<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 September 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 November 11, 1999
<PAGE> 2
THE MILLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
<S> <C>
Consolidated Balance Sheets as of September 30, 1999 1
and December 31, 1998.
Consolidated Statements of Income for the 2
Nine Months Ended September 30, 1999 and September 30, 1998.
Consolidated Statements of Income for the 3
Nine Months Ended September 30, 1999 and September 30, 1998.
Consolidated Statements of Cash Flows for the 4
Nine Months Ended September 30, 1999 and September 30, 1998.
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK N/A
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
</TABLE>
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),
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>
September 30, 1999 December 31,1998
(Unaudited) (Note)
------------------ -----------------
ASSETS
<S> <C> <C>
Income producing property:
Land and land improvement $ 167,951 $ 167,607
Building and improvements 716,109 705,638
Furniture, fixtures and equipment 31,137 28,004
Less: accumulated depreciation and amortization (233,022) (214,766)
----------- -----------
Total income producing property 682,175 686,483
Land held for investment and/or sale 10,606 10,606
Real estate development in progress 33,290 28,987
Investment in unconsolidated joint ventures 203,499 145,980
----------- -----------
Total real estate and development assets 929,570 872,056
Cash and cash equivalents 8,566 10,510
Restricted cash 18,732 13,422
Accounts receivable, net 23,907 23,017
Notes receivable 6,114 6,291
Deferred costs, net 42,420 44,000
Other assets 3,142 1,066
----------- -----------
TOTAL ASSETS $ 1,032,451 $ 970,362
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages, notes and loans payable $ 871,932 $ 782,182
Accounts payable and other liabilities 53,267 55,210
----------- -----------
Total liabilities 925,199 837,392
Minority interest 43,546 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 (375,046) (359,404)
Unamortized restricted stock award (927) (1,357)
----------- -----------
Total stockholders' equity 63,706 78,918
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,032,451 $ 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
September 30, 1999 September 30, 1998
------------------ ------------------
REVENUES:
<S> <C> <C>
Minimum rent $ 25,787 $ 25,229
Percentage rents 599 573
Recoveries from tenants 13,254 12,361
Other revenues 2,307 1,972
Fee income 3,330 3,006
Interest income 589 542
-------- --------
45,866 43,683
EXPENSES:
Recoverable from tenants 11,424 11,121
Other operating 1,279 1,288
General and administrative 3,293 2,311
Interest expense 11,781 11,146
Depreciation and amortization 8,786 9,114
-------- --------
36,563 34,980
Other income/(expense) (220) (454)
Equity in earnings of unconsolidated joint ventures 3,513 1,330
-------- --------
Income before extraordinary item and minority interests 12,596 9,579
Equity in extraordinary losses on debt extinguishments
of unconsolidated joint ventures - (673)
-------- --------
Income before minority interests 12,596 8,906
Minority interests (5,115) (3,621)
-------- --------
Net income $ 7,481 $ 5,285
======== ========
Earnings Per Common Share - Basic:
Income before extraordinary item $ 0.32 $ 0.24
======== ========
Extraordinary loss on extinguishment of debt - (0.01)
======== ========
Net income per common share - basic $ 0.32 $ 0.23
======== ========
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item $ 0.32 $ 0.24
======== ========
Extraordinary loss on extinguishment of debt - (0.01)
======== ========
Net income per common share - assuming dilution $ 0.32 $ 0.23
======== ========
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>
Nine Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------- ------------------
REVENUES:
<S> <C> <C>
Minimum rent $ 77,752 $ 74,802
Percentage rents 1,133 1,972
Recoveries from tenants 39,759 36,534
Other revenues 5,728 4,950
Fee income 9,320 7,750
Interest income 2,125 2,330
--------- ---------
135,817 128,338
EXPENSES:
Recoverable from tenants 34,634 32,021
Other operating 3,733 3,995
General and administrative 9,177 7,295
Interest expense 34,551 33,060
Depreciation and amortization 26,179 27,411
--------- ---------
108,274 103,782
Other income/(expense) 120 (540)
Equity in earnings of unconsolidated joint ventures 7,173 4,161
--------- ---------
Income before extraordinary item and minority interests 34,836 28,177
Extraordinary loss on debt extinguishments (2,762) (422)
Equity in extraordinary losses on debt extinguishments
of unconsolidated joint ventures - (673)
--------- ---------
Income before minority interests 32,074 27,082
Minority interests (13,028) (11,049)
--------- ---------
Net income $ 19,046 $ 16,033
========= =========
Earnings Per Common Share - Basic:
Income before extraordinary item $ 0.89 $ 0.72
========= =========
Extraordinary loss on extinguishment of debt (0.07) (0.02)
========= =========
Net income per common share - basic $ 0.82 $ 0.70
========= =========
Earnings Per Common Share - Assuming Dilution:
Income before extraordinary item $ 0.89 $ 0.71
========= =========
Extraordinary loss on extinguishment of debt (0.07) (0.02)
========= =========
Net income per common share - assuming dilution $ 0.82 $ 0.69
========= =========
Dividends declared per common share $ 1.5075 $ 1.4625
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 6
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Income before minority interests $ 32,074 $ 27,082
Adjustments to reconcile income before minority interests
to net cash provided by operating activities:
Net accretion of note receivable (525) (525)
Depreciation and amortization 26,179 27,411
Provision for losses on accounts receivable 315 187
Proceeds from land sale 800 --
(Gain)/loss on sale of land (728) --
Equity in earnings of unconsolidated entities (7,173) (4,161)
Amortization of restricted stock awards 429 568
Extraordinary loss on debt extinguishment 2,762 422
Equity in extraordinary losses on debt extinguishment
of unconsolidated joint ventures -- 673
Other changes in assets and liabilities:
(Increase)/decrease in accounts receivable (349) 1,863
Decrease in notes receivable 702 665
(Increase)/decrease in other assets (758) 333
Increase in accounts payable and other liabilities 240 4,189
--------- ---------
Net cash provided by operating activities 53,968 58,707
INVESTING ACTIVITIES:
Investment in real estate and development assets (88,397) (89,218)
Distributions received from unconsolidated entities 15,071 14,607
Deferred costs (4,216) (6,185)
--------- ---------
Net cash used in investing activities (77,542) (80,796)
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 255,443 176,078
Repayments of mortgages, notes and loans payable (165,692) (122,978)
Refinancing costs (4,593) (1,019)
Restricted cash (5,310) 813
Dividends (35,337) (33,334)
Distributions (22,881) (22,997)
Proceeds from exercise of stock options -- 1,025
--------- ---------
Net cash provided by (used in) financing activities 21,630 (2,412)
--------- ---------
Net decrease in cash and cash equivalents (1,944) (24,501)
Cash and cash equivalents at beginning of period 10,510 25,263
--------- ---------
Cash and cash equivalents at end of period $ 8,566 $ 762
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 33,608 $ 31,983
========= =========
</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 September 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 September 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 (Philadelphia)
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)
Concord Mills Concord, NC (Charlotte)
Block
-----
The Block at Orange Orange, CA (Los Angeles)
Community Centers
-----------------
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 nine
month period ended September 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, 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 Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Numerator for basic earnings per share $ 7,470 $ 19,015
======== ========
Numerator for diluted earnings per share $ 7,529 $ 19,145
======== ========
Denominators:
Denominator for basic earnings
per share -- weighted average shares 23,180 23,163
-------- --------
Outstanding unvested Restricted Stock Awards --
weighted average shares (93) (93)
-------- --------
Denominator for basic earnings per share --
adjusted weighted average shares 23,087 23,070
-------- --------
Effect of dilutive securities:
Employee stock options and grants 361 297
-------- --------
Denominator for diluted earnings per
share-adjusted weighted average shares 23,541 23,460
======== ========
Basic earnings per share $ 0.32 $ 0.82
======== ========
Diluted earnings per share $ 0.32 $ 0.82
======== ========
</TABLE>
Limited partnership units in the Operating Partnership (15,844,084 outstanding
at September 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 September 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 September 30, 1999
------------- ------------------------
<S> <C>
Ontario Mills 50.0%
Grapevine Mills 37.5%
Arizona Mills 36.8%
The Oasis at Sawgrass 50.0%
The Block at Orange 50.0%
Concord Mills 37.5%
Katy Mills 62.5%
Opry Mills 66.7%
Arundel Mills (1) 75.0%
Meadowlands Mills (1) 66.7%
Sugarloaf Mills 50.0%
</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 $208.1 million of Joint Venture
debt, which includes $80.5 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 September 30, 1999 and December 31, 1998
and results of operations for the nine months ended September 30, 1999 and 1998
are presented below for all Joint Ventures.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
Operating Development Total
--------- ----------- -----
ASSETS:
<S> <C> <C> <C>
Income producing property $ 726,292 $ - $ 726,292
Construction in progress 18,168 353,229 371,397
Deferred costs, net 198,463 - 198,463
Other 77,818 21,956 99,774
------------------------------------------------
$1,020,741 $ 375,185 $1,395,926
================================================
LIABILITIES AND PARTNERS' EQUITY:
Debt $ 756,520 $ 92,803 $ 849,323
Other liabilities 50,972 68,592 119,564
Operating Partnership's accumulated equity 37,413 105,888 143,301
Joint Venture partners' accumulated equity 175,836 107,902 283,738
------------------------------------------------
$1,020,741 $ 375,185 $1,395,926
================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Operating Development Total
--------- ----------- -----
ASSETS:
<S> <C> <C> <C>
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>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Operating Development Total
--------- ----------- -----
REVENUES:
<S> <C> <C> <C>
Minimum rent $61,661 $ - $61,661
Percentage rents 198 - 198
Recoveries from tenants 24,912 - 24,912
Other property revenues 5,036 - 5,036
Interest income 4,609 2,350 6,959
-------------------------------------
Total revenues 96,416 2,350 98,766
EXPENSES:
Recoverable expenses 24,006 - 24,006
Other property expenses 6,069 8 6,077
Interest expense 29,180 - 29,180
Depreciation and amortization 26,801 - 26,801
-------------------------------------
Total expenses 86,056 8 86,064
Other income/(expense) 2,801 - 2,801
-------------------------------------
Net income $13,161 $ 2,342 $15,503
=====================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 5,141 $ 2,032 $ 7,173
=====================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Operating Development Total
--------- ----------- -----
REVENUES:
<S> <C> <C> <C>
Minimum rent $ 44,200 $ - $ 44,200
Percentage rents 501 - 501
Recoveries from tenants 18,614 - 18,614
Other property revenue 4,001 - 4,001
Interest income 2,314 137 2,451
------------------------------------------
Total revenues 69,630 137 69,767
EXPENSES:
Recoverable expenses 17,372 - 17,372
Other property expenses 3,829 - 3,829
Interest expense 20,251 - 20,251
Depreciation and amortization 18,870 - 18,870
------------------------------------------
Total expenses 60,322 - 60,322
Other income/(expense) 3,123 - 3,123
Extraordinary loss on debt extinguishment (2,060) - (2,060)
------------------------------------------
Net income $ 10,371 $ 137 $ 10,508
==========================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 3,488 $ - $ 3,488
==========================================
</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 nine
months ended September 30, 1999, which the Company expects to recognize as
income in the fourth quarter of 1999.
7. DECLARATION OF DIVIDEND
On September 21, 1999, the Company declared a dividend of $.5025 per
share which was paid on October 26, 1999 to stockholders of record as of October
11, 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 September 30, 1999 to three months ended
September 30, 1998.
Income before extraordinary item and minority interest for the three months
ended September 30, 1999 increased by approximately $3.0 million (31.5%) to
$12.6 million as compared to the three months ended September 30, 1998. The
increase was the result of an increase in revenues of approximately $2.2 million
(5.0%), an increase in other income/(expense) of approximately $0.2 million
(51.5%) and an increase in equity in earnings of unconsolidated joint ventures
of $2.2 million (164.1%) offset by an increase in expenses of approximately $1.6
million (4.5%).
Revenues:
Minimum rent for the three months ended September 30, 1999 increased
approximately $0.6 million (2.5%) compared with the three months ended September
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 September 30, 1999 increased
$0.9 million (7.2%) compared to the three months ended September 30, 1998. The
increase was primarily due to increases in recoverable operating costs for
various projects.
Other property revenue for the three months ended September 30, 1999 increased
$0.3 million (17.0%) compared with the three months ended September 30, 1998.
The increase was primarily due to an increase in income related to the
Company's pushcart program and increases in tenant termination income at
various properties.
Fee income for the three months ended September 30, 1999 increased $0.3 million
(10.8%) compared with the three months ended September 30, 1998. Fee income for
the three months ended September 30, 1999 is comprised of management fees of
approximately $1.1 million and development, leasing and finance fees of
approximately $2.2 million as compared to $0.9 million and $2.1 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.
Expenses:
Recoverable expenses for the three months ended September 30, 1999 increased
$0.3 million (2.7%) compared with the three months ended September 30, 1998. The
increase was primarily due to an increase in real estate taxes of $0.3 million
at Sawgrass Mills and $0.1 million at Mount Prospect. Additionally, Potomac
Mills had increased hard surface repair costs of $0.1 million. The increase was
partially offset by a reduction in painting costs of $0.1 million at Franklin
Mills and a reduction in hard surface repair costs of $0.1 million at Gurnee
Mills.
General and administrative expenses for the three months ended September 30,
1999 increased $1.0 million (42.5%) compared with the three months ended
September 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, The Oasis at Sawgrass and Concord Mills).
12
<PAGE> 15
Interest expense for the three months ended September 30, 1999 increased $0.6
million (5.7%) compared with the three months ended September 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).
Equity in earnings of unconsolidated joint ventures for the three months ended
September 30, 1999 increased $2.2 million (164.1%) compared with the three
months ended September 30, 1998. The increase was primarily due to $1.7 million
of interest income received related to tax increment financing on the Katy Mills
joint venture and income earned at The Block at Orange, The Oasis at Sawgrass
and Concord Mills which commenced operations in the fourth quarter of 1998,
second quarter of 1999 and third quarter of 1999, respectively.
Depreciation and amortization expense for the three months ended September 30,
1999 decreased $0.3 million (3.6%) compared with the three months ended
September 30, 1998. The decrease was primarily due to a decrease in expense
relating to assets reaching the end of their depreciable or amortizable lives at
Gurnee Mills.
Equity in extraordinary losses on debt extinguishment for the three months ended
September 30, 1999 decreased $0.7 million (100.0%) compared with the three
months ended September 30, 1998. The decrease was primarily due to the write-off
of prior unamortized loan costs in the third quarter of 1998 related to the
refinancing of Grapevine Mills.
13
<PAGE> 16
THE MILLS CORPORATION
(Unaudited)
Comparison of nine months ended September 30, 1999 to nine months ended
September 30, 1998.
Income before extraordinary item and minority interest for the nine months ended
September 30, 1999 increased by approximately $6.7 million (23.6%) to $34.8
million as compared to the nine months ended September 30, 1998. The increase
was the result of an increase in revenues of approximately $7.5 million (5.8%),
an increase in other income/(expense) of approximately $0.7 million (122.2%) and
an increase in equity in earnings of unconsolidated joint ventures of
approximately $3.0 million (72.4%) offset by an increase in expenses of
approximately $4.5 million (4.3%).
Revenues:
Minimum rent for the nine months ended September 30, 1999 increased
approximately $2.9 million (3.9%) compared with the nine months ended September
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.
Percentage rents for the nine months ended September 30, 1999 decreased
approximately $0.8 million (42.5%) compared with the nine months ended September
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 nine months ended September 30, 1999 increased
$3.2 million (8.8%) compared to the nine months ended September 30, 1998. The
increase was primarily due to increases in recoverable operating costs for
various projects.
Other property revenue for the nine months ended September 30, 1999 increased
$0.8 million (15.7%) compared to the nine months ended September 30, 1998. The
increase was primarily due to an increase in income related to the Company's
pushcart program and increases in tenant termination income at various
properties.
Fee income for the nine months ended September 30, 1999 increased $1.6 million
(20.3%) compared with the nine months ended September 30, 1998. Fee income for
the nine months ended September 30, 1999 is comprised of management fees of
approximately $3.2 million and development, leasing and finance fees of
approximately $6.1 million as compared to $2.4 million and $5.3 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
seven projects in 1999 (The Block at Orange, Katy Mills, Concord Mills, Opry
Mills, The Oasis at Sawgrass, Ontario Mills and Grapevine Mills) versus five
projects in 1998 (The Block at Orange, Grapevine Mills Katy Mills, Concord Mills
and The Oasis at Sawgrass).
Expenses:
Recoverable expenses for the nine months ended September 30, 1999 increased $2.6
million (8.2%) compared with the nine months ended September 30, 1998. The
increase was primarily due to an increase in real estate taxes of $1.0 million
at Sawgrass Mills, $0.3 million at Mount Prospect and $0.2 million at each of
Potomac Mills and Gurnee Mills. 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 nine months ended September 30, 1999 decreased
$0.3 million (7.6%) compared with the nine months ended September 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 nine months ended September 30, 1999
increased $1.9 million (25.8%) compared with the nine months ended September 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, The Oasis at Sawgrass and Concord Mills).
Interest expense for the nine months ended September 30, 1999 increased $1.5
million (4.5%) compared with the nine months ended September 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 nine months ended September 30,
1999 decreased $1.2 million (4.5%) compared with the nine months ended September
30, 1998. The decrease was primarily due to $0.9 million decrease in expense
relating to assets reaching the end of their depreciable or amortizable lives at
Gurnee Mills.
Other income/(expense) for the nine months ended September 30, 1999 increased
$0.7 million (122.2%) compared with the nine months ended September 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 nine months ended
September 30, 1999 increased $3.0 million (72.4%) compared with the nine months
ended September 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, The Oasis at Sawgrass
and Concord Mills which commenced operations in the fourth quarter of 1998,
second quarter of 1999 and third quarter 1999, respectively. Also, the Company
received $1.7 million of interest income related to tax increment financing on
the Katy Mills joint venture.
Extraordinary losses on debt extinguishments for the nine months ended September
30, 1999 increased $2.3 million (554.5%) compared with the nine months ended
September 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 with the Sawgrass Mills Phase II refinancing
and the refinancing of the Company's line of credit.
Equity in extraordinary losses on debt extinguishments for the nine months ended
September 30, 1999 decreased $0.7 million (100.0%) compared with the nine months
ended September 30, 1998. The decrease was primarily due to the Company's share
of the write-off of prior unamortized loan costs in 1998 related to the
refinancing of Grapevine Mills.
15
<PAGE> 18
THE MILLS CORPORATION
(Unaudited)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's balance of cash and cash equivalents was
$8.6 million, not including its proportionate share of cash held in
unconsolidated entities. In addition to its cash reserves, the Company had $7
million available under its line of credit. The terms of this facility are as
follows:
<TABLE>
<CAPTION>
AMOUNT
TOTAL OUTSTANDING
MATURITY/ FACILITY AT 9/30/99
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 $ 93,000
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 4.7 years at September 30, 1999 (including funded
construction and operating debt of the unconsolidated joint ventures), while
maintaining investment-grade interest rates (7.05% weighted average interest
rate for the Company's indebtedness and funded construction and operating debt
of the unconsolidated joint ventures at September 30, 1999).
On September 29, 1999, the Opry Mills joint venture entered into a
construction loan agreement in the amount of $168 million. The loan commitment
matures on October 1, 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 September 30, 1999. The Company guarantees 100% of the outstanding loan
balance until specified debt service requirements based on historical operating
data are fulfilled.
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 agreement 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
September 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
16
<PAGE> 19
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
partnerships such as Meadowlands Mills Limited Partnership for certain carried
interests.
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 September 30, 1999, the Company had consolidated debt of
approximately $871.9 million and gross unconsolidated joint venture debt of
approximately $849.3 million. The Company's pro rata share of gross
unconsolidated joint venture debt was $296.9 million (net of tax increment
financing) at September 30, 1999. Of this amount, the Company guaranteed $127.6
million (additionally, the Company has guaranteed $80.5 million of its joint
venture partners' share of debt). The Company's consolidated debt plus its pro
rata share of gross unconsolidated joint venture debt totalled approximately
$1.2 billion. Of this amount, $778.9 million was fixed rate debt and $389.9
million 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 $518.3 million with $650.5 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 2.73 and 2.70 at September 30, 1999 and
September 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 six projects: Katy Mills, Opry Mills, Arundel
Mills, Sugarloaf Mills, Vaughan Mills and Meadowlands Mills.
Katy Mills opened on October 28, 1999. This project has been
financed principally with external borrowings and equity contributions from
joint venture partners and the Operating Partnership. The Katy Mills joint
venture has obtained a $168 million construction loan commitment. The Company
anticipates that the Operating Partnership's equity requirement for Katy Mills
may total as much as $26.3 million. As of September 30, 1999, the Operating
Partnership had contributed $29.9 million. The Company anticipates that $3.6
million will be returned to the Operating Partnership when Kan Am contributes
additional funds pursuant to the joint venture partnership agreement.
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 $70.0 million of which $37.0
million has been funded as of September 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 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 September 30, 1999. The Company anticipates closing on
the remainder of the site in February 2000, with construction commencing later
in 2000. Surgarloaf 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.
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 2000 groundbreaking.
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 first quarter of 2000, 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 2000 groundbreaking.
The Company anticipates that the Operating Partnership's total
required equity for Meadowlands Mills and Vaughan Mills may exceed $62.0
million, of which approximately $32.1 million had been funded as of September
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.
18
<PAGE> 21
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 Atlanta, Georgia; Cleveland, Ohio; Denver, Colorado; North
Aurora, Illinois (Chicago); Sacramento, California; San Francisco, California;
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 $170
million. At September 30, 1999, approximately $133 million had been spent on
these projects and it is anticipated that an additional $37 million will be
spent during the next two years. Of the estimated costs of $170 million, $80
million will be financed with external sources and $90 million will be funded
by the Operating Partnership. At September 30, 1999, the Operating Partnership
had funded $69 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 Nine Months Ended September 30, 1999 to Nine Months
Ended September 30, 1998. Net cash provided by operating activities decreased
approximately $4.7 million (8.1%) to $54.0 million for the nine months ended
September 30, 1999 as compared to $58.7 million for the nine months ended
September 30, 1998. The decrease was due to an increase in tenant billings and
a decrease in accounts payable. Net cash used in investing activities
decreased approximately $3.3 million (4.0%) to $77.5 million for the nine
months ended September 30, 1999, as compared to $80.8 million for the nine
months ended September 30, 1998, primarily as a result of decreased
expenditures for deferred costs and an increase in distributions received from
unconsolidated entities. Net cash provided by financing activities increased
approximately $24.0 million (996.8%) to $21.6 million for the nine months ended
September 30, 1999 as compared to ($2.4) million for the nine months ended
September 30, 1998. The increase was primarily due to the refinancing of ten
community centers and the additional debt related to Sawgrass Mills (see
Liquidity and Capital Resources discussion).
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 nine months ended September 30, 1999 increased to $66.7 million
compared to $60.1 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 Nine Months Ended
September 30, September 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... $12,596 $ 9,579 $34,836 $28,177
Adjustments:
Add: Depreciation and amortization of real estate
assets ........................................... 7,665 8,222 23,153 24,591
Add: Real estate depreciation and amortization of
unconsolidated entities........................... 3,106 2,453 8,690 7,342
------- ------- ------- -------
Funds from operations ................................... $23,367 $20,254 $66,679 $60,110
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</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 systems, 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 being implemented) involves 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 any 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 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, new general ledger and accounts payable
systems were installed which are 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. The Company also has
received written certification from software vendors regarding the compliance of
commercial off the shelf software packages utilized for fixed asset
depreciation, tax return preparation, job cost accounting, stock option plan
administration and cash flow projections.
COSTS
The Company believes that the Y2K issue will not pose significant
costs and does not expect remediation expenditures at the property level 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.
22
<PAGE> 25
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.
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 continues to contact 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
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 August 16, 1999 to
report certain operational information concerning the Company and
the properties owned or managed by it as of June 30, 1999. No other
reports on Form 8-K were filed by registrant for the applicable
quarter covered by this report.
24
<PAGE> 27
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
November 15, 1999 By: /s/ Kenneth R. Parent
- ------------------------ ---------------------------
(Date) Kenneth R. Parent
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<PAGE> 28
THE MILLS CORPORATION
EXHIBIT INDEX
NUMBER EXHIBIT
+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.
<PAGE> 29
*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.
- -------------------------------------------------------------------------------
* 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> 30
++ 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.
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,566
<SECURITIES> 0
<RECEIVABLES> 30,021
<ALLOWANCES> 0
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<CURRENT-ASSETS> 0
<PP&E> 915,197
<DEPRECIATION> (233,022)
<TOTAL-ASSETS> 1,032,451
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 231
<OTHER-SE> 107,021
<TOTAL-LIABILITY-AND-EQUITY> 1,032,451
<SALES> 0
<TOTAL-REVENUES> 143,089
<CGS> 0
<TOTAL-COSTS> 108,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,530
<INCOME-PRETAX> 32,074
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (2,762)
<CHANGES> 0
<NET-INCOME> 19,046
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