Am and/or the potential equity issuances. The Company
anticipates its required future equity requirements for Mills City at Orange and
Houston Mills in the aggregate may total as much as $30 million.
The Company expects to commence construction in 1998 of Meadowlands
Mills, with a targeted opening date in 1999. The Company is currently evaluating
its financing options with respect to this project, including obtaining
an additional partner to provide additional equity.
The Company is conducting due dilligence on several other proposed
Mills, including evaluating a site in Charlotte, North Carolina and a second
site in North Aurora, Illinois, west of Chicago.
In addition to these new Mills, the Company is planning to spend
approximately $115 million on its existing portfolio during the next three
years to complete its expansion and remerchandising programs in each of the
Company's first four Mills. It is anticipated that these projects will be
financed with amounts available under existing credit facilities, additional
external borrowings, equity contributions from Kan Am and other potential
equity issuances.
Capital Resources. The Company anticipates that its operating
expenses, interest expense on outstanding indebtedness, recurring capital
expenditures and distributions to stockholders in accordance with REIT
requirements will be provided by cash generated from operations, potential
ancillary land sales and borrowings under its Line of Credit.
The Company believes that it will have the capital and access to
additional capital resources sufficient to expand and develop its business in
accordance with its operating, development and financing strategies.
Distributions. The Company has paid and intends to continue to pay
regular quarterly distributions to its stockholders. Distributions are payable
at the discretion of the Board of Directors and depend on a number of factors,
including net cash provided by operating activities, its financial condition,
capital commitments, debt repayment schedules and such other factors as the
Board of Directors deems relevant.
CASH FLOWS
Comparison of Three Months Ended March 31, 1997 to Three Months Ended
March 31, 1996. Net cash provided by operating activities decreased $0.4
million, or 3.4%, to $12.3 million for the three months ended March 31, 1997 as
compared to $12.7 million for the three months ended March 31, 1996. Net cash
provided by (used in)
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
investing activities increased $26.8 million, or 112.3%, to $2.9 million for the
three months ended March 31, 1997, as compared to ($23.9) million for the three
months ended March 31, 1996, primarily as a result of decreased expenditures for
real estate and development assets and the return of advances from certain joint
ventures. Net cash provided by (used in) financing activities increased $86.6
million, to $85.8 million for the three months ended March 31, 1997, as compared
to ($0.8) million for the three months ended March 31, 1996, primarily as a
result of the additional capital provided by the sale of common stock in 1997.
FUNDS FROM OPERATIONS
The Company generally considers Funds From Operations ("FFO") a widely
used and appropriate measure of performance for an equity REIT which provides a
relevant basis for comparison among REITs. FFO as defined by NAREIT means income
(loss) before minority interest (determined in accordance with GAAP), excluding
gains (losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. FFO is presented to assist investors in
analyzing the performance of the Company. The Company's method of calculating
FFO may be different from methods used by other REITs and, accordingly, may not
be comparable to such other REITs. FFO (i) does not represent cash flows from
operations as defined by GAAP, (ii) is not indicative of cash available to fund
all cash flow needs and liquidity, including its ability to make distributions
and (iii) should not be considered as an alternative to net income (determined
in accordance with GAAP) for purposes of evaluating the Company's operating
performance.
FFO for the quarter ended March 31, 1997, increased to $14.9 million
compared to $12.9 million for the comparable period in 1996. FFO amounts were
calculated in accordance with NAREIT's definition of FFO as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1997 1996
----- -----
(DOLLARS IN THOUSANDS)
Funds From Operations Calculation:
<S> <C> <C>
Income before extraordinary item and minority interest............................... $ $
6,077 4,165
Adjustments:
Add: Depreciation and amortization of real estate assets 7,705 8,706
Add: Real estate depreciation and amortization of unconsolidated affiliates 722 -
Add: Extraordinary loss on debt extinguishnment of unconsolidated affiliates 397 -
---------- -----------
$ 14,901 $ 12,871
Funds From Operations................................................................ ========== ===========
</TABLE>
12
<PAGE> 15
SEASONALITY
The regional shopping center industry is seasonal in nature, with mall
tenant sales peaking in the fourth quarter due to the Christmas season. As a
result, a substantial portion of the percentage rents are not paid until the
fourth quarter. Furthermore, most new lease-up occurs towards the later part of
the year in anticipation of the holiday season and most vacancies occur toward
the beginning of the year. In addition, the majority of the temporary tenants
take occupancy in the fourth quarter. Accordingly, cash flow and occupancy
levels are generally lowest in the first quarter and highest in the fourth
quarter. This seasonality also impacts the quarter-by-quarter results of net
operating income and FFO, although this impact is largely mitigated by accruing
minimum and percentage rents on a straight line basis during the year in
accordance with GAAP.
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 that 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 and percentage
rent clauses that provide additional rent after a certain minimum sales level is
achieved. These provisions provide some protection to the Company during highly
inflationary periods.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
In February 1997, the Company issued 13,650 shares of Common Stock to
Gene Hess in settlement of ligitation. The shares were valued at
$337,500 and were issued in a private placement exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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.
The Company filed four reports on Form 8-K during the quarter ended
March 31, 1997.
a. The Company's Current Report on Form 8-K filed on January 23, 1997
announced the closing of the Potomac Mills-Gurnee Mills refincing.
b. The Company's Current Report on Form. 8-K filed March 12, 1997 filed
an Opinion of Hogan & Harston L.L.P. dated March 12, 1997 relating
to certain tax matters.
c. The Company's Current Report on Form 8-K filed March 18, 1997 filed
as Exhibits a form of Underwriting Agreement among the Company and
Merrill Lynch & Co., Merrill Lynch Pierce Fenner & Smich
Incorporated and an Opinion of Hogan & Harston L.L.P. relating to
the legality of the shares of Common Stock.
d. The Company's Current Report on Form 8-K filed March 25, 1997 filed
as Exhibits a Terms Agreement among the Company, Merrill Lynch &
Co., Merrill Lynch Pierce Fenner & Smith Incorporated, Dean Witter
Reynolds Inc., Legg Mason Wood Walker, Incorporated and Salomon
Brothers, Inc. pertaining to the issuance of 150,000 shares of
Common Stock and an Opinion of Hogan & Harston L.L.P. relating to
the legality of the shares of Common Stock.
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
May 14, 1997 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>
1.1 None
2.1 None
*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.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
<S> <C>
*10.11 None
Promissory Note, dated as of November 16, 1993, by Western Hills
Associates Limited Partnership in favor of Connecticut General Life
Insurance Company
*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 Mortgage, 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
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
<S> <C>
*****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
*****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
10.29-10.47 Intentionally Omitted
******10.48 Note dated July 30, 1996 by Sawgrass Mills Phase II Limited Partnership
in favor of CS First Boston Mortgage Capital Corp.
******10.49 Mortgage Security Agreement, Assignment of Leases and Rents and Fixture
Filing dated as of July 30, 1996, between Sawgrass Mills Phase II
Limited Partnership, as Mortgagor and CS First Boston Mortgage Capital
Corporation, as Mortgagee.
****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.
*******10.52 Second Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Fixture Filing by Potomac Mills-Phase III (MLP)
Limited Partnership and Washington Outlet Mall (MLP) Limited
Partnership, collectively, as Grantor to R. Eric Taylor, a resident of
Fairfax County, Virginia as Deed Trustee for the benefit of CS First
Boston Mortgage Capital Corp., as Beneficiary dated as of December 17,
1996
*******10.53 Assignment of Leases and Rents and Security Deposits dated as of
December 17, 1996 by Potomac Mills-Phase III (MLP) Limited Partnership
and Washington Outlet Mall (MLP) Limited Partnership to CS First Boston
Mortgage Capital Corp.
*******10.54 Mortgage, Security Agreement, Assignment of Rents and Fixture Filing by
Gurnee Mills (MLP) Limited Partnership, as Mortgagor to CS First Boston
Mortgage Capital Corp., as Mortgagee dated as of December 17, 1996
*******10.55 Assignment of Leases and Rents and Security Deposits dated as of
December 17, 1996 by Gurnee Mills (MLP) Limited Partnership to CS First
Boston Mortgage Capital Corp.
*******10.56 Trust and Servicing Agreement dated as of December 1, 1996 among
Potomac Gurnee Finance Corp., as Depositor, AMRESCO Management, Inc.,
as Servicer, ABN AMRO Bank N.V., as Fiscal Agent and LaSalle National
Bank, as Trustee
*******10.57 Credit Agreement dated as of October 28, 1996, among The Mills
Corporation, The Mills Limited Partnership, Sunrise Mills (MLP) Limited
Partnership and CS First Boston Mortgage Capital Corp.
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
<S> <C>
*******10.58 General Pledge and Security Agreement, dated as of October 28, 1996
made by The Mills Limited Partnership in favor of CS First Boston
Mortgage Capital Corp.
*******10.59 Intercompany Pledge and Security Agreement dated as of October 28,
1996, and by The Mills Limited Partnership, The Mills Corporation,
Sunrise Mills (MLP) Limited Partnership and Sawgrass Mills Phase II
Limited Partnership in favor of CS First Boston Mortgage Capital Corp.
*******10.60 Assignment of Partnership Interested dated as of the 28th day of
October, 1996 from The Mills Limited Partnership to CS First Boston
Mortgage Capital Corp.
*******10.61 Revolving Note dated as of October 28, 1996 from The Mills Limited
Partnership to CS First Boston Mortgage Capital Corp. in the maximum
amount of $40,000,000.
*******11 Statement Re: Computation of Per Share Earnings.
*******21.1 List of Subsidiaries of the Registrant
*******23 Consent of Ernst & Young LLP
</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).
***
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.
******
Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the third quarter ended September 30, 1996
*******
Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 107,365
<SECURITIES> 0
<RECEIVABLES> 27,266
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 850,507
<DEPRECIATION> (186,287)
<TOTAL-ASSETS> 954,750
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> 201,469
<TOTAL-LIABILITY-AND-EQUITY> 954,750
<SALES> 0
<TOTAL-REVENUES> 40,224
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,049
<INCOME-PRETAX> 3,509
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,509
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0
</TABLE>
