<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 1-12994
-------
THE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1802283
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1300 Wilson Boulevard, Arlington, Virginia 22209
------------------------------------------------
(Address of principal executive offices - zip code)
(703) 526-5000
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
23,058,753 shares of Common Stock
$.01 par value as of May 6, 1998
<PAGE> 2
THE MILLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997. 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and March 31, 1997. 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and March 31, 1997. 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited) (Note)
-------------- -----------------
<S> <C> <C>
ASSETS
Income producing property:
Land and land improvement $ 167,409 $ 167,409
Building and improvements 708,031 703,805
Furniture, fixtures and equipment 26,168 25,253
Less: accumulated depreciation and amortization (213,632) (206,357)
------------ ------------
Total income producing property 687,976 690,110
Land held for investment and/or sale 7,397 7,397
Real estate development in progress 14,071 18,904
Investment in partnerships 120,292 95,299
------------ ------------
Total real estate and development assets 829,736 811,710
Cash and cash equivalents 8,527 25,263
Restricted cash 13,045 15,623
Accounts receivable 20,647 21,078
Notes receivable 6,729 6,733
Deferred costs, net 42,862 43,654
Other assets 4,355 2,560
------------ ------------
TOTAL ASSETS $ 925,901 $ 926,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages, notes and loans payable $ 718,474 $ 703,713
Accounts payable and other liabilities 48,796 54,929
------------ ------------
Total liabilities 767,270 758,642
Minority interest 64,642 68,955
STOCKHOLDERS' EQUITY
Common stock $.01 par value, authorized 100,000,000
shares, issued and outstanding 23,058,753 and
22,311,486 shares in 1998 and 1997, respectively 230 229
Additional paid-in capital 437,936 436,639
Accumulated deficit (342,514) (337,142)
Deferred compensation (1,663) (702)
------------ ------------
Total stockholders' equity 93,989 99,024
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 925,901 $ 926,621
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
REVENUES:
Minimum rent $ 24,537 $ 23,200
Percentage rents 1,166 1,119
Recoveries from tenants 12,064 11,550
Other property revenue 1,490 1,277
Fee income 1,379 2,515
Interest income 1,109 563
------------ ------------
41,745 40,224
EXPENSES:
Recoverable from tenants 10,383 10,399
Other operating 1,469 1,323
General and administrative 2,406 2,246
Interest expense 11,094 12,049
Depreciation and amortization 9,612 8,486
------------ ------------
34,964 34,503
Other income (expense) (43) 243
Equity in earnings of unconsolidated joint ventures 1,940 113
------------ ------------
Income before minority interest 8,678 6,077
Minority interest (3,558) (2,568)
------------ ------------
Net income $ 5,120 $ 3,509
============ ============
Net income per share (basic) $ 0.22 $ 0.18
============ ============
Net income per share (diluted) $ 0.22 $ 0.18
============ ============
Dividends declared per common share $ 0.4875 $ 0.4725
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income before minority interest $ 8,678 $ 6,077
Adjustments to reconcile income before minority interest
to net cash provided by operating activities:
Net accretion of note receivable (175) (175)
Depreciation and amortization 9,612 9,437
Provision for losses on accounts receivable (52) 9
Equity in earnings of unconsolidated joint ventures (1,940) (113)
Net gain on sale of land and equipment - (281)
Restricted stock awards 342 -
Other changes in assets and liabilities:
Decrease (increase) in accounts receivable 385 (961)
Decrease in notes receivable 179 316
Increase in other assets (1,697) (3,735)
(Decrease) increase in accounts payable and other liabilities (967) 1,752
------------- ----------
Net cash provided by operating activities 14,365 12,326
INVESTING ACTIVITIES:
Investment in real estate and development assets (32,264) 3,524
Distributions from unconsolidated joint ventures 3,729 -
Proceeds from sale of land and furniture and equipment - 650
Deferred costs (1,537) (1,236)
------------- ----------
Net cash (used in) provided by investing activities (30,072) 2,938
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 21,500 4,082
Repayments of mortgages, notes and loans payable (6,739) (25,113)
Restricted cash 2,578 699
Dividends (10,826) (7,988)
Distributions (7,542) (7,717)
Proceeds from sale of Common Stock - 121,811
------------- ----------
Net cash (used in) provided by financing activities (1,029) 85,774
------------- ----------
Net (decrease) increase in cash and cash equivalents (16,736) 101,038
Cash and cash equivalents at beginning of period 25,263 6,327
------------- ----------
Cash and cash equivalents at end of period $ 8,527 $ 107,365
============= ==========
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 11,075 $ 12,991
============= ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Mills Corporation (the "Company") is a fully-integrated,
self-managed real estate investment trust ("REIT").
The Company conducts all of its business through The Mills Limited
Partnership ("the Operating Partnership"), in which it owns, as of March 31,
1998, a 1% interest as the sole general partner and a 58.25% interest as a
limited partner. The Company, through the Operating Partnership, is engaged
primarily in the ownership, development, redevelopment, leasing, acquisition,
expansion, and management of super-regional, value and entertainment-oriented
outlet malls (the "Mills") and community shopping centers (the "Community
Centers"). As of March 31, 1998, the Operating Partnership owns or holds an
interest in the following operating properties:
<TABLE>
<S> <C>
Mills Location
----- --------
Franklin Mills Philadelphia, PA
Gurnee Mills Gurnee, IL (Chicago)
Potomac Mills Woodbridge, VA (Washington, DC)
Sawgrass Mills Sunrise, FL (Ft. Lauderdale)
Ontario Mills Ontario, CA (Los Angeles)
Grapevine Mills Dallas, TX (Dallas/Fort Worth)
Arizona Mills Tempe, AZ (Phoenix)
Community Centers Location
----------------- --------
Butterfield Plaza Downers Grove, IL
Coopers Plaza Voorhees, NJ
Crosswinds Center St. Petersburg, FL
Fashion Place Columbia, SC
Germantown Commons Shopping Center Germantown, MD
Gwinnett Marketfair Duluth, GA
Liberty Plaza Philadelphia, PA
Montgomery Village Off-Price Center Gaithersburg, MD
Mount Prospect Plaza Mount Prospect, IL
West Falls Church Outlet Center Falls Church, VA
Western Hills Plaza Cincinnati, OH
</TABLE>
In addition to the operating properties, the Company is involved in
the pre-development or development of a number of new projects, including The
Block at Orange (Orange, California), Katy Mills (Houston, TX), Meadowlands
Mills (Carlstadt, NJ), Concord Mills (Charlotte, NC), Vaughan Mills (Toronto,
Canada), Opry Mills (Nashville, TN) and Sawgrass Mills Phase III Expansion
(Sunrise, FL).
6
<PAGE> 7
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
the Company's management in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. The results of operations for the
three month period ended March 31, 1998, is not necessarily indicative of the
results that may be expected for the full year. These financial statements
should be read in conjunction with the Company's audited financial statements
and footnotes thereto, included in The Mills Corporation Annual Report on Form
10-K for the year ended December 31, 1997.
The accompanying consolidated financial statements of the Company
include the accounts of the Company and its subsidiaries, including its
majority owned subsidiary, the Operating Partnership. The accounts of the
Operating Partnership include the accounts of all Properties which are wholly
owned or controlled by the Operating Partnership as well as its wholly-owned
subsidiaries Mills Management L.L.C. ("Mills Management"), and Management
Associates Limited Partnership ("MALP"). In addition, the Operating
Partnership owns 5% of the voting common stock and 99% of the preferred stock
of the Mills Services Corporation ("MSC"), an entity formed in connection with
the Company's initial public offering to provide development, management,
leasing and finance services to third-party companies and unconsolidated
entities. As a result of the Operating Partnership's ownership of 99% of the
economic interests, MSC is consolidated with the Operating Partnership. The
Company's ownership in certain Mills operating properties, as well as certain
properties under development are through investments in the partnerships.
These investments are accounted for using the equity method of accounting. All
significant intercompany transactions and balances have been eliminated in
consolidation.
2. RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in
the financial statements to conform to the 1998 presentation.
3. PER SHARE DATA
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share (FAS 128), which was adopted by the
Company on December 31, 1997. Under the new requirements, FAS 128 replaced
"primary EPS" with "basic EPS". Basic EPS is calculated by dividing income
available to common shareholders by the weighted number of common shares
outstanding during the period. Entities with complex capital structures are
required to report "diluted EPS". Diluted EPS is calculated by adjusting net
income for the period for the effects of convertible securities and dividing
the resulting adjusted net income by the weighted average shares outstanding
during the period, adjusted for the dilutive effect of options, warrants,
contingent shares and convertible securities.
7
<PAGE> 8
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,1998
-------------
<S> <C>
Numerator for basic earnings per share $ 5,116
==========
Numerator for diluted earnings per share $ 5,157
==========
Denominators:
Denominator for basic earnings
per share - weighted average shares 22,875
Vested Restricted Stock Awards -
weighted average shares 35
----------
Denominator for basic earnings per share
adjusted weighted average shares 22,910
Effect of dilutive securities:
Employee stock options and grants 417
----------
Denominator for diluted earnings per
share-adjusted weighted-average shares 23,327
==========
Basic earnings per share $ 0.22
Diluted earnings per share $ 0.22
</TABLE>
Limited partnership units in the Operating Partnership (15,858,948 and
16,328,884 outstanding at March 31, 1998 and December 31, 1997, respectively)
may be exchanged for shares of common stock of the Company on a one-for-one
basis in certain circumstances. This exchange right has not been considered in
the computation of per share data as it does not have a dilutive effect.
4. INVESTMENT IN PARTNERSHIPS
Certain Mills under development are partially owned through joint
ventures ("Joint Ventures"). The Company is also the managing general partner
of these Joint Ventures. The Company's interest in each Joint Venture is as
follows:
<TABLE>
<CAPTION>
Ownership %
Joint Venture as of March 31, 1998
------------- ---------------------
<S> <C>
Ontario Mills 50.0%
Grapevine Mills 37.5%
Arizona Mills 36.8%
Sawgrass Mills Phase III 50.0%
The Block at Orange 50.0%
Concord Mills 50.0%
Katy Mills 75.0%
Meadowlands Mills 58.2%
</TABLE>
8
<PAGE> 9
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
As major business decisions require the approval of at least one other
general partner, the Company does not control these Joint Ventures pursuant to
Statement of Position 78-9. As a result, its investments are accounted for
under the equity method, where the investments are recorded at cost and
subsequently adjusted for net equity in income (loss) and cash contributions
and distributions. The Company reduces its investment in Joint Ventures to
eliminate intercompany profits on sales of services that are capitalized by the
Joint Ventures.
In connection with the Joint Venture agreements, the Company is
committed to providing certain levels of equity in addition to amounts invested
to date. The Company has guaranteed repayment of $67.6 million of Joint
Venture debt until certain debt service coverage tests are met. Of the $67.6
million, $18.6 is also guaranteed joint and several with other partners. In
addition, the Company is contingently liable for property taxes and assessments
levied against Ontario Mills Limited Partnership by the City of Ontario Special
Assessment District. The aggregate amount of the special tax assessment is
approximately $22.0 million and will be collected over a 25 year period to fund
debt service on bonds issued by the City to fund the infrastructure
improvements.
Combined balance sheets at March 31, 1998 and December 31, 1997 and
results of operations for the three month periods ended March 31, 1998 and 1997
are presented below for all Joint Ventures:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Assets:
Income producing assets $ 456,821 $ 465,316
Construction in progress 160,073 112,495
Other 130,963 122,458
----------- -----------
$ 747,857 $ 700,269
=========== ===========
Liabilities and partners' equity
Debt $ 397,985 $ 358,538
Other liabilities 46,382 71,849
Operating Partnership's accumulated equity 94,348 75,600
Joint Venture partners' accumulated equity 209,142 194,282
----------- -----------
$ 747,857 $ 700,269
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- ------------
<S> <C> <C>
Revenues $ 21,319 $ 6,211
Recoverable and other property expenses (6,857) (2,104)
Interest expense (6,370) (1,636)
Depreciation and amortization (6,165) (1,861)
Other income 3,055 665
Extraordinary loss on debt extinguishment - (961)
----------- -----------
$ 4,982 $ 314
=========== ===========
Operating Partnership's equity in earnings of unconsolidated joint ventures $ 1,940 $ 113
=========== ===========
</TABLE>
9
<PAGE> 10
The primary difference between the carrying value of the Company's
investment in unconsolidated joint ventures and the Operating Partnership's
accumulated equity noted above is due to capitalized interest on the investment
balance, capitalized development and leasing costs which are recovered by the
Operating Partnership through fees earned during construction and loans to the
Joint Ventures included in other liabilities above.
5. DECLARATION OF DIVIDEND
On February 26, 1998, the Company declared a dividend of $.4875 per
share which was paid on April 21, 1998 to stockholders of record as of April 1,
1998.
10
<PAGE> 11
THE MILLS CORPORATION
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of three months ended March 31, 1998 to three months ended March
31, 1997.
Income before minority interest for the three months ended March 31, 1998
increased by approximately $2.6 million, (42.8%) to $8.7 million as compared to
the three months ended March 31, 1997. The increase was the result of an
increase in revenues of approximately $1.5 million (3.8%) and an increase in
equity in earnings unconsolidated joint ventures in the amount of $1.8 million
(1,617%) offset by an increase in expenses of approximately $0.5 million
(1.3%).
Revenues:
Minimum rents for the three months ended March 31, 1998 increased approximately
$1.3 million (5.8%) compared with the three months ended March 31, 1997. The
increase was primarily due to additional rents obtained in connection with the
company's expansion and remerchandising efforts coupled with higher occupancy
levels and lease rates across the properties.
Recoveries from tenants for the three months ended March 31, 1998 increased
$0.5 million (4.5%) compared to the three months ended March 31, 1997. The
increase was primarily due to an increase in recoverable operating costs and an
increase in the recoveries from Franklin Mills due to increasing the
management-imposed ceiling on operating cost pass-throughs paid by the tenants
at the Franklin Mills project coupled with increased occupancy.
Interest income for the three months ended March 31, 1998 increased $0.5
million (97%) compared with the three months ended March 31, 1997. The
increase was due to interest earned associated with a favorable litigation
settlement in 1998.
Fee income for the three months ended March 31, 1998 decreased $1.1 million
(45.2%) compared with the three months ended March 31, 1997. The decrease was
due to fewer projects under development with fully executed fee agreements
during the quarter ended March 31, 1998 relative to the quarter ended March 31
,1997 resulting in a reduction in the amount of development fees earned. During
1997 fees were earned on three projects under development (i.e., Ontario Mills,
Grapevine Mills and The Block at Orange) compared to the period ended March 31,
1998 in which only two projects (i.e., The Block at Orange and Grapevine Mills)
were generating development fee income.
Expenses:
General and administrative expenses for the three months ended March 31, 1998
increased $0.2 million (7.1%) compared with the three months ended March 31,
1997. The increase was due to additional personnel required for increased
domestic and international development activities and additional projects.
Interest expense for the three months ended March 31, 1998 decreased $1.0
million (7.9%) compared with the three months ended March 31, 1997. This
decrease was due to lower effective interest rates resulting from various
refinancings, primarily Franklin Mills and Liberty Plaza which occurred in May
1997 and a lower aggregate average debt balance.
Depreciation and amortization expense for the period March 31, 1998 increased
$1.1 million (13.3%) compared with the three months ended March 31, 1997. The
increase is due to expense relating to assets placed in service during the
second half of 1997 associated with the remerchandising of Franklin Mills,
Potomac Mills and Gurnee Mills.
11
<PAGE> 12
Other income/expense for the three months ended March 31, 1998 decreased $0.3
million (117.7%) compared with the three months ended March 31, 1997. The
decrease was due to lower gain realized on land sales.
Equity in earnings of unconsolidated joint ventures for the three months ended
March 31, 1998 increased $1.8 million (1,616.8%) compared with the three months
ended March 31, 1997. This increase was due to the recognition of earnings in
connection with the operations of three projects (i.e., Ontario Mills,
Grapevine Mills and Arizona Mills) during 1998 compared with recognition of
earnings on only one project (i.e., Ontario Mills) during 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's balance of cash and cash
equivalents was $8.5 million, not including its proportionate share of cash
held in unconsolidated entities. In addition to its cash reserves, the Company
had $15.0 million available under its Sawgrass D Tranche Certificate.
<TABLE>
<CAPTION>
AMOUNT
TOTAL OUTSTANDING
NATURE OF FACILITY MATURITY INTEREST RATE TERMS FACILITY AT 3/31/98
- ------------------ -------- ------------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
Line of Credit......................... 10/31/98 LIBOR + 3.00% Interest Only $ 60,000 $ 60,000
Sawgrass D Tranche Certificate......... 1/18/01 LIBOR + 4.30% Interest Only 15,000 -
--------- ---------
$ 75,000 $ 60,000
--------- ---------
</TABLE>
Any amounts available under the Line of Credit are subject to certain
performance measurements and restrictive covenants. The Company was in
compliance with the applicable covenants at March 31, 1998.
On April 1, 1998, the Company refinanced its existing $60.0 million
line of credit with borrowings under a $100.0 million unsecured revolving line
of credit facility with Hypo Bank of New York. The line will be used to fund
working capital requirements, development costs, and equity investments. The
term of the facility is for two years with a one year extension option.
Interest is payable on a varying scale based on the Company's leverage ratio.
On April 1, 1998, the interest rate on this facility was LIBOR plus 1.40
percent on the outstanding balance. A facility fee of 0.20% is charged
annually on the entire $100.0 million facility.
The Company had consolidated debt of approximately $718.5 million at
March 31, 1998, of which $611.8 million was fixed-rate debt and $106.7 million
was variable-rate debt. Scheduled principal repayments of consolidated
indebtedness through 2000 are $111.1 million with $607.4 million due
thereafter. The Company expects to refinance or repay these obligations with
cash generated from operations, external borrowings (including refinancing of
existing loans) or equity issuances. The Company's pro rata share of
unconsolidated joint venture debt at March 31, 1998, was $155.5 million (net of
tax increment financing), of which it had guaranteed $67.6 million ($18.6
million of this $67.6 million is also guaranteed jointly and severally by other
joint venture partners).
The Company's ratio of debt-to-total market capitalization was 41.3%
and 42.1% at March 31, 1998 and March 31, 1997, respectively. If the Company's
pro-rata share of indebtedness of all unconsolidated joint venture properties
were included, the ratio of debt-to-total market capitalization would be 46.2%
and 44.1%, respectively.
12
<PAGE> 13
THE MILLS CORPORATION
(Unaudited)
Development, Remerchandising and Expansion. The Company is involved
in the following development, remerchandising and expansion efforts:
At least six projects are planned to be completed in the next several
years, including The Block at Orange, Katy Mills, Concord Mills, Opry Mills,
Vaughan Mills and Meadowlands Mills. The Block at Orange is scheduled to open
in the fourth quarter of 1998. A joint venture partner of the Company, Kan Am,
has committed to fund all of the equity required for this project ($60.0
million) by the second quarter of 1998. The partnership has also obtained a
$136.0 million loan commitment for this project. Concord Mills and Katy Mills
are scheduled to open in the second half of 1999. These projects will be
financed principally with external borrowings and other equity contributions
from joint venture partners and the Operating Partnership. The Company
anticipates that the Operating Partnership's required future equity requirements
for Concord Mills and Katy Mills may total as much as $60.0 million in the
aggregate of which $44.2 million had been funded as of March 31, 1998.
In February 1998, the Company announced that it had secured a site in
Toronto, Canada to develop Vaughan Mills, the first Mills project to be
developed outside of the United States. This project will be developed through
a joint venture with Cambridge Shopping Centers Ltd. The Company also expects
to commence development of Opry Mills and Meadowlands Mills in the fourth
quarter of 1998 and during 1999, respectively. The Company anticipates that the
Operating Partnership's required future equity requirements for Opry Mills,
Meadowlands Mills and Vaughan Mills may exceed $100.0 million of which
approximately $27.3 million had been funded at March 31, 1998. The Company is
also conducting due diligence on several other proposed sites, including
evaluating sites in San Francisco, California, North Aurora, Illinois
(Chicago), Atlanta, Georgia, South Weymouth, Massachusetts (Boston), Tampa,
Florida and Baltimore, Maryland.
The Company is in the process of expanding Potomac Mills, Sawgrass
Mills and remerchandising Franklin Mills and Gurnee Mills. The costs of these
expansion and remerchandising programs is estimated at $145 million. At March
31, 1998, approximately $52.0 million had been spent on these projects and it
is anticipated that an additional $93 million will be spent during the next two
years. Completion of these projects will be financed with external
borrowings, equity contributions from Kan Am and other potential equity
issuances. At March 31, 1998, the operating partnership had funded $46 million
of the required equity to finance these programs and its remaining equity
funding requirements are estimated at approximately $43 million.
Capital Resources. The Company anticipates that its operating
expenses, interest expense on outstanding indebtedness, recurring capital
expenditures and distributions to stockholders in accordance with REIT
requirements will be provided by cash generated from operations, potential
ancillary land sales and borrowings under its Line of Credit.
The Company believes that it will have the capital and access to
additional capital resources sufficient to expand and develop its business in
accordance with its operating, development and financing strategies.
As a potential source of additional longer-term capital, the Company
is exploring the possible repositioning of its community center portfolio in a
way that will facilitate a sale of these assets over a period of time, as
capital is needed. Such repositioning may include the contribution of these
assets into another real estate company for stock (or other forms of ownership)
with the intent of liquidating the stock over a period of two to four years.
In addition to providing the Company with a new source of development capital,
such a transaction would allow management to focus on its main retail products.
Distributions. The Company has paid and intends to continue to pay
regular quarterly distributions to its stockholders. Distributions are payable
at the discretion of the Board of Directors and depend on a number of factors,
including net cash provided by operating activities, its financial condition,
capital commitments, debt repayment schedules and such other factors as the
Board of Directors deems relevant.
13
<PAGE> 14
THE MILLS CORPORATION
(Unaudited)
CASH FLOWS
Comparison of Three Months Ended March 31, 1998 to Three Months Ended
March 31, 1997. Net cash provided by operating activities increased $2.0
million, or 16.5% to $14.4 million for the three months ended March 31, 1998
as compared to $12.3 million for the three months ended March 31, 1997. Net
cash (used in) provided by investing activities decreased $33.0 million or
1123.6% to ($30.1) million for the three months ended March 31, 1998, as
compared to $2.9 million for the three months ended March 31, 1997, primarily
as a result of increased expenditures for real estate and development assets
and advances to certain joint ventures. Net cash provided by (used in)
financing activities decreased $86.8 million, to ($1.0) million for the three
months ended March 31, 1998, as compared to $85.8 million for the three months
ended March 31, 1997, primarily as a result of the additional capital provided
by the sale of common stock in 1997.
FUNDS FROM OPERATIONS
The Company generally considers Funds From Operations ("FFO") a widely
used and appropriate measure of performance for an equity REIT which provides a
relevant basis for comparison among REITs. FFO as defined by National
Association of Real Estate Investment Trusts (NAREIT) means income (loss)
before minority interest (determined in accordance with Generally Accepted
Accounting Principles (GAAP) ), excluding gains (losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. FFO (i) does not represent cash flows from operations as defined
by GAAP, (ii) is not indicative of cash available to fund all cash flow needs
and liquidity, including its ability to make distributions, and (iii) should
not be considered as an alternative to net income (determined in accordance
with GAAP) for purposes of evaluating the Company's operating performance.
FFO for the quarter ended March 31, 1998 increased to $19.6 million
compared to $14.9 million for the comparable period in 1997. FFO amounts were
calculated in accordance with NAREIT's definition of FFO as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
----------
- ------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Funds From Operations Calculation:
Income before minority interest . . . . . . . . . . . . . . . . $ 8,678 $ 6,077
Adjustments:
Add: Depreciation and amortization of real estate assets . . . 8,559 7,705
Add: Real estate depreciation and amortization of
unconsolidated affiliates . . . . . . . . . . . . . . . . . 2,334 722
Add: Extraordinary loss on debt extinguishment of
unconsolidated affiliates . . . . . . . . . . . . . . . . . -- 397
---------- ---------
Funds From Operations . . . . . . . . . . . . . . . . . . . . . $ 19,571 $ 14,901
========== =========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
THE MILLS CORPORATION
(Unaudited)
SEASONALITY
The regional shopping center industry is seasonal in nature, with mall
tenant sales peaking in the fourth quarter due to the Christmas season. As a
result, a substantial portion of the percentage rents are not paid until the
fourth quarter. Furthermore, most new lease-up occurs towards the latter part
of the year in anticipation of the holiday season and most vacancies occur
toward the beginning of the year. In addition, the majority of the temporary
tenants take occupancy in the fourth quarter. Accordingly, cash flow and
occupancy levels are generally lowest in the first quarter and highest in the
fourth quarter. This seasonality also impacts the quarter-by-quarter results of
net operating income and FFO, although this impact is largely mitigated by
accruing minimum and percentage rents on a straight-line basis during the year
in accordance with GAAP.
ECONOMIC TRENDS
Because inflation has remained relatively low during the last three
years, it has had little impact on the operation of the Company during that
period. Even in periods of higher inflation, however, tenant leases provide, in
part, a mechanism to help protect the Company. As operating costs increase,
leases permit a pass-through of the common area maintenance and other operating
costs, including real estate taxes and insurance, to the tenants. Furthermore,
most of the leases contain base rent steps and percentage rent clauses that
provide additional rent after a certain minimum sales level is achieved. These
provisions provide some protection to the Company during high inflationary
periods.
15
<PAGE> 16
THE MILLS CORPORATION
(Unaudited)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kramer Litigation
On March 3, 1998, the Company received a payment of $2.0 million from
A.J. 1989 Trust (the "A.J. Trust"), in payment of a judgment obtained in an
action originally filed on April 27, 1994, by the A.J. Trust, Mr. Richard
Kramer and a partnership affiliated with Mr. Kramer against the Operating
Partnership, Herbert S. Miller, and certain other parties. Consequently with
the payment, the parties to such litigation dismissed with prejudice the
remaining claims in the suit.
ITEM 2. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4. OTHER INFORMATION
None
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MILLS CORPORATION
May 14, 1998 By: /s/ Kenneth R. Parent
- -------------------- --------------------------------------------
(Date) Kenneth R. Parent
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
17
<PAGE> 18
THE MILLS CORPORATION
EXHIBIT INDEX
(Pursuant to item 601 of Regulation S-K)
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
<S> <C>
1.1 None
2.1 None
***3.1 Amended and Restated Certificate of Incorporation of the Company
***3.2 Amended and Restated Bylaws of the Company
**3.3 Limited Partnership Agreement of the Operating Partnership (filed as part of
Exhibit 10.3)
*4.1 Specimen Common Stock Certificate of Company
*4.2 Agreement dated March 15, 1994, among Richard L. Kramer, the A.J. 1989 Trust,
the Irrevocable Intervivos Trust for the Benefit of the Kramer Children, the N
Street Investment Trust, Equity Resources Associates, Herbert S. Miller, The
Mills Corporation and The Mills Limited Partnership (filed as Exhibit 10.19)
**4.3 Non-Affiliate Registration Rights and Lock-Up Agreement
**4.4 Affiliate Registration Rights and Lock-Up Agreement
*10.1 Form of Employee Non-Compete/Employment Agreements
****10.2 1994 Executive Equity Incentive Plan
**10.3 Limited Partnership Agreement of Operating Partnership
*10.4 Option Agreement (Sunrise Residuals/Parcels 4 and 5)
*10.5 Form of Noncompetition Agreement between the Company, the Operating Partnership
and each of Kan Am and the Kan Am Partnerships
*10.6 Form of Noncompetition Agreement with Kan Am Directors
*10.7 Agreement dated March 15, 1994 among Richard L. Kramer, the A.J. 1989 Trust, the
Irrevocable Intervivos Trust for the Benefit of the Kramer Children, the N
Street Investment Trust, Equity Resources Associates, Herbert S. Miller, The
Mills Corporation and The Mills Limited Partnership
*10.8 Form of Indemnification Agreement between the Company and each of its Directors
and Executive Officers
*****21.1 List of Subsidiaries of the Registrant
* Incorporated by reference to the Registrant's Registration Statement on
Form S-11, Registration No. 33-71524, which was declared effective by
Securities and Exchange Commission on April 14, 1994 (Commission File
No. 1-12994).
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the first quarter ended March 31, 1994 (Commission File No.
1-12994).
*** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the second quarter ended June 30, 1997.
**** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the third quarter ended September 30, 1997.
***** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,572
<SECURITIES> 0
<RECEIVABLES> 27,376
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 901,608
<DEPRECIATION> 213,632
<TOTAL-ASSETS> 925,901
<CURRENT-LIABILITIES> 0
<BONDS> 718,474
0
0
<COMMON> 230
<OTHER-SE> 93,759
<TOTAL-LIABILITY-AND-EQUITY> 925,901
<SALES> 0
<TOTAL-REVENUES> 41,745
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,094
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,120
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
