<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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.
23,942,684 shares of Common Stock
$.01 par value, as of August 13, 1999
<PAGE> 2
THE MILLS CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998. 1
Consolidated Statements of Income for the
Three Months Ended June 30, 1999 and June 30, 1998. 2
Consolidated Statements of Income for the
Six Months Ended June 30, 1999 and June 30, 1998 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and June 30, 1998. 4
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Certain matters discussed in this form 10-Q and the information incorporated by
reference herein contain "forward-looking statements" for purposes of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
relating to, without limitation, future economic performance, plans and
objectives of management for future operations (including Year 2000 compliance)
and projections of revenue and other financial items, demographic projections
and federal income tax consequences, which can be identified by the use of
forward-looking terminology such as "may," "will," "except," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereon or
comparable terminology. Such forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those described in such forward-looking statements. These risks and
uncertainties include those set forth in the Company's annual report on Form
10-K and other SEC filings.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited) (Note)
----------------- -----------------
<S> <C> <C>
ASSETS
Income producing property:
Land and land improvement $ 167,951 $ 167,607
Building and improvements 711,845 705,638
Furniture, fixtures and equipment 30,090 28,004
Less: accumulated depreciation and amortization (227,126) (214,766)
----------- -----------
Total income producing property 682,760 686,483
Land held for investment and/or sale 10,606 10,606
Real estate development in progress 40,396 28,987
Investment in unconsolidated joint ventures 167,685 145,980
----------- -----------
Total real estate and development assets 901,447 872,056
Cash and cash equivalents 1,347 10,510
Restricted cash 16,683 13,422
Accounts receivable, net 28,294 23,017
Notes receivable 6,270 6,291
Deferred costs, net 45,185 44,000
Other assets 3,737 1,066
----------- -----------
TOTAL ASSETS $ 1,002,963 $ 970,362
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages, notes and loans payable $ 834,055 $ 782,182
Accounts payable and other liabilities 54,702 55,210
----------- -----------
Total liabilities 888,757 837,392
Minority interest 46,368 54,052
STOCKHOLDERS' EQUITY
Common stock $.01 par value, authorized 100,000,000
shares, issued and outstanding 23,179,593 and 23,131,697
shares in 1999 and 1998, respectively 231 231
Additional paid-in capital 439,448 439,448
Accumulated deficit (370,857) (359,404)
Unamortized restricted stock award (984) (1,357)
----------- -----------
Total stockholders' equity 67,838 78,918
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,002,963 $ 970,362
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE> 4
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
REVENUES:
Minimum rent $ 25,948 $ 25,036
Percentage rents 338 233
Recoveries from tenants 13,173 12,109
Other revenues 1,756 1,488
Fee income 2,662 3,365
Interest income 482 679
------------- -------------
44,359 42,910
EXPENSES:
Recoverable from tenants 11,488 10,517
Other operating 1,252 1,238
General and administrative 2,960 2,578
Interest expense 11,647 10,820
Depreciation and amortization 8,776 8,685
------------- -------------
36,123 33,838
Other income/(expense) 519 (43)
Equity in earnings of unconsolidated joint ventures 2,643 891
------------- -------------
Income before extraordinary item and minority interests 11,398 9,920
Extraordinary loss on debt extinguishment - (422)
------------- -------------
Income before minority interests 11,398 9,498
Minority interests (4,628) (3,870)
------------- -------------
Net income $ 6,770 $ 5,628
============= =============
Earnings Per Common Share - Basic:
Income before extraordinary item $ 0.29 $ 0.26
============= =============
Extraordinary loss on extinguishment of debt - (0.01)
============= =============
Net income per common share - basic $ 0.29 $ 0.25
============= =============
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item $ 0.29 $ 0.25
============= =============
Extraordinary loss on extinguishment of debt - (0.01)
============= =============
Net income per common share - assuming dilution $ 0.29 $ 0.24
============= =============
Dividends declared per common share $ 0.5025 $ 0.4875
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 5
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
REVENUES:
Minimum rent $ 51,965 $ 49,573
Percentage rents 534 1,399
Recoveries from tenants 26,505 24,173
Other revenues 3,421 2,978
Fee income 5,990 4,744
Interest income 1,536 1,788
------------- -------------
89,951 84,655
EXPENSES:
Recoverable from tenants 23,210 20,900
Other operating 2,454 2,707
General and administrative 5,884 4,984
Interest expense 22,770 21,914
Depreciation and amortization 17,393 18,297
------------- -------------
71,711 68,802
Other income/(expense) 340 (86)
Equity in earnings of unconsolidated joint ventures 3,660 2,831
------------- -------------
Income before extraordinary item and minority interests 22,240 18,598
Extraordinary loss on debt extinguishment (2,762) (422)
------------- -------------
Income before minority interests 19,478 18,176
Minority interests (7,913) (7,428)
------------- -------------
Net income $ 11,565 $ 10,748
============= =============
Earnings Per Common Share - Basic:
Income before extraordinary item $ 0.57 $ 0.48
============= =============
Extraordinary loss on extinguishment of debt (0.07) (0.01)
============= =============
Net income per common share - basic $ 0.50 $ 0.47
============= =============
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item $ 0.57 $ 0.47
============= =============
Extraordinary loss on extinguishment of debt (0.07) (0.01)
============= =============
Net income per common share - assuming dilution $ 0.50 $ 0.46
============= =============
Dividends declared per common share $ 1.005 $ 0.9750
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 6
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income before minority interests $ 19,478 $ 18,176
Adjustments to reconcile income before minority interests
to net cash provided by operating activities:
Net accretion of note receivable (350) (350)
Depreciation and amortization 17,393 18,297
Provision for losses on accounts receivable 427 109
Equity in earnings of unconsolidated entities (3,660) (2,831)
Amortization of restricted stock awards 372 453
Extraordinary loss on debt extinguishment 2,762 422
Other changes in assets and liabilities:
(Increase)/decrease in accounts receivable (353) 1,066
Decrease in notes receivable 371 399
(Increase)in other assets (3,137) (1,069)
Increase in accounts payable and other liabilities 968 3,038
------------- -------------
Net cash provided by operating activities 34,271 37,710
INVESTING ACTIVITIES:
Investment in real estate and development assets (56,828) (63,533)
Distributions received from unconsolidated entities 12,356 9,743
Deferred costs (4,373) (4,638)
-------------- -------------
Net cash used in investing activities (48,845) (58,428)
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 198,546 135,055
Repayments of mortgages, notes and loans payable (146,673) (101,095)
Refinancing costs (4,593) (179)
Restricted cash (3,261) (130)
Dividends (23,306) (22,067)
Distributions (15,302) (15,270)
Proceeds from exercise of stock options -- 250
------------- -------------
Net cash provided by (used in) financing activities 5,411 (3,436)
------------- -------------
Net decrease in cash and cash equivalents (9,163) (24,154)
Cash and cash equivalents at beginning of period 10,510 25,263
------------- -------------
Cash and cash equivalents at end of period $ 1,347 $ 1,109
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 23,015 $ 21,212
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 7
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Mills Corporation (the "Company") 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 June 30,
1999, a 1% interest as the sole general partner and a 58.4% 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, retail and entertainment-oriented
centers (the "Mills" and "Block" projects) and community shopping centers (the
"Community Centers"). As of June 30, 1999, the Operating Partnership owns or
holds an interest in the following operating properties:
<TABLE>
<CAPTION>
Mills Location (Metropolitan Market Served)
----- -------------------------------------
<S> <C>
Franklin Mills Philadelphia, PA
Gurnee Mills Gurnee, IL (Chicago)
Potomac Mills Woodbridge, VA (Washington, DC)
Sawgrass Mills Sunrise, FL (Ft. Lauderdale)
Ontario Mills Ontario, CA (Los Angeles)
Grapevine Mills Dallas, TX (Dallas/Fort Worth)
Arizona Mills Tempe, AZ (Phoenix)
The Oasis at Sawgrass Sunrise, FL (Ft. Lauderdale)
<CAPTION>
Block
-----
<S> <C>
The Block at Orange Orange, CA (Los Angeles)
<CAPTION>
Community Centers
-----------------
<S> <C>
Butterfield Plaza Downers Grove, IL
Coopers Plaza Voorhees, NJ
Crosswinds Center St. Petersburg, FL
Fashion Place Columbia, SC
Germantown Commons Shopping Center Germantown, MD
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.
5
<PAGE> 8
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 six month
period ended June 30, 1999 are 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 Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The accompanying consolidated financial statements of the Company include
the accounts of the Company and its subsidiaries, including its majority owned
subsidiary, the Operating Partnership. The accounts of the Operating Partnership
include the accounts of all Properties which are wholly owned or controlled by
the Operating Partnership as well as its wholly owned subsidiaries Mills
Management L.L.C. ("Mills Management"), and Management Associates Limited
Partnership ("MALP"). In addition, the Operating Partnership owns 5% of the
voting common stock and 99% of the preferred stock of the MillsServices Corp.
("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 interest in certain Mills and
Block operating properties, as well as certain properties under development, are
held through investment in partnerships that own Ontario Mills, Ontario
Mills Residual, Grapevine Mills, Grapevine Mills Residual, Arizona Mills, The
Oasis at Sawgrass Mills, The Block of Orange, Concord Mills, Katy Mills, Opry
Mills, Arundel Mills, Sugarloaf Mills, Vaughan Mills and Meadowlands Mills.
Such investments are accounted for using the equity method of accounting. All
significant intercompany transactions and balances have been eliminated in
consolidation. Minority interests represent the ownership interests in the
Operating Partnership not held by the Company.
2. RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1999 presentation.
3. EARNINGS PER SHARE
The Company accounts for earnings per share pursuant to SFAS 128. Basic EPS
is calculated by dividing income available to common shareholders by the
weighted number of common shares outstanding during the period. Diluted EPS is
calculated by adjusting net income for the period for the effects on minority
interests resulting from issuance of stock pursuant to restricted stock or
option grants and dividing the resulting adjusted net income by the weighted
average shares outstanding during the period, adjusted for the dilutive effect
of options and stock grants.
6
<PAGE> 9
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
-------------- -------------
<S> <C> <C>
Numerator for basic earnings per share $ 6,762 $ 11,550
============= =============
Numerator for diluted earnings per share $ 6,824 $ 11,621
============= =============
Denominators:
Denominator for basic earnings
per share -- weighted average shares 23,158 23,155
------------- -------------
Outstanding unvested Restricted Stock Awards --
weighted average shares (51) (71)
------------- -------------
Denominator for basic earnings per share --
adjusted weighted average shares 23,107 23,084
------------- -------------
Effect of dilutive securities:
Employee stock options and grants 462 278
------------- -------------
Denominator for diluted earnings per
share-adjusted weighted average shares 23,640 23,433
============= =============
Basic earnings per share $ 0.29 $ 0.50
============= =============
Diluted earnings per share $ 0.29 $ 0.50
============= =============
</TABLE>
Limited partnership units in the Operating Partnership (15,844,084 outstanding
at June 30, 1999 and December 31, 1998) may be exchanged for shares of common
stock of the Company on a one-for-one basis in specified circumstances. This
exchange right has not been considered in the computation of per share data as
it does not have a dilutive effect.
4. MINORITY INTERESTS
Minority interests include the interests of unitholders in the Operating
Partnership. The unitholders' interests are adjusted at each period end to
reflect the ownership percentage at that particular time. The unitholders'
interest were 40.60% and 40.65% at June 30, 1999 and December 31, 1998,
respectively.
7
<PAGE> 10
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. INVESTMENT IN UNCONSOLIDATED ENTITIES
Certain operating properties or properties under development are partially
owned through joint ventures ("Joint Ventures") in which the Company is also a
co-general and co-managing partner. The Company's interest in each Joint Venture
is as follows:
<TABLE>
<CAPTION>
Ownership %
Joint Venture as of June 30, 1999
------------- -------------------
<S> <C>
Ontario Mills 50.0%
Grapevine Mills 37.5%
Arizona Mills 36.8%
The Oasis of Sawgrass 50.0%
The Block at Orange 50.0%
Katy Mills 62.5%
Concord Mills 37.5%
Opry Mills 66.7%
Meadowlands Mills (1) 66.7%
Arundel Mills (1) 75.0%
</TABLE>
(1) The Company's ownership percentage for Meadowlands Mills and Arundel
Mills will be 53.3% and 37.5%, respectively, when all joint venture
partners have executed their respective partnership agreements.
The Company's ownership percentage in each joint venture is defined as the
Company's residual interest before giving consideration for a priority return
paid on partners' unreturned capital. In general, each partner earns a 9%
priority return on unreturned capital with the remaining cash flows split
according to ownership interest.
Since 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 investments 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 $194.6 million of Joint Venture debt,
which includes $101.6 million of our joint venture partners' share of debt,
until certain debt service coverage tests are met. In addition, the Company is
contingently liable for property taxes and assessments levied against Ontario
Mills Limited Partnership by the City of Ontario Special Assessment District.
The remaining aggregate amount of the special tax assessment is approximately
$18.8 million and will be collected over a 25 year period through 2020 to fund
debt service on bonds issued by the City to fund the infrastructure
improvements.
8
<PAGE> 11
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Condensed combined balance sheets at June 30, 1999 and December 31, 1998 and
results of operations for the six months ended June 30, 1999 and 1998 are
presented below for all Joint Ventures.
<TABLE>
<CAPTION>
JUNE 30, 1999
Operating Development Total
<S> <C> <C> <C>
Assets:
Income producing property $ 586,307 $ - $ 586,307
Construction in progress 5,441 355,657 361,098
Deferred costs, net 143,662 - 143,662
Other 83,946 22,048 105,994
-----------------------------------------------------------
$ 819,356 $ 377,705 $ 1,197,061
===========================================================
Liabilities and partners' equity:
Debt $ 602,011 $ 125,996 $ 728,007
Other liabilities 50,479 42,036 92,515
Operating Partnership's accumulated equity 22,076 91,726 113,802
Joint Venture partners' accumulated equity 144,790 117,947 262,737
-----------------------------------------------------------
$ 819,356 $ 377,705 $ 1,197,061
===========================================================
DECEMBER 31, 1998
Operating Development Total
Assets:
Income producing property $ 522,174 $ - $ 522,174
Construction in progress 34,787 264,434 299,221
Deferred costs, net 128,882 - 128,882
Other 79,562 33,573 113,135
-----------------------------------------------------------
$ 765,405 $ 298,007 $ 1,063,412
===========================================================
Liabilities and partners' equity:
Debt $ 546,726 $ 36,570 $ 583,296
Other liabilities 57,476 60,700 118,176
Operating Partnership's accumulated equity 23,761 83,114 106,875
Joint Venture partners' accumulated equity 137,442 117,623 255,065
-----------------------------------------------------------
$ 765,405 $ 298,007 $ 1,063,412
===========================================================
</TABLE>
9
<PAGE> 12
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
Operating Development Total
<S> <C> <C> <C>
Revenues:
Minimum rent $ 39,821 $ - $ 39,821
Percentage rents 114 - 114
Recoveries from tenants 16,258 - 16,258
Other property revenues 3,118 - 3,118
Interest income 2,502 507 3,009
-----------------------------------------------------------
Total revenues 61,813 507 62,320
Expenses:
Recoverable expenses 15,697 - 15,697
Other property expenses 3,906 8 3,914
Interest expense 18,206 - 18,206
Depreciation and amortization 17,203 - 17,203
-----------------------------------------------------------
Total expenses 55,012 8 55,020
Other income/(expense) - 1,579 1,579
-----------------------------------------------------------
Net income $ 6,801 $ 2,078 $ 8,879
===========================================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 2,376 $ 1,284 $ 3,660
===========================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
Operating Development Total
<S> <C> <C> <C>
Revenues:
Minimum rent $ 28,847 $ - $ 28,847
Percentage rents 615 - 615
Recoveries from tenants 12,393 - 12,393
Other property revenue 2,568 - 2,568
Interest income 1,490 44 1,534
-----------------------------------------------------------
Total revenues 45,913 44 45,957
Expenses:
Recoverable expenses 11,555 - 11,555
Other property expenses 2,749 - 2,749
Interest expense 13,080 - 13,080
Depreciation and amortization 12,553 - 12,553
-----------------------------------------------------------
Total expenses 39,937 - 39,937
Other income/(expense) 2,136 - 2,136
Net income $ 8,112 $ 44 $ 8,156
===========================================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 2,831 $ - $ 2,831
===========================================================
</TABLE>
10
<PAGE> 13
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 and 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.
6. REVENUE RECOGNITION
The Company, as lessor, has retained substantially all the risks and
benefits of ownership and accounts for its leases as operating leases. Minimum
rent from income producing property is recognized on a straight-line basis over
the terms of the respective leases. Commencing in the second quarter of 1998,
percentage rents are recognized when tenants' sales have reached breakpoints
stipulated in the respective leases. For periods prior to the second quarter of
1998, such rents were recognized on an accrual basis. The effect of
implementation of this policy was a decrease in percentage rent for the six
months ended June 30, 1999, which the Company expects to recognize as income in
the fourth quarter of 1999.
7. DECLARATION OF DIVIDEND
On May 18, 1999, the Company declared a dividend of $.5025 per share which
was paid on July 27, 1999 to stockholders of record as of July 12, 1999.
11
<PAGE> 14
THE MILLS CORPORATION
(Unaudited)
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Comparison of three months ended June 30, 1999 to three months ended June 30,
1998.
Income before extraordinary item and minority interest for the three months
ended June 30, 1999 increased by approximately $1.5 million, (14.9%) to $11.4
million as compared to the three months ended June 30, 1998. The increase was
the result of an increase in revenues of approximately $1.4 million (3.4%), an
increase in other income/(expense) of approximately $0.6 million (1307.0%) and
an increase in equity in earnings of unconsolidated joint ventures of $1.8
million (196.6%) offset by an increase in expenses of approximately $2.3 million
(6.8%).
Revenues:
Minimum rent for the three months ended June 30, 1999 increased approximately
$0.9 million (3.6%) compared with the three months ended June 30, 1998. The
increase was primarily due to additional rents obtained in connection with the
Company's expansion and remerchandising efforts at Franklin Mills and Gurnee
Mills as well as higher lease rates across the properties.
Recoveries from tenants for the three months ended June 30, 1999 increased $1.1
million (8.8%) compared to the three months ended June 30, 1998. The increase
was primarily due to increases in recoverable operating costs for various
projects.
Other property revenue for the three months ended June 30, 1999 increased $0.3
million (18.0%) compared with the three months ended June 30, 1998. The increase
was primarily due to increases in tenant termination income at various
properties in the portfolio and an increase in income related to the Company's
pushcart program.
Fee income for the three months ended June 30, 1999 decreased $0.7 million
(20.9%) compared with the three months ended June 30, 1998. Fee income for the
three months ended June 30, 1999 is comprised of management fees of
approximately $1.2 million and development, leasing and finance fees of
approximately $1.5 million as compared to $0.8 million and $2.6 million,
respectively, for the same period in 1998. The increase in management fees in
1999 was due to the opening of one Block project in the fourth quarter 1998 (The
Block at Orange) and the opening of The Oasis at Sawgrass in the second quarter
of 1999 from which the Company is earning management fees. The decrease in
development, leasing and finance fees in 1999 was due to fees being earned from
five projects in the second quarter of 1999 (The Block at Orange, Katy Mills,
Concord Mills, Opry Mills and The Oasis at Sawgrass) versus six projects in the
second quarter of 1998 (The Block at Orange, Grapevine Mills, Ontario Mills,
Katy Mills, Concord Mills and The Oasis at Sawgrass).
Expenses:
Recoverable expenses for the three months ended June 30, 1999 increased $1.0
million (9.2%) compared with the three months ended June 30, 1998. The increase
was primarily due to an increase in real estate taxes of $0.4 million at
Sawgrass Mills and $0.1 million at each of the following projects: Potomac
Mills, Gurnee Mills and Mount Prospect. Additionally, Potomac Mills had
increased hard surface repair costs of $0.2 million.
General and administrative expenses for the three months ended June 30, 1999
increased $0.4 million (14.8%) compared with the three months ended June 30,
1998. The increase was primarily due to the increase in costs associated with
the Company's retail operations and expanded operations (i.e. the opening of the
Block at Orange and the Oasis at Sawgrass).
Interest expense for the three months ended June 30, 1999 increased $0.8
million (7.6%) compared with the three months ended June 30, 1998. The increase
was due to the additional debt on the ten community centers that was refinanced
in 1999 and the additional debt related to Sawgrass Mills that was obtained in
June 1999 (see Liquidity and Capital Resources discussion).
12
<PAGE> 15
Equity in earnings of unconsolidated joint ventures for the three months ended
June 30, 1999 increased $1.8 million (196.6%) compared with the three months
ended June 30, 1998. The increase was primarily due to a gain on a joint venture
land sale in the second quarter of 1999 of $1.6 million of which the Company's
share was $0.8 million and income earned at the Block at Orange and the Oasis at
Sawgrass which commenced operations in the fourth quarter of 1998 and second
quarter of 1999, respectively.
Extraordinary losses on debt extinguishments for the three months ended June 30,
1999 increased $0.4 million (100.0%) compared with the three months ended June
30, 1998. The increase was primarily due to the write-offs of prior unamortized
loan costs in the second quarter of 1998 related to the refinancing of Sawgrass
Mills Phase II and the refinancing of the Company's line of credit.
13
<PAGE> 16
THE MILLS CORPORATION
(Unaudited)
Comparison of six months ended June 30, 1999 to six months ended June 30, 1998.
Income before extraordinary item and minority interest for the six months ended
June 30, 1999 increased by approximately $3.6 million (19.6%), to $22.2 million
as compared to the six months ended June 30, 1998. The increase was the result
of an increase in revenues of approximately $5.3 million (6.3%), an increase in
other income/(expense) of approximately $0.4 million (495.3%) and an increase in
earnings of unconsolidated joint ventures of approximately $0.8 million (29.3%)
offset by an increase in expenses of approximately $2.9 million (4.2%).
Revenues:
Minimum rent for the six months ended June 30, 1999 increased approximately $2.4
million (4.8%) compared with the six months ended June 30, 1998. The increase
was primarily due to additional rents obtained in connection with the Company's
expansion and remerchandising efforts at Franklin Mills and Gurnee Mills as well
as higher lease rates across the properties. Also, the addition of two anchor
tenants at the community centers contributed to the increase in minimum rents.
Percentage rents for the six months ended June 30, 1999 decreased approximately
$0.9 million (61.8%) compared with the six months ended June 30, 1998. The
decrease was due to the implementation in the second quarter of 1998 of a policy
of not recognizing percentage rents until the tenant's sales have reached the
break points stipulated in the respective leases. The Company expects to
recognize the percentage rent as income in the fourth quarter 1999.
Recoveries from tenants for the six months ended June 30, 1999 increased $2.3
million (9.6%) compared to the six months ended June 30, 1998. The increase was
primarily due to increases in recoverable operating costs for various projects.
Other property revenue for the six months ended June 30, 1999 increased $0.4
million (14.9%) compared to the six months ended June 30, 1998. The increase was
primarily due to increases in tenant termination income at various properties in
the portfolio and an increase in income related to the Company's pushcart
program.
Fee income for the six months ended June 30, 1999 increased $1.2 million (26.3%)
compared with the six months ended June 30, 1998. Fee income for the six months
ended June 30, 1999 is comprised of management fees of approximately $2.2
million and development, leasing and finance fees of approximately $3.8 million
as compared to $1.6 million and $3.2 million, respectively, for the same period
in 1998. The increase in management fees in 1999 was due to the opening of one
Block project in the fourth quarter 1998 (The Block at Orange) and the opening
of The Oasis at Sawgrass in the second quarter of 1999 from which the Company is
earning management fees. The increase in development, leasing and finance fees
in 1999 was due to fees being earned from five projects in the first quarter of
1999 (The Block at Orange, Katy Mills, Concord Mills, Opry Mills and The Oasis
at Sawgrass) versus three projects in the first quarter of 1998 (The Block at
Orange, Grapevine Mills and Ontario Mills).
Expenses:
Recoverable expenses for the six months ended June 30, 1999 increased $2.3
million (11.1%) compared with the six months ended June 30, 1998. The increase
was primarily due to an increase in real estate taxes of $0.7 million at
Sawgrass Mills and $0.2 million at each of the following projects: Potomac
Mills, Gurnee Mills and Mount Prospect. Additionally, Franklin Mills, Gurnee
Mills, Potomac Mills and Mount Prospect had combined increased snow removal
costs of $0.2 million and Potomac Mills had increased hard surface repair costs
of $0.2 million.
14
<PAGE> 17
Other operating expenses for the six months ended June 30, 1999 decreased $0.3
million (9.3%) compared with the six months ended June 30, 1998. The decrease
was primarily due to a decrease in contribution to promotional programs of $0.2
million at Gurnee Mills.
General and administrative expenses for the six months ended June 30, 1999
increased $0.9 million (18.1%) compared with the six months ended June 30, 1998.
The increase was primarily due to the increase in costs associated with the
Company's retail operations and expanded operations (i.e. the opening of the
Block at Orange and the Oasis at Sawgrass).
Interest expense for the six months ended June 30, 1999 increased $0.9 million
(3.9%) compared with the six months ended June 30, 1998. . The increase was due
to the additional debt burden on the ten community centers that was refinanced
in 1999 and the additional debt related to Sawgrass Mills that was obtained in
June 1999 (see Liquidity and Capital Resources discussion).
Depreciation and amortization expense for the six months ended June 30, 1999
decreased $0.9 million (4.9%) compared with the six months ended June 30, 1998.
The decrease was primarily due to $0.6 million decrease in expense relating to
assets reaching the end of their depreciable or amortizable lives at Gurnee
Mills.
Other income/(expense) for the six months ended June 30, 1999 increased $0.4
million (495.3%) compared with the six months ended June 30, 1998. The increase
was primarily due to a gain on a land sale at Franklin Mills.
Equity in earnings of unconsolidated joint ventures for the six months ended
June 30, 1999 increased $0.8 million (29.3%) compared with the six months ended
June 30, 1998. The increase was due to a gain on joint venture land sale in the
second quarter of 1999 of $1.6 million of which the Company's share was $0.8
million and income earned at the Block at Orange and the Oasis at Sawgrass which
commenced operations in the fourth quarter of 1998 and second quarter of 1999,
respectively, The increase was partially offset by gains on joint venture land
sales in the first quarter of 1998.
Extraordinary losses on debt extinguishments for the six months ended June 30,
1999 increased $2.3 million (554.5%) compared with the six months ended June 30,
1998. The increase was due to a prepayment penalty of $2.4 million that was paid
with the refinancing of the community centers in the first quarter of 1999 plus
the write-off of the related prior unamortized loan costs. The increase was
partially offset by the 1998 write-offs of prior related unamortized loan costs
associated the the Sawgrass Mills Phase II refinancing and the refinancing of
the Company's line of credit.
15
<PAGE> 18
THE MILLS CORPORATION
(Unaudited)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's balance of cash and cash equivalents was $1.3
million, not including its proportionate share of cash held in unconsolidated
entities. In addition to its cash reserves, the Company had $46 million
available under its line of credit. The terms of this facility are as follows:
<TABLE>
<CAPTION>
AMOUNT
MATURITY/ TOTAL OUTSTANDING
--------- FACILITY AT 6/30/99
EXTENSION INTEREST RATE TERMS (000'S) (000'S)
--------- ------------- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Line of Credit............. 4/1/00 LIBOR + 1.50% Interest Only $ 100,000 $ 54,000
4/1/01
</TABLE>
FINANCING ACTIVITIES. During 1999, the Company completed several financing
and refinancing activities, extending the weighted average life of the Company's
indebtedness to 4.9 years at June 30, 1999 (including funded construction and
operating debt of the unconsolidated joint ventures), while maintaining
investment-grade interest rates (6.99% weighted average interest rate for the
Company's indebtedness and funded construction and operating debt of the
unconsolidated joint ventures at June 30, 1999).
On June 11, 1999, the Company entered into a non-recourse mezzanine loan
agreement in the amount of $57 million secured by its equity interest in
Sawgrass Mills. The proceeds were used to pay down the Company's line of credit
by $40 million and fund development activities. The new loan is a non-amortizing
loan with a repayment date of October 1, 2000. The interest rate is payable at a
variable rate with a variable margin, which is LIBOR plus 4.75%.
On March 31, 1999, the Katy Mills joint venture entered into a construction
loan commitment in the amount of $168 million. The loan commitment matures on
June 30, 2002 with a one year extension option. The interest rate is payable at
a variable rate with a variable margin, which is LIBOR plus 2.00% at June 30,
1999. The Company guarantees 100% of the outstanding loan balance until
specified debt service requirements based on historical operating data are
fulfilled.
On March 31, 1999, the Katy Mills joint venture entered into a tax
increment financing bridge loan commitment in the amount of $25 million. The
loan is used to bridge tax increment financing bonds. The loan commitment
matures on June 30, 2001. The interest rate is payable at a variable rate with
a variable margin at either the base rate (which is the greater of the prime
rate or federal funds rate plus 2.75%) or LIBOR plus 2.75%. The Company
guarantees the outstanding bridge loan balance. The loan was repaid in July,
1999.
On February 4, 1999, the Company received a five year, $750 million capital
commitment from Kan Am, a significant unit holder of the Operating Partnership
and joint venture partner, to fund future development projects. Subject to terms
and conditions, Kan Am will continue to fund certain project level capital as
they have on several of the Company's prior projects. Approximately $300 million
is to be funded in specifically identified development projects over the next
two years including Katy Mills, Concord Mills, Arundel Mills and Sugarloaf
Mills. In addition, Kan Am has agreed to work with the Company to identify such
other projects, and to use best efforts to provide funding for such projects, in
the approximate amount of $150 million in each of 2001, 2002 and 2003.
Consistent with prior partnerships, Kan Am will fund 50% to 100% of a specific
project's equity requirement and receive a percentage of ownership interest
equal to half of the percentage of equity that they have funded, subject to
further adjustment in parternships such as Meadowlands Mills Limited Partnership
for certain carried interests.
16
<PAGE> 19
On January 27, 1999, the Company entered into a nonrecourse mortgage loan
of $112.5 million for ten Community Centers. The proceeds were used to repay a
prior mortgage loan of $81.8 million and to fund the Company's development
equity requirements. This new indebtedness is a 30-year amortizing loan with an
anticipated balloon repayment date of February 1, 2009. The loan bears a fixed
interest rate of 7.30%.
Effective October 28, 1996, the Company filed a universal shelf
registration statement on Form S-3 to offer a maximum of $250.0 million of
common stock, preferred stock and common stock warrants. Pursuant to this shelf
registration, the Company sold a total of 5,325,000 shares of common stock in
1997 generating net proceeds of $121.8 million.
At June 30, 1999, the Company had consolidated debt of approximately $834.1
million and gross unconsolidated joint venture debt of approximately $728.0
million. The Company's pro rata share of gross unconsolidated joint venture debt
was $252.9 million (net of tax increment financing) at June 30, 1999. Of this
amount, the Company guaranteed $93.0 million (additionally, the Company has
guaranteed $101.6 million of our joint venture partners' share of debt). The
Company's consolidated debt plus its pro rata share of gross unconsolidated
joint venture debt totalled approximately $1.1 billion. Of this amount,
$780.6 million was fixed rate debt and $306.4 was variable rate debt. Scheduled
principal repayments of the Company's consolidated indebtedness and its pro
rata share of gross unconsolidated joint venture debt through 2003 are $472.6
million with $614.4 million due thereafter. The Company and its partners expect
to refinance or repay these obligations with cash generated from operations,
external borrowings (including refinancing of existing loans) or equity
issuances.
The Company's EBITDA (earnings before interest, taxes, depreciation,
amortization and extraordinary items) to interest expense coverage ratio
(including the Company's proportionate share of EBITDA and interest expense of
unconsolidated joint ventures) was 2.67 and 2.77 at June 30, 1999 and June 30,
1998, respectively.
17
<PAGE> 20
THE MILLS CORPORATION
(Unaudited)
Development, Remerchandising and Expansion. The Company is involved in the
following development, remerchandising and expansion efforts:
The Company's most significant development efforts currently are focused on
the development of seven projects: Katy Mills, Concord Mills, Opry Mills,
Arundel Mills, Sugarloaf Mills, Vaughan Mills, and Meadowland Mills.
Katy Mills and Concord Mills are scheduled to open in the second half of
1999. These projects will be financed principally with external borrowings and
equity contributions from joint venture partners and the Operating Partnership.
The Concord Mills joint venture has obtained a $199.0 million construction loan
commitment and the Katy Mills joint venture has obtained a $168 million
construction loan commitment for their respective projects. The Company
anticipates that the Operating Partnership's equity requirements for Concord
Mills and Katy Mills may total as much as $38.8 million in the aggregate, of
which approximately $42.7 million had been funded as of June 30, 1999,
representing an over-funding of $3.9 million. This over-funding, which resulted
primarily from the admittance of Kan Am into Concord Mills joint venture in the
fourth quarter of 1998, will be refunded in the second half of 1999 as Kan Am
fulfills its equity requirements.
Opry Mills and Arundel Mills are scheduled to open in 2000. The projects
will be financed principally with external borrowings and equity contributions
from joint venture partners and the Operating Partnership. The Company
anticipates that the Operating Partnership's equity requirements for Opry Mills
and Arundel Mills may total as much as $67.5 million of which $20.6 million has
been funded as of June 30, 1999. Opryland Attractions, Inc. contributed an
interest in land to the Opry Mills joint venture and received capital account
credit of $25.0 million. The remaining project costs are expected to be
financed through construction loans. Opry Mills broke ground on October 5, 1998
and Arundel Mills broke ground on July 15, 1999.
Jointly with Kan Am, the Company entered into a several purchase agreements
to acquire an approximate 225-acre site located near Atlanta, Georgia for the
Sugarloaf Mills project. The first assemblage of land, approximately 63 acres,
was acquired on June 30, 1999. The Company anticipates closing on the remainder
of the site during the second half of 1999 and January 2000, with construction
commencing in 2000. Sugarloaf Mills is targeted to open in 2001. Kan Am will
fund all the required equity for this project and the remaining project costs
are expected to be financed through a construction loan. At June 30, 1999, the
Company had funded $12.5 million which was refunded by Kan Am in the third
quarter of 1999.
In February 1998, the Company announced that it had secured a site in
Vaughan, Ontario for the development of Vaughan Mills, the first Mills project
to be developed outside the United States. The project will be developed through
a joint venture with Cambridge Shopping Centres Limited of Toronto. The Company
has begun the land assemblage and is targeting a 2001 opening date.
The Company has acquired a mortgage interest in a 592-acre site located on
the New Jersey Turnpike (I-95) adjacent to the Meadowlands Sports Complex and
approximately five miles from New York City. Commencement of construction is
contingent upon the completion of ongoing Environmental Impact Statement and
the federal/state permitting process. A Special Area Management Plan (SAMP) for
the Meadowlands area was published in the Federal Register on April 22, 1999.
The guidelines proposal in the SAMP would, upon their anticipated adoption in
the third quarter of 1999, permit development of 1.5 million square feet of
gross leasable area (GLA) for Meadowlands Mills. The project would be developed
on an entitled site of 90.5 acres plus roads and retention facilities. Upon
procurement of all necessary entitlements it is anticipated that the project
will be developed by a joint venture formed among the Operating Partnership,
Kan Am, Empire Ltd., and Bennett S. Lazare, an individual affiliated with the
Empire Ltd. The Company has targeted Meadowlands Mills for a 2002 opening.
18
<PAGE> 21
The Company anticipates that the Operating Partnership's total required equity
for Meadowlands Mills and Vaughan Mills may exceed $60 million of which
approximately $36.6 million had been funded as of June 30, 1999. The Company is
currently negotiating arrangements to obtain the balance of such equity
requirements, but these arrangements are subject to certain matters outside the
control of the Company.
In addition to the above, the Company is also conducting due diligence on
several other proposed sites for its Mills and Block projects, including sites
in San Francisco, California; Sacramento, California; North Aurora, Illinois
(Chicago); Atlanta, Georgia; Cleveland, Ohio; Denver, Colorado; Philadelphia,
Pennsylvania; South Weymouth, Massachusetts (Boston) and Tampa, Florida. The
Company is also continuing to evaluate various prospective international sites
with a concentrated focus on Western Europe as well as other domestic sites for
other Mills-type projects and for the Company's new "Block" project format.
The Company is in the process of expanding and/or remerchandising Potomac
Mills, Sawgrass Mills, Franklin Mills, Gurnee Mills and Ontario Mills. The costs
of these expansion and remerchandising programs is estimated at $169.5 million.
At June 30, 1999, approximately $113.8 million had been spent on these projects
and it is anticipated that an additional $7l.2 million will be spent during the
next two years. Of the estimated costs of $169.5 million, $79.6 million will be
financed with external sources and $89.9 million will be funded by the Operating
Partnership. At June 30, 1999, the Operating Partnership had funded $64.2
million of the required equity to finance those programs.
19
<PAGE> 22
THE MILLS CORPORATION
(Unaudited)
Capital Resources. The Company anticipates that its operating expenses,
interest expense on outstanding indebtedness, recurring capital expenditures and
distributions to stockholders in accordance with REIT requirements will be
provided by cash generated from operations, potential ancillary land sales and
borrowings under its Line of Credit.
The Company believes that it will have the capital and access to additional
capital resources sufficient to expand and develop its business in accordance
with its operating, development and financing strategies.
Distributions. The Company has paid and intends to continue to pay regular
quarterly distributions to its stockholders. Distributions are payable at the
discretion of the Board of Directors and depend on a number of factors,
including net cash provided by operating activities, its financial condition,
capital commitments, debt repayment schedules and such other factors as the
Board of Directors deems relevant.
CASH FLOWS
Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30,
1998. Net cash provided by operating activities decreased approximately $3.4
million (9.1%) to $34.3 million for the six months ended June 30, 1999 as
compared to $37.7 million for the six months ended June 30, 1998. Net cash used
in investing activities decreased approximately $9.6 million (16.4%) to $48.8
million for the six months ended June 30, 1999, as compared to $58.4 million for
the six months ended June 30, 1998, primarily as a result of decreased
expenditures for real estate and development assets and advances to certain
joint ventures and an increase in distributions received from unconsolidated
entities. Net cash provided by financing activities increased approximately $8.8
million (257.5%) to $5.4 million for the six months ended June 30, 1999 as
compared to ($3.4) million for the six months ended June 30, 1998. The increase
was primarily due to the refinancing of ten community centers.
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.
20
<PAGE> 23
THE MILLS CORPORATION
(Unaudited)
FFO for the six months ended June 30, 1999 increased to $43.3 million compared
to $39.9 million for the comparable period in 1998. FFO amounts were calculated
in accordance with NAREIT's definition of FFO as follows:
<TABLE>
<CAPTION>
==================================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Funds from operations calculation:
Income before extraordinary item and minority
interest................................... $ 11,398 $ 9,920 $ 22,240 $ 18,598
Adjustments:
Add: Depreciation and amortization of real
estate assets............................ 7,774 7,810 15,488 16,369
Add: Real estate depreciation and
amortization of unconsolidated entities 2,836 2,555 5,584 4,889
--------- --------- --------- ---------
Funds from operations........................ $ 22,008 $ 20,285 $ 43,312 $ 39,856
--------- --------- --------- ---------
=================================================================================================================
</TABLE>
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
recognizing minimum rents on a straight-line basis over the term of related
leases 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 highly inflationary
periods.
IMPLICATIONS OF YEAR 2000
The Year 2000 ("Y2K") presents the problem that many existing computer
programs do not have the ability to properly recognize a year that begins with
"20" instead of the familiar "19". As a result, programs having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. The failure to accurately recognize the year 2000 could result in a
variety of problems from data miscalculations to system failure. The Company has
identified potential risks related to the Y2K problem in five primary areas:
computer hardware, operating systems software, applications software, telephone
and voice mail, and embedded/3rd-party systems.
21
<PAGE> 24
THE MILLS CORPORATION
(Unaudited)
STATE OF READINESS
A. The Project Plan
The Company has developed a Year 2000 Compliance Assessment and Remediation
Project Plan (the "Project Plan") for the purpose of identifying, understanding
and addressing the issues associated with the Y2K problem. The Project Plan
involves three phases: Phase I (which has been implemented) involved
establishing a team of Company personnel and outside consultants who would
provide the technical expertise, temporary human resources and project
management skills necessary to execute the Plan; Phase II (which has been
implemented with respect to corporate systems and which is near completion with
respect to the Company's properties) focuses on inventory (i.e. identifying
hardware, software, and critical embedded/3rd-party systems) and assessment of
Company information technology and telecommunications systems; and Phase III
(which is currently being implemented) involve the repair or replacement of
non-compliant hardware, software and embedded systems, if required.
B. Readiness of Properties
The Company has sought assurances for Year 2000 compliance from its
vendors, contractors, lenders and tenants through questionnaires, and to date,
no material issues have been noted in responses received. The Company has
conducted testing and verification at the majority of its operating properties,
with particular attention paid to life safety and building automation systems.
Such testing has revealed no material Year 2000 concerns, and items that are
not compliant are in the process of being upgraded or repaired. With respect to
properties currently under construction, the Company is seeking assurances for
Year 2000 compliance from its general contractors that building systems will be
compliant, and as the life safety and building automation systems are
CPU-driven, such systems will be tested at start-up to confirm compliance.
C. Corporate, Financial and Accounting Systems
The Company has assessed its exposure with respect to its accounting and
management software. Specifically, a new general ledger system has been
installed which is fully Y2K compliant in the first quarter 1999. The Company
has also developed its own Y2K compliant software package for its tenant ledger
system that was installed in 1998. The Company's payroll service provider has
recently received its ITAA*2000 certification.
COSTS
While testing is still occurring at certain of the properties, the Company
believes that the Y2K issue will not pose significant costs and does not expect
remediation expenditures to exceed $50,000 in the aggregate. In addition, the
Company believes that with the implementation of the new financial and
accountings systems, planned and completed, the Y2K issue will not pose
significant operational issue or costs. Total cost of remediation for these
corporate systems is not expected to exceed $500,000. However, the costs of the
project and the date on which the Company plans to complete the Y2K
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party Y2K readiness and other factors.
RISK ASSESSMENT
Based on the information the Company has received to date, the Company does
not believe that the impact of the Y2K problem will have a material adverse
effect on its financial condition and results of operations. Moreover,
because the Company's major source of income is rental payments under long term
leases, the failure of key information systems is not expected to have a
material adverse effect on the Company's financial condition and results of
operations. Even if the Company experienced problems with its information
systems, the payment of rent under the leases would not be excused.
22
<PAGE> 25
Should any of the Company's lenders, manufacturers, vendors or suppliers
cease to conduct business due to Y2K related problems, the Company is prepared
to contract with alternate providers without experiencing any material adverse
effect on its financial condition and results of operations. With regard to
tenants, the Company is currently contacting tenants in order to assess the risk
of tenants' failure to operate due to the Y2K problem and the possible effect on
the Company's rental income, if any.
CONTINGENCY PLANS
Given the low risk of substantial Y2K issues affecting the Company or its
properties, the need for contingency plans have been minimized. With respect to
the Company's properties, building automated and life safety systems contain
manual override options which may be utilized in the event of a system failure.
Additional security personnel will be on staff on December 31st/January 1st, and
such staff will have backup cellular service and radio communication available.
Key management personnel will also be on-site at each of the properties that
night, and will have obtained an emergency contact name at the public utilities
(electric, water and gas). In the event of a power grid failure, back-up
generators may be used to temporarily power the properties' control rooms and
mall management offices.
23
<PAGE> 26
THE MILLS CORPORATION
(Unaudited)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
The Annual Meeting of the Shareholders of The Mills Corporation was
held on May 18, 1999. The following is a tabulation of the voting
for each proposal presented at the Annual Meeting and a listing of
Directors whose term of office as Directors continued after the
meeting.
Proposal 1: ( to elect directors to a term expiring upon the date of
the Annual Shareholders Meeting in the year 2002):
<TABLE>
<CAPTION>
CONTINUING DIRECTORS TERM
-------------------- EXPIRES
-------
<S> <C>
James C. Braithwaite 2001
James F. Dausch 2001
Joseph B. Gildenhorn 2001
Harry H. Nick 2001
Robert P. Pincus 2001
Charles R. Black, Jr. 2000
Dietrich von Boetticher 2000
John M. Ingram 2000
Peter B. McMillan 2000
<CAPTION>
DIRECTORS STANDING TERM VOTES
FOR ELECTION EXPIRES VOTES FOR WITHHELD
------------------ ------- --------- --------
<S> <C> <C> <C>
Franz von Perfall 2002 20,397,428 160,879
Cristina L. Rose 2002 20,387,592 170,716
Laurence C. Siegel 2002 20,404,346 153,346
</TABLE>
24
<PAGE> 27
Nominees required a favorable vote of a plurality of the shares of
Common Stock present and entitled to vote, in person or by proxy, at the
meeting, accordingly, all members standing for re-election were elected.
Proposal 2: (to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31,
1999):
Votes for: 20,431,529
Votes against: 49,413
Votes withheld: 77,365
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Exhibit Index attached hereto is hereby incorporated by reference to
these items.
Report on Form 8-K was filed by the Company on June 18, 1999 to report
certain operational information concerning the Company and the
properties owned or managed by it as of March 31, 1999. No other reports
on Form 8-K were filed by registrant for the applicable quarter covered
by this report.
25
<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MILLS CORPORATION
August 13, 1999 : /s/ Kenneth R. Parent
- --------------------- --------------------------------------------
(Date) Kenneth R. Parent
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
<PAGE> 29
THE MILLS CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
+3.1 Amended and Restated Certificate of Incorporation of the Company.
+3.2 Amended and Restated Bylaws of the Company
**3.3 Limited Partnership Agreement of the Operating Partnership (filed as
part of Exhibit 10.3)
*4.1 Specimen Common Stock Certificate of Company
*4.2 Agreement dated March 15, 1994, among Richard L. Kramer, the A.J.
1989 Trust, the Irrevocable Intervivos Trust for the Benefit of the
Kramer Children, the N Street Investment Trust, EquityResources
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 Form of Noncompetition Agreement between the Company, the Operating
Partnership and each of Kan Am and Kan Am Partnerships of Kan Am and
the Kan Am Partnerships
*10.5 Form of Noncompetition Agreement with Kan Am Directors
*10.6 Trust and Servicing Agreement, dated as of December 1, 1993, among
Sawgrass Finance L.L.C., as depositor, The First National Bank of
Chicago, as servicer, and State Street Bank and Trust Company, as
Trustee
*10.7 Amended and Restated Mortgage, Security Agreement, Assignment of
Lessee and Rents and Fixture filing, dated as of December 1, 1993,
by Sunrise Mills Limited Partnership, as mortgagor, in favor of
Sawgrass Finance L.L.C., as mortgagee
*10.8 Assignment of Leases and Rents, dated as of December 1, 1993,
between Sunrise Mills Limited Partnership and Sawgrass Finance
L.L.C.
*10.9 Assignment of Note, Mortgage, and Assignment of Rents dated as of
December 21, 1993, by Sawgrass Finance L.L.C. in favor of State
Street Bank & Trust Co.
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
*10.10 Agreement dated March 15, 1994 among Richard L. Kramer, the A.J.
1989 Trust, the Irrevocable Intervivos Associates, Herbert S.
Miller, The Mills Corporation and The Mills Limited Partnership
*10.11 Form of Indemnification Agreement between the Company and each of
its Directors and Executive Officers
***10.12 First Amendment to Trust and Servicing Agreement (Exhibit 10.7)
dated as of June 1, 1995, among Sawgrass Finance L.L.C., as
depositor, The First National Bank of Chicago, as servicer, and
State Street Bank and Trust Company, as trustee.
***10.13 Prepayment Premium Agreement dated as of June 1, 1995, between The
Mills Limited Partnership and State Street Bank and Trust Company,
as trustee.
****10.14 Second Amendment and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Fixture Filing by Potomac Mills-Phase III
(MLP) Limited Partnership and Washington Outlet Mall (MLP)
Limited Partnership, collectively, as Grantor to R. Eric Taylor, a
resident of Fairfax County, Virginia as Deed Trustee for the
benefit of CS First Boston Mortgage Capital Corp., as Beneficiary
dated as of December 17, 1996.
****10.15 Form of Assignment of Leases and Rents and Security Deposits dated
as of December 17, 1996 by Potomac Mills-Phase III (MLP) Limited
Partnership and Washington Outlet Mall (MLP) Limited Partnership to
CS First Boston Mortgage Capital Corp (see Exhibit 10.53).
****10.16 Mortgage Security Agreement, Assignment of Rents and Fixture Filing
by Gurnee Mills (MLP) Limited Partnership to CS First Boston
Mortgage Capital Corp., as Mortgagee dated as of December 17, 1996
****10.17 Form of Assignment of Leases and Rents and Security Deposits dated
as of December 17, 1996 by Gurnee Mills (MLP)Limited Partnership to
CS First Boston Mortgage Capital Corp.
****10.18 Trust and Servicing Agreement dated as of December 17, 1996 among
Potomac Gurnee Finance Corp., as Depositor, AMRESCO Management,
Inc., as Servicer, ABN AMRO Bank NY, as Fiscal Agent and LaSalle
National Bank as Trustee.
</TABLE>
- -----------------------
* Incorporated by reference to the Registrant's Registration Statementon
Form S-11, Registration No. 33-71524, which was declared effective by
Securities and Exchange Commission on April 14, 1994.
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the first quarter ended June 30, 1994.
*** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the second quarter ended June 30, 1995.
**** Incorporated by reference to the Registrant's Quarterly Annual Report
on Form 10-Q for the third quarter ended September 30, 1996
+ Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the second quarter ended June 30, 1997.
<PAGE> 31
++ Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the second quarter ended September 30, 1997.
+++ Incorporated by reference to the Registrant's Annual Report on form
10-K for the year ended December 31, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,347
<SECURITIES> 0
<RECEIVABLES> 34,564
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 909,886
<DEPRECIATION> (227,126)
<TOTAL-ASSETS> 1,002,963
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 231
<OTHER-SE> 114,175
<TOTAL-LIABILITY-AND-EQUITY> 1,002,963
<SALES> 0
<TOTAL-REVENUES> 93,951
<CGS> 0
<TOTAL-COSTS> 71,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,770
<INCOME-PRETAX> 19,478
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (2,762)
<CHANGES> 0
<NET-INCOME> 11,565
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
</TABLE>
