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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 21, 1997)
[LOGO]
150,000 SHARES
THE MILLS CORPORATION
COMMON STOCK
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The Mills Corporation (the "Company") is a fully-integrated, self-managed
real estate investment trust (a "REIT") which owns, develops, redevelops, leases
and manages a portfolio currently consisting of five super-regional, value and
entertainment oriented malls (the "Mills") and 11 community shopping centers
(the "Community Centers," and together with the Mills, the "Properties")
containing an aggregate of approximately 10.1 million square feet of gross
leasable area ("GLA").
The Company offers hereby (the "Offering") 150,000 shares of its common
stock, par value $.01 per share ("Common Stock") to the several underwriters
(the "Underwriters") who participated in the Company's offering of 4,500,000
shares of Common Stock which closed March 18, 1997 (the "March Offering"). The
shares of Common Stock offered hereby are being sold by the Company to the
Underwriters at a price of $24.75 per share so that the Underwriters may cover a
portion of their short position resulting from over-allotments in connection
with the March Offering. The Common Stock is listed on the New York Stock
Exchange ("NYSE") under the symbol "MLS." The last reported sale price of the
Common Stock on the NYSE on March 19, 1997 was $24 3/4 per share. It is expected
that delivery of the shares of Common Stock offered hereby will be made in New
York, New York, on or about March 21, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 20, 1997.
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Certain persons participating in this Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include the purchase of shares of Common Stock prior to the
pricing of the Offering for the purpose of maintaining the price of the Common
Stock, the purchase of shares of Common Stock following the pricing of the
Offering to cover a syndicate short position in the Common Stock or for the
purpose of maintaining the price of the Common Stock, and the imposition of
penalty bids. For a description of these activities, see "Plan of Distribution."
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AS USED HEREIN, THE TERM "COMPANY" INCLUDES THE MILLS CORPORATION AND ITS
DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING THE MILLS LIMITED PARTNERSHIP (THE
"OPERATING PARTNERSHIP"), MANAGEMENT ASSOCIATES LIMITED PARTNERSHIP (THE
"MANAGEMENT PARTNERSHIP") AND MILLSSERVICES CORP. (THE "THIRD-PARTY SERVICES
CORPORATION"), UNLESS THE CONTEXT INDICATES OTHERWISE.
THE COMPANY
The Company is a fully-integrated, self-managed REIT which owns, develops,
redevelops, leases and manages a portfolio currently consisting of five Mills
and 11 Community Centers, containing an aggregate of approximately 10.1 million
square feet of GLA. The Mills comprise the primary focus of the Company's
operations, containing approximately 7.9 million square feet of GLA (of which
approximately 900,000 square feet is owned by certain anchor store tenants) and
accounting for approximately 83% of the Company's total rental revenues for the
year ended December 31, 1996. The five existing Mills serve the following
metropolitan markets: Washington, D.C./Baltimore, Philadelphia/Wilmington,
Ft.Lauderdale/ Miami/Palm Beach, Chicago/Milwaukee and Los Angeles. The Company
provides all development, redevelopment, leasing, financing, management and
marketing services with respect to all Properties currently in operation.
RECENT DEVELOPMENTS
CHARLOTTE PROJECT
Simon-DeBartolo Group, Inc. ("Simon") and the Operating Partnership have
entered into an agreement pursuant to which Simon and the Operating Partnership
have agreed to examine the feasibility of joint development and ownership of
Mills-type shopping centers in various metropolitan markets. Pursuant to such
agreement, on February 21, 1997, the Company and Simon announced their intention
to form a partnership to acquire and develop an approximately 1.5 million square
foot super-regional, value and entertainment oriented mall on a 135-acre site in
Charlotte, North Carolina.
FRANKLIN MILLS REFINANCING
The Company has received a proposal from an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for the refinancing of
$165 million of existing mortgage indebtedness encumbering Franklin Mills. As
part of such refinancing, the Company would have the ability to use up to $75
million of the proceeds from the March Offering to pay off a portion of the
existing mortgage indebtedness. The Company currently anticipates that, if the
refinancing is consummated, it will repay $65 million of the existing
indebtedness. The remaining balance of such indebtedness would bear interest at
a fixed rate over seven- or ten-year Treasuries, at the option of the Company.
Under certain circumstances, the Company would be able to borrow from Merrill
Lynch some or all of the amount of principal repaid in connection with the
refinancing. However, there can be no assurance that the refinancing will be
consummated or, if consummated, what the terms of such transaction will be.
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POTOMAC MILLS--GURNEE MILLS SECURITIZATION
In December 1996, the Company completed a $289.9 million refinancing of the
existing mortgage indebtness on Potomac Mills and Gurnee Mills. This refinancing
was achieved through a $284 million all-investment grade securitization with a
weighted average fixed rate coupon of 7.02% and an anticipated balloon repayment
date in seven years. The all-in cost (which consists of interest expense and the
amortization of all costs and expenses associated with the related debt over the
term of such debt) of the new debt is 7.22% compared to an all-in cost of 8.21%
for the refinanced debt. The refinanced debt had a variable interest rate which
was 6.97% on December 1, 1996. Under an interest rate cap agreement, the maximum
variable interest rate on the refinanced debt was 8.12%. Approximately $151
million of the refinanced debt was scheduled to have matured in November 1997.
OPENING OF ONTARIO MILLS
On November 14, 1996, the Company opened its most recent project, Ontario
Mills, in Ontario, California. This approximately 1.7 million square foot
project (upon completion of space for eight anchor store tenants containing
approximately 500,000 square feet of GLA) opened on time, under budget and 90%
leased. The entertainment zone at Ontario Mills, which is the prototype for
future Mills entertainment zones, currently includes a 30-screen AMC Theatres, a
Virgin Megastore and will include, among others, American Wilderness Experience
and IWERKS.
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering (expected to be
approximately $3,687,500 after deducting estimated expenses of approximately
$25,000) to finance future development projects and to fund expansions and
remerchandising of existing Mills. Pending application of the net proceeds as
described above, such proceeds may be invested in short-term, income-producing
investments such as commercial paper, government securities or money market
funds that invest in government securities.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the terms agreement and
related underwriting agreement (collectively the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Dean Witter Reynolds Inc., Legg Mason Wood Walker, Incorporated and Salomon
Brothers Inc are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company, the number of shares of Common
Stock set forth below opposite their respective names. The Underwriting
Agreement provides that the obligations of the Underwriters to purchase the
shares of Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares of Common Stock if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITERS COMMON STOCK
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<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................. 22,125
Dean Witter Reynolds Inc. .............................................. 22,125
Legg Mason Wood Walker, Incorporated.................................... 22,125
Salomon Brothers Inc.................................................... 22,125
Alex. Brown & Sons Incorporated......................................... 3,330
Credit Suisse First Boston Corporation.................................. 3,330
Donaldson, Lufkin & Jenrette Securities Corporation..................... 3,330
A.G. Edwards & Sons, Inc. .............................................. 3,330
PaineWebber Incorporated................................................ 3,330
Prudential Securities Incorporated...................................... 3,330
Smith Barney Inc. ...................................................... 3,330
Wasserstein Perella Securities, Inc. ................................... 3,330
Robert W. Baird & Co. Incorporated...................................... 1,660
William Blair & Company, L.L.C. ........................................ 1,660
Crowell, Weedon & Co. .................................................. 1,660
Dain Bosworth Incorporated.............................................. 1,660
EVEREN Securities, Inc. ................................................ 1,660
Fahnestock & Co. Inc. .................................................. 1,660
Friedman, Billings, Ramsey & Co., Inc. ................................. 1,660
Gruntal & Co., Incorporated............................................. 1,660
Janney Montgomery Scott Inc. ........................................... 1,660
Edward D. Jones & Co., L.P. ............................................ 1,660
McDonald & Company Securities, Inc. .................................... 1,660
Mesirow Financial, Inc. ................................................ 1,660
Piper Jaffray Inc. ..................................................... 1,660
Rauscher Pierce Refsnes, Inc. .......................................... 1,660
Raymond James & Associates, Inc. ....................................... 1,660
Roney & Co., LLC........................................................ 1,660
Sands Brothers & Co., Ltd. ............................................. 1,660
The Seidler Companies Incorporated...................................... 1,660
Sutro & Co. Incorporated................................................ 1,660
Utendahl Capital Partners, L.P. ........................................ 1,660
Wheat, First Securities, Inc. .......................................... 1,660
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Total......................................................... 150,000
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</TABLE>
The shares of Common Stock offered hereby are being sold by the Company to
the Underwriters at a price of $24.75 per share so that the Underwriters may
cover a portion of their short position resulting
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from over-allotments in connection with the March Offering. There is no discount
or commission associated with the sale of the shares of Common Stock to the
Underwriters.
In the Underwriting Agreement, the Company has agreed to indemnify the
several Underwriters against certain civil liabilities, including certain
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with the Offering, the rules of the Securities and Exchange
Commission permit the Representatives to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
Representatives may reduce that short position by purchasing Common Stock in the
open market. In general, purchases of a security for the purpose of
stabilization or to reduce a syndicate short position could cause the price of
the security to be higher than it might otherwise be in the absence of such
purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Subject to certain exceptions, the Company, certain of its officers,
directors and affiliates and the Operating Partnership have agreed not to,
directly or indirectly, offer, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of any shares of Common Stock or partnership
interests in the Operating Partnership, or securities exercisable or
exchangeable for Common Stock or rights to purchase Common Stock for a period of
82 days after the date of this Prospectus Supplement without the prior written
consent of the Representatives.
Merrill Lynch, Pierce, Fenner & Smith Incorporated has provided, and from
time to time provides, investment banking and financial advisory services to the
Company for which customary compensation has been, and will be, received.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock pursuant to this
Prospectus Supplement and certain federal income tax matters will be passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C. Certain legal
matters will be passed upon for the Underwriters by Rogers & Wells, New York,
New York.
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PROSPECTUS
$250,000,000
THE MILLS CORPORATION
PREFERRED STOCK, COMMON STOCK AND COMMON STOCK WARRANTS
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The Mills Corporation (the "Company") may from time to time offer in one or
more series or classes its (i) preferred stock, $.01 par value ("Preferred
Stock"), (ii) common stock, $.01 par value ("Common Stock"), and (iii) warrants
exercisable for Common Stock ("Common Stock Warrants"), with an aggregate public
offering price of up to $250,000,000 (or its equivalent based on the exchange
rate at the time of sale) in amounts, at prices and on terms to be determined at
the time of offering. The Preferred Stock, Common Stock and Common Stock
Warrants (collectively, the "Securities") may be offered, separately or
together, in separate series, in amounts, at prices and on terms to be described
in one or more supplements to this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Preferred Stock, the specific
title and stated value, any dividend, liquidation, redemption, conversion,
voting and other rights, and any public offering price; (ii) in the case of
Common Stock, any public offering price; and (iii) in the case of Common Stock
Warrants, the specific title and aggregate number, the issue price and the
exercise price. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to help preserve the status of the Company as
a real estate investment trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax considerations relating to,
and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement with,
between or among them, will be set forth, or will be calculable from the
information set forth, in an accompanying Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of a Prospectus
Supplement describing the method and terms of the offering of such Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 21, 1997.
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AS USED HEREIN, THE TERM "COMPANY" INCLUDES THE MILLS CORPORATION AND ITS
DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING THE MILLS LIMITED PARTNERSHIP (THE
"OPERATING PARTNERSHIP"), MANAGEMENT ASSOCIATES LIMITED PARTNERSHIP (THE
"MANAGEMENT PARTNERSHIP") AND MILLSSERVICES CORP. (THE "THIRD-PARTY SERVICES
CORPORATION"), UNLESS THE CONTEXT INDICATES OTHERWISE.
THE COMPANY
The Company is a fully-integrated, self-managed real estate investment trust
(a "REIT") which owns, develops, redevelops, leases and manages a portfolio
currently consisting of five super-regional, value and entertainment oriented
malls (the "Mills") and 11 community shopping centers (the "Community Centers,"
and together with the Mills, the "Properties") containing an aggregate of
approximately 10.1 million square feet of gross leasable area ("GLA"). The Mills
comprise the primary focus of the Company's operations, with approximately 7.9
million square feet of GLA, of which approximately 900,000 square feet is owned
by certain anchor store tenants.
The Company is the sole general partner of, and currently holds a majority
of the partnership interests ("Units") in, the Operating Partnership. Units
(other than those owned by the Company) are redeemable at the option of the
holder under certain circumstances for Common Stock or, at the option of the
Company, the cash equivalent thereof. As the sole general partner of the
Operating Partnership, the Company has the exclusive power to manage and conduct
the business of the Operating Partnership, subject to certain limited
exceptions. The Operating Partnership either holds title to the Properties or
directly or indirectly holds 100% of the general and limited partnership
interests in the partnerships that own the Properties (the "Property
Partnerships"), except for the Property Partnerships that own Franklin Mills and
Ontario Mills, in which the Operating Partnership holds 77.6% of the partnership
interests (which represents 100% of the current income and cash flow from
Franklin Mills) and 50%, respectively, as of December 31, 1996. The Company also
has formed joint ventures to develop additional properties.
The Company conducts all of its business through the Operating Partnership
and the Operating Partnership's various subsidiaries (the "Operating
Subsidiaries"), which include: (i) the Management Partnership, which provides
leasing and management services for the Properties, and (ii) the Third-Party
Services Corporation, which provides management services to properties in which
the Operating Partnership does not own an interest and provides development
services for the Properties and (iii) various partnership subsidiaries that have
been formed to hold title to the individual properties. The Operating
Partnership owns 100% of the interests in the Management Partnership and 99% of
the non-voting preferred stock and 5% of the voting common stock of the Third
Party Services Corporation (representing, in the aggregate, a 99% economic
interest). In addition, Herbert S. Miller, a director of the Company, and an
affiliate of Kan Am US, Inc. each owns .5% of the non-voting preferred stock and
47.5% of the voting stock of the Third-Party Services Corporation (representing,
in the aggregate, a 1% economic interest).
The Company was incorporated in Virginia on January 2, 1991, and was
reincorporated in Delaware in 1994. The principal executive offices of the
Company are located at 1300 Wilson Boulevard, Arlington, VA 22209, and its
telephone number is (703) 526-5000.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
PRICE FLUCTUATIONS OF THE COMMON STOCK AND TRADING VOLUME; SHARES AVAILABLE FOR
FUTURE SALE
A number of factors may adversely influence the price of the Company's
Common Stock in the public markets, many of which are beyond the control of the
Company. These factors include possible increases in market interest rates,
which may lead purchasers of Common Stock to demand a higher annual yield from
distributions by the Company in relation to the price paid for Common Stock, the
relatively low daily trading volume of REITs in general, including the Common
Stock and any inability of the Company to
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invest the proceeds of a future offering of Securities in a manner that will
increase earnings per share. Sales of a substantial number of shares of Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for shares. The Company also may issue shares of Common
Stock (subject to the Ownership Limit, as defined under "Description of Common
Stock--Restrictions on Transfer; Excess Stock") upon redemption of Units issued
in connection with the formation of the Company, its initial public offering
("IPO") and the acquisition by the Company of its assets in April 1994
(collectively, the "Formation Transactions"). In addition, 2,500,000 shares of
Common Stock of the Company have been issued or reserved for issuance pursuant
to the Company's 1994 Executive Equity Incentive Plan, as amended (the "Plan"),
and these shares, upon issuance, will be available for sale in the public
markets from time to time pursuant to exemptions from registration requirements
or upon registration. As of December 31, 1996, options to purchase 1,460,504,
shares of Common Stock and 63,247 shares of restricted stock had been granted or
authorized to be granted to certain directors, officers and employees of the
Company and its subsidiaries and remain outstanding. No prediction can be made
about the effect that future sales of Common Stock will have on the market
prices of shares.
RISKS RELATING TO DEBT
As of December 31, 1996, the Company had consolidated debt of approximately
$730.1 million (excluding its pro rata share of unconsolidated joint venture
debt). The Company is subject to the risks normally associated with debt
financing, including the risk that its cash flow will be insufficient to meet
required payments of principal and interest. If a Property is mortgaged to
secure payment of indebtedness and the Company is unable to meet mortgage
payments, the mortgagee could foreclose upon the Property, appoint a receiver
and receive an assignment of rents and leases or pursue other remedies, all with
a consequent loss of income and asset value to the Company. Foreclosures could
also create taxable income without accompanying cash proceeds, thereby hindering
the Company's ability to meet the real estate investment trust distribution
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
Because the terms of most of the Company's indebtedness do not require any
principal payments prior to maturity, and the Company does not anticipate making
any such payments prior to maturity, it may be necessary to refinance or repay
such indebtedness either through additional secured or unsecured debt financing,
private or public debt issuances, additional equity offerings or sales of
assets. If prevailing interest rates or other factors at the time of refinancing
result in higher interest rates upon refinancing, the interest expense relating
to such refinanced indebtedness would increase, which would adversely affect the
Company's funds from operations and the amount of distributions it can make to
its stockholders. If the Company were unable to secure refinancing of the
mortgage indebtedness encumbering a Property on acceptable terms, the Company
might be forced to dispose of such Property upon disadvantageous terms, which
might result in losses to the Company, thereby adversely affecting funds from
operations and cash available for distribution by the Company to its
stockholders.
The Company is developing and plans to continue to develop new retail
properties, including new Mills. The funds necessary to construct and develop
new properties must be obtained through additional equity or debt securities
offerings, conventional third-party debt financing, participating loan
arrangements or joint venture arrangements. There can be no assurance that the
Company will obtain the financing necessary to fund new development and
expansion projects. In addition, the additional debt service payments required
in respect of any additional debt incurred, and the dilutive effect of any
additional equity securities issued to finance future development, could
adversely affect the Company's ability to make distributions to its
stockholders.
The Company anticipates that any new projects, some of which could be
developed through joint venture arrangements, would be financed through lines of
credit or other forms of secured or unsecured construction financing which
generally carry a floating interest rate. Although the Company likely would
hedge or cap all of such construction financing, no assurance can be given that
the Company would be able
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to obtain permanent debt or equity financing on acceptable terms to refinance
such construction loans upon substantial completion of the project or that the
Company would be able to hedge or cap its debt on economically viable terms. As
a result, the floating interest rate on the construction loans could be
outstanding for a longer period of time than anticipated at the time of
borrowing, resulting in the curtailment of development activities or a decrease
in the amount of cash available for distribution to stockholders. If the Company
had construction loans outstanding and interests rates were to increase, the
Company's debt service for floating rate construction loans would increase (but
not in excess of the applicable cap rate), thereby adversely affecting the
Company's financial condition and results of operations.
The Company's organizational documents do not limit the amount of
indebtedness that the Company may incur. The Company could become more highly
leveraged, resulting in an increased risk of default on the obligations of the
Company and an increase in debt service requirements that could adversely affect
the financial condition and results of operations of the Company.
INFLUENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS
The executive officers of the Company and Kan Am US, Inc. and its affiliates
("Kan Am"), which is substantially owned and controlled by three directors of
the Company (the "Kan Am Directors"), and their respective affiliates directly
and indirectly own a substantial percentage of the total Common Stock and Units
outstanding. The Units not held by the Company are exchangeable for Common Stock
or, at the option of the Company as sole general partner of the Operating
Partnership, the cash equivalent of that number of shares of Common Stock.
Interested directors may not vote on whether to elect to pay cash in exchange
for Units in which they have a direct or indirect interest. Various directors of
the Company, including the Kan Am Directors, have substantial influence on the
Company and, by virtue of their ownership of Common Stock, on the outcome of any
matters submitted to the Company's stockholders for approval. The interests of
such executive officers and Kan Am Directors might not be consistent with the
interests of all other stockholders, and they may use their voting influence
contrary to the stockholders' interest. Although there is no understanding or
arrangement for these stockholders and their affiliates to act together on any
matter, such stockholders would be in a position to exercise significant
influence over the affairs of the Company if they were to act together. In the
event that all or a substantial portion of such Units are exchanged for shares
of Common Stock, such persons will increase their influence over the Company and
on the outcome of any matters submitted to the Company's stockholders for
approval. The influence and voting power of the remaining stockholders would be
correspondingly limited.
The Company, as the sole general partner of the Operating Partnership, may
have certain fiduciary responsibilities to the other partners in the Operating
Partnership which may conflict with the interests of the stockholders of the
Company (including decisions regarding the sale or refinancing of the Properties
and the timing and amount of distributions from the Operating Partnership). In
addition, those individuals and entities (including the executive officers of
the Company, the Kan Am Directors and their respective affiliates) which hold
Units may have certain limited rights in decisions affecting the Operating
Partnership which may conflict with the interests of those individuals and
entities that purchase shares of Common Stock in this offering. In particular, a
holder of Units may suffer different and/or more adverse tax consequences than
the Company upon the sale or refinancing of some of the Properties as a result
of unrealized gain attributable to certain Properties or the tax status of the
Unit holder. These Unit holders and the Company, therefore, may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of the Properties. Although the Company, as the sole general partner
of the Operating Partnership, has the exclusive authority as to whether and on
what terms to sell or refinance an individual Property, these Units holders
might seek to influence the Company not to sell or refinance the Properties,
even though such sale might otherwise be financially advantageous to the
Company, or may seek to influence the Company to refinance a Property with a
higher level of debt than would be in the best interests of the Company.
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The Kan Am Directors and their respective affiliates also may have interests
that may conflict with the interests of the stockholders of the Company in
connection with Kan Am's joint ventures with the Operating Partnership to
develop, own, and operate additional properties.
GENERAL RISKS OF DEVELOPING AND OPERATING RETAIL SHOPPING CENTERS
The Company intends from time to time to develop new Mills or expand
existing Mills, and may engage in the development of regional outlet centers,
new community centers and expansion of existing Community Centers, as such
opportunities arise. Such projects generally require significant expenditures of
capital and are frequently dependent on obtaining various forms of government
and other approvals, the receipt of which cannot be assured. In addition, while
policies with respect to development activities are intended to limit some of
the risks otherwise associated with development, the Company nevertheless would
incur development risks in connection with any such project, including
expenditures of funds for, and devotion of management's time to, projects which
may not be developed on a timely basis or at all. Accordingly, there can be no
assurance if or when any development of new Mills, regional outlet centers or
community centers or expansions of existing Properties would be completed, or if
completed, that the costs of development or expansion would not exceed, by a
material amount, projected costs.
The Company's income and cash available for distribution would be adversely
affected if multiple tenants were unable to meet their obligations. In the event
of default by a tenant, the Company may experience delays in enforcing its
rights as lessor and may incur substantial costs in protecting its investment.
Moreover, at any time, an anchor store tenant may seek the protection of the
bankruptcy laws, which could result in the termination of such tenant's lease
and, if followed by its closing or by its sale to a less desirable retailer,
could adversely affect customer traffic in a center and thereby reduce the
income generated by that center. Furthermore, certain of the Company's tenants,
including anchor tenants, hold the right under their leases to terminate their
leases or reduce their rental rate if certain occupancy conditions are not met,
if certain anchor tenants are closed, if certain sales levels are not achieved,
or if an exclusive use provision is violated.
The Company's income and cash available for distribution also would be
adversely affected if the Company were unable either to rent unleased space in
the Properties or to relet space after the expiration of a tenant's lease on
economically favorable lease terms. The ability of the Company to rent or to
relet space in the Properties is affected by many factors, including covenants
contained in leases with certain tenants in the Properties restricting the use
of other space at the Properties. The Company's tenants generally enter into
leases with an initial term ranging from five to 15 years. No assurance can be
given that any tenant whose lease expires in the future will renew its lease at
that time, or on economically favorable terms, or that the Company will be able
to find a replacement tenant. The failure by the Company to rent unleased space
on a timely basis or at all would likely adversely affect the Company's
financial condition and results of operations. The Company may also incur costs
in making improvements or repairs to property required by a new tenant.
There are other companies that are engaged in the development or ownership
of value retail properties that compete with the Company in seeking tenants.
This results in competition for acquisition of prime locations and for tenants
who will lease space in the value retail properties that the Company and its
competitors own or operate. The development of new super-regional outlet malls
or other value retail shopping centers with more convenient locations or better
rents may attract the Company's tenants or cause them to seek more favorable
lease terms at or prior to renewal, and may accordingly adversely affect the
business, revenues or value of the Properties. In addition, traditional
retailers may increase their competition with value retailers for the limited
pool of consumers by engaging in marketing and selling activities similar to
those of value retailers, thus blurring the distinction between traditional
retailers and value retailers.
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GENERAL RISKS OF EQUITY REAL ESTATE INVESTMENTS
Real property investments are subject to varying degrees of risk. The
economic performance and value of a Property are affected by a number of
factors, including: the national economic climate; the regional economic climate
(which may be adversely impacted by plant closings, industry slowdowns and other
factors); local real estate conditions such as an oversupply of retail space or
a reduction in demand for real estate in the area; the attractiveness of the
Properties to tenants; competition from other available space; the quality of
maintenance, insurance and management services; and increased operating costs.
In addition, other factors may adversely affect a Property's value, including
changes in government regulations and other laws, rules and regulations
governing real estate, zoning or taxes, changes in interest rate levels, the
availability of financing and potential liability under environmental and other
laws.
Equity real estate investments are relatively illiquid and therefore tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. All of the Properties are in the same
line of business. In addition, certain significant expenditures associated with
each equity investment (such as debt service, real estate taxes and operating
and maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If any Property fails, the ability to
convert the Property to an attractive alternative use or to sell the Property to
recoup the Company's investment may be limited. Should any of the foregoing
events occur, the Company's income and funds available for distribution would be
adversely affected.
Under various federal, state and local laws, ordinances and regulations, the
Company may be considered an owner or operator of real property or may have
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may become liable for the costs of removal or remediation of certain
hazardous substances released on or in its Properties or disposed of by it, as
well as certain other potential costs which could relate to hazardous or toxic
substances. Such laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the release of such hazardous
substances. The failure to remediate properly such substances may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. Such costs or liabilities may exceed the value of such
real estate.
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to its Properties with policy
specifications and insured limits that it believes are customary for similar
properties. The Company also carries comprehensive earthquake and pollution
cleanup coverage on all its Properties. With respect to the Mills only, the
Company carries off-premises power coverage and with respect to Sawgrass Mills
only, the Company carries sinkhole coverage. There are certain types of losses
(generally of a catastrophic nature, such as wars or other acts of God) which
may be either uninsurable or not economically insurable. Should an uninsured
loss occur with respect to a Property, the Company could lose both its invested
capital in and anticipated profits from the Property.
RISKS RELATING TO CONTROL OF THE COMPANY
The major policies of the Company, including its policies with respect to
development, acquisitions, financing, growth, operations, debt capitalization
and distributions, are determined by the Company's Board of Directors. The Board
of Directors may revise these and other policies from time to time, subject to
certain limitations, without the approval of stockholders. Accordingly,
stockholders have little control over changes in policies of the Company other
than its policy of maintaining its qualification as a REIT. A change in these
policies could adversely affect the Company's financial condition or results of
operations.
Certain provisions in the Amended and Restated Certificate of Incorporation
of the Company (the "Certificate of Incorporation") and the Amended and Restated
Bylaws of the Company (the "Bylaws") may have the effect of discouraging a third
party from making an acquisition proposal for the Company and may thereby have
the effect of impeding a change in control of the Company under circumstances
that could give the holders of Common Stock the opportunity to realize a premium
over the then prevailing
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market price. The Certificate of Incorporation further authorizes the Board of
Directors to issue up to 20,000,000 shares of Preferred Stock, and to establish
the preferences and rights (including the right to vote and the right to convert
into Common Stock) of any shares of Preferred Stock issued. The power to issue
Preferred Stock could have the effect of delaying or preventing a change in
control of the Company even if a change in control were in the best interests of
the stockholders. The Ownership Limit (as defined under "Description of Common
Stock--Restrictions on Transfer; Excess Stock") also may have the effect of
precluding acquisition of control of the Company by a third party even if a
change in control were in the best interests of the stockholders. In addition,
the Board of Directors of the Company has three classes of directors. Directors
for each class are chosen for a three-year term upon the expiration of the
current class' term. The staggered terms for directors may affect the
stockholders' ability to change control of the Company even if a change in
control were in the stockholders' best interest.
The Company has invested and expects in the future to invest in certain
instances as a co-venturer or partner in the development of new Properties,
instead of developing projects directly. Such investments may involve risks not
present in a wholly-owned development project, including the absence of
exclusive control over the development, financing, leasing, management and other
aspects of the project and the possibility that the Company's co-venturer or
participating lender might become bankrupt, have interests or goals that are
inconsistent with those of the Company, take action contrary to the
instructions, requests or interests of the Company or otherwise impede the
Company's objectives. The Operating Partnership may also have fiduciary
responsibilities to the other investors which may conflict with the interests of
the Company's stockholders.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF STOCK
In order to maintain its qualification as a REIT, not more than 50% in
number or value of the outstanding capital stock of the Company may be owned,
directly or constructively under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. In order to help protect the
Company from the risk of losing its REIT status due to concentration of
ownership among its stockholders, the Company has limited ownership of the
issued and outstanding shares of capital stock by any single stockholder to 5%
of the outstanding Common Stock (determined taking into account certain
ownership attribution rules) (with exceptions for certain persons that became
stockholders or Unit holders in the Formation Transactions). The Board of
Directors may waive the percentage ownership limit if it is satisfied that
ownership in excess of this limit will not jeopardize the Company's status as a
REIT. See "Description of Common Stock-- Restrictions on Transfer; Excess
Stock." A transfer of Common Stock to a person who, as a result of the transfer,
violates the ownership limit will be void. Shares of Common Stock acquired in
breach of the limitation will be automatically exchanged for shares of a
separate class of stock not entitled to vote or to participate in distributions
("Excess Stock"). In addition, ownership, either directly or indirectly under
the applicable attribution rules of the Code, of stock in excess of the
ownership limit generally will result in the conversion of those shares into
Excess Stock. Excess Stock may be redeemed by the Company for the lesser of the
price paid and the average closing price for the ten trading days preceding
redemption. See "Description of Common Stock--Restrictions on Transfer; Excess
Stock" for additional information regarding the ownership limits.
CERTAIN TAX RISKS
The Company believes that it has qualified and will continue to qualify as a
REIT under the Code, commencing with its taxable year ended December 31, 1994.
Qualification as a REIT involves the determination of various factual matters
and circumstances not entirely within the Company's control, as well as the
satisfaction of numerous requirements (some on an annual and quarterly basis)
established under highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations. In this regard, the
Company regularly undertakes a wide range of marketing and
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promotional activities with respect to the Mills, some of which are different
from and more extensive than the marketing and promotional activities addressed
to date by the Internal Revenue Service (the "IRS") in private letter rulings
issued to other REITs, the only available guidance. Hogan & Hartson L.L.P.,
counsel to the Company, has rendered an opinion that, although the matter is not
free from doubt, the Company's performance of such marketing and promotional
activities will not affect its ability to qualify as a REIT. Accordingly, there
can be no assurance that the Company's performance of the marketing and
promotional activities or other activities might not adversely affect the
Company's qualification as a REIT.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions (in which event
certain penalty taxes would be applicable), the Company also would be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification is lost. The additional tax incurred in such
event would significantly reduce the cash flow available for distribution to
stockholders and to meet debt service obligations. In addition, distributions to
stockholders would no longer be required to be made. See "Federal Income Tax
Considerations--Taxation of the Company."
The Company believes that the Operating Partnership, the Management
Partnership, and each of the other partnership and limited liability company
subsidiaries will qualify for treatment as partnerships under the Code. If any
of such subsidiaries fails to qualify for such treatment under the Code, the
Company would cease to qualify as a REIT, and such subsidiary would be subject
to Federal income tax (including any alternative minimum tax) on its income at
corporate rates. See "Federal Income Tax Considerations-- Other Tax
Considerations."
To obtain the favorable tax treatment associated with qualifying as a REIT
under the Code, the Company generally is required each year to distribute to its
stockholders at least 95% of its net taxable income. See "Federal Income Tax
Considerations--Taxation of the Company (Annual Distribution Requirements)." The
Company could be required to borrow funds on a short-term basis to meet the
distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT, even if management believed that then
prevailing market conditions were not generally favorable for such borrowings.
Even if the Company continues to qualify as a REIT, it is and will be
subject to certain Federal, state and local taxes on its income and property
(including possibly in certain circumstances a tax at the rate of 100% on
profits attributable to land sales). See "Federal Income Tax Considerations." In
addition, the Company's net income, if any, from the development activities and
other operations conducted through the Third-Party Services Corporation is
subject to federal income tax. See "Federal Income Tax Considerations--Other Tax
Consequences."
Furthermore, no assurance can be given that new legislation, Treasury
Regulations, existing administrative interpretations (which are not necessarily
binding on the IRS) or court decisions will not significantly change the
Company's qualification as a REIT or the Federal income tax consequences of such
qualification to the Company.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the net
proceeds from the sale of the Securities will be used for the development of
additional properties, as suitable opportunities arise, for the repayment of
certain outstanding indebtedness at such time and for working capital and other
general corporate purposes.
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RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1996, for the year ended December 31, 1995 and for the period from
April 22, 1994 (the Company's IPO) to December 31, 1994 was 1.32x, 1.16x, and
1.20x, respectively. There was no preferred stock outstanding for any of these
periods or for any of the periods specified below. Accordingly, the ratio of
earnings to combined fixed charges and preferred stock dividends is identical to
the ratio of earnings to fixed charges.
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income (loss) before
extraordinary items plus fixed charges. Fixed charges consist of interest
expense (including interest costs capitalized), and the amortization of debt
issuance costs.
Prior to completion of the Company's IPO, certain of the predecessor
entities to the Company (the "Mills Entities") operated in a highly leveraged
manner. As a result, although the Properties have historically generated
positive net cash flow, the combined statements of operations of The Mills
Entities for the period from January 1 to April 21, 1994 and for the fiscal
years ended December 31, 1993, 1992 and 1991 show net losses. Consequently, the
computation of the ratio of earnings to fixed charges for such periods indicates
that earnings were inadequate to cover fixed charges by approximately $4.4
million, $14.3 million, $21.5 million and $42.4 million, respectively. The
reorganization and recapitalization effected in connection with the IPO
permitted the Company to de-leverage the Properties significantly, resulting in
an improved ratio of earnings to fixed charges for the periods subsequent to the
IPO.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock. As
of December 31, 1996, there were no shares of Preferred Stock outstanding.
Under the Company's Certificate of Incorporation, the Board of Directors may
from time to time establish and issue one or more classes or series of Preferred
Stock. The Board may classify or reclassify any unissued Preferred Stock by
setting or changing the number, designation, preference, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms or conditions of redemption of such series (a "Designating
Amendment").
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Certificate of Incorporation and Bylaws.
GENERAL
The Board of Directors is empowered by the Company's Certificate of
Incorporation to designate and issue from time to time one or more classes or
series of Preferred Stock without shareholder approval. The Board of Directors
may determine the relative preferences, rights and other terms of each class or
series of Preferred Stock so issued. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, it may afford the holders of any class or series of Preferred
Stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of Common Stock. The Preferred Stock will, when issued, be fully paid
and nonassessable.
The Prospectus Supplement relating to any Preferred Stock offered thereby
will contain the specific terms thereof, including, without limitation:
(1) The title and stated value of such Preferred Stock;
(2) The number of such shares of Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
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(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock will
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock of the Company, including the
conversion price (or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to
such Preferred Stock;
(12) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(13) Any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(14) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of Common
Stock of the Company, and to all equity securities ranking junior to such
Preferred Stock; (ii) on a parity with all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
on a parity with the Preferred Stock; and (iii) junior to all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock. The term "equity securities" does
not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends (or dividends in kind or in other
property if expressly permitted and described in the applicable Prospectus
Supplement) at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend will be payable to holders
of record as they appear on the stock transfer books of the Company on such
record dates as are fixed by the Board of Directors.
Dividends on any series of Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of the Preferred Stock
for which dividends are non-cumulative, then the holders of such series of the
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to
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pay the dividend accrued for such period, whether or not dividends on such
series are declared payable on any future dividend payment date.
Unless otherwise specified in the Prospectus Supplement, if any shares of
Preferred Stock of any series are outstanding, no full dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment on the Preferred Stock of such series. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred Stock of
such series, all dividends declared upon Preferred Stock of such series and any
other series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock will be declared PRO RATA so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock will in all cases bear to each other the same ratio that accrued
dividends per share on the Preferred Stock of such series (which will not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock do not have a cumulative dividend) and such
other series of Preferred Stock bear to each other. No interest, or sum of money
in lieu of interest, will be payable in respect of any dividend payment or
payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in Common Stock or other capital stock ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) will be declared or paid or set aside for payment or other
distribution upon the Common Stock, or any other capital stock of the Company
ranking junior to or on a parity with the Preferred Stock of such series as to
dividends or upon liquidation, nor will any Common Stock, or any other capital
stock of the Company ranking junior to or on a parity with the Preferred Stock
of such series as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such stock) by the
Company (except by conversion into or exchange for other capital stock of the
Company ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation).
As a general rule, for purposes of determining whether a distribution with
respect to the Company's stock is a taxable dividend, the Company's current and
accumulated earnings and profits first are allocated to the distributions with
respect to Preferred Stock (and among classes and series of Preferred Stock in
accordance with their respective priorities), with any balance being allocated
to distribution with respect to Common Stock. The effect of this rule is to
cause all distributions with respect to Preferred Stock to be fully taxable as
dividends before any portion of a distribution with respect to Common Stock is
taxable as a dividend. See "Federal Income Tax Considerations--Taxation of
Taxable Domestic Stockholders" and "-- Taxation of Non-U.S. Stockholders." If
for any taxable year, the Company elects to designate as "capital gains
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of shares of beneficial
interest (the "Total Dividends"), then the portion of the Capital Gains Amount
that
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will be allocable to the holders of shares of Preferred Stock will be the
Capital Gains Amount multiplied by a fraction, the numerator of which shall be
the total dividends (within the meaning of the Code) paid or made available to
the holders of shares of Preferred Stock for the year and the denominator of
which shall be the Total Dividends.
Excess Stock received in exchange for Preferred Stock would not be entitled
to receive dividends or other distributions paid on the Preferred Stock other
than liquidating distributions. See "Description of Common Stock--Restrictions
on Transfer; Excess Stock."
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, in whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that will be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
will not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock will
automatically and mandatorily be converted into the applicable capital stock of
the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all Preferred Stock of
any series shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the current dividend period and (ii) if such
series of Preferred Stock does not have a cumulative dividend, full dividends of
the Preferred Stock of any series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, no Preferred Stock of any series
shall be redeemed unless all outstanding Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of Preferred Stock of such series to preserve the
REIT status of the Company or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding Preferred Stock of such series. In
addition, unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on all outstanding shares of any series of
Preferred Stock have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for all past
dividends periods and the then current dividend period, and (ii) if such series
of Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, the Company will not purchase or
otherwise acquire directly or indirectly any Preferred Stock of such series
(except by conversion into or exchange for capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing will not prevent the
purchase or acquisition of Preferred Stock of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Preferred Stock of such series.
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If fewer than all of the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed PRO RATA from the holders of record
of such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice will state: (i) the redemption date; (ii) the number of
shares and class or series of Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such Preferred
Stock are to be surrendered for payment of the redemption price; (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date; and (vi) the date upon which the holder's conversion rights, if any, as to
such shares shall terminate. If fewer than all of the Preferred Stock of any
series are to be redeemed, the notice mailed to each such holder thereof will
also specify the number of shares of Preferred Stock to be redeemed from each
such holder. If notice of redemption of any Preferred Stock has been given and
if the funds necessary for such redemption have been set aside by the Company in
trust for the benefit of the holders of any Preferred Stock so called for
redemption, then from and after the redemption date dividends will cease to
accrue on such Preferred Stock, and all rights of the holders of such shares
will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment is made to
the holders of any Common Stock or any other class or series of capital stock of
the Company ranking junior to the Preferred Stock in the distribution of assets
upon any liquidation, dissolution or winding up of the Company, the holders of
each series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for distribution to stockholders liquidating
distributions in the amount of the liquidation preference per share (set forth
in the applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which will not include any accumulation in respect
of unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend). After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidating distributions on all outstanding Preferred Stock and
the corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Preferred Stock in the
distribution of assets, then the holders of the Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company will be distributed among
the holders of any other classes or series of capital stock ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, will not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of Preferred Stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated in
the applicable Prospectus Supplement.
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Whenever dividends on any Preferred Stock shall be in arrears for six or
more consecutive quarterly periods, the holders of such Preferred Stock (voting
separately as a class with all other series of Preferred Stock upon which like
voting rights have been conferred and are exercisable) will be entitled to vote
for the election of two additional directors of the Company at a special meeting
called by the holders of record of at least ten percent (10%) of any series of
Preferred Stock so in arrears (unless such request is received less than 90 days
before the date fixed for the next annual or special meeting of the
shareholders) or at the next annual meeting of shareholders, and at each
subsequent annual meeting until (i) if such series of Preferred Stock has a
cumulative dividend, all dividends accumulated on such shares of Preferred Stock
for the past dividend periods and the then current dividend period shall have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment or (ii) if such series of Preferred Stock do not have a
cumulative dividend, four consecutive quarterly dividends shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. In such case, the entire Board of Directors will be increased by two
directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of each series
of shares of Preferred Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting (such series voting separately as a
class), (i) authorize or create, or increase the authorized or issued amount of,
any class or series of capital stock ranking prior to such series of Preferred
Stock with respect to the payment of dividends or the distribution of assets
upon liquidation, dissolution or winding up or reclassify any authorized capital
stock of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Company's
Certificate of Incorporation or the Designating Amendment for such series of
Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so
as to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; provided,
however, with respect to the occurrence of any of the Events set forth in (ii)
above, so long as the shares of Preferred Stock remain outstanding with the
terms thereof materially unchanged, taking into account that upon the occurrence
of an Event, the Company may not be the surviving entity, the occurrence of any
such Event will not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of Preferred Stock and
provided further that (x) any increase in the amount of the authorized Preferred
Stock or the creation or issuance of any other series of Preferred Stock, or (y)
any increase in the amount of authorized shares of such series or any other
series of Preferred Stock, in each case ranking on a parity with or junior to
the Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, will not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Preferred Stock of such series shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of shares of
Common Stock into which the Preferred Stock are convertible, the conversion
price (or manner of calculation thereof), the conversion period, provisions as
to whether conversion will be at the option of the holders of the Preferred
Stock or the Company, the events requiring an adjustment of the conversion price
and provisions affecting conversion in the event of the redemption of such
series of Preferred Stock.
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RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock--Restrictions on
Transfer; Excess Stock," for the Company to qualify as a REIT under the Code,
not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year. To assist the
Company in meeting this requirement, the Certificate of Incorporation provides
that no holder of Preferred Stock may own, or be deemed to own by virtue of
certain attribution provisions of the Code, more than 5% of the Company's issued
and outstanding capital stock, subject to certain exceptions specified in the
Certificate of Incorporation. See "Description of Common Stock--Restrictions on
Transfer; Excess Stock."
TRANSFER AGENT AND REGISTRAR
The Registrar and Transfer Agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF COMMON STOCK
GENERAL
The Company is authorized to issue 100,000,000 shares of Common Stock. The
outstanding Common Stock entitles the holder to one vote on all matters
presented to shareholders for a vote. Holders of Common Stock have no preemptive
rights. At December 31, 1996, there were 16,907,164 shares of Common Stock
outstanding.
Shares of Common Stock currently outstanding are listed for trading on the
New York Stock Exchange (the "NYSE"). The Company will apply to the NYSE to list
the additional Common Stock to be sold pursuant to any Prospectus Supplement,
and the Company anticipates that such shares will be so listed.
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
stockholders and are entitled to receive ratably such dividends as may be
declared on the Common Stock by the Board of Directors in its discretion from
funds legally available therefor. In the event of the liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of all debts and other liabilities
and any liquidation preference of the holders of Preferred Stock. Holders of
Common Stock have no subscription, redemption, conversion or preemptive rights.
Matters submitted for stockholder approval generally require a majority vote of
the shares present and voting thereon.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that, with respect to an annual meeting of
stockholders, the proposal of business to be considered by stockholders may be
made only (i) by or at the direction of the Board of Directors or (ii) by a
stockholder who is entitled to vote at the meeting and who has complied with the
advance notice procedures set forth in the Bylaws. In addition, with respect to
any meeting of stockholders, nominations of persons for election to the Board of
Directors may be made only (i) by or at the direction of the Board of Directors
or (ii) by any stockholder of the Company who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in the Bylaws. In
general, for notice of stockholder nominations or business to be timely, the
notice must be received by the Company not less than 60 days nor more than 90
days prior to the first anniversary of the previous year's annual meeting.
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent, Registrar and Dividend Disbursing Agent for the Common
Stock is First Chicago Trust Company of New York.
RESTRICTIONS ON TRANSFER; EXCESS STOCK
For the Company to continue to qualify as a REIT under the Code, not more
than 50% in value of its outstanding capital stock may be owned, directly or
constructively, by five or fewer individuals (as defined in the Code) during the
last half of a taxable year, the Common Stock must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of 12 months (or
during a proportionate part of a shorter taxable year) and certain percentages
of the Company's gross income must be from particular activities. See "Federal
Income Tax Considerations--Taxation of the Company--Requirements for
Qualification." Because the Board of Directors believes it is essential for the
Company to continue to qualify as a REIT, the Certificate of Incorporation
contains a provision restricting the acquisition of the Company's capital stock
that is intended to help the Company meet the applicable ownership requirements
(the "Ownership Limit Provision").
The Ownership Limit Provision provides that, subject to certain exceptions
specified in the Certificate of Incorporation, no stockholder (subject to
certain exceptions) may own, or be deemed to own by virtue of the constructive
ownership provisions of the Code, more than 5% (the "Ownership Limit") of the
Company's capital stock. The Ownership Limit Provision provides that certain
persons that became stockholders or Unit holders in the Formation Transactions
may (subject to certain limitations) acquire additional shares pursuant to the
right of any one or more of them to exchange Units in the Operating Partnership
into shares of Common Stock or from other sources, subject to an overriding
limitation that no person may acquire additional shares if, as a result, any
five beneficial owners of the Company's capital stock would own more than 49.9%
of the Company's outstanding capital stock. The constructive ownership rules are
complex and may cause the Company's capital stock owned directly or
constructively by a group of related individuals and/or entities to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 5% of the Company's capital stock (or the acquisition of an
interest in an entity which owns the Company's capital stock) by an individual
or entity could cause that individual or entity (or another individual or
entity) to constructively own in excess of 5% of the Company's capital stock,
and thus subject such capital stock to the Ownership Limit.
The Board of Directors may waive the Ownership Limit with respect to a
particular stockholder if the stockholder obtains either a ruling from the
Internal Revenue Service or an opinion of counsel satisfactory to the Board of
Directors which concludes that the waiver will not cause any person to violate
the Ownership Limit. In addition to preserving the Company's status as a REIT,
the Ownership Limit may prevent any person or group of persons from acquiring
unilateral control of the Company. The Ownership Limit may be changed by the
Board of Directors, subject to certain limitations.
If shares of the Company's capital stock in excess of the Ownership Limit,
or shares which would cause the Company to be beneficially owned by fewer than
100 persons, are acquired by any person, such acquisition would be null and void
as to the intended transferee and the intended transferee would acquire no
rights or economic interest in those shares. The shares of the Company's capital
stock that would be in excess of the Ownership Limit will automatically be
exchanged for shares of Excess Stock that will be transferred, by operation of
law, to the Company as trustee of a trust for the exclusive benefit of the
transferee or transferees to whom the shares are ultimately transferred (without
violating the Ownership Limit). While held in trust, the Excess Stock will not
be entitled to vote, will not be considered for purposes of any stockholder vote
or the determination of a quorum for such vote and will not be entitled to
participate in any distributions made by the Company other than liquidating
distributions. The original transferee-stockholder may, at any time the Excess
Stock is held by the Company in trust, designate a beneficiary of such original
transferee-stockholder's interest in the trust (representing the number of
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shares of Excess Stock attributable to the capital stock originally held by the
transferor-stockholder), provided that (i) the price paid by such designated
beneficiaries does not exceed the price paid by such original
transferee-stockholder, and (ii) the designated beneficiary's ownership of the
capital stock represented by such Excess Stock would be permitted under the
Ownership Limit Provision. Immediately following such designation, the Excess
Stock would automatically be exchanged for capital stock out of the class of
which the Excess Stock resulted. In addition, the Company would have the right,
for a period of 90 days during the time the Excess Stock is held by the Company
in trust, to purchase all or any portion of the Excess Stock from the original
transferee-stockholder at a price equal to the lesser of the price paid for the
stock by the transferee-stockholder and the average closing market price for the
Company's capital stock on the date the Company exercises its option to purchase
the stock or, if the capital stock being redeemed is not then being traded, the
average of the last reported sales of the capital stock to be redeemed on the
ten days immediately preceding the relevant date. This 90-day period commences
on the date of the violative transfer if the transferee-stockholder gives notice
of the transfer to the Company, or the date the Board of Directors determines
that a violative transfer has occurred if no notice is provided.
All certificates representing shares of the Company's capital stock will
bear a legend referring to the restrictions described above.
All persons who own a percentage of the Company's capital stock equal to or
exceeding the Ownership Limit (or such lesser percentage as set forth in the
Treasury Regulations) of the Company's capital stock must file a statement with
the Company containing information regarding their ownership of the Company's
capital stock, as set forth in the Treasury Regulations. In addition, each
stockholder shall upon demand be required to disclose to the Company in writing
such information with respect to the direct, indirect and constructive ownership
of shares as the Board of Directors deems necessary to comply with the
provisions of the Code applicable to a REIT or to comply with the requirements
of any taxing authority or governmental agency.
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Securities offered by any Prospectus Supplement and may be attached to or
separate from such Securities. Each series of Common Stock Warrants will be
issued under a separate warrant agreement (each, a "Warrant Agreement") to be
entered into between the Company and a warrant agent specified in the applicable
Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely
as an agent of the Company in connection with the Common Stock Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of Common Stock Warrants. The following
sets forth certain general terms and provisions of the Common Stock Warrants
offered hereby. Further terms of the Common Stock Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following:
(1) the title of such Common Stock Warrants;
(2) the aggregate number of such Common Stock Warrants;
(3) the price or prices at which such Common Stock Warrants will be
issued;
(4) the designation, number and terms of the shares of Common Stock
purchasable upon exercise of such Common Stock Warrants;
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(5) the designation and terms of the other Securities offered thereby
with which such Common Stock Warrants are issued and the number of such
Common Stock Warrants issued with each such Security offered thereby;
(6) the date, if any, on and after which such Common Stock Warrants and
the related Common Stock will be separately transferable;
(7) the price at which each of the shares of Common Stock purchasable
upon exercise of such Common Stock Warrants may be purchased;
(8) the date on which the right to exercise such Common Stock Warrants
shall commence and the date on which such right shall expire;
(9) the minimum or maximum number of such Common Stock Warrants which
may be exercised at any one time;
(10) information with respect to book entry procedures, if any;
(11) a discussion of certain federal income tax considerations; and
(12) any other terms of such Common Stock Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Common Stock Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a description of certain Federal income tax considerations
to the Company and the holders of Securities of the treatment of the Company as
a REIT under applicable provisions of the Code. The applicable Prospectus
Supplement will contain information about specific Federal income tax
considerations, if any, relating to Securities other than Common Stock. The
following discussion, which is not exhaustive of all possible tax
considerations, does not give a detailed discussion of any state, local or
foreign tax considerations. Nor does it discuss all of the aspects of Federal
income taxation that may be relevant to a prospective stockholder in light of
his or her particular circumstances or to certain types of stockholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
Federal income tax laws. As used in this section, the term "Company" refers
solely to The Mills Corporation and not to the Operating Partnership, the
Third-Party Services Corporation, or other entities.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the IRS (including its practices and
policies in issuing private letter rulings, which are not binding on the IRS
except with respect to a taxpayer that receives such a ruling), and judicial
decisions. No assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, or
changes in administrative practices and policies of the IRS will not materially
affect the accuracy of any statements in this Prospectus.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
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TAXATION OF THE COMPANY
GENERAL. The Company, which is considered a corporation for Federal income
tax purposes, has elected to be taxed as a REIT under Sections 856 through 860
of the Code effective commencing with its taxable year ended December 31, 1994.
The Company believes that it is organized and has operated in such a manner so
as to qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner. No assurance, however, can be given that
the Company has operated in a manner so as to qualify as a REIT or that it will
continue to operate in such a manner in the future. Qualification and taxation
as a REIT depends upon the Company's ability to meet on a continuing basis,
through actual annual operating results, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code on
REITs, some of which are summarized below. While the Company intends to operate
so that it qualifies as a REIT, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in circumstances of the Company, no assurance can
be given that the Company satisfies such tests or will continue to do so.
Hogan & Hartson L.L.P., counsel to the Company, has rendered its opinion
that the Company has qualified to be taxed as a REIT under the Code commencing
with the Company's taxable year ended December 31, 1994, and its organization
and proposed method of operation will enable it to continue to so qualify for
future taxable years. Although such opinion concludes that the Company's
performance of certain marketing and promotional activities will not affect its
ability to qualify as a REIT, such opinion is not free from doubt with respect
to this issue. Further, investors should be aware that opinions of counsel are
not binding upon the IRS or any court. The opinion of Hogan & Hartson L.L.P. is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters, including representations regarding
the nature of the Company's properties and the future conduct of its business.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet on a continuing basis, through actual annual operating results,
distribution levels, and share ownership, the various qualification tests
imposed under the Code discussed below. Hogan & Hartson L.L.P. will not review
the Company's compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failure to qualify as a REIT, see "Failure to Qualify."
The following is a general summary of the Code provisions that govern the
Federal income tax treatment of a REIT and its stockholders. These provisions of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, Treasury Regulations and
administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income taxes on net income that it currently
distributes to stockholders. However, the Company will be subject to Federal
income tax on any income that it does not distribute and will be subject to
Federal income tax in certain circumstances on certain types of income even
though that income is distributed.
If the Company invests in retail properties or other real estate in foreign
countries, the Company's profits from such investments will generally be subject
to tax in the countries where such properties are located. The precise nature
and amount of any such taxation will depend on the laws of the countries where
the properties are located. If the Company satisfies the annual distribution
requirements for qualification as a REIT and is therefore not subject to Federal
corporate income tax on that portion of its ordinary income and capital gain
that is currently distributed to its stockholders, the Company will generally
not be able to recover the cost of any foreign tax imposed on profits from its
foreign investments by claiming foreign tax credits against its U.S. tax
liability on such profits. Moreover, a REIT is not able to pass foreign tax
credits through to its stockholders. The Canadian joint ventures with Cambridge
described under the caption "The Company" likely will subject the Company to
Canadian tax. The Company will
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seek to structure its investment in a manner so as to reduce the amount of
Canadian tax imposed. Any Canadian taxes paid by the Company will be an
operational cost of the Company because the tax cost is not recoverable through
the foreign tax credit mechanism as discussed above.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares of
stock, or by transferable certificates of beneficial interest; (3) that would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(4) that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (5) the beneficial ownership of which is held by
100 or more persons; (6) that during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities); and (7) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(1) through (4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company's Certificate of Incorporation contains restrictions regarding the
transfer of its Common Stock that are intended to assist the Company in
continuing to satisfy the share ownership requirements described in (5) and (6)
above. See "Description of Common Stock--Restrictions on Transfer; Excess
Stock."
Section 856(i) of the Code provides that a corporation which is a "qualified
REIT subsidiary" (defined generally to mean any corporation if 100% of the stock
of such corporation is held by the real estate trust at all times during the
period such corporation was in existence) shall not be treated as a separate
corporation and all assets, liabilities, and items of income, deduction and
credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities,
and items of income, deduction and credit (as the case may be) of the real
estate investment trust. Thus, in applying the requirements herein, the
Company's "qualified REIT subsidiaries" would be ignored, and all assets,
liabilities, and items of income, deduction and credit of such subsidiaries
would be treated as assets, liabilities and items of income, deduction and
credit of the Company. Potomac Mills Finance Corp., The Mills GP, Inc.,
Washington Potomac Partners Corp., and Mills Grapevine Corporation are all
qualified REIT subsidiaries.
If a REIT is a partner in a partnership, the REIT will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the assets and gross income (as defined in the Code) of the
partnership attributed to the REIT will retain the same character as in the
hands of the partnership for purposes of Section 856 of the Code, including
satisfying the gross income tests and the assets tests described below. Thus,
proportionate share of the assets, liabilities and items of income of the
Operating Partnership the Company's and its subsidiary partnerships or limited
liability companies are treated as assets, liabilities and items of income of
the Company for purposes of applying the requirements described herein.
ABSENCE OF C CORPORATION EARNINGS AND PROFITS. A corporation will qualify
as a REIT only if, at the close of its taxable year, it has no earnings and
profits accumulated in any non-REIT tax year. The Company was formed in 1991 but
was not active until 1993. The Company elected S corporation status for its
taxable years commencing with January 1, 1993. The Company terminated its S
election immediately prior to its initial public offering in April of 1994. If
the Company's S corporation election was valid for all of its taxable years
commencing with January 1, 1993, including its short S corporation year ending
immediately prior to its initial public offering, the Company would have no
earnings and profits accumulated in any non-REIT year and thus would have met
the earnings and profits requirement for its short C corporation taxable year
ended December 31, 1994 and for tax years thereafter. The Company believes that
it qualified as an S corporation for its taxable years commencing with January
1, 1993, and including the short S corporation year, and that it does not have,
and has not had, accumulated earnings and profits from a non-REIT tax year.
Nevertheless, the S corporation requirements are highly technical and complex
and there can be no assurance that the IRS might not assert that the Company
failed to qualify as an S
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corporation for some reason. In such an event, the Company would not be eligible
to qualify as a REIT until the tax year when it paid out the accumulated
earnings and profits from the non-REIT tax years.
INCOME TESTS. In order to maintain qualification as a REIT, there are three
gross income requirements that must be satisfied annually. First, at least 75%
of the REIT's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the REIT's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from the same items which qualify under the 75% income test, and from
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the REIT's gross income
(including gross income from prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions (related to the identity of the tenant, the computation of
the rent payable, and the nature of the property leased) are met. The Company
does not anticipate receiving rents that fail to meet these conditions in an
amount that reasonably could be expected to jeopardize its satisfaction of the
75% and 95% gross income tests. In addition, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental space for occupancy only and are not otherwise
considered "rendered to the occupant."
The Company, through the Operating Partnership, the Management Partnership
and Mainstreet Retail Limited Partnership, a subsidiary of the Management
Partnership, which are not "independent contractors," currently performs
management and leasing activities with respect to Properties that are owned
entirely or partially by the Operating Partnership. The Third-Party Services
Corporation provides development services for existing properties and new
properties acquired by the Company and may in the future provide management and
leasing services with respect to certain properties (including Ontario Mills) in
which the Company does not own a 100% interest.
In connection with the performance of such management and leasing
activities, the Company regularly undertakes a wide range of marketing and
promotional activities that are intended to promote and benefit an entire mall
operation through increasing consumer spending and thereby increasing the rents
that the Company derives from its tenants. The IRS, in a number of private
letter rulings issued to other REITs, has approved specific advertising and
promotional activities undertaken by a REIT that owns a retail shopping center
where such marketing activities are intended primarily to increase overall
spending at the centers (and therefore the REIT's revenues from tenants), rather
than to benefit a specific tenant. Some of the advertising and promotional
activities undertaken by the Company are identical to those approved by the IRS
in these private letter rulings, but in view of the relatively unique nature of
the Mills, some of the Company's advertising and promotional activities are
different from and more extensive than those addressed specifically by the IRS
to date in private letter rulings.
The Company has represented that all of its advertising and promotional
activities, whether focused on only the mall itself or on specific stores at the
mall, have as their primary purpose encouraging increased spending throughout
the mall and thereby increasing the Company's overall revenues through increased
rents (which are typically based upon a percentage of sales), which is the basic
premise upon which the IRS has concluded that a REIT owning retail properties
can engage in advertising and
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promotional activities generally. Accordingly, the Company believes that all of
its management, leasing and development activities, including its marketing and
promotional activities, to the extent that they might be considered a service to
tenants, should be considered "usually or customarily rendered" in connection
with the rental of space for occupancy. Based, in part, on the Company's various
representations, Hogan & Hartson L.L.P., counsel to the Company, is of the
opinion, that, although the matter is not free from doubt, the performance of
such activities by the Company will not affect the qualification of the rents
received from tenants as "rents from real property" (and thus the Company's
ability to qualify as a REIT). In addition, opinions of counsel are not binding
upon the IRS or a court. Accordingly, no assurance can be given that the IRS
will not challenge the Company's position with respect to certain activities
performed by the Company, or that such a challenge would not be successful. A
successful challenge by the IRS could result in the Company failing to satisfy
the gross income requriements for the years during which it engaged in such
activities, and therefore failing to qualify as a REIT for such years. See
"--Failure to Qualify." However, under certain circumstances, the Company may
not fail to qualify as a REIT but rather would be subject to a tax imposed with
respect to its "excess net income," as described below.
The Company does not believe, after consultation with its professional
advisors, that there will be a material adverse effect on its business
operations or its ability to qualify as a REIT as a result of its performance of
its marketing and promotional activities. Nevertheless, in order to remove any
possible ambiguity with respect to such activities, the Company will soon begin
requiring certain marketing and promotional activities to be performed by
independent contractors which are adequately compensated and from which the
Company receives no income. If the Company contemplates providing services to
tenants that may reasonably be expected not to meet the "usual or customary"
standard, it will arrange to have such services performed by such an independent
contractor. See "Failure to Qualify."
With respect to fees received by the Operating Partnership or other
partnership entities from Properties in which the Operating Partnership owns
less than a 100% interest, the IRS takes the position that a portion of such
fees (corresponding to that portion of a Property owned by a third-party) does
not qualify for the 75% or 95% gross income tests. Mainstreet Retail Limited
Partnership also manages vendor space in the common areas of third-party
properties and partially-owned properties the income from which may not qualify
for the 75% and 95% gross income tests.
Services to properties in which the Operating Partnership does not own any
interest are rendered by the Third-Party Services Corporation. In addition, the
Third-Party Services Corporation provides development services to the
Properties, as discussed above. The Operating Partnership owns 99% of the non-
voting preferred stock and 5% of the voting common stock of the Third-Party
Services Corporation. The Operating Partnership also holds a note issued by the
Third-Party Services Corporation. The Company's share of any dividend or
interest received from the Third-Party Services Corporation should qualify for
purposes of the 95% test, but not for purposes of the 75% test. The Company does
not anticipate that it will receive sufficient dividends and interest from the
Third-Party Services Corporation to cause it to exceed the limit on
non-qualifying income under the 75% test.
In addition to rents, the Operating Partnership derives income from interest
on the mortgage loans extended by the Operating Partnership to the Property
Partnership holding Franklin Mills which will qualify for purposes of the 75%
and 95% gross income tests. To qualify for the 95% gross income test, interest
cannot depend in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be disqualified solely
by reason of being based on fixed percentage or percentages of receipts or
sales. The Operating Partnership does not charge interest dependent in whole or
in part on profits.
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If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if (i) it attaches a schedule of the source and nature of each item of
its gross income to its federal income tax return for such year, (ii) the
inclusion of any incorrect information in its return was not due to fraud with
intent to evade tax, and (iii) the Company's failure to meet such tests is due
to reasonable cause and not due to willful neglect. It is not possible, however,
to state whether in all circumstances the Company would be entitled to the
benefit of these relief provisions. Even if these relief provisions were to
apply, however, a tax would be imposed with respect to the "excess net income"
attributable to the failure to satisfy the 75% and 95% gross income tests. See
"Failure to Qualify" for a discussion of such tax.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets: (i) at least
75% of the value of the Company's total assets must be represented by "real
estate assets," cash, cash items and government securities; (ii) not more than
25% of the Company's total assets may be represented by securities other than
those in the 75% asset class; and (iii) of the investments included in the 25%
asset class, the value of any one issuer's securities (other than an interest in
a partnership, shares of a "qualified REIT subsidiary" or another REIT) owned by
the Company may not exceed 5% of the value of the Company's total assets, and
the Company may not own more than 10% of any one issuer's outstanding voting
securities (other than an interest in a partnership, shares of a "qualified REIT
subsidiary" or another REIT). The Operating Partnership owns 99% of the
nonvoting preferred stock and 5% of the voting common stock of the Third-Party
Services Corporation. In addition, the Operating Partnership owns a note issued
by the Third-Party Services Corporation, and by virtue of its ownership of
Units, the Company is considered to own its PRO RATA share of the stock of the
Third-Party Services Corporation owned by the Operating Partnership and the note
of the Third-Party Services Corporation. Neither the Company nor the Operating
Partnership, however, owns more than 10% of the voting securities of the
Third-Party Services Corporation. In addition, the Company and its senior
management believe that the Company's PRO RATA share of the value of the
securities of the Third-Party Services Corporation (taking into account both the
Company's pro rata share of the stock of the Third-Party Services Corporation
and the Company's PRO RATA share of the note of the Third-Party Services
Corporation) does not exceed 5% of the total value of the Company's assets.
There can be no assurance, however, that the IRS might not contend either that
the value of the securities of the Third-Party Services Corporation held by the
Company (through the Operating Partnership) exceeds the 5% value limitation or
that the nonvoting stock of the Third-Party Services Corporation owned by the
Operating Partnership should be considered "voting stock" for this purpose.
The 5% value requirement must be satisfied each time the Company increases
its ownership of securities of the Third-Party Services Corporation (including
as a result of increasing its interest in the Operating Partnership as limited
partners exercise their redemption rights). Although the Company plans to take
steps to ensure that it satisfies the 5% value test for any quarter with respect
to which retesting is to occur, there can be no assurance that such steps will
always be successful or will not require a reduction in the Company's overall
interest in the Third-Party Services Corporation.
ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, the Company
generally must distribute to its stockholders at least 95% of its income each
year. In addition, the Company will be subject to tax on the undistributed
amount and also may be subject to a 4% excise tax on undistributed income in
certain events.
The Company believes that it has made, and expects to continue to make,
timely distributions sufficient to satisfy the annual distribution requirements.
It is possible, however, that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the distribution requirements. In
that event, the Company may cause the Operating Partnership to arrange for
short-term, or possibly long-term, borrowing to permit the payments of required
dividends.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative
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minimum tax) on its taxable income at regular corporate rates. Unless entitled
to relief under specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief. If the
Company were to fail to satisfy the 75% or 95% gross income test but were to
qualify for such statutory relief, it would be subject to a 100% tax on an
amount equal to (a) the amount of gross income by which it failed to satisfy the
applicable gross income test multiplied by (b) a fraction intended to reflect
the Company's profitability.
PENALTY TAX ON PROHIBITED TRANSACTIONS
The Company's share of any gain realized on the sale of any property held as
inventory or otherwise primarily for sale to customers in the ordinary course of
its trade or business generally will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income will also have an adverse effect upon the Company's ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership, through the Property Partnerships, intends to hold the
Properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning and operating the Properties and
other retail properties and to make such occasional sales of the Properties as
are consistent with the Company's investment objectives. Based upon such
investment objectives, the Company believes that in general the Properties
should not be considered inventory or other property held primarily for sale to
customers in the ordinary course of a trade or business and that the amount of
income from prohibited transactions, if any, will not be material. Nevertheless,
the IRS could contend otherwise. In particular, the Company indirectly owns
parcels of land which are located adjacent to particular Properties that are not
necessarily required for use within the regional outlet mall or community
shopping center located at the Property (referred to as "outparcels"). The
Company may sell one or more of these outparcels from time to time. In addition,
in connection with the development of a regional outlet mall at a Property, the
Company may sell parcels of land within the mall ("anchor parcels") to major
anchor tenants who desire to own the land on which their facility is located.
The Company believes that the outparcels and anchor parcels should not be
considered inventory or as held primarily for sale to customers in the ordinary
course of the Company's trade or business, but there is a risk that the IRS
could contend otherwise, in which event, the profit from such sales allocable to
the Company would be subject to a 100% tax. In the event that the Company
determines that the level of such activity with respect to the outparcels and/or
anchor parcels is sufficient to cause such sales to be subject to 100% tax, the
Company intends to hold and sell such parcels through a separate corporation in
which the Operating Partnership would hold a non-voting stock interest. The
Company would structure the stock interest owned by the Operating Partnership in
any such corporation to ensure that the various asset tests described above were
not violated (i.e., the Operating Partnership would not own more than 10% of the
voting securities of such corporation and the value of the stock interest would
not exceed 5% of the value of the Company's total assets). Such corporation
would be subject to a corporate level tax on its taxable income attributable to
land sales, thereby reducing the amount of cash available for distribution by
the Company.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income, and corporate stockholders will not be
eligible for the dividends received deduction as to such amounts. Distributions
that are designated as capital gain dividends will be taxed as long-term capital
gains (to the extent they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the stockholder has
held its stock. However, corporate stockholders may be required to treat up to
20% of
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certain capital gain dividends as ordinary income. Distributions in excess of
current or accumulated earnings and profits will not be taxable to a stockholder
to the extent that they do not exceed the adjusted basis of the stockholder's
Common Stock, but rather will reduce the adjusted basis of such Common Stock. To
the extent that such distributions exceed the adjusted basis of a stockholder's
Common Stock, they will be included in income as long-term capital gain (or
short-term capital gain if the Common Stock have been held for one year or
less), assuming the Common Stock are a capital asset in the hands of the
stockholder.
In general, a domestic stockholder will realize capital gain or loss on the
disposition of Common Stock equal to the difference between (i) the amount of
cash and the fair market value of any property received on such disposition and
(ii) the stockholder's adjusted basis of such Common Stock. Such gain or loss
generally will constitute long-term capital gain or loss if the stockholder has
held such shares for more than one year. Loss upon a sale or exchange of Common
Stock by a stockholder who has held such Common Stock for six months or less
(after applying certain holding period rules) will be treated as a long-term
capital loss to the extent of distributions from the Company required to be
treated by such stockholder as long-term capital gain.
Under certain circumstances, domestic stockholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
TAXATION OF TAX EXEMPT STOCKHOLDERS
The Company does not expect that distributions by the Company to a
stockholder that is a tax-exempt entity will constitute "unrelated business
taxable income" ("UBTI"), provided that the tax-exempt entity has not financed
the acquisition of its Common Stock with "acquisition indebtedness" within the
meaning of the Code and the Common Stock is not otherwise used in an unrelated
trade or business of the tax-exempt entity.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a limited summary of such rules.
Prospective Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of U.S. Federal, state and local income tax laws with
regard to an investment in Common Stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of U.S. real property interests and not designated by the Company as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
the Company. Such distributions, ordinarily, will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a Non-U.S.
Stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's Common Stock, but rather will reduce the adjusted basis of such
Common Stock. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Stockholder's Common Stock, they will give rise to tax liability if
the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the
sale or disposition of his Common Stock as described below (in which case they
also may be subject to a 30% branch profits tax if the stockholder is a foreign
corporation). As a result of a legislative change made by the Small Business Job
Protection Act of 1996, effective for distributions made after August 20, 1996,
the Company is required to withhold 10% of any distribution in excess of the
Company's current and accumulated earnings and profits. Consequently, although
the Company intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that the Company does not do so any portion of a
distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%. However, the Non-U.S.
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Stockholder may seek a refund of such amounts from the IRS if it is subsequently
determined that such distribution was, in fact, in excess of current or
accumulated earnings and profits of the Company, and the amount withheld
exceeded the Non-U.S. Stockholder's United States tax liability, if any, with
respect to the distribution.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") at the
normal capital gain rates applicable to U.S. stockholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Stockholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is or could be designated by the
Company as a capital gain dividend. The amount withheld is creditable against
the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Company believes that it is a
"domestically controlled REIT," and, therefore, that the sale of Common Stock
will not be subject to taxation under FIRPTA. If the gain on the sale of Common
Stock were to be subject to tax under FIRPTA, the Non-U.S. Stockholder would be
subject to the same treatment as U.S. stockholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals), and the purchaser of the
Common Stock would be required to withhold and remit to the IRS 10% of the
purchase price.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF OPERATING PARTNERSHIP, MANAGEMENT PARTNERSHIP AND
OTHER PARTNERSHIP SUBSIDIARIES ON REIT QUALIFICATION. Substantially all of the
Company's investments are through the Operating Partnership and Property
Partnerships (including limited liability companies which own interests in the
Property Partnerships and in which the Operating Partnership owns interests)
which hold title to the Properties. The Operating Partnership also carries out
activities through the Management Partnership and various subsidiary
partnerships and limited liability companies (together with the Property
Partnerships, the "Subsidiary Partnerships"). The Operating Partnership and the
Subsidiary Partnerships may involve special tax considerations. Such
considerations include (i) the allocations of income and expense items of the
Operating Partnership, which could affect the computation of taxable income of
the Company, (ii) the status of the Operating Partnership and the Subsidiary
Partnerships as partnerships (as opposed to associations taxable as
corporations) for income tax purposes, and (iii) the taking of actions by the
Operating Partnership and the Subsidiary Partnerships that could adversely
affect the Company's qualification as a REIT. The Company believes that the
Operating Partnership and the Subsidiary Partnerships each qualify for tax
purposes as a partnership (and not as an association taxable as a corporation).
If, however, either the Operating Partnership and/or the Subsidiary Partnerships
were treated as an association taxable as a corporation, the Company would fail
to qualify as a REIT for a number of reasons.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The Operating Partnership
was formed by way of contributions of appreciated property (including certain of
the Properties). When property is contributed to a partnership in exchange for
an interest in the partnership, the partnership generally takes a carryover
basis in that property for tax purposes equal to the adjusted basis of the
contributing partner in the property, rather than a basis equal to the fair
market value of the property at the time of contribution (this difference is
referred to as a "Book-Tax Difference"). The Partnership Agreement requires
allocations of income, loss, gain and deduction with respect to the contributed
Property be made in a manner consistent with the special rules in section 704(c)
of the Code and the regulations thereunder, which allocations will
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tend to eliminate the Book-Tax Differences with respect to the contributed
Properties over the life of the Operating Partnership. However, because of
certain technical limitations, the special allocation rules of section 704(c) of
the Code may not always entirely eliminate the Book-Tax Difference on an annual
basis or with respect to a specific taxable transaction such as a sale. Thus,
the carryover basis of the contributed Properties in the hands of the Operating
Partnership could cause the Company (i) to be allocated lower amounts of
depreciation and other deductions for tax purposes than would be allocated to
the Company if all Properties were to have a tax basis equal to their fair
market value at the time of their contribution to the Operating Partnership, and
(ii) possibly to be allocated taxable gain in the event of a sale of such
contributed Properties in excess of the economic or book income allocated to the
Company as a result of such sale.
THIRD-PARTY SERVICES CORPORATION. A portion of the amount distributed by
the Company to stockholders comes from the Third-Party Services Corporation,
through dividends on stock held by the Operating Partnership and payments on the
note held by the Operating Partnership. The Third-Party Services Corporation
does not qualify as a REIT and thus pays Federal, state and local income taxes
on its net income at normal corporate rates. As a result of interest and other
deductions, the Third-Party Service Corporation does not pay significant income
tax currently. There can be no assurance, however, that the IRS will not
challenge these deductions. In any event, future increases in the income of the
Third-Party Services Corporation will be subject to income tax. Any Federal,
state or local income taxes that the Third-Party Services Corporation is
required to pay reduces the cash available for distribution by the Company to
its stockholders. In addition, as described above, the value of the securities
of the Third-Party Services Corporation held by the Company cannot exceed 5% of
the value of the Company's assets at a time when a limited partner exercises his
redemption right. See "Taxation of the Company--Asset Tests." This limitation
may restrict the ability of the Third-Party Services Corporation to increase the
size of its respective business unless the value of the assets of the Company is
increasing at a commensurate rate.
STATE AND LOCAL TAXES. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the Federal
income tax consequences discussed above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in the Common Stock of the Company.
PLAN OF DISTRIBUTION
GENERAL
The Company may sell Securities in or through underwriters for public offer
and sale by them, and also may sell Securities offered hereby to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell
Securities upon terms and conditions set forth in the applicable Prospectus
Supplement. In connection with the sale of the Securities, underwriters may be
deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of the Securities for whom they may act as agent. Underwriters may
sell Securities to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions or commissions from the underwriters
and/or commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to
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participating dealers, will be set forth in the applicable Prospectus
Supplement. Underwriters, dealers and agents participating in the distribution
of the Securities may be deemed to be underwriters, and any discounts and
commissions received by them and any profit realized by them on resale of the
Securities may be deemed to be underwriting discounts and commissions under the
Securities Act. Underwriters, dealers and agents may be entitled, under
agreements to be entered into with the Company, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant to
delayed delivery contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate principal amount of Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Securities covered by its
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for the Company and its Subsidiaries
in the ordinary course of business.
LEGAL MATTERS
The legality of the Preferred Stock, the Common Stock and the Common Stock
Warrants offered hereby, and certain federal tax matters, will be passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements and financial statement schedule of
The Mills Corporation and the combined financial statements of The Mills
Entities appearing in The Mills Corporation Annual Report (Form 10-K) for the
year ended December 31, 1995, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements and
financial statement schedule, and combined financial statements have been
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected at the Public Reference Section maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and the
following regional offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Company's Common Stock are listed
on the New York Stock Exchange and such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the fees prescribed by the Commission. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
such site is "http://www.sec.gov."
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996; and
2. The Company's Current Report on Form 8-K dated March 11, 1997.
All documents filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Securities to which this Prospectus relates shall be
deemed to be incorporated by reference in this Prospectus and shall be part
hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously filed document
incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific offering of Securities
or in any other subsequently filed document that is also incorporated or deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement is
qualified in its entirety by the information appearing in the documents
incorporated by reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon their
written or oral request, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents). Written requests
for such copies should be addressed to The Mills Corporation, 1300 Wilson
Boulevard, Arlington, VA 22209, Attention: Thomas E. Frost (telephone number
(703) 526-5000).
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NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN
CONNECTION WITH THE OFFERING. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
PAGE
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The Company.................................... S-3
Recent Developments............................ S-3
Use of Proceeds................................ S-4
Plan of Distribution........................... S-5
Legal Matters.................................. S-6
<CAPTION>
PROSPECTUS
PAGE
-----
<S> <C>
The Company.................................... 2
Risk Factors................................... 2
Use of Proceeds................................ 8
Ratios of Earnings to Fixed Charges............ 9
Description of Preferred Stock................. 9
Description of Common Stock.................... 15
Description of Common Stock Warrants........... 17
Federal Income Tax Considerations.............. 18
Plan of Distribution........................... 27
Legal Matters.................................. 28
Experts........................................ 28
Available Information.......................... 29
Incorporation of Certain Documents by
Reference..................................... 30
</TABLE>
150,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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MARCH 20, 1997
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